15 June 1993 Administrative Letter 9231896 F - Deductibility of Ontario Mining Tax in Computing Income

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.

AUDIT DIRECTORATE	RULINGS DIRECTORATE
Audit Technical Support Division	Resource Industries Section
E.H. Gauthier	Peter Lee (613) 957-8977
Director

Attention:  Mervyn Scott Forestry/Mining Specialist

XXXXXXXXXX

Deductibility of Ontario Mining Tax In Computing Tax Under Section 8 of the B.C. Income Tax Act

This is in reply to your memorandum of October 21, 1992 wherein you requested our opinion with respect to the deductibility of Ontario mining tax ("OMT") in the course of calculating the tax payable by XXXXXXXXXX under the Income Tax Act (British Columbia) (the "B.C. Act"), the administration of which is the responsibility of Revenue Canada. OMT is relevant for the computation of XXXXXXXXXX deduction under paragraph 20(1)(v) of the Income Tax Act (Canada) (the "Act") and Part XXXIX of the Income Tax Regulations (Canada) (the "Regulations").

XXXXXXXXXX

We apologize for the delay in replying to you.

Facts

1.     XXXXXXXXXX

2.     Paragraph 8(1)(b) of the B.C. Act requires taxpayers to first determine B.C. tax payable in accordance with the ordinary rules provided by Part I of that Act and subsection 124(4) of the Act. Then, a second calculation of B.C. tax payable is to be made on the assumption that, among other provisions, paragraph 18(1)(m) of the Act (except as it applies to the B.C. mining levies listed in the provision) and the resource allowance had not been enacted. If the latter calculation of tax is less than the former calculation the net amount can be deducted from B.C. income tax payable.

3.     Notwithstanding paragraph 18(1)(a) of the Act, paragraph 20(1)(v) of the Act and Part XXXIX of the Regulations allow certain portions of provincial mining taxes to be deductible in computing a taxpayer's income for both the purposes of the Act and the B.C. Act. As stated in the Canada Tax Service (DeBoo) at page 20-1801, the purpose of paragraph 20(1)(v) of the Act is to:

... provide an exception to the general rule that taxes on income are not deductible in computing the amount of that income which is subject to tax under the Act.

4.     Paragraph 8(1)(b) of the B.C. Act lists the specific B.C. mining taxes which are not to be deducted in making the notional calculation of taxable income required to be made under that paragraph. The B.C. Act does not list OMT for exclusion from deduction and one could initially conclude that OMT is deductible for this reason. However, there is a further level of analysis to be undertaken to determine whether OMT is in any case precluded from deduction by virtue of paragraph 18(1)(a) of the Act or by virtue of paragraph 18(1)(m) of the Act as it applies for the purposes of the Act and the B.C. Act.

5.     Paragraph 18(1)(a) of the Act provides that:

... no deduction shall be made in respect of ... an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property...

6.     Pursuant to the Ontario Mining Tax Act (the "OMTA"), OMT is levied on annual profits from every mine in Ontario. Such profits are calculated by deducting certain specifically permitted deductions from the mining revenue. Revenue is broadly defined under the OMTA as the total consideration that is received or is receivable from another person for the Ontario-produced mineral substances or processed mineral substances sold. It also includes hedging revenues.

7.     Permitted deductions under the OMTA are as follows:

(a)     general expenses attributable to the production of output from the mines;

(b)     operating and maintenance expenses, net of rents and other recoveries, related to social assets in Ontario. A "social asset" is defined in section 1 of the OMTA as a "tangible asset owned by the operator that is incidental to mining and processing operations and relates directly to the provision of housing, recreational or service facilities if the asset is necessary to attract or retain employees and is available for the use of all employees.";

(c)     administrative and overhead expenses that are reasonably attributable to the production or sale of the output of the mines;

(d)     scientific research expenditures or development research expenditures conducted in Canada and incurred by the operator to the extent that such expenditures are related to the output of the mines;

(e)     donations made by the operator for charitable, educational or benevolent purposes which are reasonably related to mining operations in Ontario;

(f)     amounts in respect of exploration and development expenditures incurred in Ontario net of Ontario Mineral Exploration Program Act grants and other government assistance but not including resource property purchase costs;

(g)     allowed depreciation of mining and processing assets;

(h)     expenditures incurred in the transportation of output from the mine to the point of delivery of the output to its purchaser;

(i)     pension plan contributions, deductible under the Act, in respect of employees of Ontario mining operations or the processing in Canada of the mine's output; and

(j)     the operator's prescribed processing allowance.

