Nova Scotia Sand and Gravel Limited v. Minister of National Revenue, [1976] CTC 2317

Roland St-Onge (orally: July 13, 1976):—The appeal of Nova Scotia Sand and Gravel Limited in respect of the respondent’s assessments of its income for the 1972 and 1973 taxation years was heard on July 9, 1976, and one of the matters at issue is whether the appellant company’s 1973 profits qualify as “Canadian manufacturing and processing profits” within the meaning of section 125.1 of the new Income Tax Act and thus entitle it to a corporate tax deduction of $17,612.10 from its income for the 1973 taxation year. In other words, do the appellant’s activities fall within any of the exceptions contained in paragraph 125.1 (3)(b) of the new Income Tax Act, which reads as follows:

(b) “manufacturing or processing” does not include

(i) farming or fishing,

(ii) logging,

(iii) Construction,

(iv) operating an oil or gas well,

(v) extracting minerals from a mineral resource,

(vi) processing, to the prime metal stage or its equivalent, ore from a mineral resource,

(vii) producing industrial minerals,

(viii) producing or processing electrical energy or steam, for sale,

(ix) processing gas, if such gas is processed as part of the business of

selling or distributing gas in the course of operating a public utility, or

(x) any manufacturing or processing of goods for sale or lease, if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active businesses carried on in Canada was from

(A) the selling or leasing of goods manufactured or processed in Canada by it, and

(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it.

The appellant further claimed capital cost allowance of $13,850.50 in 1972 and $55,133 in 1973 in respect of property allegedly used directly or indirectly in the manufacturing or processing of goods for sale and therefore falling within subparagraph (a)(i) of Class 29 of Schedule B of the Income Tax Regulations.

In its Notice of Appeal, the appellant company describes its operations as follows:

The first step is to excavate the raw material from its pits, by means of loaders. At this point some of the material may be sold directly. The extracted material is transported to its plant by three means—directly by front-end loader, by trucks charged by the loader, or by conveyor belt charged by the loader. At the plant, the material is washed to remove impurities and separated according to size. The semi-processed material is then stockpiled. From this point, the material may be sold directly; alternatively, if it is sand, it may move to the specialty sands plant, or if it is stone, it may move to the portable crusher and/or portable wash plant for crushing, re-washing and re-sizing before sale and delivery. When sand enters the specialty sands plant, it is dried and screened to obtain the desired composition for the finished product. Then it is fed from the appropriate storage bin into the bagging machine, after which it is ready for sale and delivery.

The result of the foregoing processing operations is a higher quality and range of products than would be available if the Appellant had no sophisticated screening or washing procedures. The appellant’s products may be, and are, used for many different purposes by the purchaser—industrial, commercial, and domestic.

Mr Wallace Brown, who has been working for the appellant company for 9 years and who is the general manager, has completely substantiated these allegations in his testimony.

He further explained that the appellant company’s main plant was situated at Shubenacadie, 35 miles from Halifax, where the staff works on a day-to-day operation.

The appellant company has a pit at Belmont, one at Balpoint, and a quarry. The exploration is made by drilling for samples to assess the quality and quantity of sand and gravel. Apparently, it is a slow and expensive process.

The stripping is executed by dozers which remove the trees and the excavation by loaders and dragline. Trucks or conveyors remove the sand and gravel to the Shubenacadie plant for processing.

The processing is carried out by three wash plants, a drying plant, a crusher and by selecting the quality and the size of the sand and rocks and by bagging it in different quantities such as 100 or 50 pound bags.

The appellant company produces the following types of sand: asphalt, concrete, industrial, masonry, Belmont Alwhite, airport and traction, as well as producing highway and roofing gravel; washed and unwashed stone; pit run sand and gravel, traction bulk, concrete aggregate, fertilizer filler, and Kentucky blue grass underlay. It also Produces marble according to the demand, which was negligible in 1973.

The Shubenacadie plant operated on a 24-hour basis during 1972 and 1973 and it runs three weeks in a row in one year to produce the white sand. It is situated on a 1,500 acre tract of land where there are also a moving plant and two wash plants, one stationary and one mobile.

Mr Brown then filed a document containing figures to show the appellant company’s operation in dollars and in tonnage.

Dr James Nowlan, geologist, formerly Deputy Minister of the Nova scotia Department of Mines, has had great experience in exploration work. He testified that he did not find, and could not give, a definition of industrial minerals: that the meaning of these words was much wider than that of the word “mineral” alone; that rocks or sand and gravel are not industrial minerals except for the pure silica sand. He also rested his opinion on the Classifications in Statistics Canada which do not contain the expression “industrial mineral” but classify products as “metallic” and "non-metallic", and testified that the same equipment is used to produce minerals or sand and gravel.

