Fickes v. The Queen, 94 DTC 1969, [1994] 1 CTC 2884 (TCC)

Lamarre, J.T.C.C.:—

Issue

These are appeals from assessments of income tax issued by the Minister of National Revenue (the Minister) in respect of the appellant’s 1987, 1988 and 1989 taxation years. In his return of income for the year 1987, the appellant sought to deduct in computing income the sum of $153,000 as a business loss for an amount he had to pay to the Canadian Imperial Bank of Commerce (CIBC) for his share of a personal guarantee that he had given when he acquired shares of CSP Canada Safety Products Inc. (CSP Canada). He also sought to deduct as business losses legal, accounting and office expenses related to the payment of such guarantee in the amounts of $8,108 in 1987, $10,095 in 1988 and $2,650 in 1989.

In making the 1987 assessment under appeal, the Minister considered the appellant’s payment of $153,000 pursuant to the loan guarantee in 1987 plus related expenses of $8,108 as a capital loss on a business investment only half of which was deductible from his other income.

Furthermore, the Minister disallowed deduction of the legal, accounting and office expenses for 1988 and 1989 on the basis that "they were expenditures incurred to prevent further pay outs on the loan guarantee" and therefore not incurred for the purpose of gaining or producing income.

Counsel for the appellant made a preliminary remark saying that he would enter in evidence the appellant's history of putting money up for business ventures in order to establish that when he became involved as a guarantor of the bank loan to CSP Canada he was acting as a trader or at least was engaged in an adventure in the nature of trade.

Facts

In order to establish the intention of the appellant when he acquired the shares of CSP Canada and his manner of operation, counsel for the appellant called five witnesses, including the appellant.

The first witness, Mr. Brookes Diamond, has been an artist's manager for 23 years. He met the appellant in 1966 and first dealt with him in 1975, when he decided to run an event called the Atlantic Folk Festival that was designed to be an annual event. It required more capital than he had, so he approached the appellant who lent him an amount ranging between $3,000 to $5,000. The loan was made for an agreed term of three to four months bearing interest at a given rate plus a set amount of money, more or less like a bonus, that was a percentage of the amount loaned. He paid back the appellant according to the terms of the deal. In 1976, they did the same thing with the same result.

He approached the appellant again, in the early 1980s, without success, to have him invest in a retail business. He said the appellant never intended to become a long-term investor in his businesses, and that anyhow the appellant told him that his money was already tied up somewhere else.

On cross-examination, Mr. Diamond said the appellant was a good friend, that he went to see the appellant because the bank would not lend him money, that the appellant lent him money for the two first years of the festival that lasted in total for seven years, and that the appellant refused to invest $30,000 in his retail business because he said he was on the verge of making another deal.

Mrs. Stephanie Crouse was called as a second witness and her testimony was corroborated by the appellant. She has known the appellant for 16 years and lived with him in a common-law relationship from 1978 to 1990. When she met him, he was part owner in a service marine company, where he was in charge on a full- time basis of the electronic part of the business. In 1981, the appellant’s father died, at which time, the appellant started to receive income from a trust fund through his father’s estate and he sold his part in the marine company. He then set up a small marine company of his own, in the name of Oceanus Marine which still exists but is now a holding company for the appellant. Mrs. Crouse also testified that in 1984, the appellant bought a property 45 miles from Halifax. She and the appellant wanted to develop a horse farm, and their plans were to get into breeding and raising horses.

