Date: 20010717
Docket: 2000-1497-IT-G
BETWEEN:
SUNCOR ENERGY INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
[1]
The issue is whether the amount of $746,033
("expenditure') claimed by the Appellant in its 1990
taxation year for salary and employment benefits[1]:
(a)
was deductible in computing its profit pursuant to subsection
9(1) of the Income Tax Act ("Act") for
that year, or
(b)
should be treated as an addition to the undepreciated capital
cost, within the meaning of paragraph 13(21)(f) of the
Act, of assets described in classes 41(b) and
10(g) of Schedule II of the Income Tax Regulations
("Regulations") on the basis that the Appellant's
tailings ponds and dykes resulting from such expenditure
constituted a "structure" eligible for capital cost
allowance ("CCA") under paragraph 20(1)(a) of
the Act.
FACTS:
[2]
Both the past and present tenses are used in describing
operations, the same processes having occurred in 1990 and since
that time.
[3]
The Appellant mines oil sands near Fort McMurray, Alberta. The
oil sands operation involves three broad functions, namely:
mining of the oil sands, extraction of bitumen[2] from the oil sands and the
upgrading of bitumen into lighter crude oil products.
[4]
Prior to the commencement of mining, the landscape typically
consisted of 15 to 45 feet of inorganic overburden and 150
to 250 feet of ore (oil sand) above a limestone base. In essence,
the mining phase involves the removal of muskeg and overburden to
gain access to the oil sand and the removal of oil sand in order
to extract bitumen therefrom. Accordingly, after an area is mined
there will be a hole or "pit" up to 300 feet deep.
Mammoth shovels load about 150,000 tons of oil sand per day into
huge trucks, the largest of which carry 240 tons. The ore is
transported to and crushed at a sizing plant. More than 6,000
tons of ore are then transported, by several kilometres of
conveyor belt, to the extraction plant. As hot water and steam
are added, the oil sand begins to separate into bitumen, sand and
clay. In the separation cells, the sand settles to the bottom and
the bitumen floats to the surface as a froth. The thick bitumen
is diluted with naphtha so it can be separated and pumped. The
diluted bitumen is put through centrifuges to remove remaining
minerals and water. The water, clay, sand and residual bitumen,
called fine tailings, are pumped into holding ponds. The clay and
sand settle to the bottom while the water is recycled back to the
extraction plant. Suncor is working with other industries and
government to reduce or eliminate the amount of water stored in
the ponds. Research to reclaim the ponds is ongoing so that
trees, shrubs and grass can be planted.
[5]
Coke drums separate the bitumen into coke and hydrocarbon
vapours. The coke is a high sulphur fuel similar to coal. Some of
it is used as a fuel source for the utilities plants. The rest is
stockpiled. The hydrocarbon vapours are sent to the fractionator
where they are separated into naphtha, kerosene, and gas oil. The
utilities plant provides the water, steam and electricity that
keep the entire operation in production. Sulphur, a by-product of
the operation, is sold for the purpose of making fertilizer.
[6]
The Appellant's operation results in the shipment of more
than 26 million barrels of oil products by pipeline to Edmonton
for distribution to markets across Canada and the United States
of America.
[7]
The extraction process, employing steam and hot water to separate
the bitumen from the oil sand results in large volumes of
"tailings" which are a mixture of water, sand and clay.
Accordingly, the result of the mining and extraction operations
is the continual generation of waste products: in particular,
overburden and tailings. The tailings must continuously be
discharged.
[8]
The Appellant operates under a commitment to restore its oil
sands leases and accumulated waste materials in an
environmentally acceptable manner. The Appellant's integrated
operations are designed to dispose of waste products in a manner
that will return the land to a condition similar to its
pre-mining state. In particular, the Appellant's systematic
disposal of tailings is integral to the reclamation of the
land.
[9]
The Suncor Mining Plan requires that substantially all of the
overburden and tailings be deposited back into the previously
mined-out areas of the pit. The first step in the proper disposal
of tailings and overburden is the placing of overburden in the
open pit so as to separate the disposal area from the area being
actively mined. As such, the overburden is used to construct a
dyke separating the disposal area from the active mining area.
