CATTANACH,
J.:—This
is
an
appeal
by
the
appellant
from
its
assessment
to
income
tax
by
the
Minister
for
its
1965
taxation
year.
At
the
outset
of
the
trial
the
appellant
abandoned
the
submission
set
out
in
paragraph
14
of
its
amended
notice
of
appeal.
Paragraph
14
reads
as
follows
:
The
deductions
in
respect
of
scientific
research
under
sections
72
and
72A
are
not
subject
to
any
reduction
or
abatement
by
reason
of
the
fact
that
some
part
of
the
income
of
the
Appellant
may
have
been
exempt
pursuant
to
the
provisions
of
section
83(5)
and
under
the
provisions
of
sections
72
and
72A
the
said
deductions
should
be
allowed
in
full.
It
was
agreed
between
the
parties
that
the
matter
of
calculation
under
Section
701
of
the
Regulations
to
the
Income
Tax
Act
being
the
amount
that
may
be
deducted
under
Section
11(1)
(p)
of
the
Act
in
computing
the
appellant’s
income
should
be
referred
back
to
the
Minister
without
further
direction
from
the
Court
as
to
the
formula
to
be
applied.
The
Minister
admitted
the
appellant’s
submission
in
paragraph
17
of
its
amended
notice
of
appeal
that
mining
taxes
are
not
deductions
entering
into
the
calculation
of
profits
for
the
purpose
of
Section
1201
of
the
Regulations
to
the
Income
Tax
Act
for
the
1965
taxation
year.
Paragraph
17
reads
as
follows:
The
deductions
for
mining
taxes
are
deductible
from
income
pursuant
to
the
relevant
provisions
in
the
Income
Tax
Act
and
are
not
deductions
entering
into
the
calculation
of
profits
for
the
purpose
of
Regulation
1201
of
the
Income
Tax
Regulations;
therefore,
the
calculation
made
by
the
Minister
should
have
excluded
the
full
amount
of
such
mining
taxes
in
redetermining
the
depletion
allowable
to
the
Appellant.
The
Minister
also
admitted
that
the
amount
of
$1,408,585
in
the
calculation
of
additional
allowance
for
depletion
in
Form
T
7W-C
to
the
notice
of
re-assessment
dated
May
8,
1969
should
be
varied
as
may
be
required
to
ensure
that
scientific
research
expenditures
and
allowances
deductible
under
Section
72(1)
(b)
and
Section
72A
have
not
been
deducted
in
the
computation
of
profits
for
the
purpose
of
the
calculation
of
the
depletion
allowances
for
1965
pursuant
to
Section
1201
of
the
Regulations
of
the
Income
Tax
Act.
In
these
respects
the
appeal
is
therefore
allowed
and
the
assessment
is
referred
back
to
the
Minister
for
reconsideration
and
re-assessment
in
accordance
with
the
agreement
between
the
parties.
There
are
two
issues
remaining
for
determination.
The
first
such
issue
for
convenience
I
refer
to
as
the
townsite
issue.
During
a
period
commencing
in
1956
and
ending
on
June
14,
1961
the
appellant
made
or
incurred
expenditures
totalling
$5,891,779
in
connection
with
a
townsite
at
Thompson,
Manitoba
as
more
particularly
set
out
in
paragraphs
4,
5,
6,
7
and
8
of
the
amended
notice
of
appeal.
Those
paragraphs
read
as
follows:
4.
In
and
prior
to
1956,
the
Appellant
acquired
extensive
mining
claims
in
the
Cross
Lake
Mining
Division
of
The
Pas
Mining
District
of
the
Province
of
Manitoba
and
satisfied
itself
that
ore
bodies
contained
in
the
claim
area
were
of
sufficient
value
and
extent
to
justify
a
major
mining
development
with
related
milling,
smelting
and
refining
operations.
5.
The
claim
area
was
situated
in
completely
undeveloped
country
remote
from
any
town
or
village.
It
was
accordingly
necessary
to
consider
how
employees
required
for
the
Appellant’s
operations,
who
numbered
2,000
or
more,
would
be
housed
and
provided
for.
In
order
that
the
Appellant
could
proceed
with
the
development
of
the
area,
it
was
obliged
to
conform
to
provincial
government
policy
with
regard
to
the
provisions
to
be
made
for
its
prospective
employees.
6.
In
the
year
1956,
the
Appellant
commenced
negotiations
with
the
Province
of
Manitoba
which
culminated
in
an
agree-
ment
dated
as
of
December
3,
1956,
between
Her
Majesty
the
Queen
in
Right
of
the
Province
of
Manitoba
and
the
Appellant
(referred
to
herein
as
“the
Agreement”).
Its
provisions,
in
so
far
as
they
relate
to
this
Notice
of
Appeal,
may
be
summarized
as
follows:
(a)
A
municipal
entity
known
as
the
Local
Government
District
of
Mystery
Lake
would
be
organized
by
the
Government
of
Manitoba,
which
District,
when
formed,
would
be
bound
by
the
terms
of
the
Agreement;
(b)
A
townsite
would
be
laid
out
within
the
District
in
the
vicinity
of
the
Appellant’s
mine
and
plant;
(c)
The
Appellant
at
its
own
expense
would
construct
in
the
townsite
roads,
lanes,
sidewalks,
an
assembly
hall
and
necessary
townsite
offices,
fire
stations,
school
buildings,
sewers,
water
mains,
a
pumping
station,
and
sewage
disposal
facilities
would
become
the
property
of
the
District
or
of
a
School
District
to
be
formed
in
the
District;
(d)
The
Appellant
would
pay
to
the
District
an
annual
amount
computed
according
to
formula
to
be
applied
against
current
expenditures
of
the
District
including
school
costs.
(e)
No
property,
real
or
personal,
of
the
Appellant
(other
than
private
residences
and
boarding
houses)
would
at
any
time
be
subject
to
municipal,
district,
school
district
or
other
local
government
assessment
tax
rates
of
any
kind
or
nature
whatsoever.
7.
The
thirty-six-month
period
during
which
income
derived
from
the
Appellant’s
Thompson
Mine
was
exempt
under
section
83(5)
commenced
on
June
15,
1961.
8.
Prior
to
the
commencement
of
the
exempt
period
the
Appellant
made
or
incurred
expenditures
aggregating
$5,891,780.74
in
connection
with
the
townsite
referred
to
in
paragraph
6.
None
of
these
expenditures
came
within
any
of
the
subparagraphs
(a)
to
(f)
inclusive
of
Regulation
1205(2).
By
paragraph
13
of
the
amended
notice
of
appeal
the
appellant
claims
a
deduction
of
25%
of
the
foregoing
amount
in
computing
its
income
for
its
1965
taxation
year
pursuant
to
Section
1205
of
the
Regulations
to
the
Income
Tax
Act,
which
reads
:
1205.
(1)
Subject
to
subsection
(3),
where
a
taxpayer
operates
in
Canada
a
coal
mine
or
a
mine
described
in
paragraph
(a)
of
subsection
(1)
of
section
1201,
he
may
deduct
in
computing
his
income
for
a
taxation
year,
such
amount
as
he
may
claim
not
exceeding
25%
of
an
amount
calculated
as
set
forth
in
subsection
(2).
(2)
The
amount
referred
to
in
subsection
(1)
is
the
aggregate
of
all
expenditures
made
or
incurred
by
the
taxpayer
which
are
reasonably
attributable
to
the
prospecting
and
exploration
for
and
the
development
of
the
mine,
prior
to
the
mine
coming
into
production
in
reasonable
commercial
quantities,
except
to
the
extent
that
the
expenditures
were
(a)
expenditures
in
respect
of
which
a
deduction
from,
or
in
computing,
a
taxpayer’s
income
tax
or
excess
profits
tax
was
provided
by
section
8
of
the
Income
War
Tax
Act;
(b)
expenditures
in
respect
of
which
an
amount
was
deducted
in
computing
a
taxpayer’s
income
under
section
16
of
chapter
63
of
the
Statutes
of
1947
or
section
16
of
chapter
53
of
the
Statutes
of
1947-48
or,
if
the
expenditure
was
incurred
prior
to
1953,
under
section
53
of
chapter
25
of
the
Statutes
of
1949,
Second
Session;
(c)
expenditures
incurred
after
1952
in
respect
of
which
a
deduction
was
or
is
provided
by
section
53
of
chapter
25
of
the
Statutes
of
1949,
Second
Session,
or
section
83A
of
the
Act;
(d)
expenditures
deducted
in
computing
the
income
of
the
taxpayer
in
the
year
incurred;
(e)
the
cost
to
the
taxpayer
of
property
in
respect
of
which
an
allowance
is
provided
under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act;
or
(f)
the
cost
to
the
taxpayer
of
a
leasehold
interest.
(3)
The
amount
deductible
under
subsection
(1)
shall
not
exceed
the
amount
calculated
as
set
forth
in
subsection
(2)
minus
the
aggregate
of
(a)
amounts
deducted
under
subsection
(1)
in
computing
the
income
of
the
taxpayer
for
previous
taxation
years,
and
(b)
similar
amounts
deducted
in
computing
the
income
of
the
taxpayer
for
the
purpose
of
the
Income
War
Tax
Act
and
The
19,8
Income
Tax
Act.
Paragraph
13
reads
as
follows
:
13.
The
Appellant
made
or
incurred
expenditures
referred
to
in
paragraph
8
prior
to
the
Thompson
Mine
coming
into
production
in
reasonable
commercial
quantities.
Such
quantities
are
reasonably
attributable
to
the
development
of
that
mine
within
the
meaning
of
Regulation
1205
in
Part
XII
of
the
Income
Tax
Regulations
and
the
Appellant
claims
a
deduction
of
twenty-five
per
cent
(25%)
of
that
amount
in
computing
its
income
for
the
year.
The
Minister,
by
paragraph
15
of
his
amended
reply,
denies
that
the
appellant
is
entitled
to
such
deduction.
Paragraph
15
reads
as
follows:
15.
In
any
event,
the
Respondent
says
that
the
expenditures,
if
any,
incurred
by
the
Appellant
in
respect
of
the
Thompson
townsite
were
not
expenditures
made
or
incurred
by
the
Appellant
which
are
reasonably
attributed
to
the
prospecting
and
exploration
for
and
development
of
a
mine
prior
to
the
mine
coming
into
production
in
reasonable
commercial
quantities,
and
that
the
Appellant
was
not
entitled
to
the
deduction
claimed
under
Regulation
1205
of
the
Income
Tax
Regulations.
The
Minister
also
contends
that
the
issue
with
respect
to
the
deductibility
of
expenditures
incurred
by
the
appellant
for
the
townsite
at
Thompson,
Manitoba,
as
set
out
immediately
above,
is
res
judicata,
since
the
same
issue,
or
substantially
the
same
issue
had
been
decided
by
my
brother
Gibson
in
a
previous
appeal
in
the
Exchequer
Court
of
Canada
entitled
The
International
Nickel
Company
of
Canada
Limited
v.
M.N.R.,
[1969]
1
Ex.
C.R.
