Walsh,
J:—This
case
concerns
an
appeal
by
plaintiff
and
a
cross
appeal
by
defendant
from
the
decision
of
the
Tax
Review
Board
dated
September
29,
1977,
which
found
in
favour
of
the
defendant
on
one
of
the
two
issues
raised
and
in
favour
of
plaintiff
on
the
other.
By
Notice
of
Reassessment
dated
June
20,
1973,
the
Minister
of
National
Revenue
had
assessed
defendant
with
respect
to
its
1970
taxation
year
on
the
basis
that
the
sum
of
$473,623.12
profit
realized
from
the
sale
of
certain
real
property
in
the
Province
of
Ontario
was
income
of
the
defendant
for
the
year.
It
was
defendant’s
contention
that
this
profit
was
in
the
nature
of
a
capital
gain
and
this
contention
was
upheld
by
the
decision
of
the
Tax
Review
Board.
The
second
issue
arose
from
a
Notice
of
reassessment
dated
the
same
date
in
respect
of
defendant’s
1968
taxation
year
which
included
in
the
computation
of
its
income
for
that
year
the
sum
of
$135,947.16
described
as
interest
revenue
realized
from
the
acquisition
of
the
Glen
Abbey
property
from
Clearstream
Developments
Limited.*
This
reassessment
was
upheld
by
a
decision
of
the
Tax
Review
Board
and
defendant
appeals
it
by
way
of
counterclaim.
On
the
Same
day
a
reassessment
was
made
in
respect
of
the
1969
taxation
year
which
increased
the
plaintiff’s
income
for
that
year
by
eliminating
a
loss
carry
forward
from
1968
of
$11,001.38
which
adjustment
arose
as
a
result
of
the
aforementioned
reassessment
made
in
respect
of
the
1968
taxation
year.
Similarly
as
a
result
of
a
subsequent
reassessment
on
the
first
issue
the
Minister
deducted
the
sum
of
$305,447.75
as
a
paragraph
85(b)(1)(d)
reserve
from
the
sale
of
a
portion
of
the
Glen
Abbey
property
from
the
income
of
defendant
previously
assessed
by
the
Minister
of
National
Revenue
for
its
1970
taxation
year.
Neither
of
these
latter
two
reassessments
are
directly
involved
in
the
present
appeal
or
cross-appeal
as
the
case
may
be
as
they
are
merely
consequential
to
the
original
assessments
which
are
in
issue
before
the
Court.
In
making
the
assessments
based
on
the
contention
that
the
profit
from
the
sale
of
property
was
of
an
income
nature
the
Minister
made
the
following
assumptions.
(a)
in
1964,
a
corporation
known
as
Clearstream
Developments
Limited
(hereinafter
referred
to
as
“Clearstream”)
held
title
to
certain
real
property
subject
to
a
first
mortgage
as
well
as
options
to
purchase
two
adjoining
parcels
of
land
(hereinafter
referred
to
as
“parcels
2
and
3”).
(b)
on
July
22,
1964,
defendant
loaned
to
Clearstream
$350,000
secured
by
a
second
mortgage
on
parcel
1
and
at
the
same
time
received
an
assignment
from
Clearstream
of
its
interest
in
the
options
to
purchase
parcels
2
and
3
as
further
security
for
the
loan.
(c)
on
July
20,
1965,
defendant
agreed
to
advance
a
further
sum
of
$175,000,
the
second
mortgage
thereby
being
increased
to
$525,000.
(d)
on
July
26,
1968,
defendant
acting
through
an
intermediary
entered
into
an
agreement
with
Clearstream
to
purchase
said
parcel
1
and
the
assignment
of
the
options
to
purchase
parcels
2
and
3.
(e)
on
December
31,
1968,
title
of
the
property
was
transferred
to
the
defendant
as
well
as
the
rights
under
the
options.
(f)
on
October
3,
1969,
defendant
exercised
the
options
to
purchase
parcels
2
and
3.
(g)
by
an
agreement
dated
April
21,
1970,
defendant
sold
approximately
288
acres
of
parcels
1
and
3
thereby
realizing
a
profit
in
the
amount
of
$473,623.12.
(h)
at
all
material
times
defendant
in
acquiring
title
to
the
said
parcels
1,2
and
3
had
the
intention
of
dealing
in,
trading
in
or
otherwise
turning
the
said
real
property
to
account
for
a
profit.
Reliance
is
placed
on
sections
3,
4
and
paragraph
139(1)(e)
of
the
Income
Tax
Act,
RSC
1952,
c
148
in
effect
at
the
time.
Defendant
contends
that
in
1964
it
had
surplus
funds
available
from
its
business
operations
but
had
never
engaged
in
the
money
lending
business
when
it
was
approached
by
a
representative
of
Clearstream
to
provide
interim
financing
for
the
construction
of
a
golf
course,
swimming
pool
and
parking
lot
on
a
portion
of
the
property
known
as
Glen
Abbey
property,
as
a
result
of
which
it
loaned
the
sum
of
$350,000
for
two
years
secured
by
a
second
mortgage
on
parcel
1
together
with
the
assignment
as
additional
security
of
options
to
purchase
parcels
2
and
3.
These
options
were
an
integral
part
of
defendant’s
underlying
security
for
its
loan
without
which
it
would
not
have
granted
the
loan.
Construction
problems
as
well
as
financial
and
administrative
problems
were
encountered
and
before
the
expiration
of
the
two
year
term
defendant
agreed
to
lend
an
additional
$175,000.
Actually
a
total
of
$500,000
was
advanced
to
defendant.
Defendant
defaulted
on
both
the
first
and
second
mortgage
payments
as
well
as
on
certain
option
payments
and
eventually
after
the
second
mortgage
fell
due
in
July,
1966
defendant
instituted
a
foreclosure
action
in
the
Supreme
Court
of
Ontario
against
Clearstream
which
was
vigorously
defended
with
the
result
that
there
were
considerable
delays
and
some
danger
of
the
action
being
dismissed.
The
options
on
parcels
2
and
3
although
extended
would
have
expired
if
not
exercised
by
1969.
Defendant
believed
that
Clearstream
would
not
be
financially
able
to
exercise
the
options.
Accordingly,
in
order
to
protect
its
security
it
would
have
been
necessary
for
defendant
to
fund
this
exercise
by
the
payment
of
an
amount
in
excess
of
an
additional
$326,000
which
it
did
not
wish
to
do.
Meanwhile
the
relationship
between
Clearstream
and
defendant
had
deteriorated
so
it
had
reached
the
conclusion
that
to
protect
its
investment
it
should
terminate
its
dealings
with
Clearstream
and
attempt
to
purchase
the
Glen
Abbey
property
through
a
nominee
corporation
with
the
view
to
liquidating
same
as
soon
as
a
purchaser
could
be
found.
