Potash Corporation of Saskatchewan Inc. v. The Queen

Potash Corporation of Saskatchewan Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2022-07-07
Neutral citation
2022 TCC 75
File numbers
2020-208(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2020-208(IT)G
BETWEEN:
POTASH CORPORATION OF
SASKATCHEWAN INC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on March 21, 2022, at Regina, Saskatchewan
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Nathalie Goyette
Marc Pietro Allard
Counsel for the Respondent:
Courtney Davidson
Carla Lamash
JUDGMENT
UPON hearing the evidence and submissions of counsel for the Appellant and counsel for the Respondent;
IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the reassessments that denied the deduction in computing income under the Income Tax Act of base payments made to the Province of Saskatchewan under the Mineral Taxation Act, 1983 (Saskatchewan) for each of the Appellant’s 1999 through 2002 taxation years is dismissed with costs to the Respondent.
The Respondent shall have 30 days from the date of this judgment to submit written submissions on costs. The Appellant shall have a further 30 days to provide written submissions in response to the Respondent’s submissions. The written submissions of each party are not to exceed 10 pages.
Signed at Ottawa, Canada, this 7th day of July 2022.
“J.R. Owen”
Owen J
Citation: 2022 TCC 75
Date: 20220707
Docket: 2020-208(IT)G
BETWEEN:
POTASH CORPORATION OF
SASKATCHEWAN INC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J
I. Introduction
[1] Potash Corporation of Saskatchewan Inc (the “Appellant”) appeals reassessments that denied the deduction in computing income under the Income Tax Act (the “ITA”) of certain payments made to the Province of Saskatchewan under the Mineral Taxation Act, 1983 (Saskatchewan) (the “MTA”) for each of its 1999 through 2002 taxation years (the “Taxation Years”).
II. Facts
[2] At the commencement of the hearing, the parties submitted an Agreed Statement of Facts (Partial), which included two volumes of documents (the “PASF”). I marked the two volumes of documents as exhibit AR-1. I will refer to individual documents in AR-1 by their tab numbers. Appendix A to these reasons reproduces the facts stated in the PASF.
[3] In addition to the PASF, Ms. Trina Heal testified for the Appellant. Ms. Heal is the senior director of tax compliance and reporting for the Appellant. Ms. Heal was not an employee of the Appellant during the Taxation Years, and her testimony was limited to explaining how the Appellant calculated its liabilities under the MTA for the Taxation Years.
A. The Mining Operation of the Appellant
[4] During the Taxation Years, the Appellant was an integrated fertilizer and related industrial and feed products company, with potash mining operations in the province of Saskatchewan. Potash is the common name given to a group of minerals containing potassium.
[5] The mining and processing operations of the Appellant comprised four steps which are, illustrated at tab 1 of AR-1:
Mine potash from underground deposits using two- and four-rotor continuous boring machines.
Move the mined potash ore by conveyor belt to underground, bins where it is stored.
Transport the stored potash ore to a production mineshaft and hoist the potash ore to the surface. This step represents the end of the extraction process.
4. Process the potash ore by crushing, grinding, drying, compacting and crystallizing it. The crystallized form of potash is the product sold by the Appellant.
[6] The Appellant produced potash from mines in Saskatchewan for no purpose other than selling the potash.
B. The Base Payment and the Profit Tax
[7] For each of the Taxation Years, the Appellant paid to the Province of Saskatchewan a base payment calculated in accordance with section 5 of The Potash Production Tax Schedule (the “PPTS”) and a profit tax calculated in accordance with section 6 of the PPTS and The Potash Production Tax Regulations (the “PPTR”).
[8] The base payments for the Taxation Years were as follows:
Taxation Year
Base Payment
1999
$14,643,226
2000
$16,454,834
2001
$14,673,344
2002
$13,655,538
[9] I will refer to these amounts individually as a “Base Payment” and collectively as the “Base Payments”.
