Bethlehem Copper Corporation LTD v. Minister of National Revenue, [1972] CTC 493, 72 DTC 6410

Collier, J:—This is an appeal from an assessment by the respondent which in effect disallowed the appellant’s contention that its income for its fiscal year ending February 28, 1967 was exempt from taxation by virtue of subsection 83(5) of the income fax Act, RSC 1952, c 148 and amendments. That subsection and subsection (6) 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.

(6) In subsection (5),

(a) “mine” does not include an oil well, gas well, brine well, sand pit, gravel pit, clay pit, shale pit or stone quarry (other than a deposit of oil shale or bituminous sand), but does include a well for the extraction of material from a sylvite deposit and all such wells, the material produced from which is sent to a single plant for processing, shall be deemed to be one mine; and

(b) “production” means production in reasonable commercial quantities.

In the fiscal year in question, the appellant’s income of $6,646,130.27 was derived from mining operations in its so-called Jersey mine. It had previously obtained a three year tax holiday in respect to its so-called East Jersey mine. The issue as stated by appellant’s counsel is: was the Jersey mine at its opening and in the year in question a part of the East Jersey mine, or were they two separate and distinct mines? As stated by counsel for the respondent: was the operation of the appellant commencing in 1962 and continuing into later years the same essential operation of one mine? The subtle differences in the two formulations of the issue will become more apparent from the facts.

The appellant was incorporated in 1955 for the purpose of exploring and developing certain copper mineral claims in the Highland Valley area of British Columbia. In the first two years the exploratory and proving work was done principally in what the annual reports for 1956 and 1957 refer to as the lona and Jersey Zones. It was, however, recog- nized, if not then, by 1958 that there were two ore bodies in the Jersey zone; one was named the East Jersey and the other the Jersey. Subsequent annual reports made the distinction between the two zones and the two ore bodies. Financial arrangements were made with Japanese business interests and further proving work was done.

In 1961 Wright Engineers Limited prepared a lengthy report entitled “Production Plan and Economic Analysis for a 3,000 tons per day Plant”. This report described the differences in the rock and copper ore between Jersey and East Jersey and contemplated the construction of a 3,000 tons per day crusher or mill, with the ore coming first from East Jersey; the report also contemplated a later increase in plant capacity to make economically practical the handling of ore from Jersey. The mining method was to be open pit, and as I read the recommendations, two pits were contemplated, one for East Jersey and another for Jersey. Wright Engineers Limited felt that in the preparation of the “Jersey mine site” (their words) the main road and facilities serving the East Jersey pit would be available (Exhibit 15, sec 10-1).

I digress to a brief examination of the two ore bodies referred to above. First, l am content to adopt the description of an ore body as given by Dr Holland, a very well qualified and experienced geologist, now chief of the Mineralogical Branch of the Department of Mines and Petroleum Resources of British Columbia: an ore body is a mass of rock mineralized with some valuable metallic mineral that can be mined at a profit.* [1] The uncontradicted evidence before me is that the East Jersey ore body was a small vein-type ore body of three and one half million tons with a ratio of two and one half tons of waste to one ton of ore. It was a narrow body and the change from ore to waste was sharp. The Jersey ore body was larger, 1,000 feet in depth and 600-1,000 feet in width. It was a very fractured ore body with numerous faults similar to a cracked tea cup, with fine mineralization following the cracks. It was a much lower grade deposit compared to East Jersey.

Dr Holland testified the structural control in both ore bodies was in a north-south direction and because Jersey lay to the west of East Jersey, there was, in his words, no structural connection between the two ore bodies. The distance between the two was approximately 1,000 to 1,100 feet.

I resume the narrative. Because of financial limitations, the initial capacity of the plant, and the higher grade of ore, East Jersey was brought into production first. This was in late 1962. The appellant claimed and was granted by the respondent a tax exemption for three years commencing December 1, 1962. The respondent made certain tentative reservations in its grant in respect to the appellant’s other mineral claims which were not included in this particular application. In 1963 and 1964 and up to February 17, 1965, all ore milled came from East Jersey. As I have indicated, the ore was extracted by means of the open pit method. Some development work on Jersey was commenced in 1964, that is, the preparatory work necessary for another open pit.

On February 17, 1965 a serious slide in East Jersey halted that operation permanently and Jersey was brought into production as soon as possible thereafter, although this was earlier than contemplated in the Original plan. The closest horizontal distance between the Jersey open pit and the East Jersey open pit was approximately 800 feet.

