Daniel L Marcus v. Her Majesty the Queen, [1974] CTC 435

Heald, J:—This is an appeal from income tax reassessments by the defendant of the plaintiff’s income tax returns for the years 1965, 1966, 1967 and 1968. By said reassessments, the defendant added to the plaintiff’s income the sum of $80,955.81, particulars of which are as follows:

for the 1965 taxation year — $27,120.00

These additions to income result from the purchase and sale by the plaintiff of 6% income debentures and common shares of Camflo Mattagami Mines Ltd (hereafter Camflo).

The plaintiff, a resident of Ottawa, is 48 years old. At the present time he is the president of a mining company engaged in the production of silver, zinc, lead and copper in Quebec. From 1942 to 1962, he was continuously engaged on a full time basis with the Royal Canadian Navy. In 1962, he accepted full time employment at Ottawa as a commission salesman with Nesbitt Thomson and Company Limited, one of the larger Canadian firms of stockbrokers and was duly licensed as a securities salesman under the provisions of the Ontario Securities Act. He left the employ of Nesbitt Thomson in November of 1965 to join West Indies Plantations, a public company whose shares were listed on the Toronto Stock Exchange. The major activity of that company was land development in the West Indies. The plaintiff became president of this company in 1966 and continued with said company until the fall of 1968 when he left to become Executive Vice- President of Consolidated Canadian Faraday, another mining company, engaged in the production of uranium, nickel and copper. He remained with that company for two years when he left to assume his present position.

The transactions in issue in this action took place while the plaintiff was a securities salesman in the employ of Nesbitt Thomson. In that employment he was what is called in the trade a “customer’s man”. It was his function to counsel customers on the purchase and sale of securities and to assist them in completing said transactions through his employer’s facilities. He was paid for his services by a rather modest guaranteed salary plus a commission, the commission being a percentage of the brokerage fees earned by Nesbitt Thomson on the business initiated by the plaintiff. The fact that he was a successful securities salesman is attested to by his earned income from salaries and commissions during this employment. In 1963, his salary and commissions were over $24,000, in 1964, over $28,000 and for less than a full year in 1965, over $32,000. The plaintiff was not, at any time, an officer, director or shareholder of Nesbitt Thomson.

The plaintiff testified that during his years in the Navy, he did acquire a modest number of Canada Savings Bonds, a few corporate bonds and some common shares of two or three companies. He estimated the value of his investment portfolio when he retired from the Navy in 1962 to be approximately $15,000 to $20,000. Additionally, in the years 1956, 1957 and 1958 he invested in an insurance business in Victoria, BC, where he was stationed at the time, and from which he received an annual income of approximately $3,000. His tax returns for the years 1965 to 1969 show dividends on investments ranging from approximately $1,000 to $4,000. However, the returns from and after 1970 show very little in the way of interest or dividends on investment. The reason for this was that in 1969 he invested to the extent of some $100,000 in a private electronic systems company which venture was unsuccessful, the company going into bankruptcy. This unfortunate venture wiped out his savings and left him with a substantial indebtedness to his bank.

In May of 1963, the plaintiff became interested in the activities of Camflo, initially due to the fact that over a two to three week period one of his customers purchased some 50,000 common shares of Camflo. This customer asked the plaintiff to make an investigation as to the future prospects of Camflo. The plaintiff talked to Camflo’s president in Ottawa, discussed Camflo’s prospects with Nesbitt Thomson’s senior mining analyst and then, in June of 1963, visited Camflo’s mine near Val d’Or, Quebec. While at the mining site, he had discussions with mining geologists and company officers. He said that the construction of the mine was well advanced, considerable diamond drilling had been done and it was evident that the mine contained a fairly sizeable ore body. The sinking of the shaft had not commenced but the location thereof had been determined. During this visit to the mine, the plaintiff formed a favourable impression of Camflo’s management team on the site.

The plaintiff returned to the mine site for another inspection and investigation visit during the fall of 1963. By this time the sinking of the shaft had commenced. This visit convinced him even more than had his visit in May that Camflo possessed huge economic ore bodies which would be comparatively inexpensive to extract. As a result of his own investigations, his conclusion was that Camflo would be a good investment for those of his clients who were not in need of current income. Accordingly he recommended the purchase of Camflo shares to his clients (many of whom were old friends from his days in the Navy) and many of these clients, acting on his recommendation, purchased Camflo shares. In April of 1964, he himself purchased some 45,000 escrowed Camflo shares at 50¢ per share (roughly one-half the market value at that time) from one of the original vendors of Camflo. 5,625 of said escrowed shares were released in August of 1964, a further 8,300 were released in February of 1965 and the balance of 31,075 were released in April of 1966. Plaintiff sold all of these shares in 1966 the first two lots totalling 13,925 some time prior to April of 1966 and the balance of 31,075 between April 1966 and December 1966. The plaintiff derived a substantial profit from this transaction in escrow shares. The exact amount of his profit was not established in evidence. However, there was evidence to the effect that the market price of Camflo shares in 1965 and 1966 ranged from $2.85 to $3.85 per share. Camflo proved to be a most successful venture and is now one of Canada’s leading gold producers. In thé last few years, the market price of its shares has risen to as high as $23 and is presently trading in the $13 to $14 range.