Dr Nowlan does not agree that industrial materials include minerals and rocks and he added that sand and gravel are not considered a mineral.

Counsel for the respondent called his own expert, Mr G Robert Guillet, BA, MA, P Eng and vice-president of Gartner Lee Associates Ltd.

He has specialized in the industrial mineral field for more than 20 years. He has conducted exploration and drilling programs, product evaluation and marketing on a wide variety of mineral commodities used by the construction, ceramic and chemical industries. His positions with the Ontario Division of Mines and the Ontario Securities Commission have given him an appreciation of the special problems related to resource development and financing. He is the author of several dozen technical reports and papers, and has lectured on industrial minerals at McMaster University. In 1976 he gave five lectures across Canada on industrial minerals.

He testified that sand and gravel are definitely industrial minerals and commented on the many definitions which were presented to him by the respondent by saying that, although there are some differences, they are basically the same. Mr Guillet then read an explicit article on minerals.

Finally, he gave his own definition of an industrial mineral by saying:

Any non-renewable resource of economic value, which is not a substance to produce metal and is not a fuel.

Counsel for the appellant argued that the classification of Statistics Canada, which was prepared by the same federal power as the one that enacted the Income Tax Act, carries more weight than any definition filed by the respondent; that the said definitions, prepared some 10 years ago, were self-serving documents prepared as propaganda to render this study more attractive to students, and that, according to the testimony of his expert witness, Dr James Nowlan, rocks, sand and gravel are not industrial minerals.

He referred the Board to a voluminous jurisprudence, which is well expanded in his Notice of Appeal as follows:

Reasons in Support of Appeal

1. It is respectfully submitted that all of the Appellant’s operations constitute ’’processing” and that none of them represent “producing industrial minerals’, within the meaning of subparagraph 125.1 (3)(b)(vii) of the Income Tax Act or paragraph 1104(9)(g) of the Income Tax Regulations. It is first submitted that neither sand nor gravel is an industrial mineral within the meaning of those provisions.

2. There is no generally accepted definition of the term “mineral”, and its meaning is capable of expansion or restriction according to the purpose of the statute and the context in which it is used. See Canadian Gypsum Company Limited v MNR [[1965] CTC 210 at 213] 65 DTC 5125 at page 5127 (Exchequer Court). The definition of “minerals” in subsection 248(1) of the Income Tax Act provides no guidance in this respect.

3. Re McAllister and Toronto and Suburban Railway Company, 40 OLR 252 (Supreme Court of Ontario 1917), held that ordinary stone in a quarry was not a “mineral” within the meaning of the statute that was there under consideration. The mining legislation of Nova Scotia, Ontario, and British Columbia and the mining tax legislation of Ontario all exclude sand and gravel from the definition of “mineral”. The only income tax case that appears to deal with the matter—Paju v MNR, [[1974] CTC 2121] 74 DTC 1087 (Tax Review Board)—supports the position that sand and gravel are not “minerals” within the meaning of the Income Tax Act.

4. In the alternative, it is submitted that if sand and gravel are minerals, the Appellant is still not “producing industrial minerals”, since most of its product is not specifically intended or used for industrial purposes. From its product range of approximately 60 different items, only about 15 are listed by the Appellant as having an industrial use. The Appellant has no interest in or control over the use to which any of the various sand and gravel products that it sells are put by the purchasers. In many cases its products will not be used in industry.

5. In the further alternative, if sand and gravel as produced by the Appellant are found to be industrial minerals, it is further submitted that their produc- tion as industrial minerals is complete once the material has been physically separated from the ground. See Texaco Exploration Company v MNR [[1975] CTC 404] 75 DTC 5288 (Federal Court—Trial Division) and W S Hatch Co v Public Service Commission, 277 P 2d 809 at page 813 (Supreme Court of Utah 1954). It is accordingly submitted that the production of industrial minerals ceases at the time the excavated material is loaded onto trucks, or conveyor belts, for conveyance to the Appellant’s processing plant. This Is indicated by the fact that the material would be saleable at this point. If sand and gravel are industrial minerals, their character as industrial minerals is complete at this point, and nothing that the Appellant does thereafter produces industrial minerals.

6. Consequently the Appellant’s processing operation, for purposes of the relevant provisions of the Income Tax Act and the Income Tax Regulations, would commence, under the alternative submission In paragraph 5, at the point where the production of industrial minerals ceases—that is, after the materia! has been separated from the ground. Consequently, it is submitted that the trucking, washing, sorting, separating, crushing, drying, screening, and bagging activities would qualify as “processing”.

