Denison Mines Ltd. v. MNR, 71 DTC 5375, [1971] CTC 640 (FCTD), aff'd 72 DTC 6444 (FCA), aff'd 74 DTC 6525 (SCC)

CATTANACH, J.:—This is an appeal from the appellant’s income tax assessment for its 1961 taxation year.

The basic facts are not in dispute and are as follows.

On March 24, 1960 Can-Met Explorations Limited, a company incorporated pursuant to the laws of the Province of Ontario and Consolidated Denison Mines Limited, also a company incorporated pursuant to the laws of the Province of Ontario were amalgamated by letters patent issued under the laws of the Province of Ontario to continue these two companies as one company under the name of Denison Mines Limited, the appellant herein.

The principal business of the appellant is exploring for and mining minerals.

In the middle of this century the demand for uranium became pressing.

Early in the 1840’s a schooner captain, in the course of his travels on the north shores of Lake Superior anl Lake Huron gathered mineral samples, one of which was identified as pitchblende. A century later, when uranium was in great demand, the memory of the captain’s find led to intensified attempts to discover the ‘‘lost’’ deposit which was believed to be near the north shore of Lake Superior, some 70 miles west of Sault Ste. Marie, Ontario. It was not until 1953 that the great discovery was made in the Blind River-Lake Elliot region which led to the development of the largest uranium field known in the world.

Early in 1954 the appellant (then known as Consolidated Denison Mines Limited) acquired property in the region on the west side of Quirke Lake (and below the surface of the lake) about 11 miles north of the present town of Elliot Lake. In 1954 a drill hole intersected a low grade uranium-bearing quartzpebble conglomerate bed at a depth of 2,550 feet. A second hole was then drilled 2 miles to the east which, at a depth of 1,700 feet, produced results that were astounding. A conglomerate bed about 16 feet thick was found which showed an average grade of 2.43 pounds uranium oxide per ton of ore. An intensive program of surface drilling was begun, a further 28 holes on a grid pattern were drilled which outlined the appellant’s orebody, the largest known deposit in the world to this date.

The appellant obtained a contract to supply some 20 million pounds of uranium oxide to the Crown corporation, the only permitted purchaser, with fixed amounts to be delivered at specified times. The appellant, by the terms of its contract, had 18 months to get into production, a very short time to do so and to mine and exploit an orebody of this size. Therefore there was great urgency in this contract.

Originally there were approximately 12 mining companies with mining properties in the region all of which had contracts to supply uranium oxide to the Crown corporation. Most of the companies, which were financed by the sale of bonds, were faced with difficulties in paying the bond holders, due to high operating costs, so that a number of contracts which these companies held were taken over by more successful companies.

This is what happened between the appellant and Can-Met Explorations Limited hereinafter referred to as Can-Met. Can- Met had a property adjoining that of the appellant at the eastern boundary. The supply of uranium oxide called for by the contract which Can-Met had entered into could be readily fulfilled from the resources of the appellant and the appellant assumed that responsibility. This led to the amalgamation of these companies in 1960.

The appellant went into production on January 1, 1958 and Can-Met went into production on June 1, 1958, but no ore has been produced from the Can-Met property since March 31, 1960. Because the appellant went into production on January 1, 1958 it is, by virtue of Section 83(5) of the Income Tax Act, exempted from including in its income, the income derived from the operation of its mine, during the period of 36 months beginning with the day on which the mine came into production, i.e. January 1, 1958, the date determined by the Minister for the purposes of Section 83. The appellant is therefore exempt for the years 1958, 1959 and 1960. The appellant’s 1961 taxation year being the taxation year now under review, is the first year that the appellant is subject to income tax on its income derived from the operation of the mine. Can-Met was also exempt during its period of production, that is until March 31, 1960, when it became amalgamated to form the appellant and there has been no production from the Can-Met property since that date.

Mr. Joseph Kostuik, a mining engineer with wide experience in mining generally and in the more recent years of his career with “trackless” mining in particular, became president of the appellant in July 1955. He was responsible for the mining plan of the appellant from the outset (including that of Can-Met).

The appellant’s mine has a surface area of about 4,700 acres.

The main ore zone 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. The upper end of the main ore zone is 550 feet below the surface and deepens 3,000 feet at the southern boundary.

The ore zone is reached by two main vertical shafts about one-half mile apart. The first shaft gives access to the orebody at 1,600 feet and the second shaft, further down-dip, intersects the main ore zone at 2,454 feet. Originally the ore was hoisted to the surface at the first shaft but now the second shaft is used exclusively for that purpose. The first shaft continues to perform the very vital function of supplying ventilation to the underground workings and, if I recall the evidence correctly, also serves as an access to transport personnel below. There are two other shafts on what was formerly Can-Met property which have been connected to the underground system to provide ventilation.

