John B Lansdell v. Minister of National Revenue, [1972] CTC 74, 72 DTC 6057

Kerr, J:—This is an-appeal from a decision of the Tax Appeal Board dated April 23, 1970 (reported [1970] Tax ABC 383) which dismissed an appeal from reassessments of the appellant’s income tax for his 1964 taxation year.

In the reassessments the respondent included as income of the appellant the sum of $4,371.98 described therein as “a share of profit from underwriting of stock of Earlcrest Resources Ltd”, and the sum of $6,737.50 described as “profit from trading stock of the said company”. It is the inclusion of these sums that is in issue.

The appellant submits that if the $4,371.98 was a taxable profit, it was realized not by the appellant beneficially but by his wife; and that the profit of $6,737.50 arose from an investment by him in shares of the said company and constituted a non-taxable capital gain.

The respondent submits that the said company was being underwritten by a group of which the appellant was a member, that the group realized a profit of $14,573.25 upon the sale of shares of the company and that the $4,371.98 was the appellant’s portion thereof; also that during the underwriting period the appellant purchased 20,000 shares of the company, for the purpose of reselling them, and that he quickly sold them at a profit of $6,737.50; and that the said two sums totalling $11,109.48 constituted income realized in the course of business carried on by the appellant within sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act.

Evidence was given at the trial in this Court by the appellant and his wife and by a stock salesman, John C Lees; and on behalf of the respondent by two assessors in the Department of National Revenue, James G Baxter and William C Clerkson.

The appellant described himself as a financial consultant and real estate broker in Vancouver. Prior to coming to Canada from England in 1953 he had a Master’s Degree in Economics from Cambridge University, later he practised law as a solicitor in London and also studied accountancy. When he came to Canada he joined what was called the “Yorkshire Group” of companies and several years later became a director and vice-president of companies in that Group, including York shire Corporation, Yorkshire Securities Ltd and certain other subsidiary and affiliated companies, in which he was engaged principally in real estate and trust activities. In 1963 he resigned from those companies and established his own business, in connection with which he acquired a real estate company, obtained a real estate agent’s licence, and became a financial consultant tn real estate and mortgage investments, but not in respect of stocks, and he performed management and accounting services for private companies holding real estate.

In 1964 the appellant had a personal investment brokerage account with the said Yorkshire Securities Ltd; and his wife had two personal accounts there which had originated with her own private funds given to her by her parents. The appellant managed his wife’s accounts and business affairs. He received advice respecting the stock market from a personal friend, John C Lees, a stock salesman with Yorkshire Securities, whom he had known for years and whose advice respecting the stock market he valued highly. He and Lees assisted each other in various ways; he assisted Lees in matters of administration, composed business letters for him, and helped in things of that nature; Lees became his client in real estate and mortgage transactions and gave him advice relating to the stock market.

The appellant said that in July 1964 Mr Lees became aware of an opportunity to purchase through Lyons Trading Company a block of stock in Earlcrest Resources Ltd, hereinafter referred to as “Earlcrest”, in a proposed underwriting and he asked the appellant if he would be interested. He replied that he would not be interested in purchasing on his own account, but that his wife might be interested in purchasing some of the available stock. A few days later Lees notified him that he had other interested clients who were willing to participate in a purchase of a block of 100,000 Earlcrest shares at 13¢ per share, with options to purchase 75,000 additional shares, and suggested that the appellant or his wife join these other clients in putting up a group total of $13,000 for the purpose. The objective was to sell the stock at a profit, return their investments to the participants and divide any profit according to agreed proportions. Lees proposed that the transaction be carried out by pooling the contributions and having one single account with Yorkshire Securities in the name of one of the contracting parties who could give necessary instructions respecting the account. The appellant said that he then agreed, specifically on behalf of his wife, that she would put up $5,200 of the required $13,000 as one of the participating group of purchasers, and that he himself would act as trustee for the group and allow his own name to be used and represented to Lyons Trading Company as that of the person purchasing the stock. Lees asked him to prepare the necessary. documents. Thereupon, a trust account to deal with the shares was opened with Yorkshire Securities under the name “John C Lees Trust Account”, and concurrently the appellant opened another account with Yorkshire Securities under the name “J B Lansdell #2 Trust Account” (Exhibit 4) for the purposes of the transaction. At this time the appellant also signed and gave to Lees the following letters, one dated July 23, 1964 (Exhibit 2) and the other dated July 24, 1964 (Exhibit 3), addressed to William C Lyons, Lyons Trading Co Ltd:

July 23rd, 1964.

