Suncor Inc. v. R., [1996] 2 CTC 144

Hugessen J.A: — This is an appeal and a cross-appeal from a decision of the Trial Division which allowed in part claims by the respondent in respect of certain alleged overpayments of the tax imposed by section 23 of the Excise Tax Act R.S.C. 1985, c. E-13.

The The facts

The respondent is a synthetic crude oil producer which operates a production facility near Fort McMurray, Alberta. The production process at this facility involves extracting and treating oil sand (sometimes called “tar sand”) so as to transform the bitumen into three liquids: kerosene, gas oil and naphtha. The three liquids are then separately “unifined” (catalytically treated with hydrogen to remove gaseous products from the liquids) and stored in tanks. Finally, the three unifined liquids are recombined together to form synthetic crude oil.

Though the unifined kerosene produced by the respondent is primarily used to then produce synthetic crude oil, a portion of it is drawn off and either sold directly or utilized in equipment at the plant as fuel for diesel engines. The respondent has always paid the applicable excise tax on all unifined kerosene sold directly or used as diesel engine fuel.

However, a further portion of the unifined kerosene produced at the plant is also drawn off and transported back to the conveyer belt system which moves the oil sands from the mine area to the extraction plant. This unifined kerosene is sprayed on the conveyor belts to prevent the oil sands from sticking to the belts; the kerosene so used is known as “belt spray”. Though some of the belt spray is lost through evaporation and misting, a large portion of this sprayed kerosene is actually absorbed by the oil sands and then extracted again as product at the end of the production process.

The statutory provisions

The relevant statutory provisions [1] are as follows:

23(1) Whenever goods mentioned in Schedule I or II are imported into Canada or taken out of warehouse or manufactured or produced in Canada and delivered to a purchaser thereof, there shall be imposed levied and collected, in addition to any other duty or tax payable under this Act or any other Act or law, an excise tax in respect of those goods at the rate set opposite the applicable item in whichever of those Schedules is applicable computed, where that rate is specified as a percentage, on the duty paid value or the sale price, as the case may be.

(2) Where the goods are imported, the excise tax imposed by subsection (1) shall be paid by the importer or transferee who takes the goods out of bond for consumption at the time when the goods are imported or taken out of warehouse for consumption, and where the goods are manufactured or produced and sold in Canada, the excise tax shall be payable by the manufacturer or producer at the time of delivery of the goods to the purchaser thereof.

(4) Whenever goods mentioned in Schedule I are sold by a licensed wholesaler or are retained for his own use or for rental by him to others, there shall be imposed, levied and collected in addition to any other duty or tax payable under this Act or any other Act or law, an excise tax in respect of those goods at the rate set opposite the applicable item in that Schedule computed, where that rate is specified as a percentage, on the duty paid value or the price at which the goods were purchased by him, as the case may be, payable by him at the time the goods are delivered to the purchaser or so retained for use or rental.

(6) The tax imposed by subsection (1) is not payable in the case of goods mentioned in Schedule I that are purchased or imported by a licensed wholesaler for resale by him.

(7) The tax imposed by this section or by section 27 is not payable in the case of

(b) goods that are purchased or imported by a manufacturer licensed for the purposes of this Part and that are to be incorporated into and form a constituent or component part of an article or product that is subject to excise tax under this Act;

(10) When goods of any class mentioned in Schedules I and II are manufactured or produced in Canada and are for use by the manufacturer or producer thereof and not for sale, the goods shall, for the purposes of this Part, be deemed to have been delivered to a purchaser thereof, and the delivery shall be deemed to have taken place when the goods are used or appropriated for use, and the minister may determine the value of the goods for the tax.

The trial judgment

In a finding of fact based on his appreciation of the evidence before him, the trial judge determined that one third of the belt spray kerosene used by the respondent was lost while two thirds adhered to the oil sand and was reintroduced into the production process resulting in a correspondingly higher yield in the volume of unifined kerosene at the end of the process. That finding has not been put in issue on this appeal.

As a matter of law, the trial judge also found that the respondent was entitled to relief in respect of the belt spray kerosene which was thus reprocessed. He said:

I should find first of all that the plaintiff has made out its case for some kind of exemption on use of its kerosene for belt spray purposes. In its oil extraction process, some of that kerosene finds its way back into the product stream and results in a proportionately higher yield.

