Judgments

Decision Information

Decision Content

A-132-74
David Cooper (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Urie and Le Dain JJ. and
MacKay D.J. Toronto, December 15, 1976 and February 8, 1977.
Income tax — Income calculation Profits on sale of
mining shares Whether interest in mining property acquired
under prospecting arrangement within ambit of s. 83(3) of Income Tax Act — Whether appellant disposed of his shares while or after carrying on campaign to sell to public thus
excluding from exemption under s. 83(4) of the Act Appeal dismissed — Income Tax Act, R.S.C. 1952, c. 148, ss. 10(1)(j) and 83.
Respondent claims that profits realized by the appellant on the sale of shares of the capital stock of a corporation were part of his income. Appellant contends that the shares were acquired in consideration for the transfer to the corporation of an interest in a mining property that he acquired by arranging to provide money and expenses for prospecting by a prospector and that the amounts received were therefore excluded from his taxable income by virtue of sections 10(1)(j) and 83 of the Income Tax Act. The respondent counters that the appellant disposed of his shares while or after carrying out a campaign to sell shares of the corporation to the public so that by virtue of subsection 83(4) of the Act, paragraphs 83(2)(b) and 83(3)(b) do not apply.
Held, the appeal is dismissed. Although the appellant acquired his interest in the mining property under an arrange ment to carry out prospecting and that prospecting was in fact carried out, he disposed of his shares while carrying on a campaign to sell shares of a corporation to the public.
Appleby v. M.N.R. [1972] F.C. 703, applied. Appleby v. M.N.R. [1975] 2 S.C.R. 805, distinguished.
APPEAL. COUNSEL:
Paul J. Sullivan for appellant.
J. R. Power and C. Fien for respondent.
SOLICITORS:
Shibley, Righton & McCutcheon, Toronto, for appellant.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment rendered in English by
LE DAIN J.: This is an appeal from a judgment of the Trial Division dismissing an appeal from a decision of the former Tax Appeal Board which had dismissed an appeal from income tax re assessments for the 1965 and 1966 taxation years. By his re-assessments the respondent Minister included in the income of the appellant certain profits realized by the latter on the sale of shares of the capital stock of a corporation. The appellant contends that the shares were the consideration for the transfer to the corporation of an interest in a mining property that he acquired under an arrangement with a prospector pursuant to which he advanced money for, or paid, the expenses of certain prospecting which was carried out by the prospector.
The issues on appeal involve the application of section 10(1)(j) and part of section 83 of the Income Tax Act, R.S.C. 1952, c. 148, as amended, which, as they applied to the taxation years 1965 and 1966, read as follows:
10. (1) There shall not be included in computing the income of a taxpayer for a taxation year
(j) an amount received as a result of prospecting that section 83 provides is not to be included.....
83. (1) In this section,
(a) "minerals" do not include petrôleum or natural gas,
(b) "mining property" means a right to prospect, explore or mine for minerals or a property the principal value of which depends upon its mineral content, and
(e) "prospector" means an individual who prospects or explores for minerals or develops a property for minerals on behalf of himself, on behalf of himself and others or as an employee.
(2) An amount that would otherwise be included in comput ing the income of an individual for a taxation year shall not be included in computing his income for the year if it is the consideration for
(a) a mining property or interest therein acquired by him as a result of his efforts as a prospector either alone or with others, or
(b) shares of the capital stock of a corporation received by him in consideration for property described in paragraph (a) that he has disposed of to the corporation,
unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.
(3) An amount that would otherwise be included in comput ing the income for a taxation year of a person who has, either under an arrangement with the prospector made before the
prospecting, exploration or development work or as employer of the prospector, advanced money for, or paid part or all of, the expenses of prospecting or exploring for minerals or of develop ing a property for minerals, shall not be included in computing his income for the year if it is the consideration for
(a) an interest in a mining property acquired under the arrangement under which he made the advance or paid the expenses, or, if the prospector was his employee, acquired by him through the employee's efforts, or
(b) shares of the capital stock of a corporation received by him in consideration for property described in paragraph (a) that he has disposed of to the corporation,
unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.
