Lunham & Moore Ltd. v. R., [1975] C.T.C. 183, 75 D.T.C. 5131

Heald, J:

1 The plaintiff was incorporated in 1947 under the name of Lunham & Moore Tankers Limited and has carried on since then the business of operating a shipping company involved basically in bulk cargo service trading around the world. In the early 1960's the company was reorganized, its ships were sold and thereafter the company chartered ships rather than using ships owned by it. The name of the company was changed in 1962 to its present name. As a result of the sale of its ships, plaintiff had substantial cash funds which were held in a surplus account in reasonably liquid form so that if the company ever decided to once again own ships rather than charter them, the necessary funds would be available. A substantial portion of said funds were invested in “short-term—30, 60 or 90 day paper” and the balance was invested in high-grade bonds and so-called “blue chip” common stocks. Tab H to Exhibit 1 summarizes the plaintiff's investment portfolio at December 31 in the years 1960 to 1967 inclusive. At all relevant times this portfolio had a value of several million dollars. The president of the company, Mr Angus, who made all the investment decisions for the company testified that their policy was “to be as liquid as possible and to make the best return they could on their investments”. He said further that about 5% of his working time was spent on the plaintiff's investment decisions, the rest of his time being spent in running the plaintiff's shipping business. Tabs F and G to Exhibit 1 are the plaintiff's financial statements for the years 1964 and 1965. In 1964 plaintiff's gross revenue from its shipping operations was $1,342,219 while its income from investments was $159,080. In 1965 the shipping revenue was $1,154,328 while the investment income was $144,589.

2 The plaintiff has never, either before or after the years under review, been assessed by the Income Tax Department as a trader or dealer in securities.

• (a) $100,000 principal amount 6% First Mortgage Income Bonds due 1974, and

• (b) 17,000 shares of the common stock of Camflo.

4 Mr Angus said that in the view of the plaintiff company said investment seemed to be a secure investment with a better than average return and that one could reasonably expect a better than average return, having regard to the fact that such an issue was more speculative than Government of Canada Bonds, for example.

5 Said securities were purchased from St Adele Valley Enterprises Ltd (hereafter St Adele). The plaintiff dealt with St Adele on a completely arm's-length basis and has had no other business dealings of any nature whatsoever with either St Adele or Camflo, either prior or subsequent to the purchase of said Camflo securities.

6 Tab E to Exhibit 1 is a copy of the ledger sheet from the plaintiff's corporate records showing the way in which the Camflo transaction was recorded. Said securities were paid for by the plaintiff on August 6, 1964. The securities were delivered to the plaintiff's bank on August 12, 1964. The plaintiff sold the 17,000 common shares as follows:

Date               No. of Shares          Price Received
(a)            Aug. 26/64            10,000 shares            $15,893.00
(b)            Nov. 5/64              2,000 shares              3,905.00
(c)            Jan. 15/65             5,000 shares             16,137.50

7 Said shares were sold through a stockbroker on the stock exchange in the normal fashion. The proceeds from the sale of shares were treated as a “write-down” on their investment in the bonds. Mr Angus said that when the Camflo securities were purchased, the Camflo common shares were listed and were trading on the stock exchange around $1.60 per share, thereby reducing their bond investment to somewhere around $70,000 and that since the interest on the debenture was at 6%, this was, in their view, a fairly attractive investment. He said their basic interest was in the bonds and to obtain a good return on them without too much risk. He went on to explain that an issue like subject Camflo issue was a fairly common method of enabling a mining venture to get into production once it had established that it possessed a proven and economically viable ore body. He said that, by August of 1964 Camflo had a proven ore body of gold with equipment and buildings and a shaft sunk to a depth of about 800 feet and that about $1 million had already been spent on the property.

8 The Camflo mine continued to be successful. The debenture issue in which the plaintiff participated enabled Camflo to go into production. By the end of 1965, over $1 million worth of gold had been mined.

9 At the present time Camflo is one of Canada's leading gold mines. Because of Camflo's rather spectacular success, the $100,000 debenture purchased by the plaintiff was fully redeemed by December of 1966 even though the maturity date for said debentures was in 1974. The plaintiff did not sell subject debentures but held them until their full redemption in 1966.

10 The plaintiff's basic reason for purchasing the Camflo securities was, in the words of Mr Angus, “to make the most of our surplus funds—to get the most return commensurate with the risk involved”.

11 As above referred to, the plaintiff sold 12,000 of its Camflo shares in 1964 and the remainder of 5,000 in 1965. The Minister of National Revenue reassessed the plaintiff for the 1964 and 1965 taxation years by adding to its reported income the following amounts:

1964 -- $19,440
                               1965 --   8,100

Bonus of ... common shares of Camflo Mines Ltd. deemed to be taxable income at $1.62 per share.

12 The plaintiff objected to said reassessments relying, inter alia, upon sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act, RSC 1952, c 148, as amended. It is the plaintiff's submission that the acquisition of the Camflo securities was made as part of the acquisition of a portfolio investment consisting of shares and income debentures and were not acquired as part of a business or profit-making scheme. The plaintiff further submits that the Camflo shares were issued together with the debentures as an inducement to investors to purchase the debentures, which prudent investors might not otherwise have been prepared to do, owing to the nature of the capital risk involved in said securities. The plaintiff argues that said common shares were not issued as a “bonus” in any sense of that term. It is the plaintiff's view that said Camflo shares constituted capital assets or investment properties in the hands of the plaintiff, and as such, the value thereof should not be included in its income.

