MARTLAND,
J.
(all
agree)
:—This
is
an
appeal
from
a
judgment
of
Thurlow,
J.,
in
the
Exchequer
Court,
dismissing
the
appellant’s
appeal
from
the
Income
Tax
Appeal
Board,
which
had
dismissed
an
appeal
from
the
income
tax
assessment
of
the
appellant
for
the
year
1951.
The
only
question
in
issue
was
as
to
the
inclusion
by
the
respondent,
as
part
of
the
appellant’s
income
for
that
year,
of
an
amount
of
$140,084.89
realized
by
it
on
the
sale
of
certain
petroleum
and
natural
gas
leases.
The
facts
are
not
in
dispute.
William
Harrison
Riddle,
an
American
citizen
and
a
promoter
with
considerable
experience
in
the
oil
industry,
in
1949
organized
a
scheme
whereby
farmers
in
Saskatchewan,
owning
mines
and
minerals
in
their
lands
subject
to
lease
to
other
parties,
could
pool
their
interests
in
their
mineral
rights
and
under
such
leases.
For
this
purpose
he
caused
to
be
incorporated,
under
The
Companies
Act
of
Saskatchewan,
on
December
1,
1949,
Farmers
Mutual
Petroleums
Ltd.
(hereinafter
referred
to
as
‘‘Farmers
Mutual’’),
with
an
authorized
capital
of
1,000,000
shares
without
nominal
or
par
value.
The
scheme
of
operation
of
Farmers
Mutual
was
that
a
farmer
wishing
to
become
a
member
would
transfer
his
mineral
rights
and
assign
his
lessor’s
interest
under
his
petroleum
and
natural
gas
leases
to
Farmers
Mutual.
That
company
would
issue,
in
return,
one
share
of
its
capital
stock
for
each
acre
of
mineral
rights
transferred
to
it
and
would
agree
to
hold
in
trust
for
such
member
an
undivided
one-fifth
interest
in
those
mineral
rights
transferred
to
it
by
him.
By
an
agreement
dated
December
13,
1949,
Farmers
Mutual
appointed
Riddle
as
its
promoter
and
organizer
for
a
period
of
five
years.
He
had
the
sole
and
exclusive
right
to
solicit
memberships
in
that
company
and
to
sell
and
promote
the
sale
of
its
shares.
He
agreed
to
pay
all
expenses
incurred
in
connection
with
the
incorporation
of
the
company
and
the
sale
of
its
shares
and
also
agreed
to
pay
for
such
clerical,
bookkeeping
and
office
facilities
as
it
might
require
for
its
ordinary
business.
Farmers
Mutual
agreed
to
compensate
Riddle
by
giving
him
an
undivided
one-fifth
interest
in
all
mineral
rights
acquired
by
Farmers
Mutual
and
in
all
rents,
profits
and
advantages
accrued
or
to
accrue
therefrom,
including
rental
payments
under
existing
gas
and
oil
leases
held
by
Farmers
Mutual.
Riddle
employed
a
number
of
agents
to
solicit
memberships
in
Farmers
Mutual.
He
had
initially
assumed
that
all
the
farmers
solicited
would
already
have
made
leases
of
their
petroleum
and
natural
gas
rights.
He
discovered
that
this
was
not
always
the
case.
While
there
was
no
legal
impediment
to
preclude
a
farmer
who
had
not
leased
his
petroleum
and
natural
gas
rights
from
becoming
a
member
of
Farmers
Mutual,
Riddle
adopted
a
policy
of
not
admitting
to
its
membership
any
one
who
had
not
made
such
a
lease.
However,
in
the
case
of
persons
who
had
not
so
leased
their
petroleum
and
natural
gas
rights,
he
notified
his
agents
that
he,
personally,
was
agreeable
to
leasing
those
rights.
