Date: 20080522
Docket: A-273-07
Citation: 2008 FCA 188
CORAM: RICHARD
C.J.
SEXTON
J.A.
EVANS
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
ATCO ELECTRIC LTD.
Respondent
REASONS FOR JUDGMENT
SEXTON J.A.
Introduction
[1]
This is an appeal by Her Majesty the Queen (the
“appellant”) of the decision of Justice Sheridan (the “Tax Court Judge”) in Queen
v. ATCO Electric Ltd. 2007 TCC 243, which allowed the appeal by ATCO Electric Ltd. (the “respondent”
or “taxpayer”) of reassessments in respect of the 1997 and 1998 taxation years.
The decision below also allowed the respondent’s appeal for the 2000 tax year
but that finding was not appealed before this Court.
[2]
The respondent is in
the business of the generation, transmission, distribution and retailing of
electric energy throughout the Province of Alberta. It
operates “integrated” coal-fired generating stations, where coal mines are
exploited specifically to provide a source of fuel for the manufacture of
electricity in adjacent power plants. In order to obtain the treatment it seeks
under the Income Tax Act R.S.C. 1985, c. 1 (5th Supp.) (the
“Act”) and the Income Tax Regulations C.R.C. c. 945 (the “Regulations”) the
respondent needs to show that the assets, upon which it claims special Capital Cost
Allowance treatment, are required to put coal into its “prime metal stage or
its equivalent” (“PMSE”).
[3]
As a result, this appeal primarily concerns the
meaning of PMSE as provided in the Act and the Regulations. The parties agree
that this expression can be understood as encompassing the
point where the production processes have produced a marketable, saleable
commodity which meets the specification of its consumers. However, they
disagree on how to precisely determine when a commodity has become a marketable
one.
[4]
In the decision under appeal, the Tax Court
Judge concluded that whether a particular commodity is marketable can depend on
the circumstances of the particular taxpayer, including the market reasonably
available to the taxpayer. The appellant, on the other hand, advocates an
approach that would not consider those particular circumstances. That is, every
metal would have its own “prime metal stage” and each mineral resource have its
particular “equivalent of a prime metal stage,” irrespective of other
circumstances.
[5]
For the reasons that follow, I would reject the
appellant’s approach and would dismiss the appeal.
Facts
[6]
During the tax years
in question the respondent owned the Battle River Generating Station and
jointly owned the Sheerness Generating Station, both of which are in Alberta. The stations are coal-fired electricity generating
stations that the respondent operates to produce electric energy.
[7]
The generating
stations are fuelled by thermal coal that is extracted from adjacent mines,
which were also owned, jointly or wholly, by the respondent. The specific type of coal mined – sub-bituminous coal – has a low
energy content, which renders the coal ideal for fuelling generating stations
but uneconomical for transport. Thus
the mines were exploited specifically to provide a source of fuel for the
manufacture of electricity in the adjacent power plants: such an arrangement is known as an “integrated” coal-fired
generating station. The location of the generating station also created a
market for the coal.
The fact that the respondent owned (or jointly owned) both the mines and the
generation stations is atypical for this industry.
[8]
For ease
of reference the process of the extracting and processing of the coal at the
integrated mines in question can be broken down into six stages:
- Strip
Mining –
First, layers of top soil and earth are removed to expose the coal deposit
below. Large pieces of coal are pushed out and broken into chunks which
can be loaded into over-sized trucks.
- Blending
– Second,
the trucks transport the coal into a metal-lined cone-shaped pit, from
which sub-bituminous coal of varying quality is blended into a conveyor
system.
- Primary
Crushing
– Third, the blended sub-bituminous coal is crushed to a size not in
excess of 6 inches and then stockpiled onto a “reclaim pile.”
- Secondary
Crushing
– Fourth, the coal is crushed to a size not in excess of 1 inch; also,
electro-magnets remove metals from the coal to improve its efficient
combustion.
