Federal Court of Appeal Decisions

Date: 20070608

Docket: A-261-06

Citation: 2007 FCA 223

 

CORAM:       DÉCARY J.A.

                        NADON J.A.             

                        PELLETIER J.A.

 

BETWEEN:

THE MINISTER OF PUBLIC SAFETY

AND EMERGENCY PREPAREDNESS (CANADA)

 

Appellant

and

TENASKA MARKETING CANADA,

a division of TMV Corp.

 

Respondent

 

 

 

Heard at Toronto, Ontario, on May 3, 2007.

Judgment delivered at Ottawa, Ontario, on June 8, 2007.

 

REASONS FOR JUDGMENT BY:                                                                              DÉCARY J.A.

CONCURRED IN BY:                                                                                                  NADON J.A.

                                                                                                                                 PELLETIER J.A.

 

 

Date: 20070608

Docket: A-261-06

Citation: 2007 FCA 223

 

CORAM:       DÉCARY J.A.

                        NADON J.A.             

                        PELLETIER J.A.

 

BETWEEN:

THE MINISTER OF PUBLIC SAFETY

AND EMERGENCY PREPAREDNESS (CANADA)

 

Appellant

and

TENASKA MARKETING CANADA,

a division of TMV Corp.

 

Respondent

 

 

REASONS FOR JUDGMENT

DÉCARY J.A.

[1]               This GST case is all about tracking natural gas, as it moves across the continent via pipeline, from Western Canada, into the United States, and then back into Eastern Canada. In the case at bar, the Canada Border Services Agency (the Agency) determined that GST was owed by Tenaska Marketing Canada (Tenaska) in respect of shipments of natural gas on re-entering Canada.

 

 

[2]               The question for the Court is whether section 144.01 of the Excise Tax Act and/or section 23 of the Customs Act operate on the facts of this case to deem no “importation” of natural gas to occur for GST purposes.

 

[3]               Tenaska sought judicial review of the decision of the Agency. It is common ground that this was the proper way to proceed, since no appeal is available under either the Customs Act or the Excise Tax Act in respect of this type of situation. Counsel for the Minister recognized that there was a gap in the legislation which ought to be corrected.

 

[4]               On May 10, 2006, O’Keefe J. allowed the application for judicial review (2006 FC 583). He found at paragraph 35 that “section 144.01 applies to natural gas, even though it is commingled with other natural gas” in the pipeline. Being of the view that “the officer should have applied section 144.01 to the facts of this particular situation to determine if the natural gas in question met the requirements of the section”, he sent the matter back to a different officer for re-determination.

 

[5]               The Minister filed a Notice of Appeal. Tenaska filed a Notice of Cross-Appeal.

 

[6]               The Minister alleges that the Federal Court erred when it found that the Agency’s decision should be set aside because no reference was made in the decision to section 144.01 of the Excise Tax Act or section 23 of the Customs Act. In the Minister’s view, the role of the Judge was to ascertain himself, applying the applicable statutory provisions, whether the assessment was legally correct based on the factual record before the Agency. On the merits, it is the Minister’s view that section 144.01 of the Excise Tax Act did not operate to exempt the natural gas imported by Tenaska from GST since the factual record before the Agency did not demonstrate

a) that the gas imported from the United States had in fact previously originated from Canada, and

 

b) that the sole purpose for transporting the imported natural gas through the United States was to deliver it from a place in Canada to another place in Canada.

 

The Minister also submits that section 23 of the Customs Act is not applicable since no regulations have been made in respect of pipeline transportation.

 

[7]               In its cross-appeal, Tenaska asks that the Order of the Federal Court be varied: rather than referring the assessment to a different officer for re-determination, the Judge should have voided the assessment on the basis that section 144.01 of the Excise Tax Act and 23 of the Customs Act operate to exempt the natural gas from GST.

 

The Background

[8]               The background was carefully set out by O’Keefe J. in paragraphs 3 to 9 of his reasons:

[3]  Tenaska Marketing Canada, a division of Tenaska Marketing Ventures Corp. which is a Nebraska corporation (the applicant), is in the business of trading natural gas in Canada. The applicant purchases natural gas in western Canada, and then transports the natural gas to its customers in eastern Canada via the Great Lakes Pipeline, which stretches from the Manitoba-Minnesota border through Minnesota, Wisconsin and Michigan, before re-entering Canada at Sault Ste. Marie or St. Clair, Ontario.

