Consumers’ Gas Co. et al. v. Deputy Minister of National Revenue for Customs and Excise, [1976] 2 SCR 640

Supreme Court of Canada

Consumers’ Gas Co. et al. v. Deputy Minister of National Revenue for Customs and Excise, [1976] 2 S.C.R. 640

Date: 1975-10-07

The Consumers’ Gas Company and others Appellants;

and

The Deputy Minister of National Revenue for Customs and Excise Respondent.

1975: April 29; 1975: October 7.

Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Taxation—Sales tax—Exemptions—Apparatus used in the manufacture or production of goods—Gas pressure regulators not exempt—Excise Tax Act, R.S.C. 1970, c. E-13, Sch. III, Part XIII, para. 1(a).

Section 29(1), read in conjunction with Sch. III, Part XIII, para. 1(a) of the Excise Tax Act, R.S.C. 1970, c. E-13, provides that machinery and apparatus sold to or imported by manufacturers for use by them in the manufacture or production of goods are not subject to the consumption or sales tax imposed by s. 27. The question arose before the Tariff Board and the Federal Court as to whether the operation of gas pressure regulators was different from that of transformers and therefore not embraced by the Hydro-Québec case, [1970] S.C.R. 30, which held that electrical transformers were exempt from sales tax as apparatus used “in the manufacture or production of goods.” The Board and the Federal Court considered the operation of the gas pressure regulators as different since they merely take the gas from higher to lower pressure pipes while transformers produce a new current at a different voltage.

Held (Laskin C.J. and Ritchie, Spence and de Grandpré JJ. dissenting): The appeal should be dismissed.

Per Martland, Judson, Pigeon, Dickson and Beetz JJ.: While the economic function of the gas pressure regulators was similar to that of the electricity transformers, in the Hydro‑Québec case the Tariff Board and the Courts did not depart from the principle that “manufacture or production” do not include distribution but held transformers exempt solely because their operation was held to be “production”. The pressure regulators, as

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apparatus merely controlling the flow of gas in pipes, cannot be considered as used in the “production of gas” within the usual meaning of these words.

Per Laskin C.J. and Ritchie, Spence and de Grandpré JJ. dissenting: The words of para. 1(a)(i) of Part XIII of Sch. III i.e. “the manufacture or production of goods” have been taken throughout as synonymous, however the use of the disjunctive “or” requires that they be given a separate and different meaning. It is possible to qualify for the exemption on the basis of ‘production of goods’ even if they were manufactured elsewhere. Whether the alteration of electrical current in the Hydro-Québec case or the lowering of the pressure by gas regulators may be characterized as “manufacture” or not, both processes should be characterized as “production”. The gas regulators bring into existence “goods” usable and marketable to the consumer, an integral part of production of commodities such as gas or electricity.

[Hydro-Québec v. Dep. Min. of Nat. Revenue for Customs and Excise, [1970] S.C.R. 30 referred to.]

ON APPEAL from a decision of the Federal Court of Appeal[1] dismissing an appeal from a decision of the Tariff Board that gas regulators were not exempt from the consumption or sales tax assessed by s. 27 of the Excise Tax Act. Appeal dismissed, Laskin C.J. and Ritchie, Spence and de Grandpré JJ. dissenting.

A. de L. Panet, and David B. Daubney, for the appellants.

S.M. Froomkin and P.J. Evraire, for the respondent.

The judgment of Laskin C.J. and Ritchie, Spence and de Grandpré JJ. was delivered by

SPENCE J. (dissenting)—This is an appeal from the judgment of the Federal Court of Appeal pronounced on October 10, 1972, by which judgment the Court, with the Associate Chief Justice dissenting, dismissed an appeal from a declaration of the Tariff Board made on April 5, 1972.

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The appellant Consumers’ Gas Company had applied to the Tariff Board for a declaration under what is now s. 59 of the Excise Tax Act, R.S.C. 1970, c. E-13, that the regulators, with which I shall deal hereafter, were exempt from the consumption or sales tax assessed by s. 27 of the Excise Tax Act. Section 29(1) of the Excise Tax Act provides:

29. (1) The tax imposed by section 27 does not apply to the sale or importation of the articles mentioned in Schedule III.

and Schedule III, in Part XIII, s. 1(a), provides:

1. All the following:

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

(i) the manufacture or production of goods,

…

The appellant Consumers’ Gas Company, together with other intervenants in the application for a declaration by the Tariff Board, is engaged in the operation of gas utility systems. The appellant Consumers’ Gas Company manufactures or produces and distributes natural gas which it obtains in a small part from its own wells in Lake Erie and in the large part by purchase from the Trans Canada Pipelines Limited. The distribution is made to residential, commercial, industrial and other customers in Ontario, Quebec and parts of the Eastern United States.

