Johns-Manville Canada v. The Queen, [1985] 2 S.C.R. 46

Johns‑Manville Canada Inc. Appellant;

and

Her Majesty The Queen Respondent.

File No.: 16940.

1984: May 15, 16; 1985: July 31.

Present: Dickson C.J. and Ritchie, Beetz, Estey, McIntyre, Chouinard and Wilson JJ.

*Ritchie J. took no part in the judgment.

on appeal from the federal court of appeal

Income tax ‑‑ Income/capital distinction ‑‑ Open pit mining operation ‑‑ Land acquired for rimming ‑‑ Land not overlaying ore body ‑‑ Whether acquisition cost a capital expense or deductible as revenue expense ‑‑ Income Tax Act, R.S.C. 1952, c. 148, ss. 4, 11(1)(a), 12(1)(a), (b) ‑‑ Income Tax Regulations, s. 1100(1).

Appellant, in the course of operating its open pit mine, was forced to buy peripheral land in order to continue the necessary wall slope and angle of repose of the overburden. The land did not overlay any of the ore body and would gradually disappear as the mine deepened and the mouth of the mine became wider. At issue was whether or not appellant had the right to charge the purchase cost of this land to expense rather than to capital.

Held: The appeal should be allowed.

These expenditures should be allocated to the revenue account and not to capital. Common sense dictated that these expenditures, made in the course of the taxpayer's regular day‑to‑day business operations, were necessary to avoid a shut down of the taxpayer's operations. These expenditures were not part of a plan for assembling assets and had no semblance of a once and for all acquisition. Since the expenditures were not connected with assembling an ore body or a mining property that itself could be developed independently of any ore body, there was no entitlement to depletion or capital cost allowance. These expenditures, however, were not disqualified by s. 12(1)(a). That section favoured the inclusion of these expenditures in authorized expenses because there is no other provision made in the Act for these items which were incurred of necessity according to good business and engineering practice.

Cases cited

Denison Mines Ltd. v. Minister of National Revenue, 1974 212 (SCC), [1976] 1 S.C.R. 245; B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224, considered; Knight v. Calder Grove Estates (1954), 35 T.C. 447; British Salmson Aero Engines, Ltd. v. Commissioner of Inland Revenue (1937), 22 T.C 29; Minister of National Revenue v. Algoma Central Railway, 1968 116 (SCC), [1968] S.C.R. 447; Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634; Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337; Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948; Mitchell v. B.W. Noble, Ltd., [1927] 1 K.B. 719; British Insulated and Helsby Cables, Ltd. v. Atherton, [1926] A.C. 205; Vallambrosa Rubber Co. v. Farmer, [1910] S.C. 519; Ounsworth v. Vickers, Ltd., [1915] 3 K.B. 267; Regent Oil Co. v. Strick, [1966] A.C. 295; Golden Horse Shoe (New), Ltd. v. Thurgood, [1934] 1 K.B. 548; Kennecott Copper Corp. v. United States, 347 F.2d 275 (1965); Welch v. Helvering, 290 U.S. 111 (1933); Commissioner of Internal Revenue v. Lincoln Savings & Loan Assn., 403 U.S. 345 (1971); Tucker v. Granada Motorway Services Ltd., [1979] 2 All E.R. 801, referred to.

Statutes and Regulations Cited

Income Tax Act, R.S.C. 1952, c. 148, ss. 4, 11(1)(a), 12(1)(a), (b).

Income Tax Regulations, s. 1100(1).

Authors Cited

Bittker, Boris I. Federal Taxation of Income, Estates and Gifts, vol. 1, Boston, Warren, Gorham & Lamont, 1981.

Mertens Law of Fed Income Tax §25.20 (1979 Rev., vol. 4A), Wilmette, Illinois, Callaghan & Co.

Pinson, Barry. Pinson on Revenue Law, 15 ed., London, Sweet & Maxwell, 1982.

Tiley, John. Revenue Law, London, Butterworths, 1981.

APPEAL from a judgment of the Federal Court of Appeal, 1981 4981 (FCA), [1982] CTC 56, 82 DTC 6054, allowing an appeal from a judgment of Gibson J. Appeal allowed.

Donald G. H. Bowman, Q.C., and William I. Innes, for the appellant.

Alban Garon, Q.C., and Roger Roy, for the respondent.

The judgment of the Court was delivered by

1. Estey J.‑‑The question on appeal is whether the taxpayer‑appellant has the right under the Income Tax Act of Canada to charge to expense, rather than to capital, the cost of purchase of land at the periphery of an open pit mine, in the course of its mining operations. The issue concerns the taxation years ending in 1969 (two fiscal periods) and 1970. The pre‑1972 Income Tax Act applies.

2. There is no problem of credibility, the facts are few and are largely agreed upon by the parties in their pleadings. The following are the relevant extracts from the statements of claim and defence on which there is no disagreement.

Statement of Claim

3. The Plaintiff [appellant] is in the business of mining and processing asbestos ore from an open pit mine located within the municipal limits of the town of Asbestos, Quebec and of selling asbestos produced thereby. The mine has been in operation since 1881.