At this stage, before dealing further with the facts, I refer to certain decisions which have considered subsection 83(5): MNR v The Mac- Lean Mining Company Limited, [1970] SCR 877; [1970] CTC 264; 70 DTC 6199, which reversed [1969] CTC 257; 69 DTC 5185; Marbridge Mines Limited v MNR, [1971] CTC 442; 71 DTC 5231 (Exch); Bermah Mines Limited v MNR, 41 Tax ABC 359; 66 DTC 519. In the MacLean case, mining had been carried on at Buchans, Newfoundland for many years. Over the years several shafts had been sunk to mine different ore bodies, but all shafts were connected by an underground haulway to the original shaft. The last shaft sunk was the Rothermere shaft. In 1950 a deeper ore body some 3,000 feet from the Rothermere shaft was discovered. In order to bring it into production, the Rothermere shaft was deepened and a tunnel opened into the new ore body (the Mac- Lean ore body). in the mining of the MacLean ore body, certain other uses of the Rothermere working were made. Thurlow, J, in the Exchequer Court, held the MacLean workings to be a distinct mine and the taxpayer entitled to the exemption provided by subsection 83(5). The Supreme Court of Canada reversed the decision and accepted the Minister’s contention that the MacLean workings were simply an extension of an old or existing mine into a new ore body and not a new mine. Pigeon, J, who gave the judgment of the Court, said at pages 880-882 I 266-267, 6200-6201]:

In my view, the decisive consideration in favour of the Minister’s decision is that the MacLean orebody was not developed as a separate mine. An essential step in the process was the deepening by some 800 feet of the Rothermere shaft and the driving from that shaft of an exploratory heading some 2,300 feet underground towards the MacLean orebody. The substantial expenditure involved in deepening the Rothermere shaft and carrying an exploratory heading over a considerable distance shows that the use of the Rothermere workings was of very substantial importance in that development.

Such use was also going to be of substantial importance in the actual working of the MacLean orebody. It appears that the miners as a rule reach their working places and return to the “dry” that way. Compressed air for operating their drills as well as sand for filling the mined-out stopes also comes that way as well as the fresh air for ventilation, the exhaust only being by the MacLean shaft. Furthermore, all the water that seeps into the MacLean workings is carried out that same way, being pumped first from the bottom to the tunnel that was built as the exploratory heading, flowing by gravity to the Rothermere shaft due to a slight grade that was thoughtfully provided and being finally pumped up the Rothermere shaft.

It may be that the MacLean orebody, being completely distinct from the others and separated from the nearest other, the Rothermere, by a sub- stantial distance of over 1,000 feet, could have been developed and operated as a distinct mine. In my view, it is clear that this is not what happened in fact. This orebody was developed as an integral part of a mining operation including the Rothermere. Not only did its development proceed as an expansion of that underground operation towards the other orebody but it was not designed to be operated otherwise than as a unit with the Rothermere. Some essential facilities without which the MacLean orebody cannot be worked at all are provided by the Rothermere workings, such as ventilation. On this account, with respect, Thurlow J. was in error in saying: “all the elements necessary for a distinct mine appear to me to be present”.

There is also the fact that ore is not carried to the surface until it reaches the Lucky Strike shaft at the end of an underground haulage way and is then treated in a common mill after being mixed with the ore from the other pits. However, these factors may not be decisive. Mining itself is complete by the production and hoisting of the ore and one can well conceive of a single mill serving several mines. The building of an underground haulage way rather than a surface road or railway as means of transporting the ore from a mine to a common mill may possibly make no difference. Those questions are therefore left open.

What I find decisive against the view that the MacLean workings are a separate mine is the fact that those workings were developed from the Rothermere workings which were substantially altered for the purpose of developing the MacLean orebody and of exploiting it for producing ore. Some 800 feet of the Rothermere shaft and the whole of the exploratory heading were dug for that sole purpose. Those parts of the Rothermere workings are really integral parts of the MacLean workings without which the latter could not be operated and would not be producing ore.