[10] The quantum of the Base Payments is not in dispute. The Appellant acknowledged that to the extent that I find that the Base Payments are deductible in computing its income under the ITA, there is a corresponding reduction in the adjusted resource profits of the Appellant for the purposes of computing the resource allowance of the Appellant for the Taxation Years under former paragraph 20(1)(v.1) of the ITA. This concession reflects the direct relationship between the prohibition in paragraph 18(1)(m) and the resource allowance deduction under former paragraph 20(1)(v.1). [1]
[11] The detailed calculations made by the Appellant for the Taxation Years are set out in tabs 16 through 19 of AR-1. Ms. Heal explained that for each of the Taxation Years, the Appellant first computed its liability for the profit tax for the year. This required the Appellant to compute its profits for the year in accordance with the PPTR. [2] The Appellant also used the determination of its profits for the year in the computation of the rate of tax in accordance with subsection 5(3) of the PPTS.
[12] The Appellant filed its federal T2 income tax returns for the Taxation Years on the basis that the Base Payments and the profit tax paid by the Appellant for those years were not deductible in computing its income under the ITA. Following the release of the Tax Court of Canada decision in Cogema Resources Inc v The Queen, [3] the Appellant changed its position and sought to deduct the Base Payments. Nothing turns on the fact that the Appellant changed its position regarding the Base Payments. [4]
III. The Submissions of the Parties
A. The Appellant’s Submissions
[13] The Appellant submits that the Appellant is liable for a “complex web of taxes and levies” applicable to the resource industry in Saskatchewan. Some of these amounts are deductible in computing income under the ITA and some are not.
[14] The Appellant submits that the Base Payments are deductible in computing income under the ITA because the base payment, which is calculated in accordance with section 5 of the PPTS, is incurred for the purpose of gaining or producing income, is not based on the profits of the Appellant, and is not based on potash produced but on potash sold or otherwise disposed of.
[15] The Appellant submits that the base payment and the profit tax are distinct and separate liabilities under the MTA. The Appellant cites Cogema as indicative of the distinction between a tax on sales and a tax on production and submits that the calculation of the base payment shows that it is a tax on sales of potash that is deductible in computing income under the ITA.
[16] In particular, the base payment for a year is calculated by applying a rate of tax to the quantity of potash sold or otherwise disposed of by the Appellant in that year. The rate of tax is determined by dividing a prescribed percentage of the Appellant’s profits for the year by the tonnes of potash sold or otherwise disposed of by the Appellant in that year. The rate of tax cannot be less than a prescribed minimum rate or greater than a prescribed maximum rate. The Appellant’s profits are therefore relevant only to the rate of tax, not to the computation of the base payment.
[17] The Appellant submits that the base payment is an incident of the Appellant’s income earning activities and that the calculation of the base payment shows that the base payment is payable regardless of whether the Appellant earns a profit and, citing Harrods (Buenos Aires), Ltd v Taylor-Gooby (H M Inspector of Taxes), [5] is therefore not a tax on income. In contrast, the profit tax is payable only if the Appellant earns a profit and is akin to the provincial mining tax addressed by the British Columbia Court of Appeal in Teck.
[18] The Appellant submits that paragraph 18(1)(m) of the ITA does not preclude the deduction of the Base Payments. The Appellant cites paragraphs 15, 23 and 24 of Mobil for the proposition that paragraph 18(1)(m) applies when two conditions are met:
a. The payment in issue is in the nature of the payments described in subparagraph 18(1)(m)(ii), that is, “a royalty, tax [. . .] lease rental or bonus or as an amount [. . .] in lieu of any such amount”; and
b. The payment relates to the acquisition, development or ownership of a Canadian resource property or the production in Canada of minerals. [6]
[19] The Appellant submits that the calculation of the base payment shows that the second condition is not satisfied because the payment does not relate to any of the activities described by that condition.
[20] First, the acquisition, development or ownership of a Canadian resource property does not result in liability for a base payment. Second, the production of potash in and of itself does not result in liability for a base payment. This distinguishes the base payment from the royalty payable to Saskatchewan on all potash extracted, recovered or produced under leases granted by Saskatchewan.
[21] Finally, the Appellant submits that contrary to the position of the Respondent, the text and effect of subsection 92A(4) of the Constitution Act, 1867 do not necessitate that if the base payment is not an income or profit tax, it must be a tax on production. The subsection empowers Saskatchewan to make laws in relation to the raising of money by any mode or system of taxation in respect of non‑renewable natural resources. The power is broadly worded, and there are several examples of taxes levied by Saskatchewan in respect of non-renewable natural resources that do not fall into either of the two categories suggested by the Respondent.
