David T Winchell v. Minister of National Revenue, [1974] CTC 177, 74 DTC 6152

Urie, J:—The appellant appeals to this Court from a decision of the Tax Appeal Board dated August 27, 1970, wherein it was held that the respondent properly included in the appellant’s taxable income for the year 1965 the sum of $85,250 derived by the appellant from the sale of three separate groups of mining claims to three different purchasers in that year. The appellant takes the position that the amounts received by him from the sales were not taxable by virtue of subsection 83(3) of the Income Tax Act as it read in 1965, being the consideration for an interest in a mining property acquired for the appellant by a prospector pursuant to an arrangement whereby the appellant advanced money to or paid the expenses of the prospector for the purpose of prospecting or exploring for minerals and thereby being exempt income within the meaning of paragraph 139(1)(o) of the said Act.

Counsel agreed that the case essentially is one to be determined on its own facts. While those facts are relatively simple, a rather full review of the evidence is necessary to adjudicate properly the issue.

The appellant described himself, in evidence, as a mining executive who, in 1965 and now, conducted his business from the City of Toronto. In the late summer of 1965 a firm of mining engineers and consultants, A C A Howe & Associates Limited (hereinafter called the “Howe Company”), also of Toronto and which had been known to the appellant since 1958, was handling a drilling programme for him on a mining property in New Brunswick owned by one of the companies which he controlled. One J E Tilsley, a geologist employed by the Howe Company, was apparently in charge of this operation. The appellant called Mr Tilsley by telephone and advised him that he had acquired or was about to acquire control of a company which owned a tract of mining claims in Nova Scotia and requested him to go to Halifax to examine the records of the vendor company and to report to him on the geological prospects of the properties owned by it. The appellant testified that he also asked him to do a general investigation of the geological possibilities of the surrounding area with a view to acquiring additional claims if they were worth while. He further stated that he retained Mr Tilsley for such purposes in his personal capacity, rather than as an employee of the Howe Company because he was dissatisfied with the firm of geologists which he had working for him in Nova Scotia and Mr Tilsley had been recommended to him by the president of the Howe Company, Mr A C A Howe, as a knowledgeable geologist on the Maritimes area. Furthermore, he was aware from prior experience that in order to take advantage of subsection 83(3) of the Income Tax Act the prospector with whom the arrangement contemplated by that section was made had to be an individual rather than a corporation and since he wished property to be explored for minerals he knew that he would have to employ Mr Tilsley in his personal capacity and not as an employee of the Howe Company.

As I recall it, no evidence was given as to whether or not any financial arrangement was alleged to have been made when the instructions were given by Mr Winchell although Mr Tilsley stated that he felt that the responsibility for the work was divided and assumed that the costs would be billed in some fashion as Mr Winchell and Mr Howe decided.

In accordance with his instructions Mr Tilsley proceeded to Halifax where he reviewed the records of the area as provided by officials of the vendor company and subsequently visited the property in Cape Breton for the purpose of resampling the disclosures. In addition he looked at the surrounding country, apparently in a somewhat cursory fashion, to see the extent of mineral occurrences and to cross-check the geophysical material which had been provided to him. When he returned to Toronto a few days later he first reviewed his findings with Mr Howe and subsequently by telephone with Mr Winchell.

In or about the late afternoon of August 31, 1965 Mr Winchell and Mr Howe met at Mr Winchell’s office to discuss acquisition of the claims following which both testified that they had telephone talks with Mr Tilsley concerning the claims to be acquired. Mr Winchell gave to Mr Howe $750 cash at that time to be given to Mr Tilsley for his expenses and, in particular, for the purpose of telegraphing the Ministry of Mines in Nova Scotia sufficient funds for the issuance of prospecting licences to Mr Tilsley covering 11 tracts of land at a fee of $10 per tract. Colloquially this is described as claim staking. Such licences gave to the holder the right to prospect for minerals on each tract, each of which is comprised of the 16 claims mentioned therein. The money apparently was received the following day by the Ministry in Halifax and on September 16 1965 five licences were issued to Mr Tilsley covering tracts 78, 90, 91, 102 and 103 as shown on Reference Map 11K10B in the County of Inverness. Subsequently, on November 24, 1965, a licence was issued to Mr Tilsley covering a further 16 claims described as tract number 12 on the same map. All six tracts were sold by Mr Winchell in December 1965. Tract 103 was sold on December 7 to Bunker Hill Extension Mines Limited for $16,000. Tracts 78, 90, 91 and 102 were sold on December 9, 1965 to North Pacific Mines Limited (NPL) for $64,000. Tract 12 was sold on December 21, 1965 to Consolidated Bellekeno Mines Limited for $6,000. The respondent added to the appellant’s 1965 taxable income the sum of $85,250 being the total of the three sale prices less the $750 paid to Mr Howe by the appellant, by notice of reassessment dated November 6,1968, from which the appellant now appeals.

