Mobil Oil Canada Ltd. v. Her Majesty the Queen, [1994] 2 CTC 249

MacGuigan J.A.:—The issue between the parties on this appeal is a narrow one: whether the appellant is entitled to an exemption from federal sales tax on the purchase of a Dash-8 aircraft by virtue of subparagraph 6(b)(i) of Part XVII of Schedule III of the Excise Tax Act (“the Act"), R.S.C. 1970, c. E-13, as amended by S.C. 1980-81-82-83, c. 68, subsection 40(6). This provision reads as follows:

Aircraft, parts and equipment therefor, when purchased or imported for use exclusively in the provision of. . .

(b) air services directly related to (i) the exploration and development of natural resources. . . .

The sales tax of nine per cent is imposed by subsection 27(1) of the Act, R.S.C. 1970, c. E-13, as amended by S.C. 1980-81-82, c. 68, subsection 10(1), and the exemption is provided by subsection 29(1) of the Act, R.S.C. 1970, c. E-13 as amended by S.C. 1980-81-82, c. 104, section 9, which provides that "the tax imposed by section 27 does not apply to the sale or importation of the goods mentioned in Schedule 3”.

I

The Dash-8 was used by the appellant to fly crews into and out of oil and gas fields in remote areas of northern Alberta and British Columbia, and flew a regularly scheduled route three times a week between Calgary, Edmonton and Whitecourt, Alberta, which were the centres where the crew members lived, to sites farther north.

The trial judge found (Mobil Oil Canada, Ltd. v. Canada, [1993] 1 C.T.C. 158, 60 F.T.R. 217) on the evidence that an oil well without any secondary (water flood) recovery systems or tertiary (or enhanced) recovery systems (using other hydrocarbons) will provide access to only about 10 per cent of the oil which exists in the part of the reservoir tapped by that well. With secondary recovery systems in operations up to 30 per cent of the available oil in a reservoir can be recovered. With enhanced recovery systems, up to 70 per cent of the oil available in the rock can become accessible.

The trial judge had no difficulty in deciding that the installation of such secondary and enhanced recovery systems qualified as development (C.T.C. 167, F.T.R. 221-22)

. . . I think it is a fair use of the word [development] to describe some of the activities in question. For example, there is a continual process of drilling more wells into a known reservoir to further define or exploit the field; wells which may have been drilled earlier but which were not brought into production may be opened up; drilling is done to try to tap into other strata where it is hoped oil bearing rock will be found: some wells are reworked (recompleted or reconditioned) after they have been producing for some time, if the quality of the production has decreased. Secondary and tertiary (or perhaps more accurately "enhanced") recovery systems are also sometimes put in place.

Moreover, the measures were effective for recovery (C.T.C. 162, F.T.R. 223):

As a result of the development activities in question, the plaintiff increased the oil production in the Rainbow field from 729 cubic metres per day to 1136 cubic metres. It increased gas production at Sierra from 3342 cubic metres per day to 4750 cubic metres per day.

Recognizing that both of the statutory words “development” and “natural resources" had been given a broad meaning by this Court in Bridges Brothers Ltd. v. The Queen, [1985] 2 C.T.C. 63, 85 D.T.C. 5285 (F.C.A.), in the context of the use of a helicopter to control, inter alia, animal and human trespassers on a blueberry farm, the trial judge posed the question for decision as follows (C.T.C. 167, F.T.R. 229-30):

The question I have to ask myself is whether the Federal Court of Appeal’s decision means that development in its broadest sense is used in 6(b)(i) and, consequently, that counsel for the plaintiff's argument is correct when he asserts that all the activities being carried on in the oil and gas fields, before those resources leave the fields, is development. Alternatively, is a narrower definition of the word "development" in the context of oil and gas fields the proper one.

The trial judge opted for a narrow interpretation, and decided that (C.T.C. 168, F.T.R. 230):

[Development of an oil or gas field involves work done to open up the "ore" body—that is, give access to the oil or gas as the case might be—but does not include the on-going operation of the facilities which are used to extract the oil or gas, once those facilities have been put in place. Thus, development would not include the treatment or process- ing of oil and gas in the field before transmission to a refinery occurs. It would not include the operation of secondary and enhanced recovery systems once they had been installed. I think this distinction accords with the French text of subparagraph. 6(b)(i), "l'exploration et la mise en valeur des ressources naturelles”. I do not accept the suggestions, made in this case, that oil and gas have no commercial value until they reach the well head or until they are processed in the field before being placed in the pipeline.

Based on this holding that development does not include the operation of secondary or enhanced recovery systems, or the operations of treatment facilities in the pas fields or in the batteries in the oil fields, the Trial Judge held that the appellant ad not met the required burden of proof in establishing that the Dash-8 was purchased for use exclusively in the provision of air services directly related to the development of the oil and gas fields in question.

II

The essential issue is as to the meaning of the statutory word "development" in this context.

