Oakside Corporation Limited v. Minister of National Revenue, [1991] 1 CTC 2132, 91 DTC 328

Beaubier, T.C J.:—This case was heard in Calgary, Alberta, on November 21, 1990.

The appellant, Oakside Corporation Ltd., claims losses in respect to income for the 1984 and 1985 taxation years on account of the sale of shares to the appellants controlling shareholder. The loss claimed for 1984 is $92,000. The loss claimed for 1985 is $82,646.

The Minister of National Revenue assessed and reassessed the appellant and disallowed the deduction in respect to each year and treated the losses claimed as capital losses which were deemed to be nil by virtue of paragraph 40(2)(e) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The appellant corporation was incorporated as a shelf corporation by lawyers in Calgary, Alberta. Hermann G. Bessert of Calgary acquired all of the common shares and became President and Director of the corporation and established its first year-end on May 31, 1979. The corporation's business was to acquire high-risk investment opportunities in shares, options and other forms of securities; in addition it did provide consultant services respecting various investments of Victoria Mortgage Corporation and Victoria Mortgage (Alberta) Ltd., both of which corporations became wholly owned by the appellant in the course of its services.

The evidence establishes that the appellant corporation dealt through a broker and, where stocks were concerned, through stock exchanges, in respect to all of its stock purchases except the two stock purchases in question.

The two stock purchases were both purchased directly from the treasury of the issuing corporation and in each case the appellant executed sophisticated investor documentation for the purposes of the Securities Commission of the Province of Alberta, agreeing, among other things, not to sell the shares so purchased within one year from the date of purchase. Each set of shares so purchased was financed by a bank loan and the share certificates themselves were delivered directly to the bank in return for a cheque in favour of the issuing corporation. There is no evidence as to whether the certificates were in street form when they were delivered.

The first set of shares purchased was 37,000 shares of Gulch Oil and Gas Ltd. for $101,750 in 1979. It should be noted that in 1983 Camel Oil and Gas Ltd. acquired Gulch Oil and Gas Ltd. as a result of which the appellant's 37,000 shares in Gulch were exchanged for 14,510 shares in Camel. The second set of shares so purchased was 80,000 shares of Lobell Oil & Gas Ltd. for $100,000 in 1981.

On January 2, 1982, the appellant had acquired all of the issued and outstanding shares of Victoria Mortgage Corporation Ltd. and Victoria Mortgage (Alberta) Ltd. which together had total assets of approximately 8.5 million dollars. The evidence is that Victoria Mortgage Corporation Ltd. requested a cease trading order in 1985 in British Columbia and was liquidated.

On May 7, 1982, the appellant passed a director's resolution filed as Exhibit A-4 which stated in resolution #2 thereof: "The company does not intend to liquidate its investments in Gulch Resources Ltd. and Lobell Oil and Gas Ltd. prior to May 31, 1983.” In addition, in the May 31, 1982 statement of the appellant, the appellant wrote down the share investment in its financial statement, according to the testimony of Mr. Bessert, because Oakside was qualified as a broker dealer in British Columbia and if it had not written down the values, the ratios of investment of the corporation might have jeopardized its licences in British Columbia.

In 1984 the appellant sold all of its shares in Lobell to its sole shareholder, Hermann Bessert, for $8,000. In 1985 the appellant sold all of its shares in Camel to its soleshareholder, Hermann Bessert, for $6,385. As a consequence of these transactions, the appellant sustained losses of $92,000 in 1984 and $95,365 in 1985.

There is no dispute in respect to the evidence that the shares in question were not intended to yield dividends and that activities of the appellant with respect to all of its other share and security purchases and sales were on income account excepting for report of a taxable capital gain of $375 in 1979.

In respect to each of the purchases, the appellant signed documents pursuant to the provisions of Securities Regulations to the effect that in respect to the purchase, the purchaser acted as principal for investment only and not with a view to resale of (sic) distribution”. The Minister of National Revenue put great store on these phrases. The Court accepts the interpretation by Mr. Bessert that the word" resale" contained in the phrase refers to a redistribution to several others, but that the phrase also permits the purchaser of the shares to sell to a third party in its entirety after the one year has expired.

The appellant called Mr. Bessert as its only witness. The Minister of National Revenue called Mr. Bhola, the auditor in charge who reviewed various transactions in the income tax returns of the appellant and in particular the reported capital gain of $375 in 1979 and another capital gain claimed in 1983 in respect to a redemption of preferred shares in a corporation referred to as "Victoria Mortgage Corporation".

The evidence established that the appellant financed its investments by borrowing so far as possible, invested for the most part in shares or options that were listed on the Alberta Stock Exchange, for the most part did not invest in dividend producing corporations or corporations with a prospect of dividends, and except for the investments in the Victoria corporations" was a very minor shareholder in respect to any of its investments. With respect to the investments in question, which were purchased from treasury, the documents signed were the ordinary documents that have to be signed in such cases and, excepting for the legality of the time restraint required by security regulations, and the fact they were purchased from treasury, do not differ particularly from the very great majority of other investments of the appellant which were dealt with on an income basis although the reassessed shares sold were held for a longer period of time. The evidence establishes that the appellant entered into avid trading at approximately the peak of the oil boom in Alberta and that it was in the business of trading shares such as those in question before the Court.

This Court accepts the evidence that the resolution respecting the shares and the write-down of the shares was done for licensing purposes in the province of British Columbia. However, these did not affect the actual intent with which the shares were purchased or in respect to which they were held and ultimately sold by the appellant. That intent was to gain income from their purchase and sale. The multitude of transactions brought into evidence by the appellant indicate that the appellant was a trader and that the transactions reassessed by the Minister of National Revenue were in fact transactions on income account.

The appeal is therefore allowed, with costs in favour of the appellant.

Appeal allowed.