T-3114-82
The Queen (Plaintiff)
v.
Nomad Sand & Gravel Ltd. (Defendant)
INDEXED AS: CANADA V. NOMAD SAND & GRAVEL LTD.
Trial Division, Rouleau J.—Toronto, May 5;
Ottawa, July 16, 1987.
Income tax — Income calculation — Deductions — Gravel
pit operation — Levy imposed by Ontario Pits and Quarries
Control Act, 1971 on material extracted as security for
rehabilitation cost of area — Payments made to provincial
Treasurer expenditures deductible pursuant to s. 18(1)(a)
Income Tax Act — Deductibility tests met — Expenditures
(I) made for purpose of gaining or producing income; (2) not
capital in nature.
Income tax — Income calculation — Capital cost allowance
— Front-end loaders used in gravel pit operation within Class
22 property — To fall within Class 10, equipment must be
used to produce income from "mine" — No authority for
proposition gravel pit "mine".
The defendant company operated a sand and gravel pit. It
was required to pay to the Ontario government pursuant to the
Pits and Quarries Control Act, 1971 an annual levy on the
material extracted, as security towards the cost of rehabilita
tion of the area. The amount was refundable upon rehabilita
tion. The defendant claimed as a deduction the amount paid by
it to the Ontario government under the Act, and for the
purpose of capital cost allowance, classified as Class 22 assets
the front-end loaders used in its operations. This is an appeal
from the Tax Review Board's decision allowing the defendant's
appeal from a notice of reassessment respecting its 1976 taxa
tion year.
The Crown argues that the amount paid by the defendant
cannot be considered as an expense or outlay because it was
paid into a contingency account and the Province did not own
the money until the rehabilitation work was not performed. It
was further argued that the front-end loaders were acquired for
the purpose of gaining and producing income from a mine and
fell within Class 10 property. The defendant contends that the
provincial legislation imposed on it a legal obligation to make
the payments and that those payments are deductible as having
been made in accordance with generally accepted accounting
principles. The defendant's position is that once these monies
were paid to the Province they were gone forever since its
intention was to forfeit them rather than to spend a greater
amount for the rehabilitation of the pit.
Held, the appeal should be dismissed.
Based on the facts of this case, there is nothing in Minister of
National Revenue v. Atlantic Engine Rebuilders Ltd., [1967]
S.C.R. 477, on which the Crown relied in asserting that a
deposit is not an expenditure, which can be of assistance to it.
The dictum in that case which is important here is that a
taxpayer is to be taxed on its true profit in each year. Nor is the
Federal Court of Appeal decision in The Queen v. Burnco
Industries Ltd. et al. relevant. In that case, the taxpayers,
unlike the defendant herein, were under no legal obligation to
pay out monies.
To be deductible as a current expense, an expenditure must
satisfy two tests: (1) it must be made for the purpose of gaining
or producing income; (2) it must not be of a capital nature.
Under subsection 9(1) of the Income Tax Act, the income for a
taxation year from a business or property is the "profit"
therefrom for the year. The first question to ask is not whether
an expense is excluded from deduction by paragraph 18(1)(a)
or (b) but rather "whether its deduction is permissible by the
accepted business and accounting practice". Therefore, an ex
penditure properly deducted according to accounting standards
would be deductible unless prohibited by a provision of the
Income Tax Act.
The payment made to the Province of Ontario in the form of
an annual levy constitutes an allowable deduction. The defen
dant was required by law to make that payment for the purpose
of gaining income from its sand and gravel operation. The
expenditure was not capital in nature.
The front-end loaders used by the defendant in its operation
fall within the Class 22 definition of Schedule B of the Income
Tax Regulations, as being "power-operated movable equip
ment designed for moving and placing earth or rock", in the
form of sand and gravel. To fall within the Class 10 definition
of assets, it would have to be shown that the equipment was
used for the purpose of producing income from a "mine". No
authority was cited in support of the proposition that a gravel
pit is a "mine". The case of Paju v. The Minister of National
Revenue (1974), 74 DTC 1087 (T.R.B.) is the one that dealt
most directly with that issue, and the facts therein are identical
to those in the case at bar. In Paju the Tax Review Board
found that a gravel pit did not necessarily fall under the
definition "mine" and that therefore the taxpayers' loader
qualified as a Class 22 asset.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 9(1),
18(1)(a),(b),(e)•
Income Tax Regulations, SOR/54-682, Schedule B,
Classes 10 (as am. by SOR/74-402, s. 1), 22 (as added
by SOR/64-167, s. 3).
