Steeves v. The Queen, 76 DTC 6269, [1976] CTC 470 (FCTD)

Dube, J:—By consent this action was heard together on common evidence with the action styled Winston A Steeves v Her Majesty the Queen, T-591-74. This judgment therefore applies to both actions.

This is an appeal from a reassessment of the plaintiffs’ income tax for the 1968, 1969, 1970 and 1971 taxation years. By Notices of Reassessment dated February 19,1973 the Minister [of National Revenue] increased the plaintiffs’ income in the amounts set out as follows:

The Minister included the above amounts as a benefit received from Goodyear Paving Limited (hereinafter “Paving”) within the meaning of paragraph 8(1)(c) of the Income Tax Act, RSC 1952, c 148, as amended.

The plaintiffs, two brothers in the road construction business, from Riverview in the Moncton area of New Brunswick, agreed in 1958 to form a company for the purpose of carrying on asphalt paving in Newfoundland with H K Goodyear, K D Goodyear and George Pomeroy (hereinafter the “Newfoundland group”). Paving was incorporated in 1959 and incurred heavy losses mostly because of the incompetence of the Newfoundland group. It was decided, by an agreement dated April 2, 1964, that the plaintiffs would acquire the shareholdings of the Newfoundland group in Paving in consideration for the plaintiffs assuming all debts, including personal guarantees, to the exoneration of the Newfoundland group.

lt was also agreed that the book debts owing by Paving to J Goodyear & Sons Ltd and Goodyear Construction Co Ltd, two companies controlled by the Newfoundland group, be assigned to the plaintiffs, debts totalling $620,633.13 for an aggregate consideration of $70,000.

The plaintiffs who are efficient roadbuilders turned Paving around and made it a successful venture. All debts of Paving were paid, the plaintiffs recovered their $70,000 investment and in the course of the 1968, 1969, 1970 and 1971 taxation years Paving paid out to the plaintiffs the amounts listed above, as book debts were being reimbursed to them pursuant to the assignment.

The defendant states that these transactions were an adventure in the nature of trade whereby the book debts were acquired by the plaintiffs with the intention of realizing a profit, thus taxable under paragraph 139(1)(e) of the Act.

The issue to be determined in this appeal is whether or not the benefit conferred on the plaintiffs as a result of the repayment to them by Paving of the book debts constitutes an adventure in the nature of trade and thus taxable, or a capital gain and tax free.

It is a well established principle that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances. There is no single magic criterion to be invoked for an instant determination. The very nature of the subject matter of the transaction may be such as to exclude the possibility that it was anything else but a trade transaction. If the element of speculation is present, a transaction productive of income might well be regarded as an adventure. The intention to make a profit is an important factor, but its presence is not an essential prerequisite, and its absence does not negative the idea of an adventure. The consideration prompting the transaction may be of such a nature as fo invest it with the character of an adventure, even if there was no intention of making a profit in the first place. The fact that the transaction is totally different from the usual course of business of the taxpayer, and is a first transaction of the kind on his part, does not necessarily mean that it is not an adventure. It is not essential for a transaction to be an adventure that some operation be performed on the subject matter to carry it through (vide MNR v James A Taylor, [1956-60] Ex CR 3; [1956] CTC 189; 56 DTC 1125).

Jurisprudence has developed several tests to determine whether a gain is capital or income, including the following “badges of trade”. Is the subject matter normally the subject of trading and very exceptionally the subject of investment? How long has the property been held? How frequent the same type of transactions by the same person? Has the property been worked up during ownership so as to make it more marketable? Has the opportunity to transact emerged suddenly? What was the motive behind the acquisition of the asset? The secondary intention? Was it an investment, or essentially a speculation? Is the transaction part of a profit-making scheme? Did the purchaser deal with the property in the same way as a dealer would? How remote were the possibilities of realizing a profit when the transaction was entered into? Was there a “commercial animus” present at the time? (vide Scace, The Income Tax Law of Canada, 2nd edition, chapter 2; MNR v James N Sissons, [1969] CTC 184; 69 DTC 5152; Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131).

The well known test applied by the Lord Justice Clerk in Californian Copper Syndicate v Harris (1904), 5 TC 159, is still valid. He said at page 166:

. . . the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

In the case at bar, did the plaintiffs purchase the book debts with the intention of making a profit? Was it an astute speculation on their part which turned out to be fruitful? Or was it part and parcel of an overall transaction which was carried out to salvage their roadbuilding operations from imminent financial disaster?

The relevant facts, as I appreciate them, may be summarized as follows.

