Denison Mines Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Toronto, April 26;
Ottawa, September 20, 1971.
Income Tax—Business income, computation of—Capital
cost allowances—Uranium mine—Passage-ways through
ore body, cost of constructing—Passage-ways an enduring
asset—Whether cost current or capital expenditure—Income
Tax Act, s. 11(1)(c); Income Tax Regulations 1100(1)(a)
(xii), Sch. B, class 12.
Income Tax—Corporations—Mining company—Subsidi-
ary formed to provide housing for miners—Losses of sub
sidiary reimbursed by parent—Whether deductible by par-
ent—Whether subsidiary agent of parent.
Appellant, which had acquired a valuable uranium deposit
at Elliot Lake, Ontario, contracted to supply large quantities
of uranium oxide to a Crown corporation and under the
contract was required to get into production in a very short
time. In order to extract the ore, appellant drove passage
ways through the underground ore body itself rather than
the surrounding waste rock, and mining was extended from
these passage-ways to adjoining areas. The passage-ways
were used for ventilation, as a means of access, and for
transportation of ore, and it was intended that they would
continue in use for the life of the mine, which was estimated
to be 90 years. The value of the ore extracted from the
passage-ways exceeded their cost of construction. In 1958,
1959, 1960 and 1961 appellant expended more than $21,-
000,000 in constructing and extending the passage-ways
through the ore bodies. Under s. 83(5) of the Income Tax
Act, appellant was exempt from income tax on its mining
profits in 1958, 1959 and 1960. In 1961, when it first
became taxable, appellant claimed capital cost allowances
on the cost of the passage-ways under Income Tax Regula
tion 1100(1)(a)(xii) and Schedule B, class 12. The Minister
disallowed the deduction.
To avoid violating conditions in a trust deed, appellant
caused the incorporation of a subsidiary to provide housing
for appellant's employees. In 1961, appellant reimbursed
the subsidiary for a loss of more than $300,000 in the
subsidiary's operations and sought to deduct that amount on
the footing that the loss was sustained by the subsidiary as
agent for appellant. The Minister disallowed the deduction.
Held, both deductions were properly disallowed.
1. While the passage-ways were assets for the enduring
benefit of appellant's trade they were constructed to meet
appellant's immediate need for ore and the expenditures
thereon were therefore current operating expenses of appel
lant's business and not capital expenditures. British Insulat-
ed and Helsby Cables Ltd. v. Atherton [1926] A.C. 205;
Canada Starch Co. v. M.N.R. [1969] 1 Ex.C.R. 96, applied.
2. The evidence did not lead to an irrebuttable conclusion
that the subsidiary company was acting as agent of appel
lant. Smith Stone and Knight Ltd. v. Birmingham Corp.
[1939] 4 All E.R. 116, considered.
APPEAL from income tax assessment for
1961.
J. J. Robinette, Q.C., R. Robertson, Q.C. and
D.S. Ewens for appellant.
D. G. H. Bowman and M. J. Bonner for
respondent.
CATTANACH J.—This is an appeal from the
appellant's income tax assessment for its 1961
taxation year.
The basic facts are not in dispute and are as
follows.
On March 24, 1960, Can-Met Explorations
Limited, a company incorporated pursuant to
the laws of the Province of Ontario and Con
solidated Denison Mines Limited, also a compa
ny incorporated pursuant to the laws of the
Province of Ontario, were amalgamated by let
ters patent issued under the laws of the Prov
ince of Ontario to continue these two compa
nies as one company under the name of
Denison Mines Limited, the appellant herein.
The principal business of the appellant is
exploring for and mining minerals.
In the middle of this century the demand for
uranium became pressing.
Early in the 1840's a schooner captain, in the
course of his travels on the north shores of
Lake Superior and Lake Huron gathered miner
al samples, one of which was identified as
pitchblende. A century later, when uranium was
in great demand the memory of the captain's
find led to intensified attempts to discover the
"lost" deposit which was believed to be near
the north shore of Lake Superior, some seventy
miles west of Sault Ste. Marie, Ontario. It was
not until 1953 that the great discovery was
made in the Blind River-Lake Elliot region
which led to the development of the largest
uranium field known in the world.
Early in 1954 the appellant (then known as
Consolidated Denison Mines Limited) acquired
property in the region on the west side of
Quirke Lake (and below the surface of the lake)
about 11 miles north of the present town of
Elliot Lake. In 1954 a drill hole intersected a
low grade uranium-bearing quartz-pebble con
glomerate bed at a depth of 2,550 feet. A
second hole was then drilled two miles to the
east which, at a depth of 1,700 feet, produced
results that were astounding. A conglomerate
bed about 16 feet thick was found which
showed an average grade of 2.43 pounds urani
um oxide per ton of ore. An intensive pro
gramme of surface drilling was begun, a further
28 holes on a grid pattern were drilled which
outlined the appellant's orebody, the largest
known deposit in the world to this date.
The appellant obtained a contract to supply
some twenty million pounds of uranium oxide
to a Crown corporation, the only permitted pur
chaser, with fixed amounts to be delivered at
specified times. The appellant, by the terms of
its contract, had 18 months to get into produc
tion, a very short time to do so and to mine and
exploit an orebody of this size. Therefore there
was great urgency in this contract.
Originally there were approximately 12
mining companies with mining properties in the
region all of which had contracts to supply
uranium oxide to the Crown corporation. Most
of the companies, which were financed by the
sale of bonds, were faced with difficulties in
paying the bond holders, due to high operating
costs, so that a number of contracts which these
companies held were taken over by more suc
cessful companies.
This is what happened between the appellant
and Can-Met Explorations Limited, hereinafter
referred to as Can-Met. Can-Met had a property
adjoining that of the appellant at the eastern
boundary. The supply of uranium oxide called
for by the contract which Can-Met had entered
into could be readily fulfilled from the
resources of the appellant and the appellant
assumed that responsibility. This led to the
amalgamation of these companies in 1960.