The
property
was
eventually
purchased
by
a
nominee
of
defendant,
Ontra-Desar
Realty
Investments
Limited.
At
no
time
was
it
contemplated
that
there
would
be
a
gain
on
the
sale
of
the
Glen
Abbey
property
nor
was
this
an
underlying
motivation
for
the
purchase,
the
only
purpose
being
to
liquidate
the
considerable
amounts
due
to
defendant
by
Clearstream,
and
to
avoid
the
loss
of
a
substantial
part
of
defendant’s
security.
In
1970
defendant
disposed
of
parcels
1
and
3
and
realized
a
gain
of
$473,623.12
thereon
this
resulting
from
an
unanticipated
purchase
offer.
With
respect
to
the
counterclaim
defendant
alleges
that
it
never
received
the
$135,947.16
interest
or
any
part
thereof
in
its
1968
taxation
year,
this
interest
merely
appearing
as
an
adjustment
figure
between
Ontra-Desar
and
Clearstream
in
determining
the
balance
owing
by
Ontra-Desar
on
the
purchase
from
Clearstream,
but
was
never
paid
by
Outra-Desar
to
defendant
since
Ontra-Desar
was
merely
its
nominee,
the
two
companies
really
being
one
and
the
same.
In
contesting
this
counterclaim
plaintiff
relies
on
paragraph
6(1
)(b)
of
the
Income
Tax
Act.
John
Bailey
a
professional
engineer
who
has
been
president
of
defendant
since
1960
testifies
that
he
is
the
controlling
shareholder.
The
company
formerly
operated
under
other
names
but
he
had
been
associated
with
it
since
1954.
The
company
was
a
large
scale
contractor
dealing
primarily
in
institutional
buildings,
having
constructed
university
buildings
at
Waterloo
and
McMaster
Universities
and
a
number
of
general
hospitals
all
over
the
Province
of
Ontario.
By
the
late
1960s
it
did
some
$25,000,000
worth
of
work
per
annum
and
apparently
has
work
in
progress
at
present
worth
between
$75,000,000
and
$100,000,000.
He
stated
that
it
was
essential
for
the
company
to
be
able
to
obtain
bonding
in
order
to
bid
on
and
undertake
these
contracts
but
that
despite
the
company’s
good
credit
record
bonding
companies
would
refuse
bonding
if
the
liquidity
of
the
company
deteriorated.
In
1964,
two
years
after
he
had
acquired
the
balance
of
shares
of
the
company
from
a
Mr
Soules
with
whom
he
had
been
associated
for
some
time
and
whose
opinion
he
valued,
he
heard
from
him
that
a
Mr
D
J
G
Halford,
an
architect
whom
he
also
knew
and
trusted
and
others
were
planning
to
acquire
land
to
build
a
high
quality
golf
course
and
develop
the
peripheral
lands
around
it
in
the
vicinity
of
Oakville.
A
company
was
to
be
formed
for
these
purposes
which
later
became
Clearstream.
The
promoters
of
this
project
had
been
negotiating
with
a
company
known
as
Interia
Investment
Management
Limited
for
a
loan
of
$350,000
on
a
second
mortgage
to
develop
the
golf
course
on
the
property
which
was
to
be
bought
from
the
Jesuit
Fathers
of
Upper
Canada
Holding
Corporation
who
would
hold
the
first
mortgage.
Interia
was
to
receive
12%
interest
together
with
three
common
shares
of
Clearstream,
amounting
to
a
12
/2%
holding
in
that
company.
This
deal
fell
through
and
Mr
Bailey
testified
that
his
company
agreed
to
lend
the
same
amount,
although
he
was
satisfied
to
receive
10%
interest
together
with
three
shares
in
Clearstream.
His
company
had
surplus
funds
to
invest
at
the
time
and
10%
was
a
good
yield.
The
land
which
was
purchased,
hereinafter
referred
to
as
parcel
1
contained
174
acres
on
which
the
course
would
be
built
with
a
substantial
house
on
it
which
it
was
intended
to
use
in
the
first
instance
as
the
club
house
as
well
as
an
additional
62
acres
around
the
periphery
of
the
golf
course.
Parcel
2
on
which
an
option
was
obtained
was
separated
from
parcel
1
by
a
stream
known
as
Sixteen
Mile
Creek
and
contained
48.6
acres
zoned
as
residential,
while
parcel
3
on
which
an
option
was
also
obtained
was
to
the
south
of
parcel
1
and
zoned
as
industrial
land.
At
the
time
of
making
the
loan
Mr
Bailey
concluded
that
as
services
were
not
too
far
distant
the
option
price
to
be
paid
for
parcel
2
was
less
than
its
real
value,
that
the
option
price
for
parcel
3
was
a
realistic
appraisal
of
its
value
but
that
the
purchase
price
for
parcel
1
was
really
more
than
it
was
worth
at
the
time.
It
must
be
remembered
that
he
was
a
contractor
and
nota
real
estate
expert
and
that
he
relied
substantially
on
Mr
Soules’
view
for
information
as
to
the
value
of
the
property,
so
this
evidence
is
of
little
value.
In
any
event
he
considered
that
the
options
for
parcels
2
and
3
formed
a
substantial
part
of
the
security
and
testified
that
he
would
never
have
made
the
loan
on
parcel
1
but
for
the
existence
of
these
options.
A
well-known
golf
course
architect
Howard
Watson
had
been
retained
and
the
course
was
to
be
built
by
contractors
who
were
retained
for
this
purpose,
and
not
by
Mr
Bailey’s
company
and
was
to
be
completed
by
1965.
Because
of
his
wide
experience
in
earth
moving
operations
he
contributed
some
of
his
time
without
remuneration
in
supervising
the
work
and
he
became
one
of
the
directors
of
Clearstream
in
October
of
1964.
The
contractors
Coniston
Construction
Company
got
into
difficulties
however
with
other
work
they
were
doing
in
the
Toronto
area
and
removed
most
of
their
equipment
towards
the
end
of
the
1964
year.
Meanwhile
Clearstream
had
trouble
arranging
additional
financing
within
their
own
group
and
various
package
deals
were
offered
to
attract
investors.
It
was
initially
arranged
with
a
group
of
people
representing
the
Upper
Canada
Country
Club
that
they
would
purchase
the
course
and
club
house
from
Clearstream
at
cost
plus
a
modest
fee.
Clearstream
hoped
to
make
its
profits
from
development
of
the
peripheral
lands
around
the
golf
course.
Upper
Canada
Country
Club-encountered
difficulty
in
getting
sufficient
members
however
and
the
completion
of
the
golf
course
was
delayed
and
interest
charges
were
mounting.