When the dyke reaches a sufficient height (30 to 60 feet),
tailings are discharged on top of the dyke or directly into the
disposal area ("tailings pond"). Sand and clay will
settle out of the tailings that are discharged on top of the
dyke, thereby adding to the dyke. Respecting tailings discharged
into the pond, the sand forms a beach which helps to support the
dyke. In both cases, tailings are disposed of over other tailings
or overburden
[10] From the
time that tailings begin to be discharged into the dyke, the dyke
will be comprised mainly of tailings sand or a mixture of both
tailings sand and overburden, depending on the particular dyke.
The sand that settles out of the tailings as a result of the
continuous discharge of tailings onto the dyke is compacted into
"sand cells". Cells are used to retain and control the
placement of sand. The cells are continually compacted by
bulldozers during tailings discharge. The sand cells are packed
by bulldozer to force the water out and to condense the sand so
that the dyke remains stable. When bulldozers are not available
for compaction, cell activities are discontinued. When an area
being employed as a tailings pond disposal reaches the height
permitted, new overburden and tailings will be directed to a new
tailings disposal area.
[11] Each of
the above continuous activities was undertaken as part and parcel
of the ultimate reclamation process. As the lease continues to be
mined, additional tailings disposal areas are created to return
the overburden and tailings systematically to the previously
mined area.
[12] The
reclaimed land, restored to roughly the pre-mined elevation, will
consist of an equivalent volume of tailings and sand to supplant
the oil sand removed and will be capped with layers of overburden
and muskeg. The former tailings disposal areas, when filled in,
will not, upon reclamation, be distinguishable from the
surrounding lands. Tailing disposal areas and dykes are part of
the mining and extraction process and part of the reclamation of
the mined area. The end result will be a landscape that is
similar to the landscape that existed prior to mining.
[13] Over 99%
of the expenditures were salary costs and employee benefits of
the bulldozer drivers and other employees who compact the
tailings into the dykes. Counsel for both parties agreed that the
expenditures in issue were properly treated by the Appellant,
under generally accepted accounting principles, as operating
expenses for financial reporting purposes. The Appellant incurred
similar expenses in compacting tailings in the years both prior
to and subsequent to the 1990 taxation year. Such expenses are
continuing and recurring. They have been incurred by the
Appellant since the commencement of its oil sands business and
will continue to be incurred each year until the termination of
the oil sands operations at the Appellant's site.
[14] Douglas
Andrew Kennedy ("Kennedy"), Director of Mine
Engineering for the Appellant, testified that the waste materials
from the plant operation were sand, silt, clay and water. He said
that the Appellant had a large series of pumps and tailings lines
that take the waste material from the extraction plant and pump
them out for disposal, either on the tailings dykes directly or
into the tailings ponds. He said also that water which is on the
dyke runs off it into the pond. He stated that the objective with
respect to the majority of the waste was to dispose of it within
the mined-out area of the pit. He emphasized that the dykes were
made of overburden hauled from the mine and sand from the
extraction tailings. He said that about 20% to 40% of the
tailings sand is placed on the dykes and the balance is pumped
off the dyke and directly into the pond. He also said that the
sand on the dyke is compacted by bulldozers. He stated further
that the Appellant applied a great deal of engineering to ensure
that the dykes were stable and that the seepage of water in the
dyke was controlled. This was achieved by introducing impervious
barriers within the dyke, usually clay materials from the
Appellant's operation, that resisted the flow of water
through the dyke. He said that the Appellant used filters that
captured seepage within the dyke, the intent being to ensure that
the pile of waste material was stable. When asked if materials
other than what was extracted from the earth were used in the
dyke, his response was:
No. There really aren't. These are the waste materials ...
that came from either the mining process or the extraction
process.
Kennedy said that the extraction plant could only operate as
long as there was a place to put the tailings. He said that if
the tailings lines were interrupted, the extraction plant would
shut down immediately. Accordingly, he testified that if the
lines were operating, it was important to continue to build the
dykes up so that there would be a place to put waste materials
from the plant. He said that at any particular time there would
be enough capacity in the pond for two to six months'
tailings. He emphasized his point by saying that if the
extraction plant stopped working as a result of the compaction
stopping, the Appellant would not be able to continue to produce
the resource.
[15]
Kennedy said that as well as putting the overburden material on
the tailings dykes, sometimes it was put into simple dumps in a
stockpile area often contained within the mined-out pit area.