The appellant went into production on Janu-
ary 1, 1958 and Can-Met went into production
on June 1, 1958, but no ore has been produced
from the Can-Met property since March 31,
1960. Because the appellant went into produc
tion on January 1, 1958 it is, by virtue of s.
83(5) of the Income Tax Act, exempted from
including in its income the income derived from
the operation of its mine during the period of
thirty-six months beginning with the day on
which the mine came into production, i.e. Janu-
ary 1, 1958, the date determined by the Minis
ter for the purposes of s. 83. The appellant is,
therefore, exempt for the years 1958, 1959 and
1960. The appellant's 1961 taxation year, being
the taxation year now under review, is the first
year that the appellant is subject to income tax
on its income derived from the operation of the
mine. Can-Met was also exempt during its
period of production, that is until March 31,
1960, when it became amalgamated to form the
appellant and there has been no production
from the Can-Met property since that date.
Mr. Joseph Kostuik, a mining engineer with
wide experience in mining generally and in the
more recent years of his career with "trackless"
mining in particular, became president of the
appellant in July 1955. He was responsible for
the mining plan of the appellant from the outset
(including that of Can-Met).
The appellant's mine has a surface area of
about 4,700 acres.
The main ore zone consists of two uranium-
bearing conglomerate beds, designated as Reef
A and Reef B dipping from north to south at an
average angle of 19 degrees. The upper end of
the main ore zone is 550 feet below the surface
and deepens 3,000 feet at the southern
boundary.
The ore zone is reached by two main vertical
shafts about one-half mile apart. The first shaft
gives access to the orebody at 1600 feet and the
second shaft, further down-dip, intersects the
main ore zone at 2,454 feet. Originally the ore
was hoisted to the surface at the first shaft but
now the second shaft is used exclusively for
that purpose. The first shaft continues to per
form the very vital function of supplying venti
lation to the underground workings and, if I
recall the evidence correctly, also serves as an
access to transport personnel below. There are
two other shafts on what was formerly Can-Met
property which have been connected to the
underground system to provide ventilation.
Main roadways and conveyor ways radiate
out from the shafts to form the framework of
the mine plan. From these main arteries other
passages extend into the active mining areas.
The ore is mined from the A and B reefs
above which are three other reefs designated as
D, E and F, which have not been touched,
separated from A and B and each other by
layers of quartzite. To date the A and B reefs
have been partially mined. In relation to the
entire orebody about 10% has been extracted
from the A and B reefs.
The ore in the A and B reefs is being mined
by the room and pillar method. Basically the
room and pillar method is the driving of a
passage into orebody from which mining is then
extended into rectangular rooms spaced regular
ly in the inclined orebody. Pillars separate the
rooms. The mining plan called for the passage
ways to be 350 feet ahead of the rooms but that
was not always possible. As mining advanced
each room attains the approximate size of 65
feet wide, 250 feet long and 16 feet high
inclined 19 degrees. The pillars are 20 feet wide
and extend the entire length of the room. The
ore is drilled and blasted, then removed from
the room through a small opening into the pas
sage. It is mechanically scraped from the rooms
by "slushers". The efficient operating distance
of these devices is 250 feet which dictates the
length of the room and being assisted by gravity
an incline is required. Because of this the ore
can only be removed from the room in one
direction into the passage-way. The height of
the room is dictated by the width of the ore-
body and by the height of the machinery which
is 15 feet. The passage-ways are 300 feet apart
and this is because of the length of the rooms.
When the broken ore is scraped from the
rooms it is then loaded into large rubber-tired
20 ton trucks and hauled to a belt conveyor.
There it is dropped on a steel grid to separate
over-sized boulders which are further broken.
The conveyor carries the broken ore to an
underground crusher installed in 1969. Former
ly the broken ore was carried to shaft No. 1 and
hoisted to the surface where it was crushed.
Now the ore is hoisted by No. 2 shaft but No. 1
shaft may still be utilized. The crushed ore is
then subjected to further treatment to achieve
the final product which is uranium concentrate.
As I have mentioned before about 21 to 3
pounds of uranium oxide are obtained from a
ton of ore.
No haulage underground is done by rail
which undoubtedly accounts for the term
"trackless mining".
At the present time in the area which has
been developed 65% of the ore has been
removed with 35% remaining in the pillars and
in some other small areas. This is according to
the plan. It is intended, when circumstances
require, to drive the passage-ways to the
extremities of the properties in the A and B
reefs. When market conditions make it practica
ble and when the A and B reefs have been gone
over the second time, which means that 50% of
the pillars is removed, then at that future time
the D, E and F reefs will be mined simultane
ously. The broken ore from these reefs will be
dropped into the passage-ways created in
mining the A and B reefs and the conveyor
ways and other facilities now existing will be
utilized for the removal of the ore from the D,
E and F reefs, as well as 50% of the pillars in A
and B, to the surface. The quality of the ore in
the three upper reefs is generally inferior to that
in A and B but there are some very high-grade
pockets.
The D, E, and F zones do not cover as wide
an area as the A and B zones. They are narrow
er and not as long, but they are continuous and
unbroken. The positions of the ways created
through the A and B zones will determine
where the rooms will be in the D, E and F zones
when they are mined. It is a matter of obvious
common sense for the purpose of mining D, E
and F zones to use the passage-ways in A and B
zones rather than duplicate or create new pas-
sage-ways in the upper zones. It was always
Mr. Kostuik's intention that the passage-ways
in the lower zones would be used to mine the
upper zones.
Mr. Kostuik estimated the present ore
reserves to be 245 million tons of which 80%
can be extracted leaving a net reserve of 196
million tons which will produce 375 million
pounds of uranium oxide. At the present rate of
production this would result in a 90 year life
expectancy of the mine. However this may vary
depending upon the markets for uranium oxide.
