Her Majesty The Queen v. Nomad Sand and Gravel Limited, 91 DTC 5032, [1991] 1 CTC 60 (FCA)

Urie, J.A.:—The appellant appeals from a decision of Rouleau, J. in the Trial Division [[1987] 2 C.T.C. 112; 87 D.T.C. 5343] in which he dismissed the appel- lant’s appeal from a decision of the Tax Review Board rendered in 1987 [[1982] C.T.C. 2035; 82 D.T.C. 1070], whereby the respondent's appeal from reassessments of income tax for its 1974, 1975, 1976 and 1977 taxation years were allowed. This appeal relates only to the respondent's 1976 taxation year since in the other three years—1974, 1975 and 1977—there were nil assessments in respect of the respondent's income and for those three taxation years the respondent's appeals should have been dismissed at the Tax Review Board level and since that had not been done, the appellant's appeal to the Trial Division for those years should have been allowed. Counsel for the respondent agreed that this should have been the proper disposition of the appeal before Rouleau, J. so that to that extent at least the appeal will be allowed in this Court.

The Facts

The facts, which are not in dispute, were succinctly and accurately summarized by the learned trial judge in the following passage from his reasons for judgment (page 112-13 (D.T.C. 5344)).

During the period in question the defendant company carried on the business of operating a sand and gravel pit at Brighton, Ontario. The company's operation consisted of removing raw material from a gravel pit, transporting it to crushers and washers and from there to loading trenches. Three "966 Carruthers” front-end loaders were used to transport the material.

In order for the defendant to obtain the necessary licence to operate a gravel pit, it was required, pursuant to the Pits and Quarries Control Act, S.O. 1971, c. 96, to produce a site plan for the rehabilitation of the area. The rehabilitation required by the Act comprised levelling off the banks of the pit, the gradual sloping of the floor of the pit, covering the area with top soil and planting grass and trees on the site. The defendant estimated the cost of such rehabilitation to be approximately between $125,000.00 and $130,000.00.

Pursuant to section 5 of the Pits and Quarries Regulations, O. Reg. 545/71, a levy of $0.02 per ton was imposed on the material extracted from the pit as security towards the cost of the rehabilitation. The amount paid by the defendant as a levy bore interest at the rate of 6 per cent and was refundable when and if the rehabilitation of the pit was completed.

In its 1976 taxation year, the defendant claimed as an expense in carrying on business the amount of $7,994.02 paid by it to the Ontario government pursuant to the Pits and Quarries Control Act. The Minister reassessed the defendant's 1976 taxation year on the basis that the defendant was not entitled to claim the amount as an expense and that certain assets owned by the defendant and used in its operations, namely front-end loaders, should be classified as Class 10 assets for capital cost allowance purposes, rather than as Class 22 assets as claimed by the defendant, with the result that the capital cost allowance claimed was reduced by the amount of $3,972.85.

The defendant objected to the Reassessment of March 1979 and the Minister of National Revenue confirmed the Reassessment by a Notification of Confirmation dated June 13, 1980. The defendant then appealed to the Tax Review Board which, by judgment dated January 4, 1982, allowed the appeal. It is that judgment which is now under appeal.

The Issues

There are just two issues in the appeal:

(1) Whether in computing its income from its business the respondent was entitled to deduct the payments which it made to the government of Ontario in compliance with the Pits and Quarries Act on the basis that they were outlays or expenses incurred by it in earning or producing income from the business and, accordingly, deductible in the computation of its taxable income for the 1976 taxation year by virtue of paragraph 18(1)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") or whether, properly understood, they were deposits transferred or credited to a reserve and thus precluded from deductibility for such purpose, by virtue of paragraph 18(1)(e) of the Act.

(2) Whether the front-end loaders used by the respondent in its sand and gravel operations ought, for the purpose of calculating capital cost allowance, to have been classified as Class 10 or as Class 22 assets.

