Minister of National Revenue v. Bethlehem Copper Corporation LTD, [1974] CTC 707, 74 DTC 6520

Martland, .I (per curiam):—This appeal is from a judgment of the Federal Court of Appeal, which dismissed an appeal by the appellant, hereinafter referred to as “the Minister”, from the judgment at trial, in favour of the respondent, hereinafter referred to as “the Company”, on its appeal from an assessment by the Minister of its income for the fiscal year ending February 28,1967.

The Company was incorporated in 1955, under the laws of British Columbia, for the purpose of exploring and dredging certain copper mineral claims in the Highland Valley area of that province. In the first two years of the Company’s operations the exploratory and proving work was done principally in what the Company’s annual reports for 1956 and 1957 refer to as the lona and Jersey zones. The trial judge found that it was recognized by 1958 that there were two ore bodies in the Jersey zone—the Jersey and the East Jersey.

In April of 1958 the Company’s consultants recommended that “before an accurate estimate of grade could be made, an extensive underground bulk sampling program is required” which would involve “mainly diamond drilling, churn drilling having been concentrated principally on the Jersey and East Jersey zones thereby outlining two substantial and separate ore bodies”. A contract was awarded by the Company to drive an adit through the Jersey and East Jersey ore bodies and to carry out an exploration program.

In February of 1960 the Company made an agreement with certain Japanese interests (“the Sumitomo companies”) with the object of bringing the property into production without delay. The agreement provided for the sale to Sumitomo of shares of the Company, the consideration to be used by the Company to complete exploration of the ore bodies and, in particular, to explore an anomaly lying between the Jersey and East Jersey zones which, were it found to have contained sufficient tonnage of commercial grade, might have necessitated a pit dealing with or including all three zones. It appears that, having explored the area between the Jersey and the East Jersey zones and having found insufficient mineralized rock, the Company was required, as a matter of economic necessity, to develop each of the Jersey and East Jersey zones separately.

In 1967 Wright Engineers Limited, a firm of consulting engineers retained by the Company, prepared a production plan and economic analysis. This report described the differences in the rock and ore between the Jersey and East Jersey zones and contemplated construe- tion of a 3,000 tons per day crusher and mill with ore coming first from the East Jersey zone. The report also contemplated a later increase in plant capacity to make the handling of ore from the Jersey zone economically practical. The mining method was to be open pit and two pits were contemplated, one for East Jersey and the other for Jersey.

Based on the Wright Engineers’ economic analysis, an agreement was made between the Company and the Sumimoto group whereby Sumimoto provided funds to put the property into production at a rated mill capacity of 3,000 tons per day. The agreement contemplated expansion of the facilities to 5,000 tons per day.

Production from the East Jersey ore body was commenced on December 31, 1962, with a mill having a capacity of 3,300 tons per day. The ore was extracted by means of open pit mining. At the rated mill capacity of 3,300 tons per day the East Jersey ore body would have been mined out in approximately three years. The Company filed a claim for exemption under subsection 83(5) of the Income Tax Act, RSC 1952, c 148, as amended, hereinafter referred to as “the Act’, in respect of the period commencing December 1, 1962, when production in reasonable commercial quantities commenced from the East Jersey ore body. The exemption was granted, subject to certain qualifications.

Some development was commenced on the Jersey zone in 1964; ie, the preparatory work necessary to bring in another open pit. The directors of the Company authorized the expansion of plant capacity to 6,000 tons a day in January, 1964, and in January of 1965 the expansion of the mill to 10,000 tons per day was authorized. In February of 1965 the mill was operating at approximately 4,600 tons per day; by April of 1966 this had increased to 6,000 tons per day and by December of 1966 it had reached 10,000 tons per day. This was part of the program to redesign the mill to treat ore from the Jersey ore body.

On February 17, 1965 a rock slide in East Jersey forced the Company permanently to discontinue the East Jersey operation. The Jersey Ore body was brought into production shortly thereafter, somewhat earlier than had been contemplated in the original plan.

