Westar Mining Ltd.v. The Queen, 92 DTC 6358, [1992] 2 CTC 11 (FCA)

Mahoney, J.A. (Stone, J.A., concurring):—This appeal, from a reported decision of the Trial Division ([1988] 2 C.T.C. 349, 88 D.T.C. 6505), is concerned with whether $1,328,000, being business interruption insurance proceeds, is exempt from income tax as income derived from the operation of a mine”. The learned trial judge held the proceeds not exempt. An alternative submission, that the proceeds were not income within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), rejected at trial, was not pursued on appeal and, indeed, the contrary was a basic premise of the appellant's argument.

Many of the material facts are set forth in a statement of agreed facts fully recited in the decision below. Documentary evidence included the insurance policies and the viva voce evidence was mainly directed at the negotiation of the settlement of the insurance claim. Portions of the examination for discovery of an officer representing the respondent were read into the record. It was established on discovery that the insurance proceeds were considered by the respondent to be income from business, not income from property, i.e., the policies of insurance perse.

The plaintiff carried on the business of operating a coal mine, called the Balmer Mine, and related processing facilities at Elkview, B.C., which came into production May 1, 1971. On December 4, 1971, a fire occurred at the processing plant. It did not operate at all from December 4 to 20 and was in partial production from December 21 to 29, after which it was in full production. During the shut-down, coal continued to be mined and was stockpiled at the Balmer Mine. In the result, in its 1972 taxation year, the appellant was paid $1,455,865 by its insurers. Of that amount, it is agreed, $1,328,000 related to its loss of profits in respect of coal from the Balmer Mine.” At the time of the fire and at the time the insurance proceeds were received, the appellant's income from the operation of the Balmer Mine was exempt from taxation pursuant to subsection 28(1) of the Income Tax Application Rules, 1971.

28.(1) Subject to prescribed conditions, there shall not be included in computing the income of a corporation, income derived from the operation of a mine that came into production before 1974 to the extent that such income is gained or produced during the period commencing with the day on which the mine came into production and ending with the earlier of December 31, 1973 and the day 36 months after the day the mine came into production, except that this subsection does not apply in respect of a mine that came into production after November 7, 1969 unless the corporation so elects in respect thereof in the prescribed manner and within prescribed time.

(2) In this section,

(a) “income derived from the operation of a mine" means the income derived from the operation of the mine before any deduction is made under section 65 or 66 of the amended Act;

The appellant had made the necessary election in a timely fashion. It was not argued that the definition of ITAR paragraph 28(2)(a) is relevant to the present case. In 1975, ITAR section 28 was amended by the addition of subsection (1.1) (S.C. 1974-75-76, c. 26, s. 133. (Royal Assent March 25, 1975.)

(1.1) The expression “income derived from the operation of a mine” is, for purposes of this section and section 83 of the former Act as it read in its application to the 1971 and preceding taxation years, hereby declared to include and always to have included the income of a corporation from the processing, to the prime metal stage or its equivalent, of ore from a mineral resource owned by the corporation.

Subsection 83(5) of the "former Act" had provided:

83. (5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing on the day on which the mine came into production.

The former Act had no definition of“ income derived from the operation of a mine" other than that retroactively provided by ITAR subsection 28(1.1). In my opinion, subject to the effect, if any, to be given to that definition, the effect of ITAR subsection 28(1) and subsection 83(5) of the former Act is, for all purposes relevant to this appeal, identical.

There is a considerable body of jurisprudence dealing with the interpretation and application of subsection 83(5). None of it takes account of the retroactive amendment. Before reviewing the authorities, I think it desirable to consider particular objections taken to the conclusions of the trial judge.

While he did review authorities dealing specifically with subsection 83(5), the learned trial judge seems to have found the judgment of Reed, J., in Cominco Ltd. v. The Queen, [1984] C.T.C. 548, 84 D.T.C. 6335 (F.C.T.D.) particularly persuasive. It dealt with the proceeds of business interruption insurance in the context of the so-called earned depletion allowance under section 65 of the Income Tax Act and Regulation 1201. She found that:

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.

