Irving Oil Ltd. et al. v. Provincial Secretary of New Brunswick, [1980] 1 SCR 787

Supreme Court of Canada

Irving Oil Ltd. et al. v. Provincial Secretary of New Brunswick, [1980] 1 S.C.R. 787

Date: 1980-03-18

Irving Oil Limited, Foster Wheeler Limited and Canaport Limited Appellants;

and

The Provincial Secretary of The Province of New Brunswick Respondent;

1979: November 28, 29; 1980: March 18.

Present: Martland, Ritchie, Pigeon, Dickson, Estey, Mclntyre and Chouinard JJ.

ON APPEAL FROM THE SUPREME COURT OF NEW BRUNSWICK, APPEAL DIVISION

Taxation—Sales tax—Exemptions—Judicial review—Scope of judicial review—Machinery and apparatus used in manufacture or production of goods for sale or use—Machinery and apparatus as defined by the Minister—Failure of Minister to define—The Social Services and Education Tax Act, R.S.N.B. 1973, c. S-10, s. 11(o).

The appellant Irving Oil owns and operates a refinery at Saint John. With successive expansions of capacity additional storage tanks for crude oil were erected some five and a half miles away. These tanks and some preliminary treatment facilities are owned by the appellant Canaport, a wholly owned subsidiary of Irving Oil. Foster Wheeler Limited was construction agent of Irving Oil for the refinery expansion.

The case arose out of a claim to an exemption from sales tax taken by way of a notice of objection, under the provisions of s. 27 of the Act, disputing the assessment. The objections were, though an alternative basis was urged in some cases, all based on s. 11(o) of the Act which exempts “machinery and apparatus as defined by the Minister, and complete parts thereof, which in the opinion of the Minister are to be used directly in the process of manufacture or production of goods for sale or use”.

The Tax Commissioner allowed the exemption for some of the disputed items and denied it for others. Appellants appealed under s. 28 of the Act to the Minister who gave a written decision allowing the appeal with respect to several items, holding that they did “constitute machinery and apparatus used directly in the production of goods and qualify for the exemption under Section 11, subsection (o)” and affirming the Tax Commissioner’s decision with respect to the other items.

[Page 788]

From this decision an appeal was taken to the Supreme Court of New Brunswick under s. 29. There the items involved were “A” propane tanks used for storage, in liquid form, of propane produced at the refinery to which odor is added prior to sale if the propane meets sale requirements; “B” electrical transformers, both purchased and rented; “C” mixers installed in the crude oil storage tanks; “D” pipes, valves, fittings, and other miscellaneous items used in connection with the operation of the Canaport facilities and in the course of bringing by pipeline the crude to the refinery. Excepting only from the last item “any valves or ancillary equipment which fall within the category of the pressure regulators discussed in Consumers’ Gas”, [1976] 2 S.C.R. 640, the appeal was allowed. The Court of Appeal however allowed the appeal by the Provincial Secretary and restored the decision of the Minister. The unanimous opinion of that Court noted that the Minister had never issued a definition of the machinery and apparatus exempted under para. (o) and held that there could be no exemption until the Minister defined the specific machinery and apparatus to be exempt.

Held: The appeal should be allowed.

The question is whether in the absence of a ministerial definition the exemption avails for all machinery and apparatus coming within the class specified in para. (o), this class of goods being sufficiently described to be ascertainable without a definition. In Carling Export, [1931] A.C. 435, it was held that, although no regulations had been prescribed under the Special War Revenue Act, 1915 (Can.), provision, the brewery company was entitled to the benefit of an exemption from excise tax on goods manufactured for export, under regulations prescribed by the Minister of Customs and Excise. The reasoning in that case applies a fortiori here. Section 28 of the Act provides for an appeal to the court from the decision of the Minister on an assessment. If in the absence of a definition the claim for exemption failed it would mean that by not making use of the defining power the Minister could make his decisions unassailable. Further, the power of issuing a definition is to be exercised in good faith and it would be usurpation of power for a Minister to suppress such an exemption by issuing no definition. In restoring the judgment of the trial judge (which the Court of Appeal would have affirmed apart from the objection based on the absence of a ministerial definition) it should be observed with respect to item “D” covering pipes, valves, fittings and other miscellaneous items, that these items are all used

[Page 789]

in an integrated process initiated in one place and completed at the refinery proper. This is not the same situation as in the Consumers’ Gas case, where pressure regulators were denied the benefit of federal exemption because they were not used in “the manufacture or production of goods” but in distribution. Here the regulators at the Canaport facility are used in the overall manufacturing process, the operation of the refinery, and not in the distribution of its products.

