Louis Wolfin, Frobisher Securities LTD v. Minister of National Revenue, [1984] CTC 2427, 84 DTC 1382

Taylor, TC J:—These are appeals heard on common evidence in Vancouver, British Columbia, on November 16, 17 and 18, 1983. The income tax assessments against which Mr Wolfin (“Wolfm”) appealed were for the years 1973, 1974, 1975, 1976, 1977 and 1978, in which the Minister of National Revenue considered certain gains as on income, not on capital account. For Frobisher Securities Ltd, (“Frobisher”) the taxation years were 1975, 1976 and 1977, and the appeal was for the same reasons. Certain penalties had been imposed in the assessments of Wolfin, but at the start of the hearing the Minister agreed to have these deleted from the assessments. The essence of the issue can be gleaned from the documents filed with the Court:

— In 1971 the appellant purchased shares in Lure Camera Ltd. The appellant sold its shares in Lure Camera Ltd in 1975.

— The appellant sold its shares in Lure Camera Ltd since it had a major difference of opinion with the management of Lure and decided that the future success of the company was doubtful.

— The appellant was at all material times a broker-dealer involved in the promotion of mining and other stocks through the Vancouver Stock Exchange and the Vancouver Curb Exchange.

— The principal shareholder of the appellant is Louis Wolfin.

— Lure Camera Ltd (hereinafter referred to as Lure) was incorporated on December 9, 1971 pursuant to the laws of the province of British Columbia.

— Pursuant to an agreement dated May 24, 1972 between Lure, Thomas J Woods and Joe D Cox, Lure was granted an exclusive worldwide right and license to make and use and sell disposable cameras having a certain patented mechanism.

— Pursuant to the aforesaid agreement, Lure issued 750,000 shares of which Frobisher Securities Ltd obtained 140,000 shares. The said shares were placed in escrow.

— In 1972, a further 950,000 shares were issued by Lure for cash at 10¢ per share of which 62,001 shares were issued in the name of Louis Wolfin.

— By way of a prospectus dated December 13, 1972, Lure offered the public 200,000 and a secondary sale of 50,000 shares owned by Louis Wolfin. The aforesaid prospectus was withdrawn by Lure’s directors.

— On April 30, 1974, Louis Wolfin and Frobisher Securities Ltd entered into an agreement to sell 62,001 shares of Wolfin and 120,000 escrow shares of the appellant to William Meiklejohn for the consideration of $125,000 upon receipt of consent to transfer and a further $15,000 on or before May 15, 1975.

— The second installment was not paid with the consequence that the appellant and Louis Wolfin sold their interest in the Meiklejohn agreement to Meteor Developments Ltd for $18,200.

— An operating motive for the acquisition by the appellant of the Lure shares was for resale at a profit.

— At all material times, the appellant was a promoter and trader in securities.

— At all material times, the principal shareholder of the appellant, Louis Wolfin, was a trader in securities.

— The respondent relied, inter alia, upon sections 9, 38 and 39 of the Income Tax Act, SC 1970-71-72, c 63 as amended.

For Wolfin

The activities of the various businesses were described in detail in both the notice of appeal and the reply to the notice of appeal, which together comprised some 20 typed pages. A brief summary of the financial information which for the basis of this appeal is taken from the notice of appeal:

— According to calculations prepared by officials of Revenue Canada the appellant realized the following gains:

— Avino Mines & Resources Ltd.

1973 $ 2,445.16)

1974 $ 5,344.17)

1975 $ 569.50)

1977 ($13,706.36)

— Gallahad Petroleums Ltd. (Formerly Boru Mining Ltd.)

1973 $12,500.00

1975 $10,000.00

1977 $ 3,037.00

— Kerry Mines Ltd.

1973 $15,000.00

— Lure Camera Ltd.

1974 $42,800.00

— Berkeley Resources Inc. (Formerly Trevlac Resources Ind.)