In my view, a finding that some relief is warranted does not run against the grain of the Excise Tax Act and its particular provisions dealing with exemptions. I agree that such exemptions are to be strictly interpreted and applied. My interpretation of section 23(7) of the Act leads me to conclude that the exemption provisions therein are clearly stated and clearly applicable to the case before me. If this provision is read in conjunction with section 23(10), which deals with the appropriation of goods by a producer for its own use, where the tax applies, it is logical to conclude that the kerosene in question is, to a certain degree at least, incorporated into and forms a constituent part of a product that is subject to excise duty and, as such, tax exempt. It also seems to me that the legislator’s intention was not to impose an excise duty more than once on any commodity or ingredient of materials which are later to be amalgamated, fused, joined, merged or transformed into a product which it taxable under the Act.

(Appeal Book, Reasons for Judgement, pages 156-57)

The appeals

Both parties have appealed the trial judge’s finding. By the principal appeal, the Crown contests the respondent’s right to claim any exemption at all and seeks to collect the excise tax imposed by section 23 on the entire amount of belt spray kerosene used. By its cross-appeal, the respondent takes the position that it should be entitled to an exemption from excise tax with respect to the entire amount of belt spray kerosene and not merely to the two thirds thereof which is reprocessed.

Analysis

It is convenient to deal first with the respondent’s cross-appeal since it may be quickly disposed of.

If I understand counsel correctly, the argument is that respondent is not liable to tax on any part of the belt spray kerosene because it does not “use” the kerosene in the sense of consuming it. In my view, this argument is entirely without merit. Nothing in the text of the statute supports the view that the tax is intended to apply only to goods which are consumer. Quite the contrary; the tax clearly applies to durable goods which are manufactured or produced in Canada or imported into the country .The word “use” itself is quite broad enough to cover what the respondent does with the belt spray kerosene [2] . Indeed, it would be difficult to think of any other word which would be more appropriate. The kerosene is sprayed on the conveyor belt to assist the latter’s function of transporting the oil sands. That is its use and what it is useful for. The one third in volume of the kerosene which is lost to evaporation, misting and the like, is used up in the process in very much the same way as is the other kerosene which is used by the respondent for the purposes of fuelling diesel engines in the plant. It properly attracts tax by the combined operation of subsections 23(1) and 23(10).

In a related line of argument, counsel also suggests that the belt spray kerosene is not used because i is simply taken out of the production process at a late stage and recycled back into the same process at an earlier stage. The analogy is made to a hypothetical batch of kerosene which is found to be contaminated or not to meet specifications and is therefore put back through the process to correct the problem.

The analogy is inexact and misleading. Manifestly, product which is defective and requires reprocessing is not being used; it is put back into the production stream because it requires reprocessing. Belt spray kerosene does not require reprocessing. On the contrary, it is a finished product. It is put into the production stream not for the sake of processing it but merely as an incident to its use as an aid in the processing of the oil sands. That is why it is used and the use attracts the tax.

This brings me to the principal appeal by the Crown. If I understand counsel’s position correctly, it is that all of the belt spray kerosene, including the two thirds thereof which the trial judge found to be reintroduced into the processing stream, is “used” by the respondent and “not for sale” so as to engage the deeming provision of subsection 23(10) and the charging provision of subsection 23(1). Furthermore, it is the appellant’s position that the respondent is not entitled to relief under the provisions of paragraph 23(7)(b) because it does not purchase the belt spray kerosene and the latter does not become a constituent or component part of the final product.

In my view, none of these submissions is well founded.

In the first place, it seems to me to be quite clear that the deeming provision of subsection 23(10) is only attracted if the goods in question meet both of two conditions: they must be for use by the manufacturer and they must not be for sale. The use of the word “and” in the text of the subsection is clearly conjunctive. As I have already indicated in dealing with the cross-appeal, it is my opinion that the first of those conditions is met and that all of the belt spray kerosene is used by the respondent.

The second condition, however, is another matter. The respondent argues, correctly in my view, that the two third of the belt spray kerosene which remains in the production stream cannot properly be said to be “not for sale”. Indeed, it is impossible to see on what basis one could say that any part of the production stream was “not for sale” until such time as it was withdrawn from the process and either discarded as waste or put to some other use. The fact that something may temporarily be in a form not suitable for sale is surely irrelevant if its ultimate destination is to be sold. I would think it was safe to assume that the respondent is not operating its plant for charitable purposes or for the simple fun of the thing, and that the whole purpose of the process is to produce something which can eventually be put on the market and sold, whether in the from of kerosene, synthetic crude oil or something else. At the point at which the belt spray kerosene is reinserted into the production process it simply cannot be said that it is not for sale and the fact that some tiny proportion thereof will ultimately be again withdrawn from the production process and again used as belt spray kerosene is surely irrelevant to such a determination. To put the matter in general terms, the raw materials used in a process, the end product of which is a marketable commodity, cannot be said to be not for sale unless or until they are withdrawn from sale. Belt spray kerosene which remains in the production stream cannot be said to have been withdrawn from sale.

