A-1051-88
Westar Mining Ltd. (Appellant)
v.
Her Majesty the Queen (Respondent)
INDEXED AS.' WESTAR MINING LTD. V. CANADA (C.A.)
Court of Appeal, Mahoney, Stone and Linden JJ.A.—
Toronto, November 26, 1991 and Ottawa, March 30,
1992; Ottawa, May 11, 1992.
Income tax — Exemptions — Appeal from trial judgment
holding business interruption insurance proceeds not tax
exempt under Income Tax Application Rules, 1971 (ITAR), s.
28 as "income derived from the operation of a mine" — When
. fire temporarily shut down coal processing plant in 1971,
appellant paid $1,328,000 for lost profits — 1975 amendment
to 1TAR, s. 28(1.1) retroactively defining "income derived from
the operation of a mine" as including income from processing
to prime metal .stage — Trial Judge holding monies must be
received as result of extraction, processing or sales to come
within exemption — Case law establishing "operation of a
mine" economic concept — Operation of mine as economic
activity, not physical acts involved in extracting and process
ing, generating income — Insurance contracts entered into in
course of mining business — Insurance proceeds indemnity for
lost income resulting from interruption of processing opera
tion, by definition, included in "income derived from the oper
ation of a mine" — Taxation clause in insurance policy irrele
vant as parties to contract cannot stipulate taxation impact.
This was an appeal from the trial judgment holding that bus
iness interruption insurance proceeds were not exempt from
income tax under subsection 28(1) of the Income Tax Applica
tion Rules, 1971, (ITAR) as "income derived from the opera
tion of a mine". The appellant operated a coal mine and related
processing facilities. The processing plant was temporarily
shut down as a result of fire in 1971. The appellant received
$1,328,000 for lost profits. At that time the appellant's income
from the operation of the mine was exempt from taxation pur
suant to subsection 28(1) which defined "income derived from
the operation of a mine" merely as income derived from the
operation of the mine before any deduction was made under
section 65 or 66. A 1975 amendment to ITAR added subsec
tion 28(1.1) which retroactively defined "income derived from
the operation of a mine" as including the income of a corpora
tion from the processing to the prime metal stage of ore from a
mineral resource. The Income Tax Act did not define the
phrase, although it was also used in subsection 83(5), which
exempted from income income derived from the operation of a
mine during the first 36 months of production. The Trial Judge
held that if monies received are to be considered income
derived from the operation of a mine, they must be received as
a result of extraction, processing or sales. He found Cominco
Ltd y The Queen, [ 1984] CTC 548 (F.C.T.D.), which dealt with
the proceeds of business interruption insurance in the context
of the earned depletion allowance under section 65 of the
Income Tax Act and Regulation 1201, persuasive. He also held
that to allow the proceeds to be defined as arising from the
operation of a mine would give taxpayer a double benefit—the
right to charge off premiums paid for this insurance and then
an exemption when proceeds are paid. Finally, he held that the
clause in the insurance policies indicating that proceeds there
from would not be tax exempt, while not determinative, indi
cated the intention of the parties. The appellant argued that the
insurance proceeds were income since they replaced income
lost in the course of operating a business and the income lost
would have been exempt from income tax because it would
have been income derived from the operation of a mine.
Held (Linden J.A. dissenting), the appeal should be allowed.
Per Mahoney J.A. (Stone J.A. concurring): The insurance
proceeds were derived from the operation of a mine within the
meaning of ITAR, subsection 28(1). The authorities, most of
which dealt with the interpretation and application of subsec
tion 83(5) prior to the addition of the 1975 definition, have
established that "operation of a mine" is an economic concept.
It is the operation of a mine as an economic activity, not the
physical acts involved in extracting and processing, that gener
ates income. The business interruption insurance contracts
were entered into in the course of taxpayer's mining business,
not some other business, and solely to ensure the income from
that business. The insurance proceeds were received as indem
nity for the loss of income that resulted from the interruption
of a processing operation, which, by definition, is included in
"income derived from the operation of a mine".
Cominco was not helpful. It turned on the definition of the
terms, which expressly incorporated the definition of "taxable
production profits from mineral resources in Canada" set out
in subsection 124.1. The Court of Appeal has held that sections
124.1 and 124.2 set up a separate scheme of inclusions and
exclusions from income for purposes of the special incentive
program. Each incentive to economic activity incorporated by
Parliament into the Income Tax Act is a code unto itself. The
intention expressed in one is not an aid to understanding the
intention of another.
