A-289-81
Sydney John Becker (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Pratte, Le Dain JJ. and Hyde
D.J.—Montreal, September 22; Ottawa, Decem-
ber 10, 1982.
Income tax — Income calculation — Deductions — Appeal
from judgment of Trial Division dismissing appeal from
assessments by Minister denying business loss claimed by
appellant — Whether loss due to investment or adventure in
nature of trade — Taxpayer's intention — Appeal allowed —
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3(d), 248.
The appellant purchased the controlling interest in BCP,
made advances and loan guarantees. Applying his engineering
and business skills, he restructured the business. However, it
failed to succeed and the appellant, in computing his taxable
income, deducted his total losses as a business loss. The Minis
ter of National Revenue assessed on the basis of losses from
investment. Before the Trial Division, the appellant testified
that his purpose in purchasing the company was to transform
the business in order to make it profitable with a view, not to
retaining it to produce income, but to selling it as soon as
possible for a profit; and if successful, to repeating this opera
tion. The Trial Judge found the appellant to be a credible
witness but held, applying Irrigation Industries Ltd. v. Minister
of National Revenue, [ 1962] S.C.R. 346, that the immediate or
dominant purpose was to retain the business for the purpose of
earning income. The question is whether the Trial Judge erred
in applying Irrigation Industries to the facts as found.
Held, the appeal is allowed. The Trial Judge, having found
the appellant's testimony to be credible, erred in failing to
accept the uncontradicted statement that Becker never intended
to retain the business but rather to transform the company and
sell it at a profit. Unlike in Irrigation Industries, which
involved the mere purchase of shares with a view to resale, the
present case involved the application of engineering and entre
preneurial skills in order to modify the company's production.
It is an adventure in the nature of trade to perform such an
operation with the avowed intention of repeating it.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Commissioners of Inland Revenue v. Livingston et
al. (1926), 11 T.C. 538.
DISTINGUISHED:
Irrigation Industries Ltd. v. Minister of National Reve
nue, [1962] S.C.R. 346; 62 DTC 1131.
REFERRED TO:
Gairdner Securities Ltd. v. Minister of National Reve
nue, 54 DTC 1015 (S.C.C.).
COUNSEL:
G. Du Pont for appellant.
W. Lefebvre, Q.C. and R. McMechan for
respondent.
SOLICITORS:
Verchère, Noël & Eddy, Montreal, for
appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
LE DAIN J.: This is an appeal from a judgment
of the Trial Division [unreported, T-5605-79,
judgment dated May 8, 1981] dismissing the
appellant's appeal from income tax assessments in
respect of his 1975 and 1976 taxation years.
The issue is whether the appellant could deduct
in the computation of his taxable income for the
year 1976 an amount of $434,276.55, which repre
sents a loss incurred by the appellant in 1976 in
respect of advances to and loan guarantees for
British Canadian Pitwood Limited (hereinafter
referred to as "BCP") during the period 1963 to
1975. The question is whether the loss resulted
from an investment or from an adventure in the
nature of trade. It turns on the intention with
which the appellant purchased the controlling in
terest in BCP and put funds into the company by
way of advances and loan guarantees.
The appellant graduated in engineering in 1938
and went into the family plumbing business, which
his father had founded in 1914, and under his
direction the company evolved into a fairly large
and sophisticated mechanical work enterprise. In
1963 the appellant disposed of his interest in the
company and looked around for what else he
might do with his money and experience. He
learned that BCP, a New Brunswick lumber com
pany, was in financial difficulties and might be
available for purchase. After a fire which was not
adequately covered by insurance, Mr. Cleland, the
owner of the business who was in his seventies, was
unable to find new financing. The company, how
ever, had a good wood supply, and while its busi
ness had been the sale of unfinished lumber, the
appellant saw great potential for the business if it
were expanded to include the sale of lumber fin
ished to the specifications of purchasers. This
would require a restructuring of the business to
include drying the green lumber between the mill
ing and manufacturing processes by an improved
dry-kilning process which the appellant had
learned about in his contracting business.
In December 1963 the appellant purchased 90%
of the shares in BCP for $1 and the assumption of
BCP's liabilities up to a maximum of $160,000,
and it was agreed that Cleland would provide
on-site management for a salary and 10% of prof
its. Cleland retained the remaining 10% of the
shares with an agreement that he would sell them
to the appellant upon ceasing to be manager.
Cleland died in 1964.
