Judgments

Decision Information

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A-133-86
The Queen (Appellant)
v.
The Consumers' Gas Company Ltd. (Respondent)
INDEXED AS: CANADA V. CONSUMERS' GAS CO.
Court of Appeal, Pratte, Hugessen and Mac- Guigan JJ.—Montréal, November 20 and 21; Ottawa, December 2, 1986.
Income tax — Income calculation — Company distributing gas required by public authorities to relocate portions of pipeline network — Nature of payments received therefor — Court of Appeal had decided payments not to be deducted from undepreciated capital cost — No provision in Act making them income — "Assistance" in s. 13(7.1) refers to grant not to payments similar to ones made by private business to advance own interests — Appeal dismissed — Income Tax Act, S.C. 1970-71-72, c. 63, s. 13(7.1) (as am. by S.C. 1974-75-76, c. 26, s. 6(4)).
The respondent is a public company distributing natural gas in Ontario. It receives the gas from trunk pipelines at a gate station and distributes it through steel gas mains running beneath the surface of streets and roads. Various organizations (mostly public authorities) from time to time require the relocation of portions of the pipeline network in order to do construction work for their own purposes. In these cases, the respondent calculates the costs associated with the relocations and bills the party requesting them. The amount it can recover may be limited by statute. It is common ground that the respondent's expenditures respecting the relocations are for capital account.
In R. v. Consumers' Gas Company Ltd., this Court held that payments received for relocation work should not be deducted from the gross cost of such relocation for the purposes of establishing the undepreciated capital cost and calculating the capital cost allowance under the Income Tax Act. The question is whether such receipts should be brought into income. The Trial Division held that they were for capital account and need not be taken into income.
Held, the appeal should be dismissed.
The expert accounting evidence was that the receipts should be treated as capital and not as income. Absent some provision of the statute specifically bringing them into income, they continue to be treated, as required by generally accepted accounting principles, as capital receipts.
Subsection 13(7.1) of the Income Tax Act can not be applied to reduce the capital costs of the assets. That subsection provides that where a taxpayer has acquired depreciable prop erty at a capital cost to him and has also received "assistance" from a public authority respecting the property, the capital cost is deemed the capital cost thereof minus the assistance. The
word "assistance" carries with it the colour of a grant or subsidy. Here, the payments made to Consumers' Gas by public authorities were made in the same way and for the same reasons as payments made by private business, that is, for the purpose of advancing the interests of the payor.
CASES JUDICIALLY CONSIDERED
APPLIED:
R. v. Consumers' Gas Company Ltd., [1984] I F.C. 779 (C.A.); Ottawa Valley Power Co. v. Minister of National Revenue, [1969] 2 Ex.C.R. 64.
COUNSEL:
Gaston Jorré and Sandra Phillips for
appellant.
Mortimer S. Bistrisky for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Aird & Berlis, Toronto, for respondent.
The following are the reasons for judgment rendered in English by
HUGESSEN J.: The respondent, The Consumers' Gas Company Ltd., in the normal course of affairs each year receives payments from third parties in respect of certain pipeline relocation work carried out at the latters' request.
This Court' has previously held that such receipts should not be deducted from the gross cost of such relocations for the purposes of establishing the undepreciated capital cost and calculating the capital cost allowance under the Income Tax Act [S.C. 1970-71-72, c. 63]. The main question in the present appeal is whether such receipts should be brought into income.
The undisputed facts, which do not vary in any significant respect from one taxation year to an other, were fully but concisely stated by Urie J. A., writing for this Court in Consumers' Gas No. 1 [at pages 782-784]:
R. v. Consumers' Gas Company Ltd., [1984] 1 F.C. 779 (C.A.), herein referred to as Consumers' Gas No. I.
The respondent is a public company having its head office in Toronto, Ontario. It is engaged in the business of distribution of natural gas to over 725,000 residential, commercial and industrial customers in Ontario, and, as well, in the production of natural gas, primarily from wells in Lake Erie and in the sale and rental of gas appliances. Its business activities, including its rates and accounting methods and practices, are subject to the approval of the Ontario Energy Board. The vast bulk of its revenue (approximately 95%) in the years in issue, was attributable to its gas distribution business. The gas is mainly received from trunk pipelines at a gate station outside its operating area. From the gate station the respondent distributes the gas through steel gas mains which generally run beneath the surface of streets and roads. The individual customers are provided with gas through pipes leading from the mains.
Various persons and organizations such as government departments, municipalities, utilities, telephone companies and other private companies from time to time require the reloca tion of portions of the pipeline network in order to do construc tion work for their own purposes. Usually such relocations are required because of some physical conflict arising from the construction work but they may also be undertaken for safety reasons. The parties requesting the relocations may or may not be customers of the respondent.
