Minister of National Revenue v. Louis W. Spencer, [1961] CTC 109, 61 DTC 1079

THORSON, P.:—This is an appeal from the decision of the Income Tax Appeal Board, sub nom. No. 548 v. M.N.R. (1958), 20 Tax A.B.C. 39, dated July 22, 1958, allowing the respondent’s appeal against his income tax assessment for 1956.

The circumstances leading to the appeal, apart from the facts

on which it must be determined, may be stated briefly. In filing his income tax return for 1956, dated April 23, 1957, the respondent certified that his income from business was $22,453.10 to which he added $50.50 as income from investments making a total income of $22,503.60. He summarized the item of $22,453.10

Summary of Income —1956

Share of Net Income

On June 24, 1957, he filed an amended return for 1956 in which he certified his income from business at $15,957.63 and his income from investments at $4,088.90 making a total income of $20,046.53. It is clear that the item of $4,088.90 included the item of $50.50 already referred to and the item of $4,038.40 which in his original return he had included in the amount of his income from business and in his summary had described as interest on mortgages receivable. The amended return also contained the following note:

"NOTE:

Bonuses and Discounts on Mortgages maturing in 1956, deleted from Taxable Income as originally filed. Reference—Case No. 248 v. M.N.R.

—Exchequer Court of Canada, June 3, 1957.”

The reference is plainly to the decision of the Income Tax Appeal Board in No. 248 v. M.N.R. (1954-55), 12 Tax A.B.C. 342, dated March 23, 1955, and the decision of Cameron, J., in Cohen v. M.N.R., [1956] Ex. C.R. 236; [1957] C.T.C. 251, dated June 3, 1957, in which he allowed the taxpayer’s appeal from the decision of the Income Tax Appeal Board.

In assessing the respondent for 1956 the Minister included the amount of $2,457.07, which the respondent had deleted from his original return, on the assumption that this amount represented the total of the differences between the amounts at which the respondent had purchased certain mortgages or which he had advanced when he acquired other mortgages and the principal amounts which he received in 1956 on the maturity of such mortgages in that year, or, in other words, the total of the discounts and bonuses at or with which he had purchased or acquired the mortgages.

On July 22, 1957, the respondent objected to the assessment on the ground that the discounts and bonuses were capital income. On October 31, 1957, the Minister notified the respondent that he confirmed the assessment as having been made in accordance with the provisions of the Income Tac Act and in particular on the ground that the profit from transactions in mortgages had been properly taken into account in computing the respondent’s income in accordance with the provisions of Sections 3 and 4 of the Act. Thereupon the respondent appealed to the Income Tax Appeal Board which allowed his appeal. It is from this decision that the present appeal is brought.

The sole issue in the appeal is whether the amount of $2,457.07 was properly included in the income tax assessment for 1956 levied against the respondent.

The facts are not in dispute. The respondent is a barrister and solicitor practising in Toronto. From 1938 to early in 1959 he was in equal partnership with Mr. Joseph L. Addison in the firm of Spencer, Addison and Scott. The firm had a general practice including real estate. The dispute in the appeal centres around the profits realized by the respondent in 1956 from eleven mortgages which he and Mr. Addison had purchased together at a discount or acquired with a bonus prior to 1956 and had matured in that year. A statement of these mortgages was filed as Exhibit 1. In respect of each of the eleven transactions it showed the name and address of the mortgagor, the date of the purchase or acquisition of the mortgage, the amount of principal outstanding at such date, the date of maturity of the mortgage and the amount of the discount at which it had been purchased or the bonus with which it had been acquired. The total amount outstanding on the mortgages at the time of their purchase or acquisition was $42,675 and the total amount of the discounts and bonuses realized on their maturity came to $8,076.79. This, of course, was in addition to the interest on the mortgages during their currency. Of the eleven transactions six were purchases of real estate mortgages and five were loans where the amount of the mortgage was greater than that advanced, four of the loans being on the security of real estate mortgages and the other on the security of a chattel mortgage.

For reasons that will appear the facts will be dealt with in greater detail later but the outline that I have given is sufficient for the purpose of indicating the nature of the issue in the appeal. For the respondent it was argued that the discounts and bonuses realized by him were enhancements of the value of investments, whereas the submission on behalf of the Minister was that they were income within the meaning of Sections 3 and 4 of the Income Tax Act, R.S.C. 1952, c. 148. including, of course, the definition of ""business’’ in Section 139(1) (e) as including ‘an adventure or concern in the nature of trade’’.

Sections 3 and 4 of the Act provide as follows :

“3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all

(a) businesses,

(b) property, and

(c) offices and employments.

4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.”

And Section 139(1) (e) defines ‘‘business’’ as follows:

“139. (1) In this Act,

(e) ‘business’ includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;”

The distinction between profits that are subject to income tax and those that are not, together with the test to be applied in determining on which side of the dividing line they fall, was clearly stated in the well-known case of Californian Copper Syndicate (Limited and Reduced) v. Harris (1904), 5 T.C. 159. In that case the company had been formed for the purpose, inter alia, of acquiring and re-selling mining property and had acquired and worked several mining properties in California and then sold them to a second company receiving payment in fully paid up shares of the latter company. The company was assessed in respect of the profit made on the transaction and appealed against the assessment so made but the Commissioners held that the company had carried on an adventure or concern in the nature of trade within the meaning of the First Case of Schedule D of the Income Tax Act of 1842 and that the profits arising from the transaction whether received in eash or shares from another company were assessable to income tax. The Court of Session as the Court of Exchequer in Scotland agreed that the determination of the Commissioners was right. Its decision is of particular importance because of the objective test which the Lord Justice Clerk (Macdonald) laid down for determining whether the gain from a transaction was a capital one or income subject to tax. At page 165, he said :

"‘It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they make is liable to be assessed for Income Tax.”

