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Citation: 2005TCC387
Date: 20050818
Docket: 2004-2399(IT)I
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BETWEEN:
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JACK (JOHN) A. BOLEN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
(Delivered orally from the Bench at Winnipeg, Manitoba on May 6, 2005)
MargesonJ.
[1] This is a very tough case, not in the sense of the law, but it is a tough case in the sense of the results which flow from the decision one way or the other. As I indicated to Mr. Bolen, this Court cannot decide the case on the basis of sympathy or pathos or fear that he might go into bankruptcy, even though it has great sympathy for him and I hope that that does not take place.
[2] The Appellant was obviously put to this great expense because somebody breached an agreement with him; there is no doubt about that. He went to court and fought it and was successful in obtaining some restitution. The issue is what he received as a result of the court action.
[3] On the basis of the Reply to the Notice of Appeal and on the basis of what the Appellant said in testimony, it is quite clear without even seeing the Statement of Claim (although it may have been helpful to see it) what the Court has before it is the evidence that Mr. Bolen gave and the presumptions which were not rebutted and were accepted by the Appellant.
[4] In the Reply at page 3, paragraph 11, the Minister stated:
11. In so reassessing the tax liability of the Appellant, the Minister made the following assumptions of fact:
a) The Appellant owned mining claims and leases in the Fort Frances area (the "Property");
b) The Appellant entered into an agreement (the "Agreement") with Minescape Exploration Inc. ("Minescape") and Wallbridge Mining Company Limited ("Wallbridge") in which the Appellant exchanged the mining rights of the Property for royalties and shares in Minescape and Wallbridge;
c) Minescape and Wallbridge breached the Agreement.
[5] The evidence shows that the Appellant took legal action against them and incurred legal fees in taking this action to acquire his rights back. What did he acquire back? He acquired the mining rights back from Minescape and Wallbridge and his right to obtain information and a database.
[6] As indicated in subparagraph 11 e) of the Reply, the Appellant was awarded mining rights to the property. According to the evidence, he, in turn, turned the rights over to another company that he was dealing with. But the legal action was by him to get back the rights which were his. Then he had the right to transfer these rights to whoever he wanted to. Those are the salient facts.
[7] In the evidence that the Appellant gave there was nothing to contradict these facts. He did say that he received $5,000 a month from Hexagon Gold and ownership of the rights. The Court was not told the exact particulars of how that occurred but that had nothing to do with the mining rights themselves.
[8] The Appellant said that his whole purpose was to get his rights back, work them a bit and then transfer them on in some mode to somebody else and make money from them.
[9] That was his whole business. That was the business that he was in from the beginning according to what he told the Court.
[10] To him, this was income. "If I had not fought for it, I would not have had -- I would have had to start over again."
[11] To him that was the same as being awarded income or salary. However the Court is satisfied from the evidence that the legal action that he took was not to protect an income stream, or to reverse lost income. It was to obtain his mining rights to the property.
[12] There is no doubt in the Court's mind that what he sued for was the right to have these mineral rights back. That is basically what he said in his evidence.
[13] The Court is aware of his statement that he has been homeless for a year and his family has broken up and if he loses this case he may have to declare bankruptcy. Further, that he has been unable to get a job, that the mining companies seem to think that he has a conflict of interest and they will not hire him. Those facts however have nothing to do with the issue as to whether as a result of the legal action, what he received was "capital" in nature or on account of "income".
[14] He was adamant that what he was doing was seeking to protect his income and at the end of the day that may have been the indirect result of having been awarded his shares, which in turn he sold.
[15] But the income that he did have in the end was income that came about as a result of the sale of these shares. That was his business anyway. He was staking claims, building them up, selling them to another company and taking back shares in the other company. What he received as a result of the legal action was a capital asset.
[16] The Respondent argued that the real issue was whether or not these legal costs were incurred on account of capital or on account of income. If they were on account of income they could be written off as he attempted to do. If they were capital, then the expenses would have to be dealt with differently.
[17] What the Appellant was doing throughout his business was acquiring mineral rights. They are more particularly described in income tax jargon as "cumulative eligible capital property" and that is the way that they have to be regarded as far as she was concerned. The question is whether they were capital in nature or not and whether the expenses in issue were deductible or not.
[18] Counsel referred to the case of Farmers Mutual Petroleums Ltd. v. Canada[1] in which the Supreme Court of Canada said:
The object and purpose of the lawsuits, however, was to compel the restoration to the land owners of the mineral rights which the appellant had purchased.
[19] In the case at bar, the Court concludes that the Appellant was seeking to protect the assets from which his income was derived as in that case.
[20] In that case, the Court said,
...and the evidence establishes, that those rights were items of fixed capital, and were so regarded by the appellant. At the time the litigation occurred, the sum total of the mineral rights acquired by the appellant, all of which were of the kind involved in the litigation, represented all of the appellant's capital assets. The appellant did not trade in them, but intended to retain them perpetually.
[21] In the case at bar, the Appellant, when he received the rights back as a result of the court action, transferred them on, which he had the right to do.
[22] Further the Court in Farmers Mutual Petroleums Ltd., supra, said:
It was to protect those capital assets from attack that the legal costs of the litigation were incurred, and, to quote the words of Dixon J. (later Chief Justice) in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation [(1946), 72 C.L.R. 634 at 650.], referring to the costs of defending title to land: ...
The fact that the leases acquired by the appellant, along with the mineral rights, were more immediately connected with the production of income than was the franchise involved in the Dominion case does not affect the matter in principle. It is relevant in relation to the application of s. 12(1)(a), but in relation to s. 12(1)(b) we must ask the question, was this outlay for the purpose of preserving a capital asset? In my opinion it clearly was and, if that is so, s. 12(1)(b) prevents its deduction.
[23] In this case the Court is satisfied that when it asks that question, it obtains the same results.
[24] Counsel also referred to the case of Sunshine Mining Co. v. Canada[2], where the comments are of a more general nature:
The general concept is that a transaction whereby an enduring asset or advantage is acquired for the business is a capital transaction.
[25] When you apply that principle to what the Appellant here has acquired as a result of the legal action, one must conclude that what he got back was a capital asset.
[26] At paragraph 15, the Court said:
... in the case at bar, I am satisfied that the true nature of the monies paid by the plaintiff Dolly Varden was, in effect, the purchase price for a one-half interest in the Dolly Varden mining properties, clearly an expenditure for the "acquisition of an addition to the plaintiff's business organization", and as such, in my view, an expenditure on account of capital.
[27] At paragraph 17,
The facts in the case at bar involving ownership of mineral rights and permits and mineral properties is a classic example of the kind of situation contemplated in the above quotation and, in my view, is a clear case of true capital assets.
[28] Reading those cases and applying them to the facts in the present case, the Court has no hesitation whatsoever, although regretfully, in concluding that what the Appellant was seeking to do in taking the legal action that he did and incurring the legal expenses that he did was to obtain a capital asset. As far as the Court is concerned, the Minister has properly disallowed the deduction of the legal costs as expenses and allows them as capital expenditures.
[29] Regretfully, the Court will have to dismiss the appeal and confirm the Minister's assessment.
Signed at New Glasgow, Nova Scotia this 18th day of August 2005.
Margeson J.
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