Geophysical Engineering Limited v. Minister of National Revenue, [1976] CTC 687, 76 DTC 6390

de Grandpre, J (concurred in by Laskin, CUC, Judson and Beetz, JJ):—Appellant, relying on the provisions of subsection 83(3) of the Income Tax Act, RSC 1952, c 148, as amended, has attacked the assessment for income tax purposes made by the Minister as to the taxation years ending March 31, 1963 and 1965. Its position briefly stated is that the profits on the sale of shares of the capital stock of Silverfields Mining Corporation Limited are not to be included in com- puting its income because the shares were acquired by its predecessor, Keevil Consultants Limited, under an arrangement falling clearly within the four corners of the section. Appellant was unsuccessful in turn before the Tax Appeal Board, the Trial Division of the Federal Court and the Federal Court of Appeal.

In this Court, appellant submitted two propositions:

(1) the prospecting which preceded the incorporation of Silverfields Mining Corporation Limited and the issue of the shares, the sale of which gave rise to the assessment, was done by one Frantz who was at all material times a person who was a prospector within the meaning of the Act because prospecting “on behalf of himself” or “on behalf of himself or others”;

(2) if Frantz was not such a prospector, he did his prospecting as an employee of the syndicate which eventually brought into being Silverfields Mining Corporation Limited.

My brother Spence, whose reasons I have had the advantage of reading, has come to the conclusion that the first submission cannot be entertained but that the second one is well-founded and that the appeal should therefore be allowed. Before reaching this conclusion, he has reviewed the facts and quoted the relevant portions of the statute, thus relieving me of the obligation of entering into any details. I will say immediately that I share his conclusion as to the first submission but that, with respect, I cannot agree that appellant should succeed in its second submission.

We are faced here with a pure question of fact which throughout has been decided against appellant. Thurlow, JA, speaking for the Court, after having concluded that Frantz was an employee rather than a contractor, continued ([1974] CTC 867 at 869):

Was he then at the material times an employee of the syndicate or, conversely, as the question is posed by subsection 83(3), was the syndicate at the material times his employer?

I think not. Keevil Mining Group Limited (hereafter KMG) was his regular employer throughout the period. That company paid him his salary. It charged Geophysical Engineering and Surveys Limited, and through it the syndicate, for the time Frantz spent on the project. The syndicate paid him nothing. The prospecting that was carried out was done because his employer, KMG, through Dr Keevil, had bidden him to do it. No witness testified that there had been any express agreement to transfer Frantz’s employment to the syndicate for the particular project and in my opinion the evidence does not warrant the implication of such an agreement.

Urie, JA, while agreeing with the reasons and conclusion of his brother Thurlow, added a few observations, the relevant one reading ([1974] CTC 867 at 871):

The findings of the learned trial judge, which are amply supported by the evidence and ought not to be disturbed by this Court, negate any possible conclusion that his employment was ever transferred to the syndicate by KMG, his regular employer. Evidence confirming that such a transfer occurred, if it did, could easily have been established by calling as a witness Dr Keevil Sr, the person from whom Mr Frantz normally took instructions during the course of his regular employment, but Dr Keevil did not testify.

I need not quote any authority for the proposition that this Court will not interfere to modify concurrent findings of fact unless we are satisfied that the decision of the learned trial judge was wrong and that there was no evidence on which he could have reached his conclusion. In the case at bar, appellant has failed to convince me that such is the situation. On the contrary, I am struck by the fact that the two principals to the alleged agreement whereby for a time the employment of Frantz was to be transferred from his regular employer KMG to the syndicate, one Keevil and one Kay, did not testify. It is true that the solicitor who was acting for both of them was heard and stated that he had brought to the attention of his clients the necessities of subsection 83(3), but the trial judge and the Court of Appeal were certainly entitled to find that this evidence was not strong enough to displace the basic relationship between regular employer and regular employee.

For these reasons, I would adopt in its entirety the judgment of the Court of Appeal. Accordingly, I would dismiss the appeal with costs.

