Heald, J:
1 These two actions were tried together on common evidence, by the order of Cattanach, J and are appeals from assessments for income tax for the plaintiff's 1968, 1969 and 1970 taxation years.
2 At the commencement of the trial, an agreed statement of facts was filed and reads as follows:
1. The Plaintiff, Sunshine Mining Company, (herein referred to as “Sunshine”) is incorporated under the laws of the State of Idaho, one of the United States of America, and in the 1968, 1969 and 1970 taxation years, and in prior taxation years, carried on business in Canada and elsewhere as a mining exploration and oil and gas exploration and production company.
2. Sunshine Exploration Limited (herein sometimes referred to as “Sunshine Exploration”) is incorporated under the laws of the Province of Alberta and is a wholly-owned subsidiary of Sunshine.
3. Sunshine is the owner and operator of a silver mine located in the State of Idaho, in the United States of America and from time to time before and after the events in question has entered into agreements for the purpose of developing and operating mining properties.
4. By agreement made as of March 5, 1964 and dated for reference February 1, 1964, Sunshine Exploration entered into an agreement with Dolly Varden Mines Ltd. (NPL) a company incorporated under the laws of the Province of British Columbia (herein referred to as “Dolly Varden”) which agreement is referred to as “the principal agreement”. The principal agreement is annexed as Exhibit 1 hereto.
5. By agreement made as of March 5, 1964, Dolly Varden, Sunshine Exploration and Sunshine acknowledged and agreed that in executing the principal agreement, Sunshine Exploration was acting as agent for and on behalf of Sunshine. The agency agreement is annexed as Exhibit 2 hereto.
6. Between March and October, 1964 work was done by Sunshine on the property, and approximately $348,000 expended for that purpose. On or about November 30, 1964, Sunshine gave notice to Dolly Varden that it proposed to enter the second development period. The notice is annexed as Exhibit 3 hereto. On or about January 14, 1965 Dolly Varden gave notice of default to Sunshine specifying in the said notice points in respect of which defaults under the agreement were alleged. The notice is annexed as Exhibit 4 hereto.
7. On or about January 22, 1965, Dolly Varden and Sunshine concluded an amending agreement (herein referred to as “the second amending agreement”) a copy of which is annexed as Exhibit 5 hereto.
8. Sunshine did not carry out all of the work stipulated in Schedule “A” to the second amending agreement and on or about August 31, 1965 the agreement was terminated as of September 30, 1965. On October 1, 1965 Dolly Varden commenced an action for damages for breach of contract against Sunshine and Sunshine Exploration.
9. By judgment pronounced October 7, 1969, the Supreme Court of Canada awarded damages for breach of contract to Dolly Varden. The reasons for judgment are annexed as Exhibit 6 hereto.
10. Sunshine retained Messrs Bull, Housser & Tupper, Barristers and Solicitors of Vancouver in the Province of British Columbia for the purpose of defending the action commenced by Dolly Varden.
11. Sunshine disbursed amounts totalling approximately $537,837.67 in respect of the action commenced by Dolly Varden, of which amount, the sum of $393,582.42 would have been allowed by the Minister of National Revenue as exploration and development expenses incurred in searching for minerals in Canada had Sunshine performed the work under Schedule “A” to the second amending agreement. Deductions of the total amount were claimed by Sunshine on the basis that the amounts represented exploration and development expenses in searching for minerals or were otherwise deductible as follows:(a) Incurred in prior years and claimed in 1968 year:
To professional services paid Bull, Housser & Tupper $ 22,733.32
Deposit with Court for settlement of judgment and
Interest re Dolly Varden action 34,202.11
Paid Leslie Wright & Rolfe Ltd re Court bond, Dolly
Varden action 3,260.00
To professional services paid 1966 Bull, Houser & Tupper 14,938.02
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Total $ 75,133.45(b) Incurred and claimed in 1968 taxation year:
To professional services paid Bull, Housser & Tupper $ 3,436.00
Paid Leslie Wright & Rolfe Ltd re Court bond, Dolly
Varden action 6,075.00
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Total $ 9,511.00(c) Incurred and claimed in 1969 year:
Final judgment paid Dolly Varden $393,582.42
Interest on judgment 41,978.60
Miscellaneous expenses re Dolly Varden action 17,632.20
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Total $453,193.22
12. As a result of deducting the amount referred to in paragraph 11, Sunshine reported a business loss of $127,495.82 in its 1969 taxation year and in computing its 1970 taxable income it deducted the same amount of $127,495.82.
13. By assessments dated December 29, 1971, the Minister of National Revenue disallowed the deduction of the amounts claimed by Sunshine in its 1968, 1969 and 1970 taxation years as outlined in paragraphs 11 and 12 hereof.