Mr Tilsley testified that he received no money until $200-$300 cash was handed to him by Mr Howe on or about August 31, 1965 for the purpose of recording the claims and this was more than required for that purpose because “we assumed we would be staking additional claims” and as well, was for other minor expenses incurred in relation to obtaining the licences. The licences were issued in his name because he, too, was familiar with the requirements of section 83, having been given detailed instructions in this regard by Mr Winchell’s lawyer at some time during the dealings with the tracts in question although he knew of them before receiving such instructions.

Mr Tilsley testified that when he was doing the work in accordance with the appellant’s instructions he was at all material times on the Howe Company payroll; received most of his instructions from the president, Mr Howe; received reimbursement for travel and other expenses from the Howe Company; did not bill the appellant in his capacity as a geologist or prospector for services rendered and disbursements made in connection with the work; knew nothing of the payment of $750 to Mr Howe by the appellant until well after it had been made and received no funds other than the money involved in obtaining the prospector’s licences from Mr Howe or the appellant. A helicopter was used to fly over the tracts for which licences had already been obtained, the cost of which was billed through and by the Howe Company. He sent the telegrams to Halifax to the Ministry before Mr Howe returned to the office so that by the time he received the $200-$300 from him the necessary work had been done. A letter dated December 11, 1965 to the appellant on his own letterhead, as distinct from that of the Howe Company, apparently written from Nova Scotia, transferred to Mr Winchell all of the licences hereinbefore referred to, except for tract 12. It is perhaps of some significance that this letter is dated after the dates of the agreements for sale of all tracts, except tract 12. Subsequently formal transfers for all tracts were executed by Mr Tilsley. By letter dated December 28, 1965 addressed to Mr Tilsley the appellant, in effect, confirmed his arrangement with him. This, of course, postdates all three agreements of sale.

Mr Howe testified that he had been associated with Mr Winchell in various capacities for a number of years and still is, and that Mr Tilsley had first been employed in a senior capacity by his firm, on a profit sharing basis, in about 1964. Part of the conditions of his employment was that he could prospect on his own account and for other individuals and that he had done so on several occasions. The arrangement with the appellant was one such occasion, was entered into with his approval and the $750 he received from Mr Winchell on August 31 was to be for Mr Tilsley. He stated that he reimbursed Mr Tilsley for his out-of-pocket expenses in acquiring the prospecting licences and later gave him about $200 for his time after clearing it with Mr Winchell. He knew that Mr Tilsley did not bill Mr Winchell for his services or have any fee structure for such services. He was unable to say why the whole $750 was not given to Mr Tilsley either on August 31, 1965 or at a later date despite the fact that it was to have been given to him to cover his expenses in accordance with the purported arrangement with Mr Winchell. He admitted that other moneys were received by his firm for other stakings in the area including some undetermined amount in relation to tract 12.

The respondent took the position that Mr Tilsley was at all material times an employee of the Howe Company and was not acting either as an employee or as an independent prospector for the appellant in the manner contemplated by section 83 and relied heavily in this contention on the following letter dated September 1, 1965, from the Howe Company to the appellant, which the appellant did not recall receiving:

September 1, 1965.

Mr D T Winchell,

1309-7 King Street East,

Toronto, Ontario.

Dear Mr Winchell:

We hereby acknowledge receipt from you of $750.00 cash towards the costs to be incurred on your behalf in locating areas for filing on claims In the Cape Breton area of Nova Scotia by our Mr J E Tilsley who will assign to you, or as you direct, such claims as are covered by licences Issued by the Department of Mines of Nova Scotia in his name for your benefit.

Yours sincerely,

A C A HOWE & ASSOCIATES LTD

(sgd) A C A Howe

A CA A Howe, P Eng.

A form of receipt, on plain paper, for the $750, dated the same day, produced from the records of the Howe Company was also tendered in evidence.

Both Mr Howe and Mr Winchell denied that the letter indicated the true nature of the arrangement with Mr Tilsley. Mr Howe in his examination in chief indicated that he had dictated the letter to his secretary who had typed it on his firm letter head in error since it should have been on his personal letterhead. This hardly seems consistent with the fact that the first person plural is used twice in the letter and the signature, acknowledged to be his by Mr Howe, is under the firm name. In cross-examination he stated that it was unlikely that he dictated the letter since it was a routine acknowledgement of the receipt of money, a detail which normally would be handled by his secretary without reference to him and the letter while signed by him, was probably among a lot of routine correspondence which he would sign without reading. This of course, does not explain why, if the $750 was for Mr Tilsley, it was necessary for Mr Howe’s secretary even to have knowledge of it, either as a routine or special matter and why it was necessary for him to acknowledge it on Mr Tilsley’s behalf and without his knowledge rather than letting him perform that task himself.

