Imperial Oil v. Canada, 2007 FC 464

 

 

 

Date: 20070502

Docket: T-1920-04

Citation: 2007 FC 464

Ottawa, Ontario, May 2, 2007

PRESENT:     The Honourable Mr. Justice O'Keefe

 

 

BETWEEN:

IMPERIAL OIL, a partnership of

Imperial Oil Limited and

McColl Frontenac Petroleum Inc.

Plaintiff

and

 

HER MAJESTY THE QUEEN

Defendant

 

REASONS FOR JUDGMENT AND JUDGMENT

 

O’KEEFE J.

 

[1]               This is an appeal pursuant to subsection 81.22(2) of the Excise Tax Act, R.S.C. 1985, c. E-15, (the Act). The plaintiff is challenging a decision of the Minister of National Revenue (the Minister) denying the plaintiff a refund of excise tax remitted upon the sale of fuel oil.

 

[2]               The plaintiff requests that:

(a)    the appeal be allowed;

(b)   the matter be referred back to the Minister for processing on the basis that the plaintiff is entitled to a refund of the excise tax on the fuel oil in the amount of $100,280.00; and

(c)    costs of this action.

 

[3]               The defendant requests that this action be dismissed with costs.

 

Background

 

[4]               The plaintiff, Imperial Oil, is licensed as a manufacturer or producer of fuel oil under the provisions of Parts III and IV of the Act. The defendant is Her Majesty the Queen, as represented by the Minister of National Revenue (Canada Revenue Agency since December 12, 2005).

 

[5]               The plaintiff’s business includes the sale of gasoline and diesel fuel. The plaintiff sells these products through Esso service stations and other dealers across Canada. Gasoline and diesel fuel are also available at cardlock sites, where customers use a card to purchase fuel directly. Gasoline and diesel fuel purchased at service stations is generally used in the internal combustion engines of vehicles. The products sold by the plaintiff at its service stations or cardlock facilities are not marketed as heating oil. The plaintiff does not store the products it markets as heating oil separately from diesel fuel. Gasoline is stored separately from diesel fuel.

 

[6]               The diesel fuel which is the subject matter of this action (the disputed fuel) was sold from February 15, 1998 to February 15, 2000 (the relevant time period), by the plaintiff to Canada Safeway Limited. The sale price of the disputed fuel charged to Safeway included an amount of excise tax levied pursuant to subsection 23(1) of the Act. The plaintiff remitted excise tax to the defendant on its sale of the disputed fuel to Safeway.

 

[7]               During the relevant time period, Safeway purchased the disputed fuel from the plaintiff through both the cardlock system and bulk deliveries to tank facilities at the Calgary and Edmonton Safeway terminals. The disputed fuel sold to Safeway was suitable for use in internal combustion engines of the compression-ignition type. There was no discussion between the plaintiff and Safeway during the relevant period, regarding the use of the fuel prior to its purchase with respect to both cardlock and bulk purchases. The plaintiff accounted for the disputed fuel sold to Safeway as diesel fuel.

 

[8]               In the course of its business, Safeway transports food in climate-controlled transport trailers.  Safeway used the disputed fuel in the operation of integrated temperature control systems in its trailers. The trailers are used to protect food while in storage or transport by either heating or cooling it. The integrated temperature control system is a separate unit made up of five integrated components:

(1)   an internal combustion diesel engine of the compression-ignition type, with its own fuel tank;

(2)    a mechanically driven refrigerant compressor;

(3)   an evaporator;

(4)   a condenser; and

(5)   a thermostat and temperature control computer with associated control valves and sensors.

 

[9]               The disputed fuel sold by the plaintiff to Safeway at the cardlock facility was pumped into a separate tank on the trailers. A portion of the diesel fuel purchased by bulk delivery to the plaintiff’s tank facilities was pumped into a separate tank on the trailers, which fuel became a component of the disputed fuel. Disputed fuel pumped into the tanks on the trailers was used exclusively to power the internal combustion engine that was part of the integrated temperature control system on the trailers. The tractors used to pull the trailers have separate fuel tanks.

 

[10]           The disputed fuel is combusted in an internal combustion engine of the compression-ignition type, which in turn drives a compressor. The compressor heats the refrigerant by the act of compression. The compressed and heated refrigerant is then available to be used in different modes, depending on whether the trailer is to be heated or cooled. This is a function of the ambient temperature and the product being transported or stored. The heating and cooling process is controlled by the thermostat and computer control on the temperature control system. For trailer cooling, the heated refrigerant flows through a condenser to release heat to the external atmosphere.  The condensed refrigerant then flows to the evaporator where it is converted back to a vapour, providing cooling for the trailer. For trailer heating, hot refrigerant can be controlled to bypass the condenser and channelled to the evaporator, where it will heat the trailer. 

