Vineland Quarries and Crushed Stone Ltd. v. MNR, 70 DTC 6043, [1970] CTC 12 (Ex Ct)

CATTANACH, J.:—The Minister by Notice of Motion seeks to amend his Reply to the appellant’s Notice of Appeal from its assessment to income tax for its 1965 taxation year.

The appellant is a joint stock company which operates a quarry on property it owns.

In filing its income tax return for the 1965 taxation year the appellant claimed a capital cost allowance on $39,556.11 in respect of machinery used in its quarrying operations. This claim was made pursuant to Section 11(1) (a) of the Income Tax Act, Regulation 1100(1) (n) and Class 19 of Schedule B to the Income Tax Regulations.

Section 11(1) (a) reads as follows:

11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year:

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

Regulation 1100(1)(n) reads as follows:

1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

(n) where the taxpayer is a corporation that had a degree of Canadian ownership in the taxation year, or is an individual who was resident in Canada in the taxation year for not less than 183 days, such amount as he may claim in respect of property of Class 19 in Schedule B that was acquired in a particular taxation year not exceeding the lesser of

(i) 50% of the capital cost thereof to him, or

The relevant language of Class 19 of Schedule B to the Regulations is the exclusion of a business that ‘‘was not a business that was principally (viii) mining’’. ,

The Minister re-assessed the appellant by reclassifying the machinery as coming within Class 10 of Schedule B to the Income Tax Regulations, that is, ‘‘property that is mining machinery and equipment’’, and Regulation 1100(1) (a) (x) so that in the result the Minister reduced the applicable rate of the capital cost allowance on the amount of $39,566.11 from 50% to 30%.

The appellant filed a Notice of Objection to the resultant assessment. The Minister confirmed the assessment and the appellant appealed directly to this Court.

The appellant claims, in its Notice of Appeal, that its operations fall within Class 19 of Schedule B to the Income Tax Regulations and that accordingly it is entitled to be allowed capital cost allowance on the amount of $39,566.11 at the rate of 50% pursuant to Regulation 1100(1) (n) on the ground that its quarrying operations do not constitute a business that is principally mining within the meaning of clause (viii) of paragraph (b) of Class 19 of Schedule B to the Income Tax Regulations.

The Minister, in his Reply to the Notice of Appeal, states that, in assessing the appellant as he did, he did so on the assumption “that the Appellant, in extracting, removing, crushing, grading and selling crushed stone and gravel from the quarries which in its financial statements were described as Quarry #1 and Quarry #2, and which was the appellant’s principal business, carried on the business of mining within the meaning of subparagraph (viii) of paragraph (b) of Class 19 of Schedule B to the Income Tax Regulations’’. He then pleads that the appellant’s operations constitute the business of mining and that, therefore, the appellant is not entitled to calculate its capital cost at the rate of 50% pursuant to Regulation 1100(1)(n) and Class 19 of Schedule B.

That is the issue between the parties on the pleadings as they presently stand.

However, in a ‘‘Schedule of Fixed Assets and Depreciation thereon’’ for the year ending December 31, 1965 in the financial statements comprising part of the appellant’s income tax return for its 1965 taxation year, the appellant also claimed capital cost allowance with respect to assets described as ‘‘Quarry #1’’ and ‘‘Quarry #2’’ on the respective amounts of $1,484 and $6,608.

This deduction was claimed pursuant to Section 11(1) (a) of the Income Tax Act, the amount thereof being calculated in accordance with Schedule E to the Income Tax Regulations and pursuant to Section 1100(1) (g) of the Regulations.

Paragraph (g) of Section 1100(1) reads as follows:

(g) such amount, not exceeding the amount calculated in accordance with Schedule E, as he may claim in respect of the capital cost to him of a property that is an industrial mineral mine or a right to remove industrial minerals from an industrial mineral mine where the mine is not a coal mine or a resource described in paragraph (a) of subsection (1) of section 1201;

Schedule E sets out the formula for computing the deduction applicable to ‘‘an industrial mineral mine’’.

