Oro Del Norte, S.A. v. Her Majesty the Queen, [1990] 2 CTC 67, 90 DTC 6373

Jerome, J.:—This motion for an order compelling the respondent (defendant) to produce certain documents and reattend to be examined on their contents, came on for hearing at Edmonton, Alberta on December 1, 1989. On January 1, 1990 I dismissed the motion for reasons given orally and indicated that these written reasons would follow.

For the purpose of this motion the relevant facts are as follows. In its income tax return for the 1979 taxation year the plaintiff included the amount of $18,256 in its cumulative Canadian exploration expenses. The amount allegedly represents tunnelling costs incurred on one of the plaintiff's mining resource properties called the Cardinal River Coal Underground Mine ("the CRC Underground Mine”). The plaintiff claims that since these costs were incurred for the purpose of bringing a mineral resource in Canada into production and were expenses incurred prior to the production of the resource in reasonable commercial quantities they fall within the definition of “Canadian exploration expense" in subparagraph 66.1(6)(a)(iii.l) of the Income Tax Act, R.S.C. 1952, c. 148, am. S.C. 1970-71-72, c. 63 as amended. The amount is, therefore, deductible from income under section 66 of the Act.

By notice of reassessment dated February 18, 1985 the defendant disallowed the inclusion of the $18,256 in the plaintiff's cumulative Canadian expenses and reclassified it as costs of acquisition of depreciable assets described in Class 12 of Schedule II of the Income Tax Regulations. In reassessing the plaintiff, the defendant relied upon the following assumptions of fact specified in paragraph 6 of the statement of defence:

(a) that the Plaintiff was involved in the open pit method of extraction of coal from a section of the syncline known as the Jewel Coal Seam in the Cardinal River Coal Surface Mine ("hereinafter referred to as "the CRC Surface Mine”) at all material times;

(b) that the CRC Surface Mine was a mine that had come into production of a mineral resource in reasonable commercial quantities by 1979;

(c) that in 1979, the Plaintiff incurred expenses in the amount of $18,256.00 for the purpose of developing an underground mine (hereinafter referred to as "the CRC Underground Mine") in the Jewel Coal Seam;

(d) that the CRC Underground Mine was located in the same orebody as the CRC Surface Mine;

(e) that the CRC Underground Mine was related to or was to be related to a potential or actual extension of the CRC Surface Mine;

(f) that the Plaintiff was aware of the existence of the deeper orebody (later constituting the CRC Underground Mine) from deep drilling from the surface prior to opening of the CRC Surface Mine;

(g) that the expenses incurred by the Plaintiff in developing the CRC Underground Mine were incurred for the purpose of developing a mine, shaft, main haulage way or similar underground work designed for the continuing use of the CRC Surface Mine or an extension thereof, sunk or constructed after the CRC Surface Mine came into production.

The defendant subsequently filed its list of documents pursuant to Federal Court Rule 448.

On April 18, 1988, Mr. Dirk Vanderkooi, basic files auditor of the Edmonton District Office of Revenue Canada, Taxation was examined for discovery, and undertook to advise counsel as to what facts and information the author of defendant's document 68 had in making the assertion that without the surface mine the underground mine was not as viable. The defendant responded to the undertaking as follows:

Mr. White (the author of Defendant's Document 55-68) cannot recall precisely what information was available to him at that time; however, in preparing his letter, he is certain he received the materials sent by Mr. Vanderkooi which contained the company's submissions in support of its position. He was also familiar with another, quite similar situation in respect of which a ruling had recently been requested and given. The subject statement and others were based on his experience with this recent ruling and on his 17 years experience in the field of mining taxation.

Mr. Vanderkooi was further examined for discovery on August 23, 1989 at which time he refused to disclose the identity of the company involved in "the other, quite similar situation" referred to in the response to undertaking noted above. Furthermore, Mr. Vanderkooi was questioned with regard to a letter from the Director General, Corporate Rulings Directorate of Revenue Canada, Taxation's Head Office to the Mineral Policy Branch Energy, Mines and Resources which is identified as defendant's document 75 and is Exhibit "A" to the affidavit of Mr. Ulrich. The relevant portion of that letter is as follows:

In the course of auditing the 1979-81 taxation years of the above companies, we have encountered three unrelated problems on which we request your advice. Attached are the Company's submissions setting out its position on each of the three situations.

1. The Cardinal River Underground Mine—New Mine Status

The attached submission from Luscar is in response to our contention that the underground mine is merely an extension of the existing open pit mine. It did not appear different from the five others which we have dealt with in the past, the most recent being the concerning which you advised us in your letter dated November 25, 1982. We used the reasons contained in that letter to advise our Edmonton District Office on the Cardinal River situation. The company has since requested we review this additional information and seek your advice.

Mr. Vanderkooi refused to identify the five other situations referred to and to produce any documents, including income tax returns, in the defendant's possession relevant to those situations.

By notice of motion filed September 1, 1989 the plaintiff seeks an order compelling the defendant to identify and produce all documents relevant to the five similar situations referred to in document 75 and the answer to the undertaking given on examination for discovery. Further, the plaintiff seeks an order compelling Mr. Vanderkooi to reattend to answer questions relating to the documents sought. Following the filing of this motion counsel for the defendant advised the mining companies referred to in documents 68 and 75 that the plaintiff in this action was seeking production of documents on their files. Counsel informed the Court that in effect only four companies are involved, two of which do not oppose production. The remaining two companies support the defendant's opposition to this motion. The actual written responses from these companies have been placed in a sealed envelope and attached to one of the affidavits filed in support of the defendant's position.