Main roadways and conveyor ways radiate out from the shafts to form the framework of the mine plan. From these main arteries other passages extend into the active mining areas.

The ore is mined from the A and B reefs above which are three other reefs designated as D, E and F, which have not been touched, separated from A and B and each other by layers of quartzite. To date the A and B reefs have been partially mined. In relation to the entire orebody about 10% has been extracted from the A and B reefs.

The ore in the A and B reefs is being mined by the room and pillar method. Basically the room and pillar method is the driving of a passage into orebody from which mining is then extended into rectangular rooms spaced regularly in the inclined orebody. Pillars separate the rooms. The mining plan called for the passage-ways to be 850 feet ahead of the rooms but that was not always possible. As mining advanced each room attains the approximate size of 65 feet wide, 250 feet long and 16 feet high inclined 19 degrees. The pillars are 20 feet wide and extend the entire length of the room. The ore is drilled and blasted, then removed from the room through a small. opening into the passage. It is mechanically scraped from the rooms by ‘‘slushers’’. The efficient operating distance of these devices is 250 feet which dictates the length of the room and being assisted by gravity an incline is required. Because of this the ore can only be removed from the room in one direction into the passage-way. The height of the room is dictated by the width of the orebody and by the height of the machinery which is 15 feet. The passage-ways are 300 feet apart and this is because of the length of the rooms.

When the broken ore is scraped from the rooms it is then loaded into large rubber-tired 20-ton trucks and hauled to a belt conveyor. There it is dropped on a steel grid to separate oversized boulders which are further broken. The conveyor carries the broken ore to an underground crusher installed in 1969. Formerly the broken ore was carried to shaft No. 1 and hoisted to the surface where it was crushed. Now the ore is hoisted by No. 2 shaft but No. 1 shaft may still be utilized. The crushed ore is then subjected to further treatment to achieve the final product which is uranium concentrate. As I have mentioned before about 214 to 3 pounds of uranium oxide are obtained from a ton of ore.

No haulage underground is done by rail which undoubtedly accounts for the term ‘‘trackless mining’’.

At the present time in the area which has been developed 65% of the ore has been removed with 35% remaining in the pillars and in some other small areas. This is according to the plan. It is intended, when circumstances require, to drive the passageways to the extremities of the properties in the A and B reefs. When market conditions make it practicable and when the A and B reefs have been gone over the second time, which means that 50 % of the pillars is removed, then at that future time the D, E and F reefs will be mined simultaneously. The broken ore from these reefs will be dropped into the passage-ways created in mining the A and B reefs and the conveyor ways and other facilities now existing will be utilized for the removal of the ore from the D, E and F reefs, as well as 50% of the pillars in A and B, to the surface. The quality of the ore in the three upper reefs is generally inferior to that in A and B but there are some very high-grade pockets.

The D, E, and F zones do not cover as wide an area as the A and B zones. They are narrower and not as long, but they are continuous and unbroken. The positions of the ways created through the A and B zones will determine where the rooms will be in the D, E and F zones when they are mined. It is a matter of obvious common sense for the purpose of mining D, E and F zones to use the passage-ways in A and B zones rather than duplicate or create new passage-ways in the upper zones. It was always Mr. Kostuik’s intention that the passage-ways in the lower zones would be used to mine the upper zones.

Mr. Kostuik estimated the present ore reserves to be 245 million tons of which 80% can be extracted leaving a net reserve of 196 million tons which will produce 375 million pounds of uranium oxide. At the present rate of production this would result in a 90 year life expectancy of the mine. However this may vary depending upon the markets for the uranium oxide.

Despite the fact that only 10% of the ore has been extracted a veritable labyrinth of rooms and passage-ways has been created during the years 1957 to 1960, the extent of which can be appreciated by a reference to three plans introduced in evidence as exhibits to the affidavit of a mining engineer called as an expert witness.

The rooms and passage-ways, where the men are not required to go, have been flooded deliberately and sealed off because of the radio-active nature of the ore, but all can be readily drained and reopened when the need arises to extract the pillars.

The most significant thing to note is that the passage-ways were driven through the orebody and not in the waste rock beneath. The general tenor of the evidence of the mining engineers who were called as expert witnesses was that Mr. Kostuik in devising the mining plan to extract the ore from the appellant’s properties by use of trackless mining, and the room and pillar method with all underground workings exclusively in the orebody was an innovation in a uranium mine with a great but calculated risk attached. The plan proved successful and with the benefit of aftersight I fail to appreciate the risk involved because the plan to me seems eminently sensible and the logical one to have adopted. I believe the risk to have been anticipated had to do with the stability of the floor and the strength of the roof. The latter difficulty was overcome by the use of rock bolts.

