Gordon Thomas Haig v. Minister of National Revenue, [1972] CTC 2562, 72 DTC 1465

The Chairman:—This is an appeal by Gordon Thomas Haig against income tax reassessments dated May 15, 1969 for the taxation years 1964 to 1967 inclusive and from a notice of assessment dated August 20, 1969 for the taxation year 1968 wherein the Minister of National Revenue added back to income certain investment carrying charges deducted by the taxpayer in each of those years.

The case was heard on June 11, 1971 at a hearing held in the City of Regina in the Province of Saskatchewan at which the presiding member was J O Weldon, Esquire, QC, then a member of the Tax Appeal Board which, on December 15, 1971, became the Tax Review Board. However, judgment was reserved and no decision rendered by. him prior to his retirement from the Board in March of 1972. Accordingly, by consent of both parties, this Board has now been given jurisdiction to issue its decision and judgment on the basis of the transcript of the evidence and the argument taken before Mr Weldon, without further representation by counsel.

The facts of this appeal are similar to those arising in the appeal of one Joseph Horning in respect of the taxation years 1964, 1965, 1966 and 1967, and, by consent, it was agreed by both parties that the evidence and argument in the Haig appeal would constitute the evidence and argument in the Horning appeal and that the latter would abide the result of the appeal of the said Gordon Thomas Haig.

The appellant was. at all material times a professional engineer residing at Regina, Saskatchewan. On July 13, 1956 Prairie. Pipe Manu- facturing Co Ltd was incorporated with the object of engaging in the manufacture and sale of welded steel pipe for use in the gathering, transmission and distribution of oil, natural gas, and petroleum products. The company commenced production of steel pipe in June of 1957. It is agreed that the company purchased, on August 26, 1959, all the assets and undertakings, and assumed all the liabilities, of Interprovincial Steel Corporation Ltd, a company then constructing a steel mill at Regina to manufacture steel skelp, sheet, plate and strip; and that, on the same date one year later, the name of the company was changed to Interprovincial Steel and Pipe Corporation Ltd. Throughout the transcript of the evidence, the company is referred to, mainly, as IPSCO and, where not so designated, will frequently be referred to herinafter merely as “the company”.

It is further agreed that, from about April 15, 1960 until the present time, the company has carried on an integrated steel and pipe manufacturing business at the City of Regina in the Province of Saskatchewan and has distributed its products widely throughout six of the provinces of Canada and several of the states of the United States of America.

The parties are further in agreement that, in reviewing the jurisprudence, there is very little authority, if any, on the point dealing with the question of the deductibility of interest relating to dividend earnings which really forms the basis of this appeal. The amounts that have been disallowed by the Minister were amounts paid by the appellant by way of interest on money allegedly borrowed by him for the purpose of earning income pursuant to paragraph 11 (1)(c) of the Income Tax Act.

It is also agreed that, from the outset, the appellant was a key man in the organization and it was his responsibility to supervise the construction of the Prairie Pipe plant, which project followed closely after the company’s incorporation in 1956, and also to construct steel mills for IPSCO. He became vice-president of production of the amalgamated companies and he was also a director of IPSCO from 1960 until the spring of 1969 when he was dismissed from his employment with IPSCO for reasons which have no relevancy to the determination of this appeal. Lest the foregoing statement leave the wrong impression, it should be added that it was not long before he was engaged in a larger operation in a very high capacity, which operation was in direct competition with the company he had just left. Mr Horning, who during the material time was a prominent figure in the company, is no longer with. it, but again, as applies to this. appellant, Mr Horning’s present occupation has no connection whatsoever, nor is it material in any. way, in my view, to the decision to be arrived at in this case.

The facts are interesting in that it was considered a bold venture to build a steel mill on the Prairies, since it was believed that there was no function for it, that it would be impossible to have the. steel produced, and there was no experienced labour pool available nor any of the other normal needs. of a steel mill such as. are. to. be found in. the heavily industrialized areas where the Steel Company of Canada Limited, DOFASCO and Algoma Steel carry on their operations. To the surprise of almost everyone, except perhaps the appellant and some of his close associates, IPSCO turned out to be a form of industrial miracle, in that it was Saskatchewan’s largest industrial employer at the material time and has proven to be an extremely successful company over the period of the years.