The Company filed a further claim for exemption from taxation under subsection 83(5) of the Act in June of 1965, in respect of a period commencing February 17, 1965, for income from the operation of the Jersey ore body. The Minister refused to grant the exemption. In its 1967 return of income the Company, in a schedule entitled “taxation adjustment—February 1967”, claimed as exempt under subsection 83(5) the sum of $6,646,130.27. That sum was computed by deducting the costs of concentrate production and marketing from the income from concentrates produced. Tax was assessed by the Minister on the basis that the amount of income was not exempt.

The relevant provisions of the Act are as follows:

83. (5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.

(6) In subsection (5),

(a) “mine” does not include an oil well, gas well, brine well, sand pit, gravel pit, clay pit, shale pit or stone quarry (other than a deposit of oil shale or bituminous sand), but does include a well for the extraction of material from a sylvite deposit and all such wells, the material produced from which is sent to a single plant for processing, shall be deemed to be one mine; and

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

The trial judge made the following findings:

(1) “In the fiscal year in question the Company’s income of $6,646,130.27 was derived from mining operations in its so-called Jersey mine.”

(2) “The uncontradicted evidence before me is that the East Jersey ore body was a small vein-type ore body of three and one half million tons with a ratio of two and one half tons of waste to one ton of ore. It was a narrow body and the change from ore to waste was sharp. The Jersey ore body was larger, 1,000 feet in depth and 600-1,000 feet in width. It was a very fractured ore body with numerous faults similar to a cracked tea cup, with fine mineralization following the cracks. It was a much lower grade deposit compared to East Jersey.

“Dr Holland testified the structural control in both ore bodies was in a north-south direction and because Jersey lay to the west of East Jersey, there was, in his words, no structural connection between the two ore bodies. The distance between the two was approximately 1,000 to 1,100 feet.”

(3) Open pit mining is the removal of overburden to uncover the ore. Drilling and blasting of the rock takes place and benches are eventually established. The ore and waste are removed by truck on a system of roads.

(4) None of the facilities or works of East Jersey were used in the workings on Jersey, except for a minor portion of a surface road. East Jersey had its own benches, berms, road systems and a power line. Jersey had and has the same things, but not connected with East Jersey. The techniques used for extracting ore in Jersey were different from those used in East Jersey.

(5) When Jersey ore was brought to the expanded mill, problems not encountered with East Jersey ore arose which had to be solved by consultants. The mill had to be expanded to make production from Jersey economically feasible.

(6) It was not feasible to work the two ore bodies as one pit and to do so would be to invite bankruptcy. What happened was in fact the operation of two distinct mines.

(7) lt was not economically feasible to obtain further ore from the East Jersey pit by a pit extension of the south end and a block cave from the Jersey pit.

(8) It was not uncommon for one mill to crush the ore from more than one mine.

(9) While the two ore bodies are relatively close, the evidence is clear that, from an economic view, they had to be worked separately by two individual pits.

On these findings, and after a consideration of the relevant authorities, the learned trial judge concluded that the Company had operated two distinct mines and that it was entitled to the tax benefit provided by subsection 83(5) in respect of the Jersey mine.

The Minister’s appeal to the Federal Court of Appeal was dismissed. The Chief Justice, who delivered the judgment of the Court, said:

Certain things are, I think, not in dispute, viz:

1. While East Jersey and Jersey are close together, they are not physically connected and the operation of extracting ore from one was physically quite independent of the operation of extracting ore from the other.

2. The operation of extracting ore from either East Jersey or Jersey would, if it had been the sole business of the respondent, have been “the operation of a mine” within the meaning of those words in subsection 83(5).

