The Queen v. Mattabi Mines Ltd., 89 DTC 5357, [1989] 2 CTC 94 (FCTD), aff'd 92 DTC 6252 (FCA)

Teitelbaum, J.:—The plaintiff, Her Majesty the Queen, hereinafter referred to as the "Crown", appeals, by means of a direct action, a judgment of the Tax Court of Canada delivered on April 23, 1987 whereby the appeals by the defendant, Mattabi Mines Limited, hereinafter referred to as "Mattabi", of income tax reassessments in respect of its 1977 and 1978 taxation years were allowed and the amounts of $2,904 in 1977 and $3,773 in 1978 were held to be deductible as inventory allowance pursuant to paragraph 20(1)(gg) of the Income Tax Act.

Mattabi, a subsidiary of Noranda Inc., owns and operates a zinc/copper/ lead mine at Ignace, Ontario. There is also mined, but to a much lesser extent, silver. At the same location Mattabi owns and operates a mill at which the crude ore from the mine is processed into concentrate for sale for smelting and/or refining operations. The processing of the ore into concentrates is achieved by a method called ''flotation".

The entire process, from mining of the rock to the sale of the concentrate was explained, in great detail, by defendant's witness Bruce Park Wallace, a mineral processing engineer employed by defendant's parent company Noranda Inc. Mr. Wallace was called by defendant both as a witness to give evidence of his personal knowledge as to the operation of Mattabi and as an expert to explain the contents of articles and reports produced as evidence in this case.

An affidavit of Mr. Wallace, as an expert, was duly produced into the Court record.

Mr. Wallace would seem to be very familiar with the operations of Mattabi in that he was at the mine and mill of the defendant at least 25 times. This witness went into great detail in explaining the operation at Mattabi and in particular in explaining the process of how the iron copper and zinc concentrate is formed from the mined rock. I believe it necessary for the present purpose to give a brief summary of the witness' testimony.

The mining at Mattabi is presently underground. During the years in issue, 1977 and 1978, the mining was "open pit" mining. In the mining operation the ore is broken free from the ore body. Because the broken ore is large in size, it must first be broken into ore size that can be conveyed to the processing plant where it will continue to be crushed to a sufficiently fine size in an attempt to separate as much as possible the economic minerals found in the ore rock. The size of the ore rock is approximately 12mm or less “it is more fine than sugar or salt but less fine than flour”. This final crushing, there are three stages of crushing, is done at the rod or ball mill. Because the rods or balls (which are made of steel) are used for crushing, they must be replaced at frequent intervals and at great cost. A supply is always maintained. At this stage of the operation, it is a wet process. At the rod mill water is added and some reagents have been added to the crushed mine ore making it into a pulp. In order to obtain a concentrate, after certain reagents have been added, air is injected into the pulp causing bubbles to form, and, depending on the reagent added and the quantity added, certain economic minerals rise to the top. This "scum" is skimmed off leaving a form of concentrate. In order to obtain a higher concentrate of a particular mineral, the process is repeated as often as it is found economically feasible.

At Mattabi, the economic minerals are copper, lead and zinc. After the copper, lead and zinc concentrate have been slammed off from the ore rock, what is left, the waste product, is called tailings. These tailings are stored in perpetuity. The copper concentrate is sent to Noranda Smelting to make copper metal, slabs are then sent for copper refining at Noranda Refining where the "concentrate" is refined into gold, silver and cathode copper.

With regard to the copper concentrate sent for refining, Mattabi, which is a joint venture of Noranda Mines Inc. and Abitibi Paper, owns the entire product. It pays the other subsidiaries for the smelting, refining and for selling the product. The sales are made by Noranda Sales.

The lead concentrate, which is sold as a wet pulp, much of the water remains with the lead, is loaded onto rail cars and sent to a company known as Sarco. This company is not related to the defendant.

The zinc concentrate, which is a brownish powder, is dried at Mattabi's premises and sold to Canadian Electrolitic Zinc, a company "most part owned and controlled by Noranda". This product when sold has a four per cent water content.

Mattabi uses the reagents necessary to obtain the concentrate of lead, zinc and copper only.

Exhibit D-2 is a flow sheet showing the entire process that takes place, from mining the ore to obtaining the concentrate at Mattabi Mines Limited. Each economic mineral, copper, lead and zinc, has its own distributors, conditioners, rougher or cleaner cells, thickeners, filters and storage tanks.

In giving evidence with regard to the flotation process at Mattabi Mines in 1977-1978, the witness was referred to Exhibit D-3, a "short summary" of the flotation process which the witness wrote. The witness also referred to Exhibit D-4, an excerpt from a book on the flotation process prepared by Dow Chemical.

According to Wallace, the most important function in the entire process in obtaining concentrate, is the flotation process. It is the flotation process that allows the attachment of the mineral particle to the “air bubble” which causes the mineral particle to rise to the top “of the pulp” to be skimmed off to form the concentrate. According to Wallace the flotation process can only occur if there is use of reagents called (1) conditioners/modifiers, (2) activators/depressants, (3) frothers and (4) collectors.

Wallace defines the flotation process as:

Flotation is a physico-chemical method of concentrating finely ground ore. The process involves chemical treatment of an ore pulp to create conditions favorable for the attachment of certain mineral particles to air bubbles. The air bubbles carry the selected minerals to the surface of the pulp and form a stabilized froth which is skimmed off while the other minerals remain submerged in the pulp.

(Exhibit A-3, page 1)

He goes on to state, in Exhibit A-3, what differential flotation is:

Differential flotation involves the sequential concentration of similar minerals from the same ore. At Mattabi this is illustrated by the production of separate copper, lead and zinc sulphide concentrates. Differential flotation is achieved by the judicious and sequential application of flotation reagents categorized as conditioners/modifiers activators/depressants, frothers and collectors.

