Amar Investments Lid v. Minister of National Revenue, [1976] CTC 2012

A W Prociuk (orally: June 9, 1975):—At the commencement of the hearing of these appeals for the taxation years 1966 and 1968, the parties agreed that the appeals be consolidated.

The appellant appeals from the respondent’s reassessment of its income for the taxation year 1966 by notice dated November 12, 1970, wherein a sum of $107,625 was added io its income as gain on the sale of mining claims, and from the respondent’s reassessment of its income for the taxation year 1968 by notice dated January 20, 1971, wherein a sum of $27,500 was added to its income as gain on the sale of mining claims.

The appellant’s ground of appeal in both instances is that it is entitled to the benefit of the provisions of subsection 83(3) of the Income Tax Act, as it was then in force, and that it did not contravene the provisions of paragraph 83(4)(a) of the said Act. For convenience I shall quote the said sections, as they read at the relevant time.

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 io 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) or 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 shares of the corporation to the public, or . .

The parties agreed on a Statement of Facts, which I shall recite as they pertain to each year under appeal. Counsel for the respondent advised, and same was confirmed by counsel for the appellant, that the paragraphs which I shall cite from the amended Replies to the Notices of Appeal both dated February 20, 1973, in each taxation year under appeal constitute the agreed Statement of Facts. For the taxation year 1966, the agreed Statement of Facts reads as follows:

1. With respect to the Statement of Facts set out in the Notice of Appeal, he says:

(a) he admits paragraphs 1, 2 and 3.

(b) he does not admit paragraphs 4 and 5.

2. He does not admit any allegations contained in that portion of the Notice of Appeal entitled Reasons for Appeal.

3. By an agreement dated June 1st, 1965 between Frank Merryth and the Appellant, Frank Merryth agreed in consideration of 100,000 shares of Bonanza Explorations Ltd to stake certain claims for the Appellant in the Slocan Mining Division in the Province of British Columbia.

4. By an agreement dated June 16th, 1965, Frank Merryth agreed to acquire on behalf of the Appellant an option on eight claims being in the Nelson Slocan assessment district of British Columbia.

5. By an agreement dated August 13th, 1965, Frank Merryth acquired from John Frederick James Hayne and Sybil Rose Hayne an option to purchase eight mining claims in the Nelson Slocan Assessment District of British Columbia.

6. On behalf of the Appellant on July 23, 1965 Frank Merryth acquired four additional claims adjacent to the Hayne option claims.

7. By an agreement dated August 26th, 1965 the Appellant and Frank Merryth sold the option referred to in paragraph 5 and the four claims referred to in paragraph 6 to Bonanza Explorations Ltd (NPL) in consideration of 750,000 fully paid common shares, 100,000 of which were to be allotted to Merryth the remainder being allotted to the Appellant.

8. In December of 1965, the Appellant purchased for $10,000 the 100,000 shares allotted to Merryth.

9. Releases of Ecrow shares of Bonanza Explorations Ltd (NPL) were as follows:

December 9, 1965	100,000	to Merryth
December 9, 1965	25,000	to the Appellant
March 16, 1966	62,500	to the Appellant

10. In its 1966 taxation year the Appellant sold 87,500 shares of Bonanza Explorations Ltd (NPL) to Columbia Securities Ltd as follows:

January 31, 1966	28,985 @ $1.23	35,651.55
February 28, 1966	28,420 @ $1.23	34,956.60
March 31, 1966	30,095 @ $1.23	37,016.85
	87,500	$107,625.00

11. The 1966 fiscal year end of the Appellant was March 31, 1966.

12. James V San Severino is a director and president of the president of the Appellant, Columbia Securities Ltd and Bonanza Explorations Ltd (NPL).

13. That in a prospectUs dated December 1, 1965 of Bonanza Explorations Ltd (NPL) the Appellant was named as the promoter of Bonanza Explorations Lid (NPL).

14. That by an underwriting agreement dated November 15, 1965 Columbia Securities Ltd agreed to underwrite 100,000 shares of Bonanza Explorations Ltd (NPL) at a price of $0.35 a share.

