Georgetown Investments Limited v. Minister of National Revenue, [1990] 2 CTC 2232, 90 DTC 1728

Sarchuk, T.CJ.:—Georgetown Investments Ltd. (Georgetown) appeals from reassessments of tax with respect to its 1979, 1980, 1981 and 1982 taxation years. The appellant is a company incorporated under the Companies Act of British Columbia. At all material times Dr. John Ho-A-Shoo owned 80 per cent of the shares of Georgetown Investments Ltd. and was its president while Esther Ho-A-Shoo, his wife, held the remaining 20 per cent. Dr. Ho-A-Shoo is a dental surgeon. Esther Ho-A-Shoo earned a B.Sc. (Home Ec.) degree and is entitled to practice as a dietician. Both reside in the City of Vancouver. A number of disparate issues were raised by the appellant and I propose to deal with the evidence and arguments respecting each matter separately.

A. Unreported Management Income

The respondent reassessed the appellant by including in its income the amount of $3,600 as unreported management income in each of its 1979, 1980, 1981 and 1982 taxation years. The respondent also levied penalties pursuant to subsection 163(2) of the Income Tax Act (the "Act") in respect thereof on the basis that the appellant knowingly or under circumstances amounting to gross negligence made, participated in, assented to or acquiesced in the making of omissions in its returns of income for those years whereby the tax payable by it was less than the tax otherwise payable. The appellant does not object to the inclusion of the aforesaid amounts in its income but maintains that there is no justification for the imposition of the penalties in the circumstances.

For a number of years Dr. Ho-A-Shoo has carried on the practice of dentistry in Vancouver. In or about 1970 he incorporated Georgetown as an investment and management vehicle. It is not disputed that Georgetown provided certain services to the practice. At all relevant times Mr. S.F. Avis, chartered accountant, attended to the books of Georgetown while that service was provided for the dental practice by one Mr. Van der Voort, a certified accountant.

The testimony of Avis as well as that of Dr. Ho-A-Shoo and of Mr. W.D. McCartney, a chartered accountant retained by Georgetown following the reassessments, established that commencing several years prior to 1979, the first of the taxation years in issue, a management fee was accrued as an expense in the books of the practice. A corresponding fee was taken into the income of Georgetown. There never were any cash payments. During the taxation years in issue the management fee continued to be accrued on the books of the practice but for some inexplicable reason the corresponding income side was not accrued in the books of Georgetown. In his testimony Avis recalled including the management fee in the books of Georgetown in previous years and that he obtained the necessary information orally either from Van der Voort or Dr. Ho-A-Shoo. He could not account for the failure to include the management fee in the taxation years in issue and conceded that he failed to make a general inquiry to establish whether similar income from a close source of this nature had been received in any of the taxation years in issue. He put this down to a simple oversight. Evidence was also adduced that the management fee formed but a small portion of the appellant's income during those years.

Counsel submitted that it was quite conceivable that both the appellant and the directors would not even know that this amount was not being accrued. Counsel also contended that there was no knowing omission or misrepresentation and that the penalty ought to be vacated.

I agree. Counsel for the respondent, in my view, quite correctly conceded that on the basis of the evidence before the Court it would be difficult to support a conclusion of gross negligence.

B. Bad Debts-Education Loans

In March 1987 the appellant refiled its 1980 income tax return and claimed additional expenses for bad debts amounting to $72,753.72. It also claimed bad debt expenses of $14,900 in its 1981 taxation year and $17,502.47 in its 1982 taxation year. In each case the deductions claimed were amounts purportedly loaned by it to the children of the shareholders Dr. John and Esther Ho-A-Shoo for their education costs, which said loans had not been repaid.

The respondent disallowed the deduction of these amounts and imposed penalties pursuant to subsection 163(2) of the Act. The reassessment was made on the basis that the bad debts claimed were education advances to the children of the appellant's shareholders and were not amounts expended to gain or produce income from a business or property. The appellant does not contest the disallowance of these, amounts but maintains that there is no justification for the imposition of the penalties.

Testimony on this issue was adduced on behalf of the appellant from Dr. and Mrs. Ho-A-Shoo and from Mr. W. Terrence Plummer (Plummer), a business associate of Dr. Ho-A-Shoo's. The respondent called Avis and Mr. Robert

L. Card. The impugned transactions arose in the following manner.

Commencing in 1976 various expenses incurred by the three Ho-A-Shoo children with respect to their attendance at universities in the United States had been paid by Georgetown. From 1976 to 1978 inclusive these expenses had been debited by the appellant to Dr. Ho-A-Shoo's personal account. In 1979 Dr. Ho-A-Shoo became involved in certain gold mining ventures, in the course of which he met Card, who was to be secretary of a syndicate to be formed. Card, now a financial consultant, was at that time employed as an auditor with Revenue Canada, a position he held until approximately the end of May 1980. In his testimony Dr. Ho-A-Shoo recalled a meeting attended by Card, Plummer and himself during the course of which the conversation turned to potential tax liabilities, particularly those of Georgetown. He said that although there was nothing in particular with respect to the 1980 taxation year of Georgetown which led him to seek Card's advice on the subject of "tax deductions", he engaged him in a conversation to that effect in the course of which he mentioned that one of his major expenses was the children’s tuition and board in the United States. He asserted that Card advised him if he could properly document the university’s expenses "you could get tax deductions."