- Pulverizing – Fifth, while in a
bunker the coal is crushed in a mill to a baby-powder fineness; this
process also ends up removing pyrites and other waste products which could
not be burned.
- Combustion – Sixth, the coal is
ready to be blown by air from the pulverizer to a nozzle tip which
introduces the fuel into the combustion chamber to commence the process to
generate electricity.
[9]
In computing its
income tax liability under Part I of the Act, the respondent computed its
resource profits based on an imputed rate of return on coal handling equipment used
up to the point that the coal had been pulverized inside the power plants and
classified the equipment utilized up to that point as Class 41 assets pursuant
to the Regulations. This was done on the basis that the PMSE had not been
reached until after the “Pulverizing” stage.
[10]
In reassessment the
Minister computed the respondent’s resource profits on the basis that the PMSE
was reached after the “Primary Crushing” stage (that is, after the point the
thermal coal had reached the reclamation stockpiles). The Minister also classified
the assets used during the process after the “Primary Crushing” stage as
constituting “generating or distributing equipment and plant (including
structures) of a producer or distributor of electrical energy” so as to be a
Class 1(m) asset instead of a Class 41 asset. As a result, under the Minister’s
reassessment the respondent was only entitled to deduct 4 percent of its
assets’ undepreciated capital cost as opposed to 25% if the asset were
designated as a Class 41 asset. The respondent appealed
that reassessment.
Relevant Legislative Provisions
[11]
The
provisions related to the calculation of resource profits and determining the
appropriate class for the respondent’s assets clarify that the crux of this
appeal lies in the appropriate interpretation of the phrase “prime metal stage
or its equivalent.”
[12]
Paragraph 20(1)(a)
of the Act permits the taxpayer to deduct such part of the capital cost of
property as is allowed by the Regulations. Pursuant to subparagraphs 1100(1)(a)(i)
and (xxvii) of the Regulations, Class 1 assets may be deducted at a rate of 4%
of their undepreciated capital cost and Class 41 assets, at 25%. Class 41(b)(i)
in Schedule II of the Regulations includes property acquired after 1987 for the
purpose of gaining or producing income from a mine.
Subparagraph 1104(5)(a)(i) of the Regulations provides a definition of
the expression “income from a mine” for the purposes of, inter alia,
Class 41:
|
For the purposes of
paragraphs 1100(1)(w) to (ya), subsections 1101(4a) to (4d) and
Classes 10, 28 and 41 of Schedule II, a taxpayer’s “income from a mine”, or
any expression referring to a taxpayer’s income from a mine, includes income
reasonably attributable to
(a) the
processing by the taxpayer of
(i) ore (other than
iron ore or tar sands ore) all or substantially all of which is from a
mineral resource owned by the taxpayer to any stage that is not beyond the
prime metal stage or its equivalent,
…
|
Pour l’application des
alinéas 1100(1)w) à ya), des paragraphes 1101(4a) à (4d) et des
catégories 10, 28 et 41 de l’annexe II, le revenu qu’un contribuable tire
d’une mine comprend le revenu qu’il est raisonnable d’imputer :
a) au
traitement par le contribuable des substances suivantes :
(i) le minerai – sauf
le minerai de fer et le minerai de sables asphaltiques – tiré en totalité ou
en presque totalité d’une ressource minérale appartenant au contribuable, jusqu’à
un stade ne dépassant pas celui du métal primaire ou son équivalent,
[…]
|
[Emphasis added.]
