A-406-79
Samuel Eidinger (Appellant)
v.
The Queen (Respondent)
INDEXED AS: EIDINGER V. CANADA
Court of Appeal, Pratte, Hugessen and Mac-
Guigan JJ.—Montréal, November 19, 1986.
Income tax — Income calculation — Income or capital gain
— Whether partial repayments of loans assigned to appellant
as part of reacquisition of financially troubled corporation
income or capital gain — Appeal from Trial Division judg
ment holding enhancement in value of loans to company not
capital profit resulting from circumstances not controlled by
appellant but income as gain resulting from appellant's per
sonal efforts and hence part of adventure in nature of trade —
Trial Judge misinterpreting Supreme Court of Canada deci
sion in Sissons case — Said case not standing for proposition
gain arising from entrepreneur's personal efforts necessarily
income rather than capital gain — Evidence herein negates any
carefully considered plan for realization of speculative profits
— Although, in aspiration, assignment of loans as part of
reacquisition profit-making venture, here unquestionably
capital investment — Therefore, partial repayments on loans
not income from business but capital gain — Appeal allowed.
CASES JUDICIALLY CONSIDERED
APPLIED:
Californian Copper Syndicate v. Harris (1904), 5 T.C.
159 (Scot. Exch. Ct.).
EXPLAINED:
Minister of National Revenue v. Sissons, [1969] S.C.R.
507; [1969] C.T.C. 184.
DISTINGUISHED:
Steeves (SS) v. The Queen, [1977] CTC 325 (F.C.A.).
COUNSEL:
Michael D. Vineberg for appellant.
Daniel Verdon for respondent.
SOLICITORS:
Phillips & Vineberg, Montréal, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment of
the Court delivered orally in English by
MACGUIGAN J.: This case raises a classic issue
of income tax law. In the words of the Lord Justice
Clerk (Macdonald) in Californian Copper Syndi
cate v. Harris (1904), 5 T.C. 159 (Scot. Exch.
Ct.), at page 166, "Is the sum of gain that has
been made a mere enhancement of value by realis
ing a security, or is it a gain made in an operation
of business in carrying out a scheme for
profit-making?"
In this case the issue was resolved by the Trial
Judge as follows [ [1979] CTC 296, at page 303;
79 DTC 5218, at pages 5223, 5224]:
Although Defendant has an acceptable explanation as to why
he took nominal sums which he required for living expenses out
of the company as repayment of loans rather than as salary—
namely that the company's affairs were so precarious when he
again took over that the bank might well call its loans, putting
the company into bankruptcy unless it could begin to show a
profit, and I am satisfied that the tax considerations did not
enter into his mind, nevertheless I am forced to the conclusion
that although, at the time of the acquisition, assignment of the
loans to him was of little interest to him and not a primary
consideration for his reacquisition of the business, the acquisi
tion of these loans by such assignment cannot be considered as
a capital investment by him (even if he had paid some nominal
sum for them) but must be considered as part and parcel of the
acquisition of the business. Therefore even though it was an
isolated transaction and he is certainly not in the business of
acquiring loans or book debts, the acquisition of them cannot
be considered as a 'capital investment by him. Although the
reasoning in the Australian case of Wills is persuasive, the
weight of Canadian jurisprudence and in particular the
Supreme Court case of Sissons (although the facts in it were
somewhat dissimilar in that the taxpayer had deliberately
purchased two loss companies and transferred a profitable
business to one of them which was able to write off its losses
against these profits and thus repay a loan to the other com
pany enabling it to redeem debentures held by the taxpayer—in
short a well thought out scheme) lead me to conclude that the
enhancement in value of the loans to the company which he
acquired from nil to a sufficient value to enable repayment of
them to him to be commenced was not a capital profit resulting
from circumstances which he did not control but that it was a
result of Defendant's personal efforts and hence part of an
adventure in the nature of trade.
We are all agreed that the learned Trial Judge
has misinterpreted the decision of the Supreme
Court of Canada in Minister of National Revenue
v. Sissons, [1969] S.C.R. 507; [1969] C.T.C. 184.
We do not agree that the Sissons case stands for
the proposition that gain arising from an entre
preneur's personal efforts has, by reason of that
fact alone, the quality of income rather than of
capital gain. In fact, the passage of Pigeon J. at
pages 511 S.C.R.; 187 CTC on which such an
interpretation might be based was merely part of
the Court's rejection of all five of the reasons upon
which the Trial Judge there had based his conclu
sion. A more decisive consideration seems rather to
have been that in the paragraph which immediate
ly follows at pages 511-512 S.C.R.; 187 CTC:
(e) Finally, respondent's gain cannot properly be considered as
having arisen fortuitously. On the contrary, uncontradicted
evidence shows that it is the result of a carefully con
sidered plan executed as conceived.
Pigeon J. further adds, at pages 512 S.C.R.; 188
CTC:
Here the clear indication of "trade" is found in the fact that the
acquisition of the securities was a part of a profit-making
scheme. The purpose of the operation was not to earn income
from the securities but to make a profit on prompt realization.
The operation has therefore none of the essential characteristics
of an investment, it is essentially a speculation.
In the instant case the evidence negates any
such carefully considered plan for the realization
of speculative profits. In that respect it also differs
from the scheme considered by this Court in
Steeves (SS) v. The Queen, [1977] CTC 325, at
page 327 where Urie J. emphasized that "the
transaction was structured in the fashion in which
it was to achieve a desired purpose."
Here, as the above passage from his reasons
shows, the Trial Judge found that (1) "the tax
considerations did not enter into his [appellant's]
mind" and (2) "at the time of the acquisition,
assignment of the loans to him was of little interest
to him and not a primary consideration for his
reacquisition of the business".
The fact that the assignment of the loans was
"part and parcel" of the appellant's reacquisition
of a business which he himself founded years
earlier and which he wished to rescue from its
financially perilous position must lead to the same
conclusion with respect to the loans as would be
drawn for the business itself, viz., that, although in
aspiration a profit-making venture, it was unques
tionably a capital investment. For that reason we
are all agreed that the partial repayments on the
loans made by the business to the appellant in the
1971 and 1972 taxation years were not income
arising from the appellant's business in those
years.
The appeal will therefore be allowed, with costs
both here and in the Trial Division, the judgment
of the Trial Judge set aside, and appellant's
income tax assessments for the 1971 and 1972
years referred back to the Minister of National
Revenue for reconsideration and reassessment in
accordance with these reasons.
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.