Pits and Quarries Control Act, 1971, S.O. 1971, c. 96, s.
11(2).
Pits and Quarries Control Regulations, O. Reg. 545/71,
s. 5.
CASES JUDICIALLY CONSIDERED
FOLLOWED:
Paju v. The Minister of National Revenue (1974), 74
DTC 1087 (T.R.B.).
DISTINGUISHED:
Minister of National Revenue v. Atlantic Engine
Rebuilders Ltd., [1967] S.C.R. 477; [1967] C.T.C. 230;
The Queen v. Burnco Industries Ltd. et al. (1984), 84
DTC 6348 (F.C.A.).
CONSIDERED:
Daley v. M.N.R., [1950] C.T.C. 254 (Ex. Ct.).
COUNSEL:
P. Plourde and S. Phillips for plaintiff.
R. T. Hughes for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Fraser & Beatty, Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
ROULEAU J.: This is an appeal commenced by
way of statement of claim from a decision of the
Tax Review Board dated January 4, 1982, allow
ing the defendant's appeal of a notice of reassess
ment issued by the plaintiff on March 16, 1979
with respect to the defendant's 1976 taxation year.
During the period in question the defendant
company carried on the business of operating a
sand and gravel pit at Brighton, Ontario. The
company's operation consisted of removing raw
material from a gravel pit, transporting it to crush-
ers and washers and from there to loading tren
ches. Three "966 Carruthers" front-end loaders
were used to transport the material.
In order for the defendant to obtain the neces
sary licence to operate a gravel pit, it was required,
pursuant to the Pits and Quarries Control Act,
1971, S.O. 1971, c. 96, to produce a site plan for
the rehabilitation of the area. The rehabilitation
required by the Act comprised levelling off the
banks of the pit, the gradual sloping of the floor of
the pit, covering the area with top soil and planting
grass and trees on the site. The defendant estimat
ed the cost of such rehabilitation to be approxi
mately between $125,000 and $130,000.
Pursuant to section 5 of the Pits and Quarries
Control Regulations, O. Reg. 545/71, a levy of
$0.02 per ton was imposed on the material extract
ed from the pit as security towards the cost of the
rehabilitation. The amount paid by the defendant
as a levy bore interest at the rate of 6% and was
refundable when and if the rehabilitation of the pit
was completed.
In its 1976 taxation year, the defendant claimed
as an expense in carrying on business the amount
of $7,994.02 paid by it to the Ontario government
pursuant to the Pits and Quarries Control Act,
1971. The Minister reassessed the defendant's
1976 taxation year on the basis that the defendant
was not entitled to claim the amount as an expense
and that certain assets owned by the defendant
and used in its operations, namely front-end load
ers, should be classified as Class 10 assets [Income
Tax Regulations, SOR/54-682, Schedule B (as
am. by SOR/74-402, s. 1)] for capital cost allow
ance purposes, rather than as Class 22 assets
[idem (as added by SOR/64-167, s. 3)] as claimed
by the defendant, with the result that the capital
cost allowance claimed was reduced by the amount
of $3,972.85.
The defendant objected to the reassessment of
March 1979 and the Minister of National Reve
nue confirmed the reassessment by a notification
of confirmation dated June 13, 1980. The defen
dant then appealed to the Tax Review Board
which, by judgment dated January 4, 1982,
allowed the appeal. It is that judgment which is
now under appeal.
There are two issues before the Court. The first
is whether the payments made by the defendant to
the Ontario government pursuant to the Pits and
Quarries Control Act, 1971 were an outlay or
expense incurred by the defendant to earn income
from its operation within the meaning of para
graph 18(1)(a) of the Income Tax Act [S.C. 1970-
71-72, c. 63] and therefore deductible from its
income for the taxation year in question or wheth
er they are deposits or reserves which are not
deductible under paragraph 18(1)(a) or (e) of the
Act.
The second issue is whether the front-end load
ers used by the defendant in its sand and gravel
operations are, for the purpose of calculating capi
tal cost allowance, items falling within Class 22,
Schedule B of the Income Tax Regulations, as
contended by the defendant or whether the equip
ment falls within Class 10, as alleged by the
plaintiff.
