Source: https://taxinterpretations.com/content/356686
Timestamp: 2019-04-21 16:16:00+00:00

Document:
Appeals heard on January 29, 30 and 31, 2007 at Calgary, Alberta.
The appeals from the assessments made under the Income Tax Act for the 1996 and 1997 taxation years are dismissed with costs.
Signed at Ottawa, Canada, this 11th day of April 2007.
 These appeals for the appellant's 1996 and 1997 taxation years were heard together. They arise from the application of subsection 103(1) of the Income Tax Act as a result of a transaction that took place in the appellant's 1996 taxation year.
 The parties have entered into a statement of agreed facts ("SAF"). It is attached as Appendix A to these reasons. Appendix B is Tab 51 of the agreed book of documents, a series of schematic diagrams of agreed transactions. There is virtually no dispute on the basic factual background.
 The facts leading up to the transaction giving rise to the assessments are somewhat complex but the issue itself turns out to be fairly simple. I shall briefly state it in this paragraph. The appellant became a partner in the Penn West Petroleum partnership with two of its subsidiaries. Penn West Petroleum partnership owned oil and gas properties including properties in the Blueberry area of British Columbia. These properties were previously owned by PetroCanada, who transferred them to two of the partners (or their predecessors) of the Penn West Petroleum partnership. The Blueberry properties were subject to rights of first refusal ("ROFRs") held by Phillips Petroleum Resources Ltd., Suncor Inc. and B.C. Star Partners. Penn West knew that the ROFRs were an encumbrance on the property and it recognized its obligation to convey the Blueberry properties to the holders of the ROFRs if they chose to exercise their rights. PetroCanada gave notice to Phillips of the conveyance of the properties to the partnership. Penn West was reluctant to convey the properties directly to Phillips (possibly because of the adverse effect such a sale would have on its Canadian oil and gas property expense pool ("COGPE")). Phillips in any event objected to the price stated in PetroCanada's ROFRs notices. Penn West therefore suggested that Phillips acquire the property indirectly by becoming a partner in the Penn West Petroleum partnership. Under the Penn West Petroleum partnership agreement it was provided that where property of a partnership was conveyed to a partner any income or loss of the partnership arising from such distribution was to be allocated to the party to whom the property was distributed. This is what happened. The Blueberry properties were distributed to Phillips. Under the partnership agreement the tax consequences of this distribution, specifically the erosion of the COGPE, went with the property and it was Phillips who suffered the reduction of its COGPE and not Penn West. The respondent contends that this result contrevenes section 103 of the Income Tax Act. The Minister allocated to the appellant as a partner in the Penn West Petroleum partnership its pro rata share of the proceeds and as a consequence reduced its COGPE proportionately.
 In the following summary of the facts I shall use the same abbreviations as in the SAF. Effective April 1, 1993, PetroCanada transferred certain oil and gas properties (the "TroCana assets") to a partnership, Trocana Resources. That partnership consisted of PetroCanada and Trocana Resources Inc. ("TRI"), its wholly owned subsidiary. That partnership was dissolved on November 30, 1993. A 97% interest in the properties was transferred to PetroCanada and 3% to TRI.
 The next step was the formation of 594159 Alberta Ltd. ("594), of which 1% was owned by PetroCanada and 99% by 552792 Alberta Inc. ("552"). Counsel for the appellant informed me that 552 was owned by one Murray Edwards, who was at arm's length with PetroCanada. This statement was not disputed by the respondent.
 Effective February 17, 1994, PetroCanada sold to 594 its interest in the TroCana assets for $155,050,000 and its shares in TRI to 552 for $14,750,000. Thus, 594 and TRI, the two subsidiaries of 552, owned respectively 97% and 3% of the TroCana assets. They formed the TroCana partnership on February 21, 1994 and rolled their interests in the TroCana assets into the TroCana partnership under subsection 97(2) of the Income Tax Act. In return, 594 received 145,500,000 partnership units and TRI received 4,500,000 units.
 The effect of the election to have subsection 97(2) apply was that the deemed cost of the oil and natural gas tangibles transferred by 594 and TRI were $14,425,313 and $413,555 respectively. The deemed cost of the resource properties (oil and natural gas leases) was nil. 594's interest in the partnership was 97% and TRI's was 3%.
All Net Profits, Net Losses, taxable income and tax losses of the Partnership and all other items of income, gain, loss, deduction, recapture and credit of the Partnership, which are allocable for the purposes of the Income Tax Act shall be allocated to the Partners in accordance with their sharing ratios set forth under Section 3.10. All Net Profits and Net Losses shall be determined by the Managing Partner in accordance with generally accepted accounting principles.
Allocations and distributions to Partners under this Agreement shall be made based on the Partner's respective sharing ratio, such sharing ratio to be determined by the Partners at the end of each fiscal year of the Partnership in accordance with the number of Units each Partner owns relative to the total number of Units outstanding for the Partnership.
Subject to Section 3.5 all income and loss for income tax purposes of the Partnership, proceeds of disposition of Canadian resource properties (as defined in the Income Tax Act) which are received or receivable by the Partnership, crown royalties payable by the Partnership on production of petroleum substances, Canadian exploration expense, Canadian development expense, Canadian oil and gas property expense and investment tax credits (all as defined in the Income Tax Act) arising from the expenditures of the Partnership and all other amounts which are separately allowable for the purposes of the Income Tax Act or any other applicable provincial legislation shall be allocated among the Partners in accordance with there Partnership Interests and all such allocations shall be made as of the end of each fiscal year of the Partnership.
 Article 9 dealt with redemption of units.