It should also be borne in mind that there was an urgent need to get the mine into production as expeditiously as possible which was a factor in influencing Mr. Kostuik to adopt the plan he did. The ore extracted in creating the passage-ways went into production along with the ore mined from the rooms. There was no difference.

The value of the ore extracted from the passage-ways exceeded the cost of opening those passage-ways.

In the appellant’s financial statements to its shareholders, prepared by its auditors, the value of the ore recovered from the passage-ways was credited to income from the product and the cost of opening the passage-ways was charged to income.

In paragraph (2) of its notice of appeal the appellant alleges that the cost of the construction and extension of these passageways incurred in the years 1958, 1959, 1960 and 1961 was $21,320,096. (During the course of the trial this figure was revised to $21,288,243. )

For its 1961 taxation year the appellant sought to deduct the amount of $9,229,794.33 of the foregoing amount in computing its income for that year as a capital cost allowance pursuant to Section 11(1) (a) of the Income Tax Act and paragraph (f) of Class 12 of Schedule B to the Income Tax Regulations.

Section 11(1) (a) 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 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 (1) (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 the rate in Class 12 of 100%.

The Minister disallowed this claim for deduction.

The appellant’s contention is that the passage-ways were main haulage ways or similar underground works designated for continuing use, and extensions thereof sunk or constructed after the mine came into production within the meaning of paragraph (f) of Class 12 of Schedule B and accordingly it is entitled to deduct up to 100% of the amount expended therefor in computing its income for 1961.

The costs of the mine shafts do not enter into the computation of the cost because they were sunk prior to 1958.

The appellant submitted that the expenditure is a capital outlay because the passage-ways were constructed for a continuing use, that is to say, for ventilation purposes, as a means of access and for the transportation of ore. It was submitted that being a capital expenditure the cost is deductible, that it was immaterial that the passage-ways were constructed or extended through the orebody and that the proceeds of the ore removed from the ways during the course of their construction should not be deducted from the gross cost of their construction (in which ease the cost would be nil because the proceeds from the ore exceeded the cost of construction) but rather that the proceeds should be taken into product or revenue account for the purpose of determining the profit or loss on the mining operation.

On the other hand the position of the Minister is that the costs of excavating the areas in question are not capital expenditures, but are current operating expenses laid out for the purpose of producing ore and revenue therefrom, in furtherance of the appellant’s business and as such these costs are an integral part of the profit-making activity of the appellant. It was the further contention of the Minister that if the passageways should be found to be capital assets there was no capital cost because the proceeds of the ore extracted should be set off against the cost of construction and the proceeds exceeded that cost.

This then is the main issue between the parties.

In support of its contention the appellant called six expert witnesses. Three were mining engineers or consultants whose testimony was basically that, in their opinion, the appellant’s underground network of passages were all main haulage ways or similar underground works designed for continuing use. Three were accountants who testified that in their opinion the cost of the underground passage-ways and similar works were capital expenditures and should be brought into the appellant’s books as such and amortized over a period of years, but that the proceeds from the ore extracted from the passage-ways should be brought into account as revenue.

The Minister called an equal number of expert witnesses in each category. The mining engineers or consultants so called expressed the view that the construction of the underground passages were part and parcel of the appellant’s activity of mining and the fact that the passage-ways resulted was incidental to that activity. If my recollection of the evidence is correct, it is my belief that these witnesses testified that all of the passage-ways could not be considered as main haulage ways or works similar thereto. The accountant witnesses called by the Minister expressed the view that the cost of constructing the passage-ways should not be brought into capital account but should be set off as operating expenses against the proceeds of the ore extracted from the passage-ways, which should be brought into revenue account to obtain the profit to the appellant.

In the pleadings there were three other subsidiary issues raised.

In paragraph 7 of the notice of appeal it is alleged that the appellant claimed as a deduction $11,919 as place of business and paid up capital tax paid to the Province of Ontario. The Minister did not allow the deduction. In paragraph 4 of his reply the Minister admitted that the appellant claimed the deduction and that it was disallowed. In all other respects the allegations were denied.

No evidence was adduced by the appellant with respect to this claim for deduction, nor was there any argument before me on this point by either party. I therefore assume that this particular claim was abandoned by the appellant and if my assumption is incorrect I would dismiss this particular claim because no evidence was called with respect thereto and the appellant has failed to discharge the onus cast upon it.

In paragraph 6 of the notice of appeal the appellant alleges that an amount of $227,772 was expended in 1956 and 1957, before the mine came into production, for the construction and maintenance of temporary roads required to provide access to the mine site to enable the contractor to transport mining machinery and equipment. The point is that the appellant sought to claim the additional cost of the heavy load-bearing road over the cost of a normal road as a capital expenditure to be included in the cost of mining machinery and equipment within paragraph (k) [Class 10] of Schedule B deductible at the rate of 30%. The Minister reclassified the amount claimed as falling within paragraph (g) Class 1 of Schedule B that is a road deductible at the rate of 4%.

