Corlite Petroleums Ltd. v. The Queen, 76 DTC 6450, [1976] CTC 766 (FCTD)

The Associate Chief Justice:—This is an appeal under the Income Tax Act from a reassessment of income tax for the year 1965. By it the Minister assessed tax in respect of $112,500 as the profit realized by the plaintiff on the disposition of certain mining claims for shares in a company and certain other consideration. It is now conceded that the assessment is in error in that a further amount of $10,000 should be allowed as an expense deduction. The issues in the action are, first, whether the proceeds of disposition of the mining claims was income and, if so, second, whether the shares received by the plaintiff in the transaction were worth the 50¢ per share at which they were valued by the Minister.

The plaintiff company was incorporated in 1955 by Harry G Curlett and his solicitor each of whom subscribed for one no par value share. Its objects include:

. . . to trade, deal in, contract with, refer to, purchase, lease or acquire otherwise howsoever lands and products thereof or interests in land, mines, quarries, wells, leases, privileges, licenses, concessions and rights of all kinds covering, relating to or containing or believed to cover, relate to or contain petroleum, natural and artificial gas, oil, minerals and mineral substances of all and every kind whatsoever;

Following its incorporation, the company made an unsuccessful bid for an oil lease in Saskatchewan. Some years later it might have become interested in an oil lease in the Leduc area, but the transfer was not completed. Those were all its activities until August 1964. C C Curlett then became the transferee of the solicitor’s share and a director in addition to his father, Harry G Curlett. Two days later, on August 26, 1964, the directors approved the purchase by Harry G Curlett on behalf of the company from Peter Eskow and five associates of 69 mineral claims situated near Fort St John, British Columbia. On the same occasion, the directors also ratified the purchase by Harry G Curlett on behalf of the company of a D7 Caterpillar tractor and authorized him to enter into employment agreements for the construe- tion of a road to the company’s property “and for the working of its said claims”.

The purchase price of the ciaims, as expressed in the agreement, was to be $60,000 of which $10,000 was to be paid to each of Eskow and his five associates, in two payments, the first, of $1,000, at the time making the agreement, and the other of $9,000 on November 1, 1966. Subsequently, Eskow was given, instead, for his interest a share in the plaintiff company.

In the months that followed, a tracked vehicle for off-road travel, called a halflinger, a portable diamond drill and a small ore grinder were purchased and work was undertaken on the opening of an access road from mile 419 of the Alaska Highway, some 45 to 47 miles to the foot of the Churchill Mountain in the general neighbourhood of a vein of copper-bearing rock which had been discovered in the mountainside at the 7,500 foot level. Several miles of such a road had already been opened by others to get ground access to other mining claims. The work done by the plaintiff's employees included improving this portion and beginning the opening of a passable route in the remaining distance. C C Curlett, who was never there, described the road as a rough road passable by a half-ton pick-up or a four-wheel-drive vehicle. By August 1965, however, even after further work had been done by Churchill Copper Corporation Limited in the summer of that year, the road was not suitable for passenger cars or heavy trucks and it did not give access to the property sufficient for Dr Ridland, a geologist, to reach and examine the vein.

GC C Curlett testified that the plaintiff also got in touch with a representative of a company which sold cable equipment.

Early in October 1964 the plaintiff contacted Nissho (Canada) Ltd of Vancouver, respecting the making of a purchase agreement for crude ore to be produced from the property. A letter written by C C Curlett on or about October 5, 1964 indicates that there had been a telephone conversation, and it asks for early confirmation that Nissho would be prepared to enter into such an agreement on certain terms

.. aS we hope to commence operations at the claims this coming weekend, and must make arrangements for sale to your firm, or otherwise, on a trial basis, prior to October 15 . . .

The reply, dated October 7, 1964, recites:

We are now pleased to note that a new road from the Alaska Highway to the foot of the property is now complete, and mining of crude ore is expected to be commenced on or about the 10th of October.

A further letter from Nissho to H G Curlett, dated October 8, 1964, included the statement:

We were surprised by the speed with which you bought up the property outright and we were also surprised by the speed with which you built a new access road to the property.

The capital of the plaintiff company was $3. Financing for the downpayments to the vendors of the claims, for the purchase of the equip- ment referred to and for the work done on the road was provided by a real estate and mortgage investment company belonging to H G Curlett. The amounts so financed during the period from August 25, 1964 to December 31, 1965 were:

The purpose of all this—according to the testimony of C C Curlett— was initially, at least, to develop and carry on an operation of recovering and removing for sale crude ore with a high copper content. It was referred to as a “high grading" operation, by which I understood something akin to taking out the most accessible and richest of the ore by as simple a removal process as could be devised for it, a surface operation in which, after blasting and loosening the ore, it could be lowered by cable to the base of the mountain to be there loaded on trucks for carriage to or towards its destination. H G Curlett, it was said, had great confidence in Eskow, a part-time prospector with whom he had had an earlier successful venture in recovering ore from an erratic boulder, and Eskow had persuaded him that the vein was large and rich in copper content. The property had not, however, been explored. No diamond drilling had been done on it. No information had been assembled as to the quantity or quality of ore in the vein. All Eskow had were some surface samples which showed a high copper content. H G Curlett has since died. Eskow was not called as a witness.

