Mandrell Industries, Inc. v. M.N.R., 65 DTC 5142, [1965] CTC 233 (Ex Ct)

CATTANACH, J.:—These are appeals from assessments under the Income Tax Act, R.S.C. 1952, c. 148 of Mandrel Industries, Inc. for its 1958 and 1959 taxation years.

The parties filed an ‘‘Agreed Statement of Facts’’ dated April 8, 1965 with appendixes. In addition, the parties agreed that either party might supplement the agreed statement of facts by oral evidence, which the appellant did by calling one witness, David Doyle Mize, who has been president of the appellant company since its inception in 1956.

The ‘‘ Agreed Statement of Facts’’ reads as follows:

“1. Electro-Technical Labs, Inc., (whose successor is the Appellant Mandrel Industries, Inc.) on May 15th, 1956, entered into an Agreement in writing with Electro-Technical Labs. Canada, Ltd., herein called ‘‘the Trading Agreement”? whereby Electro-Technical Labs. Canada, Ltd. acquired an exclusive right or dealership in distributing and marketing the products of Hlectro-Technical Labs, Inc. in Canada for a period of 5 years as more particularly set out in the Trading Agreement (Appendix “A”).

2. The Appellant Mandrel Industries, Inc., is hereinafter sometimes referred to as ‘‘Mandrel’’ or ‘‘the Appellant”.

3. Mandrel’s predecessor Electro-Technical Labs, Inc. had also granted an exclusive Sales Contract to Electro-Tech International Inc., a U.S. corporation, by Agreement dated January 3rd, 1956 (Appendix ‘‘C’’) with respect to sales in areas other than Canada and the United States.

4, Electro-Technical Labs, Inc., a company incorporated in the United States, but now extinct, had, prior to July, 1956, carried on the business of manufacturing certain specialized geophysical and seismic instruments and equipment. The equipment the company manufactured was used in exploratory work in the oil and gas industry and was marketed throughout the world.

5. In July, 1956, Electro-Technical Labs, Inc. was dissolved into its parent company Mandrel Industries, Inc. (a United States corporation which at the time was Electric Sorting Machine Company and which changed its name to Mandrel Industries, Inc. in the same month of July, 1956). As a result the Appellant Mandrel Industries, Inc. acquired all the rights of Electro-Technical Labs, Inc. and assumed its various liabilities and obligations, including all rights, liabilities and obligations of Electro-Technicals Labs, Inc. under the Trading Agreement (Appendix “A”).

6. Electro-Tech International Ine. a company incorporated in the United States, Electro-Technical Labs (Alberta) Ltd. a company incorporated in Canada, and Electro-Technical Labs. Canada, Ltd., a company incorporated in Canada, were all at all material times controlled by Mr. H. A. Sears, a resident of Harris County, Texas, who owned beneficially all of the shares of each of the said companies.

7. At all material times Electro-Technical Labs (Alberta) Ltd., by arrangement with Electro-Technical Labs. Canada, Ltd. constituted the sales organization in Canada by which sales were made in Canada pursuant to the rights granted to Electro-Technical Labs. Canada, Ltd. under the Trading Agreement (Appendix ‘‘A’’).

8. At all material times neither the said H. A. Sears nor Electro-Tech International Inc., nor Electro-Technical Labs (Alberta) Ltd., nor Electro-Technical Labs. Canada, Ltd. had any share interest or control in Mandrel or in any predecessor in interest of Mandrel.

9. In July of 1957 the Appellant held discussions with Mr. H. A. Sears relating to acquisition of the shares or assets of Electro-Tech International Inc., Electro-Technical Labs (Alberta) Ltd. and Electro-Technical Labs. Canada, Ltd. These negotiations broke down.

10. By letter of August 10th, 1957, (Appendix ‘‘B’’) the Appellant purported to terminate the exclusive sales contract with Electro-Tech International Inc., dated January 3rd, 1956 (Appendix ‘‘C’’). In September, 1957, the Appellant sued Electro-Tech International Ine. and H. A. Sears in the United States District Court for the Southern District of Texas, Houston Division (Appellant’s Original Complaint is Appendix **D”). In October, 1957, Electro-Tech International Inc. and H. A. Sears defended the action and filed a Counterclaim and Cross Action is Appendix **E”). The Appellant then filed an Answer to the Cross Action (Appendix “F”).

11. Towards the end of April, 1958, negotiations between Mandrel, Electro-Tech International Inc., Electro-Technical Labs. Canada, Ltd., Electro-Technical Labs (Alberta) Ltd. and

H. A. Sears were commenced resulting in settlement of the said lawsuit and other matters as evidenced by written Agreement dated the 27th day of June, 1958 (Agreement with Exhibits ‘‘A’’ to ‘‘J’’ attached, is Appendix “G”).

12. The amount of $490,853.18 U.S. Funds was the balance of the account owing by Electro-Tech International Inc. to the Appellant as at June 27th, 1958 for goods sold and services rendered by the Appellant to Electro-Tech International Inc. to such date.

18. Executed copies of Appendix ‘‘G’’ were delivered to all parties on June 27th, 1958. The closing took place on July 15th, 1958 at Houston, Texas.

14. That a Resolution of the Directors of Electro-Technical Labs (Alberta) Ltd. was passed effective as at July 15th, 1958 (Appendix ‘‘H’’), approving the agreement marked as Appendix ‘‘G’’ between Electro-Technical Labs (Alberta) Ltd. and the Appellant.

