Teitelbaum,
J.:—The
plaintiff,
Westcoast
Petroleum
Ltd.
(Westcoast)
is
appealing,
by
means
of
a
trial
de
novo,
reassessments
of
its
1978-79
income
tax
returns
in
which
the
Minister
added
to
Westcoast's
taxable
income,
for
the
1978
taxation
year
a
sum
of
$772,321
and
for
the
1979
taxation
year
the
sums
of
$976,601
and
$116,890.
Westcoast
is
an
Alberta
Corporation,
with
headquarters
in
Calgary.
One
of
Westcoast's
undertakings
is
the
operation
of
a
pipeline
in
British
Columbia
under
the
jurisdiction
of
that
province's
Ministry
of
Transportation.
One
of
the
functions
of
the
British
Columbia
Ministry
is
to
approve
the
tariffs
which
Westcoast
may
charge
its
shippers
for
the
use
of
its
pipeline.
By
changing
these
tariffs,
Westcoast
received
for
its
1978
taxation
year
a
sum
of
$722,321
in
excess
of
its
authorized
rate
of
return
and
a
sum
of
$976,601
for
1979
in
excess
of
its
authorized
rate
of
return.
After
Westcoast
received
the
notices
of
reassessment,
dated
May
19,
1982,
it
filed
notices
of
objection
to
the
said
notices
of
reassessment.
By
a
further
notice
of
reassessment
dated
August
18,
1983,
the
1979
adjustments
were
confirmed
and
by
a
notification
of
confirmation
dated
August
18,
1983,
the
1978
adjustment
was
confirmed.
In
the
taxation
years
1978
and
1979,
the
tarriffs
charged
by
Westcoast
to
its
customers
remained
at
their
then
current
levels.
During
Westcoast's
1978
and
1979
taxation
years,
it
set
up
a
"rate
stabilization
reserve
account"
in
its
books
and
records
in
respect
to
the
amount
of
$772,321
and
$976,601,
and
in
the
1979
taxation
year,
Westcoast
added
an
interest
factor
of
$116,890
to
the
"rate
stabilization
reserve
account".
The
amounts
of
$772,321,
$976,601
and
$116,890
were
not,
according
to
Mr.
Browning,
Westcoast's
Vice-President
of
Finance
and
Corporate
Secretary,
kept
separately
from
other
funds
of
Westcoast
but
were
used
by
Westcoast
in
its
everyday
operations
notwithstanding
that,
according
to
Mr.
Laurence,
Westcoast's
past
President,
Westcoast
had
more
than
sufficient
funds
during
the
taxation
years
in
issue
to
operate
without
the
use
of
the
funds.
Westcoast
admits
to
not
reporting
the
amount
of
$772,321
as
income
in
its
1978
tax
return
and
did
not
report
the
amount
of
$976,601
as
income,
and
deducted
the
amount
of
$116,890
in
its
1979
tax
return
but
reported
these
amounts
as
"accounts
payable
and
accrued
charges"
under
the
current
liabilities
section
of
its
balance
sheet
(Paragraph
5,
statement
of
claim).
Westcoast,
in
its
amended
statement
of
claim,
in
paragraphs
6,
7
and
8
states
its
reasoning
as
to
why
the
sums
of
$772,321
and
$976,601
were
not
reported
as
income
and
why
it
was
of
the
belief
the
sum
of
$116,890
is
interest
payable
in
respect
of
the
1979
taxation
year
on
borrowed
money
used
for
the
purpose
of
earning
income.
6.
The
Plaintiff
says
that,
notwithstanding
the
provisions
of
paragraph
12(1)(a)
of
the
Income
Tax
Act,
the
sum
of
$772,321
recorded
on
its
financial
statements
for
its
1978
taxation
year
and
the
sum
of
$976,601
recorded
on
its
financial
statements
for
its
1979
taxation
year
were
not
received
on
income
account
and,
therefore,
were
not
properly
included
in
the
Plaintiff's
taxable
income
for
those
taxation
years
because
those
amounts
were
received
by
the
Plaintiff
as
a
loan
on
which
it
was
required
to
pay
interest
as
described
in
clause
5
above.
Accordingly,
the
Plaintiff
was
not
legally
entitled
to
retain
such
amounts
for
its
own
account
at
the
time
they
were
received.
7.
In
the
alternative,
the
Plaintiff
says
that
the
sum
of
$772,321
recorded
on
its
financial
statements
for
its
1978
taxation
year
and
the
sum
of
$976,601
recorded
on
its
financial
statements
for
its
1979
taxation
year
were
not
required
to
be
included
in
the
computation
of
the
income
of
the
Plaintiff
for
those
taxation
years
because
paragraph
20(1)(m)
of
the
Income
Tax
Act
provides
for
a
reserve
for
the
full
amount
of
those
receipts.
8.
The
Plaintiff
says
further
that
the
sum
of
$116,890
was
interest
payable
in
respect
of
the
1979
taxation
year
on
borrowed
money
used
for
the
purpose
of
earning
income
from
the
business
within
the
meaning
of
paragraph
20(1)(c)
of
the
Income
Tax
Act
which
is
deductible
in
computing
income
for
the
said
taxation
year.
In
the
amended
statement
of
defence,
in
paragraphs
7,
8
and
9,
the
defendant,
Her
Majesty
the
Queen
(Crown)
makes
the
following
allegations
as
to
why
it
is
of
the
belief
the
sums
of
$772,321
and
$976,601
is
income
and
why
the
sum
of
$116,890
is
not
interest
to
earn
income.
7.
In
reassessing
the
Plaintiff
by
Notices
of
Reassessment
dated
May
19,
1982,
the
Minister
of
National
Revenue
assumed,
inter
alia,
(a)
the
amounts
of
$772,321
and
$976,601
were
income
from
the
Plaintiff's
business
in
its
1978
and
1979
taxation
years
respectively,
(b)
the
said
amounts
were
not
reasonable
amounts
as
a
reserve
in
respect
of
goods
or
services
that
it
was
reasonably
anticipated
would
have
to
be
delivered
or
rendered
after
the
end
of
the
plaintiff's
1978
and
1979
taxation
years,
(c)
the
said
amounts
were
not
outlays
or
expenses
incurred
by
the
Plaintiff
for
the
purpose
of
gaining
or
producing
income
from
its
business
in
its
1978
and
1979
taxation
years,
(d)
the
amount
of
$116,890
was
not
an
outlay
or
expense
incurred
by
the
Plaintiff
for
the
purpose
of
gaining
or
producing
income
from
its
business
in
its
1979
taxation
year.
8.
The
Defendant
further
says
that
in
1978
and
1979
the
amounts
of
$772,321
and
$976,601
respectively
were
transferred
or
credited
by
the
Plaintiff
to
a
reserve
or
contingent
account
within
the
meaning
of
paragraph
18(1)(e)
of
the
Income
Tax
Act.
9.
The
Defendant
further
says
that
the
amount
of
$116,890
in
1979
was
not
payable
by
the
Plaintiff
in
respect
of
the
1979
taxation
year
pursuant
to
a
legal
obligation
to
pay
interest
on
borrowed
money
used
for
the
purpose
of
earning
income
from
a
business
or
property.
Westcoast
called
two
ordinary
witnesses
and
one
expert
witness
to
give
evidence
on
its
behalf.
The
Crown
called
one
expert
witness
on
its
behalf.
The
Issues
Westcoast
makes
three
specific
arguments
in
relation
to
the
inclusion
of
the
amount
of
$772,321
in
its
1978
return
as
income
and
the
amount
of
$976,601
in
its
1979
return
as
income.
First,
it
claims
the
excess
profits
as
a
loan,
since
it
alleges
it
was
not
legally
entitled
to
retain
such
amounts
for
its
own
use
at
the
time
they
were
received.
Hence,
the
amounts
should
not
be
included
in
income.
Secondly,
if
the
amounts
are
not
loans,
they
represent
legitimate
reserves
for
which
the
Income
Tax
Act
(I.T.A.)
provides
a
deduction
from
income
which
would
offset
any
inclusion
of
these
amounts
in
income.
Thirdly,
if
the
amounts
represent
loans,
Westcoast
claims
the
interest
is
deductible
as
an
expense
since
it
relates
to
money
borrowed
for
the
purpose
of
earning
income.
What
must
be
decided
is
the
character
of
the
"excess"
funds
received
by
Westcoast
for
the
1978-1979
taxation
years.
Westcoast
states
these
"excess"
funds
cannot
be
considered
as
income,
in
that
the
funds
have
not
been
earned,
the
funds
are
owing
to
the
shippers/producers
and
thus
the
sum
of
$116,890
charged
by
Westcoast
must
be
considered
as
an
interest
expense.
Westcoast
is
of
the
belief
that
the
sum
of
$116,890
is
a
legitimate
legal
interest
expense
as
it
is
retaining
"excess"
funds
owing
to
shippers/producers
and
until
the
excess
sum
is
"repaid"
to
the
shippers/producers,
it
must
pay
interest
for
the
"excess"
funds.
It
is
also
Westcoast's
submission
that
the
funds
could
also
be
considered
as
deferred
revenue
not
earned
in
1978
and
1979
pursuant
to
paragraph
12(1)(e)
or
20(1)(m)
of
the
I.T.A.
At
the
commencement
of
the
hearing,
Westcoast
made
an
amendment
to
the
conclusion
of
the
amended
statement
of
claim
by
adding,
after
paragraph
a)
the
following
“by
further
allowing
deduction
of
interest
in
the
amount
of
$116,800.”
The
amendment
was
allowed.
Exhibits
1,
2
and
3
are
filed
by
consent.
Exhibits
4,
5
and
6
are
filed
by
consent,
subject
to
interpretation
and
inference
to
be
made
by
the
defendant.
Mr.
Robert
Howard
Laurence
(Laurence)
was
called
by
Westcoast
as
its
first
witness.
Laurence
was
employed
by
Westcoast
in
1974
as
Vice-President,
Exploration.
He
became
President
in
1976.
He
took
early
retirement
in
mid
1981.
Laurence
explained
that
he
is
familiar
with
the
pipeline
operations
of
Westcoast
and
the
structure
of
the
tariff
charges
before
1976.
