Smith, DJ:—This is an appeal by the plaintiff by way of trial de novo from a decision of the Tax Review Board, dated October 13, 1976, which decision allowed the defendant’s appeal against a reassessment of his income and tax liability therefor for the taxation year 1971, and referred the reassessment back to the Minister of National Revenue for reassessment.
The main issue is whether the defendant’s share ($30,000) of moneys received by him and four associates from Mattagami Lake Mines Limited in settlement of disputes between them and Mattagami in respect of a number of mining claims staked and purchased by him and his associates, is exempt from income tax under section 83 of the Income Tax Act or is taxable as income derived from a venture in the nature of trade. If the decision on this issue is adverse to the defendant, there will be an issue to decide whether the defendant incurred deductible expenses in connection with the venture, and if so, the amount of such expenses.
At the opening of the trial the defendant, who was not represented by counsel, moved for dismissal of the action on the ground of “harass- ment”. After hearing what the defendant had to say and also argument from counsel for the plaintiff, the court was of the opinion that no facts had been shown that could justify the dismissal of the action and that the trial should proceed. The motion was therefore dismissed.
For a number of years prior to 1969 the defendant had been engaged, not exclusively and not continuously, in the business of prospecting for minerals in northern Ontario. For some period he also operated a motor vehicles sales business at Timmins under the name of Boychuk Motors.
In 1969 the defendant, together with Jean-Baptiste Lavoie and Gerard Gagnon, formed, informally, a syndicate with the name of Cross Canada Exploration. The purpose of the syndicate was to prospect for minerals. Only the three men named above were members, at least at first. The agreement or arrangement between them was never committed to writing.
According to the evidence of the defendant and of Serge Lavoie, son of Jean-Baptiste Lavoie, the defendant was frequently in the bush, searching for favourable ground on which to stake claims. Serge Lavoie stated that the others of the syndicate likewise prospected in the bush, not always for the syndicate. Serge himself sometimes worked for his father and sometimes for himself. His father and he sometimes did contract work for other people, which provided some of the funds required for their own prospecting and living expenses.
In 1969 and 1970 there was a good deal of interest in staking claims in the area of Six Mile Lake, district of Kenora-Thunder Bay, Patricia Mining division. By 1971 there were several hundred prospectors in the area. In one year some 10,000 claims were staked and recorded. The Lavoies and Gagnon, and sometimes the defendant were in this area in the winter of 1970-1971. In March, 1971, Serge Lavoie found a narrow strip of land running from east to west that was open for Staking. It lay immediately north of the North Boundary Line of Block 7. He, with his father and Gagnon, staked this land in three claims, Numbers 309428, 309429 and 309423 (exhibit D-3). He thought. this land was valuable, partly because mining was being carried on not far south of its southern boundary and partly because the company working there, presumably Mattagami, would need to bring water across one of the three claims for its mining operations. He thought it likely that the mineralized vein or body in which mining was going on might extend across or dip under these long narrow claims.
Some question was raised by Mattagami about these claims, and Mr Buchan, the mining recorder required that they be inspected to determine boundaries, acreage and whether they were free for staking. The inspection was made on April 23 or 24. J B Lavoie had asked the defendant to be present and help with the inspection. At the inspection, which took all day, both the Lavoies were present, also the defendant, representatives of Mattagami and Mr McLennan, a land surveyor. Subsequently, on May 12, Mr Buchan wrote Serge Lavoie advising that the three claims had been recorded, effective that day (Exhibit D-2).
Gagnon staked five claims in April, lying immediately north of the three claims whose numbers are given. above. In all he staked 9 claims which were brought into the settlement eventually made with Mattagami, which is referred to a little later in these reasons.
On April 26, 1971 the defendant obtained a miner’s license. On April 28 he found 2 claims, numbers 212740 and 212739, free for staking, about 5 miles east of the other claims. He restaked these as numbers 310316 and 310317. On June 2 he found 2 other claims which were open for staking. These were numbers 212737 and 212738. They adjoined numbers 310316 and 310317. He restaked them as numbers 310318 and 310319. On both occasions, April 28 and June 2, Serge Lavoie was working with him. On June 2 they observed that some mining development work had been started on or within 50 feet or so of one of the two claims restaked that day. Serge indicated that this was an encouraging sign.
The rights of the defendant and his associates to most, if not all, of the foregoing claims and perhaps of others, were disputed by Mattagami.
Some time before April 19, 1971 Serge Lavoie had become a full partner with the defendant and the Lavoies. Also before that date the four of them realized that they might have some legal problems on their hands with respect to their claims. They engaged Michael Tesluk, a lawyer practising in Timmins, as their legal adviser. It was agreed that Tesluk’s legal services would not be paid for in cash but by giving him an interest in mining properties and claims belonging to the group. From about the end of April Tesluk paid most of the expenses incurred by the Lavoies and Gagnon in connection with prospecting. According to Serge Lavoie, Tesluk paid all those expenses.
