First Investors Corp. Ltd. v. The Queen, 85 DTC 5343, [1985] 2 CTC 96 (FCTD), aff'd 87 DTC 5175 (FCA)

Muldoon, J:—The above double styles of cause are displayed because of the Associate Chief Justice's orders pronounced, with the parties' consent, on November 1983, that the trials be heard together and on common evidence.

These cases raise the issue of characterizing certain sums realized by the plaintiffs as capital gains or business income.

The parties, by their respective counsel have very helpfully presented a statement of agreed issues and matters, which is Exhibit 1. It runs as follows:

The parties hereby agree upon the following issues and matters for the purpose of these appeals only:

1. The sole issue for determination is whether or not the amounts are capital gains or income from business.

2. There is no dispute as to the amounts involved.

3. Since Associated and First Investors have not received all of the proceeds of sale, they are respectively entitled to and have claimed reserves in computing amounts subject to tax. Accordingly, if there is judgment in favor of the Plaintiffs, this Honourable Court is respectfully requested to refer the matter back to the Minister for reassessment on the basis of the amounts being taxable as capital gains, and expressly permitting the Plaintiffs to claim any reserves to which they may be otherwise entitled. If there is judgment for the Minister, it is sufficient to dismiss the appeals without more.

4. Both appeals are to be heard on common evidence, by prior Court Order.

5. The Minister, hereby admits into evidence the documents tabbed A through R, both inclusive, but does not thereby admit the relevance thereof and hereby reserves the right to challenge the relevance of any fact or facts at the hearing of this matter.

The above statement (Ex 1) is verified by the signatures of counsel for their respective clients.

The plaintiffs are corporations both incorporated pursuant to the laws of Alberta and each has its principal office at the City of Edmonton in that province. The business for which each plaintiff was incorporated, and which was carried on, was that of an investment contract company, whose purpose is to raise investors’ capital by way of investment contracts. The funds were then usually committed to long-term investments by each plaintiff, all pursuant to the Investment Contracts Act of Alberta, RSA 1980, Chap. I-10, subject to scrutiny and regulation by the Alberta Securities Commission.

Since the issue to be resolved is one which turns upon the taxpayers’ intentions and since the taxpayers are corporations, it will be reasonable to examine their corporate nature, the kind of business in which they were at the material times engaged; and from that examination to draw reasonable inferences of the intention formed by their directing mind or minds at the material times.

Exhibit 2, admitted on consent of both counsel, being two ring-binders of documents, A to R with subdivisions, contains the diagram B-1. It reveals that the two plaintiffs, First Investors and Associated, are what one might term “sibling’’ corporations with each other and with Athabasca Holdings Limited. Exhibit 2:B-2 shows that between 1970 and 1978, neither plaintiff's assets consisted of any large proportion of real estate. Associated is the smaller corporation and First Investors is the larger as between the plaintiffs. The three aforementioned corporations were all virtually wholly- owned subsidiaries of Principal Group Ltd which, in 1966, had become a wholly-owned subsidiary of Collective Securities Ltd. Athabasca Holdings is a relatively small subsidiary which operates primarily as a real estate holding company.

A copy of the Investment Contracts Act is Exhibit 2:D-1. Certain definitions prescribed in that Act describe the plaintiffs’ business scope and limitations on the kind of regulated business which they were permitted to conduct. Thus, the Act provides:

1. In this Act

(a) “Commission” means the Alberta Security Commission;

(d) “issuer” means a company that offers for sale, sells, makes or enters into investment contracts of its own issue, but does not include an insurer within the meaning of the Insurance Act;

(e) “Minister” means the member of the Executive Council charged by the

Lieutenant Governor in Council with the administration of this Act;

(f) “prescribed” means prescribed by the regulations;

(g) “qualified assets” means

(iv) real property acquired by foreclosure or in satisfaction of a debt and held for a period of less than 7 years, and

(i) “Registrar” means the Registrar of the Alberta Securities Commission;

(k) “Superintendent” means the Superintendent of Insurance appointed under the Insurance Act.

2. Nothing in the Insurance Act shall be construed to require an issuer within the meaning of this Act to take out a licence under that Act.

The above-mentioned provincial statute runs to some 17 pages with its 49 principal sections, and the knowledgeable reader will appreciate from the foregoing passages the unmistakable flavour of close regulation which it imposes on investment companies, the plaintiffs included. Prior to 1973, the Act was administered by the Alberta Securities Commission but later the administration was turned over to the Superintendent of Insurance.

By further agreement of counsel for the respective parties (transcript, p 19) an excerpt from the document, entitled “Statement of the Evidence to be adduced on behalf of the Plaintiffs by Mr Kenneth Marlin’, was accepted into the evidence (transcript, pp 20 to 33) as if expressed viva voce by the sole witness to testify, Mr Marlin.