The
pipeline
was
constructed
pursuant
to
terms
of
an
agreement
dated
January
31,
1961
(Exhibit
2-1)
and
amended
on
September
26,1961
(Exhibit
2-2).
Exhibit
2-1
is
an
agreement
entered
into
by
Westcoast
Transmission
Company
Limited
and
Her
Majesty
the
Queen
in
Right
of
the
Province
of
British
Columbia
represented
by
the
Minister
of
Commercial
Transport
(Minister).
One
of
the
obligations
of
Westcoast
Transmission
was
to
incorporate
a
company
under
the
laws
of
British
Columbia
with
the
registered
office
being
in
the
Province
of
British
Columbia.
The
principal
object
of
the
corporation
is
the
construction
and
operation
of
a
pipeline
and
any
extension
thereto.
The
amending
agreement,
Exhibit
2-2,
is
between
Westcoast
Transmission,
the
Minister
and
the
company
incorporated
pursuant
to
Exhibit
2-1,
Western
Pacific
Products
and
Crude
Oil
Pipelines
Ltd.
(Westpack)
Westpack
&
Westcoast
Transmission
became,
in
1971,
Westcoast
Petroleum
Ltd.,
the
plaintiff
in
the
present
proceedings.
A
further
amendment
to
Exhibits
2-1
and
2-2
took
place
on
November
1,
1966
(Exhibit
2-3).
The
purpose,
according
to
Laurence,
of
Exhibit
2-3,
is
to
define
the
obligation
of
Westpack
to
expand
the
agreement
of
January
31,
1961
(Exhibit
2-1)
to
include
a
schedule
of
tariffs
and
to
establish
a
review
of
tariffs,
if
requested
by
either
party
to
the
agreement
on
the
5th
and
10th
anniversary
of
the
agreement.
Exhibit
2-3
is
the
agreement
governing
the
operation
of
the
pipeline
from
October
1966.
This
agreement
was
in
effect
when
Laurence
became
President
of
Westcoast.
The
pipeline
originated
in
Taylor,
B.C.,
was
12
inches
in
diameter
and
terminated
in
Kamloops,
B.C.
near
the
Trans
Mountain
pipeline.
In
1976,
a
small
spur
was
built
for
Prince
George,
B.C.
According
to
Exhibit
2-1,
the
capacity
of
throughput
of
the
pipeline
was
to
be
not
less
than
75,000
barrels
(of
oil)
per
day.
Laurence
states
that
when
originally
built,
the
throughput
was
45,000
barrels
per
day,
that
subsequent
expansion
to
the
pipeline
increased
the
throughput
by
adding
more
horse
power
and
more
pumping
stations.
Up
to
1974,
Westcoast
confined
its
charges
to
a
tariff
in
a
tariff
schedule
set
out
in
the
agreement
of
1961
(Exhibit
2-1)
and
changed
in
the
agreement
of
1966
(Exhibit
2-3).
The
tariff
charged
per
barrel
decreased
as
the
throughput
increased.
It
was
a
rigid
fixed
tariff
(Exhibit
2-3,
page
6).
Westcoast
could
charge
66#
per
barrel
for
throughput
of
from
0
to
30,000
barrels
per
day
but
only
38¢
per
barrel
for
throughput
of
from
70,001
to
75,000
barrels
per
day.
In
September
1974,
approximately
two
years
before
the
review
date
fixed
in
Exhibit
2-3,
Westcoast
made
a
submission
to
the
Minister
for
an
increase
in
the
tariff
of
16#
per
barrel
for
oil
being
transported
from
Taylor,
B.C.
to
Kamloops,
B.C.
and
an
increase
of
9.5#
per
barrel
for
oil
being
transported
from
Taylor,
B.C.
to
Prince
George,
B.C.
Exhibit
4
is
the
submission
made
by
Westcoast
to
the
Minister.
The
submission
is
titled
"For
a
Review
of
Existing
Tariff
Schedule".
Laurence
alleges
that
the
reason
for
the
request
for
an
increase
in
tariff
before
the
fixed
review
date
was
that
it
was
determined
and
became
apparent
in
1974
that
the
production
of
oil
in
north
east
British
Columbia
had
peaked
in
1971
at
approximately
70,000
barrels
per
day,
that
this
amount
decreased
to
approximately
58,000
barrels
per
day
and
the
projection
showed
a
declining
curve.
The
decline
would
continue
to
shorten
the
“life”
of
the
pipeline
to
approximately
ten
years
from
an
original
"life"
of
30
years.
Up
to
1974,
the
pipeline
throughput
peaked
at
approximately
70,000
barrels
per
day
and
the
projection
showed
a
decline
curve
and
the
decline
would
continue
to
shorten
the
“life”
of
the
pipeline
to
approximately
ten
years.
From
the
peak
of
70,000
barrels
per
day
of
throughput,
there
was
a
decline
to
58,000
barrels
per
day
in
1969
and
a
further
reduction
of
throughput
to
approximately
48,000
barrels
per
day
in
1974.
The
pipeline
became
utilized
which
would
mean
a
"shortened
life"
for
the
pipeline.
Therefore,
Westcoast
asked
for
an
increase
in
tariffs
two
years
before
a
scheduled
review
date.
Laurence
also
gave
as
a
reason
for
requesting
an
increase
in
tariffs
the
increased
costs
of
environmental
measures
and
inflation.
In
February
1975,
the
Minister
granted
an
increase
of
2#
per
barrel
of
oil
throughput
for
oil
from
Taylor
to
Kamloops,
B.C.
and
1.5¢
per
barrel
of
oil
throughput
from
Taylor
to
Prince
George,
B.C.
This
was
only
an
interim
rate
adjustment
(Exhibit
5).
The
Minister
also
informed
Westcoast,
in
Exhibit
5,
that
the
interim
rate
of
adjustment
will
maintain
Westcoast's
revenue
"at
a
reasonable
level
pending
a
full
review
of
your
tariff
application
by
the
B.C.
Energy
Commission.”
A
further
interim
adjustment
was
granted
by
the
Minister,
in
a
letter
dated
July
23,
1975,
whereby
Westcoast
could
charge
80¢
a
barrel
of
oil
to
be
transported
from
Taylor
to
Kamloops
and
49.5#
per
barrel
of
oil
to
be
transported
from
Taylor
to
Prince
George
(Exhibit
6).
In
Exhibit
6,
the
Minister
proposed
that
a
cost
for
service
principle
be
adopted
with
regard
to
determination
of
interim
tariffs
commencing
January
1976.
The
Minister
suggests
the
recommended
rate
of
return
on
equity
in
the
rate
base
be
11.4
per
cent
plus
depreciation
calculated
on
annual
throughput
volumes.
In
addition
to
the
above,
it
is
proposed
that
the
cost
for
service
principle
be
adopted
with
regard
to
determination
of
interim
tariffs
commencing
in
January
1976.
The
recommended
rate
of
return
on
equity
in
the
rate
base
for
such
an
arrangement
is
11.4%.
At
the
same
time
it
is
proposed
that
depreciation
charges
will
be
related
to
the
annual
throughput
volumes
based
on
projected
remaining
lifetime
volumes.
Consideration
is
also
being
given
to
the
possibility
of
holding
a
public
hearing
in
1976
for
the
purpose
of
considering
all
aspects
pertaining
to
the
operation
of
the
pipeline,
and
in
particular
the
appropriate
tariffs
to
be
charged
after
November
1,
1976
in
accord
with
the
existing
agreement.
(Exhibit
6)
Cost
of
service
principle
is
defined
by
Laurence
as
the
cost
of
operating
the
pipeline,
both
tangible
and
intangible,
with
a
given
rate
of
return
plus
depreciation
determined
on
an
annual
throughput
volume.
Laurence
states
that
as
regards
depreciation,
the
original
cost
of
the
"plant"
was
depreciated
on
a
straight
line
basis,
30-year
life
for
the
pipeline,
but
that
it
was
changed
to
a
throughput
volume
depreciation
calculated
on
the
remaining
life
of
oil
reserves.
He
states
that
the
problem
with
this
method
is
that
it
is
most
imprecise.
It
is
impossible
to
know
what
are
the
remaining
oil
reserves
and
what
amounts
of
oil
will
be
continued
to
be
shipped
via
the
pipeline,
the
volume
depending
on
the
requirements
of
the
refineries
and
what
the
shippers
will
ship.
Laurence
states
that
the
concept
is
simple
but
lacks
in
precision
in
that,
the
oil
reserves
are
constantly
changing
as
are
the
requirements
of
the
shippers.
Westcoast
accepted
the
principle
of
the
proposal
contained
in
Exhibit
5.
Exhibit
2-5
dated
March
26,
1976
is
the
accepted
proposal
by
the
Minister.
Westcoast
was
allowed
a
27#
per
barrel
depreciation
rate
as
well
as
80¢
per
barrel
of
oil
to
Kamloops
and
49.5#
per
barrel
to
Prince
George.
This
is
to
advise
that
I
have
no
objection
to
the
Company
changing
to
a
throughput
method
of
depreciation,
as
of
January
1,
1976.
Based
on
discussions
between
our
respective
staffs
the
depreciation
rate
would
be
27#
per
barrel
until
otherwise
approved.
Throughput
and
revenue
projections
for
1976
indicate
that
the
existing
interim
rates
of
.80¢
to
Kamloops
and
.495¢
to
Prince
George
will
provide
a
rate
of
return
on
the
rate
base
of
approximately
10
/2%.
As
this
is
in
keeping
with
your
recent
presentation
to
me
I
consider
the
existing
rates
to
be
adequate
for
1976.
If
the
Company
decides
to
retain
the
straight
line
basis
of
depreciation
for
1976
it
will
be
necessary
to
reduce
the
tariff
to
some
lesser
level
consistent
with
a
similar
rate
of
return.
(Exhibit
2-5)
It
is
to
be
noted
that
it
is
the
Minister
who
advised
Westcoast
that
he
had
no
objection
to
a
change
in
the
method
of
depreciation
proposed
by
Westcoast
and
states
he
is
satisfied
with
the
existing
tariff
rates.
