Docket: 2011-3547(IT)I
BETWEEN:
DANNY MICHAUD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal
heard on February 13, 2014, at Prince George, British Columbia.
Before: The Honourable
Justice Robert J. Hogan
Appearances:
|
For the Appellant:
|
The
Appellant himself
|
|
Counsel for the Respondent:
|
Gergely Hegedus
|
____________________________________________________________________
JUDGMENT
The appeal from the reassessments made under the Income
Tax Act for the 2007 and 2008 taxation years is allowed and the matter
is referred back to the Minister of National Revenue for reconsideration and
reassessment in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 17th day
of March 2014.
“Robert J. Hogan”
Citation: 2014 TCC 83
Date: 20140317
Docket: 2011-3547(IT)I
BETWEEN:
DANNY MICHAUD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
The Appellant claimed
business losses of $13,525 and $22,931 in respect of his 2007 and 2008 taxation
years. According to the Appellant these losses were incurred in respect of
mining activities which constituted a business.
[2]
The Minister of
National Revenue (the “Minister”) disallowed the losses on the grounds that the
Appellant’s mining activities had a strong personal element and were not
conducted in a sufficiently commercial manner to constitute a business. In the
alternative, the Respondent argues that if the mining activities do constitute
a business, the Appellant’s losses should be limited to $8,426 for the 2007
taxation year and $14,068 for the 2008 taxation year on the ground that the
expenses claimed in excess of those amounts were not incurred for the purpose
of earning income.
[3]
During the relevant
period the Appellant was employed by Lomak Bulk Carriers as a truck driver. He
drove an open box bed truck that hauled gold ore for the Kemess gold mine in Northern British Columbia. His normal work schedule was four consecutive days of work
followed by four consecutive days off.
[4]
The Appellant acquired
a Free Miner Certificate in March 2000 and began reporting expenses in
connection with his mining activities in 2002. He commenced prospecting for
gold and other precious metals shortly after receiving his licence.
[5]
The Appellant began to
acquire mineral claims under the provincial claim registry system. By 2007 he
had acquired claims in Phillips Creek and Bella Coola. In 2008 he added claims in
Manson Creek.
[6]
The Appellant describes
his mining activities in 2007 and 2008 as consisting of prospecting for
precious metals, particularly placer gold. He explained that he first used gold
pans to find gold in creeks or streams located on his mining claims. Generally
speaking, if gold is found in a watercourse there is a greater chance that it
will also be discovered on the adjacent land. If gold is not present in the
sediment in the watercourse there is a high likelihood that no viable deposits
will be found on the claim.
[7]
While this was not
relevant for the taxation years under review, the Appellant testified that his
prospecting activities were successful. Having discovered commercially viable
gold deposits on one of his claims he now plans to begin commercial mining
operations on that claim next year. To date he has invested over $300,000 in
equipment to exploit the claim and anticipates spending a similar additional
amount to begin mining operations next year. His evidence was not contradicted
by the Respondent on this point.
[8]
The Appellant explained
that British Columbia’s mining legislation requires a claim owner to perform a
specified minimum amount of work on his claim in order to maintain it in good
standing. The claim owner must file with the regulatory authorities a work
schedule showing performed work and the hourly rate at which the work including
that performed directly by the claim owner, is credited towards the required
minimum amount.
[9]
Jillian Graham, the
Canada Revenue Agency auditor (the “CRA auditor”) who disallowed the
Appellant’s losses, testified that she believed that the Appellant made no more
than four weekend prospecting trips in each of the years under review.
[10]
The Appellant disputes
this allegation. According to the Appellant, his practice was to report the
minimum amount of work required to maintain his claim in good standing. He
claims that he did more work than he reported to the mining authorities. The
CRA auditor appears to have based her findings solely on the written reports
filed by the Appellant.
[11]
It also appears that
the CRA auditor failed to take into account the Appellant’s follow-up
activities in his home laboratory. The Appellant testified that after each
field trip he brought back earth samples. These samples were subjected to
sophisticated laboratory testing to determine levels of gold concentration.
[12]
The CRA auditor noted
that the Appellant had custody of his two school‑aged children on his
days off. This meant that the Appellant could undertake mining field trips only
on weekends in late spring, or during the summer months when the children were
not in school. Because the Appellant’s children accompanied him on his field
trips, the CRA auditor suspected that the Appellant’s mining activities were
more in the nature of a personal pursuit or hobby. The fact that the Appellant
used the mining field trips as an opportunity to camp with his children appears
to have influenced the CRA auditor in her decision to disallow the losses. She
concluded that, ultimately, the Appellant was not engaged in a business because
he was not digging up earth on a significant enough scale to produce gold in
sufficient quantities to constitute a viable mining operation.
[13]
My review of the
evidence has satisfied me that the Appellant was engaged in gold prospecting in
a commercial manner in 2007 and 2008. The Appellant’s testimony reveals that he
has acquired significant knowledge in the fields of precious metal prospecting
and mine development.
[14]
Much of this knowledge
appears to have been acquired from the Appellant’s interaction with personnel
of the Kemess mine. The Appellant has a well-defined business plan which has put
him on the cusp of undertaking gold production on one of his claims. The
Appellant has invested significant effort and capital in his mining activities.
I also take comfort from the fact that the CRA auditor acknowledged that she
failed to consider whether the Appellant was engaged in gold prospecting in a
commercial manner. Her conclusion that he was not carrying on a business activity
appears to have been motivated by the fact that the Appellant’s mining
activities had not matured to the point of actual gold production on a
commercial scale. Prospecting is a first step that precedes investment in the
commencement of mining operations. Ore must be found in sufficient quantities
before capital will be committed to mine development and to production. More
often than not, prospecting activities are not successful. A great deal of time
may pass between the prospecting, mine development and actual production stages.
In the case of the Appellant, the presence of his children on his field trips
did not interfere with his gold prospecting activities, which have led to the
discovery of commercially viable deposits on one of his claims.
[15]
I must now consider the
Respondent’s alternative argument. The CRA auditor conducted a detailed and
thorough analysis of the expenses claimed by the Appellant with respect to his
mining activities. For 2007, the CRA auditor disallowed expenses of $5,099
on the basis that they were personal in nature and did not relate to the
Appellant’s mining activities. For 2008, the auditor disallowed expenses
of $8,863 for the same reason. I can find no error in the CRA auditor’s
analysis. More importantly, the Appellant has failed to convince me that the
disallowed expenses were not personal in nature. Therefore, I accept the
Respondent’s alternative argument and conclude that the Appellant’s business
losses from his mining activities were $8,426 for the 2007 taxation year and
$14,068 for the 2008 taxation year.
Signed at Ottawa, Canada, this 17th day of March 2014.
“Robert J. Hogan”
CITATION: 2014 TCC 83
COURT FILE NO.: 2011-3547(IT)I
STYLE OF CAUSE: DANNY MICHAUD v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Prince George, British Columbia
DATE OF HEARING: February 13, 2014
REASONS FOR JUDGMENT BY: The
Honourable Justice Robert J. Hogan
DATE OF JUDGMENT: March 17, 2014
APPEARANCES:
|
For the
Appellant:
|
The Appellant himself
|
|
Counsel for the
Respondent:
|
Gergely Hegedus
|
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the
Respondent: William F. Pentney
Deputy
Attorney General of Canada
Ottawa,
Canada
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