Date: 19991216
Docket: 97-2332-IT-I; 97-2328-IT-I
BETWEEN:
ALEXANDER SCHMIDT, DOUGLAS SCHMIDT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] These appeals were heard at Calgary, Alberta on August 23, 1999 on common evidence and pursuant to the Informal Procedure of this Court.
[2] Testimony was given by Alexander Schmidt on behalf of himself and on behalf of his son, Douglas Schmidt and by Douglas William McDonald, an appeals officer with Revenue Canada. Numerous exhibits were filed.
[3] The issue is whether in the 1991 through 1994 years for Douglas and the 1992 through 1994 years for Alexander certain expenses allegedly related to the discovery of a mine near Cottonwood, British Columbia and related activities were deductible.
Facts
[4] I find the principal facts to be as follows.
[5] For Douglas, the revenues and expenses claimed are stated in paragraph 5 of the Reply to his Notice of Appeal which reads as follows:
|
1991 |
1992 |
1993 |
1994 |
|
|
Gold Mining Revenues |
$ 720 |
$ 0 |
$ 452 |
$ 0 |
|
Advertising Expense |
239 |
|||
|
Business Tax and Fees Expense |
25 |
231 |
29 |
|
|
Repairs and Maintenance Expense |
809 |
|||
|
Meals Expense |
297 |
389 |
||
|
Office Expense |
170 |
|||
|
Motor Vehicle Expense (No CCA) |
734 |
2,934 |
750 |
|
|
Expenses per Work Schedules submitted to the BC Provincial Government |
26,404 |
16,086 |
6,389 |
2,730 |
|
Total Expenses |
28,678 |
16,317 |
9,712 |
3,509 |
|
Net Loss as filed |
$27,958 |
$16,317 |
$9,260 |
$3,509 |
[6] For Alexander, the revenues and expenses claimed are stated in paragraph 5 of the Reply to his Notice of Appeal which reads as follows:
|
1992 |
1993 |
1994 |
|||
|
Gold Mining Revenues |
$1,600 |
$7,000 |
$9,638 |
||
|
Legal and Accounting Expenses |
48 |
1,416 |
|||
|
Purchases |
2,014 |
29 |
|||
|
Business Tax and Fees Expenses |
136 |
1,009 |
1,413 |
||
|
Repairs and Maintenance Expense |
1,303 |
389 |
4,296 |
||
|
Meals, Travel & Accommodation Expenses |
118 |
1,611 |
867 |
||
|
Office Expense |
2,317 |
2,980 |
2,873 |
||
|
CCA on Equipment |
3,500 |
6,650 |
5,937 |
||
|
Motor Vehicle Expense |
2,384 |
4,432 |
8,715 |
||
|
Expenses per Work Schedules submitted to the BC provincial Government |
12,700 |
8,091 |
6,242 |
||
|
Total Expenses |
22,506 |
26,787 |
31,759 |
||
|
Net Loss as filed |
$16,317 |
$9,260 |
$3,509 |
|
|
[7] In 1982 Alexander, a prospector, discovered a circular anomaly which contained spectacular traces of platinum, gold and other minerals, including osmium. It was finally determined in 1986 that the discovery consisted of the remains of a huge meteorite which had hit our planet numerous years ago. The area of the discovery is approximately seven kilometres north of Cottonwood, British Columbia. Drilling and assay results were equally spectacular, revealing considerable amounts of gold, platinum, osmium and other minerals.
[8] Both Appellants invested considerable amounts of money trying to find out more about the discovery. Drilling and testing costs were incurred and capital expenditures made with a view to eventually developing the discovery; considerable equipment was acquired and/or leased.
[9] Numerous leases were obtained from the Government of British Columbia or acquired from third parties.
[10] As an indicator of the value of the minerals reference is made to an option entered into with American Marketing Corporation ("AMC") wherein AMC acquired the right to purchase up to 1,000,000 tons of ore from one particular lease area at $400 per ton during a four year period from April 27, 1985 to April 26, 1989. That deal did not materialize because, on the occasion of a shipment of ore to the United States, the United States Federal Reserve Board discovered that the ore, besides containing other minerals, also contained osmium, a material not allowed to be imported into the United States.
[11] Prior to a Revenue Canada audit in 1995 a trailer belonging to the Appellants, or one of them, containing numerous vouchers and receipts and bank records was stolen from a location near the mine site. Notwithstanding efforts by helicopter flights over the general area to attempt to locate the trailer, the trailer was never located. After this theft Revenue Canada advised the Appellants to try and get duplicates of the receipts and vouchers and bank records. The Appellants tried but were unsuccessful, in the main, for various reasons. As to the bank records, these could not be obtained because the bank had converted to a computer system such that there were no duplicates of the records for the years in question and prior years.