Spence, J (dissenting):—This is an appeal from the judgment of the Federal Court of Appeal pronounced on November 29, 1974. By that judgment, the Federal Court of Appeal dismissed an appeal from the judgment of Walsh, J pronounced on July 27, 1973. Walsh, J had dismissed an appeal from the judgment of the Tax Appeal Board pronounced on October 16, 1970, by which judgment the said Tax Appeal Board had confirmed the assessment for income tax purposes made by the Minister as to the tax years ending March 31, 1963 and 1965.

The original appeal of assessment was made by Keevil Consultants Limited, the taxpayer. However, as of November 30, 1972, Keevil Consultants Limited, Geophysical Engineering and Surveys Limited and Pinnacle Surveys Limited amalgamated and continued as one corporation under the name of Geophysical Engineering Limited, the present appellant. On September 28, 1973 Walsh, J made an order adding Geophysical Engineering Limited as an appellant, amended his reasons for judgment accordingly, and directed that proceedings be carried on as if Geophysical Engineering Limited had been substituted for the previous appellant Keevil Consultants Limited.

The judgment in the Federal Court was reported in [1973] CTC 518, and the judgment of the Federal Court of Appeal was reported in [1974] CTC 867. Both judgments contained extensive references to the facts and, therefore, I need only make brief reference to those circumstances which I wish to emphasize.

The appeal concerns the problem of whether the taxpayer was entitled to a deduction under the provisions of subsection 83(3) of the Income Tax Act, RSC 1952, c 148, as amended by Statutes of Canada 1965, c 18, section 19. I quote subsection 83(3):

83. (3) An amount that would otherwise be included in computing the income for a taxation year of a person who has, either under an arrangement with the prospector made before the prospecting, exploration or development work or as employer of the prospector, 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, or, if the prospector was his employee, acquired by him through the employee’s efforts, 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.

lt is the contention of the appellant that one Joseph Conrad Frantz was a prospector within the definition of paragraph 83(1)(c) supra and that 10,000 free shares and 90,000 escrowed shares of the capital stock of Silverfields Mining Corporation Limited were acquired by the appellant’s predecessor Keevil Consultants Limited under an arrangement which the prospector made before the prospecting, exploration or development work or as an employer of the prospector and that, therefore, the income therefrom should not be computed in the income of the predecessor of the appellant, the said Keevil Consultants Limited, for the years 1963 and 1965. The profits on the sale of the said shares were taxed by the Minister as income and assessments made thereon in the amounts of $9,532.19 for the year ending March 31, 1963, and $105,138.46 for the year ending March 31, 1965.

Dr Norman Keevil, Sr was concerned with the direction of and owned either all or the substantial majority of the shares of a group of companies said to be some twenty in number, including Goldfields Mining Corporation Limited, Keevil Consultants Limited and Geophysical Engineering and Surveys Limited. For the purpose of acting as a general agent and operator of those various companies, he had caused to be incorporated another corporation known as Keevil Mining Group Limited. This corporation had only administrative employees as its tasks were largely of such character with the exception of two men, the said Joseph Conrad Frantz and another, Boyko, who were both engineers. Both Frantz and Boyko spent about 50% of their time in the field. As such, they were exposed to the possibility of injury in the carrying out of their duties while, of course, the administrative staff had no such peril. Therefore, the two companies, Keevil Mining Group Limited and Geophysical Engineering and Surveys Limited, made an arrangement whereby both men would also be shown as employees of the latter and that $5,000 per year would be paid to each of them by the said Geophysical Engineering and Surveys Limited. The latter then billed Keevil Mining Group Limited for the said $5,000 annual salary and also for the Workmen’s Compensation Board assessment which it paid on behalf of those two men and was reimbursed by Keevil Mining Group Limited. Therefore, in truth, Joseph Conrad Frantz was only an employee of Keevil Mining Group Limited. In addition, however, he was a duly elected director of Geophysical Engineering and Surveys Limited as the letters patent of that company require one of its directors to be a professional engineer, a requirement which was said to have been exacted so that the word “engineering” could be used in its corporate name.

