Federal Court of Appeal Decisions

                                                                                                                              A-472-96

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

CHEVALIER D.J.

BETWEEN:

                                       BOW RIVER PIPE LINES LTD.

                                                                                                                             Appellant

                                                                 - and -

                                           HER MAJESTY THE QUEEN

                                                                                                                         Respondent

Heard at Montreal, Quebec, on Monday and Tuesday, May 12 and 13, 1997.

Judgment rendered at Ottawa, Ontario, on Wednesday, July 16, 1997.

REASONS FOR JUDGMENT BY                                             DESJARDINS J.A.

CONCURRED IN BY                                                                            DÉCARY J.A.

                                                                                                             CHEVALIER D.J.

                                                                                                                              A-472-96

CORAM:        DESJARDINS J.A.

DÉCARY J.A.

CHEVALIER D.J.

BETWEEN:

                                       BOW RIVER PIPE LINES LTD.

                                                                                                                             Appellant

                                                                 - and -

                                           HER MAJESTY THE QUEEN

                                                                                                                         Respondent

                                           REASONS FOR JUDGMENT

DESJARDINS J.A.

This case deals with the purpose and effect of transitional provisions as applied to partnerships in the Income Tax Act. At issue are the conditions which must be met by a claimant who wishes to avail himself of the provisions of a former law when a new one comes into operation and where the legislation permits the former law to apply in certain circumstances.

This matter comes to us by way of an appeal from a decision of Christie A.C.J. of the Tax Court of Canada in which he dismissed the appellant's appeal for the 1987 to 1991 taxation years on the basis that the appellant had not acquired, prior to December 4, 1985, certain resource properties as a result of being a member of a partnership, as required by the provisions of paragraph 98(5)(d) of the Income Tax Act, applicable through the transitional provisions relating to the repeal of that paragraph.^[1]    In the result, the appellant was not entitled to add $5,874,367 to its "Cumulative Canadian Oil and Gas Property Expense" ("CCOGPE") account.

There are three grounds of appeal. The first and third were raised by the appellant. The second was raised by the respondent.

The first ground is whether the Tax Court judge erred in concluding that the appellant had not become a member of the partnership so as to benefit from the "bump-up" permitted by paragraph 98(5)(d) of the Income Tax Act,^[2] considering that the requirements of the LRR Limited Partnership Agreement^[3] signed by the parties and the provisions of subsection 69(3) and paragraph 71(a) of the Partnership Act (Alberta)^[4] had not been complied with.

The second ground is whether the trial judge erred in answering in the affirmative questions (2) and (3) of three questions put by him in relation to paragraphs 26(5)(a) and (b) of the applicable transitional provisions of the Income Tax Act, namely whether:

[...]

2.        ... the property was acquired by the partnership after December 4, 1985, but pursuant to an agreement in writing entered into before that date; and

3.        ... the property was received by the appellant in satisfaction of its interest in the partnership which interest was acquired after December 4, 1985, but pursuant to an agreement in writing entered into before that date.

The third ground is whether the trial judge erred in refusing to the appellant the benefit of paragraph 66.4(5)(a) once he found that the appellant had the status of assignee of the interest of Lone Rock.

The legislative provisions

Counsel agree that the purport of subsection 98(5) of the Income Tax Act is correctly set out in the Canadian Tax Reporter:^[5]

Subsection 98(5) permits a tax-free rollover where, within three months of the termination of a Canadian partnership defined in section 102, one but not more than one of the partners commences to carry on the business of the previous partnership as a sole proprietor, using the partnership property received by him as proceeds of disposition of his partnership interest. As a matter of law, a partnership ceases to exist when one partner acquires the partnership interests of all other partners[...]

Paragraph 98(5)(d) of the Income Tax Act was repealed by S.C. 1986, c. 55 s. 26(4).^[6] Subsection 26(5) of the same statute indicates that the repeal applies only to circumstances that occurred after December 4, 1985. Certain classes of taxpayers can still invoke paragraph 98(5)(d) of the Income Tax Act if they meet the conditions set out in the transitional provisions.

Subsections 26(4) and (5), of the transitional provisions, with the relevant parts reproduced in bold, read thus in context with section 26:

26.(1) Subparagraph 98(3)(b)(ii) of the said Act is repealed and the following substituted therefor: "(ii) where the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii), the amount determined under paragraph (c) in respect of his undivided interest in the property;" (2) Paragraph 98(3)(d) of the said Act is repealed. (3) Subparagraph 98(5)(b)(ii) of the said Act is repealed and the following substituted therefor: "(ii) where the amount determined under subparagraph (a)(i) exceeds the amount determined under subparagraph (a)(ii), the amount determined under paragraph (c) in respect of the property;" (4) Paragraph 98(5)(d) of the said Act is repealed. (5) Subsections (1) to (4) are applicable with respect to property received by a member of a partnership where (a) the property was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date, (b) the property is received in satisfaction of an interest in the partnership acquired by the member after December 4, 1985, otherwise than (i) pursuant to an agreement in writing entered into on or before that date, or (ii) from a person with whom the member was not dealing at arm's length, where the interest in the partnership has not been acquired in an arm's length transaction after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date, or (c) the property is received in satisfaction of an interest in the partnership that was owned by a corporation at a time when control thereof was acquired (otherwise than by virtue of an acquisition described in paragraph 256(7)(a) of the said Act) after December 4, 1985, otherwise than pursuant to an agreement in writing entered into on or before that date, and, for the purpose of subparagraph (b)(ii), the references to "arm's length" shall be interpreted as though the said Act were read without reference to paragraph 251(5)(b) thereof.

26. (1) Le sous-alinéa 98(3)b)(ii) de la même loi est abrogé et remplacé par ce qui suit: "(ii) lorsque le montant déterminé en vertu du sous-alinéa a)(i) dépasse le montant déterminé en vertu du sous-alinéa a)(ii), le montant déterminé en vertu de l'alinéa c) relativement à sa participation indivise dans ces biens;" (2) L'alinéa 98(3)d) de la même loi est abrogé. (3) Le sous-alinéa 98(5)b)(ii) de la même loi est abrogé et remplacé par ce qui suit: "(ii) lorsque la somme déterminée en vertu du sous-alinéa a)(i) dépasse la somme déterminée en vertu du sous-alinéa a)(ii), la somme déterminée en vertu de l'alinéa c) relativement aux biens;" (4) L'alinéa 98(5)d) de la même loi est abrogé. (5) Les paragraphes (1) à (4) s'appliquent aux biens reçus par une personne qui était membre d'une société, à condition: a) qu'ils aient été acquis par la société après le 4 décembre 1985 autrement que conformément à une convention écrite conclue avant le 4 décembre 1985; b)qu'ils soient reçus en paiement d'une participation dans la société que le membre a acquise après le 4 décembre 1985 autrement que: (i) conformément à une convention écrite conclue avant le 5 décembre 1985, ou (ii) d'une personne avec qui le membre avait un lien de dépendance, lorsque la participation dans la société a été acquise dans le cadre d'une opération avec lien de dépendance après le 4 décembre 1985 autrement que conformément à une convention écrite conclue avant le 5 décembre 1985; ou c) qu'ils soient reçus en paiement d'une participation dans la société, qu'une corporation avait à la date, postérieure au 4 décembre 1985, où le contrôle de la corporation a été acquis - sauf s'il l'a été par suite d'une acquisition visée à l'alinéa 256(7)a) de la même loi - autrement que conformément à une convention écrite conclue avant le 5 décembre 1985. Pour l'application du sous-alinéa b)(ii), le sens de l'expression "lien de dépendance" est déterminé sans égard à l'alinéa 251(5)b).

