Harold L Mondrow v. Minister of National Revenue, [1972] CTC 2443, 72 DTC 1371

The Chairman (orally from the Bench):—Gentlemen, I am going to be as brief in my reasons as you have been in your arguments, because it is really a question of fact, as both of you have agreed.

This is an appeal by the taxpayer, Harold L Mondrow, from a reassessment made by the Minister for the taxation year 1965 in which he added back into the income of the taxpayer certain funds received by him from the sale of mining claims to a corporation, and wherein a sum of interest was levied on that original sum. The figures are not in dispute.

The facts, as briefly as I can summarize them, are that one H W Barta is a prospector of some considerable experience, whose activities, since his entry into Canada, are contained in Exhibits A-1 and A-2. Suffice it to say that, since he graduated in his native Germany in 1954 with a degree in mining technology, he has been actively engaged in prospecting, either as an employee or as an independent contractor or on his own behalf, in this country.

He gave evidence that, in the fall of 1964—probably in the months of October and November—he was prospecting in the Marathon District of the Province of Ontario. According to his evidence he had previous knowledge of various maps and geological information that is available to all who would enter into the prospecting trade or venture or profession.

He says that he prospected along both sides of the Pic River, some two or three miles to the east of Marathon and running for a considerable distance to the north. He said that he decided that, in his view, there was a potential in the area. (1 may be paraphrasing his evidence.) However, by the time he went to Toronto in December of 1964, he felt that he should seek financial assistance to explore further and, if deemed advisable, stake a number of claims in the general area where he had—and I think it is fair to infer this from his evidence—a preconceived idea that there might be a profitable venture.

He spoke to the appellant in this case, and they entered into a so- called grubstaking agreement, which I believe is Exhibit A-3, whereby certain sums totalling $1,000 were to be paid to the prospector, Barta, if up to 20 claims were staked. If no claims were staked, the liability of the appellant was to be limited to $200. An agreement was signed on or about January 8, 1965, and Barta returned in due course, certainly within a very few days, to what was then the Port Arthur area. He indicates that he arrived in Port Arthur on or about January 14th because receipts are available (among a group of receipts filed as Exhibit A-4) indicating that. He said he went to the Mining Recorder’s office to ascertain whether or not any claims had been staked in the general area that he had in mind, finding that none had been staked— although admitting that this did not preclude claims having been staked but not registered within the 30-day period or having in fact prior ownership by the time he arrived in the area.

He went into the bush on or about January 16, 1965 and for a period of three days he prospected around the area of the Pic River including both sides of the river and toward the centre of the overall area that he had previously walked over and explored in the fall of 1964.

He said that, through taking samples from outcroppings that were available at this period of time, he settled on a specific area that should be staked. He then telephoned, and later wired, the appellant that 20 claims had been staked pursuant to the agreement, and the appellant complied with his obligation under the agreement.

The evidence is that the claims were sketched out on a preliminary sketch which is Exhibit A-11, and that the witness Barta obtained the assistance of another man to go with him into the bush and do the actual staking. It was also given in evidence that Barta had used up his permissible number of claims under his mining licence, which at the time was 18, and he therefore required the use of the licences of two other people, Miller and Michano, in order to actually register the claims staked for the appellant. Apparently the staking was done between January 26 and 29, 1965. Subsequently the claims were registered on February 2nd at the Recorder’s Office. This was done by Barta, who did the necessary paper work in Port Arthur to accomplish what was required. Exhibit A-9 substantiates his presence in the Port Arthur area from January 31st to February 3rd. There is no doubt, and it is not disputed by the Minister, that Barta was in fact where he said he was at the time he said he was, and that he did what he said he did in January 1965.

The real question at issue is whether or not the agreement was entered into before the prospecting actually took place, or whether Barta had already predetermined where the 20 claims were to be staked, and merely required financial support to go back and carry out the mechanical and technical aspects of the recording of the claims.

Many cases have come before the predecessor to this Board and before the courts, dealing with subsection 83(3) of the Income Tax Act. About the only finding common to all the cases that one can extract is that the mere staking of claims is not sufficient to constitute prospecting. Little solace can be taken by the Board from the cases, that clearly indicate that this is a very difficult section to interpret. Nevertheless the difficulty that may be facing the presiding officer does not permit him to defer his obligation to make such a finding as the evidence before him indicates.

The appellant called as an expert witness Dr Philip P Hallof, who is a man of some considerable experience in the mining field and extremely qualified academically, as shown by Exhibit A-14. I paraphrase his evidence because I would not purport to infer to the parties and their counsel that I understood in total everything that he said, because a great deal of it was of a scientific and technical nature far beyond the Board’s knowledge. Nevertheless, it is apparent from his evidence that prospecting today consists of far more technical and scientific assistance to the men in the field than previously existed or was evident a hundred years ago, or even, I dare say, a considerably shorter period of time ago than that. This geophysical assistance to prospectors has become a large part of the development of the vast mineral resources of this country.

There has been nothing brought forward in the evidence to contradict anything that Dr Hallof has said, nor is there anything, in my view, to contradict the perhaps old-fashioned or classic mind’s-eye view that one has of the prospector in the field with a pick chipping away at outcroppings, and making perhaps a “guesstimate” of the value of the property being examined. He has said also that there are negative findings that assist the prospector in the field, such as the fact that there is no evidence of previous work in the area. This appears to be borne out in the prospectus filed as Exhibit R-1, because I take from that exhibit the comment of the consulting engineer, Mr Howe, that, where there is no history of previous work done, there is something to indicate to those reading the prospectus that this is not the second or third or more try at the same piece of property that others may have originally attempted to develop.

As I indicated to counsel for the respondent during his argument, it is inconceivable to me, and I think it would be very naïve of this Board or any court to assume, that a person seeking a grubstake would go into the field or try to persuade a backer to support him out in the field without having made some prior inquiry as to the general area and the prospects of success in the area into which he was about to venture.

To give full effect to the fine distinction of prospecting as provided by Dr Hallof would, to my mind, preclude anyone from taking advantage of the provisions of the Act, which were obviously intended to induce people to seek out the vast mineral resources of this country, if in his prospecting he made use in any way of the technical and scientific advances of the last few years. I think we must be on the lookout for any effect upon taxpayers in cases like this. The Board must be satisfied that there was no collusion or connivance or conspiracy between the prospector and the grubstaker to merely make a decision in a business office somewhere well remote from the actual land to be staked, after which the prospector merely goes through the process of a sham to seek to bring the backer under the provisions of the Act. There is nothing in the evidence in this case that would lead me to believe that any such thing took place.

I am satisfied that, with the experience Mr Barta had, he could easily have come to a conclusion after three days of prospecting, in the classical sense if not under the legal definition of the word, if such there be; that his experience would have led him to the area in which he subsequently staked the claims; and that these claims were staked subsequent to and in accordance with the appellant’s Exhibit A-3, which was in fact a grubstaking agreement.

Therefore, for the reasons cited, from the information contained in the exhibits filed, and from the viva voce evidence, ! would allow the appeal and refer the matter back to the Minister for reassessment deleting the additional tax of $16,393.46 levied in the assessment dated February 2, 1970, for the 1965 taxation year. It therefore follows that the interest levied on that sum would no longer be applicable.

Appeal allowed.