Nova, an Alberta Corporation v. Her Majesty the Queen, [1987] 1 CTC 265, 87 DTC 5146

Dubé, J.:—The only issue left to be resolved in this income tax appeal is whether all pipes and valves located between the outlet connection of the main pipeline and the compressor stations (and the meter stations) are to be treated as an integral part of the “pipeline” or of the compressor stations (or the meter facilities) for the purposes of capital cost allowance.

In the former alternative, they would fall under Class 2 of Schedule II with a six per cent depreciation. In the latter alternative, they would fall under Class 8 of Schedule II with a 20 per cent depreciation. For the plaintiff the difference between the two alternatives could result in disallowing capital cost allowance of $592,233 for the 1977 taxation year and $845,799 for the 1978 taxation year.

In 1977 the policy of the Minister of National Revenue was changed and those connecting pipes and valves began to be treated as part of the “pipeline” and not part of the compressor stations or metering facilities.

In the alternative, the Minister submits that the valves and pipelines in question are property that is “distributing equipment and plant acquired primarily for the production or distribution of gas” and accordingly is properly included in Class 2 of Schedule II of the regulations to the Income Tax Act. The relevant provisions of Class 2 read as follows:

Class 2 (6 per cent)

Property that is

(b) a pipeline, other than gas or oil well equipment, unless, in the case of a pipeline for oil or natural gas, the Minister in consultation with the Minister of Energy, Mines and Resources, is or has been satisfied that the main source of supply for the pipeline is or was likely to be exhausted within 15 years from the date on which operation of the pipeline commenced;

(d) manufacturing and distributing equipment and plant (including structures) acquired primarily for the production or distribution of gas

The plaintiff ("NOVA") is incorporated by a special Act of the Legislature of Alberta with head office at Calgary. Its principal business is the transmission of natural gas within the boundaries of that province.

According to the expert evidence of Donald G. Olafson, an officer of the plaintiff and president of its subsidiary Novacorp International Consulting Ltd. and a mechanical engineer, there are four segments to the natural gas industry: exploration, production, transmission and distribution. Exploration involves searching for, drilling for and discovering natural gas reservoirs. Production involves drilling wells, gathering natural gas and processing it. Transportation (also called transmission) starts at a point commonly known as the “field gate" located near the processing plant. It ends where the gas enters a distribution system. The distribution starts where the transmission ends, at a point commonly called the “city gate”. Significant pressure reductions occur at that point. The expert witness says that the plaintiff is in the transportation (or transmission) business and does not do any exploration, production or distribution.

According to Mr. Olafson, the word "pipeline" in terms of common industry usage describes the cross-country pipe utilized to convey natural gas. In his affidavit he describes a pipeline as follows:

The word “pipeline” in terms of common industry usage describes the cross country pipe utilized to convey natural gas. A pipeline can describe either a mainline or a branch line. It would include the pipe and components and appurtenances attached to it including isolating valves. It would not include a compressor station or measurement facility isolated by isolating valves from the pipeline. A compressor station starts at the downstream side of the station suction side valve and ends at the upstream side of the station discharge valve. The pipe and valves in issue serve the compressor station. Without the station they would be unnecessary. When stations are retired for any one of a number of operating reasons these pipes and valves are almost always retired.

Mr. Olafson also says that natural gas transmission is subject to numerous rules and regulations dealing with safety. The safety standards for pipelines are specified in the Pipeline Act (R.S.A.) and for compressors in the Boilers and Pressure Vessels Act (R.S.A.). He says that both Alberta statutes adopt the Canadian Standards Association Z-184 Code which spells out the rules for designing, constructing and operating a gas pipeline system. The rules in Z-184 are more stringent for compressor stations than for pipelines.

In his opinion, neither compressor stations nor metering facilities are described by the word "pipeline". They would fall under the term “pipeline system". Nova's pipeline system is not used for distribution: it is a transportation or transmission system.

Nova takes delivery of the gas at the field gate and delivers it at the provincial borders where it is taken over for further transportation or distribution by other carriers or distributors.

In his view, people involved in the industry use the terms “pipeline system" to describe the overall operation. The term "pipeline" means the main pipe which runs cross-country, including valves, gauges, etc. but excluding compressor stations and metering facilities. The term "mainline" is used as opposed to "branch line" or “lateral line”’.

