Assessment Review Board

Commission de révision de l’évaluation foncière

ISSUE DATE: April 19, 2016

FILE NO.: WR 138836

Assessed Person(s): Union Gas Limited

Appellant(s): Union Gas Limited

Respondent(s): Municipal Property Assessment Corporation (“MPAC”)

Respondent(s)/ Municipality(ies): City of Belleville, City of Burlington, City of Dryden, City of Hamilton, City of Kingston, City of North Bay, City of Temiskaming Shores, Town of Bracebridge, Town of Cochrane, Town of Gravenhurst, Municipality of Greenstone, Town of Hearst, Town of Iroquois Falls, Town of Smooth Rock Falls, Township of Coleman, Township of Edwardsburgh/Cardinal, Township of Evanturel, Township of Leeds and the Thousand Islands, Loyalist Township, Mattice-Val Cote Township, Township of Nipigon, Oro-Medonte Township, Papineau-Cameron Township, Severn Township, Municipality of South Dundas, South Stormont Township, Locality of Kirkland Lake, Locality Education of Timiskaming, Municipality of Port Hope, and Municipality of Temagami

Property Locations: See Schedule “A”

Roll Numbers: See Schedule “A”

Appeal Numbers: See Schedule “A” (deemed 2016 appeals)

Taxation Years: 2013, 2014, 2015 and 2016 (deemed appeals)

Hearing Event No.: 613840

Legislative Authority: Section 40 of the Assessment Act, R.S.O. 1990, c. A.31, as amended

Heard: February 9, 2016 in Toronto, Ontario

APPEARANCES:

Parties	Counsel/ Representative
Union Gas Limited	Peter Milligan and Jamie Walker
MPAC	Donald Mitchell
Municipality(ies)	No one appeared

DECISION OF THE BOARD DELIVERED BY SCOTT McANSH AND SUBUOLA AWOLERI

INTRODUCTION

1The only issue in these appeals is the proper classification of natural gas “gate stations.” These are properties where an odorant is added to “pipeline quality” natural gas before it is distributed to residential and small commercial customers. Union Gas Limited (“Union Gas”) is required by law to add this odorant, which smells like rotten eggs, to the natural gas. They argue that this legal requirement is determinative of these appeals.

2At issue is the interpretation of clause 6.(1)1.i of the General Regulation, O. Reg. 282/98 enacted pursuant to the Assessment Act. That clause states that any “land used for or in connection with, manufacturing, producing or processing anything” is in the industrial property class. Union Gas argues that adding an odorant to natural gas is not “processing anything” and, as a result, the gate stations should be in the commercial property class, pursuant to clause 5.(1)1 of the same Regulation, as land “that is not included in any other property class.” MPAC argues that this issue has been determined by this Board in Enbridge Gas Distribution Inc. v. Municipal Property Assessment Corp. Region No. 13, [2011] O.A.R.B.D. No. 256 (“Enbridge”) and that decision should not be interfered with. There, Member Wyger held that the operation at the gate station meets the tests of “processing anything” and the gate station there was therefore in the industrial property class. Leave to appeal that decision was denied by Justice Edwards in Enbridge Gas Distribution Inc. v. Municipal Property Assessment et al., 2012 ONSC 4901.

3We agree with Justice Edwards that there is no reason to doubt the correctness of Member Wyger’s decision in Enbridge. We find that the addition of an odorant to natural gas is a process that changes the character of natural gas and makes it significantly more marketable. We therefore confirm that the properties before us are properly classified in the industrial property class.

Facts

4The parties did not call any evidence, rather they entered an agreed statement of facts. The process for bringing natural gas to consumers has six steps:

(1) a producer extracts the raw natural gas from a producing well

(2) Union Gas purchases a specific amount of raw natural gas from the producer on behalf of its customers

(3) raw natural gas is transported by the producer to a processing plant to be processed into “pipeline quality” natural gas

(4) the processed unodourized “pipeline quality” natural gas is transported from the processing plant back to the producer

(5) “pipeline quality” natural gas is transported by the producer to one of the Subject Properties owned by Union Gas , where an odorant is injected to render the gas detectable and therefore safe

(6) “pipeline quality” natural gas is transported by Union Gas to its consumers through its local distribution network.

5The odorant used by Union Gas is Mercaptan. It is injected into the gas at the gate stations to make it smell like rotten eggs. Prior to entering the gate station the gas is odorless, upon its exit it has a strong odor. This is a safety requirement imposed by clause 4.21.1 of the Oil and Gas Pipeline Systems, CSA-Z662-2011 (the “Code”), which is incorporated in the Oil and Gas Pipeline Systems Regulation, O Reg 210/01 by way of section 8(1) of the Codes and Standards Adopted by Reference Regulation, O Reg 223/01, both of which are enacted pursuant to the Technical Standards and Safety Act, 2000, SO 2000, c 16.

