Pleiad Investments Limited v. Minister of National Revenue, [1977] CTC 2546

The Chairman:—This is the appeal of Pleiad Investments Limited from income tax assessments in respect of the 1969 and 1971 taxation years. By notice of assessment dated May 1, 1974, the respondent added to the appellant’s 1969 income an amount of $195,007.64 as interest received on the redemption of a mortgage. The respondent having taken into account the balance of a 1970 loss adjusted the appellant’s taxable income at $124,810.64. By notices of assessment dated October 23, 1975, the respondent made a minor revision of the appellants net income for 1969 and, applying the 1970 loss, the 1969 taxable income was nil. The 1971 taxation was affected by the respondent’s 1969 revision and having carried forward to 1971 the balance of the 1970 loss, the revised net taxable income for 1971 is $194,264.70. The appellant’s objection to and appeal from the respondent’s assessment arise from the addition to the appellant’s 1969 income of the amount of $195,007.64. However, at the beginning of the hearing, counsel for the respondent referred to legal expenses incurred by the appellant company in the amount of $742.94 and stated that the respondent was prepared to allow these expenses with the result that the amount in issue is $194,264.70.

The appellant company had a nil assessment in the 1969 year and since there can be no appeal from a nil assessment based on the decision in the case of Her Majesty the Queen v Garry Bowl Ltd, [1974] CTC 457; 74 DTC 6401, the 1971 taxation year only is properly under appeal. However, the Board has held on several occasions that where, in a "nil assessment’’ taxation year, losses were incurred which are applicable to another taxation year, such as occurred in the instant appeal, the losses can be completely considered and dealt with during the hearing of an appeal for a subsequent taxation year.

Issue

Counsel for the appellant contends that the payments received in 1969 in consideration of the assignment of its right under a mortgage was a consideration for the disposition of a capital asset; that there was no taxable income in the 1969 fiscal year other than on a capital gain and that the whole of the loss of some $218,000 incurred in 1970 should be applied to the 1971 fiscal year. Counsel for the respondent, on the other hand, submits that the gain realized by the appellant in assigning the mortgage covering the asset was income from a business within the meaning of paragraph 139(1)(e) of the Income Tax Act, RSC 1952, c 148, as amended, and that the Minister properly applied part of the 1970 loss to the 1969 fiscal year and the balance to the 1971 fiscal year.

The issue in this appeal, though more sophisticated than most, is nevertheless what is commonly referred to as a trading case and the facts, as in all such cases, are of prime importance in determining the issue.

At the commencement of the hearing, counsel for the appellant filed with the Board a book of documents containing Exhibit A-1 to Exhibit A-37. Counsel for the respondent accepted, on their face value, all the documents in Exhibit A except the trust agreement dated May 26, 1969 (Exhibit A-20), and a copy of a meeting of the board of directors of Leitrim Investments Co Limited dated November 1, 1968 (Exhibit A-18), and he questioned the dates and the legal effect of the said two documents.

Summary of Facts

Counsel for the appellant called as witness Mr Victor Levy, vice- president of Monder International Ltd who, from the period of 1951 to 1973, was employed as an officer with and for the Cummings family in relation to their various enterprises.

Mr Levy testified that the Cummings’ general business was the acquisition and development of large rental income producing real estate in several cities in Canada. In Ottawa the Cummings properties, prior to the acquisition of a mortgage for the parcel of land on St Laurent Boulevard, included some 510 apartment building units on Richmond Road acquired in or about 1963. The Cummings also owned 50% of Carlingwood Shopping Centre since 1960. Mr Levy stated that it was the policy of the Cummings to have the real estate owned by them held in trust by separate companies.

