Stephen S Steeves v. Her Majesty the Queen, [1977] CTC 325

Urie, J (concurred in by Ryan, J and Kerr, DJ):—This is an appeal from a judgment of the Trial Division dismissing with costs the appellant’s appeal from assessments in respect of his 1968, 1969, 1970 and 1971 taxation years. The respondent, in the assessments in issue, had included in the appellant’s income the sums of $4,000 in 1968, $31,500 in 1969, $12,000 in 1970 and $12,000 in 1971 as income from a venture in the nature of trade within the meaning of sections 3, 4 and paragraph 139(1 )(e) of the Income Tax Act, RSC 1952, c 148 (prior to the amendments by section 1 of SC 1970-71-72, c 63).

Very briefly the salient facts are these. The plaintiff, one of two brothers engaged in the road construction business in New Brunswick, with his brother and three residents of Newfoundland, caused a company to be incorporated, a company known as Goodyear Paving Limited (hereinafter called “Paving”) to engage in the road paving business in Newfoundland. From the date of its incorporation in 1959 to the material date herein of April 2, 1964, the company incurred substantial financial losses in its operations due principally, the learned trial judge found, to the inept management of the Newfoundland shareholders who, by agreement, had the responsibility for the day-to-day management of the company and who, between them, owned 50% of its issued common shares. The other 50% were owned by the Steeves brothers. As a result by an agreement dated April 2, 1964 the plaintiff and his brother Winston A Steeves purchased all of the shareholdings of the Newfoundland group in consideration of the Steeves brothers assuming all company debts, including personal guarantees, to the exoneration of the Newfoundland group plus the sum of $1 for each of their respective shares of the company.

The Newfoundland group also agreed that book debts owing by Paving to J Goodyear & Sons Ltd and Goodyear Construction Co Ltd, companies which they controlled, be assigned to the Steeves brothers. These aggregated $620,633.13 and the agreed consideration for the assignment was $70,000.

The Steeves brothers, during the next few years succeeded in turning around the fortunes of Paving, and by the summer of 1967 all outstanding, unsecured liabilities to outside creditors had been paid. In addition, prior to March 31, 1966 the appellant and his brother received a total of $70,000 from Paving pursuant to the assignments of book debts, that is, an amount equivalent to the sum expended for such assignments. Then in each of the years 1968 through 1971 the sums above referred to, which were the subject of the assessments appealed, were paid to the appellant and his brother by Paving.

Stripped to its essentials, it is the appellant’s contention that the purchase of the book debts as part of the purchase of the interest of the Newfoundland group in Paving, necessitated as it was by the dire financial plight of that company, which in turn, by reason of the guarantees made by the appellant and his brother as well as the companies they controlled, threatened their economic well-being, was capital in nature and not income from a profit-making scheme. This argument in its various forms was made before the learned trial judge who, having reviewed the evidence carefully, concluded [p 476] that:

. . . the transaction cannot be characterized as a separate investment in Capital made by the two plaintiffs independently from their other ventures. They are road builders and they purchased road-building debts, debts incurred by Paving while they owned half the shares and repaid by the same company while they owned all the shares. The purchase of these book debts was not a separate investment in a different field but a transaction which was very much part and parcel of a profit-making scheme, building and paving roads in a businesslike, efficient manner.

He held, therefore, that the amounts included in income by the Minister were properly included.

There was ample evidence upon which he could have so found and, in my opinion, we ought not to disturb this finding. Supportive of his conclusion, it should be pointed out that neither the form of the transaction nor its substance lend credence to the appellant’s view thereof. The agreement of April 2, 1964 between the Newfoundland group as vendors and the Steeves brothers as purchasers was for the sale of the vendors’ 100 common shares of Paving to the purchasers for the sum of $100. In other words, for a nominal consideration.

The assignments, on the other hand, while dated the same day as the main agreement, were made by J Goodyear & Sons Limited and Goodyear Construction Limited as assignors and the Steeves brothers as assignees and were each for a substantial consideration, aggregating $70,000 for debts having a face value of $620,633.13.

Paragraph 5(g) of the main agreement reads as follows:

That the Vendors shall forthwith cause J Goodyear & Sons Limited and Goodyear Construction Company Limited to sell, transfer and assign all their book debts, including both current and equipment accounts, against Goodyear Paving Limited, to the Purchasers herein in accordance with the terms and conditions of certain Assignment of Debt Agreements bearing even date herewith.

This clause, when read in conjunction with the assignments, in my view clearly indicates that while the purchase of the book debts was certainly an essential part of the overall plan to save Paving, in order to preclude the possibility of payment thereof being demanded of Paving by the assignors, the transaction was structured in the fashion in which it was to achieve a desired purpose. That purpose was succinctly characterized in the following passage from his reasons for judgment [p 475]:

There is no evidence that plaintiffs ever purchased book debts before. They obviously did so on this occasion because it seemed to them to offer rewarding possibilities. If the Paving venture turned sour they would lose $70,000 more, but if everything went well, they could reap over $600,000, perhaps tax free. It was a calculated risk based on self-confidence.

Having seen and heard the witnesses and having before him all relevant documentary evidence, particularly the sale agreement and the assignments, there was, in my opinion, ample support for the findings of the learned trial judge.

Accordingly, for all of the above reasons, I would dismiss the appeal with costs.