The Minister of Revenue v. Mattabi Mines Limited, [1984] CTC 566

Robins, JA:—This is an appeal by the Minister of Revenue (“the Minister”) from a judgment pronounced on December 8, 1982, which allowed an appeal by Mattabi Mines Limited (“Mattabi” or “the Company”) from a decision of the Minister made pursuant to the Corporations Tax Act, 1972 (“the Act”) confirming a reassessment of Mattabi’s liability for corporation tax for the 1974 taxation year. The facts are not in dispute and, in so far as they are material to this appeal, may be stated shortly.

Mattabi is a mining company which was incorporated in 1970 for the purpose of developing and bringing into production a zinc, copper and silver mine located in northwestern Ontario. The Company commenced its pre-production program in September 1970 and the mine came into production in reasonable commercial quantities on August 1, 1972.

In 1970, and for some years prior, the income derived from the operation of a new mine was exempt from taxation, both federally and provincially, for a period of 36 months from the day on which the mine came into production in reasonable commercial quantities. However, in the Spring of 1971, the federal government announced that this thirty-six month “tax holiday” would be terminated as of December 31, 1973. The provincial government followed suit and also ended the exempt income status of new mines on December 31, 1973, but did not publicly announce its intention to do so until April 1974, when the provincial Budget was brought down. Accordingly, the income derived from the operation of the Mattabi mine became fully taxable after December 31, 1973. The exemption the Company had previously enjoyed was provided for in paragraph 75(2)(a) of the Act, which read, in part, as follows:

75. (2) (a) . . . there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of thirty six months commencing with the day on which the mine came into production.

(b) In clause a,

(ii) “production” means production in reasonable commercial quantities.

In 1972 Mattabi’s net income from the operation of its mine was $7,377,779; and in 1973 its net income was $39,919,506. By virtue of subsection 75(2), this income, in its entirety, was exempt from corporation tax. In each of these years the Company declared its net income as being “nil” under both the Act and the Income Tax Act, Canada.

In 1974 Mattabi reported a taxable income of $24,906,6000. [sic] At the rate provided for under the Act, this would attract corporation tax of $2,988,806. That figure is undisputed. However, as against it, Mattabi claims to be entitled to deduct an investment tax credit in the amount of $736,962 for the 1974 taxation year. Whether it is legally entitled to that tax credit is the main bone of contention in this case.

Mattabi’s claim to the deduction is founded on section 106 of the Act. Under that section, which like subsection 75(2) no longer appears in the Act, a corporation was allowed a tax credit of five per cent of the cost of machinery and equipment acquired and used during a specified period for the purpose of earning income to be deducted from the tax otherwise payable by the corporation. More particularly, the relevant parts of the section provided that:

106. (1) There may be deducted from the tax otherwise payable under this Part for a fiscal year by a corporation an amount equal to 5 per cent of the cost of machinery and equipment acquired and used in that fiscal year bvy the corporation which machinery and equipment is acquired pursuant to an agreement entered into after the 26th day of April, 1971, and which shall be used by the corporation solely in Ontario prior to the 1st day of April, 1973, for the purpose of earning income.

(4) Notwithstanding subsection 3, where a corporation has a net loss, any amount which may be deducted under subsection 1 may be deducted in subsequent fiscal years to the extent that the deduction allowed under subsection 1 exceeds the tax otherwise payable by the corporation in the previous fiscal years and, except as herein provided, no deduction shall be allowed in any fiscal year of the corporation ending after the 31st day of March, 1974, except that with respect to the first fiscal year of the corporation ending after the 31st day of March, 1974 the amount which may be deducted from the tax otherwise payable for the fiscal year shall not exceed the portion of the tax otherwise payable for that fiscal year that the number of days in that fiscal year prior to the 1st day of April, 1974, bears to 365

(5) In this section,

(b) “net loss” means the amount, if any, by which the non-capital losses exceed the incomes of a corporation for the fiscal years ending between the 26th day of April, 1971, and the 1st day of April, 1973, except that,

There is no question that the Company acquired machinery and equipment pursuant to agreements entered into within the time limits described in subsection 106(1) and used such machinery and equipment within those time limits. On Mattabi’s figures, the aggregate cost of the equipment and machinery was $15,064,193 which at five per cent, would produce a tax credit of $753,209. Having regard, however, to the proportion of Mattabi’s total tax attributable to the period of 1974 ending on March 31, 1974, the maximum tax credit available to the Company under subsection 106(4) would be $736,962. That is the amount claimed. In Mattabi’s contention it was properly entitled under subsections 106(1) and (4) to deduct the sum of $736,962 from the provincial tax otherwise payable on its 1974 taxable income.

