Taylor,
T.C.J.:—This
is
an
appeal
heard
in
Winnipeg,
Manitoba
on
November
13
and
14,
1985,
against
an
income
tax
assessment
for
the
year
1978,
in
which
the
Minister
of
National
Revenue
had
treated
an
amount
of
$162,667
as
a
“business
investment
loss/'
whereas
the
taxpayer
had
claimed
it
as
a
“business
loss.”
The
basic
circumstances
of
the
case
were
not
in
dispute,
but
the
areas
of
disagreement
are
recorded
in
the
notice
of
appeal,
and
the
reply
to
notice
of
appeal:
For
the
appellant:
—
In
1976
the
Appellant
purchased
shares
of
CROSSROADS
INDUSTRIES
LTD.,
(hereinafter
called
“Crossroads”),
and
personally
guaranteed
the
indebtedness
of
Crossroads.
—
In
1978
the
Appellant
suffered
a
loss
of
$162,667.00
as
a
result
of
having
guaranteed
the
indebtedness
of
Crossroads.
—
In
computing
his
income
for
the
1978
taxation
year
the
Appellant
claimed
the
loss
as
a
non-capital
loss
in
accordance
with
paragraphs
111(1)(a)
and
111(1)(b)
of
The
Income
Tax
Act.
—
The
loss
was
a
non-capital
loss
because
the
purchase
of
the
said
shares
of
Crossroads
by
the
Appellant
and
the
guarantee
of
the
indebtedness
of
Crossroads
by
the
Appellant
was
an
adventure
in
the
nature
of
trade
by
the
Appellant.
For
the
respondent:
—
Messrs.
Swail,
Diacos
and
the
Appellant
invested
funds
in
Crossroads
Industries
Ltd.;
—
Crossroads
Industries
Ltd.
went
into
receivership
and,
as
a
result
of
honoring
personal
guarantees
in
addition
to
the
lost
investment,
all
three
individuals
sustained
a
$162,667
loss
in
1979;
—
the
Appellant's
sources
of
income
are
salaries,
investments
and
a
farm
operation;
—
He
(the
Minister)
relied
inter
alia,
on
the
provisions
of
sections
9,
38,
39
and
111
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
as
amended
by
s.
1
of
c.
63,
S.C.,
as
it
applies
to
the
1978
taxation
year.
—
.
.
.
an
amount
of
$162,667
was
properly
disallowed
as
a
business
loss
in
the
1978
taxation
year
and
that
an
allowable
business
investment
loss
was
correctly
allowed
in
the
1979
taxation
year.
The
appellant
was
(and
remains)
president
of
R.
H.
Leslie
Real
Estate
Development
Co.
Ltd.,
from
which
source
he
earned
income
and
retained
a
keen
interest
and
knowledge
of
real
estate
matters
and
transactions
in
the
Winnipeg
area.
In
addition
he
operates
substantial
motel
developments
(which
he
owns
through
other
corporations,
and/or
with
other
individuals).
One
prominent
individual
with
whom
he
is
associated
is
the
“Diacos”
referred
to
above
—
Mr.
George
Diacos.
By
Mr.
Leslie’s
testimony
Diacos
was
effectively
a
“silent
partner”
leaving
all
management
and
decision
making
up
to
the
appellant.
The
“Swail”
referred
to
above
is
a
Mr.
Wesley
H.
Swail,
another
local
businessman.
In
addition
to
the
involvement
of
these
other
two
gentlemen
in
the
“Crossroads”
situation
a
fourth
participant
was
a
Mr.
Hassan
Leslie,
a
relative
of
the
appellant,
who
also
left
business
matters
up
to
Mr.
Leslie
(according
to
the
appellant)
and
in
fact
he
provided
Mr.
Leslie
with
a
power
of
attorney.
A
very
major
element
put
forward
by
the
appellant
with
respect
to
“Crossroads”
was
that
even
though
he
was
(at
the
times
relevant)
only
a
12
/2
per
cent
owner
of
the
shares
of
Crossroads,
he
directed
the
affairs
of
Crossroads
on
behalf
of,
or
with
the
concurrence
of,
the
other
three
named
participants
—
Diacos,
Swail,
and
Hassan
Leslie.
None
of
these
three
appeared
at
the
hearing
or
testified
in
connection
with
the
matter.
Further,
according
to
Mr.