B. The Respondent’s Submissions
[22] The Respondent submits that the history of resource taxation in Canada and in Saskatchewan provides important context to the interpretation of the MTA. Prior to 1982, provinces were restricted to two methods of raising revenues from natural resources in the province: royalties on production from resources in which the province had a proprietary interest and “direct” taxes on producers within the province. In 1982, subsection 92A(4) was added to the Constitution Act, 1867 to empower each province to impose indirect taxes on resource production within the province. The Respondent submits that Saskatchewan enacted the PPTS to tax all potash produced within its borders.
[23] Prior to May 6, 1974, a payor could deduct in computing income under the ITA a royalty paid to a province but could not deduct an income or profit tax paid to a province. To protect the federal tax base, paragraph 18(1)(m) of the ITA was enacted on May 6, 1974, to disallow the deduction in computing income under the ITA of all provincial royalties and taxes in relation to resource production.
[24] Citing section 4 of the MTA, the Respondent submits that the MTA imposes a “mineral production tax” on “the production or sale or other disposition of each scheduled mineral produced in Saskatchewan.” By virtue of subsection 2(3) of the MTA, the use or consumption of a scheduled mineral such as potash is deemed to be a sale or other disposition of that mineral.
[25] The PPTS and the PPTR detail how the base payment and the profit tax are applied and calculated. The Respondent summarizes the pertinent provisions as follows:
a. Subsection 3(1) of the PPTS applies the mineral production taxes imposed by the MTA to all potash that is produced from any lands in Saskatchewan and that is sold or otherwise disposed of on or after January 1, 1990.
b. Subsection 3(2) of the PPTS states that each producer is liable for the mineral production taxes imposed by the MTA on the sale or other disposition of potash produced from the mine or mines with respect to which that person is a producer.
c. Clauses 2(a) and (d) of the PPTS define “mine” and “producer”. The term “mine” means any opening in or excavation of the ground in Saskatchewan from which potash is or is capable of being produced. The term “producer” means a person who has the right to produce and sell or otherwise dispose of potash from a mine, whether that person does so himself or herself or through any other person.
d. Clause 2(1)(x) of the PPTR defines “disposition” to mean (i) any transaction or event with respect to an asset that entitles a producer to proceeds of disposition; (ii) any transfer of an asset by way of gift; or (iii) the removal, other than a temporary removal, of an asset from a mine for any reason.
e. Clause 2(1)(mm) of the PPTR defines “proceeds of disposition” to mean the fair market value of an asset disposed of in specified circumstances such as a non-arm’s length disposition by a producer.
f. Subsection 2(2) of the PPTR states that “produced” means extracted from the ground and includes “treated” as defined in clause 2(1)(yy) and stored and shipped in Saskatchewan or with the prior written approval of the minister (defined in clause 2(1)(h) of the MTA) outside Saskatchewan.
[26] The Respondent submits that the base payment and the profit tax are created under the same enabling provisions of the MTA and notes that section 4 of the PPTS provides that the “mineral production taxes” imposed by the MTA consist of the base payment and the profit tax. The base payment is a tax on 35% of a potash producer’s profits from potash, subject to a minimum and maximum amount, and is paid only after the sale or other disposition of the potash. Consequently, the income earning process is complete before the base payment becomes payable by the Appellant.
[27] The Respondent cites Roenisch v MNR, [7] First Pioneer Petroleums Ltd v MNR [8] and Munich Reinsurance Company (Canada Branch) v R [9] for the proposition that paragraph 18(1)(a) of the ITA prohibits the deduction of income or profit-based taxes in computing income under the ITA and cites Quemont Mining Corp v MNR, [10] Nickel Rim Mines Ltd v Ontario (Attorney General) [11] and Teck for the proposition that this principle applies to provincial mining taxes that are based on income or profit.
[28] The Respondent cites Teck for the additional proposition that a legislature does not have to compute income in a specific manner for a tax to be a tax on income and Quemont for the proposition that a tax may be an income or profits tax even though it is based on an estimate of profits.