 

[11]           The disputed fuel purchased from the plaintiff by Safeway was not used with any type of oil-burning equipment to produce an open flame. The disputed fuel was used in internal combustion engines of the compression-ignition type, which did not produce an open flame. Rather, the burning of the fuel occured in a combustion chamber. 

 

[12]           On March 3, 2000, the plaintiff applied for a refund of excise tax allegedly paid in error under the Act on the disputed fuel sold to Safeway, by filing a form N15 with the defendant. The basis of the refund claim was that the disputed fuel was exempt from excise tax under Part III or any other provision of the Act, in that the fuel oil was used as “heating oil” within the meaning of the Act. The refund claim covered the time period of February 15, 1998 to February 15, 2000.

 

[13]           The plaintiff’s refund application was denied by notice of determination number N-O5E-1747, dated April 5, 2000. The plaintiff filed a notice of objection in response. The plaintiff appealed the defendant’s decision by filing a statement of claim in the Federal Court, on October 28, 2004.

 

[14]           The defendant published Excise Taxes and Special Levies Notice ET/SL-058, which reflects the defendant’s end-user refund policy in the period of the refund claims in this action. The defendant’s current policy with respect to the interpretation of the term “heating oil” under the Act is set out in ET/SL Policy Statement EP-001. The following are summaries of the notice and policy statement:

 

Excise Taxes and Special Levies Notice ET/SL-058

 

·        If at the time of purchase, the use of the goods was known to be for an excise-tax exempt purpose, the goods must be purchased exempt of excise tax by furnishing an excise tax exemption certificate or other acceptable documentation to the supplier; or

 

·        If at the time of purchase, it was not possible to determine the use of the goods, or the goods had both excise tax-exempt and taxable uses, the goods must be purchased on an excise tax-paid basis.  The purchaser can file an end-user refund claim directly with the CRA for the portion of the goods that was used under exempt conditions.

 

Under no circumstances should licensed manufacturers or wholesalers provide partial excise tax exemptions for goods.  Goods must be sold either on a 100% excise tax-paid or tax-exempt basis.

 

ET/SL Policy Statement EP-001

 

·        CCRA’s position is that the term “heating oil” means: any fuel oil for use in oil-burning equipment for the generation of heat for domestic or industrial purposes.

 

·        CRRA construes the term “oil-burning equipment” to mean: any liquid-fuel-burning device that contains a burner to produce an open flame but does not include internal-combustion engines.

 

·        CCRA maintains its policy of examining how fuel oil is manufactured and marketed in determining the intended use of the fuel.

 

·        CCRA maintains its policy of examining the end-use of fuel in determining the actual use of fuel oil.

 

 

[15]           The parties agreed that should this Court determine that the plaintiff is entitled to a refund of excise tax, the matter is to be returned to the Agency to determine the quantum of the refund.

 

Issues

 

[16]           The plaintiff submitted the following issues for consideration:

1. Does the burning of fuel oil in an internal combustion engine to power a compressor which heats the refrigerant used in the temperature control units in transport trailers constitute the fuel being “heating oil” for the purposes of the Excise Tax Act?
2. Alternatively, does the burning of fuel oil in an internal combustion engine in the course of operation of temperature control units on transport trailers result in the fuel being “heating oil” for the purposes of the Excise Tax Act for the period when the temperature control unit is heating the transport trailer?

 

[17]           The defendant submitted the following issues for consideration:

1. Does the fuel oil produced by the plaintiff and sold to Safeway fall within the definition of “diesel fuel” specified at subsection 2(1) of the Excise Tax Act?  Specifically, 

a)      was the fuel oil sold to Safeway intended to be used as heating oil? and,

b)      was the fuel oil sold to Safeway actually used as heating oil?

 

Plaintiff’s Allegations

 

[18]           The parties have consented to the disclosure of their pre-trial conference memoranda. The following is a summary of the plaintiff’s allegations as found in the statement of claim and pre-trial conference memorandum.

 

[19]           The plaintiff alleges that the fuel oil sold to Safeway was not subject to excise tax under subsection 23(1) of the Act since it was used as heating oil. The plaintiff submits that the fuel oil was used in order to produce heat to operate the integrated temperature control systems in Safeway’s trailers. The temperature control systems are used to protect food while in storage or in transport. The plaintiff alleges that Safeway’s use of the fuel oil in the operation of climate-controlled units used on transport trailers qualified it as “heating oil” for the purposes of the excise tax imposed under subsection 23(1) of the Act, since the fuel oil was consumed for the purpose of heating.