Leslie,
due
to
the
critical
financial
situation
(imminent
collapse
or
bankruptcy)
of
Crossroads,
at
the
time
he
(Leslie)
became
involved,
the
other
shareholder
a
Mr.
Gergely,
who
did
retain
50
per
cent
of
the
shareholdings
himself,
also
accepted
and
under
stood
the
pre-eminent
role
of
Mr.
Leslie.
Mr.
Gergely
did
not
testify.
The
arrangements
for
the
appellant,
Diacos,
Swail
and
Hassan
Leslie
to
acquire
shareholdings,
guarantee
the
loans,
and
become
involved
in
Crossroads
happened
very
quickly
—
essentially
between
July
26,
and
July
28,
1976.
It
was
this
“rush”
situation
which
the
appellant
blamed
for
the
lack
of
real
documentation
or
detail
regarding
the
management
and
control
of
the
company.
According
to
Mr.
Leslie,
his
decision
to
become
involved
was
based
on
his
personal
knowledge
of
two
things
—
(a)
that
a
large
adjacent
industry
Versatile
Manufacturing
Ltd.
would
require
the
land
and
buildings
of
Crossroads
at
an
early
date,
indeed
had
made
quite
public
its
intention
to
expand
its
own
operations
to
include
that
site;
and
(b)
that
the
real
estate
(land
and
buildings
only)
of
Crossroads
was
worth
at
least
$400,000
maybe
$550,000,
and
therefore
the
“guarantees”
he
and
his
partners
were
called
upon
to
make
were
well
within
the
limits
of
the
unencumbered
portion
of
the
fixed-asset
security
available.
In
addition
it
was
(in
July
1976)
the
opinion
of
Mr.
Leslie
that
the
“equipment”
of
Crossroads
(heavy
and
special-
ized)
was
probably
worth
$150,000
more
(even
encumbered)
than
its
book
value.
A
quick
assessment
on
his
part
therefore,
was
that
if
he
and
his
partners
(Diacos,
Swail
and
Hassan
Leslie)
were
required
to
guarantee
or
provide
funding
up
to
$200,000
they
would
be
well
secured.
A
"Memorandum
of
Understanding”
dated
July
28,
1976
signed
by
all
shareholders
was
entered
as
Exhibit
A-11.
In
my
mind
it
is
a
very
important
piece
of
evidence
and
the
critical
first
two
paragraphs
are
reproduced
herein,
with
Mr.
Ger-
gely
described
as
the
"Assignor,”
and
Mr.
Leslie
and
his
partners
as
the
"Assignees”:
1.
The
Assignor
shall
cause
each
of
the
above
three
named
companies
to
issue
to
the
Assignees
(in
equal
shares)
treasury
shares
to
equal
in
number
the
present
shareholdings
of
the
Assignor
in
each
of
the
said
three
companies.
2.
The
Assignees
shall,
on
or
before
July
29th,
1976,
arrange
a
bank
loan
for
the
said
three
companies
of
$200,000.00
to
be
secured
by
a
joint
fixed
and
floating
third
debenture
of
the
said
three
Companies
together
with
a
general
assignment
in
each
instance
of
Accounts
Receivable,
or
such
other
securities
as
a
bank
may
require.
The
said
bank
loan
shall
be
further
secured
by
the
personal
guarantees
of
each
of
the
Assignees.
It
was
also
the
testimony
of
Mr.
Leslie,
that
in
his
view
the
major
problem
in
Crossroads
was
lack
of
proper
management
—
Mr.
Gerley
continuing
to
do
all
functions
—
sale,
production,
office,
etc.,
just
as
he
had
probably
done
from
the
time
he
started
the
company
specializing
in
“Tool
and
Die
Works,”
"Precision
Tooling,”
"Production
Machineries”
and
"Heavy
Equipment
Repairing.”
After
the
entry
of
Leslie
into
the
company
there
were
staff
and
management
changes,
as
well
as
a
concerted
effort
to
control
inventory
and
production,
and
to
improve
the
general
appearance
of
the
plant.
It
became
evident
quickly
to
him
that
assets
had
been
overestimated,
as
well
as
liabilities
underestimated,
and
there
were
difficulties
resulting
from
Mr.
Gergely’s
use
of
company
funds.