On
April
15,
1976,
Westcoast
received
a
letter
dated
April
12,1976
informing
it
that
the
pipeline
situation
is
to
be
referred
for
a
review
to
the
B.C.
Energy
Commission
(Exhibit
2-8).
In
the
spring
of
1976,
representatives
of
Westcoast
met
with
the
principals
of
the
B.C.
Energy
Commission
to
ask
for
an
interim
upward
adjustment.
Westcoast
was
told
that
the
Commission
would
hold
a
public
hearing,
which
was
scheduled
for
November
11
or
12,
1976
but
was
later
deferred.
The
last
proposed
date
for
the
hearing
was
to
have
been
January
11
and
12,1977.
On
May
17,
1976,
the
B.C.
Energy
Commission,
by
Order
G-23-76,
granted
Westcoast
an
increase
in
its
tariffs
effective
June
1,
1976.
It
is
important
to
note
that
in
G-23-76,
it
is
stated:
PROVIDED
however
that
the
foregoing
tariff
is
authorized
on
an
interim
basis
pending
a
full
determination
of
the
matters
referred
to
in
said
direction
at
a
public
hearing
to
be
held
by
the
Commission.
The
rates
or
a
portion
thereof
hereby
authorized
will
be
subject
to
refund
together
with
interest
at
9
per
cent
per
annum
thereon
pending
the
result
of
such
public
hearing.
(Exhibit
2-12)
[Emphasis
added.
I
According
to
G-23-76,
the
rate
increase
is
authorized
on
an
interim
basis
pending
determination
of
matters
relating
to
capital
structure,
cost
of
service,
traffic,
tolls
and
tariffs
and
rate
of
return
at
a
public
hearing
by
the
Commission.
The
order
then
states
that
the
rates
authorized
in
the
Order
dated
May
17,
1976
or
a
portion
thereof
will
be
subject
to
refund
together
with
interest
at
nine
per
cent
per
annum
pending
the
result
of
the
public
hearing.
No
public
hearing
ever
took
place
and
Westcoast
was
never
ordered
to
refund
any
of
the
sums
it
received
from
shippers
as
a
result
of
this
Order.
Laurence
alleges
that
Westcoast
was
of
the
opinion
that
any
surplus
was
refundable
and
therefore
he
suggested
a
tariff
cut
when
Westcoast
realized
that
its
return
would
be
higher
than
that
which
was
agreed
to
with
the
Minister
(Exhibit
2-15).
I
am
of
the
view
that
a
tariff
reduction
for
future
years
is
not
a
refund.
The
same
shippers/producers
may
or
may
not
ship
the
same
quantities
of
oil
as
in
the
year
in
which
the
surplus
was
made.
Therefore,
the
shipper
which
had
shipped
less
oil
in
the
following
year
or
years
would
not
get
its
"proper
refund".
The
Commission
wrote
back
stating
Westcoast
is
to
continue
to
charge
the
tariff
approved
in
Order
G-23-76
(Exhibit
2-12)
“with
the
excess
revenue
subject
to
refund
with
interest
at
9%
per
annum"
(Exhibit
2-16).
On
August
13,
1976,
an
order,
G-30-76,
was
issued
by
the
Commission
allowing
for
a
reduction
in
the
tariffs
to
be
charged
shippers
(Exhibit
2-19).
Subsequently,
Westcoast
made
representations
to
the
Minister
to
take
away
jurisdiction
from
the
Commission
and
to
keep
the
jurisdiction
within
his
own
department.
During
this
time,
Westcoast
worked
out
an
agreement
acceptable
to
all
shippers
on
tariff
determination.
Since
only
the
shippers
could
have
an
interest
on
tariff
determination
and
they
were
satisfied
with
the
agreement
arrived
at
with
Westcoast,
Westcoast
suggested
that
the
public
hearing
as
proposed
by
the
Commission
is
no
longer
necessary.
By
January
1977,
Laurence
was
advised
that
the
Minister
would
keep
complete
jurisdiction
over
Westcoast's
pipeline
operation.
From
May
26,
1977,
Westcoast
never
heard
further
from
the
Commission.
Laurence
states
Westcoast
was
concerned
about
the
refund
to
be
made
as
mentioned
in
order
G-23-76
(Exhibit
2-12)
because
the
order
does
not
give
any
indication
as
to
how
the
refund
should
be
made.
The
agreement,
he
states,
with
the
shippers
was
that
any
surplus
be
factored
into
subsequent
tariffs
having
the
effect
of
increasing,
in
future
years,
the
price
received
by
the
producer
for
the
oil
transported
(Exhibit
2-17,
page
2,
last
full
paragraph).
Laurence
states
the
consensus
at
the
August
1976
meeting
with
the
shippers/producers
was
that
by
lowering
the
tariff
"the
surplus
which
Westcoast
had
received
would
eventually
find
its
way
back
to
the
producers".
Westcoast
has
no
contracts
with
producers.
It
only
deals
with
shippers.
Exhibit
2-17
is
a
letter
written
by
Westcoast
to
shippers
who
may
also
be
producers.
The
letter
was
written
following
the
meeting
where
Westcoast
made
proposals
for
tariff
determination.
In
Exhibit
2-17
memorandum
dated
September
13,
1976,
on
page
3
paragraph
(d)
is
found
the
proposal
made
by
Westcoast
to
the
shippers/producers.
The
essence
of
the
proposal
is
to
establish
a
formula
for
tariff
determination
on
a
cost
of
service
basis
acceptable
to
the
shippers/producers.
It
was
proposed
that
any
excess
or
shortfall
would
be
carried
forward.
Seven
of
eight
responses
agreed
to
the
formula
according
to
Laurence.
(d)
Because
of
the
variables
which
are
inherent
in
our
pipeline
operations,
it
is
probable
that
actual
revenue
generated
could
either
fall
short
or
exceed
to
some
extent
the
amount
required
to
achieve
the
agreed
upon
rate
of
return.
Accordingly,
Westcoast
would
propose
that
a
semi-annual
financial
review
take
place
each
year
for
the
purpose
of
allowing
the
Company
to
adjust
these
tariffs,
if
required,
to
achieve
this
return.
In
addition,
any
excess
or
short-fall
in
revenue
determined
on
an
annual
basis
would
be
carried
forward
and
factored
into
revenue
requirements
and
tariff
determinations
for
the
succeeding
year.
At
the
end
of
each
year
a
financial
report,
including
a
forecast
of
the
ensuing
years'
operations
and
proposed
tariffs,
would
be
forwarded
to
each
of
the
Producers
and
the
Minister
of
Transport
and
Communications.
(Exhibit
2-17,
Memorandum
dated
Sept.
13,
1976,
page
3,
paragraph
(d))
The
above
proposal
was
approved
by
the
Minister.
From
1976
to
the
time
Laurence
left
Westcoast
on
early
retirement,
mid
1981,
it
was
the
method
used
to
calculate
tariffs
although
no
semi-annual
financial
review
ever
took
place
with
the
shippers
nor
was
any
excess
carried
forward
and
factored
into
revenue
requirements
and
tariff
determination
for
the
succeeding
year.
Westcoast
also
failed
to
send
a
financial
report
at
the
end
of
each
year
to
the
shippers.
It
also
failed
to
send
a
forecast
of
the
ensuing
years
operations
and
proposed
tariffs.
What
was
sent
were
notifications
of
tariff
changes.
There
is
no
mention
of
interest
in
the
proposal
but
the
issue
of
interest
was
raised
by
the
Minister.
Interest
was
accrued
in
respect
of
the
surplus
as
of
the
1979
year.
Laurence
admitted
that
although
the
above
approved
proposal
speaks
of
a
semi-annual
financial
review
take
place
for
the
purpose
of
allowing
West-
coast
to
adjust
the
tariffs,
it
never
took
place
with
the
producers/shippers,
it
only
occurred
internally.
He
states
the
tariffs
were
not
adjusted
semiannually
but
only
as
required.
There
was
no
change
in
the
tariff
from
October
1,
1977
to
November
1,
1979.
There
was
no
semi-annual
adjustment
nor
is
there
any
commitment,
he
states,
to
make
a
semi-annual
adjustment.
He
also
admits
that
financial
statements
were
not
sent
out
to
the
producers/
shippers
although
this
is
stated
in
the
proposal
above
mentioned.
In
summary,
Laurence
states,
in
his
testimony,
that
it
was
his
understanding
of
the
agreement
with
regard
to
any
surplus
amounts
received
by
Westcoast
from
the
operation
of
the
pipeline,
that
because
Westcoast
could
never
predict
with
any
accuracy
what
the
throughput
would
be
in
any
given
year
and
what
repairs
to
the
pipeline
would
be
required
in
any
given
year,
this
left
Westcoast
in
a
position
that
it
could
not
predict
what
its
revenues
would
be.
It
was
his
understanding
that
if
Westcoast
had
a
higher
rate
of
return
than
what
was
allowed,
the
surplus
is
a
refundable
surplus,
an
obligation
to
the
shippers/producers
and
if
the
revenue
was
less
than
the
permitted
amount,
the
revenue
could
be
made
up
in
subsequent
years
by
higher
tariff
charges.
Laurence
is
of
the
opinion
that
the
proposal
found
in
Exhibit
2-17
memorandum
of
September
13,
1966,
paragraph
(d)
was
not
followed
with
the
producers/shippers
“as
it
could
not
achieve
anything".
It
was
only
effective
or
put
into
operation
with
the
agreement
of
the
Minister,
the
agreement
of
the
shippers
was
not
required.
In
cross-examination
Laurence
explained,
in
part,
the
operation
of
the
pipeline.
The
shipper
tenders
the
oil
for
transportation.
The
shipper
pays
the
cost
of
transportation
in
accordance
with
the
tolls
(tariffs)
then
in
effect.
The
shipper
is
billed
in
accordance
with
the
rates
then
in
effect.
In
the
event
that
the
shipper
does
not
pay
the
amount
of
the
invoice
within
ten
days,
the
carrier,
Westcoast,
would
have
the
legal
right
to
sell
the
oil
as
Westcoast
retains
a
lien
on
the
oil
in
the
event
of
non-payment.