The conclusions reached by the Federal Court of Appeal are stated in the following passage from the judgment [pp 348-9]:

The position that the appellant takes, as I understand counsel, is that “mine” in subsection 83(5) means an enterprise used to extract ore “and produce copper concentrate”. This is, in effect, an integration of two business operations, namely, (a) extraction of ore, and (b) milling of concentrates. In my view, the authorities do not support such a wide ambit for the exemption in subsection 83(5). In 1958, Cartwright, J, as he then was, discussing the predecessor of subsection 83(5) [in North Bay Mica Co Ltd v MNR, [1958] SCR 597 at 601; [1958] CTC 208 at 212; 58 DTC 1151 at 1152-3] said, in effect, that he inclined to the view that the word “mine” meant “a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore”, and the passage in which he did so was quoted with approval by the Supreme Court of Canada, in a judgment delivered by Pigeon, J in MNR v Maclean Mining Co Ltd, [1970] SCR 877 at 882-3; [1970] CTC 264 at 268; 70 DTC 6199 at 6201. Moreover, in the latter case, Pigeon, J said at page 882 [267, 6201]: “Mining itself is complete by the production and hoisting of the ore ‘. . .” In my view, “operation of a mine” in subsection 83(5) refers only to the extraction of ore from an ore body and does not include processing of the ore after it has been produced.

My conclusion is, therefore, that the appellant’s submission that the extraction of ore from the Jersey ore body is only part of the operation of a mine consisting of the whole of the extraction and processing activities carried on by the respondent must be rejected.

I am further of opinion that, having regard to the fact that the trial was conducted on the basis that what was in issue was whether that which was superficially a separate mining operation was not an operation of a mine within subsection 83(5) because “mine” in this context means an enterprise for extracting ore and producing concentrates therefrom, the question does not arise on this appeal as to whether, within the ordinary meaning of words, and having due regard to the definition quoted by Cartwright, J, the operation of these two open pits was really the operation of only a single “mining concern” and was not, therefore, the operation of two separate “mines”. I can conceive of very difficult questions of fact in applying these concepts, particularly where there are varying degrees of physical sépara- tion of. properties or of separation in the time and mode of operation. In respect of such questions, both parties should be on notice before trial, of the nature of the issue that has been raised so that they may have an Opportunity to prepare their respective cases on the evidence. The trial of this matter was not conducted on any such issue and, in my view, the matter cannot justly be considered from that point of view on this appeal.

The Federal Court of Appeal revised the formal judgment at trial, which had referred the assessment back to the Minister, so as to provide as follows:

The appeal is allowed and the assessment is referred back to’ the Minister for reassessment on the basis that, by virtue of subsection (5) of section 83 of the Income Tax Act, there is not to be included, in computing the respondent’s income for the taxation year, any part of the respondent’s income that was derived from the extraction of ore from the Jersey ore body during the period of 36 months commencing with the day on which it came into production.

The Company filed a cross-appeal seeking to restore the terms of the judgment at trial, but this was abandoned on the argument before this Court.

The Minister submitted, on the appeal to this Court, that the Federal Court of Appeal had erred in holding that the words “operation of a mine” in subsection 83(5) of the Act refer only to the extraction of ore from an ore body and do not include the processing of the ore after it has been produced.

lt was also submitted that the operation of the Jersey and East Jersey pits was the operation of a single mining concern and, therefore, the operation of one mine.

As to the first point, I agree with the view expressed by the Federal Court of Appeal, which is in accordance with the opinions expressed in this Court in North Bay Mica Company Limited v MNR, [1958] SCR 097; [1958] CTC 208; 58 DTC 1151, and in MNR v MacLean Mining Company Limited, [1970] SCR 877; [1970] CTC 264; 70 DTC 6199.

