Canadian Pacific Railway Company v. Canada

Canadian Pacific Railway Company v. Canada
Court (s) Database
Federal Court Decisions
Date
2021-09-29
Neutral citation
2021 FC 1014
File numbers
T-1359-07
Decision Content
Date: 20210929
Docket: T-1359-07
Citation: 2021 FC 1014
Toronto, Ontario, September 29, 2021
PRESENT: Mr. Justice Diner
BETWEEN:
CANADIAN PACIFIC RAILWAY COMPANY
Plaintiff
and
HER MAJESTY THE QUEEN
Defendant
and
ATTORNEY GENERAL OF SASKATCHEWAN
Intervener
JUDGMENT AND REASONS
Table of Contents
I. Introduction 3
II. Background 9
III. Partial Agreed Statement of Facts 10
1. Historical Background of the Construction of the Transcontinental Railway 10
(a) 1871 BC Terms of Union 10
(b) Initial Attempts to Construct Transcontinental Railway 11
(c) 1880 Contract 12
(d) 1881 CPR Act 15
(e) Issuance of the CPRC Charter and Incorporation in 1881 17
(f) CPRC Constructs and Operates the Railway 18
(g) Subsequent Corporate History 19
(h) Federal Taxation in Canada at the time of the 1880 Contract 19
(i) Extension of Manitoba boundaries in 1881 20
(j) Saskatchewan and Alberta Join Confederation in 1905 20
(k) CPRC Pays Certain Taxes or Makes Payments in Lieu of Taxes 21
(l) Federal taxes 21
(m) Provincial Taxes 27
(n) Events of the 1960s 28
(o) CPRC Invokes Clause 16 against Federal Taxation in 2004 30
IV. The Witnesses and Evidence 33
V. Issues 36
1. Clause 16 does not have constitutional force but does have statutory and contractual force 38
(a) Clause 16 does not have constitutional force 38
(b) Clause 16 has statutory force 65
(c) Conclusion on the legal status of Clause 16 86
2. The Kingstreet remedy does not apply in these circumstances 87
(a) Parties’ positions 88
(b) Analysis 92
(c) Conclusion on the Kingstreet remedy 122
3. Clause 16 must be interpreted using both contractual and statutory interpretation principles 122
(a) Identifying the interpretive framework to determine the scope of Clause 16 123
(b) Conclusion on interpretive principles applicable to Clause 16 134
4. Clause 16 applies to LCT, but not to Income or Fuel Tax 135
(a) The Parties’ arguments 135
(b) Surrounding circumstances: The historical context of the 1880 Contract 141
(c) Income Tax 145
(d) Fuel Tax 167
(e) LCT 199
(f) Conclusion on the scope of the Clause 16 Exemption 205
5. Clause 16 was neither repealed nor rescinded in the 1960s nor after CPRC’s 1984 continuance, with respect to federal taxation 205
(a) Effect of discussions and negotiations between the Parties in the 1960s 207
(b) CBCA continuance did not terminate Clause 16 223
6. No declaratory relief is warranted 234
7. With no available remedy, equitable defences raised need not be addressed 237
JUDGMENT in T-1359-07 240
Annex A: Map of Main Line 242
Annex B: Term 11 of the BC Terms of Union 243
Annex C: 1872 CPR Act 244
Annex D: 1874 CPR Act 253
Annex E: 1881 CPR Act, including text of 1880 Contract 264
Annex F: Copy of original, signed 1880 Contract 277
Annex G: CPRC Charter 280
Annex H: CBCA Articles and Certificate of Continuance 296
Annex I: Excerpts of Illustrated Catalogue of CPRC Facilities 304
I.
Introduction
[1] This case is about whether the Plaintiff should be exempt from certain taxes due to a single clause in the contract that led to its formation over 140 years ago. That clause states:
16. The Canadian Pacific Railway, and all stations and station grounds, work shops, buildings, yards and other property, rolling stock and appurtenances required and used for the construction and working thereof, and the capital stock of the Company, shall be forever free from taxation by the Dominion, or by any Province hereafter to be established, or by any Municipal Corporation therein; and the lands of the Company, in the North-West Territories, until they are either sold or occupied, shall also be free from such taxation for 20 years after the grant thereof from the Crown.
[2] In 1880, a railway syndicate was formed by George Stephen, who would become the first president of the Canadian Pacific Railway Company (“CPRC” or the “Company”), the Plaintiff in this action. Mr. Stephen’s syndicate (the “Stephen Syndicate”) signed a contract with the Defendant (“Canada” or the “Crown”) to construct Canada’s first cross-country railway (the “1880 Contract”).
