The Chairman:—This is an appeal by the taxpayer against an assessment dated June 16, 1969 for the taxation year 1967, wherein there was added to the appellant’s income for the year the net profit realized by him on the sale of an oil derrick to Cox and Company Limited.
The appeal was heard on October 18, 1971 at the City of Edmonton in the Province of Alberta by J O Weldon, Esquire, QC. At the material time, Mr Weldon was a member of the Tax Appeal Board and the presiding member at the sittings in question, and heard the evidence and the argument presented on behalf of the parties on the date aforementioned. However, judgment was not delivered by Mr Weldon before his retirement from the Tax Review Board in March of 1972.
The parties have consented that a member of the Tax Review Board as it is now constituted shall render judgment based on the transcript of the evidence and argument of counsel before Mr Weldon, and their consent in writing has been filed.
The appeal in question arises out of the fact that the appellant was, at all material times, the beneficial holder of 75% of the issued shares of a company known as Cox and Company Limited and a 50% shareholder in a company known as Prairie Well Servicing Co Ltd, in which his “partner”, a Mr Matheny, owned the other 50%.
The evidence indicates that the business of these two companies was the result of certain requirements and regulations of the Alberta Oil and Gas Conservation Board, which enjoin oil companies, when they are finished with a well and wish to abandon it, to leave the site as nearly as possible as it was before the well was dug. This requires that the pipe and casing be extracted and cement poured into the hole to plug it off so that there is no communication between one area and another. Cox and Company Limited, in which the appellant was the major shareholder, contracted to supply the services necessary for such clean-up operations.
On these jobs, a certain amount of pipe is salvaged, which goes to the lease owner or the people operating the well. In most instances, the extractor is paid in cash on a footage basis for the pipe and casing pulled out. Occasionally the lease operators will barter on the basis of payment in pipe or some other material in place of cash, but, in any case, the basis of the payment is usually the number of feet of pipe extracted. In other words, the contractor pulls the casing out and charges so much a foot for doing so. This was the business of Cox and Company Limited.
Prairie Well Servicing Company Limited, as the name would indicate, was a company which serviced all wells operating out of its particular area. This latter company, hereinafter referred to as “Prairie’’, would service producing oil wells rather than abandoned ones, and if a particular well was having trouble with clogged tubing, the operators would call on the company to pull it out, clean it and put it back in. Prairie’s job was therefore to get the well back into production.
These facts are gone into in some detail in the evidence, but I think that, for the purpose of this appeal, it is sufficient to say that both Cox and Company Limited and Prairie were using equipment known as “derricks” or “rigs” in their operations, and it is the sale of an oil derrick by the appellant, in his personal capacity, to Cox and Company that gives rise to the assessment under appeal.
The evidence is that at all the material times, and indeed for some years prior to 1967, the only occupation of the appellant Cox was in connection with the two companies, namely, Cox and Company Limited and Prairie. At no time from the date he became interested in Prairie in 1950 or 1951 until 1967, the year in which he sold the oil derrick in question, had he ever sold equipment on his own account. This is not in dispute in the proceedings. There is some evidence that, after he moved to Canada from the United States in or about 1946, he did act as a commission agent selling additives to be put in pipelines for conditioning oil, etc, but at no time prior to 1961 had he purchased heavy equipment in his own right and at no time prior to 1967 had he sold heavy equipment in his own right and, in both the 1961 and the 1967 transactions, it was the same piece of equipment that was involved.
The Minister of National Revenue has reassessed the appellant’s 1967 income on the basis that the net profit made by the appellant on the sale of this oil derrick to Cox and Company Limited must be included therein and tax levied thereon.
What happened was that the appellant, through an insurance adjuster, was able to purchase the oil derrick in question for the sum of $575 after it had been rather extensively damaged in a collision. Through an independent contractor, he spent the sum of $2,500 to have the derrick repaired and another $30 for trucking, resulting in a total cost to him of $3,105 for the purchase and reconditioning of this rig. In 1967 he sold it to Cox and Company Limited for $10,000, and the Minister has added to income the net profit of $6,895 on the ground that it was income from an adventure in the nature of trade.
The position of the respondent is, of course, that the appellant acquired the oil derrick for the sole purpose of selling it or otherwise turning it to account for a profit and, further, that it was inventory of the appellant and never a capital asset of any business carried on by him. By inference, also, it is the respondent’s allegation that, at best, the appellant acted as agent for Cox and Company Limited and/or Prairie when he purchased this equipment at such a nominal sum, and therefore the difference between what he paid for it and what he sold it to the company for represents an earned commission. The evidence indicates that equipment of this sort, when new, costs in the neighbourhood of $20,000.
