Judgments

Decision Information

Decision Content

Denison Mines Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Jackett C.J., Thurlow J. and Sweet D.J.—Toronto, October 10, 11, 12 and 13, 1972.
Income tax—Business income, computation of—Capital cost allowances—Uranium mine—Passage-ways through ore body, cost of constructing—Whether an enduring asset—Whether cost of extracting a current or capital cost— Income Tax Act, s. 11(1)(c); Income Tax Regulations 1100(1)(a)(xii), Sch. B, class 12.
Appellant, which had acquired a valuable uranium deposit at Elliot Lake, Ontario, contracted to supply large quantities of uranium oxide to a Crown corporation, and under the contract was required to get into production in a very short time. In order to extract the ore appellant drove passage ways through the underground ore body, and mining was extended from these passage-ways to adjoining areas. The passage-ways were used for ventilation, as a means of access, and for transportation of ore, and it was intended that they would continue in use for the life of the mine, which was estimated to be 90 years. The value of the ore extracted from the passage-ways exceeded their cost of construction. In 1958, 1959, 1960 and 1961 appellant expended more than $21,000,000 in constructing and extending the passage-ways through the ore bodies. Under section 83(5) of the Income Tax Act appellant was exempt from income tax on its mining profits in 1958, 1959 and 1960. In 1961, when it first became taxable, appellant claimed capital cost allowances on the cost of the passage ways under Income Tax Regulation 1100(1)(a)(xii) and Schedule B, class 12. The Minister disallowed the deduction.
Held (affirming Cattanach J. [1971] F.C. 295), the deduc tion was properly disallowed.
In computing the profit from appellant's mining operation it was necessary to deduct the cost of extracting ore from the passage-ways and such cost was therefore a current cost and not the capital cost of property. Moreover, if extraction of the ore in question brought into existence something which did not previously exist, viz. the passage-ways, the cost of extracting that ore was on ordinary commercial principle not a cost to appellant of such property but rather a cost of earning the profit from the sale of the ore so extracted.
APPEAL from Cattanach J. [1971] F.C. 295.
J. J. Robinette, Q.C., and R. Robertson, Q.C., for appellant.
D. G. H. Bowman and M. J. Bonner for respondent.
The judgment of Jackett C.J., and Thurlow J. was delivered by
JACKETT C.J. (orally)—This is an appeal from a decision of the Trial Division [ [1971] F.C. 295] dismissing an appeal by the appellant from its assessment under Part I of the Income Tax Act for the 1961 taxation year.
Two questions had to be dealt with by the Trial Division; one was the validity of a claim for capital cost allowance under section 11(1)(a) of the Income Tax Act and the other was the validity of a claim in respect of a loss sustained by a subsidiary in providing housing for the appellant's employees. This appeal con cerns only the claim for capital cost allowance.
Cattanach J., in giving his reasons for the judgment of the Trial Division, has fully outlined the relevant facts and there is no need to repeat them.
Section 11(1)(a) of the Income Tax Act authorizes a deduction, in computing the income of a taxpayer for a taxation year, of such part of the "capital cost" to the taxpayer of "property" as may be allowed by regulation. Cattanach J. disallowed the taxpayer's claim for capital cost allowance because, in his view, the expenditures in respect of which the claim was made were "current operating expenses laid out as an integral part of the profit-making activity of the company" and were not, therefore, "capital cost" of "property".
We agree with that conclusion but, out of deference to the argument of counsel in this Court, we will endeavour, to explain briefly, in our own words, our reasons for having reached it.
The appellant's business consists of extract ing ore from an underground mine, processing such ore and disposing of it. The appellant has a very large mine, which will probably continue in operation for many years.
Having regard to the nature of its mine, the appellant has planned its extraction so that, during the first phase, it removes only part of the ore from the areas encountered as the miners move out from the mine shaft so that the ore that is left will be support for the "ceiling" of rock above the ore body. This is necessary so that the miners may get back and forth to the mine shaft as the first phase extraction opera tion moves further from the mine shaft and during subsequent phases of the total extraction process.
The part of the ore body that, in pursuance of the appellant's plan, is so left for support during this first phase of the extraction process is left in the form of walls (called "pillars"), which
(a) are so arranged as to leave throughways through the ore that, as the process contin ues, lead from the mine shaft to the outer limits of the mine, and
(b) create rectangular spaces (called "rooms").
The overall operation results in many such "throughways", some of which subdivide into branches as they extend towards the boundary of the mine and most of which travel alongside a series of "rooms".
The result is that, as the extraction operation moves further from the mine shaft a "through- way", created by earlier extraction, is available for moving ore back to the shaft as it is current ly extracted from "rooms" and from extensions of the throughway, is available for other move ments required by the extraction operation, and is available for ventilation. This use of the throughways is contemplated by the appellant's plan of operation until the various throughways have reached the outer limits of the mine. In addition, it is contemplated that they will serve a similar purpose when ore is removed from higher levels and when, during subsequent phases, ore in the original walls or pillars is extracted by one process or another.