Subsequent
to
1975,
the
tariff
was
determined
on
a
cost
of
service
basis,
the
shipper
tenders
its
oil
for
shipment
and
pays
the
charges
in
accordance
with
the
published
tariff.
The
shipper
is
notified
by
Westcoast
of
a
tariff
change
(Exhibit
2-34).
Exhibit
3-3
is
a
schedule
of
Westcoast's
charges.
These
charges
remained
in
effect
to
November
1,
1979.
For
the
taxation
year
1978
and
to
October
1979
taxation
year,
the
shipper
would
pay
charges
in
accordance
with
the
schedule
found
in
Exhibit
3-3.
All
notifications
of
tariff
changes
must
be
approved
by
the
Minister
only.
All
tariff
adjustments
are
conditional
on
the
Minister’s
approval.
The
approval
of
the
shippers
as
to
any
tariff
adjustments
was
not
sought.
Laurence
admits
that
there
never
was
a
cash
refund
to
the
shippers
in
1977,1978
and
1979.
In
fact,
Westcoast
never
made
a
cash
refund
to
any
one
of
the
shippers/producers.
Westcoast
had
a
surplus
in
1978.
It
also
had
a
surplus
in
1979
(Exhibit
3-4).
The
1978
surplus
was
not
factored
into
the
1979
tariff
charges.
There
was
no
surplus
factored
into
the
1978,
1979
and
1980
years.
There
was
no
change
in
the
tariff
from
November
1,1979
to
1983.
The
shippers
were
not
advised
that
in
1979
Westcoast
had
a
surplus
of
$186,922.
The
surplus
money
according
to
Laurence
was
never
used
by
Westcoast
in
the
operation
of
its
business
in
that
Westcoast
had
more
than
sufficient
funds
at
the
time
to
operate
its
business.
Laurence
believes,
and
this
was
confirmed,
that
the
surplus
funds
were
never
segregated
from
the
company's
funds
and
kept
in
a
separate
bank
account.
Laurence
is
of
the
opinion
that
although
there
was
no
reduction
in
the
tariff
to
the
end
of
1978,
he
believes
Westcoast
could
have
made
one.
Westcoast
decided
not
to
make
a
reduction
as
Westcoast
thought
it
not
necessary
to
do
so.
This
statement
was
later
retracted
by
Laurence.
He
then
states
that
no
reduction
was
made
because
at
that
time
Westcoast's
(financial)
position
was
not
known
due
to
two
breaks
in
the
pipeline
and
the
costs
that
would
be
incurred
in
the
repairs
to
the
pipeline
and
to
maintain
an
ongoing
security
for
the
pipeline.
The
evidence
of
Laurence
is
such
that
I
am
satisfied
that
Westcoast
had
full
discretion
as
to
what
to
do
with
the
surplus
funds.
Westcoast
could
decide
if
it
would
or
would
not
factor
into
the
subsequent
year
or
years
any
surplus
it
retained.
It
is
correct
to
say
that
the
Minister
had
to
approve
a
tariff
change
but
it
was
always
Westcoast
that
would
initiate
any
tariff
change.
The
shippers
were
simply
notified
of
the
tariff
change.
In
fact,
Westcoast
never
told
the
shippers
of
any
surplus
it
retained.
I
am
satisfied
that
an
agreement
existed
with
the
Minister
that
the
surplus
would
be,
eventually,
factored
into
future
tariffs
but
no
agreement
exists
as
to
when
this
was
to
be
done.
It
was
all
left
to
the
discretion
of
Westcoast.
As
further
evidence
of
Westcoast's
discretion
with
the
use
of
the
surplus
funds
is
the
evidence
of
Laurence
that
Westcoast
did
not
use
the
surplus
funds
in
its
operations
as
it
had
its
own
funds.
If
this
is
so,
why
would
Westcoast
keep
the
surplus
funds,
pay
nine
per
cent
interest
for
the
surplus
funds
as
if
these
funds
were
a
loan
and
not
tell
the
shippers
of
the
existing
surplus.
Surely
if
at
the
end
of
1978
a
tariff
reduction
could
have
been
made
but
was
not
made,
as
Laurence
states
“it
is
not
necessary
to
make",
this
clearly
indicates
a
discretion
as
to
when
a
reduction
of
tariffs
will
be
made.
If
the
surplus
is
to
be
considered
a
debt,
an
obligation
to
refund
or
repay,
surely
the
repayment
would
have
been
done
as
soon
as
possible
by
Westcoast.
Ronald
Charles
Browning
was
employed
by
Westcoast
on
January
1,
1980.
In
1980,
he
was
hired
as
the
company
Treasurer.
He
now
is
the
company's
Vice-President
of
Finance
and
its
Corporate
Secretary.
It
was
he
who
prepared
the
financial
statements
and
tax
returns
for
the
taxation
year
1979.
He
has
looked
at
the
accounting
practices
of
Westcoast
including
its
pipeline
operation
and
he
concluded
that
the
method
of
accounting
used
in
the
previous
(1978-79)
two
years
was
appropriate.
With
regard
to
the
pipeline
operation,
the
income
“was
basically
the
allowed
rate
of
return
set
by
the
governing
body,
any
deficit
would
be
made
up
by
tariff
increases
at
future
dates
and
any
surplus
would
be
used
up
through
lower
future
tariffs”.
The
adjustments
were
recorded
in
a
payable-receivable
account.
The
witness
prepared
the
rate
stabilization
account,
1976
to
1986
found
in
Exhibit
3-4.
Exhibit
3-4
shows
the
balance
in
the
rate
stabilization
account
for
the
years
1976
to
1986
including
interest
from
1979
to
1986.
Westcoast
received
its
audited
statement
(Exhibit
1,
page
44)
as
at
December
31,
1979.
In
the
liability
column
is
the
surplus
retained
by
Westcoast.
The
surplus
forms
part
of
Westcoast's
liabilities.
There
was
no
advice
from
Clarkson
Gordon,
Westcoast's
auditors,
that
the
financial
statements
should
be
qualified
because
of
this.
The
surplus
amounts
shown
in
Exhibit
3-4
would
be
communicated
to
the
Minister,
Browning
states,
at
least
once
per
year
and,
on
occasion,
2
or
3
times
per
year.
Exhibit
3-12
are
calculations
to
demonstrate
the
effect
of
various
tariffs
on
the
surplus
held
by
Westcoast.
It
shows
a
surplus
revenue
as
of
December
31,
1978
of
$772,000
then
projects
the
revenue
required
which
is
based
on
the
rate
of
return,
operating
expenses
and
taxes.
The
projected
surplus
revenue
is
based
on
total
revenue
of
$10,059,000.
Mr.
Browning
states
that
for
the
years
1980-81-82
the
tariff
receipts
were
deficient
before
the
calculation
of
interest.
This
resulted
in
the
surplus
declining.
He
then
went
on
to
describe
that
in
1982
the
throughput
was
forecast
at
9.8
million
barrels
which
was
a
decrease
of
1
million
barrels
from
the
previous
year.
He
states
that
if
this
had
occurred
there
would
have
been
a
reduction
in
the
surplus
account
as
there
would
have
been
insufficient
revenue
to
meet
the
rate
of
return
Westcoast
was
entitled
to,
which
would
have
resulted
in
a
deficit.
In
1983,
there
is
a
substantial
increase
in
the
surplus
because
of
increased
throughput
which
was
not
projected
nor
did
the
predicted
reduction
in
production
of
oil
occur.
Westcoast
had
predicted
a
throughput
of
9.5
million
barrels
but
found,
at
the
end
of
the
year,
a
throughput
of
10.8
million
barrels.
This
accounted
for
the
increase
in
the
surplus.
The
forecasts
of
throughput,
according
to
Browning,
is
made
by
Westcoast
from
information
it
obtains
from
its
shippers.
Westcoast
plays,
according
to
this
witness,
no
part
in
the
forecasts.
The
surplus
money
was
accounted
for
in
a
reserve
account
but
was
not
in
a
separate
bank
account,
it
being
included
in
Westcoast's
funds.
He
admits
that
the
shippers
were
billed
in
accordance
with
the
approved
tariff.
A
shipper
would
normally
be
invoiced
twice
a
month
for
transportation
of
oil.
With
regard
to
the
interest
factor
the
witness
states
that
interest
was
deducted
as
an
expense.
A
book
entry
was
made
to
this
effect
but
Westcoast
kept
the
money
in
its
general
account.
The
interest,
although
not
paid
out,
was
compounded.
It
would
enable
Westcoast
to
lower
tariffs
in
subsequent
years
if
there
was
found
to
be
a
sufficiently
high
surplus.
Browning
states
that
in
1980-81-82,
the
tariffs
fell
far
short
of
the
required
revenues
and
in
this
manner
he
states
the
shippers
were
paid
back
"by
not
increasing
the
tariffs
the
shippers
were
paid
back".
He
does
not
know
if
the
Minister
would
have
allowed
an
increase
in
tariffs
even
if
Westcoast
showed
a
surplus.
I
am
satisfied
from
Mr.
Browning's
evidence
and
it
corroborates
Laurence,
that
it
is
not
in
Westcoast's
complete
discretion
to
increase
tariffs.
The
Minister
must
give
his
consent
to
any
tariff
change.
The
evidence
shows
that
it
is
Westcoast
who,
at
its
discretion,
initiates
the
process
to
request
an
increase.
Westcoast
therefore
decides,
when,
if
at
all,
it
reduces
the
tariff
or
leaves
it
as
its
then
rate
which
may
or
may
not
reduce
the
amount
of
funds
held
in
the
surplus
account.
Westcoast,
in
its
discretion,
decides
if
it
will
or
will
not
factor
into
the
tariffs
to
be
set
the
surplus
it
is
holding.
Mr.
Henry
Richardson
Lawrie
(Lawrie)
was
called
by
Westcoast
as
its
expert
witness.
Lawrie
is
a
chartered
accountant
with
the
firm
of
Price
Waterhouse.
Counsel
for
the
Crown
agreed
that
Lawrie
can
be
considered
an
expert
witness.
It
was
agreed
that
Lawrie's
report
should
be
admitted
as
having
been
read.
