Date: 20071123
Docket: T-85-03
Citation: 2007
FC 1234
Calgary, Alberta,
November 23, 2007
PRESENT: The Honourable Mr. Justice Campbell
BETWEEN:
ALTAGAS MARKETING INC.,
GYRFALCON HOLDINGS LTD., INUVIALUIT
PETROLEUM CORPORATION AND IPL HOLDINGS
INC.
Plaintiffs
and
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT AND
JUDGMENT
[1]
In 1984,
the Inuvialuit of the Northwest
Territories
concluded a settlement agreement with Canada entitled the Inuvialuit Final
Agreement (IFA) which was subsequently entrenched in law by the Western
Arctic (Inuvialuit) Claims Settlement Act, S.C. 1984, c.24. Under the IFA,
the Inuvialuit are entitled to a royalty of 10% of the production of certain
petroleum bearing lands which are the subject matter of the present dispute. Under
the agreement, as administrators, Canada
has the obligation to collect and remit this royalty. The vehicle Canada chose to accomplish this
result is the Canada
Petroleum Resources Act R.S.C.
1985, c. 36 (2nd Supp.) (CPRA). It is agreed that this legislation applies to the lands
in question.
[2]
The
Plaintiffs are petroleum producers licensed under the CPRA with respect
to the petroleum producing lands in question. A central feature of the present
dispute is the fact that, while Canada granted the Plaintiffs a standard form
production licence under the CPRA which contains a royalty provision
that only yields a fraction of the royalty to which the Inuvialuit are
entitled, by letter dated May 16, 2002 (Agreed Statement of Facts, Tab 6), Canada
assessed the Plaintiffs under the CPRA for the full 10% royalty required
to be collected and remitted under the IFA. By letter dated August 9,
2002, the Plaintiffs objected to this assessment (Agreed Statement of Facts,
Tab 7). Canada’s response of October 25, 2002, given by Minister of Indian
Affairs and Northern Development, confirmed the assessment “given the
paramountcy of the Inuvialuit Final Agreement over other legislation including
the Canadian Petroleum Resources Act” (Agreed Statement of Facts, Tab 8 ).
I. The Central Question
[3]
The
central question of this appeal is: Was Canada’s royalty assessment of 10% made
according to law?
[4]
Even
though the present challenge is framed as an “appeal” of the contested
assessment, as a statutory appeal under s.63 of the CPRA, the Supreme
Court of Canada’s decision in Dr. Q v. College of Physicians and Surgeons of
British Columbia, [2003] 1 S.C.R. 226 at paragraph 21, directs that a
statutory appeal is to be conducted as a judicial review; therefore the
standard of review of the central question must be determined. With respect to
a pragmatic and functional analysis of the decision-making under review, given that
the question to be answered is with respect to a question of law, it is not
contested that the standard of review of the assessment under review is
correctness.
[5]
The answer
to the central question is the product of the determination of three key issues.
The fact base for addressing the key issues is a document entitled “Agreed
Statement of Facts” which is the preliminary document in a binder of documents,
filed by consent, by the same name; the contents of the document form Appendix
A to these reasons.
[6]
The
hearing of the present appeal was conducted by written and oral argument over
two sessions. In the first session, a wide range of issues were addressed;
however, in the second session the issues were narrowed substantially with
important clarifying statements of position being made on the record by Counsel
for both parties.
A. The key issues
1. What are Canada’s royalty obligations under
the IFA?
[7]
The provisions
of the IFA which set out Canada’s
obligations are contained in the section entitled “Administration of Existing Rights”
attached to these reasons as Appendix B.
[8]
The IFA
contains an arbitration scheme intended to settle disputes under the IFA.
Canada’s obligations under the IFA
are settled by the following passage of an arbitration decision dated April 29,
2004 which has the force of law:
We reject the view taken by
Counsel for the Respondent that Canada
was a mere conduit for collecting the royalties on behalf of the Inuvialuit. Canada took on a heavy obligation
when it agreed to continue administering these rights on behalf of the
Inuvialuit particularly when the rate of royalty expected to be received by
the Inuvialuit was clearly and unequivocally specified as the COGA rate.
