October 07, 2011

Her Majesty The Queen (Appellant) v. The International Nickel Company of Canada Limited (Respondent)

75 DTC 5460
Supreme Court of Canada
November 13, 1975

Deductions — Mining Company — Computation of depletion base — Scientific research expenditures — Income and profits — Income Tax Act, R.S.C. 1952, ss. 11(1)(j), 72, 139(la). [see ss. 20(1)(t), 37, and 4(1) of the new Act] — Income Tax Regulations, ss. 1201(2) and 1201(4).

For the years 1967 and 1968 the taxpayer mining company expected a greater depletion allowance than that granted by the Minister. The company appealed to the Federal Court (Trial Division) arguing that for the purpose of calculating its depletion allowance under Regulation 1201, expenses incurred in its long-term scientific research projects were not deductible in determining its profits because (1) they were capital in nature, and alternatively (2) they were not expenses related to the day-to-day manufacturing operations. The Trial Division (74 DTC 6096) accepted the first argument and allowed the appeal. This decision was upheld by the Federal Court of Appeal (74 DTC 6382) on the alternative around. The Minister appealed further.

Held: The appeal was dismissed. The scientific research expenses were not incurred in the day-to-day manufacturing operations. They were also of a capital nature. Further, for the purpose of ascertaining the depletion base Regulation 1201 enumerates what items of expenditure are to be deducted from profits as distinct from income and this list does not include scientific research expenses.