(4) Paragraph (b) of subsection (2) and paragraph (b) of subsection (3) do not apply:
(a) in the case of a person who disposes of the shares while or after carrying on a campaign to sell shares of the corpora tion to the public, or,
(b) to shares acquired by the exercise of an option to pur chase shares received as consideration for property described in paragraph (a) of subsection (2) or paragraph (a) of subsection (3).
The issues on appeal are the following:
1. Was there an arrangement to carry out pros pecting and was prospecting in fact carried out?
2. Did the appellant acquire his interest in a mining property under the arrangement?
3. Did the appellant dispose of his shares in the corporation while or after carrying on a campaign to sell shares of the corporation to the public?
The facts are as follows. The appellant had been employed only a short time as a commission sales man of M. Greene and Associates Limited, secu rity dealers, (hereinafter referred to as "Greene & Associates"), when he met one Dr. W. N. Ingham, a consulting geologist, who was at the time of their meeting doing work for Greene & Associates in connection with a mining property in which they were interested. There is no evidence as to how Ingham came to speak to the appellant and in particular whether anyone else in Greene & Associates suggested that he speak to him. At the time of their meeting Ingham was a knowledgeable and experienced geologist and prospector. The appellant had never before made an arrangement with a prospector, and he struck Ingham as lack ing in knowledge of such matters. The appellant
fell into a general discussion of mining matters with Ingham and asked Ingham if he knew of any interesting mining prospects. Ingham said he knew of an interesting area. He had in mind an area in Malartic Township with which he was particularly familiar because of previous work. The appellant evinced an interest in acquiring a mining property, and Ingham suggested that they enter into a grub- staking agreement. An agreement was drawn up by a solicitor, C. Marshall Hames, and signed by the appellant and Ingham on March 1, 1965. Neither the appellant nor Ingham was able to produce a copy of this agreement, and Hames was not called upon to do so. The appellant and Ingham were agreed in their testimony, however, as to the existence of the agreement and its essen tial nature. Both testified that Ingham was to select an area that looked promising, based on his previous knowledge and experience, and to do some prospecting, with a view to making a recom mendation as to whether to stake claims. The appellant agreed to pay Ingham $800, of which $200 was paid in advance and the balance was to be payable upon completion of the work. Ingham testified that he was to receive the $800 whether or not it was decided to stake claims.
Ingham selected an area in Malartic Township about 15 miles from his office in Val d'Or in which to do some prospecting. The selection was based on what Ingham had learned of the area while work ing as a resident geologist at Val d'Or for the Quebec Department of Mines during the years 1944 to 1956. During this period he had prepared a geological map of the whole of the Malartic Township. Since working for the Quebec govern ment he had maintained contact with the area as a consulting geologist operating out of Toronto, with an office in Val d'Or from about 1964. He was thus very familiar with the geology and mining potential of the region. The selection of the area in which to prospect was also based in part on the activity and interest being generated by Camflo Matagami Mines, about four miles from the site selected by Ingham. Moreover, there were at the time about twelve companies mining gold or base- metal ores in the Malartic-Val d'Or area. It was an active mining area in which the prospects for further discovery were favourable.
Following the agreement with the appellant Ingham went to Val d'Or, hired another prospec tor, James House, to assist him, particularly with the heavy labour of digging and removing snow, and set out to try to locate some old trenches along the shore of Lake Malartic that he recalled from his earlier explorations of the area. They did not have any success on the first day, but on the second day they located one of the trenches and worked for another day or two to clear the snow and expose the rock in it. House did most of this work with Ingham checking on it from time to time. Ingham also examined a shear zone forma tion elsewhere in the area but did not take any samples from it. He took five samples of rock from the trench by the shore of the lake and had them assayed. All but one of them failed to show any significant gold content. The one that did show something significant was considered to be encouraging although still relatively modest. Ingham said that because of the activity in the area and the rush to stake claims there was no time to be lost on further prospecting. He reported the results of his work to the appellant and recom mended that claims be staked in an area centering on the trench from which the samples had been taken. The appellant told him to go ahead. Ingham said that he based his recommendation on the analysis of the samples taken from the old trench, his research into the geology of the area, and the other activity in the area. He referred to the result of the sampling as affording "a little encourage ment" and "a small gold assay." It would appear that in addition to the study he had made of the area before he met the appellant Ingham carried out some further research after the agreement with the appellant into the geology of the particu lar area which he had selected for prospecting.
Ingham staked twenty-four claims for the appel lant covering an area of 1,200 acres. He forwarded the title to these claims to the appellant in a letter dated April 26, 1965 in which he said, "These documents complete my part of the agreement made on March 1 between David Cooper as `Grubstaker' and myself as `Prospector' ", and he received payment from the appellant of the bal ance of $600 owing under the agreement.
By agreement dated April 28, 1965 the appel lant sold the claims to Hampshire Mines Limited.
This company, which later changed its name to Kaiser Mines of Canada Limited, will for conveni ence be hereinafter referred to as "Kaiser". The consideration for the transfer was 800,000 shares, later reduced to 700,000 shares, of the capital stock of Kaiser, of which 70,000 were held as free vendor shares and 630,000 were escrowed.
Kaiser entered into an underwriting option agreement dated April 28, 1965, with Greene & Associates. The appellant estimated that in the course of the sale of Kaiser stock to the public he probably sold between 75,000 and 100,000 shares on behalf of Greene & Associates. He estimated that this volume might have involved between 30 and 50 separate sales. In the fall of 1965 the appellant sold the 70,000 free shares held by him through his own brokers for a total price of $32,796.14. In the fall of 1966 he sold his 630,000 escrowed shares to a company that had taken over Kaiser for a total price of $57,000.
By notice of re-assessment dated June 3, 1969 the respondent re-assessed the appellant for the 1965 and 1966 taxation years bringing into income the appellant's profits of $32,796.14 and $56,460 on the sale of his Kaiser shares. The appellant's appeal from this re-assessment was dismissed by the Tax Appeal Board, and an appeal by him from the Board's decision was dismissed by the Trial Division of this Court.
It is not disputed that Dr. Ingham was a pros pector. Whether what was contemplated by the grubstaking agreement that he made with the appellant and what he in fact did in the first week or two of March was prospecting within the mean ing of section 83 of the Act is another question. This is the first question to be determined. The learned Trial Judge, having come to the conclusion that the appellant did not acquire his interest in the mining property as a result of the work done by Ingham and House in the field but as a result of a decision to stake claims based on other consider ations, did not express a firm opinion as to whether that work could be considered to be prospecting. He did, however, express strong doubts that it could. "Additionally", he said, "I am extremely doubtful that selecting five samples of rocks within a few feet of each other in a 1,200 acre area without any exploration of the balance of the area can be said to be `prospecting' as that term is used
in section 83." With respect, I cannot agree with this view. I do not think that the character of what was done, assuming it to be a bona fide effort, is to be determined by the extent and duration of it. It was clearly a recognized form of prospecting: walking over the ground, uncovering rock forma tions, examining and taking samples from them for analysis. The extent and duration of what was done were limited by several factors: Ingham's familiarity with the area, the conditions of the ground, and the sense of urgency. Ingham's knowl edge and experience would permit him to focus his prospecting efforts. It should be remembered also that in addition to taking samples from the trench he did some further research, based on public records, into the geological features of the area. This too was a form of prospecting.
The essential conclusion of the Trial Judge, however, is that, whether or not the work carried out by Ingham after the grubstaking agreement can be called prospecting, the decision to stake was not based on this work but on the knowledge of the area that Ingham had previously acquired and on the current activity in it, in particular the Camflo development some four miles away from the area chosen for staking. This is clearly indicated in the following passage of his judgment:
To qualify for exemption, the appellant must establish:
(a) that the prospecting efforts in respect of the subject property were expended by the prospector before the proper ties were acquired; and
(b) that the properties were acquired as a result of any such
efforts. (See M.N.R. v. Karfilis [1967] 1 Ex.C.R. 129 at 154.
