Roland
St-Onge:—In
1968
appellant
realized
a
profit
of
$86,317
on
the
sale
of
shares
which
it
held
in
Fibracan
Inc,
hereinafter
referred
to
as
“Fibracan”.
This
profit
was
taxed
as
income;
appellant
however
contends
that
it
was
a
tax-exempt
capital
gain.
Since
the
facts
on
which
the
action
is
based
are
clearly
set
out
in
the
pleadings,
we
felt
it
advisable
to
cite
the
following:
(TRANSLATION)
NOTICE
OF
APPEAL
A.
STATEMENT
OF
FACTS.
1.
In
1964
a
group
of
six
industrialists
or
businessmen
and
two
engineers,
who
had
personal
savings
for
investment,
agreed
to
form
an
“investment
club”;
appellant
company
was
incorporated
for
that
purpose
on
December
3,
1964,
with
an
authorized
capital
of
$150,000,
divided
into
20,000
common
shares
with
a
par
value
of
$1.00
each
and
13,000
preferred
shares,
having
a
preferential,
non-cumulative
dividend
of
six
per
cent
and
a
par
value
of
$10.00
each,
the
said
authorized
capital
being
increased
by
80,000
additional
common
shares
at
a
par
value
of
$1.00
each
by
means
of
supplementary
letters
patent
dated
October
18,
1967.
2.
Fernand
Lucchesi
is
the
president
of
appellant
and
of
Fibracan.
3.
As
indicated
by
its
letters
patent,
appellant
is
an
investment
company.
4.
On
December
7,
1964,
subscriptions
were
accepted
by
appellant
from
the
eight
shareholders,
to
whom,
on
receiving
cash
payment
for
the
said
subscriptions,
appellant
issued
16,000
common
and
6,400
preferred
shares
in
its
capital
stock,
fully
paid
up,
for
a
total
sum
of
$80,000.
5.
Other
applications
for
shares
in
appellant’s
capital
stock
were
subsequently
received,
the
shareholders
making
monthly
advances
to
appellant,
or
monthly
payments,
to
pay
for
shares
subscribed
or
to
be
subscribed,
as
in
any
investment
club.
6.
On
December
10,
1968,
there
were
33,433
common
shares
in
appellant’s
capital
stock
issued
and
outstanding,
600
common
shares
subject
to
option,
and
8,800
preferred
shares
issued
and
outstanding,
making
the
total
paid-up
capital
$122,033.
7.
On
November
30,
1961,
Edgar
D’Souza,
an
engineer
and
an
acquaintance
of
Fernand
Lucchesi,
incorporated
Fibracan
as
a
company
manufacturing
polystyrene
cups,
with
an
authorized
capital
stock
of
$575,000,
divided
into
27,000
preferred
shares,
with
a
cumulative
dividend
of
six
per
cent,
redeemable
and
participating
after
payment
of
a
dividend
of
$0.20
per
share
to
the
common
shares,
having
a
par
value
of
$10.00
each,
and
300,000
common
shares
with
a
par
value
of
$1.00
each.
8.
As
large
sums
were
necessary
for
the
establishment
of
Fibracan,
Edgar
D’Souza,
through
Fernand
Lucchesi,
interested
appellant
in
investing
in
the
capital
stock
of
Fibracan.
9.
During
1965
and
1966,
appellant
subscribed
and
paid
for
a
total
of
57,425
common
shares
in
the
capital
stock
of
Fibracan,
and
4,250
preferred
shares,
making
a
total
of
$99,925.
10.
On
September
22,
1967,
Fibracan,
in
recognition
of
the
services
rendered
to
it
since
its
incorporation
by
its
directors
and
the
members
of
its
managing
committee,
the
persona!
endorsement
by
the
latter
of
substantial
loans
contracted
by
Fibracan,
a
number
of
things
done
by
the
said
persons
and
their
attendance
at
regular
meetings
without
remuneration
or
reimbursement
for
travel
expenses,
granted.
(a)
to
its
directors
and
the
members
of
its
managing
committee
an
option
to
purchase
9,000
common
shares,
the
said
option
being
valid
for
a
period
of
five
years
from
September
22,
1967,
at
a
price
of
$1.50
per
common
share,
at
the
rate
of
60
common
shares
in
the
capital
stock
of
Fibracan
for
each
attendance
at
the
regular
meetings
of
the
Board
of
Directors
or
the
managing
committee,
as
the
case
may
be,
namely
in
the
case
of
Messrs.
