Newmont Canada Corporation v. The Queen

Newmont Canada Corporation v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-03-08
Neutral citation
2011 TCC 148
File numbers
2003-4491(IT)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Income Tax Act
Decision Content
Docket: 2003-4491(IT)G
BETWEEN:
NEWMONT CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on December 1, 2, 3, 4, 7, 8 and 9, 2009,
at Toronto, Ontario.
Before: The Honourable Justice Steven K. D'Arcy
Appearances:
Counsel for the Appellant:
John M. Campbell,
David W. Chodikoff
and Tarsem S.Basraon
Counsel for the Respondent:
Wendy Burnham and
Deborah Horowitz
____________________________________________________________________
JUDGMENT
The appeals with respect to the assessments made under the Income Tax Act for the Appellant’s 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 taxation years and its taxation year ending July 18, 1996, are dismissed.
Costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 8th day of March 2011.
“S. D’Arcy”
D'Arcy J.
Citation: 2011 TCC 148
Date: 20110307
Docket: 2003-4491(IT)G
BETWEEN:
NEWMONT CANADA CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1] The Appellant has appealed notices of reassessment issued in respect of each of its taxation years ending between December 31, 1988 and July 18, 1996.
[2] There are three issues in this appeal:
1) Whether section 80.2 of the Income Tax Act (the “Act”) applied to 50% of the approximately $29 million of mining tax the Appellant deducted when determining the amount of a royalty payment it was required to make in each of its taxation years ending between December 31, 1988 and July 18, 1996.
2) Whether the Appellant was entitled to deduct $7.25 million under either section 9 or subparagraph 20(1)(p)(ii) of the Act for a loan it made to a third party that was not repaid.
3) Whether the Appellant was entitled to deduct approximately $157,000 by virtue of subparagraph 20(1)(p)(i) of the Act.
[3] During the five days of testimony, I heard from the following five witnesses:
- Mr. Joseph Baylis, former Vice-president, Investor Relations and General Counsel of the Appellant;
- Mr. Michael Proctor, former Vice-president, Finance of the Appellant;
- Mr. Walter Zaverucha, a consultant who provides services with respect to land title reviews;
- Ms. Paula Kember, a former assistant controller of Corona Corporation; and
- Mr. Gordon MacGibbon, a large file case manager with the Canada Revenue Agency.
[4] I found all of the witnesses to be credible.
[5] Before addressing the issues in this appeal, I will review the history of the Appellant and the Golden Giant Mine.
History of the Appellant and the Golden Giant Mine
[6] During most of the relevant period, the Appellant was a public company, Hemlo Gold Mines Inc. The company's main activities were the operation of the Golden Giant Mine in Northern Ontario and exploring for minerals, particularly gold, in Canada and the United States.
[7] The Golden Giant Mine was an extremely successful gold mine located in the Marathon area of Northern Ontario. It was adjacent to two other gold mines, the David Bell Mine and the Page Williams Mine.
[8] Two prospectors (Donald McKinnon and John Larche) staked mining claims in the Thunder Bay area in 1980 (the “M&L Claims”). Two exploration companies, Goliath Gold Mines Ltd. ("Goliath") and Golden Sceptre Resources Ltd. ("Golden Sceptre"), eventually held the M&L claims, which included the area that became the Golden Giant Mine.[1]
[9] On November 10, 1982, a Noranda company, Noranda Exploration Company Limited ("Norex") entered into an agreement (the "Golden Giant Agreement") with Goliath and Golden Sceptre pursuant to which Norex would earn a 50-percent interest in the M&L Claims by completing an exploration program on the claimed property, constructing the Golden Giant Mine, financing all capital costs and bringing the mine into production within two years of the date of the Golden Giant Agreement.[2]
[10] When developing the Golden Giant Mine, Norex determined (sometime in the latter half of 1983) that the best location for the mine shaft was on a piece of property that was referred to as the "Quarter Claim." As a witness for the Appellant noted, a shaft is normally drilled through waste rock, not through ore, such as gold ore. Norex could not find a waste rock area within the area covered by the M&L Claims. However, it was able to locate what it believed was such an area on the adjacent David Bell Mine site. Teck Corporation and International Corona Resources Ltd. (jointly referred to as "Teck/Corona") owned the rights to the David Bell Mine.[3]
[11] As a result, on January 25, 1983, Norex entered into an agreement (the "Quarter Claim Agreement”) with Teck/Corona pursuant to which Norex was granted the option to acquire a 100% undivided interest in the Quarter Claim subject to, among other things, a 50% net profits royalty in favour of Teck/Corona[4] (the "Quarter Claim Royalty"). It is the Quarter Claim Royalty that has given rise to the first issue herein.
[12] Norex's interest in the M&L Claims vested on March 25, 1985[5] and the first gold from the Golden Giant mine was poured in April 1985.[6]
[13] Norex's interest in the Quarter Claim vested in 1986.[7] The Court was not provided with the actual date the Quarter Claim vested.
[14] In early 1987, the interests in the Golden Giant Mine held by Goliath, Golden Sceptre, and Norex, including Norex's interest in the Quarter Claim, "were merged" into a new company, Hemlo Gold Mines Inc.[8] Hemlo Gold Mines then became a public company.
[15] Hemlo Gold Mines (through its subsidiary HGM Inc.) operated the Golden Giant Mine through all of the years under appeal with the exception of 1995 and 1996.
[16] In 1995, Hemlo Gold Mines, HGM Inc. and a numbered company merged to form a new company called Hemlo Gold Mines Inc. In 1996, Hemlo Gold Mines Inc. merged with an arm's length corporation, Battle Mountain Gold Ltd., and the name of the company was changed to Battle Mountain Canada Ltd.[9] Newmont Mining Corporation acquired the company in 2001 and its name was changed to Newmont Canada Ltd.
[17] For ease of reference, I will refer to the Appellant and its predecessors (from the date of the 1987 amalgamation) as Hemlo Gold.
[18] In addition to operating its mines, Hemlo Gold carried out exploration activities and invested in numerous third-party entities. On April 21, 1988, it entered into an agreement with a junior exploration company, Windarra Minerals Ltd. ("Windarra"). Pursuant to the agreement, Hemlo Gold, in 1988 and 1999, made an equity investment in Windarra of $9.271 million and loaned Windarra $8.25 million (the "Windarra Loan").[10]
[19] On November 6, 1992, Hemlo Gold entered into a settlement agreement with Windarra (the “1992 Settlement Agreement”) which had the effect of extinguishing $7.25 million of the Windarra Loan.[11] The second and third issues relate to the 1992 Settlement Agreement.
[20] I will first consider the issue relating to section 80.2 of the Act.
Issue 1: The Quarter Claim Issue
[21] It is the Appellant's position that section 80.2 of the Act applies in each of the years under appeal to reduce Hemlo Gold's income by 50% of the Ontario mining tax paid or payable by Hemlo Gold in respect of the Quarter Claim.
[22] The Respondent does not agree.
Summary of the Law
[23] Section 80.2 of the Act was a provision that addressed certain concerns that Parliament had with respect to reimbursements of certain Crown charges.[12] Appendix A to these Reasons contains the wording of section 80.2 as it read prior to February 1990 and as it read after January 1990.
[24] In the publication entitled Canadian Resource Taxation the general operation of section 80.2 is described as follows:[13]
Paragraphs 12(1)(o) and 18(1)(m) must be read in conjunction with section 80.2. Under section 80.2, if a Crown charge under paragraph 18(1)(m) or 12(1)(o) is reimbursed by the taxpayer under the terms of a contract and the taxpayer is resident in Canada or carrying on business at the time of such payment, the reimbursement paid by the taxpayer is deemed to be an amount paid by the taxpayer under paragraph 18(1)(m) and the recipient who is reimbursed is deemed not to have received the amount. The provision ensures non-recognition of the receipt by the party that is reimbursed and ensures recognition of the Crown charge by the taxpayer making the reimbursement.
[25] The following example of the general application of section 80.2 was provided in a paper delivered by Mr. Christopher R. Post at the 2005 Prairie Provinces Tax Conference:[14]
. . . In the absence of a provision like 80.2, it would have been fairly easy for oil and gas producers to plan their way around crown charges not being deductible by reimbursing other taxpayers for such amounts.
For example, say Taxpayer A holds the mineral rights to a particular property and Taxpayer B farms-in to that property, and Taxpayer A continues to have the obligation to pay the crown charges on all oil and gas production. If Taxpayer B agrees to reimburse Taxpayer A for all the crown charges related to production, the payment by Taxpayer B for crown charges would become deductible for tax purposes but for 80.2. . . . 80.2 deems the person making the reimbursement (Taxpayer B in the example above) not to have made the actual payment “but to have paid an amount described in 18(1)(m) equal to the amount” of the payment. In other words, the one making the reimbursement is considered for income tax purposes to have made a payment directly to the crown. In this example, the payment for crown charges made by Taxpayer B are not deductible for tax purposes, under the rules as originally introduced, which is consistent with the intent of 12(1)(o) and 18(1)(m).
As well, 80.2 deems the one receiving the reimbursement (Taxpayer A in the example) not to have received anything for tax purposes. As a result Taxpayer A would have no income or loss—which is consistent with the cash position and the intent of the legislation.
[26] Counsel for the Appellant and Respondent both argued that section 80.2 is not an anti-avoidance rule, but rather is a relieving provision. This depends upon whom one is considering; in the example that Mr. Post provided, the provision is a relieving provision to taxpayer A but an anti-avoidance provision to taxpayer B.
[27] Prior to February 1990, the following conditions had to be satisfied before section 80.2 applied:
- A taxpayer, under the terms of a contract, reimburses another person for an amount paid or that became payable by that other person, and
- Such amount was included in the income of that other person or denied as a deduction in computing the income of that other person by virtue of paragraph 12(1)(o) or paragraph 18(1)(m), as the case may be, and
- The person was resident in Canada or carrying on business in Canada at the time of the reimbursement.
[28] After January 1990, the conditions that had to be satisfied were as follows:
- A taxpayer under the terms of a contract, pays to another person an amount (referred to as the "specified payment") that may reasonably be considered to have been received by the other person as a reimbursement, contribution or allowance in respect of an amount (referred to in paragraph (b) as the "particular amount") paid or payable by the other person,
- The particular amount is included in the income of that other person or denied as a deduction in computing the income of that other person by reason of paragraph 12(1)(o) or paragraph 18(1)(m), as the case may be; and
- The person was resident in Canada or carrying on business in Canada at the time of the reimbursement.
[29] Both parties noted that the difference between the pre-February and post-January 1990 wording of the section did not affect the application of the section to the issues in this appeal.
[30] When making their arguments, counsel for the Appellant and counsel for the Respondent focused on two issues: whether the deduction of Ontario mining taxes was denied by paragraph 18(1)(m) and whether there was a reimbursement. In fact, counsel for the Respondent argued that, if I accept the Respondent's position with respect to paragraph 18(1)(m), there is no need to consider the issue of whether or not there was a reimbursement.
[31] While I accept that, based on the evidence before me, these are the only two issues, it is clear from the wording of section 80.2 that one must first determine if there was a reimbursement before considering whether paragraph 18(1)(m) applies. It is only if a reimbursement is received in respect of an "amount" that one is required to determine if the deduction of the "amount" is denied under paragraph 18(1)(m). The application of paragraph 18(1)(m) is irrelevant if a reimbursement of an "amount" did not occur.
[32] In determining whether there was a qualifying reimbursement within the meaning of section 80.2 of the Act, I will first consider the wording of section 80.2 as it applied to payments made after January 1990 since that would include most of the years under appeal. I will then consider whether the change in wording affected the application of the section.
[33] I will begin by considering the meaning of the word reimbursement as it is used in section 80.2.
[34] The Appellant argued that reimbursement is a context-specific term, but did not provide a definition.
[35] Counsel for the Respondent argued, citing Westcoast Energy,[15] that in order for a payment to qualify as a reimbursement, the payee must have a legal right to claim the amount. They also cited Associate Chief Justice Rossiter who, in Alberta Power,[16] stated in paragraph 94: "What is contemplated is a situation where one party is forced to pay an amount that is properly the liability of another party and is therefore entitled to be reimbursed the funds from the second party." Finally, they argued that in order for there to be a reimbursement there must have been an amount paid by a reimbursing party.
[36] As the Supreme Court of Canada has stated, statutory interpretation of fiscal legislation should be done “. . . according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. . . .”[17]
[37] The word reimburse, in the ordinary sense, is defined by the Canadian Oxford Dictionary[18] as follows:
1. repay (a person who has expended money). 2. repay (a person's expense).
[38] Webster’s dictionary[19] provides a similar definition. The word is defined as "1: to pay back to someone. . . 2: to make restoration or payment of an equivalent to." Black's Law Dictionary[20] defines reimbursement as "1. Repayment. 2. Indemnification.”