Another group of companies was controlled by Joseph H Hirshhorn and associated with Mr Hirshhorn in the operation of those companies was Stephen Kay. The same firm of solicitors acted as solicitors for both groups of companies and in that firm Sir Michael Butler was the member actively engaged in the legal affairs of both groups of companies. He knew that Mr Hirshhorn was interested in silver properties in the Cobalt area of the Province of Ontario and he knew that Joseph Conrad Frantz had some interesting theories as to the possible existence of similar ore bodies on the east side of Lake Temiskaming in Fabre Township in the Province of Quebec. He therefore introduced Dr Keevil and Mr Kay, representing Hirshhorn interests. It was Sir Michael Butler’s opinion that the Hirshhorn group had capabilities in the area of public companies which the Keevil Mining Group did not possess and that, therefore, their association might be of some mutual benefit.

The Hirshhorn group already had an option on the Reinhardt claims in South Lorraine in the Cobalt area and it was desirable to find other claims. When Mr Kay and Dr Keevil expressed an interest in the investigation of Frantz’s theories as to possible mineralization in the Fabre Township area in Quebec, Sir Michael Butler was keenly aware of the provisions of section 83 of the Income Tax Act and was insistent, therefore, that an individual prospector be chosen with whom an arrangement could be made under the provisions of the said section. Joseph Conrad Frantz was a natural choice under such circumstances in view of his previous knowledge of the Cobalt area and his theory as to possible mineralization in the Fabre Township area. Therefore, the matter was discussed by Sir Michael Butler, Dr Keevil, Mr Kay and Joseph Conrad Frantz on several occasions in the latter part of August 1962, and it is the opinion of Butler and Frantz that an arrangement was arrived at, and to quote Butler:

A. As I recall, in my presence Mr Frantz was asked by Dr Keevil and Mr Kay to go up and put his theories to the test and see if he could acquire some claims for this group, so that there would be another property along with the Reinhardt property that would go into Silver Fields or such company as would be formed.

At or shortly after this time, Sir Michael Butler became concerned with the fact that as solicitor for both groups he was instrumental in having those groups enter into a very loose arrangement and there might have been a clash of interest thereafter which would certainly involve him and his firm in an almost untenable position. He therefore, on the instructions of Mr Kay and Dr Keevil, caused to be drafted a document entitled “Memorandum of Agreement” which was dated August 30, 1962. I quote that document in full:

MEMORANDUM OF AGREEMENT

Pursuant to discussions between us over the past two days, we, the undersigned, agree jointly to cause to be staked and recorded unpatented mining claims in Fabre Township, Quebec, covering an area of apparent mineralization therein on the shores of Lake Temiskaming as indicated by Mr J C Frantz, the scope of such staking to be designated by him.

It is further agreed that we shall own beneficially the properties so staked, and shall be responsible for the costs of the staking and recording of the same (and associated expenses) in the following proportions, namely:

Goldfields Mining Corporation Limited	— 3/7ths
Joseph H Hirshhorn	— 3/14ths
Mrs Stephen Kay	— 23/ 140ths
Keevil Consultants Limited	— 1/7th
Penelope Explorations Limited	— 1/40th
United Reef Petroleums Limited	— 1/40th

In the event that it may be decided to dispose of these properties in the future and any one or more of us may be unavailable to execute any agreements or documents of transfer in this respect, we each hereby severally appoint Goldfields Mining Corporation Limited trustee to hold the said properties on our respective parts and to dispose of the same as agent for us. in the proportions above set out, and we hereby each appoint Goldfields Mining Corporation Limited our respective attorney for these purposes, this Memorandum constituting its full and complete authority in this regard.

This Memorandum may be signed in a number of counterparts for convenience, in which case all of such counterparts shall form our complete agreement in this regard.

DATED this 30th day of August, 1962.