And then there follows, at page 166, the famous statement of the test to be applied :

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being— Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profitmaking

? ‘ ‘

The italics are mine.

The test thus laid down has been approved in a great many cases: vide, for example, by Lord Dunedin, speaking for the Judicial Committee of the Privy Council, in Commissioner of Taxes v. Melbourne Trust, Limited, [1914] A.C. 1001 at page 1010; by Lord Buckmaster in the House of Lords in Ducker v. Rees Roturbo Development Syndicate Limited and C.I.R. v. Rees Roturbo Development Syndicate Limited, [1928] A.C. 132 at page 140; by Duff, J., as he then was, speaking for the Supreme Court of Canada, in Anderson Logging Co. v. The King, [1925] S.C.R. 45 at page 48; [1917-27] C.T.C. 198; and by this Court and per Kerwin, J., as he then was, speaking for the Supreme Court of Canada, in Atlantic Sugar Refineries Limited v. M.N.R., [1948] Ex. C.R. 622; [1948] C.T.C. 326; [1949] S.C.R. 706; [1949] C.T.C. 196. More recently it has been approved by the Supreme Court of Canada in Campbell v. M.N.R., [1953] 1 S.C.R. 1 at page 6; [1952] C.T.C. 334 at page 337, per Locke, J.; Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77 at page 94; [1953] C.T.C. 237 at page 254, per Locke, J.; Noak v. M.N.R., [1953] 2 S.C.R. 136 at page 138; [1954] C.T.C. 6 at page 8, per Kellock, J.; M.N.R. v. Independence Founders Ltd., [1953] 2 S.C.R. 389; [1953] C.T.C. 310, per Rand, J., at page 395 and per Estey, J., at page 399 [at pages 315 and 318 respectively in [1953] C.T.C.]; Minerals Ltd. v. M.N.R., [1958] S.C.R. 490 at page 495; [1958] C.T.C. 236 at page 241, per Martland, J.; and Frankel Corpn. Ltd. v. M.N.R., [1959] S.C.R. 713 at page 724; [1959] C.T.C. 244 at page 255, per Martland, J.

Before I set out the facts, in addition to those already outlined, in the detail that is necessary for the proper determination of the issue in the appeal I should refer again to the decision of Cameron, J., in Cohen v. M.N.R. (supra), which I have already cited and which I shall hereafter call simply the Cohen case. I do so because of the difficult situation that has arisen since it was rendered. The difficulty in the present case is due to the fact that, if it had not been made, the taxability of the respondent’s profits for 1956 would, in all likelihood, not have been questioned by him, for it was only after it had been rendered that he conceived the idea that his profits from his bonuses and discounts were not taxable income and filed an amended income tax return in which he eliminated them from the statement of his income for 1956 which he had himself certified in his original return for that year.

Difficulty has arisen in other cases. After the decision in the Cohen case became public a great many taxpayers who had purchased mortgages at a discount or acquired them with a bonus and realized profits from them on their maturity appealed to the Income Tax Appeal Board against their income tax assessments on the ground that such profits had been improperly included therein and the Board allowed their appeals in the belief that it was bound to do so by the decision. From these decisions the Minister has appealed to this Court. The fact that the present appeal is only one of sixteen such appeals now pending in this Court indicates the wide-spread extent of the practice of purchasing or acquiring mortgages at a discount or with a bonus and realizing profits from them on their maturity. In addition, there are other cases involving consideration of the decision in which the Income Tax Appeal Board dismissed the taxpayer’s appeal and he brought an appeal from its decision to this Court.

It is important, therefore, to set out the facts of the Cohen ease and examine the reasons for the decision with a view to ascertaining the extent, if any, of its authority as a decision governing the cases referred to.

It appears from the reasons for judgment that it was agreed that the evidence adduced before the Income Tax Appeal Board should constitute the evidence in the case in this Court. I, therefore, set out the facts as they appear from the reasons and as amplified in some respects in the report of the decision of the Board (1954-55), 12 Tax A.B.C. 342.

The appellant in the Cohen case, a resident of Toronto, was about 76 years of age and in semi-retirement from the motion picture business in which he had been active for many years. He had accumulated considerable wealth of which, prior to 1947, he had, on the advice of a well-known investment counsel, invested a substantial portion in stocks. In 1947, being fearful of a depression similar to that experienced in 1929, he converted practically all his stocks, to the extent of approximately $300,000, into cash. He had other assets of substantial value.

After he had done this he put some of his money to a different use. In 1948 and in subsequent years, acting on the advice of Mr. Henry Rosenberg, his friend and solicitor, he purchased mortgages as well as a few agreements for sale and shares in mortgages at a discount. Some of the mortgages were first mortgages but others were second or third mortgages. It was said to be proved that there was an element of risk in all of them and that they were of such a nature that lending corporations would not be interested in acquiring them. Some were on hotels and others were building loans.

The reasons for judgment do not indicate the rate of interest on the mortgages or the rate of interest on second or third mortgages that was ordinarily current in the Toronto area at the time but it was said to have been established that all the mortgages purchased by the appellant bore interest at the current and normal rate for such mortgages and that the amount of the discount was that which was usual for securities of the kind purchased. All the mortgages had, at the date of their purchase, only a short time still to run to their maturity, in no case longer than two years. The appellant deliberately chose mortgages with an early maturity because, as he said: "‘I am an elderly man and I have been doubtful as to whether I should go into longterm securities. 1 want to keep myself as liquid as possible. ‘ ‘ He did not sell any of the mortgages but held them all to their maturity. All of them were paid in full at or before their maturity without any loss to him.

In each of the four years, namely, 1949-1952 inclusive, for which the appellant was assessed he realized substantial profits from the mortgages that he had purchased. The details of the amounts of his profits in each of the years and the number of the mortgages that matured during such year from which they were mainly realized are set out in the report of the decision of the Income Tax Appeal Board. In 1949 the profits amounted to $5,463.82, mainly from two mortgages, in 1950 to $8,147.85, mainly from two mortgages, in 1951 to $17,558.99, mainly from five mortgages, and in 1952 to $21,797.29, mainly from seven mortgages, or a total in the four years of $52,967.96, mainly from sixteen mortgages. In each year the amount of the profits realized from the mortgages that matured during the year represented the total of the differences between the prices that the appellant had paid for the mortgages at the time of their purchase and the amounts of principal that he received on their maturity or, in other words, the total of the discounts at which he had purchased them. The difference in each year between the amount of the profits that were realized on the mortgages that matured during the year and the total profits of the year represented profits which the appellant realized from a one- third share in a block of fifty-seven mortgages which he and others had purchased at a discount in 1945.

It is thus apparent that the appellant’s mortgage purchase transactions were very profitable to him.

In assessing the appellant for each of the four years, the Minister added the amount of the profits that he had realized from the mortgages that matured during such year and the amount of his other profits from his share of the fifty-seven mortgages to the amount of taxable income that he had reported in his income tax return.

To complete the picture I should say that in addition to the sixteen and fifty-seven mortgages that I have mentioned, the appellant purchased a few other mortgages at a discount which were not paid off until after 1952.

In deciding whether he should purchase the mortgages referred to the appellant relied to a very great extent on Mr. Rosenberg’s advice. He did not advertise that he had money to lend or that he was in the market for the purchase of mortgages. The offers of the mortgages at a discount were brought to his attention by Mr. Rosenberg who had investigated the circumstances of the mortgages and found that they were suitable. In some cases he refused to purchase, in others where the amount involved was substantial and he wished to lessen his personal risk he joined one or two others in the purchase and in others he made the purchase as offered. He did not know the parties to the mortgage and, except on one or two occasions, had no personal knowledge of the security. He either accepted or rejected the offer made to him and did not attempt to secure a discount other than that which the mortgagee offered. Mr. Rosenberg handled all the legal matters for him, collected the interest and principal as they fell due and remitted the proceeds to him less his legal fees for the services that he had rendered.

I should add that the appellant did not use all the funds realized from the sale of his stocks for the purchase of mortgages at a discount but retained at all times substantial amounts in bank savings accounts.

The issue in the case was whether the profits realized by the appellant from his purchase of the sixteen mortgages and his share of the fifty-seven mortgages constituted income from a business within the meaning of Sections 3, 4 and 127(1) (e) of the Income Tax Act. Cameron, J., reversing the decision of the Income Tax Appeal Board, sub nom. No. 248 v. M.N.R. (1955), 12 Tax A.B.C. 342, found that the appellant was not engaged in an adventure or concern in the nature of trade and that the profits realized by him were made on ordinary investments by an enhancement in their value at maturity and were capital accretions, not taxable gains.

It is clear that Cameron, J., arrived at his conclusion as the result of the inferences which he drew from the facts of the case as he interpreted them. But he was, it seems to me, impressed with the fact that the appellant did not sell the mortgages that he had purchased but held them until their maturity and with the submission of counsel for the appellant that, since the mortgages were bought to keep and not to sell, the transactions could not be considered as trading or an adventure in the nature of trade. He recognized, of course, that in certain circumstances the mere purchase of securities and their retention to maturity might constitute an adventure in the nature of trade as, for example, in the case of Smith Barry v. Cordy (Inspector of Taxes) (1942-48), 28 T.C. 250, but he distinguished that case from the one before him on the facts. The most important distinction that he drew was that in the case before him all the mortgages bore interest at the current and normal rate for investments of that kind. On the facts of the case as he viewed them, Cameron, J., was unable to find that the appellant had "‘organized himself’’ to buy mortgages at a discount in a commercial way or that the profits realized by him represented vain made in an operation of business in carrying out a scheme of profit making. In his opinion, the appellant was looking for investments which would yield a fair return, and found them in the mortgages which bore what he considered a fair return on his investments. There was also the risk of capital loss which he balanced against the possibility of gain which made him decide that it was worth while to risk his capital. Cameron, J., did not agree that the appellant’s primary purpose was to secure the discount. As he put it, that was doubtless one of the appellant’s motives but so was his desire to secure the interest. In his opinion, the skill and care which the appellant exercised were precisely those of a prudent investor who desired to spread his investments among a number of carefully chosen securities. In this connection he justified the action of the appelant in confining his purchase of mortgages to those that had only a short time to run to their maturity on the ground that in his case and because of his advanced age it was reasonable and proper for him to secure investments which would mature at an early date, particularly as it was proven that they bore a substantial degree of risk.

My reading of the reasons for judgment in the Cohen case leads me to the opinion that Cameron, J., reached his conclusion that the profits realized by the appellant in the case before him were merely enhancements in the value of the investments made by him and, therefore, capital accretions and not capital gains by reason of his reliance on certain facts that had been established before him and the inferences which he drew from them and that he did not intend that his decision on the facts of the case before him should extend to and apply to all cases in which a person had purchased or acquired mortgages at a discount or with a bonus and realized a profit therefrom on the maturity of the mortgages. He was concerned only with the facts of the case before him and his decision should be confined to them.

