



COURT OF APPEAL FOR BRITISH
COLUMBIA




Citation:



British Columbia v. Burlington Resources Canada Ltd.,









2015 BCCA 19




Date: 20150116

Docket: CA040742

Between:

Her Majesty the
Queen in Right of the
Province of British Columbia

Appellant

(Defendant)

And

Burlington Resources
Canada Ltd.

Respondent

(Plaintiff)

Corrected
Judgment:  the word intangible was corrected to read tangible
in the second paragraph of the summary and in paragraph 57.




Before:



The Honourable Mr. Justice Lowry

The Honourable Mr. Justice Chiasson

The Honourable Madam Justice Stromberg-Stein




On appeal from:  An
order of the Supreme Court of British Columbia,
dated February 26, 2013 (
Burlington

Resources Canada Ltd. v. British
Columbia
,
2013 BCSC 292, Vancouver Docket S090759).




Counsel for the Appellant:



D.R. Poore





Counsel for the Respondent:



D.W. Pangman





Place and Date of Hearing:



Vancouver, British
  Columbia

October 20, 2014





Place and Date of Judgment:



Vancouver, British
  Columbia

January 16, 2015









Written Reasons by:





The Honourable Mr. Justice Chiasson





Concurred in by:





The Honourable Mr. Justice Lowry

The Honourable Madam Justice Stromberg-Stein








Summary:

The respondent Burlington
Resources Canada Ltd. procured well cementing services from BJ Services Company
Canada (BJ Services). BJ Services places cement in the annulus of wells,
and once set, the cement becomes part of the realty. Following a tax audit, the
appellant concluded that the materials associated with the cementing process
were sold as tangible personal property to the respondent by BJ Services and
attracted provincial sales tax (PST). The respondent objected to the
assessment of PST, claiming that its contract with BJ Services was a contract
of service and that it never had possession of the cementing materials, which
lost their character as tangible personal property once they set and became
affixed to the land. On appeal from the Ministers decision, the chambers judge
agreed with the respondent and set aside the assessments, holding that the
cement materials remained under the control of BJ Services until the work was
completed, at which point the materials were affixed to the land and title to
them passed to the Crown, which owns the real property. The Crown appealed,
submitting that the trial judge erred in her application of the burden of proof
in tax appeals and in her characterization of the contractual relationship
between the respondent and BJ Services.

Held: the appeal is
dismissed. The trial judge correctly stated that while the Crown is entitled to
rely on assumptions of fact in tax cases and the burden of proof lies with the
respondent, these assumptions may be demolished. Based on the evidence before
her, she found that the Crowns assumptions were demolished, and there was ample
evidentiary support for her to do so. She was correct to set aside the
assessments because the cementing material, the tangible personal property, did
not pass to the respondent before it lost that character and became part of the
realty. The Crowns assumption to the contrary was based on a misconception of
the initial auditor, who did not have and did not ask for the contractual
documents.

Reasons
for Judgment of the Honourable Mr. Justice Chiasson:

Introduction

[1]

This appeal concerns whether British Columbia provincial sales tax
(PST) is payable arising out of the supply to the respondent by BJ Services
Company Canada (BJ Services) of well cementing materials.  At issue is
whether taxable material was sold to the respondent and the application of the
rule that a taxpayer has the onus of disproving a taxing authoritys
assumptions of fact that are the foundation of a tax assessment.

Background

[2]

The respondent carries on the business of oil and gas exploration in
British Columbia and elsewhere in Canada.  It contracts with BJ Services
and other companies for the construction and service of its wells.

[3]

At issue in this case is the provision of well cementing and well
stimulation services by BJ Services to the respondent.  BJ Services
placed cement in the annulus of wells (the space between the outside of the
casing and the well bore).  Once set, the cement acts as a barrier to protect
the casing from corrosion and seals the well from fluids and gases that might
otherwise escape to the atmosphere.  The process makes the well casing an
immoveable part of the realty.

[4]

The Crown concluded that the materials associated with the cementing
process were sold as tangible personal property to the respondent by BJ Services
and attracted PST.

[5]

The respondent objected to the assessment of PST on the basis that its
contract with BJ Services was a contract of service.  It contends it did
not have possession of the cementing materials and they lost their character as
tangible personal property once they set and became affixed to the land.

[6]

On appeal from the Ministers decision, the chambers judge held that the
cement materials remained under the control of BJ Services until the work
was completed.  At that point, the materials were affixed to the land and title
to them passed to the Crown which owns the real property.

[7]

The assessments were set aside.

Reasons of the trial judge

[8]

The judges reasons are lengthy and thorough.  It was necessary for her
to examine many aspects of well construction.  On appeal the focus is somewhat
more limited.  I am grateful for the very full explanation provided by the
judge, but will attempt to limit my reference to her reasons to those portions
that are applicable to the issues on appeal.

[9]

The judge began by stating the issue and the positions of the parties:

[7]        Are the contracts between [the respondent] and BJ Services
properly characterised as service contracts to which the provision of materials
was incidental, or are they contracts by which BJ Services sold materials
to [the respondent]?

[8]        The Crown submits that the contracts were time and
materials contracts.  In other words, they are contracts for sale of the
materials from BJ Services to [the respondent].

[9]        The Crown further submits that the form of the
contracts is not determinative and that any transfer of tangible personal
property (TPP) for consideration regardless of the form of contract is
subject to PST.

[10]      [The respondent] states that the essence of the
contracts between it and BJ Services is determinative of the correct
characterisation as service contracts and not contracts for the sale of goods.

[11]      [The respondent]
further states that if this is not conclusive, pursuant to the [
Social
Service Tax Act
, R.S.B.C. 1996, c. 431], the materials which are used
by BJ Services and which both do and do not become affixed to the real
property in the course of providing services are not taxable.

[10]

She then examined the burden of proof in a tax appeal.  In summary,
because the taxpayer has direct knowledge of facts relevant to liability for
tax which may not be known or known fully by the taxing authority, the Crown is
entitled to make assumptions of fact when making an assessment.  These
assumptions must be pleaded if litigation ensues.  The taxpayer has the onus of
disproving the Crowns assumptions.

