Johns-Manville Canada Inc v. Her Majesty the Queen, [1979] CTC 348, 79 DTC 5270

Gibson, J:—Johns-Manville Canada Inc appeals from three assessments for each of the taxation years 1969 and 1970 disallowing a deduction of $2,758,670 in the computation of its income. This amount of money was expended by Johns-Manville acquiring land adjacent to its Jeffrey open pit mine at Asbestos, Quebec, for the purpose of slope stability.

According to the pleadings, the Minister alleges that these sums were an outlay of capital or a payment on account of capital within the meaning of paragraph 12(1)(b) of the Income Tax Act, RSC 1952, c 148.

Whether or not that position is correct is the only issue in this appeal.

In respect to such an issue, the Supreme Court of Canada in MNR v Algoma Central Railway, [1968] CTC 161 at 162; 68 DTC 5096, said:

Parliament did not define the expressions “outlay . . . of capital” or “payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia (1966), AC 224, by Lord Pearce. In referring to the mat- ter of determining whether an expenditure was of a capital or an income nature, he Said, at p 264:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

In considering any particular expenditures, their decision of whether or not any should be applied to capital account must be based upon business or commercial principles. An exemplification of such application is the Supreme Court of Canada’s decision in Denison Mines Limited v MNR, [1974] CTC 737; 74 DTC 6525. In that decision, the Supreme Court of Canada agreed with the reasons of the Trial Judge, Cattanach, J, and the further comments made by the Court of Appeal, Jackett, CU. The Supreme Court of Canada, after referring to the citation by Cattanach, J of the words of Viscount Cave, LC in British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205:

. . . But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital .. .

Said:

He (Cattanach, J)

... went on to hold, however, that in the light of the special circumstances of this case, the enduring benefit derived from the passages did not make it necessary to find that the expenditures for the extraction of ore from the passages should be regarded as capital expenditures in assessing the Company’s income. After stating that the operation must be looked at objectively rather than subjectively, he said (at pp 653-4):

In doing so the preponderance of the evidence leads me to the conclusion that the expenditures were made in furtherance of the appellant’s business of extracting ore. The activity was in fact current ore extraction to meet the appellant’s immediate need to produce ore. What the appellant did was to extract ore and that was anticipated by the appellant as the direct and immediate result of its expenditures even though the ultimate result of that activity was an asset that endured to the benefit of the appellant’s business. In my opinion the expenditures here in question are current operating expenses laid out as an integral part of the profit-making activity of the company. They were costs incidental to the production and sale of the output of the mine and as such are operating costs.

And the Court further commented:

The Federal Court of Appeal agreed with this decision. Jacket, CJ who delivered the judgment of the Court, said:

In considering that question, it must be emphasized that, as far as appears from the pleadings or the evidence, no more money was spent on extracting the ore the extraction of which resulted in the haulageways than would have been spent if no long term continuing use had been planned for them.

One business or commercial principle that has been established for so long that it is almost a rule of law is that “The profits . . . of any transaction in the nature of a sale must, in the ordinary sense, consist of the excess of the price which the vendor obtains on sale over what it cost him to procure and sell, or produce and sell, the article vended. . . .” (see The Scottish North American Trust, Ltd v Farmer (1910), 5 TC 693, per Lord Atkinson at 705).

Our difficulty, at the outset, with the appellant’s claim for capital cost allowance is therefore that we cannot accept the submission of the appellant that, while the profit from the mining operating, as far as the ore taken from its rooms is concerned, is the net of proceeds of disposition over costs of extraction, the profit from the mining operation, as far as the ore taken from the “haulageways” is concerned, is the proceeds of disposition without deducting the costs of extraction of such ore. That submission is contrary to a long line of authority.

In the second place, if we are correct in our view that the deduction of such costs is required in preparing the profit and loss account for the year in which they are incurred, it would not seem that any sound system of accounting could show them also as a “capital cost” of something other than the ore. No single disbursement can be reflected twice in the accounts, if the result is to be an accurate reflection of the state of the businessman’s affairs.

Another exemplification of this proposition is the case of Pitt (Inspector of Taxes) v Castle Hill Warehousing Co Ltd, [1974] 1 WLR 1624 (Ch D), Megarry, J at page 1629:

In considering all these elements, and in looking at the case as a whole, it is the practical and business point of view that counts for more than the juristic classification of the legal rights employed or exhausted in the process. As Lord Uphohn said in Strick v Regent Oil Co Ltd (1966 AC 295, 345: “It is a question of fact and degree and above all judicial common sense in all the circumstances of the case.’’ In other judgments there are references to “common sense” simpliciter, but the adjective “judicial” may be useful as indicating that the kind of common sense needed is one that is not at large, but is guided and tutored by the authorities.

Johns-Manville is in the business of mining and processing asbestos ore from its Jeffrey open pit mine located within the municipal boundaries of the Town of Asbestos and is selling the asbestos it produces.

The open pit from which the ore is mined measures approximately 5,700 feet at major axis, 3,500 feet at minor axis and 950 feet in depth. The ore body is cylindrical with east and west bulges in shape and plunges to the south-west away from the town at an angle of approximately 55°. It measures approximately 2,000 feet in diameter.

For slope stability as excavation of the mine proceeds, the evidence establishes that it is necessary on the horizontal plane to remove substantial quantities of soil and rock. As it was put in Exhibit 2, Tab “H”:

THE JEFFREY OPEN PIT

The control of a slide at the Jeffrey mine of Canadian Johns Manville in Asbestos was an outstanding example of a successful pit slope stabilization program, ranking in scope with the Panama Canal slide project as one of the largest in the world. It involved pit wall drainage and removal of overburden to minimize Slide inducing pressures.