This, I think, is the proper view to take of the decision and its effect. It is in accord with the authority of the Californian Copper Syndicate case (supra) and the statement of the Lord Justice Clerk, at page 165, in which he referred to the difficulty of defining the line between an investment and a trading transaction and of determining the question whether the gain on a transaction was, on the one hand, a mere enhancement of value by realizing a security or, on the other, a gain made in an operation of business in carrying out a scheme for profit-making and emphasized that " ‘ each case must be considered according to its facts’’.

Similarly, the determination of whether a particular transaction was an investment or an adventure or concern in the nature of trade and, therefore, business within the meaning of Section 139(1)(e) of the Act, formerly Section 127(1) (e), must, in every case, depend on the facts of the case.

In M.N.R. v. Taylor, [1956] C.T.C. 189, I had occasion to consider the meaning and ambit of the term ‘‘adventure or concern in the nature of trade’’ in Section 127(1) (e), as it then was, and, at page 199, expressed the following opinion:

“It is, I think, plain from the wording of the Canadian Act, quite apart from any judicial decisions, that the terms trade’ and ‘adventure or concern in the nature of trade’ are not synonymous expressions and it follows that the profit from a transaction may be income from a business within the meaning of Section 3 of the Act, by reason of the definition of business in Section 127(1) (e), even though the transaction did not constitute a trade, provided that it was an adventure or concern in the nature of trade.’’

There are several English decisions in which a similar statement regarding the meaning of the term in the United Kingdom Act is made, of which the decision in C.I.R. v. Fraser (1942), 24 T.C. 498, is an example. There the Lord President (Normand) of the Court of Session said, at page 502 :

“We must remind ourselves that we are to decide whether the Respondent was carrying on a trade, but whether the transaction was an adventure in the nature of trade . . . It would be extremely difficult to hold that a single transaction amounted to a trade but it may be much less difficult to hold that a single transaction is an adventure in the nature of trade.”

Then in the Taylor case (supra), after reviewing the English decisions, I expressed the further opinion, at page 210:

“The cases establish that the inclusion of the term adventure or concern in the nature of trade’ in the definition of trade’ in the United Kingdom Act substantially enlarged the ambit of the kind of transaction the profits from which were subject to income tax. In my opinion, the inclusion of the term in the definition of ‘business’ in the Canadian Act, quite apart from any judicial decisions, has had a similar effect.’’

And I repeat what I said in that case that it is not possible to lay down any single criterion for deciding whether a particular transaction was an adventure in the nature of trade for the answer in each case must depend on the facts and surrounding circumstances. In every case the true nature of the transaction must be determined.

That being so, it must follow that, where the issue in a case is whether the profits realized from the transactions under review were enhancements of the value of investments or profits from a business, including therein transactions that were adventures in the nature of trade, and, therefore, income within the meaning of Sections 3 and 4 of the Income Tax Act, the determination of the issue must depend on the facts and surrounding circumstances of the case, for it is no more possible to lay down a single criterion for deciding that the transactions were investments than it would be for deciding that they were adventures in the nature of trade. The true nature of the transactions must be determined.

In view of the extent to which the Income Tax Appeal Board has followed to decision in the Cohen case as if it were a governing authority of general application in cases where a taxpayer had realized profits from the purchase or acquisition of mortgages at a discount or with a bonus it is desirable, in my opinion, to set out certain propositions so that each appeal to this Court from a decision of the Board applying the decision in the Cohen case may be determined, as, in my opinion, it should be, on its own facts and surrounding circumstances and the true nature of the transactions from which the profits sought to be charged

were realized.

Thus, the fact that a person who had purchased mortgages at a discount or acquired them with a bonus did not sell them but held them to maturity is not necessarily an indication that he had purchased or acquired them as investments, for the decision of the English Court of Appeal in Smith Barry v. Cordy (supra) establishes that there can be trading in securities without any sale of them prior to their maturity. The sale of mortgages prior to their maturity is not an essential condition of dealing in them. Indeed, the holding of them to their maturity might well be an important feature of an operation of business in a scheme of profit-making for such a policy could well result in greater profit to the holder than if he sold them prior to their maturity and had to give a discount to the purchaser.

And certainly, the fact that a person confined his purchase or acquisition of mortgages to those that had only a short time still to run to their maturity does not tend to show that his activities were those of an investor rather than of a trader. Indeed, such a practice is less consistent with investment than with trading. The purpose of the practice might well be to accelerate the rate of turnover of the money used in the operation in order to make more profits or to spread the money over a wider field with a view of lessening the risk of loss. It seems to me that Cameron, J., recognized this and felt it necessary, in the appellant’s case, to justify a practice, which was not a usual one for an investor to follow, on the ground of the appellant’s advanced years.

Moreover, the fact that the second and third mortgages bore the same rates of interest as first mortgages does not tend to prove that the owner purchased or acquired them as investments in view of the fact that he purchased them at a discount or acquired them with a bonus. Indeed, it seems unreal to assume that he was primarily concerned with receiving the interest that the mortgages bore. It is much more likely that he was primarily Ÿ concerned with making the profit that would be realized from

his speculative adventure when the mortgages matured.

Even if all the features that I have referred to were present in a single case they would not necessarily determine that the profits resulting from the realization of the discounts and bonuses on the maturity of the mortgages were merely enhancements of the value of investments. They might as readily in a particular case constitute income within the meaning of Sections 3 and 4 of the Act.

Moreover, the fact that a person had consistently purchased or acquired mortgages that involved a substantial degree of risk is, I think, more indicative of a speculative scheme for making profits than of a policy of investments for the purpose of securing a fair return on the monies invested. In the Californian Copper Syndicate case (supra) the Lord Justice Clerk stressed the importance of the element of speculation in determining that the finding of the Commissioners that the transaction in question in that case was an adventure or concern in the nature of trade was right. There can be trading in what would ordinarily be an investment if the facts and circumstances of the case are such as to warrant such a finding.

Under the circumstances, while this Court has no right to review the decision in the Cohen case, it would, in my opinion, not be improper to express the opinion that if the decision had been the reverse of what it was and the appeal from the decision of the Income Tax Appeal Board had been dismissed and the assessment levied against the appellant affirmed it could not reasonably have been said that such a decision was erroneous. There was sufficient evidence from which inferences leading to such a decision could fairly and reasonably have been drawn. There is nothing anomalous or unusual about this statement, for there is no difficulty in conceiving a situation in which the facts are such that one person would draw a different one and it could not be said categorically that one was right and the other wrong. In my opinion, the facts in the Cohen case were of such a nature.

Thus, the fact that Cameron, J., was unable to find that the appellant had ‘‘organized himself’’ to buy mortgages in a commercial way is not conclusive that his profits did not represent gains made by him in an operation of business in carrying out a scheme of profit making. Such decisions as those in Rutledge v. C'.I.R. (1929), 14 T.C. 490, and Lindsay et al. v. C.I.R. (1932), 18 T.C. 48, in which the facts were, of course, different from those in the Cohen case, establish that it is not essential to a transaction being an adventure in the nature of trade than an organization should have been set up to carry it into effect. In any event, the appellant in the Cohen case did not have to organize himself to buy mortgages at a discount in view of the fact that Mr. Rosenberg, on whose advice he relied to a very great extent, performed this function for him in a very efficient manner. And it could reasonably have been inferred from the facts that the appellant and Mr. Rosenberg had beetween them worked out a very effective profit-making scheme.

Certainly, the evidence establishes that the appellant in the Cohen case, notwithstanding his advanced years, was a man of business experience and that after he had converted his stocks into cash in 1947 he embarked upon a definite policy of putting some of the money realized from the sale of his stocks to a specific use, namely, the purchase of mortgages at a discount. He deliberately confined his purchases to mortgages that had only two years or less still to run to their maturity and all of them, whether first, second or third mortgages, were of such a nature that lending corporations would not have been interested in acquiring them and they all involved a considerable element of risk. They were thus not of the kind that a person would ordinarily choose for investment purposes. On the contrary, there was a highly speculative element in all of them which enabled the appellant to purchase them at a discount. He held them all until their maturity with the result that he realized substantial profits, equal to the discounts at which he had purchased them. It could, in my opinion, have been reasonably inferred from his course of conduct that he was not looking for investments that would yield a fair return on his money. If that had been his object he would have invested in mortgages that earned the same interest without any risk. Consequently, it could have been reasonably inferred that he was not primarily concerned with securing the interest that the mortgages bore but that what he was really interested in was the realization, in addition to the interest, of the discounts at which he had purchased the mortgages and the resulting profits. That being so, it could reasonably have been inferred that he had gone beyond the care and skill that a prudent investor would have shown and had skilfully, with reliance on the advice of Mr. Rosenberg, deliberately embarked upon a speculative scheme of purchasing risky mortgages at a discount with a view to realizing profits from them on their maturity equal to the discounts at which he had purchased them and that his transactions were not investments but rather adventures in the nature of trade and that the profits from them were income within the meaning of Sections 3 and 4 of the Act.

Under the circumstances, it is plainly erroneous to regard the decision in the Cohen case as an authority governing the determination of the issues in the appeals from decisions of the Income Tax Appeal Board to which I have referred or as laying down a pattern of principles of general application in cases where a person had purchased mortgages at a discount or acquired them with a bonus and realized profits from them on their maturity. The decision did not purport to be such an authority or to lay down such a pattern. It was based on a conclusion reached by Cameron, J., as the result of the inferences that he drew from the facts as he viewed them and its applicability is restricted accordingly. Indeed, there is no rule of general application in cases of the kind referred to except that in every case the question whether the profits realized by a person who has purchased mortgages at a discount or acquired them with a bonus are enhancements of the value of investments or gains made ‘‘in an operation of business in a scheme for profit making” or profits from an adventure or adventures in the nature of trade and, therefore, income within the meaning of Sections 3 and 4 of the Income Tax Act is a question of fact and its determination must depend on the facts and surrounding circumstances of the case and the true nature of the transactions from which the profits were realized.

The statement thus made is merely a particular application of the well established principle that, in determining whether the profits realized from particular transactions, or a single transaction, were capital accretions or profits from a business or an adventure in the nature of trade and, therefore, taxable income, ‘‘each case must be considered according to its facts’’, as the Lord Justice Clerk said in the Californian Copper Syndicate case (supra). This principle has been stated by the Supreme Court of Canada in numerous cases, as, for example, by Locke, J., in Campbell v. M.N.R., [1953] 1 S.C.R. 3 at page 6; [1952] C.T.C. 334 at page 337, and in Sutton Lumber and Trading Co. Ltd. v. M.N.R., [1953] 2 S.C.R. 77 at page 93; [1953] C.T.C. 237 at page 253; by Kerwin, J., as he then was, in Noak v. M.N.R., [1953] 2 S.C.R. 136 at page 137; [1954] C.T.C. 6 at page 7 ; by Kerwin, C.J., as he had become, in McIntosh v. M.N.R., [1958] S.C.R. 119 at page 121; [1958] C.T.C. 18 at page 20, with his emphasis on the fact that it is impossible to lay down a test that will meet all circumstances and that it is a question of fact in each case; by Martland, J., in Minerals Limited v. M.N.R., [1958] S.C.R. 490; [1958] C.T.C. 236 ; and by Judson, J., in Regal Heights Ltd. v. M.N.R., [1960] S.C.R. 902 at page 907; [1960] C.T.C. 384 at page 390, where he stressed that ‘‘these cases must all depend on their particular facts’’.

