The Queen v. Consumers' Gas Co. Ltd., 84 DTC 6058, [1984] CTC 83 (FCA)

Urie, J:—This appeal is from a judgment of the Trial Division [now reported at [1983] 1 FC 314] which allowed the appeals of the respondent from assessments made by the Minister of National Revenue in respect of the respondent’s 1971, 1972, 1973 and 1974 taxation years.

In the course of its business, the respondent from time to time, at the request of its customers, relocates portions of its pipelines for the transmission of natural gas. Those customers reimburse the respondent for all or part of such reloca- tion costs. According to the appellant the issue to be determined in this appeal is whether or not the reimbursements must be taken into account in determining the respondent’s income for tax purposes. The respondent, on the other hand, avers that the sole issue is whether or not the reimbursements referred to may properly be applied to reduce the respondent’s undepreciated capital cost of class 2 assets. Which is the correct characterization of the issue will become clarified later in these reasons.

I

The Relevant Facts

The respondent is a public company having its head office in Toronto, Ontario. It is engaged in the business of distribution of natural gas to over 725,000 residential, commercial and industrial customers in Ontario, and, as well, in the production of natural gas, primarily from wells in Lake Erie and in the sale and rental of gas appliances. Its business activities, including its rates and accounting methods and practices, are subject to the approval of the Ontario Energy Board. The vast bulk of its revenue (approximately 95 per cent) in the years in issue, was attributable to its gas distribution business. The gas is mainly received from trunk pipelines at a gate station outside its operating area. From the gate station the respondent distributes the gas through steel gas mains which generally run beneath the surface of streets and roads. The individual customers are provided with gas through pipes leading from the mains.

Various persons and organizations such as government departments, municipalities, utilities, telephone companies and other private companies from time to time require the relocation of portions of the pipeline network in order to do construction work for their own purposes. Usually such relocations are required because of some physical conflict arising from the construction work but they may also be undertaken for safety reasons. The parties requesting the relocations may or may not be customers of the respondent.

Whenever it can the respondent attempts to recover the full cost of the relocations from the party requesting them. However, the amount it can recover may be limited by the provisions of either the Public Service on Highways Act (RSO 1970, c 388) or the Railway Act (RSC 1970, c R-2). The respondent in all cases carefully calculates all elements of cost associated with the relocations and bills the parties in full for such costs or such part thereof as is permitted by statute.

Upon completion of the relocations the original pipe is usually abandoned and left in the ground although certain above-ground equipment such as parts of regulator stations may be salvaged. In the latter event credit is presumably given for the value of the salvaged equipment.

The average annual number of relocations in the taxation years in question was about 225.

Prior to the decision of the Court in Canadian Pacific Limited v The Queen, [1978] 2 FC 419; [1977] CTC 606; 77 DTC 5388, the respondent treated reimbursements received from the parties for whom relocations were undertaken in essentially the same manner as it did for financial statement purposes, ie, it reduced the amount of the gross cost of its relocated pipe by the amount of the reimbursements and added the net amount only to the undepreciated capital cost of the class (class 2). In substance, it took capital cost allowance on the net cost only. Incidentally, for rate fixing purposes that is one of the methods for treating the reimbursements authorized by the Ontario Energy Board. After the Canadian Pacific case the respondent took the position that for tax purposes it (a) was entitled to add the gross cost of the relocations to the undepreciated capital cost of the class and to claim capital cost allowance on the gross amount, and (b) was not obliged to include the reimbursements in the calculation of its revenues for tax purposes.

II

Alleged Errors

The appellant’s principal objection to the judgment appealed from is that the learned trial judge erred in concluding that the respondent is entitled to include the gross cost of relocations in the undepreciated capital cost of its Class 2 assets and not to include the reimbursements in its revenue for the purpose of computing its income under the Income Tax Act. In particular counsel for the appellant submitted that the trial judge erred in that the issue of whether the reimbursements constituted income was decided in the Canadian Pacific case and in holding that, in this case, the reimbursements were not income. In the alternative, in effect, he said that the Canadian Pacific case was not applicable on the facts of this case.