A
form
of
petroleum
and
natural
gas
lease
was
used
by
his
agents
for
this
purpose,
which
provided
for
a
ten-year
lease
with
a
cash
payment
of
ten
cents
per
acre
of
land
leased,
with
a
one-year
drilling
commitment
by
the
lessee,
which
commitment
might
be
postponed
from
year
to
year
by
a
payment
of
ten
cents
per
acre
in
each
year.
Such
leases,
when
obtained,
were
assigned
to
Farmers
Mutual
in
the
same
way
as
were
members’
leases
to
other
lessees.
On
May
30,
1950,
Riddle
caused
to
be
incorporated,
under
The
Companies
Act
of
Saskatchewan,
Minerals
Ltd.,
the
present
appellant,
with
an
authorized
capital
of
$20,000,
divided
into
20,000
shares
of
a
par
value
of
$1
each.
At
the
outset,
all
the
issued
shares
in
the
appellant
company
were
owned
by
Riddle
and
his
wife.
The
appellant
became
his
‘‘alter
ego’’.
Accordingly,
by
agreement
dated
June
1,
1950,
and
made
between
Riddle
and
the
appellant,
Riddle
sold
to
the
appellant
his
business
as
promoter
and
organizer
of
Farmers
Mutual,
including
his
rights
under
the
agreement
of
December
13,
1949,
made
between
himself
and
Farmers
Mutual.
The
consideration
paid
to
Riddle
was
$10,000.
Another
agreement
was
also
made
on
June
1,
1950,
by
Riddle,
the
appellant
and
Farmers
Mutual,
whereby
Riddle
assigned
to
the
appellant
all
his
rights
under
the
agreement
of
December
13,
1949.
The
appellant
agreed
to
carry
out
all
Riddle’s
obligations
under
that
agreement
and
Farmers
Mutual
accepted
the
assignment.
Following
the
making
of
these
agreements,
the
operation
of
Farmers
Mutual
was
carried
on
by
the
appellant.
Agents
of
the
appellant
solicited
memberships
in
Farmers
Mutual
and
continued
the
practice
of
taking
leases
of
petroleum
and
natural
gas
rights
from
farmers
in
its
own
name
in
cases
where
they
had
not
already
made
leases
of
their
petroleum
and
natural
gas
rights.
The
appellant
used
a
printed
form
of
lease
bearing
its
own
name
as
lessee,
similar
in
terms
to
the
leases
which
Riddle
had
taken
in
his
own
name.
Those
leases
previously
taken
by
him
were
assigned,
in
respect
of
his
lessee’s
interest,
to
the
appellant.
Commissions
were
paid
by
the
appellant
to
his
agents
in
connection
with
the
obtaining
of
these
leases
in
the
same
way
as
they
were
paid
for
the
obtaining
of
memberships
in
Farmers
Mutual.
Farmers
Mutual,
through
the
efforts
of
Riddle
and
of
the
appellant,
acquired
mineral
rights
in
approximately
750,000
acres
of
land
in
Saskatchewan.
Petroleum
and
natural
gas
leases
made
to
Riddle
as
lessee
(and
assigned
by
him
to
the
appellant)
and
to
the
appellant
as
lessee
totalled
some
81,000
acres.
Funds
were
advanced
from
time
to
time
to
the
appellant
equally
by
Central
Ledue
Oils
Limited
and
Del
Rio
Producers
Ltd.,
two
oil
companies
which
were
under
the
direction
of
Neil
McQueen
and
Arthur
Mewburn.
In
consideration
of
these
advances,
and
in
partial
payment
of
them,
one-half
of
the
capital
stock
of
the
payment
was
issued
to
these
two
companies
in
November
1950.
In
his
evidence
Riddle,
when
asked
as
to
the
intention
of
the
appellant
regarding
the
petroleum
and
natural
gas
leases
taken
by
it
from
farmers,
stated
that
they
did
not
know
what
they
would
do
with
them.
He
said
that
he
tried
to
get
McQueen
and
Mewburn
to
take
them
and
that
they
did
not
want
them.
