Date: 20020614
Dockets: T-1709-90
T-1710-90
T-1711-90
T-1712-90
Neutral Citation: 2002 FCT 675
Ottawa, Ontario, June 14, 2002
Present: The Honourable Mr. Justice Blais
BETWEEN:
SEASPAN INTERNATIONAL LTD.
Plaintiff
and
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT AND JUDGMENT
- By these actions the plaintiff Seaspan International Ltd. seeks to obtain a refund from the defendant Her Majesty The Queen for federal sales tax and excise tax paid on diesel fuel it had purchased.
- [2] The plaintiff is a company incorporated under the laws of British Columbia, having an office in North Vancouver, B.C., carrying out the business of operating a tug and barge service on the British Columbia coast and internationally.
FACTS
- [3] The plaintiff owns and operates 42 tug boats and 2 self-propelled train ships as well as numerous dump barges which are towed by the tugs. The tugs range from 39 to 142 ft. in length, and from 440 to 5,750 in horsepower and carry from 2 to 9 crew-members.
- [4] From January 1988 to December 1988, which is the relevant time period, the plaintiff purchased diesel fuel in Canada in connection with its business.
- [5] At the time of these purchases, the plaintiff paid sales and excise tax under the Excise Tax Act, R.S.C. 1985, c. E-15 (hereinafter referred to as the "Act") on diesel fuel purchased for the generation of electricity used in certain aspects of the operation of those of its vessels which are tug boats and train ships.
- [6] On September 27, 1989 the plaintiff applied for a refund of the excise and sales tax paid on the diesel fuel at the time of purchase for the year 1988. The amount of excise tax and sales tax paid by the plaintiff are the object of the four (4) actions. The details are as follows:
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T-1709-90 From April to June 1988, the amounts are excise tax $20,924.40 and sales tax $13,862.43; T-1710-90 From January to March 1988, the amounts are excise tax $16,300.64 and sales tax $10,717.69; T-1711-90 From July to September 1988, the amounts are excise tax $17,796.00 and sales tax $11,745.36; T-1712-90 From October to December 1988, the amounts are excise tax $17,540.48 and sales tax $11,401.33. |
- [7] The Minister of National Revenue, on behalf of the defendant, notified the plaintiff that the application for refund was denied on the basis that ships (marine vessels), including tug boats and train ships, were vehicles. By notice of objection dated December 20, 1989 the plaintiff objected to the determination made by the Minister of National Revenue and the four (4) actions were filed on June 14, 1990.
PERTINENT LAW
- [8] Paragraph 23(8)(c) of the Act provides a specific exemption for excise tax payable in the case of diesel fuel for use in the generation of electricity, except where electricity so generated is used primarily in the operation of a vehicle.
| 23. (8) The tax imposed under subsection (1) or under section 27 is not payable in the case of ... (c) diesel fuel for use in the generation of electricity, except where the electricity so generated is used primarily in the operation of a vehicle. |
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23. (8) La taxe imposée au paragraphe (1) ou par l'article 27 n'est pas exigible : ... c) dans le cas de combustible diesel devant servir à la production d'électricité, sauf lorsque l'électricité ainsi produite est principalement utilisée pour faire fonctionner un véhicule. |
- [9] Subsection 51(1) of the Act provides for goods exempted from sales tax:
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51. (1) The tax imposed by section 50 does not apply to the sale or importation of the goods mentioned in Schedule III, other than those goods mentioned in Part XIII of that Schedule that are sold to or imported by persons exempt from consumption or sales tax under subsection 54(2). |
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51. (1) La taxe imposée par l'article 50 ne s'applique pas à la vente ou à l'importation des marchandises mentionnées à l'annexe III, excepté les marchandises mentionnées à la partie XIII de cette annexe qui sont vendues ou importées par des personnes exemptées du paiement de la taxe de consommation ou de vente en application du paragraphe 54(2). |
- [10] Section 3 of Part VI of Schedule III provides a specific exemption for sales tax on fuel oil for use in the generation of electricity, except where electricity so generated is used primarily in the operation of a vehicle:
| 3. Fuel oil for use in the generation of electricity except where the electricity so generated is used primarily in the operation of a vehicle.
