D.MNR for Customs and Excise v. Amoco Canada Petroleum Co. Ltd., 86 DTC 6008, [1986] 1 CTC 124 (FCA)

Urie, J. (Heald, J. concurring:)—This is an appeal brought pursuant to section 60 of the Excise Tax Act, (the “Act”) from a decision of the Tariff Board which held that certain pipe, pipeline equipment and related apparatus (the pipelines) purchased by the respondent were exempt from sales tax by virtue of Part XIII of Schedule III of the Act. The right of appeal is, of course, limited to questions of law. The relevant sections of the Act and of Schedule III are:

27.(1) There shall be imposed, levied and collected a consumption or sales tax of nine per cent on the sale price of all goods

(a) produced or manufactured in Canada

29. (1) The tax imposed by section 27 does not apply to the sale or importation of the goods mentioned in Schedule III, other than those goods mentioned in Part XIII of Schedule III that are sold to or imported by persons exempt from consumption or sales tax under subsection 31(2).

SCH. HI — PART XIII — 1. All the following:

(a) machinery and apparatus sold to or imported by manufacturers or producers for use by them directly in

(i) the manufacture or production of goods

The Issue

In essence, then, the only issue is whether the pipelines are used directly in the production of saleable components of natural gas liquid which components, it was agreed, are propane, iso-butane, normal butane and pentanes plus.

The Facts

There are two pipelines in issue. They are, first, the “Ocelot extension”, which is a line of 114.3 millimetre pipe, some 33 kilometres in length, running from the Ocelot Peco gas processing plant to the Petro Canada Bra- zeau River Plant in Alberta. The second is described as the "Pex extension”, also a 114.3 millimetre pipeline which extends a distance of approximately 32 kilometres from the Petro Canada Brazeau River Plant to the Pembalta System Station 8. Both are part of the “Buck Creek Gathering System” which is a pipeline system in the Pembina Oilfield area designed, built and operated to gather liquid hydrocarbons mix from various gas processing plants for the Buck Creed fractionation plant. There it is separated into the saleable components earlier referred to, namely, propane, iso-butane, normal butane and pentanes plus.

The sole witness for the respondent, Mr. Matthews, testified that the raw liquid hydrocarbons mix delivered to the Buck Creed plant is not normally saleable before fractionation. That process is accomplished principally at the Buck Creed plant but the raw mix can be diverted for processing at Edmonton or even Sarnia, Ontario, and, in fact, has been so diverted from time to time for technical reasons. The evidence of the appellant’s witness, Horte, discloses that no change in the nature, state, quality or condition of the raw liquid natural gas mix takes place between the gas processing plant and the fractionation plant. However, before its entry into the system, the liquid hydrocarbons have been removed from the natural gas, as received from the ground, at the gas processing plant and the vapour pressure is reduced to a point where the mix can be handled in the transport system. Between the gas processing plant and the fractionation plant there are no intermediate interventions or withdrawals, although the raw mix gathered from other plants may be introduced into the system as the mix gets closer to Buck Creek. Finally, the evidence discloses that the only economic method for transporting the raw liquid hydrocarbons mix in quantity, from the gas processing plants to the fractionation plant, is by pipeline. The cost in transporting the mix by truck was said to be "prohibitive”. The production of those producers who use trucks is so small that to build a pipeline to gather their product would not be economic. On the basis of this evidence, the Tariff Board reached the following conclusion:

In the present appeal, the evidence shows that the hydrocarbon mix, once inserted into the pipeline moves directly to the fractionating plant and is not subject to any further treatment en route. Upon arrival at the Buck Creek plant, it is then separated into its components, propane, iso and normal butane and pentanes plus, for sale. The fact that a portion of the hydrocarbon mix was temporarily being diverted does not change the original purpose and intended use for the pipeline.

The Board therefore declares that the pipelines and related apparatus in issue, namely the Ocelot extension and the Pex extension, are pipelines used directly in the production of natural gas liquids and are exempt from the tax imposed by section 27(1) of the Act.

It is from this decision that the present appeal is brought.