She said that the appellant was regularly approached by people to put his money in their businesses because he was known as having money. Most of the time he declined but some proposals he accepted. It came out from her testimony that the appellant invested money in Brandon International Marketing Ltd. (Brandon) in 1982, where he lost his money. He also invested in Dartmouth Fire Stop Inc. when he was approached by Garnett Swinemar who had a franchise to sell fire extinguishers in Dartmouth. She testified that at the same time a person named Bob McDonald operated the same franchise in Halifax and after some time, the two companies were merged into CSP Halifax Dartmouth Inc. After the merger, the appellant wanted to get out of the company and concentrate on the farm they just bought. She testified that the appellant was then approached by the shareholders of ASP Canada which was the company supplying the fire extinguishers. ASP Canada was apparently in financial difficulties and they wanted the appellant and McDonald to put money in the company to keep it from going under. Both the appellant and McDonald agreed to finance the company, thinking the injection of funds could become profitable. According to Mrs. Crouse, the appellant did not have anything to do with the daily activities and was not receiving any money from the company. After a while, they proposed to go public, and the office moved to Toronto. The appellant travelled there once or twice to set things up. When it looked as if the company was not going to be viable, she said the appellant wanted to get out of it.

The third witness, Mr. Kirk Rafuse, is a marketing consultant, who incorporated Brandon in 1979. He said the company was set up to aid small businesses in developing marketing strategies. When Mr. Rafuse approached the appellant, his company was acting as the Canadian representative of Saxton Communications Group which was an American company that had developed marketing plans for many of the Fortune 500 companies, such as for example Chase Manhattan Bank, City Bank, New York Yankees, Ford, Shell and Texaco. In 1981, it had five full-time employees. At that time, an injection of cash was required and Mr. Rafuse signed on behalf of Brandon two promissory notes in favour of the appellant for an amount of $5,000 each, payable a few months after with interest at the rate of 25 er cent per annum. A third promissory note was signed by Mr. Rafuse's spouse on behalf of Brandon, in favour of the appellant for an amount of $1,000, payable on the same conditions in less than a year. All three notes were never repaid. Instead, Mr. Rafuse testified that he offered the appellant a shareholder position in the company on a short-term basis until the company got turned around. The appel- lant guaranteed a bank loan of $75,000 for Brandon and became a controlling shareholder. From this moment, the appellant oversaw payment of the bills and the general bookkeeping and administration of the company. Mr. Rafuse testified that ne anticipated at this time that he would buy back the shares of the appellant at three times the net profit of the company after a year or a year and a half under a buy-sell agreement. In cross-examination Rafuse admitted that he had no other sources of income besides Brandon and that it was not realistic to think that he could buy out the appellant at that time. The appellant testified that when he invested in Brandon, it looked like a viable company regarding the contracts it had with Saxton Communications, Blue Line Editor and Scotsburn Milk, each known as serious companies. And as long as he had control via his shares and the shareholders' agreement, he seemed comfortable with it. But the company eventually closed, the main reason was that the staff was offered employment by someone who first attempted to buy part of the company. The appellant was asking too much for the shares and the buyer did not accept the proposal and left with the employees. The appellant had to pay the guarantee to the extent of $60,000 to the bank which he declared as a business loss in the year 1982. Years later, Mr. Rafuse again approached the appellant for bridge financing in the range of $100,000 and this time the appellant declined the proposal.

The last two witnesses, Mr. Garnet Swinemar and the appellant testified on the transaction that is the subject of the present appeal, which is the investment with the fire extinguishers' franchiser which led to the payment in 1987, by the appellant, of the amount guaranteed by him to the CIBC, to the extent of $153,000 plus the legal and accountant fees incurred in relation to this guaranteed payment in the years 1987, 1988 and 1989.

