1 Ex. C.R. EXCHEQUER COURT OF CANADA [19697 563 BETWEEN : Toronto 1969 THE INTERNATIONAL NICKEL JanV. 22-2 4, COMPANY OF CANADA, LIM- APPELLANT; 27-30 ITED Ottawa Feb. 12 AND THE MINISTER OF NATIONAL r RESPONDENT. REVENUE 1 Income tax—Deductions—Mining—"Development expenses"—Construction —Question of fact—Expert evidence, whether admissible—Cost of constructing townsite for mining employees—Income Tax Act, s. 83A(3)(c)(ii). Income tax—Deduction for provincial mining tax—Computation of— Whether allowed in respect of exempt income—Income Tax Act, s. 11(1)(p)—Income Tax Regulations, 701. Appellant discovered an ore body at Thompson, Manitoba in 1956 following years of prospecting and exploring, and in following years built for its employees on municipally-owned land a townsite consisting of roads, sewers, schools, fire stations and municipal buildings which it turned over to the local municipalities in accordance with its contract with the Province. During the years 1958 to 1961 appellant did some surface drilling and underground development and began the production stage. None of its employees living at the townsite in those years was engaged in the development stage of mining. In computing its
564 1 R C. de l'É COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 income for those years appellant sought to deduct the amount ex- pended on construction of the townsite in those years, contending INTER- NATIONAL that they were "development expenses incurred ... in searching for NICKEL Co. minerals" within the meaning of s. 83A(3) (c) (ii) of the Income Tax OF CANADA Act. The Minister disallowed the deduction. LTD. O. In 1961 appellant had income from its mining operations in Manitoba MINISTER OF and elsewhere but all of its income from mining operations in Mani- NATIONAL REVENUE toba was exempt from income tax by s. 83A(5) of the Income Tax Act but was subject to a provincial mining tax in Manitoba of $130,135. Appellant sought to deduct the amount of the provincial mining tax m computmg its federal income tax for 1961, relying on s. 11(1)(p) and Income Tax Regulation 701. The Minister disallowed the deduction. Held, appellant was entitled to neither deduction claimed. 1. The words "development expenses" in s. 83A(3) are confined to expenses incurred at the development stage of mining as understood by people in the mining business, viz expenses incurred in the opening up of an ore body by shafts, drives and subsidiary openings for the various purposes of subsequent mining. The meaning of the words "development expenses" in s. 83A(3) is a question of fact, upon which expert evidence as well as dictionary definitions is admissible. Mount Isa Mines Ltd v. Fed. Com'r of Taxation (1954) 92 C.L.R. 483; John-son's Asbestos Corp. v. M.N R. [1966] Ex. C.R. 212, considered. 2. On the proper construction of Income Tax Regulation 701 the deduction to which appellant was entitled in respect of mining taxes paid Manitoba must be calculated by reference to its income derived from mining operations in Manitoba which is subject to federal income tax, in this case nil. Quemont Mining Corp. et al v. M.N.R. [1967] 2 Ex. C.R. 169, distinguished. INCOME TAX APPEAL. C. F. H. Carson, Q.C., Stuart D. Thom, Q.C. and John M. Fuke, for appellant. D. G. H. Bowman and G. V. Anderson for respondent. GIBSON J.:—There are two issues for decision on this appeal by The International Nickel Company of Canada, Limited from assessments for income tax for the taxation years 1958, 1959, 1960 and 1961 respectively. On the first issue, the company contends that its $6,920,-825.74 expenditures of a capital nature which it incurred in establishing and building the Townsite of Thompson at its Thompson mine in northern Manitoba were "development expenses" incurred by it in "searching for minerals in Canada" in those taxation years within the meaning of section 83A(3) of the Income Tax Act and as such were
1 Ex' C.R. EXCHEQUER COURT OF CANADA [1969] 565 deductible in the respective years in which they were 1969 incurred for the purpose of computing the income of the INTER- company for those taxation years. NATIONAL NICKEL CO. On the second issue, the company contends that it can OF CANADA deduct the sum of $130,135.80, paid in 1961 to the Prov-V. ince of Manitoba under The Mining Royalty and Tax Act, MINISTER NA TIONALOF R.S.M. 1954, c. 169, from its income which was subject to REVENUE tax in that year, which income came from sources in the Gibson J. Province of Ontario and elsewhere. (During 1961 and for a — 36-month period from June 15, 1961, the appellant's income in the Province of Manitoba which was derived solely from the operation of the Thompson mine at Thompson Manitoba was exempt under section 83(5) of the Income Tax Act.) For this contention the company relies on section 11(1) (p) of the Income Tax Act and submits that on a true interpretation of section 701 of the Regulations to the Income Tax Act in relation to the facts of this case, the company is entitled to this type of deduction. The evidence discloses that the appellant commenced prospecting operations in the Province of Manitoba in 1946 and following a programme of prospecting and exploration, made the initial discovery of a major ore body in the so-called Thompson area in early 1956. The Thompson area is approximately 400 air miles north of the city of Winnipeg and is in about the centre of the Province of Manitoba. There were no inhabitants in this area before the appellant established the Townsite. By October 1956 as a result of a programme of surface diamond drilling, the company had ascertained that there was an important ore body extending about 3 2 miles in this area, that there were 15 million tons of indicated ore, and that if a mine were established it could support a mining, milling and smelting operation of 50 million pounds of nickel per year. The appellant at that time decided to proceed to establish a mine in the Thompson area and entered into negotiations and finally into an agreement with the Province of Manitoba, which agreement is dated December 3, 1956, concerning a number of matters, one of which was the construction and establishment of the subject Town-site. During the course of these negotiations, the appellant
566 1 R.C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 indicated to the Province of Manitoba officials that it INTER- contemplated an outlay of about $144,000,000 on this e NATIONAL cTio CO. mining p p r oject. OF CANADA Between 1957 and 1961, the date upon which the first LTD. v. nickel was produced at the Thompson mine, $15,000,000 MINISTER OF NATIONAL was spent in a continued rporog r r a amme of surface drilling g REVENUE and underground development. A development shaft and a Gibson J. production shaft were sunk commencing in early 1957. And by the end of 1960 the appellant had proven ore reserves of 25 million tons. The development work of diamond drilling, construction of shafts, haulageways, drifts, cross-cuts and raises during all relevant periods was done for the appellant by independent contractors, and in the main by a company by the name of Patrick Harrison Limited. The appellant, in 1956, estimated that it would have about 2,400 employees in the production (or extraction) milling, smelting and refining operations at its Thompson mine. It was then estimated that the townsite population would be 8,000 persons; it is more than that in fact, now. At all relevant times, about a little over one-half the appellant's employees at the Thompson Townsite were (and are now) engaged in mining and a little less than one-half were engaged in milling, smelting and refining operations. The balance making up 100% of the employees there, were (and are now) administrative and supervisory personnel. Exhibit R-1 shows the breakdown of all such employees. The appellant, pursuant to the said agreement of December 3, 1956, was required by the Province of Manitoba to build this Thompson Townsite at its own expense. All the roads, sewers, schools, fire stations, municipal buildings and other structures below referred to were built at the Thompson Townsite by the appellant on lands owned by the local Government District or the Official Trustee of the School District of Mystery Lake, which local Government District and School District were set up pursuant to enabling Province of Manitoba legislation. (See Exhibit A-1). None were constructed on lands owned by the appellant. The appellant was not permitted by
1 Ex. C.R EXCHEQUER COURT OF CANADA [1969] 567 Province of Manitoba legislation to build a townsite and 1969 own it, as is often done in other cases when mines are INTER-established in remote areas such as Thompson, and where 1v egEL Co. there are no living accommodations and other buildings OF CANADA providing necessary living amenities, such as schools, a v D . ' hospital etc. By this agreement of December 3, 1956, as MINISTER OF NATIONAL stated, the appellant had to build all these buildings and REVENUE things and hand them over to the said local Government Gibson J. District and School Authorities of the Province of Mani-toba. As a consequence, the appellant at no time could or can now or in the future, make any deduction from its taxable income in any taxation year for capital cost allowance under the Income Tax Act in respect to the capital cost of these buildings or things at Thompson Townsite not owned by it, but built and paid for by it. The employees of the appellant who lived in the Town-site from the commencement of the production or extraction stage of the mining operations were engaged in production (or extracting) operations of the appellant which includes bringing ore to the mill, and also in milling, smelting and refining operations of the appellant and the administrative work relating to the same. None were engaged in prospecting, exploration or development work. The Townsite was not built and developed for the purposes of the personnel who did the said underground development work for the appellant at the Thompson mine. As stated, the said underground development work was done by independent contractors, and none of their personnel lived in the Townsite. A summary in a convenient form for quick reference of much of what has been stated above, may be found in the document filed as Exhibit A-4 at this trial. It is entitled a "Brief History of Manitoba Exploration and Development of Thompson Mine, Surface Plants and Townsite". As to the first issue, the deductibility of the Thompson Townsite expenditures, the parties agree: 1. That the appellant entered into an agreement dated as of December 3, 1956, with Her Majesty The Queen in right of the Province of Manitoba. Under that agreement the appellant made or