(Exhibit A-3, page 1)

He states that the chemical treatment is a treatment of the pulp with the reagents which causes the air bubbles which have been injected into the pulp to carry the selected mineral particles to the top. Different categories of reagents are used for different purposes. It is important that the correct amount of reagent be added to the pulp to achieve the desired result as the same reagent can be used for different minerals depending on the quantity used and for which mineral it is to be used.

In order to better understand how the flotation reagents function when added to the mineral pulp, one can refer to pages 1, 2 and 3 of Exhibit D-3. For the purpose of this judgment, I do not believe it necessary to repeat what is stated in this Exhibit.

It is sufficient to say that I am satisfied that for Mattabi to obtain the copper, lead or zinc concentrate, it is necessary for it to add one or more reagents to the mineral pulp to cause the required mineral to float to the top to be skimmed off and to be further processed in accordance with the flow chart (Exhibit D-2).

The reagents are chemical compounds that usually have to be manufactured or “processed, to some extent". The main user of these reagents is the mining industry. According to the requirements of a mine, each mine will use different reagents and different quantities of reagents. Very small quantities of any particular reagent are required to cause the flotation process to occur.

This witness states that all of the reagents, used at Mattabi, even if only small quantities are used, are always stored at the mill or very close by. He states the mill must have immediate access to any of the reagents which means "a satisfactory inventory” must be at hand. If a required reagent were not available, it could mean the “probably closing of the plant". Mr. Wallace states that the cost of keeping such an inventory of reagents is “significant” and that the reagent is an important component (in the process). He states that the reagent is essential to the processing of the ore and that "it is unthinkable to run out". He states the reagents must be "on hand" even if not to be used.

Plaintiff produced, as Exhibit D-4(a) a vial containing a sample of zinc concentrate made at the plant of Mattabi in 1988. It is substantially the same as zinc concentrate produced by Mattabi in 1978. When the witness smelled the zinc concentrate he stated it has a musty odor and he therefore concluded that since the mine rock from which the zinc concentrate came from has no odor, the odor that the witness spoke of “presumably” is caused by the reagent still in the concentrate. The witness states that he is speculating, in that he has previously smelled this odor at the mine where the concentrate was kept in storage.

In speaking of the “life span" of the reagents, the witness states that it is very short. Oxygen and temperature tend to decompose the reagent very quickly. Because of the process that ore (the mined rock) must go through to become concentrate, heat, drying, storage, the witness is of the view that the reagent would almost completely decompose. In the final refining of the concentrate the reagent would completely disappear.

The witness referred to a procedure originated by a Mr. Sanby in Australia to analyze for reagents on mineral products, particularly for collector reagents. The test is to see if there were any residual reagents, that is, reagents that were left in the ore concentrate. Mattabi had requested the performance of a similar procedure for some of its own ore concentrate. Mattabi’s test was qualitative and not quantitative.

The test was carried out by Technitrol Canada Ltée/Ltd., a company recommended by the Department of Mines and Resources of Canada. Three samples of zinc concentrate were given to Technitrol for testing. The three samples given were:

(1) Zinc Cleaner Concentrate—25 per cent solid 75 per cent moisture

(2) Zinc Filter Concentrate—10 to 12 per cent moisture

(3) Zinc Dryer Concentrate—3 to 4 per cent moisture

The test report of Technitrol Canada Ltée/Ltd. (Schedule 6 to Wallace Affidavit) and dated January 4, 1988 indicates, and this is confirmed by Wallace after he had analyzed the report, that the zinc concentrate samples given for testing "would have at least small quantities of reagents or their residuals". The quantities (of the reagent) would be very small.

Wallace admits that at the end of the entire process, from mine to concentrate, one has all these particles which are in essence the same as to what was crushed and ground and put into the mill. He states that the absorption of the reagent has no effect on the mineral particle itself "not a determined effect anyway" due to the fact that most of the reagent(s) used would end up in the tailings (waste product) or would, if skimmed off with the froth, evaporate. Furthermore, in the filtering and drying process some residual of the reagents could also be eliminated. The presence of any further reagents, after the entire process has occurred and after decomposition and evaporation, in any of the concentrate “is of no consequence to the concentrate", it does not add or detract to the value because of the very small quantities and will be eliminated in the smelting.

I am satisfied, from the evidence given by Mr. Wallace together with the report of Technitrol Canada Ltée/Ltd. that reagents are an essential additive to the production of concentrate at the defendant's mill and that it would not be possible to produce the concentrate unless the reagents are added to the ore. I am satisfied that the end product, the concentrate, whether lead, copper or zinc, contains some very small quantity of reagent but the quantity of reagent has no value or effect with regard to the concentrate, the concentrate being the same as what was mined but in a different form, that is, in separate zinc, lead and copper concentrates.

Mr. George Michael Penna (Penna), employed by Noranda Inc. as Vice- President, Taxation, gave evidence on behalf of Mattabi. Although Penna is a chartered accountant, he has been employed by Noranda for 14 years, was previously employed by International Nickel Co. and by the Government of Canada in its taxation department as a corporate tax auditor, he was not called upon to give evidence as an expert. He informed the Court that Noranda Inc. now owns 60 per cent of Mattabi. In 1977-78, Matagami Lakes Mines owned 60 per cent of Mattabi and that Noranda Inc. owned 35 per cent of Matagami Lakes Mines. In 1979, Noranda merged with Matagami Lakes Mines and thus became a 60 per cent owner of Mattabi. Abitibi Paper owned, in 1977-78 and still owns, 40 per cent of Mattabi. In that Mattabi is considered one of Noranda's group of companies, Noranda, (Penna) administers Mattabi's tax responsibilities.