Dr. Ho-A-Shoo says he then approached his accountant, Avis, and told him that an official at Revenue Canada had indicated that the payments made in respect of the children’s expenses could be deducted by Georgetown in its calculation of income for tax purposes. According to Dr. Ho-A-Shoo, Avis advised him that he was not aware of anything in the Act whereby such deductions were permitted but notwithstanding that view agreed to ”. . . put it in and if the income tax says well, it is not deductible, well then we will stop doing it.” Dr. Ho-A-Shoo also said that he provided Avis with Card's telephone number and suggested that he confirm the advice given by Card. He added that he was not concerned whatsoever about the conflicting opinions received from Avis and Card as to the deductibility of these amounts.

With respect to the mechanics of the transaction Dr. Ho-A-Shoo asserted that it was Avis who suggested that the amounts be treated and recorded as loans and that his sole instruction to Avis was to have the appellant claim it as a deduction. He was not concerned with the form in which that deduction was to be claimed or the manner in which it was to be entered in the books of Georgetown. Dr. Ho-A-Shoo recalled only that the payments were shown as a loan on the books of Georgetown and that promissory notes were drawn up and were signed by his children. The only explanation ever given by him to the children was that the promissory notes were required for income tax purposes.

In his testimony Avis said that in 1980 the business of Georgetown was reasonably successful, and in discussing the preliminary findings for the year with Dr. Ho-A-Shoo it was determined that Georgetown would be required to pay tax. It was then that Dr. Ho-A-Shoo raised the question of education expenses and their deductibility. He told Avis that an education loan would be allowable as a corporate expense and that advice to that effect had been given to him by Card, an acquaintance who worked for the Income Tax Department.

Mr. Avis steadfastly maintained that the suggestion that Georgetown deduct the education expenses was first raised by Dr. Ho-A-Shoo and that in response he expressed the opinion that he did not know of any manner in which that would be allowed under the Act. He recalls being referred to Card and that upon Dr. Ho-A-Shoo's urging he attempted to call him on several occasions, albeit unsuccessfully. Avis advised Dr. Ho-A-Shoo that he would look into the suggestion and then conducted what he described as a very cursory investigation, the results of which he could not recall. Avis testified that ultimately the advice that he gave to Georgetown and to Dr. Ho-A-Shoo was that "if he wished to have them done, the return would be prepared on that basis.”

Avis carried out Dr. Ho-A-Shoo's instructions by aggregating the education expenses paid by Georgetown but previously debited to Dr. Ho-A-Shoo's personal account to the end of the 1980 fiscal period. The total, $72,753.72, was then shown in the books of Georgetown as a journal entry, dated April 30, 1980 with the following notation: "To record loans by Georgetown to Allan, Raymond and Deanne Ho-A-Shoo." A further reference: "see attached notes" indicates that at one point of time the promissory notes executed by the children were to be attached to the journal.

The next relevant item in the books of Georgetown is the notation "To set up provision for loss" which was described as follows by Mr. McCartney: “It would appear that what they have done is they have set up a loan account and then they have made a subsequent journal entry to write that loan off as a bad debt.”

When asked how the loans had been treated by Georgetown for income tax purposes McCartney advised: "Again, they were set up originally as a loan, and they were subsequently determined to be uncollectible and treated as a bad debt. And they were written off for tax purpose as a bad debt.”

With respect to the amounts expended on behalf of the children's education to April 30, 1981 and April 30, 1982 the same approach was used, except that the amounts paid by Georgetown in these years was not first debited to Dr. Ho- A-Shoo's personal account.

When Avis was asked whether he formed an opinion that these items were expenses of the company he equivocated, limiting his response to the com- ment "They were loans and they were basically uncollectible accounts. . .". He affirmed that they were treated as uncollectible accounts in the same year that the journal entries were made.