6The parties agree that the applicable legal test to determine if the subject properties are used for “processing anything” is that set out in Minister of National Revenue v. Federal Farms Ltd. 1966 CanLII 884 (CA EXC), [1966] Ex CR 410, 66 DTC 5068; aff’d [1967] S.C.R. vi and Tenneco Canada inc. v. R., 1987 CanLII 9000 (FC), [1988] 2 FC 3; aff’d (1991) 91 D.T.C. 5207 (F.C.A.), which asks:

(1) whether the process changed the product in its form, appearance or nature; and

(2) whether the process made the product more marketable?

7Before we address the application of this legal test to the facts before us, we need to address the importance of the Enbridge decision to these appeals.

Enbridge

8In Enbridge, the facts were identical to those before us, though that appeal concerned one property and not thirty-two. In careful reasons, Member Wyger addressed nearly all of the same arguments presented to us. While that decision is not technically binding upon us, it was subject to scrutiny by Divisional Court, and carries a great deal of weight. A decision of this Board that is directly on point should be followed unless there is a significant change in circumstances or there are reasons to doubt that the previous decision is correct. The Divisional Court did not see any reasons to doubt the correctness of the decision in Enbridge, and neither do we.

9Union Gas contends that there is jurisprudence that is determinative of the appeal, which was not before Member Wyger. They point, specifically, to paragraph 47 of Enbridge, where Member Wyger stated that he,

searched the cases presented and the dictionary definitions therein to find some reference to support Mr. Fleet's contention that the addition of a legal or health or safety requirement or standard does not add to a product's marketability, but could find none.

Union Gas states that there were a number of decisions of the Federal Court that were not before Member Wyger that would have answered this question.

10In our review of the cases presented by Union Gas and the decision in Enbridge, it appears that there are five decisions of the Federal Court, which are referenced by Union Gas, which were not presented by the parties in Enbridge. These decisions are:

(1) Consumers’ Gas Co. v. Deputy Minister of National Revenue (Customs and Excise), [1972] FC 1057 (“Consumers’ Gas”)

(2) Demolition A.M. De L’Est Quebec Inc. v. Minister of National Revenue, 1993 CanLII 17181 (TCC), [1993] 2 CTC 2447 (“Demolition”;

(3) Harvey C. Smith Drugs Ltd. v. Minister of National Revenue, 1986 CanLII 7450 (TCC), [1986] 1 CTC 2339 (“Harvey Smith”); aff’d 1992 CanLII 14733 (FC), [1992] 3 FC 363 (“Harvey Smith FC”); aff’d [1994] 1 CTC 323 (FCA)

(4) Midland Transport Ltd. v. R., 1994 CanLII 19344 (TCC), [1994] 2 CTC 2303 (“Midland”)

(5) Repsol Canada Ltd. v. R., [2015] 3 CTC 2048 (“Repsol”)

As set out below, we do not view any of those cases as determinative of the central issue before us. It is unlikely that a decision of this Board will ever canvas all of the jurisprudence that touches on the topic before it. A failure to consider peripheral cases, such as these, does not remove the highly persuasive nature of previous decisions of this Board that directly dispose of the issue.

National Code

11Union Gas raised an issue before us that was not directly addressed by Member Wyger. They argued that the wording of clause 4.21.1 of the Oil and Gas Pipeline Systems indicates that the addition of the odorant is not processing. That clause states:

Fuel gas that is to be delivered to customers through distribution lines or service lines, or to residences associated with a compressor station, and that does not naturally possess a distinctive odor to the extent that its presence in the atmosphere is readily detectable at all gas concentrations not less than one-fifth of the lower explosive limit, shall have an odorant added to it to make it so detectable, except that odorization shall not be necessary for such gas delivered for further processing or use where the odorant would serve no useful purpose as a warning agent.

12Union Gas argues that, in using the term “further processing,” the Code is specifying that processing took place prior to the addition of the odorant. While the Code can be read that way, it is far from clear that the addition of the odorant is not a process. “Further processing” could refer to processes after the addition of the odorant, however, it could just as easily refer to processes prior to that stage. Certainly, a technical guidance on the handling of natural gas does not determine if the properties fall within clause 6.(1)1(i) of the General Regulation. We put no weight on the wording of the legal requirement to add an odorant to natural gas.

