Minister of National Revenue v. Frederick Litwin and Murray Kadis, [1976] CTC 77, 76 DTC 6062

Addy, J:—The present case was called for trial before me at the same time as the case of The Minister of National Revenue v Murray Kadis, Court No T-1106-72. Both taxpayers are partners with an equal share in Field Explorations Limited.

It was agreed by all parties that the two cases would be tried together on common evidence as counsel were satisfied that both the legal and the factual issues are identical in all respects. Although the present reasons relate to the respondent Litwin, they are therefore equally applicable to the case of the respondent Kadis.

The issue before the Court is whether or not the Respondent is entitled, pursuant to subsection 83(3) of the Income Tax Act (RSC 1952. c 148, as amended by SC 1965, c 18, subsection 19(2)), to insist that the amount of $19,467.82 received from the sale of the respondent’s share to the company, which amount represents a profit resulting from the sale of an interest in mining properties to that company, is exempt from his taxable income.

The relevant portions of subsection 83(3) are reproduced hereunder for the sake of convenience:

(3) An amount that would otherwise be included in computing the income for a taxation year of a person who has . . . under an arrangement with the prospector made before the prospecting, exploration or development work . . . 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

At the hearing, both counsel agreed that there was really no issue of law to be determined but merely some very simple factual questions to be decided, namely, whether the mining properties in question were acquired following and as the result of prospecting done on behalf of the taxpayer previous to their acquisition and pursuant to a previously executed agreement between the taxpayer and a prospector.

In addition to the agreed facts, only one exhibit was filed and one witness was called, namely, the prospector, one Robert Rosenblat. The exhibit consisted of an agreement in writing dated April 8, 1966 between Litwin and his partner Kadis as grubstakers and Rosenblat as prospector.

I find no difficulty in coming to the conclusion that the agreement was in fact signed on April 8, 1966 and that, subsequent to the signing of that agreement, Mr Rosenblat went to visit the mining area in Nova Scotia.

The witness Rosenblat was a professional prospector with over twenty years of experience in prospecting for base metals, gold, oil and gas in Canada, the United States and Australia. Although largely self-educated, he appeared quite knowledgeable and intelligent.

He stated that, although he had never prospected in Nova Scotia, from his examination and analysis of the geological maps and data relating to the area and from his previous knowledge of rock formations of this continent, he came to the conclusion that the particular area, which he finally recommended to the respondent and the respondent’s partner, appeared to be very promising and quite suitable for development from a mining standpoint.

He therefore spoke to the respondent and the written agreement of April 8, 1966 resulted. Under the agreement, he was authorized to prospect and explore for mineral deposits in and near Hanis County and, following same, to stake not more than seventy-five claims which, in his opinion, would be best suited geologically. The partners agreed to pay the prospector his costs plus $15 per claim.

On the week following the execution of the agreement, he flew to Nova Scotia and went to the designated area. He examined the subject-property on which he eventually obtained six licences for the respondent and his partner. His examination of the actual property took between ten to twelve hours. The property was approximately six square miles in area. He also spent about ten days examining a larger area surrounding the subject-area. This larger area was about ten miles wide by twenty miles long.

His examination consisted of walking over the area and looking for evidence of a contact zone, the existence of which was indicated from the geological maps and data previously studied. He was searching specifically for evidence of mineralization which might appear on outcroppings on any float or fault, or for evidence of previous exploration of the ground. He found no evidence of previous prospecting, work or Surveying. Because the overburden of shale, sand and gravel is quite thick, he was unable to reach the bedrock with a shovel or a rod and he failed to find any confirmation of the expected mineralization. He found no exposed mineralization whatsoever.

On the other hand, he found no negative evidence, that is, any sign which might indicate that the mineralization would not be as indicated by the general data which he had examined previous to his leaving for Nova Scotia. The type of negative evidence he was looking for was evidence that the ground had been drilled or worked previously or evidence of outcroppings, showing a different mineralization than that indicated in the general geological maps and data.

After his examination of the ground as above described, he attended at the Recording Office in Halifax and there verified that there was no record of the ground ever being claimed or worked previously and that the claims were available. Following this, he phoned the respondent in Toronto and advised that the property be acquired. He stated that he received, at that time, specific authorization to acquire the six properties.

The witness testified that the decision to acquire mining lands and to attempt to develop them would depend normally on the preliminary geological maps and data to the extent of some 80% and the decision would depend to the extent of about 20% on the actual prospecting or the physical examination of the ground. My brother Heald, J in the case of David Cooper v MNR, [1974] CTC 346; 74 DTC 6255, at page 350 [6259] described the test under subsection 83(3) in the following words:

To qualify for exemption, the appellant must establish:

(a) that the prospecting efforts in respect of the subject property were

expended by the prospector before the properties were acquired; and

(b) that the properties were acquired as a result of any such efforts. (See MNR v Karfilis, [1967] 1 Ex CR 129 at 154; [1966] CTC 498 at 524; 66 DTC 5327 at 5340.) See also Winchell v MNR (supra).

