RAND J.:-The question raised in this appeal is whether the Minister of National Revenue has validly exercised a discretion in his award to the appellant of what are called development and depletion allowances in respect of the sinking and operation of an oil well in the Turner Valley field of Alberta. The section of the Income War Tax Act, R.S.C. 1927, chapter 97 by which provision is made for such allowances is as follows:
5. "Income" as hereinbefore defined shall for the purposes of this act be subject to the following exemptions and deductions:- (a) Such reasonable amount as the Minister, in his discretion, may allow for depreciation, and the Minister in determining the income derived from mining and from oil and gas wells and timber limits shall make such an allowance for the exhaustion of the mines, wells and timber limits as he may deem just and fair; and in the case of leases of mines, oil and gas wells and timber limits, the lessor and the lessee shall be entitled to deduct a part of the allowance for exhaustion as they agree and in case the lessor and the lessee do not agree, the Minister shall have full power to apportion the deduction between them and his determination shall be conclusive.
It is objected that the mode of ascertaining the allowance is so unrelated to any accounting basis appropriate to these two items that it is fundamentally wrong and outside the scope of discretion with which the section invests the Minister.
The method used was embodied in an empirical formula. The base figure was the gross income less the amount of royalties payable to superior lessors of the land. The S.C.R.]
combined allowance was then fixed at 257 of the sum ascertained. That in turn was distributed between the two items in the following manner:
the amount for depletion was fixed at 257 of the net income less the allowance for development, but since the net income, at that stage, consisted of the taxable income plus the combined allowance, the amount for depletion was one-third of the taxable income.
Now as the taxable income had already been ascertained, the allowance for depletion could at once be calculated, and a deduction of this sum from the total allowance gave that for development and completed the distribution.
It will be seen that the relation between the two items will vary as the taxable income, itself dependent on operating expenses, fluctuates; if, for instance, there were no such expenses, the taxable income would be the net income less the allowance, but since the latter is one-quarter of the gross income, the taxable income would be three-quarters of the gross, one-third of which would exhaust the allowance, and thereby attribute the whole of it to depletion.
Conversely, if the expenses of operation eliminated the taxable income by reducing the net to the amount of the allowance, depletion would disappear and the total attributed to the development costs. It is conceded that in certain situations a depletion allowance could be related to net income, but it is said that the conditions of the particular resource here are such as to exclude that as a proper basis of calculation; and it is contended that in the circumstances both of these items, in order to have any accounting foundation, must be directly related, as to development, to the actual outlay, and as to depletion, to some estimate of total resource value. But treating the distribution within the fixed combined allowance to be material, the method adopted has not been shown to be without foundation in accounting principle.
From what appears, it is quite impossible to say that over a wide field of this kind of production the allowance will not in the end work out fairly and justly. Certainly no attempt was made to establish that it will not do that.
One basis may, in a mathematical aspect, appear to be more scientific, more exact, than another: but it was not said and cannot be said categorically that the use of this practical formula will not fairly serve the