[11]

The judge clarified this onus:

[21]      The taxpayer has three options in dealing with the
facts assumed by the Crown in raising the assessment under dispute:

(a)        Challenging
the Crowns allegations that the facts were assumed;

(b)        Assuming
the onus of showing that one or more of the assumptions was wrong; and/or

(c)        Contending
that even if the assumptions were made, they do not of themselves support the
assessment under appeal.

(
Pillsbury Holdings Ltd. v. Minister of National Revenue
(1964)
,
64 D.T.C. 5184 (Ex. Ct.) at pg. 5188)



[23]      The taxpayer bears the burden of proving on a
balance of probabilities that the assumptions were not made or that the
assumptions are wrong.  (
Canada v. Loewen
, 2004 FCA 146 at
para. 8)



[25]      A court may draw a
negative inference from the taxpayers failure to adduce material evidence in
the taxpayers possession or control and conclude that the taxpayer has not met
its initial legal burden with respect to the assumptions.  (
Northland BCCA
2010
[
Northland Properties Corp. v. British Columbia
, 2010
BCCA 177] at para. 33)

[12]

At para. 27, the judge commented that s. 116 of the
Social
Service Tax Act,
R.S.B.C. 1996, c. 431 [
SSTA
], codified the
common law burden of proof.  It states:

Evidence that an assessment or
estimate has been made or a penalty has been imposed under this Act is proof, in
the absence of evidence to the contrary, that the amount stated in the
assessment or estimate or imposed as a penalty is due and owing, and the onus
of proving otherwise is on the person liable to pay the amount estimated,
assessed or imposed.

She observed at para. 29:

The Federal
Income Tax Act
,
R.S.C. 1985, c. 1 (5th Supp.), the legislation under which the common
law of assumptions and the taxpayers burden of proof developed, does not
contain such a provision.  Nor does the provincial statute, the
Corporation
Capital Tax Act
, R.S.B.C. 1996, c. 73 (CCTA) contain an equivalent
to s. 116.1 of SSTA.  In considering the CCTA, the British Columbia Court
of Appeal has suggested that a provision in the
Tobacco Tax Act,
R.S.B.C. 1996, c. 452,

which is identical to s. 116.1 of the
SSTA, may impose an even higher burden on the taxpayer than arises at common
law.  (
Northland BCCA 2010
at para. 13)

[13]

The judge went on to describe the well cementing provided by BJ Services:

[39]      Well cementing is a process in which quick-drying
cement is mixed with water and other additives (the materials) to produce a
slurry which is injected under pressure into a well casing in order to make a
well casing an immovable part of the real property and to reinforce the wells
walls, permitting better access to the wells contents.



[47]      In order to provide well cementing services, the
cementing materials are blended with water at the well site by BJ Services
using BJ Services mixing equipment to manufacture cement slurry.  The
cement slurry is then pumped continuously into the well by BJ Services
using BJ Services pumping equipment at high pressure through pipes rigged
up by BJ Services to the connection point of the casing at the top of the
well head.

[48]      The cementing materials provided by BJ Services
for use in the well services are in the possession of BJ Services at all
times.

[49]      All of the cementing materials brought to a well
site by BJ Services are mixed into slurry and pumped as described above. 
The cement slurry is pumped out of the bottom of the casing into the annulus.

[50]      In order for BJ Services to be paid for the
well cementing, the cement slurry must reach the annulus and set in accordance
with the treatment program designed for the well.



[52]      On occasion and in
particular in some projects, a portion of the cement slurry may reach the top
of the casing and come out of the annulus, resulting in waste cement slurry
which [the respondent] must dispose of.

[53]      No part of the well
services was conducted by [the respondent].

[14]

The judge addressed the contractual arrangements between the respondent
and BJ Services at length.  They include a provision referring to products
supplied by BJ Services stating that the risk of loss remains with [BJ Services]
until title passes upon [the respondents] acceptance of the products or equipment.
 This occurred when the respondent signed documentation acknowledging that the
work was completed (at para. 95).  The judge noted the respondents
position at para. 161:

BJ Services does not
request payment and is not entitled to be paid for the materials brought to the
well site until the materials have been used in providing a successful service
and [the respondent] has authorized payment of the invoices.

After canvassing the contractual
materials, she summarized the relevant provisions:

[169]    The contractual provisions relevant to this appeal
have been set out above.  In summary, they provide that:  the [Master Service
Agreement] governs the rights and obligations concerning all services,
materials, products or equipment provided by BJ Services to [the
respondent]; BJ Services is an independent contractor; if a party signs
the others forms for receipt or other purposes, the terms and conditions do
not modify the [Master Service Agreement] or any Work Order; the risk of loss
remains with BJ Services until title passes on [the respondents]
acceptance of the products or equipment; only authorized persons working for BJ Services
or its subcontractors are permitted to enter a work site where BJ Services
is working; and, the warranty period for products and materials consumed by
their ordinary use is ninety days rather than twelve months; and BJ Services
compensation is to be set out in the Work Order.

[170]    [The respondent] and BJ Services also entered
into SPCs [Special Purchasing Contracts] which by definition in the [Master
Service Agreement], were Work Orders.  There were 3 SPCs in effect during the
audit period.

[171]      Of most relevance, the services [in the SPCs] are
specified as stimulation and cementing services, and pricing discounts are set
out for those services.

[172]    [The respondent] submits
that the contract between it and BJ Services consists of the [Master
Service Agreement], the SPCs and any Work Orders for a specific well or
project.  I agree.

[15]

The judge commented on the pre‑contract evaluation undertaken by
the respondent and BJ Services:

[87]      In evaluating pricing, [the respondent] would only
look to the total projected costs of the services and not to the cost of the
components such as materials and service costs going into the cost of the
services.



[91]      In negotiating a discount or analyzing a bid, [the
respondent] considered the total cost of the well services and did not concern
itself with the charges listed for the material and services.

