Coastal Construction and Excavating Limited v. Her Majesty the Queen, [1996] 3 CTC 2845, 97 DTC 26

Bowman J.T.C.C.: — This appeal is from an assessment for the appellant’s 1989 taxation year, and specifically for the taxation year comprising the fiscal period commencing on July 1, 1989 and ending December 31, 1989.

The issues are as follows:

(a) The appellant purchased a centrifuge and excavator/loader in its fiscal period ending June 30, 1988 and an excavator in its fiscal period ending December 31, 1989. The appellant claims:

(i) that this equipment was “certified property” as defined in subsection 127(9) of the Income Tax Act’, and

(ii) in any event the Minister of National Revenue did not have the power to reduce the investment tax credit carry-forward balance from the fiscal periods ending June 30, 1988 and June 30, 1989 available for application to later years.

(b) The appellant purchased a rock crusher in its fiscal period ending June 30, 1988 and claimed an investment tax credit on the basis that the property was “approved project property” as defined in subsection 127(9). It incurred expenses of $89,396 in respect of the purchase and renovation of the rock crusher. Of this amount, $44,076 was incurred prior to May 6, 1988, the date upon which the project for which the crusher was bought was approved by the Minister of Regional Industrial Expansion.

The respondent’s position is that:

(a) the centrifuge and excavators are qualified properties and are not certified properties;

(b) the fact that the Minister treated the excavators and centrifuge as certified properties in a prior, statute-barred [1] year does not prevent his adjusting the investment tax credit carry-forward balances to reflect his view that the properties should have been treated as qualified properties;

(c) the expenses of $44,076 incurred in respect of the rock crusher prior to May 6, 1988 were not the cost of an approved project property but rather were expenses of a qualified property.

The facts are not substantially in dispute. The appellant carried on business in Nova Scotia. There are two aspects of its business with which we are concerned here:

(a) in the years in question it was involved in crushing rock in Frenchdale, Nova Scotia;

(b) it was also engaged in a coal reclamation project.

I shall deal first with the rock crushing business, for which the rock crusher was purchased and in respect of which the expenses of renovation of that equipment were incurred. The appellant’s position is that the expenses incurred before May 6, 1988 related to a stone crusher that is “approved project property”.

The definition of “approved project” and “approved project property” are as follows:

“approved project” means a project with a total capital cost of depreciable property, determined without reference to subsection 13(7.1) or (7.4), of not less than $25,000 that has, upon application in writing before July 1988, been approved by the Minister of Regional Industrial Expansion;

“approved project property” of a taxpayer means property that is certified by the Minister of Regional Industrial Expansion to be property that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer, and to be

(a) a prescribed building, to the extent that it is acquired by the taxpayer after May 23, 1985 and before 1993, or

(b) prescribed machinery and equipment acquired by the taxpayer after May 23, 1985 and before 1993,

that has been acquired pursuant to a plan by the taxpayer to use the property in Cape Breton primarily for an approved purpose in an approved project or, in the case of a prescribed building, to be leased by him to a lessee (other than a person exempt from tax under this Part by virtue of section 149) who can reasonably be expected to use the building pursuant to a plan to use it in Cape Breton primarily for an approved purpose in an approved project, or

(c) part of a prescribed building to the extent that the part is acquired by the taxpayer after May 23, 1985 and before 1993 to be

(i) used by the taxpayer, or

(ii) leased by him to a lessee (other than a person exempt from tax under this Part by virtue of section 149) who can reasonably be expected to use that part

pursuant to a plan to use that part in Cape Breton primarily for an approved purpose in an approved project, or

(d) where the taxpayer is a leasing corporation, prescribed machinery and equipment acquired by him after May 23, 1985 and before 1993, to be leased by the taxpayer in the ordinary course of carrying on a business in Canada to a lessee (other than a person exempt from tax under this Part by virtue of section 149) who can reasonably be expected to use the property in Cape Breton primarily for an approved purpose in an approved project, but this paragraph only applies if the first lessee of the property commenced use of the property after May 23, 1985,

and for the purpose of this definition,

(e) “for an approved purpose” means for the purpose of

(i) any of the activities described in subparagraphs (c)(i) to (ix), (xi) and (xii) of the definition “qualified property”,