See also: Winchell v. M.N.R. quoted supra [74 DTC 6152].)
In this case, the prospector, Dr. Ingham, acting and relying on information and material acquired by him as a resident geologist working for the Quebec Government, decided, before doing any exploring or prospecting whatsoever that an area centering on certain excavated trenches might be a promising area for mineral occurrences. Based on this background infor mation plus the fact that Camflo Matagami Mines Ltd. had a successful gold mine only four miles away, he recommended to the appellant that subject claims be staked. I believe it to be a necessary inference from the evidence that the claims would have been staked without the collecting and assaying of the five rock samples. Accordingly, I have the view that subject claims were not acquired as a result of any prospecting efforts as required in (b) above. Additionally, I am extremely doubtful
that selecting five samples of rocks within a few feet of each other in a 1,200 acre area without any exploration of the balance of the area can be said to be "prospecting" as that term is used in section 83. I infer from the evidence that Dr. Ingham intended all along to stake claims in this area and that the selection of a few rock samples does not alter the true nature of his mission. Dr. Ingham was an experienced geologist and admitted familiarity with the provisions of section 83. I have the view that the selection of the rock samples was an attempt on his part to comply with said section 83 and that such "token" prospecting or exploration as was carried out in this case does not meet the requirements of section 83.
It was the contention of the appellant that the Trial Judge was in error in holding, with reference to subsection 83(3), that the mining properties must have been acquired as a result of the pros pecting efforts. It was said that this test is appli cable to subsection (2), where the terms are "as a result of his efforts as a prospector", rather than to subsection (3), where the language is "under the arrangement under which he made the advance or paid the expenses". Although the precise formula tion of the test which the Trial Judge adopted may be more obviously applicable to the terms of sub section (2), where it is the prospector who acquires the mining property, than to those of subsection (3), the Trial Judge was not, in my opinion, in error in proceeding on the assumption that there must be in the case of subsection (3), a causal relationship between the prospecting efforts and the acquisition of the property. Section 10(1)(j) of the Act indicates that what is generally contem plated by section 83 is an amount received "as a result of prospecting". The evident purpose of section 83 is to encourage prospecting as the means by which mineral resources are discovered. The arrangement referred to in subsection (3) must have for its object the kind of work that is identified there as "prospecting or exploring for minerals" or "developing a property for minerals". When the subsection speaks of an interest in mining property being acquired "under" such an arrangement it must mean as a result of the prospecting work carried out pursuant to such an arrangement. If the prospecting work has no bear ing on the acquisition of the property then the property cannot, in any meaningful sense, be said to have been acquired under an arrangement of the kind contemplated by the Act. The staking of claims pursuant to an agreement that provides for the staking of claims as well as prospecting is
something done "under" the agreement, but the staking of claims alone is clearly not what is contemplated by section 83. Thus the question is whether the prospecting had a bearing on the decision to stake claims. It need not, in my opin ion, be the exclusive basis for such decision. Nor do I think its relative importance as a factor underlying the decision is crucial. It is sufficient, in my view, if the result of the prospecting is a factor taken into consideration in the decision as to whether to stake claims. Otherwise, bona fide prospecting efforts that contribute to the location of mineral deposits might be excluded from the exemption by reason of the extent of a prospector's prior knowledge of an area.
The Trial Judge concluded, in effect, that the work carried out by Ingham in March 1965 had no bearing whatever on the decision to stake claims. He inferred from the evidence that Ingham intend ed all along, as a result of the knowledge he already possessed and of the Camflo development, to stake claims in the area, and that he would have staked claims whether or not he had taken rock samples from the trench. In my opinion, the evi dence does not support this inference. There is no evidence whatever to support the inference that Ingham would have recommended the staking of claims in a particular area without an opportunity to test by some further prospecting the general impressions he had acquired in his previous work. The Trial Judge's finding of fact concerning the basis of Ingham's recommendation to the appel lant does not, in my view, adequately reflect the evidence. As indicated above, the Trial Judge found that: "Based on this background informa tion plus the fact that Camflo Matagami Mines Ltd. had a successful gold mine only four miles away, he recommended to the appellant that sub ject claims be staked."