The Jeffrey is the largest asbestos mine in the western world and one of the largest pits in Canada—more than a mile in diameter at surface and about 900 ft deep. Production is 33,000 tons of ore daily plus another 60,000-65,000 tons per day of overburden and waste material.

In January 1971, an estimated 35 million tons of soil and rock started to slide in the southeast corner of the pit, extending some 250 ft into the edge of the town and a scant 75 ft from the primary crusher and related facilities. The slope area involved had a 600 ft high rock section covered by 200 ft of overburden. The rock was highly fractured serpentinized periodotite with a number of major shear zones dipping into the slope. Overburden contained several layers of permeable sand and gravel. Mining was currently taking place near the toe of the slope. Initial movement was only about 3 inches a day, but the slide soon threatened to disrupt mill ore supply. Golder Associates was retained to help stop the movement and by October of that year there was no further evidence of movement.

According to the evidence, it is the eastern wall which is adjacent to the town which is subject to instability. It is in this area that land was acquired for the purpose of using it for slope stability so that the operation of the mine could continue. No part of the ore body is located sub-adjacent to the properties purchased for this purpose during the 1969 and 1970 taxation years. In other words, the properties did not add or augment the reserves of the mine from which ore could be extracted but it did permit Johns-Manville to extract the ore that was in the mine and sell it. As to this, part of paragraph 6 of the Statement of Claim is admitted, namely:

in the course of carrying on its mining operations the level of the ore body was lowered and it became necessary for the Plaintiff to push back year by year the walls of the pit in order to maintain an appropriate wall angle.

The position of the defendant is, according to the pleadings:

for the purpose of doing so properties were acquired carrying with them pursuant to Article 414 of the Civil Code the ownership of what was above and what was below and that pursuant to the rights given to the Plaintiff by Article 414 of the Civil Code as the proprietor of lands acquired, the Plaintiff made excavations thereon and drew away therefrom such materials as were necessary for the exploitation of the existing mine and otherwise he denies paragraph 6 of the Statement of Claim;

In other words, the defendant admits that Johns-Manville made excavations on the properties acquired in 1969 and 1970 and removed the soil from them for the purpose of mining its existing ore body.

In removing the overburden and rock from the properties acquired, the material was put in the area where Johns-Manville puts its waste tailing and is of no value.

In brief, the submission of Johns-Manville is that subject lands were acquired and the overburden and underlying rock were removed from these lands for the purpose of preventing such overburden and underlying rock falling into the mining pit in the course of Johns-Manville mining operations which would have caused the mining operations to come to an end.

The evidence also discloses that the acquisition of property at the periphery of its mining pit has been a constant part of the mining operations of Johns-Manville and purchases of land have occurred annually for almost 40 years. The acquisition cost of the purchases of such lands represent only a relatively small percentage of the annual cost of sales of Johns- Manville—see Exhibit 2, Tab I:

PROPERTY PURCHASES/1966-1973

	Property	Jeffrey
Year	Purchases	Cost of Sales	%
1966	$1,173,000	$ 28,343,000	4.4%
1967	1,090,000	29,435,000	3.7%
1968	1,038,000	33,555,000	3.1%
1969	1,104,000	34,222,000	3.2%
1970	1,486,000	42,817,000	3.5%
1971	2,098,000	43,103,000	4.9%
1972	1,083,000	48,037,000	2.3%
1973	146,000	51,770,000	0.3%
Total	$9,218,000	$311,282,000	3.0%

SCHEDULE OF COSTS—1966 TO 1973

JEFFREY MINE

							(000’s)
Description	1966		1967		1968		1969		1970		1971		1972		1973
Explosives	$	590	$	529	$	765	$ 1,051		$ 1,044		$	979	$	875	$	880
Fuel Oil
(Process)	$	276	$	280	$	284	$	345	$	342	$	391	$	410	$	595
All Other Oil	$	677	$	950	$ 1,180		$ 1,310		$ 1,570		$ 1,790		$ 1,863		$ 2,234
Maintenance
Materials	$ 4,082		$ 4,317		$ 5,161		$ 5,755		$ 7,588		$9,395		$ 8,242			8,606
Bagging
Materials	$ 2,592		$ 2,383		$ 2,496		$ 2,565		$ 2,842		$ 2,966		$ 2,860			3,268
Cost of
Sales	$28,343		$29,435		$33,555		$34,222		$42,817		$43,103		$48,037		$51,770
March 25/74

In my view, there are “special circumstances” in this case (cf British Insulated and Helsby Cables, Limited v Atherton (supra)) leading to the conclusion that the subject expenditures are not properly attributable to capital. The subject expenditures did not add to or preserve the ore body. Instead, the lands purchased by these expenditures were in essence consumed for all practical purposes in the course of and as part of the mining operations of Johns-Manville and as a consequence were expenditures “incidental to the production and sale of the output of the mine” (cf Denison Mines Limited v MNR (supra)) and were part of the cost in the determination of profits.

Therefore, after considering the whole of the evidence, and as stated, looking at the character or quality of the expenditures based upon business or commercial practice rather than the character of the asset acquired by the expenditures, the conclusion is that the subject expenditures in the taxation years 1969 and 1970 were not on capital account within the meaning of paragraph 12(1 )(b) of the Income Tax Act.

The appeal is allowed with costs.