The Crown's position is that the amounts paid
by the defendant to the Ontario government pur
suant to the Pits and Quarries Control Act, 1971
are not an expense under the Income Tax Act
because the monies were paid into what the Crown
calls a contingency account and are therefore not
deductible. The Crown argues that the amount is
paid on deposit with the Treasurer of Ontario and
that the deposit may be forfeited if the rehabilita
tion program is not properly carried out by the
company making the deposit. Further, the money
cannot be considered and expense or an outlay
because the loss of the deposit under subsection
11(2) of the Pits and Quarries Control Act, 1971
is contingent upon the discretionary power of the
Provincial Minister. The Crown maintains that the
Province had no ownership in the monies paid as a
levy until such time as the rehabilitation work was
not performed by the defendant. If, however, the
work was performed then the monies would be
returned to the company but would not be con
sidered to be income.
As to the second issue, the classification of the
front-end loaders used in the defendant's opera
tion, the plaintiff maintains that the loaders were
acquired and used by the defendant for the pur
pose of gaining and producing income from a mine
and therefore fall within the definition of Class 10
property. It was agreed by both parties that the
determination of this issue would depend on
whether or not a gravel pit is a mine. It is the
plaintiff's submission that the defendant's gravel
pit operation did constitute a mining operation.
The defendant, on the other hand, argues that
even though the payments made by it to the
Government of Ontario are referred to in the Pits
and Quarries Control Act, 1971 as a deposit as
security for the rehabilitation of the sand and
gravel pit, the defendant was under no obligation
to carry out such rehabilitation and, in fact, never
intended to do so since the cost of such rehabilita
tion would have been significantly higher than the
total amount of the payments. The defendant fur
ther argues that it was required by law to make
these payments in order to earn income from its
sand and gravel operation. The defendant's opera
tion was subject to the provisions of the Pits and
Quarries Control Act, 1971 and the Regulations
which imposed a legal obligation on the defendant
to make the payments in question to the provincial
government. Accordingly, the plaintiff submits
these payments were directly related to the defen
dant's revenues and in turn its profit or income,
from the sand and gravel operation for the year in
respect of which the payment was made.
The defendant's position is that it would never
in fact actually obtain a refund of the amount of
monies it paid as a levy. In order to get the
payments back the defendant would have been
required to spend a substantially higher amount
towards the cost of rehabilitation; that is the cost
of rehabilitation would greatly exceed the aggre
gate amount of the payments made pursuant to the
legislation so that the defendant would never
obtain an actual refund or get any money back as
alleged by the plaintiff. Therefore, the defendant
argues, once these monies were paid by it to the
province, they were gone forever.
The defendant's next submission in support of
its argument that the payments are deductible is
that they were made in accordance with the gener
ally accepted accounting principles. The basic
accounting principle supporting the deductibility
of these expenses is that of matching revenues and
expenses so that the financial statement of a par
ticular period will present fairly the results of
operations for that period; it is a matter of match
ing the expenses to the revenue for that period.
In this case the defendant argues, where the cost
of rehabilitating the pit far exceeds the payments
made by way of the levy charged, the payment
made in each year would be reported as an expense
for accounting purposes. Further, the payment was
required in order to earn income from the business
and was directly related to the amount of material
removed from the pit in that year. In that way,
there was an appropriate matching of revenues and
expenses in calculating profit and loss for that
year.
It is the defendant's position that generally
accepted accounting principles should normally be
applied for taxation purposes unless, by exception,
some provision of the Income Tax Act requires a
departure from those principles. The defendant's
submission is that the payments made by it to the
province were clearly outlays or expenses made or
incurred for the purpose of producing income from
the defendant's operation and are therefore proper
deductions in the calculation of its income for
income tax purposes pursuant to sections 9 and 18
of the Income Tax Act.
As to the classification of the front-end loaders,
the defendant maintains that this equipment falls
squarely within the definition of Class 22 assets
which during the year in question provided as
follows:
Property acquired after March 16, 1964, that is power-
operated movable equipment designed for the purpose of
excavating, moving, placing or compacting earth, rock, concrete
or asphalt, but not including a property that is included in
class 7.
The front-end loaders, argues the defendant,
were power-operated, movable equipment designed
for and used by the defendant for moving and
placing earth or rock, in the form of sand and
gravel. Contrary to the opinion held by the plain
tiff, the defendant is of the view that its operation
did not constitute a "mining" operation which
would result in the front-end loaders being classi
fied as Class 10 items for the purpose of calculat
ing the defendant's capital cost allowance.
