Kempo, TCJ:—The appeals were heard in Halifax, Nova Scotia and concern the tax liability of the appellant for its 1979 and 1980 taxation years. The issues in these appeals relate to the appellant’s ship or vessel known as the Mersey Viking. Because of the unique circumstances and issues in this case, written legal memorandums and submissions were requested and filed subsequent to the hearing.
Part I — Issues
The central issue is as to whether the fish processing activity which took place on board the Mersey Viking while it was operating at least 12 nautical miles and not more than 200 nautical miles from the nearest Canadian coast occurred “‘in Canada” for purposes of the manufacturing or processing deduction under section 125.1 of the Income Tax Act (the “Act’’) and accelerated capital cost allowance entitlement under Class 29 of Schedule II to the Income Tax Regulations (the “Regulations”).
Another issue is in respect of the proper classification of the processing equipment on board the Mersey Viking for capital cost allowance purposes and whether it is a Class 7 asset as determined by the Minister or a Class 8 asset as alleged by the appellant.
Finally, two matters involving questions of the onus or burden of proof arose during the hearing. The first is whether the Minister had assumed, at the time of and as a basis for the reassessments, that the fish processing activities had not taken place in Canada as is alleged in his reply to notice of appeal. The second is with respect to his omission in his reply of those facts and matters concerning the crew on board the vessel upon which the reassessments had been based.
Part II — Decision
The appeals of the appellant are to be dismissed in all respects.
For the reasons given in Part III hereof:
(a) the appellant’s vessel, the Mersey Viking and all of its manufacturing and processing equipment is, for capital cost allowance purposes, a Class 7 asset;
(b) the manufacturing and processing equipment on the Mersey Viking is not otherwise a Class 29 asset as it is not property used in Canada; and (c) the manufacturing and processing activity of the Mersey Viking is not counted in determining the amount of the deduction under subsection 125.1(1) of the Income Tax Act as it was not an activity that was performed in Canada.
Part III — Reasons
A. Facts
The appellant's business consists of the catching and processing of fish; it is a corporation incorporated in Nova Scotia and having its head office in Liverpool, Nova Scotia. Two witnesses gave evidence on behalf of the appellant: its president, Dr William Murphy and its executive vice-president, Mr Cecil Smith. Both of these gentlemen were extensively familiar with all of the appellant’s operations, including particularly the acquisition and operation of the ship or vessel which is in issue in these appeals.
In order to prosecute a distant east coast fishery and at the same time produce a top quality product for competitive sale in domestic and international markets, and following an assessment by Dr Murphy and Mr Smith of the economic viability of such a venture plus extensive study and consultations by them in respect of the technological nature of the kind of vessel that would be required, the appellant acquired a 176 foot, 1,100 ton factoryfreezer-trawler which had been built for it according to its specifications in the shipyards at Karbo, Norway. Its cost was $5.8 million.
This vessel was called the M/V Mersey Viking (“M/V” means motor vessel). It was specifically designed and constructed to serve as both a fishing vessel and a fish-processing factory. Technical details of the vessel had been provided to the Minister together with an allocation and basis for dividing costs between the processing operation and the remainder of the vessel. The shipyard allocation of the contract cost of the vessel was:
74.81 per cent hull and machinery
6.17 per cent electronics
19.02 per cent manufacturing and processing equipment
The Mersey Viking had been designed and acquired to prosecute (ie exploit) distant shrimp and cod fisheries, on a year-round basis, off the east and north-east coast of Canada. This was an area of operation that had had no Canadian capability or presence and which was being actively prosecuted by foreign nationals.
The Mersey Viking was said to be the appellant’s first "sea-going" factory. They did not have a shrimp processing facility on shore but did have an on-shore facility for processing its local cod catches.
There appeared to be no question but that factory/freezer technology was a requirement for successful and competitive prosecution of a distant shrimp and cod fishery. Foreign factory-freezer-trawlers were already in the business and had been capturing the world fish markets because of their ability to produce and market a quality freshly-frozen product. The Mersey Viking was probably Canada’s first factory-freezer-trawler with year-round capabilities — and it has proven to be profitable for the appellant.
To capsulate the overall intent, the vessel was said to be designed
... to prosecute a distant fishery and produce a top quality product that would command top prices in the world market place for the products it produced. (T.14, 27.A)
... to process a product that was caught very quickly so the product would be fresh and of top quality; [that the product] could be processed regularly on board and stored and the vessel could be kept at sea for some long period of time and then return to its home base. (T.14-15, 28.A.)
Under normal conditions the Mersey Viking operated out of Country Harbour, Nova Scotia which is about 150 miles east of Halifax on the eastern shore of Nova Scotia.
The design and function of this vessel as a factory-freezer-trawler enabled it to operate on a year-round basis — that is, for shrimp from June to December and northern cod for the rest of the year. One side of the vessel was said to have been designed for use in the catching, processing, packaging, freezing and storing of shrimp. The other side was designed for use in the catching, processing, freezing and storing primarily of northern cod. One whole deck, or level, was used principally for the processing aspect, and another level was used for on-board storage of the finished, frozen product pending unloading at port in Country Harbour.
The processing activities on this vessel were described as being labour intensive when compared to the vessel’s highly automated fishing capabilities.
The entire crew comprised approximately 18 people. There was a skipper, a mate, two engineers and a cook — the remaining 13 would perform some fishing duties but would spend the majority of their time processing the catch. As the fishing and processing activities on the vessel would be going on for 24 hours a day the crew was required to work two six-hour shifts per day, if not longer when required.
In accordance with the common usage of the industry the crew's remuneration was based on a percentage of the catch. However in 1979-1980 approximately one-half of the total crew were experienced foreigners who had been brought in with the permission of the Department of Employment and Immigration to train the Canadian crew. They were provided with guaranteed minimum pay in the event their percentage of the catch was insufficient. These included the skipper, the mate, the two engineers, the cook and the factory supervisors.
The cod fishing was by net trawling with a very high catch rate per net. This resulted in very short fishing periods per day. Often there were only two net tows per day of less than one hour in total duration — and the rest of the day was taken up in the processing of that catch at the earliest possible time in order to maintain and preserve its freshness.
The cod catch was dumped into a holding tank and from there they were brought out for a throat-cut in order to bleed. The fish, as it struggled, would pump the blood out of its system resulting in a whiter or better product. After 15 to 20 minutes they were then headed and gutted, washed and checked for remaining blood and gut, and they then were frozen in vertical plate freezers, or blocks, roughly four inches thick. After three and one-half to four hours for freezing, the product was put into the vessel's storage freezer which had a storage capacity of 400-410 metric tons of cod.
The equipment used in the aforementioned processing of cod was described as a holding tank, heading and gutting machines, bleeding tanks, conveyors, washing machines and freezers.
The shrimp was similarly caught by net trawling however, unlike the cod fishery, the catching and processing was almost continuous because the holding tank, filled with sea water to keep the shrimp alive, had the capacity of housing well in excess of the entire net catch. Each net catch could comprise of two-four tons and the holding tank (which was the same one used for cod) could hold 10-15 tons of fish. It was said that 20 tons, or one ton per hour, of shrimp could be processed per day.
The live shrimp were removed from the holding tank, sorted and graded, boiled (with shells), cooled, dried, frozen, packaged in cartons and then put in freezer storage which could hold 240-250 metric tons of packaged shrimp.
The equipment used in the processing of the shrimp was described as the aforesaid holding tanks, grading machines, cookers, cooling tanks, conveyors, freezing tunnel, weighing and packaging machines.
All of the aforedescribed processing equipment was European made and had been installed in the vessel at the Norway shipyard by welding or bolting.
The appellant’s president, Dr William Murphy, having had many years of hands-on experience in the fishing and processing industry, had been an active participant in all matters involving the specifications of the vessel. He also made the final decisions in respect of the acquisitions of the required processing equipment. And notwithstanding their fixation by bolting or welding, he said that all of the processing equipment was not only removable and replaceable but was also, if removed, capable of being installed and used in the appellant’s shore-based processing facility. On the one hand Dr Murphy conceded that the vessel and all the processing equipment had been acquired as a unit, and that there had been no intention or reason to remove the equipment from the vessel; however on the other hand, and being knowledgeable as to the vagaries of the fishing industry, he felt there was every reason for the appellant to keep its options open in this respect.
Because of its size the Mersey Viking was prohibited by Canadian law from fishing anywhere within Canada’s 12-mile territorial sea. There was no such geographical prohibition as to its processing activities. Apparently vessels of 65 feet or less in length were not prohibited from fishing inside the 12-mile territorial sea or within the 200-mile limit, although their fishing could be confined to predetermined or authorized zones in either of these areas.
i
Dr Murphy and Mr Cecil Smith testified that to their knowledge the Mersey Viking had not prosecuted a fishery beyond the 200-mile limit nor had it fished or processed its catch beyond that limit, whether inadvertently or otherwise.
As mentioned earlier, the cod fishery was prosecuted during the period January to May. It occurred in fishing zones outside the 12-mile limit but within the 200-mile limit north of Newfoundland and up along the coast of Labrador. The vessel also had fished in Ungava Bay, the Hudson Strait and the Davis Strait off Baffin Island. While it was conceivable and possible that the cod catch had been processed while the vessel was inside the 12-mile limit of the territorial sea in the Davis Strait, in Ungava Bay or West Resolution Island, inside the Hudson Strait or while in transit down the Strait of Belle Isle or around the Gulf of St Lawrence, the evidence was that this would not have been the case in the normal course of events. Put another way, it was highly likely that the processing of the catch did not occur inside the 12-mile limit of the territorial sea except in those circumstances where the vessel had to go inside for matters of safety, weather conditions, fuelling, repair or provision requirements or simply when it was steaming to its home port with catch on board yet to be processed.
The shrimp catch, as was noted earlier, was subjected to very prompt processing and accordingly it would have been unlikely that there was much to be done, if anything, while the vessel would have been within the 12-mile limit of the territorial sea while steaming home from the Grand Banks off the east coast of Newfoundland or off the east coast of Labrador.
Indeed it would not have been economical or practical to have steamed to a place within the 12-mile limit of the territorial sea just to process a catch — as the vessel was often fishing deeply within the 200-mile limit. Further, the Court doubts that this method of operation could have been an option to the appellant as it would have defeated the very purpose and scheme of of the venture which was to process and freeze a freshly caught product.
Apart from a daily recording of where the vessel fished, the weather conditions, the amount, quality and size of the product etc, no logs or records had been prepared or kept by the appellant as to where any of the processing of the cod or the shrimp had occurred.
