22 November 1990 Ministerial Correspondence 73984 F - CCA Class on Railway Tracks and Spur Line

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

	November 22, 1990
Special Audits Division	Resource Industries
E.H. Gauthier	Section
Director	John Chan
	952-9019
Shaukat Lakhani
Specialized Industries Section	7-3984

SUBJECT:  24(1) Railway Tracks and Spur Line

We are writing in reply to your memorandum dated June 3, 1989 wherein you requested a technical interpretation of Class 10(m) of Schedule II of the Income Tax Regulations (the "Regulations") in relation to   24(1)

Mrs. C. Lau of the Toronto D.O. has confirmed that 24(1) alluded to in your memorandum is the same property which is the subject of your more detailed enquiry dated September 29, 1989 (our File No. 7-4387) We will therefore defer our comments with respect to 24(1) our reply to the latter enquiry.

BACKGROUND

1.     24(1)

2.     

3.     

4.     Class 10 Schedule II of the Regulations

          Class 10 in Schedule II of the Regulations provides for:

     Property not included in any other class that is

(k)     property (other than property included in Class 28 or property described in paragraph (l) or (m)) that was acquired for the purpose of gaining or producing income from a mine and that is

(i)     a structure that would otherwise be included in Class 8, or

(ii)     machinery or equipment, ...;

(l)     property acquired after the 1971 taxation year for the purpose of gaining or producing income from a mine and providing services to the mine or to a community where a substantial proportion of the persons who ordinarily work at the mine reside, if such property is ...

(ii)      a road, sidewalk, airplane runway, parking area, storage area or similar surface construction, or

(iii)     machinery or equipment ancillary to any of the property described in subparagraph (i) or (ii),

but is not

(iv)     a property included in Class 28, or

(v)     a railway not situated on the mine property;

(m)     property acquired after March 31, 1977, principally for the purpose of gaining or producing income from a mine, if such property is

(i)     railway track and grading including components such as rails, ballast, ties and other track material, ...

(iv)     conveying, loading, unloading or storing machinery or equipment, including a structure, acquired for the purpose of shipping output from the mine by means of the track referred to in subparagraph (i).

5.     Subparagraph 1104(5) of the Regulations

     The provisions of Regulation 1104(5) which would be relevant are as follows:

     For purposes of Class 10 in Schedule II, "income from a mine", or any expression referring to income from a mine, includes income reasonably attributable to

(a)     the processing of

(i)     ore, other than iron ore or tar sands ore, from a mineral resource owned by the taxpayer to any sage that is not beyond the prime metal stage or its equivalent,

(c)     the transportation of

(i)       output, other than iron ore or tar sands ore, from a mineral resource owned by the taxpayer that has been processed by him to any stage that is not beyond the prime metal stage or its equivalent, to the extent that such transportation is effected through the use of property of the taxpayer that is included in Class 10 in Schedule II by virtue of paragraph (m) thereof or that would be so included if that paragraph were read without reference to subparagraph (v) thereof.

6.     Toronto D.O.'s Opinion

     The Toronto D.O. has observed that Class 10(m)(i) includes any railway track and grading to the extent that it is acquired after March 31, 1977 principally for the purpose of gaining or producing income from a mine. It is their view that the railway track referred to therein would include railway track situated on the mine property ("on-site track") and railway track not situated on the mine property ("off-site track"); railway track between the mine and the concentrator, mill, smelter or refinery; and a railway spur line joining the main CN railway track.

7.     Another Taxpayer's View

     The Toronto D.O. indicated that while 24(1) is not yet expressed any opinion on whether the railway track falls within the ambit of Class 10(m)(i), 24(1) asserts that finance had ----------- railway spur mines in Class 10(m) to the extent that it ships output from a mine.

     The unnamed company also asserts that "output" referred to in Class 10(m)(iv) means finished goods destined for sale. Thus, the unnamed company contends that to include on-site railway tracks in Class 10(m), thereby excluding them from the earned depletion base ("EDB"), described in Regulation 1205, would result in unfair penalties being imposed on mining companies that ship ore, concentrates or any intermediate products by rail rather than by conveyor belts or any machinery or equipment that qualify for inclusion in EDB by virtue of being Class 10(k) properties.

