10 February 1984 Income Tax Severed Letter 7-2897 - [C.C.A. Classification of Pipelines ]

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.

DATE February 10, 1984

TO- REVIEW COMMITTEE

FROM- Specialty Corporations Rulings Division Services, Public Utilities And Exempt Corporations Section D. Lanos

Ref: 7-2897 & 5-5502

ATTENTION R.M. Beith R.J.L. Reid A.G. Cockell

C.C.A. Classification of Pipelines

Purpose:

1. To distinguish "pipelines" and "refinery and chemical plant pressure piping" (pressure piping) and to determine what constitutes a "pipeline" as that word is used in Class 2(b) of Schedule II of the Income Tax Regulations.

2. To establish terms of reference which may be applied consistently in classifying the above assets for capital cost allowance purposes.

Taxpayers and Others Involved:

1 XXXX

2 XXXX

3. Toronto District Office - Appeals Division.

Overview of Problem

1. Department's Position

Our present position, based on Interpretation Bulletin IT-482 , paragraph 9, sentences 2 and 3, is that the pressure piping generally utilized in an oil refinery complex, being a "line of pipe", would normally qualify as a Class 2(b) asset unless it could be considered an integral part of a refinery's processing equipment or storage tanks, in which case, it has been accepted as a Class 29 or Class 6 asset respectively if it otherwise qualified within those classes.

XXXXPosition:

XXXX submits that such pressure piping is clearly distinguishable, both in Canadian law and in the standards of the Canadian Standards Association, from "pipelines" within the meaning of that word for purposes of Class 2(b). Therefore, pressure piping can not be included in Class 2(b) as though it were a pipeline.

Transactions in Detail

1. History:

Regulations Division (A. Cockell) reviewed the Department's practice concerning the classification of pipeline assets in 1980 and was reluctant to define "pipeline" in a precise manner in the Income Tax Regulations preferring instead to have the Department's position outlined in the then anticipated IT-482 (issued November 30, 1981).

Examination of the background file to IT-482 confirms that the problem of determining whether the pressure piping used in the oil and gas industry was a pipeline for purposes of Class 2(b) was never addressed, probably, because there was no record of a problem in the research files when the bulletin was being written. Pressure piping or its equivalent is not discussed specifically in IT-482 .

2. Re-Assessments under Appeal:

Toronto District Office, relying on the comments in paragraph 9 of IT-482 and supported by direction from Corporate Rulings Directorate (P. Clemens) given initially in 1982 and re-affirmed in 1983. XXXX from Class 29 to Class 2 (a "first" for re-assessments of this kind for this District Office). These returns are now under appeal and Toronto D.O. Appeals Division has written for our advice in this regard.

3. Taxpayer representations: XXXX Mr. Daniel Bourgeois of the Department of Finance also receives a copy and finds XXXX submission reasonable. Mr. Bourgeois or Derek Williams wish to be advised of the results of our review.

4. Tax Impact:

The classification or reclassification of refinery pressure piping as Class 2 assets involve

Technical Aspects:

1. Legal Opinion:

We have not yet sought an opinion from Legal Services on the legal argument made by XXXX which, generally, is that inasmuch as the word "pipeline" is not defined in the Income Tax Act or Income Tax Regulations, it must take meaning assigned it in other Canadian legislation and in accepted usage (i.e. dictionary meaning) .

2. Legislation:

"Pipeline" was first included in Class 2(b) of Schedule B to the Income Tax Regulations in 1949 but has never been defined. However, it was defined for purposes of the Pipeline Regulation Act RSA 1942, of Alberta as early as 1939. The earlier federal and provincial legislation regulating gas and oil pipelines did not refer specifically to pressure piping systems. However, in defining "pipeline" for their own purposes, pipelines were generally described as those running to or from a refinery fence. Some definitions contained a list of specific exclusions which included "pipelines located within a refinery fence". In any event, it is clear even in this early legislation that every line of pipe or pipeline is not necessarily a "pipeline" within the spirit of the Canadian law which regulates gas and oil pipelines.