[3] The railway had been promised to British Columbia (“BC”) under Term 11 of the BC Terms of Union (UK), 1871, reprinted RSC 1985, App II, No 10 [BC Terms of Union] the terms by which BC had joined Confederation nearly a decade earlier. Term 11 obligated Canada to construct a railway that would connect the BC seaboard with Canada’s railway system within ten years of BC’s entry into Confederation (the “BC Undertaking”).
[4] Under the 1880 Contract, Canada offered a number of incentives to CPRC to fulfill the BC Undertaking, including grants of money and land, to name a few. One of these incentives was Clause 16 of the 1880 Contract (“Clause 16” or the “Exemption”), reproduced above, which lies at the heart of this action.
[5] The year after the parties signed the 1880 Contract, Canada enacted enabling legislation, An Act respecting the Canadian Pacific Railway (1881), 44 Vict, c 1 [1881 CPR Act]. The 1881 CPR Act authorized the 1880 Contract’s grants of money and land, the Exemption, and other incentives to the Company. It also adopted the planned route of the railway as it had been established in the earlier Act to provide for the construction of the Canadian Pacific Railway Act, 1874, 37 Vict, c 14 [1874 CPR Act]. CPRC and Canada (the “Parties”) refer to this route, which was intended to satisfy the BC Undertaking, as the Main Line (“Main Line”, a map of the Main Line is reproduced in Annex A to these Reasons).
[6] Parliament annexed the 1880 Contract and the Letters Patent dated February 16, 1881 (the “CPRC Charter”), which incorporated CPRC, to the 1881 CPR Act. These three instruments – the 1880 Contract, 1881 CPR Act, and CPRC Charter (the “CPRC Instruments”) – provided the terms and incentives that enabled CPRC to construct the transcontinental railway line to BC, thereby helping Canada fulfill the BC Undertaking.
[7] The Company completed construction of the Main Line in late 1885. This pivotal Canadian achievement was memorialized in the well-known photograph of Company Director Donald Smith driving in the last ceremonial spike on the morning of November 7, 1885, at Craigellachie, BC. The photograph retains an iconic status in Canadian history because it forever commemorates the central role that the transcontinental line played in Canada’s nation building.
[8] The Plaintiff submits that Clause 16 imposed on Canada an obligation not to tax the Main Line. It contends that because Parliament enacted and ratified the 1880 Contract through legislation (the 1881 CPR Act), Clause 16 not only has statutory force, but it also has constitutional status because of its role in fulfilling Canada’s obligations under Term 11 of the BC Terms of Union.
[9] In this action, CPRC claims recovery of three taxes it alleges Canada collected in contravention of Clause 16: (i) income tax (“Income Tax”), (ii) large corporations tax (“LCT”), paid under the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], and (iii) fuel tax (“Fuel Tax”) under the Excise Tax Act, RSC 1985, c E-15 [ETA] (collectively, the “Taxes”).
[10] CPRC grounds its claim for recovery on a public law cause of action recognized by the Supreme Court of Canada (“SCC”) in Kingstreet Investments Ltd v New Brunswick (Finance), 2007 SCC 1 [Kingstreet]. In Kingstreet, the SCC removed certain barriers to restitutionary claims against public authorities.
[11] In addition to seeking Kingstreet restitution for the Taxes it claims were levied contrary to Clause 16, CPRC also seeks a number of forward-looking declarations relating to the Taxes and to Clause 16 generally. Specifically, it seeks declarations that:
a) any purported action that is inconsistent with Clause 16 is ultra vires and, to the extent of the inconsistency, of no force and effect;
b) the Defendant is not entitled to collect amounts under Part II of the ETA on diesel fuel purchased, consumed, or used in the operation of the Main Line; and
c) the Defendant is not entitled to collect these amounts under Part I of the ITA on income earned by CPRC in connection with the operation of the Main Line.
[12] As will be described later in these Reasons, the Plaintiff proposed revised wording of the first declaration in advance of an April 30, 2021 hearing, namely that any purported action of the federal Crown to tax or collect taxes on diesel fuel purchased, consumed, or used in the construction or working of the Main Line, or income earned by CPRC in connection with the operation of the Main Line, and on the capital stock of CPRC, is inconsistent with Clause 16 of the 1880 Contract, and therefore of no force or effect.
[13] Canada rejects the arguments and remedies sought by the Company. It argues that Clause 16 represents no more than a contractual right between the Company and the Crown under the 1880 Contract, and that neither Clause 16 nor any of the associated CPRC Instruments assumed a statutory or constitutional character. It submits that the Kingstreet remedy is not available on the facts of this dispute since Canada argues that no unconstitutional taxation arises.