(ii) farming, or

(iii) a prescribed activity, and

(f) “leasing corporation” means a corporation whose principal business is leasing property, manufacturing property that it sells or leases, the lending of money, the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing part or all of the sale price of merchandise or services, or selling or servicing a type of property that it also leases, or any combination thereof.

The respondent accepts that the crusher, and any expenses relating thereto that were incurred after May 6, 1988 are costs of an “approved project property”. The sole dispute that the respondent has with the appellant’s claim is that the expenses incurred prior to May 6, 1988, the date of the approval contemplated by the definition of “approved project” in subsection 127(9), were not expenses relating to an “approved project property”. All of the other conditions have been met. It should be noted that, to meet the requirements of the definition of “approved project” and “approved project property” there must be both an approval of the project and a certification of the property by the Minister of Regional Industrial Expansion. The Act does not require a certification of each expense. Both of the conditions have been met. The project was approved and the property was certified.

Nothing in the definitions quoted above requires that the expenditures in respect of the property be incurred after the date of approval. I do not accept the respondent’s contention that the approval can have only prospective effect, and no principle of interpretation requires that I give subsection 127(9) such an interpretation. Such a restrictive interpretation would not be in accordance with the scheme of the Act, its object and spirit or the régime that it regulates. Section 12 of the Interpretation Act reads:

Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

To require that the project be approved and the property and related expenses be certified before anything can be spent appears to me to be inconsistent with that rule and with the attainment of the object of legislation that provides for investment tax credits at different rates. Such a restriction does not, moreover, make economic sense. In my opinion the expenses of $44,076 incurred prior to May 6, 1988 were the costs of “approved project property”.

I come now to the somewhat more complex question of the centrifuge and excavators. This aspect of the appellant’s business involved the reclamation of coal from waste at the abandoned mine site of the Devco mine. Briefly put, when the mine closed in 1975 large piles of waste were left at or near the mine site. In the case of the Devco mine, the stone would come out of a wash plant, a mechanical operation that was used to separate the coal from impurities, and would be placed on the surface of the soil. By the time the mine closed the pile of waste covered an area of about 120 acres and was 20-25 feet high. The waste evidently contained about 10% coal. The appellant’s plan was to remove the waste, separate the coal, put the rock back, contour the property and plant grass. The coal was to be sold to Nova Scotia Power Corporation. The separation of the coal and its sale constituted of course the commercial objective of the operation, but the environmental improvement of the site was an important but secondary incident.

The recovery of coal from the waste involved the following steps. The waste was removed by the excavator and loaded on trucks which transported it to a 60 ton feed hopper, about a mile from the waste site. From there it went by conveyor belt to the wash plant where the coal was separated from the rest of the waste, consisting of rock, mud and clay. Briefly, this was accomplished by means of a large rotating drum 8 feet in diameter by 25 feet in length. The rotating drum effected a partial separa tion of the larger pieces of rock and coal and the resulting solution of water, rock and coal would be pumped into two cyclones (cylinders) about 3 feet in diameter and was rotated at high speed by means of jets of water. The heavier pieces of rock would be forced to the outside and the coal, which is lighter, would stay in the middle and drop into the vortex. Following this the coal was screened and washed several times and placed in another hopper which fed it into the centrifuge where it was spun at high speeds and dried. Apparently the centrifuge enabled the appellant to reduce the moisture level in the coal. It is obvious - and not disputed - that the centrifuge and the excavator were essential and integral parts of the coal reclamation project. The question is whether they are “certified property” as that expression is defined in section 127(9). That definition reads as follows:

“certified property” of a taxpayer means any property (other than an approved project property) described in paragraph (a) or (b) of the definition “qualified property” in this subsection

(a) that was acquired by the taxpayer

(i) after October 28, 1980 and

(A) before 1987, or

(B) before 1988 where the property is

(I) a building under construction before 1987, or

(II) machinery and equipment ordered in writing by the taxpayer before 1987,

(ii) after 1986 and before 1989, other than a property included in subparagraph (i),

(iii) after 1988 and before 1995,

(iv) after 1994 and before 1996 where

(A) the property is acquired by the taxpayer for use in a project that was substantially advanced by or on behalf of the taxpayer, as evidenced in writing, before February 22, 1994, and

(B) construction of the project by or on behalf of the taxpayer begins before 1995, or

(v) after 1994 where the property

(A) is acquired by the taxpayer under a written agreement of purchase and sale entered into by the taxpayer before February 22, 1994,

(B) was under construction by or on behalf of the taxpayer on February 22, 1994, or

(C) is machinery or equipment that will be a fixed and integral part of property under construction by or on behalf of the taxpayer on February 22, 1994,

and that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer, and

(b) that is part of a facility as defined for the purposes of the Regional Development Incentives Act, chapter R-3 of the Revised Statutes of Canada, 1970, and was acquired primarily for use by the taxpayer in a prescribed area.

The respondent agrees that all of the criteria in the definition are met except for one, viz. that the equipment be part of a “facility” as defined for the purposes of the Regional Development Incentives Act (“R.D.I.A.”). “Facility” is defined in the RDIA as follows:

“facility” means the structures, machinery and equipment that constitute the necessary components of a manufacturing or processing operation, other than an initial processing operation in a resource-based industry.

Paragraph 15(a) of the RD I A provides:

The Governor in Council may make regulations (a) defining for the purposes of this Act the expressions “manufacturing or processing operation”, “initial processing operation” and “resource-based industry”.

The Regulations made pursuant to the RDIA define “initial processing operation”, “manufacturing or processing operation” and “resource-based industry” as follows:

“initial processing operation” means an operation the product of which is a fuel or a material mainly used for further processing or manufacturing, and includes the refining of petroleum, the production of newsprint and the processing of ores to form mineral concentrates, but does not include

(a) the processing by roasting, leaching or smelting of mineral concentrates to produce metals,

(b) the processing of wood by the sulphite process into bleached sulphite pulp in a pulp mill that prior to January 1, 1972 produced dissolving and high alpha cellulose pulp on a regular basis,

(c) the converting of wood pulp into paperboard or paper other than newsprint, or

(d) the processing, other than petroleum refining, of a product resulting in a significant chemical change in the principal material used;

“manufacturing or processing operation” means an operation whereby any goods, products, commodities or wares are created, fabricated, refined or made more marketable, but does not include

(a) the merchandising of any goods, products, commodities or wares except where they are products of, and their merchandising is integral with, an operation whereby they are created, fabricated, refined or made more marketable,

(b) the growing, catching or harvesting of any natural or cultivated product of nature,

(c) the extracting of minerals by any method,

(d) the production of energy except as an integral part of and solely for use in an operation whereby any goods, products, commodities or wares are created, fabricated, refined or made more marketable,

(e) the mixing of concrete or asphalt if, in the opinion of the Minister, such operations is carried out to a significant degree for direct application in plastic form to roadway paving or for direct use in construction in metropolitan and surrounding areas,

(f) salt or potash extraction,

(g) any mobile manufacturing or processing operation, except where the applicant agrees to use the assets of the operation for a period of a least five years in such area of the designated region as is specified by the Minister,

(h) construction work

(i) repairing as distinct from rebuilding,

(j) the rendering of consumer services, and

(k) publishing other than printing;

“resource-based industry” means an industry that uses as a principal material a material

(a) the original location of which is not the consequence of human design,

and

(b) that is in or close to its natural state.

The appellant admits that the coal reclamation project is an “initial processing operation”.