1974 $61,667.50

— Holofile Industries Ltd.

1975 $ 7,846.99

1976 $139,502.89

1977 $ 3,222.14

— New Congress Resources Ltd.

1977 $4,149.18

— Osec Properties Corp.

1978 $1,731.45

— Manufacturing Process owned by Lincoln Industries Ltd.

1974 $50,000.00

— Oniva

1974 $15,250.00

1975 $28,360.00

1976 $20,237.00

The respondent relied, inter alia, upon sections 3, 9, subsections 248(1), 163(2), 39(4), 39(5) and 85(1) of the Income Tax Act, SC 1970-71-72, c. 63, as amended, and contended:

— an operating motive for the acquisition by the appellant of the shares (in the above corporations) and the manufacturing process acquired was for resale of same at a profit;

— at all material times the appellant was in the business of stock speculation and stock promotion;

— the gains realized by the appellant in each of the years under appeal were the combination of a scheme of profit-making engaged in by the appellant;

— at all material times the appellant was a trader in securities;

— the cost to the appellant of the following shares transferred by him to Frobisher Securities Ltd. in 1977 was as follows:

(i) Avino Mines & Resources Ltd	$60,431.38
(ii) Gallahad Petroleums Ltd	NIL
(iii) New Congress Resources Ltd	15,850.82
(iv) Holofile Technology Inc	$14,374.86
(v) Onaca Exploration Ltd	$1.00
(vi) Kerry Mines Ltd	NIL

— . . . The appellant’s gain or loss on the transfer by him of various securities to Frobisher Securities Ltd (has been correctly calculated by the Minister) in 1977 in that pursuant to the elections filed under subsection 85(1) by the appellant, the agreed values were less than the fair market value and cost of the said securities with the consequence that the deemed proceeds were equal to the lower of the aforesaid.

Mr Wolfin provided detailed testimony regarding his assertions with respect to the gains, in particular that his efforts to bring the various endeavours to fruition had met with only limited success, and in some cases considerable frustration. Two other gentlemen also testified on behalf of the appellants, explaining their own association with Mr Wolfin, and their particular interests in the transactions under review.

The able arguments from counsel clearly set out the different perspectives of the parties, and certain quotations from those arguments will serve to highlight the major portion of the testimony and evidence:

For the appellants:

.. we have heard evidence from Mr Wolfin concerning various investments that he made in three manufacturing type companies, ie Lure Camera, Holofile Industries, and Lincoln Industries, plus investments in six resource companies.

Exhibit A-8 is the camera that was to be manufactured, produced and distributed. After spending considerable time checking this camera out and determining that it could be produced and marketed, Mr Wolfin incorporated a company that helped with the raising of the money to begin production.

Now, we’re not talking about simply a vague idea that never got off the drawing board stage. We’re talking about a situation where thousands of cameras were produced. Exhibit A-10 is the prospectus that was prepared for the purpose of raising the initial money.

It is understandable that Mr Wolfin accepted the offer from the other shareholders to purchase his shares, and these factors that I’ve just summarized make it clearly apparent that this transaction does not have the badges of trade. This was a clear, unmistakable investment opportunity made by an entrepreneur such as Mr Wolfin is, to become involved in a manufacturing process, and his attempt to produce a product such as this camara, he made every attempt that a reasonable man would do.

. . . Holofile has many similarities to Lure.

In order to raise the money from the public to pay for the prototype and for other costs which approached $500,000, Holofile merged with Jersey consolidated and became a public company whose shares traded on the Vancouver Stock Exchange.

Once again, as a result of a need for funds to pay personal taxes, and significantly because of the change in the direction of the company, Mr Wolfin agreed to sell some of his shares. I suggest that the nature of the investment, the holding period, the reason for sale, and the type of activity particularly all point to a capital gain.