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3. Mazout servant à la production de l'électricité, sauf lorsque l'électricité ainsi produite sert principalement au fonctionnement d'un véhicule.
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ISSUE
- [11] Is the plaintiff entitled to claim a refund of sales tax and excise tax under the Excise Tax Act because the fuel oil or diesel fuel was used to generate electricity which was not "used primarily in the operation of a vehicle"?
FINDINGS
- [12] Fortunately, both parties agree on most of the facts at the base of these claims. The parties disagree however on the interpretation to be made of relevant sections of the law and also on the application of the pertinent case law.
- [13] The plaintiff's outside tugs and coastal tugs tow barges which carry goods to destinations up and down the British Columbia coast and internationally.
- [14] Also, the plaintiff's ship docking tugs are used for ship berthing and ship towage. Train ferries carry rail cars and road trailers between the Vancouver Lower Mainland area and Vancouver Island.
- [15] The crew on board the plaintiff's vessels perform various tasks which are necessary for the operation of the vessels. These tasks include navigating the vessel, operating the machinery, tending the decks, hooking up cables, and performing repairs and maintenance. They are required to work during their "watch", and when they are not on "watch" they carry on recreational activities such as watching television, listening to the radio, exercising, washing clothes, heating, sleeping, etc.
- [16] While there are no paying passengers on the tug boats per se, there are non-crew employees and contractors called "supernumerary" on the vessels from time to time. Also, the train ferries carry truck drivers whose truck tractors are being transported. These truck drivers share the accommodations with the crew-members during their stay on board.
- [17] The crew-members remain on board the vessels continuously for periods of time which vary according to the category of vessel as follows:
outside tugs - four (4) weeks;
coastal tugs - two (2) weeks;
ship docking tugs - twelve (12) hours; and
train ferries - two (2) weeks.
- [1] Each of the plaintiff's vessels has diesel fuel tanks in which the diesel fuel is filled. The diesel fuel in the tanks is used to power three (3) different types of engines:
- (a) internal combustion engines used to propel the vessels;
- (b) auxiliary engines which power generators to produce electricity; and
- (c) auxiliary engines which produce hydraulic power to run tow inches and anchor winches.
- [2] Both parties agree that most of the diesel fuel consumed by the plaintiff's vessel (approximately 90%) is used to supply internal combustion engines to propel the vessels, and the remaining portion (that is approximately 10%) is used by the auxiliary engines to produce electricity. Less than 1% is used to produce hydraulic power.
- [3] The electricity generated on board the plaintiff's vessel is used to power electrical equipment. This electrical equipment performs various functions including navigation, communication, lighting, heating, cooling, cooking, ship safety and maintenance, some of which are not essential to the propulsion or safe navigation of the vessels.
- [4] Mr. Ian Smart, an expert provided on behalf of the plaintiff, testified and provided evidence that many of the electrical devices on Seaspan's vessels provide electrical services that are "hotel services". The "hotel load" is defined in marine architecture and engineering as those services that are not required for propulsion and navigation of the vessel. The expert witness made assessments of the "hotel load" determined by the plaintiff when the claims were made and he testified that in his opinion the use of the "hotel load" subject to minor adjustments is accurate. Using a very sophisticated formula referred to in the expert report, the electrical energy consumed by "hotel services" can be calculated and from that calculation, the fuel used to create hotel services electrical energy is determined and shown not to be used in the propulsion or the navigation of the vessel.
- [5] Again referring to the expert report, the on-board electrical services and electrical engineering systems that are considered to be "hotel load" and are recognized as such by the marine industry, and in particular by naval architect and marine engineers involved in the design marine vessels, are:
(a) cooking appliances;
(b) heating accommodation and working spaces;
(c) domestic refrigeration and freezer appliances;
(d) mechanical ventilation systems;
(e) air-conditioning systems in accommodation and working spaces;
(f) supply of sanitary water and sewage treatment appliances;
(g) supply of freshwater including heating.