During the years under appeal, the appellant purchased extremely large blocks of shares of the company and acquired a substantial investment. He began this acquisition from the beginning of his employment in 1956 and some of the shares were purchased at a very low price, a few of them on what are known as “stock options” and others on the open market.

The evidence indicates that, notwithstanding its later spectacular success, the company found itself in dire financial straits in the years 1961 and 1962, and was again faced with a severe problem in 1967 and 1968 as a result of an extended price war that lasted through the major part of those two years. But the basic dispute, as I have said, is whether or not the amounts involved are deductible under paragraph 11(1)(c) of the Income Tax Act. The actual amounts of interest paid are not in dispute or that the borrowed moneys were used to buy IPSCO shares, and what we are really dealing with is the question of the interpretation to be given to the said paragraph 11(1)(c).

The position of the respondent is that, since we are concerned with paragraph 11(1)(c), to be deductible the interest must have been paid on money used to earn income from a business, or with respect to property which is being held for the purpose of gaining or producing income; that it is the same test that must be applied in connection with paragraph 11(1)(a) dealing with business expenses; that it is also the same test that is usually applied under the regulations dealing with capital cost allowance on depreciable property that is being held for the purpose of gaining or producing income.

Before going further, it should be noted that it is unquestioned that at all material times the appellant was what is commonly known as “an insider” and had full access to the discussions, exchanges of ideas, and actions of the board of directors from time to time, and in fact took part at material times in formulating the decisions of the said board of directors. In the evidence of Mr Haig it is indicated that, in the latter part of 1957 and the early part of 1958 right through until the contract for the construction of the plant was let in October 1958, he was engaged directly in the preparing of a feasibility study for the purpose of determining whether or not the proposed steel industry could succeed in the Province of Saskatchewan.

He says that his involvement in the preparation of the IPSCO feasibility study led him to consider the profit potentiality of the proposed steel mill and that the general conclusion of the study was that it was feasible to put a steel mill in Regina and that it had a better profit potential than normally existed in areas served by other steel industries.

The appellant is a graduate engineer, having completed his university education after the war at the University of Manitoba where he graduated as a mechanical engineer. He then joined the firm of Canada Packers Limited as a project engineer, and was responsible for the edible-oil refinery that was built in Winnipeg. He was project engineer on that job and worked with them for three years before moving on to employment with another firm in Winnipeg as an estimator, Originally in the plumbing and heating department, or in the mechanical department which involved plumbing and heating. At the end of the three years, he was general manager of that company, which was known in the trade as a mechanical contractor.

In December of 1956 he joined Prairie Pipe Manufacturing Co Ltd as general manager and was in charge of engineering for the proposed pipe mill which was to manufacture pipe from 3 inches to 16 inches in diameter. He explains that IPSCO, the company we are considering, was the continuing corporate vehicle of Prairie Pipe Manufacturing Co Ltd, as already mentioned, being in fact the same company with a name change. The concept was that there was a need for a pipe industry in Western Canada. The only manufacturer in those early days was Page-Hersey out of Welland, Ontario and that firm was supplying the whole of Canada at the same time as a German group called Canadian Phoenix, or Alberta Phoenix — it is not clear just what the correct name at the material time was — was considering setting up a pipe mill in Edmonton. As Mr Haig says in his evidence (p 19):

At that time there was a vacuum in the pipe industry. The oil. and gas development that was going on in the early 50’s indicated there was a growing demand for pipe. Canadian Phoenix, or Alberta Phoenix as it was known in those days, started their project in the latter part of 1955 and Prairie Pipe started their project in 1956 . . . . Both mills were in the same range. Alberta Phoenix mill was 3 inch to 12 inch diameter and Prairie Pipe mill was 3 inch to 16 inch diameter.

He goes on to say that the company was, from the outset, designed to be a public company, its promoter being a gentleman by the name of J W (William) Sharp, who was the primary mover and had also promoted Inland Cement, which was a Regina firm. The reason that Sharp got involved was through the Saskatchewan Government, because it had been approached by a German firm and had made an agreement to build a pipe mill in Regina. Because in that period of 1956 there appeared to be a lack of steel supply for a pipe mill, even though the German firm had built and constructed cement or concrete foundations in the Regina area it withdrew totally from the project, and that left the project with no sponsor whatsoever.