(c) the Designated Properties shall include a promissory note of the Partnership in an amount equal to the Percentage of the working capital of the Partnership at the time of distribution.
The rights of distribution under Section 9.1 may be exercised by any Partner giving notice to the Managing Partner of its election to have the Partnership redeem the Designated Units and of the specification of the Designated Properties. The Managing Partner will have up to 10 days from receipt of such notice to accept or reject such notice. Upon acceptance of such notice by the Managing Partner, the election is irrevocable by such Partner. The effective date of the election will be the first day of the month following receipt of the notice or such other date as may be agreed to by the Managing Partner. The Managing Partner will cause the Designated Properties to be conveyed by an agreement in form and substance satisfactory to the Managing Partner to be prepared and submitted to the Partner for execution together with any election forms required by the Income Tax Act. After the conveyance, subject to Section 3.17 hereof, the retiring Partner will have no further interest in the Partnership or any of its remaining assets in respect of the Designated Units. The redemption and conveyance will be carried out pursuant to any tax deferral provisions of the Income Tax Act which are available at the date of such transfer and all parties agree to co-operate in doing all things and executing all documents necessary therefor. Upon any distribution of Designated Properties pursuant to this Article 9, the proceeds of disposition, income or loss, credit and expenses that arises in the Partnership will be allocated in accordance with the provisions of Section 3.17 hereof.
Notwithstanding Section 9.2, if there is a distribution of Designated Properties pursuant to Section 9.1 those Partners who receive Designated Properties shall be deemed to remain Partners and holders of the number of Designated Units for so long as is necessary to effectively cause the allocation of the amounts referred to in Section 3.17. After the allocation of the amounts referred to in Section 3.17, the one Units which is held by any Partner exercising its rights under Section 9.1 hereof to have all of its Units, except one, redeemed will be acquired by the Partnership for $1.00 and will be cancelled without the payment of any other consideration therefor or any act by either the Partner or the Partnership.
(b) amounts of the Partnership which are relevant for income tax purposes and which are otherwise allowable pursuant to Section 3.15 hereof, shall be allocated to such Partner to the extent of any Units redeemed on the basis of the proportion such amounts relative to the portion of the fiscal year of the Partnership ending on the last day of the month following the effective date of the election in respect of redemption of Units under Section 9.2, subject to any agreement between the Managing Partner on behalf of the Partnership and the specific Partner to whom such allocation is to be made.
 Effective April 22, 1994, the appellant acquired from 552 the common shares of 594 and all the shares of TRI for $14,750,000 in cash and common shares.
 To recapitulate the situation on April 22, 1994, then, the appellant had the common shares of 594 and all the shares of TRI who, through the TroCana partnership owned the TroCana assets. PetroCanada, as the result of its sale to 594 of the TroCana assets owned 10,000,000 preferred shares of 594 and was owed by it $145,050,000 by way of promissory notes and debentures.
(b) the appellant giving PetroCanada subsidiary, Chancellor, 1,955,828 special warrants in exchange for the $18,000,000 second debenture of 594 held by PetroCanada.
 The Penn West Acquisition Agreement dated April 22, 1994 contained other provisions but they do not appear to be germane to the issue in this case. It is sufficient to say that following the various transactions contemplated by the Penn West Acquisition Agreement, TRI and 594 became wholly owned subsidiaries of the appellant at a cost of about $170,000,000. The parties agree that the acquisition of the TroCana assets significantly increased the value of the appellant's shares and that the TroCana assets were independently valued at about $253,000,000.
 Effective July 1, 1994, the appellant transferred its oil and gas properties to the TroCana partnership pursuant to an election under subsection 97(2) of the Income Tax Act in return for partnership units. The name of the partnership was changed to Penn West Petroleum partnership.
(a) No. 1: to change the name of the partnership and to reflect the appellant's becoming a partner with 85,000,000 units.
(b) No. 2: to reflect 594's contribution of additional assets for 598,290 more units.
(c) No. 3: to reflect the fact that 626360 Alberta Ltd. ("626") a wholly owned subsidiary of the appellant became a partner of Penn West Petroleum after 626 acquired the shares of 594 and 594 wound up and distributed its assets to 626, including its 146,098,290 units in the partnership.
 On January 31, 1995, 626 and the appellant amalgamated. As noted above, some of the TroCana assets, known as the Blueberry assets, were subject to ROFRs in favour of Philips, Suncor and B.C. Star. PetroCanada gave notice to these companies that it had sold its interest in the Blueberry assets to 594.
 The ROFR exercise prices were stated in the notices and are set out in paragraph 29 of the SAF. Suncor, Philips and BC Star objected to the exercise prices contained in the notices. PetroCanada issued a new notice.
 On December 29, 1994, the appellant sent a letter of agreement to Phillips that contained an offer to sell units of Penn West Petroleum to Philips. The agreement, which was accepted by Phillips, is central to the issue in this case.
d. "Pipeline Interest" means the entire interest acquired by Alberta pursuant to the Petro-Canada Sale (and now held by the Partnership) in the pipeline operated pursuant to a Pipeline Operating Agreement dated July 31, 1969 and amended by a Clarification Agreement dated April 1, 1993, including without limitation the Aitken Creek lateral.
e. the principal amount will bear interest at the CIBC prime rate until February 24, 1995 and at the CIBC prime rate plus 2% thereafter.