Dr Murphy is a dentist by profession, had been more than a figurehead president of the appellant since its inception in 1964, and for the preceding four years had been intimately involved in all aspects of the appellant’s business on a full-time basis. He has an extensive working knowledge with respect to the east coast fishery through his involvement in the Law of the Sea discussions since 1976 as well as having been a Canadian Commissioner to the Northwest Atlantic Fisheries Organization (NAFO) which is the successor organization to the International Commission for the Northwest Atlantic Fisheries, of which he also had been an active member.
His evidence was that by 1977 Canada had not only extended its territorial sea to 12 miles but it also had enlarged its area of exclusive fisheries jurisdiction contiguous thereto an outward distance of 200 miles subject to equidistant lines in respect of those countries having coasts nearer than 200 miles that were opposite or adjacent to the coast of Canada. As an example, because there is not 200 miles separating Baffin Island and Greenland, the fishing jurisdiction was purportedly divided at equidistant lines down the middle of Davis Strait.
According to Dr Murphy, and if I understand him correctly, the involvement of an international organization like NAFO, which deals with the assessment and exploitation of trans-boundary fish stocks, was necessary because certain parts of Canada’s continental shelf on which fish spawning and/or ground-fish feeding areas are located extend beyond the 200-mile limit. The classic example thereof is that of the Flemish Cap and the Nose and the Tail of the Grands Banks off Newfoundland. The fish know no fences or boundaries and simply migrate in and out, however the majority of the spawning areas of these species of fish are inside the 200-mile limit of Canadian jurisdiction.
Dr Murphy said that the Articles of NAFO recognize the primacy of the fishery jurisdiction as belonging to each coastal state within their 12-mile territorial sea and their 200-mile fishing zone. The Articles themselves were not put into evidence, however a map entitled “Canada 200 Mile Fishing Zone and NAFO Fishing Boundaries" was introduced as Exhibit A-2 in the proceedings. This map apparently was produced in 1981 by the Communications Branch of Canada’s Department of Fisheries and Oceans. It shows, inter alia, the boundary of NAFO fishing areas, sub-areas and divisions and the 183-metre (100-fathom) contour. It also shows the 200-mile fishing zone boundary which was said to be a general representation of the geographical coordinates prescribed by Order in Council dated January 1, 1977 made under the provisions of Canada’s Territorial Sea and Fishing Zones Act.
The following is representative of Dr Murphy's explanation of the extent to which various Canadian government departments exercised supervision and control over the Mersey Viking and its activities.
The Mersey Viking had to be registered as a commercial fishing vessel under the Canada Shipping Act as well as a processing facility under the Fish Inspection Regulations of Canada. The vessel, and the processing methods thereon, were required to meet sanitary, health and other specifications that apply to processing facilities in Canada.
The vessel must report, via radio, on a daily basis to the Department of Fisheries and Oceans as to its geographic location and its hail of volume of fish on board.
Personnel from or representing the Canadian Department of Fisheries and Oceans could and did board the vessel looking for fishery violations such as mesh size and the accuracy in the reporting of catch, data and kind of product on board. They would also be checking the accuracy of the log records.
According to Dr Murphy that Department also had discretion as to the requirement of the carriage of an observer or inspector on board whose function was to ensure that all of the regulations were being observed. In the course of their duties they would have access to the vessel's radio communications and navigation equipment to ensure that the vessel was in fact where its log record said it was.
If a violation had been observed that required enforcement, Fisheries and Oceans officials or representatives could communicate with and obtain assistance from government patrol and enforcement vessels such as the Fisheries Protection vessels, Coast Guard vessels, certain naval vessels that had an enforcement function and/or patrolling aircraft.
Dr Murphy said that anywhere from 25 per cent to 30 per cent of the foreign ships that had been authorized by specific treaty or by Canadian permit to fish within Canada’s 200-mile limit would have had a Canadian government observer on board at all times. Also, personnel from or representing Fisheries and Oceans could board such vessels at sea at any time, and most of such boardings would have occurred anywhere within the 12 to 200-mile limit.
It was Dr Murphy’s evidence that the Government of Canada regularly patrolled and actively enforced its exclusivity of fishing jurisdiction over the 200-mile fishing zone (ie the Exclusive Economic Zone (the “EEZ’’)) against any foreign ships which had not been given any right or authority to fish within the area.
Apart from one example of which Dr Murphy was aware involving a breach by a Spanish ship that was prosecuted following its arrest when it next came into a Canadian port, the Court was not enlightened as to the kinds and methods and extent of enforcement that could be lawfully taken while such an unauthorized or unlicenced vessel was seen to have been fishing and was still within the 200-mile limit but beyond the 12-mile territorial sea, or indeed what could lawfully have been done if the situation occurred within the 12-mile territorial sea.
As to the other matter in this appeal involving the Minister's assumptions, the relevant portions of his reply to notice of appeal were as follows:
5. Notices of Reassessment dated February 1, 1982 issued to the Appellant informing it that the Respondent had reassessed its income tax liability:
(a) for its 1979 and 1980 taxation years by classifying the vessel M/V Mersey Viking as Class 7 property and thereby reducing the amount claimed as a deduction for capital cost allowance in the following amounts:
1979 — $242,050.00
1980 — 392,649.00
(b) for its 1980 taxation year by removing the cost of the M/V Mersey Viking from the “cost of manufacturing and processing capital” in the computation of the “manufacturing and processing profits deduction” thereby reducing the “manufacturing and processing profits deduction”.
7. In so reassessing the Appellant’s taxation years the respondent made, inter alia, the following assumptions of fact:
A. Classification for Capital Cost Allowance Purposes of M/V Mersey Viking (1979 and 1980)
(a) The vessel M/V Mersey Viking and all furniture, fittings and non-radiocommunication equipment attached to it are depreciable property of Class 7;
(b) The vessel M/V Mersey Viking and all furniture, fittings and equipment attached to it are not a structure that is manufacturing or processing machinery or equipment;
(c) The primary purpose of the vessel M/V Mersey Viking is to catch fish; (d) The vessel M/V Mersey Viking is not used in Canada;
B. Manufacturing and Processing Profits Reduction (1980)
(e) The vessel M/V Mersey Viking was not used in “qualified activities” of the Appellant as the activities were not performed in Canada.
B. STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS HE INTENDS TO SUBMIT
8. The respondent relies, inter alia, upon the sections 3, 4, 9, 20(1)(a), 125.1(3)(a), 125.1(3)(b), 255 and 248(1) of the Income Tax Act, RSC 1952, c 148 as amended by SC 1970-71-72, c 63, s 1 and upon section 1100, section 5202, “cost of manufacturing and processing capital” and “qualified activities” and Schedule II the Income Tax Regulations, CRC 1978, c 945 and upon the Territorial Seas and Fishing Zones Act, RSC 1970, c T-7.
9. The respondent submits that the Appellant’s vessel M/V Mersey Viking and all furniture, fittings and non-radiocommunication equipment attached to it were depreciable property of Class 7 in Schedule II of the Income Tax Regulations.
10. The Respondent submits that in 1980 the Appellant was not entitled to a manufacturing and processing tax credit within the meaning of section 125.1 of the Income Tax Act as the processing activity was not performed in Canada.
The Minister's reply was dated March 14, 1984, some six weeks prior to the hearing. The notice of appeal had been prepared by the appellant's lawyer, Mr E C Harris, QC, who had been actively involved throughout and had made representations to the Minister’s officials at all stages of this matter. The aforementioned assumptions pleaded in clauses 7.A.(d) and 7.B.(e) of the reply and the assertion set out in clause 10 thereof, all concerning the “in Canada" matter, had not been addressed in either of the appellant’s notice of appeal dated October 13, 1983 or its notice of objection dated April 28, 1982. The notice of confirmation by the Minister dated March 25, 1983 over the signature of F C Embree, Chief of Appeals, Appeals Division, Halifax District Office did not specifically address this issue and was as follows:
The formal objection(s) which you have made to the notice(s) of assessment for income tax in respect of taxation year(s) ended November 30, 1979 and 1980 has
(have) been carefully considered in accordance with paragraph 165(3)(a) of the Income Tax Act.
The Minister of National Revenue has considered the facts and reasons set forth in your Notice(s) of Objection and hereby confirms that the assessment(s) has
(have) been made in accordance with the provisions of the Income Tax Act for the following reasons:
for the purpose of paragraph 20(1 )(a) of the Act and Section 1100 of the Income Tax Regulations the capital cost of the freezer-trawler “MERSEY VIKING” owned by the taxpayer has been properly determined to be property of Class 7 of Schedule Il of the said Regulations; and that the Taxpayer’s Canadian Manufacturing and Processing profits for the 1979 and 1980 years have been properly computed and taken into account in accordance with paragraph 125.1 (3)(a) of the Act and Sections 5200 and 5201 of the Income Tax Regulations.
There is no reason not to accept the evidence of Dr Murphy and Mr Smith that prior to the contents of clauses 7.A.(d), 7.B.(e) and 10 of the Minister's reply, supra, being recently brought to their attention, they had not been aware of those assertions as having been actually made or assumed by the auditor/assessor who caused the assessments in issue to be made nor by an appeals officer during the objection process for that matter.
The aforementioned Chief of Appeals, Farrell C Embree, gave evidence at the hearing, having been called by the Respondent's counsel on one and one-half hours' notice. The auditor/assessor in this case was Mr Lennis Moore. It was explained that as Mr Moore was not at work on the day of this hearing he was not available to be called to give evidence on such short notice. The Minister's counsel further stated that he had not been given notice prior to the hearing that he might be called upon to establish when the assumptions had been made.
Mr Harris, counsel for the appellant, stated from the counsel table that he had not been made aware of the Minister’s concern as to the “in Canada” matter prior to his receipt of the reply to notice of appeal. Neither counsel asserted prejudice nor requested an adjournment.
Mr Embree, over the objections of the appellant’s counsel, was allowed to read into the record certain portions of Mr Moore's departmental T-20 report. The function of this report was described as “. . . a summation of the work he performed in conducting his audit and results of that and outlining the changes he is making and so somebody else, picking the file up, will be able to grasp what was done.” (T. 142, 24.A.)
This report included a notation in respect of the subject vessel as having been “... used at least partially in non-Canadian territorial waters ... .” (T. 144, 27. A.) Notwithstanding this, Mr Embree was not able to establish from the departmental file in his possession that this had been one of the factual foundations for the reassessments that had been communicated to the appellant or its representatives. The exchange of correspondence on the file between Mr Moore and the appellant or its representatives prior to the date of the reassessments does not make any mention of or disclose any reference to the “in Canada" matter.