GOLDFIELDS MINING CORPORATION LIMITED

Per:

Vice-President

Joseph H Hirshhorn

Witness to the signature

of Joseph H Hirshhorn

Mrs Stephen Kay

*■ KEEVIL CONSULTANTS LIMITED

Per:

Witness to the signature

of Mrs Stephen Kay

President

PENELOPE EXPLORATIONS LIMITED

Per:

President

UNITED REEF PETROLEUMS LIMITED

it is to be noted that it purports to be an agreement between Goldfields Mining Corporation Limited, Joseph H Hirshhorn, Mrs Stephen Kay, Keevil Consultants Limited, Penelope Explorations Limited, and United Reef Petroleums Limited. Mrs Stephen Kay is the wife of Stephen Kay, and Sir Michael Butler agrees that she never instructed him personally but that her interest was represented by her husband throughout. Penelope Explorations Limited and United Reef Petroleums Limited were both Hirshhorn companies. It is to be noted further that the agreement does not refer to a contract between Joseph Conrad Frantz and the signatories thereof and Frantz was not a party. It is an agreement, in short, for the ownership of claims to be staked under the direction of Joseph Conrad Frantz between the various signatories, individual and corporate, and also an agreement that conveyances of those properties, if and when they were staked under Frantz’s direction, could be made by Goldfields Mining Corporation Limited as agent for and on behalf of the other signatories. The latter provision, Sir Michael Butler states, was included because it would have been difficult to obtain execution of the numerous documents which the conveying of such interests would entail and Goldfields Mining Corporation Limited being one of the Keevil group with offices very convenient to Sir Michael Butler, the conveyances could easily be accomplished by virtue of this provision.

Sir Michael Butler was emphatic in his evidence that this agreement was not and did not purport to be the arrangement referred to in section 83. It was not, in fact, an arrangement with Joseph Conrad Frantz at all. That latter arrangement was made verbally and is summarized in the above quotation from Sir Michael Butler’s evidence. Joseph Conrad Frantz acted on that arrangement. He had, in fact, commenced his course of action prior to August 30, 1962. He first studied the maps in the material in reference to the area and concluded that if his on-the-ground inspection justified such a course 29 claims in Fabre Township should be staked. Joseph Conrad Frantz had no mining licence from the Province of Quebec. Moreover, he was not skilled in the manual task of staking. He was a geological engineer. It was therefore more efficient that the actual work of staking be done by someone else. Again, it was natural to choose a Keevil company and Geophysical Engineering and Surveys Limited was that agent readily available. Therefore, on August 28, 1962, ie, two days before the execution of the aforerecited agreement, Frantz had informed the North Bay office of Geophysical Engineering and Surveys Limited that he would require certain claims to be staked, and notations in the records of that company indicate that it had notice of the task which was to be assigned to it on that date.

Frantz then proceeded with his in-the-field work and on September 1 and 2, 1962, he went to Fabre Township and went over the ground doing the ordinary work of a prospector. On September 3 he went with another Geophysical Engineering and Surveys Limited employee, Flanigan, over the Reinhardt claims, and on September 4 he returned to Toronto stopping en route at the Geophysical Engineering and Surveys Limited office in North Bay and giving detailed instructions as to the claims to be staked. These claims were staked by and in the names of various persons who held miners’ licences in Quebec and the claims were recorded in the proper office. Those claims were later transferred directly from the persons in whose names they had been recorded to Silver Fields Mining Corporation Limited, the purchaser thereof. That company, in consideration for the claims, issued 700,000 shares and those shares were divided in accordance with the percentages set out in the agreement which I have quoted, so that 10,000 free shares and 90,000 escrowed shares were issued to Keevil Consultants Limited. It is the profit upon the sale of those shares with which this appeal is concerned.

Frantz had been accustomed, on other occasions, to utilizing the services of Geophysical Engineering and Surveys Limited in his work both for Keevil Mining Group Limited and the other Keevil companies. Whenever he did so, he caused to be set up in the records and accounts of Geophysical Engineering and Surveys Limited an account in the name of Keevil Mining Group Limited or whichever Keevil company for which he was performing the particular service. On this occasion, Frantz particularly instructed the Geophysical Engineering and Surveys Limited to set up an account in his own name and the account was set up in the name of Joseph Conrad Frantz. The various charges and disbursements made by Geophysical Engineering and Surveys Limited in connection with the staking were entered in that account and, in addition, a variety of other items, all of some considerable importance in determining this appeal.