The respondent’s position is that the operation is not a “manufacturing or processing operation”, as defined in the Regulations because the definition excludes in paragraph (c) “the extracting of minerals by any method”.

The appellant contends that at the assessment and objection levels this part of the definition of “facility” appears not to have been focused on by the departmental officials and that the respondent cannot at this stage raise the point, because the central focus was upon the words “in a resourcebased industry”. In support of this argument departmental memoranda (T-20 and T-401) were put in evidence, and a portion of the examination for discovery was read into the record.

I do not think that I can give effect to this contention. The basic premise of the assessment and its confirmation was that the appellant’s operation was not a “facility” as defined in the RDIA and as noted by the appeals assessor in the T-401 memorandum it is for the appellant to satisfy every component of that definition. In a footnote in Cadillac Fairview Corp. Ltd. v. R., [1996] 2 C.T.C. 2197 (T.C.C.), the following observation was made,

at page 2202:

The appellant pleaded that the payments were made pursuant to the guarantees and this allegation was denied. Counsel for the appellant argued that since the Minister had not pleaded that he “assumed” that the payments were not made pursuant to the guarantees the Minister had the onus of establishing that the payments were not made pursuant to the guarantees. The question is, if not a pure question of law, at least a mixed one of law and fact. In any event the basic assumption made on assessing was that the appellant was not entitled to the capital loss claimed and it was for the appellant to establish the several legal components entitling it to the deduction claimed. An inordinate amount of time is wasted in income tax appeals on questions of onus of proof and on chasing the will-o’-the-wisp of what the Minister may or may not have “assumed”. I do not believe that Minister of National Revenue v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, [1964] D.T.C. 5184, has completely turned the ordinary rules of practice and pleading on their head. The usual rule — and I see no reason why it should not apply in income tax appeals — is set out in Odgers’ Principles of Pleading and Practice, 22nd edition at page 532:

The “burden of proof’ is the duty which lies on a party to establish his case. It will lie on A, whenever A must either call some evidence or have judgment given against him. As a rule (but not invariably) it lies upon the party who has in his pleading maintained the affirmative of the issue; for a negative is in general incapable of proof. Ei incumbit probatio qui dicit, non qui negat. The affirmative is generally, but not necessarily, maintained by the party who first raises the issue. Thus, the onus lies, as a rule, on the plaintiff to establish every fact which he had asserted in the statement of claim, and on the defendant to prove all facts which he has pleaded by way of confession and avoidance, such as fraud, performance, release, rescission, etc.

Counsel referred to a number of rules of interpretation, including the teleological approach, and contended that, since the objective of both the RDIA and the enhanced investment tax credit is to provide an incentive to start and carry on businesses in Cape Breton, I should interpret the provision in a manner that best achieves its object. I agree, as noted above, that the Act must be construed when possible to ensure the attainment of its objects, but I am faced with the reasonably comprehensible words “the extraction of minerals by any method”.

Counsel for the respondent referred to two definitions, one in Black’s Law Dictionary and one in the Petit Robert Dictionnaire de la Langue Française, as follows:

Black’s Law Dictionary:

EXTRACT, v. To draw out or forth; to pull out from a fixed position. Webster. To “extract” ore within the meaning of a royalty provision in a mining lease contemplates not only the removal of the ore from the mine and throwing it on a dump, but also the separation of the ore from the dirt and refuse in which it was found on the dump. Giersa v. Creech, Mo.App., 181 S.W. 588, 589.

Petit Robert Dictionnaire de la Langue Française:

EXTRACTION n.f. (XIVe; estration, XIIe (au sens II); lat. extractus, p. p. de extrahere. V. Extraire). 1. Io Action d’extraire, de retirer une chose du lieu oU elle se trouve enfouie ou enfoncée. Extraction de sable, de pierres dans une carrière. L'extraction de la houille : abattage, roulage et montée. Chir. Action de retirer de l’organisme un corps étranger. V. Arrachement, énucléation, évulsion, exérèse, extirpation. Extraction d’une dent cariée, d’un fragment d’os. Extraction d’une balle. 20 Action de séparer une substance du composé dont elle fait partie. Extraction d’une essence par distillation. - Extraction d’un gaz par la distillation. 30 (fin XVe) Math. Extraction de la racine carrée, de la racine cubique.