As I understand that decision it turned on the definition, by Regulation 1201, of the terms "production profits" and "resource profits". Reed, J., held that, as in the present case, “the breadth of the wording of section 3" of the Act brought the insurance proceeds into taxable income because they were income from a business, but went on

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 statutory definition of" income derived from the operation of a mine” is as set out in ITAR subsection 28(1.1) and paragraph (2)(a). It does not track the statutory definitions in issue in Cominco.

I do not think Cominco is helpful in deciding the issues here. Post-May 6, 1974, the definition of "resource profits” in play there expressly incorporated, among other things, the definition of "taxable production profits from mineral resources in Canada" set out in subsection 124.1(1) of the Act. This Court expressly approved the following opinion of McNair, J., in Gulf Canada v. Canada, [1991] 1 C.T.C. 99, 90 D.T.C. 6622, at page 112 (D.T.C. 6632) (F.C.T.D.); [1992] 1 C.T.C. 183, 92 D.T.C. 6123, at page 187 (D.T.C. 6127) (F.C.A.):

In my opinion, sections 124.1 and 124.2 set up their own separate scheme of inclusions and exclusions from income for purposes of the special incentives programs.

Each incentive to economic activity incorporated by parliament into the Income Tax Act seems to me very much a code unto itself; I do not think the intention expressed in one is very helpful to an understanding of the intention of another. That is particularly so when one is trying to understand what parliament meant by a certain kind of “income” in the context of a provision and the definition of the term in that provision bears little or no resemblance to the pertinent definition in the provision from which assistance is sought.

The second objection is to the following finding [at D.T.C. page 6511]:

To permit these proceeds to be defined as accruing or arising from the operation of a mine is clearly going beyond that which parliament intended. To do so would really give the plaintiff a double benefit—the right to charge off premiums paid for this insurance and then an exemption when proceeds are paid—clearly not the intended result.

Counsel were in agreement that there was no evidence that the appellant had claimed or the Minister allowed a deduction of the insurance premiums in calculating its taxable income. [1]

Finally, referring to a provision of the insurance policies, he said:

The tax exemption clause in the policies of insurance clearly articulated that the proceeds from the insurance policies would not be exempt, and provision would have to be made for taxes accruing as a result of any payments. This is not determinative, but it is an indication by the parties to the contract that proceeds would not be income earned from the operation of a mine, and these parties had the advice of counsel and chartered accountants before signing the documents. They may have acted from a mistaken impression of the law, and that's why it is not determinative.

With respect, the provision is not only not determinative; it is irrelevant. The parties to a contract cannot stipulate the tax results of their bargain. That said, the decision was plainly not based on that evidence.

Before considering the ratio of the judgment below, it will be useful to review the authorities. The first question is the breadth of meaning to be given the term "derived from”. I do not propose to quote from C.P.R. v. Provincial Treasurer of Manitoba, [1953] 4 D.L.R. 233, 10 W.W.R. 1, in spite of the appellant's stress of it. That case was concerned with the expression “income attributable” and, since it relied on the authority of Gilhooly v. M.N.R., [1945] Ex. C.R. 141, [1945] C.T.C. 203, 2 D.T.C. 725, which was concerned with a depletion allowance under the Income War Tax Act, R.S.C. 1927, c. 97, para. 5(1)(a) in respect of income "derived from" mining, I see no point in not moving at once to it. The taxpayer had a life interest in the income of her father's estate and claimed a deduction for depletion on stock dividends received by the executors from a mining company. For purposes relevant to this appeal, Cameron, J., held:

The word “derive” is defined in Murray's New English Dictionary, volume 3, page 230, as "to flow, spring, issue, emanate, come, arise, originate, having its derivation from” and in the Shorter Oxford English Dictionary, Volume 1, as "to draw, fetch, obtain; to come from something as its source".