The appellant made the necessary changes to
the business, which were financed by loans from
him and loans from others guaranteed by him. The
new plant was in full operation by 1968 and made
a modest profit in that year. Then in 1969 the
appellant began to encounter serious wood supply
difficulties. For the next six years or so he was
unable to obtain an adequate supply of wood and
he was obliged to cease operations in 1976. It was
clear that the money he had put into the company
by way of loans and loan guarantees was a total
loss, and in that year he treated the loss as a
business loss deductible in computing his income.
In his reassessment the Minister of National
Revenue disallowed the deduction as a business
loss. The appellant's appeal was dismissed by the
Trial Division.
Paragraph 3(d) of the Income Tax Act, R.S.C.
1952, c. 148, as amended by S.C. 1970-71-72, c.
63, s. 1, permits the taxpayer to deduct from his
income for the year his loss from a business, and
"business" is defined by section 248 of the Act to
include "an adventure or concern in the nature of
trade".
The appellant contends that the BCP enterprise
was for him an adventure in the nature of trade
because his purpose in purchasing the company
was to transform the business in order to make it
profitable with a view, not to retaining it for the
purpose of earning income, but to selling it as soon
as possible for a profit.
The appellant testified that he saw the potential
for a large increase in earnings by changing the
business to one that would make finished products,
and he thought this would make the business
attractive to prospective purchasers. There was the
following exchange on this point in his testimony:
And that was the basic motive in getting involved, that
the return on investment, for me, was exceptional, and
the return on investment for a potential buyer was a very
attractive one, and I felt that I wouldn't have any dif
ficulty in marketing the plant once I could get the thing
in operation.
Q. Once the business had been turned around, or rejuvenat
ed, or re-designed by your good hands, Mr. Becker, did
you intend to keep the mill?
A. It was impossible ....
Q. Or BCP.
A. ... it ... I looked at it, once I decided to go into the
venture, I looked at it ... at it strictly on the basis that I
would execute my plan, and sell the end result the same
way as a machinery builder sells a machine. What I was
doing was just putting some ideas, and some engineering
know-how together, to produce a production facility
which it was impossible for me to keep.
The appellant testified that it would be impos
sible for him to keep the business because he did
not wish to move to New Brunswick, and the
business had to be owned by someone who had an
assured supply of wood. He thought that one of the
nearby pulp and paper companies like Fraser
might buy it once its profitability had been demon
strated. He also testified that he would not want to
remain indefinitely as owner of the business
because it would prevent him from carrying on his
engineering career. He envisaged the possibility
that after selling BCP he might repeat the opera
tion with or for others. On cross-examination there
was the following testimony concerning the appel
lant's purpose:
Q. I said: Were you not interested in the fact that the profit
margin was so great?
A. It was my prime objective, because in all my business
experience, anything I ever sold was always evaluated on
the return on investment. And if you have an asset or an
investment that has no profit margin, you can't realize
any money for it. So, my objective, in this whole exercise,
was to realize a maximum profit so that I could realize a
maximum sale price and get the biggest return for my
efforts and my investment that I possibly can.
Q. But you did, then, consider the possibility of recouping
your investment through the profit of the business?
A. I never considered that, no.
During the entire period that he owned the
business the appellant did not draw any income
from it. He had a discussion with someone in
Fraser concerning the possibility of a sale of the
business after he became concerned about the
future of the wood supply, but nothing came of it.
He had some discussions with others concerning
possible sale, but nothing came of them because it
was not possible to assure a wood supply.
The Trial Judge's conclusion on the facts and
the test which he applied are reflected in the
following passages from his reasons for judgment
[at page 8]:
When it is said that the intention of the taxpayer when entering
into an isolated transaction may give the operation the essential
ingredient of a business venture for the purposes of the Income
Tax Act, the intention referred to is the motivating intention,
the immediate and prevailing purpose or at least one of the
immediate and dominant purposes for which the act is done. I
accept the plaintiff's statement that it was his intention to
transform the company, make it profitable and eventually sell it
at a profit. But the intention of eventually disposing of the
company was not, in so far as I can appreciate the situation, the
motivating factor or one of the motivating factors that led him
to invest into B.C.P. Ltd. The plaintiff's personality, his entre
preneurial skill and desire, and his whole course of conduct
following the acquisition appear to me inconsistent with the
view that his immediate purpose was to speculate. The state
ment of Martland J. in Irrigation Industries Ltd. v. M.N.R.,
[1962] S.C.R. 346; 62 DTC 1131, applies here perfectly [at
page 351 of the Supreme Court Reports]:
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. I think that there must be clearer indica
tions of "trade" than this before it can be said that there has
been an adventure in the nature of trade.
