Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 DTC 6532, 2006 SCC 20, [2006] 1 SCR 715

                                                 SUPREME COURT OF CANADA

Between:

Ontario (Minister of Finance)

Appellant

and

Placer Dome Canada Limited

Respondent

Coram: Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

______________________________

Placer Dome Canada Ltd. v. Ontario (Minister of Finance), [2006] 1 S.C.R. 715, 2006 SCC 20

Ontario (Minister of Finance)                                                                          Appellant

v.

Placer Dome Canada Limited                                                                       Respondent

Indexed as:  Placer Dome Canada Ltd. v. Ontario (Minister of Finance)

Neutral citation:  2006 SCC 20.

File No.:  30580.

2005:  November 17; 2006:  May 25.

Present:  Bastarache, Binnie, LeBel, Deschamps, Fish, Abella and Charron JJ.

on appeal from the court of appeal for ontario

Taxation — Mining tax — Hedging — Whether definition of “hedging” in mining tax legislation restricted to transactions that result in delivery of output of mine — Mining Tax Act, R.S.O. 1990, c. M.15, s. 1(1) “hedging”.

Statutes — Interpretation — Taxation legislation — Administrative practices — Presumption against tautology — Meaning of definition of “hedging” in mining tax legislation — Mining Tax Act, R.S.O. 1990, c. M.15, s. 1(1) “hedging”.

In late 1993, PDC entered into an agreement with its parent company, PDI, whereby PDI was designated PDC’s exclusive agent for the purpose of conducting hedging activity.  In 1995 and 1996, pursuant to that agreement, PDI carried out hedging transactions on PDC’s behalf in order to protect the PDI Group from fluctuations in the spot price of gold.  On or shortly after entering into those transactions, PDI allocated them to PDC.  The total net gains that PDC realized from those transactions were $6,423,000 in 1995 and $11,440,000 in 1996.  At the time, the Minister of Finance’s own administrative practice excluded financial transactions from the statutory definition of “hedging” unless those transactions resulted in the delivery of output from an Ontario mine.  Consistent with this practice, PDC excluded the gains from its computation of profits under the Ontario Mining Tax Act because no gold had been delivered pursuant to those transactions.  By the time PDC was reassessed in 2000, the policy had changed.  Under the new policy, transactions constitute hedging so long as they are entered into prior to the delivery of output and to the extent that the volume of the transactions does not exceed the productive capacity of the Ontario mine.  The Minister thus sought to include the gains in PDC’s profits for the tax years in question.  PDC unsuccessfully appealed this reassessment before the Superior Court of Justice.  The trial judge found that the transactions at issue fell within the statutory definition of hedging because there was a nexus or “some link” between the output of the mines and the financial transactions.  A majority of the Court of Appeal set aside the decision and allowed PDC’s appeal, concluding that the definition of hedging was restricted to contracts that were settled by physical delivery of gold from an Ontario mine.

Held:  The appeal should be allowed.

The definition of “hedging” in the Mining Tax Act extends to transactions that do not result in the physical delivery of output from an Ontario mine.  This interpretation avoids the redundancy that results between the statutory definitions of “hedging” and “proceeds” of mining operations.  Under the Act, “hedging” is defined in terms of a number of components, including “the fixing of a price for output of a mine before delivery by means of a forward sale”.  The expression “fix the price” cannot mean simply setting the price that will be paid upon delivery of the output.  If so, the legislature would not have needed this element in the statutory definition of “hedging” as the price received upon delivery of the output would clearly fall within all “consideration that is received . . . from the output of the mine”, the first component of the definition of “proceeds”, and within “all consideration received . . . from . . . future sales or forward sales of the output of the mine”, the third component.  A court should avoid adopting an interpretation that renders any portion of a statute meaningless or redundant and, in this case, the presumption against tautology carries considerable weight.  [3] [43‑46]

The broader interpretation of “hedging” is consistent with the context of the statutory definition.  In addition to “the fixing of a price . . . by means of a forward sale”, the definition of “hedging” refers to “the fixing of a price . . . by means of . . . a futures contract on a recognized commodity exchange”, “the purchase or sale forward of a foreign currency related directly to the proceeds of the output of a mine” and “does not include speculative currency hedging”.  It is significant that futures contracts are seldom settled by physical delivery.  Similarly, a sale or purchase forward of foreign currency is a separate transaction from the sale of an underlying commodity and would not itself be settled by physical delivery of the commodity.  [47]

In light of the scheme and context of the Mining Tax Act, the statutory definition of “hedging” must refer to something more than transactions that are settled by delivery of output.  The “some link” test applied by the trial judge is an appropriate response to the gap left in the Act by the failure to express more clearly what constitutes the “fixing of a price” for output of a mine.  [49]

The shift in the Minister’s administrative practice is reflective of the ambiguity that inheres in the statute itself and cannot be relied upon as an interpretive tool except to support the view that the statutory definition falls short of being clear, precise and unambiguous.  Although administrative practice can be an “important factor” in case of doubt about the meaning of legislation, it is not determinative.  In a case such as the present one where a statutory provision admits of more than one possible meaning, the Minister, having decided that its former interpretation was incorrect, is not precluded from changing its practice.  [40]

Cases Cited

Considered: Echo Bay Mines Ltd. v. Canada, [1992] 3 F.C. 707; Québec (Communauté urbaine) v. Corp. Notre‑Dame de Bon‑Secours, [1994] 3 S.C.R. 3; distinguished: Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54; Inco Ltd. v. Ontario (Minister of Finance), [2002] O.J. No. 3150 (QL); referred to: Harel v. Deputy Minister of Revenue of Quebec, [1978] 1 S.C.R. 851; Will‑Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, 2000 SCC 36; Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Johnston v. M.N.R., [1948] S.C.R. 486; Nowegijick v. The Queen, [1983] 1 S.C.R. 29; Hill v. William Hill (Park Lane) Ld., [1949] A.C. 530; Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147.

