Patrick a Cramond v. Minister of National Revenue, [1972] CTC 2193, 72 DTC 1172

Roland St-Onge:—This appeal was heard at Vancouver, BC on October 29, 1971 by the Tax Appeal Board as it was then constituted, and is from reassessments dated October 20, 1969 wherein tax in the amounts of $6,205.70, $4,019.39 and $10,194.14 was levied in respect of income for the taxation years 1963, 1965 and 1966 respectively.

The appellant, a businessman residing at North Vancouver, BC, alleged that in 1962 he entered into a grubstaking agreement with William Harold Hudson, Arthur O Hall and Robert Zielinski, whereby he was to receive a 25% interest in any claims staked. Pursuant to this agreement Robert Zielinski, a prospector, was to carry on prospecting on mineral properties in the vicinity of Buttle Lake on Vancouver Island and to stake a number of claims. A company by the name of the “Buttle Lake Mining Company Limited” was incorporated on January 30, 1962 and the participants in the agreement agreed to transfer the mineral claims to the company in return for 650,000 shares of the company, of which the appellant received 162,500 for his 25% interest. He also purchased 12,500 shares at ten cents per share. He then sold part of his shares as follows:

On the other hand, the respondent alleged that the group was formed on January 16, 1962 for the purpose of acquiring certain mining claims near the boundary of the property of Western Mines Ltd, a company which had just announced drill results indicating substantial ore grades and tonnage on its property. Following this announcement, Robert Zielinski with his employee, Mr C W Jay, immediately proceeded to the area and staked 28 claims. On or about the end of January 1962 the group incorporated Buttle Lake Mining Company Limited (NPL) and sold its interest in the claims to the company — each member receiving 162,500 shares, all of which were placed in escrow. From the time of the incorporation and at all material times the appellant was a director and president of Buttle Lake which became a public company at the beginning of April 1962. At about the same time C M Oliver & Co Ltd underwrote the sale of shares of Buttle Lake to the public and further underwritings by this stock brokerage firm were made in Buttle Lake’s shares in subsequent years.

The appellant was at all material times a stock salesman and subsequently a partner in C M Oliver & Co Ltd. In 1963, 1965 and 1966 the appellant sold his shares of Buttle Lake which he had acquired by purchase from the company and from the public in the years under appeal for the purpose of trading or turning them to account.

The respondent contended that no prospecting took place on these claims prior to the staking and if any was done by the said Zielinski, it was prior to 1962 or the agreement; and that the appellant’s course of conduct constituted a business within the meaning of paragraph 139(1 )(e) of the Income Tax Act.

The evidence adduced shows that on January 16, 1962 Mr Zielinski wrote a letter (Exhibit A-1) to the group in which he acknowledged receipt of $40 which they had sent him by way of an advance on the expenses he would incur when staking mining claims in the Buttle Lake area on Vancouver Island, and stated also that all his expenses were to be paid by the group for this undertaking. On January 24, 1962 he wrote another letter to the group (Exhibit A-2) the relevant part of which is reproduced hereunder:

This will confirm that in consideration of the sum of $323.23, payment of which is hereby acknowledged, which covered the expenses of my prospecting trip to the Buttle Lake area, I hereby transfer a 25% interest to each of you in the mining claims which I have staked and which may be more particularly described as shown on British Columbia Mining Receipt No 52572-D, dated the 24th January, 1962, taken out in my name and recording “JAY 1-28” Mineral Claims situate 3 miles west of head of Buttle Lake and adjoining the Western Mines claims on the north. I will retain the remaining 25% interest for myself.

According to this correspondence it seems that a grubstaking agreement actually took place between the group and the prospector. However, the Board cannot rely on the terms of the above reproducd letter to determine exactly when Mr Zielinski did his prospecting and should examine all the circumstances of this transaction.

It is in evidence that a company by the name of Western Mines Ltd was already operating in the above-mentioned area, but was not permitted to do any staking in Strathcona Provincial Park because of certain restrictions imposed by the province. Apparently some members of the group knew about these restrictions and offered 25,000 shares to an employee of the Chamber of Mines for information con- cerning the date on which these restrictions would be lifted, and another 25,000 shares to a prospector* for a plan or map showing the exact location of the final post on Western Mines property — which would be the means of saving a great deal of time.

In addition to acquiring this information, the group hired a prospector who knew the area very well because he had done some prospecting there during the summer of 1959. Called on behalf of the respondent, Mr Zielinski explained that all this prospecting started when an acquaintance asked him to go and tie together all the open Crown grants. which were near the Western Mines property. Before visiting the site in 1959, he read and studied all the reports of the Minister of Mines and assembled a whole collection of books on the subject. This considerable amount of inquiry convinced him that the Western Mines structure was present in the area where the “Jay” claims were later staked and later in the year he went over on foot to examine the structure and to probe beneath the surface at different spots. This examination of the site confirmed his convictions. At that time he could not do anything about it because the prices of zinc and lead were very low.

ln September or October 1960 Mr Zielinski returned to this area to do some prospecting as an employee of Big Interior in Great Centra! Lake and prospected also the area where the “Jay” claims were staked. He corroborated Mr Jay’s testimony to the effect that both had, prior to 1962, studied the reports and maps of the Minister of Mines and Minerals with respect to the same area and had come to the conclusion that the Western Mines structure was there and that mineralization extended over the northern boundary of Western Mines property. He also stated: that Mr Hudson knew that he (Zielinsky) was quite familiar with the area and, consequently, asked him to go and locate the claims; that he obtained a sketch of the location from another prospector showing him exactly where to start staking and that without this information he would have wasted days searching for the final posts of Western Mines property; that because of previous prospecting he knew the showings were there despite the presence of the snow.

In support of the contention by the appellant that he is entitled to the exemption provided by subsection 83(3), his counsel argued that the claims were acquired by Mr. Cramond through the efforts of his employee, Mr Jay. The evidence on this question is crystal clear. Mr Jay was the employee of the prospector, Mr Zielinski. His second argument was that an agreement had been entered into “prior to the prospecting, exploration or development work”. After a careful scrutiny of the evidence on that question, the Board is not certain that the prospecting was done pursuant to the agreement. Some money was paid to the prospector “to go and locate the claims”. Everyone interested in this transaction knew that the mineral was there. They had even promised some 25,000 shares of the company for the purpose of finding out just when the restrictions would be lifted and another 25,000 shares to find out exactly where to start, thus avoiding any waste of time. They hired a prospector who had previously prospected in the area, so they used all means at their disposal to arrive there first and stake the claims. This race to place some posts cannot be regarded as prospecting, and the evidence adduced shows without doubt that the prospecting was done prior to the agreement of 1962. Furthermore, it was easier to carry out prospecting in the summer of 1959 than in the winter of 1962 when everything was covered with snow.

The fact that Mr Zielinski effectuated his prospecting prior to 1962 prevents the appellant from benefiting by subsection 83(3) which reads in part as follows:

(3) An amount that would otherwise be included in computing 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 developing a property for minerals, shall not be included in computing his income for the year if it is the consideration for. . .

According to the evidence, Mr Zielinski, in 1962, did no prospecting, exploration or development work but, as already stated, merely staked the claims. This, in my opinion, is not sufficient to allow the appellant to benefit by the provisions of the above section and, consequently, the appeal should be dismissed.

Appeal dismissed.