The sole witness, Kenneth Marlin, in 1972, when the Speedway land was acquired, was general sales manager and vice-president for sales in the plaintiff companies. In his vice-presidential role, Mr Marlin was responsible for liaison with the regulatory authorities among other corporate responsibilities. In 1973, he became president of both plaintiffs, and he continued in the office of president of Principal Consultants Ltd, the broker-dealer which employes the sales force personnel. At the time of giving his testimony Mr Marlin was senior vice-president of Principal Group and he still retains responsibility for liaison with the regulatory authorities in the various jurisdictions across Canada. At one time, during the period in which the International Speedway's race track was being developed, Mr Marlin had served as a volunteer-director and chairman of the board of the Speedway enterprise. Also involved with the plaintiffs during the material times was Marlin Management International Limited, a company owned by other members of Mr Marlin’s family, in which company, he said (transcript, p 69) he had no shares. At the same time, Mr Marlin testified that he was in no conflict of interest and that everyone involved in the subject transactions was aware of his unique position of which he had made full disclosure.

The agreed excerpt is too voluminous to be recited here, but some pertinent facts can be drawn from that statement.

At page 20 of the transcript:

5.2 Investment contract corporations are unique in Canada. Apart from the Plaintiffs, the only other sighnificant one remaining in Canada is Investors Syndicate Ltd, with head office at Winnipeg, Manitoba.

At page 23 of the transcript:

5.5 The investment contract corporation requires the approval of the Securities Commission (Alberta and elsewhere) to any proposed offering of a plan to the investor. The corporation can invest the funds it has raised in particular investments without having to file and clear a prospectus for each such particular investment. However, investments by the Company must withstand the scrutiny of the Securities Commission as being a proper investment, a qualified asset and otherwise fulfilling the criteria prescribed for the investment contract corporations.

At pages 31, 32 and 33 of the transcript one finds the following passages:

5.9 The Securities Commission (Alberta and elsewhere) scrutinizes the qualified asset portfolio and reserves to ensure the investment contract corporation can fulfil its contractual obligations. The test set out in paragraph 8(c) of the Investment Contracts Act is whether or not the company has:

(a) on deposit ""qualified assets approved by the Superintendent [of Insurance] aggregating in amount, when valued as provided in section 29, not less at any time than the amount for which the company under the terms of its investment contracts, is liable as of that time to pay in cash to the holders of all its investment contracts then outstanding . . ., and

(b) the stipulated reserves to fulfil future obligations assuming a rate of return approved by the Superintendent.

5.10 An investment contract corporation can be distinguished from other financial investment corporations as follows:

(1) it differs from a mutual fund in that an investor in a mutual fund holds units representing an individed interest in the fund itself; whereas in the Plaintiffs' case the investor has only a contract stipulating repayment of an amount (with interest) with no ownership interest in the underlying investments,

(2) only the investment contract provides a fixed return, with the Securities Commission scrutinizing the qualified asset base and reserves to ensure the contractual obligation can be fulfilled: in this regard the investment contract corporation is most akin to an insurance company, endeavoring to match its long term investments with its long term obligations,

(3) it is not a trust company, mortgage company or bank.

5.11 Examples of usual investments are:

(1) cash,

(2) marketable securities, and

(3) mortgages.

5.12 The types of investments and the proportion they comprise of the total assets of the Plaintiffs, and the changes from 1971 to 1977, both inclusive is shown in Exhibit B-2. Real estate holdings were unusual and only the Speedway land and the Saint John land (both acquired in satisfaction of debt) were of any significance in amount.

Reference to the Speedway land focusses the issue in contention here, since parts of it were bought simultaneously by the plaintiffs and Athabasca Holdings in September 1972, and later sold simultaneously for more than the plaintiffs paid, as of May 1, 1976. It is that "more”, reported as capital gains in the plaintiffs’ 1976 corporate tax returns, which the Minister of National Revenue reassessed to be taxable as income from the plaintiffs’ business.

The Speedway land is that which was formerly operated as the Edmonton International Speedway, lying north of the north-west quadrant of the City of Edmonton, and graphically shown in the maps filed as Exhibit 2:C. The land, a parcel of about 370 acres, is situated a short distance north of 137 Avenue (the city's northern boundary at all material times) within the Municipal District of Sturgeon No 90. According to Mr Marlin’s testimony (transcript, pages 11, 12 and 13) the situation and circumstances were as follows:

The land was, as I mentioned earlier, outside the city limits. It bordered on 127th Street. To the east of 127th was in the city. It became the residential subdivision known as “Casteldowns”, and it was north of 137th Avenue. It doesn't border onto 137th, but just north of 137th, and on the west side it was bordered by the Northern Alberta Railway.

The zoning on that property, it was designated — classification designated agricultural reserve, with probable future use as a light industrial.

On a portion of the land in question there was a major motor race track built. At the time it was completed, it was considered one of the major racetracks in the world. It was built at a cost of in excess of $1 million, and had viewing stands for some 10,000 people — pardon me, some 30,000 people, and a 9,000 square foot building, parking facilities, and a portion of the land, the 124 acres, that was the part outlined in red that was held by Collective, was known as the “Sharp” property. It continued as a farm property where Mr Sharp had the right to continue living there and getting the benefit of the crop.

That's a layout [Ex 3] of the Speedway Park with the tower, three story tower, the look out tower. It was actually a combination of four different types of race tracks, including drag racing, Can-Am racing — we actually sponsored the Can-Am race on two different occasions and attracted a lot of publicity, and the opening Can- Am race had something in excess of 40,000 in attendance.