[14] Moreover, although Canada accepts that the 1881 CPR Act has never been repealed directly, it points out that CPRC has historically been a taxpayer, including on the Main Line. Canada submits that the Company is now precluded from recovery, having failed to invoke Clause 16 before this litigation, and thereby has lost its right to do so under the equitable defences of laches, estoppel, and waiver and acquiescence.
[15] Canada further asserts that Clause 16 was rescinded in the 1960s or, in the alternative, that it ceased to apply to CPRC upon the Company’s continuance under the Canada Business Corporations Act, RSC 1985, c C-44 [CBCA] in 1984.
[16] Finally, Canada also asserts that the Federal Court is not the proper venue in which to challenge the Taxes, noting that the governing tax statutes provide for mechanisms under the purview of the Tax Court of Canada (“Tax Court”), of which CPRC ought to have availed itself. In Canada’s view, the limitation periods applicable to those mechanisms have now expired.
[17] CPRC served the Attorneys General with a Notice of Constitutional Question due to the constitutional issues raised. The Attorney General for Saskatchewan intervened, only making submissions with respect to the constitutional issue.
[18] Finally, in terms of the pleadings, prior to the issuance of the decision in References re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11 [GGPPA References] in March 2021, CPRC also claimed recovery of the charges it paid under the Greenhouse Gas Pollution Pricing Act, SC 2018, c 12, s 186 [GGPPA]. However, after the Supreme Court concluded in the GGPPA References (at paras 5, 212-219) that the charges imposed under the GGPPA are regulatory charges rather than taxes, the Plaintiff withdrew its claim to recovery of GGPPA payments, as Clause 16 relates only to taxation. Following the GGPPA References, CPRC also withdrew a claim for declaratory relief in relation to the GGPPA.
[19] History permeates not only the factual context of this case, but the action itself. These proceedings originated at this Court in 2007. Several motions and procedural steps have taken place in the years since, resulting in various interlocutory decisions, which included an order to bifurcate the trial into two stages: (i) liability and (ii) damages. This decision concerns the liability phase of the trial. Hearings took place remotely first in October and November 2020 to hear the evidence. Legal arguments followed in February and March 2021, and post-hearing conference took place on April 30, 2021.
[20] This is not the only action scrutinizing Clause 16 and its impact on taxation. CPRC also has ongoing proceedings in Alberta, Saskatchewan, and Manitoba (the “Prairie Provinces”), through which it challenges provincial taxation. These actions are at various stages of litigation. This action, however, is the first of the four related matters to go to trial on its merits.
[21] After considering all of the arguments, and for the reasons that follow, CPRC has not persuaded me that Clause 16 has constitutional status. I also find that Clause 16 does not apply to Income Tax or Fuel Tax. It follows that no recovery or declaratory relief are warranted in relation to these two taxes.
[22] I do, on the other hand, find that Clause 16 applies to LCT. I am satisfied that Clause 16 benefits from a statutory character, that it has not been rescinded or repealed, and that it exempts the Company from taxation on its capital stock captured by LCT. However, I am also of the view that the Kingstreet remedy – which I find to be a means to recover taxes unlawfully levied only under an unconstitutional statute – does not apply to the facts of this case. Additionally, because Canada eliminated its LCT in 2006, a forward-looking declaration, being entirely hypothetical, is not warranted under the circumstances, for that tax, or for any other. Thus, the Plaintiff’s cause of action fails, and no recovery or declaratory relief requested is available.
[23] The reasons for these conclusions follow. First though, a review of the background to this action provides the historical context that gives rise to the issues raised before this Court.
II. Background
[24] I note at the outset that while some of the statutes cited in this decision were adopted in both official languages and are equally authoritative in English and French, others, including the CPRC Instruments, were drafted exclusively in English, and the French text, where it is available, constitutes a translation. For consistency, and because this case concerns issues of contractual and statutory interpretation of the CPRC Instruments – thus the intention and the language chosen by the drafters being highly relevant – I include bilingual excerpts only where the statutes themselves were adopted in both official languages, and where both the English and the French text can therefore be considered equally authoritative.
[25] Prior to the start of trial, the Parties presented the Court with a Partial Agreed Statement of Facts (“PASF”); a non-disputed document that summarizes significant portions of the relevant history to this action. I reproduce the PASF below, with the Parties’ permission. I have removed the portion related to the GGPPA. I have also removed defined terms from the PASF that have already been established above, included references to Annexes to these Reasons where appropriate, and added citations where missing.