Robert Card also testified. He recalled attending one meeting at the Ho- A-Shoo residence with regard to a gold mining syndicate, during the course of which Dr. Ho-A-Shoo mentioned certain costs he was incurring with respect to his children and asked whether there was any method of dealing with them. Card urged that Dr. Ho-A-Shoo discuss the matter with his accountant and since he appeared to have a number of business enterprises may have suggested that if his children were working for these enterprises he could consider paying them a reasonable salary. Card also said that as an auditor with Revenue Canada he was constantly besieged with requests for advice and that his standard reply was "make sure you save your receipts and put a full explanation and the government will allow you to write-off your business expenses". Card specifically denied being asked by Dr. Ho-A-Shoo whether Georgetown could be used to pay for educational expenses and denied that he responded that if it was properly documented it would be acceptable. He added that he was not even aware of the existence of Georgetown at that time.

Plummer attended this meeting as well, however, his evidence as it relates to this issue was of negligible assistance.

The position of the appellant is that the respondent has failed to demonstrate the requisite degree of negligence to warrant the imposition of a penalty. Counsel submitted that Dr. Ho-A-Shoo, insofar as tax matters were concerned, was not particularly knowledgeable. Although Georgetown was incorporated Dr. Ho-A-Shoo conceptually had difficulty in separating his own business activities from those of Georgetown. This lack of sophistication led him to consult and rely on professionals. He spoke to Card, and based on the information he says he received from him, discussed the possibility of flowing these expenses through Georgetown. His consultations with his accountant Avis, produced an equivocal answer to the effect that it might or might not be accepted, but if it was not it would simply be disallowed. That was sufficient to disabuse him of any impropriety in having Georgetown's returns prepared and forwarded on that basis. Counsel argued that given Dr. Ho-A-Shoo's background it would be inappropriate in such circumstances to impose penalties.

I cannot accept the appellant's submissions. Let me say at the outset that the testimony of Dr. Ho-A-Shoo, Card and Avis was in each case coloured to some extent by self interest. However given the choice I am more inclined to accept the Avis-Card version of events than that of Dr. Ho-A-Shoo. The latter is not as unsophisticated in tax matters as he would have the Court believe and I am satisfied that he was well aware of the misrepresentations required to enable Georgetown to claim the education costs as expenses.

The simple fact of the matter is that Georgetown never advanced any funds to the Ho-A-Shoo children on the basis that they were loans which were to be repaid. Dr. Ho-A-Shoo's evidence was that as far as he was concerned Georgetown did not expect to be repaid at the time the funds were advanced. Neither he nor Georgetown ever asked the children to repay these amounts. The only purpose Dr. Ho-A-Shoo had in mind when he asked his children to execute promissory notes was to obtain "proper documentation of the expenses" and the only explanation provided to them with respect to the promissory notes was that they were required for income tax purposes. When cross-examined about the possibility of repayment of these amounts Dr. Ho-A-Shoo conceded that the understanding was that the only time the children might have to pay anything was if the Income Tax Department did not accept the notes and Georgetown had to pay income tax, and even then only to the extent of the amount of additional tax so incurred.

I am satisfied that the advances made by Georgetown to the children were never intended to be loans, should not have been recorded as such in the books of Georgetown and it follows that since no debtor/creditor obligation had been created the amounts could not properly be treated as uncollectible debts. In my view the appellant in claiming the deductions it did in relation to the amounts advanced to the children of its shareholders knowingly made false statements in its returns of income filed for its 1980, 1981 and 1982 taxation years. That being the case, the respondent quite properly levied penalties pursuant to the provisions of section 163 of the Act.

C. Crestwood Guest Home Capital Cost Allowance Issue

1. The respondent disallowed capital cost allowance in respect of the Crestwood Guest Home (Crestwood) claimed by the appellant in computing its income for its 1979 to 1982 taxation years inclusive. In so reassessing the respondent reallocated the purchase price of $600,000 paid by the appellant and its partner in July 1977 to the land, building and chattels as follows:

At the commencement of the trial counsel for both parties advised me that this issue had been resolved and the matter is to be referred back to the respondent for reconsideration and for a reassessment of the capital cost allowance to be allowed to the appellant on the basis that the purchase price is to be allocated as follows:

2. With respect to capital cost allowance one further issue was raised. In 1981 the appellant acquired the one-half interest in Crestwood owned by its partner. It included the building and Class 6 assets for the purpose of capital cost allowance. The respondent treated the acquisition as an addition to Class 3 assets. The appellant initially maintained that the respondent erred in so doing and adduced evidence in support of its position.

At the conclusion of the trial counsel advised the Court that he did not intend to deal with this issue and that the appellant was abandoning its position.

D. Mountainwood Project; Quatsino Copper; Rose Syndicate; Rosedale Syndicate

Counsel for the appellant argued that all four transactions resulted in expenses being incurred which could be characterized as business losses or losses arising from an adventure in the nature of trade and suggested that Georgetown's activities with regard thereto could in a sense be viewed globally. Counsel also treated the Quatsino Copper, Rose Syndicate and Rosedale Syndicate matters as a continuing or inter-related transaction.