Instead, the evidence was that by letter from Mr Moore addressed to the attention of Mr Harris dated the same date as that of the T-20 report referred to above, the assessor's position (excluding those not of concern to the issues at hand) was that the vessel, including the furniture, fixtures and equipment must be reported, for capital cost allowance purposes, as a Class 7 asset and further that
.. In regard to eligibility of the vessel as forming part of the manufacturing and processing capital, we do accept those processing activities performed on board ship by persons who use special equipment not usually required in the normal operation of a fishing vessel. However, it is our opinion that Mersey Seafoods Limited has no manufacturing or processing profits, in connection with the “Mersey Viking” since the activities started out aboard the vessel were not performed by employees of the company but rather by self-employed individuals. (T. 153, 67.Q.)
Mr Embree conceded that this letter of Mr Moore's had made no mention of the “in Canada" matter. As noted earlier, this issue had not been raised or addressed in the appellant’s notices of objection.
While its relevance may be questionable, in any event, the evidence is not all that clear as to the extent of the discussions of the reassessments which had occurred between Mr Embree, acting as an appeals officer, and Mr Harris subsequent to the reassessments and the filing of the notices of objection. When writing to his head office on March 1, 1983 for an opinion because of the unique and unusual features of the matter (he called it an “SOS for some help” (T.146, 41.A.)), Mr Embree made note therein, amongst other things, of Mr Harris’ contention that the vessel had operated only in Canadian waters. Apparently the head office response was not enlightening and Mr Embree followed their advice, which was simply to confirm the reassessments.
B. Analysis
The Assumptions
The evidence before me is that the reasons communicated by the Minister's auditor/assessor to the appellant for the reassessments did not include those assumptions of fact pleaded in clauses 7.A.(d) and 7.B.(e) of the reply which are repeated for convenience:
7.A. Classification for Capital Cost Allowance Purposes of M/V Mersey Viking (1979 and 1980)
(d) The vessel M/V Mersey Viking is not used in Canada;
B. Manufacturing and Processing Profits Reduction (1980)
(e) The vessel M/V Mersey Viking was not used in ""qualified activities” of the Appellant as the activities were not performed in Canada.
Rather the subject matter was mentioned in cursory form in the assessor's internal departmental T-20 report which subsequently drew the attention of the appeals officer after objection had been taken to the disclosed reasons for the reassessments.
Both counsel made reference to Kit-Win Holdings (1973) Limited v The Queen, [1981] CTC 43; 81 DTC 5030 and the remarks of Cattanach, J appearing under the heading “Onus of Proof”, and particularly His Lordship's statement on page 56 (DTC 5039) that
A taxpayer is entitled to known the findings and assumptions upon which the Minister, or his assessors based the assessment when it was made.
The appellant does challenge the Minister’s allegation that he did assume the matter of territoriality as pleaded in his reply, and submits that the consequence thereof would be that the evidentiary burden would be on the Minister to establish what he has alleged, that is, that the fish processing had not occurred in Canada during the relevant time.
However the evidence before me was such that neither party would have, nor indeed could have, adduced probative evidence to show or prove the matter one way or the other simply because the fish processing activities had not been recorded or logged either as to time or place.
As Mr Harris conceded in argument, “. . . if the burden of proof is on the taxpayer, presumably we are going to have great difficulty because we just can’t prove that and, of course, nobody had any idea that we would need to prove it.” (T.25) The dilemma and position of the Minister could not be much different from that of the taxpayer in the case at bar.
Further, there is ample factual evidence to support a finding that, apart from the happening of those occasional subsidiary or ancillary circumstances noted earlier in the facts, the processing would have occurred beyond the 12-mile territorial waters of Canada but within Canada’s 200- mile fishing zone.
Accordingly the issues raised with respect to the timing and/or communication of the “in Canada" assumption together with the burden of proof thereof is no longer relevant to the outcome of these appeals.
Dealing next with the employment status of the crew on board the vessel, it appears that this was one of the Minister’s stated reasons for the reassessments that had been communicated to the appellant. Apparently the Minister's auditor/assessor, Mr Moore, was of the view that the fish processing activities carried out by the crew were not as “employees" of the appellant within the meaning of “cost of manufacturing and processing labour” in section 5202 of the Regulations but rather as self-employed individuals or co-adventurers.
That this matter had not, in the Minister's reply to notice of appeal, been assumed, pleaded or relied on is a mirror image of the previous issue.
The appellant’s position is that while the matter had been raised in the assessing and internal appeal process, the Minister has dropped the issue by not referring to it in his reply and rather has put all his eggs in the “territorial" basket.
The Minister’s submission is that both matters were assumed, both are in evidence before Court and both should be dealt with. Further, since the employee versus co-adventurer matter is not in the reply, the Minister is either no longer relying on that particular assumption or, alternatively, has the burden of proving it.
The overall paucity of evidence adduced in this respect precludes me from making any findings of fact or drawing any inferences therefrom with any degree of certainty.
I would agree that the Minister would, in circumstances such as these, bear the burden of proof. He simply has not accomplished this in this case.
The view of the Chief Justice of the Federal Court of Appeal at 240 (DTC 6182) of The Queen v Littler, [1978] CTC 235; 78 DTC 6179 is particularly applicable to this matter:
In my view, when a cause of action is to be supported on the basis of a statutory provision, it is elementary that the facts necessary to make the provision applicable be pleaded (preferably with a direct reference to the provision) so that the opposing party may decide what position to take with regard thereto, ... and prepare for trial with regard thereto .... [T]he respondent not only did not refer to that section ... he did not plead facts .... Had that been pleaded, other facts might well have been the subject of evidence in addition to those that were brought out at trial. In my view, it is no mere “technicality”, but a matter of elementary justice to abstain, in the absence of very special circumstances, from drawing inferences from evidence adduced in respect of certain issues in order to make findings of fact that were not in issue during the course of the trial.
Capital Cost Allowance
The applicable property classes under Schedule II of the Regulations that were raised, relied upon and argued are set out for easy reference.
Class 7 (15 per cent)
Property that is
(a) a canoe or rowboat;
(b) a scow;
(c) a vessel . . . ;
(d) furniture, fittings and equipment attached to a property included in this class, but not including radiocommunication equipment;
(e) a spare engine for a property included in this class;
(f) a marine railway; or
(g) a vessel under construction.
Class 8 (20 per cent)
Property not included in Class . . . 7 . . . that is
(a) a structure that is manufacturing or processing machinery or equipment;
Class 29 (50 per cent)
Property that would otherwise be included in another class in this Schedule
(a) that is... property acquired by the taxpayer ...
(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease . . . and
(b) that is
(i) property that, but for this class, would be included in Class 8, . . .
The Mersey Viking was registered as a vessel under the Canada Shipping Act RSC, c 29, s 1, which is defined therein as follows:
2. In this Act
“vessel” includes any ship or boat or any other description of vessel used or designed to be used in navigation;
and paragraph 13(21 )(g) of the Income Tax Act, for capital cost allowance purposes, states that “ 'vessel’ means a vessel as defined in the Canada Shipping Act.”
The Minister’s position is that the appellant’s claim for increased capital cost allowance must fail because the Mersey Viking is a vessel, and the processing equipment in question is attached to the vessel. The Mersey Viking is therefore a Class 7 asset under paragraph (c) and the processing equipment is a Class 7 asset under paragraph (d). Class 7 is all-inclusive excepting for radiocommunication equipment, and it is therefore not necessary to look elsewhere to determine if anything else on board that is attached could be in another class.
Further, the Minister submits that if it is a Class 7 asset it cannot be included in Class 8 because of its opening words even if it is a structure (which is clearly not admitted). If it is not a Class 8 asset it cannot be a Class 29 asset, even if it is used in Canada for manufacturing and processing.
The appellant asserts that if there is an ambiguity in the words used in Class 7, the Court should have due regard to the object and purpose of Class 29 which is the incentive or fast-write-off class in Schedule II to encourage and promote growth of manufacturing and processing in Canada. And given that the appellant is processing goods for sale in an exclusive and specifically designed component of the Mersey Viking, it is appropriate to apportion the vessel accordingly as is done, for example, with factories on land that have functional components that may be fiscally viewed as mutually exclusive.
Continuing on with this theme, the appellant urged that the Court should not read paragraphs (c) and (d) of Class 7 in isolation. The manufacturing or processing equipment is not an integral part of the vessel. It performs an entirely independent function from the operation of the vessel as a vessel. Put another way, the operation of the vessel is not in any way dependent on the manufacturing and processing equipment on board. Therefore the word in paragraph (d) of Class 7 should be interpreted as meaning furniture, fittings and equipment “appropriate for’’ a property in that Class which in this case is for a vessel “‘as a vessel”.
Further, the appellant submits that the matter of "attachment” in paragraph (d) of Class 7 may be viewed as a relative term; as one involving intention and the degree of attachment. Admittedly, some form of attachment to a ship or vessel is necessary. And notwithstanding the obvious requirement to bolt or weld the equipment in place, it could be readily removed and replaced if obsolete and also could be taken out for use in on-shore facilities if necessary. Accordingly the equipment cannot be described as an integral and ordinary part of the vessel having an attachment in the manner of a permanent fixation thereto which is what is envisaged in paragraph (d) of Class 7.
Nova Construction Company Ltd v MNR, [1983] CTC 58; 83 DTC 5105 was cited as authority for the proposition that one can have a "structure” that is moveable, so the fact that the vessel moves through the water does not make the manufacturing and processing equipment therein any less a "structure" than anything else. (vide paragraph (a) of Class 8)
The Minister's position on this last point is that the Mersey Viking is a factory-freezer-trawler, constructed as a composite whole or single entity. It is a vessel, and a vessel is not a structure. A structure is something that is in one place, that is affixed somehow and which is built up of parts and is intended to remain on a foundation.
In my opinion the Nova Construction case is of limited assistance. There the portability of the asphalt plant required disassembly of its component parts, transportation thereof by trucks or trailers followed by reassembly at a new location — all with the use of a crane. This had been. done twice in the year. It took six to eight men, a dozen trucks, tractors and trailers and at least three and one-half days for each move. Mr Justice Mahoney looked at the definition of "structure" and noted on page 59 (DTC 5107):
... The Shorter Oxford English Dictionary.
STRUCTURE: 6. An organized body or combination of mutually connected and dependent parts or elements.
