MacKay, J.:—This is an appeal from a reassessment by the Minister of National Revenue, dated February 18, 1985, of the income tax return of the plaintiff corporation for its 1979 taxation year. Notice of objection to the reassessment was served on May 3, 1985. The Minister had not notified the plaintiff that he had vacated or confirmed the reassessment when this action was commenced by statement of claim, filed on August 26, 1986, pursuant to then subsection 172(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act"), as amended.
Only one of two issues raised by the plaintiff's action was outstanding at the time of trial. That outstanding issue was tried and is the subject matter of these reasons. It concerns the reassessment by the Minister of National Revenue whereby he disallowed the plaintiff's claim, in its 1979 taxation year tax return, that costs amounting to $18,256, incurred for exploration drilling and tunnelling in development of the Cardinal River Coal Underground Mine ("the CRC underground mine”), were Canadian exploration expenses as provided for in section 66.1 of the Income Tax Act as it applied in 1979. By this reassessment the Minister deleted the expense from the plaintiff's cumulative Canadian exploration expense and reclassified the amount as the cost of acquisition of depreciable property of the type described in Class 12 of Schedule II to the Income Tax Regulations. This reclassification affected the plaintiff's right to claim certain allowances.
The other matter raised in the plaintiff's statement of claim concerns the classification of income received by it from participation with others in an operation to upgrade lignite coal from the Bienfait Mine in Saskatchewan. The plaintiff's income tax return for 1979 in relation to this aspect of its income was also reassessed by the Minister, but by her amended defence the defendant agrees that the plaintiff's appeal be allowed "insofar as it relates to income earned by the plaintiff from the Bienfait Mine”. The action by the plaintiff is allowed in respect to that matter and by order this matter is referred back to the Minister for reassessment on the basis admitted by the defendant in this action.
In advance of trial the plaintiff applied for an order, pursuant to Rule 494(11) that the Court, in the presence of counsel for the parties, inspect the mining site. Counsel provided written submissions in relation to the application which the defendant opposed and counsel were heard by telephone conference call. I then ordered that the application be allowed and that provision for transportation be made by the plaintiff for travel from Edmonton to the Cardinal River Coals Ltd. property south of Hinton, Alberta, that arrangements for the inspection tour be agreed upon by counsel for the parties and that costs of the inspection of the property be borne by the plaintiff in any event of the cause. At the commencement of trial in Edmonton, counsel advised the Court of arrangements that had been agreed upon, including that the second day scheduled for the hearing be utilised to visit the mine site. This was done and the arrangements made were helpful to the Court in gaining an appreciation of the scope and scale of the mining operations and of the location of existing and earlier open pit surface operations and of the site of entry to the underground mine. The mine was not fully developed before it was abandoned and today there is little evidence, except for the levelled site and sealed portals, that substantial work was done a decade ago to establish an underground mine.
In the amended defence filed in this matter on January 3,1990, assumptions of fact relied on by the Minister in his reassessment are set out as follows.
6. In reassessing the plaintiff as he did and with respect to the matter here remaining in issue, the Minister of National Revenue relied, inter alia, upon the following assumptions of fact:
(a) that the plaintiff was involved in the open pit method of extraction of coal from a section of the syncline known as the Jewel Coal Seam in the Cardinal River Coal Surface Mine ("hereinafter referred to as"the CRC Surface Mine”) at all material times;
(b) that the CRC Surface Mine was a mine that had come into production of a mineral resource in reasonable commercial quantities by 1979;
(c) that in 1979, the plaintiff incurred expenses in the amount of $18,256 for the purpose of developing an underground mine(hereinafter referred to as “the CRC Underground Mine") in the Jewel Coal Seam;
(d) that the CRC Underground Mine was located in the same ore body as the CRC Surface Mine;
(e) that the CRC Underground Mine was related to or was to be related to a potential or actual extension of the CRC Surface Mine;
(f) that the plaintiff was aware of the existence of the deeper ore body (later constituting the CRC Underground Mine) from deep drilling from the surface prior to opening of the CRC Surface Mine;
(g) that the expenses incurred by the plaintiff in developing the CRC Underground Mine were incurred for the purpose of developing a mine, shaft, main haulage way or similar underground work designed for the continuing use of the CRC Surface Mine or an extension thereof, sunk or constructed after the CRC Surface Mine came into production.
When the matter came on for trial an agreed statement of facts was set out in the following terms, from which I omit only the references contained in the original to various exhibits filed with that statement.
A. Introduction
1. At issue in this action is the appropriate treatment, for income tax purposes, of expenses incurred by the plaintiff ("Oro") during its 1979 taxation year for surface and underground development for the extraction of coal at the Cardinal River Coals mine site (the “ Cardinal River Mine"). Oro alleges that these expenses are "Canadian exploration expense" as defined in either subparagraph 66.1(6)(a)(iii) or 66.1 (6) (a)(iii.1) of the Income Tax Act, as it read with respect to the taxation year in issue; the defendant (the"department") denies that this is the case on the basis that the expenses incurred in developing the underground were not expenses of the nature contemplated by those subparagraphs and has reclassified these expenses
2. In 1979 paragraph 66.1(6)(a) of the Act defined "Canadian exploration expense" in part as follows:
66.1(6)(a) "Canadian exploration expense" of a taxpayer means any outlay or expense made or incurred after May 6, 1974 that is:
(iii) any expense incurred by him for the purpose of determining the existence, location, extent or quality of a mineral resource in Canada including any expense incurred in the course of:
(A) prospecting,
(B) carrying out geological, geophysical or geochemical surveys,
(C) drilling by rotary, diamond, percussion or other methods, or
(D) trenching, digging test pits and preliminary sampling,
but not including
(E) any Canadian development expense, or
(F) any expense that may reasonably be considered to be related to a mine, whether or not owned by the taxpayer, that has come into production in reasonable commercial quantities or to be related to a potential or existing extension thereof,
(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,
(a) clearing, removing overburden and stripping, and
(b) sinking a mine shaft, constructing an adit or other underground entry,
Subsection 248(1) of the Act defined "mineral resource" to include “a coal deposit".
3. At all times material to this action Cardinal River Coals Ltd. ("CRC") was the operating company at the Cardinal River Mine for the following group of joint venturers:
Consolidation Coal Company of Canada ("Consol") | 50.0 per cent |
Luscar Ltd. (" Luscar") | 32.5 per cent |
Forestburg Collieries Ltd. (” Forestburg") | 12.5 per cent |
Oro | 5.0 per cent |
4. The expenses incurred in developing the underground were allocated amongst and paid by the joint venturers in proportion to their respective undivided interests in the Cardinal River Mine and the outcome of these proceedings will be accepted by the other joint venturers and by the Department as determinative of the same issue for all joint venturers for each of the years 1979 through 1983. 5. Total expenses incurred by the joint venturers in respect of the development of the underground for the five year period (1979-1984) were in excess of $21,000,000. The reclassification of these expenses has significant impact upon the earned depletion base, resource allowance and capital cost allowance available to each of the joint venturers. There is no dispute with respect to the amounts of the proposed adjustments.
B. History and Geological Background
6. The Cardinal River Mine is a metallurgical coal mine located in the foothills of the Canadian Rockies, 180 miles west of Edmonton. More precisely, the area is situated 26 miles south of the town of Hinton and 4.5 miles northeast of Cad- omin. . . .
7. The coal is extracted exclusively from the Jewel Seam which extends along the mountain front in Alberta for a maximum known distance of some 60 miles. The seam's thickness varies from 26 feet to 40 feet in those areas outlined by drilling. The Jewel Seam is often folded, steeply pitching, irregular, distorted and displaced by faults . . . Much of it is unsuitable for mining because of its variable structure, thickness and quality. Only 15 to 20 per cent of this seam is accessible by open pit surface mining methods within the Cardinal River Mine area. . . .
8. Mining within the Cardinal River Mine area was begun by Luscar in 1921 (the "Luscar Mine"). Mining was discontinued in 1956, after the introduction of the diesel locomotive caused a significant reduction in the demand for coal. The Luscar Mine was completely abandoned; however, Luscar maintained its coal leases in the area.
