M.A.F. Energy Investments Inc. v. Minister of National Revenue, [1988] 1 CTC 2057, 88 DTC 1017

Rip, T.C.J.: —M.A.F. Energy Investments Inc., the appellant, appeals from notices of reassessment in respect of its 1981 and 1982 taxation years in which the Minister of National Revenue, the respondent, treated the proceeds of disposition of various securities on revenue account.

M.A.F. Energy Investments Inc. (hereinafter sometime referred to as "M.A.F.") is a Canadian corporation incorporated under the laws of the Province of Ontario in 1979 and continued under the Canada Business Corporations Act in 1981. M.A.F. was incorporated by and on behalf of Mr. Michael A. Farrugia. During the taxation years in issue he was the sole beneficial shareholder of the appellant and one of its two employees. Mr. Farrugia was the corporation's sole driving force.

Mr. Farrugia is a graduate in chemical engineering and prior to 1976 worked for Canadian Pacific reviewing potential energy acquisitions contemplated by its subsidiaries. In November 1976 Mr. Farrugia commenced employment with the brokerage house MacDougall, MacDougall and Mac- Tier ("MacDougall") in Toronto where he worked until February 1980. His initial position with the MacDougall firm was as a research analyst in the oil and gas area. He realized that he could make more money by becoming an account executive with his own clients and in 1978 he took on the added responsibilities of an institutional account executive. In this position, Mr. Farrugia provided investment advice based on his research to various financial institutions; when these institutions or their clients purchased shares through MacDougall, Mr. Farrugia would receive a commission. In early 1979 Mr. Farrugia worked on private placements at MacDougall. However he felt that MacDougall, which he described as an “old line firm", did not know about emerging companies in the oil and gas area and in February 1980 he left that firm to work on his own. He decided to carry on his private placement activities through the appellant.

In June 1980, Mr. Farrugia joined a formed partner at MacDougall and another person to help form WDL Securities Ltd., which was a wholly owned subsidiary of W.D. Latimer Ltd. ("WDL"), also a brokerage house in Toronto. Mr. Farrugia, in conjunction with his continuing activities for the appellant, worked as an institutional account executive at WDL until September 1981 when he left WDL. Mr. Farrugia rejoined MacDougall in December 1981 to work in his former position as research analyst and institutional account executive. He again left MacDougall in April 1983 to work full time at Windsor Resources Inc. ("Windsor"), a company in which M.A.F. had a substantial interest. In May 1982, Mr. Farrugia was named Chairman of the Board of Windsor.

Mr. Farrugia testified he had recommended the shares of Windsor to various institutional clients and when the value of Windsor shares dropped substantially he felt “morally responsible" to these clients. At Windsor his main responsibility appeared to be to find a purchaser for Windsor who would take the company off the hands of the current shareholders. In June 1983 Mr. Farrugia was elected president of Windsor and, in his words, was running the company. Upon the sale of the majority interest in Windsor in April 1984 Mr. Farrugia's relationship with that company terminated. On leaving Windsor he joined Nesbitt, Thomson, Bondgard, a brokerage house, where, at time of trial, he was vice-president, acquisitions and mergers, in the oil and gas industry.

Mr. Farrugia testified that the purpose in incorporating M.A.F. was to provide him with an instrument by which he could arrange private placements for junior resource corporations and provide consulting services relating to the oil and gas industry with the benefit of limited liability. Mr. Farrugia testified that he spent approximately 60 per cent of his time in the years under appeal providing services to M.A.F. M.A.F.'s income during the years under appeal has earned as follows:

The private placement and consulting business did not continue in any significant fashion after 1983 due to the general downturn in the oil and gas business.

