Judge Flanigan (orally: November 22, 1974):
1 This is one of a group of appeals by Robert W McGraw, John J McGraw, the estate of John McGraw, Mrs Jean C McGraw and Richard D McGraw, covering among them the years 1966 to 1969 and, I am told, also the 1971 taxation year. A great deal of evidence has been heard in the last two days and a vast amount of it has really been directed at showing that the late John McGraw was a trader and the companies that he operated or used as vehicles were also trading quite heavily on the Vancouver Stock Exchange in highly volatile stock.
2 The question at issue is whether the profits made by the McGraw family in Glacier Investments Limited, a personal corporation during the years in question, are capital gains or whether they should be treated as income as a result of what was really a venture in the nature of trade with respect to two stocks in companies known as Pathfinder Resources Limited and Adera Mining Limited, which I will refer to in the course of this judgment as Pathfinder and Adera.
3 In the early 30's, the late Mr McGraw worked for a local brokerage house which he subsequently purchased and renamed Continental Securities, I believe it was. During the course of time, another company came into the picture known as Continental Investments, but I think that, although they were separate entities, the two companies really did the same thing, and were trading companies owned and operated by the late Mr McGraw.
4 In addition there was another trading company by the name of Burnbank Investments Ltd which was owned by Mrs Jean McGraw to the extent I think of 69%, a Mr MacPhail owning the other 31%. Mr MacPhail was the floor trading man for Continental Securities and Investments and the evidence indicates that Burnbank was incorporated really to give him an equity position in the transactions that Mr McGraw was involved in.
5 Mr McGraw was obviously a knowledgeable man of very great experience in the workings of the Vancouver Stock Exchange, having been, over the course of some 30 years, a member, director and president thereof and who obviously, from the exhibits that have been filed by both the appellant and the respondent, engaged in the trading of millions of shares not only over the years but also sometimes in enormous volume in only a matter of months. He was not “a professional man” in the sense that is implied by that antiquated term, and he had a definite desire that his three sons should not become part of the commercial brokerage business in which he was engaged, but should make their careers either in the recognized professions or in business.
6 The oldest son, John McGraw, Jr, John James McGraw to be exact, who gave evidence for approximately four hours yesterday, was, I believe, 22 years of age in 1955 and had finished four years of geology at the University of British Columbia and, after taking a year off, subsequently graduated in 1956. He apparently was the closest to inheriting the trading instincts of his father, because he attempted on several occasions to go into business with him, but his father would have no part of it. He said that he did not want his sons to be engaged in such a volatile, up-and-down business as he had been involved in over the years.
7 In 1955, in order to persuade his sons to stay in school and college and head into fields other than his field, as well as, I suppose, for tax planning purposes, or for any of many other reasons, after seeking professional advice, he set up a company known as Glacier Investments Limited. He held the preferred stock from the outset and the growth stock was given to his wife and children. This was meant, as John McGraw, Jr has said, to give his family some idea of the types of investments that they should look for in their future life and particularly to emphasize that they should not deal in the types of stocks that their father dealt in.
8 From 1955 on, Glacier Investments bought “blue chip” stocks, as the jargon of the trade goes, and from then until 1965 held basically the same stocks, though on occasion, as one would expect, there were changes in the portfolio and clearly Glacier was treated by the taxation officials as being a holding company with the long-term purpose of realizing an appreciation of capital and obtaining dividend income. Meanwhile, the late Mr McGraw, in his brokerage business, went through three or four phases. At the outset it was a retail brokerage house, but it gradually shifted to the point where it became more of an underwriting institution, a wholesale operation whereby his company with its own seat on the Stock Exchange was able to act for other brokers on a commission basis, and in 1965, for the first time, he became involved in what is commonly known as the “start-up” type of company.
9 The first company he started up was Adera and he, as the records show, obtained a considerable number of shares for the account of Glacier Investments. According to John McGraw, Jr, his father had a theory that “when you get into a stock, you should sell enough to get your investment back as quickly as possible, if the market permitted, and then hold the balance until the time arrived when you felt that the stock should no longer be held”. The evidence is that in his trading companies, as I have said, the late Mr McGraw turned over hundreds of thousands, even millions, of these shares during the period of time between 1965 and his death near the end of December 1970. His avowed intention, according to John McGraw, Jr, in getting Glacier into this type of operation, was to hold the Adera shares for a long-term investment, knowing that this type of resource business would not produce dividend income for many years but his experience over the years having indicated that once in a while people who take a flyer into this highly volatile field succeed in getting, as the saying goes, a substantial accretion of capital, and therefore it was his avowed intention that the Adera shares that were put in Glacier should remain there for a long period of time.
10 The first sale took place in late 1965 when the Adera stock rose to a position where it was possible, by selling a small quantity of stock, to recover Glacier's investment in it, which one should realize was not very substantial. Subsequently other sales took place over the period from 1965 to 1968 and the basic reason given for the sell-out of these shares was that in 1967 Adera had become involved in exploration in the Rainbow area of Alberta, an area that later became a very important oil section of that province, and I think he said that in 1967 and 1968 the stock rose as high as $2.50. Mr McGraw, Jr, who was by then a practising geologist, or was in the geophysics business in the United States, had occasion to be in Calgary and in Vancouver quite often because he was in the process of setting up a branch office of the United States corporation for which he worked.
