Citation: 2003TCC21
Date: 20030206
Docket: 2000-4067(IT)G
BETWEEN:
HUDSON BAY MINING AND SMELTING CO.,
LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.T.C.C.
ISSUES:
[1] The issue is
whether the Appellant was required by subparagraph
12(1)(x)(iv) of the Income Tax Act
("Act") to include in computing its income for
its 1993 taxation year the amount of $454,060 received from the
Government of the Province of Manitoba as a "new investment
credit" ("NIC") by virtue of the provisions of
The Mining Tax Act of Manitoba.
[2] The pertinent
part of paragraph 12(1)(x) reads as follows:
12(1) There shall be
included in computing the income of a taxpayer for a taxation
year as income from a business or property such of the following
amounts as are applicable:
...
(x) ...any
amount ... received by the taxpayer in the year, in the
course of earning income from a business or property, from
...
(ii) a
government, municipality or other public authority
where the amount can reasonably be considered
to have been received
(iii) as
an inducement, whether as a grant, subsidy, forgivable loan,
deduction from tax, allowance or any other form of inducement,
or
(iv) as a
reimbursement, contribution, allowance or as assistance, whether
as a grant, subsidy, forgivable loan, deduction from tax,
allowance or any other form of assistance, in respect of the cost
of property or in respect of an outlay or expense
FACTS:
[3] Counsel presented
an agreed statement of facts to the Court. The relevant facts
taken from it are as follows:
1. The
Appellant's principal business was exploring for minerals,
mining and the processing of mineral ores.
2.
Inspiration Resources Corporation ("IRC") was a
publicly traded company and was the controlling shareholder of
the Appellant.
3. The
Appellant wanted to explore and develop certain mineral claims
situated in Manitoba.
4. IRC
controlled several other Canadian exploration companies which had
mineral leases upon which they wished to have exploration work
conducted.
5. Prior
to 1993 IRC entered into "flow-through share"
arrangements with certain limited partnerships. The monies raised
pursuant to these agreements was used to fund exploration
programs upon, inter alia, mineral leases owned by the
Appellant. One of such Appellant's mineral claims was located
at Namew Lake, Manitoba. An exploration shaft was drilled with
the said flow-through share funds.
6. The
Appellant, an "operator" as defined in the Mining
Tax Act, is subject to provincial tax on net income from
mining and processing Manitoba minerals.
7. In
1993 the Manitoba Mining Tax Branch completed an audit of the
Appellant and determined
...that the expenditures related to the
sinking of the exploration shaft at Namew Lake constituted
"depreciable assets" for purposes of the Mining Tax
Act. Only expenditures which were considered to constitute
"depreciable" assets resulted in new investment
credits.
8.
Accordingly, the Manitoba Ministry of Finance granted the
Appellant approximately $637,357 (5% of the approximately
$12,747,149 spent on the shaft) of NIC's. It was agreed that
NIC's are deductible to the extent of 50 percent of mining
taxes payable in a taxation year and that unused balances could
be carried forward to be applied to subsequent taxation
years.
9. The
Appellant deducted a total of $454,060 of NIC's from mining
tax in its 1988, 1989 and 1990 taxation years.
10. The parties
agreed that mining taxes paid by the Appellant to the Province of
Manitoba are not deductible for purposes of the Income Tax
Act ("Act").
[4] Appellant's
counsel submitted a book of documents which Respondent's
counsel agreed were relevant. He also accepted the truth of their
contents.
[5] Gwendolyn Wendy
Barth ("Barth"), gave evidence on behalf of the
Appellant. She testified that the Appellant acted as the agent
for IRC in performing the aforesaid exploration work. She stated
that since the Appellant was acting as such agent, it did not
claim any Canadian exploration expense in computing its income
for income tax purposes. She stated further that the Appellant
claimed no deductions in respect of the work done on the Namew
Lake property with flow-through share proceeds. She testified
further that no "tax pools" were set up by the
Appellant respecting the expenditures and that no amount was
recorded for capital assets. She also said that the Appellant
deducted no portions of the Manitoba mining tax for federal
income tax purposes.
[6] Barth testified
that the Appellant had claimed exploration expenses for Manitoba
mining tax purposes. She stated further that although this was
disallowed on the Manitoba audit, the Manitoba Ministry of
Finance agreed that amounts expended for the exploration shaft at
Namew Lake should be regarded as "depreciable assets"
for purposes of the Mining Tax Act.
[7] Barth also stated
that the Appellant took the position that the $454,060 of NIC
that had been deducted and that related to the Namew Lake mine
shaft did not have to reduce any of the Appellant's tax pools
or assets.
[8] The Minister of
National Revenue ("Minister") reassessed the Appellant
for its 1993 taxation year by including the sum of $454,060,
equal to the amount deducted by the Appellant from its Manitoba
mining tax, in computing its income for that year pursuant to the
provisions of subparagraph 12(1)(x)(iv) of the
Act.
