Cullen,
J:—With
respect
to
the
facts
of
this
case
there
is
little
if
any
disagreement.
What
is
in
dispute
is
the
interpretation
to
be
given
to
the
actions
taken.
The
plaintiff
is
a
very
successful
carpet
retailer.
On
October
15,
1976
the
plaintiff
entered
into
a
memorandum
of
understanding
with
a
corporation
called
Talcorp
Associates
Ltd
(Talcorp),
pursuant
to
which
Talcorp
in
1976
purchased
on
behalf
of
itself
and
the
plaintiff
1,200,000
shares
of
Bad
Boy
Limited
—
one-half
for
each
—
at
a
price
of
$3
per
share
for
a
total
purchase
price
of
$3,600,000.
The
evidence
of
Mr
Jerry
Van,
and
I
accept
it
after
hearing
him,
is
that
in
order
to
pay
its
share
of
the
purchase
price,
namely
$1,800,000,
the
plaintiff
borrowed
from
Taicorp
the
sum
of
$900,000
and
established
a
line
of
credit
with
the
Bank
of
Montreal
to
borrow
the
balance.
The
evidence
and
the
statement
of
claim
are
at
variance
as
to
the
actual
amount
borrowed
and
the
amount
paid
directly
by
the
plaintiff
from
its
own
resources
but
it
is
of
no
consequence
here.
At
the
time
of
its
purchase,
Bad
Boy
Limited
had
substantial
non-capital
losses
available
for
deduction
for
tax
purposes
against
future
income
under
the
provisions
of
paragraph
111
(1
)(a)
of
the
Income
Tax
Act.
Certainly
there
can
be
no
doubt
that
part
at
least
of
the
reason
for
acquiring
Bad
Boy
Limited
was
the
expectation
that
it
would
enable
the
plaintiff
to
reduce
some
of
its
profits
before
taxes
by
using
the
available
running
non-capital
losses
account
of
Bad
Boy
Limited.
The
memorandum
of
understanding
provided,
inter
alia,
for
the
purchase
by
Bad
Boy
Limited
of
the
assets
of
Factory
Carpet,
which
was
a
subsidiary
company
of
S
B
Diversified
Limited
(a
holding
company)
at
the
time,
at
a
purchase
price
not
to
exceed
$4,000,000
of
which
$1,800,000
was
to
be
payable
in
cash
on
closing.
It
was
intended
that
forthwith
after
the
transfer
of
assets
of
Factory
Carpet
to
Bad
Boy
Limited
the
$1,800,000
amount
received
on
the
sale
of
such
assets
would
be
used
to
retire
the
plaintiff’s
liabilities
on
the
purchase
of
the
Bad
Boy
Limited
shares
and
to
release
the
two
principals
from
personal
guarantees.
The
transfer
of
the
assets
was
never
effected.
In
1977
Bad
Boy
Limited
was
placed
in
receivership
and
its
shares
became
worthless.
The
original
agreement
between
the
plaintiff
and
Taicorp
contained
a
put
option
which
allowed
Taicorp
to
put
its
600,000
shares
of
Bad
Boy
Limited
to
the
plaintiff
at
a
predetermined
price.
During
the
1978
taxation
year
Talcorp
exercised
its
put
option
and
the
plaintiff
was
required
to
purchase
the
shares
of
Bad
Boy
Limited
that
were
originally
purchased
by
Talcorp.
The
put
option
was
the
subject
of
litigation
eventually
leading
to
the
plaintiff
purchasing
the
shares
of
Bad
Boy
Limited
owned
by
Taicorp
for
$1,600,000.
This
trial
involves
two
actions,
and
the
parties
hereto
have
agreed
to
hear
them
on
common
evidence.
Action
cited
as
T-2799-81
relates
to
the
purchase
by
the
taxpayer
of
the
original
acquisition
of
600,000
shares.
Action
cited
as
T-1717-83
relates
to
Talcorp
putting
its
stock
to
the
taxpayer.
In
my
view
the
reasons
for
judgment
cited
here
are
the
same
reasons
applicable
to
T-1717-83
and
accordingly
will
be
shown
as
such.
