Decision No. 33-R-2000
January 19, 2000
APPLICATION by the Canadian National Railway Company for a determination of the net salvage value of a line of railway on the Cudworth Subdivision in the province of Saskatchewan; and
APPLICATION by seven rural municipal governments in the province of Saskatchewan for a preliminary ruling that the value of assets acquired under the various Rehabilitation Agreements be excluded from net salvage value determinations; and
IN THE MATTER OF a hearing held in Saskatoon, Saskatchewan, from November 15 to November 19, 1999.
File No. T6338-3-1
TRIBUNAL
- Marian L. Robson
- Chairman of the Panel, Canadian Transportation Agency
- Jean Patenaude
- Vice Chairman, Canadian Transportation Agency
- Keith Penner
- Member, Canadian Transportation Agency
- Mary-Jane Bennett
- Member, Canadian Transportation Agency
- Gilles Dufault
- Member, Canadian Transportation Agency
APPEARANCES
- Winston Smith, Q.C. and James Foran, Q.C.
- Counsel, Rural Municipality of Bayne No. 371, Rural Municipality of Hoodoo No. 401, Rural Municipality of Fish Creek No. 402, Rural Municipality of St. Louis No. 431, Town of Wakaw, Town of Cudworth, Village of Domremy
- Witnesses
- Bob Elchuk, Alderman, Town of Wakaw
Lawrence Godin, Reeve, Rural Municipality of St. Louis No. 431
Louis Kolla, Reeve, Rural Municipality of Hoodoo No. 401
Joe MacLeod, Mayor, Town of Cudworth
Helen Roslinski, Reeve, Rural Municipality of Fish Creek No. 402
Dr. Lawrence Gould - William McMurray
- Counsel, Canadian National Railway Company
- Witnesses
- Sandra Mielitz, Vice President, Grain and Fertilizers, Prairie Division
Robert Feeney, Manager, Corporate Development, Strategic Planning
Marcel Leduc, Manager, Regulatory Costing, Financial Planning - Marc Shannon
- Counsel, Canadian Pacific Railway Company
- Heather Piercy
- Counsel, Canadian Pacific Railway Company
- Witness
- Deepak Ekbote, Director, Cost Research and Analysis
- Lucia Stuhldreier
- Counsel, Province of Saskatchewan
- Witnesses
- The Honourable Maynard Sonntag, Minister, Highways and Transportation
Bernard Churko, Senior Executive Director, Grain, Rail and Area
Transportation Planning Branch, Highways and Transportation
William Cooke, Grain and Rail Specialist, Grain, Rail and Area
Transportation Planning Branch, Highways and Transportation - Lee Morrison
- Member of Parliament, Cypress Hills-Grasslands
- Pat Stewardson
- Executive Director, Western Rail Coalition
- Paul Beingessner
- Western Rail Coalition
- Ron Gleim
- Western Rail Coalition
- Robert Lobdell
- Chairman, West Central Road & Rail Ltd.
- Glen Byrnes
- Vice Chairman, West Central Road & Rail Ltd.
- Bill Woods
- Secretary, West Central Road & Rail Ltd.
- Sinclair Harrison
- President, Saskatchewan Association of Rural Municipalities
- Lance LaFountain
- Secretary, Wood Mountain Road and Rail Committee
- Lonny McKague
- Red Coat Road and Rail
- Bob Peake
- Town of Cudworth
- Michael Klein
- Mayor, Village of Wood Mountain
- Mike Badham
- President, Saskatchewan Urban Municipalities Association
- William Drew
- Transportation Advisor, Canadian Wheat Board
- Armand Roy
- Rural Municipality of St. Louis
- Garry Mazurkewich
- Public Interest
I - INTRODUCTION
In response to the Canadian National Railway Company's (hereinafter CN) "Notice of Discontinuance of a Railway Line" published on May 6, 1998, the rural municipal governments of Bayne No. 371, Hoodoo No. 401, Fish Creek No. 402 and St. Louis No. 431, the Towns of Wakaw and Cudworth and the Village of Domremy (hereinafter the applicants) accepted to purchase a portion of CN's Cudworth Subdivision (hereinafter the railway line) in the province of Saskatchewan.
The applicants and CN were unable to reach agreement on the net salvage value of the said railway line. Subsequently, CN filed an application under subsection 145(5) of the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA) on June 22, 1999 for a net salvage value determination of the railway line.
On July 12, 1999, the applicants filed an application with the Canadian Transportation Agency (hereinafter the Agency) requesting that the Agency render a preliminary ruling that the net salvage value determination of CN's Cudworth Subdivision exclude the value of rehabilitation assets. The federal government had provided funding for such assets under various Rehabilitation Agreements concluded with CN and the Canadian Pacific Railway Company (hereinafter CP) between 1977 and 1990. The applicants also requested that the Agency convene a hearing to examine this matter.
After examining the applicants' request, the Agency determined that it would hold a public hearing into the rehabilitation asset issue. The Agency concluded that this issue has broad impact, not only on CN but also on CP as well as on other persons and governments who may be affected by or are interested in railway lines that have been the subject of Rehabilitation Agreement funding. The Notice of Public Hearing was issued on August 20, 1999.
The terms of reference for the hearing stated:
Specifically, the Agency will consider any impact the Rehabilitation Agreement funding may have on the nature and extent of a railway company's interest in railway lines that are transferred to governments pursuant to the provisions of Part III, Division V, of the CTA.
On September 10, 1999, the applicants submitted their additional arguments in respect of their application. CN and CP filed their answers in October and the applicants provided their reply on October 22, 1999.
