D & B Oilfield Contracting Ltd. v. Minister of National Revenue, [1989] 2 CTC 2140, 89 DTC 425

Lamarre Proulx, T.C.J.:— This is an appeal from reassessments of income tax for the 1983 and 1984 taxation years of the appellant.

The question in issue is whether the appellant disposed of an interest in a partnership or of a Canadian resource property.

In reassessing the appellant, the respondent relied upon the following assumptions of fact:

(a) the appellant was a participant in a joint venture known as "DAS Ventures";

(b) by agreement dated March 31, 1982, the appellant sold a mining claim known as "4th of July Creek” to another participant in the joint venture. Sikanni Oilfield Construction Ltd.;

(c) the proceeds of disposition from the sale of the mining claim was $400,000; the appellant received $285,085.57 in its 1983 taxation year and $47,098.98 in its 1984 taxation year;

(d) all other assets allegedly sold to Sikanni Oilfield Construction Ltd., by the agreement dated March 31, 1982, including the 44 Silver City shares, were sold for proceeds equal to nil;

(e) the 4th of July Creek mining claim was a Canadian Resource Property;

(f) the proceeds of disposition from the sale of the 4th of July Creek mining claim were on account of income;

(g) the appellant did not have a partnership interest in DAS Ventures of which it could dispose.

The respondent submits that the appellant disposed of a Canadian resource property that was a property described in subparagraph 66(15)(c)(ii)(v) or (vi) of the Income Tax Act (the Act) and the proceeds of disposition therefrom were included in the amount referred to in clause 66.2(5)(b)(v)(A) of the Act to the extent that the proceeds became receivable. He further submits that the appellant was a participant in a joint venture and was not a partner in a partnership and, therefore, the appellant disposed of a Canadian resource property and not a partnership interest.

The evidence showed that the appellant is a company located In Fort Nelson, British Columbia. It is in the oilfield construction and operations, construction and repair activities related to pipelines, etc. Sikanni Oilfield Construction Ltd. (Sikanni) is also a company located at Fort Nelson, B.C., and carried on activities of the same nature as those of the appellant. Both companies have placer mining operations. In the summer of 1980, both companies agreed to work together on the exploration and exploitation of two mining sites: one known as the 4th of July Creek and the other as the 40 Mile Creek. The prospecting leases of the first site were owned by a Mr. Churchill and those of the second site were owned by Marten Creek Placers Limited the main shareholder of which is Mr. Claxton. The appellant and Sikanni were desirous of formalizing their joint undertaking and in the fall of 1980 met with their lawyer, Mr. Schuck, to ask him to draw an agreement and invite him to participate in the venture. There seems to be a common belief that, though a draft agreement may have been prepared, no formal agreement has ever been signed. In any event, if it has been, no copy has been located and this agreement has not been filed with the Court. Mr. Schuck invested $55,000 in the deal. The understanding was that he would have no other contribution to make and that he would share in the profits as well as in the losses. If there were losses, his contribution would not be higher than the contributed amount. The appellant and Sikanni were to contribute both cash and equipment. The new venture was called DAS Ventures. DAS was formed of the initials of the names of the three participants, Doug (Busat), Andrew (Schuck) and Svean (Harlon). The appellant and Sikanni each had a 45 per cent interest in the venture and Mr. Andrew Schuck had a 10 per cent interest. Apparently, he had been asked by the two companies to be part of the venture to play a role as a tie breaker, He never had to play that role. At about the same time, a corporation, Silver City Placers Ltd. was formed and the shares were held in about the same proportion as in DAS Ventures. Sikanni had 44 shares, D.&.B. Oilfield Contracting Ltd. 44 shares, and Andrew Schuck 12 common shares.

On February 20, 1981, Silver City Placers Ltd. acquired from Marten Creek Placers Ltd. a licence and right to occupy, develop and placer mine the subject properties (40 Mile Creek) for a period of four years commencing March 15, 1981. In so far as the "4th of July Creek" was concerned, no written agreement has ever been drawn with the owner of the prospecting leases, Mr. Churchill. However, there was a verbal agreement between Mr. Churchill and DAS Ventures for the right to mine those properties owned by Mr. Churchill on "4th of July Creek". This is evidenced by a letter sent to Mr. Churchill by Mr. Svean on behalf of DAS Ventures. With respect to the "4th of July Creek" it is the common understanding of the parties that the right to develop and placer mine belonged to DAS Ventures. This right was for a term of three years. In the early spring of 1981 DAS Ventures opened a winter road, brought equipment, diesel, and set up a self-contained camp to start mining in June. The cost of this preparatory work may have been about $150,000. During the summer of 1981 DAS Ventures operated placer mining. Gold was extracted and the gross income would have been approximately $1 million.