3 The “principal agreement” referred to in paragraph 4 of the agreed statement is a lengthy and detailed document, but its effect was to require the plaintiff, as operator, to carry out successive stages of work on Dolly Varden's mining properties in the Kitsault Valley of British Columbia with a view to developing said mining properties and bringing them into production. There were to be four stages of development. The First Stage was to extend from the commencement of the agreement to December 31, 1964 and was exploratory in nature. The Second Stage was to commence with the conclusion of the First Stage and to extend until the property was in production in reasonable commercial quantities. The Third Stage was the period in which each of the parties was to recover its development costs. The Fourth Stage was the remaining life of the agreement (for a maximum of 50 years) during which the parties would share equally and profits realized from production. Dolly Varden agreed, on the closing date, to assign and convey to the plaintiff one-half of the mining properties described in the agreement. The plaintiff agreed to deposit with an escrow agent documents to evidence a complete reconveyance of the half interest to Dolly Varden, which were to be delivered to that company if the plaintiff terminated the agreement or failed to give notice of its intention to proceed to the Second Development Stage. Since the plaintiff never did so proceed, the reconveyance documents were so delivered to Dolly Varden.
4 The “second amending agreement” referred to in paragraph 7 of the agreed statement provided that:(a) The plaintiff withdrew and cancelled its notice of intention to enter the Second Development Period.
(b) Dolly Varden withdrew its notice of default and excused the plaintiff from any further work on the programme described in Schedule F to the principal agreement.
(c) The First Development Period was extended to September 30, 1965 with the plaintiff having the right by giving notice before August 31, 1965 to extend it further to December 31, 1966.
(d) The plaintiff covenanted to carry out additional work as set forth in Schedule A to the second amending agreement prior to October 1, 1965. In the event the work outlined in said Schedule A was not completed prior to October 1, 1965, Dolly Varden had the right to terminate the principal agreement. The plaintiff did not carry out said work and the agreement was terminated by Dolly Varden as set out in paragraph 8 of the agreed statement. The work stipulated in said Schedule A included the carrying out of a programme of diamond drilling and unwatering, testing the downward plunge of one of the ore bodies, testing by diamond drilling the width of mineralization in parts of the ore body and completing stipulated amounts of diamond drilling on other parts of the property which had been included under the umbrella of the principal agreement.
5 As stated in paragraph 11 of the agreed statement, the plaintiff's total outlay in respect of the legal proceedings referred to in paragraphs 8, 9 and 10 thereof was the sum of $537,837.67. This sum is further broken down as follows:
(a) Damages awarded to Dolly Varden by final judgment of
the Supreme Court of Canada $393,582.42
(b)Interest thereon 76,180.71
(c) Legal fees and Court bond expense re Dolly Varden action 68,074.54
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TOTAL $537,837.67
6 At the trial, counsel for the defendant agreed that if the damage award in the sum of $393,582.42 was deductible, then the items of interest, legal fees and costs set out in (b) and (c) above would also be deductible because of the deductible nature of the matter in respect of which they were paid. Thus, the sole issue to be determined in these proceedings is the deductibility or non-deductibility of the award of damages by the Supreme Court of Canada.
7 The defendant made a threefold submission in support of his position that said damage award was not deductible. The defendant's first position was that said amounts were not expenses incurred by the plaintiff for the purpose of gaining or producing income from a business (italics mine) and were thus not deductible pursuant to paragraph 12(1)(a) of the Income Tax Act, RSC 1952, c 148.[FN1: <ul>12. (1) In computing income no deduction shall be made in respect of<li><p>(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from property or a business of the taxpayer,</p></li></ul>] The defendant submits that the reason the plaintiff made subject payments to Dolly Varden was for the plain and simple reason that it was ordered so to do by the Supreme Court of Canada. The defendant argues that said payments were made because the plaintiff wished to relieve itself of its obligations under the Dolly Varden agreements and that it was never the intention of the plaintiff to make these expenditures with a view to gaining or producing income from a property or a business and that, accordingly, the plaintiff has not brought itself within the provisions of paragraph 12(1)(a).
8 In view of the decision of President Thorson in Imperial Oil Limited v Minister of National Revenue, [1947] C.T.C. 353, 3 D.T.C. 1090, I am not able to accept this first submission of the defendant. At page 373 [1099] of said judgment, the learned President said:
It is no answer to say that an item of expenditure is not deductible on the ground that it was not made primarily to earn the income but primarily to satisfy a legal liability. This was the kind of argument that was expressly rejected by the High Court of Australia in the Herald & Weekly Times, Ltd case (supra) and it should be rejected here. In a sense, all disbursements are made primarily to satisfy legal liabilities. The fact that a legal liability was being satisfied has, by itself, no bearing on the matter. It is necessary to look behind the payment and enquire whether the liability which made it necessary—and it makes no difference whether such liability was contractual or delictual—was incurred as part of the operation by which the taxpayer earned his income.[FN2: <p>Italics mine.</p>]
9 The defendant's second submission was to the effect that the amounts in dispute were paid on account of capital and are thus covered by the provisions of paragraph 12(1)(b) of the Income Tax Act.[FN3: <ul>12. (1) In computing income, no deduction shall be made in respect of:<li><p>(b) an outlay, loss or replacement of capital a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,</p></li></ul>]
10 In order to test the validity of this submission, it is necessary to analyse the true nature of subject payments in the light of the existing jurisprudence. A perusal of the principal agreement and the relevant amending agreements makes it clear that the plaintiff was to perform the exploration work specified for the First Development Stage and in return therefor it was to receive a one-half interest in the Dolly Varden mining properties.