9. Other than the Luscar Mine, there have been a number of mines on the Jewel Seam in the past at Cadomin, Mountain Park and on Folding Mountain. The Jewel Seam was in 1979, and is currently, being mined not only within the Cardinal River Mine area by the joint venturers, but also on coal leases immediately adjacent to the Cardinal River Mine area by a subsidiary of Manalta Coal Ltd.
10. When it became apparent that there was a significant market in Japan for metallurgical coal, Luscar concluded that the economic climate warranted the investigation of recommencing mining activities. In contemplation of carrying out strip mining operations in the Cardinal River Mine area, Luscar submitted a proposal to the Interdepartmental Committee on Mining Taxation in November of 1967 in support of an application for the three year tax exemption which was available, at that time, for new mines under subsection 83(5) of the pre-reform Income Tax Act. . . . The application was given preliminary approval on January 26, 1968, and the Department of National Revenue, in consultation with the Department of Energy, Mines and Resources, subsequently granted, at Luscar's request, a three year tax exemption for income from the Cardinal River Mine effective September 1, 1970. ... .
11. Once assured that the tax exemption would be approved, Luscar entered into a joint venture agreement with Consol on May 1, 1968 for the purpose of mining coal from the Luscar coal leases. Together the two companies formed CRC, for the purpose of "the construction of coal preparation facilities and excavating, mining and preparing coal” from the Luscar properties. At that time only a stripping operation was contemplated. . . .
12. Subsequent transactions resulted in the membership of the joint venture being as described in paragraph 3.
13. On February 7, 1969 an agreement was entered into with the Japanese for the delivery of 1,000,000 long tons of "Quality Coking Coal" for 15 years requiring the removal of approximately 7,280,000 cubic yards of overburden annually. In satisfaction of the obligation assumed under this agreement, in excess of 15,000,000 tons of coal was delivered to the Japanese long before the expiration of the 15-year period.
14. This production schedule required the opening of a number of surface pits, each of which was opened and operated under a separate licence issued by the Energy Resources Conservation Board pursuant to the Coal Conservation Act, S.A. 1973, c. 65. Each of these licences required the licensee to extract the maximum quantity of coal capable of being economically mined from the surface. . . . The attached plan . . . outlines the coal lease areas with the various surface mine permit and licence areas superimposed, and provides an illustration of the development of the surface mine in 1979, prior to the commencement of work on the underground.
C. Underground Mine Development
15. Anticipating a steadily increasing demand for coking coal Consol proposed, in 1976, a drilling program ” to increase the confidence of the surface reserves that are not in the measured category and to verify some of the assumptions used to calculate the deep reserves [in the Cardinal River Mine area]”. . . . The prospect of continued strong Japanese markets encouraged the joint venture to proceed with such a drilling program and plans to develop the underground. A preliminary evaluation of two potential underground mining areas was completed in January, 1978.
16. In March of 1978 Luscar advised Consol... as follows:
Our geologists have carefully examined all the reserves beyond the stripping limit, and have concluded that the reserve with the most favourable mining conditions is the down dip extension of pit 51-B-2. The syncline continues to dip six to eight degrees to the southeast and broadens towards the south.
17. A supplementary study, completed in 1979, identified two additional potential underground mining areas. . . Ultimately the area adjacent to and beyond the stripping limit of the 51-B-2 Pit was selected. . . .
18. In this area the Jewel Seam was continuous and without serious faults or displacements; however, the dip of the syncline was such that it was no longer economical to extract the coal by surface methods because the amount of overburden which would have to be removed to extract the coal would have resulted in an uneconomic stripping ratio of as much as 31:1. ...
19. Underground Mining Feasibility Studies were prepared in May 1980 . . . July 1980 . . . and August 1980 . . . for the purpose of assessing the merits of applying an hydraulic mining method, in comparison to other methods of extraction, and assessing the economic viability of such a project. Ultimately it was decided that the development should proceed and on September 28, 1980 CRC submitted to the Energy Resources Conservation Board its application for a licence to develop an underground hydraulic mine. ..... Subject to some requests for additional information the application was granted and the permit and the licence required were issued. . . .
20. A helpful summary of the underground is contained in the Presentation to the Steel Mills Technical Committee dated September 1980..... The actual plans which served as the basis for budgeting purposes throughout the life of the project are the following:
Cardinal River Coals Ltd. Preliminary Underground Mine Study — August 1979. . . .
Cardinal River Coals Ltd. Underground Mine Feasibility Study — August 1980. ... .
Underground Mine Study No. 5 — September 1982 (2 volumes). . . .
Cardinal River Coals Ltd. Underground Mine Study No. 7 — August 1984. . . . 21. The following facilities were to be utilized in the operation of both the surface and the underground:
(a) the preparation plant and its associated clean coal storage, coal silo and settling pond;
(b) railspur and loadout facilities;
(c) employee transportation facilities between Hinton and the Cardinal River Mine;
(d) road access, traversing the open pit operations, to the junction of the surface haul road and the private underground access road;
(e) process water and environmental treatment facilities;
(f) electrical substation served by Calgary Power.
22. The following surface facilities were to be utilized exclusively in the operation of the underground:
(a) the dewatering plant;
(b) office building;
(c) equipment maintenance building;
(d) underground employee washing and changing facilities;
(e) private underground access road from its junction with the surface haul road to the No Name Creek portal site;
(f) domestic water supply and sanitation facilities;
(g) electrical feedline from the electrical substation.
23. The construction schedule . . . shows the proposed time frame for the development of the underground. In October of 1980, CRC started clearing the surface site for the underground tunnels at No Name Creek. In February of 1981 CRC hired Cementation Company (Canada) Ltd. and the underground tunnels were begun. Cementation Company's work on site ceased in November of 1982. Development of the underground continued until November of 1983, when all development work was suspended due to the fall in world coal prices. Some development coal had been extracted during construction of development tunnels in the Jewel Seam, but the underground never commenced commercial production. The underground was maintained free of water by pumping until 1985 when CRC applied to the Energy Resources Conservation Board for temporary abandonment. .. . .
The issues
In its statement of claim the plaintiff objected to the reclassification of expenses, from cumulative Canadian exploration expenses to costs of acquisition of depreciable assets of a prescribed class, on the grounds that the expenses incurred by it were for the purpose of bringing a mineral resource in Canada into production and were expenses incurred prior to commencement of production from the resource in reasonable commercial quantities, as provided in section 66.1 of the Act. Among other matters referred to in the statement of claim, the plaintiff states that the CRC underground mine operations were self- sufficient and in all ways were independent of the operations of the CRC surface mine. The underground mine is said to be a new mine within the meaning of section 66.1.
As paragraph A.1 in the agreed statement of facts states, the plaintiff contends the expenses in question are Canadian exploration expense" as defined in either subparagraph 66.1 (6)(a)(iii) (hereinafter"subparagraph (iii)", for convenience) or subparagraph 66.1 (6)(a)(iii.1) (hereinafter "subparagraph (iii.1)", for convenience) of the Act. No breakdown of expenses is provided allocating particular expenses to one or other of those provisions.
Counsel for the defendant urged at trial that each of these two subparagraphs of section 66.1 incorporates a different definition or test. Expenses claimed under subparagraph (iii) must be of the sort there described that are not expenses reasonably considered to be related to a mine, or to a potential or existing extension of a mine, that has come into production in reasonable commercial quantities. In short, it was urged the expenses must be in relation to a new mine. Under subparagraph (iii.1) the expenses must be of the sort described in that subparagraph in relation to a new mineral resource before commencement of production in reasonable commercial quantities from the resource. It is urged that the plaintiff must establish that expenses incurred meet either of the two definitions or tests if it is to fully succeed in its claim.
No argument was raised concerning the nature of the expenses here claimed in terms of the sort of expenses described in subclauses (A) to (D) of the first of those subparagraphs, or within subclauses (a) and (b) of the second of those provisions. Thus, for purposes of these reasons all of the expenses in question are assumed to have been incurred either in the course of prospecting, carrying out geological, geophysical or geochemical surveys, drilling by rotary, diamond, percussion or other methods, trenching, digging test pits and preliminary sampling, as provided in subparagraphs (iii)(A) to (D), or in clearing, removing overburden and stripping, or sinking a mine shaft, constructing an adit or other underground entry, as provided in subparagraphs (iii.1)(a) and (b).
