Newfoundland and Labrador Corporation Ltd. et al. v. Attorney General of Newfoundland

The judgment of the Court was delivered by

Is The Mining and Mineral Rights Tax Act, 1975, the Act No. 68 of 1975, ultra vires the Legislature of Newfoundland either in whole or in part, and, if so, in what particular or particulars and to what extent? Does the Act, if it is intra vires, apply to the Appellants in the present case?

2. In this Act

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(c) “contractor” means any person who contracts with another person having a right to carry out mining operations to deliver minerals to that other person for a valuable consideration from lands on or in which such rights exist;

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(e) “gross income” means the total income derived by an operator or a contractor from the sale of minerals consequent upon mining operations in a fiscal year and, if such minerals are processed prior to the sale, includes the income from processing;

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(g) “mining operations” means the extraction or production within the province of minerals up to and including primary crushing, and includes the

transportation, handling, storing, distribution and sale of such minerals, but does not include processing;

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(i) “net income” means the gross income less those amounts permitted to be deducted from the gross income by Section 6;

(j) “operator” means a person who

(i) has the right to extract minerals, and

(ii) carries out mining operations on or under lands within the province;

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(m) “processing” means processing minerals within the province, and includes concentrating, milling, pelletizing, smelting, refining and fabricating of minerals;

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(p) “taxable income” means the net income less those payments permitted to be deducted from the net income by Section 7;…

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PART II

Mining Tax

5.—(1) Subject to subsection (2), and Section 8, every operator and every contractor is liable for and shall pay to the Minister in the manner and at the time or times set out in this Act an annual tax of fifteen per centum (15%) of the taxable income derived by the operator or the contractor from mining operations within every mine within the province during each fiscal year.

(2) The Lieutenant-Governor in Council may by order declare with respect to any taxpayer that the tax payable by the operator or contractor under subsection (1) shall be based on the taxable income derived by the operator or contractor from mining operations within individual mines or groups of mines as may be prescribed in the order.

(3) For the purposes of subsection (2), “mine” means a work or undertaking in which mining operations are conducted, and includes a quarry.

6.—(1) Subject to subsection (2) of this section, the net income of a taxpayer shall be ascertained by deducting from the gross income of the taxpayer

(a) all expenses and outlays reasonably incurred in mining operations and in processing minerals

extracted from land pursuant to those mining operations;

(b) such amount as may be prescribed for depreciation of the cost, exclusive of interest charges of any kinds of vehicles, machinery, plant, equipment, buildings and other assets of a capital nature used in mining operations, and processing minerals extracted from land pursuant to those mining operations, and for the purposes of this paragraph the regulations may prescribe different rates and methods of depreciation for different kinds of capital assets, but where the vehicles, machinery, plant, equipment and buildings or any part thereof have been disposed of in a fiscal year, the proceeds from the disposal shall be applied to reduce the cost or value of any additions thereto in that year, and where those proceeds exceed the cost of the additions the excess shall be applied to reduce the balance remaining to be depreciated of those assets required in previous fiscal years, and where no such balance remains to be depreciated the excess shall be applied to reduce deductions otherwise allowable under this subsection;

(c) such amount, if any, exclusive of interest charges of any kind, as the Minister in his absolute discretion allows for exploration and preproduction development expenditures exclusively and necessarily incurred for the proper conduct of those mining operations from which the gross income is generated, but the aggregate of the deductions made under this paragraph shall not exceed the total expenditures;

(d) all moneys paid to Her Majesty during the fiscal year by way of

(i) taxation imposed specifically upon the area or acreage of the land in which mining operations are being conducted within the province, whether or not the Act imposing the taxation is passed before or after the coming into operation of this Act, and

(ii) rentals, royalties, charges and other payments for the right to engage in the mining operations which generates all or part of the gross income, but not any payment by way of taxation, except as permitted by subparagraph (i) of this paragraph (d);

(e) such reserves for doubtful debts as the Minister in his absolute discretion permits for the mining operations during the fiscal year;

(f) an amount by way of return on capital directly and necessarily employed by the taxpayer in processing minerals extracted from land pursuant to mining operations equal to eight per centum (8%) of the original cost, exclusive of interest charges, of the depreciable assets, including machinery, equipment, plant, buildings, works and improvements used by the taxpayer in the processing of such minerals, but the amount to be deducted under this paragraph shall not be in excess of sixty-five per centum (65%) of the portion remaining after deducting from the gross income the amounts specified in paragraphs (a) to (e) inclusive.