3. We understand that the Purchaser had expressed an interest in purchasing the Assets presently owned by the Partnership for cash consideration. Unfortunately, the Assets are not for sale by the Partnership on that basis. In considering the advisability of purchasing the Units, the Purchaser should note that the Agreement by which the Partnership is governed (the "Partnership Agreement") contains in Section 9.1 provisions that a partner may request a redemption of his units in consideration for a share of the Partnership's assets. Such request must be accepted by Penn West, as managing partner of the Partnership. As part of any purchase of the Units from the Vendor, Penn West is prepared to represent that, if the Purchaser were to request a redemption of the Units during the period commencing on or after February 1, 1995 and ending March 1, 1995 and request a conveyance of the Assets in redemption therefore [sic] in accordance with Section 9.1. Penn West, as managing partner of the Partnership, would accept such redemption on the basis requested, subject to the terms of this letter and the entering into of a definitive redemption agreement with the Partnership and agreement that, upon any such redemption, the redemption price of the Assets will be allocated as to 90% to petroleum and natural gas rights, 10% to tangibles and a nominal amount to any other assets. In the event that the Purchaser requests such a redemption in accordance with this Agreement and the Partnership Agreement and such redemption does not occur, Penn West, as managing partner of the Partnership, and Alberta, as a partner of the Partnership, will cause the redemption by the Partnership of the Units for an amount equal to the Purchase Price plus any amount of interest payable under the Promissory Note to the date of redemption.
4. The Partnership Agreement provides presently that in the event that the Purchaser were to redeem its Units and request a distribution to it of the Assets that any proceeds of disposition deemed to be received by the Partnership will be allocated to the Purchaser for tax purposes to reflect such distribution. If for any reason such allocation is disallowed by the governing tax authority in whole, or in part, prior to December 30, 1999, upon it being finally determined by a court of competent jurisdiction or by agreement between the taxing authority and Penn West, the Purchaser agrees to pay an amount to the Partnership equal to 7% of the amount not so allocated as additional consideration for the distribution to the Purchaser of the Assets. It is acknowledged and agreed that the amount of the proceeds of disposition to be allocated to the Purchaser under the Partnership Agreement in respect of the distribution of the Assets shall not be in excess of 90% of the Purchase Price.
5. The Purchaser shall not be liable to pay an amount under clause 4 hereof as additional consideration for the distribution of the Assets in respect of any income (the "Excess Income") allocated to the Purchaser for income tax purposes for the fiscal period of the Partnership commencing February 1, 1995 other than the proceeds of disposition related to the distribution of the Assets.
Penn West will be liable for and shall indemnify Purchaser in respect of any income tax payable by Purchaser on the Excess Income computed on the assumption that the Purchaser is fully taxable.
6. If the Purchaser does not redeem the Units prior to June 30, 1995, the Purchaser will grant to Penn West an option to purchase the Units exercisable on or after June 30, 1995 and prior to June 30, 1998 at the Purchase Price.
7. Penn West covenants that it will cause the Partnership Agreement to be amended as necessary to reflect the provisions of this Agreement.
 What it boils down to is this: Phillips, on behalf of itself and Suncor and B.C. Star wanted the Blueberry assets and the appellant knew that it could insist on getting them because of the ROFRs. The appellant knew that for the partnership to sell the Blueberry assets directly to Phillips would erode its proportionate share of the COGPE. It therefore invited Phillips to acquire units in the partnership. This would enable Phillips to avail itself of the provisions in the TroCana partnership agreement relating to redemption of units, distribution of assets and specifically article 3.17 which is set out above. It essentially attributes to a partner to whom property of the partnership is distributed the income tax consequences of such distribution.
(b) upon entering into such agreements in respect of the distribution of the Designated Properties in form and substance satisfactory to the Managing Partner.
Notwithstanding Section 9.2, Section 96(1.1) of the Income Tax Act shall be applicable if there is a distribution of Designated Properties pursuant to Section 9.1 and those Partners who receive Designated properties shall be deemed to remain Partners pursuant to such Section 96(1.1) for income tax purposes until the next fiscal year end of the Partnership.
 On February 17, 1995, Phillips sent a notice to the appellant as managing partner of the partnership electing to have its units redeemed on February 24, 1995. On February 24, 1995, Phillips paid 626 $14,255,086.94 in satisfaction of the promissory note. By February 24, 1995, 626 and the appellant had already amalgamated.
 Also, on February 24, 1995, Phillips, the partnership, the appellant and TRI executed an agreement under which the Blueberry assets were tranferred to Phillips in satisfaction of Phillips' interest in the partnership. The value of the petroleum and natural gas rights was allocated to Phillips in the amount of $12,751,844.40 and the tangibles in the amount of $1,416,870.60.
* Allocation made on the basis of 92.82%, 0%, 1.91% and 5.27%, respectively.
 At the risk of over simplification what happened was this. When the Blueberry assets were distributed to Phillips in satisfaction of its partnership share there was, under subsection 98(2), a deemed disposition of them and a corresponding reduction of the COGPE which, in the absence of article 3.17 of the agreement, would have been allocated among the partners in accordance with their respective interests in the partnership: the appellant 36.08%; TRI 1.91%; 626 56.74% and Phillips 5.27%. After the amalgamation of the appellant with 626 the appellant's percentage interest became 92.82%. These percentages will have changed as the result of the addition to the partnership of a new partner, Northern Reef Exploration Ltd. as of August 30, 1995. I have been unable to reconcile the percentage interest of Northern Reef in the amended agreement no. 6 of 3.50% and that shown in the reply of 12.37%. This was not explained to me and I shall ignore it as it does not bear on the question involved here. Schedule A to the reply shows the appellant with an 85.96% interest.
 The question is whether the entire deemed proceeds of the disposition of the Blueberry assets can be allocated to Phillips for tax purposes by reason of article 3.17 despite the fact that for balance sheet purposes Phillips had only a 5.27% interest.
(1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.
