Taylor,
T.CJ.:—These
are
appeals
against
income
tax
assessments
for
the
years
1977
and
1978,
heard
in
Toronto,
Ontario,
on
December
11,
1986,
in
which
the
Minister
of
National
Revenue
dissallowed
a
deduction
claimed
under
paragraph
20(1)(gg)
of
the
Income
Tax
Act,
described
by
the
corporation
as
an
"inventory
allowance”,
based
on
the
valuation
of
the
reagents
in
"inventory"
at
the
relevant
time.
For
purposes
of
description,
I
will
call
the
item
upon
which
the
disputed
“inventory
allowance"
has
been
claimed
—
the
“reagent
raw
material
inventory".
There
was
no
dispute
between
the
parties
regarding
quantum,
only
a
difference
of
view
on
the
interpretation
of
paragraph
20(1)(gg).
This
proposition
of
the
appellant
was
contained
in
the
notice
of
appeal:
Statement
of
Facts
—
Ore
extracted
from
the
Mattabi
mine
is
processed
at
a
mill
owned
by
the
Appellant
and
also
located
at
Ignace.
The
purpose
of
the
mill
is
to
eliminate
some
of
the
waste
material
in
the
ore
so
that
the
resulting
product
will
contain
a
higher
percentage
of
mineral
content
by
weight
and
volume.
—
The
product
which
comes
from
the
mill
is
referred
to
as
"concentrate"
and
the
Appellant's
two
principal
concentrates
are
copper
concentrate
and
zinc
concentrate.
—
The
copper
concentrate
is
shipped
to
Noranda,
Quebec,
tor
smelting;
and
the
product
from
the
smelter
is
shipped
to
Montreal
for
refining.
The
zinc
concentrate
is
shipped
to
an
electrolytic
zinc
plant
at
Valley
Field,
(sic)
Quebec,
for
the
production
of
zinc
as
a
pure
metal.
None
of
the
smelting
or
refining
facilities
is
owned
by
the
Appellant.
—
Reagents
such
as
Copper
sulphate,
Xanthate
and
Minerec
are
added
to
the
ore
at
the
mill
and
are
an
essential
additive
for
the
processing
of
ore
into
concentrate.
It
would
not
be
possible
to
produce
the
concentrate
unless
reagents
were
added
to
the
ore.
—
Most
of
the
reagents
remain
with
the
waste
material
which
comes
from
the
mill
but
traces
of
certain
reagents
are
contained
in
the
concentrate
and
eliminated
only
in
the
smelting
or
refining.
—
When
computing
its
income
for
the
1978
taxation
year,
the
Appellant
deducted
an
amount
in
respect
of
the
“3%
inventory
allowance"
permitted
by
paragraph
20(1)(gg)
of
the
Income
Tax
Act
for
its
raw
material
inventory
at
the
commencement
of
its
1978
taxation
year;
and
such
amount
included
the
sum
of
$3,773.00
representing
3%
of
the
cost
amount
to
the
Appellant
of
its
reagents
included
in
such
raw
material
inventory.
—
In
determining
for
tax
purposes
the
cost
of
the
Appellant's
inventory
of
unsold
mine
products
at
the
end
of
a
fiscal
period,
the
cost
of
reagents
used
in
the
processing
of
such
mine
products
is
included
in
the
"cost
amount"
of
such
inventory.
In
other
words,
having
processed
ore
and
produced
concentrates,
the
cost
of
reagents
consumed
in
the
processing
of
the
ore
appears
as
a
cost
of
the
resulting
inventory
of
concentrates
for
tax
purposes.
—
For
the
Appellant's
1978
taxation
year,
the
Appellant
claimed
and
the
Minister
of
National
Revenue
allowed
the
"3%
inventory
allowance”
on
the
cost
of
the
Appellant's
opening
inventory
of
concentrates
which,
as
described
in
paragraph
13
above,
included
the
cost
of
reagents
consumed
in
the
processing.
—
The
Appellant
states
that
reagents
which
it
owns
for
use
in
its
business
of
extracting
ore
and
processing
ore
into
concentrate
are
tangible
property
accurately
described
in
the
Appellant's
inventory
and
held
for
some
of
the
purposes
described
in
subparagraph
20(1)(gg)(ii)
of
the
Income
Tax
Act.