Carling Export Brewing and Malting Company Limited v. The King, [1931] A.C. 435, applied; Dominion Press Limited v. Minister of Customs and Excise, [1928] A.C. 340; Quebec Hydro Electric Commission v. Deputy Minister of National Revenue, [1970] S.C.R. 30; Consumer’s Gas v. Deputy Minister of National Revenue, [1976] 2 S.C.R. 640; Michelin Tires Manufacturing (Canada) Ltd. (1976), 15 N.S.R. (2d) 150; 14 A.P.R. 150, referred to.

APPEAL from a judgment of the Supreme Court of New Brunswick[1] allowing an appeal from a judgment of Barry J., Q.B.C.[2], allowing an appeal under ss. 27, 28, 29 of The Social Services and Education Tax Act. Appeal allowed with costs, judgment of Barry J. restored and varied by deleting therefrom the exception pertaining to valves and ancillary equipment which fall within the category of pressure regulators.

E. Neil McKelvey, Q.C., and William B. Goss, for the appellants.

Richard C. Speight and David M. Norman, Q.C., for the respondent.

The judgment of the Court was delivered by

PIGEON J.—This appeal is from a judgment of the Appeal Division of the Supreme Court of New Brunswick, (1978), 24 N.B.R. (2d) 124, reversing the judgment of Barry J., (1977), 17 N.B.R. (2d) 203, which vacated, subject to a minor exception, an assessment issued against the appellants under The Social Services and Education Tax Act (the “Act”) of the Province of New Brunswick, R.S.N.B. 1973, c. S-10.

[Page 790]

The appellant, Irving Oil Limited, owns and operates a refinery at Saint John. In connection with successive expansions of capacity, additional storage tanks for crude oil were erected at Mispec, five and one-half miles away, and connected to the refinery by underground pipelines. The appellant, Canaport Limited, is a wholly owned subsidiary of Irving Oil Limited which owns the tanks at Mispec together with some facilities for preliminary treatment of the oil. The other appellant, Foster Wheeler Limited, was a construction agent of Irving Oil Limited with respect to the refinery expansion.

Section 27 of the Act provides that liability for tax assessed may be disputed by a notice of objection served upon the Tax Commissioner who is then required to reconsider the assessment and give a decision in writing. Objections were duly served under this provision and, except that an alternative basis was urged in some cases, they were all based on the exemption allowed by para. (o) of s. 11 in the following terms:

(o) machinery and apparatus as defined by the Minister, and complete parts thereof, which in the opinion of the Minister are to be used directly in the process of manufacture or production of goods for sale or use;

The Tax Commissioner did reconsider the assessments and gave written decisions allowing the exemptions for some of the disputed items, denying it for other items.

Section 28 of the Act provides for an appeal to the Minister from the decision of the Commissioner and the appellants did appeal accordingly. The Minister gave a decision in writing allowing the appeal with respect to several items on the basis that they did: “constitute machinery and apparatus used directly in the production of goods and qualify for exemption under Section 11, subsection (o)”. With respect to other items the decision of the Commissioner was affirmed.

[Page 791]

From the decision of the Minister an appeal was taken to a judge of the Supreme Court of New Brunswick under s. 29 of the Act which reads:

29. If the appellant is dissatisfied with the decision of the Minister, he may within thirty days from the date of mailing of such notice, appeal from such decision to a Judge of the Supreme Court.

When the appeal was heard by Barry J., the items involved were, as stated by him at p. 209, the following:

“A” propane tanks used for storage, in liquid form, of propane produced at the refinery location to which odor is added prior to sale if the propane meets the proper tests to meet sale requirements. If it does not meet the tests, it is used at the refinery furnaces and boilers. If it does so, odor is added and the propane is sold;

“B” electrical transformers used to change the electricity purchased at 138,000 volts to the voltages necessary to the refinery process, such transformers being both purchased and rented;

“C” mixers installed in the crude oil storage tanks at Mispec;

“D” pipes, valves, fittings, and other miscellaneous items used at the Mispec location in connection with the operation of the facilities there and in the course of transporting by pipeline the crude to the refinery (List exhibit P-7).

The trial judge allowed the appeal with respect to all those items excepting only from the last item (at pp. 217-218) “any valves or ancillary equipment which fall within the category of the pressure regulators discussed in the Consumers’ Gas case[3]”.

From this judgment an appeal was brought before the Appeal Division by the Provincial Secretary and there was also a cross-appeal seeking the elimination of the exception made by Barry J.

As previously mentioned, the main appeal was allowed and the decision of the Minister restored by the Appeal Division. Limerick J.A. giving the unanimous opinion of the Appeal Division noted

[Page 792]

that the Minister had never issued a definition of the machinery and apparatus exempted from tax under para. (o), and said (at pp. 133-134):

The wording of the clause 11(o) was modeled after Schedule III of the Excise Tax Act, R.S.C. 1952, c-100 as amended by R.S.C. 1952, Vol. 5 supplement c-320, but the provision in the Excise Tax Act omitted the final words of section 11(o) “for sale or use”.

