Sogemines Development Co. Ltd. v. MNR, 72 DTC 6254, [1972] CTC 284 (FCTD)

Heald, J:—This is an appeal from the judgment of the Tax Appeal Board dismissing the appeal of the appellant from its income tax assessments for the taxation years 1958, 1959, 1960 and 1961.

One of the main issues in this appeal rests upon the application and interpretation of subsections 83A(3) and (8a) of the Income Tax Act as they were for said taxation years. The relevant provisions read as follows:

83A. (3) A corporation whose principal business is

(a) (not applicable) or

(b) mining or exploring for minerals,

may deduct, in computing its income under this Part for a taxation year, the lesser of

(c) the aggregate of such of

(i) (not applicable), and

(ii) the prospecting, exploration and development expenses incurred by it in searching for minerals in Canada,

as were incurred after the calendar year 1952 and before the end of the taxation year, to the extent that they were not deductible in computing income for a previous taxation year, or

(d) of that aggregate, an amount equal to its income for the taxation year

(i) if no deduction were allowed under paragraph (b) of subsection (1) of section 11, and

(ii) if no deduction were allowed under this section,

minus the deductions allowed for the year by subsections (1), (2) and

(8a) of this section and by section 28.

(8a) Notwithstanding subsection (8), where a corporation (hereinafter in this subsection referred to as the “successor corporation”) whose principal business is

(a) (not applicable), or

(b) mining or exploring for minerals,

has, at any time after 1954, acquired from a corporation (hereinafter in this subsection referred to as the “predecessor corporation”) whose principal business was . . . mining or exploring for minerals, all or substantially all of the property of the predecessor corporation used by it in carrying on that business in Canada,

(c) pursuant to the purchase of such property by the successor corporation in consideration of shares of the capital stock of the successor corporation.

(d) as a result of the distribution of such property to the successor corporation upon the winding-up of the predecessor corporation subsequently to the purchase of all or substantially all of the shares of the capital stock of the predecessor corporation by the successor corporation in consideration of shares of the capital stock of the successor corporation, or

(da) - (applicable to the 1961 taxation year only)—as a result of the distribution of such property to the successor corporation upon the winding- up of the predecessor corporation where the predecessor corporation was at all times a subsidiary wholly-owned corporation subsidiary to the successor corporation,

there may be deducted by the successor corporation, in computing its income under this Part for a taxation year, the lesser of

(e) the aggregate of

(i) (not applicable), and

(ii) the prospecting, exploration and development expenses incurred by

the predecessor corporation in searching for minerals in Canada,

to the extent that such expenses

(iii) were not deductible by the successor corporation in computing its income for a previous taxation year, and were not deductible by the predecessor corporation in computing its income for the taxation year in which the property so acquired was acquired by the successor corporation or its income for a previous taxation year, and

(iv) would, but for the provisions of paragraph (b) of subsection (1), paragraph (b) of subsection (2), paragraph (d) of subsection (3) and paragraph (d) of subsection (8) or of any of those paragraphs or this subsection, have been deductible by the predecessor corporation in computing its income for the taxation year in which the property so acquired was acquired by the successor corporation, or

(f) of that aggregate, an amount equal to such part of its income for the year

(i) if no deduction were allowed under paragraph (b) of subsection (1) of section 11, and

(ii) if no deduction were allowed under this section,

(minus any deduction allowed for the year by section 28), as may reasonably be regarded as attributable to . . . the production of minerals from mines, situated on property from which ‘the predecessor corporation had, immediately before the acquisition by the successor corporation of the property so acquired ... a right to take or remove minerals;

and, in respect of any such expenses included in the aggregate determined under paragraph (e), no deduction may be made under this section by the predecessor corporation in computing its income for the taxation year in which the property so acquired was acquired by the successor corporation or its income for any subsequent taxation year.

Sogemines Limited, the parent corporation of the appellant, was incorporated under the Companies Act of Canada by Letters Patent issued on May 9, 1951.

