Cambrian Disposals Limited v. Minister of National Revenue, [1976] CTC 2071

A W Prociuk (orally: November 28, 1975):—The appellant, Cambrian Disposals Limited, a corporation incorporated by Letters Patent under the laws of the Province of Ontario on July 6, 1970, appeals from the respondent’s reassessment of its income in respect of the taxation years 1971, 1972 and 1973 wherein in 1971 the sum of $114,867.33 claimed by the appellant to have been a capital receipt was treated as income by the respondent, drilling exploration costs in the sum of $1,179.89 deducted therefrom and interest and penalties added to the tax assessed. Also the appellant was disallowed capital cost allowance under Class 24 of Schedule B to the Income Tax Regulations, as the respondent placed the appellant’s half interest in the assets (being, in the main, a pipeline and a disposal well) under Class 2 for the years under appeal.

In his Reply to the Notice of Appeal, the respondent conceded the first item, that is, the sum of $114,867.33, to be a non-taxable capital receipt. This point was spoken to by both counsel at the commencement of the hearing of this appeal. Accordingly, the appellant’s taxable income for 1971 is nil; penalties and interest are deleted; and the cost of drilling and exploration in the sum of $1,179.89 is carried forward into the 1972 taxation year.

The issue remaining to be resolved is whether or not the appellant is entitled to capital cost allowance under Class 24 or Class 2 of Schedule B to the Income Tax Regulations. The facts essentially are not in dispute.

Briefly, the appellant’s objects of incorporation, as set out in its Notice of Appeal, are:

(i) TO carry on the business of transporting, collecting, storing and disposing of any materials, substances, liquids or solutions of any kind and description including without detracting from the generality of the foregoing, solids, water, brine, fluids and gases, or any of them, or any combination of them.

(ii) subject to The Professional Engineers Act, to carry on the business of engineering;

(iii) TO act as consultants, geologists and managers to persons, firms and corporations engaged in petroleum, natural gas, disposal and mining operations;

(iv) TO acquire, drill, own, lease, prospect for, open, survey, develop, work, improve, maintain and manage, either for its own account or others, wells, permits, concessions, reservations, water and lands of every kind and description; and

(v) TO guarantee, with or without security, the performance of contracts and the performance of any obligations or undertakings of any other person, company or association with whom or which the Company may have dealings including the payment of dividends, interest, principal and premium, if any, of or on shares, bonds, debentures, debenture stock or other securities, mortgages or liabilities of any such person, company or association, and to accept as security for any loans and guarantees made or goven [sic] by the Company any security that may be offered by such person, company or association, including shares, bonds, debentures, debenture stock, chattel mortgages, pledges, liens or other securities or obligations of such other company or of or upon the property of such person, association or company; PROVIDED, however, that it shall not be lawful for the Company hereby incorporated directly or indirectly to transact or undertake any business within the meaning of The Loan and Trust Corporations Act.

In 1970, it owned certain surface leases and a well suitable for disposal of a pollutant, in this instance, brine, located some six miles from a plant owned and operated by Dome Petroleum Limited (hereinafter referred to as “Dome”) in Sarnia, Ontario, the latter’s business being the production of liquefied petroleum gas or “LPG” as it is commonly referred to. The storage of LPG requires subsurface salt caverns, and Dome constructed these for its purposes by drilling wells in subsurface salt formations and forcing fresh water into them. As the salt dissolved therein, it was pumped out, and the cavern so created was used for the storage of LPG. Only a small quantity of this brine, approximately 10% of the total, is needed by Dome in its process of extracting LPG from its storage caverns at which time brine is poured back to raise the level of LPG in a given cavern. The remaining 90% of the brine must be disposed of pursuant to the rules and regulations of the environmental authorities. In prior years the brine was dumped by Dome into a nearby river, which practice is now prohibited.

On or about March 17, 1971 the appellant and Dome entered into an agreement, filed as Exhibit A-1, whereby Dome would construct a pipeline from its plant to the well referred to earlier. Each party acquired a half-interest in the pipeline, well and surface leases. The items and the terms thereof are more particularly set out in the said Agreement filed as Exhibit A-1. I note that the Agreement sets out with some emphasis that, apart from being 50/50 owners as tenants in common of the pipeline and well and sharing in that proportion in the profits and losses from the operations thereof, they (the appellant and Dome) are not to be construed as a partnership, presumably, I take it, with partnership obligations and liabilities pursuant to the laws of the Province of Ontario respecting partnerships. The pipeline is connected to the Dome plant and the excess brine is pumped into it, and from there it finds its way via the pipeline into the well. (See Exhibits A-2 to A-6 inclusive, which are photographs of the connection of the pipeline to the plant at Sarnia, Ontario, and of the wellhead structure as well.)