The facts

This case proceeded before the Tax Court of Canada on an Agreed Statement of Facts^[7] together with a related Book of Agreed Exhibits consisting of some twenty-two documents. Certain of those documents must be reproduced on account of the importance of events that occurred prior to December 4, 1985. Suffice it to say for the purpose of this appeal that the appellant and Lone Rock Resources Ltd. ("Lone Rock") were each incorporated under the laws of Alberta and are governed by the Business Corporation Act of that province. At the relevant time, each was a private corporation and a taxable Canadian corporation as defined under subsection 89(1) of the Income Tax Act. The appellant operated a crude oil pipeline gathering and transmission systems in Alberta and Saskatchewan. The appellant and Lone Rock were each engaged in the business of exploring for, developing and producing crude oil, natural gas and related hydrocarbons in Western Canada. On October 10, 1985, counsel for Koch Exploration Canada Ltd. ("Koch"), the parent of the appellant and a U.S. resident corporation also engaged in the business of exploring, developing and producing crude oil, natural gas and related hydrocarbons in Western Canada, wrote to the President of Koch offering initial advice regarding the proposed acquisition of Lone Rock by the appellant. The letter read:^[8]

Re:     Proposed Acquisition of Lone Rock

Resources Limited ("Lone Rock") by

Bow River Pipelines Ltd. ("Bow River")

Further to our meeting of Wednesday, October 9, 1985 the following summary of our initial advice is offered for your consideration. All references herein to sections, subsections, paragraphs and subparagraphs are to the Income Tax Act (Canada) (the "Act") unless otherwise expressly stated.

FACTS

In general terms, we understand the pertinent facts to be as follows:

1.        Lone Rock and Bow River are taxable Canadian corporations as defined in paragraph 89(1)(i). The taxation year of Bow River ends on December 31 and the taxation year of Lone Rock ends on September 30.

2.        As of September 30, 1984 Lone Rock had 'tax pools' as follows:

Non-Capital Losses

year ended September 30, 1981                                                            $ 1,192,564

year ended September 30, 1982                                                                  589,192

Undepreciated Capital cost ("UCC")                                                             $ 1,062,941

Cumulative Canadian oil and gas

property expense ("CCOGPE")                                                                      $ 2,658,811

Cumulative Canadian Development Expense (CCCDE")                                    32,641

Earned Depletion Base                                                                                            136,162

Attributable Canadian Royalty Income Balance                                               3,097,605

3.        Lone Rock owes approximately $7,000,000 to the Bank of Montreal.

4.        Bow River is negotiating with the shareholders of Lone Rock with a view to acquiring 100% of the issued and outstanding shares of Lone Rock for a purchase price of approximately $5,000,000.

PROPOSED TRANSACTIONS

The following transactions were discussed at our recent meeting:

1.        Lone Rock would incorporate a wholly-owned subsidiary ("Newco").

2.        Lone Rock and Newco would form a limited partnership (the "Partnership") pursuant to the Partnership Act (Alberta).

3.        Lone Rock would contribute a 90% undivided interest in its oil and gas assets to the Partnership in exchange for a 99.99% interest in the Partnership. Newco would have a .1% interest in the Partnership. The remaining 10% of the oil and gas assets (the "Retained Assets") would be left in Lone Rock to ensure that the resource pools of Lone Rock were not "streamed" through the application of the successor rules at a time when Lone Rock did not own any Canadian resource property. The Partnership and Lone Rock would execute and file elections pursuant to subsection 97(2) in prescribed form and manner in order to ensure that the transfer occurred on a "roll-over" basis. The selection of the elected amounts is discussed hereinafter.

4.        Bow River would acquire the shares of Lone Rock for, say, $5,000,000. Thereafter, Bow River would subscribe for $7,000,000 worth of treasury shares of Lone Rock. The subscription proceeds would be used by Lone Rock to retire its band debt.

5.        If necessary in order to utilize the non-capital losses of Lone Rock, Bow River would transfer one or more producing properties to Lone Rock on a "roll-over" basis in exchange for shares of Lone Rock. Elections pursuant to subsection 85(1) would be executed and filed in prescribed form and manner with respect to such transfer.

6.        At such time as the non-capital losses of Lone Rock have been used up, Lone Rock would be wound-up in to Bow River on a "roll-over" basis pursuant to subsection 88(1). The result of such a winding-up would be that all of Lone Rock's assets, which would consist of the 99.99% interest in the Partnership, the Retained Assets and any properties acquired from Bow River would be distributed to Bow River.

7.        After the winding-up of Lone Rock, Newco would be wound-up with the result that its partnership interest would be distributed to Bow River. As a result, the Partnership would then cease to exist and all of the assets of the Partnership would be distributed to Bow River.

INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS

The implementation of the proposed transactions should have the following income tax consequences:

1.        The transfer of the Canadian oil and gas assets from Lone Rock to the Partnership can be accomplished on a tax deferred or "roll-over" basis pursuant to subsection 97(2) provided that the appropriate elections are duly made and filed. The elected amount for the tangible depreciable property will presumably be the UCC of such property. There is considerable latitude in the selection of the elected amount for the Canadian resource property. If a nominal elected amount is chosen, the resource tax pools will remain with Lone Rock. After the change in control of Lone Rock such pools will, pursuant to the successor rules, be "streamed" to production from properties in which Lone Rock had an interest immediately prior to the change of control and the proceeds from any disposition of such properties. Provided that the Retained Assets include undivided interests in all of Lone Rock's properties the application of the successor rules should not present a problem. If an elected amount equal to the CCOGPE of Lone Rock was selected and if the acquisition of control of Lone Rock occurred during the first fiscal period of the Partnership it would appear that the successor rules would be avoided because, at the time of the change in control, Lone Rock would not have any CCOGPE. Rather, Lone Rock would be entitled to an allocation of Canadian oil and gas property expenses. ("COGPE"), in an amount equal to 99.99% of the elected amount, from the Partnership at the end of the fiscal period of the Partnership.

2.        The aggregate adjusted cost base of all of the Lone Rock shares owned by Bow River would be approximately $12,000,000.

3.        The winding-up of Lone Rock and the consequential distribution of its assets to Bow River will occur on a "roll-over" basis pursuant to subsection 88(1). Pursuant to paragraph 88(1)(d), and provided Lone Rock's interest in the Partnership is capital property, Bow River will be able to "bump" the cost for tax purposes of the Partnership interest acquired on the winding-up to an amount equal to the adjusted cost base of the Lone Rock shares less certain deductions including the amount of cash or other property acquired on the winding-up and dividends previously received from Lone Rock. The details of these deductions will have to be given further consideration.

