Victor v Spencer and Mary Spencer v. Minister of National Revenue, [1978] CTC 2109, 78 DTC 1129

Delmer E Taylor:—These are appeals heard on common evidence, against income tax assessments by which the Minister of National Revenue increased the taxable income of each of the appellants by $32,436.95, $26,500 and $47,725.32 for the years 1971, 1972 and 1973, respectively, which amounts were alleged to have arisen as a result of redemption of certain preferred stock and promissory notes held by the appellants in a corporation totally owned and controlled by them. The respondent relied, inter alia, upon sections 3, 4 and paragraph 139(1 )(e) of the Income Tax Act, RSC 1952, c 148, and section 3, subsections 9(1) and 248(1) of the Income Tax Act, SC 1970-71-72, c 63 and amendments thereto. It should be noted for the record that a further matter relating to a lease option agreement had been at issue between the parties on filing the appeal, but this had been resolved and did not come before the Board for determination. Where either the term "appellant” or "appellants” is used in the balance of this judgment, it will be understood to refer equally to both appeals.

Facts

Victor V Spencer and Mary Spencer are husband and wife and have been engaged in the manufacture and merchandising of paper products since 1954. They carry on business through corporations in which they have equal interests. Both participate actively in the business operations of the corporations. The appellants entered into an agreement in February 1970 whereby they acquired all the outstanding capital stock, and certain promissory notes, of Gateway Papers Limited (hereinafter referred to as "Gateway” or "the company”), a corporation operating in Winnipeg in the Province of Manitoba. Gateway was and continues to the present time to be actively engaged in the business of processing and dealing in fine paper products. Commencing with the date of the aforesaid agreement the appellants took over the management of Gateway from its previous owners and have continuously owned and managed it since that time up to the present. After the change in management of Gateway Papers Limited it became a profitable operation, and Gateway proceeded to redeem the preferred shares in the year 1970, and to pay off the indebtedness owing on its promissory notes over the years 1970 to 1973 inclusive. The agreement of February 1970, for a total consideration Of $114,421.33, provided the appellants with 10,000 no par value common shares, 1,600 $10 par value cumulative preferred shares and six promissory notes having a face value of $311,745.86 (principal and accrued interest). The redemption created a gain of $213,324.53 ($311,745.86 + $16,000 — $114,421.33), taxed in equal proportions to the appellants.

Contentions

It was the position of the appellants in their notices of appeal that:

—thé purchase of the shares and of the promissory notes of Gateway did not form part of the ordinary business activities of the appellants and was not an adventure in the nature of trade on their part, but constituted an investment made by them in the said corporation;

—the amounts received by the appellants on the redemption of the preferred shares and as payment of the promissory notes were received on the realization of capital assets and are not subject to tax;

—in any event, the amounts received by the appellants in 1970 on the redemption of the preferred shares and on account of the realization of the promissory notes should not be included in computation of the appellants’ income in the subsequent years.

The respondent contended in the reply to the notice of appeal that:

—at the time the appellants purchased the securities referred to in paragraph 7(e) hereof, Gateway was in serious financial difficulties:

—at the time they acquired the securities the appellants had the means within their command to enhance the value of the securities and they knew that the success of the operation lay within the reach of their capabilities;

—the appellants applied their expertise and management competence to the business of Gateway and turned it from a loss position into a success;

—the purchase of the securities was part and parcel of a profitmaking scheme.

