Date: 20000330
Docket: 98-687-IT-G
BETWEEN:
ATCON CONSTRUCTION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] This is an appeal with respect to the Appellant's 1991
taxation year.
[2] The Appellant Atcon Construction Ltd. ("Atcon")
operates a quarry at Belldune, New Brunswick. At the quarry,
Atcon processes the quarry rock into products that it sells to
its customers. The quarry operation is a 24-hour, 5 day a week
continuous operation that involves, depending on the particular
product specification; drilling, blasting, sorting, crushing,
screening, and if required additional sorting, crushing and
screening. The Atcon method of quarry operation is to employ a
tight pattern of drilling and blasting so that after the blast
some product is ready for sale whereas the balance of the rock is
crushed and screened until the ultimate desired size is achieved.
The products range from large size, Armour Stone, Rip Rap and
Shot Rock through to smaller sized 0-3", 0-1 ¼"
and 0- ¾" rock.[1] The products are continually tested to meet
customers standards and requirements.
THE REASSESSMENT
[3] On February 3, 1994, the Minister of National Revenue (the
"Minister") reassessed the Appellant for its 1991
taxation year. The Minister allowed $63,156 additional in capital
cost allowance but reduced the investment tax credit
carry-forward balance for purchases that were made in the 1989,
1990 and 1991 taxation years from $1,084,363 to $506,296. The
Appellant objected to the reassessment by Notice of Objection
dated May 4, 1994. Upon confirming the reassessment on December
8, 1997, the Minister revised the investment tax credit and
allowed only $179,668.
[4] Atcon asserts the quarry rock it produces is a
manufacturing and processing operation that is one continuous
process resulting in a final product and does not involve the
extraction of minerals from the rock. Atcon further asserts that
the equipment used in the process should be classified as
"certified property" as defined in subsection 127(9) of
the Income Tax Act (the "Act") as opposed
to "qualified property". By classifying the equipment
as "qualified property", that meant that the investment
tax credit rate was 15% instead of the 30% that would have been
allowed had the Minister classified the equipment as
"certified property". The Minister came to the
"qualified property" conclusion based on the finding
that the equipment was not part of a "facility" as
defined in section 2 of the Regional Development Incentives
Act (the "RDIA").
THE LEGISLATIVE PURPOSE AND SCHEME
[5] Subsection 127(5) of the Act reads as follows:
Investment tax credit. - There may be deducted from the
tax otherwise payable by a taxpayer under this Part for a
taxation year an amount not exceeding the least of
(a) his annual investment tax credit limit for the
year.
[6] Subsection 127(9) of the Act defines
"certified property", "investment tax
credit", "qualified property" and "specified
percentage" as follows:
"certified property" of a taxpayer means any
property (other than an approved project property) described in
paragraph (a) or (b) of the definition
"qualified property"
(a) that was acquired by the taxpayer
(i) after October 28, 1980 and
(A) before 1987, or
(B) before 1988 where the property is
(I) a building under construction before
1987,
(II) machinery and equipment ordered in
writing by the taxpayer before 1987,
(ii) after 1986 and before 1989, other than a property
included in subparagraph (i), or (iii) after 1988,
and that has not been used, or acquired for use or lease, for
any purpose whatever before it was acquired by him, and
(b) that is part of a facility as defined for the
purposes of the Regional Development Incentives Act and
was acquired primarily for use by the taxpayer in a prescribed
area.
[emphasis added]
...
"investment tax credit"...means the amount,
if any, by which the aggregate of
(a) the aggregate of all amounts each of which is the
specified percentage of
(i) the capital cost to him of a qualified property...or
certified property acquired by him in the year;
...
"qualified property" of a taxpayer
means...that is
...
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975,
that has not been used,...before it was acquired by the
taxpayer and that is
(c) to be used by him in Canada primarily for the purpose
of
(i) manufacturing or processing goods for sale or
lease,
...
"specified percentage" means
(a) in respect of a qualified property
...
(iii) acquired primarily for use in the Province of
Newfoundland, Prince Edward Island, Nova Scotia or New Brunswick
or the Gaspé Peninsula,
...
(B) after 1988, 15%,
(d) in respect of certified property
...
(iii) in any other case, 30%.
[7] The purpose of the RDIA is to promote economic
growth. The RDIA provides for development incentives for
businesses in the manufacturing sector but does not provide the
same for businesses in the resource sector.
[8] The preamble of the RDIA reads as follows:
An Act to provide incentives for the development of productive
employment opportunities in regions of Canada determined to
require special measures to facilitate economic expansion and
social adjustment.
[9] Section 2 of the RDIA defines "facility"
as such:
"facility" means the structures, machinery
and equipment that constitute the necessary components of a
manufacturing or processing operation, other than an
initial processing operation in a resource-based
industry.
[emphasis added]
[10] Section 15 of the RDIA says:
The Governor in Council may make regulations
(a) defining for the purposes of this Act the
expressions "manufacturing or processing operation",
"initial processing operation", "resource-based
industry" and "commercial operation".
[11] Subsection 2(2) of the Regulations Respecting Regional
Development Incentives defines "initial processing
operation" and "manufacturing or processing
operation" as follows:
"initial processing operation" means an
operation the product of which is a fuel or a material mainly
used for further processing or manufacturing,
...
"manufacturing or processing operation" means
an operation whereby any goods, products, commodities or wares
are created, fabricated, refined or made more marketable, but
does not include
...
(c) the extracting of minerals by any
method.
