| February 6, 1990 | |
| Special Audits Division | Rulings Directorate |
| E.N. Gauthier | Resource Industries Section |
| Director | John Chan |
| 952-9019 | |
| Bob Neville | |
| Specialized Industries Section | File No. 7-4629 |
Subject: Request for Technical Interpretation Classification of Pipeline Schedule II of the Income Tax Regulations (the "Regulations")
We are writing in reply to your request for an interpretation regarding the proper classification of a pipeline and related gas gathering equipment for capital cost allowance ("CCA") purposes.
You described circumstances wherein a taxpayer acquires a pipeline and related gas gathering equipment (the "system") in an arms-length transaction. The taxpayer will use the System exclusively for the purpose of earning a fee for service in gathering and transmitting natural gas owned by third parties. The taxpayer does not own an interest in the gas reserves for which the System was established.
You then ask what the proper CCA classification of the system would be if the System is used for gathering and transmission of natural gas to
(a) a main transmission line operated by an unrelated public utility,
(b) a gas plant owned by a third party, and
(c) a straddle plant owned by a third party.
Your Opinion
In your view, the pipeline used in situations (a) and (c) above would be property described in Glass 2 or 1 depending on the date of purchase, whereas the pipeline used in situation (b) would be eligible for Class 10 or 41 treatment depending on the date of purchase.
Our Comments
We concur with your classification of the pipelines in the situations described above.
Class 2 (Class 1 for acquisitions after 1987) includes property that is a pipeline, other than gas or oil well equipment. "Gas or oil well equipment" is defined in subsection 1104(2) of the Regulations and includes, in paragraph (b) thereof, a pipeline acquired to be used solely for transmitting gas to a natural gas processing plant - such as a pipeline used in situation (b). Class 10 (Class 41 for acquisitions after 1987) includes property that is gas or oil well equipment.
The definition of "gas or oil well equipment" specifically excludes therefrom a pipeline for removal, or for collection for immediate removal, of natural gas from a gas field except when used for transmission to a natural gas processing plant. This exclusion would apply to the pipeline used in situation (a) where the taxpayer's pipeline transmits sweet gas (i.e. gas which requires little or no processing) from the gas field. said pipeline would therefore be eligible only for Class 2 (or Class 1) classification.
On the basis of an informal opinion by John Kurrant, Oil and Gas Specialist that a straddle plant (i.e. a plant in which by-products such as butane, propane, ethane, etc. are produced from processed gas), is not a natural gas processing plant (i.e. a plant in which produced or natural gas is processed by removal of water and sulphur therefrom) we share your view that the pipeline described in situation (c) would not qualify as gas or oil well equipment and, as a consequence thereof, would be classified as Class 2 or Class 1 as the case may be.
Classification of the related gas gathering equipment would be determined by the type of equipment included therein. We refer to Nova, an Alberta Corporation vs The Queen, 88 DTC 6386, F.C.A., in which a "pipeline" referred to in Class 2 was held to be a component of a "pipeline system" and pipes and valves within a compressor station on the pipeline system was permitted classification as Class 8 property, notwithstanding that the pipeline itself was classified as a Class 2 property.
In conflict with the Nova decision is the case of Northern and Central Gas Corporation Limited vs The Queen, 87 DTC 5439, F.C.A., which held that the words "distributing" and "distribution" in Class 2 are used in a broad and general sense and would include a transmission system in the natural gas industry, which, in turn, would include a pipeline system. In the Northern decision, a liquified natural gas plant located on a transmission line was held to be Class 2 property.
These conflicting decisions have resulted in confusion for both the Department and for taxpayers in other industries because they have posed but left unanswered the questions of
(i) whether one applies industry standards for interpreting the Act, and
(ii) whether it is the business operations of the taxpayer or the use of the property which is determinative in classifying property for CCA purposes.
However, it is our view that where related gas gathering equipment is not included in any other class in schedule II of the Regulations and such property qualifies as "gas or oil well equipment" contemplated in subsection 1104(2) of the Regulations, this property would be classified as Class 10 or Class 41 as the case may be.
DirectorBilingual Services and Resource Industries DivisionRulings Directorate