Despite the fact that only 10% of the ore has
been extracted a veritable labyrinth of rooms
and passage-ways has been created during the
years 1957 to 1960, the extent of which can be
appreciated by a reference to three plans intro
duced in evidence as exhibits to the affidavit of
a mining engineer called as an expert witness.
The rooms and passage-ways, where the men
are not required to go, have been flooded delib
erately and sealed off because of the radio
active nature of the ore, but all can be readily
drained and reopened when the need arises to
extract the pillars.
The most significant thing to note is that the
passage-ways were driven through the orebody
and not in the waste rock beneath. The general
tenor of the evidence of the mining engineers
who were called as expert witnesses was that
Mr. Kostuik in devising the mining plan to
extract the ore from the appellant's properties
by use of trackless mining, and the room and
pillar method with all underground workings
exclusively in the orebody was an innovation in
a uranium mine with a great but calculated risk
attached. The plan proved successful and with
the benefit of after-sight I fail to appreciate the
risk involved because the plan to me seems
eminently sensible and the logical one to have
adopted. I believe the risk to have been
anticipated had to do with the stability of the
floor and the strength of the roof. The latter
difficulty was overcome by the use of rock
bolts.
It should also be borne in mind that there was
an urgent need to get the mine into production
as expeditiously as possible which was a factor
in influencing Mr. Kostuik to adopt the plan he
did. The ore extracted in creating the passage
ways went into production along with the ore
mined from the rooms. There was no
difference.
The value of the ore extracted from the pas-
sage-ways exceeded the cost of opening those
passage-ways.
In the appellant's financial statements to its
shareholders, prepared by its auditors, the value
of the ore recovered from the passage-ways
was credited to income from the product and
the cost of opening the passage-ways was
charged to income.
In par. 2 of its notice of appeal the appellant
alleges that the cost of the construction and
extension of these passage-ways incurred in the
years 1958, 1959, 1960 and 1961 was $21,320,-
096. (During the course of the trial this figure
was revised to $21,288,243).
For its 1961 taxation year the appellant
sought to deduct the amount of $9,229,794.33
of the foregoing amount in computing its
income for that year as a capital cost allowance
pursuant to s. 11(1)(a) of the Income Tax Act
and par. (f) of class 12 of Schedule B to the
Income Tax Regulations.
Section 11(1)(a) reads as follows:
11. (1) Notwithstanding paragraphs (a), (b) and (h) of
subsection (1) of section 12, the following amounts may be
deducted in computing the income of a taxpayer for a
taxation year:
(a) such part of the capital cost to the taxpayer of
property, or such amount in respect of the capital cost to
the taxpayer of property, if any, as is allowed by
regulation;
Paragraph (f) of class 12 of Schedule B reads
as follows:
Property not included in any other class that is
(f) a mine shaft, main haulage way or similar underground
work designed for continuing use, or any extension there
of, sunk or constructed after the mine came into
production,
By virtue of Regulation 1100(1)(a)(xii) there
is allowed to a taxpayer, in computing its
income from a business or property, deductions
for each taxation year equal to such amounts as
it may claim in respect of property of each of
the classes in Schedule B not exceeding in
respect of property of class 12 the rate of
100%.
The Minister disallowed this claim for
deduction.
The appellant's contention is that the pas-
sage-ways were main haulage ways or similar
underground works designed for continuing use,
and extensions thereof sunk or constructed
after the mine came into production within the
meaning of par. () of class 12 of Schedule B
and accordingly it is entitled to deduct up to
100% of the amount expended therefor in com
puting its income for 1961.
The costs of the mine shafts do not enter into
the computation of the cost because they were
sunk prior to 1958.
The appellant submitted that the expenditure
is a capital outlay because the passage-ways
were constructed for a continuing use, that is to
say, for ventilation purposes, as a means of
access and for the transportation of ore. It was
submitted that being a capital expenditure the
cost is deductible, that it was immaterial that
the passage-ways were constructed or extended
through the orebody and that the proceeds of
the ore removed from the ways during the
course of their construction should not be
deducted from the gross cost of their construc
tion (in which case the cost would be nil
because the proceeds from the ore exceeded the
cost of construction) but rather that the pro
ceeds should be taken into product or revenue
account for the purpose of determining the
profit or loss on the mining operation.
On the other hand the position of the Minister
is that the costs of excavating the areas in
question are not capital expenditures, but are
current operating expenses laid out for the pur
pose of producing ore and revenue therefrom,
in furtherance of the appellant's business and as
such these costs are an integral part of the
profit-making activity of the appellant. It was
the further contention of the Minister that if the
passage-ways should be found to be capital
assets there was no capital cost because the
proceeds of the ore extracted should be set off
against the cost of construction and the pro
ceeds exceeded that cost.
This then is the main issue between the
parties.
In support of its contention the appellant
called six expert witnesses. Three were mining
engineers or consultants whose testimony was
basically that, in their opinion, the appellant's
underground network of passages were all main
haulage ways or similar underground works
designed for continuing use. Three were
accountants who testified that in their opinion
the costs of the underground passage-ways and
similar works were capital expenditures and
should be brought into the appellant's books as
such and amortized over a period of years, but
that the proceeds from the ore extracted from
the passage-ways should be brought into
account as revenue.
The Minister called an equal number of
expert witnesses in each category. The mining
engineers or consultants so called expressed the
view that the construction of the underground
passages was part and parcel of the appellant's
activity of mining and the fact that the passage
ways resulted was incidental to that activity. If
my recollection of the evidence is correct, it is
my belief that these witnesses testified that all
of the passage-ways could not be considered as
main haulage ways or works similar thereto.
The accountant witnesses called by the Minister
expressed the view that the cost of constructing
the passage-ways should not be brought into
capital account but should be set off as operat
ing expenses against the proceeds of the ore
extracted from the passage-ways, which should
be brought into revenue account to obtain the
profit to the appellant.