I am not entirely satisfied that it would be appropriate to accept this approach in its entirety. I propose instead to first consider the evidence and submissions relating to the Mountainwood Project. Then I will review the circumstances giving rise to the Quatsino “bad debt" issue and to the Rose and Rosedale Syndicate claims.

Before proceeding, some comments as to the nature of the appellant's business activities during the taxation years in issue and prior thereto are warranted. Georgetown was incorporated by Dr. Ho-A-Shoo and his wife in or about 1970 as a direct result of changes to the Income Tax Act which had the effect of limiting the deduction of certain expenses to individuals. From its inception, Georgetown was an investor in real estate with its primary interest being rental properties in the Vancouver and Seattle areas. In 1979 it owned the Camby Private Hospital, the Crest Motor and Trailer Park, the Laura Court, the Kingsway Apartments and had an interest in the Crestwood Guest House. At one time the appellant also owned the Seyom Apartments in Merritt, British Columbia and a project referred to as University Village in the Seattle area. At various times properties were sold or were traded to acquire new and better properties and in all instances the gain therefrom was reported for income tax purposes on capital account. Although Dr. Ho-A-Shoo also asserted that the appellant was in the business of lending money, I do not believe that was the case. The advances on behalf of the children were not loans and one other example given by Dr. Ho-A-Shoo amounted to no more than a guarantee by the appellant of a co-venturer's loan. On the evidence it is fair to conclude that prior to its involvement in Quatsino Copper and the Rose and Rosedale Syndicates virtually all of the appellant's transactions were rental property investments.

I turn now to the transactions in issue.

(i) The Mountainwood Project

In 1980, the appellant claimed an expense of $106,319.93 with respect to an “abandoned development". This related to an agreement by the appellant to purchase an apartment complex known as the Mountainwood Project (Mountainwood). The respondent allowed the appellant a capital loss of $53,160 in respect thereof.

Mountainwood was a 600-suite apartment building developed by Abacus Cities (Abacus) near the Simon Fraser University in the Municipality of Burnaby. According to Dr. Ho-A-Shoo the appellant had sold two of its rental properties, Laura Court Apartments and the Crest Motor and Trailer Park and was in need of "a tax write-off" before December 31, 1979. In the same year, Abacus was placed in receivership and the appellant through its agent, Pemberton Realty, approached the receiver in an attempt to acquire Mountainwood. The purchase price was $13.1 million. At the time Georgetown attempted to purchase the property the buildings had been completed and apparently all 600 units were occupied by tenants. Interim financing was being arranged by Pemberton Realty and, according to Dr. Ho-A-Shoo, the assurance from Pemberton regarding the loan was so convincing that the appellant agreed to put up a non-refundable deposit of $100,000. Counsel was retained by the appellant and documents were prepared in order to complete the transaction. Unfortunately for some reason the promised financing failed to materialize, the transaction could not be completed and the deposit was forfeited.

Counsel for the appellant submitted that the principal activity of Georgetown after its incorporation was without doubt the acquisition of various buildings and apartments as long-term investments in real property. However, counsel also argued that in 1978,1979 and 1980 the appellant became very active in what he called the venture capital area and was increasingly involved in a number of situations which were unquestionably speculative in nature, more particularly the Mountainwood project, the Quatsino Copper share purchase and the Rose and Rosedale gold mining ventures.

Mr. Little distinguished the real estate transactions in which the appellant had been involved since its incorporation on the basis that those were longterm investments acquired for that purpose, as contrasted to Mountainwood, Quatsino, Rose and Rosedale. With specific reference to Mountainwood, counsel argued that this transaction differed from the appellant's normal real estate activities and that the Court ought to accept Dr. Ho-A-Shoo's testimony that the acquisition of Mountainwood was intended solely for the purpose of a quick resale at a large profit. Mr. Little argued that notwithstanding the fact that Mountainwood was a sound investment from the point of view of the fact that it was a building fully occupied, it was nonetheless a high risk acquisition because of the high level of financing contemplated. He urged the Court to accept the intention expressed by the appellant's major shareholder, the circumstances surrounding the acquisition of Mountainwood, and the taxpayer's more recent involvement in "risk ventures" to conclude that the losses incurred in this transaction were expenditures made in the course of an adventure in the nature of trade.

With respect I cannot accept Dr. Ho-A-Shoo's assertions that the possibility of reselling Mountainwood swiftly at a profit was the motivating factor in the appellant's mind when it entered into the transaction. Such a conclusion is not supported by other facts. The appellant has no history of dealing with real estate as a speculator would. There is little evidence supporting counsel's submission that the acquisition was so highly financed as to suggest a speculative intent. It is significant that when the Mountainwood project fell through, the appellant again through Pemberton Realty, purchased 55 three bedroom units in Surrey, British Columbia from Abacus’ receiver at a price of approximately $608,000,00. These properties, Dr. Ho-A-Shoo admitted, were held by the appellant "maybe six years, seven years maybe”.