III. Partial Agreed Statement of Facts
[26] CPRC is a business corporation originally incorporated by Letters Patent under the Great Seal of Canada dated February 16, 1881.
1. Historical Background of the Construction of the Transcontinental Railway
(a) 1871 BC Terms of Union
[27] British Columbia joined the Canadian Confederation on July 20, 1871, in accordance with the BC Terms of Union.
[28] Under Term 11 of the BC Terms of Union, the Federal Government undertook to secure the commencement, within two years, and the completion, within ten years from the date of the union, of a railway that would connect the seaboard of British Columbia with the railway system of Canada. (The full text of Term 11 is reproduced in Annex B to these Reasons.)
(b) Initial Attempts to Construct Transcontinental Railway
[29] In June 1872, Parliament passed legislation to facilitate the construction of the transcontinental railway by private enterprise: An Act Respecting the Canadian Pacific Railway SC 1872, 35 Vict, c 71 [1872 CPR Act] (reproduced in Annex C to these Reasons).
[30] Among other things, the 1872 CPR Act authorized the Federal Government to grant a subsidy of up to $30 million and up to 50 million acres of land on either side of the Main Line of a future railway, and additional land subsidies for branch lines.
[31] Parliament passed two additional acts in 1872:
a) An Act to incorporate the Canada Pacific Railway Company, SC 1872, 35 Vict, c 73 a different company from the Plaintiff, led by Hugh Allan; and
b) An Act to incorporate the Inter-oceanic Railway Company of Canada, SC 1872, 35 Vict, c 72 a syndicate led by David MacPherson.
[32] The private sector railway construction efforts outlined in the 1872 CPR Act did not begin because of the “Pacific Scandal” of 1873, which involved allegations of political kickbacks to the Conservative government of Prime Minister John A. Macdonald.
[33] The Liberal government that came to power in 1873 was unsuccessful in attracting private capital to build the transcontinental railway and subsequently decided to build the railway as a government enterprise.
[34] In 1874, the Parliament of Canada passed the 1874 CPR Act (reproduced in Annex D to these Reasons). Among other things, the 1874 CPR Act repealed the 1872 CPR Act, noted the failure of construction of the railway in private hands, and authorized construction of the transcontinental railway as a public enterprise of the Federal Government. The 1874 CPR Act also provided a definition of the “Canadian Pacific Railway” by reference to its physical location and the branch lines to be included therein.
[35] In 1878, the Conservatives were re-elected to power, and continued to build the transcontinental railway as a government enterprise. However, progress was slow and the national treasury was being depleted by the expense of the project. With the ten-year period referenced in the BC Terms of Union approaching, the Federal Government again decided that the railway should be constructed and operated by private enterprise.
[36] In 1880, the Stephen Syndicate was formed for the purpose of constructing and operating the transcontinental railway. The syndicate was composed of George Stephen and Duncan McIntyre of Montreal, John S. Kennedy of New York, Richard B. Angus and James J. Hill of St. Paul, Minnesota, Morton, Rose & Co. of London, England, and Kohn, Reinach & Co. of Paris, France.
(c) 1880 Contract
[37] The 1880 Contract for the transfer of the existing portion, construction of the remaining portion, and perpetual operation of the “Canadian Pacific Railway” was entered into between the Stephen Syndicate and the Federal Government on October 21, 1880. (An original copy of the 1880 Contract is reproduced in Annex F to these Reasons, as well as in the Schedule to the 1181 CPR Act found in Annex E.)
[38] The 1880 Contract was signed by the Minister of Railways and Canals, Sir Charles Tupper, on behalf of the Federal Government, and the members of the Stephen Syndicate.
[39] Clause 16 contains the tax exemption at issue in this claim:
The Canadian Pacific Railway, and all stations and station grounds, work shops, buildings, yards and other property, rolling stock and appurtenances required and used for the construction and working thereof, and the capital stock of the Company, shall be forever free from taxation by the Dominion, or by any Province hereafter to be established, or by any Municipal Corporation therein; and the lands of the Company, in the North-West Territories, until they are either sold or occupied, shall also be free from such taxation for 20 years after the grant thereof from the Crown.
[40] Clause 1 describes the two parties to the 1880 Contract (the Company and the Federal Government), and further states that the railway would be referred to as the “Canadian Pacific Railway” as defined in the 1874 CPR Act (i.e., Main Line).