In 1958 the Trans-Canada Highway was being built in the Province of Newfoundland. The Newfoundland group were engaged in road construction but had no paving experience, whereas the plaintiffs had acquired an extensive knowledge and a solid reputation as roadbuilders and pavers in the Maritime provinces. They joined, plaintiffs supplying the paving equipment and key personnel including the superintendent, plant men, road operators and the paving equipment. The Newfoundland group provided some equipment, labour, and above ali the ability to secure contracts in their own province.

On October 2, 1958 the parties entered into a written agreement providing, inter alia, what equipment be supplied by each party, that the Bank of Montreal be appointed banker, that two of the five directors jointly be able to negotiate all or any paper negotiable, that a superintendent be supplied by plaintiffs, that all supplies and materials be purchased by the superintendent, that monthly statements be sent to each director, that the five directors be the two Steeves, the two Goodyears and Pomeroy, with the plaintiffs holding 100 shares and the Newfoundland group also 100 shares.

On April 29, 1959 letters patent were issued federally incorporating Paving pursuant to the agreement.

The uncontradicted evidence is quite clear that the Newfoundland group did not carry out their obligations. The whole operation in Newfoundland from the outset was disorganized and lackadaisical. The monthly statements to the directors were never issued, the superintendent was constantly circumvented, decisions were taken without his authority, the most remunerative phases of the road programme were subcontracted by the Newfoundland group to their own companies while using Paving equipment to carry out these side operations, cost records were improperly kept.

On January 15, 1963 Douglas B Peters, then Assistant General Manager, Eastern Division, Bank of Montreal, wrote to plaintiffs informing them that matters had “reached a crisis”.

It is clear from the correspondence filed in exhibit and from the evidence of Douglas B Peters that the bank relied heavily on their favourable experience with, and their high opinion of, the plaintiffs personally, in the bank’s decision to finance the various companies of the plaintiffs. It is because of the bank’s confidence in them that they financed Paving as long and as far as they did.

Douglas Peters said he had known the plaintiffs’ names since 1952 and met them first in Halifax in 1958. He “had credibility in the Steeves, not the Goodyears’’. He knew that plaintiffs were in jeopardy with the Newfoundland operation. He sent down the bank’s industrial engineer to investigate the situation and was “shocked” by his report: “Goodyear might drag Steeves down and I was most reluctant to see this happen.”

On July 10, 1963 plaintiffs wrote to the Newfoundland group expressing their deep concern over the “persistent violations of the October 1958 Montreal agreement” protesting the failure to issue monthly statements, lamenting over “the tremendous loss sustained by the company when fuels and lubricants were not accounted for’, insisting that all invoices be approved by the superintendent, condemning the rental of Paving equipment to other Newfoundland group companies without prior approval. After that long recital of objections and suggestions, plaintiffs concluded the letter with an offer to sell their interests “at your convenience, but not later than July 30th, 1963”.

On July 26, 1963 the Grand Falls, Newfoundland, Manager of the Bank of Montreal wrote to plaintiffs stating they were very disturbed by the financial position of Paving which “presents a very alarming situation” and urging plaintiffs to “visit Grand Falls at an early date” and “to come to some reasonable workable agreement with the Goodyears, otherwise we do not see how this contract can be carried on”.

On that same date H K Goodyear wrote a very short letter to Winston Steeves:

Dear Winston:

In view of past events, I have decided if a reasonable offer for the purchase of my equity in Goodyear Paving Limited is made, I! am prepared to sell.

There ensued further meetings and correspondence, including a letter from the Newfoundland group dated November 5, 1963 stressing that “liquidation would be the ruination of both of us”. The reference was to the liabilities assumed by both groups, their various companies and themselves personally, vis-a-vis the bonding companies and the Bank of Montreal.

The various takeover agreements were completed on April 2, 1964.

Under one agreement the Newfoundland group sold to the plaintiffs their 100 shares for $1, subject inter alia to the purchasers being able to make a proper and satisfactory arrangement with all of the creditors of Paving whereby they will not take any legal action for at least two years and look to Paving for payment of said debts.

Under an assignment of book debts, J Goodyear & Sons Ltd (a Newfoundland group company) assigned to the two plaintiffs personally debts owing by Paving in the amount of $546,752.30 for the sum of $61,600. Under another such assignment Goodyear Construction Co Ltd (another Newfoundland group company) assigned to the two plaintiffs personally debts owing by Paving in the amount of $73,880.83 for the sum of $8,400. Both assignments to take effect only when the agreement of sale of Paving shares is completed.