Keevil Mining Group Limited paid Frantz’s salary at the ordinary rate but then charged that payment to Geophysical Engineering and Surveys Limited and such charge was entered in the said account in the name of Joseph Conrad Frantz. Also, Joseph Conrad Frantz’s actual expenses for such matters as travel, hotel accommodation, etc were similarly entered. The total of that account was $1,118.29. When Geophysical Engineering and Surveys Limited were ready to bill Joseph Conrad Frantz for this amount, he instructed that company to bill the various persons and companies who, under the provisions of the agreement which I have quoted, were to own an allocate part of the properties staked with an allocate share of that account. It was the ordinary course of Geophysical Engineering and Surveys Limited to charge the usual staking fee of $50 per claim. In this case, Geophysical Engineering and Surveys Limited chose to fix the total fee at $40 per claim and divided the sum of $1,160 between the various parties to the agreement. Although Mr David Brown, who was the secretary or secretary-treasurer of all the Keevil companies, had no exact memory of why this reduced fee should be charged, it was his conjecture that it was for the reason that Dr A R Clarke, the president of Geophysical Engineering and Surveys Limited, believing that it was Joseph C Frantz’s personal venture, determined to give Frantz a discount. I find this significantly indicating that Geophysical Engineering and Surveys Limited had nothing whatsoever to do with the venture or had no interest therein and were simply carrying out staking services upon the instructions of Mr Frantz. Keevil Consultants Limited paid the allocate share of that $1,160 charge.

Keevil Mining Group Limited were billed for nothing and paid nothing. Keevil Mining Group Limited received no part of the 700,000 shares issued by Silverfields in payment for the claims.

It must be remembered, as I have pointed out, that Joseph Conrad Frantz was a full-time employee of Keevil Mining Group Limited, although listed as an employee of Geophysical Engineering and Surveys Limited for the two purposes I have already outlined, ie, the use of his name as an engineer in the directorate and the covering of him for workmen’s compensation purposes. Geophysical Engineering and Surveys Limited made no payment toward the disbursements and received no shares of Silverfields Mining Corporation.

At the hearing of the appeal before Walsh, J in the Federal Court, three persons only gave evidence for the present appellant and no one gave evidence on behalf of the Minister. Those three persons were Sir Michael Butler, whose evidence I have used throughout these reasons, David S Brown, the man in charge of accounting for the Keevil companies, and Joseph Conrad Frantz, the geological engineer. In his reasons for judgment, Walsh, J said:

. . in fact, it was common ground during the argument in the present case that the three witnesses who testified had all been exceptionally frank and honest in their testimony, but, nevertheless, the evidence could be. so polished and the emphasis changed that conceivably a different conclusion might be reached.

The latter comment had reference to a decision as to the same transaction made by the Chief Justice of the Federal Court.

Counsel for the Minister, Walsh, J noted, had conceded in argument that Mr Frantz was doing prospecting work but, despite the clear acceptance of the evidence of the only witnesses who testified, came to the conclusion that Frantz was and remained in the employ of the Keevil Mining Group Limited, and the fact that the appellant (then Keevil Consultants Limited) was one of a group of companies associated with Keevil Mining Group Limited and for whom Keevil Mining Group Limited rendered accounting and other services did not make Frantz an employee of Keevil Consultants Limited. Walsh, J therefore dismissed the appeal. That dismissal was affirmed by the Federal Court of Appeal, Thurlow, J, as he then was, and Urie, J rendering concurring reasons.

It was, of course, the unanimous opinion of all the judges below that Frantz was not, within the words of section 83, an individual who prospects or explores for minerals or develops a property for minerals on behalf of himself. With that decision I am in total agreement. Joseph Conrad Frantz had no personal interest whatever in the claims or in the profit which resulted from the sale of the shares paid for those claims. He received, throughout, his ordinary salary at the ordinary rate. It is true that in the evidence there were rather inexact and undetailed references to the hope or expected reward or bonus which, at Dr Keevil’s sole discretion, had been paid to Frantz on other occasions and which he might receive in reference to the transaction presently under consideration but no reliance whatsoever could be placed on such vague theorizing.