It is the appellant's contention that the Tariff Board in deciding the issue before it, as hereinbefore set out, erred in law in two respects:

(1) it misinterpreted the phrase “for use directly in the manufacture or production of goods” as it appears in paragraph 1(a) of Schedule III, Part XIII of the Act, supra, and its interpretation was contrary to the jurisprudence; and

(2) its decision was perverse in that there was no evidence to support its conclusion that the pipelines in issue are used in the production or manufacturing process.

The respondent, of course, takes issue with those submissions. I propose to deal with the contentions seriatim.

(1) The Misinterpretation Argument

As I understand it, it is common ground that the goods in issue are machinery and apparatus, that the respondent is a producer and that the production of the saleable propane, iso-butane, normal butane and pentanes plus is the production of goods within the exemption accorded by section 29 of the Act. The sole question remaining in the resolution of the issue is, thus, are the pipelines used “directly in the production" of the saleable goods produced at the Bulk Creek fractionation plant.

While that decision to a large extent is a fact-finding exercise, it requires the application of a correct interpretation of sections 27(1) and 29(1) of the Act and of Schedule III, Part XIII, paragraph 1(a) thereof. Thus, since the meaning of statutory provisions must be determined, the issue raised is a question of law, although the respondent argued to the contrary.* [1]

The submission of counsel for the appellant on this aspect of his attack on the impugned decision is that since the pipelines constitute a system for the transportation, gathering, handling, conveying and distribution of goods without participating in any way in effecting a change in the nature, form and quality of the goods they are not directly used in the production of goods as required by paragraph 1(a) of Schedule III to Part XIII.

For the latter part of his submission he relies on the well-known judgment of the Supreme Court of Canada in The Queen v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140 and in particular what was said by Spence, J. at 145:

For the present purposes, I wish to note and to adopt one of the definitions cited by the learned judge, i.e., that “manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery”. (The italics are my own.)

With deference, I do not believe that that principle assists in the resolution of the problem with which the Court is faced here. There can be no doubt that the process at the Buck Creek fractionation plant imparts new forms, qualities and properties to the raw liquid hydrocarbons mix. The sole question is, are the pipelines directly used in that process? There is equally no doubt that without that raw mix there can be no production of goods acquiring new forms, qualities and properties. Nor can it be contended that there is any intermediate intervention between the two plants which affects, adds to or subtracts from the raw mix after it leaves the gas processing plant and before it reaches the fractionation plant. Any pumping which is required to ensure the flow of the mix through the pipelines, it was agreed, is not a factor which need be taken into account in the circumstances of this case since it only facilitates the movement of the mix and does not affect in any way the nature of the product being conveyed.

Having said that, the question in this case is, what is the correct meaning of the word "directly" in the statutory provision before the Court? Appellant's counsel argues that the word "directly" connotes a degree of immediacy, in terms of time, as it relates to the actual commencement of the process leading to changes in form, quality or property although he agrees that the word is not synonymous with either of the words "exclusively" or "solely". That degree of immediacy, he argues, is not present when the alleged beginning of the process is at a gas processing plant located as many kilometres away from the fractionation plant as is the Ocelot Peco plant, for example. He relies on earlier Tariff Board decisions as the foundation for this interpretation of the word.

Counsel for the respondent, on the other hand, argues that simply because goods are used for the purpose of conveyance of materials (here the raw mix) in an operation in which those goods will undergo changes in form, quality and property ought not to exclude the means of conveyance (here the pipelines) from the exemption provided by section 29 and Schedule III. Neither immediacy nor the intermediate intervention of some other element is necessarily a factor. It is a question of fact to be decided in each case.

The Act does not define the word "directly" nor does the record disclose that any evidence was adduced as to a special meaning attributed to it in the industry. Therefore, it should be given its grammatical and ordinary meaning unless such a meaning would lead to an absurdity, repugnance or inconsistency. In determining ordinary meaning the use of dictionaries is permissible and helpful. As well, the context in which the word is used in the Act may provide assistance and cannot be ignored.

As to the dictionary meanings, the following excerpts from well-known authorities provide support for both points of view:

Black’s Law Dictionary, 5th edition:

Directly In a direct way without anything intervening, not by secondary, but by

direct means.