These waste dumps were also engineered according to the witness,
it being important to ensure that the waste material was stable
in the short term and acknowledging that it was creating a land
form for longer term reclamation.
[16] On
cross-examination, Kennedy said that the Appellant had a full
grouping of drawings and reports for each dyke. He said that the
tailings ponds with their perimeter dykes were built to contain
the tailings produced by mine extraction and that they were so
built with consideration for geo-technical requirements to ensure
stability. He stated that if they were not so built to ensure
stability they could fail with the consequent catastrophic
flooding of the mine pit. He also described coke drains which
collected seepage and drained water, the drains being connected
to pipes. Those pipes ran to the outside of the dyke to drain
water away. He also stated that the coke drains could be about
five feet thick and 100 feet long. Kennedy also described sand
filters whose purpose was to accommodate seepage. He discussed a
design summary and recommendations respecting stability, seepage
and monitoring and investigation. He said that it was prepared by
Hardy BBT, a consulting engineering company. For monitoring
purposes, standpipes were used to measure the level of water in
the deck. Instruments to measure water pressure were employed as
were slope indicators whose function was to measure water
movement. Kennedy said that the dykes could be as high as 300
feet. He also said that, by looking at them, one could not tell a
dyke from a waste dump.
[17] The
Respondent produced a witness, Dr. Peter Byrne
("Byrne"), a professional engineer who was qualified to
give opinion evidence in the field of geotechnical engineering
and, in particular, with respect to the questions of whether,
from a theoretical and a practical engineering perspective the
ponds and attendant dykes of the Appellant would be considered as
structures, and also, what engineered attributes of their design,
physical nature and purpose would constitute them as
structures.
[18] Byrne
stated that, from reading reports, his perception was that the
Appellant's main concern was about failure of the pond and
that they had to remove water from what was pumped up to the site
with the resultant compaction of the coarser part of the tailings
to make it strong. He stated that it was cheaper to use
overburden than the tailings so that the engineering was
"really about trying to make it safe at the minimum
cost". He said that Hardy Associates[3] were well recognized as geotechnical
engineers in the area of tailings disposal. He stated that the
dykes were well engineered because they took account of strength,
stability and leakage. He referred to the clay barriers used to
ensure that water would not leak out and, if so, that it was
collected in pipes and returned to the pond. He referred to the
operations as minimizing cost and said that the balance between
safety and the cost made good engineering. He said that the
drains were sometimes made of coke material and sometimes of
sand.
[19]
Byrne's report read in part:
The sands in the cells were mechanically compacted using
bulldozers to increase their strength and prevent failure by
liquefaction. In addition, filters and drains were installed to
control porewater pressures and provide additional strength. The
materials used for the filters and drains were not derived from
the tailings, but were specially selected, and included plastic
drainpipes. In addition, an impervious barrier or clayey core
zone was commonly added in the upper region of the dyke to
control seepage, an instrumentation to measure porewater
pressures was installed. These are all indications of an
engineered structure, and a concern for stability.
[20] In direct
examination, in response to a query as to why he said materials
were specially selected, Byrne stated that:
... they mentioned coke, and I presumed they had found that
the coke had the right properties for the drain. They also
mentioned using sand and I would think that they would have had
to process that sand to make it okay for a drain.
Byrne also states in his report that:
The dykes at the Suncor impoundment are about 200 to 300 ft in
height. As such, they are very large structures forming the
perimeter of an impounding structure that has been designed and
constructed to contain the bulk of the waste material or
tailings. The dykes themselves are largely comprised of a portion
of the tailings which has been compacted to increase their
strength. In addition, they contained filters and drains to
reduce porewater pressures that further increase strength and
stability. In their upper regions, the dykes also contain a
clayey core to reduce seepage. Thus, the tailings ponds and
attendant perimeter dykes are engineered structures which use a
portion of the tailings themselves to contain the bulk of the
tailings. Although this can be a very cost-efficient procedure,
it does require careful engineering design and planning to avoid
failures. The numerous reports by Hardy Associates, whose
engineers were and are well recognized in geotechnical
engineering and design of earth structures, attest to the fact
that these structures were carefully engineered from beginning to
end.