Mr. Farrugia testified that the private placement and consulting business of the appellant was generating significant revenue which permitted the corporation to purchase securities. He purchased shares in companies that had, in his view, a growth potential. He explained he wished to "get into” a company early on in its history so that the growth would be substantial*. [1] In investing in a particular corporation Mr. Farrugia would “look at the people operating the company; he said that he did not "want to play the market". He would acquire his shares through a broker, directly through a private placement, or from treasury of a particular corporation. He said he caused M.A.F. to invest in companies run by people he had met in the consulting business or through the consulting business. The companies whose shares he acquired were junior resource corporations which, because of his background, he had knowledge of. Mr. Farrugia did not expect these corporations to begin paying dividends immediately, although he did anticipate that dividends would be paid in the long term. He expected that initially any earnings would be retained by the corporations to provide growth capital. He invested in both public offering companies and companies whose shares were not offered to the public.

During the taxation years in issue, M.A.F.'s fiscal year terminated on February 28.

The following attempts to provide a short description of the securities the appellant acquired and purchased, and Mr. Farrugia's evidence in respect of the transactions.

Olympic Oil and Gas Inc. ("Olympic")

The appellant acquired 50,000 shares in Olympic through participation in a group which acquired shares from treasury through a private placement in October 1979. M.A.F. disposed of the shares in November 1980 for a gain of $93,377. The shares were acquired at .10¢ each. Olympic became a public offering company in or about September 1980. Mr. Farrugia knew the president of Olympic and sold the shares when they reached approximately $2, which he though was "ridulously high” and overpriced in respect of the asset value of the company.

Redford Mines Inc. ("Redford")

This corporation and Coralta Resources Ltd. ("Coralta") were run by the same person, Mr. Robert Grey. Coralta had engaged M.A.F. as a consultant in early 1980 for a private placement of common shares and convertible debentures. M.A.F. acquired shares in Redford in November 1980. Redford was searching for gas in Tennessee and if successful, it was expected the gas wold be connected to a pipeline. Mr. Farrugia received a “tip” to purchase the shares because pipeline connection was “imminent”; the president of Redford told him he expected the connection. Mr. Farrugia eventually telephoned people in the industry who informed him Redford's gas would not be connected to the pipeline in the short term. Consequently, M.A.F. sold the shares in January 1981 for a gain of $8,108. In cross-examination Mr. Farrugia revealed he found out one Murray Pezim was behind Rhodes and because of Mr. Pezim's reputation of backing companies without assets, M.A.F. sold the shares within eight days of acquisition.

Rhodes Resources Inc. ("Rhodes")

The shares of Rhodes were acquired in November 1980 and sold in December 1980 for a loss of $22,286. A colleague informed Mr. Farrugia that Rhodes was on the verge of a major discovery. He did some research and purchased some stock. He eventually learned the shares were part of a stock promotion and he caused M.A.F. to sell.

Hangor Resources Inc. ("Hangor")

This company's shares were recommended to Mr. Farrugia by his secretary, whose uncle ran the company. Mr. Farrugia decided to invest “a little money" in Hangor in December 1980. After making enquiries about his secretary's uncle, he did not get a favourable response and therefore sold the shares in February 1981, for a loss of $3,308.

Univex Mining Corp. Ltd. ("Univex")

Univex was described by Mr. Farrugia as a "small oil and gas exploration company". His lawyer knew the people involved in Univex and they recommended a position in a private placement. M.A.F. acquired the Univex shares in February 1980 and disposed of them because of Mr. Farrugia's "tenuous" financial situation at the time in October and November 1981 at a loss of $2,816.

Buckingham Resources ("Buckingham")

Buckingham shares were acquired in December 1980 by M.A.F. and are still held. Mr. Farrugia described Buckingham as an "initially successful emerging oil and gas company" whose capital has been effectively returned. In later years the company's results "soured".

Coralta Resources Ltd.

