CITATION: Great Lakes Power Limited v. Municipal Property Assessment Corporation et al., 2013 ONSCDC 4776

Divisional Court File No.: 915/12

DATE: 20130926

SUPERIOR COURT OF JUSTICE – ONTARIO

DIVISIONAL COURT

APPLICATION under section 46 of the Assessment Act, R.S.O. 1990, c. A. 31

RE: Great Lakes Power Limited (Applicant/Respondent in Appeal)

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Municipal Property Assessment Corporation, The Corporation of the City of Sault Ste. Marie, The Corporation of the Township of Michipicoten, Michipicoten Locality Education, and The Sault Ste. Marie Board of Education (Respondents/Appellant and Respondent in Appeal)

BEFORE: Matlow, Hockin, C.A. MacDonald, JJ.

COUNSEL: Adam Stephens, for the Applicant (Respondent in Appeal)

Donald G. Mitchell, for the Respondent (Appellant)

HEARD February 26, 2013 in Sudbury

E N D O R S E M E N T

HOCKIN, J.:

[1] The Municipal Property Assessment Corporation (“MPAC”) appeals from the decision of Ellies J. of July 6, 2012 exempting from real property taxation under the Assessment Act, R.S.O. 1990, c. A.31 (the “Act”) certain machinery and equipment affixed to eleven hydro-electric generating stations owned and operated by Great Lakes Power Limited (“GLP”) across northern Ontario.

[2] GLP’s proceedings were taken by way of application for a declaration that a number of components which are functionally important and common to its hydro-electric generating stations were exempt under s. 3(1), para. 18 of the Act. The Act’s definition of “real property” and the exemption provision read as follows:

1. (1) In this Act,

“land”, “real property” and “real estate” include,

(d) all buildings, or any part of any building, and all structures, machinery and fixtures erected or placed upon, in, over, under or affixed to land,

3. (1) All real property in Ontario is liable to assessment and taxation, subject to the following exemptions from taxation:

4. All machinery and equipment including the foundations on which they rest to the extent and in the proportion used for producing electric power for sale to the general public but not including any buildings, structures, structural facilities or fixtures used in connection therewith.

[3] It is common ground that the tasks of interpretation and fact finding for Justice Ellies were difficult ones. For the purpose of the Act, there are no definitions of “machinery and equipment” and “buildup, structures, structural facilities or fixtures”. The parties did what they could by calling expert evidence from engineers on the general operation of a hydro-electric generating station, evidence on the functions of the components and the proper characterization of the many components in issue. The hearing before Justice Ellies extended over three days. There was extensive argument. After taking the matter under reserve, he delivered lengthy and in our view, complete reasons on why the items in issue fell inside or outside the definition/meaning of “machinery and equipment” in this case.

[4] At the heart of the appeal is the appellant’s submission that the application judge’s characterization of the items in issue followed the “integration test” and in that he committed an error in principle. This ground of appeal, as set out in the Notice of Appeal is as follows:

1. Paragraph 18 of subsection 3(1) of the Act provides an exemption from property tax for all machinery and equipment including the foundations on which they rest to the extent and in the proportion used for producing electric power for sale to the general public but not including any buildings, structures, structural facilities or fixtures used in connection therewith.

2. The application judge erred in law by finding that the penstocks and surge tanks, which were conceded to be structures, could also be equipment within the meaning of section 3(1)18 of the Act. Specifically, the judge erred in applying the “integration test” rejected by the Court of Appeal in Nabisco Brands Ltd. v. Ontario (Regional Assessment Commissioner, Region No. 15) 91988), 2003 43566 (ON SC), 64 O.R. (3d) 135 to determine that the penstocks and surge tanks are equipment.

3. Having determined that “structural facilities” in paragraph 18 of section 3(1) of the Act refers to “a structure designed or constructed for a particular activity or purpose” the application judge erred in finding that the penstocks and surge tanks are not structural facilities or structures within the meaning of the Act.

[5] In our view, the application judge did not apply the “integration test” but followed carefully the difficult path set by the Court of Appeal by Arnup J.A. in Metals Alloys Co. Ltd. v. Regional Assessment Commissioner, Region No. 15, (1985), 1988 4594 (ON CA), 64 O.R. (2d) 135 (O.C.A.) and Dubin J.A. in Re: Nabisco Brands Ltd. and Regional Assessment Commissioner, Region No. 15 (1988), 64 O.R. (2d) 135 (O.C.A.).