There was no evidence that the appellant had claimed or the
Minister had allowed a deduction of the insurance premiums in
calculating appellant's taxable income.
The provision in the insurance policy regarding taxation was
irrelevant. The parties to a contract cannot stipulate the tax
results of their bargain.
Per Linden J.A. (dissenting): The exemption in ITAR, sub
section 28(1) cannot be construed so broadly as to cover insur
ance proceeds received because of the non-operation of a
processing plant at a mine, however much that income may be
connected or related to the business of mining. Parliament has
not exempted all income earned by mining companies, nor has
it exempted all income earned in the business of mining. Only
income derived from the operation of a mine is exempt. Each
form of income earned by a mining business must be
examined to determine whether it falls within the exemption or
not.
The purpose of ITAR, subsection 28(1) was to encourage the
mining industry in Canada, but it was not intended to
encourage the mining business in general. Its goal was to pro
vide an incentive to the operation of mines, i.e. particular
activities of the mining business which would benefit our soci
ety most. Digging, processing and selling of certain mining
resources, normally considered part of the operations of a
mine, are especially useful in fostering employment, trade and
other economic activity and of particular value to our eco
nomic well-being and deserving of special treatment. While
the processing plant was closed, that aspect of the work of the
mine which is most beneficial was neither being engaged in
nor being promoted, and to permit a tax incentive would not
advance the specific purpose of the legislation. Nothing in the
section suggests that Parliament intended to reward inactivity.
Had Parliament intended to exempt all income from every
aspect of the business of mining, it could have done so. As it
did not, it must be assumed that "operation of a mine" was
meant to have a more restricted meaning.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, R.S.C. 1952, c. 148, s. 83(5) (as am. by
S.C. 1955, c. 54, s. 21).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 18(1)(c), 65,
124.1(1) (as enacted by S.C. 1974-75-76, c. 26, s. 80).
Income Tax Application Rules, /971, S.C. 1970-71-72, c.
63, Part III, s. 28 (as am. by S.C. 1974-75-76, c. 26, s.
133).
Income Tax Regulations, SOR/54-682, s. 1201 (as am. by
SOR/75-342, s. I).
Income War Tax Act, R.S.C. 1927, c. 97, s. 5(1 )(a).
CASES JUDICIALLY CONSIDERED
DISTINGUISHED:
Cominco Ltd v The Queen, [1984] CTC 548; (1984), 84
DTC 6535 (F.C.T.D.).
CONSIDERED:
Gulf Canada Ltd. et al. v. The Queen (1990), 90 DTC
6622; 38 F.T.R. 81 (F.C.T.D.); Canada v. Gulf Canada
Ltd. (1992), 92 DTC 6123 (F.C.A.); Gilhooly, Grace v.
Minister of National Revenue, [1945] Ex. C.R. 141;
[1945] 4 D.L.R. 235; [1945] C.T.C. 203; Commissioners
of Taxation v. Kirk, [ 1900] A.C. 588 (P.C.); Minister of
National Revenue v. Hollinger North Shore Exploration
Company, Limited, [1963] S.C.R. 131; (1963), 36 D.L.R.
(2d) 636; [1963] C.T.C. 51; 63 DTC 1031; Gunnar Min
ing Limited v. Minister of National Revenue, [1968]
S.C.R. 226; (1968), 67 D.L.R. (2d) 153; [1968] C.T.C.
22; 68 DTC 5035; Falconbridge Nickel Mines Ltd. v.
Minister of National Revenue, [1972] F.C. 835; [1972]
CTC 374; (1972), 72 DTC 6337 (C.A.); Minister of
National Revenue v. Bethlehem Copper Corp., [1973]
F.C. 565; [1973] CTC 345; (1973), 73 DTC 5281 (C.A.);
M.N.R. v. Bethlehem Copper Corp. Ltd., [1975] 2 S.C.R.
790; [ 1974] CTC 707; (1974), 74 DTC 6520.
REFERRED TO:
C.P.R. v. Provincial Treasurer of Manitoba, [1953] 4
D.L.R. 233; (1953), 10 W.W.R. (N.S.) I (Man. Q.B.).
APPEAL from trial judgment, [1988] 2 C.T.C.
