Court File and Parties
COURT FILE NO.: CV-14-12656 DATE: 2023-11-03
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: SCR Holdings Inc. (formerly known as SCR Mines Technology Inc.) Appellant – and – Minister of Finance Respondent
Counsel: L. Summerhill / M. Carinci, for the Appellant E. Strashin / N. Tso, for the Respondent
HEARD: October 16, 17, 18 and 19, 2023
Reasons for Judgment
R.D. GORDON, J.
Overview
[1] The appellant is an Ontario corporation involved in the mining services industry. For its taxation years ended September 30, 2007 and 2008 it claimed the Ontario Manufacturing and Processing Profits (the “MPP”) tax credit provided for in s. 43 of the Corporations Tax Act (the Act). In reassessments made by the respondent the tax credit was disallowed.
[2] The appellant appeals from those reassessments. The amounts in dispute are $210,172 for the 2007 taxation year and $214,885 for the 2008 taxation year.
[3] This appeal is brought under s. 85(1) of the Act and is deemed by s. 87(1) to be an action in this court.
The Tax Credit in Question
[4] For the taxation years in question, the MPP tax credit was available to corporations that had “eligible Canadian profits” as defined in s. 43(3) of the Act.
[5] A corporation’s “eligible Canadian profits” included its “mining income”, defined as the amount by which the corporation’s “mining profits” exceeded specified deductions, as provided in s. 505 of RRO 1990, Reg. 183 (the Regulation) made under the Act.
[6] Insofar as this action is concerned, “mining profits” was defined in s. 505(3) of the Regulation as the corporation’s income for the taxation year from: (a) the production and processing of ore from a mineral resource operated by it, or (b) the processing of ore from a mineral resource not operated by it.
[7] The central question before me is whether for the taxation years in question the appellant had “mining profits”, that is, income from one or both of these sources.
[8] To answer the central question, it is necessary to address the following sub-issues:
- Was the appellant’s income from a mineral resource operated by it?
- If so, was its income from the production and processing of ore from that mineral resource?
- If not, was its income from the processing or ore?
The Appellant’s Business
[9] During the taxation years, the appellant worked almost exclusively underground in mines in the Sudbury basin owned by Vale. Its work was contract work awarded through a tender process in which the scope of work was closely defined and pertained primarily to essential underground mine infrastructure such as electrical services, ventilation, and ore chutes. The appellant had no discretion to go outside the scope of work contained in the contract without approval in writing from Vale. Its work was subject to final approval of Vale. It had no authority over Vale employees and, for the most part, did not use Vale equipment.
[10] It can be fairly said that the work of contractors such as the appellant was integral to the operations of Vale. Although Vale and its employees have extensive expertise in mining, they do not have the required expertise or resources to undertake many of the services provided by their contractors. However, the appellant was not directly involved in the extraction of ore at the mines. Extraction of the ore was always done by Vale employees who continued to work, for the most part, uninterrupted by the services rendered by the appellant.
Analysis
Did the Appellant have Income from a Mineral Resource Operated by it?
[11] The Act incorporates the definition of “mineral resource” found in s. 248(1) of the Income Tax Act (Canada). As it pertains to this case, a mineral resource is a base or precious metal deposit.
[12] It is common ground between the parties that the ore deposits mined by Vale in the Sudbury basin constitute base metal deposits – primarily nickel and copper.
[13] The question is whether the mineral resource was operated by the appellant.
[14] Unfortunately, the word “operated” is not defined in the Act.
[15] The appellant argues that the Legislature specifically chose the word “operated” and not “owned” to describe the requisite relationship to the mineral resource required to qualify for the MPP tax credit and SCR is therefore not precluded. In the absence of a specific definition of “operated” it urges me to accept a broad interpretation of the legislation that would include contractors such as it.
[16] As confirmed in Canada v. Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, tax legislation must be interpreted by conducting a “textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole, however, where tax provisions are drafted with “particularity and detail” a largely textual interpretation is appropriate as taxpayers are entitled to arrange their affairs to minimize the amount of tax payable.