In response to the Notice of Public Hearing, the Agency received fifty-two submissions from interested persons and governments, including such parties as the Province of Saskatchewan, the Saskatchewan Association of Rural Municipalities, the Saskatchewan Urban Municipalities Association, the Western Rail Coalition, the West Central Road & Rail Ltd. and the Canadian Wheat Board. A listing of all parties who filed submissions is found in the appendix attached hereto. A number of these submissions were presented orally at the hearing.
The Agency rendered decisions on a number of procedural matters prior to conducting the public hearing.
- In its Decision No. LET-R-209-1999 dated August 3, 1999, the Agency granted CP full participation rights as a party in the Agency's hearing of the rehabilitation asset issue.
- In its Decision No. LET-R-278-1999 dated November 4, 1999, the Agency found the following:
- that all submissions, with the exception of the Canadian Grain Commission's submission (which the Agency found to be beyond the terms of reference for the hearing) were filed within time limits and substantially complied with the filing requirements set out in the Notice of Public Hearing;
- that it is appropriate to expect that all expert witnesses planning to participate at the hearing include, as part of their witness statements, the evidence which they will be relying on, together with their analysis in support of any conclusions or opinions they present;
- that the portions of the applicants' witness statements that addressed the viability of short line operations along with short line feasibility studies were beyond the terms of reference for the hearing. In making its net salvage value determinations, the Agency has jurisdiction only to examine the assets of the vendor railway company, which is a federal entity; and,
- that all witness and intervener statements at the hearing should be confined to address the net salvage value of assets funded under the Rehabilitation Agreements and whether or not these assets represent an interest of the vending federal railway company, whose interest is to be transferred to governments pursuant to section 145 of the CTA.
- Agency Decision No. LET-R-291-1999 dated November 10, 1999 provided that:
- the applicants would have a right at the hearing to present direct evidence as well as rebuttal evidence to address any expert evidence that may be filed by CN or CP prior to the hearing;
- the applicants' request for an adjournment of the hearing was denied as any adjournment would create undue hardship and financial cost to participants and parties had adequate time to prepare their cases;
- the evidence in the CN and CP witness statements regarding short lines and short line viability, the consequences of present and future inadequate returns to either CN or CP and the privatization of CN were outside the terms of reference; and,
- CP would be directed to file, before the commencement of the hearing, its technical evidence relating to the Uniform Classification of Accounts and to produce the affirmation by the Minister of Transport relating to the interest of the federal government in the rehabilitation assets and CP's ownership thereof which was referred to in CP's witness statement.
The public hearing was held in Saskatoon, Saskatchewan, from November 15 to November 19, 1999. The Agency has considered the positions of all parties in making its findings.
II - BRANCH LINE DISCONTINUANCE AND TRANSFER PROCESS
In these proceedings, the Agency heard from interveners who brought forward issues of concern regarding branch line abandonment and its related impact on communities. Many interveners indicate that, with the elimination of railway subsidies and changes in the legislative framework affecting the rail transportation of grain, branch line abandonment has become a major issue for affected communities. CN and CP have abandoned approximately 20 percent of their lines across Canada since 1983 and cite reasons such as efficiency, cost and the movement towards the consolidation of rail networks.
Interveners are concerned that branch line discontinuances impact the socio-economic environment of Prairie communities in which they are found. They indicate that decisions to discontinue railway and grain elevator operations on branch lines become intertwined as both railway and grain companies strive to become more cost effective and efficient. But to the existing farm community, interveners believe that transportation and handling decisions are made by the railway and grain handling companies without taking into consideration the impact that these decisions will have on the local municipalities. They state that if new short line operations do not materialize, grain elevators located along branch lines scheduled for abandonment generally close either during or shortly after the completion of the branch line discontinuance process. Larger high throughput grain elevator facilities are replacing these closed facilities and are being built on either mainlines or secondary mainlines. With elevator closures and rail line abandonment, farmers have had to change their delivery patterns. Additionally, grain companies are offering 'trucking incentives' to encourage delivery to high throughput facilities. As a result, farmers truck longer distances between farms and terminals/transfer facilities.
Interveners also contend that many people believe that increased trucking activity is leading to significant road damage and safety concerns and is more harmful to the environment. They state that road costs are not a factor in the decision making process for branch line abandonment and these associated costs are borne by the taxpayer. The applicants indicate that railway line abandonment results in a declining tax base which has a destabilizing effect on communities.
The Agency recognizes that these issues and concerns are important to Prairie communities. They are similar to matters that formed part of traditional branch line discontinuance and conveyance hearings under the former National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.). However, the current matter raised by the applicants is not one of branch line abandonment but one that is much narrower in focus. The Agency has been asked to deal with the question of branch line rehabilitation assets and how they are to be treated in a statutory net salvage value determination. The Agency's specific task is to determine whether rehabilitation assets form part of CN's interest in the Cudworth rail line. This will include an examination of the question that even if CN has a beneficial interest in these assets, does the federal government's funding of them have any impact on a net salvage value determination under the CTA.
Subsequent to its decision on the treatment of rehabilitation assets, the Agency will then identify CN's assets and will determine their net salvage value. This valuation exercise is a separate proceeding.
III - RELEVANCE OF REHABILITATION AGREEMENTS
It was acknowledged by all hearing participants that the railway rehabilitation assets in issue in these proceedings were funded under Rehabilitation Agreements entered into between CN, CP and the federal government between 1977 and 1990.