     Presumably, the unnamed company's assertions were submitted in support of the view that the on-site railway track should be included in Class 10(k) or (l) in order that said track would be eligible for inclusion in EDB.

YOUR REQUEST

Having considered the above, you ask

(1)     whether railway track used by mining companies for the purpose of gaining or producing income from a mine in the above scenario can also be considered as Class 10(k) property, and

(2)     whether the reference to "shipping output from the mine" in Class 10(m)(iv) applies to products destined for sale or to any output, whether destined for sale or for processing by the owner of the railway track.

OUR COMMENTS

General

There seems to be little doubt that the on-site railway track and spur line are properties that are described at subparagraph (i) of Class 10(m), viz., railway track including components such as rails, ballast, ties and other track material.

In order that the on-site railway track and spur line may be classified as Class 10(h), (l) or (m) properties, however, they must have been acquired for the purpose of gaining or producing income from a mine.

The meaning of the phrase "income from a mine" was extended by Regulation 1104(5) to include, under paragraph (c) thereof, the transportation of output, from the taxpayer's mineral resource, that has been processed by him to any stage that is not beyond the prime metal stage.

Rulings' position with respect to the extended meaning of "income from a mine" in Regulation 1104(5) is that:

(1)     transportation of processed mine output is excluded unless it is described in Regulation 1104(5)(c), i.e., transportation of mine output processed to and including the prime metal stage would be included whereas transportation of mine output processed beyond the prime metal stage would be excluded,

(2)     transportation of produced but unprocessed ore is included, and

(3)     transportation in the course of processing ore to any stage not beyond the price metal stage as described in Regulation 1104(5)(a) is included.

Our position was confirmed by Current Amendments and Regulations Division on January 9, 1989.

     "Paragraph 1104(5)(c) was added to the Regulations to implement the March 31, 1977 Budget proposal that railway systems be placed on the same basis as roads and other systems used for transporting ore from a mine site. As a consequence of the amendment, the railway system is entitled to capital cost allowance at a minimum rate of 30 percent".

Current Amendments further stated that the position adopted by Rulings supports the intent of the Budget proposal relating to railway systems.

The "Budget" referred to is the Budget Document dated March 31, 1977 which states at page 34

     "In addition the cost to a mining company of constructing a railway spur line will be given the same treatment as the cost of constructing a road to transport ore from a mine site".

The Supplementary Budget Papers dated March 31, 1977 further stated at page 15 that

     "The cost of any railway spur lines acquired by a mining company after March 31, 1977 to produce income from a mine will qualify for inclusion in Class 28 of the Capital Cost Allowance Regulations if the mine is a new mine, and for inclusion in Class 10 otherwise. This will permit the cost to be written off for tax purposes on the declining balance basis at a rate of at least 30 per cent rather than at 4 per cent under the existing regulations. This measure will place a railway system on the same basis as roads and other systems for transporting ore from a mine site".

The above comments regarding the intent of the Budget proposal appears to be consistent with the unnamed company's contention that Finance had intended to include off-site railway spur lines in Class 10(m) so that off-site railway spur lines, which were written off at 4% as Class 1(h) property, could be written off at a rate of at least 30%.

On-Site Railway Tracks

Class 10(l) was introduced into the Regulations as Class 10(ka) applicable to the 1972 and subsequent taxation years and Class 10(k) was contemporaneously amended to exclude 10(l) properties therefrom.

Provided that the requirements in the preamble of Class 10(l) have been satisfied, it appears that as a consequence of subparagraph 10(l)(ii) which refers to a road, sidewalk, airplane runway, parking area, storage area or similar surface construction, railway tracks would qualify for inclusion therein as "similar surface construction". Furthermore, "a railway not situated on the mine property", i.e., off-site track, is excluded frown Class 10(l) thy virtue of (v) thereof, which implies that on-site track must be included.

Thus, prior to the introduction of Class 10(m), it was clear that all surface railway tracks situated on the mine property would qualify for inclusion in Class 10(l) provided that the purpose tests in the preamble thereof had been satisfied.

Class 10(m) was introduced into the Regulations as Class 10(kb) on February 10, 1978 effective after March 31, 1977 to implement the March 31, 1977 federal budget proposals which are described above.