[17] A textual analysis requires that the word “operated” be given its ordinary meaning.
[18] The contextual analysis requires that the word “operated” be examined in the context of the Act as a whole and any other related legislation.
[19] The purposive analysis requires identification of the objects intended to be achieved by the legislation and interpretation of the word “operated” in a manner that meets those objects.
The Textual Analysis
[20] In the ordinary sense, to operate a mineral resource is to control the working of or direct the operation of the base metal deposits.
[21] On a textual analysis, SCR did not operate the mineral resource. Indeed, I expect if anyone asked who operated, for example, the Creighton Mine at a given time, the answer would be Vale not SCR. The mineral resources were owned by Vale, and they were run by Vale. SCR could neither direct the operation of the mineral resources nor the employees of Vale. Clearly SCR did not control the working of the metal deposits or direct the operation of them.
The Contextual Analysis
[22] The Act provides for the taxation of corporations that have a permanent establishment in Ontario. In general terms, the tax payable by a corporation is determined by multiplying its taxable income by the basic taxation rate of the corporation for the taxation year.
[23] However, the Act provides for several credits against the tax payable by a corporation depending on such things as the nature of its income and the nature of the expenses it incurs. By doing so the Act targets certain corporate businesses for special tax treatment, effectively reducing the final tax payable by them.
[24] There is nothing in the context of the Act itself that would suggest other than the plain or ordinary meaning of “operated”.
[25] In the taxation years under appeal, the Mining Tax Act RSO 1990, c. M.15, imposed tax on every operator of a mine. “Operator” was defined to include (a) person who had the right to work a mine and win mineral substances therefrom, personally or through agents or employees or together with one or more other persons, and (b) a person who has the right to receive a share of the proceeds or the profits of a mine or who has an interest in a mine, whether as a member of a joint venture, as a member of a partnership, or as a beneficiary of a trust that has the right to work the mine and win mineral substances therefrom, but does not include any person whose only right or interest is the right to receive royalties.
[26] SCR did not have the right to work a mine or win mineral substances nor did it have the right to receive a share of the proceeds of the profits of the mine or have an interest in the mine.
[27] On a contextual analysis there is nothing to suggest that an operator of a mine would include a contractor hired to construct mine infrastructure.
The Purposive Analysis
[28] Tax credits are provided as incentives to the corporations eligible for them. In return for those incentives the government expects there to be some benefit to the people of the province – benefits like new jobs, the retention of jobs, the encouragement of innovation, the encouragement of research and development, and the preservation and development of cultural pursuits to name but a few.
[29] When, in the 1992 Budget, the Minister proposed to increase the value of the MPP tax credit, he explained that he intended the tax credit to be an incentive to, among others, the mining industry. He said the change was being made to support Ontario business in investing and creating jobs by reducing taxes on manufacturing, small business and resource industry. He also listed the tax rate reduction as an example of “concrete steps to foster private sector investment and innovation and help create jobs”. [See Ontario, Treasurer of Ontario and Minister of Economics, 1992 Ontario Budget: Meeting Ontario’s Priorities (30 April 1992) at pp.2 and 10].
[30] This aligns with the policy behind federal tax incentives for the resource sector, described by the Federal Court of Appeal in ATCO Electric Ltd. v. R., 2008 FCA 117 as having been enacted largely to provide tax incentives for the resource sector to flourish in light of the high-risk nature of resource explanation and the prohibitive capital costs involved in mineral extraction.
[31] At least insofar as mining was concerned, the object of the tax credit was to create jobs. To create jobs, new mines or mine expansion was required. Risky and expensive exploration would need to be undertaken; and once a discovery was made, major capital projects would follow. The lower effective tax rate resulting from the tax credit provided an incentive to undertake the required exploration and development.
[32] Although the discovery, development and expansion of mines may be implemented by companies such as SCR they are undertaken by those who have a direct economic stake in the minerals. Without a new or expanding mine, there could be no new jobs to create.
