International Nickel Company of Canada, Limit
ed (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Toronto, June 22,
23, 24; Ottawa, August 24, 1971.
Income Tax—Mining company—Expenditures on con
struction of townsite for employees in mine—Not "develop-
ment" expense—Income Tax Regulations, s. 1205.
Income Tax Income from mining—Depletion allow-
ance—Profit, computation of—Computation of profit for
determining depletion allowance—Scientific research to
acquire "know how"—Capital expenditure—Income Tax
Regulations, s. 1201(5)—Income Tax Act, s. 72(1).
1. Expenditures of a mining company on the construction
of a townsite to house employees engaged in the extraction
and processing of ore at its mine are not attributable to the
"development" of the mine and hence are not deductible
under Income Tax Regulation 1205 in computing the com-
pany's income.
International Nickel Co. v. M.N.R. [1969] 1 Ex.C.R.
563, applied; Mount Isa Mines Ltd. v. Fed. Com'r of
Taxation [1954] 92 C.L.R. 483, distinguished; M.N.R.
v. MacLean Mining Co. [1970] S.C.R. 877; Johnson
Asbestos Corp. v. M.N.R. [1966] Ex.C.R. 212,
considered.
2. In 1965, appellant was allowed a deduction under s.
72(1) of the Income Tax Act of $2,726,784 expended on
scientific research for the improvement and development of
processes. Appellant contended that in computing its profit
for 1965 under Income Tax Regulation 1201(2) for the
purpose of determining depletion allowances, the expendi
ture on scientific research was not deductible as being a
capital expenditure.
Held, the object of the expenditure on scientific research
was the acquisition of a fund of scientific "know how", and
it was therefore a capital expenditure and so not deductible
under Regulation 1201 in computing appellant's profit.
British Insulated & Helsby Cables Ltd. v. Atherton
[1926] A.C. 205, applied.
INCOME tax appeal.
Stuart Thom, Q.C., and R. Webster for
appellant.
D. G. H. Bowman and Elizabeth A. McFad_
yen for respondent.
CATTANACH J.—This is an appeal by the
appellant from its assessment to income tax by
the Minister for its 1965 taxation year.
[His Lordship referred to certain issues which
were abandoned or agreed by the parties, and
then continued:]
There are issues remaining for determination.
The first such issue for convenience I refer to
as the Townsite issue.
During a period commencing in 1956 and
ending on June 14, 1961, the appellant made or
incurred expenditures totalling $5,891,779 in
connection with a townsite at Thompson,
Manitoba, as more particularly set out in para
graphs 4, 5, 6, 7 and 8 of the Amended Notice
of Appeal.
Those paragraphs read as follows:
4. In and prior to 1956, the Appellant acquired extensive
mining claims in the Cross Lake Mining Division of The Pas
Mining District of the Province of Manitoba and satisfied
itself that ore bodies contained in the claim area were of
sufficient value and extent to justify a major mining devel
opment with related milling, smelting and refining
operations.
5. The claim area was situated in completely
undeveloped country remote from any town or village. It
was accordingly necessary to consider how employees
required for the Appellant's operations, who numbered
2,000 or more, would be housed and provided for. In order
that the Appellant could proceed with the development of
the area, it was obliged to conform to provincial govern
ment policy with regard to the provisions to be made for its
prospective employees.
6. In the year 1956, the Appellant commenced negotia
tions with the Province of Manitoba which culminated in an
agreement dated as of December 3, 1956, between Her
Majesty the Queen in Right of the Province of Manitoba
and the Appellant (referred to herein as "the Agreement").
Its provisions, in so far as they relate to this Notice of
Appeal, may be summarized as follows:
(a) A municipal entity known as the Local Government
District of Mystery Lake would be organized by the
Government of Manitoba, which District, when formed,
would be bound by the terms of the Agreement;
(b) A townsite would be laid out within the District in the
vicinity of the Appellant's mine and plant;
(c) The Appellant at its own expense would construct in
the townsite roads, lanes, sidewalks, an assembly hall and
necessary townsite offices, fire stations, school buildings,
sewers, water mains, a pumping station, and sewage dis
posal facilities would become the property of the District
or of a School District to be formed in the District;
(d) The Appellant would pay to the District an annual
amount computed according to formula to be applied
against current expenditures of the District including
school costs;
(e) No property, real or personal, of the Appellant (other
than private residences and boarding houses) would at
any time be subject to municipal, district, school district
or other local government assessment tax rates of any
kind or nature whatsoever.
7. The thirty-six-month period during which income
derived from the Appellant's Thompson Mine was exempt
under section 83(5) commenced on June 15, 1961.
8. Prior to the commencement of the exempt period the
Appellant made or incurred expenditures aggregating $5,-
891,780.74 in connection with the townsite referred to in
paragraph 6. None of these expenditures came within any
of the subparagraphs (a) to (f) inclusive of Regulation
1205(2).
By paragraph 13 of the amended notice of
appeal the appellant claims a deduction of 25%
of the foregoing amount in computing its
income for its 1965 taxation year pursuant to s.
1205 of the Regulations' to the Income Tax
Act.
Paragraph 13 reads as follows:
13. The Appellant made or incurred expenditures
referred to in paragraph 8 prior to the Thompson Mine
coming into production in reasonable commercial quantities.
