ARQ v. Wesdome Gold Mines Ltd., 2018 QCCA 518 (Queb. C.A.)

A mining company (“McWatters”) operated its Kiena gold mine, whose primary facilities were situated at Lac de Montigny near Val-d’Or, until October 2002, when it put the mine on care and maintenance (having exhausted the reserves, although there were still measured and indicated resources), and put it up for sale. The Quebec taxpayer (“Wesdome”) acquired the mine in December 2003 (after McWattters had ceased exploration work on the property) in order to obtain access to previously identified targets at its (previously acquired) exploration property to the north through extending an access shaft in the Kiena property. Its exploration program was successful and, after several years, processing activities recommenced at the Kiena facilities.

ARQ assessed on the basis that Wesdome’s related expenditure did not qualify as Canadian exploration expense under s. 395(c) of the Taxation Act (essentially identical to ITA, s. 66.1(6) – Canadian exploration expense – (f)(vi)), as being “any expense that may reasonably be related to a mine in the mineral resource that has come into production in reasonable commercial quantities or to an actual or potential extension of such a mine.”

In confirming the finding of Godbout J below that Wesdome’s expenditures qualified as CEE, Levesque JCA first stated (at paras. 80-81, TaxInterpretations translation):

[T]he judge … correctly concluded that the provisions of section T.A. paragraph 395(c) did not require that the exploration expenses were to be incurred respecting a “new mine” to be eligible for tax credits.

… [I]f the legislator had wished the contrary, this could have been expressly provided in the provision. This was done elsewhere in T.A. paragraph 395(c.1), whose context also is Canadian exploration expenses.

After quoting a bilingual version of s. 395(c.1) (which was similar to an older version of CEE – (g),) he stated (at paras. 82-83, 85-87):

Following on this, in order for the exclusion in T.A. paragraph 395(c) to apply, there must be a concurrence between the time when the exploration expenses were incurred and the reaching of production in reasonable commercial quantities from the mine.

It therefore should be concluded that if a mine had already reached a level of commercial production in the past, but at the time when the expenses were incurred that level was no longer being achieved, the expenses would be eligible for the tax credit. …

On the evidence, the judge determined that at the time when the exploration expenses were incurred, the Kiena mine reserves were exhausted. This was recognition that the mine was not at a level of production in reasonable commercial quantities, when the expenses were incurred.

It is from this sole perspective that the criterion of financial return is relevant. If Wesdome had incurred exploration expenses in the Kiena mine when the mineral reserves were not exhausted, but instead were proven and probable, the conclusion of the judge would certainly have been different as he could have affirmed that the mine had reached a level of production in reasonable commercial quantities.

Furthermore, the fact that the Kiena mine was on “care and maintenance” on its acquisition by Wesdome in 2003 does not support an additional argument supporting the position of the appellant. It is true that the judge assimilated this concept to the fact that the Kiena mine was “in practice … considered as closed.” To the contrary, the fact that the mine was open, closed or on care and maintenance does not form part of the criteria provided in T.A. paragraph 395(c) for determining if exploration expenses are eligible for credit.

The ARQ reassessed the taxpayer for its 2006 and 2007 taxation years a few days after the taxpayer had been dissolved (on March 14, 2011) in connection with voluntary dissolution proceedings for the winding-up of the taxpayer into its wholly-owning parent. S. 306 of the Business Corporations Act (Quebec) (which did not apply to this type of dissolution proceeding) and s. 313 (which did) provided, respectively:

Despite its dissolution, a corporation remains a party to any judicial or administrative proceeding to which it was a party before its dissolution, and a proceeding may be brought against it within three years after its dissolution.

As of the dissolution of the corporation, its rights and obligations become those of the shareholder, and the shareholder becomes a party to any judicial or administrative proceeding to which the corporation was a party.

In reversing the finding of Godbout J below that each reassessment was invalid “as the Agency had not addressed such Notice of Assessment to the right legal entity,” Levesque JCA stated (at paras. 66-70, TaxInterpretations translation):

In this case, the question is not whether the notice of reassessment issued after the dissolution of the corporation was actionable by the sole shareholder by reason of the dissolution. The judge did not comment on the time when the tax debt arose [then, by footnote, citing Simard-Beaudry for the proposition that a tax debt arises as the taxable income is generated].

It also is not a question of determining if a procedure of an administrative nature had been commenced before the dissolution of Wesdome since the judge had concluded that an audit procedure was in progress at the time of its dissolution.

The question to which it is necessary to respond is whether the provision of creditor protection measures in BCA section 313 is limited solely to claims, recourse and administrative or judicial proceedings against the sole shareholder. I consider that this question must be responded to in the negative.

It is unsurprising the notice of assessment was sent to Wesdome. T.A. section 1008 is explicit: “the Minister shall send a notice of assessment to the person by whom the fiscal return was filed.”

The dissolution of Wesdome was effected on March 14, 2011. This did not have the effect of obliterating the tax debt of Wesdome and of annulling the debt. That debt was assumed in conformity with B.C.A. section 313 by the respondent, the sole shareholder of the corporation that had ceased to exist.

Godbout J below had found that the assessment for each the two years of a corporation ("Wesdome") was invalid “as the Agency had not addressed such Notice of Assessment to the right legal entity,” given that the Notice was issued in the name of Wesdome shortly after its dissolution in voluntary dissolution proceedings for its winding-up into its sole parent. Levesque JCA found that such assessments were not void on this ground (although, as noted above, they were nonetheless to be reversed on the substantive CEE grounds). S. 313 of the Business Corporations Act (Quebec) provided that “As of the dissolution of the corporation, its rights and obligations become those of the shareholder, and the shareholder becomes a party to any judicial or administrative proceeding to which the corporation was a party.” He stated (at para. 70):

The dissolution of Wesdome was effected on March 14, 2011. This did not have the effect of obliterating the tax debt of Wesdome and of annulling the debt. That debt was assumed in conformity with B.C.A. section 313 by the respondent, the sole shareholder of the corporation that had ceased to exist.

This did not directly answer the point of Godbout J that the assessments had been issued in the name of the wrong entity (the dissolved sub rather than the parent). However, Levesque JCA had earlier stated that “the judge had concluded that an audit procedure was in progress at the time of its dissolution” (emphasis his).