The idea of a continuing administration on behalf of the Inuvialuit carries
with it the well known special relationship of the Crown to aboriginal peoples
which goes beyond the idea of a mere administrator. In addition, the Crown
retained powers that exceeded those of the Inuvialuit in that, for example, Canada could revoke the COGA and
replace it with a different regime as Canada
in fact did [the CPRA]. However, even if one were for the sake of
argument to take the idea of an “administrator” as a simple starting point,
this is a situation where the administrator has taken on a very significant
obligation beyond that of a bare administration. The Respondent has taken on
a clear obligation to remit on the basis of the COGA royalty rate. The
characterization of the relationship as a mere conduit or as merely principal
and agent understates the responsibility of Canada. Equally we reject the view taken by
Counsel for the Claimants that
Canada must pay the royalty
irrespective of whether it is able to collect it or not. While we find that the
obligation of the Respondent is a heavy one, we do not find in the language of
the provisions the intent to create an absolute guarantee or an absolute
obligation to pay under any and all circumstances.
(Emphasis added)
(Book of Documents, Tab 9,
pp.24-25)
[9]
The
calculation of the amount of the royalty payable is set out in s.7(96) of the IFA.
The law in force on December 31, 1983 was the Canada Oil and Gas Act
S.C. 1980-81-82 (COGA) which stipulated a royalty of 10%. I agree with Canada’s argument that, even though
the COGA has been repealed, this stipulation is, by law, the royalty
that must be collected and remitted under the IFA.
[10]
Indeed, during
the second session of the hearing of the present appeal, Counsel for the Plaintiffs
agreed that the Plaintiffs are liable to pay whatever royalty is prescribed
under the CPRA Regulations; that is, if the Regulations say the COGA
rate is to be paid, or they say 10% is to be paid, or any other royalty is to
be paid, the Plaintiffs would be obliged to pay it. I understand that the
point stressed by the Plaintiffs is, they would pay any royalty according to a lawful
collection process engaged to have them do so; their main argument is the
assessment challenged was not based on such a process.
2. What is
the apparent scope of the royalty provisions of the production licence issued
to the Plaintiffs under the CPRA?
[11]
Section 55
of the CPRA is straight forward in setting out the royalty obligation of
production licence holders:
|
55. (1) There
are hereby reserved to Her Majesty in right of Canada, and each holder of a
share in a production licence is liable for and shall pay, in accordance with
the regulations, such royalties as may be prescribed, at the rates
prescribed, in respect of petroleum produced from frontier lands and in
respect of the periods prescribed.
|
55.
(1) Sont réservées à Sa Majesté du chef du Canada les redevances qui peuvent
être fixées par règlement sur la production d’hydrocarbures provenant des
terres domaniales aux taux et pour les périodes réglementaires. Chaque
indivisaire d’une licence de production — l’assujetti — est tenu,
conformément au règlement, au paiement de ces redevances.
|
The
Regulations which set out the formulae of calculating the royalty required by s.55(1)
are the Frontier Lands Petroleum Royalty Regulations (SOR/92-26) (the Regulations);
the following excerpt from s.3(1) shows how a CPRA royalty is calculated:
|
3. (1) The
prescribed royalty payable to Her Majesty under subsection 55(1) of the Act
by each interest holder is
(a) in respect
of petroleum produced from project lands in a month preceding the month of
payout
(i) beginning
with the first production month and ending with the eighteenth production
month, one per cent of the gross revenues of the interest holder from that
petroleum,
(ii) beginning
with the nineteenth production month and ending with the thirty-sixth
production month, two per cent of the gross revenues of the interest holder
from that
petroleum,
...
|
3.
(1) La redevance payable à Sa Majesté, en vertu du paragraphe 55(1) de la
Loi, par chaque indivisaire d’une licence de production — l’assujetti — est
égale :
a)
dans le cas de la production d’hydrocarbures provenant des terres domaniales
du projet au cours d’un mois précédant le mois de recouvrement de
l’investissement initial, à :
(i)
un pour cent des revenus bruts de l’assujetti provenant des hydrocarbures, à
compter du premier mois de production jusqu’au dix-huitième,
(ii)
deux pour cent, à compter du dix-neuvième mois jusqu’au trente-sixième,
…
|
[12]
Section 4
of the production licence issued to the Plaintiffs under the CPRA is a
royalty provision which reads as follows:
Subject to the Act, each
holder of a share in a production licence is liable for and shall pay, in
accordance with the regulations, such royalties as may be prescribed, at the
rates prescribed, in respect of petroleum produced from frontier lands and in
respect of the periods prescribed.
