Denison Mines Ltd. v. Minister of National Revenue, 74 DTC 6525, [1974] CTC 737, [1976] 1 S.C.R. 245

Martland, J (per curiam):—This is an. appeal from a judgment of the Federal. Court of Appeal which unanimously. dismissed the appellant’s appeal from a judgment of Cattanach, J in: the. Federal Court, Trial Division, which, in turn, dismissed the appellant’s appeal from an assessment by the respondent, hereinafter referred to as “the Minister”, in respect of the income of.the the appellant, hereinafter referred to as “the. Company”, for the 1961 taxation year.

The Company’s principal. business is mining. and exploring for minerals. On March 24, 1960 Can-Met Explorations Limited, hereinafter referred to as “Can-Met”, and. Consolidated Denison Mines Limited, hereinafter referred to as “Consolidated”, were amalgamated under the Company’s name.

Early in 1954 Consolidated had acquired property containing the largest uranium deposit known in the world. Consolidated was a party to a contract to supply. some 20 million pounds of uranium oxide to a Crown corporation with fixed amounts to be delivered at specified times. Consolidated, under the contract, had 18 months within which to commence production. The learned trial judge found that this was a very short time to do so and to mine and exploit an orebody of such size. He said that there was a great urgency in this contract. Consolidated commenced production on January 1, 1958, and Can-Met went into production on June 1, 1958.

Since Consolidated commenced production on January 1, 1958, which date was also the date determined by the Minister for the purposes of section 83 of the Income Tax Act, RSC 1952, c 148, by virtue of subsection 83(5) of that Act, hereinafter referred to as “the Act”, it was exempted from including in its income the income derived from the operation of its mine during the years 1958, 1959 and 1960. There has been no production from the Can-Met property since the date of amalgamation.

The main ore zone of the Company’s mine consists of two uranium- bearing conglomerate beds designated as Reef A and Reef B dipping from north to south at an average angle of 19 degrees. Above these are three other reefs, designated as Reefs D, E and F, which have not yet been touched. The upper end of the main ore zone is 550 feet below the surface and the zone deepens to 3,000 feet at its southern boundary.

The main ore zone is reached by two main vertical shafts about one-half mile apart, from which radiate main roadways and conveyor ways to form the framework of the mine. From these main arteries other passages extend into the active mining area.

The mining of the ore in the A and B Reefs is done by the “room and pillar’ method, which consists of the driving of a passage into the orebody from which mining is then extended into rectangular rooms spaced regularly in the inclined orebody. Pillars separate the rooms. As mining advances, each room attains the approximate size of 65 feet wide, 250 feet long and 16 feet high. The pillars are 20 feet wide and extend the entire length of the room. The ore is drilled and blasted and then removed from the room through a small opening into the passageway. When the broken ore is scraped from the rooms it is loaded into large rubber-tired, 20-ton trucks and hauled to a belt conveyor which carries the broken ore to an underground crusher installed in 1969. In the period in question the ore was taken to one of the vertical shafts where it was raised to the surface and further processed until it became the final product, uranium oxide.

It is intended, when circumstances require, to drive the passageways to the extremities of the ore zone in the A and B Reefs. At some future time the D, E and F Reefs will be mined simultaneously. The broken ore from these reefs will be dropped into the passageways created in mining the A and B Reefs and the conveyor ways and other facilities existing in the passageways will be used for the removal of this ore to the surface.

The passageways were driven through the orebody and not in the waste rock beneath. The ore extracted in creating the passageways went into production along with the ore mined from the rooms, there being no difference in the quality. The value of the ore extracted from the passageways exceeded the cost of opening those passageways.

In the period following January 1, 1958, the amounts spent in creating the passageways were treated by the Company, in its published financial. statements, as current operating expenses deducted in determining net profit for the year. The proceeds from the sale of ore obtained from the passageways were shown in the Company’s published financial statements for 1958, 1959 and 1960 as “Revenue from Production” and in 1961 were included in the computation of “Operating Profit”.

in the income tax returns for 1958, 1959 and 1960 the expenses and revenues in connection with the passageways were treated no differently than they were treated in the published financial statements.

In computing its income for purposes of the Act for its 1961 taxation year the Company sought to deduct the amount of $9,229,794.33, being part of the amount of $21,288,243 alleged to have been the cost of the construction and extension of the passageways incurred in the 1958, 1959, 1960 and 1961 taxation years. The Company claimed such deduction on the basis of paragraph 11 (1)(a) of the Act and paragraph

(f) of Class 12 of Schedule B to the Income Tax Regulations and Regulation 1100(1)(a)(xii) of the said Regulations. The Minister disallowed this claim for deduction.

Paragraph 11 (1)(a) of the Act reads as follows:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

Paragraph (f) of Class 12 of Schedule B to the Income Tax Regulations reads as follows:

Property not included in any other class that is

(f) a mine shaft, main haulage way or similar underground work designed for continuing use, or any extension thereof, sunk or constructed after the mine came into production.