During the trial counsel for the appellant abandoned this ground of appeal.

There, therefore, remains but one additional issue to the main issue mentioned above.

This issue concerns the cost of housing for employees.

The mine was located in the wilderness and in order to develop and operate the mine it was necessary to provide private housing for employees. The mining operations, both by Consolidated Denison and Can-Met, were financed by borrowings from the public by way of bond issues secured by deeeds of mortgage and trust. One deed of trust was between Consolidated Denison and Guaranty Trust Company of Canada as trustee dated October 1, 1955. The other deed of trust was between Can-Met and Guaranty Trust Company of Canada, as trustee dated June 15, 1956. In the opinion of the legal advisers to Can-Met and Consolidated Denison that conditions in the trust deeds precluded the companies from devoting any of the funds received by them to providing or financing housing for their employees. Accordingly Consolidated Denison and Can-Met caused a company to be incorporated under the name of Con-Ell Properties Limited (hereinafter referred to as Con-Ell) to obtain and provide housing for the employees of the companies and to undertake the administration of that housing. Guarantees were given to the Royal Bank by Consolidated Denison and Can-Met in favour of Central Mortgage and Housing Corporation to permit Con-Ell to acquire housing and dispose of the houses to the employees. Consolidated Denison and Can-Met each beneficially owned 50% of the issued and outstanding shares of Con-Ell. On the amalgamation of Consolidated Denison and Can-Met into the appellant, the appellant became the beneficial owner of all the outstanding shares in Con-Ell.

In computing its income for 1961 the appellant deducted an amount of $546,964.09 as paid or incurred by the appellant in reimbursing Con-Ell for costs in providing housing for the appellant’s employees. In assessing the appellant the Minister did not allow this deduction. During the trial counsel for the appellant conceded that he was able to establish only $329,616, as the amount of the alleged loss of the appellant.

The position taken by the appellant is that Con-Ell acted as its agent in providing housing for its employees and that the losses of the agent are the losses of the principal and deductible in determining the appellant’s income. Counsel for the appellant contended that in law there is no difference in the appellant selecting a corporate entity as its agent than if it had selected a natural person to act in that capacity.

The position of the Minister is that the losses incurred by Con-Ell are the losses of that company and not the losses of the appellant.

This constitutes the second issue between the parties.

I turn to the main issue, that is, whether the appellant is entitled to deduct capital cost allowance with respect to the expenditures incurred by it in constructing main haulage ways and similar underground works under paragraph (f) of Class 12 of Schedule B to the Regulations.

It is essential to the appellant’s case that the expenditures are outlays or payments on account of capital within the meaning of Section 12(1)(b) of the Income Tax Act. If they are outlays or expenses incurred for the purpose of gaining or producing income from the appellant’s business then the expenditures would be deductible within Section 12(1) (a) in computing the appellant’s profit from its business.

In order to fall within Section 11(1) (a) which permits of the deduction of such part of the capital costs to the taxpayer as is allowed by regulation, the expenditures must be capital expenditures. The purpose of Section 11(1) (a) is to permit the deduction of outlays of capital, if permitted and to the extent permitted by regulation, which would not otherwise be deductible.

Therefore the first question for determination is whether the expenditures are capital expenditures, as contended by the appellant, or current operating expenses laid out as an integral part of the profit-making activity of the appellant, as contended by the Minister.

On this view of the matter it is of secondary importance whether the labyrinth of underground passages resulting from the extraction of ore therefrom by the appellant are main haulage ways or similar underground works designed for continuing use within the meaning of paragraph (f) of Class 12 of Schedule B to the Regulations. It has been disputed by the Minister that all of the underground passages so qualify and that the cost thereof is that alleged by the appellant because that cost includes a portion of current administrative and overhead expenses which the Minister contends is not properly included in that cost in the event that the cost should be found to be a capital cost.

As I see it, the primary question is whether the expenditures are capital expenditures.

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, L.C. in British Insulated and Helsby Cables, Limited v. Atherton, [1926] A.C. 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 passageways 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 passage-ways 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 I’ 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 lifetime of the mine.

It was pointed out by counsel for the appellant that since the passage-ways fall within the meaning of the words in paragraph (f) of Class 12 of Schedule B to the Regulations upon which capital cost is allowed, it follows that it was contemplated by the draftsmen of the regulations that the passage-ways were capital assets.