[29] The Respondent submits that the Appellant’s characterization of the base payment as a tax on sales is flawed. A sales tax is paid by the purchaser of a product while the base payment is a direct tax on a producer of potash in Saskatchewan.
[30] The Respondent submits that even if the base payment is not an income or profits tax, the deduction of the base payment in computing income under the ITA is prohibited by paragraph 18(1)(m) of the ITA. The Respondent submits that the application of paragraph 18(1)(m) to the base payment is consistent with the text, context and purpose of the provision.
[31] The Respondent submits that the decision in Cogema is not applicable as the statutory regime addressed in that case is different from the regime in the MTA. In particular, the regime addressed in Cogema applied only to sales of uranium, while the regime in the MTA applies to all potash produced in Saskatchewan that is sold or otherwise disposed of, which includes potash used or consumed by the producer.
IV. The Statutory Provisions
A. The Relevant Provisions of the ITA
[32] The provisions of the ITA relevant to the issue in this appeal are reproduced in the analysis section of these reasons.
B. The Relevant Provisions of the MTA
[33] The provisions of the MTA relevant to the issue in this appeal are reproduced in Appendix B to these reasons.
V. Analysis
[34] The Appellant submits that the Base Payments are deductible in computing its income under subsection 9(1) of the ITA and that paragraphs 18(1)(a) and 18(1)(m) of the ITA do not apply to the Base Payments. The Respondent submits that the Base Payments are not deductible in computing income because either paragraph 18(1)(a) or 18(1)(m) of the ITA, or both of those paragraphs, applies to the Base Payments. I will therefore address each of these provisions of the ITA.
A. The Deduction of Business Expenses under Subsection 9(1) and Paragraph 18(1)(a) of the ITA
[35] Subsection 9(1) states:
9(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year.
[36] Paragraph 18(1)(a) states:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
[37] In Symes v The Queen, [12] the Supreme Court of Canada confirmed that because profit is a net concept, subsection 9(1) authorizes the deduction of business expenses while subsection 18(1) is limiting only. Iacobucci J, writing for the majority, states:
In other words, the “profit” concept in s. 9(1) is inherently a net concept which presupposes business expense deductions. It is now generally accepted that it is s. 9(1) which authorizes the deduction of business expenses; the provisions of s. 18(1) are limiting provisions only. [13]
[38] Iacobucci J addresses the relationship between subsection 9(1) and paragraph 18(1)(a) as follows:
. . . the well accepted principles of business practice encompassed by s. 9(1) would generally operate to prohibit the deduction of expenses which lack an income earning purpose, or which are personal expenses, just as much as ss. 18(1)(a) and (h) operate expressly to prohibit such deductions. For this reason, there is an artificiality apparent in the suggestion that one can first examine s. 9(1) in order to determine whether a deduction is authorized, and can then turn to s. 18(1) where another analysis can be undertaken . . . .
Although ss. 18(1)(a) and (h) may, therefore, simply be analytically repetitive or confirmatory of prohibitions already embodied in s. 9(1), they may serve to reinforce the point already made, namely, that the s. 9(1) test is a legal test rather than an accountancy test. At the same time, they conveniently summarize what might otherwise be abstract principles of commercial practice. . .
There is no doubt that, in some cases, s. 9(1) will operate in isolation to scrutinize deductions according to well accepted principles of business practice. In this respect, I refer to cases, also noted by the trial judge, in which the real issue was whether a particular method of accounting could be used to escape tax liability . . . . In other cases, including the present case, however, the real issue may be whether a deduction is prohibited by well accepted principles of business practice for the reason that it is not incurred for the purpose of earning income, or for the reason that it is a personal or living expense. In such cases, any treatment of the issue will necessarily blur s. 9(1) with ss. 18(1)(a) and (h). [14]
[39] The courts have consistently held that tax imposed upon the income of a taxpayer is not deductible in computing the income of that taxpayer under the ITA. In Munich Reinsurance, Sharlow JA stated this principle in the following terms:
In support of that proposition, the appellant cites the well established principle that the payment of income tax is not an expenditure made for the purpose of earning income because it is an expenditure of income already earned: Roenisch v. M.N.R., [1931] Ex. C.R. 1, [1931] 2 D.L.R. 90, 1 D.T.C. 199, First Pioneer Petroleums Ltd. v. M.N.R. [1974] C.T.C. 108, 74 D.T.C. 6109, 43 D.L.R. (3d) 722 (F.C.T.D.). The validity of this principle cannot be challenged . . . . [15]
[Emphasis and double emphasis added.]