The purposes and objects of said corporation as set out in its Letters Patent are as follows:

(a) To carry on, whether as principals or agents, the business of an investment company and, in that connection, to purchase, underwrite, take in exchange, subscribe for or otherwise acquire upon and subject to such terms and conditions as may seem expedient, hold, sell, alienate and otherwise dispose of shares, stocks, bonds, debentures, debenture stock, warrants, option certificates or other evidences of indebtedness, securities and investments of every kind and to manage, sell, alienate or otherwise dispose of any of the assets of the Company from time to time and generally to make investments of the funds or moneys of the Company in any kind of property, real and immoveable, personal and moveable, and to change, alter, vary or realize upon any investments from time to time and to reinvest the proceeds thereof.

(b) For the purposes of the Company to conduct researches and investigations in respect of securities, organizations, businesses and general business conditions; and to secure information pertinent to the investment of the assets and funds of the Company.

The appellant corporation is a wholly owned subsidiary of said Sogemines Limited and was incorporated under the Companies Act of Canada by Letters Patent issued on December 6, 1955. The main purposes and objects of the appellant corporation as set out in said Letters Patent were to carry on the business of a prospecting, exploration, development, mining and natural resources company.

Both corporations had their head offices at Montreal and the fiscal year of each corporation ended on the 31st day of December each year.

By Agreement dated December 21, 1955, Sogemines Limited, as vendor, agreed with the appellant corporation, as purchaser, to sell, transfer and assign to it certain of the vendor’s assets. The relevant portions of this Agreement read as follows:

WHEREAS the Purchaser is a wholly owned subsidiary of the Vendor and has been formed for the purpose of taking over and carrying on the mining exploration and development work of the Vendor, and will reimburse the Vendor for all expenditures made by it in that connection, the whole with the same effect and to the same extent as though such exploration and development work had always been carried on by the Purchaser.

NOW THEREFORE THIS AGREEMENT WITNESSETH that the parties hereto have agreed and do hereby agree together as follows:—

1. The Vendor hereby sells, transfers and assigns to the Purchaser, thereof accepting:—

(a) All the right, title and interest of the Vendor in, to and under the following agreements or arrangement relating to mining exploration and development and in and to all mining rights, claims, prospects, discoveries, information, data, records, reports and other assets pertaining thereto, namely:—

(i) Agreement dated as of January 1, 1953 between The Rio Tinto Company Limited and the Vendor as supplemented by Letter Agreement dated November 28, 1955;

(ii) Agreement dated June 19, 1953 between M J O’Brien, Limited and the Vendor with respect to the exploration of certain mining lands in the Province of New Brunswick; and

(iii) Arrangement entered into in March 1953 with Hollinger Consolidated Gold Mines, Limited, Noranda Mines, Ltd, The Mining Corporation of Canada, Limited, The N A Tim-mins Corporation and the Vendor with respect to the exploration of certain mining claims in the Province of New Brunswick; and

(b) 2,250 shares of the capital stock of Rio Canadian Exploration Company Limited without nominal or par value.

The Vendor hereby expressly subrogates the Purchaser in all the Vendor’s rights in and under the aforesaid agreements and arrangement.

The Purchaser acknowledges to be aware that Association de Prospection et de Recherches Minières has a 50% participation in the Vendor’s interest under the agreement referred to in (i) above and a 75% participation in the Vendor’s interest in each of the agreement and arrangement referred to in

(ii) and (iii) above.

2. The sale, transfer and assignment contained herein is thus made for and in consideration of the sum of $2,250 paid by the Purchaser to the Vendor, the receipt whereof is hereby acknowledged.

Furthermore the Purchaser shall reimburse and repay to the Vendor, not later than December 31, 1955, without interest, the sum of $313,491.30 being the total amount expended by the Vendor under the aforesaid agreements and arrangements in exploring for mines and minerals.