Dr. Ho-A-Shoo's testimony with regard to the appellant's intention was, quite frankly, unsatisfactory. As previously mentioned the appellant at various times sold properties or traded them to acquire other rental properties. In all instances the gains therefrom were reported for tax purposes as being on capital account. Dr. Ho-A-Shoo's attempts to distinguish the purpose underlying the various property acquisitions made over the years and the appellant's consistent treatment of them as capital properties were lame. The evidence before me falls short of meeting the onus on the appellant to establish that the loss incurred by it was not incurred on account of capital.

(ii) Quatsino Copper (Facts)

In 1980 the appellant claimed the amount of $75,000 as an expense with respect to a “bad debt” arising out of its involvement with Quatsino Copper- Gold Mines Ltd. The respondent allowed the appellant a capital loss in respect thereof.

Quatsino Copper is a public company listed on the Vancouver Stock Exchange. Its major assets were asserted to be gold, silver, copper and coal mining leases. Although Dr. Ho-A-Shoo's evidence was again unclear, from his comments and from the testimony of Plummer, it appears that the appellant's initial involvement in Quatsino preceded its involvement in the Rose Syndicate.

Dr. Ho-A-Shoo was approached by the promoters of Quatsino to invest in their company by purchasing shares. Just when this occurred is not certain but it must have been prior to 1979. The appellant purchased a number of shares in Quatsino at different times and at different prices, ultimately acquiring approximately 750,000 shares at a total cost of $75,000. These shares were purchased at a discount and the manner of acquisition rendered them subject to Vancouver Stock Exchange rules which required the shares to be held in escrow and which precluded Georgetown from reselling the shares for a period of one year. By the time Georgetown received the shares the stock was worthless. In Dr. Ho-A-Shoo's words at some point thereafter “It (Quatsino) was knocked off the Exchange", and subsequently, to the best of his knowledge was struck off by the Registrar of Companies. The appellant owns the shares to this date.

(iii) Rose Syndicate (Facts)

At the outset I should note that Dr. Ho-A-Shoo's testimony regarding the Rose and Rosedale transactions was extremely difficult to follow, in part because of the weakness of his recollection of events, and in part because of the difficulties he had, as indeed did other witnesses and counsel, with the similarity in names. This all too often led to references to the Rosedale Syndicate when the Rose transaction was being discussed and vice versa.

In taxation year 1980 the appellant claimed expenses for bad debts with respect to the amount of $82,511 advanced by it to the Rose Syndicate. The respondent allowed the appellant the capital loss on the basis that the funds had been advanced for a capital investment and were not advanced in the course of an adventure in the nature of trade.

Although the pleadings suggest that both the Rose and Rosedale Syndicates were formed in 1980 that does not appear to be entirely correct. As noted, Dr. Ho-A-Shoo's testimony as well as that of Robert Card was vague on details, including dates, Plummer also testified with respect to the Syndicates and it is principally from his evidence that I piece together the following sequence of events. Since approximately 1975 Plummer owned a company that built gold mining equipment. In the course of its business he became involved with Quatsino and through that connection became acquainted with Dr. Ho- A-Shoo who was, to his knowledge, a shareholder of Quatsino. In or about 1979 Dr. Ho-A-Shoo produced an engineering report from the Quatsino engineer which suggested that there were relatively high gold values on a particular property that Quatsino had under option. As a result of further discussions the appellant, Plummer, Walter B. Plummer and Robert L. Card entered into an agreement to participate, as the Rose Syndicate in a program designed to bring into commercial production a placer lease located near Hope, British Columbia. The interest of the appellant in the Syndicate was 50 per cent. Plummer's company was to supply the equipment for the operation. The result of the Rose Syndicate project was in Plummer's words: "We dug a great big hole on the side of the Fraser River and the engineering report was invalid. There wasn't, there was very little gold there, unfortunately."

It was his recollection that the project was commenced in the spring of 1979 and was closed down approximately six months later.

Dr. Ho-A-Shoo described the project as: “Really we were going to go in the Fraser River and with a new sluice box and try and get some gold from the placer in the River."

He recalled that Georgetown advanced some $82,511 to finance this program but in very short order it was: "a total disaster because we had to use lots of water, and the sluice box I do not think was designed for what they call ‘flour gold'; you could see, when the sun shines on the water, the gold washing away."

