Dobell v. The Queen, 77 DTC 5316, [1977] CTC 458 (FCTD)

Collier, J:—This is an appeal by the taxpayer from a decision of the Tax Review Board. The grounds advanced in this Court are quite different from those put before the Board.

The Minister of National Revenue included an amount of $15,000 in the plaintiff’s income for the 1972 taxation year. He applied section 59 of the “new” Act.t [1] The Minister assumed the plaintiff had made a disposition of certain resource property after 1971; that subsections 59(3) and (4) applied. The plaintiff asserted the disposition was made in 1971; the subsections referred to did not then exist; there was therefore no tax liability under them.

Mr Mah, counsel for the defendant, very frankly conceded that if the plaintiff’s factual testimony and that of a witness on his behalf were accepted, the appeal against the Minister’s assessment must be allowed. The question then is essentially one of fact.

The plaintiff at one time held a floating debenture on assets of Cowichan Copper Company Ltd (Cowichan Copper). Among those assets were a number of Crown-granted mineral claims in the Cowi- chan area, BC. He foreclosed on his debenture. The claims were quit-claimed to him, probably in 1969. Certain other assets of Cowichan Copper were sold by the plaintiff to Dison Developments Ltd (a private company) in return for stock. One of the principals in the latter company was Sidney B Fowlds. Fowlds had acquired, in his own right, in 1969 or 1970, a number of located mineral claims. They were in the same area as the plaintiff’s.

The plaintiff and Fowlds were also directors of a company called Dison International Limited. It was a public company. Fowlds was president. In 1969 Dison International acquired all the shares of Dison Developments Ltd. The latter owned a mineral lease and a 1,500 ton per day mill near Jordan River. The complicated dealings among a number of companies are described in Exhibit 2. I merely summarize here to record that Dison International was involved in mining development, and that both Dobell and Fowlds had a substantial share interest.

Fowlds and the plaintiff had differing views as to the destiny of Dison International. In the latter part of 1971 two developments began about the same time. The plaintiff’s share interest in Dison International was purchased. One reason for this was to obtain the consent of the Vancouver Stock Exchange to the release of certain escrow shares owned by Fowlds. The other parallel occurrence was an oral agreement for the acquisition by Dison International of Dobell’s and Fowlds’ mineral claims. The company was arranging to put through an underwriting of shares. Part of the plan was to explore and, if possible, develop those claims.

Both Fowlds and Dobell testified the agreement selling the claims was concluded in December 1971, probably around the 12th of the month. It is their evidence that the company became the legal owner at that time. The formal transfer, and payment, was not made until February 1972. The effect of this evidence is, of course, that the “disposition” of the resource property took place before subsections 59(3) and (4) came into play.

The Revenue Department, in its assessment, understandably relied on certain documents (Exhibits 1 and 2) to which Dobell and Fowlds were signatories. Exhibit 1 was the formal agreement purporting to sell and transfer the claims. It is dated February 1, 1972. The price was $50,000. The vendors were to receive $25,000 each. Exhibit 2 was a statement of material facts filed with the Vancouver Stock Exchange in connection with the offering of Dison International shares to the public. It is dated February 3, 1972, effective February 9. Item 12 refers to the agreement (Exhibit 1) whereby the company purchased the claims. Item 4 states that part of the proceeds of the underwriting would be used to pay for the claims.

The underwriting was successful. Dobell and Fowlds were paid later in February.

The defendant pointed out that when the plaintiff took the assessment to the Tax Review Board, he did not question the date of February 1 as the date of the sale or disposition of the property. Fowlds has an outstanding appeal against an assessment levied against him. In documents filed in that matter (Exhibits 3 and 4) he did not raise the question of the “true” date of the sale.

Counsel for the defendant rightly urged that the oral testimony of the two witnesses (as to the 1971 date of sale) ought, in the circumstances outlined above, to be scrutinized very carefully. I have done that. I have kept in mind the plaintiff and Fowlds might be now tailoring their evidence to avoid tax liability.

I am satisfied that is not the case. I accept their evidence that the disposition took place in 1971. I shall set out my reasons.

Dobell testified here, and before the Tax Review Board, that the claims had cost him approximately $100,000. When he was assessed by the Minister, he took the view he could not be taxed on what was a capital loss. He was confident he could succeed on that point. He did not have a lawyer acting for him. He found out at the Tax Review Board level he could, in fact, by reason of particular provisions of the new Act, be taxed on what he felt was a capital loss. He then appealed to this Court, on the grounds earlier outlined. I accept this explanation.

Fowlds testified that while he did not set out the 1971 date in Exhibit 4 (August 22, 1975) or Exhibit 3 (May 7, 1976), he had, some time before, told an assessor what the correct date was. As with Dobell, he did not attach any significance to the point. He, too, thought he had, on other grounds, an iron-clad position. I accept his explanation. I found no reason, during the giving of his testimony (or since), to disbelieve him.

As to what occurred in December 1971, and as to why documents were dated in February 1972, Fowlds testified as follows. Again, I accept his evidence.

The new income tax legislation was to take effect in 1972. There was to be a “valuation” day. Rumour had it the date would be in December 1971. Fowlds wanted to complete the sale and purchase of the properties, certainly before the end of the year. He was anxious that the underwriting proceed. He had met the stock exchange stipulation that, before an underwriting were approved, Dobell’s shares in Dison International be bought. As a result the escrow shares were released in early December. He engaged, on behalf of the company, a consulting geologist (Malcolm) to report on the claims in question, and to make recommendations. He fixed the date of that appointment as mid-December. He said he would not, and could not, have authorized that engagement unless the company owned the claims. Malcolm’s report is dated January 31, 1972. Obviously, the work on the ground preceded that date. Fowlds said the investigation began in December. I believe him.

In respect of the oral agreement as to the sale and purchase, this was testified to. Both Fowlds and Dobell knew the company did not, in December, have the funds to pay the purchase price of $50,000. It was agreed that payment would not be insisted on until after the underwriting. Fowlds said he had guaranteed the indebtedness of the company. If the underwriting proved unsuccessful, then he would have paid Dobell on behalf of the company. Again, I accept that evidence.

I turn to the dates on the documents. Fowlds said Dison’s solicitor was Colin D McQuarrie, QC. But for the putting together of the underwriting, it was decided to enlist the services of Angus Ree, another lawyer. The latter had been for some years a solicitor with the Vancouver Stock Exchange, but had returned to private practice. He was very experienced in the legal aspects of underwritings. According to Fowlds, Ree’s view was that the material documents had to be dated within one week of the effective date of the underwriting documents. That effective date (earlier I recorded February 9, 1972— see Exhibit 2) was changed by Ree, according to Fowlds, to February

7. Ree prepared the formal transfer (Exhibit 1). He was the one who dated it February 1. I note also the transfer recites payment and receipt of $50,000 as of that date. Payment was not, in fact, until later.

I have carefully weighed all the above evidence. I am satisfied it is credible and trustworthy.

The disposition in question therefore took place in 1971, not in February 1972.

The appeal is allowed. The assessment of the Minister, in respect of the inclusion of $15,000 in the plaintiff’s taxable income for 1972, is vacated.

The plaintiff is entitled to his costs of this action.