In the pleadings there were three other sub
sidiary issues raised.
In par. 7 of the notice of appeal it is alleged
that the appellant claimed as a deduction
$11,919 as place of business and paid up capital
tax paid to the Province of Ontario. The Minis
ter did not allow the deduction. In par. 4 of his
reply the Minister admitted that the appellant
claimed the deduction and that it was disal
lowed. In all other respects the allegations were
denied.
No evidence was adduced by the appellant
with respect to this claim for deduction, nor
was there any argument before me on this point
by either party. I therefore assume that this
particular claim was abandoned by the appellant
and if my assumption is incorrect I would dis
miss this particular claim because no evidence
was called with respect thereto and the appel
lant has failed to discharge the onus cast upon
it.
In par. 6 of the notice of appeal the appellant
alleges that an amount of $227,772 was expend
ed in 1956 and 1957, before the mine came into
production for the construction and mainte
nance of temporary roads required to provide
access to the mine site to enable a contractor to
transport mining machinery and equipment. The
point is that the appellant sought to claim the
additional cost of the heavy load-bearing road
over the cost of a normal road as a capital
expenditure to be included in the cost of mining
machinery and equipment within par. (k) of
Schedule B deductible at the rate of 30%. The
Minister reclassified the amount claimed as fall
ing within par. (g) class 1 of Schedule B that is a
road deductible at the rate of 4%.
During the trial counsel for the appellant
abandoned this ground of appeal.
There, therefore, remains but one additional
issue to the main issue mentioned above.
This issue concerns the cost of housing for
employees.
The mine was located in the wilderness and in
order to develop and operate the mine it was
necessary to provide private housing for
employees. The mining operations, both by
Consolidated Denison and Can-Met, were
financed by borrowings from the public by way
of bond issues secured by deeds of mortgage
and trust. One deed of trust was between Con
solidated Denison and Guaranty Trust Compa
ny of Canada as trustee dated October 1, 1955.
The other deed of trust was between Can-Met
and Guaranty Trust Company of Canada as
trustee dated June 15, 1956. In the opinion of
the legal advisers to Can-Met and Consolidated
Denison conditions in the trust deeds precluded
the companies from devoting any of the funds
received by them to providing or financing
housing for their employees. Accordingly Con
solidated Denison and Can-Met caused a com
pany to be incorporated under the name of
Con-Ell Properties Limited (hereinafter referred
to as Con-Ell) to obtain and provide housing for
the employees of the companies and to under
take the administration of that housing. Guaran
tees were given to the Royal Bank by Con
solidated Denison and Can-Met in favour of
Central Mortgage and Housing Corporation to
permit Con-Ell to acquire housing and dispose
of the houses to the employees. Consolidated
Denison and Can-Met each beneficially owned
50% of the issued and outstanding shares of
Con-Ell. On the amalgamation of Consolidated
Denison and Can-Met into the appellant, the
appellant became the beneficial owner of all the
outstanding shares in Con-Ell.
In computing its income for 1961 the appel
lant deducted an amount of $546,964.09 as paid
or incurred by the appellant in reimbursing Con-
Ell for costs in providing housing for the appel
lant's employees. In assessing the appellant the
Minister did not allow this deduction. During
the trial counsel for the appellant conceded that
he was able to establish only $329,616, as the
amount of the alleged loss of the appellant.
The position taken by the appellant is that
Con-Ell acted as its agent in providing housing
for its employees and that the losses of the
agent are the losses of the principal and deduct
ible in determining the appellant's income.
Counsel for the appellant contended that in law
there is no difference in the appellant selecting
a corporate entity as its agent than if it had
selected a natural person to act in that capacity.
The position of the Minister is that the losses
incurred by Con-Ell are the losses of that com
pany and not the losses of the appellant.
This constitutes the second issue between the
parties.
I turn to the main issue, that is, whether the
appellant is entitled to deduct capital cost allow
ance with respect to the expenditures incurred
by it in constructing main haulage ways and
similar underground works under par. (fl of
class 12 of Schedule B to the Regulations.
It is essential to the appellant's case that the
expenditures are outlays or payments on
account of capital within the meaning of s.
12(1)(b) of the Income Tax Act. If they are
outlays or expenses incurred for the purpose of
gaining or producing income from the appel
lant's business then the expenditures would be
deductible within s. 12(1)(a) in computing the
appellant's profit from its business.
In order to fall within s. 11(1)(a) which per
mits of the deduction of such part of the capital
costs to the taxpayer as is allowed by regula
tion, the expenditures must be capital expendi
tures. The purpose of s. 11(1)(a) is to permit the
deduction of outlays of capital, if permitted and
to the extent permitted by regulation, which
would not otherwise be deductible.
Therefore the first question for determination
is whether the expenditures are capital expendi
tures, as contended by the appellant, or current
operating expenses laid out as an integral part
of the profit-making activity of the appellant, as
contended by the Minister.
On this view of the matter it is of secondary
importance whether the labyrinth of under
ground passages resulting from the extraction
of ore therefrom by the appellant are main
haulage ways or similar underground works
designed for continuing use within the meaning
of par. (fl of class 12 of Schedule B to the
Regulations. It has been disputed by the Minis-
ter that all of the underground passages so
qualify and that the cost thereof is that alleged
by the appellant because that cost includes a
portion of current administrative and overhead
expenses which the Minister contends is not
properly included in that cost in the event that
the cost should be found to be a capital cost.
As I see it, the primary question is whether
the expenditures are capital expenditures.
I have no doubt that the underground pas
sages, or a very substantial portion of them are
assets for the enduring benefit of the trade
within the meaning of those words used by
Viscount Cave L.C. in British Insulated and
Helsby Cables Ltd. v. Atherton [1926] A.C.
205, in the most notable and frequently cited
declaration on this subject. He said at page 212:
... 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.