Substantial
additional
refinancing
was
sought
and
obtained
in
1977,
from
Tohcan
Limited
(TOHCAN),
secured
by
a
charge
against
all
the
fixed
assets
of
Crossroads,
but
also
guaranteed
by
Mr.
Leslie
and
his
partners
and
now
a
new
feature
for
security
from
one
of
Mr.
Leslie’s
other
operating
companies:
(From
the
Agreement
with
Tohcan
—
Exhibit
A-18)
Covenant
to
pay
and
perform
of
Kings
Motel
Winnipeg
Ltd.
for
$650,000
to
be
released
after
two
years
from
the
date
of
the
loan’s
disbursement
and
only
when
70%
of
the
value
of
lands
and
buildings
plus
60%
of
the
value
of
machinery
and
equipment
(as
determined
by
an
appraiser
acceptable
to
TohCan)
exceeds
our
loan
amount
outstanding,
providing
Crossroads
Industries
Ltd.
has
met
its
1977
and
1978
forecast.
This
additional
condition
laid
down
by
Tohcan
in
Exhibit
A-18
put
the
most
strict
parameters
around
Mr.
Leslie
and
his
partners
in
attempting
to
continue
to
operate
Crossroads.
Operating
losses
continued
unabated,
and
late
in
1977
serious
efforts
were
made
to
dispose
of
the
“land,
buildings
and
assets”
of
Crossroads.
I
quote
from
one
such
offer
made
to
Versatile,
filed
as
Exhibit
A-23,
dated
October
24,
1977,
which
is
typical
of
the
disposal
attempts
during
that
period,
—
the
desperation
in
the
situation
is
evident:
Please
be
advised
that
the
Directors
of
Crossroads
Industries
Ltd.,
namely
Messrs.
Leslie,
Diacos,
Gergely,
and
Swail
would
be
interested
in
disposing
the
land,
buildings,
and
assets
of
the
above
mentioned
company.
Since
Leslie,
Diacos,
and
Swail
are
not
knowledgeable
in
this
field
it
would
be
their
interest
now
to
sell
the
property
now
after
they
had
financially
backed
up
the
Corporation
after
its
previous
difficulty.
For
your
information
our
contingent
liability
against
the
property
is
as
follows:
—
1st
Mortgage
in
favour
of
Tohcan
Ltd.
at
prime
plus
3%
which
is
approximately
11%%
today
—
$650,000.00
(personally
guaranteed
by
all
Shareholders,
including
Zoltan
Gergely.)
—
$500,000.00
—
Loans
and
Shareholder’s
Loans
TOTAL
INDEBTEDNESS:
$1,150,000.00
You
will
find
enclosed
documentation
figures
taken
as
of
January
1st,
1977
re
the
fair
market
valuation
of
the
property
as
follows:
|
—
Appraisal
report
on
land
and
buildings
—
|
$452,500.00
|
|
—
The
estimated
equipment
valuation
—
|
486,331.00
|
|
—
Lot
improvement
and
extras
—
|
78,000.00
|
|
$1,016,831.00
|
Our
inventory
is
in
excess
of
$150,000.00
in
addition.
Therefore
the
valuation
of
the
assets
of
the
Corporation
has
been
set
at
in
excess
of
$1,000,000.00.
These
efforts
were
singularly
unsuccessful,
and
the
posture
of
the
company
by
early
1978
is
exemplified
in
the
following:
Exhibit
A-27
dated
March
14,
1978:
Please
be
advised
that
the
Directors
of
Crossroads
Industries
Ltd.
are
prepared
to
sell
their
property
at
1295
Chevrier
Blvd.
at
and
for
the
sum
of
$685,000.00.
You
will
please
find
enclosed
the
Plot
Plan
for
Parcels
1,
2
and
3
inclusive
and
the
property
at
1295
Chevrier
Blvd.
consists
of
two
buildings,
the
new
one
is
100’
x
80’
with
three
door
openings
of
12’
x
16’
each.
The
ceiling
height
of
the
building
is
24'
high
and
is
heavy
duty
constructed
with
high
amperage,
executive
offices,
air
conditioning,
etc.
The
old
building
constituted
6700
sq.
ft.
also
with
high
amperage
available.
and
Exhibit
A-30,
dated
April
21,
1978:
STEEL
FABRICATING
PLANT
ACT
NOW
—
EXCELLENT
OPPORTUNITY
Please
be
advised
that
the
above
captioned
company
has
available
immediately
a
Steel
Fabricating
Plant
totally
equipped
with
all
excellent
machinery
ready
to
operate.