7. The case law interpreting ‘‘manufacturing and processing” as used in earlier provisions of the Income Tax Act has taken a quite liberal view of the meaning of these terms. See Federal Farms Limited v MNR [[1988] CTC 62] 66 DTC 5068 (Exchequer Court); Admiral Steel Products Limited v MNR [40 Tax ABC 322] 66 DTC 174 (Tax Appeal Board). It is submitted that the number of people that the Appellant employs and the investment that it has in machinery and equipment to process the extracted material into a more readily marketable form involve the kind of manpower, machinery, and capital that the latter case held constitutes “processing”.

8. Accordingly it is respectfully submitted that the Appellant has been processing goods for sale, within the meaning of the relevant provisions of the Income Tax Act and the Income Tax Regulations, either in ail its operations or at least in all of its operations other than excavation, and that the reassessments of its income and tax for the 1972 and 1973 taxation years should be revised accordingly.

He also referred the Board to the American jurisprudence to sustain the contention that sand and gravel are not minerals; and that any “production” ceases when the sand and gravel are extracted and what happens thereafter is “processing”.

He terminated his argument by maintaining that, although the onus of proving the facts is on the appellant, the respondent has some responsibility to prove that the appellant was producing industrial minerals during the taxation years 1972 and 1973 in order to justify his action in not allowing a reduction of tax under section 125.1 and not granting capital cost allowance within the meaning of paragraph 20(1)(a) of the Income Tax Act and paragraph 1100(1)(g) and subsection 1104(9) of the Regulations made thereunder.

Counsel for the respondent, referring to the relevant provisions of the Act and the Income Tax Regulations said that the appellant company wants to benefit from the Act both ways, and that the appellant was inconsistent in also claiming capital cost allowance as a producer of industrial minerals; that all the cases cited by the appellant must be ignored, even if they did decide that rocks, sand and gravel were not minerals because the problem at issue is new and totally different from those in the cited cases.

According to counsel for the respondent, his expert witness is well versed in the field of industrial minerals and, consequently, the Board would be well advised to rely on his opinion rather than on that of Mr Brown whose field of activity is not industrial minerals.

According to the evidence adduced, it seems that the appeliant company was processing sand and gravel, but the question at issue is whether the appellant company produces an industrial mineral.

Dr D C Nowlan said that rocks, sand and gravel are not minerals whereas Mr Guillet maintained that they are.

When it comes time to study new expressions put forward by much advanced, industrialized countries, the Board must not give too much importance to what has been said, written or enacted by other provincial authorities or to earlier court decisions because, prior to 1973, the problem of knowing what was the intention of Parliament when it enacted section 125.1 of the Income Tax Act did not exist. The Board must study the expressions in the context of the time they were enacted and, to interpret them, it must give to those words the meanings in current use in the relevant field of activity.

There is no doubt that Mr Guillet is well versed in the field of industrial minerals. His past record proves this, and he has no hesitation in proclaiming that rocks, sand and gravel are industrial minerais. He even has his own definition which classifies the appellant company as producing industrial minerals.

Furthermore, all the definitions provided by the respondent show that, according to modern knowledge in that field, the appellant company produces industrial minerals.

It is common knowledge in the sand and gravel business that one does not produce this raw material by the simple fact of digging and carrying it. It is equally known that a company such as the appellant's company, which proceeds the way it does, has in fact produced an industrial mineral because the raw material was being processed to render it more commercial.

Does the word “mineral” include rocks, sand and gravel? As simple as it may seem, I want to resort to three basic classifications of the earth: animal, vegetable and mineral. “Animal” includes all living creatures, “vegetable” all growing vegetation, and “mineral” all inanimate objects. I am inclined to believe that, when Parliament enacted section 125.1 of the Act, the intent was to give the simplest meaning to the word “mineral” to identify an inanimate object which would include rocks, sand and gravel. Keeping that in mind, it is reasonable to believe that the opinion of Mr Guillet is correct and that the word “mineral” includes rocks, sand and gravel.

Furthermore, all the definitions given by the respondent are most eloquent and convince the Board that, in the years under appeal, the appellant company was producing industrial minerals. Therefore, because of the exception contained in subparagraph 125.1 (3)(b)(vii) of the Act, these activities of the appellant company and the profits therefrom are excluded from the manufacturing or processing of goods for sale by definition, and any machinery or equipment used for the purpose does not come within Class 29 of the Regulations for capital cost allowance purposes.

Consequently, for these reasons, the appeal is dismissed.

Appeal dismissed.