(Agreed Statement of Facts,
Tab 5)
[13]
The result
is that, on the plain meaning of s.55, petroleum producers are to pay such
royalties as are prescribed in the Regulations. The Regulations
make no specific mention of the special royalty rate set out in the IFA,
and, indeed, the calculation under the Regulations assessed only 10% of
that which was required to be remitted to the Inuvialuit by Canada under the IFA.
According to admissions made by Canada
on examination for discovery, this disparity was not addressed until the end of
1999. At that time Canada concluded that COGA rates probably applied to
the IFA, the royalty on production should be calculated under the COGA,
and it was suspected that, in fact, the royalty was being calculated under the CPRA
(Memorandum of Facts and Law of the Plaintiffs, Tab C, pp.52-54).
[14]
I have no
difficulty in finding that the apparent scope of the royalty provisions of the
production licence issued to the Plaintiffs under the CPRA does not
encompass the royalty required to be collected and remitted by Canada under the IFA.
3. Are the
royalty provisions of the production licence capable of an interpretation which
does encompass the royalty required to be collected and remitted by Canada under the IFA?
[15]
Canada’s written argument that this
interpretation exists begins with the following primary assertions:
Section 55 of the CPRA says
that “each holder of a share in a production licence is liable for and shall
pay…such royalties as may be prescribed, at the rates prescribed, in respect of
petroleum produced from frontier lands…”
Section 2 defines “prescribed”
as meaning “(a) in the case of a form or the information to be given on a form,
prescribed by the Minister, and (b) in any other case, prescribed by the
regulations made by the Governor in Council”.
Production licence number 6,
which is the source of the Plaintiffs’ right to produce gas, is a form
prescribed by the Minister of Indian Affairs and Northern Development.
(Supplemental Reply of the
Defendant, October 19, 2007, paras. 5-7)
[16]
The
argument then proceeds to attempt to establish that the production licence
issued to the Plaintiffs, being a “form” prescribed by the Minister, has the
effect of allowing the Minister to over-ride the Regulations with
respect to setting royalties. That is, by this reasoning, Canada argues that the rates set out
in the Regulations can be altered by the Minister, to the effect that
the royalty rate set by the production licence is the rate set out in s.7(96)
of the IFA.
[17]
I reject
this argument because it fails on the first of the primary assertions; the
quotation of s.55 is inaccurate. This inaccuracy skews the plain meaning of
the provision and, only thereby, allows the argument to be advanced. The precise
working of the provision bears repeating:
|
55. (1) There
are hereby reserved to Her Majesty in right of Canada, and each holder of a
share in a production licence is liable for and shall pay, in accordance
with the regulations, such royalties as may be prescribed, at the rates
prescribed, in respect of petroleum produced from frontier lands and in
respect of the periods prescribed.
(Emphasis
added)
|
55.
(1) Sont réservées à Sa Majesté du chef du Canada les redevances qui peuvent
être fixées par règlement sur la production d’hydrocarbures provenant des
terres domaniales aux taux et pour les périodes réglementaires. Chaque
indivisaire d’une licence de production — l’assujetti — est tenu,
conformément au règlement, au paiement de ces redevances.
|
[18]
With
respect to the correct interpretation of s.55, I find that the words “such
royalties as may be prescribed” in the phrase “shall pay, in accordance
with the regulations, such royalties as may be prescribed at the rates
prescribed…” refer directly to, and only to, the royalties set out in the Regulations.
Therefore, for greater clarity, the phrase should be read as: “shall pay, in
accordance with the regulations, such royalties as may be prescribed [in the
regulations] at the rates prescribed [in the regulations]…”. Therefore, the
words “such royalties as may be prescribed” are not capable of operating as an
independent source of royalty obligations.