Penna states that the first marketable product of the defendant is the concentrate. The crushed ore is not a marketable product. He is of the opinion that it could only become a marketable product if it were to be transported to a mill nearby. He states the cost of transport of crushed ore is too expensive. He knows of no company that sells crushed ore.

Defendant filed Exhibit D-5. Schedule "A" is an analysis of the inventory "on hand" at the end of Mattabi's 1977 taxation year. It formed the basis of the three per cent inventory allowance taken at the end of 1978. Schedule "B" is the notice Revenue Canada issued (form T7W-C). It is an analysis of items (many) reassessed for the 1978 taxation year. The pages following Schedule "B" are explanations of the reassessments and were prepared by Revenue Canada. Schedule "C" is a reconciliation of Mattabi's income for 1978 to its net income filed with its 1978 tax return. Schedule "D" is an analysis of Mattabi’s concentrate inventory at the end of 1977. It is an attempt to revalue the concentrate at cost.

Exhibit D-6 is the financial statement and audit report for the 1978 taxation year. It contains the balance sheet and statement of income. Exhibit D-7 contains the same documents as Exhibit D-6 except they represent the 1977 taxation year of Mattabi.

Mr. Penna states, in referring to the second page of Exhibit D-6, that at the end of the 1977 and beginning of the 1978 year Mattabi had $10,536,755 in inventory of mine products and $2,627,761 of materials, supplies and prepaid expenses. For the 1978 year the figure is $15,713,842 and $2,803,944. He states that under mine products is included concentrate on hand at the end of the year and any finished metal Mattabi may have had at the end of the year.

Included in "materials" are the reagents, of which this case is about, lumber and timber for Mattabi's underground mining, there was none in 1977 and 1978 taxation years as it was open pit mining, lubricants, spare parts and other similar articles. No crushed ore are included in inventory.

The reagents, according to this witness, are included as an inventory item and not deducted as an expense. He states that this is done in order to achieve a better matching of revenue to cost. Exhibit D-5 Schedule "A" is an analysis of the opening inventory and inventory allowance at end of 1977 and opening of 1978. “It is a reconciliation or analysis of the components and tie into the balance sheet". On Schedule "A" the balances per financial statements, the 1978 financial statements refers to 1977 figures. The inventory allowance for 1978 is based on the closing inventory of 1977.

The cost amount of inventory represents the amount upon which the three per cent is calculated for tax purposes. As can be seen on this schedule, the cost amount of the reagent inventory is $125,783 and Mattabi calculated three per cent of this amount to arrive at a sum of $3,773 which is the amount disallowed by the Minister of National Revenue for the 1978 taxation year.

It should be noted that the plaintiff allowed a three per cent inventory allowance on the cost amount of inventory on the copper concentrate, zinc concentrate and LME zinc, the zinc having been purchased, which Mattabi had in its inventory.

The reagent copper sulphate is shown separately. It also shows on this Exhibit that the three per cent Inventory Allowance was allowed for this reagent. This allowance was due to an error on the part of a representative of the Minister as will be seen later on in these reasons.

As did defendant, the plaintiff filed a plaintiff's book of documents which contains five tabs. The documents under each tab refer to an exhibit. Plaintiff filed five exhibits, P-1 to P-5. Exhibit P-1 refers to Mattabi's 1977 tax return, P-2 to Mattabi's 1978 tax return, P-3 to the notice of reassessment for 1977, P-4 to the notice of reassessment for 1978, P-5 to a letter dated March 17, 1982 from the Minister to Mattabi. The plaintiff also filed Exhibit P-6, a letter dated March 8, 1982 from the Minister to Mattabi and Exhibit P-7, a document prepared by a representative of Mattabi as a reply to Exhibit P-6.

These exhibits give a good background as to the income tax problems that existed between the Minister and Mattabi. It would appear from these exhibits that the issue of the three per cent inventory allowance for the reagents was a very small part of the existing income tax problem. All the other items in dispute, except that of the three per cent inventory allowance regarding reagents, were accepted by Mattabi. It would appear Mattabi had originally claimed the allowance on the supply of steel rods and steel balls used in the production of the concentrate, the timber and other supplies. The steel rods and steel balls are a very expensive part of the material supplies. The allowance on these items was disallowed by the Minister and accepted by Mattabi.

Penna, in cross-examination, states that the reason why reagents are part of inventory accounting is, as he believes, the appropriate treatment for accounting purposes, “it fits accounting method of treating inventory" as per the accounting institute.

The witness believes that the accounting definition of inventory found in Terminology for Accountants, 3rd Ed. published by the Canadian Institute of Chartered Accountants, and which states:

Inventory

1. Items of tangible property which are held for sale in the ordinary course of business or are in the process of production for such sale, or are to be currently consumed in the production of goods or services to be available for sale. 2. An itemized list of goods; the annual or other periodic account of stock taken in a business; the articles that are inventoried.

Closing Inventory

inventory on hand at the end of an accounting period.

Opening Inventory

inventory on hand at the beginning of an accounting period.

“is an appropriate definition of inventory for accounting and tax purposes".

Although Penna is not called as an expert witness, no objection was made to the opinion he voluntarily gave as to his opinion on the validity of the definition of inventory when he gave it.

In speaking of the concentrate produced by Mattabi, Penna believes the lead concentrate is sold, “fairly immediately”, to Asarco in the United States and, in 1977-78, Mattabi had no inventory of lead concentrate. Mattabi had an inventory of copper and zinc concentrate, the zinc concentrate is sold to Canadian Electrolitic Zinc and the copper concentrate is sold to Noranda.