[12] The operation was carried on between the two Appellants on a partnership basis and Alexander testified they were 50/50 partners. However, the revenues and expenses reported on their returns for both Appellants varied from time to time and percentage wise from year to year. On this issue, Alexander testified that advances were made from time to time by himself and by Douglas. According to documents submitted, Alexander contributed $178,134 and Douglas contributed $112,372 over the period 1981 to 1994 for a total of $290,506. Volume 1 of Exhibit A-4 indicates that $249,152 was expended on diverse items of equipment.
[13] On this point the transcript of Alexander's testimony reads as follows:
Q. How did you fund the purchase of a quarter of a million dollars of equipment and all these expenses?
A. Doug made 70,000, $76,000 a year and he wanted to invest it and I have taken my retirement savings plans and cashed them in and I worked and put my money in there and right now, I worked in Canada for 50 years, I'm 70 years old and I don't own a house, I don't own nothing except the mine. I own a car that's 20 years old because I believed in the mine but what was worse than my belief is my wife believed in it.
...
As it stands, it hasn't worked out very well, but it's of course only my fault, my miscalculation is that Doug isn't married and Doug hasn't got a house and he owns a car that's 12 years old. What if it happens if we put, we've put everything that we had into the mine because when the evidence was added, it was good and it would produce a facility that would run for over 200 years and that it would create jobs, not just for our kids, or create jobs for many, many people, and everybody agrees with that. The experts agree with it but we also have people who want to get into the action without compensation, and it is a problem but not a surmountable problem because eight separate mines can be built on the structure now and the way the land is, the disposition of the land is such that eight concentrating facilities can be built and they will employ no less than 5,000 high-tech people and there are markets for all that material, so I was very happy with it and my wife was very happy with it and I didn't mind spending the money because I could see that it wouldn't cost any money, we going to make money but it's much slower than I thought it should be but not unreasonably slower because of the average it takes 16 years to find the mine and put it into production in Canada and we have spent about the same amount of time and we hope to bring it into production.
[14] There were small amounts of income in each year. On being asked where that income came from, considering that the mine was not actively producing ore during the years in question, it was explained by Alexander that the income derived from the sale to various parties of small bits of gold and other minerals and consideration received for transfers of leases.
[15] Exhibit A-4 contains seven large binders with details of some of the alleged exploration expenses incurred as well as other material concerning the project.
[16] Of greater importance, because the expenses referred to in those binders do not correspond with the expenses claimed, Alexander testified that all of the expenses claimed by the Appellants related to the mine in question. He further stated that over 90% of the invoices and vouchers are not contained in the documents at Exhibit A-4 as these were amongst the items in the trailer when it was stolen.
[17] As to the large expenses referred to as "Government", the amounts claimed by Alexander, namely $12,700 in 1992, $8,091 in 1993 and $6,242 in 1994, the first page in each of Vols. 5, 6 and 7 of Exhibit A-4 refers to these amounts as "Work Sch-Govt. Br. Col." representing "Costs not Claimed in previous years". To support where said Costs came from, Alexander filed Exhibit A-6 being eight samples of "Statements of Exploration and Development on printed forms of the British Columbia Ministry of Energy, Mines and Petroleum Resources. The largest of these refers to Physical Costs between August 8, 1986 and October 20, 1986 of $210,000. As to the $26,404 claimed in 1991 by Douglas, a similar Work Sheet is annexed to his 1991 return filed as Exhibit R-1. The cross-examination of Mr. McDonald by Alexander reads as follows:
Q. You have stated that the worksheets, the work schedules were made up Alex Schmidt and I have the worksheets that were made by me, they were stamped by the British Columbia government after the inspection of the work and after the approval of these amounts, they allowed us an extension of our leases.
May I give this to His Honour?
HIS HONOUR: Have you seen this?
MR. A. SCHMIDT: They are all stamped by the B.C. government at some times, not at the same time. The inspector goes out and confirms whether the work was done or not and I have a thousand of these.
...
MR. A. SCHMIDT: Work schedule, stamped by the British Columbia government and accepted after inspection, I have a thousand of them over the duration of the work and I won't burden the court with leaving the documents here, but these are some.