Counsel for the plaintiff relied on the Supreme
Court of Canada decision in Minister of National
Revenue v. Atlantic Engine Rebuilders Ltd.,
[ 1967] S.C.R. 477; [ 1967] C.T.C. 230, to support
its argument that the defendant's payments to the
province were deposits and not expenditures. I am
not persuaded by the plaintiff's argument nor do I
think that the Atlantic case is of any assistance to
its proposition. The facts of that case are clearly
different from those in the case at bar. There the
respondent company rebuilt Ford engines. When a
rebuilt engine was shipped to a Ford dealer, the
dealer was charged the invoice price of the rebuilt
engine plus a deposit to be held pending receipt of
a used rebuildable engine of the same model. The
unredeemed deposits held by the respondent com
pany at the end of its taxation year were added by
the Minister to the Company's declared income for
the year. The Minister argued that the company
was not entitled to any deduction in respect of its
liability to repay the deposits since the liability was
contingent upon the delivery by the dealers of the
used engines. The Court held that the deposits
could not be regarded as forming part of the
respondent company's profits and that there was
nothing in the Income Tax Act to require them to
be treated as profits.
That finding, according to the plaintiff, should
lead this Court to the conclusion that a deposit
made by a taxpayer is not an expenditure in the
same way that the receipt of a deposit cannot be
considered to be income.
I disagree with the plaintiff. The Atlantic case,
supra, does not, in my opinion, lead to that conclu
sion. The dicta of the Supreme Court of Canada in
Atlantic which is of particular importance to this
case is that a taxpayer is to be taxed on its true
profit in each year. I can see nothing in the case
which is of assitance to the plaintiff based on the
facts of this case.
I fail to see the relevance of the other authorities
relied upon by the plaintiff in support of its posi
tion. For example, the plaintiff referred to the
Federal Court of Appeal decision in The Queen v.
Burnco Industries Ltd. et al. (1984), 84 DTC
6348. In that case the taxpayers upon excavating
gravel from a gravel pit, became obligated to
backfill the area pursuant to an agreement with
the local municipality. Although the costs of back-
filling were not incurred until a subsequent taxa
tion year, the taxpayers deducted the expenses in
the year of excavation. The Federal Court of
Appeal found that the deductions were properly
disallowed, holding that an expense could not be
said to have been incurred by a taxpayer who was
under no obligation to pay out any money. Clearly,
that is not the case here, where the defendant was
obligated, pursuant to the Pits and Quarries Con
trol Act, 1971 and its Regulations, to pay the levy
to the Province of Ontario in order to carry out its
sand and gravel pit operation. I agree with the
Federal Court of Appeal's finding that expenses
cannot be deducted until they are incurred; I
disagree with the plaintiff that the decision in
Burnco is of any relevance to this case.
In my opinion, the annual levy payments made
by the defendant to the province constitute a part
of the defendant's current operating expenses and
are deductible under paragraph 18(1)(a) of the
Income Tax Act. Subsection 9(1) of the Act states
that income for a taxation year from a business or
property is the "profit" therefrom for the year. It
has long been recognized that tax must be imposed
not on the gross amount received but on that
amount less the expenses incurred to produce it.
Paragraph 18 (1) (a) of the Income Tax Act is
recognition of that very fundamental principle:
18. (1) In computing the income of a taxpayer from a
business or property 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 the business or property;
Paragraph 18(1)(b) of the Act prohibits the
deduction of 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 Part
I of the Act.
There are therefore two tests for an allowable
deduction. First, the expenditure must pass the test
of having been made for the purpose of gaining or
producing income. Second, it must then be shown
not to be capital in nature. Provided the expendi-
ture meets these two criteria, it is then deductible
as a current expense.
The Income Tax Act does not define the term
"profit" as that word is used in subsection 9(1) of
the Act. However, a judicial statement as to the
proper approach for determining net profit is set
out in Daley v. M.N.R., [1950] C.T.C. 254 (Ex.
Ct.), where Thorson P. stated at page 260:
The correct view, in my opinion, is that the deductibility of the
disbursements and expenses that may properly be deducted "in
computing the amount of the profits or gains to be assessed" is
inherent in the concept of "annual net profit or gain" in the
definition of taxable income contained in section 3. The deduct-
ibility from the receipts of a taxation year of the appropriate
disbursements or expense stems, therefore, from section 3 of the
Act, if it stems from any section, and not at all, even inferen-
tially, from paragraph (a) of section 6.
