Gerardus Van Halderen and Elizabeth Van Halderen v. Her Majesty the Queen, [1994] 1 CTC 2187, 94 DTC 1027

Christie, A.C.J.T.C.C.:—The year under review is 1987. These appeals were heard together on common evidence. The appellants are husband and wife. The core issue is the appellants’ liability to income tax on amounts realized by them related to the disposition of 14 coal licenses and mining equipment. This equipment was generally referred to by those involved in that disposition and the related acquisition as "the surface assets".

Hereinafter the appellant Gerardus van Halderen will be referred to as "the appellant” and his wife Elizabeth van Halderen by her name.

In the years 1985 to 1987 the appellant was involved in consulting work with reference to logging and mining. He owned shares of two companies called Canadian Roundwood Company Ltd. ("Roundwood") and Premanco Industries Ltd. ("Premanco"). Fifty per cent of the shares of Roundwood were held by the appellant and the other 50 per cent by Elizabeth van Halderen. Fifty per cent of the shares of Premanco were held by Elizabeth van Halderen, 40 per cent by the appellant and 10 per cent by their son Gerry.

In 1985 Mr. Gillespie was president of Carolin Mines Ltd. ("Carolin"), a public corporation whose shares were traded on the Vancouver and Toronto stock exchanges and through the National Association of Security Dealers Automated Quotations Systems. Gillespie also held shares of David Minerals Ltd. ("Minerals") and New Lintex Ltd. He was president of both and they were also public corporations.

On Jul 1, 1985, the appellant commenced rendering services to Carolin and this terminated on October 30, 1985. The evidence of the appellant and Gillespie about the circumstances pertaining to this work is not in harmony. But canvassing this will not contribute to resolving these appeals. Suffice it to say that Gillespie agreed that the appellant should have 20,000 shares of Carolin for those services. The shares were delivered to the appellant on January 29, 1987. I will return to them later.

Minerals was in financial difficulties and the appellant and Elizabeth van Halderen decided that Roundwood would loan Minerals $200,000 [1] . On September 25, 1985, Minerals issued a debenture in which it undertook to pay Roundwood $500,000 and interest at the Royal Bank's prime rate plus 2 A per cent per annum on September 1, 1987. This debenture was subject to outstanding debentures in favour of the Royal Bank. Because of the subordinate position of this debenture to debentures held by that bank and acting on legal advice the appellant sought a further debenture related to unencumbered assets. On November 14, 1985, Merida Developments Ltd. ("Merida"), a wholly-owned subsidiary of Minerals, issued a further debenture in favour of Roundwood in the same form as the first debenture. A third debenture relating to the $200,000 loan was issued on April 18, 1986 by Gilwil Holdings Ltd. in favour of Roundwood. It was for $100,000 plus specified interest. Gilwil Holdings Ltd. was a private company the shares of which were held by Gillespie and his wife.

On October 1, 1985, which is after the first debenture but before the other two, an agreement was made involving Minerals, Merida and Roundwood. In the agreement Minerals and Merida are" herein collectively called the'vendor' and sometimes called the 'Grantor'." Roundwood is "herein called the'purchaser' and sometimes called the'Grantee'."

The opening paragraph recites that in consideration of $200,000 paid by the grantee to the grantor the latter grants to the grantee all merchantable timber on certain tracts of land described in Schedule "A" together with the right to cut and remove the timber for a period of five years from the date of the agreement. But the rights of the purchaser are subject to any prior grants of timber that are registered on the title to the properties and are subject to the prior rights granted on the properties listed in an attached Schedule "B". [2]

There follows six numbered paragraphs. The first reads:

1. The purchaser agrees to pay to the vendor the balance of funds from the sale of the logs less the purchaser's cost of logging the timber. For the purpose of this agreement, the purchaser's cost shall be the actual cost of logging the timber plus a sum equal to 25 per cent of the actual cost of logging the timber. The purchaser agrees to take all reasonable steps to obtain the best price available for the timber.

The next five-numbered paragraphs relate to such matters as the purchaser agreeing to fell the trees in a workmanlike manner; any timber and trees not removed before the five-year period are forfeited to the vendor; any dispute shall be settled by arbitration; the vendor covenants that he has the right to dispose of the timber and trees; the agreement is binding on the parties, their heirs, executors, administrators and assigns.

A second agreement, also dated October 1, 1985, was entered into between Minerals and Roundwood. The wording of this agreement, except for Scheduled", is the same as the wording of the other agreement of October 1,1985. [3]

While the headings of these agreements are AGREEMENT FOR SALE OF TIMBER and the language of sale and purchase is used in them, the appellant testified that they were not really agreements of that kind. He said: "These are the timber agreements that Mr. Gillespie signed on behalf of Minerals and Merida, giving Canadian Roundwood a right of first refusal to do their logging on a contractual basis.” He added: “It was a contract of logging. As I say, it was on page two, at cost plus 25 per cent of the balance going to Minerals.”

Roundwood logged and sold some timber under the contracts. The three debentures and the two timber agreements all relate to the one $200,000 loan from Roundwood to Minerals.

