Shell Canada Resources Ltd. v. MNR, 84 DTC 6129, [1984] CTC 169 (FCA)

Mahoney, J:—This is an application made pursuant to section 28 of the Federal Court Act RSC 1970 (2nd Supp) c 10, and subsection 44(7.3) of the Excise Tax Act, RSC 1970, c E-13 as amended by SC 1980-81, c 68, to review and set aside the respondents decision rejecting the appellant’s application for a refund of the natural gas and gas liquids tax imposed pursuant to subsection 28.13(1) of the Excise Tax Act and the Canadian ownership surcharge imposed under subsection 65.22 of the Energy Administration Act, SC 1974-75-76, c 47 as amended by 1980-81-82, c 114. The Canadian ownership surcharge need not be dealt with separately as it stands or falls with the natural gas and gas liquids tax. The sole issue is whether the respondent erred in law in holding that the natural gas in respect of which the tax in issue was imposed was not within the exception provided by paragraph 25.13(3)(a).

(3) Notwithstanding subsections (1) and (2), no tax is payable under this section in respect of

(a) marketable pipeline gas consumed at a gas processing plant in the production of marketable pipeline gas or natural gas liquids, other than marketable pipeline gas consumed after January 31, 1981 in the separation of natural gas liquids into their individual components;

The exception to the exception is not directly in play. None of the gas in respect of which the tax was levied was consumed in the separation of natural gas liquids into their individual components. It is not disputed that the gas, on the deemed receipt of which by the appellant the tax was levied, was “marketable pipeline gas” nor that it was “consumed at a gas processing plant”. The only dispute is whether it was consumed ‘‘in the production of marketable pipeline gas”. The appellant says it was; the respondent says it was not. Again, the manner and purpose of its consumption is not disputed.

Natural gas, as it emerges from the ground, is commonly called “raw gas”. It is a mixture of components. The function of a gas processing plant is to separate and remove certain of those components to produce marketable pipeline gas. Some of the components removed are themselves merchantable commodities, eg, natural gas liquids, such as propane. Others, eg, water, must be wasted. If the raw gas is “sour gas”, among the components that must be removed to produce marketable pipeline gas is hydrogen sulphide, an acid gas. The hydrogen sulphide, once separated, is processed to produce elemental sulphur. The hydrogen sulphide that does not react to form sulphur is incinerated to produce sulphur dioxide which is vented to the atmosphere (Case, Tab 8, Ex. B).

It is tax levied in respect of the marketable pipeline gas consumed in the incineration of hydrogen sulphide that is in issue. The respondent’s position is that, since no marketable pipeline gas is produced by or consequent upon the incineration of the hydrogen sulphide, the gas consumed in the incinerator is not consumed in the production of marketable pipeline gas. The appellant’s position is that a gas processing plant is a system and that the production of marketable pipeline gas necessarily entails the lawful disposal of the components of raw gas separated in its production.

The gas in issue is all consumed in Alberta. It is illegal to release hydrogen sulphide into the atmosphere.* [1] The method of disposal described is legal and subject of permits issued under the provincial statute. Unless the components of raw gas separated in the production of marketable pipeline gas can somehow be disposed of, be it by sale, storage or as waste, the plant cannot be operated. Unless the disposal of each is legal, the plant cannot be operated legally. If the hydrogen sulphide cannot, in fact, be disposed of, the gas processing plant must be shut down and no marketable pipeline gas will be produced at it. If the hydrogen sulphide cannot be disposed of legally, marketable pipeline gas cannot be legally produced at the plant.

In his submission, the respondent questions the Court’s jurisdiction to review the decision under section 28 of the Federal Court Act. He says it is a finding of fact which is not alleged to have been made in a perverse or capricious manner or without regard to the material before him and is not, therefore, subject to review under paragraph 28(1)(c). The question, as put by the appellant, is whether the respondent erred in applying the law to undisputed facts. The impugned decision, as evidenced by the letter of January 4, 1983, communicating it (Case, Tab 10), is not founded on an express determination that, as a matter of fact, the incinerator is not an integral part of the system, nor incineration an essential element of the process, whereby marketable pipeline gas is produced at a gas processing plant. The respondent was invited more than once by the appellant to express the findings of fact on which he based his decision. He did not do so. Rather, the decision appears clearly to be founded on an interpretation of paragraph25.13(3)(a) based on the facts alleged in the appellant’s rebate claim, particularly Exhibit B.

The decision is subject to review under paragraph 28(1 )(b) on the principle enunciated in Canadian Lift Truck Co Ltd v Deputy Minister of National Revenue, [1956], 1 DLR (2d) 497.