It follows, accordingly, that the decision in the present case must be based on its facts and surrounding circumstances and the true nature of the respondent’s transactions, independently of and without regard to the decision in the Cohen ease. I, therefore, continue my statement of the facts in the detail that is necessary. In doing so, I shall set them out in categories. The first of these consists of facts relating to the nature of the eleven mortgages that the respondent and Mr. Addison had purchased or acquired. With the exception of one that was purchased in December of 1952 and matured in March of 1956, the others were comparatively short term mortgages. Six of them were purchased or acquired in 1953 with only three years or less still to run to their maturity, three in 1954 with only two years or less still to run and the chattel mortgage in 1956 which was paid off in a little over a month. Of the six mortgages that were purchased at a discount three were first mortgages and three second mortgages and of the four real estate mortgages that were acquired with a bonus all were second mortgages. The chattel mortgage was of a special nature. All of the real estate mortgages were on houses of an older type some of them being 40, 50 or 60 years old. The respondent stated that these involved a certain capital risk. Here I set out his explanation of why a discount or bonus was necessary in his exact words:

“We felt there was a possibility that, if we did not provide for a fund in the event that some of these mortgages came back on us and we had to lose them, we wanted at least to safeguard our principal investment, and it would not be sound business—sound investment on our part to buy them at their face value without a discount, because they were secondary securities.”

In order to make sure that the court reporter had taken down what I thought that the respondent had said, I had him read back the statement and the respondent explained that when he had said ‘‘sound business’’ he had meant ‘‘sound investment’’. Many of the mortgages, in addition to being on old houses, were of a special nature. Of the six mortgages that had been purchased at a discount three were from clients of the firm, and of the five loans that were made with a bonus four were to clients. On his cross-examination the respondent admitted that in these eases the client had attempted to raise money from some other source but had found that he was unable to do so for various reasons, namely, that the security was not good or that the discount demanded was too onerous or too expensive, and had then appealed to the respondent and Mr. Addison who thought it was or might be a good investment. There is a further fact that belongs in this category. Most of the mortgages carried interest at the rate of 6 per cent, even although they were second mortgages and of a risky character. But it was established that the prevailing rate of interest charged by lending institutions on first class securities in the Toronto area was 6 per cent and that the prevailing rate on first class second mortgages was 12 per cent without any bonus or discount.

The circumstances under which the respondent and Mr. Addison purchased or acquired their mortgages and the manner of their purchase or acquisition may be stated briefly. They did not advertise that they were in the market for the purchase of mortgages or willing to lend money on them. They did not go out looking for mortgages or solicit or canvas anyone nor did anyone do this on their behalf. But, as I have already stated, three of the six mortgages purchased at a discount had been purchased from clients of the firm who had tried without success to raise money from other sources. The same was true of the four loans to clients of the firm. Of the three mortgages purchased at a discount from persons other than clients two were made from clients of other solicitors, and of the five loans that were made the one that was not made to a client of the firm was made to a client of another solicitor. When the respondent and Mr. Addison were ready to enter into a mortgage transaction they did so as equal partners. The respondent stated that they consulted one another but he admitted that the arrangement between them was a loose one. Mr. Addison would look at a property and if he thought that it was a good investment he went ahead and completed the transaction and told the respondent about it afterwards. In some eases the respondent acted similarly. Mr. Addison did most of the inspections and the respondent relied on his judgment. These included investigations of title of the same kind as those that would have been made for a client. In some cases the mortgage was registered in Mr. Addison’s name and in others in the respondent’s. The respondent did not think that there were any in the joint names of the partners. He did not recollect any but they might have been on the odd occasion. But, in any event, the mortgages belonged to the respondent and Mr. Addison in equal shares. In some cases there were negotiations as to the amount of the discount or bonus at or with which the mortgage was purchased or acquired. The partners did not borrow any money from the purchase or acquisition of any of the mortgages. When it was decided to proceed with a transaction the necessary money for the purchase or acquisition of the mortgage came from the firm’s general account or the respondent’s investment account.

It was not necessary for the respondent and his partner to organize themselves for the conduct of their mortgage transactions. They were already well equipped for the purpose. Through their law office they looked after the collection of the payments under the mortgages as they fell due in the same way as they looked after collections on behalf of their clients. As the payments were made, they were deposited to the credit of the respondent’s investment account. All the mortgage transactions into which the respondent and Mr. Addison entered were closely related to their activities as barristers and solicitors and they arose out of their connections with their clients and other solicitors. I have already referred to the circumstances under which they were purchased or acquired. The respondent and Mr. Addison held all the mortgages that they had purchased or acquired until their maturity or until they were paid prior to their maturity, except two. These they sold to a client of the firm, giving him a discount, in order to raise money to pay their income tax.

