Her Majesty the Queen v. William a Perkins, [1978] CTC 389, 78 DTC 6290

Collier, J:—This appeal was heard on common evidence with another appeal: The Queen v Harry J Perkins (T-462-77).

The Minister of National Revenue added into the income of the defendant, for the years 1968 and 1970, an amount of $1560. For the year 1970 the Minister added a similar amount into the taxable income of the defendant in the other action. William and Harry Perkins are brothers.

Both defendants successfully appealed to the Tax Review Board. The Minister now appeals to this court.

The amounts of tax involved in these particular appeals is relatively small. At stake, however, are much greater amounts. That statement will become more clear when I recount the facts.

The contest here is whether the total amount of $3120 received by the defendant, and the sum of $1560 received by his brother, are to be treated as a capital gain or as profit realized from an adventure in the nature of trade.

As always in litigation, but especially in cases concerned with an adventure in the nature of trade, the facts are paramount.

“These cases must all depend on their particular facts. . .’’* [1]

The defendants in these two actions are sons of Joseph A Perkins. I shall sometime refer to them as the taxpayers. I shall refer to Joseph A Perkins as Perkins, Jr. Perkins, Jr is the guiding hand behind several companies. Those companies are:

Perkins Motors Limited

Taggart Service Limited

Perkins Realty Limited.

Perkins Motors Limited is a General Motors car distributorship. Taggart Service Limited is a trucking business. It is licensed by the Ontario Transport Board for certain routes. That business began in 1944. Perkins, Jr has been, at all material times, the president. It has been a successful operation.

At some time* [2] a trust set up by Perkins, Jr owned or controlled Perkins Motors ‘Limited. The trust is for the benefit of the defendants and their sister. Perkins Motors Limited owns 100% of both Taggart service Limited and Perkins Realty Limited.

I shall refer to that trust and the companies I have described as the Perkins Group.

I turn now to another family of companies. They are as follows:

Snelgrove Nu-Drive Limited

Snelgrove Motors Limited

Carman’s Car Rentals Limited.

Those companies were owned or controlled by Graham W Snelgrove. I shall refer to him as Snelgrove. I shall refer to these three companies as the Snelgrove Group.

Snelgrove owned or controlled another company called Frontier Forwarding Limited. Frontier, in turn, owned or controlled two companies:

Jones Transport Company Limited

Jones American Transport, Inc.

The first is a Canadian company, the second is American. I shall refer to them as the Jones Companies.

The Canadian company was in the truck carrier business. It was licensed by the Ontario Transport Board. Its licenses covered different routes to those held by the Taggart Company. The American Jones Company had a border crossing license between Windsor and Detroit. The main portion of the Jones Companies’ operations and business was carried on in the Canadian company.

Snelgrove and Perkins, Jr knew each other. They were both in the carrier business. One of the Snelgrove companies was also a General Motors dealership in Brantford.

In August of 1964 Snelgrove came to Perkins. He offered to sell the Jones Companies’ trucking business. Snelgrove was anxious to sell. He wanted to get out of the trucking business. Negotiations took place between the two men. They were assisted by accountants and lawyers.

At the time of the negotiations there were no current audited financial statements for the Jones Companies. Snelgrove produced estimated figures indicating their financial state. Agreements which were eventually signed were based on those unaudited figures.

Perkins, Jr and the defendants inspected the companies’ physical plant and equipment at Brantford, Hamilton and Toronto. The companies owned approximately 35 pieces of transport equipment. They rented, from the Snelgrove Group, 34 other units of various kinds. The equipment was not in the best of shape.

Nor were the financial affairs of the Jones Companies. They had been losing money for several years.

Perkins, Jr and his sons felt the Jones Companies could, with better management, be successful. The licensed routes it held in Ontario meshed quite well with the routes the Taggart Company had. Both lines met in Toronto.

During the negotiations Snelgrove gave estimates, as well, of the amounts owed by the Jones Companies to trade creditors and its banker. Some of the trade creditors were the Snelgrove Group. Snelgrove himself was owed $45,000, apparently a loan to the Jones Companies. The amounts owing to the Snelgrove Group, including Snelgrove’s loan, were estimated to be between $135,000 and $190,000.

It ultimately turned out the amounts owed to trade creditors and to the Snelgrove Group were much more than the figures which had been provided at the negotiation stage. Those figures, and others, were, as I earlier recounted, included in certain written agreements. Those documents will be described later. The amounts owed to the onelgrove Group, including Snelgrove’s loan, were almost $244,000. That was well out of the estimated range of $135,000 to $190,000. The amount owed to other trade creditors turned out to be approximately $136,000.

At some stage it had been decided by Perkins, Jr, after consultation with his sons, that another trust would be created. It was to have a part in the whole transaction. The debts owed by the Jones Companies to the Snelgrove Group would be purchased by Perkins, Jr as trustee for the trust. The defendants are the beneficiaries in it.

In the course of the negotiations between Snelgrove and Perkins, Jr there was bargaining in respect of the amount to be paid for the Snelgrove Group book debts. The figure finally agreed upon was $125,000. This was on the basis of the estimate given by Snelgrove that those debts were in the range of $135,000 to $190,000.

In the final arrangement the purchaser. of the Jones Companies took on their liabilities. It was also agreed the units leased by the Snelgrove Group to the Jones Companies would be purchased by Taggart.