Coralta, as stated earlier, was a client of M.A.F. Mr. Farrugia knew Coralta's president, Mr. Bob Grey, and as a result, he said, he acquired warrants in April 1980 to purchase 100,000 shares at $5.25. In April, 1981, when the shares were trading at $8, he acquired the shares at the warrant price; failure to exercise his option during the first year would increase the price in the second year of the option to $6.50. M.A.F. borrowed funds for the purchase. M.A.F. commenced disposing of the shares one month later because he "got nervous about Tennessee”. The first sales were transacted on the stock exchange. However Mr. Grey did not want such a quantity of shares publicly traded and offered to buy the balance of the shares from M.A.F. The shares were sold in May 1981 for a gain of $248,955.

To a question in cross-examination Mr. Farrugia replied that M.A.F. acquired the warrants as fees for services rendered in Coralta's private placement. Also, he said, one of the reasons for selling was that he did not trust Mr. Grey.

Eastern Leaseholds Inc. ("Eastern")

Eastern held oil and gas leases. A friend of Mr. Farrugia advised him to purchase shares of the Company and he caused M.A.F. to do so in May 1981. However after the purchase he heard "only bad news" about Eastern and sold the shares in September or October 1981 at a loss of $34,706.

Bluesky Oil and Gas Ltd. ("Bluesky")

Bluesky shares were purchased because of an "error" in October 1981. Mr. Farrugia stated he believed a sale of a number of Bluesky shares went through on his brokerage account in October 1981; he then purchased an equal number of shares the same month to cancel the original sale. There appears to be no loss or gain.

Windsor Resources Inc. ("Windsor")

Windsor was incorporated prior to 1980; Mr. Farrugia described the company as having drilling options on various properties “which looked attractive". Mr. Farrugia was "one of its founders" and a director. He stated he "held a fair position in the company personally” prior to the incorporation of the appellant. He originally purchased 250,000 shares for $25,000 shares. Eventually his investment and M.A.F’s investment in Windsor aggregated $700,000. Mr. Farrugia testified he was "personally involved” with Windsor which he saw as “a major vehicle to form a large company”. He indicated that notwithstanding his “large position" in Windsor he wanted a "better position” and to increase his ownership in Windsor he participated in $1.55 private placement of shares. When Windsor's shares began trading on the stock exchange in October 1980 M.A.F. began acquiring additional stock. Mr. Farrugia purchased the shares because he “really believed in Windsor and the people running it”. Between November 1980 and September 1981, when the market for Windsor was at its peak, M.A.F. acquired shares in Windsor, paying as much as $8.05 per share.

The first substantial sale of Windsor stock took place in September 1981.* [2] Additional sales took place in February 1982. Mr. Farrugia stated that because of cost of the shares he felt exposed; he was, he said, "on the hook for $400,000”. The value of Windsor shares had dropped from a high of $8.75 per share to $6 and to $5.25 after the National Energy Policy was announced on October 28, 1980. Prior to the National Energy Policy program Mr. Farrugia had arranged a placement of 300,000 shares of Windsor at $7.50. Most of his assets were in Windsor and he felt he had to liquidate, he explained, because of his financial condition. However, he did not want to sell on the open market.

In September 1981 Mr. Farrugia had discussions with the president of Caledonia Resources Ltd. (“Caledonia”). It was agreed that Mr. Farrugia would cause the Windsor shares to be sold to either the president of Caledonia or Caledonia itself and, in return M.A.F. would purchase shares in Caledonia from the president of that corporation. The Caledonia shares were acquired by M.A.F. on September 17,1981: M.A.F. sold 40,000 shares of Windsor and purchased 105,000 shares of Caledonia. M.A.F. immediately started to sell the Caledonia shares because of Mr. Farrugia's need for cash. The day after the purchase of the Caledonia shares the president of Caledonia advised him not to sell the shares and to repurchase the shares he had sold. Another arrangement was worked out between Mr. Farrugia and the president of Caledonia: Mr. Farrugia assisted him in disposing of the Windsor shares and the president of Caledonia agreed to purchase from M.A.F. the shares of Caledonia at $6 per share. These sales took place during October and November 1981. M.A.F. experienced a loss of $95,417 on the disposal of the Caledonia shares.