[92]      In proposing a discount
or making a bid, BJ Services looked at the projected total revenue it
could expect to obtain from [the respondent] for the well services and not at
the revenue attributable to products and materials or services.

[16]

At para. 102, the judge commented on the form of invoice submitted
by BJ Services:

the invoices are consistent in
that each invoice has, regarding materials, a column called Quantity Used. 
None of the invoices say Quantity Sold.

[17]

Relevant to the history of the treatment of cementing materials, the
judge reviewed historical interactions between the government and BJ Services:

[105]    Ms. Linda J. Smorang, the former Manager of Tax
& Treasury for BJ Services (formerly known as Nowsco), testified
regarding a conversation she had in the year 2000 with an individual in the
Refunds Group of the British Columbia government.  It was her evidence that the
individual told Ms. Smorang to stop charging PST on the materials used by BJ Services
in the course of providing cementing services to its customers.

[106]    As a result, BJ Services stopped charging PST
and started self-assessing as of October 1, 2000, which was the first day
of BJ Services fiscal year.  BJ Services also added an additional
one per cent to their BC surcharge to recoup the money BJ Services paid in
the self-assessment.

[107]    On September 11, 2000, Ms. Smorang sent a
letter to one of BJ Services customers in which she stated:

For your information, effective
October 1, 2000, we will no longer be charging British Columbia Social
Service Tax on our invoices for materials consumed in British Columbia.  Rather
we will self assess the sales tax on the cost of such materials.



[111]    On February 26,
2007, Mr. Joe Chahal, the government auditor, sent an email to Marlene
Madsen of [the respondent] in which Mr. Chahal stated, in part:

BJ Services Company Canada
provides time and material contracts for well cementing services, where the price
of the materials are separately stated from the service charges.  Therefore, [the
respondent] is liable for the cost of the cement, calcium chloride and other
materials purchased.  Our branch is treating all well cement service contracts
as time and material contracts.

[112]    On March 1,
2007, Mr. Chahal wrote to [Taxation Branch - Oil and Gas Sector Specialist]
Ms. Clarotto and stated, in part:

I am auditing [the respondent] and was advised by Appeals
& Litigation Branch to assess all purchases of materials purchased for the
well servicing invoices from BJ Services Company.  We treat all well
servicing contracts as time and materials, as opposed to lump-sum contracts. 
The auditors who had audited BJ Services Company had erroneously allowed
BJ to self-assess on the cement and other materials purchased and used under
these contracts

[18]

Mr. Chahal concluded his audit based on extrapolations from 51
invoices.  The judge noted, at para. 117, that the proceedings before her
were based on the same extrapolation method.  If [the respondent] can
establish that there is no tax payable on those 51 invoices, the appeal should
be allowed.

[19]

The judge discussed the audit and its conclusions.  I repeat salient
portions of her analysis:

[124]    In an email dated February 26, 2007, Mr. Chahal
advised [the respondent] that BJ Services Company Canada provides
time-material contracts for well cementing services where the price of
materials are separately stated from the service charges.  Mr. Chahal was
referring to the invoices from BJ Services to [the respondent].  He had
concluded that because there were separate line items in the invoices for
materials and labour or service, they were time and materials contracts, and [the
respondent] therefore would be liable to pay PST on the costs of the materials.

[125]    Mr. Chahal also advised [the respondent] that
the Ministry was treating all well service contracts as time and material
contracts.

[126]    One of the bases for Mr. Chahals conclusion
that the contracts were time and material contracts was because there was a
separate line item for products and for labour on the invoice.  Another reason
was that he understood that title passed before the material was installed as
realty.

[127]    Mr. Chahal did not consider whether BJ Services
provided the materials to [the respondent] or whether BJ Services used the
materials in the course of providing a service.  He concluded that the
cementing materials were sold as a sale of tangible personal property in
conjunction with the work performed.

[128]    Mr. Chahal agreed
in his testimony that his thought process was essentially to look at the 51
sample invoices where he noted the separate line item for materials and
labour.  From that he concluded that these were time and material contracts. 
He applied government policy to treat time and material contracts as a sale of
tangible personal property.  Therefore, in his opinion, PST was payable by [the
respondent].

[20]

Although Mr. Chahal had not seen the contractual documentation
between the respondent and BJ Services, the judge noted this would have
made no difference to his opinion because he had concluded that these were
time and material contracts and that sales tax was payable on the cost of the
materials.  She continued:

[131]    Mr. Chahal was asked about para. 2.34 of
the [Master Service Agreement] which states in its last paragraph, unless
otherwise stated in a work order, the risk of loss remains with contractor until
title passes upon companys acceptance of the products or equipment.  He
testified that would not have made any difference to the audit because the
statement of risk of loss being with the contractor until title passes is
standard with any contract.  He further stated: The question is when did title
pass?.  He was then asked: Your conclusion that title passes before
installation is based on the fact that you believe this to be a time and
material contract?.  He replied yes to that question.  His conclusion was that
the title to materials passed before it is installed to real property.

[132]    The audit was concluded
and the assessment was issued on the basis that the contracts between BJ Services
and [the respondent] were time and material contracts.  Pursuant to a policy of
the Ministry at that time, as set out in Bulletin SST072, in time and
material contracts, a tax was payable by the purchaser on the materials.  [The
respondent], it was determined, was the purchaser.

[21]

The judge then turned to the legislative framework which was followed by
a discussion of the Crowns assumptions.  These were summarized by the judge at
para. 143:

·

BJ Services provided the materials to its customers;

·

The materials were used for the benefit of [the respondent];

·

BJ Services purchased the materials on its own account for
the purpose of resale and not for its own use;

·

BJ Services charged for the materials used and the basis for
the provision of materials was that [the respondent] was to pay for material by
quantity and unit price;

·

Contracts for well services explicitly provided that a price
would be charged for material;

·

[The respondent] acquired the materials pursuant to the contract;

·

BJ Services did not provide the materials at its own expense;

·

[The respondent] used the materials or allowed BJ Services
to use the materials at its expense;

·

[P]rovision of the materials was not merely incidental to the
contracts.