According to Mr Haig, the Government of Saskatchewan then approached Sharp “to see if he would pick up the threads of that original concept and build a pipe mill in the Regina area”. It was generally as a result of that that the feasibility study previously referred to was developed, based on the German study, and the appellant Haig was directly involved in the original study for the pipe mill and also in the design and purchasing of the equipment. Appellant’s Exhibits A-1 and A-2, being the annual report of the company for 1958 and the interim report for the six months ended February 28, 1959, respectively, indicate that the financial success of the company was truly astronomical. The capital investment of that particular company was $1.5 million in fixed assets and the gross investment, or working capital, was $2.5 million. In the first complete fiscal year there was a profit of $800,000 before taxes or, in other words, a one-third return on the investment.

As the appellant explained, since the “profitability aspect” of Prairie Pipe was very good, “it consumed an awful lot of steel’. In relative terms, in the first year it consumed over 40,000 tons of steel and its purchases on the open steel market represented a tremendous amount of money. As a result of that, Mr Sharp and a number of other local citizens got together and thought that they could produce a new industry to supply Prairie Pipe and, with that idea in mind, they incorporated Interprovincial Steel Corporation Ltd, now known as IPSCO. This company was to supply steel coil as a feed for the pipe mill, which is apparently the basic ingredient in the manufacture of steel pipe and is also referred to as “skelp”.

In the beginning these supplies had been received from Dominion Foundries and Steel, as well as from other companies. There was no steel mill in Western Canada that could provide this raw feed. There were only three possible suppliers in all of Canada: Dominion Foundries and Steel Limited (DOFASCO) in Hamilton, Ontario; The Steel Company of Canada (STELCO) in Hamilton; and Algoma Steel Corporation at Sault Ste-Marie, Ontario. The major supplier of those three was DOFASCO and a lot of steel was bought in the United States. As the witness stated, the thought behind IPSCO was to provide a source of steel for Prairie Pipe, a business that had then proved to be extremely profitable, and the feasibility studies hereinbefore referred to were undertaken at that time with regard to IPSCO’s profitability. The witness moved directly over to IPSCO to work on these studies and, as has been stated, this occurred during the latter part of 1957 and early 1958.

According to the witness, the feasibility studies showed that the operation should be an extremely profitable one. The investment in Prairie Pipe had been relatively small but Interprovincial Pipe would require a larger investment of approximately $15 /2 million.

There was no great general reaction in the area to the pipe mill concept as, according to Mr Haig, the only people it would hurt would be Page-Hersey of Welland, who had the Western steel market cornered, so to speak, at the material time. Mr Sharp and his associates then approached the various large established steel companies to see if they wished to participate but they were not interested in becoming associated with it, and the promoters were then left to find their own resources. It is interesting to note that the potential source of iron for this steel mill was exclusively scrap steel and the capacity, in terms of the finished product, was to be 100,000 tons of finished product per year, that is, half-rolled product as the plant was to be “a flat roll mill’. The appellant in his evidence went into some detail as to how this manufacturing process is carried out but, although interesting, it is not of great relevance in so far as this case is concerned.

The Saskatchewan Government was interested in that it guaranteed a $10,000,000 mortgage debenture and took an equity position as a result of having the original feasibility study checked by a firm of professionals, at some expense to the government, in the range of $60,000. It was then a question of how the provincial government would recover its investment, and it was arranged that the said government was to get shares to the approximate value of the $60,000 which they had expended in connection with the feasibility study.

The project was then ready to proceed, and the appellant was in complete charge from October of 1958 and the first ingot was poured from the electric furnaces in the “melt shop” in April of 1960. As the company ran into difficulties, in that they had to discharge the contractor from the job because of inefficient operation which resulted in his becoming insolvent during the material time, it was then forced to obtain a substitute contractor, with the eventual result that the estimated cost was overrun by approximately $2.5 million. There were also many other problems that delayed the anticipated start-up date of the rolling mill. During the period from 1960 to 1962 things were so bleak for the company that apparently, according to the witness, it was the general opinion of others in the steel and pipe industry that the enterprise was going bankrupt. There were major start-up problems: the company was starting up a complete complex in the steel industry, which, apparently, is not easily done, and Mr Haig said it was just a matter of quality problems right within the organization. The first problem was the absence of any complete knowledge of the handling of scrap as raw feed. Then, they were dealing with a two-mill operation consisting of a roughing mill and a steckel mill for rolling down the product into a thin-gauge material. There were at the time only about three of these steckel mills in the world and therefore the company was in a relatively new field. Again, this was the largest steckel mill in the world and, to the witness’s knowledge, it still is the largest in the world. It is therefore understandable that many difficulties were experienced.