 

[20]           The plaintiff attached two documents to its pre-trial conference memorandum:

(a)    “Transport Temperature Control Systems”, an instructional booklet published by Thermo King Corporation; and,

(b)   “Service Training – Basic Refrigeration”, an instructional booklet published by Carrier Corporation.

 

Defendant’s Allegations

 

[21]           The following is a summary of the allegations found in the defendant’s statement of defence and pre-trial conference memorandum.

 

[22]           The defendant alleges that the plaintiff produces many different types of petroleum products, including automotive diesel and heating oil intended for use in furnaces (heating diesel).  It is submitted that the plaintiff sells automotive diesel at gas pumps, while heating diesel is delivered by Esso Home Comfort trucks. The defendant claims that the plaintiff does not sell heating diesel at its gas stations. The defendant also states that the plaintiff keeps a separate accounting system for automotive diesel and heating diesel. The defendant alleges that the fuel sold to Safeway was automotive diesel, sold at gas pumps, not heating diesel, delivered by Esso Home Comfort Trucks.

 

[23]           The defendant notes that the Federal Court has confirmed that the definition of “diesel fuel” in subsection 2(1) of the Act creates a two-step sequential test. First, the Court must determine whether the plaintiff knew at the time of sale whether Safeway intended to use the fuel as heating oil. The defendant submits that if the parties did not intend to use the fuel as heating oil, then the action must fail. Second, if the Court finds that the parties intended that the fuel oil sold to Safeway be used as heating oil, the Court must decide whether Safeway actually used it as heating oil.  In W.O. Stinson & Son Ltd. v. Canada (Minister of National Revenue), (2005) 281 F.T.R. 307, 2005 FC 1427, Justice Beaudry stated that the two-step test (intended use and actual use) was not simultaneous, since manufacturers would almost always be unable to ensure that the fuel sold was actually used for the intended purpose of customers.

 

[24]           The defendant alleges that the fuel oil sold to Safeway falls within the statutory definition of “diesel fuel” as set out in subsection 2(1) of the Act, as it was not intended to be used as heating oil, nor was it actually used as such. The defendant alleges that the fuel in question was automotive diesel, sold at gas pumps, not heating oil. The defendant states that it is clear that the plaintiff and Safeway did not intend the automotive diesel to be used as heating oil. In addition, the defendant alleges that the fuel used in the operation of the climate-controlled units on Safeway’s trailers was not actually used as heating oil.

 

[25]           It is submitted that the plaintiff’s status as a manufacturer or producer of the disputed fuel oil rendered the plaintiff liable to pay excise tax upon the fuel oil pursuant to subsection 23(1) and Schedule I, section 9.1 of the Act. The defendant submits that the Act does not contain any provision that would exempt the plaintiff from the tax imposed on fuel oil by the Act. It is submitted that the Act does not exempt a producer from its obligation to pay tax simply because the fuel oil was sold to operate equipment that produces heat when the fuel oil is not “heating oil”.

 

[26]           The defendant alleges that the plaintiff did not commit any error when it paid and remitted excise tax on the fuel oil and therefore is not entitled to any refund pursuant to the Act.

 

Analysis and Decision

 

[27]           The issue to be determined in this case is whether the disputed fuel sold to Safeway by the plaintiff falls within the exception contained in the definition of diesel fuel, in that it is fuel oil that was intended for use and actually used as heating oil.  If the disputed fuel is found to be heating oil, then it would be exempt from excise tax. An exercise in statutory interpretation will be necessary in order to determine whether the disputed fuel is “heating oil” under subsection 2(1) of the Act.

 

[28]           In Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, (1998) 154 D.L.R. (4^th) 193, Justice Iacobucci wrote at page 40:

Although much has been written about the interpretation of legislation (see, e.g., Ruth Sullivan, Statutory Interpretation (1997); Ruth Sullivan, Driedger on the Construction of Statutes (3rd ed. 1994) (hereinafter "Construction of Statutes"); Pierre-André Côté, The Interpretation of Legislation in Canada (2nd ed. 1991)), Elmer Driedger in Construction of Statutes (2nd ed. 1983) best encapsulates the approach upon which I prefer to rely.  He recognizes that statutory interpretation cannot be founded on the wording of the legislation alone.  At p. 87 he states:

Today there is only one principle or approach, namely, 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.

