Jill E. Kay v. Minister of National Revenue, [1971] CTC 113, 71 DTC 5085

JACKETT, J.:—This is an appeal from the appellant’s assessments under Part I of the Income Tax Act for the 1964 and 1965 taxation years. The appeal brings into question the correctness of the assessments in so far as they tax the appellant on profits received upon sales of certain company shares in those years and, in the alternative, brings into question the correctness of the amounts of those profits as determined by the assessments.

The appellant’s husband was at all relevant times employed by or associated with companies in what he described as the ‘‘mine finding business’’. By virtue of such employment or association he was instrumental in having her made a member of a syndicate that, in 1962, acquired the beneficial interest in certain mining “claims” under the mining legislation of the province of Quebec, which claims were promptly resold to a newly incorporated company, called Silverfield Mining Corporation Limited (hereinafter referred to as ‘‘Silverfield’’), for a consideration consisting of shares in that company. As a result of her membership in that syndicate, the appellant paid her share of the expenses incurred by it, which amounted to $190.56; and received 11,500 “Free Shares’’ and 103,500 ‘‘Escrowed Shares” in Silverfield. All this was completed in 1962.

The mining properties represented by the “claims” so sold to Silverfield were good prospects, which required to be explored by drilling to determine whether they were in fact properties that could be developed to advantage. This work was carried on by Silverfield without the discovery of a commercial mine.

However, at about the same time that Silverfield acquired the “claims” from the syndicate, it also acquired an interest in another property on which it carried on a successful. exploration programme in consequence of which it brought a silver mine into commercial production in January 1963.

This latter success on the part of Silverfield resulted in a market in which the appellant was able to sell 10,000 of her Silverfield shares for $29,762.50 in 1964 and another 32,400 for $109,367.58 in 1965.

The assessments appealed from increased the appellant’ s taxable income and income tax for each of the years in question, by reason of the sales of the shares in question, as follows :

The questions that arise on this appeal fall into two groups.

In the first place, certain: questions arise with reference to Section 83 of the Income Tax Act, the relevant parts of which read as follows:

83. (1) In this section,

(a) “minerals” do not include petroleum 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

(c) “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 computing 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 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

(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 corporation to the public, or

(b) to shares acquired by the exercise of an option to purchase shares received as consideration for property described in paragraph (a) of subsection (2) or paragraph (a) of subsection (3).

The appellant says that, having regard to the facts established by the evidence placed before the Court on the hearing of this appeal, Section 83(3) operates to exclude the amounts received by her for the shares in question in the computation of her incomes for the years in question. The Minister disputes this and says that, even if it is so on a reading of Section 83(3) by itself, Section 83(4) excludes the application of Section 83(3) to the facts of this case.

As an alternative to relying on Section 83(3), the appellant submits that, while the acquisition of the mining claims and their sale by the syndicate was an adventure in the nature of trade, that was a ‘‘business’’ within Section 3 of the Income Tax Act by virtue of Section 139(1) (e) of that Act, that that adventure was completed when the members received their shares in Silverfield in 1962, and that, even if the acquisition of those shares and their subsequent resale in 1964 and 1965 was a business within Section 139(1) (e), it was a separate adventure and the profits therefrom were the proceeds of sale less the value of the shares sold when they were acquired in 1962. The respondent’s position on this branch of the appeal is that there was only one adventure and that was not completed until the Shares received for the mining “claims” were ultimately disposed of.

I turn first to the question whether it has been established that the appellant is entitled to take advantage of Section 83(3). The answer to this question depends on the facts established by the evidence. I propose to state them briefly without detailed references to the evidence of the various witnesses.

The commencement point is the existence in Canada of two organizations (involving various companies and arrangements) whose activities included searching for and developing potential mining properties. One (which I will refer to as the “Keevil Group’’) was headed by a Dr. Keevil and the other (which I will refer to as the ‘‘Hirshhorn Group’’) was headed by one Joseph H. Hirshhorn. The appellant’s husband, who was a professionally trained engineer who directed the searching activities for the Hirshhorn Group had, just before the events in question, convinced himself that a property known as the Reinhardt Claims warranted exploration. His ‘‘opposite number” with the Keevil Group, J. C. Frantz, had reached a similar position with regard to a property known as the Fabre Township Claims. These two groups operated completely independently of each other.

