Date: 20020927
Docket: T-570-01
Neutral citation: 2002 FCT 1014
Ottawa, Ontario, September 27, 2002
Present: The Honourable Madam Justice Tremblay-Lamer
BETWEEN:
ECHO BAY MINES LTD.
Applicant
- and -
MINISTER OF INDIAN AFFAIRS
and NORTHERN DEVELOPMENT
Respondent
REASONS FOR ORDER AND ORDER
[1] This is an application for judicial review of a decision of the Minister of Indian Affairs and Northern Development (the "Minister") dated March 6, 2001 confirming the Chief of the Mining Administration Division's assessment dated October 1, 1999 disallowing depreciation allowances claimed by the applicant pursuant to paragraph 65(8)(g) of the Canada Mining Regulations, C.R.C. 1978, c. 1516, as amended by SOR/88-9 (the "Mining Regulations".) Hereinafter, unless otherwise stated, all references to the Mining Regulations will be to those as amended by SOR/88-9, for its 1992, 1993 and 1994 fiscal years. This decision was made pursuant to section 84 of the Mining Regulations, as amended by SOR/99-219.
[2] The applicant, during the years in question, was the operator of the Lupin Mine in the Northwest Territories and as such filed mining royalty for the 1992, 1993 and 1994 fiscal years (the "returns") in respect of mining operations and capital equipment at that mine. The assessment of mining royalties in the Northwest Territories is governed by the Mining Regulations. In its returns, the applicant claimed deductions for depreciation allowance pursuant to the provisions of paragraph 65(8)(g) (as it was during the fiscal years in question and prior to being repealed in 1999 by SOR/99-219) of the Mining Regulations.
[3] In deducting these amounts, the applicant calculated the percentages for purposes of complying with paragraph 65(8)(g) of the Mining Regulations based on the cost of all assets used in the production of the output of the mine, including the cost of assets acquired during the particular year.
[4] The applicant explains that it further tracked the undepreciated balance available in the asset pool, to ensure that no depreciation in excess of cost was claimed or would be claimed in future years. In other words, according to the applicant, the total depreciation allowance claimed by it did not exceed 100% in the aggregate of the cost to the applicant of the depreciable assets used in the production of the output of the Lupin mine.
[5] In 1996, the Minister, through his delegate the Chief of the Mining Administration Division, Robert Lauer, retained Coopers & Lybrand, Chartered Accountants, to conduct an audit of each of the mining royalty returns for the 1992, 1993 and 1994 years.
[6] The initial draft audit reports were not accepted by the Chief of the Mining Administration Division as the depreciation claimed in those years (1992-94) was significantly higher than the 15% per annum allowable under paragraph 65(8)(g) of the Mining Regulations. The audit reports were therefore amended and as a result, some deductions requested by the applicant were denied.
[7] The result was that these denials of deductions to the Applicant, based on the adjustments to the calculation of depreciation allowance, resulted in proposed royalty assessments to the Applicant in the 1992, 1993 and 1994 years. The details of these proposed assessments were communicated by letter to the Applicant dated December 4, 1997.
[8] The total additional amount included in these proposed reassessments was $546,564 in royalties.
[9] The applicant was given 30 days from December 4, 1997 to comment on the audit reports, failing which mining royalty assessments for the 1992, 1993 and 1994 years would be issued, based on the draft audit reports.
[10] By letter dated December 29, 1997, the applicant disagreed with the proposed audit adjustments to the calculation of depreciation allowances for mine and processing assets.
[11] The Minister's officials responded by letter dated October 1, 1999, after several communications with the Applicant. The letter indicated that "On the basis of these audits, Echo Bay Mines Ltd. is hereby assessed mining royalty pursuant to section 65 of the Canada Mining Regulations in the amounts of $546,564." (the same as in the proposed assessments)
[12] The applicant sought a review of this assessment pursuant to section 84 of the Mining Regulations, SOR/99-219.
[13] Scott Murray, the Senior Advisor (Legislation) of the Mineral Resources Directorate, Northern Affairs Program, Department of Indian Affairs and Northern Development, confirmed the assessment on behalf of the Minister by letter dated March 6, 2001.
[14] The Minister interpreted paragraph 65(8)(g) in the following manner: an operator is allowed to deduct up to 15% of the original cost of the depreciable asset in each fiscal year until 100% of the original cost has been claimed as depreciation allowance.
[15] The Minister rejected the applicant's interpretation of paragraph 65(8)(g). The Minister's reasons for rejecting the applicant's interpretation are found in the following paragraphs:
The company's argument is set out in the last paragraph on page 2 and the first and second paragraphs on page 3 of the Taschuk letter. If a newly purchased asset costs less than 15 percent of the cost of all the depreciable assets of the mine used in production, including those that have already been depreciated, then the newly purchased asset may be fully depreciated in its first year. It appears that the company is mixing its concepts by combining the depreciable assets, with assets which have already been depreciated, to come up with an aggregate cost to the operator of the depreciable assets in the pool. I would suggest that this is double counting in that an asset which has been fully depreciated is not capable of being further depreciated, and therefore, is not a depreciable asset pursuant to paragraph 65(8)(g).