II. The Answer to the Central
Question
[19]
The
central question of this appeal is: Was Canada’s royalty assessment of 10% made
according to law? On the basis of the above analysis, my answer is “no”.
III. Relief
[20]
Pursuant
to s.63(4) of the CPRA, as they request, the Plaintiffs are entitled to
have the assessment vacated.
IV. Costs
[21]
Both the
Plaintiffs and Canada agree that the assessment of
costs arising from the result achieved is to be the subject of further
argument.
JUDGMENT
THIS COURT ORDERS AND ADJUDGES that:
Pursuant to s.63(4) of the Canada Petroleum Resources Act R.S.C. 1985, c. 36 (2nd Supp.), the assessment of May 16,
2002 is vacated.
The determination of costs is reserved.
“Douglas
R. Campbell”
Appendix A
AGREED STATEMENT OF FACTS
[Note: The references
noted in the right hand margin are to the binder of documents on the record
named “Agreed Statement of Facts”.]
PARTIES
1.
The Plaintiff AltaGas Marketing Inc. (“AltaGas”)
is a body corporate incorporated under the laws of Canada, carrying on business
in and having offices in the City of Calgary in the Province of Alberta and elsewhere in Canada.
2.
The Plaintiff Inuvialuit Petroleum Corporation
(“IPC”) is a body corporate incorporated under the laws of Canada, carrying on
business in and having offices in the Town of Inuvik in the Northwest Territories.
3.
The Plaintiff Gyrfalcon Holdings Ltd.
(“Gyrfalcon”) is a body corporate incorporated under the laws of Canada,
carrying on business in and having offices in the Town of Inuvik, in the Northwest
Territories.
4.
The Plaintiff IPL Holdings Inc. (“IPL Holdings”)
is a body corporate incorporated under the laws of Canada, carrying on business
in and having offices in the City of Calgary in the Province of Alberta and elsewhere in Canada.
HISTORY
5.
The Canada Oil and Gas Act was enacted by
S.C. 1980-81-82, c.81 and proclaimed in force on March 5, 1982 (SI/82-96) (as
amended, “COGA”). On December 31, 1983, the COGA applied to Crown lands
in the Northwest Territories.
The COGA was repealed in stages, with the last provisions being repealed
by S.C. 1994, c.10, section 30, in force May 12, 1994.
COGA [TAB 1]
6.
On June 5, 1984, Canada and the Committee for Original Peoples’ Entitlement (“COPE”),
representing the Inuvialuit of the Inuvialuit Settlement Region, entered into
the Inuvialuit Final Agreement (“IFA”).
IFA [TAB 2]
7.
The IFA was entrenched in a statute
called the Western Arctic (Inuvialuit) Claims Settlement Act, S.C. 1984,
c.24, which came into force on July 25, 1984 (with amendments, the “WACSA”).
The IFA was subsequently amended by two Amending Agreements both dated
the 11th of May, 1987, and a third Amending Agreement dated the 23rd
of August, 1988. The three Amending Agreements were also entrenched in a
statute called the Act to Amend the Western
Arctic (Inuvialuit) Claims Settlement Act.
WACSA [TAB 3]
8.
The Inuvialuit Regional Corporation (“IRC”) is
the successor to COPE. IRC is a corporation without share capital formed under
the Canada Corporations Act and created by reason of the IFA for
the purposes, inter alia, of generally representing the Inuvialuit and
their rights and benefits. Inuvialuit Land Corporation (“ILC”) is a separate
corporate entity, a wholly owned subsidiary of IRC, which owns the Inuvialuit
lands provided under the IFA. As owner of the Inuvialuit lands, ILC,
pursuant to the IFA, is the person entitled to receive royalty payments
on behalf of the Inuvialuit.
9.
Among other benefits, the IFA granted
title to the Inuvialuit of certain lands (to be held by ILC) located in the Northwest Territories. By virtue of
paragraph 7(1)(a)(i) of the IFA, ILC is to hold certain of these lands
“in fee simple absolute”, subject to the rights and interests identified in the
IFA including certain subsurface alienations listed in Annex P to the IFA.
10.
Annex P contains, inter alia, a reference
to a certain subsurface alienation titled “Exploration Agreement No. 224”,
which encumbered the land which is the subject of this proceeding (the “Ikhil Land”).