The natural gas as received from Trans Canada Pipelines is delivered at a pressure of 400 to 1,000 pounds per square inch (p.s.i.g.) and the natural gas which it receives from its own wells in Lake Erie is received at a pressure of 600 to 800 p.s.i.g. Natural gas at such pressure is not marketable to either residential or industrial customers. It is, however, most efficiently transported through pipelines at these very high pressures. Upon arrival of the natural gas in the appellant’s pipelines at a point near an urban distribution area, it is piped through a “gate station”. There, in addition to other treatment such as heating to prevent freezing on depressurization and the addition of an odour to permit detection of leaks, the pressure is reduced

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by passing through an apparatus which is known as a regulator. This first regulator installed at the gate station reduces the pressure to about 400 p.s.i.g. and then as the gas approaches the ultimate user it passes through a number of other similar regulators so that when the gas arrives at the residence of the consumer the pressure is reduced to about one-quarter p.s.i.g. and at the place of certain industrial customers to five to ten p.s.i.g.

It is the contention of the appellant Consumers’ Gas Company and of the other intervenants that these regulators are exempt from sales tax under the provisions of s. 29 of the Excise Tax Act in that they are apparatus sold to or imported by manufacturers or producers for use by them directly in the manufacture or production of goods. The Deputy Minister denies this contention.

The unanimous judgment of the Tariff Board was that the appellants were not entitled to such exemption. Two of the three members of the Board, but not the Chairman, were also of the opinion that the appellants were not manufacturers or producers within the meaning of those words in the said para. 1 of Part XIII of the Schedule.

Upon the appeal to the Federal Court of Appeal, the Deputy Minister did not support this latter opinion and the sole question before the Federal Court of Appeal was whether or not the regulators were apparatus used in the manufacture or production of goods. Counsel agreed that the regulators were apparatus and counsel also agreed that natural gas was a “goods”. Indeed, natural gas appears in Sch. III in Part VI under the heading “Fuels and Electricity” as para. 7.

The appeal to the Federal Court of Appeal is by virtue of s. 60 of the Excise Tax Act which in subsection (1) permits an appeal “upon any question that in the opinion of the court or judge is a question of law”. The majority of the Federal Court of Appeal was of the view that the decision of the Tariff Board in refusing to make the declaration requested was one of fact and that no

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appeal lay therefrom but continued to express the opinion that if the appeal did involve a question of law it should be decided against the appellants.

The Associate Chief Justice, Noël, treated the appeal as one from a decision of the Board in which an erroneous test or principle had been applied and which amounted to a misdirection in law. Both the majority of the Federal Court of Appeal and the Associate Chief Justice quoted and relied on the decision of this Court in Canadian Lift Truck Co. Ltd. v. Deputy Minister of National Revenue for Customs and Excise[2], where Kellock J. said at p. 498:

While the construction of a statutory enactment is a question of law, and the question whether a particular matter or thing falls within the legal definition is one of fact, nevertheless if it appears to the appellate Court that the tribunal of fact has acted either without evidence or that no person properly instructed as to the law and acting judicially could have reached the particular determination, the Court may proceed on the assumption that a misconception of law has been responsible for the determination.

In my view, the facts in the particular appeal are not in any way contradicted and the task of the Tariff Board, of the Federal Court of Appeal, and of this Court is simply to interpret the provisions of para. 1(a)(i) of Part XIII of the Excise Tax Act and apply that interpretation to those facts. I have no doubt that this is a question of law and that the appellants had an appeal as of right to the Federal Court of Appeal. The appellants were granted leave to appeal to this Court.

