Cullen, J: —This is an appeal by way of statement of claim from a notice of determination of a loss issued by the Minister of National Revenue (the Minister) on November 2, 1982. This notice reduced the plaintiff's noncapital losses for both its 1977 and 1978 taxation years under Part I of the Income Tax Act, 1970-71-72, c. 63 as amended, by treating the cost of linefill as the cost of a depreciable property falling within paragraph (b) of Class 2 of Schedule II of the Regulations for the purpose of calculating the capital cost allowance per paragraph 20(1)(a) of the Act and Part XI of the Regulations.
The appeal is in respect of the plaintiff's 1977 and 1978 taxation years and relates to one pipeline purchased in 1977 and another pipeline built in 1978. As the facts involve the same issue of law, the matters were heard together on common evidence.
Facts
The plaintiff is a company incorporated under the laws of Alberta and is a wholly owned subsidiary of the Alberta Energy Company Limited. The plaintiff is involved in the business of transporting crude oil. There is no significant dispute on the facts and I have therefore taken them from the opening portion of the plaintiff's argument.
In 1975 the plaintiff agreed with the members of the Syncrude project to construct a main pipeline to transport crude oil between Mildred Lake near Fort McMurray and the terminal, Pipeline Alley, in Edmonton, Alberta. Pursuant to the agreement between the plaintiff and the Syncrude participants, the plaintiff purchased from Imperial Pipeline Company, a subsidiary of Imperial Oil, the pipeline that runs from Red Water north of Edmonton to the proposed terminal point of the main pipeline in Pipeline Alley. The purpose for that acquisition was to obtain the rights of way which were associated with the Red Water pipeline, in order that the main pipeline could be constructed on that same right of way and that is not in question.
In connection with the purchase of the Red Water pipeline, the plaintiff also purchased from Imperial Pipeline Company approximately 37,000 barrels of conventional crude oil which at that moment in time was in the pipeline as linefill.
During 1977 and the early part of 1978, the plaintiff constructed the main pipeline and the pumping and metering and installations and other things associated with it. Before the main pipeline was completed and ready to operate on the basis contemplated in the agreement, naphtha and gas oil were introduced into the main pipeline of the southerly terminal near Edmonton and, with the benefit of a borrowed pump, were transported in a northerly direction to the Syncrude plant to be used in start-up operations. After the desired volumes of naphtha and gas oil were introduced into the main pipeline at the southerly end, conventional crude oil was borrowed from a third party by the Syncrude participants and that was also put into the southerly end of the main pipeline to push the remaining naphtha and gas oil that was in the line out of the line at the Syncrude plant.
The borrowed crude was not pumped out of the pipeline at the northerly end, and it stayed in the line where the line or the construction of the pipeline facility proceeded and was completed.
When the Syncrude plant was ready to commence commercial operations in accordance with the Deficiency and Throughput Agreement, the plaintiff purchased from the operators of the Syncrude plants sufficient synthetic crude oil completely to fill the pipeline, which amounted to approximately 666,000 barrels of oil at a cost of approximately $11 million. That is the oil that is called "linefill".
In Article 30 of the Deficiency and Throughput Agreement, the linefill was introduced into the main pipeline at its northerly inlet station, and as it was pumped into the main pipeline it displaced borrowed crude oil in a southerly direction and out of the main pipeline at the southerly terminus where it was returned to the participants in the Syncrude project or to the person or company from whom that oil had been borrowed.
In order to insure a continuous flow of product into and out of pipelines, pipelines are invariably filled with what is called a “cargo” or what has been called the contents or what Mr. Shwed (expert witness) called the “linefill”. When the substance being transported is being introduced in the inlet end of the pipeline an equal volume of substance is delivered at the outlet end of the pipeline and thus, normally the pipeline will be filled with a substance and transported and that has been called "linefill", and that is the meaning of the term linefill which has been adopted by the defendant in their statement of defence. (The confusion is that the term linefill in the plaintiff's statement of claim, and the term linefill in the Throughput and Deficiency Agreement is not intended to refer to the oil in the pipeline at any particular time but rather refers to that particular oil which was purchased by the plaintiff.)