In assessing the appellant for its 1965 taxation year, the Minister allowed the deduction claimed by the appellant with respect to Quarries #1 and #2 on the basis that they were “industrial mineral mines’’ while at the same time he reduced the rate of capital cost allowance on the quarry equipment from 50% to 30% on the ground that the appellant’s principal business was mining.

The effect of the proposed amendment to the Minister’s Notice of Reply is that, while maintaining the correctness of his assessment with respect to the reduction of the rate of capital. cost allowance on the quarry equipment on the ground that the appellant’s business is principally mining, in the event that the Court should hold the contrary, then the appellant should not be entitled to deduct any amount with respect to its Quarries #1 and #2, (which deduction the Minister had allowed) under Section 1100(1)(g) of the Regulations since the quarry would not be ‘‘an industrial mineral mine’’ within the meaning of that Regulation.

As I understood the argument of counsel for the Minister, it was that the Minister, in assessing the appellant as he did, was doing so on a consistent basis. If the appellant’s business was principally mining, then the rate of capital cost allowance on the equipment would be 30% rather than 50% and the quarries would be an industrial mineral mine to which the appellant would be entitled to the deduction claimed by it. However, if the Court should find that the appellant’s business was not principally mining then he submitted that the quarries could not be ‘‘an industrial mineral mine’’ and so the appellant is not entitled to the deduction with respect thereto. It is to guard against that eventuality that the Minister seeks to amend his Reply to plead that alternative.

On the other hand, counsel for the appellant submitted that there was no inconsistency in the basis of the Minister’s assessment. He submitted that the words ‘‘a business that was principally mining’’ as used in Class 19 of Schedule B may well have a different meaning from the words ‘‘an industrial mineral mine’’ as used in Section 1100(1) (g) of the Regulations and accordingly the appellant’s claims for deductions with respect to quarries and equipment are not mutually incompatible.

To me the point is arguable and one with respect to which the Minister is entitled to a decision of the trial judge.

It was also the position taken by counsel for the appellant that the Minister cannot appeal from his own assessment with which position I am in complete agreement. He said that when the Minister seeks to amend his Reply to the Notice of Appeal to raise an alternative plea, he is, in effect, launching a crossappeal to his own assessment. I am not in agreement with this latter submission.

As I understand the basis of an appeal from an assessment by the Minister, it is an appeal against the amount of the assessment.

In Harris v. M.N.R., [1965] 2 Ex. C.R. 653 at 662; [1964] C.T.C. 562 at 571, my brother Thurlow said:

. . . On a taxpayer’s appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. . . .

Here the Minister does not seek to increase the amount of the assessment. He seeks to maintain the assessment at the amount he assessed. However by his amendment to his Reply he seeks to ensure that, if the Court should find that the basis of his assessment was wrong, he might then, pursuant to reference back, assess a considerably lesser amount on what he foresees the Court might say is the correct basis of assessment.

In M.N.R. v. Beatrice Minden, [1962] C.T.C. 79 at 89, Thorson, P., the former President of this Court, said:

. . . In considering an appeal from an income tax assessment the Court is concerned with the validity of the assessment, not the correctness of the reasons assigned by the Minister for making it. An assessment may be valid although the reason assigned by the Minister for making it may be erroneous. This has been abundantly established.

In effect the Minister says that for a reason he thinks to be correct he assessed the appellant to income tax at ‘‘X’’ dollars. The appellant says that the reason assigned by the Minister was incorrect. The Minister then says if the Court should hold the basis for his assessment of ‘‘X’’ dollars is erroneous, then for what the Court might find to be the correct reason, he would assess the appellant at “X” minus “Y” dollars.

This I think the Minister is entitled to do and accordingly I would allow the motion and permit the Minister to amend his Reply to the Notice of Appeal as requested. The costs of the motion shall be costs in the cause.