Counsel for both parties agreed that Sogemines Limited, up to December 21, 1955, had in fact expended the sum of $313,491.30 in exploring for mines and minerals under the agreements and arrangement set out in paragraph 1 of said Agreement. Counsel also agreed that the appellant corporation itself expended the following sums in exploring for mines and minerals:

For the taxation year 1955, when the expenses assumed by appellant under the above Agreement ($313,491.30) were added to the expenses actually made by appellant itself ($10,324.68), the total exploration expenses at year end amounted to $323,815.98. However, appellant had a short fiscal year in 1965 (December 6 to December 31) and its income for that period was only $5,805.19 and therefore, in filing its income tax return for 1955, it claimed only the said sum of $5,805.19 out of the total exploration expenses resulting in no taxable income for the year 1955. A similar course was adopted for the taxation years 1956 and 1957 in that expenses equal to earnings for those years were deducted in order to reduce appellant’s taxable income to nil.

Appellant took the position that under the authority of subsection 83A(8a) it was entitled to say that the expenses deducted in 1955, 1956 and 1957 were a part of the expenses assumed from Sogemines Limited and were not expenses incurred by it in the said years. Appellant took the view that it was entitled to hold back its own expenses to be deducted after all the expenses assumed from Sogemines Limited ($313,491.30) had been utilized to reduce its tax liability for its initial years of operation.

In the first instance, it appears that the Income Tax Department agreed with appellant’s right to adopt such a procedure, because on July 31, 1961 one Herbert Walter, then a member of the assessing staff of respondent’s Montreal District Taxation Office, wrote to Mr Angus A MacNaughton, a chartered accountant, now Executive Vice-President of the appellant, the following letter:

Dear Mr MacNaughton,

Enclosed please find revised Capital Cost schedules and Residual Development Expenses available for future years.

Yours truly

Herbert Walter.

Attached to this letter was a document headed: “Sogemines Development Co Ltd — Schedule No 1 — Mining, Development & Exploration Expense.” I reproduce hereunder the said Schedule No 1:

However, in assessing appellant’s income for the years 1958 to 1961 inclusive, the Minister seems to have taken a different view of the Sogemine expenses assumed by the appellant under the agreement of December 21, 1955 on the basis that appellant has not brought itself within the provisions of subsection (8a) of said section 83A.

Specifically, the Minister says that appellant has failed to prove that the “principal business” of the predecessor corporation (Sogemines Limited) was “mining or exploring for minerals”.

The cases have held that the question of “principal business” is a question of fact to be determined by an examination and comparison of all the facts concerning each of the various types of business in which the company is engaged.* [1]

In this case, Sogemines Limited had as its objects and purpose, the carrying on of an investment business. Its Letters Patent make no mention of exploration or mining. From its incorporation in 1951 through 1955, all of its income is from its investments (dividends, interest on bonds, interest on guarantees and bank interest). The assets held by Sogemines Limited during the relevant period (1951 to 1955) were investment assets only — they consisted of shares in mining and industrial companies; US treasury certificates, shares in investment fund companies and Dominion of Canada bonds.

Appellant’s contention is that because a considerable portion of Sogemines’ investments during this period were in mining stocks, that this is indicative of the orientation of Sogemines towards exploring for mines and minerals. I cannot accept this submission. The purchase of mining stocks by an investment company can surely not change its business from that of investment to that of mining.

During 1951 to 1955, Sogemines’ source of funds was from capitalization and gains on sale of investments. These funds were, in the main, used to purchase other investments.

In August of 1955, Sogemines Limited “went public” and issued two prospectuses dated August 25, 1955, one covering an offering of common shares and the other covering an offering of preferred shares. Paragraph C of the Statutory Information in each prospectus states as follows:

(C) The general nature of the business carried on by the Company is that of an investment company. The Company has broad general powers of investment in securities, property and interests of all kinds without restriction.

Thus, as late as August of 1955, the principal officers of Sogemines Limited who signed said prospectuses described their company as an investment company.

Sogemines’ activities were mainly carried on by the Board of Directors, all of whom had other principal occupations. Sogemines had only one part-time employee who had other duties as well. The company owned no mining equipment, it had no office, no telephone listing, no annual budget and no payroll.