8.     The following deductions are specifically excluded under the OMTA:

(a)     capital payments or amounts in respect of depreciation, amortization, obsolescence or depletion, unless expressly permitted;

(b)     interest or dividends paid;

(c)     royalties for the right to extract mineral substances or use of real property in connection with the extraction of mineral substances which are paid to any person other than the Crown; and

(d)     any income or profits tax and any tax on capital paid to any jurisdiction.

9.     XXXXXXXXXX

Your Questions

10.      You requested our opinions on the following questions:

(a)     If a provincial tax is an income tax that fits the wording of paragraph 18(1)(m) of the Act, would that tax initially be denied under paragraph 18(1)(a) of the Act?

(b)     Could it be argued that as the deductibility of the tax would also be denied under paragraph 18(1)(m) of the Act, it doesn't matter that it is denied under paragraph 18(1)(a) of the Act? That is, the deductibility can be denied under either provision and the taxpayer could chose which one, so it doesn't matter if a particular tax is an income tax.

(c)     Is the OMT an income tax?

(d)     If the OMT is an income tax and is denied a deduction pursuant to paragraph 18(1)(a) of the Act, would the operators subject to this tax be allowed to deduct interest they pay on these taxes?

(e)     If none of the provincial mining taxes are income taxes, what purpose does paragraph 20(1)(v) of the Act serve?

Your Views

11.     Your views with respect to the above-noted questions are as follows:

(a)     If a provincial tax is an income tax that fits the wording of paragraph 18(1)(m) of the Act, such tax will initially be denied under paragraph 18(1)(a) of the Act and the deduction of such tax under section 8 of the B.C. Act will also be denied.

(b)     The taxpayer does not have a choice and paragraph 18(1)(a) must be applied first.

(c)     The OMT is an income tax.

The Representative's Views

12.     XXXXXXXXXX

Our Views

13.     We do not agree with XXXXXXXXXX view stated in 12 above. In our opinion, the better view is that OMT is an income or profit tax and that such tax is not incurred in the course of earning profits but is incurred after such profits have been earned for the purpose of paragraph 18(1)(a) of the Act. Accordingly, OMT is not deductible in computing XXXXXXXXXX income by virtue of paragraph 18(1)(a) of the Act and is also not deductible in making the notional calculations of tax and taxable income as required by paragraph 8(1)(b) of the B.C. Act.

XXXXXXXXXX

In paragraphs 17, 19 and 20 below, we provide our responses to your questions in the order of (c) and (d), (e), and (a) and (b), respectively.

14.     In the case of Mattabi Mines Ltd. v. Minister of Revenue (Ontario), (1989) 53 D.L.R. (4d) 656 (SCC), Wilson J. commented on page 663:

The jurisprudence interpreting this phrase (in paragraph 18(1)(a) of the Act) has provided some clear principles. In Royal Trust Co. v. M.N.R., (1957) 9 D.L.R. (2d) 28, Thorson P. said this about the provision in the federal Act (then s. 12(1)(a)), at pp. 39-40:

The essential limitation in the exception expressed in s. 12(1)(a) is that the outlay or expense should have been made by the taxpayer "for the purpose" of gaining or producing income "from the business". It is the purpose of the outlay or expense that is emphasized but the purpose must be that of gaining or producing income "from the business" in which the taxpayer is engaged. If these conditions are met the fact that there may be no resulting income does not prevent the deductibility of the amount of the outlay or expense. Thus, in a case under the Income Tax Act if an outlay or expense is made or incurred by a taxpayer in accordance with the principles of commercial trading or accepted business practice and it is made or incurred for the purpose of gaining or producing income from his business its amount is deductible for income tax purposes.