These passage-ways on their completion
became haulage ways for the transportation of
ore from the rooms to conveyors, they provided
necessary ventilation to the areas where mining
was being carried on, and they provided a
means of access by personnel. It is true that
when work in a particular area was completed
in the first phase of the mining operation the
passage-ways were flooded or sealed off to
prevent the hazard from the radio-active nature
of the ore. However the evidence was conclu
sive that on the retreat from the outer boundar
ies for the removal of the ore in the pillars those
passage-ways would be opened and utilized.
Those that remain open will be similarly
utilized.
While to date all mining has been done in the
A and B zones, the passage-ways will be util
ized when and if mining operations are conduct
ed in the D, E and F zones. I entertain some
doubt as to whether the plan of the passages in
the A and B zones was dictated by a plan for
this future mining of the D, E and F zones. It
might well be that the plan for the mining of the
D, E and F zones will be dictated by the loca
tion of the existing passages in the A and B
zones, but the evidence is conclusive, in my
view, that the passage-ways will be utilized to
mine the upper zones. To do otherwise would
be a useless duplication. Further, these passage
ways have the quality of permanence to render
them an enduring benefit within the meaning of
the authorities. "Enduring" is a relative term
and does not mean "everlasting". The passage
ways will endure throughout the lifetime of the
mine.
It was pointed out by counsel for the appel
lant that since the passage-ways fall within the
meaning of the words in par. (fl of class 12 of
Schedule B to the Regulations upon which capi
tal cost is allowed, it follows that it was contem
plated by the draftsmen of the regulations that
the passage-ways were capital assets.
However, it does not follow that because a
capital asset exists the expenditures which
brought that asset into being are necessarily
capital expenditures rather than income or reve
nue expenditures. Viscount Cave did not say
that. He did say that in the absence of special
circumstances leading to an opposite conclusion
the fact that an expenditure is made with a view
to bringing into existence an asset for the
enduring benefit of the trade is a very good
reason for treating the expenditure as a capital
one. The question which must next be answered
is whether the special circumstances leading to
an opposite conclusion as contemplated by Vis
count Cave are present in the present appeal.
The orebody is a uniquely regular, homogene
ous, solid mass of mineral in which the appel
lant could work in any direction and extract ore.
The appellant's business is the extraction of ore
and the sale of uranium oxide derived
therefrom.
The appellant had substantial commitments to
supply uranium oxide under its contracts with
Eldorado, the Crown corporation. Originally
Consolidated Denison obligated itself to supply
1,875,000 pounds of uranium oxide between
May 1, 1957 and March 31, 1962, 1,600,000
pounds by December 31, 1957 and 340,000
pounds per month thereafter. This original
agreement was amended to increase the total
commitment to 20,805,000 pounds to terminate
March 31, 1963.
Can-Met had a similar contract with Eldorado
to supply some 7,710,600 pounds of uranium
oxide.
Upon the amalgamation of Consolidated
Denison and Can-Met to form the appellant, the
obligations of both Can-Met and Consolidated
Denison became the obligations of the appel
lant. The joint obligations work out to about
471,000 pounds per month or 5,640,000 pounds
per year. It takes a ton of ore to produce 21 to
3 pounds of uranium oxide. So to produce the
appellant's annual commitment would require
approximately 16,920,000 tons of ore. The
annual reports indicate that the appellant was
not successful in meeting its full commitments,
but came extremely close to doing so. For
example in 1961 the appellant produced 5,379,-
168 pounds of uranium oxide, whereas its com
mitment was 5,640,000 pounds. Of the uranium
oxide produced by the appellant between 1958
and 1961 inclusive, I would estimate very
roughly that about 6,500,000 pounds came from
ore extracted from the passage-ways or an
annual average of 1,620,000 pounds.
Under its agreement with Eldorado, Con
solidated Denison had 18 months to begin meet
ing its commitments. Mr. Kostuik testified that
this was a short time and that the urgency to
begin producing was a factor which impelled
the decision to exploit the orebody on a mass
mining basis, that is, by delving into the ore-
body immediately and extracting ore from
every available opening although the trackless
mining method would have been adopted in any
event.
The reason is obvious. The appellant could
extract ore by driving its openings in any
direction.
As I understood the evidence of Mr. Kostuik,
there is no different technique employed in
extracting ore from the long headings than from
a room. The jackleg and scraper method of
mining is equally applicable to any phase or
section of the mine and to strike drives as it is
to room mining. However Mr. Kostuik did say
that the more skilled crews were used in the
passage-ways, but these same crews also ope
rated in the rooms depending on the progress of
the operations.
The ore from the rooms and passage-ways
were loaded, hauled, hoisted and milled
together.
There is no doubt in my mind that what the
appellant was doing in the passage-ways was
extracting ore but it was extracting ore from the
passage-ways in accordance with a precon
ceived plan which resulted in the passage-ways
becoming haulage ways in a predefined pattern.
The question, therefore, is what was the appel
lant doing? Was it building haulage ways or was
it extracting ore?
In Commissioner of Taxes v. Nchanga Con
solidated Copper Mines Ltd. [1964] A.C. 948,
Viscount Radcliffe said at page 958:
... Leaving aside the undesirability of determining the
nature of a payment by the motive or object of the payer,
their Lordghips cannot find in the evidence any support for
the idea that the preservation of Nchanga's business was in
fact the purpose of the arrangement or that the benefit
obtained by its payment was to endure in any other sense
than that it was to condition the year's production.
The foregoing language emphasises that it is
undesirable to determine the nature of a pay
ment by the motive or object of the payer. The
operation must be looked at objectively rather
than subjectively.