349; (1988), 88 DTC 6505; 23 F.T.R. 71 holding
business interruption insurance proceeds were not
exempt from tax under Income Tax Application
Rules, 1971 subsection 28(1) as "income derived
from the operation of a mine". Appeal allowed.
COUNSEL:
William I. Innes and Clifford L. Rand for appel
lant.
Wilfrid Lefebvre, Q.C. and John Shipley for
respondent.
SOLICITORS:
Stikeman, Elliott, Toronto, for appellant.
Ogilvy, Renault, Montréal, for respondent.
The following are the reasons for judgment ren
dered in English by
MAHONEY J.A.: This appeal, from a reported deci
sion of the Trial Division, 1 is concerned with whether
[1988] 2 C.T.C. 349.
$1,328,000, being business interruption insurance
proceeds, is exempt from income tax as "income
derived from the operation of a mine". The learned
Trial Judge held the proceeds not exempt. An alterna
tive submission, that the proceeds were not income
within the meaning of the Income Tax Act [S.C.
1970-71-72, c. 63], rejected at trial, was not pursued
on appeal and, indeed, the contrary was a basic pre
mise of the appellant's argument.
Many of the material facts are set forth in a state
ment of agreed facts fully recited in the decision
below. Documentary evidence included the insurance
policies and the viva voce evidence was mainly
directed at the negotiation of the settlement of the
insurance claim. Portions of the examination for dis
covery of an officer representing the respondent was
read into the record. It was established on discovery
that the insurance proceeds were considered by the
respondent to be income from business, not income
from property, i.e., the policies of insurance per se.
The plaintiff [appellant] carried on the business of
operating a coal mine, called the Balmer Mine, and
related processing facilities at Elkview, B.C., which
came into production May 1, 1971. On December 4,
1971, a fire occurred at the processing plant. It did
not operate at all from December 4 to 20 and was in
partial production from December 21 to 29, after
which it was in full production. During the shut
down, coal continued to be mined and was stockpiled
at the Balmer Mine. In the result, in its 1972 taxation
year, the appellant was paid $1,455,865 by its insur
ers. Of that amount, it is agreed, "$1,328,000 related
to its loss of profits in respect of coal from the
Balmer Mine." At the time of the fire and at the time
the insurance proceeds were received, the appellant's
income from the operation of the Balmer Mine was
exempt from taxation pursuant to subsection 28(1) of
the Income Tax Application Rules, 1971 [ITAR] [S.C.
1970-71-72, c. 63, Part III].
28. (1) Subject to prescribed conditions, there shall not be
included in computing the income of a corporation, income
derived from the operation of a mine that came into production
before 1974 to the extent that such income is gained or pro
duced during the period commencing with the day on which
the mine came into production and ending with the earlier of
December 31, 1973 and the day 36 months after the day the
mine came into production, except that this subsection does
not apply in respect of a mine that came into production after
November 7, 1969 unless the corporation so elects in respect
thereof in prescribed manner and within prescribed time.
(2) In this section,
(a) "income derived from the operation of a mine" means
the income derived from the operation of the mine before
any deduction is made under section 65 or 66 of the
amended Act;
The appellant had made the necessary election in a
timely fashion. It was not argued that the definition
of ITAR paragraph 28(2)(a) is relevant to the present
case. In 1975, ITAR section 28 was amended by the
addition of subsection (1.1). 2
28....
(1.1) The expression "income derived from the operation of
a mine" is, for the purposes of this section and section 83 of
the former Act as it read in its application to the 1971 and pre
ceding taxation years, hereby declared to include and always to
have included the income of a corporation from the process
ing, to the prime metal stage or its equivalent, of ore from a
mineral resource owned by the corporation.
Subsection 83(5) [R.S.C. 1952, c. 148 (as am. by S.C.
1955, c. 54, s. 21)] of the "former Act" had provided:
83....
(5) Subject to prescribed conditions, there shall not be
included in computing the income of a corporation income
derived from the operation of a mine during the period of 36
months commencing with the day on which the mine came
into production.
The former Act had no definition of "income derived
from the operation of a mine" other than that retroac
tively provided by ITAR subsection 28(1.1). In my
opinion, subject to the effect, if any, to be given to
that definition, the effect of ITAR subsection 28(1)
and subsection 83(5) of the former Act is, for all pur
poses relevant to this appeal, identical.
2 S.C. 1974-75-76, c. 26, s. 133. (Royal Assent March 13,
1975.)