[41] Under clause 7:
a) the Federal Government agreed to transfer to the Company certain portions of the line already constructed or to be completed; and
b) the Company was required to “forever efficiently maintain, work and run” the Main Line.
[42] Under clause 9, the Federal Government granted the Company a subsidy of $25 million and 25 million acres of land.
[43] Under clause 10, the Federal Government agreed to grant lands required for the railway construction, including “the lands required for the road bed of the railway, and for its stations, station grounds, workshops, dock grounds and water frontage at the termini on navigable waters, buildings, yards and other appurtenances required for the convenient and effectual construction and working of the railway, in so far as such land shall be vested in the Government”, and permitted the admission of materials into Canada free of duty where intended for use in the original construction of the Railway.
[44] Clause 14 granted the Company the power to construct additional branch lines.
[45] Clause 15 provided the Company with a 20-year exclusive right to operate a railway in the region.
[46] Schedule A of the 1880 Contract prescribed the form of an act of incorporation, or draft charter, to be granted to the Stephen Syndicate and incorporating the “Canadian Pacific Railway Company”.
[47] On December 10, 1880, the Federal Government tabled the 1880 Contract in the House of Commons and introduced resolutions to appropriate the $25 million and the 25 million acres of land. The resolutions were debated by the Parliament of Canada and the Senate, and adopted on January 27, 1881.
(d) 1881 CPR Act
[48] The 1881 CPR Act (which includes the text of the 1880 Contract, as reproduced in Annex E to these Reasons) was then introduced in and enacted by Parliament. It received Royal Assent on February 15, 1881.
[49] The 1880 Contract, including the draft charter attached to it, was appended as a schedule to the 1881 CPR Act.
[50] The 1881 CPR Act provided for the construction and permanent working of the Railway. Its recitals state, in part:
Whereas by the terms and conditions of the admission of British Columbia into Union with the Dominion of Canada, the Government of the Dominion has assumed the obligation of causing a Railway to be constructed, connecting the seaboard of British Columbia with the Railway system of Canada;
And whereas the Parliament of Canada has repeatedly declared a preference for the construction and operation of such Railway by means of an incorporated Company aided by grants of money and land, rather than by the Government, and certain Statutes have been passed to enable that course to be followed, but the enactments therein contained have not been effectual for that purpose;
And whereas certain sections of the said Railway have been constructed by the Government, and others are in course of construction, but the greater portion of the Historic Main Line thereof has not yet been commenced or placed under contract, and it is necessary for the development of the North-West Territory and for the preservation of the good faith of the Government in the performance of its obligations, that immediate steps should be taken to complete and operate the whole of the said Railway;
And whereas, in conformity with the expressed desire of Parliament, a contract has been entered into for the construction of the said portion of the Historic Main Line of the said Railway, and for the permanent working of the whole line thereof, which contract with the schedule annexed has been laid before Parliament for its approval and a copy thereof is appended hereto, and it is expedient to approve and ratify the said contract, and to make provision for the carrying out of the same;
[51] The 1881 CPR Act provided as follows:
a) Section 1 approved and ratified the 1880 Contract, and authorized the Federal Government to perform and carry out the conditions of same;
b) Section 2:
permitted the Governor-in-Council to issue to the Stephen Syndicate, in conformity with the 1880 Contract, under the corporate name of the Canadian Pacific Railway Company, “a charter conferring upon them the franchises, privileges and powers embodied in the schedule to the said contract and to this Act appended”; and
provided that such charter, upon being published in the Canada Gazette, “shall have force and effect as if it were an Act of the Parliament of Canada, and shall be held to be an Act of incorporation within the meaning of [the 1880 Contract]”;
c) Section 3 permitted the Federal Government to grant money and lands to the Company for purposes of constructing the Railway, and stated in part:
Upon the organization of the said Company… and in consideration of the completion and perpetual and efficient operation of the railway by the said Company, as stipulated in the said [1880 Contract], the Government may grant to the Company a subsidy of twenty-five million dollars in money, and twenty-five million acres of land, to be paid and conveyed to the Company in the manner and proportions, and upon the terms and conditions agreed upon in the said contract, and may also grant to the Company the land for right of way, stations and other purposes, and such other privileges as are provided for in the said contract.
d) Section 4 permitted the Federal Government to grant duty-free admission of materials required to construct the Railway, including:
… all steel rails, fish plates, and other fastenings, spikes, bolts and nuts, wire timber and all material for bridges to be used in the original construction of the said Canadian Pacific Railway…
e) Section 5 authorized the transfer of the already constructed portions of railway line to the Company, as well as portions that the Federal Government was still completing.
