MacGuigan, J.:—This case raises a classic issue of income tax law. In the words of the Lord Justice Clerk (Macdonald) in Californian Copper Syndicate Limited v. Harris (1904), 5 T.C. 159 at 165, “‘Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profitmaking?’’
In this case the issue was resolved by the trial judge as follows, Appeal Book, p. 290; [1979] C.T.C. 296 at 303:
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 acquisition 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 company 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 M.N.R. v. Sissons, [1969] C.T.C. 184; 69 D.T.C. 5152. We do not agree that the Sissons case stands for the proposition that gain arising from an entrepreneur'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 187 (D.T.C. 5154) 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 conclusion. A more decisive consideration seems rather to have been that in the paragraph which immediately follows at 187 D.T.C.:
(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 considered plan executed as conceived.
Pigeon, J. further adds, at 188 (D.T.C.):
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 v. The Queen, [1977] C.T.C. 325 at 327; 77 D.T.C. 5230 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 profitmaking venture, it was unquestionably 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.
Appeal allowed.
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