Such expenditures are reasonably attributable to the devel
opment of that mine within the meaning of Regulation 1205
in Part XII of the Income Tax Regulations and the Appel
lant claims a deduction of twenty-five per cent (25%) of
that amount in computing its income for the year.
The Minister, by paragraph 15 of his amend
ed reply, denies that the appellant is entitled to
such deduction.
Paragraph 15 reads as follows:
15. In any event, the Respondent says that the expendi
tures, if any, incurred by the Appellant in respect of the
Thompson townsite were not expenditures made or incurred
by the Appellant which are reasonably attributed to the
prospecting and exploration for and development of a mine
prior to the mine coming in to production in reasonable
commercial quantities, and that the Appellant was not enti
tled to the deduction claimed under Regulation 1205 of the
Income Tax Regulations.
The Minister also contends that the issue with
respect to the deductibility of expenditures
incurred by the appellant for the townsite at
Thompson, Manitoba, as set out immediately
above, is res judicata, since the same issue, or
substantially the same issue had been decided
by my brother Gibson in a previous appeal in
the Exchequer Court of Canada entitled The
International Nickel Co. v. M.N.R. [1969] 1
Ex.C.R. 563.
In that case the appellant herein sought to
deduct the townsite expenditures incurred in
1958 to 1961 under s. 83A(3)(c)(ii) of the
Income Tax Act as "the prospecting, explora
tion and development expenses incurred by it in
searching for minerals in Canada".
Mr. Justice Gibson held that the expenses so
incurred by the appellant were not "develop-
ment expenses" within the meaning of s.
83A(3).
In this appeal the same appellant seeks to
deduct the same townsite expenses (subject to
the fact that only that portion of those expenses
up to June 15, 1961 are claimed) as
the aggregate of all expenditures made or incurred by the
taxpayer which are reasonably attributable to the prospect
ing and exploration for and the development of the mine,
prior to coming into production in reasonable commercial
quantities
under Regulation 1205.
On June 29, 1970, the Minister moved for an
order striking out the pertinent paragraphs of
the appellant's notice of appeal on the ground
that the issues of fact and law raised thereby
were res judicata. The motion was dismissed
without prejudice to the Minister's right to
renew his submission in this respect at the trial
which was done.
The next issue concerns the deductibility of
expenditures made or incurred by the appellant
in respect of scientific research in its 1965
taxation year which, again for convenience,
may be referred to as the scientific research
issue.
During the year 1965 the appellant made or
incurred expenditures in Canada in the aggre
gate amount of $2,726,784 which fall within
one or other of subpar. (i) to (y) of s. 72(1)(a) of
the Income Tax Act 2 .
These expenditures had been claimed by the
appellant and allowed as deductions by the
Minister.
The issue in this respect is outlined in the
first sentence of par. 15 of the amended notice
of appeal which reads as follows:
15. The expenditures on scientific research referred to in
paragraph 10(a) hereof were not business expenditures
deductible in the ordinary course in the computation of
profits for the purpose of section 1201 of the Income Tax
Regulations and were not deductible on any basis in com
puting profits for the purpose of the said section.
In par. 17 of the amended reply to the notice
of appeal the Minister submits that such expen
ditures for scientific research were properly
deductible in computing the appellant's profits
for the purposes of Reg. 1201 3 .
Paragraph 17 reads as follows:
17. The Respondent says that in computing the Appel
lant's profits for the purposes of Regulation 1201 of the
Income Tax Regulations, he properly deducted expenditures
of a current nature incurred and claimed by the Appellant
with respect to scientific research; the said amounts were
deductible in the ordinary course in the computation of
profits.
There is no dispute between the parties that
the appellant operates base metal mines within
the meaning of Reg. 1201(1)(a)(iii) and that the
deduction allowed is 33 1/3% of the aggregate
of the appellant's profits reasonably attributable
to the production of prime metal from all
resources operated by it.
It is agreed that the scientific research expen
ditures are deductible under s. 72(1)(a) of the
Income Tax Act as expenditures of a current
nature. The dispute between the parties lies in
whether the amount expended by the appellant
on scientific research is an amount which
should be deducted in computing profits for the
purposes of Reg. 1201.
It is obviously to the appellant's advantage to
keep the amount of its profits as high as possi
ble for that is the amount by reference to which
the deduction of 33 1/3% under Reg. 1201(2) is
computed. The greater the amount of the profit,
the greater is the deduction permitted. Converse
ly it is in the interest of the Minister to contend
that the expenditures are deductible so that the
base upon which depletion is computed is
decreased.
The position of the appellant is that the
expenditures in scientific research Should not
be deducted in computing profits under Reg.
1201, nor is it directed by Reg. 1201 that such
expenditures should be deducted. It is the
appellant's contention that these expenditures
are not laid out to earn income but are of a
capital nature. If such is the case then the
expenditures are not deductible under Reg.
1201. On the other hand the Minister contends
that these expenditures are current expendi
tures laid out in carrying on the appellant's
business and as such are properly deductible.
A further issue arises in connection with the
expenditures on scientific research.