 The agreement upon which we must focus consists essentially of sections 3.17 and 9.1 as amended by the partnership amending agreement together with the letter agreement between the appellant and Phillips of December 29, 1994. Can it be said that the principal purpose for these contractual provisions "may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under [the Income Tax] Act"?
The authorities lead to this conclusion, that if there is an agreement to do something, not expressed on the face of the agreement signed, that something which is to be done being included in some other writing, parol evidence may be admitted to show what that writing is, so that the two taken together may constitute a binding agreement within the statute of Frauds.
Then, my Lords, there was a case of Dobell v. Hutchison, (2) which went exactly upon the same principle. There, the defendant having put up a thing for sale by auction, the plaintiff entered into a written agreement, signed by himself, to purchase it upon certain specified terms. It turned out that Hutchison, the defendant, had not a title which authorized him to sell, and consequently, that he could not complete the sale; but, in the correspondence which took place afterwards, several letters referred to the terms which had been signed by Dobell, the plaintiff, as being the terms which were then subsisting between them, and the Court of Queen's Bench held that, parol evidence being given to show what the terms were to which Hutchison referred in his letters, the two might be taken together, so as to bind Hutchison, and to show that that was the written paper, signed by the plaintiff, to which he referred as being the terms of the contract.
(1) 6 H. L. 257. (2) 3 A. & E. 355.
(2) Subject to subsections (3) and (5) and 85(3), where at any time after 1971 a partnership has disposed of property to a taxpayer who was, immediately before that time, a member of the partnership, the partnership shall be deemed to have disposed of the property for proceeds equal to its fair market value at that time and the taxpayer shall be deemed to have acquired the property at an amount equal to that fair market value.
 This would reduce the partner's COGPE by reason of paragraph (a) of the description of F in the definition of cumulative Canadian oil and gas property expense in subsection 66.4(5). I need not set out the elaborate algebraic formula in the definition of COGPE. It is sufficient to say that if a partnership disposes of Canadian resource property the proceeds of disposition reduce the partner's COGPE in proportion to the partner's partnership share by reason of subsection 64.4(6). The assessments against Penn West do just that. How then does section 3.17 alter this result? It provides that the proceeds of disposition deemed to be received by the partnership in respect of the distribution by the partnership to a partner of Canadian resource property shall be allocated to the partner to whom the property is distributed.
(c) Other agreements reached between partners. It follows from the foregoing that any agreement which seeks to alter a partner's status or entitlement ex post facto can quite properly be implemented as between the partners, whether for accounting purposes or otherwise, but will not bind the Revenue. Thus, where partners agreed to re-allocate the firm's income between themselves several years after it arose, so as to obtain the maximum benefit from available tax reliefs, the re-allocation was held to be of no effect vis-à-vis the Revenue.
On the other hand, a bona fide agreement which governs the partners' present and future relationship and which does not seek to have any retrospective effect will be equally valid as between the partners themselves and as between them and the Revenue, provided that its terms are adhered to. Thus, it is, for example, open to the partners to agree that the entirety of a capital allowance or balancing charge accruing in respect of a particular partnership asset will be enjoyed or borne by one or more of their number; or even that one partner will indemnify the others against a particular partnership liability, without affecting the deductibility of that liability in computing the profits of the firm for tax purposes. Significant tax advantages can often be obtained from careful planning, coupled with the use of such agreements.
 The situation described in the above passage is not exactly what we have here. Section 3.17 seeks to allocate what are purely notional proceeds of disposition arising as the result of a deeming provision of the Income Tax Act, subsection 98(2). That provision deems the partnership to have disposed of the property for proceeds equal to its fair market value. Section 3.17 of the partnership agreement seeks to provide that the deemed disposition that the Income Tax Act dictates falls on the partnership can be shifted contractually to one of the partners even though as a civil matter nothing has changed. I have serious reservations as to whether this can be achieved as a matter of law. Obviously partners can contractually divide up a real pie any way they like but I have a conceptual difficulty in seeing how a pie that exists only because the Income Tax Act deems that it exists and belongs to the partnership can, by agreement, be given to one of the partners along with the tax consequences that flow from that notional ownership. Let us compare the effect under section 3.17 with the following hypothetical example. Three partners A, B and C would, in the normal course, share profits equally. To achieve a particular tax result, they agree that two thirds of the partnership income is to be allocated to partner C. They can obviously do that if the arrangement is genuine and legally binding and is not a sham. Partner C can keep the two thirds share of the partnership income. If the division is unreasonable and tax motivated, the Minister can allocate some of the income back to A and B under subsection 103(1). This affects the incidence of tax but does not alter in any way the civil consequences of the agreement between the partners. What must be emphasized, however, is that subsection 103(1) is premised upon the existence of a legally binding agreement with genuine civil consequences. Here I am faced with the Minister's applying subsection 103(1) to what is, as a civil matter, arguably a legal impossibility. Obviously the Minister's assessments were premised on the contractual arrangements doing what they purported to do. I am aware that the concerns that I have tentatively expressed about the legal efficacity as against the Minister of section 3.17 of the partnership agreement, the purpose of which is to transfer to a partner to whom partnership assets are distributed the tax effect of a notional disposition that the Income Tax Act visits upon the partnership, may possibly not be consistent with the administrative practice expressed in two departmental rulings contained in tabs 49 and 50 of the joint book of documents. Moreover, I heard no representation from counsel on the point and I saw no evidence of the accounting treatment. The financial statements were not put in evidence and I do not know how a distribution of partnership property to a retiring partner is treated for accounting purposes. One problem on which I would need some argument is this: it seems at least highly artificial if not legally impossible to allocate a deemed receipt to one partner particularly where such a deemed receipt would in all probability not find its way into the profit and loss statement for accounting purposes. One might ask parenthetically why then is it not just as problematic to allocate to the partners their pro rata shares of the deemed proceeds, in this case 5.27% to Phillips and 92.82% to the appellant?