Deleted
from
the
report
is
paragraph
"g"
on
pages
7
and
8,
a
portion
of
paragraph
(i)
on
page
15
and
the
words
“and,
if
the
pipeline
were
sold
or
abandoned",
from
paragraph
(ii)
on
page
16.
These
deletions,
according
to
Lawrie,
in
no
way
change
his
opinion
as
stated
in
his
report.
Lawrie's
report
is
filed
as
Exhibit
7.
In
pages
1
to
8
to
the
end
of
paragraph
4,
Lawrie
lists
the
facts
upon
which
he
based
his
report.
He
states
that
after
listening
to
the
evidence
of
Laurence
&
Browning
he
saw
no
reason
to
make
any
changes
to
his
report.
The
facts,
in
preparing
his
report
which
he
judged
to
be
material
are:
(1)
Westcoast
had
to
receive
the
Minister’s
approval
in
setting
tariffs
(2)
Westcoast
was
entitled
to
earn
a
permitted
rate
of
return
subject
to
the
approval
of
the
Minister
(3)
Westcoast
was
required
to
account
for
the
tariff
receipts
in
excess
of
permitted
rate
of
return
and
to
take
the
excess
receipts
(surplus)
into
acocunt
in
setting
tariffs
in
subsequent
years.
(4)
Westcoast
was
required
to
accrue
interest
on
the
surplus
and
to
take
that
amount
into
account
in
setting
tariffs
in
subsequent
years
(5)
The
producers
involved,
in
the
majority,
agreeing
to
such
an
arrangement
(6)
Westcoast
did
all
of
the
above.
The
questions
that
Lawrie
is
asked
to
answer
are:
(a)
Did
the
amounts
of
$722,321
(or
$852,321)
and
$976,601
constitute
revenues
of
Westcoast
for
the
1978
and
1979
years,
respectively,
in
accordance
with
generally
accepted
accounting
principles?
(b)
If
such
amounts
did
not
constitute
revenues,
what
do
they
constitute
under
generally
accepted
accounting
principles?
(c)
Was
the
interest
of
$116,890
accrued
at
December
31,
1979
an
expense
for
1979
in
accordance
with
generally
accepted
accounting
prnciples?
(Exhibit
7,
pages
10
&
11)
Lawrie
is
of
the
opinion
that
the
amounts
of
$772,321
for
the
taxation
year
1978
and
$976,601
for
the
taxation
year
1979
do
not
constitute
revenues
for
Westcoast
in
accordance
with
generally
accepted
accounting
principles,
that
these
sums
represent
a
debt
or
liability.
Lawrie
believes
that
the
above
mentioned
sums
are
not
revenue.
He
states
that
in
order
for
the
above
mentioned
sums
to
be
revenue,
the
money
must
have
been
earned
“meaning,
there
is
nothing
requiring
the
company
(Westcoast)
to
pay
it
back".
He
is
of
the
belief
that
Westcoast
has
a
debt
or
liability
because
the
amounts
in
issue
had
to
be
paid
back
or
accounted
for,
to
be
paid
back
including
accrued
interest.
On
page
15
of
Exhibit
7,
Lawrie
has
this
to
say
as
to
why
the
amounts
in
issue
are
to
be
considered
a
debt
or
liability:
By
definition,
those
amounts
should
be
considered
to
constitute
a
debt
or
liability.
They
represented
"a
sum
of
money
owed
by
one
person
(the
debtor—Westcoast)
to
another
(the
creditor—the
shipper(s)).
They
are
payable
at
some
fixed
or
determinable
future
date;
that
is,
the
following
year
by
reducing
the
tariffs
which
would
otherwise
be
permitted
and
collected
in
that
year.
The
amounts
also
have
the
characteristic
of
a
liability
in
that
interest
is
to
be
accrued
on
them.
As
will
be
seen,
I
am
satisfied
that
Lawrie
erred
when
he
based
his
opinion
on
the
assumption
that
the
amount
of
the
surplus
represented
a
sum
of
money
owed
by
Westcoast
to
the
shippers.
I
am
satisfied
the
shippers
never
had
the
legal
right
to
claim
any
of
the
surplus
from
Westcoast.
In
speaking
of
whether
the
amounts
in
issue
are
revenues,
Lawrie
states:
By
definition,
the
amounts
might
possibly
be
considered
to
constitute
revenues.
However,
if
they
were
revenues,
those
revenues
were
not
earned
in
those
years
because
Westcoast
was
not
entitled
to
them,
but
was
to
account
to
and
report
the
amounts
to
the
Ministry
and
the
shippers
in
the
following
years,
take
the
amounts
into
account
in
setting
subsequent
tariffs
(i.e.
reduce
what
would
otherwise
be
charged),
accrue
interest
on
the
amounts
and
likely
pay
the
amounts
and
the
interest
to,
or
for
the
benefit
of,
the
shippers.
The
definition,
"unearned
revenues",
is
not
really
appropriate.
To
the
extent
a
portion
of
the
tariff
was
repayable,
it
constituted
a
debt
or
liability.
(Pages
15
and
16,
Exhibit
7)
Here
again
there
is
an
apparent
error
in
the
assumptions
of
Lawrie.
Westcoast
was
never
and
never
did
account
to
and
report
to
the
shippers
of
any
surplus.
The
witness
states
that
he
concluded
that
if
the
money
in
issue
is
revenue,
it
would
be
unearned
and
be
deferred
revenue
because
Westcoast
had
an
obligation
to
account
for
the
sums
and
to,
in
effect,
repay
the
sums
in
issue.
The
sums
in
issue
are
deferred
because
the
amounts
exceeded
the
allowed
rate
of
return,
the
amounts
had
to
be
accounted
for
in
subsequent
tariffs
and
therefore
had
to
be
repaid.
He
states
there
is
no
essential
difference
between
unearned
revenue
and
deferred
revenue.
With
regard
to
the
issue
of
interest,
Lawrie
states,
at
page
16
of
his
report:
Interest
of
$116,890
accrued
at
December
31,
1979
was
an
expense
for
1979
in
accordance
with
generally
accepted
accounting
principles.
Interest
has
to
be
calculated
at
9%
per
annum
and,
if
the
balance
was
a
payable,
credited
(added)
to
such
balance.
The
other
side
of
the
credit
would
be
a
charge—
a
charge
to
interest
expense.
(If
the
balance
was
a
receivable,
the
opposite
situation
would
apply
and
interest
receivable
and
income
would
be
recorded.)
In
the
report
under
discussion
found
on
pages
25,
26
and
27,
Lawrie
is
of
the
belief
that
revenue
should
not
be
recognized
as
revenue
until
it
is
earned,
that
is,
that
Westcoast
has
the
right
to
keep
the
revenue
and
not
pay
it
back
“directly
or
indirectly”.
He
states
a
cash
receipt
collected
with
the
rendering
of
services
is
not
"recognizable
revenue
if
it
must
be
or
is
likely
required
to
be
returned
or
repaid".
He
does
say
“In
some
such
cases,
receipts
are
recognized
as
revenue,
but
at
the
same
time,
a
"reserve"
or
provision
is
required
to
be
made
to
reflect
the
fact
that
a
portion
of
such
revenue
is
subject
to
return
or
repayment".
I
am
satisfied
that
Mr.
Lawrie
bases
his
entire
opinion
on
the
assumption
that
Westcoast,
if
it
collects
more
than
its
permitted
rate
of
return
must
repay
directly
or
indirectly
the
excess
(surplus)
to
the
shippers.
In
the
case
of
Westcoast
and
the
shippers,
the
amount
of
tariff
revenue
earned
ina
year
is
dependent
on
the
permitted
rate
of
return
as
approved
by
the
Ministry.
If
tariffs
collected
exceed
those
so
permitted,
that
excess
does
not
constitute
revenue,
but
rather
a
payable
to
the
shippers.
If
tariffs
collected
are
less
than
those
permitted,
Westcoast
has
a
receivable
equal
to
the
deficiency
and
the
revenue
for
the
year
is
equal
to
the
tariffs
collected
plus
the
tariffs
receivable.
(Page
26,
Exhibit
7)
For
accounting
purposes,
the
form
or
manner
in
which
something
is
received
or
paid
does
not
change
its
basic
character;
a
basic
accounting
rule
is
that
substance,
not
form,
be
followed.
Accordingly,
collecting
the
tariff
by
charging
the
shippers
for
the
service
does
not
mean
that
the
tariff
(or
certainly
not
all
of
it)
represented
revenue.
Similarly,
reducing
what
could
be
collected
from
the
shipper
in
the
form
of
a
tariff
in
the
following
year
does
not
mean
that
that
net
amount
represented
reduced
revenue.
(Page
27,
Exhibit
7)
He
also
states
that
it
is
his
opinion
that
specific
identification
of
the
individual
creditors
is
not
always
a
requirement
under
general
acceptable
accounting
principles
to
record
a
liability.
In
the
present
case
the
shippers
can
be
identified.
He
states
that
for
accounting
treatment
of
Westcoast,
he
knows
of
no
reason
to
go
beyond
the
group
of
shippers
if
this
is
legal.
He
believes
Westcoast
need
not
go
to
the
producers.
He
also
states
that
he
would
have
provided
the
same
accounting
opinion
as
given
by
Clarkson
Gordon
(Exhibit
1,
page
44)
that
is:
In
our
opinion,
these
financial
statements
present
fairly
the
unconsolidated
financial
position
of
the
company
as
at
December
31,
1979
and
1978
and
the
results
of
its
unconsolidated
operations
and
changes
in
its
financial
position
for
the
years
then
ended
in
accordance
with
generally
accepted
accounting
principles
applied
on
a
consistent
basis
during
the
years.
He
states
any
other
treatment
of
the
funds
in
issue
would
have
meant
a
qualified
opinion
on
his
part.
He
admits
that
if
repayment
was
made,
that
is,
legally
discharging
the
debt
or
liability
by
payment
to
the
shippers
then
the
accounting
treatment
that
followed
the
present
form
could
be
wrong.
He
also
states
that
if,
as
a
matter
of
law,
the
sum
in
issue
is
not
a
liability,
he
believes
the
accounting
treatment
of
making
it
a
liability
is
more
valid.