4. The open pit from which the ore is mined measures approximately 5700 feet at major axis, 3500 feet at minor axis and 950 feet in depth. The ore body is cylindrical with east and west bulges in shape and plunges to the southwest, away from the Town, at an angle of approximately 55d<s. It measures approximately 2000 feet in diameter.

5. In order to achieve both safe and economic mining of the ore it is, at all times and for each segment of the wall of the pit, necessary to determine the wall slope and the angle of repose of the overburden.

6. No part of the ore body is located subjacent to the properties purchased by the Plaintiff during its 1969 and 1970 taxation years, so that the Plaintiff did not by acquiring the said properties add to or augment the reserves available to it from which ore could be extracted.

Statement of Defence

3. He [the Deputy‑Attorney General of Canada on behalf of Her Majesty] admits that in the course of carrying on its mining operations the level of the ore body was lowered and that it became necessary for the Plaintiff to push back year by year the walls of the pit in order to maintain an appropriate wall angle and that for the purpose of doing so properties were acquired carrying with them pursuant to Article 414 of the Civil Code the ownership of what was above and what was below and that pursuant to the rights given to the Plaintiff by Article 414 of the Civil Code as the proprietor of lands acquired, the Plaintiff made excavations thereon and drew away therefrom such materials as were necessary for the exploitation of the existing mine ....

4. The learned trial judge found that in the years in question the land purchases amounted to $2,758,670, a figure slightly higher than that pleaded in the statement of defence, but no issue was taken with this finding by the respondent before this Court. The law of gravity being what it is, the hole dug in the ground in order to remove the ore must be conically shaped and must expand outwards but on the same slope as the hole is deepened by the removal of ore. Hence the required enlargement of the diameter of the hole at the top of the mining pit necessitates the purchase of land at the periphery of the pit and the removal therefrom of the soil and rock to a substantial depth. The evidence was that for almost forty years mining operations have required a progressive acquisition of land so as to maintain the walls of the conically‑shaped mining pit at a safe angle. As the pit deepens in the course of mine operations its mouth at the surface must widen in order to maintain a safe angle of slope. Consequently, additional land was regularly acquired and any buildings thereon were removed. The soil was then stripped away so that the wall of the pit was pushed back or outwards from its prior location. In the conventional sense of "land", all that remains of the acquired area is a part of a sloped wall, well below the original surface, between the top of the mine and the exposed ore body at the bottom of the pit. As additional land was acquired, the sloping wall was pushed further outward and consequently the actual location of the surface of each acquisition moves down the wall although the sloped angle of its surface remains generally constant. Any roadways located on the "steps" cut into the face of the wall likewise disappear on each enlargement of the pit and are re‑established on the new sloping wall after the surface of the additional lands has been stripped off. All these changes proceed as the removal of the ore body progresses.

5. The mining operations are extensive. During the relevant time period, production was 33,000 tons of ore and 60,000‑65,000 tons of overburden and waste materials daily. Thus about 100,000 tons of material were removed from the base of the pit in these mining operations every day. In order to show the hazards against which the program of land acquisition was carried out as a safeguard, events in the periods immediately succeeding the taxation years in question were the subject of both pleadings and evidence:

Statement of Claim

9. In January 1971, at a time when the Plaintiff [appellant] was seeking means to prevent the collapse of the easterly wall, there occurred a serious landslide stimulated by a large inflow of water under the easterly slope which came about when the ground pressure caused a water and sewer main to break. The slide damaged seven commercial buildings and resulted in the evacuation and relocation of a substantial number of families.

10. In 1974 it became increasingly evident that some movement of overburden on the easterly slope was again taking place and after consultation with its advisers on this question the Plaintiff decided upon a buffer zone of 150 feet as a safety measure. This decision resulted in an accelerated schedule of property purchases and related relocations which continued into 1975. In spite of these precautions, in January of 1975 a serious slide occurred on the east side of the pit with the result that some 3,000,000 tons of material was suddenly dislodged and together with four residences dropped into the pit, fortunately without loss of life.

The learned trial judge discussing this program said:

According to the evidence, it is the eastern wall which is adjacent to the town which is subject to instability. It is in this area that land was acquired for the purpose of using it for slope stability so that the operation of the mine could continue.

He also found:

No part of the ore body is located subadjacent [sic] to the properties purchased for this purpose during the 1969 and 1970 taxation years. In other words, the properties did not add or augment the reserves of the mine from which ore could be extracted but it did permit Johns‑Manville to extract the ore that was in the mine and sell it.

5. The learned trial judge concluded that these land expenditures were not in the nature of capital outlays but rather were expenses incurred in the mining operations and should be taken into account in the computation of net income in connection therewith. In the course of so determining, the learned justice stated: "The evidence also discloses that the acquisition of property at the periphery of its mining pit has been a constant part of the mining operations of Johns‑Manville and purchases of land have occurred annually for almost 40 years. The acquisition cost of the purchases of such lands represent only ..." about 3 per cent of the average of the cost of sales of the appellant during the eight‑year period from 1966 to 1973 inclusive. He continued:

The subject expenditures did not add to or preserve the ore body. Instead, the lands purchased by these expenditures were in essence consumed for all practical purposes in the course of and as part of the mining operations of Johns‑Manville and as a consequence were expenditures "incidental to the production and sale of the output of the mine" (cf Denison Mines Limited v. M.N.R. [1974 212 (SCC), [1976] 1 S.C.R. 245]) and were part of the cost in the determination of profits.