[6] The high water mark for the integration test was the following statement by Costello J. in Babcock and Wilcox Ltd. v. Regional Assessment Region No. 21, January 29, 1980, unreported but cited by Arnup J.A. in Metal Alloys at p.301, supra.

The judges in each of the cases, as I did, dwelt at some length on the description of the peculiar structure or process involved but each case was resolved on the application to the facts of the individual case of the same principle: “Does it form an integral part of the over-all or general process of the same person of manufacturing from raw material to a finished product?”

[7] In Metals Alloys the integration test was rejected by Arnup J.A. in favour of a wider approach. At p. 303 he stated as follows:

Mr. Chernos submitted that the approach taken in these cases, and especially the “test” enunciated by Judge Costello, was fallacious in that the “integration test”, which Mr. Chernos agreed was a valid consideration in deciding whether the machinery was being used for manufacturing purposes, had been used in determining whether the item was a “building or structure”, on the one hand, or “machinery” on the other. Mr. Chernos submitted that the tribunal of fact should first decide if the “item” was a building. If it was, the question of use, integrated or otherwise, was irrelevant. During the argument, I expressed the view, which I still hold, that the question: “What is this item used for?” is an appropriate question for the assessor, or the tribunal of fact, to ask. It is, however, only one of the questions to be asked and answered. Other questions are: How is this item constructed? Why was it constructed in this shape, or of this material, or of this size? Does it look like a building? Is it built like a building? Does something happen within or on this item that is an integral part of the manufacturing process, as distinct from happening within or on a piece of machinery that the item encloses?

[8] Three years later, Dubin J.A. in Nabisco sounded a note of caution that Justice Arnup’s observation that where “something physical happened” as part of the manufacturing process in or on the item was relevant to the item’s characterization was “pure obiter”. See p. 152, 1988 4594 (ON CA), 64 O.R. (2d) 135. In our view this was an instruction not to return to the single test approach of Babcock and Wilcox.

[9] In any event, there is the following useful statement by the Divisional Court in PPG Canada Inc. v. Ontario Regional Assessment Commission, Region No. 25 (1990) 40 O.A.C. 105 (Ont. Div. Ct.) where Reid J. summarized Metals Alloys and Nabisco as follows:

This approach contemplates two distinct analytical steps. The first one may be referred to as the characterization process. It requires that items be characterized as either “buildings or structures” on the one hand or “machinery or equipment” on the other hand. Following that process, step two need only be considered if the items have been characterized as machinery or equipment. If the items have been so characterized, it becomes necessary to determine whether the machinery or equipment is “used for manufacturing purposes.”

The approach laid down in Nabisco was essentially that adopted in Metals and Alloys. Both stipulated that the ordinary meaning of the words of s. 3(17) was to govern, rather than some extended definition such as had been adopted in Labatt and followed in other cases. Essentially one had to look at the thing in question and decide whether it fell into one category or the other in light of the ordinary meaning of the words.

Once the proper characterization is made, if the item is found to be a building or a structure within the meaning of the Act, that character cannot change merely because the building or structure is used, even in a most essential way, in the manufacturing process. It is less clear whether the use that the item is put to is a significant factor in the characterization process itself. In other words, is the use informative as to whether the item is a building or structure rather than machinery or equipment.

Dubin J.A. in Nabisco remarked that Arnup J.A.’s approach was somewhat different than the approach of the Supreme Court of Canada insofar as it treated use as a relevant factor in determining what the item is. However, Dubin J.A. did not reject the “use” approach; he merely concluded that even adopting this approach, the same result would follow in Nabisco.

It is thus clear that use is one factor that may be taken into account in characterizing the item under the first step. Others may also be used. Those which Arnup J.A. found to be relevant, indeed cogent, were:

“building”, however, is an ordinary English word, and in this statute should be given the meaning an ordinary person would attribute to it. What we have in this case looks like a building. It is almost identical to its neighbouring structure, which is admittedly a building. It is built like a building. It is used like a building. Nothing takes place in it or on it of a mechanical or chemical nature independently of and distinct from the various machines that it encloses. The only reasonable conclusion, in my view, is that it is a building.