I have today delivered to Continental Investment Corporation Ltd certified cheque for $13,000 for the purpose of participating in the proposed underwriting of Earlcrest Resources Ltd, on the following terms and conditions, namely:—

1. Should the underwriting proposal be approved by The Vancouver Stock Exchange delivery of 100,000 shares of Earlcrest Resources Ltd shall forthwith be made by Continental to my account at Yorkshire Securities Ltd.

2. That should the underwriting proposal be rejected by the Vancouver Stock Exchange my cheque shall be returned to me on July 24th, 1964.

3. That it is further agreed that I shall participate in the succeeding options entered into between the Earlcrest and Continental to the extent of 121/2 /o of the option granted as per the enclosed agreement.

4. That it is also agreed that W Lyons, Lyons Trading Co Ltd or Continental on behalf of W Lyons deliver free to the account of “John C Lees Trust Account”, 50,000 shares of Earlcrest Resources Ltd upon receipt by Continental of my $13,000 cheque.

5. That in the event that Yorkshire Securities Ltd on behalf of J B Lansdell is able on July 24th, 1964, to sell 100,000 shares of Earlcrest Resources Ltd referred to in Paragraph #1 of this letter at 15 cents or better then 25,000 shares of the 50,000 held in the John C Lees Trust Account shall be returned to Lyons Trading, Wm Lyons or Continental. The remaining 25,000 shares held in the John C Lees Trust Account shall then be delivered to J B Lansdell free of charge.

6. That should less than 100,000 shares be sold on behalf of J B Lansdell on July 24th, the 50,000 shares held by John C Lees Trust Account Shall be forfeit and delivered free to J B Lansdell.

7. That it is agreed that Yorkshire Securities Ltd on behalf of J B Lansdell shall be given the first opportunity to sell the underwritten stock to the extent of 100,000 shares prior to the sale of stock by other members of the underwriting syndicate.

8. That in the event that the underwriting agreement is rejected by The Vancouver Stock Exchange the 50,000 shares held in the Lees Trust Account shall be immediately returned to Lyons.

July 24th, 1964.

Further to my letter to you of yesterday I now confirm that I have received from Continental Investment Corp Ltd 100,000 shares of Earlcrest Resources Ltd as required under Paragraph 1 of our Letter Agreement.

I also confirm that the 25,000 shares of free stock deposited to the account of “John C Lees Trust Account” yesterday have been turned over to my account free and clear and I further confirm that you are now released from your obligation to deposit a further 25,000 shares in accordance with Paragraphs 4 and 5 of the Letter Agreement. Paragraphs 6, 7 and 8 are of no further force and effect.

In regard to Paragraph 3 of the said letter which remains in force I ask you to confirm by signing the attached copy of this letter that you are holding the beneficial interest in 1216% of the options contained in the underwriting agreement for my account as follows:

	My	Price	Price	Option Option
Option	Proportion		per share	Period Period
200,000 shares	25,000	.121/2-¢ 3125.00		30 days
200,000	25,000	.17%2¢ 4375.00		90 days
200,000	25,000	.221/2(5 5625.00		150 days

It is understood that my beneficial interest in these options will continue in respect of any extensions or modifications of the said options.

The appellant also testified to the effect that he did not sign or furnish a cheque for $13,000 as stated in his July 23 letter, although it said “my $13,000 cheque”, that the cheque there referred to was to be a cheque of Yorkshire Securities, as was customary in dealings between brokerage firms, and that the plan was that Mr Lees would obtain the necessary cheque for that amount from Yorkshire upon that company being satisfied that it would be covered by contributions from the several participants or by charges to their accounts. The participants were to be Mrs Lansdell, J A McKelvie and J E Watson (or perhaps his wife). The appellant knew Mr Watson as an astute trader on the floor of the stock exchange who was in the employ of Yorkshire securities.