15. A Special Resolution of the Shareholders of Electro- Technical Labs (Alberta) Ltd. was passed effective as at July 15th, 1958 (Appendix “I” approving the Resolution of the Board of Directors of Electro-Technical Labs (Alberta) Ltd.

16. Attached hereto is a Certificate executed by Electro- Technical Labs (Alberta) Ltd. dated July 15th, 1958 (Appendix “J”), certifying that the said Resolutions set forth in Appendixes ‘ * H ’ ’ and ‘ ‘ I ” are in full force and effect.

17. At the closing on July 15th, 1958, Electro-Technical Labs (Alberta) Ltd. delivered to the Appellant an Agreement in writing dated July 15th, 1958 between Electro-Technical Labs (Alberta) Ltd. and the Appellant (Appendix “K”).

18. On July 7th, 1958, Electro-Technical Labs. Canada, Ltd. passed a Resolution (Appendix **L”), authorizing the Directors to assign to the Appellant the Trading Agreement (Appendix** A”), a true copy of which Resolution is attached to a Certificate executed by Electro-Technical Labs. Canada, Ltd., dated July 7th, 1958 (Appendix **M”).

19. At the closing on July 15th, 1958, Electro-Technical Labs. Canada, Ltd. delivered to the Appellant an Assignment Agreement dated July 15th, 1958 (Appendix “N”) with respect to the Trading Agreement (Appendix “A”).

20. At the closing on July 15th, 1958 two Promissory Notes for $154,853.18 and $150,000.00 in U.S. Funds made by Electro-Tech International Ine. in favour of the Appellant were delivered by Electro-Tech International Inc. to the Appellant. An unexecuted copy of each of the said Notes is attached hereto and marked respectively as Appendixes “O” and ‘‘P’’. The originals or executed copies of such Notes are not in the hands of the Appellant. The originals of such Notes were forwarded to the President of the Appellant in California on July 15th, 1958 for endorsement, assignment and/or execution by the Appellant to Electro-Technical Labs (Alberta) Ltd. and Electro-Technical Labs. Canada, Ltd. respectively, as provided for in the form contained on Appendixes ‘‘O’’ and ‘‘P’’. Such Notes were so endorsed, assigned and/or executed by the Appellant and were returned to the Attorneys for the Appellant on July 18th, 1958 and were delivered immediately to the respective Assignees, Electro-Technical Labs (Alberta) Ltd. and Electro-Technical Labs. Canada, Ltd.

21. The Appellant first registered as a corporation in Alberta on July 2nd, 1958. On July 15th, 1958, it took over all the personnel of Electro-Technical Labs (Alberta) Ltd. and Hlectro-Technical Labs. Canada, Ltd. with the exception of Mr. Donald Barton who did not choose to join the Appellant’s organization. The Appellant did not participate in any sales or carry on business in Canada prior to July 15th, 1958.”

Mr. Mize testified that upon the expiry of the exclusive right or dealership with Electro-Technical Labs. Canada, Ltd. there was no intention whatsoever of renewing it because the policy of the appellant had been changed so that it would market its products on its own account throughout the world by means of branch sales and service offices to be established. There were no such branches established in 1957 but subsequent thereto between 21 and 30 branches were set up in strategic areas.

In furtherance of this avowed policy discussions were held in July 1957 with Sears to acquire the exclusive Canadian sales contract held by him, for which at that time, Mize testified the appellant offered to pay $200,000 based upon $50,000 (being the annual profit realized by Electro-Technical Labs. Canada, Ltd.) for each of the four years the contract had to run. However the negotiations were broken off by Sears.

In August 1957 a similar exclusive arrangement with ElectroTech International Ltd. with respect to marketing the appellant’s products in areas other than Canada and the United States was purported to be terminated which resulted in the instigation of the law suit referred to in paragraph 10 of the Agreed Statement of Facts during the currency of which the trading agreement with Electro-Technical Labs. Canada, Ltd. was honoured.

Mr. Mize further testified that in negotiating the settlement of the law suit a value of $150,000 was placed upon the Canadian sales contract being on the basis of $50,000 per year for the three unexpired years.

The appellant herein had obtained an injunction restraining Klectro-Tech International Inc., from using any funds it received from the sale of equipment of the appellant. Because of this Sears was in financial difficulty and made overtures to the appellant to effect a settlement. Sears was therefore negotiating from a position of weakness whereas the appellant was negotiating from a position of strength.

The promissory note for $150,000 (Appendix P”) made by Electro-Tech International Inc. to the appellant was endorsed by the appellant to Electro-Technical Labs. Canada, Ltd. without recourse upon the appellant. This was done, Mr. Mize testified, because the original obligation to pay was between sister companies.

The appellant in preparing its income tax returns for the years 1958 and 1959 claimed amounts as deductions on account of amortization allowances with respect to the acquisition of the trading agreement. However in its Notice of Appeal from the assessments the appellant alleges that it should not have claimed amortization allowances, but rather should have claimed the payment of $150,000 as a deduction which would result in a loss in both the 1958 and 1959 taxation years and accordingly claims a refund of taxes and interest paid.

The appellant in its income tax return for 1958 disclosed a loss of $7,538.26 and in computing that loss it had deducted “Amortization of payment to Electro-Technical Labs. Canada, Ltd. $26,286.96”.

Similarity in its 1959 return the appellant disclosed a net income of $20,680.68 in the computation of which there was deducted $52,573.93 described as ‘‘Amortization of trading franchise’’.