APPELLANT'S SUBMISSIONS:
[9] Appellant's
counsel submitted that paragraph 12(1)(x) does not apply
to the NIC's under the Manitoba Mining Tax Act. He
said that the section has no application in the situation where
although a monetary benefit is obtained, there is no acquisition
of a deductible asset or expense. Counsel's position was,
simply stated, that the "assistance" received from the
Manitoba Ministry of Finance by way of NIC's which is
deductible from Manitoba mining tax, was not received "in
respect of the cost of property" or in respect of an
"outlay or expense" as those terms are used in
subparagraph 12(1)(x)(iv) above. He submitted that those
words must be read in the context of the Income Tax Act.
He said that in that context the Appellant received no assistance
in respect of the cost of any property, none being acquired. He
said further that the Appellant received no assistance in respect
of an outlay or expense, which in the context of the Act
it had not been incurred, it acting as an agent only for IRC.
[10] Counsel submitted
further that paragraph 12(1)(x) does not apply to the
NIC's because the tax treatment of same is governed by the
specific provisions of paragraph 66.1(6)(a) and
(b). Paragraph 66.1(6)(a) defines "Canadian
exploration expense" to include a number of activities such
as geological, geophysical, or geochemical or drilling expense,
but states specifically that:
... any assistance that a taxpayer has
received or is entitled to receive ... in respect of or
related to his Canadian exploration expense shall not reduce the
amount of any of the expenses described ...
above. He then pointed out, by way of
distinction, that paragraph 66.1(6)(b), dealing with the
calculation of "cumulative Canadian exploration
expense"[1],
provides that any assistance is to be deducted to the extent that
it relates to Canadian exploration expenses incurred after 1980.
Specifically, the pertinent parts of the paragraph read as
follows:
"cumulative Canadian exploration
expense" of a taxpayer ... shall be the amount, if any,
by which the aggregate of ...
(i) ... all
Canadian exploration expenses made or incurred by him before that
time ...
exceeds the aggregate of all amounts each of
which is ...
(ix) any
assistance that he has received or is entitled to receive in
respect of any Canadian exploration expense incurred after 1980
or that can reasonably be related to Canadian exploration
activities after 1980, to the extent that the assistance has not
reduced his Canadian exploration expense by virtue of paragraph
9(g).
Counsel pointed out that paragraph
9(g) deals with oil or gas wells and has no application to
the mining industry. He submitted that the NIC's which the
Appellant received were "assistance" of the kind
contemplated by the foregoing paragraphs. He stated, however,
that since subparagraph 66.1(6)(a)(vii) deemed the
Appellant not to have incurred any of the exploration expense
funded by the flow-through share agreements, the Appellant had no
Canadian exploration expenses in respect of which it must deduct
the amount of the assistance.[2]
[11] Counsel then said:
The scheme of the Income Tax Act in these
provisions is to prevent a taxpayer from creating a deductible
expense pool and at the same time not decreasing the amount of
this tax pool by any assistance that it has received. In other
words, the tax policy is to prevent a taxpayer from being able to
deduct an amount as an expense, to the extent that the taxpayer
was reimbursed all or a portion of this expense or received some
kind of monetary benefit with respect to the expense.
Since the Appellant earned no Canadian
exploration expenses and acquired no depreciable assets for
purposes of the Income Tax Act, that is, had no tax deductions
available to it as the result of the exploration expenses funded
with the flow-through share agreements, any new investment
credits that it received from the Manitoba Government did not
have to decrease its cumulative Canadian exploration expense or
the capital cost of any assets. In other words, paragraph
66.1(6)(a) and (b) were working as they were meant to work and
nothing was being done by the Appellant to circumvent the tax
policy which these paragraphs embodied.
[12] Counsel referred to
West Coast Energy Inc. v. Her Majesty the Queen, [1991] 1
C.T.C. 471, a case dealing with damages received by the taxpayer
for breach of contract and negligence, and quoted Mr. Justice
Denault respecting paragraph 12(1)(x) as follows:
This section was implemented in response to
certain court cases, in particular The Queen v. Consumers'
Gas Co., [1987] 2 F.C. 69, [1987] 1 C.T.C. 79, 87 DTC 5008
(A.D.); affg [1986] 1 C.T.C. 380, 86 DTC 6132 in which the
taxpayer was in the business of distributing natural gas. The
taxpayer received certain payments from third parties in respect
of certain pipeline relocation carried out at the latters'
request. The taxpayer treated the reimbursements as capital
receipts which resulted in reducing the annual depreciation of
the assets and the taxpayer's income was higher than it would
have been had the reimbursements been taken into account. The
Federal Court of Appeal held that 1) the corporation was not
required to include that amount in its income and 2) it was also
not required to adjust its capital cost base. This decision
created an inequity to which Parliament addressed its attention.