568 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 incurred the following outlays or expenses during `r INTER- the taxation years involved in this appeal in respect NATIONAL NICKEL CO. of the townsite for which provision was made in the OF CANADA said agreement: LTD. v. .1958 1959 1960 1961 MINISTER OF Roads, lanes and side- NATIONAL walks REVENUE $ 222,287.81 $ 501,441 $ 588,902 $ 246,979 Administration building Gibson J. (includes assembly hall, townsite office and fire station) .... — 317,930 47,526 21,459 Schools 269,241 173,607 912,770 Sewers and water mains Sewer lines—storm .. 616,766.46 569,408 266,802 906 Sewer lines—sanitary 211,756 82 243,922 194,812 14,084 Water lines 395,253.65 504,981 315,556 5,190 R Sewage lift station .... 63,634 — — Clearing and Grubbing 96,670 3,935 15,923 Parking lot .... . 11,150 9,313 (R—denotes red figure) $1,446,064.74 $2,578,377 $1,600,453 $1,206,931 2. That the aforesaid amounts were outlays of capital or payments on account of capital. 3. That the principal business of the appellant was mining within the meaning of section 83A(3) (b) of the Income Tax Act. As to this first issue, the question for decision is whether the aforesaid amounts were "development expenses" incurred by the appellant in searching for minerals in Canada within the meaning of sub-paragraph (ii) of paragraph (c) of subsection (3) of section 83A of the Income Tax Act in the pertinent taxation years. The relevant part of section 83A(3) (c) (ii) of the Act reads: 83A (3) ... A corporation whose principal business is (b) mining or exploring for minerals, may deduct, in computing its income under this Part for a taxation year, .. . (c) the aggregate of such of (ii) the prospecting, exploration and development expenses incurred by it in searching for minerals in Canada, as were incurred after the calendar year 1952 and before April 11, 1962, to the extent that they were not deductible in computing income for a previous taxation year,
1 Ex. C.R. EXCHEQUER COURT OF CANADA [1969] 569 By this provision of the Act, the deduction in computing 1 969 its income for a taxation year allowed tO a mining corpora- INTER-tion whose principal business is mining such as the subject 1v egE1 N .Co. corporation, is confined to expenses incurred by it in impie-OF CANADA menting the first three of the four stages of mining name- L; o. ly, the prospecting, exploration and development stages MINISTER NISTE OF and there may not be included in such deduction expenses REVENUE incurred in implementing the fourth stage of mining which Gibson J. is the production (or the extraction) stage; and for "prospecting", "exploration" or "development" expenses incurred to qualify as a deduction under this provision, such expenses must be incurred in "searching for minerals in Canada". No deduction is allowed for production (or extraction) expenses incurred by such a corporation even though incurred "in searching for minerals in Canada". This is of significance as will appear later in these reasons, because in this case, it was contended by the appellant and disputed by the respondent, firstly, that the "searching for minerals" at the subject Thompson- mine commenced with the prospecting and will continue during the whole life of the mine, that is, until the last ore is extracted; and secondly, that "development expenses" within the meaning and for the purpose of section 83A(3) of the Income Tax Act do not have to have a direct and specific searching aspect to them to qualify as deductible expenses, but instead a broader meaning should be given to the category of expenses which qualify as such "development expenses" in searching for minerals in Canada once it is established that the principal business of a mining corporation is mining, and that, at a particular mine site where "development expenses" are incurred by it, searching for minerals is an essential aspect of such mining. In summary, the appellant's submission on this first issue was that on the evidence and on a true construction of the relevant provisions of the Income Tax Act: 1. That Parliament has directed that a corporation whose principal business is mining may deduct certain expenses not otherwise deductible in computing its income, incurred by it in searching for minerals. These expenses identified as those of prospecting, exploring and developing, are not otherwise deductible because they are capital in nature under income 91301-7
570 1 R.C. de l'É COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 tax law and do not fit into any category of deducti- INTER- ble capital outlay under Part XI of the Regulations, ATIO NI L AL but are closely related to earning the corporation's OF CANADA income. LTD. y. 2. That there are two questions to be answered. The MINISTER OF NATIONAL first is whether the cost to the appellant of building REVENUE the Thompson Townsite was a development expense Gibson J. in relation to its mining business, and the second was whether such expense had been incurred in searching for minerals. 3. That on the first question, evidence was adduced by it which adequately supports the proposition that townsite costs are development expenses in the mining business. 4. That all the prospecting and exploring and all the underground tunnelling and drilling is pointless and a waste of time and money, without miners to extract the minerals that have been discovered. That when these minerals are located in remote and forbidding areas it requires more than the mere offer to pay wages to attract the miners and supporting personnel to the area to operate the mine on an economic basis. That this situation is characteristic of mining in Canada. That in some instances mining companies have built the facilities necessary for the operation of their mines. That in the present case the appellant was not able to follow this practice because of the policy of the Government of Manitoba against company towns, and as a result, does not own or control the townsite. 5. That development expenditures need not be directly related to searching in order to be 'deductible under section 83A(3) of the Act. That the phrase "incurred... in searching for minerals" does not govern development expenses as though the question were "are these development expenses on the town-site incurred in searching for minerals?". That if that were so, then the phrase "incurred in searching for minerals" would also govern prospecting and exploring and subparagraph (ii) would read "The c
1 Ex C R EXCHEQUER COURT OF CANADA prospecting expenses incurred in searching for min- erals, the exploration expenses incurred in searching minerals and the development expenses incurred NAT in searching for minerals". 6. That the search for minerals is the common feature of everyaspect of a minin That it is by no means necessary or correct to limit searching to the type of operation that is described as prospecting or exploring. 7. That "prospecting" is a preliminary operation more in the nature of searching for anomalies indicating mineral deposits rather than specifically searching for minerals. 8. That "exploration" is the more detailed, but still general, investigation of a possible ore body in which its extent and mineral content is more definitely determined. 9. That considering the enormous areas of land that must be examined and the fact that ore bodies seldom offer conspicuous surface indications of their existence, prospecting and exploring, although searching, are only the beginning of the search. That the evidence shows that detailed searching for minerals not only continues into the actual mining operation, but is in the present case, an essential aspect of the ultimate mining operation. 10. That prospecting and exploration are the first steps taken towards searching in the field of mining. They are initially general and diffused operations. If a mineral deposit is located, the search becomes more and more concentrated and intensive and leads to the development operations required to gain access to the minerals which are believed to exist below the ground and culminates in the mining operation itself. 11. That the statute refers to searching "for minerals" and not "for mineral deposits". Prospecting and exploration are generally understood terms and when such activities are being conducted the search is not for minerals directly but for mineralized zones 91301-7a [1969] 571 1969 T N I I O Cg N E L A C L o . OF CANADA LTD. v. INISTER of P gcompany's 0o p erations. M NATIONAL REVENUE Gibson J.