Those are precisely the terms used in the Canadian Standards Association Z-184 Code for the year 1986. The word pipeline is defined as follows at page 42:

Pipeline means those facilities through which gas is conveyed and includes pipe, components, and appurtenances attached to the pipe up to and including the isolating valves used at pressure limiting, pressure regulating, pressure relief, measurement, and compressor stations.

The description of "pipeline system” appears as follows at page 43:

Pipeline system means pipelines, stations and other facilities required for the storage, transportation, and measurement of gas.

The Code defines "compression station” as follows at page 38:

Compression station means equipment installed for the purpose of increasing the pressure in a pipeline system and includes piping and auxiliary devices such as valves, compressors, control instruments, enclosures, and ventilating equipment.

The two relevant terms with reference to distribution are described at page 39:

Distribution line means a pipeline in a distribution system that conveys gas to individual service lines or other distribution lines.

Distribution system means the distribution and service lines, and their associated control devices, through which gas is conveyed from transmission lines or from local sources of supply to a customer’s meter.

The witness further explained that NOVA utilizes 14,000 kilometres of pipeline, 38 compressor stations and 750 meter stations. The compressor stations are connected to the pipeline by isolating valves. The compressors are located at intervals along the pipeline to provide additional pressure. As compressor stations become obsolete, they are replaced. At times, they are merely brought up to date, but usually they are retired and demolished. The compressor pipes are thicker than the pipeline pipes so as to resist to the higher pressure. A compressor station does not last as long as a pipeline as the parts cannot be replaced ad infinitum because they become obsolescent. On the other hand, a pipeline can go on for more than half a century. The average life of a compressor would be about 25 years. A long crosscountry pipeline can take much more pressure than a short confined yard pipe leading to a compressor or a meter. Therefore, compressor or meter pipes (better know as “yard pipes”) are made of sturdier material so as to stand stress and vibration.

Also called on behalf of the plaintiff was Wayne D. Neuss, a civil engineer and president of Petrotech Lavalin Inc. He confirmed that there are four aspects to the oil and natural gas industries and that Nova is exclusively dedicated to the transportation or transmission phase.

In his view as well, the term “pipeline system” is commonly used in the industry to describe the entire system including pipelines, compressors, pumping stations, metering facilities, etc., whereas the term "pipeline” is used both commonly and technically to refer to the cross-country pipe used to convey oil or natural gas. He says that a pipeline may refer to a main line or a branch line. He defines "compressor station” as including all piping leading to and from a pipeline, like valves, compressors, control instruments, enclosures and ventilating equipment. He says that a compressor station is not part of the "pipeline”. Similarly, with the metering facilities which serve to measure various aspects of the substance flowing into and out of the pipeline. Nova's system was constructed to gather Alberta natural gas and was designed to become a component part of the Trans-Canada system for shipping natural gas to eastern Canada.

In the following paragraph of his affidavit Mr. Neuss describes the technical differences between "pipeline” and "compressor stations”:

Compressor stations are designed in accordance with CSA Z-184 which cites the ANSI B 31 standards for their mechanical design. Station facilities are totally separate from pipeline facilities in that they are designed to more stringent factors of safety and built under different methods, have certain characteristics that make them obsolete such as efficiency (depending upon the value of the fuel), availability of spare parts (some compressor manufacturers cannot or do not maintain long-term spare parts), and changes in system flow patterns whereby certain stations must be replaced (both mainline and laterals), and must be protected from solids and liquids which may accumulate in the pipeline (scrubbers, separators, etc. are needed). When compressor units are changed (centrifugal, reciprocating) normally the entire station, including piping, valves, scrubbers, separators, control devices, etc. must be replaced, since the new compressor will not fit the existing facilities.

The witness further says that pipes and valves used in a compressor station or metering facilities form part of these facilities and not part of the pipeline. It is also his opinion that, in terms of industry standards, Nova's high pressure pipeline system is not “manufacturing or distributing equipment and plant”’.

It is worth noting that Mr. Neuss was a member of the Technical Committee on the Gas Pipeline Code which in 1986 provided the aforementioned definitions of the terms pipeline, pipeline system, etc. In earlier Codes the term “pipeline system" was not included but merely the word “pipeline" which was described as follows, at page 26, (in 1979):

Pipeline means those physical facilities through which gas is conveyed including pipe, valves, and other appurtenances attached to pipe.

Yet, those earlier codes were titled “Gas Pipeline Systems" [my emphasis].