There is a considerable body of jurisprudence deal
ing with the interpretation and application of subsec
tion 83(5). None of it takes account of the retroactive
amendment. Before reviewing the authorities, I think
it desirable to consider particular objections taken to
the conclusions of the Trial Judge.
While he, did review authorities dealing specifi
cally with subsection 83(5), the learned Trial Judge
seems to have found the judgment of Reed J., in
Cominco Ltd y The Queen 3 particularly persuasive. It
dealt with the proceeds of business interruption insur
ance in the context of the so-called earned depletion
allowance under section 65 of the Income Tax Act and
Regulation [Income Tax Regulations, SOR/54-682 (as
am. by SOR/75-342, s. 1)] 1201. She found that:
There is no doubt that had the plaintiff actually earned the
income for which the insurance proceeds are replacements,
they would have been considered production profits and the
allowances pursuant to section 65(1) would have been
deducted.
As I understand that decision it turned on the defini
tion, by Regulation 1201, of the terms "production
profits" and "resource profits". Reed J., held that, as
in the present case, "the breadth of the wording of
section 3" of the Act brought the insurance proceeds
into taxable income because they were income from
a business, but went on [at page 552]:
The insurance proceeds, however, cannot be brought within
the much more specific wording of Regulation 1201(2)—pro-
duction profits (pre-May 6, 1974) and Regulation 1201—
resource profits, (post-May 6, 1974). The proceeds simply did
not arise out of the "production of ... metal or industrial min
erals" or from "the processing in Canada or ores from a min
eral resource".
The statutory definition of "income derived from the
operation of a mine" is as set out in ITAR subsection
28(1.1) and paragraph 28(2)(a). It does not track the
statutory definitions in issue in Cominco.
I do not think Cominco is helpful in deciding the
issues here. Post-May 6, 1974, the definition of
"resource profits" in play there expressly incorpo
rated, among other things, the definition of "taxable
3 [ 1984] CTC 548 (F.C.T.D.).
production profits from mineral resources in Canada"
set out in subsection 124.1(1) [as enacted by S.C.
1974-75-76, c. 26, s. 80] of the Act. This Court
expressly approved the following opinion of McNair
J., in Gulf Canada Ltd. et al. v. The Queen. 4
In my opinion, sections 124.1 and 124.2 set up their own sepa
rate scheme of inclusions and exclusions from income for pur
poses of the special incentive programs.
Each incentive to economic activity incorporated by
Parliament into the Income Tax Act seems to me very
much a code unto itself; I do not think the intention
expressed in one is very helpful to an understanding
of the intention of another. That is particularly so
when one is trying to understand what Parliament
meant by a certain kind of "income" in the context of
a provision and the definition of the term in that pro
vision bears little or no resemblance to the pertinent
definition in the provision from which assistance is
sought.
The second objection is to the following finding.
To permit these proceeds to be defined as accruing or arising
from the operation of a mine is clearly going beyond that
which Parliament intended. To do so would really give the
plaintiff a double benefit—the right to charge off premiums
paid for this insurance and then an exemption when proceeds
are paid—clearly not the intended result. 5
Counsel were in agreement that there was no evi
dence that the appellant had claimed or the Minister
allowed a deduction of the insurance premiums in
calculating its taxable income. 6
Finally, referring to a provision of the insurance
policies, he said:
The tax exemption clause in the policies of insurance clearly
articulated that proceeds from the insurance policies would not
be exempt, and provision would have to be made for taxes
accruing as a result of any payments. This is not determinative,
4 (1990), 90 DTC 6622 (F.C.T.D.), at p. 6632; (1992), 92
DTC 6123 (F.C.A.), at p. 6127.
5 At p. 357.
6 S. 18(1)(c) of the Act prohibits the deduction from taxable
income of an outlay for the purpose of producing exempt
income.
but it is an indication by the parties to the contract that pro
ceeds would not be income earned from the operation of a
mine, and these parties had the advice of counsel and chartered
accountants before signing the documents. They may have
acted from a mistaken impression of the law, and that's why it
is not determinative?
With respect, the provision is not only not determina-
tive; it is irrelevant. The parties to a contract cannot
stipulate the tax results of their bargain. That said, the
decision was plainly not based on that evidence.
