Placer Dome Inc. v. The Queen, 93 DTC 235, [1993] 1 CTC 2411 (TCC)

Bell, T.C.C.J.:— The appellant was formed by an amalgamation, on August 12, 1987, of a number of corporations including Campbell Red Lake Mines Ltd. (“Campbell Red Lake"). The appeal relates to notices of reassessment dated December 7, 1989, January 18, 1990 and April 3, 1991, issued to the appellant but relating to the taxation years of Campbell Red Lake ending December 31, 1985, December 31, 1986 and August 12, 1987 respectively.

Issues

The issue in this appeal is whether an underground mining operation conducted by Campbell Red Lake was the same mine as its open pit mining operation or whether it was a new mine.

Facts

In 1975 Amoco Canada Petroleum Co. ("Amoco") discovered a gold deposit at Detour Lake in the Province of Ontario. Between 1975 and 1979 Amoco did exploratory work which involved an extensive drilling program that traced the mineralized zone from bedrock near surface down to approximately the 1,800 foot level. It also sank a decline described as being a tunnel about 10” x 14” in dimension that was put in at a decline of approximately minus 15 per cent down into the earth to a depth of approximately 400 feet. The purpose of such decline was expressed to be to enable the exploration crew to gain access to the mineralized zone, to check whether it was continuous across in width and to confirm some of the information that they would have obtained from the surface diamond drilling. In essence, the purpose was to expand knowledge, to expand the ability to predict the continuity, grade and other characteristics and dimensions of the mineralized zone. The appellants only witness, Mr. Charles Henry Brehaut, senior vice president environment and a director of the appellant, stated that one would normally anticipate finding a use for such decline in the eventual mining plan but he did not know whether Amoco had any particular need or use in mind for it. He then stated that although Amoco had put three cross-cut tunnels across the ore zone to have a look at the ore, Campbell Red Lake, in quest of more information, put a drift tunnel down the middle of the mineralized zone, did some drilling to test the boundaries, put in drifts along the drill holes to test the boundaries and obtained grade estimates from three different methods and performed other tests to inspect the ore zone. Mr. Brehaut explained that a drift was a tunnel that ran parallel to the ore body and a cross-cut was a tunnel that went across the ore body, both large enough for someone to walk through and also to handle equipment.

On October 11, 1979, Campbell Red Lake entered into a joint venture agreement with Amoco pursuant to which Campbell Red Lake agreed to expend $10,000,000 exploring the mineral resource to earn a 50 per cent interest therein. Campbell Red Lake, in that year, commenced an exploration program which it carried on for approximately one year. Mr. Brehaut explained that at the end of 1980 or in early 1981 a decision was made to commence the mining operation and that this was to be done on the basis of two mines. He stated that the intention was to start with an open pit mine, having rejected the possibility of commencing with an underground mine and then mining the surface portion thereafter. He testified further that the feasibility study showed that the economic depth of the ore that could be mined by open pit methods was 120 metres and that it would be necessary to use an underground mine in order to mine successfully below that level. He stated that construction of the open mine site started in 1981, that in 1982 the company started to strip the overburden off the top of the rock to expose the ore body, that the open pit mine came into production towards the end of 1983 and that it produced through 1987.

Mr. Brehaut explained that the initial step consisted of defining the surface area, Clearing the overburden and then commencing to mine down, gradually lowering the pit area until arriving at the 120 metre depth. He explained further that in so doing the slopes had to be in the order of 50 degrees to enable safe working at the bottom of the pit. He then explained that the grades were not as high as anticipated based upon interpretation of surface diamond drill results, that there were not as many tonnes in the open pit as anticipated and that this operation was completed in four years as opposed to the planned five and one-half years. He stated that the decline may have been used to pump water that would have leaked through the pit rock or through diamond drill holes down the elevation but that it was definitely not planned to be an integral part of the open pit. He also explained that an open pit mine would use much larger equipment than would be used in an underground mine. This included huge trucks, large excavator shovels and tall mast drills. In 1987 when the company terminated the open pit operation, it left the mine open at the top but sealed the holes created by the decline and cross-cuts that went into the ore body. This was done to keep water from snow, rain and surface run-off in the pit. Otherwise, it was left as it was.

Mr. Brehaut testified further that not a high proportion of the employees who had worked in the open pit mine would have had the skills to enable them to work in the underground mine. He also said that, apart from a couple of trucks which were retained to transport the ore from the headframe to the mill, all open mine equipment was sold.