Evidence

Mr Victor V Spencer, of the Town of Tillsonburg, Province of Ontario, stated he was a professional engineer and businessman—an “entrepreneur”. In the years prior to those under review he and his wife owned and operated Honeycomb Construction Services Limited and Shearmat Construction Limited (hereinafter referred to as “Honeycomb” and “Shearmat”), both in the paper industry in the Province of Ontario. Late in 1970 they became aware of some financial difficulties in Gateway, with which they had some business connections, and also that Canada Trust Company. (hereinafter referred to as “Canada Trust”) was in charge of affairs of that company. After some exploratory discussions they made an offer to Canada Trust, in a letter dated January 16, 1970 (filed as Exhibit A-1), and. followed this by another letter dated January 20, 1970 (Exhibit A-2). The witness Submitted as Exhibit A-3 a copy of a one-page unaudited balance sheet for Gateway as at October 27, 1969 and indicated this had been practically all the information available to him when making the offer. A copy of a document dated February 4. 1970 (referred to as “the agreement”), between the appellants as purchasers and Canada Trust as vendors, was filed as Exhibit A-4; and a copy of the unaudited financial statement for Gateway as at December 31, 1969, dated February 26. 1970, was filed as Exhibit A-5. The reason for the appellants’ interest in Gateway was some obvious compatibility with their existing business; that certain economies both of operation and scale could ensue under their management; and a specific need existed in the Manitoba market for some of the Gateway products. In Mr Spencer’s view, under the terms of the agreement, the assets required for continuing the company’s operations were retained, the balance disposed of or realized upon, and the net proceeds allotted to the vendors. He was buying the company as a going concern. After acquisition, the company’s operations were changed, the inventory, rolling stock (trucks) and overhead drastically reduced, the variety and complexity of customer lines and products modified, and certain obviously unprofitable operations discontinued. With the dedication of approximately 25% of the available management time of both appellants, the business rapidly improved. He had not been aware during negotiations with Canada Trust up to and including at least the letter of January 20, 1970 that part of the capitalization of Gateway was in the form of loans to the company. When this had been revealed to him by Canada Trust, he had also been informed that the purchase of the said notes was a non-negotiable condition in any agreement to obtain control of the company. The agreement therefore, in his opinion, sets out basically a method of arriving at the amount to finally be paid (which several months later as evidence will show turned out to be a total of $114,421.33), since there was no other method of reaching accord on the worth of the company or its assets.

Under cross-examination the witness acknowledged that Shearmat also had been acquired by the appellants when it was in serious financial difficulty (bankrupt in fact); that arrangements to partially pay the creditors of Shearmat had extended over five years, but that in the meantime the appellants had redeemed preference stock they had acquired, and there had been an accumulated loss position on acquisition which had been available as a tax credit against future earnings. Although the witness indicated certain liabilities had been assumed on the purchase of Shearmat, it was not clear if these were trade liabilities or more similar to the corporate promissory notes in the instant case. The appellants had been aware before acquisition that a similar accumulated loss position probably existed in Gateway, and from their Shearmat experience they knew this could be valuable as an income tax credit. The appellants had ceased to charge interest on the promissory notes once they had acquired the company Gateway, since in their view that could have only further increased the financial burden to Gateway during the readjustment period.

Mr James Giesbrecht, of Lethbridge, Alberta, stated that during late 1969 or early 1970 he had been the officer of Canada Trust responsible for maintaining the operation at Gateway and disposing of the business under the most favourable circumstances he could negotiate. He had dealt with the appellants as well as with others, in such attempts to arrange a sale or realization of some kind. The existence of the promissory notes had not been disclosed until negotiations had almost been completed because the client on whose behalf Canada Trust was acting owned all the promissory notes but only 50% of the capital stock (although Exhibit A-4 shows it, Canada Trust, to have been the owner of all the capital stock by February 4, 1970).

It was this situation which prompted the agreement to be drawn up in the way it was—the formula largely deriving from Mr Giesbrecht’s efforts in attempting to negotiate some realization. He filed with the Board as Exhibit A-6 a document which he said had preceded the agreement and was typical of the format he had used with prospective buyers. It made no mention of the promissory notes, and indicated a tentative “cut-off date of January 31, 1970”. The promissory notes themselves involved in the appeals. were submitted as Exhibit A-7. These were completely unsecured and as of the date of the agreement all were overdue and unpaid.

A statement as at April 30, 1970 (Exhibit A-8), representing the settlement of the accounts for sale of Gateway under the agreement, was filed by Mr Giesbrecht and he reconciled for the Board the amount shown thereon with the amount in dispute in these appeals.