The appellant's evidence then addressed the coal licenses. He first knew in 1985 that Minerals had 14 coal licences in the Chetwynd area of British Columbia. On or about May 30, 1986 he learned that they were for sale consequent upon Minerals having been placed in receivership by the Royal Bank. The appellant told the receiver that Roundwood had an interest in the timber in the area covered by the coal licences. The receiver replied that no bids had been received for the licences and advised of his intention to let them lapse because there was $24,000 rent owing under them. The appellant thereupon made application to the Ministry of Energy, Mines and Petroleum Resources in Victoria to have the licences transferred to him upon payment of the $24,000. When the receiver became aware of this he paid the $24,000 and invited the appellant to bid on the licences. On November 18, 1986, the appellant offered $27,500 for the 14 licences. This was accepted by the receiver on January 27, 1987, conditional upon obtaining the approval of the Supreme Court of British Columbia. That approval is in an Order of the Court dated February 12, 1987. The appellant said the licences were taken in his name because he had a Free Miners Certificate which was a requirement to hold such licences. Neither Roundwood nor Premanco has such a certificate.

On November 18,1986, the appellant also offered the receiver $13,100 for the surface assets. This was accepted on January 9, 1987, again conditional upon obtaining the approval of the Supreme Court of British Columbia. That approval is in an order of the Court dated January 30, 1987.

Reverting to the 20,000 shares of Carolin that Gillespie agreed to deliver to the appellant for services rendered, difficulty was encountered in obtaining the shares. In May of 1986, before obtaining delivery, the appellant, acting on what turned out to be unfortunate advice, sold 17,500 shares of Carolin short and as sometimes happens to those who engage in that manoeuvre he was later faced with a serious potential loss.

On January 28, 1987, he telephoned Gillespie from Quesnel pressing him for the 20,000 shares. Gillespie suggested they meet for lunch in Vancouver. The appellant flew there the next day. At lunch the debentures and the coal licences were discussed in addition to the Carolin shares. A meeting followed at 2:30 that afternoon in the boardroom of Campney & Murphy. Mr. Dale Kermode of that firm represented the appellant and Gillespie was represented by Mr. George Brazier of DuMoulin, Black. The result was an agreement in writing between the appellant and Gillespie. Its terms are in a letter of January 29, 1987, from Kermode to Brazier. It reads:

This will confirm the agreement reached at our meeting on Thursday, January 29, 1987.

Forthwith upon delivery of this letter of agreement you will deliver to us that share certificate in favour of Premanco Industries Ltd. evidencing ownership of 20,000 shares in Carolin Mines Ltd. [4]

Upon receipt of said shares, Mr. van Halderen agrees to accept through Mr. Orval Gillespie some 50,000 shares in Carolin Mines Ltd. to be delivered by no later than Monday, February 23, 1987, which shares are to be non-legend stock, in consideration for which shares Mr. van Halderen will cause to be returned to Mr. Gillespie the following:

1. Debenture dated September 23, 1985 [s/c] [5] given by David Minerals Ltd. to Canadian Roundwood Co. Ltd. ("Roundwood").

2. Debenture dated November 14, 1985 from Merida Developments Ltd. to Roundwood.

3. Debenture in favour of Roundwood from Gilwil Holdings Ltd., dated April 18, 1986.

4. The equipment presently in the possession and control of Mr. van Halderen owned by Gilwil Holdings Ltd. [6]

It is specifically understood and agreed that if the 50,000 Carolin shares are not delivered to Mr. van Halderen by Mr. Gillespie by Monday, February 23, 1987 at the close of business hours, this agreement will be void and unenforceable.

It is also understood that the equipment shall be returned by Mr. van Halderen to Mr. Gillespie at Mr. van Halderen's expense to a location to be discussed and agreed upon at a later date.

The agreement contained herein is hereby agreed to by the undersigned this January 29, 1987:

Orval Gillespie

Gerard van Halderen

At the luncheon meeting one of the matters discussed was a "gentleman's understanding" between the participants that if the issues about the 20,000 shares and the debentures were settled, the coal licences and surface assets would be sold to Gillespie for their cost to the appellant. On February 2, 1987, Kermode wrote Brazier as follows:

I refer to discussions which arose at our meeting on January 29, 1987 and wish to record the agreement that was then reached as follows:

1. Mr. van Halderen will sell to Mr. Gillespie any David (Minerals Ltd.) assets, other than timber properties, acquired from the Receiver of David for a price equivalent to the purchase price plus costs relating to acquisition.

2. Such costs will include Mr. van Halderen's time and expenses directly incurred together with other costs and disbursements directly or indirectly incurred.

3. Mr. Gillespie will pay Mr. van Halderen the said purchase price by February 28, 1987.

4. Mr. van Halderen from February 28, 1987 will get two years use of the equipment and other assets so acquired, and will refurbish and maintain such equipment as he may use at his own expense durin that period of time. That equipment which is not used will be ultimately transferred to Mr. Gillespie as is where is.

5. Mr. van Halderen will also collect and move the Chetwynd surface equipment assets (i.e. the surface assets) to a storage area on Mr. van Halderen's property near Quesnel for a price of $15,000, payable in advance of said move.

Please let us know if this does not accurately set out your recollection of the discussion.

This question was asked of the appellant by his counsel and this answer given:

Q. Now, why at this point in time, would you be prepared to dispose of your coal licences?

A. I had found out something that I didn't tell Mr. Gillespie. I’d found out that the cutting permit, and I think it was cutting permit number 642, had expired because you must renew that every year with the Forest Service. And it had not been done within 30 days of the expiry date. And so it meant that even me owning the coal licences or anybody would have to reapply to cut the timber, so it became for me a worthless investment actually.