Further (on pages 13 and 14 of the transcript) Mr Marlin testified as follows:

The property continued to be used as a sports facility on a percentage of gross receipts basis, and there were many races sponsored there. In fact, the one booklet that we looked at is 1975 where it's showing the Pacemaker Invitational. That was one of the major races that they sponsored. Some racing continued at the track during the full time that First and Associated held the land. During the time the land was held, there was no application made to subdivide the land or undertake to service the land or improve it in any way.

The critical path of transactions which the plaintiffs trace leading up to the plaintiffs’ acquisitions of their portions of the Speedway property is long and convoluted. In December 1962, Collective Securities Ltd, (which, be it remembered, was at all material times the owner of the Principal Group since 1966), acquired the plaintiff, Associated. Associated then had in its investment portfolio approximately $3,600,000 worth of six per cent preferred shares of Equitable Investment Corporation which was domiciled in the United States of America. This situation is described in Mr Marlin’s testimony. (transcript, pp 49 to 56) According to Mr Marlin the questionable value of this asset, which was changed or converted several times, resulted in the loss of Associated's registered status in Saskatchewan. He said that for about 10 years neither this plaintiff nor First Investors was registered in Saskatchewan.

The regulatory authorities of Saskatchewan communicated their misgivings to the Securities Commission of Alberta, which in turn required Asso- ciated to show cause why its registration in that province should not be suspended. Subsequently, Associated's registration was not renewed in British Columbia. Exhibit 2:1-6 illustrates that the Securities Commission of British Columbia was closing in upon associated in March 1972, with a requirement to show cause there, too.

Previously, in February 1970, the plaintiffs made loans to Cambridge Development Ltd for $7,100,000. (Exhibit 2:F-3) In that transaction Associated gave up the equitable note for principal and interest accruing due over 21 months in the total of $2,830,000. First Investors transferred marketable securities and cash making up the difference of $4,270,000. According to Mr Marlin, the significance of this transaction for the plaintiffs was twofold. Firstly, the plaintiffs received in partial consideration a $5.2 million first mortgage on the Cambridge Building, fully secured against that prime 16- storey office building on Jasper Avenue in downtown Edmonton. (Exhibit 2:G-1) Secondly, the assets were in Alberta, instead of remaining in the USA. The transaction achieved other benefits, too, not least of which was the replacement of unsecured assets of $2.83 million.

Subsequently, according to Mr Marlin, a new controlling shareholder of Cambridge reviewed the transaction, perceived it to be inequitable and launched a lawsuit against the plaintiffs. The witness described what happened next.

With the Cambridge lawsuit outstanding and with the Cambridge notes and debentures under question, we realized that in order to settle the Cambridge lawsuit, that we had to free up the Cambridge debentures and Cambridge notes, and again we proceed to find assets that could be qualified that could replace the debentures and notes held by First and Associated.

Marlin Management Company, in the management business — it was originally Marlin Travel. It spun the travel business off but was in the business of doing some construction work and building some rental units. It built some rental units in the City of Edmonton and had acquired a tract of land, some 50 acres of land in St. John, New Brunswick, and had rezoned the land and had received building permits and mortgaging to build a residential apartment complex.

The full project, if it had been fully completed, would have had I believe it was 1,200 rental units. This property was held by Marlin Management. The first high- rise building was under construction. There were services that had been put in on some of the subdivision, and when this dilemma of where could we find an asset that could satisfy the requirements of the regulatory people, Blaine Archibald, who was then President of Associated and First Investors, and myself visted Mr Harry Rose who was then Chairman of the Securities Commission to discuss with him various alternatives that we might enter into to put some more satisfactory asets into the companies, and we proposed that we could put a debenture on Marlin Management, secured by the land, the 50 acres of land, exempting the part where the high-rise was under construction, and that if they would be happier with that arrangement than with the Cambridge notes and debentures and would find no fault with the fact that it was a family company — even though I was not an officer of the company or a shareholder, it was clearly a Marlin company — and went through that in some detail and he gave us approval saying that “If it’s as you say, if there’s value there and it’s backed up by appraisals’’, he says, “yes”, he said, “I would approve such a transaction.” (Transcript, pages 90 to 92)

So, it appears, in September 1971, the plaintiffs received and took a debenture from Marlin Management International Ltd, an Albertan company, in the principal amount of $1,776,944 at eight per cent per annum payable on October 1st each year, with the whole amount of principal and interest then outstanding to become due on October 1, 1983. (Exhibit 2:H-3) As security for the principal sum and interest, Marlin Management conveyed to the plaintiffs land Parcels “A” to "E" and "X" in the Brentwood Park Subdivision of the City of St. John, New Brunswick. This is the Marlin debenture.

It is apparent that the Alberta Securities Commission was not about to accept any easy assurances of the plaintiffs about the Marlin debenture, for its chief auditor wrote (Exhibit 2:1-1) on October 27, 1971, with some very searching commentaries and questions.

