Thomas Ough v. Minister of National Revenue, [1987] 2 CTC 2292, 87 DTC 581

Goetz, T.C.J.:—The appellant appeals his tax assessment for his 1978 taxation year. The issue is whether the appellant is liable to pay income gain, capital gain or any tax at all, having not reported any income with respect to the sale of a property known as “Parcel ‘C’ in his 1978 tax return.

Facts

The appellant was the president and owner of Construction & Industrial Specialties Ltd. ("C.I.S."). The Company was engaged in steel fabrication and rented "Parcel ‘C’” from Marathon Realty Company Limited ("Marathon") since 1966. As a result of difficulties with respect to the lease, the appellant's solicitor began negotiations with Marathon for the purpose of buying "Parcel C'". These negotiations resulted in Marathon writing the appellant's solicitor on September 29, 1976, enclosing an offer to purchase "Parcel ‘C’” for $97,500, which document was to be signed by C.I.S. Completion of the transaction was delayed by virtue of the fact that both parties were waiting for a subdivision plan from the City of Saskatoon and also the promise of services to be supplied by the City of Saskatoon.

Meanwhile, during 1977 C.I.S. fell on hard times and on December 28, 1977, the Canadian Imperial Bank of Commerce, ("the bank") bankers for C.I.S., made demand on a debenture in the sum of $300,000, entered into on October 5, 1976. Further, by virtue of such demand, the bank, on December 28, 1977, appointed a receiver. On the same date the bank called upon the appellant, pursuant to a registered assignment dated September 9, 1974, to pay the sum of $212,000 plus interest to the bank.

C.I.S. having gone into receivership, the Receiver and the bank took over control of all operations and employed the appellant to assist them in the realization of assets of C.I.S. Counsel was retained by the bank to act for it, as well as the receiver and the appellant, in closing out the affairs of C.I.S. The bank, according to the manager who gave evidence, "controlled the whole transaction”.

In giving evidence, the appellant's solicitor stated that he had acted for C.I.S. and Mr. Ough for several years and that when the company went into receivership he would be able to act as well for the receiver and the bank.

The appellant learned through a friend employed by Dobrey Management Ltd. ("Dobrey") that Dobrey was interested in buying "Parcel 'C'", having become aware of the receivership. Meanwhile, the appellant's solicitor had in hand an offer to purchase "Parcel 'C'" from C.I.S. to Marathon for $97,500. Mr. Ough advised Dobrey that he did not have title. Nevertheless, on April 10, 1978, the solicitors for Dobrey made a formal offer to purchase “Parcel 'C' for $140,000 cash. This information, upon being conveyed to the receiver as well as to the bank, prompted the bank to finance the transactions between Marathon and C.I.S. and C.I.S. and Dobrey with a view, of course, of recovering a portion of the moneys owing by C.I.S. and guaranteed by Ough. In that there were numerous creditors of C.I.S., on April 13, 1978, after discussions with the appellant, the receiver and the bank, the appellant's solicitor altered the offer to purchase between C.I.S. and Marathon by “whiting out" C.I.S. in the document, both in the heading and in the execution clause, and substituting the name of Thomas Richard Ough, the appellant. On the same day, an agreement for sale of land was executed between Thomas Richard Ough and Dobrey for $140,000.

The bank had strict control of this course of action. It might also be added that Ough's solicitor advised Marathon of the change in name of the purchaser and the reason for such change. In any event, the bank provided the solicitors for Ough with a certified cheque in the amount of $97,500 payable to Marathon which was to be held in trust until the appellant's solicitor received the $140,000 purchase price from Dobrey's solicitors. At one of the meetings it was made clear by Ough's solicitor that the bank would indemnify Mr. Ough for any capital gain tax if exigible. The bank agreed to this. At the same time, on April 13, 1978, the bank had the appellant execute an assignment whereby the end proceeds from the two transactions between Marathon and Ough and between Ough and Dobrey would be held in trust and paid to the bank. Proceeds of such sale between Ough and Dobrey would go towards reducing C.I.S.' debt and Ough's liability under his personal guarantee. Registration of title to "Parcel 'C'" under the name of Ough and under the name of Dobrey did not occur until October 1978, due to survey problems, but the transfers from Marathon to Ough and from Ough to Dobrey were registered together in “dovetail” registrations. All funds were entered into the solicitor's trust ledger under the name of Thomas Richard Ough — C.I.S. Out of the funds held in trust, the bank authorized full payment of the fees for the appellant’s solicitor and any balance remaining was paid to the bank. Included in these funds remitted to the bank was the sum of $3,710.35 as interest earned on the trust fund. The bank retained this amount although Ough's solicitor sent a T-5 slip to the appellant which he had turned over to his accountants in preparing his tax return. The appellant says he never received such funds and does not remember dealing with the T-5 slip at all.