563;
[1969]
C.T.C.
106.
In
that
case
the
appellant
herein
sought
to
deduct
the
townsite
expenditures
incurred
in
1958
to
1961
under
Section
838A
(3)
(c)
(ii)
of
the
Income
Tax
Act
as
‘the
prospecting,
exploration
and
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada’’.
Mr.
Justice
Gibson
held
that
the
expenses
so
incurred
by
the
appellant
were
not
‘‘development
expenses’’
within
the
meaning
of
Section
83A(3).
In
this
appeal
the
same
appellant
seeks
to
deduct
the
same
townsite
expenses
(subject
to
the
fact
that
only
that
portion
of
those
expenses
up
to
June
15,
1961
are
claimed)
as
The
aggregate
of
all
expenditures
made
or
incurred
by
the
taxpayer
which
are
reasonably
attributable
to
the
prospecting
and
exploration
for
and
the
development
of
the
mine,
prior
to
coming
into
production
in
reasonable
commercial
quantities.
under
Regulation
1205.
On
June
29,
1970
the
Minister
moved
for
an
order
striking
out
the
pertinent
paragraphs
of
the
appellant’s
notice
of
appeal
on
the
ground
that
the
issues
of
fact
and
law
raised
thereby
were
res
judicata.
The
motion
was
dismissed
without
prejudice
to
the
Minister’s
right
to
renew
his
submission
in
this
respect
at
the
trial
which
was
done.
The
next
issue
concerns
the
deductibility
of
expenditures
made
or
incurred
by
the
appellant
in
respect
of
scientific
research
in
its
1965
taxation
year
which,
again
for
convenience,
may
be
referred
to
as
the
scientific
research
issue.
During
the
year
1965
the
appellant
made
or
incurred
expenditures
in
Canada
in
the
aggregate
amount
of
$2,726,784
which
fall
within
one
or
other
of
subparagraphs
(i)
to
(v)
of
Section
72(1)
(a)
of
the
Income
Tax
Act,
which
read:
72.
(1)
There
may
be
deducted
in
computing
the
income
for
a
taxation
year
of
a
taxpayer
who
carried
on
business
in
Canada
and
made
expenditures
in
respect
of
scientific
research
in
the
year
(a)
all
expenditures
of
a
current
nature
made
in
Canada
in
the
year
(i)
on
scientific
research
related
to
the
business
and
directly
undertaken
by
or
on
behalf
of
the
taxpayer,
(ii)
by
payments
to
an
approved
association
that
undertakes
scientific
research
related
to
the
class
of
business
of
the
taxpayer,
(iii)
by
payments
to
an
approved
university,
college,
research
institute
or
other
similar
institution
to
be
used
for
scientific
research
related
to
the
class
of
business
of
the
taxpayer,
(iv)
by
payments
to
a
corporation
resident
in
Canada
and
exempt
from
tax
under
this
Part
by
paragraph
(gc)
of
subsection
(1)
of
section
62,
(v)
by
payments
to
a
corporation
resident
in
Canada
for
scientific
research
related
to
the
business
of
the
taxpayer;
.
.
.
These
expenditures
had
been
claimed
by
the
appellant
and
allowed
as
deductions
by
the
Minister.
The
issue
in
this
respect
is
outlined
in
the
first
sentence
of
paragraph
15
of
the
amended
notice
of
appeal
which
reads
as
follows
:
15.
The
expenditures
on
scientific
research
referred
to
in
paragraph
10(a)
hereof
were
not
business
expenditures
deductible
in
the
ordinary
course
in
the
computation
of
profits
for
the
purpose
of
section
1201
of
the
Income
Tax
Regulations
and
were
not
deductible
on
any
basis
in
computing
profits
for
the
purpose
of
the
said
section.
.
..
In
paragraph
17
of
the
amended
reply
to
the
notice
of
appeal
the
Minister
submits
that
such
expenditures
for
scientific
research
were
properly
deductible
in
computing
the
appellant’s
profits
for
the
purposes
of
Regulation
1201,
which
reads
as
follows
:
1201.
(1)
For
the
purpose
of
this
Part,
(a)
“resource”
means
(i)
an
oil
or
gas
well,
(ii)
a
bituminous
sands
deposit,
(iii)
a
base
or
precious
metal
mine,
or
(iv)
an
industrial
mineral
mine
in
respect
of
which
the
Minister
of
Mines
and
Technical
Surveys
has
certified
that
(A)
the
mineral
is
contained
in
a
non-bedded
deposit,
(B)
the
mineral
is
sylvite,
or
(C)
the
mineral
is
halite
and
is
extracted
by
underground
mining
and
not
by
operating
a
brine
well
;
and
(b)
a
person
who
has
an
interest
in
the
proceeds
of
production
from
a
resource,
under
an
agreement
providing
that
he
shall
share
in
the
profits
remaining
after
deducting
the
costs
of
operating
the
resource,
shall
be
deemed
to
be
a
person
who
operates
the
resource.
(2)
Where
a
taxpayer
operates
one
or
more
resources,
the
deduction
allowed
is
331%
of
(a)
the
aggregate
of
his
profits
for
the
taxation
year
reasonably
attributable
to
the
production
of
oil,
gas,
prime
metal
or
industrial
minerals
from
all
of
the
resources
operated
by
him,
minus
(b)
the
aggregate
amount
of
the
deduction
provided
by
subsection
(4).
(3)
Where
the
value
of
the
output
of
gold
during
a
taxation
year
from
one
or
more
mines
operated
by
a
taxpayer
is
not
less
than
70%
of
the
aggregate
value
of
the
output
during
the
year
from
all
of
the
resources
operated
by
him,
in
lieu
of
the
deduction
otherwise
allowed
under
subsection
(2),
the
deduction
allowed
is
the
greater
of
(a)
40%
of
(i)
the
aggregate
of
his
profits
for
the
taxation
year
reasonably
attributable
to
the
production
of
oil,
gas,
prime
metal
or
industrial
minerals
from
all
of
the
resources
operated
by
the
taxpayer,
minus
(ii)
the
aggregate
amount
of
the
deduction
provided
by
subsection
(4),
or
(b)
$4
per
ounce
of
the
output
of
gold
for
the
year
from
the
mine
or
mines
operated
by
the
taxpayer.
(4)
For
the
purposes
of
subsections
(2)
and
(3),
there
shall
be
deducted
from
the
aggregate
of
the
profits
of
a
taxpayer
for
a
taxation
year
reasonably
attributable
to
the
production
of
oil,
gas,
prime
metal
or
industrial
minerals
from
all
of
the
resources
operated
by
him,
the
aggregate
of
(a)
his
losses,
if
any,
for
the
taxation
year
reasonably
attributable
to
the
production
of
oil,
gas,
prime
metal
or
industrial
minerals
from
all
of
the
resources
operated
by
him,
(b)
any
amounts
deducted
in
computing
the
taxpayer’s
income
for
the
taxation
year
under
the
provisions
of
section
83A
of
the
Act,
subsections
(3)
and
(10)
of
section
141
of
the
Act
and
sections
1204
and
1205
of
these
Regulations,
(c)
such
part
of
any
amount
deducted
in
computing
the
taxpayer’s
income
for
the
taxation
year
under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act
as,
(i)
in
the
case
of
a
taxpayer
whose
principal
business
is
contract
drilling,
may
reasonably
be
regarded
as
having
been
deducted
in
respect
of
property
acquired
for
the
purpose
of
production
of,
oil,
gas,
metals
or
industrial
minerals,
and
(ii)
in
any
other
case,
may
reasonably
be
regarded
as
having
been
deducted
in
respect
of
property
acquired
for
the
purpose
of
exploring
or
searching
for,
or
production
of,
oil,
gas,
metals
or
industrial
minerals,
to
the
extent
that
that
part
thereof
has
not
already
been
deducted
in
computing
profits
for
the
purpose
of
subsection
(2)
or
(8)
or
deducted
under
another
paragraph
of
this
subsection,
(d)
any
amount
deducted
in
computing
the
taxpayer’s
income
for
the
taxation
year
under
paragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act
in
respect
of
(i)
borrowed
money
used
in
connection
with,
or
used
for
the
purpose
of
acquiring
property
used
in
connection
with,
or
(ii)
an
amount
payable
for
property
used
in
connection
with
exploring
or
searching
for,
or
production
of,
oil,
gas,
metals
or
industrial
minerals,
to
the
extent
that
the
amount
so
deducted
has
not
already
been
deducted
in
computing
profits
for
the
purpose
of
subsection
(2)
or
(3)
or
deducted
under
another
paragraph
of
this
subsection,
and
(e)
amounts
not
included
in
computing
the
taxpayer’s
income
for
the
year
by
virtue
of
subsection
(5)
of
section
83
of
the
Act.
(5)
For
the
purpose
of
this
section,
(a)
“industrial
mineral
mine”
does
not
include
a
coal
mine;
(b)
output
for
a
taxation
year
from
a
mine
or
bituminous
sands
deposit
does
not
include
output
in
respect
of
which
the
profits
therefrom
are
not
included
in
computing
the
taxpayer’s
Income;
(c)
where
someone
other
than
the
taxpayer
has
an
interest
in
the
output
of,
or
in
the
proceeds
from
the
sale
of
the
products
of,
a
resource
operated
by
the
taxpayer
or
by
the
taxpayer
and
some
other
person,
the
output
for
the
taxation
year
from
the
resource
is
only
such
part
of
the
output
for
the
year
therefrom
otherwise
determined
as
may
reasonably
be
regarded
as
the
proportionate
share
thereof
that
is
consistent
with
the
taxpayer’s
interest
in
the
output,
or
the
taxpayer’s
interest
in
the
proceeds
from
the
sale
of
the
products,
as
the
case
may
be;
and
(d)
profits
reasonably
attributable
to
the
production
of
oil
or
gas
from
a
well
or
bituminous
sands
deposit
shall
not
include
profits
derived
from
transporting
or
processing
the
oil
or
gas.
Paragraph
17
reads
as
follows:
17.
The
Respondent
says
that
in
computing
the
Appellant’s
profits
for
the
purposes
of
Regulation
1201
of
the
Income
Tax
Regulations,
he
properly
deducted
expenditures
of
a
current
nature
incurred
and
claimed
by
the
Appellant
with
respect
to
scientific
research;
the
said
amounts
were
deductible
in
the
ordinary
course
in
the
computation
of
profits.
There
is
no
dispute
between
the
parties
that
the
appellant
operates
base
metal
mines
within
the
meaning
of
Regulation
1201(1)
(a)
(iii)
and
that
the
deduction
allowed
is
3312
%
of
the
aggregate
of
the
appellant’s
profits
reasonably
attributable
to
the
production
of
prime
metal
from
all
resources
operated
by
it.
It
is
agreed
that
the
scientific
research
expenditures
are
deductible
under
Section
72(1)
(a)
of
the
Income
Tax
Act
as
expenditures
of
a
current
nature.
The
dispute
between
the
parties
les
in
whether
the
amount
expended
by
the
appellant
on
scientific
research
is
an
amount
which
should
be
deducted
in
computing
profits
for
the
purposes
of
Regulation
1201.