This is evidenced by the budget speech for 1985:
It is a generally accepted commercial
principle that the cost of an asset or the amount of an expense
should be reduced by any reimbursement or similar payment
received that relates to the acquisition of the asset or the
incurring of the expense. For example, a commercial tenant who
was reimbursed by a landlord for part or all of the cost of
making leasehold improvements, would subtract the payment in
computing the cost of such property. A similar result would arise
with respect to the manufacturer's rebates.
Recent court decisions have indicated that
this principle may not apply for all income tax purposes.
The budget proposes to require that all
payments in the nature of reimbursements or inducements in
respect of the acquisition of an asset or the incurring of a
deductible expense be included in income for tax purposes unless
the recipient elects to reduce the cost basis of the related
property or the amount of related expense.
After lengthy analysis the Court determined
that the amount respecting damages was not a
"reimbursement" within the meaning of paragraph
12(1)(x).
[13] Appellant's
counsel, in summary, stated that the Appellant did not, from its
flow-through share activities, have any "property ...
outlay or expense" in respect of which it sought a
deduction. He said that the work done was a "nothing"
for the purposes of the Act, the Appellant having incurred
no Canadian exploration expense in the exploration funded by
flow-through shares. He stated further that the NIC's were
deducted from Manitoba mining taxes, an expense to the Appellant
which was not deductible under the Income Tax Act.
[14] Finally, counsel said
that paragraph 12(1)(x) was a provision of general
application which "would have to give way to a specific
provision which applied to the facts". This provision, he
said, is paragraph 66.1(6)(a) which deals with a
flow-through share contract and what is to be done with any
assistance that is received. He referred to the third edition of
Driedger on the Construction of Statutes by Ruth Sullivan
at page 186 as follows:
Implied exception (generalia specialibus
non derogant). Where two provisions are in conflict and one
of them deals specifically with the matter in question while the
other is of general application, the conflict may be avoided by
applying the specific provision to the exclusion of the more
general one. The specific prevails over the general; it does not
matter which was enacted first.
Counsel then submitted that:
The conflict which exists between
12(1)(x) and 66.1(6)(a) and (b) is that the
former provision requires the tax cost or expense, with respect
to which the assistance was received, be decreased. The latter
provision has already provided that there is no tax cost or
expense and has also provided that the assistance would not
decrease any tax cost or expense with respect to which the
assistance was not received.
Paragraph 12(1)(x) does not contain
any reference to paragraphs 66.1(6)(a) or (b), so
one cannot say that Parliament's intention was to give
Paragraph 12(1)(x) priority.
[15] Appellant's
counsel also referred to paragraph 12(1)(x.1) which
includes in income all amounts each of which is
a fuel tax rebate received in the year by the
taxpayer under subsection 68.4(3) of the Excise Tax Act
...
His point was that had subparagraph
12(1)(x)(iv) been intended to include amounts which were
benefits arising under a statute other than the Income Tax
Act, the legislators would likewise have used appropriate
inclusive language.
RESPONDENT'S SUBMISSIONS:
[16] Respondent's
counsel said that, in effect, Appellant's counsel wanted to
read subparagraph 12(1)(x)(iv) as having the word
"deductible" in front of "cost of property"
and "outlay or expense". He also stated that if the
Minister could not tax the Appellant, the amount of benefit
received by virtue of the NIC's would be a windfall.
[17] Respondent's
counsel also submitted that West Coast was distinguishable
on the facts in that it dealt only with an award of damages which
did not fall under paragraph 12(1)(x).
[18] Counsel referred to
Tioxide Canada Inc. v. The Queen, 93 DTC 1499 (T.C.C.) and
96 DTC 6296 (F.C.A.). This case dealt with a tax credit pursuant
to the Quebec Income Tax Act, such credit taking the form of a
reduction in Quebec income tax payable which it had incurred in
connection with scientific research. The Minister included that
amount in its income under paragraph 12(1)(x) of the
Act and also reduced, by the amount of the credit, the
balance in the taxpayer's "qualified expenditures"
account for purposes of computing its federal investment tax
credit. This Court dismissed Tioxide's appeal on the basis
that the tax credit was, "properly included in calculating
its income ... under paragraph 12(1)(x) of the
Income Tax Act".
ANALYSIS AND CONCLUSION:
[19] Counsel agreed that
the only matter in issue was whether the aforesaid sum of
$454,060 was includable in the Appellant's income by virtue
of subparagraph 12(1)(x)(iv). However, because of one
comment made by this Court, not being the ratio
decindendi, and because of the parties' apparent
reliance on subparagraph 12(1)(x)(iii), I shall later
refer to that comment.
