Walsh, J:—This case concerns an appeal by plaintiff and a cross appeal by defendant from the decision of the Tax Review Board dated September 29, 1977, which found in favour of the defendant on one of the two issues raised and in favour of plaintiff on the other. By Notice of Reassessment dated June 20, 1973, the Minister of National Revenue had assessed defendant with respect to its 1970 taxation year on the basis that the sum of $473,623.12 profit realized from the sale of certain real property in the Province of Ontario was income of the defendant for the year. It was defendant’s contention that this profit was in the nature of a capital gain and this contention was upheld by the decision of the Tax Review Board. The second issue arose from a Notice of reassessment dated the same date in respect of defendant’s 1968 taxation year which included in the computation of its income for that year the sum of $135,947.16 described as interest revenue realized from the acquisition of the Glen Abbey property from Clearstream Developments Limited.* This reassessment was upheld by a decision of the Tax Review Board and defendant appeals it by way of counterclaim. On the Same day a reassessment was made in respect of the 1969 taxation year which increased the plaintiff’s income for that year by eliminating a loss carry forward from 1968 of $11,001.38 which adjustment arose as a result of the aforementioned reassessment made in respect of the 1968 taxation year. Similarly as a result of a subsequent reassessment on the first issue the Minister deducted the sum of $305,447.75 as a paragraph 85(b)(1)(d) reserve from the sale of a portion of the Glen Abbey property from the income of defendant previously assessed by the Minister of National Revenue for its 1970 taxation year. Neither of these latter two reassessments are directly involved in the present appeal or cross-appeal as the case may be as they are merely consequential to the original assessments which are in issue before the Court.
In making the assessments based on the contention that the profit from the sale of property was of an income nature the Minister made the following assumptions.
(a) in 1964, a corporation known as Clearstream Developments Limited (hereinafter referred to as “Clearstream”) held title to certain real property subject to a first mortgage as well as options to purchase two adjoining parcels of land (hereinafter referred to as “parcels 2 and 3”).
(b) on July 22, 1964, defendant loaned to Clearstream $350,000 secured by a second mortgage on parcel 1 and at the same time received an assignment from Clearstream of its interest in the options to purchase parcels 2 and 3 as further security for the loan.
(c) on July 20, 1965, defendant agreed to advance a further sum of $175,000, the second mortgage thereby being increased to $525,000.
(d) on July 26, 1968, defendant acting through an intermediary entered into an agreement with Clearstream to purchase said parcel 1 and the assignment of the options to purchase parcels 2 and 3.
(e) on December 31, 1968, title of the property was transferred to the defendant as well as the rights under the options.
(f) on October 3, 1969, defendant exercised the options to purchase parcels 2 and 3.
(g) by an agreement dated April 21, 1970, defendant sold approximately 288 acres of parcels 1 and 3 thereby realizing a profit in the amount of $473,623.12.
(h) at all material times defendant in acquiring title to the said parcels 1,2 and 3 had the intention of dealing in, trading in or otherwise turning the said real property to account for a profit.
Reliance is placed on sections 3, 4 and paragraph 139(1)(e) of the Income Tax Act, RSC 1952, c 148 in effect at the time.
Defendant contends that in 1964 it had surplus funds available from its business operations but had never engaged in the money lending business when it was approached by a representative of Clearstream to provide interim financing for the construction of a golf course, swimming pool and parking lot on a portion of the property known as Glen Abbey property, as a result of which it loaned the sum of $350,000 for two years secured by a second mortgage on parcel 1 together with the assignment as additional security of options to purchase parcels 2 and 3. These options were an integral part of defendant’s underlying security for its loan without which it would not have granted the loan. Construction problems as well as financial and administrative problems were encountered and before the expiration of the two year term defendant agreed to lend an additional $175,000. Actually a total of $500,000 was advanced to defendant. Defendant defaulted on both the first and second mortgage payments as well as on certain option payments and eventually after the second mortgage fell due in July, 1966 defendant instituted a foreclosure action in the Supreme Court of Ontario against Clearstream which was vigorously defended with the result that there were considerable delays and some danger of the action being dismissed. The options on parcels 2 and 3 although extended would have expired if not exercised by 1969. Defendant believed that Clearstream would not be financially able to exercise the options. Accordingly, in order to protect its security it would have been necessary for defendant to fund this exercise by the payment of an amount in excess of an additional $326,000 which it did not wish to do. Meanwhile the relationship between Clearstream and defendant had deteriorated so it had reached the conclusion that to protect its investment it should terminate its dealings with Clearstream and attempt to purchase the Glen Abbey property through a nominee corporation with the view to liquidating same as soon as a purchaser could be found. The property was eventually purchased by a nominee of defendant, Ontra-Desar Realty Investments Limited. At no time was it contemplated that there would be a gain on the sale of the Glen Abbey property nor was this an underlying motivation for the purchase, the only purpose being to liquidate the considerable amounts due to defendant by Clearstream, and to avoid the loss of a substantial part of defendant’s security. In 1970 defendant disposed of parcels 1 and 3 and realized a gain of $473,623.12 thereon this resulting from an unanticipated purchase offer.
