Beaubier,
T.C.C.J.:—This
matter
was
heard
in
Toronto,
Ontario
on
August
23
and
24,
1993.
It
is
an
appeal
pursuant
to
the
general
procedure
of
this
Court
concerning
the
appellant's
1986
taxation
year.
At
issue
is
whether
or
not
expenditures
of
$4,047,470
spent
by
the
appellant
to
insert
a
fibreglass
reinforced
liner
into
a
subsea
pipeline
of
approximately
4,100
feet
from
a
single
buoy
mooring
in
the
Bay
of
Fundy
to
crude
oil
storage
tanks
near
St.
John,
New
Brunswick
constitutes
a
current
expense
or
a
capital
expenditure.
The
appellant
deducted
it
as
a
current
expense.
It
was
reassessed
on
the
basis
of
paragraph
18(1)(b)
of
the
IncomeTax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
and
the
current
expense
was
disallowed.
The
parties
filed
an
agreed
statement
of
facts
and
various
documents.
The
appellant
called
two
expert
witnesses,
Mr.
Frank
S.
Joynson,
P.E.,
an
engineer,
and
Mr.
Andrew
F.
Cook,
F.C.A.,
a
chartered
accountant.
The
agreed
statement
of
facts
reads
as
follows:
The
parties
hereto,
by
their
solicitors,
admit
the
following
facts
and
documents,
provided
that
such
admissions
are
made
for
the
purpose
of
this
proceeding
only
and
may
not
be
used
against
any
party
on
any
other
occasion,
or
by
any
other
person,
and
provided
further
that
the
parties
may
adduce
further
and
other
evidence
relevant
to
the
issues
and
not
inconsistent
with
this
agreed
statement
of
acts.
Background
1.
The
appellant,
Canaport
Ltd.
("Canaport"),
is
a
company
incorporated
under
the
laws
of
Canada.
All
of
the
issued
and
outstanding
shares
of
Canaport
are
owned
by
Irving
Oil
Ltd.
("Irving
Oil”).
Irving
Oil
is
incorporated
under
the
laws
of
New
Brunswick.
2.
Canaport
operates
an
offshore
crude
oil
tanker
unloading
and
receiving
facility
(the
“
Monobuoy
System")
at
Mispec
Point,
Saint
John
Harbour,
Saint
John,
New
Brunswick.
3.
Canaport's
exclusive
customer
is
Irving
Oil.
The
crude
oil
unloaded
through
the
Monobuoy
System
is
imported
by
Irving
Oil
for
its
refinery
operation
located
in
Saint
John.
The
Monobuoy
System
was
built
in
1969
and
1970
at
a
time
when
Irving
Oil
was
undertaking
a
major
expansion
of
its
Saint
John
Refinery.
Saint
John
Harbour
is
too
shallow
to
accommodate
the
large
tankers
that
would
carry
and
deliver
crude
oil
to
the
expanded
facilities
at
the
refinery.
Accordingly,
the
Monobuoy
System
was
built
to
carry
crude
oil
from
the
large
tankers
to
the
Irving
Oil
refinery
on
shore.
Several
dozen
tankers
use
the
Monobuoy
System
each
year
and
discharge
many
millions
of
barrels
of
crude
oil.
4.
All
costs
incurred
by
Canaport
in
the
course
of
its
operations
are
reimbursed
by
Irving
Oil.
Canaport
charges
Irving
Oil
service
fees
based
on
Canaport's
total
cost
of
service.
The
Monobuoy
System
5.
The
major
components
of
the
Monobuoy
System
are
as
follows:
(a)
a
mooring
terminal
located
approximately
1,250
metres
(4,100
feet)
offshore.
At
the
centre
of
the
mooring
terminal
is
a
floating
buoy
(the
“
monobuoy”);
(b)
a
seabed
manifold
which
lies
on
the
sea
floor
and
is
connected
to
the
monobuoy
by
a
flexible
hose;
(c)
a
subsea
crude
oil
pipeline
(the"
Sealine")
which
is
connected
to
the
seabed
manifold
and
extends
from
the
manifold
to
the
shore;
(d)
a
subsea
ballast
pipeline
which
has
an
internal
diameter
of
508
mm.