The appellant said that soon thereafter he discovered that although the proceeds of sales of Earlcrest shares were being credited to the J B Lansdell #2 Trust Account, Yorkshire Securities had, contrary to the instructions he had given to Lees, debited his personal account (Exhibit 5) with the $13,000; that the debit should have been to his wife’s account, rather than to his personal account, for the participation and contribution were by his wife, not by him personally. He at once requested Mr Lees to make the requisite corrections. Lees replied that he would check into the matter and later informed him that sales of the stock in the course of the several days that had elapsed had put the #2 Trust Account in funds in excess of $15,000 and that this was more than sufficient to return their investments to the participating clients. The appellant asked Lees to have the accounts corrected. In this respect the appellant’s #1 personal account with Yorkshire Securities (Exhibit 5) shows a debit of $13,000 paid to Continental Investment Corporation re Earlcrest on July 23, 1964, and credits bearing the same date of transfers of $2,600 from J E Watson and $5,200 from J A McKelvie, leaving a net debit of $5,200 charged to the appellant in that connection as of that date; and a credit on July 27 of $5,200 transferred from the appellant’s #2 Trust Account, which cleared the said net debit.

The appellant’s #2 Trust Account shows that the 100,000 Earlcrest shares and the 25,000 free shares referred to in the second paragraph of the appellant’s July 24 letter (Exhibit 3) were received into that account, and it also shows numerous other entries of Earlcrest shares bought and sold. It also shows under date of July 27, 1964 transfers of $5,200 to J A McKelvie, $2,600 to J E Watson and $5,200 to the appellant’s #1 personal account. This #2 Trust Account also shows a later debit of $14,573.25 cash on September 22, 1964. This is the amount of the group’s profit, of which the share of the appellant or his wife was the $4,371.98 that was added to the appellant’s income for 1964. The appellant testified that he was a trustee for and accountable to the participants and that he distributed that entire profit to them on or about September 23, 1964 by giving his personal cheques, including two personal cheques for his wife’s share, namely, one for $2,000 payable to her personal investment company, Ayr Holdings Ltd, the other for $2,371.98 to her account with Yorkshire Securities. Ayr Holdings Ltd is owned 90% by Mrs Lansdell and 10% by the appellant.

The appellant testified that he decided that the participation in the venture to buy the 100,000 block of Earlcrest shares, with its options, would be by his wife, rather than by himself personally, because he was in a higher tax bracket than she was and any profits from the venture, if held to be taxable, would attract less tax if the profits were hers than they would if they were his. The incidence of income tax was often a consideration in his business and in this instance he gave consideration to possible tax implications at the outset, and when he discovered that Lees had made an error in charging his personal account he immediately asked Lees to have the error corrected, as the contribution was to have been by his wife, so arranged by him as manager of her business affairs, and he was not making any contribution on his own behalf.

Mr Lees confirmed the appellant’s testimony that he had indicated that he was not interested in personally joining the venture to buy the 100,000 block of Earlcrest shares but that he would exercise his authority as manager of his wife’s business affairs to make her a contributor to the undertaking; that her contribution was to be drawn from her #1 account with Yorkshire Securities, but the appellant’s personal account had been charged in error and contrary to the appellant’s instructions; that the appellant immediately directed him to have the accounts corrected and gave him a “severe tongue lashing” for causing the error to be made; and that at the time it was thought that the simplest and most convenient way to correct the error was to transfer $5,200 from the #2 Trust Account to clear the net debit of that amount charged to the appellant’s #1 personal account, which transfer was made on July 27, 1964, along with transfers of $5,200 to J A McKelvie and $2,600 to J E Watson.

Mr Lees also confirmed that he had asked that the contributors have one account with Yorkshire Securities and one person to give necessary instructions, and that he asked the appellant to prepare appropriate documents, which the appellant did by his letters dated July 23 and 24. Lees said that William Lyons had brought Earlcrest to his attention initially and that he undertook to find buyers for 100,000 shares (out of 200,000 with options for an additional 600,000 available to Continental Investment Corporation), which would provide options to purchase another 75,000 shares at stated prices; that Continental Investment Corporation was underwriting the Earlcrest shares; that there usually is a flurry of interest when there is an underwriting and the underwriter endeavours to build up a market in order to exercise options and dispose of shares acquired; that an underwriting period is a fertile time to be involved, and the objective is to maintain a market and sell at a profit. He had given support to the market for Earlcrest by purchasing some shares in the period concerned.

On his examination for discovery the appellant said that Lees had complete discretion to sell the Earlcrest shares as he saw fit and to support the market if he had to; the underwriting and publicity could be expected to encourage people to buy the stock and Yorkshire Securities would feed shares into the market; and that all of the Earl- crest shares in the accounts were purchased for resale at the earliest possible date at the highest possible price.