Fernand
Lucchesi,
Lionel
Barnabé,
Jean
Royer
and
Gilles
Barré,
all
directors.
of
the
appellant,
1,320,
780,
300
and
240
common
shares
respectively,
and
(b)
to
each
of
the
five
members
of
the
managing
committee,
including
Fernand
Lucchesi,
an
option
to
purchase
4,000
common
shares
in
the
capital
stock
of
Fibracan,
which
said
option
could
be
exercised
during
the
five-year
period
from
September
22,
1967,
at
a
price
of
$1.50
per
common
share.
11.
At
July
25,
1968,
the
capital
stock
of
Fibracan,
issued
and
outstanding,
stood
at
174,109
common
shares
and
10,255
preferred
shares.
12.
Early
in
1968
negotiations
were
commenced
between
Edgar
D’Souza
and
Fernand
Lucchesi,
officers
of
Fibracan
and
Charterhouse
Canada
Limited
(hereinafter
referred
to
as
Charterhouse),
the
latter
being
prepared
to
purchase
common
shares
in
the
capital
stock
of
Fibracan
at
$0.85
per
share.
13.
In
May,
1968,
the
purchase
of
65,000
common
shares
in
the
capital
stock
of
Fibracan
by
Charterhouse
was
renegotiated
at
a
price
of
$1.75
per
share.
14.
On
May
17,
1968,
Edgar
D’Souza
advised
Fernand
Lucchesi
that
the
issued
and
outstanding
common
shares
in
the
capital
stock
of
Fibracan
would
undergo
an
appreciable
increase
in
value
such
that
in
the
next
two
years
he
foresaw
that
the
market
value
of
the
common
shares
would
be
about
$10.00.
Edgar
D’Souza
also
spoke
of
expanding
Fibracan’s
operations
in
Toronto
and
Vancouver;
he
mentioned
the
growth
in
sales
volume,
from
$156,000
in
the
first
year
of
operations
to
$669,000
in
the
third
year,
and
forecast
a
volume
of
business
amounting
to
$1,500,000
in
the
fourth
year,
which
amount
would
double
in
the
fifth
and
sixth
years.
15.
(a)
Whereas
Fibracan
was
expanding
and
would
continue
to
do
so
for
many
years
to
come,
so
that
any
profit
realized
would
be
immediately
reinvested
in
the
business
and
no
part
of
it
distributed
to
its
shareholders
in
the
form
of
dividends;
(b)
whereas
the
shares
in
Fibracan
were
subject
to
restrictions
on
transfers
of
common
stock,
under
its
by-law
No.
5,
so
that
any
shareholder
wishing
to
sell
his
common
stock
was
first
obliged
to
offer
it
to
the
other
shareholders,
at
a
price
equal
to
one
and
one-quarter
times
the
book
value
of
the
common
stock
established
in
the
last
balance
sheet
of
the
preceding
financial
year
(June
30);
(c)
whereas
the
book
value
of
a
common
share
in
the
capital
stock
of
Fibracan
was
32.4
cents
on
June
30,
1966,
and
74.8
cents
on
June
30,
1967;
(d)
whereas
because
of
a
financing
arrangement
with
Charterhouse,
Fibracan
could
not
pay
a
dividend
on
its
issued
and
outstanding
preferred
shares
without
first
meeting
certain
conditions:
(e)
whereas
Fibracan
had
to
compete
with
large
companies
that
are
well
established
in
the
field
of
manufacturing
cups
and
other
similar
products;
and
(f)
whereas
appellant’s
shareholders
were
beginning
to
find
that
appellant
was
slow
in
yielding
a
return
on
its
investments;
(g)
Fernand
Lucchesi
took
Edgar
D’Souza
at
his
word
and
suggested
to
him
that
he
buy
all
the
common
shares
in
the
capital
stock
of
Fibracan
held
by
appellant,
at
$10.00
a
share.
16.