The
previous
Company
because
of
its
difficulties
other
than
production
ceased
its
operations
on
the
15th
day
of
April,
1978.
The
Plant
has
15,000
square
feet
in
total
of
which
8,800
sq.
ft
is
a
new
building
with
24'
ceilings
and
3
16’
overhead
doors.
The
property
is
in
excess
of
two
acres
of
land
in
a
prime
agricultural
and
industrial
area
situated
off
the
famous
Pembina
Hwy.
The
location
is
back
to
back
with
Versatile
Manufacturing.
There
is
trackage
running
through
the
property
and
excellent
room
for
expansion
and
storage,
parking,
etc.
Anyone
who
is
looking
towards
expansion
and
who
could
be
situated
in
the
central
part
of
Canada
(Winnipeg)
could
take
advantage
of
this
property
at
an
excellent
price
considerably
below
the
cost
of
replacing
a
factory
of
this
nature.
Please
contact
the
undersigned
without
delay
and
we
will
be
happy
to
oblige
with
further
information
advantageous
to
you.
All
of
the
above
efforts
to
sell,
during
both
1977
and
1978
were
conducted
by
and
under
Leslie
Real
Estate
and
Development
Co.
Ltd.,
over
the
signature
of
Mr.
R.
H.
Leslie,
the
appellant
in
this
matter.
Finally
the
real
estate
was
taken
over
by
one
of
Mr.
Leslie’s
other
companies
and
through
a
rather
unclear
route
eventually
found
its
way
to
the
ownership
of
Versatile
Manufacturing
Co.,
the
adjoining
industry,
some
time
in
1982.
While
precise
amounts
related
to
such
transfer
of
the
real
estate
and
the
final
acquisition
by
Versatile,
might
be
interesting
to
know,
I
do
not
find
it
necessary
to
concern
myself
with
them
for
purposes
of
determining
this
appeal.
However,
it
is
important
that
in
overall
terms
Mr.
Leslie's
testimony
was
that
they
(the
shareholders)
realized
in
1982
from
the
real
estate
disposition,
about
the
amount
of
$550,000,
which
he
had
considered
it
to
be
worth
back
in
1976.
There
is
one
other
point
that
should
be
mentioned
—
it
dealt
with
a
company
owned
or
controlled
by
Mr.
Leslie
called
Nationwide
Industries
Ltd.
It
had
been
set
up
in
about
1974,
and
possessed
as
its
major
asset,
the
patent
on
a
concrete
forming
system,
which
Mr.
Leslie
regarded
as
revolutionary,
and
possibly
very
profitable.
At
one
time
before
1976
he
had
offered
to
let
Mr.
Gergely
(of
Crossroads)
use
the
patent,
on
certain
business
terms,
but
that
had
not
worked
out.
Crossroads
did
provide
some
small
amounts
of
supplies
to
Nationwide,
but
the
entire
business
done
by
Nationwide
was
not
great,
and
it
had
not
been
very
profitable.
Nationwide
continued
to
operate
during
the
times
critical
to
the
instant
appeal,
and
in
the
view
of
the
respondent,
it
was
possible
amalgamation,
association
with,
or
continued
use
of
Crossroads
as
a
supplier,
which
represented
the
rationale
for
the
interest
and
involvement
of
Mr.
Leslie
and
his
associates
with
Crossroads.
Simply
put,
the
prospects
of
putting
his
own
unprofitable
company
Nationwide,
together
with
Crossroads,
thereby
ensuring
the
success
of
nationwide,
through
using
the
productive
capacity
and
assets
of
Crossroads
more
effectively
was
the
objective
of
Mr.
Leslie
according
to
the
respondent.
One
letter
from
Mr.
Leslie,
on
Leslie
Real
Estate
Ltd.,
paper,
in
September
29,
1977,
(Exhibit
A-21)
did
attempt
to
sell
both
Crossroads,
and
Nationwide
in
the
following
terms:
We
would
be
prepared
to
sell
our
Crossroads
Industries
to
your
Corporation
for
$1.5
million
and
one-half
interest
in
Nationwide
industries
for
$500,000.00.