Mr William Arthur Dyer, CA, presented a document (Exhibit A-9) which provided some assistance in determining the amounts paid out to the appellants during the years 1970 through 1973 related to these appeals. This showed the following:

Argument

Counsel for the appellants urged upon the Board that the appropriate distinction be made in the review of the evidence between the position of the taxpayers as only shareholders, and that of the company Gateway, itself. The appellants had a real business reason for the acquisition of Gateway—it was thought to be, and proved to be; a valuable addition to their other operations. The capital base of the company had been the shares, both common and preferred, and also the promissory notes payable. The notes represented legitimate debts of Gateway for value received before the entry of the appellants on the scene. The action of Canada Trust in keeping certain rather vital information from the appellants during negotiations was completely explained by Mr Giesbrecht and it should not enter into these appeals as a factor. The appellants had been prepared to purchase the shares of the company for what finally turned out to be $114,421, before knowing about the promissory notes. The acquisition of the notes and the manner by which payment was to be made were dictated by Canada Trust. The appellants would have had no reason to destroy or write down the notes after purchase, since they hoped the notes could be redeemed some day. The transaction. for Gateway could not be compared to that indicated in Shearmat—Shearmat had been bankrupt and there was no specific evidence presented by the respondent regarding similar promissory notes in that company. Gateway was not bankrupt and the only liability it had not continued to pay in a proper business fashion was that related to the promissory notes. In all other ways it had remained a proper functioning company. Certainly the appellants were experienced business people and hoped to turn Gateway around, make it profitable and gain therefrom—that should not be held against them, rather it should be a factor in their favour. The taxpayers, however, had not searched out securities on which they could realize a gain—it had been a necessary part of the package. It was necessary to look beyond and through the specific transactions detailed in the agreement and recognize that the appellants had really acquired that which they had sought—the control of the company business as part of their total operations.

Counsel recognized the similarity which might be drawn to the instant case by a reading of several previous cases, notably: MNR v James N Sissons, [1968] CTC 363; 68 DTC 5236 (Exch); reversed [1969] SCR 507; [1969] CTC 184; 69 DTC 5152; J Harold Wood v MNR, [1969] SCR 330; [1969] CTC 57: 69 DTC 5073; Alexander Dewar v MNP, [1972] CTC 2499: 72 DTC 1421; Stephen S Steeves v Her Majesty the Queen, [1976] CTC 470; 76 DTC 6269 (FCTD); affirmed by the Federal Court of Appeal [1977] CTC 325; 77 DTC 5230; Paul Racine, Amédée Demers and François Nolin v MNP, [1965] CTC 150: 65 DTC 5098. Counsel, however, did submit that each of these could be distinguished from this case—in Steeves (supra) the appellants had at all times been 50% owners of the business acquired and the appellants had sought out the purchase of the notes involved; in Dewar (Supra) a proposal in bankruptcy to the creditors had been made; and in Sissons (supra) the business acquired and that of the appellants were unrelated, the appellant in that case being in an entirely different field of endeavour.

The Board was referred by counsel to Revenue Canada Interpretation Bulletin IT-114 dealing with discounts, premiums and bonuses on debt obligations, particularly paragraphs 15 and 16 which read as follows:

15. The following are some of the circumstances in which a taxpayer may more properly be classed as an “investor” rather than as an “original lender” or a ‘trader or dealer”:

(a) the investment in debt obligations was made from funds derived from Savings rather than borrowings,

(b) the investment in debt obligations is only a minor part of a taxpayer’s normal income earning activity, or

(c) purchases of debt obligations are made only infrequently.

16. If the taxpayer’s activities can be classified as those of an investor, the amount of any realized discount or bonus is treated as a capital gain. Conversely, the amount of any premium is treated as a capital loss either at the maturity of the obligation or at the date of disposition thereof. The amount of the particular taxable capital gain or the allowable capital loss as the case may be is determined in the normal manner under the provisions of subdivision c of Division B of the Act.