[6] The expert also mentioned that the "hotel load" applies to all vessels and not only to those carrying passengers.
[7] The electrical energy was generated exclusively by the auxiliary generators. The third auxiliary engine is connected to hydraulic pumps that are used solely for the purposes of driving hydraulic motors. The fuel supply to these auxiliary engines cannot be converted into electrical energy.
[8] The parties agreed that a motion to determine a question of law should be brought to adjudicate the plaintiff's first argument to the effect that the plaintiff's vessels were not "vehicles" for the purposes of the Act. This motion was brought on April 23, 1993 and was heard by Mr. Justice Joyal on May 10, 1993. Justice Joyal by order dated September 3, 1993 determined that the plaintiff's vessels are "vehicles" for the purposes of the Act which decision was affirmed by the Federal Court of Appeal on June 25, 1998. Leave to appeal the Federal Court of Appeal's judgment was denied by the Supreme Court of Canada on February 18, 1999.
[9] The last question that was said to be decided was whether the plaintiff could benefit from the exemption provided by the Act.
ANALYSIS
[10] In a nutshell, counsel for the defendant has clearly identified the real issue in the present matter. The defendant considers that the crew-members on a vessel are an integral part to the vessel itself.
[11] Counsel for the plaintiff suggests that the crew-members, even though they participate in the operation of the vessel, do not constitute an integral part of the vessel itself. The defendant submits that the exemption invoked by the plaintiff does not apply because the "hotel load" electricity generated on board the plaintiff's ships was used primarily in the operation of a vehicle, and since the plaintiff's ships cannot operate without their crews, even the electricity generated on board the ships for the crew's comfort is to be electricity used primarily in the operation of a vehicle.
[12] The defendant is not challenging the sophisticated calculation of the "hotel load" as demonstrated by the plaintiff and particularly by the expert witness, but rather suggests that the subtle distinction of the "hotel load" does not apply to a vessel as it could have applied to a train, which was in fact the case in Via Rail Canada Inc. v. M.M.R., [1993] C.I.T.T. No. 111 (QL).
[13] A change to the legislation was made in 1966. The Minister of Finance, the Honourable Mitchell Sharp, explained before the House of Commons:
| The essential point is that what we are exempting is diesel fuel used in the generation of electricity for commercial and industrial uses and so on. It was not our intention to eliminate it in connection with diesel fuel used for transportation. ... The purpose of this exemption is to apply only to the generation of electricity for industrial, commercial and domestic use.
House of Commons Debates, June 23, 1966, p. 6812 |
[14] Both parties agreed that reference could be made to the intention of the government as expressed in the House of Commons at the time of this legislative change when it was the object of debate. Nevertheless, the parties do not agree on what the Minister really meant.
[15] It is to be noted that this law was passed in 1966 and the decision by the Minister of Revenue was made in 1989 to refuse the claims made by the plaintiff. On this point, the Department of National Revenue had issued "Excise News" (No. 65 in July 1989). At page 5 of this document, the Department provides explanations in regards to the interpretation of the sales tax exemption for diesel fuel and fuel oil used in the generation of electricity. Less than a year later, in January 1990, the Department issued "Excise News" No. 67 with the objective to clarify the policy announced in "Excise News" No. 65 referred to above in July 1989.
[16] Frankly, I do not see any contradiction between the two "Excise News" documents nor in the statement made by the Minister of Finance fourteen (14) years earlier. The January 1990 "Excise News" clearly indicates that the exemption could apply when a power source generates electricity for use under both taxable and exempt conditions and also provides the conditions in which the exemption could apply.
[17] Both parties have entered much evidence as to what the term "operation of a vessel" truly means for the purpose of the law. It seems that there is only one case which has addressed what the word "operation" in the context of a vessel means. See New Brunswick Court of Queen's Bench, R. v. Turbide, [1986] N.B.J. No. 679. Unfortunately, the analysis in Turbide, supra is in regards to the Lobster Fishery Regulations and not in relation to the Excise Tax Act. There, the judge had to decide whether the captain was involved in the operation of the vessel given that the said captain pretended that he was not in charge. Even though the analysis provided by the judge in Turbide, supra should be seen as one element among others, for the purposes of my analysis, I think that Turbide, supra should be distinguished from the case at bar.