[18] As to expenses incurred in Alberta as opposed to British Columbia, Alexander stated that some of the expenses, although incurred in Alberta, were incurred there of necessity because of the long drive from Calgary, where the Appellants lived, to Jasper and then to Quesnel and Cottonwood. In other words, food, oil and gas would be acquired in Alberta although it was intended to be used for travel to British Columbia or consumed in British Columbia. Mr. McDonald stated that very few trips were actually made to the site by the Appellants whereas Alexander testified that he made at least 10 trips per year to the site.
Respondent's Submissions
[19] The Respondent asserts that the expenses claimed were not incurred or if incurred were not incurred for the purpose of gaining or producing income from a business or property. The Respondent further submits that it is impossible in most cases to determine any correlation between the alleged expenses and the mine. The Respondent also says that many of the expenses were personal in nature and therefore not deductible. The Respondent further denied many of the expenses related to food, oil, gas and other car expenses because they were incurred in Alberta and not British Columbia. The testimony of Mr. McDonald, the appeals officer, was that for Douglas most expenses were simply estimates. He also stated that most expenses were paid by Alexander.
[20] Respondent contends that the Appellants have the burden of proof with respect to expenses and that that burden has not been discharged. Respondent submits further that the expenses were not vouchered, including the large expenses referred to as "Government".
Appellants' Submissions
[21] The Appellants submit that the expenses claimed were incurred and related to the mine and further that they qualify as Canadian exploration expenses ("CEE") contemplated in Section 66.1 of the Income Tax Act ("Act").
Analysis and Decision
[21] In his final submission, counsel for the Respondent stated that what I was facing was a "mess". I agree but cannot use that as an excuse for not trying to sort out the mess. The mess is caused by several factors. Firstly the Appellants, although 50/50 partners did not divide income and expenses on that basis. Secondly, in the years in question the Appellants claimed losses from prior years but did not file on the basis that expenses were CEE but rather were business expenses and losses. Thirdly, in the absence of vouchers, how can one determine the nature of the expenses and their relationship to the exploration project? Fourthly, the summaries of expenses in Exhibit A-4 are different than those claimed in the tax returns, as set forth in paragraph 5 in each Reply.
[22] I accept the credibility of Alexander and believe him that the expenses claimed were truly incurred with respect to the mine. Vouchers and receipts could not be provided because they were stolen. The explanation of why some expenses were incurred in Calgary is understandable.
[23] As to "Government" expenses, although the Work Sheets do not establish that the costs were incurred they bear the stamp of the B.C. mining authority and at the least give some support to Alexander's testimony.
[24] Moreover, generally the expenses claimed are low in relation to the magnitude of the discovery and I see no reason to reduce them.
[25] As to the partnership issue, I accept Alexander's testimony that the Appellants were equal partners. Thus, their returns were wrong. All income and expenses should have been shown and divided equally. The error seems to have resulted from the Appellants having related income to amounts they received individually and having related expenses to amounts expended individually. In effect this only affects the 1991 year because in the other years the losses claimed end up being equal for both Appellants.
[26] Consequently, because there was a partnership from 1991 to 1994, any revenues received by Alexander in 1991 must be included in the partnershp revenues and the resultant loss for 1991 claimed by Douglas is to be divided equally between the Appellants.
[27] Further, in my opinion, there is no doubt that there was a mining exploration very actively carried on from at least 1982 through 1994. Much equipment was acquired including microscopes, seismic instruments and a 1981 Chevrolet van. Total expenditures were approximately $290,000. Several structures were erected, drilling and assaying operations were carried out.
[28] It is also my view that the expenses claimed related only to the mining adventure and therefore qualified as CEE within the meaning of Section 66.1 of the Act. Thus the ability to carry forward losses of previous years is unlimited rather than restricted by Section 111 of the Act dealing with losses generally. On this point counsel for the Respondent properly pointed out that I could not declare the CEE deductible in a given year without knowledge that amounts had not been claimed in previous years. This is true but in my opinion that is a function of the reassessment process to be carried out as a result of this Judgment, i.e., the Minister is to determine whether any expenses carried forward were claimed in previous years. If so, they cannot be deducted in subsequent years. That does not affect my conclusion that the expenses are CEE.
[29] There was also some concern as to whether the CEE issue was really before the Court. However, it is raised in paragraph 6 in the Notices of Appeal and the Replies say nothing concerning said paragraph 6.
[30] Consequently, for the above reasons, the appeals are allowed, with costs, and the matters are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.
Signed at Ottawa, Canada this 16th day of December 1999.
"T.P. O'Connor"
J.T.C.C.