WALSH,
J.:—This
action
came
on
for
hearing
before
me
in
Calgary
at
the
same
time
as
the
case
of
William
J.
McKinley
v.
M.N.R.
(p.
574),
and
it
was
agreed
by
the
parties
that
the
evidence
heard
should
apply
to
both
cases
since
the
facts
are
identical
save
for
certain
differences
in
the
situation
of
the
appellant
McKinley
which
gave
rise
to
an
additional
argument
on
his
behalf
as
a
result
of
which
a
separate
judgment
dealing
with
this
separate
argument
will
be
rendered
in
his
ease.
The
notice
of
appeal
sets
out
in
both
cases
that
Siebens
Leaseholds
Ltd.
was
incorporated
on
April
18,
1956
under
the
name
of
M.
&
S.
Mining
Company
Limited
and
on
August
23,
1957
its
name
was
changed
to
Siebens
Leaseholds
Ltd.
which,
in
1958,
commenced
acquiring
petroleum
and
natural
gas
leases
and
rights.
On
or
about
March
29,
1958
McKinley
acquired
167
or
one-sixth
of
the
common
shares
of
the
company
in
the
name
of
Tam
Holdings
Ltd.,
a
company
wholly
owned
by
him,
and
became
an
officer
of
it,
at
which
time
the
balance
of
the
shares
were
held
by
Range
Investments
Limited,
a
non-resident-owned
corporation.
William
Siebens,
the
appellant,
came
to
Calgary
in
June
1959
following
graduation
from
the
University
of
Oklahoma
in
petroleum
engineering,
and
advanced
geological
training
and
military
service,
and
accepted
employment
with
Siebens
Leaseholds
Ltd.
on
the
basis
that
he
would
be
given
an
opportunity
to
purchase
shares
of
the
company,
and
in
August
1960
he
purchased
167
common
shares
from
Range
Investments
Limited,
which
company
incidentally
was
controlled
by
his
father,
Harold
Siebens,
who
had
been
active
in
the
oil
and
petroleum
industry
in
western
Canada
prior
to
his
retirement
when
he
took
up
residence
in
Nassau.
Between
1960
and
1965,
William
Siebens
and
William
McKinley
operated
Siebens
Lease-
holds
Ltd.
and
bought
and
sold
petroleum
and
natural
gas
leases
and
rights,
carried
out
substantial
exploration
work
and
operated
a
map
service.
Their
ultimate
objective
was
allegedly
to
acquire
and
hold
producing
acreage
which
would
enable
the
company
to
become
a
producer
of
petroeum
products.
On
January
26,
1965
they
each
sold
their
one-sixth
share
interest
and
Range
Investments
sold
its
two-thirds
interest
in
Siebens
Leaseholds
Ltd.
to
Canadian
Export
Gas
and
Oil
Ltd.
in
an
arm’s
length
transaction
and
respondent
assessed
Siebens
and
McKinley
on
the
amount
received
as
consideration
for
their
shares
without
taking
into
account
the
underlying
cost
of
the
assets
of
Siebens
Leaseholds
Ltd.
in
computing
their
profit
on
this
sale
of
shares.*
Appellants
Siebens
and
McKinley
say
that
the
sale
of
their
shares
constituted
the
realization
of
a
capital
investment
and
that
the
amount
received
was
not
income,
and
in
the
alternative
that
respondent
failed
to
compute
accurately
appellants’
profit
which
arose
cn
the
sale
of
their
shares
for
the
reason
that
it
failed
to
take
into
consideration
the
underlying
cost
of
the
assets
of
Siebens
Leaseholds
Ltd.
represented
by
those
shares.
In
reply
to
the
notice
of
appeal
in
each
case
respondent
states
that
during
the
period
from
1958
to
1965,
Siebens
Leaseholds
Ltd.
carried
on
the
business
of
a
lease
trader
and
broker
realizing
thereby
profits
in
excess
of
$1,100,000,
and
that
it
acquired
and
dealt
with
its
inventory
of
petroleum
and
natural
gas
leases
and
rights
in
the
course
of
its
business
as
a
trader
with
a
view
to
trading
therein
or
otherwise
turning
them
to
account
in
the
most
profitable
manner
open
to
it.
Appellants
were
each
assessed
for
one-sixth
of
the
$1,100,000
for
which
the
shares
were
sold
or
$183,700
less
$167
being
the
cost
of
the
shares
at
$1
each,
and
less
one-sixth
of
$70,969.59
or
$11,851.92
being
their
respective
shares
of
expenses
incurred
on
sale
of
the
shares,
leaving
a
net
profit
of
$171,681.08.1
In
making
the
assessments
under
appeal
herein
respondent
acted
upon
the
following
assumptions
:
(a)
that
William
J.
McKinley
joined
Siebens
Leaseholds
Ltd.
in
1958
as
a
Director
and
its
Chief
Executive
Officer;
(b)
that
Harold
W.
Siebens,
who
controlled
Range
Investments
Limited,
William
J.
McKinley
and
the
Appellant
were
experienced
and
knowledgeable
in
the
oil
and
gas
business,
having
participated
in
various
commercial
ventures
relating
to
oil
and
gas
rights;
(c)
that
Siebens
Leaseholds
Ltd.
was
at
all
material
times
and
throughout
its
existence
a
trader
in
oil
and
natural
gas
rights
and
leases;
(d)
that
all
oil
and
gas
rights
and
leases
acquired
by
Siebens
Leaseholds
Ltd.
were
a
part
of
its
salable
inventory
and
were
acquired
with
a
view
to
trading
therein
or
otherwise
turning
them
to
account
in
the
most
profitable
manner
open
to
it;
(e)
that
early
in
the
month
of
January
of
1965
negotiations
took
place
between
officers
of
Canadian
Export
Gas
&
Oil
Ltd.
and
Siebens
Leaseholds
Ltd.
with
respect
to
the
sale
by
Siebens
Leaseholds
Ltd.
of
certain
specific
oil
and
gas
leases
in
its
inventory
to
Canadian
Export
Gas
&
Oil
Ltd.;
(f)
that
Canadian
Export
Gas
&
Oil
Ltd.
entered
into
written
agreements
dated
26
January,
1965
and
16
March,
1965,
with
Range
Investments
Limited
and
the
Appellant
wherein,
inter
alia:
(1)
Range
Investments
Limited
and
the
Appellant
agreed
to
sell
all
the
shares
of
Siebens
Leaseholds
Ltd.
to
Canadian
Export
Gas
&
Oil
Ltd.
for
$1,100,000.00.
