Ok Ready-Mix LTD v. Minister of National Revenue, [1980] CTC 2730

John B Goetz:—This is an appeal by OK Ready-Mix Ltd in respect of the assessments of the respondent for the 1973 and 1974 taxation years. In the year 1973 the appellant declared Canadian manufacturing and processing profits amounting to $416,784.51 but the respondent, by notice of reassessment dated July 14, 1976, reassessed the 1973 year so as to reduce the Canadian manufacturing and processing profits previously reported to $315,010. In filing its 1974 T2 corporation income tax return, the appellant declared Canadian manufacturing and processing profits amounting to $368,635; however, the respondent by notice of reassessment dated July 14, 1978, reassessed the appellant’s 1974 year so as to reduce the Canadian manufacturing and processing profits previously reported to $309,461. In reassessing the appellant, the respondent relied, inter alia, upon paragraphs 125.1 (3)(a) and 125.1(3)(b)(vii) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and upon sections 5200 and 5202 of the Income Tax Regulations.

OK Ready-Mix Ltd is engaged in the manufacture of ready mix concrete and in particular of concrete blocks. It owns and operates a gravel pit in Windfill, British Columbia, and leases a gravel pit in Cranbrook, British Columbia, which pits produce sand and gravel utilized in the manufacturing process at the appellant’s plant. The issue is whether the operations of the appellant at the gravel or aggregate pits qualify as Canadian manufacturing and processing “profits” within the meaning of section 125.1 of the Income Tax Act and consequently entitled to obtain certain deductions. The respondent maintains that the appellant’s activities fall within the exception contained in paragraph 125.1(3)(b) of the Income Tax Act which reads as follows:

“manufacturing or processing’’ does not include producing industrial minerals.

Facts

The appellant filed with the Board a letter and a group of photographs with explanations of the operations from the pit to the ready mix plant operated by the appellant. To sum up the basic steps and operations, I quote from a comment made by me during the argument by counsel for the respondent:

THE CHAIRMAN . . . But I think you are both satisfied that we have enunciated the steps. You start excavating from the pit; then you move it in whatever way to your crusher, to your screens, to your piles, you must pile it up in different spots I am sure, at the pit site. And then it is moved on to your processing plant where you put it in different containers or bins and then draw it up via belts, with your computers and make your mixture with your cement and any other ingredients you might be making to manufacture concrete. Is that pretty much—

MR BROWN: That is it.

THE CHAIRMAN: I hope that does not presume judicial notice, that is why I am putting it in the record.

MR BROWN: No, that is pretty much it, Mr Chairman.

The appellant filed as Exhibit A-1, a letter from OK Ready-Mix Ltd to the Director of Taxation, Penticton, BC, dated April 1, 1977, which reads in part as follows:

The aggregate must be of the correct size for the ultimate use; in some cases the correct shape and free of foreign matter such as soil, clay, lime, etc. Even the sand used must be able to absorb the water so as to become a wetting agent within the overall product.

The photos filed show the beginning of the pit operations whereby the raw gravel or aggregate, which includes rocks, stones and sand is excavated from the pit with a front-end loader carrying six to eight yards of raw gravel. This is then dumped into a pre-screening unit preceding the actual crusher. The screen unit is designed to remove from the raw material, all sand and natural rock. The crusher itself crushes the larger material rejected by the pre-screen unit. The size at this point cannot be controlled; therefore, within the crusher itself there is a second screening or sort-to- size system. Rock not sorting within this screen system is returned to the crusher mechanism for a second “go round’’. From the crusher, material is conveyed to pre-sized loading hoppers. The overrun is further conveyed to open stock piles. The piles are a reserve against peak periods, withdrawals, and crushing equipment breakdowns. Loading from the bins is semiautomatic into truck-trailer units, which truck-trailer units carry the aggregate to the appellant’s ready-mix concrete plant and deposit it into different bins, according to size, shape and weight. All of the excavating, screening, crushing and separating the raw gravel in various sizes and dimensions into separate bins or rock piles is carried on within the gravel pits. At this point a pit operator if conducting an independent pit operation could sell the aggregate which begins with fines (sands) to smaller stones, larger stones and crushed rocks, to any user of aggregate who wishes to combine it with cement to produce concrete. This could be by way of sale to individuals, construction contractors or ready-mix plants, which on the whole with modern construction techniques are the major users of aggregate as excavated and sorted to size at the raw gravel pit.

The appellant says that, in that this operation is conducted by itself and in that it carries the finished aggregate to its ready-mix plant, it qualifies for manufacturing or processing profits within the meaning of section 125.1 of the Income Tax Act. When the aggregate (in various sizes) is deposited in special bins at the ready-mix plant site, the appellant, in its ready-mix operation, then has available to it all types of aggregate necessary to meet the design and control specification of concrete mixtures, as set out in Exhibit A-2 filed by the appellant, being a brochure of the Canadian Portland Cement Association.