Statutes and Regulations Cited

Constitution Act, 1867, s. 53 .

Corporations Tax Act, R.S.O. 1990, c. C.40, s. 80(18).

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), s. 152(8) .

Mining Tax Act, R.S.O. 1990, c. M.15, ss. 1(1) “hedging”, “proceeds”, 3(1), (5), 8(7).

Mining Tax Act, 1972, S.O. 1972, c. 140, s. 3(3).

Mining Tax Amendment Act, 1987, S.O. 1987, c. 11, ss. 1(4)(cb), 1(7)(j).

Regulation Made Under the Mining Tax Act, 1972, O. Reg. 126/75, ss. 1(f), 4(1).

Authors Cited

Grottenthaler, Margaret E., and Philip J. Henderson.  The Law of Financial Derivatives in Canada.  Toronto: Carswell, 2003 (loose-leaf updated December 2005, release 2).

Hogg, Peter W., Joanne E. Magee and Jinyan Li.  Principles of Canadian Income Tax Law, 5th ed.  Toronto: Carswell, 2005.

Kraus, Brent W.  “The Use and Regulation of Derivative Financial Products in Canada” (1999), 9 W.R.L.S.I. 31.

Krishna, Vern.  The Fundamentals of Canadian Income Tax, 8th ed.  Toronto:  Carswell, 2004.

Smithson, Charles W.  “A Building Block Approach to Financial Engineering:  An Introduction to Forwards, Futures, Swaps and Options” (1997), 1017 PLI/Corp 9.

Sullivan, Ruth.  Driedger on the Construction of Statutes, 3rd ed. Toronto:  Butterworths, 1994.

APPEAL from a judgment of the Ontario Court of Appeal (Gillese, Armstrong and Blair JJ.A.) (2004), 190 O.A.C. 157, [2004] O.J. No. 3554 (QL), setting aside a decision of Cullity J. (2002), 61 O.R. (3d) 628, [2002] O.J. No. 3690 (QL).  Appeal allowed.

Anita C. Veiga and Leslie M. McIntosh, for the appellant.

Al Meghji, Mahmud Jamal and Jacqueline Code, for the respondent.

The judgment of the Court was delivered by

LeBel J. —

I.  Introduction

1                                   The issue at the core of this appeal concerns the proper interpretation of “hedging” in s. 1(1) of the Mining Tax Act, R.S.O. 1990, c. M.15, in order to determine the scope of the tax base under the Act.  Hedging, as it is commonly understood, refers to transactions that offset financial risk inherent in other transactions, such as price risk or foreign exchange risk.  In the present case, the Court is called upon to determine whether the definition of “hedging” in the Mining Tax Act is informed by, or is narrower than, the commonly understood meaning of the term.  Specifically, the Court must decide whether the statutory definition is restricted to transactions that result in the physical delivery of the output of an Ontario mine or includes profits derived from “hedging” programs in respect of mining operations.

2                                   Until 1998, the Minister of Finance’s own administrative practice excluded financial transactions from the statutory definition of “hedging” unless those transactions resulted in the delivery of output from an Ontario mine.  In 1995 and 1996, Placer Dome Canada Limited (“PDC”) realized gains of $6,423,000 and $11,440,000, respectively, from certain financial transactions.  Consistent with the Minister’s administrative practice prevailing at the time, it excluded those gains from its computation of profits under the Mining Tax Act because no gold had been delivered pursuant to those transactions.  By the time PDC was reassessed in 2000, the Minister’s policy had changed.  Under the new policy, transactions constitute “hedging” so long as they are entered into prior to the delivery of output and to the extent that the volume of the transactions does not exceed the productive capacity of the Ontario mine.  This would mean that certain non-speculative transactions which fix the ultimate price of mine output would fall within the statutory definition of “hedging”, even if such transactions did not result in the physical delivery of output.  Thus, the Minister sought to include the gains in PDC’s profits for the tax years in question.  PDC appealed this reassessment.  Although PDC was unsuccessful before Cullity J. of the Ontario Superior Court of Justice, a majority of the Court of Appeal for Ontario allowed PDC’s appeal.

3                                   I conclude that the definition of “hedging” in the Mining Tax Act extends to transactions that do not result in the physical delivery of output from an Ontario mine.  This interpretation avoids the redundancy that results, on PDC’s interpretation, between the statutory definitions of “hedging” and “proceeds” of mining operations.  Moreover, it ensures that resources are taxed at their “locked in” value or their “realized price”.

II.  Background

4                                   PDC is a wholly owned subsidiary of Placer Dome International (“PDI”).  PDI has approximately 50 direct and indirect subsidiaries around the world and, together with those subsidiaries, is engaged in the international exploration, production and sale of gold.  In 1995 and 1996, PDC, or a predecessor prior to an amalgamation, operated three mines in Ontario: the Campbell Red Lake underground mine, the Detour Lake mine and the Dome mine.  It also operated the Sigma gold mine in Quebec and the Endako molybdenum mine in British Columbia, and owned all the shares of a corporation that operated the Kiena gold mine in Quebec.

5                                   It is not disputed by the parties that all the gold produced by PDC in 1995 and 1996 was sold to bullion dealers at, or approximately at, the spot market price and that none of the gold produced was the subject of a forward sale or a futures contract.  At issue in the present case is a series of transactions entered into by PDI on PDC’s behalf as part of a comprehensive program designed to manage the risk associated with fluctuations in the spot price of gold.  Those transactions included forward contracts, spot deferred contracts, fixed interest floating lease rate contracts, put options and call options.  It is common ground that none of these transactions were settled by physical delivery of gold from any of PDC’s Ontario mines.