He then stated that in late 1983 the company started the initial preparation for the shaft collar for the underground mine, that the headframe was installed in 1984 and that the breaking of rock to sink the vertical shaft started at the end of 1984. He testified that this shaft was about 600 metres deep and that it was 200-300 metres from the open pit mine. He also said that the disappointing results of the ore body and the falling price of gold caused second thoughts and that a consultant was retained to review all data from the initial drill programs from the work that had been carried on underground. He stated that a feasibility study was being made to obtain better information on ore reserve characteristics in terms of dimensions and grade, that experience in the open pit mine was not considered sufficient and that the company had to go underground to gather additional information. The required information was available in 1986 and a decision to proceed with the underground mine was made in the fourth quarter of that year with development work commencing immediately thereafter. He stated further that the mine did not reach commercial production until late 1987.

Counsel for the appellant then produced a map and entered same as an exhibit. Mr. Brehaut explained that a ramp system displayed thereon was put in to give access to the ore body for mining purposes and to serve as one of the major ventilation passageways. It also showed the shaft that had been built, the tunnels from which the underground mining was done and a return air raise which exited into the open pit mine about 20 metres from the top of same. In addition it showed that underneath the open pit mine was a“ "crown pillar”, being a segment of the natural rock structure about 30 metres deep which separated the open pit mine from the underground mine. He then explained that in this underground mine horizontal slices were made at the bottom or at major levels, in the sense that a slice was removed, fill was brought in and roof supports and ground supports were established. He explained the nature of the underground mining operation in more detail and that specialized underground miners were needed who had skills different from those who worked in the open pit mine.

Mr. Brehaut then gave evidence as to“ "supposed connections" between the open pit mining operation and the underground mining operation. The first was the air raise. He explained that it had to exit somewhere and the fact that it was decided to place that exit in the open pit was a matter of convenience and also cheaper than constructing such raise to exit on the ordinary ground surface. He then explained with respect to water that the initial plan had all extra water needed at the site coming from Little Hopper Lake, a few miles away from the mine. He also described how the open pit mine, which had been abandoned, had started to flood and that that water could be used in the underground mining operation. It was used for mixing with a sand fill to create a slurry that was used in the mine. He described that as a matter of safety, because underground mining was taking place beneath the open pit mine, the decision not to let the open pit fill with water was made. He testified further that the use of this water had not been part of the initial plan and that the underground mining operation could have been conducted with water from Little Hopper Lake. Mr. Brehaut stated that the aforesaid decline had been built for exploratory purposes, that it was never an integral part of the open pit mine but was used to pump some water up from the mine and was also used as passageway for air coming down into the mine. It also had ladders in it to provide an emergency escape route. He emphasized that in spite of these uses the purpose of the decline was initially exploratory and was not planned to be part of the open pit mine. He also stated that there were no other physical connections between the two mining operations.

At the commencement of his cross-examination, counsel for the respondent entered as an exhibit a booklet containing 12 documents. He asked Mr. Brehaut questions about a number of documents including an October, 1980 Detour Lake joint venture executive summary, a pamphlet prepared by the appellant entitled "The Mine Development Process, Campbell Red Lake 1980 Annual Report”, excerpts from a joint venture agreement dated December 29, 1982, Detour Lake Mine capital expenditures summary — 1984 and 1984 annual reports, 1985 annual report excerpts and other documents. The scope of such cross-examination seemed to be a review of facts established in direct examination and of the timing of decisions respecting the timing of the operations and of the actual commencement of and conduct of various activities. He referred Mr. Brehaut to the December 29, 1982 joint venture agreement between Amoco and Campbell Red Lake and read, inter alia, the following portion therefrom:

It is acknowledged by the Venturers that, subject always to a venturers' decision to the contrary, the development of the Detour Lake Mine is divided into two phases, as contemplated in the August 24, 1982 memorandum of the operator to the venturers, namely, the current open pit development work and subsequently the underground development work and the increasing of the capacity of the Detour Lake Mine to 4,000 tonnes per day. For the purposes hereof, "Phase II” shall be considered to have commenced as at the date of commencement of work under an annual budget with the object of increasing the capacity of the Detour Lake Mine by more than twenty percent (20 per cent), or such other date as may be decided by venturers’ decision, it being acknowledged that as at the date hereof neither of the venturers has any obligation to proceed with Phase II and neither Venturer shall at any time be committed to any Phase II expenditure other than in a Budget in which it has elected to participate.