 

 [4]  In July 2003, what is now the CBSA (formerly the Canada Customs and Revenue Agency), an agency under the portfolio of the Minister of Public Safety and Emergency Preparedness (the respondent), initiated a verification of the applicant's compliance with customs legislation in respect of importations of natural gas effected by the applicant in the 2002 calendar year. During the course of the verification, the applicant submitted several documents concerning 24 importations of natural gas. Among the documents filed was a copy of a contract executed January 15, 1996 between the applicant and a U.S. affiliate (the purchase and sales contract). The purchase and sales contract transferred title to the natural gas to the U.S. affiliate when the gas crossed the border into the U.S. Title was transferred back to the applicant when the natural gas re-entered Canada in Ontario. The applicant asserted that these were simply "transfers of convenience" effected to comply with the Federal Energy Regulatory Commission (FERC) guidelines in the U.S.

 

[5]  With respect to 12 of the 24 importations of natural gas, the applicant reported that the natural gas originated from the U.S. and conceded that it is subject to GST upon importation. With respect to the other 12 importations of gas (which the applicant referred to as in-transit gas), the applicant reported that the natural gas originated from Canada, should be classified under tariff item no. 9813.00.00.92 (goods, originating in Canada, exported and returned) and therefore should be exempt from GST.

 

[6]  On January 27, 2005, the CBSA issued two DASs pursuant to paragraph 59(1)(a) of the Customs Act to correct the errors in tariff classification that were identified during the verification. The DASs assessed the applicant $2,693,622 in GST and $555,324 in prescribed interest (collectively, the assessment) on the basis that the applicant ought to have paid GST on its importations of in-transit gas in 2002 at the time the natural gas re-entered Canada.

 

[7]  The reasons for this assessment can be found in the letters and reports prepared by Mark Kapiczowski, a compliance verification officer of the CBSA. In the final verification report dated January 21, 2005, Kapiczowski advised that because the in-transit gas entered the Great Lakes Pipeline where it was combined or commingled with gas from U.S. sources, it must be classified under tariff item no. 2711.21.00.00 (natural gas) and is subject to GST upon importation.

 

[8]  Kapiczowski also noted that even if the in-transit gas could be verified as having originated in Canada, there was a transfer of ownership at the Manitoba border and the gas was supplied outside of Canada by way of sale. Therefore, GST was payable upon reimportation.

 

[9]  The applicant paid the assessment and has since recovered the GST portion of the assessment by taking an input tax credit, but has not recovered the interest portion. The applicant brought this application for judicial review to challenge the assessment. According to the applicant, there are no other appeal mechanisms in the Excise Tax Act or the Customs Act. The respondent did not take issue with the availability of judicial review in this case.

[9]               In order to transport its Canadian natural gas from Western Canada to Eastern Canada, Tenaska chose to transport it in the cheapest way, i.e. via the TCPL-GLGC pipeline, whose Canadian portion is owned by TransCanada Pipeline Limited (TCPL) and whose American portion is owned by Great Lakes Gas Transmission Company (GLGC). The pipeline starts in Alberta, runs through Saskatchewan and Manitoba, and then through the States of Minnesota, Wisconsin, and Michigan, before re-entering Canada in Ontario. The point at which the TCML and the GLPL are connected, in the West, is at Emerson, Manitoba, and in the East, at either Sault Ste. Marie or        St. Clair, Ontario.

 

[10]           To ensure that Tenaska was not viewed as either shipping natural gas in the U.S., or otherwise carrying on business in the U.S., Tenaska sold the gas to its U.S. affiliate when it crossed the border and repurchased it from its affiliate when it crossed back into Canada.

 

[11]           Due to its unique physical properties, large volumes of natural gas can only be transported in a continuous stream. Once delivered into a pipeline for transportation, it becomes commingled with other natural gas. Individual molecules are not separately identifiable, and cannot be accurately tracked or traced. As a result, natural gas is sold and purchased on a “quality and quantity basis”, and treated as a fungible good, with title taken on a quality and quantity basis. Accordingly, and at the ultimate point of delivery, what the purchaser would actually receive is the same general volume and quality of natural gas (less any fuel consumed in transport), and having the same effective heat content that was delivered at the upstream point. Pipeline transportation contracts generally provide for the commingling of the natural gas delivered to the pipeline with other natural gas, and require specified quality standards for natural gas being delivered to or by the pipeline.