6                                   On December 21, 1993, PDC entered into an agency agreement with PDI whereby PDI was designated PDC’s exclusive agent for the purpose of conducting hedging activity.  In 1995 and 1996, pursuant to that agreement, PDI carried out hedging transactions on PDC’s behalf in order to protect the PDI Group from fluctuations in the spot price of gold.  Under the terms of the agreement, PDI took instruction from PDC as to the amounts of precious metals to be hedged, but was otherwise free to conduct hedging activity on PDC’s behalf at its discretion.  On or shortly after entering into these transactions, PDI allocated them to PDC.  In its internal bookkeeping and financial statements and in computing its income from gold production for the purpose of claiming a resource allowance in its corporate tax returns, PDC, in turn, allocated the transactions among its Canadian mines on the basis of proportionate production from each mine.  The gold that was so allocated was less than the actual production from the mines.  The total net gains that PDC realized from these transactions were $6,423,000 in 1995 and $11,440,000 in 1996.

III.  Legislative Framework and Application of the Law

7                                   The present appeal concerns only a very specific and limited part of the taxation regime of the mining industry in Canada.  Over the years, this industry has seen the rise and fall of a number of rules and policies designed to address its particular needs and difficulties.  Many of them will be found, for example, in the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .), more particularly in provisions about the deductibility of Crown royalties or mining taxes and, for a long time, about depletion allowances.

8                                   Under s. 3(1) of the Mining Tax Act, mine operators pay tax based on profit.  Profit is defined in s. 3(5) as proceeds less allowable deductions, and “proceeds” is defined in s. 1(1) as follows:

“proceeds” means the total consideration that is received or is receivable from another person or persons, in any currency, whether in cash or non‑cash form, from the output of the mine, including all by‑products sold, or the amount determined in the prescribed manner, and all consideration received or receivable from hedging and future sales or forward sales of the output of the mine, converted at the date of receipt of the consideration to the equivalent in Canadian funds, if receivable in funds of another country;

Thus, this definition includes three components: (a) total consideration from the output of the mine; (b) all consideration from hedging; and (c) all consideration from future or forward sales of the output of the mine.

9                                   “Hedging” is defined in s. 1(1) as follows:

“hedging” means the fixing of a price for output of a mine before delivery  by means of a forward sale or a futures contract on a recognized commodity exchange, or the purchase or sale forward of a foreign currency related directly to the proceeds of the output of a mine, but does not include speculative currency hedging except to the extent that the hedging transaction determines the final price and proceeds for the output;

10                               It is well established that in resolving doubt about the meaning of a tax provision, the administrative practice and interpretation adopted by the Minister, while not determinative, are important factors to be weighed: see Harel v. Deputy Minister of Revenue of Quebec, [1978] 1 S.C.R. 851, at p. 859,  per de Grandpré J.; Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, 2000 SCC 36, at para. 66, per Binnie J. (dissenting, but not on this point).  Prior to 1998, the Minister took the position that a hedging transaction only fell within the statutory definition if it was settled by physical delivery of the mining operator’s output.  In October 1998, the Minister’s policy changed.  Under the new policy, transactions that did not result in physical delivery would be caught by the statutory definition so long as they were entered into prior to the delivery of output and to the extent that the quantities of the commodity hedged did not exceed the operator’s output for the taxation year in question.

11                               There is no dispute that at the time PDC filed its mining tax returns for the years in question, it did so in conformity with the administrative practice prevailing at the time.  However, by the time that PDC’s returns were reassessed in 2000, the policy had changed.  While PDC emphasizes that its returns were consistent with the Minister’s own practice at the time they were filed and argues that the former policy is entitled to substantial weight in interpreting the Mining Tax Act, the Minister submits that it is not estopped from changing its practice having decided that its original interpretation was incorrect.

12                               The Minister argues that PDC’s interpretation and, indeed, its own interpretation under the former administrative practice, result in a substantial redundancy between the statutory definitions of “hedging” and “proceeds”.  In the Minister’s view, “hedging” encompasses transactions that do not culminate in delivery of output so long as there is a sufficient nexus between the output of the mine and the hedging contract.

13                               PDC responds that the definition of “hedging” in the Mining Tax Act is limited to transactions that result in the physical delivery of the output of an Ontario mine.  Any redundancy in the Mining Tax Act, it submits, cannot displace the clear words of that provision.

IV.  Judicial History

A.  Superior Court of Justice (2002), 61 O.R. (3d) 628

14                               Cullity J. dismissed PDC’s appeal from the confirmation of the assessments by the Minister.  He relied in part on the principles outlined in Echo Bay Mines Ltd. v. Canada, [1992] 3 F.C. 707 (T.D.), about the general purpose, characteristics and methods of hedging and held that those principles should inform the meaning of the definition of “hedging” in the Mining Tax Act.  In his view, the terms of the statutory definition make it clear that there must be a nexus, or “some link”, between the output of a mine and the financial transaction, but restricting that definition to transactions that culminate in the delivery of the output of the mine would introduce a significant redundancy into the Act.  Specifically, if hedging “by means of a forward sale” were restricted to sales that are settled by delivery of output, then that part of the statutory definition would be deprived of any meaning that is not already covered by the inclusion in the definition of “proceeds” of the “total consideration . . . from the output of the mine”.

15                               The trial judge stated that whether or not there is a sufficient link between a hedging transaction and output is a question of fact.  In light of a number of factors, including: (a) the underlying purpose of the transactions; (b) the existence and terms of the agency agreement between PDI and PDC; (c) the allocation of the transactions to PDC pursuant to that agreement; and (d) PDC’s treatment of the gains and losses for the purpose of its internal accounting and corporate tax returns, Cullity J. concluded that the transactions were related to the output of PDC’s mines.  He observed that any other conclusion would not have been reasonable or realistic in the circumstances.