In
preparing
its
tax
return
for
1977,
the
plaintiff
valued
its
inventory
of
shares
of
Bad
Boy
Limited
at
the
lower
of
cost
or
market
as
permitted
under
subsection
10(1)
of
the
Income
Tax
Act.
As
a
result
of
this
inventory
revaluation,
a
non-capital
loss
was
shown
in
the
1977
taxation
year
which
reduced
taxable
income
to
nil
and
created
a
non-capital
loss
carry-forward
of
$1,564,144.
In
preparing
its
tax
return
for
1978,
the
plaintiff
revalued
its
inventory
in
shares
of
Bad
Boy
Limited
acquired
from
Talcorp
in
1978
and
claimed
a
non-capital
loss
of
$1,600,000
and
deducted
its
legal
fees
arising
from
the
litigation
with
Talcorp
in
the
amount
of
$50,080.
The
Minister
of
National
Revenue
disallowed
the
non-capital
loss
deduction
arising
from
the
revaluation
of
all
the
shares
of
Bad
Boy
Limited
owned
by
the
plaintiff
and
the
deduction
of
the
legal
fees
incurred
in
1978.
The
Minister
has
also
disallowed
the
non-capital
loss
deduction
claimed
by
the
plaintiff
in
1979.
The
nub
of
the
controversy
centres
around
the
following
propositions:
1.
the
plaintiff
submits
that
the
shares
of
Bad
Boy
Limited
were
inventory
of
the
plaintiff
and
were
properly
valued
at
their
fair
market
value
(subsection
10(1)
of
the
Income
Tax
Act);
2.
the
plaintiff
submits
that
in
purchasing
the
Bad
Boy
Limited
shares
the
company
was
engaged
in
carrying
on
a
business,
an
“adventure
in
the
nature
of
trade”,
and
the
loss
from
carrying
on
such
business
was
properly
deductible
in
computing
taxable
income;
3.
the
Minister
of
National
Revenue
has
taken
the
position
that
the
shares
of
Bad
Boy
Limited
owned
by
the
plaintiff
in
1977
and
the
shares
of
the
Bad
Boy
Limited
acquired
from
Taicorp
in
1978
were
capital
property
and
not
an
inventory
of
the
plaintiff.
Thus,
are
they
non-capital
losses
or
capital
losses?
The
key
to
the
plaintiff's
case
is
of
course
contingent
upon
the
intentions
of
the
principals
of
Factory
Carpet
Ltd
at
the
time
they
purchased
the
shares
of
Bad
Boy
Limited.
Was
it
their
“primary
and/or
secondary
intention”
at
the
time
of
the
acquisition
of
the
shares
to
resell
at
a
profit
after
using
up
the
non-capital
loss
carry-forward
of
Bad
Boy
Limited
or
was
the
selling
of
the
shares
the
motivating
factor
(driving
force)
in
the
transaction?
The
Court
is
called
upon,
on
a
balance
of
probabilities,
to
determine
the
real
intentions
of
the
principals
behind
the
plaintiff.
Although
this
is
a
very
subjective
exercise
to
say
the
least,
the
Court
must
examine
the
objective
facts
to
arrive
at
such
a
determination.
New
winds
have
not
been
blowing
along
the
judicial
trail
in
so
far
as
this
issue
is
concerned.
It
is
a
question
of
fact.
The
first
conclusion
to
be
drawn
from
the
facts
as
pleaded
is
that
the
acquisitions
of
the
shares
were
an
isolated
transaction.
I
will
comment
on
the
evidence
later
but
the
pleadings
are
clear
in
their
wording.
However,
it
has
been
held
that
the
singleness
or
isolation
of
a
transaction
is
not
conclusive
on
whether
or
not
it
was
an
adventure
in
the
nature
of
trade.
It
is
a
criterion
amongst
others;
see
generally
on
that
MNR
v
Jones
A
Taylor,
[1956-1960]
Ex.
CR
3;
[1956]
CTC
189.
Similarly,
the
idea
that
the
fact
that
a
transaction
is
“different”
in
nature
from
any
of
the
other
activities
of
the
taxpayer
does
not
of
itself
take
it
out
of
the
category
of
being
an
adventure
in
the
nature
of
trade.
The
case
of
MNR
v
Henry
J
Freud,
[1969]
SCR
75;
[1968]
CTC
438,
has
also
defeated
the
proposition
that
the
acquisition
of
shares
is
necessarily
an
investment.