This explanation is further clouded by the fact that copies of numerous entries from various of the Howe Company’s accounts, including expense accounts for Mr Tilsley, were introduced in evidence by the respondent as well as a copy of a receipt dated September 1, 1965, indicating that the $750 was taken into account and disbursed at least in part by the company. Mr Howe was unable to give any satisfactory explanation for any of these and no bookkeepers or accountants from his firm were called to clarify the matters.

There is no doubt in my mind that on the evidence adduced before me that all of the participants in the so-called staking operation were well aware that, if the appellant hoped to gain the advantage conferred by subsection 83(3) of the Income Tax Act, Mr Tilsley would have to be found to be a prospector as defined in paragraph 83(1)(c). On the evidence, I find that Mr Tilsley was, at all material times, ‘‘an individual who prospects or explores for minerals” within the meaning of that subsection as it has been interpreted by Jackett, P, as he then was, in Foster v MNR, [1971] CTC 335; 71 DTC 5207. The sole issue, then, requiring adjudication is whether the appellant falls within subsection

(3) of section 83:

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.

It appears clear from a careful reading of section 83 as a whole that its purpose is to encourage development of mineral resources by, inter alia, prospectors, or persons who have financed prospectors, by ensuring they are not taxed upon amounts received in consideration for mining properties which they have prospected, explored or developed. It is also clear that any arrangement made with the prospector under subsection (3) must be made before the prospecting, exploration or development work is commenced. Bearing in mind, therefore, that the section creates a special situation exempting those persons personally engaged in, or financing the development of, mineral resources from tax on moneys received from the sale of mining properties so acquired, the section must be strictly construed. It is trite law, of course, that it is quite proper for the taxpayer to so arrange his affairs to take advantage of tax provisions eliminating or minimizing his tax liability. However, in order to do so, he must bring himself squarely within the exemptions provided in given situations if he is to avail himself of such advantages and, in my view, the evidence discloses in several ways that the appellant herein did not do so.

Firstly, counsel for the appellant conceded that Mr Tilsley had not been an employee of the appellant but even if counsel had not done so it is clear that the nature of their relationship was not that of master and servant. In Market Investigations Limited v Minister of Social Security, [1969] 2 QB 173 at 184:

In earlier cases a single test, such as the presence or absence of control, was often relied on to determine whether the case was one of master and servant, mostly in order to decide issues of tortious liability on the part of the master or superior. In the more complex conditions of modern industry, more complicated tests have to be applied. It has been suggested that a fourfold test would in some cases be more appropriate, a complex involving (1) control, (2) ownership of the tools; (3) chance of profit; (4) risk of loss. Control In itself is not always conclusive. . . .

The observations of Lord Wright of Denning LJ and of the judges of the Supreme Court suggest that the fundamental test to be applied is this: “Is the person who has engaged himself to perform these services performing them as a person in business on his own account?”. If the answer to that question is “yes”, then the contract is a contract for services. If the answer is “no”, then the contract is a contract of service. No exhaustive list has been compiled and perhaps no exhaustive list can be compiled of the considerations which are relevant in determining that question, nor can strict rules be laid down as to the relative weight which the various considerations should carry in particular cases. The most that can be said Is that control will no doubt always have to be considered, although it can no longer be regarded as the sole determining factor; and that factors which may be of Importance are such matters as whether the man performing the services provides his own equipment, whether he hires his own helpers, what degree of financial risk he takes, what degree of responsibility for Investment and management he has, and whether and how far he has an opportunity of profiting from sound management in the performance of his task.

On the basis of Cook, J’s test, it is clear that in the circumstances herein recited there was no contract of service and, therefore, Mr Tilsley was not an employee within the meaning of subsection 83(3). I so find since I accept his evidence and that of Mr Howe that at all material times he was under the direct control of Mr Howe, was on the payroll of the Howe Company and no portion of his salary was billed to the appellant.

Secondly, in my view, neither was he an independent contractor involved in a contract for services. I accept his evidence and find as a fact that he neither billed the appellant for services rendered in his capacity as a prospector nor received anything from the appellant for the services he performed in relation to the claims in question or from their sale and that all his expenses, other than staking expenses, were paid by the Howe Company. I also accept his evidence and find as a fact that he received most of his instructions from the company president, Mr Howe, although he did speak with the appellant on occasion and knew in a general way that the appellant was the person making the decisions. It is thus clear that Mr Tilsley was in all respects a full-time employee of the Howe Company and the arrangement which was made between Mr Howe and the appellant was to use Mr Tilsley as the instrument whereby the desired result of qualifying for the exemption provided for by section 83 could be achieved.