13 The defendant, on the other hand, submits that the purchase by the plaintiff of the $100,000 debenture and the 17,000 common shares was an act done in what was truly the carrying on of its business and that the resulting profit was income from a business or adventure or concern in the nature of trade within the meaning of said sections 3 and 4 and paragraph 139(1)(e) of the Act and must, therefore, be included in the plaintiff's income. In the alternative, the defendant pleads “... that the proceeds received by the Plaintiff from the sale of the 17,000 Camflo shares were payments made to it as interest or as a bonus in the nature of income with respect to ...” subject debentures (see paragraph 6 statement of defence).

14 On the facts here established in evidence, I have concluded that the plaintiff's submissions as to the true nature of subject transaction are correct. In the case of Daniel L Marcus v The Queen, [1974] C.T.C. 435, 74 D.T.C. 6346, this same issue of Camflo securities was the subject matter of the transactions under review. However, in that case, the plaintiff, who was a “customer's man” in a brokerage firm, played a significant role in promoting the sale of Camflo shares and debentures and thus, the facts are quite different and distinguishable from the facts in the case at bar. At page 442 [6351] of that judgment I said:

The plaintiff relies heavily on the Supreme Court decision in Irrigation Industries Ltd v Minister of National Revenue, [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 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.

• (1) whether the person dealt with the property purchased by him in the same way as a dealer would ordinarily do, and

• (2) whether the nature and quantity of subject-matter of the transaction may exclude the possibility that its sale was the realization of an investment, or otherwise of a capital nature, or that it could have been disposed of otherwise than as a trade transaction.

16 Dealing with the said first test, it is my opinion that this plaintiff did not deal with the Camflo shares as a dealer would ordinarily do. Said shares were treasury shares, acquired as a small portion of a very large investment portfolio, consisting mostly of bonds, debentures and high-grade common stocks. Most of this portfolio was dividend earning. Most of the Camflo shares were sold almost immediately and not held for speculative gain. The shares were purchased outright for cash, none were purchased on future or short dealings; no borrowed funds were used to make subject purchase. As in the Irrigation Industries case (supra) what the plaintiff did here “was to acquire a capital interest in a new corporate business venture, in a manner which has the characteristics of the making of an investment, and subsequently to dispose, by sale, of that interest.”[FN1: <p>Quotation from Martland, J at page 354 [222, 1134].</p>]

17 Turning to the second test, it is my view that the following quotation from the judgment of Martland, J at page 352 [220, 1133] applies equally to the facts of the case at bar:

The nature of the property in question here is shares issued from the treasury of a corporation and we have not been referred to any reported case in which profit from one isolated purchase and sale of shares, by a person not engaged in the business of trading in securities, has been claimed to be taxable.

18 Defendant's counsel referred to the case of David C McDonald v The Queen, [1974] C.T.C. 836, 74 D.T.C. 6644a recent decision of the Federal Court of Appeal. In my view, this case is easily distinguishable on its facts from the case at bar. In that case, the trial judge made two findings of fact which, the Court of Appeal held, were fully supported by the evidence. Firstly, there was a finding that the appellant's sole purpose in purchasing his share of the property was to realize an accretion to the purchase price by sale at a time when the increase in price obtainable made it expedient to sell. In the case at bar, there was no such “sole purpose”. On the evidence here, it is clear that plaintiff's intention was an investment intention, an intention to add to an investment portfolio for income on investment. In the McDonald case (supra), the second finding of fact was to the effect that the annual income from the land was so negligible as to be immaterial. In this case, we have a “package” investment of $100,000. On the face of it, the dividend was 6% on $100,000. However, by selling off immediately a portion of the “package”, the effective rate of return was increased to something over 9%. Whether the rate of return on investment is considered to be 6% or 9%, either of these rates of return are sufficient to clearly distinguish the McDonald case (supra).

19 In support of paragraph 6 of the statement of defence that the proceeds from the sale of Camflo's shares were a “bonus in the nature of income”, defendant's counsel cited the decision of my brother Cattanach, J in the case of West Coast Parts Co Ltd v Minister of National Revenue, [1964] C.T.C. 519, 64 D.T.C. 5316.

20 I have read that decision with some care and have concluded that it does not assist the defendant because of the very different factual situation. At page 526 [5320] of that judgment, Mr Justice Cattanach observes:

... that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated.

• 1. West Coast was no longer in the truck parts business. It was in the process of liquidating its assets. In the case at bar, the plaintiff was and still is in the shipping business.

• 2. In West Coast the loan was to a large extent, unsecured, and thus far different from a corporate debenture, with sinking fund provisions, as is the case here. The risk factor in West Coast was much higher thus adding to the speculative nature of the transaction. In the case at bar, on the evidence adduced, I have no difficulty in concluding that subject investment was one a prudent investor, looking to a fair and safe return by way of interest or dividends would make.

• 3. In West Coast the company directors were not unfamiliar with the finance and loan business since they were also directors of a car financing corporation. In the case at bar, there is no evidence that Mr Angus or anyone else associated with the plaintiff is, in any way, involved in or associated with the money lending or financing business.

22 It is also significant that Mr Justice Cattanach at page 528 [5321] of the judgment takes the trouble to distinguish between the facts of that case and “a simple case of investment, such as the purchase of a debenture at a discount.” In the case at bar, what the plaintiff really did was to purchase subject debenture at a discount through its sale of the common shares.

23 The appeal is allowed with costs. Plaintiff's reassessments for the taxation years 1964 and 1965 are referred back to the Minister for further reassessment not inconsistent with these reasons.