4.        The dissolution of the Partnership, which will occur as a consequence of the winding-up of Newco, will occur on a "roll-over" basis pursuant to subsection 98(5). In accordance with paragraph 98(5)(b), the assets of the Partnership will be deemed to have been acquired by Bow River at a cost equal to their cost amount, for the purposes of the Act, to the Partnership plus an additional designated amount (the "Designated Amount") determined in accordance with paragraph 98(5)(d). In general terms, the Designated Amount will be the amount by which the adjusted cost base to Bow River of its interest in the Partnership exceeds the aggregate cost amount to the Partnership of the assets which will be distributed to Bow River on the dissolution of the Partnership. In the case of Canadian resource property, as defined in the Act, and depreciable capital property, as defined in the Act, the amount which may be designated is limited to one-half of the Designated Amount. In addition, the amount which would result in the cost amount of the particular property being increased to the fair market value of such property. It is generally considered that the cost amount of Canadian resource property which is distributed on the dissolution of a partnership is nil.

CONCLUSION

In our view the foregoing indicates that the COGPE "bump" would be computed from a starting point of a $12 million adjusted cost base of the Lone Rock shares. It is apparent that the co-operation of Lone Rock will be required in terms of the organization of the Partnership and the contribution of assets thereto. It is likely that some compensation will have to be given to the shareholders of Lone Rock in order to ensure their cooperation. Apart from that additional cost and the extra cost in terms of additional accounting and legal input, we believe that their (sic) is little downside to Bow River in terms of attempting to obtain the COGPE "bump". However, it is also clear that the availability of the COGPE "bump" is by no means certain, although it is at least probable.

As you will appreciate this letters is fairly general and a considerable number of details will require attention if you wish to implement the transactions described herein. We have provided a copy of this letter to Mr. R.W. Bowhay for his comments, and would suggest that Mr. Bowhay be consulted before a decision is made to pursue the COGPE "bump".

By letter dated October 16, 1985, (the "First Letter"), Koch, as agent for the appellant, proposed to purchase from the shareholders of Lone Rock all of the issued and outstanding shares of Lone Rock. The letter addressed to the shareholders of Lone Rock, read:^[9]

This letter is forwarded to you by Koch Exploration Canada, Ltd. ("Koch") in pursuance of the discussions we have had relative to the purchase by Koch of all of the shares of Lone Rock Resources ("Lone Rock"). In the course of such discussions, Lone Rock has provided to Koch copies of land schedules entitled respectively; Alberta Acreage; Saskatchewan Acreage, and British Columbia Acreage (the "Land Schedules"); copies of the Financial Statements for Lone Rock up to July 31, 1985 (the "Financial Statements"); and copies of the Federal and Provincial Corporation Income Tax Returns for Lone Rock up to the taxation year ended September 30, 1984 (the "Tax Returns").

We understand that the authorized capital of Lone Rock is an unlimited number of Class 'A' no par value voting shares of which 6,126,709 are issued and held as follows:

Shareholders                                                                                            Number of Shares

Lone Rock Energy Limited                                                                                  3,669,543

Danford E.E. Bodrug                                                                                                            2

Bodrug & Son Acceptance Ltd.                                                                             424,220

99109 Canada Ltd.                                                                                                1,192,360

Robert Edgar McLennan                                                                                           22,955

Estate of Evan W.G. Bodrug                                                                                   817,629

Total Issue                                                                                                             6,126,709

We further understand that:

i)        the working interests in oil and gas properties to which Lone Rock is presently entitled and the encumbrances are as has been represented to us;

ii)       Lone Rock has conducted its business in the ordinary course during Lone Rock's current fiscal period and will continue to do so up to closing; and

iii)      all debt of Lone Rock, except its 'net bank position' as hereinafter defined, will have been paid, forgiven or otherwise discharged prior to or concurrent with the sale of the Lone Rock shares to Koch.

We have, otherwise, relied upon the information contained in the Land Schedules, the Financial Statements and the Tax Returns and the within proposal is based and conditioned upon such reliance and the understanding aforesaid.

It is proposed that Koch purchase from you all of the issued and outstanding shares of Lone Rock for a net purchase price calculated as follows:

Gross amount                                                                               Cdn$12,340,000

Loss: Lone Rock's 'net bank position'

as of the closing date, calculated in

the same manner as in the table entitled

'Month-End Position' attached to the

financial statements prepared as of July 31,

1985, at which date the net bank position

equalled $7,084,000                                                                               

Net Purchase Price                                                                        Cdn$

It is understood that the purchase by Koch may be done on behalf of any Koch subsidiary or affiliated company. The effective date for the purchase will be October 1, 1985. A closing date of December 17, 1985 is proposed.

If this proposal is acceptable to you, Koch will prepare for your consideration a formal sale agreement and related documentation. Prior to closing Koch would not expect you to offer any of the Lone Rock shares for sale to any other entity and your acceptance of this proposal is your confirmation of this. Completion of the sale of the Lone Rock shares to Koch will be subject to the tender of all the issued and outstanding approval of directors, opinions of counsel and completion of other related matters in a manner satisfactory to each of yourself and Koch. [Italics supplied]

This proposal has been prepared in multiple original counterparts. If it is acceptable to you, it would be appreciated if you would sign each of the enclosed multiple originals in the space provided therefor below and return all, saving one for your records, so signed to the undersigned at the letterhead address before 4:30 p.m. on October 25, 1985.

On October 25, 1985, the shareholders of Lone Rock accepted the offer.

By letter dated October 28, 1985, (the 'Second Letter'), addressed to the shareholders of Lone Rock, Koch proposed to increase the net purchase price by $450,000. This letter read:^[10]

We refer to our October 16, 1985 correspondence (the 'Original Proposal') pertaining to the acquisition by Koch Exploration Canada, Ltd. ('Koch') of all of the shares of Lone Rock (the 'Shares'). We hereby propose to increase the net purchase price as indicated in the Original Proposal by $450,000, subject to the conditions set out in our Original Proposal and subject to the following conditions, namely:

1.        At the time of the closing of purchase of the Shares, the assets of Lone Rock will include a significant interest in a partnership (the 'Partnership') which is the owner of substantially of all the working interests in the oil and gas properties of Lone Rock which are referred to in the Original Proposal.

2.        Prior to the closing of the purchase of the Shares, Koch shall have received a favourable income tax ruling (the 'Ruling') from Revenue Canada confirming that as a consequence of the liquidation of Lone Rock into Koch and thereafter the liquidation of the Partnership into Koch, Koch shall be entitled to 'step-up' the cost, for income tax purposes, of working interests in the former assets of the Partnership to an amount not less than $4,500,000.

If the Ruling is not obtained by December 11, 1985, then, unless otherwise agreed, closing of the purchase of the Shares shall occur on December 17, 1985 at and for a price equal to the net purchase price plus $15,000. If the Ruling is obtained after December 11, 1985, then Koch shall pay the sum of $450,000 as additional consideration for the Shares, such payment to be made within 14 days from the date of the receipt of the Ruling.