The company’s list of Security Holdings as of July 31, 1955 is revealing of the true nature of this company’s business (as shown on page 176 of the Book of Documents filed at the trial by consent of counsel as Exhibit A-1). Said list is as follows:

It is significant that out of a total holding of over ten million dollars, some $247,000 represents the company’s total participation in mining exploration projects. About half of the ten million dollar figure is comprised of investments in Canadian Petrofina Limited, an industrial company organized for the purpose of owning and operating gas stations in Canada and in Inland Cement Company Limited, a company manufacturing and selling cement.

The Shorter Oxford English Dictionary defines “principal” as “The chief, main, or most important thing, part, point or element.” Looking at all of the facts and circumstances in this case, I fail to see how mining and exploration can be considered to be the chief or main or most important element of Sogemines’ business.

The appellant relies on the Consolidated Mogul case (supra). However, the facts in that case were quite different from the case at bar. First of all, the cases are different in that Consolidated Mogul had mining and exploration objects in its charter. Then, in Mogul, the company was incorporated in 1954 and, in that same year it actively entered into the business of mining generally, developing one mine and exploring many others. During the years under review (1957 to 1960 inclusive), it carried out considerable work on mining properties in which it was interested but its chief task was the management and development of properties owned by other companies. The Minister argued that Mogul was not engaged in mining or exploring but in management. This argument was rejected by Spence, J who said at page 59 [p 432]:

. . . The respondent may be engaged in the business of mining or exploring for minerals just as well as the owner of the property if, under the contract with that company, it does the mining or exploring for minerals.

In the case at bar, Sogemines was not involved in mining or exploring in any way in 1951 and in 1952. In 1953, it became a partner in three mining and exploration ventures but in none of these ventures was it the operating partner actively engaged in the search for minerals. Even accepting appellant’s argument that its participation in these mining syndicates gave it the character of “mining or exploring”, I am of the view that this venture was only a minor part of Sogemines’ total operation, that it was only a sideline at the most.

Mr Justice Spence, in the Consolidated Mogul! case (supra) expressed agreement with the Tax Appeal Board judgment which considered the following factors:

(a) corporate name;

(b) corporate purposes and objects as contained in Company’s Letters Patent;

(c) the development of its own properties to point of commercial production after an expenditure of over half a million dollars;

(d) its general and continuing mining, development and exploring activities during the relevant period;

(e) its management contract under which it undertook very serious and extensive mining operations on behalf of several mining companies bringing them to a successful conclusion;

(f) the way so many mining companies seemed to turn to Mogul

for scientific and technical services as well as for financing help;

and

(g) its experienced and specialized officers and staff.

In reviewing the evidence in this case, the only such factor present here is the corporate name which has a mining connotation.

I have, therefore, concluded that the Consolidated Mogul decision is clearly distinguishable on its facts.

For all of the foregoing reasons, I have concluded that the “principal business” of Sogemines Limited was not that of “mining or exploring for minerals” within the meaning of subsection 83A(8a).

I am also of the view that the appellant fails to comply with the provisions of paragraph 83A(8a)(c) of the Income Tax Act. This provision required, for the taxation years in question, that the consideration for the purchase of said mining property by the taxpayer be shares of the taxpayer corporation.

In this case, the mining property was transferred from Sogemines Limited to the taxpayer by the Agreement of December 21, 1955. The only reference to consideration is contained in paragraph 2 of said Agreement. Paragraph 2 sets out the sum of $2,250 in cash plus reimbursement not later than December 31, 1955 to Sogemines Limited by the appellant of the sum of $313,491.30, being the total amount expended by Sogemines Limited under the three mining Agreements set out in paragraph 1 (a)(i), (ii) and (iii) thereof. The Agreement for Sale contains nothing from which it can be inferred that any part of the purchase price of the mining property was to be paid for in shares of the appellant corporation.

As a matter of fact, the evidence before me is all to the contrary. At the trial, Angus A McNaughton, Executive Vice-President of the appellant corporation, testified that paragraph 2 of the Agreement for Sale of December 21, 1955 stated the total consideration for the Agreement. He also stated very positively that Sogemines Limited did not receive any shares of the appellant as a part of the consideration for the transfer of the mining property.