The fact that the tailings ponds with attendant perimeter
dykes were carefully engineered to contain the tailings allows
them to be considered as "structures". The key aspects
involved are:
1)
Control of seepage by seepage barriers.
2)
Compaction of the tailings in the cells of the retention dykes to
provide strength and stability and so prevent failure and release
of tailings.
3)
Reduction in porewater pressures by inclusion of drainage to
increase strength of the tailings in the dyke.
4)
Control of placement rates of the beach deposits to allow time
for drainage and consolidation and reduce the possibility of
liquefaction failure.
5)
Control of erosion by inclusion of filters which prevents erosion
failure and assures the drains in the dykes do not clog.
[21] On
cross-examination, Byrne said that the compaction activity is an
on-going activity to ensure that the strength remained. Byrne
also said that no compaction would be necessary if the material
(obviously tailings) "wasn't coming". He testified
that he had no opportunity or occasion to discuss what the word
"structure" meant in case law and had no idea of that.
He said that it was his view:
... if it's engineered for stability and seepage control,
that would make it a structure.
[22] Then
followed this exchange:
Q.
So if I find something that is engineered and that has seepage
control, you would say to me, "that's a
structure"?
A.
I suppose you might get into this thing about "if it was
very badly engineered, would it be a structure or not?"
Q.
No, let's assume it's very well engineered.
A.
Well, I'm a little nervous in here about the direction you
might be going. You might ... you might ... you might produce
some example that I would sort of say, "well, gee, I'm
not sure I'd call that a structure". I've mentioned
already that if it wasn't a reasonable size, perhaps I
wouldn't call it a structure.
Q.
Let's assume it's very large and it's very well
engineered and it's engineered for stability and it's
engineered for seepage control. If I were able to point to
something like that would you then say to me, "That is
definitely a structure"?
A.
That would be my tendency but I have a feeling that I'm kind
of walking into a trap in here.
[23] Byrne
then agreed with Appellant counsel's suggestion that since
the overburden was from the mine site there were no
"borrowed" materials used in this dyke. He also agreed
with counsel that a normal reference to component parts in a
building included cement, steel, wiring et cetera and that
the dyke was not really built of component parts in that sense.
He also agreed that it was made from the excavated earth.
[24] Byrne
sought to draw a "huge difference" between the tailings
pond and waste dumps indicating that a waste dump would result in
a gentle slope movement but a failure of a tailings dam
"could kill a lot of people". He then referred to the
tailing ponds as "major structures".
[25] Byrne
agreed with Appellant counsel's suggestion that the ultimate
aim of the manner of building the tailings disposal pond was
reclamation. He also agreed with counsel that tailings dams are
designed to be abandoned and not operated and further that the
Appellant was designing them with a view to abandoning them to
the land. Byrne then agreed with counsel that the tailings pond
would ultimately become part of the land and that the Appellant
would reclaim it and walk away from it. He also agreed with
counsel's suggestion that the tailings pond was unlike water
retention dams which are designed to be operated as such not
being designed to be abandoned like the tailings ponds. Further,
Byrne agreed with counsel that the pond was a staged conventional
embankment as opposed to a conventional dammed embankment, the
word "staged" being used to describe the step by step
building of it as needed. He further agreed with counsel's
suggestion that:
... what's going on here is the approach we're using
is essentially allowing us to build as much as we need to deposit
the current year's waste, and then to deposit next year's
waste, we're going to spend more money to deposit that
year's waste.
Byrne then agreed with Appellant's counsel that one of the
reasons there was water in the pond is because it was needed for
sedimentation and reclamation.
APPELLANT'S SUBMISSIONS
[26]
Appellant's counsel asserted that the expenditures did not
result in any advantage or benefit extending beyond the 1990
taxation year. He said that similar expenditures are incurred
each year and that the expenses incurred in one year cannot be
found to relate to revenues earned in any subsequent year. In
short, the Appellant's position was that the expenditures
were incurred to dispose of the waste generated by the mining
operations in 1990 and in that year only. Counsel also submitted
that the expenses were reclamation costs which the Appellant must
incur in order to return the land to its previous state.
[27] Counsel
also argued that the Appellant's activities did not result in
the acquisition of an asset. He said that:
Tailings ponds and dykes have no inherent value; they are
essentially waste dumps that are designed from day one to be
abandoned.
