10 April 1985 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

DATE April 10, 1985

To - APPEALS BRANCH Appeals & Referrals Division

FROM - RESOURCES INDUSTRIES SECTION G.R. White

ATTENTION Mr. B.A. Chisholm

RE: Classification of Compressor Facilities for the purpose of injecting gas into a gas formation

This is in reply to your memorandum of January 22, 1985 in which you request our comments on the following facts:

XXXX

Comments

It is clear the compressors do not qualify for investment tax credit since they are used equipment. They would not then be qualified property under paragraph 127(10)(b).

We also do not consider the compression of gas as manufacturing or processing. This is supported by the decision in the Consumers Gas Co. et al vs. Deputy Minister of National Revenue for Customs and Excise (72 DTC 6431) F.C.A. affirmed by the Supreme Court of Canada (75 DTC 5423) in which the Court held that the Tariff Board was correct in finding that "the regulator is not used" directly in the manufacture or production "of the gas but rather is used only in modifying the pressure at which the gas already manufactured and produced, is delivered to its purchasers".

Paragraph 7 of IT 476 states inter alia that "equipment, structures and connecting lines for the purpose of injecting gas or liquids into a gas or oil formation to facilitate production therefrom or for the purpose of enhancing the recovery from a gas or oil well will also qualify as gas or oil well equipment". In our view, the subject compressors are equipment for the purposes of injecting gas into a gas formation.

We have issued opinions and rulings inferring that field facilities for in situ projects are included in Class 10(j) and constitute gas and oil well equipment.

In view of all of the above, it is our opinion that the compressors are distinct from the plant assets, that they are Class 10(j) equipment not Class 29 and that these particular compressors as a result are prescribed equipment but are not qualified property because they had been used before they were acquired by the taxpayer.

Class 2(d) describes manufacturing and distributing equipment and plant (including structures) acquired primarily for the production or distribution of gas. Nitrogen is a gas and since none of the exceptions listed in Class 2(d) apply, it is our opinion that the nitrogen plant is properly included in Class 2(d).

Subparagraph (d)(iii) of Class 2 has been amended and will be gazetted April 3, 1985 applicable to property acquired after that date. The amendment reads

(iii) a property acquired for the purpose of processing natural gas, oxygen or nitrogen before delivery of such gas to a distribution system

This amendment was intended to include facilities such as XXXX, nitrogen plant but in our opinion it fails to do so because one cannot process oxygen or nitrogen since they are both elements (i.e. substances that consist of atoms of only one kind) and because we do not consider injection into a gas field as delivery to a distribution system. A better wording would have been "producing" oxygen or nitrogen.

It would seem the intention of the legislation is now to exclude oxygen and nitrogen plants from Class 2. However, from a technical point of view, it would seem such plants fall in Class 2.

Director General Corporate Rulings Directorate Legislation Branch