Consumers' Gas Co. Ltd. v. The Queen, 86 DTC 6132, [1986] 1 CTC 380 (FCTD), aff'd 87 DTC 5008, [1987] 1 CTC 79 (FCA)

Muldoon, J.:—This appeal is taken in regard to the plaintiffs 1975, 1976 and 1977 taxation years. In the course of its business, the plaintiff is frequently obliged to relocate segments of its pipelines at the instance of various persons, firms, corporations or governmental authorities engaged in construction projects which would have impinged upon the pipeline. What is here in issue is the tax consequences of the relocation transactions. There is a secondary issue whose disposition, the parties agree, is dependent upon the disposition of the primary issue.

For the reasons which follow, including all logically implicit reasons which may not be specifically articulated here, this Court finds that the plaintiffs contentions prevail over the defendant's in this case.

The parties, by their counsel, have thoughtfully and helpfully tendered the “Agreement of the Parties as to Certain Facts and Other Matters", which was received as Exhibit 6 at trial. According to paragraph 5 of Exhibit 6 the case of The Queen v. Consumers' Gas, [1983] 1 F.C. 314; [1982] C.T.C. 339 (Trial Division); [1984] 1 F.C. 779; [1984] C.T.C. 83 (Appeal Division) involved the same parties in regard to the plaintiff's 1971 to 1974 taxation years. The parties agree that the facts in the case at bar are essentially the same as the facts involved in the previous case, above-cited. Indeed, they further agree "that there is no material difference in the facts except as to matters of quantum and expert evidence" and that the Court does not need to resolve matters of quantum.

In the Appeal Division the reasons for judgment of the panel were written by Mr. Justice Urie, with whom Messrs. Justices Stone and Lalande concurred. Urie, J. is reported to have recited the relevant facts, commencing at 782 (C.T.C. 84), as follows:

The respondent [the plaintiff, Consumers' Gas] 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%) 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 Works on Highways Act, R.S.O. 1970, c. 388 or the Railway Act, R.S.C. 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 The Queen v. Canadian Pacific Limited' [1] 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, i.e., 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.

In the above-cited case in the Appeal Division, the taxpayer's counsel asserted a preliminary objection to the Crown's appeal as it was formulated having presented a position which was neither pleaded nor argued in the Trial Division. Mr. Justice Urie is further reported, at 787 (C.T.C. 86), as writing:

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 Canadian Pacific case contributions were not taken into revenue but were capitalized? [2] and, therefore, found as follows: [3]

I have concluded that the 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.

Ultimately, Urie, J. concluded, as reported at 790 (C.T.C. 88):

. . . 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.

Finally, on this issue Mr. Justice Urie is reported on 795 (C.T.C. 91), as having written:

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.

That matter is, however properly in issue in the present trial proceedings. The judgment above-cited stands unaltered. From the disposition of these parties’ earlier case by the Court of Appeal, leave to appeal was declined by a panel of the Supreme Court of Canada. [1984] 1 S.C.R. xii.

Among the exhibits tendered by consent of the parties’ respective solicitors is a certain volume IV, now Exhibit 4, which is agreed evidence. Tab 3 in Exhibit 4 is a transcript of the testimony of one Ronald Bruce Carter, an accountant, but not called as an expert, which testimony was elicited before Mr. Justice Walsh in the above-cited case, The Queen v. Consumers’ Gas, [1983] 1 F.C. 314; [1982] C.T.C. 339, at trial. Although Robert T. Rutherford, Donald Frederick MacLean and David Bonham all testified viva voce in the case at bar, it must be borne in mind that Mr. Carter is the fourth witness, whose earlier testimony before Walsh, J. is imported here by agreement.

The one and only witness called by the plaintiff to testify viva voce, as an expert, was Robert Thomas Rutherford, a chartered accountant, being a partner and director of quality control in and for the firm of Thorne Riddell. In Mr. Rutherford's case, as well as those of the other two expert witnesses, there is no need to recite all qualifications in explicit detail, because they are known to the parties and are recited in the transcripts. Two qualifications only should be mentioned in this context. Mr. Rutherford was a member, between 1978 and 1981, of the Accounting Standards Committee of the Canadian Institute of Chartered Accountants (hereinafter: CICA) and, as of the trial date, was about to become the second chairman of the Accounting, Auditing and Public Sector Standards Committee of CICA.