A formal joint venture agreement had been prepared by the parties (Exhibit A-3) but was never executed since; as Dr. Ho-A-Shoo observed: "By the time this was prepared by Mr. Munro the mining corporation had collapsed . . . the Syndicate had collapsed."

Rosedale Syndicate (Facts)

After the Rose Syndicate collapsed Plummer made arrangements with other parties to transfer all of its assets to the Yukon for use in another project. The arrangement with respect to this property was, as Plummer noted, quite convoluted and difficult to explain. Suffice it to say that one Luis Bankovsky was the lessee of certain placer claims owned by Kluane Resources Ltd. In the summer of 1979 Bankovsky entered into an agreement with the Rosedale Syndicate (consisting of Dr. Ho-A-Shoo, Plummer, Elmer Fogarassy and Norm Smalley) to finance, supply equipment, operate and manage the said mine claim (Exhibit A-2, Sch. B). It appears that as a result of this arrangement the Rose Syndicate assets consisting of one large sluice box, electrical generators, pumps and other similar equipment were "rolled into this other arrangement". Whether there was any consideration for the transfer of these assets from the Rose Syndicate to the Rosedale Syndicate is, on the evidence before me, quite uncertain. Dr. Ho-A-Shoo has virtually no recollection as to the basis on which the assets were transferred from the Rose Syndicate to the Rosedale Syndicate. He recalls only that in all instances it was the appellant who advanced funds to the Rosedale Syndicate and the equipment was sent to the Yukon with the objective of the arrangement to mine for coarse gold. This project was to be managed by Messrs. Fogarassy and Smalley.

At some point of time in 1979 a further agreement was entered into (Exhibit A-2) by the Rosedale Syndicate (carried on by Dr. Ho-A-Shoo, W.T. Plummer and others); Dr. John S. Ho-A-Shoo and Plummer, described as “the Partners"; Kluane Gold (carried on by Hugh McFarland and others) and Hugh McFarland in his personal capacity. By virtue of this agreement Rosedale granted an option to Kluane to purchase all its right, title and interest in the mining agreement between Bankovsky and the Rosedale Syndicate and in certain tools, other equipment and other chattels located on the claim site. In the event the option was exercised the purchase price for the Rosedale Syndicate's interests as above described was to be the sum of $800,000 to be paid by way of a series of four cash payments, the last one to be made on or before May 1, 1980. With respect to this option Dr. Ho-A-Shoo's understanding was that it came about when one of the Syndicate partners, Fogarassy, indicated that he had found a buyer for the whole operation, Mr. Orville B. Berkinshaw, a Calgary entrepreneur.

No direct evidence was adduced as to when the option was exercised although it seems certain that it was. Furthermore from the testimony of Plummer and Dr. Ho-A-Shoo I conclude that no cash was ever received by the Rosedale Syndicate or by the individual members or by the appellant. It is a fact however that a promissory note in the amount of $720,000 was issued by Kluane Gold in favour of the Rosedale Syndicate (Exhibit R-3). This took place in January 1980.

Both Plummer and Dr. Ho-A-Shoo referred to a meeting in Vancouver at which certain documents, including the Kluane Gold option were executed, and the promissory note was produced. Plummer recalled the events as follows:

Mr. Paris: And in exchange for rolling these assets or transferring these assets to the Rosedale Syndicate you had a three or four per cent interest in that?

A.: In the new venture.

Q.: In Rosedale?

A.: Yes. I think that the way it's structured.

Q.: Did you ever receive any money from Kluane Gold when you [sic] exercised that option?

A.: No.

Q.: Did you get a promissory note from Kluane?

A.: I was involved in the meeting when all those documents were signed, and that was here in Vancouver.

Q.: All of those documents?

His Honour: Which meeting and which documents?

Mr. Plummer: Okay, now we're talking about when Kluane Gold —

Mr. Paris: Exercised —

A.: —on paper, on paper signed a contract to acquire and purchase for $800,000 the total assets and the property that was involved in the mining situation.

Q.: You say "on paper" because nothing ever came of it?

A.: Because nothing ever came of it.

Q.: Did you get an interest in the promissory note or did you get a promissory note?

A.: I've still got copies of it, but I didn't have any money to pursue it at that particular time. And John did pursue an action.

At that meeting I wouldn't sign it unless we got a promissory note from one of the better heeled individuals in that meeting, and that happened to be a fellow by the name of Berkinshaw. And so he did obtain a personal guarantee from Orville Berkinshaw, who is a, he had a huge amount of stock in a company that was doing very well in the market at that time, "Fera", and which was an oil company listed in Vancouver but both their assets were in Alberta.

By the time we had a chance to pursue that, he rolled down most of his assets —

Q.: We being?

A.: John and I met with a lawyer here, and we did get a default judgment against Orville Berkinshaw.

Q.: What year was that?

