John Christopher Doyle v. Minister of National Revenue, [1970] CTC 356, [1970] DTC 6262

GIBSON, J.:—This is a separate trial of one part of this appeal and is an appeal from a re-assessment of income, for the 1954 taxation year of the appellant, alleged to have been received by him arising out of a South American transaction.

The re-assessment was made on June 11, 1959 by adding to the net income of the appellant previously assessed in the amount of $198,173.11 an amount of $2,080,000 stated in the re-assessment to be an ‘‘amount not reported but deemed to be income’’ resulting in a net revised income of $2,278,173.11 and re-assess- ment of tax in the sum of $1,859,194.33.

In response to a request for further information concerning this re-assessment the Department of National Revenue on July 23, 1959 by letter said as follows :

The re-assessment of June 11, 1959 with respect to the 1954 year of Mr. Doyle added an amount of $2,080,000 to his income, which amount arose out of a transaction whereby Canadian Javelin Limited acquired certain interests in four companies in South America, and other rights, and the subsequent issue of capital stock of Canadian Javelin for $2,080,000.

As to such alleged facts, the appellant, in part, pleaded :

In September 1954, Canadian Javelin purchased from the Appellant or his nominees the investment in the limited partnerships holding certain Chilean mining properties for $2,080,000.00, Canadian funds. The Appellant then used the cash proceeds of this Chilean transaction to purchase about 1,000,000 common shares in the capital stock of Canadian Javelin through R. S. Weston Co. Ltd., which shares represented an unsubscribed portion of an underwriting of shares offered to the public by R. S. Weston Co. Ltd. at $2.00 per share. At the time of the said transaction, the Appellant was not an officer or director of Canadian Javelin but he owned approximately 19% of its outstanding common shares. . . .

As to the issue of whether or not the said sum is 1954 income of his, the appellant, pleaded in part:

The Appellant received no income nor was deemed to have received any income other than that reported in his income tax return for the year 1954.

Any amounts received by the Appellant as a result of the acquisition by Canadian Javelin of the investment in the limited partnerships holding Chilean mining properties were in the nature of capital and not taxable under the provisions of the Income Tax Act of Canada.

Alternatively, if the sum of $2,080,000 referred to in paragraph 20 hereof was an amount that would otherwise be included in computing the income of the Appellant for the taxation year 1954, subsection (2) of section 83 of the Income Tax Act directed that it should not be so included since it was the consideration for interests in mining properties acquired by the Appellant as a result of his efforts as a prospector.

The relevant assumptions of the Minister pleaded were:

That on July 16, 1951, Javelin Foundries and Machine Works Limited of which the Appellant was controlling shareholder sold all of its business and undertaking to a newly formed corporation, Canadian Javelin and Machine Works Limited whose name was later changed by supplementary letters patent dated April 5, 1954 into Canadian Javelin Limited (hereinafter called Canadian Javelin Limited) . . .

That the Appellant in the summer of 1954 went to Chile and caused to be formed under the law of the Republic of Chile, four Chilean Limited Companies* [1] referred to in paragraph 13 of the Amended Reply to the Amended Notice of Appeal, in which he held a 99% interest for the acquisition of iron ore properties or interest therein with a view to trading, dealing or otherwise turning to account his right and interest in the said Chilean Limited Companies.

That on September 2nd 1954 the Appellant sold to Canadian Javelin Limited 99% of his right and interest in and to the four South American Companies referred to above in paragraph 18 of the Amended Reply to the Amended Notice of Appeal, including the lease of the El Carmen mines, located at Charnaral, Province of Atacama, Chile and all neighbouring holdings of iron ore mining properties.

That on September 2nd 1954 the Appellant in selling his right and interest in and to the said four South American Companies referred to above in paragraph 13 of the Amended Reply to the Amended Notice of Appeal realized a profit of not less than $2,080,000.

That the said profit of $2,080,000 realized by the Appellant in 1954 upon the sale of his right and interest in and to the said four South American Companies to Canadian Javelin Limited was income from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act.

That the Appellant did not personally incur any expenses in 1954 in acquiring the said iron ore properties of interests in Chile in that year.