Now, one should note another series of transactions which is said to be on the critical path of events leading to the acquisition of the Speedway lands. Again, in September of 1971, Principal Group had an open account payable in excess of $700,000 to First Investors. This account was noticed by the Securities Commission which, according to Mr Marlin, required it to be repaid because it was not a qualified asset. By means of various trades and shuffles First Investors emerged with a debenture from Lenrice Engineering Ltd, for $765,000 principal payable on October 1, 1983, with interest payable monthly at eight per cent compounded annually. Thus, according to the witness, First Investors had replaced the receivable from Principal Group with a qualified asset, the Lenrice debenture.

In the meanwhile, in December 1971, Associated acquired all of First Investors' interest in the Marlin debenture, amounting to $853,310. Thereby, Associated acquired the Marlin debenture, and concurrently gave up its share of the Cambridge mortgages. Apparently the Alberta Securities Commission was feeling rather skittish about the Marlin debenture as can be perceived from their continuing letters dated: November 25, 1971, from Joanne B Veit, solicitor, as she then was (Exhibit 2:1-3); also November 25, 1971 from J O Dawrish, CA, chief auditor (Exhibit 2:1-4); April 20, 1972, again from the chief auditor expressing open dissatisfaction (E(hibit 2:1-9); and August 2, 1972, from R T Pointe, CA, auditor, stating flatly about the Marlin debenture that “In our opinion this is not acceptable security". (Exhibit 2:1-14).

In the meanwhile also, the British Columbia Securities Commission inveighed against Associated by letters copied to the Albertan Commission and dated: March 6, 1972, from W S Irwin, superintendent of brokers requiring attendance in Victoria to show cause why Associated's registration should not be suspended (Exhibit 2:1-6); April 25, 1972, from ET T Jewitt, CA, chief accountant expressing "great concern" about the investments of both plaintiffs, including the Lenrice and Marlin debentures. (Exhibit 2:1-10) Further in Exhibit 2:1 are examples of letters from the plaintiffs to the respective securities commissions explaining their portfolios and promising to do everything possible to meet the regulators’ expectations and requirement satisfactorily.

The transactions involved during the material times are reputed to be graphically illustrated in Exhibit 2:K, three file folders being respectively: K-1 (yellow); K-2 (green); and K-3 (beige). The foregoing, somewhat detailed narration of the various transactions, is meant to serve as a background to bring out the active intervention of the regulatory authorities which, the plaintiffs allege, forced them into the conduct which has brought about this action. One certainly cannot impute bad faith to the regulators. One is, however, struck by the force of their virtually unchallengeable authority over the two plaintiff taxpayers.

The first stage of the Speedway property acquisition series, as the witness put it, "had Lenrice and Marlin acquire the Speedway land". The verb “‘ac- quire” here has its own special contextual meaning, for neither of those corporations ever actually took formal registered title to the land. Principal Group in effect acted as purchaser. Referring to Exhibit 2: J-1, a letter dated June 30, 1972 addressed to the directors of Edmonton International Speedway Ltd care of their solicitors from B O Archibald, solicitor and general counsel of Principal Group Ltd, Mr Marlin testified on cross-examination:

A. It doesn’t mention any purchasers there, does it? It says "some undisclosed purchasers”, and that would include Marlin, Rice, First, Associated, Athabasca, Collective perhaps. (Transcript: pp 161-2)

Q. Sir, isn’t it true that the vendor, Speedway, despite the structuring of the deal as you explained it yesterday, always looked to Principal for payment?

A. Yes, I would say that that was true. Document-wise, one of their notes was from Principal Group Limited, if I’m correct in my memory. The other was an Athabasca note for four thirty-five, but Speedway did look to Principal for satisfaction of that.

. . . What you’re saying is that the transaction took place, and the second transaction or the second part of the transaction moved the land from Rice and Marlin to First and Associated and Athabasca, so there was two parts to the transaction. The first was the moving to Lenrice and to Marlin, and the second was moving from Marlin and Lenrice to First and Associated and Athabasca. (Transcript: pp 163-4)

A. — the Act does state that land obtained in satisfaction of a debt as well as a foreclosure on a mortgage, and it’s possible and does happen where, to satisfy the debt, a piece of real estate is obtained in satisfaction of the debt that hasn’t necessarily been charged as a mortgage on that property. You know, as long as — you follow what I’m saying?

A. . . . Mind you, on any Agreement for Sale, the title does not pass. (Transcript: p 165)

Q. MR VAN IPEREN: Well, let’s cut it short, sir. Is it fair to say that this particular transaction was structured —

A. Yes.

Q. — to take advantage of this legislation so that the companies could go on title? I’m not talking about their purposes. I’m not saying it was — but simply, to put it differently, Associated, First Investors, could not go on title as they did by simply going to Speedway and buying it for them.

A. That’s true. It was structured in such a way that it could comply with the Investment Contracts Act and have the approval of the regulatory people so that First and Associated could acquire it in satisfaction of the debt, so what you say is true, and approval was obtained from the regulatory people saying that it did meet the requirements, and there was also independent legal opinion that the property had been properly acquired.

Q. We’re not really — we don’t have to — you and I don’t have to argue about the fact that it actually was structured or not. It was done this way.