Having found that the appellant has not brought itself within the provisions of subsection 83(8a) in at least two particulars, this finding would normally dispose of the appeal. However, learned counsel for the appellant submitted that the Minister was statute-barred on June 27, 1963 (the date of reassessment for the taxation years 1958, 1959, 1960 and 1961) from reassessing the returns for the years 1958 to 1961 inclusive. Appellant’s submission is that since respondent allowed appellant to deduct in the years 1955 to 1957 inclusive, the expenses it acquired from Sogemines Limited, while at the same time appellant was incurring exploration expenses on its own account, in now disallowing similar Sogemines Limited expenses for the years 1958 to 1961 inclusive, the respondent is actually disallowing what he earlier allowed and that he is “statute-barred” from doing so. He submits that respondent is “statute-barred” now from changing the 1955-1957 assessments because the four-year period for reassessment permitted under subsection 46(4) of the Act has expired in respect of the 1955-1957 assessments.

Subsection 46(4) of the Income Tax Act reads as follows:

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation or committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (ii) of paragraph (a), in any other case,

re-assess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

It is my view that the respondent was not “statute barred” from re- assessing the appellant as he did on June 27, 1963 because said reassessment was within the four-year period allowed under said subsection 46(4) for the years 1958 to 1961 inclusive. The years 1955 to 1957 inclusive are not changed, the assessed tax was originally nil and it remains nil.

A similar factual situation arose in the case of New St James Limited v MNR, [1966] Ex CR 977; [1966] CTC 305.

In that case, in assessing appellant for 1955, the Minister allowed a deduction of the full amount spent by the appellant in that year on repairs to a building which appellant held under a five-year lease, treating the expenditure as rent paid. In the result, appellant had a substantial loss in 1955 for income tax purposes. in his assessments of appellant for the four years 1956 to 1959, the expenditure on repairs in 1955 was treated as made on account of a leasehold interest and a deduction of one-fifth of the amount was allowed for each of those years. As more than four years had elapsed between the original assessment for 1955 and the assessments for the later years, appellant contended that subsection 46(4) of the Income Tax Act precluded the Minister from recomputing appellant’s 1955 loss in the assessments for the following years. Sheppard, DJ dismissed the appeal holding that only the 1955 assessment was affected by the four year limitation of subsection 46(4). At page 979 [p 307] he said:

The limitation of section 46(4) only applies when four years have elapsed after the designated notice or notification and that has occurred only in respect of the 1955 taxation year.

Hence section 46(4) imposes no restriction as to any year other than 1955 and therefore not to the subsequent years 1956 to 1959 inclusive to which the four years have not elapsed and the limitation of section 46(4) cannot apply. For these subsequent years section 46(4), having no application, does not preclude an assessment being made in accordance with the provisions of this Statute, including sections 139(1)(x) and 32(5). That requires the loss for the years 1956 to 1959 inclusive being taken as provided by the Statute, not as implied in the assessment for the year 1955.

In the case at bar, the four-year limitation period had not expired in respect of the taxation years 1958 to 1961 inclusive when they were reassessed in 1963. Therefore, the Minister quite properly reassessed in accordance with the requirements of section 83A of the statute, notwithstanding his earlier view of same, as implied in the assessments for the years 1955 to 1957 inclusive.

Even if the Minister implied acceptance of the Sogemines Limited expenses by the 1955 to 1957 assessments, he is not bound by such implied acceptance when the conditions prescribed by the Act were not met in later assessments—see MNR v Inland Industries Ltd, [1972] CTC 27; 72 DTC 6013; and Ernest G Stickel v MNR, [1972] CTC 210; 72 DTC 6178 (judgment dated April 18, 1972).

I have the view that the Minister was correct in his application of section 83A in reassessing appellant for the taxation years 1958 to 1961 inclusive and that he was not barred by subsection 46(4) from making such a reassessment.

The appeal is therefore dismissed with costs.