Thus the plaintiffs were acquiring control over Paving, assuming all liabilities for Paving debts to the exoneration of the Newfoundland group, and acquiring book debts totalling $620,633.13 for $70,000.

Plaintiffs applied their paving expertise and management competence to the Newfoundland operation and gradually over the years turned it into a successful venture.

At least at the outset, they had to guarantee personally and with the credit of their New Brunswick companies the Bank of Montreal loans, and in some instances the more important Paving creditors, to steady the financial position of Paving, specially during the two-year moratorium.

After all other debts had been paid, plaintiffs caused Paving to start paying over to them personally the moneys owing to the two Newfoundland companies and assigned to them under the two April 2, 1964 assignments.

The issue to be determined is whether the repayment of these book debts constitutes a capital gain or a benefit resulting from an adventure in the nature of trade. Stripped of all its corporate complexities, the situation, as I see it, is basically this: the two businessmen invested $70,000 from their own resources to purchase book debts worth in excess of $600,000 and their investment paid off. It was undoubtedly a very shrewd transaction launched at a desperate stage where men. of lesser determination would rather have retrenched than plunge deeper.

There is no evidence that plaintiffs ever purchased book debts before. They obviously did so on this occasion because it seemed to them to offer rewarding possibilities. If the Paving venture turned sour they would lose $70,000 more, but if everything went well, they could reap over $600,000, perhaps tax free. It was a calculated risk based on self-confidence.

Purchasing book debts is not of itself a transaction which is such as to exclude the possibility that it was anything else but an adventure in the nature of trade, specially where it is a transaction outside the usual course of business. The mere fact that the element of speculation is present in this case does not make it an adventure and it is very difficult to assess how remote were the possibilities of realizing a profit when the book debts were purchased. They were certainly very remote in the opinion of the Newfoundland group who were satisfied of disposing of the debts at such a discount: over $600,000 for $70,000. Dollars sold for 11 cents must appear to be very long shots indeed.

Yet, the plaintiffs must have viewed the odds as being bearable and to a very high degree within their control. After all, the success of the operation lay within the reach of their own capability. While acquiring book debts is not within the normal course of their business, building roads is their business, and the success of the former rested entirely on the results of the latter. If the plaintiffs had purchased the book debts of, say, a fashion store, in one isolated transaction, where they had no knowledge of the clothing business and no means within their command to enhance the book debt value, then the transaction might very well be considered to be entirely outside their “business”. But, obviously, such is not the case here.

In MNR v Sissons (supra) Pigeon, J stated at page 187 [5154]:

the fact that the gain arose at least in part from the respondent’s efforts, this clearly tends to show not that it is a capital gain but profit from a “business”. One of the characteristics of income from such a source is that it is essentially the result of the businessman’s efforts.

He also said at page 188 [5154]:

Here the clear indication of “trade” is found in the fact that the acquisition of the securities was a part of a profit-making scheme. The purpose of the operation was not to earn income from the securities but to make a profit on prompt realization. The operation has therefore none of the essential characteristics of an investment, it is essentially a speculation.

It is true that in the case at bar, the acquisition of the book debts was not carried out in the normal course of business, it was a first deal of that type by the plaintiffs, but they did carry it out as part and parcel of a large profit-making scheme, with their numerous companies, their extensive paving operations and their own personal credit intertwined in the meshes of their “business”.

In Atlantic Sugar Refineries v MNR, [1949] SCR 706; [1949] CTC 196; 4 DTC 602, the appellant was faced with a prospective loss and to offset this, speculated in raw sugar futures and made a profit of some $70,000. The Supreme Court of Canada held that, even if it were the only transaction of that character, in the light of all the evidence, it was part of the appellant’s business and therefore a profit from its business. Kerwin, J said at page 709 [201]:

The Company was not investing idle capital funds nor was it disposing of a capital asset. In no sense may it be said that the operations were unconnected with the appellant’s business and it is at least an added circumstance that the speculation was made in raw sugar.

In my view the transaction cannot be characterized as a seperate investment in capital made by the two plaintiffs independently from their other ventures. They are roadbuilders and they purchased roadbuilding debts, debts incurred by Paving while they owned half the shares and repaid by the same company while they owned all the shares. The purchase of these book debts was not a separate investment in a different field but a transaction which was very much part and parcel of a profit-making scheme, building and paving roads in a businesslike, efficient manner.

I find therefore that the amounts included in income by the Minister were properly included. The appeal is dismissed with costs.