A. It was done that way, right. (Transcript: p 166)

Indeed, it was done that way with the cooperation not only of Lenrice and Marlin, but also of the Principal Group and Athabasca. When Athabasca disposed of its portion of the Speedway land, it reported its gain as income, having passed on a goodly portion of its original acquisition to Collective Securities. Collective also reported its part of the gain as income.

The cross-examination of the witness, Marlin, who had acted for all four purchasers, continued as follows:

Q. Well, sir, I submit to you that both Athabasca and Collective eventually were looking at this opportunity to make a profit, didn’t they?

A. No, I would say they were not motivated by that. They were motivated by participating with the other regulated companies in acquiring the block which naturally was not for sale separately, and First Investors’ and Associated’s needs and ability to handle the land was limited. They only needed or could afford to assume so much debt and acquire so much land in satisfaction of debt, and so acting in concert with those companies was clearly the motive.

I would re-emphasize that neither Collective nor Athabasca would have been at all interested in buying part of or all of that land had it not achieved the purpose that First and Associated had. (Transcript: p 188)

Q. So it’s your evidence then, sir, that Athabasca, which markets real estate, did not enter into this particular transaction with a profit motive?

A. No.

Q. Although it’s in the business.

A. No. How many times have we stated that position?

Q. l’m talking about Athabasca; I’m not talking about Associated.

A. Okay, and my evidence is clearly that none of the members of the Principal Group, including the Principal Group itself, would have entered into that transaction except for the needs to satisfy the regulatory people.

Q. Mr Marlin, at the end of your examination-in-chief this morning, you were asked by Mr Nichols what you hoped, among other things, to achieve, and I’m talking about the companies that are before the Court, entering into this transaction, and you indicated that there was the pressure of the Securities Commission, and I think you also indicated that you hoped for, and correct me if I’m wrong if I’m misquoting, an increase in value so at least to the extent that the carrying charges would be covered, but then I think you went on, and to meet your obligations to the individual investors in the contracts, is that correct?

A. That’s true.

Q. Didn’t you say that this morning?

A. That’s right.

Q. Okay, and what are those obligations to the investors?

A. The obligation to the investor is to live up to the terms of the investment contract which guarantees the return of the money plus a guaranteed return of whatever the guarantee rate, 3 /2 or 4 per cent, plus whatever additional credit had been declared during the term of that certificate.

At maturity that money must be there, and during the accumulation of that maturity value, the assets in support of that certificate naturally must increase at a rate sufficient to be sure that there is 100 per cent of certificate liabilities on deposit at all times during the term of the contract.

So that is the obligation to the certificate holder that the Securities Commission refer to and police to see that, in fact, it’s there.

Q. And this is what you hoped to achieve by purchasing this land? That’s your evidence?

A. That’s right. (Transcript: pp 189 and 190)

Q. Did you apprehend that both companies were in danger of losing their registrations, or was that more a danger to which Associated’s was exposed, on the basis of the evidence that has been produced?

A. Associated was the company that was in jeopardy more than First inasmuch as it did eventually deregister or was not re-registered in BC, and it wasn’t reregistered in Saskatchewan, although the problems of Associated, a sister company of First, spilled over, if you like, into First and consequently put First in a difficult financial position as well resulting in First not being registered in Saskatchewan, and that was a direct result of Associated’s non-qualified preferred shares. We had no problem until then. (Transcript: p 191)

The principal documentary support for the witness' testimony about the purpose for the land acquisition, as the taxpayers’ counsel mentioned in argument, is Exhibit 2:1-6, the letter from the British Columbia Securities Commission, of March 6, 1972. This was the letter to “show cause why the registration of Associated . . . should not be suspended.” It was answered by Mr Archibald, in his capacity of president of First Investors (curiously), on March 17, 1972. (Exhibit 2:1-8) However, there follows more correspondence addressed to that Commission from the ubiquitous Mr Archibald again in his presidential roles in First Investors (Exhibit 2:1-11) and in Associated (Exhibit 2:1-12).

The witness, Mr Marlin, was ubiquitous, too. He had some close knowledge of the Speedway land, because he had earlier attempted to sell it on behalf of the Speedway corporation, of which he had been a director. (Transcript: p 102) He was well informed about the land’s negative qualities. He was also conscious of its positive qualities. (Transcript: pp 172, 173, 175, 176 and 179) Not the least of those positive qualities was the land's close proximity to the boundary of the City of Edmonton with the concomitant possibilities of annexation and/or light industrial or even residential development within the seven-year period during which the plaintiff taxpayers were legally permitted to hold the land.

The plaintiffs did not intend to operate a motor racing facility. If Mr Marlin's stated intentions were those of the plaintiffs, and that is a reasonable inference, then their intentions were at least to realize enough gain to keep up with the costs of carrying the land such as municipal taxes and levies, the cost of the money invested in the land and the cost of interest paid to certificate holders in proportion to the land’s value in ratio to the plaintiffs’ entire qualified assets. (Transcript: p 169) Such a gain, as Mr Marlin well knew, would have to be realized from an increase in the price for which they would have ultimately sold it, over the price which they paid for it. His, and the plaintiffs’, satisfaction with the acquisition is expressed at pages 101 to 103 of the transcript.

