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On common consent, the following chart of the shareholdings of the companies was submitted as Exhibit A-1: Share Holdings Taxation Years 1974, 1975, 1976, 1977 & 1978 ENTREPRISES ATOMIC ATOMIC ROCLAR ROCLAR Royal Lefebvre Royal Lefebvre Clarence Lefebvre 100 common shares 125 common shares 99 common shares (49.5%) (42%) (49%) Wanda Lefebvre Clarence Lefebvre Marie-Rose Lefebvre 100 common shares 125 common shares 99 common shares (49.5%) (42%) (49%) Jean Claude Ruel Aurèle Lefebvre Jean Truel 1 common share 50 common shares 4 common shares (1%) (16%) (2%) The underlined names indicate the groups chosen by the Department of National Revenue. ... For support, Counsel referred in particular to the following cases: The Queen v Mars Finance Inc, J Euclide Perron Limitée and Les Immeubles Perron Limitée, [1980] CTC 216; 80 DTC 6069; John B Holden v MNR, [1928-34] CTC 116; 1 DTC 218; MNR v Holden, 1928-34 CTC 127 & 129; 1 DTC 234, 243; [1948] CTC 265; 4 DTC 491; The Executors of the Estate of David Fasken v MNR, [1948] Ex CR 580; Buckerfield’s Limited, Green Valley Fertilizer & Chemical Co Ltd, Westland Elevators Limited and Burrard Terminals Limited v MNR, [1964] CTC 504; 64 DTC 5301. ...

History As portrayed by the appellant in his notice of appeal, the salient points are: — From 1973 to 1976 I was in the employment of Manitoba Hydro and—as a condition of employment—I was also member of the MANITOBA CIVIL SERVICE SUPERANNUATION FUND. ... The lump sum return from the superannuation fund was transferred to an existing registered retirement savings plan. — REVENUE CANADA has maintained so far that I was entitled to a retirement savings plan deduction of $3,500 plus the sum roll-over of $3,938.06; they have explained that the amount of $3,500 was applicable in view of my membership in a superannuation fund for part of 1976 and they have rejected my argument that the allowable deduction should be $5,500 plus the lump sum roll-over. Contentions For the appellant: — REVENUE CANADA would unfairly discriminate against employees on construction projects if it would insist on the lower deduction limit. ...

In 1967, 1968 and 1969 the appellant borrowed, on the security of a second mortgage, the sum of $30,000 from Smith & Gibbons and $25,000 from Egret Acceptance Corporation to finance further projects of two associated companies—Marcall Construction Limited (Marcall) and Gorell Investments Limited (Gorell), controlled by the Calligaro family. As at December 31, 1969 these liabilities were on the books of the appellant as follows: Smith & Gibbons $30,000 Egret Acceptance Corporation $25,000 $55,000 The members of the Calligaro family were not sophisticated businessmen and did not get proper professional advice. ... Counsel for the Minister, in his argument, submitted that that part of the funds borrowed in the second re-financing to pay off the Smith & Gibbons loan was not used to earn income, but to discharge an existing liability. ...

The appellant and his late brother, George William Harvey Pruden, carried on a business as well drillers in partnership under the firm name and style of Pruden & Sons in and about the Town of Selkirk, Manitoba until the said brother died on July 9, 1965. ... With reference to accounts receivable, I quote the last paragraph on page 2 of the agreement as well as paragraphs 3(a), (b) and (c) on pages 4 and 5, and which read as follows: AND WHEREAS for the purposes of this Agreement the accounts receivable of the business are to be determined, in accordance with generally accepted accounting procedure, by Messrs Vopsi, Matheson, Green & Company, the auditors of the business (and hereinafter called “the auditors’’)—such determination to be made as at March 1 AD, 1968. ... Notwithstanding the foregoing part of this paragraph, it is agreed that the purchase price being paid is as between the parties apportioned as follows, such apportionment however not to affect the sale of the business as a going concern and as a whole entity: (a) Accounts receivable to be determined as hereinbefore set out,—One ($1.00) Dollar; (b) All office equipment, trucks and automobiles (with the exception of the automobile more particularly described in paragraph 10 hereof, and now in the Vendor’s possession), machinery and equipment, and the like as more particularly set out in Schedule “A” hereto—Eleven Thousand ($11,000.00) Dollars; and (c) For all cash on hand and cash in the bank, and for all the remaining equity of the Vendor in the business, and for the right hereby given to the Purchaser to continue to use the name ‘‘Pruden & Sons” if he so desires, and for goodwill—Twelve Thousand, four hundred ninety-nine ($12,499.00) Dollars. ...