The effective date of the transaction must follow the establishment of the Partnership and we therefore propose an effective date of November 15, 1985, but we anticipate that the original closing date of December 17, 1985 could be maintained.

Koch acknowledges that all costs associated with the application for the Ruling will be for its account.

This proposal has been prepared in multiple original counterparts. If it is acceptable to you, it would be appreciated if you would sign each of the enclosed multiple originals in the space provided therefore below and return all except one of such originals, duly executed, to the undersigned at the letterhead address on or before 4:30 p.m. on October 31, 1985.

The shareholders of Lone Rock accepted the offer on October 29, 1985.

On November 8, 1985, Lone Rock became the sole shareholder of the Numbered Company. This is all that occurred prior to December 4, 1985.

On December 16, 1985, in (the "Third Letter") Koch wrote to Lone Rock suggesting a change in the closing date. The letter read:^[11]

With respect to the acquisition of Lone Rock Resources Ltd. by Bow River Pipe Lines Ltd., it is now apparent that the proposed closing date of December 17, 1985 cannot be met. Also we are advised that the transaction cannot be closed until we have in hand the approval of Investment Canada. The Application for Review was submitted December 5, 1985, but, as you know, there is a possibility of an extended delay before approval is granted.

We would therefore suggest that the closing date now be established as the later of:

a)        January 8, 1986; or

b)       the first Tuesday in the week following the week in which the approval in writing of Investment Canada is received;

provided that if such approval is not received by March 4, 1985, either party may, at its option, terminate the proposed acquisition.

If you are in accord with the foregoing, would you kindly sign and return the attached copy of this letter.

The shareholders of Lone Rock accepted the offer on December 17, 1985.

The Honourable Sinclair Stevens, Minister responsible for Investment Canada, wrote to the appellant, on December 27, 1985, granting approval under the Investment Canada Act.^[12]

On January 14, 1986, the Directors of the Numbered Company passed the following Resolution:^[13]

RESOLUTION OF THE DIRECTORS OF 335827 ALBERTA LTD., APPROVED, ADOPTED AND CONSENTED TO IN WRITING WITHOUT THE HOLDING OF A MEETING AS EVIDENCED BY THE SIGNATURES OF ALL OF THE DIRECTORS PURSUANT TO THE BY-LAWS OF THE CORPORATION

WHEREAS it is desirable and in the best interests of the Corporation to create a partnership with Lone Rock Resources Ltd. which will acquire all or substantially all of the oil gas properties of Lone Rock Resources Ltd.;

AND WHEREAS it is desirable and in the best interests of the Corporation to enter into a Limited Partnership Agreement with Lone Rock Resources Ltd., an Alberta company, pursuant to the terms and conditions contained in the form of proposed Limited Partnership Agreement annexed hereto as Schedule 'A';

NOW THEREFORE BE IT RESOLVED THAT:

1.        The Corporation do enter into a Limited Partnership Agreement with Lone Rock Resources Ltd. pursuant to the terms and conditions of the proposed Limited Partnership Agreement annexed to this Resolution as Schedule 'A' (herein 'Limited Partnership Agreement').

2.        The President of the Corporation be and the same is hereby authorized and directed to:

(a)      negotiate, consent to or acquiesce in any amendments, revisions, deletions or additions to the said Limited Partnership Agreement which he in his sole discretion deems in the best interest of the Corporation or are necessary in order to conclude the said transaction and further to execute same on behalf of and in the name of the Corporation

(b)      negotiate, enter into, approve and adopt on behalf of the Corporation any and all agreements, documents and undertakings ancillary or necessary for the establishment of the said Limited Partnership and execute same on behalf of and in the name of the Corporation;

(c)      take any and all actions, steps or proceedings on behalf of the Corporation which he in his sole discretion deems advisable and in the best interest of the Corporation and are necessary to establish the Limited Partnership.

DATED, the 14th day of January, 1986.

On the same day, January 14, 1986, the Numbered Company and Lone Rock entered into a limited partnership agreement under the name of LLR Limited Partnership Agreement.^[14] The general partner was the Numbered Company which, by reason of its contribution, became entitled to receive 0.01% of the profits. Lone Rock was the sole limited partner which, by reason of its contribution, was entitled to 99.9% of the profits.

The general partner had, subject to the provisions of the agreement, exclusive management power. The limited partner had none. The limited partner was, however, not liable for any of the obligations or losses of the partnership except to the extent of the amount contributed by it, as its capital contribution and its interest in the partnership assets. Article XII provided for the transfer of partnership interests according to the following lines:^[15]

12.06 Transfer of Partnership Interests

The interest of any Partner in the Partnership shall be transferable. An instrument of transfer of such interest and power of attorney must:

(a)      be executed by the assignor or any legal representative thereof and the assignee who must agree therein to be bound by the terms of this Agreement; and

(b)      have the execution by the assignor or legal representative guaranteed by a Canadian chartered bank, a trust company qualified to carry on business in Canada, a member of the Investment Dealers Association of Canada, or a member of any recognized Canadian stock exchange or verified in some other manner acceptable to the Registrar.

[...]

12.08 Recording of Transfer

The Registrar will record the transfer and the General Partner will amend or cause to be amended the Register and the General Partner will do all other things and make such filings and recordings as are required by law including the filing of an Amended Certificate.

12.09 Effectiveness Conditional

No transfer will become effective until the terms hereof have been complied with and all filings and recording have been made as required by the Partnership Act and other applicable legislation in respect of the admission of the assignee to the Partnership or the increase of his interest therein, as the case may be.

Article XVIII restricted severely the changes that could be made to the limited partnership agreement. This article is reproduced in full in the analytical part of the present reasons for judgment. On the same date, this Certificate was executed by the Numbered Company and Lone Rock:^[16]

CERTIFICATE OF LIMITED PARTNERSHIP

PURSUANT TO SECTION 51 OF THE PARTNERSHIP

ACT, REVISED STATUTES OF ALBERTA, 1980,

CHAPTER P-2 AND AMENDMENTS THERETO

1.        The firm name under which the Limited Partnership is to be conducted is 'LRR LIMITED PARTNERSHIP'.

2.        The character of the business of the Limited Partnership is to carry on the exploration for and development and production of oil, gas and related hydrocarbons in Canada, as well as any other business which the General Partner considers appropriate.

3.        The name and place of residence of each Partner, both General and Limited, are as follows:

General Partner:

335827 Alberta Ltd.

100, 610 - 8th Avenue S.W.

Calgary, Alberta

T2P 1G5

Limited Partner:

Lone Rock Resources Ltd.

1000, 610 - 8th Avenue S.W.

Calgary, Alberta

T2P 1G5

4.        The Limited Partnership commenced as of January 14, 1986. The Limited Partnership shall terminate on December 31, 2050 unless sooner dissolved or terminated pursuant to Article XIII of the Partnership Agreement.

5.        The Limited Partner shall contribute, in assets, various petroleum and natural gas rights, tangibles and miscellaneous interests in accordance with the provisions of a proposed Roll-Over Agreement between the Limited Partner and the Partnership which contributed assets shall have a fair value of approximately $12,500,000.00

The General Partner shall contribute, in cash, the sum of $1,200.00.