Respondent's counsel then referred Mr. Brehaut to a document entitled Detour Lake Mine Capital Expenditures Summary — 1984 showing actual expenditures of $8,783,784 for Phase II expansion underground and a figure of $9,334,460 shown as "Approved by J.V.” (joint venture) in respect of which Mr. Brehaut said that Amoco and Campbell Red Lake would have approved that as part of an annual budget presented at the end of 1983 pursuant to the joint venture agreement. Counsel on further cross-examination, for example with respect to a December 31, 1982 letter of commitment from the Toronto- Dominion Bank for a specified loan, referred to the use in such letter of the terms Phase I and Phase II.

Mr. Brehaut, in response to counsel’s queries, explained that crushed rock for the purpose of smoothing out the jagged rock floor of the underground working area was dumped down the air raise and also that water was pumped up the decline that had been constructed for exploratory purposes.

No witness was called by respondent's counsel.

Cross-examination did not, in my opinion, compromise Mr. Brehaut's evidence. To some extent it added detail to testimony he had given in direct examination.

Counsel for both parties agree that the open pit mining operation and the underground mining operation were contained in a single ore body.

Appellant's position

Counsel for the appellant argued that early in 1984 it became apparent that the reserves had been overstated and in light of falling gold prices a full review of the plan to construct the underground mine had to Be undertaken. Instead of commencing with the development of the underground, extensive exploration work was conducted commencing in December, 1984 with the objective of determining the feasibility of developing the underground mine in the context of the then current and projected gold prices. He referred to the evidence and said that although they had planned to do a development in which the underground mine would follow automatically after the open pit mine, as the result of a complete review in 1984 and 1985, Campbell Red Lake made an independent decision to proceed with the underground mine not dependent upon the continuation”.

He then discussed the connections between the two operations. He submitted that the use of water from the open pit mine was not essential but, because it existed, Campbell Red Lake, instead of hauling water from a lake several miles away, used the open pit mine water. He stated, with respect to the second connection that the return air raise had to come out of the ground somewhere in the vicinity of the open pit mine and it was in fact brought out in the wall of the open pit mine about 20 metres below ground surface. With respect to the decline he stated that it did not provide any connection between the open pit mine and the underground mine, that it was not used in the open it mining operation and was built for the sole purpose of determining the location, extent and quality of the ore body. He then referred to what he described as incidental use of the decline but emphasized that no tie existed between the decline and the mining operations carried out at the open pit mine.

Appellant's counsel then referred to a number of cases which, in his submission, supported the proposition he wished to advance. The first of these was North Bay Mica Co. v. M.N.R., [1958] S.C.R. 597, [1958] C.T.C. 208, 58 D.T.C. 1151, a decision of the Supreme Court of Canada in which Purdy Mica Mines Ltd. operated a mica mine on certain mining claims. After obtaining reports from geologists it decided not to proceed with further investigation and ceased operations. North Bay Mica Co. subsequently operated a mine on these claims and sought exemption from tax under subsection 74(1) of the then Income Tax Act on the ground that it had established a mine. The appeal was allowed on the basis that in the intervening years the property lost the character of a mine and that North Bay Mica Co. Ltd. had not acquired a mine but a derelict and abandoned property which it hoped to develop into a mine. Mr. Justice Cartwright said, at page 601 (C.T.C. 212, D.T.C. 1152):

For the appellant it is contended that the word “ mine” as used in clause (b) of subsection 74(1) means not "a portion of the earth containing mineral deposits" but rather “a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore".

and then accepted that contention. Appellant's counsel, on the basis of this decision submitted that the word “mine” meant a mining concern taken as a whole, not just the ore body.

