Teck-Bullmoose Coal Inc. v. R., [1997] 1 CTC 2603

Sobier J.T.C.C.: — The Appellant appeals from the determination of loss made by the Minister of National Revenue (the “Minister”) with respect to its taxation year ending September 29, 1983 whereby the Minister denied the Appellant the right to deduct its share of road construction costs totalling $5,746,359, which share the Appellant included in the calculation of its Canadian exploration expense (“CEE”). This amounted to $2,930,643.

The Appellant held a 51 per cent interest in a joint venture formed for the purpose of developing the Bullmoose Coal Mine located near Tumbler Ridge, British Columbia. The other joint venturers were Lornex Mining Corporation holding a 39 per cent interest and Nissho-Iwai Canada Ltd., a subsidiary of a Japanese company holding a 10 per cent interest.

In 1976, a near surface metallurgical coal deposit was found on the Bullmoose Mountain property explored by the Teck mining group.

Negotiations were carried on with the Japanese steel industry culminating in a Metallurgical Coal Sale and Purchase Agreement (the “Sale Agreement”) made the 31st day of July 1981 for the sale of coal from the Bullmoose Mine which was then developed as an open pit mine.

Under the Sale Agreement, the coal was to be delivered by road and rail to the Ridley Island loading facility at Prince Rupert, British Columbia.

In order to accomplish this, a heavy duty road was required to be built from the mine site to the Chetwynd-Tumbler Ridge Highway, a British Columbia highway. Access was available from the Chetwynd- Tumbler Ridge Highway to the mine site by way of an existing logging road built in 1975 (the “Canfor Road”).

The Canfor Road required upgrading in order for it to be usable in opening the mine site. It could not economically accommodate the vehicles required to haul the coal out. The Canfor Road was in fact upgraded to a standard which would permit equipment and heavy haulage units to be used. The Canfor Road was used to bring material and supplies to the site during construction. Construction of the mine site which began in May 1982 included a breaker station, conveyors from the mine to a raw coal silo, preparation plant, dryer, clean coal silo, shops and warehouse facilities and an administrative office. The work was completed in October 1983.

The new road (the “New Road”) to be built to the Chetwynd- Tumbler Ridge Highway for the most part ran parallel to the Canfor Road and was designed by Yellowhead Engineering and Technical Services Ltd. (“Yellowhead”) in consultation with the mine operators and Arrow Transportation Systems Inc. (“Arrow”) which company was to provide the truck transportation from the mine to the rail transfer facility at Tumbler Ridge. Arrow was invited to make a proposal for this service and did so by letter dated August 23, 1982. Arrow’s input in the design was necessary since it was required to inform the engineers and construction company of the size, shape and weight of the trucks to be used as well as the load to be carried. Without this information, the road designers could not do their job. Construction of the New Road was said to have commenced in the late summer of 1982. I assume that this was after August 23, 1982.

The New Road was built on Crown land using a right of way granted by the Province of British Columbia. The joint venture had no ownership in the land on which the New Road was built, neither did it have any leasehold interest in it. On completion, the New Road became a public highway.

Simply stated, the issue is whether the monies expended to construct the New Road were CEE or as the Respondent maintains an eligible capital expenditure.

The Respondent argues that if the joint venture owned the New Road, the cost would have been deductible as part of its capital cost allowance but since it did not, the cost is an eligible capital expenditure (see Minister of National Revenue v. Wardean Drilling Ltd., [1969] C.T.C. 265, 69 D.T.C. 5194 (Ex. Ct.) and also Saskatoon Community Broadcasting Co. v. Minister of National Revenue, 20 Tax A.B.C. 97 (TAB).

The Appellant therefore must demonstrate that the expenditures were CEE.

Subparagraph 66.1(6)(a)(iii.l)(“iii.l”) of the Income Tax Act (the “Act”) as it was applicable in 1983 reads as follows:

(a) “Canadian exploration expense”. - “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 Appellant argues that the New Road enabled it to commence production. But is the commencement of production the equivalent of bringing a mineral resource into production? There are two parts to (111. 1). The first is that to be CEE, the expense must be one that is incurred for the purpose of bringing a mineral resource into production. The second is that the expense or outlay must have occurred prior to the commencement of production from the resource in reasonable commercial quantities. While it was established that the first shipments of coal in reasonable commercial quantities took place after all or at least a significant part of the expenditures were made, the Appellant must also establish the first part of (111.1).