(20
inches)
and
runs
parallel
to
the
Sealine;
(e)
an
onshore
storage
tank
farm
which
is
connected
to
the
onshore
end
of
the
Sealine.
6.
At
all
material
times,
a
tanker,
when
using
the
Monobuoy
System,
was
first
attached
to
the
monobuoy.
Floating
hoses
were
then
installed
between
a
manifold
on
the
tanker
and
the
monobuoy's
pipe
system.
Crude
oil
was
then
pumped
from
the
tanker
through
the
monobuoy,
through
the
seabed
manifold
and
into
the
Sealine.
Finally,
the
crude
oil
was
deposited
onshore
in
a
storage
tank
farm
by
means
of
a
booster
pump
located
at
the
shore
end
of
the
Sealine.
Once
a
tanker
had
discharged
its
load
of
crude
oil,
sea
water
was
pumped
through
the
Sealine
in
order
that
no
crude
oil
remained
in
the
offshore
component
of
the
Monobuoy
System
while
that
facility
was
not
in
use.
This
pumping
of
sea
water
into
the
Sealine
was
undertaken
in
order
to
minimize
the
hazard
of
environmental
damage
in
the
event
of
a
leak
or
breach
of
the
Sealine.
When
the
next
tanker
was
attached
to
the
monobuoy
to
discharge
crude
oil,
the
sea
water
in
the
Sealine
was
pumped
into
holding
tanks
on
shore
and
processed
to
remove
any
oil
residue.
7.
The
Sealine
is
approximately
1,250
metres
(4,100
feet)
in
length.
As
originally
built,
the
Sealine
consists
of
a
steel
pipe
914
mm.
(36
inches)
in
diameter.
Part
of
the
steel
pipe
has
a
normal
thickness
of
12.7
mm.
(0.50
inches)
and
the
remainder
has
a
normal
thickness
of
14.3
mm.
(0.56
inches).
The
internal
surface
of
the
steel
pipe
was
originally
bare.
The
steel
pipe
acts
as
a
pressure
retaining
structure
capable
of
withstanding
the
operating
pressure
of
the
crude
oil
pumped
through
the
Monobuoy
System.
The
exterior
surface
of
the
steel
line
is
covered
in
a
layer
of
coal
tar
enamel.
That
layer
of
enamel
has
an
average
thickness
of
6.4
mm.
(0.25
inches).
The
coating
is
designed
to
prevent
corrosion
of
the
exterior
surface
of
the
steel
pipe.
The
coal
tar
enamel
is,
in
turn,
covered
with
a
69.5
mm.
(2.74
inches)
to
73.0
mm.
(2.87
inches)
thick
layer
of
reinforced
concrete.
The
concrete
provides
weight
and
stability
to
the
Sealine
in
order
to
ensure
that
the
Sealine
remains
on
the
seabed.
The
concrete
also
protects
the
steel
pipe
from
objects
such
as
rocks
and
anchors.
The
major
part
of
the
Sealine
is
covered
in
mud
and
silt.
A
visual
sketch
profile
of
the
Sealine
is
marked
as
Exhibit
A.
8.
During
the
course
of
construction
in
1969,
adverse
weather
conditions
caused
currents
of
sufficient
magnitude
to
rupture
the
concrete
coating
of
the
Sealine.
As
a
result,
the
steel
pipeline
floated
to
the
surface
of
Bay
of
Fundy
and
was
severely
damaged.
It
was
therefore
necessary
to
rebuild
the
Sealine
onshore
and
drag
it
out
again
onto
the
sea
floor.
9.
The
Monobuoy
System
was
first
put
in
service
in
1970.
For
accounting
purposes,
the
entire
Monobuoy
System,
including
the
Sealine,
has
been
depreciated
at
the
rate
of
4
'/2
per
cent
straight
line.
That
depreciation
rate
was
based
on
the
anticipated
useful
life
of
the
Irving
Oil
refinery
expansion
referred
to
in
paragraph
3
above.
Inspection
of
Sealine
corrosion
and
investigation
of
repair
methods
10.
By
1979,
there
was
corrosion
on
the
interior
surface
of
the
Sealine.
That
corrosion
was
first
confirmed
when,
in
July
1979,
a
man
inspected
the
Sealine
by
travelling
down
a
portion
of
the
shore
end
of
the
Sealine
using
a
wheeled
vehicle.