This
is
how
Pigeon,
J
phrased
it
at
80-81
(CTC
442):
It
is
clear
that
while
an
acquisition
of
shares
may
be
an
investment
(MNR
v
Foreign
Powers
Securities
Corp
Ltd,
[1967]
SCR
295).
It
may
also
be
a
trading
operation
depending
upon
circumstances
(Asler
Hammond
and
Nanton
Ltd
v
MNR,
[1963]
SCR
432;
Hill-Clarke
Frances
Ltd
v
MNR,
[1963]
SCR
452).
I
am
thus
prepared
to
go
as
far
as
saying
that
the
subject
matter
of
the
transaction
is
only
an
element
to
consider.
Lord
President
Clyde
put
it
succinctly
and
beautifully
in
Balgownie
Land
Trust,
Ltd
v
CIR
(1929),
14
TC
684
.
.
A
single
plunge
may
be
enough
provided
it
is
shown
to
the
satisfaction
of
the
Court
that
the
plunge
is
made
in
the
waters
of
trade
..
Can
it
be
sustained
that
the
plaintiff's
avowed
intention
to
resell
for
a
profit
is
a
sufficient
test?
In
delivering
the
majority
judgment
in
the
case
of
Irrigation
Industries
Ltd
v
MNR,
[1962]
SCR
346;
[1962]
CTC
215,
Martland,
J
commented
on
page
351
(CTC
219)
on
the
appellant’s
intention
to
sell
the
shares
at
a
profit
as
soon
as
is
possible:
In
my
opinion,
a
person
who
puts
money
into
a
business
enterprise
by
the
purchase
of
the
shares
of
a
company
on
an
isolated
occasion,
and
not
as
part
of
his
regular
business,
cannot
be
said
to
have
engaged
in
an
adventure
in
the
nature
of
trade
merely
because
the
purchase
was
speculative
in
that,
at
that
time,
he
did
not
intend
to
hold
the
shares
indefinitely,
but
intended,
if
possible,
to
sell
them
at
a
profit
as
soon
as
he
reasonably
could.
I
think
that
there
must
be
clearer
indications
of
“trade”
than
this
before
it
can
be
said
that
there
has
been
an
adventure
in
the
nature
of
trade.
And
finally
on
page
355
(CTC
223):
The
only
test
which
was
applied
in
the
present
case
was
whether
the
appellant
entered
into
the
transaction
with
the
intention
of
disposing
of
the
shares
at
a
profit
so
soon
as
there
was
a
reasonable
opportunity
of
so
doing.
Is
that
a
sufficient
test
for
determining
whether
or
not
this
transaction
constitutes
an
adventure
in
the
nature
of
trade?
I
do
not
think
that,
standing
alone,
it
is
sufficient.
It
should
be
noticed
that
Irrigation
Industries
bought
“treasury”
shares
(not
on
the
market)
and
here
the
plaintiff
bought
what
could
be
termed
as
“corporate”
shares.
As
Mr
Justice
Collier
said
in
Bossin
v
The
Queen,
[1976]
CTC
358
at
368;
76
DTC
6196
at
6201:
“the
distinction
in
facts
is
not
conclusive
in
any
way
.
.
.”.
It
becomes
apparent
that
the
intention
of
selling
the
shares
at
a
profit
is
thus
inconclusive.
As
disclosed
in
the
statement
of
claim
and
in
the
statement
of
defence,
it
is
relatively
safe
to
conclude
that
the
plaintiff
was
not
engaged
in
the
business
of
dealing
with
securities.
I
therefore
assume
prima
facie
that
the
plaintiff,
through
its
directing
minds,
could
indeed
have
intended
from
the
time
it
acquired
the
shares
to
sell
them
at
a
profit
as
quickly
as
possible.
Only
two
events
had
to
be
satisfied
before
the
plaintiff
could
sell
the
shares
of
Bad
Boy
Limited:
the
full
utilization
of
Bad
Boy
Limited's
non-capital
losses
account,
and
the
turning
of
Bad
Boy
Limited
into
a
profitable
enterprise
again
(which
undoubtedly
would
increase
the
value
of
its
shares).