B.  Court of Appeal for Ontario (2004), 190 O.A.C. 157

16                               Writing for the majority, Armstrong J.A. allowed PDC’s appeal.  In his view, the definition of “hedging” in the Mining Tax Act was clear, unambiguous and precise, and was restricted to contracts that were settled by physical delivery of gold from an Ontario mine.  Applying this interpretation, two findings of fact made by the trial judge were determinative:  (a) all gold produced by PDC’s Ontario mines was sold to bullion dealers at approximately the spot market price; and (b) none of the gold was the subject of a forward sales contract.  In light of those facts, Armstrong J.A. found it impossible to conclude that the transactions could be said to fix the price for output of the Ontario mines.  The principles articulated in Echo Bay Mines were inapplicable as that case involved the interpretation of a different statute, one in which no statutory definition for hedging was provided.  Moreover, in applying expert evidence adduced in Echo Bay Mines to fill a perceived deficiency in the record before him, Armstrong J.A. considered that Cullity J. had run afoul of the rule against judicial innovation articulated by this Court in Ludco Enterprises Ltd. v. Canada, [2001] 2 S.C.R. 1082, 2001 SCC 62, at para. 38.

17                               Armstrong J.A. concluded that there was no fatal redundancy in the Act because there could be future sales or forward sales contracts relating to the output of the mine that are not caught by the definition of “hedging” in the Act, “either because they do not take place on a recognized commodity exchange or for some other reason” (para. 40).  In the alternative, he held that any such redundancy could not displace the plain meaning of the provisions at issue.  He was reinforced in his conclusion by the observation that, while consideration is inherently a gross concept, gains and losses from hedging transactions are necessarily computed as net values.  Including a net amount within the computation of consideration would distort fundamental concepts of accounting.  He also opined that the Minister’s administrative practice was entitled to be given some weight based on the principles articulated in Harel and Will-Kare Paving.  He noted that the burden for proving that the Mining Tax Act imposes a tax on net gains from the transactions rests with the Minister, relying on Gonthier J.’s statement in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, for that purpose.  If mistaken in the view that the statutory definition of “hedging” was unambiguous, Armstrong J.A. would have resolved any reasonable doubt in favour of the taxpayer in accordance with the residual presumption.

18                               Gillese J.A. would have dismissed PDC’s appeal.  In her view, the statutory definition is ambiguous in that it admits of two reasonable interpretations.  The “narrow” interpretation, which was reflected in the Minister’s former administrative practice, restricts “hedging” to contracts, the subject matter of which is the output of a mine.  The “broad” interpretation, reflected in the Minister’s new administrative practice (and the Minister’s position in the present case), encompasses contracts which have as their subject matter something other than the output of a mine, but which can nevertheless be said to fix the price for the output of a mine.  In her view, the narrow interpretation results in a serious redundancy between the second and third elements of the statutory definition of “proceeds”, that is, “hedging” and “forward sales of the output of the mine”, respectively.  She concluded that the broad interpretation is preferable and that the statutory definition refers to contracts with a subject matter other than the output of a mine so long as those contracts are:  (a) formed prior to delivery of output; (b) on a recognized commodity exchange; and (c) the means by which the price for the output of an Ontario mine is fixed.

19                               In addressing the subsidiary arguments, Gillese J.A. concluded that the Minister was not estopped from changing his administrative practice and, if anything, the change in administrative practice supported the view that the statutory definition is ambiguous.  She noted that hedging is necessarily a net concept and that, as a result, “consideration from hedging” has to be a net concept in the circumstances.  On the question of whether options could properly be considered forward sales contracts, she noted that the characterization by the trial judge of the transactions is a mixed question of law and fact and, as such, is entitled to some deference.

V.  Analysis

A.  The Issue

20                               As I have noted, the central issue in this case concerns the computation of profits for the purpose of the Mining Tax Act.  Specifically, the issue is whether the statutory definition of “hedging” encompasses financial transactions that are not settled by physical delivery of the output of an Ontario mine.  I will first address the principles of statutory interpretation applicable to taxation statutes.  Next, I will briefly review the nature and mechanisms of hedging, as that term is used under generally accepted accounting principles (“GAAP”).  Finally, I will turn to an analysis of the statutory provision at issue in this appeal.

B.  Interpretation of Tax Statutes

(1)  General Principles

21                               In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, this Court rejected the strict approach to the construction of taxation statutes and held that the modern approach applies to taxation statutes no less than it does to other statutes.  That is, “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament” (p. 578): see 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at para. 50.  However, because of the degree of precision and detail characteristic of many tax provisions, a greater emphasis has often been placed on textual interpretation where taxation statutes are concerned: Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54, at para. 11.  Taxpayers are entitled to rely on the clear meaning of taxation provisions in structuring their affairs.  Where the words of a statute are precise and unequivocal, those words will play a dominant role in the interpretive process.

22                               On the other hand, where the words of a statute give rise to more than one reasonable interpretation, the ordinary meaning of words will play a lesser role, and greater recourse to the context and purpose of the Act may be necessary: Canada Trustco, at para. 10.  Moreover, as McLachlin C.J. noted at para. 47, “[e]ven where the meaning of particular provisions may not appear to be ambiguous at first glance, statutory context and purpose may reveal or resolve latent ambiguities.”  The Chief Justice went on to explain that in order to resolve explicit and latent ambiguities in taxation legislation, “the courts must undertake a unified textual, contextual and purposive approach to statutory interpretation”.

23                               The interpretive approach is thus informed by the level of precision and clarity with which a taxing provision is drafted.  Where such a provision admits of no ambiguity in its meaning or in its application to the facts, it must simply be applied.  Reference to the purpose of the provision “cannot be used to create an unexpressed exception to clear language”: see P. W. Hogg, J. E. Magee and J. Li, Principles of Canadian Income Tax Law (5th ed. 2005), at p. 569; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622.  Where, as in this case, the provision admits of more than one reasonable interpretation, greater emphasis must be placed on the context, scheme and purpose of the Act.  Thus, legislative purpose may not be used to supplant clear statutory language, but to arrive at the most plausible interpretation of an ambiguous statutory provision.