The pleadings in this action concern the reassessment of the plaintiff's income tax for the 1979 taxation year. Yet the agreed statement of facts and much of the evidence relate not merely to that year but to subsequent years as well. Counsel for the parties were agreed that the Court should take into consideration, so far as they are relevant, events and decisions after 1979 with a view to rendering a decision that will be determinative in relation to the plaintiff's expenses incurred in the CRC underground mine for 1979 and subsequent years to and including 1983, as set out in paragraph 4 of the agreed statement of facts. Presumably, the classification of these expenses in terms of subparagraph (iii) and subparagraph (iii.1) of the Act, for all years that may be under consideration, will turn upon assessment of the same factors as are raised in this action in regard to reassessment of tax for the 1979 taxation year. The assumptions of fact relied upon by the Minister in his reassessment are of less significance than the issues identified by counsel, and the considerations underlying those, in light of the manner in which this action developed, in particular the filing of an amended defence on January 3, 1990, after the plaintiff's reply to the defence was filed, and reliance in the amended defence upon both subparagraph (iii) and subparagraph (iii.1), and the agreement that determination of this action in relation to the 1979 taxation year is to be followed for all other years to 1983 where the issues arising are similar. However, for the record it is proper to deal with the Minister’s assumptions as accepted by the parties or as they relate to the issues identified at trial.
Insofar as the first three assumptions of the Minister are concerned the plaintiff does not dispute that ''the plaintiff was involved in the open pit method of extraction of coal from a section of the syncline known as the Jewel Coal Seam in the Cardinal River Coal Surface Mine . . . at all material times”, that “the CRC Surface Mine was a mine that had come into production of a mineral resource in reasonable commercial quantities by 1979", and that, in that year, "the plaintiff incurred expenses in the amount of $18,256 for the purpose of developing an underground mine. . . . in the Jewel Coal Seam".
The other assumptions of the Minister are interrelated with the two primary issues raised by counsel. Thus, two assumptions have significance in relation to the question whether the "resource" developed by the underground mine and the surface mine is the same, the issue which is said by the defendant to arise in relation to subparagraph (iii.1). These assumptions are that "the CRC Underground Mine was located in the same ore body as the CRC Surface Mine”, and that "the plaintiff was aware of the existence of the deeper ore body (later constituting the CRC Underground Mine) from deep drilling from the surface prior to the opening of the CRC Surface Mine”. The other two assumptions have significance in relation to the issue whether the underground mine is a "new mine” in the sense that it is not simply an extension of the surface mine, the issue said by the defendant to arise in relation to subparagraph (iii). These assumptions are, that "the CRC Underground Mine was related to or was to be related to a potential or actual extension of the CRC surface mine”, and that "the expenses incurred by the plaintiff in developing the CRC underground mine were incurred for the purpose of developing a mine, shaft, main haulage way or similar underground work designed for the continuing use of the CRC surface mine or an extension thereof, sunk or constructed after the CRC surface mine came into production”.
It bears repeating that the two issues on which the parties disagree are whether exploration expenses of the sort described in clauses (A) to (D) of subparagraph (iii) were for purposes of a new mine as envisaged in that subparagraph including in particular, clause (F), and whether development expenses of the sort described in clauses (a) and (b) of subparagraph (iii.1) were for purposes of bringing into production a “new resource”, that is, a resource from which there was not previous production in reasonable commercial quantities.
Implications arising from the history of relevant legislative provisions
Before turning to these issues the history of the legislative provisions in question is of some interest. As noted in paragraph 10 of the agreed statement of facts, effective September 1, 1970, a three-year tax exemption for income earned was granted pursuant to then subsection 83(5) of the Act, in relation to the development of the then new Cardinal River surface mine developed by Cardinal River Coals Ltd.
With tax reform in the early 1970s that exemption, applying to new mines, was repealed effective December 31, 1973, and in its place subparagraph 66.1 (6)(1 )(a) was enacted in 1974, including subparagraph (iii) as it was in 1979. Exploration expenses described within that subparagraph may be written off at 100 per cent in the year in which they were incurred. Development expenses of a new mine following 1974 could only be written off at 30 per cent per annum on a declining balance basis. Then in 1979, with effect from November 1978, development expenses as described in subparagraph (iii.1) were included as "Canadian exploration expenses" by enactment of that subparagraph, bringing those expenses within arrangements for deduction from income at 100 per cent of the expenses in the year in which they were incurred.
Whether the expenses incurred in relation to the CRC underground mine are classified, as the plaintiff claims, as Canadian exploration expenses within subparagraph (iii) or subparagraph (iii.1), or, as the Minister's reassessment determined, as costs of acquisition of depreciable property within Class 12 of Schedule II of the Regulations, the plaintiff is entitled to claim the expenses as deductions from revenue at the rate of 100 per cent in calculating income for the year in which the expenses were incurred. However, if they are classified as Canadian exploration expenses, but not otherwise, they may also be claimed as a Cumulative fund against which, in subsequent years, a portion may be claimed as allowances against income otherwise taxable. In short, classification as Canadian exploration expenses permits claiming the expenses twice, fully in the year they are incurred, and in subsequent years as a portion of cumulative exploration expenses.
The fact that the plaintiff had been granted an exemption from tax on income earned in the first three years of operation of the CRC surface mine, commencing in 1970, under the former provision then prevailing for tax incentives, was not included as a factor to be considered in the amended defence filed in this action. Nevertheless, counsel for the defendant urged at trial that it is relevant, in considering whether the underground mine is separate and apart from the surface operations, that the plaintiff had already received a three-year holiday, an exemption of tax on income, for establishment of its operations at the mine site. The plaintiff urges that the tax exemption granted in relation to the opening of its surface mining operations is irrelevant to the question of whether the underground mine was separate from its surface operations, an issue which depends on interpretation and application of subparagraph (iii) and subparagraph (iii.1) as these read in 1979.
I agree with the plaintiff's position, that the prior exemption in relation to surface mine operations is not relevant to determining the issues here. I do so despite brief reference in Luscar's application for that exemption, submitted in 1967, to coal on the property which was recoverable only by underground mining. In an eight page brief that outlines the project then under consideration for surface mining, for establishment of facilities and services at the site, if a substantial market in Japan could be established, the only reference to underground mining is the following:
An estimated 25,000,000 tons of coal are available by underground mining methods, but a great deal of testing and development is required to determine whether these reserves could be recovered economically.
In my view, that brief reference, and reference to potential underground reserves in correspondence about the same time from Luscar to its then proposed joint venturer Consolidated, does not establish any more than that Luscar, and the plaintiff when it was created, were aware that there was substantial coal within the leased areas that was not recoverable by surface mining. Indeed, Luscar was aware of this as a result of its earlier operations at the site in the years from 1921 to 1956 when underground mining and, in later years of that period, surface mining had been carried on.
I assume that the plaintiff was aware, in a literal sense, of "the existence of the deeper ore body (later constituting the CRC Underground Mine) from deep drilling from the surface prior to opening of the CRC Surface Mine” as one of the Minister's assumptions, (f) above, states. Yet I do not consider, for the evidence does not support such a finding, that it then knew much about the quality of the coal, or the dimensions of the Jewel Seam, or the quantity of coal that would be recoverable economically by underground mining, or by the particular underground mine in question, until some years after the surface mining operations were underway. Only in the latter part of the 1970s decade, when the prospects of further expanding markets in Japan led to substantial exploration activity, was feasibility planning undertaken for underground hydraulic mining. Paragraphs 15, 17 and 19 of the agreed statement of acts make clear that a preliminary evaluation of two potential underground mining areas was completed in 1978, that two additional potential underground mining areas were identified in 1979, and that it was only in 1980 that feasibility studies concerning utilization of an hydraulic mining method led to a decision to commence the CRC underground mine at a particular location.
In my view, neither the fact that Luscar had some limited knowledge in 1967 of coal that might be recovered by underground mining, the economics of which process had not been studied, nor the fact that an exemption was granted under the former subsection 83(5) of the Act for income earned in the first three years of the surface mining operations at the Cardinal River property, are relevant in determining whether the expenses incurred in relation to the CRC underground mine are properly classified within subparagraph (iii) or subparagraph (iii.1).