It
is
obviously
to
the
appellant’s
advantage
to
keep
the
amount
of
its
profits
as
high
as
possible
for
that
is
the
amount
by
reference
to
which
the
deduction
of
3312
%
under
Regulation
1201
(2)
is
computed.
The
greater
the
amount
of
the
profit,
the
greater
is
the
deduction
permitted.
Conversely
it
is
in
the
interest
of
the
Minister
to
contend
that
the
expenditures
are
deductible
so
that
the
base
upon
which
depletion
is
computed
is
decreased.
The
position
of
the
appellant
is
that
the
expenditures
on
scientific
research
should
not
be
deducted
in
computing
profits
under
Regulation
1201,
nor
is
it
directed
by
Regulation
1201
that
such
expenditures
should
be
deducted.
It
is
the
appellant’s
contention
that
these
expenditures
are
not
laid
out
to
earn
income
but
are
of
a
capital
nature.
If
such
is
the
case
then
the
expenditures
are
not
deductible
under
Regulation
1201.
On
the
other
hand
the
Minister
contends
that
these
expenditures
are
current
expenditures
laid
out
in
carrying
on
the
appellant’s
business
and
as
such
are
properly
deductible.
A
further
issue
arises
in
connection
with
the
expenditures
on
scientific
research.
The
second
sentence
of
paragraph
15
of
the
appellant’s
amended
notice
of
appeal
reads
as
follows:
If
it
should
be
held
that
any
of
these
expenditures
can
be
regarded
as
business
expenditures
deductible
in
the
ordinary
course,
which
the
Appellant
says
is
not
the
case,
the
Appellant
claims
that
they
should
accordingly
enter
into
the
computation
of
profits
under
section
4
of
the
Act
without
prejudice
to
the
Appellant’s
right
to
deduct
the
whole
amount
of
such
expenditures
under
section
72(1)
(a)
aforesaid
in
the
calculation
of
income
for
the
year.
In
effect
the
appellant
claims
that
the
amount
expended
by
it
on
scientific
research
is
deductible
twice.
First
they
are
deductible
under
Section
72
with
respect
to
which
there
is
no
dispute
and
second,
if
it
should
be
found
that
the
scientific
research
expenditures
are
business
expenditures
deductible
in
the
ordinary
course
and
accordingly
deductible
for
the
purposes
of
Regulation
1201,
then
the
appellant
says
that
the
expenditures
are
deductible
in
the
computation
of
its
profits
under
Sections
3
and
4
of
the
Income
Tax
Act
as
well
as
and
in
addition
to
the
deduction
permitted
under
Section
72.
This
contention
the
Minister
denies.
The
issues
before
me
may
be
summarized
as
follows:
1.
The
townsite
expenditures:
(a)
are
those
expenditures
‘‘reasonably
attributable
to
the
.
.
.
development
of
the
mine,’’;
and
(b)
is
this
matter
res
judicata?
2.
The
scientific
research
expenditures
:
(a)
are
those
expenditures
properly
deductible
for
the
purpose
of
computing
profit
under
Regulation
1201;
and
(b)
if
they
are,
then
is
the
appellant
entitled
to
double
deduction
of
these
expenditures
once
under
Section
72
and
again
under
Sections
3,
4
and
12?
Prior
to
trial
the
parties
through
their
counsel
agreed
upon
the
following
statement
of
facts:
The
parties
hereto
by
their
solicitors
agree
upon
the
facts
herein
set
out
and
agree
that
the
documents
hereunder
referred
to
may
be
admitted
in
evidence
in
the
trial
of
this
action
without
further
proof
as
to
their
execution
or
authenticity.
The
foregoing
agreement
is
for
the
purpose
of
this
appeal
only
and
the
agreed
facts
and
documents
may
not
be
used
by
either
party
against
the
other
on
any
other
occasion
or
by
any
other
person.
It
is
further
agreed
that
either
party
may
adduce
further
and
other
evidence
relevant
to
the
issues
and
not
inconsistent
with
the
facts
herein
set
out.
1.
The
Appellant
is
a
corporation
incorporated
under
the
laws
of
Canada.
2.
The
Appellant
prospects
and
explores
for
minerals
throughout
Canada
and
mines
and
processes
mineral
ores
in
the
Provinces
of
Ontario
and
Manitoba.
In
Ontario
it
operates
base
metal
mines
in
the
Sudbury
area
and
mills,
smelters
and
refineries
in
the
Sudbury
area
and
in
Port
Colborne.
In
Manitoba
it
operates
base
metal
mines
in
the
Thompson
area
and
a
mill,
smelter
and
refinery
at
Thompson.
3.
The
Appellant
began
to
prospect
and
explore
for
minerals
in
Manitoba
in
the
year
1946.
During
the
period
from
1946
to
1950
such
operations
were
conducted
in
what
is
known
as
the
Lynn
Lake
area
the
location
of
which
is
identified
on
a
map
of
Manitoba
that
accompanies
this
agreed
statement
of
facts
and
forms
part
thereof
and
is
referred
to
as
Map
“A”.
4.
Promising
ore
leads
are
not
discovered
by
the
Appellant
in
the
Lynn
Lake
area
and
attention
was
drawn
to
other
areas
including
the
Bird
River
area,
Rice
Island
in
Wekusko
Lake
and
the
southern
part
of
the
Setting
Lake
area
as
identified
on
Map
“A”.
5.
Indications
of
ore
in
the
Setting
Lake
area
directed
attention
in
a
northeasterly
direction
towards
Moak
Lake
and
Mystery
Lake.
This
area
is
shown
on
Map
“B”
which
accompanies
this
agreed
statement
of
facts
and
forms
part
thereof.
6.
In
or
about
the
year
1952
indications
of
rather
large
underground
deposits
of
low
grade
nickel
mineralization
were
found
in
the
Moak
Lake
area
and
diamond
drilling
operations
were
commenced
and
continued
actively
in
that
area.
In
the
year
1955
a
shaft
was
sunk
to
a
depth
of
about
1300
feet
to
do
underground
development.
7.
During
the
period
from
1949
to
1955
search
and
exploration
activities
by
way
of
airborne
magnetometers
and
surface
operations,
including
diamond
drilling,
were
conducted
throughout
the
length
of
the
entire
claims
area
outlined
in
red
on
Map
“B”.
By
the
end
of
1955
about
1900
claims
had
been
acquired
in
that
area
and
some
500,000
feet
of
diamond
drilling
had
been
performed.
The
Appellant’s
exploration
expenditures
up
to
this
time
had
been
about
$10,000,000.
8.
In
February
or
early
March
of
1956
the
first
drill
holes
were
made
in
what
is
now
known
as
the
Thompson
ore
body
which
showed
very
favourable
mineralization
under
Thompson
Lake
as
identified
on
Map
“B”.
9.
Drilling
operations
in
and
about
the
Thompson
Lake
area
were
stepped
up
very
materially
and
by
the
month
of
October
in
the
year
1956
some
92
diamond
drill
holes
had
been
made.
10.
By
October
1956
the
Appellant
was
satisfied
that
the
ore
body
in
the
Thompson
Lake
area
was
of
sufficient
value
and
extent
to
justify
a
major
mining,
milling
and
processing
operation
capable
of
producing
50,000,000
pounds
of
nickel
a
year.
It
was
at
that
time
thought
that
ore
from
the
Moak
Lake
area
would
produce
another
25,000,000
pounds
of
nickel
a
year
thereby
making
it
economically
feasible
to
consider
a
75,000,000
pound
a
year
processing
plant
at
Thompson.
11.
In
mid
1956
James
C.
Parlee,
the
then
manager
of
the
Appellant’s
reduction
operations
in
the
Sudbury
area
in
Ontario,
a
competent
and
experienced
mining
engineer,
was
taken
off
his
normal
work
and
given
the
responsibility
of
formulating
recommendations
as
to
the
plans
and
policies
that
should
be
followed
by
the
Appellant
in
the
Thompson
Lake-Moak
Lake
area
in
Manitoba.
12.
Mr.
Parlee
was
given
the
responsibility
of
assembling
the
technical
data,
looking
after
the
engineering
and
lay-out
and
doing
a
feasibility
study
as
to
the
economics
of
and
the
engineering
and
facilities
required
for
a
mining
operation
and
processing
plant
capable
of
producting
(sic)
75,000,000
pounds
of
nickel
a
year.
18.
In
the
month
of
October,
1956,
the
Appellant
which
had
previously
been
in
contact
with
officials
of
the
Manitoba
government
with
regard
to
the
possibility
of
operations
in
the
Thompson
Lake-
Moak
Lake
area
proceeded
with
its
negotiations
with
the
Manitoba
Government.
14.
Because
there
was
no
available
mill
or
smelter
in
the
vicinity
that
could
handle
the
ore
that
was
to
be
produced
from
the
Appellant’s
projected
mining
operations,
consideration
was
given
to
the
place
where
such
facilities
should
be
constructed.
It
was
the
Appellant’s
conclusion
that
the
most
economical
place
to
build
a
processing
plant
was
in
the
immediate
vicinity
of
the
Thompson
Lake
ore
body.
15.
The
decision
was
made
in
the
fall
of
1956
to
build
a
mill
and
a
smelter
adjacent
to
what
is
now
Thompson
in
the
Province
of
Manitoba
to
process
the
ore
that
would
be
obtained
from
the
mining
operations
in
the
Thompson
Lake-Moak
Lake
mineral
deposits.
It
is
contemplated
that
mining,
milling
and
smelting
operations
would
maintain
a
production
level
of
75,000,000
pounds
of
nickel
per
annum.
The
decision
to
build
a
refinery
at
Thompson
in
conjunction
with
the
mill
and
smelter
to
process
the
production
from
these
facilities
was
made
in
1957.
16.
The
Appellant
determined
that
to
conduct
its
operations
on
the
projected
basis
including
the
operation
of
the
refinery
would
require
a
total
of
2400
employees
of
whom
about
1400
would
be
engaged
either
directly
or
indirectly
in
the
extraction
and
milling
operation.
This
group
of
about
1400
would
comprise
those
who
actually
worked
underground,
the
surface
crew
required
to
sustain
the
underground
operations,
the
milling
crew
and
those
who
would
be
responsible
for
the
supervision
of
the
extracting
and
milling.
The
balance
of
the
employees
would
be
engaged
in
smelting
and
refining
operations
and
in
management,
supervisory
and
administrative
capacities.
17.
There
were
no
housing
or
urban
facilities
of
any
nature
whatsoever
in
the
Thompson
Lake
area
when
the
Appellant
commenced
its
operations
early
in
1956.
The
nearest
urban
area
of
any
substantial
dimension
was
the
City
of
Winnipeg
which
lay
400
air
miles
to
the
south.
The
Town
of
Lynn
Lake
having
a
population
of
approximately
two
thousand
housed
the
working
force
of
the
Sherritt-Gordon
mine
in
the
Lynn
Lake
area
and
lay
150
miles
in
a
northwesterly
direction.