Stroud’s Judicial Dictionary. Fourth Edition, at p 2640 quotes Lord Denning in BP Refinery (Kent) v Walker, for which no citation is given. He is quoted as saying, in part:
"It is, I think, characteristic of a structure that it is built up of component parts on the site.”
and said "[t]hat expresses my understanding of the term in this context."
There has been a recent spate of reported decisions stressing the use of a words-in-total-context approach in matters involving interpretation such that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”; vide E A Dreidger, Construction of Statutes, 2nd ed (1983), at 87, as approved by the Supreme Court speaking through Estey, J in Stubart Investments Limited v The Queen, [1984] CTC 294 at 316; 84 DTC 6305 at 6323. See also Harris Steel Group Inc v MNR, [1985] 1 CTC 181 at 183; 85 DTC 5140 (FCA) at 5142; Lor-Wes Contracting Ltd v The Queen, [1985] 2 CTC 79 at 83; 85 DTC 5310
(FCA) at 5312 and Canterra Energy Ltd v The Queen, [1985] 1 CTC 329 at 332; 85 DTC 5245 (FCTD) at 5247-48.
However such principles are of application and are to be utilized in circumstances where a statutory provision, or regulation, can be said to be less than clear. In other words, there must be some ambiguity extant requiring judicial interpretation before the modern principles of statutory interpretation come into play.
There is nothing in the evidence which casts any doubt on the fact that the Mersey Viking is other than a vessel. Further it was designed, constructed, purchased and used as a multi-faceted unit and not as individual parts pending later assemblage into an operational machine. Vide MacMillan Bloedel (Alberni) Limited v MNR, [1973] CTC 295 at 298; 73 DTC 5264 at 5267 (FCTD). The Mersey Viking is a composite, functionally synchronized factory-freezer-trawler.
This vessel, including its attached furniture, fittings and non-radiocommunication equipment is, prima facie, a Class 7 asset. Parliament has prescribed a particular and encompassing classification for such a vessel. There is no ambiguity in this respect.
Further there is no ambiguity in the words and expressions employed in paragraphs (c) and (d) of Class 7. There is no reason to go beyond their ordinary and plain meaning. To interpret the words “equipment” and “attached” to be modified in a manner to mean as “appropriate to a vessel as a vessel” would be pure arbitrary segregation and would amount to judicial legislation. There are no words or expressions in Class 7 which would invite such a meaning.
While it may well be that any temptation to do so may be outside Class 7 itself in circumstances where the equipment is used in manufacturing or processing activities, such would be completely precluded in any event because Parliament clearly prescribes that the fast write-off provisions of Class 29 requires the equipment be otherwise included in Class 8 and that, by the clear and unambiguous opening words of Class 8, property in Class 7 is to be excluded.
Simply put, having found that the property is in Class 7, that is the end of the matter and there is no requirement to look elsewhere except for radiocommunication equipment.
And there is no reason to find that Parliament intended otherwise because even if the equipment also fell within paragraph (a) of Class 8, it was clearly expressed to be excluded. The only conclusion that can be drawn is that Parliament did not intend to extend the fast write-off provisions of Class 29 property to Class 7 property.
Therefore, and even apart from the territorial issue, the Minister was not in error in classifying the vessel Mersey Viking and all its furniture, fittings and non-radiocommunication equipment as depreciable property of Class 7.
But the matter does not end here. If my finding is in error the territorial issue in this appeal remains of vital significance as to whether the Class 29 characterization could, in any event, be applicable to the equipment on the Mersey Viking.
In Canada
As is succinctly submitted by the Minister's counsel:
The central issue in this appeal is whether the fish processing activity of the M/V Mersey Viking occurred in Canada.
If the activity did not occur in Canada, the Mersey Viking is not a class 29 asset, because subparagraph (a)(i) of that class is defined as property “to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease”. If the activity did not occur in Canada it is not a “qualified activity”, which is defined in regulation 5202 as one “. . . performed in Canada in connection with manufacturing or processing . . .”. If the activity is not a qualified activity, it can not be used to determine the “cost of manufacturing and processing capital” and the “cost of manufacturing and processing labour”, which in turn are the numerators used to determine the “Canadian manufacturing and processing profits” under regulation 5200. The result is that the activity of the Mersey Viking would not be counted in determining the amount of the deduction under s 125.1(1).
The Minister's position thereto is equally succinctly summarized as follows:
In assessing the Appellant the Minister assumed that the Mersey Viking is a vessel, not a structure, that is a class 7 asset, and that its fish processing activities do not take place in Canada.
The Mersey Viking fishes and processes its catch in Canada’s EEZ [Exclusive Economic Zone], which is beyond the 12 mile limit but within the 200 mile limit.
The EEZ is an area where Canada exercises only “sovereign rights" for limited purposes as opposed to the full “sovereignty" exercised on land and in territorial waters.
Canada’s EEZ is not part of the territory of Canada.
An activity performed in Canada’s EEZ is not performed in Canada.
An activity performed in Canada’s EEZ is not performed in Canada for income tax purposes unless s 255 is applicable to that activity.
The parties have relied upon two pieces of legislation as having significant bearing on the matter at hand.
Section 255 of the Income Tax Act first appeared in the legislation in 1966 as subsection 139(12) and, although renumbered, it read as follows in 1979- 80:
SEC. 255. “In Canada".
The expression “in Canada" is, for greater certainty, hereby declared to include and to have always included for the purposes of this Act the sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which grants are issued, by the Government of Canada or of a province, of a right, licence or privilege to explore for, drill for or take any petroleum, natural gas or minerals.
Section 255 was repealed and the following was substituted therefor by SC 1980-81, c 48, s 111 (assented to February 26, 1981):
255. For the purposes of this Act, “Canada” is hereby declared to include and to have always included
(a) the sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which the Government of Canada or of a province grants a right, licence or privilege to explore for, drill for or take any minerals, petroleum, natural gas or any related hydrocarbons; and
(b) the seas and airspace above the submarine areas referred to in paragraph (a) in respect of any activities carried on in connection with the exploration for or exploitation of the minerals, petroleum, natural gas or hydrocarbons referred to in that paragraph.
The Territorial Sea and Fishing Zones Act was first enacted in 1964 (SC 1964-65, c 22). It authorized the Governor in Council to list geographical coordinates of points from which baselines may be determined. It provides that the territorial sea of Canada extended to three nautical miles beyond the baselines and that the fishing zones of Canada were those areas contiguous to the territorial sea and extending nine nautical miles beyond the outer limit.
In 1970, that Act was amended by c 45 (1st Supp) to provide for a territorial sea of 12 nautical-miles and also that the fishing zones of Canada would be those areas of the sea adjacent to the coast of Canada as may be prescribed by Order in Council. Some of the provisions of this legislation are as follows:
2. Every provision of this Act extends and applies to every Act of the Parliament of Canada, now or hereafter passed, and to every order, rule or regulation thereunder, except in so far as any such provision is inconsistent with the intent or object of such Act, order, rule or regulation, or would give to any word, expression or clause thereof an interpretation repugnant to the subject-matter or the context, or is, in any such Act, order, rule or regulation, declared not applicable thereto.
3. (1) Subject to any exceptions under section 5, the territorial sea of Canada comprises those areas of the sea having, as their inner limits, the baselines des- cribed in section 5 and, as their outer limits, lines measured seaward and equidistant from such baselines so that each point of the outer limit line of the territorial sea is distant twelve nautical miles from the nearest point of the baseline.
4. (1) The fishing zones of Canada comprise such areas of the sea adjacent to the coast of Canada as may be prescribed by the Governor in Council pursuant to subsection 5.1(1).
(2) Unless otherwise specified therein, the laws of Canada respecting fishing and the exploitation of the living resources of the sea apply to the fishing zones of Canada in the same way and to the same extent as they apply to the territorial sea of Canada.
5.1 (1) Subject to subsection (2), the Governor in Council may, by order, prescribe as fishing zones of Canada such areas of the sea adjacent to the coast of Canada as are specified in the order and may, as he deems necessary, amend such areas.
(2) A copy of each order that the Governor in Council proposes to make under subsection (1) shall be published in the Canada Gazette; and no order may be made by the Governor in Council under subsection (1) based upon any such proposal except after the expiration of sixty days following publication of the proposal in the Canada Gazette.
In 1977, an Order was made, pursuant to section 5.1 of the Territorial Sea and Fishing Zones Act, by the Governor General in Council extending certain areas of the sea as fishing zones to the extent of 200 nautical miles. This Order was published in the Canada Gazette Part II, Vol III, No 1, the preamble of which is reproduced as follows:
Registration
SOR/77-62 1 January, 1977
TERRITORIAL SEA AND FISHING ZONES ACT
Fishing Zones of Canada (Zones 4 and 5) Order PC 1977-1 1 January, 1977
Whereas it is deemed essential, in order to ensure the proper conservation and management of the living resources of the sea in areas adjacent to the coast of Canada, to extend the areas under the fisheries jurisdiction of Canada on both the Atlantic and Pacific coasts by prescribing additional fishing zones of Canada pursuant to the Territorial Sea and Fishing Zones Act;
Whereas the Government of Canada is engaged in consultations with the Governments of the United States of America, of France and of Denmark on the delimitation of waters subject to the respective fisheries jurisdiction of Canada and of these countries in those areas where their respective coasts are adjacent or opposite to the coast of Canada;
And Whereas the limits of the fishing zones of Canada as established in the annexed order are intended to be without prejudice to any negotiations or to any positions which may have been or may be adopted respecting the limits of maritime jurisdiction in such areas.
Therefore, His Excellency the Governor General in Council, on the recommendation of the Secretary of State for External Affairs, with the concurrence of the Minister of Fisheries and the Environment, pursuant to section 5.1 of the Territorial Sea and Fishing Zones Act, is pleased hereby to make the annexed Order prescribing as fishing zones of Canada certain areas of the sea adjacent to the coast of Canada, effective January 1, 1977.
ORDER PRESCRIBING AS FISHING ZONES OF CANADA CERTAIN AREAS OF THE SEA ADJACENT TO THE COAST OF CANADA
When read together, it is quite obvious that neither the Territorial Sea and Fishing Zones Act nor the Order in Council passed thereunder pur- ports to have or could have the effect of extending and fixing the international boundaries of the Dominion of Canada for all purposes at the 200- mile seaward limit. And it is quite clear that neither party to this appeal made such an assertion.
According to the evidence, the fishing and processing activities on board the Mersey Viking occurred beyond the 12-mile territorial sea but within the 200-mile fishing zone.