In Michelin Tires Manufacturing (Canada) Ltd. (1976), 15 N.S.R. (2d) 150; 14 A.P.R. 150, Cooper J.A. fully set out the origin and history of the Nova Scotia legislation which was, at the applicable time of that case, identical with the above wording of the Excise Tax Act. The Minister in Nova Scotia, immediately following the legislation in that province, formally and legally defined machinery and apparatus on July 3, 1963. The question in that case was entirely different than in the case before this court. In “Michelin” a subsequent minister purposed to redefine “machinery and apparatus” and the Court held the redefinition ultra vires the Minister and the original definition effective because the Minister purported to limit the generic class set out in the legislation.

There are a number of possible situations which can be created by taxing acts which delegate some power to a Minister of the Crown.

1. The act may impose a tax and create the exemption and delegate a power to make administrative decisions to the Minister as in Carling Export Brewing and Malting Company Limited and the King, [1931] A.C. 435.

2. The Act may delegate to the Minister specifically the power to impose a tax or create an exemption as in Dominion Press Limited and Minister of Customs and Excise, [1928] A.C. 340.

The provisions of ss. 11(o) fall somewhere between the two above situations. The Act imposes the tax, and, creates an exemption on a generic classification of goods, but delegates to the minister the power to determine by definition the specific machinery and apparatus, included in the generic class, which are exempt from taxation. Just as there were no exemptions allowed in the Dominion Press case because the goods involved were not shown to fall within the regulations made by the Minister, so in this case, the machinery and apparatus for which the exemption is claimed cannot be shown to have been defined or specifically particularized by the Minister and it is only such items, which come

[Page 793]

within the generic class that are specifically defined or particularized by the Minister, which are exempt. The Act contemplates that such a definition would be formulated by the Minister shortly after the Act should come into effect.

The omission of the Minister to define the particular class of machinery to be exempt from tax, his failure to refer to that omission as the reason for upholding the assessments and his references to considerations not in the contemplation of the statute do not affect the legal application of clause 11(o). There can be no exemption thereunder until the Minister defines the specific machinery and apparatus to be exempt from taxation.

Had I concluded that clause 11(o) created an exemption from taxation, without the Minister defining the machinery and apparatus to be exempt, I would have dismissed the appeal as I consider the items involved in this appeal would have been exempt from taxation.

I will first point out that in the Michelin Tires case the legal situation was quite different. In Nova Scotia the Minister had issued a definition which referred to the goods “ruled as exempt” under the federal Excise Tax Act by the Department of National Revenue. In 1963, the federal exemption was repealed by Parliament and, in that situation, a new definition was issued referring to the goods “which have been ruled as exempt… as of June 12, 1963”. No question appears to have been raised concerning the validity of that definition and what was in issue was a recent new definition which was held ultra vires by the Nova Scotia Court of Appeal.

In New Brunswick the situation is different. No definition of the goods exempt under para. (o) was ever issued by the Minister since the Act was originally adopted in 1950 (S.N.B. c. 17). It is apparent from the decisions of the Tax Commissioner and of the Minister in the instant case, that the claim of exemption was dealt with as if the only requirement was that the machinery and apparatus “be used directly in the process of manufacture or production of goods for sale or use”. The only item which counsel for the respondent claimed to have been excluded by a definition is the transformers. The record, however, does not

[Page 794]

disclose any such definition, all I can find is the following statement in the Minister’s decision:

In the case at hand it is my understanding that there has not been a minister charged with the administration of the Social Services & Education Tax Act who has defined the production, transmission or distribution of electricity as being exempt under Section 11(o) of the Act. The exemption in this area has been restricted solely to the New Brunswick Electric Power Commission and not extended beyond this point. In fact the legislation provides a special exemption to the New Brunswick Electric Power Commission on this subject.

This is clearly not a definition, it is nothing more than an interpretation of the Act with which the trial judge rightly disagreed.

The question therefore is whether, in the absence of a ministerial definition, the exemption avails for all machinery and apparatus coming within the class specified in para. (o). It is obvious that this class of goods is sufficiently described to be ascertainable without a definition. It is not the kind of indefinite expression which requires a definition in order to make sense. The defining power is by no means indispensable for proper application. In fact, it has not been included in the re-enacted federal Excise Tax Act exemption (Schedule III, Part XIII, para. 1(a) (S.C. 1973-74, c. 12, s. 25).

Before coming to the conclusion that “There can be no exemption… until the Minister defines the specific machinery and apparatus to be exempt from taxation”, Limerick J.A. mentioned two Privy Council cases. In Carling Export[4] the Crown was claiming gallonage tax on beer which had been mostly exported to the United States at a time when prohibition was in force in that country. The exempting provision in the Special War Revenue Act, 1915 read:

…Provided that such excise tax shall not be payable when such goods are manufactured for export, under

[Page 795]

regulations prescribed by the Minister of Customs and Excise.

