Alberta Gas Trunk Line Co. Ltd. v. Minister of National Revenue, [1972] S.C.R. 498, 71 DTC 5403, [1971] CTC 723

Supreme Court of Canada

Alberta Gas Trunk Line Co. Ltd. v. Minister of National Revenue, [1972] S.C.R. 498

Date: 1971-10-06

Alberta Gas Trunk Line Company Limited Appellant;

and

The Minister of National Revenue Respondent.

1971: June 15, 16; 1971: October 6.

Present: Abbott, Martland, Judson, Spence and Laskin JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Taxation—Income Tax—Exchange premium—Pipeline company—Indebtedness to be discharged in U.S. dollars—Part of service charges paid by shippers of gas in U.S. dollars—Indemnity agreement against exchange loss—Exchange premium a part of income—Difference between U.S. dollars borrowed and Canadian dollars received, not a business loss—Income Tax Act, R.S.C. 1952, c. 148, ss. 3, 12(1)(a), (b), 27(1)(e).

The appellant owns and operates a natural gas transmission system used in the transportation of natural gas from various points in Alberta to various delivery points within Alberta, including a delivery point at Coleman where gas is delivered into the system operated by Alberta Natural Gas Company (see p. 490). The appellant entered into a gas transportation contract with certain shippers to receive, transport and deliver daily volumes of gas. The appellant financed the construction of its pipeline by the borrowing of U.S. dollars and this indebtedness was to be discharged in U.S. dollars. Pursuant to the terms of the gas transportation contract, the payments received by the appellant for the transportation of the gas were partly in Canadian dollars and partly in U.S. dollars, which were now at a premium in relation to the Canadian dollars. In assessing the appellant, the Minister included the premium on the U.S. dollars received. The appellant submitted that the agreement with the shippers included an indemnity agreement against exchange losses on its U.S. indebtedness as well as a gas transportation contract. A second issue was raised when the Minister disallowed the deduction of an exchange loss which was alleged to have been sustained in 1961 when the appellant borrowed the U.S. dollars. At that time, it received a lesser amount in Canadian funds because the Canadian dollar was then at a premium in relation to the U.S. dollar. The appellant treated the difference in the two amounts as a business loss. The Minister’s assessment was

[Page 499]

upheld by the Exchequer Court on both issues. The company appealed to this Court.

Held: The appeal should be dismissed.

The American dollars received by the appellant from the shippers represented income from its business operations, and their full value had to be taken into account in determining its income from its business for tax purposes.

With respect to the second issue, the appellant did not establish an exchange loss in 1961. Whether or not any loss will be sustained will depend upon the exchange rates existing when the U.S. dollars are repaid. In any event, whatever such losses may prove to be, the borrowing was a borrowing of capital for the construction of capital assets.

APPEAL from a judgment of Sheppard J. of the Exchequer Court of Canada[1], in an income tax matter. Appeal dismissed.

John G. McDonald, Q.C., G.R. Forsyth and R.C. Macfarlane, for the appellant.

G.W. Ainslie, Q.C., and J.R. Power, for the respondent.

The judgment of the Court was delivered by

MARTLAND J.—This is an appeal from a judgment of the Exchequer Court of Canada¹ dismissing the appellant’s appeal from the income tax assessment for its 1966 taxation year. There are two questions involved:

1. Did the gas transportation contract, hereinafter described, contain two separate promises by the shippers (a) to pay for the cost of transporting their gas, and (b) to indemnify the appellant against any exchange loss resulting from its liability to pay capital and interest, in U.S. funds, in respect of its issue of Series B First Mortgage Sinking Fund Bonds, or did it provide for payment by the shippers of part of the price for transporting their gas in U.S. funds, so as to make its receipt of

[Page 500]

such dollars a part of the income of the business which it carries on?

2. Did the appellant, which, in its 1961 taxation year, incurred a capital obligation to pay $67,000,000 in U.S. funds in respect of the said bonds, which resulted in its receipt of $66,641,171.88 in Canadian funds, incur a business loss in that taxation year of $358,828.12, being the difference in those amounts, which it was entitled to deduct from its income for that year, in computing its income tax liability?

The appellant owns and operates a natural gas transmission system used in the transportation of natural gas from various points within the Province of Alberta to various delivery points, within Alberta, including a delivery point at Coleman, Alberta, which is near the south-eastern corner of British Columbia, where gas is delivered into the system operated by Alberta Natural Gas Company.

The appellant entered into a gas transportation contract, dated June 14, 1960, with Alberta and Southern Gas Co. Ltd. and Westcoast Transmission Company Limited, herein referred to as “the shippers”, to receive, transport and deliver daily volumes of gas in accordance with the terms and conditions of the contract, by means of a gas transmission system, which the appellant undertook to construct. The provisions for payment for the transportation of the gas in the contract, which were applicable to the events which in fact occurred, were as follows:

12. BILLING AND PAYMENT

12.1 Billing: On or before the twentieth (20th) day of each month, (the appellant) 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”)

[Page 501]

and the number of United States dollars, if any, which shall be substituted for Canadian dollars pursuant to paragraph 12.2.

