Walter D Kitts v. Minister of National Revenue, [1979] CTC 2845, 79 DTC 712

The Chairman:—The appeal of Walter D Kitts is from an assessment in respect of the appellant’s 1975 taxation year.

Issue

The issue is whether an amount of $157,500 was properly included in the appellant’s 1975 income pursuant to subsection 59(3.1) of the Income Tax Act, SC 1970-71-72, chapter 63, as an amount realized in 1975 from the disposition of an interest in a Canadian resource property as defined by subparagraph 66(15)(c)(ii) allegedly owned by the appellant on December 31, 1971, or whether the proceeds of the said disposition were a “conditional receivable’’ and “capital property’’ on December 31,1971, as claimed by the appellant.

Facts

The respondent’s reply summarizes adequately, for purposes of this appeal, the facts and the figures which give rise to the instant issue. The appellant, who represented himself at the hearing, did not dispute the facts as Stated in the Minister’s reply but objected to the intrepretation given by the respondent to the pertinent sections of the Income Tax Act.

Paragraph 3 of the respondent’s reply reads as follows:

3. The Respondent, in assessing the Appellant for tax in the 1975 taxation year, acted on the following findings or assumptions of fact:

(a) in 1956 and for some time thereafter, the Appellant was a prospector looking for uranium;

(b) on August 6, 1956, the Appellant entered into an Agreement with British Newfoundland Exploration Limited (‘Brinex’);

(c) although the terms of said Agreement speak for themselves, in substance:

(i) the Appellant was employed by Brinex to prospect for minerals in certain areas;

(ii) in exchange for this prospecting, the Appellant received $300 per month plus food and accomodation (sic);

(iii) in addition, the Appellant was permitted to stake out certain ‘discovery areas’ for Brinex;

(iv) in exchange for staking out these ‘discovery areas’, Brinex would hold a

7% undivided interest in each “discovery area” for the Appellant;

(v) Brinex had the sole and exclusive option for 20 years to purchase the interest of the Appellant in a “discovery area” for $210,000;

(d) as a result of the Appellant’s prospecting efforts, the Appellant in 1956 or shortly thereafter staked a “discovery area”;

(e) pursuant to said Agreement, Brinex held a 7% undivided interest in said “discovery area” for the Appellant;

(f) Brinex, pursuant to an Agreement dated September 12, 1975, exercised its option and acquired the Appellant’s interest in said “discovery area”;

(g) payment for the acquisition of the Appellant’s interest in said “discovery area” by Brinex was as follows:

$105,000 payable to the Appellant on September 12, 1975

$105,000 payable to the Appellant on January 2, 1976;

(h) the Appellant in his 1975 taxation year, with respect to the disposition of his interest in said “discovery area” disposed of a ‘‘Canadian resource property” owned by the Appellant on december 31, 1971;

(i) as a result of said disposition by the Appellant, $157,500 or 75% of the proceeds ($210,000 times 75%) less an allowable reserve relating to the $105,000 due in 1976 is taxable in accordance with subsections 59(4) and 64(1.1) of the Income Tax Act.

Appellant’s Contention

The appellant contends that he did not own a resource property interest on December 31, 1971 and that the terms of the agreement between British Newfoundland Exploration Limited (hereinafter called the “company”) and the appellant, dated August 6,1956 (Exhibit A-2), precludes any notion of his ownership of a mineral and resource property. The appellant suggests that the holding of his interest by the company and the restrictive conditions of paragraph 9 of the agreement, by which he was prevented from selling or transferring his interest for a period of twenty years, was incompatible with the concept of a bona fide ownership which the appellant contends is the operative word in subsection 59(3.1). It is the appellant’s submission that the company had no intention of giving to any prospector ownership interest in any discovery and what he did have was a contingent asset or a contigent receivable which entitled him to receive $210,000 if, and when, the company decided to pay for such, plus interest. The appellant concludes that ‘‘the vehicle to convey that $210,000 was an illusionary ownership interest and not a bona fide ownership interest”.

Respondent’s Submission

It is the respondent’s submission that the appellant had a 7% interest in a discovery area which was subject to conditions set out in the agreement between the company and the appellant dated August 6, 1956 (Exhibit A-2). The respondent also stated that the evidence was that the appellant did not dispose of that interest until September 12, 1975, at which time the company chose to exercise the option it had provided for in the agreement of 1956, and referred to in Exhibits R-1 and R-2. The appellant therefore disposed of his 7% undivided interest in the discovery area, which he owned on December 31, 1971, for a consideration of $210,000.

The respondent explained that prior to 1972 the proceeds from the disposition of the appellant’s interest would not have been taxable under the Income Tax Act of 1971 but in the 1972 Income Tax Act, Parliament provided for a deduction from income for the acquisition of such interests (section 66) but, by the same token, treated the disposition of these interests as income (section 59).

In contending that the proceeds of the disposition of his interest are taxable in the appellant’s hands, the respondent relied on subsection 59(3.1) which reads:

Where a taxpayer has made a disposition of property owned, or deemed to have been owned, by him on December 31,1971 and thereafter without interruption until the date of disposition that is property described in any of subparagraphs 66(15)(c)(i) to (vi) and is not property described in paragraph (1.1)(b), the following rules apply:

(a) the relevant percentage of the taxpayer’s proceeds of disposition therefrom shall be included in the amount referred to in subparagraph 66.2(5)(b)(v) to the extent that the proceeds become receivable; and

(b) where the taxpayer and the person who acquired the property were not dealing with each other at arm’s length, for the purposes of this section and sections 66 and 66.2

(i) the cost to that person of the property shall be deemed to be the amount included in the amount referred to in paragraph (a) in respect of the disposition by the taxpayer of the property, and

(ii) when that person subsequently disposes of the property or any right or interest therein, that person shall be deemed to have owned the property on December 31, 1971 and thereafter without interruption until the disposition thereof.

