Cominco Ltd. v. The Queen, 84 DTC 6535, [1984] CTC 548 (FCTD)

Reed, J:—This case concerns the appropriate characterization of business interruption insurance proceeds, received by the plaintiff in its 1974 taxation year, and whether or not the processing allowance accorded by operation of subsection 65(1) of the Income Tax Act, SC 1970-71-72, c 63, and the Regulations relevant thereto (Part XII of the Income Tax Regulations) should be allowed as a deduction by the taxpayer in respect of those proceeds.

The facts are not in dispute. The plaintiff operates at Trail, British Columbia, a zinc plant at which ore, owned both by it and purchased from others (and which was extracted from mines in Canada), is processed to, but not beyond, the prime metal stage. In December 1973 a fire occurred at the plaintiffs zinc plant putting one of its three “roasters” (the facilities used at one stage of the process in refining the ore) out of commission for approximately a month. This resulted in loss of income for which the plaintiff received insurance proceeds of $1,380,797. The plaintiff accounted for this both on its books and for tax purposes as profits from its mining operation, in accordance with generally accepted accounting principles. It had always treated the premium paid for such insurance as an expense attributable to the earning of its mining income.

The plaintiff and the defendant both agree that the proceeds received are, for tax purposes, to be treated as income. See generally London and Thames Haven Oil Wharves Ltd v Attwooll, [1967] 2 All ER 124 (CA): The King v BC Fir and Cedar Lumber Company Limited, [1932] AC 441 (PC); Seaforth Plastics Ltd v The Queen, [1979] CTC 241 (FCTD).

The question that arises is whether or not certain allowances which are available as deductions from mining income (or processing income) are properly available with respect to these insurance proceeds.

Subsection 65(1) of the Income Tax Act provides:

65(1) There may be deducted in computing a taxpayer’s income for a taxation year such amount as an allowance, if any, in respect of

(b) the processing, to the prime metal stage or its equivalent, of ore from a mineral resource

as is allowed to the taxpayer by regulation.

The Regulations were amended in the course of the 1974 taxation year so that two different texts are relevant. This difference does not, however, affect the essential issue. It is Part XII of the Income Tax Regulations which is relevant. Regulation 1200 provides:

1200. For the purpose of section 65 of the Act, there may be deducted in computing the income of a taxpayer for a taxation year such of the amounts determined in accordance with this Part as are applicable.

Prior to May 6, 1974, the applicable Regulations read:

1201 (2) Where a taxpayer in a taxation year has production profits he may in computing his income for the year, deduct an amount equal to 33 %% of the amount of

(a) his production profits for the year minus

(b) the aggregate of the deductions for the year provided for by subsections (4) and a).

1201 (5)

(f) “production profits" in relation to a taxpayer means the aggregate of his profits reasonably attributable to

(i) the production of

(A) oil,

(B) gas, or

(C) metal or industrial minerals to any stage that is not beyond the prime metal stage or its equivalent

from all sources operated by him, and

(ii) the processing in Canada of ores from a mineral resource not operated by the taxpayer to any stage that is not beyond the prime metal or its equivalent;

[Emphasis added]

After May 6, 1974 the Regulations read:

1201. In computing a taxpayer’s income for a taxation year there may be deducted an amount equal to the lesser of

(a) 25% of the amount, if any, by which his resource profits for the year exceed four times the aggregate of amounts, if any, deductible under subsections 1202(2) and (3) in computing his income for the year, and

(b) his earned depletion base, as of the end of the year (before making any deduction under this section for the year).

1204. For the purposes of this Part “resource profits" of a taxpayer for a taxation year means the amount, if any, by which the aggregate of

(c) his taxable production profits from mineral resources in Canada for the year

within the meaning ascribed thereto by subsection 124.1(1) of the Act . . .

exceeds

Section 124.1(1) of the Act:

1. For the purposes of this Part, “taxable production profits from mineral resources in Canada’’ . . . means the amount, if any, by which the aggregate of

(a) where the corporation has production from a mineral resource in Canada operated by it, the amount . . . and

(b) the amount, if any, of the aggregate of its incomes for the year from

(i) the production in Canada of

(A) petroleum, natural gas or related hydrocarbons, or

(B) metals or minerals to any stage that is not beyond the prime metal stage

or its equivalent, from mineral resources in Canada operated by it,

(ii) the processing in Canada of ores from mineral resources in Canada not operated by it to any stage that is not beyond the prime metal stage or its equivalent . . .

[Emphasis added]

The question, then, is whether the insurance proceeds should be considered to be not only income in the hands of the taxpayer but also, more specifically, production profits from his mineral processing operation. There is no doubt that had the plaintiff actually earned the income for which the insurance proceeds are replacements, they would have been considered production profits and the allowances pursuant to subsection 65(1) would have been deducted.

The plaintiff argues that the rationale found in the cases which have held insurance proceeds to be income for tax purposes should equally be applied to give them the character of production profits (from its mineral processing operation).

In the London and Thames case, (supra), at 132, it was said:

In either case the question must be what the sum recovered represents, and in either case the answer to that question must be that it represents profit which would otherwise have been earned by the use of the thing concerned.