 

Recent cases which have cited the above passage with approval include: R. v. Hydro-Québec, [1997] 1 S.C.R. 213; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Verdun v. Toronto-Dominion Bank, [1996] 3 S.C.R. 550; Friesen v. Canada, [1995] 3 S.C.R. 103.

 

[29]           The Supreme Court of Canada has ruled that all statutes, including taxing statutes, “must be interpreted in a textual, contextual and purposive way.” (see Canada Trustco Mortgage Co. v. Canada [2005], 2 S.C.R. 601, 2005 SCC 54 at paragraph11). This approach is therefore applicable to the interpretation of the provisions of the Excise Tax Act. It is useful to reproduce paragraphs 10 and 11 of Canada Trustco:

10.      It has been long established as a matter of statutory interpretation 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": see 65302 British Columbia Ltd. v. Canada,  [1999] 3 S.C.R. 804, at para. 50. The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.

 

11.      As a result of the Duke of Westminster principle (Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)) that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable, Canadian tax legislation received a strict interpretation in an era of more literal statutory interpretation than the present. There is no doubt today that all statutes, including the Act, must be interpreted in a textual, contextual and purposive way. However, the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation. Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe.

 

[30]           Subsection 23(1) of the Act provides that excise tax shall be imposed, levied and collected upon goods listed in Schedule I, when they are produced or manufactured in Canada and delivered to a purchaser. By virtue of section 9.1 of Schedule I, a tax of $0.04 per litre is imposed on diesel fuel. Subsection 2(1) states that “diesel fuel” includes any fuel oil suitable for use in internal combustion engines of the compression-ignition type, unless the fuel oil was intended for use and actually used as heating oil.  Once excise tax is paid on the sale of diesel fuel, an application may subsequently be made for a refund of the tax paid upon the portion of the fuel which qualifies as heating oil.

 

[31]           The Act does not define the term “heating oil.” As a result, the legislative intent behind the use of the term “heating oil” must be determined.

 

[32]           The legislative background with respect to the imposition of a tax on diesel fuel, can be found in the following documents: “Budget in Brief”, December 11, 1979 and the House of Commons Debates for December 11, 1979.  (See House of Commons Debates, 2 (ll December, 1979) at 2259 (Hon. John Crosbie)).

Budget in Brief, December 11, 1979;

 

To promote conservation and raise revenues, an excise tax of 25 cents a gallon on all transportation fuels is levied immediately. . . .

 

Oil for heating will remain tax-exempt.

 

                                                                        (Emphasis Added)

 

House of Commons Debates for December 11, 1979:

 

Because of the absolute necessity of further encouraging our people to use fewer oil products, to conserve oil products now having to be imported in ever larger quantities and at ever greater prices as our own domestic supplies dwindle, and in order to raise badly needed revenues for the Government of Canada in a manner that also serves another vital national purpose, an excise tax of 25 cents per gallon is imposed on gasoline, diesel and other transportation fuels effective tonight…. This tax will not apply to heating oil in the home or elsewhere…. The tax will apply to all users of transportation fuels and will replace the current tax of 7 cents a gallon on gasoline which applied only to non-commercial users. . . .

 

                                                                        (Emphasis Added)

 

 

It would appear from these excerpts that the purpose of the change was to encourage a reduction in the  use of fuel for transportation purposes.

 

[33]           Historically, the Canada Customs and Revenue Agency (CCRA) interpreted the term “heating oil” to mean:

Any fuel oil for use in heating homes, buildings or other rooms (or structures that are regularly or habitually occupied by persons or whose primary function or purpose is to house equipment or goods, but where persons would be present, at least from time to time.

 

 

[34]           As a result of a decision of the Canadian International Trade Tribunal in November 2000, the CRRA, in its policy statement dated April 29, 2002, changed its definition of “heating oil” to mean:

. . . any fuel oil for use in oil-burning equipment for the generation of heat for domestic or industrial purposes.

 

Furthermore, the CCRA construes the term “oil-burning equipment” to mean,

 

…any liquid-fuel-burning device that contains a burner to produce an open flame but does not include internal combustion engines.

 

 

[35]           The definition of diesel fuel contained in subsection 2(1) of the Act does not state that fuel oil used in internal combustion engines of the compression-ignition type cannot be heating oil.  Rather, it states that fuel oil that is suitable for use in internal combustion engines of the compression-ignition type other than fuel oil that is intended for use and is actually used as heating oil, is included in the definition of diesel fuel.  I do not believe that the definition precludes fuel oil  used in an internal combustion engine of the compression-ignition type from being considered heating oil in the appropriate circumstance. While I acknowledge that the CCRA’s definition of heating oil excludes diesel fuel used in internal-combustion engines, I would again note that there is nothing in the definition of diesel fuel found in subsection 2(1) of the Act that precludes fuel oil burned in an internal combustion engine of the compression-ignition type from being considered heating oil if it is intended for use and is actually used as heating oil.