Ingham testified as to what he agreed to do for the appellant as follows:
I agreed to select a certain vicinity or area within a larger area of Val d'Or and go to that place and examine it and look for economic minerals. And, I further agreed, that if in my opinion, I found something encouraging and looked interesting, I will tell him that I found something encouraging and I would advise him and if he wanted to, it was time to stake some claims on the property.
There was the following testimony by him as to why he selected the area he did for prospecting:
Q. Yes, what I am wondering is on what basis did you decide where to start looking?
A. Well, several. One, my general knowledge of the area gained through the mapping and through study of other information in that vicinity. And then, secondly, a memory of having seen some old trenches in that vicinity on which there was no published information whatsoever, so my idea was to go and prospect that particular spot as a likely place to find something, and so that's what led me there.
He testified as to what he reported to the appellant as follows:
I telephoned him and said that a little encouragement had been found in one of the old trenches, as a result of our sampling and that in addition to that I had researched in detail, the geology of the particular part of Malartic which I thought favourable; a good place to do more work than had already been done ....
... I told him that I confirmed that there was some gold in this one spot and that the other conditions looked favourable and I thought he should stake.
... I told him that as a result of the prospecting I had a small gold assay and as a result of other things happening in the area and, as a result of my own research in the particular vicinity, that I believed that claims were worth staking and did he want to go ahead and stake it. And his answer was, "yes" do it.
According to the testimony, then, Ingham did not start out with firm instructions to stake claims at places of his own choosing in an area selected by him. The understanding was that he would pros pect in an area that he considered promising and report to the appellant. His recommendation to stake claims was based, at least in part, on the results of his prospecting, which included further research, consisting of the study of public records, into the geology of the area. It is my impression that the Trial Judge overlooked or failed to attach any weight at all to this further research. I am unable to conclude on the evidence that it is a reasonable inference that neither Ingham nor the appellant considered that any further prospecting was necessary or desirable before deciding whether or whereto stake claims. The surface prospecting that was carried out was concentrated on a par ticular site but it was not, with respect, the per functory or superficial effort that merits charac terization as a "token" one. Ingham took the trouble to engage House, and House expended considerable effort covering several days locating
the trench and exposing the rock to Ingham's satisfaction. It was not the effort of a man who was engaged in a mere pretense. The trench deter mined the area that was staked, some of it includ ing the bed of the Lake. The prospecting that was focused on the trench had a direct bearing, in my opinion, on the decision to stake. '
It is necessary to turn now to the question of whether the appellant can be said to have been carrying on the campaign to sell the shares of Kaiser to the public. The meaning of these words was considered by the Supreme Court of Canada in Appleby v. M.N.R. [1975] 2 S.C.R. 805. There, a majority of the Court, affirming judgments of the Trial and Appellate Divisions of this Court, held that an individual who was the sole beneficial shareholder of the company that made the under writing option agreement for the sale of shares was carrying on the campaign to sell the shares to the public within the meaning of subsection 83(4) of the Act. It would appear from the facts of that case that Appleby personally controlled and direct ed the entire sales campaign through his active intervention, and that his company was in effect his instrument for carrying on the campaign. Judson J., delivering the majority judgment for himself and Ritchie and de Grandpré JJ., empha sized the active and controlling role played by Appleby as follows [at pages 810-11]:
The trial judge also found that Appleby was personally instru mental in the making of the underwriting agreements that were entered into by the three mining companies; that if he did not personally write the sales literature that the securities company mailed to promote the sale of shares, he ordered the writing of this material and saw to it that none of it was sent out without his having read and approved of it. Finally, it was Appleby himself who every day telephoned W. D. Latimer Company Limited in order to set the prices at which the latter was authorized to buy and sell the shares of the three mining companies. The appellant's factum filed in this Court states the position of Latimer in these terms: "Latimer was in the terms of the trade `running the box' for J. Appleby Securities Limit ed." It is obvious to me that it was running the box on the sole instructions of Appleby, who at the same time had his own shares to dispose of.
