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Citation: 2004TCC750
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Date: 20041109
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Docket: 2002-2640(IT)G
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BETWEEN:
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COGEMA RESOURCES INC., (THE SUCCESSOR CORPORATION OF 3326110 CANADA LTD., FORMERLY
CORONA GRANDE EXPLORATION CORPORATION),
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
Docket: 2002-3762(IT)G
2002-4062(IT)G
BETWEEN:
COGEMA RESOURCES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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REASONS FOR JUDGMENT
Beaubier,J.
[1] These
appeals for the years 1994, 1995 and 1996 were heard together on common
evidence at Saskatoon, Saskatchewan on November 1, 2004. The Appellant called
its Senior Vice President and Financial Officer, Gerald Sherman, C.A. and read
in part of the examination for discovery of the Respondent's auditor in the
files, Patrick Robert Saint Pierre. Respondent's counsel filed various
documents without objection by the Appellant.
[2] At
the outset of the hearing the parties filed Exhibit AR-1 agreeing to judgment
on all except one issue. Those matters are determined accordingly. It reads:
ISSUES CONCEDED BY THE
RESPONDENT
2002-2640(IT)G
Cogema Resources Inc. (the
successor corporation of 3326110 Canada Ltd., formerly Corona Grande
Exploration) v. The Minister of National Revenue
1. With respect
to the 1994 taxation year of the Appellant, allow a deduction to the Cluff
Mining Partnership for the rent paid under the Current Surface Lease in the
amount of $528,179.25 as a properly deductible expense in 1994, resulting in a
decrease to the partnership income of the Appellants predecessor corporation,
Corona Grande Exploration Corporation, in the amount of $105,635.00.
2. With respect
to the 1995 taxation year of the Appellant, allow a deduction to the Cluff
Mining Partnership for the rent paid under the Current Surface Lease in the
amount of $528,179.25 as a properly deductible expense in 1995, resulting in a
decrease to the partnership income of the Appellants predecessor corporation,
Corona Grande Exploration Corporation, in the amount of $105,635.00.
3. With respect
to the 1996 taxation year of the Appellant, allow a deduction to the Cluff
Mining Partnership for the rent paid under the Current Surface Lease in the
amount of $504,300.25 as a properly deductible expense in 1996, resulting in a
decrease to the partnership income of the Appellants predecessor corporation,
Corona Grande Exploration Corporation, in the amount of $100,860.05.
2002-3762(IT)G
Cogema Resources Inc. v. The
Minister of National Revenue
1. With respect
to the 1994 taxation year of the Appellant, allow a deduction for additional
interest in the amount of $28,005.00 as a properly deductible expense in 1994.
2. With respect
to the 1994 taxation year of the Appellant allow a deduction for rent paid in
the amount of $528,179.00 as a properly deductible expense in 1994, resulting
in the decrease in partnership income of the Appellant in the amount of
$422,543.00.
3. With respect
to the 1995 taxation year of the Appellant, allow a deduction for interest in
the amount of $104,269.00 as a properly deductible expense in 1995.
4. With respect
to the 1995 taxation year of the Appellant, allow a deduction to the Cluff
Mining Partnership for rent paid in the amount of $528,179.00 as a properly
deductible expense in 1995, resulting in a decrease in the partnership income
of the Appellant in the amount of $422,543.00.
2002-4062(IT)G
Cogema Resources Inc. v.
The Minister of National Revenue
1. With respect
to the 1996 taxation year of the Appellant, allow a deduction for an interest
expense in the amount of $979,901.00.
2. With respect
to the 1996 taxation year of the Appellant, allow a deduction to the Cluff
Mining Partnership for rent paid in the amount of $504,300.00 as a properly
deductible expense in 1996, resulting in a decrease in the partnership income
of the Appellant in the amount of $403,440.00
[3] The
Appellant ("Cogema") mined uranium ore in Saskatchewan. It deducted a
resources surcharge which it paid respecting uranium yellowcake (U3 O8)
under The Corporation Capital Tax Act (Saskatchewan), S.S. 1979-80 c.
C-38.1 (the "Saskatchewan Act"). The central issue at the
hearing which remained in dispute is whether that surcharge was a tax paid in
relation to production in Canada of a mineral resource located in Canada and
whether its deduction is denied under paragraph 18(1)(m) of the Income
Tax Act.
[4] Subparagraph
18(1)(m)(v)(B) of the Income Tax Act for 1994 – 1996 reads:
18(1) In computing the
income of a taxpayer from a business or property no deduction shall be made in
respect of …
(m) Royalties, etc.