Probably in late May or early June of 1964, the president of Camflo asked the plaintiff whether Nesbitt Thomson would be interested in handling a 1.2 million dollar debenture issue for Camflo. The plaintiff referred this proposal to Nesbitt Thomson’s underwriting department in Montreal. After investigation, Nesbitt Thomson agreed and a letter agreement dated June 8, 1964 (Exhibit 4) was entered into. Said agreement provided that Nesbitt Thomson would use its best efforts to sell $1,200,000 of 6% income debentures of Camflo having a term of 10 years, the debenture purchasers to receive a bonus of Camflo common shares.

The exact number of bonus shares had not been determined as of June 8, 1964, but was subsequently settled on the basis of 17 shares per $100 debenture. Said debenture issue was to be a private placement, thus obviating the need for a prospectus and clearance from the Securities Commission. Nesbitt Thomson was to be the exclusive agent, was to receive a 3% commission based on the principal amount of the debentures sold provided that no commission was payable unless the full amount of $1,200,000 in debentures was sold.

The plaintiff testified that he and a fellow salesman with Nesbitt Thomson, one Charles Petch, decided to purchase between them $100,000 of the debenture issue (to which would be attached a bonus of 17,000 common shares). However, neither of them was in a financial position to produce the needed $100,000 in cash. They did have about $15,000 each in cash. Petch had his own private company, Charles Petch Investments Limited, which apparently was able to borrow the remaining $70,000 from its bank. Thus, the plaintiff and Petch decided to use Charles Petch Investments Limited as a vehicle for this transaction, the company to borrow said $70,000 with the plaintiff and Petch signing the note at the bank as guarantors. The above arrangement was the intention of the parties in June and early July. However, the plaintiff, on July 14, informed Camflo’s president, one Florence, that only $1 million out of the total of $1.2 million had been sold and told him further that it appeared the full amount would not be sold by the deadline date, ie, July 24, 1964. He said that this news was quite a shock to Mr Florence because, in anticipation of successful completion of the debenture issue, the company had proceeded with its development work and had incurred new obligations in the order of $175,000. The situation was a very serious one for Camflo. If the debenture proceeds were not available, there was a real possibility that the holders of an earlier debenture issue “would end up owning the mine’’, in the words of the plaintiff.

According to the plaintiff, Mr Florence suggested to him that he, the plaintiff, take up the outstanding $200,000 of the debenture issue, thus ensuring the success of the issue. The plaintiff says he advised Florence that he did not have the necessary funds or credit to do this. Florence then proposed that Camflo would lend said $200,000 to the plaintiff who would buy the debentures on the understanding that Camflo would then sell the debentures to a third party. The object of the exercise was to take the pressure off Camflo so far as the July 24 deadline was concerned, thus giving Camflo added time to market the remaining $200,000 of the debenture issue. The plaintiff consulted with his partner Petch and they decided to agree to this proposal and to again use Fetch’s company, Charles Petch Investments Limited as the vehicle. The result was an agreement in the form of a letter dated July 21, 1964 (Exhibit 7 from Camflo to Charles Petch Investments Limited) which reads as follows:

Subject to receipt of our funds in the amount of One Million Two Hundred Thousand Dollars ($1,200,000.00), on or about July 24th, 1964, resulting from the sale of the issue of One Million Two Hundred Thousand Dollars ($1,200,000.00) 6% Secured Income Debentures of our company, due July 1st, 1974, we hereby agree to lend Charles Petch Investments Limited the sum of Two Hundred Thousand Dollars ($200,000.00) against your company’s Two Hundred Thousand Dollars ($200,000.00) Collateral Trust Note, bearing interest at the rate of 5 /2% per annum and to mature February 26, 1965.

We hereby agree to accept from you as collateral in respect of the said note Two Hundred Thousand Dollars ($200,000.00) Camflo Mattagami Mines Limited 6% Secured Income Debentures due July 1st, 1974, and Twenty-five Thousand Dollars ($25,000.00) Bank of Nova Scotia notes maturing February 26th, 1965. Provided always that you may, with our written consent, which shall not be unreasonably withheld (sic), substitute other securities for such collateral.