CN argues, however, that it is beyond the Agency's jurisdiction to interpret the Rehabilitation Agreements as these Agreements are irrelevant to a net salvage value determination under Division V, Part III, of the CTA.
As the Agreements specify that any dispute as to the rights of any of the parties shall be referred to the Federal Court of Canada, CP argues that it is not within the Agency's mandate to attempt to resolve the instant asset ownership dispute by interpreting the Agreements.
Conversely, the applicants argue that CN and CP are improperly characterizing the issue before the Agency as one involving privity of contract as opposed to the real issue, which is an accurate determination of net salvage value. This determination, according to the applicants, is clearly within the Agency's jurisdiction. In support, the applicants refer to an earlier decision of the Agency which indicated that in any actual net salvage value proceedings, the Agency would have a mandate to hear and determine any asset ownership dispute, which determination would extend to an examination of relevant agreements.
The issue of entitlement to the rehabilitation assets was addressed by the Agency in Decision No. 347-R-1999 dated June 17, 1999.
In this Decision, the Agency concluded, in part, that in an appropriate case it would have the right to examine the Rehabilitation Agreements. The Agency stated:
... several CN and CP railway lines have been identified by the railway companies as possible candidates for transfer. In the ordinary course, the Agency would expect that negotiations would follow any railway offer to transfer these railway lines. In some cases, negotiations may be successful, without the need to resort to the Agency. In other cases, there may be a need for dispute resolution over the transfer value and one or both parties may apply to the Agency under subsection 145(5) of the CTA.
If this happens, the Agency will have a clear mandate to hear and determine the scope and value of the railway's interest in a railway line. At that time, the Agency will have a clear mandate to examine the rehabilitation funding and the Agreements and any other relevant information.
The Agency finds that the present CN application filed under subsection 145(1) of the CTA in respect of a portion of its railway line on the Cudworth Subdivision is an appropriate case within the meaning of the above-noted Decision. There is a dispute in this case regarding the ownership of assets on the Cudworth Subdivision which were funded under the Rehabilitation Program. The Rehabilitation Agreements are an important source of evidence on ownership and the intention of the parties.
Fundamentally, in determining the net salvage value of a line of railway, the Agency must assess what constitutes the railway company's interest in the railway line and if a controversy exists regarding the nature or extent of a railway company's interest in a particular railway line, the Agency must have the jurisdiction to determine it. Were it not to do so, any resulting net salvage value determination by the Agency could be flawed by virtue of taking into account too many or too few assets.
Accordingly, the Agency shall examine all of the Rehabilitation Agreements.
IV - RAILWAY COMPANIES' INTEREST IN REHABILITATED LINES
The applicants, CN, CP and the Province of Saskatchewan all state that the Rehabilitation Agreements are clear and unambiguous on their face. On the one hand, the railway companies state that the Agreements show that the intention of the parties to the Agreements was to grant full and outright ownership of the assets to the railway companies. The applicants, on the other hand, submit that while the railway companies have the legal title of the rehabilitation assets, the Government of Canada has retained the beneficial ownership of the assets by way of an implied trust.
In the event that the Agency is unable to determine asset ownership based upon an examination of the Agreements, the applicants and the railway companies also submitted additional evidence and argument relating to matters outside of the Agreements themselves. In this respect, the applicants argue that the Agency should examine extrinsic evidence relating to the intention of the parties such as the context and circumstances giving rise to the Agreements, as well as the historical regulatory treatment of these funded assets. Conversely, the railway companies submit that all the extrinsic evidence points to an intention that there was to be a full ownership grant to the railway companies of all assets.
Applicants' submissions on the Rehabilitation Agreements
The applicants argue that the Rehabilitation Agreements contain an implied intention to create a trust in favour of the producers who use the railway lines that have been rehabilitated under the government program. That is, through these Agreements the federal government intended to benefit those using the western grain transportation and handling system.
The applicants refer to the purpose of the Prairie Branch Line Rehabilitation Program as set out in the preamble to one of the Agreements which provides, in part, that:
WHEREAS it is in the public interest and to the general advantage of Canada that the grain transportation and handling system in Western Canada be modernized and improved; and
According to the applicants, this purpose is important in any reading of the various terms and conditions in the Agreements. For example, the applicants cite the fact that the agreements did not permit the railway companies to use the funds advanced under the government program for any purpose. The use of the funds was restricted to the advancement of the purpose of the Agreements which was to improve the efficiency, the collection and the transportation of grain on the branch lines subject to the government program.
The Agreements also specify the funding amounts to be spent on specific works and assets in relation to each railway line covered under the Agreements. Further, the Agreements provide that all expenditures made by the railway companies are to be subject to verification and audit by the Canadian Transport Commission. Finally, the railway companies were required to pay interest on any funds advanced and not spent at the end of a three month period.
The applicants state that all of these terms show that the intention of this funding was that the funds were to be treated as a trust, dedicated to advancing the purpose of the Rehabilitation Program. Under this trust, the railway companies became the trustees or conduits for the transmission of the benefits. The federal government is the settlor and the railway companies are the trustees, holding these assets for the benefit of the system users which are the producers.
The applicants assert that a trust does not have to be expressly stated in a contract if such an intention can be implied. According to the applicants, the intention to create a trust here is clear and unambiguous and all of the conditions creating the trust have materialized. That is, the property which is subject to the trust is clearly identifiable and the beneficiaries of the trust, although unnamed in the trust, are the producers who need not be identified in any event. This is because the trust is a purpose trust, established to benefit the public and recognized in law as charitable. In summary, the trust was designed to benefit producers of western grain through the rehabilitation and upgrading of the railway lines used to transport their grain.