Current pipeline regulations issued by the Provinces of Alberta and Ontario clearly distinguish "pipelines" from "pressure piping" by incorporating as part of those regulations the construction standards established by the Canadian Standards Association ("CSA") in respect of each. The standards are:

a) CSA Z183, Oil Pipeline Transportation Systems.

b) CSA Z184, Gas Transmission and Distribution Systems.

c) CSA B51, Construction and Inspection of Boilers and Pressure Vessels, incorporating American National Standards Institute B.31.3, Chemical Plant and Petroleum Refinery Piping.

3. Industry Standards:

The fundamental difference which separates pipelines from pressure piping, both of which otherwise qualify as conduits for transporting oil, gas, water or other substances in a fluid or gaseous state, is that the latter always must meet the higher more stringent construction standards of CSA B51 so that it may transport substances under pressure. The industry standards listed in 2 above thus distinguish pipelines and pressure piping on the basis of function rather than on physical location, size, or length (i.e. see IT482, Para. 9, "short lines"). Accordingly, although pressure piping is normally found within a refinery's gates, on occasion it may be located without. Likewise, pipelines constructed to C.S.A. Z183 or C.S.A. Z184 standards, although normally used to transport substances to and from refinery or other manufacturing facilities, could also be found within a refinery's gates.

4. Current Usage (Dictionary Meaning):

The dictionary definition of "pipeline" which appears most to support XXXX position is that, dating back to 1882 and found in the Shorter Oxford English Dictionary on Historical Principles, which described a pipeline as "a conduit of iron pipes for conveying petroleum from the oil wells to the market or refinery ...". The Department's position appears to rely on either the "line of pipes" definition in Webster's New Collegiate Dictionary or the "connected series of pipes" definition in Black's Law Dictionary and makes no distinction vis à vis pressure piping.

Alternatives:

A. Request Finance to amend the Income Tax Regulations either to define "pipeline" for purposes of Class 2(b) or, at least, to set out for greater certainty those types of lines of pipes which are not included in Class 2(b) vis à vis the gas and oil industry. In the interim, advise Finance that we are prepared to administer Class 2(b) to include therein those pipelines constructed pursuant to the C.S.A. Standards C.S.A. Z183 and C.S.A. Z184 and to exclude therefrom those pressure piping constructed pursuant to C.S.A. B51. Revise IT-482 to reflect this administrative policy and publish a Greenie pending its issue. Pressure piping would then fall into Class 8(i) by default.

B. Continue to administer Class 2(b) in accordance with our present practice described in the Overview above until Finance either amends the law or gives us a definite commitment that amendments are forthcoming or the Courts provide guidance.

C. Administer Class 2(b) as described in Alternative A without seeking amendments from Finance.

Pros and Cons:

Alternative A:

Pro: The need to defend in the Courts what in our view is a weak position is avoided. Our present position does not give weight to existing law and industry standards. XXXX position is grounded in a long standing dictionary meaning and in definitions which have evolved in federal and provincial legislation.

Con: 1. Paul Clemens, Section R1, has prepared at our request a memorandum dated February 3, 1984 listing 7 reasons for maintaining our present position.

2. Our new position opens the door to Class 29 and investment tax credit qualification for pressure piping.

Alternative B:

Pro: Clarification of the law in this issue would be forced. Con: XXXX intends to press its position in the Courts.

Alternative C:

Pro: Same as for Alternative A.

Con: 1. Clarification of uncertain law in this area is lost.

2. The door is then opened for further public requests for Class 2(b) exclusions not specifically blessed in the Act or Regulations.

Recommendation

Alternative A for the reasons listed in the "Pros" thereto. In addition, as regards P. Clemens' memorandum of February 3, 1984, we are not aware of any case law which supports the Department's position and, in our view, section 2(f) of Alberta's Pipeline Act being an exclusionary provision could equally support the position that pipelines do not include pressure piping.

for Chief Services, Public Utilities And Exempt Corporations Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch