Case: Echo Bay Mines Ltd v R [1992] CF 707
Outcome: cited
Echo Bay Mines Ltd v R [1992] 3 CF 707, a Canadian Trial Court decision, was cited but was of little assistance. It was a case concerned with the calculation of income tax. The Court there held that the price received by the taxpayer for the silver it produced was the sum of receipts from delivery of actual production and from settlement of forward sales contracts. The judge applied observations made in the Supreme Court of Canada in Atlantic Sugar Refineries v Minister of National Revenue [1949] CTC 196, another income tax case concerned with whether profits on sugar futures formed part of income. In that case Locke J (Kellock J concurring) said (at [12]): In trades where natural products are purchased in large quantities, hedging is a common, and in some cases, a necessary practice, and the cost of such operations in trades of this nature is properly allowable as an operating expense of the business. Where, as in the present case, the trader elects to close out his short sales and take a profit, this is, in my opinion, properly classified as profit from carrying on the trade. In Echo Bay Mines [1992] 3 CF 707, MacKay J said (at 733): I conclude that the price received by the plaintiff for the silver it produced was the sum of receipts from delivery of actual production and from settlement of forward sales contracts. The business of the plaintiff was silver production. In these circumstances where the plaintiff participated in forward sales contracts and settlements, however, as a hedge against price fluctuations in silver, and in which the commodity traded was silver futures, I do not conclude that the plaintiff was involved in futures speculation for investment purposes. There was a clear business purpose in its sales and settlement of silver futures contracts, a purpose integrated with its sales of product to yield income; the plaintiff was trying to obtain an assured price for the sale of the silver it produced. ... Here the forward sales transactions were in respect of the same commodity as the plaintiff's production; both were, in my view, integral aspects of the plaintiff's business of producing silver, and returns from these activities were income from production of metals within Regulation 1204(1). 273 The decision of MacKay J in Echo Bay Mines [1992] 3 CF 707 was approved by the Supreme Court of Canada in Placer Dome Canada Ltd v Ontario (Minister of Finance) (2006) SCC 20. In that case the Supreme Court held that hedging transactions fixed the price for the output of a mine. It approved the reasoning of Gillese JA who dissented in the Court of Appeal of Ontario: Placer Come Canada Ltd v Ontario (Minister of Finance) (2004) 190 OAC 157. Woodside Energy relied upon a passage from the dissenting judgment of Gillese JA as supportive of the position taken by Woodside Energy. Her Honour said (at [119]): The general purpose of the Act is to tax output from a mine. However, there is no reason to refer to anything but the first type of consideration in the definition of "proceeds" if the purpose of that provision is limited to taxing output. The apparent purpose of including the second and third types of consideration is to tax gains arising from specified types of financial transactions (ie hedging, future sales or forward sales) that are related to the output of the mine. The view that hedging transactions were related to the output of the mine in that case was said by counsel for Woodside Energy to sit comfortably with the conclusion that hedge expenses can be incurred "in relation to" the sale of petroleum produced from a petroleum project.