His Lordship concluded:

Therefore, after considering the whole of the evidence, and as stated, looking at the character or quality of the expenditures based upon business or commercial practice rather than the character of the asset acquired by the expenditures, the conclusion is that the subject expenditures in the taxation years 1969 and 1970 were not on capital account within the meaning of section 12(1)(b) of the Income Tax Act.

The Court of Appeal, Ryan J. writing on behalf of the court, reversed the trial court and concluded that these expenditures were of a capital nature and could not be charged as an expense in the computation of profit from the appellant's mining operations. In the course of his judgment, His Lordship acknowledged:

It is no doubt true that the overburden, soil and rock removed in the course of blending the lots with the pit have little or no commercial value. It may also be true that, on completion of the mining of the ore, the site of the asbestos deposit and the pit may be a valueless wasteland‑‑a real possibility.

Later in the judgment it was stated: "It may even be, as he [the trial judge] concluded, that the lots in question are in a way consumed." Indeed the Court of Appeal stated: "...I accept the Trial judge's basic findings of fact."

6. However, in reaching the conclusion that these expenditures were capital in nature, it was stated:

As I see it, the lots were bought because they were adjacent to the pit and thus could be used to extend its slope, an extension that resulted in the lots becoming part of the pit. The lots, as part of the pit, serve as land on which the operation is in part carried on; for example, roads (the location of which may shift as the wall extends), spiralling up the side of the pit, are used to carry ore out of the pit.

And further, it was stated that the expenditures were:

... for purchases of lots of land which were incorporated in the operating structure of the enterprise ... [This] dominates the consideration that the lots are purchased annually in anticipation of the lowering of the level of the ore deposit. And it dominates the consideration that the lots may only remain as portions of a virtual wasteland when the mine ceases to operate.

7. The Court of Appeal, in the course of its judgment, distinguished the judgment of this Court in Denison Mines Ltd. v. Minister of National Revenue, 1974 212 (SCC), [1976] 1 S.C.R. 245. In that case this Court found that the creation of corridors and haulage ways in a mine in the course of removing the ore body entailed expenditures which were not capital in nature but were expenses to be deducted from the sale of ore once removed. The Court found that on ordinary commercial principles the cost of removing the ore was deductible in the computing of the annual profit or loss of the mining operation. The passageways, haulage ways and corridors were really created or resulted as a by‑product of the mining operation. The court below distinguished this case because there the taxpayer was required to expense the expenditures which were made in the very extraction of the ore.

8. The fact that the expenditures here involved were made for the purchase of land is perhaps an important if not vital part of the reasoning which led the court below to its conclusion that they were capital expenditures. After concluding, as the quotations above reveal, that the dominant consideration was that the lots were purchased for incorporation into the operating structure of the enterprise, the court found support for that conclusion in Knight v. Calder Grove Estates (1954), 35 T.C. 447. That case concerned open pit mining, as does this appeal, and there the taxpayer, already possessing mineral rights, purchased the surface rights in lands lying above the mineral deposit. It was not possible to gain access to the minerals without passing through the acquired lands and of course, had a single owner owned both the fee and the minerals, there would have been but one purchase. It is not surprising therefore that Lord Upjohn, at p. 453, concluded on those facts that "[i]t is a purchase of land for the adventure...." The acquisition of the surface and minerals were both essential and known to be essential at the outset of the mining venture, in order to open the mine.

9. It is interesting to note that the respondent, the Minister of National Revenue, in the Denison case, supra, took the opposite position from that which the Crown takes in this appeal. In Denison the Minister asserted that the expenditures were in the nature of current expenses and not capital outlays in contrast to the position here that the mining operation expenditures are capital in nature and not in the nature of expense outlays for the removal of ore. Presumably, although the court below does not so state, the expenditures in question here do not qualify because they are incurred, in a sense, as a preparatory measure to the actual removal of ore. This is a distinction perhaps too fine to be made in the determination of tax liability. If this were to be a consideration or a test, then in the Denison circumstances, should the operations momentarily pass through non‑ore‑bearing rock, the expenditures would become capital but would resume their current expense nature when the tunnelling once again encountered ore‑bearing rock. This explanation of the Denison judgment would seem to be at variance with a statement in the court below later in its judgment:

The lots, on being absorbed, become part of a combined structure consisting of the ore body and the sloping pit without which the enterprise could not be carried on because, otherwise, there would be danger of slides.

In Denison, the operation of the mine could not be carried on without the creation and preservation of the haulage ways which resulted from the removal of ore‑bearing rock. In each case, Denison and here, the taxpayer's expenditures resulted in the creation of a facility which had some relationship, according to the court below, to the removal of ore thereafter. In the one case, the Minister assigns to the expenditure the character of expense and to the other the character of capital. This Court in Denison concluded that the former was the characterization appropriate in the law on the facts. Whether the same conclusion must be reached on the facts of this case must now be discussed.

