R. v. International Nickel Co. of Canada, Ltd., [1976] 2 SCR 675

Supreme Court of Canada

R. v. International Nickel Co. of Canada, Ltd., [1976] 2 S.C.R. 675

Date: 1975-11-13

Her Majesty the Queen Appellant;

and

The International Nickel Company of Canada, Limited Respondent.

1975: March 24, 25, 26; 1975: November 13.

Present: Laskin C.J. and Judson, Ritchie, Beetz and de Grandpré JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Income tax—Depletion allowance—Research expenditures—Calculation of profit—Capital nature of long-term research expenses—Income Tax Act, R.S.C. 1952, c. 148, ss. 11(1)(j), 72—Income Tax Regulations (Can.), reg. 1201.

In calculating the depletion allowance in terms of regulation 1201 the minister sought to deduct from the profits on which the allowance fell to be calculated the sums of $4,363,280 for the year 1967 and $5,890,205 for the year 1968. These were the amounts expended on long-term scientific research in the years in question. The trial judge accepted that the scientific research expenditures were of a capital and not of an income nature, and were not deductible in computing profits under the rules developed over many years by the courts. The Court of Appeal affirmed the judgment at trial but for a different reason, namely, that profits are to be ascertained in the normal manner of calculating the difference between receipts attributable to production and the expenses of earning those receipts and that the research costs in question not having been incurred in the production of prime metal were not deductible by virtue of the language of reg. 1201.

Held: The appeal should be dismissed.

Regulation 1201 provides for a calculation of profit reasonably attributable to the particular activity and reg. 1201(4) enumerates what is to be deducted from such profit. The enumeration does not require deduction in that computation, of research expenses that are deductible in computing income by virtue of ss. 11(1)(j) and 72 of the Act. The precise formula adopted under statutory authority for the purpose of computing the depletion base does not permit the courts to read into it any unspecified deduction that might seem to be dictated by policy considerations.

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International Nickel Company of Canada Limited v. Minister of National Revenue, [1971] F.C. 213; Minister of National Revenue v. Imperial Oil Ltd., [1960] S.C.R. 735 referred to.

APPEAL from a judgment of the Federal Court of Appeal[1] dismissing an appeal from a judgment of Urie J.[2] at trial allowing an appeal from a reassessment of tax by the Minister. Appeal dismissed.

G.W. Ainslie, Q.C., and B.J. Wallace, for the appellant.

Stuart Thom, Q.C., and T.E. McDonnell, for the respondent.

The judgment of the Court was delivered by

JUDSON J.—This is an appeal from the judgment of the Federal Court of Appeal dismissing the Minister’s appeal from the judgment of Mr. Justice Urie, sitting at trial. The issue in the appeal is the method of computing the depletion allowance of The International Nickel Company of Canada, Limited, for the taxation years 1967 and 1968 under Reg. 1201(2) of the Income Tax Regulations. This regulation provides as follows:

1201. (2) Where a taxpayer operates one or more resources, the deduction allowed is 33⅓% of

(a) the aggregate of his profits for the taxation year reasonably attributable to the production of oil, gas, prime metal or industrial minerals from all of the resources operated by him,

minus

(b) the aggregate amount of the deduction provided by subsection (4).

The Minister wishes to deduct from the profits mentioned in this regulation the sum of $4,363,280 for the year 1967, and $5,890,205 for the year 1968. The company resists this deduction. The issue has been determined against the Minister in the Federal Court both at trial and on appeal. These two sums represent the amounts expended

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for long-term scientific research in the years in question. I should note here that we are not concerned with expenditures on scientific research relating to day-to-day mining and processing operations carried on in the company’s mines and processing plants. These expenditures, which are sometimes referred to in the evidence as “Quality Control”, are not included in the amounts involved in this appeal.

The Company advances two grounds in support of its position. In the words of its counsel in his opening remarks at trial:

(1) “scientific research expenditures incurred by it are of a capital and not of an income nature, and are not deductible in computing profits under the jurisprudential rules developed by the Courts over a period of many years in connection with the income tax.”

(2) “scientific research expenditures are not related to the production of prime metal, and thereby are not deductible by virtue of the language of Regulation 1201.”

The trial judge in the Federal Court accepted the first argument and ruled that the research expenses in question were of a capital nature, having been incurred to secure an asset or advantage for the enduring benefit of the trade. In doing so, he followed a former judgment of the Federal Court involving the same parties and the same issue: International Nickel Company of Canada Limited v. Minister of National Revenue[3].

The Federal Court of Appeal affirmed the judgment at trial but for different reasons. Accepting the second ground, it stated the principle in these words: (Jackett C.J., at p. 57)

What has to be determined under Regulation 1201(2) is the respondent’s profits for the 1967 taxation year ‘reasonably attributable to the production of… prime metal’. In my view, the correct approach to that question is to be found in Minister of National Revenue v.

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Imperial Oil Ltd., [1960] S.C.R. 735, per Judson J. at pages 744-45, where, dealing with an earlier version of Regulation 1201(2) (which did not differ in any material respect from the one now under consideration), he said, in effect, that the Regulation required, in relation to oil or gas wells, as a first step, that one ‘Determine the profits or losses of each producing well in the normal manner by ascertaining the difference between the receipts reasonably attributable to the production of oil or gas from the well and the expenses of earning those receipts’.

In this context, the Court of Appeal stated that profits are to be ascertained in the normal manner of calculating the difference between receipts attributable to production and the expenses of earning those receipts. It went on to state that the research dealt with in the appeal is not part of the operations of producing prime metal. To quote again from the reasons of Jackett C.J. at p. 59:

Such long time research is a long-term operation by the company which, in addition to any profits it may produce directly, is designed to ensure a successful enduring metal production business for the respondent in the future. As such, the costs, incurred are not expenses of the respondent’s production of prime metal.

I agree with the foregoing. That profits and income are not interchangeable words in the Act and Regulations is, of course, well established.

Research Expenditures are first dealt with in the Act in s. 11(1)(j), which permits the deduction in computing the income of a taxpayer for the taxation year of “such amount in respect of expenditures as is permitted by s. 72 or by s. 72A”. Our concern is with s. 72 which permits the deduction, first, of all expenditures of a current nature on scientific research made in Canada, and, second, with certain defined limits, expenditures of a capital nature for the same purpose.

Turning now to Reg. 1201, which deals with the depletion base, it provides, as the Federal Court of Appeal held, for a calculation of profit reasonably

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attributable to the particular activity. Then subs. (4) of Reg. 1201 enumerates what is to be deducted from the profit so calculated. I adopt the conclusion of the Federal Court of Appeal expressed in the following terms (p. 60):

Moreover, while that enumeration specifically singles out such amounts as capital cost allowance (depreciation) and interest on borrowed money for deduction from gross profit in computing the depletion base, it does not require deduction in that computation of the research expenses that are deductible in computing income by virtue of paragraph 11(1)(j) and section 72. In the face of such a very precise formula adopted under statutory authority for the specific purpose of computing the depletion base, I am of the view that it is not open to the Courts to read into the statutory formula any unspecified deduction that might seem to be dictated by policy considerations.

I cannot leave the subject without stating that I am substantially in accord with the trial judge that the research expenses in question here are of a capital nature.

I would affirm the judgment of the Federal Court of Appeal and dismiss this appeal with costs. It is unnecessary to consider the issue of res judicata which was argued before us and based on the 1971 case above referred to between the same parties.

Appeal dismissed with costs.

Solicitor for the appellant: D.S. Thorson, Ottawa.

Solicitors for the respondent: Osler, Hoskin & Harcourt, Toronto.