Another
$350,000
was
needed
to
complete
the
construction
and
he
agreed
to
advance
$175,000
if
the
other
members
of
the
group
would
match
this.
Actually
on
this
basis
he
only
eventually
loaned
an
additional
$150,000.
When
Coniston
was
placed
in
receivership
in
1965
one
of
the
Clearstream
group
John
Bright
and
Mr
Bailey
were
deputed
by
the
group
to
approach
them
to
terminate
the
contract,
and
the
course
would
then
be
completed
with
rented
equipment,
the
work
being
supervised
by
another
member
of
the
group.
Interest
on
his
second
mortgage
fell
into
default
during
1965
and
1966
but
Clearstream
still
tried
to
raise
money
from
anyone
who
would
advance
it
and
eventually
involved
some
40
investors.
His
bonding
companies
began
pressing
him
and
wanted
him
to
collect
the
amount
due
on
this
loan
and
the
matter
got
so
serious
that
he
felt
that
his
contracting
business
would
be
damaged
unless
he
could
get
out
of
this
investment.
On
July
22,
1966
there
was
a
default
of
the
interest
and
principle
due
to
him
as
well
as
the
sums
due
on
the
first
mortgage
as
a
result
of
which
his
company
Greenington
Group
Limited
commenced
proceedings
against
Clearstream.
He
reached
a
tentative
agreement
with
the
other
members
of
the
group
that
he
would
take
the
title
to
the
property
and
try
to
sell
it
and
after
reimbursing
his
company
for
the
balance
due
on
the
mortgage
any
remaining
balance
would
go
to
Clearstream.
Although
this
was
approved
by
92%
of
the
shareholders
the
deal
never
went
through.
He
attempted
to
resign
as
a
director
of
Clearstream
in
view
of
a
conflict
of
interest
but
had
difficulty
getting
the
other
directors
to
attend
a
meeting
to
accept
his
resignation.
Considerable
hostility
was
shown
towards
him
because
of
his
foreclosure
of
the
mortgage
and
his
action
was
vigorously
contested.
He
had
to
make
certain
payments
on
the
options
to
the
Jesuit
Fathers
so
as
to
keep
the
options
in
effect,
for
which
he
was
eventually
reimbursed
by
Clearstream.
The
more
the
action
was
contested
on
procedural
grounds
the
more
concerned
he
became
about
realizing
on
his
security,
and
so
did
his
bonding
company.
His
attorney
was
pessimistic
about
the
possibility
of
finalising
the
proceedings
at
an
early
date.
Realtors
were
retained
in
Oakville
and
the
option
properties
were
advertised
for
sale
but
no
offers
were
received.
In
his
view
the
property
as
a
whole
including
the
option
properties
might
not
be
of
sufficient
value
to
repay
all
mortgages
and
additional
loan
funds
put
up
by
Clearstream.
He
knew
a
Mr
Buehler,
President
of
Brethour
Realty
Service,
and
retained
him
to
negotiate
a
purchase
of
the
property
for
cash,
not
disclosing
to
Clearstream
that
he
would
be
the
buyer.
He
estimated
the
value
of
the
golf
course
and
peripheral
lands
at
$2,000
an
acre,
allowing
little
extra
for
the
house
on
the
golf
course
property.
He
considered
that
the
option
parcel
zoned
residential
was
worth
$10,000
an
acre
and
that
zoned
industrial
$6,000
an
acre
making
a
total
of
$1,450,000
in
all.
The
first
mortgage
was
$360,000.
The
prices
payable
to
exercise
the
options
would
of
course
have
to
be
deducted.
He
calculated
an
offer
of
$700,000
plus
the
assumption
of
all
the
liabilities
would
leave
something
to
enable
Clearstream
investors
to
recover
part
of
their
investment.
Actually
he
was
able
to
buy
the
property
for
$1,575,000.
The
golf
course
was
now
in
use.
If
he
had
not
continued
to
operate
it
it
would
have
deteriorated
rapidly
and
affected
the
value
of
the
development
of
land
around
it
so
he
put
some
of
his
own
people
in
and
continued
operating
it
at
a
deficit.
During
the
winter
he
opened
a
ski
hill
however
on
the
property
which
was
successful.
He
instructed
Mr
Buehler
to
dispose
of
the
property
as
soon
as
possible.
He
had
hoped
that
once
he
had
acquired
title
to
the
property
his
position
with
his
bonding
companies
would
improve
but
bonding
was
still
suspended
due
to
his
lack
of
liquidity.
Fortunately
his
company
had
a
substantial
backlog
of
work
already
bonded
for
about
two
years
and
he
hoped
that
his
position
would
be
recovered
before
this
delay
expired.
He
was
willing
to
sell
for
a
price
which
would
have
got
his
money
back
but
had
no
serious
offer.
All
of
a
sudden
a
real
estate
agent
phoned
him
saying
he
had
a
potential
buyer
who
was
interested
in
the
land
to
the
west
of
the
river
but
did
not
want
to
buy
parcel
2.
He
wished
to
sell
everything
but
the
purchaser
flatly
refused
so
he
sold
parcels
1
and
3.
The
sale
price
was
actually
suggested
by
the
agent
who
had
approached
him.
The
purchase
from
Clearstream
was
made
by
Ontra-Desar
Realty
Investments
Limited
a
company
incorporated
by
Greenington
Group
Limited
for
this
sole
purpose,
all
funds
being
provided
to
it
by
the
use
of
Greenington
Group
Limited
bank
credit.
It
is
common
ground
between
the
parties
that
no
issue
arises
out
of
the
separate
corporate
personality
of
the
two
companies
which
may
be
considered
as
one
and
the
same
company,
both
wholly
owned
by
Mr
Bailey.
It
was
the
sale
by
Ontra-Desar
to
Home
Smith
Limited
of
parcels
1
and
3
in
1970
for
$1,930,000
which
gave
rise
to
the
reassessment
for
that
year
on
the
basis
that
the
purchase
in
1968
and
resale
in
1970
at
a
profit
was
an
income
transaction.
The
agent
William
Sorokolit
Realty
Limited
had
introduced
Home
Smith
Limited
to
defendant
received
its
5%
commission
from
Greenington
Group
Limited
on
the
sale.
The
witness
later
learned
that
the
purchaser
was
a
large
scale
developer
which
had
acquired
extensive
land
holdings
in
the
area
and
required
parcels
1
and
3
to
consolidate
them,
but
was
not
in
the
least
interested
in
parcel
2
although
it
was
zoned
for
residential
development
since
it
was
to
the
east
of
the
river
and
to
that
extent
cut
off
from
the
other
parcels.