[13]
Paragraph 20(1)(v.1) of the Act permits
the deduction of a resource allowance as defined by section 1210 of the
Regulations. The calculation of the resource allowance depends upon a number of
variables, including “gross resource profits” which is defined in subsection 1204(1) of the
Regulations:
|
(1) For the purposes
of this Part, “gross resource profits” of a taxpayer for a taxation year
means the amount, if any, by which the total of
…
(b) the amount,
if any, of the aggregate of his incomes for the year from
…
(ii) the production
and processing in Canada of
(A) ore, other
than iron ore or tar sands ore, from mineral resources in Canada operated
by him to any stage that is not beyond the prime metal stage or its
equivalent,
…
exceeds the aggregate
of the taxpayer’s losses for the year from the sources described in paragraph
(b), where the taxpayer’s incomes and losses are computed in accordance with
the Act on the assumption that the taxpayer had during the year no incomes or
losses except from those sources…
|
(1) Pour l’application
de la présente partie, les bénéficies bruts relatifs à des ressources d’un
contribuable pour une année d’imposition correspondent au montant éventuel
par lequel le total
[…]
b) du
montant, s’il en est, de l’ensemble de ses revenues pour l’année tires
[…]
(ii) de la production
et du traitement au Canada
(A) du minerai,
à l’exception du minerai de fer ou du minerai de sables asphaltiques, tiré de
ressources minérales au Canada que le contribuable exploite, jusqu’à un
stade du métal primaire ou son équivalent,
[…]
dépasse le total de
ses pertes pour l’année provenant des sources visées à l’alinéa b), à
condition que ses revenus et pertes soient calculés conformément à la Loi,
selon l’hypothèse que ses seuls revenus et pertes pour l’année provenaient de
ces sources…
|
[Emphasis
added.]
[14]
Mineral
resources include coal deposits (s. 248(1) of the Act).
Decision
Below
[15]
The Tax
Court Judge allowed the taxpayer’s appeal with respect to taxation years 1997
and 1998.
[16]
As a preliminary
matter, the Tax Court Judge decided that a report issued by the appellant’s
expert, John Mossop (the “Mossop Report”), was not admissible as it violated
the principle outlined by Dussault, J. in Oligny v. The Queen 96 DTC
1744 which states that “…it is the responsibility of the judge, not of an
expert, to interpret the Act and to give the words that are used therein
their rightful meaning”. She also concluded that even had the Mossop Report
been admitted, she would have preferred the evidence of the respondent’s
expert. The Tax Court Judge made these determinations only after Mr.
Mossop gave oral evidence to the Court.
[17]
Turning to
the definition of PMSE, the Tax Court Judge, looking at the relevant legislation,
concluded that the wording of clause 1204(1)(b)(ii)(A) in the
Regulations contemplated an approach that considers the circumstances of each
case in determining when the PMSE had been reached. She concluded this based on
the failure of Parliament to add the expression “for that ore” after PMSE, as
well as the decision to not define PMSE, even though the term has no
industry-accepted meaning.
[18]
She subsequently
turned to the scant jurisprudence articulating the meaning of PMSE: the
decision of Justice Mahoney in Canadian Pacific Ltd. v. Canada (1994),
171 N.R. 64, [1994] F.C.J. No. 933 (QL) (C.A.) (“Canadian Pacific”) and
the dissenting judgment of Justice Linden in Gulf Canada Resources Ltd. v.
Canada (1996), 192
N.R. 283, [1996] F.C.J. No. 110 (QL) (C.A.) (“Gulf
Canada”). The Tax Court Judge decided that “the Federal Court of Appeal was
careful to couch its conclusions in terms of the particular facts of each case”
(at para. 39). This reflected an approach that, in interpreting PMSE,
necessitated scrutinizing the specific requirements of the taxpayer’s consumers
in assessing the marketability and saleability of what is being produced and
processed.
[19]
The Tax
Court Judge also indicated that it would not make either commercial or common
sense to ignore the circumstances of the taxpayer’s business in applying the
existing jurisprudence. She stated, at paragraph 46 of her reasons:
Rather than
setting a prime metal stage benchmark for bituminous sand that would apply in
all cases, the overall effect of Justice Linden’s analysis is to underscore the
importance of the specific requirements of the consumer in assessing the
marketability and saleability of what is being produced and processed. The
evidence shows that the determination will necessarily be subject to an
infinite range of variables including such things as the kind of ore produced,
its quality, its location relative to the consumer, the economics of its
transport, technological developments and the market demand, at any given
moment, for the product which the ore is required to produce. [Footnote
omitted.]