He then referred to MacLean Mining Co. v. M.N.R., [1970] S.C.R. 877, [1970] C.T.C. 264, 70 D.T.C. 6199, another decision of the Supreme Court of Canada. In this case the appellant sank a shaft known as the Lucky Strike Shaft and built a mill close to it. It also had open pit operations as well as other shafts successively sunk for mining other ore bodies. An underground haulage way was also built to connect all shafts so that all the ore could be finally hoisted up the Lucky Strike Shaft for feeding the mill. In 1950 exploration indicated the existence of what became known as the MacLean ore body. One of the other shafts was deepened and an exploratory heading was constructed from that shaft to the indicated ore body. A shaft was then sunk for mining that ore body and in 1958 a haulage way was built to carry the ore to the Lucky Strike Shaft. By 1963 full production in reasonable commercial quantities therefrom was under way. This case arose as a result of the disallowance of a statutory claim for the exemption from income. tax for a three-year period. Mr. Justice Pigeon, in delivering judgment for the Court, decided that the MacLean ore body was not developed as a separate mine. He found that the substantial expenditure involved in deepening the Rothermere Shaft and carrying an exploratory heading over a considerable distance showed that the use of the Rothermere workings was of very substantial importance in that development. He also stated that the miners would reach their working places and return by that shaft, that compressed air for operating their drills as well as sand for filling the mined-out stopes came that way, that fresh air for ventilation and the exhaust system used that shaft and that water which had seeped into the workings was carried out that way. He found that although the MacLean ore body, being completely distinct from the others, could have been developed and operated as a distinct mine, it was developed as an integral part of a mining operation including the Rothermere. He stated that not only did its development proceed as an expansion of that underground operation towards the other ore body but it was not designed to be operated otherwise than as a unit with the Rothermere. At page 882 (C.T.C. 267-68, D.T.C. 6201) he said:

What I find decisive against the view that the MacLean workings are a separate mine is the fact that those workings were developed from the Rothermere workings which were substantially altered for the purpose of developing the MacLean ore body and of exploiting it for producing ore. Some 800 feet of the Rothermere shaft and the whole of the exploratory heading were dug for that sole purpose. Those parts of the Rothermere workings are really integral parts of the MacLean workings without which the latter could not be operated and would not be producing ore.

In order to reach a different conclusion, one would have to interpret the word “mine” in subsection 83(5) as meaning "a portion of the earth containing mineral deposits”. This is not the usual meaning, the usual expression in that sense being “ore body”.

Counsel then emphasized the distinction between an ore body and a mine and submitted that it was not a separate ore body that was taken into account but rather the common workings.

Counsel then referred the Court to Marbridge Mines Ltd. v. M.N.R., [1971] C.T.C. 442, 71 D.T.C. 5231. Here, the appellant company, in 1962, brought into production a nickel mine on its property in Quebec, which was designated as No. 1 mine, and was granted the three-year tax exemption for new mines provided by subsection 83(5) of the Income Tax Act. Another ore body was discovered by the company on adjacent claims in 1964 which began to produce ore in commercial quantities in 1965. This operation became known as the No. 2 mine. The company's claim for tax exemption in respect of income derived from the operation of No. 2 mine was denied by the Minister of National Revenue on the ground that No. 2 mine was not a new mine but part of No. 1 mine. The evidence showed that the various underground workings, equipment and machinery capable of producing ore and every other physical thing necessary to bring the ore to the surface were separate and distinct in the No. 1 and No. 2 mines. On the other hand, common facilities were used for the treatment of ore from both mines and there was one mine manager, one work force and other integrated services for both.

Mr. Justice Gibson, of the Exchequer Court of Canada, at page 445 (D.T.C. 5233), said:

In the subject case, as the evidence indicated and as are illustrated on Exhibit 2, the various underground workings, equipment and machinery capable of producing ore, the ventilation and escape raises and every other physical thing necessary to bring the ore to the surface are separate and distinct in the so-called No. 1 and No. 2 mines; and in respect of none of these is there any integrated system for the extraction of ore, unless it could be said that two accidental and incidental common things could establish the contrary proposition. These things are a powder magazine between the two so-called mines on the ground surface, which powder magazine was used for the storage of dynamite for both the mines; and a common water line to one pond which originally came from a creek, which water lines in both cases were surface lines.

In my view, these two matters are of no significance or assistance in resolving the question in issue on this appeal.

The learned justice continued on page 447 (D.T.C. 5234) as follows:

In my view, there can be a mine also within the meaning of subsection 83(5) of the Act, even if there is one management, one work force, one payroll, other integrated services and so forth. These are matters of personnel and personnel services, and not the physical things of a mining concern taken as a whole which make it “capable of producing ore” and are irrelevant in the consideration of the question on this appeal.

In sum, ore is the end product of a mine and it is only the physical things in a mining concern taken as a whole which cause it to be” capable of producing ore" that are relevant in the determination of whether in a given case there is or is nota mine within the meaning of the subsection. Economic factors such as the integration of management, work force or financing and all other such factors, and also the method or manner of employment of facilities for the treatment, refining or smelting of the ore after the ore has been hoisted to ground surface are all irrelevant in such determination.

