A J Frost:
1 This is an income tax appeal in respect of the 1967, 1968 and 1969 taxation years wherein certain development costs of the appellant were disallowed on the ground that its principal business is not mining or exploring for minerals within the meaning of subsection 83A(3b) of the Income Tax Act as it was prior to 1972. The said section provides, inter alia, as follows:
83A. (3b) A corporation whose principal business is
2 The appellant company is a British Columbia corporation controlled by Cominco Limited. Its objects as set forth in the memorandum of agreement include:
(a) To acquire by purchase, lease, hire, discovery, location, or otherwise, and hold, mines, mineral claims, mineral leases, mining lands, prospects, licences, and mining rights of every description, and to work, develop, operate, turn to account, sell, or otherwise dispose thereof:
(b) To dig, drill, or bore for, raise, crush, wash, smelt, reduce, refine, amalgamate, assay, analyse, and otherwise treat gold, silver, copper, lead, iron, coal, petroleum, natural gas, and any other ore, deposit, metal, or mineral whatsoever, whether belonging to the Company or not, and to render the same merchantable, and to buy, sell, and deal in the same or any product thereof:
(c) To engage in any branch of mining, smelting, milling, and refining minerals.
3 The appellant company owned two mining properties on Vancouver Island near the Cowichan area. One property was acquired from Sunlock Mines Limited (hereinafter referred to as “Sunlock”), a subsidiary of Cominco Limited, and the other property was acquired from Gabbro Copper Mines Limited (“Gabbro”)’ a subsidiary of Noranda Mines Limited. In other words what happened was simply that the two mining companies, Sunlock and Gabbro, got together and formed Sunro Mines Limited (the appellant) because their respective properties were contiguous and could be operated more profitably as a single unit. Subsequently, on November 1, 1960, in order to effect further economies, the appellant entered into a leasing agreement with Cowichan Copper Company Ltd (“Cowichan”) whereby the appellant “leased” or “contributed” its mine as a joint venture arrangement in exchange for compensation based on three variables: (a) the price of copper; (b) the quantity of ore produced; and (c) the quality of that ore and the amount of copper contained therein.
4 The predecessor corporations, Sunlock and Gabbro, had expended $313,251 on exploration and development of the said properties which on acquisition of the mining properties became the capitalized costs of the appellant and subject to write-off against future earnings. As well, the appellant incurred on its own behalf development costs as follows:
1956 $ 28,277
1957 560,029
1958 280,879
1959 12,810
1960 1,178
--------
$883,173
Of the original costs here in issue, only $170,272 has not been recognized as a deductible expense by the tax authorities. Counsel for the appellant in his argument submitted thatIt is clear that the payments made under the Cowichan Copper agreement to the Appellant were to the Appellant “income derived from the operation of a mine” within the meaning of Section 83A (5) of the Act. Indeed, that point is uncontested because the three-year tax holiday stipulated in Section 83 (5) was, on request by the company granted to the Appellant for the years 1962–1965.
5 Prior to 1962 the appellant did not receive any income from its mining property. Between 1962 and 1970 the appellant's income and expenses were reported for tax purposes as follows:
Cowichan
Income Sundry and
Royalty Administration
Gain on Sales Interest Income? Expenses
1962 -- 1,799 243,301 834
1963 782 9,671 379,029 1,877
1964 -- 13,378 -- 2,055
1965 1,250 12,107 1,615 2,159
1966 -- 5,921 90,452 2,302
1967 3,300 6,637 61,621 1,371
1968 1,050 7,171 59,590 1,867
1969 1,203 9,884 -- 1,853
1970 -- 12,965 -- --
6 As a practical measure, the 1960 agreement was amended in 1965 and 1967 to meet changing conditions and to facilitate continued mining operations.
7 During the period under appeal, each president of the appellant was a senior mining engineer of Cominco Limited and four of the five directors were mining experts. From time to time these directors inspected the mine property and gave advice concerning the operations of the mine.
8 An examination of the financial statements of the appellant company suggests that the revenues received by the appellant were passive in nature, and give prima facie support to the position of the Minister of National Revenue that the principal business of the appellant was not mining or exploration for minerals. However, the financial statements, according to the evidence, only tell part of the mining story as they reflect only the legal form chosen by the appellant company to have its mine worked.
9 The evidence adduced at the hearing indicated that the agreement with Cowichan called a “lease” did not in any practical sense remove the appellant from the business of mining. The appellant was keenly interested in all phases of the mine's operations and never became detached from its operations or progress. The appellant took steps from time to time of an active nature to keep the mine in operation alive.
10 The board of directors, comprised mainly of mining engineers and geologists, was consulted with respect to the mining and exploration of the mine and concurred in amendments to the leasing agreement to meet changing conditions. All profits realized were derived from mining activities. The contractual arrangements with Cowichan did little more than set up a conduit pipe through which mining profits flowed to the appellant as owner of the mine. The legal arrangements provided for the collection of “royalties” (amended from time to time) and did not constitute a separate business activity to that of mining or in any way change the essential character of the appellant's business. The so-called production royalties were not fixed investment returns but rather income from the business of mining while the precise amounts received by the appellant from time to time were determined by the terms of the formula. The basis of the formula was in fact varied periodically to help the mine to operate successfully. Under these circumstances, it seems to me that all development expenses constitute a proper charge against income and are a deductible expense in determining taxable income. On the facts before me, I conclude that the “lease agreement” was a joint venture to develop and exploit a mine and in effect constituted a sharing arrangement.
11 I find little ground for the contention that the financial arrangements with Cowichan changed the character of the income earned. The case of MNR v Hollinger North Shore Exploration Co Ltd, [1963] S.C.R. 131; established that income “derived from the operation of a mine” has a meaning equivalent to income “arising or accruing” from the operation of a mine. Here the amount received by the appellant is in a similar category, as the quantum of income was determined by mining operations. Further this situation can be clearly distinguished from a simple investment where the investor is completely passive and his return depends on his contractual and property rights rather than on any degree of entrepreneurship.
12 In this appeal, the business engaged in was mining and the profits were mining profits derived from price, quality and quantity of ore. The predecessor companies were mining companies, the appellant was a mining company, Cominco Limited and Noranda Mines Limited are mining companies as well as Cowichan, and the development costs at issue in this appeal were expended to earn mining income.
13 Appeal allowed in full.
Email this Content