The Argument

Issue I

After rejecting the applicability of several cases cited by the appellant as supporting its proposition that the annual payments made by the respondent to the government of Ontario as security for the rehabilitation of the gravel and sand pits site were security deposits not deductible in the calculation of the respondent's taxable income, the learned trial judge made the following finding (at page 116 (D.T.C. 5346-47)):

In my opinion, the annual levy payments made by the defendant to the province constitute a part of the defendant's current operating expenses and are deductible under paragraph 18(1)(a) of the Income Tax Act. Subsection 9(1) of the Act states that income tor a taxation year from a business or property is the” profit” therefrom for the year. It has long been recognized that tax must be imposed not on the gross amount received but on that amount less the expenses incurred to produce it. Paragraph 18(1)(a) of the Income Tax Act is recognition of that very fundamental principle:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

The Income Tax Act does not define the term "profit" as that word is used in subsection 9(1) of the Act. However, a judicial statement as to the proper approach for determining net profit is set out in Daley v. M.N.R., [1950] C.T.C. 254; 50 D.T.C. 877, where Thorson, P. stated at page 260 (D.T.C. 880):

The correct view, in my opinion, is that the deductibility of the disbursements and expenses that may properly be deducted in computing the amount of the profits or gains to be assessed" is inherent in the concept of annual net profit or gain” in the definition of taxable income contained in Section 3. The deductibility from the receipts of a taxation year of the appropriate disbursements or expenses stems, therefore, from Section 3 of the Act, if it stems from any section, and not at all, even inferentially, from paragraph (a) of Section 6.

That being so, it follows that in some cases the first enquiry whether a particular disbursement or expense is deductible should not be whether it is excluded from deduction by Section 6(a) or Section 6(b) but rather whether its deduction is permissible by the ordinary principles of commercial trading or accepted business and accounting practice . . .

[Emphasis added.]

Section 3 was the forerunner to the present subsection 9(1) and paragraph 6(a) was the forerunner to the present paragraph 18(1)(a).

Therefore, in accordance with this principle, an expenditure properly deducted according to accounting standards would be deductible for tax purposes unless prohibited by some provision of the Act.

There is, in my opinion, no question that the amount paid in this case by the defendant to the Province of Ontario in the form of an annual levy constitutes an allowable deduction. The expenditure was made, indeed had to be made by the defendant, for the purpose of gaining income from its sand and gravel pit operation and is clearly not capital in nature.

The applicability of the generally accepted accounting principles in relation to income tax law has been the subject of comment in many cases, the latest of which in this Court was in Foothills Pipe Lines (Yukon) Ltd. v. Canada, [1990] 2 C.T.C.448; 90 D.T.C. 6607 where, speaking on behalf of the Court, I say at page 455 (D.T.C. 6612):

Among those principles is that which recognizes that according to generally accepted accounting principles, sums received by a taxpayer should be recorded in a taxpayer's financial statements, in the way which most nearly reflects its actual financial position at any given time or for any given period, but for purposes of ascertaining the taxpayer's income for tax purposes the receipt of the sums may require to be recorded differently. In Neonex International Ltd. v. The Queen, [1978] C.T.C. 485 ; 78 D.T.C. 6339 at 499 (D.T.C. 6348) I had occasion to express the principle in this way:

There is no doubt that the proper treatment of revenue and expenses in the calculation of profits for income tax purposes with a view to obtaining an accurate reflection of the taxable income of a taxpayer, is not necessarily based on generally accepted accounting principles. Whether it is so based or not is a question of law for determination by the Court having regard to those principles (see M.N.R. v. Anaconda American Brass Ltd., [1956] AC 85; [1955] CTC 311 ; 55 DTC 1220; see also Associated Investors of Canada Ltd. v. M.N.R., [1976] Ex CR 96; [1967] CTC 138; 67 D.T.C. 5096).

[Emphasis added.]

The reference in the passage to M.N.R. v. Anaconda American Brass Ltd., [1956] A.C. 85; [1955] C.T.C. 311; 55 D.T.C. 1220 is to the following excerpts from the judgment of the Privy Council where Viscount Simonds said at pages 319 and 321 (D.T.C. 1224 and 1225):

The income tax law of Canada as of the United Kingdom is built upon the foundations described by Lord Clyde in Whimster and Co. v. C.I.R., 12 Tax Cases 813 in a passage cited by the Chief Justice which may be here repeated.