Both courts below, however, held that Frantz was and continued to be a full-time employee of the Keevil Mining Group. It is perfectly true that Frantz received his salary at the same rate from the same payer, Keevil Mining Group Limited, but the part of that salary applicable to the time which Frantz spent on the venture in reference to those 29 claims in Fabre Township was charged back by Keevil Mining Group Limited to the account in the name of Joseph Conrad Frantz in the books of Geophysical Engineering and Surveys Limited and made up part of the $1,189.29, the total of that account.

lt is true that there was no formal assignment or transfer of Frantz’s services from Keevil Mining Group Limited to the syndicate whose names are set out in the agreement which I have quoted, but no such formal assignment is necessary and what determines the matter is the intention of the parties: Mersey Docks and Harbour Board v Coggins, [1946] 2 All ER 345 at 349 and 354. The controlling mind in all of the Keevil Mining Group of companies was Keevil himself and it was the unanimous testimony of the only three witnesses who gave evidence that Dr Keevil had ordered Frantz to carry out this work for the syndicate. Sir Michael Butler made it abundantly plain to Dr Keevil that whoever was to do the prospecting had to be an individual prospector and not a company. Therefore, Dr Keevil would have had it plainly in his mind that Frantz, when carrying out the duties which Dr Keevil directed him to carry out, must have been acting as such individual person and not an employee of Keevil Mining Group Limited. It was, of course, necessary that Frantz himself assent to this transfer of his services and certainly there can be no doubt from Frantz’s evidence that he did so. Moreover, I can find no indication otherwise from the documentation and, in fact, every indication that this was the intention of all persons. I regard the circumstance that Frantz caused to be set up in the books of Geophysical Engineering and Surveys Limited an account in his own name and not in the name of Keevil Mining Group Limited as most indicative of this position. I regard Frantz’s direction to Geophysical Engineering and Surveys Limited to bill that account out to the members of the syndicate again as indicative of Frantz’s assent to the transfer of his services and the payment of the account in allocate shares by the various members of the syndicate as again indicative that all parties had agreed that Frantz would be the prospector prospecting on behalf of the syndicate and not on behalf of either Keevil Mining Group Limited or Geophysical Engineering and Surveys Limited.

It is true that the parties to the agreement of August 30, 1962, having determined that Frantz should carry out the prospecting on their behalf, entered into an agreement in writing to allocate the shares of both cost and ownership between members of the syndicate but failed to create any writing whatsoever outlining Frantz’s part. I am of the opinion that that failure is not fatal to the claim of the appellant.

Subsection 83(3) speaks of “an arrangement with the prospector made before the prospecting, exploration or development work or as employer of the prospector . . .”. I see no requirement from those words that there be an agreement in writing and, in fact, practical experience would have told the legislator that very few of such arrangements are in writing or even carried out with any degree of formality. The necessity for writing in the present case arose in the mind of the solicitor, Butler, not in reference to what may well be termed a “grubstaking” of Frantz but as to the division of the costs and the profits between two different and independent groups of investors. The word “arrangement” was considered by the Judicial Committee in Newton v Commissioner of Taxation of the Commonwealth of Australia, [1958] 2 All ER 759. There, the Judicial Committee was concerned with the words appearing in the Commonwealth Income Tax and Social Services Contribution Assessment Act, 1936-51, Division 7, section 260(c):

Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly . . .

Lord Denning, in giving the judgment of the Committee, said at page 763:

Their Lordships are of opinion that the word “arrangement is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons—a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial pian, but also ail the transactions by which it is carried into effect—all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else.

So, in the present case, the word “arrangement” in subsection 83(3) of the Income Tax Act, in my view, covers the plan of operation worked out between the syndicate and Frantz whereby Dr Keevil consented in Frantz leaving the performance of his duties as servant of the Keevil Mining Group Limited and assuming specific duties for the syndicate and Frantz assented to this transfer accepting his regular salary as compensation for the performance of such duties.

I am therefore of the opinion that the appeal should be allowed with costs in this Court and in the courts below, and that it should be declared that the appellant is entitled to a deduction of the amounts aforesaid in its 1963 and 1965 assessments for income tax purposes.