He
then
tried
to
qualify
his
answer
by
stating
that
a
company
can
have
unasserted
claims
against
it
but
if
the
conclusion,
from,
I
assume
accountants
and
lawyers,
is
that
the
company
will
have
to
pay
the
claims,
general
accounting
principles
dictate
that
the
claims
must
be
shown.
I
am
satisfied
that
such
a
claim
might
possibly
be
considered
a
contingent
liability
and
not
set
up
as
a
debt
or
liability.
It
is
only
a
possible
debt
or
liability.
He
admits
that
a
contingent
liability
can
be
noted
or
put
into
the
balance
sheet
with
an
explanation
on
the
probability
of
having
to
pay
the
claim.
He
states
he
arrived
at
his
conclusion,
found
on
page
28
of
his
report,
that
the
sums
in
issue
are
debts
or
liabilities
for
Westcoast
without
seeking
a
legal
definition
of
a
liability
but
nevertheless
concluded
it
was
a
liability.
He
is
of
the
belief
that
a
legal
opinion
is
not
necessary.
He
also
states
that,
using
the
definitions
of
earned
and
earned
revenue
found
on
page
13
of
Exhibit
7
and
the
definition
of
"earn"
found
on
page
14
of
Exhibit
7,
if
Westcoast
had
performed
what
was
asked
of
it,
it
would
“generally”
be
entitled
to
the
revenue
if
it
charged
a
fee
for
the
service.
If
Westcoast
used
the
revenue
after
it
provided
the
service,
that
revenue
would
have
been
earned.
He
admits
that
Westcoast
transported
oil,
that
it
billed
for
its
service,
the
amount
of
the
invoice
was
based
on
a
tariff,
the
shipper
paid
for
the
service
and
the
money
was
not
segregated
(he
claims
this
is
immaterial)
but
he
maintains
nevertheless
this
is
not
totally
revenue
because
Westcoast
had
the
obligation
to
repay
a
portion
of
the
revenue
in
subsequent
years.
He
acknowledges
that
the
customer
is
the
shipper
and
that
Westcoast
had
no
obligation
to
account
to
the
shipper.
He
believes
the
only
reason
one
cannot
consider
the
sums
received
by
Westcoast
as
earned
revenue
is
the
obligation
of
Westcoast
to
repay
to
the
shippers
a
portion
(the
surplus)
of
the
revenue.
He
admits
that
his
answers
on
page
15
(ii)
of
Exhibit
7
“By
definition,
the
amounts
might
possibly
be
considered
to
constitute
revenue"
and
on
page
16
"The
definition
'unearned
revenues'
is
not
really
appropriate.
To
the
extent
a
portion
of
the
tariff
was
repayable,
it
constituted
a
debt
or
liability”
is
his
own
opinion
on
liability
and
not
that
of
a
lawyer.
It
is
the
opinion
of
this
witness
that
the
tariff
figure
is
not
the
real
figure
in
determining
revenue.
He
also
acknowledges
that
the
shipper
does
not
know
the
amounts
in
the
surplus
account,
the
times
of
"draw
down"
and
that
an
accountant
for
a
shipper
could
not
note
its
portion
of
any
surplus
as
a
receivable
on
the
shippers'
financial
statements.
William
Grant
Stephen
(Stephen),
a
chartered
accountant,
testified
as
the
Crown's
expert
witness.
His
conclusions
differ
with
that
of
Lawrie.
He
is
of
the
opinion
that
the
sums
in
issue
are
earned
revenues
for
Westcoast
in
1978-1979
and
that
the
amount
of
interest
is
not
an
expense
to
earn
income.
His
report
is
filed
as
Exhibit
8.
Counsel
for
Westcoast
agreed
that
Stephen
can
be
considered
an
expert
witness.
Stephen,
in
arriving
at
his
opinion,
states
he
examined
Exhibits
1,
2
and
3,
followed
the
assumptions
found
in
(v)
and
(vi)
of
Exhibit
8,
page
2,
relating
to
legal
liability
(he
requested
a
legal
opinion)
looked
at
the
CICA
handbook,
looked
at
the
authorities
(text
book),
looked
at
pronouncements
in
the
United
States
and
examined
a
series
of
Public
Utility
Reports.
When
Exhibit
8
was
submitted
as
evidence
and
as
read,
counsel
for
plaintiff
objected
stating
any
opinion
based
on
Exhibit
8-6,
Report
of
Ontario
Hydro
for
1986,
on
Exhibit
8-7,
Report
of
Manitoba
Hydro
July
8,
1988
and
Exhibit
8-8,
Nova
Scotia
Power
Corporation
March
31,
1986,
are
not
admissible
and
should
be
deleted
as
being
hearsay.
I
rejected
the
objection.
Experts
may
rely
on
hearsay
evidence
in
stating
their
opinion.
It
is
simply
a
matter
for
the
Court
to
decide
how
much
weight
should
be
given
to
such
evidence.
The
report,
Exhibit
8,
was
allowed
to
be
filed
as
read.
Stephen's
opinion
is
to
be
found
on
page
12
of
Exhibit
8-1:
Based
on
the
information
described
above,
it
is
my
opinion
that
the
amounts
received
by
Westcoast
pursuant
to
a
tariff
charged
to
its
customers
for
services
rendered
by
it
in
its
1978
and
1979
taxation
years,
and
the
"interest
factor”
in
the
1979
taxation
year,
which
were
recorded
by
Westcoast
in
an
account
referred
to
as
the
Rate
Stabilization
Account
should
have
been
recorded
in
Westcoast's
books
of
account
as
a
reserve
arising
from
appropriations
of
retained
earnings
and
not
as
a
liability
and
an
expense
or
revenue
reduction.
He
states
that
the
analysis
used
in
arriving
to
his
opinion
was
that:
1)
he
attempted
to
determine
whether
the
amount
transferred
to
the
rate
stabilization
account
was
revenue
2)
he
attempted
to
determine
whether
this
amount
was
an
expense
3)
he
attempted
to
determine
whether
this
amount
was
a
liability
and
he
then
examined
the
criteria
of
a
reserve
and
he
concluded
the
account
should
be
a
reserve.
In
determining
whether
the
amounts
in
issue
are
revenues,
he
states
he
is
of
the
belief
that,
in
the
present
case,
revenue
of
Westcoast
is
the
throughput
times
the
relevant
charges.
Revenue
is
defined
by
the
Canadian
Institute
of
Chartered
Accountants
(CICA)
as
increases
in
economic
resources
flowing
to
a
company.
He
states
that
if
one
were
to
deduct
the
amount
put
into
the
Rate
Stabilization
Account
(RSA),
the
definition
of
revenue
"does
not
follow”.
An
expense
is
defined
by
the
CICA
as
decreases
in
economic
resources
which
take
place
in
ordinary
revenue
activities
of
an
entity.
He
states
the
transfer
of
the
sums
in
issue
to
the
RSA
is
not
an
expense.
The
earnings
in
excess
of
the
desired
level
is
not
a
decrease
in
Westcoast's
economic
resources
as,
he
claims,
there
is
no
requirement
to
refund
the
difference
between
the
actual
and
the
desired
return.
He
concluded
there
was
no
requirement
to
make
a
refund
due
to
the
legal
opinion
he
obtained
wherein
he
was
told
the
money
did
not
have
to
be
refunded.
The
evidence
of
Westcoast's
witnesses
confirmed
the
assumption
made
by
Stephen
that
the
surplus
funds
did
not
have
to
be
refunded.
In
fact,
no
refund
was
made
in
the
taxation
years
in
issue
nor
could
the
shippers
claim
a
refund.
In
discussing
the
issue
of
liabilities,
the
witness
lists
three
types
and
concludes
none
of
the
three
are
applicable
in
the
present
case.
He
lists
the
three
types
of
liabilities
as:
1)
Legal
2)
Equitable
3)
Constructive
On
pages
7,
8
and
9
of
Exhibit
8
is
a
detailed
discussion
of
each
of
the
liabilities.
He
concludes
there
is
no
legal
liability
"that
as
a
matter
of
law
no
legal
action
could
have
been
commenced
against
the
plaintiff
(Westcoast)
on
behalf
of
the
plaintiff's
customers
who
paid
the
tariff
in
effect
in
the
1978
and
1979
taxation
years
to
recover
or
have
paid
out
any
part
of
the
amounts
credited
by
the
Plaintiff
to
the
Rate
Stabilization
Account".
He
also
assumed
that
Westcoast
could
not
recover,
by
an
action
any
"revenue
deficiencies”.
Counsel
for
Westcoast
questioned
the
witness
as
to
what
he
means
when
he
states
"no
legal
action
could
have
been
commenced".
Counsel
for
Westcoast
submits
anyone
may
"commence
an
action”.
I
am
satisfied
that
what
was
meant
to
be
said
was
that
such
an
action
would,
in
the
opinion
of
legal
counsel,
not
be
successful.
The
witness
also
concluded,
after
studying
the
text
Accounting
Theory,
fourth
edition,
by
Eldon
S.
Hendriksen,
that
no
equitable
or
constructive
liability
exists.
The
witness
states
that
an
equitable
obligation
is
one
where
payment
is
required
to
keep
good
business
relationships.
In
the
present
case,
this
did
not
exist
as
the
shippers
were
not
aware
of
the
surplus
and
were
not
made
aware
of
same.
He
states
that
Westcoast
had,
in
his
opinion
a
great
deal
of
discretion
with
regard
to
the
surplus.
He
gives
as
an
example
of
Westcoast's
discretion
the
fact
that
it
is
Westcoast
who
prepared
for
the
Minister
the
forecast
of
throughput
and
expense
and
it
is
Westcoast
that
decided
what
would
be
included
in
the
forecast.
The
witness
also
states
that
in
order
to
have
a
liability
one
must
be
in
a
position
to
know
the
amount
of
the
liability
and
when
it
must
be
paid,
that
it
must
be
payable
at
a
determined
time.
In
the
present
case,
the
timing
of
reducing
the
tariffs
or
of
not
raising
the
tariffs
is
entirely
at
the
discretion
of
Westcoast.