The Canadian Imperial Bank of Commerce realized, on the assets of C.I.S., the profit on the sale from Ough to Dobrey, and then proceeded to absorb all of Ough's personal assets, namely, term deposits, mortage moneys, savings accounts and the cash surrender value of his insurance policies in the amount of approximately $90,000.

Appellant's Position

Counsel for the appellant argued that Ough acted as agent for C.I.S. or the receiver to recoup the bank's loss on its loan to C.I.S. and that such agency did not have to be committed to writing.

Crown's Position

The position of the Crown is that if there was an agency relationship on the part of the appellant it would mean that "Parcel 'C'" would have belonged to C.I.S. or the Canadian Imperial Bank of Commerce. In that C.I.S. had numerous creditors lurking in the wings, the taking of title in the name of Ough precluded the appellant in acting as C.I.S.' agent.

In answer to the possibility that the appellant acted as the bank's agent, counsel argued that the bank had been most meticulous in its security documentation and had the appellant execute an assignment to the bank of his interest in "Parcel 'C'" in April 1978. Counsel maintains oral evidence is not admissible with respect to the purpose and background of the transaction between Ough and Marathon and the agreement for sale between Ough and Dobrey.

Findings

On April 13, 1978, there was executed an offer to purchase between Ough and Marathon and on the same date at the same time Ough signed an agreement for same with Dobrey. These documents shall be referred to as "the transaction”.

The bank was the facilitator in the transaction. It provided the funds to enable Ough to obtain a transfer of "Parcel 'C'" from Marathon and hence to consummate the sale to Dobrey leaving Ough with a “flip over" profit to apply on account of the debt owing by C.I.S. and of course his personal guarantee. In my view, the assignment to the bank of the appellant's interest in the property was for the sole purpose of ensuring that the bank would not lose any of the funds advanced to the appellant and also to ensure that any of the resulting profit would be applied directly to reduce the balance outstanding on the appellant’s personal guarantee.

The evidence does not support the appellant's submission that the appellant was acting as agent for the bank. There is no evidence that the bank or Ough were interested in obtaining beneficial ownership of the property. On the contrary, the Assignment Agreement between the appellant and the bank clearly indicates that the assignment is for the purpose of providing the bank with security for payment. The Assignment Agreement provides, in part, as follows:

WHEREAS the Assignor is indebted to the Assignee and such debt is now due and payable; and

WHEREAS the Assignor wishes to assign his interest in the said land and in the said offer to purchase and in the said agreement to the Assigned as security for payment of such debt.

. . .the Assignor does hereby assign and transfer to the Assignee all the estate, right, title and interest of the Assignor, now existing or arising hereafter, in and to that parcel of land situate in the Province of Saskatchewan and being composed of that portion of the North West Quarter (NW A) of Section Thirty-three (33), Township Thirty-six (36), Range Five (5), West of the Third Meridian, as shown outlined in red on the sketch plan attached hereto as part of Schedule ‘A’, together with all interest of the Assignor in the said offer to purchase, and in the said agreement, to hold the said land and title thereto and to derive benefits therefrom until the said debt owing to the Assignee is paid in full.

THE ASSIGNOR hereby appoints the Assignee his irrevocable attorney for the purpose of conveying the said land to the Purchaser and for the purpose of receiving the proceeds of such sale and applying such sale proceeds to the debt owing by the Assignor to the Assignee. [Emphasis added.]

The agreement quite clearly indicates that the assignment was only to be effective until the debt was paid in full and was for the express purpose of providing security for the debt owed to the bank by C.I.S.

With respect to the issue of whether the profits from the transaction should be taxable as capital gains or income, I cannot accept the appellant's submission that the resulting profits were not income in nature. In the often cited case of Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098, Noël, J. stated:

To give to a transaction which involves the acquisition of capital the double character of also being at the same time an adventure in the nature of trade, the purchaser must have in his mind, at the moment of purchase, the possibility of reselling as an operating motivation for the acquisition; that is to say that he must have had in mind that upon a certain type of circumstances arising he had hopes of being able to resell it at a profit instead of using the thing purchased for purposes of capital.

In the present case the evidence is clear that the acquisition of Marathon's property was with the intention of reselling it immediately for a profit. It is this intention which determines the nature of the transaction and on the basis of the evidence I must conclude that this purchase and resale of property was made in the course of an adventure in the nature of trade.

The appeal is dismissed.

Appeal dismissed.