The second sentence of par. 15 of the appel
lant's amended notice of appeal reads as
follows:
If it should be held that any of these expenditures can be
regarded as business expenditures deductible in the ordi
nary course, which the Appellant says is not the case, the
Appellant claims that they should accordingly enter into the
computation of profits under section 4 of the Act without
prejudice to the Appellant's right to deduct the whole
amount of such expenditures under section 72(1)(a) afore
said in the calculation of income for the year.
In effect the appellant claims that the amount
expended by it on scientific research is deducti
ble twice. First they are deductible under s. 72
with respect to which there is no dispute and
second, if it should be found that the scientific
research expenditures are business expendi
tures deductible in the ordinary course and
accordingly deductible for the purposes of Reg.
1201, then the appellant says that the expendi
tures are deductible in the computation of its
profits under secs. 3 and 4 of the Income Tax
Act as well as and in addition to the deduction
permitted under s. 72.
This contention the Minister denies.
The issues before me may be summarized as
follows:
1. The townsite expenditures;
(a) are those expenditures "reasonably
attributable to the ... development of the
mine,"?; and
(b) is this matter res judicata?
2. The scientific research expenditures;
(a) are those expenditures properly deducti
ble for the purpose of computing profit under
Regulation 1201?; and
(b) if they are, then is the appellant entitled to
double deduction of these expenditures once
under s. 72 and again under secs. 3, 4 and 12?
[His Lordship here set out in extenso an
agreement of the parties as to the facts on the
townsite expenditures issue, and referred to the
witnesses called by the appellant on the issue as
to the scientific research expenditures, and then
proceeded as follows:]
I turn to the first issue in the foregoing sum
mary, that is the Township issue.
In International Nickel Co. v. M.N.R. (supra)
the appellant herein sought to deduct $6,920,-
825.75 expended in establishing and building
the townsite at Thompson, Manitoba as devel
opment expenses incurred by it in searching for
minerals in Canada in its 1958, 1959, 1960 and
1961 taxation years in accordance with s.
83A(3) of the Income Tax Act in computing its
taxable income for those years.
The relevant language of s. 83A(3) reads as
follows:
83A. (3) A corporation whose principal business is
(b) mining or exploring for minerals,
may deduct, in computing its income under this Part for a
taxation year, the lesser of
(c) the aggregate of such of
(ii) the prospecting, exploration and development
expenses incurred by it in searching for minerals in
Canada, ...
The issue before my brother Gibson was
whether the townsite expenses incurred by the
appellant were "development expenses incurred
in searching for minerals in Canada" within the
meaning of s. 83A(3). In resolving this issue he
said at page 584:
As to this first issue, in my view there are two questions
to be answered namely, (1) whether the expenditures made
by the appellant in building the Thompson Townsite in the
relevant years were "development expenses", and (2)
whether such expenditures were incurred in "searching for
minerals" in Canada in such years, within the meaning of
section 83A(3) of the Income Tax Act during the relevant
taxation years.
Having posed the two foregoing questions for
himself Mr. Justice Gibson then proceeded to
construe the meaning of the words "develop-
ment expenses" independently of the words "in
searching for minerals".
He said at pages 587-588:
... In my view, what Parliament intended in this subsec
tion of the Act, was to confine "development expenses" to
those expenses which are incurred at the development stage
of mining as understood by people in the mining business
which is, in my view, evidenced by the opinion of Mr. Cox
and the dictionary definitions and the definitions from
mining publications put in evidence.
As a result, I am of opinion that "development expenses"
within the meaning of section 83A(3)(c)(ii) of the Income
Tax Act mean those expenses which are incurred in the
opening up of an ore body by shafts, drives and subsidiary
openings for the various purposes of subsequent mining
such as, the valuation of deposits, the estimate of its ton
nage and in due course, its extraction. This, in essence, is
the meaning given to development by E. J. Pryor in his
Dictionary of Mineral Technology above referred to.
Predicated on such a construction of those words, and on
a consideration of the whole of the evidence, I am of the
view and find as a fact, that the appellant's expenditures
above referred to, on the Thompson Townsite in the Prov
ince of Manitoba are not of such a nature or kind as to fall
within such meaning of "development expenses". I am
further of the opinion that, in the main, they are production
expenses of the mining of the Thompson mine.
I construe the quoted comments of Mr. Jus
tice Gibson as defining the words "development
expenses" per se as indicated. Having conclud
ed that the expenses incurred by the appellant
in building the Thompson Townsite are not
"development expenses" it follows logically
that they cannot be development expenses
incurred by it in searching for minerals in
Canada.
He continues on page 588:
The conclusion I reach is that it is impossible to relate the
development work done by the appellant at its Thompson
mine "in searching for minerals" during the relevant taxa
tion years to the necessity for the appellant building the
townsite and incurring the cost of doing so. Instead, the
necessity for building such a townsite and incurring the cost
of doing so, was to enable the appellant to extract the ore at
the production stage of mining this mine ...
The appellant was, therefore, unsuccessful in
this issue of its appeal before Mr. Justice
Gibson.