The applicants state that the significance of this particular public purpose trust is that it will remain in effect even when the responsibility for carrying out the purpose is transferred to another party. This, according to the applicants, is made possible by the enactment of section 145 of the CTA relating to the transfer of railway lines to governments. The applicants state that while the railway companies cannot claim any benefit from the transfer of the assets, they may, in their fiduciary position, transfer the assets to new users in accordance with section 145 of the CTA.
In terms of how this trust operates, the applicants state that upon the sale of a railway line from CN or CP to a short line operator, the new operator would become the new trustee, continuing to hold the rehabilitation assets in trust for the beneficiaries. The short line operator would not be able to sell the assets. If and when short line railway operations cease, the assets would revert back to the federal government.
The applicants also argue that the word "grant", which is found in the Rehabilitation Agreements, neither detracts from the creation of the trust nor determines the nature and extent of the railway company's interest in the rehabilitation assets. In support of this position, the applicants refer to the Black's Law Dictionary's 7th edition, which defines "grant" as follows:
Grant: an agreement that creates a right of any description other than the one held by the grantor. Examples include leases, easements, charges, patents, franchises, powers and licenses.
The applicants state that this definition does not support a finding that a "grant" necessarily conveys full ownership rights to an asset. In response to CP's argument on the interpretation of the word "grant" given by the Ontario Court of Appeal in Re The Board of Education for the City of Toronto and Doughty et al. [1935] O.R. 85, the applicants argue that this case shows above all that the term "capital grant" must be read in the overall context in which it appears.
The applicants believe that CN and CP were only to use the funds in accordance with the purposes set out in the Rehabilitation Agreements. Thus, "capital grant" although used in the Agreements, did not mean that full ownership was being conveyed to the railway companies.
Railway companies' submissions on the Rehabilitation Agreements
Both CN and CP argue that the Rehabilitation Agreements should be interpreted as granting them full ownership of the assets. This submission relies on the use of the term "capital grant" found in the Rehabilitation Agreements.
CP states that a grant is, by nature, a gifting of funds with the intention and result of passing full ownership of the funds and the items purchased with the funds. CP refers to the decision of the Ontario Court of Appeal in Re The Board of Education for the City of Toronto and Doughty et al., supra, where at page 89 the Court concluded:
The word "grant" is said to be the strongest and widest word of gift and conveyance known to the law. That which is given once cannot be revoked.
CP submits that this decision shows that the grant given to the railway companies in the Rehabilitation Agreements was the strongest, widest and most absolute form of payment or conveyance that the government could make. Thus, the recipient railway companies were granted full ownership of the funded assets.
In this respect, the railway companies argue that the Agreements contain a clause whereby the federal government places a "lien" on the ownership of certain rolling stock that was part of the Rehabilitation Program. There is no comparable term relating to infrastructure assets. Thus, if it had been the federal government's intention to retain any right over the infrastructure assets purchased under the government program, there would have been a clause similar to that regarding the rolling stock.
CN and CP also argue that if it had been the federal government's intention to retain a residual right on the assets purchased under the Rehabilitation Program, a clause would have been included in the Agreements allowing the donor to trace the proceeds from the sale of the assets. In support, CP refers to the definition of the term "entitled" set out in the final CP Rehabilitation Agreement between the Minister of Transport and CP dated May 28, 1984, entered into evidence as exhibit RM-6.
According to CP, the use of the word "entitled" in this Agreement signified that once the required works set out in the Agreement had been completed, CP had the right to the funds and, therefore, the right to the assets purchased with the funds.
In response to the applicants' position that the Agreements create a trust, CP submits that in law, the creation of a trust requires the existence of three conditions: i) a beneficiary must be identifiable, ii) there is to be no evidence of a contrary intention, and iii) there must be a clear indication of a trust.
CP states that the Rehabilitation Agreements do not identify the applicants as a beneficiary group nor do the Agreements clearly show that a trust was intended, this notably due to the absence of any language establishing a settlor.
CN and CP argue that if the Agency finds that the railway companies do not own the assets outright, those assets cannot be included in any offer to sell a railway line. The assets would simply not be part of the railway company's interest and not available for sale.
If, on the other hand, the Agreements create a trust wherein the railway companies are essentially the conduits, neither CN nor CP would be able to sell any funded assets as this would place them in breach of the trust. Exclusion of these assets from a sale would, according to CN and CP, frustrate the intention of Parliament as set out under the CTA which was designed, in part, to encourage short line railway development in Canada.
In terms of additional consequences to an implied trust, CP states that if the Agreements confer a beneficial ownership in the assets, such an ownership could only be conveyed to the grain transportation and handling system participants. In attempting to clarify who such participants are, CP referred to the definition of "system participant" which appeared in section 2 of the Western Grain Transportation Act, R.S.C., 1985, c. W-8. The definition referred to system participant as meaning " ... any corporation, partnership or organization engaged in the transportation of grain by rail or the shipping or handling of grain for transportation by rail ...". CP states that municipal governments, who are the applicants in these proceedings, do not fall within this definition and consequently could not claim any beneficial ownership even if the Agency were to conclude that the Rehabilitation Agreements created an implied trust.
Applicants' submissions on extrinsic considerations
The applicants argue that if the Agency finds that the intention of the parties to the Agreements is not reflected in the wording of the Agreements, the Agency should consider the context and circumstances giving rise to the Agreements, as well as the historical regulatory treatment of these funded assets.