The
corrosion
of
the
Sealine
interior
surface
resulted
from
both
the
flushing
of
seawater
through
the
Monobuoy
System
after
tankers
had
discharged
their
oil
cargo
and
the
storage
of
seawater
in
the
Sealine
when
the
Monobuoy
System
was
not
in
use.
As
noted
in
paragraph
6
above,
sea
water
was
flushed
through
and
stored
in
the
pipeline
to
minimize
the
hazard
of
environmental
damage
in
the
event
of
a
leak
or
breach
of
the
Sealine.
11.
After
the
presence
of
corrosion
had
been
confirmed,
Canaport
investigated
ways
of
conducting
an
internal
inspection
of
the
full
length
of
the
Sealine.
It
was
determined
such
an
inspection
could
be
performed
by
an
ultrasonic”
pig”
device
which
would
travel
inside
the
Sealine.
In
order
to
facilitate
the
inspection
of
the
Sealine
by
the
"pig"
and
to
support
the
weight
of
the
“pig”
in
the
Sealine,
Canaport
was
required
to
install
supports
for
the
first
579
metres
(1,900
feet)
of
the
Sealine’s
shore
end.
12.
In
November
1982,
after
the
supports
had
been
installed,
Rôntgen
Technische
Dienst,
bv
(“RTD”)
performed
a
comprehensive
internal
inspection
of
the
first
540
metres
(1,800
feet)
of
the
Sealine
shore
end
using
an
ultrasonic
"pig".
The
inspection
recorded
both
the
steel
pipe
thickness
and
the
extent
of
internal
corrosion.
RTD
prepared
for
Canaport
a
report
summarizing
the
results
of
the
inspection
(the
"1983
RTD
Report").
The
1983
RTD
Report
was
delivered
to
Canaport
in
late
February
1983.
The
1983
RTD
Report
concluded
there
were
large
areas
of
internal
corrosion
in
the
first
540
m.
(1,800
feet)
of
the
Sealine’s
shore
end.
The
severity
of
the
corrosion
(e.g.,
average
corrosion
pit
depth)
increased
as
the
distance
from
the
shore
increased.
The
deepest
corrosion
pit
was
9.1
mm.
(0.36
inches)
deep
ina
wall
thickness
of
15.5
mm.
(0.61
inches).
That
pit
was
observed
at
530
metres
(1740
feet)
into
the
Sealine.
A
copy
of
the
1983
RTD
Report
is
marked
as
Exhibit
B.
13.
On
or
about
Februar
10,
1983,
Jim
Lloyd,
Area
Engineer,
Irving
Oil,
prepared
a
memorandum
for
Canaport
regarding
the
methods
for
repairing
or
replacing
the
Sealine.
The
memorandum
identified
three
repair
techniques
for
rehabilitating
the
Sealine.
These
techniques
are
as
follows:
(i)
instituting
a
corrosion
inhibitor
injection
programme,
(ii)
coating
the
inside
of
the
Sealine,
and
(iii)
installing
a
liner
in
the
Sealine.
A
copy
of
this
memorandum
is
marked
as
Exhibit
C.
14.
On
or
about
June
27,
1983,
Jim
Lloyd
prepared
a
further
memorandum
for
Canaport
regarding
the
Sealine.
This
memorandum
reviewed
the
1983
RTD
Report
and
the
results
of
earlier
inspections
of
the
Sealine.
The
memorandum
highlighted
that
a
leak
in
the
Sealine
could
be
expected
to
occur
in
the
next
several
years.
It
recommended
that
a
liner
be
installed
in
the
Sealine
and
that
provision
be
made
to
have
equipment
available
to
repair
any
leak
pending
the
completion
of
that
permanent
repair.
A
copy
of
the
memorandum
is
marked
as
Exhibit
D.
15.
Canaport
reviewed
and
considered
the
recommendations
set
out
in
Exhibit
D
and,
on
or
about
August
21,
1984,
issued
to
four
engineering
firms
requests
for
quotations
for
a
study
of
the
repair
or
replacement
of
the
Sealine.
The
"scope
of
work"
for
the
requests
for
quotations
provided
that
the
contractor
was
required
to
carry
out
a“
"detailed
engineering
study
of
methods
of
repair
or
replacement"
of
the
Sealine,
and
also
“examine,
in
depth,
all
possible
methods
of
repair
and
replacement”.
