It reads: “(1) The amount of any gain arising from the disposal of an asset is the excess of the consideration received for the disposal over the cost base of the asset at the time of the disposal. (2) The amount of any loss arising from the disposal of an asset is the excess of the cost base of the asset at the time of the disposal over the consideration received for the disposal.” S. 52 of the Act deals with the determination of cost base. The relevant sections read: “(1) Subject to this Act, this Section establishes the cost base of an asset for the purposes of this Act. (2) The cost base of an asset purchased, produced or constructed by the taxpayer is the amount paid or incurred by the tax payer in respect of the asset, including incidental expenditures of a capital nature incurred in acquiring the asset, and includes the market value at the date of acquisition of any consideration in kind given for the asset. … (6) Unless otherwise provided in this Act, expenditures incurred to alter or improve an asset -which would not have been allowed as deductions are added to the cost base of the asset.” The cost base of the original interests is therefore determined taking into consideration S. 52 of ITA.
S. 52 of the ITA allows in the calculation of the cost base to include incidental expenses of a capital nature incurred in acquiring the asset when disposing original interests. S. 89G (a) modifies Part VI of the ITA by allowing excess costs under S. 89C (2) attributable to the interest to be deducted from the cost base at the time of disposal. S. 89C (2) of the ITA reads: “Where, in any year of income, the total deductions of a contractor in relation to petroleum operations undertaken in a contract area exceed the cost oil for that year of income arising from those operations in the contract area, the excess shall be carried forward to the next following year of income and is deductible for that year of income against the cost oil for that year of income arising from petroleum operations in the contract area until the excess is fully deducted or the petroleum operations in the contract area cease.” It is in dispute whether excess costs are deducted only when oil production starts.
The Act does not define excess costs. S. 89C (2) of the ITA merely refers to them when it states that “where in any year of income the total deductions of a contractor in relation to petroleum operations exceed the cost oil for that year of income”. It further states that the excess shall be carried forward to the following year of income. S. 89A of the ITA defines cost oil to mean a contractor’s entitlement to production as cost recovery under a petroleum agreement. Cost oil means an entitlement. It is argued that a contractor has no entitlement until when production has started. An entitlement is defined by Black’s Law Dictionary 8th Edition p. 573 as “an absolute right to a (usu. monetary) benefit, such as social security, granted upon meeting a legal requirement.”
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