This
scheme
is
highly
plausible
and
if
profitable
would
certainly
attract
a
different
tax
treatment
than
the
one
adopted
by
the
Minister.
This
last
statement
is
probably
gratuitous
but
experience
has
proven
that
such
is
often
the
case.
Since
this
scenario
did
not
come
about
I
am
now
called
upon
to
determine
if
indeed
this
scheme
was
intended
by
the
controlling
minds
of
the
plaintiff
at
the
time
the
shares
of
Bad
Boy
Limited
were
purchased.
It
is
appropriate
at
this
juncture
to
turn
to
the
evidence
which
reveals
more
information
and
more
detail
than
do
the
pleadings.
Mr
Jerry
Van
was
called
by
the
plaintiff.
He
was
at
the
time
of
the
acquisitions
the
president
of
the
plaintiff,
had
some
17
years'
experience
in
the
carpet
business,
and
was
associated
with
the
plaintiff
from
about
1970.
We
learn
from
Mr
Van
that
in
the
carpet
retail
business
(and
this
can
be
said
of
most
retail
businesses)
they
had
a
real
concern
about
supply
of
product
from
their
manufacturers.
Indeed
he
indicated
that
some
manufacturers
were
loathe
to
supply
the
plaintiff
because
of
discounting
deals
they
were
able
to
make,
thereby
selling
for
less
than
other
retailers
who
were
also
customers
of
the
manufacturers.
Because
of
this
they
determined
it
was
a
golden
opportunity
when
shares
in
Toronto
Carpet
(later
called
Barrymore)
became
available.
By
purchasing
these
shares
they
owned
a
manufacturing
company
capable
of
providing
the
merchandise
required
by
the
plaintiff,
in
short,
a
measure
of
vertical
integration.
Some
rationalizing
was
done
and
the
shares
in
this
private
company
are
still
held
today
by
the
plaintiff.
The
plaintiff
probably
could
not
survive
without
an
assured
supply,
thus
a
good
reason
for
holding
on
to
the
shares
and
control
of
Barrymore.
The
intention
of
the
plaintiff
in
this
transaction
was
clear,
the
reason
for
purchase
was
evident,
and
the
reason
for
not
reselling
even
for
profit
is
obvious
—
the
plaintiff
needs
Barrymore.
I
can
see
the
purchase
of
Bad
Boy
Limited
shares
as
analogous
possibly
but
certainly
not
comparable.
Mr
Van
was
a
positive,
credible
witness
and
most
consistent
in
his
testimony
—
even
to
admitting
or
conceding
in
cross-
examination
that
neither
Talcorp
nor
the
Bank
of
Montreal
were
told
his
and
his
partner's
ultimate
aim
was
to
realize
"every
businessman's
dream”
—
liquidity.
Sell
and
get
out.
I
see
nothing
heinous
or
even
inappropriate
in
this.
Provision
was
made
in
the
memorandum
of
agreement
that
if
Mr
Van
sold
and
left
the
firm
he
would
not
carry
on
this
kind
of
business
for
five
years.
Also,
one
of
the
documents
clearly
indicates
new
management
was
contemplated
and
that
Mr
Van
would
not
be
running
the
operation
as
president
and
chief
executive
officer.
His
evidence
was
remarkably
coherent
for
such
a
large
and
complicated
transaction.
He
was
convincing
throughout
and
never
wavered
under
excellent
cross-examination.
He
conceded
his
surprise
at
the
extent
of
the
losses
of
Bad
Boy
Limited
over
and
above
the
amount
he
thought
they
were.
It
is
also
interesting
to
note
that
Trucena,
the
company
originally
approached
to
participate
in
the
acquisition
of
shares,
were
not
prepared,
after
careful
consideration,
to
participate
unless
Mr
Van
committed
himself
to
a
term
as
chief
executive
officer.
Mr
Van
would
not
make
that
commitment
but
one
cannot
help
but
feel
that
if
Mr
Van
had
“stayed
on
board”
then
Trucena
would
have
entered
into
agreement
with
the
plaintiff
—
solid
confidence
indeed
in
Mr
Van.
Mr
Van
was
most
consistent,
as
I've
said
earlier.
His
evidence
is
that
Factory
Carpet
was
a
very
successful
enterprise.