Wilson J. further commented at page 665 of the Mattabi Mines case:

The only thing that matters is that the expenditures were a legitimate expense made in the ordinary course of business with the intention that the company could generate a taxable income some time in the future.

At the same page, Wilson J. quoted with approval paragraph 2(b) of Interpretation Bulletin IT-487, April 26, 1982, entitled "General Limitations on Deduction of Outlays or Expenses":

(b)     "... for the purpose...". It is not necessary to show that income actually resulted from the particular outlay or expenditure itself. It is sufficient that the outlay or expense was a part of the income-earning process. (Underlines are mine.)

15.     In the case of Dominion Natural Gas Co. Ltd. v. M.N.R., (1941) S.C.R. 19, the Supreme Court of Canada interpreted the phrase "for the purpose of earning income" found in paragraph 6(1)(a) of the Income War Tax Act (now paragraph 18(1)(a) of the Act) to mean "in the process of earning the income". (Underlines are mine.)

16.     The word "income" is not defined in the Act (N.B., under the predecessor to the Act, Income War Tax Act, the word "income" was defined as "the annual net profit or gain..."), but, pursuant to subsection 9(1) of the Act a taxpayer's income from a business or property is his profit therefrom subject to the provisions in Part I of the Act. In the case of M.N.R. v. Anaconda American Brass Ltd., 55 DTC 1220 (P.C.), the Privy Council adopted the following excerpt from Whimster and Co. v. C.I.R, 12 T.C. 813:

In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts.

Nevertheless, the Act does not define the word "profit", nor does it prescribe how or by what method such profit is to be computed except such calculation is subject to certain restrictions under Division B of the Act. Accordingly, the word "profit" has to be interpreted in its ordinary meaning and it is always a question of fact as to what is the profit amount.

17.     It is arguable that the word "income" used in paragraph 18(1)(a) of the Act must refer to only income computed under Division B of the Act (see paragraph 2c of Interpretation Bulletin IT-487), and that it must refer to the same amount or to at least an approximation of XXXXXXXXXX actual net income or profits for the year from its Ontario mining business. Since OMT is based on an income amount calculated under the OMTA, which is not an approximation of XXXXXXXXXX actual net income or profits for the year from its Ontario mining business, it is arguable that OMT is not an income tax and hence is incurred for the purpose of earning income under Division B of the Act.

In the case of First Pioneer Petroleums Ltd., 74 DTC 6109 (FCTD), Mahoney, J. decided at page 6111 that provincial corporation taxes were not incurred for the purpose of gaining or producing income under paragraph 12(1)(a) (now paragraph 18(1)(a)) of the Act for the following reasons:

... because by their very nature the income taxes were incurred because income was gained or produced and not for the purpose of gaining or producing it. The authorities clearly reject the proposition that where... two separate jurisdictions impose a tax on the same income, in the absence of an express statutory provision to the contrary, the tax paid or payable to one can be taken into account in determining the taxable income for the other....

At the same page, Mahoney, J. quoted with approval from Audette J. in the case of Clinton W. Roenisch, (1931) Ex. C.R. 1 at 4:

It is self evident that the amount of the income tax paid to the province is not an expense for the earning of income, within the meaning of section 6(a) of the Income War Tax Act. When such a payment is made to the province, it is not so made to earn the income, it is paid because there is an income showing gain and profit.

At the same page, Mahoney, J. quoted with approval from the Lord Chancellor, the Earl of Halsbury, in the case of A.G. v. Ashton Gas Company, (1906) A.C. 10 at 12:

Profit is a plain English word: that is what is charged with income tax... The income tax is a charge upon the profits; the thing which is taxed is the profit that is made, and you must ascertain what is the profit that is made before you deduct the tax.... (Underlines are mine.)

In the case of Quemont Mining Corp. Ltd. et al., 66 DTC 5376 (Ex. Ct.), Cattanach, J. concluded at pages 5392 and 5394:

... the duties imposed under the Quèbec Mining Act are taxes imposed upon annual profits, both realized and estimated, and is not an expense incurred by Quemont for the purpose of producing income from its property or business.... It follows that the amount so paid is not deductible as being an exception to the prohibition in section 12(1)(a) (now paragraph 18(1)(a)) of the Income Tax Act.