11 However, it did not complete said First Development Stage to the satisfaction of Dolly Varden and a dispute arose between the parties as a result of which the second amending agreement was entered into and under this agreement the plaintiff was to perform the exploratory work set out in Schedule A thereto. Because of its failure to complete this work, in effect, the First Development Stage was never completed, thus the plaintiff never became entitled to its one-half interest in the mining properties, and because it had not earned said one-half interest, the escrowed transfers covering said one-half interest were returned to Dolly Varden.
12 The moneys paid pursuant to the Supreme Court judgment were the amounts which were necessary to do the work agreed to be per formed by the plaintiff under said Schedule A. Had the plaintiff performed the work set out in Schedule A within the time frame contemplated in the agreement, it would have earned and become entitled to a one-half interest in the Dolly Varden mining properties.
13 President Jackett (as he then was) said in Associated Investors of Canada v Minister of National Revenue, [1967] C.T.C. 138 at 144, 67 D.T.C. 5096 at 5099:
... The general concept is that a transaction whereby an enduring asset or advantage is acquired for the business is a capital transaction. (See British Insulated and Helsby Cables, Ltd v. Atherton, [1926] A.C. 205.)
14 In the case of Canada Starch Co Ltd v Minister of National Revenue, [1968] C.T.C. 466 at 472, 68 D.T.C. 5320 at 5323, the learned President set out the distinction between outlays on revenue account and on capital account in this manner:
In other words, as I understand it, generally speaking,
(a) on the one hand, an expenditure for the acquisition or creation of a business entity, structure or organization, for the earning of profit, or for an addition to such an entity, structure or organization, is an expenditure on account of capital, and
(b) on the other hand, an expenditure in the process of operation of a profit-making entity, structure or organization is an expenditure on revenue account.
15 Applying the rationale of these cases to the facts in the case at bar, I am satisfied that the true nature of the moneys paid by the plaintiff to Dolly Varden was, in effect, the purchase price for a one-half interest in the Dolly Varden mining properties, clearly an expenditure for the “acquisition of an addition to the plaintiff's business organization”, and as such, in my view, an expenditure on account of capital.
16 Plaintiff's counsel cited my decision in the case of Asamera Oil Ltd v The Queen, [1973] C.T.C. 305, 73 D.T.C. 5274, in support of his submission that subject expenditures in the case at bar were expenditures on revenue account. However, in my view, the Asamera case (supra) is clearly distinguishable on its facts. In that case, I said at page 312 [5278]:
This is not the case of an oil company owning mineral rights or mineral permits to explore which are exploited and developed by said company. The plaintiff owned nothing in Indonesia; it had no rights in the minerals; it had no property rights in the wells or the equipment; it had been hired to perform services and even its right to receive payment therefor was dependent on the oil production on the subject lands.
17 The facts in the case at bar involving ownership of mineral rights and permits and mineral properties is a classic example of the kind of situation contemplated in the above quotation and, in my view, is a clear case of true capital assets.
18 I have thus concluded that the subject amounts were payments on account of capital and thus non-deductible under the provisions of paragraph 12(1)(b) of the Act.
19 The only other question to be considered is whether the facts and circumstances in this case are such as to bring the plaintiff within the exempting provisions of paragraph 83A(3b)(b) and subparagraph (f)(ii), the relevant portion of which reads as follows:
83A. (3b) A corporation whose principal business is
20 On the facts in this case, it is clear that the moneys paid by the plaintiff to Dolly Varden were “not incurred by the plaintiff in searching for minerals in Canada” as that expression is used in the above quoted section. This is apparent from the plain meaning of the words as they appear in the statute and is also supported by judicial decisions.[FN4: <p>See for example<em>Johnson's Asbestos Corp</em>v<em>Minister of National Revenue</em>, [1965] C.T.C. 165 at 170, 65 D.T.C. 5089 at 5092, and<em>Farmers Mutual Petroleums Ltd</em>v<em>Minister of National Revenue</em>, [1967] C.T.C. 396, 67 D.T.C. 5277.</p>] It was my understanding that the plaintiff's counsel agreed that section 83A had no application to the facts of this case.
21 For the foregoing reasons, the plaintiff's appeal is dismissed with costs.
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