. . . Can there be any question that mining dividends are derived from mining? I think not. . . .

In Commissioners of Taxation v. Kirk, [1900] A.C. 588 at 592, Lord Davey said “Their Lordships attach no special meaning to the word "derived", which they treat as synonymous with arising or accruing".

Kirk was concerned with a New South Wales statute taxing incomes derived from land of the Crown". That quotation was cited with approval by the Supreme Court of Canada in M.N.R. v. Hollinger, [1963] S.C.R. 131, [1963] C.T.C. 51, 63 D.T.C. 1031, at pages 134 ff. [S.C.R.], which held that rent received by a mine owner from another operator of the mine was" income derived from the operation of a mine” within the contemplation of subsection 83(5). In Gunnar Mining v. M.N.R., [1968] S.C.R. 226, [1968] C.T.C. 22, 68 D.T.C. 5035, at pages 232 ff. [S.C.R.], the taxpayer had invested income derived from the operation of its mine during the 36-month period in short-term securities and sought to have that investment income exempted under subsection 83(5). Spence, J., for the Court, said:

What is exempt under [subsection 83(5)] is“ income derived from the operation of a mine”. The income from the short term investments was not income derived from the operation of the mine but was income derived from the investment of the profits of the mine. This income from the short term investments cannot be regarded as incidental income in the operation of the mine any more that any ot er income gained from use of the profits of the mine could be so considered

Counsel for the appellant stressed the circumstance that in the tax exempt period the corporation also showed as incidental income rental which it received from the letting of certain houses at the mine property and argued that the income from the short-term securities was just another form of income incidental to the mining operation. I do not think that argument can be accepted. Those houses were built by the company so that its workers at the mine might reside therein. Certainly their construction and letting, and the receipt of rental therefrom,was incidental to the operation of the mine. To put it perhaps colloquially, during the tax exempt period the appellant was operating two businesses—firstly, a mining business, and secondly, an investment business, and the fact that its purpose in operating the second business was so that it might accumulate funds in a readily realizable form with which it could pay off the five per cent sinking fund debentures if they became due makes it nonetheless the operation of a second business.

In Falconbridge Nickel Mines v. M.N.R., [1972] C.T.C. 374, 72 D.T.C. 6337 (F.C.A), the issue was whether the exemption of subsection 83(5) extended to income from the sale, after the 36 months, of ore extracted during the 36 months. The taxpayer argued that the words "operation of a mine” meant no more than the physical removal of ore from the ground. This Court upheld the Minister's assessment which had exempted from tax income from all sales of ore within the 36 months, including ore produced before the mine had come into "production", [2] and had taxed income from sales of ore extracted during the period but sold after its expiration. The members of the panel were unanimous in the result but each gave reasons for judgment. Sheppard, D.J., held that the words “during the period of 36 months" modified "income derived" and not "operation of a mine”. He did not find it necessary to discuss the meaning of the term "operation of a mine”.

Sweet, D.]., at page 378 (D.T.C. 6341), held:

The operation of the mine within the meaning of the relevant legislation can only mean the conducting of a viable, practical undertaking for that purpose. For this it is necessarily, and I would think obviously, required that there be an organization, a business enterprise so structured and set up that the multiplicity of requirements to that end will be available. The extracting of the ore, the conversion of it into metal and the sale are parts, and important parts, but only parts of those requirements. For realistic achievement of the result to be accomplished in a practical and effective sense, they must be supported and accompanied by other activities. It is the totality of that organization, of that enterprise, and the totality of the conduct of the business which is“ the operation of a mine” within the meaning of the legislation.

Jackett, C.J., who expressed general agreement with the reasons of both of his colleagues, said, at page 379 (D.T.C. 6342):

If, in subsection 83(5),"operation of mine" means the mere physical extraction of the ore, in my view, the appellant should succeed, provided, always, that it can ever be said that income is derived from a mere physical operation of that kind considered apart from a business of which it is a part.