He concluded by finding that the so-called No. 2 mine was a mine within the meaning of "mine" in subsection 83(5) of the Income Tax Act and that the appellant should succeed in its claim for exemption from income.

Appellant's counsel then referred the Court to M.N.R. v. Bethlehem Copper Corp., [1975] S.C.R. 790, [1974] C.T.C. 707, 74 D.T.C. 6520. In this case there were two ore bodies about 1,000 feet apart in one zone. The first ore body was brought into production in 1962 and was granted a three-year tax exemption under subsection 83(5) of the Income Tax Act. In 1965 a serious slide halted work on the first deposit area permanently and the second ore body was brought into production. The Minister of National Revenue refused the company's claim for a three-year exemption for the second ore body and the company appealed therefrom. When the company succeeded in both the Federal Court-Trial Division and Court of Appeal, the Minister of National Revenue appealed to the Supreme Court of Canada. That appeal was dismissed and the Court confirmed that the operation of the second ore body was exempt from tax. There were concurrent findings of fact that while the two operations were close together, they were not physically connected and the operation of extracting ore from one was physically quite independent of the extraction operation at the other. At pages 803-4 (C.T.C. 714-15, D.T.C. 6525) Mr. Justice Martland, for the Court, said:

In my opinion there is "a mine” within the meaning of subsection 83(5) if there is a body of ore together with the workings, equipment and machinery capable of producing it. The Jersey was not a mine merely because of the existence of a body of ore, separate from the East Jersey ore body. It would not have become a separate mine if the Jersey ore had been extracted as a result of the further development of the East Jersey mine. But it became a mine when its separate body of ore commenced to be extracted by means of its separate and distinct extraction facilities.

The fact that it was operated by the same company which had operated East Jersey does not preclude a claim under subsection 85(5) in respect of it.

The fact that the company used the same mill for processing the Jersey ore as it had used for the East Jersey ore does not affect the position. As has already been noted, the mining process is completed by the production of the ore.

The appellant's counsel then submitted that although the same above- ground milling facilities were used, this case would be authority for the proposition that milling and mining were different in that mining stops at the surface of the ground.

The final case referred to by appellant's counsel was Falconbridge Copper Ltd. v. The Queen, [1979] C.T.C. 307, 79 D.T.C. 5227 (F.C.A.). In this case, the plaintiff taxpayer company owned certain mining claims identified as S claims. During exploratory work on that site in 1935, the P showing was discovered approximately one-half mile away from the S showing. No work was done on the P showing at that time. In 1952, diamond drilling was begun on the S showings and the S mine began production in December, 1953. Effective April 1, 1954, the S mine was granted an exemption under subsection 83(5). Surface drilling in 1955 produced interesting results and it was decided to sink a shaft at the site of the P showings. In February, 1958 the P shaft was completed to a depth of 2,000 feet. It was established that the access of the P ore body ran in a north-south direction, while the S ore zones ran nearly east-west. Many essential facilities, without which the P ore body could not be worked at all, were provided by the S workings. These essential common facilities were escape ways, compressed air, ventilation, gas warning system, underground haulage ways, drainage outlet, provision of backfill, interchangeable work crews and the use of both P and S shafts for making the connections between the two workings. The company claimed exemption in respect of the P workings on the basis that it was a new mine. The Minister of National Revenue refused to grant that exemption on the basis that the S mine had already been granted same. The company's appeal from this assessment was dismissed. appellant's counsel emphasized the extreme integration and interdependence of facilities in that case and referred to the words of Mr. Justice Heald from the Federal Court-Trial Division report, [1975] C.T.C. 561, 75 D.T.C. 5394, at page 569 (D.T.C. 5400), wherein the learned justice said, after accepting evidence to the effect that the S ore bodies were not explored from the P shaft nor were the P ore bodies explored from the S workings,

However, notwithstanding this factual difference, I have concluded that the Perry ore body was developed as an integral part of the plaintiff's mining operation, including the Springer workings. The Perry workings "was not designed to be operated otherwise than as a unit” with Springer. . . .

In my opinion, it has been established on the evidence that the Perry workings could not operate, function and produce ore without the essential services above referred to which are provided to it by Springer.