He,
himself,
was
approached
at
one
time
by
a
representative
of
British
American
Oil
Company,
who
suggested
that
Riddle
should
work
as
a
broker
for
that
company
in
obtaining
leases
for
it
and
suggesting
that
that
company
would,
as
part
of
the
arrangement,
take
over
the
leases
held
by
the
appellant.
This
offer
was
not
accepted.
In
the
spring
of
1951
Amigo
Petroleums
Ltd.
approached
Riddle,
with
a
view
to
acquiring
the
interest
of
the
appellant
in
certain
of
the
leases
held
by
it.
Riddle
refused
this
proposal,
but
offered
to
sell
the
appellant’s
interest
in
all
the
leases
which
it
held
at
a
flat
price
of
$2
per
acre.
This
offer
was
accepted
and
a
letter
agreement
was
made
between
the
appellant
and
Amigo
Petroleums
Ltd.,
dated
May
5,
1951,
respecting
this
sale,
subject
to
the
rights
of
the
Amigo
Company
to
refuse
any
lands
in
respect
of
which
it
was
not
satisfied
as
to
title.
All
of
the
appellant’s
leases
were
assigned,
pursuant
to
this
agreement,
to
Amigo
Petroleums
Ltd.,
save
only
those
relating
to
a
small
portion
of
the
lands
in
respect
of
which
there
was
some
question
as
to
title.
The
profit
realized
by
the
appellant
upon
this
sale
was
$140,084.89.
The
sole
question
in
issue
is
as
to
whether
this
sum
represents
taxable
income
of
the
appellant
or
is
a
capital
gain.
The
relevant
sections
of
The
1948
Income
Tax
Act
applicable
in
respect
of
this
question
are
as
follows:
“3.
The
income
of
a
taxpayer
for
a
taxation
year
for
the
purposes
of
this
Part
is
his
income
for
the
year
from
all
sources
inside
or
outside
Canada
and,
without
restricting
the
generality
of
the
foregoing,
includes
income
for
the
year
from
all
(a)
businesses,
(b)
property,
and
(c)
offices
and
employments.
4.
Subject
to
the
other
provisions
of
this
Part,
income
for
a
taxation
year
from
a
business
or
property
is
the
profit
therefrom
for
the
year.
127.
(1)
In
this
Act,
(e)
‘business’
includes
a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatsoever
and
includes
an
adventure
or
concern
in
the
nature
of
trade
but
does
not
include
an
office
or
employment.”
For
the
appellant
it
was
contended
that
the
sale
of
the
petroleum
and
natural
gas
leases
was
an
isolated
transaction,
whereby
the
appellant
disposed
of
all
its
leases
at
a
uniform
price,
and
constituted
the
sale
of
a
capital
asset.
The
respondent
took
the
position
that
the
sale
of
the
leases
was
a
gain
from
a
trade
or
business
carried
on
by
the
appellant.
The
test
to
be
applied
in
resolving
this
issue
is
the
frequently
cited
statement
of
the
Lord
Justice
Clerk
in
Californian
Copper
Syndicate
v.
Harris
(1904),
5
T.C.
159
at
165:
“It
is
quite
a
well
settled
principle
in
dealing
with
questions
of
assessment
of
Income
Tax,
that
where
the
owner
of
an
ordinary
investment
chooses
to
realise
it,
and
obtains
a
greater
price
for
it
than
he
originally
acquired
it
at,
the
enhanced
price
is
not
profit
in
the
sense
of
Schedule
D
of
the
Income
Tax
Act
of
1842
assessable
to
Income
Tax.
But
it
is
equally
well
established
that
enhanced
values
obtained
from
realisation
or
conversion
of
securities
may
be
so
assessable,
where
what
is
done
is
not
merely
a
realisation
or
change
of
investment,
but
an
act
done
in
what
is
truly
the
carrying
on,
or
carrying
out,
of
a
business.