As its only witness, the plaintiff (Minister) called Mr. René Widner who explained why the copper sulphate reagent was treated differently from the other reagents, that is, why the Minister allowed the three per cent inventory allowance on this reagent and not for the other reagents.

He explained, and I accept his explanation as not only true but clearly understandable, that his expertise is in the field of audits of large resource industries, the mining and oil industry and a short time before the audit of Mattabi commenced, he was doing an audit of another company where he was shown copper sulphate, in bags, and was told that the copper sulphate is sold as fertilizer. He therefore assumed, in doing the audit of Mattabi that the copper sulphate was a product produced by Mattabi and sold by it as a product (as Mattabi sold concentrate as a product). He therefore allowed the 3 per cent inventory allowance on this "product" as he did with the concentrate produced by Mattabi. He was satisfied that it was a "product" offered for sale as per paragraph 20(1)(gg) of the Income Tax Act (I.T.A.).

As stated, I am entirely satisfied that it is only because of an assumption, which happens to be wrong in Mattabi's case, that the Minister failed to disallow the three per cent inventory allowance claim for the copper sulphate reagent. The issue therefore is to determine whether the taxpayer, Mattabi Mines Limited, is entitled to claim the three per cent inventory allowance for its reagents pursuant to paragraph 20(1)(gg) of the I.T.A.

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

Inventory Allowance

(gg) an amount in respect of any business carried on by the taxpayer in the year, equal to that portion of 3% of the cost amount to the taxpayer, at the commencement of the year, of the tangible property (other than real property or an interest therein) that was

(i) described in the taxpayer's inventory in respect of the business, and

(ii) held by him for sale or for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business

that the number of days in the year is of 365.

Procedural Issue

Counsel for Mattabi makes the following preliminary submission. He admits that the present hearing, although an appeal from a decision of the Tax Court of Canada by the Minister, is a trial de novo and, generally, in matters such as the present one, the onus would be on the defendant, the taxpayer. Counsel furthermore submits that the courts have held that there is an obligation on the Minister to disclose the basis of any reassessment. The Minister is obliged to set out certain assumptions of fact upon which he made the reassessment and it would then be for the taxpayer (onus on taxpayer) to deal with the assumptions as set out. The taxpayer, in order to deal with the assumptions, based on specific facts, would have the onus to show that the facts are wrong or, if the facts are correct, the assumptions themselves are wrong. Counsel refers to the case of M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294 at 302; 64 D.T.C. 5184 at 5188 where Mr. Justice Cattanach states:

The relevance of this pleading appears from the decision of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 186; [1948] C.T.C. 195 per Rand J., delivering the judgment of the majority, at p. 489, 202:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.

(For the word "appellant" in that quotation, may be substituted "respondent" for the purpose of this appeal). The respondent could have met the Minister's pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister's allegation that he did assume those facts,

(b) assuming the onus of showing that one or more of the assumptions was wrong, or

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them. In any event, the Minister did not choose such alternative in this case and relied on the facts that he had assumed at the time of the assessment).

Counsel for Mattabi suggests that in the present case there is an inconsistency with respect to the reassessments made by the Minister regarding the issue of the reagents. The reassessment speaks of the reagents used by Mattabi while at the same time no reassessment is made with regard to the reagent copper sulphate used by Mattabi. Counsel questions whether the Minister truly assumed the facts as stated in its statement of claim. He submits that if there exists a doubt as regards the assumptions made by the Minister, that is, the assumptions upon which the Minister based his reassessments, then the onus that rests with the taxpayer as stated above no longer rests with the taxpayer. It, the onus, shifts to the Minister and the onus no longer is on the taxpayer to disprove the assumptions, the onus shifts to the Minister.

The assumptions of the Minister are found in paragraph 10 of the statement of claim.

10. The Minister of National Revenue reassessed the 1977 and 1978 taxation years of the Defendant by disallowing the deductions claimed of $2,904.00 and $3,773.00 respectively, on the basis of the assumption of facts, inter alia, stated in paragraphs 3 to 9 inclusive, hereinabove.

The assumptions in paragraphs 3 to 8 inclusively simply describe Mattabi, its operation and describe the manner in which all the reagents are used. Counsel for Mattabi states he has "no quarrel" with paragraphs 3 to 8. Counsel states he disputes the assumptions contained in paragraph 9 of the statement of claim in that, the reference is to all of the reagents used by Mattabi and that the evidence clearly indicates that the reagent copper sulphate was not considered as no reassessment was made for this particular reagent. Counsel therefore submits that since the assumptions upon which the reassessment was based are wrong, the onus shifts to the plaintiff, the Minister, and the burden of proof (onus) shifts to the plaintiff.

9. The reagents were not held by the Defendant for sale nor for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business.

There is no doubt that the reassessments upon which the present claim is based do not take into consideration the claims made by Mattabi in its 1977 or 1978 income tax return as regards the reagent copper sulphate. The three per cent inventory allowance claimed by Mattabi for the reagent copper sulphate was not disallowed by the Minister while other claims for the three per cent inventory allowance regarding the other reagents were disallowed.