As a supplementary point, counsel requested the Board give consideration to the appellants’ claim that, since the preferred shares were redeemed in 1970, any gain on them (whether $15,900 or $16,000) should be taxed only in that year, not in the subsequent years; and that in addition all payments to the appellants (if held to be taxable) should only be taxed on a pro rata basis (the gain as a percentage of the total received) distributed over the four years during which payments had been made—1970 through 1973—as provided for in Interpretation Bulletin IT-114, a portion of which counsel quoted for support:

11. . . . In the case of those obligations that are redeemed by instalment payments, the amount of any discount may be included in the income of the taxpayer only after he has recovered the whole amount that he paid for the obligation; but if he wishes to bring the discount into income on ‘the basis that part of it is received at the time each payment on account of principal is received, the basis is acceptable.

Counsel for the respondent argued that the appellants had purchased the promissory notes with the view that they were certain to rapidly improve the company financially and to redeem the notes, while at the same time taking advantage, for income tax purposes, of any previously accumulated losses. This was a scheme which could only be characterized as a venture in the nature of trade when one considered the experience with Shearmat. In the instant case the appellants had ceased to accrue or receive interest on the notes after purchase, and had simply waited until funds were available to pay themselves the principal. It was accepted that the appellants had a certain legitimate business interest in acquiring Gateway, but the method used demonstrated a well-formulated plan by which the notes payable and control of the company could be purchased in order to provide a profit to the appellants. This was the main motivation. Counsel also referred to the same cases brought forward for the appellants, but also noted some relevant comments in West Coast Parts Co Ltd v MNR, [1964] CTC 519; 64 DTC 5316, and Irrigation Industries Limited v MNR, [1962] CTC 215; 62 DTC 1131. The reasons

(a) to (e) given by Mr Justice Pigeon at page 187 [5154] of the Sissons decision (supra) were quoted with approval. Using these criteria, in the submission of counsel the appellants had engaged in a transaction which must be heid to have been a venture in the nature of trade, and could not be regarded an investment as contended by the appellants.

On the subsidiary point raised by counsel for the appellants regarding the appropriate years for taxation, counsel’s view was that the Minister had taken the position that the appellants had first to recover the initial cost of the notes and shares, and that payment to them after that time would all be taxable as received. The Minister did not agree that the amount of $16,000 received and allocated for redemption for preferred shares in 1970 necessarily applied there. Further it was argued that no consideration could be or should be given for proportionate taxation liability on the four years involved in the redemption plan. The Minister regarded the transaction detailed in the agreement as one program—both shares and notes payable— and had taxed the gain received accordingly, in the years under review. The Board should not vary the Minister’s assessment, as suggested, since such variation would place part of the gain in dispute in the year 1970, taxation of which was statute-barred.

Findings

Dealing first with the subsidiary issue of the appropriate taxation years, the Board points out that the only basis for “proportionate” crediting of the receipts from the notes payable to the various taxation years from 1970 through 1973. which might exist. can only be seen in paragraph 11 of the Interpretation Bulletin. In my view, it is of limited value since the wording in the same paragraph would disqualify the appellants: “where the purchasing of debt obligations to resell or to hold until maturity either forms part of the taxpayer’s ordinary business or constitutes a business in itself, the amount of any realized discount is included in computing the taxpayer’s income" (italics mine). In the instant case there was no evidence that the taxpayers intended to resell the promissory notes, and the notes had already reached maturity, and payment of both principal and interest was overdue when they were acquired. There is no particular evidence available to the Board which would similarly disqualify the proceeds from the redemption of the preferred shares from the alternate tax treatment indicated in the Bulletin.