The appellant contends that the Trial Judge
misunderstood the purport of the decision in Irri
gation Industries and thereby misdirected himself
in law, and that his implied finding of fact that the
appellant intended to retain the business for the
purpose of earning an income from it was clearly
wrong. I find myself obliged to agree, with great
respect, with both of these contentions.
It appears from the foregoing passages in the
reasons of the Trial Judge that he was distinguish
ing between the immediate or motivating purpose
of the appellant and what the appellant intended
to do "eventually", and that he considered the
decision in Irrigation Industries reflected this dis
tinction. In my respectful opinion that was a mis
understanding of the judgment in that case. In
Irrigation Industries it was clear that the shares
were purchased with the intention of selling them
for a profit as soon as possible, but the majority
held that this was not sufficient by itself to give
the transaction the character of trade. An impor
tant difference between Irrigation Industries and
the present case is that the BCP venture did not
simply involve a purchase of shares with an inten
tion to resell them for a profit, but the purchase of
a business with the intention of transforming it in
order to turn it into a profitable enterprise.
The implied finding of fact by the Trial Judge
that the immediate or dominant purpose of the
appellant at the time he purchased BCP was to
retain the business for the purpose of earning
income from it is, given the Trial Judge's own
statement in the course of the argument as to the
appellant's credibility, clearly contrary to the
unchallenged evidence of the appellant. The
respondent laid stress on the fact that neither in
his notice of objection nor in his examination on
discovery did the appellant state that his purpose
was to sell the company for a profit as soon as
possible. This might have been a basis for an
adverse finding as to credibility, but the Trial
Judge made it clear in the course of the argument
that he found the appellant to be a credible wit
ness. He referred to the appellant's testimony as
frank, open and direct. There is not a suggestion in
his reasons for judgment that he had any reserva
tions as to credibility. Indeed, in his reasons he
said that he accepted the appellant's statement
"that it was his intention to transform the com
pany, make it profitable and eventually sell it at a
profit". This was a further affirmation of the
appellant's credibility, but it was in my opinion a
misapprehension of the appellant's evidence. The
appellant did not say that he intended to sell the
business "eventually", thereby implying that his
immediate or motivating intention in purchasing it
was to retain it for the purpose of earning income.
He said that he could not keep the business and
that he never intended to recover his investment by
income from the business. In my opinion, if the
appellant's testimony is to be taken as credible,
and it cannot be treated otherwise by this Court in
view of the position taken by the Trial Judge on
the question of credibility, there is only one con
clusion that can properly be drawn from it, and
that is, that it was the appellant's intention, upon
changing the nature of BCP's business and making
it profitable, to sell it as soon as possible for a
profit.
This brings the case in my opinion within the
conception of an adventure in the nature of trade
that was applied in The Commissioners of Inland
Revenue v. Livingston et al. (1926), 11 T.C. 538.
That case involved an isolated instance in which
the taxpayers purchased a ship and changed its
character with a view to selling it for a profit. The
test that was applied was whether the operations
involved in the venture were of the same kind and
carried on in the same way as those which were
characteristic of ordinary trading in the line of
business in which the venture was made. It was
said [at page 5431: "The profit made by the
venture arose, not from the mere appreciation of
the capital value of an isolated purchase for resale,
but from the expenditure on the subject purchased
of money laid out upon it for the purpose of
making it marketable at a profit. That seems to me
of the very essence of trade." Doing what the
appellant proposed to do, with the avowed inten
tion of possibly repeating the operation, if success
ful, may be regarded as a "line of business". Cf.
Rand J. in Gairdner Securities Ltd. v. Minister of
National Revenue, 54 DTC 1015 (S.C.C.), at page
1016: "There could be a business of taking over,
by means of stock control, run down industries,
building them up, and disposing of them ...."
For these reasons I am of the opinion that what
the appellant did with respect to BCP was an
adventure in the nature of trade and that the loss
which resulted from it was therefore a business
loss which is properly deductible in the computa
tion of the appellant's income for the 1976 taxa
tion year.
I would accordingly allow the appeal, set aside
the judgment of the Trial Division, vacate the
reassessments dated January 22, 1979, and refer
the matter back to the Minister for reconsideration
and reassessment on the basis that the loss in
question was a loss from carrying on a business,
the whole with costs.
PRATTE J.: I agree.
* * *
The following are the reasons for judgment
rendered in English by
HYDE D.J.: For the reasons given by Mr. Justice
Le Dain I would maintain this appeal with costs
and dispose of the matter in accordance with his
conclusions.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.