At page 5392, Cattanach, J. commented on the court decisions in the case of Nickel Rim Mines Ltd. v. Attorney General for Ontario, (1966) 1 O.R. 345:

... the Ontario Court of Appeal considered whether the tax imposed by section 4 of the Mining Tax Act, R.S.O. 1950, chapter 237 was ultra vires the Province as not being "direct" as it must be to fall within the taxing authority conferred on the Province by section 92 of the British North America Act. The section of the Ontario Mining Tax Act there under review, to all intents and purposes and subject to those variations which have already mentioned, closely parallels sections 13 and 14 of the Quèbec Mining Act. Wells, J. who heard the action in the first instance came to the conclusion that the tax on the profits from the ore which was sold was a direct tax, but that the tax on the profits from the ore which was not sold was an indirect tax. On appeal Porter, C.J.O. who delivered the judgment of the Court of Appeal, agreed with Wells, J. that the tax, in so far as it applies to realized profits, is a direct tax. However, as to the tax on ore not sold, he took the view that it was also a direct tax. At page 363 he said:

In the case at bar, we are considering a profit tax, to be assessed at the end of each year. Although the tax in part may be upon profits estimated before actual sale, I do not think that the nature of the tax is thereby affected....

It is clear from the above quoted language that the Court of Appeal recognized that the tax imposed under the Ontario Mining Tax Act on realized and estimated profits was a tax on income. (Underlines are mine.)

The above-noted Canadian jurisprudence supports the view that by the very nature of provincial income taxes or Quèbec or Ontario mining taxes, such taxes are incurred only after profits have been earned and calculated in accordance with the respective provincial legislation and are not incurred in the course of earning such profits, notwithstanding the fact that the profit amounts calculated under the applicable provincial legislation may not be an approximation of profits of the companies. The Canadian and British jurisprudence (see the cases of Ho Shuk Yuen Lai, 80 DTC 1044 (TRB), and The London County Council, (1901) A.C. 26 (HL)) also support the view that a tax on annual value of a property (i.e., the levying of tax on a notional basis) was an income tax even if such value might not be equal to or might not be an approximation of the actual rental income. Lord MacNaghten commented in the case of The London County Council at page 35:

Income tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else... The standard of assessment varies according to the nature of the source from which taxable income is derived. That is all. Schedule A contains the duties chargeable for and in respect of the property in all lands, tenements, and hereditaments capable of actual occupation. There the standard is annual value. It is difficult to see what other standard could have been adopted as a general rule. But there again, if the subject of charge be lands let at rack-rent, the annual value is "understood to be the rent by the year at which the same are let." In every case the tax is a tax on income, whatever may be the standard by which the income is measured. It is a tax on "profits or gains" in the case of duties chargeable under Schedule A and everything coming under that schedule - the annual value of lands capable of actual occupation as well as the earnings of railway companies and other concerns connected with land - just as much as it is in the case of the other schedules of charge. And it is to be observed that the expression "profits or gains" which occurs so often in the British Income Tax Acts is constantly applied without distinction to the subjects of charge under all the schedules. (Underlines are mine.)

(Notwithstanding the conclusion of the House of Lords in the case of The London County Council that the tax levied under Schedule A of the British Income Tax Acts was an income tax, the U.S. Second Circuit Court of Appeals concluded in the case of F.W. Woolworth Co. v. United States, 91 F. (2d) 973, that such tax was not an income tax in the United States sense.)

Based upon the above-noted Canadian and British jurisprudence, it is our opinion that OMT is an income or profit tax and that it is not deductible in computing XXXXXXXXXX income by virtue of paragraph 18(1)(a) of the Act. As a result, any interest incurred by XXXXXXXXXX on unpaid OMT is also not deductible in computing XXXXXXXXXX income by virtue of paragraph 18(1)(a) of the Act.