In doing so the preponderance of the evi
dence leads me to the conclusion that the
expenditures were made in furtherance of the
appellant's business of extracting ore. The
activity was in fact current ore extraction to
meet the appellant's immediate need to produce
ore. What the appellant did was to extract ore
and that was anticipated by the appellant as the
direct and immediate result of its expenditures
even though the ultimate result of that activity
was an asset that endured to the benefit of the
appellant's business. In my opinion the expendi
tures here in question are current operating
expenses laid out as an integral part of the
profit-making activity of the company. They
were costs incidental to the production and sale
of the output of the mine and as such are
operating costs.
There are other indicia confirming this con
clusion. Approximately 50% of the ore pro
duced by the appellant was extracted from the
passage-ways. The expenditures made by the
appellant were entered in its financial report to
shareholders as prepared by its auditors as cost
df production in computing its annual profit in
both the pre-production and post-production
periods. In the appellant's income tax returns
the expenditures were described as cost of
sales. The haulage ways do not appear in any
balance sheet as a capital asset. The proceeds
from the ore recovered as a direct result of the
activity which gives rise to the expenditures
formed part of the appellant's revenue from
production. There was no basal difference in
the technique of removing ore from the pas-
sage-ways and removing ore from the room.
The ore from both sources formed the output of
the mine. With that consideration in mind it
would be incongruous to treat the cost of
removing the ore from the rooms as a current
expense and that of removing ore from the
passage-ways as a capital expense. The only
justification for so doing would be that as a
result of the extraction of ore from the passage
ways an asset of enduring benefit to the appel
lant's trade resulted. But I have said above, the
fact that a capital asset, in the sense of an
enduring benefit resulting, does not necessarily
make the expenditures expended therefor capi
tal expenditures rather than revenue expendi
tures.
Authority for the foregoing proposition is
found in Canada Starch Co. v. M.N.R. [1969] 1
Ex.C.R. 96. In that case the President of this
Court (as he then was) had to consider whether
amounts laid out to secure the registration of a
trade mark, including an amount paid to the
registered owner of the identical mark to with
draw its objection thereto was a payment on
capital account or a payment incidental to ordi
nary trading operations. A trade mark when
acquired is a capital asset.
At page 103 Jackett P. said:
... In my view, a trade mark that actually distinguishes
is, even under the statutory scheme, a result that flows from
the current operations of a business and it follows, as I have
already indicated, that the moneys laid out in the operations
that incidentally give rise to trade marks are moneys laid
out on revenue account.
Since I have concluded that the expenditures
laid out by the appellant in extracting ore are
moneys laid out on revenue account even
though passage-ways of an enduring benefit to
the appellant resulted incidentally therefrom,
that conclusion effectively disposes of the main
issue in this appeal which, in my opinion, must
be dismissed.
However before leaving this subject it is
appropriate that I consider the evidence of the
expert accounting witnesses. I preface the con
sideration of this evidence by the axiom that the
Courts reserve to themselves the right to deter
mine whether the "accountancy principles"
relied upon in any particular case are based on
sound postulates.
Three accountants of outstanding qualifica
tions and repute were called on behalf of the
appellant.
As I understand the evidence of these three
witnesses, each accepted the premise that the
haulage ways and similar underground works
created by the extraction of ore therefrom were
capital assets because of their enduring quality
and usefulness in the future operation of the
mine.
Each witness accepted the premise that the
appellant's business was extracting ore and that
the proceeds of the ore mined from the passage
ways which was then milled and sold by the
appellant must be brought into revenue for the
current financial year.
These witnesses were unanimous in their opi
nion that the more appropriate method of
account on the theory of "matching" would be
that the cost of creating the passage-ways
should be deferred or capitalized against future
revenues, that is, that future proceeds should
bear some portion of that cost, otherwise the
cost of the ore first mined would be much
higher than the cost of the ore mined later.
While these witnesses contended that the
accountancy principle advocated by them was
the more appropriate method, nevertheless,
they did agree that the accepted and common
accounting practice would be to treat the expen
ditures incurred by the appellant in extracting
ore from the passage-ways as current deduc
tions against the proceeds in the financial year.
This is precisely what the appellant's auditors
did in the pre-production years, that is, those
prior to January 1, 1958 for Consolidated Deni-
son and June 1, 1958 for Can-Met. The reve
nues from the ore from the passage-ways were
netted against the expenditures which created
the asset of a capital nature obviously for the
reason that they were expenditures laid out to
produce income. The appellant's auditors con
tinued this accounting method after the expira
tion of the exempt period.
All three of the expert witnesses called by the
appellant indicated that they would have hesi
tated to certify the financial statements in the
form prepared by the appellant's auditors, that
is, where the expenses being claimed as capital
costs in this appeal were deducted as ordinary
costs of production, without qualification
because this is generally accepted accounting
practice.
Again all three of these witnesses adopted the
view that if an expense resulted in a benefit
which endured beyond the current year it was a
capital expenditure and therefore not deductible
under s. 12(1)(b) of the Income Tax Act except
by virtue of a capital cost allowance under s.
11(1)(a) of the Act and par. (f) of class 12 of
Schedule B of the Regulations. All three wit
nesses agreed, when the question was put to
them on cross-examination, that if a capital cost
allowance provision did not exist they would
deduct the expenses here in question as current
operating expenses thereby achieving the
deduction in computing income by that means.
An equal number of expert accounting wit
nesses were called on behalf of the Minister all
of whom expressed views diametrically
opposed to the accounting witnesses called on
behalf of the appellant.
In summary it was their opinion that from an
accounting view the costs here in question
should be treated as current costs and should
not be deferred and that the proper accounting
principle to be adopted was that the direct costs
of producing revenue in a particular period
should be matched against the revenue pro
duced thereby. It was also their view that if the
passage-ways were capital assets the capital
cost should be determined by deducting the
proceeds of the ore from the cost of creating
the passage-ways.
The fallacy in the position taken by the appel
lant's expert accounting witnesses is, as I see it,
the acceptance of the premise that if a capital
asset results then the expenditures which bring
that asset into being are capital costs and their
failure to recognize that a capital asset may
result from current expenditures. Neither am I
convinced that in the circumstances of this
appeal accounting principles dictate that there
should be a deferral of those costs against
future years.