The
simplest
case
is
that
of
a
person
or
association
of
persons
buying
and
selling
land
or
securities
speculatively,
in
order
to
make
gain,
dealing
in
such
investments
as
a
business,
and
thereby
seeking
to
make
profits.
There
are
many
companies
which
in
their
very
inception
are
formed
for
such
a
purpose,
and
in
these
cases
it
is
not
doubtful
that,
where
they
make
a
gain
by
a
realisation,
the
gain
they
make
is
liable
to
be
assessed
for
Income
Tax.
What
is
the
line
which
separates
the
two
classes
of
cases
may
be
difficult
to
define,
and
each
case
must
be
considered
according
to
its
facts;
the
question
to
be
determined
being—Is
the
sum
of
gain
that
has
been
made
a
mere
enhancement
of
value
by
realising
a
security,
or
is
it
a
gain
made
in
an
operation
of
business
in
carrying
out
a
scheme
for
profit-making?”
The
respondent
has
made
reference
to
the
objects
of
the
appellant
as
set
forth
in
its
Memorandum
of
Association,
which
include
the
acquiring
and
selling
of
mineral
claims
and
trading
and
dealing
in
leases.
The
existence
of
these
objects
and
powers,
however,
does
not
determine
the
question
in
issue
here.
Locke,
J.,
delivering
the
judgment
of
this
Court
in
Sutton
Lumber
and
Trading
Company
Limited
v.
M.N.R.,
[1953]
2
S.C.R.
77
at
83:
[1953]
C.T.C.
237
at
244,
states:
‘‘The
question
to
be
decided
is
not
as
to
what
business
or
trade
the
company
might
have
carried
on
under
its
memorandum,
but
rather
what
was
in
truth
the
business
it
did
engage
in.
To
determine
this,
it
is
necessary
to
examine
the
facts
with
care.
’
’
Similarly,
Lord
Warrington
of
Clyffe,
in
the
case
of
Salisbury
House
Estate,
Ltd.
v.
Fry,
15
T.C.
287
at
316,
says
:
“But
the
Crown
contends
that
the
fact
that
the
taxpayer
is
a
limited
company
may
distinguish
its
operations
from
those
of
an
individual.
Assuming
the
Memorandum
of
Association
allows
it,
and
in
this
case
it
unquestionably
does,
a
Company
is
Just
as
capable
as
an
individual
of
being
a
landowner,
and
as
such
deriving
rents
and
profits
from
its
land,
without
thereby
becoming
a
trader,
and
in
my
opinion
it
is
the
nature
of
its
operations,
and
not
its
own
capacity,
which
must
determine
whether
it
is
carrying
on
a
trade
or
not.
Nor
do
I
see
any
reason
why,
as
in
the
present
case,
some
of
its
operations
under
the
wide
powers
conferred
by
the
Memorandum
should
not
be
operations
of
trade,
whereas
others
are
not.”
It
is,
therefore,
necessary
to
determine
from
other
evidence
whether,
in
fact,
the
acquisition
and
sale
by
the
appellant
of
the
leases
in
question
were
merely
the
realization
of
an
ordinary
investment
or
were
a
part
of
the
carrying
on
or
carrying
out
of
the
appellant’s
business.
The
principal
business
of
the
appellant
was
the
sale
and
the
promotion
of
the
sale
of
shares
in
Farmers
Mutual
and
the
organization
of
that
company.
As
previously
pointed
out,
Riddle,
and,
in
turn,
the
appellant,
decided,
as
a
matter
of
policy,
that
they
would
take
petroleum
and
natural
gas
leases
from
farmers
who
had
not
previously
leased
those
rights,
so
as
to
make
it
possible
for
them
to
become
members
of
Farmers
Mutual.
This
was
not
a
matter
of
legal
necessity
to
enable
such
farmers
to
become
members
of
Farmers
Mutual.
It
was
not
incumbent
on
the
appellant
to
take
such
leases.