The
contractor
was
also
required
to
summarize
and
compare
these
various
methods
of
repair
and
replacement
having
particular
regard
to
:
(i)
cost,
(ii)
time
required
to
prepare
for
and
complete
the
project,
(iii)
estimated
life
and
reliability
of
the
repair
or
replacement,
and
(iv)
restrictions
or
limitations
in
the
operation
of
the
Sealine
resulting
from
the
repair
or
replacement.
Pursuant
to
the
requests
for
quotations,
the
engineering
study
contract
was
awarded
to
two
firms:
Wescan
Maritime
Consultants
Ltd.
("Wescan")
and
Hudson
Engineering
Corporation
("Hudson").
A
copy
of
the
“scope
of
work"
for
the
requests
for
quotation
is
marked
as
Exhibit
E.
16.
Pursuant
to
the
contract
referred
to
in
paragraph
15
above,
Wescan
studied
various
schemes
for
work
on
the
Sealine.
On
or
about
January
1985,
Wescan
delivered
a
report
to
Canaport
outlining
the
results
of
its
study.That
report
concluded
that
the
most
appropriate
scheme
involved
the
insertion
of
a
fibreglass
liner
pipe
inside
the
Sealine.
A
copy
of
Wescan's
report
is
marked
as
Exhibit
F.
17.
Pursuant
to
the
contract
referred
to
in
paragraph
15
above,
Hudson
also
studied
various
schemes
for
work
on
the
Sealine.
On
or
about
March
1985,
Hudson
delivered
to
Canaport
a
report
outlining
the
results
of
its
study.
That
report
concluded
that
the
favoured
scheme
involved
the
insertion
of
a
fibreglass
liner
pipe
in
the
Sealine.
Hudson's
report
is
marked
as
Exhibit
G.
18.
In
October
1984,
a
serious
failure
in
the
Sealine
occurred
approximately
1,070
metres
(3,500
feet)
from
the
shore.
A
corrosion
pit
adjacent
to
a
pipe
weld
had
developed
into
a
hole
approximately
12.70
mm.
(0.50
inches)
in
diameter.
On
this
occasion,
the
Sealine
was
repaired
by
placing
a
specially
fabricated
metal
clamp
over
the
hole
area.
The
total
repair
cost
was
$2,182,747.
Of
that
amount
$1,006,800
was
incurred
for
purposes
of
locating
the
hole
and
acquiring
and
installing
the
clamp.
The
remaining
$1,175,947
was
incurred
for
lightering
fees
(that
is,
the
fees
for
the
transportation
of
crude
oil
from
tanker
to
shore
by
smaller
ships
capable
of
operating
in
the
shore
area
while
the
offshore
component
of
the
Monobuoy
System
was
down
during
the
course
of
the
repair
operations).
The
total
amount
of
$2,182,747
was
deducted
from
Canaport's
taxable
income
in
its
1984
taxation
year.
19.
In
December
1984,
in
light
of
the
failure
in
the
Sealine
noted
in
paragraph
18
above,
Canaport
retained
RTD
to
perform
a
second
comprehensive
internal
inspection
of
the
Sealine.
A
specially
modified
ultrasonic
"pig"
travelled
down
the
first
1000
metres
(3,280
feet)
of
the
Sealine
from
the
shore
end,
recording
both
the
steel
pipe
thickness
and
the
extent
of
the
internal
corrosion.
The
results
of
the
inspection
are
summarized
in
a
RTD
report
dated
February
9,1985
(the
“1985
RTD
Report").
As
stated
in
the
1985
RTD
Report,
there
were
large
areas
of
internal
corrosion
in
the
Sealine
and
the
severity
of
that
corrosion
increased
going
further
into
the
line.
The
deepest
corrosion
pit
observed
was
a
14
mm.
(0.55
inches)
pit
in
a
wall
thickness
of
14.5
mm.
(0.57
inches).
A
copy
of
the
1985
RTD
Report
is
marked
as
Exhibit
H.
20.
On
the
basis
of
the
1985
RTD
Report
and
the
reports
from
Hudson
and
Wescan,
Canaport,
together
with
the
Engineering
Department
of
Irving
Oil,
considered
the
available
options
for
remedying
the
large
areas
of
corrosion
in
the
Sealine.