(ii)
It
was
agreed
that
on
the
sale
of
the
shares,
Siebens
Leaseholds
Ltd.
would
own
only
certain
specified
leases,
reservations,
permits
and
royalty
agreements
set
forth
in
Schedules
A,
B
and
C
of
the
agreement
dated
26
January,
1965.
(iii)
Canadian
Export
Gas
&
Oil
Ltd.
agreed
to
change,
within
six
months,
the
name
of
Siebens
Leaseholds
Ltd.
so
that
it
did
not
contain
the
word
Siebens
or
any
similar
name.
(iv)
Range
Investments
Limited
and
the
Appellant
agreed
to
sell
to
Canadian
Export
Gas
&
Oil
Ltd.
for
the
same
price
of
$1,100,000
the
leases,
reservations
and
permits
set
forth
in
Schedules
A,
B
and
C
of
the
agreement
referred
to
in
subparagraph
(ii)
above,
in
the
event
that
they
were
unable
to
deliver
the
shares
of
Siebens
Leaseholds
Ltd.
(g)
that
the
Appellant
and
Range
Investments
Limited
were
authorized
by
William
J.
McKinley
to
enter
into
the
appellants
his
portion
of
the
aggregate
of
these
taxes,
$70,969.59
as
a
cost
in
determining
his
profit
on
the
sale
of
his
shares
of
Siebens
Leaseholds
Ltd
agreements
referred
to
above
dated
January
26th
and
March
16th
and
to
agree
to
sell
his
167
shares
of
Siebens
Leaseholds
Ltd.
(held
in
the
name
of
Tam
Holdings
Limited,
a
company
the
shares
of
which
were
wholly
owned
by
William
J.
McKinley)
and
by
an
agreement
between
these
parties
dated
16
February,
1965,
Tam
Holdings
Limited
agreed
to
deliver
these
167
shares
for
sale
to
Canadian
Export
Gas
&
Oil
Ltd.
for
one-sixth
of
the
$1,100,000
sale
price;
(h)
that
prior
to
the
transfer
of
the
shares
of
Siebens
Leaseholds
Ltd.
to
Canadian
Export
Gas
&
Oil
Ltd.,
a
new
company
known
as
Siebens
Oil
&
Gas
Ltd.
was
incorporated
;
(i)
that
Siebens
Leaseholds
Ltd.
entered
into
an
agreement
with
Siebens
Oil
&
Gas
Ltd.
dated
the
16th
day
of
February,
1965,
whereby
Siebens
Leaseholds
Ltd.
sold
to
Siebens
Oil
&
Gas
Ltd.
a
group
of
leases
known
as
“Fargo
override”
thereby
realizing
a
taxable
profit;
(j)
that
all
other
assets
and
liabilities,
and
the
business
of
Siebens
Leaseholds
Ltd.,
with
the
exception
of
the
specific
group
of
leases
sought
by
Canadian
Export
Gas
&
Oil
Ltd.,
were
transferred
to
the
newly
incorporated
company,
Siebens
Oil
&
Gas
Ltd.;
(k)
that
Siebens
Oil
&
Gas
Ltd.
continued
to
carry
on
the
business
previously
carried
on
by
Siebens
Leaseholds
Ltd.
;
(l)
that
the
acquisition
of
167
shares
in
Siebens
Leaseholds
Ltd.,
the
acquisition
of
an
inventory
of
petroleum
and
natural
gas
leases
by
Siebens
Leaseholds
Ltd.
and
the
trading
therein,,
the
negotiations
with
respect
to
certain
of
these
leases
owned
by
Siebens
Leaseholds
Ltd.,
the
incorporation
of
Siebens
Oil
&
Gas
Ltd.,
with
the
transfer
of
all
the
assets
and
liabilities
of
Siebens
Leaseholds
Ltd.
thereto,
and
the
sale
of
the
shares
of
Siebens
Leaseholds
Ltd.
at
a
time
when
its
assets
included
only
specific
leases
sought
by
Canadian
Export
Gas
and
Oil
Ltd.,
were
part
of
a
scheme
for
profit-making
by
the
Appellant
and
the
two
other
shareholders
of
Siebens
Leaseholds
Ltd.;
(m)
that
the
sale
of
the
shares
of
Siebens
Leaseholds
Ltd.
constituted
in
essence
the
disposal
of
certain
of
the
company’s
trading
inventory
at
a
profit
to
the
Appellant
and
resulted
in
the
Appellant’s
realizing
a
profit
which
was
income
from
a
business
or
adventure
or
concern
in
the
nature
of
trade
and
is
required
to
be
included
in
computing
the
Appellant’s
income
for
the
1965
taxation
year.
William.
Siebens
testified
that
his
father,
Harold
Siebens,
who
had
incorporated
Siebens
Leaseholds
with
McKinley,
wanted
him
to
take
over
after
he
became
inactive
in
1958
after
which
time
he
had
nothing
to
do
with
the
decision-making
although
he
continued
to
get
the
financial
statements
of
the
company
through
Range
Investments.
McKinley,
who
had
been
a
lease
broker
before
Joining
the
company,
taught
him
a
lot
about
the
business
which
depends
on
rapid
decision-making.
He
always
hoped
that
the
company
would
develop
into
a
producing
company
but
they
had
bad
luck
experiencing
68
dry
holes.
The
government
requires
certain
minimum
payments
to
be
made
and
exploration
work
to
be
done
on
lease
and
reservation
acres
and
a
bond
has
to
be
put
up
undertaking
to
do
a
certain
amount
of
exploration
work
each
year.
By
1964
the
company
had
become
involved
in
very
heavy
obligations
as
a
result
of
this,
Range
Investments
having
put
up
some
$240,000
in
bonds
was
unwilling
to
put
up
any
more
and
the
company
was
faced
with
the
possibility
of
having
to
abandon
some
of
its
licences
and
acreage.