6.        The Limited Partner is not required to make any other or additional contributions.

7.        Pursuant to Article VIII of the Partnership Agreement, the General Partner shall, from time to time and not less than semi-annually, determine the amount by which the liquid assets of the Partnership exceed the amount which, in the opinion of the General Partner, is required for the business, liabilities and operations of the Partnership and to reimburse the General Partner for any amounts owing to it and shall then convert such excess to cash and distribute such amounts to the Partners in proportion to their respective interests in the Partnership.

8.        The Limited Partner, by reason of its contribution, is entitled to receive 99.99% of all profits of the Partnership and the General Partner, by virtue of its contribution, is entitled to receive 0.01% of the profits of the Partnership.

9.        A Limited Partner has the right to transfer his Units but in doing so must comply with the provisions of Article XII of the Partnership Agreement.

10.      No time has been agreed upon within which the contribution of the Limited Partner is to be returned.

11.      No right has been given to the Limited Partner to substitute an assignee as contributor in his place.

12.      No right has been given to admit additional Limited Partners.

13.      No Limited Partner has a right of priority over other Limited Partners to a return of contributions or to compensation by way of income or any other priority.

14.      The General Partner is a corporation and may be removed as the General Partner at any time by an Extra-Ordinary Resolution passed by the Limited Partner which resolution shall appoint a new General Partner to the Partnership as a replacement for the General Partner being removed.

15.      Except upon the dissolution of the Partnership, no Limited Partner has the right to demand or receive property other than cash, in return for his contribution.

16.      The Limited Partnership Agreement attached as Exhibit 'A' hereto is, by this present reference, incorporated herein, to have the same effect as if each and every term thereof were set forth in this present Certificate.

IN WITNESS WHEREOF 335827 Alberta Ltd., as General Partner, and Lone Rock Resources Ltd., as Limited Partner, have executed this Certificate as of the 14th day of January, 1986.

Further on this same date, January 14, 1986, the partnership entered into a "rollover agreement" with Lone Rock whereby Lone Rock transferred all of its Canadian resources property and depreciable property to the partnership in return for a 99.99% interest in that partnership. The agreement recited that its "effective date is 12:01 a.m. on the 15th day of January 1986".^[17]

On January 15, 1986, the appellant Lone Rock and all of the shareholders of Lone Rock executed a "Share Purchase Agreement" retroactive to October 29, 1985. This agreement deals with the acquisition of the shares of Lone Rock by the appellant.^[18]

On January 16, 1986, Mr. Ryer wrote to the Corporate Rulings Directorate of Revenue Canada at Ottawa requesting an advance income tax ruling in relation to certain of the income tax consequences arising from the acquisition of Lone Rock by the appellant.^[19]

On January 28, 1986, the directors of Lone Rock adopted this resolution:^[20]

The undersigned, being all of the directors of Lone Rock Resources, Ltd. ('Corporation'), an Alberta corporation, subject to the Companies Act of the Province of Alberta, do hereby consent in writing to the adoption of, and do hereby adopt, the following resolution:

RESOLVED:

1.        That the subscription tendered by Bow River Pipe Lines Ltd. of Calgary, Alberta, for $7,822,053 Class 'A' shares of the Corporation for a total price of $7,053,840.82 be, and hereby is, approved and accepted; and

2.        That the Corporation issue Share Certificate No. 20 in the name of Bow River Pipe Lines Ltd. for $7,822,053 Class 'A' shares of the Corporation, such shares being issued as fully paid and non-assessable; and

3.        That Bow River Pipe Lines Ltd. be, and hereby is, instructed to remit the subscription price of $7,053,840.82 to the Bank of Montreal in settlement of loan advances made to the Corporation by the said Bank of Montreal.

Effective: January 28, 1986.

On June 13, 1986, Revenue Canada replied to Mr. Ryer's letter of January 16, 1986, as follows:^[21]

This is further to our recent telephone conversation (Senecal/Ryer) during which we discussed the reasons why this Department will not be providing 'grandfathering' rulings or opinions with respect to the proposed amendments tabled in the House of Commons by the Minister of Finance on June 11, 1986 governing the step-up in the tax value of distributed partnership property on partnership dissolutions.

We are therefore closing our file with respect to your request. Your $250.00 deposit will be refunded to you under separate cover.

On September 29, 1986, a "Distribution Agreement" was signed between the appellant and Lone Rock according to which Lone Rock "assigns, transfers and conveys to and sets over unto the transferee" (the appellant) "all of the right, title and interest of the transferor" (Lone Rock) "in and to all its property, assets and business..."^[22] A Notice to Amend the Certificate was signed by the Numbered Company and by the new partner, the appellant. It read thus:

We, the undersigned, hereby give notice that the Certificate of Limited Partnership of LRR Limited Partnership dated January 14, 1986 and registered at Central Registry of the Province of Alberta as L.P. 2925 on January 14, 1986 (the "Certificate") is hereby amended as follows:

1.        Paragraph 3 to the Certificate is deleted and the following is substituted therefor:

3. The name and place of residence of each Partner, both General and Limited, are as follows:

General Partner                         Limited Partner

335827 Alberta Ltd.                           Bow River Pipe Lines Ltd.

400 Bow Valley Sq. I              400 Bow Valley Sq. I

202 - 6th Avenue S.W.            202 - 6th Avenue S.W.

Calgary, Alberta                        Calgary, Alberta

SAVED AS AFORESAID, the Certificate is hereby ratified and confirmed.

Lone Rock failed to sign the Notice to Amend the Certificate substituting the appellant as the limited partner. Moreover, the certificate was not filed with the Central Registry. That same day, the appellant caused Lone Rock to be wound up. The next day, September 30, 1986, the Numbered Company and the appellant signed a "Distribution Agreement" whereby the partnership assigned, transferred and conveyed to the appellant all of the right, title and interest of the partnership in and all of its property, assets and business.^[23] The partnership and the appellant also entered into a Distribution Agreement whereby the partnership assigned, transferred and conveyed to the appellant all of its property, assets and business.^[24] The Numbered Company was then dissolved. The partnership's certificate was cancelled the same day.^[25]

The decision under appeal

With regard to the first ground of appeal, the trial judge concluded that the appellant never became a "member of a partnership" so as to satisfy the opening words of subsection 26(5) of the transitional provisions. He held so because the appellant had not become a partner in the LRR Limited Partnership since the compliance requirements of subsection 69(3) and paragraph 71(a) of the Partnership Act (Alberta)^[26] had not been met. He said:^[27]

My understanding is that the position of the appellant comes down to this: the operative steps by which it became a partner all occurred on September 29, 1986 and consisted of the Resolutions of the Directors of Lone Rock approving the proposed Distribution Agreement between Lone Rock and the appellant and authorizing it to be executed by any of the Directors; the Distribution Agreement entered into between Lone Rock as "Transferor" and the appellant as "Transferee" which provides: "The Transferor hereby assigns, transfers and conveys to and sets over unto the Transferee all of the right, title and interest of the Transferor in and to all its property, assets and business"; and the dissolution of Lone Rock under the Corporations Act. Of special importance is the clause just quoted that appears in the Distribution Agreement between Lone Rock and the appellant. It is to be noted that the first whereas clause in the Distribution Agreement between the partnership and the appellant reads: "WHEREAS effective September 29, 1986 Lone Rock Resources Ltd., the former sole limited partner of the partnership, was wound up into its parent, Bow River, which is now the sole limited partner."