The expression “in Canada” as it appears in section 255 of the Income Tax Act, supra, is not defined. It is expressed to be declaratory of what that expression is to include and has always included. Prior to 1981 the section was expressed to be “for greater certainty” and it omitted any reference to the seas and airspace above the seabed and subsoil. In 1981 the words “for greater certainty” were omitted and the seas and airspace above the submarine areas were prescribed to be included and are declared to have always been included in “Canada”. Since the meaning of “Canada" has not been defined, except to be expressly inclusive of the off-shore marine and submarine areas involving mineral or energy activities, it requires interpretation.
It is the position of the appellant that:
(1) a similarly worded inclusion in the Income Tax Act for fishing and processing activities within the fishing zones of Canada is not required because Canada has already asserted such expansive and comprehensive maritime jurisdiction of application in its fishing zones beyond its territorial waters that it is exercising “sovereign rights” that amount to “sovereignty” for that purpose;
(2) in respect of fishing activities, Canadian “sovereignty” is just as complete in the 200-mile fishing zone as it is within the territorial sea or its internal waters and “it follows that activities falling within that jurisdiction are being carried on in Canada, regardless of where Canada’s international boundaries may be delimited for other purposes;
(3) if the term “Canada” remains undefined or insufficiently defined and there may be some ambiguity in its application to a particular case, regard is to be had to the object and purpose of what are obviously incentive provisions that are designed to encourage manufacturing and processing in Canada. The “processing by Canadians of fish caught by a Canadian crew on a Canadian vessel, on board that vessel in waters subject to Canadian jurisdiction or ‘sovereign rights’, where it is more economical and efficient to process the fish on board rather than on shore, followed by the landing of the catch in a Canadian port and its marketing from there, is as much within the objectives of the incentives as would be the processing of the fish on Canadian soil”; and
(4) Canadian law precludes fishing by a vessel of the size of the Mersey Viking in its territorial sea. The fact that the appellant processes its catch in conjunction with its fishing within Canada’s 200-mile fishing zone has not, in the final analysis, anything to do with concerns involving Canada’s international boundaries or its assertion of sovereign rights over fishing in these areas. Therefore ""Canada” should be interpreted as inclusive of the waters of its said fishing zones where only that interpretation is consistent with the clear objects of the applicable provisions of the Income Tax Act and the Regulations.
The arguments of the appellant’s counsel are highly innovative and very persuasive. However, and with the greatest of respect, I am not able to agree that, for income tax purposes, the term “Canada” includes fish processing activities in the waters of its 200-mile fishing zone.
I am not convinced that, for the purposes at hand, the words “in Canada” in their ordinary, plain and grammatical sense can be taken to mean anything more than its territorial limits as it is commonly understood. In my Opinion the Minister’s counsel is correct in his submission that these are areas over which Canada has sovereignty and which are classically known as its land mass, its internal water, its territorial sea and the airspace above and the beds and subsoil below these areas.
Statutory Interpretation
While not directly raised in argument by either party, the matter nonetheless requires cognizance of some of the basic proponents of the general rules of statutory interpretation.
In Stubart Investments Limited, supra, Mr Justice Estey at 316 (DTC 6323) noted that the introduction of exceptions and allowances in fiscal legislation was the beginning of the end of the reign of the strict rule. And Mr Justice MacGuigan, in the recent decision of Lor-Wes Contracting Ltd, supra, at 82 (DTC 5313) was of the view that certain recent decisions had cleared out a great deal of the “underbrush” that had previously surrounded the interpretation of tax law and that older authorities may no longer be absolutely relied upon. His Lordship stresses employment of the words-in-total-context approach in the determination of the object and purpose of the taxing provisions as being the modern principle to be followed.
Section 255 of the Income Tax Act is a declaratory provision drafted in an inclusive manner. There is no apparent reason to disregard or modify the longstanding interpretative rule that an including definition is not generally regarded as exhaustive but rather as an extension or enlargement of the main word or words. Maxwell on The Interpretation of Statutes, 12th ed, 1969, at 270; Craies on Statute Law, 7 ed, 1971, at 214. The word or expression to be interpreted is to bear both its normal meaning and its statutory meaning.
Moreover, where a statute defines something as including other things, it may not always be the case that the general word is to be interpreted in light of the specific, as the latter may be included as a deliberate extension of the ordinary meaning of the general term rather than merely to avoid doubt: Maxwell, supra, at 292.
Also for consideration is the following extract from Maxwell, supra, at 33:
It is a corollary to the general rule of literal construction that nothing is to be added to or taken from a statute unless there are adequate grounds to justify the inference that the legislature intended something which it omitted to express. Lord Mersey said: “It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do”. [Thompson v Goold & Co [1910] AC 409, at 420]. “We are not entitled”, said Lord Loreburn LC, “to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself”. [Vickers, Sons & Maxim, Ltd v Evans [1910] AC 444, at p 445].
There exists a presumption that legislation does not alter the existing common law beyond that which is expressly stated in, or necessarily implied from, the language used in the enactment in question; the presumption not being applicable where the language used is clear and unambiguous enunciating a clear intent of change: Maxwell, supra, at 116 and 122. In all doubtful matters where the language used is expressed in general terms, their construction should follow the rules of common law in cases of that nature, as statutes are not presumed to alter the common law further or otherwise than as expressly declared or found therein: Craies, supra at 339.
Returning to the matter at bar, there is no interpretative assistance gained by viewing the word “Canada” in section 255 of the Income Tax Act in context with the expression as used elsewhere in the Act.
I am not unmindful of the provisions of the Interpretation Act, RSC 1970, c I-23 wherein by section Il it is prescribed that
Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.
The “object” sought for by the appellant relates to the incentive benefit of the fiscal manufacturing and processing tax credit. However the object of the incentive provisions can not operate or be used to add to or include something in the tax legislation that, upon a literal and grammatical reading, may not be there in the first place.
In R A Jodrey Estate v Minister of Finance [1980] CTC 437 (SCC) at 456 Dickson, J (as he then was) referred to the recent English decision of Sansom v Peay [(1976 3 All ER 375, at 379] in which Brightman, J was of the opinion that, as there was no duty to ensure that a tax exemption applied, it would not be permissible to construe it in a broad manner in order to achieve this end unless the wording permitted such a construction
Sovereignty
While it is apparent that the meaning to be attributed to "Canada" must be provided by Canadian law, basic international law principles with respect to the concepts of sovereignty and state territory are of relevance. I would adopt the words of those commentators put forth by the Minister's counsel as representing a succinct and accurate analysis, in general terms, of these concepts as they are well known and understood:
The state territory and its appurtenances (airspace and territorial sea), together with the government and population within its frontiers, comprise the physical and social manifestations of the primary type of international legal person, the state.
lan Brownlie, Principles of Public International Law, 3rd ed 1979, page 109.
. .. one of the essential elements of statehood is the occupation of the territorial area within which the state law operates. Over this area supreme authority is vested in the State .... Hence there arises the concept of “Territorial Sovereignty” which signifies that within this territorial domain jurisdiction is exercised over persons and property to the exclusion of other States.
J G Starke, An Introduction to International Law, 8th ed 1977, page 182.
And I accept counsel's submission that, from an international perspective, these principles suggest that "Canada" is composed of the territory over which Canada has sovereignty. However it is to be noted that these general statements are subject to some equally longstanding and well known exceptions or limitations. These include the need to recognize the diplomatic immunities, the right of foreign vessels to enter inland or internal waters without penalty in cases of distress and the right of "innocent passage” to foreign ships within the territorial sea. Therefore while it would be wrong to confer any absoluteness on the concept, sovereignty is more than just an abstract notion.
The International Law Perspective
Turning to the matter of maritime territory over which Canada has sovereignty, or some special form thereof, the starting historical point for all practical purposes is the 1958 Geneva Conventions on the Law of the Sea.
There were four. I propose to reproduce those Articles in the Conventions that are of relevance.
Articles 1(1), 1(2), 2, 14(1), 24(1) and 24(2) of the Convention on the Territorial Sea and the Contiguous Zone provide:
1(1). The sovereignty of a State extends, beyond its land territory and its internal waters, to a belt of sea adjacent to its coast, described as the territorial sea.
1(2). This sovereignty is exercised subject to the provisions of these articles and to other rules of international law.
2. The sovereignty of a coastal State extends to the air space over the territorial sea as well as to its bed and subsoil.
14(1). Subject to the provisions of these articles, ships of all States, whether coastal or not, shall enjoy the right of innocent passage through the territorial sea.
24(1). In a zone of the high seas contiguous to its territorial sea, the coastal State may exercise the control necessary to:
(a) Prevent infringement of its customs, fiscal, immigration or sanitary regulations within its territory or territorial sea;
(b) Punish infringement of the above regulations committed within its territory or territorial sea.
24(2). The contiguous zone may not extend beyond twelve miles from the baseline from which the breadth of the territorial sea is measured.
[Emphasis added.]
Articles 6(1) and 7(1) of the Convention on Fishing and Conservation of the Living Resources of the High Seas provide:
6(1). A coastal State has a special interest in the maintenance of the productivity of the living resources in any area of the high seas adjacent to its territorial sea.
7(1). Having regard to the provisions of paragraph 1 of Article 6, any coastal State may, with a view to the maintenance of the productivity of the living resources of the sea, adopt unilateral measures of conservation appropriate to any stock of fish or other marine resources in any area of the high seas adjacent to its territorial sea, provided that negotiations to that effect with the other States concerned have not led to an agreement within six months.
[Emphasis added.]
Articles 2(1) and 3 of the Convention on the Continental Shelf provide:
2(1). The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources.
3. The rights of the coastal State over the continental shelf do not affect the legal status of the superjacent waters as high seas, or that of the airspace above those waters.
[Emphasis added.]
Articles 1 and 2 of the Convention on the High Sea provide:
1. The term “high seas” means all parts of the sea that are not included in the territorial sea or in the internal waters of a State.
2. The high seas being open to all nations, no State may validly purport to subject any part of them to its sovereignty. Freedom of the high seas is exercised under the conditions laid down by those articles and by the other rules of international law. It comprises, inter alia, both for coastal and non-coastal States:
(1) Freedom of navigation;
(2) Freedom of fishing; ...
[Emphasis added.]
It should not go unnoticed that the Territorial Sea Convention speaks of “sovereignty” and the right of “innocent passage”; the Fishing Convention speaks of “special interests”; the Continental Shelf Convention speaks of “sovereign rights” for certain purposes which are not to affect the legal status of the superjacent waters as high seas and the High Seas Convention speaks of “freedom of navigation”.