By virtue of Regulation 1100, subsection (1), subparagraph (a)(xii), there is allowed to a taxpayer, in computing its income from a business or property, deductions in each taxation year equal to such amounts as it may claim in respect of property of each of the classes in Schedule B not exceeding, in respect of property of Class 12, 100%.

The Company contended that the expenditures made for the construction and extension of the passageways were outlays on account of capital, such passageways being main haulageways or underground works within the meaning of paragraph (f) cited above.

The Minister contended that these expenditures were current business expenses. The Minister made other submissions, but, in the light of my view as to the disposition of the main issue between the parties, it is not necessary for me to discuss them.

The learned trial judge was of the view that the underground passages were for the enduring benefit to the Company’s trade. He said ([1971] CTC 640 at 650-1]:

I have no doubt that the underground passages, or a very substantial portion of them are assets for the enduring benefit of the trade within the meaning of those words used by Viscount Cave, LC in British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205, in the most notable and frequently cited declaration on this subject. He said at page 212:

“. . . But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.; . .”

These passage-ways on their completion became haulage ways for the transportation of ore from the rooms to conveyors, they provided necessary ventilation to the areas where mining was being carried on, and they provided a means of access by personnel. It is true that when work in a particular area was completed in the first phase of the mining operation the passage-ways were flooded or sealed off to prevent the hazard from the radio-active nature of the ore. However, the evidence was conclusive that on the retreat from the outer boundaries for the removal of the ore in the pillars those passage-ways would be opened and utilized. Those that remain open will be similarly utilized.

While to date all mining has been done in the A and B zones, the passageways will be utilized when and if mining operations are conducted in the D, E and F zones. I entertain some doubt as to whether the plan of the passages in the A and B zones was dictated by a plan for this future mining of the D, E and F zones. It might well be that the plan for the mining of the D, E and F zones will be dictated by the location of the existing passages in the A and B zones, but the evidence is conclusive, in my view, that the passage-ways will be utilized to mine the upper zones. To do otherwise would be a useless duplication. Further, these passage-ways have the quality of permanence to render them an enduring benefit within the meaning of the authorities. “Enduring” is a relative term and does not mean “everlasting”. The passage-ways will endure throughout the life time of the mine.

He went on to hold, however, that in the light of the special circumstances of this case, the enduring benefit derived from the passages did not make it necessary to find that the expenditures for the extraction of ore from the passages should be regarded as capital expenditures in assessing the Company’s income. After stating that the operation must be looked at objectively, rather than subjectively, he said (at pp 653-4):

In doing so the preponderance of the evidence leads me to the conclusion that the expenditures were made in furtherance of the appellant’s business of extracting ore. The activity was in fact current ore extraction to meet the appellant’s immediate need to produce ore. What the appellant did was to extract ore and that was anticipated by the appellant as the direct and immediate result of its expenditures even though the ultimate result of that activity was an asset. that endured to the benefit of the appellant’s business. In my: opinion the expenditures here in question are current operating expenses laid out as an integral part of the profit-making activity of the company. They were costs incidental to the production and sale of the output of the mine and as such are operating costs.

There are indicia confirming this conclusion. Approximately 50% of the ore produced by the appellant was extracted from the. passage-ways. The expenditures made by the appellant were entered in its financial report to shareholders as prepared by its auditors as cost of production in computing its annual profit in both the preproduction and post-production. periods. In the appellant’s income tax returns the expenditures were described as cost of sales. The haulage ways do not appear in any balance sheet as a capital asset. The proceeds from the ore recovered as a direct result of the activity which gives rise to the expenditures formed part of the appellant’s revenue from production. There was no basal difference in the technique of removing ore from the passage-ways and removing ore from the room. The ore from both sources formed the output of the mine. With that consideration in mind it would be incongruous: to treat the cost of removing the ore from the rooms as a current expense and that of removing ore from the passage-ways as a capital expense. The only justification for so ‘doing would be that as a result of the extraction of ore from the passageways an asset of enduring benefit to the appellant’s trade resulted. But I - have said above, the fact that a capital asset, in the sense of an enduring benefit resulting, does not necessarily make the expenditures expended _ therefor capital expenditures rather than revenue expenditures.

He decided that this conclusion effectively disposed of the main issue in the appeal. '

The Federal Court. of Appeal agreed with this decision. Jackett, Cu, who delivered the judgment of the Court,>said:

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 Scottish North American Trust, Ltd v Farmer (1910), 5 TC 693, per Lord Atkinson at 705).

Our difficulty, at the outset, with the appellant’s claim for capital cost allowance is therefore, 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 submission is contrary to a long line of authority.

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 disbursement 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, paragraph 11(1)(a) does not authorize capital cost allowance.

He also made the following statement later in his reasons:

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 operations 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 “capital cost”, of acquiring the haulageways.

I am in agreement with the reasons of the learned trial judge and with the comments made in the judgment of the Federal Court of Appeal, which I have cited. I would dismiss the appeal with costs.