10. The simple question which must here be decided, therefore, is this: can the taxpayer, when purchasing the additional surface area needed for the enlargement of the cone, charge the purchase price of the land as a production expense or must the taxpayer capitalize the land cost? The taxpayer's expense incurred in removing the overburden from these lands is not in issue. It should be noted that at one stage the Minister allowed a depletion allowance for part of the lands so acquired. This was acknowledged by both parties to be a conciliatory gesture rather than a supportable interpretation of the Income Tax Act depletion allowance provisions. These lands were not ore bearing and were not part of the surface overlaying the mineral deposit. The classification of these expenditures as capital would leave the taxpayer, of course, without any deductions from income in respect thereto. This of course is not decisive but may be of relevance in assessing the interaction of the "expense" and "capital" provisions in the overall pattern of the statute.

11. This proceeding concerns only s. 12(1) of the Income Tax Act, R.S.C. 1952, c. 148, which provided as follows:

12. (1) In computing income, no deduction shall be made in respect of

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

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

12. Section 4 of the Act may also be of some relevance:

13. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.

14. When one turns to the appropriate principles of law to apply to the determination of the classification of an expenditure as being either expense or capital, an unnerving starting place is the comment of the Master of the Rolls, Sir Wilfred Greene, in British Salmson Aero Engines, Ltd. v. Commissioner of Inland Revenue (1937), 22 T.C. 29, at p. 43:

... there have been ... many cases where this matter of capital or income has been debated. There have been many cases which fall upon the borderline: indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons....

This Court encountered s. 12(1)(b) in Minister of National Revenue v. Algoma Central Railway, 1968 116 (SCC), [1968] S.C.R. 447. Fauteux J., as he then was, at p. 449, stated:

Parliament did not define the expressions "outlay . . . of capital" or "payment on account of capital". There being no statutory criterion, the application or non‑application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination....

The Court thereupon expressed agreement with the decision of the Privy Council in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224. The Privy Council there determined that a payment made by the taxpayer as an inducement to a service station operator to sign an exclusive agency contract was an income expenditure and not a capital outlay. The contract had a life of five years and thus was an asset of sorts which amounted to an opportunity by the taxpayer to market its gasoline exclusively through the operator's outlet. Nonetheless Lord Pearce concluded, at p. 260:

B.P.'s ultimate object was to sell petrol and to maintain or increase its turnover. There can be no doubt that the only ultimate reason for any lump payment was to maintain or increase gallonage.

Here the taxpayer made the expenditure not in order to acquire a piece of land so that it could strip non‑ore‑bearing rock from it but in order to derive income from the taxpayer's existing ore body which was not located underneath the land in question. After reviewing a number of different approaches to the problem of classifying in law and accounting the nature of the expenditure, Lord Pearce stated, at pp. 264‑65:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

"depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process":

per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634, 648.

(Emphasis added.)

14. The Privy Council applied another test in the course of characterizing the expenditures in B.P. Australia Ltd., supra, at p. 271:

Finally, were these sums expended on the structure within which the profits were to be earned or were they part of the money‑earning process?

This question is remarkably apt on the circumstances in the appeal now before this Court. The Privy Council's answer was that the expenditure was not to be taken as being on the structure but rather as part of the money earning process. At page 273, Lord Pearce, in considering the manner in which the benefit procured by the expenditure was to be used, stated that such benefit was to be used "in the continuous and recurrent struggle to get orders and sell petrol". In my view, the same result is reached on the circumstances existing in this appeal. The removal of the ore here was obviously the continuous and recurrent struggle in which the taxpayer was principally engaged, and the expenditure here was, as revealed by its uniform history over the years and by its role in the process of the recovery of ore, part of the essential profit‑seeking operation of the taxpayer.

15. In the Hallstroms case, [Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634], Dixon J., as he then was, in discussing the difference between capital and income expenditures, stated, at p. 647, that the difference lay:

...between the acquisition of the means of production and the use of them; between establishing or extending a business organisation and carrying on the business; between the implements employed in work and the regular performance of the work...; between an enterprise itself and the sustained effort of those engaged in it.

16. Other tests have been adopted in other tax systems. Also in Australia, in the High Court decision in Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337, the court, speaking through Dixon J. enunciated three principles to be applied in determining the character of an expenditure by a taxpayer for the purposes of applying the taxation statute. He stated, at p. 363:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

On the preceding page, His Lordship, in explaining the test from another aspect, said:

... the expenditure is to be considered of a revenue nature if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.

The Court on that occasion was concerned with the character to be ascribed to a payment made by one competitor to another to secure a discontinuance of a new and threatening adventure. The Court concluded the payment was capital in nature and should not be charged to revenue.

17. There is almost an endless rainbow of expressions used to differentiate between expenditures in the nature of charges against revenue and expenditures which are capital. It has been said that the terminology employed is merely an attempt to identify particular factors which may tilt the scale in a particular case in favour of one or the other conclusions. At one time it was considered helpful to identify the funds expended as either "circulating capital" or "fixed capital". The vocabulary has changed but the same problem of classification survives.