The legislative provisions in issue: subparagraphs 66.1 (6)(a)(iii) and 66.1 (6) (a) (iii.1) of the Act
The provisions of the Income Tax Act in issue are fully set out in the agreed statement of facts. For the record I note that these provisions were amended in 1985, but the changes then made are not relevant here and the references to statutory provisions in these reasons are to those applicable in the years in question. These are to be construed in accord with the general principles enunciated by Mr. Justice Estey in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, at page 316 (D.T.C. 6323), that is, the statutory language is to be interpreted in the context of the statute as a whole, and, in the words of E. A. Driedger in Construction of Statutes (2nd ed., 1983), at page 83:
... the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament . ...
The use of terminology used in the industry may be significant where the Income Tax Act does not itself define words that it uses. In Nova, an Alberta Corp. v. The Queen, [1988] 2 C.T.C. 167, 88 D.T.C. 6386, at page 174 (D.T.C. 6390), Mr. Justice Urie, for the Court of Appeal said in relation to the word "pipeline", used in a schedule to a regulation, a word he described as one in "fairly common usage":
. . . I would have thought that in construing it in its "popular sense" would mean that sense “which people conversant with the subject matter with which the Statute is dealing [in this case those utilizing the service of the pipeline for the transmission of gas, oil, water, steam or solids] would attribute to it" not the popular sense derived from the perception of the man in the street not conversant with either the user industries or pipelines ....
The approach set out by Mr. Justice Urie, relying upon the meaning of words used in the Act as understood by those in the industry affected, explains the role of expert witnesses in this case, particularly in relation to the word "mine" in subparagraph (iii), and in relation to the words" mineral resource" in subparagraph (iii.1). The former is not defined in the Act, but the latter is defined in subsection 248(1), in part, as including "a coal deposit”.
Before considering the evidence, presented by expert witnesses and otherwise, an examination of the two provisions in issue is warranted, to consider whether, as the defendant urges, they import different tests or definitions, and if so, what the differences are.
In argument, counsel for Her Majesty urged that the test under subparagraph (iii) was whether the expenses were incurred on a new mine, that is, that they not be in relation to a mine, or to a potential or existing extension of a mine, that has already come into production in reasonable commercial quantities. For expenses to be included under the other provision, subparagraph (iii.1), it was urged that these must be incurred in bringing into production a new mineral resource, that is, one that has not earlier come into production in reasonable commercial quantities. This distinction was not really opposed by the plaintiff who argued that all of the expenses here incurred were made either in assessing the Jewel Seam to determine possible sites for underground hydraulic mining as a mine separate from surface mining operations, or in development of the underground mine, once the location had been determined and a provincial permit for its development was obtained. In the plaintiff's view the underground mine was a new mine within subparagraph (iii) and the resource it was developed to exploit, while part of the Jewel Seam mined by surface operations, was a new resource, a new coal deposit within subparagraph (iii.1), since it was not an economic resource or deposit recoverable by further surface operations. Without determining for the moment either position advanced by the plaintiff in regard to the application of the statutory provisions, I am satisfied that the two provisions each provide a separate test or definition for Canadian exploration expense.
Yet in my view the two definitions do not relate solely to whether expenses are incurred in relation to a“ new mine” or to a" new resource”. While another aspect was not dealt with in argument, perhaps because it is obvious from the statutory language, it seems clear, in my view, that subparagraph (iii) and subparagraph (iii.1) also provide for different sorts of expenditures, defined by the purposes for which they are incurred, in two different phases in the exploration for and development of mining projects.
Thus, expenses included under subparagraph (iii) are those incurred "for the purpose of determining the existence, location, extent or quality of a mineral resource”, including a coal deposit, in Canada, but not including any expense related to a mine, or an extension thereof, that has come into production in reasonable commercial quantities. Certain types of expenditure are set out in clauses (A) to (D) as illustrations, and by the descriptive words used in these (i.e., "prospecting . . . geological, geophysical or geochemical surveys . . . drilling . . . or trenching, digging test pits and preliminary sampling"), the general purpose already set out is emphasized. In my view, this provision, subparagraph (iii), includes expenses incurred in preliminary activities undertaken in assessing whether there exists an ore body or a coal deposit which will warrant in economic terms the development of a mine to recover marketable minerals or coal. They need not be related to a ” new mine" in the sense of leading to development of a new mine, for that may ultimately prove not to be feasible, but they may not be related to an existing mine, or an extension of a mine, that already has come into production in reasonable commercial quantities.
Expenses included under subparagraph (iii.1), in my view, are those incurred after the preliminary exploration work is concluded and a decision has been made to proceed with a mining project. The expenses are those relating to development of the project "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". The general introductory words of the subparagraph appear broad enough to include all expenses incurred for the purpose set out, but preliminary exploratory expenses are excluded from subparagraph (iii.1) by their separate definition in subparagraph (iii). Moreover, the examples here included in subparagraph (iii.1), "clearing, removing overburden and stripping” in clause (a) appear to relate to surface mining projects, and “sinking a mine shaft, constructing an adit or other underground entry" in clause (b) appear to relate to underground mining, activities undertaken after a decision to exploit a resource or deposit, using particular methodology, where the resource has been established. Expenses incurred for these purposes,"incurred prior to the commencement of production from the resource in reasonable commercial quantities", are Canadian exploration expenses within subparagraph (iii.1).
The distinction may have no effect upon a taxpayer's claim to include as Canadian exploration expenses all the preliminary expenses incurred until a decision is made to initiate a new mining project, and all development expenses of that project where a new mine is sought to be developed in a resource that has not earlier yielded production in reasonable commercial quantities. Where, however, the expenses incurred may be reasonably considered to relate to a mine, or an extension thereof, that has come into production in reasonable commercial quantities, then preliminary expenses incurred in assessing the mineral resource may not be claimed as Canadian exploration expenses. Where development expenses of a mining project, incurred after the decision to establish new mine workings, are determined to be for the purpose of bringing into production a mineral resource that has already yielded production in reasonable commercial quantities, then those expenses may not be claimed as Canadian exploration expenses. Theoretically at least, it is possible that in the circumstances of a given case, particular expenses incurred in a mining project may be allowable as Canadian exploration expense under one or other of subparagraph (iii) and subparagraph (iii.1), or under neither one.
In this case, preliminary expenses incurred in assessing the Jewel Seam for purposes of the underground mine may only be claimed as Canadian exploration expenses if the underground mine project is separate and apart from and not an extension of the surface mining operations. Further, the expenses incurred in the development of the underground mine, probably the larger portion of expenditures here in issue, can only be claimed as Canadian exploration expenses if the resource the underground mine was designed to bring into production is determined to be a resource that had not earlier yielded production in reasonable commercial quantities from the surface mining operations.
Witnesses at trial
In addition to the agreed statement of facts substantial evidence was adduced at trial, much of it from expert witnesses.
For the plaintiff, testimony was elicited from Mr. Gordon D. Ulrich, President of Luscar, Ltd. and an officer of the plaintiff corporation, which is associated with Luscar and with Forestburg Collieries, all three companies being controlled by the same persons. The three companies collectively have a 50 per cent interest in the operations of Cardinal River Coals Ltd. and that interest is treated as a single interest voted by Luscar in the joint venture with Consolidated that is carried on under the name of Cardinal River Coals Ltd. Within the latter corporation major decisions, including capital expenditures, major planning and sales, are determined by joint decisions of Luscar and Consolidated, while day-to-day operating decisions are left to the general manager of Cardinal River Coals Ltd. Mr. Ulrich is a professional engineer registered in both British Columbia, where he holds a geological specialty, and in Alberta. He has more than 25 years' experience in the mining industry and since 1975 he has been engaged entirely in the coal industry. He joined Luscar Ltd. as a financial analyst in 1978 and in September of that year was named manager of the corporate planning department. In 1981 he was named vice-president, finance and planning, and in 1990 was appointed president and a director of Luscar. He was thoroughly familiar with the CRC underground mine from his personal involvement with all phases of its planning and development.