 I considered calling counsel back because they both argued the cases on the basis that section 3.17 was at least legally effective, the sole question being whether subsection 103(1) applied. The court is of course not bound by agreements or assumptions by the parties on matters of law (see L.I.U.N.A. Local 527 Members' Training Trust Fund v. The Queen, 92 DTC 2365 at 2368 to 2369). It may well be that in accounting for partnership income for tax purposes deemed receipts or other notional amounts that the Income Tax Act requires be taken into account be recognized. In other words the argument would be that we must accept that the Income Tax Act itself in paragraph 96(1)(a) creates an artificiality or a legal fiction to which effect must be given for the purpose of section 103 of the Income Tax Act.
(a) For the purposes of section 103 income means income for accounting purposes independently of the Income Tax Act.
(b) It is legally impossible to allocate deemed receipts to partners where such amounts are notional and arise solely from a provision of the Income Tax Act. The deemed tax consequences, whether negative or positive, that arise from certain transactions are simply not commodities that can be moved around from one person to another.
(c) Partnership income for the purposes of section 103 means income computed using the rules of the Income Tax Act, including the notional items of income, deductions or restrictions contained in the rules in subdivision (j) of Division B of Part I of the Income Tax Act.
 I am tentatively of the view that alternative (c) appears to be the one that is most consonant with the scheme of the Act.
 Since the point was not argued, however, I decline to express a concluded opinion and shall endeavour to deal with the case on the basis on which it was argued, i.e. that section 3.17 of the agreement is legally effective to permit certain tax incidents of dispositions or deemed dispositions of resource properties by partnerships to be allocated to partners in a manner that is inconsistent with their proportionate entitlement under the partnership agreement, even though this may require a certain suspension of legal disbelief on my part. I might observe that the result is the same whether or not the contractual arrangements are legally effective. If they are, subsection 103(1) may be invoked. If they are not, there is no need for subsection 103(1).
 I do not think that, even if as a civil matter of contract the parties can do what section 3.17 purports to do, it is reasonable in the circumstances that prevail here to shift the deemed and indeed notional proceeds of disposition to Phillips together with the tax consequences. One must bear in mind that Phillips got into the partnership with the obvious intent of getting right back out again. While it is admitted that Phillips was a partner despite the somewhat ephemeral nature of its participation one cannot ignore the fact that it became a partner solely to be able to extract the Blueberry assets from the partnership in a manner that was acceptable to the appellant.
 The respondent accepts, and, I believe, correctly, that section 3.17 may have had as its genesis a commercial purpose that is justifiable in some circumstances and, as Mr. Elms, the comptroller of the appellant at the time, testified, such provisions in partnership agreements are not uncommon in the industry. Where a partner rolls resource properties into a partnership and makes an election under subsection 97(2) so that the assets go in on a tax deferred basis it is not unreasonable that there be a provision in the agreement that when those assets are taken out by the same partner, that partner rather than the other partners should bear the tax cost associated with the disposition by the partnership of such tax deferred assets. Therefore, the result of the application of section 3.17 may not be unreasonable in some circumstances. However, the situation I just described is not what we have here. In determining reasonableness a number of factors should be considered. First, Phillips never put any assets into the partnership at all, either under subsection 97(2) or otherwise. Therefore, the tax burden of the deemed disposition does not in this case fall on the person upon whom according to the rationale for section 3.17 expressed above it should in fairness be falling. Second, Phillips joined the partnership simply to extract the Blueberry assets. Third, it was not merely a matter of Phillips' joining the partnership and taking advantage of a pre-existing section 3.17. The partnership agreement had to be amended to meet Phillips' specific objective. In particular section 9.1 of the agreement had to be amended to permit Phillips to designate the properties (presumably the Blueberry assets) that it wanted to take out of the partnership. Fourth, Phillips' involvement in the partnership was, under the indemnity agreement between Phillips and the other partners, risk free.
 Counsel for the respondent points to clause 4 of the letter agreement of December 29, 1994 between the appellant and Phillips as evidence of a tax advantage to the appellant resulting from the arrangement. Clause 4 simply evidences a recognition by careful legal advisors that section 3.17 might not be effective to achieve the result at which it was aimed. Obviously if section 3.17 did not work and the tax consequences and the proceeds of the deemed disposition bounced back onto the appellant it expected to get paid more to compensate it. The provision for an additional 7% payment is only prudent.
 I revert then to the question whether the principal reason for the agreement between Phillips and the appellant may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under the Income Tax Act.
 Certainly the motive of getting the Blueberry assets out of the partnership was purely commercial and had nothing to do with tax. Indeed, the following exchange took place between Mr. Crump, counsel for the appellant and Mr. Elms, the comptroller of the appellant at the time.
(Q) And so at the end of the day, what was the primary reason for doing the transaction with Phillips in the fashion that you did it?
(A) Well, we wanted to try and get out of the lawsuit - - the potential lawsuit that was coming up.
