Noranda Mines Limited (Successor Corporation) v. Minister of National Revenue, [1987] 1 CTC 2187, 87 DTC 153

Bonner, T.C.J.:—The appellant, as successor to Mattagami Lake Mines Limited (hereinafter “Mattagami”), appeals from assessments of income tax for Mattagami’s 1977 and 1978 taxation years. During those years Mattagami was engaged in developing a mine at Lyon Lake, about 50 miles from Ignace, Ontario. In the course of doing so it purchased machinery and equipment as follows:

In computing a claim for an investment tax credit under subsection 127(5) of the Income Tax Act the appellant treated the machinery and equipment as “qualified property” within the meaning of paragraph 127(9)(b) of the Act. The respondent disallowed the claim.

The facts are not in dispute. The pathway through the Act and Regulations to the point where the dispute arises is:

(a) subsection 127(5) of the Act permits the deduction of an amount equal to the lesser of a taxpayer's “investment tax credit at the end of the year” and another amount;

(b) paragraph 127(9)(b) of the Act defines “investment tax credit” by reference to a calculation which includes the capital cost to the taxpayer of “. . . a qualified property acquired by him . . .”;

(c) the term “qualified property” is defined by paragraph 127(10)(b) of the Act to include “prescribed machinery and equipment” that is to be used by the taxpayer in Canada primarily for the purpose of extracting minerals from a mineral resource (subparagraph 127(10)(c)(iii) of the Act); and

(d) paragraph 4600(2)(f) of the Income Tax Regulations provides that property is "prescribed machinery and equipment'' for purposes of paragraph 127(10)(b) of the Act if it is included in paragraph (k) of Class 10 of Schdule B to the Regulations.

It was the position of the appellant that the property in question is property described in paragraph (k). Paragraph (k) reads:

(k) property (other than a property included in class 28 or property described in paragraph (ka) or (kb)) that was acquired for the purpose of gaining or producing income from a mine and that is

(i) a structure that would otherwise be included in class 8, or

(ii) machinery or equipment,

except a property acquired before May 9, 1972 for the purpose of gaining or producing income from the processing of mineral ores after extraction from a mineral resource that is not owned by the taxpayer,

The respondent, on the other hand, says that the property is not described in paragraph (k) because it is described in paragraph (ka) (now redesignated as paragraph (I)). That provision reads:

(ka) property acquired after the 1971 taxation year for the purpose of gaining or producing income from a mine and providing services to the mine or to a community where a substantial proportion of the persons who ordinarily work at the mine reside, if such property is any of the following:

(i) an airport, dam, dock, fire hall hospital, house, natural gas pipeline, power line, recreational facility, school, sewage disposal plant, sewer, street lighting system, town hall, water pipeline, water pumping station, water system, wharf or similar property,

(ii) a road, sidewalk, aeroplane runway, parking area, storage area or similar surface construction, or

(iii) any machinery or equipment ancillary to any of the property described in subparagraph (i) or (ii),

but is not any of the following:

(iv) a property included in Class 28, or

(v) a railway not situated on the mine property,

It was common ground that apart from the words of exception in paragraph (k), namely, . . property described in paragraph (ka) . . .”, the property was described in paragraph (k).

Adrianus Moerman, Project Engineer at the mine, gave evidence as to the nature and function of the property in question. His evidence was unchallenged. I now summarize it. The water supply pumphouse is located on the shore of Lyon Lake only a short distance from the other mine buildings. It contains submersible electric pumps and a back-up diesel pump used to draw water from the lake and move it via a pipeline to the mine in order to:

a. pressurize sprinkler lines forming the fire suppression system in the shaft and stopes and in the administration and changehouse buildings;

b. cool air compressors used to provide compressed air required for the operation of drills; and

c. suppress dust as required by law to protect the health of miners and to flush away the rock chips created by the process of drilling holes in the rock in preparation for blasting.

The property in question does not include and is separate from the system for supplying the mine and the administration building with potable water obtained from a well.

The pumping station is located underground adjacent to the shaft at the 1200 foot level. It is required for the removal of water which seeps into the mine from the surface and also water which is introduced into the mine for the purposes of drilling operations as previously outlined. The water is collected in a system of underground ditches and flows to a sump. There provision is made to allow rock particles to settle. Two pumps which operate at a rate of 250 gallons per minute are provided at the pumping station for the purpose of propelling to the surface the clear water produced by the settling process. A further pump is provided in order to pump the sludge or dirty water to the surface.

Finally, the third class of property comprises the system for distributing electric power flowing from the transformer enclosure for substation located behind the hoist room at the surface on the mine property. The system distributes power at two different voltages (as required for the intended end use) for purposes of operating the hoist, the compressors, the pumps, the ventilation machinery, the underground crusher and such lighting as is provided at the work face. The system utilizes armoured cables attached to the shaft and to the timbers which support the underground passageways.* [1] Switch gear and transfomers required for further alteration of voltage underground form part of the system.

Counsel for the appellant argued that the phrase 4 . . for the purpose of . . 7’ in paragraph (ka) modifies not only the phrase ".. . gaining or producing income from a mine . . .”, but also the phrase “.. . providing services to the mine . . .”; that the property in question cannot be said to provide "services to the mine” because it forms part of the mine itself, and he referred to the decisions of the Supreme Court of Canada in North Bay Mica Company Limited v. M.N.R., [1958] C.T.C. 208; 58 D.T.C. 1151, and M.N.R. v. MacLean Mining Company Limited, [1970] C.T.C. 264; 70 D.T.C. 6199, with regard to the meaning of the word "mine”; and finally that the property listed in subparagraph (i) of paragraph (ka) has the general character of a public utility or social asset whereas the property now in question does not.