Other evidence for the plaintiff was adduced at trial from three expert witnesses. Neil J. Duncan, a professional engineer registered in Manitoba, in Alberta where he also had acquired certification as a mine manager for underground mines and for surface mines, and in British Columbia where he had acquired certification as a coal mine manager. Mr. Duncan, a qualified mining engineer in the United Kingdom before coming to Canada in 1968, worked in Western Canadian coal mining projects until 1972 when he joined the Alberta Energy Resources Conservation Board as Senior Mining Engineer, responsible for reviewing all coal mine development applications including those relating to the CRC underground hydraulic mine here in question. He left that Board in August 1988 and then formed his own consulting practice concerned with coal mining, feasibility studies and general engineering. He was accepted as an expert mining engineer with particular expertise in coal mining, and as an expert in relation to government regulation of coal mining in Alberta, partie- ularly in regard to safety and conservation, for the years that he served with the Alberta regulatory board.
A second expert witness for the plaintiff was Dr. Jerry M. Whiting, Chair of the Department of Mining, Metallurgical and Petroleum Engineering at the University of Alberta where he has also been Professor of Mining Engineering since 1983. Dr. Whiting joined the university after nearly ten years as a consulting engineer in relation to resources, exploration, mining, energy and mineral exploration and related works, and for six of those years he was president of an independent consulting firm in the United States where most of his professional services had been based before he joined the University of Alberta in 1983. He was accepted as an expert in mining engineering and as a mineral economist with particular experience in assessing the economies of the extraction of coal.
The final expert called by the plaintiff was Landy A. Stinnett, a consulting engineer of Lakewood, Colorado, offering consulting services for the past 12 years, primarily in geological and mining engineering, much of it concerning coal. Prior to that he had worked for major producing firms for about 12 years, much of that service relating to coal production. Throughout his career he had been involved in a variety of projects, tasks and roles relating to virtually all aspects of mining for coal. He was accepted as an expert in geological engineering as well as a mining engineer with particular experience in the coal industry.
On behalf of the defendant, two expert witnesses were called. Mr. Richard T. Marshall, now a consultant, of Calgary, formerly president, 1983-90, of the Coal Association of Canada, from 1978-82 General Manager, Coal, of BP Canada Ltd., responsible for overall management of BP's interests in coal and potash in Canada, and from 1965-78 with Canadian Pacific Companies as Manager Special Projects, Fording Coal Ltd., Assistant General Manager of CanPac Minerals Ltd., and as Manager, Engineering and Production, and formerly Chief Engineer, Mining Division of Canadian Pacific Oil & Gas Ltd., and from 1954-65 in various capacities with Western Minerals Ltd. While not a member of the professional association of engineers, Mr. Marshall was accepted as a resource management consultant with special expertise in the area of coal mining.
The last expert witness, Dr. R. Marc Bustin, Professor of Geological Sciences at the University of British Columbia was accepted as a geologist with special expertise in coal geology. Dr. Bustin's research and his contributions to geological literature, especially concerning coal resources, have been notable and at the time of trial he was working to complete a glossary on Canadian coal, a joint project of industry, national agencies and the academic community designed to lead to agreement on terminology used in relation to coal characteristics. In addition, he had completed portions concerning coal resources of Western Canada and of the Arctic for a major new atlas and for a North American geological treatise.
Much of the experts' testimony concerned the use of terminology, particularly of the words ” mine” and ” resource", within the coal mining industry, in light of the terms of the subparagraphs of the Income Tax Act here in question. I noted at trial that I did not accept the opinions of any of the experts so far as these concerned the interpretation of the Income Tax Act. Determination of that interpretation is a task for the Court, not for the expert witnesses, but the latter may be, and in this case were, helpful in assessing how words found in the Act may be used in the industry, and in the opinions offered about the interrelations of surface and underground mining operations of Cardinal River Coals Ltd. and about the interrelation of the coal reserves planned for exploitation by surface and underground operations.
Was the CRC Underground Mine related to the surface mine operations within subparagraph (iii)?
There is no question that substantial expenditures were incurred by the plaintiff in preliminary exploration, surveying, drilling and preliminary sampling concerning the Jewel Seam in the late 1970s which led ultimately to the decision in 1980 to proceed with the underground mine by means of tunnels or slopes commencing at portals located at No Name Creek. This work and the planning for the underground mine is summarized in paragraphs 15 to 22 of the agreed statement of facts.
Significant stages in this process included the preliminary evaluation of potential underground mining areas by 1978 and 1979, the decision in the latter year or early in 1980 to select as the most promising site for developing an underground mine using hydraulic mining technology, then in use in only one other coal mine in Canada, to mine coal from the syncline of the Jewel Seam as it dipped downward beyond the stripping limit of the 51-B-2 surface pit. There it was estimated the coal seam could yield more than 20 million tons of coal of some 38 million R.L.T. estimated in place, if an hydraulic mine could be developed. Once that area had been selected, feasibility studies for the underground mine were undertaken and completed in May, July and August of 1980. The last of these provided the basis on which the joint venture operators applied on September 28, 1980 to the Alberta Energy Resources Conservation Board for a permit to develop and a licence to operate the underground hydraulic mine. The necessary permit was granted in January 1981 and in December 1981 the necessary licence to operate the mine was granted subject to certain conditions on which further information was required.
Provincial approval to commence site preparation for the proposed mine portals at No Name Creek was granted in October 1980 and work at that site on the surface was then initiated. From that time, in my view, expenses of the underground mine project were in relation to the development of the mine, allowable as Canadian exploration expenses if they qualify under subparagraph (iii.l). Expenses of the project until that time are said by the plaintiff to be Canadian exploration expenses under subparagraph (iii), incurred in relation to a new mine, not, as the defendant contends, in relation to a mine or an extension of a mine that had already come into production in reasonable commercial quantities. In the plaintiff's view the underground mine was separate and distinct from, and was not merely an extension of, the surface mine. Counsel for the parties referred to judicial decisions dealing with the question of what constituted a "mine" within the meaning of the former subsection 83(5) of the Act. It may be recalled that it was under that provision that CRC had earlier enjoyed a three-year exemption from income for tax purposes of income earned on production from its open pit surface mining operations. That provision was
83. (5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.
That provision or its predecessor was dealt with in decisions of the Supreme Court of Canada in North Bay Mica Co. v. M.N.R., [1958] S.C.R. 597, [1958] C.T.C. 208, 58 D.T.C. 1151, in M.N.R. v. MacLean Mining Co., [1970] S.C.R. 877, [1970] C.T.C. 264, 70 D.T.C. 6199, and in M.N.R. v. Bethlehem Copper Corp., [1975] 2 S.C.R. 790, [1974] C.T.C. 707, 74 D.T.C. 6520, and by this Court in Falconbridge Copper Ltd. v. The Queen, [1975] C.T.C. 561, 75 D.T.C. 5394 (F.C.T.D.), appeal dismissed, [1979], C.T.C. 307, 79 D.T.C. 5227 (F.C.A.).
In the North Bay Mica case the Court was concerned with the application of then subsections 74(1) and (2) of the Act, the predecessor in slightly different form but substantially similar to the later subsections 83(5) and (6), in relation to a mine for production of mica from a property acquired in 1949 which had earlier been mined by another who had ceased operations there four years earlier. After acquisition of the property the taxpayer developed a project to mine mica at a location in close proximity to one mined earlier by the previous owner of mining rights who was not aware of the ore which was later exploited by the taxpayer. Mr. Justice Cartwright for the majority of the Court, held that the mine qualified for exemption of income under the Act; it was implicitly not the same mine as had come into production prior to 1945 because the first company had abandoned its mine and removed supporting buildings so that the property was no longer a mine when it was acquired by the taxpayer. In the course of his reasons Cartwright, J. 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". . . . incline to the view that this contention is sound; but be that as it may, the facts appear to me to bring the claim of the appellant within the plain words of the section.
Construction of a mine thereafter, recovering ore from a site unknown to the first operator on the property, brought the work within the meaning of "a mine ... that came into production of ore during the period 1946 to 1954 inclusive” as the statutory provision then specified and the taxpayer was entitled to exemption from income under the Act.