The facts relating to the course of conduct followed by the respondent and his partner are of the utmost importance. The eleven mortgage transactions that resulted in the profits for 1956 were not the only mortgage transactions into which the respondent and Mr. Addison had entered. They had begun to purchase mortgages at a discount or acquire them with a bonus as early as 1947 or 1948. Almost, if not all, of them were second mortgages with only a short time still to run to their maturity. At the trial counsel for the appellant put their number at 162, which the respondent did not dispute. Counsel for the respondent put their number at 132. A list of such mortgages as at December 31, 1954, filed as Exhibit A, shows 135 mortgages. In addition, there were those that matured in 1955. It would not be unreasonable to conclude that the respondent and Mr. Addison entered into over 150 mortgage transactions for they had purchased or acquired mortgages in 1955 and 1956 similar to the eleven that matured in 1956. The respondent stated that the eleven mortgages maturing in 1956 were typical of the mortgage transactions generally, but my examination of the list of mortgages, filed as Exhibit A, shows that out of 135 mortgages only seven had over two years to run to their maturity from the time that they were purchased or acquired and that most of the others had only approximately a year or even less to run. The amount of the discounts realized on the mortgages listed in Exhibit A for the years 1949 to 1954 came to $33,075.60. In this connection there is the related fact that on October 1, 1956, the respondent, his partner Mr. Addison and their respective wives caused Revel Investments Limited, an Ontario corporation, to be created and thereafter the respondent and Mr. Addison transferred all their mortgages to the new corporation. Since then the corporation has carried on in the same manner as the respondent and Mr. Addison had done and they ceased their purchase or acquisition of mortgages.

Only the facts relating to the intention of the respondent and Mr. Addison remain to be stated. The respondent said that when he and Mr. Addison had purchased mortgages at a discount they intended to keep them and had purchased them as an investment, that they felt that there was a risk involved and wanted to safeguard their principal investment and thought that in order to do so they should buy at a discount, and that when they loaned money at a bonus it was the same as when they bought a mortgage at a discount. In addition, there is the fact that in his original income tax return for 1956 the respondent certified that his profits from the realization of his mortgages in that year were income from business and that for 1955 he filed a similar return.

On the facts I have no hesitation in finding the appeal herein should be allowed and the Minister’s assessment affirmed. There are several reasons for this conclusion.

The facts relating to the nature of the mortgages purchased or acquired by the respondent and Mr. Addison clearly indi. cate that they were not ordinary investments of the kind envisaged by the Lord Justice Clerk in the Californian Copper Syndicate case (supra). At the time of their purchase or acqui sition they had, with very few exceptions, only a short time still to run to their maturity. As securities they were, to say the least, of a risky and second-class nature. Certainly, they were not of the kind that would be considered as investments by a prudent person who was primarily concerned with securing a fair return on his money. The evidence of the respondent that, in the case of the seven mortgages that he and Mr. Addison had purchased or acquired from clients, they had not been able to raise money on their securities from other sources supports this view. Indeed, it would be unrealistic, if not fantastic, to conclude that the respondent and Mr. Addison were putting their money into these mortgages with a view to securing the kind of interest return that an ordinary prudent investor would reasonably expect. If that had been their intention, it is much more likely that they would have invested in first-class mortgages in which the element of risk would have been largely eliminated. But the fact is that they were not thinking of ordinary investments. On the contrary, it is clear that what they were interested in was the speculative aspect of the transactions. There is no doubt in my mind that when they purchased or acquired their mortgages they did so because they saw the prospect of profits substantially in excess of the returns that would flow from ordinary investments and that they entered into the transaction for the purpose of making the profits that they expected would accrue to them when they realized, on the maturity of the mortgages, the discounts or bonuses at or with which they had purchased or acquired them. Consequently, I do not see how it could reasonably be considered that their profits were merely enhancements of value of securities in which they had invested. In my opinion, they were plainly gains made by the respondent and Mr. Addison as the result of their operation of the speculative scheme for profit making into which they had entered and which they had carried out.

Moreover, the circumstances under which they had purchased or acquired the mortgages and the manner of their purchase or acquisition of them are more consistent with the idea of operations of business in a scheme of profit-making than with that of a policy of investments. The respondent and Mr. Addison relied on one another in making their mortgage transactions in the same way as they relied on one another in their respective activities as solicitors. Neither the respondent nor Mr. Addison made any independent selection of investments. The transactions into which they entered, whether completed by Mr. Addison or by the respondent, were, in my opinion, business transactions.

The respondent and Mr. Addison were well organized for the conduct of such transactions. I have already referred to the decisions that establish that it is not essential to a transaction being an adventure in the nature of trade that an organization should have been set up to carry it into effect. But, obviously, the fact that there was such an organization goes a considerable distance towards the conclusion that such an adventure was contemplated. In the respondent’s case there was such an organization. In their capacity as solicitors the respondent and Mr. Addison came into contact with the mortgage situation in the Toronto area in its various phases and had a special knowledge of the prospects of gain that might result from purchasing or acquiring mortgages of a speculative nature. They were in touch with clients of the firm or clients of other solicitors who owned mortgages that they wished to sell, some of them had been unable to sell them, and they took a chance of a speculative nature for the purpose of profit-making. They were not investing. The opportunities for their speculative ventures came to them by reason of their practice as solicitors. They were, of course, well equipped for handling their mortgage transactions. in an effective manner. They acted for clients in collecting mortgages for them and they used the same system for collecting their own mortgages. On the facts, it would be reasonable to conclude that the respondent and Mr. Addison had made their dealings in mortgages a business subsidiary to that of their business as solicitors.

