McAdam v. The Queen, 78 DTC 6133, [1978] CTC 198 (FCA)

The Chief Justice (concurred in by Le Dain, J and Hyde, DJ) (judgment delivered from the Bench):—This is an appeal from a judgment of the Trial Division dismissing an appeal from reassessments of the appellant under Part I of the Income Tax Act for the 1965 and 1967 taxation years involving income amounts of $1,000 and $520.46, respectively.

I am of opinion that the appeal to this Court should be dismissed; and, subject to one point to which I will refer hereafter, I should be prepared to adopt the reasoning of the learned trial judge. Apart from that point, it would be sufficient, in my view, merely to indicate that the appellant’s submissions have not persuaded me

(a) that any of the learned trial judge’s findings of fact was clearly wrong, or

(b) that the learned trial judge had fallen into any error in law.

However, a point has been raised on this appeal that was not raised before the learned trial judge, which point makes it necessary to reconsider the application of the exempting provision invoked by the appellant. In addition, as I see it, a somewhat unusual type of business is involved. I deem it advisable, therefore, to summarize, in my own way, what appear to me to be the relevant facts as revealed by the evidence and to indicate briefly why the appellant’s submissions do not persuade me that the reassessments should be set aside or varied.

The relevant facts as revealed by the evidence may, in my view, be Summarized as follows:

1. In 1955, the appellant and one Flanagan

(a) formed a partnership as consulting geologists in order to earn their “life”, and

(b) entered into an arrangement quite apart from their consulting partnership (whether it was strictly a “partnership” or merely an agreement to work in concert is irrelevant) to work together on finding and developing mineral deposits (hereinafter sometimes referred to as their “developing activities”), which activities were still being carried on in concert at the time of the trial in 1972.* [1] 2. The first step in their developing activities of which there is evidence is their participation in a syndicate, of which there were other members, organized to “follow up” the possibility of mining what is referred to as the “Frotet Lake area”, which syndicate caused certain mining companies to be created. One of such companies, called Anomaly No 4 Mines Limited, acquired from the syndicate a group of claims for a consideration of 1,200,000 of its shares of which the appellant and Flanagan each received 60,000 for his interest in the claims. In 1960, the syndicate was wound up and the appellant and Flanagan received, from the other members of the syndicate, the balance of the shares in that company, by way of settlement for their interest in the syndicate, so that they each then held 600,000 shares in such company, the name of which was subsequently changed to McAdam Mining Corporation Limited.

3. In the meantime, as part of their developing activities, the appellant and Flanagan had been prospecting in the Chibougamau area, where they found some asbestos; and they decided to use McAdam Mining Corporation to further the development of such area.

4. To finance such development by the company, it was decided to make an offering of some of its shares to an underwriter who would resell them.

5. It was also decided by the appellant and Flanagan to include, in this part of their developing activities, two brothers by the name of Gauvreau and ‘their “free” shares in the company were shared in equal proportions with the Gauvreaus.

6. As part of the plan to have the Chibougamau area developed by the company, the four individuals sold to the company asbestos claims for 200,000 of the company’s shares, of which the appellant received 50,000.

7. To carry out the financing aspect of the plan, the company was caused to enter into an underwriting agreement with one Cameron, but it was found that he was unable to carry out his responsibilities under that agreement unaided and the four shareholders undertook the responsibility of raising the necessary initial underwriting capital in order to bring about the sale of shares of the company to the public and, with such help as Cameron was able to provide, a market was built up by the four individuals for most of the shares covered by the underwriting agreement.

8. As the company was provided with the necessary capital (by the Cameron underwriting and subsequent underwritings with another company), the company developed the asbestos claims to the point where it was able to enter into an agreement with an international operator for further development and ultimate production by that international operator. Such agreement provided a prospect for the company of an ultimate annual income that would be dependent on the extent that the international operator decided to use the claims in question for production operations and on the future state of the asbestos market.

9. In the meantime, the appellant, in 1965 and 1967. to raise money for personal reasons, made the sales of the small portions of his shares in the company that gave rise to the profits that are in issue in this appeal.