She added:

[147]    In issuing the assessment, it was assumed that the [tangible
personal property] provided by BJ Services was purchased by [the
respondent] at the time of delivery.  It was assumed that delivery would have occurred
at the well site, but no more specific assumption was made with respect to the
exact time of delivery under the contract, except that such delivery occurred
prior to any installation of the [tangible personal property] in real property.

[148]    It was also assumed that the General Terms and
Conditions in the Price Books of BJ Services applied to the transactions. 
Specifically, it was assumed that the following condition in s. 11
applied:

Customer shall nominate a
responsible representative to be present throughout the performance of the
Services to designate and provide the point of connection into which
BJ Service Company Canada is to deliver any material and to designate the
quantities of which and the pressure and times at which same are to be
delivered.

[149]    The Crown interpreted
this provision to be a contractual term which applied to the transactions
indicating that the point and time of delivery of the materials was at [the
respondents] well site, but otherwise might change from transaction to
transaction.  Thus it was not necessary to assume a more specific time of
delivery.

[22]

After summarizing the contractual provisions the judge turned to
contract interpretation:

[182]    Returning to the onus upon a taxpayer in a tax case,
as stated by Mr. Justice Lowry in [
Trac v. British Columbia
, 2007
BCCA 60]

at para. 30:  The act of demolishing a ministerial
assumption entails proving on the balance of probabilities the material facts
that are within the taxpayers knowledge if those facts do not support the
assumption.

[183]    I am satisfied that [the respondent] has proven on a
balance of probabilities that the facts and assumptions relied upon by the
Crown are incorrect.



[185]    [The respondent] has proven that the contract with BJ Services
is not a contract for the sale of materials, but is a contract for services. 
It was formed between two corporations who contracted in their roles as a well
operator and a service provider in the oil and gas industry.  The terms and
provisions of the contract are consistent with those roles.  The operation of
the contract as described by the witnesses was consistent with the terms and
provisions of the contract.  Not only is the essence or true nature of the
contract a contract for services, but the terms as a whole on their plain
meaning form a contract for services.

[186]    Specifically, in their role as a service provider,
the evidence establishes that BJ Services purchased the materials for its
own use; the benefit to [the respondent] was a completed well service; [the
respondent] paid a price for the service which included the materials; the
price for the materials is set out in the contract; [the respondent] did not
acquire the materials pursuant to the contract; and [the respondent] was not
the user of the materials.  Provision of the materials is proven to be
incidental to the contracts.  The materials were not delivered to [the
respondent], but to the control of BJ Services at the site for their use
in mixing the cement or preparing for well stimulation in the course of their
provision of well services to [the respondent].

[187]    Accordingly, I find that
[the respondent] has demolished the Crowns assumptions.

[23]

Having concluded that the Crown could not rely on its assumptions, the
judge considered whether the Crown had established that the assessment was
valid.  The first question was whether the respondent failed to provide
complete disclosure resulting in a negative inference.

[24]

The judge observed that the audit was based on a sample of 51 invoices. 
Supporting material for the remaining approximately 1,000 invoices was not
produced by the respondent.  The Crown contended that it was not possible to
know the true nature of the contractual arrangements.  The judge reviewed the
positions of the parties.  She rejected the Crowns contention.  The judge then
turned to the assessment.

[25]

The Crown asserted that the contracts between the respondent and BJ Services
were time and material contracts based on the separate line items in the
invoices for materials and services [which were] determinative of the nature of
the contract.  The judge reviewed sale of goods law and administrative
practices and policies of the Crown.  She stated:

[205]

The issue for decision is
the application of the provisions of the SSTA to these facts. The inclusion of
materials as a separate line item on the invoices under column headed Quantity
Used is not determinative of the contractual arrangements between the parties
or the taxability of the transactions between the parties.

[26]

It was the Crowns position that the respondent was a purchaser because
there was a large-scale transfer of property to it for economic consideration. 
It relied on s. 5(1) of the
SSTA
:

5 (1) At the time of making a
purchase, the purchaser must pay to the government a tax at the applicable rate
under section 6.

[27]

The judge addressed this position stating:

[221]

On
the facts, [the respondent] did not acquire the incidents of title to the
materials when they arrived at the well site. Nor did they acquire title when
the materials were mixed and pumped into the well head. It was BJ Services
who controlled the pumping process. More fundamentally, it is without an air of
reality that [the respondent] would purchase mixed wet cement or any materials
at that point. For example, the well does not require mixed wet cement at the
well head in order to become operational and yield hydrocarbons. What is
required is that the annulus be filled and the casing become secured to the
earthen side of the well bore by cement which has set properly so that the
pumping of hydrocarbons can take place.

[222]

The service provided
by BJ Services is the application of their knowledge, skills and equipment
to ensure that the material has the required effect on the well. Again, for
example, BJ Services services include steps taken to determine the proper
mix for the cement for a particular geological and geographic location with
engineering input, and after arrival and mixing at the well, pumping it into
the well in correct quantities and at the correct pressure, so that it results
in a cemented well ready for production. The materials used are incidental to
the technical service provided.

She also noted that pursuant to the contractual
arrangements between the respondent and BJ Services the risk of loss
remains with BJ Services until title passed on [the respondents]
acceptance [of the products or equipment].

[28]

The judge observed:

[226]

The
title to the materials which became affixed to the real property passed to the
owner of the real property, in this case the Crown who owns the lands, by
accession. At the point in time when the materials became incorporated into the
realty, they ceased to be [tangible personal property].

[227]

With regard to the
materials that come out of the well bore, they have no use and must be disposed
of. In the case of the cement slurry returns, they are necessary to the
provision of the service in order that it can be determined that the cement has
been pumped to the bottom of the well bore and then up through the annulus to
the top of the annulus.

[29]

The judge rejected the Crowns submission that any transfer of tangible
personal property for consideration is subject to tax on the basis that the
respondent did not acquire the materials from BJ Services.