In this respect, Dr. Lawrence Gould, an expert witness testifying on behalf of the applicants, states that the intention of the federal government, as the donor, is relevant in determining the ownership of the economic benefits that flow from a donation and grant. In the present case, this intention can be gleaned from several facts outside of the Agreements.
Firstly, according to Dr. Gould, the net book value of the funded assets was recorded by CN and CP as a liability in their donations and grants accounts rather than as a component of shareholder equity. Secondly, one of the Agency's predecessors, the Canadian Transport Commission, and the Parliament of Canada, through the enactment of the Western Grain Transportation Act and later, through the enactment of Division VI, Part III, of the CTA relating to the regulation of railway transportation rates for the movement of western export grains, all have denied the railway companies the ability to claim ownership costs for these assets. Dr. Gould submits that these facts show that the railway companies were intended to be used as conduits for the achievement of the purposes set out in the Rehabilitation Agreements.
Dr. Gould presents a second argument in favour of finding that the railway companies should not receive any benefits from these assets. This argument is based upon the principle that the taxpayer should not have to pay twice for the same assets.
In this respect, Dr. Gould states that the federal government not only funded the Prairie Branch Line Rehabilitation Program, but is now also providing financial assistance for the creation of short line railways under the auspices of the Canada Agri-Infrastructure Program. Dr. Gould states that the federal government, and the taxpayers of Canada, would effectively pay twice for the rehabilitation assets if they were included as part of the railway company's interest in lines being transferred to short line purchasers.
In further support of his position, Dr. Gould submits that an unearned donation and grant should not create a financial gain or loss for the railway companies. He states that the funded assets were acquired by the railway companies at zero cost and that their sale should not provide them with a windfall gain.
All of the above considerations, according to Dr. Gould, show that the federal government never intended to grant the railway companies full ownership of the assets. Thus, it was not necessary to put into the Agreements any residual clause according the federal government a reversionary interest in the assets.
Many of the interveners who participated in these proceedings, including the Honourable Maynard Sonntag, Minister of Highways and Transportation for the Province of Saskatchewan, as well as Mr. Lee Morrison, Member of Parliament for Cypress Hills-Grasslands, supported Dr. Gould's testimony. They too are particularly concerned with the taxation principle and argue that taxpayers will be paying twice for the funded assets if these assets are found to form part of the railway companies' interest in a railway line.
Railway companies' submissions on extrinsic considerations
Overall, the railway companies argue that the Rehabilitation Agreements are clear and unambiguous. Accordingly, the parole evidence rule prevents the Agency from looking at evidence outside of the Agreements themselves. In this respect, CP refers to a decision of the Supreme Court of Canada in Horse et al. v. R, [1988] 2 W.W.R. 289, where Estey J. in writing for the Court states:
In my view the terms are not ambiguous. The normal rule with respect to interpretation of contractual documents is that extrinsic evidence is not to be used in the absence of ambiguity; nor can it be invoked where the result would be to alter the terms of a document by adding to or subtracting from the written agreement.
CN and CP submit, however, that if the Agency is to examine extrinsic evidence, all of the evidence points to an intention that there was to be a full ownership grant to the railway companies of all assets.
In this respect, CN and CP refer to a letter dated September 30, 1999, authored by the Minister of Transport, the Honourable David Collenette, which states that none of the Rehabilitation Agreements contain clauses that accord residual ownership rights to the track assets paid for by the government, or stipulations that the government would recover any portion of the rehabilitation expenditure in the event that the railway companies sold the track assets at some time in the future.
The railway companies also argue that they have sold rehabilitation assets in the past without any involvement of the federal government and this indicates that the railway companies hold full asset ownership.
According to the railway companies, the Prohibition Orders (which were Governor in Council Orders prohibiting the abandonment of certain grain dependent Prairie branch lines) were rescinded upon enactment of the CTA. They argue that this rescission, in the absence of any other action by the federal government to retain ownership of the rehabilitation assets, is a clear indication that the federal government did not have any continuing residual interest in the rehabilitation assets on the affected lines. Thus, the railway companies state that since the repeal of the Prohibition Orders, both CN and CP have discontinued lines and salvaged railway assets subject to the Rehabilitation Program without any opposition from the federal government. CN further argues that in enacting subsection 142(2) of the CTA, Parliament expressly forced the railway companies to discontinue operations on certain rehabilitated lines and, in doing so, did not demand any type of residual right to the funded assets. CN also submits that if it had been the federal government's intention to retain a residual right on the funded assets, it could have done so under the CN Commercialization Act, R.S.C., 1995, c. 24, wherein certain assets were specifically identified as being subject to a reversionary interest in the Crown.
A further argument raised by the railway companies relates to the timing of the rehabilitation funding. That is, under the historical statutory framework for the payment of subsidies for the maintenance of uneconomic branch lines, the railway companies were compensated for their investments in branch line assets. Payment under this scheme was provided to the railway company after the completion of their investment, and it was never disputed that the railway companies owned these assets, in spite of being reimbursed for them after the fact by the federal government. The railway companies argue, in these proceedings, that the ownership of rehabilitation-funded assets should not be treated any differently merely because they were given the investment funds in advance of, as opposed to after, the actual investment.
The railway companies conclude that the Agency must find that the railway companies are the only true owners of the funded assets because: the railway companies have always considered the assets as their own; no dispute exists between the parties to the Rehabilitation Agreements; and the federal government has never disputed the ownership of the assets.