If the appellant is entitled to capital cost allowance under Class 24, it must fit into that class, of which the relevant portions read as follows:

Property acquired

(b) before 1977 that would otherwise be included in another class in this Schedule,

(iii) that was acquired by the taxpayer after 1970 primarily for the purpose of preventing, reducing or eliminating pollution of

(A) any of the inland, coastal or boundary waters of Canada, or

(B) any lake, river, stream, watercourse, pond, swamp or well in Canada,

that is caused, or that if the property had not been acquired and used, would be caused by

(C) operations carried on by the taxpayer at a site in Canada at which operations have been carried on by him from a time that is before 1974,

(D) the operation in Canada of a building or plant by the taxpayer, the construction of which was either commenced before 1974 or commenced under an agreement in writing entered into by him before 1974, or

(E) the operation of transportation or other moveable equipment that has been operated by the taxpayer in Canada (including any of the Inland, coastal or boundary waters of Canada) from a time that is before 1974,

It is admitted by both parties that we are not concerned with clause (E). As will be seen, (C) and (D) under subparagraph (iii) of paragraph

(b) are the relevant clauses herein.

Counsel for the appellant stressed the fact that the appellant’s witness John A Pounder, a professional petroleum geologist and one of the directors of the appellant company, stated that the well and pipeline in which the appellant had a one-half interest, being attached to the plant, became an integral part thereof, and that without them the plant could not operate. It would offend the law respecting environment, under which it would be prohibited from, and penalized for, polluting neighbouring waters.

It is agreed that the appellant does not manufacture LPG, that it does not own the plant per se, that is, any part of the main plant beyond the valve that connects the pipe to the plant as seen in Exhibits A-2 and A-3, and that it does not itself construct the salt caverns in which the LPG is stored and which make it necessary to dispose of the excess brine. Its concern commences at the valve connecting the pipeline with the plant.

Counsel for the appellant referred to a number of cases, both Canadian and British, in an effort to establish that, in the circumstances, the pipe and the well are part and parcel of the plant. The principal case referred to is the Supreme Court of Canada case of British Columbia Forest Products Limited v MNR, [1971] CTC 270; 71 DTC 5178, affirming the Exchequer Court decision reported in [1969] CTC 156; 69 DTC 5127. I can best summarize the problem in that case by referring to the headnote at page 5179 of 71 DTC, which reads in part as follows:

(1) An examination of the details of each of the disputed assets and its functions led to the conclusion that all of the assets fell within Class 3. The items in the mill building, while they might have formed part of the manufacturing plant, were a part of the very fabric of the mill building. They were not chattels which were merely attached to the building but were part of the building itself. The items outside the mill were structures, if they were not buildings. The word “structure” as used in Class 3 did not have to be construed ejusdem generis with the word “building”. It is preceded by the word “other”, thus contemplating structures other than buildings. As defined in an English case, a structure is something of substantial size which is built up from component parts and intended to remain permanently on a permanent foundation. The items outside the mill met this test.

In other words, in that case the structures or the assets outside the mill became part of the mill — became part of the building. In this instance, it is argued that the pipeline, being attached to the plant, becomes part of the plant, and there are cases, as indicated by learned counsel for the appellant, in which the word “plant” has a much broader meaning than the word “buildings”, so that there would be little difficulty in establishing that the pipeline becomes part of the plant.

That does not end the problem, even assuming that I were to decide that the pipeline is in fact part and parcel of the plant. In the instant case, a further obstacle faces the Board and is contained in clauses

(C) and (D) of paragraph (b) of Class 24; and I quote these clauses again:

Property acquired

(b) before 1977 that would otherwise be included in another class in this

Schedule,

(iii) that was acquired by the taxpayer after 1970. primarily for. the. purpose of preventing, reducing or eliminating pollution of

(B) any lake, river, stream, watercourse, pond, swamp or well in Canada

that is caused, or that, if the property had not been acquired and used, would be caused by

(C) operations carried on by the taxpayer at a site in Canada at which operations have been carried on by him from a time that is before 1974,

(D) the operation in Canada of a building or plant by the taxpayer, the construction of which was either commenced before 1974 or commenced under an agreement in writing entered into by him before 1974, or. . . .

It is agreed that the date is not material herein because the agreement is dated March 1971.

Counsel for the respondent pointed out that it is exclusively the operations of Dome that cause the pollution. It is Dome’s plant that is instrumental in this regard, and the appellant comes in at the end of the line with its assets which only dispose of the pollutant.

Unless I have misconstrued the entire situation, it seems ‘clear to me that the appellant, in the circumstances, does not qualify to receive capital cost allowance on its one-half interest in the pipeline and well under Class 24 for the reasons stated, and its appeal on this issue is dismissed.

in the result, the appeal is allowed in part on the basis that, in the taxation year 1971 the sum of $114,867.33 is to be treated as a capital receipt for that year; that the cost of drilling and exploration in the sum of $1,179.89 is to be brought forward to the taxation year 1972; and that penalties and interest for the taxation year 1971 are to be hereby deleted. The entire matter is referred back to the respondent for reassessment accordingly.

Appeal allowed in part.