Mrs Lansdell testified that she had two accounts with Yorkshire Securities in her own right, one of which was a #1 brokerage account; her husband had her authority and full trust to manage her business affairs and stock transactions and her accounts with Yorkshire, and in fact did so, and she had instructed Yorkshire that her husband had such authority; and she was satisfied to have her husband and Mr Lees conduct the Earlcrest undertaking as they saw fit without interference or guidance by her. She acknowledged that she made a profit on the venture.

The witness, J G Baxter, called on behalf of the respondent testified respecting the items in the appellant’s accounts with Yorkshire Securities and the dealings in Earlcrest shares as there shown, including in the #2 Trust Account the receipt of 25,000 free shares on July 24, 1964, 100,000 shares on July 27, 1964, 25,000 on August 4, 25,000 on August 25 and 25,000 on September 3, 1964 (the last three receipts of 25,000 shares appear to be shares acquired by exercising the options to buy them); debits on July 27 totalling $13,000 made up of transfers of $5,200 to McKelvie, $2,600 to Watson and $5,200 to the appellant’s #1 personal account; and finally the withdrawal of proceeds of the Earlcrest sales in the amount of $14,573.25 on September 22, 1964. The total of Earlcrest shares shown in the #2 Trust Account as sold was 221,500 in the period July 23 to October 19, 1964, which includes support shares bought and sold. Mr Baxter determined that the profit in the account had come from a share underwriting and accordingly it was assessed by the Department as taxable.

The other witness for the respondent, William C Clerkson, testified respecting an assessment made by the Department in 1965 on Mrs Lansdell in connection with her participation, along with her husband, in the purchase of shares of Calix Mines, when they were being underwritten. There, too, there was an account with Yorkshire Securities and Mr Lees was involved. Mr McKelvie was active in promoting sales of the stock. Mrs Lansdell was taxed on her profit. In that respect she testified that she had bought the shares through Mr Lees on her husband’s advice and she had left the management to her husband. On his examination for discovery the appellant said that he also paid tax on his own profit on that transaction. There was also reference to dealings in stock of New Far North Mines Ltd in 1965 in which the appellant had agreed with Lees to act as a nominee and had allowed Lees to use the appellant’s name and account.

The Tax Appeal Board appears to have understood that the appellant gave his personal cheque for the $13,000. His letter of July 23 refers to “my $13,000 cheque”. The Tax Appeal Board also found that the appellant was a self-styled trustee and at most had been his wife’s agent to a limited degree and said (page 387):

The appellant has sought, of course, to establish that this particular series of buying and selling transactions was done as trustee for his wife and not on his own account. As by now should be well and generally known, there is a burden of proof resting on the appellant in an income tax matter that is much heavier than that required of a plaintiff in an ordinary civil action. In the now classic case of Johnston v MNR, [1948] SCR 486; [1948] CTC 195, which has been cited scores of times in other cases, it was stated by Rand, J that the onus is on the appellant to demolish the basic fact on which an assessment rests and that, if he does not do so, his appeal must fail. I make no observations about the credibility of the three witnesses heard — they were testifying to what had occurred some five years earlier — and some allowance must be made for that circumstance. It suffices to say that their evidence, taken by itself and not being supported by the documentary evidence produced, failed to convince me that the appellant was really acting for his wife rather than solely in his own interests when the particular shares that produced the profit of $4,371.98 were bought and sold. The shares involved were a strange purchase to be made by one purporting to act as a trustee for his wife as well as others. Turning over part of the proceeds to Ayr Holdings Limited and Yorkshire Securities Limited strikes me as largely an afterthought on the appellant’s part. To me it savours of an assignment of profits after they had been earned through the appellant’s activities.

However, I was favourably impressed by the appellant and his wife and Mr Lees when they gave evidence before me. In this Court the appellant explained that he had not given any cheque for the $13,000, that the cheque referred to in his letter was to be a cheque that Yorkshire Securities would deliver in exchange for the shares being acquired, as was usual in dealings between brokerage firms.

Although the witnesses were testifying in 1971 in respect of events of 1964, I do not think that Lees would have said that he had been given a severe tongue lashing by the appellant if it had not taken place, and he corroborated the appellant’s testimony in material respects as to the error in the accounts and as to the participation of the appellant’s wife, who also gave corroborative evidence in that respect.