He said further that they were a liability, not an asset, and
that they were not included as assets on the Appellant's
balance sheet.
[28] Counsel
noted further, as agreed by Respondent's counsel, that the
deduction of the expenditures as operating expenses was made
according to generally accepted accounting principles
("GAAP").
RESPONDENT'S SUBMISSIONS
[29] Counsel
for the Respondent submitted that the expenditures were capital
in nature made to provide long term containment and storage for
tailings and water. Counsel submitted that the tailings ponds and
dykes should not be characterized differently from assets:
... that could be said to have a role in waste disposal such
as the bulldozers that are compacting the waste on the dykes
which, I would submit, would most obviously be viewed as a
capital asset.
[32]
Respondent's counsel, in discussing whether the tailings
ponds and dykes were structures said:
... if the characterization of these as structures under the
Regulations would seem to apply, and I would submit they clearly
apply, and so these are assets that are recognized in the Income
Tax Act that are being produced, this is very relevant to the
question of whether or not the purpose of the expenditure to
acquire those assets ought to be characterized as creating an
enduring benefit by virtue of the acquisition of that asset.
[31] Counsel
also urged the Court to adopt Byrne's testimony that the
tailings ponds and dykes were structures from an engineering
perspective in determining whether they were a structure for
purposes of the Act.
ANALYSIS AND CONCLUSION
[32] The
Appellant, relying upon GAAP, in computing its income for the
1990 taxation year, obviously regarded the expenditures as
current operating expenses, saying that they were properly so
deductible under subsection 9(1) of the Act which reads as
follows:
Subject to this Part, a taxpayer's income for a taxation
year from a business or property is his profit therefrom for the
year.
This would be normal procedure in computing income but for
paragraph 18(1)(a). It is not the starting point for
deductions. It simply prohibits the deduction of certain outlays
and expenses. It reads as follows:
In computing the income of a taxpayer from a business or
property no deduction shall be made in respect of ... an outlay
or expense except to the extent that it was made or incurred by
the taxpayer for the purpose of gaining or producing income from
the business or property;
The parties agree that the expenditures were made for the
purpose of gaining or producing income from a business. The
question then arises as to whether they were on account of income
or capital.
[35]
Paragraph 18(1)(b) states that no deduction shall be made
in respect of:
... an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of depreciation,
obsolescence or depletion except as expressly permitted by this
Part;
If the Minister is of the view that an outlay or expense is
not properly deductible in the computation of profit he must, for
purposes of paragraph 18(1)(b), determine that the amount
is capital in nature and must do so without resort to the
description of assets in Schedule II of the Regulations
("Schedule II"). Only then and only in certain
circumstances does paragraph 20(1)(a) invite examination
of the classes of assets described in Schedule II as qualifying
for capital cost allowance. That paragraph provides that
notwithstanding paragraphs 18(1)(a) and (b),
there may be deducted:
... such part of the capital cost to the taxpayer of property,
or such amount in respect of the capital cost to the taxpayer of
property, if any, as is allowed by regulation;
[34] The
Respondent made its assessment, denying the deduction of the
expenditures in the determination of profit, by combining Class
41(b) and Class 10(g) of Schedule II. The
pertinent part of Class 41(b) reads:
Property ... that is property ... that would otherwise
be included in ... Class 10
The pertinent part of Class 10(g) reads as follows:
Property not included in any other class that is ... a
building or other structure
with certain exceptions not applicable here.
[35]
Respecting the Appellant's position, there is no doubt that
it made the expenditures in relation to its production of income
for the 1990 year only. Similar expenditures would have to be
made in each of the subsequent taxation years. If the overburden
and waste products were not used in building the tailings ponds
and dykes no extraction operations could be performed, there
being no ability to dispose of those components. Clearly, similar
outlays or expenses had to be made in each subsequent year. Over
99% of the expenditures were salary costs and employee benefits
in relation to the compacting services provided by the bulldozer
operators. Those expenditures were approximately 0.25% of the
Appellant's total operating costs.
[36]
Although the tailings pond and dykes were the result of the
expenditures, those expenditures were made in respect of services
which were part of the Appellant's operation of its business.