The
town
of
Flin
Flon
housed
the
working
force
of
the
Hudsons
Bay
Mining
and
Smelting
mine
and
lay
175
miles
in
a
southwesterly
direction.
18.
From
the
time
it
was
decided
to
undertake
mining
operations
in
the
Thompson
Lake
area
the
Appellant
considered
it
to
be
an
essential
element
in
its
projections
and
plans
for
such
operations
that
there
should
be
a
town
immediately
adjacent
to
the
extracting
and
processing
operations
to
house
the
personnel
necessary
for
those
operations
and
provide
the
supporting
urban
facilities.
A
modern
town
close
to
the
mine
in
which
the
Appellant’s
employees
were
prepared
to
live
with
their
families
was
necessary
if
a
mine,
mill
and
processing
facilities
of
the
size
contemplated
by
the
Appellant
was
to
be
carried
on
successfully.
Such
a
town
was
necessary
to
keep
a
stable
working
force
in
the
Appellant’s
extraction,
milling
and
processing
operation.
A
small
short
term
mining
operation
could
be
operated
with
a
crew
of
single
men
but
it
would
be
a
transient
force
that
would
not
stay
for
any
length
of
time
and
a
relatively
permanent
operation
could
not
be
run
on
that
basis.
An
operation
of
the
size
of
that
projected
at
Thompson
could
not
be
run
without
an
urban
settlement
adjacent
to
it
that
would
attract
good,
satisfactory
employees
who
were
prepared
to
stay
there
happily
on
a
career
basis
and
raise
families.
This
class
of
person
would
not
come
unless
they
were
provided
with
a
high
standard
of
living
to
encourage
them
to
leave
the
reasonably
high
standard
of
living
they
would
enjoy
in
the
urban
areas
in
the
southern
part
of
Canada
as
well
as
to
suffer
the
rigorous
climate
which
is
characteristic
of
the
northern
area
of
Manitoba
in
which
Thompson
lies.
19.
Studies
were
made
of
company
towns
in
the
Sudbury
District
in
Ontario
and
the
situation
was
discussed
with
two
other
major
mining
companies
in
the
Province
of
Manitoba.
On
the
basis
of
these
studies
and
discussions
the
Appellant
estimated
what
would
be
necessary
in
the
way
of
a
company
town
to
house
and
provide
facilities
for
the
Appellant’s
employees
and
the
supporting
population.
It
was
estimated
that
including
service
personnel,
that
is
to
say,
those
who
would
operate
banks,
stores,
gasoline
stations
and
theatres
etc.,
and
doctors,
nurses,
teachers
and
municipal
employees
and
including
the
families
of
married
personnel,
facilities
would
have
to
be
provided
for
a
town
having
a
population
of
at
least
8,000
persons.
20.
Initially
consideration
was
given
by
the
Appellant
to
the
construction
of
a
company
town
in
which
the
Appellant
would
own
the
land
and
buildings
and
would
rent
or
sell
houses
to
its
employees
and
others
who
came
to
live
in
the
town.
21.
Feasibility
studies
conducted
in
the
months
of
July,
August
and
September
of
1956
contemplated
a
company
town.
However,
it
became
clear
to
the
Appellant
that
the
Government
of
Manitoba
would
not
permit
a
company
town
to
be
constructed.
It
was
understood
by
the
Appellant
that
it
was
the
policy
of
the
Government
of
Manitoba
that
such
new
urban
areas
should
be
organized
under
the
Local
Government
District
Act
of
the
Province
of
Manitoba
which
had
previously
been
enacted.
22.
Before
the
Appellant
could
go
ahead
with
its
plans
it
had
to
reach
an
agreement
with
the
Province
of
Manitoba
on
certain
matters.
These
matters
are
set
out
in
the
letters
written
by
J.
R.
Gordon,
Vice-President
of
the
Appellant
to
Douglas
L.
Campbell,
the
Premier
of
the
Province
of
Manitoba,
each
dated
October
20,
1956.
Mr.
Campbell
replied
to
Mr.
Gordon
by
letter
dated
October
22,
1956.
Copies
of
these
three
letters
are
attached
to
this
statement.
23.
Negotiations
with
the
Manitoba
government
and
officials
of
that
province
led
to
the
settlement
of
an
agreement
between
the
Appellant
and
the
Province
of
Manitoba
which
was
dated
the
3rd
day
of
December,
1956
and
executed
on
or
about
that
date.
A
copy
of
this
agreement
is
attached
to
this
statement.
24.
The
Appellant’s
exploration
and
searching
operations
and
subsequent
extraction
operations
were
conducted
on
Manitoba
crown
lands
and
its
processing’
operations
were
conducted
on
land
purchased
by
it
from
the
Province
of
Manitoba.
The
Appel-
lant
acquired
title
to
the
land
upon
which
it
built
and
carried
on
its
processing
operations.
25.
For
the
purpose
of
establishing
the
townsite
at
Thompson
in
the
Local
Government
District
of
Mystery
Lake
the
Appellant
paid
the
sum
of
$1.00
per
acre
for
the
requisite
land
area
which
was
then
transferred
by
the
Province
to
the
Local
Government
District.
It
was
upon
this
area
that
the
townsite
facilities
were
constructed
by
or
at
the
expense
of
the
Appellant
and
the
Appellant
did
not
acquire
the
ownership
in
the
surface
rights
of
the
land
in
the
townsite
or
any
part
thereof.
26.
Townsite
lots
when
ready
for
occupation
for
business
or
domestic
purposes
were
sold
to
individuals
and
companies
for
such
purposes
by
the
Local
Government
District
which
retained
the
whole
proceeds
of
such
sales.
The
Appellant
purchased
such
townsite
lots
as
it
required
on
which
to
build
houses
to
rent
to
certain
of
its
executive
employees.
27.
The
townsite
was
planned
by
the
Metropolitan
Town
Planning
Commission
of
Greater
Winnipeg
in
collaboration
with
officers
of
the
Appellant.
Based
upon
the
Commission’s
recommendations
to
the
Manitoba
Department
of
Municipal
Affairs
it
was
a
requirement
of
the
Government
of
Manitoba
that
the
townsite
facilities
to
be
constructed
by
the
Appellant
or
at
its
expense
would
incorporate
such
features
as
storm
sewers
and
water
mains
larger
than
would
be
immediately
required
by
a
town
of
8,000
people
in
order
to
provide
for
future
expansion
of
the
town.
28.
The
order
of
events
in
the
Thompson
Lake
project
was
in
general
outline
as
follows:
|
.01
|
In
the
year
1957
a
development
shaft
was
put
down
to
some
|
|
thing
over
1,000
feet
to
permit
construction
of
the
lateral
|
|
underground
works
on
the
various
levels
from
which
ore
|
|
was
to
be
produced
in
the
initial
stages
of
the
operation.
|
|
The
development
shaft
was
completed
late
in
the
year
1957
|
|
and
the
lateral
work
started
immediately.
A
second
shaft
|
|
which
became
the
main
production
shaft
was
sunk
to
a
|
|
depth
of
2,500
feet
and
was
completed
late
in
1958.
The
|
|
lateral
underground
work
started
in
conjunction
with
the
|
|
development
shaft
was
then
joined
up
with
the
production
|
|
shaft
as
it
went
down
in
order
that
production
could
com
|
|
mence
and
ore
could
be
hoisted
as
soon
as
it
was
possible
|
|
to
do
so.
|
|
.02
|
While
this
was
going
on
surface
buildings
were
constructed.
|
|
In
1957
the
change
houses
for
the
underground
workers,
the
|
|
warehouse
and
mechanical
service
houses
were
completed.
In
|
|
1958
the
mill
was
built
and
construction
was
commenced
on
|
|
the
permanent
head
frame
which
was
completed
in
late
1959.
|
|
A
500-foot
stack
was
constructed
to
take
away
the
exhausts
|
|
from
the
smelter.
|
|
03
|
In
connection
with
the
townsite,
in
1957
the
area
was
sur
|
|
veyed
and
early
in
1958
clearing
away
the
overlying
vege
|
|
tation
was
commenced,
streets
and
sidewalks
were
laid
out
|
|
as
well
as
the
sewer,
water
and
domestic
storm
sewers
and
|
|
water
pipes
in
the
streets.
|
29.
Subject
to
verification
if
the
Respondent
so
requests,
the
Appellant’s
expenditures
made
or
incurred
on
the
construction
of
the
townsite
facilities
at
Thompson
up
to
June
15,
1961
were
as
follows:
|
.04
|
In
October,
|
1957,
|
a
thirty
mile
railway
branch
line
from
|
|
Sipiwesk
on
the
Hudsons
Bay
line
of
the
Canadian
National
|
|
Railway
between
The
Pas
and
Churchill
was
completed
to
|
|
Thompson.
|
|
|
.05
|
Late
in
1958
the
Appellant
arranged
with
a
building
con
|
|
tractor
from
the
City
of
Winnipeg
to
start
building
domestic
|
|
houses
|
for
|
sale.
|
In
this
regard,
the
Appellant
undertook
|
|
with
the
builder
that
if
his
houses
were
not
sold
the
Appel
|
|
lant
would
|
guarantee
|
that
rents
were
|
paid
to
him
for
a
|
|
period
of
time.
All
building
construction
work
in
the
town
|
|
site
including
the
building
of
houses
to
be
rented
or
sold
|
|
to
subsequent
inhabitants
was
done
by
independent
contrac
|
|
tors
and
the
construction
of
the
townsite
facilities
was
also
|
|
done
by
independent
contractors
under
contracts
let
by
the
|
|
Appellant
with
the
approval
of
the
Resident
Administrator
|
|
under
the
Local
Government
District
Act.
|
|
|
.06
|
The
|
main
production
|
shaft
was
|
completed
by
the
end
of
|
|
1958
and
the
main
haulageway
at
the
1,000
foot
level
was
|
|
connected
so
that
ore
could
be
picked
up.
|
|
|
.07
|
In
1958
the
mill
building
was
completed
and
mill
equipment
|
|
was
being
installed
by
the
end
of
that
year.
In
1959
|
the
|
|
smelter
|
building
|
was
|
finished
|
and
|
equipment
|
had
|
been
|
|
installed.
|
|
|
.08
|
The
first
residences
in
the
townsite
were
occupied
late
in
|
|
1958
and
some
60
houses
were
occupied
by
a
time
early
in
|
|
1959
|
largely
by
|
executive
|
personnel,
|
engineers,
|
geologists
|
|
and
others
employed
by
the
Appellant.
In
1959
work
in
con
|
|
nection
with
water
lines,
sewer
lines
and
surface
roads
for
|
|
additional
|
buildings
was
|
advanced
to
the
|
extent
that
|
111
|
|
more
homes
were
constructed
to
be
occupied.
In
December
|
|
of
that
year
the
first
public
school
was
opened
and
handed
|
|
over
to
the
resident
administrator.