The Appellant did not acquire mining properties within the meaning of Section 83(1) (b) of the Income Tax Act or an interest in such mining properties and that the profit of $2,080,000 realized by him in 1954 upon the sale of his right and interest in and to the four South American companies referred to above in paragraph 13 of the Amended Reply to the Amended Notice of Appeal was not an amount that is a consideration for mining properties or interest therein acquired by him as a result of his efforts as a prospector either alone or with others within the meaning of Section 83(2) (a) of the Income Tax Act.

That the Appellant was not a prospector within the meaning of Section 83(1) (c) of the Income Tax Act.

According to the evidence, the appellant, for some years prior to May 1954, had been president, a director and a major shareholder in Canadian Javelin Limited.

In May 1954, he was requested by certain other of the shareholder-interests in Canadian Javelin Limited to resign as an officer, director and employee of it. The reason given for such a request was that the stock of Canadian Javelin Limited had been de-listed from the Canadian Stock Exchange in 1953 and it was felt by the persons representing such interests that the probability of having the company stock re-listed on this exchange would be better if the appellant quit his said relationships with Canadian Javelin Limited.

The appellant resigned and says that at that time he did not intend to return to the employ of Canadian Javelin Limited and to again become a director and president of it, which he in fact did do in November 1954.

The appellant, when he resigned in May, 1954, says he moved himself and his family to the State of Connecticut.

At that time, he said that although he owned about 30 to 40% of the then issued shares of Canadian Javelin Limited either on his own account or through a company all of which shares he owned, namely, boon Strachan Coal Company Limited, he did not intend to keep them, but instead to liquidate them at some convenient future time.

At that time also, he said that he decided to look for sources of iron ore, being familiar and experienced with the iron ore industry, and with that in view because he had knowledge of such sources through geological reports which were readily available through many public sources, he went to Chile. Through the American Embassy he met one Joseph Sibley. Through him he found out how to claim against Chilean-owned Government properties and also through him he was introduced to two Chilean attorneys who subsequently were instrumental in arranging exploitation leases with a number of owners of iron ore properties. These attorneys also, on the appellant’s instructions, set up the subject limited partnership agreements which held for the appellant all of the exploitation agreements and lease agreements which were obtained in respect to these iron ore properties in Chile.

The appellant says he was successful in obtaining a number of agreements and prior thereto he had Mr. Sibley carry out searches and prospecting for such. The appellant provided Sibley with the money for such purposes and Sibley hired the various labourers, truckers, supplies and so forth, all of which were necessary to carry out these searches and prospecting.

The appellant went into the field with Sibley and the hired crew on four or five occasions according to him.

While all this was going on, the appellant went back and forth to Connecticut and other places in the United States for the purpose of trying to obtain markets for iron ore if and when there was put into production any of the iron ore properties in respect of which he was successful in obtaining an interest in. The appellant, as stated, did obtain interests in certain iron ore properties in Chile which appeared to be favourable and caused the four subject limited partnerships to be formed which took title to such interests. The appellant retained 99% interest in such limited partnerships.

In the fall of 1954, Mr. Paul Pesenon, the chief engineer of Canadian Javelin Limited came down to Chile to look at the iron ore properties the interest in which had been put in these limited partnerships and also to look at a property known as the El Carmen Mines. As a result of which he did and what transpired between the appellant and those who controlled Canadian Javelin Limited, an agreement to purchase all the interest of the appellant in the same was entered into in November 1954 between Robert Sherwood and Canadian Javelin Limited. This Agreement was dated as of September 2, 1954. Robert Sherwood was the nominee of the appellant. The appellant signed for Canadian Javelin Limited, he by this time, having rejoined that company as a director and president.

Some of the relevant excerpts from this Agreement are as follows:

MEMORANDUM OF AGREEMENT made in duplicate at the City of Montreal, in the Province of Quebec, on this second day of September, 1954.