Interveners' submissions
The interveners that appeared before the Agency in these proceedings, who included, among others, municipal and producer representatives as well as short line railway operators, argue that the Branch Line Rehabilitation Program was for the benefit of the farmers and the communities along the railway lines. The program was put in place to ensure that the railway companies would continue to move grain from the branch lines to export positions. They argue that the purpose of the Rehabilitation Program was to provide efficient, economic and safe railway service. The survival of businesses and communities on the railway line depends on the continuation of the rail service.
The Honourable Maynard Sonntag argues that the value of the assets acquired under the Rehabilitation Program should be returned to the taxpayers. He maintains that taxpayers would essentially pay for the same assets twice if the value of the rehabilitation assets were included in a net salvage value determination. He also argues that, through the Canada Agri-Infrastructure Program which provides funding to short line railway operations, the federal government would be providing funds for municipal governments to acquire assets that had already been paid for by taxpayers under the Rehabilitation Program.
Mr. Lee Morrison, Member of Parliament, rejects the railway companies' argument that the Rehabilitation Program served as a system of maintenance of assets already owned by them. Mr. Morrison contends that the government program acts, in effect, as a "mechanics lien". He states that the railway companies' contention that this program served as a form of compensation for losses incurred transporting grain under the Crow Rate is offset by the fact that the railway companies were historically granted a significant amount of land, and were actually compensated for those losses in advance.
The Wood Mountain Road and Rail Committee submits that the value of the assets acquired under the Rehabilitation Program inflates the price of the railway line and consequently a short line railway operation may not be viable. The Western Rail Coalition states that high acquisition costs are one of the major causes of failure when trying to form a short line railway. Another reason is that the revenue divisions offered by the railway companies are insufficient to allow a short line railway to be successful, given the large investment required in the infrastructure.
The Western Rail Coalition also argues that the railway companies would have benefitted in the long term if there had not been a Rehabilitation Program because grain would have been forced from the branch line to the main line, and the branch line network would have been rationalized sooner. Therefore, they argue that this substantiates their position that the benefit from the Rehabilitation Program was intended for the farmers. To this end, the Coalition contends that increased trucking and maintenance costs were avoided, communities were able to maintain a tax base and businesses remained in the communities because of the availability of rail service.
Agency decision
The applicants, supported by many of the interveners in these proceedings, have presented two principal arguments in support of the position that the rehabilitation assets do not form part of a railway company's interest in a railway line being sold to governments under section 145 of the CTA.
First, they stated that the Agreements and all the surrounding circumstances showed that the railway companies were trustees for these assets, holding them for the benefit of the grain producers, with the federal government being the beneficial owner. Secondly, the applicants stated that any inclusion of these assets in the railway company's interest would lead to a double payment by taxpayers - with the federal government having first paid for the assets and then, any governments buying lines under section 145 of the CTA, needlessly paying for them a second time.
CN and CP argued that the Rehabilitation Agreements grant them full ownership of the funded assets, that a trust does not exist, and that as the funds were conveyed absolutely to the railway companies, there cannot be any question of double payment.
In examining these arguments, the Agency will first determine whether there is an express trust. The Agency will then go on to determine whether there is an implied trust, based upon a review of the Agreements and all of the surrounding circumstances of this case. The Agency will conclude with an examination of the double payment arguments raised in these proceedings.
Regarding the first question, the applicants have not suggested that the Agreements created an explicit trust and the Agency cannot find any language in these Agreements which refers to the existence of such a trust. Accordingly, the Agency concludes that there is no express trust created by these Agreements.
In respect of the second question, whether there is an implied trust, the law regarding the creation of such trusts is well established and has been stated recently by the Ontario Court of Justice, in Brown v. Collett Ltd. [1996] O.R No. 625 at para. 39 and 40 (O.C.J.G.D.), online: QL (CJ). In this case, the Court affirms that:
The elements pertaining to the creation of an implied trust are the same as those of an express trust. In order to have an express trust to come into existence, it must have three essential characteristics:
- the intention of the alleged settlor to create a trust must be certain;
- the subject matter of the trust or trust property must be certain; and
- the objects or beneficiaries of the trust must be certain.
The principle of the "three certainties" is fundamental to the creation of a trust.
All of the participants in these proceedings acknowledge that the rehabilitation assets were purchased pursuant to specific contracts entered into between CN, CP and the federal government. These Agreements, twelve in total, including amendments, were filed with the Agency pursuant to an Agency direction under section 18 of the National Transportation Agency General Rules, SOR/88-23. There is no indication in these proceedings that there are other Agreements or documents which are integral to the formation of the branch line rehabilitation funding program.
The question the Agency has been asked to answer here is whether the parties to these Agreements intended to create an implied trust. In this respect, the Agreements themselves, as written, are fundamental to understanding the intentions of the parties. This approach, that is, examining the Agreements first in order to obtain an understanding of the parties intentions, is well accepted in law, and is adopted in G.H.L Fridman, The Law of Contract in Canada (4th), Toronto, Carswell, 1999, where at page 477 it is stated:
The contents of any express term or terms are basic to a true understanding of the nature, scope and extent of the contractual rights and duties of the parties. What has been spoken or written by them as part of the contract is the prime source of knowledge of their intention.