The witness testified that members were not happy with the “pipeline" definition and inserted the term “pipeline system" which better reflects the view of the industry as to the distinction between a “pipeline" and a “pipeline system". He agreed that the National Energy Board has not yet accepted the 1986 Code, whereas Alberta has already done so.

The sole witness called by the Crown was J. R. Eickmeier, an independent senior production engineering consultant, formerly with the National Energy Board and, before that, with Energy, Mines and Resources. The report which he filed in lieu of an affidavit is entitled “Discussion Paper Industry Standards and Practices with respect to Gas Pipeline Systems" [my emphasis].

It is noteworthy that, not only in the title, but throughout his report he uses the expression “pipeline system" in the same manner as the two previous witnesses and the 1986 Z-184 Code to describe the entire system including all components such as the pipeline, the compressors, the metering facilities, etc. whereas the word “pipeline" appears intermittently to describe the long cross-country pipe. For instance, at page 3 he writes that “The station sites [including compressors] are likely to be located along the pipeline at intervals of from sixty to several hundred miles". Further down the page: “Metering facilities will be located at station sites at major purchase or sales points along the pipeline". Obviously, a term cannot properly be used to describe at the same time the whole and one of the component parts. It appeared to me that, perhaps unconsciously, he was himself using the current industry distinction between “pipeline system" and “pipeline".

Mr. Eickmeier referred, however, to the National Energy Board Act* [1] definition of pipeline which appears under section 2 as follows:

“pipeline” means a line for the transmission of gas or oil connecting a province with any other or others of the provinces, or extending beyond the limits of a province or the offshore area as defined in section 87, and includes all branches, extensions, tanks, reservoirs, storage facilities, pumps, racks, compressors, loading facilities, interstation systems of communication by telephone, telegraph or radio, and real and personal property and works connected therewith.

But he agrees that Nova's pipeline system is not regulated by the National Energy Board Act. The Province of Alberta Pipeline Act, 1975 defines a pipeline as follows:

“pipeline” means a gas line, oil line, fluids line, multi-phase line, solids line, secondary line, distribution line or flow line.

and gas line is defined as follows:

“gas line” means a pipe for the transmission of gas from a secondary line or storage facility to a distribution centre or storage facility and includes installations in connection therewith but does not include a multiphase line, secondary line, flow line or distribution line.

The term installation is further described as follows:

“installation” means

(i) any equipment, apparatus, mechanism, machinery or instrument incidental to the operation of a pipeline, and

(ii) any building or structure that houses or protects anything referred to in sub-clause (i),

but does not include a refinery, processing plant, marketing plant or manufacturing plant,

Mr. Eickmeier goes on to describe what, in his view, comprises “a compressor installation”. He says that it should of course include the facilities within the building, or portions of the building, housing the compressor. He agrees it also includes the short sections of pipe between the individual compessor units but it does not include the so-called “yard pipes” which, in his view, would belong to the pipeline. He writes as follows at page 12 of his report:

The yard piping is likely to be the same as the mainline pipe in terms of grade and quality of steel, and it performs the same function as the mainline pipe, i.e. that of conveying gas. Under the CSA Z184 Code, being the industry standard, the yard piping must conform to the same design factors as apply to mainline pipe in built-up areas or areas where there may be a concentration of people. Similarly, the same welding standards apply as in the case of the mainline pipe. The yard piping for the most part is buried, but portions may be above ground. Mainline piping also may be above ground at block valve locations or at certain types of river crossings.

In his final conclusion he says as follows:

. . . In terms of code requirements, industry convention and function, the station yard piping is more akin to the mainline piping than it is to the compressor installation.

In my view, the various definitions of “pipeline” in the federal and provincial acts serve merely the purposes of those acts and do not govern the interpretation of the Income Tax Act. The Act must be construed according to its own definitions, or the ordinary meaning of the words used, or the common usage by the people in the relevant industry.

Subsection 1104(2) of the Income Tax Regulations defines, for the purposes of allowances in respect of capital cost, the following properties:

2(a) a “railway system”

(b) a “telephone system”

(c) a “telegraph system”

(d) a “tramway or trolley bus system”

The subsection does not follow at paragraph 2(e) with a “pipeline system”, but with “gas or oil well equipment” which includes equipment, structures and “pipelines”. If Parliament intended to treat the property in question as part of a “pipeline system” it would have done so under paragraph 2(e). The best that can be said is that the draftsmanship leads to confusion.

