In The Queen v. Repsol Canada Ltd. et. al., 2017 FCA 193, the Federal Court of Appeal (FCA) upheld the Tax Court of Canada’s decision to include in Class 43 (depreciable at 30%) a $1.2 billion liquid natural gas (LNG) regasification facility. The Income Tax Regulations have since been amended: such facilities acquired after March 18, 2007 are included in Class 47 (depreciable at 8%). Two quick points in the FCA’s decision are worth noting here.
- New argument rejected: The Crown unsuccessfully sought to raise a new argument on appeal. Class 1(n) includes equipment acquired primarily for the distribution of gas except property acquired for the purpose of processing natural gas before delivery of such gas to “a distribution system”. The LNG facility was in fact part of a larger supply chain that included importing LNG transported by tanker from offshore, processing that LNG into its gaseous form, then subsequently distributing that gas through transmission and distribution pipelines. On appeal the Crown argued that the LNG facility did not qualify for the exception in Class 1(n) because it was already part of a gas “distribution system”, there being no difference between distributing gas (in liquid form) by tanker and distributing gas (in gaseous form) by pipeline (see paragraph 49). The FCA rejected this argument in part because the Crown did not argue the point at trial. It would be unfair for the Crown to raise this new argument on appeal because Repsol might have led different evidence at trial (see paragraph 51).
- Integration principle reaffirmed: The FCA reaffirmed the well-accepted judge-made “integration principle” to the effect that processing includes all activities necessary and integral to the processing operation. The Tax Court thus correctly found that a jetty was included in Class 43 because it was integral to the LNG terminal, which was clearly a processing operation. The jetty was properly included in Class 43 in this context notwithstanding the specific inclusion of “a jetty” in Class 3(h) (see paragraph 65).