18. Another example of these helpful but not controlling tests, and of the changing taxation law vocabulary, is found in the decision of the Privy Council in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948, where Viscount Radcliffe stated, at p. 959:

Nevertheless, it has to be remembered that all these phrases, as, for instance, "enduring benefit" or "capital structure" are essentially descriptive rather than definitive, and, as each new case arises for adjudication and it is sought to reason by analogy from its facts to those of one previously decided, a court's primary duty is to inquire how far a description that was both relevant and significant in one set of circumstances is either significant or relevant in those which are presently before it.

The judicial committee added, at p. 960, that when defining what was a capital structure established for "enduring" benefit, "enduring" did not necessarily mean permanent, nor did it mean perpetual.

19. Analogies in this field are infinite. One which comes to mind is the lump sum payment to an employee in order to terminate an employment contract or rights on dismissal. This was determined many years ago to be a payment in the nature of a charge against revenue rather than capital. In Mitchell v. B. W. Noble, Ltd., [1927] 1 K.B. 719, Lord Hanworth M.R., at p. 737, stated that the payment was made "not in order to secure an actual asset to the company but to enable the company to continue to carry on, as it had done in the past...." The findings in both courts below in the case at bar are that no intention to acquire a lasting asset is present and indeed no lasting asset was acquired. Both courts, in slightly different terminology, found the land to have been consumed in the mining process. If this analogy is apt, the "expense" classification is to be preferred in the circumstances here.

20. At one time, the test applied by the courts in discriminating as between revenue and capital was the "once and for all" test. This test was adopted by Viscount Cave L.C. in British Insulated and Helsby Cables, Ltd. v. Atherton, [1926] A. C. 205, at p. 213. Viscount Cave observed that the finding of revenue or capital was a question of fact, but then concerned himself with the answer to the question because of an imprecise finding below. The test he adopted at p. 213 was "to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year", although he recognized that this test was not "to be, a decisive one in every case". Later on at pp. 213‑14 the Lord Chancellor elaborated:

...where 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 a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

In this the Court relied upon the earlier decision of Vallambrosa Rubber Co. v. Farmer, [1910] S.C. 519, at p. 525. A few years later in Ounsworth v. Vickers, Ltd., [1915] 3 K.B. 267, at p. 273, Rowlatt J. interpreted this test as not requiring that expenditures be made on an annual basis in order to qualify them as a deduction from revenue but rather that the expenditures be "made to meet a continuous demand".

21. This discussion of authorities takes one full circle to the words of Lord Reid in Regent Oil Co. v. Strick, [1966] A.C. 295, at p. 313:

So it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in the light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on strict application of any single legal principle.

(Emphasis added.)

22. It is of little help, in my respectful opinion, to attempt to classify the character of the expenditure according to the subject of that expenditure. Here it was land, and expenditure for land may be classified in good accounting and in good law as capital or, in different circumstances, as an expenditure chargeable against revenue in the computation of profit. In the words of Romer L. J.:

It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed.

Golden Horse Shoe (New), Ltd. v. Thurgood, [1934] 1 K.B. 548 (C.A.), at p. 563.

The interest in the land there involved was large piles of tailings, and the courts found the purchase of that interest was a cost in the nature of expense and not capital.

23. Textwriters have made heroic attempts to reconcile the fluctuating tests and standards applied by the courts in determining this question. Repeatedly it is said, except for the one authority already noted, British Insulated and Helsby Cables, supra, that the question is one of law. No doubt in the predominant sense that is true. However, the underlying facts upon which the question of law is determined are so interwoven with the principles of law that it is difficult to say that it is not at least a mixed question of law and fact. Having explored the earlier cases under "the once and for all" and "the common sense" rules, one textwriter concluded:

The courts seem now to have accepted an "identifiable asset test," making the obtaining of or the enrichment of some capital asset as the key factor in capital expenditure. The test is: can a capital asset be identified for which the payment was made?

Pinson on Revenue Law (15th ed. 1982), at p. 50.

Other textwriters tend to cast their eyes further back into the earlier cases where the terminology employed was "fixed capital" on the one hand or "circulating capital" on the other, so that an expenditure with the former in mind was a capital expenditure while an expenditure from the latter source was not. The definitions in those cases were, of course, critical to the sense of the court's reasoning. Fixed capital was taken to be that which is in the form or shape of assets, either tangible or intangible, but identifiable as such, and which either produces income directly or can be employed to earn or produce income, for example, a machine. On the other hand, circulating capital was said to be that form or part of the wealth of a taxpayer which is intended to be used, in the sense of being temporarily expended, dedicated or disposed of by circulation in the business undertaking, and which comes back to headquarters bringing a profit. Such is the case with inventory in a sales enterprise. The learned author of Revenue Law, Butterworths, 1981, John Tiley, at p. 226, declined to bring the older vocabulary of circulating and fixed capital into the test and he likewise declined to modernize the "once and for all test", supra. The latter he rejected because all expenditures which have "an enduring effect" are not of a capital nature, as we have already seen in the employment case, supra. He then goes on to criticize the asset test, particularly where "the asset is not discernible as part of the assets of the business..." (p. 226); and concludes, on the same page, with reference to adhering too closely to the use of the acquired asset to determine the nature of the expenditure, that "the danger is that it [the asset test] will be applied, as have its predecessors, without regard to the variety of facts or, again like its predecessors, without regard to the disclaimer of universality uttered by its formulators".