Does this mean that the onus or put differently, the burden of proof has, as a result of not disallowing all the claims of the inventory allowance, shifted from the taxpayer to the Minister? In the present case, I am satisfied that the issue of upon whom rests the onus or burden of proof is of no consequence. What is at issue is the interpretation to be given to paragraph 20(1)(gg) of the I.T.A. It is not a question of determining whether the onus upon the taxpayer has been satisfied by the evidence he has filed. In any event, the evidence of Rene Widner clearly indicates that it was as a result of an erroneous assumption by him that the three per cent inventory allowance taken by Mattabi for the copper sulphate reagent was not reassessed. When the Minister made his assumption, the copper sulphate was not considered as a reagent but as a product manufactured by Mattabi to be sold. The fact that the Minister did not disallow or reassess the three per cent inventory allowance taken by Mattabi for the copper sulphate reagent in no way caused a prejudice to Mattabi. It is a simple error in an assumption made by a representative of the Minister. This does not cause a change of the onus on a taxpayer. The onus, in ordinary cases of reassessments and as agreed by counsel for Mattabi, is on the taxpayer. In cases such as the present one, where, because of an error in an assumption, a three per cent inventory allowance is not disallowed for a single reagent while other inventory allowance for reagents is disallowed, the onus does not shift to the Minister but remains with the taxpayer.

Mattabi's Submission

Mattabi considered the issue as one centring on the proper interpretation to be given to paragraph 20(1)(gg) of the I.T.A or more specifically subparagraph 20(1)(gg)(ii). Mattabi noted that there are two requirements outlined in paragraph 20(1)(gg), first, all the tangible property must be described in a taxpayer's inventory in respect of the business and second, the tangible property in respect of which the inventory allowance is claimed must either be held by the taxpayer for sale or be held by the taxpayer for the purpose of being processed, fabricated, manufactured, incorporated into, attached to or otherwise converted into or used in the packaging of property for sale in the ordinary course of business.

In terms of construing paragraph 20(1)(gg) of the I.T.A., Mattabi submits that it is important to have a general sense of the intent of the section and its meaning before looking at the meaning of the particular words of the section In this regard, counsel for Mattabi directed me to the language of provincial retail sales tax statutes which contain wording similar to subparagraph 20(1)(gg)(ii) and cited the case of Matheson & MacMillan Ltd. v. P.E.I.; Island Construction Ltd v. P.E.I. (1986), 59 Nfld. & P.E.I.R. 189 (P.E.I. S.C.). This case dealt with the Prince Edward Island Provincial Tax Act and the wording of the relevant section is

. . . goods purchased for the purpose of being processed, fabricated or manufactured into, attached to or incorporated into goods for the purposes of sale

Island Construction, a manufacturer of asphaltic concrete was assessed sales tax on liquid asphalt used to make asphaltic concrete. It appealed the assessment on the ground that the liquid asphalt was purchased for the purpose of incorporation into goods for the purpose of sale. The Court applied a recipe analogy and found that liquid asphalt was but one ingredient of the recipe which, when combined with other ingredients and cooked at the proper temperature, produced an end product, asphaltic concrete.

It is the defendant's position that reagents may not be ingredients in the obvious way liquid asphalt is an ingredient but the reagents are essential ingredients in the "process" that produces the concentrates. The reagents enter directly into the concentrate and are therefore an integral part of the process as the mixture which becomes the saleable concentrate.

Mattabi also submits that the presence or lack thereof of reagents in the concentrate (although the evidence indicates that there are minute traces of the reagent in the concentrate) is irrelevant to the interpretation of paragraph 20(1)(gg) of the I.T.A. It is Mattabi's contention that the language of the section focuses not on the end product but on the process of making the end product. There is no requirement that the reagent be present in the end product. The section makes no reference to property that is held and incorporated into or contained in the end product, instead it refers to property that is held for the purpose of being processed, fabricated, manufactured, etc. Moreover, according to Mattabi, reagents are used directly in the making of the concentrate and therefore are not like lubricants or gasoline used on machinery or equipment used in the production of concentrate. Mattabi maintains that the purpose of the reagents is to liberate the mineral particles.

After reviewing the various meanings attributed to the verbs in subparagraph 20(1)(gg)(ii) Mattabi submits that the reagents are held by it for the purpose of being

(a) incorporated into the final concentrate as they are held to be combined with ground ore to produce concentrates. The reagents, the ore pulp and what may be termed the earlier concentrates, are continuously blended, mixed into or combined with the final concentrate;

(b) manufactured and/or manufactured into property for sale as the reagents are combined with ground ore to produce concentrates, per the meaning of "manufacture" commented on in The Queen v. York, Marble, Tile and Terrazzo Ltd., [1968] C.T.C. 44; 68 D.T.C. 5001 (S.C.C.);

(c) processed and/or processed into property for sale as the reagents are held to be combined with ground ore, the combined mixtures being processed into concentrates. With respect to "process", Mattabi indicates that it did not matter whether the word "process" (the same applied to manufacture) was read with the word “into”, as the meaning of the word "process" is broad enough so that it can be said that reagents are held for the purpose of being processed into property for sale. To further support this proposition, Mattabi cited the case of Harvey C. Smith Drugs Ltd. v. M.N.R., [1986] 1 C.T.C. 2339; 86 D.T.C. 1243 (T.C.C.), where the Tax Court commented that "process" not only has a broad meaning but has an ever increasing range of meanings so as to make it almost impossible to define.

In order to assist the Court in interpreting paragraph 20(1)(gg) of the I.T.A, Mattabi makes reference to paragraph 17 of the Interpretation Bulletin IT-435R and submits that the case before me is just such a case that falls within paragraph 17. In this regard, reagents are not identifiable in the end product (although they are present in minute quantities) but they are essential raw materials for the production of the final product. Mattabi also makes reference to the budget document of March 31, 1971 as a means of assisting the Court in the interpretation of paragraph 20(1)(gg) of the I.T.A. and cites the case of Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79; 85 D.T.C. 5310 as authority for allowing references to budget statements when examining the introduction of amendments to the I.T.A. Mattabi submits that in the case before me, the paragraph 20(1)(gg) allowance can be considered to be a relieving provision in that the section was brought in as a broad measure of relief designed to offset the effects of inflation, with the objective of assisting businesses with liquidity problems and enhancing their cash flow. Thus the 20(1)(gg) allowance is similar to the incentive provision in the Lor-Wes case, supra, in the sense that there is a stated purpose which was for the benefit of taxpayers. Further, paragraph 20(1)(gg) of the I.T.A. was intended to apply to inventories of tangible property such as reagents, because they are used in producing property for sale, the replacement cost of which could be subject to inflation.