[20]
Reviewing
the evidence, the Tax Court Judge was satisfied that the taxpayer was engaged in the
production and processing of sub-bituminous coal up to and including its
pulverization. She rejected the appellant’s contention that PMSE was reached
after the “Primary Crushing” stage since there was no alternative, viable
market for the taxpayer’s sub-bituminous coal in its reclaim pile condition.
Issues
[21]
The ultimate question
in this appeal is to determine whether the Tax Court Judge erred in deciding
that the PMSE can be interpreted to include the individual circumstances of the
taxpayer, including the marketability of the product. The issue of whether the Tax
Court Judge erred by excluding the evidence of the appellant’s expert must also
be dealt with.
Standard of Review
[22]
In Housen v.
Nikolaisen, [2002] 2 S.C.R. 235 (“Housen”), the Supreme Court of
Canada explained that the standard of review to be applied by appellate courts
varies in relation to the nature of the question at issue. For questions of
law, a standard of correctness is applied (Housen, paragraph 8). For
questions of fact, a standard of palpable and overriding error should be used (Housen,
paragraph 10). For questions of mixed fact and law, a standard of palpable and
overriding error is generally applied, unless an extricable error of law can be
identified, in which case a standard of correctness is used (Housen,
paragraphs 27-28).
[23]
The parties agree that
the interpretation of the phrase “prime metal stage or its equivalent” is a
question of law.
Analysis
Did the Tax Court Judge err in deciding
that the PMSE can be interpreted to include the individual circumstances of the
taxpayer?
[24]
The
provisions to be interpreted in this appeal were enacted largely to provide tax
incentives for the resource sector to flourish in light of the high-risk nature
of resource exploration and the prohibitive capital costs involved in their
extraction. Justice Linden in Gulf Canada at para. 30 said:
Resource industries have for a number of years been
subject to favourable taxation. Canada possesses a vast quantity of natural
resources. It has been felt that the national interest is served by encouraging
the development of the resource sector. But resource activities are risky and
expensive. Recognizing this, Parliament has developed a series of tax
incentives for the resource sector. A number of special provisions relating to
the treatment of various expenditures and of income, including incentives
available in computing that income, have been made available to certain
businesses that qualify as resource activities. Included among these is
paragraph 1204(1)(b) of the Regulations, which sets out five resource
income "sources". Qualifying under any of these source descriptions
allows the particular industry access to special income-side resource
treatment.
[25]
The
complication in the present case lies in the integrated nature of the
generating stations at Battle
River and Sheerness with the mines.
The difficult question that must be answered by this Court is, as articulated
by the appellant, “the determination of the point at which mining activities
end and electricity manufacturing activities begin…” To add further difficulty, not only is
PMSE undefined in the Act or the Regulations, it is common ground between the
parties that the phrase does not have a technical or trade meaning in the
industry. Finally, because sub-bituminous coal is a non-metallic ore, it cannot
actually have a prime metal stage, but only an equivalent thereto (Tax Court
Judge’s reasons, at para. 31).
[26]
As
indicated earlier, this Court has engaged in a jurisprudential analysis of PMSE
only twice, in the cases of Canadian Pacific and Gulf Canada (per
Justice Linden, dissenting).
[27]
In Canadian Pacific, the taxpayers transported metallurgical
coal from mine sites to smelters and thermal coal from mine sites to power
generating plants. They attempted to argue that the transportation of the coal
was integral to the coal’s processing to the equivalent of the prime metal
stage, even though the taxpayers did not conduct this processing. Indeed, by
the time the coal was loaded on the railcars of the taxpayers, the coal had
already been sold by the mining company to the ultimate purchaser who did the
final processing. All the taxpayers did was to transport the coal from the
seller to the buyer. However, the taxpayers claimed that the transportation
alone entitled them to rebates of tax paid on diesel fuel used to power the
transporting trains pursuant to the
Excise Tax Act R.S.C.