11 With his knowledge and understanding of the reports on Adera, he came to the conclusion that the stock was overpriced and it was eventually sold. I think that they received somewhere in the neighbourhood of $1.80 per share which perhaps indicates that they did not hold long enough or perhaps, on the other hand, that it was prudent to sell this stock at that time and take the profits that they had hoped for when they went into the transaction.
12 The other enterprise, of course, concerns the Pathfinder shares in connection with which the family company, Glacier, along with Mrs McGraw's Burnbank company entered into a grub staking agreement with one Oates and subsequently received for their participation 308,750 shares of Pathfinder Resources Limited. They acquired these in 1968 and I think they disposed of all but the 116,000 that they still have today, and these first shares, whatever the figure—but it was over 100,000 as I recall—were sold for the same reason as the first Adera shares, namely, when the opportunity was right to gain back the original investment which again was very small.
13 In Pathfinder the McGraws also had founder's shares, for which I think they had paid 121/2¢ maximum, and no further sales of Pathfinder stock were made until after the death of their father in 1970. These sales took place in the early part of 1971, and the explanation given was that the estate was top heavy with Pathfinder shares and control of the company had moved towards Eastern interests as a result of some movement into the asbestos field. In any event, for whatever reason, it was deemed wise to reduce their Pathfinder holdings substantially, which they did by the sale of 125,000 shares over the first two or three months of 1971.
14 The real thrust of the respondent's argument is that Mr McGraw, Sr merely lifted from his trading companies a substantial number of shares of these two mining companies, and thereby attempted to make a capital gain to which he would not have been entitled had the shares remained in Continental or Burnbank, both the latter companies being in the business of trading in shares and other securities.
15 One must look, I think, at the type of investments that Glacier had held from its inception. Exhibit A-2, prepared under the direction of Roger C Cohen, who gave evidence and was the US attorney for John McGraw, Jr, shows that for the first 10 years Glacier's investment portfolio consisted solely of shares costing a dollar or more per share. Mr Cohen said that, over the 15 years in question, of the total shares held by the personal corporation, 65%, on the average, paid dividends. Exhibit A-2 also shows that the number of stocks held by Glacier Investments for more than 12 months was substantial and that, in by far the majority of the years in question, 100% of its investment portfolio had been held for 12 months or more.
16 There is no question that it would have been very helpful to have the evidence of the late Mr McGraw. I have had the opportunity of hearing two of his sons, one of whom, Mr John McGraw, Jr, was, I think, perhaps the person most closely associated with his father so far as this family holding company was concerned, at least in the year 1955 when it was set up and in 1967 and 1968 when the sell-off of the last of Glacier's Adera shares took place.
17 I am aware of the cases that state that the least that one can expect in a trading case is that the purchaser will take the witness-box and swear that the intention was to hold and make a capital gain rather than to turn the item to account at a profit at the first opportunity. I suppose that if they were not prepared to do that, their appeals would never reach this stage.
18 I am also aware that one must be suspect of that evidence because sometimes people, over an intervening period of years, can convince themselves that a certain intention is a fact that, in truth, at the outset, which was the material time, was not their real intent. I have considered, of course, the interest that the McGraw brothers have in the outcome of these appeals. I have observed John James McGraw for some four hours in the witness-box. I have considered the manner in which he has given his evidence and his demeanour under direct and cross-examination, and I have no hesitation whatsoever in coming to the conclusion that he is a very credible witness. Moreover, I am satisfied that there is ample extraneous evidence to confirm that the intent of John McGraw, Sr in 1955 was to do exactly as John McGraw, Jr has said in the witness-box, that is, to buy investments that would be held for the long haul and not investments of the volatile nature that he (Mr McGraw, Sr) was used to dealing with.
19 The question is, does the change in approach, the venture into “start-up” companies in 1965 and, in particular, the actions of the McGraws in buying and selling Adera and Pathfinder shares, change the situation so that this personal corporation should be said to be engaged in an active business of trading in shares. It is interesting to note that Adera is still in existence and although I am not sure of its full proper name, I think it is now known as “Western Adera”; and that the McGraw family, through corporate vehicles or otherwise, still holds some 28% of that stock. It is also, as I have said earlier, a matter of record that they still hold over 100,000 shares of Pathfinder.
20 This is a case that I think must be determined solely on its facts, because it is an unusual case in that we are dealing with share transactions—neither of which admittedly was going to produce dividend income, but either of which was hopefully going to produce an accretion of capital if it turned out to be one of the fortunate ones “that might take off”. In this case, both of them apparently were successful, which indicates, I suppose, the efficiency and expertise of the late Mr McGraw.
21 On all the evidence, I am considering the manner in which this personal corporation, Glacier Investments Ltd, has operated and the manner in which the individuals held these stocks, especially when one looks at some which have been held from the very beginning of the company's existence in 1955.
22 As the McGraws are performing today, their whole overall approach, except for the ventures into Pathfinder and Adera, has been to carry out the avowed intent of McGraw, Sr in 1955.
23 In my view the excursion into the start-up field of these two companies, Pathfinder and Adera, is not sufficient to nullify that intent and the fortuitous profit that they collectively made on it is, in my view, a capital profit and, on the facts of this case, should not be taxable. I would therefore allow the appeals in all the McGraw cases including, as I understand counsel have agreed, those in respect of the year 1971.
24 In so far as the appellant estate is concerned, its income tax assessments in respect of its 1967, 1968 and 1969 taxation years are referred back to the respondent for reassessment accordingly.
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