Alberta Natural Gas Company v. Minister of National Revenue, 71 DTC 5400, [1971] CTC 718, [1972] S.C.R. 490

MARTLAND, J. (all concur) :—This is an appeal from a judgment of the Exchequer Court of Canada (reported [1969] C.T.C. 316), which dismissed the appellant’s appeal from the income tax assessment made in respect of its 1966 taxation year. The respondent, in computing the amount of loss to be carried forward from previous years, 1960 to 1962 inclusive, added to the appellant’s income, for the years 1963 to 1966 inclusive, certain amounts as being part of the appellant’s income from its business. These amounts represented the exchange premium in respect of American dollars received by the appellant pursuant to the provisions of the gas transportation contract hereinafter described

The appellant owns and operates a pipeline which transports natural gas across the south-eastern corner of British Columbia from the vicinity of Coleman, Alberta, to a point on the Canada- United States boundary near Kingsgate, British Columbia. The pipeline operated by the appellant connects with the pipeline system of the Albera Gas Trunk Line Company Limited, which company collects natural gas from various gas fields for delivery to the appellant near Coleman, Alberta.

The appellant entered into a contract dated September 20, 1960 with Alberta nad Southern Gas Co. Ltd. and Westcoast Transmission Company Limited, hereinafter referred to as ‘‘the shippers’’, to receive, transport and deliver daily volumes of gas in accordance with the terms and conditions of the contract. Under the contract the appellant agreed to construct and complete its pipeline by December 81, 1961.

The appellant was referred to in the agreement as “Pipeline Company”.

The appellant, under this agreement, was to be compensated for the transportation of natural gas for the shippers on a ‘‘cost of service’’ basis, which included provision for operating expenses, depreciation, amortization, taxes, and a return at a rate of 14% per annum.

The agreement provided for payment monthly in lawful money of Canada. This agreement was amended by an amending agreement dated January 31, 1961.

The agreement, as amended, did not contain the previous provision providing for payment in Canadian money, but provided as follows:

12. BILLING AND PAYMENT

12. Billing: On or before the twentieth (20th) day of each month, Pipeline Company shall render an itemized bill to each shipper showing the monthly cost of service charge calculated for that shipper in accordance with paragraph 13 for the preceding month (hereinbefore defined as the “billing month”).

12.2 Part Payments in United States Dollars: If Pipeline Company shall cause the construction of the said pipeline and/or facilities required for increased capacity to be financed in whole or in part by the sale prior to December 31st, 1964, of securities of Pipeline Company requiring payment of principal, premium, if any, and interest in United States dollars (such securities being hereinafter referred to as “U.S. pay securities”) then each shipper shall in its payment of its said monthly cost of service charge substitute for the same number of Canadian dollars and Pipeline Company shall accept in substitution, the number of United States dollars determined as hereinafter set forth, but not to exceed sixty- six percent (66%) of the said monthly cost of service charge . . . .

The amount of United States dollars to be so paid monthly by each shipper shall be its proportionate share of one-twelfth (1/12) of the amount of United States dollars set forth in the schedule referred to in (ii) above for the year in which the shipper’s payment is due; . . .

12.83 Payment: On or before the last day of the month following the billing month each shipper shall pay Pipeline Company at Pipeline Company’s office, Calgary, Alberta, for so much of the bill as shall be payable in Canadian dollars and at the place designated by Pipeline Company pursuant to paragraph 12.2 for so much of the bill as shall be payable in United States dollars.

The appellant financed the construction of its pipeline, in part, by the borrowing of 25,000,000 United States dollars which was secured by 534% First Mortgage Pipeline Bonds, Series A. In accordance with paragraph 12.2 of the Gas Transportation Contract as amended, the appellant gave notice to the shippers that it desired :

to receive that part of the monthly cost of service charge referred to in the said Gas Transportation Contract which is to be paid in United States dollars, as in the said Contract provided, at Alberta Natural Gas Company’s office, Calgary, Alberta.

Attached to the notice was a schedule of the total annual amounts of the payments unconditionally required by the terms of the appellant’s indebtedness to be discharged in United States dollars.