[39] In Westcoast Energy, the Federal Court, after considering a number of examples of the word reimbursement in different legal relationships, stated at paragraph 46:
46 In all of the examples of the word reimbursement, there exists a flow of benefits between the respective parties. The person who benefits is under a legal obligation to pay back the amount expended. . . .[21]
[40] In Canada Safeway,[22] the Federal Court of Appeal noted that the term "reimbursement" has to be interpreted by reference to the context in which it is used and from which it can acquire greater and appropriate specification.
[41] In my view, the word reimbursement, as used in section 80.2 of the Act, means the payment by a person of an amount to a third party as repayment of or indemnification for an amount paid or payable by the third party.
[42] I agree with counsel that the difference between the pre-February and post‑January 1990 wording of section 80.2 does not affect the determination of whether there was a qualifying reimbursement within the meaning of section 80.2. The pre‑February 1990 wording refers to a taxpayer who "reimburses another person for an amount” while the post-January 1990 wording refers to a taxpayer who pays to another person "an amount . . . that may reasonably be considered to have been received by the other person as a reimbursement, contribution or allowance in respect of an amount". In both instances the section, in my view, refers to payments by a person of an amount to a third party as repayment of or indemnification for an amount paid or payable by the third party.
Summary of the Relevant Facts
[43] Mr. Proctor testified that the president of Norex, Mr. Harvey, and the secretary of Norex, Mr. Ivany, negotiated the Quarter Claim Agreement.[23] Neither of these individuals testified at the hearing. In fact, I did not hear testimony from anyone who was involved in negotiating the Quarter Claim Agreement.
[44] One of the witnesses for the Appellant agreed that the Quarter Claim Agreement was essentially an option to acquire property.[24] Under the agreement, Norex was granted the option to acquire a 100% undivided right, title and interest in and to the Quarter Claim subject to the paramount rights of the Crown, an existing 3% royalty,[25] and the Quarter Claim Royalty.[26]
[45] Under the terms of the Quarter Claim Agreement, Norex was deemed to have exercised its option to acquire the 100% undivided interest in the Quarter Claim once it fulfilled its contractual obligations with respect to exploring the Quarter Claim and commenced sinking the shaft for the mine, and once its interests, under the Golden Giant Agreement, in the M&L Claims (including the Golden Giant Mine) vested.[27]
[46] The Quarter Claim Agreement also provided for the following rights and obligations:[28]
- Norex was given permission to sink the shaft for the Golden Giant Mine and agreed to explore the Quarter Claim and act as operator if the Quarter Claim was mined.
- Norex agreed to provide hoisting capacity of 500 tons per day for any gold ore (or other material) mined in the Quarter Claim and to reserve milling capacity of 500 tonnes per day for the mined gold ore.[29]
- Norex agreed to allow Teck reasonable access to the shaft and shaft site in order for Teck to explore and exploit the David Bell Mine.[30]
- Teck/Corona agreed that once it obtained a surface and mineral lease for the David Bell mine (including the property where the Quarter Claim was located), it would take all necessary steps to create a separate lease for the Quarter Claim for the benefit of Norex.[31]
[47] The Quarter Claim agreement contains a clause that states the following:[32]
T/C [Teck/Corona] and Norex recognize and agree that due to the early stage of development of the Corona Property [the David Bell Mine] and the Golden Goliath Property [the Golden Giant Mine] they are unable to agree with certainty as to some of the matters set out in this letter on which, however, they have nevertheless reached a basic understanding. In connection with those matters and as further exploration and development work is carried out on those properties they will use their best efforts to reach definitive agreements. In the meantime Norex and T/C agree that this letter and the agreements set out herein will bind them to the fullest extent possible. From time to time Norex and T/C will settle and enter into more formal agreements at the request of either Norex or T/C.
[48] Mr. Baylis noted that some of the matters that were subsequently agreed to were:[33]
- A change in the area conveyed. (The area was enlarged to accommodate the mineshaft).[34]
- A reduction in the mining rate from the agreed 500 tons per day, after several years, due to rock mechanics and stresses on the shaft.[35]
- Agreements on how costs relating to the Quarter Claim were to be tracked and recorded.
- Agreements on mining practices and plans relating to mining the boundary between the Quarter Claim and the David Bell Mine.