In the present appeal the appellant contends
that it is entitled to deduct 25% of its expendi
tures made or incurred in connection with the
Thompson townsite in the total amount of $5,-
891,799 pursuant to Reg. 1205 to the Income
Tax Act over a period of successive taxation
years as an expenditure made or incurred by the
taxpayer which is "reasonably attributable to
the prospecting and exploration for and the
development of the mine, prior to the mine
coming into production in reasonable commer
cial quantities," except to the extent that the
expenditures were inter alia not deductible
under s. 83A or with respect to which the prop
erty is subject to capital cost allowance, neither
of which exceptions are applicable in the pres
ent case. The mine came into production in
reasonable commercial quantities on June 14,
1961. What is being claimed as a deduction are
the expenditures incurred from the inception of
the townsite until June 14, 1961 which accounts
for a lesser amount than was claimed under s.
83A in the appeal before Mr. Justice Gibson.
The substance of the argument on behalf of
the appellant, as I understood it, was that the
word "development" may be used in two
senses, first in a technical sense and second in a
broad sense. It was submitted that in s. 83A the
word is used in a technical sense and is further
limited by the words "in searching for miner
als" but in Reg. 1205 the word is not so limited
and should be interpreted in its broadest sense.
The word "mine" as used in Reg. 1205 can be
extended to surface facilities and to include
housing facilities and amenities for the labour
force without which there could be no mine.
That being so it follows that the expenditures
on the townsite can be reasonably attributable
to the development of the mine.
In support of the foregoing argument counsel
for the appellant submitted that Mr. Justice
Gibson in the previous appeal was considering
the words "development expenses" within the
context of s. 83A(3)(c)(ii) and that he attributed
the technical meaning to them that he recog
nized the possibility of a wider interpretation.
Gibson J. said at page 587:
... I am of opinion that the meaning given to those words
by the witness Wright is not what Parliament intended. His
meaning is much too wide and is one which may be accepta
ble and relevant in reference to the concept of an overall
development of many projects being done today which may
involve the establishment of a new town but it is not the
concept of development which is applicable to the subject
matter of this case.
Counsel also referred to the Australian deci
sion of Mount Isa Mines Ltd. v. F. C. of T.
(1954) 92 C.L.R. 483, not as a precedent but as
illustrative of the widest possible meaning being
given to the word "development" in the context
of the statute under review in that case, the
pertinent section of which reads as follows:
Section 122. (1) Where a person, who is carrying on
mining operations (other than coal mining) in Australia for
the purpose of gaining or producing assessable income,
incurs expenditure on necessary plant and development of
the mining property, an amount ascertained in accordance
with the provisions of the section shall be an allowable
deduction.
Following upon a successful period of
exploration and investigation the appellant had
carried on a mining undertaking in a remote and
isolated part of Australia. When the first
exploration shafts were sunk there was a small
township known as Mount Isa some two miles
from the mining property. The existing facilities
were totally inadequate for the reasonable
accommodation and living amenities of its
employees, the number of which was increasing
steadily. The appellant, out of its own
resources, undertook the building of a new
township. This project involved the construc
tion of houses, provision of a water supply,
electrical power, sanitary services, medical,
hospital and educational facilities and attendant
amenities.
It was held that all expenditures, other than
expenditure on a plant of a capital nature direct
ly attributable to the establishment of the mine
and to the working of it or its extension or
expansion from time to time should for the
purposes of s. 122 be regarded as an expendi
ture on the "development" of the mining
property.
Mr. Justice Taylor said at pages 489-90:
The purely developmental phase of many projects may,
perhaps, readily be recognized, but in the case of a mining
venture this is not so. A mine is not constructed once and
for all, it is not static but constantly progresses and grows to
enable the winning of minerals to proceed. Sometimes this
process goes hand in hand with working operations whilst
on other occasions it may be the outcome of deliberate and
independent operations designed to render the underlying
minerals more easily accessible or to further plans for the
expansion or extension of the mining operations. The
expression in s. 122 is, however, one of wide import and
was, I think, intended to signify, apart from expenditure on
plant, all expenditure of a capital nature directly attributable
to the establishment and conduct of the mining operations
in which the taxpayer is engaged. There are, I think, suffi
ciently clear indications that this is so. The section permits a
person who is carrying on mining operations for the purpose
of gaining or producing assessable income to treat a wide
class of expenditure of a capital nature as deductible for the
purposes of the Act over a period calculated by reference to
the estimated life of the mine, and it is inconceivable that
the legislature intended to permit such a deduction in the
case of capital expenditure incurred on development, in the
sense of work preparatory to the commencement of or
ancillary to actual mining operations, and yet deny such a
deduction in respect of expenditure of a capital nature
necessarily incurred contemporaneously with and directly in
association with mining operations. This consideration alone
would, I think, dispose of any suggestion that the word
"development" should be understood in any restricted
sense but there is a further contrary intention to be found in
the section. The deduction which is permitted in respect of
plant is a deduction in relation to expenditure of a capital
nature incurred on necessary plant. That is, on the language
of the section, plant which is necessary for the carrying on
of the mining operations for the purpose of gaining or
producing assessable income. In the case of plant the allow
able deduction is not subject to any restriction other than
that to be found in the wide words of the section. Accord
ingly, expenditure on plant is within the scope of the section
whether it is necessary for the day-to-day working of the
mine or for developmental work in the narrowest sense and
I should think this circumstance throws some little light on
the meaning of the word "development" as used in the
section. The deduction in each case is clearly intended to
serve the same purpose and it would be out of keeping with
the general sense of the section to give a restricted meaning
to the latter word and thereby limit the range of expenditure
on development in respect of which a deduction might be
claimed. Perhaps, the import of the section is best under
stood by regarding the use of the word "development" as
intended to amplify the section and to cover capital works
not covered by the word "plant". At all events I am satis
fied that all other expenditure of a capital nature directly
attributable to the establishment of the mine and to the
working of it or to its expansion or extension from time to
time should, for the purposes of the section, be regarded as
expenditure on the development of the mining property.