What was it which induced the plaintiffs to enter into the transaction? This, after all, was no foreclosure under a mortgage whose indebtedness was not being repaid. This was an amicable, accommodating and highly structured — even contrived — acquisition, technically at least in order to satisfy debts, but not debts which had become actionable. Having acquired their portions of the Speedway land in the autumn of 1972, the plaintiffs sold their land acquisitions in the spring of 1976, when they could legally have held them until the autumn of 1979. The circumstances of the holding and sale of these qualified assets might cast light upon the plaintiff corporations' motives, and so those circumstances ought also to be reviewed.

By March 1973, both securities commissions, those of British Columbia and Alberta, are seen to have begun evincing profound dissatisfaction with the portfolio of Associated’s qualified assets. On March 2, 1973, the superintendent of brokers of the British Columbia Securities Commission wrote (Exhibit 2:L-1) as follows to Brian Sopp, then apparently president of Associated:

For some time now the Commission has been examining the financial condition of Associated Investors of Canada Ltd, (Associated) within the context of the provisions of the Investment Contracts Act, as those provisions apply to the maintaining of “qualified assets”, defined in Section 2 of that Act.

The Commission’s accounting staff has completed an analysis of Associated’s financial affairs as at June 30th, 1972 resulting in the computation as set out hereunder.

Therefore according to the computations of the Commission's staff, Associated is short of $1,094,491 of the total necessary to meet cash surrenders and is short $2,058,676 necessary to properly reserve for outstanding contracts.

Associated's registration as an issuer expires upon March 31st next and therefore we wish to place you upon notice that unless the deficiencies set out previously herein are rectified to the satisfaction of the Superintendent on or before March 31st, 1973, it is the intention of the Superintendent to refuse to renew the registration of Associated as an issuer.

On March 30, 1973, the chairman of the Alberta Securities Commission wrote (Exhibit 2:L-2) as follows to yet another president of Associated, G A Patrick:

I found upon discussing what transpired at our meeting with you and your fellow-directors today, that neither the Vice-Chairman nor I was impressed by the corporate facade separating the operation of Associated Investors of Canada Ltd, and Mr Donald M Cormie.

Just two years ago in April, when the Commissioners met with representatives of both Associated and First Investors Corporation Ltd, we received impressive promises that the companies’ affairs would be put in order with dispatch. Now, you and your associates appear on the scene, not being responsible for the operation of the Company for the past several months and you make promises. I do not question your sincerity, but the Commission is not persuaded that any more time should be afforded to the Company to operate within the requirement of The Investment Contracts Act.

I have instructed the Registrar to register the Company so that the effect on other contract companies of further steps to be taken may be minimized.

The Commission is reporting to the Minister on the affairs of the Company and its deficiencies, with the recommendation that a receiver and manager be appointed.

Until such time as action is taken by the Minister, the Commission will require you to report weekly, to its Chief Financial Analyst, Mr M A Lemay, CA, on progress made with respect to the four points raised at the meeting today. He will also concern himself with other matters that may require your attention and action.

Mr Lemay has also been instructed to examine any loans or investments entered into by the Company, in excess of $100,000. You will, therefore, bring any such transactions to Mr Lemay's attention, before they are concluded.

After receiving the above regulatory thunderbolt, Granton A Patrick, still president of Associated, wrote on April 16, 1973 to the above-mentioned Mr Lemay, thus, (Exhibit 2:L-3) in part:

Re: Associated Investors of Canada Ltd

Asset and Management Reorganization

In accordance with your request, the writer now wishes to confirm progress in the above noted with reference firstly to the assets and secondly to the management of the Company. The writer would also like to outline our future plans which will be implemented as quickly as possible.

We propose the following steps be undertaken to comply with your request as to replacement of or shoring up certain assets belonging to our Company:

(1) Speedway Land — We will be proceeding immediately to sell this land, together with the land taken in on the Marlin settlement. We will not sell this land for less than fair market value and accordingly, do not expect a sale within the next few days. We have spoken now with several developers and have received several requests for information concerning the property. We are endeavoring to sell the land to the City of Edmonton for a site for the Commonwealth Games. We also note that, since our meeting, Mayor Dent has indicated that the City may go into the business of assembling a land bank of industrial reserve land. This land is presently a zoned industrial reserve (light).

Cross-examined about Exhibit 2:L-3 Mr Marlin testified as follows:

Q. Okay, now, sir, this letter was written April 16th, 1973. Do you recall at all as to when these discussions took place with these various developers prior obviously to April 16th, 1973?

A. I don't recall the exact time. Grant Patrick was then President of Associated and was dealing on this more than anyone else in the company at that time. He was with us up until I believe it was August of that year.

Q. ’73?

A. I think it was August, ’73, that Grant Patrick left the employment.

Q. Okay, my question is, sir, these discussions with the developers that apparently have taken place by April 16th, 1973, do you recall when these took place? Like, immediately after September 15th, 1972 when the property was acquired, prior to the acquisition of the property, or after it?