– any
amount (other than a prescribed amount) paid or payable by virtue of an
obligation imposed by statute or a contractual obligation substituted for an
obligation imposed by statute to
(i) Her Majesty
in right of Canada or a province,
(ii) an agent of
Her Majesty in right of Canada or a province, or
(iii) a
corporation, commission or association that is controlled by Her Majesty in
right of Canada or a province or by an agent of Her Majesty in right of Canada
or a province
as a royalty, tax (other than a tax
or portion of a tax that may reasonably be considered to be a municipal or
school tax), lease rental or bonus or as an amount, however described, that may
reasonably be regarded as being in lieu of any such amount, and that may
reasonably be regarded as being in relation to
(iv) the
acquisition, development or ownership of a Canadian resource property, or
(v) the production in Canada
of …
(B) metal,
minerals (other than iron or petroleum or related hydrocarbons) or coal from a
mineral resource in Canada to any stage that is not beyond the prime metal
stage or its equivalent, …
[5] The
deductions claimed by Cogema for surcharges paid under the Saskatchewan Act
were:
1994 $2,020,888
1995 $1,612,637
1996 $1,879,699
They were paid pursuant to section 13.1 of the Saskatchewan Act,
which in those years read in part:
13.1 In addition to any tax
payable pursuant to subsection 13(1), a resource corporation shall, with
respect to each of its fiscal years, pay a tax in an amount equal to the
positive difference between:
(a) the
aggregate of: …
(iii) if a fiscal year or
portion of a fiscal year commences on or after April 1, 1993, 3.6% of the
resource corporation's value of resource sales in that fiscal year or portion
of that fiscal year; and
(b) the tax
payable, if any, by the resource corporation pursuant to this Act determined in
accordance with subsection 13(1) for the corresponding fiscal year mentioned in
clause (a).
[6] The
surcharge was not paid at the time of production of the ore or of the
yellowcake. It was paid at the time of sale of that yellowcake. Two problems
were raised as to these sales.
The first was that in 1995 Cogema sold yellowcake that it had swapped and
received from Denison. Mr. Sherman "believed" that Denison's
yellowcake was not all mined in Saskatchewan. "Belief" is not
knowledge and "belief" is not enough to refute the Respondent's
assumptions that all of the ore in question was from the Cluff Lake mine in
Saskatchewan which was leased from Saskatchewan. Mr. Sherman's belief was
stated frankly and honestly.
[7] The
second problem raised was that section 13.1 of the Saskatchewan Act
levies the surcharge on resource sales, which at that time was taken by
Saskatchewan to mean the definition of "gross sales" in Part III of The
Crown Mineral Royalty Schedule, 1986, pursuant to The Mineral
Disposition Regulations 1986. It reads:
15(1)(n) "gross sales"
means the aggregate of the sales prices and all other amounts paid or payable
to or for the benefit of the royalty payer for uranium ore or uranium
concentrate produced from the Crown lease, and in computing gross sales the
rules set out in section 19 shall apply;
As an aside, for the purposes of the issue in dispute, sections 19 and 32
of the Regulations cause the surcharge on the swap to be levied at the
time that Cogema sells the swapped material, even if it was produced outside of
Canada. Failing those provisions, this Court would find the sale of the swapped
material to have occurred when Cogema transferred it to Denison. Therefore,
Regulations 19 and 32 postpone the levying of the surcharge.
[8] Paragraph
18(1)(m) of the Income Tax Act forbids a deduction of … an amount
paid … (to Saskatchewan) as a royalty, tax … that may reasonably be regarded as
being in relation to … (v) the production in Canada of … (B) … minerals ….
[9] The
evidence is that produced and inventoried ore or yellowcake is not subject to
the surcharge; rather, the surcharge is levied at its sale. For this reason,
the Appellant argues, in essence, that the surcharge is a sales tax and
therefore is deductible. To forbid the deduction of the surcharge, 18(1)(m)
should have referred to "the proceeds realized from the sale or
disposition of production."
[10] The Respondent's argument concedes that the surcharge is not levied on
the annual production as the yellowcake is produced by Cogema. Rather the
surcharge occurs when the conditions of section 13.1 of the Saskatchewan Act
apply. In essence, the value of production for surcharge purposes is established
at the time of sale as specified in the Saskatchewan Act.
[11] Respecting paragraph 18(1)(m) of the Income Tax Act,
Sharlow J.A., speaking for the Federal Court of Appeal, stated at paragraphs 20
to 25 inclusive of Mobil Oil Canada Ltd. v. R, 2001 DTC 5668:
[20] In my
view, Mobil's proposed definition incorrectly assumes that the word
"royalty" as used in paragraph 18(1)(m) is limited to its meaning in
the commercial context. It must be borne in mind that paragraph
18(1)(m) deals fundamentally with payments to the Crown. It is
therefore appropriate to recall that the word "royalty" in its
original sense refers to Crown prerogatives or Crown rights. That meaning of
"royalty" was applied in Attorney-General of Ontario v. Mercer (1883),
8 App. Cas. 767 (P.C.)
to the interpretation of section 109 of what is now the Constitution Act,
1867, which reads as follows:
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All Lands,
Mines, Minerals, and Royalties belonging to the several Provinces of Canada,
Nova Scotia, and New Brunswick at the Union, and all Sums then due or payable
for such Lands, Mines, Minerals, or Royalties, shall belong to the several
Provinces of Ontario, Quebec, Nova Scotia, and New Brunswick in which the same
are situate or arise, subject to any Trusts existing in respect thereof, and
to any Interest other than that of the Province in the same.