Your
expansion
to
Crossroads
Industries
Ltd.
would
run
in
the
neighbourhood
of
$500,000.00
and
for
$2.5
million
investment
I
can
assure
you
that
you
would
have
a
great
addition
to
your
good
family.
I
do
not
find
the
evidence
provided
to
the
Court
as
supportive
of
the
Minister's
assertion
regarding
any
planned
form
of
amalgamation
of
Crossroads
and
Nationwide,
and
see
no
reason
to
examine
that
specific
proposal
any
further.
A
further
point
to
be
mentioned,
is
that
counsel
for
the
Minister
brought
forward
as
a
witness
a
Mr.
Rayner,
Appeals
Officer,
with
Revenue
Canada,
who
had
conduct
of
the
files
of
Mr.
Leslie,
after
a
notice
of
objection
had
been
filed
in
December
1981.
He
met
with
Mr.
Leslie’s
accountant,
Mr.
Forzley,
C.A.
early
in
the
summer
of
1982,
(this
meeting
at
the
request
of
Mr.
Rayner)
and
later
in
August
he
met
again
with
both
Mr.
Forzley
and
Mr.
Leslie.
Mr.
Rayner's
recollection,
supported
by
his
notes
of
the
meeting
was
that
the
reason
advanced
by
Mr.
Forzley
that
the
disputed
loss
was
a
“business
loss,”
was
because
Mr.
Leslie
had
been
in
the
business
of
loaning
of
funds.
That
proposition
was
rejected
by
the
Minister,
and
on
the
limited
information
which
related
to
that
point
brought
out
at
the
hearing,
I
would
say
correctly
so.
It
should
be
noted
that
Mr.
Lesley’s
recollection
of
the
above
meeting
in
April
1982
was
that
he
had
informed
Mr.
Rayner
that
it
was
for
the
purpose
of
“turning
the
business
(Crossroads),
around,
making
it
profitable,
and
then
selling
it
(the
business)
at
a
profit,’
that
he
got
into
the
deal.
Mr.
Rayner
had
no
recollection
of
that
rationale
being
put
forward
at
any
time.
While
this
situation
clearly
raised
the
possibility
of
a
question
regarding
credibility,
I
do
not
find
it
necessary
to
decide
the
issue
on
only
those
grounds
of
credibility.
I
do
point
out
however
that
Mr.
Forzley,
was
not
called
as
a
witness
for
any
aspect
of
this
hearing
(indeed
no
supporting
witness
was
called),
and
to
the
degree
that
credibility
has
a
certain
bearing
on
almost
all
such
appeals,
Mr.
Leslie
has
left
his
case
in
some
jeopardy.
Ultimately
then,
we
reach
the
point
where
the
Minister
has
assessed
Mr.
Leslie,
on
the
basis
that
the
loss
was
a
“business
investment
loss,”
deductible
under
certain
conditions
as
outlined
in
the
Act,
because
(according
to
the
Minister)
Mr.
Leslie
intended
to
make
a
profit
from
operating
Crossroads,
whether
or
not
in
some
kind
of
conjunction
with
Nationwide.
At
the
hearing
however,
Mr.
Leslie
contended
—
yes,
he
intended
to
turn
Crossroads
around,
and
make
it
profitable
—
but
not
for
the
purpose
of
keeping
it
and
earning
profit
on
his
investment,
but
rather
to
sell
it
—
if
I
can
use
the
expression
"lock
stock
and
barrel"
—
and
make
his
profit
that
way.
Put
in
simple
terms,
the
proposition
of
the
Minister
is
that
Mr.
Leslie
incurred
the
loss
(the
$162,667
at
issue)
in
attempting
to
earn
a
profit
from
using
that
Capital
in
a
business;
whereas
Mr.
Leslie
contends
that
he
lost
the
money
—
as
a
part
of
an
inventory
item
he
had
acquired
which
he
wished
to
sell
—
(the
business
of
Crossroads)
—
and
that
he
simply
lost
money
in
attempting
to
do
so.
Also
Mr.
Leslie
noted
in
testimony
that
he
did
not
think
there
was
any
“goodwill”
in
Crossroads
in
July
1976;
and
whatever
his
perception
of
its
future
might
have
been
then,
within
about
three
months
he
was
well
aware
that
the
financial
condition
was
much
worse
that
he
had
anticipated,
and
that
the
prospects
of
"turning
it
around"
using
Mr.