Mr. Swinemar, who initially had some experience as a stockbroker, knew the appellant for 25 years. In the spring of 1984, Mr. Swinemar was introduced by the appellant’s brother to the franchisor distributing a new product in the field of fire extinguishers, called Haylonite. The advantage of the said product compared to the conventional extinguishers was that it did not require a nitrogen propellent. With such kind of extinguisher, there was no residue left, no damage to expensive equipment compared to the dry chemical extinguisher that was already on the market. The new product was packaged in the form of little extinguishers marketable for homes and offices. According to Mr. Swinemar, this product was to replace all conventional extinguishers. He was offered the city of Dartmouth as his franchise territory. In order to get the franchise, he needed $16,000. He therefore approached the appellant who was interested because he previously heard of the project from his brother. In June 1984, they decided to incorporate Dartmouth Fire Stop Inc. in which the appellant owned a little more than 50 per cent of the shares and Mr. Swinemar owned the balance. They were bound by a shareholders’ agreement whereby the appellant could sell his shares and Mr. Swinemar had a right of first refusal. According to Mr. Swinemar, the appellant did not want to stay in the company for more than a year. As the appellant put the money in, he looked after the books and the cheques of the company. Mr. Swinemar looked after the sales and was receiving a salary while the appellant did not. After a while, things happened to turn in a way different than foreseen. The product the company was selling had to be approved by the Underwriters’ Laboratories of Canada (ULC) before it could be sold to government agencies. ULC is a testing organization in Canada that applies rigorous tests on safety products. They did not receive ULC approval before January 1986. The result showed on the profitability of the venture as they could not sell as many products as they would have liked.

In early 1985, they realized the venture was not viable by itself. So they decided to expand the market of fire extinguishers over a broader geographical area, and it is at that time they established the new corporation (CSP Halifax Dartmouth Inc.). CSP Halifax Darmouth Inc. had four shareholders, the appellant 30 per cent, McDonald 30 per cent, Garnet Swinemar 20 per cent and Graham Davis 20 per cent. In this transaction, the appellant did not invest money and reached an agreement with McDonald whereby the latter would reimburse all the debts of Dartmouth Fire Stop Inc, which debts amounted to approximately $70,000. In the result, the appellant testified that he had no financial exposure in CSP Halifax Dartmouth Inc., but he owned shares in it. He was not involved in the day-to-day operations but he with McDonald had the authorization to write the cheques.

In July 1985, the appellant and McDonald decided to buy out the Canadian franchisor of the fire extinguishers, CSP Canada, owned by ASP International Inc. (ASP). With this transaction, they had the right to distribute fire extinguishers across Canada. The appellant owned 25.5 per cent of the shares, McDonald 25.5 per cent, and two other persons owned the balance, Terence G. MacPherson 24.5 per cent and David Fogarty 24.5 per cent. How they bought the shares and how much they paid for them was confusing. My understanding is that the appellant bought 25.5 per cent of the shares of ASP that was liquidated in CSP Canada afterwards. The appellant would: have paid $20,000 for the acquisition of the shares and would have assumed 50 per cent of a debt of $150,000 due by ASP to the CIBC. Said debt of $150,000 would have been repaid by McDonald and the appellant was therefore indebted to McDonald for his share, $75,000. The evidence was unclear as to when and how the appellant had to guarantee half of the loan of $400,000 made to CSP Canada by the CIBC, on which he had to pay the $153,000 under issue here. Part of the appellant’s testimony implied that the guarantee was given by him when he acquired the shares of CSP Canada via ASP. But at the end of his testimony, the appellant stated that he first bought the shares of ASP, that was dissolved into CSP Canada and then gave the guarantee to the CIBC. I will quote here the appellant when he was answering a question as to when he purchased ASP, he answered:

It had to be before August of 1985, because the bank would not release any moneys on a loan guarantee to a company that we didn't own.

And previously to a question from the Court as to when he bought the shares of CSP Canada through ASP and when he guaranteed half of the loan of $400,000 made by the CIBC to CSP Canada, the appellant answered:

. . that's correct (the guarantee was given in August 1985). That's why I say we owned the shares before that, because we couldn't get the loan without owning the shares As soon as I bought ASP, I owned CSP.

