Shultup Management & Investments LTD v. Minister of National Revenue, [1972] CTC 2655

The Chairman (orally):—This is an appeal by Shultup Management & Investments Ltd, a company incorporated under the laws of the Province of British Columbia, against a Notice of Reassessment by the Minister for the taxation year 1962. The reassessment deals with the sale of certain mining claims for the sum of $25,000, which amount was regarded by the appellant as exempt from income tax under and by virtue of the exemption provided by subsection 83(3) of the Income Tax Act and has been added to its taxable income by the Minister. The matter was heard at Vancouver on September 21 and 22, 1970 by J O Weldon, Esquire, QC, then a member of the Tax Appeal Board, but judgment was not rendered by him prior to his retirement from the Tax Review Board in 1972.

The parties were given the opportunity of having the case decided on the transcript of the evidence and the argument taken at the trial; of having the transcript of evidence accepted and re-arguing the appeal; or of having the entire case reheard and re-argued. The parties have consented to the second of these alternatives; and, by virtue of this agreement, I have read the transcript of evidence and today heard argument on behalf of those parties.

Notwithstanding the voluminous evidence and the many ambiguous sections of the transcript, the issue can be broken down under two headings: First, were the persons Zielinski and/or Cohen employed by the appellant company to do work contemplated by subsection 83(3) of the Act? Second, did the work that Zielinski and/or Cohen did fit within the definition of prospecting, exploration or development, as intended by Parliament in enacting the relevant sections of the Income Tax Act, thereby entitling the appellant, if it was the person who made the arrangement with the said individuals, to qualify for such relief? There is no doubt that the work done, first by Zielinski and second by Cohen, was done under an employee relationship and not under a grubstaking arrangement.

In late October 1959 Isaac Shulman was the president of and, along with his wife, the owner of all of the shares of the appellant company. Shulman caused Zielinski, who was a prospector in the general sense of the word, to go to the area of Loughborough Inlet, an inlet on the west coast of British Columbia, to investigate the site of a previous mine and to restake the area, doing whatever in his opinion was necessary to benefit Shulman. Zielinski went to the specified location and staked the area of the old workings, and continued on to stake a total of 14 claims, during the course of which assignment he managed to personify the classical mind’s-eye picture of a prospector chipping away at outcroppings and deciding by “an eyeball assessment” — a talent gained through years of experience — whether or not a particular area was worthy of staking and recording or not.

Apparently, however, nothing was done with these claims after they were registered and, as the one-year period during which work to the amount of $100 must be done on each claim was drawing to an end, Shulman called into consultation one Cohen, who was a graduate engineer and had experience in prospecting and exploring for minerals in the area. In order to preserve the claims, it was possible, instead of doing the stipulated work, to pay the sum of $100 per claim, which would involve the outlay of some $1,400. It was agreed, or at least suggested by Cohen, that it would be cheaper to restake the claims than to pay the work assessment. Therefore, for an amount that turned out to be, according to the evidence, some $750 odd, he went to the area, found the old markings of Zielinski, probed the trenching and tunneling area, and came up with a report, which was submitted to the Registrar of Mining Claims in the hope that it would satisfy the work requirements of the Act. It did not, but it did satisfy the Registrar in so far as four of the claims were concerned. This occurred in October or early November of 1960.

It was decided then that the cheapest way to protect the other claims was to restake them, and Cohen says that, on November 14, 15 and 16, he went back to the area, followed the lines of Zielinski and, in a matter of two or three hours, he restaked certain claims — that turned out to be nine or ten in number — did not bother with some of the claims that Zielinski had staked because in his view they were not going to be productive, and staked others that, to his trained mind and eye, showed a possible return for future development. He could not stake these claims in the name of Shulman because of the restriction contained in section 52 of the British Columbia Mineral Act, which requires a year to expire before claims can be restaked and registered in the name of any previous owner who has lost title to them for failure to comply with the work regulations of the said Act. The claims were therefore registered in Cohen’s name and an agreement was entered into between Cohen and Shulman which, in effect, was a trust agreement, indicating that Cohen held the claims in trust for Shultup Management & Investments Ltd.

By resolution of the board of directors of the appellant company executed on December 17, 1960, the president was authorized to instruct Cohen “to restake the ground covered previously” and, after setting out a certain number of claims, the resolution specified that the company accept from Cohen a declaration of trust declaring that he was holding such restaked mineral claims on behalf of the company and that such declaration was to be completed as soon as the restaked claims had been recorded. This, of course, was all done subsequent to whatever work and activity Cohen had done on the property.