Mattabi further submits that in light of the Supreme Court of Canada’s decision in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294; 84 D.T.C. 6305 (S.C.C.) the words of paragraph 20(1)(gg) of the I.T.A. should not be construed strictly, but should be read in their ordinary and grammatical sense and in accordance with the intention of Parliament.

Essentially, it is Mattabi's position that the appropriate approach to the interpretation of paragraph 20(1)(gg) of the I.T.A., specifically subparagraph 20(1)(gg)(ii), is one which has regard to the practical commercial realities of the essential nature of the reagents to the production of the concentrates and which facilitates the relief from inflation intended by Parliament. Moreover, it is clear from the evidence that the production of copper, lead and zinc concentrates could not be achieved in any commercially feasible manner without reagents. As such, a broader approach to the interpretation of paragraph 20(1)(gg) of the I.T.A. is justified and therefore reagents can be said to come within the provisions of paragraph 20(1)(gg) of the I.T.A.

Crown's Submission

Counsel for the Crown commences her submissions by noting that paragraph 20(1)(gg) of the I.T.A. was not a normal deduction in computing profit for tax or accounting purposes. The section was brought into the I.T.A. in 1977 under particular circumstances prevailing at the time. As such, it has a limited scope and is available only after certain conditions are fulfilled, namely, where the tangible property in the taxpayer's inventory is in respect of the business and is held by the taxpayer for sale or for the purpose of being processed, fabricated, incorporated into, attached to or otherwise converted into or used in the packaging of property for sale in the ordinary course of business.

It is the Crown's submission that when dealing with paragraph 20(1)(gg) one must first identify inventory for the taxpayer's business and then identify the property in that inventory that meets the particular conditions set out in subparagraph 20(1)(gg)(ii) of the I.T.A. In other words, what the subsection does is limit the type of inventory that is subject to the inventory allowance.

The Crown views the issue before the Court in the following terms: "to what types of inventory does subparagraph 20(1)(gg)(ii) limit the deduction?"

Counsel for the Crown dealt with the question of what amounts to inventory for tax purposes and noted that the accounting definition of inventory, which is in effect the tax definition, includes a much broader category of profits than that referred to in paragraph 20(1)(gg) of the I.T.A. Inventory is defined as:

. . . items of tangible property which are held for sale in the ordinary course of business and are in the process of production for such sale or are currently consumed in the production of goods or services to be available for sale”

(pages 134 & 135, Transcript — B.J. Arnold, Canadian Tax Foundation, Toronto, 1983, p. 303)

The Crown submits that paragraph 20(1)(gg) encompasses only the first two categories of inventory, but does not include the third category, namely property currently consumed in the production of goods available for sale. Reagents are properly described in the third category, as they are costs which represent property that was consumed in the production of the final product, concentrate. They (reagents) do not fit within the provisions of paragraph 20(1)(gg) of the I.T.A. and therefore do not qualify for the deduction in the same way that advertising, spare parts and other supplies are considered inventory for income tax purposes that qualifies for the inventory allowance. The Crown further submits that paragraph 20(1)(gg) of the I.T.A. is aimed at the basic cost of the inventory and was not intended to be applied to all of the cost of inventory, otherwise the provision of paragraph 20(1 )(gg) would have contained wording such as "that tangible property described in the taxpayer's inventory".

The Crown maintains that the focus of the section of the I.T.A. is on the end product that is being offered to the customer (the saleable concentrate). This is based on the premise that the inclusion of the word "purpose" in the context of “for the purpose of being processed, fabricated . . .” focuses the effect of the section not on the production itself but on the end result of the production. Therefore, one must connect the end result the purpose with the treatment of the property, which is described in various ways.

It was also the Crown's contention that in order to properly read paragraph 20(1)(gg) of the I.T.A. one has to link the words “into property for sale" with the verbs processed and manufactured so that the property is "processed into or manufactured into property for sale in the ordinary course of business." According to the Crown, such a reading further supports the proposition that the focus of the section is on the end result of the production.

The Crown also submits that in order for inventory to qualify for the deduction, the property in the inventory must be held for the purposes of becoming the final product or it must be physically present in the final product and be intended to be present in the final product. According to the Crown, the fact that there is some residue of the reagent in the final product does not fufil the conditions because it is not there as property for sale, the quantity is minute and temporary and is not an ingredient in the final product. The reagents never become part of the economic mineral particles and cannot be considered one “united body" of concentrate.

Furthermore, the Crown noted that from a practical point of view, it is the grinding that liberates the mineral particles and the flotation step effects the separation of the economic minerals. Thus, the reagents are only a sorting mechanism and as a result of this sorting, a different form of particle is created. In addition, the commercial and practical reality is that the final product (the saleable concentrate) has the value and is what the purchaser is buying, the reagent is of no consequence to the purchaser.

Therefore, the Crown's position is that in order to quality for the paragraph 20(1)(gg) deduction, the inventory must be of such a nature as to become property for sale or be incorporated into property for sale and that reagents, although they are essential to the process, are consumed in the production of the final concentrate. Therefore, reagents do not become property for sale but are in the same class of inventory as fuel, supplies such as steel rods and balls, which are used to produce the concentrate but are not part of the concentrate.