 I do not regard such statements as determinative. One must look at all of the evidence and not just one isolated statement by a witness. I accept that the appellant wanted to resolve the dispute with Phillips about the Blueberry assets. That was a commercial motivation. This does not, in my view, detract from the fact that they chose an arrangement that if effective had as its purpose the disproportionate skewing of the division of partnership income (albeit deemed income) arising from one transaction. The arrangement from Phillips' point of view was not tax motivated. It wanted to get the assets at the lowest possible cost. It was apparently prepared to accept the possible tax disadvantage, if any, arising out of the application of section 3.17 of the partnership agreement. In a sense this case bears, at least in some aspects, a resemblance to XCO Investments Ltd. v. The Queen, 2006 1 C.T.C. 2220, affirmed 2006 F.C.A. 53, a case that both parties relied on. In XCO, there was a clear commercial purpose - the sale of real estate. As well there was also a partner, Woodwards, to whom the tax consequences were irrelevant.
 Possibly in many cases where subsection 103(1) might apply the same pattern exists - a commercial transaction together with one partner to whom the tax consequences are either irrelevant or of less importance.
 There are three other arguments that should be mentioned briefly. The first is that there was no reduction of tax because the tax consequences merely got moved to Phillips. Certainly the purpose of the arrangement was to reduce the appellant's tax. I have no idea what Phillips' tax situation might have been at the time but if the intent is to reduce one taxpayer's tax this is in my view sufficient to invoke subsection 103(1).
 The second is that if a provision in the partnership agreement such as section 3.17 has in its inception a fiscally "innocent" purpose i.e. a purpose that is not to reduce unreasonably a partner's income it cannot later acquire a fiscally inappropriate purpose that justifies the invocation of subsection 103(1). With respect, I am unable to accept this view. I think one must look at the purpose for which the agreement is being used, in this case when Phillips entered the partnership.
 Third, it is argued that since subsection 103(1) is an anti-avoidance section like section 245, the respondent has an onus to demonstrate abuse in the same way in which the Supreme Court of Canada in Canada Trustco Mortgage Company v. The Queen,  2 S.C.R. 601, stated that the Crown had the onus of establishing abusive tax avoidance. I do not agree that where we are dealing with an anti-avoidance provision such as subsection 103(1), the Crown has an additional onus of establishing an abuse. Undoubtedly the existence or non-existence of abuse is a factor that the court may take into account in determining whether the tax avoidance at which the section is aimed exists so as to justify the application of the provision. This is however not a matter of putting an additional onus on the Crown. Rather, it is a factor that may or may not be taken into account in interpreting and applying the provision.
 I think the principal reason for the arrangement between the appellant and Phillips in the form in which it was configured (i.e. Phillips in and out and the virtually immediate redemption of the units and the distribution to Phillips of the Blueberry assets) was the reduction of the appellant's tax that would otherwise have been payable. There was no reason for the arrangement other than to make the lower price that Phillips was prepared to pay fiscally palatable to the appellant. Otherwise the appellant could simply have sold the assets directly to Phillips. The allocation of the deemed proceeds under section 3.17 and the resultant shifting of the incidence of tax to Phillips resulted in a disproportionate division of the deemed proceeds of disposition and therefore a reduction of the appellant's tax given that the appellant had a 92.82% and Phillips a 5.27% interest in the partnership. The Minister's reallocation of the proceeds of disposition of the resource property to the partners in accordance with their interest in the partnership is reasonable whereas it is highly unreasonable to make somebody a 5.27% partner for 25 days (January 30, 1995 to February 24, 1995), pay it 5.27% of the other income and yet allocate to that partner $14,168,716 (100%), of the deemed proceeds of disposition of assets distributed to that partner.
 The appeals are dismissed with costs.
The parties agree that the following are, for the purposes of this proceeding only, facts upon which the Court may base its decision. The parties shall be free to introduce additional facts in evidence at trial, provided that any facts sought to be introduced in evidence at trial do not contradict in any way the facts agreed to herein. In this agreement the Income Tax Act is referred to as the "Act".
1. The Appellant is a corporation formed under the laws of Alberta and resident in Canada for purposes of the Act.
2. TroCana Resources Inc. ("TRI"), 594159 Alberta Ltd. ("594"), 552792 Alberta Inc. ("552") and 626360 Alberta Ltd. ("626") are all corporations formed under the laws of Alberta, PetroCanada Inc. ("PetroCanada") is a corporation formed under the laws of Canada.
3. Effective April 1, 1993, PetroCanada transferred its interest in certain oil and gas leases, including related production and transmission facilities, and located primarily in North Eastern British Columbia (the "TroCana Assets") to TroCana Resources, a partnership comprised of PetroCanada and TRI, a wholly owned subsidiary of PetroCanada (the "First TroCana Resources Partnership"). The First TroCana Resources Partnership was dissolved on November 30, 1993 and an undivided 97% interest in the TroCana Assets was distributed to PetroCanada and an undivided 3% interest in the TroCana Assets was distributed to TRI.
4. 594 was incorporated in Alberta on January 4, 1994. The shares of 594 were held by 552 (99%) and PetroCanada (1%).
6. Effective February 17, 1994, PetroCanada sold its shares in TRI to 552 for a price of approximately $14,750,000.
7. TRI and 594 had a common ownership in the TroCana Assets, which included properties known as the Blueberry Assets, TRI as to an undivided 3% working interest and 594 as to an undivided 97% working interest.
8. The TroCana Resources Partnership ("TroCana Partnership") was formed on February 21, 1994 by TRI and 594 through an agreement for the purpose of having the partnership own and operate the TroCana Assets (the "TroCana Partnership Agreement"). The TroCana Partnership Agreement is at Exhibit 1, Tab 26.
9. On February 21, 1994, 594 transferred its interest in the TroCana Assets to the TroCana Partnership in exchange for 145,500,000 partnership units. 594 and the TroCana Partnership jointly elected to have the provisions of subsection 97(2) of the Act apply to the transfer wherein the deemed cost of oil and natural gas tangibles was $14,425,313 and the deemed cost of resources properties (oil and natural gas leases) was nil.