Before considering the ratio of the judgment
below, it will he useful to review the authorities. The
first question is the breadth of meaning to be given
the term "derived from". I do not propose to quote
from C.P.R. v. Provincial Treasurer of Manitoba, 8 in
spite of the appellant's stress of it. That case was con
cerned with the expression "income attributable" and,
since it relied on the authority of Gilhooly, Grace v.
Minister of National Revenue, 9 which was concerned
with a depletion allowance under the Income War Tax
Act, , ° in respect of income "derived from" mining, I
see no point in not moving at once to it. The taxpayer
had a life interest in the income of her father's estate
and claimed a deduction for depletion on stock divi
dends received by the executors from a mining com
pany. For purposes relevant to this appeal, Cameron
J., held:
The word "derive" is defined in Murray's New English Dic
tionary, Volume 3, p. 230, as "to flow, spring, issue, emanate,
come, arise, originate, having its derivation from", and in the
Shorter Oxford English Dictionary, Volume 1, as "to draw,
fetch, obtain; to come from something as its source".
Can there be any question that mining dividends are derived
from mining? I think not ....
In Commissioners of Taxation v. Kirks " Lord Davey said
"Their Lordships attach no special meaning to the word
'derived', which they treat as synonymous with arising or
accruing".
7 Ibid.
M [1953] 4 D.L.R. 233 (Man. Q.B.).
9 [1945] Ex.C.R. 141.
10 R.S.C. 1927, c. 97, s. 5(1 )(a).
[1900] A.C. 588 (P.C.), at p. 592.
Kirk was concerned with a New South Wales statute
taxing "incomes derived from land of the Crown".
That quotation was cited with approval by the
Supreme Court of Canada in Minister of National
Revenue v. Hollinger North Shore Exploration Com
pany, Limited, 12 which held that rent received by a
mine owner from another operator of the mine was
"income derived from the operation of a mine"
within the contemplation of subsection 83(5).
In Gunnar Mining Limited v. Minister of National
Revenue, 13 the taxpayer had invested income derived
from the operation of its mine during the 36-month
period in short term securities and sought to have that
investment income exempted under subsection 83(5).
Spence J., for the Court, said:
What is exempt under the latter section [s. 83(5)] is "income
derived from the operation of a mine". The income from the
short term investments was not income derived from the oper
ation of the mine but was income derived from the investment
of the profits of the mine. This income from the short term
investments cannot be regarded as incidental income in the
operation of the mine any more than any other income gained
from use of the profits of the mine could be so considered.
Counsel of the appellant stressed the circumstance that in
the tax exempt period the corporation also showed as inciden
tal income rental which it received from the letting of certain
houses at the mine property and argued that the income from
the short term securities was just another form of income inci
dental to the mining operation. I do not think that the argument
can be accepted. Those houses were built by the company so
that its workers at the mine might reside therein. Certainly
their construction and letting, and the receipt of rental there
from, was incidental to the operation of the mine. To put it
perhaps colloquially, during the tax exempt period the appel
lant was operating two businesses—firstly, a mining business,
and secondly, an investment business, and the fact that its pur
pose in operating the second business was so that it might
accumulate funds in a readily realizable form with which it
could pay off the 5 per cent sinking fund debentures if they
became due makes it nonetheless the operation of a second
business.
In Falconbridge Nickel Mines Ltd. v. Minister of
National Revenue, 14 the issue was whether the
exemption of subsection 83(5) extended to income
12 [l963] S.C.R. 131, at pp. l34 ff.
13 [1968] S.C.R. 226, at pp. 232 ff.
14 [ 1972] F.C. 835 (C.A.).
from the sale, after the 36 months, of ore extracted
during the 36 months. The taxpayer argued that the
words "operation of a mine" meant no more than the
physical removal of ore from the ground. This Court
upheld the Minister's assessment which had
exempted from tax income from all sales of ore
within the 36 months, including ore produced before
the mine had come into "production", 15 and had
taxed income from sales of ore extracted during the
period but sold after its expiration. The members of
the panel were unanimous in the result but each gave
reasons for judgment. Sheppard D.J., held that the
words "during the period of 36 months" modified
"income derived" and not "operation of a mine". He
did not find it necessary to discuss the meaning of the
term "operation of a mine".