An absurdity is created if the original cost of fully depreciated assets is included in the calculation of depreciation allowance for newly purchased production assets. The fully depreciated assets could be used over and over to generate depreciation allowance. This methodology would allow, after a certain time, newly purchased assets to be fully depreciated in the year of acquisition. There would be a tendency to overstate the actual cost of production of the output of the mine, upon which the royalty is assessed, in that and each subsequent fiscal year. The result would be an understating of the value of the output of the mine and the reduction or elimination of royalties payable. Paragraph 65(8)(g) was not intended to operate in this manner.
I do not find Echo Bay's interpretation of paragraph 65(8)(g) convincing. In order for their argument to succeed the text of paragraph 65(8)(8) would have to be as follows:
g) a depreciation allowance determined by the operator, not exceeding 15 per cent per year and 100 per cent of the aggregate of the cost to the operator of the depreciable assets used in the production of the output of the mine. [Emphasis in original].
If the preposition "of' had been used, it would have been clear that the phrase "and 100 per cent of the aggregate" was to be read in conjunction with "of the cost to the operator of the depreciable assets." Instead the preposition "in" was used and it is clear that the phrase "and 100 per cent in the aggregate" refers to and limits the previous phrase "not exceeding 15 per cent per year." I must conclude that "aggregate" refers to a compilation of the individual tranches of depreciation allowance taken in the previous years. [Emphasis added].
Tribunal Record at 39.
Did the Minister err in its interpretation of paragraph 65(8)(g) of the Mining Regulations?
[16] Paragraph 65(8)(g) of the Mining Regulations in force at the relevant time read as follows:
| 65(8) The following deductions may be made in computing the value of the output of a mine for a fiscal year:
...
(g) a depreciation allowance determined by the operator, not exceeding 15 per cent per year and 100 per cent in the aggregate of the cost to the operator of the depreciable assets used in the production of the output of the mine; ... |
|
65(8) Pour déterminer la valeur de la production d'une mine au cours d'une année financière, il est permis de déduire les montants suivants:
...
(g) l'allocation d'amortissement déterminée par l'exploitant ne dépassant pas 15% par année, et 100% dans l'ensemble du coût, pour l'exploitant, des biens amortissables utilisés à la production de la mine; ... |
|
|
|
|
[17] The issue in this case hinges upon the different interpretations of paragraph 65(8)(g) of the Mining Regulations advanced by the parties. To facilitate an understanding of this case, I have summarized their positions below.
The Applicant's Position
[18] The applicant submits that the Minister erred in interpreting the provisions of paragraph 65(8)(g) of the Mining Regulations. According to the applicant, the phrase "not exceeding 15 percent per year' and the phrase "and 100 percent in the aggregate" refer to the cost to the operator of the depreciable assets used in the production of the output of the mine. Thus, the depreciation allowance may not exceed 15% per year of the cost to the operator of the depreciable assets used in the production of the output of the mine, and 100% of the aggregate of the cost of the operator of the depreciable assets used in the production of the output of the mine.
[19] Under this interpretation, all the depreciable assets are placed in a pool. If a depreciable asset ceases to be used in the production of the output of the mine, its original cost is subtracted from the depreciable pool. Similarly, if the operator begins to use a newly acquired asset in the production process, the cost to the operator of that asset is added to the depreciable pool. Each year, in computing the royalty, the operator may deduct a depreciation allowance not exceeding 15% of the depreciable pool balance. This allowance is subject to the limitation that the cumulative aggregate amount deducted cannot exceed 100% of the depreciable pool.
[20] Furthermore, where the aggregate depreciation allowances claimed by an operator over a period of seven or eight years have reached the 100% limitation and where the operator then acquires a new depreciable asset, the new asset can be fully depreciated in the year it is acquired. This is subject to the limitation that the cost has to be equal to or less than the 15% of the cost of all of the depreciable assets of the mine then used in production, including those that have already been depreciated.
[21] The applicant submits that this interpretation does not lead to an anomalous result due to the nature of the mining industry. After seven or eight years, a mine will be quite aged, which means that the future of the mine becomes more questionable with each passing year. Should an operator acquire additional assets to sustain the mine, the operator should be entitled to recover its capital. If the operator is required to depreciate an asset over an additional seven or eight year period, the operator may consume the benefit of the asset while not receiving credit for this depreciation.