In my opinion the foregoing was insufficient to constitute the appellant a partner. Subsection 69(3) of the Partnership Act was not complied with. It requires that a notice to amend the certificate to substitute the appellant as a limited partner be signed by Lone Rock as the assigning limited partner. This was not done. Further, the Amended Certificate was not filed with the Central Registry as required under paragraph 71(a) of the Partnership Act. It must be also noted that the inference to be drawn from subsection 65(3) of the Partnership Act is that an assignment by a limited partner in a limited partnership of his interest therein does not, of itself constitute the assignee a substituted limited partner.

He further concluded, as an additional reason that, since the terms of the "Limited Partnership Agreement" of January 14, 1986, had not been complied with,^[28] the appellant could not have become a "member of a partnership".

Article XII of the partnership agreement deals with the transfer of partnership interests. Paragraph 12.06(a) required the instrument transferring Lone Rock's interest in the partnership to the appellant to be executed by Lone Rock and the appellant "who must agree therein to be bound by the terms of this agreement". Those quoted words were not complied with. There was also non-compliance with paragraph 12.06(b) in that the instrument of transfer did not have the execution by Lone Rock guaranteed by a Canadian chartered bank or other financial institution described in that paragraph. The Amended Certificate was not filed as required by 12.08. Further, 12.09 precluded Bow River from becoming a partner until the terms of Article XII were complied with and all filings required by the Partnership Act were made in respect of the admission of Bow River to the partnership.

With regard to the second ground of appeal, the trial judge was satisfied that the phrase "agreement in writing" was broader than the term "contract". He said the following:^[29]

What, then, is the object or purpose of subsection 26(5) of the 1986 statute? To my mind the answer is that if a taxpayer has expended time or money or both with the intention of relying on paragraph 98(5)(d) of the Act in conducting its affairs the repeal of the paragraph is not applicable where that intention is evinced by agreements in writing, not necessarily contractual in nature, entered into prior to December 4, 1985. But those agreements must set in motion the taking of steps that lead directly to the making of agreements of the kind described in paragraphs 26(5)(a), (b) and (c) after that date that do give rise to contractual obligations. I do not think that reference to an agreement in legislation or in some other context means that the agreement must create contractual rights and obligations.

He then continued:^[30]

Regarding the second point, the property was acquired by the partnership pursuant to agreements contained in the First Letter dated October 16, 1985 and in the Second Letter dated October 28, 1985 which should be read together. There is a clear nexus between those letters and the rollover agreement between Lone Rock and the partnership effective January 15, 1986. Under this agreement Lone Rock transferred all of its Canadian resource property and depreciable property to the partnership in return for a 99.99% interest in that partnership. The property was, therefore, acquired by the partnership pursuant to agreements in writing entered into before December 4, 1985.

With reference to the third point, as indicated in respect of the first point, the appellant received the partnership property on September 29, 1986 under the Distribution Agreements of that date between the Numbered Company as Transferor and the appellant as Transferee and between the partnership and the appellant. It received this property in satisfaction of its interest in the partnership. This interest was acquired under the Distribution Agreement of September 29, 1986 between Lone Rock as Transferor and the appellant as Transferee. But the acquisition on September 29, 1986 can be said to have been made pursuant to the agreements in the First and Second Letters. There is a bridge between those letters and the agreements just mentioned.

With regard to the third ground of appeal, the trial judge dismissed the application of paragraph 66.4(5)(a) of the Income Tax Act on the basis that it "was not even alluded to in the pleadings, in the evidence, in argument at trial or in the written submissions made after trial before judgment was issued.^[31]

Analysis

It is trite law that no one has a vested right to a law as it stands at a particular time in history.^[32] However, in order to alleviate the effect of certain changes in the law, Parliament may limit the scope of the new law by providing that special measures will apply to persons who meet certain conditions. Such measures are essentially remedial in nature.^[33] Their purpose, in tax matters, is generally to protect those classes of taxpayers who have, in good faith, arranged their affairs in accordance with the law applicable at the time, although the legal and technical details of their transactions may not have been completed until after the law was modified. Depending on the terms of the legislation, the transitional measures found in a statute may allow them to be covered by the former law despite the coming into force of the new legislation.

Subsection 26(5) of the transitional provisions, together with paragraph (a) and subparagraph (b)(i), provide that paragraph 98(5)(d) of the Income Tax Act is still effective with respect to property received by a member of the partnership where the property was acquired by the partnership after December 4, 1985, pursuant to an agreement in writing entered into before that date, and the property is received by the member of the partnership in satisfaction of an interest in the partnership acquired after December 4, 1985, pursuant to an agreement in writing entered into on or before that date.

Given the transitional provisions, what must be determined in the case at bar is:

1)          whether the appellant became a member of the partnership;

2)          whether the property was acquired by the partnership after December 4, 1985, pursuant to an agreement entered into before that date, and whether it was received by the member of the partnership in satisfaction of an interest in the partnership acquired after December 4, 1985, pursuant to an agreement in writing entered into on or before that date.

The first question is dealt with in the analysis of the first ground of appeal.

The second, which comprises two issues, is dealt with in the analysis of the second ground of appeal.

The first ground of appeal

It was essential for the appellant to become a member of the partnership at the time of the Distribution Agreement of September 29, 1985. The words "member of a partnership" are undefined in the Income Tax Act. The parties were, however, governed by the common law, by their various agreements and by the Partnership Act (Alberta). These sources assist in defining the meaning of "member of a partnership".

The appellant claims it gained the status of a "member of a partnership". It submits that this phrase, as found in the federal legislation, encompasses assignees of partnership interests and that, to a minimum, this is the appellant's situation. Indeed, the Tax Court judge did not deny the appellant had become an assignee of a partnership interest. The appellant also pleads that although, admittedly, it did not become a limited partner, on account of the failure to meet the statutory formalities of transfer provided in the Partnership Act (Alberta), it nevertheless became a general partner under the provincial statute. The formalities regarding the registration of an amended certificate are only meant to protect the creditors. When they are not complied with, limited partnership cannot be claimed. The status of general partner, it says, is however attained. The appellant states that, although there is no known jurisprudence in Alberta or in any other Canadian province on the effect of non-compliance with the registration of a notice to amend a certificate of limited partnership, the law in the United States under the Uniformed Limited Partnership Act (ULPA) of 1916 provides that failure to file a certificate does not negate the associations between the partners nor does it affect the rights of the partners against each other. This U.S. Law was the model for many provincial limited partnership legislations including that of Alberta.^[34]

But the difficulty is that, quite aside from the statute, Lone Rock, on September 29, 1986, never gave itself the trouble of following, on the transfer to the appellant of its interest in the limited partnership, the specific terms of the LRR Limited Partnership Agreement of January 14, 1986, by which it was bound. Indeed, the Certificate registered on January 14, 1986, stated at paragraph 9:

9. A Limited Partner has the right to transfer his Units but by doing so must comply with the provisions of Article XII of the Partnership Agreement.

