Jack Appleby v. Minister of National Revenue, [1971] CTC 728, 71 DTC 5438

PRATTE, J.:—This is an appeal from a decision of the Minister of National Revenue confirming the reassessments of the appellant’s income tax for the years 1965, 1966 and 1967. These reassessments, as well as the decision appealed from, were made on the assumption that, to the declared income of the appellant for those years, were to be added the profits that he realized on the sale of shares in the capital stock of three mining companies.

As will soon be seen, the question raised by this appeal is whether the appellant is precluded by Section 83(4) (a) of the Income Tax Act from taking advantage of Section 83(3). These two subsections of Section 83 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

At the outset of the trial, counsels filed an ‘‘ Agreement for trial” in which they agreed as to certain facts as well as to the issue for the determination of the Court. The content of this document may be summarized as follows :

1. The facts

Under three agreements made with prospectors, which agreements were of the kind contemplated by the first paragraph of Section 83(3), the appellant, in 1965 and 1966, acquired three groups of mining claims which he later transferred to mining companies for a consideration consisting of shares in these companies. The first group of claims was thus sold to Winston Mines Limited, the second one to Boeing Mines Limited and the third one to Marlboro Mines Limited. In 1965, 1966 and 1967, the appellant sold most of the shares that he had thus acquired and thereby realized sizeable profits which, admittedly, were income from a business of the appellant.

2. The issue

The issue for the determination of the Court is whether Section 83(3) (b) of the Income Tax Act does not apply to profits realized by the appellant on the sales of the shares of the three above mentioned mining companies on the basis that the appellant disposed of these shares while or after carrying on a campaign to sell shares of those three companies to the public. If the Court holds that the provi- sions of Section 83(8) do not apply to the profits thus realized by the appellant, the appeal should be allowed in part and the reassessments referred back to the respondent for the purpose of determining the deductions to which the appellant may be entitled in computing his income for the 1965, 1966 and 1967 taxation years.

It is therefore uncontested that the appellant sold at a profit shares of mining companies which he had gotten in consideration for the transfer to those companies of mining rights that he had acquired under arrangements of the kind contemplated by Section 83(3). Normally, under Section 83(3), the consideration received by the appellant for these shares should have been excluded from his income. However, the respondent takes the position that the appellant cannot take advantage of Section 83(3) since, as contemplated by Section 83(4), he disposed of his shares of the three mining companies “while or after carrying on a campaign to sell shares’’ of these corporations to the public. The appellant does not deny having sold his shares while sales campaigns were being carried on, but he submits that these campaigns were not carried on by himself but by J. Appleby Securities Limited, a company of which he was the president ; for this reason, he contends that Section 83(4) does not prevent him from taking advantage of Section 83(3).

Since September 24, 1964, the appellant has always been the president, as well as the sole beneficial shareholder of J. Appleby Securities Limited, a company which was incorporated on September 11, 1964 ‘‘to carry on business as a general financial agent, broker, stock broker and promoter and generally to carry on in all its branches an agency, promotion and brokerage business’’. While this company can certainly be referred to as a “one man company’’, it is beyond dispute that it has always been a genuine corporation and not merely a sham or simulacrum. Indeed, as soon as it was granted its registration from the Ontario Securities Commission, on January 13, 1965, the appellant’s company started to carry on the business of broker and dealer in securities and it is clear from the evidence that there has never been any confusion between the affairs of the company and those of its president and sole shareholder. It is also beyond dispute that J. Appleby Securities Limited was carrying on campaigns for the sale of shares in the capital stock of Winston Mines Limited, Boeing Mines Limited and Marlboro Mines Limited when the appellant disposed of his shares in these three companies. As the parties disagree, however, in their appreciation of the part that the appellant played in those campaigns, it will be necessary to relate the circumstances in which the appellant acquired and sold his shares of the three mining companies already mentioned.

A few weeks after J. Appleby Securities Limited had started to do business, the appellant instructed his lawyer to secure the incorporation of a mining company. The new company, called Winston Mines Limited, came into existence on February 3, 1965 ; its directors were persons that the appellant knew or that had been recommended to him by his lawyer. Two days later, on February 5, the appellant made an arrangement with a prospector who, in consideration for the appellant’s financial support, agreed to prospect for minerals in a certain area and to endeavour to stake out mineral claims that were to be transferred to the appellant. On February 22 the appellant sold the mining claims that he had acquired under this arangement to Winston Mines Limited for a consideration consisting of 75,000 free shares and 675,000 escrowed shares of that company. On the very same day, Winston Mines Limited entered into an underwriting option agreement with J. Appleby Securities Limited. The prospectus of Winston Mines Limited was then prepared by the lawyer of the mining company (who happened to be also the lawyer of J. Appleby Securities Ltd.) and filed with the Ontario Securities Commission. This prospectus, dated February 24, 1965, was signed by the appellant as the promoter of the mining company and as the president of the J. Appleby Securities Limited, the underwriter; it contained, among others the following statements :

3. . . .

Jack Appleby, 28 Aldburn Road, Toronto, Ontario, is the promoter of the company at the present time.

12. By agreement dated the 22nd day of February, 1965, the company acquired from Jack Appleby, 28 Aidburn Road, Toronto, Ontario, seven (7) unpatented mining claims . . . The consideration paid to Jack Appleby aforesaid, was the issue to Jack Appleby of 750,000 shares of the capital stock of the Company of which 90% thereof were escrowed subject to the provisions of paragraph 8 hereof . . .

20. Jack Appleby, by reason of the beneficial ownership of securities of the company as set out in paragraph 12 hereof, is in a position to elect or cause to be elected a majority of the directors of the Company.

21. 75,000 free vendor shares owned by Jack Appleby, aforesaid, may be offered for sale under this prospectus but the proceeds therefrom will not accrue to the treasury of the Company.

As soon as the approval of the Ontario Securities Commission had been given, J. Appleby Securities Limited started to take up the shares of the mining company and engaged into a campaign for the sale of the shares of that company. This campaign consisted mainly in the sending by J. Appleby Securities Limited to its actual or prospective clients of the prospectus of Winston Mines Limited and of literature recommending the purchase of this stock. In addition, as a part of its campaign, J. Appleby Securities deemed it necessary to ‘‘support the market’’ of the shares of Winston Mines Limited ; in order to achieve this Appleby Securities Limited entered into an agreement with another broker, W. D. Latimer and Company Ltd. Under this agreement, the precise nature of which need not be determined,

W. D. Latimer and Company Ltd. was to purchase, at prices set from day to day by J. Appleby Securities Limited, all the shares of Winston Mines Limited that would be offered to it; it was also to sell, at prices also to be fixed by J. Appleby Securities, as many of the shares so acquired as it could; finally, it was agreed that all the shares that W. D. Latimer and Company Ltd. would have acquired and that would remain unsold would be paid for by J. Appleby Securities Limited.

This campaign was being carried on when the appellant decided to sell his 75,000 free shares of Winston Mines Limited. He did not sell them (at least directly) to J. Appleby Securities, though, but rather through other brokers who, knowing of the arrangement that had been made with W. D. Latimer and Company Ltd., sold them (with the exception of a few shares) to the latter. As W. D. Latimer and Company Ltd. could not dispose of these shares, they (or at least most of them) were acquired and paid for by J. Appleby Securities Limited at a time when this company could have gotten shares of Winston Mines Limited at a much cheaper price under the underwriting agreement. Having thus rid himself of his free shares, the appellant later disposed privately of his ‘‘escrowed’’ shares of Winston Mines Limited.

Coming now to the acquisition and sale by the appellant of shares of the two other mining companies, Boeing Mines Limited and Marlboro Mines Limited, it will suffice to say that these shares were acquired and sold by the appellant in circumstances which were identical to those related above.