He went on to relate how he was told by a forester that processing a new application for a cutting permit would take a long time and there was no guarantee of success.

On February 27, 1987, Brazier wrote Kermode as follows:

Further to your letter of February 2, 1987 in respect to the captioned matter, would you please provide us with particulars of the David assets acquired by Mr. van Halderen from the receiver of David, including the purchase price (together with supporting documents), a statement of his costs in respect to the same, together with a copy of the bill of sale or other transfer document indicating that the purchase has been completed.

As you are aware, the parties initially agreed that these transactions would be completed by February 28. In view of the lack of information in the possession of our client, we are asking that the matter be extended to March 13. We would appreciate it if you would take instructions from your client and advise. Thank you very much.

Kermode sent a copy to his client on March 2,1987. This letter reads:

Enclosed is a copy of a letter dated February 27,1987 from Mr. Brazier requesting certain information and an extension until that information is received.

Without considering whether or not this request is reasonable, I suggest that you provide the information to the extent possible. You may wish to provide it directly to Mr. Gillespie. If so, please provide us with particulars of it. Otherwise we can transmit those particulars.

The appellant was asked by his counsel if the extension had been granted. He replied: "Well, no officially, not in writing. I said let it run for awhile, because I do not believe that Mr. Gillespie will come up with the shares anyway, come up even in a few days. But officially, I didn't give an extension no.”

On March 13, 1987, Kermode wrote Brazier as follows:

We refer to the memorandum of agreement dated January29, 1987 and the February 2, 1987 letter of clarification.

The agreement is void due to non-delivery of the 50,000 shares by February 23, 1987. We appreciate that the delivery was frustrated by certain orders of the regulatory authorities.

We refer further to our letter dated February 2, 1987 with regard to the sale of assets of David Minerals Ltd. acquired by Mr. van Halderen. Mr. Gillespie did not pay Mr. van Halderen the therein indicated purchase price by February 28, 1987.

Our client is now prepared to consider an agreement that would be essentially structured wherein Carolin shares would be received by our client and sold netting a total sum no less than $500,000 (Cdn) in consideration of the sale of the David debenture, the David-Merida debenture and the Gilwil debenture. The sale of the shares could be handled by a Carolin nominee and could be spread out over time, to be negotiated.

With respect to the David assets, our client is prepared to sell to Mr. Gillespie the Chetwynd assets comprised of equipment and coal leases as set out in the attached schedule for $55,000 as is, where is if:

1. The funds are received in trust with our firm by March 17,1987.

2. The $500,000 derived from sale of shares as set out above has been accomplished by August 1, 1987.

3. Mr. Gillespie [7] has unrestricted use for a period of two years of the following equipment:

One Continuous Miner

One 12-71 GM Generator Set

One Mine Ventilation Fan

One Roof Bolting Machine

24 Tunnel Arch Supports

Two Ore Haulers

Two Underground Transformers

Enough electrical cable to safely wire the above

The $55,000 is to be deposited in trust with our firm on or before March 17, 1987 and will be deemed to be a non-refundable deposit, and sale of the assets will not pass in the event that the sale of shares does not complete in the manner ultimately negotiated by the parties.

Alternatively, should your clients not wish to purchase the Chetwynd assets, the sale of the David debenture etc., for $500,000 can nonetheless continue. Sale of the Chetwynd assets is contingent upon the other transactions being fulfilled.

Our client will commit, in the context of the above to:

1. Deliver the debentures free of all further interest or claim.

2. Deliver the Chetwynd assets in the same condition as bought from the Receiver.

3. Turn over all interest in the Ainsworth property exclusive of timber rights.

4. Move the Chetwynd surface assets to the storage yard in Cottonwood, B.C. for $15,000 cash paid in advance.

5. Immediately return the Gilwil equipment at his expense.

6. Immediately deliver to Mr. Gillespie the remaining 7,226 David Mineral shares in his possession. [8]

Our client is negotiating with others in respect of the Chetwynd assets and any delay does result in expense. That is why the March 17, 1987 has been imposed. After that date our client will deal with others on a first come first served basis.

The appellant said the $500,000 was "more or less arbitrary.” He agreed it was "just plucked out of the air".

The late Mr. William J. Esselmont of Clark, Wilson, who had replaced Mr. George Brazier of DuMoulin Black, now became involved. Although he con- tinued to deal with Gillespie, his primary clients were a syndicate who were financing the payment of the debentures, the acquisition of the coal licenses and surface assets by David Coal Corporation and the retirement of the debentures. As will be seen this required $601,000, being $200,000 respecting the debentures and $401,000 for the coal licences and surface assets. There were also legal fees and presumably other expenses involved. The overriding interest was the acquisition of the coal licences. The role of this corporation will be discussed shortly. Mr. Guerin of New Jersey and Mr. Wolford of Kentucky were identified with that syndicate. Wolford was President of David Coal Corporation. Gillespie said that he was "now taking instructions" from Guerin and Wolford. On March 17, 1987, Esselmont wrote Kermode as follows:

Please find enclosed our trust account cheque in the amount of $55,000 as requested in your letter of 13 instant. This check is delivered to you on your undertaking that it will be returned if our respective clients cannot conclude an agreement along the lines set out in your said letter by March 20, 1987.