Finally,
after
some
discussion,
appellant
consented
to
give
Edgar
D’Souza
an
option
on
all
its
57,425
common
shares,
at
$4.00
a
share,
and
on
ail
its
4,250
preferred
shares,
at
their
par
value,
which
it
held
in
the
capital
stock
of
Fibracan,
the
said
option
to
be
valid
for
a
period
of
90
days
from
May
17,
1968.
17.
The
price
offered,
$4.00
per
share,
was
so
attractive
under
the
circumstances
that
the
appellant’s
directors
did
not
hesitate
over
appellant’s
selling
Edgar
D’Souza
ail
of
its
common
shares
in
the
capital
stock
of
Fibracan,
and
appellant
thus
recovered
its
investment.
18.
On
or
about
June
4,
1968,
subject
to
obtaining
an
exemption
from
registration
from
the
Securities
Commission,
Charterhouse
subscribed
for
60,000
common
shares
in
the
capital
stock
of
Fibracan
at
the
price
of
$2.00
per
share,
and
the
said
shares
were
issued
to
it
on
July
26,
1968.
19.
At
the
end
of
August
or
beginning
of
September
1968,
Edgar
D’Souza,
acting
through
Charterhouse,
purchased
30,000
common
shares
in
the
capital
stock
of
Fibracan
from
appellant
at
$4.00
per
share,
and
2,250
preferred
shares
in
the
capital
stock
of
Fibracan
at
their
par
value,
namely
$1.00
(sic)
per
share,
for
a
total
cost
of
$142,500,
consisting
of
$71,250
cash,
$35,625
payable
on
September
5,
1969,
and
$35,625
on
September
5,
1970,
the
balance
of
the
selling
price
to
bear
no
interest,
and
a
sales
commission
of
$3,552
payable
to
Edgar
D’Souza
to
be
deducted
from
the
selling
price.
20.
Purchase
of
the
said
common
stock
by
Edgar
D’Souza
at
$4.00
a
share
also
enabled
the
latter
to
set
a
value
for
his
own
common
shares
in
the
capital
stock
of
Fibracan,
transferred
as
collateral
security
on
a
loan.
21.
The
proceeds
thus
received
by
appellant
from
the
sale
of
the
said
shares
in
the
capital
stock
of
Fibracan
were
reinvested,
for
example,
in
shares
quoted
on
the
Stock
Exchange
—
to
cite
only
a
few,
Industrial
Acceptance
Corporation,
Dupont
of
Canada,
Great
Lakes
Paper
Ltd.,
Price
Co.,
Abitibi,
Alcan,
Chemcell,
Traders,
Westcoast,
Bell
Canada,
American
Growth
Special,
Acklands
Ltd.,
etc.
in
the
same
way
as
an
individual
makes
investments.
22.
Appellant
subsequently
considered
various
proposals
for
investment
in
the
capital
stock
of
such
companies
as
Nilus
Leclerc
Inc.,
La
Buanderie
Lévis
Ltée,
etc.
23.
As
the
option
to
purchase
granted
on
September
22,
1967,
was
conferred
on
Fernand
Lucchesi
personally
and
not
on
the
appellant,
Fernand
Lucchesi
wished
the
appellant’s
directors
to
be
informed
of
this
option
and
wanted
appellant
to
state
officially
that
it
was
not
interested
in
the
said
option,
so
that
Fernand
Lucchesi
could
not
be
charged
in
due
course
by
any
of
appellant’s
shareholders
with
having
taken
advantage
of
his
position
as
an
officer
and
director
of
appellant
and
of
Fibracan,
and
this
is
why
the
matter
was
included
in
appellant’s
book
of
minutes.
24.
Appellant
has
no
office,
employees,
or
telephone,
and
engages
in
no
public
advertising
or
solicitation
to
attract
funds
or
secure
investments,
but
remains
a
strictly
private
investment
company,
As
it
is
not
in
the
securities
business,
it
is
not
registered
with
the
Quebec
Securities
Commission
as
a
broker.
B.
GROUNDS
FOR
APPEAL.
25.
The
profit
of
$86,317
realized
on
the
sale
of
the
shares
in
the
capital
stock
of
Fibracan
constitutes
a
capital
gain,
as
was
held,
for
example,
in
Canada
Permanent
Mortgage
Corporation
v
MNR,
1971
DTC
5409,
[and
Foreign
Power
Securities
Corporation
Limited
v
MNR,
1967
DTC
5084],
as
appellant
is
an
investment
company
and
not
in
the
business
of
selling
securities.