(2) No deduction shall be made from the gross income under subsection (1) in respect of

(a) disbursements not wholly, exclusively and necessarily expended for the purpose of generating the gross income;

(b) expenditures for the provision or replacement of plant, machinery or equipment or any other item of a capital nature;

(c) any amount transferred or credited to a reserve contingent account or sinking fund, other than for permitted doubtful debts referred to in subsection (1);

(d) rentals, royalties and other payments paid by the taxpayer to any person, other than Her Majesty, under any Act, agreement, grant, lease or licence for the right to engage in mining operations;

(e) disbursements made for the purpose of maintenance of property not applied in the generation of the gross income during the fiscal year;

(f) any payment made for goods or services provided by a parent, subsidiary, affiliated or associated company in excess of the actual costs of those goods or services.

7. For the purposes of Section 5, the taxable income derived from mining operations by an operator and by a contractor is the net income less either

(a) all moneys paid during the fiscal year, by way of rental, royalty or other payment to any person, other than to Her Majesty, for the grant of the right to engage in mining operations; or

(b) twenty per centum (20%) of the net income, whichever is the greater.

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PART III

Mineral Rights Tax

(a) Tax Payable By Operators and Contractors

9.—(1) Subject to subsection (2), every operator and every contractor is liable for and shall pay to the Minister in the manner and at the time or times set out in this Act an annual tax of twenty per centum (20%) of the amount, if any, by which twenty per centum (20%) of the net income of the operator or contractor exceeds the aggregate of all moneys paid by the operator or contractor during the fiscal year by way of rental, royalty or other payment to any person, other than Her Majesty, for the grant of the right to engage in mining operations.

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(b) Tax Payable By Recipients Of Rentals, Royalties and Like Payments

10.—(1) Every person who receives from

(a) an operator, contractor or any other person during a fiscal year any money by way of rental, royalty or other payment for the grant to the operator, contractor or other person of the right to engage in mining operations; or

(b) the Minister of Mines and Energy during a fiscal year any money by way of payment to that person, as owner of an undeveloped mineral area, pursuant to Section 8 of The Undeveloped Mineral Areas Act,

is liable for and shall pay to the Minister in the manner and at the time set out in this Act an annual tax of twenty per centum (20%) of the net revenue received in consideration of the grant of the right during that fiscal year.

(2) For the purposes of subsection (1), “net revenue” means the total sum received from the operator, contractor, person or the Minister of Mines and Energy during the fiscal year less

(a) all administrative, accounting, legal and other expenses which in the opinion of the Minister are necessarily incurred by the taxpayer in the collection of the money from the operator or contractor;

(b) such amount, as the Lieutenant-Governor in Council may allow for any costs and outlays incurred by the taxpayer within the area of land in or upon which the taxpayer has the right to engage in mining operations or such other areas of land as may be prescribed; and

(c) all moneys paid during the fiscal year, by way of rental, royalty or other payment to any person, other than to Her Majesty, for the grant of the right to engage in mining operations.