Mr. Rutherford's written opinion, together with the accompanying certificate pursuant to Rule 482, was received as Exhibit 7. Mr. Rutherford expressed his written opinion on the relevant application to the facts and issues herein of generally accepted accounting principles. After reciting the material which he reviewed, he proceeded to formulate his professional opinion, thus:

One of the issues raised in this case relates to proper accounting treatment of the reimbursements received by Consumers' Gas towards the cost of relocating its plant — essentially its pipeline at the request of third parties. The accounting treatment is stated in the summary of significant accounting policies contained in the annual reports of Consumers' Gas as “Contributions in aid of construction are deducted from the cost of acquiring property, plant and equipment, with subsequent depreciation calculated on the net cost." The accounting treatment by Consumers’ Gas is known as the cost reduction approach and is identified as such in the Accounting Recommendations of the Canadian Institute of Chartered Accountants Handbook. This approach recognizes the fundamental important principle of matching credits received against related expenditures made. In my opinion the accounting treatment is in accordance with generally accepted accounting principles.

You have asked me to consider whether the reimbursement of “contribution in aid of construction” could be considered income and included in the statement of income in the year of receipt. In my opinion the reimbursement is a capital receipt and therefore its inclusion in the statement of income in the year of receipt would not be in accordance with generally accepted accounting principles.

(Exhibit 7)

Both Mr. MacLean and Mr. Bonham, each a highly qualified expert in his own right, allowed in testimony that they did not differ from Mr. Rutherford's opinion. Curiously, the respective counsel who called the one and the other two seemed well satisfied with their evidence.

In the matter which Mr. Justice Walsh ought not to have adjudicated in Consumers' Gas Company Ltd. v. The Queen, [1983] 1 F.C. 314; [1982] C.T.C. 339, he nevertheless presented very carefully crafted and cogent reasons which are of a highly persuasive quality in the present case. Since the reasons of Walsh, J. are set out verbatim in the above-cited report, it will suffice to recite only a few passages here.

In that earlier case between the same parties Mr. Justice Walsh is reported, at 328-29 (C.T.C. 346), thus:

The defendant cannot seriously maintain its first contention that both the amounts paid and reimbursements received by the plaintiff should be considered as on income account. Even the defendant’s own expert witness disagrees with this and it is evident that the expenses of relocation were not expenses laid out on account of income but were merely for the relocation of certain of the plaintiff’s pipelines which were in themselves capitalized assets. Moreover, the reimbursement represented in the great majority of cases less than 40 per cent of total cost and it would be difficult to conceive of the plaintiff disbursing the difference as income-producing expense when no change of income is involved.

Further, according to Walsh, J., at pp. 330-31 (C.T.C. 347)

. . . in the present case the plaintiff never disposed of the old pipelines nor obtained the new ones by way of conveyance from third parties, but built them itself aided by contributions from such third parties.

In the present case the contributions went into the plaintiff’s books as contributions to capital for income tax purposes. The plaintiff points out that by definition in subsection 248(1) of the Income Tax Act (139(1)(e) of the 1952 Act) “business” is defined as including a concern in the nature of trade. Paragraph 12(1)(g) (6(j) of the 1952 Act) includes in “income” any amount received by the taxpayer in the year that was dependent upon the use of or production from property . ..”. Certainly the relocations of the pipelines which the plaintiff made were not adventures in the nature of trade calculated to result in profit. It was obliged to make the relocations by law in the greater number of cases and even for those which it had made voluntarily by contract with a private company, these were not done in order to sell more gas or acquire a new customer. At best they might be said to be done as a matter of goodwill and good business relations. Neither were the amounts received dependent upon the use of or production from the plaintiff’s property. While the defendant argues strongly that the frequency of the relocations indicates that they were current business transactions, this does not necessarily make the contributions subject to entry in the revenue account, nor is it a more important factor than the absence of any element of profit.

At 332-33 (C.T.C. 348-49), Mr. Justice Walsh is further reported as follows:

The defendant contends that it is not possible to consider the contributions as contributions to surplus. Jurisprudence does not so hold however, each case depending on its own facts. In the Ottawa Valley Power case for example (supra) [. . . [1969] 2 Ex. C.R. 64] Jackett P. in a somewhat obiter portion of his judgment States [at page 76 of the Exchequer Court Reports] that in the event that the Ottawa Valley Power itself had paid for the alterations instead of Hydro paying for them on behalf of Ottawa Valley Power, then “In my view, the explanation is that, from a commercial point of view, if that had happened, there would be two aspects of the matter, viz,

(a) the appellant would have incurred capital costs for which it should have capital cost allowance, and

(b) the appellant would have received a payment from the purchaser of its power which should be taken into its revenues if it is part of the payment for which it has sold in the course of its business or should be regarded as a capital receipt if, in the circumstances, it should be so characterized.” [Emphasis mine.