The appellant, on the other hand, through his counsel, contends that this was the one and only time, in the twenty years that he has been in this country, that he has ever engaged in the purchase and sale of heavy equipment. He says he had three reasons for purchasing it. The first reason was that his companies were in financial difficulties at the material time and there was a very real danger that he might lose these companies and have to go back into business for himself again — in other words, start again from scratch — and I will deal with that situation later. Secondly, he saw the possibility that he could rent the equipment to other oil companies and produce income through the rental of it. Thirdly, if either of his companies were at any time to require additional equipment as a result of breakdowns or the need for equipment on several jobs at once, he would have it available at a much less expensive price than they would have to pay on the independent market.
In order to understand some of the assertions of the appellant, it is necessary to review briefly some of the events that took place in 1961 and subsequent years.
First of all, in or about 1961 Prairie owned a large piece of equipment that was involved in a railway crossing collision with a train. This accident resulted in the filing of a law suit against Prairie, wherein the railway company claimed compensation for losses in the amount of $400,000. The evidence indicates that there was not sufficient insurance to cover a claim as large as this, and that, after a period of three years, either through litigation, settlement, or both, the insurers were able to dispose of the claim for some $160,000. However, during the life of this claim, the appellant had serious cause to fear that Prairie would be forced into bankruptcy if the railway company was successful in its action for recovery of the excess loss over and above the insurance coverage.
Because of this threat of bankruptcy, the heavy equipment in Prairie, or a great deal of it at any rate, was transferred to Cox and Company Limited without the transfer of any cash. However, the transfer was effected by agreements of sale, and perhaps secured by promissory notes. Nevertheless, if the action against Prairie had been successful, this transfer would not have assisted either Cox and Company Limited or Prairie in any way, because the successful litigant against Prairie would simply have called in the receivables of Prairie, and it is conceivable from the evidence that both Prairie and Cox and Company Limited would have been unable to meet their obligations as they fell due, and would therefore have become insolvent.
The appellant claims that, in the light of this situation, when he learned from an insurance adjuster that the piece of equipment in question in this appeal could be obtained at a very reasonable price, he proceeded to purchase and restore it, as has been set out above. He kept it either in his yard or in one of his companies’ yards, where, he states, he intended to rent it or to sell it to one of his companies, if it proved necessary to do so in order to continue operations.
The fact is that at no time, or so it would appear from the evidence, was he able to rent it, and there is no real indication that he made any serious attempt to rent it. He explains this situation by pointing to the fact that, by the time the rig was restored to running condition, the oil business was “in the doldrums” and there was very little call for rental of this type of equipment due to lack of activity in the oil-well drilling field. It was not until what is known as, or is referred to in the evidence as, “the Rainbow development” took place that his two companies began to be productive again.
After he had this piece of equipment for a number of years, he received an offer of $10,000 for it from an independent source, but he refused to sell. He subsequently sold it to Cox and Company Limited for the same price he had been offered for it, and it was used by that company in its business operations for a little over a year and then sold to a third party for the same amount of money.
In my view, it is immaterial what the limited company did with it after it purchased it. The material question to be determined in this appeal is what the intention of the appellant was at the time he purchased the equipment. Did he in fact purchase it on his own account as a Capital asset to be retained in case he might need it himself to enable him to start up in business again if his companies went under? Did he buy it with the hope of generating some income by virtue of being able to rent the equipment to outsiders? Or did he merely buy it with the hope that he might repair it for a reasonable outlay and make a considerable profit on its sale?
At the time of the hearing, the appellant was 75 years of age. By a simple deduction this would indicate that at the time he purchased the equipment he was about 65, but still active to some degree in the casing-pulling business. It is not inconceivable that, if his worst fears had been realized and his two companies had had to be liquidated as a result of a judgment against Prairie in the matter of the railway company’s claim, he would have made a determined effort to start up in business anew.
The appellant’s assertion that Cox and Company Limited and Prairie were in difficult financial straits in 1961 and 1962 is borne out by the exhibits filed on behalf of the appellant, which show considerable losses for the 1961 and 1962 fiscal years of both companies. There is also no evidence to contradict the appellant’s assertion that, in the period between 1961 and 1967, the oil industry had entered, to use his words, “the doldrums”, and that it was only “on the comeback trail”, in so far as the type of business to which he was a party was concerned, in the latter part of the 1960’s.
The sitting member at the material time indicated to appellant’s counsel that the fact that this was one, isolated transaction did not really help the Board in its decision as the definition of “business” that has long been accepted includes therein “an adventure in the nature of trade”. Thus, even a single transaction can be classed as such an adventure and can be taxable. He then pointed out that what is relevant, however, is why the taxpayer went into the transaction, that is, whether he entered into it as a trading venture with the purpose of making a profit, or whether he purchased the rig as a capital asset that he intended to use for his own benefit, distinct and separate from the interests of the companies in which he was a substantial controlling shareholder.