In the fall of that year, Sikanni advised the appellant that it did not want to continue the joint undertaking and asked the appellant to purchase its share of the joint undertaking. The price of $400,000 was suggested. The appellant decided not to purchase but to be bought out at the same price. Sikanni did purchase something in the amount of $400,000. It is the nature of the subject matter of the purchase that has to be determined respecting the outcome of this case. Sikanni showed this purchase in its income tax return as a purchase of a Canadian resource property which was at first refused by Revenue Canada on the ground that it was an interest in a partnership. Later on, Revenue Canada changed its views and accepted Sikanni's position.

Witnesses for both, the appellant and Sikanni were asked by both Counsel as to how the price was arrived at. Mr. Busat for the appellant answered that the price probably was made up of the amount of expenses that were incurred in the preparation of the operations and of the value of the equipment jointly owned. In Mr. Ashdown's view (Sikanni's accountant), this was not the case. The value of the equipment owned by DAS was about $85,000. The appellant’s share was 45 per cent of this amount. As to the expenses, they would not have amounted to a very high amount since they had been offset by the income derived from the gold mining operations in the summer. Though Mr. Ashdown was insistent on the fact that what was purchased was the mining rights, he could not answer as to how the price had been arrived at. No valuation whatsoever had been made of the mining rights.

On March 31, 1982, an agreement was signed between D & B Oilfield Contracting Ltd., Sikanni Oilfield Construction Ltd. and Andrew Schuck. This agreement is the nub of the matter in this case and though it cannot be recited in its entirety, I will refer to the most important parts thereof:

WHEREAS the Vendor, the Purchaser and Schuck have carried on a partnership since July 1, 1980 under the name ‘DAS Ventures', and their partnership interests are set out opposite their names and as follows:

SIKANNI OILFIELD CONSTRUCTION LTD.	45%
D. & B. OILFIELD CONTRACTING LTD.	45%
ANDREW SCHUCK	10%

2. The partnership has acquired certain assets more particularly set forth on Schedule "A" hereto.

3. The Vendor is the owner of forty-four (44) common shares in Silver City Placers Ltd. (hereinafter called "the Company") represented by share certificate number five (5) (hereinafter referred to as "the Vendor's Share”).

4. The parties have agreed to dissolve the partnership and the Purchaser is desirous of purchasing the Vendor's share and Vendor's partnership interest and the Vendor is desirous of selling the same to the Purchaser on the terms and conditions hereinafter contained.

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows:

1. The Vendor warrants and represents that:

(a) He is the registered holder and beneficial owner of the Vendor's share;

(b) The issued capital of the Company is as follows:

SIKANNI OILFIELD CONSTRUCTION LTD.	44 Common Shares
D. & B. OILFIELD CONTRACTING LTD.	44 Common Shares
ANDREW SCHUCK	12 Common Shares
Total —	100 Common Shares

(e) He is the beneficial owner of forty five (45%) of the interest in the partnership assets set forth in Schedule "A";

(f) The assets of the partnership are free and clear of all liens, charges and encumbrances, save and except for those charges and encumbrances known to the Purchaser and set forth on Schedule “B” hereto;

2. On the basis of the warranties and representations of the Vendor set forth in Paragraph 1 of this Agreement and subject to the terms and conditions of this Agreement the Vendor hereby sells and assigns to the Purchaser the Vendor's share and the Vendor's interest in the partnership assets for the sum of ONE HUNDRED THOUSAND ($100,000.00) DOLLARS and by transfer of Cenaca Aircraft, more particularly set forth and described in Schedule "C" hereto to be paid to the Vendor and transferred to the Vendor by the Purchaser on the Closing Date.

6. The parties agree that the said partnership between the parties hereto is hereby dissolved effective as of the Closing Date.