Prior
to
the
purchase
of
the
shares
in
Bad
Boy
Limited
they
had
been
giving
serious
thought
to
becoming
a
public
company.
Through
some
inside
information
they
heard
that
Mr
Lastman’s
shares
might
become
available
for
a
price
of
$3.76
per
share.
Mr
Van's
evidence
is
that
they
were
excited
and
intrigued
by
the
opportunity.
To
him
this
would
enable
them
to
meet
business
objectives,
namely
go
public,
and
to
gain
dollars,
and
if
they
turned
Bad
Boy
Limited
around,
could
sell
and
gain
that
all-too-often
elusive
“liquidity”.
As
businessmen,
they
examined
the
records
available
to
the
public,
and
because
a
$500,000
loss
was
shown
over
a
period
of
some
months,
they
decided
to
cover
that
situation
by
offering
$3
per
share
rather
than
the
$3.76.
Mr
Van
conceded
that
although
the
plaintiff
was
successful
and
earned
$1.8
million
per
year,
there
was
little
hope
of
gaining
the
liquidity
sought
unless
they
went
public,
thus
the
reason
for
buying
shares
of
the
public
company.
The
answers
to
“why
purchase”
seem
quite
clear
therefore,
if
one
examines
Mr
Van's
evidence.
They
were
contemplating
going
public
with
Factory
Carpet
Ltd
but
it
was
expensive
and
usually
the
market
is
looking
for
corporations
that
have
been
in
business
for
periods
in
excess
of
5
years,
even
a
very
successful
business.
Purchasing
the
shares
of
the
public
company
Bad
Boy
Limited
gave
them
another
route.
Also,
Bad
Boy
Limited
had
significant
non-capital
losses
available
to
enable
the
plaintiff
to
"shelter”
from
income
tax
the
profits
of
the
plaintiff.
Going
public
gave
them
a
ready
market
for
their
shares.
Mr
Van
stated
they
saw
several
opportunities
to
increase
substantially
the
value
of
Bad
Boy
Limited.
Aside
from
providing
outlets
to
Factory
Carpet
Ltd
in
areas
where
they
had
none,
they
would
be
able
to
rationalize
Bad
Boy
Limited
in
several
ways.
He
mentioned
selling
off
or
closing
unprofitable
outlets,
and
in
other
areas
complement
furniture
and
appliance
stores
with
Factory
Carpet
Ltd
product.
He
felt
the
marketing
method
used
by
Bad
Boy
Limited
was
inefficient
and
costly
but
could
be
turned
around
in
two
or
three
years.
It
is
clear
Mr
Van
and
his
partners
had
the
business
acumen
to
turn
Bad
Boy
Limited
around.
The
roadblock
to
this
happening
was
the
financial
information
subsequently
received
that
the
figure
$500,000
was
incorrect.
The
actual
figure
turned
out
to
be
around
$2
million.
Counsel
for
the
defendant
argued,
and
endeavoured
in
cross-examination
to
suggest,
the
shares
could
not
be
sold
because
the
shareholders
agreement
was
the
same
as
the
earlier
Toronto
Carpet/Barrymore
agreement.
Not
so,
pointed
out
Mr
Van
because
of
the
words
"where
applicable”
in
the
memorandum
and
the
fact
that
Barrymore
was
a
private
company
whereas
Bad
Boy
Limited
was
a
public
company,
shares
being
traded
on
the
exchange.
Also,
Taicorp
was
really
in
a
no-lose
situation
due
to
the
put
option
and
the
personal
guarantee
they
insisted
on
having
(so
did
the
Bank
of
Montreal).
The
main
reason
for
"adopting”
such
a
measure
"where
applicable”
without
spelling
everything
out
in
detail
was
the
time
factor
—
speed
was
of
the
essence.
By
rolling
in
Factory
Carpet
Ltd,
after
the
shares
had
been
acquired,
it
would
enable
them
to
pay
off
Talcorp
and
the
Bank
of
Montreal
and
secure
a
release
from
the
personal
guarantees
given
by
the
principals.
I
am
satisfied
that
the
two
transactions
Barrymore
and
Bad
Boy
Limited
are
separate
and
not
comparable.