In the Marbridge case (supra) the appellant had acquired certain mining claims in the Township of La Motte, PQ and in 1968 brought into production a nickel mine from an ore body discovered in Lots 9 and 10. The appellant was granted a three-year tax exemption. Later an ore body was discovered on Lots 12 and 13 and that property was brought into production in 1965. The Minister refused an exemption for No 2 mine on the grounds it was part of No 1 mine. The production from both mines went through the same crusher and then was shipped elsewhere for further processing. It appears from the evidence the two workings were not physically connected in any way as in the MacLean case (supra), nor was there any use of the facilities of No 1 mine in respect to the working of No 2 mine, except for two minor accidental things. Gibson, J held No 2 mine was a separate mine within the meaning of subsection 83(5).* [2]

The DTC headnote in the Bermah case accurately, in my view, summarizes that decision and I reproduce it here from pages 519-529:

In 1918 Company P commenced to operate a gold and silver mine in British Columbia. In 1936, when the two upper levels of the mine were apparently exhausted, the pillars supporting these levels were blasted out, leaving a large hole filled with rock and debris (a “glory hole’’). Mining of the lower-grade deeper levels was carried out sporadically by Company P until about 1956 when all operations were discontinued. In September 1959 a prospector obtained a one-year lease on the glory hole area from Company P, formed the appellant private company, and assigned his lease to the new company. Within a few months, the appellant company discovered an extremely rich ore shoot in the wall of the glory hole, began shipping ore in April 1960 and continued to do so until September 1960 when its lease expired, all of which production was in the appellant’s taxation year ended March 31, 1961. After the expiry of the lease, Company P proceeded to mine the remaining ore in the new ore shoot. The appellant company claimed that its income for the 1961 taxation year was exempt from tax under section 83(5) which exempts the income derived from the operation of a mine during the first three years of production. The Minister ruled that the appellant was not entitled to the exemption because the appellant’s mine was the same mine as that operated by Company P and that the mine came into production in 1918 and not in 1960.

Held-. The appeal was allowed. The appellant company was entitled to the exemption claimed. The appellant’s mine was a different mine from the mine operated by Company P. It was clear from the evidence that Company P had concluded years ago that there was no more ore in the glory hole area and that it had abandoned its property. There could be no question that what the appellant discovered and operated was a “new mine”, within the terms of the judgment of the Supreme Court of Canada in North Bay Mica Co Ltd v MNR (58 DTC 1151). All of the appellant’s income for the 1961 taxation year was derived from the operation of this mine during its first six months of production.

I was told that in the Bermah case the rich ore shoot was not more than twenty feet from the old workings, but had been hidden by a curtain or screen of rock.

I return now to the evidence here. Before the closing of East Jersey the ore, as I have said, was extracted by the open pit method. In this procedure the overburden is removed to uncover the ore. Drilling and blasting of the rock takes place and benches are eventually established. The ore and waste are removed (in this case) by truck on a system of roads. The road systems are important here.

The evidence before me, in my opinion, clearly establishes that none of the facilities or workings of East Jersey were used in the workings on Jersey, except for a minor portion of a surface road (see Exhibit 14). East Jersey had its own benches, berms, road systems and a power line. Jersey had and has the same things, but not connected with East Jersey. The techniques used in Jersey were different from those in East Jersey: the benches were started at 40 feet apart (later reduced to 33 feet) as compared to 30 feet in East Jersey; the blasting patterns and explosives used were different because of the differences in the rock; sorters were used to sort waste from ore in East Jersey because of the sharp cut-off rate there (sorters were not used in Jersey because the cut-off rate was not nearly as sharp). When Jersey ore was brought to the expanded mill, problems not encountered with East Jersey ore arose, which had to be solved by consultants. I have earlier pointed out that the mill had to be expanded to make production from Jersey economically practical.

The respondent contends the appellant’s activities in Highland Valley must be viewed as one integrated operation, that in looking at the words “operation of a mine” as applied to the facts here, one must look at the whole of the appellant’s operations past and present. Mr Scollin relied on a number of factors in support of the respondent’s position that this was one mining concern:

(a) The appellant’s plan for an orderly development of its property and the fact that in many of its annual reports it referred to its Operations as if they were one mine. It is true that in 1960 there was some indication of ore between East Jersey and Jersey and the possibility of one pit was considered. On further testing, this indication proved incorrect. Mr Ewanchuk, a vice-president of the appellant and assistant to the president, testified it was not feasible to work these two ore bodies by one pit. Dr Holland said such a method would have invited bankruptcy. I agree with those views. The fact that at times the appellant loosely termed its East Jersey and Jersey Operations as a “mine”, to my mind is not conclusive. In the MacLean case, Pigeon, J pointed out that the MacLean ore body could have been operated as a distinct mine . but it is clear this is not what happened in fact”. In my view, in this case, regardless of the appellant’s words or descriptions, what happened in fact was the operation of two distinct mines.