In the MacLean Mining case the Court held that subsection 83(5) of the Act did not apply, to permit an exemption from earnings from a mine project developed on a property where the taxpayer had a number of mine shafts and open pit operations for mining what were apparently separate ore bodies. The taxpayer had extended one mine shaft, the Rothermere, well beyond its planned depth and had driven an exploratory heading from the deepened shaft to the new ore body before sinking a new shaft at the latter site, and thereafter the Rothermere shaft continued to be used for access by miners to the working places in the new ore body, to supply compressed air, ventilation and water to, and pumping out of water from, the new workings. Mr. Justice Pigeon, speaking for the Court, found that the new ore body was not developed as a separate mine. He said, at pages 881-82 (C.T.C. 267-68, D.T.C. 6201):
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. 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. . . .
There is also the fact that ore is not carried to the surface until it reaches the Lucky Strike shaft at the end of an underground haulage way and is then treated in a common mill after being mixed with the ore from the other pits. However, these factors may not be decisive. Mining itself is complete by the production and hoisting of the ore and one can well conceive of a single mill serving several mines. The building of an underground haulage way rather than a surface road or railway as means of transporting the ore from a mine to a common mill may possibly make no difference. Those questions are therefore left open.
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 Bethlehem Copper Mr. Justice Martland for the Court held that subsection 83(5) was applicable to a surface mine developed to exploit a second ore body after a serious slide had halted work at a mine, previously granted an exemption under subsection 83(5), even though the second ore body was known when the first mine operations were initiated, and despite the fact that ore from the later second mine was processed at the same mill erected on the surface at the site when the first mining operation was commenced. The proximity of the two ore bodies, in this case approximately 1,000 feet, and the use of the same processing mill, though modified to deal with a different quality, a lower grade, of ore from the second ore body, did not mean that the second and first operations were one or that the second was an extension of the first. They utilized separate facilities and works, different techniques were used in the two mines, and it was not feasible to work the two ore bodies, which differed significantly in their composition, as one, or to extend the operations of the first. Martland, J. defined a" mine" within subsection 83(5) in the following terms, at pages 803-04 (C.T.C. 714-15, D.T.C. 6525):
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 s. 83(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. . . .
In Falconbridge Copper, Mr. Justice Heald of this Court (as he then was) held that subsection 83(5) was not applicable in the case of a mine which, though constructed to mine a separate ore body from one also mined by the taxpayer approximately one half mile away, in circumstances where the later mining project was undertaken in a manner that he found on the evidence to be an extension of the first mine. The two were interconnected at three levels underground; essential services were provided for the later project through the original mine shafts; ore, which was essentially the same in the two ore bodies was brought together from both ore bodies, and partially crushed underground and then lifted, and waste water was pumped, through the mine shafts at the original workings. Working crews were to some extent interchangeable. The operation of the later workings was substantially dependent upon use of facilities and services of the first mine workings, and the later workings were not a separate mine.
The jurisprudence is helpful in suggesting factors which might by analogy be considered in determining whether particular mine workings constitute a mine separate from an existing mine that has already come into production in reasonable commercial quantities.
Factors which the defendant submits in this case are supportive of the conclusion that the expenses here in question were related to an extension of an existing mine include the following:
1. The location of the coal to be mined by the underground mine was in the Jewel Seam as it dipped in a syncline southeast from the limit planned for recovery of coal by surface mining at the 51-B-2 open pit. The coal to be mined was within the coal leases already mined by several open pit operations, for which an exemption from tax of income earned had already been granted under subsection 83(5). As I have noted the last of these factors, the exemption previously granted, is not relevant to the application of subparagraph (iii), in my view.
2. The underground project was undertaken by the same joint venture operation as was already in substantial commercial production by surface mining in a number of open pit operations exploiting the Jewel Seam, and without any new agreement relating to the underground project. The defendant urged that ownership of the resource is an important factor in assessing whether expenses are incurred in relation to an existing mine or a new mine. I am not persuaded that it is necessarily an important factor in the application of the statutory provisions in question.
3. The fact that it was the same coal seam, continuing in a syncline, for both the open pit and the planned underground operations, meant that CRC relied in part on information and observations from its open pit operations in inferring information about the quality of coal, the dimensions of the seam, its slope and the quality of ground conditions above and below the seam which were important in planning access by underground tunnels. Admittedly, such information was helpful, but by no means sufficient without the substantial drilling operations to further explore the coal deposit in the area where underground operations were ultimately planned.
4. Surface facilities supportive of CRC's operations at the site, including those set out in paragraph 21 of the agreed statement of facts, were to be utilized in both the surface and underground operations. These included the preparation plant, which had been substantially expanded and almost doubled in capacity in 1979, and the associated clean coal storage, coal silo and settling pond, the railspur ana loadout facilities and others, including CRC's substantial facilities to support its surface operations. However, in my view, none of the facilities there referred to, which I would describe as general infrastructure of the company’s operations, can be any more directly related to the lifting of coal from the underground than to the removal of coal from any of the particular surface pits at the property.
In the words of Pigeon, J. in MacLean Mining, quoted earlier, "Mining itself is complete by the production and hoisting of the ore and one can well conceive of a single mill serving several mines". The latter phrase, in my view, is equally referable to all of the general infrastructure supporting a mining operation, which is not in itself an integral part of the process for production and lifting of coal.
5. Plans for the underground mine from the feasibility study of August 1980, up to and including the final revised plan dated August 1984 used for budgeting purposes, included provision for access to the underground by means of portals and tunnels from the base of the high wall of the 51-B-2 open pit. These plans were heavily relied on by Mr. Marshall and by the defendant in argument that the underground mine was an extension of the mine from the 51-B-2 open pit.
The last of these factors warrants brief review. The proposal to provide access to the underground mine from portals at the 51-B-2 open pit first appears in the Underground Mine Feasibility Study of August 1980 which became the basis for the submission by CRC to the provincial board in September of that year. The proposal is included in the submission then made to the Board. Mr. Ulrich, in his testimony for the plaintiff, indicated that at that stage the proposal for portals from the open pit was designed to facilitate rapid development of the underground mine by providing a second access way through portals and tunnelling in what would otherwise have been a 200 to 300 foot barrier left in place between the workings of the open pit and the underground. The area in the seam closest to the open pit would have been the first mined and by developing that area from portals in the open pit, while proceeding to develop the main access from the other direction, from tunnels commencing at No Name Creek, would have facilitated more rapid development of the underground workings. At some later stages proposals were considered within CRC for utilizing portals from the open pit as a principal means of access for extraction of the underground coal, a concept first abandoned with the decision to proceed from tunnels at No Name Creek, but later revived and reflected in the September 1982 mine plan document when, because of financial uncertainties, it appeared that the original plans for hydraulic mining might have to be abandoned. At a still later stage, in the final plan of August 1984, access from the 51-B-2 open pit was still included, but then primarily as a means for ventilation of the early underground workings, were the mine to proceed. In 1981 culverts were actually purchased by CRC for use as portal entry installations for the site at the 51-B-2 open pit, though they were never installed and budget provisions for entries from the open pit were struck out at the end of 1982. Throughout its dealings with the Alberta Board until abandonment of the project, CRC continued periodic reference to the possible provision of access from the 51-B-2 pit.
Despite the evidence of continuing interest in entry to the underground from that open pit, Mr. Ulrich testified that the joint venture had never formally approved that an entry be made from the open pit, and that such an entry had never been approved by the Alberta Board. The permit granted on January 21, 1981 by that Board makes no specific reference to this matter though it did have conditions, including a requirement for a detailed mining plan to be submitted in the third quarter of each calendar year and a report on the previous year's operation to be submitted by February 15 in each year, and it reserved to the Board power to cancel or suspend the permit or to amend it as the Board deemed appropriate. There was a condition included in the licence granted to CRC to operate the underground mine, in December 1981, that before commencement of drivage of entries from the open pit approval of the Board was required, and CRC was to submit specific details about its plans, and about sequencing of combined operations of the underground mine and the open pit, which was required to be filled and reclaimed. No such plans were ever submitted to the Board. The Board did not approve the openings from the open pit. The testimony of Mr. Duncan, from his experience as a senior member of the Board staff was that the Board would not ever have approved openings from the open pit which, in his view, would have created substantial safety concerns for the underground operations. The latter concern was echoed by Dr. Whiting.