 

[12]           Given the fundamental properties of natural gas (i.e., it is a fungible commodity, commingled with the contents of the pipeline on delivery, and therefore not separately identifiable once delivered), all of Tenaska’s shipments of the Canadian natural gas via the TCPL/GLGC Pipeline were commingled with like natural gas and lost their separate identities once delivered to that pipeline. Furthermore and when transported through the U.S., the Canadian natural gas would likely have been further commingled with U.S. produced natural gas, being delivered to the GLPL at various points in the U.S.

 

[13]           Counsel for both parties informed the Court that to their knowledge, there were no Canadian tax consequences other than the GST one at issue in the circumstances of this case.

 

Relevant Statutory Provisions

Relevant Ministerial Backgrounder and Explanatory Notes

[14]           Prior to the enactment of paragraph 144.01 (a) of the Excise Tax Act, the then Minister of Finance, Mr. Paul Martin, issued a News Release, on August 7, 1998, that contained a Backgrounder, excerpts of which were quoted in O’Keefe J.’s reasons:

Backgrounder

Oil, Gas and Electricity

 

The following proposals are aimed at simplifying compliance with the Goods and Services Tax and Harmonized Sales Tax (GST/HST) and at ensuring the continued competitiveness of the Canadian energy sector:

 

§    simplifying export documentation requirements;

§    zero-rating natural gas and outbound transportation where the gas is

      processed prior to export;

§    zero-rating the storage of natural gas prior to export;

§    removing the tax on certain exchanges at straddle plants;

§    zero-rating cross-border exchanges and flows of oil and gas shipped by

      pipeline and electricity transported by power-line; and

§    removing the tax on specified exchanges of property and services under

      farm-out arrangements.

 

Export documentation requirements

 

…

 

In order to treat a supply of goods as a zero-rated supply, the supplier must maintain satisfactory proof of export of the goods. If a supplier of crude oil, natural gas or electricity treats a sale as zero-rated based on the purchaser's stated intention to export the product and the purchaser does not provide proof of export to the supplier, the supplier remains liable for the tax on the sale. The fungible character of crude oil, natural gas, electricity and other goods shipped by pipeline, power-line or other conduit can result in difficulties for suppliers in satisfying the export documentation requirement. The problem is of particular concern where the purchaser acquires like product from several suppliers.

 

An alternative approach to deal with export documentation requirements is proposed for continuous transmission commodities. The proposal addresses suppliers' compliance difficulties while taking into account potential revenue and competitive equity concerns that could arise as a result of diversions of zero-rated products into the Canadian market. For purposes of these measures, the term "continuous transmission commodity" refers to crude oil, natural gas, electricity, or any tangible personal property, that is transportable by means of a pipeline, power-line or other conduit.

 

…

 

Supplies to Unregistered Persons

 

…

 

Another important aspect of this arrangement is that Revenue Canada's administration recognizes the fungible nature of continuous transmission commodities - i.e., if gas is purchased from different suppliers during a period it may not be possible, because of the sameness of the product, to track the destination of a particular purchase. In these circumstances, Revenue Canada will compare the amount of product purchased under certificate with the amount actually exported during a period by a purchaser.

 

Cross-Border Flows

 

Continuous transmission commodities sold in Canada for use or resale in another part of the country may cross and re-cross the Canada-United States border when shipped by pipeline or power-line before reaching their destination. Similarly, product acquired in the United States for shipment to another part of the United States may be shipped through Canada. The physical flow of the product is a result of the pipeline's or power-line's route. 

 

…

 

It is proposed that the GST/HST legislation be amended to ensure that the tax will not apply to imports where physical cross-border flows of continuous transmission commodities are solely as a result of the pipeline or power-line's route .   …

 

Also, it is proposed that where a continuous transmission commodity is transported by power-line, pipeline or other conduit from a place in Canada to a place outside Canada where it is stored until it is transported back to Canada, the commodity will not be regarded as having been exported or imported.  …

 

…

 

These measures are proposed to apply to the transportation of a continuous transmission commodity from a place of origin to a destination, including any intermediate transportation to or from a place of storage, where the transportation from the place of origin begins after Announcement Date.

 

(my emphasis)

 

[15]           In Explanatory Notes issued in June 1999 with respect to proposed amendments to the Excise Tax Act, the following comments appear:

Continuous transmission commodities (i.e., oil, natural gas or electricity transported by pipeline or power-line) may be transported across the Canadian border more than once en route to a delivery point in or outside Canada solely because of the route the pipeline or power-line must take. In this situation, the administrative position has been to base the tax treatment on the origin and ultimate destination of the commodity and not on the in-transit border crossings. In other words, tax does not apply where such a commodity crosses the border solely for the purpose of being transported by pipeline or power-line from a place outside Canada to another place outside Canada or from a place in Canada to another place in Canada. Section 144.01 is added to codify the administrative practice for greater certainty.

