Avril Holdings Ltd. v. Minister of National Revenue, 70 DTC 6366, [1970] CTC 572, [1971] S.C.R. 601

PIGEON, J. (all concur) :—This appeal is from a judgment of the Exchequer Court, Kerr, J., affirming a decision of the Tax Appeal Board ([1969] Tax A.B.C. 397) which upheld the Minister’s re-assessment of appellant’s income tax for its 1962 taxation year. By that re-assessment the sum of $222,320.70 was added to appellant’s income as recovery of capital cost allowances.

At the commencement of its 1962 taxation year, appellant then known as Twin Bridges Sand & Gravel Ltd. was carrying on the business of mining, processing and selling sand and gravel principally in the immediate vicinity of Edmonton. The mining was done in five pits, one of which was known as East Side Lands, another Entwistle Lands, and the three others as Clover Bar Lands. On January 31, 1962 appellant ceased operations having sold the business as of that date to another company recently incorporated under the name of Twin Bridges Sand and Gravel (1960) Ltd. This sale was made at book value and includes all appellant’s assets, except the above-mentioned lands in which mining rights only were transferred to the new company. Subject to those mining rights, the lands, which appellant owned in fee-simple, were sold to a third company, Clover Bar Lands Company Ltd. The agreement of sale is dated February 2, 1962 and the price is $761,841 for which appellant agreed to accept debentures. These were not in fact delivered immediately but only at a later date in the following taxation year.

The Minister took the view that the sale of the lands was a disposition of ‘‘depreciable property’’ within the meaning of Section 20(1) of the Income Tax Act, and that the amount stated in the agreement as the sale price was the ‘‘proceeds of disposition” under Section 20(5)(c). This resulted in the addition to appellant’s declared income of the aforementioned sum of $222,320.70 as “capital cost recovery on disposal of ‘Schedule E’ assets’’.

Appellant’s first ground of appeal is that the lands were not depreciable property. Under Income Tax Regulation 1100(1) (g) the depreciable property is ‘‘an industrial mineral mine’’ and the subject-matter of the sale was land that could not, it is contended, be said to be a mine because the mining rights had been previously severed from the fee and transferred to another company. It is also urged that under Schedule E, as it then read, the allowance contemplated in the regulation is to be computed by reference to the capital cost of the mineral rights only, because the allowance is required to be computed on the basis of a rate that is determined after subtracting from the capital cost of the mine the ‘‘residual value’’ which is defined as ‘‘the estimated value of the property if all commercially mining materials were removed’’. It is submitted that this means that no capital cost allowance or depreciation is allowed on the residual value.

The first question is therefore as to the meaning of the word “mine” in the relevant regulation and Schedule. Does it mean, as appellant contends, the mineral deposits only or does it, in a case like this, mean the land on which the mineral deposit is found? There can be no doubt that when appellant, or its predecessor, acquired each of the five mines with which we are concerned, what it bought was land with mineral deposits included. This is clearly shown to be the usual method of operation in that business, and it is also what Schedule E contemplates. There would be no residual value if mineral rights only were acquired. While it is true that such residual value must be deducted from the cost of the property in establishing the rate of capital cost allowance, this allowance is not expressed to be granted in respect of anything but the ‘‘property’’, that is an “industrial mineral mine”.

In M.N.R. v. MacLean Mining Co. Ld., [1970] C.T.C. 264, this Court was required to interpret the word ‘‘mine’’ in Section 83(9) of the Income Tax Act. It was held that it could not be interpreted as meaning ‘‘a portion of the earth containing mineral deposits’’ and it was also indicated that it rather meant “a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore’’. It must, however, be noted that this was based on the context of the specific section under consideration in which subsection (6)(a) specifically excludes among other things “sand pit, gravel pit’’. The context of the provisions relevant to this ease is quite different. Instead of metal mines that are usually acquired in the form of mining rights, we are here dealing with “industrial mineral mines” that are almost invariably obtained by purchasing the fee. Also, a completely different system of allowance is involved, namely depreciation not depletion. In the context of Schedule EK, it is apparent that the word ‘‘mine’’ is not taken in its usual meaning as applied to metal mines but in a special meaning as part of the expression ‘‘industrial mineral mine’’. With respect to metal mines, it was pointed out that ‘‘a portion of the earth containing mineral deposits” was not the usual meaning of the word mine. Here, it must be noted that the word ‘‘mine’’ is not in common use to describe a sand or gravel pit. This is therefore a case where the word is obviously not taken in the usual sense. Everything in Schedule E indicates that it is taken as meaning a portion of the earth containing mineral deposits. This is especially apparent from the definition of ‘‘residual value’’, bearing in mind that Section 2(a) [thereof] shows that the “property” means the mine ’ \

2. The rate for a taxation year is

(a) if the taxpayer has not been granted an allowance in respect of the mine for any previous year, an amount determined by dividing the capital cost to the taxpayer minus the residual value by the total number of units of commercially mineable material estimated as being in the property, and . . . (Italics added.)