In order to give a true picture of the appellant’s part in the chain of events which culminated in the sale of his mining shares, three additional remarks are appropriate. First of all, it appears that the appellant’s role as the promoter of the mining companies did not end up with their incorporation. In- deed the appellant, while denying that he had had anything to do personally with the fact that the three mining companies had entered into an underwriting agreement with J. Appleby Securities Limited, said that he had hoped that another broker would accept to underwrite the shares of these companies or, at least, to share the underwriting with J. Appleby Securities as had been done in other cases; he added, however, that he had not approached any other broker than J. Appleby Securities Ltd. in order to know whether his hopes could materialize. From these assertions, it must be inferred, in my opinion, that the appellant was personally instrumental in the making of the underwriting agreements that were entered into by the three mining companies. Secondly it must be pointed out that the appellant, or persons acting on his behalf, certainly participated in the drafting of the prospectus of the three mining companies; otherwise it would be difficult to explain the insertion in these prospectuses of a clause specifying that the appellant’s free shares “may be offered for sale under this prospectus’’ (in the case of Winston Mines Limited) or “will be offered for sale under this pros- spectus’’ (in the case of the two other mining companies). Lastly, it deserves to be noted that the appellant took an active part in the day to day operations of his brokerage firm, J. Appleby Securities Limited, and that, for this reason, he was personally involved in the campaigns for the sale of the shares of the three mining companies. For instance, if the appellant, as he said, did not write himself the literature that was mailed by the firm in order to promote the sale of the shares, the appellant saw to it that such material be written and that it not be sent without his having previously perused and approved it. As another instance of the involvement of the appellant in the sales campaigns carried on by his brokerage company, one could mention the fact that it was the appellant himself who, every day, would telephone W. D. Latimer Company Ltd. in order to tell the prices at which the latter was authorized to buy and sell the shares of the three mining companies.

Bearing all these circumstances in mind, ean it be said that the appellant carried on a campaign for the sale of shares of the three mining companies? Counsel for the appellant first submitted that such a finding could not be made since the appellant was not registered under The Securities Act (Ontario) and, consequently, was not authorized under that Act to carry on a campaign for the sale of shares. This submission can easily be disposed of. I am not called upon to interpret or apply The Securities Act (Ontario) and the fact that the appellant might have infringed the provisions of that Act is irrelevant to the question of whether the appellant carried on sales campaigns as provided in Section 83(4) of the Income Tax Act.

This, however, was not the main argument put forward on behalf of the appellant. Counsel submitted that the appellant had been involved in the sales campaigns carried on by J. Appleby Securities Limited only because he happened to be the president of that company; in these circumstances, said he, since the appellant and his brokerage tirm are two distinct legal persons, the appellant cannot be considered to have personally carried on the sales campaigns unless it be found that J. Appleby Securities Limited had acted as the appellant’s agent. Now, counsel added that such a finding could not be made.

In my opinion, it is clear that J. Appleby Securities was not acting as the appellant’s agent when it carried on the sales campaigns. That is to say that J. Appleby Securities Limited had no authority to bind the appellant or to acquire rights on his behalf. But all that can be inferred from such a finding is that the profits made by that company and the liabilities that it incurred while it carried on the campaigns were the companies’ profits and liabilities and not the appellant’s. The fact that there was no relation of agency between the appellant and his brokerage company does not dispose of the question that needs to be answered here.

Under Section 83(3), those who, in consequence of their having provided a prospector with financial assistance, acquired mining properties that they disposed of to a corporation in consideration for shares in the capital stock of the corporation, are given the privilege of excluding from their income the consideration that they receive for these shares. This privilege, however, is denied under Section 83(4) “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 . . . ”. The obvious purpose of Section 83(4) is to ensure that the amount excluded from the income of the taxpayer under Section 83(3) is the reward for his financial participation in prospecting, and not for his activities as a dealer in shares. If, as I think, such is the purpose of Section 83(4), it would be meaningless if it did not apply to a situation like the present one where the appellant, taking advantage of the fact that he was at the same time the president and sole shareholder of a brokerage firm, the promoter of mining companies and the owner of mining properties, not only caused the sales campaigns to be carried on but actively and materially assisted in the carrying on of these campaigns.

I therefore decide that Section 83(3) does not apply to profits realized by the appellant on the sale of his shares of Winston Mines Limited, Boeing Mines Limited and Marlboro Mines Limited. As agreed upon by the parties, the appeal will therefore be allowed in part and the reassessments referred back to the respondent for the purpose of determining the deductions to which the appellant may be entitled in computing his income for the three years under consideration.

The respondent will be entitled to his costs.