All this time, Mr Haig was involved directly in both the production side and the engineering side, because he had by then gone over to the production side after being primarily on the engineering side, with the responsibility of trying to clear up the difficulties encountered as a result of the production problems. He says that these problems were corrected and that profitable commercial production began late in 1961.

The original intent of putting the steel and pipe industries together in one total complex was set in motion with the acquisition by Prairie Pipe Manufacturing in 1959 of all the assets of Interprovincial Steel Corporation Limited, the companies having many shareholders and directors in common. This resulted in the major producer and the major purchaser of steel pipe being under one roof, so to speak.

The appellant has filed: as Exhibit A-6 the annual report of IPSCO for the fiscal year ending in 1960; as Exhibit A-7 its 1961 fiscal year- end report; and as Exhibit A-8 its annual report for 1970. It should be pointed out here that this year 1970 was the first year in which a dividend was declared.

As a result of the start-up problems of the IPSCO mills to which the witness has referred, Prairie Pipe Manufacturing Company Ltd did not continue to be profitable after having purchased the assets of Interprovincial Steel. In 1961 the loss before depreciation and taxes was over one million dollars, and this was just about the time, as the witness says, that the company was about to turn around and reverse its direction and proceed towards adequate commercial production. At this time, the company was still buying steel from other suppliers and in the general market, thus supplementing its own supply with outside purchases. The witness said, “I think it was about December 1961 that we were 100% on steel facilities as the raw feed for the pipe mill’, which was just before the beginning of the company’s 1962 fiscal period. Until the incorporation of IPSCO, Prairie Pipe was limited pretty well to serving Western Canada and the Northwest Territories with steel pipe whereas, with the incorporation of IPSCO, its complex enabled it to expand the market. In fact, as soon as supply came in, the market was immediately expanded right through to Newfoundland and into the Southern United States and its salesmen were selling into California and as far west as Hawaii.

Notwithstanding this, in 1961 the company was virtuallly broke, and as a result the Government of Saskatchewan stepped into the breach and guaranteed further bank loans on a temporary basis to enable the company to continue. According to the appellant, it was quite obvious, at the particular time when the government stepped in and guaranteed those loans, that the company was turning around. In fact, according to him, under their very good accounting system, it was quite easy to see the month-to-month progress. He said that, notwithstanding the fact that the books showed a loss of over a million dollars, the greater part of that loss was incurred in the earlier part of the year and one could see that the bottom was being reached. This is borne out by the fact that in 1962 IPSCO showed a profit of half a million dollars and had not yet reached its potential. The actual feasibility forecast was in the vicinity of five million dollars and it turned out in the long run that, from a feasibility standpoint, it would prove significantly profitable. Apparently the really significant money began to roll in during the fiscal year that ended in February of 1963, which showed a profit, before depreciation and before taxes, of $2,210,000, after having shown losses of over a million dollars in 1961 and a profit of half a million dollars in 1962. In the succeeding years, the company showed a profit of $1,801,000 in 1964; $2,803,000 in 1965; $3,426,000 in 1966; and $1,601,000 in 1967. There is no question that in the material time, that is, in the years under appeal, the company was showing a considerable profit. The matter that gives rise to this appeal before the Board is the fact that no dividends were declared by the company during this period and, to put it briefly, it is the respondent’s contention that the funds borrowed by the appellant were used to purchase the company’s shares in the hope of capital accretion, and not for the purpose of earning income therefrom within the accepted meaning of paragraph 11 (1 )(c) of the Income Tax Act.

As I have stated earlier, the appellant was acquiring shares in the company from the year 1956 on, and continued to buy them right up until 1968.