Discussion

Section 20 of the I.T.A. deals with deductions permitted in computing income from business or property. Paragraph 20(1)(gg) provides for a special deduction in the computation of income for tax purposes. Therefore, a taxpayer could deduct, in computing his/her income an amount equal to three per cent of the cost amount of inventory held by the taxpayer at the beginning of the year for sale or for the purpose of being processed, fabricated, manufactured, incorporated into, attached to or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business.

As indicated by both counsel, the deduction was announced in the March 31, 1977 budget as a measure to provide some relief from the effects of inflation for taxpayers whose business required them to invest in and carry an inventory of tangible goods other than real property. The section providing for the inventory allowance was repealed in 1986.

To qualify for the deduction, the inventory on hand at the start of the fiscal period must be tangible property (other than real estate or an interest therein) and must meet two basic requirements:

1) it (the tangible property) must be described in the taxpayer's inventory in respect of the business;

and

2) it must be property held for sale or for the purpose of being processed, fabricated, manufactured, incorporated into, attached to or otherwise converted into or used in the packaging of, property for sale in the ordinary course of business.

A failure to establish all the elements of paragraph 20(1 )(gg) of the I.T.A. results in a disentitlement to the deduction, Canada v. Dresden Farm Equipment Ltd., [1989] 1 C.T.C. 99; 89 D.T.C. 5019 (F.C.A) at 5023.

There is no dispute that the reagents are described in Mattabi's inventory in respect of the business and that the saleable lead, copper and zinc concentrates are the "property for sale in the ordinary course of business". Further, I agree with the Crown's submission that the paragraph 20(1)(gg) deduction does not extend to all inventory held by a taxpayer simply because the taxpayer chooses to include it (property) in its inventory, but applies only to inventory which meets the conditions set out in paragraph 20(1)(gg) of the I.T.A.

The disagreement between the parties centres around the second requirement, specifically the wording of subparagraph 20(1 )(gg)(ii) and whether the reagents fall within its provisions. Mattabi submits that the language of the subsection focuses not on the end product, as counsel for the Crown suggests, but on the process of the making of the end product. According to Mattabi, one has to look at the function, purpose of the reagents and how they are used. I agree with Mattabi on this last point. However, in my opinion, the key to resolving the issue in the case, lies not with an in depth analysis of the language of the section, but with determining, at the outset, what exactly the reagents do.

As I have indicated, the concentrate is achieved by a method known as flotation. The chemical treatment involved in flotation is the treatment of the ore pulp with reagents which causes the air bubbles which have been injected into the pulp to carry the selected minerals to the top and form a stabilized froth (scum) which is skimmed off.

Essentially, what reagents do is create conditions favourable for the adherence of the desired minerals to air bubbles and hence the formation of mineral laden froth on the surface of the ore pulp (I gave a full and detailed discussion of the entire process in reviewing the evidence of Bruce Park Wallace). It must be noted that the bulk of the reagent used in the process remains in the tailings and only minute particles of reagent are present in the saleable concentrate. The reagent disappears in the final refining process. The absorption of the reagent has no effect on the economic mineral particle itself and is of no consequence to the purchaser of the concentrate.

I accept the Crown's submission that the words "processed", "fabricated" and "manufactured" should be linked with the word "into" so that the subsection reads as follows:

(ii) held by him

(a) for sale

(b) for the purpose of being

(A) processed into . . . property for sale

(B) fabricated into . . . property for sale

(C) manufactured into . . . property for sale

(D) incorporated into . . . property for sale in the ordinary course of business

One must also keep in mind that this section provided for a specific deduction from the business income of a taxpayer. The deduction is provided for, in part, in respect of certain property held in inventory that is used for the packaging of property for sale or that is attached to property for sale or is incorporated into property for sale. It does not appear to allow for property that might be used in the process without being actually part of the final product. If this were the case, items such as fuel and spare parts, which are inventory, would also be eligible for the deduction.

With respect to the term “incorporate”, Mattabi noted that the primary meaning given to the word is:

To combine or unite into one body or substance, to mix or blend thoroughly together (a number of things or one thing with another)

(Shorter Oxford Dictionary)

and

To combine ingredients into one consistent whole, to unite intimately (as into a new substance or presentation) . . . blend, combine or mingle thoroughly to form a homogenous product (mechanically incorporating the materials into a smooth uniform paste). . .

I cannot accept Mattabi's proposition that the reagents are held to be blended and combined with ground ore to produce concentrate. "Incorporated into" connotes mixing or uniting to form one substance. The reagents create the environment, which allows the segregation of the economic minerals. It is more a “sorting process" which separates rather than combines. Moreover, only minute traces of the reagents remain in the concentrate, and that is only temporary, as they eventually disappear.

Counsel for Mattabi noted the Supreme Court of Canada’s comments on the meaning of the term "manufacture" in the case of The Queen v. York Marble Tile and Terrazzo Ltd., supra. Spence, J. (writing for the Court) adopted the following definition of manufacture as providing the proper test in determining whether work done constitutes manufacture within the meaning of the Excise Tax Act:

. . . manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery .. . .

However, it should also be noted that "what is manufacture or production within the ordinary sense of those words is something that varies according to the context of the class of activity involved”, Consumers' Gas Co. et al. v. D./M.N.R., Customs and Excise, [1972] F.C. 1057; 72 D.T.C. 6431 (F.C.A.).

The evidence, as stated by Wallace, is that at the end of the entire process, from mine to concentrate, one has all these particles which are essentially the same as what was crushed and ground and put into the mill. The absorption of the reagent has no effect on the mineral particle itself, due to the fact that most of the reagents end up in the tailings, or would, if skimmed off with the froth, evaporate. Further, as the quantity of the reagent has no effect or value with regard to the concentrate and it seems that the concentrate was the same as what was mined but in a different form, namely separate zinc, lead and copper concentrate, I cannot accept that in the context of Mattabi's activity reagents are manufactured into property for sale.