[49] There were two written amendments to the Quarter Claim Agreement. The first amending agreement (the “1983 Amending Agreement”) was signed on December 1, 1983[36] (ten months after the parties entered into the Quarter Claim Agreement). It appears from the recitals that the purpose of the amendment was to address Norex’s request that Teck/Corona grant it an immediate conveyance of the Quarter Claim.
[50] The second amending agreement was entered into on July 4, 1995 (the “1995 Amending Agreement”).[37] Mr. Baylis explained that the amendments were required once it was no longer technically feasible to mine the Quarter Claim at the agreed rate of 500 tons per day. The 1995 Amending Agreement provided for a deemed gold production rate and deemed unit production costs that were to be used in the calculations of payments to Teck/Corona under the Quarter Claim Agreement, including the Quarter Claim Royalty.[38]
[51] Mr. Baylis, during cross-examination, stated that Norex received in 1986 “a conveyance of the Quarter Claim, subject to the rights of Teck and Corona and the paramount rights of the Crown and the numbered company for a net smelter interest.”[39] It appears that this conveyance was the lease referred to in the 1983 Amending Agreement, which was converted to a fee simple interest in 1989.[40]
[52] I will now turn to the Quarter Claim Royalty. When negotiating the Quarter Claim Agreement neither of the parties imagined or believed that the Quarter Claim contained valuable gold or other mineral reserves. The parties only discovered that the property contained valuable gold reserves after they drilled the shaft and explored the deeper portions of the Quarter Claim.[41] As a result, Hemlo Gold paid substantial amounts to Teck/Corona in respect of the Quarter Claim Royalty.
[53] Norex had agreed to pay Teck/Corona the Quarter Claim Royalty in consideration of the grant of the option with regard to the Quarter Claim. The Quarter Claim Agreement states that the royalty will be payable to Teck/Corona after Norex has recouped its capital outlays in connection with the mining of the ore, but not including capital costs relating to the shaft. The calculation of the royalty is set out in Schedule D to the Quarter Claim Agreement.[42]
[54] Schedule D was described as boilerplate, a template that was used by Noranda in hundreds of agreements. It was used whenever Noranda (including Norex) “did a joint venture agreement of any sort.”[43]
[55] Schedule D required Norex to establish a Royalty Account to which it was to debit the following:[44]
1) Preproduction costs (expenditures on exploration, development and construction made solely for the benefit of the Quarter Claim and made prior to the commencement of commercial operations).
2) Operating losses from the Quarter Claim.
3) Post-production capital expenditures (capital costs for the Quarter Claim incurred after production commenced).
4) Interest charges on month-end balance in Royalty Account.
5) Reserve charges (amount calculated based upon estimated costs of rehabilitating and restoring the Quarter Claim).
[56] Schedule D required Norex to first apply any net profits from the Quarter Claim to the reduction of the amounts debited to the Royalty Account. It stated that “[w]hile there is any debit balance in the Royalty Account, Norex shall retain all Net Profits.”[45] Whenever the Royalty Account did not have a debit balance, net profits were to be distributed 50% to Norex and 50% to Teck/Corona.
[57] Mr. Proctor noted that, at the time the agreement was entered into, it was assumed that there would be “a lot of debits to the Royalty Account and, therefore, it would take some time, even if the mine was earning money, for the earnings to have offset the capital that had previously had [sic] been debited.”[46]
[58] As discussed previously, the parties realized significant profits from mining the Quarter Claim. The actual point at which the Royalty Account went to a credit balance is not clear. Mr. Proctor was vague on this point. He first thought it was 1989,[47] but then on redirect was taken to the 1987 financial statements of Hemlo Gold (its first financial year), which show a royalty being paid to Teck/Corona in 1987.[48] It is not clear, based upon the evidence before me, if Hemlo Gold paid a royalty in 1986. The Court was only provided with Quarter Claim Royalty statements for the 1991, 1992, 1993 and 1995 fiscal years.[49] I was not provided with royalty statements for any year prior to 1991, even though Mr. Proctor referred to the statements as crucial documents.[50]
[59] Further, the Court was not provided with evidence with respect to the magnitude of the preproduction costs, the post-production capital expenditures, or the operating losses (if there were any) at the commencement of operations. In addition, the point in time at which the Royalty Account went from a debit balance to a credit balance was not provided to the Court.