The appellant says, however, that no one questions the existence of a valid partnership between Lone Rock (as limited partner) and the Numbered Company (as general partner). Nor is there any doubt regarding Lone Rock's intention to transfer its partnership interest to the appellant who wished to acquire the partnership interest, a transfer not opposed by the Numbered Company. Thus, the failure to comply with the terms of the LRR Limited Partnership Agreement of January 14, 1986, does not negate the transfer of the interest. It simply indicates that Lone Rock, which controlled the Numbered Company, and Bow River, which controlled Lone Rock, had implicitly consented to a new course of dealing. Such action, says the appellant, is permitted under section 21 of the Partnership Act (Alberta) which provides:

21(1) The mutual rights and duties of partners whether ascertained by agreement or defined by this Act may be varied by consent of the partners.

(2) The consent may be either expressed or inferred from a course of dealing.

                                                                                       [Emphasis added]

The appellant's argument flies, however, in the face of article XVIII of the LRR Limited Partnership Agreement of January 14, 1986, on which the transfer of the partnership interest of September 29, 1985, is based. Article XVIII reads in full:^[35]

18.01 Amendments to Partnership Agreement

Except as otherwise provided by this Agreement and subject to Section 18.04 hereof, no amendment to this Agreement shall be effective unless the same has been approved by the Limited Partners by an Extraordinary Resolution, provided that any amendment which affects the General Partner must also have the consent of the General Partner.

18.02 Amendments by General Partner

The General Partner may, without prior notice to or consent from any Limited Partner, amend any provisions of this Agreement, from time to time, to cure any ambiguity or to correct or supplement any provisions contained herein which, in the opinion of counsel to the Partnership, may be defective or inconsistent with any other provisions contained herein; provided, however, that no such cure, correction or supplemental provision shall be made if it may adversely affect the interests of the Limited Partners.

18.03 Notice of Amendments

Limited Partners shall be notified of full details of any amendments to this Agreement within 30 days of the effective date of the amendment.

18.04 Prohibited Amendments

Notwithstanding the above or any other provisions to the contrary which may be contained in this Agreement, no amendment shall be adopted if such amendment would change the Partnership to a general partnership or change the liability of or reduce the interests of the General Partner or the Limited Partners to allow the Limited Partners to take part in the control or management of the business of the Partnership.

The parties could not have implicitly waived the formalities of transfer of the partnership interest provided for in the LRR Limited Partnership Agreement so as to change the liabilities of the partners. The LRR Limited Partnership Agreement prohibited such an occurrence.

Did the appellant, however, as assignee of the Lone Rock's interest in the partnership, become a "member of the partnership" pursuant to the transitional provisions of the Income Tax Act?

The Partnership Act (Alberta) recognizes the status of assignee (subsection 65(1)).^[36] However, it entitles the assignee, who, like the appellant, has not perfected his limited partner status and has not become a substituted limited partner, only to receive the share of the profits to which his assignor would otherwise have received. An assignee has no right to information or account of the partnership transactions nor any right to inspect the partnership books (subsection 65(3)).^[37] Clearly, the statute then does not place the assignee in a position to carry on the business of the partnership, an essential element for whoever wishes to claim the "bump-up" advantage given under subsection 98(5) of the Income Tax Act. Subsection 98(5), it will be recalled,^[38] applies only in situations where one member of the partnership continues to carry on the business of an extinguished partnership as a sole proprietorship.

The appellant, therefore, never achieved the status of a "member of a partnership".

The second ground of appeal

In order to succeed on the second ground of appeal, the appellant must demonstrate that the property was acquired by the partnership after December 4, 1985, pursuant to an agreement in writing entered into before that date, and that it received the property in satisfaction of an interest in the partnership pursuant to an agreement in writing entered into before December 4, 1985.

With regard to the first branch of this requirement, the respondent states that the First Letter required the completion of a formal sale agreement. The First and Third Letters indicated that the sale was subject to regulatory approval, including Investment Canada. The Second Letter required that Koch receive a favourable income tax ruling from Revenue Canada. Proposals subject to the completion of conditions such as those do not, says the respondent, create binding obligations.

There is little merit in the respondent's contention.

The Tax Court judge did not err in concluding that the words "agreement in writing" did not require that the agreement create "contractual rights and obligations". This was made clear by this Court (Décary J.A.) in Her Majesty the Queen v. Trade Investment Shopping Centre Ltd.^[39] which confirmed the earlier decision of Noël J.^[40] The word "agreement in writing" is not limited to a purchase/sale agreement. It certainly covers instruments of negotiation such as those reflected in the three Letters. Even if the First Letter indicates: "If his proposal is acceptable to you, Koch will prepare for your consideration a formal sale agreement and related documentation", this First Letter, once accepted, became a commitment on the part of the parties to pursue a business proposition. Two other accepted Letters ensued. They all meet the requirement of "agreement in writing".

The trial judge did not err in finding that the appellant had established that the partnership had acquired the property after December 4, 1985, pursuant to an agreement in writing. The appellant promised to buy, and eventually bought, the entire shares of Lone Rock on January 14, 1986, retroactively dated to October 29, 1985. Lone Rock, on January 14, 1986, became a limited partner in a partnership with the Numbered Company, created on November 8, 1985, and wholly owned by Lone Rock. This partnership had been created pursuant to an agreement in writing in the sense that its creation had been the subject of an accord in the second Koch letter. It is true that, had the approval of Investment Canada and a favourable advance tax ruling not been met,^[41] the agreement could have been cancelled. But the terms agreed to up to that point were still enough to constitute an "agreement in writing".

Under the second branch of the requirement, the appellant must, however, have received the property in satisfaction of an interest in the partnership pursuant to an agreement in writing entered into before December 4, 1985. In the case of The Queen v. Trade Investment Shopping Centre Limited,^[42] referred to earlier, a transitional provision similar to the one in the case at bar was considered. It was said that the "agreement in writing" must be binding on the party claiming the advantage of the transitional measure. That party must demonstrate it is bound to execute an obligation pursuant to an "agreement in writing" entered into prior to the cutting date provided in the legislation. In that case, it was held that the defendant could rely on a transitional provision because it had an irrevocable and irreversible obligation to sell a shopping centre pursuant to the terms of a purchase option contained in a lease.