However, it does not follow that because a capital asset exists the expenditures which brought that asset into being are necessarily capital expenditures rather than income or revenue expenditures. Viscount Cave did not say that. He did say that in the absence of special circumstances leading to an opposite conclusion the fact that an expenditure is made with a view to bringing into existence an asset for the ending benefit of the trade is a very good reason for treating the expenditure as a capital one. The question which must next be answered is whether the special circumstances leading to an opposite conclusion as contemplated by Viscount Cave are present in the present appeal.

The orebody is a uniquely regular, homogeneous, solid mass of mineral in which the appellant could work in any direction and extract ore. The appellant’s business is the extraction of ore and the sale of uranium oxide derived therefrom.

The appellant had substantial commitments to supply uranium oxide under its contracts with Eldorado, the Crown corporation. Originally Consolidated Denison obligated itself to supply 1,875,000 pounds of uranium oxide between May 1, 1957 and March 31, 1962, 1,600,000 pounds by December 31, 1957 and 340,000 pounds per month thereafter. This original agreement was amended to increase the total commitment to 20,805,000 pounds to terminate March 31, 1963.

Can-Met had a similar contract with Eldorado to supply some 7,710,000 pounds of uranium oxide.

Upon the amalgamation of Consolidated Denison and Can-Met to form the appellant, the obligations of both Can-Met and Consolidated Denison became the obligations of the appellant. The joint obligations work out to about 471,000 pounds per month or 5,640,000 pounds per year. It takes a ton of ore to produce 214 to pounds of uranium oxide. So to produce the appellant’s annual commitment would require approximately 16,920,000 tons of ore. The annual reports indicate that the appellant was not successful in meeting its full commitments, but came extremely close to doing so. For example in 1961 the appellant produced 5,379,168 pounds of uranium oxide, whereas its commitment was 5,640,000 pounds. Of the uranium oxide produced by the appellant between 1958 and 1961 inclusive, I would estimate very roughly that about 6,500,000. pounds came from ore extracted from the passage-ways or an annual average of 1,620,000 pounds.

Under its agreement with Eldorado, Consolidated Denison had 18 months to begin meeting its commitments. Mr. Kostuik testified that this was a short time and that the urgency to begin producing was a factor which impelled the decision to exploit the orebody on a mass mining basis, that is, by delving into the orebody immediately and extracting ore from every available opening although the trackless mining method would have been adopted in any event.

The reason is obvious. The appellant could extract ore by driving its openings in any direction.

As I understood the evidence of Mr. Kostuik, there is no different technique employed in extracting ore from the long headings than from a room. The jackleg and scraper method of mining is equally applicable to any phase or section of the mine and to strike drives as it is to room mining. However Mr. Kostuik did say that the more skilled crews were used in the passage-ways, but these same crews also operated in the rooms depending on the progress of the operations.

The ore from the rooms and passage-ways were loaded, hauled, hoisted and milled together.

There is no doubt in my mind that what the appellant was doing in the passage-ways was extracting ore but it was extracting ore from the passage-ways in accordance with a preconceived plan which resulted in the passage-ways becoming haulage ways in a predefined pattern. The question, therefore, is what was the appellant doing? Was it building haulage ways or was it extracting ore?

In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948, Viscount Radcliffe said at page 958 :

. . . Leaving aside the undesirability of determining the nature of 2 payment by the motive or object of the payer, their Lordships cannot find in the evidence any support for the idea that the preservation of Nchanga’s business was in fact the purpose of the arrangement or that the benefit obtained by its payment was to endure in any other sense than that it was to condition the year’s production. . . .

The foregoing language emphasizes that it is undesirable to determine the nature of a payment by the motive or object of the payer. The operation must be looked at objectively rather than subjectively.

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 other 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 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 passageways as a capital expense. The only justification for so doing would be that as a result of the extraction of ore from the passage-ways 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.

Authority for the foregoing proposition is found in Canada Starch Company Limited v. M.N.R., [1969] 1 Ex. C.R. 96; [1968] C.T.C. 466. In that case the President of the Exchequer Court (as he then was) had to consider whether amounts laid out to secure the registration of a trade mark, including an amount paid to the registered owner of the identical mark to withdraw its objection thereto was a payment on capital account or a payment incidental to ordinary trading operations. A trade mark when acquired is a capital asset.

At page 103 [473] Jackett, P. said:

. In my view, a trade mark that actually distinguishes is, even under the statutory scheme, a result that flows from the current operations of a business and it follows, as I have already indicated, that the moneys laid out in the operations that incidentally give rise to trade marks are moneys laid out on revenue account. . . .

Since I have concluded that the expenditures laid out by the appellant in extracting ore are moneys laid out on revenue account even though passage-ways of an enduring benefit to the appellants resulted incidentally therefrom, that conclusion effectively disposes of the main issue in this appeal which, in my opinion, must be dismissed.