The collateral so pledged by you in respect of the said note shall be deposited with the Bank of Nova Scotia, Main Branch, 125 Sparks Street, Ottawa, Ontario.

Is (sic) is specifically understood and agreed that, save and except for payments of interest at the rate aforesaid, the liability of Charles Petch investments Limited under the said note shall be limited to the collateral so pledged and on deposit at any time, and the transfer of such collateral to Camflo Mattagami Mines Limited shall constitute payment of the said note in full and shall relieve and release Charles Petch Investments Limited from any further claims on the said note, save and except for interest as aforesaid, and the said note shall be delivered up and cancelled. Notwithstanding anything hereinbefore contained, Charles Petch Investments Limited, may, at its’ (sic) option, pay to Camflo Mattagami Mines Limited on the 26th of February 1965 the principal sum of Two Hundred Thousand Dollars ($200,000.00) plus accrued interest due, the said note shall be delivered up and cancelled and you shall be entitled to receive forthwith any collateral security then on deposit as aforesaid.

in the event that the terms and conditions herein set forth are acceptable to you, would you please sign under your corporate seal the enclosed counterpart of this letter and return it to us, whereupon this letter shall constitute a binding agreement between us.

Said letter agreement was duly signed and executed by the signing officers of both companies.

In the result, the plaintiff and Petch had taken up $300,000 of the debenture issue which entitled them to 51,000 shares of Camflo as a bonus. As between the partners, it was agreed that the plaintiff would take $200,000 (and 34,000 Camflo shares) and Petch would take the remaining $100,000 (and 17,000 Camflo shares).

The formal bond purchase agreement (Exhibit 9) shows only two debenture purchasers, Shenkman Properties Co Limited of Ottawa and St Adele Valley Enterprises Limited of Montreal, each of these companies taking up $600,000 of the debenture issue. However, according to the plaintiff, he and Petch received their $300,000 debentures from the Shenkman allotment. The financing was thus completed and closing took place on August 6, 1964.

The plaintiff said that the arrangement was that Mr Florence would attempt to sell the said debentures for him on or before February 26, 1965, the maturity date of the collateral trust notes given to Camflo. By the agreement (Exhibit 7), if subject debentures were not sold by February 26, 1965, they were to be turned back to Camflo. Actually, Mr Florence was successful in interesting a firm of Montreal bond consultants in the debentures. Their original offer was for 70% to 75% of face value. The plaintiff refused this offer because, in his opinion, it was too low. Ater two weeks of further negotiations, the plaintiff sold subject debentures for $170,000 to the same Montreal firm said sale taking place in mid-January of 1965. The plaintiff then paid for the debentures their face value plus accrued interest ($205,002.80), thereby becoming entitled to the return of the $200,000 in collateral trust notes plus the $25,000 in Bank of Nova Scotia notes which he had deposited as collateral.

The plaintiffs position, then in January of 1965, was that after the various transactions were finalized, he was the owner of some 34,000 common shares of Camflo (the market value of which amounted to approximately $3.10 per share—see Exhibit 13) worth approximately $105,400 for which he paid absolutely nothing. All he had risked for a few months was the $25,000 Bank of Nova Scotia notes. The original $15,000 which he had turned in to Charles Petch Investments Limited when the original plan was a fifty-fifty involvement with Petch in the first $100,000 of debentures was returned to him by Petch in February of 1965. Said 34,000 common shares were resold by the plaintiff as follows: 21,500 shares in 1966; 10,000 shares in 1967; and 2,500 shares in 1968.

Besides the said 34,000 shares and the 45,000 escrowed shares, the plaintiff, between August of 1964 and July of 1965, purchased, additionally, in excess of 26,000 shares of Camflo through Nesbitt Thomson in normal market transactions. Furthermore, his wife, Audrey Marcus, between October of 1963 and September of 1964, purchased some 80,000 shares of Camflo.

The evidence also indicates (Exhibit 41) that between May of 1963 and July of 1965, the plaintiff was the agent on the sale of over 900,000 shares of Camflo.