[18] The plaintiff suggests that this Court rely upon the case of Via Rail Canada Inc. v. M.M.R., supra where the Canadian International Trade Tribunal ("CITT") decided that diesel fuel used to generate electricity which is used to provide hotel services aboard conventional passenger rail cars is not used primarily in the operation of the vehicle:
| With respect to the issue of hotel services in conventional passenger cars, the Tribunal concludes that the appeals must be allowed.
Pursuant to subsection 51(1) of the Act, the sales tax does not apply to the sale of the goods mentioned in Schedule III to the Act. Section 3 of Part VI of this schedule contains an exemption for "[f]uel oil for use in the generation of electricity except where the electricity so generated is used primarily in the operation of a vehicle." The Tribunal is of the view that this section is applicable to the appeals at issue. If Parliament's intention had been to restrict the applicability of this exemption to the kind of situations mentioned by counsel for the respondent, there would have been no reason for the legislator to use words excluding electricity "used primarily in the operation of a vehicle" from the scope of the exemption. The Tribunal is convinced that the diesel fuel used by VIA to generate electricity for hotel services aboard conventional cars meets the statutory requirements set out in section 3 of Part VI of Schedule III to the Act.
There is uncontested evidence that electricity is generated under each conventional car by way of an axle generator and that this electricity is used exclusively to provide hotel services and that it is unsuitable to propel a train. |
[19] The documents provided by the plaintiff and the testimony and reports filed by the expert witness on the plaintiff's behalf, is uncontested evidence which provides that the portion of electricity generated by the auxiliary engine that forms the basis of the plaintiff's refund claims was used exclusively to provide hotel services and was unsuitable to propel the plaintiff's vessels.
[20] In my view, it is obvious that pursuant to the expert evidence and to the additional evidence submitted, the electricity in question was not used to navigate the vessels. The "hotel load" "represents the electricity used to run equipment which was not used to propel or navigate the vessel". At page 8 of Via Rail, supra, the CITT stated:
| For all the foregoing reasons, the Tribunal concludes that VIA is entitled to obtain tax refunds with respect to the portion of fuel, as is calculated through various complex formulae, used in the generation of electricity needed to provide hotel services aboard conventional cars. Such fuel comes within the purview of section 3 of Part VI of Schedule III to the Act. |
Counsel for the defendant suggested that this decision be distinguished from the case at bar because it was in relation to passenger cars, whereas the present situation relates to transportation of cargo where only crew-members are on the vessels and where only occasionally a few passengers would be on-board as truck drivers sharing the crew-members' accommodation. Also, it should be distinguished particularly based on the fact that the crew-members form an integral part of the vessel.
[21] In my view, the approach suggested by counsel for the defendant is not acceptable. In Via Rail, supra, the CITT did not make a distinction between the crew-members of Via Rail and the passengers, and as I do not wish to deny the importance of the crew-members on a ship, it would not, nonetheless, be reasonable to conclude that even though the crew-members could stay on a vessel for lengthy period such as two, three or four weeks, all the electricity generated to provide services for them should be considered as "primarily in the operation of the vehicle".
[22] In my opinion, when reading the relevant section of the law, this conclusion simply cannot be drawn. Also, as suggested by counsel for the plaintiff, administrative policy and interpretation are not determinative but can be attributed a substantial amount of weight thus, becoming an important factor in case of doubt as to the meaning of legislation. Also, Décary J.A. speaking on behalf of the Federal Court of Appeal in Vaillancourt v. The Queen (1991), 91 D.T.C. 5408 at page 5412, after noting that it is well settled law that Interpretation Bulletins only represent the opinion of the Department of National Revenue, held:
| ... Having said that, I note that the courts are having increasing recourse to such Bulletins and they appear quite willing to see an ambiguity in the statute -- as a reason for using them -- when the interpretation given in a Bulletin squarely contradicts the interpretation suggested by the Department in a given case or allows the interpretation put forward by the taxpayer. ...