In assessing the appellant the Minister disallowed both the amounts of $26,286.96 and $52,573.93 as not being proper deductions under the Income Tax Act.

The appellant objected to the assessments by notices dated April, 1961. The respondent confirmed the assessments from which assessments the appeals are brought to this Court.

There is no dispute as to the amounts involved but the dispute is as to the taxability thereof. The face value of the note endorsed by the appellant is $150,000 in United States funds. It is agreed that the corresponding value in Canadian funds is $144,578.31.

There are three issues in the present appeals. In the first instance the Minister disputes that the note in question was given solely in consideration for the acquisition or cancellation of the exclusive sales contract and says that the appellant received other benefits as well. If that contention is correct, it follows that the appellant has failed to discharge the onus of proving the expenditure.

The second issue is whether the payment of $150,000 U.:S. funds (assuming such to have been established) in the circumstances outlined above, made by the appellant to Electro- Technical Labs. Canada, Ltd. constitutes an outlay or payment on account of capital within the meaning of Section 12(1) (b) of the Income Tax Act and accordingly is not properly deductible as a current expense in computing income, as contended by the Minister.

This issue involves consideration of Section 12(1) (b) of the Act which provides as follows:

‘12. (1) In computing income, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part, . . .”?

The third issue arises if the second issue is resolved against the contention of the appellant and the payment is held to have been a capital outlay. The appellant then contends that the acquisition of the trading agreement was a purchase of a franchise, concession or licence which had approximately three years to run and accordingly the appellant is entitled to deduct the amount of the payment of $144,578.31 in Canadian funds, by way of capital cost allowance over a three year period in accord- ance with Section 11(1) (a) of the Income Tax Act and the regulations promulgated thereunder.

Section 11(1) (a) reads as follows:

“11. (1) Notwithstanding paragraphs (a), (b) and (h) of subsection (1) of section 12, the following amounts may be deducted in computing the income of a taxpayer for a taxation year :

(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation; . . . .”

The pertinent regulation is Section 1100(1) (c) of Part XI of the Income Tax Regulations, reading as follows:

“1100. (1) Under paragraph (a) of subsection (1) of section 11 of the Act, there is hereby allowed to a taxpayer, in computing his income from a business or property, as the case may be, deductions for each taxation year equal to

(c) such amount as he may claim in respect of property of class 14 in Schedule B not exceeding the lesser of

(i) the aggregate of the amounts for the year obtained by apportioning the capital cost to him of each property over the life of the property remaining at the time the cost was incurred, or

(ii) the undepreciated capital cost to him as of the end of the taxation year (before making any deduction under this subsection for the taxation year) of property of the class;’’

Property of class 14 in Schedule B is described as follows:

“Property that is a patent, franchise, concession or licence for a limited period in respect of property . . .”

(The exceptions subsequently outlined are not applicable.)

The question so raised for determination is whether what the appellant acquired was a ‘ patent, franchise, concession or licence for a limited period in respect of property’’ within the meaning of the introductory words of class 14 of Schedule B, it being common ground that the appellant is entitled to such allowance if the rights acquired by it so qualify.

In view of the conclusions I have reached on the second and third issues raised in these appeals, it is not necessary for me to consider the first issue referred to above, that is, whether the payment of $150,000 U.S. funds was given solely for the acquisition or termination of the exclusive sales contract between the appellant and Electro-Technical Labs. Canada, Ltd. For the purpose of considering the remaining issues I assume that it was without in any way deciding the matter.

The first question for determination is, therefore, whether the payment was an outlay or payment on account of capital.

The matter was succinctly put by Abbot, J. in British Columbia Electric Railway Company Limited v. M.N.R., [1958] S.C.R. 133 at 137; [1958] C.T.C. 21 at 31 as follows:

“Once it is determined that a particular expenditure is one made for the purpose of gaining or producing income, in order to compute income tax liability it must next be ascertained whether such disbursement is an income expense or a capital outlay. The principle underlying such a distinction is, of course, that since for tax purposes income is determined on an annual basis, an income expense is one incurred to earn the income of the particular year in which it is made and should be allowed as a deduction from gross income in that year. Most capital outlays on the other hand may be amortized or written off over a period of years depending upon whether or not the asset in respect of which the outlay is made is one coming within the capital cost allowance regulations made under s. 11(1) (a) of The Income Tax Act.’’

Applying such a test to the facts of this particular case, it is clear that the payment was made for the ultimate purpose of gaining or producing income in the sense that greater profits would accrue to the appellant but in my view such payment cannot be construed as an income or operating expense. What the appellant acquired was the right and the means to sell in Canada. As indicated in paragraph 21 of the ‘‘Agreed Statement of Facts’’ the appellant took over the entire staff, with one exception, of Electro-Technical Labs (Alberta) Ltd. and Electro- Technical Labs. Canada Ltd. To me this was not an expense of running the business in Canada but rather an expense incidental to launching its own selling organization in Canada. To be able to do that it had to rid itself of the covenants in the sales agreement.

In order to determine whether a particular out-going represents an outlay of capital, several tests have been proposed one of which is that of Lord President Clyde in Robert Addie

Sons’ Collieries Lid. v. C.I.R., 8 T.C. 671 at 676.

“Is it an expenditure laid out as part of the process of profit earning? Or, on the other hand, is it a capital outlay? Is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is is a condition of carrying on its trade at all!”

The most notable and frequently cited declaration as to what constitutes a capital outlay is that of Viscount Cave in British Insulated and Helsby Cables Limited v. Atherton, [1926] A.C. 205 at 213 :

. But when an expenditure i is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to _ capital.”

In Vallambrosa Rubber Co, Ltd. v.. Farmer, 5 T.C. 529, Lord Dunedin said in part at page 536:

_ “I do not say this consideration is absolutely final or determinative ; but in a rough way I think it is not a bad criterion of what is capital expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income ., expenditure is a thing that is going to recur every year.”

In applying the foregoing classical tests to the present case, I cannot but think that the payment here in question was an outlay on account of capital: What the appellant did here was to make a payment once and for all, with a view to bringing into being an advantage for the enduring benefit of the trade. There is no question that the payment was made once and for all. I also think it is clear that what the payment brought into being was an advantage in that the appellant could operate its own selling operation in Canada without being in breach of its previously existing exclusive sales contract with Electro-Technical Labs. Canada, Ltd. Furthermore, under arrangement for settlement of the Texas law suit, the appellant acquired not only an unfettered right to sell to any prospective customer directly on its own account rather than only to Electro-Technical Labs. Canada, Ltd. but also acquired an existing sales and servicing organization as a whole. In my view, therefore, what the appellant did was to make a capital outlay for these purposes. Once acquired, other expenditures would be made in the course of operating that organization. Such expenditures would be current.

It is true that the advantage acquired in this case was the right to begin. selling operations in Canada three years earlier than the appellant would otherwise have been able to do and a question might. be raised as to whether such a right is of ‘enduring benefit’’ or of à ‘‘permanent character’’. These phrases were introduced in some of the judicial dicta on this subject to indicate that an asset or advantage acquired must have enough durability to justify. its being treated as a capital asset and the terms are not used synonymously with ‘‘everlasting’’. There have been many instances. where an ‘‘advantage’’ has been held to be “enduring” despite the fact that it had a very limited life or duration.

Counsel for the appellant placed much reliance: on the authority of the decision in Anglo Persian Oil Company Limited v. Dale, [1932] 1 K.B. 124. However, in my view such case is readily distinguishable in that the decision was based on the relationship which existed between the Company and its agents. Lawrence, L. J. in commenting on the Crown’s argument said at pages 140 and 141, “The fallacy, underlying the whole of this argument, in my judgment, consists in treating the agent as if he were an independent trader and not the agent of the Company carrying on the Company’ s trade ... it (the Company) merely effected a change in its business methods and internal organization”. In the present case Electro-Technical Labs. Canada, Ltd. was carrying on a business on its own account in Canada and not a part of the business of the appellant company. It was, in fact, an independent trader.

The payment was not a commutation of profits 4 as in Johnston Testers v. M.N.R., [1965] C.T.C. 116 and in Kelsall Parsons & Co. v. C. I. R., 21 T.C. 608 although the basis of the valuation of the payment was an estimate of profits for the three years the exclusive sales contract had to run. Neither was it a payment to an agent or servant of the appellant of a revenue nature.

I also think that the facts of the present case are distinguishable from those in Scammel & Nephew Ltd. v. C.I.R., 22 T.C. 479 also relied on by the appellant in that the expenditure in that case was made to protect a revenue item, an account receivable, and an expenditure to protect a revenue item is itself a revenue item.

For these reasons I, therefore, hold that the expenditure of $150,000, if made by the appellant in consideration of the assignment of the exclusive sales contract, was a capital outlay and not properly deductible as a current expense under the provisions of the Income Tax Act.

This, therefore, brings me to a consideration as to whether the outlay was for an asset falling within the capital cost allowance regulations made under Section 11(1) (a) of the Income Tax Act quoted above.

As a basic premise I accept the submission of counsel for the appellant that what the appellant granted to Electro-Technical Labs. Canada, Ltd. as a result of the exclusive sales contract between them dated May 11, 1956 was in all likelihood a “concession”, ‘‘franchise’’ or a ‘‘licence’’. I think that such words must be given the meaning or sense in which they are employed in ordinary commercial usage and they extend not only to certain kinds of rights, privilege or monopolies conferred by or pursuant to legislation or by governmental authorities, but also extend to analogous rights, privileges or authorities created by contract between private persons.

But acceptance of the foregoing premise does not resolve the present issue because the question here is whether what the appellant acquired is property which was a ‘‘concession’’, “franchise” or ‘‘licence’’ for a limited period.

What the appellant did acquire was freedom to carry on selling operations in Canada without being in breach of contract three years earlier than it previously would have been able to do. The appellant, at all times, had the inherent right to sell in Canada, but during the currency of the exclusive sales contract to do so would have involved a breach of contract. It could now sell its products to any customer in Canada and was not restricted by contract to selling only to Electro-Technical Labs. Canada, Ltd.

The transaction by which the appellant obtained the discharge from its covenants in the exclusive sales contract was accomplished by way of an agreement between it and Electro-Technical Labs. of Canada, Ltd. dated July 15, 1958 in which the parties were termed ‘‘assignor’’ and ‘‘assignee’’ respectively whereby the assignor (Electro-Technical Labs. Canada, Ltd.) purported to grant and assign unto the assignee (the appellant) the exclusive sales contract and all rights, title and interest thereto for the assignee’s own use and benefit. I must assume that the parties to the assignment deliberately and consciously adopted this method rather than by the more direct method of release or cancellation of the exclusive sales contract.

However, I am obliged to look at the substance of the transaction and the consequences which flow therefrom. In so stating I have not overlooked the statements of the House of Lords in C.I.R. v. The Duke of Westminster, [1936] A.C. 1 that every man is entitled to order his affairs, by his ingenuity, so that a tax attaching is less than otherwise. But here what must be done is to consider the proper legal operation of the agreement.

It is axiomatic at comman law that a person cannot contract with himself. It is meaningless to say that a person can accept something from himself which is already his own. Therefore, the appellant herein could not grant a ‘ concession ”, ‘ franchise ’ ’ or “licence” to itself. As against this, counsel for the appellant contends that the doctrine of merger, which is dependent on intention, does not apply and that what the appellant intended to acquire was the right to go into business in Canada three years earlier than it ordinarily would by purchasing the exclusive sales contract. But as I have mentioned before, what the appellant acquired was a release from its covenant to sell exclusively to Electro-Technical Labs. Canada, Ltd. It did not acquire property. Therefore it follows that the appellant did not acquire property that is a “concession”, ‘‘franchise’’ or ‘‘licence’’ within the meaning of the introductory words of Class 14 of Schedule B to the Regulations under Section 11(1) (a) of the Income Tax Act.

The appeals are, therefore, dismissed with costs.

and

MINISTER OF NATIONAL REVENUE; Respondent.

Exchequer Court of Canada (Cattanach, J.), May 18, 1965, on appeal from a decision of the Tax Appeal Board, reported 32 Tax A.B.C. 266.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections

The appellant had prospered: in business and in 1957 began: to: indulge in the ownership and racing of horses. He thereupon acquired four horses and a trainer and entered several events. In 1958, deciding that he would like to expand his operation ‘to’ include the breeding, raising and training of horses, he instructed: a real estate agent to find him a near-by. tract of land on which he could build a home and stable and from which he could commute to his business in the city. On April 8, 1958 he bought 60 acres of land just outside Edmonton for $21,000. However, as soon as the snow melted he found the land unsuitable and instructed his agent to re-sell it at or above what he had paid for it. Twenty-five acres were thus sold on May 5, 1958 for $18,750 and an option then given on the remainder was exercised 1% years later for $25,000. The appellant then renewed his efforts to acquire suitable land and on August 5, 1958 bought 80 acres for $60,000. After this he became disillusioned with horse racing and in a fit of pique sold off his four horses at a loss. He then had no need for the land and on November 15, 1958 sold 40 acres for $40,000. An option for the remainder was exercised in 1959 for $50,000. In the Minister’s view, both properties had been acquired for the purpose of dealing in, trading with, or otherwise turning them to account for profit and the profits so derived in 1958 constituted income from adventures in the nature of trade, and hence “business” income. In the appellant’s view, however, both profits were capital increments resulting from the sale of land intended for a capital purpose.

HELD:

(i) That a taxpayer’s intentions were more accurately deduced from his actions than from his ex post facto declarations;

(ii) That the quick re-sale of both parcels of land was not in itself conclusive, being equally indicative of a desire not to retain the land for greater gain and also of a decision to take an immediate profit rather than gamble on waiting for a greater one;

(iii) That the appellant was hopeful of using the land for the declared purpose but the possibility of this hope not being realized and of the consequent re-sale of the land were at all times present in the appellant’s mind, thus characterizing the transactions as ventures in the nature of trade;

(iv) That the balance of probability that the properties were both acquired for horse racing and breeding purposes to the exclusion of any purpose of disposition at a profit was not established and the conclusions reached by the Minister could therefore not be said to be unwarranted;

(v) That the appeal be dismissed.

T. H. Miller, for the Appellant.

T. Mayson and Frank 1). Jones, for the Respondent.

CATTANACH, J.:—This is an appeal from a decision of the Tax Appeal Board dated June 18, 1963 whereby the Board dismissed an appeal of the appellant from the assessment of the Minister under the Income Tax Act, R.S.C. 1952, c. 148, for the appellant’s 1958 taxation year.

There is no dispute as to the amounts of the assessment but the question for determination is whether profits realized on the sale of two parcels of real estate were properly included in computing the appellant’s income under Part I of the Income Tax Act for his 1958 taxation year.

By the Notice of Appeal from the Tax Appeal Board the appellant sets out his ease as follows:

<4

(b) The amounts received by the Appellant from the sale of the said properties constitute capital arising from the disposition of properties acquired for capital purposes.

(c) The amounts received by the Appellant from the sale of the said properties were not received from adventures in the nature of a trade but were a result of the disposition of properties which had been acquired for a specific purpose which purpose was later abandoned.

(d) There was no intent by the Appellant in acquiring the said properties to enter into the business of buying and selling land at a profit.”

The Minister, by his reply to the Notice of Appeal, alleges:

9. In making the re-assessment, notice of which was given on the 3rd day of February, 1960, the Respondent acted upon the following assumptions :

(a) that the Appellant acquired Parcel 1 with a view to trading in, dealing with, or otherwise turning it to account at a profit ;

(c) that the Appellant acquired Parcel 2 with a view to trading in, dealing with, or otherwise turning it to account at a profit;

(e) that the profits arising from the sale of portions. of Parcels 1 and 2 during the Appellant’s 1958 taxation year constituted part of his income for 1958 since they were profits from a business or adventure in the nature of trade.’’

and continues to state:

“13. The Respondent says that the profit arising from the sale of portions of Parcels 1 and 2 in 1958 was income from a business of the Appellant within the meaning of paragraph

(e) of subsection (1) of Section 139 of the Income Tax Act and was properly included in computing the Appellant’s income for his 1958 taxation year in accordance with the provisions of sections 3 and 4 thereof.’’

The narrow issue is, therefore, whether the appellant at the respective times when he purchased these two properties did so ‘‘with a view to trading in, dealing with or otherwise turning (them) to account at a profit’’. If he did the resultant profits are taxable. If, however, the purchases of the properties, as the appellant alleges, were exclusively ‘‘for capital purposes’’, then such profits would not be taxable.

The onus of showing that the assumptions of the Minister in assessing the appellant were incorrect falls on the appellant. To determine whether the appellant has discharged that onus it is necessary to examine the events leading to his acquisition of the two parcels of land.

The appellant, who was born and raised on a farm in Russia, came to Canada at an early age and eventually acquired farms located about 50 miles from the City of Edmonton, Alberta, which he suecessfully operated and where he raised Belgian draft horses and pure bred cattle until 1946. In that year he purchased a small dry-cleaning and related business in the City of Edmonton operating under the firm name and style of ‘‘Page The Cleaner and Furrier’’. By virtue of hard work and astute business acumen the appellant expanded this small dry-cleaning business into the largest and most successful, as well as profitable, chain of dry-cleaning establishments in the city. He purchased land upon which he constructed a modern and efficient plant as well as land upon which he built branches in strategic locations throughout the city. As the business prospered the appellant caused it to be incorporated as a joint stock company in which his two sons assumed active roles.

In 1957, at the urging of his sons, the appellant became interested in racing horses. He professed a love of animals and having both the money and leisure time to do so he yielded to his sons’ urgings to seek more relaxation and enjoyment. Accordingly, in that year he bought two race horses in Toronto, Ontario, Pen- Ever and Handsome Joey for $2,000 each. He employed a trainer and raced these horses in Eastern Canada with moderate «nccess. He also instructed his trainer to be on the alert for a good horse for breeding purposes. On the recommendation of his trainer he bought two more horses, Squire John, a gelding, for $4,500 and Retaliation, a stallion with an extremely good blood line for $6,500, thereby increasing his stable to four. He raced these horses in the East for a short time, then moved them to Winnipeg and eventually to Edmonton.

In 1958 the appellant decided he would race exclusively in Western Canada and, by the acquisition of some good brood mares, expand his operation to include horse breeding and raising as well as training and racing. To fulfil this plan it would be necessary for the appellant to have land and appropriate facilities of his own.

Accordingly he instructed a real estate agent to be on the lookout for a suitable parcel of farm land, about 100 to 150 acres in area, in any direction from Edmonton but within reasonably close proximity thereto so that he could still supervise the dry-cleaning business. This agent showed the appellant a farm of 80 acres about 15 miles south east of Edmonton, which the appellant considered unsuitable because the land was too rolling, too narrow to accommodate a training track and, more important, it was too distant from the city to permit of easy commuting.

The appellant then made his needs known to another real estate agent named Dale who showed him a 60 acre parcel of land just beyond the northern limits of the City of Edmonton about one half mile to the west of a highway running generally north to the Town of St. Albert. It was situated in an area zoned as a Green Belt.

When the appellant cursorily inspected the land it was blanketed with snow, which, he testified, did not permit a detailed examination of the terrain but representations were made to him by another real estate agent, named Kostyniuk, which led him to believe that the land was suitable for his purposes. The representations made by Kostyniuk, who did not receive a commission on the sale, were essentially that the land was not the best for farming purposes, that it was reasonably level, but above all that it was a good buy at the asking price of $350 an acre. In this agent’s view it was a safe buy, he considered it a ‘hot” piece of land and at the price asked he urged the appellant to buy because he insisted, on the basis of location and price, the appellant could not go wrong. The appellant purchased the land forthwith. His entire inspection of the land and consideration of the factors involved took less than 45 minutes. The land was purchased on April 8, 1958 at a total cost of $21,000 paid in cash.

The appellant then had casual conversations with an architect and general contractor, both of whom he had engaged in connection with work relating to his dry-cleaning business. He explained to the architect his general needs, a ranch type home, stables for twenty horses, living facilities for his trainer and help, a training track and other related facilities. However, no working drawings were prepared, nor was any fee paid to the architect. The contractor estimated that the cost of the facilities desired by the appellant would be approximately $100,000, but such estimate was admittedly a very rough one and any contract for their construction would have been entered into on a cost plus basis. The estimate so given to the appellant did not shock him because it confirmed his own estimate of what he would be required and was prepared to spend. Neither the architect nor the contractor inspected the land and no instructions were ever given to either to proceed with the plan.

On the advent of spring and the disappearance of the snow, the appellant showed the land he had purchased to one of his sons, who advised his father that the land was most unsuitable. The land was rolling and would require an inordinately large expenditure for filling, grading, levelling and drainage to permit of the construction of a race training oval. Further the land was adjacent to a large slough or lake (which is shown on detailed maps of the area) in which mosquitoes would breed in great numbers. The land was also not far distant from a cement plant from which the prevailing wind would carry dust i injurious to horses.

The appellant was disgusted and particularly annoyed with Kostyniuk. He therefore instructed Kostyniuk to rid him of this property for as much as he could get for it, but with the express stipulation that any sale should be at a price which would occasion the appellant no loss. A minimum price was, therefore, stipulated but no maximum. The matter was thus left in the hands of Kostyniuk with the additional instructions to locate for the appellant an acceptable and satisfactory parcel of land.

On his part, Kostyniuk testified that he felt an obligation to extricate the appellant because he considered it was at his persuasion the appellant bought this land.

