Leslie Modolo v. Minister of National Revenue, [1979] CTC 3057, 79 DTC 844

John B Goetz:—The appeal of Leslie Modolo was heard in Toronto, Ontario, on March 19,1979. This appeal is from a reassessment by the Minister of the appellant’s income for the taxation year 1973 wherein he assessed the appellant’s income on the basis that the appellant did not include in his 1973 income the sum of $7,000, received on account of the redemption of a debenture issued to the appellant by a corporation known as Marlin Motion Pictures Limited.

The apppellant contends that the sum of $7,000 was an accretion of capital whereas the Minister takes the position that it was income to the taxpayer in his taxation year 1973.

In reassessing the appellant, the respondent relied, inter alia, upon subsection 9(1) and section 248 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The appellant was a distributor of educational films, having previously been employed by the National Film Board. In August 1968 he incorporated his own company, Marlin Motion Pictures Limited (hereinafter referred to as “Marlin”). On November 1,1968, the appellant’s accountant set up a 10-year issue of a $100,000 floating charge debenture, of which Kenneth Knight received a debenture on the face value of $50,000 although he advanced only $25,000. A photocopy of the Knight debenture was filed. The appellant did not file his debenture but said that he purchased the debenture on the face value of $14,000, although only paying $7,000 to Marlin. These loans, by way of debentures, were made to Marlin on November 1,1968. Two provisions of the debenture were:

(a) The Principal amount hereby secured shall fall due and be paid on the 1st day of September, 1978.

(b) No interest shall be payable, nor accrue, on the principal amount hereof until the 1st day of September, 1973, when interest shall begin to accrue on the principal amount hereof, then outstanding, at the rate of 8% per annum, payable, yearly, in arrears, on the 1st day of September, in each year thereafter, commencing on the 1st day of September, 1974, until the principal amount hereof is paid in full. (Italics mine).

The security for the payment of the principal and interest of the debentures rested upon a first floating charge in favour of the holder of the debentures, on all the property and assets of the Company for the time being, both present and future.

In June 1969 Marlin purchased certain property with a face value of land being $23,407.05 and the building thereon $29,782.10. The Company did well as is disclosed by the financial statements filed by the appellant. Eighty- five per cent of the issued shares of the Company were owned by the appellant. The only other shareholders were Knight and the appellant’s wife.

In June 1969 Marlin sold its land to the appellant and to a Mr Feldman for a sum of $60,000. This land was sold in February 1978 by Feldman by transferring his half interest to the appellant’s wife. The land at this time was valued at $125,000, Mrs Modolo paying one-half of that amount. The appellant attributed the appreciation in value of the property as a result of expensive renovations in 1975 in the sum of approximately $50,000. No supporting documents for this contention were filed.

When Marlin sold the land, the appellant’s consideration therefor was the redemption of his debenture in the sum of $14,000 and the assumption of half the balance on the mortgage.

It is from these dealings that the present situation arises whereby the respondent maintains that the appellant, in having Marlin redeem his debenture with a face value of $14,000, was given a benefit of $7,000 in the 1973 taxation year.

An interesting feature in this case is that the debentures of both Knight and Modolo were redeemed five years before the maturity date of the debentures.

The succession of events, as before stated, lead me to believe that the manner in which the debentures were issued at a very substantial discount and the fact that the gain arose from the appellant’s effort in the conduct of his business, tends to show that it was not a capital gain but a profit from a “business”. Being the majority shareholder, the appellant was in a position to negotiate the terms of the debenture and it cannot be said that the $7,000 gain to the appellant arose fortuitously. On the contrary, it would appear that it was the result of a carefully considered plan executed as conceived. Having regard to the limited assets of the Company at the time the debentures were issued clearly makes the whole transaction one of a precarious and speculative nature.

I find that the purpose of the issuing of the debentures, and the manner in which it was done, was not to earn income from the debentures but to make a profit on prompt realization which in fact did occur. Although the operation may have the characteristics of an investment, it is essentially a speculation.

In MNR v James N Sissons, [1969] CTC 184; 69 DTC 5152, Pigeon, J, said at pp 189 and 5155 respectively:

.. . It is equally well established that even a single operation entered into for gain takes a business character when it cannot properly be considered as an investment but it is to be characterized as a speculation. In such circumstances, it is an adventure in the nature of trade: R K Fraser v MNR, [1964] SCR 657; [1964] CTC 372;

64 DTC 5224, MNR v Freud, [1968] CTC 438; 68 DTC 5279.

I therefore find that the whole transaction with respect to the debentures was an adventure in the nature of trade. It was not an investment in the ordinary sense but rather was a speculative transaction and was a profit from the appellant’s business, which profit arose essentially through the efforts of the appellant as a businessman.

For the above reasons, the appeal is dismissed.

Appeal dismissed.