At page 72 of the transcript, Mr Haig was asked the following question by his counsel:

Turning to the years under review, you purchased large quantities of IPSCO shares: can you tell the Board your reason for acquiring those shares, that is, in the years 1964 through 1967 under appeal in which loans were made for the purpose of acquiring shares?

The witness quite frankly admits that he purchased the shares for two reasons. One was that, based on the orders that were coming in, the company was apparently going to start to realize the expectations that were predicted in the feasibility study, and it could be seen that, after a disastrous start, the company was going to begin to generate good returns on its money. Therefore appellant’s first hope was that the share value would appreciate and increase, and his second was that the company would declare a dividend and he would thus benefit from both aspects.

He financed his purchases by accepting money from anyone who would lend it to him, and he says that he canvassed all the banks in Regina as well as the IPSCO Credit Union. He borrowed some of the money from National Feeders, a company that had some excess funds, and he borrowed on his life insurance and mortgaged his home. He put everything else up as collateral. These borrowings took place primarily in 1964, or at least in the 1963-64 era. There were some further borrowings in later years but, at the material time, conventional borrowing was done from the chartered banks and, because of his relationship with IPSCO, he got a prime rate of 6% when money was readily available. He also borrowed on margin accounts, the margin account interest being 7%, and he did this through the James Richardson Company, now Richardson Securities, and through the Midland Osler Company. However, he says that about twice as much money was borrowed from the banks than was borrowed from these brokerage houses. He goes on to say that in 1967 the first pressure started to come as far as money was concerned, and the rates of interest started to creep up.

Exhibit A-22 shows his purchases and sales of IPSCO shares for the years in question, and it was explained that, although the transactions appear to be great in number, they were not in fact really so great, because one block of shares released and sold by the appellant might be sold to several different persons over a period of time. Appellant says that in 1963 he had shares lodged with Richardson’s in Regina on a margin account. The price of the shares in the margin account got too thin and certain of his shares were sold for lack of margin notwithstanding that he was out of town at the time. The funds from the sales were brought into his account to reduce the margin. There are instances where shares were sold at less than he paid for them but, as he says, he was not in control of those shares which were bought and sold on margin as, even though he had no desire to sell them, he had to cover his margin account with the broker.

In March of 1966, and as had been the situation for some time, the appellant held approximately 55,874 shares. He sold approximately 4,000 shares to realize a gain, but in June he bought some shares at 75/8, that is, about 4,000 shares in the 7 /2 to 7% range, which was the highest value that the shares had ever achieved to that date. Furthermore, 7% remained the highest level reached over probably the next three years. However, in October of that year, he was again sold out, and lost $2 a share on approximately 4,000 shares. In January of 1967, a series of sales is shown, all in reasonably small amounts, and again he says these shares were not sold voluntarily. His loans with the banks in all cases were demand loans at 6%, and they were adjusted upwards as the prime rate was adjusted. He paid all the interest charges against those bank loans each year and renegotiated the loans accordingly, as they were demand loans for one year each. After approximately three to four years with no dividends and no action, the banks called their demand loans and, at the time, since it was also the beginning of a tight money period, he was forced to sell some of his shares to meet his obligations at the bank.

It is interesting to note here that he had never been an active purchaser of shares of companies other than IPSCO or a a seller of shares on the market, and he said that in his lifetime he could recall having had only three or four transactions in other shares, and concerning these he had supplied information to the Minister of National Revenue: once where he purchased 100 shares of Kerr Addison Mines, another time when he had purchased some Home Oil shares and he had also bought some shares of Pydee Engineering in 1946 which he did not sell until approximately twenty years later, during which period they declared taxable dividends, which he reported and on which he paid tax. However, generally speaking, he dealt in no shares except those of IPSCO. He says that the reason for this was that he had a personal interest in and a personal knowledge of IPSCO.

The appellant states that in each year he declared on his income tax return all the interest rates that he had had to pay to the banks, or to whatever institution he owed money, and stated at the bottom of the form that he certified this to be correct and that the moneys borrowed and the interest rates generated were for the purchase of Interprovincial Steel shares; and at the hearing it was never suggested that he had made any attempt to hide the purpose for which these loans were taken out.

The question is whether the loans were taken out for the purchase of income-producing assets within the meaning of paragraph 11(1)(c), that is, pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property, or whether the interest claimed as a deduction was in fact interest paid on money used to purchase a capital asset.