It
is
of
interest
to
note,
although
not
relevant
to
the
present
assessment,
that
the
golf
course
eventually
became
the
famous
Glen
Abbey
Golf
Course
Club
in
which
the
renowned
golfer
Jack
Nicklaus
participated
in
the
design
and
which
is
intended
to
become
the
permanent
home
of
the
Canadian
open
golf
championship.
Obviously
during
the
time
the
course
was
being
built
by
the
Clearstream
group,
with
the
intent
of
using
the
house
on
the
property
as
the
club
house,
it
was
only
a
much
more
modest
development
which
was
foreseen,
as
a
converted
house,
even
a
large
one
such
as
the
one
in
question
would
certainly
be
insufficient
for
a
golf
club
of
this
nature,
to
say
nothing
of
the
necessary
ancillary
buildings
which
a
golf
course
requires.
They
had
hoped
to
build
the
golf
course
for
$230,000
and
even
including
improvements
to
the
club
house
spend
only
$350,000
over
and
above
the
purchase
price
of
parcel
1.
The
witness
Bailey
testified
that
Greenington
Group
Limited
(which
had
formerly
been
called
Robertson
Yates
(1966)
Limited)
had
at
about
the
same
time
been
developing
some
taxable
income
and
had
acquired
two
completed
town
house
developments
for
leasing
purposes
so
as
to
be
able
to
take
advantage
of
a
5%
capital
cost
allowance.
One
was
in
Don
Mills
and
the
other,
known
as
Forest
Glen,
was
in
Cooksville
and
consisted
of
150
units.
The
company
however
had
neither
purchased
the
land
nor
built
the
units,
and
sold
them
after
a
couple
of
years
in
about
1970.
The
profit
realized
from
these
sales
is
not
involved
in
the
present
reassessment.
There
is
no
doubt
that
Mr
Bailey
and
his
associates
in
Clearstream,
all
professional
or
businessmen
in
the
Oakville
area
in
which
the
property
is
situated
planned
to
make
a
profit
by
developing
the
peripheral
land
around
the
golf
course
for
residential
use.
There
is
no
indication
that
they
intended
to
construct
residences
on
it
themselves
but
presumably
they
hoped
to
subdivide
it
into
building
lots
and
sell
these
lots
to
builders
or
developers.
It
became
apparent
however
that
the
town
of
Oakville
was
not
favourable
to
this.
It
was
his
view
that
Genstar
which
eventually
became
owner
of
the
large
area
of
some
1,500
acres,
including
the
subject
property
sold
to
Home
Smith,
proceeded
with
the
subsequent
lavish
golf
course
development
in
conjunction
with
the
Royal
Canadian
Golf
Association
in
order
to
impress
the
town
authorities
with
a
view
to
permitting
the
zoning
of
the
other
land
for
residential
development.
As
early
as
September
1966
Mr
Bailey
had
through
Haney
Hunt
and
Bowden
Limited,
large
realtors
in
Oakville,
tried
to
sell
the
option
lands
of
parcel
2,
and
parcel
3
(for
which
the
option
price
had
now
been
increased
to
$208,000
so
that
the
total
cost
to
take
up
the
two
options
was
now
$340,000)
but
received
no
offer.
In
the
agreement
of
sale
from
Clearstream
to
Heinrich
Ochs,
the
agent
who
was
acting
on
behalf
of
the
company
to
be
formed
(Ontra-Desar)
it
was
provided
that
the
purchaser
would
assume
the
first
mortgage
but
that
the
sale
was
conditional
on
the
assignment
by
the
Jesuit
Fathers
to
the
purchaser
of
the
option
to
purchase
parcels
2
and
3
and
on
the
vendor
agreeing
with
Robertson
Yates
(as
defendant
was
then
called)
for
release
and
discharge
at
the
time
of
closing,
of
any
encumbrance,
lien,
claim
or
other
interest
which
it
might
have
on
the
three
parcels.
Mr
Bailey
insisted
on
this
as
the
vendors
were
not
to
know
that
he
or
his
company
were
in
fact
the
purchasers
so
that
the
second
mortgage
would
automatically
be
extinguished
as
a
result
of
their
purchase.
It
had
to
appear
to
the
vendors
that
his
claims
under
the
second
mortgage
would
be
discharged
in
full
and
the
security
given
therefor
released
to
the
purchasers.
As
soon
as
the
purchase
was
completed
his
company
was
in
a
position
to
pay
up
any
arrears
due
on
the
first
mortgage
and
to
take
up
the
options
on
parcels
2
and
3.
Subsequently
defendant
sold
the
land
on
parcel
2
in
about
1973
but
that
is
not
the
subject
of
the
present
assessments.
Thomas
McWhirter,
CA
defendant’s
auditor
testified,
corroborating
Mr
Bailey’s
evidence
as
to
the
problems
with
the
bonding
companies
as
a
result
of
the
loss
of
liquidity
due
to
not
being
able
to
obtain
repayment
of
the
second
mortgage,
the
original
loan
of
$350,000
having
only
been
made
for
two
years.
To
keep
the
option
on
parcels
2
and
3
in
force
payments
of
$7,000
had
to
be
made
to
the
Jesuit
Fathers
semi-annually
and
on
several
occasions
defendant
had
to
make
the
payments
itself
after
waiting
until
five
minutes
before
the
deadline
to
see
if
Clearstream
would
be
making
them.
He
was
aware
that
Clearstream
group
had
been
trying
without
success
to
sell
the
Glen
Abbey
property.
He
was
greatly
concerned
with
the
delays
in
the
action
brought
by
defendant
to
foreclose
the
second
mortgage,
which
was
constantly
being
delayed
by
various
procedures
which
were
brought,
he
believes,
to
gain
time
for
Clearstream.
He
shared
Mr
Bailey’s
views
that
the
investment
was
not
fully
protected
by
the
value
of
parcel
1
and
needed
the
added
security
of
the
options
on
parcels
2
and
3,
and
he
was
not
aware
at
the
time
that
Home
Smith
were
buying
property
in
the
area.
Robertson
Yates
(1966)
Corporation
was
operated
as
one
with
Greenington
Group,
Robertson
Yates
carrying
on
the
construction
business
and
the
Greenington
Group
after
1966
becoming
involved
mainly
in
sewer
and
water
main
construction
plus
investment
in
town
houses.
As
a
result
there
was
a
lack
of
liquidity
which
resulted
in
the
sale
of
the
town
houses.
The
statement
of
adjustments
as
of
September
17,
1978,
the
date
of
the
finalization
of
the
purchase
from
Clearstream
by
Ontra-Desar
is
especially
significant.