572 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 or areas. The mineral itself is the ultimate object of INTER- the search and this stage of the search is conducted NATIONAL NIc%EL CO. in the course of the mining operations. OF CANADA LTD. 12. That sub-paragrap h ( ii ) o f subsection (3)of section y. 83A of the Act is worded as it is, not to define or MINISTER NA IONALF limit "searching", but to include in the deductible REVENUE expenses of the business of mining certain stipulat- Gibson J. ed amounts otherwise not deductible that may be incurred at any stage of the mining operation. 13. That said sub-paragraph (ii) must be set in the context of the whole section and as part of the scheme of taxing the income of mining companies. 14. That because the word "searching" follows closely after "prospecting and exploring" it is rather natural but by no means necessary to limit searching to the sort of operations that are described as prospecting or exploring. The evidence indicates, as stated, that prospecting and exploring are preliminary operations more in the nature of searching for anomalies or mineral deposits rather than specifically for minerals. 15. That searching is a prevailing aspect of a mining company's business at all stages and that Parliament meant that all expenses incurred in that connection should be deductible. 16. That the statute has also been interpreted and applied by the Department of National Revenue on that basis, as is evidenced by the fact that many of the expenditures on the permanent underground structure were not directed to looking for minerals—e.g. sinking the production shaft and driving the main haulageways (see Exhibit A-19), but still the practice of the Department has been to allow these expenses without question. 17. That had the Department restricted the deductibili-ty of underground development expenses to those having a direct and specific searching aspect, the purpose of section 83A(3) of the Act would have been frustrated. It is evident that the departmental practice was to allow these expenses as coming within section 83A. That was done because it was recognized that the searching for minerals was the
l Ex. C.R. EXCHEQUER COURT OF CANADA [1969] 573 essential aspect of mining and that development 1969 expenses in the broad sense were incurred in this IN R - search. NATIONAL NICKEL Co. OF CANADA Contrarywise and in summary, the respondent's submis- sion on this first issue was: MINIS V T . E R OF 1. That the cost of installing the services and con- NATIONAL REVENIIE structing the buildings of the Thompson Townsite is Gibson J. not a "development expense incurred in searching for — minerals in Canada" within the meaning of section 83A(3) of the Income Tax Act. (a) The said cost is not a "development expense" within the meaning of section 83A(3) of the Act at all, or in the sense in which that expression is used in the mining industry. Development as that term is used in the mining industry connotes the operation following exploration and preceding production, of physically reaching and opening up the ore body in preparation for extraction. It includes the sinking of development shafts, cross-cutting, drifting and raising. It does not include construction of a townsite for the accommodation of persons who will be engaged in extraction, milling, smelting and refining operations. See Johnson's Asbestos Corporation v. M.N.R.' (b) The said cost is, in any event, not a development expense "incurred in searching for minerals". (i) The words "in searching for minerals" connote a direct and immediate relationship between the "development" and the searching contemplated by section 83A(3) of the Act. In other words, the section permits a deduction not of "development expenses" but of development expenses as qualified by the words "in searching for minerals". This may be expressed in one of two ways: (A) that the development contemplated by section 83A(3) of the Act must in itself involve searching, or 1 [1966] Ex. C R 212.
574 1 R C. de l'É COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 (B) that the "searching" referred to in sec-INTER-tion 83A(3) of the Act must be a part of , NATIONAL NICKEL CO the development operation. OF CANADA The appellant's theory appears to be that LTD V the court may treat the two parts of section MINISTER OF NATIONAL 83A(3) of the Act as isolated and contends REVENUE in effect that the townsite expenses are devel-Gibson J. opment expenses (even though the construction of the townsite in itself involved no searching for minerals, nor was it related to any activity that could be described as "development in searching for minerals") and seeks to satisfy the test imposed by the limiting words "in searching" by alleging that the extraction operation in which some of the employees were to engage in "searching for minerals". Even if this latter contention advanced on behalf of the appellant (i.e. that persons engaged in extraction are "searching for minerals") had merit—the "searching" upon which the appellant bases its case is—even if the term searching were appropriate—an incidental and minor part of an efficient extraction operation. (ii) The "searching" contemplated by section 83A(3) of the Act is a searching which forms part of the development operation. It is a searching that takes place in the stage preceding extraction (production). - (c) Even if the appellant were right in contending that: (i) the cost of carrying out its obligations under the agreement with Manitoba was "a development expense" (even though it involved no searching), and (ii) the underground extraction operations of extracting ore were "searching for minerals" (even though that "searching", so-called, formed no part of development) the claim to deduct the townsite expenses should still be denied because the section must be read together rather than bisected and its component parts treated in isolation one from the other.
IEx.CR EXCHEQUER COURT OF CANADA [1969] 575 (d) The allegation that the persons engaged in min- 1969 ing operations underground 'were engaged in I NTER- "searching" is in any event wrong. Their essential TIO NIcLNco. activity was the extraction of proven ore for the OF CANADA most part as well as, to some degree, of "well Lv. indicated" ore. The efficient extraction of ore MINISTER OF NATIONAL may include following down stringers or other REVENUE irregularities running from the main ore body. Gibson J. This is an incidental part of extraction and can- not be described as "searching". Even if it could, it would hardly justify the conclusion that the entire underground operation at Thompson took its character from this activity. (e) Alternatively, the cost of constructing the buildings and installing the other services which the appellant was obliged to pay for is in no sense a "development expense incurred in searching for minerals". It was the price paid or consideration given for the extensive and important rights and concessions granted to the appellant by Manitoba under the agreement of December 3, 1956. See Farmers Mutual Petroleums Ltd. v. M.N.R.2 (f) If the appellant's contention is correct that the townsite costs are "development expenses incurred by it in searching for minerals" within the meaning of section 83A(3) of the Act, the same reasoning would apply to the cost of similar assets in a company town owned by a mining company. The result of this would be that a mining company could treat all of its capital outlays for plant buildings or company towns owned by it as development expenses incurred in searching for minerals and deductible under section' 83A of the Act. On the appellant's reasoning there is no difference in principle between the cost of the town-site at Thompson which it did not own and the cost of a company town owned by it. Both, according to the appellant's theory, would be development expenses incurred in searching for 2 [1966] Ex. C.R. 1126.