Clearly, a corporation’s eligibility for the five per cent investment tax credit is contingent on it having sustained a “net loss’’ within the meaning of subsections 106(4) and (5) during the qualifying period fixed by the section. In Mattabi’s case, its pre-1974 tax returns did not show any such loss; indeed, in each of the years prior to 1974 it reported its non-capital loss as being “nil”. Therefore, on the basis of its own returns, Mattabi was plainly not able to qualify in 1974 for the section 106 tax credit. In order to remedy this and become eligible for the credit, Mattabi sought to create a net loss in 1971 by filing, along with its 1974 corporation tax return, an amended capital cost allowance schedule for its 1971 taxation year claiming a capital cost allowance of $100 for the 1971 taxation year. The amended schedule appears as follows:

It is Mattabi’s position that this revised capital cost allowance claim establishes a non-capital loss, albeit nominal, in 1971, as a result of which the Company incurred a “net loss” between the dates specified in paragraph 106(5)(b). It follows, in the Company’s submission, that the revision qualifies it for the investment tax credit and entitles it to the deduction claimed in the 1974 taxation year.

Mattabi explains the delay in amending its 1971 tax return in this way. The income derived from the operation of its mine between August 1, 1972 and December 31, 1973 was totally exempt from tax. The Company therefore did not have any “income” for the purpose of Ontario corporation tax or otherwise from its inception until the end of 1973. Undoubtedly, the Company could have claimed capital cost allowance on its depreciable assets during the period prior to the commencement of commercial production or before it had any taxable income, but there was then no practical reason for doing so. Although the Company knew that its three-year exempt period would terminate on December 31, 1973 for federal tax purposes, it did not know that the exempt period would also terminate in Ontario on that date until an announcement to that effect was made in April 1974. It became evident only then that the Company would be subject to provincial tax in 1974 and would be in a position to utilize the investment tax credit if it could show a “net loss” during the qualifying period. For that reason, the Company revised its tax accounting in 1974 (or, more correctly, in 1975 when it filed its 1974 return), as it maintains it was entitled to do, thereby creating a $100 loss in 1971 which, it says, has the effect of qualifying it for a tax credit of $736,962 in 1974.

The Minister refused to accept the amended capital cost allowance schedule or to acknowledge that Mattabi had suffered a net loss in the 1971 tax year. His disallowance of the Company’s claim to the benefit of section 106 is put on two grounds:

1. That the Company was barred from amending or reopening its tax return for a prior year in which the time for filing an objection to an assessment had expired, or having filed an objection, after the time for appeal from the confirmation of the assessment had passed, and

2. That on a proper construction of section 106, the Company did not, in any event, suffer a “net loss” within the meaning of the section entitling it to the investment tax credit.

On the first issue, the Minister contends that the trial judge erred in concluding, as he did, that the Minister was obliged to accept the amendment to Mattabi’s 1971 return. In his submission neither the provisions of the Act nor its regulations or the administrative practice of the federal tax authorities operate to require the Minister to permit a taxpayer to amend the capital cost allowance claimed for a prior year after the time for assessment, objection and appeal relating to that year had lapsed. The learned trial judge devoted the major part of his carefully considered reasons to this issue. On the view I take of the case it is not necessary to determine the correctness or otherwise of the conclusion reached by him. Since, in my opinion, it does not affect the result, I am prepared to accept for our present purposes that the Company was entitled to revise its 1971 tax return as it purported to do. I leave open for another occasion the technical questions with respect to late filing of amended returns which have been raised in the rather unique circumstances of this matter. I would only observe that to the extent the learned judge considered the retroactive amendment of subsection 75(2) of the Act significant to the Company’s claim under subsection 106, I respectfully disagree. That section was repealed by a valid enactment of the provincial legislature. Its repeal in no way affects the law applicable to the filing of amended tax returns and is irrelevant to a determination of whether the Minister is obliged to accept an amended return.

