Her Majesty the Queen v. Burnco Industries LTD, [1981] CTC 518, 82 DTC 6001

Mahoney, J:—This is an appeal by the Crown from a decision of the Tax Review Board, [1980] CTC 2817; 80 DTC 1705, which upheld the defendant’s right to deduct the estimated cost of backfilling portions of a gravel pit from the revenue received from the sale gravel removed from those portions in determining its taxable income for the taxation year in which the revenue was received. It was heard together with like appeals in respect of Clayton R Carroll, James F Burns, Jr, and James F Burns, Sr.* [1]

The quantum of the deductions made is not in issue. The only issue is whether the deductions can be made.

The factual evidence was all comprised in an agreed statement of facts and two books of agreed documents. The only viva voce evidence was that of A Wayne Hopkins, a chartered accountant and a holder of a doctorate in business administration, presently professor of accounting at the University of Regina, qualified and accepted as an expert in financial and managerial accounting.

The factual evidence follows:

1. The defendant, Burnco Industries Limited (“Burnco”), is a corporation resident in Canada which, in the relevant period, carried on gravel mining operations on certain lands originally purchased by a group comprised of the individual defendants, J F Burns, Sr, J F Burns, Jr and C R Carroll (collectively known as “Carburn Aggregates”).

2. Carburn Aggregates owned a few parcels of land for the purpose of mining gravel and selling the gravel to Burnco. Burnco was the operator of the gravel mining operations.

3. The defendant, Burnco’s 1974 taxation year ended on October 31, 1974 and its 1975 taxation year ended October 31, 1975.

4. This appeal relates to what is known as “the Ogden Gravel Pit” which is located on the Glenmore Trail from the east bank of the Bow River easterly to 24th Street East, in Calgary, and within the City limits. This land had been purchased by Carburn Aggregates in 1958-1959 but it was annexed to the City of Calgary in 1960.

5. A permit to mine gravel from the Ogden Gravel Pit was applied for in 1966 and was received in 1968. It was for a period of five years ending January 1st, 1973. In 1960 the defendant Burnco applied for an extension of the area to be mined so that they would have a permit from 1973 onwards. The defendants did not get this permit immediately but they continued their operations pending the report of the engineer retained by the city, involving the whole large gravel deposit area which included the Ogden Pit. The question involved apparently was the impact on the environment and the ground water flow through the area because it was an old river channel and had the effect of developing lakes. When Burco moved into a new area, within ten days they were served with an injunction issued on behalf of the Department of Environment of Alberta which enjoined them from continuing mining, pending the signing of an agreement with the City of Calgary. This agreement was signed May 30, 1974 between Burnco Industries Limited, the City of Calgary, James F Burns, Sr, James F Burns, Jr and Clayton R Carroll (hereinafter referred to as the “Ogden Agreement” and was properly executed by the parties thereto. A copy of the Ogden Agreement is included in the Agreed Book of Documents at Tab A. The Ogden Agreement was effective from January 1, 1974.

6. Under paragraph 4 of the Ogden Agreement, the city undertook to grant a licence to mine gravel and remove earth from the Ogden Gravel Pit and sets out specifications in Exhibit A thereto relating to the excavation, backfilling and ground water control and that Burnco et al were to mine no other portion of the described land, other than the Ogden Pit. The mining of gravel was to cease before December 31st, 1978 and all gravel stock piles were to be removed and replacement of backfilling was to be completed on or before June 30, 1980.

7. One of the terms of the Ogden Agreement was that the defendant together with the individuals of Carburn Aggregates were required to file a Performance Bond in the amount of $250,000. Such a Performance Bond was obtained and delivered to the City of Calgary. A copy thereof is included at Tab B of the Agreed Book of Documents.

8. Attached to the Schedules to the Ogden Agreement were elevation maps and areas designated as the “Ogden Pit Mining Schedule” marking out what areas could be mined in what years. Gravel excavation consisted of:

A. GRAVEL EXCAVATION — (Reference Plan — Sheet 1 of 5 “Ogden Pit Mining Schedule”)

1. The prescribed schedule of excavation over a five-year period (1974 to 1978 inclusive) shall be as follows:

		Area Designation	(Loose Measure) to
	Year	(Sheet 1 of 5)		be Removed* [2]
	1974	Areas Al, A2, A3, A4		580,000
	1975	Area B		584,000
	1976	Area C		620,000
	1977	Area D		640,000
	1978	Area E		660,000
			Total	3,084,000
9.	The attachment to Schedule “A” to the Ogden Agreement was entitled

“Outlines Specifications for Excavation, Backfilling and Groundwater Control”. Further, specifications were given with the type of backfill required and a schedule of backfilling was set forth as follows:

SCHEDULE OF BACKFILLING TO INDUSTRIAL GRADES

(6 /2 Year Program — 1974 to Mid 1980)

Year	Area Designation	Approximate Cubic Yards
1974	“A”	635,000
1975	“B1”, “82”	635,000
1976	“C”	635,000
1977	“D”	635,000
1978	“E1”, “E2”	635,000
1979	“F”	635,000
1980	“G”	312,000
Total Material Required to Fill
to Industrial Grades		4,122,000 Cubic Yards

NOTE: Yield of borrow pit material for backfilling excavated areas to 95% compaction calculated at a ratio of 1.1 to 1.0. That is, 11 bank cubic yards required to fill 10 Cubic yards of excavation.

Section 4 of the Ogden Agreement also provided that if mining was accelerated, then backfilling would be accelerated accordingly.

10. When mining operations commenced in 1974 the depth of excavation was two feet below what was known as “the industrial grade”. This in fact covered the water table by two feet. On the average they were at the water table elevation two feet below industrial grade.