I, of course, have not had the opportunity of observing the appellant in the course of giving his evidence, but the impression I have received, from the questions of the presiding member and certain comments made by him during the hearing, is that he was impressed with the manner in which this one and only witness gave his evidence, and that he considered any one, or even all three, of the reasons given by the appellant for purchasing the oil derrick in question plausible under the circumstances.
It seems to me that the onus placed on the taxpayer in any of these trading appeals is to satisfy the Board, on a preponderance of evidence, that the explanation put forward by him is reasonable. The Minister’s presumption that a transaction was a trading transaction is not an irrebuttable one, nor is it a presumption that must be refuted beyond all reasonable doubt before an appellant taxpayer can succeed in such a Case.
The respondent has attempted to rebut the appellant’s allegations by saying that Cox and Company Limited did not have any need for this particular rig at the time of its purchase by Mr Cox because it had just acquired five such rigs from the Prairie Company without any cash payment. Furthermore, counsel contended that, although these two companies were not associated within the meaning of the Income Tax Act, Mr Cox’s substantial shareholdings in them both made it extremely likely that this equipment would have been available to Prairie if it had needed it.
In my view this does not rebut the explanation given by the appellant, and perhaps it is not necessary for the respondent to rebut it. However, it is my opinion that the respondent’s contention does not even answer the appellant’s contention that he bought this derrick as insurance against the event that both his companies might be forced into liquidation by reason of the threat of impending judgment against them in favour of the Canadian Pacific Railway Company. In such case, the appellant would have lost his investment in both those companies and would have had to start over again from scratch.
Respondent’s counsel very adeptly points out that the rig sat for five or six years without generating any income, and that the Board should not therefore attribute to the appellant any intention of putting it to use to generate income by renting it to other companies. This does not, to my mind, provide an answer to the situation described by the appellant, and uncontradicted by the evidence, whereby, by the time repairs had been effected to the damaged rig, there was no longer a market available at the material time for its rental in view of the overabundance of such equipment standing idle in the area due to the current slump in oil exploration.
Counsel for the Minister also points out that the appellant eventually sold the rig to his company for the exact amount that the third- party stranger had offered, namely, $10,000, and that Cox and Company Limited, in turn, had reaped the slight benefit of having acquired it for $10,000 instead of the $3,000 odd which it had cost Mr Cox, so that the company could deduct capital cost allowance on this inflated amount. The fact remains that there is nothing in the evidence to suggest that the offer made by the third party was not a valid and bona fide offer, and there is no evidence whatsoever to suggest that it was in any way a sham offer intended merely to fix a value on this equipment at which the appellant could transfer it to his company.
As the presiding member said, at page 73 of the transcript: “They could have several jobs proceeding at the same time. . . . Some of them may not be working. He thought it would be useful. I am not convinced he could not make use of it.” He is referring, of course, to the fact that the two companies, when business returned to normal, could have had several jobs going and some of their other rigs be out of order, in which case they might definitely have had a use for this piece of equipment. Mr Weldon then went on to point out that one must look to the intention of the appellant at the material point of time and see what his intention was at the time of purchase. It is apparent from the evidence that, by the time the derrick was in suf- ficently good repair to be sold or rented, neither company needed it because business in that area was at a low level.
At page 76 of the transcript, the presiding member stated: “I think you have to show that he intended to do that” (here he is referring to selling the equipment in a trading transaction to one of his companies) “in 1961 for the purpose of turning a profit, turning it to account and making a profit.” Again, in answer to the suggestion of respondent’s counsel that perhaps the appellant had intended to make no profit on turning it over, the presiding member says, at page 83: “No, there is no evidence of that, nor is there any evidence that he intended to make a profit. His evidence is, mainly, that he intended to use it for his companies or possibly to use it himself. After all, this man is experienced in casing pulling.” Mr Weldon went on to say that the appellant was not primarily a salesman, and counsel for the respondent agreed with that assertion.
Counsel for the respondent submits that there is only the appellant’s unsupported assertion that it was his intention to use this asset, and nothing further. With that contention I disagree. The appellant held the derrick in question for some six years. He made no attempt to sell it and, in fact, turned down an offer to sell it. It was only when he was satisfied that he was not going to be forced into starting up a new business to support himself that he sold it to one of his companies at an appropriate time.
One of the Minister’s assumptions is that the appellant acquired the oil derrick “for the purpose of selling it or otherwise turning it to account for profit”. I am satisfied, from the explanations given by the appellant, that this was not the case. Therefore, on the evidence and on the material filed as exhibits, as well as on the arguments submitted by the parties, I would allow the appeal and refer the matter back to the Minister for reassessment accordingly, on the ground that the net profit of $6,895 made by the appellant on this transaction should not form part of his taxable income for 1967.
Appeal allowed.
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