Mattabi also argued that the meaning of the word "process" is broad enough to allow a finding that reagents are held for the purpose of being processed into property for sale.

In this regard, counsel for Mattabi referred to the case of Federal Farms Ltd. v. M.N.R., [1966] C.T.C. 62; 66 D.T.C. 5068 (Ex. Ct.), affirmed without written reasons, [1967] C.T.C. vii; 67 D.T.C. 5311 (S.C.C.). The issue in that case was whether the taxpayer was a manufacturing and processing corporation for the purposes of tax credit. The taxpayer was in the business of preparing vegetables for market and the question raised was whether this preparation actively constituted processing. The Court found that vegetables were processed by the taxpayer (company) within the ordinary and common meaning of the word "process". Cattanach, J. noted at page 66 (D.T.C. 5071) that:

It is the golden rule of interpretation that words used in a statute are used in their ordinary sense unless that would lead to some absurdity, or some repugnancy or inconsistency with the rest of the statute in which event the ordinary sense of the words used may be modified so as to avoid that absurdity or inconsistency, but no farther. I think it is sound to say that in the absence of a clear expression to the contrary words in the Income Tax Act should receive their ordinary meaning, but if it appears from the context in which they are used that they have a special technical meaning then they should be read with such meaning.

and continued at page 67 (D.T.C. 5071 and 5072):

While I am aware that dictionaries are not to be taken, in all instances, as authoritative exponents of the meaning of words as used in Acts of Parliament, nevertheless when words are used in their ordinary sense (as I have concluded they are in the section under which the present appeal is made) it is then appropriate that resort be had to recognized dictionaries for it is in these books that the ordinary meaning of a word is ordinarily to be found.

The word "process" is defined in the Shorter Oxford English Dictionary, Third Edition, as "To treat by a special process; e.g. to reproduce (a drawing, etc.) by a mechanical or photographic process".

In Webster's Third New International Dictionary published in 1964 the word "process" is defined as follows, "to subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result: put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process (- ing cattle by slaughtering them) (- ed milk by pasteurizing it) (- ing grain by milling) (- ing cotton by spinning):"

In Webster's Second New International Dictionary published in 1959 the following definition of the word "process" appears, "To subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form as live stock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.”

Other standard works consulted define "process" as "to treat, prepare, or handle by some special method".

Counsel for Mattabi also cited the case of Harvey C. Smith Drugs Ltd., supra, which dealt with manufacturing and processing in respect of a tax credit. The Tax Court of Canada recognized that the meaning of "processed" was quite broad and attempted to formulate some guidelines, namely:

(1) does the process change the product in its form, appearance or other characteristic?

and

(2) does the process make the product more marketable?

This test is not entirely appropriate for the interpretation of "processed into” in regards to paragraph 20(1)(gg) of the I.T.A., as there is "no product" before the mill operation is complete. Although I agree that the process (flotation) makes the economic mineral particles more marketable, i.e. in the form of copper, lead and zinc concentrate.

There is no doubt that flotation is a process, in the common, ordinary sense of the word, and that reagents are an essential ingredient in the process but I am not convinced by the evidence that reagents can be said to be "processed into" the property for sale, namely the final concentrates. As I indicated earlier, (I believe it bears repeating), the reagents create conditions favourable for the adherence of the desired minerals to air bubbles and hence the formation of mineral laden froth on the surface. Although the end product (the various concentrates) contain very minute traces of reagent, the quantity of the reagent has no value or effect with regard to the concentrate. In fact, because of the process the ore goes through to become concentrate, the reagents decompose and are refined out at a later stage by the purchasers of the product. Moreover, the essential ingredient of the concentrate is the mineral ore particle, the reagent has no effect on the economic mineral particle itself and is of no consequence to the purchaser of the concentrate.

Mattabi has also submitted that its reagents are within the meaning of paragraph 20(1)(gg) as described in paragraph 17 of Interpretation Bulletin IT-435R. In my opinion, paragraph 17 of the bulletin is not of much assistance in resolving the issue before me. Paragraph 17 provides that:

With regards to the requirements . . . the Department's position is that the inventory must be physically used or be an actual ingredient in the finished product, but it is not necessary that the inventory be identifiable in the finished product. An example of a raw material which is an essential ingredient of the finished product is a chemical used to make a product, where the chemical is not identifiable in the end product. Examples of materials which are not physically used or an actual ingredient in the finished product are supplies and spare parts used to maintain and repair machinery essential to production or a combustible material, such as coal, used to generate the energy necessary to operate the equipment.

There is no dispute that Interpretation Bulletins are not binding. The example given by the Department in the Bulletin is just that, an example. These are the most obvious examples of what would not qualify for the 20(1)(gg) deduction. I cannot (as correctly noted by the Crown) assume that what is not referred to in the Bulletin should quality for the deduction. I am required to look at the provisions of the paragraph in question.

Conclusion

For the reasons noted above and based on a common sense reading of paragraph 20(1)(gg) of the I.T.A, I am not convinced that Mattabi's inventory of reagents comes within the provisions of this paragraph and as such Mattabi is not entitled to the 20(1)(gg) deduction in respect of the reagents.

The present appeal is allowed and the matter is to be referred back to the Minister of National Revenue for reassessment in accordance with these reasons.

In accordance with subsection 178(2) of the I.T.A., the Minister shall pay to the defendant, Mattabi Mines Limited, all reasonable and proper costs.

Appeal allowed.