For
the
reasons
given
earlier,
it
was
clear
the
taxpayer
must
retain
the
shares
of
Barrymore.
In
the
transaction
involving
Bad
Boy
Limited
no
such
situation
exists.
Clearly
there
are
objective
indications
for
accepting
the
intention
of
the
principals
—
the
taxpayer.
Mr
Van
had
17
years
in
the
carpet
business
and
wanted
out.
He
also
wanted
liquidity
and
had
considered
the
possibility
of
making
the
taxpayer
a
public
company.
His
recital
of
the
problems
involved
when
a
"new”
or
"short
history”
company
seeks
to
go
public
are
straightforward
and
in
my
view
correct.
The
fact
of
considering
going
public
lends
credence
to
the
taxpayer’s
intention
that
the
principals
were
seeking
liquidity
—
sell
and
move
on
to
something
else.
Purchasing
the
shares
of
Bad
Boy
Limited,
a
public
company,
using
their
non-capital
losses,
rationalizing,
and
reorganizing,
are
all
consistent
with
the
intention
to
turn
the
company
around,
make
it
more
profitable
and
thereby
increase
the
value
of
the
shares,
plus
the
probability
of
enticing
other
shareholders
to
invest,
ie
buy
shares
enabling
this
public
company
to
succeed.
Mr
Van's
evidence
was
that
two
to
three
years
should
do
it
even
given
his
knowledge
of
the
loss
of
$500,000.
Despite
the
eventual
information
that
the
loss
approached
$2
million
the
principals
sought
means
to
save
Bad
Boy
Limited.
It
became
obvious
that
saving
the
company
was
impossible.
From
the
outset
the
principals
were
involved
in
the
enterprise
and
were
prepared
to
roll
in
the
shares
of
Factory
Carpet,
to
risk
a
year’s
earnings
of
the
taxpayer’s
$1.8
million
and
to
work
two
to
three
years
to
turn
it
around
before
selling
the
shares,
placing
them
in
a
liquid
position.
It
is
all
consistent
with
the
intentions
expressed
by
Mr
Van
in
evidence.
Counsel
for
the
defendant
cited
Becker
v
The
Queen,
[1983]
CTC
11;
83
DTC
5032.
I
will
not
spell
out
the
“facts”
for
they
are
available
to
those
who
wish
to
read
the
case.
Suffice
it
to
say
that
the
trial
judge's
decision
was
overturned
by
the
Appeal
Court
who
found
the
transaction
there
an
adventure
in
the
nature
of
trade.
It
is
true
that
the
taxpayer
here
did
not
have
to
sell
but
its
clear
intention
was
to
sell.
In
my
view
the
decision
of
the
Federal
Court
of
Appeal
is
applicable
to
the
present
case.
Mr
Justice
Le
Dain,
in
distinguishing
the
Irrigation
case,
has
elaborated
what
I
believe
to
be
a
useful
criterion
to
resolve
the
matter
in
dispute.
The
criterion
can
be
conveniently
referred
to
as
the
"enhancement"
criterion.
In
the
Irrigation
case
the
controlling
minds
behind
the
company
did
nothing
to
enhance
the
value
of
the
shares.
They
simply
bought
them,
held
them
and
sold
them
at
a
profit.
This
is
what
Mr
Justice
Le
Dain
said
in
the
Becker
case
(supra)
at
14
(DTC
5034):
An
important
difference
between
Irrigation
Industries
and
the
present
case
is
that
the
BCP
venture
did
not
simply
involve
a
purchase
of
shares
with
an
intention
to
resell
them
for
a
profit,
but
the
purchase
of
a
business
with
the
intention
of
transforming
it
in
order
to
turn
it
into
a
profitable
enterprise.
[Emphasis
is
mine]
and
later
at
14
(DTC
5035):
The
appellant
did
not
say
that
he
intended
to
sell
the
business
“eventually",
thereby
implying
that
his
immediate
or
motivating
intention
in
purchasing
it
was
to
retain
it
for
the
purpose
of
earning
income.
He
said
that
he
could
not
keep
the
business
and
that
he
never
intended
to
recover
his
investment
by
income
from
the
business.