According to the testimony of C C Curlett, by early October 1964, upon receipt of the letter from Nissho, it had become apparent to H G Curlett that the operation would be too expensive for him to finance on his own and when the work on the road closed down, whether because of winter or otherwise, precisely when does not appear, the operation was, for practical purposes, at an end. By April of 1965, before any further work was done, and it is by no means clear that any was planned, the plaintiff was engaged in negotiations with Marvin Judd, a mining promoter, on behalf of Churchill Copper Corporation Limited, which led to a deal for the exploration and development of the property by that company and included arrangements which gave that company the right to acquire the property in consideration of 50% of its shares plus certain rights in regard to its management and control. From that time toward, no work was done by the plaintiff on the road or the claims and any work that was done on them was done by Churchill. It is also of some importance to noie

that, whatever may have been contemplated before, from that time forward, it was not contemplated that a mine for the production of ore from the property would ever be operated by the plaintiff company.

The negotiations and deal were described by C C Curlett in his examination-in-chief, according to my notes of his evidence, as follows:

In April 1965 the company was approached by Marvin Judd who was a mining promoter resident in Vancouver and who with some associates owned or controlled three separate mining properties in the same general area as the claims we are concerned with. One had been explored and developed where they had a proved tonnage which in conjunction with the other three made a feasible package which had reasonable hopes of attracting financing from a major mining corporation.

The correspondence we had had with the Japanese concern indicated that to satisfy their conditions before purchasing we would have to expend enough to show a large proven body of ore. To do this from private funds would involve far more monies than we had originally expected and, for this reason, a combining of our claims with those of Judd and associates seemed a very attractive proposition. Subsequently, we did enter into such a contract originally proposing the properties be amalgamated and a new company be incorporated with Corlite in bare control and the others with 49 percent of the stock. At that stage the share capital was envisaged in the order of 5 million shares and Corlite asking for 300,000 free shares with a further 150,000 in escrow. I might add neither father nor I were familiar with security regulations in the province of British Columbia. Mr Judd explored that aspect of the proposed new company and eventually it was agreed Corlite would accept 225,000 free shares plus $45,000 as reimbursement for expenditures to date, and sell the entire physical assets of Corlite to the new company, Churchill.

Churchill was also to undertake to discharge the remaining obligations of the plaintiff, totalling another $45,000, to the prospectors. While the evidence indicates that the approach was made by Judd rather than by the plaintiff, it could scarcely have been surprising that Judd should do so since Eskow had tried unsuccessfully to sell the mining claims to him before making the arrangement with H G Curlett for their purchase by him on behalf of the plaintiff.

Thereafter an agreement was executed on or about July 24, 1965, under which the plaintiff agreed to sell the claims to Churchill for shares in a new company to be incorporated and to execute and deliver a bill of sale of the claims in escrow to a firm of solicitors for delivery to Churchill upon receipt of a statutory declaration by a representative of Churchill stating that by November 30, 1966 Churchill gave notice to Corlite of its intention to equip the property for production and had paid Corlite’s costs and expenses in connection with the claims.

Later, by an agreement dated November 29, 1965, the agreement of July 29 was terminated and a new deal was made under which the plaintiff sold the claims to Churchill for 225,000 paid-up shares of its capital stock plus $45,000 in respect of the plaintiff’s costs and expenses in connection with the property and the assumption by Churchill of the plaintiff’s obligations under the agreement with the prospectors. The shares were issued shortly afterwards and have since been disposed of by the plaintiff.

The question that arises for determination on the first issue is whether the shares received by the plaintiff were realized from an adventure or concern in the nature of trade within the meaning of paragraph 139(1)(e) of the Income Tax Act. If so, they were a receipt of an income nature and the plaintiff is subject to tax in respect of their value at the time when the plaintiff became entitled to them, that is to say, November 29, 1965.

In my opinion, the shares were realized from an adventure or concern in the nature of trade. I do not believe that H G Curlett or the plaintiff ever expected that the plaintiff would carry on an operation of mining or marketing ore from the claim. The most that, in my view, can be said of the supposed scheme for a “high grading” operation is that the plaintiff might have undertaken it if it had proved feasible to do so on a trifling capital investment and if some better way of realizing an acceptable profit had not arisen in the meantime. The generality of the plaintiff’s purpose in acquiring the property, to my mind, becomes apparent from the situation at the time of the purchase and from what subsequently transpired. It also appears from the evidence given by C C Curlett that

We could tie the property up with a payment of $5,000 and then examine it at leisure. To examine it prior to tying it up would have been an unwarranted expense in my father’s estimation.

To tie the property up without examining it is one thing. To decide on a mining operation without an examination is another and quite a different decision.