576 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 minerals. The result of the appellant's reasoning INTER- would be that the cost of a company town owned NATIONAL NICKEL CO. by a mining company could not be deducted OF CANADA under the capital cost allowance provisions of sec-LTD. V. tion 11(1) (a) of the Act, but only as a develop-MINISTER OF ment expense incurred in searching for minerals NATIONAL REVENUE in Canada under section 83A since under section Gibson J. 1102(1)(a) of the Regulations to the Income Tax Act The classes of property described in this Part and in Schedule "B" shall be deemed not to include property (a) the cost of which is deductible in computing the taxpayer's income Thus on the appellant's contention, a mining company that put up a townsite which it owned could deduct the entire cost in one year under section 83A of the Act. It would in fact be obliged to use section 83A and if it sold any of the buildings, it would not be subject to the recapture provisions of section 20 of the Income Tax Act. It could, for example, having deducted the full cost under section 83A of the Act sell the townsite to a subsidiary which could then begin to deduct capital cost allowance on it. (g) Section 83A of the Act is not intended to allow mining companies to write off all capital expenditures which they incur. Section 11(1) (b) and Part XII of the Regulations (depletion allowance) to the Income Tax Act, section 83A of the Act (prospecting, exploration and development expenses incurred in searching for minerals) and section 83 (three year exemption) of the Income Tax Act provide a variety of exceptional and specific concessions and privileges to mining companies that are not granted to other industries. Had Parliament intended to allow mining companies to deduct capital expenditures of the type in issue in this case made under agreements such as the agreement of December 3, 1956, with Manitoba it is submitted that it would have said so. To extend section 83A(3) (c) (ii) of the Act to allow the
1 Ex. C R. EXCHEQUER COURT OF CANADA [1969] 577 deduction of the cost of putting in municipal ser-1969 vices under an agreement with the province T be to construe that section as if it read: NATIONAL NICKEL CO. all capital expenditures incurred by a corporation whose prin- OF CANADA cipal business is mining or exploring for minerals which were 11 v 21 . ) ' incurred prior to the date on which the mine came into MINISTER OF production. NATIONAL REVENUE If the appellant's contention is right that the Gibson J. expenditures involved in this case are "development expenses incurred by it in searching for minerals" it is difficult to conceive of any capital expenditures incurred before the mine comes into production that would not be. Section 83A of the Act confers a restrictive right to a deduction of a specific type of expenditure. Its obvious purpose is to allow the deduction of those expenses of searching for minerals in Canada that form part of the three successive stages of prospecting, exploration or development. Section 83A of the Act contemplates no deduction of the cost of a townsite which was ultimately to accommodate persons engaged in extraction, milling, smelting and refining. So much for the submissions of the parties. The question on this first issue in this case is, are the expenditures on the Thompson Townsite by the appellant of the kind that Parliament meant to allow to be deducted as "development expenses" in computing the appellant's income for the taxation years in question under the provisions of section 83A(3) of the Income Tax Act. Interpreting what Parliament meant to include in "development expenses" under that section of the Act in a case such as this, may be: (a) a question of law under the principle that the construction of all written documents, including statutes, belongs to the court alone (Taylor on Evidence, paragraph 43, page 47, and Camden v. Inland Revenue Commissioners3, Loblaw Groce-terias Co. v. Toronto4 , Rogers-Majestic Corp. v. 3 [1914] 1 K.B. 641. 4 [1936] S.C.R. 249.
578 1 R C de l'É COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 Toronto5, The Firestone Tire and Rubber Co. of INTER- Canada v. Hamilton 6, and Edwards v. Bairstow 7, NATIONAL NICKEL CO. or OF CANADA LTD. (b) a question of fact to be determined on the evi-V. MINISTER OF dence under the exception to that principle illus-NATIONAL trated by A. G. for the Isle of Man v. Moore' REVENUE (see per Lord Wright at page 267) and applied by Gibson J. the Supreme Court of Canada in Western Minerals Ltd. et al v. Gaumont°. (Cf. Crow's Nest Pass Coal Co. (Ltd.) v. The Queen 10 per Locke J., at page 752 delivering the judgment of the court). This is a difficult matter to decide in this case. But even if interpreting Parliament's meaning of "development expenses" under that section of the Act should be considered a question of law only, in any event, (and is always the case in matters such as this) the question of whether the appellant's expenditures on the Thompson Townsite are of such a nature or kind as to fall within such meaning of "development expenses" is a question of fact. As a result, in a case such as this, it is difficult to separate questions of law and fact because evidence which will enable the court to put itself in a position to construe the words "development expenses" in " the section of the Act (if construction is a question of fact to be determined on the evidence) is the same or practically the same as that which the court will use to determine whether the words "development expenses" in the section of the Act cover the subject expenditures of the appellant on the Thompson Townsite. But, that is no reason for not differentiating between these two separate matters. After careful consideration, I am of the opinion that both matters are questions of fact in this case, to be determined on the evidence. On the issue of what are such "development expenses", the appellant's witness Harold M. Wright gave evidence. Mr. Wright is a metallurgical engineer by profession, is a registered professional engineer in the Province of British 5 [ 1943] SCR. 440. 6 [1955] SCR. 604. 7 [1956] A.C. 14. 8 [1938] 3 All E R. 263. 9 [1953] 1 SCR. 345. 10 [1961] S.C.R. 750.
1 Ex. C R EXCHEQUER COURT OF CANADA [19691 579 Columbia, a member of the Canadian Institute of Mining 1 969 and Metallurgy, the Institution of Mining and Metallurgy INTER-in London England and the Australasian Institute of Min- N C%EL Co. ing and Metallurgy of Melbourne Australia. OF CANADA LTD. He has had extensive practical experience throughout v MINISTER OF Canada, the United States and South America and is NATIONAL President of Wright Engineers Limited, Vancouver, B.C., REVENUE consulting and design engineers which company has 263 Gibson J. employees. Mr. Wright gave evidence that his company's work frequently involves "designing the complete package ... for a new mining project". He said that when: . . . A mining company finds a new mine and asks initially that a Feasibility Study or a Production Plan Report be prepared. This is sometimes referred to as an Economic and Production Analysis in which capital costs and operating costs at an agreed rate of pro- duction are developed An economic analysis based on the study provides the directors of the company with information required to make a decision as to the feasibility of the project. If the reports are favourable they are then used for banking purposes to raise the required money or for backing up a security offering to the public. These studies have to be very complete and in addition to including the cost for putting the mine in operation to produce so many tons a day, they include the costs for the concentrator, and the service facilities such as water, power, telephone, repair shops and assay office In remote or very isolated areas the company will have to arrange for housing for married and single people and for such facili- ties as schools, hospitals, churches, supermarkets and recreational facilities, and the studies will include the costs for these services. He also said that he considered . . . the building of a townsite to be a necessary development expense in order to bring a mme into production in an isolated area such as Thompson, Manitoba. Speaking generally, he also said that : - In order to attract and retain the services of stable and qualified workers in isolated areas, the mining company must assume responsibility for the establishment of a townsite at the mine site which has not only good housing, but also good schools, medical services and recreational facilities. The townsite must be such that not only the workers will be happy 'living there but also their wives and children In order to establish such a townsite, the mining company must spend large sums of money initially to develop it by installing the necessary sewers, water works, power, etc. In addition, the company may assist employees to purchase houses, usually with some repurchase arrangement in the event that an employee leaves. It must be remembered that young married couples have little capital of their own. Also, providing the initial municipal services will keep the municipal taxes low.
