The March 21, 2013 Federal Budget changed the tax law applicable to the pipeline abandonment trust (Trust) structure that has been submitted to the National Energy Board (NEB) as the proposed mechanism for setting aside funds for the cost of abandoning interprovincial and international pipelines subject to NEB jurisdiction. As a result, the qualifying environmental trust (QET) rules in the Income Tax Act (Act) will apply to the proposed Trusts with the result that funds for pipeline abandonment held in the Trust will be subject to the double tax inherent in the QET regime. This is not expected to pose material problems for any particular pipeline company or shipper. However, over the course of the lives of the Trusts, this change is likely to add hundreds of millions of tax dollars to Government coffers.

Here we see a near perfect revenue raiser for the Government. It is buried so deeply within a difficult to understand mechanism that few will figure it out, and of them, a small fraction will be voters who will care enough about this issue to penalize the Government. This recalls the iconic statement attributed to Jean Baptiste Colbert, King Louis the XIV’s Finance Minister, that “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”  The Federal Government seldom hits this high note as well as it did here.


In its RH-2-2008 Decision, the NEB set out principles, a process and a timeline for Stream 3 – Pipeline Abandonment – Financial Issues, of the Land Matters Consultation Initiative.  The NEB established a time line by which pipeline companies subject to NEB jurisdiction must develop and file, for NEB approval, a mechanism to set aside the funds for pipeline abandonment and a proposal for collection of abandonment funds.     Companies are required to begin setting aside abandonment funds no later than 2015.

We assisted various pipeline companies as they collaborated to develop a trust model that would satisfy the NEB’s requirements and avoid the QET double tax that results from the taxation of investment income accumulating within a QET, and additional taxation of all distributions from the QET that are made to fund pipeline abandonment expenditures. To the extent that this double tax applies, additional funds would have to be contributed to the Trusts.

In the March 21, 2013 Federal Budget, the Government announced amendments to the Act that are intended to require trusts established to collect funds for pipeline abandonment to be established on the basis of the QET rules. This announcement did not indicate that relief from QET double taxation was contemplated. While effort is sure to be made to obtain this relief, the wording of the legislative proposal does not bode well in this regard in light of the Government’s already thorough understanding of the issue.

The double taxation described above is probably justified from a policy perspective in the mining context because the QET rules were originally introduced to solve a problem peculiar to mining. That is, mines tend to be owned by single purpose companies. When a mining company incurs reclamation expenses, its revenue source (the mine) has typically expired. This makes it impossible to deduct the majority of those expenses for tax purposes, and leaves the expenses stranded in a defunct company. The QET rules address this problem in a revenue neutral way, from the Government’s perspective, by permitting the deduction of reclamation expenses as funds are contributed to a trust, and double taxing the trust’s investment income. So, there is a reasonable policy argument to justify double taxation in the case of mining QETs.

The same policy considerations do not apply to pipelines for various reasons. Most importantly, contributions mandated by the NEB and made by a pipeline company to a Trust are almost certainty deductible without the assistance of the QET rules. Hence, the imposition of double tax on funds held for pipeline abandonment is not justified in the same way it is with regard to mine reclamation.

The Budget announcement is not likely to have material financial consequences for any particular pipeline company. Those companies that are able to pass taxation costs onto their shippers will simply do so. In fact, the announcement in the Budget may be a small positive for those pipeline companies.  Pipeline companies regulated by the NEB are required by the provisions of the NEB Act to charge tolls that are just and reasonable and to incur only prudent costs.  Companies that choose to go the QET route, in the absence of a positive ruling from the CRA, may have been faced with objections from shippers with respect to the QET double tax element of tolls proposed to be collected by pipeline companies for pipeline abandonment costs. The amendments to the Act announced in the Budget foreclose that possibility.

Pipeline companies that cannot simply pass taxation costs onto their shippers will absorb whatever part of the QET double tax they cannot pass on through the NEB’s prescribed transportation rates.

There are many interprovincial and international pipelines. Abandonment costs per pipeline could be in the hundreds of millions to billions of dollars. It is accordingly estimated that over the course of the next 50 years, many billions of dollars will be accumulated in pipeline abandonment trusts. Therefore, industry-wide in the long run, the double tax described above is very substantial. However, on a company by company basis, year by year, the additional funds that the pipeline companies and/or shippers will be required to contribute to the Trusts as a result of this double tax are not expected to be material.