He then held, in the circumstances of that
case, the provision of accommodation and
amenities was a necessary part of the establish
ment and conduct of the appellant's undertaking
and accordingly, should be treated as an expen
diture incurred in the development of the
mining property for the purposes of the section.
With respect to the Mount Isa case (supra)
the word "development" in the language "in-
curs expenditure on necessary plant and devel
opment of the mining property" is in a context
far different from that in which it appears in the
language of s. 83A of the Income Tax Act, the
pertinent portion of which reads, "the prospect
ing, exploration and development expenses
incurred by it in searching for minerals ..." and
from that in which the word appears in Reg.
1205 the pertinent language of which reads,
"expenditures made or incurred by the taxpayer
which are reasonably attributable to the pros
pecting and exploration for and the develop
ment of the mine, ...".
Mr. Justice Taylor in concluding that the
word "development" should not be construed in
a restricted sense supplemented that conclusion
by reliance on the maxim of noscitur a sociis.
He construed the word "development" because
of its association with the words "necessary
plant" as used in the context of the section. In
the case of "necessary plant" the allowable
deduction was not subject to any restriction
other than to be found in the wide words of the
section and that throws a similar wide meaning
on the word "development" as used in the
section.
However in s. 83A and in Reg. 1205 the word
"development" is used in association with the
words, "prospecting" and "exploration".
In M.N.R. v. MacLean Mining Co. [1970]
S.C.R. 877, Pigeon, J. in delivering the unani
mous decision of the Supreme Court of Canada
considered the meaning of the word "mine" as
used in s. 83(5) of the Income Tax Act and said
that the word could not be interpreted to mean
the ore body but rather a "mining concern taken
as a whole, comprising mineral deposits, work
ings, equipment and machinery capable of pro
ducing ore" and that "mining itself is complete
by the production and hoisting of the ore".
It follows that what is done with the ore after
it reaches the pit head is not "mining" but
rather a subsequent process of treatment.
It therefore seems to me that the word
"mine" as used in Reg. 1205 is not synonymous
with the words "mining property" used in the
section under review in the Mount Isa case
(supra), which was the assumption made by
counsel for the appellant, but rather the word
"mine" has the more restricted meaning
ascribed to it in the MacLean Mining case
(supra).
In Johnson's Asbestos Corp. v. M.N.R.
[1966] Ex.C.R. 212, Jackett, P. considered the
meaning of the phases or activities of mining
preceding the delivery of ore to the pit head.
They are (a) prospecting, (b) exploration, (c)
development, and (d) extraction, or production.
Jackett, P. then found the meaning of those
words in the jargon of mining engineers and
others in the mining industry to be,
(a) "prospecting" - the initial stage of locating
the site of a possible mining operation;
(b) "exploration" - in general terms, is the
operation of testing for the existence and
extent of an ore body and includes
prospecting;
(c) "development" of a mine, in general
terms, means to uncover the body or area
which is to be the subject matter of the
extraction process. Development is the prepa
ration of the deposit or mining site for actual
mining;
(d) the actual production or extraction pro
cess he defined with respect to asbestos,
which was the mineral in the case before him,
as drilling the rock and breaking it up with
explosives, selection of the fibre bearing por
tions and transporting it to a mill for separa
tion. I should think that the meaning of pro
duction or extraction, in general terms, would
be the removal of the ore to the pit head and
that such meaning is self-evident.
Mr. Justice Gibson held that mining was com
prised of the four foregoing phases in Interna
tional Nickel Co. v. M.N.R. (supra) and in Mar-
bridge Mines Ltd. v. M.N.R. [1971] C.T.C. 442.
As I have previously indicated, Mr. Justice
Gibson in the appeal of the appellant with
respect to the deductibility of these same town-
site expenses under s. 83A of the Act first
directed his attention to whether they were
"development" expenses (which he held that
they were not) and then considered whether
they were development expenses incurred in
searching for minerals (which he also held that
they were not).
I am unable to follow how I can attribute a
different and wider meaning to the expenditures
attributable to the development of a mine where
such words appear in Reg. 1205 than that which
was attributed by Mr. Justice Gibson to the
words "development expenses" where they
appeared in the context of s. 83A of the Act as
contended by the appellant.
It is a cardinal rule of construction to give the
same meaning to the same words or expressions
in different parts of a statute unless there is a
very clear reason for not doing so. In my view
no such reason exists. The first observation is
that the meaning should be found from the
section itself. If it is not clear then other sec
tions may be looked at to see in what sense the
word is used. The same principles of interpreta
tion apply to regulations made under authority
of a statute.