Mr.
Beck,
president
of
Canadian
Export
Gas
&
Oil
Ltd.,
had
encountered
his
father
casually
at
a
cocktail
party
in
November
1964
and
had
enquired
if
they
had
any
acreage
in
northern
Alberta
which
they
would
like
to
farm
out.
Mr.
Beck
expressed
renewed
interest
in
January
1965,
asking
them
at
that
time
if
they
would
sell
the
company.
The
Canadian
Export
Gas
&
Oil
Ltd.’s
operations
manager
examined
the
very
detailed
maps
which
Siebens
Leaseholds
had
of
the
oil
lands
in
the
western
provinces
and
in
due
course
made
the
offer
of
$1,100,000
for
the
shares
of
the
company.
Mr.
McKinley
had
retired
in
December
1964
and
was
on
a
Caribbean
trip
and
could
not
be
located
at
the
time,
so
while
appellant
was
satisfied
that
he
would
be
willing
to
join
in
with
Range
Investments
and
himself
in
the
sale
of
all
the
shares
of
the
company
the
purchasers
insisted
on
a
clause
being
put
into
the
agreement
to
the
effect
that
if
all
the
shares
could
not
be
delivered
then
the
assets
of
the
company
which
they
were
acquiring
would
be
sold
in
any
event
for
the
same
price.
He
himself
wished
to
continue
in
business
so
he
formed
the
Siebens
Oil
and
Gas
Ltd.
(in
which
McKinley
had
no
interest)
and
some
of
the
assets
of
Siebens
Leaseholds,
including
its
furniture,
search
records,
maps
and
some
royalties
and
other
properties
which
they
were
holding
in
trust
and
could
not
sell,
were
withdrawn
from
Siebens
Leaseholds
and
disposed
of
to
the
new
Siebens
Oil
and
Gas
Ltd.
by
a
separate
agreement
before
the
shares
of
Siebens
Leaseholds
were
sold
to
Canadian
Export.
He
also
retained
the
staff
who
had
worked
for
Siebens
Leaseholds.
The
map
board
system
was
especially
important
to
him
as
it
was
very
detailed
showing
dry
holes,
pipe
lines,
freehold
and
Crown
reservation
acres
and
the
owner
of
each
quarter
section
of
land,
who
was
working
there,
and
searches
of
open
freehold
land
in
the
province,
and
they
had
files
of
every
search
in
western
Canada
and
at
one
time
had
written
to
most
of
the
freehold
leaseholders
in
Alberta.
The
company
had
also
acted
as
agents
for
major
companies
and
independents
who
did
not
wish
to
reveal
their
interests
in
certain
areas,
working
on
a
commission
basis.
The
company
had
lost
money
consistently,
however,
1964
being
the
first
year
in
which
it
showed
a
surplus.
Its
principal
source
of
revenue,
although
a
continually
increasing
one,
was
from
the
sale
of
oil
leases
and
rights
supplemented
by
leasing
services
and
commissions
and
charges
for
the
use
of
its
map
room.
He
denied
that
he
had
indicated
to
Mr.
Beck
a
preference
for
selling
shares
of
the
company
rather
than
physical
assets.
In
the
agreement
for
the
sale
of
the
shares,
however,
it
was
specified
that
the
company
would
not
at
the
time
of
closing
have
any
outstanding.
contracts
of
any
nature
except
for
the
lease,
reservation
and
the
permit
contracts
or
other
agreements
set
forth
in
Schedule
A,
the
royalty
agreements
annexed
as
Schedule
B
covering
the
leases
set
forth
in
Schedule
A
and
granting
a
3%
overriding
royalty,
the
royalty
agreements
annexed
as
Schedule
C
covering
the
reservations
and
Permit
in
Schedule
A
granting
a
214%
overriding
royalty,
and
the
contract
giving
rise
to
already
existing
overrides
indicated
in
Schedule
A.
Mr.
Beck
subsequently
testified
that
it
was
on
the
basis
of
the
items
listed
in
these
schedules
that
the
amount
of
his
company’s
offer
for
the
shares
of
the
company
was
calculated
and
that
these
were
the
only
assets
which
they
expected
the
company
to
have
(other
than
certain
cash
items
and
bonds
provided
for
in
clauses
8,
9
and
10
of
the
rather
elaborate
agreement,
the
details
of
which
do
not
concern
us
here).
On
February
16,
1965,
prior
to
the
closing
with
Canadian
Export
Gas
&
Oil
Ltd.,
Siebens
Leaseholds
Ltd.
sold
to
Siebens
Oil
and
Gas
Ltd.
certain
leases
and
reservations,
trust
certificates,
royalty
agreements,
mineral
titles,
office
equipment
and
other
assets
listed
in
Schedules
A
to
N
of
the
agreement
between
them,
including
the
3%
gross
overriding
royalty
on
certain
leases
and
214%
gross
overriding
royalty
on
certain
reservations
and
permit
already
referred
to,
which
royalty
agreements,
reservations
and
permit
formed
part
of
the
assets
remaining
in
the
company
when
the
shares
were
acquired
by
Canadian
Export
Gas
&
Oil
Ltd.
By
this
agreement
Siebens
Leaseholds
Ltd.
had
also
sold
to
Siebens
Oil
and
Gas
Ltd.
certain
leases
and
royalty
agreements
held
by
it
in
trust;
which,
as
Mr.
Siebens
indicated,
could
not
be
included
in
the
sale
to
Canadian
Export
Gas
&
Oil
Ltd.
The
aggregate
sale
price
of
all
these
assets
was
$479,559.53,
so
it
was
not
an
unsubstantial
part
of
the
company’s
assets
that
was
stripped
off
and
sold
to
the
new
company
before
the
sale
of
the
shares
of
the
company,
which
now
held
only
the
remaining
assets,
was
made
to
Canadian
Export
Gas
&
Oil
Ltd.
Mr.
William
R.
Hancock,
now
vice-president
in
charge
of
exploration
of
Canadian
Export
Gas
&
Oil
Ltd.,
and
Mr.
August
S.
Beck,
the
president
of
that
company,
also
testified
corroborating
Mr.