Sweet D.J., at pages 841-842 held:
The operation of the mine within the meaning of the rele
vant legislation can only mean the conducting of a viable,
practical undertaking for that purpose. For this it is necessarily,
and I would think obviously, required that there be an organi
zation, a business enterprise, so structured and set up that the
multiplicity of requirements to that end will be available. The
extracting of the ore, the conversion of it into metal and the
sale are parts, and important parts, but only parts, of those
requirements. For realistic achievement of the result to be
accomplished, and accomplished in a practical and effective
sense, they must be supported and accompanied by other activ
ities. It is the totality of that organization, of that enterprise and
the totality of the conduct of the business that is "the operation
of a mine" within the meaning of the legislation.
Jackett C.J., who expressed general agreement with
the reasons of both of his colleagues, said, at pages
836-837:
If, in section 83(5), "operation of mine" means the mere
physical extraction of the ore, in my view, the appellant should
succeed, provided, always, that it can ever be said that income
is derived from a mere physical operation of that kind consid
ered apart from a business of which it is a part.
The other view, and, in my view, the correct view, is that
when section 83(5) talks of income derived from operation of a
mine, it is referring to income derived from a business of oper
ating the mine, for, in relation to profit producing activity (as
15 "production" was, and is, defined as "production in reaso
nable commercial quantities."
opposed to property or employment) a business is the sort of
income source contemplated by the Income Tax Act. See, for
example, section 3 of the Act....
A mere physical act considered apart from the other steps nec
essary to bring income into existence is not a source of income
as contemplated by the Act. It follows that the mere physical
act of extracting ore from the mine, considered apart from the
business of which it forms a part, is a barren act that is not, in
itself, capable of being an income source. That physical act
cannot, therefore, be what is contemplated by section 83(5)
when it speaks of "operation of a mine" as something from
which income is derived.
Minister of National Revenue v. Bethlehem Copper
Corp.,' 6 it has been suggested, led Parliament to
enact ITAR subsection 28(1.1). The taxpayer had
brought an open pit mine into production along with
a mill to process the ore to concentrate and became
entitled to the 36-month period of exempt income
beginning December 1, 1962. In February, 1965, a
rock slide terminated operations at the open pit.
Shortly thereafter, a second open pit was brought into
production nearby. Its ore was processed at the
existing mill. The taxpayer claimed, and was denied
by the Minister, a second 36-month period of exempt
income. Jackett C.J., delivered judgment for the
Court.
The position that the appellant takes, as I understood coun
sel, is the "mine" in section 83(5) means an enterprise used to
extract ore "and produce copper concentrate". This is, in effect,
an integration of two business operations, namely, (a) extrac
tion of ore, and (b) milling of concentrates. In my view, the
authorities do not support such a wide ambit for the exemption
in section 83(5)... [Quotations from authorities, North Bay
Mica Co. v. M.N.R., [1958] S.C.R. 597, and M.N.R. v.
MacLean Mining Co., [1970] S.C.R. 877, omitted.] In my
view, "operation of a mine" in section 83(5) refers only to the
extraction of ore from an ore body and does not include
processing of the ore after it has been produced. (In either case,
of course, what is contemplated is not the mere physical act of
extraction of ore or of extraction of ore and processing of the
ore. What is contemplated is a profit-making process consist
ing of such physical acts and the disposition of the products for
a consideration by sale or otherwise.)
My conclusion is, therefore, that the appellant's submission
that the extraction of ore from the Jersey ore body is only part
of the operation of a mine consisting of the whole of the
extraction and processing activities carried on by the respon
dent must be rejected.
16 [1973] F.C. 565 (C.A.), at p. 568; [1975] 2 S.C.R. 790, at
pp. 795-797.
In the result, the assessment was referred back for
reassessment on the basis that [at page 5691:
... by virtue of section 83(5), there is not to be included, in
computing the respondent's income, that part of the respon
dent's income that was derived from the extraction of ore from
the Jersey ore body [new pit] during the period of 36 months
commencing with the day on which it came into production.
Martland J., delivering judgment for the Supreme
Court of Canada, recited extensively from the reasons
of Jackett C.J., and, as to that issue, expressly agreed
with his views. The other issue, irrelevant here, was
whether the open pit was simply an ore body and not
a mine. It was a mine.
The appellant's argument is predicated on two pro
positions which, in my view, are unexceptionable:
(a) the insurance proceeds were clearly income
since they replaced income lost in the course of
operating a business; and
(b) the income lost would have been exempt from
income tax because it would have been income
derived from the operation of a mine.
Furthermore, the authorities establish that "derived
from" is a term of wide import.