26.
Even
if,
as
respondent
claims,
the
profits
were
taxable,
which
is
categorically
denied
by
appellant,
they
were
received
over
a
period
of
three
years
and
section
85B(d)(i)
would
therefore
apply
in
the
circumstances.
27.
Respondent
appears
to
be
making
a
distinction
between
the
sale
of
shares
by
an
investment
group
and
the
sale
of
shares
by
an
investment
group
with
corporate
status.
28.
Appellant
has
always
sought
long-term
investments
with
a
good
rate
of
return.
Apart
from
dealings
in
shares
quoted
on
the
Exchange,
the
sale
of
the
shares
in
Fibracan
was
the
only
other
transaction
undertaken
by
appellant.
29.
No
benefit
or
advantage
can
be
conferred
on
appellant
by
Fibracan,
because
in
the
first
place
the
option
to
purchase
6,640
common
shares
in
the
capital
stock
of
Fibracan
was
not
conferred
on
appellant
but
on
Fernand
Lucchesi,
Lionel
Barnabé,
Jean
Royer
and
Gilles
Paré,
and
secondly,
the
book
value
of
the
Fibracan
shares
at
the
time
the
option
was
exercised
was
about
$0.85,
while
their
market
value
per
share
varied
between
$1.50
(the
price
paid
by
the
shareholders)
and
$2.00
(the
price
paid
by
third
parties
such
as
Charterhouse).
Respondent’s
reply
to
the
notice
of
appeal
reads
in
part
as
follows:
(TRANSLATION)
15.
In
assessing
appellant
for
the
1968
taxation
year
Respondent
relied
inter
alia
on
the
presumptions
resulting
from
the
following
facts:
(a)
appellant
was
incorporated
by
letters
patent
issued
on
December
3,
1964;
(b)
Fibracan
Inc.
commenced
operations
on
July
15,
1964;
(c)
even
before
Appellant’s
incorporation
the
monies
required
to
pay
for
the
shares
purchased
by
its
shareholders
had
been
used
for
the
purchase
of
shares
in
Fibracan
Inc.;
(d)
up
to
September
1968
all
the
capital
stock
subscribed
by
Appellant’s
shareholders
was
used
by
Appellant
for
the
purchase
of
shares
in
Fibracan
Inc.;
(e)
in
1966
Appellant
held
57,425
common
shares
and
4,250
preferred
shares
issued
by
Fibracan
Inc.;
(f)
Fernand
Lucchesi,
President
of
the
Appellant,
is
also
President
of
Fibracan
Inc.;
(g)
between
its
incorporation
on
December
3,
1964,
and
September,
1968,
Appellant
was
engaged
in
only
one
activity,
namely
the
launching
or
promotion
of
Fibracan
Inc.;
(h)
as
Fibracan
Inc.
was
a
newly-formed
business,
Appellant
could
not
hope
to
receive
any
dividends
for
a
good
many
years;
(k)
in
August,
1968,
Appellant
exercised
its
option
to
purchase
6,640
common
shares
in
Fibracan
Inc.
at
$1.50
each,
whereas
this
right
to
purchase
had
been
conferred
only
on
certain
shareholders
in
Fibracan
Inc.
and
the
value
of
the
said
shares
was
at
least
$4.00
each:
(l)
Respondent
rightly
treated
as
taxable
business
income
the
profit
of
$86,317.00
realized
on
the
sale
of
shares
mentioned
in
paragraph
15(i)
above;
(m)
Respondent
also
rightly
treated
the
transaction
mentioned
in
paragraph
15(k)
above
as
having
conferred
on
Appellant
a
taxable
profit
of
$16,600.00;
(B)
STATUTORY
PROVISIONS
AND
SUPPORTING
REASONS
16.
Respondent
relies
inter
alia
on
sections
3,
4,
8(1),
85B(1)(d)
and
139(1
)(e)
of
the
Income
Tax
Act;
17.
the
profit
of
$86,317.00
realized
by
Appellant
in
1968
represents
income
from
a
business
within
the
meaning
of
sections
3,
4
and
139(1)(e)
of
the
Act;
18.