1985, c. E-15, as am. (“Excise Tax Act”). This Court explored the meaning of PMSE as understood in the
Excise Tax Act at para. 30 where Mahoney J.A. stated:
In my opinion, when metallurgical and
thermal coal has been processed to the condition in which it meets the
specifications of its consumers and they buy and take delivery of it as coal in
that condition, it has certainly reached the equivalent of the prime metal
stage within the contemplation of the definition of "mining" in
subsection 49.01(1) of the Excise Tax Act. I would not exclude the
possibility that it had reached that stage sooner but that is not the issue
here. [Emphasis
added.]
The Court concluded that, despite the fact that additional processing
of the coal occurred after it was delivered to the customers, the state of PMSE
had been reached since the coal already met the
specifications of the customers. As a result, the taxpayers were not entitled
to such rebates.
[28]
The other
decision to consider the meaning of PMSE was the dissenting opinion of Justice
Linden in Gulf Canada. This case centred around the calculation of the
taxpayer’s resource profits pursuant to the Regulations. The taxpayer was a
petroleum producer, and had claimed deductions for a capital cost allowance and
a related interest expense with respect to assets used for the purposes of
producing synthetic crude oil from the bituminous sands deposits in Northern
Alberta. The taxpayer’s operations had three distinct phases: the mining of the
sands, the extraction of bitumen from the sands, and the transformation of that
bitumen so as to obtain synthetic crude oil. Subsection 1204(3) of the
Regulations states that incomes or losses derived from, inter alia,
processing petroleum “from a natural accumulation of petroleum” cannot be used
to calculate “gross resource profits” under section 1204 in the Regulations.
The majority concluded that while profits relating to the mining of the sands
could constitute gross resource profits, the same could not be said for the
extraction and transformation operations because they constituted the processing
of petroleum. This analysis by the majority therefore has no bearing on the
case before this Court, and I would also note that there was no need for the
majority to interpret what the PMSE would be in such a context.
[29]
Justice
Linden, dissenting, concluded that subsection 1204(3) did not apply because a
bituminous sands deposit constituted a “mineral resource” pursuant to section
248(1) of the Act, and could therefore not constitute petroleum for the
purposes of the Act. Since this was the point of contention between he and the
majority, Justice Linden’s analysis on PMSE is not necessarily divergent from
the majority’s judgment as the majority had no need to consider this issue.
[30]
The next
step in Justice Linden’s analysis, therefore, was to consider what constituted
the PMSE in the context of obtaining synthetic crude oil from bituminous sands.
After citing with approval the definition provided by this Court in Canadian
Pacific, Justice Linden continued at paragraph 41:
In my view, the
equivalent of the prime metal stage for mineral production is that point where
the production processes have produced a marketable, saleable commodity which
meets the specification of its consumers.
Again, it must be emphasized that, having concluded that the
operations in question were operations whereby petroleum was processed within
the meaning of subsection 1204(3) of the Regulations, the majority did not need
to engage in this analysis.
[31]
As a final
note, Justice Linden, at paragraph 43, emphasized that the equivalence is not
of a “…‘technical’ nature, but of an economic one. It is that point in the work
where the mining operation has produced a product to sell.”
[32]
The
parties agree with the tests as articulated in Canadian Pacific and by
Linden J.A. in Gulf Canada; the contention between the parties is how to
interpret these tests. The appellant adopts Justice Linden’s holding in Gulf
Canada that the PMSE is reached at that point where the production processes
have produced a marketable, saleable commodity which meets the specification of
its consumers. However, it submits that this test establishes a
“commodity-based, or objective, test that places the point of PMSE to be before
an individual consumer conducts its own activities in using the coal and not a
‘subjective’, or individual business circumstances-based, test.” In effect, the
appellant argues that every mineral resource has its own PMSE unrelated to the
circumstances of the taxpayer processing the resource. The respondent, on the
other hand, takes the position that the determination of the PMSE requires an
examination of the facts of the actual production and processing operation for
each specific taxpayer, as well as the market faced by that taxpayer.