In examining these particular Agreements, the Agency acknowledges the preamble to the first Rehabilitation Agreement dated September 15, 1977, (exhibit RM-1) which states, in part, that:
WHEREAS Her Majesty has represented to CN and CP that the sum of $100 Million will be made available in the form of a capital grant to cover the cost of carrying out during 1977 and 1978 the rehabilitation program described in Appendices A, B, C and D hereto pertaining to branch lines in Western Canada. [Emphasis added]
Section 2 of the same Agreement provides that:
2. CN agrees with Her Majesty that prior to March 31, 1978, it will carry out the rehabilitation program described in Appendix A hereto and Her Majesty agrees to pay to CN as hereinafter set forth, by way of a capital grant, the amount of its total expenditure incurred in carrying out that program, but the aggregate payable to CN under this Agreement shall not exceed $17,162,700 for the program described in Appendix A. [Emphasis added]
Sections 3, 4 and 5 of this Agreement detail similar obligations although for varying amounts of money and for CP as well as for CN. That is, these sections also refer to there being a capital grant.
The second Rehabilitation Agreement dated March 9, 1979 (RM-2), the third Rehabilitation Agreement dated July 17, 1980 (RM-3), the fourth Rehabilitation Agreement dated October 23, 1981 (RM-4), the final CN Rehabilitation Agreement dated May 28, 1984 (RM-5) as well as the final CP Rehabilitation Agreement dated May 24, 1984 (RM-6), all contain similar clauses.
Based on the characteristics referred to above with respect to the creation of an implied trust, the Agency finds that the use of the term "grant" to describe the manner by which the capital is conveyed does not provide certainty with respect to the intention of the government to create a trust. The use of that word suggests, on the contrary, that the railway companies were to receive full ownership of the funded assets. This conclusion derives from the ordinary meaning of the word "grant" as well as the definition set out in Re Board of Education for the City of Toronto and Doughty et al, supra.
The Agency's examination, however, has gone further than just interpreting the word "grant' based upon dictionary or case law definitions. The Agency has carefully examined all of the Agreements and has not found any terms or conditions which create an implied trust, or conversely, which detract from the "grant" as being other than an absolute conveyance.
The Agency acknowledges that the Agreements contain conditions whereby the federal government retains a residual right on certain railway equipment (for example, rolling stock) purchased under the Rehabilitation Program. A similar term relating to infrastructure assets is noticeably absent. If it had been the government's intention to retain some type of interest in respect of these particular assets, through an implied trust or otherwise, it is reasonable to expect that a similar clause would have been put into the Agreements.
As no such clause was added and there is no evidence to suggest that the absence of such a clause was an oversight, the Agency concludes that no such reversionary interest or trust for infrastructure assets was intended.
The Agency does not accept the applicants' argument that a reversionary clause was not necessary. It may be true that in cases of a true trust such reversionary clauses are not necessary, but, and as more fully set out below, these Agreements do not create a trust or charitable trust. They create an outright funding of assets, with the railway companies becoming the sole owner of the funded infrastructure assets.
The Agency has examined the preambles to the Agreements, which refer to the public interest and the modernization and improvement of the Canadian grain transportation and handling system in Western Canada. These are the accepted goals of the funding program. These preambles might offer assistance if the Agreements were otherwise ambiguous. But, in this case, the Agreements are not ambiguous and there is no language in these preambles which in any way detracts from the totality of the capital interest being conveyed here.
Overall, the Agency does not find in these Agreements the creation of an implied trust whereby the federal government is the settlor and the railway companies are the trustees. The wording of the Rehabilitation Agreements appears rather to confer upon the railway companies full ownership, including beneficial ownership, of the assets purchased under the Rehabilitation Program.
Other matters have been raised before the Agency relating, for example, to the historical regulatory treatment of grants and donations as well as the principle of double payment by taxpayers to suggest that the beneficial ownership of these assets does not rest with the railway companies, but rather with the federal government. The Agency will now examine these issues.
The Agency notes that subsection 142(2) of the CTA requires railway companies to discontinue various lines of railway which were identified in Schedule IV of the legislation. Discontinuance was to be completed by no later than March 31, 1996 or 10 days after the coming into force of that section. Schedule IV contains railways lines that benefitted from rehabilitation funding.
In 1996 when the CTA was enacted, if the federal government had considered that it had a residual interest in the rehabilitated railway lines that were to be imminently abandoned, Parliament could have expressly provided for it at that time. The Agency finds that as no special provision was included in this legislation, the federal government did not intend to retain any residual ownership in the rehabilitation assets.
Parliament could also have included a special residual rights clause dealing with the transfer of railway lines to governments in subsection 145 of the CTA; however, it did not. The Agency finds that this also indicates that the federal government did not intend to retain any residual interest in these assets.
This conclusion is supported by the enactment of section 96 of the CTA which accords specific treatment for railway lands that were obtained by expropriation pursuant to theRailway Act, R.S.C., 1985, c. R-3. Special treatment was, therefore, recognized in certain areas under the CTA. However, as there is no special treatment in the CTA for rehabilitation assets, the Agency concludes that none was intended.
This conclusion is also supported by the specific legislated treatment of certain government assets during the privatization of CN. For example, pursuant to section 6 of the CN Commercialization Act, Parliament gave to the Minister of Transport the express power to direct CN to transfer back to the Minister or some other Minister or Crown corporation, any property of CN which the Minister considered appropriate. There was no evidence before the Agency in these proceedings that this power had been exercised in respect of the rehabilitation assets. Notwithstanding, this provision shows that special legislative treatment was available, if necessary, as one way of dealing with the rehabilitation assets. It is an approach which was not used at the time of passage of the CTA in 1996 which suggests that the federal government did not wish to retain any such ownership right over the funded assets.
The Agency also notes the evidence in these proceedings that CN and CP have either transferred or discontinued rehabilitated railway lines on several occasions over the past twenty years. No accounting to the federal government has been made or requested for affected rehabilitation assets.