18.     With respect to XXXXXXXXXX reference to U.S. jurisprudence, the U.S. Court of Claims commented in the case of Inland Steel:

The tax credit in the Internal Revenue Codes (U.S.) (the "I.R.C.") s. 901(b)(1) is to be decided under criteria established by United States revenue laws and court decisions. To be creditable, the foreign tax must be the substantial equivalent of an income tax as that term is understood in the United States... It is a privilege extended by legislative grace, and the exemption must be strictly construed... In Bank of America National Trust and Saving Association, 72-1 USTC 9418, this court has distilled the authorities and articulated the applicable test. To qualify as an income tax in the United States sense, the foreign country must have made an attempt always to reach some net gain in the normal circumstances in which the tax applies... Constitutional validity of the OMT has been considered and the Ontario Court of Appeals has held the OMT to be a "direct tax" in the Canadian sense. In its opinion, the court stated that the OMT is not a tax on gross profit but a tax on "what might very reasonably, I think, be described as net profit" (see the case of Nickel Rim Mines, Ltd., 53 D.L.R. (2d) 290 at page 292). This characterization is not unimportant, but at the same time it is not decisive, nor is it necessarily to be taken as referring to "net profit" in the sense known to the United States... Plaintiff contends, correctly, that "net income" has not been a fixed concept during the development of the United States income tax system... even if these observations might be true for some of the individual items, taken singly, that Ontario holds to be non-deductible, when the mass of the omitted items in the OMT are considered together and in combination as applied to plaintiff's mining because, it is clear to us that the tax does not seek to reach, or necessarily reach, any concept of net gain from the mining business which would be recognized as such in this country... We can see, in short, no real connection between "net profit" under the OMT and the general concept of net gain known to the United States (and to the regular Canadian income tax laws)... The sum of it is that, from several viewpoints and in several aspects, taxpayer has failed to show that the OMT fits our concept of an income tax, or the concept spelled out in Bank of America. The foreign tax credit under I.R.C. s. 901 is therefore not allowable. (Underlines are mine.)

In the case of Texasgulf, the court noted that the OMT is not an income tax for the purposes of crediting the corporation's federal income tax for a tax paid to a foreign country, and held that U.S. regulation s. 1.901-2 has not altered this law and has codified the holding in the case of Inland Steel.

In the above-noted U.S. jurisprudence, OMT did not qualify for foreign tax credit for U.S. tax purposes because under strict interpretation of s. 901 of I.R.C., such tax was not considered to be income tax in the United States sense, even though the U.S. court recognized the importance of the decision of the Canadian Court of Appeal in the case of Nickel Rim Mines, Ltd. - OMT was a profit or income tax in the Canadian sense. In our view, it is irrelevant as to whether OMT is an income tax in the United States sense for the purpose of paragraph 18(1)(a) of the Act. Furthermore, in our opinion the better view is that the above- noted Canadian and British jurisprudence (i.e., in particular, the case of Quemont Mining Corp. Ltd. et al. which is directly on point) rather than the United States jurisprudence should be followed and relied on in the case at hand.

19.     Paragraph 20(1)(v) of the Act corresponds to paragraph 11(1)(p) of the former Act. If a mining tax was deductible in computing income under paragraph 18(1)(a) of the Act, then paragraph 20(1)(v) of the Act would be redundant. Furthermore, in the case of Rio Algom Mines Ltd. v. M.N.R., 70 DTC 6046 (SCC), the lawyers argued about the deduction of mining tax under paragraph 20(1)(v) of the Act and not under paragraph 18(1)(a) of the Act. This implies that a mining tax has been generally accepted as not deductible in computing income by virtue of paragraph 18(1)(a) of the Act.

20.      Paragraph 18(1)(m) of the Act was added by subsection 7(1) of SC 1974-75-76, c 26 (i.e., a long time after paragraph 20(1)(v) of the Act was enacted). Both paragraphs 18(1)(a) and (m) of the Act can be applied (i.e., they are not mutually exclusive). In our opinion, there is a respectable argument that paragraph 18(1)(a) of the Act (a general deduction limitation provision) must be applied before any other specific deduction limitation provisions are applied (by analogy, see the cases of The Royal Trust Co. v. M.N.R., 57 DTC 1055 (Ex. Ct.), and Swarn Kumar Bahl, 93 DTC 5074 (FCTD)).

If you have any questions or wish to discuss any of the above, please contact the writer.

Director Manufacturing Industries, Partnerships and Trusts DivisionRulings Directorate