As noted by Milan Sahovic and William W Bishop in Max Sorensen (ed), Manual of Public International Law, 1968, at 340:
It should be noted however, that these provisions of the Convention do not change the legal status of this part of the marginal sea. The contiguous zone remains part of the high seas and the rights which the coastal state may exercise in it do not involve any extension of sovereignty over it.
[Emphasis added.]
In 1970, as was mentioned earlier, the Territorial Sea and Fishing Zones Act was amended to provide for a territorial sea of 12 nautical-miles and to provide that the fishing zones of Canada are to be those areas of the sea adjacent to the coast of Canada as may be prescribed by the Governor in Council. In 1977, the fishing zones were extended to the 200 nautical-mile limit.
In J-G Castel, International Law, 3rd ed 1976, at 853-56 there is a reproduction of the comments of the honourable Mitchell Sharp, Secretary of State for External Affairs on the introduction of the Bill to amend the Territorial Sea and Fishing Zones Act. That the Government of Canada at that time was not seeking sovereignty for its exclusive fishing zones can be seen from the following extracts taken from that statement:
In a statement on a bill to amend the Territorial Sea and Fishing Zones Act, made to the House of Commons on April 17th, 1970, the Honourable Mitchell Sharp, Secretary for External Affairs, said:
The new fishing zones will be established only where Canada’s primary interests relate to fisheries, and in areas where Canada has historic claims. In such areas the bill would, in keeping with the government’s approach to the question, enable us to separate fisheries jurisdiction from the complete sovereignty which states exercise in their territorial sea and internal waters. This separation of fisheries jurisprudence from sovereignty already underlies the concept of the contiguous fishing zone which has become an established principle of customary international law, owing in good measure to the pioneering activities of Canada.
The Canadian government is convinced, on the basis of its lengthy experience in this field, that neither existing customary international law nor contemporary conventional international law are adequate to prevent the continuing and increasingly rapid depletion of the living resources of the sea. It is for this reason that we propose to extend our fisheries jurisdiction in the manner I have described.
It seems anomalous that whereas international law recognizes the right of coastal states to control the exploitation of mineral resources and of the so- called sedentary species of shellfish on the continental shelf adjacent to their shores, it has not yet developed an equally effective system for the management of the “free-swimming” fish in coastal areas. A coastal state may licence foreign entrepreneurs to exploit the mineral resources of its continental shelf, but so far only a few states have taken a similar approach to controlling the exploitation of coastal fisheries resources.
Exclusive rights to harvest may be necessary, but they are not an end in themselves. The end we have in mind is conservation and rational management, and for this purpose we require jurisdiction. That jurisdiction, however, does not rule out the possibility of sharing fisheries exploitation with other countries; it does, however, allow us to set rules for that exploitation, to impose licensing requirements if necessary and thus to share the financial burden of conservation as well as the financial rewards of exploitation.
Following the establishment of Canada’s new fishing zones we intend to conclude negotiations for the phasing out of the fishing activities of the countries which have traditionally fished in the areas concerned, . . .
[Emphasis added.]
J A Yogis, ‘Canadian Fisheries and International Law’, Canadian Perspectives on International Law and Organization, 1974, University of Toronto Press, asserts at 406:
The Canadian legislation [the Territorial Sea and Fisheries Zones Act as am 1970] might be said to be merely a new application of the contiguous zone principle which in essence is a means of separating fisheries jurisdiction “from the bundle of jurisdictions which constitute sovereignty”.
It is significant that those responsible for the legislation have attempted to make clear that regulation is to apply only to certain bodies of water in which Canada believes she has a special interest .... In other words, there is evidence to suggest that unilateral action was taken to accomplish a change with a minimum of inteference with traditional principles.
And at 407:
The fishing zone concept was an. acknowledgement of the need to approach fisheries problems from a functional rather than a purely legalistic point of view. By recognizing that jurisdiction for fisheries purposes need not correspond to the territorial sea, a departure was made from the traditional approach. In its present application, the fishing zone concept might be regarded as an even more controversial method of exercising jurisdiction.
At this point it should be noted that there is no suggestion in the arguments submitted that the Law of the Sea Conventions per se effect changes in the extent of the operation of municipal law. However the Articles of concordance are of relevance when the characterization of maritime jurisdiction is to be considered: Reference re Offshore Mineral Rights of British Columbia, 1967, infra. In the case at bar the ultimate question is that of the juridical nature of Canada’s fishing zones in the context of the ordinary and grammatical meaning of the expression “Canada” in the Income Tax Act.
Following 12 years of protracted negotiations, the United Nations Convention on the Law of the Sea was concluded and signed at Montego Bay on December 10, 1982 (the “1982 Convention"). It is not yet in force. The document is voluminous and comprises some 320 Articles. The pertinent Articles are reproduced:
PART II
TERRITORIAL SEA AND CONTIGUOUS ZONE
Article 2
Legal status of the territorial sea, of the air space over the territorial sea and of its bed and subsoil
1. The sovereignty of a Coastal State extends, beyond its land territory and internal waters ... to an adjacent belt of sea, described as the territorial sea.
2. This sovereignty extends to the air space over the territorial sea as well as to its bed and subsoil.
3. The sovereignty over the territorial sea is exercised subject to this Convention and to other rules of international law.
[Emphasis added.]
Article 3
Breadth of the territorial sea
Every State has the right to establish the breadth of its territorial sea up to a limit not exceeding 12 nautical miles, measured from baselines determined in accordance with this Convention.
Article 33 Contiguous zone
1. In a zone contiguous to its territorial sea, described as the contiguous zone, the coastal State may exercise the control necessary to:
(a) prevent infringement of its customs, fiscal, immigration or sanitary laws and regulations within its territory or territorial sea;
(b) punish infringement of the above laws and regulations committed within its territory or territorial sea.
2. The contiguous zone may not extend beyond 24 nautical miles from the baselines from which the breadth of the territorial sea is measured.
PART V
EXCLUSIVE ECONOMIC ZONE
Article 55
Specific legal régime of the exclusive economic zone
The exclusive economic zone is an area beyond and adjacent to the territorial sea, subject to the specific legal régime established in this Part, under which the rights and jurisdiction of the coastal State and the rights and freedoms of other States are governed by the relevant provisions of this Convention.
Article 56
Rights, jurisdiction and duties of the coastal State in the exclusive economic zone
1. In the exclusive economic zone, the coastal State has:
(a) sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources, whether living or non-living, of the waters superjacent to the sea-bed and of the sea-bed and its subsoil, and with regard to other activities for the economic exploitation and exploration of the zone, such as the production of energy from the water, currents and winds;
(b) jurisdiction as provided for in the relevant provisions of this Convention with regard to:
(i) the establishment and use of artificial islands, installations and structures;
(ii) marine scientific research;
(iii) the protection and preservation of the marine environment; (c) other rights and duties provided for in this Convention.
[Emphasis added.]
2. In exercising its rights and performing its duties under this Convention in the exclusive economic zone, the coastal State shall have due regard to the rights and duties of other States and shall act in a manner compatible with the provisions of this Convention.
3. The rights set out in this article with respect to the sea-bed and subsoil shall be exercised in accordance with Part VI.
Article 57
Breadth of the exclusive economic zone
The exclusive economic zone shall not extend beyond 200 nautical miles from the baselines from which the breadth of the territorial sea is measured.
Article 58
Rights and duties of other States in the exclusive economic zone
1. In the exclusive economic zone, all States, whether coastal or land-locked, enjoy, subject to the relevant provisions of this Convention, the freedoms referred to in article 87 of navigation and overflight and of the laying of submarine cables and pipelines, and other internationally lawful uses of the sea related to these freedoms, such as those associated with the operation of ships, aircraft and submarine cables and pipelines, and compatible with the other provisions of this Convention.
[Emphasis added.]
2. Articles 88 to 115 and other pertinent rules of international law apply to the exclusive economic zone in so far as they are not incompatible with this Part.
3. In exercising their rights and performing their duties under this Convention in the exclusive economic zone, States shall have due regard to the rights and duties of the coastal State and shall comply with the laws and regulations adopted by the coastal State in accordance with the provisions of this Convention and other rules of international law in so far as they are not incompatible with this Part.
Article 61
Conservation of the living resources
1. The coastal State shall determine the allowable catch of the living resources in its exclusive economic zone.
2. The coastal State, taking into account the best scientific evidence available to it, shall ensure through proper conservation and management measures that the maintenance of the living resources in the exclusive economic zone is not endangered by over-exploitation. As appropriate, the coastal State and competent international organizations, whether subregional, regional or global, shall co-operate to this end.
Article 62
Utilization of the living resources
1. The coastal State shall promote the objective of optimum utilization of the living resources in the exclusive economic zone without prejudice to article 61.
2. The coastal State shall determine its capacity to harvest the living resources of the exclusive economic zone. Where the coastal State does not have the capacity to harvest the entire allowable catch, it shall, through agreements or other arrangements and pursuant to the terms, conditions, laws and regulations referred to in paragraph 4, give other States access to the surplus of the allowable catch, having particular regard to the provisions of articles 69 and 70, especially in relation to the developing States mentioned therein.
Article 73
Enforcement of laws and regulations of the coastal State
1. The coastal State may, in the exercise of its sovereign rights to explore, exploit, conserve and manage the living resources in the exclusive economic zone, take such measures, including boarding, inspection, arrest and judicial proceedings, as may be necessary to ensure compliance with the laws and regulations adopted by it in conformity with this Convention.
[Emphasis added.]
PART VI
CONTINENTAL SHELF
Article 76
Definition of the continental shelf
The continental shelf of a coastal State comprises the sea-bed and subsoil of the submarine areas that extend beyond its territorial sea throughout the natural prolongation of its land territory to the outer edge of the continental margin, or to a distance of 200 nautical miles from the baselines from which the breadth of the territorial sea is measured where the outer edge of the continental margin does not extend up to that distance.
Article 77
Rights of the coastal State over the continental shelf
1. The coastal State exercises over the continental shelf sovereign rights for the purpose of exploring it and exploiting its natural resources.
[Emphasis added.]
2. The rights referred to in paragraph 1 are exclusive in the sense that if the coastal State does not explore the continental shelf or exploit its natural resources, no one may undertake these activities without the express consent of the coastal State.
3. The rights of the coastal State over the continental shelf do not depend on occupation, effective or notional, or on any express proclamation.
Article 78
Legal status of the superjacent waters and air space and the rights and freedoms of other States
1. The rights of the coastal State over the continental shelf do not affect the legal status of the superjacent waters or of the air space above those waters.
2. The exercise of the rights of the coastal State over the continental shelf must not infringe or result in any unjustifiable interference with navigation and other rights and freedoms of other States as provided for in this Convention.