Appellant
cannot
claim
a
reserve
for
the
amounts
to
be
collected
in
1968
and
1969
on
the
sale
price
of
the
shares
mentioned
in
paragraph
15(i)
above,
since
section
85B(1)(d)
of
the
Act
requires
that
the
payments
be
spread
over
a
period
of
more
than
two
years
after
the
date
of
the
sale:
19.
The
purchase
of
the
6,640
shares
mentioned
in
paragraph
15(k)
above
conferred
on
Appellant
a
benefit
or
advantage
taxable
under
section
8(1)
of
the
Act.
At
the
hearing
Edgar
D’Souza,
who
had
already
enjoyed
considerable
success
in
business
management,
explained
that
his
intention
initially
was
to
set
up
a
corporation
known
as
Fibracan
which
would
be
an
attractive
investment
for
people
of
Quebec.
He
had
a
study
made
by
the
Société
canadienne
d’études
techniques
et
d’investissements
Incorporée
of
the
feasibility
of
setting
up
a
factory
to
make
paper
cups
in
the
Lac
St-Jean
region;
the
report
was
then
submitted
to
Mr
Lucchesi
and
his
group
with
a
view
to
interesting
them
in
the
new
business.
This
report,
which
considered
inter
alia
the
situation
of
the
Canadian
market,
anticipated
production
costs
and
the
planned
financial
structure
of
the
business,
forecast
the
following
profits:
|
Net
Profit
|
|
Net
Profit
|
|
|
before
|
after
after
|
Available
for
|
Year
|
Sales
Sales
|
Tax
|
Tax
|
Tax
|
Tax
|
Reinvestment^
|
1
|
$
549,600
|
|
$
67,250
|
|
$
43,900
|
$
89,900
|
2
|
870,200
|
|
181,600
|
|
98,610
|
133,410
|
3
|
1,059,600
|
|
254,660
|
|
135,250
|
165,490
|
The
factory
called
for
an
initial
investment
of
$220,000.
The
Lucchesi
group,
interested
in
making
a
good
long-term
investment,
took
shares
in
the
business,
on
condition,
first,
that
the
directors
be
chosen
from
the
said
group
and,
second,
that
the
company
by-laws
restrict
share
transfers,
so
as
to
make
the
sale
of
shares
by
shareholders
difficult.
At
first
it
seemed
that
none
of
the
50
to
60
shareholders
would
have
control
of
the
company,
but
it
should
be
noted
that,
by
1964,
the
Lucchesi
group
had
already
acquired
30%
of
the
controlling
shares.
The
private
nature
of
the
company
did
not
facilitate
share
transfer;
there
was
in
fact
no
purchase
of
shares
except
the
one
by
Charterhouse
in
1968.
On
July
4,
1964
Fibracan,
which
had
obtained
permission
from
the
Securities
Commission
to
issue
common
and
preferred
stock,
passed
a
resolution
that
such
shares
be
issued
to
subscribers
mentioned
in
the
resolution,
including
the
witness,
Mr
D’Souza,
who
was
entitled
to
6,300
common
shares.
On
December
14,
1970,
in
a
letter
addressed
to
Jean-Paul
Marcoux
(Exhibit
A-11),
Mr
G
M
Alarie,
secretary
of
Fibracan,
described
the
different
options
provided
and
the
value
of
Fibracan
shares
at
various
times.
This
letter
reads
as
follows:
Further
to
our
conversation,
as
requested
by
you
I
am
providing
details
regarding
share
offerings
made
to
shareholders,
management
committee
members
and
others,
as
per
the
recorded
company
minutes
and
also
the
audited
statements
prepared
by
Samson,
Bélair,
Côté,
Lacroix
et
Associés,
our
auditors.
1.
On
October
29,
1966,
shareholders
were
given
the
opportunity
to
buy
common
shares
of
the
company
at
$1.00
per
share.
Non
shareholders
were
given
this
opportunity
to
purchase
common
shares
at
$1.50
per
share.
Also,
on
May
26,
1967,
both
Messrs.
D’Souza
and
Alarie
were
provided
options
for
a
5-year
period
to
purchase
common
shares
at
$1.50
per
share.
2.
Based
on
the
June
30,
1966,
financial
statement
of
the
company,
the
book
value
of
the
common
shares
was
32.4
cents
each.