15. That by an underwriting agreement dated the 1st day of December, 1965 Columbia Securities Ltd agreed to purchase 100,000 shares of Bonanza Explorations Ltd (NPL) at a price of $0.95 a share together with an agreement to purchase a further 100,000 more shares at $0.95 a share within 60 days.

16. That by an underwriting agreement dated the 1st day of December, 1965 Columbia Securities Ltd agreed to purchase 100,000 shares of Bonanza Explorations Ltd (NPL) at $0.95 a share together with an agreement to purchase a further 100,000 shares at $0.95 within 60 days or when the market price was $1.67 whichever was to be sooner.

17. That by a further agreement dated January 25, 1966 the time period for the purchase of the additional 100,000 shares mentioned in the preceding paragraph be extended to April 3, 1966.

18. That during 1965 and 1966 with particular reference to December of 1965, January, February and March of 1966, Columbia Securities Ltd was itself and through intermediaries selling shares of Bonanza Explorations Ltd

(NPL) to the public.

For the taxation year 1968, the following paragraphs set out the facts agreed upon in respect of that year:

1. With respect to that portion of the Notice of Appeal entitled Statement of Facts, the Minister of National Revenue says:

(a) he admits paragraphs 1, 2 and 3;

(b) he does not admit paragraphs 4 and 5.

2. He does not admit any allegations set forth in that portion of the Notice of Appeal entitled Reasons for Appeal.

3. By an agreement dated February 17th, 1967, between Edward A Little and the Appellant, Edward A Little agreed in consideration of $25.00 per day to stake certain mining claims in the Kamloops Mining District of British Columbia.

4. On March 2nd, 1967, Edward A Little as agent for the Appellant recorded 30 “Molly” mining claims in the name of the Appellant.

5. On March 2nd, 1967, the Appellant sold all its Interest in the 30 “Molly” claims to Lucky Strike Mines Ltd (NPL) for 750,000 escrow shares of Lucky Strike Mines Ltd (NPL).

6. Upon the release from escrow the Appellant sold 50,000 shares of Cosmic Lode Mines Ltd (NPL), the new name of Lucky Strike Mines Ltd (NPL), to Columbia Securities Ltd at $0.55 a share realizing a net gain of $27,500.

7. James V San Severino was the President of both Columbia Securities Ltd, Cosmic Lode Mines Ltd and the Appellant.

8. In a Prospectus dated May 12, 1967, the Appellant is named as the promoter of Cosmic Lode Mines Ltd (NPL).

9. By an underwriting agreement dated March 8, 1967, Columbia Securities Ltd agreed to purchase 250,000 shares of Lucky Strike Mines Ltd (NPL) at $0.10 per share.

10. By an underwriting agreement dated May 12, 1967, Columbia Securities Lid agreed to purchase 200,000 shares of Cosmic Lode Mines Ltd (NPL) at $0.30 a share.

11. That during 1967 with particular reference to March, Apri land May of that year, Columbia Securities was itself and through intermediaries selling shares of Cosmic Lode Mines Ltd (NPL) to the public.

12. That following the underwriting agreement of May 12, 1967 the Appellant received the release of the 50,000 escrow shares referred to in paragraph 6.

In so far as paragraph 3 of the 1968 statement is concerned I was requested by counsel to check the evidence as to whether or not Edward A Little did any bona fide prospecting, or whether he merely went out to stake certain claims on behalf of his employer, James V San Severino, president and controlling shareholder of both the appellant and Columbia Securities Lid. Little’s testimony, coupled with a short description of his employment, as set out in the prospectus of Cosmic-Lode Mines Ltd filed as Exhibit R-5, leads me to the conclusion that Little could hardly be called a prospector as that term is ordinarily recognized. I am satisfied that he went to an area well-known to his employer, went through the motions of a prospector and staked a number of claims, of which he recorded 30 in the name of the appellant, covering an area of some 1,600 acres in the course of three days. (See Exhibit A-7.)

Accordingly, I entertain some grave doubts as to whether the appellant comes within the provisions of subsection 83(3) of the Act in this instance.

In the case of the witness Merryth, I have no difficulty, on the basis of his qualifications and his oral testimony, in concluding that he prospected for minerals and, as a result, staked the four claims shown in Exhibit A-4 which he and the appellant sold to Bonanza Explorations Ltd. The appellant acquired 12 claims in all, as recited in the agreed Statement of Facts referred to earlier. Therefore, assuming for the moment that the appellant is not excluded by virtue of paragraph 83(4)(a), it would appear that the 1966 appeal could only succeed in part, that is, in respect of that portion of the gain applicable to the four claims mentioned in Exhibit A-4.

