Alberta Natural Gas Company v. Minister of National Revenue, [1969] CTC 316, 69 DTC 5230

SHEPPARD, D.J.:—Alberta Natural Gas Company, the appellant, has appealed against an assessment for the year 1966 whereby the Minister, in computing the amount of loss to be carried forward from previous years 1960-62 inclusive, has added to the appellant’s income for the years 1963 to 1966 inclusive, certain amounts (set forth in Exhibit 3, column 3 of Para. 9, Statement of Facts Admitted) as additional income from the appellant’s business. These amounts were computed in respect of United States dollars received by the appellant pursuant to a Gas Transportation agreement by computing the amounts at the Current rates of exchange (Exhibit 3, Paras. 10 and 11 S.O.F.A.) The question is whether these amounts (Exhibit 3, column 3 of Para. 9) are income which the appellant denies and the respondent affirms. The facts follow.

The appellant owns and operates a pipeline to transport natural gas from a point 1,700 feet within Alberta to Kingsgate, British Columbia, where it connects with the pipeline of Pacific Gas Transmission Company, which then transports to points in the United States of America. Under agreement dated 20 September, 1960 between Alberta & Southern Gas Co. Ltd. and Westcoast Transmission Co. Ltd. as Shippers of the First Part and Alberta Natural Gas Company, the appellant, as Pipeline Company of the Second Part (Exhibit 1, P. 1) the appellant agreed to build a pipeline to transport natural gas from the Alberta side of the boundary to a junction with the Pacific Gas Transmission at Kingsgate, British Columbia and the Shippers severally agreed to pay to the appellant monthly cost of service charge according to billings by the appellant as therein provided. That principal agreement was amended by an amending agreement dated January 31, 1961 between the same parties (Ex. 1, p.p. 40-52) which amended the principal agreement by deleting various paragraphs of the principal agreement and substituting therefor and by providing for the billings by the appellant to designate the part of the monies to be paid in United States dollars and the part in Canada dollars.

The appellant built the pipeline in the years 1960 and 1961 and the building was partly financed by the Appellant selling 934% First Mortgage Pipeline bonds for twenty-five million dollars payable in United States dollars. (Ex. 4, and Ex. 3), S.O.F.A., Para. 8.) Pursuant to the amended agreement the appellant having designated the part of the monies to be paid in United States dollars received from the shippers United States dollars in amount sufficient to pay the principal, maturing and to be paid in United States dollars under the said First Mortgage Pipeline bonds. The United States dollars received by the appellant, the respective dates and the exchange rates favourable to the United States dollar appear in Exhibit 3, Para. 10, (S.O. F.A.) and those amounts (shown in Exhibit 3, Column 3, Para. 9, S.O.F.A.) were added by the Minister to the appellant’s in- come for taxation years 1963-66 inclusive in determining the amount of loss to be carried forward. The appellant contends as follows:

That the agreement as amended constitutes two agreements.

(i) A service agreement which services were payable in Canada dollars.

(ii) The amending agreement constitutes a forward exchange contract or hedge for exchange as a wholly independent and separate agreement whereby the appellant agreed in advance to exchange Canada dollars for United States dollars at par and that such resulting exchange (a) was not income and (b) produced no profit or income within the Income Tax Act.

On the other hand respondent contends that the United States dollars were received as part of the appellant’s remuneration for the transporting of gas and therefore being received for the performance of the appellant’s services were income in the amount of Canada dollars receivable from the premium on United States dollars received.

The important paragraphs in the principal agreement with any amendment by the amending agreement (and excepting the underlining here added) are as follows:

2.3 Pipeline Company agrees to receive, transport and deliver daily volumes of gas in accordance with paragraph 4.

2.0 The shippers agree to pay Pipeline Company in accordance with the monthly cost of service basis provided in paragraph 13.

12. BILLING AND PAYMENT:

12.1 Billing: On or before the twentieth (20th) day of each month, Pipeline Company shall render an itemized bill to each shipper showing the monthly cost of service charge calculated for that shipper in accordance with paragraph 13 for the preceding month (hereinbefore defined as the “billing month”). (Ex. 1, p. 25.)

12.2 Part payment in United States Dollars: If Pipeline Company shall cause the construction of the said pipeline and/or facilities required for increased capacity to be financed in whole or in part by the sale prior to December 31, 1964, of securities of Pipeline Company requiring payment of principal, premium, if any, and interest in United States dollars (such securities being hereinafter referred to as “U.S. pay securities”), then each shipper shall in its payment of its said monthly cost of service charge substitute

for the same number of Canadian dollars, and Pipeline Company shall accept in substitution, the number of United States dollars determined as hereinafter set forth, but not to exceed sixty-six percent (66%) of the said monthly cost of service charge.

Pipeline Company shall, not later than thirty (30) days after each sale of any U.S. pay securities, give notice to each shipper setting forth the following :

(i) The total outstanding amount of U.S. pay securities;

(ii) A schedule of the total annual amounts of such payments unconditionally required by the terms of such U.S. pay securities to be made in United States dollars; and

(iii) The place where Pipeline Company desires to receive that part of the said monthly cost of service charge which is to be paid in United States Dollars.