II

Preliminary Objection

In his memorandum of fact and law, counsel for the respondent argued that the principal position taken by the appellant in her memorandum of fact and law ought not to be entertained by this Court in that it presents a position that was neither pleaded nor argued in the Trial Division nor did it form the basis of the reassessments against which the respondent’s action was directed. The principal position to which the respondent refers, as expressed in the appellant’s memorandum, is as follows:

38. The Deputy Attorney General of Canada submits that, assuming Canadian Pacific to be applicable, then for tax purposes Consumers’:

(a) is entitled to add the gross cost of the relocations to its Class 2 undepreciated

capital cost and take capital cost allowance on the whole of the relocation cost

BUT

(b) is obliged to include the reimbursements in the computation of its profit and, consequently, in its income for tax purposes.

In order to appreciate this argument, reference should first be made to the Canadian Pacific case following which an analysis of the pleadings shall be made in light of the ratio decidendi of that case and the allegations of the respondent as to what was or was not pleaded.

The decision of this Court in the Canadian Pacific case arose out of an appeal from the Trial Division and the headnote accurately sets forth the facts relating to that part of the judgment dealing with capital cost allowance.

(2) The Capital Cost Allowance: Respondent, acting at the request of third parties, made capital expenditures or expenditures deemed to be so, after it had been agreed that the third party would pay respondent an amount not exceeding that expenditure. Respondent calculated the capital cost allowance in respect of those assets, but the amounts received from the third parties were not taken into consideration in determining their capital cost. Appellant contends that the capital cost of those assets must be diminished by an amount equal to that received from the third parties. Appellant divided the eight transactions under consideration into two categories: (1) instances in which the respondent made expenditure on its own account and (2) cases in which respondent made the expenditure for the account of a third party who ultimately paid for it. Those cases in the second category were considered individually.

In respect of the first category of cases (which are similar to the relocations undertaken by the respondent in that the expenditures were made by the respondent after it had been agreed that the third party would pay the respondent amounts not exceeding the amounts of the expenditures) Pratte, J, speaking for the Court had this to say at 445 of the report:

The contention of the appellant in respect of these transactions is that the “capital cost to the taxpayer of depreciable property”, within the meaning of section 20(5)(e), is the net cost to the taxpayer and that the expenditure to which section 84A(3) refers is what the taxpayer “has actually expended in net”. Therefore, in the five cases under consideration, the “capital cost to” the respondent, or the expenditure incurred by it, is, according to the appellant, the amount of the respondent’s outlay less the contribution of the third party.

The learned Trial Judge, in my opinion, rightly rejected that contention which appears to me to be inconsistent with the decision of the House of Lords in Birmingham Corp v Barnes ([1935] AC 292) where it was held that “the actual cost to” a taxpayer of depreciable property is equal to the amount paid by the taxpayer. As Lord Atkin said in that case (at page 298):

What a man pays for construction or for the purchase of a work seems to me to be the cost to him: and that whether someone has given him the money to construct or purchase for himself; or, before the event, has promised to give him the money after he has paid for the work; or, after the event, has promised or given the money which recoups him what he has spent.

It was on the basis of this reasoning that the respondent changed its treatment of the reimbursements in the calculation of its undepreciated capital cost. In its principal submission counsel for the appellant contended that while the reasoning in the Canadian Pacific case may entitle the respondent to add the gross cost of the relocations to its Class 2 undepreciated capital cost and to calculate the capital cost allowance on the whole of the relocation cost, the case neither considered nor decided the issue of whether such receipts were income which had to be included in the respondent’s revenues for tax purposes.

The learned trial judge, rightly, I think, found that he was bound by the principle expressed in the Canadian Pacific case in so far as the treatment of the reimbursements as an addition to undepreciated capital cost is concerned. However, he went further and, after reviewing considerable jurisprudence concluded that in the Candian Pacific case contributions were not taken into revenue but were capitalized (page 18 of reasons) and, therefore, found as follows (page 21 of reasons):

I have concluded that Plaintiff in the present case was justified in considering that contributions received towards the relocation of its pipelines done, not for its benefit, but for the benefit of the parties making the contributions, can be carried to a contributed capital account without passing through income.