This brings me to the second ground upon which the Minister rejected Matta- bi’s claim to the investment tax credit. On the assumption that the Company was entitled to amend its capital cost allowance schedule for the 1971 taxation year, does it qualify for a tax credit under subsection 106(4) in the 1974 taxation year? In the Minister’s submission, even if the Company had the right to reopen its 1971 return at the late date it did, it nonetheless on the merits did not satisfy the requirements of section 106 and was properly denied the deduction claimed in 1974.

In construing section 106, it is to be observed that: (1) the tax credit is deductible only as against tax otherwise payable by a corporation; (2) the eligible machinery and equipment must be used solely in Ontario before April 1973 “for the purpose of earning income’’; (3) the qualifying period is the period April 26, 1971 to April 1, 1973; (4) if an overall ‘‘net loss’’ is incurred during the qualifying period the period is extended in accordance with the provisions of subsections 106(4); and, (5) that a “net loss’’ occurs when a corporation’s non-capital losses exceed its “incomes’’ during the period.

Can this Company be said to have suffered a “net loss’’ as that term is defined by subsection 106(5)? In its submission, since Mattabi’s income to December 31, 1973 was totally exempt from taxation under subsection 75(2), it had no income to that date. Therefore a prior non-capital loss, even of a nominal amount, exceeds the Company’s “incomes’’ for the period between April 26, 1971 and April 1, 1973, and thus constitutes a “net loss’’ within the meaning of subsection 106(5) entitling the Company to extend the time for claiming the tax credit to 1974. With deference to the very able arguments of counsel for the Company, on the view I take of this statutory provision, merely because this mining company had a non-capital loss in 1971 does not necessarily compel the conclusion that it suffered a “net loss’’ within the meaning of subsection 106(5).

A “net loss’’ would occur only if the overall non-capital losses incurred during the qualifying period exceed the “incomes’’ of the corporation during the same period. In this case, to state the self-evident, this Company’s profits far exceeded the nominal capital cost allowance loss in 1971 upon which it relies, or for that matter, the losses which it sought to establish for 1972 as an alternative basis for its claim to the benefit of subsection 106(4), and which were not accepted by the trial judge. Realistically, the Company had very substantial income and no true net loss for the overall period. The question then is whether, because that in- come was not subject to tax, it is not income to be taken into account in making the computations needed to determine “net loss” under subsection 106(5)?

Subsection 106(5) speaks of “incomes” in the plural. The section makes no reference to income not subject to tax by virtue of subsection 75(2). Manifestly, if such income is included in the equation, no “net loss” can result. In this respect, the Company takes the position that a determination of whether Mattabi had a “net loss” within the meaning of the section, to quote from its statement of law and fact, “requires a computation of income for tax purposes so that paragraph 75(2)(a) governs and dictates that income derived from the operation of Mattabi Mines shall not be included in computing the income of the respondent”.

What then of subsection 106(1)? It contemplates a tax credit against tax otherwise payable with respect to machinery and equipment only if the machinery and equipment is used solely in Ontario prior to April 1, 1973, “for the purpose of earning income”. Here, in contrast to subsection 106(5), the Company’s position is that “income” should be interpreted to include non-taxable income under section 75. Quoting again from its statement, the Company says that “the determination of whether Mattabi acquired or used machinery and equipment for the purpose of earning income does not involve the computation of income for tax purposes and so section 75(2)(a) does not apply”.