When the plaintiff purchased the Red Water pipeline system it was filled with crude oil and at that time the plaintiff acquired whatever interest the vendor of the Red Water pipeline had in the linefill and had paid cash for that crude oil.
The plaintiff was obliged to purchase from participants of the Syncrude project enough synthetic crude to fill the pipeline and that amounted to 666,000 barrels, which was purchased and paid for by the plaintiff.
When the main pipeline was completely filled with the synthetic crude oil purchased by the plaintiff, then the main pipeline began to transmit synthetic crude oil owned by the Syncrude participants and produced at the Syncrude plant. That is called "shippers' products" under the agreement. As the synthetic crude oil was transported in a southerly direction through the main pipeline, it displaced the linefill that had been purchased by the plaintiff and that linefill was discharged at the southerly outlet of the main pipeline and was delivered to one or more of the participants in the Syncrude project or to their order.
The linefill that had been purchased by the plaintiff was fully displaced and delivered in this manner by September 29, 1978, and well before the end of the 1978 taxation year. Similarly, all of the conventional crude oil contained in the Red Water pipeline at the date of its purchase by the plaintiff was pumped out of the Red Water pipeline and delivered to third parties prior to the end of the plaintiff's 1977 taxation year. (And there is an admission, in fact, that this linefill was in fact pumped out of the two respective pipelines in the years in which it was acquired. That has been admitted in discovery.)
The Plaintiffs Position
1. The purpose of the purchase of the pipeline was outlined earlier. This pipeline already had linefill in place, about 37,000 barrels of conventional crude, which was purchased along with "the Red River Pipeline”. This linefill was fully pumped out of the pipeline and delivered to third parties in the plaintiff's 1977 taxation year.
In calculating its income for the 1977 taxation year, the plaintiff treated the linefill as the cost of property, falling with Class 8, Schedule Il of the Regulations for the purpose of calculating and deducting capital cost allowance, pursuant to paragraph 20(1)(a) of Part XI of the Regulations.
2. In 1977, as stated earlier, the plaintiff began building the pipeline for the transporting of synthetic crude oil from Mildred Lake to Edmonton. The pipeline was completed on April 30, 1978, and under an agreement with the Syncrude participants, the plaintiff was the owner of this pipeline. The plaintiff states it commenced operations on May 1, 1978. Before operations began the plaintiff purchased on its own account in the 1978 taxation year sufficient crude oil to fill the pipeline, and did so pursuant to a contractual obligation to the users of the pipeline.
In calculating its income for the 1978 taxation year, the plaintiff also treated the cost of the crude oil purchased to fill the pipeline as the cost of property falling within Class 8 of Schedule II of the Regulations for the purpose of calculating and deducting the capital cost allowance as per paragraph 20(1)(a) of the Act. (Class 8 is the catch-all class).
The Defendant's Position
The Minister reassessed the plaintiff in respect of its 1977 and 1978 taxation years. The Minister treated the cost of linefill as the cost of depreciable property coming within paragraph (b) of Class 2 of Schedule II (pipelines) of the Regulations, for the purpose of calculating and deducting the capital cost allowance.
Notices of Objection
The plaintiff filed notices of objection dated December 20, 1982 and was advised by notice of confirmation dated September 9, 1983 that the determination of the losses for 1977 and 1978 tax years were confirmed.
The Issues (Plaintiff and Defendant)
The Plaintiff:
The plaintiff denies that linefill is a part of the oil pipeline and therefore does not fall within paragraph (b) of Class 2 of Schedule II as “pipeline”. The plaintiff contends that linefill is a tangible capital property, not included in any class listed in Schedule II and therefore falls within paragraph (i) of Class 8 of Schedule II for the purpose of calculating capital cost allowance.
In the alternative, the plaintiff argues that the cost of the linefill was an expense incurred for the purpose of earning income from a business in the 1977 and 1978 taxation years which did not bring into existence an asset or advantage of an enduring or lasting nature and therefore is deductible pursuant to section 9 of the Act.