[20] In Tioxide, one
of the facts stated in the Respondent's Reply to the Notice
of Appeal, relied upon by the Minister, was that:
... the tax credits were
incentive payments made to the appellant during the years
in question for research and development activities.
(italics added)
The Respondent advanced as a general
proposition in that Reply that,
... during the taxation years at issue
the Appellant received governmental assistance as an
inducement payment in the form of a tax deduction.
(italics added)
The Appellant argued that the tax credit it
received under the Quebec legislation could not be government
assistance within the meaning of paragraph 12(1)(x)
"because those credits were not received
from a government or other public authority"
but rather
"were granted by the Quebec
Taxation Act"
This Court determined that such amounts were
"received".
This Court then considered the question of
whether the benefit resulting from the provincial tax credit was
an inducement or assistance within the meaning of paragraph
12(1)(x) of the Act.
The Court said:
The purpose of paragraph 12(1)(x),
which was added in 1986, is to require - subject to certain
restrictions mentioned in the paragraph and certain exceptions
covered by Part LXXIII of the Income Tax Regulations - the
inclusion in a taxpayer's income from a business or property
of inducement payments received in any form whatsoever and the
value of certain benefits received in respect of the cost of a
property or of an expense as a reimbursement, contribution or
allowance or any form of assistance. ...
The paragraph is designed to reverse a trend
in the courts not to include certain types of payments in
calculating a taxpayer's income on the ground that the
amounts received were payments on capital account and also should
not be taken into account in calculating the capital cost of
property.
The Court then said:
In arguing that paragraph 12(1)(x)
required the inclusion of the amounts of tax credits granted to
it under the aforementioned Quebec legislation for those years,
when calculating the Appellant's income for the years at
issue, counsel for the Appellant relied mainly on subparagraph
12(1)(x)(iii). I, for one, am of the opinion that
subparagraph 12(1)(x)(iv) applies equally well to the benefit
received by the Appellant in the circumstances of the instant
case.[3]
(italics added)
The Court went on, without specifying a
subparagraph, to conclude that the tax credit amounts from which
the Appellant benefited were properly included in calculating its
income under paragraph 12(1)(x) of the Act.
[21] I do not find this
decision of assistance to the Respondent. Submissions respecting
paragraph 12(1)(x) in that case appear to have been based
solely upon the wording of subparagraph (iii) which required the
amount so received[4] to be some form of inducement. It will be
recalled that under subparagraph (iv) the NIC, in order to be
included in income, must be an amount received from a government
where the amount can reasonably be considered to have been
received in respect of the cost of property or in respect of
an outlay or expense.
(italics added)
[22] It is clear that the
Appellant was acting as an agent for IRC in a "flow-through
share arrangement" and that it therefore had no
"Canadian exploration expense" and, accordingly, no
"cumulative Canadian exploration expense" by virtue of
the exploration work conducted by it. It is also clear that the
"assistance" received by way of NIC's was not
received "in respect of the cost of property" and was
not in respect of "an outlay or expense". It made no
outlay and incurred no expense in the context of the Act,
having acted only as an agent for IRC.
[23] This appeal would
succeed on that basis alone. However, Appellant's counsel
added that the "cumulative Canadian exploration
expense" of a taxpayer means all Canadian exploration
expenses made or incurred minus the amount of any
assistance which the Appellant has received or is entitled to
receive in respect of any Canadian exploration expense. His point
was, as set out above, that paragraph 12(1)(x) was a
provision of general application while the Act
specifically provided for the treatment of "any
assistance" in respect of Canadian exploration expense. I
agree with counsel's submission that the specific provision
would apply if the exploratory work expenditures were Canadian
exploration expenses of the Appellant. They were not. This is
consistent with and an example of the Driedger statement that the
"specific prevails over the general".
[24] The submission of
Respondent's counsel that if not taxed, the amount of the
benefit would be a windfall seems to presuppose that every
receipt must be taxable or taken into account somehow in the
determination of taxability. That submission simply cannot
succeed.
[25] This Court, in
Tioxide, after hearing the Appellant's submissions
respecting subparagraph 12(1)(x)(iii), said, without
reasons,
... that subparagraph
12(1)(x)(iv) applies equally well to the benefit received
...
However, it appears not to have had the
benefit of any submission on that subparagraph, the Appellant
having relied mainly on its argument that subparagraph
12(1)(x)(iii) did not apply. The tax credit appears
clearly to have been an "inducement" as that word in
used in subparagraph 12(1)(x)(iii). In the absence of any
submission respecting subparagraph 12(1)(x)(iv) there is
no judicial comment on that provision The circumstances,
including pertinent legislative provisions, being markedly
different in the instant case, the appeal, for the above
reasons, is allowed with costs.
Signed at Ottawa, Canada this 6th day of
February, 2003.
J.T.C.C.
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