24. The federal taxation scene in the United States does not appear to offer much assistance in the solution of this problem. The relevant provision in the Internal Revenue Code, § 162(a) provides in part as follows:

§162....

(a)...There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business....

(Emphasis added.)

25. In determining what is "ordinary and necessary", the American courts take an approach similar to the "common sense rule" discussed supra. In Kennecott Copper Corp. v. United States, 347 F.2d 275 (1965) (Ct. Cls.), the Court stated at p. 304:

...the terms `ordinary and necessary' as used in the statute are not to be given a narrow, restricted, dictionary‑type meaning, but are to be applied in each case in the context of the taxpayer's business and the circumstances occasioning the expenditure.

(See also: Welch v. Helvering, 290 U.S. 111 (1933), per Cardozo J., at pp. 113‑15.) However, it has been said:

Viewed as a prohibition against deductions for capital expenditures, however, the phrase "ordinary and necessary" is a handkerchief thrown over something that is already covered by a blanket. This is because IRC §263(a), denying any deduction for amounts paid for the acquisition, improvement, or betterment of property, explicitly embodies "the basic principle that a capital expenditure may not be deducted from current income" and takes precedence over IRC §162.

Boris I. Bittker. Federal Taxation of Income, Estates and Gifts, (Boston 1981), vol. 1, p. 20‑43.

The learned author, after discussing a rule which appears to be the counterpart of our distinct asset rule, supra, states, at p. 20‑66:

There are, however, many other situations in which the usual criteria of a capital expenditure are either over‑inclusive or under‑inclusive. The "separate and distinct additional asset" and "useful life beyond the current year" criteria, if applied rigorously, would classify numerous purchases of minor items as capital expenditures....

The Internal Revenue Code is, of course, a much more finely articulated instrument of legislation than are the taxation statutes in the United Kingdom and Canada which include fewer provisions more generally expressed. Congress has sought to deal explicitly with individual sectors of commerce and industry, and as a result the Code contains approximately 2000 sections, in addition to numerous regulations. Accordingly, we find comments in the United States tax literature about the disqualification of expenditures from revenue deductions where the result of the expenditure is the acquisition of property rights, as such expenditures may be recovered through complicated statutorily‑created depletion allowance provisions. Additionally, there is a special provision in the IRC (§616(a)) which enables a mining operator to deduct expenditures "resulting directly from such physical mining processes or activities as the driving of shafts, tunnels, galleries and similar operations undertaken to make the ore or mineral in place accessible for production operations". The IRC additionally includes detailed provisions for the deduction of development expenditures in mining generally (introduced by s. 309(a) and (d) in the 1951 Act). Apart from the mining provisions in and regulations under the United States legislation, the test adopted generally in the answer of the question of capital versus income expenditures is found, by the United States Supreme Court in Commissioner of Internal Revenue v. Lincoln Savings & Loan Assn., 403 U.S. 345 (1971), at p. 354, to lie in a general test which is prefaced by the observation that "...the presence of an ensuing benefit that may have some future aspect is not controlling". The Court goes on to state: "What is important and controlling...is that the...payment serves to create or enhance...what is essentially a separate and distinct additional asset...." In discussing this decision one learned author concludes:

Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. This issue is a factual one.

See Mertens Law of Fed Income Tax §25.20 (1979 Rev., vol. 4A, c. 25, p. 112).

26. After this review of the authorities it can be seen that the principles enunciated by the courts and the elucidation on the application of those principles is of very little guidance when it becomes necessary, as it is here, to apply those principles to a precise set of somewhat unusual facts.

27. The question remains for answer, therefore, what is the proper application of the relevant provisions of the Income Tax Act to the facts of this case? Section 12(1)(a) of the Act provides (which is repeated here for convenience):

28. (1) In computing income, no deduction shall be made in respect of

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

It is clear that the expenditures by this taxpayer were made "for the purpose of gaining or producing income from property". However, the income did not come from the property acquired by the expenditures here in issue. The income of the taxpayer came from the business of mining. In order to better assess the qualification of these expenditures for deduction under the provisions of the Act, it is necessary to consider the wording in s. 12(1)(b), in conjunction with s. 12(1)(a), which for convenience I repeat here:

12. (1) In computing income, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part,