[22] According to the applicant, its interpretation of paragraph 65(8)(g) is consistent with the legislative purpose of the Mining Regulations. In addition to raising royalties from mining operations, the Mining Regulations also encourage investment by allowing a depreciation allowance. This balancing of interests requires a broad and generous interpretation of the allowance provisions.
The Respondent's Position
[23] The respondent submits that the paragraph 65(8)(g) depreciation allowance acknowledges that only a portion of an operator's cost of the depreciable assets used in its mining operation should be deducted in each fiscal year when determining the amount of the operator's royalty. Each year, as the depreciable assets are used and gradually used up in the mining operations, up to 15% of their cost may be deducted until the depreciable assets are fully depreciated.
[24] According to the respondent, paragraph 65(8)(g), by its ordinary meaning, permits a maximum annual depreciation allowance claim for a depreciable asset equal to 15% of its cost, commencing in the year the asset is acquired and ending when the asset has been fully depreciated. In other words, the operator may deduct up to 15% of the original cost of the depreciable asset in each fiscal year until 100% of the original cost has been claimed as depreciation allowance. This is referred to by accountants as the "straight line" method of depreciation. Using the straight line method of depreciation, at the rate of 15% per annum, a depreciable asset will be fully depreciated over the course of approximately seven fiscal years.
[25] Under this interpretation, in the first year that royalties are payable, a 15% depreciation allowance may be claimed against the cost of the production assets. A 15% depreciation allowance may be claimed in each of the second through sixth years; in the seventh year, a 10% depreciation allowance may be claimed. After the seven years, the production assets used in the first year have been depreciated 100%. If additional production assets are purchased in year five, a 15% depreciation allowance may be taken for the new assets in each of the years five through ten, and the remaining 10% may be taken in year eleven. Therefore, each year's assets are depreciated independently and in isolation from any other year's assets.
Discussion and decision
[26] Questions of interpretation normally attract a correctness standard of review. However, in Moreau-Bérubé v. New Brunswick (Judicial Council), [2002] S.C.J. No. 9 at para. 61, the Supreme Court of Canada stated that "... questions of law arising from the interpretation of a statute within the tribunal's area of expertise will also attract some deference." The Court referred to Bastarache J. who noted the following in Pushpanathan v. Minister of Citizenship and Immigration, [1998] 1 S.C.R. 982 at para. 37:
... even pure questions of law may be granted a wide degree of deference where other factors of the pragmatic and functional analysis suggest that such deference is the legislative intention ... Where, however, other factors leave that intention ambiguous, courts should be less deferential of decisions which are pure determinations of law.
[27] In the case at bar, it is true that the Minister's delegate has some expertise in matters relating to the application of the Mining Regulations. However, the interpretation of paragraph 65(8)(g) did not require any particular technical or scientific knowledge (Gerle Gold Ltd. v. Golden Rule Resources Ltd., [2001] F.C. 647 (C.A.)). Therefore, in my opinion, the appropriate standard of review is correctness.
[28] Having considered the submissions of the parties, I am of the opinion that the correct interpretation is the one proposed by the respondent.
[29] I adopt this position for the following reasons:
[30] Firstly, I am of the opinion that the applicant has wrongly interpreted paragraph 65(8)(g) with respect to its deduction of depreciable assets. The applicant argues that the aggregate cost of all depreciable assets on hand as of its fiscal year-end, including assets that have already been fully depreciated, may be used to determine the 15% upper limit of its annual depreciation allowance. Furthermore, a mine operator may deduct as much as 100% of the cost of a new capital asset in the year it is purchased, as long as that amount does not exceed 15% of the historical costs of the assets on hand, including those assets that may have been fully depreciated.
[31] In my opinion, this interpretation is contrary to the words used in paragraph 65(8)(g). This provision only permits an allowance in respect of "depreciable assets". An asset that has already been fully depreciated is not capable of being further depreciated and therefore is not a depreciable asset.
[32] If I was to adopt the applicant's position, an anomaly would be created whereby a fully depreciated asset could be used over and over to enlarge the pool of depreciable assets, increasing the amount of depreciation allowance allowed. This was recognized by the Minister, who stated that:
An absurdity is created if the original cost of fully depreciated assets is included in the calculation of depreciation allowance for newly purchased production assets. The fully depreciated assets could be used over and over to generate depreciation allowance. This methodology would allow, after a certain time, newly purchased assets to be fully depreciated in the year of acquisition. There would be a tendency to overstate the actual cost of production of the output of the mine, upon which the royalty is assessed, in that and each subsequent fiscal year. The result would be an understating of the value of the output of the mine and the reduction or elimination of royalties payable. Paragraph 65(8)(g) was not intended to operate in this manner.