Stephen
admits
that
his
statement
that
the
money
received
becomes
revenue
was
an
assumption
given
to
him
by
the
Crown.
He
admits
that
there
are
situations
when
amounts
charged
is
not
to
be
considered
as
revenue
such
as
prepaid
rent
or
insurance
costs.
He
also
admits
that
a
charge
made
by
one
part
to
another
is
not
necessarily
revenue
in
the
year
when
the
charge
is
made.
I
find
that
this
adds
little
to
the
present
case.
In
the
examples
given
by
counsel
for
Westcoast,
no
service
has
yet
been
performed.
In
the
present
case,
Westcoast
performed
the
service
for
which
it
obtained
payment.
Stephen
is
of
the
opinion,
contrary
to
the
opinion
of
Lawrie,
that
the
amount
of
funds
received
by
Westcoast
in
excess
of
what
is
allowed,
the
permitted
rate
of
return,
can
be
income.
He
states
that
the
general
practice
is
that
whatever
a
company
earns
(on
the
tariff)
is
earnings.
He
so
concludes
because
of
his
own
expertise
working
with
utility
companies
and
as
confirmed
in
Tabs
6,
7
and
8
of
Exhibit
8.
The
witness
further
states
that
he
concluded
that
the
revenues
are
increases
in
economic
resources
for
Westcoast
because
Westcoast
did
not
have
to
pay
out
any
funds
in
the
1978
and
1979
taxation
years
and
that
there
was
no
clear
mechanism
that
the
surplus
would
have
to
be
paid
out.
Mr.
Stephen
is
of
the
view
that
the
certificate,
Exhibit
1,
page
44,
is
incorrect.
He
states
he
would
not
have
given
such
a
certificate
if
he
were
to
have
audited
the
plaintiff
company.
It
is
obvious
that
there
is
a
serious
difference
of
opinion
between
the
two
experts.
Plaintiff
submits
that
the
issue
is
to
determine
whether
the
revenue
of
Westcoast
was
determined
in
accordance
with
general
accounting
principles
(GAP).
a)
an
amount
equal
to
permitted
rate
of
return
and
recovery
of
allowable
costs
or
b)
an
amount
equal
to
cash
collected
and
received
or
receivable
with
respect
to
billings.
It
is
Westcoast's
submission
that
it
is
the
a)
alternative
that
is
the
correct
one.
It
states
that
all
that
the
tariff
mechanism
is,
is
a
means
to
collect
cash.
That
cash
collected
need
not
always
be
revenue.
Westcoast
only
included
in
its
income
part
of
the
amount
of
the
revenue
it
received,
that
is,
the
permitted
rate
of
return
and
the
costs
incurred
in
operating
the
pipeline
plus
the
depreciation.
Counsel
submits
that
it
is
well
established
that
income
determination
starts
with
subsection
9(1)
of
the
Income
Tax
Act
(I.T.A.).
This
section
states:
9.
(1)
Subject
to
this
Part,
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property
is
his
profit
therefrom
for
the
year.
According
to
plaintiff,
income
is
profit
and
that
the
Courts
have
held
that
since
there
is
no
definition
of
profit
in
the
I.T.A.,
general
accounting
principles
must
apply
(see
Dominion
Taxicab
Association
v.
Minister
of
National
Revenue,
[1954]
C.T.C.
34
at
37
and
38;
54
D.T.C.
1020).
Plaintiff
submits
that
Lawrie
looked
at
the
facts
provided
and
gave
an
opinion
from
an
accounting
point
of
view
that
where
the
tariff
collected
is
in
excess
to
the
permitted
rate
of
return
and
costs,
the
excess
represented
an
obligation
and
thus
a
liability
was
created.
Stephen
does
not
agree.
He
states
that
no
obligation
has
been
created
in
the
tax
year
basing
himself
on
the
assumption
that
no
legal
obligation
has
been
created
between
Westcoast
and
the
shippers
of
oil
in
the
pipeline.
I
am
satisfied
that
no
legal
obligation
has
been
created
whereby
Westcoast
would
have
to
repay
the
surplus
funds
it
is
holding
to
the
shippers
who
paid
these
funds
and
which
funds
were
the
cause
of
the
surplus.
In
essence,
it
is
plaintiff's
submission
that
because
it
will
one
day
have
to
either
lower
its
tariffs
or
keep
the
same
tariffs
although
its
costs
have
increased,
or
raise
its
tariffs
by
a
percentage
less
than
required
to
ensure
it
receives
its
permitted
rate
of
return,
it
is
in
effect
returning
to
the
shippers
and
thus
the
producers
the
surplus
funds
it
holds.
I
do
not
agree.
Counsel
for
Westcoast
refers
to
the
case
of
Kenneth
B.S.
Robertson
Limited
v.
M.N.R.
[1944]
Ex.
C.R.-170;
[1944]
C.T.C.
75;
2
D.T.C.
655
not
for
the
facts
of
the
case
but
for
the
principle
to
be
found
therein.
At
[C.T.C.]
pages
90
and
91,
Thorson
J.
states:
It
seems
equally
clear
that
if
income
is
received
in
any
one
year
it
is
taxable
in
that
year,
even
although
it
has
not
yet
been
earned,
and
it
follows
that
the
appellant
was
not
entitled
to
make
any
deduction
from
income
received
by
it
in
any
year
on
the
ground
that
it
was
not
earned
in
such
year.
This
does
not,
however,
dispose
of
this
appeal,
for
the
question
remains
whether
all
of
the
amounts
received
by
the
appellant
during
any
year
were
received
as
income
or
became
such
during
the
year.
Did
such
amounts
have,
at
the
time
of
their
receipt,
or
acquire,
during
the
year
of
their
receipt,
the
quality
of
income,
to
use
the
phrase
of
Mr.
Justice
Brandeis
in
Brown
v.
Helvering
(supra).
In
my
judgment,
the
language
used
by
him,
to
which
I
have
already
referred,
lays
down
an
important
test
as
to
whether
an
amount
received
by
a
taxpayer
has
the
quality
of
income.
Is
his
right
to
it
absolute
and
under
no
restriction,
contractual
or
otherwise,
as
to
its
disposition,
use
or
enjoyment?
To
put
it
in
another
way,
can
an
amount
in
a
taxpayer’s
hands
be
regarded
as
an
item
of
profit
or
gain
from
his
business,
as
long
as
he
holds
it
subject
to
specific
and
unfulfilled
conditions
and
his
right
to
retain
it
and
apply
it
to
his
own
use
has
not
yet
accrued,
and
may
never
accrue?
Plaintiff
submits
this
is
exactly
where
they
are
in
the
present
case.
With
respect,
I
cannot
agree.
Westcoast's
right
to
the
money
is
absolute
and
under
no
restriction
for
the
time
that
the
money
is
in
its
possession.
The
evidence
is
clear
that
at
no
time
did
Westcoast
make
any
refund
of
the
surplus
funds.
All
that
Westcoast
was
obliged
to
do,
if
it
had
an
excess
of
funds,
that
is,
a
sum
greater
than
its
permitted
rate
of
return,
was,
eventually
to
factor
the
surplus
into
its
tariffs
in
subsequent
years.
The
money
it
had
collected
for
the
transportation
of
oil
was
used
by
Westcoast
as
if
it
was
absolute
property
of
Westcoast.
No
evidence
was
made
to
convince
me
that
Westcoast
was
restricted
in
the
use
of
the
surplus
funds.
It
is
further
submitted
by
Westcoast
that
if
I
do
not
find
that
the
surplus
sum
is
a
liability,
and
I
do
so
find,
but
a
receipt
for
services
to
be
performed
then,
normally,
pursuant
to
paragraph
12(1)(a)
of
I.T.A.
the
amounts
should
be
included
in
income
except
for
subsection
20(1)(m)
which
provides
for
a
reasonable
reserve
for
services
to
be
rendered
after
the
end
of
the
taxation
year.
12.
(1)
There
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
as
income
from
a
business
or
property
such
of
the
following
amounts
as
are
applicable:
(a)
Services,
etc.,
to
be
rendered
—
any
amount
received
by
the
taxpayer
in
the
year
in
the
course
of
a
business
(i)
that
is
on
account
of
services
not
rendered
or
goods
not
delivered
before
the
end
of
the
year
or
that,
for
any
other
reason,
may
be
regarded
as
not
having
been
earned
in
the
year
or
a
previous
year,
or
(ii)
under
an
arrangement
or
understanding
that
it
is
repayable
in
whole
or
in
part
on
the
return
or
resale
to
the
taxpayer
of
articles
in
or
by
means
of
which
goods
were
delivered
to
a
customer;
20.
(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto
(m)
Reserve
in
respect
of
certain
goods
and
services
—
subject
to
subsection
(6),
where
amounts
described
in
paragraph
12(1)(a)
have
been
included
in
computing
the
taxpayer's
income
from
a
business
for
the
year
or
a
previous
year,
a
reasonable
amount
as
a
reserve
in
respect
of
(i)
goods
that
it
is
reasonably
anticipated
will
have
to
be
delivered
after
the
end
of
the
year,
(ii)
services
that
it
is
reasonably
anticipated
will
have
to
be
rendered
after
the
end
of
the
year,
(iii)
periods
for
which
rent
or
other
amounts
for
the
possession
or
use
of
land
or
chattels
have
been
paid
in
advance,
or
(iv)
repayments
under
arrangements
or
understandings
of
the
class
described
in
subparagraph
12(1)(a)(ii)
that
it
is
reasonably
anticipated
will
have
to
be
made
after
the
end
of
the
year
on
the
return
or
resale
to
the
taxpayer
of
articles
other
than
bottles;
Plaintiff
submits
that
since
paragraph
12(1)(a)
requires
the
inclusion
of
the
surplus
funds
in
its
income
then
the
total
sums
in
issue
for
the
taxation
years
1978
and
1979
would
be
a
reasonable
reserve,
in
that,
the
only
way
Westcoast
can
appropriate
any
portion
of
the
surplus
is
by
delivery
of
the
product
in
future
years
at
a
sufficiently
low
tariff
so
that
the
revenue
does
not
yield
the
permitted
rate
of
return.