On October 31, 1968 most of the Cummings properties were amalgamated into a public company which was subsequently purchased by Trizec in 1971. Also on October 31, 1968 the appellant company “Pleiad Investments’’ was incorporated (Exhibit A-1), and was included among the 15 Cummings properties that went public on that day. Two of the Cummings properties mentioned in the pleadings were not included. One was Marlow, a Cummings property whose only asset was the Boulevard Shopping Centre in Montreal East. The other was a company called Leitrim Investments Co Limited whose shares were acquired by the Cummings in the autumn of 1969 and to which reference will later be made.

In early autumn of 1968 a real estate agent by the name of Harasty brought to the officers of the Cummings properties in Montreal a proposition concerning a one million square foot parcel of land on St Laurent Boulevard in the east end of Ottawa. The asking price of the land was $800,000 and there is evidence that the land could have been purchased for $750,000.

The officers of the Cummings properties came to Ottawa and with the assistance of an architect made a physical examination of the said land. The land which had a solid rock base was found to be Suitable for a medium priced rental apartment and townhouse development. For the purposes to which the land was to be used, the Cummings properties officials at that time estimated the land to be worth from $0.50 to $0.55 per square foot.

Another parcel of land of some 700,000 square feet in Vanier in Ottawa east was also considered by the Cummings officials at that time, but the matter was dropped as a result of soil tests which proved to be unsuitable for the proposed development.

When the one million square feet of land on St Laurent Boulevard was brought to the attention of the officers of Cummings properties, they were informed that there was a mortgage against the subject land which was some three years in default.

The Mortgage

The mortgage on the St Laurent Boulevard property was for an amount of $400,000 computed from April 1, 1965, at a rate of interest of 12% and payable on October 1, 1965 (Exhibit A-3). The mortgage was registered on June 23, 1965.

The mortgagor was Dennison Houses Limited and the mortgagees at the time were Samuel Lyon Caplan and Boris Levine of Westmount, Quebec. No payment, either of principal or interest, was made by the mortgagor on October 1, 1965 or thereafter.

On March 22, 1967 Messrs Caplan and Levine assigned their interest in the mortgage to Messrs S L Caplan, N H Caplan and Bruce Moidel (Exhibit A-4).

On May 2, 1967 a writ of foreclosure was issued against Dennison Houses Limited. The amount owing and claimed at that time was $400,000 in principal and $111,270.94 in interest.

On June 12, 1967 Dennison Houses Limited filed a notice of desiring an opportunity to redeem the mortgaged property (Exhibit A-6).

On June 30, 1967 an order of the Supreme Court was obtained directing that all necessary inquiries be made and all accounts be taken before the Master in Toronto so as to determine the amount of money that will be due and payable for principal, interest and costs as of the date of the Master’s report (Exhibit A-7).

On August 29, 1967 Her Majesty the Queen represented by the Treasurer of Ontario filed an application to the Supreme Court to be added as a party defendant claiming an amount of $273.35 in tax arrears as of May 1, 1966 (Exhibit A-9).

On August 30, 1967 upon application of the Treasurer of the Province of Ontario an order was made converting the foreclosure action into a sale action. On that date the Master’s report indicated that the amount owing under the mortgage was $531,084.26.

The Master also found that when the 6-month period would expire on February 29, 1968, the amount owing on the mortgage at that time would be $556,246.74 and an amount of $314.37 would be owing to the Treasurer of Ontario (Exhibit A-11).

On February 27, 1968 the Caplans made a proposal of bankruptcy under the Bankruptcy Act which was ratified by the Court. Mr Peter Lawrence was appointed as trustee and a committee of five inspectors was formed to deal with the Caplan assets (Exhibit A-12).

As of June 27, 1968 the Caplans had not repaid the $556,246.74 due on the mortgage but they did pay $16,500.73 on account of arrears of taxes and also paid to the Treasurer of Ontario $314.37 (Exhibit A-13).

On August 1, 1968 the Supreme Court of Ontario ordered the sale of the mortgaged land (Exhibit A-14), although Dennison Houses Limited was insolvent at that time. No certificate of bankruptcy had been filed on August 31, 1968 (Exhibit A-15).

