23 January 2004 Internal T.I. 2004-0057561I7 - classification of Pipeline Appendage Equipment

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: whether natural gas transmission pipeline appendage equipment should be classified as Class 1 or Class 8

Position: Class 1(n),

Reasons: review of relevant case law

January 23, 2004

Technical Applications and Valuations Division	Reorganizations and Compliance Programs Branch	Resources Division
Place de Ville, Tower B	Ted Harris
112 Kent Street, 13th Floor	(613) 957-2114

Attention: Christine Savage,
Coordinator-Resource Industries 2004-005756

Transmission and Distribution of Natural Gas
Classification of Pipeline Appendage Equipment

We are writing in response to your request for our views as to whether the Agency's position relating to the classification of natural gas transmission pipeline appendage equipment (i.e., equipment that is ancillary to a natural gas transmission pipeline, such as compressor stations, metering equipment, and liquefying and storage facilities, etc.) remains as described in our memo of July 10, 2001 (document No. 2000-003498).

Our Comments

As you are aware, three panels of the Federal Court of Appeal have considered this issue. In Northern and Central Gas Corporation Limited v. The Queen 87 DTC 5439, the Court concluded that the terms "distributing" and "distribution" as used in paragraph (d) of Class 2 (now paragraph (n) of Class 1) should be interpreted in the broad and general sense and not in the more restrictive sense used by the natural gas industry (i.e. the industry distinguishes between the transmission and the distribution of natural gas). The Court's conclusion was based on the fact that this paragraph is not limited to the production and distribution of natural gas, but includes other gases as well.

The case of Nova, an Alberta Corporation v. The Queen 88 DTC 6386 involved a taxpayer whose business consisted solely of the transmission of natural gas on behalf of third parties. In this case, the majority of the Court found that the word "pipeline" as used in the Regulations should have the meaning ascribed to the term by the oil and gas industry.¹ The majority also found that Nova was not involved in the business of distributing gas as that term is used in the industry or as defined in the dictionary. However, Pratte, J. in dissent was of the opinion that the conclusion reached in Northern and Central Gas should have been followed in the Nova case.

Finally, in Pacific Northern Gas Limited v. The Queen, 91 DTC 5287, the Court reviewed the decisions in the two earlier cases and concluded that "the reasoning on which this Court based its decision in Northern and Central Gas Corporation Limited v. The Queen (1987) 87 DTC 5439 is sound and must be preferred to the reasons subsequently given in the case of Nova, an Alberta Corporation v. The Queen (1988) 88 DTC 6386."

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If we were to adopt the rationale in Nova as submitted by the industry, the classification of pipeline appendage equipment used in the transmission of natural gas as either Class 1 or Class 8 property would depend solely on whether the taxpayer carries on a natural gas distribution business and whether such equipment is to be used primarily (i.e. more than 50%) in that distribution business. In addition, natural gas distribution pipeline appendage equipment has always been considered by the natural gas industry as Class 1 (previously Class 2) property.² In our view there is no tax policy reason for such differences in classification, as the useful economic life of the assets would be the same in all cases.

Conclusion

Based on our interpretation of the three decisions of the Federal Court of Appeal as described above, we confirm the position set out in our memo of July 10, 2001 that all natural gas transmission pipeline appendage equipment should be included in Class 1(n) of Schedule II of the Regulations. This position will be communicated to the public in the near future.

We trust that our comments will be of assistance.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES

¹ The oil and gas industry refer to a "pipeline system" when it is intended to refer to all of the related equipment.

² The industry distinguishes between a natural gas transmission system and a natural gas distribution system. A transmission system carries natural gas over long distances at high pressures, while a distribution system carries natural gas at relatively low pressures over shorter distances.

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