Transcanada Pipelines Limited v. Minister of Revenue, [1993] 1 CTC 277

Morden, A.C.J.O., McKinlay and Catzman, JJ.A.:— This appeal by the Minister of Revenue concerns assessments made in respect of capital tax alleged to be payable by TransCanada Pipelines Limited for the years 1978 through 1981 pursuant to the Corporations Tax Act in the form in which it appeared in R.S.O. 1980, c. 97 (the Act). The issue in the appeal is whether certain payments made by the respondent to gas producers in those years, described as “take or pay payments", were properly deducted from the respondent's paid-up capital during those years in accordance with the formula appearing in paragraph 54(1)(c) of the Act (the subsection). Specifically, the issue is whether the take or pay payments were "investments . . . in . . . advances to other corporations" within the meaning of the subsection. The trial judge concluded that they were. We agree with his conclusion.

In broad outline, the scheme of the take or pay payments was as follows. Under long-term supply contracts with gas producers, the respondent agreed to purchase certain minimum quantities of gas each year. If, in any year, it was unable to take delivery of the agreed minimum, it was nevertheless required to pay the producer the full minimum purchase price, and it correspondingly became entitled to credit for such payments against future purchases of gas, within a limited period of time, provided that it otherwise complied with its minimum contract obligations. The price to be paid for such future purchases of gas would be the price in effect at the time of delivery less the amount of any prior take or pay payments.

Counsel for the respondent submitted, in our view correctly, that in the absence of any judicial authority on the meaning of the words "investments" or"advances" in the context of the subsection, it was appropriate for the Court to have regard to dictionary definitions of those terms.

The first question is whether the take or pay payments were"investments" Within the meaning of the subsection. Counsel for the appellant acknowledged in argument that the object of the contracts pursuant to which the take or pay payments were made was the guaranteed supply of gas to the respondent. That guaranteed supply of gas was essential to the business of the respondent, which was the transportation and sale of natural gas. Counsel for the appellant sought, however, to distinguish between the take or pay payments and the contracts under which they were made, and submitted that, because the payments were not made to earn income or to acquire assets and did not represent the expenditure of excess or surplus capital, they did not qualify as "investments". We do not accept this distinction. In our view, once one accepts that the object of the contracts was the guaranteed and continuing supply of gas, which was essential to the respondent's business, it follows that the payments made pursuant to those contracts as a necessary component of the attainment of that object were investments" within the dictionary definition of that term as “[an expenditure of money] for future benefits or advantages" even though not specifically linked to revenue: see Webster's Ninth New Collegiate Dictionary (1983), page 636; cf. The Houghton Mifflin Canadian Dictionary of the English Language (1980), page 689.

The second question is whether the take or pay payments were advances" within the meaning of the subsection. The agreed statement of facts indicates that, in the early years, the demand for natural gas grew steadily and, with

growing market demand, the respondent was nearly always able to purchase the minimum gas quantities it had undertaken to buy. As time passed, however, natural gas demand stayed constant, rather than growing rapidly as previously anticipated, and the result was an over-supply of gas. During the gas purchase contract years in question, the demand was less than the minimum annual amount of gas that the respondent was required to purchase, with the result that the respondent was required to make the take or pay payments in question. In the temporal sense, these take or pay payments were advance payments required to be made by the respondent when it found itself unable to take delivery of the minimum quantity of gas specified in its contract with a gas producer. At the time they were made, the respondent expected and certainly hoped that, in the fullness of time, it would call for the delivery of an equivalent amount of gas for which it had so paid. While subsequent events belied this expectation and this hope, they did not, in our view, change the character of the take or pay payments which, at the time they were made, fell within dictionary definitions of"advance" as a" payment [made] beforehand or in anticipation" and a "payment made before . . . the completion of an obligation for which it is to be paid": Dictionary of Business and Finance (1957), page 9.

For the foregoing reasons, we are of the view that the trial judge correctly concluded that the take or pay payments were “ investments” and "advances" within the meaning of the subsection. Accordingly, the appeal is dismissed with costs.

Appeal dismissed.