3.
On
September
22,
1967,
several
members
of
the
management
committee,
most
of
whom
were
directors
of
the
company,
were
provided
options
to
purchase
common
shares
at
$1.50
per
share
for
a
5-year
period.
4.
According
to
audited
statement
of
June
30,
1967,
the
book
value
of
the
common
shares
was
74.8
cents
each.
5.
In
early
1968,
the
President
of
Fibracan
entered
into
negotiations
with
Charterhouse
Canada
Limited
to
get
the
company
to
invest
in
Fibracan.
In
the
early
stages,
Charterhouse
Canada
Limited,
based
on
book
value
of
June
30,
1967,
offered
the
company
85
cents
for
each
common
share.
However,
in
May
1968,
agreement
was
reached
between
the
company
and
Charterhouse
Canada
Limited
for
the
sale
of
60,000
common
shares
at
$2.00
each,
subject
to
approval
of
the
Quebec
Securities
Commission.
6.
The
actual
share
transaction
with
regard
to
Charterhouse
Canada
Limited
took
place
on
July
26,
1968.
According
to
this
letter
the
Fibracan
shares
had
a
low
book
value.
Mr
D’Souza
maintained
that
this
was
due
to
the
company’s
lack
of
capital,
the
difficulty
in
training
qualified
staff,
and
competition
from
American
companies,
which
made
price
cuts
of
nearly
50%.
This
situation
obliged
Fibracan
to
resort
to
an
offering
of
shares
in
order
to
obtain
the
capital
needed
to
run
its
factory
efficiently.
In
other
words,
the
company
would
have
to
face
bankruptcy,
or
sell
its
assets
to
another
company,
unless
it
could
obtain
the
sum
of
$150,000
at
short
notice.
Its
directors
and
shareholders,
including
the
Lucchesi
group,
had
no
more
money
to
invest
in
Fibracan.
Mr
D’Souza
said
he
personally
approached
Charterhouse,
a
financial
institution
which
purchased
shares
in
new
companies
for
investment
purposes,
shares
which
it
later
resold
at
a
profit.
The
latter
offered
to
buy
stock
at
$0.85
per
share.
As
the
directors
and
shareholders
had
paid
$1.50
per
share
themselves,
they
could
not
accept
this
offer.
After
considerable
negotiation,
Charterhouse
decided
to
buy
60,000
common
shares
at
$2
per
share,
provided
that
Fibracan
shareholders
could
not
sell
their
shares
without
first
offering
them
to
Charterhouse.
Subsequently,
at
a
meeting
with
the
Lucchesi
group
at
the
Queen
Elizabeth
Hotel,
Mr
D’Souza
told
them
that
Fibracan
shares
would
be
worth
up
to
$10
each.
This
optimistic
statement
caused
some
discussion,
as
a
result
of
which
Mr
D’Souza
agreed
to
sign
an
option
to
purchase
from
the
said
group
all
the
shares
it
held
in
Fibracan
at
$4
each.
However,
he
only
exercised
half
his
option,
since
the
members
of
the
group
decided
to
retain
the
other
half.
An
amount
of
$3,562
was
credited
to
Mr
D’Souza
from
the
purchase
price
as
a
commission.
Mr
D’Souza
also
testified
that
Fibracan
had
offices
and
warehouses
in
Toronto,
Vancouver,
Chicago
and
Weston
(USA),
and
that
it
intended
to
put
up
a
new
$600,000
factory
in
Toronto.
Two
of
the
appellant
company’s
shareholders
testified
that
they
had
decided,
after
examining
the
feasibility
report,
to
put
their
savings
into
appellant
company
so
as
to
build
up
a
pension
fund
for
themselves.
One
of
them,
an
engineer,
said
that
all
shareholders
in
the
appellant
company
had
the
technical
skill
to
carry
out
their
undertaking.
He
had
himself
taken
steps
to
acquire
shares
or
equity
in
other
companies
not
registered
on
the
Exchange,
but
which
could
pay
attractive
dividends,
such
as
Nilus
Leclerc,
Victoriaville
Casket
and
Buanderie
Lévis.