Counsel for the respondent submitted that the appellant’s contention as to the accounting treatment to be accorded the reimbursements, (supra), for tax purposes ought not to be considered to two reasons:

(1) because the appellant neither pleaded this position nor argued it at trial and, therefore, it cannot be argued in this Court, and

(2) in any event, although the judgment of this Court in Canadian Pacific did not deal with the question of whether or not the reimbursements should be taken into income or form part of the shareholders’ equity, on the facts of this case the reimbursements are not profit derived from a “taxpayer’s income for a taxation year from a business or property . . .” within the meaning of subsection 9(1) of the Income Tax Act* [1] as alleged by counsel for the appellant. If the respondent’s argument with respect to (1) is sustained, it will, of course, be unnecessary to deal with the second argument, unless the learned trial judge was right in concluding that the Canadian Pacific case determined that such reimbursements were capital in nature and the facts of this case being indistinguishable from those in the Canadian Pacific case the same conclusion must follow.

Counsel for the appellant relied on paragraphs 11, 12, 15 and 16 of the amended statement of defence as providing the basis for entitling him to argue that the reimbursements form part of the respondent’s revenue for purpose of the calculation of taxable income. Those paragraphs read as follows:

11. He says that both the amounts paid and the reimbursements received by the Plaintiff pursuant to its agreements with third parties and in each case arising out of the same agreement were on income account.

12. He says that if the amounts disbursed by the Plaintiff under its agreement with third parties were on capital account, which is not admitted but denied, either

(a) the capital cost to the Plaintiff of each of its relocated pipelines built pursuant to its respective agreement with a third party is the amount disbursed by it under each agreement less the reimbursement received from the third party thereunder; or

(b) in each case a pipeline was disposed of for proceeds of disposition equal to the amount the Plaintiff was reimbursed under its respective agreement with the third party.

15. He further submits that both the amounts paid and the reimbursements received by the Plaintiff pursuant to its agreements with third parties and in each case arising out of the same agreement were on income account and accordingly those amounts are properly deductible and those reimbursements received are properly included, in calculating the Plaintiffs income for each respective taxation year.

16. In the alternative, if the amounts disbursed by the Plaintiff under its agreements with third parties were on capital account, which is not admitted but denied, he submits that either

(a) the capital cost to the Plaintiff for each of its relocated pipelines built pursuant to its respective agreement with a third party is the amount disbursed by it under each agreement less the reimbursement received from the third party thereunder; or

(b) in each case a pipeline was disposed of for proceeds of disposition equal to the amount the Plaintiff was reimbursed under its respective agreement with the third party so that although the amount disbursed by it pursuant to that agreement would properly be added to its undepreciated capital cost of pipelines, that undepreciated capital cost is reduced by those proceeds of disposition.

Counsel also said that paragraph 5 of the partial agreed statement of facts supports his contention. It reads as follows:

5. It is further agreed that if this Honourable Court should find wholly in favour of the Plaintiff (ie that the plaintiff is entitled to include the amounts referred to in paragraph 2(a) in its Class 2 capital cost and that those amounts do not result in any other offsetting effect on taxable income), then (as compared with reassessment) (i) the Plaintiffs undepreciated capital cost (“UCC”) at the end of each taxation year (prior to any cost allowance being taken) should be increased by the amounts shown in Table 3 below and (ii) the Plaintiffs capital cost allowance (“CCA”) for each year should be increased by the amount shown in Table 3.

Since heaviest reliance was placed on paragraphs 11 and 15, it should be observed at the outset that each states that “both the amounts paid and the reimbursements received by the plaintiff . . . were on income account.” (emphasis added). This, in appellant counsel’s submission, could only mean to the drafts- man of an answering plea, or in counsel’s preparation for trial, that the Minister of National Revenue viewed the reimbursements as revenue for inclusion in the calculation of the taxpayer’s taxable income in the years in which they were received.