On April 1, 1987, Shelley C. Fitzpatrick of Campney & Murphy wrote Esselmont setting out in detail a proposal for a limited partnership and returned the $55,000. This proposal was changed in some particulars in a letter to Esselmont from her dated April 8, 1987. It reads:

Further to the negotiations which have taken place between our offices, we would confirm that our clients are willing to settle the outstanding matter on the following basis:

1. The Coal Licenses (Schedule" B") and Assets (Schedule"C") would be rolled into a limited partnership (the"partnership"). The General Partner would be a limited company and would hold initially a 0.01 per cent interest. The holder of the issued class "A" units would be Gerard van Halderen. He would receive the "A" units in exchange for the transfer of the licenses and the assets. The holder of the "A" units would be entitled to all profit and loss except for the amount allocated to the general partner until the class" C" and"D" units were issued as described below. An election would be made under section 97 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") so as to avoid realization of gain or loss on the transaction.

Class "B" partnership units would be issued to Orval Gillespie in exchange for $1 under the terms of the agreement governing the partnership. The class B" unit would be entitled to 0.01 per cent interest in the profits and loss on the assets of the partnership with the bulk of the profit and loss accruing to "A" units. Holding a" B” unit would also entitle its holder to be issued, in exchange for contribution of $401,000 on or before June 1, 1987 (increasing daily at a rate of 10 per cent per annum to August 1, 1987), the class "C" unit which, upon issue, would give its holder the right to 99.97 per cent of the profit and loss and assets of the partnership. The interest of "A" units hold falls to 0.01 when the "C" unit is taken up. If the "C" unit were not taken up by August 1, 1987, the right to take it up would lapse as would the interest in the"B" unit. When the amount of $401,000 was contributed by way of capital into the partnership, under the terms of the agreement governing the partnership, that cash would be distributed as capital distribution to the holder of the class "A" unit. The result would then be that the holder of the class B" and class C" unit would hold 99.98 per cent of the assets and interests of the partnership. A separate option would be granted to Mr. Gillespie or his nominee to acquire all of the interest in the share capital of the general partner for $1 if the "C" unit was taken up.

2. The limited partnership would acquire the coal licenses and surface assets on the same basis as that which Gerard van Halderen purchased same from the receiver of David Minerals Ltd., i.e. without any warranty as to title. It is to be acknowledged that the licences will be acquired expressly subject to the terms and conditions of an agreement dated November 26, 1979 between J. W. McLeod and Semper Resources Inc.

3. The debentures (Schedule "A") would be sold for $200,000, payable $55,000 as a non-refundable deposit upon execution of this agreement and $145,000 payable to Campney & Murphy on or before June 1, 1987, provided that if such funds are not paid on or before that date, a further sum being interest at the rate of 10 per cent per annum on the principal amount of $145,000 from June 1, 1987 to date of payment will be paid.

4. Upon receipt of the aforesaid deposit and upon execution of a formal agreement, escrow arrangements will be made with Clark, Wilson who will hold the assets against delivery of funds as contemplated above.

5. The Coal Licenses will be transferred to Mr. Gillespie's nominee, David Coal, to be held in trust for the partnership. No transfer of the coal licences will occur until such time as all moneys outlined in paragraphs 1 and 3 are paid to the limited partnership and Gerard van Halderen respectively and further, that the moneys paid to the limited partnership are distributed to Gerard van Halderen.

6. Upon payment of the aforesaid sums outlined in paragraphs 1 and 3, Canadian Roundwood and/or Gerard van Halderen and Betsy van Halderen shall:

(a) Deliver duly executed assignments of the three debentures;

(b) Deliver 7,226 David Mineral Ltd. shares to Clark, Wilson;

(c) Deliver the surface assets, subject to paragraph 7 below, in the same condition as bought from the receiver;

(d) Deliver the Gilwil equipment (Schedule "E") to Mr. Gillespie as directed and at his expense;

(e) Move the surface assets to Gerard van Halderen's storage yard in Cottonwood,

British Columbia, upon payment to him of $15,000 in advance.

7. Gerard van Halderen shall have unrestricted use of the equipment in Schedule "D" for a period of two years where upon the equipment will be returned to Mr. Gillespie or his nominee in substantially the same condition as presently exists. The use of the aforesaid equipment shall survive the purchase and sale of the other assets.

This offer is conditioned on it being accepted by your client(s) and the $55,000 deposit being received by our offices no later than noon, Friday, April 10, 1987.

We look forward to hearing from you in respect of the foregoing.

A copy was sent to Roundwood, attention of the appellant. With reference to this letter it should be noted that these steps had been taken prior to or were taken subsequent to April 8, 1987:

— February 24, 1987, Roundwood transferred to Premanco its rights in the three debentures and the logging agreements for $230,000. The agreement recites that:" Roundwood is essentially a Research & Development Company with no facility to collect under the debentures nor to exercise its rights under the logging agreement." The evidence is that the $230,000 is the $200,000 loaned by Roundwood to Minerals plus $30,000 interest.

— February 28, 1987, Premanco assigns the rights it acquired on February 24,1987, to the appellant and Elizabeth van Halderen. The agreement recites that they have" loans outstanding to the Company in the amount of $257,842.04”. Two hundred thousand dollars of the $257,842.04 is forgiven.

— February 26, 1987, 305294 British Columbia Ltd. ("305294") is incorporated.

— May 11, 1987, the sole subscriber to the memorandum and the first director of 305294 (a secretary employed by Campney & Murphy) is allotted for $0.01 the one common share in the capital of the company subscribed for by her and this share is immediately transferred to the appellant. Elizabeth van Halderen is elected sole director and appointed president and secretary.