By an agreement dated April 19, 1971, (Exhibit P-2) the four partners and Mr Tesluk agreed, inter alia, as follows:
1. All the parties hereby form a joint prospecting and grubstaking agreement to provide a team for the purpose of acquiring mining properties and claims in the Six-Mile Lake area, Patricia Mining divison for the prospecting season of 1971, commencing on the 19th day of April, 1971, and terminating on or before the 31st day of December, 1971, or on such date as the parties may determine.
2-a. The parties shall diligently prospect and scout for minerals of economic importance, locate, stake, and otherwise acquire grounds in the Six-Mile Lake area, Patricia Mining division, shall do and perform such assessment work as is required, and shall report to each other regularly . . .”
Paragraph 4 of the agreement provided for the interests the parties were entitled to receive thereunder on the following basis: each of the parties, except Tesluk, was to be entitled to receive 23.75% of the consideration, if any, received by the parties for their interest in any mining properties or claims acquired by the parties during the currency of the agreement. The remaining 5% would go to Tesluk.
By a second agreement between the same 5 parties, dated May 1, 1971, (Exhibit P1) the percentage interests of the parties, other than Tesluk, were modified slightly.
At this point it may be useful to note that the dispute with Mattagami Lake Mines Limited over the claims dragged on for months. It was finally settled, late in 1971 by Mattagami paying $150,000 for the transfer to it of the disputed claims. The 5 parties to the above 2 agreements agreed among themselves that the $150,000 would be divided equally between all 5 of them (Exhibit D17). Thus the defendant’s interest in the settlement was $30,000. The reassessment by the Minister added this amount to the defendant’s income for 1971.
The five party agreements mentioned supra are in form unquestionably prospecting agreements, though some of the terms of the agreement of April 19 are far from clear. What matters, however, is not the actions contemplated by the provisions of the agreements, but what the defendant and his associates actually did, also what is required under the law to exempt prospecting earnings from inclusion in a person’s income for the purposes of the Income Tax Act. I quote the relevant portion of section 83 of the Act.
83 (1) In this section
(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) . . .
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) . .
unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.
lt appears to be well settled that merely staking claims is not enough to constitute prospecting. See MNR v Karfilis (1967) 1 Ex CR 129; [1966] CTC 498; 66 DTC 5327. Searching or exploring for minerals is necessary. Where a prospector is looking over land that has never before been visited for prospecting purposes, he normally goes over the area with some care, having first examined available geological maps and reports and come to the conclusion that the area seems promising for the discovery of mineral deposits of sufficient grade and quantity to make a mine. He examines outcroppings, breaks off samples of rock, removes overburden to expose the solid rock, cuts trenches across veins and takes the rocks and mineral matter from each trench for the purpose of having them assayed. But when a strike has been made in the area and numbers of prospectors flock in and many claims are being. staked, as in the present case, there is very little time to lose. Delay while doing the various things involved in full prospecting may mean that somebody else stakes land before a man who was earlier in the field gets around to staking it. In such circumstances the course of wisdom is to seek land that either has not been staked before or on which the claims have lapsed, in what looks like a promising location, stake and record what claims are available in the vicinity. With protection so obtained, the prospector has time to carry on his search for and examination of mineralized rock formations in the hope of finding deposits that indicate a mine may possibly be developed.
Hard rock mining in Canada requires a great deal of capital. Consequently, except when the prospecting is done by or for an established mining company it is most unlikely that the prospector and his associates will have access to the large sums needed to pay for all the drilling and other steps required to determine whether or not a profitable mine can be established there. The most that ordinary prospectors hope to do is to finance enough work, with sufficient success, to make their mining prospect attractive enough that an established mining company will be persuaded to take on the gamble of turning the prospect into a mine and will buy the claims for cash or shares or part cash and part shares in the company that will be going ahead with the enterprise.
In the present case there was a great rush of prospectors into the Six Mile Lake area, Patricia Mining division in the latter part of 1970 and first half of 1971. The defendant and his associates in Cross Canada Exploration wisely decided to look for land in the area that was free for staking, and to stake and record claims whose location made them look promising. This they succeeded in doing in some cases, notably the three long, narrow claims, numbers 309428, 309429 and 309723, near which mining was being carried on, and the four claims, numbers 310316, 310317, 310318 and 310319, on or very close to one of which development work had been started.