[60] Mr. Proctor appeared to imply during his testimony that there were no capital costs that were subject to the Quarter Claim Agreement.[51] However, an exhibit filed by the Appellant with respect to the calculation of mining taxes shows preproduction expenditures of $1.676 million in 1986 and post‑production expenditures of approximately $184,000 and $904,000 in 1986 and 1987 respectively. The exhibit does not provide the preproduction expenses incurred prior to 1986.[52]
[61] Mr. Proctor explained how Hemlo Gold and Teck/Corona determined the income attributable to the Quarter Claim. The Quarter Claim was not a separate mine; it was part of the Golden Giant Mine. Mr. Proctor referred to the Quarter Claim as a mine within a mine.[53]
[62] The gold ore mined from the Quarter Claim was commingled with the gold ore from the remainder of the Golden Giant Mine and thus could not be separately identified when it arrived at the processing mill. Therefore, the parties had to agree on a method for determining the income realized from mining the Quarter Claim.[54]
[63] Mr. Proctor noted that the first step was for the parties to determine the amount of gold ore removed from the Quarter Claim[55]. Hemlo Gold then determined the quality of the ore (from sampling the mined ore) and the metallurgical recovery in the mill. It then used the information so obtained and the net realizable value of the gold to determine the revenue for a specific period for the gold mined from the Quarter Claim.[56]
[64] Costs were determined based upon the overall costs of the Golden Giant Mine, including the mill and administrative costs. The costs were allocated to the Quarter Claim based upon either tons mined or tons milled. Mr. Proctor noted that Hemlo Gold and Teck/Corona identified certain costs of the Golden Giant Mine (mainly administrative costs) that were not allocated to the Quarter Claim.[57]
[65] Mr. Proctor also discussed an issue that arose when calculating the amount of the deduction in respect of the Ontario mining tax. Mr. Proctor noted that Noranda was the operator of the Golden Giant Mine during its development stage. During that period, Noranda used the available write-offs arising from the Golden Giant Mine to reduce the mining tax payable in respect of its other operations in Ontario. As a result, Hemlo Gold, once it started operating, had fewer write-offs available to it than it would have had if it had been the operator during the development stage of the Golden Giant Mine.[58]
[66] As a result, Hemlo Gold, for the purposes of the calculation of the Quarter Claim Royalty, calculated in October 1988 a "notional mining tax." This calculation was explained in an October 4, 1988 letter from Mr. Proctor to the assistant controller of Teck Corporation as follows:[59]
. . . As discussed previously, the "notional" tax payable represents the tax that would have been payable by the Golden Giant Mine (consisting of the #1 Deposit and the Quarter Claim), if the mine had been built and operated by a separate free-standing company having no other operations or exploration activities in Ontario.
. . .
I have allocated the “notional” tax to the Quarter Claim based upon its direct contribution to the cumulative notional numbers. . . .
[67] The letter goes on to calculate the first amount deducted in respect of mining taxes. It was deducted in 1988 in respect of income earned prior to December 31, 1987.
Application of Law to the Facts
[68] I must, based upon the wording of section 80.2 of the Act, determine if Teck/Corona, under the terms of the Quarter Claim agreement, paid an amount to Hemlo than can reasonably be considered to have been received by Hemlo as a reimbursement, contribution or allowance in respect of Ontario mining taxes paid or that became payable by Hemlo.
[69] This requires me to determine, in the first instance, if Teck/Corona paid an amount to Hemlo Gold as repayment of or indemnification for an amount paid or payable by Hemlo Gold.
[70] The Appellant's counsel argued, "that the application of Teck-Corona's share of revenues from the Quarter Claim to [Hemlo Gold's] liability, as operator, for mining taxes on the Quarter Claim was a reimbursement of 50 per cent of the Quarter Claim mining taxes.”[60] In the alternative, the Appellant's counsel submitted "that the deduction of the Quarter Claim mining taxes, in determining the net distributable profits [under the Quarter Claim Agreement], constituted a reimbursement for the purpose of section 80.2.”[61]
[71] I do not accept the Appellant's arguments. Teck/Corona did not pay an amount to Hemlo as a reimbursement under the Quarter Claim Agreement. The only payment made by either party was the payment of the Quarter Claim Royalty by Hemlo Gold to Teck/Corona.