[40] An expenditure of the income that has been determined for a taxation period cannot be incurred as part of the process of earning that income and therefore runs afoul of both the general deductibility rule in subsection 9(1) and the prohibition in paragraph 18(1)(a).
[41] Provincial income taxes imposed by “agreeing” provinces [16] provide a particularly clear example of the application of this principle because such provinces start with taxable income under the ITA and apply their own rules to the taxation of that amount. Consequently, there is no doubt that the imposition of the provincial income tax follows the income earning process for the taxation period and therefore is an expenditure of the income already determined for that period. [17]
[42] However, while income taxes provide a clear example of taxes that are not incurred as part of the process of earning income but following that process, the determination of the deductibility of an expenditure that is in the nature of a tax does not rest on the characterization of that expenditure as an income tax, but on the more basic question—stated by paragraph 18(1)(a) of the ITA—of whether the expenditure was made or incurred for the purpose of gaining or producing income from a business or property.
[43] This general proposition was clearly articulated by Sharlow JA in the excerpt from Munich Reinsurance reproduced above. Sharlow JA cites the seminal Canadian decision of the Exchequer Court of Canada in Roenisch, in which Audette J states:
It is self-evident that the amount of the income tax paid to the province is not an expense for the purpose of earning the income, within the meaning of 6a [the predecessor to paragraph 18(1)(a) of the ITA]. When such payment of taxes is made to the province, it is not so made to earn the income, it is paid because there is an income showing gain and profit. [18]
[Emphasis added.]
[44] In Teck, the appellant argued that provincial mining taxes were in the nature of a royalty and therefore were deductible as an outlay or expense made or incurred for the purpose of gaining or producing income. The Crown argued that mining taxes were income taxes and that a levy in the nature of an income tax was not an expense or outlay incurred for the purposes of earning income. Lowry J of the British Columbia Supreme Court and Levine JA writing for the British Columbia Court of Appeal both agreed with the Crown.
[45] Because the respective positions of the appellant and the Crown turned on the characterization of the mining taxes in issue, Levine JA considered the correct legal characterization of those taxes [19] and found that they were taxes on income. [20] Levine JA then states:
I therefore conclude that the Extra-Provincial Mining Taxes are income taxes, which, in accordance with wording of the various iterations of the federal Act and the authorities, were not deductible in computing income under s. 18(1)(a) of the federal Act because they were not outlays or expenses incurred for the purpose of gaining or producing income. [21]
[Emphasis and double emphasis added.]
[46] On the basis of the foregoing, the question that must be addressed is whether, as implicitly required by subsection 9(1) of the ITA and explicitly required by paragraph 18(1)(a) of the ITA, the Base Payments were incurred by the Appellant for the purpose of gaining or producing income from its business of mining, producing and selling potash. This determination requires consideration of the provisions in the MTA imposing liability on the Appellant for the Base Payments. These provisions are reproduced in Appendix B.
[47] For ease of reference, I will reproduce the main charging provisions in the MTA here. Clauses 2(1)(e), (k), (l) and (m), subsections 2(2) and 2(3), and sections 4 and 5 of the MTA state:
Interpretation
2(1) In this Act:
. . .
(e) “mineral production tax” means any tax imposed by this Act on the production or sale or other disposition [22] of a scheduled mineral;
. . .
(k) “prescribed” means prescribed in the regulations;
(l) “Schedule” means a schedule to this Act;
(m) “scheduled mineral” means any mineral in respect of which a Schedule to this Act is enacted;
. . .
(2) Any word or expression used in this Act but not defined in this Act may be defined in the regulations.
(3) The use or consumption of a scheduled mineral by a person who is liable to pay the mineral production taxes imposed by this Act on the production or sale or other disposition of that scheduled mineral is deemed to be a sale or other disposition of that scheduled mineral.
. . .
Mineral production taxes
4 A tax is hereby imposed on the production or sale or other disposition of each scheduled mineral produced in Saskatchewan.