In August 1962 Mr. Kay, acting on behalf of the Hirshhorn Group, visited Dr. Keevil to investigate the possibility of the Keevil Group joining with the Hirshhorn Group to exploit the Reinhardt Claims. Not only did Dr. Keevil show interest in that suggestion but he told Mr. Kay of Mr. Frantz’s views about the Fabre Township property. In the result, it was decided that a company should be incorporated to acquire and exploit, among other properties, the Reinhardt Claims and the Fabre Township property. Among the other steps upon which they must have agreed to bring this about, it was agreed that a syndicate should be formed to acquire the necessary interests in the Fabre Township property and sell them to the proposed company.

At this point it is necessary to explain what was involved, from a business point of view, in acquiring the necessary prop- erty interest in the Fabre Township property. The relevant provincial law contemplates a mining property being ‘‘staked’’ on the ground by a person who holds an appropriate licence. When that has been done and the necessary registration requirements have been satisfied, that person acquires the mining rights in the property subject to certain obligations concerning work to be done on the property. Once the actual licensed staker has so acquired such rights, usually referred to as ‘ claims ’, he may sell or otherwise dispose of them to someone else. Against this background it appears that one of the activities of one of the Keevil companies, Geophysical Engineering & Surveys Limited (and presumably of other companies), is to stake mining claims on behalf of others. That is, persons employed by the company who hold the necessary licences stake designated properties on the understanding that they will hold the claims so acquired for the person by whom the company was employed to do the staking, and the company charges a fee for this service.

I have inserted this bit of background as it seemed necessary to understand the syndicate agreement that was entered into to implement the understanding reached by Dr. Keevil and Mr. Kay concerning acquisition of the Fabre Township Claims for the proposed company. That syndicate as it was ultimately set up was composed of two companies of the Keevil Group, two companies of the Hirshhorn Group, Mr. Hirshhorn personally, and the appellant. The agreement was dated August 30, 1962 and the substantive portion reads as follows:

Pursuant to discussions between us over the past two days, we, the undersigned, agree jointly to cause to be staked and recorded unpatented mining claims in Fabre Township, Quebec, covering an area of apparent mineralization therein on the shares of Lake Temiskaming as indicated by Mr. J. C. Frantz, the scope of such staking to be designated by him.

It is further agreed that we shall own beneficially the properties so staked, and shall be responsible for the costs of the staking and recording of the same (and associated expenses) in the following proportions, namely:

In the event that it may be decided to dispose of these properties in the future and any one or more of us may be unavailable to execute any agreements or documents of transfer in this respect, we each hereby severally appoint Goldfields Mining Corporation Limited trustee to hold the said properties in our respective parts and to dispose of the same as agent for us in the proportions above set out, and we hereby each appoint Goldfields Mining Corporation Limited our respective attorney for these purposes, this Memorandum constituting its full and complete authority in this regard.

Goldfields Mining Corporation Limited		. 3/7ths
Joseph H. Hirshhorn		3/14ths
Mrs. Stephen Kay		28/140ths
Keevil Consultants Limited		1/7th
Penelope Explorations Limited	.1	1/40th
United Reef Petroleums Limited		l/40th

This Memorandum may be signed in a number of counterparts for convenience, in which case all of such counterparts shall form our complete agreement in this regard.

After that agreement was signed, Mr. Frantz reviewed the literature concerning the mining possibilities of the Fabre Township property and spent one day there examining the surface indications. Having found nothing to negative his previously formed opinion of the possibilities, he then arranged with Geophysical Engineering & Surveys Limited to stake the specific areas in Fabre Township that he designated to them. While Geophysical’s records showed this work in Mr. Frantz’s name, he instructed them to send accounts for the staking services to the members of the syndicate according to their respective interests in the syndicate. This account was computed at $40 per claim and was in excess of what had been charged on the company’s books for the job, which included, in addition to the time and expenses of the actual stakers, Mr. Frantz’s time and expenses for the day he spent on the property before it was staked.

After the property was staked Goldfields Mining Corporation Limited, acting under the authority conferred on it by the syndicate agreement, sold the beneficial interest in the Fabre Township Claims to Sil verfield and, as a result, the claims were transferred by the actual stakers to that company.