Prior to the letter of April 1, 1987, a conference call about the limited partnership was arranged by Kermode. The participants were the appellant, his accountant Mr. Camdem of Coopers & Lybrand, Kermode, Fitzpatrick and Mr. R.J. MacRae, also of Campney & Murphy. The kind of appreciation that the appellant had of what was being proposed is reflected in this extract from the transcript of the evidence:

A. And we'd started discussing limited partnership, that that would be just as good and just as legitimate to put everything in a limited partnership as going with the debentures, but it wasn't an organizational or structural thing, and frankly, to tell you the truth, I have a general idea how it works. I mean, I put something in, I get shares for it, another guy puts something in, get shares for it, and then some arrangements are made, but that’s about as far as it goes. I left that part up to my wife, Betsy, and. . . .

HIS HONOUR: Was she in on the call?

THE WITNESS: No, she wasn’t, but later on her and Shelley Fitzpatrick discussed that at great lengths, and she was basically the one that negotiated the terms and conditions, and I don’t know, kept track of the paperwork.

HIS HONOUR: But what happened? What was—what did you understand was being put to you in this five-cornered conference call?

THE WITNESS: What did I understand?

HIS HONOUR: Yes.

THE WITNESS: I understood that it was a way of transferring the debentures to Mr. Gillespie and transferring the coal licences to Mr. Gillespie in a legal structure from a taxation point of view and from an organizational point of view, and that there would be no down side for me in that thing. There would be—it would be legal, there would be nothing wrong with it, in other words. It was completely within the law. That's what I understood.

It was another way of doing the same amount of business. That's the way I looked at it.

The appellant said he never believed” that working with David Coal Corporation in mining in British Columbia would ever happen. This was followed by this question put by counsel for the respondent and this answer given by the appellant: Q. But in general terms you did not want to mine these coal leases . . . licenses? A. I tell you the truth, I abhorred the fact that . . . I abhorred the thought I would have to go to work with him [Gillespie].”

On April 9, 1987, Esselmont wrote Fitzpatrick saying:

For your information, our client is David Coal Corporation who will:

(a) be the limited partner who subscribes for the class "B" and class "C" partnership units;

(b) be the optionee of the class "A" unit;

(c) hold the Schedule "B" licenses and Schedule "C" assets in trust for the partnership;

(d) be the assignee of the three debentures.

On May 12, 1987, 305294 and the appellant entered into a limited partnership agreement. The appellant is referred to therein as "van Halderen". It provides:

1. 305294 and van Halderen on the execution of this agreement agree to form a limited partnership under the laws of British Columbia for the purpose of carrying on the business of owning and exploiting mineral resources in the Province of British Columbia, which partnership shall be known as “ 305294 Coal Development limited partnership".

2. 305294 shall be the general partner and van Halderen shall be the limited partner holding one class "A" unit of Partnership.

3. The limited partnership shall exist until December 31, 2016, unless it is terminated earlier by agreement or by operation of law.

4. 305294 shall contribute $1 cash on execution of this agreement and van Halderen shall contribute $99 as contribution for one class "A" unit of limited partnership entitling the holder to the rights set out in this agreement.

5. Neither 305294 nor van Halderen may be required to contribute additional amounts.

6. In addition to van Halderen, other persons may be admitted as limited partners upon subscription for the one class” B" unit, one class" C" unit and one class“ D" unit, each having the rights set out in this agreement, and which units shall be issued in exchange for capital contributions of:

(a) $1 in the case of the class "B" unit;

(b) $401,000 in the case of the class "C" unit if the contribution is made on or before June 1, 1987 but increasing daily at the rate of 10 per cent per annum up to August 1, 1987 (which capital contribution may be referred to as the “class "C" unit contribution”); and

(c) property, specifically assets which could be used in the course of the partnership business, if such assets have a cost to the transferor and a fair market value on the date of transfer of $40,600.

7. 305294 as the general partner shall have the full power and authority on behalf of the partnership to do all acts necessary or desirable to carry on the partnership business, including without restricting the generality of the foregoing:

(a) to borrow money from time to time, to draw, make, execute and issue promissory note, evidence of indebtedness, other negotiable or non- negotiable instruments and to grant security by way of mortgage, debenture or otherwise on partnership property;

(b) to hold legal title to partnership property, whether real or personal property, on behalf of the partnership.

8. The income or loss of the partnership shall be allocated on the last day of the fiscal period to persons who are partners holding units on the last day and only to such persons in accordance to the following:

(a) to the general partner 0.01 per cent;

(b) to the holder of the class "A" unit being a limited partnership unit:

(i) if the class B", C" and class D" units are not issued, 99.99 per cent;

(ii) if only the class” B” unit has been issued and the class"C" and class” D" units are not issued, 99.98 per cent;

(iii) if the class" B" and the class“ D” units have been issued, 99.97 per cent;

(iv) if both the class” B” and class"C" units have been issued, 0.01 per cent;

(c) to the holder of the class" B" unit, if issued, 0.01 per cent;

(d) to the holder of the class C" unit, if issued, 99.96 per cent;

(e) to the holder of the class "D" unit, if issued, 0.01 per cent. [9]

9. The holder of the class "A" unit shall be entitled to receive as a distribution of cash all amounts contributed as the class "C" unit contribution which cash distri- bution shall not be regarded as a distribution of income to the holder of the class "A" unit, but rather shall be a right of the class "A" unit holder to receive as a distribution of partnership property.