BY AND BETWEEN:

ROBERT SHERWOOD, of 440 Park Avenue in the City of New York, United States of America, acting in his capacity as special agent for undisclosed principals of South America, (hereinafter called the “Vendor”)

— and —

PARTY OF THE FIRST PART

CANADIAN JAVELIN LIMITED, a body politic and corporate, duly incorporated according to the laws of Canada, with its head office and principal place of business at civic number 1010 St. Catherine Street West, in the City and District of Montreal, Province of Quebec,

(hereinafter called the “Purchaser”)

PARTY OF THE SECOND PART

WHEREAS the Vendor desires to sell a 99% interest in four Chilean Limited Companies organized under the Corporation and Mining Acts respectively of the Republic of Chile, said companies to be known as Compania Minera El Inca Limitada, Compania Minera El Alacalufe Limitada, Compania Minera El Chango Limitada, and Compania Minera EI Diaguito Limitada, including the lease of the El Carmen mines, located at Charnaral, Province of Atacama, Chile, and other neighbouring iron ore properties, and warrants delivery of same in such form as shall be acceptable to the Purchaser.

AND WHEREAS the Purchaser desires to purchase the said companies and leases.

NOW, THEREFORE, THESE PRESENTS WITNESSETH THAT, for and in consideration of the mutual covenants and agreements hereinafter mentioned, the parties hereby mutually covenant and agree as follows:

1. The Vendor hereby sells, transfers, conveys, makes over and assigns unto the Purchaser, 99% of its right and interest in and to the four South American companies to be known as Compania Minera El Inca Limitada, Compania Minera El Alacalufe Limi- tada, Compania Minera El Chango Limitada, and Compania Minera El Diaguito Limitada, including the lease of the El Carmen mines, located at Charnaral, Province of Atacama, Chile, and all neighbouring holdings of iron ore mining properties.

2. The consideration to be paid by the Purchaser shall be the sum of TWO MILLION AND EIGHTY THOUSAND DOLLARS, Canadian Funds, payable forthwith, or as the Vendor shall dictate. As a further consideration, forming part of this memorandum of agreement, the Vendor agrees, on behalf of his principals to subscribe to the purchase of common shares of treasury stock of Canadian Javelin Limited to a like value,—the Vendor hereby representing to the purchaser that such shares of the Company are authorized and presently unissued,—such shares to be in negotiable form commonly referred to as “street” certificates, and delivered to the nominee of the principals in this transaction.

4, This agreement shall be deemed to have been made and to have become effective on the second day of September 1954.

5. This agreement shall be governed by and interpreted in accordance with the laws of the Province of Quebec, Dominion of Canada.

The financial statements of Canadian Javelin Limited as at December 31, 1954 (see Exhibit 3) on the asset side show an item of $2,080,000 categorized as ‘‘Deposit on Chilean Contracts (See comments in report)’’. On the liability side of the balance sheet such $2,080,000 is shown as part of the issued and fully paid no par value common shares. The ‘‘comments in report’’ shown on the said asset side of the balance sheet read as follows :

The amount of $2,080,000.00 shown on the balance sheet under the heading of “Deposit on Chile Contracts” represents monies paid towards the acquisition of certain interests in four different mining companies formed in Santiago, Chile, during the month of November 1954. They include:

Compania Minera El Inca Limita'da

Compania Minera Chango Limitada

Compania Minera Alacalufe Limitada

Compania Minera Diaguito Limitada

The appellant in evidence, says that the said $2,080,000 was held in trust by Canadian Javelin Limited until the end of 1954 and was then transferred beneficially to the treasury of that company in 1955. But he or his counsel admitted that in 1954 the offsetting item on the balance sheet for this sum was represented by part of the issued no par value common stock.

The appellant says that he incurred expenses in obtaining these mining interests which the respondent admits amount to $308,000. The appellant says he financed these expenses by borrowing some funds from his wife and other funds from Boon Strachan Coal Company Limited. He admits that he declared in 1954 that his taxable income for the year 1953 was only $11,175. The appellant also says that subsequent to 1954, he had a lawsuit with his nominee in the above mentioned agreement, namely Robert Sherwood. This lawsuit was commenced in the Quebee Superior Court and was settled in 1957 or 1958. Under the terms of the settlement, the appellant said he transferred to him 522,000 of these said shares in Canadian Javelin Limited.

Counsel for the appellant submits there are five issues on this appeal, namely:

1. Whether or not the right of the Minister to assess arose in 1954 or 1955.

2. Whether or not the shares or cash received by the appellant were received in his capacity as a prospector within the meaning of Section 83(2) (a) and (b)-of the Income Tax Act.