Each month the appellant sent to each of the shippers an invoice setting out the amount payable in respect of the transportation of gas on behalf of the shippers for the preceding month, and the portion of the amount payable which was to be paid in United States dollars. A typical invoice, that of August 14, 1963, addressed to Alberta and Southern Gas Co. Ltd. was an follows:

Pursuant to the invoices rendered, the appellant received payments, pursuant to the terms of the amended Gas Transportation Contract, partly in Canadian dollars, and partly in United States dollars. The United States dollars received by the appellant were deposited in a United States dollar bank account in Canada with the Royal Bank of Canada and the Canadian Imperial Bank of Commerce and were used in making the payments of United States dollars on account of both principal and interest as they fell due under the 534% First Mortgage Pipeline Bonds.

Between February, 1962 and December 31, 1966 the United States dollar was at a premium in relation to the Canadian dollar, varying between 4 and 9 cents Canadian.

The respondent, in assessing the appellant’s income, included the premium in relation to those American dollars received by the appellant and expended in payment of the principal amount of its indebtedness. The premium received in respect of the American dollars expended in payment of interest was not assessed, it being recognized that this was a properly deductible expense.

The submission of the appellant is that, in substance, the agreement was one for the transportation of natural gas in consideration of payments of Canadian dollars and that the agreement also included a forward exchange contract under which the appellant was enabled to acquire from the shippers United States dollars for Canadian dollars at par. It was contended that, under such a contract, under accepted accounting principles, the United States dollars should be valued at their cost to the appellant. It was further argued that this forward exchange contract was a long term hedge against potential loss in servicing its bond indebtedness and to diminish potential capital loss and that, in consequences, the exchange premium was not income and did not produce income or profit for income tax purposes.

The position of the respondent is that the American dollars received by the appellant were payments made by the shippers for the services rendered to them by the appellant, and that consequently those dollars were a part of the appellant’s income for tax purposes.

In order to succeed in its argument the appellant must first establish that, under the terms of the agreement, the consideration for the transportation of the natural gas was payable in Canadian dollars. The other portions of its submission are dependent upon that proposition. Accordingly it is necessary to consider what the agreement between the appellant and the shippers actually provided.

The basis of the contract was that the appellant would receive, transport and deliver natural gas of the shippers, who would pay for the service on a cost of service basis. The determination of the cost of service was contained in paragraph 13, which sets out the various items to be taken into account in its computation.

The provisions as to actual payment for the service are contained in the next preceding section, paragraph 12, under the heading ‘‘BILLING AND PAYMENT”. The relevant portions of this paragraph have been already set forth.

Clause 12.2 of the agreement, as originally executed, provided as follows:

12.2 Payment: On or before the last day of the month following the billing month each shipper shall pay Pipeline Company in lawful money of Canada at Pipeline Company’s office, Calgary, Alberta, for charges for the billing month as billed by Pipeline Company in accordance with this paragraph 12.

This clause was deleted completely by the amending agreement. Clause 12.2 of the agreement, as amended, is headed ‘Part Payment in United States Dollars’’. Whereas the original agreement had called for payment for the appellant’s services in Canadian dollars, the new clause 12.2 provided that, in the event of the appellant financing the construction of its pipeline in whole, or in part, by means of “U.S. pay securities’’ sold prior to December 31, 1964, then each shipper ‘‘shall in its payment of its said monthly cost of service charge ’ ’ substitute United States dollars for Canadian dollars, to the extent provided in the agreement, not to exceed 66% of the monthly cost of service charge.

Clause 12.3 of the amended agreement, headed “Payment”, provides that on or before the last day of the month following the billing month each shipper shall pay the appellant at its Calgary office ‘‘for so much of the bill as shall be payable in Canadian Dollars’’, and, at a place designated by the appellant, ‘so much of the bill as shall be payable in United States Dollars”.

The appellant did sell U.S. pay securities, in the principal amount of $25,000,000, prior to the stipulated date, to assist in financing the construction of its pipeline.

The purpose of this provision is clear. It was to enable the appellant to obtain United States dollars with which to meet the payments required under the terms of its U.S. pay securities. But it also seems to me to be equally clear, on the wording of the amended agreement, that those United States dollars were to be received by the appellant as part of the payment for its services under the contract. Following the amendment of the agreement, it contemplated, not total monthly payments in Canadian dollars, but: payments partly in Canadian funds and partly in United States funds. The United States dollars received by the appellant under the agreement formed part of its earned income. I cannot construe the agreement as being one which provides for payment for the appellant’s services in Canadian dollars, coupled with a forward exchange contract for the purchase by the appellant from the shippers of United States dollars.

This being so, it is my opinion that the appeal fails and should be dismissed with costs.