—
If
the
cost
of
reagents
consumed
in
the
processing
of
ore
is,
for
tax
purposes,
an
appropriate
component
of
the
cost
of
unsold
mine
products
(concentrates)
at
the
end
of
a
taxation
year,
then
the
Appellant
states
that
the
cost
of
its
reagents
not
yet
used
in
the
processing
of
ore
is,
for
tax
purposes,
an
appropriate
component
of
the
cost
of
its
raw
material
inventory
at
the
end
of
a
taxation
year.
For
the
Minister
the
situation
was:
—
The
Respondent
submits
that
the
reagents
were
not
held
by
the
Appellant
for
the
purpose
of
being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to
or
otherwise
converted
into
property
for
sale
in
the
ordinary
course
of
its
business.
Consequently,
the
Appellant
is
not
entitled
to
relief
under
paragraph
20(1)(gg)
of
the
Income
Tax
Act.
The
appellant's
witnesses
provided
to
the
Court
a
complete
and
detailed
review
of
the
“mining”
process
up
to
the
"concentrate"
stage
of
the
product.
This
information
generally
accorded
with
the
brief
summary
of
the
process
contained
in
the
notice
of
appeal.
Both
parties
were
in
agreement
that
there
was
on
hand
at
the
start
and
end
of
the
respective
fiscal
periods
something
which
might
be
described
as
an
inventory
of
reagents,
not
yet
used
for
the
production
of
the
concentrate.
According
to
the
assessment
though,
even
if
"inventory",
it
was
not
inventory
covered
by
paragraph
20(1)(gg)
of
the
Act
for
the
deduction
claimed.
In
his
argument
counsel
for
the
appellant
concentrated
on
two
points.
First,
in
his
interpretation
of
paragraph
20(1)(gg)
—
"the
inventoried
items
do
not
have
to
be
sold
themselves.
If
they
are
held
for
the
purpose
of
being
processed,
then
the
objective
is
achieved".
And
second,
—
"The
Minister
has
permitted
the
deduction
of
the
3
per
cent
allowance
with
respect
to
the
cost
of
those
reagents
which
were
used
in
processing
the
ground
ore
which
produced
the
concentrate
on
hand”.
I
would
further
note,
that
Mr.
Morgan
viewed
paragraph
20(1)(gg)
as
providing
the
"inventory
allowance”
for
a
wide
range
of
inventory,
restricted
only
by
the
specific
limitations
which
can
be
found
in
that
section,
particularly
"real
estate".
For
purposes
of
the
first
argument
(above)
counsel
parsed
the
critical
portion
of
the
tax
provisions
in
the
Act
as:
20.
(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
and
(h),
in
computing
a
taxpayer's
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(gg)
an
amount
in
respect
of
any
business
carried
on
by
the
taxpayer
in
the
year,
equal
to
that
portion
of
3%
of
the
cost
amount
to
the
taxpayer,
at
the
commencement
of
the
year,
of
the
tangible
property
(other
than
real
property
or
an
interest
therein
and
currency
that
is
held
for
other
than
its
numismatic
value)
that
was
(i)
described
in
the
taxpayer's
inventory
in
respect
of
the
business,
and
(ii)
held
by
him
for
sale
or
for
the
purposes
of
being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to,
or
otherwise
converted
into
or
used
in
the
packaging
of,
property
for
sale
in
the
ordinary
course
of
the
business
that
the
number
of
days
in
the
year
is
of
365;
An
outline
of
the
appellant's
argument
reads
as
follows:
Sec.
20
(1)
(gg)(ii)
held
by
him
for
sale
or
for
the
purposes
of
being
—
processed,
—
fabricated,
—
manufactured,
—
incorporated
into,
attached
to,
or
otherwise
converted
into
or
used
in
the
packaging
of,
property
for
sale
in
the
ordinary
course
of
the
business
.
.
.
Simply
put
counsel
separated
the
word
"processed"
from
the
latter
part
of
that
section
which
deals
with
"property
for
sale”.