In Mr. Farrugia’s view the disposition of the Caledonia shares was in fact a sale of the Windsor shares, since the transaction was the method utilized to dispose of the Windsor shares; M.A.F. had no desire to retain the Caledonia shares but to liquidate them as quickly as possible.

In February 1982 Mr. Farrugia, in his words, “was feeling squeezed" and because of his need for cash caused M.A.F. to sell an additional 66,850 shares of Windsor to friends on a private basis. M.A.F. lost $312,163 on the sale of Windsor stock in September 1981 and February 1982.

Holderness Investments Limited ("Holderness")

Holderness was a corporation whose sole asset was real estate in St. John's, Newfoundland. When the discovery of oil in Hibernia was announced early in 1979 Mr. Farrugia thought it would be opportune to invest in Newfoundland real estate since the oil industry would require office space. A friend, Miller Ayre, lived in St. John's, Newfoundland. Mr. Ayre's family company, Ayre & Sons Limited (“A & S"), owned a four-storey building on Water Street, one of St. John's main streets, in which the family carried on a retail trade. Only one and a half storeys of the building were occupied. In 1979 Messrs. Farrugia and Ayre met in Montreal and agreed to "work together" toward a potential real estate development. A further meeting was arranged with some members of Mr. Ayre's family in St. John's. In St. John's Mr. Farrugia saw plans for the alteration and renovation of the building owned by A & S, which overlooked the harbour, and he sat in on meetings at which the renovations were discussed.

Mr. Farrugia had no prior experience in real estate. He noticed that Water Street was not in a retail area. He got in touch with a friend in Montreal, Mr. Tony Pacaud, who was a realtor, to discuss the matter. As a result of these discussions Mr. Farrugia returned to St. John's and convinced the Ayres to stop the renovation of the building and consider the property for development of an office building. Mr. Farrugia returned to Montreal.

In Montreal Mr. Farrugia met with Mr. Pacaud, Nigel Lees, a friend, and Mr. Jamie Wright, an architect. These four gentlemen returned to Newfoundland to discuss the development of the property with the Ayres family. In February 1980 the Ayres family and Mr. Farrugia and his associates agreed to form a joint venture corporation, Ayre's Cove Investments Ltd. ("Cove"), to develop the property; 50 per cent of this corporation was to be owned by A & S and 50 per cent by Mr. Farrugia and his colleagues from Montreal. The interests of Mr. Farrugia's group were transferred to Holderness. Each member of the group, or a corporation owned by one of them, held 25 per cent of the shares in Holderness. M.A.F. was a shareholder of Holderness. The Water Street property then was transferred to the joint venture corporation.

Work then began for the development of the property. Mr. Picaud acted as developer and Mr. Wright as architect. Mr. Farrugia played a passive role during the period of February 1980 and in June 1981 plans were projected for the development: architectural plans were drawn, traffic studies were undertaken, experts were hired to prepare retail projections and costs to justify the project, meetings took place with the city council for approval of the development. Discussions with council revolved around zoning and the heritage designation of the property, amongst other things. After seven to eight months of discussions and negotiations the city council approved the development of a ten-storey building having 140,000 square feet of rentable area.

In the meantime efforts were being made to obtain a major tenant for the building. At first the owners directed their attention to the major oil companies such as Gulf Oil and Mobil Oil; they had very little success, said Mr. Farrugia. However the Bank of Nova Scotia, of which the elder Mr. Ayre was on the Board of Directors, was looking for a headquarter building for Newfoundland and indicated an interest. The owners advised the Bank they would receive a favourable rate; the Bank indicated it wanted equity in the property. The owners thought that with the Bank as an owner or tenant they would obtain favourable financing for the project and contemplated the Bank taking a 50 per cent equity interest. As time went on, and after the city had given its approval to the development in 1980, the Bank of Nova Scotia was getting more and more interested and at one point asked the owners, according to Mr. Farrugia, "what it would take to get rid of you". Mr. Farrugia stated that Mr. Pacaud was annoyed at the Bank's attitude but talks continued. In June 1981, when the project was ready to proceed, the Bank offered to purchase the property for $100 per square foot, an amount Mr. Farrugia believes was the highest price then or since offered for land in Newfoundland.