Referring back to the remarks of the appellant when asked why he went into this, it seems rather obvious to the Board that he intended and hoped that there would be an accertion in value in the shares. I think it is safe to say that no sound investor, whether he be an experienced trader or just a man of common sense about to embark on an investment in a particular company, would borrow to the extent that this appellant did if he felt that the shares were not going to increase in value. To put it another way, this Board does not believe that people make investments, either for capital or for income-producing purposes, in the anticipation that they will lose money.

The second part of the answer given by the witness to the question put to him was that, as a result of his personal knowledge of the potential of the company as indicated in the feasibility study and by the practical results that the company was achieving, he felt he could look forward to substantial profits by way of dividends on his large shareholdings in the company.

We must therefore look to the attitude of the board of directors, of which the appellant was one, with respect to the payment of dividends at the material time.

Before reaching a final conclusion on the attitude of the directors, one must consider and remember that this was a new operation in the Western Canada region and that it was a new type of business, one of the very few in the world so far as the skelp mill was concerned, and therefore it was understandable that there should be some overcautiousness on the part of the directors when dealing with available funds or reserves of the company.

At page 52, the witness was asked to tell what he knew of the general attitude, or the prevailing mood, of the directors and the officers of the company toward the payment of dividends in the period from 1962 to 1967. A great deal of irrelevant conversation took place between there and page 55, at which point the witness was finally allowed to answer the question. To paraphrase his answer, it appears that in 1962 the company was just turning around and showing the beginnings of a profit. There had been violent eruptions in the directorship (as was mentioned earlier in the transcript of the evidence), but it was obvious, to the witness at least, that the company was really starting into what you might call the first full year of operation from the feasibility study point of view. In other words, the company was finally entering into something after a delay of three years from the date of the original concept.

There had been many shareholders of the company, including the appellant, who had been in Prairie Pipe Manufacturing Co Ltd, an enterprise which had been very profitable. These people were disturbed not only at not having received any money in the form of dividends but also by the fact that the shares had taken a tremendous dip during a period of extreme distress in late 1960 to early 1961 era. They wanted something to show for their eight years of investment. Mr Haig, however, although he agreed with them, the latter was not one of a group that was unanimous. The matter was not put to a vote, but there were discussions held with the directors and there was a difference of opinion as to what action should be taken. Apparently, two of the shareholders were directly agitating for dividends, while a Mr Turvey, who was an accountant, was attempting to conserve funds in the event of something going wrong. In 1964 another problem began to enter into the picture, and that was that the IPSCO sales organization had started to penetrate into Eastern Canada and other areas not previously covered and, as he put it, “were literally bragging, through their annual reports, of the penetration that they were achieving in the general market”. Even though there were three mills supplying similar products to this marketing area, IPSCO was achieving 50% to 60% of the sales, and it was as yet the smallest of the three producers. This resulted in a price war, where the Eastern companies allowed a reduced price to Western customers, shrouded, as the witness says, as a trucking allowance and were also offering further concessions such as laying the pipe at no extra cost right alongside the trench or the right of way for the pipeline. This was in an endeavour to counter the sales efforts of IPSCO, which was selling in Ontario at prices 5% below those quoted by STELCO. This continued for a year, extending into and through 1964, and as a result of this unusual set of conditions, there was a drop in the profits, as is shown on Exhibit A-11. As soon as this temporary price war was over, the profits increased and the company formed a management executive group, made up of members of the board of directors, which met quarterly on an informal basis, and at virtually every meeting the subject of dividends came up. The appellant says that he was all for paying of dividends because he was so heavily in debt for the shares that he had purchased. He also wanted to receive dividends in return for his financial efforts as well as for the physical work and expertise that he had contributed to the company and its organization.

In 1964 certain borrowings of the company on a bond issue came out and restrictions on the payment of dividends were attached. However, according to the witness, these restrictions were not prohibitive. One restriction was that the company was to have $4 million in working capital, and the company was already well over that amount. The other restriction was that the company was to have $12 million in shareholders’ equity and the company’s position at that time was $15 million in shareholders’ equity. At no time after that date, according to the witness, had either one of those minimum figures been breached, so there was really no hindrance to the payment of dividends on account of the bond issue.

