Her Majesty the Queen v. Johns-Manville Canada Inc, [1982] CTC 56, 82 DTC 6054

Ryan, J:—This is an appeal from a judgment of the Trial Division allowing with costs the appeal of the respondent from assessments for its taxation years ending on November 30 and December 31, 1969 (two of its taxation years ended in 1969) and December 31, 1970. The assessments were made on the basis that the expenditures sought to be deducted were outlays on account of capital and thus within paragraph 12(1 )(b) of the Income Tax Act*. [1] The sums claimed were paid by the respondent for the purchase of lots of land which were used for the purpose of extending the rim of an open pit, used in the mining of asbestos, in order to maintain an appropriate wall slope. It was submitted by the taxpayer that the expenditures, made annually, were directly related to the current production of the ore mined. The trial judge allowed the appeal. He held that the lands purchased were, for all practical purposes, consumed as part of the annual mining operations of the respondent. The sums expended for the purchase of the lands were thus expenditures incidental to the annual production and sale of the output of the mine: they were current in nature. The appellant, in this appeal from the trial judgment, submitted that the trial judge erred: he ought, it was said, to have held that the expenditures were on capital account.

The respondent operates an asbestos mine in the town of Asbestos. Its business is the mining and processing of asbestos ore and the selling of the product.

The ore is mined from an open pit. The pit is about 5,700 feet at its major axis, 3,500 feet at its minor axis, and 950 feet deep. The ore body from which the asbestos is mined is cylindrical. It has east and west bulges. It is about 2,000 feet in diameter.

Safe and economic mining of the ore requires that the walls of the pit be sloped. In mining the ore, the level of the ore body is lowered. It accordingly is necessary to keep pushing back the wall of the pit. For this purpose, properties adjacent to it were bought during the years under appeal. After the lots were purchased, overburden was removed to obtain an appropriate wall angle. The costs of these purchases are the sums involved in this appeal.

As has been noted, the trial judge found that the costs of acquiring the lots of land were current, not capital, in nature.

The trial judge cited this passage from the judgment of Mr Justice Fau- teux (as he then was) in MNR v Algoma Central Railway, [1968] SCR 447; [1968] CTC 161; 68 DTC 5096 at 449 [162, 5097]:

Parliament did not define the expressions “outlay . . . of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224, [1965] 3 All ER 209, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

The trial judge stated that the decision whether an expenditure should be applied to capital or income account .. . must be made upon business or commercial principles”.

He found that to maintain slope stability as excavation proceeded, it was necessary .. on the horizontal plane to remove substantial quantities of soil and rock”. He also found that . according to the evidence, it is the eastern wall which is adjacent to the town which is subject to instability. It is in this area that land was acquired for the purpose of using it for slope stability so that the operations of the mine could continue. No part of the ore body is located sub-adjacent to the properties purchased for this purpose during the 1969 and 1970 taxation years. In other words, the properties did not add [to] or augment the reserves of the mine from which ore could be extracted, but it did permit Johns-Manville to extract the ore that was in the mine and sell it.”

The trial judge also found that the evidence disclosed that “. .. the acquisition of property at the periphery of its mining pit has been a constant part of the mining operations of Johns-Manville and the purchases of land have occurred annually for almost 40 years. The acquisition costs of the purchases of such land represent only a relatively small percentage of the annual cost of sales of Johns-Manville . ..”

He was of the view that there were “special circumstances” in this case leading to the conclusion that the expenditures made for the purchase of the lots were “.. . not properly attributable to capital”. The expenditures . . did not add to or preserve the ore body. Instead, the lands purchased by these expenditures were in essence consumed for all practical purposes in the course of and as part of the mining operations of Johns-Manville and as a consequence were expenditures ‘incidental to the production and sale of the output of the mine’ (cf Denison Mines Limited v MNR) and were part of the cost of the determination of the profits.”

The trial judge reached his conclusion that the expenditures were current after, in his words, “.. . considering the whole of the evidence, and as stated, looking at the character and quality of the expenditures based upon business or commercial practice rather than the character of the asset acquired by the expenditures . .

The trial judge clearly placed some reliance on Denison Mines Limited v MNR, [1976] 1 SCR 245; [1974] CTC 737; 74 DTC 6525. In that case, the taxpayer was engaged in uranium mining. The so-called “room and pillar” method was used in the mining operations. Passageways were driven from the mine shaft through the ore body itself in the course of extracting the uranium. The mining of the ore was extended from the passageways into rectangular “rooms” which were also created by mining the ore. The taxpayer sought to set up as a capital cost the cost of extracting the ore from the passageways. These passageways were being used currently and were to be used in the future for getting the broken ore to crushers and to the mine shafts. They were also used for ventilation. The passageways would obviously be in use for a long time, probably until the ore body was exhausted.