The Caplans and Moidel, who held the mortgage security, assigned the land to Peter Lawrence, the trustee (Exhibit A-16).

The judgment which had been issued against Dennison Houses Limited on June 30, 1967 was also assigned to Peter Lawrence (Exhibit A-17).

It was at this stage of events in respect of the St Laurent property that the Cummings family in August or September 1968 became interested in the mortgaged land and sent officials of Cummings properties to verify the suitability of the land for the development of apartment buildings and townhouses. The land having been found to be suitable for the proposed project, negotiations with Mr Lawrence were undertaken in the latter part of October 1968, as a result of which an option for the acquisition of the mortgage was made and was accepted by Mr Lawrence on November 1, 1968 (Exhibit A-19).

On November 1, 1968 the amount involved in the mortgaged property was $625,692 including the $16,500.73 paid by the Caplans for taxes. The amount agreed to be paid by the Cummings for the mortgage was $400,000, the amount originally due on the covenant of the mortgage, $10,000 legal fees and $16,500 for tax arrears (above referred to) making a total of $426,500.

For the purpose of holding the option on the mortgage, the shares of an Ontario corporation Leitrim Investments whose only assets were some $200 was purchased in the autumn of 1968 by the Cummings. Robert and Jack Cummings, the principal shareholders of the Cummings properties and Mr Andrew Lapointe were the directors. Exhibit A-18 purports to be minutes of a meeting of the directors of Leitrim Investments Co Limited whereby it was resolved that the option agreement for the acquisition of the mortgage be proceeded with. (Exhibit A-18 is one of the two documents in Exhibit A to which counsel for the respondent objects as to the date and as to what transpired at the meeting.) On November 1, 1968, on signing the option agreement, Leitrim Investments Co Limited paid $10,000 to Mr Lawrence, the trustee.

As I understand it, it was intended that Leitrim Investments Co Limited would hold the option and/or mortgage as agent or trustee for Pletad Investments, the appellant, which was incorporated on October 31, 1968, and which was to also become the owner of Cummings properties in Calgary.

The financing for the purchase of the mortgage through Leitrim Investments Co Limited was dore by Marlow Enterprises, a Cummings property to which reference has already been made and whose only business was the operation of the Boulevard Shopping Centre in Montreal. There is no evidence whatever that Marlow Enterprises was engaged in the business of purchasing or selling mortgages or that it was in the business of lending money. Of the three above named companies only Pleiad was included in the Cummings properties that were amalgamated and went public.

On November 1, 1968 the option was signed by Peter Lawrence and later on November 5, 1968 was approved by the committee of inspectors (Exhibit A-20). On that same day the option was exercised and the amount of $416,500 was paid to Peter Lawrence and all the rights and title to the mortgage were assigned to Leitrim Investments Co Limited (Exhibits A-21, A-24, A-25, A-26 and A-27).

Early in 1969 the Cummings people learned that the shares of Dennison Houses Ltd had been acquired by Wes Nicol, a barrister active in the field of development in Ottawa, the Sussman family and a Mr Grant, from the firm of Zimmerman and Winters (later to be known as Wesmari Holdings Ltd) with the intention of redeeming the mortgage and proceeding with the development of the mortgaged property. Two meetings were held between the Cummings officers and the Nicol-Zimmerman group with a view to making arrangements for a joint development of the land. One meeting was held on February 19, 1969 and the other on March 12, 1969. However, negotiations were not successful and the joint project was dropped. There is some evidence to the effect that at the last meeting, having failed to agree with the Nicol-Zimmerman group on the joint development of the land, Cummings offered to purchase the shares of Dennison Houses Ltd which was refused.

In May of 1969 the Cummings paid an additional $22,601 in accumulated municipal taxes to the City of Ottawa. On May 20, 1969 an order was obtained to change the venue of the proceedings from Toronto to Ottawa (Exhibit A-28), and a notice of change of solicitors was also filed (Exhibit A-31). On May 29 the Master at Ottawa issued an order fixing June 3 as the date at which all necessary directives concerning the sale of the mortgaged land would be given.