Section 15 of the Interpretation Act R.S.C.
1970, c. I-23, provides,
Where an enactment confers power to make regulations,
expressions used in the regulations have the same respec
tive meanings as in the enactment conferring the power.
In my view the word "development" in the
context in which it appears in Reg. 1205 indi
cates that the word is used in the same sense
that it is used in s. 83A of the Act. As I have
previously indicated the word is used both in s.
83A and in Reg. 1205 in association with the
words "prospecting" and "exploration" which
affects the sense in which the word "develop-
ment" is used. The meanings of the three opera
tions of prospecting, exploration and develop
ment have been determined in the Johnson's
Asbestos case (supra), the previous Internation
al Nickel appeal and in the Marbridge case
(supra).
It is apparent from the agreed statement of
facts that the employees of the appellant whom
the townsite was to house were engaged in the
extraction and milling operation and in smelting
and refining operations and in management,
supervisory and administrative capacities (see
par. 16). Later in par. 18 it is stated that "such a
town was necessary to keep a stable working
force in the appellant's extraction, milling and
processing operation". It was not contended
that employees engaged in the development
phase were intended to live nor that any such
persons lived in the townsite. The evidence
before Mr. Justice Gibson was to like effect. He
held that the townsite expenditures were not
"development expenses" but were related to
extraction and production. That being so it fol
lows that those townsite expenditures cannot be
attributable to the development of the mine.
They were attributable to extraction and subse
quent treatment of the ore.
Accordingly the appeal on the issue that the
township expenditures are deductible under
Reg. 1205 is dismissed.
In view of the conclusion I have reached it is
not necessary for me to consider whether the
matter is res judicata.
There remains for determination the issue
respecting expenditures by the appellant on
scientific research.
The legislative intent in enacting s. 72 of the
Income Tax Act is clear.
Section 11(1) provides that notwithstanding
par. (a) and (b) of section 12(1) the amounts
specifically mentioned in s. 11 may be deducted
in computing the income of a taxpayer for the
taxation year. Paragraph (j) of section 11(1)
provides for the deduction of such amount in
respect of expenditures on scientific research as
is permitted by s. 72 or by s. 72A.
The obvious purpose of s. 72 is to permit the
taxpayer to deduct from its income the amounts
spent on scientific research within the meaning
of s. 72 which might not otherwise be deducti
ble either because barred by s. 12(1)(b) as capi
tal expenditures or because of the possibility
the amount so expended might not be incurred
directly in the income earning process within
the meaning of s. 12(1)(a) 4 .
It is common ground between the parties that
the appellant's expenditures on scientific
research are deductible under s. 72 of the
Income Tax Act in computing its income for its
taxation year as expenditures of a current
nature made in Canada. This was done.
However the issue is whether the appellant's
expenditures on scientific research are deducti
ble in the computation of its profits for the
purpose of Reg. 1201 to arrive at the base upon
which depletion allowance is to be calculated.
The appellant's position is that these expendi
tures are not business expenditures laid out for
the purpose of gaining or producing income
from its business, but rather are an outlay on
account of capital and as such are not to be
deducted to determine profits in the ordinary
course.
On the other hand, the Minister's position is
that the expenditures on scientific research are
current expenditures directly related to the
appellant's business incurred with the view of
improving the appellant's business position and
form an integral part of the appellant's
operations.
Put in succinct terms the dispute is whether
the expenditures on scientific research are in
substance revenue or capital expenditures.
Again it is common ground that if they are
capital expenditures they are not properly
deductible in ascertaining the depletion base for
the purposes of Reg. 1201, but if they are
expenditures incurred directly in the income
earning process then they are deductible for the
purposes of Reg. 1201.
The classical and most notable test whether a
payment is one made on account of capital is
that enunciated by Viscount Cave L. C. in Brit-
ish Insulated and Helsby Cables Ltd. v. Ather-
ton [1926] A.C. 205, where he said at page 213:
... 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 circum
stances leading to an opposite conclusion) for treating such
an expenditure as properly attributable not to revenue but
to capital.
The appellant in the present case because of
the extent and nature of its business expends
large sums on scientific research and had done
so for many years. It employs highly qualified
personnel whose exclusive function is to devote
their entire time and outstanding ability to a
constant study of existing processes used by the
appellant with a view to improving and making
those processes more efficient as well as pro
jects as to the feasibility of hitherto untried
processes and methods or discovery of
unknown processes. If those studies prove the
feasibility of such new projects it has resulted
and may again result in the appellant expending
large sums to build a plant to utilize the process
so discovered or an improvement on a process
in use. It has been by this constant search for
better ways that the appellant has kept in the
forefront of its field.
This necessarily results in a continual outlay
on scientific research by the appellant. It is a
continuing and never ending programme.
Therefore the expenditure may not be made
"once and for all" within the test of Lord Cave.
Conceivably the expenditures of the appellant
might be considered as being made by the
appellant on a number of separate scientific
projects which overlap and thereby give the
appearance of a continuing expenditure where
as when one of the multitudinous projects is
completed that would be an expenditure on that
particular project "once and for all". But
whether an expenditure is made "once and for
all" is not the sole or even the primary
determinant.