She also referred to a decision of a Missouri appellate court, Giersa v. Creech, 181 S.W. 588 at page 590 where the Court stated:

This is especially true where, as here, such construction accords, as it does here, with the natural and literal meaning of the words used. Nor do we think this construction inconsistent with the clause of the lease providing for the payment of royalty on the ores “to be extracted from said premises.” Plaintiffs claim that the ores sued for were already, and not “to be,” extracted from the premises. The term “extract”, as here used, evidently covers the whole work necessary to make marketable ore - mining, cleaning, and delivering to market, and, unless unreasonable should be applied to all ores found “in, on, or under said lands”. The work of lifting the ore from the ore bed to the surface is shown to be a small part only of what is necessary to market this ore. The ore cannot be said to be “extracted” until separated from the dirt and refuse in which it is found.

I can think of no words that more aptly describe what the appellant was doing than “the extracting of minerals”. The initial extraction took place when the ore and waste were removed from the underground and separated, but no principle of statutory construction and no application of the plain meaning of the word “extracting” would justify my restricting the meaning to the initial operation. The waste, when removed and deposited on the ground, formed part of the terrain where it stayed for years until the appellant embarked on the secondary operation of extracting from the waste the coal that was not extracted in the initial operation.

Accordingly, I need not consider the application of the words “in a resource-based industry” or the application of the decision of Muldoon J. in Fibreco Pulp Inc. v. R. (sub nom. Fibreco Pulp Inc. v. Canada), [1994] 2 C.T.C. 114, 94 D.T.C. 6325 (F.C.T.D.). In that case he held that a pulp mill was not part of a “resource-based industry”. The Federal Court of Appeal ([1995] 2 C.T.C. 172, 95 D.T.C. 5412) expressed “serious doubts” about his conclusion that the pulp mill was not part of a “resource-based industry”, but affirmed his judgment on other grounds. It is difficult to know just what assistance the judgment would have been if I had been obliged to consider the question in light of the Court of Appeal’s “serious” but unspecified doubts about its correctness.

Finally, the appellant contends that because the Minister, in prior years, had treated the operation as a “facility” as defined in the RDIA he was not entitled to change the investment tax credit carry- forward from those admittedly statute-barred years to affect the taxable income of a year that was not statute-barred to conform to his view that the property was qualified and not certified. This interpretation would involve a conclusion that a determination of the balance of a carry-forward of investment tax credits for a statute-barred year was tantamount to an assessment. I do not read section 152 of the Income Tax Act as supporting such a conclusion. The Minister is obliged to assess in accordance with the law. If he assesses a prior year incorrectly and that year becomes statute-barred this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute-barred, even though it involves adjusting carry-forward balances from previous years, whether they be loss carry-forwards or balances of investment tax credits. New St. James Ltd. v. Minister of National Revenue, [1966] C.T.C. 305, 66 D.T.C. 5241 (Ex. Ct.); Aallcann Wood Suppliers v. The R. (sub nom. Allcan Wood Suppliers Inc. v. Canada), [1994] 2 C.T.C. 2079, 94 D.T.C. 1475 (T.C.C.). No question of estoppel arises: Goldstein v. R. (sub nom. Goldstein v. Canada), [1995] 2 C.T.C. 2036, 95 D.T.C. 1029.

The appeal is therefore allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the expenses of $44,076 incurred in respect of the rock crusher prior to May 6, 1988 are part of the costs of an “approved project property” within the meaning of subsection 127(9) of the Income Tax Act.

Success being divided there will be no order for costs.

Appeal allowed in part.