Alberta Gas Trunk Line Co. Ltd. v. Minister of National Revenue, [1972] S.C.R. 498, 71 DTC 5403, [1971] CTC 723

MARTLAND, J. (all concur) :—This is an appeal from a judgment of the Exchequer Court of Canada (reported [1970] C.T.C. 452) dismissing the appellant’s appeal from the income tax assessment for its 1966 taxation year. There are two questions involved :

1. Did the gas transportation contract, hereinafter described, contain two separate promises by the shippers (a) to pay for the cost of transporting their gas, and (b) to indemnify the appellant against any exchange loss resulting from its liability to pay capital and interest, in U.S. funds, in respect of its issue of Series B First Mortgage Sinking Fund Bonds, or did it provide for payment by the shippers of part of the price for transporting their gas in U.S. funds, so as to make its receipt of such dollars a part of the income of the business which it carries on?

2. Did the appellant, which, in its 1961 taxation year, incurred a capital obligation to pay $67,000,000 in U.S. funds in respect of the said bonds, which resulted in its receipt of $66,641,171.88 in Canadian funds, incur a business loss in that taxation year of $358,828.12, being the difference in those amounts, which it was entitled to deduct from its income for that year, in computing its income tax liability ?

The appellant owns and operates a natural gas transmission system used in the transportation of natural gas from various points within the Province of Alberta to various delivery points, within Alberta, including a delivery point at Coleman, Alberta, which is near the south-eastern corner of British Columbia, where gas is delivered into the system operated by Alberta Natural Gas Company.

The appellant entered into a gas transportation contract, dated June 14, 1960, with Alberta and Southern Gas Co. Ltd. and Westcoast Transmission Company Limited, herein referred to as ‘ ‘ the shippers’’, to receive, transport and deliver daily volumes of gas in accordance with the terms and conditions of the contract, by means of a gas transmission system, which the appellant undertook to construct. The provisions for payment for the transportation of the gas in the contract, which were applicable to the events which in fact occurred, were as follows :

12. BILLING AND PAYMENT

12.1 Billing: On or before the twentieth (20th) day of each month, (the appellant) 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”) and the number of United States dollars, if any, which shall be substituted for Canadian dollars pursuant to paragraph 12.2.

12.2 Part Payment in United States Dollars: If (the appellant) shall cause the construction of the said pipeline to be financed in whole or in part by the sale prior to December 31st, 1964, of securities of (the appellant) requiring repayment of principal, and/or 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 (the appellant)

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; . . . .

12.3 Payment: On or before the last day of the month following

the billing month each shipper shall pay (the appellant) at

(the appellant’s) office, Calgary, Alberta, for so much of the bill

as shall be payable in Canadian dollars and at the place designated by (the appellant) 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 by the borrowing of United States $67,000,000 which was secured by Series B First Mortgage Pipeline Sinking Fund Bonds. The appellant received, out of the proceeds of the sale of such bonds, in April and July 1961, Canadian $66,641,171.88. The appellant, in preparing its accounts and financial statements, showed the liability at the figure of $67,000,000, and deducted from its income the sum of $358,828.12 (which sum is the balance between

$67,000,000 and $66,641,171.88).

In accordance with paragraph 12.2 of the gas transportation contract, the appellant gave notices to the shippers that it desired :

that payments pursuant to the provisions of the said paragraph 12.2 be made to the Company at 505 - 2nd Street, S.W., Calgary, Alberta.

Attached to the notices were schedules 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 April 1966, addressed to Alberta and Southern Gas Co. Ltd. was in part as follows :

Pursuant to the invoices rendered, the appellant received payments pursuant to the terms of the 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 and were used in making the payments of United States dollars on account of both principal and interest as they fell due under the Series B First Mortgage Pipeline Sinking Fund Bonds. Throughout 1962-1966, the United States dollar was at a premium in relation to the Canadian dollar.

The learned trial judge dismissed the appellant’s appeal and with respect to the first issue did so on the basis that (page 460) :

As the business of the appellant is the transportation of gas, and the payment in United States dollars is received pursuant to such business, therefore, it is income within Section 3 of the Income Tax Act. (Tip Top Tailors Ltd. v. M.N.R., [1957] S.C.R. 703 at page 707; [1957] C.T.C. 309.) To determine the amount of that income, the United States dollars must be translated into Canada dollars which is the measure of the receipt of income and such resulting sum must be credited to income. Therefore the assessment for the taxation year is proper in adding to the income for the years 1962 to 1966 inclusive the amounts of the United States dollars received by the appellant pursuant to Paragraph 12.2.

With respect to the second issue on the basis that (page 461) :

As the pipeline is a capital asset built by borrowed money, brought into Canada to finance the construction of the capital asset, therefore, the loss by reason of changing into Canada dollars is a loss incurred in a capital expense. That loss could not be a business loss within Section 27(1) (e) of the Income Tax Act . . . .

The first issue is the same as that which was considered by this Court in the case of Alberta Natural Gas Company v. M.N.R., which was argued immediately prior to the argument of the present appeal. The relevant provisions of the contract under consideration in that case and those of the contract in issue before us are substantially the same. The submissions of the appellant in the former appeal were somewhat different from those made in the present appeal in that, in the former, it was contended that the agreement included a forward exchange contract, as well as a gas transportation contract, while, in the latter, it is argued that the agreement included an indemnity agreement against exchange losses on the U.S. pay securities as well as a gas transportation contract.

As I said in my reasons in the other case, it is clear that the purpose of paragraph 12.2 was to provide the appellant with U.S. dollars with which to meet its obligation under the U.S. pay securities. But, in my opinion, it is equally clear, under the wording of paragraph 12.2, that the U.S. dollars which the shippers were obligated to pay, and the appellant was obligated to accept, were in payment of the monthly cost of service charge which the shippers were required, by paragraph 2.3 of the agreement, to pay for the transportation of their gas. The substitution of American for Canadian dollars required to be paid by the shippers and to be accepted by the appellant is defined as being ‘‘in payment of its said monthy cost of service charge.’’ That being so, it is my view that the American dollars received by the appellant represented income from its business operations, and their full value had to be taken into account in determining its income from its business for tax purposes.

With respect to the second issue, the appellant has not established a loss of $358,828.12 in the year 1961. It borrowed $67,000,000 in U.S. funds. The Canadian equivalent, at that time, was $66,641,171.88. Whether or not any loss will be sustained by the appellant will depend upon the exchange rates existing when the U.S. dollars are repaid.

But, in any event, whatever such losses may prove to be, the borrowing was a borrowing of capital, for the construction of capital assets.

If the appellant, in due course, is required to pay more Canadian dollars to liquidate its capital debt of $67,000,000 (U.S.) than the number of Canadian dollars realized on the sale of its U.S. pay securities, the difference between the two amounts will represent a loss on capital account, and it cannot be deducted from income for tax purposes.

For these reasons, in my opinion, the appeal should be dismissed with costs.