American Metal Company of Canada, Ltd., Appelant, v. Minister of National Revenue, [1952] CTC 302, 52 DTC 1180

CAMERON, J.:—This is an appeal from the decision of the Income Tax Appeal Board dated January 9, 1951, whereby the appellants’ appeals to that Board from assessments to income taxes for the years 1946, 1947 and 1948 were disallowed.

In its returns for those years the appellant had claimed as deductions a proportion of certain expenses incurred by it in exploring for minerals, but such deductions were disallowed by the respondent on the ground that the chief business of the appellants was not that of mining or exploring for minerals within the meaning of certain sections of the Income War Tax Act and Income Tax Act, to which I shall now refer.

For the taxation year 1948 the following provisions enacted by Section 16, subsection 4 of c. 63 of the Statutes of Canada, 1947, were in effect :

"‘A corporation whose chief business is that of mining or exploring for minerals is entitled to deduct from income, as defined in the said Act, of the year of expenditure, an amount equal to all prospecting, exploration and development expenses incurred by it in searching for minerals during the year 1948 if the corporation files certified statements of such expenditures and satisfies the Minister that it has been actively engaged in prospecting and exploring for minerals by means of qualified persons and has incurred the expenditure for such purposes. ’’

For the year 1947, Section 8, subsection 9, of the Income War Tax Act provided as follows:

"A corporation whose chief business is that of mining or exploring for minerals is entitled to deduct from the aggregate of the taxes under this Act and the Excess Profits Tax Act, 1940, payable by it in respect of the year of expenditure, twenty percentum of all prospecting, exploration and development expenses incurred by it in searching for minerals during the year 1947 ; provided that no such deduction shall be allowed unless the corporation files certified statements of expenditures and satisfies the Minister that it has been actively engaged in prospecting and exploring in Canada for minerals by means of qualified persons and has incurred the said expenditures for such purposes.”

For the taxation year 1946, Section 8, subsection 9 of the Income War Tax Act differed in some respects from the form in which it appeared in 1947. But for the purposes of this appeal it is not necessary to distinguish them, it being agreed that for each of these years, as well as for 1948, the only problem is to determine what was the chief business of the appellant. It is not suggested that the facts warrant any distinction being drawn between any of the years in question; the appellants must succeed —or fail—in all three appeals.

The appellant is a wholly-owned subsidiary of the American Metal Company Limited, which has its head office in New York City and is incorporated under the laws of the State of Delaware. The parent company conducts an international business in non-ferrous metals owning, operating and having investments in mines, smelters and refineries in many countries and conducts exploration work throughout the world. The appellant company was incorporated by Dominion Charter in 1930, and from that year until 1943 its sole business was that of purchasing metals in Canada, some portion of which was sold in Canada and the remainder of which was sold to the parent company.

Prior to 1943 the appellant company was not concerned with exploration for minerals in Canada. The parent company, from time to time, sent its mining engineers and geologists to Canada, but finding this somewhat unsatisfactory, decided to establish a Canadian organization for that purpose.

From 1943 on, all exploration work was conducted by the appellant company. This part of the appellant’s business was conducted from a small office in Toronto, and was under the direction of the appellant’s chief geologist. The field work consisted of the examination by a geologist of promising mines, and also sending out of small prospecting parties to explore certain areas for minerals.

In 1943 the appellant company employed a staff of 15 persons in all on this work. In 1946 it employed 15 people in all. It ex- amined 17 out of 60 mining properties offered for its consideration, participated in one prospecting syndicate, and expended a total of $36,128.29 on this work. In 1947 eight people were employed and 32 mining properties were examined, the total expenditure being $34,953.18. In 1948 only six people were employed, 27 mining properties were examined, and the company participated in the prospecting syndicate above mentioned, the total expenditure being $40,060.00. From these activities in 1946, 1947 and 1948 no income whatever resulted.