There is no evidence of actual exploration work being carried on by the defendant or his associates on any of the claims staked by them, beyond walking over the ground and sometimes picking up and examining visually some rocks. The agreement of April 19, 1978, between them, certainly contemplated much more. The reason for no further activity being shown may well be the fact that from the date of staking they were embroiled in a dispute with Mattagami over ownership of many, if not all, of the claims. Pending the outcome of a dispute of this kind it is most unlikely that they would exert much effort or spend money for work on claims which in the end might be found to belong to somebody else. What they would have done by way of exploring and developing their claims if there had been no dispute is mere speculation, though there is nothing to suggest it was not an agreement made bona fide. Of course, the nature of the settlement by which (see Exhibit D17), in exchange for $150,000 they transferred 21 claims recorded in their names to Mattagami and relinquished any rights they might have against 7 other claims recorded in Mattagami’s name, precluded them from doing anything after the date of the settlement, October 19, 1971.
The onus is always on the person who claims an exemption from a tax to prove that he falls within one of the exceptions for which the exemption has been provided. In my opinion the defendant has not discharged that onus. He has not proved that he or his associates prospected or explored for minerals on any of the claims in question or that he or they developed a property for minerals as those terms have been interpreted in judicial decisions. It may be that if there had been no dispute with Mattagami, enough work of the kind contemplated by the agreement of April 19, 1971, would have been done to show that true prospecting was carried on, but we have no evidence on this point. The evidence of the defendant and Serge Lavoie on what they were looking for and the location of the claims staked is equally consistent with the contention of the plaintiff as with that of the defendant. In other words their evidence does not point preponderate^ toward a conclusion that their group was engaged in searching and exploring for minerals that might be developed into an operating mine, rather than to a conclusion that their real objective was to take the opportunity afforded by mineral finds made by others to stake whatever ground they found open, in as favorable a position as possible, with a view to making a quick sale. The latter alternative would be a venture in the nature of trade and the profit made by the defendant in the taxation year would be properly included in his income for that year. The contrary not having been proved the plaintiff is entitled to succeed, so far as subsection 83(2) is concerned.
I now consider whether subsection (3) of section 88 affords the defendant a right to exemption from inclusion, of his $30,000 share of the $150,000 paid by Mattagami, in his income for 1971. This subsection requires that there must be an arrangement between the prospector and the person who advances money to him for prospecting or pays part or all of the expenses of prospecting or exploring for minerals or for developing a property, which arrangement must be made before the prospecting, exploring or development work is done. Then the interest in the mining property in question must be acquired under the arrangement. Finally, if the prospector is the employee of the person who acquires the interest, the interest must be acquired through the employee’s efforts.
In the present case none of the defendant’s associates, viz: Jean- Baptiste Lavoie, Serge Lavoie, Gerard Gagnon and Michael Tesluk, were employees of his, nor was he an employee of any of them.
There may have been some understanding about payment of expenses between the defendant, Jean-Baptiste Lavoie and Gagnon and Serge Lavoie prior to the agreement of April 19, 1971, but if so, what its terms were is very uncertain. All that the evidence discloses is that during the first four months of 1971 the defendant did pay most of the bills for expenses incurred by the other three as well as his own expenses. He stated that at one time he had receipts for expense bills paid by him totalling $7400, most of which had been lost in a fire in Mr Tesluk’s office, where they were being kept.
After about May 1, 1971, according to the defendant’s evidence, he still continued to pay his own expenses, and also some bills incurred by the others, but from his evidence it appears that Tesluk paid most of the expenses of the others, apart from the defendant. Serge Lavoie stated that from the end of April Tesluk paid all expenses.
On the evidence before me I am unable to conclude that it was pursuant to an arrangement such as is described in subsection 83(3) of the Income Tax Act that the defendant either advanced money to or paid part or all of the expenses incurred by any of his associates in “prospecting or exploring for minerals’’ in the year 1971. Even the agreement of April 19 of that year (Exhibit P2), which might conceivably apply to advances or payments made for work done after that date, is too indefinite to constitute an arrangement by which the defendant would “grubstake’’ the others.
The agreement begins by stating that the parties (5) “hereby form a joint prospecting and grubstaking agreement”, but the only provision in it that relates to grubstaking is clause 3, which reads:
3. The parties shall supply each other with such men and equipment as is necessary and the parties shall be entitled to their reasonable living and travelling expenses.
We have seen that from shortly after the date of this agreement Tesluk paid most, if not all, expenses. Nothing in the agreement indicates how and by whom expenses of the parties had been met prior to its date, nor that Tesluk would be paying them from and after April 30. There seems to have been a verbal understanding that payment of expenses by Tesluk along with legal services, would be the consideration for the interest (5%) given him by the agreement in the claims staked by the parties. In the final settlement, on October 20, 1971, (Exhibit D-17) Tesluk’s share was increased to 20%. There is no evidence that he had performed other services than those mentioned in this paragraph.
In my view the agreement (Exhibit P-2) does not contain an arrangement such as is contemplated by subsection 83(3) of the Income Tax Act.