24                               Although there is a residual presumption in favour of the taxpayer, it is residual only and applies in the exceptional case where application of the ordinary principles of interpretation does not resolve the issue: Notre-Dame de Bon-Secours, at p. 19.  Any doubt about the meaning of a taxation statute must be reasonable, and no recourse to the presumption lies unless the usual rules of interpretation have been applied, to no avail, in an attempt to discern the meaning of the provision at issue.  In my view, the residual presumption does not assist PDC in the present case because the ambiguity in the Mining Tax Act can be resolved through the application of the ordinary principles of statutory interpretation.  I will say more on this below.

(2) The Burden of Proof

25                               The parties disagree on who bears the burden of proof in this case.  The burden of proof under the Mining Tax Act is set out in s. 8(7).  That section referentially incorporates s. 80(18) of the Corporations Tax Act, R.S.O. 1990, c. C.40, which provides that

[a]n assessment, subject to being varied or vacated on an objection or appeal and subject to a reassessment, shall be deemed to be valid and binding despite any error, defect or omission therein or in any proceeding under this Act relating thereto.

Thus, the taxpayer bears the burden of establishing that the factual findings upon which the Minister based the assessment are wrong.  This is the same burden that applies under the Income Tax Act, s. 152(8) : see V. Krishna, The Fundamentals of Canadian Income Tax (8th ed. 2004), at p. 35; Johnston v. M.N.R., [1948] S.C.R. 486.

26                               PDC and the majority of the Court of Appeal, cite Notre-Dame de Bon-Secours for the proposition that the party claiming the benefit of a legislative provision has the burden of showing that he or she is entitled to rely on it.  Specifically, at p. 15, Gonthier J. held:

The burden of proof thus rests with the tax department in the case of a provision imposing a tax obligation and with the taxpayer in the case of a provision creating a tax exemption.

Gonthier J.’s statement in Notre-Dame de Bon-Secours was obiter dicta, made in the context of explaining the traditional rule that tax legislation must be strictly construed.  His point was simply that the residual presumption in favour of the taxpayer, which follows from the strict construction rule, was distinct from the concept of burden of proof.  The burden of proof was not at issue in the case before him, and Gonthier J.’s comment was made in passing, without reference to the leading case law establishing the burden of proof in tax cases.  The fundamental rules on the allocation of evidentiary burden in this matter remain valid.  I cannot accept that, with this statement, he intended to overrule an established body of jurisprudence.  The taxpayer bears the burden of displacing the Minister’s factual assumptions, but the concept of burden of proof is not applicable to the interpretation of a statute, which is necessarily a question of law: Johnston.

27                               Before moving on from this point, I wish to address the similar observation made in the context of explaining the analytical approach to the general anti-avoidance rule (“GAAR”) in Canada Trustco, at paras. 64-65.  In that case, the Court noted that, as a practical matter, the taxpayer was not required to disprove that he or she had violated the object, spirit or purpose of the provision.  Rather, the Minister, who is in a better position than the taxpayer to make submissions as to the legislative intent behind particular taxation provisions, was obliged to identify the purpose of the provisions and to show how that purpose would be frustrated or defeated by the taxpayer’s arrangements.

28                               The statement in Canada Trustco is distinguishable in that it applies in cases where the taxpayer has complied with the letter of the law, and where the Minister seeks to rely on GAAR to nevertheless disallow the taxpayer’s claim on the basis that it is inconsistent with the object and spirit of the provision in question. It would be both impractical and unduly onerous to require a taxpayer whose transaction falls within the four corners of a tax provision to also disprove that he or she has violated the object, spirit or purpose of the provision.  The same line of reasoning does not apply in the present case where the meaning of the provision is ambiguous.  In a case such as the present one, the meaning of the relevant provision is a question of law, and there is no onus on either party in respect of it — the duty to ascertain the correct interpretation lies with the court.

C.  Hedging

29                               In order to give some context to the discussion of the statutory definition of “hedging”, I will begin with a brief overview of hedging, as it is commonly understood under GAAP.  The transactions at issue in the present case are financial derivatives.  Generally speaking, financial derivatives are contracts whose value is based on the value of an underlying asset, reference rate, or index.  As Professors Grottenthaler and Henderson explain, there are essentially two reasons for entering into such a contract — to speculate on the movement of the underlying asset, reference rate or index, or to hedge exposure to a particular financial risk such as the risk posed by volatility in the prices of commodities: see M. E. Grottenthaler and P. J. Henderson, The Law of Financial Derivatives in Canada (loose-leaf), at p. 1-8.  This distinction between speculation and hedging is an important one.  A transaction is a hedge where the party to it genuinely has assets or liabilities exposed to market fluctuations, while speculation is “the degree to which a hedger engages in derivatives transactions with a notional value in excess of its actual risk exposure”: see B. W. Kraus, “The Use and Regulation of Derivative Financial Products in Canada” (1999), 9 W.R.L.S.I. 31, at p. 38.  Because the gold that was allocated to the transactions at issue in the present case did not exceed the actual production from the respective mines, the transactions were not speculative in the ordinary sense of the term.

30                               The two basic types of derivative transactions are forward contracts and options:  see Grottenthaler and Henderson, at pp. 1-4 et seq.  A forward contract is a contract that obligates one party to buy, and another party to sell, a specified amount of a particular asset at a specified price, on a given date in the future.  The obligation contained in a forward contract is two-sided in that both parties are obligated to perform the contract.  By contrast, an option which grants the purchaser upon payment of a premium the right, but not the obligation, to purchase (“call option”) or sell (“put option”) an asset on a specified date is a one-sided obligation.  Nevertheless, they both function as hedging tools.