Reasonable notice of any change in (iii) above shall be given to each shipper. After January 30, 1965, the schedule referred to in

(ii) above shall be changed only by mutual agreement of the parties.

The amount of United States dollars to be so paid monthly by each shipper shall be its proportionate share of one-twelfth (1/12) of the amount of United States dollars set forth in the schedule referred to in (ii) above for the year in which the shipper’s payment is due; said proportionate share to bear the same ratio to one-twelfth (1/12) of the total amount for the year as that shipper’s monthly cost of service charge then payable bears to the sum of the monthly cost of service charges of both shippers then payable.” (Ex. 1, Amending Agreement, p. 44.)

12.3 Payment: On or before the last day of the month following the billing month each shipper shall pay Pipeline Company at Pipeline Company’s office, Calgary, Alberta, for so much of the bill as shall be payable in Canada dollars and at the place designated by Pipeline Company pursuant to paragraph 12.2 for so much of the bill as shall be payable in United States dollars. (Ex. 1, Amending Agreement, p. 45.)

(Paragraph 5 of the Amending Agreement (Ex. 1, p. 46) renumbers paragraphs 12.3 to 12.6 of the principal agreement to new numbers 12.4 to 12.7 respectively.)

13. COST OF SERVICE:

Each shipper shall pay to Pipeline Company a monthly cost of service charge calculated in accordance with this para. 18. The

first billing month for which payment shall be due hereunder shall be the earliest of the months determined in accordance with clauses (a), (b) and (c) below:

(a) the next month following the date gas is first delivered hereunder at the principal point of delivery,

(b) if Pipeline Company shall have completed construction of the said pipeline by December 31, 1961, the month of January, 1962,

(c) if Pipeline Company shall have completed construction of the said pipeline after December 31, 1961, the second month next following completion of construction of the said pipeline.

13.1 Calculation of Cost of Service: The cost of service charge for each shipper shall be determined by multiplying Pipeline Com- pany’s total cost of service during the billing month by the fraction whose numerator is the shipper’s Daily Contract Quantities of both shippers. Such total cost of service shall equal the sum of the following amounts:

Then follow clauses under the respective headings:

(a) Operating Expenses: ‘‘ Reasonable and necessary expenses for the billing month’’, etc.

(b) Depreciation

(ce) Amortization

(d) Taxes

(e) Return

(Ex. 1, p. 26, Principal Agreement, and for clauses a, b, and ec, see Amending Agreement, p. 46.)

The contracts are in writing hence their construction is for the Court as a question of law, Bowes v. Shand (1877), 2 App. Cas. 4595, per Lord Cairns, L.C. at p. 462 ; Turner v. Sawdon & Co., [1901] 2 K.B. 653, per A. L. Smith, M.R. at p. 656. There is no evidence of any technical words or those with a special meaning in trade usage or of any intention of the parties to use the words according to such special meaning. It therefore follows that the words will be construed according to ‘‘strict, plain, common meaning of the words themselves’’. Tsang Chuen v. Pi Lo Kwai, [1932] A-C. 715, per Lord Blanesburgh at p. 728 ; Grey v. Pearson (1857), 6 H.L.C. 61, Lord Wensleydale at p. 106. The meaning of the agreement as amended is determined by the Court from the words used and evidence of the meaning is therefore inadmissible.

The agreement (Ex. 1) indicates that the monies in question were received for the services rendered in the business of the appellant.

The first recital of the principal agreement bearing. date September 20, 1960 states ‘‘its principal purpose the transportation of gas from Canada” and the last recital states ‘‘ whereas Pipeline Company desires to transport gas for the Projects from a point in Alberta to the international boundary where it will deliver the gas into the facilities of Pacific Gas Transmission Company’’.

The covenants indicate that the “principal purpose” referred to in the recital is carried out by the appellant as Pipeline Company agreeing “to receive, transport and deliver’’ gas (Para. 2.3) and by the shippers agreeing to pay ‘‘in accordance with the monthly cost of service basis provided in Para. 13 ’’ (Para. 2,5). No doubt there are preliminary covenants of the appellant as Pipeline Company which are incidental to this ‘‘ principal purpose” such as the covenants to build, (Para. 2.1) to maintain and operate the pipeline (Para. 2.4), to increase the capacity (Para. 2.2) to provide the exclusive use to the shippers if the law so permits (Para. 2.6) but these covenants are merely preliminary and incidental to the ‘‘principal purpose’’, as their performance leads to the ability of the appellant “to receive, transport and deliver’’ gas as agreed.

There are provisions for payment by the shippers contained in the Force Majeure paragraph (Paragraph 14, Ex. 1, p. 31 and Amending Agreement p. 48) but this paragraph has not applied and is here irrelevant. Accordingly the service of receiving, transporting and delivering of gas by the appellant is the principal purpose of the agreement so as to denote the values exchanged namely transporting of gas by the appellant and payment by the Shippers and is therefore a substantive part of the agreement.