11.
Exploration Agreement No. 224 had been entered
into between Canada and various
interest holders under the provisions of the COGA effective as of
September 5, 1982.
12.
In 1985, IRC created a separate corporate
entity, Inuvialuit Petroleum Corporation (“IPC”), whose objective was to become
a profitable, medium-sized, diversified and integrated petroleum company for
the benefit of the Inuvialuit. IPC is a wholly owned subsidiary of IRC.
13.
The Canada Petroleum Resources Act (as
amended, the “CPRA”) was enacted by R.S.C. 1985, c.36 (2nd
Supp). The CPRA was assented to on November 18, 1986 and came into force on
February 15, 1987 (SI/87-63). The CPRA has been amended by a number of
amending statutes. The CPRA was in force at all times during the
currency of Production Licence No. 6, referred to in paragraph 20 hereof.
CPRA [TAB 4]
14.
Exploration Agreement No. 224 became Exploration
Licence No. 224 pursuant to the provisions of the CPRA.
15.
On September 1, 1987, the then licensees under
Exploration Licence No. 224, being Gulf Canada Resources Limited, Mobil Oil
Canada Ltd., and Petro-Canada Inc., applied for a significant discovery licence
applicable to the Ikhil Land pursuant to the CPRA.
16.
On or about July 20, 1988, the Queen in Right of
Canada, as represented by the Minister of Indian Affairs and Northern
Development (the “Minister”) issued a significant discovery licence applicable
to the Ikhil Land to Gulf Canada Resources Limited, Mobil Oil Canada Ltd. and
Petro-Canada Inc. (hereinafter “SDL No. 29”), pursuant to the CPRA for
the period at issue. By the terms of SDL No. 29, the licencees were granted
certain exploration, development and other rights as to the following lands:
|
Latitude
|
Longitude
|
Portion
|
|
68°50'
|
134°00'
|
Sections 25-27, 34-37, 44-46
|
|
|
|
AREA: 3132 HECTARES
|
17.
At all material times, the lands referred to in
paragraph 16 have been owned by ILC in fee simple absolute, subject to the
other rights and interests identified in the IFA, pursuant to paragraph 7(1)(a)
(i) of the IFA.
18.
As a result of certain agreements entered into
at various times in 1996 and 1997, IPC acquired all of the interests of the
original licensees in SDL No. 29. The transfers of the said interests were
made and registered in accordance with the provisions of Part VIII of the CPRA.
19.
In or about January, 1998, AltaGas and IPL
Energy Inc. each acquired an interest in SDL No. 29 whereby SDL No. 29 was
thereafter held by IPC as to a 33.3335 per cent interest, AltaGas as to a
33.3335 per cent interest and IPL Energy Inc. as to a 33.333 per cent
interest. The transfers of the said interests were made and registered in
accordance with the provisions of Part VIII of the CPRA.
20.
In response to an application for a production
licence by IPC as representative of the SDL No. 29 licensees, on or about July
5, 1999, the Minister issued a production licence effective June 23, 1999 to
IPC, AltaGas and IPL Energy Inc. (hereinafter “PL No. 6”) pursuant to the
provisions of the CPRA. By the terms of PL No. 6, the licencees were granted
the exclusive right to develop and produce petroleum, among other rights, as to
the following lands:
|
Latitude
|
Longitude
|
Portion
|
|
68°50'
|
134°00'
|
Sections 25, 26, 34, 35, 36, 44, 45, 46
|
|
|
|
AREA: 2506 HECTARES (more or less)
|
PL No. 6 [TAB 5]
21.
On or about October 7, 1998, IPL Energy Inc.
changed its name to Enbridge Inc.
22.
On or about June 23, 1999, Enbridge Inc.
transferred various interests to IPL Holdings, including all of its interest in
PL No. 6.
23.
In or about December 1999, IPC transferred all
of its interest in PL No. 6 to Ikhil Resources Ltd. (“Ikhil”).
24.
On or about July 31, 2002, Ikhil was dissolved
by Articles of Dissolution pursuant to the Canada Business Corporations Act.
All property of every nature and kind of Ikhil were transferred to, and all
obligations of Ikhil were assumed by, Gyrfalcon including all of the right,
title and interest of Ikhil in PL No. 6.