580 1 R.0 de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 As to what, in his opinion, "development" meant, he INTER- stated as follows: NATIONAL NICKEL Co. From my experience in the mining industry I have become familiar OF CANADA with the terminology employed in describing or referring to its opera- LTD. v. tons and the meanings given to words and phrases used in the MINISTER OF industry. A reference to "development" in connection with a mine NATIONAL extends to various operations which must be undertaken in preparation REVENUE for the removal of ore from the mine. Without attempting an ex- haustive statement, development includes the construction of the mine Gibson J. shaft and haulageways, the dehneation of the ore body in preparation for extraction operations, and the provision of living facilities and amenities for the work force that will be engaged in the mining and subsequent operations. His conclusion in respect to the subject matter, he stated in these terms: I have been informed with regard to the part played by Inco in Building and developing the townsite at Thompson, Manitoba, and the costs incurred by it in that connection. It is my opinion, based on my experience aforesaid, that the costs incurred by Inco in connection with the townsite at Thompson, Manitoba, can be properly described as development expenses and would be so considered in the ordinary understanding of those engaged in the mining industry. On cross-examination, he said that he would include in some cases as such "development expenses", the cost of a mill, a smelter and a refinery, and even the head office of a mining company distant many miles from the mine. On the issue of what are the subject "development expenses", the respondent called Herbert H. Cox, a consulting mining engineer who has had extensive practical mining experience in Canada and who is now a consultant. He disagreed with the view expressed by Mr. Wright in these words: The view expressed by Mr. Wright as to the meaning of the word "development" in the mining industry in my opinion is inconsistent with the meaning and use of that word m the mining industry. In my experience I have never before heard the word used in the mining industry to include such matters and the meaning which he gives to it is not that given in any dictionary or other publication m the mining field which I have examined. Excerpts from dictionaries and glossaries of mining terms containing definitions of "development" ... (are exhibited). (Witness produced excerpts which were filed.) In my opinion these definitions correctly set out the meaning of the word development as that term is currently used in the mining industry. (Words in brackets are mine) .
1 Ex. CR. EXCHEQUER COURT OF CANADA [1969] 581 The following dictionary definitions and definitions from 1969 mining publications on this matter were introduced and INTER-referred to in evidence (most of them by the witness Cox, NIcL Co. but some are part of the respondent's evidence) . OF CANADA LTD. Mining includes surface operations, as quarrying in open cuts and O. the working of placers, as well as underground work. In a given MINISTER OF mineral deposit, mining operations may be divided into 4 stages: NATIONAL REVENUE Prospecting, or the search for minerals. Gibson J. Exploration, or the work of exploring a mineral deposit when found. It is undertaken to gain knowledge of the size, shape, position, characteristics, and value of the deposit. Development, or the driving of openings to and in a proved deposit, for mining and handling the product economically. Exploitation (mining), or the work of extracting the mineral. These terms are used loosely. It is often difficult to distinguish between prospecting and exploration, or between exploration and development, as the different kinds of work insensibly shade into one another; an arbitrary differentiation between them is usually established at a given property. Confusion also arises when the terms are extended to describe operations on a property containing several orebodies. In such cases, prospecting for new orebodies is a part of exploration. In certain mineral deposits, prospecting and exploration are done in one operation by boring; as in the disseminated lead ores of S.E. Mo, and in those Mesabi iron ores and gold placers that are mined by open-cut methods. (Mining Engineers' Handbook, Vol. 1, Third Edition, 1941, Robert Peele and John A. Church, published by John Wiley & Sons, Inc., New York). Mine. . . . 3. The terms "mine" and "coal mine" are intended to signify any and all parts of the property of a mining plant, either on the surface or underground, that contribute directly or indirectly to the mining or handling of coal. (Glossary of Geology and Related Sciences, Second Edition, J. Marvin Weller, published by American Geological Institute, Washington). DEVELOPMENT. Opening up of an ore body by shafts, drives and subsidiary openings in readiness for valuation of deposit, estimate of its tonnage, and in due course extraction. (Dictionary of Mineral Technology, 1963, E. J. Pryor, published by Mining Publications Ltd., Salisbury House, London, England). development. a. To open up a coal seam or ore body as by sinking shafts and driving drifts, as well as installing the requisite equipment. Nelson. b. Work of driving openings to and in a proved ore body to prepare it for mining and transporting the ore. Lewis, p. 20. c. The amount of ore in a mine developed or exposed on at least three sides. C.T.D. d. S. Afr. The Work done in a mine to open up the paying ground or reef and, in particular, to form drives or haulages around blocks of ore which are then included under developed ore reserves. Beerman. e. A geologic term, applied to those progressive changes in fossil genera and species that have followed one another during the deposition of the strata of the earth. Fay.
582 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 (A Dictionary of Mining, Mineral, and Related Terms, Paul W. Thrush, published by U S. Department of the Interior, Bureau of INTER- NATION a L Mines) . NICKEL Co. Development. 1. A geological term, applied to those progressive OF CANADA changes in fossil genera, and species, which have followed one another LTD. V during the deposition of the strata of the earth. (Roberts) MINISTER OF 2. Work done in a mine to open up ore bodies, as sinking shafts NATIONAL and driving levels, etc. (Skinner). Sometimes used synonymously REVENUE with "annual assessment" work. Gibson J. (A Glossary of the Mining and Mineral Industry, 1947, Albert H. Fay, Bulletin 95, Department of the Interior, Bureau of Mines, Wash-ington). Development (min.). To open up a coal seam or orebody as by sinking shafts and driving drifts, as well as installing the requisite equipment. (Dictionary of Mining, 1964, A Nelson, published by George Newnes Ltd , Tower House, London, England). Development is the work of drivmg openings to and in a proved ore body to prepare it for mining and transporting the ore. (Elements of Mining, Third Edition, 1964, Robert S. Lewis, Revision by George B. Clark, published by John Wiley & Sons Inc , New York) . DEVELOPMENT—Is the underground work carried out for the purpose of reaching and opening up a mineral deposit. It includes shaft sinking, cross-cutting, drifting and raising. (Mining Explained, 1968, Northern Miner Press Limited, published by Northern Miner Press Limited, Toronto). The study of the Carter Royal 'Commission on Taxation in respect to "Taxation of the Mining Industry in Cana-da" was also referred to. This Study, in part, in reference to "development" reads as follows: The decision to develop a property marks the beginning of the third stage in the progress towards a producing mine. Information gathered in the prospecting and property examination stages will have been analysed and estimates made of the grade, size and characteristics of the orebody and of the costs of transportation and treatment. The development stage may be defined as the preparation of an area believed to contain ore for extraction of the ore in commercial quantities. Activities include clearing and stripping the property, removal of overburden, constructing roads and railways, housing, warehouses and power connections (possibly involving the construction of power facilities), shaft-sinking and underground development (or open-pit preparation) prior to extracting the ore, and installing a headframe and underground machinery. If the ore is to be treated at the mine site, activities also include preparation of an area for, and construction of, a mill and possibly a smelter. During this stage ore will be extracted in the course of underground work. While preliminary underground work is usually carried on as much as possible outside the mineralized area, conditions sometimes suggest that it be carried on in the orebody so that large amounts of ore may be extracted in this period.