In
1958
the
first
stores
|
|
were
opened
and
in
1959
more
|
stores
were
opened
and
a
|
|
shopping
complex
was
built.
|
|
|
.09
|
Permanent
hoisting
apparatus
in
the
main
production
shaft
|
|
was
installed
in
1959.
Construction
on
the
refinery
was
com
|
|
menced
in
1959
and
continued
until
completed
in
1961.
In
|
|
1961
|
the
|
necessary
|
office
buildings
at
the
mine
|
site
were
|
|
completed.
|
|
|
.10
|
Hiring
the
work
force
required
for
the
Appellant’s
mining
|
|
and
processing
operations
commenced
in
1960.
In
that
year
|
|
ore
was
produced
and
the
mill
and
concentrator
went
into
|
|
production
in
June.
The
|
smelter
|
started
up
in
September
|
|
1960.
|
The
|
refinery
|
was
|
started
|
up
in
|
1961.
|
On
June
15,
|
|
1961,
the
mine
came
into
production
in
reasonable
commer
|
|
cial
quantities.
|
|
|
.11
|
By
the
end
of
1961
there
were
approximately
3,500
people
|
|
living
in
the
Town
of
Thompson
in
650
dwellings
plus
some
|
|
construction
camp
buildings
that
were
not
yet
dismantled.
|
|
1958
|
1959
|
1960
|
|
1961
|
Total
|
|
Roads,
lanes
and
sidewalks
|
..$
|
222,287
|
$
501,441
|
$
588,902
|
$
|
9,040
|
$1,321,670
|
|
Administration
building
|
|
|
(includes
assembly
hall,
|
|
|
townsite
office
and
fire
|
|
|
station
)
|
|
317,930
|
47,526
|
|
22,638
|
388,094
|
|
Schools
|
|
—
|
269,241
|
173,607
|
235,659
|
678,507
|
|
Sewers
&
Water
mains
|
|
|
Sewer
lines—storm
|
.....
_
|
616,766
|
569,408
|
266,802
|
|
1.621R
|
1,451,355
|
|
Sewer
lines—sanitary
..........
|
211,757
|
243,922
|
194,812
|
|
3,005
|
653,496
|
|
Water
lines
...........................
-
|
395,253
|
504,981
|
315,556
|
|
2,784R
|
1,213,006
|
|
Sewage
lift
station
|
|
63,634
|
|
—
|
63,634
|
|
—
|
|
|
—
|
|
|
Clearing
&
Grubbing
|
|
—
|
96,670
|
3,935
|
|
949
|
101,554
|
|
Parking
Lot
|
|
—
|
11,150
|
9,313
|
|
20,463
|
|
—
|
|
|
$1,446,068
|
$2,573,377
|
$1,600,453
|
$266,886
|
$5,891,779
|
(R—denotes
red
figure)
30.
By
an
amended
notice
of
appeal
to
the
Exchequer
Court
of
Canada
dated
24th
July,
1963,
and
filed
in
the
Exchequer
Court
of
Canada
under
court
No.
A-1551,
the
Appellant
appealed
from
income
tax
assessments
for
its
1958,
1959,
1960
and
1961
taxation
years.
This
appeal
is
referred
to
in
this
statement
as
the
previous
Inco
appeal.
In
that
appeal
the
Appellant
contended
that
the
townsite
expenditures
were
deductible
in
computing
the
Appellant’s
income
pursuant
to
Section
83A
(3)
of
the
Income
Tax
Act.
The
townsite
expenditures
involved
in
this
appeal,
court
No.
B-3221,
are
the
same
as
those
involved
in
the
previous
Inco
appeal,
subject
only
to
the
fact
that
the
amount
of
$1,206,931
incurred
in
1961
and
involved
in
the
previous
Inco
appeal
were
the
townsite
expenditures
for
the
whole
year
whereas
the
amount
of
$266,886
referred
to
in
paragraph
29
hereof
as
having
been
incurred
in
1961
is
only
that
portion
thereof
made
or
incurred
in
1961
prior
to
June
15
of
that
year.
31.
This
agreement
shall
not
derogate
from
the
right
of
the
respondent
to
contend
that
the
issue
in
this
appeal
of
the
deductibility
of
the
townsite
expenditures
is
res
judicata.
32.
The
affidavit
of
John
R.
Power
filed
in
the
Exchequer
Court
of
Canada
in
this
appeal
on
a
motion
to
strike
out
certain
of
the
paragraphs
of
the
Notice
of
Appeal
may
be
referred
to
on
the
hearing
of
this
appeal.
33.
The
recital
of
facts
agreed
to
in
this
statement
is
based
upon
the
testimony
of
J.
C.
Parlee
aforesaid
given
in
the
previous
Inco
appeal.
Appended
to
the
agreed
statement
of
facts
were
copies
of
the
maps
referred
to
in
paragraphs
3
and
9,
the
correspondence
between
the
president
of
the
appellant
company
and
the
Premier
of
Manitoba
and
a
copy
of
the
agreement
dated
December
3,
1956
between
Her
Majesty
the
Queen
in
right
of
the
province
of
Manitoba
and
the
appellant.
The
agreed
statement
of
facts
eonstitutes
the
evidence
directed
to
the
townsite
issue.
With
respect
to
the
scientific
research
issue
the
appellant
called
two
witnesses,
Dr.
Louis
Renzoni,
the
vice-president
of
the
appellant
in
charge
of
special
technical
projects
and
Mr.
Meckie,
the
chief
accountant,
taxes,
of
the
appellant
who
supervised
the
preparation
and
filing
of
the
pertinent
tax
return
herein.
I
turn
to
the
first
issue
in
the
foregoing
summary
that
is
the
township
issue.
In
The
International
Nickel
Company
of
Canada
Limited
v.
M.N.R.
(supra)
the
appellant
herein
sought
to
deduct
$6,920,825.75
expended
in
establishing
and
building
the
townsite
at
Thompson,
Manitoba
as
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada
in
its
1958,
1959,
1960
and
1961
taxation
years
in
accordance
with
Section
83A(3)
of
the
Income
Tax
Act
in
computing
its
taxable
income
for
those
years.
The
relevant
language
of
Section
83A(3)
reads
as
follows:
83A.
(3)
A
corporation
whose
principal
business
is
(b)
mining
or
exploring
for
minerals,
may
deduct,
in
computing
its
income
under
this
Part
for
a
taxation
year,
the
lesser
of
(c)
the
aggregate
of
such
of
(ii)
the
prospecting,
exploration
and
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada,
.
.
.
The
issue
before
my
brother
Gibson
was
whether
the
townsite
expenses
incurred
by
the
appellant
were
‘
development
expenses
incurred
in
searching
for
minerals
in
Canada’’
within
the
meaning
of
Section
83A(3).
In
resolving
this
issue
he
said
at
page
584
[125]
:
As
to
this
first
issue,
in
my
view
there
are
two
questions
to
be
answered
namely,
(1)
whether
the
expenditures
made
by
the
appellant
in
building
the
Thompson
Townsite
in
the
relevant
years
were
“development
expenses”,
and
(2)
whether
such
expenditures
were
incurred
in
“searching
for
minerals”
in
Canada
in
such
years,
within
the
meaning
of
Section
83A(3)
of
the
Income
Tax
Act
during
the
relevant
taxation
years.
Having
posed
the
two
foregoing
questions
for
himself
Mr.
Justice
Gibson
then
proceeded
to
construe
the
meaning
of
the
words
‘‘development
expenses’’
independently
of
the
words
“in
searching
for
minerals’’.
He
said
at
pages
587-588
[127-128]
:
.
.
.
In
my
view,
what
Parliament
intended
in
this
subsection
of
the
Act,
was
to
confine
“development
expenses”
to
those
expenses
which
are
incurred
at
the
development
stage
of
mining
as
understood
by
people
in
the
mining
business
which
is,
in
my
view,
evi
denced
by
the
opinion
of
Mr.
Cox
and
the
dictionary
definitions
and
the
definitions
from
mining
publications
put
in
evidence.
As
a
result,
I
am
of
opinion
that
“development
expenses”
within
the
meaning
of
Section
83A(3)
(c)
(ii)
of
the
Income
Tax
Act
mean
those
expenses
which
are
incurred
in
the
opening
up
of
an
ore
body
by
shafts,
drives
and
subsidiary
openings
for
the
various
purposes
of
subsequent
mining
such
as,
the
valuation
of
deposits,
the
estimate
of
its
tonnage
and
in
due
course,
its
extraction.
This,
in
essence,
is
the
meaning
given
to
development
by
E.
J.
Pryor
in
his
Dictionary
of
Mineral
Technology
above
referred
to.
Predicated
on
such
a
construction
of
those
words,
and
on
a
consideration
of
the
whole
of
the
evidence,
I
am
of
the
view
and
find
as
a
fact,
that
the
appellant’s
expenditures
above
referred
to,
on
the
Thompson
Townsite
in
the
Province
of
Manitoba
are
not
of
such
a
nature
or
kind
as
to
fall
within
such
meaning
of
“development
expenses”.
I
am
further
of
the
opinion
that,
in
the
main,
they
are
production
expenses
of
the
mining
of
the
Thompson
mine.
.
.
.
I
construe
the
quoted
comments
of
Mr.
Justice
Gibson
as
defining
the
words
‘‘development
expenses’’
per
se
as
indicated.
Having
concluded
that
the
expenses
incurred
by
the
appellant
in
building
the
Thompson
townsite
are
not
development
expenses’’
it
follows
logically
that
they
cannot
be
development
expenses
incurred
by
it
in
searching
for
minerals
in
Canada.
He
continues
on
page
588
[pages
128-129]
:
The
conclusion
I
reach
is
that
it
is
impossible
to
relate
the
development
work
done
by
the
appellant
at
its
Thompson
mine
“in
searching
for
minerals”
during
the
relevant
taxation
years
to
the
necessity
for
the
appellant
building
the
townsite
and
incurring
the
cost
of
doing
so.
Instead,
the
necessity
for
building
such
a
townsite
and
incurring
the
cost
of
doing
so,
was
to
enable
the
appellant
to
extract
the
ore
at
the
production
stage
of
mining
this
mine
.
.
.
The
appellant
was,
therefore,
unsuccessful
in
this
issue
of
its
appeal
before
Mr.
Justice
Gibson.
In
the
present
appeal
the
appellant
contends
that
it
is
entitled
to
deduct
25%
of
its
expenditures
made
or
incurred
in
connection
with
the
Thompson
townsite
in
the
total
amount
of
$5,891,799
pursuant
to
Regulation
1205
of
the
Income
Tax
Act
over
a
period
of
successive
taxation
years
as
an
expenditure
made
or
incurred
by
the
taxpayer
which
is
‘
‘
reasonably
attributable
to
the
prospecting
and
exploration
for
and
the
development
of
the
mine,
prior
to
the
mine
coming
into
production
in
reasonable
commercial
quantities’’,
except
to
the
extent
that
the
expenditures
were
inter
alia
deductible
under
Section
83A
or
with
respect
to
which
the
property
is
subject
to
capital
cost
allowance
neither
of
which
exceptions
are
applicable
in
the
present
case.