Counsel for the respondent argued that the property was acquired for the purpose of providing services to the mine because the language of paragraph (ka), not being limited or restricted in any way, is sufficiently broad to cover it. She submitted that, for example, the electrical wiring within the mine leading to individual light bulbs and motors is to be regarded as providing electrical service. Her position was that:

. . . the service that is provided to the mine is a service up to the point where one has something that can be utilized. One does not have anything that can be utilized until such time as you have got the outlet at the end in the mine.

In relation to the submissions made by counsel for the appellant with respect to the meaning of the word "mine”, she asserted that the meaning, when used in the context of the provisions now under consideration, may be different from that used in subsection 83(5) of the former Act and that, if the submission were correct, the appellant would not have acquired machinery or equipment for the purpose of producing income from the mine but, rather, that it would have acquired a mine.

The question whether the property now in issue falls in paragraph (ka) depends on two tests:

(a) Was it acquired for the purpose of providing services to the mine? and

(b) Is it property described in the concluding subparagraphs of paragraph (ka)?

Paragraph (ka) must be read in the context of the relevant provisions of the Income Tax Act which include subparagraph 127(10)(c)(iii) and paragraph 127(11)(b) They read:

127(10) For the purposes of subsection (9), a ‘qualified property" of a taxpayer means

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975 and before July 1, 1980

that has not been used for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(iii) extracting minerals from a mineral resource,

and

127(11) For the purposes of subsection (10),

(b) for greater certainty, the purposes referred to in subparagraphs (10)(c)(i) to (x) do not include

(i) storing (other than the storing of grain), shipping, selling and leasing of finished goods,

(ii) purchasing of raw materials,

(iii) administration, including clerical and personnel activities,

(iv) purchase and resale operations,

(v) data processing, and

(vi) providing facilities for employees, including cafeterias, clinics and recreational facilities.

Those provisions clearly express a Parliamentary intent that "qualified property” include property directly used in the production of the desired end product, but not include property used for ancillary or peripheral purposes or supporting activities. That intention appears to have been implemented by the draftsman in listing property in subparagraph (i) of paragraph (ka). He has listed there the social assets sometimes required when a work force must be housed when employed in a remote area and property useful in providing service of the sort offered by a public utility. Thus, for example, the draftsman has chosen to use the term "power line” and not electric wire, "sewage disposal plant” and not septic field, "sewer” and not sewage pipe, "water pipeline” and not water line, "water pumping station"" and not water pump and, finally, "water system"" and not plumbing system. In this context the word "service”, which otherwise would have many meanings, should be taken to refer to activities which only indirectly support the production of ore, such as activities involving the supply to a "company town” of utilities or the supply of substances such as water, gas and electricity on a scale or in a manner similar to a public utility.

The parliamentary intent previously referred to should be carried into effect by so restricting the meaning to be given to the word "service” for another reason. In Highway Sawmills Limited v. M.N.R., [1966] C.T.C. 150 at 157; 66 D.T.C. 5116 at 5120, Cartwright, J. said:

The answer to the question what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.

A finding that the two pumping stations are qualified property is one which, in my view, is in conformity with the scheme of the legislation which is to treat as “qualified property” property of direct and immediate use in the production process.

The water pumphouse at Lyon Lake supplies water to the mine primarily for purposes connected with underground drilling and blasting operations. The provision of that water has nothing in common with the operations of a public utility. The water is not fit for drinking. The pumping station does not "provide services” to the mine within the meaning of those words in paragraph (ka). Rather, it provides water to the mine alone, that water being a substance that is essential to the drilling and blasting operations that are fundamental to the production of ore.

The underground pumping station and the machinery and equipment therein are provided not for the purpose of supplying water service to the mine but, rather, for the purpose of removal of water from the mine. Part of the water requiring removal is present in the mine as a consequence of the use of water for drilling and dust suppression. That water and water which seeps in must be removed in order to prevent flooding of the workings. Thus, the property which is the water pumping station at the 1200 foot level was acquired not for the purpose of "providing services” to the mine within the meaning of paragraph (ka) but, rather, for use directly in operating the mine.

The property comprising the electrical system which is downstream, so to speak, from the mine's transformer enclosure does not, in my view, fall within paragraph (ka). The property is not a "power line”. In the French version of paragraph (ka) the words “ligne de transport d'énergie” are used. In my view those words are much more apt to describe lines belonging to a utility which bring power to a building or mine site than to describe wires and cables which distribute that power within the building or mine site to the point of end use. The property now in question is, in ordinary usage, described as “electrical wires” or “fils d'électricité”. Furthermore, it does not supply electrical service to the mine. Rather, it distributes electricity within the mine itself.

The pleadings raise the same issue with respect to the sum of $3,605 in machinery and equipment purchased in 1978 in connection with the Bell River Pumphouse at another mine. The parties agreed that success or failure of the appellant on that item would rest on the outcome in relation to the Lyon Lake water supply pumphouse. The appellant having succeeded on one succeeds on the other as well.

In the result the appeals will be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that the appellant is entitled to an investment tax credit in relation to the property in issue. The appellant shall have its costs.

Appeals allowed.