Siebens’
evidence.
Mr.
Hancock
said
that
they
were
at
first
interested
in
certain
leases
and
in
finding
out
whether
they
were
available
to
be
farmed
out
or
otherwise
acquired
but
later
became
interested
in
acquiring
the
company
itself
as
a
means
of
acquiring
the
acreage
they
were
interested
in.
Mr.
McKinley
played
no
part
in
the
discussions
and
was
not
in
Calgary
at
the
time
and,
as
far
as
he
knows,
Harold
Siebens
played
no
part
in
the
discussions.
Certain
obligations
of
the
company
were
not
attractive
to
them
and
in
setting
the
price
for
the
shares
they
evaluated
the
acreage
in
which
they
were
acquiring
rights.
As
the
deal
developed
they
decided
to
acquire
all
the
leases
and
reservations.
They
were
particularly
interested
in
certain
leases
and
were
less
interested
in
the
reservations
as
they
would
require
certain
expenditures,
but
eventually
took
them
all
through
acquiring
the
shares
in
the
company.
He
was
in
no
way
involved
in
the
decision
to
buy
the
shares
rather
than
physical
assets,
this
being
a
matter
which
was
up
to
Mr.
Beck
to
decide.
Mr.
Beck
testified
that
his
company
was
short
on
acreage
and
wanted
to
pick
up
some
more.
He
knew
both
Harold
Siebens
and
McKinley.
He
met
Harold
Siebens
at
a
social
occasion
in
the
autumn
who
suggested
that
he
see
his
son
William
and,
as
a
result,
they
looked
at
what
the
company
had
by
way
of
leases
and
reservations
at
its
office
and,
in
due
course,
made
an
offer
to
buy
the
shares
of
the
company.
They
had
a
tax
loss
carry
forward
so
it
was
desirable
to
make
the
offer
for
the
shares.
He
does
not
recall
ever
having
made
an
offer
for
the
properties
themselves
and
there
was
certainly
no
suggestion
from
Siebens
that
they
would
only
sell
shares
and
not
the
licences
or
reservations
as
such.
Beck
was
aware,
however,
that
an
offer
on
this
basis
would
probably
be
more
attractive,
although
his
company
was
really
only
interested
in
the
leases.
He
was
aware
at
the
time
that
certain
properties
were
still
in
process
of
negotiation
and
the
price
offered
for
the
shares
was
based
on
the
list
given
to
him
of
the
properties
which
would
be
included
in
the
sale,
and
he
was
aware
that
other
assets
would
be
removed
from
the
company
first.
There
were
no
negotiations
whatsoever
with
McKinley
and
the
only
reason
for
inserting
the
clause
in
the
agreement
providing
for
the
sale
of
the
assets
in
question
in
the
event
that
all
the
shares
could
not
be
sold
was
that
this
was
put
in
at
the
last
minute
on
the
advice
of
their
counsel
as
McKinley
could
not
be
communicated
with
to
agree
to
the
sale
of
his
shares
and
certain
developments
in
drilling
in
the
vicinity,
if
successful,
might
result
in
a
rapid
increase
in
value
of
the
properties
so.
they
did
not
wish
to
leave
a
loophole
whereby
McKinley
could
then
refuse
to
sell
his
shares.
Mr.
McKinley
also
testified
and
corroborated
Siebens’
evidence.
He-stated
that
he
became
active
in
the
industry
in
1950
as
a
field
representative
acquiring
petroleum
and
natural
gas.
freehold
rights
and
later
became
land
manager
for
a
company
operated
by
Harold
Siebens
which
Siebens
sold
in
1952.
Until
the
autumn
of
1955
he
then
worked
with
others
but
rejoined
Siebens
when
he
commenced
operating
in
Canada
again
and
in
1958
joined
him
in
forming
a
new
company,
Siebens
Leaseholds
Ltd.
which
he
helped
to
finance
through
his
Tam
Holdings
Ltd.
although
the
bulk
of
the
financing
was
put
up
by
Range
Investments
Ltd.
At
the
time
of
the
present
sale
the
company
was
still
trying
to
acquire
petroleum
and
natural
gas
interests
which
might
become
productive.
In
December
1964,
however,
after
a
visit
with
Harold
Siebens
in
the
Bahamas
he
was
asked
to
resign
from
the
company
which
he
did
as
of
January
1,
1965
so
he
was
no
longer
working
for
the
company
when
the
present
sale
was
made
although
he
still
had
his
shares
through
Tam
Holdings.
He
knew
that
William
Siebens
was
concerned
about
the
company’s
heavy
obligations
and
new
capital
which
would
be
needed
and
that
Range
Investments
would
not
put
any
more
capital
in.
He
himself
w
as
somewhat
less
concerned,
however,
and
was
willing
to
carry
on
for
another
year.
At
the
time
he
knew
of
no
prospective
sale
and
first
heard
of
it
on
February
9,
1965
as
a
result
of
a
telephone
call
he
received
on
the
Grand
Cayman
Islands
as
a
result
of
which
he
then
returned
to
Calgary
and
agreed
to
go
along
with
the
sale.
He
had
been
looking
forward
to
retiring
for
about
two
years
before
that
in
any
event.
He
admitted
that
he
had
been
with
a
former
company,
Siebens
Minerals
Ltd.,
which
carried
on
basically
the
same
business
as
Siebens
Leaseholds
Ltd.
and
in
which
the
shares
were
sold
after
some
of
its
assets
had
been
transferred
to
Siebens
Leaseholds.
He
was
merely
an
employee,
however,
and
not
a
shareholder
of
that
company.
Before
that
he
had
worked
as
lease
trader
and
broker
for
another
company
of
Harold
Siebens,
Alberta
Leaseholds
Diversified,
in
which
the
shares
had
also
been
sold
in
1952.
Robert
Seaton,
the
former
director
of
the
Minerals
Division
of
the
Alberta
Department
of
Mines
and
Minerals
and
since
1970.
in
private
consulting
practice,
testified
as
an
expert
witness
-to
the
effect
that
it
was
quite
common
for
an
oil
company
to
enter
into
the
business
of
becoming
a
producing
oil
and
gas
company
by
trading
in
exploratory
reservations
and
leases,
and
that
a
number
of
the
largest
producing
oil
companies
now
in
existence
started
out
that
way.