10. As well, on February 21, 1994, TRI transferred TroCana Assets to the TroCana Partnership in exchange for 4,500,000 partnership units. TRI and the TroCana Partnership jointly elected to have the provisions of 97(2) of the Act apply to the transfer wherein the deemed cost of oil and natural gas tangibles was $413,555 and the deemed cost of resources properties (oil and natural gas leases) was nil.
11. As of February 21, 1994, 594 held a 97% interest and TRI held a 3% interest in the TroCana Partnership.
12. Section 3.5 of the TroCana Partnership Agreement provided that all items of income, gain loss, deduction, recapture and credit of the TroCana Partnership shall be allocated to the partners in accordance with their sharing ratios set forth under section 3.10 of the TroCana Partnership Agreement.
13. Section 3.10 of the TroCana Partnership Agreement provided that allocations and distributions would be made in accordance with the number of units each partner owns relative to the total number of units outstanding for the TroCana Partnership.
14. Section 3.15 of the TroCana Partnership Agreement provided that all proceeds of disposition of Canadian resource properties (as defined in the Act) which are received or receivable by the Partnership, are to be allocated among the partners in accordance with their partnership interests.
"The redemption and conveyance will be carried out pursuant to any tax deferral provisions of the Income Tax Act which are available at the date of such transfer and all parties agree to co-operate in doing all things and executing all documents necessary therefore. Upon any distribution of Designated Properties pursuant to this Article 9, the proceeds of disposition, income or loss, credit, and expenses that arise in the Partnership will be allocated in accordance with the provisions of Section 3.17 hereof."
17. Effective April 22, 1994, the Appellant acquired the common shares of 594 and all of the issued shares of TRI owned by 552 for a purchase price of $14,750,000, payable by $1,000,000 cash and the issuance of 2,500,000 common shares from the Treasury of the Appellant at a price of $5.50 per share. The Share Purchase Agreement between the Appellant and 552 reflecting this transaction is at Exhibit 1, Tab 28.
18. In an Exchange Agreement effective April 22, 1994, the Appellant agreed to exchange the 10,000,000 Class "A" preferred shares of 594 held by PetroCanada for 1,403,508 special warrants for common shares in the Appellant at a price of $7.125 for each special warrant. In addition, the Appellant agreed that a wholly owned subsidiary of PetroCanada, Chancellor Holdings Corporation ("Chancellor") would exchange a second debenture issued by 594 in an original principal amount of $18,000,000 for 1,955,828 special warrants of the Appellant at a price of $7.125 for each special warrant. The Exchange Agreement between the Appellant, PetroCanada and Chancellor reflecting this transaction is at Exhibit 1, Tab 31.
19. The conditions governing the Appellant's acquisition of all of the issued and outstanding shares of 594 and TRI, including paying the indebtedness owing by 594 PetroCanada and Chancellor under certain debt instruments, are governed by the provisions of the "Penn West Acquisition Agreement" among the Appellant, Chancellor, PetroCanada, 552 and 398559 Alberta Ltd. effective April 22, 1994. The Penn West Acquisition Agreement is at Exhibit 1, Tab 30.
20. As a result of the transactions described in paragraphs 17 through 19 above, the Appellant acquired the TroCana Assets through its acquisition of TRI and 594, which became wholly owned subsidiaries of the Appellant. The acquisition cost to the Appellant was approximately $170 Million which it raised through Bank financing ($100 Million) and through the private placement of approximately 10,475,000 shares or special warrants at a price of $7.125 per share or warrant (approximately $74,600,000). The Toronto Stock Exchange approved the Appellant's transactions and financings and an additional listing of up to 13,475,000 of its shares on May 11, 1994. A copy of the letter from the Toronto Stock Exchange conditionally approving the listing of up to 13,525,000 common shares dated May 11, 1994 and a letter from Martin Lambert of Bennett Jones Verchere correcting the 13,525,000 figure to 13,475,000 dated May 17, 1994 are at Exhibit 1, Tab 16.
21. After announcing its intent to acquire the TroCana Assets through the acquisition of TRI and 594, the value of the Appellant's securities increased 50% from approximately $5.50 to $8.25 per share. The TroCana Assets were independently valued at approximately $253 Million at the time of the Appellant's acquisition of the TroCana Partnership. The letter from Martin Lambert of Bennett Jones Verchere to the Toronto Stock Exchange, dated May 3, 1994, which outlines these facts is at Exhibit 1, Tab 15.
22. The Appellant transferred all of its oil and gas properties (worth approximately $85 million) to the TroCana Partnership on a tax-deferred basis under subsection 97(2) of the Act effective July 1, 1994. In exchange, the Appellant received the TroCana Partnership units with a fair market value of the properties transferred. The addition of the Appellant as a partner and the change of the TroCana Partnership's name to the Penn West Petroleum Partnership was reflected in Partnership Amending Agreement No. 1, effective July 1, 1994, a copy of which is at Exhibit 1, Tab 46.
23. 626 was incorporated in Alberta on September 27, 1994, as a wholly owned subsidiary of the Appellant. At all material times, the Appellant owned all of the issued and outstanding shares of 626. As a result of several transactions carried out during its taxation year ended January 31, 1995, 626 became the sole shareholder of 594.
24. Effective January 1, 1995, 626 and 594 entered into a Distribution of Assets and Assumption of Liabilities Agreement pursuant to which 626 acquired all the assets of 594 and assumed all the liabilities of 594. The Agreement is at Exhibit 1, Tab 33.
25. Effective January 1, 1995, the TroCana Partnership Agreement was amended to have 626 replace 594 as a partner. A copy of the Partnership Amending Agreements No. 3 is at Exhibit 1, Tab 46.