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[23] The Court also should rely on the testimony of Mr. Reid, representative of the plaintiff, who told the Court that through his discussions with Mr. Holtby, who was a representative of the Department of Revenue to establish that the computation of the "hotel load" at 75% of the full load of the electrical equipment in question, was in fact reasonable. The plaintiff made all efforts to clearly identify the portion of the electricity generated for what is called the "hotel load". The interpretation made by the plaintiff of the exemption seems to be correct and reasonable. The Supreme Court of Canada has already repeated many times that any ambiguities found in the taxing statutes shall be resolved in favour of the taxpayer as per Mr. Justice Estey in Johns-Manville Canada Inc. v. The Queen, 85 D.T.C. 5373 (SCC) at 5384 where he stated:
| Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual, ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer. |
[24] In addition, Justice Sopinka of the Supreme Court of Canada held in Fries v. The Queen, 90 D.T.C. 6662 (SCC) said that:
| We are not satisfied that the payments by way of strike pay in this case come within the definition of 'income. . . from a source' within the meaning of s. 3 of the Income Tax Act. In these circumstances the benefit of the doubt must go to the taxpayers. |
[25] I cannot accept the suggestion made by the defendant that the services received by the crew-members when on-board should be regarded as incidentally obtained as though it was a personal benefit from the comfort "provided by certain equipment on board the ships" and that the comfort is provided to these individuals primarily because they are crew-members who are on the ship. In my view, it is exaggerated and unreasonable to suggest that all the services provided to the crew-members of the vessels should be seen as provided to the vessel itself and that in consequence, the electricity which provides comfort to the crew should be seen as electricity used primarily in the operation of the vehicle.
[26] The crew-members on the vessel are obliged to stay on the vessel because they cannot leave and as soon as they disembark at any port they take every opportunity to do so when they are not on duty. If the legislator wanted to indicate that the crew-members are an integral part of the vessel, it should have been clearly stated in the legislation.
[27] Therefore, I have no hesitation in arriving at the following conclusion: the exception mentioned at paragraph 23(8)(c) of the Act and at section 3 of Part VI of Schedule III to the Act concerning excise tax and sales tax should apply to the plaintiff because the diesel fuel used in the generation of electricity was not used primarily in the operation of a vehicle and the plaintiff is therefore entitled to the refund of the claims in the four (4) actions.
J U D G M E N T
[28] Consequently, the four (4) claims should be returned to the Minister of Revenue for a new assessment pursuant to this judgment.
[29] The plaintiff is entitled to its costs.
[30] Dawson J.'s order dated August 28, 2001, held that the trial judge would deal with the costs regarding her order. Therefore, I order that the parties file their written representations no later than June 28, 2002 and I will be seized with the file for the purpose of the decision on costs.
Pierre Blais
Judge
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1709-90, T-1710-90, T-1711-90, T-1712-90
STYLE OF CAUSE: SEASPAN INTERNATIONAL LTD. v. THE QUEEN
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: May 07, 2002
REASONS FOR ORDER OF the Honourable Mr. Justice Blais :
DATED: June
APPEARANCES:
Mr. Timothy W. Clarke FOR PLAINTIFF
Mr. Christopher S. Wilson
Mr. Jan Brongers FOR DEFENDANT
Mr. Michael Roach
SOLICITORS OF RECORD:
Bull, Housser & Tupper FOR PLAINTIFF
Barristers and Solicitors
300 - 1055 West Georgia St.
Vancouver, BC, V6E 3R3
Telephone: (604) 641-4939
Fax: (604) 646-2686
Morris Rosenberg FOR DEFENDANT
Deputy Attorney General of Canada
Department of Justice Canada
Civil Litigation Section
East Memorial Building, Room 2194
284 Wellington Street
Ottawa, Ontario
K1A 0H8
Telephone: (613)957-4838
Fax: (613) 954-1920