By
so
doing
the
cost
of
exploration
and
the
risks
may
be
spread
among
as
many
people
as
possible.
He
concluded
that
Siebens
Leaseholds
Ltd.’s
business
could
have
led
to
its
becoming
an
oil
producing
company.
On
the
second
issue
in
these
appeals
of
whether
the
cost
of
acquiring
the
inventory
sold
should
be
taken
into
account
in
the
calculation
of
the
profit
made
on
the
sale
of
the
shares
in
the
event
that
such
sale
is
found
to
be
taxable,
James
Gordon
Hutchison,
C.A.
testified
that
he
is
familiar
with
the
company’s
financial
statements
and
assessments,
and
that
the
cost
of
the
sale
of
the
shares
should
be
taken
as
being
the
value
of
the
‘
Inventory
of
petroleum
and
natural
gas
leases
and
other
rights
at
cost,
(including
first
year
rentals)
”
which
leases
were
valued
at
$135,901
and
reservations
at
$33,264
for
a
total
of
$169,165
on
the
balance
sheet
as
at
January
31,
1965
of
Siebens
Leaseholds
Ltd.
(page
40
of
Exhibit
A-1,
produced
as
part
of
Agreement
as
to
documents).
The
sale
agreement
left
the
company
with
this
together
with
sufficient
cash
to
pay
estimated
income
tax
of
$16,800
and
provided
that
any
undisclosed
liabilities
would
be
for
the
vendors’
account.
As
a
result
of
this,
additional
tax
in
the
amount
of
$70,969.59
which
was
assessed
was
paid
over
by
the
vendors
and
the
Minister
in
his
re-assessment
allowed
the
pro
rata
proportion
of
this
to
appellant
as
part
of
the
cost
of
the
shares
sold.
It
is
his
opinion
that
instead
of
allowing
each
of
the
appellants
$12,018.92*
he
should
have
allowed
them
one-
sixth
of
$169,165
or
$28,194,
or
an
additional
deduction
of
$16,176
in
round
figures
for
each
appellant,
as
the
cost
of
the
shares
against
the
sale
price
of
same.
This
case
is
difficult
in
that,
while
there
is
considerable
jurisprudence
touching
on
some
of
the
points
in
issue,
the
facts
of
this
case
do
not
fit
squarely
within
any
of
these
decisions,
most
of
which
must
therefore
be
distinguished.
This
is
not
a
case
where
a
company
was
incorporated
with
the
intention
of
disposing
of
its
assets
by
the
sale
of
its
shares
at
a
profit.
The
shares
were
held
for
a
relatively
lengthy
period
of
time
(some
9
years)
and
the
shareholders
hoped
that
they
would
eventually
locate
oil
or
natural
gas
on
some
of
their
properties
and
become
a
producing
company.
To
this
extent
it
can
be
distinguished
from
such
cases
as
Ronald
K.
Fraser
v.
M.N.R.,
[1964]
C.T.C.
372;
Nicholas
DeToro
v.
M.N.R.,
[1965]
C.T.C.
321
;
Ralph
K.
Farris
v.
M.N.R.,
[1970]
C.T.C.
224
(now
on
appeal),
and
similar
cases
dealing
with
disposal
of
shares.
In
this
respect
it
more
closely
resembles
the
cases
of
Paul
Racine,
Amédée
Demers
and
François
Nolin
v.
M.N.R.,
[1965]
C.T.C.
150,
and
Gordon
S.
Shipp,
Harold
G.
Shipp,
Bessie
L.
Shipp
and
June
C.
Shipp
v.
M.N.R.,
[1967]
C.T.C.
330.
Neither
can
I
find
that
there
was
a
secondary
intention
on
the
part
of
appellant
at
the
time
he
acquired
his
shares
to
dispose
of
them
or
of
most
of
the
assets
of
the
company
at
a
profit
rather
than
to
participate
in
the
operation
of
the
company
with
a
view
to
producing
income
from
these
operations
so
as
to
bring
it
within
the
findings
of
such
cases
as
Hersch
Fogel
v.
M.N.R.,
[1959]
C.T.C.
227;
Bayridge
Estates
Limited
v.
M.N.R.,
[1959]
C.T.C.
158;
Regal
Heights
Limited
v.
M.N.R.,
[1960]
C.T.C.
384;
G.
W.
Golden
Construction
Limited
v.
M.N.R.,
[1967]
C.T.C.
111,
which
applied
the
case
of
Fraser
v.
M.N.R.
(supra)
;
M.N.R.
v.
Clifton
H.
Lane,
[1964]
C.T.C.
81,
which
relied
on
the
Regal
Heights
case
(supra)
and
Normac
Investments
Limited
v.
M.N.R.,
[1969]
C.T.C.
468,
which
also
referred
to
the
Regal
Heights
case
(supra),
the
case
of
M.N.R.
v.
James
N.
Sissons,
[1969]
C.T.C.
184,
and
the
case
of
Western
Leaseholds
Limited
v.
M.N.R.,
[1959]
C.T.C.
531.
On
the
contrary,
with
respect
to
the
absence
of
secondary
intention
it
more
closely
resembles
the
cases
of
Racine,
Demers
et
al.
(supra),
Hazeldean
Farm
Company
Limited
v.
M.N.R.,
[1966]
C.T.C.
607,
and
John
S.
Davidson
v.
M.N.R.,
[1968]
C.T.C.
136,
which
latter
case
I
distinguished
in
the
case
of
Farris
v.
M.N.R.,
(supra).
Part
of
the
difficulty
in
the
present
case
arises
from
the
fact
that
this
company
was
not
one
formed
for
the
purpose
of
acquiring
and
later
developing
and
operating
a
specific
asset
such
as
a
shopping
centre,
apartment
building
or
a
land
development
and
then
disposing
of
same
by
sale
of
shares
of
the
company,
but
a
substantial
part
of
the
company’s
business
consisted
of
the
acquisition
and
sale
of
petroleum
and
natural
gas
leases
and
rights
and
it
was
only
as
a
result
of
the
revenue
generated
by
these
sales
during
the
period
between
1958
and
1965,
together
with
such
other
revenue
as
it
could
get
from
the
use
of
its
map
room
or
by
acting
as
agents
for
other
companies
that
it
was
able
to
continue
in
business,
always
with
the
hope
of
eventually
acquiring
rights
in
some
oil
or
gas
producing
property.