These factors led him to conclude that the thing was a building.

In Nabisco, Dubin J.A. used certain aspects of the things under consideration which he described in the following passage:

In my respectful opinion, the judgment under appeal, as is the case of the judgments upon which the learned trial judge relied, has given an interpretation to the language of s. 3, para. 17, inconsistent with its intent and with any interpretation that the language can reasonably bear. By an extended definition of “real property”, machinery and fixture erected or Placed upon, in, over, under or affixed to land are constituted real property for the purposes of the Assessment Act and thus assessable, as are buildings and structures. What is exempt from taxation are not buildings or structures used for manufacturing purposes but machinery including the foundations upon which they rest, which are used for manufacturing purposes. Buildings and structures used for manufacturing purposes are not exempt from taxation. What is meant by machinery can clearly be ascertained by a reading of s. 3, para. 17, in its entirety, reproduced above, as well as other provisions of the Assessment Act. It is to be noted that although all machinery erected or Placed upon the land is assessable, not all machinery is exempt from taxation.

The relevant characteristics may differ in accordance with the facts of the case as will the significance to be accorded to them and there is no closed catalogue of governing characteristics.

The question thus becomes what would be the result of adopting the Metal and Alloys/Nabisco approach in this case. In deciding what the items are, one would look at all of the characteristics of the bins or silos not just at their use, although use could be relevant.

[10] We have not overlooked the appellant’s submission that the application judge could not, in law, at once describe penstocks and surge tanks as structures and machinery. However, there is this statement by Dubin J.A. in Nabisco, at p. 148:

…if not buildings, they are by any definition structures. Machinery erected or placed upon land including the foundation on which it rests and enclosed for protective purposes may in a sense be viewed as a structure but, nevertheless, would still constitute machinery and not a structure within the meaning of the Assessment Act.

[11] The inquiry, therefore, requires that one look at all the characteristics of the “item” including use to determine its character. That is what the application judge did. That his approach was the correct one is illustrated by the difference in result on his conclusion that an intake was taxable and a penstock was not.

[12] The second ground of appeal as set out in the Notice of Appeal is as follows:

4. The judge erred in his interpretation of the phrase “used for producing power” in paragraph 18 of subsection 3(1) by finding that machinery and equipment used to facilitate the economic production of hydroelectric power but not used directly in the process of transforming water to electricity, qualified as machinery and equipment used for producing electric power. Specifically, the judge erred in finding that various items of equipment including ice/trash booms, trash racks, stop logs, gates, guides, hoists and cranes used primarily for maintenance or safety purposes are used for producing electric power within the meaning of s. 3(1)18.

[13] The application judge’s reasons at paras. 120-138 contain a complete review of the authorities on this issue. We do not agree that the law required a finding that the item is “directly” involved in the transformation of water to electricity. In particular, and with the greatest of respect, we do not consider Justice Reilly’s view in U.L. Canada Inc. v. Ontario (Regional Assessment Commissioner, Region No. 20), [1994] O.J. No. 3116, at para. 20 that the “item in question must be directly involved in a ‘change’ or a part of the process from raw materials to finished product” to be supported by the authorities. He relied on the judgment of Vannier, D.C.J. in Weyerhauser Canada Ltd. v. Sault Ste. Marie, 1967 150 (ON SC), [1968] 1 O.R. 460 but the question for Judge Vannier was not whether the item was directly involved but was “an integral part of the overall process”. This was the basis of the approach of the application judge. It was the correct approach.

[14] Finally, we view as significant that there is no express requirement in section 3(i).18 of the Act for an item to be used in production “directly”.

[15] The standard of review applicable to Justice Ellie’s interpretation of section 3(1)18 of the Act is correctness. There is a thorough and in our view correct interpretation of the section by him in his lengthy reasons. It is not suggested that there were any errors of fact.

[16] For these reasons, the appeal is dismissed.

[17] Counsel, at the hearing, indicated that costs should follow the event and be fixed at $13,000 inclusive of tax. Cost are therefore fixed in that amount in the applicant/respondent’s favour.

Hockin, J.

Matlow, J.

C. A. MacDonald, J.

Released: September 26, 2013