10. At the time of. the trial, the four individuals together held approximately one-sixth of the outstanding shares in the company, were the principal company officers and exercised de facto control of the company; and they hoped to retain their shares and use their influence to cause the company to utilize part of its income to pay dividends and the rest for further prospecting and development.

In these circumstances. the first question that arises is whether the profits made by the appellant on the 1965 and 1967 sales of shares were profits from a business within the extended meaning of that word in the Income Tax Act.* [2] In my view, the developing activities of the appellant, carried on in concert with Flanagan from 1955 to the time of the trial, constituted a profit-making operation or business of finding mineral properties, developing them and turning them to advantage as circumstances from time to time might make it seem advisable to do and included carrying out some or all of such activities through the use of corporations and reaping advantages by taking shares in such companies and selling such shares. It was, therefore, open to the learned trial judge to hold, as he did, viz [p 218]:

In all of these activities it seems to me the plaintiff’s main objective was to earn income. While he said in evidence, in regard to the shares he holds and has held in the company, that they were in his eyes a long-term investment, I am convinced he also had the intention to sell these shares at any time it became desirable to supplement his other income.

In any event, I do not think it can be said that he was clearly wrong in so holding. Compare McDonough v MNR, [1949] Ex CR 300; [1949] CTC 213; 4 DTC 621; MNR v Independence Founders Ltd, [1953] 2 SCR 390; [1953] CTC 310; 53 DTC 1177; Gairdner Securities Limited v MNR, [1954] CTC 24: 54 DTC 1015. [3] Indeed, it would seem that subsection 83(2) of the Income Tax Act, to which reference will be made hereafter, was framed on the assumption that, at least in some cases, shares are received and sold as part of the overall profit-making scheme or business of a prospector.

The second branch of the appeal relates to the application of the following portions of section 83 of the applicable Income Tax Act, viz:

83. (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.

(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 shared 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 first question that arises under section 83 is whether, for the purposes of the appeal, the amounts received by the appellant for the shares sold in 1965 and 1967 fall within the words of subsection 83(2). More specifically, the question is whether the shares sold by the appellant in those years were received by him in consideration for a mining property described in paragraph 83(2)(a). Apparently, at trial, the appellant assumed the onus of establishing that the shares were so received. With regard to such attempt, the learned trial judge made the following finding [p 218]:

The remaining issue is whether any portion of the shares sold in 1965 and 1967 ought not to be included in income by reason of subsection 83(2). In my view the plaintiff has not brought himself within the exempting provisions. Counsel, on his behalf, prepared an ingenious breakdown of the plaintiff’s share position from time to time in the company (Exhibit 1). Without going into the details, the end result of the exhibit is to invite the Court to find that 518.18 of the 1,500 shares sold are subsection 83(2) shares. This is accomplished by using arbitrary percentages with respect to shares, both ordinary and so-called prospector’s shares, acquired and sold by the plaintiff since his initial acquisition of the 60,000 subsection 83(2) shares.

the carrying on of a business within the ordinary meaning of that word. In any event, a question arises in my mind as to whether the decision in MNR v Tara Exploration and Development Company Limited, [1974] SCR 1057 at 1059; [1972] CTC 328 at 330; 72 DTC 6288 at 6289, affects the implications that might otherwise be attributed to that decision.

I cannot accept the invitation to so find. In my view the onus is on the plaintiff to show that the 1,500 shares he sold were in fact prospector’s shares, but in my view there is nothing in the evidence to distinguish these 1,500 shares or any part of them from the other ordinary shares acquired by the plaintiff since 1960.