While there is evidence that in its planning CRC continued throughout the life of the project to include proposals for portals and entry from the open pit mine, I accept that these were never formally approved by the joint venture. More significantly, CRC never sought approval for these plans which the provincial Board had indicated would be necessary before proceeding, and no approval for these proposed entries was ever given by the Board. None of the planning proposals were ever brought to fruition. There was thus no physical interconnection between the open pit and the proposed underground workings.
The various factors relied on by the defendant to link the expenses incurred on the underground mine with existing mining operations by CRC do not, in my view, outweigh the factors that support the conclusion that these were expenses related to a mine separate and apart from other operations of CRC. The latter factors include the following:
1. Aside from proposals, never brought to fruition, for entries to the underground area from the base of the 51-B-2 pit, planning for the underground mine, and development of those plans, was undertaken with a view to establishing a project that financially and otherwise would produce coal independently from CRC's other operations. The only lasting interrelations envisaged with those other, surface, operations were to ensure that access to the underground area did not compromise the possibility of future recovery from open pit operations, and, if the underground mine were as productive as its planners hoped, to reduce some measure of production in the more costly portions of surface operations. Each of the surface open pits had a life span up to five or six years whereas the underground mine was planned with a view to exploiting the coal available in a period of 15 years or more. In the August 1980 feasibility study it was anticipated the underground mine would come into production in 1983, just one year before the end of the anticipated life of the 51-B-2 pit. Mr. Ulrich testified that the scheduling for that pit’s operations was not affected by the planning and development of the underground mine, including the scheduling of filling and reclamation of the pit site.
2. By 1981 some 97 million dollars had been expended by CRC on capital account in its surface operations through a series of open pits each of which was subsequently backfilled in accordance with reclamation steps approved by the province. For the underground mine it was anticipated some 80 million dollars would be required in development of the mine over a five- year period, so that it was a project which in capital terms was nearly as large as all of the surface operations up to that time.
3. The coal to be recovered by the Jewel Seam by underground mining was beyond the limits of economic recovery by known surface mining methods. Dr. Whiting and Mr. Stinnett, who appeared for the plaintiff, each stressed the economic feasibility of extraction from a known ore body or coal seam as a key to the existence of a mine, and here the coal accessible by underground mining could not be considered a part of the surface mining operations.
4. The staff for the underground operations, including the mine manager and all underground personnel each required special certification for underground work which was not required of surface crew members. Thus, the work force employed in surface mining and in underground operations was essentially not interchangeable.
5. Once development of the mine was completed the underground operations were planned to utilize hydraulic mining methods for mining and removing the coal. All equipment and services planned were different from those utilized in surface mining and the equipment used in the open pit operations could not be used in development or recovery of coal from the underground mine.
6. Entirely different safety considerations applied to the underground mine from those applicable in surface mining operations, including, for the underground, dealing with the dangers from methane gas, possibilities of spontaneous combustion and rockfalls, and these in turn dictated entirely support services and facilities.
7. The underground mine was planned with its separate surface support and operating facilities at No Name Creek. A dewatering plant, to be located near the processing plant, was required to handle the slurry of coal and water pumped from the underground mine, before the coal could be transferred to the processing plant or to storage. The underground mine was conceived, with the exception of the proposals to provide entry portals from the 51-B-2 pit, with a 200 to 300 foot barrier of ground, including the coal seam, left in place between the underground workings and the open pit operation and between those workings and any previous underground mines. This barrier was, in the view of at least Mr. Duncan and Mr. Stinnett, an important safety feature to provide stability and minimize possibilities of flooding in the underground workings.
Evidence was adduced that in the early 1980s Mr. Ulrich had written an intracompany memorandum recommending against seeking a tax ruling in advance in relation to the underground mine since the Minister might not agree in advance that the planned operation was a separate mine. Evidence was also adduced that at one stage in the mid-1980s the Department of Revenue had consulted the Department of Energy, Mines & Resources whose experts on coal mining had advised that in their judgment the underground mine was separate from other mines and was not an extension of any mine at the site. In my view, neither of these opinions rendered to the parties has any significance for assessing whether, on the facts, the expenses here incurred were in relation to an existing mine or an extension of a mine, under subparagraph (iii).
Similarly, for construing the statutory provision, there is no relevance in the evidence of certain publications of CRC, designed as general information for anyone interested in the operations including visitors to the property, which used the term "mine" with reference to the entire operation at the property and within that term described the surface operations and underground development.
I find, after considering all of the evidence, that in the circumstances of this case the preliminary exploratory expenses incurred in relation to the underground mine were not related to a mine, or to a potential or existing extension of a mine, that had come into production in reasonable commercial quantities. Thus, in my. view, the preliminary expenses incurred in exploration for the underground mine do constitute Canadian exploration expense within the meaning of subparagraph (iii) of the Act.
Were expenses incurred in development of the underground mine incurred
prior to the commencement of production from the resource in reasonable
commercial quantities, within subparagraph (iii. 1)?
As I have construed subparagraph (iii.1), insofar as expenses were incurred after October 1980, when CRC started clearing the surface site at No Name Creek for the portals for underground tunnels, for the purpose of bringing a mineral resource into production, they were what I have described as development expenses. Significant stages in this development, summarized in paragraph 23 of the agreed statement of facts, included the hiring of Cementation Company (Canada) Ltd. to excavate the tunnels, work which was terminated in November 1982 when the tunnels had been extended about 4000 feet to a point below the coal seam. From there further development was to be undertaken by CRC, including the excavation of the slurry pumping station at the bottom of the workings, and development of tunnels below the seam from which working places could be established. Development work was continued until November 1983, but at a rate slower and on a scale reduced from that originally planned. Initially, the work was slowed by budget considerations arising from financing changes for one of the joint venture partners and soon thereafter, early in 1983, as a result of falling market prices for coal. At the end of 1982 the project budget for the next year was cut back, excluding expenditures originally projected for acquisition of underground mining equipment, for all surface installations and for entries from the 51-B-2 open pit. Tunnelling was not completed and the slurry station was not excavated before all development was suspended towards the end of 1983 because of rapid deterioration in world markets for coal with no prospect for improvement in the near term. The underground was maintained free of water by pumping until 1985 when CRC applied for and was granted approval by the Alberta Board to abandon the mine. Since then no maintenance was carried on, the underground tunnels were left free to flooding and the mine was sealed to preclude access from the portal site at No Name Creek.
Even though the underground mine was not completed as planned and it never commenced commercial production, no argument was directed to the purpose of the expenses incurred in developing the mine, and, in my view, these expenses were incurred for the purpose of bringing a coal deposit into commercial production.
Were the expenses incurred "prior to the commencement of production from the resource in reasonable commercial quantities’? No jurisprudence was cited for guidance on this question. Opinions of the expert witnesses called by the parties were offered. For them as for the parties, a key factor in dealing with this issue is the significance to be given to the fact that all of the coal recoverable from the CRC property was from the Jewel Seam. It was the source of production mainly by underground mining methods in the 1921-1956 era. Where the seam is accessible by surface mining technology it is the source of open pit mine production since 1970. It is the same seam, mined at the surface by the 51-B-2 pit and continuing from the limit of that pit in a syncline, which was to be the source of production from the hydraulic underground mine.
In the opinions of both Mr. Marshall and Dr. Bustin, witnesses called by the defendant, the continuity of the Jewel Seam from the 51-B-2 pit to the nearby area to be exploited by the underground mine led to the conclusion that the two areas were of the same resource. For Mr. Marshall the plaintiff's contemplated entries from the base of the 51-B-2 pit was also a factor. For Dr. Bustin the coal in that open pit and in the planned underground mine were the same deposit and the same resource in light of their proximity and geological considerations, including the continuity of the Jewel Seam, essentially the same quality of coal, dipping to the southeast from the open pit without apparent structural interruptions in the seam or in the rock in which it was deposited.