The fact that the appellant was tax exempt by
virtue of s. 83(5) during its pre-production years
of 1958, 1959 and 1960 does not relieve the
appellant from computing its income in accord
ance with the Income Tax Act (see M.N.R. v.
Portage La Prairie Mutual Insurance Co. [1965]
1 Ex.C.R. 234 at p. 243). Under s. 4 it is
provided that income for a taxation year from a
business is the profit therefrom for the year. By
the language of s. 83(5) the income that is
exempt is "income from the operation of a
mine" which by virtue of s. 4 is the profit
therefrom. This means that the profits in
exempt years are the difference between the
receipts for such years and the expenditures
laid out to eain those receipts.
This is what the appellant's auditors did in its
pre-production years in preparing the financial
report to the shareholders. This was acknowl
edged by all expert accounting witnesses to be
the proper accounting practice but the expert
witnesses called by the appellant, as I under
stood their testimony, testified that, in their
opinion, the cost of extracting the ore from the
passage-ways during the exempt period
becomes a capital cost in subsequent years
against which the receipts from the ore are not
set off.
The result of this procedure would be that the
direct costs of producing the ore in the exempt
period are removed from the computation of
the appellant's income and become costs in
subsequent years. The effect is that exempt
income becomes exempt cost free gross
income. This, I think, distorts both the exempt
income and the non-exempt income in that
exempt income is much greater by reason of not
having the costs laid out to earn that income set
off against the receipts and the profit in subse
quent years is reduced correspondingly. This is
the logical result of the deferral procedure
advocated by the appellant's witnesses.
In Marsh Fork Coal Co. v. Lucas (1930) 42
F. (2nd) 83, a decision of the Circuit Court of
Appeals, Fourth Circuit, Parker, Circuit Judge,
speaking on behalf of the Court in considering
the matching accounting principle in the opera
tion of a coal mine, said at page 85:
When an operator has removed sufficient coal to extend
his tunnels so that he cannot maintain production with the
equipment which he has, he must as a matter of course lay
down more track and put in more cars and locomotives. The
question is, Shall the expense thereby incurred be charged
against the coal, the removal of which necessitated the
expenditure to maintain normal operation, or against the
coal yet unmined? We think it is but fair to charge against
the coal which has been mined the expense which its
removal has necessitated. We think, also, that this is the
only practicable method of accounting. To capitalize the
expenditures made to maintain normal output means that
the cost of removal is pyramided against the coal farther
back in the mine, with the result that the coal nearest the
head house will appear to have been mined at abnormal
profit and that farther back at a loss.
The foregoing reasoning by Parker, Circuit
Judge, is in accordance with the financial
results I have outlined above in the circum-
stances of the present appeal and constitutes a
sound argument against the deferral principle of
accounting advocated on behalf of the
appellant.
However, the principle of accounting so
advanced on behalf of the appellant is rendered
abortive by my conclusion for the reasons I
have indicated, that the expenditures in ques
tion incurred by the appellant were outlays for
the purpose of producing income. The asset
acquired by the appellant in the form of useful
passage-ways was an incident of those expendi
tures and the adoption of a practical mining
plan but those costs remain costs expended on
revenue account, and do not properly enter a
calculation of the capital cost of that asset.
There was no outlay of capital to bring that
asset into being.
In view of the conclusion I have reached, it is
not necessary for me to decide the propriety of
items included in the appellant's calculation of
the cost of the passage-ways. Those costs
included direct and haulage costs in the amount
of $7,631,661 as well as an allocation of general
mine office expenses in the amount of $3,348,-
645 and a portion of head office expense in the
amount of $1,031,022. These expenses, along
with others, are a portion of the normal cost of
the conduct of the appellant's business, as for
example, fire insurance, snow clearing, fire pro
tection, inventory adjustment, municipal taxes,
witnesses compensation and depreciation on the
apartments owned by Con-Ell. While I make no
decision on the matter I am doubtful if such
items are properly included and it may well be
that the capital cost for which deduction is
sought is a percentage of an inflated base.
The remaining issue is that involving the cost
of housing for the appellant's employees.
The appellant is seeking to deduct in the
computation of its profits the losses incurred by
its wholly owned subsidiary in providing hous
ing for the appellant's employees and the
administration of that programme during the
appellant's 1961 taxation year on the sole
ground that Con-Ell was acting as agent for the
appellant.
The losses were those incurred on the sale of
houses to the employees, the proceeds not
being sufficient to cover the cost of land and
the construction of the houses; the costs of
administration such as the salary of a business
manager; in the operation of multiple apartment
units, the rental receipts not being sufficient to
cover the costs of operations and losses in
guarantees to Central Mortgage and Housing
Corporation with respect to mortgage loans.
I experienced difficulty in ascertaining how
the amount of the losses was calculated. Both
Con-Ell and the appellant kept separate books
of account and employed different auditors. All
employees of Con-Ell were paid by the appel
lant and their salaries were charged back to
Con-Ell. In the books of the appellant monthly
accruals were made in anticipation of Con-Ell's
losses and at the year end adjustments were
made to reflect the actual loss incurred. Since
the debits made by the appellant were only
estimates, no doubt to allocate certain of its
funds to cover those losses, I assume at the
year end a comparison was made with the
books of Con-Ell which would show the actual
loss and an appropriate adjustment would then
be made in the books of the appellant so that
the amounts would correspond.
It is also my understanding that apart from
the payment by the appellant of the salaries of
the appellant's employees working for Con-Ell
with a corresponding charge back to Con-Ell,
that the bulk of the financing of Con-Ell's oper
ation was financed by bank loans, originally
guaranteed by Consolidated Denison and Can-
Met and in 1961 by the appellant. Then, too,
advances were made to Con-Ell by the appel
lant to discharge obligations incurred by Con-
Ell when Con-Ell's borrowed funds were not
sufficient to do so. Again I assume that these
advances were made to enable Con-Ell to pay
amounts which the appellant had guaranteed.