Site construction began in May 1982. A great deal of work on the site was done prior to the New Road being available. The Canfor Road was used to transport materials, men and supplies to the construction site, although parts of the New Road were used as they became available. Therefore, the site was already accessible by reason of the Canfor Road.

According to the Appellant, the New Road was necessary in order for the joint venture to be able to deliver coal in the quantities required under the Sale Agreement. Without the New Road, the joint venture would be unable to meet its contractual obligations. Without the New Road, thes mine would not have been developed since there would be no means- available to transport the coal economically. The Canfor Road was not ar alternative.

In a letter from Arrow to Bullmoose Operating Corporation of August 23, 1982, it was stated:

This letter is our response to your firm’s invitation to present a proposal on the truck transportation of coal from the Bullmoose plant to the rail transfer facilities at Tumbler Ridge, for the North East Coal Project.

While this is a proposal for the transportation of the coal, there is also another glimpse of the purpose of the road which is contained in the copy of the Bullmoose Access Road General Description, enclosed in a letter from Yellowhead to the Department of Lands of British Columbia, under the heading Traffic where it stated:

The main function of the road will be to transport coal produced at the Bullmoose property to the rail loading facilities at Tumbler Ridge. A secondary use will be for transport of employees from the townsite at Tumbler Ridge to the work site.

The following is an excerpt of the Examination in Chief of Mr. Mike Lipkewich, General Manager of the Bullmoose operation:

Q. Was there any access to the Bullmoose ore body, the Bullmoose mineral resource prior to the construction of that road?

A. There was a forestry road [1] that interconnected the old Gwillim Road and passed through the mine site area.

Q. If you look down in the southwest corner, you can see that there is from time to time paralleling the solid line - the new road — a broken line. Does that broken line, where it appears, indicate the old forestry road?

A. That’s correct.

Q. Was the forestry road satisfactory or usable for the purposes of bringing this mine into commercial production, or for use in relation to this mine?

A. No.

Q. And why is that?

A. The quality of the road that was required to move that coal from the mine site to the rail loadout was dictated by the equipment that would be used. This was very heavy equipment, heavy trucks. The volume was rather significant, and it would have been uneconomic to use the existing forestry road to move that volume of coal over that quality of road.

Q. Would it have been possible to move the volume of coal within the time period required over the existing road facilities?

A. No. I don’t think anybody would be able to do that. It was uneconomic and I think it would have been impossible to move that volume of coal over the existing roads.

The Appellant argues that in (111.1) the test is a “use” test and not a “purpose” test. However, the facts must speak in order that one is able to determine the purpose.

The Canfor Road was used in developing the site or bringing the resource into production. It could have continued to serve that purpose. It was not until at least six months after the development commenced at the mine site that the construction began on the New Road. Work had to be done on the Canfor Road to upgrade it to accommodate the moving of material to the site. If any expenditures were incurred to bring the coal into production, the expenditures on the Canfor Road would be them.

If a road of the substance and quality of the New Road was built for the purpose of accessing the site and would later be used to move coal, there would be a good argument that the building of the road was an efficient way of handling both the problem of access to the mine and later removal of the coal and the expenses might well be considered to be CEE.

According to the Appellant, the purpose of the New Road was to enable the joint venture to ship coal in sufficient quantities to meet its contractual obligations under the Sale Agreement. If this was to be the goal of CEE, then the legislature would have enacted a provision which would have defined CEE as an expense or outlay incurred for the purpose of enabling the resource to be put into production on an economic basis incurred prior to the commencement of production from the resource in reasonable commercial quantities. As it was, the Act merely says that the outlay or expense is to be incurred for the purpose of bringing the mineral resource into production, whereas the second part dealing with reasonable commercial quantities only goes to the time when the expense must be incurred.

The Teck Corporation’s annual report to shareholders states with respect to the Bullmoose mine that as of October 1982 ...

Construction progress has been good and is at a stage where work can continue efficiently throughout the winter. Site grading in the plant area is almost completed and construction of the coal washing plant, the shop and warehouse building, and office are well underway.

Concrete work has progressed on schedule with the raw coal silo and the clean coal load-out silo as well as two load-out silos at the railhead having been completed.

All of this work was work bringing the mine into production and was done without the benefit of the New Road.

The site was not originally served by hydro or telephones. These facilities were built by B.C. Hydro and B.C. Tel at the joint venture’s cost. Again, the joint venture did not have title to those facilities, even though paid for by it. What the joint venture received was a reliable supply of electricity and reliable telephone communications. The Appellant claimed the cost of these services as CEE. The claims were denied but eventually allowed even while the cost of the New Road was not.