(b) In a prospectus dated September 21, 1965 an engineer’s report by D D Campbell, indicated in his opinion, that further ore could be obtained from East Jersey by a pit extension at the south end and a block cave from the Jersey pit. The respondent relies on this report as indicating the two workings were or could be in some way connected. Mr Campbell did not give evidence at the hearing. Mr Ewanchuk testified that further investigation has indicated the so- called reserves in East Jersey would be uneconomic to work and the appellant has since removed this ore from its reserves calculations. He expressed the view the block cave method was not economically feasible. I accept his evidence on these points.

(c) The respondent points to the fact that the development of East Jersey and Jersey was financed pretty well at the same time. East Jersey was a relatively small ore body and it seems to me those financing the project would hesitate unless there was some assurance that another productive ore body was available in the future.

(d) The use of a common crushing plant for ore from East Jersey and Jersey. The evidence before me is that it is not uncommon for one mill to crush the ore from more than one mine (Dr Holland).

(e) The fact that East Jersey and Jersey are contiguous in a business and geographic sense. Mr Scollin fairly conceded that bald measurements of distance between ore bodies are not conclusive. While these two ore bodies are relatively close, the evidence is clear that from an economic point of view they had to be worked separately, by two individual pits. I was impressed by the evidence of Dr Holland in respect to questions put to him regarding the Lornex operation in the Highland Valley where one open pit is being prepared. In Dr Holland’s opinion, the Lornex property is one ore body with areas of unmineralized rock lying within it.

In fairness to Mr Scollin, he contended that the factors set out above should not be separated one from the other, but should be viewed as a whole. While I have dealt with these matters seriatim, I have tried to view them as a whole, but have concluded that on the facts in this case, there were and are two distinct mines.

I was at first troubled by a passage in the MacLean judgment at pages 882-883 [268, 6201-6202] which I set out:

In order to reach a different conclusion, one would have to interpret the word “mine” in Section 83(5) as meaning “a portion of the earth containing mineral deposits”. This is not the usual meaning, the usual expression in that sense being “orebody”. It is well known that mines often, if not generally, include several orebodies. Parliament cannot possibly have intended that a mining concern would get the benefit of the three-year exemption whenever a new orebody was being mined. This is an exception and it must be strictly construed. In this connection, I would refer to what Cartwright, J (as he then was) said in North Bay Mica Co Ltd v MNR, [1958] SCR 597 at 601; [1958] CTC 208 at 212:

“For the appellant it is contended that the word ‘mine’ as used in clause (b) of Section 74(1) means not ‘a portion of the earth containing mineral deposits’ but rather ‘a mining concern taken as a whole, comprising mineral deposits, workings, equipment and machinery, capable of producing ore’. Support for this contention is sought in the circumstances that if ‘mine’ has the first of the two suggested meanings, then, (i) the phrase ‘certified . . . to have been operating on mineral deposits’ is inapt as it presupposes an entity capable of carrying on operations; and (ii) the draftsman should have substituted for the clause ‘that came into production’ the clause ‘that was brought into production’. From this the appellant goes on to argue that the ‘mine’ of the appellant is one entirely different from the ‘mine’ of Purdy Mica Mines Limited.

I incline to the view that this contention is sound; but, be that as it may, the facts appear to me to bring the claim of the appellant within the plain words of the section.

I feel the reference to several ore bodies there must be read with the facts of that case in mind. The workings there were underground, not open pit, and it was obviously feasible, as in fact was done, to work the new ore body by use of some parts of the facilities used to work the other ore bodies. Earlier in its judgment, the Court had said the MacLean ore body might have been developed as a distinct mine. I also point out that at the time of the MacLean decision, subsection 83(6) as it then stood did not have the now additional words dealing with sylvite wells. In the case of sylvite deposits, Parliament has expressly provided that if there is more than one well in a sylvite deposit, and if the material is sent to a single plant for processing, the wells shall be deemed one mine. When that amendment was made in 1966, Parliament apparently did not see fit to include a similar restriction in respect to mineral produced from two ore bodies in the same general area.

For the reasons I have given, the appeal is allowed and the assessment referred back to the Minister accordingly.

The appellant is entitled to its costs.