Mark G Smerchanski v. Minister of National Revenue, [1977] CTC 2466

Delmer E Taylor:—This is an appeal against income tax reassessments in which the Minister of National Revenue increased the taxable income of the appellant by an amount of $5,074.68 for the year 1961, and disallowed a charitable donation of $1,125 for the same year; and increased the taxable income of the appellant by an amount of $667 for the year 1962. The appellant relied upon sections 3, 4, paragraphs 27(1)(a) and 139(1)(e) of the Income Tax Act, RSC 1952, chapter 148. The respondent relied upon sections 3, 4, paragraphs 27(1 )(a) and 139(1 )(ae) of the said Act.

Facts

The $5,074.68 was a gain on the sale of approximately 1,000 shares in a company Border Chemical Company Ltd (hereinafter referred to as “Border” or “the company”). The $1,125 donation was not supported by an acceptable receipt. The $667 was a gain on the sale of certain shares in a company South Dufault Mines Ltd (hereinafter referred to as “Dufault”).

Contentions

The appellant contended that:

—the acquisition and disposition by him of certain shares in the capital stock of the corporations known as Border Chemical Ltd and South Dufault Mines Ltd were acquisitions and dispositions of a property investment and therefore capital in quality and nature;

—the said acquisitions and dispositions were not a business or part of a business of the appellant:

—the respondent has failed to provide a proper deduction to him in calculating taxable income in respect of the charitable donation of $1,125 paid by him.

The position of the respondent was that:

—the appellant had acquired the said 1,000 shares of Border Chemical Ltd with the intention of dealing or trading or otherwise turning them to account at a profil, and that the profit of $5,074.68 realized by the appellant in his 1961 taxation year upon the sale of the said shares was income from a business;

—the appellant did not prove that he made the said charitable donation by filing receipts with the Minister as required;

—the appellant had acquired the shares of South Dufault Mines Ltd with the intention of dealing or trading or otherwise turning them to account at a profit.

Evidence

The appellant who gave evidence himself is, and was during the times material, a chemical engineer with considerable expertise and experience in the mining industry.

In 1959 he formed Border and has remained since its inception in control of the company, which has in the intervening years been very successful. Counsel for the appellant filed with the Board several documents related to the early affairs of the company, which included minutes and records of primarily the financial transactions involved in bringing Border into production and making it a stable element of the industry, now making a substantial portion of the sulphuric acid requirements for Western Canada. As president and chief motivator, the appellant actively assisted in the promotion and underwriting of the sales of shares in Border during the years in question, purchasing and selling company stock where he deemed it advisable, and making available to the company (through his firm of solicitors) substantial sums of money in the process. When the initial period of conceiving, financing, constructing, developing and getting Border into production was completed, the appellant’s activity in the shares of Border had produced for him a gain of $5,074.68.

No evidence was provided to the Board with regard to the charitable donation of $1,125.

With regard to the Dufault matter, it was established that the purchase of the stock had occurred in 1956 and that it was not unusual for the appellant to invest in such a way, particularly in the mining industry in those years. His position was that he had made the purchase only reluctantly, even though he was familiar with some of the people engaged in the Dufault mining venture.

Counsel for the respondent, both in cross-examination of the appellant and through Mr James MacKay, an officer of Revenue Canada, introduced as evidence further documentation dealing with the tax matters at issue. The Board was made aware that the appellant had on a separate occasion been involved in income tax proceedings with the Department and, to minimize the amount of evidence necessary for the Board, counsel agreed that the Board also be made aware of the fact that the appellant had participated in the founding and development of several mining companies prior to the particular years in question in this appeal.

Argument

Counsel for the appellant asserted that the efforts of the appellant had been solely in the interest of establishing the company, that the appellant would not spend any effort during such a busy period on trading in the market on shares of Border to make such a relatively small sum, and that had there been a loss, rather than a gain, it would have been a capital loss. The appellant’s total efforts, including the buying and selling of the particular Border shares involved, had been to obtain and maintain market confidence in the company during its formative years and all the funds raised through the public stock issues had gone into the company for the purchase of assets, or the cost of operation—none had gone to the appellant. It had all been a necessary part of the underwriting process. On the Dufault matter, the appellant was merely buying shares as any other investor and sold them when the opportunity came along some years later.