In Vallambrosa Rubber Co. v. Farmer (1910)
5 Tax Cas. 529, Lord Dunedin said at page 536:
... Now, I don't say that this consideration is absolutely
final or determinative, but in a rough way I think it is not a
bad criterion of what is capital expenditure as against what
is income expenditure to say that capital expenditure is a
thing that is going to be spent once and for all, and income
expenditure is a thing that is going to recur every year.
Lord Dunedin obviously recognized that pay
ment once and for all is at best only a rough test
and that it is not a complete and satisfactory
one.
Lord Cave in British Insulated and Helsby
Cables Ltd. v. Atherton (supra), said this at
page 213:
... But the criterion suggested is not, and was obviously
not intended by Lord Dunedin to be, a decisive one in every
case; for it is easy to imagine many cases in which a
payment, though made "once and for all," would be proper
ly chargeable against the receipts for the year.
The converse would be equally true. Recurrent
payments may well be capital expenditures.
Dixon J. said in Associated Newspapers Ltd.
v. F. C. of T. (1938) 61 C.L.R. 337 at p. 362,
Recurrence is not a test; it is no more than a considera
tion the weight of which depends upon the nature of the
expenditure.
Basically it is necessary to determine whether
an expenditure is a capital expenditure or a
revenue expenditure to ascertain the profit
which is the taxable income. What is allowed
are those expenditures which are the real costs
of earning the income. Capital expenditure is
excluded not because it is unrelated to a profit
earning purpose, but because it is not a "proper
debit item" to be charged against the receipts of
the trade.
Lord Cave has said in the British Insulated
and Helsby Cables case (supra) at page 212,
". . there remains the question . . whether
... the sum in question is ... a proper debit
item to be charged against incomings of the
trade when computing the profits of it; ..."
In general terms the purpose of capital expen
diture is to provide, enlarge or alter the facilities
or machinery for profit earning as distinguished
from the expenditure of operating that machine.
The appellant carefully segregated the expen
ditures on scientific research between those
directed to creating new processes or improving
existing processes from those directed to main
taining and operating existing processes from
information supplied and records kept by the
many research departments of the appellant and
the former is what is being claimed as not
properly deductible to ascertain aggregate prof
its for the purposes of Reg. 1201.
For the appellant's own commercial purposes
all such expenditures on scientific research
were included in operating costs and not as
capital costs. The segregation was made for the
purpose of preparing income tax returns.
I do not attach great significance to this book
keeping or accounting practice. The outlay on
scientific research is not easily classifiable and I
can readily understand why for commercial pur
poses the appellant would regard these expendi
tures as affecting its net profit or loss. But
different considerations apply for income tax
purposes.
It is quite understandable that a commercial
enterprise in its books of account for its own
purposes will treat certain classes of expendi
tures as revenue expenditures which are, in
reality, for income tax purposes capital expen
ditures and conversely many items treated in
the accounts of business as capital receipts are
for income tax purposes taxable as income.
How an item is treated in the books of
account is not the true or adequate test of the
nature of the expenditure.
As I understand the essence of Lord Cave's
declaration it is that an expenditure is of a
capital nature when it is made with a view to
securing an asset or advantage for the enduring
benefit of the trade.
The intention of the appellant in embarking
upon and continuing its programme of scientific
research was to acquire for itself a fund of
scientific "know how" upon which it could
draw when necessity might arise. Some projects
were abandoned. Some proved fruitless. Some
continued over many years. Many projects
were undertaken which accounts for the contin
uing nature of the expenditure as does the fact
that some projects take many years for their
culmination. It is immaterial that some of the
projects failed if the intention is such that had
the object been realized an asset or advantage
would have been obtained. If the ultimate
object was an asset or advantage of a capital
nature then the expenditures antecedent there
to, are also of a capital nature.
In answer to a question from myself Dr.
Renzoni replied that in some instances the
appellant applied for and obtained a patent of
invention. If a patent is obtained the patent will
represent a capital asset the value of which will
include all costs of obtaining it. (See Weinberger
v. M.N.R. [1964] Ex.C.R. 903). It was not the
purpose of the appellant that its scientific
research should result in a patent for the matter
under investigation but rather that the appellant
would have a fund of knowledge upon which to
draw. If the appellant could and did obtain a
patent, that was incidental.
I am unable to distinguish between an expen
diture on scientific research which results in a
patent and a similar expenditure which does not
result in a patent but does result in the accumu
lation of a store of new knowledge upon which
the appellant can draw and does draw to keep
itself to the forefront of the particular trade in
which it is engaged. That was the object of the
expenditure. To me the expenditures are closely
akin from which it follows that since a patent is
a capital asset and the expenditures to obtain
that patent are capital expenditures, the expen
ditures on research to acquire new knowledge,
to devise and develop new processes and to
improve existing processes are likewise capital
expenditures.