These historical transfers or discontinuances were made possible prior to the passage of the CTA by Governor in Council approved amendments to the Abandonment of Branch Line Prohibition Orders. These Orders, as referenced above, were enacted pursuant to the provisions of the Railway Act. They prevented CN and CP from abandoning specific branch lines until January 1, 2000. The removal by the Governor in Council of certain lines from these Orders permitted the abandonment of the removed lines. There is no evidence before the Agency illustrating that the removal of these lines from the Orders was contingent upon the railway companies reconveying rehabilitation assets to the federal government upon discontinuance.
Transfers or discontinuances subsequent to the passage of the CTA have also been made possible as a result of the repeal of these Prohibition Orders in the Order Repealing Certain Abandonment of Branch Lines Prohibition Order, in SOR/96-314 dated June 20, 1996. The timing of this repeal essentially coincided with the enactment of the CTA.
No residual interest was demanded by the federal government consequent upon the repeal of these Orders. The Agency finds that this is indicative that no such interest was intended.
The Agency has also examined the 1982 and 1985 decisions of the Canadian Transport Commission (hereinafter the CTC) on the treatment of CN's and CP's claim for ownership costs on rehabilitation assets provided by the federal government as well as on the treatment of donations and grants for cost of capital purposes. The Agency finds that these decisions are not relevant to this matter.
These decisions dealt with the treatment of ownership costs of rehabilitation assets and other donations and grants as they related to subsidy and costing determinations made by the CTC. In these decisions, the CTC found that no inclusion for cost of capital or depreciation on rehabilitation assets or any other "unearned" assets be considered on costing for subsidy determinations or for any regulatory rate-making purposes. As well, in its 1982 decision which was restricted to cost of capital and depreciation issues, the CTC also stated "that its findings do not address other potential benefits to the railway companies due to the existence of the rehabilitated lines."
The issue before the Agency in these proceedings is ultimately directed towards valuing assets for net salvage value determinations, not for making costing or accounting determinations. For this reason, the costing or accounting treatment of rehabilitation assets is irrelevant to a net salvage value determination or to a determination of the interest of a railway company in the railway line.
Finally, regarding the double payment argument raised in these proceedings, the Agency finds that this argument is attractive on its face based upon what may be called "equitable" considerations. That is, no one should pay twice for the same asset.
In order for this argument to succeed, it must be demonstrated that the Agreements did not fully convey the rehabilitation assets to the railway companies. Otherwise, that which is once fully given cannot somehow be taken back.
The Agency finds that under these Agreements the railway companies were required to upgrade and maintain certain grain dependent branch lines. The railway companies did this and producers benefitted. There are no reservations or conditions in the Agreements mandating that the railway companies are not to be paid in the event of a sale of the funded infrastructure assets or that the federal government shall take back the assets upon any discontinuance of railway operations. There was an outright grant to the railway companies of full ownership in these assets. Accordingly, the Agency cannot find in favour of the applicants' double payment arguments.
V - AGENCY DETERMINATION
For all of the above reasons, the Agency finds that assets funded under Rehabilitation Agreements, entered into between the federal government, CN and CP between 1977 and 1990, form part of the railway company's interest in affected railway lines that are being transferred to governments pursuant to subsection 145(5) of the CTA.
This finding shall now be applied in the ongoing net salvage value proceedings initiated by CN regarding the sale of a portion of the railway line on its Cudworth Subdivision.
Appendix
List of parties who filed submissions
- Lawrence Godin, Rural Municipality of St. Louis No. 431
- Louis Kolla, Rural Municipality of Hoodoo No. 401
- Helen Roslinski, Rural Municipality of Fish Creek No. 402
- Joe MacLeod, Town of Cudworth
- Bob Elchuk, Town of Wakaw
- Lee Morrison, MP
- Red Coat Road and Rail
- Michael Klein, Village of Wood Mountain
- Wood Mountain Road and Rail Committee
- Saskatchewan Association of Rural Municipalities
- Saskatchewan Urban Municipalities Association
- Bob Peake
- Garry Mazurkewich
- Western Rail Coalition
- Canadian Wheat Board
- West Central Road & Rail Ltd.
- Province of Saskatchewan
- Armand Roy
- GO Transit
- Morris Huziek
- Lawrence Sosnowski
- Rural Municipality of Big Arm No. 251
- Rural Municipality of Milden No. 286
- Rural Municipality of Blaine Lake
- Rural Municipality of Fertile Valley No. 285
- Rural Municipality of Auvergne No. 76
- Village of Domremy
- Rural Municipality of Arborfield No. 456
- Rural Municipality of Turtle River No. 469
- Miles Balone
- Rural Municipality of Silverwood
- Edward Virag
- Rural Municipality of Lakeview No. 337
- Rural Municipality of Moosomin No. 121
- Rural Municipality of St. Louis No. 431
- Rural Municipality of Martin No. 122
- Rural Municipality of Flett's Springs No. 429
- Rural Municipality of Hart Butte No.11
- Rural Municipality of Wilton No. 472
- Raymond Baudais
- North Central Transportation Planning Committee
- Rural Municipality of Victory No. 226
- Rural Municipality of Sarnia No. 221
- Rural Municipality of Meeting Lake No. 466
- Rural Municipality of Lone Tree No. 18
- Rural Municipality of Bengough No. 40
- Rural Municipality of King George No. 256
- Town of Shellbrook
- Rural Municipality of Shellbrook No. 493
- Carey Oleksyn
- Arnold Venne
- Brian Domotor
- Louis Stringer
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