[33] I agree with the applicant that the Mining Regulations is a piece of legislation that attempts to balance the interests of various parties and as a result, that its provisions should be interpreted broadly . However, I cannot accept that the Governor in Council could have intended paragraph 65(8)(g) to allow fully depreciated assets to be used over and over to generate depreciation allowance.
[34] Secondly, I believe that the respondent's interpretation is correct in light of the specific wording of the provision in question. Paragraph 65(8)(g) states that the depreciation allowance determined by the operator cannot exceed "15 percent per year and 100 percent in the aggregate of the cost to the operator of the depreciable assets used in the production of the output of the mine." In my view, the use of the preposition "in", as found in the phrase "and 100 percent in the aggregate of the cost to the operator" indicates that the Governor in Council intended the 15% to refer to the amount of depreciation allowed for each individual asset per year.
[35] The distinction between the prepositions "in" and "of" was an important factor in the Minister's decision. He stated that:
I do not find Echo Bay's interpretation of paragraph 65(8)(g) convincing. In order for their argument to succeed the text of paragraph 65(8)(8) would have to be as follows:
g) a depreciation allowance determined by the operator, not exceeding 15 per cent per year and 100 per cent of the aggregate of the cost to the operator of the depreciable assets used in the production of the output of the mine. [Emphasis in original].
If the preposition "of' had been used, it would have been clear that the phrase "and 100 per cent of the aggregate" was to be read in conjunction with "of the cost to the operator of the depreciable assets." Instead the preposition "in" was used and it is clear that the phrase "and 100 per cent in the aggregate" refers to and limits the previous phrase "not exceeding 15 per cent per year." I must conclude that "aggregate" refers to a compilation of the individual tranches of depreciation allowance taken in the previous years. [Emphasis added].
[36] The Minister's statements with respect to the use of the preposition "of" are convincing, and reinforce my view that his interpretation of paragraph 65(8)(g) is correct. Had the preposition "of" been used instead of "in", then it is conceivable that the phrase "100 percent in the aggregate" could be interpreted as referring to all of the depreciable assets combined together.
[37] The Oxford English Dictionary, 2nd ed. Vol IV, defines the preposition "in" as "expressing reference or relation to something." Similarly, the ITP Nelson Canadian Dictionary of the English Language defines the preposition "in" as "with reference to". By contrast, this latter dictionary defines the preposition "of" as "from the total or group comprising". The Oxford English Dictionary, supra, indicates that "after a collective term, a quantitative or numeral word, or the nature of anything having component parts, of introduces the substance or elements of which this consists."
[38] Applying these definitions to the case at bar, if the phrase "15 percent per year and 100 percent" was intended to refer to the amount of all the depreciable assets combined together, it would have been necessary to place the preposition "of" in front of "the aggregate...." The use of the preposition "of" would have indicated that the 15 percent per year and 100 percent referred to the elements which followed, in this case, "the aggregate of the cost to the operator of the depreciable assets used in the production of the output of the mine". In order to adopt the applicant's position, paragraph 65(8)(g) would have had to have been drafted as follows:
g) a depreciation allowance determined by the operator, not exceeding 15 percent per year and 100 percent of the aggregate of the cost to the operator of the depreciable assets used in the production of the mine;
[39] However, because the preposition "of" was not used, I believe that the 15 percent per year and 100 percent does not refer to "the aggregate of the cost to the operator of the depreciable assets used in the production of the mine". In my view, the preposition "in" preceding the phrase "the aggregate..." and the preposition "of" preceding the phrase "the depreciable assets" split paragraph 65(8)(g) into different concepts. The preposition "in" specifies that the 15 percent per year and 100 percent refers to the cost to the operator (of each individual asset). However, the preposition "of" introduces another concept, that it is only the depreciable assets used in the production of the mine that are subject to this depreciation allowance.
[40] For all these reasons, it is my opinion that the Minister correctly interpreted the provision in question. Paragraph 65(8)(g) allows an operator to deduct up to fifteen percent of the original cost of the depreciable asset in each fiscal year until one hundred percent of the original cost has been claimed as depreciation allowance.
[41] Consequently, the application for judicial review is dismissed.
ORDER
THIS COURT ORDERS THAT the application for judicial review is dismissed.
"Danièle Tremblay-Lamer"
J.F.C.C.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-570-01
STYLE OF CAUSE: ECHO BAY MINES LTD. v. THE MINISTER OF
INDIAN AFFAIRS AND NORTHERN
DEVELOPMENT
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: September 12, 2002
REASONS FOR : Tremblay-Lamer, J
DATED: September 27, 2002
APPEARANCES:
Mr. Carman McNary FOR APPLICANT
Mr. Kevin Kimmis FOR RESPONDENT
SOLICITORS OF RECORD:
Fraser Milner Casgrain FOR APPLICANT
Edmonton, Alberta
Morris Rosenberg FOR RESPONDENT
Deputy Attorney General of Canada