After the appellant acquired the shares of CSP Canada, CSP Halifax Dartmouth still operated and was one distributor for CSP Canada. A joint venture was created in Cape Breton to manufacture the products. CSP Canada had 49 per cent of the joint venture. Soon the business had to be transferred to Toronto, as the major markets were there. CSP Canada moved its office to Toronto. The appellant testified that he was going there periodically, to check the operations and to make sure everything was going well. After a while, CSP Canada started manufacturing in Toronto. They had a big first order but they did not have the cash flow to meet it. So they looked for private investors (among others, people of Hong Kong were interested in incorporating a Far East company to distribute fire extinguishers for the entire Far East market, in which company the appellant would have been a director of said company but finally it never came through). At the beginning of 1987, the appellant did not want to put more money in this venture. Mr. Swinemar had the idea of trying to get a public share issue and he convinced McDonald and the appellant to put an extra $20,000 to let him go to Toronto and make the necessary contacts. He was introduced to people who were involved in various business ventures and who were interested in investing $600,000 of seed money, which was the initial financing for the public company. A written commitment was given by the seed investors in July 1987. A document called "proposed public offering CSP Inc.” was prepared by Mr. Swinemar at the beginning of 1987 in which the appellant seemed to be one of the shareholders. Mr. Swinemar testified he did not think of the appellant severing his interests when he drew that document. The appellant was called to be a director of that new corporation, but he said, they were only at the preliminaries. At this moment, he contemplated the appellant would be a shareholder of the public company.

The appellant testified that he met one of the seed investors at the end of April 1987 and he was convinced the public issue was going ahead. However, they were facing problems with the president of CSP Canada, Mr. McPherson who was caught in a fraud with the moneys of the company. Finally, the CIBC decided to call the bank loan and the appellant had to pay $153,000, and incurred expenses in relation to other payments claimed by the bank ($8,108 in 1987, $10,095 in 1988 and $2,650 in 1989). It is on these amounts that the appellant is claiming a business loss rather than a capital loss. He never got the money back, and in October 1987 the proposed public share issue floundered due to the recession in the stock market.

The appellant testified that if the public issue had gone through, his understanding is that he would have received from McDonald $50,000 for his shares in CSP Canada, and $150,000 from seed investors for his shares in CSP Canada. He would have taken this money to pay off the bank loan. Further his profit would have been received in the form of 30,000 shares and 1,600 warrants in the public corporation. He first thought of selling his shares in July 1987 when the seed investors offered him to buy them back. In fact, according to Swinemar's testimony, it was a condition imposed by the seed investors that the appellant sold them his shares in CSP Canada.

The appellant testified that after the public issue collapsed, he gave all his shares in CSP Canada to McDonald in consideration for the extinguishment of his debt of $75,000. This was not claimed in his tax return as a loss.

The appellant who described himself as a venture capitalist, summarized the situation by saying that his interest in investing in Brandon and in CSP Canada was to take it while small and make it profitable and then sell his interest. He pointed out that he did not receive any salary from these ventures.

Appellant's position

Counsel for the appellant submitted in his argument that the appellant was a venture Capitalist, who was concerned with short-term advancement of funds and making a profit in a relatively short period. It is with this philosophy, he argued, that the appellant committed himself when he signed the bank guarantee in August 1985 (when he acquired the shares of CSP Canada), that he had to pay two years later in the summer of 1987, when the bank called the guarantee. He argued that the intention behind such a commitment, was to turn the company around or put it on its feet and get his money back with a profit. He argued that if the appellant had acted simply as an investor, he would have been concerned about avoidance of risk and would have expanded his base of investments, which counsel argued he did not. He said that the evidence showed that the appellant never invested in more than one venture at the time, and he suggested that if he really had wanted to minimize his risk, he would have been involved in several operations rather than just one at the time. He concluded that the appellant in this sense really acted as a trader or a person who was conducting an adventure in the nature of trade. He based his argument on the following decisions:

West Coast Parts Co. Ltd. v. M.N.R., [1964] C.T.C. 519, 64 D.T.C. 5316 (Ex. Ct.)

M.N.R. v. Freud, [1969] S.C.R. 75, [1968] C.T.C. 438, 68 D.T.C. 5279

Placements Bourg-Royal Inc. v. The Queen, [1974] C.T.C. 362, 74 D.T.C. 6269

(F.C.T.D.)

Bossin v. The Queen, [1976] C.T.C. 358, 76 D.T.C. 6196 (F.C.T.D.)