There are many cases dealing with prospecting claims under section 83 of the Act, and as President Jackett of the Exchequer Court, now Chief Justice of the Federal Court of Canada, has said, in several of his decisions, it is a very difficult section to interpret. That is small solace for anyone who has to interpret it. The only agreement in the decided cases is that staking alone is not sufficient to constitute compliance with the Act.

It seems obvious that the purpose of the section, as enacted by the Parliament of Canada, was to encourage and reward people who were prepared to support investigations of the hidden mineral wealth of the various regions of this country. It did so by allowing any person who paid for the staking of these claims to retain, tax free, the profits realized when transferring such claims to other individuals or corporations.

As has been said so many times that one tires of saying it, and I am sure counsel tire of hearing it, that in order to take advantage of a section of the Income Tax Act that permits a taxpayer to avoid the payment of tax on what would otherwise be taxable income, he must comply strictly with the exempting provisions, and bring himself within the confines, of the section or subsection involved. In this case, all the references by the parties involved in what took place are to restaking of claims, and to the staking of additional claims where first Zielinski and later Cohen felt it would be advantageous.

In the case of Mondrow v MNR, [1972] CTC 2443; 72 DTC 1371, an expert witness was called to show how the profession, if I may use the term, of prospecting has changed over the past fifty years. Many more highly sophisticated scientific advantages are available to prospectors today than at the turn of the century and after. In many instances, before leaving the relative serenity of the financial streets in this country where these deals are hatched, the promoters have predetermined the general area that will be involved in prospecting or exploration. It is therefore not surprising that, in this case, it was decided that a good place to start was in an area that had at one time produced an operating mine.

Zielinski and Cohen are two examples of the different types of prospector that one might encounter: Zielinski, with instructions to restake the old workings, chipping away at out-croppings and deciding that other claims should also be staked; and Cohen, sketching and probing and determining by observation whether a vein was petering out or whether the visible ore might possibly be the commencement of a vein stretching some distance below the surface.

I have no hesitation in saying that, in my view, prospecting or exploration was done, in both instances, by the two individuals who attended at the scene — Zielinski perhaps being less sophisticated and Cohen more academically trained, but both experienced in field work. The appellant, in my view, has overcome one aspect of the requirement of the Act by satisfying me that “prospecting” did take place, or that “exploration” did take place, as envisaged by subsection 83(3) of the Act. When the Courts have said that staking alone is not sufficient, they have not meant that prospecting can take place without staking, because staking is an integral part of the prospecting operation and leads to the registration and ownership of the property to be worked.

The second requirement of subsection (3) of section 83 is that:

(3) An amount that would otherwise be included in computing the income for a taxation year of a person* [1] 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 hey [2] made the advance or paid the expenses, or, if the prospector was his employee, acquired by him through the employee’s efforts, . . .

Therefore, to succeed on the second requirement of subsection 83(3), the appellant company, in order for it to be exempt, must show that it had an arrangement with Cohen prior to the performance of the work or the prospecting (I can now refer to it as such).

I disregard Zielinski at this time because, in the evidence, he indicated that he had never heard of the appellant company. Cohen, on the other hand, was used to dealing with individuals and corporations and seldom knew where the claims would end up.

There is no mention whatsoever of this arrangement in any of the dealings of the appellant corporation until we get to the resolution of the board of directors, dated December 17, 1960, which is respondent’s Exhibit 2. This authorizes, after the event, the payment and transfer of the mining claims.

It is urged upon me that Shulman was the agent of the company and that it was at all times intended, as indicated by inference in the evidence, that the shares would eventually end up in one of his many corporations. He was not available to give evidence because, as I recall, he was out of the country, so I cannot speculate on what his evidence would have been. However, I am able to draw inferences, where such inferences are based on fact and not on conjecture, from the record in the transcript of evidence.

I have read the evidence in great detail, and I find nothing in the line of fact that would allow me to infer that the appellant company was the person who made the arrangement — or the corporation that made the arrangement — with Cohen as contemplated by subsection 83(3). In my view, to do so would be speculative conjecture and not a judicial inference based on the facts and, as I said at the outset, in order to have the advantage that is conferred by subsection (3) of section 83 of the Act, an appellant taxpayer must fit entirely within its requirements.

In my view the appellant company has failed on the second aspect of the dual requirement, and therefore the appeal must fail and the assessment of the Minister is reaffirmed.

Appeal dismissed.