There is, I think, overwhelming support for this conclusion in the facts relating to the course of conduct followed by the respondent and Mr. Addison. I do not, for a moment, suggest that the mere fact that a person purchased a mortgage, even a second one, at a discount or acquired it with a bonus establishes that his transaction was not an investment. Nor is the fact per se an indication of business. More is required. In each case the determination must depend on the facts and circumstances. The transaction might well be an investment and, on the other hand, it might be an operation of business. Thus, for example, if it was an instance of a policy of purchasing mortgages at a discount or acquiring them with a bonus and confining such purchases and acquisitions to mortgages that were of a risky and second class character and had only a short time still to run to their maturity with a view to making the profits that would result from the realization of the discounts and bonuses on the maturity of the mortgages it would be unreasonable to infer that the true nature of the transaction was that of an investment. Indeed, such circumstances would stamp the transaction either as an operation of business in a scheme of profit-making or, at least, as an adventure in the nature of trade. The mortgage transactions in question in this appeal were plainly of such a character. In addition to the eleven mortgages listed in Exhibit 1, there were 135 other mortgages maturing prior to December 31, 1954, which the respondent and Mr. Addison had purchased or acquired in the years 1949 to 1954. The evidence is that these mortgages were similar in nature to the eleven with which this appeal is particularly concerned. There were also other mortgages that matured in 1955 and they had also purchased or acquired mortgages in 1955 and 1956. The course of conduct thus followed by the respondent and Mr. Addison is inconsistent with the idea that they were merely. investing their money. On the contrary, the number of transactions entered into, the risky and second class nature of the mortgages and the rapidity with which the discounts and bonuses were realized are strong indications that the := respondent and Mr. Addison were making their mortgage transactions a matter of business apart from and subsidiary to their professional activity as solicitors. There is support for such a statement in Noak v. M.N.R., [1952] Ex. C.R. 20; [1951] C.T.C. 297; [1953] 2 S.C.R. 136; [1954] C.T.C. 6. The appellant in that case had purchased a large number of properties and sold them soon after their purchase. In this Court Hyndman, D.J., concluded, from the large number of transactions and the close proximity of the sales to the purchases, that the appellant’s idea in purchasing the properties involved the intention of selling them with the object of profit and not for investment purposes. His decision was unanimously affirmed by the Supreme Court of Canada. There Kerwin, J., as he then was, speaking also for Estey and Locke, JJ., said, at page 187 [[1954] C.T.C. 7] :

“The number of transactions entered into by the appellant and, in some eases, the proximity of the purchase to the sale of the property indicates that she was carrying on a business and not merely realizing or changing investments.’’

While this was a decision on whether the appellant in that case was carrying on a ‘‘business’’ within the meaning of the term as used in the Excess Profits Tax Act, S.C. 1940, c. 32, it clearly indicates that a similar conclusion might reasonably be drawn from the course of conduct followed by the respondent and Mr. Addison in the present case.

I have only one further comment to make on the facts as I have outlined them, namely, that the respondent’s statements that when he and Mr. Addison had purchased or acquired their mortgages they intended to keep them as investments and that the discounts at which they had purchased them or the bonuses with which they had been acquired were for the purpose of safeguarding their investments against the risk of loss cannot be accepted. It is well established that a taxpayer’s statement of what his intention was in entering upon a transaction, made subsequently to its date, should be carefully scrutinized. What his intention really was may be more nearly accurately deduced from his course of conduct and what he actually did than from his ex post facto declaration. Thus, in the present case, there is no doubt in my mind that when the respondent and Mr. Addison purchased or acquired their mortgages he, at any rate, was not thinking of investing his money. He considered that the profits realized in 1956 from the mortgages that matured in that year were part of his income from business for that year and he signed a certificate to that effect when he made his original income tax return for that year. He had made a similar return for 1955. As already stated, it was not until the decision in the Cohen case was rendered that the idea occurred to him that his profits were not income but were merely enhancements of the value of investments, and he filed an amended income tax return accordingly. Under the circumstances his declaration at the hearing of what his intention was should be rejected.

On the facts and surrounding circumstances of the case, I find that the profits realized by the respondent in 1956 from the mortgages that he and Mr. Addison had purchased at a discount or acquired with a bonus and had come to maturity in that year were not enhancements of the value of investments made by them. The transactions were not investments. That was not their true nature. The profits were made by the respondent and Mr. Addison in the operation of a speculative business scheme for profit-making, within the meaning of the expression used in the Californian Copper Syndicate case (supra). Certainly, they resulted from successful speculative transactions that could fairly be described as adventures in the nature of trade. That would be sufficient, by reason of the definition of business in Section 139(1) (e) of the Act, to make them income from a business within the meaning of Sections 3 and 4. But I go further and find that they were profits from a business that the respondent and Mr. Addison carried on in addition to their professional business as solicitors. Consequently, the Minister was right in assessing the respondent as he did.

In view of this conclusion I need not consider certain matters. For example, I need not deal with the submission of counsel for the respondent that he was not a money lender or the cases cited by him in support of it. They are not applicable in this case.

Nor need I consider the decision of the English Court of Appeal in Lomax v. Peter Dixon & Son, [1943] 1 K.B. 671. The Court is not here concerned with the nature of the discount in a particular case but with the nature of the transactions into which the respondent and Mr. Addison entered and the profits realized from them.

And in view of the conclusion that I have reached it is not necessary to consider whether such profits could be considered as Income from property.

It follows from what I have said that the appeal herein must be allowed and the Minister’s assessment confirmed. The appellant is also entitled to costs to be taxed in the usual way.

Judgment accordingly.