The Tariff Board was concerned with its decision, subsequently approved in the Exchequer Court and in this Court, in Hydro-Québec v. Deputy Minister of National Revenue for Customs and Excise[3]. There, exactly the same issue was in question as to the apparatus known as transformers. Again, the appellant was a distribu-

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tor of electric current and this current arrived at the distribution lines of the appellant at a very high voltage and by a series of voltage reductions in transformers was reduced to a voltage suitable for domestic and industrial uses. The Tariff Board held that the transformers used in such voltage reduction process were machinery or apparatus used in the manufacture or production of goods. In arriving at its decision, the Board noted that the operation of such transformers resulted in one electric current entering the apparatus on a primary circuit and a new and different electric current leaving the transformer from a secondary circuit having been produced by the process of induction without any physical connection between the current in the primary circuit and the lower voltage current in the secondary circuit but the Board continued:

To the Board, the principles established in these cases appear applicable to the issue between the parties in this appeal. The electrical energy produced by the applicant is not a commodity which is ordinarily used by or sold to its customer until it has been transformed; it exists, prior to such transformation, in a form which is not generally marketable because it is unsuited for the use of most customers. The action of transformers such as the applicant’s, whether or not it produces an electricity new and separate from that in the primary circuit, has been held to be a productive or manufactory action in both the case of City of Louisville v. Howard and the case of Curry v. Alabama Power cited above.

Because it is the transformation in issue that turns the electrical energy into a form that can be used by the customer, this transformation must be considered to be part of the manufacture and production of electricity. Because the transformation of voltage is done exclusively in the transformers and by the transformers, they are apparatus sold to or imported by the applicant for use by it directly in the manufacture or production of goods.

So, it is apparent that the Tariff Board in coming to that decision which, as I have noted, was confirmed in the Exchequer Court and again in this Court, relied not only on the fact that a different current resulted from the process but that

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the alteration turned the electrical energy into a form that could be used by the consumer and that, therefore, that alteration must be considered to be part of the manufacture and production of electricity.

The Tariff Board, in the present appeal, purported to distinguish that decision from the present situation. Now, in the first place, it should be noted that the thing produced in each case, i.e., the electric current going to consumers and the natural gas going to consumers, is in direct competition and it would be a most unfortunate result if the statute were interpreted so that one competitor had the advantage of a considerable reduction in the price that it must charge its customers by the exemption from sales tax. It also must be considered that the alteration wrought by the apparatus is exactly the same in each case. The transformers reduce a current from a very high voltage and therefore a very low amperage to a current with a much smaller voltage and therefore a higher amperage. The amount of energy is measured in watts and watts are simply the multiple of the voltage by the amperage. The watts remain constant throughout the process so that any reduction in the one element must result in an increase in the other element.

In the case of natural gas, the British Thermal Units (BTU’s) remain constant and the regulators simply reduce the pressure.

The Tariff Board, in the present appeal, in distinguishing the Hydro-Québec case, referred to volts and amperage as being “constituent elements” of the electrical current and supported its distinction from that decision on the basis that the constituent elements had been altered. The Associate Chief Justice, in the present appeal, found such a distinction invalid as the voltage in the case of the electricity was simply a measure of pressure as is the p.s.i.g. in the present appeal, and he regarded that error as amounting to an erroneous test or principle which resulted in an error in law within the test stated by Kellock J. in Canadian Lift Truck which I have quoted above. I agree with this conclusion. It would seem to me that the apparatus

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in each case carried out essentially the same task: it alters, I avoid for the moment, the use of the words either “manufactures” or “produces”, “goods” from a form which is unmarketable to one which is useful and marketable to consumers.

It would appear to me that throughout the decision of the Tariff Board and that of the majority of the Federal Court of Appeal, the words of (i) of para. 1(a) of part XIII, i.e., “the manufacture or production of goods”, have been considered as if the word “manufacture” and the word “production” are synonyms and the statute merely contained a repetition. I am of the opinion, on the other hand, that the use of the conjunction “or” between these two words requires them to be given a separate and a different meaning and that it is quite possible to qualify for the exemption by proving that your goods are produced by you even if they were manufactured elsewhere. This point was well taken by McRuer C.J.H.C. in Gruen Watch Co. Ltd. v. Attorney General of Canada[4], where the Chief Justice was dealing with a situation where the Gruen Watch Company bought watch movements manufactured in Switzerland and watch cases manufactured elsewhere and, in what he described as

…a very simple operation performed by unskilled labour, taking only a very few minutes at an expense of from 1.25 to 3.6 cents each, the watch movement is placed in the case and a watch ready for sale is produced.

And at p. 442, he said:

I cannot find that the simple operation of putting a watch movement into a watch case is “manufacturing” a watch in the “ordinary, popular and natural sense” of the word, but I feel clear that the plaintiffs “produced” watches “adapted to household or personal use”. It may well be that, as counsel for the plaintiffs argued, the movement as imported in the tin or aluminum case will keep time and could be used as a watch. It is not a watch “adapted to household or personal use” as the term is used in its ordinary and popular sense, and the movement in the aluminum case would be quite unsaleable as such.