To bring her within Section 83(3), the appellant does not contend that Mr. Franz was an employee of the syndicate. To succeed on the other branch of Section 83(3) the appellant must have established, as I read Section 83 and leaving aside possibilities that are not open on the evidence, among other things,

(a) that Mr. Frantz was ‘‘an individual who prospects or explores for minerals . . . on behalf of himself and others . . .’’ within Section 83(1) (c) so as to be a prospector within the meaning of that word in the section ;

(b) that the syndicate’s interest in the Fabre Township property was an interest acquired under an arrangement between the syndicate and Mr. Frantz as contemplated by Section 83(3) (a) ; and

(c) that that arrangement between the syndicate and Mr. Frantz was an agreement under which the syndicate paid part or all of the expenses of prospecting or exploring for minerals.

I am of opinion that the evidence does not support the appellant’s contention. There is no doubt that Mr. Frantz was a salaried employee of one or more of the Keevil Group of companies. While it is clear that Mr. Kay, who represented the Hirshhorn Group in working out the arrangement, regarded it as essential that Mr. Frantz be the person to decide what properties should be staked in Fabre Township, neither Mr. Kay nor Mr. Frantz suggested, at any point in their evidence, that there was any arrangement that Mr. Frantz was to act otherwise than in his ordinary capacity as an employee of one of the Keevil companies. I am satisfied that the first arrangement, as a result of which the syndicate acquired the claims, was between the two groups and that Mr. Frantz had no part in the matter other than as an employee of companies forming part of one of those groups. The second arrangement, leading to acquisition of the claims by the syndicate, was the staking arrangement. In my view, that was an arrangement between the syndicate and Geophysical Engineering & Surveys Limited, the staking company. The balance of probability, on the evidence, is that the other syndicate members, expressly or impliedly, left it to the Keevil Group, and in particular to Mr. Frantz as their employee, to make arrangements, on the syndicate’s behalf, with an appropriate company to do the staking. There is no evidence that Mr. Frantz ever agreed to do the staking himself and it seems improbable that anybody would have contemplated that he would do it.

My conclusion is, therefore, that the appellant is not entitled to the exemption in Section 83(3). I should not, however, leave the matter without making it clear that I am not impliedly expressing the opinion that the sort of arrangement found in this case is what is contemplated by Section 83(3). The sort of thing that is clearly contemplated is an arrangement

(a) under which, before a prospector goes out prospecting, etc., there is an arrangement under which some other person advances money to him or agrees to pay part or all of his expenses on the understanding that he will receive a part of anything the prospector acquires by his efforts, or

(b) under which, before a prospector goes out, there is a partnership arrangement under which his partner assumes responsibility for part or all of the expenses of the prospecting venture and shares as a partner in the fruits of success.

I doubt very much that a contract under which one person does certain designated work in the field and then stakes for a fee is an arrangement that falls within the words of Section 83(3) even if that person is an individual and the designated work ean be regarded as prospecting.

I come now to the second branch of the appellant’s case which is based on the contention that the venture here was fully completed when each of the members of the syndicate received a proportionate part of the shares in Silverfield that represented the consideration for the Fabre Township Claims. In other words, the contention is that the venture was to acquire and dispose of the mining claims.

Just what is the venture or “adventure” in any particular case is a question of fact to be determined on the evidence. In this case, in my opinion, the venture was the acquisition of the Fabre Township property, the sale of that property to a company incorporated for the acquisition of that and other mining properties for shares in that company and the disposition of those shares when and if the company had sufficient success with those mining properties to create a market for its shares. If there were any doubt as to this being the profit-making scheme from the beginning, Mr. Kay’s evidence concerning his role in the disposition process makes it clear that that was contemplated as a part of the venture from the beginning. I regard the facts as being similar in principle to those in À. K. Fraser v. M.N.R., [1964] S.C.R. 657; [1964] C.T.C. 372. The case most relied on by the appellant in this connection was the decision of the House of Lords in Gold Coast Selection Trust Limited v. Humphrey, [1948] T.R. 253; [1948] 2 All E.R. 379. That, however, was the case of a corporation that was carrying on “the trade of a dealer in stocks and shares, and an exploiter of and dealer in gold-mining concessions”. It was a continuing business and the problem was how to compute its profit for a particular year when it had shares received for mining properties in its inventories. There w as no problem there such as is found here. Here there is no business in the ordinary sense. There is a single venture in the nature of trade and the question is what was the venture. As indicated already, in my view, there was a profit-making venture or scheme that was not completed until the time arrived when, the market having reached the desired state, the shares were turned into cash.

The appeal will be dismissed with costs.