7. The parties agree to novate the existing Agreement dated the 1st day of October, 1980 between the Vendor and Purchaser, as one part, and Schuck, as the second part, so that the Purchaser herein shall replace the Vendor and Purchaser of the one part as referred to therein.

Schedule "A" listed some equipment but did not list any of the prospecting leases.

The appellant's list of authorities is the following:

Northern Sales (1963) Limited v. M.N.R., [1973] C.T.C. 239; 73 D.T.C. 5200

Pitrie v. Racey et. al.., (1963), 37 D.L.R. (2d) 495 (B.C.S.C.)

Central Mortgage & Housing Corp. v. Graham et al. (1973), 43 D.L.R. (3d)

686 (N.S.C.A.T.D.)

Steenerson et al. v. Bank of Toronto, [1922] 3 W.W.R. 922

Robert Porter & Sons Limited v. J.H. Armstrong and William Washbrough

Foster, [1926] S.C.R. 328 (S.C.C.)

Davies v. Schuilli and Mullen, [1928] 3 W.W.R. 158 (B.C.C.A.)

M.N.R. v. Nathan Strauss, [1960] C.T.C. 86; 60 D.T.C. 1060

Woodlin Developments Ltd. v. M.N.R., [1986] 1 C.T.C. 2188; 86 D.T.C. 1116.

Counsel for the respondent referred me to the following case:

Woodlin Developments Ltd. v. M.N.R., [1986] 1 C.T.C. 2188; 86 D.T.C. 1116.

Counsel for the appellant stated that the question in issue is the nature of the payment made by Sikanni pursuant to the March 31,1982 agreement. He said that it was evident from the reading of the agreement that what was sold was an interest in a partnership and shares of a corporation and that the payment also provided for the joint undertaking to cease; thus the payment was not for a Canadian resource property. As a subsidiary argument, he put forward the proposition that mining rights were not equivalent to a Canadian resource property.

The respondent rested his case on the distinction between partnership and joint venture. I was not told in which way that distinction would be useful. Would it be in relation to ownership of property? I was not referred to any jurisprudence or authorities that said that a joint venture cannot own property nor am I aware of any. Therefore, I have difficulty in understanding why an interest or assets in a joint venture would be treated differently from those in or of a partnership.

In any event, a review of the case law referred to me brings me to find that "partnership and joint venture have often been treated as synonymous, a joint venture being regarded as simply a partnership established to fulfill a particular business undertaking within a limited time”, as was said by the Associate Chief judge Christie In Woodlin Developments Ltd. v. M.N.R., supra, at 1119. In the case at bar, the venture was not limited in time nor was it limited to a project. The parties had agreed to carry on jointly placer mining operations and share in the profits therefrom for a non-limited period of time. In my view, the circumstances of this association lead more to a partnership than to a true joint venture.

It may also very well be as has been said in Hall and Son v. Platt (1954), 35 T.C. 440, that it is a "joint venture and a partnership." This case is referred to in Northern Sales (1963) Ltd. v. M.N.R., supra, at 5205. The distinction between joint venture and partnership has been considered to be immaterial in Ross v. Canadian Bank of Commerce (1923), 3 D.L.R. 339, referred to

in Central Mortgage and Housing Corporation v. Graham et al., supra, at 707: "It appears to their Lordships to be immaterial whether the combination is called a partnership or a joint venture. Probably it was a partnership. But, in any case, it was a combination, . . .”.

I tend to believe that whether it is a joint venture or a partnership does not have to be determined to decide the issue. It appears clearly from the evidence that no mining rights belonged to the partners themselves. The mining rights of one site belonged to DAS Ventures and those of the other one belonged to Silver City Placers Limited. The appellant could not have sold the mining rights or the Canadian resource property, it was not the owner of it. To reach this end, the partnership should have been dissolved first and the property, then distributed. As this did not happen, I cannot but reach the conclusion that what the taxpayer sold was its interest in the partnership and its shares in the company.

I would, however, agree that what was of interest to the purchaser (Sikanni) were the mining rights of the two sites and their exploitation by Sikanni alone. However, in view of the legal means chosen, I find that what has been sold is an interest in a partnership or a joint venture and shares of a company. The parties to the agreement could have chosen the route of purchasing or selling the assets directly. They did not.

Therefore, the appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.