Whenever it can the respondent attempts to recover the full cost of the relocations from the party requesting them. How ever, the amount it can recover may be limited by the provi sions of either The Public Service Works on Highways Act, R.S.O. 1970, c. 388 or the Railway Act, R.S.C. 1970, c. R-2. The respondent in all cases carefully calculates all elements of cost associated with the relocations and bills the parties in full for such costs or such part thereof as is permitted by statute.
Upon completion of the relocations the original pipe is usually abandoned and left in the ground although certain above-ground equipment such as parts of regulator stations may be salvaged. In the latter event credit is presumably given for the value of the salvaged equipment.
The average annual number of relocations in the taxation years in question was about 225.
Prior to the decision of the Court in The Queen v. Canadian Pacific Limited ([1978] 2 F.C. 439 (C.A.)) the respondent treated reimbursements received from the parties for whom relocations were undertaken in essentially the same manner as it did for financial statement purposes, i.e., it reduced the amount of the gross cost of its relocated pipe by the amount of the reimbursements and added the net amount only to the undepreciated capital cost of the class (class 2). In substance, it took capital cost allowance on the net cost only. Incidentally, for rate-fixing purposes that is one of the methods for treating the reimbursements authorized by the Ontario Energy Board. After the Canadian Pacific case the respondent took the posi tion that for tax purposes it (a) was entitled to add the gross cost of the relocations to the undepreciated capital cost of the class and to claim capital cost allowance on the gross amount,
and (b) was not obliged to include the reimbursements in the calculation of its revenues for tax purposes.
It is common ground on the present appeal that the expenditures made by Consumers' Gas for pipeline relocations in the circumstances described are for capital account. In the judgment now under appeal [[1986] 1 C.T.C. 380; 86 D.T.C. 6132; 2 F.T.R. 30], Muldoon J. in the Trial Division held that the partially offsetting receipts from third parties were also for capital account and need not be taken into income for the purposes of the Income Tax Act. In my view, he was right.
There is no dispute, and indeed the expert evi dence called on both sides was unanimous on the point, that generally accepted accounting princi ples require these receipts to be treated in the way that Consumers' Gas in fact treated them for financial statement purposes. In other words, proper accounting practice required that the receipts be offset against the capital expenditure in respect of which they were paid by third parties so that only the net cost of the relocation be carried to the asset side of the balance sheet. It was also not disputed that Consumers' Gas' practice of taking straight line depreciation over a period of seventy years calculated on the net cost of pipeline relocations was consistent with generally accepted accounting principles. Finally, the expert account ing evidence was that the receipts should be treat ed as capital receipts and not as income.
The principal argument advanced by counsel for the appellant is disarmingly simple. He urges that the method employed by Consumers' Gas for financial statement purposes, which is, as stated, in accordance with generally accepted accounting principles, results in the disputed receipts being
reflected 2 in the income statement. Hence, he argues, the treatment accorded for income tax purposes should also produce this result and the receipts should be treated as revenues.
With respect, it seems to me that this approach is flawed. It attempts to achieve the results pro duced by generally accepted accounting principles while rejecting the method. Although those princi ples are a guide to the interpretation and applica tion of the Income Tax Act, they cannot help where the Act itself departs from them. This is particularly so where one is dealing with the treat ment to be accorded to the reduction over time of the value of fixed assets due to aging, wear and tear, etc. Accounting principles require that a realistic estimate be made of the life of each such asset, which must then be depreciated on a straight line basis over that period. Income tax law, on the other hand, for a variety of reasons many wholly unrelated to sound accounting practice, fixes an arbitrary percentage (which can even reach 100%) for various classes of assets which may then be applied on a declining balance basis to the cost of the assets of each class and deducted from income.
Thus while it is true, as appellant argues, that accounting principles require depreciation on the net cost of capital assets always to be reflected in income, that is not the case for purposes of income tax. More particularly, on the facts of the present case, the receipts from third parties in respect of pipeline relocations are reflected in Consumers' Gas' income for financial statement purposes solely because they go to reduce the cost of the assets upon which straight line depreciation is taken over seventy years. The receipts themselves, however, are not treated as income. They are reflected in income, albeit faintly, because good accounting, unlike income tax law, requires that depreciation be taken. It is common ground here that the cost of pipeline relocations is a capital outlay and that the receipts from third parties in
2 The word "reflected" is carefully chosen: the receipts them selves do not apppear as income but, by reducing net asset cost, they go to reduce depreciation thereby indirectly increasing income.
respect thereof need not be taken into account in determining undepreciated capital cost for the pur poses of calculating capital cost allowance. The mere fact that this results in such receipts not being reflected in income does not make them income. Absent some provision of the statute specifically bringing them into income, they con tinue to be treated, as required by generally accepted accounting principles, as capital receipts. The submission therefore fails.
As a subsidiary argument, the appellant urges that those receipts which are paid to Consumers' Gas by "governments, municipalities and other public authorities" (by far the larger part both in number and in value) must be applied to reduce the capital cost of the assets by the operation of section 13 of the Income Tax Act. The actual text invoked was changed during the taxation years here under review but, on the view which I take of the matter, it is enough to consider the amended text, which is the one most favourable to the Crown's position. It is subsection 13(7.1) (S.C. 1974-75-76, c. 26, s. 6(4)), which reads as follows:
13....