It
did
so
as
a
matter
of
business
judgment
and
as
a
part
of
its
business
in
relation
to
the
sale
of
shares
of
Farmers
Mutual.
Having
acquired
those
leases,
what
disposition
was
to
be
made
of
them
by
the
appellant?
The
leases
involved
drilling
commitments
or,
alternatively,
payments
for
postponement
of
those
drilling
obligations.
It
has
already
been
mentioned
that
in
his
evidence
Riddle
said,
respecting
his
intention
in
connection
with
these
leases,
that
they
did
not
know
what
they
would
do
with
them,
that
he
had
tried
to
get
McQueen
and
Mewburn
to
take
them,
but
that
they
did
not
want
them.
He
said
that
they
talked
about
the
leases
several
times
and
that
they
knew
they
would
have
to
pay
(i.e.,
the
delay
rentals)
if
they
kept
them
long
enough.
In
the
end
a
sale
of
the
leases
was
made
less
than
a
year
after
their
acquisition.
The
appellant
argued
that
the
leases
had
been
acquired
unwillingly
and
not
as
a
part
of
the
appellant’s
business.
It
was
contended
that
the
situation
was
analogous
to
the
case
of
Glasgow
Heritable
Trust,
Ltd.
v.
C.I.R.,
35
T.C.
196.
In
that
case
the
appellant
company
was
formed
to
acquire
tenement
properties
previously
owned
by
a
partnership
of
builders.
The
shares
of
the
company
were
mainly
held
by
the
former
partners,
or
members
of
their
families.
Sales
of
flats
took
place
from
time
to
time
either
to
sitting
tenants
or
when
flats
were
vacated
by
tenants.
The
evidence
established
that
the
operation
of
the
appellant
company
was
in
the
nature
of
a
salvage
proposition.
It
was
pointed
out
in
the
judgment
of
the
Lord
President
at
p.
215
that
:
‘
The
purpose
which
informed
the
Company
was
to
salve
something
from
the
wreck
of
a
type
of
trading
enterprise
which
when
the
Company
was
formed
was
not
‘dormant’
but
dead,
by
selling
the
separate
flats
in
the
only
possible
fashion
for
the
benefit
of
the
firm’s
creditors
and
of
the
beneficiaries
of
the
estates
of
the
deceased
partners.’’
The
circumstances
of
that
case
are
not
at
all
similar
to
those
in
the
present
one.
In
this
case
the
leases
were
deliberately
acquired
by
the
appellant
as
a
part
of
its
business
in
operating
Farmers
Mutual.
There
is
no
evidence
whatever
of
any
intention
either
to
work
them
or
to
retain
them
as
an
investment.
The
appellant
was
aware
of
the
payments
which
would
be
required
if
they
were
retained
and
the
leased
lands
were
not
drilled.
It
elected
to
sell
them.
The
fact
that
the
leases
were
sold
as
a
group
rather
than
individually
or
in
separate
portions
does
not
affect
the
result.
The
appellant
contended
that
this
was
an
isolated
transaction,
but
that
does
not,
in
itself,
prevent
the
profit
from
being
taxable,
as
is
pointed
out
in
Edwards
v.
Bairstow,
[1956]
A.C.
14,
and
in
McIntosh
v.
M.N.R.,
[1958]
S.C.R.
119;
[1958]
C.T.C.
18.
In
my
view,
having
acquired
the
leases
as
a
part
of
its
business,
the
appellant
never
intended
to
retain
them,
either
for
purposes
of
development
or
as
an
investment,
but
did
intend
to
sell
them
if
and
when
a
suitable
price
could
be
obtained.
Consequently
the
profit
realized
on
their
sale
is
not
in
the
nature
of
a
capital
gain,
but
is
a
profit
made
in
the
operation
of
the
appellant’s
business.
I
would,
therefore,
dismiss
the
appeal
with
costs.
Judgment
accordingly.