[33]
I agree with the position of the respondent for
three reasons: a case-by-case approach to the PMSE is (1) consistent with the
jurisprudence on this issue; (2) a logical methodology given the fact that
determining the marketability of a resource cannot necessarily be universally
determined; and (3) consistent with the CRA’s original stance on this issue.
[34]
It is clear that the test employed by Justice
Linden was one where the marketability of the commodity is discerned within the
context of the circumstances of the taxpayer. In Gulf Canada Justice
Linden’s analysis was focused on, and limited to, a consideration of Syncrude’s
specific operations. For instance, he stated, at paras. 41-2:
In my view, the
equivalent of the prime metal stage for mineral production is that point where
the production processes have produced a marketable, saleable commodity which
meets the specification of its consumers.
According to this meaning, the equivalent
of the prime metal stage for bituminous sand is crude oil. The only marketable
product created by the Syncrude plant is synthetic crude oil. This was
confirmed by the evidence, which was accepted by the Trial Judge, who stated:
All three production components of the
plant were needed to make a product that could be transported (pipelined) to
market (distant refineries). Mined ore itself had no value because there was no
market for it. Similarly, bitumen had no value because there was no way of
moving it from the Syncrude site to market. Upgrading was needed to convert
the bitumen to a pipelineable product.
Therefore, the only
marketable product created by the Syncrude mine is crude oil. The complete
Syncrude operation is geared toward the production of marketable crude oil. All
aspects of the Syncrude operation, then, are contemplated by clause 1204(l)(b)(ii)(B).
They are all resource activities. The two deductions at issue in this case,
therefore, are properly related to the resource profits computation. They fall
specifically under paragraph 1204(1)(f) as "deductions for the year
... reasonably [] regarded as applicable to the sources of income described in
paragraph (b)." [Emphasis added.]
In my opinion, Justice Linden’s approach to defining PMSE is
the correct one for this Court to adopt. Justice Linden’s test demands consideration
of the circumstances of the individual taxpayer to determine whether the
production processes have produced a marketable, saleable commodity which meets
the specifications of the taxpayer’s reasonably contemplated customers.
[35]
I say this
in spite of the following comments from Justice Mahoney in Canadian Pacific,
emphasized by the appellant, at para. 30:
In my opinion, when metallurgical and
thermal coal has been processed to the condition in which it meets the
specifications of its consumers and they buy and take delivery of it as coal in
that condition, it has certainly reached the equivalent of the prime metal
stage within the contemplation of the definition of "mining" in
subsection 49.01(1) of the Excise Tax Act. I would not exclude the
possibility that it had reached that stage sooner but that is not the issue
here. The crushing, pulverizing and blending, in the case of metallurgical
coal, and the crushing, pulverizing and drying, in the case of the thermal
coal, done by the steel and electricity producers were not integral to the
processing of coal to the equivalent of the prime metal stage. [Emphasis
added.]
The above underlined quote could not be applied mutatis
mutandis to the facts of the case at bar. It must be emphasized that there
was a finding of fact in Canadian Pacific to the effect that the coal
already met the
specifications of the customers
prior to the pulverizing stages. Thus there could be no issue as to whether the
coal was marketable at the time the coal was loaded on the rail cars. Because
it was purchased, and therefore clearly marketable, it could be said to have
reached the prime metal stage or its equivalent.