The Defendant:
In assessing the plaintiff, the Minister assumed the following facts:
1. the plaintiff owned and managed both pipelines;
2. the plaintiff was in the business of transporting crude oil and synthetic crude oil belonging to other parties;
3. before using the pipeline for the transport of crude oil (referring to the pipeline bought in 1977), the plaintiff purchased on its own account enough crude oil to fill the pipeline;
4. with respect to the pipeline built by the plaintiff, the cost of the synthetic crude oil initially pumped into the pipeline to make it operational was part of the capital cost of the pipeline;
5. during the operational life of the pipeline the linefill does not suffer any loss in volume.
The defendant maintains that linefill is an integral component of a functioning pipeline and that linefill is required at all times to facilitate the continuous flow through the pipeline. Further, that at any time, the oil or synthetic crude shipped to a particular purchaser would provide the linefill to the pipeline. Therefore, it was not necessary for the plaintiff to purchase the initial amount of oil to fill the pipeline at the commencement of operations as the linefill would have been provided by the initial shipment of oil.
Given the above, the linefill is a part of the pipeline and its cost is part of the capital cost of the pipeline and therefore properly treated by the Minister as falling within paragraph (b) of class 2 of Schedule Il of the Regulations (6%).
In the alternative, the defendant submits that in calculating the plaintiff's income, any deduction of the capital cost allowance (as it relates to linefill) would unduly or artificially reduce the plaintiff's income, as linefill is not a depreciable asset and its purchase was not required for the operation of the pipeline. Therefore, the deduction of the capital cost allowance would be prohibited by subsection 245(1) of the Act. The defendant contends that the linefill was not acquired by the plaintiff for the purpose of gaining or producing income, that the linefill has no separate existence as a tangible asset in the plaintiff's business.
Also, the defendant submits that if the linefill is not a part of the pipeline, and as no part of the linefill was consumed during the operation, it was an asset of an enduring or lasting nature, therefore the expense incurred in acquiring the linefill was on capital account and the deduction would be prohibited under paragraph 18(1)(b) of the Act. The defendant adds that if the linefill is not part of the pipeline any deduction of the linefill as capital cost allowance would not be reasonable as the linefill did not suffer any loss of quantity during the year. Hence the deduction is prohibited by section 67 of the Act.
The defendant also submits, in the alternative, that the plaintiff did not acquire the linefill for the purpose of gaining or producing income, as per the requirements of paragraph 1102(1)(c) of the Regulations and therefore the plaintiff is not entitled to a deduction for capital cost allowance pursuant to paragraph 20(1)(a) of the Act and paragraph 1102(1 )(c) of the Regulations.
Conclusions
The plaintiff referred to confusion between its definition of linefill and the defendant's. Linefill to the plaintiff meant and means the oil purchased in both instances to enable the operation to begin. The defendant, on the other hand, sees linefill as the oil in the pipeline at any particular time. To add to this confusion about the meaning of the term, it also is possible to see linefill as part of the original purchase and part of the shippers' product before all the originally purchased oil is displaced.
This case is also made more difficult in that each side sees the pipeline as operational or functioning at a different time. Mr. Fowler, Director of Corporate Taxation and Treasurer Operations of Alberta Energy Company Limited, in his evidence, sees it this way:
Q. Mr. Fowler, can a pipeline transmit before it’s full? A. It has to have something to transmit.
Q. Do I take that the answer is yes, that it must — the pipeline must be full of line fill to transmit?
A. Not necessarily. As the product enters the inlet, I would think that would be transmitting it even though the pipeline itself may be empty at that time.
Q. Is a pipeline operational before it’s full?
A. I believe it starts to operate at the inlet pipe as soon as the first barrel is introduced.
Q. So it operates initially when it's empty? When you start putting in the linefill, you're saying that it’s operational or it’s transmitting?
A. I believe it’s — it can be said that it commences to operate with the operation of product at the inlet.
Q. Does it commence to transmit!
A. As soon as it enters, it operates. I believe it is transmitting. [Emphasis added.]
Mr. Shwed, the expert witness called by the defendant, saw "linefill as an integral part of the pipeline" and when asked to expand on that, stated at page 198 of the transcript:
A. Well, I don't visualize how pipeline can function without the linefill, because the main purpose would be defeated. It's a volume of oil contained in the pipe which had to be moved between two points. So linefill, from design point of view, from operational point of view, it has to be an integral part of the pipeline. In my mind, there are no two ways about it.