In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place the account of profit and loss to be made up for the ascertaining that difference must be framed consistently with ordinary principles of commercial accounting so far as applicable and in conformity with the rules of the Income Tax Act or of that Act as modified by the provisions and Schedules of the Acts regulating Excess Profits duty as the case may be.

But it at least supports the view that new theories of accountancy though they may be accepted and put into practice by business men, do not finally determine a trading company's income for tax purposes.

The reference to Associated Investors of Canada Ltd. v. M.N.R., [1967] 2 Ex. C.R. 96; [1967] C.T.C. 138; 67 D.T.C. 5096 is to the following passage from Jackett, P’s judgment (page 143 (D.T.C. 5099):

Profit from a business, subject to any special directions in the statute, must be determined in accordance with ordinary commercial principles (Canadian General Electric Co. Ltd. v. M.N.R., [1962] S.C.R. 3, per Martland, J. at p. 12; [1961] C.T.C. 512 at 520.) The question is ultimately "one of law for the court”. It must be answered having regard to the facts of the particular case and the weight which must be given to a particular circumstance must depend upon practical considerations. As it is a question of law, the evidence of experts is not conclusive (see Oxford Motors Ltd. v. M.N.R., [1959] S.C.R. 548, per Abbott, J. at p. 553; [1959] C.T.C. 195 at 202, and Strick v. Regent Oil Co. Ltd., [1965] 3 W.L.R. 636 per Reid, J., at pp. 645-46. See also M.N.R. v. Anaconda American Brass Ltd., [1956] A.C. 85 at p. 102; [1955] C.T.C. 311 at 319.

[Emphasis added.]

It is clear from the foregoing, it seems to me, that the trial judge did not wholly accurately describe the law when he said that ”. . . an expenditure properly deducted according to accounting standards would be deductible for tax purposes unless prohibited by some provision of the Act." More precisely, the question is one of law for the Court which must, as Jackett, P. (as he then was) said, ” . . . be answered having regard to the facts of the particular case and the weight which must be given to a particular circumstance must depend upon practical circumstances. As it is a question of law the evidence of experts is not conclusive!' [Emphasis added.] The particular facts in this case relate to the character of the payments made by the respondent each year in compliance with the Pits and Quarries Control Act and the Regulations pursuant thereto.

The proper accounting of those payments for the taxpayer's financial purposes, to most accurately reflect its actual financial position at any given time, may well be that they be recorded as expenses incurred for the purpose of gaining or producing income. That may not, as a matter of law, be the proper way for them to be recorded in the calculation of the taxpayer's taxable income.

The question to be asked for that purpose must be—do these payments, as a matter of law, have the characteristics of expenses or outlays made in earning or producing income, as the expert called by the respondent before the Tax Review Board apparently testified, or had they the characteristics of transfers to a reserve for the purpose of securing the performance of the respondent's obligation to rehabilitate the site, within the meaning of paragraph 18(1)(e) [1] as counsel for the appellant urged?

Even a cursory analysis of the Pits and Quarries Control Act and its Regulations, leads inevitably to the conclusion, in my view, that while the annual payments made pursuant thereto have to be made in order to earn income, in that to obtain and maintain the licence issued under that Act (subsection 4(1)) to operate the pit and thereby to earn that income the payments had to be made, they do not have the characteristic of deductible expenses for tax purposes, in that they are not made once and for all, without recourse. Rather they are payments which may be refunded in whole or in part, together with interest thereon, upon discharge of the payer's (in this case the respondent's) obligation to rehabilitate the pit site.

The licence must be renewed annually to insure compliance with the Act, the regulations and the licence, failing which it may be revoked. Subsection 11(1) requires that every licensee maintain on deposit with the Treasurer of Ontario the security prescribed by the regulations. Subsection 11(2) authorizes the Minister to direct the security deposited to be forfeited if the rehabilitation is not carried out as required by the Act, the regulations and the licence. Subsection 3 authorizes the Minister to cause the rehabilitation to be completed at the expense of the licensee out of the moneys forfeited.