[36]
The same
cannot be said with respect to the case at bar. As pointed out by the
respondent’s expert, Donald Downing, because the mine and the generator were
considered as an integrated project, after the “Primary Crushing” stage the
coal could not have been considered to meet the specifications of the mine’s only
real customer: the generating station. In his report, Mr. Downing indicated
that “These mines… were developed in concert with the adjacent generating
stations and were intended only to supply those stations with coal” (Appeal
Book, pg. 2775). Highlighting the evidence from his report, he stated (Appeal
Book, pgs. 2991 – 2992):
Q: And the
next question you were asked to consider is, [a]t what stage of processing, if
any, is the coal mined for use at the Sheerness and Battle River Generating
Stations a recognized commodity with a marketable value? And what is your
conclusion in that regard?
A: The
conclusion is that the coal that is mined at Battle River and
Sheerness is not a recognized commodity with a marketable value in an open
market area. And I make that opinion in the context of the integrated coal
mine and generating station, a situation which these two operations represent.
The mines and the generating stations were conceived together as projects. One
would not exist without the other. The planning and operation of the mine is
closely dovetailed with the planning and operation of the generating station.
It is true small tonnages of coal that are mined at the two operations are sold
to Alberta residents
for domestic use, but that is not an open-market sale. It’s as dictated by
regulation, and it represents a very small amount of the coal produced at the
mines. The relatively low energy contents of these subbituminous coals means
that they do not travel well, in that the relatively low energy content makes
it difficult for these coals to be transported long distances to markets. And
when you look at the degree of integration between the mines and the generating
stations, the lack of an open market for these coals and the fact that very
little of the coal is actually sold to other than the generating stations,
within that context, the coal does not represent a marketable commodity.
Q: Now, the
third question you were asked to consider is, [a]t what stage of processing is
the coal mined for use at the Sheerness and Battle River Generating Stations
able to be used to generate electricity? And what is your conclusion in that
regard?
A: My
opinion is that the point at which the coal can be used is immediately after
leaving the third stage of crushing or pulverizing, and prior to that, it
cannot be used in these generating stations. [Emphasis added.]
[37]
Even the
appellant’s expert, John Mossop, conceded in cross-examination that the coal
had no marketable value after the “Primary Crushing” stage (Appeal Book, pages
3203-4 & 3220):
Q: With
respect to the coal, is it your understanding… I’m asking you with respect to
the coal on the stockpile. Is there a buyer and a seller for that coal at the
stockpile? And if there are, who would those people be?
A: At that
particular place… there is not.
Q: And so
it’s not possible, really, to determine a market value for the coal at the
stockpile, correct, based on the definition of market value that we just
discussed?
A: That’s
true.
[…]
Q: And I
think you’ve already agreed with me, sir, that at the pile, the stockpile,
there is no market value to the coal either at Sheerness or Battle River in the way
we’ve defined market value?
A: No. That’s
true.
The definition of “market value” referred to above – admitted
by Mr. Mossop – was “the price which a willing seller is prepared to pay and
which a willing buyer who at arm’s length is prepared to accept” (Appeal Book,
page 3203).
[38]
Even if the Canadian Pacific case could
be capable of being read for the proposition that PMSE necessarily encompasses
a universal, commodity-based, approach (and I say it cannot), logic dictates
that such an approach be disregarded. That is made clear from Justice Linden’s
justification for his case-by-case approach to the definition of PMSE, who
notes, at paragraphs 49-50:
A second observation that supports the conclusion that
all of Syncrude's operations are resource activities concerns the need to
view the Income Tax Act as specifically designed for commercial realities. The
Act is replete with references to practical, commercial concepts. The resource
provisions themselves talk of "production in reasonable commercial
quantities," of "property acquired for the purpose of gaining or
producing income from a mine," of "carrying on an active business,"
of "the production of crude oil from bituminous sands," of
"resource profits," of "incomes and losses from production from
mineral resources," of "bituminous sands deposits coming into
production in reasonable commercial quantities," of "the development
of a mine for the purpose of gaining or producing income from the extraction of
material from a bituminous sands deposit." Each of these references
imports practical commercial concepts.