The
mine
came
into
production
in
reasonable
commercial
quantities
on
June
14,
1961.
What
is
being
claimed
as
a
deduction
are
the
expenditures
incurred
from
the
inception
of
the
townsite
until
June
14,
1961
which
accounts
for
a
lesser
amount
than
was
claimed
under
Section
83A
in
the
appeal
before
Mr.
Justice
Gibson.
The
substance
of
the
argument
on
behalf
of
the
appellant,
as
I
understood
it,
was
that
the
word
‘‘development’’
may
be
used
in
two
senses,
first
in
a
technical
sense
and
second
in
a
broad
sense.
It
was
submitted
that
in
Section
83A
the
word
is
used
in
a
technical
sense
and
is
further
limited
by
the
words
‘
in
searching
for
minerals’’
but
in
Regulation
1205
the
word
is
not
so
limited
and
should
be
interpreted
in
its
broadest
sense.
The
word
‘‘mine’’
as
used
in
Regulation
1205
can
be
extended
to
surface
facilities
and
to
include
housing
facilities
and
amenities
for
the
labour
force
without
which
there
could
be
no
mine.
That
being
so
it
follows
that
the
expenditures
on
the
townsite
can
be
reasonably
attributable
to
the
development
of
the
mine.
In
support
of
the
foregoing
argument
counsel
for
the
appellant
submitted
that
Mr.
Justice
Gibson
in
the
previous
appeal
was
considering
the
words
‘‘development
expenses’’
within
the
context
of
Section
83A(3)
(c)
(ii)
and
that
he
attributed
the
technical
meaning
to
them
that
he
recognized
the
possibility
of
a
wider
interpretation.
Gibson,
J.
said
at
page
587
[127]
:
.
.
.
I
am
of
opinion
that
the
meaning
given
to
those
words
by
the
witness
Wright
is
not
what
Parliament
intended.
His
meaning
is
much
too
wide
and
is
one
which
may
be
acceptable
and
relevant
in
reference
to
the
concept
of
an
overall
development
of
many
projects
being
done
today
which
may
involve
the
establishment
of
a
new
town
but
it
is
not
the
concept
of
development
which
is
applicable
to
the
subject
matter
of
this
case.
.
.
.
Counsel
also
referred
to
the
Australian
decision
of
Mount
Isa
Mines
Limited
v.
Federal
Commissioner
of
Taxation
(1954),
92
C.L.R.
483,
not
as
a
precedent
but
is
illustrative
of
the
widest
possible
meaning
being
given
to
the
word
‘‘development’’
in
the
context
of
the
statute
under
review
in
that
case,*
the
pertinent
section
of
which
reads
as
follows
:
Section
122(1).
Where
a
person,
who
is
carrying
on
mining
operations
(other
than
coal
mining)
in
Australia
for
the
purpose
of
gaining
or
producing
assessable
income,
incurs
expenditure
on
necessary
plant
and
development
of
the
mining
property,
an
amount
ascertained
in
accordance
with
the
provisions
of
the
section
shall
be
an
allowable
deduction.
Following
upon
a
successful
period
of
exploration
and
investigation
the
appellant
had
carried
on
a
mining
undertaking
in
a
remote
and
isolated
part
of
Australia.
When
the
first
exploration
shafts
were
sunk
there
was
a
small
township
known
as
Mount
Isa
some
two
miles
from
the
mining
property.
The
existing
facilities
were
totally
inadequate
for
the
reasonable
accommodation
and
living
amenities
of
its
employees,
the
number
of
which
was
increasing
steadily.
The
appellant,
out
of
its
own
resources,
undertook
the
building
of
a
new
township.
This
project
involved
the
construction
of
houses,
provision
of
a
water
supply,
electrical
power,
sanitary
services,
medical,
hospital
and
educational
facilities
and
attendant
amenities.
It
was
held
that
all
expenditures,
other
than
expenditure
on
a
plant
of
a
capital
nature
directly
attributable
to
the
establishment
of
the
mine
and
to
the
working
of
it
or
its
extension
or
expansion
from
time
to
time
should
for
the
purposes
of
Section
122
be
regarded
as
an
expenditure
on
the
‘‘development’’
of
the
mining
property.
Mr.
Justice
Taylor
said
at
pages
489-90
:
The
purely
developmental
phase
of
many
projects
may,
perhaps,
readily
be
recognized,
but
in
the
case
of
a
mining
venture
this
is
not
so.
A
mine
is
not
constructed
once
and
for
all,
it
is
not
static
but
constantly
progresses
and
grows
to
enable
the
mining
of
minerals
to
proceed.
Sometimes
this
process
goes
hand
in
hand
with
working
operations
whilst
on
other
occasions
it
may
be
the
outcome
of
deliberate
and
independent
operations
designed
to
render
the
underlying
minerals
more
easily
accessible
or
to
further
plans
for
the
expansion
or
extension
of
the
mining
operations.
The
expression
in
s.
122
is,
however,
one
of
wide
import
and
was,
I
think,
intended
to
signify,
apart
from
expenditure
on
plant,
all
expenditure
of
a
capital
nature
directly
attributable
to
the
establishment
and
conduct
of
the
mining
operations
in
which
the
taxpayer
is
engaged.
There
are,
I
think,
sufficiently
clear
indications
that
this
is
so.
The
section
permits
a
person
who
is
carrying
on
mining
operations
for
the
purpose
of
gaining
or
producing
assessable
income
to
treat
a
wide
class
of
expenditure
of
a
capital
nature
as
deductible
for
the
purposes
of
the
Act
over
a
period
calculated
by
reference
to
the
estimated
life
of
the
mine,
and
it
is
inconceivable
that
the
legislature
intended
to
permit
such
a
deduction
in
the
case
of
capital
expenditure
incurred
on
development,
in
the
sense
of
work
preparatory
to
the
commencement
of
or
ancillary
to
actual
mining
operations,
and
yet
deny
such
a
deduction
in
respect
of
expenditure
of
a
capital
nature
necessarily
incurred
contemporaneously
with
and
directly
in
association
with
mining
operations.
This
consideration
alone
would,
I
think,
dispose
of
any
suggestion
that
the
word
“development”
should
be
understood
in
any
restricted
sense
but
there
is
a
further
contrary
intention
to
be
found
in
section.
The
deduction
which
is
permitted
in
respect
of
plant
is
a
deduction
in
relation
to
expenditure
of
a
capital
nature
incurred
on
necessary
plant.
That
is,
on
the
language
of
the
section,
plant
which
is
necessary
for
the
carrying
on
of
the
mining
operations
for
the
purpose
of
gaining
or
producing
assessable
income.
In
the
case
of
plant
the
allowable
deduction
is
not
subject
to
any
restriction
other
than
that
to
be
found
in
the
wide
words
of
the
section.
Accordingly,
expenditure
on
plant
is
within
the
scope
of
the
section
whether
it
is
necessary
for
the
day-to-day
working
of
the
mine
or
for
developmental
work
in
the
narrowest
sense
and
I
should
think
this
circumstance
throws
some
little
light
on
the
meaning
of
the
word
“development”
as
used
in
the
section.
The
deduction
in
each
case
is
clearly
intended
to
serve
the
same
purpose
and
it
would
be
out
of
keeping
with
the
general
sense
of
the
section
to
give
a
restricted
meaning
to
the
latter
word
and
thereby
limit
the
range
of
expenditure
on
development
in
respect
of
which
a
deduction
might
be
claimed.
Perhaps,
the
import
of
the
section
is
best
understood
by
regarding
the
use
of
the
word
“development”
as
intended
to
amplify
the
section
and
to
cover
capital
works
not
covered
by
the
word
“plant”.
At
all
events
I
am
satisfied
that
all
other
expenditure
of
a
capital
nature
directly
attributable
to
the
establishment
of
the
mine
and
to
the
working
of
it
or
to
its
expansion
or
extension
from
time
to
time
should,
for
the
purposes
of
the
section,
be
regarded
as
expenditure
on
the
development
of
the
mining
property.
He
then
held,
in
the
circumstances
of
that
case,
the
provision
of
accommodation
and
amenities
was
a
necessary
part
of
the
establishment
and
conduct
of
the
appellant’s
undertaking
and
accordingly,
should
be
treated
as
an
expenditure
incurred
in
the
development
of
the
mining
property
for
the
purposes
of
the
section.
With
respect
to
the
Mount
Isa
case
(supra)
the
word
“development”
in
the
language
‘‘incurs
expenditure
on
necessary
plant
and
development
of
the
mining
property’’
is
in
a
context
far
different
from
that
in
which
it
appears
in
the
language
of
Section
83A
of
the
Income
Tax
Act,
the
pertinent
portion
of
which
reads,
‘‘the
prospecting,
exploration
and
development
expenses
incurred
by
it
in
searching
for
minerals
.
.
.’’
and
from
that
in
which
the
word
appears
in
Regulation
1205
the
pertinent
language
of
which
reads,
‘‘expenditures
made
or
incurred
by
the
taxpayer
which
are
reasonably
attributable
to
the
prospecting
and
exploration
for
and
the
development
of
the
mine,
.
.
.”.
Mr.
Justice
Taylor
in
concluding
that
the
word
“development”
should
not
be
construed
in
a
restricted
sense
supplemented
that
conclusion
by
reliance
on
the
maxim
of
noscitur
a
sociis.
He
construed
the
word
‘‘development’’
because
of
its
association
with
the
words
‘‘necessary
plant’’
as
used
in
the
context
of
the
section.
In
the
case
of
‘‘necessary
plant’’
the
allowable
deduction
was
not
subject
to
any
restriction
other
than
to
be
found
in
the
wide
words
of
the
section
and
that
throws
a
similar
wide
meaning
on
the
word
‘‘development’’
as
used
in
the
section.
However
in
Section
838A
and
in
Regulation
1205
the
word
“development”
is
used
in
association
with
the
words,
“prospecting”
and
‘‘exploration’’.
In
M.N.R.
v.
The
MacLean
Mining
Company,
Limited,
[1970]
S.C.R.
877;
[1970]
C.T.C.
264,
Pigeon,
J.
in
delivering
the
unanimous
decision
of
the
Supreme
Court
of
Canada
considered
the
meaning
of
the
word
“mine”
as
used
in
Section
83(5)
of
the
Income
Tax
Act
and
said
that
the
word
could
not
be
interpreted
to
mean
the
ore
body
but
rather
a
“mining
concern
taken
as
a
whole,
comprising
mineral
deposits,
workings,
equipment
and
machinery
capable
of
producing
ore’’
and
that
“mining
itself
is
complete
by
the
production
and
hoisting
of
the
ore’’.
It
follows
that
what
is
done
with
the
ore
after
it
reaches
the
pit
head
is
not
‘‘mining’’
but
rather
a
subsequent
process
of
treatment.
It
therefore
seems
to
me
that
the
word
‘‘mine’’
as
used
in
Regulation
1205
is
not
synonymous
with
the
words
“mining
property’’
used
in
the
section
under
review
in
the
Mount
Isa
case
(supra),
which
was
the
assumption
made
by
counsel
for
the
appellant,
but
rather
the
word
‘‘mine’’
has
the
more
restricted
meaning
ascribed
to
it
in
the
MacLean
Mining
case
(supra).