Counsel for the respondent, on the other hand, says that the meaning that he ascribed to those words, particularly because of the use of the word “both” in relation to expenditures and receipts as being for “income account’’, was that the Minister viewed the reimbursements as income in the hands of the respondent so that the expenditures incurred for the relocation could be chargeable as deductible expenses in the year in which they were incurred, a result which would be financially advantageous to the respondent. However, because of the Canadian Pacific case the respondent’s counsel knew that the expenditures were, for the reasons given in that case, to be added to the undepreciated capital cost of the Class 2 assets. Flowing from that knowledge the receipt of the reimbursement must, as he saw it, also be on account of capital. The plea in the statement of defence as drafted gave him no clue, he said, that the Minister would now take the position that while the expenditures could be added to the capital cost the receipt of the reimbursements would be on income account. They were inconsistent positions in his view.

I agree. I am of the opinion that no reasonable reader of the aforementioned paragraphs of the amended statement of defence would anticipate that if the Court were to find that the principle of the Canadian Pacific case were followed (notwithstanding the denial in the defence that the case was not relevant) that the respondent’s position would be that the receipt of the reimbursements was on income account although the expenditure would be for capital account. That being so and, as well, the Court having been advised by counsel for the respondent that he had objected strenuously at trial against the advancement of this position when not pleaded, it is my opinion that the trial judge should not have permitted the argument to be advanced nor to have made a finding on the accounting treatment to be accorded the receipt of the reimbursements for tax purposes; namely that the reimbursements were on the contributed capital account.

That this is the correct view of how the matter should have been dealt with is supported by the fact that it appears that the notices of reassessment in the taxation years in question, from which the respondent appealed, revised the respondent’s income in. each year on the basis, inter alia, that the expenditures for relocations could not be added to the undepreciated capital cost for the purpose of calculation of capital cost allowance. The respondent’s appeals to the Trial Division were from those reassessments claiming, in so far as the 1971, 1972 and 1973 taxation years were concerned, that it was entitled to claim capital cost allowances on the additional amounts comprising the reimbursements received from relocations during the respective years by virtue of the Canadian Pacific case, it having amended its returns after that decision was handed down. In so far as its 1974 taxation year was concerned, it took the position that its return had correctly included in the undepreciated capital cost of its Class 2 properties the gross expenditures made for relocations regardless of reimbursements received from various sources during that year. It relied on the Canadian Pacific case as its authority for so doing. Having so pleaded, it seems to me that if the Minister intended to put in issue the question of how the receipt of the reimbursements should be treated for tax purposes, (assuming that the respondent was found to be correct in relying on the Canadian Pacific case), she should have done so in clear and unmistakable terms to enable the respondent to know the case it had to meet and to adduce such evidence as it deemed necessary to meet that contention. As earlier stated, I am of the opinion that the appellant failed to do so.

The difficulty is further exacerbated by the fact that the appellant changed the position she took at trial to that which her counsel took during this appeal. In his reasons for judgment the learned trial judge described the appellant’s position at trial (page 18 of reasons), in the following way:

Defendant contends that Plaintiffs tax position is not in accordance with either accounting or economic reality, and now contends that preferably the entire cost of relocation should be included in the capital account for capital cost allowance purposes, and does not suggest that the whole contribution should be brought into income in the year when it was received, provided that it be brought in in such a way that it will be amortized in the current year and future years at a rate equal to the amount claimed by Plaintiff as capital cost allowance on the costs of relocation. The end result will be the same.

At the hearing of the appeal, counsel for the appellant agreed that he could not, on the basis of the Act, sustain his position that the reimbursements should be amortized over the depreciable life of the assets and that, therefore, he now relied on paragraph 12(l)(a)* [2] as his authority for taking them into income in the year in which they were received. In counsel for the respondent’s submission this change constituted the raising of a new defence on the appeal and was an additional reason for refusing to consider the appellant’s argument on this branch of the case.