Becker v. The Queen, [1983] C.T.C. 11, 83 D.T.C. 5032 (F.C.A.)

Leslie v. M.N.R., [1986] 1 C.T.C. 2209, 86 D.T.C. 1152 (T.C.C.)

Cull v. The Queen, [1987] 2 C.T.C. 63, 87 D.T.C. 5322 (F.C.T.D.)

W. Green Holdings Ltd. v. M.N.R., [1990] 2 C.T.C. 2068, 90 D.T.C. 1605 (T.C.C.)

Factory Carpet Ltd. v. The Queen, [1985] 2 C.T.C. 267, 85 D.T.C. 5464 (F.C.T.D.).

Respondent's position

Counsel for the respondent submits that the payment of the guarantee which is under issue in this appeal and the legal and accounting expenses related thereto were not made on account of business and therefore not totally deductible but were more in the nature of capital expenditures. He argued that to be treated as business expenses, the appellant had to prove that he was conducting an adventure in the nature of trade when he bought the shares of CSP Canada, and in order to establish this, the Court has to determine what was the appellant's operating motivation in acquiring those shares. He submits that the evidence is unclear as to how he acquired the shares, what investment was injected and how exactly he intended to make a profit. He suggested that there was no clear evidence providing a foundation for the intention that the shares of CSP Canada were acquired for the purpose of resale at a profit, and citing the Federal Court of Appeal in Mandryk v. Canada, [1992] 1 C.T.C. 317, 92 D.T.C. 6329, at page 323 (D.T.C. 6334), wherein McGuigan, J. said that "there is, thus, a presumption that such a transaction [the acquisition of shares] is of a capital nature, though it may be rebutted by the taxpayer", he concluded that the appellant did not meet his burden to overrule such a presumption.

Analysis

After having considered the evidence that was given before the Court and analyzed the facts as they were presented by both parties, I come to the conclusion that this is a case in which a claim for payment was made under a guarantee given by shareholders to a bank to induce it to advance the capital required by the shareholders’ company to carry on its business. Such a payment, when made, is an outlay of capital, as it was established by the Supreme Court of Canada in M.N.R. v. Steer, [1967] S.C.R. 34, [1966] C.T.C. 731, 66 D.T.C. 5481. Indeed, I infer from the evidence, that the guarantee to the CIBC was given by the appellant after having acquired the shares of CSP Canada.

However, even if I had concluded that such guarantee was the price paid for the acquisition of the shares, I would still say that it was a capital transaction. It came out in evidence that the appellant who was in receipt of large passive income derived from a trust created by the will of his father, who had previously accumulated work experience in the marine business, acted rather as a prudent investor and not as someone who lent his money in speculative circumstances. The evidence brought by the appellant and the other witnesses clearly indicated that he would not nave invested his money in risky enterprises. The first time, he lent small amounts of money to a friend, Mr. Diamond, who was involved in his musical business for 23 years. When Mr. Diamond asked him to lend him $30,000 for a new business, the appellant declined the proposal.

The second time he agreed to lend his money, it was to another friend, Mr. Rafuse, for amounts a little higher than the first time. Mr. Rafuse did not have the money to pay him back so he offered the appellant a controlling shareholder interest in his company, Brandon International Marketing Ltd., in consideration of which the appellant accepted to guarantee a bank loan of $75,000 for Brandon. Again in this case, the fact that Brandon was the Canadian representative of a well-known American company, Saxton Communications Group, a developer of marketing plans for big American companies, leads to the conclusion that the appellant did not think that he was investing in a risky business. In any event he protected himself with a shareholders’ agreement and by overseeing the general administration and bookkeeping of the company. It came out in evidence that if the company eventually closed and the appellant finally had to pay part of the guarantee ($60,000), it was due to circumstances out of his control.