On
or
about
April
25,
1985,
A.
J.
Banham,
Lead
Engineer,
Irving
Oil,
prepared
a
memorandum
comparing
the
proposals
set
out
in
the
Wescan
and
Hudson
reports.
A
copy
of
that
memorandum
is
marked
as
Exhibit
I.
In
September
1985,
the
Engineering
Department
of
Irving
Oil
prepared
a
report
reviewing
the
history
and
studies
of
the
Sealine
and
the
various
recommendations
for
work
on
the
Sealine.
In
that
report,
the
engineering
department
recommended
that
the
Sealine
be
repaired
by
the
insertion
of
a
fibreglass
liner.
À
copy
of
that
report
is
marked
as
Exhibit
J.
Sealine
relining
operation
21.
In
the
late
fall
of
1985
and
spring
of
1986,
Canaport
undertook
preliminary
work
for
purposes
of
the
insertion
of
a
fibreglass
reinforced
liner
("FRP
liner")
in
the
Sealine.
Following
the
repair
of
the
hole
noted
in
paragraph
18
above,
the
Sealine
remained
in
use
until
the
commencement
of
this
preliminary
work.
This
preliminary
work
included
engineering
studies
to
determine
whether
it
was
necessary
to
grout
the
void
between
the
existing
Sealine
and
the
inserted
FRP
liner,
and
studies
to
determine
the
manufacture
and
installation
requirements
for
the
FRP
liner.
In
early
1986,the
interior
of
the
Sealine
was
gauged
in
order
to
determine
the
appropriate
exterior
diameter
of
the
FRP
liner.
On
or
about
June,
1986,
Canaport
entered
into
a
contract
with
ICL
Engineering
Ltd.
for
the
provision
of
1,280
metres
(4200
feet)
of
FRP
liner
having
a
749
mm.
(29.5
inches)
internal
diameter
and
a
thickness
of
approximately
25.4
mm.
(1.0
inches).
The
expenditures
in
respect
of
the
preliminary
work
and
the
purchase
of
the
FRP
liner
was
undertaken
pursuant
to
Canaport's
expenditure
request
made
on
and
dated
November
14,
1985.
That
expenditure
request
is
marked
as
Exhibit
K.
22.
On
January
9,
1986,
Canaport
issued
to
four
engineering
and
pipeline
construction
firms
a
request
for
quotation
for
work
on
the
Sealine.
Pursuant
to
that
request,
Westminster
Land
&
Marine
Pipelines
Ltd.
("Westminster")
was
awarded
the
Sealine
relining
contract.
Westminster
and
Canaport
entered
into
an
agreement
dated
August
26,
1986
(Contract
No.
SC-CAN74-86002)
for
performance
of
the
relining
operation.
A
copy
of
Contract
No.
SC-CAN74-860002
is
marked
as
Exhibit
L.
23.
Preliminary
site
preparation
for
the
relining
operation
began
in
the
Summer
of
1986.
On
or
about
August
21,
1986,
Canaport
approved
a
supplementary
expenditure
request
in
respect
of
the
estimated
costs
of
completing
the
relining
operation
outlined
in
the
"scope
of
work"
in
the
expenditure
request
marked
as
Exhibit
K.
That
supplementary
expenditure
request
is
marked
as
Exhibit
M.
24.
The
relining
operation
was
fully
complete
on
October
21,
1986.
A
copy
of
a
drawing
which
outlines
both:
i)
the
profile
of
the
Sealine
in
Saint
John
Harbour
and
ii)
a
cross-section
of
the
relined
Sealine
is
marked
as
Exhibit
N.
25.
The
total
cost
incurred
by
Canaport
in
respect
of
the
relining
operation,
including
contract
services,
materials
and
rental
fees,
was
$4,047,470.
Canaport
was
reimbursed
by
Irving
Oil
in
1986
for
that
total
amount.
Tax
treatment
of
relining
costs
for
taxation
year
ended
December
31,
1986
26.
For
purposes
of
Canaport's
income
tax
return
for
the
taxation
year
ended
December
31,
1986,
Canaport
deducted
from
income
earned
in
that
year
the
$4,047,470
cost
in
respect
of
the
installation
of
the
liner
in
the
Sealine.