Fernand
Lucchesi,
president
of
Fibracan,
explained
that
he
had
been
invited
by
a
friend,
a
Quebec
industrialist,
to
attend
a
meeting
of
big
city
contractors
and
engineers
for
the
purpose
of
setting
up
a
company
to
deal
in
structural
steel.
This
first
meeting
gave
him
an
opportunity
to
obtain
large
amounts
of
capital.
Subsequently,
through
his
father,
he
had
occasion
to
examine
the
feasibility
report
prepared
at
Mr
D’Souza’s
request.
After
the
report
was
examined
a
questionnaire
was
prepared
by
the
Quintex
group
for
Mr
D’Souza,
who
replied
to
the
satisfaction
of
the
group.
Mr
D’Souza
required
$75,000
to
start
operations,
and
a
lawyer
was
asked
to
handle
the
incorporation.
Because
of
difficulties
in
the
choice
of
a
name,
incorporation
was
delayed
‘or
some
time.
Mr
Lucchesi
further
explained
that
the
company
had
had
no
need
to
borrow
money,
and
that
the
subscriptions
for
shares
had
been
sufficient
to
provide
$100,000—$75,000
of
which
was
to
be
invested
in
Fibracan
and
$25,000
in
other
industrial
companies.
His
group
was
in
touch
with
the
Quintex
group,
which
included
two
engineers,
two
contractors
and
an
accountant
named
Jean-Paul
Marcoux.
He
explained
that
appellant
company
had
never
been
incorporated
to
deal
in
stock
or
to
buy
control
of
Fibracan.
Each
member
of
his
group
invested
from
$5,000
to
$10,000
as
the
initial
outlay,
and
then
undertook
to
pay
$25
a
month
to
create
additional
capital,
in
order
to
make
investments
in
other
companies.
When
there
was
a
surplus
of
unused
subscriptions
appellant
company
bought
shares
in
well-known
companies
quoted
on
the
Stock
Exchange.
Finally,
Mr
Lucchesi
corroborated
the
testimony
of
the
other
witnesses,
stating
that
the
option
which
he
had
acquired
personally
had
been
referred
to
in
the
books
of
minutes
of
appellant
company,
at
his
request,
so
that
all
the
shareholders
would
be
aware
of
this
option.
Counsel
for
appellant
explained
that
neither
appellant
nor
its
shareholders
had
borrowed
money
to
purchase
the
Fibracan
shares;
that
appellant
had
purchased
them
as
a
long-term
investment
and
had
never
had
any
intention
of
reselling
them;
that
it
had
never
sold
shares
and
that
this
isolated
sale
in
1968
was
the
result
of
circumstances
which
made
it
inevitable
and,
accordingly,
not
taxable.
According
to
his
submission,
the
proven
facts
clearly
indicate
that
appellant
was
incorporated
to
make
long-term
investments;
that
it
never
acted
as
a
securities
broker;
that
it
never
advertised
its
shares
for
sale
and
that
the
latter
were
not
quoted
on
the
Exchange
and
were
subject
to
transfer
restrictions.
Appellant
was
to
buy
majority
holdings
in
small
corporations,
and
did
in
fact
take
steps
to
buy
stock
or
equity
in
Victoriaville
Casket,
Nilus
Leclerc
and
Buanderie
Lévis.
Despite
the
attractive
offer
to
purchase
all
its
shares
at
$4
a
share,
appellant
sold
only
half
of
them,
indicating,
in
counsel’s
view,
that
its
intention
was
to
keep
its
shares
as
an
investment.
Counsel
for
the
respondent
maintained
that
even
if
this
was
an
isolated
transaction
it
was
still
an
adventure
in
the
nature
of
trade,
since
appellant
invested
all
its
capital
in
a
single
company
in
order
to
promote
a
new
industry
and
sell
its
shares
at
a
profit
at
the
first
opportunity,
which
constitutes
a
purely
speculative
venture.
All
the
shareholders
in
the
appellant
company
were
astute
businessmen,
and
must
have
been
aware
of
the
highly
speculative
nature
of
a
new
business.
They
must
also
have
known
of
the
competition
which
Fibracan
was
up
against
in
the
Canadian
market.
The
purchase
of
common
and
preferred
stock
in
such
a
large
quantity
could
not
be
a
genuine
investment
like
the
purchase
of
shares
in
well-known
Canadian
companies,
of
which
appellant,
as
shown
by
its
balance
sheet,
had
only
a
token
number.