I have not found nor was my attention drawn to any item in any of the accounts to show that Mrs Lansdell contributed or was debited with a contribution of $5,200 or that she received reimbursement of that sum. Perhaps the absence of such item was due to the manner adopted to clear the appellant’s personal account when the charge to it was discovered by him, in that the net debit of $5,200 in his personal account was cleared off by transfer of an equivalent amount from the #2 Trust Account. That is the impression I got from the evidence of the appellant and Lees. However, in the light of all the evidence I do not think that the absence of any such item should cause me to reject the positive evidence of the appellant and his wife and Mr Lees as to the transaction concerned. If I accept their evidence in that connection as credible and reasonably acceptable, I should find that the appellant acted on behalf of his wife, rather than for himself, in participating in the venture to purchase the block of 100,000 shares with its free bonus shares, and to exercise accompanying options to purchase an additional 75,000 shares, and that it was Mrs Lansdell, not the appellant, who was entitled to receive and actually did receive the $4,371.98 profit from the venture. The appellant and his wife and Mr Lees appeared to me to be giving truthful evidence as to that venture with a recollection of important pertinent events, and I see no sufficient reason why I should not accept their evidence as to that venture as reasonable and credible. Therefore, l find that such profit was not income of the appellant.

Which leaves for consideration the profit made by the appellant personally, whicn he does not dispute, on his purchase of 20,000 Ear’crest shares on September 3, 1964, all of which were sold in small blocks at various times within the ensuing two months, yielding a profit of $6,737.50.

The appellant said that this purchase was on his own account and that he was taking advantage of the continuing interest of the stock market in Earlcrest stock; that Lees had recommended the purchase, as the market had absorbed a large volume of the stock and the price was rising, and he instructed Lees io buy the block of 20,000 shares and to sell them; that this was only one of many purchases of various stocks on his account, it was a rank speculation and was separate from his wife’s dealings in the Earicrest stock. Lees testified that he had advised the appellant to buy the 20,000 shares and that he, Lees, had the discretion to sell them.

The appellant was never an officer or director of the Earlcrest company.

It is not disputed tnat 20,000 shares of Earlcrest stock, which were speculative in value, were purchased on September 3, 1964, on the instructions of the appellant and for himself personally, and that he then had an intention to dispose of them at a profit as quickly as possible, and that he did dispose of them very soon thereafter. But, standing alone, that is not sufficient to establish that the transaction constituted an adventure in tne nature of trade (Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215).

However, in my view of the situation, the appellant was not in the position of an owner of an ordinary investment choosing to realize it, and the profit made by him on the purchase and sale of the 20,000 shares was not an enhancement of an ordinary investment within the meaning of the Irrigation Industries case (supra). On his own evidence the appellant was actively engaged, even if as manager of his wife’s stock transactions, in the venture of his wife, Watson and McKelvie, supported by Lees, the Yorkshire Securities stock salesman, and by Watson, that company’s trader on the floor of the Vancouver Stock Exchange, to purchase, promote, create a market for and sell Earlcrest stock, in its underwriting at that time, and he gave Lees a free hand to Support the market by purchases and to market the stock in his discretion, which Lees did to the knowledge of the appellant. The purchase of the 20,000 shares was made by Lees on September 3, the same day on which he made a purchase of 25,000 option shares, at a time when the underwriting was being actively promoted, and Lees fed them into the market in relatively smaller lots on September 8, 9, 11, 16, 17, 18, 23 and November 6. The appellant said on his examination for discovery that the purchase was a “rank speculation”, that he didn’t buy the 20,000 shares as a long term investment, and that he asked Lees to use his judgment but essentially to sell the shares. Lees had the same discretion to deal with the 20,000 shares as he had in respect of the other Earlcrest shares. The appellant actively assisted in making the initial arrangements for the acquisition of Earlcrest stock by Yorkshire Securities through Lees. He drew up the documents and held himself out as the purchaser. Underwriting and the turning of the shares into an overall profit in the course of the underwriting were the essential purposes of the undertaking. The transactions for the appellant’s personal account were closely related in time, method and purpose to those that he authorized and was a party to on behalf of his wife, Watson and McKelvie, and he had inside knowledge of what was being done by Lees to promote the stock and to support the market. I do not see any of the transactions as other than speculative transactions in a business adventure in the nature of trade in which the appellant assisted and was involved.

On my appreciation of the situation I find that the profit of $6,737.50 made by the appellant personally on the sale of the 20,000 shares of Earlcrest stock was income realized by him in the course of a business venture within the meaning of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act. The appeal in respect of that profit will be dismissed.

The assessment made upon the appellant for his 1964 taxation year will be referred back to the respondent for reassessment on the basis that the profit of $4,371.98 referred to in paragraph 4 of the Notice of Appeal was not income of the appellant.

As success has been divided there will be no order for costs.