In argument, both counsel agreed that the issue in this case is whether the documents in question are relevant to the plaintiff's case, and therefore only made incidental reference to the confidentiality provisions in section 242 of the Income Tax Act.

The basic principle governing income tax appeals is succinctly stated by Heald, J. in Huron Steel Fabricators (London) Ltd. et al. v. M.N.R., [1972] C.T.C. 506; 72 D.T.C. 6426 (F.C.T.D.) at page 512 (D.T.C. 6430):

In income tax appeals, the onus is on the taxpayer to demolish the Minister’s assessments. In order to do this, he must demolish the assumptions of fact upon which the Minister’s assessments are based.

A taxpayer must therefore be permitted access to all documents which are relevant to or relied upon by the Minister of National Revenue in reassessing a return. Counsel for the defendant concedes that the broad test of relevancy expounded by McEachern, C.J. in Boxer and Boxer Holdings Ltd. v. Reesor et al., (1983) 43 B.C.L.R. 352; 35 C.P.C. 68, and adopted by Urie, J. in Everest & Jennings Canadian Ltd. v. Invacare Corporation, [1984] 1 F.C. 856 (F.C.A.) applies:

It seems to me that the clear right of the plaintiffs to have access to documents which may fairly lead them to a train of inquiry which may directly or indirectly advance their case or damage the defendant's case particularly on the crucial question of one party's version of the agreement being more probably correct than the other, entitles the plaintiffs to succeed on some parts of this application.

In order to determine whether the plaintiff has satisfied this relevancy test regard must be had to the essence of its appeal from the defendant's reassessment of the income tax return. In the simplest of terms the plaintiff's position is that the activities at the CRC Underground Mine fall within the definition of “Canadian Exploration Expense" in subparagraph 66.1(6)(a)(iii.l) of the Income

Tax Act:

66.1(6)(a) “Canadian exploration expense” of a taxpayer means any outlay or expense made or incurred after May 6, 1974 that is

(iii.l) any expense incurred by him after November 16, 1978 for the purpose of bringing a mineral resource in Canada into production and incurred prior to the commencement of production from the resource in reasonable commercial quantities, including

(A) clearing, removing overburden and stripping, and

(B) sinking a mine shaft, constructing an adit or other underground entry

The defendant's position on the other hand is that based on the assumptions of fact relating to the plaintiff's mining activities and knowledge at the time, the requirements of subparagraph 66.1(6)(a)(iii.l) are not met. I fail to see how documents pertaining to the activities of other mining companies whether similar to the plaintiffs or not, can in any way "lead the plaintiffs to a train of inquiry which may directly or indirectly advance their case or damage the defendant's case . . .". The Minister has an obligation to treat all similarly situated taxpayers in the same manner, but it does not follow that documents pertaining to a similarly situated taxpayer are relevant to any other taxpayer's reassessment.

In any event, the affidavits filed by the defendant satisfy me that the documents in question were not relied upon by the defendant in formulating the assumptions of fact and reassessment in this case. While working on the plaintiff's file, Mr. Vanderkooi, the basic files auditor at the Edmonton office of the Department of National Revenue made various findings and assumptions of fact. He subsequently requested advice from G. Russell White, a rulings officer with the Resource Industries Section of National Revenue. On reading the request Mr. White recalled a case in which a taxpayer had advanced a similar submission. He therefore removed a letter concerning that taxpayer (one of the documents sought by the plaintiff) from the file for the purpose of using it "as a guide to assist me in communicating to Mr. Vanderkooi the Department's preliminary position with respect to the matters which he raised.” (affidavit of G. Russell White, filed November 27, 1989). At no time did he review the other material contained in that taxpayer's file. Similarly, Mr. White reviewed the letter of November 25, 1982 containing a description of four additional Income Tax Rulings. He did not, however, make reference to any of those taxpayers' files. Furthermore, in his affidavit filed November 27, 1989 Mr. Vanderkooi affirms that:

4. The final decision to reassess the Plaintiff was taken in the Edmonton District Office on the basis of our findings and assumptions of fact and on the basis of the recommendations received from Head Office.

5. At no time in the course of my work on this file, before the commencement of the Plaintiffs action, did I see a copy of the November 25, 1982 letter referred to in document #75.

6. At no time did I review or consult any of the documents requested by the Plaintiff in paragraph 2 of its Notice of Motion.

In the cases cited to me by both counsel at the hearing of this matter, it was clearly established that the documents in issue were relied upon by the respective defendants in their assumptions of fact. In Huron Steel Fabricators (London) Ltd., supra, the defendant's representative admitted at his examination for discovery that the income tax return which the plaintiff sought to have produced was relied on by the defendant in its assumptions of fact. In AMP of Canada Ltd. v. M.N.R., 10 F.T.R. 114; [1987] 1 C.T.C. 256; 87 D.T.C. 5157, the defendant's representative admitted during his examination for discovery that he used the financial statements and tax returns in issue for comparative analysis which was subsequently used in the calculation of customs duty. I do not find that kind of use here.

Accordingly, on January 12, 1990, I dismissed the motion. Costs in the cause.

Appeal dismissed.