In Highway Sawmills Lid. v. M.N.R., [1966] S.C.R. 384; [1966] C.T.C. 150, this Court held that recapture provisions were applicable with respect to a timber limit sold after all merchantable timber had been removed. Regulation 1100(1) (e) and Schedule C respecting timber limits almost exactly parallel Regulation 1100(1) (g) and Schedule E. The only significant difference is that reference is made not only to ‘‘a timber limit” but also to ‘‘the right to cut timber from a limit”. This difference does not appear material and it could not affect the result in the case, seeing that the property was land held in fee simple as in this case. Counsel for the appellant sought to distinguish the decision by reason of the fact that in that case capital cost allowance had been claimed and allowed on the basis that there was no residual value, the taxpayer being in the habit of letting such lands be sold for taxes after the removal of the merchantable timber. In my view the distinction is invalid because the basis of the decision was the construction and effect of the relevant regulation and Schedule, and this was not affected by the circumstance that the residual value had been considered nonexistent. Nothing can justify the assumption that by setting up a residual value a taxpayer is freed from the application of the provisions for recapture. Such value is nothing more than an estimate; it is. not a separate item of property.

The second ground of appeal was that, because the sale price was payable by means of debentures, it should not be considered as being the amount of money stated in the agreement but the value of the debentures. Such value was not established although an attempt was made to prove by witnesses that they were worthless. In my view, Kerr, J. was quite correct in disregarding that evidence. It is clear that, although the debentures in question were not readily marketable, they were of substantial value, and it was not shown that their value to the appellant was less than the capital cost of the property sold. Furthermore, by virtue of Section 20(5)(e) of the Income Tax Act “ “proceeds of disposition’ of property include (i) the sale price of property that has been sold’’.

Reference was made in argument to Section 24(1) which reads as follows:

24. (1) Where a person has received a security or other right or a certificate of indebtedness or other evidence of indebtedness wholly or partially as or in lieu of payment of or in satisfaction of an interest, dividend or other debt that was then payable and the amount of which would be included in computing his income if it had been paid, the value of the security, right or indebtedness or the applicable portion thereof shall, notwithstanding the form or legal effect of the transaction, be included in computing his income for the taxation year in which it was received; and a payment in redemption of the security, satisfaction of the right or discharge of the indebtedness shall not be included in computing the recipient’s income.

That section can have no application in this case because the payment for which appellant has received the debentures is not one which would be included in computing its income. If such was the case, the full amount, less the ‘‘residual value’’, would have to be added to its income instead of the recapture of capital cost allowance only.

In my view, this observation also disposes of the last ground of appeal which was that the proceeds of the disposition were not received in appellant’s taxation year 1962 because the debentures were delivered only some time after the end of that vear. The date of delivery of the debentures would be material only if the assessment was made by application of Section 24(1). Here, as a result of the execution of the contract for the sale of the lands, appellant immediately acquired a right to receive the price fixed in the contract. By virtue of Section 20(5) (c) this is ‘‘proceeds of disposition’’. When depreciable property is acquired, the fact that the price may be payable in whole or in part at a later date does not, as a rule, deprive the taxpayer of the right to claim capital cost allowance on the full price. We have no need to consider if the situation may be different in the case of taxpayers reporting on a ‘‘cash basis ’ ’ ; here it is conceded that appellant is on the ‘‘accrual basis’’. It is therefore hard to see how it can be contended that it is wrong to assess for recapture in the year of sale irrespective of the date on which the proceeds of disposition are actually payable. This would be material only if the sale had been made ‘‘in the course of a business’’, as it is only in such case that a reserve is permitted by Section 85B(1)(d). Counsel for the appellant effectively abandoned any contention that this provision could have any application by stating that it was not contended that the sale was made in the course of a business. Finally, it must be noted that Section 11 (3d) clearly implies that ‘‘ proceeds of disposition of depreciable property’’ include a sale price payable at a later date, because provision is made for a deduction in the year in which this becomes a bad debt.

For those reasons, the appeal should be dismissed with costs.