Again, at 335 (C.T.C. 349-50):

. . . It has already been concluded that paragraph 20(6)(h) of the Act dealing with grants, subsidies, or other such assistance from a government, municipality or other public authority, does not apply in the present case.

Relying on the evidence of Mr. Bonham in support of its principal argument that the subsidy should have been deducted from the cost of the relocations and only the resulting difference capitalized, the defendant refers, inter alia, to the case of J. L. Guay Ltée v. Minister of National Revenue in which Associate Chief Justice Noël, as he then was, stated at page 243 [Federal Court Reports]:

In determining the taxable profits of a taxpayer we can take as a starting point the profit and loss statement prepared according to the rules of accounting practice. However, the profit shown on this statement has always to be adjusted according to the statutory rules used in determining taxable profits. This because a number of facts taken into consideration by accountants are excluded by certain provisions of the Income Tax Act in the determining of taxpayers’ profits.

It was contended that there is no statutory provision permitting the contributions in the present case to be treated differently for tax purposes from the manner in which they were treated for accounting purposes establishing the proper rate base for the company. While there may be no statutory requirement necessitating a different treatment, the weight of jurisprudence, and more specifically the Canadian Pacific case, suggests the contrary.

Finally, Mr. Justice Walsh is reported thus in his conclusion, on page 336 (C.T.C. 350):

I have concluded that the 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. While this undoubtedly has the result, as the plaintiff readily concedes, of conferring an advantage on its shareholders which the parties making the contributions had no intention of doing, nevertheless this appears to be the correct manner of dealing with these contributions in the light of current jurisprudence. As the plaintiffs counsel argues, if this results in unintended tax advantages for the plaintiff the remedy is in the hands of the defendant by way of amending legislation.

The plaintiff’s appeal therefore must be maintained, and its tax assessments for its 1971, 1972, 1973 and 1974 taxation years are referred back to the Minister for reassessment in accordance with the terms of this judgment, with costs.

The reasoning and conclusion expressed by Mr. Justice Walsh in the above-mentioned earlier case between these same parties, are hereby adopted. The facts remain unchanged. Although the plaintiff corporation maintained before the Appeal Division that such reasoning and conclusion ought not to have been performed by Walsh J. in that case, the plaintiffs counsel was graciously pleased to ratify and adopt them in argument in the case at bar. The testimony of the three agreeable experts has not changed the legal disposition which is to be made of the issues.

How did the unanimous panel on appeal regard the matter in passing, while accepting the plaintiff’s preliminary objection in bar of appeal? In The Queen v. Consumers' Gas Company Ltd., [1984] 1 F.C. 779; [1984] C.T.C. 83

— the appeal from the cited judgment of Walsh, J. — Mr. Justice Urie is reported, at 789-90 (C.T.C. 87-88):

Since heaviest reliance was placed on paragraphs 11 and 15 [of Her Majesty’s amended statement of defence], 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 not mean to the draftsman 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.

The above observation too, while not of binding authority in this instance, is also very carefully crafted and cogent. It is hereby adopted.

The plaintiff corporation at all material times was never in the business of relocating its pipelines. It was in the business of selling and distributing gas to its customers. The reimbursements in issue were not gifts or subsidies, nor yet profit from its business or property within the meaning of subsection 9(1) of the Income Tax Act. There was most certainly no profit for the plaintiff in those reimbursements because they never exceeded its costs of relocation and they frequently fell short of such costs. It is not logical or legal to require the plaintiff to take them on income account. In this issue, the plaintiff’s contentions prevail.

In the statement of defence the Deputy Attorney-General pleaded alternatively, thus:

16. In the alternative, if the payments received from the contracting parties do not form part of the Plaintiff’s income, then he submits that the Plaintiff must reduce the cost of its Class 2 assets by the amount of the payments from the contracting parties.

17. In the further alternative, if the payments received from the contracting parties who are governments, municipalities or other public authorities do not form part of the Plaintiff’s income, then he submits that the Plaintiff must reduce the cost of its Class 2 capital assets by the amount of the payments from those contracting parties who are governments, municipalities or other public authorities pursuant to the provisions of section 13(7)(e) of the Income Tax Act (prior to 7 May 1974) and section 13(7.1) (after 6 May 1974).