A third manufacturing company which I want to summarize is the case of Lincoln Industries . . . They incorporated a company to produce and market the device, but before they got much beyond the initial stages Mr Frankel decided that as opposed to going through a public issue and becoming involved in significant shareholders, it made more sense, in Mr Frankel’s view, to bring in substantial private investors.

Mr Frankel wanted to keep the companies private, and use private funding. Mr Wolfin wished to use public funding. As a result of this disagreement, Mr Wolfin agreed to accept Mr Frankel’s proposal to sell his interest, entire interest in the Lincoln process to the company, and Exhibit A-27, a document dated July 29th, 1974, had the effect of Mr Wolfin selling his interest, according to that document, to the company but, in effect, Mr Frankel was at that time running the situation entirely.

. . . I’ve decided to summarize the three manufacturing processes because they are almost identical in many respects. There are some differences, but all three have a situation where there was a very significant potential for a breakthrough in a new, exciting, entrepreneurial business venture.

. . . we have three manufacturing processes, all of which were developed in the way a normal intelligent entrepreneur would do, and there were not processes which would be developed in the way a trader or a promoter, or simply a speculator would perform.

When we examine the investments in resource companies, it is important to note the following factors. First of all, Mr Wolfin is not a market trader. He is not a promoter. He is an entrepreneur who has developed Avino Mines and Resources Ltd, one of the more successful silver mines in Mexico.

The second resource company I wish to mention is Gallahad Petroleum. This company was originally formed to develop a mine. This was unsuccessful and the company became involved in oil and gas activities . . . It’s a situation where the company has operated for some 15 years, and Mr Wolfin indicated that while he sold some of the shares, he retains the balance of his stock, and has only sold a few shares, something like 5,000, or not many more, since the years under appeal.

The third resource company is Kerry, K-E-R-R-Y Mines Ltd. Kerry is somewhat similar. Shares were raised by sale to the public, and exploration was carried out. There was only one transaction involving shares, and Mr Wolfin stated that he still has most of his free stock, and all of his escrow stock . . .

The fourth resource company is Berkely Resources Ltd, formerly Trevlac, T-R-E-V- L-A-C. This company . . . incorporated in 1966, and there was only one transaction under appeal, and that was in 1977, when he attempted by advice of his accountants, to obtain a tax-free rollover, that’s a holding period of 11 years, only one transaction.

. . . I want to comment by saying that if we take the hard and fast approach that anyone who buys shares and sells them as soon as they increase in value, then anyone, any taxpayer participating in the stock market is taxable either on an income business or as an adventure in the nature of trade. That is not the law, that is not the Department’s assessing policy, and that is the situation before you today. We have, in the case of Lincoln, Lure and Holofile, three clear indications of a situation where a company was attempted to be developed by Mr Wolfin.

Corporate shares are to be distinguished from say raw land. Raw land can only be realized on one basis, by sale. If it’s raw, undeveloped land with no hope for development as an apartment complex, or what have you, the only way you can realize on raw land is by selling it.

In conclusion, I would like to simply state that Revenue Canada takes the position that Mr Wolfin is taxable on everything . . . That, I suggest, goes far beyond any court decision of this Court, of the Federal Court, or the Supreme Court of Canada, and I suggest that on the authority cited, on the facts before you for the past two days, on the clear evidence that Mr Wolfin, an admitted, no doubt about it, an admitted intelligent entrepreneur, but on those facts, Mr Wolfin was doing everything in his power to develop viable business enterprises, and his investment was nothing more than an attempt to obtain through corporate shares, through the ownership of corporate shares, income from dividends, income from the development of a new innovative camera, income from the development of high technology through Holofile, income through the door lock process, income through developing resource properties, as he has done very successfully in Avino Mines, we are not talking about a dreamer, we are talking, income from dividends, income from the development of a new innovative camera, income from the development of high technology through Holofile, income through the door lock process, income through developing resource properties, as he has done very successfully in Avino Mines, we are not talking about a dreamer, we are talking about a practical businessman who, through his creative activities, has created viable business operations.