Appellant's counsel then referred to subparagraph 66.1(6)(a)(iii.1) of the Act which, as aforesaid, was amended with respect to expenses incurred after May 9, 1985 to refer specifically to an expense incurred for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine. He referred to technical notes issued by the Department of Finance in relation to this amendment. They read as follows:

Mining development expenses incurred prior to production from a mineral resource qualify as Canadian exploration expenses under subparagraph 66.1(6)(a)(iii.1) of the Act. The reference to a“ "mineral resource” in that subparagraph is being changed to a reference to a "new mine”. As a result of this amendment, mining development expenses incurred in bringing a new mine in a mineral resource into production may qualify as Canadian exploration expenses even though there may previously have been production from the mineral resource by another mine.

He then urged the Court to conclude that the mine and the mineral resource are separate income tax concepts and that it mattered not if there had been prior production from the mineral resource as long as there had not been prior production from the new mine.

Respondent's position

Respondent's counsel stated that the appellant started with the open pit and simply continued to mine the same ore body underground and that this was just a mine extension. He stated that in all of the authorities referred to by appellant's counsel there were two ore bodies but in none of those cases was there an open pit mining operation and an underground mining operation. He then stated that the Court must look at different criteria and referred to the decision in the Federal Court of Canada-Trial Division in Falconbridge Copper Ltd. v. The Queen, supra. He stated that Mr. Justice Heald“ lists his criteria" on pages 566-67 (D.T.C. 5398). Counsel then went on to describe the "six criteria” which the Court is able to look at to determine whether . . . a mine is a new mine or an extension of the old mine. What he describes as criteria are described by the learned justice as “findings of fact which are, in my view, germane to a determination of the issues in these proceedings".

They were:

1. The management of Opemiska clearly contemplated, at an early date, the possibility of developing the Springer area and the Perry area concurrently and were quite conscious of the potential of the Perry area.

2. The two areas were, generally speaking, developed at the same time. They Springer No. 1 mine came into production in 1954. The decision to construct the Perry shaft was taken in 1955. The decision to sink the Springer No. 2 shaft was taken in October of 1956. In 1957, all 3 shafts were being constructed simultaneously. About the end of 1957, the decision to connect the Perry shaft with Springer No. 2 shaft at the 2,000 foot level was taken. In June of 1958, the 975 foot level connection was completed.

3. The Perry ore body was a separate ore body in relation to the Springer ore body but had similar characteristics. The geological structures of the ore veins in the two areas were quite similar. The same mill was used to process the ore from both areas with no adjustments being necessary. Ore came to the mill from both areas at the same time.

4. There were three important connections made between the Perry shaft and the Springer shafts:

(a) The connection at the 975 foot level. As referred to earlier, the expressed intention and purpose of this connection was to provide an escapeway. How- neitherever, it is clear from the evidence that after its completion in June of 1958, this connection served a number of other purposes: the use of compressed air; the use of air for ventilation; the use of the stench gas warning system.

(b) The connection at the 2,000 foot level. This connection served a number of important purposes. In addition to each and every one of the purposes referred to in (a) above (the 975 foot level connection), this connection provided the underground haulageway by which the Perry ore and waste was transported to the primary crusher located at Springer No. 2 shaft. Furthermore, this connection served as a drainage outlet for excess water occurring in the Perry workings below the 1,125 foot level. It also served as an additional escapeway. The witness, Mr. Bryce, said that it was very useful, from a safety point of view, to have many escapeways in a mine.

(c) The connection at the 275 foot level. As above stated, the main purpose of this connection was to provide backfill necessary in the Perry workings from the Springer workings. This is, in my view, a most necessary and important purpose since it is essential that the Perry stopes be filled in to prevent slides from occurring.

5. The work crews employed in the two areas were to some extent interchangeable.

6. Some, if not all of the above mentioned three connections were achieved by working from both the Springer end and the Perry end.

Respondent's counsel then said that the Crown was putting most of its emphasis on the first test, that management in the appellant's case clearly contemplated at an early date the possibility of developing the Springer area and the Perry area concurrently and was quite conscious of the potential area. He referred to the North Bay Mica Co. case setting forth the description of a mine and stated that he accepted that as a valid definition of a mine.

He then referred to the MacLean Mining Co. case, particularly to page 881 (C.T.C. 267, D.T.C. 6201), where Mr. Justice Pigeon said:

It may be that the MacLean ore body, being completely distinct from the others and separated from the nearest other, the Rothermere, by a substantial distance of over 1,000 feet, could have been developed and operated as a distinct mine. In my view, it is clear that this is not what happened in fact.