Calculation and payment of taxes
5 The mineral production taxes imposed by this Act on the production or sale or other disposition of a scheduled mineral are to be levied, calculated and paid in the manner and at the times required by or under the Schedule enacted in respect of that scheduled mineral.
[48] Section 4 of the MTA imposes a tax on the “production or sale or other disposition of” a scheduled mineral produced in Saskatchewan, and any such tax is defined in clause 2(1)(e) of the MTA as a “mineral production tax”.
[49] The words “or sale or other disposition” were not in the MTA as enacted in 1983 but were added as part of amendments under the MTAA 1989; these amendments added to the MTA the Second Schedule, which taxes sodium chloride, and the PPTS, which taxes potash. Consistent with the rules of grammar, the use of the word “or” preceding the word “sale” and the fact that the word “production” previously stood on its own suggest that the words “sale or other disposition” are intended to describe events that follow production.
[50] Under the PPTS, the application of the base payment and the application of the profit tax are each conditional on the occurrence of two events: production of the potash followed by the sale or other disposition of the potash. [23]
[51] According to the PASF, the production of potash is complete following the crushing, grinding, drying, compacting and crystallizing of the ore extracted from the mines in Saskatchewan. The Appellant produces all its potash for the purpose of sale.
[52] By way of contrast, the First Schedule to the MTA applies the “mineral production taxes” imposed by section 4 of the MTA to the production of all freehold coal produced in Saskatchewan on or after January 1, 1984, [24] and then calculates that tax by multiplying the net value of the freehold coal produced from a mine that is “sold, used, consumed or otherwise disposed of” by a rate of tax. [25]
[53] Notwithstanding the semantic differences between the provisions taxing coal and the provisions taxing sodium chloride and potash, each schedule to the MTA imposes tax on the sale, use, consumption or other disposition of a mineral produced from a mine in Saskatchewan.
[54] Section 4 of the PPTS states that the mineral production taxes imposed by section 4 of the MTA “on the sale or other disposition of potash” consist of a base payment calculated in accordance with section 5 of the PPTS and a profit tax calculated in accordance with section 6 of the PPTS.
[55] Under subsection 5(2) of the PPTS, the base payment for a particular year is determined by multiplying the quantity of the potash sold or otherwise disposed of by the producer in the year (expressed in tonnes) by a calculated tax rate that is subject to a prescribed maximum [26] and a prescribed minimum, [27] and then deducting the total of any applicable deductions, allowances and credits that are prescribed [28] or provided for in the PPTS.
[56] Under subsection 5(3) of the PPTS, the calculated tax rate (R) is expressed in dollars per tonne of potash sold or otherwise disposed of and is equal to a prescribed percentage [29] of the producer’s profits for the year (P), expressed in dollars, divided by the quantity in tonnes of potash sold or otherwise disposed of by the producer in that year (Q).
[57] The terms “P”, “Q” and “R” are defined in subsection 5(1) of the PPTS. The definition of “R” in clause 5(1)(c) of the PPTS does not make sense because subclause 5(2)(a)(i) of the PPTS refers not only to the rate of tax calculated under subsection 5(3) of the PPTS, but also to the maximum and minimum rates of tax under subsections 5(4) and 5(5) of the PPTS. This anomaly does not alter my analysis of the PPTS.
[58] According to Ms. Heal and tabs 16 through 19 of exhibit AR-1, the Appellant calculated the rate of tax under subsection 5(3) of the PPTS ignoring the maximum and minimum rates of tax and then determined whether the maximum or minimum rate under subsections 5(4) and 5(5) of the PPTS superseded the calculated rate. The Appellant’s determination of the calculated rate of tax under subsection 5(3) of the PPTS for each of the Taxation Years is not in issue.
[59] The rate of tax that applied to determine the Base Payment in each of the Taxation Years was the maximum rate under subsection 5(4) of the PPTS and section 13 of the PPTR. [30] I note, however, that if the calculated rate of tax determined by subsection 5(3) of the PPTS had applied, the Base Payment would in effect be 35% of profits less the permitted deductions, allowances and credits. [31]
[60] Under subsections 5(4) and 5(5) of the PPTS and sections 13 and 14 of the PPTR, the maximum and minimum rates of tax are $12.33 per tonne and $11.00 per tonne, respectively.