It is the respondent’s contention that the appellant’s interest is a property described in paragraph 66(15)(c) (referred to in section 59) and more particularly in subparagraph 66(15)(c)(ii) and (vi). Paragraph 66(15)(c) reads:

In this section and sections 66.1 and 66.2,

(c) “Canadian resource property” of a taxpayer means any property acquired by him after 1971 that is,

(i) any right, license or privilege to explore for, drill for, or take petroleum, natural gas or other related hydrocarbons in Canada,

*(ii) any right, licence or privilege to prospect, explore, drill, or mine for, minerals in a mineral resource in Canada,

(iii) any oil or gas well situated in Canada,

(iv) any rental or royalty computed by reference to the amount or value of production from an oil or gas well, or a mineral resource, situated in Canada,

(v) any real property situated in Canada the principal value of which depends upon its mineral resource content (but not including any depreciable property situated on the surface of the property or used or to be used in connection with the extraction or removal of minerals therefrom), or

*(vi) any right to or interest in any property (other than property of a trust) described in any of subparagraphs (i) to (v) (including a right to receive proceeds of disposition in respect of a disposition thereof);

(*asterisks mine)

Counsel for the respondent referred to the wording of paragraph 9 of the 1956 agreement and suggested that, notwithstanding that his interest was subject to various conditions, the appellant received a right to a 7% undivided interest in each discovery area as well as a right to a 7% portion of the proceeds if the company sold before the expiration of 21 years. The agreement provided that after 20 years the appellant would be free to sell or transfer his interest at will.

Counsel contended that the conditions in the agreement in no way affect the acquisition of a property right to the extent of 7% in a discovery area which, according to the definition in the agreement (para 1d) is “mineral rights in respect of a discovery area that has been reported to the company in accordance with the provisions of paragraph 7”.

It was submitted that the appellant testified as to having staked out the property as required under the terms of the agreement; as having reported it as set out in the agreement; and, as having complied with all the conditions imposed upon him in the agreement. The respondent claims that the appellant also received, under the agreement, 7% of an undivided interest in a discovery area which by definition (para 1c) in the agreement means mineral rights and concessions owned by the company.

The respondent referred to a letter dated September 12,1975 (Exhibit R-1) by which the appellant is advised that the company would exercise its option of purchasing all the appellant’s interest in the pertinent discovery area. Exhibit R-2, an agreement also dated September 12,1975, between the company and the appellant, which bears the appellant’s signature, gives effect to the company’s decision to take up the option of purchasing the appellant’s 7% undivided interest.

The respondent contended, in his summary, that the appellant’s interest is one that comes under Canadian resource property which was continuously held by the appellant until September 12, 1975, and therefore owned by him on December 31, 1971, the disposition of which is taxable pursuant to subsection 59(3.1). The relative percentage that is taxable pursuant to subsection 59(4) is 75% and he concluded that the amount of $157,500 was properly added to the appellant’s income for the 1975 taxation year.

Decision

On the basis of the evidence and the appellant’s argument, it appears evident that the 1956 agreement transferred to the appellant a 7% undivided interest in a discovery area which consisted of mineral rights, viz uranium, which had been acquired by the company from the province of Newfoundland on September 26, 1975. The facts are that these rights were held by the appellant from 1956 to the date of their sale in September, 1975, and were in his possession on December 31, 1971. It is difficult, in the circumstances, to conclude that the appellant’s rights were other than a Canadian resource property.

The appellant’s principal argument, although not quite certain as to the nature of what had been transferred to him by the 1956 agreement, was that he did not have a bona fide ownership of the interests so transferred because they were held by the company. The wording of the agreement appears abundantly clear to me that the company transferred ownership of a 7% undivided interest in a discovery area and conferred on the appellant a legal right of ownership, notwithstanding the option which the company reserved for itself to purchase, to the exclusion of others, the appellant’s 7% interest in that discovery area.

The legal concept of ownership is considerably more complex than simply the conferring of an indisputable right to dispose of property at the owner’s will. Perhaps it might be useful to cite here two passages of the Concise Law Dictionary, Fourth Edition, by P G Osborn, LLB, at 244, which defines only two pertinent legal aspects of ownership:

Absolute ownership involves the right of free as well as exclusive enjoyment, including the right of using, altering, disposing of or destroying the thing owned.

Restricted ownership is ownership limited to some extent; as, for example, where there are several joint owners, or a life tenancy, or where the property is charged with the payment of a sum of money, or subject to an easement.

The fact that the appellant’s ownership of a 7% undivided interest in a discovery area was restricted to the holding of the appellant’s interest for a period of 20 years, and by the company’s exclusive option for that period to purchase the appellant’s interest (to which the appellant had agreed in 1956), does not make the appellant less the owner of the 7% interest within the meaning of subsection 59(3.1).

I conclude, therefore, that the amount of $157,500 was properly added to the appellant’s income for the 1975 taxation year.

For these reasons, the appeal is dismissed.

Appeal dismissed.