It
shows
as
a
credit
to
the
purchaser
principal
and
interest
due
to
Robertson
Yates
Corporation
Limited
(as
defendant
was
then
known)
to
be
discharged
by
the
purchaser
as
of
August
15,
1968,
in
the
amount
of
$651,907.44.
Additional
interest
from
August
6
to
September
17
accrued
in
the
amount
of
$5,879.
The
balance
due
on
closing
is
shown
as
$483,464.60.
Actually
of
course
the
purchaser
never
paid
the
amounts
due
to
defendant
since
it
itself
was
the
purchaser,
but
on
the
other
hand
the
balance
due
on
the
closing
to
the
vendor
Clearstream
would
have
been
increased
by
these
amounts
if
they
had
not
been
shown
as
a
liability
to
be
discharged
by
the
purchaser.
He
testified
that
in
July
1966
payments
due
by
Clearstream
to
Robertson
Yates
fell
into
default
just
before
the
latter
started
foreclosure
proceedings
and
that
he
therefore
stopped
recording
interest
as
receivable
in
the
books
of
the
company,
nor
was
any
allowance
set
up
for
it
as
a
bad
debt
following
that
date,
as
he
considered
there
was
no
point
in
recording
an
item
which
there
was
little
likelihood
of
collecting.
It
simply
disappeared
from
the
accounting
records
of
defendant
and
was
never
written
off.
After
the
purchase
by
Ontra-Desar
the
transaction
was
not
recorded
on
the
basis
of
the
statement
of
adjustments
but
on
the
basis
of
total
cost,
the
principal
of
the
mortgage
amounting
to
$500,000
being
transferred
to
the
cost
of
the
assets,
and
the
balance
of
the
purchase
price
not
being
recorded
as
such.
No
books
were
ever
kept
by
Ontra-Desar,
all
its
expenses
being
recorded
only
in
Greenington’s
books.
In
cross-examination
he
refused
to
concede
that
there
was
any
discrepancy
in
the
books.
He
had
recorded
the
acquisition
at
its
actual
cost.
If
interest
had
been
received
he
would
have
recorded
it
in
Greenington’s
income
statement.
He
admitted
however
that
if
it
had
been
recorded
as
a
receivable
it
would
have
been
shown.
Examined
on
his
notes
on
defendant’s
1969
balance
sheet
he
stated
that
the
reference
to
Ture
Anderson
(Eastern)
Limited
is
to
a
construction
company
acquired
by
defendant
to
do
its
water
main
contracts.
Reference
to
the
guarantee
of
bank
advances
to
Mansion
Estates
Limited
refers
to
an
adventure
of
defendant
in
the
development
business,
which
was
part
of
its
liquidity
problem.
This
latter
company
had
subdivisions
in
Mississauga
and
Oakville
including
some
land
inventory
in
Mississauga
held
for
future
development.
Another
person
was
interested
in
it
as
well
as
Mr
Bailey.
It
dealt
in
residential
subdivisions
around
1967,
1968
and
1969
but
it
was
pretty
well
wound
up
by
1971.
He
stated
that
there
was
never
any
intention
whatsoever
to
transfer
any
of
the
golf
course
properties
to
Mansion
Estates.
This
was
a
different
type
of
property
altogether,
being
a
short
term
development
which
could
be
completed
right
away.
Morton
Greenglass,
barrister
who
acted
for
Robertson
Yates
in
the
action
against
Clearstream
to
foreclose
the
mortgage
as
well
as
attempting
to
sell
the
property
by
virtue
of
the
power
of
sale
clause
in
the
mortgage
agreement
stated
that
this
latter
was
blocked
by
a
judgment
of
the
Ontario
Supreme
Court
in
an
interlocutory
injunction
proceeding.
He
stated
that
a
great
number
of
defences
had
been
raised
in
the
foreclosure
action,
first
that
the
original
mortgage
had
never
been
beneficially
released
to
Robertson
Yates
when
an
agreement
was
reach
to
add
an
additional
$175,000
and
a
new
document
made
to
replace
the
first
$350,000
mortgage
and
secure
the
entire
amount.
The
second
defence
was
that
Robertson
Yates
which
had
a
Canadian
letters
patent
was
prohibited
by
paragraph
14(k)
of
the
Canada
Corporations
Act
from
lending
to
a
company
with
which
it
had
dealings
or
in
which
it
owned
shares.
There
was
also
a
further
contention
that
there
were
no
specific
powers
in
the
company’s
charter
for
lending
money
except
for
trade
debts.
It
was
also
contended
that
the
loan
had
been
in
con-
travention
of
The
Loan
and
Trust
Corporation
Act
of
Ontario.
There
was
also
the
contention
that
Robertson
Yates
had
verbally
agreed
with
Clearstream
that
if
it
could
not
play
up
the
mortgage
when
due
the
time
for
repayment
would
be
extended
by
two
months,
so
that
the
action
brought
was
premature.
It
was
further
contended
that
Robertson
Yates
had
never
delivered
to
Clearstream
a
copy
of
the
mortgage
contrary
to
the
terms
of
the
mortgage
and
that
contrary
to
The
Mortmain
Act
it
had
an
insufficient
license
to
make
a
loan.
Finally
it
was
contended
that
by
agreement
between
Clearstream
and
the
Jesuit
Fathers
the
two
options
had
been
assigned
as
collateral
and
that
since
any
rights
of
foreclosure
were
subject
to
redemption
the
value
of
this
security
also
had
to
be
accounted
for.
A
counterclaim
was
brought
by
Clearstream
stating
that
Mr
Bailey
had
undertaken
to
oversee
the
golf
course
construction
but
that
negligence
of
supervision
had
delayed
it.
While
he
felt
that
most
of
the
issues
raised
were
frivolous
the
multiplicity
of
motions
began
to
shake
his
confidence
in
succeeding
in
the
proceedings.
Moreover
the
ultra
vires
defence
could
easily
have
gone
to
the
Court
of
Appeal
and
there
might
not
have
been
a
hearing
before
1970
whereas
the
options
were
due
to
expire
in
August
1969.
He
felt
that
Clearstream
would
not
have
taken
up
the
options
for,
if
it
had
sufficient
money
for
this
it
could
have
used
it
to
relieve
its
default
under
the
mortgage.
There
was
a
general
hostile
atmosphere
and
it
was
impossible
to
reach
any
agreement.
He
suggested
arbitration
out
of
court
but
this
was
never
done.
After
issuing
the
writ
he
had
suddenly
realized
that
all
defendant
had
to
do
was
give
a
45
day
notice
under
a
power
of
sale
clause
in
the
mortgage
and
sell
the
property.
There
were
conflicting
terms
in
the
mortgage
however
and
this
procedure
was
restrained
by
an
injunction
brought
by
Clearstream.