(e) Issuance of the CPRC Charter and Incorporation in 1881
[52] Pursuant to s 2 of the 1881 CPR Act, the CPRC Charter incorporating the Plaintiff as the Canadian Pacific Railway Company was issued by the Governor-in-Council on February 16, 1881 (reproduced in Annex G to these Reasons).
[53] The CPRC Charter was in the form set out in Schedule A to the 1880 Contract. Among other things, the CPRC Charter:
a) Recites the fact of execution of the 1880 Contract and sets out the terms of the 1880 Contract;
b) States that the draft charter attached as Schedule A to the 1880 Contract was set out in the 1881 CPR Act;
c) Reproduces the recitals to the 1881 CPR Act, and states that the 1880 Contract and attached draft charter were approved and ratified by the 1881 CPR Act;
d) Recites the authority of the Federal Government as set out in ss 1 and 2 of the 1881 CPR Act; and
e) Grants Letters Patent of incorporation to the Stephen Syndicate on the same terms and conditions as the draft charter set out in the 1881 CPR Act.
[54] Section 4 of the CPRC Charter provides that the Company may avail itself of all the rights conferred to the Company under the 1880 Contract, and states:
All the franchises and powers necessary or useful to the Company to enable them to carry out, perform, enforce, use, and avail themselves of every condition, stipulation, obligation, duty, right, remedy, privilege, and advantage agreed upon, contained or described in the said [1880 Contract], are hereby conferred upon the Company. And the enactment of the special provisions hereinafter contained shall not be held to impair or derogate from the generality of the franchises and powers so hereby conferred upon them.
[55] The CPRC Charter was published in the Canada Gazette on February 19, 1881.
(f) CPRC Constructs and Operates the Railway
[56] CPRC completed construction of the Main Line in 1885. Since then, the Company has operated the Main Line and additional branch lines within Canada.
(g) Subsequent Corporate History
[57] The Company changed its name to “Canadian Pacific Limited” on July 3, 1971.
[58] Canadian Pacific Limited was granted a Certificate of Continuance under s 181 of the CBCA on May 2, 1984. That certificate provided for this continuance on the terms set out in the attached Articles of Continuance. (The Articles and Certificate of Continuance are reproduced in Annex H to these Reasons.)
[59] The Company reversed its name back to “Canadian Pacific Railway Company” on July 4, 1996.
[60] In 2004, CPRC transferred portions of the Main Line to a wholly owned subsidiary corporation, Mount Stephen Properties Inc. CPRC continues to maintain and operate the train service on these portions of the Main Line.
(h) Federal Taxation in Canada at the time of the 1880 Contract
[61] As of 1880, the Federal Government did not directly tax the income of individuals or corporations. There existed indirect federal taxation, including but not limited to customs duty (imposed on coal, oils, petroleum products, and wood) and excise tax (imposed on alcohol and tobacco).
[62] As of 1880, there was no direct taxation by any municipal or school authority within the Northwest Territories.
(i) Extension of Manitoba boundaries in 1881
[63] The province of Manitoba was established in 1870 over territory referred to as the “Postage Stamp”. In July 1881, the Federal Government expanded Manitoba beyond its original boundaries, by incorporating into that province lands which had formerly comprised part of the Northwest Territories.
[64] This expansion of Manitoba was provided for in An Act to provide for the extension of the boundaries of the Province of Manitoba, SC 1881, 44 Vict, c 14 [Boundaries Act]. Section 2(b) of the Boundaries Act stated in part:
The said increased limit and the territory thereby added to the Province of Manitoba shall be subject to all such provisions as may have been or shall hereafter be enacted, respecting the Canadian Pacific Railway and the lands to be granted in aid thereof.
(j) Saskatchewan and Alberta Join Confederation in 1905
[65] On July 20, 1905, the provinces of Alberta and Saskatchewan were formed and became provinces of Canada under the Alberta Act, SC 1905, 4-5 Edw VII, c 3 [Alberta Act] and the Saskatchewan Act, SC 1905, 4-5 Edw VII, c 42 [Saskatchewan Act].
[66] The Saskatchewan Act and the Alberta Act each contain the same s 24, which states:
The powers hereby granted to the said province shall be exercised subject to the provisions of section 16 of the [1880 Contract] set forth in the schedule to chapter 1 of the statutes of 1881, being an Act respecting the Canadian Pacific Railway Company [the 1881 CPR Act].