10. The holder of the class" B" unit shall be entitled to subscribe for the class C" units for the class "C" unit contribution on or before August 1, 1987, but if the holder of the class "B" does not subscribe and make the capital contribution, the interest of the class "B" unit holder in the class "B" unit shall be assigned to the general partner.

11. No partner is liable to contribute beyond the amounts set out in this agreement, notwithstanding that he may receive distributions of partnership property or income from time to time.

12. The fiscal period of the partnership shall end May 22 in each year unless changed by unanimous resolution of all partners.

On May 20, 1987, 305294 filed a certificate which had been signed on its behalf by the appellant on May 12, 1987, with the registrar of companies appointed under the British Columbia Company Act, R.S.B.C. 1979, c. 59. It reads:

TO: REGISTRAR OF COMPANIES

Ministry of Consumer and Corporate Affairs

940 Blanshard Street

Victoria, B.C.

V8W 3E6

Re: 305294 Coal Development limited partnership (the"limited partnership"*)

The undersigned hereby certifies that:

(a) the business name under which the limited partnership is to be conducted is "305294 Coal Development limited partnership";

(b) the general nature of the business to be carried on by the limited partnership is to own and exploit mineral resources in the Province of British Columbia;

(c) the full name and address within the Province of the general partner, (the "General Partner”) is as follows:

305294 British Columbia Ltd.

#1600-595 Burrard Street

Vancouver, British Columbia

V7X 1K9

(d) the limited partnership is to exist for a term to December 30, 2016 commencing upon the filing and recording of this Certificate and shall continue unless earlier terminated by operation of law or agreement.

(e) (i) $1 in cash has been paid by the limited partner who has subscribed for the class "A" unit but he is not liable to contribute further;

(ii) $1 in cash will be payable by a person who subscribes as a limited partner for the class” B" unit but he will not be liable to contribute further;

(iii) if a person subscribes for the class "C" unit for limited partnership on or before June 1, 1987, he will contribute cash of $401,000 for the class" C" unit but after June 1, 1987 but up to August 1st, 1987, the amount thus called for shall increase at the rate of 10 per cent per annum determined on a daily basis but beyond that, the holder of the class "C" unit as a limited partner will not be required to contribute further;

(iv) if a person subscribes for the class"D" unit he must contribute property to be used in the partnership business, which property must have a cost and a fair market value at least equal to $40,600;

(f) The rights of the general partner and the limited partner to property and income are as follows:

(i) the general partner will be entitled to a 0.01 per cent interest in all profit and loss;

(ii) the holder of the class "A" unit as a limited partner will be entitled to:

(A) 99.99 per cent of profit and loss if the class "B", class "C" and class "D" units are not issued: and

(B) 99.98 per cent of profit and loss if the class B” but not the class “C" unit and class "D" unit are issued;

(C) 99.97 per cent of profit and loss if the class“ B" and class D" but not the class"C" units have been issued; or

(D) 0.01 per cent of profit and loss if the class "B", class "C" and class "D" units have all been issued and the holder of the class "A" unit is entitled to the exclusion of the other partners to receive as a distribution of partnership property an amount equal to the amount contributed on account of capital for the class "C" unit;

(iii) the holder of the class B” unit as a limited partner will be entitled to 0.01 per cent of profit and loss and to subscribe for the class C" unit on or before August 1st, 1987;

(iv) the holder of the class "C" unit as a limited partner will be entitled to:

(A) 99.97 per cent of profit and loss if the class "D" has not been issued; or

(B) 99.96 per cent of profit and loss if the class"D" unit has been issued;

(v) the holder of the class "D" unit will be entitled to 0.01 per cent of the profit and loss of the limited partnership.

On May 22, 1987, the appellant and 305294 entered into an agreement whereby the former sold the coal licenses and the surface assets to the latter. It was provided that the purchase price shall be paid in full by the issue to the appellant of a class D unit. Both parties agreed to execute and file an election under section 97 of the Income Tax Act. On the same date they signed an election and a certification with respect to the truthfulness, correctness and completeness under subsection 97(2) regarding the licenses and surface assets. The appellant is the transferor and 305294 the transferee. The partnership interest in the licenses and assets is estimated at $213,000. The surface assets are described as depreciable property and the licenses as resource property.

On May 25, 1987, David Coal Corporation and the appellant entered into a Share Purchase Option agreement. It recites that the appellant holds the only issued share of 305294, one class A unit and one class D unit of the limited partnership. David Coal is given the option of purchasing the share and the units if these events occur:

(a) The subscription of the one (1) class "B" unit in the limited partnership by David Coal;

(b) The subscription of the one (1) class "C" unit in the limited partnership by David Coal together with the capital contribution provided for pursuant to the terms of the agreement governing the limited partnership; and

(c) The distribution of the capital contribution paid by David Coal for the class C" unit to van Halderen to his own account pursuant to the terms of the agreement governing the limited partnership.

The share was transferred to David Coal Corporation on May 25, 1987, and the class A and D units were transferred to it on May 26, 1987. On that date Elizabeth van Halderen resigned as director of 305294 and Esselmont was elected in her stead. He was also appointed president and secretary.

