David J. Foster v. Minister of National Revenue, [1971] CTC 335, 71 DTC 5207

JACKETT, P.:—These three appeals by the same appellant from his re-assessments under Part I of the Income Tax Act for the 1963, 1965 and 1966 taxation years, respectively, were heard together.

The appeals involve a number of ventures that conform to a common pattern. In each of them,

(a) the appellant acquired a number of mining claims;

(b) the appellant sold the mining claims to a company that he had caused to be incorporated for a consideration consisting of shares in that company ;

(c) the appellant sold the shares that he had received (or most of them) to a company or companies the shares of which belonged to him or to members of his family;

(d) the appellant, in the course of a business as a “brokerdealer” that he operated under the name of Durham Securities, carried on, on behalf of the company or companies to which he had sold the shares, a campaign to sell those shares to the public.

The appeals raise a question as to whether the appellant was properly assessed in respect of the profits made by him in selling the shares in question (step #(c) supra).

The appeals also raise a question as to whether, if such profits are taxable, they should be computed on a ‘‘cash’’ basis or an “accrual” basis. Finally, they raise a question as to whether the appellant was properly assessed for penalty under Section 56(2) of the Income Tax Act for the 1963 taxation year.

I deal first with the taxability of the profits.

The appellant concedes that the profits in question were profits from adventures in the nature of trade that fall within the definition of “business” that has been adopted for the purposes of the Income Tax Act by Section 139(1) (e) of that Act. His position is, however, that he is entitled to take advantage of Section 83(3) of that Act when read with Section 83(1) (b) and (ec). Those provisions read as follows:

83. (1) In this section

(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.

(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.

The respondent denies that the facts fall within Section 83(3) and says that, even if they do, Section 83(3) does not apply by virtue of Section 83(4), which reads as follows :

(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 facts alleged by the appellant to bring him under Section 83(3) are substantially the same in the case of each venture. He says, in effect, that in each case he made, with an individual* [1] whose occupation was prospecting or exploring for minerals, an “arrangement” to prospect for a certain kind of mineral in an agreed upon region with a view to finding suitable areas on which claims could be staked for the appellant, and that, in each case, he paid sums of money to such individual before such prospecting began so that such individual would be able to pay the expenses involved. He further says in effect that, in each case, the claims in question were staked on his behalf as a result of advice from such individual based on the results of the prospecting under the arrangement.

The contention of the appellant, as I have thus summarized it in my own words, has been established, in my view, by the evidence given by the appellant himself and the evidence given by the two individuals so employed by him. In my view, the evidence so given has not been shaken in any of its essentials notwithstanding searching cross-examination. There are no more discrepancies or inconsistencies in such evidence than, in my view, one would expect to find in evidence given concerning that type of transaction years after the event. The one special feature of the evidence is the cloud on the appellant’s evidence created by the discovery that at least one of the letters in his files concerning the matter was not in fact written until some three years after the time indicated by the date that it bore. I have given full consideration to the doubt raised by this feature of the evidence before finally reaching the finding of fact expressed in this paragraph. I had this “cloud” in mind throughout the evidence. I watched the witnesses with care and I came to the conclusion that their evidence was true in its essentials notwithstanding some of the unorthodox practices that seem to regulate relations between some prospectors and their sponsors.

That is not, however, an end of the matter as far as Section 83(3) is concerned. There are difficulties in understanding what is meant by some of the language in Section 83.

In the first place, Section 83(1)(c) defines a ‘‘prospector’’ to mean 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’’. In this ease, the appellant arranged with the individuals in question to prospect or explore for minerals with a view to obtaining mining claims for himself alone. Counsel for the appellant submits that the words ‘‘on behalf of himself, on behalf of himself and others or aS an employee’’ apply only to the words “develops a property” and have no application to the words ‘‘prospects or explores for minerals’’. I cannot so read the words used. On the other hand, I do not think that those words have the effect of excluding from the definition of ‘‘prospector’’ an individual whose sole occupation is prospecting or exploring for minerals as an independent contractor for others. The definition clearly includes, on the one hand, an individual who prospects or explores on behalf of himself alone or on behalf of himself and partners and, equally clearly, it includes, on the other hand, an individual who prospects or explores as an employee of another person. There seems to be no reason why an individual who prospects or explores as an independent contractor for others should be excluded when both these other classes are included. In my view, properly appreciated, as used in this definition, the words ‘‘an individual who prospects or explores . . . on behalf of himself’’ includes an individual who prospects or explores for the purpose of carrying out contracts or arrangements made by him with third persons. From the point of view of his status in the business world, any person in a service occupation may be in business on behalf of himself or on behalf of himself and others even though his actual work consists in doing things to carry out contracts with third persons. A shoemaker, for example, is repairing shoes for his customers on behalf of himself or on behalf of himself and others. Equally, as it seems to me, an individual in the business of prospecting may prospect or explore for others on behalf of himself or on behalf of himself and others. In my view, therefore, even if the two individuals here concerned had been restricting themselves to prospecting or exploring as independent contractors for money payments, they fall within the definition of ‘‘prospector’’ in Section 83. In fact, however, it would seem probable that, in each case, a substantial part of their activities consisted in prospecting or exploring to acquire mining claims for themselves and, if that is so, they fell within the definition of prospector even if my interpretation of the definition is wrong.* [2]

The other difficulty that I encounter in reading Section 83(3) is the meaning to be given to the expression ‘‘advanced money” in the phrase “advanced money for . . . the expenses of prospecting or exploring for minerals . . .” The only sense of the verb “advance” that I find in the Shorter Oxford English Dictionary that seems to come close to fitting the context is “II . . . 2. To pay before due, and hence, to pay or lend on security of future reimbursement’’. This idea of a payment before due, which fits well the case of an advance on salary or even an accountable advance in respect of travelling expenses, seems to me to be much too restricted to accomplish what I see as the object of Section 83(3) when read as a whole. It has, however, been held that the word ‘‘advance’’ is often used to mean simply ‘‘pay’’.(see Words and Phrases, Vol. I, page 162). This is probably such a case. In any event, while not as scientifically drafted as it might be, it seems clear to me that Section 83(3) is intended to apply to any ‘‘arrangement’’ under which money is paid to a “prospector” in advance of prospecting or development work contemplated by the “arrangement” for the purpose of putting the ‘‘prospector’’ in funds for the “expenses” involved. In other words it is an attempt to cover what, in the vernacular of the business, is referred to as a “ grubstaking ” arrangement.

My conclusion is, therefore, that the facts fall within Section 83(3) unless Section 83(4) applies. As all the evidence points to the conclusion that there was no “campaign” to sell shares of the corporation in question ‘‘to the public’’ until after the sales giving rise to the profits that are the subject of the assessments, I hold that the re-assessments under appeal were in error in bringing such profits into the appellant’s income for the years in question.

Having regard to that conclusion, the question as to the proper way of computing such profits does not arise.

It was conceded by counsel for the respondent during argument that the appeal for the 1963 taxation year should be allowed, in any event, so far as the penalty assessed under Section 56(2) is concerned.

The appeals will be allowed with costs and the re-assessments will be referred back to the respondent for re-assessment on the basis that the profits in question are subject to the statutory rule in Section 83(3) of the Income Tax Act and on the basis that the penalty under Section 56(2) should not be assessed for the 1963 taxation year.