31                               Derivative transactions may be settled in a number of different ways: physical delivery of the underlying asset, cash settlement or offsetting contract.  Most derivative contracts, however, are not settled by physical delivery.  The most important point about settlement is that, at least for the purposes of GAAP, the way in which a derivative contract functions as a “hedge” is unaffected by the method by which the contract is settled.

32                               An example may be useful at this stage to better illustrate how hedging transactions work and to identify the distinction between hedging and speculation.  Assume that on January 1, 2006, the price of gold is $200/oz.  Company A is a gold producer and wishes to hedge its exposure to fluctuating gold prices.  On January 21, A enters into a forward sale contract for 100 oz. of gold at $200/oz.  If the price of gold falls, the value of the hedging contract increases.  Conversely, if the price of gold increases, the value of the contract decreases.  It is this characteristic that separates a hedge from a purely speculative transaction.  The producer who faces genuine exposure to price fluctuations effectively trades some of the opportunity for gains that would accompany increasing gold prices for security against decreasing gold prices.  This relationship is most visible where derivative transactions are cash settled (as they most commonly are).  If, on July 31, the price of gold has fallen to $100/oz., the contract may be cash settled by a payment of the difference between the strike price ($20,000) and the spot market price at the time of settlement ($10,000).  Thus, the counterparty to the forward sale contract would issue a cheque to A for $10,000.  The greater the margin by which the price of gold decreases, the greater the profit on the hedging contract.

33                               In Echo Bay Mines, the Trial Division of the Federal Court considered the principles of hedging under GAAP.  In that case, the taxpayer was a silver producer that had entered into forward sales contracts in order to protect itself against the risk of declining silver prices.  When the price of silver fell, the taxpayer realized gains on those contracts by closing them out or rolling them over.  None of the contracts resulted in the delivery of any silver. Nevertheless, the taxpayer treated those gains as “resource profits” on the basis that they were income from the production of minerals in Canada.  Doing so enabled the taxpayer to take advantage of the resource allowance, as provided for in s. 20(1) (v.l) of the Income Tax Act  and s. 1204(1) of the Income Tax Regulations.  MacKay J. accepted that

under generally accepted accounting principles, a producer’s gain or loss from its execution of forward sales contracts may be considered a “hedge” and therefore matched against the production of the goods produced, if four conditions are met. . . .

1.      The item to be hedged exposes the enterprise to price (or interest rate) risk.

2.      The futures contract reduces that exposure and is designated as a hedge.

3.      The significant characteristics and expected terms of the anticipated transactions are identified.

4.      It is probable that the anticipated transaction will occur. [pp. 715-16]

He concluded at p. 733 that the price received for the silver produced was the sum of receipts from delivery of actual production and from the settlement of forward sales contracts.

34                               The decision in Echo Bay Mines illustrates the way in which financial transactions, though they may not be settled by physical delivery of the output of an Ontario mine, may nevertheless be said to “fix the price” for that output.  I agree with the following endorsement of the decision in Echo Bay Mines:

This conclusion is clearly a sensible one.  If the transactions had been physically settled then the gain or loss on the transactions would have been the actual revenue or loss from the sale of the silver and would have been on income account.  Treating the gain or loss on the forward contracts having the same economic result in any different way would have created an unjustified artificial distinction.

(Grottenthaler and Henderson, at pp. 11-8 and 11-9)

From the perspective of what constitutes hedging under GAAP, the distinction between cash-settled and delivery-settled contracts is arbitrary.

35                               Although I am mindful that Echo Bay Mines concerned a different statute, one in which “hedging” is not a defined term, I conclude that the general principles articulated in that case have some relevance here.  The central issue in Echo Bay Mines was whether gains and losses from hedging were sufficiently linked to the underlying transactions, namely the production and sale of silver, to constitute “resource profits” within the meaning of the Regulations under the Income Tax Act .  In essence, the court in Echo Bay Mines was grappling with the same question that is raised in the present case:  Can synthetic derivative transactions be said to “fix the price” for the underlying commodity even where those transactions do not result in the delivery of the underlying commodity?

D.  The Inclusion of Hedging Profits

36                               The parties agree that the transactions at issue in the present case constitute “hedging” in the ordinary sense of the term.  However, notwithstanding that it is common in the industry vernacular to speak of “realized price” as the aggregate of proceeds from spot sales and gains and losses from hedging, PDC argued before this Court that the price for the output of an Ontario mine could only be “fixed”, for the purpose of the Mining Tax Act, by a transaction that culminated in the physical delivery of that output.  I turn, then, to a consideration of the meaning of the statutory definition of “hedging”.

37                               The definition of “hedging” first appeared in 1975 in the Regulation to the Mining Tax Act, 1972, S.O. 1972, c. 140: O. Reg. 126/75, s. 1(f).  At that time, profit was calculated under s. 3(3) of the Act using:  (a) the amount of gross receipts from the output of the mine during the taxation year; (b) where the output was not sold but was treated by or for the producer of the mine, the amount of the actual market value of the output at the pit’s mouth; or (c) where there was no means for determining the actual value at the pit’s mouth in (b), the amount at which the mine assessor appraised the output.  The method by which the assessor was to appraise output under (c) was set out in s. 4(1) of the Regulation.  It was only in this last context that the definition of “hedging” came into play.  In 1987, the definition of “hedging” was introduced into the Act itself and incorporated into the definition of “proceeds”: Mining Tax Amendment Act, 1987, S.O. 1987, c. 11, ss. 1(4)(cb) and 1(7)(j).