Each of the expert witnesses called by the plaintiff, all mining engineers and one of them qualified as a mineral economist, stressed the importance to those in the industry of the economic aspect of mining. In their view, mining was an activity carried on by investment of capital and labour in the production of minerals for a profitable return. While a mineral resource might be acknowledged as existing, it was not a resource of primary interest for development by those in the industry until its existence was reasonably established and feasibility studies led to the conclusion it could be exploited for production at a profit. Thus, a resource which could only be recovered, at a profit, by thoroughly planned and developed underground mining methods, was in their view separate from a resource recoverable by surface mining methods. As Mr. Duncan expressed it in his report, the coal deposit in relation to which the joint venture incurred underground development expenses is"a distinct entity, both physically and economically, from the coal deposits elsewhere on the CRC leases which are worked by open pit methods”. That opinion would appear to be heavily influenced by the methods, either underground or surface mining, by which it was judged the coal could be recovered. That distinction may have merit in certain respects. It would, for example, preclude any claim that each of the sites of open pit operations dealt with a separate resource, for each produces coal from the Jewel Seam where it may be accessible by surface mining using the same basic techniques and equipment, moving on to a new promising site for an open pit and back-filling one that has been completely mined or nearly so.
More significantly, in my view, the opinions of Dr. Whiting and Mr. Stinnett emphasized the importance of economic planning for major mining operations, by qualified staff, which the series of studies for CRC clearly indicated had been engaged in the project. The process, in their opinion, led ultimately to the establishment of a particular portion of the Jewel Seam as a discrete resource or deposit to be exploited by a particular method, hydraulic mining, and careful development of the underground mine, as a project which could yield a profitable return from production.
Dr. Bustin's evidence was helpful in providing an understanding of the geological classification of coal resources. That classification was derived in part from Coal Resources and Reserves of Canada, (Ottawa, 1979) Report ER 79-9, Energy, Mines and Resources Canada, or later departmental publications, and it is widely accepted in the coal industry. That classification includes resources by category according to the feasibility of exploitation and the level of assurance of existence of the resources. Coal resources of immediate interest, as contrasted with those of future interest, are seams of coal that because of thickness, depth, quality and location are considered to be of immediate interest for exploitation. Included in that category of coal resources, are reserves, which feasibility studies have established to be mineable with current technological and economic conditions and for which there is no legal impediment to mining. In Dr. Bustin's view, CRC treated the resources of the underground mine as reserves, for the coal deposit to support the mine had been measured and established, by exploratory drilling and from observations from the 51-B-2 open pit, and those resources were deemed recoverable by particular underground methods. In the terms of Dr. Whiting and Mr. Stinnett they were resources deemed recoverable at a profit. Dr. Bustin acknowledged that his own expertise did not extend to assessing profitability of mining operations, a matter that lies in the competence of mining engineers, assisted by others.
Counsel for the defendant suggested that the opinion of Dr. Whiting and Mr. Stinnett about a resource, a coal deposit, was limited to a reserve, within the classification provided by Dr. Bustin. Further, it was limited by the methodology of recovery, whether by underground or surface mining methods, a limitation which ignored the possibility that a given deposit might in certain circumstances be recoverable by surface mining and in other circumstances be recoverable by underground mining. While that may well prove to be the case over time, as the operations at the CRC property since 1921 would indicate, nevertheless I am persuaded that within the mining industry, resources likely to be developed are those, classified by Dr. Bustin as reserves, which are established and for which feasibility studies indicate promise of a profitable return on the investment of capital and labour by a chosen mining method.
That concept of a mineral resource, or a coal deposit, as a restricted portion of the resources of interest to a geologist, in my view, has significance for the application of subparagraph (iii.1). Earlier, in construing subparagraph (iii) and subparagraph (iii.1) I have distinguished those provisions as related to different kinds of expenses, described as exploration and as development expenses respectively, concerned with different phases in the development of a mining project. In my view, the expenditures included under subparagraph (iii.1) are those incurred in development of a mine after the decision is made, based on feasibility studies, to proceed with a planned, specific project. At that stage the operator has established the resource, in this case a portion of the coal deposit known as the Jewel Seam, which is relied upon to support investment in the project with the expectation of profit. That resource is a reserve, in Dr. Bustin's classification, established in relation to the project to be undertaken.
The Act provides in subparagraph (iii.1) for expenses incurred “for the purpose of bringing a mineral resource [in this case a coal deposit] in Canada into production and incurred prior to the commencement of production from the resource [the coal deposit] in reasonable commercial quantities . . .”. In my view, this provision is to be interpreted as it would be understood in the mining industry, for which Parliament included Canadian exploration expense as defined in subparagraph (iii.1) as a benefit to attract investment in resource production. Within that industry development expenses would be committed only when a reserve has been established that is considered to be likely to produce a Satisfactory profit from production as a result of planned investment in a specific project.
Resources which lie within the ambit of the reserve to be recoverable by a particular development project, in my view, are the "mineral resource” or coal deposit intended by subparagraph (iii.1). Resources which lie beyond that ambit, beyond the limits of the resource to be recovered by a specific project, may lie in the same geological ore body or in the same geological coal deposit or seam, but if they were included in the meaning of "mineral resource" in subparagraph (iii.1), then only the first commercial mining development in the geological resource, or at most only the first such development on a property owned or leased by a particular developer, regardless of the size of the property if it includes only a single ore body or coal seam, would qualify as Canadian exploration expense. That would significantly restrict the application of subparagraph (iii.1), and would be of little interest to those concerned to develop mineral resources.
In this case the limits of the coal deposit recoverable from the 51-B-2 pit were defined. They did not include the area of the coal deposit to be recovered by underground mining and the limits of that area were also defined, separate from the limits of the 51-B-2 pit. Proximity of the two was a coincidence of timing in the sense that the underground mining deposit could have been defined even if the 51-B-2 pit had not yet been in production, just as other areas for possible exploitation by underground mining were defined in 1979. If one of those other areas had been selected by CRC for underground development, rather than the area actually selected, would expenses of a mine at that other site be treated differently under subparagraph (iii.1)? In my view, the proximity of the portions of the Jewel Seam, the coal deposits, to be exploited by the underground mine and the 51-B-2 pit should have little significance for the application of the statute.
In my opinion, the expenses incurred in development of the underground mine, after the decision to proceed with the project, to bring into production that portion of the coal deposit defined for extraction by that mine, were incurred prior to production in reasonable commercial quantities from that deposit and are Canadian exploration expense within the meaning of subparagraph (iii.1).
Conclusion
For the reasons set out it is my conclusion that exploration expenses of the sort described within subparagraph (iii), for preliminary planning in relation to the CRC underground mine, were incurred in relation to determining the coal deposit that was later to be exploited by the planned underground hydraulic mine and were not related to a mine that had come into production in reasonable commercial quantities or related to a potential or existing extension thereof. They qualify as Canadian exploration expense within subparagraph 66.1(6)(a)(iii) of the Act.
Further, expenses incurred in development of the underground mine, after the decision to proceed with that project, of the sort described in subparagraph (iii.1), were expenses incurred for the purpose of bringing a mineral resource in Canada into production and they were incurred prior to the commencement of production from the resource in reasonable commercial quantities. They qualify as Canadian exploration expense within subparagraph 66.1(6)(a)(iii.1) of the Act.
By separate judgment the appeal of the plaintiff is allowed, with costs, excluding any costs associated with the view of the mining site by the Court which are to be borne by the plaintiff. The reassessment of the Minister is vacated and the matter is referred to the Minister for reconsideration and reassessment, in light of these reasons, on the basis that
1. the appeal of the plaintiff is allowed insofar as it relates to income earned by the plaintiff from the Bienfait Mine is accepted in accord with the defendant's amended defence,
2. expenses incurred by the plaintiff in exploration activities related to the Cardinal River Coals Underground Mine are Canadian exploration expenses as defined by subparagraph 66.1(6)(a)(iii) of the Income Tax Act, as it applied at the relevant times; and
3. expenses incurred by the plaintiff in development related to the CRC Underground Mine are Canadian exploration expenses as defined by subparagraph 66.1(6)(a)(iii.1) of the Income Tax Act, as it applied at the relevant times.
Appeal allowed.