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12. Nothing in any Act of the province, or in any grant, deed, licence, contract, agreement or other document (whether or not such grant, deed, licence, contract, agreement or other document has received ratification by the Legislature), passed, given, made or entered into prior to the coming into operation of this Act, shall be construed so as

(a) to defeat the liability of a taxpayer to pay the tax required to be paid by Section 10 of this Part; or

(b) to enable any person who is liable for and required to pay a tax under Section 10 of this Act, to require the operator, contractor or any other person from whom such person receives any money by way of rental, royalty or other payment for the grant of the right to engage in mining operations,

(i) to pay such tax in its stead or place, or

(ii) to indemnify and save harmless such person against any such tax; or

(c) to impose any liability on the part of Her Majesty for loss or damage sustained,

and where any of the provisions contained in such Act, grant, deed, licence, contract, agreement or other document is in conflict with any of the provisions of this Act, the latter shall prevail.

32. The circumstances as to which Appellants dispute the constitutional applicability of s. 10(1)(a) of the Act, and of its associated provisions, are these, in general terms.

The Appellants dispute the constitutional application of these provisions to a payee who, outside Newfoundland, receives a payment of royalties in virtue of an agreement made outside Newfoundland and enforceable, at least as regards that payment, outside Newfoundland, the sum being payable only upon the occurrence of an event outside Newfoundland; and the payee not being engaged in any mining operations giving rise to the payment.

Taxes are either direct or indirect. A direct tax is one which is demanded from the very person who it is intended or desired should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another; such are the excise or customs.

The producer or importer of a commodity is called upon to pay a tax on it not with the intention to levy a peculiar contribution upon him, but to tax through him the consumers of the commodity, from whom it is supposed that he will recover the amount by means of an advance in price.

Mill’s well-known writings appeared not long before the drafting of the British North America Act, 1867, and were presumed by the Privy Council to be familiar to the Fathers of Confederation.

Mill’s test became firmly established in Bank of Toronto v. Lambe [(1887), 12 App. Cas. 575]. In that case Lord Hobhouse said that while it was proper and, indeed, necessary to have regard to the opinion of economists, the question is a legal one, viz. what the words mean as used in the statute. The problem is primarily one of the law rather than of refined economic analysis. The dividing line between a direct and an indirect tax is referable to and ascertainable by the “general tendencies of the tax and the common understanding of men as to those tendencies”: Lambe’s case.

The general tendency of a tax is the relevant criterion. This must be distinguished from the ultimate incidence of the tax in the circumstances of the particular case:

City of Halifax v. Fairbanks Estate [[1928] A.C. 117]; Attorney-General for British Columbia v. Kingcome Navigation Co. Ltd. [[1934] A.C. 45].

In City of Charlottetown v. Foundation Maritime Co. [[1932] S.C.R. 589], Rinfret J. pointed out that Mill’s canon is founded on the theory of the ultimate incidence of the tax, not the ultimate incidence depending on the special circumstances of individual cases.

The nature of the tax is a question of substance and does not turn on the language used by the Legislature: The King v. Caledonian Collieries Ltd. [[1928] A.C. 358].

Clearly, direct and indirect taxation are terms of historical reference, and although there is no reason to believe that the B.N.A. Act is not a document of evolving meaning, not limited to its original inspiration, jurisprudence, in so far as concerns particular forms of taxation like income or property taxes, has captured the historical spirit of “direct” and “indirect” taxation and preserved it. The effect of this was explained by Lord Cave in City of Halifax v. Fairbanks Estate [[1928] A.C. 117], at p. 125:

What then is the effect to be given to Mill’s formula above quoted? No doubt it is valuable as providing a logical basis for the distinction already established between direct and indirect taxes, and perhaps also as a guide for determining as to any new or unfamiliar tax which may be imposed in which of the two categories it is to be placed; but it cannot have the effect of disturbing the established classification of the old and well known species of taxation, and making it necessary to apply a new test to every particular member of those species. The imposition of taxes on property and income, of death duties and of municipal and local rates is, according to the common understanding of the term, direct taxation, just as the exaction of a customs or excise duty on commodities or of a percentage duty on services would ordinarily be regarded as indirect taxation; and although new forms of taxation may from time to time be added to one category or the other in accordance with Mill’s formula, it would be wrong to use that formula as a ground for transferring a tax universally recognized as belonging to one class to a different class of taxation.