The plaintiff’s evidence was to the effect that his intention in originally deciding to participate with Petch in one-half of the $100,000 debenture and share issue was to retain them for investment purposes. He said that he was more or less forced into his participation in the $200,000 debenture. He said that if Camflo were forced into bankruptcy, he would lose what the 45,000 escrowed shares had cost him. His reputation would also suffer because he had recommended Camflo to his friends, many of whom had purchased on the strength of his recommendation. Additionally, his commission on the $1,200,000 private placement would be lost. As noted earlier, Nesbitt Thomson’s commission thereon was $36,000. Of this the plaintiff was to receive and did in fact receive $15,000. The plaintiff said in his evidence that he would have been delighted to sell a portion of said $200,000 to any- one else because he felt he was over-extended. The plaintiff became a director of Camflo on August 6, 1964, the date the debenture issue was closed and remained as such until approximately March of 1967. On these facts, the Court is asked to conclude that plaintiff’s purchase of the Camflo debentures and shares was solely for the purpose of investment and that therefore the resultant profit is entirely capital in nature and does not form part of the income of the plaintiff subject to tax.

I do not so interpret the objective facts and circumstances here present. The plaintiff was a licensed stock salesman, very actively involved in promoting the sale of Camflo shares. He and his wife purchased substantial amounts of these shares themselves. The plaintiff conceded, in his evidence, that the 6% income debentures by themselves were not an attractive investment and probably not saleable alone. What was attractive in the Camflo package was the bonus of common shares. I have therefore concluded that the principal, if not the sole purpose of the plaintiff in entering into these debenture transactions, was to obtain the bonus of common shares at no extra cost and to realize the profit to be made from their sale.* [1] It is noted that the plaintiff did sell the shares as soon as, in his view, they were reasonably priced.

Looking at the plaintiff’s course of conduct, I am satisfied that, at all relevant times, he was in the business of buying and selling and speculating in the shares and debentures of Camflo. In May of 1963 he had extensive discussions with Nesbitt Thomson’s senior mining analyst about Camflo. From that time forward he was far more involved with Camflo than one would expect to be the case with an ordinary securities salesman. He visited the mine twice in 1963 and got to know all the senior management personnel very well. He was promoting and selling the company’s shares on a full time basis. When Camflo’s president wanted the $1.2 million debenture issue marketed, it was the plaintiff he approached. The president of Camflo and the plaintiff were in daily communication during this period. It is significant that at least some of the correspondence leading to the final closing of the debenture issue on August 6, 1964 is between the plaintiff on behalf of Nesbitt Thomson and other firms (see for example Exhibit 5). The plaintiff was not just acting as a securities salesman in this transaction. When the debenture issue was successfully finalized, he became and remained a director from August of 1964 to March of 1967.

The appellant assisted materially in the marketing of these securities which brought substantial gain to himself. Had he not been an insider, involved on a day to day basis with the principals of Camflo, I am certain he would not have been given the opportunity to acquire the 34,000 shares at a very minimal cost and risk to himself. By no stretch of the imagination can this plaintiff be considered to be a normal and usual purchaser of Camflo shares. The Supreme Court of Canada reached a similar conclusion in the case of Norman R Whittai v MNR, [1967] CTC 377 at 393; 67 DTC 5264 at 5272, 5273, in considering the nature of profits made on the sale of shares of companies of which the appellant was a director and for which his brokerage firm had acted as underwriters.* [2] It would hardly have been possible for the plaintiff to have been more active in his promotion of Camflo stock. He and his wife purchased large quantities themselves, he promoted the stock to his friends and customers and, as a result, sold over 900,000 shares of the stock.

The plaintiff relies heavily on the Supreme Court decision in Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131. However, that decision is clearly distinguishable on its facts from the case at bar. Martland, J, writing the majority judgment, said at page 351 [219,1133] thereof:

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.

In the case at bar, we do not have one rather modestly sized purchase “on an isolated occasion” but rather a continuous and consistent course of conduct as an insider and director actively involved in assisting and promoting the sale of shares and debentures on innumerable occasions. For these reasons, it is my view that the Irrigation Industries case (supra) does not assist the plaintiff.

For the foregoing reasons, I am of the opinion that the plaintiff’s appeal must fail except in respect of one item concerning the 1965 return. The evidence discloses that the plaintiff paid interest on the $200,000 debenture issue as set out in Exhibit 7 quoted supra in the sum of $5,002.80 in the year 1965.

Since, in my view, the debenture and share transactions are all part and parcel of the business being carried on by the plaintiff at the time, the plaintiff is entitled to deduct said interest from his 1965 income as a proper cost of earning that income.

In the result, plaintiff's appeals for the taxation years 1966, 1967 and 1968 are dismissed. With respect to the taxation year 1965, the reassessment is referred back to the Minister for reconsideration on the basis that the plaintiff is entitled to claim the sum of $5,002.80 debenture interest as a deduction from income.

Since the defendant’s assessments are sustained to a very large extent with only a small adjustment in respect of one taxation year, the defendant is entitled to the costs of the action.