A
copy
of
that
return
is
marked
as
Exhibit
O.
27.
Attached
to
Exhibit
O
are
Canaport's
audited
financial
statements
for
the
fiscal
year
ended
December
31,
1986.
In
those
statements,
Canaport
treated
the
cost
in
respect
of
the
installation
of
the
liner
as
a
current
expense
incurred
in
that
year.
28.
For
purposes
of
Irving
Oil's
income
tax
return
for
the
taxation
year
ended
December
31,
1986,
the
full
amount
paid
by
Irving
Oil
to
Canaport
in
respect
of
the
installation
of
the
liner
was
deducted
from
Irving
Oil’s
income
earned
in
that
year.
Reassessment
29.
On
August
20,
1990,
the
respondent
issued
notice
of
reassessment
no.
3497548
(the
"reassessment")
in
respect
of
Canaport's
taxation
year
ended
December
31,
1986.
The
respondent
therein
capitalized
the
$4,047,470
cost
of
the
Sealine
project
(Canaport
Job
74-1016).
Canaport's
net
taxable
income
for
that
year,
which
had
been
reported
as
“nil”,
was
adjusted
to
$4,047,470.
A
revised
capital
cost
in
Schedule
II
of
the
Income
Tax
Regulations
(Canada),
in
the
taxation
year.
A
copy
of
the
reassessment
is
marked
as
Exhibit
P.
30.
Canaport
filed
a
notice
of
objection
to
the
reassessment
on
October
25,
1990,
objecting
to
the
capitalization
of
the
Sealine
relining
project
cost
of
$4,047,470.
A
copy
of
that
notice
of
objection
is
marked
as
Exhibit
Q.
31.
The
respondent
delivered
a
notification
of
confirmation
dated
April
8,
1991.
That
notification
of
confirmation
is
marked
as
Exhibit
R.
Mr.
Joynson
is
an
acknowledged
expert
in
respect
to
underwater
pipelines
and
has
spent
his
entire
professional
life
in
that
field
since
obtaining
his
B.Sc.
in
1965.
He
has
designed,
constructed
and
worked
on
such
pipelines
all
over
the
world.
He
is
presently
employed
as
Operations
Manager
for
Costain
Oil,
Gas
&
Process
Ltd.
Mr.
Joynson
designed
and
supervised
the
installation
of
the
first
fibreglass
reinforced
liner
inside
a
subsea
ballast
line
in
the
Bahamas
in
1980.
The
one
in
question
is
the
second
such
installation
in
North
America.
Mr.
Joynson
participated
in
its
design
and
supervised
its
construction
by
Westminster
Land
&
Marine
Pipelines
Ltd.,
an
affiliate
of
his
employer.
Mr.
Joynson
stated
that
the
single
buoy
mooring
and
the
undersea
pipeline
constitute
one
entity
since
neither
can
be
operated
independently
of
the
other.
He
also
stated
during
examination
in
chief:
MR.
SEXTON:
Q.
I
am
now
moving
to
page
8
in
your
report,
does
the
lining
of
the
subsea
pipeline
merely
remedy
the
fabric
of
the
pipeline
or
does
it
result
in
an
addition
to
the
pipeline
or
the
substitution
of
an
existing
component
of
the
line
with
a
substantially
different
component?
A.
From
the
inspection
work
that
was
undertaken
by
Canaport
in
1984,
as
I
explained,
it
was
found
that
pitting
up
in
excess
of
nine
millimetres
deep
was
found.
It
occurred
along
this
narrow
strip
in
the
invert
of
the
pipeline.
This
considerable
reduction
in
the
wall
thickness
of
the
steel
pipeline,
so
its
life
as
a
pressure
retaining
structure
was
limited
and
there
was
a
high
possibility
of
a
leak
occurring
at
any
time.
In
fact
we
have
heard
that
there
was
a
leak
in
1984
which
was
temporarily
repaired.
However,
the
corrosion
is
concentrated
in
a
narrow
strip
along
the
invert
of
the
pipe,
so
even
though
the
pipe
is
in
poor
condition
the
structural
strength
of
the
line
is
not
seriously
impaired
by
the
corrosion.
By
inserting
the
FRP
liner
pipe
the
liner
pipe
is
capable
of
resisting
the
operating
pressure
of
the
oil
inside
the
original
steel
pipeline.