Counsel for the appellants urged that the agreement be regarded as a single transaction for the acquisition of the capital structure of Gateway—shares and notes—and that a distinction not be made by the Board between the acquisition of the shares for $100 and the acquisition of the notes for $114.321.33. Both common and preferred shares were purchased for $100 (and that amount was arbitrarily assigned, apparently by the Minister, to the purchase of the preferred Shares). While the Board accepts that there was indeed one total transaction, that would not appear to me to dictate that the three types of securities acquired should represent from then on only one kind of investment. Indeed they remained separate and distinct— subject to different treatment in all corporate aspects by the appellants themselves. The Board recognizes that only the most minimal information has been provided regarding the redemption of the preferred shares—an entry on Exhibit A-9 quoted earlier, and the verbal explanation of Mr Dyer, which is uncontradicted. The position the Board takes, therefore, is that the preferred shares were completely redeemed in an action separate and distinct from later or even concurrent partial redemptions of the promissory notes, and that such preference share redemption took place prior to the taxation years under review. The position of counsel for the respondent that the Board should not deal with this issue since it might place the gain involved beyond the legislative taxing capacity of the Minister is not one which I feel is soundly based.

On the major point at issue, the Board will deal with ‘some of the exhibits presented together with the verbal evidence:

A-1—This is ambiguous, and it should not be used to assert

definitely that the appellants’ offer related to the purchase of the assets of the company or the acquisition of the company itself, to whatever degree such distinction might be significant. A-2—The same comments apply as in Exhibit A-1.

A-3—Although the document does show ‘‘net shareholders’ equity

and advances—$215,119.00”, there is not sufficient evidence to assert that this should have alerted the appellants at this point in the negotiations to the existence of the notes payable.

A-4—The first three clauses read as follows:

1. The Vendor agrees to sell to the Purchasers and the Purchasers: agree to purchase from the Vendor all of the outstanding shares in the capital stock of Gateway Papers Limited (hereinafter called the. “Company”) all upon the terms and conditions herein contained, said transfer to be completed on the date for closing hereinafter provided.

2. The Vendor further agrees to sell to the Purchasers and the Purchasers further agree to purchase from the Vendor all of the promissory notes of the. Company held by the Vendor (upon which the Vendor. represents there is presently due, owing and payable by the Company to the Vendor the sum of Three Hundred and Two Thousand Six Hundred and Fifty-six Dollars ($302.656.00) plus any accrued interest thereon from November 30th. 1969) for the purchase price of a sum to be the total of:

(a) The cash on hand on January 31st, 1970 in the Company’s bank accounts;

(b) the realizable value (as hereinafter more particularly defined) of the Company’s accounts receivable:

(c) The lesser of the current book value or market value of the Company's inventory on January 31st, 1970;

(d) The value of any prepaid expenses the benefit of which the Company enjoyed as of January 31st. 1970; and

(e) The lesser of current book value or realizable market value of the automotive equipment. office and warehouse equipment, and any other fixed assets, said value being taken as of January 31st, 1970,

less the amount of all of the liabilities of the Company, both current and term, as of January 31st. 1970 (not including any liabilities of the Company in respect of amounts paid on its capital stock) and save and excepting any liabilities of the Company arising on account of the promissory notes hereinbefore referred to.

3. The Vendor will cause an investigation to be made of the financial position of the Company as at January 31st, 1970 and will cause the Purchasers to be appointed managers of the Company to take effect from February 1st, 1970.

A-5—The balance sheet of said financial statements reads as

follows:

GATEWAY PAPERS LIMITED

(Incorporated as a private company under the laws of Manitoba)

BALANCE SHEET—DECEMBER 31, 1969 (unaudited)

ASSETS

CURRENT ASSETS

Cash	$ 23,817
Accounts receivable		96,233
Inventory, at the lower of cost and net realizable value		38,218
Prepaid expenses		3,187	$161,455
FIXED ASSETS, at cost
Automotive equipment		225,876
Office and warehouse equipment		19,159
Leasehold improvements		4,029
-, .		249,064
Less accumulated depreciation		156,818	92,246
DEFERRED FINANCE CHARGES			2,333
...			$256,034
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$ 61,626
Taxes payable		9,842
The Canada Trust Company
Advances	$250,000
Accrued interest	61,746	311,746
Principal due within one year on long-term debt		19,073	402,287
LONG-TERM DEBT
Finance contracts		22,163
.
Less principal included in current liabilities		19,073	3,090
			405,377
CAPITAL STOCK AND DEFICIT
CAPITAL STOCK
Authorized	.	.	...
9,000 6% Cumulative, redeemable non-voting
preferred shares par value $10 per share
10,000 Common shares of no par value
Issued
1,600 Preferred shares (note 2)		16,000
10,000 Common shares		10,000
		26,000
DEFICIT		175,343
Excess of deficit over capital stock			(149,343)
			$256,034
Approved by the Board
Director			Director