38                               PDC raised several arguments, based on the statutory and constitutional limits on the power of the Lieutenant Governor in Council at the time, about the meaning of “hedging” when it was first introduced in the Regulation.  Specifically, PDC argues that no power had been vested in the Lieutenant Governor in Council to make regulations imposing a new tax or expanding the existing tax base, and that any such attempt would have been contrary to s. 53  of the Constitution Act, 1867 , which requires that bills imposing any tax originate in the House of Commons.  Both of these arguments depend for their validity on the proposition that the 1975 Regulation created a new tax or expanded the tax base.  I am not satisfied that the 1975 Regulation can be so construed — it did not alter the primary definition of “gross receipts” in the Act, but merely clarified the method by which a subsidiary, discretionary amount was to be assessed.  This does not, in my view, constitute a change of the radical nature that PDC suggests.

39                               In any event, whatever the precise effect of the 1975 Regulation, which need not be decided in this case, it is clear that the decision to incorporate the definition of “hedging” into the Act itself in 1987 signified a change in the statutory framework for the computation of profit.  Hedging gains were no longer included in income only where it was otherwise impossible to ascertain the market value of the output of a mine before processing.  The Act now includes them in every case as an integral component of the statutory definition of “proceeds”.  No constitutional or other impediment in 1987 prevented the enactment of such a provision, with respect to either of the proposed definitions.  Since the definitions of “hedging” and “proceeds” remain unchanged in the present Act, the task at hand is to set out the precise nature and scope of the 1987 amendments.  Although both parties rely on Hansard evidence related to the movement of the hedging provision from the Regulation to the Act, I find that evidence to be ambiguous and of little assistance in this case.  Accordingly, any analysis of the 1987 amendments must be grounded in an examination of the scheme and context of the revised Act.

40                               At the outset, I note that I do not find the arguments based on the Minister’s administrative practice to be helpful in the present case.  The fact is that there are two administrative practices — one corresponding to each of the proposed interpretations.  The shift in the Minister’s practice is reflective of the ambiguity that inheres in the statute itself and cannot be relied upon as an interpretive tool except to support the view that the statutory definition falls short of being clear, precise and unambiguous.  Although administrative practice can be an “important factor” in case of doubt about the meaning of legislation, it is not determinative: Nowegijick v. The Queen, [1983] 1 S.C.R. 29, at p. 37.  In a case such as the present one where a statutory provision admits of more than one possible meaning, the Minister, having decided that its former interpretation was incorrect, is not precluded from changing its practice.

41                               PDC argues that the Minister’s change in administrative practice is arbitrary and unfair, noting that in the same month the Minister argued for the application of the new administrative policy before Cullity J. in the present case, and for the application of the former administrative policy in Inco Ltd. v. Ontario (Minister of Finance), [2002] O.J. No. 3150 (QL) (S.C.J.).  Inco had incurred substantial losses on its hedging activities in its taxation years 1988 to 1990 and sought to deduct those losses based on the decision in Echo Bay Mines.  The critical distinction between the present case and Inco, however, is that the statutory limitation period for reassessment in Inco expired while the old administrative policy was still in place.  Whenever the Minister changes its administrative practice, it is inevitable that different taxpayers will have been taxed differently under the same provision depending on whether they were assessed prior to, or after, the change in policy.  The line between taxpayers who fall on either side of the administrative policy must be drawn somewhere, and doing so on the basis of whether a taxpayer’s taxation year is open or closed under the statute is a principled and practical approach.

42                               As I noted above, “proceeds” is defined in s. 1(1) of the Mining Tax Act in terms of three components: (a) consideration received from the output of a mine; (b) consideration from hedging; and (c) consideration from future sales or forward sales of the output of the mine.

43                               “Hedging” is also defined in terms of a number of elements.  Although only one of those elements is at issue in the present appeal, it is worth parsing the full definition in order to better appreciate the context and scheme within which the disputed phrase is placed.  Specifically, “hedging” means:

(a) the fixing of a price for output of a mine before delivery by means of

(i) a forward sale or

(ii) a futures contract on a recognized commodity exchange;

(b) the purchase or sale forward of a foreign currency related directly to the proceeds of the output of a mine; and

(c) speculative currency hedging, to the extent that the hedging transaction determines the final price and proceeds for the output.

Only “the fixing of a price for output of a mine before delivery by means of a forward sale” is at issue in the present appeal.  I note at this stage that my parsing of the definition of “hedging” differs from both the majority and dissenting reasons of the Court of Appeal.  Both Armstrong and Gillese JJ.A. suggested that forward sales and futures contracts, as the terms are used in the definition of “hedging”, must take place on a recognized commodity exchange.  However, such a view does not accord with the ordinary usage of these terms.  Forward sales are by definition “over-the-counter” products, while futures contracts are by definition exchange-traded.  Indeed, futures contracts are simply an exchange-traded form of forward sales contracts: C. W. Smithson, “A Building Block Approach to Financial Engineering: An Introduction to Forwards, Futures, Swaps and Options” (1997), 1017 PLI/Corp 9.  The significance of this point is that “forward sales” within the meaning of the definition of “hedging” cannot be distinguished from “forward sales” in the third element of the definition of “proceeds” on the basis that the former take place on a recognized commodity exchange while the latter do not.  I will say more on this point below.

44                               The difficulty that arises in coming to a plausible interpretation of this provision is that the Act does not specify what it means to “fix the price” for output of a mine by means of a forward sale.  At first blush, it might seem that fixing a price is simply setting the price that will be paid upon delivery of the output.  Indeed, this is the interpretation advocated for by PDC (the narrow interpretation).  If that were so, however, the legislature would not have needed this element in the statutory definition of “hedging”  as the price received upon delivery of the output would clearly fall within “[all] consideration that is received . . . from the output of the mine”, the first component of the definition of “proceeds”, and within “all consideration received . . . from . . . future sales or forward sales of the output of the mine”, the third component.