[emphasis added]
ANALYSIS
[12] The process in the making of the Appellant's drilled,
blasted, crushed and screened saleable rock products is an
operation whereby the commodities produced are made through the
process more valuable and marketable. The equipment[2] used from drilling
through to completed product are all components in the production
scheme. The production method adopted by the Appellant including
the patterned drilling and blasting the quarry rock through to
final screening of the rock product, I conclude, is integrated
continuous manufacturing or processing operation. The product in
the process is complete and not subject to further manufacturing
or processing. Therefore, the limitation of "initial
processing operation" is not applicable to the
Appellant's production method.
[13] I must now determine if this manufacturing and processing
operation falls within the exclusion (i.e.) is "extracting
of minerals by any method"?
[14] The expert evidence, was as expected, conflicting. The
Appellant's expert, Mr. F. Dwight Ball, a private sector
consulting geologist, concluded, "Minerals are not being
concentrated nor extracted, rock is simply being quarried and
turned directly into a suite of products". The
Respondent's expert, Dr. Donald A. Cranstone, a geologist,
employed in the public sector as a mineral economist, concluded
that "Atcon Construction Ltd. was engaged in
"extracting minerals" from its basalt-rock quarry near
Belledune, New Brunswick". Dr. Cranstone also, by way of
rebuttal, reviewed Mr. Ball's report and found in its
conclusion that "Atcon ... was not engaged in extracting
minerals from its Belledune quarry is insupportable".[3]
[15] He also states within a broad definition of mineral that
basalt rock is a mineral. He also concludes the basalt rock at
the Acton quarry is made up of many minerals including
plagioclase, pyroxene, quartz and opaque oxide.[4]
[16] The Respondent cited Judge Bowman in Coastal
Construction & Excavating Ltd. v. R., [1996] 3 C.T.C.
2845 where the taxpayer claimed that a centrifuge and two
excavators purchased by it for use in the reclamation of coal
waste at an abandoned mine site were "certified
property" under subsection 127(9) of the Act at
paragraph 22 the judge states:
I can think of no words that more aptly describe what the
appellant was doing than "the extracting of minerals".
The initial extraction took place when the ore and waste were
removed from the underground and separated, but no principle
of statutory construction and no application of the plain meaning
of the word "extracting" would justify my restricting
the meaning to the initial operation. The waste, when removed and
deposited on the ground, formed part of the terrain where it
stayed for years until the appellant embarked on the secondary
operation of extracting from the waste the coal that was not
extracted in the initial operation.
[emphasis added]
[17] Judge Bowman concluded the equipment was "qualified
property" because the taxpayer was clearly involved in the
extraction of minerals in both the primary and secondary
operations when the ore and waste were removed from the
underground and separated.
[18] In the instant case, the basalt rock was in fact removed
from the quarry face, however, the composite minerals of basalt
rock were not being extracted or separated in any sense.
[19] In Nova Scotia Sand and Gravel Limited v. The
Queen, 80 DTC 6298 (F.C.A.), the Court interpreted the
definition "producing industrial minerals" as found in
paragraph 125.1 (3)(b) of the Act. The Court stated
at page 6301:
... it was not intended by the use of the expression
"producing industrial minerals" to include the
processing of industrial minerals to produce specialized
industrial mineral products of the kind produced by the
appellant's processing operations.
[20] The Court also stated at page 6300:
... it is noticeable that what is excluded by items (i)
farming and fishing, (ii) logging, (iv) operating an oil or gas
well and (v) extracting minerals from a mineral resource, if they
are to be considered as manufacturing or processing operations at
all, are at any rate essentially operations for the production of
raw or resource material.
[21] The Court therefore concluded the sand and gravel
operation was a manufacturing or processing operation and the
exclusion of "producing industrial minerals" was not
meant to include the processing of industrial minerals to produce
the sand and gravel products of Nova Scotia Sand and Gravel
Limited. It is also clear from the decision that a
distinction was made between the production of raw or resource
material as being excluded and the processing of industrial
minerals to produce mineral products which the Court found was
not excluded, that is, not extracting minerals from a mineral
resource.
[22] The Federal Court (Trial Division) has considered the
question in another context. In Double N Earth Movers Ltd. v.
Canada, [1998] F.C.J. No. 1033 (Q.L.), Justice Campbell
stated:
[para13] By definition, "mining" in s. 69(1)
concerns activity respecting "a mineral resource". In
the decision under appeal, however, even though gravel is a
non-mineral resource, the Minister found that the restoration
of land strip-mined for gravel is considered "mining"
for the purposes of the fuel tax rebate. For this finding to be
lawful, the Minister must be taken to concede that, in the
definition of "mining" in s. 69(1), the phrase
"the restoration of strip-mined land to a usable
condition" is to be read exclusive of the other provisions
of the definition.
[23] What the Appellant does with the quarry rock is to
process the rock with its minerals intact as it is originally
found on the quarry rock face to saleable products. I conclude
that quarry rock is composed of minerals but that minerals are
not extracted in any sense from the rock and that rock product is
simply sized.
[24] The operation is a manufacturing or processing operation
whereby quarry rock is processed through a continuous production
method from drilling to final screening. This process is not the
process of extracting minerals by any method, it is the
processing of rock by sizing to produce a useable final saleable
product of crushed rock.
[25] Thus the Appellant in the manufacturing or processing
operation does not extract minerals by any method.
CONCLUSION
[26] The Appellant's operation involves property that is
part of a facility therefore it is "certified
property".
DECISION
[27] The appeal is allowed and the assessment is referred back
to the Minister of National Revenue for reconsideration and
reassessment on the basis that the Appellant's list of
equipment as found in Exhibit R-2 is "certified
property" within the meaning of subsection 127(9) of the
Income Tax Act.
[28] Costs to the Appellant.
Signed at Ottawa, Canada, this 30th day of March
2000.
"D. Hamlyn"
J.T.C.C.
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