A. No, the conversations I had with the developers was prior to the sale of the land, the Marlin and Rice, First-Associated transaction. When the land was still owned by Speedway is the time that I spoke to the developers I referred to earlier as Nu-West, Paragon, and so on. (Transcript: p 184)

Saying that the Commonwealth Games were held in 1978, Mr Marlin further said that he could not recall when he became first aware that those games would be held in 1978. However he did say that it was not to his knowledge that discussions about disposition of the Speedway land for the Commonwealth Games could have taken place before the acquisition from Marlin Management and Lenrice. (Transcript: p 185) Of course, "not to my knowledge" purposely does not mean "no", or "not at all".

Then, again, on July 13, 1973, a certain R T Pointe, CA auditor for the Superintendent of Insurance for Alberta, wrote a letter (Exhibit 2:L-4) to the apparently new and next president of Associated, one GR R Frey, posing quite pointed questions. The plaintiffs’ point about the close control and monitoring on the regulators’ part can be savoured unmistakably by this correspondence. Among other queries, Exhibit 2:L-4 contains this one.

2. Does [Associated] still hold land acquired in the Edmonton International Speedway Agreement, at a cost of $1,292,372. if so, what action is being taken to dispose of this property. We take the same position as the Securities Commission and do not consider this to be a qualified asset.

Mr Frey replied (Exhibit 2:L-5) a few days later confirming that Associated still held the Speedway land and saying that efforts were being made to expose it to the market and that several major developers had been approached in the hope of receiving concrete offers.

A few days still later, July 23, 1973, Mr Pointe wrote to Mr Marlin, then president of First, noting (Exhibit 2:L-6) that several investments of the plaintiff appeared not to be acceptable under the Investment Contracts Act. The Speedway land was among those specifically mentioned. Exhibit 2:L-7 is a copy of the first two pages of a letter purportedly written in response to Mr Pointe's immediately above-mentioned letter of July 23, 1973. This fragmentary response is dated August 16, 1973. According to the plaintiffs’ counsel the rest of that letter is somehow missing. (Transcript: p 178) The writer, for First Investors, responding about the Speedway land on page 2 of Exhibit 2:L-7, expressed the following:

6. There are three separate parcels of land which the company accepted “in satisfaction of a debt” pursuant to clause 2(1)(f)(iv) of the Statute. The adjoining parcel is appraised at $15,000 an acre and the parcel across the street to the east and a few hundred feet south sold for $26,000 an acre within the last few months. On discussions with interested parties, it appears that these three parcels if held together could be extremely valuable, and could well sell for over $20,000 an acre. The company could lose a great deal of potential profit by selling prematurely.

The exhibit ends abruptly at the bottom of page 2 with this partial sentence:

Currently it appears that the rapidly increasing real estate values will give substantial strength to the . . .

Cited in argument was a collection of Canadian jurisprudence beginning several decades ago, as well as some few cases from the United Kingdom. There seems to have been no exact precedent for the situation presented in the case at bar. The case of MNR v Valclair Investment Co Ltd, [1964] CTC 22; 64 DTC 5014, a decision of Mr Justice Kearney of the Exchequer Court of Canada, has many similarities with the instant case, but there are also some significant divergences from this case. The exigencies of the regulatory constraints in the instant case are the salient differences.

The case of MNR v Jas A Taylor, [1956] CTC 189; 56 DTC 1125, a decision of President Thorson of the Exchequer Court also figured in the argument, but it was a matter of characterization of the gain realized from the purchase and sale of a quantity of lead. Such transactions in consumable commodities are quite distinct from virtually eternally enduring subjects of transactions such as land.

However an approach to oral testimony in these matters is expressed by Thorson, P in the Taylor case (at CTC 212; DTC 1138) which runs thus:

... The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even without any intention of making a profit on the sale of the purchased commodity. And the taxpayer’s declaration that he entered upon the transaction without any intention of making a profit on the sale of the purchased property should be scrutinized with care. It is what he did that must be considered and his declaration that he did not intend to make a profit may be overborne by other considerations of a business or trading nature motivating the transaction.

To the same effect is what was written by Mr Justice Heald, then of the trial division of this court, in Canada Permanent Mortgage Corporation v MNR, [1971] CTC 694; 71 DTC 5409, at 709 (DTC 5418):

I have particularized appellant’s whole course of conduct in respect of these share transactions in view of the authorities to the effect that in determining the true purposes for which transactions are entered into, the Court should look at the whole course of conduct of the Company throughout its life and that this course of conduct should be given precedence over the oral testimony of Company officers as to intent where there is conflict between the two.

The Supreme Court decision of Gairdner Securities Limited v MNR, [1954] CTC 24 applies to this doctrine.

Mr Marlin testified, and the defendant's counsel acknowledged, that the reason for the plaintiffs’ acquisition of the Speedway land was to obtain qualified assets within the meaning of the Investment Contracts Act of Alberta. As the plaintiffs’ counsel noted “it worked". The plaintiffs acquired the land for no outlay of cash and, at the same time, disposed of the im- pugned Lenrice and Marlin Management debentures. The regulators were, at least temporarily, satisfied with this improvement of the plaintiffs’ assets. The land was taken, as it was said, in satisfaction of debts, again in purported and probably technically lawful compliance with the provisions of the provincial Act. It was a curiously “structured”, or contrived, acquisition in that the land had not been security for the indebtedness, but rather notionally first “acquired” by Lenrice and Marlin Management in order next to be conveyed to the plaintiffs and their two sibling corporations which were absolutely not investment contract companies. In all fairness, one should not levy against the plaintiffs the fact that the sibling corporations reported their part of the gain as income.