Counsel for the respondent stressed that the appellant had been a trader in both situations—Border and Dufault—and above all had a controlling interest in Border during the times material. The appellant’s past record, knowledge and experience in almost all aspects of the mining industry could not be overlooked.

Findings

Since it is essential that the issue be isolated as much as possible, and the broader and more complex background related to the appellant’s income tax affairs not overshadow it completely, the Board in writing this decision has made only limited references to the evidence presented and argument given capably and in detail, through counsel for both the appellant and the respondent. For precisely the same reason, only the minimum detail has been provided in referring to the evidence. The Board, however, has carefully reviewed, crossreferenced and analyzed the contents of the evidence presented at the hearing as it appears applicable to the matter at issue.

First, the Board, not having heard any evidence in support of the charitable donation of $1,125 in the year 1961, finds no basis upon which to alter that part of the Minister’s assessment.

Second, in the Dufault matter, the Board accepts the respondent’s position that the appellant had engaged in the founding and development of mining companies before the years in question, but this is not, in itself, decisive for this particular transaction. The general context of the evidence submitted to the Board, however, leaves little doubt that the gain resulted from a series of purchases and sales, not from an isolated transaction, and that the consistent purpose throughout was to make a profit on the sale of the stock itself, not to hold it for any other reason, even the founding and development of a mining company.

Turning to the major question—that of the gain of $5,074.68 on the Border stock—the Board finds no basis for the view that the appellant engaged in the lengthy and complicated transactions involved, with the specific purpose in mind of gaining a profit thereby. His main effort and attention during the period of time involved were devoted to establishing Border, a major factor in which, in his mind, was maintaining an orderly market for the shares of the company until the plant construction and production phases could be realized. To do so it was necessary, according to the appellant, to make known that there was a purchaser ready to buy any shares available, and a seller ready to sell any that were requested. That he filled both roles was in his opinion only good business—his only purpose being the establishment of Border—and to that end he performed whatever functions were necessary. Although the expression was not used, his argument essentially was that he acted, in practice, as the agent of Border and, as such, should not be personally taxable on the gain resulting incidentally from filling such a role.

With all of this the Board agrees up to and including his legitimately perceived role as the agent of Border. The problem for the Board, however, arises from the fact that had he continued to perceive himself as the development instrument of Border when it was evident to him that a profit of some $5,074.68 had been realized through these efforts, he should have considered leaving the funds so gained to the credit of Border. If one accepts the rationale put forward by the appellant—and I believe I at least comprehend it—then it follows that if the exercise had been a global one, all for the purpose of getting the company launched, then the net gain or loss on it might well have been considered as attributable to the company. In laying claim to the profit personally, the appellant, in the opinion of the Board, did fundamental damage to the assertion that it should remain as on capital account, arising as it did from a capital transaction conducted by him for Border—that of raising funds to establish the company. The basis of any claim to such capital status rested within the company, not with the appellant, and the Board has heard no argument which would warrant the translation of any part of the totality of the financial benefit to the company from such effort into a non-taxable gain for the appellant.

The evidence does not support the conclusion that the gain resulted from a separate profit-making scheme by the appellant, or even a part of his accepted and recognized program of trading, such as that dealing with Dufault, discussed earlier. It might be argued that attributing the profit to merely the results of trading transactions by the appellant personally (as has been done by the Minister) is not the most appropriate designation—other possible considerations being as compensation or commission for his efforts on behalf of the company, or aS a deemed dividend from some form of capital surplus. The question of any such fine distinction, however, is not before the Board. The Board was only required to examine the evidence in support of the appellant’s position that the amount of $5,074.68 represented a Capital gain accruing to him personally.

Decision

The appeal is dismissed.

Appeal dismissed.