This
manner
of
proceeding
showed
clearly
that
it
would
rather
tie
up
its
capital
in
a
company
of
an
exceptionally
speculative
nature.
Appellant
alleged
that
at
a
certain
point
Fibracan
was
short
of
capital
funds
and
had
to
sell
its
shares
to
obtain
working
capital,
even
though
Fibracan
was
forecasting
a
turnover
of
one
million
for
its
third
year
of
operation
and
net
profits
of
$135,250,
or
13
/2%
of
the
anticipated
annual
turnover.
How
could
Fibracan
have
been
forced
to
sell
stock
when
it
could
easily
have
got
the
money
from
other
sources?
It
sold
a
sizable
number
of
shares
to
Charterhouse,
which,
even
according
to
the
witnesses
in
the
case,
bought
shares
in
developing
companies
with
the
definite
intention
of
selling
them
at
the
right
time
at
a
profit.
Is
that
not
what
appellant
did
itself?
And
has
appellant
not,
under
the
guise
of
investing,
purchased
land
in
the
Bahamas
which
cannot
of
itself
produce
any
income,
and
even
entails
administrative
expenses?
With
such
assets
how
can
appellant
call
itself
an
investment
company?
Moreover,
appellant
company
does
not
have
even
8%
of
its
capital
in
gilt-edged
securities,
but
has
invested
all
its
capital
in
a
single
company
with
the
same
president,
which
is
described
as
a
new
industry.
It
is
true
that
this
was
an
isolated
transaction,
but
this
is
natural
since
it
was
the
first
one,
it
did
not
preclude
the
possibility
of
subsequent
transactions
of
the
same
kind,
and
it
was
carried
out
at
the
instigation
of
the
promoter
of
Fibracan,
who
had
every
reason
to
promote
his
company’s
interests.
In
the
circumstances
the
Board
cannot
accept
appellant’s
claim
that
it
purchased
the
shares
in
Fibracan
as
a
long-term
investment
and
never
had
any
intention
of
selling
them.
While
the
evidence
showed
that
appellant
had
never
sold
shares,
it
also
indicated
that
appellant
had
never
held
any
before,
and
that
this
was
its
first
experiment
in
the
field
of
new
undertakings.
Appellant
is
a
corporation,
and
if
we
are
to
understand
its
behaviour
we
must
judge
from
its
actions.
In
the
case
at
bar,
it
made
an
investment
of
$57,000
in
Fibracan
in
1964,
and
barely
four
years
later
sold
half
of
its
shares
and
realized
a
profit
of
over
$86,000.
For
four
years
appellant,
far
from
diversifying
its
investments,
engaged
only
in
the
launching
or
promotion
of
Fibracan
Inc,
a
company
from
which
it
could
not
hope
to
receive
dividends
for
many
years.
This
manner
of
proceeding
by
appellant
cannot
be
considered
to
be
that
of
a
taxpayer
desirous
of
putting
his
money
into
sound
securities.
In
such
cases,
especially
in
transactions
involving
real
estate,
the
appellant
almost
alleges
it
had
to
make
the
sale
for
a
variety
of
reasons,
whereas
in
this
case
appellant
did
not
even
have
a
reason
to
sell,
since
it
was
supposed
to
buy
shares
as
long-term
investments
and
was
not
in
difficulties,
as
Fibracan,
the
company
in
which
it
held
shares,
was
supposed
to
be.
Appellant
is
not
to
be
confused
with
the
company
in
which
it
held
shares
and
which
it
was
trying
to
promote.
This
transaction
has
all
the
features
of
an
adventure
in
the
nature
of
trade.
The
Board
therefore
holds
that
the
profit
realized
by
appellant
is
taxable
income
and
that
appellant
cannot
claim
a
reserve
for
the
sums
it
was
to
receive
in
1968
and
1969
on
the
sale
price
of
the
shares
mentioned,
since
section
85B(1)(d)
of
the
Act
provides
that
payments
must
be
spread
over
a
period
of
more
than
two
years
after
the
date
of
the
sale.
For
all
the
foregoing
reasons,
the
appeal
is
dismissed.
Appeal
dismissed.