In light of all the circumstances of this case the contentions expressed in the above-recited pleadings cannot reasonably prevail. The plaintiff must obviously succeed in opposition to the above-recited alternative pleadings by the defendant's solicitors.

Specifically, then, this Court finds:

(a) that the governmental, municipal and/or public authority applicants for relocation of the plaintiff’s pipelines were of exactly the same quality and status as the private applicants; accordingly, the plaintiff in receiving the reimbursements from any and all such applicants, governmental, municipal and other, was not entitled thereby to receive and did not receive any assistance therefrom, whether as a grant, subsidy, forgivable loan, deduction from tax, investment allowance or any other form of assistance;

(b) the reimbursement payments were no assistance in the above sense at all: they were sometimes barely, and in relation to the governmental, municipal or other public authority category, less than adequate capital receipts; and

(c) those reimbursement payment receipts were indeed capital receipts, and therefore not taxable.

Plaintiff's counsel argued persuasively in regard to the above matters despite the great particularity and length of his submissions. The substance of his arguments, reported verbatim in volume II of the transcript, is hereby adopted and ratified.

Plaintiff's counsel was less persuasive, however, in arguing his procedural complaint. That is, that the defendant is precluded in law from asserting the principal defence to the effect that the reimbursement payments formed part of the plaintiff's income in the years of receipt, because such defence constitutes an indirect attempt by the Minister to appeal from his own reassessments, "when in law no such appeal exists." This Court's finding on the point is that no such attempt has been demonstrated. An analysis of the jurisprudence does indeed indicate, as counsel acknowledged, (transcript Il, page 326) that the cases “‘are not 100 per cent crystal clear and it is not a black and white situation," that the Minister is really appealing from his assessment. The plaintiff’s contention in this regard is not entirely groundless, nor yet spurious, but it is not quite made out, either.

In their written agreement, Exhibit 6, the parties have provided the following:

2. The second issue relates to commissions aggregating $700,000.00 paid by the Plaintiff and raised in paragraphs 9, 10 and 11 of the Statement of Claim.

3. The Minister of National Revenue has carefully reviewed this second issue in the light of recent jurisprudence and is satisfied that the Assessments should be varied in regard to this issue only.

4. Accordingly, it is agreed between the parties that the $700,000.00 in commissions referred to in paragraph 9 of the Statement of Claim were an “eligible capital expenditure” within the meaning of section 14(5)(b) of the Income Tax Act and /2 thereof are to be added to the Plaintiff’s “cumulative eligible capital” within the meaning of section 14(5)(a) of the Act. As a result:

(i) if the Court rejects the Defendant's contention, set out in the Amended Statement of Defence, that the payments from the parties contracting for pipeline relocations are income or if the Court accepts the Plaintiff’s contention, set out in its Answer, that the Defendant may not argue that the payments from the parties contracting for pipeline relocations are income (which contention the Defendant disputes), then the appeal should be allowed and the Assessments sent back for reconsideration and reassessment on the basis that, pursuant to section 20(1 )(b) of the Act, the Plaintiff is entitled to deduct additional amounts of $35,000.00, $31,500.00 and $28,500.00 in the 1975, 1976 and 1977 taxation years;

(ii) if the Court accepts the Defendant’s contention that the payments from the parties contracting for pipeline relocations are income and if the Court rejects the Plaintiff's contention that the Defendant may not argue that the payments from parties contracting for pipeline relocations are income, then the appeal should be dismissed.

In effect, paragraph 4(i) above, suggests the appropriate result. The Court does reject the defendant's contention . . that the payments from the parties contracting for pipeline relocations are income."

Further, under the heading of Possible Outcomes-on the Relocation of Pipeline Transactions in said Exhibit 6, the parties agreed in the following suggestion, appropriately edited:

12. If the Court . . . concludes that . . . the payments from contracting parties are not part of the Plaintiff’s income for tax purposes and should not be added thereto . . . and . . . if the Court rejects the alternative submissions of the Defendant in paragraphs 16 and 17 of the Amended Statement of Defence . . .

[as, in each instance this court does, . . .]

then, the Assessments should be varied in regard to this issue and the Reassessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Plaintiff is entitled to additional capital cost allowance on its Class 2 assets of $437,397.00, $459,828.00 and $484,658.00 in the 1975, 1976 and 1977 taxation years respectively.

So be it. Judgment will be as the parties have agreed in the above-recited provisions of Exhibit 6, with taxable, and taxed, costs payable by the defendant in the plaintiff’s favour.

Appeal allowed.