While the construction of a statutory enactment in a question of law, and the question as to whether a particular matter or thing is of such a nature or kind as to fall within the legal definition is a question of fact, nevertheless if it appears to the appellate Court that the tribunal of fact had acted either without any evidence or that no person, properly instructed as to the law and acting judicially, could have reached the particular determination, the Court may proceed on the assumption that a misconception of law has been responsible for the determination; Edwards v Bairstow, [1955] 3 All ER 48.

The comment of the Supreme Court of Canada on the word “produced” as used in the Excise Tax Act is apt with reference to “production”.! [2]

. . . The words “produced” and “manufactured” are not words of any very precise meaning and, consequently, we must look to the context for the purpose of ascertaining their meaning and application in the provisions we have to construe.

Likewise apt are its observations with respect to the term “manufacturers or producers” in the same Act.;t [3]

There can be no doubt in my mind that the appellant is manufacturing electricity when its generators are in operation. Indeed, this was scarcely contested. I find it impossible to apply any restrictive definition to the term “manufacturing” since the Act itself does not do so.

I conclude that the appellant is performing the act of manufacturing electricity by the use of the generators and, being unable to find anything in the Act to dictate otherwise, I conclude that the appellant becomes a manufacturer by producing electric current by the operation of the generators.

In the absence of a restrictive definition, I conclude that the term “production of marketable pipeline gas” does not exclude the disposal of the waste components of the raw gas from which the marketable pipeline gas is produced. That disposal is essential to the continued production of marketable pipeline gas and may reasonably be regarded as an integral element of its production.

The inclusion of the exception to the exception, which is not directly in play, does, in my view, make Parliament’s intention clear. The separation of the natural gas liquids into their individual components, as does the incineration of the hydrogen sulphide, occurs after they and the marketable pipeline gas have been separated. No marketable pipeline gas is produced by or consequent upon the separation of the natural gas liquids. It is, therefore, clear that Parliament intended the production of marketable pipeline gas at a gas processing plant to comprehend a complete system and process involving not only the receipt of the raw gas and the separation of its components up to the point where the marketable pipeline gas is itself isolated but, as well, involving the further processing of the other components. If it has not had that intention, the exception to the exception would have been unnecessary. It is entirely reasonable that Parliament have intended to impose the tax at the processing plant in respect of gas consumed to produce merchantable commodities, such as propane, not themselves subject of the same tax on a later transaction, while exempting gas consumed at the plant to dispose of waste and to isolate marketable pipeline gas which, if not itself consumed at the plant, is subject of the same tax on a later transaction.

The interpretation urged by the respondent is not inconsistent with a strict literal interpretation of the exception which is directly in issue. It does, however, entail accepting as redundant the exception to the exception within the same provision. Neither, in my view, is the interpretation urged by the appellant inconsistent with a strict literal interpretation of the exception if the disposition of waste necessarily generated in the production of marketable pipeline gas is included in production. If one accepts the appellant’s interpretation, the exception to the exception is not redundant. That is clearly the interpretation to be preferred. I, therefore, conclude that had the respondent been properly instructed as to the law, he could not, acting judicially, have reached the conclusion he did.

I would set aside the respondent’s determination and refer the appellant’s refund claim, No 0805, dated March 28, 1983, back to the respondent for reconsideration and redetermination on the basis that, on the uncontroverted evidence before him, the marketable pipeline gas consumed in the incinerators at the six gas processing plants in issue was consumed in the production of marketable pipeline gas within the meaning of paragraph 25.13(3)(a) of the Excise Tax Act.

Stone, J:—The principal issue in this matter concerns the application of paragraph 25.13(3)(a) of the Excise Tax Act, RSC 1970, c E-13 as amended by SC 1980-81-82, C 68, in the circumstances described in the Reasons for Judgment of Mr Justice Mahoney. A further point was raised by the respondent in limine that the Court is without jurisdiction to hear and determine this application on the ground that it involves a question of fact and not of law. I fully agree with Mr Justice Mahoney that this point should be rejected for the reasons given by him.

It seems to me that in construing the statutory provisions in question we are to have reasonable regard to the object and purpose of the Act. This approach to statutory construction was discussed by Dickson, J in Covert et al v Minister of Finance (NS), [1980] 2 SCR 774; [1980] CTC 437, where he stated in his dissenting opinion (at 807):

Fiscal legislation does not stand in a category by itself. Persons whose conduct a statute seeks to regulate should know in advance what it is that the statute prescribes. A court should ask — what would the words of the statute be reasonably understood to mean by those governed by the statute? Unnatural or artificial construction are to be avoided.

The correct approach, applicable to statutory construction generally, is to construe the legislation with reasonable regard to its object and purpose and to give it such interpretation as best ensures the attainment of such object and purpose. The primary object of a succession duty statute, such as the legislation under consideration, is to capture such amounts for the fiscal coffers as the words of the statutory net can catch. No legislative intention can be assumed other than to collect such tax as the statute imposes, no more and no less.