21(1)(b)

24(1)

Railway Spur Line

It is apparent from Regulation 1104(5) and Rulings' position with respect thereto, however, that the transportation of ore from a mineral resource owned by the taxpayer by railway spur lines would be included in "income from a mine" provided that

(1)     the ore being transported is processed to a stage that is not beyond the prime metal stage,

(2)     the ore being transported is produced but not processed, and

(3)     the ore is transported in the course of processing as described in Regulation 1104(5)(a).

The question with respect to 24(1). This determination would also provided the solution to the question of whether the railway track is used principally for the purpose of gaining or producing "income from a mine" under Regulation 1104(5).

In connection with your other enquiry (our File No. 7-4387) regarding the eligibility of 24(1) EMR concluded, on the basis of their ------  three criteria for determining prime metal stage, that "the prime metal stage for potash occurs on the mine property when it is ready for shipment to customers. See page 3 of EMR's letter dated May 22, 1990 - a copy is attached.

Consequently, since the  24(1)

A.     Class 10(k)

     You asked whether railway track used by mining companies for the purpose of gaining or producing income from a mine can also be considered as Class 10(k) property.

     Your question is very broadly worded and we would reply that prior to the introduction of Class 10(m), the old Assessing Guide stated at page 11-138 under Mining Machinery and Equipment that

     "Paragraph (k) of Class 10 includes also railway track and track grading which are not part of a railway system if they are in or around a mine or mine plant.

     Note however that paragraph (k) of Class 10 now specifically excludes therefrom property described in paragraph (l) or (m). Under the existing Regulations, railway track used by mining companies for the purpose of gaining or producing income from a mine would not be classified as Class 10(k) property provided that it is included in Classes 10(l) or (m).

     Having regard to Noranda Mines Limited v. MNR, 87 DTC 153 (T.C.C.), in which certain property used directly in the production of ore was held to be Class 10(k) property, we are inclined to the view that railway track located underground which is clearly being used directly in the production of ore could qualify for treatment as Class 10(k) property.

B.     Railway Spur Line - Class 10(k)

     The argument proffered by the unnamed company which presumes that "output" referred to in Class 10(m)(iv) means "finished goods" was apparently submitted in furtherance of classifying railway spur lines from mine-sites under Class 10(k) or (l), which would qualify for inclusion in EDB, instead of paragraph 10(m) which would not qualify for inclusion in EDB.

In view of our comments above that surface railway tracks, acquired for the purpose of gaining or producing income from a mine and situated on the mine property, would be included in Class 10(l), but for Class 28 which qualifies for EDB pursuant to Regulation 1205(1)(c)(i) where the property is acquired after November 16, 1978, it is not necessary to address the unnamed company's contentions described at the beginning of this memorandum.

Nevertheless, you ask whether the reference to "shipping output from the mine" in Class 10(m)(iv) applies to products destined for sale or to any output, whether they be destined for sale or for processing by the owner of the track. Specifically, whether "output from the mine" means ore, concentrates, intermediate products transported between various stages of processing or finished goods.

Again, your question is very broad, and as described above an answer to your question is not germane to the issue of classification of 24(1) railway track under Class 10. We are therefore not prepared to answer your question without further determining its significance and without further research.

We offer the following general comments, however, which may be of assistance to you.

Michael Hilts, Director, Specialty Rulings Directorate stated in a paper presented at the 1989 Canadian Tax Conference that

     "As is well known by now, it is our intention to observe the plain meaning approach to statutory interpretation. This approach requires the reader of a provision in a statute to look to the plain meaning of the words of the provision to establish its effect, where the words have such a plain meaning. Where some ambiguity exists in the words, the approach requires that an interpretation should be adopted which resolves that ambiguity on a basis consistent with the intent of the legislature in enacting the provision in question".

We would therefore look to the plain meaning of the phrase "output from the mine" as it is used in Class 10(m)(iv). For purposes of classifying 24(1) railway track under Class 10, it does not seem necessary to impose a restricted meaning on the phrase as it is used in Class 10(m)(iv).

A/DirectorBilingual Services and Resource Industries DivisionRulings Directorate