Change in Form, Appearance or Nature

13The first question to be answered in determining if anything is processed on the properties is if the process changes the form, appearance or nature of the product. As noted in Respol, at paragraph 110, “the test for processing is not that it must produce new products, but simply change the product.” We agree with Member Wyger, at paragraph 36 of Enbridge, that “the product entering the gate station cannot be said to be ‘fully formed’ until after the odourant is added to it.” In adding a smell to the gas, the nature of the product is changed. It was odorless going in and has a strong odor coming out.

14Union Gas argues that the form of the gas is not changed through the addition of the odorant because that change can be reversed. They rely on Consumers’ Gas, where the Federal Court of Appeal held, at paragraph 10, that changing the pressure of natural gas cannot “be regarded as either ‘manufacture’ or ‘production’” While the Court of Appeal did focus on the reversibility of the pressure change in reaching that conclusion, we do not view a change in pressure as analogous to the addition of an odorant. This is another issue that was squarely addressed by Member Wyger in Enbridge. He stated, as paragraph 34, “the reduction in the pressure of the gas is not a change in the quality or characteristics of the product.” We agree.

15Union Gas also raised some argument that the gas remains gas as it goes through the gate station. While this is true, we find the statement of Justice Miller, in paragraph 107 of Repsol helpful:

citing the possibility of two municipalities side by side, one which requires fluoride in the town’s water and one which forbids fluoride in the water. [T]hey are not the same, something has had to have happened to one to in fact distinguish it from the other. It is inaccurate to suggest water is water is water.

The addition of the odorant is similar to the addition of fluoride in this example. The gas is changed as it passes through the gate station.

More Marketable

16In addition to being a change in form, we must be satisfied that the changes to the product that take place on the properties increase its marketability. We agree with Member Wyger, at paragraph 48 of Enbridge, that the addition of the odorant, as a legal requirement, is a perquisite to marketing the gas. That is, without the odorant the gas cannot be sold to certain customers. The increase in marketability is nearly infinite, from none to some. That is certainly more marketable.

17Union Gas argues, however, that because the odorant is a legal requirement it cannot be said to increase the marketability. They rely on Harvey Smith, where Justice Brulѐ of the Tax Court, held at paragraph 48, that a “legal requirement… does not increase the intrinsic economic worth or marketability of a product, though it may be the only legal way of getting the product to market.” While this may appear to be determinative, this point was explicitly reversed at the hearing de novo before the Federal Court. In Harvey Smith FC Justice Reed states, at paragraph 24, that “the drugs cannot be sold without the activity… the fact that this is required by law rather than being merely a personal requirement of the customer is not significant.” That was affirmed by the Federal Court of Appeal. Thus, the law on that point is that whether or not a step is legally required is irrelevant to a determination of marketability.

18Union Gas oddly contended that Justice Brulѐ’s decision in Harvey Smith was still the law. They note that the decision was cited in Midland and Demolition. We note that in each case it was not explicitly adopted by those courts. Further, even if it were adopted, that would not remove the authoritative statement on that point of law from the Federal Court in Harvey Smith FC. The law is clear that just because something is a legal requirement does not mean it does not increase marketability. As noted above, the addition of the odorant makes the gas marketable to portions of the market that were not available prior to the addition of the odorant. Exposure to markets is certainly an increase in marketability.

CONCLUSION

19The addition of an odorant to natural gas is processing as set out in clause 6.(1)1(i) of the General Regulation. The process changes the character of the gas and makes it marketable. As the properties listed in the Schedule are used for that process, they are all confirmed to be in the Industrial property class.

2016 DEEMED APPEAL

20An appeal for the 2015 taxation year is presently before the Board. Section 40.(26) of the Assessment Act provides that the appellant is deemed to have made the same appeal for the subsequent taxation year if the appeal is not finally disposed of before March 31 of the subsequent taxation year. The Board has not disposed of the 2015 appeal before March 31, 2016. For that reason, this decision also applies to the 2016 taxation year.

21Section 40.(26) of the Act directs:

Deemed appeals, 2009 and subsequent years

(26) For 2009 and subsequent taxation years, an appellant shall be deemed to have brought the same appeal in respect of a property,

(a) in relation to the assessments under sections 32, 33 and 34 for the year; and

(b) in relation to the assessment, including assessments under sections 32, 33 and 34, for a subsequent taxation year to which the same general reassessment applies, if the appeal is not finally disposed of before March 31 of the subsequent taxation year or, if an assessment has been made under section 32, 33 or 34, before the 90th day after the notice of assessment was mailed.