Historically well-understood categories of taxation have a known jurisprudential fate. Thus, a customs levy cannot be made by the Legislature whereas a property

tax or income tax falls unquestionably within their competence.

A tax is not the less a tax on income because it is imposed on a particular component of the taxpayers’ income. It may be convenient to tax one part of the taxpayers’ income in one way, another part in another way.

(a) a deduction is permitted in respect of expenses necessarily incurred in the collection of the money from the operator or contractor. It is the opinion of the Minister which determines the necessity of the expenditure.

(b) Such amounts as the Lieutenant Governor in Council may allow for costs and outlays incurred by the taxpayer within the area of land in which the taxpayer has the right to engage in mining operations.

(c) All moneys paid during the fiscal year by way of rental, royalty or other payment to any person, other than Her Majesty, for the right to engage in mining operations.

What then is the general tendency of the tax now in question?

First it is necessary to ascertain the real nature of the tax. It is not disputed that, though the tax is called a tax on “gross revenue,” such gross revenue is in reality the aggregate of sums received from sales of coal, and is indistinguishable from a tax upon every sum received from the sale of coal.

The respondents are producers of coal, a commodity the subject of commercial transactions. Their Lordships can have no doubt that the general tendency of a tax upon the sums received from the sale of the commodity which they produce and in which they deal is that they would seek to recover it in the price charged to a purchaser. Under particular circumstances the recovery of the tax may, it is true, be economically undesirable or practically impossible, but the general tendency of the tax remains.

A tax on gross revenue is actually a tax on the total sales which can be very easily tacked onto the price and passed along to the consumer. The tax imposed by Section 10 is not a gross revenue tax, nor is it a commodity tax. It is a tax on net revenues or income from rentals, royalties and like payment arrived at by deducting from the total sum received certain amounts

for specified expenses allowed by the Act. The fact that the amounts of administrative and other expenses allowed under Subsection (a) of Section 10 of the Act are in the discretion of the Minister does not make the tax a gross revenue tax. The nature of the deductions are spelled out; there can be no doubt that amounts are deductible and what the Minister may do is to quantify these amounts. The same remark is applicable to the deductions allowed under Subsection (2)(b) of Section 10 where the amount is left to the discretion of the Lieutenant-Governor in Council. This Court ought not to ascribe to the Minister or Lieutenant-Governor in Council motives that would amount to an improper exercise of these discretionary powers, which would result in no deductions being permitted, thus imposing a tax on gross rentals, royalties and like payments.

It is probably true of many forms of tax which are indisputably direct that the assessee will desire, if he can, to pass the burden of the tax on to the shoulders of another. But this is only an economic tendency. The assessee’s efforts may be conscious or unconscious, successful or unsuccessful; they may be defeated in whole or in part by other economic forces. This type of tendency appears to their Lordships to be something fundamentally different from the “passing on” which is regarded as the hallmark of an indirect tax.

There is no doubt, on the evidence, and on ordinary economic considerations which are obvious enough to justify a Court in taking judicial notice of them, that the company would seek, if it could, to include the cost to it of its catalogues and the tax payable on their free distribution in its expense of doing business, and thus seek to pass this expense on to its customers. However, economic considerations are not invariable touchstones of legal incidence. Although the tests of direct and indirect taxation have, almost from the beginning of Canadian federalism, been based on Mill’s Political Economy, they have necessarily been placed in a legal setting and have been applied as providing a legal definition and not an economic one. There is a passage in Bank of Toronto v. Lambe (1887), 12 App. Cas. 575, at p. 583, which is an appropriate reference here, although it deals with a different type of tax. The passage is as follows:

…the tax now in question is demanded directly of the bank apparently for the reasonable purpose of getting contributions for provincial purposes from those who are making profits by provincial business. It is not a tax on any commodity which the bank deals in and can sell at an enhanced price to its customers. It is not a tax on its profits, nor on its several transactions. It is a direct lump sum, to be assessed by simple reference to its paid-up capital and its places of business. It may possibly happen that in the intricacies of mercantile dealings the bank may find a way to recoup itself out of the pockets of its Quebec customers. But the way must be an obsure and circuitous one, the amount of recoupment cannot bear any direct relation to the amount of tax paid, and if the bank does manage it, the result will not improbably disappoint the intention and desire of the Quebec Government. For these reasons their Lordships hold the tax to be direct taxation within class 2 of sect. 92 of the Federation Act.