The new owners of Dennison Houses Ltd applied for an extension of time from June 3, 1969 to June 15, 1969 to redeem the mortgage. Although Cummings properties opposed the application for an extension of time, the extension was nevertheless granted by the Court on payment by Wesman Holdings (Dennison) of $50,000.

On July 25, 1969 an additional amount of $648,117.84 was paid by Wesman Holdings making a total payment of $698,117.84. Leitrim Investments Co Limited who held the mortgage in trust for Pleiad Investments, the appellant, directed that the payment be made to Pleiad Investments (Exhibit A-36). On the same day Dennison Houses Ltd directed Leitrim Investments to assign the mortgage to Wesman Holdings (Exhibit A-35 and Exhibit A-37).

As a result Pleiad received an amount of $698,117.84 for assigning to Wesman Holdings Ltd the mortgage for which an amount of some $416,000 had been paid by Leitrim Investments. Deducting expenses which were allowed by the respondent, the amount of the gain which is in issue is $194,264.70.

Counsel for the appellant contends that the evidence adduced, taken as a whole, clearly establishes that the only intention the Cummings had in making an option and subsequently purchasing the mortgage was to acquire the land and proceed with the construction of a multiple unit and townhouse development which was in keeping with the Cummings’ already established businesses of building, leasing and operating income-producing properties in several cities in Canada including Ottawa. Counsel holds that the possession of the mortgage on behalf of Pleiad was for Pleiad a capital asset and that the gain realized by Pleiad when the mortgage was redeemed was capital in nature.

Counsel for the respondent, on the other hand, contends that the mortgage and the purpose for which it was acquired was purely speculative. Although counsel for the respondent admits that according to the evidence the appellant intended to acquire the land using the mortgage as a means of doing so, he contends that the mortgage was speculative property until the time Wesman paid $50,000 to the appellant, having been granted by the Court an extension of time to redeem the mortgage. The respondent’s first submission is that the mortgage having been acquired as speculative property the gain on the disposition of the property is income from a venture in the nature of trade and taxable. In support of his first Submission, counsel for the respondent cited Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270.

The respondent’s second and alternative submission is that from the evidence it is reasonable to infer that there was an awareness on the part of the appellant company of a possibility of a gain on the sale or redemption of the mortgage and he contends that they had a secondary intention in acquiring the mortgage. The case of Racine, Demers and Nolin v MNR, [1965] CTC 150; 65 DTC 5098, was referred to in connection with the secondary intention argument.

The respondent’s third submission is that the appellant, through Leitrim Investments Co Limited, acquired the mortgage on May 26, 1969, and that there is no valid evidence that a trust existed as of November 1, 1968 by which Leitrim Investments could hold the mortgage in trust for the appellant. Counsel for the respondent concludes that as of May 26, 1969 when the appellant company, through Leitrim Investments, did in fact and in law hold the mortgage, it was evidently aware of the possibility of realizing a gain on the redemption of the mortgage and hence had a secondary intention in acquiring the mortgage. In respect to the validity of the trust agreement of November 1, 1968, counsel for the respondent referred to the cases of Ablan Leon (1964) Ltd v MNR, [1976] CTC 506; 76 DTC 6280; Amelia Rose v MNR, [1973] CTC 74; 73 DTC 5083; Kingsdale Securities Co Limited v MNR, [1975] CTC 10; 74 DTC 6674; Williams v Commissioner of Inland Revenue, [1964] NZLR 996; Permanent Trustee Co v Scales (1930), 30 SR (NSW) 391.