With respect to the counterclaim defendant alleges that it never received the $135,947.16 interest or any part thereof in its 1968 taxation year, this interest merely appearing as an adjustment figure between Ontra-Desar and Clearstream in determining the balance owing by Ontra-Desar on the purchase from Clearstream, but was never paid by Outra-Desar to defendant since Ontra-Desar was merely its nominee, the two companies really being one and the same. In contesting this counterclaim plaintiff relies on paragraph 6(1 )(b) of the Income Tax Act.
John Bailey a professional engineer who has been president of defendant since 1960 testifies that he is the controlling shareholder. The company formerly operated under other names but he had been associated with it since 1954. The company was a large scale contractor dealing primarily in institutional buildings, having constructed university buildings at Waterloo and McMaster Universities and a number of general hospitals all over the Province of Ontario. By the late 1960s it did some $25,000,000 worth of work per annum and apparently has work in progress at present worth between $75,000,000 and $100,000,000. He stated that it was essential for the company to be able to obtain bonding in order to bid on and undertake these contracts but that despite the company’s good credit record bonding companies would refuse bonding if the liquidity of the company deteriorated. In 1964, two years after he had acquired the balance of shares of the company from a Mr Soules with whom he had been associated for some time and whose opinion he valued, he heard from him that a Mr D J G Halford, an architect whom he also knew and trusted and others were planning to acquire land to build a high quality golf course and develop the peripheral lands around it in the vicinity of Oakville. A company was to be formed for these purposes which later became Clearstream. The promoters of this project had been negotiating with a company known as Interia Investment Management Limited for a loan of $350,000 on a second mortgage to develop the golf course on the property which was to be bought from the Jesuit Fathers of Upper Canada Holding Corporation who would hold the first mortgage. Interia was to receive 12% interest together with three common shares of Clearstream, amounting to a 12 /2% holding in that company. This deal fell through and Mr Bailey testified that his company agreed to lend the same amount, although he was satisfied to receive 10% interest together with three shares in Clearstream. His company had surplus funds to invest at the time and 10% was a good yield. The land which was purchased, hereinafter referred to as parcel 1 contained 174 acres on which the course would be built with a substantial house on it which it was intended to use in the first instance as the club house as well as an additional 62 acres around the periphery of the golf course. Parcel 2 on which an option was obtained was separated from parcel 1 by a stream known as Sixteen Mile Creek and contained 48.6 acres zoned as residential, while parcel 3 on which an option was also obtained was to the south of parcel 1 and zoned as industrial land.
At the time of making the loan Mr Bailey concluded that as services were not too far distant the option price to be paid for parcel 2 was less than its real value, that the option price for parcel 3 was a realistic appraisal of its value but that the purchase price for parcel 1 was really more than it was worth at the time. It must be remembered that he was a contractor and nota real estate expert and that he relied substantially on Mr Soules’ view for information as to the value of the property, so this evidence is of little value. In any event he considered that the options for parcels 2 and 3 formed a substantial part of the security and testified that he would never have made the loan on parcel 1 but for the existence of these options. A well-known golf course architect Howard Watson had been retained and the course was to be built by contractors who were retained for this purpose, and not by Mr Bailey’s company and was to be completed by 1965. Because of his wide experience in earth moving operations he contributed some of his time without remuneration in supervising the work and he became one of the directors of Clearstream in October of 1964. The contractors Coniston Construction Company got into difficulties however with other work they were doing in the Toronto area and removed most of their equipment towards the end of the 1964 year. Meanwhile Clearstream had trouble arranging additional financing within their own group and various package deals were offered to attract investors. It was initially arranged with a group of people representing the Upper Canada Country Club that they would purchase the course and club house from Clearstream at cost plus a modest fee. Clearstream hoped to make its profits from development of the peripheral lands around the golf course. Upper Canada Country Club-encountered difficulty in getting sufficient members however and the completion of the golf course was delayed and interest charges were mounting. Another $350,000 was needed to complete the construction and he agreed to advance $175,000 if the other members of the group would match this. Actually on this basis he only eventually loaned an additional $150,000. When Coniston was placed in receivership in 1965 one of the Clearstream group John Bright and Mr Bailey were deputed by the group to approach them to terminate the contract, and the course would then be completed with rented equipment, the work being supervised by another member of the group. Interest on his second mortgage fell into default during 1965 and 1966 but Clearstream still tried to raise money from anyone who would advance it and eventually involved some 40 investors. His bonding companies began pressing him and wanted him to collect the amount due on this loan and the matter got so serious that he felt that his contracting business would be damaged unless he could get out of this investment. On July 22, 1966 there was a default of the interest and principle due to him as well as the sums due on the first mortgage as a result of which his company Greenington Group Limited commenced proceedings against Clearstream. He reached a tentative agreement with the other members of the group that he would take the title to the property and try to sell it and after reimbursing his company for