I
am
satisfied
that
the
alternative
submission
of
Westcoast
that
the
sums
in
issue
are
a
reserve
in
respect
of
services
not
yet
rendered
must
fail.
Westcoast
has
already
performed
the
services,
but
has
simply
charged
too
much
for
them.
The
fact
that
Westcoast
may
use
the
excess
profits
to
lower
the
rate
on
future
performance
of
its
services
to
the
same
or
different
customers
is
not
identical
to
receiving
the
entire
sum
of
surplus
money
for
an
as
yet
unperformed
service
in
one
year
and
then
performing
the
service
in
the
following
year.
Furthermore,
paragraph
18(1)(e):
18.
(1)
In
computing
the
income
of
a
taxpayer
from
a
business
or
property
no
deduction
shall
be
made
in
respect
of
(e)
Reserves,
etc.
—
an
amount
as,
or
on
account
of,
a
reserve,
a
contingent
liability
or
amount
or
a
sinking
fund
except
as
expressly
permitted
by
this
Part
denies
deductions
for
any
reserve
not
expressly
provided
elsewhere
in
Part
1
of
the
I.T.A.
The
only
provision
that
could
have
applied
in
paragraph
20(1)(m)
and
I
have
decided
that
this
section
is
not
applicable
to
the
circumstances
of
this
case.
Because
paragraph
18(1)(e)
denies
deductions
for
reserves
to
cover
contingencies,
any
reserve
that
is
deductible
must
be
in
respect
of
a
binding
liability.
I
am
satisfied
that
there
is
no
binding
liability
to
repay
any
excess
sums
Westcoat
had
collected
for
the
delivery
of
oil
to
its
shippers.
The
evidence
clearly
indicates
that
Westcoast
was
paid
for
the
delivery
of
the
oil
in
accordance
with
a
tariff
set
by
Westcoast,
in
the
main,
and
approved
by
the
Minister.
The
shippers
were
informed
by
Westcoast
as
to
what
the
tariff
would
be
for
the
delivery
of
a
barrel
of
oil.
They
had
no
part
to
play
in
the
setting
of
the
tariff
(Exhibits
2-43,
2-33
and
-34).
The
shippers
paid
the
sums
invoiced
to
Westcoast
in
its
ordinary
course
of
business
as
an
oil
transmission
company.
I
am
also
satisfied
the
funds
paid
were
paid
to
Westcoast
"without
strings
attached”.
The
shippers
were
never
made
aware
of
any
surplus
held
by
Westcoast.
A
case
which
I
believe
is
almost
on
“all
fours"
with
the
present
one
is
that
of
Northern
and
Central
Gas
Corporation
v.
The
Queen,
[1985]
1
C.T.C.
192;
85
D.T.C.
5144
(F.C.T.D.).
The
[C.T.C.]
headnote
from
that
report
attests
to
the
similarities
between
that
case
and
the
present
one:
On
August
1,
1977
the
Ontario
Energy
Board
authorized
a
rate
increase
for
natural
gas
to
allow
the
plaintiff
to
recoup
increased
costs
it
would
incur,
as
of
that
date,
in
purchasing
gas
from
Trans
Canada.
The
plaintiff
thus
stood
to
gain
from
the
sale
of
gas
held
in
storage
on
July
31,
1977.
The
Board's
policy
was
that
such
gain
resulting
from
increased
prices
be
"passed-on"
by
the
plaintiff
to
its
customers.
The
Board
agreed
that
the
“passing
on”be
delayed
until
February
1978
so
that
it
would
benefit
a
different
mix
of
customers
than
if
implemented
in
the
summer
months.
The
plaintiff
sold
some
of
its
stored
gas
in
November
and
December
1977
resulting
in
an
inventory
gain
of
$255,340.
The
plaintiff
did
not
include
this
amount
in
its
income
claiming
that
it
was
a
liability
owed
to
its
customers.
The
Minister
included
the
amount
in
the
plaintiff's
1977
income
on
the
grounds
that
there
was
no
legal
obligation,
as
of
December
31,
1977
to
pay
out
the
amount
and
that
it
was
a
contingent
liability
within
the
meaning
of
paragraph
18(1)(e)
of
the
Act.
Madame
Justice
Reed
examined
the
jurisprudence
relating
to
paragraph
18(1
)(e)
and
concluded
that
although
the
company
knew
how
much
it
would
be
required
to
repay
at
the
end
of
the
taxation
year,
the
obligation
to
repay
that
amount
did
not
arise
until
the
following
year
when
the
Ontario
Energy
Board
finally
ordered
the
company
to
make
the
repayment.
As
she
says,
at
page
199:
The
fact
that
the
amount
of
the
liability
was
ascertainable
and
that
the
probability
of
its
not
becoming
payable
was
very
small
(almost
infinitesimally
small)
does
not
affect
the
nature
of
the
liability
.
.
.
There
was
no
legal
liability
on
the
plaintiff
at
the
end
of
1977
to
"refund"
the
sum
to
its
customers.
With
the
exception
of
the
paragraph
20(1)(m)
argument
made
by
Westcoast,
and
I
have
already
dealt
with
this
issue,
the
plaintiff
in
the
Northern
and
Central
Gas
case
made
the
same
submissions
as
Westcoast
is
making
in
the
present
case.
As
Madame
Justice
Reed
states,
at
page
199:
The
plaintiff
argues
that
the
$255,340
received
by
it
should
not
be
considered
as
income
in
its
hands
because
the
plaintiff
had
no
absolute
right
to
the
funds;
the
plaintiff
knew
it
was
going
to
be
required
to
pass
that
gain
on
to
its
customers;
it
didn't
matter
that
the
specific
customers
to
whom
it
would
accrue
could
not
be
identified;
it
was
a
clear
liability,
definite
and
measurable
(the
inventory
gain
(part
sold)
plus
interest
from
August
1,
1977,
to
December
31,
1977).
Westcoast
made
the
same
submission.
It
stated
the
surplus
received
by
it
should
not
be
considered
as
income
in
its
hands
because
Westcoast
had
no
absolute
right
to
the
funds;
that
Westcoast
knew
it
was
going
to
be
required
to
pass
that
gain
onto
its
customers
because
of
it
only
being
permitted
to
earn
a
specified
rate
of
return;
it
didn't
matter
that
the
specific
customers
to
whom
it
would
accrue
could
not
be
identified,
the
group
of
shippers
was
identifiable,
it
was
a
clear
liability
as
it
would,
in
the
future,
have
to
adjust
its
tariffs
to
"use
up"
its
surplus.
As
Madame
Justice
Reed
found,
so
do
I
find.
Madame
Justice
Reed
states
at
page
200:
The
plaintiff
had
a
legal
and
absolute
right
to
the
use
of
the
money
when
it
was
received.
There
were
no
restrictions
in
its
right
to
the
money;
there
were
no
unfulfilled
conditions
precedent.
The
money
was
clearly
income
in
the
hands
of
the
plaintiff
when
received.
Could
the
amount
then
be
considered
as
an
expense
of
making
income
because
the
plaintiff
had
a
known
and
measurable
liability
to
its
customers
at
the
end
of
1977.
The
problem
the
taxpayer
has
to
meet
is
that
while
the
amount
it
expected
to
pay
was
definitely
ascertainable
there
was
no
existing
legal
obligation
at
the
end
of
1977
requiring
payment.
[Emphasis
added.]
As
I
have
stated,
Westcoast
could
use
the
surplus
funds
in
any
manner
it
wished
to.
The
funds
were
not
segregated.
Westcoast
knew
it
would,
eventually,
have
to
adjust
its
tariffs.
No
adjustment
was
made
for
a
number
of
years.
It
was
at
its
discretion
as
to
when
it
would
eventually
factor
any
surplus
it
had
into
tariff
charges
in
subsequent
years.
There
was
no
legal
obligation
to
the
shippers
since
they
had
no
right
to
claim
the
repayment
of
any
surplus
moneys
paid
by
them
to
Westcoast
for
the
transportation
of
oil.
The
following
statement
of
Madame
Justice
Reed
at
page
201
is
equally
applicable
in
the
present
case:
There
is
no
doubt
that
the
plaintiff
could
anticipate
that
it
would
be
required
to
“refund”
the
inventory
gain
to
its
customers
by
virtue
of
a
February
1978
decision.
There
is
no
doubt
that
an
accountant
would
deem
it
necessary
to
reflect
this
fact
in
the
books
of
the
company
but
it
cannot
be
said
to
be
an
expense
for
tax
purposes.
It
was
a
reserve
for
a
contingency
liability.
The
fact
that
the
amount
of
the
liability
was
ascertainable
and
that
the
probability
of
it
not
becoming
payable
was
very
small
(almost
infinitesimally
small)
does
not
affect
the
nature
of
the
liability
(refer:
Guay
case,
(supra).
There
was
no
legal
liability
on
the
plaintiff
at
the
end
of
1977
to
“refund”
the
sum
to
its
customers.
Conclusion
Generally,
the
Income
Tax
Act
does
not
allow
the
deduction
of
reserves
from
income.
However,
where
amounts
are
put
into
reserve
accounts
to
cover
liabilities
which
are
legally
binding
and
ascertainable
in
the
taxation
year
but
which
may
not
be
enforced
until
a
later
date,
such
amounts
in
certain
circumstances
may
be
deducted
from
income.
In
the
present
appeal,
although
the
amounts
are
ascertainable,
I
am
satisfied
from
the
evidence
presented
that
there
is
no
legally
binding
obligation
to
the
shippers
to
"refund"
any
surplus
at
the
end
of
any
taxation
year.
The
surplus
funds
are
not
"loans"
to
Westcoast.
The
surplus
funds
are
sums
collected
by
Westcoast
from
its
"customers"
for
a
service
performed
by
it
in
accordance
with
an
approved
tariff
and
in
the
ordinary
course
of
its
business.
The
interest
paid
by
Westcoast
to
itself
for
an
alleged
loan
is
not,
therefore,
an
expense
in
accordance
with
the
Income
Tax
Act.
Plaintiff’s
appeal
is
dismissed
with
costs
in
favour
of
the
Crown.
Appeal
dismissed.
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