The other view, and, in my view, the correct view, is that when subsection 83(5) talks of income derived from operation of a mine, it is referring to income derived from a business of operating the mine, for, in relation to profit producing activity (as opposed to property or employment) a business is the sort of income source contemplated by the Income Tax Act. See, for example, section 3 of the Act

A mere physical act considered apart from the other steps necessary to bring income into existence is not a source of income as contemplated by the Act. It follows that the mere physical act of extracting ore from the mine, considered apart from the business of which it forms a part, is a barren act that is not, in itself, capable of being an income source. That physical act cannot, therefore, be what is contemplated by subsection 83(5) when it speaks of “operation of a mine” as something from which income is derived.

M.N.R. v. Bethlehem Copper, [1973] C.T.C. 345, 73 D.T.C. 5281 (F.C.A.); [1975] 2 S.C.R. 790, [1974] C.T.C. 707, 74 D.T.C. 6520, at pages 710-11 (D.T.C. 6522) (S.C.C.) it has been suggested, led parliament to enact ITAR subsection 28(1.1). The taxpayer had brought an open pit mine into production along with a mill to process the ore to concentrate and became entitled to the 36-month period of exempt income beginning December 1, 1962. In February, 1965, a rock slide terminated operations at the open pit. Shortly thereafter, a second open pit was brought into production nearby. Its ore was processed at the existing mill. The taxpayer claimed, and was denied by the Minister, a second 36-month period of exempt income. Jackett, C.J., delivered judgment for the Court.

The position that the appellant takes, as I understand counsel, is the“ mine” in subsection 83(5) means an enterprise used to extract ore “and produce copper concentrate”. This is, in effect, an integration of two business operations, namely,

(a) extraction of ore, and (b) milling of concentrates. In my view, the authorities do not support such a wide ambit for the exemption in subsection 83(5). (Quotations from authorities, North Bay Mica v. M.N.R., [1958] C.T.C. 208, 58 D.T.C. 1151, S.C.R. 597 (S.C.C.), and M.N.R. v. MacLean Mining, [1970] S.C.R. 877, [1970] C.T.C. 264, 70 D.T.C. 6199, S.C.R. 877 (omitted).)

In my view, “operation of a mine" in subsection 83(5) refers only to the extraction of ore from an ore body and does not include processing of the ore after it has been produced.*

My conclusion is, therefore, that the appellant's submission that the extraction of ore from the Jersey ore body is only part of the operation of a mine consisting of the whole of the extraction and processing activities carried on by the respondent must be rejected.

"' In either case, of course, what is contemplated is not the mere physical act of extraction of ore or of extraction of ore and processing of the ore. What is contemplated is a profit-making process consisting of such physical acts and the disposition of the products for a consideration by sale or otherwise.

In the result, the assessment was referred back for reassessment on the basis that

by virtue of subsection 83(5), there is not to be included, in computing the respondent's income, that part of the respondent's income that was derived from the extraction of ore from the [new pit] during the period of 36 months commencing with the day on which it came into production.

Martland, J., delivering judgment for the Supreme Court of Canada, recited extensively from the reasons of Jackett, C.J., and, as to that issue, expressly agreed with his views. The other issue, irrelevant here, was whether the open pit was simply an ore body and not a mine. It was a mine.

The appellant's argument is predicated on two propositions which, in my view, are unexceptionable:

(a) the insurance proceeds were clearly income since they replaced income lost in the course of operating a business; and

(b) the income lost would have been exempt from income tax because it would have been income derived from the operation of a mine.

Furthermore, the authorities establish that "derived from" is a term of wide import.

The ratio of the judgment below is found in the following at page 6511 [sic].