It
has
enabled
the
steel
pipeline
to
remain
in
service.
However,
the
liner
pipe
is
totally
dependent
upon
the
structural
strength
of
the
original
steel
pipeline
which
is
protected
from
external
corrosion
by
the
coal
tar
enamel
and
encased
in
the
concrete
to
stabilize
it
on
the
sea
bed.
It
is
dependent
upon
this
to
resist
the
external
environmental
forces
from
the
sea,
the
waves
and
the
currents.
If
I
can
just
explain
on
that
a
little
more.
The
waves
produce
a
velocity
on
the
sea
bed
which
tends
to
move
the
pipeline
and
each
underwater
pipeline
is
designed
so
that
it
will
resist
these
forces.
The
only
way
we
can
do
that
is
by
encasing
it
in
this
reinforced
concrete
to
provide
sufficient
weight
to
resist
the
loads
that
are
applied
to
it.
Q.
Just
stopping
there,
could
you
just
take
this
plastic
insert
and
put
that
down
by
itself
and
use
that
to
pump
the
crude
oil
through
with
no
exterior
coating?
A.
With
no
exterior
coating
that
pipe
would
not
have
stayed
on
the
sea
bed,
it
would
not
have
survived
in
the
conditions
that
exist
in
any
ocean
in
the
world.
As
we
have
heard
earlier,
even
the
original
steel
pipe
had
problems
being
installed
in
the
very
fast
currents
and
they
had
to
start
the
job
a
second
time.
So
a
steel
pipe
with
two
and
a
half
inches
of
concrete
on
the
outside
was
only
marginally
stable.
So
there
was
no
way
that
a
fibreglass
pipe
could
have
stayed
on
the
sea
bed
by
itself.
That
is
why
I
say
it
is
totally
dependent
on
the
existing
structure
that
is
there,
the
existing
pipeline
encased
in
this
concrete
to
remain
in
position
and
in
service
on
the
sea
bed.
Q.
In
doing
this
repair
was
any
work
done
at
all
to
the
coal
tar
enamel
coating
which
is
one
quarter
inch
or
to
the
reinforced
concrete
coating
on
top
of
the
coal
tar
enamel?
Was
any
work
done
on
any
of
that?
A.
There
was
no
work
done
whatsoever
on
the
external
side
of
the
pipeline
except
for
checking
that
the
pipe
was
supported
from
the
sea
bed.
.
.
.
After
the
liner
was
inserted
into
the
undersea
pipeline
it
was
sealed
in
place
by
a
concrete
grouting
which
was
pumped
into
the
entire
length
of
the
Sealine
so
that
the
liner
cannot
be
removed
and
cannot
shift
or
vibrate
within
the
Sealine
when
oil
is
being
pumped
through
it.
The
uncontested
evidence
of
Mr.
Joynson
is
that
the
liner
has
enabled
the
Sealine
to
retain
its
original
operating
life
expectancy
but
has
not
extended
that
life
expectancy.
To
quote
page
12
of
Exhibit
A-4,
the
expert's
report
reviewed
by
Mr.
Joynson
in
his
testimony:
In
essence
this
means
that
the
physical
life
of
the
repaired
subsea
pipeline
may
extend
to
that
envisaged
when
the
original
pipeline
was
installed
but
it
cannot
extend
beyond
that
date
because
the
subsea
pipeline
could
ultimately
fail
from
external
corrosion
due
to
a
breakdown
of
outside
coatings,
that
have
not
been
affected
by
the
repair
works.
Mr.
Joynson
further
testified
that
the
liner
has
not
affected
the
operation
of
external
forces
such
as
sea
water
and
sea
currents
on
the
Sealine
itself.
The
liner
merely
alleviated
the
leakage
problem,
enabled
oil
to
continue
to
be
pumped
through
the
Sealine
and
reduced
the
danger
of
pollution
by
oil
leakage.
Reviewing
the
facts
the
case
in
correspondence
with
a
similar
review
by
Estey,
J.
in
Johns-Manville
Canada
Inc.
v.
The
Queen,
[1985]
2
S.C.R.
46,
[1985]
2
C.T.C.
111,
85
D.T.C.
5373
at
pages
68-69
(C.T.C.
123-24,
D.T.C.