Findings

First, I find that all the operations at the ready-mix plant form no part of the pit operation. At the ready-mix plant, by way of computers and specific formulae for strength, color, etc, the aggregates are drawn up from the different bins by way of belts to the batch plant where they are mixed with concrete and any other additives that the ready-mix operation wishes to add according to necessary specifications in the making of concrete for various and different uses, as well as the construction of concrete blocks. The sole issue then to be determined is whether the pit operations, including excavating, screening, crushing and separating into separate piles according to size, qualify for the Canadian manufacturing or processing profits, within the meaning of section 125.1 of the Act.

Counsel for the respondent gave a very helpful argument to the Board by suggesting possible interpretations to the operation and the import of the relevant sections of the Income Tax Act that might be construed in favour of the appellant. I commend him for his forthrightness and sincerity.

Both counsel for the appellant and the respondent were aware of the decision of my learned colleague Roland St-Onge, Esq QC, a Member of the Board, in the case of Nova Scotia Sand and Gravel Limited v MNR, [1976] CTC 2317; 76 DTC 1237, as well as the judgment of Dubinsky, DJ, of the Federal Court—Trial Division, in Nova Scotia Sand and Gravel Limited v Her Majesty The Queen, [1978] CTC 279; 78 DTC 6192. The Nova Scotia Sand and Gravel Limited case involved the taxpayer in the business of excavating, extracting and processing sand and gravel for sale to anyone. The company’s operation included the exploration and transportation of raw materials of sand and rock to its processing plant. The processing operation involved washing, drying, crushing, sorting and bagging of sand and rocks, and the finished products were used in a variety of domestic, commercial, industrial and construction purposes. Nova Scotia Sand and Gravel Limited's operation only differed from the appellant’s operations at its gravel pits in that apparently the raw material excavated was carried from the pit to an outside point where the washing, drying, crushing, sorting and bagging of sand and rocks was done, from which point the aggregate in various sizes was sold.

In the instant case the appellant did all of the washing, sorting, sizing and storage of aggregate according to size, in the bins at the pit, and sometimes in stock piles. It is this operation, and only this operation, that is relevant to the appeal.

The appellant argues in that it is bound by strict specifications in the making of ready-mix, that the pit operation is combined with the ready-mix plant as a processing and manufacturing operation.

I quote from Mr Roland St-Onge’s judgment in Nova Scotia Sand and Gravel Limited (supra) at pages 2322 and 1240 respectively:

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.

. .. 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.

Though the decision of Dubinsky, DJ in Nova Scotia Sand and Gravel Limited (supra) is under appeal, I agree with the reasoning of Dubinsky, DJ, completely where he states at pages 284 and 6195 respectively:

The most important stage of the sand processing is its classifying and breaking down in various grades or particle sizes. All forms of rock raw material are reduced to the size required and once this is done, the sizes are separated.

To begin with, I am in agreement with the learned member of the Tax Review Board when he holds that the word “mineral” does include rock, gravel and sand. Britannica World Language Dictionary defines “mineral” as “a naturally occurring, homogeneous substance . . . having a characteristic set of physical properties, a definite range of chemical composition and molecular structure; any inorganic substance, as ore, a rock, or a fossil”. Stroud’s Judicial Dictionary (4th ed, 1973) says: “minerals . . . means primarily all substances other than the agricultural surface of the ground—which may be got for manufacturing or mercantile purposes, whether from a mine . . . or such as stone or clay, which are got by open working . . .” “Every substance which can be got from underneath the surface of the earth for the purposes of profit, including sand and gravel and clay ...” I am satisfied that Plaintiff’s counsel does not seriously dispute this. I am satisfied furthermore that he does not seriously assert that the expression “producing” is done by nature.

Numerous cases were cited by counsel before the Federal Court— Trial Division, and considered by Dubinsky, DJ.

There is no definition in the Income Tax Act for the term “manufacturing or processing’’, but subparagraph 125.1 (3)(b)(vii) states:

“manufacturing and processing’’ does not include producing industrial minerals.

I concur completely with Dubinsky, DJ, in Nova Scotia Sand and Gravel Limited (supra), when he says at pages 295 and 6202 respectively:

Keeping in mind the above noted “golden rule” rule of construction and having reviewed carefully the operations conducted by the plaintiff as described in detail earlier in these reasons, I am satisfied with deference to contrary view, that what the plaintiff did in the taxation years in question was unquestionably “producing industrial minerals”. The plain and ordinary meaning of the words used in the statute, when applied to the operations conducted resulting in the final marketable form of the material sold, leads me to no other conclusion.

I hold that the pit operations of the appellant come within the meaning of subparagraph 125.1 (3)(b)(vii) of the Act, mainly in that, in this operation, the appellant was producing industrial minerals. I therefore dismiss the appeal.

Appeal dismissed.