Counsel then stated that the appellant in the case at bar did not have to bring the return air raise up to the open pit. He also stated that the appellant could have used water from Little Hopper Lake but instead of so doing, chose to make the open pit a complete watering system. He then said that these connections were not accidental or incidental but that they were done for a specific purpose, namely to save money.

He quoted further from the judgment of Mr. Justice Pigeon as follows (S.C.R. 881, C.T.C. 267, D.T.C. 6201):

This ore body was developed as an integral part of a mining operation including the Rothermere. Not only did its development proceed as an expansion of that underground operation towards the other ore body but it was not designed to be operated otherwise than as a unit with the Rothermere. Some essential facilities without which the MacLean ore body cannot be worked at all are provided by the Rothermere workings, such as ventilation.

Counsel submitted that he didn't think parliament intended to give incentives, such as resource allowance and increased earned depletion to a mining extension. He stated further, “the only way I think that they might have gotten both write-offs is, if they had timed this differently". He also said that if someone wants to develop two portions of the mine, an open pit and underground and get the write-offs on both of them, "they can have them as long as they don't start commercial production from one or the other".

Respondent's counsel stated that he was not making anything of the fact that there are common facilities above the ground such as one mill, one coarse ore bin and the same trucks that were used to ferry the ore to the first conveyor belt. He clarified that by stating that he was not saying that using one mill, one crusher, one conveyor belt and one coarse ore bin constituted a common connection.

He then returned to the statement of Mr. Justice Heald in the Falconbridge case to the effect that management clearly contemplated the possibility of developing the Springer area and the Perry area concurrently. He referred to the executive summary of the October, 1980 feasibility study which" indicated a proposed program being both open pit and underground”.

He referred to the report speaking of ore reserves for the open pit and the underground, a discussion about capital for the open pit and for the underground about cash flow, about payback periods for the open pit and for the underground and that they combined same for cash flow purposes. He suggested that the categorization of expenses in Class 12(f) indicated that the appellant was treating the underground as an expansion and not "as a writeoff, as a Canadian exploration expense". He then placed more emphasis on the 1980 feasibility report which stated that the appellant was going to start commercial production in October, 1983, that within a month thereof it was going to start building the headframe and in the following year it would start sinking the shaft. His point seemed clearly to be that both mining operations were to be producing at the same time.

With respect to the connections he again referred to the air raise, what he described as a "complete water system created by the pit” and the exploratory decline which was used as a waterway. He stated that the aforesaid booklet of exhibits showed a definite plan from the beginning of the feasibility study throughout the annual reports which confirmed the progress forecast in the feasibility study to each succeeding year. He emphasized reference to the "underground phase" of the mine and submitted that that was exactly what was being done, namely a mine extension, the first phase being the open pit mine and the second phase being the underground mine.

Conclusion

Having regard to the principles extracted from the foregoing cases I have little difficulty in concluding that the underground mining operation constituted a new mine. I was not referred to any authority dealing with the situation where an open pit mining operation and an underground mining operation were conducted in one ore body. Nor was I referred to any authority dealing with two mining operations in one ore body.

However, it is clear from the Bethlehem Copper Corp. decision, supra, that the Jersey was not a mine merely because of the existence of a separate body of ore but that it became a mine when that body commenced to be extracted by means of its separate and distinct extraction facility. Also, it is my view that the underground operation was, in the words of Mr. Justice Cartwright, in the North Bay Mica Co. decision, supra, a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore.

The Marbridge Mines Ltd. case, supra, is authority for the proposition that two mines exist where there is no integrated system for the extraction of ore. In that case, a powder magazine on the surface used for storage of dynamite for both mines and a common water line to one pound were found to be accidental or incidental common things that were of no significance or assistance in resolving the question in issue.

I find that the decline was not created for any purpose other than exploratory. Even though it was used as a passageway for air and for water, it was not used in any way in the open pit mining operation. I conclude that the use in the underground mine of water from the abandoned open pit mine creates no connection between the two operations and I find also that the exit of the underground air raise in the open pit mine did not connect the two operations in any functional way.

The evidence is that the only equipment common to the two operations was trucks which were used to transport ore from the headframe of the underground mine to the mill, having nothing to do with the mining operation. I accept the evidence of Mr. Brehaut that skilled workers were needed in the underground operation and that only a low proportion of employees who worked in the open pit mining operation were qualified to work underground.