It is interesting to note that in its own Interpretation Bulletin No. IT-482 issued November 30, 1981 Revenue Canada, Taxation uses the words “pipeline system” in dealing with a compressor station used in conjunction with “the main gathering or pipeline system”.

Paragraph 8 reads as follows:

8. Where a natural gas compressor station is used in conjunction with the main gathering or pipeline system and it is used to either stabilize the varying field pressures for transmission of the gas to a gas processing plant or to compress the gas to a pressure required for its transmission to a gas processing plant, the compressor is not considered to be a component part of the pipeline and its capital cost is included in class 8. However, where the compressor station is used in conjunction with a dehydrator to compress the dehydrated gas to the pressure required for its transmission to market or the compressor station is used in a pipeline system to assist in the transmission of gas to market, its capital cost is included in class 2 by virtue of paragraph (d) thereof. [My emphasis.]

Had Parliament intended to include compressors and metering facilities in Class 2(b) of Schedule II, it would have used the expression “pipeline system”. For instance, in Class 4(a), the property is described as “a railway system”. In Class 17(a), the property is described as a “telephone system”.

As to the dictionary definitions, the Shorter Oxford English Dictionary defines “pipeline” as “a conduit of iron pipes for conveying petroleum from the oil-wells to the market or refinery, or for supplying water to a town or district”. On the other hand, that same dictionary defines “system” as follows: “a set or assemblage of things connected, associated or independent, so as to form a complex unity; a whole composed of parts in orderly arrangement according to some scheme or plan’’.

The weight of the evidence is clearly to the effect that the word “pipeline” in the industry means the long cross-country pipeline carrying gas or oil. When it is intended to refer to the whole system, the people involved call it a “pipeline system”, which makes more sense.

It should also be noted that the two experts produced by the plaintiff were straightforward and unshakeable. On the other hand, as mentioned before, the expert called by the Crown was at times confused between the meaning of “pipeline” and “pipeline system”, not only in his written report but also in cross-examination.

It is also significant that the design factors for the pipeline pipes and the yard pipes are different. Their life expectancy is different. The security requirements are different. The efficiency standards are different.

At the outset I must bear in mind the reminder of Estey, J. in Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305, that any ambiguities in the charging provisions of a tax statute are to be resolved in favour of the taxpayer. That concept was further explicated in a 1985 Supreme Court Decision in Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373, where the same learned judge said that a basic concept in tax law is “that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour the taxpayer".

In Controlled Foods Corporation Limited v. The Queen, [1980] C.T.C. 491; 80 D.T.C. 6373, Urie, J. of the Federal Court of Appeal, said at 495 (D.T.C. 6376) that “a line of authorities in Canadian jurisprudence, extending back as far as 60 years, has held that it is not improper to consider as an aid the generally accepted commercial view of the operation under review." And further down: "he was entitled to examine the generally accepted commercial view of the nature of a restaurant operation as well as the dictionary definitions of those terms".

The Minister's second alternative, that the yard pipes are property that is "distributing equipment and plant acquired primarily for the production or distribution of gas" under Class 2(d) is based entirely on a 1985 Federal Court Decision, Northern and Central Gas Corporation Limited v. The Queen, [1985] 1 C.T.C. 192; 85 D.T.C. 5144 (under appeal) wherein it was held at 197 (D.T.C. 5147) that "the subparagraphs of class 2 were intended to encompass the whole process from the production (or manufacture) of the gas (electrical energy, water or heat) to its ultimate distribution to customers (with some specific exceptions)". The learned judge also added that "in my view, distribution in subparagraph (d) is used in a broad and general way and it was intended to encompass the transmission part of the plaintiffs overall distribution system". In that case, the plaintiff’s gas corporation was not limited to transmission operations, but operated a plant and a distribution system as well, which would explain why the judge encompassed the transmission part of the plaintiff’s overall system under "distribution".

In the case at bar, it has been fully established that the plaintiff is in neither the manufacturing nor the distributing business, being solely limited to "transmission" or "transportation". The plain meaning and the commercial usage of the words "manufacturing" and "distributing" clearly do not include "transmitting" or "transporting" which terms refer to a totally different operation.

Consequently, the appeal is allowed and the reassessments referred to in paragraphs 5, 6 and 8 of the statement of claim are referred back to the Minister for variation on the basis that the pipe and appurtenances referred to in paragraph 4(a) of the statement of claim are property classified in Class 8 of Schedule II of the Regulations made pursuant to the Income Tax Act. Costs to the plaintiff.

Appeal allowed.