In Denison, the cost of mining the ore from the passageways was assessed as current, not capital, cost, and this assessment was upheld by the courts. But the case is, as I read it, distinguishable for the present case. There the passageways, thought they conferred an enduring benefit, were crated by extracting the very ore which, after processing, was to be sold. On ordinary commercial principles, the cost of extracting the ore would be deducted in computing annual profit or loss. The passageways were created as by-products of the mining of the ore. No additional costs were incurred in order to bring into being the advantage which accrued from them, even if it be assumed that . . the removal of the ore brought into existence something that did not previously exist, namely a haulageway*. [2] An enduring advantage was obtained, but absent “capital cost”. In the Federal Court of Appeal, Chief Justice Jackett, in a passage quoted by Mr Justice Martland at 253 [526, 6448] of the Supreme Court Reports, said:

. . . we are of the view that, even though the appellant planned his extraction operations so as to leave it in the result with “haulageways” that are of enduring benefit to its business, the cost of such extraction operations is, in accordance with ordinary business principles, the costs of earning the profits made by selling the ore extracted from them. If that is right, there was no cost, and therefore no “capital cost”, of acquiring the haulageways.t [3]

In the present case, there is no question that new assets were acquired by the respondent’s purchase of the lots. The purchase price of the lots was an expenditure in addition to the day-to-day labour and other costs directly involved in extracting asbestos from the mine. It was also in addition to the costs involved in removing the overburden, soil and rock. (These costs are not in issue in this case.) As I see it, the lots were bought because they were adjacent to the pit and thus could be used to extend its slope, an extension that resulted in the lots becoming part of the pit. The lots, as part of the pit, serve as land on which the operation is in part carried on; for example, roads (the location of which may shift as the wall extends), spiraling up the side of the pits, are used to cary ore out of the pit. The lots, on being absorbed, become part of a combined structure consisting of the ore body and the sloping pit without which the enterprise could not be carried on because, otherwise, there would be danger of slides. The lots, even when stripped of their overburden, continue as part of the business structure of the respondent and have value as such. I would note, incidentally, that the municipality taxes of them; this is some evidence of their continuing value. In my view, the moneys paid for the lots were “.. . moneys paid for an addition to a business structure already in existence.^ [4]

I am, with respect, of the view that the purchase price of the lots constituted an outlay to acquire capital assets. It is no doubt true that the overburden, soil and rock removed in the course of blending the lots with the pit have little or no commercial value. It may also be true that, on completion of the mining of the ore, the site of the asbestos deposit and the pit may be a valueless wasteland — a real possibility. Even so, however, so long as the mining operation continues at the site, the lots, stripped of overburden, continue to serve as part of the structure of the operation.

The respondent placed some reliance on the circumstance that expenditures for the purchase of lots had been incurred annually for some forty years, including the taxation years in question, and will continue to be incurred in the future. The expenditures, it was said, do not involve a “once and for all” outlay to acquire an asset; these expenditures, it was submitted, merely serve to enable the respondent to continue producing on an annual basis.

I recognize that the regular recurrence of the acquisitions is relevant in determining whether the outlays for the lots are income or capital in nature. But it is in no way decisive. As Dixon, J (as he then was) put it in Sun Newspapers Limited v The Federal Commission of Taxation, 61 CLR 337 at 362; “Recurrence is not a test, it is no more than a consideration, the weight of which depends upon the nature of the expenditure.” The expenditures in this case were for purchases of lots of land which were incorporated in the operating structure of the enterprise. This, to me, is a consideration, “one consideration”, which, in the words of Lord Pearce (quoted above), “dominates other and vaguer indications in the contrary direction.” It dominates the consideration that lots are purchased annually in anticipation of the lowering of the level of the ore deposit. And it dominates the consideration that the lots may only remain as portions of a virtual wasteland when the mine ceases to operate.

I may say that, in reaching my conclusion I have found helpful a passage from the judgment of Mr Justice Upjohn in Knight v Calder Grove Estates, 35 TC 447. The passage appears at 453:

The case seems to me a perfectly plain one. The parties, being minded to get and win coal from this particular area by open-cast methods, purchased the land. They could have done it by some other means, but that is the means they chose — that of purchasing the land. That adventure in the nature of things is not likely to continue for more than two or three years, and they prudently arranged for the sale of this land when the adventure in relation to it comes to an end. No one suggests that the purchase of this land is circulating capital or stock-in-trade or anything of that sort. It is a purchase of land for the adventure, and so, on ordinary principles, the transaction must be regarded as a Capital expenditure, just as when you buy land and put a factory on it, or buy land and sink a shaft. In my judgment, the fact that the adventure is not likely to continue for many years is quite irrelevant.

This is a case which does not turn on the credibility of witnesses. And it is a case in which I accept the trial judge’s basic findings of fact. It may even be, as he concluded, that the lots in question are in a way consumed. But as I see it, they are consumed simply as saleable lots of land. In my view, they continue to be used (absent their overburden) as capital assets so long as the mine operates.

I would allow the appeal with costs. I would set aside the judgment of the Trial Division, dated July 7, 1979, and I would substitute for it a judgment dismissing with costs the appeal to the Trial Division.