Three agreements, all dated October 27, 1964, were drawn up. These were exhibits 1, 2 and 3 at trial.

Exhibit 1 provided for the purchase by the Taggart Company from the Snelgrove Group of the equipment leased to the Jones Companies. The price was $90,000.

Exhibit 2 provided for the sale of the outstanding shares of the Jones Companies by Frontier to the Taggart Company. The consideration was $1.

Exhibit 3 was the sale or assignment of the Snelgrove book debts, including the Snelgrove loan, to Perkins, Jr in trust. This agreement requires more detailed explanation. It provided there should be an audit of the Jones Companies as of October 31, 1964. It was mutually agreed the net deficit of the Jones Companies would, as audited, be not more than $121,570. It went on to assign, for $125,000, the Snelgrove Group book debts. Clause 5 is significant. I set it out in full:

In the event that the net Deficit Position of the Companies as hereinbefore in paragraph 2 determined is more than $5,000 greater than $121,700 as at October 31, 1964, it is agreed and understood that said sum of $125,000 payable by the Assignee to the Assignors shall be reduced by the amount by which said Net Deficit Position is greater than $126,700. In the event that the Net Deficit Position of the Companies as above determined as at October 31, 1964 is more than $5,000 less than $121,700, it is agreed and understood that said sum of $125,000 payable by the Assignee to the Assignors shall be increased by the amount by which such Net Deficit Position is less than $116,700.

The debts owed by the Jones Companies turned out to be far greater than anyone had thought. Accordingly, Clause 5 came into play. The net result was the sum of $125,000 payable was reduced to $47,000. The latter sum was ultimately paid.

The Jones Companies had been operating at a loss position for some years. On this package transaction the Taggart Company was able to take advantage, for tax purposes, of some part of those losses. That was not the purpose of the whole arrangement. The plaintiff, in the statement of claim alleged the Taggart Company had a history of purchasing loss companies for just that advantage, then selling its transport fleet to those companies. The evidence at trial does not support that assertion.

Through the. efforts of the Perkins. Group (including Perkins, Jr and the defendants) the fortunes of the Jones Companies turned around. By 1967 its financial statements showed a net profit. The profit, in subsequent years, increased. There is little doubt the turn- around was attributable primarily to better management provided by the new owners.

The Jones Companies have since paid to Perkins, Jr in trust sufficient to reimburse him for his outlay of $47,000. Additional payments on the debts were made by the Jones Companies in 1968 and 1970. It is out of those payments the two sums of $1560 received by the defendant in this action, and the sum of $1560 received by the defendant in the other action, arise.

The balance now owing by the Jones Companies on the book debts is approximately $190,000. There is no doubt, because the Jones Companies have become successful, they have been, for some time, in a position to retire the indebtedness in full. Perkins, Jr said this had not yet been done because it was felt desirable to keep those funds in the Perkins Group (now including the Jones Companies) for working capital purposes.

Perkins, Jr was, to my mind, a frank and honest witness. He testified that when the Jones Companies were offered for sale he felt, after investigation, there was a good chance they could be made successful. He agreed that was the object of the whole exercise. He both hoped and realized that, depending on the future fortunes of the Jones Companies, the full value of the book debts might ultimately be reaped.

There are two other matters to be noted. The book debts did not bear interest. There has been no re-negotiation for interest, up to the present, between. the trust and the Jones Companies. The other matter is in connection with approvals given by the Ontario Transport Board when licensed carriers are bought and sold. I was told the Board requires the purchaser must guarantee payment of the vendor carrier’s trade debts, and must pay them within 60 days of the sale. Shareholder debts are excluded.

That concludes my summary of what I consider to be the essential facts..

The taxpayers asserted the purchase by the trust, on their behalf, of the book debts, was an investment. The resulting gain is said to be on the capital side.

I cannot agree.

I am in accord with the defendants’ contention the original sum of $125,000, for book debts estimated to be between $135,000 and $190,000, was a fair market-value price. On that point I accept the evidence of Mr de Rosenroll and Perkins, Jr. The Jones Companies were in poor financial condition. There was no certainty they could be brought into a profit making position. Even if that could be done there was the prospect it might require a great number of years before the debts could be paid in part or in full. Assuming the debts had in fact been in the neighbourhood of $135,000, it seems to me a discount of $10,000 was a reasonable and fair business proposition.

The defendants point out this is the first time they or the Perkins Group have dealt in book debts. They are not, it is said; traders in that commodity. Nevertheless, a single transaction, not in the ordinary course of a taxpayer’s calling or business, can be an adventure in the nature of trade, and the gain taxable as income.* [3]

I am unable to characterize the purchase of these book debts as a true investment.t [4] While they were unpaid they produced nothing for their buyers. They had, however, a latent potential for a profit. That, I find, is why they were singled out and specially dealt with in the overall transaction. They fall into the category of adventure in the nature of trade.

The appeal is allowed. The assessment of the Minister is restored.

The Minister shall pay to the defendant all his reasonable and proper costst [5] in connection with this appeal. The defendants were represented by the same solicitor and counsel. The cases were heard on common evidence. There will, therefore, be one set of costs only. They will be in this action.

These reasons shall apply in the other appeal (T-462-77).