Gergely's
services
were
slim
indeed.
In
any
event,
complete
desperation
had
set
in
by
March
16,
1978,
and
ina
letter
of
that
date
to
Versatile
Exhibit
A-28
the
following
paragraph
is
to
be
found:
There
is
a
$650,000.00
loan
on
the
property
which
your
Company
should
have
no
difficulty
in
assuming
which
would
mitigate
your
capital
expenditures.
As
I
see
it,
by
early
1977,
Mr.
Leslie
found
himself
simply
pouring
in
additional
money,
time
and
effort
to
retain
the
position
of
ownership
and
control
of
Crossroads.
I
am
quite
satisfied,
from
his
own
testimony
and
the
agreements
(supra),
made
with
Mr.
Gergely,
that
Mr.
Leslie
in
July
1976,
had
not
anticipated
the
requirement
for
the
costly
financing
(Tohcan)
which
eventually
brought
about
a
major
part
of
his
loss
of
funds
at
issue
before
the
Court.
While
the
shock
of
the
real
financial
situation
in
Crossroads
might
have
been
substantial
to
the
new
shareholders,
one
must
conclude
from
the
evidence
that
some
effort
was
exerted
at
least
to
the
fall
of
1976,
to
re-establish
the
business
and
get
it
going
in
a
better
direction.
But
there
is
no
substantive
indication
that
the
sole
purpose
for
the
“reorganization
and
refinancing"
was
to
sell
the
business
—
"lock
stock
and
barrel,"
which
is
the
appellant's
contention.
The
action
taken
over
a
lengthy
period
(September
7,
1976
through
June
23,
1977)
could
be
viewed
as
consistent
with
the
purpose
of
producing
a
profit
and
maintaining
the
company
—
which
is
the
Minister's
proposition.
But,
I
would
emphasize
(and
the
Court
noted
this
at
the
hearing
and
requested
submissions
from
the
parties
on
the
point),
that
such
conduct
on
the
part
of
Mr.
Leslie
is
just
as
consistent
with
and
supportive
of
an
intention
to
keep
the
company
operating
at
as
little
loss
as
possible,
(or
even
a
slight
profit)
until
the
fixed
assets
could
be
sold
at
a
profit.
I
do
not
think
his
final
method
of
disposition
in
1978
through
1982,
(assets
rather
than
shares)
should
have
any
negative
effect
on
this
perspective
of
Mr.
Leslie's
conduct.
This
is
the
perspective
of
the
events
which
I
find
most
viable.
There
is
nothing
in
Mr.
Leslie’s
background
or
experience
which
would
indicate
great
expertise
in
managing
or
turning
around
a
heavy
manufacturing
plant,
nor
did
he
show
to
the
Court
the
existence
of
any
such
organized
plan
or
program
(including
financing)
to
do
so.
Conversely,
Mr.
Leslie's
expertise,
interest,
and
knowledge
was
directly
related
to
the
potential
for
profit
to
be
seen
in
the
real
estate
itself.
In
this
context
I
would
refer
to
Richard
P.
Fraleigh
v.
M.N.R.,
[1981]
C.T.C.
3044;
81
D.T.C.
949
and
Isaac
Meisels
Investments
Limited
v.
M.N.R.,
[1983]
C.T.C.
2301;
83
D.T.C.
256.
In
the
submissions
from
counsel
requested
by
the
Court
and
noted
above,
the
respondent
emphasized
that
the
following
points
can
be
seen
in
the
Memorandum
of
Agreement
which
is
dated
July
28,
1976,
and
referred
to
above
as
Exhibit
A-11:
—
the
use
of
the
financing
monies
to,
inter
alia,
provide
the
company
with
working
capital;
—
the
provision
of
Key
Man
Insurance
in
respect
of
Mr.
Gergeley
(sic);
—
the
delineation
of
the
authority
over
the
management
and
control
of
the
company's
policies;
and
—
the
limitations
on
the
decisions
of
the
directors,
particularly
with
respect
to
the
termination
of
Mr.
Gergeley
(sic)
and
the
substantial
sale
of
the
companies'
undertakings.
—
.
.
.
the
absence
in
the
Memorandum
of
Understanding
of
any
agreement
as
to
the
ultimate
sale
of
the
company
or
its
assets.
