David Cooper v. Minister of National Revenue, [1974] CTC 346, 74 DTC 6255

Heald, J:—This is an appeal by the appellant from income tax reassessment by the respondent for the appellant’s 1965 and 1966 taxation years. The issue in the appeal is the applicability or otherwise of subsection 83(3) and (4) of the Income Tax Act. The said subsections as applicable to the 1965 and 1966 taxation years read as follows:

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.

(4) Paragraph (b) of 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

(b) to shares acquired by the exercise of an option to purchase shares received as consideration for property described in paragraph (a) of subsection (2) or paragraph (a) of subsection (3).

The appellant was, in 1965, employed as a securities salesman in Toronto with the brokerage firm of Green & Associates. Early in February of 1965, while in the employ of said brokerage firm and at their office in Toronto, he met one Walter N Ingham, a consulting geologist. Dr Ingham was, at that time, doing some work for Green & Associates in the Metagami area of Quebec. The appellant inquired of Dr Ingham whether he knew of any area where the mineral prospects looked favourable. Dr Ingham indicated that he did know of a favourable area. However, the matter was not pursued any further by either party on that occasion. However, a few days or weeks later, but still in February of 1965, Dr Ingham returned to the office of Green & Associates at which time the appellant told Dr Ingham that he was interested in making a “grubstake agreement” with him. Dr Ingham says that he selected the Malarctic area of Quebec, some 15 miles from the town of Val d’Or, Quebec where Dr Ingham had an office.

Dr Ingham holds a BA degree in geology, an MA degree in geology and a PhD in economic geology. He practised as a resident geologist at Val d’Or, Quebec for some 12 years, in the employ of the Quebec Government. Since 1956 he has been in private practice as a consulting geologist with offices in Toronto and Val d’Or. During his period of employment at Val d’Or with the Quebec Government, he mapped the entire Malarctic township, an area of some 100 square miles, outlining all features of geological interest. He was thus very familiar with the area. He testified that this area was primarily an area of gold potential. He said that he suggested to the appellant that a written “grubstake agreement” be drawn up. Both Dr Ingham and the appellant testified that the verbal agreement between the parties was to the effect that the appellant would pay Dr Ingham $800 for his services. The sum of $200 was paid to Dr Ingham by the appellant as a down-payment leaving a balance of $600 payable when Dr Ingham had completed his task. In his evidence at the trial Dr Ingham said that the verbal agreement was to the effect that when he returned to Val d’Or he was to select a more specific area, based on his general knowledge of the area, that he was to “look for economic minerals” and, in the event his search was encouraging, the appellant would then be able to stake some claims. The appellant’s version of the verbal agreement is basically the same—ie, that Dr Ingham was to “go out and do some prospecting”, also to stake claims and generally “to do whatever necessary work had to be done on the property”. The appellant said that he had no knowledge of the area in question and that he was relying on Dr Ingham’s expertise and advice. At the trial, the appellant could not remember whether a specific area was referred to in the verbal discussions in Toronto previously referred to. Both Dr Ingham and the appellant testified that they went to the office of one Marshall Hames, a Toronto solicitor, to have a “grubstake agreement” drawn up. They both said that Mr Hames did prepare such a written agreement and that they both executed said agreement. Dr Ingham said he signed the agreement in Mr Hames’ office on March 1, 1965. The appellant says he also signed in Mr Hames’ office, but is not certain whether he signed it on March 1 or some time later. Dr Ingham was unable to produce his copy of said agreement. He thinks he received a copy but that it has become lost in the ensuing years. The appellant says he never received a copy of the agreement from Mr Hames nor does he now have a copy. He testified that some 4 years later, after the income tax department had reassessed him, he asked Mr Hames for a copy of the agreement but was unable to receive a copy from him. Neither Mr Hames nor anyone from his office was called to explain the situation with respect to the missing agreement nor was any secondary evidence, such as, for example, a copy of the agreement, tendered in the absence of the missing originals. I should observe, at this juncture, that the evidence at trial of the appellant and Dr Ingham corroborates each other as to the fact of a written agreement being drawn up and signed. They also corroborate one another in most details of the agreement. There is, however, one detail of fact surrounding the agreement where their evidence is conflicting. In his evidence Dr Ingham said that Mr Cooper instructed Mr Hames as to the contents of the agreement. On the other hand, the appellant said that he (the appellant) did not instruct Mr Hames what to put in the agreement.

In any event, no written agreement was tendered in evidence and the Court is left with the evidence of Dr Ingham and the appellant as to what the understanding between them really was.

Dr Ingham says that he returned to Val d’Or on March 1 after signing the agreement and that, during the first or second week of March, he visited the area in Malarctic township which he had selected, being about 15 miles distant from Val d’Or.

At this time, there was about 2 feet of compacted snow on the ground. The area was accessible by road and car up to a point about one mile from the selected site. He used a skidoo to travel the remaining distance. He employed one James House, a prospector to accompany him and to assist him. House was a prospector of many years’ experience, having assisted Dr Ingham through four previous prospecting seasons. He defined “prospecting seasons” as being the summer-time since it was very difficult to prospect in the winter time when the area was always heavily covered with snow.