[Emphasis added]

And in the BC Fir case, (supra), but quoting from the Exchequer Court decision in that case [1928-34] CTC 36; (1929) 1 DTC 174 at 39 [175]:

It seems to me that the amounts derived from the insurance policies, on account of Net Profits, fall within sec. 3 of the Income War Tax Act. . . under contracts of indemnity against business interruption, the cost of which was borne by the business interrupted, the appellant received sums of money in substitution of the net profit that otherwise would presumably have been earned. J think such income must enter into the revenue accounts of the business like any other income ordinarily earned, or any other receipt incident to the business, and thus enter into the calculations determining what is the net income of the business, for taxation purposes.

[Emphasis added]

The plaintiffs argument, then, is that the insurance proceeds should be treated, for tax purposes, in a manner identical to that in which the earnings, for which the proceeds are a replacement, would have been treated had there been such earnings.

The defendant, on the other hand, argues that in order to be entitled to the allowances in question a taxpayer must fulfil the literal requirements of the Regulations. He argues that the allowance provided for by the Regulations comes into existence only when there has been production (or a processing) of minerals as required by the Regulations. It is to be noted that the purpose of the allowance in question is to encourage the processing of minerals in Canada.

Counsel for the defendant argues that it is a well established rule that taxing statutes should be strictly construed. See: Lumbers v Minister of National Revenue, [1943] CTC 281; 2 DTC 631 (Ex Ct) at 290 [635]:

Just as receipts of money in the hands of a taxpayer are not taxable income unless the Income War Tax Act has clearly made them such, so also, in respect of what would otherwise be taxable income in his hands a taxpayer cannot succeed in claiming an exemption from income tax unless his claim comes clearly within the provisions of some exempting section of the Income War Tax Act; he must show that every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with.

Counsel argues that the Regulations clearly contemplate the allowances come into existence only when there has been production (processing) in Canada and the generation of production profits (resource profits) therefrom. He argues that the insurance proceeds in this case come into existence as a result of nonproduction (or non-processing) by the taxpayer. Therefore, not only do they not fit within the literal requirements of the Regulations, but also to allow the deductions would not accord with the purpose for which the allowances were provided. It is recognized, of course, that with a taxing statute it is the literal wording and not the general purpose of the Act which generally controls its interpretation.

It is my view that the defendant’s position is correct. None of the jurisprudence cited by the plaintiff goes further than to say that insurance proceeds of the kind in question should be treated as general revenues for the purposes of income. Such revenues can properly be brought within the wording of the statute because of the breadth of the wording of section 3 of the Income Tax Act.

The insurance proceeds, however, cannot be brought within the much more specific wording of Regulation 1201(2) — production profits (pre-May 6, 1974) and Regulation 1201 — resource profits, (post-May 6, 1974). The proceeds simply did not arise out of the “production of . . . metal or industrial minerals” or from “the processing in Canada of ores from a mineral resource”.

The fact that the plaintiff treated the proceeds as “mineral income”, in accordance with generally accepted accounting principles is not a weighty consideration in this case. Reference can be made to the Supreme Court decision in Gunnar Mining Ltd v MNR, [1968] CTC 22; 68 DTC 5035, for the illustration of the principle that a taxpayer’s accounting practices, or even the generally accepted accounting principles, are not controlling in the face of the express wording of the Act. The Gunnar case is less useful for the second purpose for which counsel for the defendant cited it: as an analogy to the present case in that certain income in the hands of the taxpayer was held not to be mining income. It is not useful for this purpose because (1) the wording being interpreted in that case was “income from the operation of a mine” — a broader concept, it would seem, than “production profits” as defined in the relevant Regulations; and (2) the taxpayer was clearly receiving income from two separate endeavours — one a mining operation, the other a short-term investment undertaking.

Counsel for the plaintiff cited Hollinger North Shore Exploration Company Ltd v MNR, [1960] CTC 136; 60 DTC 1077 (Ex Ct) for the proposition that in the case of exemptions such as the allowance in issue in this case, the court has not been shy in allowing the taxpayers to come within its terms. The decision in that case held that a taxpayer who received royalty payments pursuant to a lease of mineral rights owned by it was entitled to treat those royalties as “income derived from the operation of a mine”. This was so even though the taxpayer did not itself operate the mine. A reading of the decision makes it clear, however, that the court came to the conclusion it did because there was no wording in the statute which restricted the exemption only to income received by the operator of the mine. In that case the Minister tried to read into the statute words that were not there, and the court refused to accept the argument. In the present case it is the taxpayer who is trying to read words into the statute which are not there.

Counsel for the plaintiff also cited Powell Rouyn Gold Mines Ltd v MNR, [1959] 22 Tax ABC 281; 59 DTC 401 (Tax App Bd) and Wilson v MNR, [1938- 39] CTC 161; [1939] 1 DLR 678 (Ex Ct). The first allowed recaptured capital cost allowance, and the second allowed a premium on dividends paid in United States funds (because the value of the Canadian dollar was at that time higher than its US counterpart) to be brought into the taxpayer’s profit base for the purposes of computing a depletion allowance and a deduction for depreciation respectively. Both cases are quite different from the present situation. The first merely characterized a recaptured capital cost in the fashion that the income would have been characterized had the deduction not been made in the first place, and the second really deals with a calculation of the amount of the payment made — a difference in the value of the dollar from time to time does not change the nature of the payment being made.

I therefore conclude that the Minister has appropriately assessed the plaintiff and the plaintiffs claim must be dismissed.