The allowance for depreciation or depletion stems from s. 11(1)(a) of the Act which authorizes the deduction of "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". Regulation 1100(1) creates a series of capital cost allowances and Schedule B sets forth the classes of property to which these rates of allowances may be applied. The property here in question is not to be found in Schedule B and hence no capital cost allowance can be taken under s. 11 with reference to the cost of these land acquisitions. Furthermore, subject to any concession made by the Minister, no depletion allowance is available on these lands as they are not used for mining purposes. Consequently, the taxpayer is in the position of either being permitted by s. 12(1)(a) to deduct these expenditures as expenses "for the purpose of gaining or producing income", or being left with no tax relief of any kind with respect to these ongoing expenditures. It should be noted that inasmuch as there was no classification in the Act for capital cost allowance for property of the type here in question, there can be no question of a terminal loss on this property on the winding up of the taxpayer's mining undertaking. If the outlay for these lands is found in law to be chargeable against income as a deductible expense, then it follows logically that the taxpayer would be required to take into income, on the winding up of operations, the proceeds, if any, received on the sale of these lands. On the other hand, if the property were to be treated as an undepreciable capital asset, then, on wind‑up and disposition of all the properties and assets of the appellant, the question would arise as to whether the taxpayer had realized a capital gain or a capital loss depending upon the relationship between the proceeds on disposition and the cost of acquisition. A capital loss would, if the Act be as it is today, only be deductible by the appellant from realized capital gains. The capital gain would be taxable at half the rate applicable to the proceeds on disposition were they taken into income, again assuming the Act continues in its present form. This reasoning, of course, does not conclusively lead to any result, either for or against either of the contending parties. On the other hand, if the interpretation of a taxation statute is unclear, and one reasonable interpretation leads to a deduction to the credit of a taxpayer and the other leaves the taxpayer with no relief from clearly bona fide expenditures in the course of his business activities, the general rules of interpretation of taxing statutes would direct the tribunal to the former interpretation. That is the situation here, in my view of these statutory provisions. These expenditures were clearly made for bona fide purposes. They clearly are not disqualified by s. 12(1)(a) nor by any other section of the Income Tax Act dealing with expenditures in the course of operating a business. The only possible basis in the statute for a denial of these bona fide expenditures closely associated with the conduct of the taxpayer's mining operations is the prohibition in s. 12(1)(b) relating to capital expenditures. I turn back, therefore, to the comments of Viscount Cave in B.P. Australia Ltd., supra, at p. 271, where he stated:

If, therefore, one must allocate these payments either wholly to one year's revenue or to capital it would seem that either course presents difficulties but that an allocation to revenue is slightly preferable.

28. In this situation, and in analyzing those facts, it may be helpful to observe:

29. The purpose of these expenditures, when viewed from the practical and business outlook, was the removal of a current obstacle in the operation of the taxpayer's mine and was not the acquisition of a capital asset;

30. These expenditures were incurred year in and year out as an integral part of the day‑to‑day operations of the undertaking of the taxpayer;

31. These expenditures form an easily discernible, more or less constant, element and part of the daily and annual cost of production;

32. These lands were not acquired for any intrinsic value but merely by reason of location, and after the mining operation for the year in question had been completed, the land had acquired no intrinsic value, and indeed, as was found below, was "consumed" in the mining process;

33. These expenditures produced a transitional benefit and one which had no enduring value because similar expenditures were required in the future if the mining operation was to be continued at all;

34. The lands acquired in any given year do not produce a permanent wall or perimeter to the mining operation but are simply a transitional location of the wall representing the cone surrounding the mining undertaking; and to the extent that the wall of the cone is used for haulage of materials from the bottom of the pit on temporary roads, there may be some transitional asset created, but this asset disappears as the wall of the cone recedes in ensuing taxation years;

35. The natural of these expenditures is made clear when it is appreciated that they have been incurred annually for almost forty years and there is no evidence whatever to indicate that mining operations can continue in the future without this annual expenditure;

36. The capitalization of these expenditures will not produce for the mining operator an asset which may be made subject to either capital cost or depletion allowances, the former because no asset recognized in the Income Tax Act is produced, and the latter because these lands contain no minerals which are being removed by the mining operations of the taxpayer;

37. These expenditures did not add to the ore body, nor did they increase the productive capacity of the mine, nor do they bear any relation to any asset engaged in the mining operation, but are simply expenditures for the removal of overburden which, if not removed, would bring the mining operation to a halt;

38. The expenditures relative to the cost of operating the mine are small and are directly related to the cost of operation averaging over a long period about 3 per cent per annum.

39. The circumstances of this case evoke in the mind many parallels or analogies. These lands, peripheral to the mouth of the open pit operation, perform a function not unlike that of a catalyst such as platinum used in the refinement of petroleum for the production of gasoline. The purchase of the platinum no doubt produces, in the hands of the refiner, an identifiable asset of value. At the end of the day, the asset has either physically disappeared or lost its desired physical characteristics. The refiner no longer possesses the original platinum asset but he has produced marketable gasoline by its use in the processing of petroleum. If not for the explicit addition of Class 26, "Property that is a catalyst", to Schedule B of the Income Tax Regulations in March 1970, the platinum in this example was qualified for deduction as an expense. The property at issue in the case at bar, however, has not been included in Schedule B. The legislators, therefore, have not precluded it from being treated as an expense if such treatment is appropriate in all the circumstances. By further analogy, a mining operator faced with the presence of a body of water above an ore body is in a somewhat similar position to that of the appellant here. The removal of the water to lay bare the minerals on the floor of the lake could hardly be seen as the creation of an asset. The cost of pumping would be an expenditure which would not create an asset in the hands of the operator. Indeed, as mining progresses and water, by the forces of nature, returns to the pit on the bottom of the lake, the water must be removed by successive pumping. The cost of this pumping would likely be, without further complicating factors, an expense properly incurred by the taxpayer to gain income and could not be seen as creating another asset. In the case at bar the land all but disappeared, as did the catalyst in the refining operation and the water in the mining operation on the floor of the lake. In none of these situations, at the end of the day, is an asset produced, nor does an asset remain. Here the taxpayer, at the end of the mining operations, is the owner of a large hole in the surface of the earth. The acquired lands represent segments down the wall of the hole, the older purchases being further down than the last purchases. There is no asset in the sense of a surface which can, by itself, be sold. The hole once filled in, at a likely considerable expense, would produce a surface which might have value in the market. Although the hole itself, and that part of the wall with which we are here concerned, might conceivably have some value, it can hardly be described as an asset which by itself has a real value. The evidence indicates that the life of this mine will end in the 1990's. Both courts below have concluded that at that time these lands will have disappeared for all practical purposes.