Dr Ingham said that when he reached the area which he had designated in his own mind as being an interesting area, he began looking for a series of excavated trenches which he became aware of when he was mapping the area for the Quebec Government. He remembered the trenches as being in close proximity to Malarctic Lake. The first day Dr Ingham and Mr House were not able to discover the trenches through the heavy snow cover. The next day Dr Ingham instructed Mr House to return to the area alone and to continue the search for the trenches. Mr House found one of the trenches immediately contiguous to the lake. The third day Dr Ingham returned with Mr House, they removed some of the snow from the discovered trench. Dr Ingham removed some pieces of rock from the trench and, upon examination, observed a small amount of pyrite mineralization. He instructed Mr House to clear more snow from the trench and he himself then proceeded further south to a large hill which was not snow- covered. He examined some rock on the hill. He said that, through his prior knowledge of the area, he knew that there was a “sheer zone” there. He defined a “sheer zone” as a geological structure which, in many cases, has been found to contain gold. He did not take any samples from this area because he did not see anything worth sampling. He then returned to Mr House. He and Mr House discovered some “interesting” quartz veins and feldspar porphyry (he said that in the Malarctic area this type of rock was always associated with gold deposits). He collected five samples which he took to the assay office on March 16. These samples were all taken from the same place—near the shore of Lake Malarctic—within 3 or 4 feet of one another. The assay: disclosed that of the five samples only one would be worth exploring further. This was sample number 4 which assayed out at 0.15 (15 oz of gold per ton of rock). Dr Ingham explained that at the market value of gold at that time, sample number 4 would have had an economic value of $5.25 per ton. He says that he then telephoned the appellant and reported that he had discovered a small gold assay and that because of his earlier research and because of said assay, he recommended that further work be done and that the property was worth staking. The appellant instructed Dr Ingham to proceed with the staking. Accordingly, on March 30, 1965, Dr Ingham purchased six licences to stake mining claims which enabled the staking of 1,200 acres. As a result, some 24 claims were staked in the name of the appellant or his nominee covering said 1,200 acres in Ranges V and VI in Malarctic township in the Province of Quebec, in the area centred by the excavated ditch. The claims were on the south-east side of Malarctic Lake and in part included the bed of the lake covered by water.

On April 26, 1965 Dr Ingham wrote to the appellant enclosing the miner’s certificates and reporting that the claims had been staked. In said letter Dr Ingham asserted that the enclosed miner’s certificates completed his part of the agreement of March 1, 1965 with the appellant and that the balance of $600 as per the agreement was now due to him. The appellant paid Dr Ingham the said $600 on May 27, 1965.

By agreement dated April 28, 1965 the appellant sold the said 24 mining claims to Hampshire Mines Limited (which company later changed its name to Kaiser Mines of Canada Limited). The consideration for said claims was 70,000 “free” shares and 630,000 “escrowed” shares of Kaiser. During the months of October and November 1965 the appellant sold the 70,000 “free” shares realizing a profit thereon of $32,796.14. In September of 1966 he sold his 630,000 “escrowed” shares, realizing a profit thereon of $56,460.

The respondent reassessed the appellant for the 1965 and 1966 taxation years bringing into income said profits of $32,796.14 and $56,460 respectively on the said shares. It is the validity of these reassessments which form the subject matter of this appeal.

On these facts, the appellant asks me to find that he has brought himself within the exemption provided in paragraph 83(3)(b) of the Act quoted (supra). The manner in which the interpretation of section 83 should be approached was discussed by Mr Justice Urie in the case of David T Winchell v MNR, [1974] CTC 177; 74 DTC 6152, where he said at pages 181-2 [6155-6]:

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 monies 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.

I agree with the above quoted comments and have concluded, on the evidence in this case also, that the appellant has not brought himself squarely within the exemptions set out in section 83.

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.* [1]

In this case, the prospector, Dr Ingham, acting and relying on information and material acquired by him as a resident geologist working for the Quebec Government, decided, before doing any exploring or prospecting whatsoever that an area centring on certain excavated trenches might be a promising area for mineral occurrences. Based on this background information plus the fact that Camflo Mettagami Mines Ltd had a successful gold mine only 4 miles away, he recommended to the appellant that subject claims be staked. I believe it to be a necessary inference from the evidence that the claims would have been staked without the collecting and assaying of the five rock samples. Accordingly, I have the view that subject claims were not acquired as a result of any prospecting efforts as required in (b) above. Additionally, I am extremely doubtful that selecting five samples of rocks within a few feet of each other in a 1,200 acre area without any exploration of the balance of the area can be said to be “prospecting” as that term is used in section 83. I infer from the evidence that Dr Ingham intended all along to stake claims in this area and that the selection of a few rock samples does not alter the true nature of his mission. Dr Ingham was an experienced geologist and admitted familiarity with the provisions of section 83. I have the view that the selection of the rock samples was an attempt on his part to comply with said section 83 and that such “token” prospecting or exploration as was carried out in this case does not meet the requirements of section 83. My conclusion is reinforced by the circumstance that in his report to Hampshire Mines Limited dated May 10, 1965 concerning subject property no reference is made to what he did in March in connection with collecting the five samples and having them assayed and staking the claims. In said report (Exhibit R-3) Dr Ingham’s recommendation No 4 reads as follows:

4. It is recommended that the preliminary exploration of your property be in the form of surface prospecting, geological mapping, and geophysical surveys. This will cost $8,000.