The assignment of the debentures from Roundwood to David Coal Corporation is dated May 25, 1987. On the same day Esselmont wrote MacRae as follows:

Please find enclosed our trust account cheque in the amount of $401,000 payable to your firm, in trust, representing payment in full for one class "C" unit in the 305294 Coal Development Limited Partnership (the"partnership").

This will confirm the prior purchase of one class“ B" unit in the partnership.

Please also find enclosed our trust account cheque in the amount of $145,000 payable to your firm, in trust, representing payment in full for the Debentures being purchased from Canadian Roundwood Co.

The delivery above is to close the agreement made between our respective clients as set out in that letter agreement from your firm dated April 8, 1987.

Finally there was a hold-back in the sum of $40,000 from the $401,000 with reference to the surface assets. This was resolved on August 27, 1987, when MacRae sent a newly executed bill of sale to Esselmont respecting those assets. The $40,000 was thereupon paid to the appellant and Elizabeth van Halderen.

The testimony of Gillespie is that the notion of introducing a limited partnership with reference to the coal licenses and surface assets originated with and was insisted upon by Campney & Murphy. His reaction to the proposal was most unfavourable. He took it to his accountant, Mr. Grayson, who declined to express an opinion about it because of his lack of expertise. Esselmont told Gillespie that if the limited partnership was not accepted there would be no deal. Esselmont obtained an opinion from a leading firm of chartered accountants that his client would not face unfavourable tax consequences because of the partnership. Gillespie never understood the purpose of it: “I just do not understand it.” Neither did Guerin nor Wolford. He said that there never was an intention that the limited partnership would carry on a mining business. The plan was that when David Coal Corporation secured the coal licenses and the surface assets it would merge with Minerals and the merged entity would exploit the coal to which the licenses related. The anticipated increase in Gillespie’s shares of Minerals was to be the source of what he hoped would be his financial gain.

Leaving aside for the moment the question of the legal ramifications of the role of the alleged limited partnership and viewing this as an ordinary trading case, I am satisfied that the gain on the disposition of the coal licenses and the surface assets, which were owned on a 50/50 basis by the appellant and Elizabeth van Halderen, was on income account. They were not acquired as an intended investment in an income-producing mining venture. The intention at the time of the acquisition of the coal licenses and surface assets was sale at a profit as soon as a propitious opportunity arose. Indeed the appellant was discussing the disposition of them with Gillespie on January 29, 1987, while he was still in the process of acquiring them from the receiver.

Further, the coal licenses are by definition (paragraph 66(15)(c) of the Act) “Canadian resource property" and the disposition of that kind of property does not give rise to a capital gain. The consequence of applying the rules pertaining to the disposition of a Canadian resource property [10] to the coal licenses would have been to include the proceeds of disposition in income and that is what the appellant and Elizabeth van Halderen were seeking to avoid.

Hence the recourse to the limited partnership. Subsections 51(1) and (2) of the British Columbia Partnership Act provide:

51 (1) A limited partnership is formed when there is filed with the registrar a certificate, signed by each person who is, on the formation of the partnership, to be a general partner.

(2) A certificate shall state

(a) the business name under which the limited partnership is to be conducted,

(b) the general nature of the business carried on or intended to be carried on,

(c) the full name and resident address of each general partner or, in the case of a general partner other than an individual, the name and address in the province,

(d) the term for which the limited partnership is to exist,

(e) the aggregate amount of cash and the nature and fair value of any other property to be contributed by all of the limited partners,

(f) the aggregate amount of any additional contributions agreed to be made by limited partners and the times at which or events on the happening of which the additional contributions are to be made, and

(g) the basis on which limited partners are to be entitled to share profits or

receive other compensation by way of income on their contributions.

In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, Mr. Justice Estey in delivering the reasons for judgment of the majority of the Court said at pages 545—46 (C.T.C. 298, D.T.C. 6308):

A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a façade of reality quite different from the disguised reality.

At page 572 (C.T.C. 313, D.T.C. 6320):

The element of sham was long ago defined by the courts and was restated in Snook v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518. Lord Diplock, at page 528, found that no sham was there present because no acts had been taken:

. . .. which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. [11]

This definition was adopted by this Court in Cameron v. M.N.R., [1974] S.C.R. 1062, [1972] C.T.C. 380, 72 D.T.C. 6325 at page 1068 (C.T.C. 384, D.T.C. 6328) per Martland, J.

When the certificate of limited partnership signed by the appellant on behalf of the general partner, 305294, was filed with the Registrar appointed under the Company Act there was, contrary to what is envisaged under paragraphs 51(2)(a) and (d) of the Partnership Act and what is said in paragraphs (b) and (d) of the certificate, no intention whatever on the part of anyone concerned with the partnership that it would carry on a mining business or a business of any kind. And no business was, in fact, ever carried on by it. The exclusive aim and purpose of the limited partnership was to create a capital gain with respect to the profit on the disposition of the coal licenses and the surface assets.

To my mind the limited partnership was intended to give the appearance of a legal entity having been created that had a bona fide intention of carrying on a business and, in particular, the business of owing and exploiting mineral resources in the province of British Columbia. Sham was, therefore, present and its target was officials of Revenue Canada concerned with the assessment of liability to tax under the Act.

In the circumstances the filing of the certificate cannot be regarded as creating a legal entity, the existence of which can enure to the benefit of the appellant or Elizabeth van Halderen with reference to their liability for income tax. The substance and reality of what occurred regarding the coal licenses and the surface assets was the transfer by the appellant and Elizabeth van Halderen of their interest therein to David Coal Corporation for $401,000. While the role played by the limited partnership was intended to have a legal purpose, it had, in the result, no legal effect. It follows that the appeals cannot succeed.

