Delmer
E
Taylor
(orally:
October
18,
1977):—These
are
the
appeals
of
Ben
Medjuck
for
the
1972
and
1973
taxation
years;
of
Roderick
C
Nolan
for
the
1973
and
1974
taxation
years;
of
Robert
D
Neill
for
the
1973
and
1974
taxation
years;
of
James
L
Griesbach
for
the
1973
taxation
year;
of
John
D
Devlin
for
the
1973
taxation
year;
and
of
Harold
C
Gunter
for
the
1973
and
1974
taxation
years.
All
appeals
have
been
heard
on
common
evidence.
One
statement
appearing
in
all
of
the
Minister’s
replies
to
the
notice
of
appeal
is
as
follows:
The
appellant
did
not
elect
in
a
manner
prescribed
by
section
26(7)
of
the
Income
Tax
Application
Rules,
1971
to
have
the
cost
of
his
capital
property
owned
by
him
on
December
31,
1971
deemed
to
be
its
fair
market
value
on
Valuation
Day.
Counsel
for
the
Minister
has
during
the
hearing
informed
the
Board
that
appellants
Gunter
and
Devlin
did
file
such
an
election
with
the
Minister.
That
is
noted,
and
whatever
responsibility
for
adjustments
may
result
therefrom
has
been
accepted
by
counsel
for
the
Minister.
Other
than
that,
the
Board
makes
no
reference
to
the
same
quotations
in
the
other
appellants’
statements.
The
appeals
concern
a
disallowance
by
the
Minister
of
National
Revenue
of
amounts
treated
as
capital
losses
and
deducted
by
the
appellants
in
compiling
their
taxable
income
for
the.
years
cited
for
each
one
respectively.
Fundy
Forests
Industries
Limited,
which
shall
be
referred
to
as
“Fundy”,
was
incorporated
in
New
Brunswick
in
1969
for
the
purpose
of
development,
construction
and
operation
of
a
pulp
mill
at
St
George,
New
Brunswick.
The
complicated
process
of
financing
and
organizing
the
company
has
been
described
to
the
Board
through
two
witnesses,
both
of
whom
had
been
shareholders—one
the
president
and
the
other
the
vice-president.
After
organization
and
development,
by
mid-
1971
the
company
was
in
production,
with
assets
of
some
$16,000,000.
Part
of
the
financing,
about
$1,937,000
came
from
the
issue
of
8
/2%
subordinated
debentures;
and
some
$63,000
came
from
the
issue
of
no
par
value
common
shares
at
10
cents
per
share.
On
April
28,
1972
an
interim
Receiver
in
Bankruptcy
was
appointed
by
the
two
major
creditors,
the
Province
of
New
Brunswick
and
Northwood
Mills
Limited.
There
is
only
one
question
to
be
determined—was
there
any
value
attributable
to
the
8
/2%
subordinated
debentures,
or
the
common
shares
of
the
company
as
at
December
31,
1971
?
A
business
evaluator,
a
witness
for
the
respondent,
presented
the
supporting
evidence
for
the
major
assumption
made
by
the
Minister
in
the
assessments
in
question
that
there
was
no
value
to
securities
in
Fundy
held
by
the
appellants
as
at
that
date.
The
position
of
the
agent
for
the
appellants,
as
he
pointed
out
in
argument,
was
on
two
major
points.
First,
that
the
Minister’s
position
was
based
on
information
largely
prepared
in
March
of
1972
(the
financial
statements
of
the
company),
and
some
further
information
related
to
the
eventual
bankruptcy
of
Fundy.
Such
retrospection,
in
his
view,
should
not
be
permitted.
Secondly,
that
the
evaluator
for
the
Minister
had
used
as
criteria
mature
industries
already
stable
and
in
production,
and
had
not
dealt
with
ones
just
starting
up
or
looking
ahead,
as
had
been
the
case
with
Fundy.
It
seems
to
me
that
the
position
of
the
agent
for
the
appellants,
as
cited
by
these
two
points,
represents
a
contradiction
in
logic.
In
his
presentation
he
has
indicated
that
the
Board
should
look
at
the
future
possibilities
ahead
for
this
company
but
should
not
permit
the
Minister
to
look
at
relevant
data
produced
after
the
significant
date
(December
31,
1971).
Whether
either
retrospection
or
a
view
of
the
future
should
be
acceptable
might
well
be
argued,
but
one
could
hardly
suggest
that
the
one
be
eliminated
and
the
other
allowed.
If
one
of
these
had
to
be
selected
and
used
for
some
reason,
it
might
well
be
argued
that
retrospection
provided
a
somewhat
more
stable
base.