Cogent evidence that this was so is furnished by the letter of September 1, 1965 and the Howe Company receipt for the $750 paid by Mr Winchell to Mr Howe dated the same day. It is of real significance, in my view, that these were both dated on the day following the one in which the appellant, together with Mr Howe, instructed Mr Tilsley to proceed with obtaining the prospector’s licences and the payment of the sum of $750 purportedly made for the use of Mr Tilsley but not all of which was ever received by him. Written as they were almost immediately after the event, they appear to indicate the true nature of the transaction as it was understood, at least by Mr Howe, at that time. This conclusion is, of course, reinforced by the extracts from the accounting records of the Howe Company entered in evidence which, while quite confusing, indicated that the moneys had been accounted for at some time by the company and, further, because in the various expense accounts which were received in evidence Mr Tilsley charged at least some of his expenses in connection with the Cape Breton claims through the Howe Company for the account of the appellant. On the basis then of this evidence I find as a fact that any arrangement made by the appellant was with Mr Howe in his capacity as an officer of the Howe Company and that the only arrangement the appellant made with Mr Tilsley in his telephone conversation with him in New Brunswick in August 1965 was to instruct him to examine the records relating to the properties owned by the company which the appellant was purchasing in Nova Scotia and to do, as he said, a general investigation of the geological possibilities of the surrounding areas. The latter arrangement was not, in my opinion, of the type contemplated by subsection 83(3) since the arrangement required by that subsection is the complete arrangement between the parties and there is no evidence before me indicating that any offer was made to Mr Tilsley and accepted by him prior to his first trip to Halifax to examine the vendor company’s records, to pay his expenses or to advance money for the prospecting, other than in the normal course of his duties as an employee of the Howe Company. In fact, he testified that he assumed his expenses would be billed in some fashion as Messrs Winchell and Howe decided.

Thirdly, if I am wrong in having found that the evidence leads inevitably to the conclusion that the arrangement made was between Messrs Winchell and Howe in Mr Winchell’s office in the late afternoon of August 31, 1965 and even if it was made by Mr Howe on behalf of Mr Tilsley, it was made after the initial prospecting of the area had been completed by Mr Tilsley and thus subsection (3) of section 83 is not applicable. In reaching this conclusion I have assumed that the investigation of the geological records in Halifax and the cursory inspection of the properties on foot and in a car a few days after those investigations was prospecting within the meaning of the Act. However, if I am wrong in this respect and this was not prospecting, then the only prospecting which was involved was that which was done by helicopter after the claims were acquired. In MNR v Karfilis, [1967] 1 Ex CR 129; [1966] CTC 498; 66 DTC 5327, Kearney, J held at page 154 [524, 5340] that the prospector did not establish to his satisfaction as he was required to do, that ‘‘he had expended efforts as a prospector in relation to the mining properties in question before he acquired them;

(b) he acquired such properties ‘as a result of’ any such efforts”. Certainly Mr Tilsley’s evidence indicates that the helicopter investigation was done after he had obtained the licences for the tracts in question and, incidentally, payment for the helicopter services was apparently made by the Howe Company. Moreover, as Kearney, J stated in MNR v Wheeler, [1967] 1 Ex CR 157 at 178; [1966] CTC 526 at 548; 66 DTC 5341 at 5353, staking, which is accomplished in Nova Scotia by taking out the prospector’s licences, is insufficient to constitute prospecting to entitle the appellant to obtain all of the exemption claimed under subsection 83(3). Therefore, the acquisition of the prospecting licences did not qualify the appellant herein for the exemption claimed.

Fourthly, while perhaps it was not essential, it is of some interest to note that there was no grubstaking agreement entered into between Mr Tilsley and the appellant whereby Mr Tilsley’s interest in the mining claims would have been disclosed. He was never entitled to participate in any profits derived from the sale of the mining properties in question nor, if I am to believe his evidence, which I do, did he receive anything for the services he performed for Mr Winchell other than in his capacity as an employee of the Howe Company. The correspondence between Mr Tilsley and the appellant in December 1965 was ex post facto of two of the sales in the case of Mr Tilsley’s letter and after all three sales in the case of the appellant’s letter. The clear implication I derive from all of this evidence is that the only reason that the prospectors’ licences were taken out in his name was with a view to enabling Mr Winchell to take advantage of subsection 83(3). As a matter of fact, Mr Tilsley so admitted in evidence. Registration in that way was not done to encourage a prospector or the “grubstake” for a prospector to explore for mining properties, which is the obvious purpose of the section, but here was resorted to solely in an attempt to obtain the exemption provided in a proper case by the section.

For all of the above reasons the appellant has failed to discharge the onus on him to bring himself strictly within the exempting provisions of subsection 83(3) and, therefore, the appeal will be dismissed with costs.