IV

The Jurisprudence

As can be seen from the foregoing there are two aspects to the objection taken by the respondent. First, that the pleadings did not raise the position taken by the appellant during argument at trial after the close of the case. Second, that a new position was advanced by the respondent for the first time on appeal.

Quite aside from any rules of court in respect of pleadings and the necessity for pleading particular defences, it is trite to say that one of the purposes of a statement of defence is to raise all grounds of defence which, if not raised, would be likely to take the opposite party by surprise. A fortiori where, as here, a particular statutory provision is to be relied upon it must be pleaded together with the facts disclosing why the provision is applicable. Jackett, CJ in The Queen v Edmund Littler Sr, [1978] CTC 235; 78 DTC 6179, put the principle in this way:

In my view, when a cause of action is to be supported on the basis of a statutory provision, it is elementary that the facts necessary to make the provision applicable be pleaded (preferably with a direct reference to the provision) so that the opposing party may decide what position to take with regard thereto, have discovery with regard thereto and prepare for trial with regard thereto. In this case, the Minister’s decision on the objection referred to section 137 but, when complying with section 99 in the preparation of his defence in the Trial Division, the respondent not only did not refer to that section although he referred to others, he did not plead facts showing that “the result of one or more . . . transactions . . . is that a person confers a benefit . . .”. Had that been pleaded, other facts might well have been the subject of evidence in addition to those that were brought out at trial. In my view, it is no mere technicality”, but a matter of elementary justice to abstain, in the absence of very special circumstances, from drawing inferences from evidence adduced in respect of certain issues in order to make findings of fact that were not in issue during the course of the trial.

In The Queen v Transworld Shipping Ltd, [1975] 61 DLR (3d) 304, a contract to enter a charter-party required Treasury Board approval and no such approval had been obtained. These facts were not pleaded nor made the subject matter, as such, of discovery or evidence at trial. Jackett, CJ for the Court viewed the onus as being on the appellant to plead such a defence, together with the facts on which it was based, in its statement of defence. He then made the following observation:

In my view, justice requires that any defence based on special statutory provisions must be pleaded, particularly if it is based on specific facts, so that the opposite party may have discovery with regard to such facts and prepare to adduce evidence with regard thereto.

While a statutory requirement, the absence of which provides a defence for the appellant, was not present in the case at bar, the principle nonetheless applies. The new defence was based on the alleged fact that the reimbursements in issue were to be viewed as falling within the ambit of paragraph 121(l)(a) of the Income Tax Act.

That contention, thus, ought to have been pleaded together with the facts which disclosed why that provision was applicable. I do not see that the amended statement of defence does so. I am of the opinion, therefore, that the pleading does not provide the underpinning required for the argument advanced for the first time after the case was closed and during final argument at the end of the trial.

As to the raising of the argument for the first time on the appeal that the reimbursements were income in the hands of the respondent in the taxation year in which they were received, there is ample authority as to when new arguments are permitted to be maintained on appeal. Some of the authorities were reviewed in the judgment of this Court in Kingsdale Securities Co Ltd v MNR, [1975] CTC 10; 74 DTC 6674, and in particular in the following passage from my reasons for judgment, with which Ryan, J concurred:

Secondly, the amended notice of appeal from the reassessments based the appeal on the partnership agreement in which each of the limited partners is one of the trust and each is described as “a Trust created by Deed of Trust dated the 2nd day of December AD 1963 through its Trustees for the time being . . .”. No plea was made, even in the alternative, that the trusts were declaratory trusts and not trusts settled by the Oklahoma relatives pursuant to the trust deeds. It was not until during the course of argument at trial that this line of reasoning was adopted by the appellant. In my view, the appellant having proceeded to trial on the basis of the validity of certain documents, ought not to be permitted to invite either the trial judge or this Court to consider the case on an entirely different basis.