1 Ex. C R EXCHEQUER COURT OF CANADA [19691 583 The High Court of Australia in Mount Isa Mines Ltd. v. 1969 Federal Commissioner of Taxation" in interpreting what I R-"expenditure on necessary plant and development of the NIA LNCo. mining property" should be included as "development OF CANADA expenses" under section 122 of the Income Tax Assessment LvD. Act of Australia 1936-1949 held that all expenditures , MINISTER OF NATIONAL other than expenditures on plant of a capital nature direct-REVENUE ly attributable to the establishment of the mine and the Gibson J. working of it or to its expansion or extension from time to time, should, for the purposes of section 122, be regarded as expenditures on the "development" of the mining property. The facts of that case were that when the first exploration shafts had been sunk in the subject mine, there was only a small townsite some distance from the mining property and the existing living facilities were totally inadequate for the reasonable accommodation and living amenities of the men employed by the mine. As a result, the mining company constructed houses for them, provided for a water supply, electrical power, sanitary services, medical, hospital and educational facilities and other attendant amenities. The trial judge, Mr. Justice Taylor, held that in the circumstances of that case, such expenditures were a necessary part of the establishment and conduct of the mining undertaking, accordingly were entitled to be charged as expenditures incurred in the "development" of the mining property for the purpose of section 122 of the Australian Act. Mr. Justice Taylor said at pages 489-90 that that section: . . permits a person who is carrying on mining operations for the purpose of gaining or producing assessable income to treat a wide class of expenditure of a capital nature as deductible for the purposes of the Act over a period calculated by reference to the estimated life of the mine, and it is inconceivable that the legislature intended to permit such a deduction in the case of capital expenditure incurred on development, in the sense of work preparatory to the commencement of or ancillary to actual mining operations, and yet deny such a deduction in respect of expenditure of a capital nature necessarily incurred contemporaneously with and directly in association with mining operations. This consideration alone would, I think, dispose of any suggestion that the word "development" should be understood in any restricted sense but there is a further contrary intention to be found in the section. The deduction which is per- mitted in respect of plant is a deduction in relation to expenditure 11 (1954) 92 C.L.R. 483.
584 1 R C. de l'É COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 of a capital nature incurred on necessary plant. That is, on the INTER- language of the section, plant which is necessary for the carrying on NATIONAL of the mining operations for the purpose of gaining or producing NICKEL CO. assessable income. In the case of plant the allowable deduction is not OF CANADA subject to any restriction other than that to be found in the wide LTD. V. words of the section. Accordingly, expenditure on plant is within the MINISTER OF scope of the section whether it is necessary for the day-to-day working NATIONAL of the mine or for developmental work in the narrowest sense and I REVENUE should think this circumstance throws some little light on the meaning of the word "development" as used in the section. The deduction in Gibson J. each case is clearly intended to serve the same purpose and it would be out of keeping with the general sense of the section to give a restricted meaning to the latter word and thereby limit the range of expenditure on development in respect of which a deduction might be claimed. Perhaps, the import of the section is best understood by regarding the use of the word "development" as intended to amphfy the section and to cover capital works not covered by the word "plant". At all events I am satisfied that all other expenditure of a capital nature directly attributable to the establishment of the mine and to the working of it or to its expansion or extension from time to time should, for the purposes of the section, be regarded as expenditure on the development of the mining property. Jackett P. in Johnson's Asbestos Corp. v. M.N.R.12 said this at page 217 about the meaning of "development expenses" in section 83A(3) of the Act after hearing evidence in respect thereto: "Development" of a mine, in general terms, means to uncover the body or area which is to be the subject matter of the extraction process. Development is the preparation of the deposit or mining site for actual mining. In the case of asbestos, it involves the removal of the overburden and of waste rock. It is of particular importance, m considering the words of sub-paragraph (ii) of paragraph (c) oI subsection (3) of section 83A to realize that this process also serves, in the case of asbestos, by exposing more fibre-bearing rock, to give more information as to the extent of the fibre-bearing rock. In other words, as the words of sub-paragraph (u) imply, in the case of asbestos at least, you may be continuing the search for the asbestos right up to the actual extraction process. As to this first issue, in my view there are two questions to be answered namely, (1) whether the expenditures made by the appellant in building the Thompson Townsite in the relevant years were "development expenses", and (2) whether such expenditures were incurred in "searching for minerals" in Canada in such years, within the meaning of section 83A(3) of the Income Tax Act during the relevant taxation years. 12 [1966] Ex. C.R. 212.
1 Ex C R EXCHEQUER COURT OF CANADA [19691 585 On the evidence adduced in respect to the subject 1969 Thompson mine, I am of opinion that the "searching for INTER-minerals" commenced with the prospecting stage and will N oT L C. continue until the mine is completely exhausted. OF CANADA LTD. On the evidence also, it was established that over 50% v. of the employees of the app ellant who lived in the MINISTER OF NATIONAL Thompson Townsite during these relevant taxation years REVENUE were miners and they were engaged in extracting minerals Gibson J. in the production stage of mining the Thompson mine and at that stage of mining, were engaged for a relatively small percentage of their time in "searching for minerals". This is abundantly clear from the evidence of the appelant's mine geologist Mr. Grant B. Hambly and the plans and photographs of the mine which were put in. At no time were any of these miners engaged in any work in the development stage of mining this Thompson mine, and as a consequence none were "searching for minerals" at such development stage. The rest of the employees of the appel- lant who lived in the Thompson Townsite during the rele- vant taxation years were engaged in the milling, smelting and refining operations of the production stage of mining this Thompson mine or were supervisory or official personnel. On the evidence also, a relative allocation of expenses incurred by the appellant to each of the four stages of mining was established. It is sufficient to record such in the manner following: Expenses Incurred by the Appellant "corporation whose principal business is ... mining ... in searching for minerals in Canada" During the Four Stages of Mining Namely, Prospecting, Exploration, Development and Production (Extraction) at Thompson Mine Manitoba. 1. At prospecting stage- (not in issue). 2. At exploration stage-(not in issue). 3. At development stage- (a) the cost of underground installation expenses such as development shafts, haulageways etc.-(Not in issue), done in the main by independent contractors, 91301-8
586 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 (b) the cost of the very little "searching for minerals" INTER- done. (There was probably no "searching for min- ATIOL NIc AL erals" done during most of the time taken up OF CANADA with development work, because development LTD. V. work, in the main, only indirectly related to MINISTER OF "searching for minerals".) NATIONAL REVENUE 4. At production (or extraction) stage- Gibson J. (a) the cost of some "searching for minerals" done by miners of the appellant, but this was relatively small in relation to the cost of mining or extracting the ore body, (b) the cost of constructing the mill, the smelter and the refinery and 18 houses in the Townsite owned by the appellant for its supervisory and official personnel, (c) the cost of miners' wages. Having made such allocation of expenses to the four stages of mining of the Thompson mine, the problem is where to allocate the cost of constructing and establishing the Thompson Townsite. No one contends such cost should be allocated or considered a prospecting or exploration expense. The appellant contends such cost was a "development expense", whereas the respondent submits it was a production expense. From the evidence, Exhibit A-4, which was put in evidence by the appellant and which, as stated, is entitled a "Brief History of the Development of Thompson Mine, Surface Plant and Townsite", the following chronology of events is found which is also relevant for such a categorization: IN 1958 — T he production stage of the Thompson mine began. — T he construction of the mill buildings was completed. — T he construction of the smelter building was commenced. — C onstruction of the Townsite began. IN 1959 —T he production stage of mining progressed.