The Ayres and Mr. Farrugia's group accepted the Bank’s offer. The Bank developed the property along the lines originally envisioned. Mr. Wright was retained as architect.

Other Purchases

M.A.F. acquired shares of three other corporations in 1979, 1980 and 1981. These shares are not the subject of this appeal but may be relevant to its disposition. In or about 1979 Mr. Farrugia raised money for a partnership, known as the Bagdhad Limited Partnership, for mining exploration. As the partnership evolved, Mr. Farrugia explained, he put more additional money in the partnership. The assets of the partnership were transferred to a corporation, Dungarvon Resources Ltd. ("Dungarvon"). The appellant's initial investment in Dungarvon was in September 1979.* [3] Additional funds were raised by Dungarvon through a private placement. Mr. Farrugia stated he "went along with colleagues who were more involved with the company" and who ran Dungarvon. His role was passive. He described the investment as one made in "good faith” because of his relationship with the Dungarvon people in other investments. He said he also invested to diversify. Dungarvon was involved in a "reverse take-over", the details of which Mr. Farrugia did not explain, and the "company went public”. Mr. Farrugia testified that subsequently he and the people running Dungarvon "went their separate ways". During the period May to September 1983, M.A.F. sold its shares because Mr. Farrugia thought "nothing would come of the company". The profit on the dispositions was $207,687.

Scovint was a private holding company acquired in 1980 by M.A.F. and two associates of Mr. Farrugia. Scovin was used a vehicle to purchase shares of other companies; for example, Scovin was used to acquire shares in the initial Windsor placement. The company was wound up in 1983 and the appellant incurred a modest loss.

Marlboro Resourcest [4] was a junior oil and gas company which was started up by “friends of friends" of Mr. Farrugia in September 1981. As a result of the National Energy Policy plans were aborted. Some money was returned to the investors. The shares are still retained by the appellant.

Submissions

The appellant submits that the dispositions in 1981 and 1982 of shares in corporations owned by it were on account of capital. On the other hand the respondent has assessed on the basis the disposition was on revenue account.

Counsel for the appellant acknowledged that "the nature of the transaction and the subject property can be strongly indicative of either a business or investment character". Relying on the Supreme Court of Canada decision in Irrigation Industries Ltd. v. M.N.R., [1962] C.T.C. 215; 62 D.T.C. 1131, he argued that “in the case of stock market transactions, it has long been accepted that they do not normally give rise to trading income”. In support of his submission he referred to the following passages of Mr. Justice Martland:

It is difficult to conceive of any case, in which securities are purchased, in which the purchaser does not have at least some intention of disposing of them if their value appreciates to the point where their sale appears to be financially desirable

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 a 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. (pages 219 (D.T.C. 1132-1133))

Corporate shares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise, (pages 221 (D.T.C. 1133-1134))

Mr. Justice Urie of the Federal Court of Canada, Trial Division considered and commented on Mr. Justice Martland's reasons in Wellington Hotel Holdings Limited v. M.N.R., [1973] C.T.C. 473; 73 D.T.C. 5391. In that appeal, as well, counsel had referred to the passage of Mr. Justice Martland at page 221 (D.T.C. 1133-34). Mr. Justice Urie said:

To put the quoted passage in its proper context it is necessary, I think, to examine the issue in the case as defined by Martland, J. At page 349 [217-18, 1132] he states the issue:

The issue in this appeal is as to whether an isolated purchase of shares from the treasury of a corporation and subsequent sale thereof at a profit, not being a part of the business carried on by the purchaser of the shares, or in any way related to it, constitutes an adventure in the nature of trade so as to render such profit liable to income tax.