Then comes the investment in Dartmouth Fire Stop Inc. Here again, the appellant started by lending fairly small amounts to a friend who had the franchise to sell a brand new product that was to replace the conventional fire extinguishers on the market. The appellant knew about this new product and seemed confident that it would become profitable. Again he was controlling the company and its administration and bookkeeping. The company was merged with another one that was operating in Halifax and the merged corporation became CSP Halifax Dartmouth, whereby the appellant held 30 per cent of the shares with no more financial exposure as McDonald, one of the shareholders of the merged company reimbursed him all the advances he had previously made to Dartmouth Fire Stop Inc.

When the appellant decided to buy out the Canadian franchisor CSP Canada in a proportion of 25.5 per cent, I agree with counsel for the respondent that the evidence is rather unclear on what his intent was in buying these shares. I understand from it that he first paid an amount of $20,000 plus he assumed 50 per cent of a loan of $150,000 that was due by ASP to CIBC. It is not clear when he gave the guarantee for 50 per cent of a loan of $400,000 that was given to CSP Canada by the CIBC and which payment is actually under issue. According to the testimony of the appellant, it would have been given approximately at the same time he acquired the shares of ASP which was then liquidated into CSP Canada. From the evidence, it was not :lear that at this moment the appellant wanted to sell his shares at a profit. It appears that he and his partners wanted to expand and control the sale of this new Haylonite product across Canada with the intention of deriving income from it by way of dividends out of the profits expected to be realized by CSP Canada. I am more inclined to infer from the evidence that the advances were made by the appellant and McDonald for the purpose of enabling CSP Canada to operate and meet expenses in the process of creating marketable fire extinguishers. The fact that they wanted to become public and that the name of the appellant appeared in all the preliminary documents as a shareholder and a director of the proposed public company confirmed this interpretation. Furthermore, it was at the request of the seed investors in the public company that the appellant finally agreed to sell his shares. It was not in evidence that he first offered his shares for sale. The testimony of Mr. Swinemar was that it was a condition for the seed investors to put money in the public company and hence the appellant sold his shares. It appears that it was only at this moment, that is in July of 1987, that the appellant thought of selling his shares.

Review of authorities

Where a taxpayer has sustained losses on loans or guarantees, the courts have treated the losses as capital losses unless the loans or the guarantees were made by the taxpayer for the purpose of gaining or producing income related to the taxpayer's business. Where in substance, a loan is made for the purpose of providing working capital to a corporation, any loss which may result is a capital loss. That was the reasoning adopted by the Supreme Court of Canada in Steer, supra, and in Stewart & Morrison Ltd. v. M.N.R., [1974] S.C.R. 477, [1972] C.T.C. 73, 1972 D.T.C. 6049, and followed by this Court in K.J. Beamish Construction Co. v. M.N.R., [1990] 2 C.T.C. 2396, 90 D.T.C. 1584; Lachapelle v. M.N.R., [1990] 2 C.T.C. 2396, 90 D.T.C. 1876; Laframboise v. M.N.R., [1992] 2 C.T.C. 2692, 92 D.T.C. 2299.

Similarly corporate shares constitute something the purchase of which is in itself an investment. The leading case on this is Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, where Mr. Justice Martland of the Supreme Court of Canada after stating the said principle went on as follows page 352 (C.T.C. 221, D.T.C. 1133):

They (the corporate shares) are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise.

It is from this passage that the Federal Court of Appeal inferred in Mandryk, supra, the presumption that the acquisition of shares is of a capital nature, though it may be rebutted by the taxpayer. [1] After establishing that it is the intention of the taxpayer at the time of acquiring the shares which is determinative in resolving such an issue, the Federal Court of Appeal concluded that a clear intention was required to offset the presumption arising from the investment in shares. In the Mandryk case, the Federal Court of Appeal had to decide if the losses realized by the respondent with respect to certain guarantees of bank loans to a corporation in which he was a shareholder, and honoured by him, were capital losses or business losses. The Court concluded that these losses were on account of capital since the taxpayer was not in the business of lending money, and Mr. Justice McGuigan added at page 324 (D.T.C. 6334):

In my view the facts do not reverse the presumption that the transaction was a capital one, because they are not consistent with an intention of selling out for a profit as soon as possible, but rather point to a simple intention to carry on business.

