Becker v. The Queen, 83 DTC 5032, [1983] CTC 11 (FCA)

Le Dain, J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s appeal from income tax assessments in respect of his 1975 and 1976 taxation years.

The issue is whether the appellant could deduct in the computation of his taxable income for the year 1976 an amount of $434,276.55, which represents a loss incurred by the appellant in 1976 in respect of advances to and loan guarantees for British Canadian Pitwood Limited (hereinafter referred to as “BCP”) during the period 1963 to 1975. The question is whether the loss resulted from an investment or from an adventure in the nature of trade. It turns on the intention with which the appellant purchased the controlling interest in BCP and put funds into the company by way of advances and loan guarantees.

The appellant graduated in engineering in 1938 and went into the family plumbing business, which his father had founded in 1914, and under his direction the company evolved into a fairly large and sophisticated mechanical work enterprise. In 1963 the appellant disposed of his interest in the company and looked around for what else he might do with his money and experience. He learned that BCP, a New Brunswick lumber company, was in financial difficulties and might be available for purchase. After a fire which was not adequately covered by insurance, Mr Cleland, the owner of the business who was in his seventies, was unable to find new financing. The company, however, had a good wood supply, and while its business had been the sale of unfinished lumber, the appellant saw great potential for the business if it were expanded to include the sale of lumber finished to the specifications of purchasers. This would require a restructuring of the business to include drying the green lumber between the milling and manufacturing processes by an improved dry-kilning process which the appellant had learned about in his contracting business.

In December 1963 the appellant purchased 90% of the shares in BCP for $1 and the assumption of BCP’s liabilities up to a maximum of $160,000, and it was agreed that Cleland would provide on-site management for a salary and 10% of profits. Cleland retained the remaining 10% of the shares with an agreement that he would sell them to the appellant upon ceasing to be manager. Cleland died in 1964.

The appellant made the necessary changes to the business, which were financed by loans from him and loans from others guaranteed by him. The new plant was in full operation by 1968 and made a modest profit in that year. Then in 1969 the appellant began to encounter serious wood supply difficulties. For the next six years or so he was unable to obtain an adequate supply of wood and he was obliged to cease operations in 1976. It was clear that the money he had put into the company by way of loans and loan guarantees was a total loss, and in that year he treated the loss as a business loss deductible in computing his income.

In his reassessment the Minister of National Revenue disallowed the deduction as a business loss. The appellant’s appeal was dismissed by the Trial Division.

Paragraph 3(d) of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63, s 1, permits the taxpayer to deduct from his income for the year his loss from a business, and business is defined by section 248 of the Act to include “an adventure or concern in the nature of trade”.

The appellant contends that the BCP enterprise was for him an adventure in the nature of trade because his purpose in purchasing the company was to transform the business in order to make it profitable with a view, not to retaining it for the purpose of earning income, but to selling it as soon as possible for a profit.

The appellant testified that he saw the potential for a large increase in earnings by changing the business to one that would make finished products, and he thought this would make the business attractive to prospective purchasers. There was the following exchange on this point in his testimony:

And that was the basic motive in getting involved, that the return on investment, for me, was exceptional, and the return on investment for a potential buyer was a very attractive one, and I felt that I wouldn’t have any difficulty in marketing the plant once I could get the thing in operation.

Q Once the business had been turned around, or rejuvenated, or re-designed by your good hands, Mr Becker, did you intend to keep the mill?

A It was impossible .. .

Q Or BCP.

A . . . it . . . I looked at it, once I decided to go into the venture, I looked at it . . . at it strictly on the basis that I would execute my plan, and sell the end result the same way as a machinery builder sells a machine. What I was doing was Just putting some ideas, and some engineering know-how together, to produce a production facility which it was impossible for me to keep.

The appellant testified that it would be impossible for him to keep the business because he did not wish to move to New Brunswick, and the business had to be owned by someone who had an assured supply of wood. He thought that one of the nearby pulp and paper companies like Fraser might buy it once its profitability had been demonstrated. He also testified that he would not want to remain indefinitely as owner of the business because it would prevent him from carrying on his engineering career. He envisaged the possibility that after selling BCP he might repeat the operation with or for others. On cross-examination there was the following testimony concerning the appellant’s purpose:

Q I said: Were you not interested in the fact that the profit margin was so great?

A It was my prime objective, because in all my busines experience, anything I ever sold was always evaluated on the return on investment. And if you have an asset or an investment that has no profit margin, you can’t realize any money for it. So, my objective, in this whole exercise, was to realize a maximum profit so that I could realize a maximum sale price and get the biggest return for my efforts and my investment that I possibly can.

Q But you did, then, consider the possibility of recouping your investment through the profit of the business?

A I never considered that, no.

During the entire period that he owned the business the appellant did not draw any income from it. He had a discussion with someone in Fraser concerning the possibility of a sale of the business after he became concerned about the future of the wood supply, but nothing came of it. He had some discussions with others concerning possible sale, but nothing came of them because it was not possible to assure a wood supply.