Counsel
concluded
these
points
by
observing:
.
.
.
It
is
respectfully
submitted
that
the
inclusion
of
the
aforementioned
provisions
and
the
absence
of
any
provision
respecting
the
ultimate
sale
of
the
company
are
consistent
with
an
intention
to
continue
the.
company
as
a
going
concern
and,
more
importantly,
inconsistent
with
an
intention
to
resell
as
soon
as
reasonably
possible.
With
respect,
it
is
my
assessment
of
Exhibit
A-11,
that
while
the
proceeds
of
the
$200,000
loan
were
used
in
the
company
to
pay
obligations
and
to
provide
capital,
the
transaction
itself
by
which
the
funds
reached
the
corporation
was
tantamount
to
the
purchase
of
50
per
cent
of
Mr.
Gergely's
shares
by
the
new
partners.
Regarding
the
other
points
raised
by
counsel
above
I
do
not
regard
them
as
specific
indication
of
an
effort
on
the
part
of
Mr.
Leslie
to
keep
Crossroads,
and
thereby
earn
a
profit
from
its
funds.
They
are
consistent
with
his
intention
to
realize
on
the
real
assets
of
the
corporation,
just
as
was
his
conduct
during
that
period
of
time.
It
was
in
these
assets
—
land,
buildings
and
equipment
—
that
Mr.
Leslie
originally
saw
the
opportunity
for
at
least
security
and
probably
profit.
The
prospect
of
realizing
on
the
fixed
assets
of
the
company
for
an
amount
greater
than
that
for
which
they
were
encumbered
(whatever
else
might
transpire)
was
clearly
the
basis
for
Mr.
Leslie’s
agreeing
to
participate
in
the
acquisition
of
company
shares
and
providing
the
personal
guarantee
of
company
liabilities,
which
actions
were
detailed
in
Exhibit
A-11
noted
above.
But
by
May
10,
1977
(Exhibit
A-18)
whatever
“surplus
value”
ever
existed
in
the
fixed
assets
of
Crossroads
was
used
up
in
a
large
refinancing
deal
with
Tohcan
Limited.
Therefore
after
May
10,
1977,
aside
from
other
obligations,
and
whatever
minor
assets
remained
unencumbered,
Crossroads
owed
$200,000
to
the
Royal
Bank,
secured
largely
by
an
assignment
of
inventory
and
account
receivable,
but
in
reality
guaranteed
by
Mr.
Leslie
and
his
partners;
and
a
$650,000
loan
from
Tohcan,
also
guaranteed.
It
is
shortly
after
this
time,
during
the
balance
of
1977
and
early
into
1978
that
Mr.
Leslie
made
valiant
efforts
to
extricate
himself
from
the
situation
by
selling
the
company,
the
assets,
or
in
my
mind
virtually
anything
that
would
save
his
own
financial
situation.
In
summary,
to
this
point,
I
see
no
prospect
that
the
refinancing
with
Tohcan
on
May
10,
1977
(Exhibit
A-18)
was
for
the
purpose
of
operating
the
company
Crossroads
at
all
—
either
to
"gain
income
therefrom”
—
(the
respondent's
position);
or
"to
turn
the
company
around
and
sell
it
at
a
profit”
—
(the
appellant's
position).
The
financial
agreements
with
Tohcan
can
only
have
accomplished
one
thing
—
to
stop
the
hemorrhage
of
funds,
and
to
give
Mr.
Leslie
and
his
partners
a
little
breathing
room
to
decide
what
to
do
next.
At
that
point,
I
am
completely
satisfied
they
all
would
have
been
happy
to
get
out
of
the
deal
at
just
a
break
even
point
—
but
that
fortuitous
circumstance
was
not
to
develop.
The
circumstances
which
existed
at
the
time
of
the
guarantee
of
the
original
$200,000
(see
Exhibit
A-11)
were
less
critical
than
the
circumstances
when
they
guaranteed
the
later
$650,000
with
Tohcan.
The
"partners”
were
at
least
optimistic
in
July
1976,
that
some
profit
might
develop,
but
they
could
not
have
retained
such
optimism
by
early
1977.
In
simple
terms,
Tohcan
really
looked
to
Mr.
Leslie
and
his
partners
for
security,
not
to
the
fixed
assets
of
the
company
at
that
time.