From the definition of the issue it is quite clear that the circumstances in that case differ substantially from those in the case at bar. This was not an isolated purchase of shares and subsequent sale. It was one of a substantial number of purchases and sales made in one taxation year as part of the business carried on by the purchaser of the shares. In the Irrigation Industries (supra) case the appellant had been largely inactive whereas in this instance the appellant was actively engaged in the hotel and restaurant business and also in the purchase and sale of securities. While the two businesses are not related I do not think that that fact in itself precludes the possibility of the appellant engaging in a business other than its main business. On this basis, therefore, I do not understand Martland, J. to have rejected the possibility that a company can engage in the business of trading in securities notwithstanding that it is not its main business and it is not a securities broker in the accepted sense.

In fact, Martland, J. in writing the judgment for the Supreme Court of Canada in a later case, N.R. Whittai v. M.N.R., [1967] C.T.C. 377; 67 D.T.C. 5264 concluded that the appellant in that case in the acquisition of the securities in question was endeavouring to make a profit from a trade or business, at all material times and, therefore, profits derived from sales were taxable. He found that the exchanges of securities were not a substitution of one form of investment for another. While he did not distinguish his judgment in the Irrigation Industries (supra) case he referred to it in the Whittai (supra) case and by implication I think it must be taken that he agrees that in a given set of circumstances persons or corporations not solely in the securities business who deal in corporate shares can be engaged in an adventure in the nature of a trade within the meaning of paragraph 139(1)(e) of the Income Tax Act. Such being the case, therefore, profits acquired from such trading would be taxable in the hands of the persons or corporations dealing in such shares and, of course, losses incurred would be deductible in computing their taxable income.

The additional facts in evidence upon which I rely to support my view are that the securities bought and sold were speculative in nature, were non-income producing, were held for relatively short periods of time and formed a substantial portion of the total business of the appellant. The fact that it was not part of the main business of the appellant is, in my view as above stated, of no particular significance. The whole course of conduct of the appellant leads inevitably to the conclusion that it is buying and selling securities to make a profit.

I cannot agree with submissions of counsel for the respondent in respect of his reliance on the Irrigation Industries case as supporting his proposition that the losses incurred were capital losses and I have reached the conclusion that the shares in question in this appeal were not investments in the sense referred to in the Irrigation Industries case nor were the changes made in the appellant's portfolio merely changes of one form of investments to another. The purchases were purely speculative and were entered into with the intention of disposing of the stock at a profit as soon as there was reasonable opportunity of so doing.

The following excerpt from the judgment of Cattanach, J. in Admiral Investments Limited v. M.N.R., (supra) at page 319 [175, 5121] succinctly states my views in the case at bar:

What must be looked at is what was done by the appellant with a view to asking the question in Lord President Clyde's words in C.I.R. v. Livingston et al. (11 T.C. 538 at p. 542):

. . . whether the operations involved (in the transactions of the company) are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.

While the appellant was not a trader in securities in the sense of that term that it was an underwriter and held a seat on a stock exchange, but rather made its purchases and sales through a stock exchange in the usual manner, nevertheless, the acts of the appellant were just the ordinary transactions of a person who deals in shares.

Mr. Justice Urie’s comments are relevant to the case at bar.

The shares disposed of by the appellant may be divided into two classes. In the first class are the shares in Olympic, Redford, Rhodes, Hangor, Univex, Coralta, Eastern and Windsor. Holderness shares are in the second class. I accept Mr. Farrugia’s evidence, which was not really challenged, that the Bluesky shares acquisition was made to cancel an error in his account.