The “general tendency” argument, found, for example, in the Caledonian Collieries case, is not one that establishes a principle outside of the context in which it was used in that case. Where, as in the present case, the tax imposed in respect of the free distribution of catalogues takes no account of what ultimately happens to

the catalogues, whether they are used or discarded, and is unrelated to any purchases made from the catalogues, it is manifest to me that the tax is so diffused in its impact that it cannot be said that there is any clearly traceable way in which the tax can be passed on.

Moreover, to borrow a phrase from the reasons of Rand J. in C.P.R. v. Attorney General for Saskatchewan, [1952] 2 S.C.R. 231, at p. 251, the tax in the present case is not “related or relatable” to any unit of a commodity or its price; indeed, no commodity is involved.

A. AND the Lessee hereby covenants with the Lessor as follows:

1. That the Lessee will, during the term of this Indenture, pay to the Lessor on or before the 25th day of January, April, July and October (hereinafter called “Quarterly Payment Dates”) in each and every year or if such day falls on a Sunday or a holiday then on the next ensuing day, as royalty for each Gross Ton of Iron Ore Products shipped from the Demised Premises during the calendar quarter immediately preceding the first day of the month in which payment is to be made as aforesaid, an amount equal to seven per cent (7%) of the Seven Islands Price thereof, or the sum of seventy-five cents (75 c), Canadian Funds, whichever shall be greater (the royalty so paid or payable being hereinafter called “Earned Royalties”);

Essentially, what is involved in the present case is an appreciation of the incidence of the tax, based, as that appreciation must be, on the subject-matter of the statute and the source of the income in respect of which the tax is levied. I regard it as too mechanical to find that an in personam tax is imposed here merely because the charging section stipulated that a “taxpayer” must pay it. The obligation to pay, a common one in tax legislation, does not necessarily determine the incidence of the tax. The definition of taxpayer is not limited to persons who reside in the Province but points rather to a class of persons identified with the operations in respect of which tax is imposed, regardless of their place of residence. It is the income derived from those operations, which themselves are limited to the Province, that, in my view, carries the burden of the tax. Whether the tax be characterized as an income tax or a tax respecting certain economic activity in the Province the result is the same, namely, that it is taxation within the Province. It would be to substitute form for substance and, indeed, empty the charging section of substance (by inviting easy evasion) to hold that a personal tax is imposed by the Act.

and such payment shall be in lieu of any and all taxes that would otherwise be payable by the Corporation or any lessee, sublessee, assignee or transferee of such premises under The Mining Tax Act, chapter 43 of The Revised Statutes of Newfoundland, 1952, as amended from time to time, or under any Act standing in the place of The Mining Tax Act as so amended, and any taxes for which the taxes now imposed by The Mining Tax Act are declared by that Act to be substituted, and any taxes imposed either generally or specifically upon mines or minerals or specifically upon persons carrying on the business of mining, in respect of operations under the said mining leases or in respect of iron ore mines or iron ore products made, produced, won, gotten, raised or removed under the provisions of the said mining leases.

12. Nothing in any Act of the province, or in any grant, deed, licence, contract, agreement or other document (whether or not such grant, deed, licence, contract, agreement or other document has received ratification by the Legislature), passed, given, made or entered into prior to the coming into operation of this Act, shall be construed so as

(a) to defeat the liability of a taxpayer to pay the tax required to be paid by Section 10 of this Part;