Here, in my view, we have a situation where the plaintiff is suggesting something should be incorporated in the legislation which is not there. The plaintiff suggests we can equate“ mining business” with the“ operation of a mine”, the actual words used in the section permitting the exemption. In my view, and I accept the definition of the defendant that operation of a mine has three and three only components, if moneys received are to fall within the exemption, operation of a mine, they must be received as a result of:

(a) extraction

(b) processing

(c) sales

This is made all the clearer by an examination of the French text.

The learned trial judge did not enlarge on that final observation.

The appellant says that the trial judge misunderstood its argument. It did not seek to equate the "operation of a mine" with "mining business" but with the "business of operating a mine” and that the “operation of a mine" is an economic concept. The respondent did not meet that argument head on. Rather, it says that the trial judge correctly understood the appellants argument and that to equate “mining business" with "the operation of a mine” would be to exempt from tax more income than parliament has expressed its intention to exempt.

With respect, the authorities would appear clearly to establish that the term "operation of a mine” is an economic concept. In Bethlehem Copper, subsection 63(5) was found to contemplate “a profit-making process” vis-a-vis the extraction of ore from an ore body. In Falconbridge Nickel, the majority clearly approached "operation of a mine” as an economic concept. Sweet, D.J. said

It is . . . the totality of the conduct of the business which is "the operation of the mine”

while Jackett, C.J. said

when subsection 83(5) talks of income derived from the operation of a mine, it is referring to income derived from a business of operating the mine. . . . A mere physical act considered apart from the other steps necessary to bring income into existence is not a source of income as contemplated by the Act.

The same approach was taken in Gunnar Mining. There the terms used by Spence, J. to distinguish the exempt from the non-exempt income were “mining business” and"investment business”. In context, he clearly meant the business of operating the mine in issue, when, as he said, “to put it perhaps colloquially . . . a mining business”. It is the operation of a mine as an economic activity, not the physical acts involved in extracting and processing, that generates income.

The artificiality of the respondent's position is made manifest by several passages in the examination for discovery of the Crown's representative, of which the following is a fair example (page 104, 1. 29ff). Mr. Bowman and Mr. Lefebvre were, respectively, counsel for the taxpayer and the Crown.

MR. BOWMAN: The Minister says this is income from a business.

Q Is that right?

A Yes.

Q What is the business that the Minister says this is income from?

A It's to fill holes.

Q The Minister thinks the taxpayer is in the business of filling holes? The plaintiff is in the business of making holes.

MR. LEFEBVRE: We're arguing. I think we're arguing. We explained the position. In the course of its business, the plaintiffs insure against the event, against the occurrence of certain risks. Now those risks occur, there's a loss of revenue that arises. The non-operation of the mine, of course, produces a loss of revenue which is filled under the insurance policy. In the absence of the insurance policy, there would have been no income. That filled the hole.

The issue, therefore, is whether this is income derived from the operation of a mine, or whether it's income derived from the non-operation of a mine covered by the insurance policy.

The business interruption insurance contracts were entered into in the course of the appellant's mining business, not some other business, and for no purpose other than to ensure the income from that business. Among the insured activities carried on as part of that mining business was the operation of the Balmer Mine. The insurance proceeds were received as indemnity for the loss of income that resulted from the interruption of a processing operation, the income from which, by definition, is included in the term '^income derived from the operation of a mine”. Extraction, in fact, continued. There is now no dispute that the proceeds were taxable because they were income from a business. They were derived from a business. If it was not the business of operating the Balmer Mine, what business was it? No alternative rationally suggests itself.

In my opinion, to the agreed extent of $1,328,000, the proceeds of the business interruption insurance were derived from the business of operating the Balmer Mine and were derived from the operation of that mine within the meaning of ITAR section 28(1). I would allow the appeal with costs here and in the Trial Division and refer the appellant's 1975 and 1976 assessments back to the Minister of National Revenue for reassessment on the basis set forth in paragraph 9 of the statement of agreed facts.

Linden, J.A. (dissenting): I regret that I am unable to agree with my brother, Mahoney, J.A.