The appellant says that the matter of dividends was formally canvassed again in the directorship, as appears from excerpts of the minutes of meetings of the board of directors in April of 1967 at which the witness was present. There had also been an earlier discussion in January of 1967 and Exhibit A-19 shows that:

Mr Osler expressed the opinion that a dividend of modest proportions should be declared at the earliest opportunity.

The witness says that there was constant discussion on an informal basis among the directors and officers with regard to the payment of dividends. There was also outside pressure from shareholders to declare dividends. The long-term investors, including, for instance, a Mr Shaw who was the largest single investor in the company, were agitating for dividends. The resistance was from a Mr MacPherson, who is now the president of the company. The appellant says, quite frankly, that in the early days he personally could not be an advocate of dividends but, once the company had started to move forward as the feasibility study had predicted it would, he became an advocate of dividends, but Mr Turvey and the opposition kept winning the argument on that score. However, the witness says, in his view dividends were bound to be forthcoming within two or three years from the time the company began to operate successfully and therefore he felt sure that dividends would be paid. Furthermore, the excerpt from Exhibit A-19 indicates that there was indeed some agitation for the payment of dividends and, according to the minutes of that meeting, the matter was to be discussed again at an early opportunity.

Unfortunately, in 1967 and through most of 1968, the company was again engaged in a price war, this time a much longer one and, according to the witness, it was, in his view, “the craziest thing that was ever thought of”. It is his opinion that nobody ever wins a price war, including the customers. This war of 1967 resulted in the Combines Investigation Commission becoming involved, and charges of unfair trade practices were laid against one of the larger companies.

Apparently, at a meeting of the board of directors on April 4, 1967, a document dealing with proposed dividends to be paid on common stock was presented by the vice-president for finance of IPSCO, and is marked as Exhibit A-21 in this appeal. The extract from the minutes indicates that, considering the various factors to be borne in mind in determining the dividend policy of the company, it was resolved that discussion of the policy of the company on this matter be deferred until the June meeting of the company directors, notwithstanding that the company was legally and financially in a position to pay dividends notwithstanding the restrictions placed upon it by reason of its bond issues.

It was between these two meetings of April and June of 1967 that the serious price war developed, and prices tumbled so. much that American Petroleum Institute pipe that normally sells for approximately $230 to $240 a ton dropped to $160 a ton and averaged probably $180 a ton during this entire price war, which according to witness, although it was comparatively short, was disastrous, being a multi-million-dollar price war. However, this was not something that could have been anticipated. There was some discussion at the hearing as to who had started it but, as the evidence indicates, no one is ever able to say with any degree of certainty who is responsible for the commencement of such price wars in any industry. When the matter of dividends came up again for discussion, the end result was that, in the face of the continuing price war, the majority of the directors came to the conclusion, notwithstanding the fact that the company was in a position to override any restrictions contained in the bond issue agreement with regard to such payments, that if a dividend was paid it would be difficult to get the money back if there was a severe drain on the company’s working capital in the event of a really prolonged price war, whereas, after the price war was over, the company could always pay a dividend at a later date as and when funds were safely available. They felt that the payment of dividends during the price war would in itself constitute a drain on the available working capital. The appellant quite frankly states that at that time, considering all the variables, he himself voted not to pay dividends, as it seemed to be a matter of survival. Therefore the dividend problem again got shelved for the time being and, according to the evidence, it was not until 1970 that a dividend was finally paid. This resulted in the payment in two parts of a total dividend of 25 cents per share.

It is always difficult for a person who has not heard a witness, nor had the opportunity to observe the demeanour or test the veracity during the proceedings of a witness, to appraise his evidence or his sincerity in the light of his interest in the case but instead to have to reply on the printed word as is the case here. However, throughout the transcript of the proceedings, the member who was presiding at the time appears to have been impressed with both the demeanour and the answers of the appellant. I refer in particular to page 168 of the transcript where Mr Weldon, after stating he had no further questions to ask of the witness, thanked him and said: “I think you have been as helpful as any appellant could be.” Again, at page 206, during the respondent’s argument, Mr Weldon remarked: “The best conclusion you can come to is that Mr Haig had helped to organize this company and get it started in its operations and hoped to continue throughout his career as one of the guiding members of the executive and have a solid stake in the company.” Mr Hynes, counsel for the respondent, then asked, “How do you get a solid stake in a company by using borrowed money?” to which the presiding member replied: “He may have had to go about it the hard way. I am quite sure that he would be the type of man who would want to have a stake at all times that he was active in the company.”

