Stelco Inc. v. R., [1998] 3 CTC 381, 98 DTC 6356

Robertson J.A.:

Prior to January 1, 1972 ss. 83(5) of the Income Tax Act 1952 provided for a three year tax holiday for new mines by dictating that “income derived from the operation of a mine” should not be included in the income of a corporation. That subsection had no counterpart in the reform legislation that came into force on January 1, 1972. For obvious reasons the government of the day decided not to eliminate the unexpired portion of the tax holiday that taxpayers had commenced to enjoy under ss. 83(5). This particular problem was addressed by the Income Tax Application Rules (ITAR’S) which is a separate statute: enacted as Part III of chapter 63, S.C. 1970-71-72. Subsection 83(5) was replaced by ss. 28(1) of the ITAR’s which extended the tax holiday to the earlier of December 31, 1973 or 36 months after the mine came into operation. In 1974 Parliament retroactively defined “income derived from the operation of a mine” to include the income of a corporation from the processing to “prime metal stage” by amending the ITAR’s to include ss. 28(1.1): see S.C. 1974-75[-76], c. 26, s. 133. The relevant provisions read as follows:

83 (5) Subject to prescribed conditions, there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day on which the mine came into production.

28 (1) Subject to prescribed conditions, there shall not be included in computing the income of a corporation, income derived from the operation of a mine that came into production before 1974 to the extent that such income is gained or produced during the period commencing with the day on which the mine came into production and ending with the earlier of December 31, 1973 and the day 36 months after the day the mine came into production, except that this subsection does not apply in respect of any mine that came into production after November 7, 1969 unless the corporation so elects in respect thereof in prescribed manner and within prescribed time.

28 (1.1) The expression “income derived from the operation of a mine” is, for the purposes of this section and section 83 of the former Act as it read in its application to the 1971 and preceding taxation years, hereby declared to include and always to have included the income of a corporation from the processing, to the prime metal stage or its equivalent, of ore from a mineral resource owned by the corporation.

The appellant corporate taxpayer was at all material times a fully integrated steel producer. As such, its operations encompassed not only its main steel plant but also a number of mines, including the Griffith iron ore mine, and other facilities for the production of raw materials used in the steel making process. By virtue of the fact that “operation of a mine” included the income from a corporation from the processing to the prime metal stage, income derived from the operation of the Griffith mine included not only income from activities carried out at the mine site itself, but also income attributable to activities at other sites.

During the taxation years in question the iron ore required by the taxpayer was obtained from several sources, including the Griffith mine. Because of the intermingling of iron ore from the various sources, it was not possible to identify any particular pig iron as having been produced from the Griffith mine. Accordingly, the Minister of National Revenue and the taxpayer reached an agreement as to what percentage of pig iron production would be attributable to each source, including the Griffith mine. As well, it was not possible to identify particular prime metal assets relating to the production of pig iron from ore from any particular source. In the circumstances the parties agreed that the attribution of capital cost allowance with respect to assets used up to the pig iron stage would be based on the same percentages. What the parties could not agree on was whether the taxpayer could deduct capital cost allowance in respect of the prime metal assets under construction and not in use at the end of the taxation year in question and attributable to the Griffith mine, in calculating its taxable income from other sources. It has always been common ground that capital cost allowance in relation to prime metal assets used in the production pig iron and attributable to the Griffith mine is not deductible from the taxpayer’s taxable income. It can, however, be deferred until after the expiration of the tax holiday. The Minister of National Revenue took the position that deferral of capital cost allowance is required with respect to both prime metal assets in use and under construction. This issue was appealed to the Trial Division of this Court and in a decision now reported at 97 D.T.C. 5076 Jerome A.C.J. ruled against the taxpayer.

The question that was presented to the Trial Judge is the same one raised on this appeal: is the taxpayer entitled to deduct from its non-mining income for the 1970, 1971 and 1972 taxation years, capital cost allowance in respect of the Griffith mine portion of the prime metal assets under construction and not in use during the taxation years in question? In my respectful view that question must be answered in the negative.

While the taxpayer advanced a number of intricate arguments in support of its position, all turn on the meaning to be ascribed to the term “income derived from the operation of the mine”. Implicit in the taxpayer’s argument is the premise that the term “operation” should be construed literally and, consequently, narrowly. Alternatively expressed, the taxpayer argues that the “operation of the mine” means physical movement of picks and shovels. Thus as the assets in question were not physically in use they did not form part of the operation of the mine. This proposition is clearly at odds with the decisions of this Court in Falconbridge Nickel Mines Ltd. v. Minister of National Revenue (1972), 72 D.T.C. 6337 (Fed. C.A.) and Westar Mining Ltd. v. R. (1992), 92 D.T.C. 6358 (Fed. C.A.).

In Falconbridge this Court held at 6342 that when ss. 83(5) speaks of the operation of a mine from which income is derived, it does not contemplate the mere physical act, for example of extracting ore from the mine. Similarly, in Westar the majority concluded at 6363 that: “It is the operation of a mine as an economic activity, not the physical acts involved in extracting and processing, that generates income.” In my opinion, assets acquired for use in the operation of an exempt mine form part of the economic structure of that mine whether or not those assets are actually used. To attribute their “non-use” to other mining operations is illogical. I say this because such assets are acquired to produce income which is exempt from taxation and ss. 18(l)(c) (formerly 12 (l)(c)) precludes the deduction of capital cost allowance incurred for the purpose of producing exempt income. The fallacy of the taxpayer’s position is demonstrated by the extreme example of assets acquired solely for use in an exempt mine (physically present at the mine site). The taxpayer’s rationale would suggest that as long as those assets lay idle it could take capital cost allowance and shelter other income bearing no relation to that exempt mine. This is so because such assets could make no contribution to the “generation” of income from the “operation” of the exempt mine. At the same, once those idle assets were put into use, not one penny could be used to shelter other non-exempt income, at least until the tax holiday ended. This result flies in the face of any reasonable interpretation of the provisions in question.

For these reasons the appeal should be dismissed with costs.

Appeal dismissed.