The
very
nature
of
its
business
required
a
constant
turnover
of
these
leases
and
permits
in
an
attempt
to
upgrade
the
company’s
inventory
of
them
and
eventually
to
obtain
control
of
or
rights
in
producing
properties.
The
disposal
of
the
leases,
reservations
and
Permit
to
Canadian
Export
Gas
&
Oil
Ltd.
by
the
sale
of
the
shares
of
appellant
and
his
associates
in
Siebens
Leaseholds
Ltd.
does
not
necessitate
a
finding
of
secondary
in-
tention
on
their
part
in
order
to
make
the
profit
on
such
sale
taxable.
It
was
at
all
times
part
of
the
regular
business
operation
of
the
company
to
acquire
and
dispose
of
such
leases,
reservations
and
permits
as
profitably
as
possible
and
the
mere
fact
that
the
sale
in
question
involved
not
merely
a
few
of
them
but
constituted
a
disposal
of
the
major
portion
of
the
company’s
inventory
of
such
assets
does
not,
in
my
view,
alter
the
situation,
so
that
if
the
sale
had
been
made
by
the
company
itself
of
the
physical
assets
I
would
have
no
hesitation
in
finding
that
the
profits
on
such
sale
were
taxable
as
income
of
the
company.
The
fact
that
the
ultimate
intention
was
to
make
the
company
a
producing
company
can
largely
be
disregarded
in
considering
whether
this
disposal
of
a
substantial
portion
of
its
assets
was
a
capital
or
income
transaction.
This
is
made
clear
in
the
case
of
Western
Leaseholds
Limited
v.
M.N.R.
(supra),
a
case
which
resembles
this
one
in
that
it
dealt
with
natural
gas
and
petroleum
rights.
It
held,
inter
alia
(see
headnote,
page
532)
:
That
the
fact
that
the
moneys
realized
from
granting
options
and
leases
would
be
utilized
to
finance
production
of
oil
was
irrelevant;
The
very
nature
of
the
company
and
its
operations
was
held
to
negate
the
claim
of
capital
gains.
As
Locke,
J.
stated
at
page
543
:
.
.
.
to
adequately
explore
[the
lands]
to
determine
whether
it
contained
oil
in
paying
quantities
required
an
expenditure
of
moneys
which
was
entirely
beyond
the
financial
capacity
of
the
appellant.
This
very
closely
resembles
the
present
situation.
In
the
well-
known
case
of
M.N.R.
v.
James
A.
Taylor,
[1956]
C.T.C.
189,
the
headnote
setting
out
the
criteria
suggested
by
Thorson,
P.
to
use
in
determining
whether
a
transaction
is
‘‘
an
adventure
or
concern
in
the
nature
of
trade’’
quotes
as
a
negative
criterion
the
following
(page
190)
:
The
intention
to
sell
the
purchased
property
at
a
profit
is
not
of
itself
a
test
of
whether
the
profit
is
subject
to
tax
for
the
intention
to
make
a
profit
may
be
just
as
much
the
purpose
of
an
investment
transaction
as
of
a
trading
one.
The
considerations
prompting
the
transaction
may
be
of
such
a
business
nature
as
to
invest
it
with
the
character
of
an
adventure
in
the
nature
of
trade
even
without
any
intention
of
making
a
profit
on
the
sale
of
the
purchased
commodity.
If
the
company
itself
would
have
been
taxable
on
the
profits
made
from
the
sale
of
these
assets,
this
brings
us
to
the
question
of
whether
the
shareholders
would
also
be
taxable
when
the
same
assets
were
sold
by
means
of
a
sale
of
the
shares
of
the
company
rather
than
physical
sale
of
the
assets
themselves.
In
rendering
judgment
in
the
Ronald
K.
Fraser
case
(supra),
Judson,
J.
stated
at
page
376:
Some
point
was
made
of
the
fact
that
the
appellant
did
not
in
one
case
sell
a
store
and
in
another
case
vacant
land
but
shares
in
two
companies.
I
agree
with
Cameron,
J.
that
this
was
merely
an
alternative
method
that
they
chose
to
adopt
in
putting
through
their
real
estate
transactions.
The
fact
that
they
incorporated
companies
to
hold
the
real
estate
makes
no
difference.
Associated
London
Properties,
Ltd.
v.
Henriksen
(H.M.
Inspector
of
Taxes)
(1942-45),
26
T.C.
46.
A
similar
finding
was
made
in
the
case
of
Nicholas
DeToro
v.
M.N.R.
(supra)
which
followed
the
Fraser
case
holding:
That
the
fact
that
the
profit
arose
from
the
sale
of
shares
rather
than
from
the
sale
of
real
property
was
immaterial;
A
contrary
decision
was
reached,
however,
in
the
Shipp
case
(supra)
by
Gibson,
J.
in
which
the
appellants
had
accepted
an
unsolicited
offer
for
their
shares
in
a
shopping
centre
which
they
had
operated
profitably
for
four
years.
He
held
that
the
activities
of
the
corporation
were
an
exception
to
the
usual
activities
of
the
appellants
and
the
corporation
was
not
formed
as
an
alternative
method
of
putting
through
a
real
estate
transaction
nor
as
a
shield
for
the
purpose
of
attempting
to
get
a
profit
on
capital
account
but
that
their
shares
were
investments
and
their
profit
was
derived
from
the
realization
thereof.
He
discussed
the
Fraser
case
(supra)
distinguishing
it
and
holding
that
the
principles
in
it
apply
only
(page
336)
:
.
.
.
when
at
the
time
of
incorporation
persons
(1)
have
acquired
real
estate
with
the
thought
that
it
be
sold
as
well
as
for
income,
and
(2)
have
caused
a
company
to
be
incorporated
for
the
express
purpose
of
attempting
to
get
profit
on
capital
account
which
otherwise
would
be
income.