However before leaving this subject it is appropriate that I consider the evidence of the expert accounting witnesses. I preface the consideration of this evidence by the axiom that the Courts reserve to themselves the right to determine whether the “accountancy principles’’ relied upon in any particular case are based on sound postulates.

Three accountants of outstanding qualifications and repute were called on behalf of the appellant.

As I understand the evidence of these three witnesses, each accepted the premise that the haulage ways and similar underground works created by the extraction of ore therefrom were capital assets because of their enduring quality and usefulness in the future operation of the mine.

Each witness accepted the premise that the appellant’s business was extracting ore and that the proceeds of the ore mined from the passage-ways which was then milled and sold by the appellant must be brought into revenue for the current financial year.

These witnesses were unanimous in their opinion that the more appropriate method of accounting on the theory of “matching” would be that the cost of creating the passage-ways should be deferred or capitalized against future revenues, that is, that future proceeds should bear some portion of that cost, otherwise the cost of the ore first mined would be much higher than the cost of the ore mined later.

While these witnesses contended that the accountancy principle advocated by them was the more appropriate method, nevertheless, they did agree that the accepted and common accounting practice would be to treat the expenditures incurred by the appellant in extracting ore from the passage-ways as current deductions against the proceeds in the financial year. This is precisely what the appellant’s auditors did in the pre- production years, that is, those prior to January 1, 1958 for Consolidated Denison and June 1, 1958 for Can-Met. The revenues from the ore from the passage-ways were netted against the expenditures which created the asset of a capital nature obviously for the reason that they were expenditures laid out to produce income. The appellant’s auditors continued this accounting method after the expiration of the exempt period.

All three of the expert witnesses called by the appellant indicated that they would have hesitated to certify the financial statements in the form prepared by the appellant’s auditors, that 1s, where the expenses being claimed as capital costs in this appeal were deducted as ordinary costs of production, without qualification because this is generally accepted accounting practice.

Again all three of these witnesses adopted the view that if an expense resulted in a benefit which endured beyond the current year it was a capital expenditure and therefore not deductible under Section 12(1) (b) of the Income Tax Act except by virtue of a capital cost allowance under Section 11(1) (a) of the Act and paragraph (f) of Class 12 of Schedule B to the Regulations. All three witnesses agreed, when the question was put to them on cross-examination, that if a capital cost allowance provision did not exist they would deduct the expenses here in question as current operating expenses thereby achieving the deduction in computing income by that means.

An equal number of expert accounting witnesses were called on behalf of the Minister all of whom expressed views diametrically opposed to the accounting witnesses called on behalf of the appellant.

In summary it was their opinion that from an accounting view the costs here in question should be treated as current costs and should not be deferred and that the proper accounting principle to be adopted was that the direct costs of producing revenue in a particular period should be matched against the revenue produced thereby. It was also their view that if the passage-ways were capital assets the capital cost should be determined by deducting the proceeds of the ore from the cost of creating the passage-ways.

The fallacy in the position taken by the appellant’s expert accounting witnesses is, as I see it, the acceptance of the premise that if a capital asset results then the expenditures which brings that asset into being are capital costs and their failure to recognize that a capital asset may result from current expenditures. Neither am I convinced that in the circumstances of this appeal accounting principles dictate that there should be a deferral of those costs against future years.

The fact that the appellant was tax exempt by virtue of Section 83(5) during its pre-production years of 1958, 1959 and 1960 does not relieve the appellant from computing its income in accordance with the Income Tax Act (see M.N.R. v. The Portage La Prairie Mutual Insurance Company, [1965] 1 Ex. C.R. 234 at 248; [1964] C.T.C. 877 at 385). Under Section 4 it is provided that income for a taxation year from a business is the profit therefrom for the year. By the language of Section 83(5) the income that is exempt is ‘‘income from the operation of a mine’’ which by virtue of Section 4 is the profit therefrom. This means that the profits in exempt years are the difference between the receipts for such years and the expenditures laid out to earn those receipts.

This is what the appellant’s auditors did in its pre-production years in preparing the financial report to the shareholders. This was acknowledged by all expert accounting witnesses to be the proper accounting practice but the expert witnesses called by the appellant, as I understood their testimony, testified that, in their opinion, the cost of extracting the ore from the passageways during the exempt period becomes a capital cost in subsequent years against which the receipts from the ore are not set oft.

The result of this procedure would be that the direct costs of producing the ore in the exempt period are removed from the computation of the appellant’s income and became costs in subsequent years. The effect is that exempt income becomes exempt cost free gross income. This, I think, distorts both the exempt income and the non-exempt income in that exempt income is much greater by reason of not having the costs laid out to earn that income set off against the receipts and the profit in subsequent years is reduced correspondingly. This is the logical result of the deferral procedure advocated by the appellant’s witnesses.