In my opinion that issue has already been decided by this Court in Bridges Brothers, where in interpreting the identical paragraph of Part XVII of Schedule Ill, this Court said (C.T.C. 63, D.T.C. 5285):

In the opinion of the Court the majority of the Tariff Board applied an unduly narrow interpretation of the word “development” in subparagraph 6(b)(i) of Part XVII of Schedule III of the Excise Tax Act and compounded the error by confining the meaning to “initial” development, thus adding a limiting expression not found in the statute. For the reasons given by the learned dissenting member, Mr. Gorman, the appeal will be allowed and it will be declared that* the importation of the helicopter in question is exempt under subsection 29(1) of the Act from consumption or sales tax.

It will be noted that the Court was content to adopt the reasons for decision of the dissenting member of the Tariff Board, who had said, (1982), 4 C.E.R. 338, 8 T.B.R. 296 (T.B.A.) at page 346 (T.B.R. 308):

“Development” is a word of broad meaning with a number of ordinary and technical usages. Included in dictionary definitions of its use in its ordinary sense are the following:

The Shorter Oxford English Dictionary, 3rd Edition: A developed or well grown condition.

Funk and Wagnails New Standard Dictionary. Gradual growth or enlargement, as of plant or animal life ....

I am satisfied that all of the uses of the helicopter in the applicant's blueberry operations are for the enhancement or protection of the blueberry plants. The ordinary meaning of the expression “development of natural resources” in section 6(b)(i) would apply to the use of the helicopter for those purposes in that it enables the plants to mature and the berries to ripen so that the owner achieves the greatest possible economic benefit [sic] from the resource.

The test here set out by the board member of the greatest possible economic benefit from the resources is identical with the meaning of /a mise en valeur des ressources naturelles in the French text of the statutory provision. [1]

This test must in my opinion be understood in the sense of the maximization of the potential of the natural resource. Therefore, development would not include, as the trial judge correctly held, treatment or processing of oil and gas in the field after extraction and before transmission to a refinery occurs. However, the aug- mentation of the available pool of oil or gas at the bottom of the well bore, through enhanced recovery systems, is not production, but rather quantitatively maximizing the commercial potential of the resource. Development must therefore mean not only the installation of such systems, but also their operation, since the maximization of potential requires both.

Thus development would include whatever precedes the extraction of the oil or gas. Extraction of oil or cas, in however adulterated a form, is production, whereas the augmentation of the pool at the bottom of the well bore is development. The two stages are clearly severable in concept, and the results are clearly measurable in fact.

Since the view I take of this question of mixed law and fact is different from that of the trial judge, the result must also be different, but it is nevertheless worth commenting on the interpretation of the word “exclusively” in the statutory provision, a matter which was argued by both parties.

The placing of the word makes it clear that, on the one hand, it refers to exclusive use, and on the other hand, that this exclusive use is in the provision of air services. Hence an aircraft which did double duty as an executive jet could not qualify for the exemption, since there would not be exclusive use in the provision of air services directly related to the development of natural resources. In the case at bar the only route ever taken by the aircraft was to the oil and gas fields. Moreover, it would be unreasonable to interpret the notion of exclusivity of use as having application to every passenger. The trial judge in my view rightly held as follows (C.T.C. 165, F.T.R. 227):

Interpretation of Subparagraph 6(b)(i)—Rainbow Employees, Relatives and Friends— Exclusivity

Counsel for the defendant does not suggest, and rightly so, that the carrying of relatives and friends on a “space available” oasis only, affects the status of the aircraft. This was a Casual and incidental usage, peripheral to the use to which the plane was being put regardless of the scope of application given to the word “exclusive”.

At the same time, counsel for the defendant argues that the use of the plane by Rainbow Pipeline employees alone takes the plane out of the category of exclusive use described in subparagraph 6(b)(i). Not only were these employees not involved in development activities (they were involved with the transportation of the oil) . . . they were not even direct Mobil employees at the time. Also, Mobil charged Rainbow Pipelines for transporting these people.

I am not convinced that the transporting of Rainbow employees for a fee removes the aircraft from paragraph 6(b)(i). As with the carrying of relatives and friends that use was incidental and ancillary.

It would also not be reasonable to suppose that Parliament intended that all development must cease the moment any production began. Exclusivity of development is not required. Development can co-exist with production, as the trial judge indeed found. Such a conclusion is merely a footnote to the error emphasized in Bridges Brothers of confining the meaning of development to initial development, "thus adding a limiting expression not found in the statute".

The only statutory requirement is that the air services provided must be “directly related" to the development of natural resources. The appellant estimated that 73 per cent of those transported were engaged in interconnected activities which involved development.? [2] The respondent cast doubt on the significance of measuring the proportion of development in this fashion, and I tend to agree. However, to my mind there is no doubt on the facts of this case that the air services were directly related to the development of natural resources. No doubt marginal cases will arise in the future, but this is not one of those cases. The trial judge came to a different result, not on the facts, but only on the basis of a different understanding of development.

Ill

The parties also disagreed extensively over issues as to the burden of proof. Not only am ! not persuaded that there is any such issue in the case at bar apart from the questions already canvassed, but in any event what has already been decided settles the appeal.

In the result, the appeal is allowed with costs both here and in the Trial Division, the judgment of the trial judge set aside, and the assessment of federal sales tax on the aircraft vacated on the ground that the purchase of the aircraft is exempt under subsection 29(1) of the ExciseTax Act from consumption or sales tax.

Appeal allowed with costs.