A.: I would think it was probably 1981 or 1982.

Q.: Do you, by any chance, have a copy of the default judgment?

A.: That would have been, John would probably have that. He was paying the lawyer. He kept me verbally apprised of where we were. But we did get a judgment of it. But by that time it was a year or two after the fact and Berkinshaw was very difficult to track, unfortunately.

The promissory note it must be noted, was not issued by Berkinshaw but he did endorse the note as guarantor both in his personal capacity and for Yukon Placer Gold Inc. There is no reference in this note to the appellant.

With respect to the suit on the promissory note the testimony was vague as to the parties involved. Although Dr. Ho-A-Shoo alleged that the suit was commenced by Georgetown he was unable to say how it obtained an interest in the note, if indeed it had one. None of the documents relating to this suit were before the Court, although they clearly exist. There was some evidence that default judgment had been obtained against Berkinshaw but no further steps appear to have been taken. Dr. Ho-A-Shoo said that the action had been commenced on a contingency fee basis by a solicitor with whom the appellant subsequently had a disagreement. Another lawyer was then retained. Although that occurred in 1985 and no activity had taken place since then it was nonetheless the appellant's intention to pursue the matter.

Appellant's Submissions re Quatsino, Rose and Rosedale

I previously referred to the primary submission advanced by counsel for the appellant to the effect that in or about 1979 and 1980 the appellant changed its investment strategy and became very active in the venture capital area. The situations in which it became involved in 1979 and 1980 were according to Mr. Little unequivocally speculative and were classic adventures in the nature of trade. With respect to Quatsino counsel submitted that Dr. Ho-A-Shoo's testimony established that the shares were purchased at a discount with the intention of reselling them at a profit in circumstances and in a manner similar to that of a trader in stocks. Counsel described the Rose Syndicate mining project as highly speculative with potential for quick profit which, had it occurred, would undoubtedly have been taxed in the appellant's hands as income. The Rosedale Syndicate was claimed to be an extension of the Rose Syndicate venture and its purpose was in Mr. Little's words: ”. . .tied in with the option that it entered into with Kluane Gold. And Kluane exercised the option and the Syndicate's properties and assets were either sold for $720,000 if you look at the promissory note, or $800,000 if you look at the agreement. . .”.

He argued that this amounted to a quick flip of the mining property and that if the promissory note "had been good Revenue would have taxed the entire amount". Counsel submitted that the respondent erred in allowing no more than a capital loss in respect thereof. He referred the Court to the decision of the Supreme Court of Canada in M.N.R. v. Henry J. Freud, [1969] S.C.R. 75; [1968] C.T.C. 438; 68 D.T.C. 5279 and in particular the comments of Pigeon, J. at page 444 (D.T.C. 5283):

In my view, the payments made by respondent could not properly be considered as an investment in the circumstances in which they were made. It was purely speculation. If a profit had been obtained it would have been taxable irrespective of the method adopted for realizing it. Such being the situation, these sums must be considered as outlays for gaining income from an adventure in the nature of trade, that is a business within the meaning of the Income Tax Act, and not as outlays or losses on account of capital.

Counsel urged the Court to reach the same conclusion with respect to the Rose, Rosedale, Quatsino and Mountainwood projects. Each, he said, was a highly speculative financial transaction not at all similar to the regularly occurring and normal real estate investments previously made by the appellant.

Conclusions

On the evidence adduced the appellant cannot succeed with respect to its claims regarding Quatsino, Rose and Rosedale. The transactions are, for several reasons, distinguishable and for that reason I have considered each in light of its own peculiar facts.

Quatsino

With respect to Quatsino I am satisfied that the appellant acted as an investor and not as a dealer or trader in stocks and bonds. The evidence as a whole fails to support an argument that the appellant considered the shares to be no more than trading assets nor does it support the contention that the transaction was an adventure in the nature of trade.

Dr. Ho-A-Shoo's testimony that the appellant's intention with respect to the purchase of the shares was “Well, the plan was that, to sell off and to get back my money and make a profit" is simplistic and not consistent with other facts. At the time the appellant acquired the shares, it was aware of the nature of Quatsino's activities. Its president and principal shareholder, Dr. Ho-A-Shoo, accepted a directorship with Quatsino and, as I understood Plummer's testimony, became actively involved in promoting the development of some of Quatsino's leases. Furthermore, it was aware that given the circumstances under which it acquired the shares, it would be precluded from disposing of them for a substantial period of time. It is not possible on these facts to find that the appellant intended to make a temporary incursion into the stock market and to realize a profit as soon as it was possible to do so. The appellant’s conduct in this transaction is more consistent with an intention to assist in making Quatsino a successful company, to ultimately derive income therefrom by way of dividends, and to benefit from the appreciation in share value which would logically follow. The fact that there may not have been any immediate likelihood of dividends being paid does not have that much significance in these circumstances.