In Marsh Fork Coal Co. v. Lucas, 42 Fed. (2nd) 83, a decision of the Fourth Circuit, Circuit Court of Appeals, Parker, Circuit Judge, speaking on behalf of the Court in considering the matching accounting principle in the operation of a coal mine, said at page 85 :

When an operator has removed sufficient coal to extend his tunnels so that he cannot maintain production with the equipment which he has, he must as a matter of course lay down more track and put in more cars and locomotives. The question is, Shall the expense thereby incurred be charged against the coal, the removal of which necessitated the expenditure to maintain normal operation, or against the coal yet unmined? We think it is but fair to charge against the coal which has been mined the expense which it removal has necessitated. We think, also, that this is the only practicable method of accounting. To capitalize the expenditures made to maintain normal output means that the cost of removal is pyramided against the coal farther back in the mine, with the result that the coal nearest the head house will appear to have been mined at abnormal profit and that farther back at a loss.

The foregoing reasoning by Parker, Circuit Judge, is in accordance with the financial results I have outlined above in the circumstances of the present appeal and constitutes a sound argument against the deferral principle of accounting advocated on behalf of the appellant.

However, the principle of accounting so advanced on behalf of the appellant is rendered abortive by my conclusion for the reasons I have indicated, that the expenditures in question incurred by the appellant were outlays for the purpose of producing income. The asset acquired by the appellant in the form of useful passage-ways was an incident of those expenditures and the adoption of a practical mining plan but those costs remain costs expended on revenue account, and do not properly enter a calculation of the capital cost of that asset. There was no outlay of capital to bring that asset into being.

In view of the conclusion I have reached, it is not necessary for me to decide the propriety of items included in the appellant’s calculation of the cost of the passage-ways. Those costs included direct and haulage costs in the amount of $7,631,661 as well as an allocation of general mine office expenses in the amount of $3,348,645 and a portion of head office expense in the amount of $1,031,022. These expenses, along with others, are a portion of the normal cost of the conduct of the appellant’s business, as for example, fire insurance, snow clearing, fire protection, inventory adjustment, municipal taxes, witnesses compensation and depreciation on the apartments owned by Con-Ell. While I make no decision on the matter I am doubtful if such items are properly included and it may well be that the capital cost for which deduction is sought is a percentage of an inflated base.

The remaining issue is that involving the cost of housing for the appellant’s employees.

The appellant is seeking to deduct in the computation of its profits the losses ineurred by its wholly owned subsidiary in providing housing for the appellant’s employees and the administration of that program during the appellant’s 1961 taxation year on the sole ground that Con-Ell was acting as agent for the appellant.

The losses were those incurred on the sale of houses to the employees, the proceeds not being sufficient to cover the cost of land and the construction of the houses; the costs of administration such as the salary of a business manager; in the operation of multiple apartment units, the rental receipts not being sufficient to cover the costs of operations and losses in guarantees to Central Mortgage and Housing Corporation with respect to mortgage loans.

I experienced difficulty in ascertaining how the amount of the losses was calculated. Both Con-Ell and the appellant kept separate books of account and employed different auditors. All employees of Con-Ell were paid by the appellant and their salaries were charged back to Con-Ell. In the books of the appellant monthly accruals were made in anticipation of Con- Ell’s losses and at the year end adjustments were made to reflect the actual loss incurred. Since the debits made by the appellant were only estimates, no doubt to allocate certain of its funds to cover those losses, I assume at the year end a comparison was made with the books of Con-Ell which would show the actual loss and an appropriate adjustment would then be made in the books of the appellant so that the amounts would correspond.

It is also my understanding that apart from the payment by the appellant of the salaries of the appellant’s employees working for Con-Ell with a corresponding charge back to Con-Ell, that the bulk of the financing of Con-Ell’s operation was financed by bank loans, originally guaranteed by Consolidated Denison and Can-Met and in 1961 by the appellant. Then, too, advances were made to Con-Ell by the appellant to discharge obligations incurred by Con-Ell when Con-Ell’s borrowed funds were not sufficient to do so. Again I assume that these advances were made to enable Con-Ell to pay amounts which the appellant had guaranteed.

The appellant is not claiming the advances made to Con-Ell as losses as such or payments necessitated by its guarantee of Con-Ell’s obligations, but it is claiming as a deduction from its income the losses of Con-Ell as being its own losses.