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Toutes les
terres, mines, minéraux et réserves royales appartenant aux différentes
provinces du Canada, de la Nouvelle-Écosse et du Nouveau-Brunswick lors de
l'union, et toutes les sommes d'argent alors dues ou payables pour ces
terres, mines, minéraux et réserves royales, appartiendront aux différentes
provinces d'Ontario, Québec, la Nouvelle-Écosse et le Nouveau-Brunswick, dans
lesquelles ils sont sis et situés, ou exigibles, restant toujours soumis aux
charges dont ils sont grevés, ainsi qu'à tous intérêts autres que ceux que
peut y avoir la province.
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[21]
The word "royalty" is still used in Canada to describe a payment that
is required by a provincial statute to be paid to the province as a share of
the production of a resource. Typically, in the case of a resource
that the province owns, there is a provincial statute that authorizes the
granting of a lease subject to the payment of royalties. The Saskatchewan Mineral
Resources Act, R.S.S. 1978, c. M-16 is an example of such a
statute. However, there is no authority that suggests that the word
"royalty" must be limited to amounts paid pursuant to such an arrangement. In
the context of payments to a province, the word "royalty" may
describe any share of resource production that is paid to the province in
connection with its interest in the resource.
[22]
Under the Road Allowances Crown Oil Act, Mobil had the right to sell its
entire oil production for the years under appeal, including the Province's
1.88% share, upon paying the Province an amount equal to 1% of the total value
of the production. In my view, that 1% payment is a royalty even though
it was the Road Allowance Crown Oil Act itself that created the
Province's 1.88% proprietary interest. I conclude, therefore, that
the payments in question are "royalties" within the meaning of
paragraph 18(1)(m) of the Income Tax Act.
Second condition: To what do the payments relate?
[23]
With respect to the second condition, it is necessary to consider only
subparagraph 18(1)(m)(v). In support of its position that the
payments are not within the scope of subparagraph 18(1)(m)(v), Mobil argues
that the payments represent the Province's net share of its 1.88% ownership in
the oil produced, and that Mobil had no rights in respect of the Crown's 1.88%
share.
[24]
I do not read subparagraph 18(1)(m)(v) as imposing any condition as to the
ownership of the oil with respect to which the payments were
made. In my view only two questions need be asked. The
first question is whether Mobil had the right to take or remove the oil from
the property. The answer to that question must be yes. Mobil owned
the leases that were the legal source of its right to take or remove the
oil. The fact that the production of the oil triggered certain
obligations under the Road Allowances Crown Oil Act did not derogate
from Mobil's right under the leases to take or remove the oil. The
second question is whether the payments may reasonably be considered to relate
to the exercise of Mobil's right to remove the oil from the ground. The answer
to that question must also be yes. Section 4 of the Road
Allowances Crown Oil Act expressly ties the exercise of that right to the
obligation to make the payments. It follows that the payments are
within the scope of subparagraph 18(1)(m)(v).
Conclusion
[25] The Trial Judge
correctly concluded that in computing Mobil's income for 1977, 1978, 1979 and
1980 under the Income Tax Act, paragraph 18(1)(m) prohibits the
deduction of the payments made to the Province of Saskatchewan pursuant to
section 4 of the Road Allowances Crown Oil Act. These appeals
should be dismissed with costs.
[12] Ultimately, the following question arises respecting the surcharge:
Would the surcharge be levied on the
Appellant if the yellowcake was not sold by the Appellant and instead, the
yellowcake was used by the Appellant to manufacture a product such as uranium
fuel rods which it then used itself?
[13] Under 15(1)(n) (see paragraph [7]) the answer is:
No.
There would be no sales prices … paid… to … the royalty payer for uranium
or uranium concentrate.
[14] The answer "No" would remain correct even if the uranium
fuel rods were not beyond the prime metal stage or its equivalent (subparagraph
18(1)(n)(v)(B)), because under the Saskatchewan Act and Regulations,
they must be sold for the surcharge to be levied.
[15] In other words, the second question answered by Sharlow, J.A. in
paragraph [24] of Mobil must be answered "No" because the
surcharge related to Cogema's actual sale of the mineral and not its right to
remove the mineral from the ground. The surcharge was a sales tax and was in
relation to the sale of minerals, not the production of minerals.
[16] The appeals are allowed and these matters are
referred back to the Minister of National Revenue for reconsideration and
reassessment pursuant to these Reasons.
[17] The Appellant is awarded its party-and-party costs, but only one set
of costs is to be taxed respecting the hearing.
Signed at Ottawa,
Canada this 9th day of November 2004.
Beaubier,
J.
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