Section 19 provides the authority to make regulations, inter alia, prescribing the form, terms, conditions and the amount of security to be deposited under section 11.

Section 5(1) of the regulations requires that the security obliged to be paid by virtue of section 11 of the Act will be deposited annually "and held by the Treasurer of Ontario bearing simple interest at the rate of 6% per annum." This requirement of holding is in contrast to the licence fee to be paid under subsection 2(8) which "shall be paid to the Treasurer of Ontario"—an outright payment of an expense, presumably properly deductible, having been incurred to permit the operator to operate his pit and thereby to earn or produce income.

There is no doubt in my mind that the foregoing analysis demonstrates that the annual payments are made as deposits to secure the rehabilitation of the site. That they may be insufficient to achieve that purpose does not change their character to that of an expense incurred for the purpose of gaining or producing income. The deposits do not become the absolute property of the province until they are forfeited as a result of the operation of the Act, for the purpose of paying, or to assist in paying, the respondent's obligations under the Act to rehabilitate. If they are not forfeited they will be returned to the taxpayer together with simple interest calculated at 6 per cent per annum. That is the substance of their character as well as their form (see Dominion Taxicab Association v. M.N.R., [1954] S.C.R. 82; [1955] C.T.C. 34; 54 D.T.C. 1020 at 38 (D.T.C. 1021-22); compare The Queen v. Imperial General Properties Ltd,, [1985] 1 C.T.C. 40; 85 D.T.C. 5045 at 48 (D.T.C. 5051)) and clearly differentiates them from business expenses deductible under paragraph 18(1)(a).

I would, therefore, allow the appeal in respect of Issue I.

Issue II

Should the front-end loaders used by the respondent in its sand and gravel operation be classified as Class 10 or Class 22 assets for the purpose of calculation of capital cost allowance?

The respondent claimed capital cost allowance on its front-end loaders on the basis that they were Class 22 assets under Schedule B to the Act, depreciable at the rate of 50 per cent under the provision as it read in 1976, namely:

Property acquired after March 16, 1964, that is power-operated, movable equipment designed for the purpose of excavating, moving, placing or compacting earth, rock, concrete or asphalt, but not including property that is included in class 7.

It would appear that the respondent's equipment both by its nature and purpose falls squarely within the definition of Class 22 assets. However, the appellant's contention is that the respondent's front-end loaders were acquired for the purpose of gaining or producing income from a mine with the result that they are Class 10 assets for capital cost allowance purposes.

The trial judge had no difficulty in concluding that the respondent's equipment was properly classified as Class 22 assets and dismissed the appellant's appeal on that issue. I am of the opinion that he was correct in so holding.

Class 10 assets were defined, in part, in 1976, as:

Property not included in any other class that is (k) property (other than property in Class 28 or a property described in paragraph (ka)) that was acquired for the purpose of gaining or producing income from a mine and that is

(ii) machinery or equipment.

Capital cost allowance on such assets is calculated at the rate of 30 per cent.

"Mine" is not defined in the Act. Its meaning is restricted in some of the provisions of the Act and regulations. For example, subsections 1104(7) and (8) of the regulations specifically exclude sand pits, gravel pits and quarries for purposes of classes 12 and 28 of Schedule B but not for purposes of Class 22 assets. Subsections 1104(5) and (6) specifically refer to Class 10 without any such restriction, but they do refer to "mineral ores from mineral resources". It is, thus, the appellant's contention that sand and gravel are industrial minerals and the pits from which they are extracted are industrial mineral mines. Therefore, it is argued, the specific provisions of the definition of Class 10 assets override the general provisions of the definition of Class 22 assets. That being so the Class 10 30 per cent capital cost allowance rate prevails in the view of appellant's counsel.