To my mind, even if there was no sham the decision of the Supreme Court of Canada in Fraser [No. 2] v. M.N.R., [1964] S.C.R. 657, [1964] C.T.C. 372, 64 D.T.C. 5224, would deprive the appellant and Elizabeth van Halderen of success in these appeals. It is sufficient to repeat here what I said about Fraser in K.J. Beamish Construction Co. v. M.N.R., [1990] 2 C.T.C. 2199, 90 D.T.C. 1584 (T.C.C.) at pages 2208-09 (D.T.C. 1591-92). The limited partnership in the case at hand is the analogue of Aidershot Investments Ltd. and Aidershot Realty Ltd. in Fraser, supra:

Fraser followed and applied Associated London Properties Ltd. v. Henriksen (1944), 26 T.C. 46, a decision of the Court of Appeal in England. The facts in Associated London Properties are that the company, a trader in real estate, and an individual caused a company to be formed in which each held 50 per cent of the shares. They advanced money to the new company to enable it to purchase a site that the appellant owned as part of its trading inventory and they guaranteed a bank loan to enable the new company to erect a building on the site. When the building was erected the appellant sold its shares in the new company at a substantial profit to the individual who held the other shares. The appellant's position was that the profit arose out of the sale of the shares and not out of the sale of land and as the company did not deal in shares, the profit did not arise from its trade. This was rejected. In delivering the judgment of the Court of Appeal, Lord Greene, M.R. said at page 53:

The supplemental case contains this finding: “ Pursuant to the order of the King’s Bench Division herein dated October 26, 1942 we, the Commissioners who heard the appeal, have duly reconsidered our finding in paragraph 8 of the case stated herein. After again considering all the facts and having regard to the inclusion of the profit in the accounts and the prospectus, we find that the profit was made in the ordinary course of the company's trade and therefore liable to tax." In my opinion, that finding is one for which there was ample evidence. When that is said, it seems to me all argument is at an end. In fact the Commissioners are finding, if I may expand the clear meaning of what they say, that, it being the business of the appellants to deal in real estate, this was the particular method of dealing in real estate which they happened to adopt, and, therefore, must be treated as a method of exploiting its real estate assets just as though they had made a direct sale to a purchaser out and out. There is nothing in law which prevents the Commissioners from finding as a fact that a profit made in these circumstances is to be treated as a profit made in the ordinary course of the appellants' business.

In my opinion, this is a pure question of fact. The finding of the Commissioners is binding upon this Court, and they have made no error in law. There was ample evidence to support their finding: therefore, the result is that the appeal must be dismissed with costs.

In Fraser, Mr. Justice Judson who delivered the judgment of the Supreme Court dismissing the appeal from the Exchequer Court gave this “bald outline of the problem" [at pages 657-58 (C.T.C. 372-73, D.T.C. 5224)]:

The appellant, together with an associate, both of whom were experienced operators in the field of real estate, bought vacant land in 1952, incorporated two companies to hold the land in two parcels, built on one parcel a store in the year 1953 and sold the store shortly before completion to Dominion Stores. The other parcel they sold at about the same time to a single purchaser. The mode of sale in each case was by way of shares, the appellant and his associate being equal shareholders in the two companies. The appellant claims that he made a capital gain. The Minister of National Revenue assessed the profit as income. The judgment of the Exchequer Court was that the profit was income. I flesh this out by adding that title to 10 acres was acquired in trust for the appellant and his associate by their solicitor on October 31, 1952, and title to an additional 113 acres was acquired in the same way on January 2,1953. On March 15, 1953, Aidershot Investments Ltd. was incorporated and on June 1, 1953, the company accepted an offer by the solicitor to sell it 36.17 acres. The land was conveyed to the company and it issued preference shares to the appellant and his associate. They also acquired some common shares. On November 18, 1953, Aldershot Realty Ltd. was incorporated. On March 1, 1954, the balance of the property was conveyed to the company and it also issued shares in the manner just described.

Judson, J. concludes his reasons for judgment in these words at page 5226:

Some point was made of the fact that the appellant did not in one case sell a store and in the other case vacant land but shares in two companies. I agree with Cameron, J. that this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact that they incorporated companies to hold the real estate makes no difference (Associated London Properties Ltd., supra).

Mr. Justice Cameron who heard and disposed of the case in the Exchequer Court, [1963] C.T.C. 130, 63 D.T.C. 1083, said at page 140 (D.T.C. 1088):

Counsel for the appellant stressed the fact that the profits made by the appellant were not made by the sale of the land but by the sale of shares received on the transfer of the land to the two companies. That profit, it is said, is a capital profit. I cannot agree with that submission. In my view, the appellant and Grisenthwaite, instead of selling the land as they might have done, adopted another method, namely, to cause two companies to be incorporated, sell the land for shares in these companies, and then sell the shares so received. That was the particular alternative method they chose to adopt in their real estate transactions.

This is immediately followed by the quotation already cited from the reasons for judgment delivered by Lord Greene in Associated London Properties, Ltd., supra. [12]

Initially there was also an issue about certain legal fees, but counsel for the litigants subsequently entered into an agreement in writing about this. The substance of that agreement will be reflected in the formal judgments.

Appeals dismissed.