Q. Cana a pipeline function or work without linefill? A. No, sir. [Emphasis added.]
With all due respect to expert witnesses, it is the Court's constant wish that they would limit themselves to being a witness and not act or behave as counsel for the party that retained them. This often leads to evasiveness in the answers in an apparent attempt to aid the client. A classic example is Mr. Shwed's evasiveness on cross-examination:
Q. What do you call the thing which is — which would be a pipeline if it was filled with oil and gas, but is not filled with oil and gas at the particular moment. What is that thing?
A. Would you be more precise?
Q. You understand what I'm talking about; you've been designing oil and gas pipelines for your whole career. And the last thing that occurs — the first thing that the separation point between the completion of construction is the completion of testing and the use of the facilities starts with the oil and gas being introduced into it. Isn't that correct?
A. No. What I said — not being introduced, being delivered at the outgoing end. Q. What's the difference between — how can it be introduced . . .?
A. —introduced at the receiving point. Drilling in the line, and then you're in the business of —
Q. I say, before the line is — anything has gone into the line at the inlet point, what do you call the thing?
A. Well, you're filling the line —
Q. No, I'm talking about all that hardware that cost millions of dollars buried in the ground, and all the pumping stations and all of the weights and all of the valves. What is that called?
A. Well, you're constructing a pipeline.
Q. No, no, you're not constructing it now because it’s — the construction phase is finished. What's it called?
A. Well, it's construction of a pipeline and your pipe is ready to proceed with testing, or opening —
Q. No, not testing, Mr. Shwed, it’s finished. Testing’s done with inert gas or water. A. Right.
Q. And it’s put in and sent out. A. Yes. Now, you start filling in. Q. In what?
A. Into that facility.
Q. What is that facility called, Mr. Shwed? A. Well, that facility’s called the "pipeline".
It is quite possible from the evidence that no linefill need be purchased, or no linefill need be in place when the “pipeline” becomes operational. Here, were it not for a clause in a contract requiring the plaintiff to purchase linefill at no cost to the shippers, the pipeline would become “operational” with the introduction of the first barrel of the shippers' crude. In that situation, when the pipeline held approximately 666,000 barrels of shippers' crude it would comprise the linefill. The pipeline, however, became operational without any linefill with the introduction of the first barrel of shippers' crude. It is inconceivable to me that the definition of pipeline in Class 2 includes linefill. Were it the intention that linefill be taxed under that class, it would have been a simple matter to say “pipeline, including linefill” but that in fact was not done. The problem facing the taxpayer could have been easily resolved by the drafters of the Regulations. If ambiguity arises the benefit must fall to the taxpayer. In Johns-Mansville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111 at 126; 85 D.T.C. 5373 at 5384, Estey, J. states:
Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.
In Canterra Energy Ltd. v. The Queen, [1987] 1 C.T.C. 89 at 95; 87 D.T.C. 5019 at 5023 Urie J. states:
. . . l have not been persuaded by my analysis of the regulation that that was not the result which the Governor in Council intended. If he did not, then the appropriate remedy for the future is readily available to him. If the regulation was not aptly worded to carry out his original intention it does not mean that this Court should preclude the taxpayer from taking advantage of the benefits of the provision as worded.
Also, there is no question that the plaintiff was under a contractual obligation to buy the initial linefill. The plaintiff had to weigh this obligation against saying no and possibly losing the contract to transport shippers' crude for the 25-year term, a significant “consideration”. Also, the tariff to be charged the shippers would be different and higher in light of the obligation imposed on the plaintiff to buy the linefill.
Tax Treatment
In the light of these conclusions what should be the tax treatment of the linefill? If Class 8, the catch-all clause, is to have any meaning in the circumstances of this case, the plaintiff must be entitled to the benefit of its provisions. As between Class 2 and Class 8, linefill is a depreciable or capital property acquired by the plaintiff and characterized as Class 8.