Accordingly Kostyniuk advertised the land for sale at $650 an acre and received numerous enquiries but no purchasers at that price. Shortly after the appearance of this advertisement at $650 an acre there was newspaper publicity of a plan that Dt. Albert was to become a satellite town. Therefore, Kostyniuk again advertised the land for sale, this time at $750 an acre. He was successful in selling 25 acres to Messrs. Kuhn and Andria at $750 an acre, a total selling price of $18,750 less Kostyniuk’s commission. This sale was arranged on May 5, 1958, that is less than one month from its purchase by the appellant on April 8, 1958. The purchasers also took an option on the remaining 35 acres at $25,000, which option was exercised in the late winter of 1959. During the currency of the option the appellant was entitled to remove the timothy hay growing thereon.

Meanwhile Kostyniuk continued in his efforts to locate suitable land for the appellant’s purposes. To this end Kostyniuk showed. the appellant a parcel of 40 acres about 2 miles due east of the first parcel. This land, the appellant inspected more carefully but decided it was too small and while the land was level it was lower than the immediately adjacent land. The asking price was $1,000 an acre. The appellant, therefore, instructed Kostyniuk to negotiate with the owner of the adjacent property, which he did, and came back with a price of $750 an acre. In the appellant’s view the adjacent land was better land and in addition it was available at a lower price. The appellant therefore bought this property, consisting of 80 acres on August 5, 1958 for a total price of $60,000, also paid in cash. This land was also. situate in the green belt but about half a mile to the east of the highway to St. Albert. Adjacent to it is a plastic pipe factory and near by there is a speedway for stock car racing which the appellant likened to a carnival when auto racing was in progress two or three nights a week. Further the land is in the direct track of aircraft using the Municipal Airport some 214 miles distant therefrom. At the time of the appellant’s second purchase of land, this airport was used exclusively for Edmonton traffic although there were rumours of the construction of a new airport to the south of the city. This second parcel was about a mile further away from the cement plant than the property originally purchased and subsequently sold by the appellant. The appellant testified that the plastic plant was a modest warehouse-like building which was buffered from the proposed site of his home and race track by dense bush which would also shield his site from any annoyance from the motor speedway. The appellant gave no thought to the presence of the airport as being detrimental to the establishment of a country estate such as he had in mind.

In the interval the appellant had continued his horse racing activity but, as will be apparent, never did embark upon the breeding part of his enterprise. During the week following his purchase of the second property the appellant’s horse Squire John was entered in a stake race with a purse of $5,000 and a trophy. Squire John came in first in the race but was disqualified for rough riding and was placed fourth by the stewards of the Western Canada Racing Association, under whose jurisdiction the race was run, with the result that Squire John was out of the money to the great and understandable annoyance of the appellant. He protested vigorously to the stewards but to no avail. The appellant’s annoyance was so great that when, within moments after this adverse decision, he met a racer and breeder, he offered to sell him his entire race horse enterprise cheap for cash. He offered his four race horses, tack, hay from the 35 acres of the first property and his farm, being the second property purchased by him a week previously. The breeder advised the appellant he was not interested in the farm since he already owned one, that he might be interested in the hay but wished to inspect it first and that he was definitely interested in the purchase of the appellant’s four race horses. The appellant offered to sell the four horses for $15,000 being their cost to him, for which price he would also throw in the tackle which had cost him approximately $3,000. The breeder countered with an offer of $10,000 whereupon the appellant expressed a willingness to accept $12,000. The difference was settled by a flip of a coin which the appellant won and the transaction was thereupon completed within a space of five minutes at the price of $11,000.

As a result of this disposition of his horses and tackle the second parcel of land was no longer required for the appellant’s horse racing enterprise which he had now abandoned. On August 20, 1958 he, therefore, instructed Kostyniuk to sell this property. The appellant’s instructions to his agent, Kostyniuk, were simply to sell the land for as much as could be gotten for it so long as he, the appellant, did not lose money. Otherwise the matter was left entirely to the discretion of Kostyniuk. Mr. Kostyniuk suggested to the appellant that he might consider holding the land for two or three years because, in his view, this land was also ‘‘hot’’ and there were likely chances of the appellant realizing a substantial profit. The appellant spurned such suggestion and reiterated his instructions that the land be sold forthwith subject to his previous instructions that the sale price should not involve a loss to himself and that he was not adverse to realizing a profit if possible. After having completed such documents as would facilitate the sale the appellant then left for a holiday in Hawaii.

Kostyniuk was successful in selling the second parcel of land, again in two separate and equal pieces by two separate sales. On November 15, 1958, 40 acres were sold to L. Letourneau Homes Ltd., a house builder, for $40,000 or $1,000 per acre. The remaining 40 acres were taken on option by Star Agencies Ltd., Kostyniuk’s employer, for $50,000, presumably to facilitate the disposition of the land because of the appellant’s absence. In any event the option on the balance of the land was exercised in February 1959 so that in effect the entire 80 acres were sold at an average price of $1,125 per acre. While the appellant was frank to admit that he sustained a loss on the sale of his racing horses sold on the spur of the moment in a fit of pique, he was equally frank in admitting that he realized a profit on the sale of the land.

When the appellant was informed of the offer of $1,000 an acre for the second parcel of land by a long distance telephone call from his solicitor in Edmonton to him in Honolulu he readily acquiesced and the sale was effected forthwith.

On the basis of such facts the appellant contends, as before intimated, that the profits arising from the sale of these two properties constitute capital accretions in his hands whereas the Minister, in assessing the appellant treated such profits as income.