The purposes and objects of the appellant company as set out in its charter are very broad, and include the buying and selling of all kinds of metals and minerals as well as prospecting and exploring for minerals. Since its incorporation it appears to have carried on no other activities. Prior to the incorporation of the appellant company, the parent company had purchased the copper production of International Nickel Company of Canada, which was then shipped to its refinery in the United States. The reason for the incorporation of the appellant company was stated by its vice-president to be twofold. Due to the increased production of copper by International Nickel Company it became economically desirable to build a refinery in Canada, and this was done in co-operation with two other corporations. The appellant was incorporated to hold the shares of the parent company in that refinery, but in 1933 or 1934 the refinery was sold to International Nickel Company. The other purpose was to purchase the electrolitic copper to be produced by that refinery. Since 1933 the appellant has purchased the entire output of refined copper from International Nickel Company, for which it pays the resale price less a sales discount of one per cent. A portion of such copper is then sold in Canada to The Consolidated Mining and Smelting Corporation, and the United Kingdom Minister of Supply, and on occasions to one other Canadian corporation. The rest is then sold to the parent company in the United States, which re-sells it to the trade. In the result, the appellant receives a profit on its buying and selling of copper of something less than one per cent on the price at which the copper is sold to the trade.

Its business of buying and selling minerals is a continuous operation. The following table is indicative of the volume of that portion of the business:

In 1946 the sale of silver amounted to $796,026.48, and in 1947 and 1948 to over $4 million in each year. The value of gold bought and sold is not stated. Zine to the value of over $7 million was sold in 1946 and over $171,000 in 1947.

It is shown that in the years in question the appellant company had no employees in Canada carrying on its business of buying and selling minerals, all work in connection therewith being conducted by and at the expense of the parent company in New York, but on behalf of the appellant.

Exhibit A-3 is a series of documents indicative of a typical sale, as it is carried out when the appellant sells to the parent company. The transaction originates with a sale by the parent company to a customer, then the parent company enters into an agreement to buy from the appellant, and then the appellant buys the required amount from the International Nickel Company. When payments are made they are in reverse sequence.

Exhibit A-4 is a similar series of agreements, invoices, shipping instructions, credit notes, etc., relating to a typical sale by the appellant to a Canadian customer. The evidence indicates that not more than three employees would be required to take care of all the work involved so far as the appellant is concerned —an executive and two assistants.

The appellant insofar as it buys and sells minerals is in the position of a middle man with an assured source of supply from the International Nickel Company and Sherrit Gordon Mines Limited, and assured outlets for its purchases to one company in the United States, (the parent company), and to two substantial customers and one smaller one in Canada. It has little, if any, credit risk, and derives its income from a small percentage on its sales.

"‘Chief business’’ is not defined in either of the Acts, and the phrase, so far as I am aware, has not been the subject of judicial interpretation. In my view it 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. The main contention of the appellant is that, as the company engaged substantially more employees in its Exploration Division (a maximum of 15) than were required to carry on th: metal dealing activities (a maximum of 3 had the work been done in Canada), that is an indication that there was greater activity in the exploration business than in the metal dealing business. That is, undoubtedly, an element to be taken into consideration, and there might be cases in which it was the determining factor. But I do not think that in this case it is at all decisive. Likewise, I am of the opinion that the relevant income from the two businesses carried on by a corporation is an important element to be considered in determining which is the chief business, but that it is not the only matter to be considered, and not necessarily the determining factor. I think, however, that it is of somewhat greater importance than that of the relative number of employees. A business is carried on for the purpose of making a profit, and from that point of view at least the more profitable operations of one branch of a business make that branch more important than other branches which are less profitable, at least to the corporation.

But, as I have said, it is not necessarily decisive. For example, a mining corporation employing 5,000 men in its various mines might make $5 million in profits over a number of years. If it be assumed that in a subsequent year it also operated a small trucking business which makes a profit of $10,000, but in the same year, due to international conditions, operates its mines with the same number of employees, but without making any profit thereon, then in such a case I do not think it could be said that the mining business had ceased to be its chief business.

Now in this case from incorporation of the company until 1943 the only business of the appellant was that of dealing in metals. That business has continued and expanded. It involves the purchase and sale of metals aggregating in value well over $40 million per year and in profits amounting to over $285,000 in 1948. Its operations are on a huge scale and undoubtedly fall within the category of big business as shown by the number of contracts entered into and the amount of money involved. No income whatever was earned in the other activity, that of exploration, and all its expenses were provided for out of the profits of the metal-dealing business.

In my opinion, these facts quite clearly establish that the metal dealing business of the company which, until 1943 was its sole business, or was at all times after 1943 when the exploration activities were also carried on, the chief business of the appellant corporation. The exploring operations, at all times, were of a relatively minor nature and could be described, I think, merely as a sideline to the main business of the corporation. The chief business of the appellant not being that of mining or exploring for minerals, the appellant is not within the provisions of the exempting sections.

For these reasons the appeals will be dismissed and the assessments affirmed. The respondent is also entitled to be paid his costs, after taxation.

Judgment accordingly.