3. If the Court should decide that the appellant was not a prospector, whether or not the proceeds were a capital receipt.

4. Whether or not the appellant was entitled to deduct the expenses incurred in acquiring the property rights which he sold to Canadian Javelin Limited.

5. What is the quantum of such expenses? Is it confined to the said sum of $308,000 or is the appellant entitled to deduct the value of 522,000 shares in Canadian Javelin Limited which he transferred to Sherwood in the settlement of the Quebee Superior Court lawsuit?

Counsel for the responded submitted that:

1. What happened was an adventure in the nature of trade. 2. The $2,080,000 was received in 1954.

3. The appellant did not acquire ‘‘mining properties’’ within the meaning of Section 83 of the Income Tax Act and did not sell “mining properties’’ to Canadian Javelin Limited. As a consequence the amount of profit must be included in computing income of appellant in 1954 under Sections 3 and 4 and 139(1) (e) of the Act.

4. The appellant has not discharged the onus proving that he personally expended $308,000, the deduction of which is claimed.

5. The settlement with Sherwood under which 522,000 shares of Canadian Javelin Limited were transferred to him was in 1957 or 1958.

The chronology of events in this matter is important. Between May 1954 and November 1954, all the transactions which gave rise to this re-assessment for income took place. During that period, the appellant was not an officer, director or president of Canadian Javelin Limited. But he was a substantial shareholder. In that period he succeeded in obtaining the interests in these Chilean iron ore properties. He went to Chile for the express purpose of doing that. He succeeded in entering into all these transactions including the final critical transaction, viz. the sale of these interests he had obtained to Canadian Javelin Limited by November 9, 1954. In less than five months he was able to complete these various transactions which resulted in a profit to him of $2,080,000.

In this final critical transaction, the appellant signed as vendor through his nominee Robert Sherwood and as executive officer for this transaction of the purchaser Canadian Javelin Limited in which company he held substantial control then and during all the previous five months. This agreement although executed on November 9, 1954, is dated as of September 2, 1954. As admitted by the appellant it was important that the agreement be made as of that date to accommodate the underwriting agreements for shares issued in Canadian Javelin Limited at that time.

The appellant obviously had in contemplation this type of transaction when he ceased to be employed as president of Canadian Javelin Limited and a member of its board of directors in May 1954 and went to Chile. And he succeeded in his project by November 9, 1954.

The whole of the activities culminating in the realization of this profit of $2,080,000 by the appellant can only be categorized as an adventure in the nature of trade within the meaning of the Jurisprudence.

Further, the appellant’s nominee received these shares in 1954. Even though Canadian Javelin Limited in their own accounting on the assets side of their balance sheet in 1954, as stated, referred to the monies representing their sale price as received in trust until certain documentation was completed, such does not change the date of receipt by the appellant.

Further, the activities of the appellant in Chile on this evidence, in my view, were not those of a prospector within the meaning of Section 83 of the Income Tax Act. At best, such evidence established that the appellant financed Sibley. It does not establish that the appellant did any prospecting himself.

The sum of $308,000 which the parties agree were expenses incurred by the appellant in the acquisition of these Chilean iron ore interests, with some hesitation, in view of the weight that I give to the evidence of proof thereof, I find that the appellant is entitled to deduct from the receipt of $2,080,000.

In my view also, the settlement with Robert Sherwood which the appellant made, pursuant to which he transferred 522,000 of his shares in Canadian Javelin Limited to him, was made in 1957 or 1958, and as a consequence for the taxation year 1954 the appellant is not entitled to deduct any part of the value of same as expenses from the said receipt of $2,080,000. In addition, from the evidence adduced at trial, there is nothing to indicate that the transfer of such shares represented a settlement made by the appellant in any way related to a cost incurred by him in acquiring the said receipt of $2,080,000.

In the result therefore, the said net receipts of income, was income. of the appellant in 1954 from a business within the meaning of Sections 3, 4 and 139(1) (e) of the Income Tax Act and as a consequence the appeal is dismissed with costs; and the re-assessment is referred back for further re- assessment not inconsistent with these Reasons.