The
day
after
the
purchase
was
made
by
Ontra-Desar
the
actions
were
dismissed
by
agreement,
with
Robertson
Yates
paying
the
costs.
John
Bright
another
barrister
testified.
He
was
one
of
the
Clearstream
group
and
has
been
secretary
of
it
from
the
end
of
1964
to
the
current
time.
He
testified
as
to
the
various
attempts
made
between
1964
and
1968
to
raise
additional
funds
as
they
were
constantly
short
of
cash.
He
agreed
that
from
time
to
time
Robertson
Yates
had
to
make
some
of
the
payments
to
keep
the
options
in
effect
when
Clearstream
had
insufficient
funds.
With
respect
to
the
settlement
which
had
been
negotiated
with
Mr
Bailey
he
stated
that
it
became
abortive
because
there
was
no
written
agreement
at
the
time
and
there
was
a
later
disagreement
as
to
some
of
the
details.
He
returned
it
to
the
shareholders
and
reported
that
what
they
had
agreed
to
was
not
quite
what
Robertson
Yates
wanted
so
the
settlement
was
never
completed.
He
corroborated
Mr
Bailey’s
evidence
to
the
effect
that
the
only
intention
of
the
Group
had
been
to
sell
the
golf
club
property
to
the
Upper
Canada
Country
Club
at
cost,
but
that
this
latter
club
was
unable
to
develop
its
membership
because
of
the
delays
in
construction.
Alternative
purchasers
were
then
sought
and
from
March
to
July
1966
the
sale
was
discussed
with
various
parties
but
nothing
developed.
The
foreclosure
action
in
July
of
1966
made
it
difficult
to
pursue
the
sale
attempts
and
this
accounted
to
some
extent
for
the
animosity
between
the
other
parties
in
Clearstream
and
Mr
Bailey.
From
January
1967
to
August
1968
however
many
purchasers
were
sought.
Probably
about
30
offers
were
received
but
none
were
accepted.
The
only
unconditional
offer
was
for
parcel
2,
and
most
of
the
offers
attached
a
condition
requiring
rezoning
or
subdivision
approval.
Except
for
parcel
2
the
other
land
appeared
to
be
10
or
15
years
away
from
development.
When
Clearstream
had
bought
the
property
they
had
felt
that
development
could
proceed
but
the
subsequent
master
plan
for
the
Town
of
Oakville
changed
this.
The
Ontra-Desar
offer
was
perhaps
$250,000
better
than
any
that
had
been
received
up
to
that
time
and
as
a
result
of
it
the
shareholders
received
a
return
of
about
46¢
on
each
dollar
they
had
invested.
Aside
from
the
mortgages
there
were
some
$250,000
of
unsecured
liabilities
to
be
paid
off.
The
legal
view
of
Clearstream’s
lawyer
was
that
it
could
delay
the
foreclosure
proceedings
for
at
least
18
months
and
perhaps
by
four
years
if
they
were
appealed.
While
Clearstream
shareholders
might
between
them
have
raised
the
sums
required
to
take
up
the
options
if
they
had
been
sure
of
selling
the
properties
soon
after,
they
had
been
unable
to
get
any
serious
offers,
and
none
were
willing
to
put
up
additional
funds.
He
stated
that
there
were
probably
50
or
more
real
estate
agents
making
offers
to
Clearstream
which
was
trying
desperately
to
sell
the
property
but
none
were
serious.
It
was
not
until
December
1966
that
Mr
Bailey
succeeded
in
getting
his
resignation
as
a
director
accepted,
so
he
would
have
had
some
awareness
of
some
of
these
offers
up
to
that
time.
A
number
of
the
prospective
purchasers
had
gone
to
Robertson
Yates
trying
to
renegotiate
its
second
mortgage
position
at
a
discount,
but
defendant
had
refused
to
do
this.
With
respect
to
the
agreement
by
Ontra-Desar
to
discharge
the
Robertson
Yates
second
mortgage
which
resulted
in
a
reduction
of
the
amount
payable
to
Clearstream
he
stated
that
provided
Clearstream
obtained
a
clear
release
from
any
liability
under
the
mortgage
it
was
of
no
concern
to
Clearstream
how
Ontra-Desar
paid
Robertson
Yates
and
whether
in
fact
it
did
so.
On
the
basis
of
this
evidence
it
is
not
difficult
to
conclude
that
the
members
of
the
Clearstream
group
when
they
acquired
land
from
the
Jesuit
Fathers
for
the
construction
of
the
golf
course,
together
with
the
surrounding
land
which
they
proposed
to
use
for
residential
development,
and
the
options
on
parcels
2
and
3,
were
embarking
on
an
adventure
in
the
nature
of
trade
and
that
any
profits
derived
therefrom
would
be
taxable
as
income.
Mr
Bailey
through
his
company
Robertson
Yates
Limited
(later
Greenington
Group
Limited)
became
actively
associated
with
a
one
eighth
participation
by
virtue
of
the
three
shares
he
obtained
when
he
caused
his
company
to
make
the
initial
second
mortgage
loan
of
$350,000.
He
was
also
active
throughout,
serving
on
several
committees
of
Clearstream
and
helping
in
the
supervision
of
the
building
of
the
golf
course
and
in
connection
with
the
later
attempts
to
sell
the
property
when
the
development
plan
became
aborted
as
a
result
of
the
financial
difficulties
of
the
group
and
problems
with
the
Town
of
Oakville
in
obtaining
necessary
zoning
changes
for
development
of
the
peripheral
property.
While
he
testified
that
he
acquired
the
three
shares
as
the
result
of
merely
adopting
the
same
terms
which
Clearstream
had
offered
to
Interia
Investment
Management
Limited
when
it
was
attempting
to
obtain
the
loan
from
that
company,
save
that
he
was
prepared
to
accept
a
lower
rate
of
interest
of
10%,
I
cannot
conclude
that
he
was
entirely
disinterested
in
the
profit
making
potential
of
the
proposed
development.
Although
an
engineer
by
profession
and
an
experienced
general
contractor,
whose
companies
had
never
been
engaged
in
money
lending
business
nor
in
residential
development
projects,
he
was
certainly
a
sufficiently
experienced
and
informed
businessman
to
appreciate
the
profit
potential
of
the
proposed
development.
While
his
company
had
surplus
funds
available
for
investment
at
the
time,
and
an
interest
rate
of
10%
in
1964
was
probably
substantially
in
excess
of
the
yield
being
obtained
from
his
companies’
other
investments,
I
do
not
believe
that
the
investment
return
from
this
loan
on
a
second
mortgage
to
be
used
for
developing
a
golf
course,
which
is
always
a
project
subject
to
some
risk,
would
have
been
sufficient
to
have
justified
this
investment
if
it
had
not
been
“sweetened”
by
his
being
given
the
three
shares
representing
a
one
eighth
interest.