On the basis of the rather complete documents produced by the appellant, all of which were accepted by the respondent, save a copy of minutes dated November 1, 1968 purporting to authorize Leitrim Investments to acquire and hold the mortgage for the appellant company, and taking into account the testimony of Mr Levy, a credible witness who was very knowledgeable as to the operations and policies of the Cummings properties at the pertinent time and the nature of the Cummings’ general business of developing and holding incomeproducing properties in several cities and in Ottawa, it seems quite clear on the facts of this appeal that the primary intention of the Cummings was to acquire the St Laurent Boulevard land for the purpose of developing apartment buildings and townhouses on the site. What, in my view, is in issue is the manner in which the appellant proceeded in its attempt to acquire the land.

Before turning to the questions as to whether the acquisition of the mortgage was in itself speculative and whether the document signed on November 1, 1968 constituted a valid trust agreement, I will first deal with the question of secondary intention.

It is on record that the subject land was brought to the Cummings’ attention in late summer of 1968; that it was visited by the Cummings and found to be suitable for their project. The Cummings’ evaluation of the land was between $0.50 and $0.55 a square foot. It was known by the Cummings that the land was mortgaged; that it was listed with E N Rhodes and Sons Limited at $850,000 but that it could be purchased for $750,000. However, no written offers were received for the purchase of the property (Exhibit R-1). Both these prices were considered by the Cummings to be uneconomical for their proposed development. There is on file a memo dated November 27, 1968 (Exhibit A-39), describing a meeting between Mr Levy and Mr Seaby, employees of Cummings and officials of Central Mortgage and Housing Corporation, the purpose of which was to inquire into the market demand for apartment buildings on the St Laurent Boulevard site and was found to be an attractive market. Rather than purchasing the land at the listed price of some $750,000 as counsel for the respondent suggested the appellant could have done, the Cummings decided as a means of acquiring the land at a price more consistent with their evaluation of the land to purchase the mortgage from Peter A Lawrence, the trustee in bankruptcy to whom the mortgage on the land had been assigned. For that purpose the shares of Leitrim Investments Co Limited were purchased by the Cummings in autumn of 1968 as a vehicle to acquire and hold the mortgage.

The uncontradicted evidence is that up until December 5, 1968, when the amount of $416,500 was paid by Leitrim Investments for the mortgage, there were no indications and/or rumours that the mortgage could or would be redeemed. It was only in early 1969 that the Cummings heard that the Wesman group had purchased the shares of Dennison Houses and sought to redeem the mortgage.

On June 3, 1969 on payment of $50,000 the time in which the subject mortgage could be redeemed was extended (Exhibit A-33). In June the balance of $648,117.84 was paid and by direction of Leitrim Investments the total amount paid for the redemption of the mortgage was paid to the appellant company and the mortgage was assigned to Wesman in July 1969.

On the basis of these facts it appears to me that at the time the option was made by Leitrim Investments and the mortgage acquired on December 5, 1968 the circumstances were such that the Cummings, as specifically stated by Mr Levy in his testimony, had no intention of selling the mortgage. In view of the fact that no payments had been made on the mortgage; that no offers had been received by Dennison Houses Limited for the purchase of the land: and the fact of the Caplan bankruptcy, eliminates the probability that the resale or redemption of the mortgage could have been a motivating factor for the Cummings in acquiring the mortgage in 1968. I am therefore satisfied on the basis of all the evidence adduced that the only intention the Cummings had in acquiring the mortgage was to obtain the land at a price which they considered to be economically sound for the development of their project.

It is pertinent to the secondary intention issue that the Cummings did not put the mortgage on the land for resale, it was in fact redeemed by Wesman after the Cummings had objected to the extension of the redemption period. The redemption of the mortgage by Wesman after so many years of accumulated interests which brought the purchase price higher than the independently estimated value of the land (Exhibit A-38) was unexpected and there is no evidence that the redemption could have been foreseen at the time the Cummings acquired the mortgage.

Closely related to the secondary intention argument is the respondent’s objection to Exhibit A-18, a copy of minutes of its directors dated November 1, 1968, authorizing Leitrim Investments to hold the mortgage in trust for the appellant. Counsel for the respondent con tends that the meeting was not held and that the appellant first acquired the mortgage as the result of a trust agreement signed on May 26, 1969 (Exhibit A-30), at which time the redemption of the mortgage by Wesman was certain.