The appellant's claim for capital cost allow ance is based upon the fact that, as a result of the way in which the ore was extracted during the first part of the first phase, these through-
ways have been created for a use during subse quent operations that is intended to continue long into the future. The jumping off point for the appellant's claim for capital cost allowance is its contention that these throughways are capital assets of the mining operation that are commonly known as haulageways. Not only is the validity of its claim based on the validity of that contention but it is also essential to its argument that it succeed in its further conten tion that the expense of removing the ore from the space where the haulageways are is the "capital cost" of such "assets".
As far as the ore removed from the "rooms" is concerned, there is no difference between the parties as to the position under the Income Tax Act. It is common ground that the proceeds of disposition of such ore less the costs of its extraction is profit from the operation of the mine.
With reference to the ore removed from the "haulageways", however, while the respondent says that the position is the same (i.e., that the proceeds of disposition of such ore less the costs of its extraction is profit from the opera tion of the mine), the appellant says
(a) that the proceeds of disposition of such ore without any deduction in respect of its extraction is profit from the operation of the mine, and
(b) that the cost of extraction of such ore is the "capital cost" of the haulageways that resulted from its removal.
Prima facie, this would seem to be an unlikely position for a taxpayer to take as, if it is sus tained, it would force the appellant to give up a deduction of expenses in the year incurred in favour of capital cost allowance, which, in prin ciple, is deductible over a period of years. In the peculiar circumstances of this case, how ever, that disadvantageous position would not arise if the appellant is correct in its further claim, which is that it is entitled to take a capital cost allowance in one year of 100 per cent. This would mean that the full cost of extraction
could be taken in the year incurred where it is desirable. 1 Moreover, if correct, the appellant's contention has the advantage, from its point of view, that, during a period of three years when income from operating the mine was "exempt", it will have been building up capital cost to be taken as a deduction in subsequent years.
In our view, the correctness of the appellant's position must be determined by sound business or commercial principles and not by what would be of greatest advantage to the taxpayer having regard to the idiosyncrasies of the Income Tax Act.
In considering that question, it must be emphasized that, as far as appears from the pleadings or the evidence, no more money was spent on extracting the ore the extraction of which resulted in the haulageways than would have been spent if no long term continuing use had been planned for them.
One business or commercial principle that has been established for so long that it is almost a rule of law is that "The profits ... of any transaction in the nature of a sale must, in the ordinary sense, consist of the excess of the price which the vendor obtains on sale over what it cost him to procure and sell, or produce and sell, the article vended ..." (See The Scot- tish North American Trust, Ltd. v. Farmer (1910) 5 T.C. 693, per Lord Atkinson at page 705.)
Our difficulty, at the outset, with the appel lant's claim for capital cost allowance is there fore, that we cannot accept the submission of the appellant that, while the profit from the mining operation, as far as the ore taken from its rooms is concerned, is the net of proceeds of disposition over costs of extraction, the profit from the mining operation, as far as the ore taken from the "haulageways" is concerned, is the proceeds of disposition without deducting the costs of extraction of such ore. That sub mission is contrary to a long line of authority.2
In the second place, if we are correct in our view that the deduction of such costs is required in preparing the profit and loss account for the year in which they are incurred, it would not seem that any sound system of accounting could show them also as a "capital cost" of something other than the ore. No single dis bursement can be reflected twice in the accounts, if the result is to be an accurate reflection of the state of the businessman's affairs.
That conclusion is sufficient to dispose of the appeal because if there is no "capital cost" of property, section 11(1)(a) does not authorize capital cost allowance.
There is, however, a further question that should be discussed. If the appellant is correct in its contention that removal of the ore from the spaces in question brought into existence capital assets known as haulageways, how can one avoid the conclusion that there was a sub stantial capital cost of such assets?
In the first place, it should be said that we are not convinced that there is involved any acqui sition or creation of property. The situation is, we assume, that the appellant already owned the property in question with the ore in situ and it did nothing except that it removed the ore so that there was remaining the waste rock bed that it previously owned. We doubt that it can be said that that brought into existence any property that did not previously exist and, as it would seem to us, if no new property was created or acquired, there cannot be any "cost" of "property" within the meaning of section 11(1)(a) of the Income Tax Act . 3
On the other hand, if we assume for sake of argument that the removal of the ore in ques tion brought into existence something that did not previously exist, namely a haulageway, in our view the cost of removing the ore is not a _ cost to the appellant of that property.
We recognize that there are cases where a single operation has two objectives and two results and that the cost of such an operation would normally be divided in a sound system of accounts.
If, for example here, there were merged into one operation the activities necessary to remove the ore and the activities necessary to bring in and instal some plant and equipment of a permanent character, the cost of that opera tion would have to be appropriately divided.
Where, however, a businessman does nothing but carry on his ordinary current operations but so plans those operations, without increasing the costs of those operations, that he has an asset of an enduring nature at the end of a period of operation, we are of the view that the situation is of a different kind. Where, for example, a businessman deliberately plans his operations so as to acquire a very valuable goodwill (both by his advertising and by his manner of doing business), we should have no hesitation in saying that ordinary business prin ciples would nevertheless require the deduction of all the costs of his operations that are ordinarily regarded as current costs in determin ing his annual profits and would attribute none of such costs to the acquisition of his goodwill.