(k) CPRC Pays Certain Taxes or Makes Payments in Lieu of Taxes
[67] Since CPRC was established, new taxes have been introduced by different levels of government. These new taxes include federal and provincial income taxes, federal and provincial capital taxes, provincial business taxes, provincial sales taxes, federal and provincial fuel taxes, federal goods and services/harmonized taxes, and payroll taxes. CPRC has paid, or borne the economic burden of, these taxes. In some instances, CPRC has made payments in lieu of taxes without prejudice to its rights under Clause 16.
(l) Federal taxes
(i) World War 1
[68] In 1916, the Federal Government enacted The Business Profits War Tax Act, 1916, SC 1916, c 11 [BPWTA] for the purpose of raising revenues for the military effort of Canadian forces in the First World War.
[69] The BPWTA imposed a tax on the profits of corporations, including transportation businesses. That tax was imposed until the end of 1920.
[70] Prior to the passing of the BPWTA, CPRC submitted a petition to the Federal Government asserting that the proposed legislation did not apply to it because of Clause 16. At the same time, CPRC said that it would be willing to pay the tax without prejudicing its rights under Clause 16.
[71] The Federal Government took the position that the proposed legislation did not breach Clause 16 and that CPRC was liable to tax under the proposed legislation.
[72] CPRC and the Federal Government ultimately agreed to an arrangement that was reflected in an Order in Council approved on May 31, 1916.
[73] The May 31, 1916 Order in Council confirmed that payments by CPRC under the BPWTA would be accepted by the Federal Government without prejudice to CPRC’s position that Clause 16 applied.
[74] In 1917, the Federal Government enacted the Income War Tax Act, 1917, SC 1917, 7-8 Geo V, c 28 [Income War Tax Act, 1917]. This statute is the forerunner of today’s ITA.
[75] Under the authority of the separate War Measures Act, 1914, SC 1914, 5 Geo V, c 2 [WMA], by Order in Council dated March 14, 1918, the Federal Government required CPRC to pay special taxes in respect of earnings and ordered that such payment would relieve CPRC of liability under the BPWTA, any other statute of like nature, and the Income War Tax Act, 1917 from and after January 1, 1918.
[76] The Federal Government’s position was that these special taxes did not conflict with Clause 16. CPRC denied that the WMA authorized the imposition of such special taxes and asserted that their imposition contravened Clause 16. At the same time, CPRC expressed a willingness to pay the special taxes without prejudice to its rights under Clause 16. The Parties’ positions are outlined in an Order in Council dated October 29, 1918 (and approved October 30, 1918).
[77] By Order in Council dated December 20, 1919, the Federal Government repealed orders and regulations made under the WMA as of January 1, 1920. This included the above-noted Orders in Council dated March 14, 1918, and October 29, 1918.
(ii) Federal Income Taxes between 1920-1947
[78] CPRC paid or accrued federal income taxes under the Income War Tax Act, 1917 for the 1920 to 1947 taxation years.
[79] There is no available information to indicate that CPRC disputed its tax liability (to the extent there was any) under the Income War Tax Act, 1917 for 1920 to 1947, based on Clause 16.
(iii) Taxes under the ITA Since 1948
a. Part I ITA Incomes Taxes
[80] Income War Tax Act, 1917 remained in force until 1948, when it was replaced by the Income Tax Act, SC 1948, c 52.
[81] Since that time, CPRC has paid federal income taxes, or amounts in respect of federal income taxes, under Part I of the ITA for years where it had net taxable income.
[82] There is no available information to indicate that CPRC filed federal income tax returns since 1948 in which it claimed the Exemption on its income or earnings attributable to the Main Line.
[83] In the six years prior to the commencement of this action in 2007 and up until and including the 2014 taxation year, CPRC was not assessed Part I Income Tax liability.
[84] After this action was commenced, CPRC was assessed and paid Income Tax for the 2015, 2016, 2017, 2018, and 2019 taxation years.
b. Part I.3 ITA Large Corporations Tax
[85] In 1990, Part I.3 was added to the ITA. This established an LCT, computed by reference to long-term liabilities, the capital stock, and retained earnings of large corporations.
[86] CPRC paid LCT to the Federal Government between 1990 until 2005. As described below, CPRC sought refunds for portions of those payments based on the Clause 16 Exemption beginning in 2004.
[87] LCT was repealed as of January 1, 2006.
(iv) Other Federal Non-Income Taxes
a. Sales Taxes
[88] The Special War Revenue Act, 1915, SC 1915, 5 Geo V, c 8 [SWRA], was enacted in 1915 and was the forerunner to the ETA. In 1920, an excise tax on sales was enacted and in 1923 the tax was amended to become a “consumption or sales tax” payable by the “producer or manufacturer” of the goods.