On these facts, both divisions of the Federal Court have found that Appleby disposed of his own shares in the Winston, Boeing and Marlboro mining companies while carrying on a campaign to sell shares of these companies to the public. They were also of the opinion that the fact that he used a company,
completely under his domination as a participant in his activi ties did not enable him to escape the exclusion from exemption contained in s. 83(4)(a) of the Income Tax Act, above quoted. With these conclusions 1 agree.
Martland J., in a concurring opinion, said [at page 807] that Appleby had "used his own com pany as a vehicle to achieve his purpose", and that "a person can be found to have carried on a campaign for the sale of shares if he causes his own company to carry it out on his behalf." He took care, however, to limit the necessary implica tions of his own conclusion as follows:
In my opinion the application of s. 83(4) of the Income Tax Act, R.S.C. 1952, c. 148, to the circumstances of this case does not involve the conclusion that if a limited company carries on a campaign to sell shares, within the meaning of that subsec tion, the agents of that company can also be said to have carried on that campaign. That is not the position in this case.
Pigeon J., dissenting, took the view that the words "carrying on a campaign to sell shares" in subsection 83(4) refer to the individual or entity who, in law, is the seller of the shares and the person entitled to the proceeds of such sales. He held that the securities company was the person who in law was making the sales, and that it could not be assimilated to or identified in law with its shareholder, Appleby.
With respect, it appears to me to be a necessary implication of the decision of the majority in the Appleby case that a person may in certain circum stances be considered to be carrying on a cam paign to sell shares to the public although he is not in law the person who is the seller of the shares or the person who is entitled to the proceeds of such sale. The question is how far this implication ought to extend beyond the very particular facts of the Appleby case. Clearly the facts are quite different in the present case. The appellant was not a share holder of Greene & Associates, much less a person in control of it. He testified that he had nothing to do with the underwriting agreement although he was in a position by virtue of his shareholding in Kaiser to elect or cause to be elected a majority of the directors of that company. His role in the sales campaign was that of a commission salesman who sold an estimated 75,000 to 100,000 shares of Kaiser to customers. On these facts the Trial Judge held that the appellant was carrying on the
campaign to sell the Kaiser shares to the public. He relied particularly on a passage from the judg ment of this Court in the Appleby case, [ 1972] F.C. 703, in which Thurlow J. (as he then was) said at p. 705:
So, in our view, if, as in the present case, an officer or employee in the course of his duties carries on a campaign to sell shares he is, in fact, personally carrying on that campaign even though he is doing it as part of the business activities of his employer.
In my respectful opinion the decision of the Supreme Court of Canada in the Appleby case has not made this statement of principle inapplicable. The question, of course, is when as a matter of fact an officer or employee should be considered to be carrying on the campaign to sell shares to the public for which his company is primarily respon sible. It would not be reasonable to fix every employee of an incorporated securities dealer, regardless of his function, with participation in the carrying on of the campaign for purposes of sec tion 83(4). One view might be that the officer or employee must have a certain control or direction over the campaign so that it can reasonably be considered to be his campaign. On the other hand it does not seem reasonable to exclude one, who, though not in a position to control or direct, is nevertheless actively engaged as a salesman in promoting the market for his own shares. A "cam- paign" to sell shares is a course of action that involves not only juridical acts but non-juridical activity of an organizational and promotional nature. The juridical act of sale is the culmination of an effort to create and develop a market for the shares and to induce persons to purchase them. It is that effort that is the campaign. Where it is not carried out by a single person it requires some organization involving more than one person. In my view, anyone actively involved in that organi zation and effort must be held to be carrying on the campaign. It must at least be true of a sales man who is actively promoting the shares and who actually sells a considerable number of them to several individuals. I am, therefore, of the opinion that the appellant must be held to have disposed of his shares in Kaiser while or after he carried on a
campaign to sell the shares of the company to the public. For these reasons I would dismiss the appeal.
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URIE J.: I concur.
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MACKAY D.J.: I concur.
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