The thrust of the Appellant’s evidence was that without the New Road, the mine would not have been brought into production. By this, it was not meant that the mine was physically incapable of being built without the New Road but that without the New Road, the coal could not be economically moved and without the delivery of coal in the quantity and volume required by the purchasers, there would be no contract for the supply of coal and therefore the mine would not have been developed.

Although (iii.l) talks of any outlay or expense, it must be an outlay or expense made or incurred for the purpose of bringing the resource into production and should not be extended to include any outlay or expense incurred in connection with the resource or its later production in commercial quantities.

In order to best be able to determine whether the New Road had as its purpose the bringing of the resource into production, one must look at the relationship which the New Road bore to bringing the resource into production. Land clearing equipment was brought in over the Canfor Road, materials for silos and other structures were also brought in via the Canfor Road. As shown above, a great deal of the construction on the site was completed without the benefit of the New Road.

The evidence of Mr. Lipkewich concerning the use of the New Road prior to moving the coal was that the Canfor Road was used to bring in material, equipment and supplies and as the New Road was completed, the completed sections were also used. This was the only evidence concerning the use of the New Road during the development stage or bringing the mine into production. The evidence was directed to showing use of the New Road after coal could be produced in reasonable commercial quantities.

Much time was spent in argument on the meaning of the word “production” and the jurisprudence dealing with that meaning included the many cases dealing with the Syncrude Project. However while the meaning of that word is an issue, there is also an issue as to the meaning of the words “for the purpose of bringing”. Those words of necessity must mean bringing the resource into being or existence as a mine capable of producing coal. [2] Therefore, it can be seen that the stage to which the resource must be brought for the purpose of (iii.l) is only to the stage of commencement of production or to the point that the mine is capable of producing coal.

While the New Road was used to bring materials, men and supplies to the construction site as it was being built, that was secondary to the purpose for which it was built which was to transport coal after it was mined. Accordingly, the expenditures in question were not CEE.

Not having title to the road or at least a leasehold interest in it, the Appellant is not entitled to claim capital cost allowance with respect to it (see Wardean Drilling Ltd. supra and Saskatoon Community Broadcasting Co. Ltd. supra).

It therefore appears that the outlays qualify as an eligible capital expenditure.

In 1983, paragraph 14(5)(b) of the Act read as follows:

(b) “eligible capital expenditure” of a taxpayer in respect of a business means the portion of any outlay or expense made or incurred by him, as a result of a transaction occurring after 1971, on account of capital for the purpose of gaining or producing income from the business, other than any such outlay or expense

(i) in respect of which any amount is or would be, but for any provision of this Act limiting the quantum of any deduction, deductible (otherwise than under paragraph 20(1 )(b)) in computing his income from the business, or in respect of which any amount is, by virtue of any provision of this Act other than paragraph 18(1 )(b), not deductible in computing such income,

(ii) made or incurred for the purpose of gaining or producing income that is exempt income, or

(iii) that is the cost of, or any part of the cost of,

(A) tangible property of the taxpayer,

(B) intangible property that is depreciable property of the taxpayer,

(C) property in respect of which any deduction (otherwise than under paragraph 20(1 )(b) is permitted in computing his income from the business or would be so permitted if his income from the business were sufficient for the purpose, or

(D) an interest in, or right to acquire, any property described in any of clauses (A) to (C),

but, for greater certainty and without restricting the generality of the foregoing, does not include any portion of

(iv) any amount paid or payable, as the case may be, to any creditor of the taxpayer as, on account or in lieu of payment of any debt or as or on account of the redemption, cancellation or purchase of any bond or debenture,

(v) where the taxpayer is a corporation, any amount paid or payable, as the case may be, to a person as a shareholder of the corporation, or

(vi) any amount that is the cost of, or any part of the cost of,

(A) an interest in a trust,

(B) an interest in a partnership,

(C) a share, bond, debenture, mortgage, hypothec, note, bill or other similar property, or

(D) an interest in, or right to acquire, any property described in any of clauses (A) to (C),

The expenses were made in respect of a business and were in curred after 1971, they were on account of capital and were for the purpose of producing income from a business. The exclusions contained in subparagraphs (i), (ii) and (iii) of paragraph 14(5)(b) are not applicable and therefore the outlays or expenses are eligible capital expenditure. For these reasons, the appeal is dismissed with costs.

Appeal dismissed.