It is, however, absolutely clear that the regulatory authorities were concerned only to have the plaintiffs’ assets upgraded: they did not require the plaintiffs to contrive to acquire this land in this manner. This particular transaction was of the plaintiffs’ own choosing, based upon Mr Marlin's knowledge of the Speedway corporation and its property, upon his appreciation of the situation which could then be exploited to the plaintiffs’ benefit and, of course, his undoubted and quite legitimate creativity and intelligence.

Mr Marlin well knew of the land’s favourable situation and condition. He knew of the statutory limitation upon holding such land for not longer than seven years. The plaintiffs’ counsel rightly argued that knowledge is not intention. Generally speaking that is quite so, but in the instant circumstances knowledge is the womb of intention, just because of the regulatory constraints to which the plaintiffs were subject. Is it right and just, or at least strictly legal, to fix the plaintiffs with freedom of business intentions when they were so closely regulated? Rather, the question ought to be: how could their intentions be held to depart from the statutory and regulatory constraints under which they — including Mr Marlin in particular — well knew they had to operate in the usual and ordinary course of their particular business?

They may well have chafed under those constraints, but they were far from oblivious of their particular necessity to conform their intentions and conduct to their particular legal régime. Therefore when they contrived to structure this particular and chosen transaction, the plaintiffs must be held to have intended:

— to hold the land for only seven years or less;

— not to develop it or to operate the speedway business;

— not to earn revenue from it over and above the costs of carrying it;

— to sell it for profit at the most propitious moment within the seven- year period after acquisition.

Clearly, in view of the law, evidence and weight of evidence the plaintiffs' intentions could not have been other than those above recited. That was the very nature of their business in relation to this acquisition which they chose to exploit in this manner.

One could not attribute the same intentions if the land acquisition had been compelled by reason of foreclosure of a defaulted mortgage, whether by agreement or by strict operation of law, as appeared to be the case of the property in New Brunswick. In that instance the land was the security for the debt: it was not first contrived to be placed in an unrelated debtor's hands, for the chosen purpose. For all practical purposes the foreclosure did not involve a discretionary acquisition, whereas the Speedway land ac- quisition very much did involve a discretionary, structured acquisition. The plaintiffs did what they intended to do. They were not precipitated willy- nilly into this transaction as a result of any debtor's default.

There appears to have been nothing illegal about that land acquisition. It was an acquisition of qualified assets in order to placate the regulatory authorities, but the regulatory authorities did not exact the choice or the structuring of the acquisition. It was a straightforward adventure in the nature of trade whose profit was part of the plaintiffs’ income.

In these actions the respective statements of defence plead that the Minister proceeded on the assumption that one of the major motivating factors for acquisition the Speedway property was the possibility of resale at a profit at some future time. Despite the tenor of Mr Marlin’s testimony, the inference of the validity of that pleading is quite compelling. To exclude that possibility as a major motivating factor in these circumstances would be simply absurd. The plaintiffs, in their plight, would never have contrived and exploited this particular acquisition had there been no perceived possibility of resale at a profit within seven years. What other action they might have taken is matter of speculation only. The reasons of Mr Justice Urie for a unanimous panel of the appeal division of this court in McDonald v The Queen, [1974] CTC 836; 74 DTC 6644 are instructive in this regard; and they are adopted and adapted herein.

The plaintiffs intended to sell the land in propitious circumstances before their prescribed time limit expired. They set about finding a buyer. It is true that the regulatory authority began, unexpectedly, to push them into selling before they judged it to be the right time. But the plaintiffs — at least in the person of Mr Marlin — were convinced that the Speedway land would attract a higher price than they had allocated or contra-accounted for its acquisition. No responsible regulator would have pushed them into disposing of that land at a loss. Thus, they were, in effect, at what one might term "structured liberty" to seek and wait for the profitable price which they were confident the land would bear, so long as that price were offered within the seven-year term. Such a price was offered in 1976, well before the time would have expired, and in accordance with the plaintiffs’ original intentions when the structured transaction was contrived, they sold the Speedway land for more money than they acquired it.

That "more", whose characterization is the subject of the parties’ dispute, is income from business. This finding resolves the issue propounded by the parties for determination by the court, there being no dispute as to the amounts involved. In the circumstances, the resolution of the issue has not been easy, but that does not in the least detract from the high degree of competence and professionalism evinced by counsel on both sides. In the result, and in accordance with paragraph 3 of Exhibit 1, the appeals are dismissed. Costs ordinarily follow the event and, unless the parties have otherwise agreed, the defendant may have taxed costs comprehending only one trial proceeding, if asked.

Counsel and/or the solicitors for the defendant shall draw up and present a formal judgment in each action for signature and sealing, and should first endeavour to secure approval of its form, if not its content, on the plaintiffs’ part. Counsel are at liberty to seek any further directions, if needed.

Appeals dismissed.