Oro del Norte, S.A. v. Canada
T-1947-86
MacKay J.
2/4/93
44 pp.
Appeal from reassessment for 1979 taxation year -- Minister reclassifying Canadian exploration expenses to cost of acquisition of depreciable property of prescribed class -- Costs incurred for exploration, drilling and tunnelling in development of Cardinal River Coal Underground Mine (CRC underground mine) -- Income Tax Act, s. 66.1(6)(a)(iii) defining "Canadian exploration expense" as any expense incurred to determine existence, location, extent or quality of mineral resource in Canada, excluding expenses reasonably related to mine or to potential or existing extension of mine that has come into production in reasonable commercial quantities -- S. 66.1(6)(a)(iii.1) extending definition to expenses to bring mineral resource in Canada into production and incurred prior to commencement of production from resource in reasonable commercial quantities -- Plaintiff open pit mining coal from Jewel Coal Seam in CRC surface mine -- CRC surface mine producing mineral resource in reasonable commercial quantities by 1979 -- Plaintiff incurred expenses to develop underground mine located in same ore body as CRC surface mine -- Aware of existence of deeper ore body from deep drilling from surface prior to opening of CRC surface mine, but knew little about quality of coal, dimensions of Jewel Seam, quantity of coal economically recoverable by underground mining until well after surface mining operations underway -- Appeal allowed and reassessment vacated -- S. 66.1(6)(a)(iii) and (iii.1) providing separate definitions for "Canadian exploration expense" -- Two definitions not relating solely to whether expenses incurred in relation to "new mine" or "new resource" -- Providing for different sorts of expenditures, defined by purposes for which incurred, in two different phases in exploration for and development of mining projects -- S. 66.1(6)(a)(iii) expenses incurred to determine existence, location, extent or quality of mineral resource, including coal deposit in Canada, but not including expenses related to mine or extension thereof coming into production in reasonable commercial quantities -- Includes expenses incurred in preliminary activities undertaken to assess existence of ore body or coal deposit warranting in economic terms development of mine to recover marketable minerals or coal -- Need not be related to "new mine" in sense of leading to development of new mine for may not ultimately prove feasible, but may not be related to existing mine, or extension of mine already coming into production in reasonable commercial quantities -- Preliminary expenses incurred in assessing Jewel Seam for underground mining only Canadian exploration expenses if underground mine project separate from, and not extension of, surface mining operations -- Expenses incurred in development of underground mine only Canadian exploration expenses if resource underground mine designed to bring into production determined to be resource not earlier yielding production in reasonable commercial quantities from surface mining operations -- Reference to cases dealing with what constituted mine to suggest factors to be considered in determining whether particular mine workings constitute mine separate from existing mine already in production in reasonable commercial quantities -- Expenses incurred on underground mine relating to mine separate and apart from other operations of CRC -- Preliminary exploratory expenses incurred in relation to underground mine not related to mine, or to potential or existing extension of mine coming into production in reasonable commercial quantities -- Constituting Canadian exploration expenses within s. 66.1(6)(a)(iii) -- S. 66.1(6)(a)(iii.1) expenses incurred after preliminary exploration work concluded and decision to proceed with mining project made -- Relate to development of project to bring mineral resource in Canada into production, and incurred prior to commencement of production from resource in reasonable commercial quantities -- Within industry, development expenses would be committed only when reserve considered to be likely to produce satisfactory profit from production as result of planned investment in specific project -- Expenses incurred in development of underground mine, after decision to proceed with project, to bring into production portion of coal deposit defined for extraction by mine incurred prior to production in reasonable commercial quantities -- Constituting Canadian exploration expense within s. 66.6(1)(a)(iii.1) -- Income Tax Act, S.C. 1970-71-72, c. 63, s. 66.1(6)(a) (as enacted by S.C. 1974-75-76, c. 26, s. 36; 1979, c. 5, s. 20).