For the Board to accept that the meeting of the directors of Leitrim Investments was not held on November 1, 1968 and that the Cummings did not intend in November and December 1968 that Leitrim Investments acquire the mortgage for the appellant, the Board would have to ignore the existence of Exhibit A-18, which is signed by Robert Cummings, Jack Cummings and Andrew Lapointe, the directors of Leitrim Investments. The Board would have to disregard the fact that the shares of Leitrim Investments were purchased in September 1968; it would have to ignore the testimony of Mr Levy who stated categorically that the Leitrim shares were purchased for the purpose of holding the mortgage for the appellant and that such was the Cummings’ intention from the beginning; it would also have to overlook the fact that Leitrim Investments, in fact, purchased the mortgage in December 1968. It is also to be noted that the trust agreement dated May 26, 1969 (Exhibit A-30, page 2) contains the following clause:

NOW THIS INDENTURE WITNESSETH that in consideration of the said Agreement and the premises the Trustee hereby declares for itself ana its successors and assigns that the said Mortgage, lands and the monies thereby secured, and the Judgment acquired by it as aforesaid was acquired and has been in trust for and on behalf of the Benificiary .. .* [1]

The minutes, the correspondence and the memos filed with the Board as Exhibits R-5, R-6, R-7, R-8, R-9 and R-13 though they deal after the May 26, 1969 trust agreement with various aspects concerning the mortgage, de not, in my opinion, warrant, as suggested by the respondent, setting aside the credible evidence that the intention of the Cummings pr»cr to and during December 1968 was to have Leitrim Investments Co Limited acquire and hold the mortgage for the appellant nor is there any valid evidence that the meeting of the directors of Leitrim Investments was not held on November 1, 1968.

The question now is whether, under the circumstances, Leitrim Investments did in fact and in law hold the mortgage as trustee for the appellant as of December 5, 1968, or whether the said trust was created only on May 26, 1969 at the time a formal trust agreement was signed.

Counsel for the respondent suggests that the meeting at which resolution passed by the directors of Leitrim Investments on November 1, 1968 was not held and that even if it had been held it did not constitute a trust. Counsel, basing himself on the case of Kingsdale Securities Co Limited (supra) and the Ablan Leon (supra) case, contends that the appellant cannot apply the May 26, 1969 trust agreement retroactively to December 1968, and also that there was no certainty as to the property to be held in trust at that time.

The evidence is that the Cummings had negotiated with Mr Lawrence concerning the purchase of the mortgage in the autumn of 1968, and had in fact acquired through Leitrim Investments an option on the mortgage on November 1, 1968 on payment of $10,000 and acquired the mortgage on December 5, 1968 on the payment of $416,500 in accordance with the resolution passed by the directors of Leitrim on November 1, 1968. Under the circumstances the resolution of November 1, 1968, which in my view is sufficiently clear, is more than a statement of intention to create a trust at some future time in which the subject matter is uncertain. The option was acquired on the same day and the mortgage four days later.

Although the formal trust agreement may have been signed on May 26, 1969, I am of the opinion that on the basis of the resolution passed by the directors of Leitrim Investments on November 1, 1968 (Exhibit A-18), the trust existed and was valid and binding as of that date and that both the option and the mortgage were acquired by Leitrim Investments on behalf of the appellant. I need not therefore comment on the respondent’s argument dealing with the retroactivity of trusts.

Whether Leitrim Investments paid for the mortgage and related disbursements by means of inter-corporate financing or by loans from independent loaning establishments is not material to the issue and in my view does not affect the validity of the trust.

However, counsel for the respondent’s principal submission is that because of the purpose for which it was acquired the mortgage on the St Laurent Boulevard was speculative property and that though it may have been capital property the mortgage was not acquired to hold as an investment asset but was acquired to obtain the land. Counsel contends that the gain realized on the sale of speculative property is income from a venture in the nature of trade and taxable.