There was no agreement in writing between the appellant and Lone Rock, as a limited partner in the partnership, which irrevocably and irreversibly obligated the appellant to acquire Lone Rock's interest in the partnership before December 4, 1985. The only reference in writing to the acquisition of Lone Rock's interest in the partnership was in the plan exposed by counsel for Koch to his President.    The only undertaking set out in the Letters related to the acquisition by the appellant of the Lone Rock Shares once Lone Rock was in a partnership with the Numbered Company. It is true that when the appellant obtained the entire shares of Lone Rock on January 15, 1986, retroactively to October 29, 1985, the stage was set for the pursuance of the plan set out by counsel to Koch since Lone Rock had become, a day earlier, a member of a partnership together with the Numbered Company. There was, however, no obligation set down in writing which bound the appellant to acquire Lone Rock's interest in the partnership. Nothing in the relevant documents irrevocably committed the appellant to acquire Lone Rock's interest in the partnership.

In fact, even if it were to be said that the agreements in writing entered into before December 4, 1985, were the basis for Lone Rock's dissolution and distribution to the appellant of its interest in the partnership, the obligation to distribute the partnership interest was on Lone Rock and not on the appellant. For it is Lone Rock who distributed the interest in the partnership to the appellant upon its dissolution. In Trade Investments, Noël J. stated the following:^[43]

If we keep in mind the fact that the purpose of the transitional provision is to protect persons who entered into contracts under the old law, it becomes clear that an agreement which is not binding on one of the parties could not be an "agreement" as to him. Only an agreement placing an obligation on the party claiming under it was contemplated by the legislation.

The Tax Court judge consequently erred when he stated that "... the acquisition of September 29, 1986, can be said to have been made pursuant to the agreements in the First and Second Letters..." There was no agreement in writing entered into before December 4, 1985, which placed an obligation on the appellant to acquire Lone Rock's interest in the partnership.

As this and the membership requirement were essential elements in order for the transitional provisions to apply to the transactions at issue, the appellant cannot avail itself of the transitional provisions of the Income Tax Act.

The third ground of appeal

The appellant argues that it is entitled to succeed even if it did not qualify, as I have found, under the transitional provisions. According to counsel, the issue in this case, as it was framed by the respondent in Her Amended Reply to the Notice of Appeal, was whether the appellant was "entitled to add the amount of $5,874,367 ("COGPE addition") to its cumulative Canadian Oil and Gas Property Expense ("CCOGPE") account in respect of Canadian resource property it received on the termination of LRRP".^[44] It is counsel's position that if the appellant falls out of the "rollover" provision contained in paragraph 98(5)(d), then the appellant falls into the provisions that generally govern the acquisition of resource properties by taxpayers other than partners. More particularly, paragraphs 66.4(5)(a) and (b) (which respectively define "Canadian oil and gas property expense" and "Cumulative Canadian oil and gas expense") provide that taxpayers generally are entitled to add the cost of the resource properties to their COGPE pools. Counsel argues that such cost is at least $5,874,367.

That argument was not raised at trial. The appellant sought to raise it once the judgment had been rendered, pursuant to section 168 of the Tax Court of Canada Rules (General Procedure)^[45] ("the Rules"). The Tax Court judge denied the application on the basis that the argument "was not even alluded to in the pleadings, in the evidence, in argument at trial or in the written submissions made after trial before judgment was issued".^[46]

The Tax Court judge's decision is unassailable. The conditions set out by section 168 of the Rules were obviously not met. His decision does not, however, dispose of the matter, since a court of appeal has a discretion to hear in appeal an argument that was not raised below.

The general rule, as noted by Major J. in Athey v. Leonati^[47] is "that an appellant may not raise a point that was not pleaded, or argued in the trial court, unless all the relevant evidence is in the record". I take it, from Athey, that where all relevant evidence is part of the record and where the opposing party suffers no prejudice, it would be an error for a court of appeal to refuse to consider the argument.

The respondent does not invoke prejudice. She alleges, rather, that there is no evidence in the record which would allow the Court to decide the issue and, in the alternative, that all the relevant evidence is not in the record.

I agree with the respondent that the first test set out in Athey is not met. However, in the very peculiar circumstances of this case, the explanation as to why there is a problem with respect to the evidence in the record lies in respondent's failure to properly amend Her Reply to the Notice of Appeal, which in turn led the appellant to present and argue the case on a wrong footing.

Here is what happened. In Her Reply to the Notice of Appeal filed on May 27, 1994, the respondent made the following assumption:^[48]

3(u) The cost to Appellant of the Canadian resource property received on the termination of LRRP was $5,874,367.00.

That assumption was all the appellant needed to rest its case in as far as the argument based on paragraphs 66.4(5)(a) and (b) was concerned.

In an Amended Reply to the Notice of Appeal dated February 21, 1996, five days prior to the hearing before the Tax Court, the respondent replaced Her 3(u) assumption with the following:^[49]

3(u) in its 1986 taxation year, Appellant increased the cost amount of the Canadian resource property received on the termination of the LRRP by $5,874,367.00.

The problem is, the respondent forgot to underline the amended assumption in Her Amended Reply to the Notice of Appeal, contrary to the requirements of subsection 55(2) of the General Procedure Rules of the Tax Court of Canada, with the result that counsel for the appellant was led to believe that the former assumption had been maintained. While it is true that pursuant to section 7 of the Rules, non-compliance does not render a proceeding a nullity, the fact is that the parties, because of respondent's non-compliance with the Rules, were at odds with each other, without even knowing it, over the applicable assumption.

Counsel for the respondent graciously conceded that were the decision of the Tax Court to be confirmed -- as I think it should be -- , the appellant would be entitled, pursuant to paragraphs 66.4(5)(a) and (b), to add the cost, if any, of the resource property to its Canadian Oil and Gas Property Expense, and that the most equitable way to deal with the present situation would be to remit the matter back to the Tax Court of Canada for the determination of the cost, if any, to the appellant of the Canadian resource property it received on the termination of the Lone Rock Resources Limited Partnership.

On the authority of subparagraph 52(c)(ii) of the Federal Court Act which gives the Court of Appeal the discretionary power, in the case of an appeal other than an appeal from the Trial Division, to "refer the matter back for determination in accordance with such directions as it considers to be appropriate", I have reached the conclusion that the new argument raised before us by the appellant with respect to the cost amount should be considered by this Court, but that in the special circumstances of this case, where arguably more complete evidence is required, it would be appropriate to have it determined by the Tax Court of Canada on the evidence that is in the record or on such further evidence as it may allow.

I am, therefore, prepared to allow the appeal -- which is otherwise dismissed -- but only to the extent of remitting the matter back to the Tax Court of Canada for determination of the cost, if any, which the appellant is entitled to add to its cumulative Canadian Oil and Gas Property Expense account, pursuant to paragraphs 66.4(5)(a) and (b) of the Income Tax Act, in respect of Canadian resource property it received on the termination of the Lone Rock Resources Limited Partnership.

There shall be no costs, considering the divided success in this appeal.

                                                                                                                 "Alice Desjardins"                    

                                                                                                                                        J.A.

"I concur

Robert Décary, J.A."

"I concur

François Chevalier, D.J."

                                                                                                                              A-472-96

BETWEEN:

                                       BOW RIVER PIPE LINES LTD.

                                                                                                                             Appellant

                                                                 - and -

                                           HER MAJESTY THE QUEEN

                                                                                                                         Respondent

                                                                                                           

                                           REASONS FOR JUDGMENT

                                                                                                            

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