With
respect,
I
would
not
so
limit
the
effect
of
the
Fraser
judgment.
In
the
Fraser
case
Judson,
J.,
referring
to
the
judgment
of
Cameron,
J.
in
the
court
below
on
the
question
of
secondary
intention
of
the
appellants,
states
at
page
375
:
In
spite
of
the
Judge’s
emphasis
on
primary
and
secondary
intention,
when
applied
to
the
facts
of
this
case
it
amounts
to
no
more
than
this.
He
was
saying
that
two
active
and
skilled
real
estate
promotors
made
a
profit
in
the
ordinary
course
of
their
.
business,
and
this
they
obviously
did.
They
were
carrying
on
a
business;
they
intended
to
make
a
profit,
and
if
they
could
not
make
it
one
w
ay,
then
they
made
it
another
way.
Also
somewhat
in
favour
of
the
appellant
is
the
case
of
Elgin
Cooper
Realties-
Ltd.
v.
M.N.R.,
[1969]
C.T.C.
426,
which
held
that
although
the
appellant’s
controlling
shareholder
had
long
been
active
in
real
estate,
on
the
evidence
the
building
in
question
had
been
intended
as
an
investment
and
that
intention
was
altered
as
a
result
of
difficulties
and
faults
encountered
during
construction
so
that
the
sale
was
not
one
made
in
the
course
of
an
adventure
in
the
nature
of
trade.
The
evidence
disclosed
clearly
that
William
Siebens
and
William
McKinley
are
both
very
knowledgeable
people
in
the
oil
and
gas
business
and
in
the
acquisition
and
sale
of
petroleum
and
natural
gas
leases
and
permits
as
well
as
in
exploration
work.
The
present
appellant,
William
Siebens,
had
not
only
been
trained
for
it
by
his
university
education
but
was
the
protégé
of
his
father,
Harold
Siebens,
who
had
devoted
most
of
his
life
to
the
business.
Although
Harold
Siebens
was
no
longer
active
at
the
time
of
this
sale
there
is
little
doubt
that
through
his
holding
in
Range
Investment
Ltd.
he
was
kept
informed
and
was
interested
in
what
was
going
on.
He
had
on
at
least
two
previous
occasions
been
a
shareholder
of
a
company
in
the
same
business
which
was
disposed
of
by
the
sale
of
its
shares
after
transferring
some
of
the
company’s
assets
to
another
company
which
he
incorporated.
This
was
done,
for
example,
in
connection
with
the
disposal
of
the
shares
of
Siebens
Minerals
Ltd.
before
the
present
company,
Siebens
Leaseholds
Ltd.
was
incorporated.
In
one
of
the
preceding
companies,
the
present
appellant,
William
Siebens,
also
owned
shares
but
his
counsel
argued
that
he
was
still
at
school
at
the
time
and
that
if
he
sold
them
it
was
because
his
father
told
him
to
and
not
as
part
of
a
pattern.
In
any
event,
all
the
parties
concerned
had
wide
business
experience
and
the
benefit
of
competent
legal
advice
and
I
cannot
conclude
that
they
were
not
well
aware
of
the
distinction
between
the
sale
of
physical
assets
of
the
company,
the
profits
resulting
from
which
would,
in
my
view,
clearly
have
been
taxable,
and
the
sale
instead
of
all
the
shares
of
the
stock
of
the
company
from
which
all
but
those
physical
assets
had
been
previously
removed,
which
would
accomplish
the
same
purpose
and
might
not
be
taxable.
Mr.
Beck,
the
president
of
Canadian
Export
Gas
&
Oil
Ltd.,
the
purchaser,
did
not
hesitate
to
admit
that
he
was
aware
of
the
distinction
and
that
he
considered
it
more
advantageous
for
his
company
to
buy
the
shares,
although
if
for
some
reason
they
could
not
get
all
of
the
shares
should
Mr.
McKinley
refuse
to
sell
his,
he
was
willing
instead
to
buy
from
the
company
the
assets
in
which
he
was
interested
for
the
same
price,
but
this
was
only
an
alternative
put
in
the
agreement
as
a
matter
of
caution.
He
suggested
in
his
evidence
that
he
was
aware
that
an
offer
for
the
shares
would
be
more
interesting
for
the
vendors,
the
implication
being
that
from
his
point
of
view
he
could
perhaps
offer
them
a
lower
price
by
purchasing
on
this
basis,
although
this
was
not
specifically
stated.
There
is
nothing
in
the
evidence
to
indicate
that
the
vendors
themselves
insisted
on
the
sale
of
the
shares
and
would
not
have
been
willing
to
sell
the
assets
as
such
however.
They
were
in
a
position
where
if
they
did
not
sell
them
soon
they
might
have
to
abandon
some
of
them
in
any
event
as
they
did
not
have
the
funds
available
to
meet
the
heavy
commitments
which
would
be
involved
in
retaining
them.
What
is
clear
is
that
appellant,
William
Siebens,
wished
to
remain
in
the
business
and
hence,
as
his
father
had
done
on
previous
occasions
with
other
companies,
he
formed
a
new
company
and
stripped
the
present
company
of
assets
which
he
wished
to
retain
which
produced
revenue,
such
as
overriding
royalties,
the
maps
and
records
and
office
furniture,
as
well
as
certain
properties
which
were
being
held
in
trust
and
allegedly
could
not
be
sold.
Although
it
was
not
provided
for
in
the
agreement
he
also
retained
the
office
staff
and
employees.
Whether
or
not
the
purchaser
was
interested
in
these
other
assets
it
was
given
no
opportunity
to
acquire
them,
its
offer
being
based
on
the
list
given
to
it
of
the
properties
which
Siebens
Leaseholds
Ltd.
was
prepared
to
sell.
If
the
company
had
simply
been
sold
as
a
going
concern
by
the
disposal
of
all
of
its
shares
without
first
stripping
off
any
of
its
assets
I
might
have
been
prepared
to
find
that
the
profit
on
the
sale
of
the
shares
represented
a
capital
gain,
since
Siebens
Leaseholds
Ltd.
was
not
formed
with
a
view
to
acquiring
a
certain
asset
or
assets
in
order
to
subsequently
dispose
of
them
at
a
profit
through
the
sale
of
its
shares.