Although a court is entitled, in the case of fiscal legislation as with other enactments, to look to the purpose of the Act as a whole, as well as the particular purpose of a given section, it must still respect the actual words which express the legislative intention.

This approach was not discussed in the reasons for judgment of the majority in that case. With respect, I would adopt it. It was the approach taken by the English Court of Appeal in Attorney-General v Carlton Bank, [1899] 2QB 158, where Lord Russell of Killowen, CJ said (at 164):

. . . I see no reason why special canons of construction should be applied to any Act of Parliament, and I know of no authority for saying that a taxing Act is to be construed differently from any other Act. The duty of the Court is, in my opinion, in all cases the same, whether the Act to be construed relates to taxation or to any other subject, namely to give effect to the intention of the Legislature as that intention is to be gathered from the language employed having regard to the context in connection with which it is employed. The Court must no doubt ascertain the subject matter to which the particular tax is by the statute intended to be applied, but when once that is ascertained, it is not open to the Court to narrow or whittle down the operation of the Act by seeming considerations of hardship or of business convenience or the like.

Accordingly, in my view, it can be taken that the primary object of the Excise Tax Act is “to capture such amounts for the fiscal coffers as the words of the statutory net can catch”. We are thus required to examine the language that was used by Parliament in casting that net and to see whether that language is reasonably clear. If it 1s, it must be given effect.

I turn to consider the provisions with which we are concerned. Of primary interest, of course, are the provisions of paragraph 25.13(3)(a). They appear in Part IV. 1 of the statute and are to be read together with the provisions of the Act expressly referred to in it as well as with related definitions contained in subsection 25.1(1). These definitions read as follows:

25.1(1) In this part,

“gas” means any hydrocarbon or mixture of hydrocarbons that, at a temperature of 15°C and a pressure of 101.325 kPa, is in a gaseous state and that is taken or removed from a natural reservoir in Canada;

“gas processing plant” means an installation in Canada at which natural gas liquids or other components are removed from gas by means of field scrubbers, field separators or other field extraction facilities or at which natural gas liquids are removed from oil by such means;

“gas reprocessing plant” means an installation in Canada at which natural gas liquids are removed from marketable pipeline gas at which such liquids and the remaining marketable pipeline gas are not further processed;

“marketable pipeline gas” means gas, other than

(a) natural gas liquids, and

(b) gas injected into a natural reservoir for any purpose, other than storage;

“natural gas liquids” means ethane, propane and butanes, and any mixture of two or more thereof, that are produced at a gas processing plant or a gas reprocessing plant;

The above-quoted definitions are followed in Part IV. 1 by a number of other provisions, including subsections 25.13(1), (2) and paragraph (3)(a) which read:

25.13(1) There shall be imposed, levied and collected on the receipt of marketable pipeline gas by a distributor in Canada a tax at the rate specified in subsection (5).

(2) There shall be imposed, levied and collected on the receipt of marketable pipeline gas by a consumer in Canada from a gas producer or a broker, or from any person acting for or on behalf of a gas producer or broker, a tax at the rate specified in subsection (5).

(3) Notwithstanding subsections (1) and (2), no tax is payable under this section in respect of a receipt of

(a) marketable pipeline gas consumed at a gas processing plant or a gas reprocessing plant in the production of marketable pipeline gas or natural gas liquids, other than marketable pipeline gas consumed after January 31, 1981 in the separation of natural gas liquids into their individual components;

By virtue of subsection 25.13(6) the appellant is deemed for purposes of Part

IV. 1 “to be the distributor” of the gas in respect of which the amounts of tax were collected and for which a refund is sought by the appellant.

The appellant contends that it is entitled to be refunded the amounts collected by the respondent on marketable pipeline gas consumed by it in the incinerators of its gas processing plants in Alberta in the process of converting hydrogen sulphide to sulphur dioxide for venting into the atmosphere. It contends that the respondent erred in collecting the tax because it is not authorized by the language of the statute, read in a fair and reasonable manner. The respondent takes the position that the tax has been properly collected on the basis that the gas was not consumed “in the production of marketable pipeline gas”. It argues that the gas was consumed in the disposal of a waste known as hydrogen sulphide. That waste is removed in the course of processing raw gas originating in underground reservoirs. The respondent further asserts that the reason hydrogen sulphide is converted to sulphur dioxide in the incinerators and disposed of into the atmosphere lay in a requirement of Alberta laws aimed at environmental protection and not at gas production. It argues that this treatment of waste gas “is merely a condition of operation of the plant, not of production of marketable pipeline gas”. Put another way, it contends that the consumption of gas in the treatment of waste is but a “dealing with a result of production” as a method of controlling pollution and is not a consumption in the production of marketable pipeline gas.