The taxpayer gave evidence on his own behalf and was represented by Mr P Smith of the law firm Payne, Smith, Smith, Campbell & Gazzola of Guelph, Ontario. ... The taxpayer’s income tax return was prepared by an accountant, and upon receipt of the assessment notice, Mr Elliott took it to his lawyer’s office — the firm of Payne, Smith et al, where it was essentially the responsibility of Mr Payne. ... It would seem to me that the interpretation placed upon the circumstances by counsel for the Minister is more plausible — that the matter did not receive the attention it warranted (whether of the taxpayer or his advisers), and that no adequate explanation of the delay has been presented. ...

In substance, those provisions appear in the agreement, paragraphs 1, 2, 3, 6 and /. 3.11 The witness, Mr Bruyneel, said that he was not present when Mr Mahar and Mr Butcher signed the agreement on March 23, 1974. ... (f) He arranged the entries and the figures so that earnings had been paid in the amount of $12,746.05 in 1974; (g) in making his own papers (Exhibit A-Q-1) he had on hand the working papers of Mr Buyneel (Exhibit A-M-2) (SN p 89), but he did not have the corporate records (SN p 97); (h) He did not agree that the figures made by Mr Bruyneel pertained to the agreement (Exhibit A-M-1) “So we took the steps we felt necessary to follow the terms of the agreement” he said (SN p 89); (i) “We felt the agreement wasn't particularly clearly constructed so we contacted Wayne, as well as contacting MacGillivray & Company and Wayne’s interpretation was not the same as the interpretation that MacGillivray & Company had put on it; and our interpretation of the agreement bore out what Wayne (Butcher) said, and that is how we recorded the items in the books.” ... This balance was paid and Butcher received Mahar’s former shares (paragraph 3.12—h & i). ...

Fleming, Neve, Kambeitz & Pottinger Barristers and Solicitors 700 Texaco Building 600 — 6 Avenue, S.W. ...

For the respondent: — The appellant acquired the subject property with the intention of selling it at a profit at the first favourable opportunity; — The appellant did not acquire the subject property with an exclusive investment intention. ... I would like to... deal briefly with: — the basic test to be applied in a case for distinguishing capital gains from ordinary income and then deal with the application of that test to the circumstances of this particular case... — I would like to conclude by examining the doctrine of secondary intention. ... The Regin case (supra) did not provide support for the appellant, indeed there was no real indication of “how he might use the property” — just generally that he had some plans for it. ...

In the period from August 1, 1972, to March 31, 1979, the Appellant bought, operated and sold the following hotels in the Province of Alberta: (a) Alberta Beach Hotel Purchased August/72 $ 243,249 Sold in 1973/74 fiscal year 267,876 Capital gain reported on 1974 return 23,401 (b) Royal Hotel Ponoka Purchased February 1/74 $ 585,193 Sold April 1975 660,000 Capital gain reported on 1976 return 45,407 (c) Innisfail Hotel Purchased September/75 $ 500,000 Sold January 1976 580,000 Capital gain reported on 1977 return 12,800 (d) Lethbridge Hotel Purchased November/76 $ 975,000 Sold November 1977 1,100,000 Capital gain reported on 1978 return 108,162 (e) Stettler Hotel Purchased March/78 $ 711,000 Sold February 1979 837,000 Capital gain 26,000 The appellant’s agent, Henry Reich, was engaged in a family trucking business for a number of years and was a shareholder, but mainly acted as a “grease monkey” and sometimes drove a bus. ... Mr Reich was advised by an hotel sales expert of City Savings & Trust to invest his funds in the purchase of the Royal Hotel at Ponoka, Alberta, which he did on February 1, 1974. ...

These were: Property Date Acquired Date Sold Profit 1971 taxation year (A) 115 Mary St August 1969 May 1971 $ 1,286.50 (B) 270 Queen St January 1970 July 1971 2,699.70 (C) 413-413 /2 Confederation St February 1970 August 1971 5,923.71 $ 9,909.91 1972 taxation year (D) Kathleen St at Indian Rd April 1969 December 1972 $ 9,290.71 (E) 863 Devine Street August 1971 March 1972 5,020.02 $14,310.73 1974 taxation year (F) 294 London Rd December 1971 June 1974 $66,615.71 (G) 177 South Brock St April 1973 February 1974 2,812.50 $69,428.21 Contentions It was the position of the appellant that the transactions involved concerned the sale of rental properties, the gain from which he should be entitled to consider on account of capital. ... Argument Counsel for the appellant made reference to three cases which related to the actions of the appellant: Her Majesty the Queen v Eino Sipila, [1977] CTC 280; 77 DTC 5179; Hope Hardware & Building Supply Co Ltd v MNR, [1967] CTC 120; 67 DTC 5085; Roland Nadeau v MNR, [1970] Tax ABC 571; 70 DTC 1368. ...