That being so, it follows that in some cases the first enquiry
whether a particular disbursement or expense is deductible
should be whether it is excluded from deduction by section 6(a)
or section 6(b) but rather whether its deduction is permissible
by the ordinary principles of commercial, trading or accepted
business and accounting practice ....
Section 3 was the forerunner to the present
subsection 9(1) and paragraph 6(a) was the fore
runner to the present paragraph 18(1)(a).
Therefore, in accordance with this principle, an
expenditure properly deducted according to
accounting standards would be deductible for tax
purposes unless prohibited by some provision of
the Act.
There is, in my opinion, no question that the
amount paid in this case by the defendant to the
Province of Ontario in the form of an annual levy
constitutes an allowable deduction. The expendi
ture was made, indeed had to be made by the
defendant, for the purpose of gaining income from
its sand and gravel pit operation and is clearly not
capital in nature.
With regards to the second issue, whether the
front-end loaders used by the defendant fall within
Class 10 or Class 22 for the purpose of determin
ing the defendant's permissible capital cost allow
ance, there is no doubt in my mind that the
defendant must succeed in its argument that the
equipment falls squarely within the Class 22 defi
nition of Schedule B of the Income Tax Regula
tions. In order for this Court to find that the
front-end loaders fall within the Class 10 defini
tion of assets the plaintiff would have to satisfy me
that the equipment was used for the purpose of
gaining or producing income from a "mine".
The plaintiff was unable to refer me to one case
which stands as authority for the proposition that
a gravel pit or stone quarry is a "mine". The case
of Paju v. The Minister of National Revenue
(1974), 74 DTC 1087 (T.R.B.) deals most directly
with this issue and the facts of that case are
virtually identical to those in the case at bar. In
Paju the taxpayers owned and operated a gravel
pit. In 1970 the taxpayers purchased a new loader
and classified this machine as well as two other
loaders under Class 22 of Schedule B of the
Income Tax Regulations in order to claim 50%
depreciation. The Minister refused to allow this.
The Tax Review Board held that the taxpayers
were allowed to claim 50% depreciation on their
equipment, finding that a gravel pit does not
necessarily fall under the definition of a "mine"
and therefore the loader qualified as a Class 22
asset. At page 1088 the Board stated:
Learned counsel for the respondent argued that Class 10
(30%) applied to the loaders since this was mining machinery
and equipment acquired for the purpose of gaining or produc
ing income from a mine. On the basis of the judgment in
Canadian Gypsum Co. Ltd. v. Minister of National Revenue,
(1965) 2 Ex. C.R. 566, learned counsel argued that the gravel
pit was a mine and the loaders accordingly were properly
classed in this group by the respondent.
In my humble opinion I do not think this resolves the point.
The term "mine" is as vague and indefinite as the term
"mineral". Whether in the circumstances this particular gravel
pit would be called a "mine" is questionable to say the least.
The appellants described the 1970 loader as a huge self-
propelled diesel tractor on rubber tire wheels with a front end
hydraulically-operated bucket having a capacity of 3 cubic
yards, and cost $44,583.38. The two old loaders- were much
smaller and on January 1st, 1970, had a book value of approx
imately $200.00.
While it is conceivable that these loaders could be used in a
mine, it does not follow that Class 22 is not open for deprecia
tion purposes when they are used for excavating, moving or
loading.
I have come to the conclusion that the respondent erred in
reducing the amount of capital cost allowance claimed on the
ground that a loader does not qualify as a Class 22 asset.
I do not think a clearer statement on the issue
could be made. Counsel for the plaintiff attempted
to circumvent the finding of the Tax Review Board
in Paju, supra, by suggesting that the wording of
paragraph (k) of Class 10 of the 1970 Income Tax
Regulations referred to mining machinery and
equipment whereas the wording of the 1976 Act
refers generally to property acquired for the pur
pose of gaining or producing income from a mine.
Accordingly, the plaintiff maintains that the issue
in Paju was whether the loader was mining equip
ment and not whether a gravel and sand pit opera
tion was a mine. I disagree with the plaintiff and I
am bound to conclude, as did the Tax Review
Board in this case, that the decision in Paju goes
further than what the Crown suggests.
Accordingly, in my opinion, the defendant's
front-end loaders properly fall within the Class 22
definition of assets in Schedule B.
For the above reasons, the plaintiff's appeal is
dismissed. Costs to the defendant.
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