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The Nova Scotia Power Corporation (the Corporation) was a public body that, since 1973, produced and delivered virtually all of the electricity in Nova Scotia. Its capital was owned by the Province. Between 1973 and 1992, the Corporation made significant borrowings. No tax was payable on the taxable income of the Corporation under the Income Tax Act and the Corporation did not file income tax returns. It did not deduct any amount in respect of capital cost or as interest.

In 1992, Nova Scotia Power Incorporated (the Appellant) purchased the assets and undertakings previously used by the Corporation in the production and distribution of electricity. As a result of the application of subs. 85(5.1) of the Income Tax Act, the capital cost of depreciable property acquired by the Appellant was equal to the capital cost of such property to the Corporation. On May 29, 1998, the Corporation filed T2 corporation income tax returns for the taxation years ending March 31, 1980 to March 31, 1993 inclusive. In those returns of income the Corporation elected, to add interest on money borrowed to acquire depreciable assets to the capital cost of those assets.

By Notices of Reassessment dated March 31, 1999, the Minister of National Revenue reassessed the Appellant. The reassessments were based on the assumption that throughout the period with respect to which the Corporation sought to apply subs. 21(1) and 21(3) of the Act, the Corporation was an agent of Her Majesty the Queen in right of Nova Scotia, with the consequence that the Act had no application to the Corporation pursuant to s. 17 of the Interpretation Act, R.S.C. 1985, c. I-21.

By letter dated June 8, 1999, the Appellant sought a determination of loss pursuant to the Income Tax Act. The questions asked read as follows:

[I]n the period up to 1992 when it disposed of its assets:

(1) Did Nova Scotia Power Corporation conduct its principal income-earning activities as an agent of Her Majesty the Queen such that section 2 of the Income Tax Act (including ancillary provisions such as section 21 of the Act) did not apply to it? And

(2) If the answer to (1) is no, was Nova Scotia Power Corporation an agent of Her Majesty the Queen with respect to the ownership of assets used in its business such that section 21 of the Income Tax Act did not apply to depreciable assets acquired by it?

The Tax Court of Canada answered the first half of each question (up to the words “such that”) in the negative and declined to deal with the second half of the questions. The Federal Court of Appeal, allowed the appeal and answered both questions in the affirmative. A motion for reconsideration was dismissed.