On
the
exact
reverse
side
of
that
argument,
the
fact
that
some
(minute
traces)
of
the
reagents
remain
in
the
concentrate
when
sold
by
the
corporation
was
also
noted
by
counsel
as
some
indication
that
it
might
be
said
the
reagents
were
"processed"
into
"property
for
sale”
(the
concentrate;
or
that
because
of
the
chemical
reaction
involved
it
might
be
said
the
reagents
were
"attached
to
—
property
for
sale").
Counsel
did
not
concentrate
heavily
on
these
arguments,
but
I
shall
return
to
them
later.
For
the
Minister,
the
disjunction
of
the
term
"processed"
from
the
term
"property
for
sale”
was
not
acceptable
—
"Therefore,
in
summary,
my
submission
is
that
the
reagents
are
used
in
the
processing
of
the
ore
into
concentrates,
but
they
are
not
themselves
processed
into
the
concentrates".
Dealing
with
this
argument
first,
I
am
not
persuaded
that
the
distinctions
sought
in
paragraph
20(1)(gg)
by
counsel
for
the
appellant
are
to
be
found
there.
As
I
read
paragraph
20(1)(gg)
the
main
words
are
”.
.
.
converted
into
.
.
.
property
for
sale
.
.
.”.
Some
of
the
various
methods
by
which
inventory
—
and
clearly
one
is
speaking
of
"raw
material
inventory"
or
"partly
finished
inventory"
in
that
connection
—
is
transferred
into
property
for
sale,
are
indicated
earlier,
and
include
—
“being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to
or
otherwise
.
.
.”
(emphasis
mine).
I
do
not
agree
with
counsel
for
the
appellant
that
the
section
provides
for
"processed"
without
reference
to
“into
property
for
sale”.
But
as
I
see
it
the
Minister's
position
comes
down
to
an
interpretation
of
paragraph
20(1)(gg)
which
in
effect
regards
the
copper,
lead
or
zinc
as
being
already
in
the
mineral
ore,
and
that
the
reagents
are
simply
used
to
get
it
out
of
there.
(That
ignores
the
fact
that
the
"concentrate"
which
the
appellant
holds
for
sale,
is
not
"pure"
copper,
lead
or
zinc,
but
merely
a
product
in
which
there
is
a
greater
concentrate
of
the
desired
product,
and
less
of
the
undesired
materials,
certainly
less
rock.)
But,
in
principle,
there
does
not
appear
to
be
any
major
argument
between
the
parties
that
the
"concentrate",
in
itself
could
be,
and
should
be
considered
for
purposes
of
the
Act
as
a
"property
for
sale",
and
the
Court
has
not
looked
at
that
question.
What
remains
as
the
issue,
as
I
see
it,
is
whether
it
can
be
said
(as
is
the
ultimate
base
of
the
Minister's
position)
that
the
only
product
being
"processed
.
.
.
into
.
.
.
property
for
sale”
is
the
mineral
itself,
and
not
the
reagents.
The
Minister
must
view
the
reagents
(or
what
remains
of
them
and
in
whatever
chemical
or
physical
form)
as
part
of
the
"waste
material";
obviously
composed
mostly
of
pulverized
rock.
I
can
agree
that
this
is
not
"property
for
sale",
as
I
understand
the
mining
process.
But
I
do
not
think
that
"waste
material"
can
be
totally
disregarded
in
looking
at
the
question
before
the
Court,
although
little
comment
was
made
on
it
at
the
hearing.
Clearly
it
is
the
"concentrate"
to
which
the
entire
mining
and
milling
operation
including
the
management
and
administration
of
the
appellant
is
devoted.
And
it
is
quite
clear
that
a
major
component
of
the
"Cost
of
Production
of
Concentrate
Inventories"
is
that
of
“Mining
Costs".
A
descriptive
schedule
(below)
was
provided
to
the
Court
by
Mr.
George
Michael
Penna,
C.A.,
to
indicate
the
technical
procedures
by
which
the
corporation
accounted
for
costs,
etc.
in
its
operation.
It
was
a
complex
and
involved
process,
but
clearly
designed
for,
and
appropriate
to,
the
mining
industry.