[61] Section 5 of the PPTS does not specify how the profits of a producer are determined for the purposes of the calculations in subsections 5(1) through 5(5). However, section 6 of the PPTS specifies in subclause 6(1)(a)(i) that profits for a year are to be determined in accordance with the PPTR.
[62] Considering the context of section 5 of the PPTS and the interpretive rule in subsection 2(2) of the MTA, the only sensible interpretation is that the Saskatchewan legislature intended that the profits referenced in section 5 of the PPTS be the same as the profits of the Appellant determined in accordance with the PPTR for the purposes of section 6 of the PPTS. Ms. Heal testified that that is how the Appellant approached the calculations.
[63] Two of the three components [32] that determine the amount of a base payment of a producer for a year are the quantity of potash sold or disposed of by the producer in the year and the rate of tax in dollars per tonne for the year. By virtue of subsection 2(3) of the MTA, the former includes not only potash in fact sold or otherwise disposed of by the producer, but also potash that is used or consumed by the producer. Subsection 2(3) ensures that the words “sold or otherwise disposed of” encompass every way in which a producer may ultimately deal with potash mined and produced in Saskatchewan.
[64] To compute the amount of a base payment for a year, a producer must first compute its profits for that year in accordance with the PPTR. This is because it is not possible to determine the applicable rate of tax under subclause 5(2)(a)(i) of the PPTS without first determining the calculated tax rate under subsection 5(3) of the PPTS. “P” of the formula used in subsection 5(3) is “the amount in dollars equal to the prescribed percentage of the producer’s profits for a year”. If profits for a year are zero, the calculated rate of tax under subsection 5(3) of the PPTS is also zero and the minimum tax rate under subsection 5(5) of the PPTS applies.
[65] Liability for a base payment will exist only in respect of potash that has been “sold or otherwise disposed of” by a producer, which includes use or consumption by the producer. Such potash is no longer in the inventory of the producer, so it is no longer capable of producing income for the producer.
[66] These two aspects of the base payment suggest to me that the base payment only arises after the conclusion of the producer’s income earning process in respect of potash subject to the base payment tax. The same is true for the taxes imposed by the First Schedule and the Second Schedule of the MTA.
[67] Specifically, there must be a realization event (a sale or other disposition of potash) before liability for a base payment can exist. Consequently, a base payment does not represent an amount paid to Saskatchewan by a producer to earn income from potash mined in Saskatchewan because liability for the tax is neither a precursor to nor a requirement for the earning of income from mining and producing potash in Saskatchewan. It is rather a liability to Saskatchewan that arises following the utilization of the potash by the producer by sale or other disposition.
[68] This is illustrated by the fact that potash mined and produced in Saskatchewan that is stored by a producer for sale or other disposition in a future year is not subject to the mineral production taxes imposed by the MTA and the PPTS until that future year. The liability for the mineral production tax on that potash clearly follows and does not contribute to the earning of income from mining and producing the potash.
[69] Based on the overall structure of the MTA and the PPTS, it is reasonable to conclude that the base payment is imposed on a quantity of potash sold or disposed of in a year rather than on profits for that year to ensure that a minimum amount of tax is paid by a producer of potash mined in Saskatchewan that has sold or disposed of that potash. Consequently, an absence of profits for a year does not affect whether a producer is liable for a base payment in respect of that year.
[70] The fact that the base payment is determined by reference to a quantity of potash does not preclude the base payment from being a tax on income. As stated by Levine JA in Teck:
49 As Lord Macnaghten said in London County Council v. Attorney-General, [1901] A.C. 26 at 35: “Income tax, if I may be pardoned for saying so, is a tax on income.” In that case, the question was whether a tax was an income tax, although it was levied on the annual value of land. Lord Davey commented (at p. 45):
The truth is that the income tax is intended to be a tax upon a person’s income or annual profits, and although (for conceivable and no doubt good reasons) it is imposed in respect of the annual value of land, that arrangement is but the means or machinery devised by the Legislature for getting at the profits.