It was held that, although no regulations had been prescribed by the Minister under this provision, the brewery company was entitled to the benefit of the exemption. Lord Thankerton said (at pp. 438-439):

In their Lordships’ opinion it is not to be readily assumed, in a taxing Act, that Parliament has delegated to a Minister the power to settle the limits of taxation, and such intention must be clearly shown by the terms of the statutory provision. A good example of such clear expression is to be found in the Dominion Press case, [1928] A.C. 340, which related to a statutory proviso that the taxes should not be payable “on goods exported or on sales of goods made to the order of each individual customer by a business which sells exclusively by retail under regulations by the Minister of Customs and Excise, who shall be the sole judge as to the classification of a business.” It is obvious that no business could claim to be one of the class on which the benefit of exception was conferred unless and until the Minister had placed the business within the class. Their Lordships are unable to find any similar clear expression in the present case,…

In my view this reasoning applies a fortiori in the present case. Section 28 of the Act, already quoted, provides for an appeal to the court from the decision of the Minister on an assessment. If by issuing no definition, the result was, as the Appeal Division held, that the claim of exemption failed it would mean that by the simple expedient of not making use of the defining power, the Minister could make his decisions unassailable. It must also be considered that the power of issuing a definition is to be exercised in good faith and it would be usurpation of power for the Minister to suppress the exemption by issuing no definition. For those reasons, I must hold that the decision of the Court of Appeal cannot be supported.

Seeing that apart from the objection based on the absence of a ministerial definition, the Court of Appeal would have affirmed the judgment of the trial judge, I will deal very briefly with each of the four items on which he ruled.

[Page 796]

As to the propane gas tanks, it is clear that they are used directly in the process of production for sale since it is at this point that odour is added, a step without which the product would not be fit for sale. As was pointed out in the Michelin case the statutory requirement of direct use is fulfilled irrespective of the percentage of use that may be ascribed to the process of manufacture as opposed to other processes such as storage and distribution.

Concerning the transformers, the basis on which the exemption was denied by the Minister was simply untenable in law. While it is proper to look at the various exemptions in considering each of them, they are nevertheless independent. The specific exemption allowed to the New Brunswick Electric Power Commission cannot create an inference to restrict the scope of other exemptions seeing that it reads:

(ff) goods purchased by the New Brunswick Electric Power Commission for direct use in producing electricity;

I might add that transformers are considered exempt from sales tax under the federal exemption previously mentioned. In the Sales Tax Guide, Canada (29th ed.), published by CCH Canadian Limited, I read at paragraph 62-520:

Power Plant.—Where electricity is used as the source of power, the exemption starts at the substation on the manufacturer’s premises where he takes the power from the utility. Exemption is allowable on transformers for supplying power primarily to electrical devices used directly in the manufacture or production of goods. The exemption also applies to switch gear, capacitors, circuit breakers and the like used in conjunction with these transformers.

It should also be noted that, as mentioned by the trial judge, transformers were held exempt from the federal sales tax in Quebec Hydro Electric Commission v. Deputy Minister of National Revenue[5].

[Page 797]

Concerning the mixers, it was admitted that identical appliances were exempt when installed at the site of the refinery proper. The fact that some are at another site is irrelevant when they fulfil the same function in respect of the crude oil that is pumped to the refinery through underground pipes. Machinery is no less used in the production of goods when a partial operation only is performed as long as such operation is part of the production process.

The same observation has to be made with respect to item “D” covering pipes, valves, fittings and other miscellaneous items used at the Mispec location. These items are all used in the integrated process initiated at Mispec and completed at the refinery proper. The trial judge felt that he was bound by the decision of this Court in the Consumers’ Gas case (supra) to hold that any valves or ancillary equipment which fall within the category of pressure regulators have to be excluded from the exemption. With respect, it must be pointed out that this is an error. The reason for which the pressure regulators were denied the benefit of the federal exemption in the Consumers’ Gas case was that they were not used in “the manufacture or production of goods” but in distribution. Such is not the case with respect to the regulators at Mispec, they are used in the overall manufacturing process, the operation of the refinery, not the distribution of its products.

For those reasons, the appeal should be allowed, the judgment of the Appeal Division should be set aside and the judgment of Barry J. should be restored and varied by deleting therefrom the exception pertaining to valves and ancillary equipment which fall within the category of pressure regulators. The appellants are entitled to costs throughout including those of the cross-appeal to the Appeal Division.

Judgment accordingly.

Solicitors for the appellants: McKelvey, Macaulay, Machum, Saint John.

Solicitor for the respondent: The Attorney General for New Brunswick, Saint John.