 

Section 144.01 also ensures that the commodity is still considered “in-transit” when it is stored or taken up as surplus product for a period until it is further transported. It must be the same measure of commodity that is further transported and it must be in the same state when further transported (i.e., not processed or altered during the interruption in its transportation to the ultimate destination) except to the extent of any consumption or alteration of the product that may be necessary or incidental to its transportation. Since it is not possible to physically hold the same unit of electricity over time or may not be feasible to hold the same molecules of oil or gas in a reserve, the product that is further transported must be merely equivalent to that which entered the pipeline or power-line at the place of origin.

 

[16]           A Customs Notice issued by the Agency on April 3, 2002, with respect to Procedures for the Importation of Continuous Transmission Commodities (CTCs), states in article 4 that

 

The Decision Below

 

[17]           O’Keefe J. noted in paragraph 28 of his reasons that there was no dispute that the natural gas in question is a “continuous transmission commodity” within the meaning of section 123(1) of the Excise Tax Act and “that the natural gas is a fungible commodity, in the sense that once natural gas is delivered to a pipeline for transport, the natural gas becomes commingled with other natural gas” and “… cannot be distinguished from other natural gas in the pipeline”.

 

[18]           He then relied on the ministerial backgrounder and on the explanatory notes to hold that section 144.01 contemplated precisely that gas would not be identifiable from other gas in a pipeline because of its fungible nature and that the section applies to natural gas, even though it is commingled with other natural gas.

 

[19]           The audit officer not having referred to section 144.01 in his decision, the Judge sent the matter back to a different officer to determine, on the facts of this particular situation, if the requirements of that section had been met. He did not provide any further interpretative guidance on the provision, nor on section 23 of the Customs Act. It is arguable that the Judge might have gone further and decided himself whether the assessments were correct on the facts of the case. As I read his reasons, however, what actually happened is that he was not satisfied that the audit had been properly performed and was of the view that the safer route was to have the audit redone by an auditor aware of the information he needed to collect in order to determine whether the requirements of section 144.01 had been met.

 

[20]           One has to keep in mind that challenges to assessments under the Excise Tax Act or the Customs Act are normally made through the appeal mechanisms set out in either of these Acts. Due to legislative oversight, the assessments in issue in this case could only be challenged through judicial review. It is the general practice, in judicial review proceedings, to send the matter back for reconsideration when the Court is of the view that proper consideration was not given to a relevant factor. The mistake of the Judge, if any, was to not give more guidance to the audit officer.

 

The Standard of Review

[21]           O’Keefe J. found that the applicable standard of review was correctness. It is not disputed that correctness is the standard that applies to the legal requirements set out in section 144.01      (see A & R Dress Co. Inc. v. The Minister of National Revenue, 2006 FCA 298).

 

[22]           The Minister suggests, and rightly so, that in order for section 144.01 of the Excise Tax Act to be applicable, the importer must demonstrate on a balance of probabilities that the natural gas was originally exported “from a place in Canada” and had been transported through a foreign country “solely for the purpose of being delivered … to another place in Canada”.

 

Whether the gas imported from the United States had in fact previously originated in Canada

[23]           The position of the Minister on this issue was not clearly articulated. Counsel appeared to suggest that section 144.01 would only apply to natural gas being transported through the United States on a sealed American pipeline, i.e. a pipeline having no delivery points within the United States. Questioned as to whether such sealed pipelines actually exist, he was unable to point to any evidence in that regard and had to acknowledge that it was very unlikely, even if such sealed pipelines existed, that Parliament would have intended section 144.01 to apply only to such situations.

 

[24]           In the end, Counsel recognized that the gas which was re-entering Canada was not, and could not be for physical reasons, the same gas that had first been exported. Counsel agreed with the Court that the burden facing the importer was to demonstrate that there was at the point of re-entry in Canada the same volume (or less) as there had been at the point of exit.

 

[25]           The determination of the volume of gas is a matter of evidence. Counsel for the Minister suggested that in the case of an unsealed American pipeline with multiple delivery points within the United States, it should be possible for an importer to establish the origin of imported gas by reference to the volumes of gas picked-up and delivered by all of the shippers who use the pipeline. Indeed, counsel noted how the National Energy Board requires all importers and exporters of natural gas to provide to the Board monthly reports; in his view, such reports could be provided to Customs to help them ascertain the Canadian origin of the imported natural gas for GST purposes.