The calculation of those losses is further complicated by the fact that Con-Ell and the appellant had different financial years ending in the 1961 calendar year. The year end of the appellant was December 31, whereas that of Con-Ell was April

30. There would be an eight month overlap.

In the books of Con-Ell the loss is shown as $496,000 whereas in the books of the appellant the loss is shown as $416,039. It was explained to me that the difference was accounted for by the difference in year ends. Then the internal auditor of the appellant deducted a further amount of $86,423 which was a portion of mine office expenses allocated to the housing operation which the appellant’s auditor had included as part of the cost of constructing the haulage ways leaving an amount of $329,616 which the appellant now claims as a deduction rather than the larger amount of $546,964.09 set out in the notice of appeal.

From the outset the appellant did not expect to make any profit from the housing operation. On the contrary, the provision of housing was necessary to attract a stable labour force to the remote area in which the mine was located and a loss was contemplated.

It was the opinion of the appellant’s legal advisers that the appellant was precluded by the provisions of the trust deeds through which the appellant was financed by public borrowing from expending any funds so derived upon provision of housing for its employees. It was for this reason that Con-Ell was incorporated to perform that function. Being a wholly owned subsidiary the directors and officers of Con-Ell were also directors and officers of the appellant and it follows that any decisions of the directors of Con-Ell would be consonant with the interest of the appellant.

Briefly the appellant’s position is that the business of Con-Ell was in reality the business of the appellant and in contradistinction thereof the position of the Minister rests on the case of Salomon v. Salomon, [1897] A.C. 22, that there are two separate legal entities and the losses of one are not the losses of the other.

It is well settled that the mere fact that a person holds all the shares in a company does not make the business carried out by that company the shareholder’s business, nor does it make that company the shareholder’s agent for carrying on the business. However it is conceivable that there may be an arrangement between the shareholder and the company which will constitute the company the shareholder’s agent for the purpose of carrying on the business and so make the business that of the shareholder. It is immaterial that the shareholder is itself a limited company.

The question therefore is whether in the circumstances of the present appeal such an arrangement exists. The basis of agency is a contractual relationship. either express or implied. There was no express arrangement here and whether one may be implied is a question of fact based on the circumstances of each particular case.

Counsel for the appellant relied strongly on Smith Stone and Knight Ltd. v. Birmingham Corporation, [1939] 4 All E.R. 116. In this case the plaintiff company was the sole shareholder of a subsidiary company. The premises occupied by the subsidiary were expropriated by the defendant. The parent company sought compensation for business disturbance on the ground that the subsidiary’s business was the parent’s business. The claim was contested on the ground that the proper claimant was the subsidiary, that being a separate entity.

Atkinson, J. reviewed the authorities and found six points that were relevant for the determination of the question : Who was really carrying on the business? Those points were:

1. Were the profits treated as the profits of the parent company? Here there were no profits but losses.

2. Were the persons conducting the business appointed by the parent company?

3. Was the parent company the head and brain of the trading venture ?

4. Did the parent company govern the adventure, decide what should be done and what capital should be embarked on the venture?

5. Did the parent company make the profits by its skill and direction? In the present appeal were the losses incurred by the appellant’s direction? and

6. Was the parent company in effectual and constant control.

On the evidence in the present appeal each of the six questions so posed must be answered in the affirmative but in my opinion this is not conclusive. The points outlined by Atkinson, J. are but indicia helpful in determining the question. Other factors may be present which point to a different conclusion.

Later Atkinson, J. said at page 121 :

. . . Indeed, if ever one company can be said to be the agent or employee, or tool . . . of another, I think the (subsidiary) company was in this case a legal entity, because that is all it was. There was nothing to prevent the claimants at any moment saying: “We will carry on this business in our own name.”

(Brackets are mine. )

Here the very reason for the incorporation of Con-Ell was predicated on the legal advice that the appellant would be in breach of the conditions of the trust deed if it conducted the housing operation on its own account. It is a principle of agency that a person cannot do by an agent what he cannot do himself.

Here Con-Ell acted as principal. It contracted with the building contractor. It obtained bank loans. Because the subsidiary was without a backlog of security the bank insisted upon a guarantee of the subsidiary’s indebtedness by the appellant, but it was Con-Ell that contracted the debt as principal and the appellant acted as guarantor only and the appel- lant also acted as guarantor of Con-Ell to Central Mortgage & Housing Corporation with which corporation Con-Ell contracted directly. Therefore the appellant did not hold out Con-Ell as its agent, nor did Con-Ell purport to act on behalf of a principal undisclosed or otherwise.

Con-Ell was carrying on business and it is important to bear in mind that limited companies that carry on businesses are separate taxable persons and the profits of their respective businesses are separate taxable profits whether or not one be the subsidiary of the other. Any attempt to erode this principle must be based upon clear and unequivocable facts leading to the irrebutable conclusion that one legal entity is acting as the agent of another and that legal entity is really doing the business of the other and not its own at all.

In my view the facts in the present appeal do not justify such a conclusion for the reasons I have expressed.

The appeal is, therefore, dismissed with costs.