The shares in the first class were acquired by M.A.F. as a result of Mr. Farrugia being in a position to cause the appellant to purchase the shares at an opportune moment, for example, through a private placement, and because of personal contacts he made in his work. The shares in these companies were acquired in several instances quickly and without any investigation of any kind, leading me to conclude the appellant was prepared to get rid of these shares if Mr. Farrugia eventually learned anything negative. When his subsequent research indicated the shares ought not to have been purchased, they were sold: Redford, Rhodes, Hangor and Eastern. Mr. Farrugia's evidence was that he invested in companies that had a growth potential but M.A.F. sold the shares of Olympic, Redford, Rhodes, Hangor and Eastern approximately a year after their acquisitions. The appellant also purchased shares at a low price and sold them soon after the corporations were publicly offered: Olympic. Shares were purchased on a "tip" or on the suggestions of friends or friends of friends: Redford, Rhodes, Hangor Univex and Eastern. Mr. Farrugia also caused the appellant to purchase shares in companies operated by a person he did not trust notwithstanding his testimony that he looked at the people operating the companies prior to investing: Redford and Coralta.

While there exist extenuating circumstances in respect of the Windsor shares I find that the purchases and sales of Windsor stock were in fact no different from the other Class I shares. The appellant and Mr. Farrugia invested a substantial amount of money and Mr. Farrugia became the senior employee of Windsor. He became president of Windsor for the purpose of finding a purchaser for its shares. The Windsor shares were sold in September 1981, Mr. Farrugia explained, because of a $400,000 liability and his need to liquidate.

At the end of the day the acquisition of the Windsor shares was similar in nature to the transaction of the other shares in Class I. I cannot find any real distinction between the two.

The activities of M.A.F. in acquiring and disposing of the shares were not acts of an ordinary person dealing in shares. M.A.F. was in the business of trading in shares. The Class I shares were purchased and sold in a consistent pattern as part of M.A.F.'s regular business: Irrigation Industries v. M.N.R.,

[1962] C.T.C. 215; 62 D.T.C. 1131. The shares were in relatively new companies, and there was no evidence that these shares were not speculative. I have no doubt that Mr. Farrugia's intentions, and accordingly that of the appellant, were to acquire the Class I shares for trade. While he has testified the shares were acquired as investments, the whole course of his conduct and that of M.A.F. indicates otherwise; the shares were acquired for resale in the course of a business.

The appellant's participation in Holderness was, in my view, quite different from that in Class I shares. Holderness served as an instrument by M.A.F. and others together with the members of the Ayres family to develop a property for investment purposes. Mr. Farrugia's testimony of his intentions on this portion of the appeal is consistent with the course of conduct of the participants. Each of A & S and Holderness owned 50 per cent of Cove. There is no evidence the Ayres or the members of Mr. Farrugia’s group were traders in land. The proposed development proceeded normally as obstacles were overcome and approval was obtained. The problem that could not be overcome was the eventual insistence of the Bank of Nova Scotia to be owner of the development rather than prime tenant with an equity interest. The owners of the property originally contemplated tenants in the oil and gas exploration business as tenants, but because such tenants were not forthcoming, agreed to deal with the Bank of Nova Scotia. Having a bank as the prime tenant, they believed, would facilitate financing of the project. For the same reason the owners were not reluctant to offer the Bank of Nova Scotia an equity interest. However as time went on the Bank became more aggressive and insisted on total ownership, eventually offering an extremely favourable price for the property. The appellant disposed of its interest in the property by selling its shares of Holderness in July 1981.

The transaction in Holderness shares was not part of M.A.F’s business of trading in stock as were the transactions in Class I shares. The Holderness shares were only indirectly related to the oil and gas activities: Mr. Farrugia recognized the attraction of Newfoundland for an investment as a result of the discoveries in Hibernia. His observation that drilling companies require administrative facilities easily could be observed by others and was not due to his knowledge of the oil and gas business. The Holderness shares were not held by M.A.F. in the course of its business and the profits from the sale were on account of capital.

The appeal for 1981 will therefore be dismissed and the appeal for 1982 will be allowed with costs in accordance with these reasons.

Appeals allowed in part.