It
was
not
his
investment
in
Clearstream
however
which
resulted
in
the
eventual
profit
which
the
Minister
now
seeks
to
tax
as
income.
He
eventually
gave
up
his
three
shares
when
the
litigation
between
his
company
and
Clearstream
was
settled
after
his
purchase
of
the
property
and
right
to
the
options
by
Ontra-Desar,
but
even
if
he
had
not
given
up
these
shares
he
would
not
have
made
any
profit
as
a
result
of
his
participation
in
the
ill
fated
Clearstream
development,
since
it
is
in
evidence
that
the
purchase
price
was
only
sufficient
to
return
to
the
members
of
the
group
about
46¢
on
each
dollar
of
their
investment.
The
members
of
the
group
therefore
received
not
a
profit
but
a
loss
on
their
investment.
In
fact
from
1966
Clearstream
was
trying
in
every
possible
way
to
dispose
of
the
property
and
option
rights
to
any
willing
purchaser
and
had
no
reasonable
anticipation
whatsoever
of
selling
at
a
profit,
but
was
trying
to
get
a
price
which
would
cut
its
losses
and
at
least
help
the
participants
recover
some
part
of
their
investment.
Meanwhile
they
were
by
every
legal
means
possible
delaying
the
foreclosure
of
the
mortgage
by
Mr
Bailey’s
company.
His
offer
through
Ontra-Desar
was
by
far
the
best
offer
received
and
they
were
pleased
to
accept
it,
as
had
the
foreclosure
proceedings
been
successful,
or
the
alternative
proceeding
to
simply
take
over
the
property
under
the
power
of
sale
clause
in
the
mortgage,
they
would
most
probably
have
had
no
return
whatsoever
on
their
investment.
What
makes
the
present
case
unusual
is
that
Mr
Bailey
and
his
company
were
involved
in
the
project
in
two
entirely
separate
and
distinct
capacities,
first
as
a
one
eighth
shareholder
of
Clearstream,
and
secondly
simply
as
a
mortgage
lender.
In
the
latter
capacity
Mr
Bailey’s
company
could
not
have
anticipated
making
any
profit.
A
mortgage
creditor
merely
received
payment
of
the
amount
due
under
the
mortgage,
and
lending
money
on
a
mortgage
cannot
normally
be
considered
as
an
adventure
in
the
nature
of
trade
unless
the
lender
is
in
this
business,
and
even
in
this
event
its
profits
would
be
limited
to
the
interest
received
together
with
any
premiums
for
prepayment
or
other
similar
income.
It
would
only
be
in
very
exceptional
circumstances
indeed
that
it
could
reasonably
be
concluded
that
a
mortgage
lender
has
made
the
loan
in
anticipation
that
there
will
be
a
default
on
it
and
that
he
will
thereby
obtain
ownership
of
property
worth
considerably
more
than
the
loan
and
be
able
to
dispose
of
same
at
a
profit.
The
evidence
is
quite
clear
that
all
that
Mr
Bailey
was
seeking
to
do
after
Clearstream’s
default
on
the
mortgage
in
1966
was
to
recover
the
amount
loaned
and
outstanding
interest.
There
is
no
evidence
whatsoever
to
cast
any
doubt
on
his
testimony
that
if
he
had
obtained
possession
of
the
property
and
rights
in
the
options
by
the
foreclosure
procedures
or
by
the
takeover
clause
in
the
mortgage
deed
he
would
then
have
attempted
to
sell
it
for
whatever
he
could
get,
hopefully
sufficient
to
recover
at
least
the
major
part
of
the
sums
due.
His
bonding
company
was
pressing
him
because
of
his
lack
of
liquidity
and
this
would
eventually
if
the
situation
were
not
remedied
cause
serious
disruption
of
his
construction
business.
He
had
no
reason
whatsoever
to
anticipate
that
after
taking
over
the
properties
he
would
be
able
to
sell
them
at
a
profit—in
fact
the
unavailing
efforts
of
the
Clearstream
group
to
do
so,
with
which
he
was
fully
familiar
gave
no
grounds
for
optimism
in
this
connection.
It
is
highly
significant
that
he
had
even
agreed
to
a
settlement
with
Clearstream
whereby
he
would
take
over
the
property
and
options
and
endeavour
to
sell
it
and
if
there
were
any
profit
this
would
go
to
Clearstream.
The
Clearstream
directors,
unwisely
as
subsequent
events
have
proved,
failed
to
implement
this
agreement.
Finally
as
a
last
resort
he
bought
the
property
from
Clearstream
through
Ontra-
Desar,
keeping
it
a
closely
guarded
secret
that
he
would
be
the
purchaser.
His
agent
negotiated
the
best
price
possible.
Mr
Bailey’s
evidence
is
uncontradicted
when
he
states
that
he
did
not
know
at
the
time
of
the
purchase
from
Clearstream
that
Home
Smith
Realty
Company
was
buying
property
in
the
area
for
a
very
large
scale
and
apparently
well
financed
development
and
had
acquired
some
1500
acres.
Had
this
been
known
to
any
of
the
Clearstream
group
it
is
evident
that
they
would
have
approached
Home
Smith
before
accepting
the
offer
of
Ontra-
Desar.
There
is
no
justification
for
assuming
that
Mr
Bailey
possessed
information
which
they
did
not.
What
is
more
probable
is
that
in
1968
at
the
time
Mr
Bailey
bought
it
through
Ontra-Desar
there
was
no
market
for
the
property
but
that
in
1970
Home
Smith,
realizing
that
the
golf
course
would
suit
its
development
plans
very
well
was
willing
to
pay
Mr
Bailey’s
company
a
premium
price
for
same.
I
therefore
conclude
that
the
profit
resulting
from
this
sale
was
an
accidental
profit
resulting
from
the
realization
of
an
investment.
In
reaching
this
conclusion
I
conclude
that
it
was
not
Mr
Bailey’s
intentions
in
1964
when
he
joined
the
Clearstream
group
and
had
his
company
make
the
initial
mortgage
loan
which
is
the
pertinent
time
frame
to
which
we
must
look,
but
rather
his
intentions
in
1968
when
he
bought
the
property
through
Ontra-Desar.
As
I
have
stated
previously,
the
original
intention
of
making
a
profit
with
the
other
members
of
the
Clearstream
group
by
the
acquisition
and
development
of
the
subject
property
did
not
result
in
any
profit
but
in
a
loss,
so
that
it
is
Mr
Bailey’s
intention
at
the
time
he
acquired
ownership
of
the
property
through
Ontra-Desar
in
1968
which
is
the
date
which
must
be
considered,
since
it
is
this
acquisition
of
ownership
and
subsequent
sale
of
profit
which
gave
rise
to
the
assessment.