Similarly, we are of the view that, even though the appellant planned his extraction operations so as to leave it in the result with "haulageways" that are of enduring benefit to its business, the cost of such extraction opera tions is, in accordance with ordinary business principles, the costs of earning the profits made by selling the ore extracted from them. If that is right, there was no cost, and therefore no "capi- tal cost", of acquiring the haulageways.
For the aforesaid reasons, we are of opinion that the appeal should be dismissed with costs.
* * *
SWEET D.J.—Respectfully, I agree with the reasons of My Lord, the Chief Justice, and My Lord Thurlow and with their result. However I would add something by way of comment.
In my view the extraction by the appellant of ore from what has been referred to as haulage- ways was a mining operation, and apparently a profitable one, by a mining company carried on
in the ordinary course of its business. The appellant extracted the ore, processed it and sold the resulting product. Following the com pletion of that mining operation there were channels through the ore body which remained because of that mining. Those channels are now designated by the appellant as haulageways and they are usable and used as haulageways.
To mine the quantity of ore produced from those channels it had, necessarily, to be taken from some part of the ore body. The appellant chose to remove it from areas where those channels now are.
There is no significant evidence that the cost of mining, so that those channels would be in their present position, resulted in any greater cost than mining in other areas as, for example, the "rooms". There is no significant evidence that there was any cost because of the forma tion of those channels as they now exist in addition to the cost of merely mining in those areas.
It would seem clear enough that the mining was done as it was so that the haulageways would be in their present position and have usefulness as haulageways. Nevertheless, and even if it may reasonably be said that a consid erable part, if not all of them, are of enduring benefit to the mining operation, the essential character of the manner by which they came into existence remains the same. The fact is that they are something remaining after the mining operation was completed. They are residua from the utilization of a part of the ore body.
Notwithstanding the use to which those chan nels may be put and notwithstanding any pur pose which may have been planned for them they did not come into existence as a result of capital expenditures. The expenditures associat ed with their creation were solely revenue costs to produce the goods the appellant was in busi ness to sell.
There is no provision in the relevant legisla tion which permits, when computing income, a deduction based on the usefulness or the utilitarian value of haulageways. There is only provision for deductions based on the capital cost of main haulageways, if any capital cost
there be. Since in my view there was no capital cost in the creation of the channels, now by the appellant designated and used as haulageways, it is my opinion that on this ground alone the appeal must be dismissed.
Accordingly I would dismiss this appeal with costs.
JACKETT C.J.:
It should not be overlooked, however, that, while the appellant's contention that it has no right to deduct costs of extraction applies to ore removed from all the haulageways, superficially at least, the right to capital cost allowance is restricted, by the regulation relied on by the appellant, to the costs of removing ore from only certain haulageways, namely, "main" haulageways.
2 See, for example, the following cases: Mersey Docks and Harbour Board v. Lucas (1881) 1 T.C. 385, per Jessel M. R. at pages 461-62; (1883) 2 T.C. 25, per the Lord Chancellor at page 28; Last v. London Assurance Corpora tion (1884) 2 T.C. 100, per Brett M.R. at pages 118-19, and per Lord Fitzgerald at pages 128-29; Russell v. Aberdeen Town & Country Club (1888) 2 T.C. 321, per Lord Her- schell at pages 326-28, and per Lord Fitzgerald at page 331; Gresham Life Assurance Society v. Styles (1892) 3 T.C. 185, per Lord Halsbury L. C. at pages 189-90, and per Lord Herschell at pages 193-94; Absalom v. Talbot (1944) 26 T.C. 166, per Viscount Simon L. C. at page 189; and Minister of National Revenue v. Irwin [1964] S.C.R. 662, per Abbott J. at pages 664-65.
The latter decision makes it clear that the same concept of profit applies under our income tax legislation. In that case Abbott J., delivering the judgment of the Supreme Court of Canada, said:
The law is clear therefore that for income tax purposes gross profit, in the case of a business which consists of acquiring property and reselling it, is the excess of sale price over cost, subject only to any modification effected by the "cost or market, whichever is lower" rule.
3 When the matter is looked at from the point of view of the businessman, it seems most improbable that any man of affairs, uninfluenced by tax considerations and by advice of tax experts, would regard the so-called haulageways as newly created or newly acquired plant or assets. There are many situations where a businessman must remove what is accessible before he can remove what is more remote. A farmer who harvests his grain, a woodsman who crops his wood lot, and a warehouseman who has an enclosed space completely filled are examples that come readily to mind. Certainly, no businessman would regard the space through which he passes, after removing what is immediately accessible, to remove what is more remote, as a newly created asset of his business. And yet, the only real differ ences between such cases and the haulageways with which
we are concerned are the walls and the greater distances. The walls are, however, there only for support and contrib ute nothing to the haulageways as such nor can the greater distances make a difference in the character of the space.
 You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.