In
Johnson’s
Asbestos
Corporation
v.
M.N.R.,
[1966]
Ex.
C.R.
212;
[1965]
C.T.C.
165,
the
President
considered
the
meaning
of
the
phases
or
activities
of
mining
preceding
the
delivery
of
ore
to
the
pit
head.
They
are
(a)
prospecting,
(b)
exploration,
(c)
development,
and
(d)
extraction,
or
production.
The
President
then
found
the
meaning
of
those
words
in
the
jargon
of
mining
engineers
and
others
in
the
mining
industry
to
be,
(a)
‘‘prospecting’’—the
initial
stage
of
locating
the
site
of
a
possible
mining
operation
;
(b)
‘‘exploration’’—in
general
terms,
is
the
operation
of
testing
for
the
existence
and
extent
of
an
ore
body
and
includes
prospecting
;
(c)
‘‘development’’
of
a
mine,
in
general
terms,
means
to
uncover
the
body
or
area
which
is
to
be
the
subject
matter
of
the
extraction
process.
Development
is
the
preparation
of
the
deposit
or
mining
site
for
actual
mining
;
(d)
the
actual
production
or
extraction
process
be
defined
with
respect
to
asbestos,
which
was
the
mineral
in
the
case
before
him,
as
drilling
the
rock
and
breaking
it
up
with
explosives,
selection
of
the
fibre
bearing
portions
and
transporting
it
to
a
mill
for
separation.
I
should
think
that
the
meaning
of
production
or
extraction,
in
general
terms,
would
be
the
removal
of
the
ore
to
the
pit
head
and
that
such
meaning
is
self-evident.
Mr.
Justice
Gibson
held
that
mining
was
comprised
of
the
four
foregoing
phases
in
The
International
Nickel
Company
of
Canada
Limited
v.
M.N.R.
(supra)
and
in
Marbridge
Mines
Limited
v.
M.N.R.,
[1971]
C.T.C.
442.
As
I
have
previously
indicated,
Mr.
Justice
Gibson
in
the
appeal
to
the
appellant
with
respect
to
the
deductibility
of
these
same
townsite
expenses
under
Section
83A
of
the
Act
first
directed
his
attention
to
whether
they
were
“development”
expenses
(which
he
held
that
they
were
not)
and
then
considered
whether
they
were
development
expenses
incurred
in
searching
for
minerals
(which
he
also
held
that
they
were
not).
I
am
unable
to
follow
how
I
can
attribute
a
different
and
wider
meaning
to
the
expenditures
attributable
to
the
development
of
a
mine
where
such
words
appear
in
Regulation
1205
than
that
which
was
attributed
by
Mr.
Justice
Gibson
to
the
words
‘‘development
expenses’’
where
they
appeared
in
the
context
of
Section
838A
of
the
Act
as
contended
by
the
appellant.
It
is
a
cardinal
rule
of
construction
to
give
the
same
meaning
to
the
same
words
or
expressions
in
different
parts
of
a
statute
unless
there
is
a
very
clear
reason
for
not
doing
so.
In
my
view
no
such
reason
exists.
The
first
observation
is
that
the
meaning
should
be
found
from
the
section
itself.
If
it
is
not
clear
then
other
sections
may
be
looked
at
to
see
in
what
sense
the
word
is
used.
The
same
principles
of
interpretation
apply
to
regulations
made
under
authority
of
a
statute.
Section
15
of
the
Interpretation
Act,
R.S.C.
1970,
c.
I-23,
provides,
15.
Where
an
enactment
confers
power
to
make
regulations,
expressions
used
in
the
regulations
have
the
same
respective
meanings
as
in
the
enactment
conferring
the
power.
In
my
view
the
word
“development”
in
the
context
in
which
it
appears
in
Regulation
1205
indicates
that
the
word
is
used
in
the
same
sense
that
it
is
used
in
Section
83A
of
the
Act.
As
I
have
previously
indicated
the
word
is
used
both
in
Section
83A
and
in
Regulation
1205
in
association
with
the
words
“prospecting”
and
‘‘exploration’’
which
affects
the
sense
in
which
the
word
‘‘development’’
is
used.
The
meanings
of
the
three
operations
of
prospecting,
exploration
and
development
have
been
determined
in
the
Johnson’s
Asbestos
case
(supra),
the
previous
International
Nickel
appeal
and
in
the
Marbridge
case
(supra).
It
is
apparent
from
the
agreed
statement
of
facts
that
the
employees
of
the
appellant
whom
the
townsite
was
to
house
were
engaged
in
the
extraction
and
milling
operation
and
in
smelting
and
refining
operations
and
in
management,
supervisory
and
administrative
capacities
(see
paragraph
16).
Later
in
paragraph
18
it
is
stated
that
‘‘such
a
town
was
necessary
to
keep
a
stable
working
force
in
the
appellant’s
extraction,
milling
and
processing
operation’’.
It
was
not
contended
that
employees
engaged
in
the
development
phase
were
intended
to
live
nor
that
any
such
persons
lived
in
the
townsite.
The
evidence
before
Mr.
Justice
Gibson
was
to
like
effect.
He
held
that
the
townsite
expenditures
were
not
‘‘development
expenses”
but
were
related
to
extraction
and
production.
That
being
so
it
follows
that
those
townsite
expenditures
cannot
be
attributable
to
the
development
of
the
mine.
They
were
attributable
to
extraction
and
subsequent
treatment
of
the
ore.
Accordingly
the
appeal
on
the
issue
that
the
township
expenditures
are
deductible
under
Regulation
1205
is
dismissed.
In
view
of
the
conclusion
I
have
reached
it
is
not
necessary
for
me
to
consider
whether
the
matter
is
res
judicata.
There
remains
for
determination
the
issue
respecting
expenditures
by
the
appellant
on
scientific
research.
The
legislative
intent
in
enacting
Section
72
of
the
Income
Tax
Act
is
clear.
Section
11(1)
provides
that
notwithstanding
paragraphs
(a)
and
(b)
of
Section
12(1)
the
amounts
specifically
mentioned
in
Section
11
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
the
taxation
year.
Paragraph
(j)
of
Section
11(1)
provides
for
the
deduction
of
such
amount
in
respect
of
expenditures
on
scientific
research
as
is
permitted
by
Section
72
or
by
Section
72A.
The
obvious
purpose
of
Section
72
is
to
permit
the
taxpayer
to
deduct
from
its
income
the
amounts
spent
on
scientific
research
within
the
meaning
of
Section
72
which
might
not
otherwise
be
deductible
either
because
barred
by
Section
12(1)
(b)
as
capital
expenditures
or
because
of
the
possibility
the
amount
so
expended
might
not
be
incurred
directly
in
the
income
earning
process
within
the
meaning
of
Section
12(1)
(a).*
It
is
common
ground
between
the
parties
that
the
appellant’s
expenditures
on
scientific
research
are
deductible
under
Section
72
of
the
Income
Tax
Act
in
computing
its
income
for
its
taxation
year
as
expenditures
of
a
current
nature
made
in
Canada.
This
was
done.
However
the
issue
is
whether
the
appellant’s
expenditures
on
scientific
research
are
deductible
in
the
computation
of
its
profits
for
the
purpose
of
Regulation
1201
to
arrive
at
the
base
upon
which
depletion
allowance
is
to
be
calculated.
The
appellant’s
position
is
that
these
expenditures
are
not
business
expenditures
laid
out
for
the
purpose
of
gaining
or
producing
income
from
its
business,
but
rather
are
an
outlay
on
account
of
capital
and
as
such
are
not
to
be
deducted
to
determine
profits
in
the
ordinary
course.
On
the
other
hand,
the
Minister’s
position
is
that
the
expenditures
on
scientific
research
are
current
expenditures
directly
related
to
the
appellant’s
business
incurred
with
the
view
of
improving
the
appellant’s
business
position
and
form
an
integral
part
of
the
appellant’s
operations.
Put
in
succinct
terms
the
dispute
is
whether
the
expenditures
on
scientific
research
are
in
substance
revenue
or
capital
expenditures.
Again
it
is
common
ground
that
if
they
are
capital
expenditures
they
are
not
properly
deductible
in
ascertaining
the
depletion
base
for
the
purposes
of
Regulation
1201,
but
if
they
are
expenditures
incurred
directly
in
the
income
earning
process
then
they
are
deductible
for
the
purposes
of
Regulation
1201.
The
classical
and
most
notable
test
whether
a
payment
is
one
made
on
account
of
capital
is
that
enunciated
by
Viscount
Cave,
L.C.
in
British
Insulated
and
Helsby
Cables,
Limited
v.
Atherton,
[1926]
A.C.
205,
where
he
said
at
page
213:
.
.
.
But
when
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
to
bringing
into
existence
an
asset
or
an
advan-
tage
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
to
revenue
but
to
capital.
.
..
The
appellant
in
the
present
case
because
of
the
extent
and
nature
of
its
business
expends
large
sums
on
scientific
research
and
had
done
so
for
many
years.
It
employs
highly
qualified
personnel
whose
exclusive
function
is
to
devote
their
entire
time
and
outstanding
ability
to
a
constant
study
of
existing
processes
used
by
the
appellant
with
a
view
to
improving
and
making
those
processes
more
efficient
as
well
as
projects
as
to
the
feasibility
if
hitherto
untried
processes
and
methods
or
discovery
of
unknown
processes.
If
those
studies
prove
the
feasibility
of
such
new
projects
it
has
resulted
and
may
again
result
in
the
appellant
expending
large
sums
to
build
a
plant
to
utilize
the
process
so
discovered
or
an
improvement
on
a
process
in
use.
It
has
been
by
this
constant
search
for
better
ways
that
the
appellant
has
kept
in
the
forefront
of
its
field.
This
necessarily
results
in
a
continual
outlay
on
scientific
research
by
the
appellant.
It
is
a
continuing
and
never
ending
programme.
Therefore
the
expenditure
may
not
be
made
‘‘once
and
for
all’’
within
the
test
of
Lord
Cave.
Conceivably
the
expenditures
of
the
appellant
might
be
considered
as
being
made
by
the
appellant
on
a
number
of
separate
scientific
projects
which
overlap
and
thereby
give
the
appearance
of
a
continuing
expenditure
whereas
when
one
of
the
multitudinous
projects
is
completed
that
would
be
an
expenditure
on
that
particular
project
“once
and
for
all”.
But
whether
an
expenditure
is
made
‘‘once
and
for
all’’
is
not
the
sole
or
even
the
primary
determinant.
In
Vallambrosa
Rubber
Co.
Ltd.
v.
Farmer,
5
T.C.
529,
Lord
Dunedin
said
at
page
536
:
.
.
.