The ratio of the judgment below is found in the
following. t'
Here, in my view, we have a situation where the plaintiff is
suggesting something should be incorporated into the legisla
tion which is not there. The plaintiff suggests we can equate
"mining business" with the "operation of a mine", the actual
words used in the section permitting an exemption. In my
view, and I accept the definition of the defendant that opera
tion of a mine has three and three only components, if moneys
received are to fall within the exemption, operation of a mine,
they must, be received as a result of:
(a) extraction
(b) processing
(c) sales
This is made all the clearer by an examination of the French
text.
The learned Trial Judge did not enlarge on that final
observation.
17 At pp. 356-357.
The appellant says that the Trial Judge misunder
stood its argument. It did not seek to equate the
"operation of a mine" with "mining business" but
with the "business of operating a mine" and that the
"operation of a mine" is an economic concept. The
respondent did not meet that argument head on.
Rather, it says that the Trial Judge correctly under
stood the appellant's argument and that to equate
"mining business" with "the operation of a mine"
would be to exempt from tax more income than Par
liament has expressed its intention to exempt.
With respect, the authorities would appear clearly
to establish that the term "operation of a mine" is an
economic concept. In Bethlehem Copper, subsection
83(5) was found to contemplate "a profit-making pro
cess" vis-Ã -vis the extraction of ore from an ore body.
In Falconbridge Nickel, the majority clearly
approached "operation of a mine" as an economic
concept. Sweet D.J. said [at page 842]:
It is ... the totality of the conduct of the business that is "the
operation of a mine"....
while Jackett C.J. said [at pages 836 - 837]:
... when section 83(5) talks of income derived from operation
of a mine, it is referring to income derived from a business of
operating the mine....
A mere physical act considered apart from the other steps nec
essary to bring income into existence is not a source of income
as contemplated by the Act.
The same approach was taken in Gunnar Mining.
There the terms used by Spence J., to distinguish the
exempt from the non-exempt income were "mining
business" and "investment business". In context, he
clearly meant the business of operating the mine in
issue, when, as he said, "[t]o put it perhaps colloqui
ally ... a mining business". It is the operation of a
mine as an economic activity, not the physical acts
involved in extracting and processing, that generates
income.
The artificiality of the respondent's position is
made manifest by several passages in the examina
tion for discovery of the Crown's representative, of
which the following is a fair example.I 8 Mr. Bowman
and Mr. Lefebvre were, respectively, counsel for the
taxpayer and the Crown.
MR. BOWMAN: The Minister says this is income from a
business.
Q Is that right?
A Yes.
Q What is the business that the Minister says this is income
from?
A It's to fill holes.
Q The Minister thinks the taxpayer is in the business of
filling holes? The Plaintiff is in the business of making
holes.
MR. LEFEBVRE: We're arguing. I think we're arguing. We
explained the position. In the course of its business, the Plain
tiffs insure against the event, against the occurrence of certain
risks. Now those risks occur, there's a loss of revenue that
arises. The non-operation of the mine, of course, produces a
loss of revenue which is filled under the insurance policy. In
the absence of the insurance policy, there would have been no
income. That filled the hole.
The issue, therefore, is whether this is income derived from
the operation of a mine, or whether it's income derived from
the non-operation of a mine covered by the insurance policy.
The business interruption insurance contracts were
entered into in the course of the appellant's mining
business, not some other business, and for no purpose
other than to ensure the income from that business.
Among the insured activities carried on as part of that
mining business was the operation of the Balmer
Mine. The insurance proceeds were received as
indemnity for the loss of income that resulted from
the interruption of a processing operation, the income
from which, by definition, is included in the term
"income derived from the operation of a mine".
Extraction, in fact, continued. There is now no dis
pute that the proceeds were taxable because they
were income from a business. They were derived
from a business. If it was not the business of operat
ing the Balmer Mine, what business was it? No alter
native rationally suggests itself.
In my opinion, to the agreed extent of $1,328,000,
the proceeds of the business interruption insurance
18 at pp. 104, I. 29 ff.
were derived from the business of operating the
Balmer Mine and were derived from the operation of
that mine within the meaning of ITAR subsection
28(1). I would allow the appeal with costs here and in
the Trial Division and refer the appellant's 1975 and
1976 assessments back to the Minister of National
Revenue for reassessment on the basis set forth in
paragraph 9 of the statement of agreed facts.
Stone J.A.: I agree.