[89] The SWRA was renamed as the ETA in 1947. The imposition of a federal sales tax under the SWRA was continued in Part VI of the ETA.
[90] In 1972, CPRC internally discussed claiming a Clause 16 federal sales tax exemption on materials manufactured by it for its own use. There is no available information to indicate that CPRC filed such a claim.
b. Excise Tax on Diesel Fuel
[91] Part III of the ETA was amended in 1986 to impose an excise tax on the manufacturers of diesel fuel effective September 3, 1985.
[92] Between 1986 and 1990, both federal sales tax (under Part VI of the ETA) and excise tax (under Part III of the ETA) were imposed in respect of diesel fuel.
[93] In 1991, the federal sales tax on diesel fuel was replaced with the Goods and Services Tax under Part IX of the ETA. Part III ETA excise tax on diesel fuel – the Fuel Tax – continues to apply.
[94] Fuel Tax is payable (i) by a manufacturer of diesel fuel on its first domestic sale and (ii) by an importer of diesel fuel upon importation into Canada.
[95] On subsequent domestic sales of diesel fuel, a supplier recovers the applicable Fuel Tax it paid by including an amount in respect of the Fuel Tax on its invoice to the buyer of the fuel. That amount may be separately broken out as a line item or not.
[96] CPRC purchases diesel fuel for use in its operations from several suppliers. Invoices or receipts received by CPRC in connection with its purchases of diesel fuel include an amount in respect of the Fuel Tax levied under Part III of the ETA for that fuel.
[97] CPRC has paid amounts to its suppliers to purchase diesel fuel without reference to Clause 16.
[98] As set out further below, in 2004 CPRC filed tax refund claims and statutory appeals with the Federal Government with respect to diesel fuel used in its Main Line operations, based on Clause 16.
(m) Provincial Taxes
[99] With respect to provincial taxation, CPRC has asserted Clause 16, including on the following occasions.
(i) 1909 Agreement with Government of Saskatchewan for Payments in Lieu of Gross Earnings Taxes
[100] Under The Railway Taxation Act, RSS 1909, c 40 [Railway Taxation Act] in 1908, the Saskatchewan government levied a tax on the gross earnings of railways operating within Saskatchewan.
[101] CPRC objected and took the position that the payment of the tax contravened Clause 16. Notwithstanding that, in 1909 an agreement was reached between CPRC and the Saskatchewan government for CPRC to make payments in lieu of the tax without CPRC waiving its right to the Exemption.
[102] CPRC and the Saskatchewan government agreed upon the amounts to be paid in lieu of the tax each year until 1935, when the Saskatchewan government refused to enter into another agreement. CPRC made those payments, while relying on its right to the Exemption.
[103] CPRC paid or accrued amounts to the Saskatchewan government, for taxes on CPRC’s gross earnings between 1934 and 1941.
[104] The Railway Taxation Act was suspended in 1941 pursuant to an agreement between the Saskatchewan government and Federal Government.
(ii) Manitoba Retail Sales Taxes
[105] In June 1971, CPRC applied for a refund of Manitoba retail sales tax on certain specified items for the years 1967 to 1970 based on the Exemption. In July 1972, Manitoba approved the application (with some minor adjustments) and granted the refund.
(iii) Saskatchewan Sales Taxes
[106] In the 1970s, CPRC disputed that Saskatchewan was entitled to levy sales taxes on CPRC under The Education and Health Tax Act, RSS 1965, c 66 based on Clause 16.
[107] In 1975, CPRC agreed to pay certain sales taxes going forward without prejudice to its position that it was exempt from the tax under Clause 16.
(n) Events of the 1960s
[108] In 1964, the governments of Alberta, Manitoba, and Saskatchewan lobbied the Federal Government to eliminate Clause 16, which prohibited municipalities in those provinces from taxing the Main Line and related property.
[109] By letter dated August 29, 1966, following an exchange of correspondence between the Parties, CPRC President Ian Sinclair wrote to Transport Minister Pickersgill:
You will recall conversations we have held over some months relative to whether as a contribution to the rationalization of Canadian transportation legislation, Canadian Pacific would be prepared voluntarily to forego the perpetual exemption from municipal taxation provided in Clause 16 of its contract of 21st October, 1880, which is the Schedule to the Canadian Pacific Railway Act, S.C. (1881) chap. 1.
This exemption from municipal taxation applies to the Historic Main Line of Canadian Pacific outside of the boundaries of the original “Postage Stamp” Province of Manitoba, across Saskatchewan and Alberta. This exemption has contractual, st