Now,
I
don’t
say
that
this
consideration
is
absolutely
final
or
determinative,
but
in
a
rough
way
I
think
it
is
not
a
bad
criterion
of
what
is
capital
expenditure
as
against
what
is
income
expenditure
to
say
that
capital
expenditure
is
a
thing
that
is
going
to
be
spent
once
and
for
all,
and
income
expenditure
is
a
thing
that
is
going
to
recur
every
year.
.
.
.
Lord
Dunedin
obviously
recognized
that
payment
once
and
for
all
is
at
best
only
a
rough
test
and
that
is
not
a
complete
and
satisfactory
one.
Lord
Cave
in
British
Insulated
and
Helsby
Cables
case
(supra)
said
this
at
page
213
:
.
.
.
But
the
criterion
suggested
is
not,
and
w
as
obviously
not,
intended
by
Lord
Dunedin
to
be,
a
decisive
one
in
every
case;
for
it
is
easy
to
imagine
many
cases
in
which
a
payment,
though
made
“once
and
for
all”,
would
be
properly
chargeable
against
the
receipts
for
the
year.
.
.
.
The
converse
would
be
equally
true.
Recurrent
payments
may
well
be
capital
expenditures.
Dixon,
J.
said
in
Associated
Newspapers
Ltd.
v.
F.C.
of
Taxation
(1938),
61
C.L.R.
337;
5
A.T.D.
87,
Recurrence
is
not
a
test;
it
is
no
more
than
a
consideration
the
weight
of
which
depends
on
the
nature
of
the
expenditure.
Basically
it
is
necessary
to
determine
whether
an
expenditure
is
a
capital
expenditure
or
a
revenue
expenditure
to
ascertain
the
profit
which
is
the
taxable
income.
What
is
allowed
are
those
expenditures
which
are
the
real
costs
of
earning
the
income.
Capital
expenditure
is
excluded
not
because
it
is
unrelated
to
a
profit
earning
purpose,
but
because
it
is
not
a
‘proper
debit
item’’
to
be
charged
against
the
receipts
of
the
trade.
Lord
Cave
has
said
in
the
British
Insulated
and
Helsby
Cables
case
(supra),
“‘.
..
there
remains
the
question
.
.
.
whether
.
.
.
the
sum
in
question
is
.
.
.
a
proper
debit
item
to
be
charged
against
incomings
of
the
trade
when
computing
the
profits
of
it;
.
.
.”.
In
general
terms
the
purpose
of
capital
expenditure
is
to
provide,
enlarge
or
alter
the
facilities
or
machinery
for
profit
earning
as
distinguished
from
the
expenditure
of
operating
that
machine.
The
appellant
carefully
segregated
the
expenditures
on
scientific
research
between
those
directed
to
creating
new
processes
or
improving
existing
processes
from
those
directed
to
maintaining
and
operating
existing
processes
from
information
supplied
and
records
kept
by
the
many
research
departments
of
the
appellant
and
the
former
is
what
is
being
claimed
as
not
properly
deductible
to
ascertain
aggregate
profits
for
the
purposes
of
Regulation
1201.
For
the
appellant’s
own
commercial
purposes
all
such
expenditures
on
scientific
research
were
included
in
operating
costs
and
not
as
capital
costs.
The
segregation
was
made
for
the
purpose
of
preparing
income
tax
returns.
I
do
not
attach
great
significance
to
this
bookkeeping
or
accounting
practice.
The
outlay
on
scientific
research
is
not
easily
classifiable
and
I
can
readily
understand
why
for
commercial
purposes
the
appellant
would
regard
these
expenditures
as
affecting
its
net
profit
or
loss.
But
different
considerations
apply
for
income
tax
purposes.
It
is
quite
understandable
that
a
commercial
enterprise
in
its
books
of
account
for
its
own
purposes
will
treat
certain
classes
of
expenditures
as
revenue
expenditures
which
are,
in
reality,
for
income
tax
purposes
capital
expenditures
and
conversely
many
items
treated
in
the
accounts
of
business
as
capital
receipts
are
for
income
tax
purposes
taxable
as
income.
How
an
item
is
treated
in
the
books
of
account
is
not
the
true
or
adequate
test
of
the
nature
of
the
expenditure.
As
I
understand
the
essence
of
Lord
Cave’s
declaration
it
is
that
an
expenditure
is
of
a
capital
nature
when
it
is
made
with
a
view
to
securing
an
asset
or
advantage
for
the
enduring
benefit
of
the
trade.
The
intention
of
the
appellant
in
embarking
upon
and
continuing
its
programme
of
scientific
research
was
to
acquire
for
itself
a
fund
of
scientific
“know
how’’
upon
which
it
could
draw
when
necessity
might
arise.
Some
projects
were
abandoned.
Some
proved
fruitless.
Some
continued
over
many
years.
Many
projects
were
undertaken,
which
accounts
for
the
continuing
nature
of
the
expenditure
as
does
the
fact
that
some
projects
take
many
years
for
their
culmination.
It
is
immaterial
that
some
of
the
projects
failed
if
the
intention
is
such
that
had
the
object
been
realized
an
asset
or
advantage
would
have
been
obtained.
If
the
ultimate
object
was
an
asset
or
advantage
of
a
capital
nature
then
the
expenditures
antecedent
thereto
are
also
of
a
capital
nature.
In
answer
to
a
question
from
myself
Dr.
Renzoni
replied
that
in
some
instances
the
appellant
applied
for
and
obtained
a
patent
of
invention.
If
a
patent
is
obtained
the
patent
will
represent
a
capital
asset
the
value
of
which
will
include
all
costs
of
obtaining
it.
(See
Weinberger
v.
M.N.R.,
[1964]
Ex.
C.R.
903;
[1964]
C.T.C.
103.)
It
was
not
the
purpose
of
the
appellant
that
its
scientific
research
should
result
in
a
patent
for
the
matter
under
investigation
but
rather
that
the
appellant
would
have
a
fund
of
knowledge
upon
which
the
draw.
If
the
appellant
could
and
did
obtain
a
patent,
that
was
incidental.
I
am
unable
to
distinguish
between
an
expenditure
on
scientific
research
which
results
in
a
patent
and
a
similar
expenditure
which
does
not
result
in
a
patent
but
does
result
in
the
accumulation
of
a
store
of
new
knowledge
upon
which
the
appellant
can
draw
and
does
draw
to
keep
itself
to
the
forefront
of
the
particular
trade
in
which
it
is
engaged.
That
was
the
object
of
the
expenditure.
To
me
the
expenditures
are
closely
akin
from
which
it
follows
that
since
a
patent
is
a
capital
asset
and
the
expenditures
to
obtain
that
patent
are
capital
expen-
ditures,
the
expenditures
on
research
to
acquire
new
knowledge,
to
devise
and
develop
new
processes
and
to
improve
existing
processes
are
likewise:
capital
expenditures.
In
M.N.R.
v.
Algoma
Central
Railway,
[1968]
S.C.R.
447;
[1968]
C.T.C.
161,
Fauteux,
J.
(as
he
then
was)
in
delivering
the
unanimous
judgment
of
the
Supreme
Court
of
Canada
said
at
page
449
[162]:
Parliament
did
not
define
the
expressions
“outlay
.
.
.
of
capital”
or
“payment
on
account
of
capital”.
There
being
no
statutory
criterion,
the
application
or
non-application
of
these
expressions
to
any
particular
expenditures
must
depend
upon
the
facts
of
the
particular
case.
W
edo
not
think
that
any
single
test
applies
in
making
that
determination
and
agree
with
the
view
expressed,
in
a
recent
decision
of
the
Privy
Council,
B.
P.
Australia
Ltd.
v.
Commissioner
of
Taxation
of
the
Commonwealth
of
Australia,
[1966]
A.C.
224;
[1965]
3
All
E.R.
209,
by
Lord
Pearce.
In
referring
to
the
matter
of
determining
whether
an
expenditure
was
of
a
capital
or
an
income
nature,
he
said,
at
p.
264
:
“The
solution
to
the
problem
is
not
to
be
found
by
any
rigid
test
or
description.
It
has
to
be
derived
from
many
aspects
of
the
whole
set
of
circumstances
some
of
which
may
point
in
one
direction,
some
in
the
other.
One
consideration
may
point
so
clearly
that
it
dominates
other
and
vaguer
indications
in
the
contrary
direction.
It
is
a
common-sense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer.”
After
having
considered
all
the
facts
in
the
present
appeal
I
have
concluded,
for
the
reasons
outlined
above,
that
the
appellant’s
expenditures
on
scientific
research
which
it
claimed
as
deductions
under
Sections
72,
72A
and
by
virtue
of
Section
11(1)
(j)
in
computing
its
taxable
income
for
the
year
are
expenditures
of
a
capital
nature
as
a
consequence
of
which
those
expenditures
are
not
deductible
in
determining
the
base
for
the
depletion
allowance
for
the
purposes
of
Regulation
1201.
It
follows
that
the
appellant
is
suecessful
on
this
issue
of
its
appeal.
Having
so
concluded
it
is
not
necessary
for
me
to
consider
the
appellant’s
alternative
contention
that
if
it
should
be
held
that
the
scientific
expenditures
in
question
were
of
a
revenue
nature
the
appellant
would
then
be
entitled
to
deduct
those
expenditures
under
Section
12(1)
(a)
as
well
as
under
Section
72
in
computing
its
taxable
income
for
the
year.
As
I
indicated
at
the
outset,
the
appeal
is
allowed
and
is
referred
back
to
the
Minister
for
re-assessment
on
matters
with
respect
to
which
the
parties
have
reached
agreement.
The
appeal
is
dismissed
with
respect
to
the
issue
as
to
the
deductibility
of
the
expenditures
incurred
or
made
by
the
appellant
in
connection
with
the
townsite
at
Thompson,
Manitoba.
The
appeal
is
allowed
with
respect
to
the
issue
that
the
expenditures
on
scientific
research
are
not
deductible
for
the
computation
of
profits
for
the
purposes
of
Regulation
1201.
As
success
is
divided
on
the
issues
which
proceeded
to
trial
each
party
is
entitled
to
its
costs
applicable
to
the
respective
issues
upon
which
each
was
successful.
Counsel
for
the
Minister
shall
prepare
a
draft
of
an
appropriate
judgment
to
implement
the
foregoing
conclusions
and
may
move
for
Judgment
in
accordance
with
Rule
337(2)
(b).
VINELAND
QUARRIES
&
CRUSHED
STONE
LIMITED,
Appellant,
and
MINISTER
OF
NATIONAL
REVENUE,
Respondent.
Federal
Court—Trial
Division
(Noël,
A.C.J.),
September
7,
1971,
in
a
motion
by
the
Minister
for
an
order
quashing
appellant’s
appeal
(continued).
See
the
headnote
to
Vineland
Quarries
&
Crushed
Stone
Limited
v.
M.N.R.
(p.
501).
CASES
REFERRED
TO:
Newbiggen-by-the-Sea
Gas
Company
v.
Armstrong
(1879),
13
Ch.D.
310;
Jane
Scribner
v.
Robert
M.
Parcells
et
al.
(1890),
20
O.R.
554;
Geilinger
v.
Gibbs,
[1897]
1
Ch.
479.
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