In other words, the Company’s position is, on the one hand, that its income, even though non-taxable, is to be taken into account in determining whether the Company qualifies in the first place for the tax incentive provided by subsection 106(1), while, on the other hand, that same income is not to be taken into account in determining whether the Company sustained a “‘net loss” as defined by subsection 106(5) for the purposes of subsection 106(4). I am unable to accept that position. Section 106 creates a five per cent investment tax deduction and sets the qualifying conditions for the deduction; its concern is not with the computation of income for tax purposes. The fine distinction sought to be drawn by the Company does not afford a basis for applying differing meanings to “income” in subsections (1) and (5) of section 106.

In my view, “income” must be treated in a consistent manner and given the same meaning throughout the section. If non-taxable income is to be considered “income” for the purpose of qualifying a corporation for the deduction under subsection 106(1), such income should also be included in the “incomes” to be taken into account in calculating the “net loss” under subsection 106(5). Conversely, if non-taxable income is not to be considered “income” for the purposes of subsection 106(1), it should also be excluded from the “incomes” referred to in subsection 106(5).

Either way, the Company cannot succeed. If its non-taxable income is not taken into consideration, the Company cannot be said to have used its machinery or equipment prior to April 1, 1973 for “the purpose of earning income”. To that date the machinery and equipment was used for the purpose of earning income not subject to tax by reason of subsection 75(2). Having regard to the time limits set by section 106, the fact that the machinery and equipment may be used at a later date to earn taxable income is, in my view, immaterial, and cannot serve to qualify a company that admittedly has not used its machinery and equipment prior to April 1, 1973 for the purpose of earning taxable income. On the other side of the coin, if the Company’s non-taxable income is taken into consideration, while it would qualify under subsection 106(1), the inclusion of this income in the computation under subsection 106(5) would not produce a “‘net loss” entitling the Company to a deduction under subsection 106(4).

Either interpretation of “income” is sufficient to dispose of the issue in this case and produce a result which, in my view, is consonant with the purpose and intent of this tax incentive provision. Since the deduction was made available only as against tax payable, it could not have been intended (if, indeed, any thought was given to the highly unusual circumstances here) to benefit a mining company that had been given a full tax holiday under another section of the Act for the entire qualifying period. No genuine loss was suffered by the Company during that period and, in my view section 106 cannot properly be construed so as to entitle the Company to the deduction claimed. A taxpayer must, of course, bring its claim within the express terms of the provision conferring a deduction and in the event of doubt or ambiguity, it is well-established that the doubt or ambiguity must be resolved in favour of the Minister. In the result, I am of the view that in the circumstances of this case Mattabi is not entitled to a subsection 106(4) deduction.

By way of alternative relief, the Company requests an order permitting it to claim the maximum capital cost allowance for 1974 available under the Act in the event the Minister’s appeal is allowed. Much argument was addressed to us on whether the trial judge erred in allowing the Company an amendment to this effect. But at this stage whether he erred or not in this respect is of little moment. In light of his disposition of the case, it became unnecessary for him to decide whether the relief sought by the amendment should be granted. The reasons which prompted him to allow the amendment do not constitute an adjudication of the issue raised thereby.

In my view, in the instant case there is no valid basis upon which this Court can or should order the Minister to permit the Company to deduct in computing its income for 1974 additional capital cost allowance up to the maximum permitted by the Act. The subject-matter of the Minister’s reassessment in no way, directly or indirectly, related to or involved a claim for the maximum capital cost allowance the Company might have claimed in 1974. The Minister was not called upon to consider or to determine any request for relief of this nature. The matter was simply not in issue in the proceedings up to the Minister’s reassessment or, indeed, at any time before the amendment was asked for at trial. Furthermore, it is evident that the order requested would involve the reopening of assessments subsequent to 1974 that are not subject to objection or appeal. The Company chose the course it wished to pursue in regard to its 1974 taxation year. Neither the applicable statutory provisions or the case law to which we were referred lend support, in my view, to the contention that the Company, having failed in that course, is now entitled to compel the Minister to permit it to adopt an approach to its 1974 tax accounting wholly unrelated to the matters in issue in its appeal from the Minister’s reassessment.

For these reasons, I would allow this appeal with costs, set aside the judgment below, and in place thereof order that Mattabi’s appeal be dismissed with costs.