This, together with the other remarks in the evidence, indicates to me that the sitting member was impressed with the evidence of the appellant, with the additional advantage of having had, at the same time, a good opportunity to assess the witness and, realizing his interest in the case, to observe and consider his demeanour in the witness box. Anyone who has been involved in trying to determine the outcome of a case from a transcript of the proceedings wifi realize what an advantage it is to have had an opportunity to view and observe a witness during his testimony.

In the evidence, much was made of the extent of the interest paid and the yield that there would have been on the amount of money that was invested by this appellant in IPSCO at the material time. At one point in the transcript counsel for the respondent — inadvertently I hope — used the phrase “reasonable expectation of profit”. This is a clause that has become synonymous with the farming cases that have come before this Board, and I am sure that respondent’s counsel was not suggesting that that phrase should be read into paragraph 11(1 )(c) of the Income Tax Act any more than, to my mind, it should be read into section 13 of that Act.

If one looks at the overall average of what the yield might have been in the light of the interest paid by the appellant on the borrowed money and at the number of shares held, and considers what dividends could have been paid out during the period had there been unanimity in the board of directors, one cannot help but come to the conclusion that, at the outset, the appellant was certainly entitled to expect that he would earn income from the purchase of IPSCO shares.

It is difficult to conceive that the appellant would mortgage his home and place himself in such debt if he did not honestly believe that the company, of whose operations he had such an intimate knowledge and in whose future he had so much faith, would produce income that would earn for him substantial dividends on his large shareholdings in the company.

The parties have not been able to cite any case in point that would assist the Board in arriving at a decision in this case. I am reminded of certain statements made in the case of Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131. The reasons leading to the conclusions of Cameron, J in what was then the Exchequer Court of Canada are referred to by Martland, J of the Supreme Court of Canada as follows ([1962] CTC at 218; 62 DTC at 1132):

The reasons leading to his (Mr Justice Cameron’s) conclusions that the purchase was not an investment are:

1. The fact that the apellant borrowed the funds necessary to effect the purchase of the shares;

2. The inference that the nature of Brunswick indicated that its shares were speculative in value and that dividends could not be expected for some years.

Martland, J then goes on to say:

With respect, I would not think that the question of whether securities are purchased ‘with the purchaser’s own funds, or with money borrowed by him, is a significant factor in determining whether their purchase and subsequent sale is or is not an investment.

Similarly, the fact that there was no immediate likelihood of dividends being paid on the shares should not have much significance, for there are many corporate ventures, financed by the sale of shares to the public, in which immediate payment of dividends may not be anticipated, and yet the purchase of the treasury shares of a company embarking on a new enterprise is a well recognized method of making an investment.

And later:

It is difficult to conceive of any case, in which securities are purchased, in which the purchaser does not have at least some intention of disposing of them if their value appreciates to the point where their sale appears to be financially desirable. If this is so, then any purchase and sale of securities must constitute an adventure in the nature of trade, unless it is attempted to ascertain whether the primary intention at the time of purchase is to retain the security or to sell it. This, however, leads to the difficulty mentioned by my brother Cartwright that the question of taxability is to be determined by seeking to ascertain the primary subjective intention of the purchaser at the time of purchase.

(The italics are mine.)

In this case, it is quite clear that the appellant only sold shares in the company when it was necessary to do so to meet his obligations. On occasion, sales were made without his concurrence because the shares had been bought on margin and his concurrence was not required. There is nothing in the evidence that might indicate that he placed himself in such an indebted position for the purpose of obtaining capital accretion only. His evidence is plausible and acceptable when he says that it was his intention to realize income by way of dividends on the shares held by him and that for that reason he borrowed the moneys that have been referred to. In my view, the inerest claimed as an expense by the appellant comes clearly within the intent and wording of paragraph 11(1)(c) of the Income Tax Act.

I would therefore allow the appeal and refer the matter back to the Minister for reassessment.

Appeal allowed.