1 Ex. C R. EXCHEQUER COURT OF CANADA [1969] 587 — T he development stage of mining also progressed. 1969 — C onstruction of the smelter buildings was com-INTER- NATIONAL pleted. NICKEL CO. — C onstruction of the refinery was commenced. of CANADA Mo. — F urther construction of the Townsite progressed. v. MINISTER OF IN 1960 NATIONAL REVENUE —T he production stage of mining progressed. Gibson J. —B oth the mill and the smelter were in operation. —T he refinery construction progressed. —T he construction of the Townsite further progressed. IN 1961 — The production stage of mining continued. — D evelopment commenced in a new area of the mine. — T he refinery commenced operation. — T he construction of the Townsite further progressed. BETWEEN 1962 and 1965 — T he Townsite was further constructed and finally completed in 1965. Certain of the evidence however, is not relevant in categorizing the cost of constructing and establishing the Thompson Townsite for the purpose of construing the meaning of the words "development expenses" in section 83A(3) (c) (ii) of the Income Tax Act in relation to the Thompson mine. I am of opinion that the meaning given to those words by the witness Wright is not what Parliament intended. His meaning is much too wide and is one which may be acceptable and relevant in reference to the concept of an overall development of many projects being done today which may involve the establishment of a new town but it is not the concept of development which is applicable to the subject matter of this case. In my view, what Parliament intended in this subsection of the Act, was to confine "development expenses" to those expenses, which are incurred at the development stage of mining as understood by people in the mining business which is, in my view, evidenced by the opinion of Mr. Cox and the dictionary definitions and the definitions from mining publications put in evidence. 91301-8i
588 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [1969] 1969 As a result, I am of opinion that "development INTER- expenses" within the meaning of section 83A(3) (c) (ii) of NATIONAL NICKEL CO. the Income Tax Act mean those exp l~ e nses which are OF CANADA incurred in the opening up of an ore body by shafts, drives LTD v. and subsidiary openings for the various purposes of subse- MIN ISTERA NATIONAL O F quent mining such as, the valuation of deposits, the esti-REVENUE mate of its tonnage and in due course, its extraction. This, Gibson J. in essence, is the meaning given to development by E. J. Pryor in his Dictionary of Mineral Technology above referred to. Predicated on such a construction of those words, and on a consideration of the whole of the evidence, I am of the view and find as a fact, that the appellant's expenditures above referred to, on the Thompson Townsite in the Province of Manitoba are not of such a nature or kind as to fall within such meaning of "development expenses". I am further of the opinion that, in the main, they are production expenses of the mining of the Thompson mine. I say "in the main", because as some of the evidence indicates, there may be a slight overlapping between the development and the production stages in the subject mine, but such, overlapping is minimal in this case and therefore immaterial for the purpose of these two findings of fact. It is immaterial for other reasons also namely, because the evidence in this case shows that "searching for minerals" in the Thompson mine during the development stages of its mining during the relevant taxation years was also minimal, if any was done at all; and that it shows that practically none of the personnel employed in the development work generally, (including any such "searching for minerals" in connection therewith) did live in the town-site; and it shows that it was never intended that they live in the townsite or enjoy any of its amenities (such as the school, the hospital and so forth, which were part of the costs of the townsite to the appellant). The conclusion I reach is that it is impossible to relate the development work done by the appellant at its Thompson mine "in searching for minerals" during the relevant taxation years to the necessity for the appellant building the townsite and incurring the cost of doing so. Instead, the necessity for building such a townsite and incurring the cost of doing so, was to enable the appellant
1 Ex C.R EXCHEQUER COURT OF CANADA [1969] 589 to extract the ore at the production stage of mining this 1969 mine mainly, and also at the same time, as supplementary INT ER- thereto, but to a relatively minor extent in relation to NATIONAL ec TI0 L Co. extracting ore, to search for minerals. OF CANADA LTD. So much for the determination of the first issue. D. MINISTER OF As to the second issue namely, the appellant's conten- NATIONAL tion that it can deduct the sum of $130,135.80 paid in 1961 REVENUE to the Province of Manitoba under The Mining Royalty Gibson J. and Tax Act, R.S.M. 1954, c. 169 from its income which was subject to tax in that year, which income came from sources in the Province of Ontario and elsewhere other than in the Province of Manitoba, a determination of it is dependent on the application of section 11(1) (p)i3 of the Income Tax Act to the facts of this case. Section 11(1)(p) of the Income Tax Act permits a deduction of such amount, of mining taxes paid from the taxable income, as may be allowed by regulation in respect to taxes on income for the year from mining operations. The relevant Regulation is 701 14 . 1311. (1) . . . the following amounts may be deducted in computing the income of a taxpayer for a taxation year: (p) Mining taxes.—such amount as may be allowed by regulation in respect of taxes on income for the year from mining operations; 14 701. (1) In computing his income for a taxation year, a taxpayer may deduct, under paragraph (p) of subsection (1) of section 11 of the Act, an amount equal to the lesser of (a) the aggregate of the taxes paid, in respect of his income derived from mining operations in a province for the year, (i) to the province, and (ii) to a municipality in the province in lieu of taxes on property or any interest in property (other than his residential property or any interest therein), or (b) that proportion of such taxes that his income derived from mining operations in the province for the year is of his income in respect of which the taxes were so paid. (2) In this section, (a) "income derived from mining operations" in a province for a taxation year by a taxpayer means, (i) if the taxpayer has no source of income other than mining operations, the amount that would otherwise be his income for the year if no amount had been deducted in computing his income under paragraph (b) or (p) of subsection (1) of section 11 of the Act, section 83A of the Act, subsection (3) of section 851 of the Act or paragraph (g) of subsection (1) of section 1100 of these Regulations, or
590 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 ~r There is no question that the tax in the sum of $130,135.80 -INTER- paid by the appellant in 1961 to the Province of Manitoba N N IC A L T C IO o. N AL is a miningtax within the meaningof the languag e of 0F CANADA section 11(1) (p) of the Income Tax Act. The question is, TD. Lv. what amount, if any, is deductible on a true application of MINISTER OF Regulation 701 to the facts of this case? Because of the NATIONAL REVENUE language of Regulation 701, this involves finding the corn-Gibson J. ponents of a fraction. (ii) in any other case, the amount that would otherwise be his income for the year if no amount had been deducted in computing his income under paragraph (b) or (p) of subsection (1) of section 11 of the Act, section 83A of the Act, subsection (3) of section 851 of the Act or paragraph (g) of subsection (1) of section 1100 of these Regulations, minus the aggregate of (A) his income for the year from all sources other than mining, processing and sale of mineral ores, minerals and products produced therefrom, and (B) an amount equal to 8% of the original cost to him of properties described in Schedule B to these Regulations used by him in the year in the processing of mineral ores, minerals or products derived therefrom, or, if the amount so determined is greater than 65% of the income remaining after deducting the amount determined under clause (A), 65% of the income so remaining, or, if the amount so determined is less than 15% of the income so remaining, 15% of the income so remaining; (b) "mine" includes any work or undertaking in which mineral ore is extracted or produced, including a quarry; (c) "minerals" include every naturally occurring inorganic or fossilized organic substance which is mined, quarried or otherwise obtained from the earth at or below its surface but does not include petroleum or natural gas; (d) "mineral ore" includes all unprocessed minerals or mineral bearing substances; (e) "mining operations" means the extraction or production of mineral ore from or in any mine or its transportation to, or over any part of the distance to, the point of egress from the mine, including processing thereof prior to or in the course of such transportation but not including any processing thereof after removal from the mine; and (f) "processing" as applied to mineral ores includes all forms of beneficiation, smelting and refining, and also transportation and distributing but does not include any of these operations that are performed with respect to mineral ore before it is removed from the mine. (3) Nothing in this section shall be construed as allowing a taxpayer to deduct an amount in respect of taxes imposed under a statute or by-law which is not restricted to the taxation of persons engaged in mining operations.