[72] Hemlo Gold obtained a 100% undivided interest in the Quarter Claim.[62] It was the evidence of the Appellant that Hemlo Gold first acquired this interest by way of lease, and then subsequently converted the interest to a fee simple interest. The Quarter Claim was part of the Golden Giant Mine.
[73] In the course of operating the Golden Giant Mine (including the Quarter Claim), Hemlo Gold incurred various expenses, including mining taxes. Hemlo Gold recovered these expenses by earning income from the Golden Giant Mine. If revenue from the Golden Giant Mine did not exceed the expenses of the mine then Hemlo Gold incurred a loss. If the revenue exceeded the expenses then Hemlo recovered its expenses and earned a profit.
[74] Once the profit calculated from the revenue and costs allocated to the Quarter Claim exceeded any debit balance in the Quarter Claim Royalty account, Hemlo Gold was required to share 50% of such calculated profit with Teck/Corona.
[75] At no time was Teck/Corona under a contractual obligation to reimburse Hemlo Gold for the expenses incurred to mine the Quarter Claim (including the mining taxes). No royalty was payable if the expenses allocated to the Quarter Claim exceeded the revenue allocated to the Quarter Claim. In such a situation, Hemlo Gold incurred, on its own account, any loss incurred in respect of the mining of the Quarter Claim.
[76] If the Quarter Claim was profitable (and mining tax was paid), but the amount of profit did not exceed the amount of any debit balance in the Quarter Claim Royalty account[63] then the costs allocated to the Quarter Claim, including the mining tax, were borne entirely by Hemlo Gold.
[77] The allocation of revenue from the Golden Giant Mine to the calculation of the Quarter Claim Royalty was not the payment of an amount by Teck/Corona. Hemlo Gold as the owner and operator of the Golden Giant Mine (including the Quarter Claim) realized all revenue from mining the Golden Giant Mine. This revenue was not the revenue of Teck/Corona. Teck/Corona was only entitled to receive an amount as a royalty. Further, such royalty was only payable if the Royalty Account showed a credit balance.
[78] The Appellant argued: "Teck/Corona had an interest in the revenues from the Quarter Claim because Teck/Corona continued to have an interest in the land and minerals by reason of the Quarter Claim agreement and the registration of that agreement on title."
[79] It was the Appellant's position that, because of this interest, the application of Quarter Claim revenues to the Appellant's liability for mining taxes as operator of the Quarter Claim was a reimbursement for the purposes of section 80.2 of the Act.
[80] The foundation of the Appellant's argument was its position that the Quarter Claim Royalty created an interest in land.
[81] The Appellant provided the Court with three cases to support its position: the Supreme Court of Canada's decision in Bank of Montreal v. Dynex Petroleum Ltd ("Dynex"),[64] the decision of the Alberta Court of Queen's Bench in Vandergrift v. Coseka Resources Ltd. ("Vandergrift")[65] and the decision of the Ontario Superior Court of Justice in St. Andrew Goldfields Ltd. v. Newmont Canada Ltd. ("St. Andrew").[66]
[82] The Supreme Court of Canada found in the Dynex case that certain royalties could constitute an interest in land. In his decision, Major J. quoted Virtue J. of the Alberta Court of Queen's Bench as follows (as paragraph 22):
Virtue J. in Vandergrift, supra, at p. 26, succinctly stated:
. . . it appears reasonably clear that under Canadian law a "royalty interest" or an "overriding royalty interest" can be an interest in land if:
1) the language used in describing the interest is sufficiently precise to show that the parties intended the royalty to be a grant of an interest in land, rather than a contractual right to a portion of the oil and gas substances recovered from the land; and
2) the interest, out of which the royalty is carved, is itself an interest in land.
[83] The Supreme Court of Canada did not determine whether the royalty at issue was an interest in land. It referred the matter back to the trial judge for determination.
[84] Virtue J., however, did make such a determination in Vandergrift. In finding that the royalty at issue therein did not create an interest in land, Virtue J. stated the following:[67]
In reading the agreement one is struck by the fact that the first reference to the nature of the interest to be conveyed uses the expression "royalty on all petroleum substances recovered from the lands," not petroleum within, upon and under the lands, but, those substances "recovered" from the lands. The next reference, in para. 2, is to a royalty on "petroleum substances found". Again, the reference is not to petroleum substances within, upon or under the lands, but to substances "found" within, upon or under the lands. The other references in [the] agreement are to [a] royalty in terms of "a share of production", "petroleum substances sold", "petroleum substances produced". Taken as a whole, I am of the view that the agreement conveys a contractual right to the payment of a royalty on petroleum substances produced from the lands, that is, a share of the petroleum after it has been removed, rather than on [sic] interest in land.