For the respondent:

... the Minister’s position is that the evidence before you would indicate that the Appellant is in the business of promoting and marketing speculative securities. As a consequence, we say that the gains realized by him, and that are under appeal before you, formed, and are an integral part of that particular business, with the result that they should be taxed on income account.

Firstly, the Appellant himself. Clearly, he is an experienced promoter and trader. His own evidence is that people have come to him to promote the particular securities in question. If you look at his company, Frobisher Securities, which I believe he indicated in his evidence, he felt and looked upon as almost indistinguishable from himself, it had traded in literally millions of shares. There is a brokerage license involved, which he had. Clearly we have an individual who has an intimate detailed knowledge of the market . . . at least, and one need only look at the complexity of the transaction involved in the Holifile transaction to determine that this is surely a very intelligent man. Finally, it is clear that at all times Mr Wolfin was an insider of the various companies involved.

The other factor, another factor I had asked you to consider, is the Appellant’s active participation in promoting all of the particular securities involved in the case before you. We do not have a situation where there is a passive investor purchasing a security sitting back and selling the same. This is an individual who has actively taken part from the first step in obtaining the particular process, in terms of the three companies, Lure, Lincoln and Holofile, or obtaining the mineral properties and incorporating the companies in terms of the resource companies.

. . . there is a pattern, a clear pattern of activity which shows a consistent scheme of profit making. Firstly, we say the first step in all of these proceedings is that there is obtained by Mr Wolfin an asset, either a mineral claim for the resource companies, or an option to acquire a particular right or a licence, the initial cost of which asset is close to, for the mineral claims I believe it was minimal, for the options it was very small. I think the Holofile was 15,000, Lincoln 25,000 and Lure 31,000.

In return for obtaining these particular assets and transferring these assets to the companies he obtained enormously large stock positions, be they in escrow, or alternatively, for want of a better phrase, the cheap stock, the ten cent stock. The next step in this particular process was to arrange to have this stock traded on the market in some particular way. This is either done directly, in other words, through the resource companies, or indirectly by way of an exchange of stock.

. . . these large accumulations of stock which are obtained at a very cheap price, are finally sold on the market by Mr Wolfin at the same time that he acts as underwriter to raise funds for the company itself. . . . Mr Wolfin not only acted as underwriter, by way of Frobisher Securities, really his own company, or on a number of occasions by Davidson once he had acquired an interest in it. But he was also officer, director and promoter of the issuer, ie the company he was in fact underwriting.

. . . at one stage he is an integral part of all aspects of bringing this particular stock to the market. He is the officer of Frobisher, the underwriter, and indeed, he also acts in his personal capacity. What we are saying is that really, in that kind of situation, you cannot separate him from Frobisher. He is one and the same and they act together.

It is clear, we submit to you, on the evidence that they were all speculative stocks. There were no dividends on any of them (that) had been paid or could be anticipated to be paid for a substantial period of time. It was, in effect, the promotion of an idea rather than a company which had industrial, firm industrial type base.

And we say, based on those authorities, and based on the evidence before you, that this particular taxpayer is part and parcel of his activities in Frobisher Securities Ltd, and as a consequence, his stocks are to be treated as inventory which arises from the business of trading in securities.

Considerable jurisprudence was provided to the Court by both counsel, and while certain portions of each case can be seen to bear some similarity to this matter, the facts in each one can also be distinguished. This issue, as is usually the case in such determinations, must be viewed on the basis of its own facts.

Both parties agreed that the appeal of Frobisher for the year 1976 technically was not before the Court in this matter, but that nothing hinged on that situation, and the appeal should be heard on the basis that it need only arise, if necessary, at the stage of determination of the specific issue. That specific issue was clearly whether the gains realized should be taxed on income or on capital account. In argument counsel for the appellants did note that the possibility existed for the Court to make some intermediate determination — partly income and partly capital, but I find that prospect not only unattractive, but virtually impossible due to the interrelationship of many or all of the facets of this matter; the complete direction of Frobisher by Wolfin; and the overlapping time frames within which many of the relevant events transpired. It is that very complexity which forms the main thrust of this judgment, and which in my view permits of only one result — that the appellants cannot succeed.

