Words and Phrases - "distribution"
The taxpayers were the partners of a limited partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified,", and then delivered to a pipeline for shipment to the U.S. resellers.
The eligibility of the related costs for investment tax credits and classification as a Class 43 asset turned principally on whether it came within the exclusion from Class 1(n) (respecting manufacturing and distributing equipment and plant acquired primarily for the production or distribution of gas) contained in (ii) thereof for “property acquired for the purpose of processing natural gas, before the delivery of such gas to a distributions system.” The Crown’s primary position was that the terminal was not so excluded because it was part of a distribution system, and secondarily took the position that the terminal’s operation was not “processing.”
In rejecting the Crown’s position, Woods JA stated (at para 40) that she agreed with C. Miller J below that the Class 1(n)(ii) exclusion “only makes sense if distribution starts at a pipeline,” and further noted (at para 48):
Northern & Central … stands for the proposition that the term “distribution” can encompass not only short-distance pipelines, in accordance with industry usage, but also long-distance transmission lines. It did not state a broader principle. …
Woods J also rejected a Crown submission that the distribution process started with the tanker, in part because, unlike Northern & Central, the purpose of the processing here was “to make the gas more marketable” rather to merely “provide storage in the course of transmission.”
In also rejecting the Crown’s position on “processing,” she stated (at paras 54 and 56):
… It is clear that the product has been changed when it is transformed from a liquid to a gaseous state. …
Furthermore ...change ... takes place during the facility’s blending operations, and ... in chemical composition… [and] the operations …transform the product from being non-marketable in the North American market, to being marketable… .
Finally, in rejecting a Crown submission that, as a jetty was specifically mentioned in Class 3(h), the Jetty should be so classified, she stated (at paras. 64-65):
…Class 3 only applies to property “not included in any other class.” … If the Jetty falls within Class 43, that is the end of the matter. …
The judge-made integration principle provides that processing includes all activities that are necessary and integral to the processing operation.
After referring to 2013-0488061E5 (below) and 2013-0488381E5, CRA stated:
[A] transfer of property by a trustee in settlement of a debt cannot also be a distribution for purposes of subsection 107(2)…; it is one or the other. A distribution is the fulfilment of a fiduciary duty owed to the beneficiary in respect of the trust property. Thus, for the portion of a transfer of value that settles a debt owing by the trust, the preamble to subsection 107(2) of the Act is not met, and by extension, paragraph 107(2)(a) will not apply.
The taxpayers were related companies, and the general partner and a 75% limited partner of a partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified," tested and processed to meet quality standards such as flammability and low O2 content, and then delivered to a pipeline for shipment to the U.S. resellers.
The eligibility of the related costs for investment tax credits turned on whether the assets qualified as a Class 43 property rather than (as maintained by the Minister) as Class 1(n) (i.e. for the distribution of natural gas) and 3(h) (i.e. a jetty not captured by any other class).
As a preliminary matter, C Miller J found that terminal and jetty were one asset on the basis that the Jetty could "be considered ancillary and necessary, and part of the integral totality of the operation occurring at the Terminal" (para. 88), including that the jetty operators monitored the safety of the overall operation. Furthermore, the terminal was not engaged in distribution, but rather processing before distribution. There was "processing" because there was a change to the goods (including a change in chemical composition) and there was an increase in the goods' marketability (i.e., the natural gas entering into the pipeline was worth more than the LNG arriving at the jetty). He also stated that, even in the "broadest sense," "distribution" of natural gas does not commence before the gas enters a transmission pipeline (para. 120).
(Class 47, which explicitly includes liquid natural gas plants and thus excludes those plants from Class 43, was introduced in 2007; consequently this appeal concerned the approximately one third of capital costs arising before that introduction.)
Stursberg v. The Queen, 93 DTC 5271 (FCA)
The other partners of the partnership consented to a reduction in the taxpayer's partnership interest from 40% to 15%, and to an increase in the partnership interest of a corporation ("WBG") of which he had voting control from 10% to 35%. WBG deposited the sum of $162,500 (representing 25% of the fair market value of the partnership assets) to the partnership, the taxpayer at the same time received a cheque for $162,500 from the partnership, and an amount of $269,812 representing 25/40ths of the taxpayer's 40% share of the partnership losses was transferred in the books of the partnership from the taxpayer to WBG.
Hugessen J.A. found that the payment of $162,500 to the taxpayer did not represent a distribution of capital to the taxpayer for purposes of s. 53(2)(c)(v) "because there [was] no change whatever in the corpus of the partnership capital or in the relative interests therein of any of the other partners" (p. 5275). Instead there was a partial disposition of the taxpayer's partnership interest to WBG, thereby giving rise to a capital gain.
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|Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition||112|