His
intention
in
1968
was
not
to
make
a
profit
by
acquiring
the
property
but
rather
to
cut
his
losses
and
recover
amounts
due
on
the
loan
and
interest
if
possible.
This
finding
is
in
line
with
established
jurisprudence
in
such
cases
as
Irrigation
Industries
Limited
v
MNR,
[1962]
SCR
346;
[1962]
CTC
215;
62
DTC
1131
in
which
Martland,
J
referred
with
approval
to
the
decision
of
Lord
Buckmaster
in
the
British
case
of
Leeming
v
Jones,
[1930]
AC
415.
The
fact
that
Mr
Bailey
had
other
companies
in
the
period
between
1967
and
1970
which
dealt
with
residential
subdivisions
and
which
had
purchased
substantial
numbers
of
town
houses
for
rental
income
and
subsequently
sold
same,
the
profits
from
which
had
been
assessed
as
income
does
not
affect
this
conclusion,
as
there
is
ample
jurisprudence
to
the
effect
that
even
a
trader
is
entitled
to
make
a
capital
gain
on
an
isolated
transaction
and
that
it
is
quite
possible
for
him
to
have
some
profits
properly
taxable
as
arising
from
an
investment
in
the
nature
of
trade,
and
at
the
same
time
in
an
entirely
separate
project
have
a
profit
in
the
nature
of
capital
gain,
so
that
each
separate
project
must
be
looked
at
by
itself.
Plaintiff’s
action
is
therefore
dismissed
with
costs
and
defendant’s
1970
income
tax
assessment
is
returned
to
the
Minister
for
reassessment
on
the
basis
that
the
realized
gain
of
$473,623.12
on
parcels
1
and
3
was
a
gain
on
capital
account.
It
is
now
necessary
to
consider
defendant’s
counterclaim
on
the
question
of
interest.
It
is
defendant’s
contention
that
since
Ontra-Desar
and
defendant
were
in
effect
one
and
the
same
no
capital
or
interest
was
paid
by
Ontra-Desar
to
defendant
when
the
purchase
was
made
from
Clearstream
in
1968
and
that
therefore
the
interest
of
$135,947.16
should
not
have
been
included
to
defendant’s
income
for
its
1968
taxation
year
and
that
the
loss
carried
forward
of
$11,001.38
for
its
1969
taxation
year
should
have
been
allowed.
Paragraph
6(1)(b)
of
the
Income
Tax
Act
in
effect
at
the
time
(RSC
1952,
c
148)
reads
as
follows:
6.(1)
Without
restricting
the
generality
of
section
3,
there
shall
be
included
in
computing
the
income
of
a
taxpayer
for
a
taxation
year
(b)
amounts
received
in
the
year
or
receivable
in
the
year
(depending
upon
the
method
regularly
followed
by
the
taxpayer
in
computing
this
profit)
as
interest
or
on
account
or
in
lieu
of
payment
of,
or
in
satisfaction
of
interest.
Amount
is
defined
in
paragraph
139(1)(a)
of
the
Act
as
follows:
139.(1)
In
this
Act,
(a)
“amount”
means
money,
rights
or
things
expressed
in
terms
of
the
amount
of
money
or
the
value
in
terms
of
money
of
the
right
or
thing.
Reading
the
two
together
it
is
evident
that
interest
does
not
have
to
actually
be
paid
in
money.
The
amount
was
clearly
receivable
by
defendant
in
1968
as
a
mortgage
creditor
and
in
lieu
of
payment
of
or
in
satisfaction
of
it,
its
alter
ego
Ontra
Desar
paid
an
equivalent
lesser
sum
in
the
cash
adjustments
from
the
sale
than
the
amount
which
it
would
otherwise
have
had
to
pay
to
the
vendor
Clearstream.
This
is
abundantly
clear
from
the
cash
adjustments
made
at
the
time
and
based
on
figures
worked
out
at
a
meeting
prior
to
the
completion
of
the
sale
between
the
Clearstream
directors
and
Mr
Bailey
and
his
accountant
Mr
McWhirter.
The
fact
that
the
vendors
did
not
know
when
Mr
Bailey
insisted
that
the
second
mortgage
be
paid
off
in
full
including
capital
and
interest
by
the
purchaser
that
the
purchaser
was
in
fact
another
of
Mr
Bailey’s
companies
does
not
alter
the
situation,
nor
does
the
fact
that
the
interest
had
not
been
recorded
in
the
books
of
defendant
as
a
receivable
following
the
default
on
the
mortgage.
It
is
unnecessary
here
to
go
into
the
question
as
to
whether
the
accounting
procedure
adopted
was
proper
or
not,
but
it
can
certainly
be
stated
that
a
company
cannot
by
the
mere
failure
to
record
interest
in
its
financial
statements
avoid
taxation
on
its
interest,
even
if
this
is
done
in
good
faith
and
with
no
intent
to
defraud.
It
is
the
real
and
actual
situation
which
must
be
looked
at
and
it
is
clear
the
defendant
actually
received
the
interest
due
to
it
on
its
loan
as
a
result
of
paying
less
in
cash
to
the
vendor
to
the
same
extent
when
the
purchase
price
was
paid.
The
argument
of
defendant
that
the
purchase
price
paid
was
more
than
the
actual
value
of
the
property
and
options
since
purchaser
knew
it
would
not
have
to
pay
off
the
second
mortgage
and
interest
is
of
no
relevance.
It
would
only
be
of
significance
if
the
purchase
price
had
been
insufficient
to
pay
off
the
entire
first
mortgage
and
outstanding
interest
plus
the
amount
due
on
the
second
mortgage
and
outstanding
interest
on
it,
in
which
case
it
could
properly
be
said
that
defendant
had
not
recovered
its
entire
investment,
but
even
in
this
event,
I
am
of
the
view
that
any
amounts
over
and
above
what
was
required
to
pay
off
the
first
mortgage
and
accrued
interest
would
in
the
first
instance
be
at-
tributed
to
the
interest
due
on
the
second
mortgage,
with
any
remaining
balance
attributed
to
the
capital,
so
that
if
there
had
been
any
loss
to
defendant
as
a
result
of
a
sale
for
such
a
price
the
loss
would
have
been
attributable
to
capital
rather
than
to
interest.
Defendant’s
counterclaim
fails
therefore
and
is
dismissed
with
costs.
The
decision
of
the
Tax
Review
Board
was
correct
on
both
issues.
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