I agree with this test but would like to add the perhaps redundant observation that where a party, other than the prospector himself, is to benefit from the exemption, subsection 83(3) requires that the prospecting be done pursuant to, as a result of, and at a time subsequent to a prospecting agreement. It becomes obvious therefore that the previous examination and analysis of the geological data done by the witness Rosenblat cannot be considered in the present case but only the actions of the witness subsequent to April 8, 1966. It therefore becomes unnecessary for me, as invited by counsel, to decide whether any such examination and analysis form part of prospecting, as the term is commonly used, although it is not difficult to conclude that it would be most imprudent and unwise for a prospector to simply go on the ground without previous examination of whatever geological data might be available.

In effect, the witness Rosenblat stated as an expert that, where the general geological data and maps indicate very promising mineralization and where a physical examination of the ground does not reveal any evidence which might tend to contradict or throw any doubt on the original tentative conclusions arrived at from such general geological data, it would be normal to recommend that the land be claimed and worked.

I would have been inclined to feel that some positive evidence of the existence of minerals to confirm the original conclusions would be required as a result of the prospecting, as opposed to merely negative evidence, before any such recommendation would be made. But, since the witness appears to be quite knowledgeable in his profession as well as honest and since there is no expert evidence to the contrary, I am certainly not prepared to reject or set aside his expert opinion on this matter for, in the circumstances, I would be obliged to oppose my personal opinion to that of an expert testifying in the field of his expertise. I certainly possess no expertise in geology or in prospecting for minerals and, if I did possess any, it would be improper for me as a judge to oppose my scientific expertise to that of an expert witness called to give an opinion evidence in that field.

I also find as a fact that the recommendation made by phone by Rosenblat to the defendant would not have been made had he found, during his examination of the ground, any evidence to contradict or put in question his original tentative conclusions and I! find further that his ultimate decision to recommend that the lands be acquired by claiming them resulted from the said prospecting and subsequent searches at the Land Office which both revealed no negative evidence to contradict his original opinion gathered from the general geological data.

A final important consideration, however, is the fact that the defendant did not testify.

It is clear that a taxpayer claiming an exemption under the abovequoted subsection 83(3) must satisfy the Court that he in fact acquired the mining property as a result of the prospecting agreement. In paragraph 3(a), the words “acquired under the arrangement” mean “acquired as a result of or pursuant to the arrangement”.

The agreement itself is a very short one and reads as follows:

You have represented to us that you have examined geological information pertaining to mineral deposits in and near Hantz Co, Nova Scotia and that you feel it’s wise to prospect and explore this area.

We (Kadis and Litwin) authorize you to go to the Province of Nova Scotia to prospect and explore for mineral deposits in and near Hantz Co and after prospecting etc, we authorize you to stake not more than 75 claims which in your opinion are best suited geologically. We agree to pay you your costs plus $15.00 per claim upon your return and delivery of title documents,

It seems obvious that this contract specifically provides that the prospector has an absolute right to stake up to seventy-five claims which he, in his own opinion, deems best suited geologically and that upon so doing the defendant will pay him $15 per claim plus his expenses. Yet, on the evidence before me, it is obvious that the prospector did not exercise this right but, after having completed his work, he phoned his clients in Toronto to recommend the purchase of the claims to them and that, at that time, he received instructions to purchase the mining properties in question.

One is left to wonder, therefore, why before buying he decided to obtain specific verbal authorization to purchase. He did not give any reason why he did this, nor did he state whether he would have purchased the properties notwithstanding instructions. to the contrary from the defendant. The question arises therefore whether the actual purchase was made as a result of the agreement, of some ancillary understanding; or of an unrelated decision of the defendant, arrived at on entirely unacceptable grounds. Even if the contract had provided that the defendant had the right to reject any recommendation. of the prospector, the fact remains that it is one thing to say that the prospector recommended the property and quite another thing to say that the grubstaker acted as a result of that recommendation.

The Court must not be left to speculate whether the defendant might not have been motivated by other completely different factors and whether he might not have acquired the properties in any event, even if the prospector’s recommendation had not been as favourable, or whether he might not have acted in fact as a result of the original opinion given by the prospector before the agreement was executed and the prospecting carried out..

In all cases such as this, the Court must be concerned with the bona fides of the agreement from the taxpayer’s standpoint as well as with the action taken under the contract itself by the prospector. The agreement existed and the prospector acted under it to some extent, but no explanation was offered by the prospector as to why the terms of the contract were not followed. The defendant’s decision to accept or not the recommendation apparently did not depend on any of the provisions of the contract but on his own business judgment and we have no evidence whatsoever as to what motivated this judgment. Nobody can really supply an answer to this part of the case except the taxpayer himself and no explanation was offered as to why he did not testify. As a result of the above and in the light of the fact that the prospector reported to his clients that the prospecting revealed no positive evidence of mineralization. I find that the defendant has failed to satisfy the onus on him to establish that the interests in the mining properties were in fact “acquired under the arrangement under which he made the advance”.

Th amount of $19,467.82 less the expenses incurred in earning that income will be therefore considered as taxable. income for the taxation year 1966. The parties having agreed that the total expenses are $650, the appeal will be allowed with costs and the matter will be referred back for reassessment on that basis and the net amount of revenue from the mining claim, that is $18,817.82, will be taken into account in reassessing the defendant.

Judgment will issue accordingly.