[30]

One of the Crowns assumptions was that BJ Services claimed an
income tax manufacturing and processing tax credit on the basis that it was
manufacturing and processing goods for sale.  The judge discussed jurisprudence
dealing with this tax credit and noted differences in the applicable
legislation.  In her view, the fact that BJ Services who is not the
taxpayer in this case followed a particular practice under the
Income Tax
Act
, R.S.C. 1985, c. 1 (5th Supp.), does not affect the
application of the SSTA to [the respondents] transactions with BJ Services.

[31]

The judge concluded:

[257]    
I find that none of the bases upon which the Crown relies demonstrate that the assessment
is valid. The Crown has not discharged the conditional legal burden.

She allowed the appeal from the assessment.

Positions of
the parties

[32]

The positions of the parties are set out in their factums as follows:

Appellant:

32.       The Trial Judge erred in law in applying the burden
of proof in tax appeals by finding that [the respondent] could (and did)
disprove the Crowns assumptions regarding the terms of its contracts with BJ Services
while failing to provide the contractual documents that govern the
Transactions.

33.       The Trial Judge erred in law in applying the burden
of proof in tax appeals by finding that [the respondent] could (and did) meet
its burden of disproving the Crowns assumptions about the contractual terms
governing all the Transactions simply by providing contractual documents
relating only to the 51 Sample Invoices.

34.       The Trial Judge erred in law by interpreting the
contracts on the basis of her view of the economic realities of the relationship
between [the respondent] and BJ Services rather than on the text of the
contracts.  Her determination
a priori
that in the oil and gas industry,
BJ Services was a service provider led her to conclude that the
contracts were service contracts.

35.       The Trial Judge erred in law in finding that
BJ Services provision of materials could not have been a sale of [tangible
personal property] because the provision was incidental to a contract for
services.  The dichotomy between contracts for the sale of goods and contracts
for services is a dichotomy that arises under sale of goods.  This court has
specifically rejected that dichotomy in applying the Act (
CW Agencies
v.
BC
, 2003 BCCA 52).

36.       The Trial Judge erred in law in distinguishing the
CW
Agencies
case on the basis that [the respondent] did not acquire the
materials it purchased from BJ Services and therefore was not a
purchaser subject to tax under the Act.  The Trial Judge relied on sale of
goods common law and dictionary definitions of acquire.  The Trial Judge did
not consider the expanded definition of acquire found in s. 29 of the [
Interpretation
Act
, R.S.B.C. 1996, c. 238].

37.       The Trial Judge made a palpable and overriding
error in concluding that [the respondent] had, in fact, provided the
contractual documents governing the 51 Sample Invoices.

Respondent:

42.       [The respondents] position with respect to the
errors alleged by the Crown is as follows.

43.       The trial judge did not err in applying the burden
of proof and finding that Burlington disproved the Crowns assumptions.  [The
respondent] produced thousands of pages of documents.  [The respondent] had no
notice that document disclosure was an issue until the Crowns closing
submission.

44.       The trial judge did not decide that [the
respondent] could disprove the Crowns assumptions by only providing documents
relating to 51 sample invoices.

45.       The trial judge did not interpret the contracts on
the basis of her view of the economic realities of the relationship between the
parties.  The judge analyzed the key terms of the contract between the parties
and applied the correct principles of contractual interpretation.

46.       The trial judge did not decide that there could not
have been a sale of [tangible personal property] because the provision of
materials was incidental to a contract for services.  The judge decided that [the
respondent] did not acquire [tangible personal property] at a sale.

47.       The trial judge was correct in deciding that [the
respondent] did not acquire the materials.  Even if the judge had considered
the definition of acquire in the
Interpretation Act
, her decision
would have been the same.

48.       The trial judge did not make a palpable and
overriding error in her findings regarding the contractual documents that [the
respondent] produced.

49.       [The respondent] submits
that the issues on appeal include the following:

a.         BJ
Services was the final user of materials that became affixed to land;

b.         [The
respondent] did not acquire materials before they became affixed to land;

c.         [The respondent] did not
acquire waste products at a sale.

Discussion

Preliminary observation

[33]

As noted, the judge discussed the burden of proof in tax cases
and the basis for the Crowns reliance on assumptions of fact.  It often is
said that the taxpayer must demolish those assumptions.  A very helpful
discussion of these matters is found in
Northland Properties Corporation v.
British Columbia
,
2010 BCCA
177.

[34]

Writing for this Court, Madam Justice Huddart stated:

[5]        Another critical distinction it will be helpful to
review is that between the onus, persuasive burden, ultimate burden, or
legal burden of proof in a case, and other evidential and tactical
burdens. The legal burden lies on the party whose responsibility it is to prove
a fact or an issue to the required standard of proof. If the party who bears
the legal burden fails to prove its case, or if the evidence weighs equally
between the two sides, then that party loses. There can be multiple legal
burdens of proof in a single action:

[6]        The
evidential
burden is not synonymous
with legal burden. An evidential burden means that a party has an obligation to
adduce sufficient evidence to put a matter in issue; it is not the same as
having the obligation to prove a fact. Care should be taken to use the term
only where appropriate.



[10]      The important point is that there are two legal
burdens in

a tax assessment appeal: the

initial legal burden on
the taxpayer to prove that the Ministers assumptions are incorrect, and, if
the taxpayer is successful, the conditional legal burden on the Crown to show
that the assessment as a whole is nevertheless valid:



[21]      Returning to the proper approach in an assessment
appeal, it is important to recall that, at the outset, the responsible Minister
assesses the tax, then communicates that assessment, and the assumptions on
which it is based, to the taxpayer. The need for the Minister to make
assumptions emerged because, in a self-assessment system, the taxpayer
generally has much greater knowledge of his or her affairs than the taxing
authority. The courts responded to this imbalance by permitting the taxing
authority to make assumptions of fact, on the basis of which it may assess the
taxpayer accordingly:  The corollary to this power is the principle that, on
judicial review, the taxpayer has the initial burden to rebut the Ministers
assumptions:



[26]      The use of demolish [with regards to the
taxpayers onus of rebuttal] has carried through to the present: The choice of
word is unfortunate, because it tends to cloud the actual nature of the
standard of proof. Demolishing does not imply a higher standard

[27]

The standard of proof
in discharging this burden is nothing more or less than the balance of
probabilities.