The surface prospecting recommended was for a period of six weeks during the summer months since the summer months are considered the prospecting season.

Subsequently, in a report dated November 15, 1965, Dr Ingham describes the results of “prospecting, geological mapping, electromagnetic survey and magnetometer survey” carried on during the period August 15 to November 15, 1965. Again, it is significant that no mention is made in that report as to what he did in March. The surface prospecting is described as having been carried out from August 15 to November 15.

To summarize, I am satisfied that what Dr Ingham did on subject property between the first week of March, 1965 and April 5 or 6, 1965 when the staking of the claims was completed cannot, in any way, be said to satisfy the requirements of subsection 83(3) of the Act.

Having concluded that the appellant has not brought himself within the exempting provisions of section 83(3), it is perhaps unnecessary to determine the applicability of subsection 83(4) of the Act. However, I express the view that even had I concluded that this appellant had brought himself within the provisions of subsection 83(3), he would have been precluded from the exemption set out in subsection 83(3) by the provisions of subsection 83(4). The appellant, was from early 1965 until October of 1965 employed by Green & Associates as a commission salesman and licensed by the Ontario Securities Commission as such. In the course of his employment, he sold some 75,000 to 100,000 shares of Kaiser Mines to some 30 or 40 clients of Green & Associates. During the same period, he was selling to clients three other stock issues being marketed by the Green brokerage firm. On these facts, I am satisfied that the appellant is covered by paragraph 83(4)(a) in that he was a person who disposed of his Kaiser shares while or after carrying on a campaign to sell shares of the corporation to the public. The appellant submitted that since he was only an employee of Green & Associates, and had no beneficial interest in said firm and was not an officer or director thereof, he could not be said to be a person who was carrying on a campaign to sell the corporation’s shares. This argument is effectively answered by reference to the decision of the Federal Court of Appeal in the case of J Appleby v MNR, [1972] CTC 317; 72 DTC 6275, where Mr Justice Thurlow said at pages 318-19 [6276]:

It is, we think, to be observed that, while the application of subsection 83(4) requires that the campaign be carried on by the person who would otherwise be entitled to exemption under subsection 83(3), the question which arises on subsection 83(4) is not one of resolving which of two persons involved in such a campaign carried it on, or for whose account or in whose name it was carried on or who was the principal and who was agent for him. Rather it is a straightforward question of whether the person seeking exemption under subsection 83(3) carried on a campaign for the sale of shares of the companies to the public. In seeking an answer to this question it could not, we think, be successfully maintained that each of several persons involved in jointly carrying on such a campaign was not a person by whom the campaign was carried on. It would, in our view, be equally untenable to suggest that a father who directed the carrying on of such a campaign by his minor son and in so doing personally supervised and directed the transactions, even to the signing of his son’s name to documents, was not himself carrying on a campaign for the sale of shares of the company to the public. The circumstance that the father had shares of his own to sell and sold them in the course of the campaign would in our opinion make the suggestion even less tenable.

There is, in our view, little to differentiate the present from such a situation and in our opinion it would be difficult to conceive of a less substantial or more artificial reason for concluding that the appellant himself did not carry on such a campaign than to say that he did not do so because it was a company that carried it on when the company was owned and completely dominated by the appellant himself.

In our view a distinction must be made between cases where one person contracts or carries on business on behalf of another and certain other cases. Where the question is one of which party is liable on the contract made by the agent it is not difficult to conclude that the principal is party to the contract and the agent is not. Similarly where the agent carries on business on behalf of a principal it is the principal who carries on the business and is party to its acts and the agent is not personally a contracting party. Where, however, an employee does an act for his employer, such as, for example, driving his car, the employee is the doer even though in the eyes of the law for some purposes his driving is also the act of his employer. So, in our view, if, as in the present case, an officer or employee in the course of his duties carries on a campaign to sell shares he is, in fact, personally carrying on that campaign even though he is doing it as part of the business activities of his employer. This distinction is the basis for our conclusion that the appellant falls within the terms of subsection 83(4) even though he is not taxable under section 3 of the Income Tax Act in respect of the profits from the business that he carries on on behalf of his employer.

That decision is authority for the view that where an employee, in the course of his duties carries on a campaign to sell shares, he is, in fact, personally carrying on that campaign, even though he is doing it as part of the business activities of his employer. In this case, the appellant actively and materially assisted in the campaign to sell the shares of Kaiser, as evidenced by his sale of a substantial number of Kaiser shares to other customers. He is thus clearly covered by the provisions of subsection 83(4).

For the foregoing reasons, the appeal is dismissed with costs.