45                               Under the presumption against tautology, “[e]very word in a statute is presumed to make sense and to have a specific role to play in advancing the legislative purpose”:  see R. Sullivan, Driedger on the Construction of Statutes (3rd ed. 1994), at p. 159.  To the extent that it is possible to do so, courts should avoid adopting interpretations that render any portion of a statute meaningless or redundant: Hill v. William Hill (Park Lane) Ld., [1949] A.C. 530 (H.L.), at p. 546, per Viscount Simon.

46                               Although the presumption is rebuttable where it can be shown that the words do serve a function, or that the words were added for greater certainty, I do not think that either of those arguments can succeed in the present case.  Here, a definition was introduced into the Mining Tax Act for a term that appears only once in the Act, outside its definitional section.  Moreover, the value of a forward sale contract that is settled by delivery of output is for all intents and purposes just the price received for the output.  There is no doubt that this amount would be caught by the definition of proceeds, and there would have been no need for the legislature to include this element in a statutory definition of “hedging”.  In the circumstances, the presumption against tautology carries considerable weight.

47                               It follows that “the fixing of a price for output of a mine” cannot be restricted to transactions that are settled by delivery of output.  This is, in my opinion, consistent with the context of the statutory definition.  In addition to “the fixing of a price . . . by means of a forward sale”, the definition of “hedging” refers to “the fixing of a price . . . by means of . . . a futures contract on a recognized commodity exchange”, “the purchase or sale forward of a foreign currency related directly to the proceeds of the output of a mine”, and “does not include speculative currency hedging”.  It is significant that futures contracts are seldom settled by physical delivery.  Similarly, a sale or purchase forward of foreign currency is a separate transaction from the sale of an underlying commodity and would not itself be settled by physical delivery of the commodity.  In short, the other elements in the statutory definition of “hedging” are consistent with the broader interpretation.

48                               PDC relies on the fact that the Minister successfully applied the “hedging” provision of the Mining Tax Act to impose and collect tax from mining companies under the former administrative policy as evidence that the narrow interpretation of “hedging” does not introduce redundancy into the Mining Tax Act.  This argument is unpersuasive.  Redundancy does not necessarily prevent the consistent or successful application of a statutory provision.  Rather, an interpretation that gives rise to a redundancy simply fails to give full effect to all of the elements in the statutory provision.

49                               In my view, in light of the scheme and context of the Mining Tax Act, the statutory definition of “hedging” must refer to something more than transactions that are settled by delivery of output.  The “some link” test applied by Cullity J. is an appropriate response to the gap left in the Mining Tax Act by the failure to express more clearly what constitutes the “fixing of a price” for output of a mine.  Moreover, the “some link” test accords with general accounting practices.  It is certain that well-accepted business and accounting principles are not rules of law.  They should not be used to displace rules of law, as legislatures are not bound by them and may modify them as they see fit for tax purposes. They must therefore play a subsidiary role to clear rules of law.  However, this Court has readily acknowledged that “it would be unwise for the law to eschew the valuable guidance offered by well‑established business principles” where statutory definitions are absent or incomplete:  see Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, at para. 35.

50                               Before this Court, PDC argued that the interpretation urged by the Minister would introduce intolerable uncertainty into the Mining Tax Act.  Without a bright line for distinguishing hedging transactions for the purpose of the Mining Tax Act, such as a delivery requirement, taxpayers would be unable to effectively predict their tax situations and to order their affairs intelligently.  This argument is not compelling.  The fact that the taxpayer can and does, presumably on a principled basis, determine whether hedging profits relate directly to the output of a mine, for the purpose of claiming the resource allowance under the Income Tax Act  and the Ontario Corporations Tax Act belies PDC’s predictability argument.  I note, in this vein, that PDC used the same financial information that it submitted with its tax return under the Mining Tax Act to claim that its hedging gains qualified as “resource profits” so as to entitle it to the resource allowance under the Corporations Tax Act.

51                               The statutory provisions at issue in this case are far from flawless.  Although the broad interpretation that I have adopted substantially resolves the redundancy problem, it gives rise to some unexpected consequences of its own.  That being said, I do not find that any of these consequences is serious enough to outweigh the substantial redundancy that results on the narrow interpretation of “hedging”.  Although, as PDC has pointed out, “consideration” is generally a gross concept, in the context of the definition of “proceeds”, “all consideration from hedging” must necessarily refer to a net concept.  Any distortion to the ordinary commercial use of “consideration” is inherent in the Mining Tax Act itself.  Similarly, although forward sales and options are distinguished from one another in terms of the particular way in which each is used to hedge price risk, both are used in much the same way to “fix the price” for output.  PDC’s argument about the serious distortion implicit in treating options as a subset of forward sales is belied by the PDC’s own Annual Reports for the tax years in question.  Those reports provide that “[t]he Corporation employs forward sales contracts including spot deferred contracts and options to hedge prices for anticipated gold sales” (emphasis added).

52                               The Mining Tax Act defines “hedging” as the fixing of a price for the output of a mine before delivery by means of, inter alia, a forward sale.  Options, as Cullity J. noted, are simply contingent forward sales, and they fix the price for output in much the same way that forward contracts do.  To attach substantially different tax consequences, within the context of a provision that taxes “proceeds from hedging” to two forms of transactions that serve the same function as hedging tools would be an absurd result that the legislature could not have intended.  Thus, I am unable to conclude that any of the subsidiary arguments raised by PDC outweigh the substantial redundancy that results from its proposed interpretation.

VI.  Disposition

53                               For these reasons, I would allow the appeal with costs throughout.

Appeal allowed with costs.

Solicitor for the appellant:  Attorney General of Ontario, Toronto.

Solicitors for the respondent:  Osler, Hoskin & Harcourt, Toronto.