[Citations omitted; underlining
in original.]

Standard of review

[35]

The Crown addressed the standard of review in
its factum.  It contends:

38.       The standard of review on errors of law is
correctness.

The standard of review on errors of fact is palpable or
overriding error.  A palpable error is one that can be clearly or plainly
seen.  An overriding error is one which must have or may well have affected the
judges decision.

39.       The Trial Judges
error in finding that [the respondent] had adduced the contractual documents
governing the 51 Sample Invoices was palpable and overriding.  There was no
basis for her to make that finding and that finding undoubtedly formed the
basis for allowing [the respondents] appeal.

[Citations omitted.]

The Crowns assumptions

[36]

The
judge correctly stated the law concerning the effect of the Crowns assumptions
in a taxing case.  The judge addressed this as follows:

[14]

When
the word assumptions is used by the courts, it refers to all the findings,
conclusions or assumptions of fact made by the assessor. (
Johnston v.
Minister of National Revenue
, [1948] S.C.R. 486 at 489;
Northland
Properties Corp. v. British Columbia (Finance)
, 2012 BCSC 721 at para. 121)

[15]

Since
the decision of the Supreme Court of Canada in
Johnston
, in an appeal of
an assessment of tax, it is incumbent upon the Crown to set forth in its
pleadings the specific facts on which it relies in raising the assessment in
dispute. Facts on which the Crown relies in raising the assessment must be
accepted as facts in any proceeding which challenges the assessment unless
questioned by the taxpayer. (
Johnston
at 489‑490)

[16]

The
rule in
Johnston
has resulted in what is referred to as the reverse onus
on the taxpayer in so far as the assumptions of the fact made by the Crown at
the time of issuing the assessment. In other words, the taxpayer faces the onus
of disproving that which the Crown assumed. (
Anchor Pointe Energy Ltd. v. R.,
2003 FCA 294)

[17]

The
assumptions are accepted as true subject to being disproven by the taxpayer.
The taxpayer, who has firsthand knowledge of its affairs and therefore is in
the best position to adduce relevant evidence to prove the material facts,
necessarily bears the legal burden of disproving, on a balance of
probabilities, that the assessors findings, conclusions, or assumptions of
fact are wrong. (
Trac
at para. 25; [Northland] at paras. 10,
15, 22, and 25)

[18]

The
rule with respect to the assumptions of fact made by the Crown has been
extended to include assumptions of fact made at the time of the consideration
of an appeal of the assessment by the Crown.

[19]

Proper communication of
the assumptions is achieved when the assumptions are set out in the Crowns
pleadings. The practice is for the Crown to disclose in its pleadings
assumptions of fact made at both the assessment and ministerial appeal level
upon which the determination of tax was based. Where pleaded, the assumptions have
the effect of reversing the burden of proof and casting on the taxpayer the
onus of disproving that which Crown has assumed. (
Anchor-Pointe
at
paras. 27 and 28)

[37]

It
is apparent immediately that the Crowns assumptions must be assumptions of
fact.  I repeat the judges summary of the Crowns assumptions:

·

BJ Services provided the materials to its customers;

·

The materials were used for the benefit of [the respondent];

·

BJ Services purchased the materials on its own account for
the purpose of resale and not for its own use;

·

BJ Services charged for the materials used and the basis for
the provision of materials was that [the respondent] was to pay for material by
quantity and unit price;

·

Contracts for well services explicitly provided that a price would
be charged for material;

·

[The respondent] acquired the materials pursuant to the contract;

·

BJ Services did not provide the materials at its own expense;

·

[The respondent] used the materials or allowed BJ Services
to use the materials at its expense ;

·

[P]rovision of the materials was not merely incidental to the
contracts.

The extent to which these are assumptions
of fact is questionable.

[38]

The judge addressed the position of the
respondent stating:

[150]    [The respondent]
challenges the assumptions on the following basis:

(a)        Certain
of the assumptions are assumptions of law and not assumptions of fact.

(b)        Certain
of the assumptions are made with respect to facts relating to BJ Services and
not [the respondent] and are therefore not assumptions which trigger the
reverse onus on [the respondent].

(c)        The
only assumption made by the Crown in issuing the assessment and the denial of [the
respondents] appeal of the assessment was that the materials were listed
separately on the invoice from a charge for services. This assumption of fact
will lead to the conclusion that the contracts between [the respondent] and BJ
Services were time and material contracts which resulted in a sale of the
materials listed on the invoice.

[151]    It is the submission of [the respondent] that the
essence of the contracts between it and BJ Services is that they are
contracts for the provision of services or service contracts and not contracts
for the sale of goods.

[152]    The evidence, [the
respondent] submits, supports its position and demolishes the Crowns
assumptions.

She then reviewed the evidence and the contractual material
that was before her.

[39]

In my view, there was evidentiary support for the judges conclusion. 
There also was support in the contractual material.

[40]

The Crown relied on BJ Services Price Book as being the applicable
contract, which it was not.  At the hearing, we were advised that counsel for
the Crown did not know whether the auditor requested contractual material from
the respondent.

[41]

The Crown asserts that a key assumption it made was described by the judge
at para. 147:

In issuing the assessment, it
was assumed that the [tangible personal property] provided by BJ Services
was purchased by [the respondent] at the time of delivery. It was assumed that
delivery would have occurred at the well site, but no more specific assumption
was made with respect to the exact time of delivery under the contract, except
that such delivery occurred prior to any installation of the [tangible personal
property] in real property.

This assumption was based on the General Terms and
Conditions in the BJ Services Price Book.  The auditor attached a copy of
this document to his Audit Report as being the terms and conditions of the
agreement between the respondent and BJ Services.  On the evidence, that
document was not applicable to the contract in issue.  The judge specifically
so found at para. 80.