Exhibit
(A-5)
Schedule
A
MATTABI
MINES
LIMITED
Analysis
of
Concentrate
Inventories
December
31,
1977
Analysis
of
Cost
of
Production
of
Concentrate
Inventories
Milling
Costs
(including
cost
of
reagents
utilized
amounting
to
approximately
$1,000,000)
$
5,077,094
Mining
Costs
7,288
,648
Plant
Services
1,425,572
Mining
Administration
2,777,348
Sub-Total
(Production
Costs
relating
to
inventory
value)
A
16,568,662
Loss
on
Disposal
of
Fixed
Assets
93,082
Total
Cost
of
Production
per
Financial
Statements
$16,661,744
|
Analysis
of
Concentrate
|
Copper
|
Lead
|
Zinc
Zinc
|
Total
Total
|
|
Production
|
Concentrate
Concentrate
Concentrate
Concentrate
|
|
1977
Concentrate
|
|
|
Produced
—
Tons
|
34,105
|
13,749
|
140,305
|
188,159
|
|
Percentage
of
Total
|
|
|
1977
Production
|
18.12%
|
7.31%
|
74.57%
|
100%
|
|
Cost
of
Concentrates
Produced
|
|
|
Amount
A
(above)
|
|
|
allocated
based
on
above
|
|
|
percentages
|
$3,002,242
|
$1,211,169
|
$12,355,251
|
$16,568,662
|
|
Add:
Freight
Costs
|
662,958
|
725,095
|
2,702,775
|
4,090,828
|
|
Cost
of
Concentrate
|
|
|
Produced
|
$3,665,200
$1,936,264
$15,058,026
$20,659,490
|
|
Cost
per
Ton
of
|
|
|
Concentrate
Produced
|
$
107.47
|
$
140.83
|
$
107.32
|
|
|
Year
End
Inventory
—
|
|
|
Tons
|
9,133
|
NIL
|
36,917
|
|
|
Cost
of
Year
End
|
|
|
Inventory
|
$
981,567
|
|
$
3,961,909
|
|
Schedule
B
MATTABI
MINES
LIMITED
Analysis
of
Inventory
Allowance
1978
Taxation
Year
Calculation
of
Cost
Amount
of
Opening
Inventory
December
31,
1977
Inventories:
|
Copper
Concentrate
|
$
981,567
|
|
Zinc
Concentrate
|
3,961,909
|
|
LME
Zinc
(purchased)
|
741,500
|
|
Copper
Sulphate
|
37,564
|
|
Total
Cost
Amount
|
$5,722,540
|
|
1978
Inventory
Allowance
granted
by
Revenue
Canada
|
|
|
3%
of
$5,722,540
|
$171,677
|
|
Reconciliation
of
Inventory
Allowance
claimed
by
Taxpayer
|
|
to
Amount
Allowed
by
Revenue
Canada
|
|
|
Inventory
allowance
claimed
on
schedule
T2S(1)
|
|
|
in
1978
T2
Income
Tax
Return:
|
|
|
—On
mine
production
|
$222,142
|
|
—
On
purchased
zinc
|
22,245
|
|
Total
claimed
by
taxpayer
|
244,387
|
Deduct:
Adjustment
to
claim
per
Form
T7W-C
attached
to
February
18,
1983
Notice
of
Reassessment
|
to
1978
taxation
year
|
72,710*
|
|
Amount
allowed
by
Revenue
Canada
|
$171,677*
|
*most
of
this
adjustment
relates
to
the
disallowance
of
"mine
stores"
inventory
claimed
by
the
taxpayer
in
the
T2
return
|
Inventory
Allowance
denied
by
Revenue
Canada
|
$
72,710
|
|
Inventory
Allowance
relating
to
unprocessed
reagents
|
3,773
|
|
Inventory
Allowance
relating
to
other
“mine
stores"
|
$
68,937
|
For
apparently
good
reasons,
(not
the
least
of
which
may
be
certain
definitions
and
restrictions
arising
out
of
the
Income
Tax
Act)
the
appellant
corporation
does
not
regard
the
costs
associated
with
mining
the
raw
"ore"
as
producing
a
"raw
material
inventory”,
and
I
hasten
to
add
that
I
do
not
question
this
procedure.
But
it
seems
to
me
that
nothing
could
be
more
of
a
"raw
material
inventory",
than
just
the
"ore"
—
except
that
this
is
the
mining
industry.