The trial judge’s conclusion on the facts and the test which he applied are reflected in the following passages from his reasons for judgment:

When it is said that the intention of the taxpayer when entering into an isolated transaction may give the operation the essential ingredient of a business venture for the purposes of the Income Tax. Act, the intention referred to is the motivating intention, the immediate and prevailing purpose or at least one of the immediate and dominant purposes for which the act is done. I accept the Plaintiff’s statement that it was his intention to transform the company, make it profitable and eventually sell it at a profit. But the intention of eventually disposing of the company was not, insofar as I can appreciate the situation, the motivating factor or one of the motivating factors that led him to invest into BCP Ltd. The Plaintiff's personality, his entrepreneurial skill and desire, and his whole course of conduct following the acquisition appear to me inconsistent with the view that his immediate purpose was to speculate. The statement of Martland J in Irrigation Industries Ltd v MNR (62 DTC 1131), applies here perfectly:

“In my opinion a person who puts money into a business enterprise by the purchase of the shares of the company on an isolated occasion, and not part of his reguar business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at the 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 a clearer indication of trade than this before it can be said that there has been adventure and adventure in the nature of trade.”

The appellant contends that the trial judge misunderstood the purport of the decision in Irrigation Industries and thereby misdirected himself in law, and that his implied finding of fact that the appellant intended to retain the business for the purpose of earning an income from it was clearly wrong. I find myself obliged to agree, with respect with both of these contentions.

It appears from the foregoing passages in the reasons of the trial judge that he was distinguishing between the immediate or motivating purpose of the appellant and what the appellant intended to do “eventually”, and that he considered the decision in Irrigation Industries reflected this distinction. In my respectful opinion that was a misunderstanding of the judgment in that case. In Irrigation Industries it was clear that the shares were purchased with the intention of selling them for a profit as soon as possible, but the majority held that this was not sufficient by itself to give the transaction the character of trade. An important difference between Irrigation Industries and the present case is that the BCP venture did not simply involve a purchase of shares with an intention to resell them for a profit, but the purchase of a business with the intention of transforming it in order to turn it into a profitable enterprise.

The implied finding of fact by the trial judge that the immediate or dominant purpose of the appellant at the time he purchased BCP was to retain the business for the purpose of earning income from it is, given the trial judge’s own statement in the course of the argument as to the appellant’s credibility, clearly contrary to the unchallenged evidence of the appellant. The respondent laid stress on the fact that neither in his notice of objection nor in his examination on discovery did the appellant state that his purpose was to sell the company for a profit as soon as possible. This might have been a basis for an adverse finding as to credibility, but the trial judge made it clear in the course of the argument that he found the appellant to be a credible witness. He referred to the appellant’s testimony as frank, open and direct. There is not a suggestion in his reasons for judgment that he had any reservations as to credibility. Indeed, in his reasons he said that he accepted the appellant’s statement “that it was his intention to transform the company, make it profitable and eventually sell it at a profit”. This was a further affirmation of the appellant’s credibility, but it was in my opinion a misapprehension of the appellant’s evidence. The appellant did not say that he intended to sell the business “eventually”, thereby implying that his immediate or motivating intention in purchasing it was to retain it for the purpose of earning income. He said that he could not keep the business and that he never intended to recover his investment by income from the business. In my opinion, if the appellant’s testimony is to be taken as credible, and it cannot be treated otherwise by this Court in view of the position taken by the trial judge on the question of credibility, there is only one conclusion that can properly be drawn from it, and that is, that it was the appellant’s intention, upon changing the nature of BCP’s business and making it profitable, to sell it as soon as possible for a profit.

This brings the case in my opinion within the conception of an adventure in the nature of trade that was applied in CIR v Livingston (1926), 11 TC 538. That case involved an isolated instance in which the taxpayers purchased a ship and changed its character with a view to selling it for a profit. The test that was applied was whether the operations involved in the venture were of the same kind and carried on in the same way as those which were characteristic of ordinary trading in the line of busiess in which the venture was made. It was said: “The profit made by the venture arose, not from the mere appreciation of the capital value of an isolated purchase for resale, but from the expenditure on the subject purchased of money laid out upon it for the purpose of making it marketable at a profit. That seems to me of the very essence of trade”. Doing what the appellant proposed to do, with the avowed intention of possibly repeating the operation, if successful, may be regarded as a “line of business”. Cf Rand, J in Gairdner Securities Ltd v MNR, [1954] CTC 24; 54 DTC 1015; at 1016: “There could be a business of taking over, by means of stock control, run down industries, building them up, and disposing of them . .

For these reasons I am of the opinion that what the appellant did with respect to BCP was an adventure in the nature of trade and that the loss which resulted from it was therefore a business loss which is properly deductible in the computation of the appellant’s income for the 1976 taxation year.

I would accordingly allow the appeal, set aside the judgment of the Trial Division, vacate the reassessments dated January 22, 1979, and refer the matter back to the Minister for reconsideration and reassessment on the basis that the loss in question was a loss from carrying on a business, the whole with costs.