26. On January 31, 1995, 594 was voluntarily dissolved.
27. On January 31, 1995, 626 and the Appellant were amalgamated pursuant to section 178(1) of the Business Corporations Act (Alberta).
28. A portion of the TroCana Assets, known as the Blueberry Assets (the "Blueberry Assets"), were subject to rights of first refusal ("ROFR") in favour of Phillips Petroleum Resources Ltd., Suncor Inc. ("Suncor"), and B.C. Star Partners ("B.C. Star"). By letters dated August 23, 1994, PetroCanada gave ROFR notices to each of Phillips, Suncor, and B.C. Star concerning PetroCanada's disposition, on February 17, 1994, of its undivided 97% interest in the Blueberry Assets to 594. (collectively, the "ROFR Notices").
30. The ROFR notification letters on each of the foregoing PetroCanada files is at Exhibit 1, Tabs 7 to 11.
31. In letters dated September 7, 1994 Suncor, Phillips, and B.C. Star took the position that the ROFR Notices of August 23, 1994 were invalid and the proposed exercise prices did not reflect the true consideration received by PetroCanada for the Blueberry Assets. A representative sample of the September 7, 1994 letters written by Suncor on behalf of itself, Phillips, and B.C. Star concerning the ROFR Notices is at Exhibit 1, Tab 12.
32. PetroCanada retracted its ROFR notification on its File 1502-01 and issued a new ROFR Notice to Phillips, Suncor, and B.C. Star in a letter dated October 14, 1994. This letter is at Exhibit 1, Tab 13.
33. On December 29, 1994, the Appellant sent correspondence to Phillips in which the Appellant offered to sell, as agent for 626, units in the Penn West Petroleum Partnership to Phillips (the "December 29, 1994 Letter Agreement"). A copy of the December 29, 1994 Letter Agreement is at Exhibit 1, Tab 17.
35. Phillips satisfied the purchase price by executing a Promissory Note in the amount of $14,168,716 in favor of 626. The addition of Phillips as a partner was reflected in Partnership Amending Agreement No. 4, effective January 30, 1995. A copy of the Promissory Note is at Exhibit 1, Tab 35 and the Partnership Amending Agreement No. 4 is at Exhibit 1, Tab 46.
36. On February 17, 1995, Phillips sent a Notice to the Appellant (as Managing Partner of the Penn West Petroleum Partnership) in which Phillips elected to have its Units redeemed by the Penn West Petroleum Partnership. The effective date of the redemption was specified to be February 24, 1995. A copy of this Notice is at Exhibit 1, Tab 40.
37. By a bank draft dated February 24, 1995, Phillips paid $14,255,086.94 to 626 in full satisfaction of all amounts due under the Promissory Note. A copy of the Receipt and Acknowledgment for payment of the Promissory Note is at Exhibit 1, Tab 22.
38. On February 24, 1995, Phillips, the Penn West Petroleum Partnership, the Appellant and TRI executed a Partnership Distribution Agreement pursuant to which certain oil and natural gas rights and tangible assets, being the Blueberry Assets, were transferred to Phillips in satisfaction of Phillips' interest in the Penn West Petroleum Partnership. The withdrawal of Phillips as a partner was reflected in Partnership Amending Agreement No. 5, effective February 24, 1995. A copy of the Partnership Distribution Agreement is at Exhibit 1, Tab 41 and the Partnership Amending Agreement No. 5 is at Exhibit 1, Tab 46.
40. On February 24, 1995, Phillips, the Penn West Petroleum Partnership, the Appellant and TRI entered into an Indemnity Agreement. A copy of the Indemnity Agreement is at Exhibit 1, Tab 42.
41. In accordance with the Penn West Petroleum Partnership Agreement, Phillips was allocated 100% of the proceeds of disposition of the Blueberry Assets as well as its pro rata share of the Penn West Petroleum Partnership's other income and resource expenses for the Penn West Petroleum Partnership's year ended January 31, 1996.
45. The parties agree that the calculations of amounts are not in issue and that Schedules "A" and "B" of the Reply accurately reflect how the Minister revised the Appellant's COGPE and reduced the Appellant's COGPE claim, respectively.
350 - 7th Avenue S.W.
Penn West Petroleum Ltd. v.
 The admission that Phillips was a partner was obviously correct in light of the Supreme Court of Canada's decision in Continental Bank Leasing Corporation v. The Queen, 98 DTC 6505. Indeed if Phillips were not a partner, subsection 103(1) could not have been applied.
In order to accomplish a sale of two oil and gas properties that were held by a partnership of which the taxpayer was a substantial partner, it was agreed that the purchaser ("Phillip") would become a 5.27% partner of the partnership and, some days later, receive a distribution to it of the two properties in substantial satisfaction of its partnership interest and, pursuant to a clause in the partnership agreement that was amended with this transaction in mind, be allocated 100% of the proceeds of disposition arising under subsection 98(2) to the partnership as a result of the resulting disposition of the two properties (as well as its 5.27% share of the partnership income for the 25 days that it was a member of the partnership).
After "tentatively" indicating his view that partnership income for purposes of section 103 meant income computed using the rules of the Act, so that such income included notional items of income such as deemed proceeds of disposition arising under subsection 98(2), Bowman C.J. went on to find that the allocation of 100% of the proceeds of disposition to Phillips was unreasonable given that the gain on the transferred properties was not attributable to Phillips having rolled assets into the partnership, it was only entitled to 5.27% of the other income of the partnership and it merely joined the partnership (for 25 days) in order to extract the two properties.

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