The
only
real
difference,
I
would
suggest,
between
the
"ore"
and
the
"reagents",
at
the
very
earliest
stages
of
the
milling
and
"extraction"
process
would
be
that
one
was
produced
from
the
mine,
the
other
purchased
outside.
It
is
simply
not
the
practice
of
the
appellant
corporation
to
apply
a
form
of
"inventory"
calculation
to
the
broken
ore
that
comes
from
the
mine.
Leaving
that
practice
aside
however,
it
is
the
“broken
ore"
and
the
"reagents"
that
are
mixed
together
(judiciously
and
according
to
formulae)
which
then
produces
—
the
"concentrate",
and
the
"tailings",
or
"waste
material”.
If
the
chemical
reaction
which
results
(by
which
the
various
selected
mineral
particles
are
either
floated
or
depressed),
is
not
a
"process"
then
I
am
not
sure
what
may
be
called
a
process,
and
if
it
is
not
a
"process",
then
it
is
not
too
difficult
to
invoke
the
use
of
the
term
"or
otherwise",
which
might
cover
almost
anything
as
long
as
there
was
end
"property
for
sale".
I
can
understand
the
position
of
the
Minister
—
that
the
reagents
are
"consumed"
in
the
process
of
extracting
the
concentrate,
and
therefore
are
a
cost
element,
not
unlike
wages
or
operating
costs
of
the
mill.
And
indeed
I
can
agree
that
the
appellant
corporation
could
so
consider
the
cost
of
the
reagents
in
that
way,
and
arguably
charge
off
as
a
cost
of
operation
for
a
year
the
expenditure
related
thereto
—
rather
than
"inventorying"
the
item
and
dealing
with
it
that
way.
But
that
is
not
what
the
appellant
chose
to
do
—
it
did
go
through
the
process
of
treating
the
reagents
as
inventory.
The
assessments
at
issue
in
this
appeal
are
relatively
small
—
1977,
$2,904,
and
1978,
$3,773
—
the
issue
is
simply
one
of
entitlement,
and
I
am
persuaded
that
in
the
circumstances
of
this
case,
the
claim
should
be
upheld.
I
am
further
strengthened
in
my
view
that
the
inventory
allowance
should
be
permitted
by
the
rather
unusual
words
included
in
paragraph
20(1)(gg)
”.
.
.
or
used
in
the
packaging
of
.
.
.”.
That
phrase
has
no
direct
application
in
this
appeal,
but
if
the
inventory
of
cardboard
boxes,
or
wrapping
paper,
for
example,
is
permitted
to
fall
under
the
provisions
of
paragraph
20(1)(gg),
then
I
fail
to
see
the
rationale
for
the
exclusion
of
so
vital
an
item
in
the
production
as
the
reagents
dealt
with
here.
I
would
say
a
final
word
on
the
second
argument
of
counsel
for
the
appellant,
—
the
Minister
had
permitted
the
allowance
on
the
reagents
in
the
concentrate
—
so
why
not
in
the
raw
materials?
I
regard
that
as
invalid,
and
I
would
not
have
been
persuaded
by
it.
The
"inventory
allowance”
permitted
in
the
concentrate
in
my
view,
has
no
relation
to
the
cost
of
the
"reagents"
used
in
the
process
of
obtaining
the
concentrate.
At
the
product
stage,
that
is
"property
for
sale",
the
component
elements
are
no
longer
identifiable
as
"inventory"
or
"raw
materials",
any
more
than
one
can
isolate
the
cost
of
labour
—
in
a
physical
sense.
I
need
say
no
more
about
that
as
I
see
it.
In
summary,
the
inventory
of
reagents
which
is
the
base
for
the
"inventory
allowance"
claimed
in
this
appeal,
falls
under
the
provisions
of
paragraph
20(1)(gg)
of
the
Act.
The
appellant
is
entitled
to
claim
amounts
of
$2,904
for
1977
and
$3,773
for
1978.
The
appeals
are
allowed
and
the
matter
referred
back
to
the
respondent
for
reconsideration
and
reassessment.
The
appellant
is
entitled
to
party
and
party
costs.
Appeals
allowed.
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