The appellant is not claiming the advances
made to Con-Ell as losses as such or payments
necessitated by its guarantee of Con-Ell's obli
gations, but it is claiming as a deduction from
its income the losses of Con-Ell as being its
own losses.
The calculation of those losses is further
complicated by the fact that Con-Ell and the
appellant had different financial years ending in
the 1961 calendar year. The year end of the
appellant was December 31, whereas that of
Con-Ell was April 30. There would be an eight
month overlap.
In the books of Con-Ell the loss is shown as
$496,000 whereas in the books of the appellant
the loss is shown as $416,039. It was explained
to me that the difference was accounted for by
the difference in year ends. Then the internal
auditor of the appellant deducted a further
amount of $86,423 which was a portion of mine
office expenses allocated to the housing opera
tion which the appellant's auditor had included
as part of the cost of constructing the haulage
ways leaving an amount of $329,616 which the
appellant now claims as a deduction rather than
the larger amount of $546,964.09 set out in the
notice of appeal.
From the outset the appellant did not expect
to make any profit from the housing operation.
On the contrary, the provision of housing was
necessary to attract a stable labour force to the
remote area in which the mine was located and
a loss was contemplated.
It was the opinion of the appellant's legal
advisers that the appellant was precluded by the
provisions of the trust deeds through which the
appellant was financed by public borrowing
from expending any funds so derived upon
provision of housing for its employees. It was
for this reason that Con-Ell was incorporated to
perform that function. Being a wholly owned
subsidiary the directors and officers of Con-Ell
were also directors and officers of the appellant
and it follows that any decisions of the directors
of Con-Ell would be consonant with the interest
of the appellant.
Briefly the appellant's position is that the
business of Con-Ell was in reality the business
of the appellant and in contradistinction thereof
the position of the Minister rests on the Salo-
mon case (Salomon v. A. Salomon & Co. Ltd.
[1897] A.C. 22) that there are two separate legal
entities and the losses of one are not the losses
of the other.
It is well settled that the mere fact that a
person holds all the shares in a company does
not make the business carried out by that com
pany the shareholder's business, nor does it
make that company the shareholder's agent for
carrying on the business. However it is conceiv
able that there may be an arrangement between
the shareholder and the company which will
constitute the company the shareholder's agent
for the purpose of carrying on the business and
so make the business that of the shareholder. It
is immaterial that the shareholder is itself a
limited company.
The question therefore is whether in the cir
cumstances of the present appeal such an
arrangement exists. The basis of agency is a
contractual relationship either express or
implied. There was no express arrangement
here and whether one may be implied is a
question of fact based on the circumstances of
each particular case.
Counsel for the appellant relied strongly on
Smith Stone and Knight Ltd. v. Birmingham
[1939] 4 All E.R. 116. In this case the plaintiff
company was the sole shareholder of a subsidi
ary company. The premises occupied by the
subsidiary were expropriated by the defendant.
The parent company sought compensation for
business disturbance on the ground that the
subsidiary's business was the parent's business.
The claim was contested on the ground that the
proper claimant was the subsidiary, that being a
separate entity.
Atkinson J. reviewed the authorities and
found six points that were relevant for the
determination of the question: Who was really
carrying on the business? Those points were:
1. Were the profits treated as the profits of
the parent company? Here there were no profits
but losses.
2. Were the persons conducting the business
appointed by the parent company?
3. Was the parent company the head and
brain of the trading venture?
4. Did the parent company govern the adven
ture, decide what should be done and what
capital should be embarked on the venture?
5. Did the parent company make the profits
by its skill and direction? In the present appeal
were the losses incurred by the appellant's
direction? and
6. Was the parent company in effectual and
constant control?
On the evidence in the present appeal each of
the six questions so posed must be answered in
the affirmative but in my opinion this is not
conclusive. The points outlined by Atkinson J.
are but indicia helpful in determining the ques
tion. Other factors may be present which point
to a different conclusion.
Later Atkinson J. said at page 121:
... Indeed, if ever one company can be said to be the
agent or employee, or tool ... of another, I think the [sub-
sidiary] company was in this case a legal entity, because
that is all it was. There was nothing to prevent the claimants
at any moment saying: "We will carry on this business in
our own name". (Brackets are mine.)
Here the very reason for the incorporation of
Con-Ell was predicated on the legal advice that
the appellant would be in breach of the condi
tions of the trust deed if it conducted the hous
ing operation on its own account. It is a princi
ple of agency that a person cannot do by an
agent what he cannot do himself.
Here Con-Ell acted as principal. It contracted
with the building contractor. It obtained bank
loans. Because the subsidiary was without a
backlog of security the bank insisted upon a
guarantee of the subsidiary's indebtedness by
the appellant, but it was Con-Ell that contracted
the debt as principal and the appellant acted as
guarantor only and the appellant also acted as
guarantor of Con-Ell to Central Mortgage and
Housing Corporation with which corporation
Con-Ell contracted directly. Therefore the
appellant did not hold out Con-Ell as its agent,
nor did Con-Ell purport to act on behalf of a
principal undisclosed or otherwise.
Con-Ell was carrying on business and it is
important to bear in mind that limited compa
nies that carry on businesses are separate taxa
ble persons and the profits of their respective
businesses are separate taxable profits whether
or not one be the subsidiary of the other. Any
attempt to erode this principle must be based
upon clear and unequivocable facts leading to
the irrebuttable conclusion that one legal entity
is acting as the agent of another and that legal
entity is really doing the business of the other
and not its own at all.
In my view the facts in the present appeal do
not justify such a conclusion for the reasons I
have expressed.
The appeal is, therefore, dismissed with
costs.
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.