5382),
the
following
can
be
observed:
1.
The
purpose
of
the
expenditure
was
to
enable
current
operations,
the
pumping
of
crude
oil
into
storage,
to
continue.
2.
The
expenditure
was
probably
a
one-time
occurrence,
but
was
to
prevent
oil
leakages
in
the
Sealine,
which
were
becoming
a
somewhat
common
occurrence.
3.
The
expenditure,
while
singular,
was
to
deal
with
a
more
or
less
constant
element
of
leaks
in
the
operation
of
the
Sealine.
4.
There
was
no
intrinsic
value
to
the
liner
once
it
was
installed.
5.
The
benefit
of
the
expenditure
was
transitional
in
the
sense
that
it
will
only
exist
as
long
as
the
pipeline
itself,
and
may
be
for
a
lesser
period.
6.
The
permanence
of
any
benefit
resulting
from
the
liner
cannot
extend
beyond
the
life
of
the
Sealine.
7.
The
pumping
operation
could
have
continued
without
the
liner,
but
likely
for
a
shorter
period
of
time.
8.
The
appellant
has
an
alternative
to
expensing
the
cost,
namely,
it
may
be
subject
to
capital
cost
allowance.
9.
The
expenditure
did
not
add
to
the
productivity
of
the
Sealine.
In
fact,
capacity
was
reduced
by
approximately
15
per
cent
since
the
diameter
was
reduced
and
the
speed
of
pumping
could
not
safely
be
increased.
10.
The
expenditure
is
about
one-half
the
cost
of
a
new
Sealine,
according
to
estimates.
It
is
approximately
four
times
the
amount
described
in
paragraph
18
of
the
agreed
statement
of
facts
as
—"$1,006,800
was
incurred
for
purposes
of
locating
the
hole
and
acquiring
and
installing
the
clamp"
to
repair
a
half-inch
hole
in
the
Sealine,
which
the
parties
agree
was
a
serious
failure
in
the
particular
circumstances
of
this
underwater
oil
pipeline
situated
in
the
Bay
of
Fundy.
As
distinguished
from
the
case
in
Shabro
Investments
Ltd.
v.
The
Queen,
[1979]
C.T.C.
125,
79
D.T.C.
5104
(F.C.A.),
the
liner
is
not
a
separate
structure
from
the
Sealine.
In
fact
the
evidence
is
that
the
liner
could
not
exist
or
function
at
all
if
it
was
not
situated
and
sealed
within
the
Sealine.
In
contrast,
it
should
be
noted
that
the
Sealine
could
have
continued
to
function
without
the
liner
albeit
for
a
period
of
time
that
would
probably
have
been
shorter
than
with
the
liner.
The
comparison
which
seems
most
apt
is
that
of
Canada
Steamship
Lines
Ltd.
v.
M.N.R.,
[1966]
C.T.C.
255,
66
D.T.C.
5205
(Exch.
Ct.)
which
concerned
the
replacement
of
floors
and
walls
of
holds
of
ships,
i.e.,
the
container
element
of
a
transportation
vessel.
In
that
case
Jackett
P.
stated
at
page
256
(D.T.C.
5206-07):
Where
the
inside
layer
of
the
ship’s
bottom,
which
also
serves
as
the
floor
for
the
ship's
cargo-carrying
holds,
has
to
be
replaced,
in
whole
or
in
part,
by
reason
of
wear
and
tear
and
of
damage
caused
by
the
cargo
carried
in
the
ship,
it
seems
clear
to
me
that
the
expense
falls
in
the
same
class
as
the
expenses
of
replacement
of
portions
of
the
outside
skin.
So
long
as
the
ship
survives
as
a
ship
and
damaged
plates
are
being
replaced
by
sound
plates,
I
have
no
doubt
that
the
ship
is
being
repaired
and
it
is
a
deductible
current
expense.
That
is
the
case
here.
The
structure
of
the
Sealine
survived
as
a
pipeline
and
the
fibreglass
reinforced
liner
replaced
the
carrying
surface
of
the
Sealine
with
a
sound
liner.
Thus
the
repair
is
a
deductible
current
expense.
The
appeal
is
allowed
and
this
matter
is
referred
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
accordingly.
The
appellant
is
awarded
its
costs.
Appeal
allowed.
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