I accept that some of the evidence might permit the perception of one or another of the items of income, or the transactions, as on capital rather than on income account, if it were the sole transaction and could be so clearly isolated from all other relevant factors which impinged on it. But, as I see it, the matter must be decided from the vantage point of a global look at all the facts and evidence. That viewpoint is particularly reinforced when the thrust of the argument for the appellant is that he was trying to make all the smaller resource companies into at least an equivalent of “Lure Camera”, or perhaps “Avino Mines”, and that at least these two are prime examples of the success attained by Wolfin in his alleged efforts to establish revenue-producing businesses as contrasted with speculative activity in corporate capital stock. I do not agree. Certainly the trail of Mr Wolfin’s activity and enterprise in Lure, and even more so in Avino, can be cast in a better light, and his tendency toward stock speculation and taking advantage of the vicissitudes of the market is somewhat more difficult to perceive than in certain of his other activities. Nevertheless, that tendency remains a constant. It is the all-pervasive background for all the activities described to the Court. His activity in the resource companies needs no great analysis — on its own such activity could not withstand the scrutiny necessary to attain his income tax objective, and the diffusion which arises from slightly less obvious, but concurrent activity in Avino, Lure, Holofile and Lincoln, does not change that at all.

The proposition of the appellants can be summarized as — the gains realized by virtue of the trading in shares resulted from transactions and events completely unrelated to and incidental to the alleged main purpose of the corporations

— “to gain revenue from the business operation of these various companies”. The Minister’s position is that the main, virtually the sole, purpose of the corporations and the activities of Mr Wolfin, was to provide the environment within which, and the mehanism through which he could trade in the shares of the companies to his advantage, and that the prospect of gains arising out of the business operations of the various companies was secondary, if it existed at all. Since I see this matter as requiring the acceptance of one or the other proposition, and since there is no doubt at all in my mind with regard to the resource companies, the decision becomes obvious.

Mr Wolfin was and remains an intelligent and resourceful entrepreneur, and he directed his energies and efforts in a manner designed to utilize to the maximum his peculiar and particular “insider” situation in all the matters which have come to the Court’s attention. That degree of dedication to his overall affairs one can only salute, but he clearly fashioned a business which at least for a time was very profitable. It was a business in which he, more than anyone else, was fully aware that the prospect of business returns in the form of dividends was almost negligible, but that the prospect of turining over the stock, as the demand for it rose or was encouraged, was a viable, immediate and attractive opportunity. Whether or not the purchasers of the stock in the various companies, including those other investors who bought out Wolfin’s interests (Lure, Holofile, etc) believed they were acquiring long-term business investments with great prospects for dividends, or whether they too looked at the acquisitions as “inventory” for immediate or later sale, is irrelevant to a determination of this issue before the Court.

Before concluding, I should like to note that no appropriate basis was provided to the Court from the appellant (Wolfin) upon which a distinction between a “market trader, or promoter’’, and an “entrepreneur” could be made, and in my view none of these terms necessary carries with it the reduction in the impact of income taxes sought by Mr Wolfin. Secondly, while some physical differences might be noted between “corporate shares” and “raw land” (see comments of counsel for the appellants above), I am unaware of jurisprudence which would identify and consecrate one or the other as outside the parameters of “inventory” for purposes of trading.

In the end analysis the evidence supports the assessments of the Minister, and most certainly the very critical one, to disallow the “‘roll over” under section 85 of the Income Tax Act. The appeals are allowed in order to delete the penalties imposed, but in all other respects the appeals are dismissed.

Appeals allowed in part.