R. v. Repsol Energy Canada – FCA: Tax Court decision in favour of taxpayer upheld

R. v. Repsol Energy Canada – FCA:  Tax Court decision in favour of taxpayer upheld


Canada v. Repsol Energy Canada Ltd. (September 20, 2017 – 2017 FCA 193, Pelletier, Boivin, Woods (author), JJ.A.).

Précis:  The taxpayer claimed that a large regasification plant in Saint John, New Brunswick fell within Class 43 property for CCA purposes.  CRA rejected the Class 43 categorization and assessed the property under Classes 1 and 3, resulting in less CCA being available.  Justice Campbell Miller of the Tax Court decided in favour of the taxpayer and awarded substantial costs.  CRA appealed both the substantive decision and the costs award.  The Federal Court of Appeal accepted the decision of the Tax Court both on substance and on costs (technically, there were four appeals involved).  Thus CRA’s appeals were dismissed with one set of costs.

Decision:   The Federal Court of Appeal set out the complex factual basis of the appeals:

[8]               In 2005, a partnership was formed by the two Repsol respondents and two members of the Irving Oil organization in order to build and operate a regasification plant in St. John, New Brunswick. The partnership interests of Repsol and Irving Oil were 75 percent and 25 percent, respectively.

[9]               The facility was constructed to provide regasification services for Repsol Energy Canada Ltd. (RECL), one of the respondents. RECL planned to import liquid natural gas (LNG) that is transported by tanker from offshore, regasify the LNG, transport the gas by pipeline to the United States border, and then sell the gas to another Repsol affiliate for marketing in the United States. Regasification is a necessary step in the process because the gas needs to be converted to a liquid state before it can be shipped by tanker.

[10]           RECL acquires title to the LNG as it is offloaded from the tankers at the facility. The LNG is blended and then regasified by the partnership before being delivered to a third party transmission line (the Brunswick Pipeline). This line was built specifically to transport the gas for RECL to the United States border where it is then sold to another Repsol affiliate.

[11]           Approximately 50 percent of the LNG is purchased by RECL from other Repsol affiliates.

[12]           The services provided by the partnership include receiving, storing, and regasifying the LNG for RECL. The facility contains a deep water pier (the Jetty) for tankers to dock, and equipment and structures (the Terminal) such as storage tanks, a high pressure tank and a vaporizer to convert the LNG into gaseous form. Part of the Terminal is located above the Jetty. The operations at the facility are complex, due to the necessity to ensure the quality of the gas and to prevent accidents.

[13]           Finally, the facility was constructed in a manner that allowed alteration to accommodate the importation of oil by Irving Oil.

[14]           Repsol, as partners in the partnership that owns the facility, are entitled to deduct their share of partnership losses for purposes of the Act. After CCA for manufacturing and processing under Class 43 was claimed in Repsol’s corporate tax returns, the Minister of National Revenue issued notices of determination of loss that recalculated the losses on the basis that the Terminal fell within Class 1(n) and the Jetty fell within Class 3(h).

The Crown raised a potpourri of arguments, all of which were rejected by the Court of Appeal.  In particular, the Court rejected the argument that the activities did not amount to “processing”:

[53]           In paragraph 36 of its memorandum, the Crown submits that the activities at the facility are not processing because the partnership does not deal with raw gas or transform the gas into something else. It submits that, whether in liquid or a gaseous form, the product is “a gas composed of at least 90 to 95 percent methane, and the parties to the different contracts define the term ‘gas’ as such.”

[54]           With respect, I disagree that the partnership does not transform the product. It is clear that the product has been changed when it is transformed from a liquid to a gaseous state. The Crown, however, relies on definitions of “gas” and “LNG” in commercial contracts. Contractual definitions are irrelevant to the question as to whether the operations at the facility transform the product. In any event, the definitions do not support the Crown’s position. The definitions in the partnership agreement referred to by the Crown are set out below (Appeal Book, p. 163, 165).

“Gas” means any hydrocarbon or mixture of hydrocarbons consisting predominantly of methane that is in a gaseous state.


“LNG” means Gas in a liquid state at or below its boiling point at a pressure of approximately one (1) atmosphere.

[55]           The definition of LNG above is not as precise as it could be, but the meaning is clear: “Gas” is defined as in a gaseous state and “LNG” is defined as in a liquid state. The important point is that there is a change in the form of the product when Gas is transformed into LNG. The Crown seems to suggest that there is no difference between Gas and LNG. I disagree.

[56]           Furthermore, the Tax Court did not rely solely on the change in the product from a gaseous form to a liquid. The Court also mentioned the change that takes place during the facility’s blending operations, and a change in chemical composition (Decision at paras 108, 109). In addition, the Tax Court concludes that the operations at the facility transform the product from being non-marketable in the North American market, to being marketable (Decision at para 112).

[57]           These conclusions are findings of mixed fact and law for which the standard of review is palpable and overriding error. In my view, there is no such error.

As a result all four appeals were dismissed, with one set of costs:

[66]           In the result, there is no reviewable error in the conclusions reached by the Tax Court.

[67]           I would dismiss the two main appeals which are in Court File Nos. A-128-15 and A-129-15, with one set of costs for both appeals. Although separate appeals were brought in respect of each respondent, the issues are identical in both.

[68]           The other two appeals, in Court File Nos. A-307-15 and A-306-15, relate to costs and were also brought separately in respect of each respondent. As mentioned above, the Crown seeks to have the Tax Court’s award of costs set aside if the Crown is successful in the main appeals. Since the Crown was not successful, I would dismiss the other two appeals, without costs.