And
that
is
understandable
from
Tohcan's
viewpoint
—
an
appraisal
report
(Exhibit
A-17)
dated
January
14,
1977
showed
a
value
for
land
and
buildings
of
only
$452,000.
In
passing,
it
is
also
interesting
to
note
that
on
that
appraisal
report,
"Crossroads
Industries
Ltd.”
is
shown
as
the
"applicant”
for
the
appraisal,
while
“B.
Leslie
Real
Estate
and
Development
Co.
Ltd.”
is
shown
as
the
"Property
owner.”
In
my
view
the
$650,000
Tohcan
loan
was
therefore
to
secure
and
stabilize
a
situation
which
existed
in
May
1977,
it
had
nothing
to
do
with
operating
the
business
for
any
purpose.
So
that
was
a
"capital”
situation
facing
Mr.
Leslie
in
May
1977.
Turning
to
the
earlier
guarantee,
this
appellant,
and
his
partners
had
acquired
50
per
cent
shareholding
equity
in
Crossroads,
by
virtue
of
the
agreement
of
July
28,1976
(Exhibit
A-11),
and
the
price
paid
for
that
acquisition
was
their
agreement
to
obtain
and
guarantee
the
$200,000
bank
loan.
The
new
partners
did
not
get
the
shareholdings
for
nothing
and
then
agree
to
the
guarantees
at
issue.
The
appellant
had
no
real
worry
about
giving
the
guarantee
because
he
believed
that
valid
security
rested
in
the
fixed
assets
of
the
corporation.
But
that
is
not
the
critical
point
—
the
conclusion
I
reach
is
that
the
$200,000
guaranteed
was
the
price
paid
for
the
shareholdings
received
from
Mr.
Gergely.
That
is
a
pure
investment
of
capital
—
no
different
than
if
Mr.
Leslie
and
his
partners
had
simply
paid
to
Mr.
Gergely
the
$200,000,
which
then
in
turn
Mr.
Gergely
might
have
used
to
retire
the
banking
obligation
for
which
he
alone
was
responsible.
Taken
to
its
simplest
element,
the
testimony
of
Mr.
Leslie
in
this
matter
can
be
viewed
that
he
did
not
intend
to
keep
the
company
Crossroads,
but
to
get
rid
of
it
—
hopefully
at
a
profit
—
but
nevertheless
not
to
keep
it;
the
best
prospect
at
the
start,
seemed
to
be
that
Versatile
would
buy
the
real
estate,
or
the
company,
(or
the
shares),
at
a
price
which
would
let
him
recover
more
than
the
investment
(guarantees)
and
realize
a
gain,
(particularly
if
he
were
able
to
make
the
operation
more
successful
and
more
attractive)
while
awaiting
such
a
sale.
It
is
my
assessment
of
Mr.
Leslie's
testimony
that
he
made
no
substantive
differentiation
between
“selling
the
business”
(the
term
he
used)
and
“selling
the
real
estate,”
and
in
the
con-
text
of
this
case
I
do
not
see
that
much
distinction
can
be
made.
In
view
of
the
final
results
—
that
Mr.
Leslie
lost
some
$162,667,
it
is
obvious
that
either
his
estimate
of
the
value
of
the
assets
in
1976
was
in
error;
or
that
while
holding
the
shares,
and
running
the
company,
that
company
lost
(through
operations)
considerable
sums
of
money.
These
contrasting
views
of
the
matter
were
not
directly
raised
at
the
hearing,
and
no
financial
information
related
to
Crossroads
was
filed.
I
admit
that
if
I
had
the
benefit
of
the
view
of
counsel
on
this
point,
I
might
be
differently
persuaded,
but
lacking
that,
I
find
that
neither
situation
(improper
original
valuation,
or
operating
losses)
would
alter
the
intrinsic
character
of
the
shares
(and/or
the
assets
they
represented)
as
inventory
for
sale.
Certainly
much
of
the
testimony
and
assistance
by
and
on
behalf
of
the
appellant
may
have
served
only
to
cloud
the
issue,
but
that
basic
fact
remains
“inventory
for
sale,’
—
and
it
is
irreconcilable
with
the
assumptions
of
the
Minister
in
striking
the
assessment.
The
appeal
is
allowed
and
the
entire
matter
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment.
The
appellant
is
entitled
to
party
and
party
costs.
Appeal
allowed.
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