(7.1) For the purposes of this Act, where a taxpayer has received or is entitled to receive assistance from a government, municipality or other public authority in respect of, or for the acquisition of, depreciable property, whether as a grant, sub sidy, forgiveable loan, deduction from tax, investment allow ance or as any other form of assistance other than
(a) an amount authorized to be paid under an Appropriation Act and on terms and conditions approved by the Treasury Board in respect of scientific research expenditures incurred for the purpose of advancing or sustaining the technological capability of Canadian manufacturing or other industry, or
(b) an amount deducted as an allowance under section 65,
the capital cost of the property to the taxpayer shall be deemed to be the amount by which the aggregate of
(c) the capital cost thereof to the taxpayer, otherwise deter mined, and
(d) such part, if any, of the assistance as has been repaid by the taxpayer pursuant to an obligation to repay all or any part of that assistance,
exceeds
(e) the amount of the assistance.
The key word in this text, as it seems to me, is "assistance", which, in the context, clearly carries with it the colour of a grant or subsidy. Here the evidence is clear that payments made to Consum ers' Gas by public authorities such as municipali ties, Ontario Hydro and the like were made in exactly the same way and for exactly the same reasons as payments made by private businesses, that is, for the purpose of advancing the interests of the payor. In this regard, the comments of Jackett P., interpreting the equivalent section of the former Income Tax Act, are apposite:
Before attempting to reach a conclusion as to whether there was a capital cost to the appellant of the additions and improve ments, it is convenient to express my conclusion about the application to the facts of this case of section 20(6)(h) which, for convenience, I repeat:
20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:
(h) where a taxpayer has received or is entitled to receive a grant, subsidy or other assistance from a government, municipality or other public authority in respect of or for the acquisition of property the capital cost of the property shall be deemed to be the capital cost thereof to the taxpayer minus the amount of the grant, subsidy or other assistance;
What this rule appears to contemplate is the case where a taxpayer has acquired property at a capital cost to him and has also received a grant, subsidy or other assistance from a public authority "in respect of or for the acquisition of property" in which case the capital cost is deemed to be "the capital cost thereof to the taxpayer minus ... the grant, subsidy or other assistance". That rule would not seem to have any application to a case where a public authority actually granted to a taxpayer capital property to use in his business at no cost to him. Quite apart from the fact that the rule so understood would have no application here, I do not think that the rule can have any application to ordinary business arrangements be tween a public authority and a taxpayer in a situation where the public authority carries on a business and has transactions with a member of the public of the same kind as the transac tions that any other person engaged in such a business would have with such a member of the public. I do not think that the words in paragraph (h)—"grant, subsidy or other assistance from a ... public authority"—have any application to an ordinary business contract negotiated by both parties to the contract for business reasons. If Ontario Hydro were used by the legislature to carry out some legislative scheme of distribu ting grants to encourage those engaged in business to embark on certain classes of enterprise, then I would have no difficulty in applying the words of paragraph (h) to grants so made. Here, however, as it seems to me, the legislature merely authorized Ontario Hydro to do certain things deemed expedi ent to carry out successfully certain changes in its method of
carrying on its business and the things that it was so authorized to do were of the same character as those that any other person carrying on such a business and faced with the necessity of making similar changes might find it expedient to do. I cannot regard what is done in such circumstances as being "assist- ance" given by a public authority as a public authority. In my view, section 20(6)(h) has no application to the circumstances of this case.
(Ottawa Valley Power Co. v. Minister of National Revenue, [1969] 2 Ex.C.R. 64, at pages 71-72).
I conclude that the appellant's subsidiary argu ment also fails.
In the light of these conclusions, it is perhaps unnecessary that I express any final opinion on a procedural argument raised by respondent. Briefly stated that argument is that the Minister cannot now be heard to urge that the receipts in question should be brought into income since that is not the treatment he accorded to them in his original notice of reassessment. Instead the Minister's posi tion originally was that the receipts should be used to decrease the undepreciated capital cost base. Since the Minister cannot appeal from his own assessment, it is the respondent's submission that the Minister could not change his position before the Trial Division so as to urge that amounts which he had heretofore treated as capital receipts should now be brought into income.
I cannot agree with this submission. What is put in issue on an appeal to the courts under the Income Tax Act is the Minister's assessment. While the word "assessment" can bear two con structions, as being either the process by which tax is assessed or the product of that assessment, it seems to me clear, from a reading of sections 152 to 177 of the Income Tax Act, that the word is there employed in the second sense only. This conclusion flows in particular from subsection 165(1) and from the well established principle that a taxpayer can neither object to nor appeal from a nil assessment.
I would dismiss the appeal with costs.
PRATTE J.: I agree.
MACGUIGAN J.: I agree.
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