In
my
opinion,
if
the
appellant's
testimony
is
to
be
taken
as
credible
by
this
Court
in
view
of
the
position
taken
by
the
Trial
Judge
on
the
question
of
credibility,
there
is
only
one
conclusion
that
can
properly
be
drawn
from
it,
and
that
is,
that
it
was
the
appellant’s
intention,
upon
changing
the
nature
of
BCP’s
business
and
making
it
profitable,
to
sell
it
as
soon
as
possible
for
a
profit.
Similarly,
it
is
edifying
to
quote
still
further
at
14
(DTC
5035):
This
brings
the
case
in
my
opinion
within
the
conception
of
adventure
in
the
nature
of
trade
that
was
applied
in
Commissioners
of
Inland
Revenue
v
Livingstone
(1926),
11
TC
538.
That
case
involved
an
isolated
instance
in
which
the
taxpayers
purchased
a
ship
and
changed
its
character
with
a
view
to
selling
it
for
a
profit.
The
test
that
was
applied
was
whether
the
operations
involved
in
the
venture
were
of
the
same
kind
and
carried
on
in
the
same
way
as
those
which
were
characteristic
of
ordinary
trading
in
the
line
of
business
in
which
the
venture
was
made.
It
was
said:
“The
profit
made
by
the
venture
arose,
not
from
the
mere
appreciation
of
the
capital
value
of
an
isolated
purchase
for
resale,
but
from
the
expenditure
on
the
subject
purchased
of
money
laid
out
upon
it
for
the
purpose
of
making
it
marketable
at
a
profit.
That
seems
to
me
of
the
very
essence
of
trade.
I
am
satisfied
the
necessary
inferences
can
be
drawn
that
paragraph
9
of
the
statement
of
claim
is
true,
and
am
satisfied
it
shows
that
the
plaintiffs
"intended"
scheme
was
its
hope
to
turn
the
fortunes
of
Bad
Boy
Limited
around.
The
turning
of
the
investment
to
account
was
the
motivating
factor
to
the
transaction,
and
thus
it
was
an
adventure
in
the
nature
of
trade.
The
fact
that
losses
were
incurred
in
the
instant
case
makes
no
difference
since,
as
stated
by
Mr
Justice
Pigeon
in
the
Freud
case
(supra):
Such
being
the
principles
to
be
applied
in
cases
when
a
profit
is
obtained,
the
same
rules
must
be
followed
when
a
loss
is
suffered.
Fairness
to
the
taxpayers
requires
us
to
be
very
careful
to
avoid
allowing
profits
to
be
taxed
as
income
but
losses
treated
as
on
account
of
capital
and
therefore
not
deductible
from
income
when
the
situation
is
essentially
the
same.
Just
prior
to
the
trial,
counsel
for
the
defendant
moved
with
consent
of
the
plaintiff
to
amend
the
statement
of
defence
in
paragraph
9
of
action
T-2779-81
and
paragraph
12
of
the
statement
of
defence
in
T-1717-83
so
they
now
read:
T-2779-81
—
Paragraph
of
Statement
of
Defence:
He
submits,
in
the
alternative,
that
as
the
600,000
shares
of
Bad
Boy
Limited
were
not
sold,
cancelled,
destroyed,
or
otherwise
disposed
of
in
the
1977
taxation
year,
no
loss
arose
in
respect
of
them
in
that
taxation
year.
T-1717-83
—
Paragraph
12
of
Statement
of
Defence:
He
submits,
in
the
alternative,
that
as
the
600,000
shares
of
Bad
Boy
Limited
purchased
from
Taicorp
Association
Ltd
were
not
sold,
cancelled,
destroyed,
or
otherwise
disposed
of
in
the
1978
or
1979
taxation
years
no
loss
arose
in
respect
of
them
in
those
taxation
years.
This
alternative
argument
was
advanced
but
I
see
no
real
merit
in
it.
The
value
of
the
shares
was
nil
as
a
result
of
the
fact
that
Bad
Boy
Limited
was
in
receivership.
What
is
added
by
selling
for
$1
or
physically
destroying
the
shares?
By
accepting
this
defence
the
Court
would,
in
my
view,
be
simply
delaying
the
inevitability
of
such
an
action
taking
place,
and
a
claim
made
in
another
year.