Counsel for the respondent, although he did not define what “speculative property’’ was, cited the decision of the Supreme Court of Canada in Regal Heights Limited v MNR (supra) in support of his contention and suggested that the facts in that case are similar to the facts in the instant appeal.

Although some of the facts before us may be similar to some facts in the Regal Heights Limited case there are other facts which in my view are fundamentally different from those of Regal Heights Limited.

In the Regal Heights Limited case (supra) the speculative aspect of the venture to which Mr Justice Judson referred was not so much in respect of the acquisition of the land but rather with reference to the use Regal Heights Limited attempted to make of the land, viz, a shopping centre.

At page 906 [389-90, 1272] Mr Justice Judson states:

These efforts were all of a promotional character. The establishment of a regional shopping centre was always dependent upon the negotiation of a lease with a major department store. There is no evidence that any such store did anything more than listen to the promoters’ ideas. There is, understandably, no evidence of any intention on the part of these promoters to build regardless of the outcome of these negotiations. There is no evidence that these promoters had any assurance when they entered upon this venture that they could interest any such department store. Their venture was entirely speculative. If it failed, the property was a valuable property, as is proved from the proceeds of the sales that they made. There is ample evidence to support the finding of the learned trial judge that this was an undertaking or venture in the nature of trade, a speculation in vacant land. These promoters were hopeful of putting the land to one use but that hope was not realized. They then sold at a substantial profit and that profit, in my opinion, is income and subject to taxation.

In the instant appeal there is no evidence of speculation in vacant land. The use to which the land would be put was predetermined. The land was to be used for the development of apartment buildings and townhouses comparable to other rental income producing properties already held by the Cummings in Ottawa. The Cummings were seeking land in the east end of Ottawa for a specific project and the Spooner land as well as the St Laurent land were considered by the Cummings for their project. There was, in my opinion, no question nor any speculation as to what the Cummings would do with the land once acquired. Nor, on the basis of the evidence was there any secondary intention of selling the mortgage or the land. In the Regal Heights Limited case the Trial Division of the Federal Court of Canada found that there existed a secondary intention and that finding was reflected in the Supreme Court decision. In Regal Heights Limited the land was in fact sold by the owners. In the present instance the Cummings had no alternative but to accept the payment when the mortgage was redeemed by Wesman.

Counsel for the respondent contends that the purchase of the mortgage for the purpose of acquiring the land was the acquisition of speculative property and automatically constitutes a venture in the nature of trade. In my opinion, the option and the mortgage on the land were capital assets and are not in themselves speculative property. The speculative nature of the mortgage depends, in my view, on the intention for which it was acquired. Had the mortgage been purchased for resale or with a view to acquiring the land but with a secondary intention of selling the mortgage if things didn't turn out, then the acquisition of the mortgage would have been speculative. However, the evidence does not support this proposition. The Cummings had estimated the value of land to be somewhere between $500,000-$550,000. The decision not to pay the asking price of $750,000 for the land but to acquire the mortgage on the land at a lower price, considered by the Cummings as being economical for their project, was a business decision which, in my view, they had every right to make. The transaction of acquiring the mortgage so as to obtain the land and proceed with a predetermined development was, in my view, Capital in nature.

In my opinion, there was no speculation in the acquisition of the mortgage and no secondary intention of selling the mortgage. The purpose for which the mortgage was acquired was to obtain the land and proceed with the development of the project. The redemption of the mortgage was not only unexpected but was beyond the control of the Cummings. The facts in the instant appeal are substantially different from those of Regal Heights Limited and, in my opinion, the decision in that case does not apply to the facts presently before the Board.

I conclude therefore that the gain realized on the redemption of the mortgage was a Capital gain and not taxable as such.

For these reasons the appeal is allowed and the matter referred back to the Minister for reconsideration and reassessment.

Appeal allowed.