24 February 1989 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

TO E.H. Gauthier Director Special Audit

J. Lakhani

FROM Rulings Directorate G.R. White 957-8585

February 24, 1989

We apologize for the delay in replying to your memorandum of May 26, 1988, but we were awaiting a relevant memorandum from Current Amendments & Regulations Division before replying.

You requested our comments on the following statements from two memorandums which appear to be contradictory. We have expanded the quotations to make them more understandable.

You question whether trucks used to transport stone after primary crushing are eligible for Class 10(k).

In the first memorandum written by André Dulude on January 31, 1986, the statement was made "in light of the Nova Scotia Sand and Gravel case it is our position that any machinery or equipment used in an activity occurring after the primary crushing of the stone will not be used for producing or gaining income from a mine. In consequence it is our view that loaders used by the taxpayer to transport mineral material in processing activities occurring after the primary crushing of the stone are properly classified in Class 22 of Schedule II."

In the second memorandum written by Esta Mikhail on September 10, 1986, the statement is made "The Department has accepted the Nova Scotia Sand and Gravel case, so accordingly the activities of drilling and blasting of rock, the crushing of material by the primary crusher and conveying the crushed stone to the main plant are not manufacturing and processing as defined in paragraph 125.1(3)(b). These activities are the production of industrial minerals and are thus excluded activities. Subsequent activities performed by secondary crushers and screeners including washing are considered to be processing activities."

We are dealing in these cases with an Industrial Mineral Mine not a mineral resource. The impact of the Nova Scotia Sand & Gravel case is demonstrated by the key phrases in paragraph 11 of IT-145R which state that producing industrial minerals includes any primary crushing operation required to make the mineral material (in this case stone) transportable from the mine or pit area as well as transporting of the material from the mine or pit.

In our opinion the statements in the subject memorandums are not contradictory. In the first memorandum the stone is being transported as part of the processing function. It was decided that the primary crushing began the processing function and it was stated as a fact that "producing ceases once the minerals are delivered to the processing area" and that loaders used to transport the ore from the pit to the processing area would be Class 10... and that Class 10(k) does not include those loaders that are used to transport the material after the processing activity starts. Such loaders are classified as Class 22 because they are not engaged in producing industrial minerals as described in paragraph 125.1(3)(b) of the Act and subsection 1104(9) of the Regulations.

In the second memorandum the primary crushing was done to make the ore transportable from the pit as in paragraph 11 of IT-145R . It was not considered that processing had begun at that point since it was stated as a fact that conveying the crushed stone to the main plant was not processing. Primary crushing for processing purposes had not taken place. Therefore the ore was not being transported as part of the processing function and the loaders would be classified as Class 10.

Our comments on the example used in IT469 paragraph 9 to express the idea mentioned in this particular paragraph are as follows:

Trucks capable of transporting crushed stone which meet the definition of automotive equipment in Class 10(a) and which also meet the requirements of Class 22 relating to their designed function will be includable in Class 22 because Class 22 takes precedence over Class 10(a) due to the opening words in Class 10. Once they meet the requirements of Class 22 they will be included in Class 10(k)(ii) because of the overriding phrase preceding Class 10(g) (property that would otherwise be included in another class that is) and because they are acquired for the purpose of gaining or producing income from a mine.

The Department has always regarded a gravel pit as a mine despite the Nomad Sand & Gravel case (87 DTC 5343) which found that a gravel pit was not a mine and which appeal to the Federal Court of Appeal was filed on September 9, 1987. In the Nova Scotia Sand and Gravel Limited case the Court held that "the taxpayers operations in processing by washing, screening, sorting etc. excavated pit run sand and gravel to produce specialized sand and gravel products do not fall within the meaning of producing industrial minerals in paragraph 125.1(3)(b) of the Act or subsection 1104(9) of the Regulations". This case did not say that the taxpayer was not gaining or producing income from a mine. Finally, a mine does not include a gravel pit or stone quarry only for the purposes described in subsection 1104(7) of the Regulations. The Federal Court of Appeal in the Nova Scotia Sand and Gravel case on page 6300 said:

"Turning to that context it is to be observed that the item in question is the seventh in a list of types of operations to be excluded from "manufacturing or processing" into which expression, presumably, because they are to be excluded, all of them would otherwise fall".

Following this reasoning subsection 1104(7) of the regulations excludes a stone quarry and gravel pit from the definition of a mine for some specific purposes because, presumably, they are mines for all purposes of Part XI.

It seems clear that we are insisting that a stone quarry is a mine except for the purpose of subsection 1104(7) of the Regulations but that the earning of "income from a mine" extends only to the primary crusher after which income is earned from manufacturing and processing. If the primary crusher is used merely to make the ore transportable from the pit it is not considered to start the processing function (paragraph 11 of IT-145R ).

Director Bilingual Services and Resource Industries Division Rulings Directorate