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This Court adopted that distinction in The Queen v. York Marble, Tile and Terrazzo Limited[5]. So, whether the alteration of the electrical current in the Hydro-Québec case or the lowering of the pressure by the regulators in the present appeal may be characterized as being manufacture, I would unhesitatingly characterize both processes as being production.

As Duff C.J. pointed out in The King v. Vandeweghe[6], at p. 248:

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

To indicate the lack of precision in the word “production”, I quote the Shorter Oxford Dictionary which describes the word “production” as

1. The action of producing; the fact or condition of being produced; an act of producing;

2. That which is produced; a thing that results from any action, process, or effort. A literary or artistic work.

And when one turns to the definition of the word “produce” in the same work, one finds as a definition

To bring forth, bring into being or existence. To bring (a thing) into existence from its raw materials or elements;

Considering the words of the paragraph in the exemption, I am of the opinion that the regulator does bring into existence a thing which has, by use of the regulator, become a “goods” usable and marketable to the consumer. In coming to this conclusion, I am influenced by the fact that natural gas, like electricity, is in a unique class of commodity and that in fact it is difficult to consider what else could be done with the gas than to alter the pressure under which it is held and that such alteration of pressure is requisite for the use of the natural gas in providing the fuel for domestic or industrial utilities. In the case of these unique commodities, the putting of the goods in a saleable condition is an integral part of the production.

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For these reasons, I would allow the appeal and direct that the Tariff Board issue a direction under the provisions of s. 59 of the Excise Tax Act declaring that the sale of the regulators was not subject to the consumption or sales tax imposed by s. 27 of the said Excise Tax Act. The appellants are entitled to their costs throughout.

The judgment of Martland, Judson, Pigeon, Dickson and Beetz was delivered by

PIGEON J.—The facts of this case are stated in the reasons of Spence J. which I have had the advantage of reading.

In my view, the Tariff Board and the Federal Court of Appeal were right in coming to the conclusion that the principle of the decision of this Court in the Hydro-Québec[7] case was not applicable. It was there held by the Tariff Board and affirmed by all Courts that electrical transformers were exempt from sales tax as apparatus used “in the manufacture or production of goods”. The judgment of the majority in this Court, as I read it, really is an endorsement of the findings of the Tariff Board the essential parts of which were quoted at length (pp. 32-34). In those findings, the key sentence is, in my view, the following (at p. 34):

…However the operation of a transformer is no mere transmission in the sense of causing the primary current to pass, go or be conveyed or conducted from the primary circuit to the secondary circuit.

(Emphasis added)

In that sentence the Board stated the reason for which transformers were, in its view, used in the manufacture and production of electricity as they further went on to say (at p. 34):

Because it is the transformation in issue that turns the electrical energy into a form that can be used by the customer, this transformation must be considered to be part of the manufacture and production of electricity.

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Because the transformation of voltage is done exclusively in the transformers and by the transformers, they are apparatus sold to or imported by the applicant for use by it directly in the manufacture or production of goods.

In my opinion, the Tariff Board and the Federal Court in the present case correctly considered the operation of gas pressure regulators as different from that of transformers since they merely cause the gas to pass, go, be conveyed or conducted from the higher pressure pipes to lower pressure pipes, instead of producing a new current at a different voltage which was the function of the transformers as it was seen in the Hydro-Québec case.

I do not disagree with the view that the economic function of the gas pressure regulators is similar to that of the electricity transformers. However, this is, I think, inconsistent with the decision in the Hydro-Québec case. The Tariff Board and the Courts did not there depart from the principle that “manufacture or production” do not include distribution. They held transformers exempt solely because their operation was held to be “production”. With respect for the other view, I cannot accept that apparatus controlling the flow of gas in pipes, which is all that pressure regulators do, can be considered as used in the “production of gas” within the usual meaning of those words.

I would dismiss the appeal with costs.

Appeal dismissed with costs, LASKIN C.J. and RITCHIE, SPENCE and DE GRANDPRÉ JJ. dissenting.

Solicitors for the appellants, Perley-Robertson, Panet, Hill & McDougall, Ottawa.

Solicitors for the respondent, D.S. Thorson, Ottawa.