1 Ex. C.R EXCHEQUER COURT OF CANADA [1969] 591 Mr. Justice Cattanach, as reported in Quemont Mining 1 969 Corp. et al v. M.N.R.16 found the components of such a INTER-fraction in three cases which he tried together. In those NIcr co . three cases, each of the mining companies had income in OF CANADA one Province only and none of the mining companies had LTD. any deduction or exemption from income under section MINISTER OF NATIONAL 83(5)16 of the Income Tax Act. So, in these two respects REVENUE at least, those cases are different from this case. Gibson J. In. this case, as before stated, for the taxation year — 1961, the relevant year as to this second issue, the appellant was exempt from taxation under the Federal Income Tax Act on all its income from the Thompson mine in the Province of Manitoba. The amount of this income from the Thompson mine for the purpose of determining the provincial mining tax paid to the Province of Manitoba under The Mining Royalty and Tax Act, R.S.M. 1954, c. 169, is admitted and was $2,178,929.99. The said sum of $130,135.80 is "the aggregate of (mining) taxes paid to the Province of Manitoba in respect to the (appellant's) income derived from mining operations in (the Province of Manitoba) for the year" 1961 within the meaning of those words in Regulation 701(1) (a) . (Words in bracket are mine). The problem is to ascertain which sum is the "lesser" namely, the said sum of $130,135.80 or the answer from the fraction that must be found in determining what is the sum in dollars of "that proportion of such taxes that ... (the appellant's) income derived from mining operations in the province for the year is of ... (the appellant's) income in respect of which the taxes were so paid" within the meaning of those words in Regulation 701(1) (b) . (Words in bracket are mine). Both parties agree and I find that the denominator of this fraction is the sum of $2,178,929.99 being the amount 15 [ 19677 2 Ex. C.R 169. 16 83. Definitions. (5) Exemption for 3 years. Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came Into production.
592 1 R C. de l'É. COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 of the income earned in the Province of Manitoba by the INTER- appellant from the Thompson mine in 1961, (which, as NATIONAL NICKEL CO. stated, was used as a basis for com p u u t t i i n n gthe mining tax OF CANADA payable and paid by the appellant to the Province of LTD. Manitoba under and by virtue of the provisions of The MINIsTERor Mining Royalty and Tax Act, NATIONAL R.S.M. 1954, c. 169, in that REVENUE year in the said sum of $130,135.80). Gibson J. The correct numerator of this fraction must next be found. Regulation 701(2) defines "income derived from mining operations". The appellant says that such definition means something different than a definition (of which there is none) of "income derived from mining operations in a province" which are the words used in Regulation 701(1) (a) and also referred to in Regulation 701(1) (b) with the exception that the words "the province" are used instead of "a province". The appellant therefore says that on a true application of the definition contained in Regulation 701(2) to the words in Regulation 701(1)(b), the sum that should be used as the numerator of the fraction that must be found, is the appellant's income earned in 1961 outside the Province of Manitoba which is subject to income tax levied by the Government of Canada. The respondent submits that the numerator of this fraction is zero, in that the computation of the appellant's income "derived from mining operations in the province for the year" within the meaning of Regulation 701(1) (b) in accordance with the said definition contained in Regulation 701(2) (a) requires a computation in accordance with the Federal laws of income tax and the results flowing therefrom. I am of the view that in computing the deduction, if any, from taxable income under the Federal Income Tax Act section 11(1) (p) and Regulation 701, requires, in order that this statutory provision and regulation may be made to work in relation to the facts of this case, that the computation be limited to the income earned in the particular Province in respect to which a deduction from income for mining tax paid is being considered, for the purpose of finding the components of the fraction in applying Regulation 701. In other words, it is not correct, in finding the components of this fraction, to take the income
1 Ex. C R EXCHEQUER COURT OF CANADA [1969] 593 computed under the Federal Income Tax Act of the appel-1969 lant from all sources outside the Province of Manitoba to INTER-create a bigger numerator than a denominator of the frac- Co. tion required to be found in applying Regulation 701(1). OF CANADA To do otherwise by ignoring the words "in a province" in D' the application of the definition contained in Regulation MINISTER of NATIONAL 701(2) (a) of "income derived from mining operations" to REVENUE the facts of a particular case such as this, would be to Gibson J. reach a conclusion contrary to the obvious intent of both — Regulation 701(1) (a) and Regulation 701(1) (b) . In my view, the intent in reference to the facts of this case, was to permit a certain deduction in respect to the mining tax (in some cases this may be a deduction of the total tax paid) paid to the Province of Manitoba from the income earned and subject to tax under the Federal Income Tax Act, and derived from the appellant's mining operation in the Province of Manitoba. Such income in 1961 earned and subject to tax under the Federal Income Tax Act in this case was zero because of the exemption from such tax allowed the appellant under section 83(5) of the Income Tax Act. (See also section 139(la) 17 of the Income Tax Act). 17 139(1a) Income from a source. For the purposes of this Act, (a) a taxpayer's income for a taxation year from a business, employment, property or other source of income or from sources in a particular place means the taxpayer's income computed in accordance with this Act on the assumption that he had during the taxation year no income except from that source or those sources, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that source or those sources and except such part of any other deductions as may reasonably be regarded as applicable to that source or those sources; and (b) where the business carried on by a taxpayer or the duties performed by him was carried on or were performed, as the case may be, partly in one place and partly in another place, the taxpayer's income for the taxation year from the business carried on by him or the duties performed by him in a particular place means the taxpayer's income computed in accordance with this Act on the assumption that he had during the taxation year no income except from the part of the business that was carried on or the part of those duties that were performed in that particular place, and was allowed no deductions in computing his income for the taxation year except such deductions as may reasonably be regarded as wholly applicable to that part of the business or those duties and such part of any other deductions as may reasonably be regarded as applicable to that part of the business or those duties.
594 1 R.C. de 1'É. COUR DE L'ÉCHIQUIER DU CANADA [19691 1969 The numerator component, therefore, of the fraction INTER- which must be found in this case in applying Regulation NATIONAL NICKEL Co. 701(b) in my view is zero. OF CANADA LTD. As a result, the appellant is not entitled to deduct any of MIN STER OF $130,135.80 paid to the Province of Manitoba as mining NATIONAL tax in 1961 from its other income subject to the Federal REVENUE Income Tax Act, earned from sources outside the Province Gibson J. of Manitoba in that year. On these two issues therefore, the appeal, is dismissed. As there was a third issue in respect to which the respondent admitted the appellant was correct, and to that extent the appellant succeeds on this appeal, the respondent is entitled to and may recover against the appellant only two thirds of the taxable costs herein. On the third issue, the appeal is allowed and the assessments are referred back for the purpose of calculating the depletion allowance on the basis that in computing the aggregate of the appellant's profits for the purposes of section 1201 of the Regulations the amounts referred to in paragraph 11A of the respondent's reply to amended notice of appeal should not be deducted.
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.