As referred to in Johns-Manville Canada Inc. v. The Queen,
85 DTC 5373 at 5377, Dixon, J. in Hallstroms Pty. Ltd. v.
Federal Commissioner of Taxation (1946) 72 C.L.R. 634, 648,
in relation to the ascertainment of whether an expense is capital
or income said that the answer:
depends on what the expenditure is calculated to effect from a
practical and business point of view rather than upon the
juristic classification of the legal rights, if any, secured,
employed or exhausted in the process.
[37] In
B.C. Electric Railway Co. Ltd. v. M.N.R., 58 DTC 1022
(S.C.C.) Mr. Justice Abbott, at 1027 and 1028,
said:
Since the main purpose of every business undertaking is
presumably to make a profit, any expenditure made "for the
purpose of gaining or producing income" comes within the
terms of s. 12(1)(a)[4] whether it be classified as an income expense or as a
capital outlay.
Once it is determined that a particular expenditure is one
made for the purpose of gaining or producing income, in order to
compute income tax liability it must next be ascertained whether
such disbursement is an income expense or a capital outlay.
The principle underlying such a distinction is, of course,
that since for tax purposes income is determined on an annual
basis, an income expense is one incurred to earn the income of
the particular year in which it is made and should be allowed as
a deduction from gross income in that year. Most capital
outlays on the other hand may be amoritized or written off over a
period of years depending upon whether or not the asset in
respect of which the outlay is made is one coming within the
capital cost allowance regulations made under s. 11(1)(a)[5] of the Income Tax
Act.
(emphasis added)
In this case, the expenditures were incurred to earn the
income of 1990, being the year in which those expenditures were
made.
[38] In
Johns-Manville (supra) the company excavated ore
from an open pit mine. To accommodate safe and economic mining
the taxpayer maintained the pit walls at a certain slope. As the
excavations became deeper, in order to retain the appropriate
wall slope the Appellant was continuously purchasing land
adjoining the expanding pit. It deducted the cost of the land as
business expenses but the Minister disallowed that deduction on
the basis that they were capital expenditures. The Supreme Court
of Canada determined that the land costs were operating expenses.
The Court found that the expenditures were incurred bona
fide in the course of its regular day-to-day business
operation. At 5384 Estey J. said:
... Common sense dictated that these expenditures be made,
otherwise the taxpayer's operation would, of necessity, be
closed down. These expenditures were not part of a plan for the
assembly of assets. Nor did they have any semblance of a once and
for all acquisition. These expenditures were in no way connected
with the assembly of an ore body or a mining property which could
itself be developed independently of any ore body ...
[39] In
Canderel Limited v. Her Majesty the Queen, 98 DTC 6100
(S.C.C.) the Appellant deducted all tenant inducement payments
made by it during its 1996 year. The Minister disallowed
such deductions. The appeal was allowed. At 6107, Iacobucci J.
said:
... Generally speaking, the courts are free, in the absence of
contrary legislation or established rules of law, to assess the
taxpayer's computation of income in accordance with
well-accepted business principles.
At 6110 the learned justice, in summarizing relevant
principles, said:
The profit of a business for a taxation year is to be
determined by setting against the revenues from the business for
that year the expenses incurred in earning said income ...
In seeking to ascertain profit, the goal is to obtain an
accurate picture of the taxpayer's profit for the given
year.
Although the tailings ponds and dykes were of use to the
Appellant for disposal purposes, the services performed by the
bulldozer operators were absolutely part and parcel of, and
essential to, the mining of ore resulting in the production of
revenue.
[40] In
Denison Mines Limited v. M.N.R., 74 DTC 6525 (S.C.C.) the
appellant, for purposes of its uranium mining operations, drove
passageways into the ore body and extended them into rectangular
rooms where the ore was mined. All such passageways were driven
through the ore body. The value of the ore extracted from those
passageways exceeded the cost of opening them, stated to be in
excess of $21,000,000. In its 1961 return (the first year it was
subject to tax following the statutory three-year exemption) the
company sought to deduct $9,000,000 of this amount as capital
cost allowance. It contended that the amount spent on the
passageways was a capital expenditure, and that the
passageways were main haulageways designed and constructed for
continuing use after the mine came into production within the
meaning of the Act. The Minister disallowed the deduction.