[42]

The auditor was not aware of a Master Agreement that controlled the
arrangements between the respondent and BJ Services or other relevant
contractual documents.  Although counsel for the Crown did not know whether the
auditor asked the respondent for contractual documents, he agreed that failure
to do so was an error.

[43]

The Master Agreement states that risk remains with BJ Services,
unless otherwise dealt with in other documents.  Those documents did not
address risk.  The default provision was applicable.

The respondents
production of documents

[44]

The Crown contends strongly that the judge erred in her consideration of
the alleged failure of the respondent to produce required contractual
documents.  It asserts that this is not simply a document production issue, but
a failure to prove the respondents case.

[45]

The judge addressed the issue as follows:

[190]    I must first address the submission by the Crown
that, with regard to the documents produced by [the respondent], there is an
issue of incomplete disclosure by [the respondent]. It seeks that a negative
inference be drawn. Pursuant to
Northland BCCA 2010
, I may find that the
taxpayer has not met its initial legal burden. (para. 33)

[191]    The audit was based on a sample of 51 invoices for
the audit period. While the issue is not strongly taken for those 51 invoices,
the Crown says that supporting documents for the balance of the approximately
1000 invoices in the audit period were not disclosed and it is therefore not
possible to know the true nature of the contractual arrangements.

[192]    It says that this is particularly problematic
because approximately 45% of all invoices between [the respondent] and BJ
Services for the audit period relate to the Ring Border project in northern
British Columbia which was the subject of a special arrangement.

[193]    In response, [the respondent] submits that Mr. Chahal
was given direct access to [the respondents] electronic records during the
field audit in Calgary. He decided to use a proration method of extrapolating
and chose the sample of 51 invoices. The appeal utilized the same proration
procedure.

[194]    The Crowns pre-trial application for disclosure of
any less formal pricing arrangements was adjourned generally after more than
1000 invoices, approximately 5000 pages of documents, were produced by [the
respondent]. The Crown did not pursue the issue before or at trial.

[195]    The pricing arrangements
are in evidence and are contained in the [Master Service Agreement] and the [Special
Purchasing Contracts]. The absence of evidence regarding invoices not included
in the audit sample of 51 invoices does not raise an adverse inference or
negatively affect the discharge of the onus on the taxpayer.

[46]

Insofar as the question was whether to draw an adverse inference, the
issue was within the discretion of the judge.  In my view, there is no basis on
which this Court would interfere with her exercise of discretion.

[47]

In my view, the absence of further documentation also does not undermine
the respondents position or the judges findings of fact.  She had evidence of
the actual operation of the project.  It was consistent with the contractual
material that was produced.  As a matter of fact, and consistent with the
contractual arrangement between BJ Services and the respondent, there was
no transfer of tangible personal property from BJ Services to the
respondent.

Whether the assessments
were valid

[48]

At the hearing of the appeal, the Crown contended that the legal form of
the arrangement between the respondent and BJ Services, not the financial
reality, governs in the contest of taxation.  This flows from the proposition
that, with limited exceptions, a taxpayer may organize its affairs as it
chooses in order to minimize tax.  That is, the form or organization is
respected.  That said, I question the extent to which the legal form of an
arrangement  a contract  could be divorced from the financial reality of the
parties.

[49]

The Crowns position at the hearing may be slightly at variance with its
apparent position before the trial judge. The Crown relies on
C‑W
Agencies Inc. v. British Columbia,
2003 BCCA 52.  The judge reviewed that
case carefully and distinguished it starting at para. 233:

[233]    The Crown submits that under the law in British
Columbia, any transfer of [tangible personal property] for consideration is
subject to tax under the SSTA
regardless of the form of contract
. [Emphasis
added.]

[234]    It relies on the 2003 decision of
Canadian
Overseas Marketing
v.

British Columbia
, 2003 BCCA 52 [
C‑W
Agencies
], where the British Columbia Court of Appeal interpreted the
meaning of provisions of the SSTA including s. 5(1), s. 17, and the
definitions of purchaser, purchase price and sale said:

[20]      From these provisions, it
is apparent the Legislature intended to capture for taxation purposes every
transfer of a good between persons for economic consideration, without regard
to its form or to the amount or mode of payment.

...

[22]      ... No identifiable price
need be stated, so long as the good being transferred is identifiable.
That
means every person who acquires an identifiable good in British Columbia for
his own use by way of a contract for consideration, whether for delivery to
himself or to another at his direction, must pay the social service tax
.
[Emphasis added.]

[235]    In
C-W Agencies
, the Court held that an
advertising agency which had prepared packages of promotional materials for its
clients and mailed those materials directly to prospective customers of its
clients made a sale of those materials to its clients.

[236]    The written and verbal contracts between C‑W
Agencies and its clients described themselves as contracts for services. The
Crown denied C‑W Agencies request for refund of tax paid for goods
purchased for resale or for incorporation into products for resale which are
not subject to tax.

[237]    At the appeal, the Crown argued that the contracts
between C‑W Agencies and its clients were, in substance, contracts for
services such that the provision of tangible personal property was only
incidental to such contracts for services. The Chambers judge accepted the
Crowns argument and upheld the refund denial. However, the British Columbia
Court of Appeal rejected the Crowns argument and held that the lottery
companies were purchasers who acquired tangible personal property under a
contract for consideration for their own use.

[238]    The Crown submits that the British Columbia Court of
Appeal decision in
C‑W Agencies
is the law in British Columbia
with respect to the sale of [tangible personal property]. It argues that on the
basis of
C-W Agencies
, it is irrelevant for the purposes of the SSTA

whether
goods were supplied pursuant to a contract for services. It follows that the
transfer of materials in this case cannot avoid taxation on the basis that it
is incidental to a contract for services. I am unable to agree with that
submission.

[239]    There are four relevant features identified in the
ratio of
C‑W Agencies
at para. 22 (emphasised above), all of
which must be present for a transaction to be taxable, and which are not all
present here. Those features are an acquisition of identifiable good, for the
persons own use, by way of a contract for consideration, and for delivery to
himself or another at his direction.

[Emphasis in original.]