There is no doubt whatsoever that the appellant was a shrewd, capable and successful business man and that he had reached a point in his life at which he could well afford to seek relief from the exacting demands of the dry-cleaning business and engage in the more relaxing business of racing horses. He had accumulated the necessary money to do so and he also had adequate time to devote to that enterprise.

I therefore accept, without hesitation, the appellant’s statement that he intended to embark upon a two-fold horse racing enterprise, (1) the racing of horses, and (2) the breeding, raising and training of race horses. The first of these two-fold purposes was in fact implemented, and could be carried on, as well as actually having been carried on, by the appellant without ownership of a tract of land, although ownership of a tract of land with essential facilities may have been more convenient. For the appellant’s second purpose of breeding horses, (which incidentally was never begun) I accept the proposition that ownership of appropriate land and facilities was essential.

To the end of acquiring a suitable property, the appellant did enter into discussions with several real estate agents in each of which he laid down three stipulations, (1) the land must be sufficiently close to the city to permit of commuting, (2) it must be suitable for race horse training and the construction of a country estate, and (8) it must be reasonable in price. This third condition, while not express, was most certainly implicit.

There were also discussions between the appellant and his architect and contractor. However, these discussions were general in their terms and no definite steps followed from them. No working plans were ever drawn. They were primarily for the information of the appellant to confirm his own estimate of the ultimate cost to him.

Turning to the first transaction, the land was bought by the appellant after a most casual and even careless inspection taking less than 45 minutes. The real estate agent, Kostyniuk advised the appellant that the land was a really good buy, it was cheap and, while he did not so testify, it is implied in his advice that if the land were not suitable for the appellant’s purposes, he could not lose and, I would assume, that he might reasonably expect to gain. This is precisely what happened within a very short time after the purchase. The appellant decided the land was not suitable so he promptly sold part: of this parcel at a substantial profit in the 1958 taxation year and the balance in the next year. In his precipitous purchase of the property the appellant could not have been oblivious of his agent’s advice.

However, the appellant did not abandon his professed intention to establish his horse breeding enterprise and within a very short time bought a second parcel of land in the immediate vicinity of the first property. I think it fair to say that the second parcel of land, while superior to the first parcel, was not in an ideal location for a country estate such as contemplated by the appellant due to the proximity of a stock car speedway, the cement plant, a plastic pipe factory, a busy municipal airport and a drive-in-theatre. Nevertheless, I accept the appellant’s testimony that he considered this land satisfactory for his plan despite these disadvantages of which he was aware but felt them to be inconsequential. The purchase of this particular parcel was at the instigation of the appellant himself. Kostyniuk had shown him the immediately adjacent property which was for sale at an asking price of $1,000 an acre, but which land, in the appellant’s view, was inferior to the adjoining property. The price for the land bought by the appellant was $750 an acre. It was obviously a better buy. Furthermore the real estate agent also considered this land to be “hot”. When the appellant decided to sell, the agent advised holding in the prospect of even greater gain than the appellant realized and this advice was proven right by subsequent events because the land tripled in value within three or four years after its sale by the appellant The appellant’s decision to sell forthwith is equally susceptible of two interpretations. One that he did not wish to speculate in real estate and the other that he was content to accept an immediate gain rather than gambling on waiting for a greater one. Accordingly such fact is not conclusive either way.

The appellant submits that his decision to sell this second property, which sale was effected within less than three months of its purchase, was prompted by an intervening act which caused the frustration of the enterprise, that is the impulsive sale of his four race horses in the circumstances related above. It should be borne in mind, however, that the second phase of the appellant’s racing enterprise, namely, the breeding and raising of horses had not been begun nor had any definite steps been taken toward its implementation. Further the success of his first transaction was fresh in his memory. The fact that the breeder who purchased the appellant’s race horses expressed no interest in this land did not deter the appellant from selling him the horses and tack. It should also be borne in mind that neither parcel so purchased by the appellant was utilized for the racing business nor were any concrete steps taken to that end.

The cumulative effect of all the foregoing circumstances indicates to me that when the appellant successively purchased these two parcels of land he had the intention of building the facilities he contemplated thereon, if, in the first instance, the land was suitable and in the second instance if it were expedient to do so. In short, he was hopeful of putting either parcel to this use but that hope was not realized and the possibility of such hope not being realized was at all times present in the appellant’s mind. He did, in fact, sell both parcels, each at substantial profit and those profits, in my opinion, are income and accordingly taxable.

It is well established that a taxpayer’s statement of what his intention was in entering upon a transaction, made subsequent to its date, should be carefully scrutinized. What his intention really was may be more accurately deduced from what he actually did than from his ex post facto declarations. Here neither parcel of land was held for any length of time, both were bought precipitously and both were sold within extremely short times of their purchase and in each instance at an attractive profit which circumstances are more consistent with the possibility of sale being present from the outset rather than his sole intention from the outset having been to operate a racing business. Even if one of the motivating reasons for the appellant’s acquisition of these parcels of land was his expectation and hope of build- ing his racing facilities thereon, if the possibility of sale was also present to his mind then the transactions were ventures in the nature of trade from their inception.

After having given careful consideration to all the evidence, I am not satisfied that there is a balance of probability that the appellant acquired the two properties for the purpose of conducting a horse racing and breeding business on them to the exclusion of any purpose of disposition at a profit. Accordingly, it cannot be said that the assumptions of the Minister in assessing the appellant as he did were not warranted.

The appeal is, therefore, dismissed with costs.