PART VII
HIGH SEAS
Article 86
Application of the provisions of this Part
The provisions of this Part apply to all parts of the sea that are not included in the exclusive economic zone, in the territorial sea or in the internal waters of a State, or in the archipelagic waters of an archipelagic State. This article does not entail any abridgement of the freedoms enjoyed by all States in the exclusive economic zone in accordance with article 58.
Article 87
Freedom of the high seas
1. The high seas are open to all States, whether coastal or land-locked. Freedom of the high seas is exercised under the conditions laid down by this Convention and by other rules of international law. It comprises, inter alia, both for coastal and landlocked States:
(a) freedom of navigation;
(b) freedom of overflight;
(e) freedom of fishing, subject to the conditions laid down in section 2;
[Emphasis added.]
2. These freedoms shall be exercised by all States with due regard for the interests of other States in their exercise of the freedom of the high seas, and also with due regard for the rights under this Convention with respect to activities in the Area.
Article 89
Invalidity of claims of sovereignty over the high seas
No State may validly purport to subject any part of the high seas to its sovereignty.
Most of the Articles in respect of the high seas are made applicable to the Exclusive Economic Zone (the “EEZ”) by Article 58(2), supra. In argument both counsel were inclined to refer to the EEZ and Canada’s 200-mile fishing zone interchangeably.
The overall scheme under the 1982 Convention has the appearance of encompassing the same characteristics as that of the 1958 Convention, namely that a State has “sovereignty” over the territorial sea and “sovereign rights” over the EEZ and the continental shelf.
But the appearances are deceptive. The 1982 Convention is obviously reflective of a significant evolution in international thought and state practice since the 1958 Convention, and more so since 1974: see D P O’Connell, 1 The International Law of the Sea, 1982, Author's Preface.
As was noted earlier the 1982 Convention was allegedly signed on December 10, 1982. Part V, comprising Articles 55 to 75, inclusive, is representative of the international consensus as to what rules should be with respect to the EEZ. However its true juridical status from an international perspective has not been resolved.
The International Law Association Committee on the Exclusive Economic Zone in its Report of the Sixtieth Conference held at Montreal August 29, 1982 to September 4, 1982 (published by the International Law Association, London 1983) made the following pertinent comments in its first (preliminary) report, at 305-9 (“UNCLOS III” therein means the Third United Nations Conference on the Law of the Sea):
7. The emerging consensus on a 200 mile Economic Zone concept at UNCLOS III has thus had a decisive impact on the development of state claims and on the potential development of the customary international law of the sea. The rules elaborated by the Conference in this respect have influenced the process of creating new legal regimes established by coastal state promulgations. ...
B. Sovereign Rights
8. It now seems received political wisdom that a coastal state has “sovereign rights” in a zone of extended jurisdiction, named the Exclusive Economic Zone (EEZ), going out to a distance of 200 nautical miles. ... As might be expected, there is a tendency to reduce the importance of regional fisheries commissions, because larger areas have become subject to exclusive national management.
9 What is more important than the wording “sovereign rights” is of course the nature of the rights or functions actually exercised by the coastal state. The evidence here seems to support the conclusion that, in the present state of international law, such rights are vested in the coastal state within the zone of extended jurisdiction, and that the factual exercise of jurisdiction is respected by the other states. ...
10. The committee should, in its future deliberations, perhaps, be careful not to over-emphasize the difference between the phrases “sovereign rights”, “jurisdiction”, “authority”, or cognate terms. . . .
11. Nevertheless, the concept of “sovereign rights” suggests a stronger position of the coastal state and a more secure basis in general international law than mere “jurisdiction”. ... The Committee might well pursue, in future studies, the comparative meanings of these terms (ie, “sovereign rights”, “jurisdiction”, etc) in various contextual settings. They would relate to the subject matter to be covered, the diverse purposes of the instruments employing the terms, and the objects of the international regime to be prescribed.
12. Such question would include inquiries as to whether the word “jurisdiction” is completely neutral, and the scope of the qualifier “sovereign” when applied to “rights” claimed under international law. ... We may ask whether the exercise of “jurisdiction” or “authority” may often amount to the same as the exercise of “sovereign rights” with regard to the general managing of fisheries as well as the decision on who shall have the right to fish, including the exclusion of fishing by foreign vessels not expressly authorized by the coastal state. ... We must not reify the words.
15. It should be emphasized that the “sovereign rights” which may seem more or less accepted, as a fundamental element of the EEZ as such, relates to resources, including fisheries. This does not imply that the coastal state may interfere with other traditional freedoms of the high seas. ...
17. Doubts may arise with regard to the possibility under existing law of exercising other, and in particular non-resource-oriented, powers which the Draft Convention purports to confer upon the coastal state within the 200 mile zone, ... “A full EEZ” may provide a more adequate comprehensive regime for the general interests of the coastal State than a fishery zone or a resources zone. ... The wide range of competences for the coastal state obviously entails a certain risk of “creeping jurisdiction”. ie the broadening of coastal state powers so that the 200 mile zone may gain by accretion the attributes of the territorial sea. ...
18. The central issue of the legal regime within the 200 mile zone are the freedoms for other states of navigation and overflight. ...
19. This leads us to the much-debated question whether, and to what extent, the Exclusive Economic Zone can still be considered part of the high Seas. .. . It is also true that the coastal state has sovereign rights over the resources of the zone, but these are functional rights which are specifically attributed to the coastal state and which do not flow from full territorial sovereignty over the waters. Thus, the legal regime of the Exclusive Economic Zone ... contains elements of high sea freedoms as well as elements of the coastal state’s sovereign rights. ... UNCLOS has avoided stating clearly in the Draft Convention whether the Exclusive Economic Zone is still part of the High Seas (minus coastal state’s rights) or a coastal state’s jurisdiction zone (minus the remaining High Seas freedoms of other states). . .. Thus, both sides are still free to argue either way, and we should rather leave this question to further analysis and review by the EEZ Committee. ...
At the working session of this self-same Conference it is reported at 320- 21 that Professor Hingorani (India) was of the opinion that “... eventually, the EEZ may come under the sovereignty of the coastal States. The present phrase of 'sovereign rights' to be exercised by the coastal States is only a transitory acceptance of the phrase which may finally be substituted by the word 'sovereignty'.” However the reported comment of Professor Michael Reisman (USA) at 323 is particularly apt:
There is still much to be said for the grotian conception of an international regime of oceans with freedoms of use for all to the common benefit of all people. The EEZ concept represents some limitation of that and there is a danger of a process of erosion which will transform an EEZ with many high seas freedoms still intact into a 200 mile territorial sea. That should not be permitted to happen without a full and explicit international consideration of the policies and consequences. Pending that, it is important to insist upon the residual international character of the waters in the EEZ and to presume that no rights have been given to the coastal state that are not express in the Draft Law of the Sea Convention. It is a principle of treaty construction that a State is not deemed to have alienated any of its territory unless it has explicitly done so; instruments purporting to do so are to be interpreted strictly. The same presumption should obtain a fortiori for alienations of property of the world community.
That the lack of an international consensus as to the legal status of the EEZ as it may affect freedoms of the air and overflight therein is clearly reflected in the analysis and concerns of Kay Hailbronner, “Freedom of the Air and the Convention on the Law of the Sea”, [1983] 77 The American Journal of International Law, 490. At 493 the author refers to the question of “creeping jurisdiction”, the introduction by the 1982 Convention of “new areas of conflicting rights” and that international aviation may have to face conflicting claims and legal requirements due to the “uncertainties in the legal status of those new areas”. At 504 she states that “the legal status of the EEZ [was] one of the most controversial issues at the Law of the Sea Conference” and that “[a] survey of the vast literature on the EEZ does not provide unequivocal answers to the issue”. She notes, on 506, that “[t]he sovereign rights of the coastal state pertain only to the resources of the zone rather than to the zone itself” and, at 505, upon reflection of the words of Article 59 in the 1982 Convention she concludes “(t]hus, the EEZ might be considered as an evolving concept in which the rights and jurisdiction of the coastal state and other states are only partly fixed by the Convention”.
Returning for the moment to the case at bar, and as mentioned earlier, both counsel made submissions as to their interpretative approach to the meaning and extent of the words “sovereignty” and “sovereign rights”. Following a long and arduous examination of the aforesaid two Conventions on the Law of the Sea and various treatises written by eminent and learned writers in the field on the subject at hand, I am unable to articulate any clear position with respect to the characterization of the legal status of the EEZ from an international law perspective: see L H J Legault, “Maritime Claims” p 377-97, G W Alexandrowicz, “Canadian Approaches to the Seabed Regime” p 410-33 and J A Yogis, “Canadian Fisheries and International Law” p 398-408 all found in Canadian Perspectives on International Law and Organization 1974, supra; K Hailbronner, “Freedom of the Air and the Convention of the Law of the Sea”, supra; D P O’Connell, 1 The International Law of the Sea, supra, ch 15; L L Herman, “The Need for a Canadian Submerged Lands Act: Some Further Thoughts on Canada’s Offshore Mineral Rights Problems”, [1980] 58 Can BAr Rev, 518.
It is opportune to repeat and adopt the words of Judge Gros (in dissent) in the Case Concerning Delimitation of the Maritime Boundary in the Gulf of Maine Area (Canada/United States of America) [1984] IC 246 at 360:
One is reminded of Mr Justice Holmes’ warning about the relativity of words: A word ... is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. (245 US 418, 425.)
The Supreme Court of Canada in Reference re Offshore Mineral Rights of British Columbia, [1967] S.C.R. 792 at 807 was of the view that the logical starting point for its purposes was the 1958 Geneva Convention “.. . which may now be regarded as defining the present state of international law on this subject”. [Emphasis added.] I am satisfied that much has happened in the international community since the 1970s and therefore can not say the same of the 1982 Convention as it may have any application to the case at bar. Additionally, the Court stated, at 821:
The rights now recognized by international law to explore and exploit the natural resources of the continental shelf do not involve any extension of the territorial sea. The superjacent waters continue to be recognized as high seas.
Much of Canada’s continental shelf is located within the delimination of the 200-mile zone (ie the EEZ). The significance of the above noted statement is that waters of the EEZ in the case at bar are superjacent to the continental shelf. And because the current debate surrounding the juridical status of the EEZ revolves around whether it is high seas minus the coastal state’s rights, or a coastal state's jurisdiction zone minus the remain- ing high seas freedoms of other states, it would not be correct to adopt the last sentence of the above quote as an accurate reflection of the modern state of affairs. There appears to be little doubt that a change has come about that is currently short of aquatic sovereignty.