There is a further ground on which I hold that subsection 83(3) does not entitle the defendant to an exemption from his income in 1971 of the $30,000 he received from the proceeds of the settlement with Mattagami. I see no reason why the word “prospecting” should have a different meaning in subsection 83(3) than that established for it by judicial decisions in relation to paragraph 83(1 )(c) and subsection 83(2). From the evidence I cannot distinguish the nature and purpose of what was done by any of those associated with him from the nature and purpose of what was done by the defendant himself. Therefore I am forced to the conclusion that even if I had held that there was an arrangement as described in subsection 83(3), under and pursuant to which the defendant had paid part or all of the expenses of his associates I would have to hold that those expenses were not expenses of prospecting for minerals, within the meaning of “prospecting” as established by previous judicial decisions.
The result is that the defendant is held to have been engaged in a venture in the nature of trade and that the Minister’s reassessment of his income for the taxation year 1971 is restored. There is however one further question to consider. The Minister’s reassessment made no deduction for expenses incurred by the defendant in earning the $30,000. The plaintiff's statement of claim contains as one of the Minister’s assumptions in making the reassessment the following:
(e) The defendant incurred no expenses in acquiring his interest in the mining claims sold to Mattagami.
This assumption is clearly in error. On the evidence I have no doubt that the defendant incurred substantial expenses. Unfortunately for him, most of his receipted bills were destroyed by a fire at the office of the legal adviser (and member) of the defendant and his associates, where these receipts were being kept, which fact has deprived him of documentary proof of many expense items. He did produce a number of receipts, some of which are not dated, but all of which seem to be related to the period of looking for claims and staking claims by and for Cross Canada Exploration’s three original members and also for Tesluk and Serge Lavoie. This includes expenses incurred in connection with an inspection ordered for 5 claims restaked by Gerard Gagnon and carried out on August 31 and September 1, 1971. These receipts were filed as exhibits D13 to D16.
| Ex D13 is an Air Canada air fare receipted ticket for a trip Dryden | ||
| to Toronto dated April 28, 1971 | $ | 56.00 |
| Ex D14 is a requisition (undated) for draft, Canadian Imperial | ||
| Bank of Commerce, to be paid to Gerard Gagnon. The money | ||
| was provided by the defendant to pay wages of two employees | 500.00 | |
| Attached are 2 receipts for light meals, total 00.00 | 3.15 |
| Ex D15 is a receipt undated, to Serge Lavoie from a hospital for | |
| Outpatient service, paid by defendant | 2.50 |
| Ex D16 consists of a bundle of receipts | |
| (a) Receipt dated June 3/71 from Hi-Way Motel, Ignace, for | |
| serge Lavoie and Tesluk—paid by defendant | 109.20 |
| (b) Receipt from Department of Mines to Serge Lavoie, dated | |
| April 28, 1971 for applications to record 21 claims, paid by | |
| defendant | 189.00 |
| (c) Receipt dated July 9, 1971 from Slate Falls Airways Ltd for | |
| air flight, paid by defendant | 120.00 |
| (d) Cheque from defendant to S Lavoie, dated May 21, 1971 | 40.00 |
| (e) Receipt from Dr to S Lavoie (undated) | 5.00 |
| (f) Receipt from Hick’s drugs to Lavoie dated May 31/71 | 5.00 |
| (g) Eight receipts for gas, mileage, etc from filling stations and | |
| garages, total | 72.50 |
| (h) Seventeen receipts from restaurants for meals | 60.45 |
| (i) Post Office registration fee, April 30/71 | .50 |
| (j) Royal York Hotel, for Tesluk | 12.50 |
| $1,175.80 |
These are all the receipts the defendant was able to produce. He swore that he had also paid over $1,000 for Jean-Baptiste Lavoie in the months of February, March and April 1971, and as stated earlier in these reasons that at one time he had receipts for payments totalling $7,400 most of which were lost in the fire at Tesluk’s office.
The defendant impressed me as being an honest man who was doing his best to state the true facts. He was quite positive that he had had receipts totalling $7,400 in his possession at one time. To my mind it is almost certain that travelling expenses of the five associates, who were at times in the bush and at other times in Thunder Bay, Ignace, Timmins, Wawa and even Toronto, and more particularly the wages of the two, sometimes three, men who, in the evidence of Serge Lavoie, were working for them in the area during much of the period, would be considerably in excess of the amounts shown on the receipts filed at the trial.
Notwithstanding the absence of more receipts than those listed above I accept the defendant’s sworn statement that he had had receipts totalling $7,400 at one time as indicating that he paid expenses totalling that amount, expenses that may properly be regarded as being incurred for the purpose of acquiring the mining claims and making a profit on their sale. I therefore hold that he is entitled to a deduction of $7,400 from his $30,000 share of the price received for the claims from Mattagami in settlement of the dispute regarding them.
As success is divided there will be no costs to either party.