However,
I
will
only
deal
with
the
situation
as
I
am
able
to
determine
it
from
the
evidence
at
December
31,
1971,
and
I
will
leave
both
future
and
retrospective
views
untouched.
The
Board
would
like
to
refer
to
a
major
quotation
given
in
argument
by
the
agent
for
the
appellants:
New
ventures
offer
the
investors
the
opportunity
to
make
sizeable
capital
gains,
and
hence
provide
opportunity
for
considerable
capital
appreciation.
Taking
some
liberty,
I
should
like
to
paraphrase
that—“New
ventures
offer
investors
the
opportunity
to
incur
sizeable
capital
losses
and
hence
provide
the
occasion
for
considerable
capital
depreciation"
(italics
mine).
I
won’t
refer
to
anything
else
in
the
agent’s
argument
since,
in
my
view,
no
comments
or
further
analysis
is
warranted.
It
would
be
of
little
value
for
me
to
review
in
any
depth
all
the
information
or
argument
presented
for
the
appellants
over
the
last
two
days.
The
attempt
put
forward
by
the
appellants
to
support
the
view
that
the
shares
and
subordinated
debentures
had
any
value
appears
to
me
to
be
based
on
three
assumptions:
(1)
that
the
internal
reports
prepared
by
the
management
during
and
just
prior
to
December
31,
1971
were
very
optimistic;
(2)
that
the
commitment
of
Northwood
Industries
to
provide
a
$2
/z
million
guarantee
for
banking
accommodations
solved
the
working
capital
problem
and
demonstrated
great
faith
and
confidence
in
Fundy;
and
(3)
that
there
actually
existed
a
contributed
surplus
of
some
$3
million
arising
from
government
grants
as
shown
under
shareholders’
equity
on
the
company
balance
sheet.
Dealing
with
the
first
assumption,
the
Board
points
out
that
it
is
difficult
to
accept
that
management
could
have
been
unaware
of
the
overwhelming
financial
and
operational
problems
which
surrounded
Fundy
and
beset
its
every
move.
The
evidence,
however,
does
indicate
that
the
management,
including
the
board
of
directors
with
few
exceptions,
was
not
composed
of
men
experienced
in
and
intimately
familiar
with
the
pulp
and
paper
industry
on
a
direct
functioning
level.
Whatever
may
have
been
the
reasons
for
the
perspective
put
forward
by
management,
and
apparently
still
held
today
that
the
worst
period
had
passed
by
December
31,
1971,
and
the
future
looked
bright,
such
an
outlook
was
not
warranted
by
the
deteriorating
conditions
and
the
visible
results.
On
the
second
assumption,
the
Board
cannot
speculate
on
the
rationale
behind
the
guaranteed
financing
provided
by
Northwood,
but
it
must
be
regarded
as
significant
that
the
arrangement
concluded
with
Fundy
provided
a
route
by
which
Northwood
could
end
up
with
control
of
Fundy,
thereby
at
least
allowing
for
maximum
leverage
in
the
future
for
Northwood
to
either
cut
its
own
losses,
or
perhaps
recover
some
of
its
already
committed
investment.
There
is
no
basis
for
the
view
that
this
guaranteed
commitment
by
Northwood
represented
an
objective
and.
unbiased
confidence
in
Fundy,
thereby
giving
value
of
any
kind
to
the
Fundy
common
shares
at
that
time.
Concerning
the
third
assumption,
the
site
location
grant
from
the
Province
of
New
Brunswick
in
the
amount
of
$3,000,000
and
the
federal
incentive
grant
of
$2,741,053
were
shown
as
part
of
surplus
in
the
shareholders’
equity
section
of
the
financial
statements
on
several
occasions.
It
is
possible
that
this
created
the
-..illusion
to
the
shareholders
that
this
total
amount
of
some
$5,741,053
could
be
used
to
offset
operating
losses.
But
there
is
nothing
in
the
provisions
in
these
grants
or
the
restrictions
attached
to
them
which
could
be
read
or
understood
in
that
way.
The
appellants
have
failed
to
establish
that
any
value
at
all
should
be
attributed
to
the
common
shares
at
December
31,
1971,
even
the
10
cents
per
share
paid,
let
alone
one
amount
suggested,
of
$5
per
share.
The
losses
of
the
company
during
its
short
operation,
some
$3,000,000,
more
than
used
up
the
funds
made
available
by
the
shareholders
through
the
issue
of
the
subordinated
debentures,
and
these
debentures
were
not
secured
or
guaranteed
in
any
way.
The
Board
accepts
the
evidence
supplied
by
the
business
evaluator
for
the
Minister
and
the
appeals
are
dismissed.
Appeals
dismissed.
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