In both years under appeal, the name of James V San Severino figured prominently as the principal actor in each company referred to in the agreed Statement of Facts.

The respondent, in each year under appeal, assessed the appellant on the basis of certain assumptions, which I shall quote from each of the amended Replies to the Notices of Appeal. In the case of the taxation year 1968, in paragraph 13 it is stated:

13. In so re-assessing the Appellant the Minister assumed that:

(a) the Appellant acquired the mining claims in question on March 2, 1967, with the intention of turning them to account by means of resale as part of a business undertaking or a venture In the nature of trade;

(b) that the Appellant did not pursuant to an arrangement with a prospector or by itself advance money for or pay part or all of the expenses of prospecting or exploring for minerals or of developing the property upon which the 30 “Molly” claims were staked;

(c) the Appellant was at all times in 1967 the promoter of Cosmic Lode Mines Ltd (NPL).

(d) the Appellant sold the shares in question to Columbia Securities Ltd either during or after it participated in a campaign to sell them to the general public;

(e) the Appellant and its controlling shareholder James V San Severino were during the period in question in the business of acquiring mining claims selling those claims to a company for shares and then promoting that company by actively carrying on a campaign for the sale of the shares of that company to the public while at the same time selling the shares which it secured in exchange for the mining claims.

In the amended Reply to the Notice of Appeal for the taxation year 1966, paragraph 19 states as follows:

19. In so assessing the Appellant, the Respondent assumed that:

(a) the Appellant acquired the twelve claims in the Nelson Slocan Assessment District of British Columbia with the intention of turning them to profit by re-sale as part of a business undertaking or as a venture in the nature of trade;

(b) that the Appellant did not receive shares of Bonanza Explorations Ltd (NPL) in consideration for any property for which it had pursuant to an arrangement with a prospector paid all or a part of the expenses of prospecting or exploring for minerals or of developing a property for minerals;

(c) the Appellant did not pay all or part of the expenses pursuant to an arrangement with a prospector, or prospecting or exploring for minerals or developing the eight mining claims in the Nelson Slocan Assessment District of British Columbia;

(d) that the Appellant and itscontrolling shareholder James V San Severino were during the period in question in the business of acquiring mining claims, selling those claims to a company for shares and then promoting that company by actively carrying on a campaign for the sale of the shares of that company to the public while at the same time selling the shares which it secured in exchange for the mining claims.

Apart from the testimony of Neil Stewart, chartered accountant, who acted as the appellant’s accountant for the years from 1965 to 1969, and whose evidence about the actual operations of the appellant in the acquisition and disposition of mining claims was less than minimal, there is no other evidence to rebut or demolish the respondent’s assumptions. In fact, no other evidence was called by the appellant, particularly in regard to the application of paragraph 83(4)(a).

As in the case of Appleby v MNR, [1974] CTC 693; 74 DTC 6514, a corporation controlled by one man acquired mining claims which it later transferred to mining companies incorporated by the same man in return for shares in those companies. It is clear from the prospectuses filed as Exhibits R-3 and R-5 that the appellant herein held the majority of shares of the said mining companies and could control the election of directors of the said companies. The mining companies entered into an underwriting agreement with a brokerage company, Columbia Securities Ltd, also incorporated by the same man (J V San Severino), for the promotion and sale of all their shares. The appellant herein, that is, Amar Investments Ltd, is named in each case as the promoter of these mining companies. The appellant sold its shares at a time when the brokerage company, that is, Columbia Securities Ltd, was carrying on a campaign for the sale of these shares within the meaning of paragraph 83(4)(a).

As I have stated, I can find no evidence on behalf of the appellant in either of the taxation years under appeal that would permit me to conclude that the assumptions on which the Minister based his assessments have been demolished. In my opinion, the appellant in each year under appeal has failed to discharge the onus that the Income Tax Act places on it, and therefore the appeal in respect of each of the taxation years 1966 and 1968 is dismissed.

Appeal dismissed.