In my view, if the question had been put in issue for purposes of trial, the learned trial judge would have been quite correct in his view that the onus was on the appellant to show that he was entitled to the benefit of what was, in substance, an exempting provision; and no fault can be found with his finding that the appellant had failed, by his evidence, to discharge such onus. However, it does not appear that the learned trial judge’s attention was brought to the state of the pleadings on this point. When the pleadings are studied from this point of view, it seems clear that the question was not in issue. By paragraph 24 of the notice of appeal the appellant said that the shares in question were received by him in consideration for interests in mining properties acquired by him in the manner contemplated by paragraph 83(2)(a) and, by paragraph 7(e), read with paragraphs 3(a) and (c), of his reply, the respondent, in effect, as I read it, alleges the same thing.* [4]

The only difficulty that I have with reference to the application of subsection 83(2) is whether, as a matter of law, a shareholder who holds shares in a company that have been acquired from two different sources can be said, when he sells some of those shares, to be selling shares acquired from a particular source. In this connection, I refer to Lawson v MNR, [1969] SCR 587; [1969] CTC 201; 69 DTC 5155, where Pigeon, J, delivering the judgment of the Court, said at pages 591-2 [203, 5157]:

One of the methods suggested is described as “specific identification”. It is sought to be applied by identifying the shares remaining in the inventory by an examination of the serial numbers on the certificates that were held for appellant by his broker. This method was properly rejected because it is inapplicable to company shares. As was pointed out by Kerwin, J (as he then was) in Canada China Clay Ltd v Hepburn, [1945] SCR 87 at 93, “the distinction between a share of capital stock of a company and the certificate of such share is (to be) borne in mind . . .”. As long as a shareholder continues to hold a certain quantity none of his shares is distinguishable from any other. Appellant’s witness Lachance, an expert accountant, said: “All shares are interchangeable one with the other’’. To endeavour to ascertain the cost by reference to the serial numbers of the certificates held would mean that the cost would be determined according to a criterion that has no relevance to the actual situation. The shares were clearly tangible things and the specific identification method was impossible of application.

However, what was being discussed in that case was value of shares acquired from different sources and, with some hesitation, I have concluded that, having regard to the object of subsection 83(2), while it may be difficult, if not impossible, as a matter of fact, it cannot be said to be legally impossible, for the purpose of that provision, to identify the source of shares sold.

Having concluded that subsection 83(2), read alone, applies to the facts of this case as pleaded, it is necessary to deal with the limitation contained in subsection 83(4). With reference to that provision the learned trial judge expressed his findings of facts in the following passage, viz [p 219]:

There was considerable argument as to the meaning to be given to the word “after” in paragraph (a) of subsection (4). Because of the conclusions I have come to earlier in these reasons, I do not propose to express any opinion on this argument. But as to the facts of the “campaign”, in my view the plaintiff, from a practical and business point of view, participated in the campaign to raise funds by the sale of shares in 1961. The underwriter, Cameron, as it turned out was a liability, rather than an asset. The plaintiff admitted the underwriting would not have succeeded unless the group of 4 had raised the money for Cameron to take up the various options. While it. may be true the plaintiff did not personally sell shares to the public, it is my view that Cameron, in the circumstances which developed, became merely a conduit by which the shares reached the public. The group of 4 themselves took the effective steps to ensure the success of the campaign.

I can see no ground for interfering with the findings of facts made by the learned trial judge on this question. Compare Appleby v MNR, [1975] 2 SCR 805; [1974] CTC 693; 74 DTC 6514, and Cooper v MNR, [1977] CTC 107; 77 DTC 5099.

However, having regard to my conclusion as to the application of subsection 83(2), it becomes necessary to deal with the question as to the meaning of the word “after” in subsection 83(4), with which question the learned trial judge found it unnecessary to deal on the issues as they were presented to him.

In effect, as I understood him, counsel for the appellant submitted that, in its context in subsection 83(4), the word “after” should not be given its ordinary meaning but should be read as requiring some relationship of cause and effect between the “campaign” and the sales of shares that are excluded from the exemption benefits..

In my view, this submission must be rejected. As it seems to me the word “after” in the phrase “while or after” must be given the same effect as it is normally given in the phrase “on or after”. As I appreciate the exempting provision, what was intended was to give a prospector a tax advantage for profits from the sale of shares only when the profit represents reward for his prospecting efforts. As I read subsections 83(2) and (4), once a prospector has engaged in activities designed to build up a market for the shares, the exempting provision no longer applies because a profit from sale of the shares would then be, in all probability, in part at least, the consequence of such activities and not merely a reward for his prospecting activities.

In my view, for the above reasons, the appeal should be dismissed with costs.