12.2 Part Payment in United States Dollars: If (the appellant) shall cause the construction of the said pipeline to be financed in whole or in part by the sale prior to December 31st, 1964, of securities of (the appellant) requiring repayment of principal, and/or 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 (the appellant) 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…

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;…

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

The appellant financed the construction of its pipeline by the borrowing of 67,000,000 United States dollars which was secured by Series B First Mortgage Pipeline Sinking Fund Bonds. The appellant received, out of the proceeds of the sale of such bonds, in April and July, 1961, 66,641,171.88 Canadian dollars. The appellant, in preparing its accounts and financial statements, showed the liability at the figure of $67,000,000, and deducted from its income the sum of $358,828.12 (which sum is the balance between $67,000,000 and $66,641,171.88).

[Page 502]

In accordance with para. 12.2 of the gas transportation contract, the appellant gave notices to the shippers that it desired:

that payments pursuant to the provisions of the said paragraph 12.2 be made to the Company at 505—2nd Street, S.W., Calgary, Alberta.

Attached to the notices were schedules of the total annual amounts of the payments unconditionally required by the terms of the appellant’s indebtedness to be discharged in United States dollars.

Each month the appellant sent to each of the shippers an invoice setting out the amount payable in respect of the transportation of gas on behalf of the shippers for the preceding month, and the portion of the amount payable which was to be paid in United States dollars. A typical invoice, that of April, 1966, addressed to Alberta and Southern Gas Co. Ltd. was in part as follows:

Pursuant to the invoices rendered, the appellant received payments pursuant to the terms of the gas transportation contract, partly in Canadian dollars and partly in United States dollars.

The United States dollars received by the appellant were deposited in a United States dollar

[Page 503]

bank account in Canada and were used in making the payments of United States dollars on account of both principal and interest as they fell due under the Series B First Mortgage Pipeline Sinking Fund Bonds. Throughout 1962-1966, the United States dollar was at a premium in relation to the Canadian dollar.

The learned trial judge dismissed the appellant’s appeal and with respect to the first issue did so on the basis that:

As the business of the appellant is the transportation of gas, and the payment in United States dollars is received pursuant to such business, therefore, it is income within Section 3 of the Income Tax Act. (Tip Top Tailors Ltd. v. The Minister of National Revenue, 1957 S.C.R. 703 at p. 707). To determine the amount of that income, the United States dollars must be translated into Canada dollars which is the measure of the receipt of income and such resulting sum must be credited to income. Therefore the assessment for the taxation year is proper in adding to the income for the years 1962 to 1966 inclusive the amounts of the United States dollars received by the appellant pursuant to paragraph 12.2

With respect to the second issue on the basis that:

As the pipeline is a capital asset built by borrowed money, brought into Canada to finance the construction of the capital asset, therefore, the loss by reason of changing into Canada dollars is a loss incurred in a capital expense. That loss could not be a business loss within Section 27(1)(e) of the Income Tax Act…

The first issue is the same as that which was considered by this Court in the case of Alberta Natural Gas Company v. The Minister of National Revenue[2], which was argued immediately prior to the argument of the present appeal. The relevant

 [Page 504]

provisions of the contract under consideration in that case and those of the contract in issue before us are substantially the same. The submissions of the appellant in the former appeal were somewhat different from those made in the present appeal in that, in the former, it was contended that the agreement included a forward exchange contract, as well as a gas transportation contract, while, in the latter, it is argued that the agreement included an indemnity agreement against exchange losses on the U.S. pay securities as well as a gas transportation contract.

As I said, in my reasons in the other case, it is clear that the purpose of s. 12.2 was to provide the appellant with U.S. dollars with which to meet its obligation under the U.S. pay securities. But, in my opinion, it is equally clear, under the wording of s. 12.2, that the U.S. dollars which the shippers were obligated to pay, and the appellant was obligated to accept, were in payment of the monthly cost of service charge which the shippers were required, by s. 2.3 of the agreement, to pay for the transportation of their gas. The substitution of American for Canadian dollars required to be paid by the shippers and to be accepted by the appellant is defined as being “in payment of its said monthly cost of service charge.” That being so, it is my view that the American dollars received by the appellant represented income from its business operations, and their full value had to be taken into account in determining its income from its business for tax purposes.

With respect to the second issue, the appellant has not established a loss of $358,828.12 in the year 1961. It borrowed $67,000,000 in U.S. funds. The Canadian equivalent, at that time, was $66,641,171.88. Whether or not any loss will be sustained by the appellant will depend

[Page 505]

upon the exchange rates existing when the U.S. dollars are repaid.

But, in any event, whatever such losses may prove to be, the borrowing was a borrowing of capital, for the construction of capital assets.

If the appellant, in due course, is required to pay more Canadian dollars to liquidate its capital debt of $67,000,000 (U.S.) than the number of Canadian dollars realized on the sale of its U.S. pay securities, the difference between the two amounts will represent a loss on capital account, and it cannot be deducted from income for tax purposes.

For these reasons, in my opinion, the appeal should be dismissed with costs.

Appeal dismissed with costs.

Solicitors for the appellant: J.G. McDonald and G.R. Forsyth, Vancouver.

Solicitor for the respondent: D.S. Maxwell, Ottawa.