Petro-Canada Inc v. The Deputy Minister of National Revenue for Customs and Excise, [1985] 1 CTC 353, [1985] DTC 5268

Mahoney, J:—This is an appeal pursuant to section 60 of the Excise Tax Act from a decision of the Tariff Board which held that two compressors and ancillary equipment, hereafter the “booster compressors”, were not exempt from sales tax by virtue of Part XIII of Schedule III to the Act. The right to appeal is limited to questions of law. The pertinent provisions of the Act and Schedule follow:

27. (1) There shall be imposed, levied and collected a consumption or sales tax of nine per cent on the sale of all goods

(a) purchased or manufactured in Canada . . .

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

PART XIII

PRODUCTION EQUIPMENT, PROCESSING MATERIALS AND PLANS

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, . . .

There is no issue that the booster compressors are machinery and apparatus, that the appellant is a producer, that the appellant uses the booster compressors and that the production of oil is the production of goods within the exemption. The only issue is whether the booster compressors are used directly in the production of the oil.

The appellant produces oil from three pools, known as Nisku “A”, “D” and “E”, by a miscible flood scheme. This involves injecting natural gas at high pressure into the underground pools. The gas acts as a solvent for the oil. The solution “sweeps” through the underground formation and enhances oil production. Part of the gas injected along with gas naturally in mixture with the oil, hereafter “solution gas”, is recovered from the oil produced, processed at an on-site gas plant and recycled. However, the quantity of solution gas is insufficient for operation of the scheme. There must be a volume of gas sufficient to replace that of the oil removed. The solution gas only replaces its own volume.

Additional gas, hereafter the “make-up gas”, is purchased. The appellant takes delivery of the make-up gas at a metering station some 12 miles from the injection station and transports it by pipeline. The booster compressors are located near the metering station. The solution gas and make-up gas are commingled at a “T” junction prior to entry into the injection compressors. Daily consumption is approximately 22 million cubic feet of make-up gas and 18 million cubic feet of solution gas. Referring to the point in the system at which the make-up and solution gases are commingled, the only witness said, at page 72 ff,

. .. There is just the T in the pipeline, in essence. The residue gas from the plant comes through a meter which is designated by this symbol. Physically within the facilities there is just a section of pipeline that goes over and connects with the section of pipeline coming in from Nova. So really, it is just a T at that point. But it then carries on down the pipeline to the compressors.

He is there referring to the injection compressors.

The injection compressors raise the pressure of the gas to approximately 5,500 pounds per square inch (psi) to inject it into the pools. The suction of the injection compressors is just over 700 psi and the solution gas is delivered to the “T” junction at that pressure. There is no pressure regulation at the “T”.

The make-up gas is delivered to the appellant at 600 to 650 psi. The booster compressors bring it to about 1200 psi. It loses pressure in transit and arrives at the “T” at the same pressure as the solution gas, just over 700 psi. The function of the booster compressors is described in the following evidence, at page 70:

Q. Can the make-up gas be transported from Nova’s transmission line to the injection compressors without using the booster compressors at the booster station?

A. Well, the Nova pipeline normally runs about 600 to 650 psi pressure. The suction through our injection compressors normally runs slightly over 700 psi. In that case, gas would not flow from Nova to our compressors. In fact, it would flow the other direction.

Q. So it would be like trying to —

A. Flow water uphill.

The majority of the Board found that:

. . . when the gas reaches the plant, it is at the same pressure as the suction of the injection compressors at 700 psi. Therefore, the Board concludes, no input pressure is supplied by the Nova booster compressors.

With respect, the evidence is clear that without the intervention of the booster compressors, the make-up gas would not reach the injection compressors at all. The conclusion of the majority is expressed in the following:

. . . The booster compressors act to maintain a uniformly high pressure to regulate the flow through the pipeline to be compatible with the intake of the injection compressors. A change in pressure, higher or lower, does not constitute production or manufacture.

In conclusion, since the booster compressors do not change the gas, only the pressure, and the injection compressors act as an intervening medium, the Board finds that the booster compressors are not used directly in the production of oil . . .

I really cannot reconcile the earlier finding that “no input pressure is supplied” by the booster compressors with the later finding that they “maintain a uniformly high pressure to regulate the flow through the pipeline to be compatible with the intake of the injection compressors”. The latter finding seems to accord with the evidence, which is that without the booster compressors the make-up gas would not reach the injector compressors. It is indisputable, on the evidence, that without the make-up gas, oil production would be drastically reduced.

The issue was not whether a change in pressure constituted production or manufacture but whether the booster pumps were used directly in the production of oil. The conclusion that because the booster compressors did not change the make-up gas, only its pressure, those compressors were not directly used in the production of oil strikes me as a non sequitur in the context of an oil production system that employs pressurized gas.