In M.N.R. v. Algoma Central Rly. [1968]
S.C.R. 447, Fauteux, J. (as he then was) in
delivering the unanimous judgment of the
Supreme Court of Canada said at page 449:
Parliament did not define the expressions "outlay ... of
capital" or "payment on account of capital". There being no
statutory criterion, the application or non-application 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 determina
tion and agree with the view expressed, in a recent decision
of the Privy Council, B.P. Australia Ltd. v. Commissioner
of Taxation of the Commonwealth of Australia, ([1966]
A.C. 224, [1965] 3 All E.R. 209) by Lord Pearce. In
referring to the matter of determining whether an expendi
ture 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 consider
ation may point so clearly that it dominates other and
vaguer indications in the contrary direction. It is a common-
sense appreciation of all the guiding features which must
provide the ultimate answer.
After having considered all the facts in the
present appeal I have concluded, for the rea
sons outlined above, that the appellant's expen
ditures on scientific research which it claimed
as deductions under secs. 72, 72A and by virtue
of s. 11(1)0) in computing its taxable income
for the year are expenditures of a capital nature
as a consequence of which those expenditures
are not deductible in determining the base for
the depletion allowance for the purposes of
Reg. 1201.
It follows that the appellant is successful on
this issue of its appeal.
Having so concluded it is not necessary for
me to consider the appellant's alternative con
tention that if it should be held that the scientif
ic expenditures in question were of a revenue
nature the appellant would then be entitled to
deduct those expenditures under s. 12(1)(a) as
well as under s. 72 in computing its taxable
income for the year.
As I indicated at the outset the appeal is
allowed and is referred back to the Minister for
reassessment on matters with respect to which
the parties have reached agreement.
The appeal is dismissed with respect to the
issue as to the deductibility of the expenditures
incurred or made by the appellant in connection
with the townsite at Thompson, Manitoba.
The appeal is allowed with respect to the
issue that the expenditures ' on scientific
research are not deductible for the computation
of profits for the purposes of Reg. 1201.
As success is divided on the issues which
proceeded to trial each party is entitled to its
costs applicable to the respective issues upon
which each was successful.
Counsel for the Minister shall prepare a draft
of an appropriate judgment to implement the
foregoing conclusions and may move for judg
ment in accordance with Rule 337(2)(b).
1 1205. (1) Subject to subsection (3), where a taxpayer
operates in Canada a coal mine or a mine described in
paragraph (a) of subsection (1) of section 1201, he may
deduct in computing his income for a taxation year, such
amount as he may claim not exceeding 25% of an amount
calculated as set forth in subsection (2).
(2) The amount referred to in subsection (1) is the aggre
gate of all expenditures made or incurred by the taxpayer
which are reasonably attributable to the prospecting and
exploration for and the development of the mine, prior to
the mine coming into production in reasonable commercial
quantities, except to the extent that the expenditures were
(a) expenditures in respect of which a deduction from, or
in computing, a taxpayer's income tax or excess profits
tax was provided by section 8 of the Income War Tax
Act;
(b) expenditures in respect of which an amount was
deducted in computing a taxpayer's income under section
16 of chapter 63 of the Statutes of 1947 or section 16 of
chapter 53 of the Statutes of 1947-48 or, if the expendi
ture was incurred prior to 1953, under section 53 of
chapter 25 of the Statutes of 1949, Second Session;
(c) expenditures incurred after 1952 in respect of which a
deduction was or is provided by section 53 of chapter 25
of the Statutes of 1949, Second Session, or section 83A of
the Act;
(d) expenditures deducted in computing the income of the
taxpayer in the year incurred;
(e) the cost to the taxpayer of property in respect of
which an allowance is provided under paragraph (a) of
subsection (1) of section 11 of the Act; or
(f) the cost to the taxpayer of a leasehold interest.
(3) The amount deductible under subsection (1) shall not
exceed the amount calculated as set forth in subsection (2)
minus the aggregate of
(a) amounts deducted under subsection (1) in computing
the income of the taxpayer for previous taxation years,
and
(b) similar amounts deducted in computing the income of
the taxpayer for the purpose of the Income War Tax Act
and the 1948 Income Tax Act.
2 72. (1) There may be deducted in computing the income
for a taxation year of a taxpayer who carried on business in
Canada and made expenditures in respect of scientific
research in the year
(a) all expenditures of a current nature made in Canada in
the year
(i) on scientific research related to the business and
directly undertaken by or on behalf of the taxpayer,
(ii) by payments to an approved association that under
takes scientific research related to the class of business
of the taxpayer,
(iii) by payments to an approved university, college,
research institute or other similar institution to be used
for scientific research related to the class of business of
the taxpayer,
(iv) by payments to a corporation resident in Canada
and exempt from tax under this Part by paragraph (gc)
of subsection (1) of section 62,
(v) by payments to a corporation resident in Canada for
scientific research related to the business of the
taxpayer;
3 So far as material to this appeal Reg. 1201 provides:
1201. (1) For the purpose of this Part,
(a) "resource" means
(iii) a base or precious metal mine, or ..
(2) Where a taxpayer operates one or more resources, the
deduction allowed is 33 1/3% of
(a) the aggregate of his profits for the taxation year
reasonably attributable to the production of oil, gas,
prime metal or industrial minerals from all of the
resources operated by him,...
12. (1) In computing income, 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 property or a business
of the taxpayer,
(b) an outlay, loss or replacement of capital, a payment on
account of capital or an allowance in respect of deprecia
tion, obsolescence or depletion except as expressly per
mitted by this Part, ..
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.