In argument, counsel for the Crown suggested that any product which a manufacturer or producer withdrew from inventory and used for its own purposes was necessarily “not for sale” and therefore taxable. This is manifestly not so. Nothing prevents a manufacturer withdrawing an item from his own inventory for his own use with the intention of later returning it to inventory for the purposes of sale; the example suggested at the hearing was that of a hammer picked off the production line for the purposes of effecting some simple running repair and then replaced in the line. I can see no difference in principle for belt spray kerosene which is mixed with oil sands and, in due course, separated therefrom and returned to the kerosene storage tanks.

It is accordingly my view that the belt spray kerosene used by the respondent, to the extent that it is not lost but returned to the production process, does not engage the deeming provision of subsection 23(10) and does not attract tax. On this basis alone, therefore, the trial judge’s conclusion was correct.

Even if I were wrong in this view, however, and it was held that subsection 23(10) does apply to the belt spay kerosene which is returned into the production stream, it is my further opinion that the trial judge was right to find that the respondent is entitled to claim the exemption provided by paragraph 23(7)(b). The Crown’s principal argument, namely that the belt spray kerosene is not “purchased” by the respondent, seems to me to overlook a necessary consequence of the application of the deeming provision in subsection 23(10) and to wrench the exempting provision in paragraph 23(7)(b) from its context.

The tax imposed by section 23 is a single incidence tax. It is charged upon manufacturers, producers, importers and wholesalers at the time that their goods are released into the stream of commerce leading to their distribution to the ultimate consumers thereof. Unlike a value added tax, which is imposed at multiple stages along the way, the scheme of exemptions built into section 23 of the statute is carefully designed to avoid the tax attaching to any given product more than once. Thus, subsection 23(6) provides that a manufacturer or producer who sells to a licensed wholesaler is freed from payment of the tax; manifestly, this is because it is the wholesaler who is made responsible for the tax by subsection 23(4). sub- section 23(7) is an integral part of this same scheme. Its clear intent is to avoid the taxation of constituent or component parts of goods which are themselves going to attract payment of the tax.

Subsection 23(10) provides that in the applicable circumstances, goods shall be “deemed to have been delivered to a purchaser thereof’. Delivery to a purchaser necessarily requires there to have been a purchase. If the delivery to a purchaser is deemed, so also must be the purchase itself. A deemed purchaser of a thing is someone who is deemed to have purchased that thing. Accordingly a manufacturer who produces something which he then uses as a component in an end product which itself attracts tax under subsection 23(1) will pay tax only once, on the end product. His appropriation of the intermediate product to his own use, a deemed delivery to a purchaser under subsection 23(10), gives rise to an exemption under paragraph 23(7)(b). If it were otherwise, the statute would serve to penalize all integrated manufacturing operations which produce intermediate marketable products [1] a result surely not intended by Parliament.

The appellant’s remaining contention is to the effect that the belt spray kerosene which is not lost does not form a constituent or component part of the final product. It is equally without foundation. The argument seems to be that because the kerosene becomes contaminated with the oil sands and loses its identity until it is once again extracted and unifined, it is not a component or constituent of the final product. To this, I can only reply, why not? There is simply no question, and the trial judge so found, that the volume of belt spray kerosene which becomes mixed with the tar sands is reflected in the volume of kerosene which is ultimately extracted at the end of the process. I know of no requirement that a constituent or component in a final product should retain its identity from the time it is introduced into the process until the end. Indeed, many constituents or components of final products will undergo radical chemical or physical changed during the process without thereby losing their character as constituents or components. Who would deny that an egg is a constituent or component of the cake into which it is baked?

It is accordingly my view that whether one adopts a purposive and contextual reading of the statute, or limits oneself to the plain meaning of the words used, the result is the same: the respondent is entitled to the exemption provided by paragraph 23(7)(b).

Disposition

For the foregoing reasons, I would dismiss both the appeal and the cross-appeal with costs.

Appeal and cross-appeal dismissed.