Subsection 28(1) of the Income Tax Application Rules, 1971 exempts from taxation “income derived from the operation of a mine." With all due respect to the reasoning of my colleague, I cannot agree that the exemption can be construed so broadly as to cover insurance proceeds received because of the non-operation of a processing plant at a mine, however much that income may be connected or related to the business of mining. Parliament has not exempted all income earned by mining companies, nor has it exempted all income earned in the business of mining. It is only income derived from the operation of a mine that is exempt.

The difference between the definition of the business of mining and the more narrow definition of the operation of a mine, which that business necessarily includes, was explained by Mr. Justice Spence in Gunnar Mining v. M.N.R., supra, at page 232 [S.C.R.]:

What is exempt under the latter section [subsection 83(5)] is “ income derived from the operation of a mine.” The income from short term investments was not income derived from the operation of a mine but was income derived from the investment of the profits of a mine. This income cannot be regarded as incidental income in the operation of a mine any more than any other income gained from the use of the profits of the mine could be so considered.

According to Mr. Justice Spence, therefore, not all of the income earned by a mining business is exempt under the section. Only income earned in the course of operating a mine is exempt, and not other secondary or subsidiary income derived from other activities, investments or agreements of a mining company. Mr. Justice Spence found that, whereas the income derived from the renting of houses to miners was exempted, as it was income derived from the operation of a mine, the income derived from short-term investments was not. Obviously, each form of income earned by a mining business must be examined on a case-by-case basis to determine whether it falls within the exemption or not.

In a similar type of case, Cominco Ltd. v. The Queen, supra, Madam Justice Reed considered whether insurance proceeds received to compensate for lost income could be considered as production profits from a mining processing operation, and thus be deductible under the Income Tax Act. As in the instant case, it was clear that, had the taxpayer actually earned the income for which the insurance proceeds were replacements, it would have been deducted. However, it was held that the insurance proceeds had come into existence as a result of non-production by the taxpayer, and therefore it did not fit within literal requirements of the regulations nor did it accord with the purposes for which the allowances were provided. Hence, the taxpayer was not allowed the benefit of the deduction with regard to the insurance proceeds, despite the fact that, had the income from the activity been actually earned, it would have been deductible under the section in question.

Insurance proceeds are often treated, for tax purposes, in the same manner as the lost revenue or property which they replace. However, we must remember that the cases are normally considering whether to bring insurance proceeds into income. The issue before this Court is not whether the insurance proceeds are income, but whether they are to be exempted. In order to determine whether the exemption has application in this instance, we must be satisfied that the taxpayer's activities come within the wording of the section.

The purpose of subsection 28(1) of the Income Tax Application Rules, 1971, is clearly to encourage the mining industry in Canada, but its aim is not the encouragement of the mining business in general. Its goal is the more limited one of providing an incentive to the operation of mines, that is, particular activities of the mining business which are thought to benefit our society most. In other words, the digging, processing and selling of certain mining resources, which activities are normally thought to be part of the operations of a mine, are considered to be especially useful in fostering employment, trade and other economic activity and, hence, of particular value to our economic well-being and deserving of special treatment. During the period in which the processing plant was closed, that aspect of the work of the mine which is felt to be especially worthwhile was neither being engaged in nor being promoted, and to permit a tax incentive here would not advance the specific purpose of the legislation. There is nothing in the section which suggests that parliament intended to reward inactivity. Had parliament meant to exempt all income from every aspect of the business of mining, it could easily have done so. As it did not, we must assume that the ph rase 'operation of a mine” was meant to be given a more restricted meaning. To grant the benefit of this section to income rom insurance proceeds payable because of the non-operation of an aspect of a mine, as proposed by Mahoney, J.A. is, in my respectful view, not in harmony with the legislative language nor with the intention of parliament.

For these reasons, I would have dismissed the appeal.

Appeal allowed.