There
is
no
doubt
the
shares
had
no
value
and
the
fact
of
their
being
physically
in
place
in
the
possession
of
the
taxpayer
cannot
detract
from
that.
Also,
it
should
be
noted
that
the
venture
was
shown
under
a
heading
"Investments"
in
the
financial
statement
of
the
company
and
later
after
discussions
with
company
officials
and
legal
counsel,
it
was
shown
as:
"Income
before
extraordinary
item
Less:
Loss
on
inventory
of
Bad
Boy
Appliances
and
Furniture
Limited,
net
of
income
taxes
—
Note
7”.
Note
7
reads:
7.
Extraordinary
Item:
The
company’s
venture
in
the
acquisition
of
Bad
Boy
Appliances
and
Furniture
Limited’s
shares
became
worthless
in
1977.
On
August
18,
1977
a
receiving
order
was
made
under
the
Bankruptcy
Act
against
Bad
Boy,
the
result
of
which
was
that
the
shares
could
no
longer
be
sold
and
the
company
has
been
advised
that
there
will
be
no
funds
available
for
shareholders
as
a
result
of
the
liquidation
of
Bad
Boy.
This
entry
was
carried
in
the
same
fashion
for
succeeding
years.
Mr
Sacks,
the
accountant
responsible,
was
called
to
explain.
He
indicated
that
the
auditor's
report
had
been
prepared
by
"our
office"
and
he
was
a
partner
in
the
firm
and
did
the
work
with
two
or
three
others.
To
him
investment
was
used
in
an
accounting
and
not
a
legal
sense.
An
explanation
was
necessary,
and
he
referred
the
court
to
page
one
of
the
auditor's
report
dated
March
6,
1977
which
reads
in
part:
"As
disclosed
in
Note
9,
we
have
not
been
able
to
determine
whether
there
has
been
a
reduction
in
the
value
of
the
shares
in
Bad
Boy
Appliances
and
Furniture
Limited”.
Note
9
reads:
9.
The
audited
financial
statements
of
Bad
Boy
Appliances
and
Furniture
Limited
for
the
39
week
period
ended
January
1,
1977
reflect
a
net
loss
of
$1,964,628
and
a
book
value
of
$4,567,611.
As
a
result
of
this,
and
because
the
investment
represents
a
block
of
shares,
the
market
value
of
these
shares
cannot
be
determined.
Given
this
information
and
the
evidence
of
Mr
Sacks,
use
of
the
word
investment
is
not
conclusive
or
binding
on
what
I
see
as
the
clear
intentions
of
the
principals,
and
the
subsequent
manner
in
which
the
shares
are
shown
in
the
auditor's
report
better
indicates
the
true
status
for
tax
purposes
of
the
shares,
as
an
“extraordinary
item”
which
better
met
the
criteria
of
his
governing
accounting
body
as
he
understood
it.
For
the
reasons
given
I
am
of
the
opinion
that
what
the
principals/tax-
payer
did
with
respect
to
Bad
Boy
Limited
was
an
adventure
in
the
nature
of
trade
and
the
loss
which
resulted
was
a
business
loss
which
is
properly
deductible
in
the
computation
of
the
taxpayer's
income.
I
therefore
vacate
the
reassessment
dated
February
25,
1981,
and
direct
it
be
referred
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
so
as
to
allow
the
deduction
claimed
by
the
plaintiff
as
a
noncapital
loss
in
respect
of
the
sum
of
$1,841,783
in
computing
its
income
for
the
1977
taxation
year.
I
therefore
vacate
the
reassessment
dated
November
9,
1982
for
the
1978
taxation
year
and
direct
that
it
be
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
so
as
to
allow
the
deduction
of
the
non-capital
loss
as
claimed
by
the
plaintiff
in
respect
of
the
sum
of
$1,650,080
for
its
1978
taxation
year
and
the
loss
carry-forward
of
$1,564,144
for
its
1977
taxation
year.
I
further
direct
that
the
reassessment
dated
November
9,
1982
for
the
1979
taxation
year
be
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
so
as
to
allow
the
deduction
of
the
non-capital
losses
carry-forward
as
calculated
by
the
plaintiff
for
its
1979
taxation
year.
The
plaintiff
is
entitled
to
its
costs
of
this
action.
Appeal
allowed.