Rose Syndicate

With respect to the Rose Syndicate I have concluded that the funds advanced by the appellant were a capital investment. I am cognizant of the fact that this transaction was different than the real property investments previously made by the appellant and that involvement in gold mining can be highly risky, however I am not persuaded these facts alone put the transaction in the category of an adventure in the nature of trade. The evidence established that the appellant was investing with its co-venturers in an effort to bring into commercial production the placer lease acquired from Quatsino. Their agreement required the parties to provide all working capital necessary for that purpose. Furthermore, it expressly stated that the Syndicate was constituted for the purposes of exploring, developing and mining, not only the specific property referred to, but also any additional properties adjacent thereto which it had the right and authority to explore, develop and mine. The project undertaken can readily be distinguished from the facts in Freud, supra, cited by counsel. In that case, as Pigeon, J. pointed out, the basic venture was not the development of a sports car with the view to the making of profit by going into the business of selling cars, but with a view to a profit from the sale of the prototype. On the other hand the agreement entered into by the members of the Rose Syndicate was for the development and operation of a placer mine. This strongly suggests an intention on the part of the Syndicate to profit through the production and sale of gold. Clearly the Syndicate's intention was to derive income from their investment on an ongoing basis. No other conclusion can readily be reached.

Rosedale Syndicate

I turn next to the Rosedale Syndicate. In 1980 the appellant claimed expenses for “bad debts” in the amount of $29,998.97 resulting from its alleged participation in this Syndicate. The respondent disallowed the claim on the basis that in 1980 the appellant was not a member of the syndicate and that any funds advanced by it were not expenditures made or incurred to earn income from business or property but were advanced on behalf of the appellant's shareholder, Dr. John Ho-A-Shoo, who was a member of the Syndicate.

I have concluded that the appellant has failed to demonstrate error in the Minister’s reassessment. The evidence adduced creates a good deal of doubt as to the involvement of the appellant in this Syndicate. On the one hand we have the evidence of Dr. Ho-A-Shoo that Georgetown was the source of certain funds advanced to the syndicate and his assertion that, as was the case in the Rose Syndicate, it was always intended that the appellant be a member of Rosedale. He also asserted that he had no personal involvement. As to the comfort letter provided by Plummer to Georgetown in 1983 setting out his “understanding that" the “entire investment in the Rosedale Syndicate was on behalf of Georgetown" I note only that in cross-examination Plummer conceded that because of his reduced interest in the Syndicate he was not responsible for its books and accounts. His "understanding" based as it was on hearsay is of little assistance to the appellant.

Unfortunately for the appellant other evidence, including certain relevant documents, is inconsistent with Dr. Ho-A-Shoo's assertions. Exhibit A-2, which consists of several agreements, names Dr. Ho-A-Shoo as a Rosedale Syndicate member but makes no mention of Georgetown. The option agreement with Kluane refers to the Rosedale Syndicate as being "carried on by Dr. John A.Ho- A-Shoo, W.T. Plummer and others" but again makes no mention of the appellant. Dr. Ho-A-Shoo and Plummer were also parties to this agreement in their personal capacity (and were described as "the Partners, parties of the second part"). No satisfactory explanation of this inclusion was forthcoming. Dr. Ho- A-Shoo's comment that some other person drew up documents which failed to reflect the true state of affairs is difficult to accept. Furthermore I reject his testimony that the promissory note from Kluane Gold was received by him on behalf of the appellant. Although the funds advanced to the Syndicate proba- bly came from the appellant on the evidence available it is not possible to conclude with the degree of certainty necessary that it and not Dr. Ho-A-Shoo was the member of this Syndicate.

The appellant's case founders on another point. The amount of $29,998.97 was claimed by the appellant in taxation year 1980 as an expense "for bad debts”. The note was dated January 22, 1980. The evidence of Dr. Ho-A-Shoo, confirmed to an extent by that of Plummer, was that several years later litigation was still being pursued against Berkinshaw, the guarantor. Dr. Ho-A-Shoo was adamant that he intended to revive the action. The evidence fails to establish that any debt was owing to it at the end of the taxation year in issue and quality fails to establish that the debt, if it existed, became a bad debt in that year.

In view of these conclusions I do not find it necessary to make any findings as to the characterization of the Rosedale Syndicate transaction.

In summary, the appeals of Georgetown Investments Ltd. are allowed without costs, and the matter referred back to the respondent for reconsideration and reassessment to the extent that:

(a) the capital cost allowance to be allowed to the appellant on the basis that the purchase price is to be allocated as follows:

(b) the penalties levied with respect to unreported management income of $3,600 are to be vacated.

Appeals allowed.