The facts of the former case are accurately summarized in the head- note of the [SCR] report:

PM Co successfully operated a mica mine from October 1942, but by February 1945 it had almost exhausted the supply of raw mica then known to it. After having a thorough inspection made by geologists, the company decided not to proceed with further investigations and in October 1945 it ceased operations. In 1949 a different geologist made a thorough inspection of the property, as a result of which he and an associate obtained a lease of the mining claims from PM Co. He caused appellant company to be incorporated in 1950, and it bought the claims from PM Co and continued Operations. It proceeded thereafter to find and develop a new dyke or vein of mica of which PM Co had not known. Ore in reasonable commercial quantities was obtained from this dyke from 1950 onwards.

The majority of the Court held that the appellant was entitled to the tax benefit conferred by section 74 of the Income Tax Act, SC 1948, Cc 52 (the predecessor of subsection 83(5) of the Act), because the property had lost the character of a mine between its abandonment by PM Co and the commencement of operations by the appellant. What the appellant had acquired was not a mine, but a derelict and abandoned property which it hoped to develop into a mine.

It is in relation to the above factual background that Cartwright, J, as he then was, said, at page 601 [212, 1152-3]:

For the appellant it is contended that the word “mine” as used in clause (b) of Section 74(1) means not ‘‘a portion of the earth containing mineral deposits” but rather ‘‘a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore”. Support for this contention is sought in the circumstances that if “mine” has the first of the two suggested meanings, then, (i) the phrase “certified . . . to have been operating on mineral deposits” is inapt as It presupposes an entity capable of carrying on operations; and (ii) the draftsman should have substituted for the clause “that came into production” the clause “that was brought into production”. From this the appellant goes on to argue that the “mine” of the appellant is one entirely different from the “mine” of Purdy Mica Mines Limited.

I incline to the view that this contention is sound; but, be that as it may, the facts appear to me to bring the claim of the appellant within the plain words of the section.

The point which is being made in this passage is that the appellant did not acquire a mine merely because it had acquired a portion of the earth containing mineral deposits. It is also clear that the phrase “capable of producing ore” means that the operation of a mine refers to the extraction of ore from the ore body. It does not include the processing of the ore after production.

In the later case, Pigeon, J, who delivered the judgment of the Court, said, at page 882 [267, 6201]:

Mining itself is complete by the production and hoisting of the ore and one can well conceive of a single mill serving several mines.

I turn now to consider the second point raised by the Minister. The submission is that the Jersey mine, notwithstanding that it had separate benches, berms, road system and power line, was simply an ore body with attendant workings and not by itself a mine, within the meaning of subsection 83(5) of the Act. Reliance is placed on a statement from the reasons of Pigeon, J in the MacLean case, at page 882 [267-8, 6201]. I will cite the whole of the passage in which this statement appears, emphasizing that portion on which the Minister relies:

What I find decisive against the view that the MacLean workings are a separate mine is the fact that those workings were developed from the Rothermere workings which were substantially altered for the purpose of developing the MacLean orebody and of exploiting it for producing ore. Some 800 feet of the Rothermere shaft and the whole of the exploratory heading were dug for that sole purpose. Those paris of the Rothermere workings are really integral parts of the MacLean workings without which the latter could not be operated and would not be producing ore.

In order to reach a different conclusion one would have to interpret the word “mine” in s 83(5) as meaning “a portion of the earth containing mineral deposits”. This is not the usual meaning, the usual expression in that sense being “orebody”. /t is well known that mines often, if not generally, include several orebodies. Parliament cannot possibly have intended that a mining concern would get the benefit of the three-year exemption whenever a new orebody was being mined. This is an exception and it must be strictly construed.

He then referred to the passage from the reasons of Cartwright, J in the North Bay Mica case which has already been quoted.