The Board has reached certain conclusions based on the above, first that Gateway was insolvent at the time of its acquisition by the appellants, and second, that the appellants were aware of this fact. Insolvency in this context does not mean that a legal state of bankruptcy had been formalized. Canada Trust had not taken the steps necessary to place the company in receivership, preferring to make efforts to realize on its investment in Gateway through some form of sale. Insolvency, however, does mean that the liabilities, including the major obligation of the promissory notes, exceeded the assets. These promissory notes cannot be ignored in any “snap-shot” view of. Gateway at February 1, 1970,-and the company regarded as otherwise operating and functioning normally, a posture advocated by counsel for the appellants.

The question which remains with the Board is, having accepted these two elements, the insolvency and the awareness of it, in what light does that cast the purchase of the shares and notes by the appellants? The main argument put forward in support of the appellants’ case was that the purchase “constituted an investment made by them in the said corporation”; and efforts at the hearing were directed to substantiate that point. Counsel for the respondent pointed out to the Board certain indications that the appellants had not dealt with the acquisitions as one would deal with an investment, but the main emphasis by counsel was placed on a detailed and complicated proposition that the transactions surrounding the acquisition and disposal of the securities by the appellants constituted a specific venture in the nature of trade—that the gain ‘‘was the result of a carefully considered plan executed as conceived” (quotations from page 187 [5154] of Sissons (supra)).

I am not convinced that counsel for the respondent in this case succeeded in establishing such a position, particularly when the purchase by a taxpayer of corporate obligations (bonds, debentures, notes, etc) prima facie carries with it the presumption that it is done for investment purposes. I am, however, extremely doubtful that in the circumstances of this case the responsibility to prove the existence of any scheme rested with the Minister. In-the instant case, I am satisfied that the appellants wanted control of Gateway for legitimate business purposes—if for no other reason than there was a valuable tax loss position in the company. I am also satisfied that the prospect of at least getting back their purchase price of the promissory notes was considered. The degree to which that should be identified as a predetermined and positive scheme may be less obvious than the fact that the rapid redemption of the preferred shares and promissory notes was at least not fortuitous^-the redemption arose from the conscious management decisions’ of the’appellants;- The words of Mr Justice Pigeon at page 187 [5154] in Sissons (supra) specifically identify the focus of the responsibility—it is. for the taxpayer:

. . to escape taxation on his gain from the operation he has to show that it is to be characterized as an investment. Otherwise, the conclusion is inescapable that it is an adventure in the nature of trade.

Counsel for the appellants pointed out that it was necessary for him to distinguish this case from Sissons (supra) and he proposed as distinctions that the appellants were extending or expanding their existing interests in paper products (manufacturing, processing and distributing) by obtaining control of Gateway and that the purchase of the promissory notes was a prerequisite in such acquisition. The judgments in Steeves (supra) and Dewar (supra) relied heavily upon Sissons and in my view, the distinctions made therein by counsel are Subordinate to the distinctions in S/ssons. In effect, counsel for the appellants was arguing that if there was a valid business reason, and a process outside the control of the appellants to acquire Gateway, then it must have been an investment. Counsel for the appellants has capably supported these two basic points—but it is not as clear that they can be extended to show the investment character of the acquisition.