In the Lachapelle decision, supra, the same principles were applied in a similar case, by Brulé, J. of this Court at page 2400 (D.T.C. 1878):

It was set out in the case of Edmund Peachy Ltd. v. The Queen, [1979] C.T.C. 51, 79 D.T.C. 5064, that the key factor in characterizing the nature of any particular gain or loss is the intent of the taxpayer at the time the expenditure was incurred or the asset acquired. To then determine the taxpayer’s intent all the facts must be considered in the context of the taxpayer's entire course of conduct.

The key determinant is how the taxpayer intended to profit. Hence, if a taxpayer acquires an asset with the intention ot deriving a stream of income therefrom, the subsequent loss is a capital loss or allowable business investment loss. If the asset was acquired with the intent to sell, hopefully at a profit, the appellant may claim a business loss if the venture proves unsuccessful. (Californian Copper Syndicate v. Harris (1904), 5 T.C. 159.)

However to resolve the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade, Martland, J. made the following point in the Irrigation Industries Ltd. case, supra, at page 351 (C.T.C. 219, D.T.C. 1133):

In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of "trade" than this before it can be said that there has been an adventure in the nature of trade.

I do not find in the evidence disclosed before me that the appellant showed a clear indication that he was acting as a trader when he bought the shares of CSP Canada or when he guaranteed the bank loan for CSP Canada. There was no clear evidence that the appellant purchased the shares of CSP Canada with the intention of transforming the company in order to turn it into a profitable enterprise and then sell his shares as it seemed to be the case in Becker, supra. Neither was there an element of high risk as in the case of West Coast Parts Co., supra, where the corporate taxpayer accepted to make a loan to a group of companies that were engaged in a single specialized venture to test a natural gas pipeline for leaks, which had prospects of being very profitable. After a careful appraisal, the corporate taxpayer lent $125,000 repayable with a premium of $56,000 plus interest at ten per cent per annum in a very short period of time. The agreement also provided for collateral security that was not sufficient to discharge the loan. In the present case, the appellant acted in a way to invest his money inconsideration of shares of a company. The guarantee given by the appellant on the loan was more for the purpose of providing working capital to the company.

The appellant also relied on the Supreme Court of Canada in the decision of Freud, supra and on the decision of the Federal Court-Trial Division in Cull, supra. I will simply quote this passage of Pigeon, J. in the Freud decision at page 82 (C.T.C. 443, D.T.C. 5282):

It is of course, obvious that a loan made by a person who is not in the business of lending money is ordinarily to be considered as an investment. It is only under quite exceptional or unusual circumstances that such an operation should be considered as a speculation.

I do not see anywhere in the evidence, that such exceptional or unusual circumstances existed in the present case. I would also add that I see a distinction between these two cases and the present one. In the Freud decision, the taxpayer was the inventor of the prototype he wanted to put on the market via his corporation. And in the Cull decision, the plaintiff was an expert in the land development which was the business field of the corporation in which he and his partners invested. This is not the case here where the appellant simply invested his money in corporate shares.

I could also adopt the attitude of the Federal Court of Appeal in Mandryk, supra, wherein McGuigan, J. said at page 324 (D.T.C. 6334):

Even if Cull is correctly decided, [2] in the light of the factual variations between cases in my view proceeding by analogy is not an adequate method of fact-finding, particularly in the face of a factual presumption, as here. In such a situation I believe a clear and strong finding is necessary.

I do not find a clear and strong finding that would support the thesis of the appellant. The loss sustained by the appellant is a capital one.

With respect to the legal and accounting fees, nothing was placed before the Court which could form a basis on which to set aside the Minister’s assumption on reassessing that these payments were on account of capital.

These appeals are therefore dismissed with costs.

Appeals dismissed.