50 The fact that the income calculated under the provincial mining statutes does not reflect “income” as calculated under the federal Act has no bearing on the characterization of the mining taxes as income taxes. . . . . [33]
[71] The base payment is a tax on an estimate of the value contributed to a producer’s business by potash sold or otherwise disposed of by that producer that applies even if the producer does not have profits for the year under the PPTR. In Teck, Levine JA observed:
39 In his analysis of the Quebec mining taxes [in Quemont, aff’d Rio Algom Miners Limited v Minister of National Revenue [1970] S.C.R. 511], Cattanach J. considered that the statutory formula for determining “profits” included the “gross value” of ore that had been “sold, utilized or shipped”, with the result that part of the profit may not have been realized. Relying on the decision of the Ontario Court of Appeal in Nickel Rim Mines Ltd. v. Ontario (Attorney General) (1965), [1966] 1 O.R. 345 (Ont. C.A.), where Porter C.J.O. for the Court stated (at p. 363): “Although the tax in part may be upon profits estimated before actual sale, I do not think that the nature of the tax is thereby affected . . . ”, Cattanach J. concluded that a tax on realized and estimated profits was a tax on income. [34]
[72] I similarly conclude based on the scheme in the MTA and the PPTS that the base payment and the profit tax are taxes on the income of a producer from sales or other dispositions of potash mined in Saskatchewan. The Saskatchewan legislature simply chose in the case of the base payment to substitute quantity of potash as a proxy for income to ensure that a minimum amount of tax would be collected in respect of such potash even if the producer did not have profits for the year as determined under the PPTR. [35]
[73] Even if the base payment is not a tax on income or profit as such, that does not alter the fact that the base payment is not incurred by the Appellant for the purpose of gaining or producing income from its potash mining business; rather, it is a tax that is applied only after the conclusion of the process of earning income from that business. As already stated, this conclusion is amply supported by the fact that the base payment applies only after a sale or other disposition of potash by the Appellant, by the fact that the profits of the Appellant for a taxation year from the same sales or other dispositions of potash must be calculated before the base payment for that year can be determined, and by the fact that the payment of the base payment is not a condition for mining potash in Saskatchewan or for producing and selling or disposing of that potash.
B. The Prohibition in Paragraph 18(1)(m) of the ITA
[74] The foregoing conclusion negates the need to consider the prohibition in paragraph 18(1)(m) of the ITA. However, to be complete, I will also address that paragraph.
[75] Two versions of paragraph 18(1)(m) are relevant to the Taxation Years. For amounts that became payable on or before December 20, 2002, paragraph 18(1)(m) of the ITA stated:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
. . .
(m) any amount (other than a prescribed amount) paid or payable by virtue of an obligation imposed by statute or a contractual obligation substituted for an obligation imposed by statute to
(i) Her Majesty in right of Canada or a province,
(ii) an agent of Her Majesty in right of Canada or a province, or
(iii) a corporation, commission or association that is controlled by Her Majesty in right of Canada or a province or by an agent of Her Majesty in right of Canada or a province
as a royalty, tax (other than a tax or portion of a tax that can reasonably be considered to be a municipal or school tax), lease rental or bonus or as an amount, however described, that can reasonably be regarded as being in lieu of any such amount, or in respect of the late payment or non-payment of any such amount, and that can reasonably be regarded as being in relation to
(iv) the acquisition, development or ownership of a Canadian resource property, or
(v) the production in Canada
(A) of petroleum, natural gas or related hydrocarbons from a natural accumulation of petroleum or natural gas (other than a mineral resource) located in Canada or from an oil or gas well located in Canada,
(B) of sulphur from a natural accumulation of petroleum or natural gas located in Canada, from an oil or gas well located in Canada or from a mineral resource located in Canada,
(C) to any stage that is not beyond the prime metal stage or its equivalent, of metal, minerals (other than iron or petroleum or related hydrocarbons) or coal from a mineral resource located in Canada,
(D) to any stage that is not beyond the pellet stage or its equivalent, of iron from a mineral resource located in Canada, or
(E) to any stage that is not beyond the crude oil stage or its equivalent, of petroleum or related hydrocarbons from tar sands from a mineral resource located in Canada;
[76] For amounts that became payable after December 20, 2002, paragraph 18(1)(m) of the ITA stated:
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
. . .
(m) any amount (other than a prescribed amount)
(i) that is paid or payable in the