The quotation given earlier is particularly applicable here—the company was insolvent and the potential purchasers were aware of that fact. Under the circumstances it is difficult to see how the acquisition of the securities would have held a prospect of return as an investment for any complete outsider—a third party. However, by purchasing the notes for $114,321.33 (the amount to which the notes were being discounted), the appellants would no longer be outsiders, they also acquired for $100 the capital stock of the company and thereby (through the capital stock, not by virtue of the promissory notes) gained control over assets which had a net realizable value of $114,421.33. It must not be concluded that the promissory notes were worthless although they were completely unsecured and in default both as to principal and interest. They still ranked ahead of any equity directly available to the shareholders of Gateway and as long as Gateway did not cease operations or declare bankruptcy, the notes in theory were worth the net realizable assets of the company. The value in the notes, however, was founded in the control and ownership of the company, not in their own intrinsic character. It is my reading of the quotation from Sissons given above that the acquisition of the obligations from a company, in which the purchasers have or may acquire by the transaction an interest as shareholders as well as creditors, places the responsibility to sustain any possible investment characteristics of the acquisition squarely on the purchasers—the presumption of an investment no longer exists. I can only interpret this to mean that where such a relationship exists (between the shareholders and the creditors), the intention to operate the company at a gain, or any other valid purpose, does not in itself eliminate the prospect of the acquisition of corporate obligations also serving as the basis of either a scheme for realization, or holding an investment—only the facts surrounding the purchase and the treatment of the obligations subsequently would provide light on this facet of the transaction.

At the date of acquisition, there was no basis visible to me that the appellants should have believed there was any prospect: of return from the securities as from an investment. Further, their actions subsequently do not support a conclusion they dealt with the securities as one would deal with an investment. Immediately following purchase the appellants eliminated any further interest charge on the promissory notes. While the explanation provided to the Board that Gateway could not afford the additional burden at that time may be logical from a company viewpoint, nevertheless it demonstrates that at least in this one situation the appellants were acting in their best interest as shareholders of, not investors in Gateway. It would be an unusual arm’s length investor indeed who would agree immediately after purchasing a security for the return anticipated on it, to cancel such return. It would also appear that as quickly as funds were generated (either through reduction of capital invested in company assets, or from profits), the appellants applied any money available to the redemption of preferred stock and promissory notes. Such prompt action lends little support to a proposition that the company securities had been acquired as part of a stable personal investment portfolio. The redemption, however, did eliminate the possibility that there could be any interest or dividend return—the securities themselves would no longer be available.

A recent decision of this Board, June M Meronek v MNR, [1977] CTC 2111; 77 DTC 77, contains some elements which are similar to the instant case and therefore it deserves comment. The presiding Member in Meronek stated quite clearly that it was not in any way similar to the Sissons case (supra), whereas in this matter before the Board I have made it equally clear that Sissons provides the complete framework for my review of the case. Further, in Meronek (supra) the presiding Member pointed out at page 2114 [79]:

Prior to the assignment and transfer of the notes and preferred shares, McWilliams had been in exactly the same position, and if he could legally enforce his rights, and unquestionably he could, I see no valid reason why the appellant could not do likewise.

Whatever rights of enforcement rested with McWilliams in Meronek allowing for recovery of his investment are not detailed in that judgment but, in the instant case, I am satisfied that any direct effort by Canada Trust at collection of the promissory notes, such as by bankruptcy or liquidation, could not have resulted in realization in excess of $114,321.33, and might have resulted in the original note holders receiving nothing. Therefore, in my opinion, it cannot be construed that for income tax purposes the purchasers in this case (the appellants) inherited or acquired rights of enforcement providing actual realization in excess of those which were available to the vendors. Finally, in the Meronek matter certain value was placed on the fact that the appellant was not an officer of the company and took no part in its management. It is quite to the contrary in this matter before the Board.

The finding of the Board therefore is that the gain realized by the appellants on the purchase and redemption of the preference shares and promissory notes of Gateway did not arise from an investment. That gain realized, however, should be allocated in the following amounts, the adjustments relating only to the taxation years:

Decision

The appeals are allowed in part to permit the amount of $24,486.95 rather than $32,436.95 to be added to the taxable income of each of the appellants for the year 1971, and this is referred back to the respondent for reassessment. In all other respects the appeals are dismissed.

Appeals allowed in part.