The Shorter Oxford Dictionary, 3rd edition:

Directly 1. In a direct manner; in a straight line of motion; straight;

3. completely, exactly;

4. without the intervention of a medium; immediately; by a direct process or mode;

5. immediately (in time); straightway.

Webster's Third New International Dictionary:

Directly 1a: without any intervening space or time: next in order: squarely, exactly; b: in a straight line: without deviation of course;

4a: without any intervening agency or instrumentality or determining influence: without any intermediate step;

6a: without a moment’s delay: at once: immediately.

The Living Webster Encylopedic Dictionary:

Directly In a direct manner; in a straight line or course; immediately; instantly;

soon; without delay; expressly; without circumlocution or ambiguity; following immediately in order.

The appellant argued that "directly” as used in the statute means "immediately or without delay”. The respondent, on the other hand, viewed the word as meaning "without any intervening medium”, a view which has found favour in some Tariff Board decisions. Both views, of course, find support in the dictionaries, supra. No absurdity nor repugnancy arises from the use of either definition and, in the context in which the word appears in the schedule to the Act, it does not appear that either interpretation would lead to an inconsistency provided the same interpretation is accepted for each of the other paragraphs of Part XIII in which the word appears.

A choice must thus be made between the alternative meanings and that choice should be one which best accords with the intention of the legislature in enacting subsection 29(1) and Part XIII to Schedule III of the Act. That intention was to exempt from payment of consumption or sales tax machinery and apparatus purchased for use directly in the manufacture or production of goods. To give it the meaning espoused by the appellant would be to give it a narrow, restricted one. On the other hand, that which the respondent wishes to ascribe to it gives to it a broader meaning. I see nothing in the context of the statute in which the word "directly” is used which indicates that the narrow meaning should prevail. In fact, as I see it, adoption of the narrow construction necessitates the imposition of an arbitrary determination as to where the manufacturing or production begins, which is unjustifiable when the application of the broader meaning may be ascertainable from the facts established in each case. Such a view of the meaning is objective and seems more consonant with the apparent intention of Parliament than the narrow meaning with its concomitant element of administrative, executive or judicial arbitrariness.

Did the Tariff Board ascertain the proper meaning of the word "directly” as it is used in this Act? If it did, then it seems to me that the application of the term so determined, to the ascertained facts, leads to a finding of fact with which this Court should not interfere unless it is plainly not supported by the evidence.

The impugned decision by itself does not give much assistance in deciding whether or not the Tariff Board properly considered the question of the meaning to be given to "directly”. However, immediately preceding the passage from the Board’s decision quoted earlier herein, the following sentence appears:

In its examination of the evidence in this appeal, the Board was guided by the consideration of similar circumstances and the criteria outlined in Appeal Nos. 1158 and 1161 (6 T.B.R. 386).

Those were two appeals by Amoco Canada Petroleum Co. Ltd. (the respondent here) with respect to other equipment, in one of which it was successful and in the other, unsuccessful. The Board dealt with them in one set of reasons. One of the issues necessitated the determination as to whether the goods in issue were used "directly" in the production of goods. In reaching its conclusion the Board considered its own and Exchequer Court jurisprudence in respect to the meaning to be given the word as well as the dictionary meaning thereof. At page 400 of the report in 6 T.B.R., in referring to one of the Board’s previous decisions, it had this to say:

. . . In his discussion of the latter case during an appeal from the Board’s decision to the Exchequer Court, Mr. Justice Jackett approved the concept of the word "directly” meaning immediately in the sense of without the intervention of a medium or agent. He also gave approval to the concept of the word "directly” as being opposite to collateral.

It is not necessary that the reasons in those appeals be examined minutely. Suffice it to say that it is abundantly clear that the Board's interpretive process and the meaning which it attributed to the word "directly", in the circumstances of those appeals, is supportable in that it considered the appropriate authorities before deciding to utilize the meaning which I believe should be attributed to it. In this case, it appears to have incorporated by reference what it said in the earlier appeals. Since I have been unable to find error in its determination of the meaning of the word in those cases, it follows that I am unable to say that any error in law was committed in this one.