In The Owners of the Ship Tasmania et al v Smith et al (1980), 15 App Cas 223 at 225, Lord Herschell, dealing with a point which was taken by the plaintiff for the first time in the Court of Appeal, had this to say:

My Lords, I think that a point such as this, not taken at the trial, and presented for the first time in the Court of Appeal, ought to be most jealously scrutinized. The conduct of a cause at the trial is governed by, and the questions asked of the witnesses are directed to, the points then suggested. And it is obvious that no care is exercised in the elucidation of facts not material to them.

It appears to me that under these circumstances a Court of Appeal ought only to decide in favour of an appellant on a ground there put forward for the first time, if it be satisfied beyond doubt, first, that it has before it all the facts bearing upon the new contention, as completely as would have been the case if the controversy had arisen at the trial; and next, that no satisfactory explanation could have been offered by those whose conduct is impugned if an opportunity for explanation had been afforded them when in the witness box.* [1]

In Charles Lamb and H L Miller v Samuel T Kincaid and Anthony Krober, 38 SCR 516 at 539, Duff, J as he then was, referred to the Tasmania case (supra) with approval and stated:

Had it been suggested at the trial that the plaintiffs ought to have proceeded in the manner now suggested, it is impossible to say what might have proved to be the explanation of the fact that the plaintiffs did not so proceed. Many explanations occur to one, but such speculation is profitless; and I do not think the plaintiffs can be called upon properly at this stage to justify their course from the evidence upon the record. A court of appeal, I think, should not give effect to such a point taken for the first time in appeal, unless it be clear that, had the question been raised at the proper time, no further light could have been thrown upon it.

There are many other authorities to the same effect but unlike those cases in which the new ground was first raised on appeal, the alternative position was in this case raised during argument before the learned trial judge. However, at that time, the cases for both parties had been closed, so that no further evidence could have been adduced by the defendant at that stage to rebut the argument and the same principles should, therefore, apply. Presumably, the defendant had led evidence which was material in defending the case pleaded against him. Neither this Court nor the trial judge ought to be put in a position of deciding whether or not all possible evidence had been adduced to counter any argument made by the other party unless it is satisfied beyond all reasonable doubt that all requisite evidence had been adduced to enable the Defendant to rebut the plaintiff's new position. I am not so satisfied and thus, I do not think that the appellant’s submissions that declaratory trusts may have been created ought to be considered by this Court or need to have been considered by the learned trial judge.

As can be seen, the circumstances in which the introduction of the new argument occurred in that case are much like those which are present in this case.

The question thus becomes, would additional evidence have assisted the respondent in rebutting the new argument? Counsel for the respondent in answering questions put to him by the Court stated that, had he understood from the pleadings that the defence raised by the appellant at the conclusion of the trial was to be advanced, he would have called expert accounting evidence to support his client’s treatment of the reimbursements as contributed capital and, as well, would have cross-examined the appellant’s expert in the hope of eliciting support from him that the treatment of the reimbursement as contributed capital was as acceptable a method as including them in the income of his client. To paraphrase what was said in the Kingsdale case, in the face of these statements, I cannot be satisfied beyond reasonable doubt that all requisite evidence had been adduced to enable the respondent to rebut the appellant’s new position either at trial or in this Court.

For all of the above reasons, therefore, I am of the opinion that the appellant’s argument both at trial and in this Court as to the character of the reimbursements received for the pipe relocations, ought not to have been considered at trial nor should it be considered in this Court since it was not properly put in issue at trial.

V

The Merits of the Appeal

I am respectfully of the opinion that this case is indistinguishable from the Canadian Pacific case. It follows, therefore, that the respondent, as found by the trial judge, was entitled to add to the undepreciated capital cost of its Class 2 assets its expenditure incurred in relocating or modifying pipe lines on the request of third parties regardless of reimbursements received from those third parties, the character of which was not an issue.

The appeal should thus be dismissed with costs.

Lalande, DJ:—I agree with Mr Justice Urie’s disposition of this appeal for the reasons given by him.