A W Prociuk:
1 The appellants George H Garneau, hereinafter referred to as “Garneau”, and John A Bennett, hereinafter referred to as “Bennett”, appealed individually from the respondent's notices of reassessment of their respective incomes for the taxation year 1972 wherein in the case of Garneau a business loss claimed in the amount of $57,800 was disallowed on the ground that it was a capital loss and the appellant was limited to a $1,000 deduction from his other income in the said year; and, in the case of Bennett, a business loss claimed in the amount of $27,200 was similarly treated by the respondent.
2 At the commencement of the hearing of these appeals the parties agreed that both be heard on common evidence. Each appellant testified in support of his appeal.
3 Both appellants are experienced and knowledgeable in the field of securities analysis and brokerage. Garneau has been in brokerage business for at least 20 years. Presently he is the officer in charge of an investment and brokerage firm for the Province of Quebec; chairman of Canadian Stock Exchange, and a governor of the Montreal Stock Exchange. Bennett has worked for many years as a securities analyst and salesman in the employ of nationally known investment and brokerage firms and is presently employed in that capacity by a Canadian investment firm.
4 In 1971 both appellants were employed by an investment and brokerage firm known as Garneau & Associates Inc of Montreal until October 1, 1971. Garneau was president and director of the firm and Bennett was a shareholder and director as well. In late July or August of that year, Garneau and Bennett and other principals of Garneau's firm were offered a partnership in a United States investment firm known as J R Timmins & Co. The offer was made by Robert N Timmins, a senior partner of that firm, and the son of the late J R Timmins who died in February of 1971. The late J R Timmins was the founder and controlling member of the firm which commenced operations in the mid-twenties. It was a much larger investment firm than Garneau & Associates Inc and offered a great future in the eyes of the appellants as the offer was presented to them. It had offices in the United States and Canada and had a seat on the New York, American, Mid-West, Montreal, Canadian and Toronto Stock Exchanges. The late J R Timmins alone had contributed sufficient capital to this firm to comply with the laws, regulations and by-laws of the respective governmental authorities and stock exchanges. The capital so contributed was in the form of blocks of shares owned by the deceased and was valued in excess of $4,000,000. Garneau states that he was assured by Robert N Timmins, in whom he had complete confidence, that the capital would not be withdrawn by the estate of J R Timmins and that neither he nor the others coming into the partnership would have to contribute any capital. Prior to entering into this partnership Garneau was obliged to wind up the business activities of Garneau & Associates Inc and this firm has been dormant ever since.
5 A partnership agreement dated October 1, 1971 was executed. It is entitled “Fifteenth Amendment to Partnership Agreement of J R Timmins & Co”—a copy of which was filed as Exhibit A-1. Garneau and Bennett became members of this partnership, each entitled to a salary of $48,000 per annum plus a 7% share of the profits.
6 Within two weeks from the date of commencement of the new partnership J R Timmins & Co, Garneau and Bennett learned that the estate of J R Timmins was going to withdraw a major portion of the capital from the partnership as of December 31, 1971 and the partners would be obliged to replace whatever amount was required under the then existing by-laws in order for the partnership to continue. Some of the partners withdrew from the firm as of November 30, 1971 and a revised partnership agreement dated December 1, 1971 was drawn up and executed by the remaining partners including Garneau and Bennett. A copy of the said agreement was filed as Exhibit A-2 and is entitled “Sixteenth Amendment to Partnership Agreement of J R Timmins & Co.”. Garneau and Bennett stated in evidence that the market was down and the firm sustained a loss in the first three months. In December of 1971 Robert N Timmins, the senior partner, advised the remaining members of the firm that on the basis of the amount of capital the estate was withdrawing from the firm they would be required to raise $600,000. He also suggested that effective January 1, 1972 a new corporation be incorporated in the State of Delaware, USA, to be known as J R Timmins & Co Inc and that it take over the business of the partnership. To raise the said $600,000 each member was required to buy shares in this corporation at $200 per share. Garneau subscribed for 425 shares and paid $85,000. Bennett subscribed for 200 shares and paid $40,000. The other members subscribed for various amounts and the said sum of $600,000 was raised and together with the capital left by the estate under appropriate financial arrangements made it possible for this new venture to commence business as of January 1, 1972.
7 Both appellants testified that it was their prime intention to hold their shares until they could be sold at a profit. I think it is a fair inference to draw that neither one was particularly pleased with the turn of events when the executors of the Timmins estate decided to withdraw capital from the partnership contrary to assurances given to the appellants two weeks earlier.
8 Exhibit A-4 as filed is an unsigned draft agreement of reorganization of the partnership and transfer of the business to J R Timmins & Co Inc, hereinafter referred to as “the company”. For the first three months in 1972 the company was doing well and it appeared that its shares would increase in value. An attempt to dispose of shares early in the year by Bennett personally and by Garneau on behalf of all the shareholders proved futile. In any event the success of the company was short-lived because it was again sustaining losses in the second quarter of 1972. By mid-summer of 1972 the principals of the company decided and agreed to sell their shares to Brosbur Investments Limited, a holding company for Burns Bros & Denton, as of October 1, 1972 for $64 a share, that being the best and highest offer they could obatin. Thus Garneau sustained a loss of $57,800 and Bennett sustained a loss of $27,200.
9 I should mention at this time that Bennett left the company at the end of February 1972 and obtained employment elsewhere. Being unsuccessful in his attempt to dispose of his shares he agreed to abide by the decision made subsequently by the shareholders of the company.
10 The respondent took the position that each of the appellants made a capital investment and the loss sustained in each case was not deductible as a business loss.
11 In my humble opinion the evidence does not support this position. The appellants are professional traders in the field of securities. Their analysis of the situation was that the newly formed company with its background of experience, goodwill and extensive connections in the main trading centres of Canada and the United States was bound to succeed at least in the immediate future. This would have enabled them to sell out at a profit. Unfortunately for them the economic tide reversed much earlier than anticipated causing them to scramble for market before it was too late in the circumstances. Assuming for a moment that a profit would have been realized it would have been most difficult if not impossible for the appellants to maintain that this was not a business profit made in the course of their ordinary business of trading in securities.
12 The appeal in each case is allowed.
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