 

[26]           Whether other types of evidence can be adduced by importers to satisfy Customs officials is not a matter for this Court to decide. Whether the evidence filed in the case at bar is sufficient is not an exercise which this Court is prepared to undertake. This is an exercise within the domain of an audit officer.

 

Whether the natural gas was transported through the United States solely for the purpose of being delivered to another place in Canada

[27]           The Minister argues that in the case at bar the gas was not transported through the United States “solely for the purpose of, being delivered …to another place in Canada” within the meaning of paragraph 144.01(a). According to Counsel, there were other purposes. The gas was also transported through the United States so that it could be sold to an American affiliate and then made available for sale by that affiliate to third parties.

 

[28]           The words “solely for the purpose of, being delivered” do not have the meaning attributed to them by the Minister.

 

[29]           First, the word “purpose” refers to the object that is sought, not to the means through which the object is sought. The statutory purpose set out in paragraph 144.01(a) is the delivery of the gas to another place in Canada. The fact that the delivery is achieved through the participation of an American company does not alter the purpose, which remains that of delivering the gas.

 

[30]           Second, the words “solely for the purpose of” in paragraph 144.01(a) must be read in context. The context is that of natural gas, as “a continuous transmission commodity”, “in the course of, … being delivered”. These words and expressions suggest that what is contemplated is a continuous flow of the gas while in transit in the United States. The French text is to the same effect.

 

[31]           This interpretation is reinforced by subsections (c) and (d) which contain specific provisions dealing with the storage of gas or taking up gas as surplus “…for a period until further transported…”.

 

[32]           The Backgrounder and the Explanatory Notes show that the word “solely” is used to exempt natural gas that flows non-stop through the United States via a pipeline transiting through the United States.

 

[33]           In the end, the change of ownership of the Canadian natural gas during its transit through the U.S. and the commingling of Canadian and American gas on the American part of the pipeline are not relevant to determine the purpose of the delivery from one place in Canada to another place in Canada. These facts form an intrinsic part of the economic reality of transporting natural gas via pipeline through the United States. This economic reality was very much in the mind of the drafter of the legislation and found its way in the terms used by Parliament.

Disposition

[34]           O’Keefe J. made no reversible error when he sent the matter back for a new determination by a different audit officer.

 

[35]           The audit officer should proceed on the basis that

a)      the question of whether a given quantity of gas originated in Canada is to be determined on a quantity and quality basis, and not of the basis of physical tracking of particular lots of gas; and

 

b)      the fact that sale to an intermediary in the course of the transportation through the U.S. is not determinative of the question of whether natural gas was transported through the United States solely for the purpose of delivery in Canada.

 

[36]           In the circumstances, the audit officer should be at liberty to seek additional information for the purpose of determining whether, on the facts of this case, section 144.01 of the Excise Tax Act operates.

 

[37]           In view of the conclusion I have reached, it will not be necessary to express any view on the applicability of section 23 of the Customs Act.

 

[38]           The appeal and the cross-appeal should be dismissed. There should be no order as to costs in view of the divided success in appeal.

“Robert Décary

“I agree.

     M. Nadon J.A.”

 

“I agree.

     J.D. Denis Pelletier J.A.” 

FEDERAL COURT OF APPEAL

 

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

 

 

DOCKET:                                                                              A-261-06

 

APPEAL FROM A JUDGMENT OR ORDER OF THE HONOURABLE JUSTICE O’KEEFE DATED 10^TH OF MAY 2006, NO. T-361-05 & T-362-05

 

STYLE OF CAUSE:                                                              MPSEP v. TENASKA MARKETING CANADA 

 

PLACE OF HEARING:                                                        Toronto, Ontario

 

DATE OF HEARING:                                                          May 3, 2007

 

REASONS FOR JUDGMENT BY:                                     Justice Décary

 

CONCURRED IN BY:                                                         Justice Nadon

                                                                                                Justice Pelletier

 

DATED:                                                                                 June 8, 2007

 

 

APPEARANCES:

 

Mr. Jan Brongers	FOR THE APPELLANT
Mr. Robert G. Kreklewetz Ms. Wendy A. Brousseau	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

Department of Justice Vancouver – British Columbia	FOR THE APPELLANT
Miller Kreklewetz LLP Toronto - Ontario	FOR THE RESPONDENT