Wherever “cost of service” appears in the agreement it includes the expense of receiving, transporting and delivering gas for the shipper. Paragraph 2.5 provides that the Shippers shall pay “in accordance with the monthly cost of service basis provided in paragraph 13’’; that cost of service expressly includes ‘‘operating expenses’’ (Ex. 1, p. 46, para. 13.1, clause a). “Cost of Service’’ has been so used in paragraphs 2.5, 12.1, 12.2 and 13.1 and must have the same meaning throughout the agreement.

The United States dollars to be paid by the shippers are intended by the parties to be a payment pro tanto of the “cost of service’’ and being part of the ‘‘cost of service’’ are payment for receiving, transporting and delivering gas. Paragraph 12.2 intends the United States dollars to be part of the cost of service : that paragraph reads in part “Each shipper shall in its payment of its said monthly cost of service charge substitute United States dollars . . . but not to exceed sixty-six percent (66%) of the said monthly cost of service charges.’’ (Ex. 1, Para. 12.2, p. 44.) Para. 12.3; p. 45 refers to the payment by the shippers of United States dollars as ‘‘so much of the bill’’ and being part of the “bill” must have been paid as part of the cost of service. Further, clause (iii) of paragraph 12.2 requires the appellant as Pipeline Company, to give notice of ‘‘the place where Pipeline Company desires to receive that part of the said monthly cost of service charge which is to be paid in United States dollars.” (Ex. 1, para. 12.2, p. 44) ; this clause (iii) of paragraph 12.2 in itself makes the cost of service to include that part payable in United States dollars. Again the last clause of paragraph 12.2 requires each shipper to pay in United States dollars — his proportionate share of “that shippers monthly cost of service charge’’ (Ex. 1, p. 45). Paragraph 12.3 requires each shipper to pay monthly ‘‘for so much of the bill as shall be payable in United States dollars’’ (Exhibit 1, p. 45).

As the service is rendered by the appellant, the Pipeline Company, it must necessarily follow that the parties intended that the United States dollars pay the cost of the appellant’s services in part. That express intention is against the United States dollars being intended as a purchase of Canada dollars and not for the payment of services rendered by the appellant pursuant to the agreement.

The contention that the United States dollars were exchanged for Canada dollars as part of a forward exchange contract or a hedge raises further difficulties. Either agreement would be executed by the appellant transferring Canada dollars for United States dollars. However, Canada dollars were not vested in the appellant so as to permit their being exchanged for United States dollars. The payment by the Shipper under para. 2.5 is to be in accordance with para. 13. Para. 13 in mandatory language “shall” requires a notice showing the amount to be paid, the portion in Canada dollars, the portion in United States dollars, and where they are to be paid. As some information, to be given by the notice, would be in the appellant only, therefore the giving of notice would precede the vesting of the obligation of the Shipper to pay United States dollars.

The intention that the giving of notice would precede the vesting of the obligation of the Shipper to pay is indicated as follows :

(a) The amount to be paid could only be known to the appellant, the Pipeline Company, and hence the shipper would only know the amount he should pay upon receiving the notice. (Ex. 1, Para. 40, p. 46, p. 26)

(b) Also the notice is to state the proportion of Canada dollars and United States dollars, para. 12.2, page 44.

(c) The time for payment is determined by the giving of notice. (Ex. 1, para. 12.3, p. 45)

(d) The contents of the notice are required in mandatory language. (Ex. 1, para. 12.1, page 25)

There is no demand for payment in Canada dollars so as to vest those dollars in the appellant to permit their being exchanged for United States dollars.

The appellant has also contended that there was no profit in the transaction in that the Canada dollars were exchanged to U.S. dollars at par and if there was no profit there could be no income within the Income Tax Act. That contention fails for the following reasons :

The fact that a particular item produced no income is irrelevant, Royal Trust v. M.N.R., [1956-60] Ex. C.R. 70 at 80; [1957] C.T.C. 32 at 57.

The real question is whether or not the United States dollars were income within Section 3 of the Income Tax Act, that is whether or not they were received: by the Appellant in its business on current account. The substance of the matter is that the United States dollars were payments for services rendered by the appellant as in Curran v. M.N.R., [1959] S.C.R. 850; [1959] C.T.C. 416, per Kerwin, C. J. at 856 [p. 423] and Martland, J. at p. 861 [p. 427], and being a payment for transporting gas must be on current account in the Appellant’s business and therefore must be included in computing the income from the appellant’s business, as within Section 3 of the Income Tax Act.

As the United States dollars have been found to be income it is not necessary to deal with the cases cited nor consider the words ‘‘in the nature of a trade” applied in Wisdom v. Chamberlain (Inspector of Taxes), [1959] 1 W.L.R. 275 (C.A.).

In conclusion, the appellant did receive United States dollars for services of the appellant in transporting gas and therefore the United States dollars as measured by Canada dollars are income within the Income Tax Act and are properly considered in determining the loss to be carried forward. The petition is therefore dismissed with costs.