[50]

The judge concluded that this Courts decision in
Re Commissioner
of the Social Services Tax Act and Con‑Force Pacific Ltd.
(1970),12
D.L.R. (3d) 490 (B.C.C.A.), was more on point:

[223]    This is similar to the case of
Re Commissioner of
the Social Services Tax Act and Con-Force Pacific Ltd
. in which Con-Force
contracted for a completed wharf or dock. It fabricated concrete piles and deck
panels at its plant and transported them to the site to be installed according
to its design and plans. They were installed under the supervision of
Con-Force. They were assessed for failing to charge and collect PST on the sale
of the piles and deck panels. On allowing their appeal, the Court of Appeal
held at para. 24:

24        The learned trial Judge
found, as the evidence warranted, that in each case the contract was for a
completed dock or wharf. In each case the design and engineering of the structure
was that of Con-Force and the structure was designed to withstand certain
designated stresses peculiar to the dock or pier in question. The piles and
panels were all designed and custom built for certain designed structures. If
the piles and panels were not used on that structure they were completely
useless and could not be used on any other structure unless it should happen
that the design of that structure were identical. The piles and panels designed
would likewise be of no use on the structure for which they were designed and
built unless tied into the structure and tensioned in accordance with the
procedures laid down in engineering plans made by Con-Force. The evidence
disclosed that unless the piles and panels were tied in as set forth in the engineering
plans prepared by Con-Force on the basis of which the contract was bid and the
post-tensioning work done as designed by Con-Force that the structure would
collapse like a house of cards.

Similarly, the formulated and mixed materials at the well head
are of no use unless they are properly utilized with BJ Services skill
and equipment.

[224]    The evidence is consistent with the terms of the
contract between BJ Services and [the respondent]. With regard to payment,
BJ Services is not paid for delivery of the materials to the well site.
They are not paid if the materials delivered to the well site are not used.

[225]    Of importance, by para. 2.34
of the [Master Services Agreement], the risk of loss remains with BJ Services
until title passes on [the respondents] acceptance. This provision regarding
risk of loss is in the same section of the [Master Service Agreement] as para. 2.31
which states that BJ Services shall decide how such services shall be
performed, and [the respondent] is interested only in the results obtained,
and has no control over the manner, method, or details of [BJ Services]
performance.

[51]

The judge rejected the Crowns contention that the contract between BJ Services
and the respondent was one of time and materials.  She held it to be a service
contract with the incidental supply of materials.  It clearly was open to her
to do so both on the documents and the evidence.  She observed:

[219]    [The respondent] submits that on the evidence and on
the operation of the [Master Service Agreement] it did not acquire all of the
incidents of title such as possession, use, control and risk. I agree.

[220]    The evidence is clear that BJ Services brought
the materials to the land in their trucks. The materials were stored in
BJ Services bins. The trucks and bins were verbally cordoned off from
persons who were not BJ Services employees. BJ Services personnel mixed
the materials and moved and pumped the materials with its own equipment. [The
respondent] did not exercise any control over the materials. BJ Services
controlled the materials at all times from their arrival at the site until the
completion of the well service and the signing of the field service order by [the
respondent].

[221]    On the facts, [the respondent] did not acquire the
incidents of title to the materials when they arrived at the well site. Nor did
they acquire title when the materials were mixed and pumped into the well head.
It was BJ Services who controlled the pumping process. More fundamentally,
it is without an air of reality that [the respondent] would purchase mixed wet
cement or any materials at that point. For example, the well does not require
mixed wet cement at the well head in order to become operational and yield
hydrocarbons. What is required is that the annulus be filled and the casing
become secured to the earthen side of the well bore by cement which has set
properly so that the pumping of hydrocarbons can take place.

[222]    The service provided by
BJ Services is the application of their knowledge, skills and equipment to
ensure that the material has the required effect on the well. Again, for
example, BJ Services services include steps taken to determine the proper
mix for the cement for a particular geological and geographic location with
engineering input, and after arrival and mixing at the well, pumping it into
the well in correct quantities and at the correct pressure, so that it results
in a cemented well ready for production. The materials used are incidental to the
technical service provided.

[52]

I see no error in this analysis or conclusions.

[53]

On appeal, the Crown relies on the definition of acquire in the
Interpretation
Act
, R.S.B.C. 1996, c. 238, and asserts that the judge erred in holding
that to acquire goods all the incidents of title were required.  This argument
was not presented to the trial judge.

[54]

In my view, little turns on the judges observation that the respondent
did not acquire all of the incidents of title.  The definition of purchaser in
the
SSTA
is one who acquires tangible personal property by sale.  The
simple fact is that the judge concluded that possession of the cementing
material was never transferred to the respondent by BJ Services.  In her
view, there was no air of reality to the contention that the respondent would
purchase mixed wet cement or any materials when the material arrived on site. 
The site was controlled completely by BJ Services.  The respondents
interest was in the final product (at para. 221).  These conclusions were
supported amply by the evidence.

Conclusion

[55]

I have quoted extensively from the reasons of the trial judge.  I did so
because they are thorough and address carefully all of the issues raised by the
Crown.  In a number of instances, I can do no better than to adopt the analysis
of the judge.

[56]

In my view, many of the Crowns assumptions were either assumptions of
law or of mixed fact and law on which the Crown was not entitled to rely, but
even if they are characterized as assumptions of fact, the judge correctly held
that the respondent had demolished them on the basis of evidence and the
contractual material before her.

[57]

The assessments cannot stand simply because the materials, the tangible
personal property, did not pass to the respondent before it lost that character
and became part of the realty as was found by the judge.  That conclusion,
again, was based solidly on the evidence and the contractual material before
the judge.

[58]

The Crowns assumption to the contrary was based on a misconception of
the auditor who apparently did not have, and did not ask for, relevant
contractual documents.

[59]

I would dismiss this appeal.

The
Honourable Mr. Justice Chiasson

I
agree:

The Honourable Mr. Justice Lowry

I
agree:

The
Honourable Madam Justice Stromberg-Stein