To summarize then, the cost to the plaintiff of the pipeline linefill purchased by it in respect of both pipelines is the cost of depreciable property. This cost is added to the undepreciated capital cost of the class to which the property belongs, namely Class 8. The undepreciated capital cost can be increased by additional Class 8 acquisitions and can be reduced by the proceeds of Class 8 dispositions as well as by amounts of capital cost allowance claimed. The remaining balance of the undepreciated capital cost at the end of the taxation year is the amount on which capital allowance for the year is calculated (as set out in Schedule 2). As long as this taxpayer continues to own Class 8 assets he can claim capital cost allowance on the undepreciated capital cost in that class. Not until the taxpayer has disposed of all the assets in that class (Class 8) does he obtain a right to claim a deduction (in the proper circumstances) on the remainder of any undepreciated capital cost of that class.
I am buttressed in this view by the comments of Dubé, J. in Nova, an Alberta Corporation v. The Queen, [1987] 1 C.T.C. 265 at 270; 87 D.T.C. 5146 at 5150:
In my view, the various definitions of "pipeline" in the federal and provincial acts serve merely the purposes of those acts and do not govern the interpretation of the Income Tax Act. The Act must be construed according to its own definitions, or the ordinary meaning of the words used, or the common usage by the people in the relevant industry.
As indicated earlier, even the expert witness called by the defendant, after much evading of the issue, conceded a pipeline could be a pipeline without linefill.
Alternative Positions Taken by the Defendant:
These alternative pleas by the defendant were not assumptions upon which the assessments were made and therefore the onus to establish them falls to the defendant. Rand, J.'s opinion in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195, is considered authority for the proposition that a taxpayer has the onus of proof with respect only to the findings or assumptions of fact made by the M.N.R. at the time of assessment. Later court decisions have refined Rand, J.'s limitation on the taxpayer's onus of proof.
In M.N.R. v. Pillsbury Holdings Ltd., [1965] 1 Ex. C.R. 676; [1964] C.T.C. 294, the plaintiff (M.N.R.) had not alleged that he assumed, in making the assessments, that the waiver of interest was an arrangement or deduction adopted by the corporation to confer a benefit or advantage on Pillsbury qua shareholder. Accordingly, Cattanach, J. considered there was no onus on Pillsbury to disprove that fact. Cattanach. J. noted that beyond the facts found or assumed in assessing Pillsbury, it was open to the Minister to have alleged further or other facts which would support the assessment. “If he had alleged such further or other facts, the onus would presumably have been on him to establish them.": Pillsbury (supra) at page 686 (C.T.C. 302).
Further, in Quality Chekd Dairy Products v. M.N.R., [1967] C.T.C. 452; 67 D.T.C. 5303, Gibson, J. found that there was not sufficient evidence before the Court to entitle the Crown to succeed on its pleaded alternative position.
That is precisely the conclusion one has to reach here.
Certainly the defendant was unable to establish that the plaintiff need not or was under no obligation to purchase the linefill; in fact all the evidence was to the contrary. Similarly, the alternative argument that the purchase or cost or expense entailed in purchasing the linefill did not result in profits to the plaintiff is really not credible given all the evidence (i.e., no purchase of the linefill by the plaintiff — no contract to the plaintiff to transport the shippers' crude). It hardly qualifies under section 67 and the Regulations of the Act as an unreasonable expense in the circumstances here, and in this business transaction the plaintiff was accepting that expense for profits to be earned and that it in fact earned even during construction.
Ownership
The extent to which the depreciation is permitted under Class 8 of course is determined by the question, who owns the linefill? In my view, the plaintiff is at all times the owner of the linefill, and though all of the “initial linefill” is displaced by shippers' oil, the linefill remains for all practical purposes the same product. The shippers' ownership of linefill ends when 100,000 barrels leaves the south end of the pipeline. It seems absurd that a plaintiff's lien could be put on its own linefill, but of course practical methods to secure a lien are possible. The plaintiff was in a position to take possession of the shippers’ product at the outlet end and transmit it to a customer for a price or could construct holding tanks to take the shippers' product and keep it in storage until that lien was paid off. Another weapon in the lien arsenal could be a refusal to transmit any of a particular shipper's oil until the lien was paid.
Accordingly, the reassessments for 1977 and 1978 taxation years are set aside, and the question of the plaintiff's 1977 and 1978 taxation years [is] referred back to Revenue Canada on the basis that the linefill is owned by the plaintiff and is to be assessed under Class 8, Schedule II of the Regulations. The plaintiff is entitled to its costs of this action.
Appeal allowed.