Counsel for the appellant has alleged an inconsistency on the part of the Canadian government with respect to the position taken in this case and the position it was taking as to the 200-mile zone before the International Court of Justice in the Gulf of Maine case, supra. The answer to that may be found at 264 of the decision wherein the Canadian/USA position was expressly reserved by the terms of their Special Agreement submitted to the Court which is reproduced as follows:
Nothing in this Special Agreement shall affect the position of either Party with respect to the legal nature and seaward extent of the continental shelf, of fisheries jurisdiction, or of sovereign rights of jurisdiction for any other purpose under international law.
In fairness to counsel, the decision of the International Court became available after the arguments had concluded.
The Supreme Court of Canada in Reference re the Seabed and Subsoil of the Continental Shelf Offshore Newfoundland, [1984] 1 S.C.R. 86 (the "Hibernia Reference”) was concerned with the continental shelf off Newfoundland. It decided that Canada, not Newfoundland, has the right to explore and exploit the mineral and other natural resources of the shelf. At 95 the Court notes that the 1958 Geneva Convention on the Continental Shelf did not grant sovereignty over the shelf but rather "sovereign rights to explore and exploit”. At 96 it is further noted that these “limited rights co-exist with the rights of other nations ... and do not affect the status of the superjacent waters. ... They stand in marked contrast to the full sovereignty ... which international law accords to coastal States over their territorial sea”; and further "[t]he regulation by international law of the uses to which the continental shelf may be put is simply too extensive to consider the shelf to be part of the State's territory”. At 97 the Court concludes:
At international law, then, the continental shelf off Newfoundland is outside the territory of the nation State of Canada Since as a matter of municipal law, neither Canada nor Newfoundland purports to claim anything more than international law recognizes, we are here concerned with an area outside the boundaries of either Newfoundland or Canada. In other words, We are concerned with extraterritorial rights.
Much of the argument in the present case is based on the assumption that continental shelf rights are proprietary. We do not think continental shelf rights are proprietary in the ordinary sense. In the words of the 1958 Geneval Convention, they are “sovereign rights” and they appertain to the coastal State as an extension of rights beyond where its ordinary sovereignty is exercised. In pith and substance they are an extra-territorial manifestation of, and an incident of, the external sovereignty of a coastal State.
While what is within or outside the international-law boundaries of Canada was not central to reaching the Court's answer to the questions posed to it, its views are relevant and highly persuasive. And keeping in mind the aformentioned unsettled status of the 200-mile fishing zone (or EEZ) at international law, it may indeed be no more than an area of extra-territorial jurisdiction of a specific and inherently limited kind at this time.
And although the subject zone might well be national waters in the sense of being vested within the legislative jurisdiction of the State, it does not necessarily follow that it must be deemed to be in the State.
The Domestic Perspective
Counsel for the appellant is correct in pointing out that many federal statutes, besides the Territorial Sea and Fishing Zones Act, supra, and the recent spate of legislation concerning energy activities on the continental shelf, assert jurisdiction beyond its territorial waters. Examples cited were the Canada Shipping Act, the Aeronautics Act, the Coastal Fisheries Protection Act, the Criminal Code, the Customs Act and the Fisheries Act. A cursory examination on my part of the Fisheries Act RSC 1970, c 14 and the Coastal Fisheries Protection Act, RSC 1970, c C-21 indicates that all waters of the fishing zones of Canada are expressly included in their respective interpretation provisions. As the matter was raised merely by way of assertion, I do not propose to go through an analysis of their particulars any further than as mentioned.
Canadian enforcement of its claimed maritime jurisdiction is the subject of comment by H Scott Fairley, “Canadian Federalism, Fisheries and the Constitution: External Constraints on Internal Ordering”, [1980] 12 Ottawa L Rev, 257 at 311:
. . . the expansion of sovereign rights carries with it the expensive and complex responsibility of seeing that these rights are enforced — and enforceable — on a continuing basis. Failure to enforce claimed rights against offenders suggests to the international community that these rights do not exist; interested foreign nations and enterprises will act accordingly.
Policing the vast expanse of ocean demarcated by the 200 mile zone of jurisdiction entails a a mammoth effort by the Canadian armed forces (Department of National Defence) and Coast Guard (Department of Transport). Surveillance and enforcement by specially designed fisheries patrol vessels, naval destroyers and maritime patrol aircraft are all part of a coordinated federal effort to ensure that the extent of reciprocal relationships with other nations is not exceeded and the juridical boundaries of jurisdiction remain a practical reality.
On the topic of enforcement, the observations of D P O’Connell, Il The International Law of the Sea, 1984 at 1071-72 are of interest:
Within the areas of State sovereignty — territorial and internal waters — the powers of enforcement of the coastal State are the same as they are in any part of national territory, subject in the case of the territorial sea to the right of innocent passage and in other respects to treaties. But within the contiguous zone or the EEZ the powers of enforcement are limited strictly to the purposes for which such jurisdictional zones are established, and they are inherently ambiguous because they do not derive from sovereignty but from a concessive rule of international law. This means that the determination of the scope of power respectively in the cases of areas subject to sovereignty and beyond these areas proceeds from opposite poles. But, whereas the pole of sovereignty is philosophically stable, that of international law is uncertain, intangible, and shifting.
The provisions of the Montego Bay Convention relating to enforcement powers in non-sovereign jurisdictional zones are of a generalized character and must be read with the precedents for their quality to be clear. In the case of the EEZ, the powers are said to include boarding, inspection, arrest, and judicial proceedings, as may be necessary to ensure compliance with the laws and regulations enacted by the coastal State in conformity with the Convention. That introduces two relativities — "as may be necessary” and “in conformity with”. The former refers to general international standards of the resort to force, and the latter to the unstable content of practice respecting the law of the EEZ.
Counsel for the appellant submits that “section 255 [of the Income Tax Act] being declaratory in nature, must be taken as saying an activity in the waters adjacent to the coast of Canada but outside the territorial sea must be regarded as being within Canada if Canada now asserts legislative and regulatory jurisdiction over that activity".
I concur with the observation of the Minister’s counsel that there was no suggestion by Lord MacMillan in Croft v Dunphy, [1933] AC 156 (PC) that, where a colony may validly enact laws that have an incidental extraterritorial effect necessary to the effectiveness of the laws operating within the colony, a state’s territory is increased thereby.
Mowat v McFee (1880), 5 Can SCR 66 is distinguishable on its facts as the Court was dealing with an Imperial statute setting boundary lines with respect to the waters of the Bay of Chaleur. The statute was held to have had the effect of making the entire Bay part of Canadian waters after Confederation.
Similarly the Judicial Committee of the Privy Council, in The Direct United States Cable Company v The Anglo-American Telegraph Company (1877), 2 App Cas 394 at 397, held that Imperial legislation, designed to reinforce an 1818 fisheries treaty with the United States, had had the same effect for Conception Bay, adjacent to Newfoundland. Lord Blackburn, speaking for the Judicial Committee, at 420-421 observes:
... the British Government has for a long period exercised dominion over this bay, and that their claim has been acquiesced in by other nations, so as to shew that the bay has been for a long time occupied exclusively by Great Britain, a circumstance which in the tribunals of any country would be very important. And moreover (which in a British tribunal is conclusive) the British Legislature has by Acts of Parliament declared it to be part of the British territory, and part of the country made subject to the Legislature of Newfoundland.
To establish this proposition it is not necessary to go further back than to the 59 Geo 3, c 38, passed in 1819, now nearly sixty years ago.
There was a Convention made in 1818 between the United States and Great Britain relating to the fisheries of Labrador, Newfoundland, and His Majesty's other possessions in North America, by which it was agreed that the fishermen of the United States should have the right to fish on part of the coasts (not including the part of the island of Newfoundland on which Conception Bay lies), and should not enter any “bays” in any part of the coast except for the purposes of shelter and repairing damages, and purchasing wood, and obtaining water, and no other purposes whatever. It seems impossible to doubt that this Convention applied to all bays, whether large or small, on that coast, and consequently to Conception Bay. It is true that the Convention would only bind the two nations who were parties to it, and consequently that, though a strong assertion of ownership on the part of Great Britain, acquiesced in by so powerful a state as the United States, the Convention, though weighty, is not decisive. But the Act already referred to, 59 Geo 3, c 38, though passed chiefly for the purpose of giving effect to the Convention of 1818, goes further.
It enacts not merely that subjects of the United States shall observe the restrictions agreed on by the Convention, but that all persons, not being natural-born subjects of the King of Great Britain shall observe them under penalties. And in particular, by sect 4, it enacts that if “any person" upon being required by the governor, or any officer acting under such governor, in the execution of any order or instructions from His Majesty in Council, shall inter alia refuse to depart from such bays, he shall be subject to a penalty of £200.
No stronger assertion of exclusive dominion over these bays could well be framed. As has been already observed, Conception Bay is in every sense of the words a bay within Newfoundland, though of considerable width; and as there is nothing to justify a construction of the Act limiting it to bays not exceeding any particular width, this is an unequivocal assertion of the British Legislature of exclusive dominion over this bay as part of the British territory. And as this assertion of dominion has not been questioned by any nation from 1819 down to 1872, when a fresh Convention was made, this would be very strong in the tribunals of any nation to shew that this bay is by prescription part of the exclusive territory of Great Britain. As already observed, in a British tribunal it is decisive.
The Supreme Court of Canada in Reference re Offshore Mineral Rights of British Columbia 1967, supra, considered the Direct United States Cable Company, supra, decision and concluded, at 809, that the case turned on the fact that “... there was legislation of the Imperial Parliament . . . which asserted exclusive dominion over the Bay.”
Returning to the case at bar, and with respect, I am unable to transpose the principles of the Direct United States Cable Company case to the situation of the very recent, and still uncertain, phenomenon of the 200 mile fishing zone (or EEZ) and section 255 of the Income Tax Act.
Given all of the above, and notwithstanding that the circumstances of the case involve a domestically owned and operated vessel processing its catch of fish beyond Canada’s 12-mile territorial sea but within Canada’s 200-mile fishing zone, section 255 of the Income Tax Act, when read in its ordinary and grammatical sense, extends Canada’s fiscal configuration to the 12-mile limit and beyond only to the extent and for the purposes as therein stated.
In my view, and giving full regard to the obvious economic policy objectives of the incentive provisions at hand, to hold otherwise would be equivalent to judicial legislation. The remedy can only be through Parliament.
Appeal dismissed.