I have been unable to find any higher authority than the Board itself for its apparent view that the presence of an “intervening medium” is conclusive of the question of direct use and express no opinion as to its validity. Assuming it to be valid, I have difficulty here with the finding that the injection compressors were an intervening medium. In the first place, the booster compressors did provide some 700 psi of the required 5500 psi to the injection of the make-up gas and, as the dissenting member observed, “that residual pressure is clearly an element in the production process”, whatever view one may take of the 500 psi evidently dissipated in transporting the make-up gas 12 miles.

In Coca-Cola Ltd v D/MNR (C&E), [1984] 1 FC 447 at 457; [1984] CTC 75 at 81, it was held that plastic and wooden cases and plastic hand carriers for bottles of soft drinks were exempt under the provision in issue as apparatus directly used in the manufacture of the soft drinks and that: “The fact that the cases and carriers are subsequently used in the warehousing and distribution processes is not relevant . . .” Dealing with another statute, the Supreme Court of Canada, in Irving Oil v Provincial Secretary of New Brunswick, [1980] 1 SCR 787 at 796, referring with approval to the decision of the Nova Scotia Court of Appeal in Re Michelin Tires, (1975) 15 NSR 150, said:

As was pointed out in the Michelin case the statutory requirement of direct use is fulfilled irrespective of the percentage of use that may be ascribed to the process of manufacture as opposed to such other processes as storage and distribution.

The issue of whether the booster compressors were used directly in the production of oil does not turn on whether they were used entirely in its production. That they also facilitated the transportation of the make-up gas to the point of production is not relevant.

I see a second problem with the finding that the injection compressors are an “intervening medium”. The majority said:

. . . In the Board’s view, the injection compressors are an intervening medium where any necessary changes in content are made before the mixture enters the pools. It is at this point that production commences . . .

The reason for their being an intervening medium seems clearly to be because “necessary changes in content” are made there.

The reference to “changes in content” is mysterious. There was discussion during the course of the hearing of the requirement that the injected gas contain at least 10 per cent ethane plus. A misapprehension of that discussion seems to be the basis upon which the majority concluded that something, aside from mixing and compressing them, was done to the gases. The evidence, at page 68, was:

Q. Are you creating a solvent when you combine the two gases?

A. Well, no. Our solvent or the requirements for our gas to be injected into the reservoir is that it contain ten per cent ethane plus. Now, either the make-up gas or the processed solution gas both meet that requirement independently. In essence, they are both the solvents in this case.

Q. So the reason you are co-mingling the two gases is just to obtain a sufficient volume; is that correct?

A. All we are doing really is making a larger volume of solvent.

There was simply no evidence that any changes in content or composition of the gas were made at either the “T” junction, the injection compressors or points between. The majority appears to have misconstrued the evidence that, in other circumstances, it might have been necessary to augment the ethane plus and to have mistakenly concluded that is what actually happened. Another possible explanation is that the majority confused the on-site processing of the solution gas prior to its introduction into the oil recovery process, with something that occurred at the injection compressors. In any event the evidence is clear: no changes in content or composition of either gas before mixture or to the mixture thereafter were effected at any point material to the production process. Nonexistent changes are not a basis for concluding that the injection compressors were an intervening medium.

The make-up gas serves only one purpose, that of constituting part of the gas injected at high pressure into the underground pools to produce the oil. The booster compressors serve both to transport the make-up gas and to deliver it at a sufficient pressure that it may be ingested by the injection compressors. The delivered pressure is a constituent part of the pressure at which the make-up gas, in mixture with the solution gas, is injected into the pool. There is no intervening medium in the process between the two sets of compressors. In my opinion, the majority of the Board erred in holding that booster compressors are not used directly in the production of the oil.

While the errors of the majority are essentially errors in findings of fact, they are egregious errors made without regard to, or in a manifest and crucial misunderstanding of, the undisputed evidence. As such, they do, in my opinion, constitute errors of law of the sort contemplated by the Supreme Court of Canada in Canadian Lift Truck v D/MNR (C&E), (1955) 1 DLR (2d) 497 at 498.

While the construction of a statutory enactment is a question of law, and the question as to whether a particular matter or thing is of such a nature or kind as to fall within the legal definition is a question of fact, nevertheless if it appears to the appellate Court that the tribunal of fact had acted either without any 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 opinion the dissenting member of the Board was correct in his conclusion.

I would allow the appeal and, pursuant to subsection 60(4) of the Act, make the order that the Board should have made, namely that the booster compressors and ancillary equipment subject of the appeal are machinery and apparatus used by the appellant directly in the production of goods and that, there being no issue as to its meeting the other requirements of Schedule III, Part XIII, s. l(a)(i), they are exempt from tax under the Excise Tax Act. I see no special reason, within the contemplation of Rule 1312, for ordering costs.

Appeal allowed.