The resource scheme is written with an eye to
commercial realities. This is
significant presently for the following reason. Parliament has clearly
contemplated Syncrude-type operations through the "mineral resource"
definition. Such bituminous sands operations are very few and far between in Canada. Notwithstanding their scarcity, they receive specific mention in the
Act. They are described in paragraph 1204(1)(b). But I note that in this
description they are called income "sources." By naming bituminous
sands activities "sources," Parliament seems to have assumed that they
comprise commercial operations. This assumption is consistent with the
commercial underpinning of the resource taxation scheme. [Emphasis added.]
[39]
In the case at bar, the commercial reality is
that the only reason for the mines at Battle River and Sheerness is to supply coal to
the nearby, integrated generating stations. Thus the mines would not have been
brought into production were it not for the decision to locate the generating
plants close by. Such a context demonstrates the potential absurdity of
adopting a universal, commodity-based approach. It is self-evident that
different mining endeavours operating in different locales will face different
viable markets due to variations in transportation costs, labour costs, quality
of the resource produced and the availability of nearby markets. It is also
obvious that different markets may well present distinct demands with respect
to such resources, thus impacting what constitutes the equivalent of the prime
metal stage for a mineral resource in that market. The notion of a universal
PMSE would ignore such commercial realities.
[40]
Finally,
it is also worth noting, although not determinative, that the CCRA (as it then
was) did take the position that idiosyncrasies could be a factor in their
Ruling on the Meaning of “the prime metal stage or its equivalent”, dated May
7, 1990 which stated that, “…the ‘prime metal stage’ of a specific ore,
although generally constant throughout an industry, can change in certain
circumstances, not only among different taxpayers but among different products
sold by the same taxpayer.” See also CRA Document 9826855, “Prime Metal Stage
or its Equivalent”, dated February 1999:
The
determination of whether or not certain metals which are recoverable from an
ore body have been ‘processed to any stage that is not beyond the prime metal
stage or its equivalent’ can only be determined by reviewing all of the
relevant facts relating to a specific mining operation.
Such
rulings, while lacking the force of law, may assist the interpretation of
statutory provisions:
London Life Insurance Co. v. Canada (2000), 266 N.R. 130, [2000] F.C.J. No. 2121 (QL) (C.A.) at para. 30.
Did the Tax Court Judge err by excluding
the evidence of the appellant’s expert?
[41]
It is not necessary
for me to decide whether or not the Tax Court Judge erred in law by deeming the
Mossop Report inadmissible, as the
Tax Court Judge preferred the evidence of the respondent’s expert in any event.
The appellant did not argue that the Tax Court Judge made a palpable and
overriding error in preferring the evidence of the respondent’s expert, Donald
Downing. From the record before me, I agree with the Tax Court Judge.
[42]
More
importantly, the evidence provided by Mr. Mossop in cross-examination supports
the contentions of the respondent and actually contradicts his own report. Mr.
Mossop had concluded, at page 4 of his report, that when the coal is placed in
the stockpile (after the “Primary Crushing” stage) “it can be considered as the
equivalent stage as prime metal because it is a recognized commodity with a
market value to a customer.” However, as indicated earlier he conceded in
cross-examination that after the “Primary Crushing” stage the coal had no
marketable value (Appeal Book, pages 3203-4 & 3220).
[43]
The prime
issue in this appeal was whether the coal had reached a marketable value after
the “Primary Crushing” stage, and because Mr. Mossop ultimately agreed with the
respondent’s expert that the coal had not did not have a marketable state, the
exclusion of his report becomes unimportant. Hence, I do not need to deal with
the law relating to exclusion of an expert report.
Conclusion
[44]
For the
reasons above, I would dismiss the appeal with costs.
"J.
Edgar Sexton"
"I
agree
J. Richard C.J."
"I
agree
John M. Evans J.A."
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