In short, I find that neither singly nor cumulatively do the above factors create connections that compromise my ability to conclude that each of the two operations was a mine. With respect to respondent's argument about the operations both being in contemplation at the same time and at an early date, I cannot conclude that this fact affects the distinct and separate operations. Likewise, the labelling of and reference to these operations as being Phase I and Phase II cannot, in my opinion, assist the respondent's case. The fact is that, although there was joint consideration of the two operations, they are, as mining operations, separate and distinct.

In conclusion, I find that the appellant's underground mining operation was a new mine. Accordingly, the appellant's appeal herein for its 1985, 1986 and 1987 taxation years is allowed with costs.

I am making a direction concurrently herewith, pursuant to section 169 of the Tax Court of Canada Rules, General Procedure, that counsel for the appellant prepare a draft of an appropriate judgment to implement this decision taking into account the following matters:

1. At the hearing, respondent's counsel agreed that if the Court determines that the underground operation is a new mine then expenses in the total amount of $15,471,567 incurred by the appellant in 1985, 1986 and 1987 and referred to in paragraph 10 of the notice of appeal as "Shaft Expenses" would be expenses incurred for the purpose of bringing a new mine into production within the meaning of subparagraph 66.1(6)(a)(iii.1) of the Income Tax Act. Appellant's counsel provided the Court a book of authorities that set the paragraph forth as reading:

(a) Canadian exploration expense" of a taxpayer means any expense incurred after May 6, 1974 that is

(iii.1) any expense incurred by him after November 16, 1978 for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine, including

(A) clearing, removing overburden and stripping, and

(B) sinking a mine shaft, constructing an adit or other underground entry. . . .

It is noted, however, that the part thereof preceding clause (A) applied only to expenses incurred after May 9, 1985 (1985, c. 45, subsection 29(8)). That part formerly read:

(iii.1) any expense incurred by him after November 16, 1978 for the purpose of bringing a mineral resource in Canada into production and incurred prior to the commencement of production from the resource in reasonable commercial quantities, including . . .

Campbell Red Lake, in its income tax returns, treated these costs as falling in Class 12(f) of Schedule II of the Income Tax Regulations ("Regulations"). Although the deduction allowed in this Class is the same as if the expenditures were Canadian exploration expenses, counsel for both parties agreed that other tax benefits would accrue to the appellant through such reclassification.

2. respondent's counsel also agreed at the hearing that if the underground mining operation was found by the Court to be a new mine then costs described in paragraph 10 of the notice of appeal as "Asset Costs” would be depreciable property described in Class 28(c)(ii) of Schedule Il of the Regulations. Appellant's counsel also set forth paragraph (c) of Class 28 of the Regulations in the aforesaid book of authorities as reading:

Property situated in Canada that would otherwise be included in another class in this Schedule that

(c) was acquired by the taxpayer

(i) after November 7, 969,

(ii) before the coming into production of the mine or the completion of the expansion of the mine referred to in subparagraph (b)(i) or (ii), as the case may be, and

(iii) in the case of a mine that was the subject of a major expansion described in subparagraph (b)(ii), in the course of and principally for the purposes of the expansion

Neither he nor respondent's counsel pointed out that the foregoing paragraph applied in respect of property acquired after 1987 (P.C. 1989-2464, S.O.R./90-22). Class 28, as it applied to the taxation years in question read differently.

3. Paragraph 17 of the notice of appeal posed the question, whether, if the underground mine was a new mine, capital cost allowance claimed with respect to the asset costs in the 1986 and 1987 taxation years of the appellant would reduce "resource profits” as that phrase is applied in computing "resource allowance” in accordance with Regulation 1211 of the Regulations. At the hearing, appellant's counsel stated that he and respondent's counsel had agreed on the consequential treatment of resource profits if the Court found the underground mining operation to be a new mine.

4. At the hearing, appellant's counsel stated that the appellant was abandoning its claim, as stated in paragraph 18 of its notice of appeal, that the asset costs although capital in nature were nonetheless expenses incurred for the purpose of bringing a new mine into production and accordingly fell within subparagraph 66.1(6)(a)(iii.1) of the Act.

5. Campbell Red Lake had, in its return of income for its 1987 taxation year, deducted the sum of $250,466 in respect of financial advice it had received from Burns Fry Ltd.. By notice of reassessment the Minister of National Revenue disallowed same. By virtue of paragraph 11 of the respondent's first reply to the notice of appeal the respondent agreed that such amount should be deductible as an expense. Counsel for the respondent confirmed this at the commencement of the hearing of this case and, accordingly, I shall not deal with that matter in these reasons.

Appeal allowed.