THE ASSESSMENT
25.
By a Letter of Assessment dated May 16, 2002 and
addressed to AltaGas (the “Assessment”), the Department of Indian and Northern
Affairs Canada assessed AltaGas on behalf of the Plaintiffs and their
predecessors in respect of the royalties payable under PL No. 6 for a thirty
(30) month period, being for the months of July 1999 to December 2001
inclusive, in the total amount of $136,296.82 (the “Assessment”). The
Department stated in its letter that it had calculated the royalty assessment
using the COGA.
Letter of Assessment [TAB 6]
26.
By letter dated August 9, 2002, AltaGas, on
behalf of the Plaintiffs and their predecessors, filed a notice of objection in
a timely manner and otherwise in accordance with section 62 of the CPRA.
AltaGas objected to the Assessment on the basis that the relevant license, PL
No. 6, made no reference to COGA, that the applicable legislation was CPRA and
the regulations made thereunder which are referred to in PL No. 6, and that the
Plaintiffs and their predecessors have calculated and paid royalties pursuant
to the CPRA and the regulations thereunder.
Notice of Objection [TAB 7]
27.
By letter dated October 25, 2002, the Minister
disallowed the Plaintiffs’ objection and confirmed the Assessment. The
Minister asserted that CPRA had been overridden in respect of royalties and did
not apply.
Minister’s Decision [TAB 8]
28.
The Plaintiffs then commenced the within
proceeding by Statement of Claim as an appeal from the Assessment and the
decision of the Minister confirming the same, all pursuant to section 63 of CPRA.
IFA ARBITRATION
29.
In accordance with section 18 of the IFA,
IRC, ILC, and Canada submitted
several issues for arbitration to an arbitration panel, including the issue of
the royalty regime payable under the IFA. On April 29, 2004, the
arbitration panel issued its award.
Arbitration Award [TAB 9]
This Agreed Statement of Facts has been
agreed to by the parties. No party may offer evidence that is inconsistent
with this Statement. Any party may offer evidence in addition to or consistent
with this Statement.
Appendix B
Inuvialuit Final Agreement (as amended)
Administration of Existing Rights
7.(93) Subject to the provisions of this Agreement, with
respect to Inuvialuit lands selected pursuant to paragraph(1)(a), any holder of
valid oil and gas, coal, mineral and quarrying rights referred to in Annex P,
and, with respect to Inuvialuit lands selected pursuant to paragraph (1)(b),
any holder of valid quarrying rights issued before December 31, 1983, shall be
entitled to enjoy such rights without alteration or interruption until their termination.
For greater certainty, the reference in this subsection to “right” includes
renewal, whether it takes place before or after July 13, 1978.
7.(94) Canada shall, on behalf of the Inuvialuit, continue
to administer the rights of interest holders referred to in subsection (93).
Where legislation allows discretionary decisions to be made with respect to
such administration, no decisions shall be made without the consent of the
Inuvialuit where the effect thereof is to offer the Crown share for bids, to
waive royalties or other payments in the nature of royalties or to prejudice
the economic interest of the Inuvialuit. No other such decisions shall be made
affecting Inuvialuit rights without prior consultation with the Inuvialuit Land
Administration. Where, however, the holder of the rights and the Inuvialuit
agree that the Inuvialuit should administer the rights or a renegotiated
version of the rights directly and both parties so inform the Minister in
writing, the Minister shall transfer such administration to the Inuvialuit.
7.(95) Canada shall, as soon as possible, remit to the
Inuvialuit any royalties, fees, rentals, bonuses or other payments in lieu of
royalties accruing after the date of this Agreement from the rights referred to
in subsection
(93). Any royalties accruing from oil and gas production
under community sites shall be included in the remittances. For greater
certainty, the Inuvialuit shall receive and manage the Crown Share within the
meaning of section 27 of the Canada Oil and Gas Act. (S.C. 1980-81-82-83, c.81)
7.(96) The amounts payable to the Inuvialuit under
subsection (95) shall be calculated on the basis of the laws and regulations in
force on December 31, 1983 applicable to Crown lands in the Northwest Territories.
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