[33] The purposive analysis supports an interpretation of the word “operates” that is in keeping with its ordinary meaning.
Conclusion
[34] One who operates a mineral resource is one who controls the working of it or directs the operation of it. SCR was not an operator of the mineral resources at which it worked. Given this finding, the remaining issue is whether SCR’s income was from the processing of ore.
Was SCR’s Income from the Processing of Ore?
[35] The word “processing” is not defined in the Act or its regulations.
[36] The appellant urges me to interpret the word broadly, as a tax credit is remedial in nature. It cites the Federal Court of Appeal decision in Canada v. Repsol Energy Canada Ltd., 2017 FCA 193 at para. 65, for the proposition that “processing” includes all activities that are necessary and integral to the processing operation. SCR argues that because its work was necessary and integral to Vale’s ability to mine and eventually process the ore, its income was from the processing of ore.
[37] However, as the respondent points out, the question in Repsol was not whether the taxpayer’s income was from processing. It was. The question was whether the costs of constructing a jetty were sufficiently involved in the processing of natural gas at its terminal to fit under a particular class of capital cost allowance. The questions are very different. Although one might readily agree with the court in Repsol that the cost of constructing the jetty properly qualified for the claimed capital cost allowance, one might not readily agree that the contractor who provided the fill had income from the processing of natural gas.
The Textual Analysis
[38] In its plain and ordinary sense, processing of ore is subjecting it to some form of treatment to change it. On a textual analysis SCR did not process ore. Indeed, it had little, if any, direct contact with the nickel and copper at the mines where it worked.
The Contextual Analysis
[39] The context in which the word “processing” is used in the Act makes it clear that there is a distinction between “production” and “processing”.
[40] An operator of a mineral resource who has income from production and processing of ore is eligible for the tax credit. One who is not an operator of a mineral resource is eligible for the tax credit only if its income is from processing ore. The antithesis is that one who does not operate a mineral resource is not eligible for the tax credit if its income is from the production of ore.
[41] Production of ore means the extraction of ore from the mineral resource. In M.N.R. v. Bethlehem Copper Corp. Ltd., [1975] 2 SCR 790, the Supreme Court of Canada, in considering s. 83(5) of the Income Tax Act (Canada), held that the “operation of a mine refers to the extraction of ore from the ore body. It does not include the processing of the ore after production.”
[42] Processing ore takes place following its production. In the context of the Federal manufacturing and processing tax credit, the Appeal Division of the Federal Court of Canada held in Tenneco Canada Inc., v. R., 1991 CarswellNat 386, that processing occurs when raw or natural materials are transformed into saleable form.
[43] The Mining Tax Act does not define production but does define processing of mineral substances as any form of beneficiation, concentrating, smelting, refining, fabricating or metallic mineral substances, manufacturing of non-metallic mineral substances and any combination thereof.
[44] Considering the above, a contextual analysis leads to the conclusion that SCR did not have income from the processing of ore. Its work was done underground and related to the production of the ore.
Purposive Analysis
[45] Similar to the purposive analysis set out above, the object of the tax credit was to create jobs by incentivizing corporations who did not operate a mineral resource to spend the time and money required to process ore from its natural state to a marketable material.
[46] SCR did not own or operate any mill, smelter or refinery. It was not involved in processing the ore. Its activities did not fall within the object of the tax credit.
Conclusion
[47] It cannot be said that SCR’s income was from the processing of ore, regardless of how broadly the word “processing” is defined. Its income was from the construction of mine infrastructure necessary for the production of ore.
Conclusion
[48] Although the appellant had income related to the mining industry, that is not sufficient to qualify for the tax credit. To qualify, SCR was required to have “mining profits”. It did not. Accordingly, its appeal is dismissed.
[49] If the parties are unable to agree on costs they may make written submissions to me, not to exceed 3 pages in length plus attachments each, within 45 days.
The Honourable Mr. Justice R.D. Gordon
Released: November 03, 2023