[85] In the third case provided by the Appellant, the St. Andrew decision, Roberts J. determined that the royalty at issue was not an interest in land. He acknowledged that royalty interests could be interests in land "if the language used in describing the interest is sufficiently precise to show that the parties intended the royalty to be a grant of an interest in land, rather than a contractual right to a portion of the substances recovered from the land, and the interest, out of which the royalty is carved, is itself an interest in land."[68]
[86] Relying on the Supreme Court of Canada's decision in Dynex, he stated that it is the intention of the parties, judged by the language creating the royalty, that determines whether they intended to create an interest in land or to create contractual rights only.[69]
[87] Roberts J. then noted that the use of the words "covenants and agrees to pay" and "produced" in the description of the royalty before him was the "first indication that the parties intended to create only contractual rights to the payment of a royalty and not an interest in land."[70]
[88] The Quarter Claim Royalty is provided for on page 7 of the Quarter Claim Agreement.[71] The actual wording is as follows:
As consideration for the grant of the option, Norex agrees to pay T/C [Teck/Corona] a 50% Net Profits royalty on ore mined from the Optioned Property. The royalty will be payable to T/C after Norex has recouped its capital outlays in connection with the mining of that ore, but not including Shaft costs all as more fully described in Schedule D hereto.
[89] The use of the word "mined" is similar to the use of the word "recovered" in Vandergrift and the word "produced" in St. Andrew. The words indicate an intention to create only contractual rights to the payment of a royalty and not an interest in land.
[90] Further, the remainder of the agreement, particularly the calculation of the net profit royalty, indicates an intention to grant a contractual right to the payment of a royalty.
[91] The court in its decision in St. Andrew referred to two other factors that may be relevant when determining whether the parties intended to create contractual rights or an interest in land:
- whether the royalty holder retains a right to enter upon the lands to explore for and extract the minerals
- whether the owner of the lands is in complete control of its interest in the lands acquired with the only right in the royalty holder being to share in the revenues produced from the minerals extracted from the lands.[72]
[92] The Quarter Claim Agreement did not grant Teck/Corona the right to enter upon the Quarter Claim to explore for and extract minerals. Teck/Corona was granted reasonable access to the shaft located on the Quarter Claim in order to explore and exploit its David Bell Mine property[73] and access to the Quarter Claim to view the work being carried on there.[74] However, neither right of access gave Teck/Corona the right to mine the Quarter Claim.
[93] Further, Hemlo Gold controlled the Quarter Claim. Once the option was granted, it acquired a 100% undivided beneficial interest in the Quarter Claim.[75] It is clear from the Quarter Claim Agreement and the evidence before me that Hemlo Gold was, at all times after it acquired the beneficial interest, in complete control of the mining of the Quarter Claim. Hemlo Gold was the sole operator of the Golden Giant Mine, which included the Quarter Claim.
[94] The Quarter Claim Agreement does contain clauses that require Hemlo Gold to mine the Quarter Claim at a certain rate and to reserve certain hoisting and milling capacity for the Quarter Claim. The purpose of such clauses was to protect Teck/Corona's contractual rights to the Quarter Claim Royalty.
[95] The clauses did not affect the daily mining operations at the mine. There are no provisions in the Quarter Claim Agreement that grant Teck/Corona any control over the daily operation of the mine. With regard to situations where any control issue may have arisen, the Quarter Claim Agreement clearly states that Hemlo Gold was in control. For example, when discussing the mining of the boundaries between the Quarter Claim and adjacent properties, the Quarter Claim Agreement states the following: "Provided that Norex complies with sound mining practice it shall have sole discretion as to which mining method to utilize on the Optioned Property."[76] In dealing with Teck/Corona's rights of access, the Quarter Claim Agreement states: "Norex shall retain the right to overall supervision and regulation of all personnel utilizing the Shaft."[77]
[96] While there was evidence before me that Hemlo Gold co-ordinated various activities with Teck/Corona to ensure the efficient and safe operation of the Golden Giant Mine and the David Bell Mine,[78] there was no evidence before me to suggest that Hemlo Gold was not in complete control of the operation of the Golden Giant Mine.
[97] In sum