In
view
of
the
stripping
off
of
assets
to
the
extent
of
$479,559.53
by
transferring
them
to
a
new
company
before
the
sale
of
the
shares
of
the
old
company,
Siebens
Leaseholds
Ltd.,
however,
I
have
reached
the
conclusion
that
what
was
really
involved
was
the
sale
of
the
assets
of
Siebens
Leaseholds
Ltd.
which
remained
in
the
company
at
the
time
of
the
sale
of
the
shares
to
Canadian
Export
Gas
&
Oil
Ltd.
and
that
in
line
with
the
Fraser
and
DeToro
judgments
(supra)
the
sale
of
the
shares
was
merely
an
alternative
method
of
putting
through
the
real
estate
transaction.
Appellant’s
appeal
must
therefore
fail
on
this
ground.
This
brings
us
to
the
alternative
argument
that
if
appellant
is
to
be
taxed
on
his
portion
of
the
profits
made
from
the
sale
of
his
shares
on
the
basis
that
what
was
really
sold
by
him
was
his
portion
of
the
physical
assets
of
the
company
being
acquired
by
the
purchasers
as
a
result
of
this
purchase,
then
his
share
of
the
book
value
of
these
assets
of
the
company
should
be
deducted
from
the
sale
price
of
these
shares
in
order
to
determine
the
profit
realized
by
him
on
the
sale
of
them.
The
Minister
has
allowed
him
only
the
par
value
of
$1
a
share
at
which
he
acquired
the
167
shares
and
his
portion
of
the
taxes
subsequently
assessed
against
the
company
which,
by
virtue
of
the
sale
agreement,
the
vendors
had
to
pay.
While
there
is
some
force
in
respondent’s
argument
that
it
is
not
the
Company
w
hich
is
being
taxed
here
on
its
profit
on
the
sale
of
the
physical
assets
but
merely
the
shareholders
on
their
profit
on
the
sale
of
the
shares
and
that
it
is
therefore
only
the
cost
of
these
shares
to
them
which
should
be
taken
into
consideration
as
a
deduction,
and
wrong
to
take
into
consideration
the
financial
statements
of
the
company
and
to
look
behind
the
sale
of
the
shares
to
calculate
the
profit
on
the
sale
of
the
properties,
it
is
precisely
because
I
have
found
that
the
sale
of
the
shares
was
merely
an
alternative
method
of
selling
the
properties
that
I
have
reached
the
conclusion
that
these
profits
are
taxable.
This
conclusion
was
not
based
on
the
fact
that
appellant
and
his
associates
were
traders
in
shares
who
have
realized
a
profit
consisting
of
the
difference
between
the
purchase
and
sale
price
of
such
shares.
It
seems
only
reasonable
then
to
conclude,
as
Mr.
Hutchison
did
in
his
evidence,
that
the
amounts
shown
in
the
balance
sheet
of
the
company
as
of
January
31,
1965
which
represented
the
financial
position
of
the
company
as
of
the
date
of
the
sale
to
Canadian
Export
Gas
&
Oil
Ltd.
as
the
value
of
the
inventory
of
petroleum
and
natural
gas
leases
and
other
rights
at
cost
(including
first
year
rentals)
in
the
amount
of
$169,165
should
be
credited
against
the
purchase
price
as
the
cost
of
these
shares
and
that
appellant
should
receive
a
credit
of
one-sixth
of
this
after
deducting
the
credits
he
has
already
been
allowed.*
While
the
Fraser
case
(supra)
does
not
actually
spell
out
how
the
calculation
of
a
profit
on
the
sale
of
shares
was
made
it
would
appear
to
have
been
made
on
this
basis.
It
was
also
what
was
done
in
the
DeToro
case
(supra).
Further
authority
for
going
behind
the
corporate
entity
to
reach
a
realistic
conclusion
as
to
actual
expenses
incurred
can
perhaps
be
found
in
the
Supreme
Court
judgment
of
M.N.R.
v.
Henry
J.
Freud,
[1968]
C.T.C.
438,
in
which
a
lawyer
joined
with
an
associate
and
formed
a
corporation
to
develop
a
proto-
type
of
a
sports
car
hoping
eventually
to
sell
their
idea
embodied
in
the
prototype
at
a
profit
to
someone
who
would
be
interested
in
putting
it
into
production.
Eventually
all
the
other
participants
withdrew
save
for
the
taxpayer
who
put
in
a
further
$13,840
to
try
to
bring
the
project
to
a
conclusion,
partly
in
the
form
of
advances
and
partly
by
direct
payments
by
him
for
labour
and
materials.
He
deducted
this
from
other
income
for
the
year.
The
Minister
claimed
this
was
a
capital
outlay
and,
moreover,
that
the
activity
was
that
of
the
corporation
and
not
of
the
taxpayer,
and
that
the
loss
was
the
corporation’s.
The
Court,
in
finding
unanimously
for
the
taxpayer,
held
inter
alia
(see
headnote)
:
_
f
(2)
The
fact
that
a
corporate
entity
was
interposed
to
carry
out
the
venture
did
not
in
the
present
circumstances
affect
the
matter;
the
taxpayer’s
shares
did
not
represent
an
“investment”
and
if
the
project
had
been
successful
there
could
be
no
doubt
but
that
a
profit
realized
from
their
sale
would
have
been
taxable.
(3)
For
the
same
reason,
the
taxpayer’s
advances
to
the
corporation
were
not
in
the
nature
of
an
“investment”
and
they
had
none
of
the
characteristics
of
a
regular
loan.
They
represented
outlays
made
in
the
hope
of
making
a
profit
on
the
whole
transaction
and
were
made
for
the
purpose
of
deriving
income
from
an
adventure
in
the
nature
of
trade.
Although
dismissing
the
appeal
on
the
main
issue,
therefore,
I
would
maintain
appellant’s
appeal
in
part,
on
this
alternative
issue
and
refer
the
re-assessment
back
to
the
Minister
for
further
re-assessment
not
inconsistent
with
the
terms
of
this
Judgment.
Appellant
having
been
partially
successful
in
his
appeal
shall
have
one-third
of
his.
costs
in
same.
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