40. In applying the law to the above stated observations, one is thrown back to the pronouncement by Lord Wilberforce in Tucker v. Granada Motorway Services Ltd., [1979] 2 All E.R. 801, where he said at p. 804:

It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another... Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments.

(Emphasis added.)

31. We must also remember the previously cited words of Lord Pearce in B.P. Australia Ltd., supra, at p. 264:

It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.

32. If we were to apply the three‑step test adopted by the Australian court in Sun Newspapers Ltd., supra, these expenditures would qualify as expenses rather than being capital in nature. The character of the advantage sought is that of an advantage in the current operations of the taxpayer. The practice was recurring and the manner in which the object of the expenditures was applied was directly incorporated into the mining operations of the taxpayer. Finally, the means adopted by the taxpayer to gain this advantage was the periodic outlay of its funds which would formerly have been classified, in the vocabulary of that day, as circulating capital. In the words of Dixon J., as he then was, in Sun Newspapers Ltd., supra, at p. 362, we are here concerned with an expenditure of a revenue nature because:

... its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.

The same judge in Hallstroms Pty. Ltd., supra, at p. 648, reminds us that the classification of such expenditures "...depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights...." The old rule of "once and for all" as well as the "common sense" test, supra, lead us to a result favourable to the taxpayer's contention.

33. The characterization in taxation law of an expenditure is, in the final analysis (unless the statute is explicit which this one is not), one of policy. In the mining industry, where the undertaking is underground mining with its associated assets such as vertical shafts and horizontal transportation elements not created directly by the removal of commercial ore, the tax treatment of capitalization is invoked. On the other hand, open pit or strip mining requiring none of these fixed facilities leads to the attribution of the associated expenditures to the revenue account. Strip mining or open pit mining with conical access (as we have here) and its associated expenditures falls in between these two rough categories of mining undertakings. The assessment of the evidence and the conclusions to be derived therefrom, and the application of the common sense approach to the business of the taxpayer in relation to the tax provisions, leads, in my respectful view, to the conclusion that the mining operations here approximate the circumstances encountered in the traditional open pit mining more than underground mining and so I conclude, with all respect to those who have otherwise concluded, that the appropriate taxation treatment is to allocate these expenditures to the revenue account and not to capital. Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer. This residual principle must be the more readily applicable in this appeal where otherwise annually recurring expenditures, completely connected to the daily business operation of the taxpayer, afford the taxpayer no credit against tax either by way of capital cost or depletion allowance with reference to a capital expenditure, or an expense deduction against revenue.

34. In summary, therefore, it can be said without fear of contradiction from this record that these expenditures by the taxpayer were incurred bona fide in the course of its regular day‑to‑day business operations. Common sense dictated that these expenditures be made, otherwise the taxpayer's operations would, of necessity, be closed down. These expenditures were not part of a plan for the assembly of assets. Nor did they have any semblance of a once and for all acquisition. These expenditures were in no way connected with the assembly of an ore body or a mining property which could itself be developed independently of any ore body, hence the inability to find entitlement for depletion or capital cost allowance for this expenditure under the statute. These expenditures are not disqualified by s. 12(1)(a) and indeed that provision of the Act favours the inclusion of these expenditures in authorized expenses because there is no other provision made in the Act for these items which are, beyond contention, incurred of necessity by the taxpayer in conducting its mining operations according to good business and engineering practice.

35. The reassessment notices included in the record make some reference to "additional depletion allowance" being allowed to the appellant and chargeable against property, the cost of which had, on reassessment, been charged back to income. Unfortunately, argument in this Court did not fully explain the net position of the taxpayer after these reassessments were effected. It obviously would be a misapplication of the taxing statute to allow the appellant a "notional" or real depletion allowance on these lands and at the same time to allow the appellant to charge the cost of the same lands as an operating expense against revenue. It is only the latter to which the appellant is entitled. Accordingly, I would allow the appeal and would direct a return of the matter to the Minister for reassessment on the basis set forth in these reasons; all with costs here and below to the appellant.

Appeal allowed with costs.

Solicitors for the appellant: Stikeman, Elliott, Robarts & Bowman, Toronto.

Solicitor for the respondent: R. Tassé, Ottawa.