The facts of the MacLean case were as follows:

In 1950, a mining concern, which had been mining at Buchans, Newfoundland, continuously since 1928, discovered a new orebody more than 1,000 feet from the nearest other known orebody. An existing shaft, the Rothermere, was deepened by some 800 feet and an exploratory heading from that shaft was driven some 2,300 feet underground towards the new ore- body, now known as the MacLean orebody. A shaft was then sunk for mining it and an underground haulage way was built to carry the ore to another shaft close to the mill. The miners use the Rothermere shaft to reach their working places. Compressed air, sand as well as fresh air come that way. Underground water is carried out the same way. Commercial production was reached in 1963. The Minister considered that the MacLean workings were simply an extension of an old or existing mine into a new orebody and not a new mine within the meaning of s 83(5) of the Income Tax Act.

At page 880, [266-7, 6200-1], Pigeon, J said:

In my view, the decisive consideration in favour of the Minister’s decision is that the MacLean orebody was not developed as a separate mine. An essential step in the process was the deepening by some 800 feet of the Rothermere shaft and the driving from that shaft of an exploratory heading some 2,300 feet underground towards the MacLean orebody. The substantial expenditure involved in deepening the Rothermere shaft and carrying an exploratory heading over a considerable distance shows that the use of the Rothermere workings was of very substantial importance in that development.

Such use was also going to be of substantial importance in the actual working of the MacLean orebody. It appears that the miners as a rule reach their working places and return to the “dry” that way. Compressed air for operating their drills as well as sand for filling the mined-out stopes also comes that way as well as the fresh air for ventilation, the exhaust only being by the MacLean shaft. Furthermore, all the water that seeps into the MacLean workings is carried out that same way, being pumped first from the bottom to the tunnel that was built as the exploratory heading, flowing by gravity to the Rothermere shaft due to a slight grade that was thoughtfully provided and being finally pumped up the Rothermere shaft.

It may be that the MacLean orebody, being completely distinct from the others and separated from the nearest other, the Rothermere, by a substantial distance of over 1,000 feet, could have been developed and operated as a distinct mine. In my view, it is clear that this is not what happened in fact. This orebody was developed as an integral part of a mining operation including the Rothermere. Not only did its development proceed as an expansion of that underground operation towards the other orebody but it was not designed to be operated otherwise than as a unit with the Rothermere. Some essential facilities without which the MacLean orebody cannot be worked at all are provided by the Rothermere workings, such as ventilation. On this account, with respect, Thurlow J was in error in saying: “all the elements necessary for a distinct mine appear to me to be present”.

It is my opinion that the factors which led to the conclusion reached in the MacLean case are not present here. This is not the case of more than one ore body being mined in a single mine. There are in this case concurrent findings of fact that, while East Jersey and Jersey are close together, they are not physically connected and the operation of extracting ore from one was physically quite independent of the extraction operation at the other. The trial judge accepted the evidence that it was not feasible to work the two bodies as one pit, and that what happened was the operation of two distinct mines.

In my opinion there is “a mine” within the meaning of subsection 83(5) if there is a body of ore together with the workings, equipment and machinery capable of producing it. The Jersey was not a mine merely because of the existence of a body of ore, separate from the East Jersey ore body. It would not have become a separate mine if the Jersey ore had been extracted as a result of the further development of the East Jersey mine. But it became a mine when its separate body of ore commenced to be extracted by means of its separate and distinct extraction facilities.

The fact that it was operated by the same company which had operated East Jersey does not preclude a claim under subsection 83(5) in respect of it. There is nothing in the subsection which precludes more than one claim to exemption being made provided that each claim relates to a separate mine.

The fact that the Company used the same mill for processing the Jersey ore as it had used for the East Jersey ore does not affect the position. As has already been noted, the mining process is completed by the production of the ore. This view is strengthened by the provisions of subsection 83(6) defining the word “mine”. Specific reference is made to wells for the extraction of material from a sylvite deposit and it is provided that all such wells, the material produced from which is sent to a single plant for processing, are to be “deemed to be one mine”. This “deeming” provision is not made applicable to substances other than sylvite and accordingly suggests that, save as to sylvite, a mine does not cease to be a mine because the ore extracted from it is processed in a mill which also processes ore from other mines.

I would dismiss the appeal with costs.