When the claims were purchased, there were some 45 to 47 miles of wilderness in which there was no road, between them and the nearest highway over which ore might be transported. Apart from wear and tear on the Caterpillar tractor and the halflinger, the amount spent by the plaintiff toward the opening of a road amounted to less than $8,000. It seems to me that it would have been obvious to anyone that a road capable of use for transporting ore would cost many times that. Yet, the Court is asked to accept that H G Curlett, a successful businessman, only became aware after the correspondence with Nissho that the production of ore from the property would require much more that he was prepared to finance.

Further, in my view, the conversations and correspondence with Nissho and what was represented to that company to stimulate its interest in purchasing ore from the plaintiff were, on the part of the plaintiff, a sham. Nissho was told that the plaintiff hoped to commence operations at the claims before mid-October 1964. It is probable that Nissho was also told verbally at or about that time that an access road to the property had already been completed. Neither was fact. There was no reason whatever to think that the production of ore would begin in October 1964, and no reason to think that ore could be transported from the claims.

Neither H G Curlett nor C C Curlett ever saw the property. Nor had the property been systematically explored or mapped. There had been no drilling done on it. Neither the quantity nor the quality of the ore nor the prospects for development of a mine had been ascertained. C C Curlett said his father relied on Eskow, in whom he had great confidence. But it was all H G Curlett’s money that was to be expended in purchasing the claims and in financing the opening of an access road to the property and I find it impossible to accept that he could ever have believed that a road passable only for light vehicles would serve for the transportation of ore over some 45 miles or that what he was prepared to spend would serve to bring the property into production of any kind. In my view, the property was acquired for the purpose of turning it to account for profit by any means that might be considered expedient including sale, and whether for cash or shares or other consideration.

The expenditure on an access road and the other actions of the plaintiff were entirely consistent with this purpose since they merely improved the prospects for the property and were as useful, if not more so, for generating a sale as they were for setting up a mining operation. The property could not be brought to production without substantial financing either for the transportation of crude ore or the installation of a smelting plant. If either was to be undertaken, the operation would have a better chance of success if carried out in connection with the development of other properties in the area. It was thus a property in which the owners of nearby properties seeking to assemble enough claims to support a viable undertaking would be interested. And it was known to Eskow, and must have been known to the Curletts as well, that Judd was interested in doing that. In the plaintiff’s hands it was, throughout, a property from which there never was any reasonable prospect of a return except by disposing of it for one consideration or another in some sort of deal with others who had other properties to develop and could generate enough financing to get a mining operation under way. As it turned out, it took an investment of $13,000,000 by Churchill to bring some of the neighbouring claims which were some 15 miles nearer to the Alaska Highway into production and no mining operation was ever established on the claims acquired from the plaintiff.

Having regard to these considerations, I am of the opinion that the Minister properly included the proceeds of the disposition of the mining claims in the computation of the plaintiff’s income for 1965.

I turn now to the issue as to the value of the 225,000 shares to which the plaintiff became entitled on September 29, 1965. The Minister assessed on the basis of a value of 50¢ per share. The plaintiff’s position is that they were worth much less and particularly so having regard to the fact that, at the time, it was expected by the plaintiff, and Judd as well, that the British Columbia Securities Commission would require that they be held in escrow while others who had taken shares for cash would have shares freely available for sale when the company “went public”. Plaintiff had by the agreement undertaken to submit to such “escrowing” if required but as matters turned out sufficient financing had been arranged and “escrowing” of vendor’s shares was not imposed.

If it had turned out that the shares had to be placed in escrow, I should have thought that would have imposed a considerable discount on their value. However, at the material time it was at best a possibility. But even that possibility might be expected to have had some effect on anyone to whom they might have been offered at the time when the plaintiff became entitled to them.

As part of the total deal arranged by Mr Judd, of which the transaction with the plaintiff was but a part, two companies agreed to buy a total of 200,000 shares for cash at 50¢ per share. As in each case the agreement to do so was linked with other arrangements, these, by themselves, are uncertain indications of the vatue of the shares. On the other hand, on November 3, 1965 Mr Judd bought 47,500 shares at 50¢ per share and this at a time when the various agreements between Churchill and the other companies, including the plaintiff, had been arranged though not finalized. On the whole, I think the evidence indicates that 500 was the value at that time of shares the sale of which was not restricted and not subject to being escrowed. The fact that Judd proposed that shares be offered to the public at $2, in my view, does not indicate that they were worth that at the material time.

As I see it, therefore, the value of the shares here in question at the material time should be taken at 500 less a discount in respect of the plaintiff's agreement to permit them to be escrowed if required. As I find nothing in the evidence to guide me in assessing what such a discount should be, it must, it seems to ma, be fixed more or less arbitrarily. On that basis, I think it should not be less than 5% and I shall fix it accordingly. The result is that the $112,500 which the Minister added in respect of the value of the shares in the computation of the plaintiff's income should be reduced by $5,625.

The appeal accordingly succeeds in part and it will be allowed and the reassessment will be referred back to the Minister for reassessment on the basis that in computing the plaintiff’s income for the 1965 taxation year the amount included in respect of the value of shares of Churchill Copper Corporation Limited should be reduced by $5,625 and a further amount of $10,000 in respect of expenses should be allowed as a deduction from income. The plaintiff is entitled to its costs of the appeal.