 

[36]           In the present case, the trailer which contains goods is heated by hot refrigerant being passed through the trailer. The refrigerant is heated by a compressor which is powered by the burning of fuel oil in an internal combustion engine of the compression-ignition type both of which are part of the temperature control system.

 

[37]           The heated coolant can also be used to cool the trailer.

 

[38]           The CCRA’s definition of heating oil speaks of the generation of heat for domestic or industrial purposes.  I am of the opinion that the burning of the disputed fuel in order to heat the refrigerant constitutes the generation of heat for an industrial purpose.  Thus the disputed fuel is heating oil, and is not considered to be diesel fuel for the purposes of the Act.  I am fortified in this conclusion by the stated intention of Parliament when the tax on diesel fuel was imposed.  It was stated that the tax was to be applicable to “all transportation fuels” and that it would apply to all “users of transportation fuels”.  It was further stated that the tax would not apply to “heating oil in the home or elsewhere”.  Parliament could have limited the meaning of heating oil to heating oil used to heat homes but it did not.  Instead, it stated that diesel fuel did not include fuel oil used as heating oil.  It is therefore the intended and actual use of the fuel oil that is relevant.

 

[39]           The burning of fuel oil in the internal combustion engine of the temperature control unit is not use as a transportation fuel, as its sole purpose is to power the compressor to produce heat in order to heat the refrigerant.

 

[40]           Finding that diesel fuel burned in internal combustion engines of the compression-ignition type could be heating oil does not resolve the matter. The diesel fuel or fuel oil must have been intended for use and actually used as heating oil in order to be exempt from excise tax.

 

[41]           I am satisfied that Safeway intended to use a portion of the diesel fuel as heating oil at the time of purchase. George McLaine, a witness for the plaintiff, testified that a portion of the diesel fuel purchased by Safeway from the plaintiff was used for the “reefer units” which are the temperature control units in the trailers. Consequently, I find that Safeway intended to use a portion of its diesel fuel as heating oil and that this portion constituted the disputed fuel.

 

[42]           I am also satisfied that a portion of the purchased diesel fuel was actually used as heating oil. George McLaine testified that between 24% and 26% of the purchased diesel fuel was used in the temperature control units.  This is the disputed fuel.

 

[43]           In reaching my decision, I have considered the arguments that the plaintiff delivers heating oil to customers as home heating products, therefore, none of the disputed fuel is heating oil. I do not accept these arguments.

 

[44]           As a result of my conclusions, the appeal must be allowed. The disputed fuel is considered to be heating oil and not subject to tax. The matter is referred back to the Minister for processing on this basis.

 

[45]           The plaintiff shall have its costs of the appeal.

 

JUDGMENT

 

[46]           THIS COURT ADJUDGES that:

1.         The appeal is allowed and the disputed fuel is not subject to excise tax and the matter is referred back to the Minister for processing on this basis.

            2.         The Plaintiff shall have its costs of the appeal.

 

 

                                                                                                            “John A. O’Keefe”

ANNEX

 

Relevant Statutory Provisions

 

Relevant provisions of each act are set out below.

 

The Excise Tax Act, R.S.C. 1985, c. E-15:

 

 

Schedule I (Section 23)

 

9.1       Diesel fuel and aviation fuel, other than aviation gasoline, $0.04 per litre.

 

 

 

 

 

 

 

 

 

 

 

 

 

FEDERAL COURT

 

SOLICITORS OF RECORD

 

 

 

DOCKET:                                          T-1920-04

 

STYLE OF CAUSE:                          IMPERIAL OIL, a partnership of

                                                            Imperial Oil Limited and

                                                            McColl Frontenac Petroleum Inc.

 

                                                            - and -

 

                                                            HER MAJESTY THE QUEEN

 

PLACE OF HEARING:                    Calgary, Alberta

 

DATE OF HEARING:                      November 6, 2006

 

REASONS FOR JUDGMENT

AND JUDGMENT:                          O’KEEFE J.

 

DATED:                                             May 2, 2007

 

 

 

APPEARANCES:

 

H. George McKenzie, Q.C.	FOR THE PLAINTIFF
Michael Roach Richard Casanova	FOR THE DEFENDANT

 

SOLICITORS OF RECORD:

 

Felesky Flynn LLP	FOR THE PLAINTIFF
John H. Sims, Q.C. Deputy Attorney General of Canada	FOR THE DEFENDANT