I have little trouble in accepting on the authority of at least some jurisprudence that sand and gravel may be described as "industrial minerals” (Nova Scotia Sand and Gravel Ltd, v. The Queen, [1980] C.T.C. 378; 80 D.T.C. 6298 at 379 (D.T.C. 6299)). But that does not mean that they come from a" mine" as that term is generally understood. In fact, Pigeon, J. in Avril Holdings Ltd. v. M.N.R., [1970] C.T.C. 572; 70 D.T.C. 6366 at 574-75 (D.T.C. 6368) observed in a different statutory context but in an apposite factual situation that:

In the context of Schedule E, it is apparent that the word"mine" is not taken in its usual meaning as applied to metal mines but in a special meaning as part of the expression “ industrial mineral mine”. With respect to metal mines, it was pointed out that “a portion of the earth containing mineral deposits" was not the usual meaning of the word mine. Here, it must be noted that the word "mine" is not a common use to describe a sand or gravel pit. This is therefore a case where the word is obviously not taken in the usual sense.

[Emphasis added.]

Further assistance is derived from what Dumoulin, J. said in the Exchequer Court case of Canadian Gypsum Co. v. M.N.R., [1965] C.T.C. 310; 65 D.T.C. 5125 at 221-22 (D.T.C. 5131):

I cannot but renew my assent to the "dicta" of Lord Watson and Justice Kitto, that “mines” and "minerals" are not definite terms: “they are susceptible of limitation or expansion, according to the intention with which they are used” (Lord Watson): and“ "The meaning of the words'mine' and'mining' like the word ‘minerals’ is by no means fixed and is readily controlled by context and subject matter". (Kitto, J.)

The vast and constantly expanding proportions of the development area in depth, width or circumference, the costly and powerful equipment at work, a labour force of about 175 men, the assignment of one or two professional engineers and of two geologists in a permanent testing laboratory, convince me that Miller’s Creek clearly evinces the characteristics of a mine.

Exhibit A-11, a lot of 22 photos of the site (11a to 11v) fully substantiate such a conclusion as to the material facts of the problem.

The respondent's admission that Miller’s Creek was not a "stone quarry" has greatly simplified the legal aspect of the case. Section 83(5), cited supra, is an exempting provision "at large”, restricted only by the excluding clause of 83(6), specifically disqualifying from the exemption benefit a "stone quarry”.

In a fiscal statute, the age-long maxim "inclusio unius est exclusio alterius" finds its fullest justification. I could well agree with Mr. Finlayson’s argument, on appellant's behalf, that "the nominal exclusion of a'stone quarry' in the definition of the noun“ "mine" coupled with the admission that Miller's Creek is not a stone quarry, must, irresistibly, lead to the deduction that, legally speaking at the very least, it is a mine.

Three things are noteworthy from that quotation. First, the meaning of the word mine”, inter alia, ” is by no means fixed and is readily controlled by the context and subject matter.” Two, the size of the operation and the skills of those involved was relevant. Three, the learned judge would have had difficulty in finding the operation in question to be a mine had it not been for the admission by the Minister that it was not a stone quarry.

Applying those factors here, it is to be noted first, that the subject matter is equipment used in the extraction, removal and transportation of sand and gravel, which is the context within which the claim that the operation is a "mine" must be viewed. Clearly, it was not a "mine" as that term is ordinarily understood. Secondly, the operation in question here was apparently relatively small. There is no evidence that professional engineers or geologists were involved as they would normally be in mining operations. Thirdly, the operation here was a gravel pit which is akin to a stone quarry, a fact which at the time of that case was of some significance to the Minister and to the Court in deciding whether the operation there was a mine.

These factors, when coupled with Pigeon, J.'s comment that the word ” mine is not in common use to describe a sand or gravel pit . . .”, and the fact that when Parliament wished to include or exclude such operations from the ambit of "mines" it said so, leads me irresistibly to the conclusion that the operation in question is not a mine. Therefore, the respondent's front-end loaders were not machinery and equipment" acquired for the purpose of gaining or producing income from a mine”. They are not Class 10 assets but were properly characterized as Class 22 assets by the learned trial judge.

The appeal, as it relates to Issue II, will, accordingly be dismissed. Success having been divided, the appellant will be entitled to one half of its taxable costs both here and in the Trial Division.

MacGuigan, J.A.:—I agree.

Linden, J.A.:—I agree.

Appeal allowed in part.