* * *
The following are the reasons for judgment ren
dered in English by
LINDEN IA. (dissenting): I regret that I am unable
to agree with my brother, Mahoney J.A.
Subsection 28(1) of the Income Tax Application
Rules, 1971 exempts from taxation "income derived
from the operation of a mine" [underlining added].
With all due respect to the reasoning of my col
league, I cannot agree that the exemption can be con
strued so broadly as to cover insurance proceeds
received because of the non-operation of a processing
plant at a mine, however much that income may be
connected or related to the business of mining. Par
liament has not exempted all income earned by min
ing companies, nor has it exempted all income
earned in the business of mining. It is only income
derived from the operation of a mine that is exempt.
The difference between the definition of the busi
ness of mining and the more narrow definition of the
operation of a mine, which that business necessarily
includes, was explained by Mr. Justice Spence in
Gunnar Mining Limited v. Minister of National Reve
nue, [1968] S.C.R. 226, at page 232:
What is exempt under the latter section [s. 83(5)] is "income
derived from the operation of a mine". The income from the
short term investments was not income derived from the oper
ation of the mine but was income derived from the investment
of the profits of the mine. This income from the short term
investments cannot be regarded as incidental income in the
operation of the mine any more than any other income gained
from use of the profits of the mine could be so considered.
According to Mr. Justice Spence, therefore, not all of
the income earned by a mining business is exempt
under the section. Only income earned in the course
of operating a mine is exempt, and not other secon
dary or subsidiary income derived from other activi
ties, investments or agreements of a mining com
pany. Mr. Justice Spence found that, whereas the
income derived from the renting of houses to miners
was exempted, as it was income derived from the
operation of a mine, the income derived from short-
term investments was not. Obviously, each form of
income earned by a mining business must be
examined on a case-by-case basis to determine
whether it falls within the exemption or not.
In a similar type of case, Cominco Ltd y The
Queen, [19841 CTC 548 (F.C.T.D.), Madam Justice
Reed considered whether insurance proceeds
received to compensate for lost income could be con
sidered as production profits from a mining process
ing operation, and thus be deductible under the
Income Tax Act. As in the instant case, it was clear
that, had the taxpayer actually earned the income for
which the insurance proceeds were replacements, it
would have been deducted. However, it was held that
the insurance proceeds had come into existence as a
result of non-production by the taxpayer, and there
fore it did not fit within literal requirements of the
Regulations nor did it accord with the purposes for
which the allowances were provided. Hence, the tax
payer was not allowed the benefit of the deduction
with regard to the insurance proceeds, despite the fact
that, had the income from the activity been actually
earned, it would have been deductible under the sec
tion in question.
Insurance proceeds are often treated, for tax pur
poses, in the same manner as the lost revenue or
property which they replace. However, we must
remember that the cases are normally considering
whether to bring insurance proceeds into income.
The issue before this Court is not whether the insur
ance proceeds are income, but whether they are to be
exempted. In order to determine whether the exemp
tion has application in this instance, we must be satis
fied that the taxpayer's activities come within the
wording of the section.
The purpose of subsection 28(1) of the Income Tax
Application Rules, 1971, is clearly to encourage the
mining industry in Canada, but its aim is not the
encouragement of the mining business in general. Its
goal is the more limited one of providing an incentive
to the operation of mines, that is, particular activities
of the mining business which are thought to benefit
our society most. In other words, the digging,
processing and selling of certain mining resources,
which activities are normally thought to be part of the
operations of a mine, are considered to he especially
useful in fostering employment, trade and other eco
nomic activity and, hence, of particular value to our
economic well-being and deserving of special treat
ment. During the period in which the processing
plant was closed, that aspect of the work of the mine
which is felt to be especially worthwhile was neither
being engaged in nor being promoted, and to permit a
tax incentive here would not advance the specific
purpose of the legislation. There is nothing in the sec
tion which suggests that Parliament intended to
reward inactivity. Had Parliament meant to exempt
all income from every aspect of the business of min
ing, it could easily have done so. As it did not, we
must assume that the phrase "operation of a mine"
was meant to be given a more restricted meaning. To
grant the benefit of this section to income from insur
ance proceeds payable because of the non-operation
of an aspect of a mine, as proposed by Mahoney J.A.,
is, in my respectful view, not in harmony with the
legislative language nor with the intention of Parlia
ment.
For these reasons, I would have dismissed the
appeal.
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.