11. A letter agreement between Burnco Industries Ltd and Carburn Aggregates dated September 6, 1974 was duly executed by the respective parties. A copy thereof is included at Tab C of the Agreed Book of Documents. In the said letter agreement Carburn Aggregates agreed with Burnco to pay the cost of backfilling from the elevation of two feet below industrial grade and up to industrial grade, and secondly to pay 25% of the cost of the Performance Bond to the City of Calgary. That reaffirms the conditions in the Ogden Agreement.

12. At no time during its 1974 taxation year did the defendant, Burnco Industries, carry out backfilling operations in respect of the Ogden Gravel Pit or cause to be carried out such operations by others.

13. However, during its 1974 taxation year the defendant, Burnco, did preparatory work for the backfilling operations including engineering work, removal of car bodies, installation of drainage facilities and did call for tenders for the backfilling operations. A number of tenders were received in early November, 1974.

14. The defendants encountered problems in attempting to carry out the backfilling operations. The first problem was that the reclamation took place progressively behind the excavation. In that all the work was below the water table, pumping water out of the pit was necessary in order to render it a dry operation. This took time. A second problem was that 1974 was a particularly busy year for contractors in the backfilling business and the defendants were advised by the consulting firm of Reid, Crowther & Partners in August 1974 that the estimated cost of backfilling would be considerably higher than what the defendants had been paying in prior years.

15. Notwithstanding the delay in tendering for backfill contractors, the individual defendants were aware of their obligations to backfill and reclaim under the Ogden Agreement.

16. The amount of the deduction which each defendant sought to deduct in its 1974 taxation year for the cost of carrying out backfilling operations in accordance with the Ogden Agreement was:

17. The total amount of $940,650.29 claimed as a deduction by the four defendants was an estimate of the cost of backfilling and reclamation attributable to the gravel mined in the defendants’ 1974 taxation year.

18. This estimate of the cost of backfilling and reclamation was obtained in the following manner:

(a) The defendants obtained expert advice from 4 outside consultants as to the necessary work required to backfill and reclaim the “Ogden Pit”. As a result the defendants obtained the reports which are included at Tabs D and E of the Agreed Book of Documents.

(b) On November 21, 1974 the defendant, Burnco, entered into a contract with Don Beddoes Construction Co Ltd to do part of the required backfilling work. A copy of the tender from Don Beddoes Construction is at Tab

F of the Agreed Book of Documents. Don Beddoes Construction Co Ltd began work after November 1974.

(c) The contract with Don Beddoes Construction gave the defendants a cost per cubic yard of backfill.

(d) The defendants then calculated the cost of backfilling and reclamation related to the gravel mined in the 1974 taxation year by adding together:

(i) the cost of the contract with Don Beddoes Construction,

(ii) an estimated cost of the remaining backfill required which was obtained by multiplying the remaining amount of backfill needed in cubic yards by the cost per cubic yard in the Don Beddoes Contract, and

(iii) an estimate of the cost of certain additional reclamation work required under the Ogden Agreement.

I accept Dr Hopkins’ evidence that generally accepted accounting practice requires that revenues and expenditures that result directly and jointly from the same transaction must be recognized at the same time. This is called the matching principle. In this particular instance, the net revenue of some $1,100,000 received for gravel removed during the defendant’s fiscal year 1974, would have overstated its profit from that business by an estimated $718,385 unless the backfilling costs which the removal had obliged the defendant to incur were recorded at its fiscal year end, even though the backfilling had not yet been done, much less paid for.

The defendant’s profit for the year was, by definition, its income for the year from that business for purposes of the Income Tax Act, SC 1970-71-72, c 63:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

As the Supreme Court of Canada said of the subsection’s identical predecessor,

The expression “profit” is not defined in the Act. It has not a technical meaning and whether or not the sum in question constitutes profit must be determined on ordinary commercial principles unless the provisions of the Income Tax Act require a departure from such principles.* [3]

Unless there is some provision prohibiting the deduction, it is to be taken in determining profit and, it follows, income.

The plaintiff relies particularly on paragraphs 18(1 )(a) and 18(1 )(e) of the Act and says that the $718,385 was neither an actual liability at year end nor an outlay made nor an expense incurred during the year but, rather, an estimate of liabilities to be incurred in the future and, therefore, credited to a reserve, contingent account or sinking fund.

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business Or property;

(e) an amount transferred or credited to a reserve, contingent account or sinking fund except as expressly permitted by this part;

As to paragraph 18(1 )(a), no outlay was made during the taxation year in issue. The question is whether the $718,385 was an expense incurred during the year. The fact that, as at year end, the amount was not ascertained is not a determining factor. Neither is the fact that the basis for its most reliable estimation was not all in existence as at the year end. The obligation to backfill arose as the gravel was removed. It was certain that there would be a cost. That cost was “an expense incurred during the year” as that term is recognized in the accrual method of accounting which is the only method acceptable in the circumstances for purposes of the Income Tax Act.

Nothing in paragraph 18(1 )(e) precludes the deduction. It was clearly not a transfer to a reserve or sinking fund. A sinking fund has a particular meaning which need not be explored. A reserve is an appropriation of retained earnings; it arises only after the earnings have been ascertained. Here we are concerned with ascertaining the earnings. There was no contingent element in the defendant’s liability to backfill. That the cost had to be estimated does not render it contingent.

The action will be dismissed with costs except that the defendant shall bear the costs of providing the court with a transcript of Dr Hopkins’ evidence. It would not have been required had the defendant complied with Rule 482.