The next question then, is, did the Tariff Board correctly apply that meaning to its findings of fact in this case?

While the Board reviewed the facts, it made no specific findings. However, from the facts on the record, as I see them, the following is clear:

(1) There is no doubt that if the pipelines in issue lay solely within the perimeter of the Buck Creed fractionation plant, they would likely be considered to be directly used as part of the production process. Counsel, as I recollect it, not only did not disagree with this view when asked where the production process begins but made the suggestion that this was the logical point of commencement. The judgment of this Court in Coca Cola Limited v. Deputy Minister of National Revenue, Customs and Excise, et al., [1984] C.T.C. 75; 51 N.R. 70 at 71, at least by implication in so far as the beginning of the production process is concerned, seems to support this proposition. Why, then, given the undisputed facts to which I earlier referred, should the commencement of the production process be limited to a point within the perimeter of the fractionation plant, be that point the property lines, or the location of the machines or equipment at which the actual changes in form, quality or property begin or somewhere between those points? Why does the direct use not commence at the point of reception of the raw material without which the production process could not begin which is, in this case, at the point at which the raw liquid hydrocarbons mix is introduced into the pipelines at the gas processing plants? There is no rational reason for the imposition of any arbitrary point of commencement of the nature of those postulated in the absence of a specific statutory direction.

(2) the pipelines are used prior to the completed production of the natural gas liquids not after so that this case, on that fact alone, is distinguishable from the Coca Cola case, supra, (where the distribution system was utilized both before and after production) and Consumer's Gas Company v. Deputy Minister of National Revenue for Customs and Excise, [1976] 2 S.C.R. 640; [1976] C.T.C. 99 (where it was a post-production distribution system) both of which were relied upon by the appellant as authorities for his contentions.

(3) the goods in issue here are used in the necessary conveyance of raw materials from a point in the production process at which neither any intermediate processing has taken place nor is any contemplated nor has the distribution of the finished products begun.

(4) since the finished fractionated products have not been produced, or begun to be produced, during the conveyance of the raw liquid hydrocarbons mix, and since there has been no intermediate intervention which could be said to initiate the production of the goods, the Tariff Board correctly found that the goods in issue were directly used in the production of natural gas liquids.

(5) the conveyance of the raw liquid hydrocarbons mix is thus part of the process whereby they are changed in form, quality and property and, as a result, they are directly used in the production process and not in the distribution process of the final product (compare Irving Oil Limited et al. v. The Provincial Secretary of the Province of New Brunswick, [1980] 1 S.C.R. 787 at 797).

It is my opinion that the Board did not err in making its findings of fact or in the application thereof to the meaning correctly attributed to the word “directly” and, therefore, the appellant fails on this branch of the appeal.

(1) The Perversity Argument

After having carefully reviewed all of the evidence, I am of the view that this contention is without merit. Certainly there was evidence that in a narrow, technical sense, the actual fractionation process did not commence until the raw liquid hydrocarbons mix was delivered from the pipeline at the Buck Creek plant. That is a far cry, however, from saying that the delivery system (the pipelines) which is exclusively used for the purpose of providing the raw mix, being the product which is absolutely essential to the production of the fractionated liquid natural gases, is not directly used in the fractionation process. No evidence adduced goes that far. The lack of direct evidence as to where the production begins necessitates that inferences be drawn from all of the evidence, direct and indirect. Those inferences where drawn become findings of fact. The drawing of them is the function of the Board. It is part of the raison d'etre for the existence of a tribunal such as the Tariff Board which has the necessary experience and expertise to draw the requisite conclusions. It is its most important function. I believe that there was evidence upon which the Board could conclude, as it did, that the goods in issue were directly used in the production of saleable natural gases. It cannot be said, in such circumstances, that its conclusion was perverse. The appellant must, therefore, fail also on this branch of its argument.

Accordingly, I would dismiss the appeal.

Pratte, J.:—While I entertain doubts as to the correctness of the decision appealed from, I cannot say that the Tariff Board erred in law in deciding as it did. I agree with Mr. Justice Urie that this appeal should be dismissed.

Appeal dismissed.