The appellant quarrels with this interpretation on the basis that it draws a distinction between gas consumed in converting raw gas into marketable pipeline gas and gas consumed in disposing of hydrogen sulphide removed from that gas. In its view these are but two steps in a single and integrated process of producing marketable pipeline gas. Upon that premise it argues that, with the exception discussed below, all gas consumed at a gas processing plant in Alberta including gas consumed in the incinerator for the purpose of disposing of hydrogen sulphide is consumed “in the production of marketable pipeline gas”. It argues that, given the mandatory nature of Alberta laws requiring conversion and disposal of hydrogen sulphide, no gas processing plant could operate and hence no marketable pipeline gas could be produced unless the hydrogen sulphide is also disposed of.

I am not persuaded by these arguments. They concede as an element that marketable pipeline gas is produced before there can be any hydrogen sulphide to convert and dispose of in the manner described. The production of marketable pipeline gas at a gas processing plant involves the removal of natural gas liquids or other “components” from the raw gas stream. It was common ground that hydrogen sulphide is a “component” of raw gas. The removal of these components result in the production of marketable pipeline gas. Nothing further is required to be done to raw gas in order to bring that about. While Alberta laws require that the waste gas be disposed of as a pollution control measure, that step is not necessary in the production of marketable pipeline gas. I can find nothing in the nature of the entire process by which marketable pipeline gas is produced that requires such disposal. Only provincial laws require it and, apparently, they rest upon a public policy that there be some measure of environmental protection at gas processing plants in Alberta. The consumption of gas in a gas plant incinerator does not result in the production of anything. It only results in the disposal of an unwanted by-product of gas production. Failure to dispose of the waste as required by Alberta laws is not a bar to continued gas plant operation. The plant may continue to operate but a tax cost is incurred. The disposal method utilized carries with it the obligation to pay tax on gas consumed in the course of giving effect to that method.

Finally, the appellant argues that a clear indication of legislative intention in its favour is to be found in the provisions of paragraph 25.13(3)(a) itself. The first part of these provisions exempts from the statutory net gas consumed in the production of marketable pipeline gas or of natural gas liquids. They are followed by words of exception reading as follows:

. . . other than marketable pipeline gas consumed after January 31,1981 in the separation of natural gas liquids into their individual components.

The appellant contends that the inclusion of these words in paragraph 25.13(3)(a) indicates an intention on the part of Parliament not to tax the gas in question. In this connection it relies upon the well-known maxim of statutory interpretation expressio unius est exclusio alterius. That maxim has been frequently applied by courts in interpreting statutes and documents, but it has its limitations.* [1] The appellant points out that the separation of natural gas liquids, like the disposal of hydrogen sulphide, occurs after the emergence of marketable pipeline gas from the raw gas stream. It contends that the express taxing of gas consumed in this separation process without the express taxing of gas consumed in the incinerator in disposing of hydrogen sulphide, indicates that it was never the intention of Parliament that the latter be taxed. I find difficulty in accepting this contention.

As already indicated, paragraph 25.13(3)(a) is not concerned exclusively with exempting from tax gas consumed in the production of marketable pipeline gas. It is also concerned with exempting from tax gas consumed “in the production of . . . natural gas liquids”. A reading of the relevant definitions in Part IV. 1 makes it clear that one method of producing natural gas liquids at a gas processing plant is by “removing” them in an unseparated form from the raw gas stream. Another is by similarly removing them from marketable pipeline gas at a gas reprocessing plant. Their individual components consist of ethane, propane and butanes. A separate process is then required in order to separate these components from each other. As the appellant put it, they must be “broken down” or “fractionated” into their individual components. These components are expressly made subject to tax under section 25.14 of the Act.

When, therefore, the excepting words quoted above are read in the context of Part IV. 1 their purpose becomes apparent. Their absence would, I think, have left open a serious argument that gas consumed in this separation process must fall within the words “in the production ... of natural gas liquids” and be exempt from tax. Their inclusion provides an answer to that argument. I cannot see that these words disclose any intention on the part of Parliament to leave untaxed gas consumed in the incinerator in disposing of hydrogen sulphide. The language of paragraph 25.13(3)(a) is reasonably clear. It provides for the exemption from tax of gas consumed in the production of marketable pipeline gas as well as in the production of natural gas liquids. It leaves subject to tax gas consumed in the separation of such liquids into their individual components which are taxed separately. I have concluded that gas consumed in the gas plant incinerator to dispose of the unwanted waste is not consumed in the production of marketable pipeline gas.

I would therefore dismiss this application but, following established practice, I would do so without costs.

Appeal dismissed.