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.