The Supreme Court of Canada agreed with the decision of Jackett
C.J. of the Federal Court of Appeal, who said:
In considering that question, it must be emphasized that, as
far as appears from the pleadings or the evidence, no more money
was spent on extracting the ore the extraction of which resulted
in the haulageways than would have been spent if no long term
continuing use had been planned for them. ...
We are of the view that, even though the appellant planned his
extraction operations so as to leave it in the result with
"haulageways" that are of enduring benefit to its
business, the cost of such extraction operations is, in
accordance with ordinary business principles, the costs of
earning the profits made by selling the ore extracted from them.
If that is right, there was no cost, and therefore no
"capital cost", of acquiring the haulageways.
[41] The
Appellant's tailing ponds and dykes were useful to it only to
the extent of outlays or expenses in a given year in which
expenses were incurred so that the mining operation could
continue in that year.
[42] The
Appellant made lengthy submissions as to why the tailings pond
and dykes did not constitute a "structure" within the
meaning of the above quoted Regulations. He referred to a number
of authorities in this regard[6]. Respondent's counsel sought to draw
distinctions in some of the quoted cases and drew upon
Byrne's evidence in an attempt to persuade the Court that
Byrne's engineering view of the tailings ponds and dykes
constituting a structure should be adopted by the Court.
[43] I have
concluded that the expenditures made by the Appellant in its 1990
taxation year were properly deductible in computing its profit
within the meaning of section 9 of the Act. The
Appellant's activities can be described, in part, as moving
waste and arranging it to accommodate the arrival of more waste
in the most efficient and cost effective manner. No asset of
enduring benefit was created, the tailings ponds and dykes in
each year having been limited in capacity and usefulness by the
expenditures made on them in that year for that year only. It is,
accordingly, unnecessary for me, having reached the above
conclusion, to discuss Byrne's evidence and the authorities
and submissions of each counsel respecting "structure"
and to make a determination in that regard. Even if I concluded
that the tailings pond and dykes were a capital asset, it is my
impression that they cannot be described as a
"structure" within the meaning of the Regulations.
Inter alia it appears that the Respondent, having
difficulty with resisting the logic of the expenditures being on
income account, motored straight to the Regulations. As stated,
the Respondent cannot, by attempting to characterize a tailings
pond and dykes as a "structure", categorize them as a
capital asset for purposes of the Act. The attempt
so to do is implicit in Respondent's counsel's
submission set out above that the characterization
... as structures under the Regulations ... is very relevant
to the question of whether or not the purpose of the expenditure
to acquire those assets ought to be characterized as creating an
enduring benefit by virtue of the acquisition of that asset.
Driedger on the Construction of Statutes, 3rd
Edition at 246 says:
Where the provision to be interpreted appears in a regulation,
it is read in the context of both the regulation and the enabling
Act as a whole. ... Because regulations are a subordinate form of
legislation, usually made after the enabling Act has been passed,
they have limited value in interpreting provisions of the Act.[7]
[44] The
appeal is allowed with costs.
Signed at Ottawa, Canada this 18th day of July 2001
"R.D. Bell"
J.T.C.C.
COURT FILE
NO.:
2000-1497(IT)G
STYLE OF
CAUSE:
Suncor Energy Inc. and The Queen
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
May 16, 2001
REASONS FOR JUDGMENT BY:
The Honourable Judge R.D. Bell
DATE OF
JUDGMENT:
July 18, 2001
APPEARANCES:
Counsel for the
Appellant:
A. Meghji
Gerald A. Grenon
Counsel for the
Respondent:
William L. Softley
M.B. Taylor
COUNSEL OF RECORD:
For the
Appellant:
Name:
Gerald A. Grenon
Firm:
Donohue Ernst & Young
Calgary, Alberta
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-1497(IT)G
BETWEEN:
SUNCOR ENERGY INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 16, 2001 at Calgary,
Alberta, by
the Honourable Judge R.D. Bell
Appearances
Counsel for the Appellant:
A.
Meghji
Gerald A.
Grenon
Counsel for the
Respondent:
William L.
Softley
M.B.
Taylor
JUDGMENT
The
appeal from the reassessment made under the Income Tax Act
for the 1990 taxation year is allowed, with costs, and the
reassessment is referred to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada this 18th day of July 2001.
J.T.C.C.
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