the balance due on the mortgage any remaining balance would go to Clearstream. Although this was approved by 92% of the shareholders the deal never went through. He attempted to resign as a director of Clearstream in view of a conflict of interest but had difficulty getting the other directors to attend a meeting to accept his resignation. Considerable hostility was shown towards him because of his foreclosure of the mortgage and his action was vigorously contested. He had to make certain payments on the options to the Jesuit Fathers so as to keep the options in effect, for which he was eventually reimbursed by Clearstream. The more the action was contested on procedural grounds the more concerned he became about realizing on his security, and so did his bonding company. His attorney was pessimistic about the possibility of finalising the proceedings at an early date. Realtors were retained in Oakville and the option properties were advertised for sale but no offers were received. In his view the property as a whole including the option properties might not be of sufficient value to repay all mortgages and additional loan funds put up by Clearstream. He knew a Mr Buehler, President of Brethour Realty Service, and retained him to negotiate a purchase of the property for cash, not disclosing to Clearstream that he would be the buyer. He estimated the value of the golf course and peripheral lands at $2,000 an acre, allowing little extra for the house on the golf course property. He considered that the option parcel zoned residential was worth $10,000 an acre and that zoned industrial $6,000 an acre making a total of $1,450,000 in all. The first mortgage was $360,000. The prices payable to exercise the options would of course have to be deducted. He calculated an offer of $700,000 plus the assumption of all the liabilities would leave something to enable Clearstream investors to recover part of their investment. Actually he was able to buy the property for $1,575,000.
The golf course was now in use. If he had not continued to operate it it would have deteriorated rapidly and affected the value of the development of land around it so he put some of his own people in and continued operating it at a deficit. During the winter he opened a ski hill however on the property which was successful. He instructed Mr Buehler to dispose of the property as soon as possible. He had hoped that once he had acquired title to the property his position with his bonding companies would improve but bonding was still suspended due to his lack of liquidity. Fortunately his company had a substantial backlog of work already bonded for about two years and he hoped that his position would be recovered before this delay expired. He was willing to sell for a price which would have got his money back but had no serious offer. All of a sudden a real estate agent phoned him saying he had a potential buyer who was interested in the land to the west of the river but did not want to buy parcel 2. He wished to sell everything but the purchaser flatly refused so he sold parcels 1 and 3. The sale price was actually suggested by the agent who had approached him.
The purchase from Clearstream was made by Ontra-Desar Realty Investments Limited a company incorporated by Greenington Group Limited for this sole purpose, all funds being provided to it by the use of Greenington Group Limited bank credit. It is common ground between the parties that no issue arises out of the separate corporate personality of the two companies which may be considered as one and the same company, both wholly owned by Mr Bailey. It was the sale by Ontra-Desar to Home Smith Limited of parcels 1 and 3 in 1970 for $1,930,000 which gave rise to the reassessment for that year on the basis that the purchase in 1968 and resale in 1970 at a profit was an income transaction. The agent William Sorokolit Realty Limited had introduced Home Smith Limited to defendant received its 5% commission from Greenington Group Limited on the sale. The witness later learned that the purchaser was a large scale developer which had acquired extensive land holdings in the area and required parcels 1 and 3 to consolidate them, but was not in the least interested in parcel 2 although it was zoned for residential development since it was to the east of the river and to that extent cut off from the other parcels. It is of interest to note, although not relevant to the present assessment, that the golf course eventually became the famous Glen Abbey Golf Course Club in which the renowned golfer Jack Nicklaus participated in the design and which is intended to become the permanent home of the Canadian open golf championship. Obviously during the time the course was being built by the Clearstream group, with the intent of using the house on the property as the club house, it was only a much more modest development which was foreseen, as a converted house, even a large one such as the one in question would certainly be insufficient for a golf club of this nature, to say nothing of the necessary ancillary buildings which a golf course requires. They had hoped to build the golf course for $230,000 and even including improvements to the club house spend only $350,000 over and above the purchase price of parcel 1.
The witness Bailey testified that Greenington Group Limited (which had formerly been called Robertson Yates (1966) Limited) had at about the same time been developing some taxable income and had acquired two completed town house developments for leasing purposes so as to be able to take advantage of a 5% capital cost allowance. One was in Don Mills and the other, known as Forest Glen, was in Cooksville and consisted of 150 units. The company however had neither purchased the land nor built the units, and sold them after a couple of years in about 1970. The profit realized from these sales is not involved in the present reassessment.
There is no doubt that Mr Bailey and his associates in Clearstream, all professional or businessmen in the Oakville area in which the property is situated planned to make a profit by developing the peripheral land around the golf course for residential use. There is no indication that they intended to construct residences on it themselves but presumably they hoped to subdivide it into building lots and sell these lots to builders or developers. It became apparent however that the town of Oakville was not favourable to this. It was his view that Genstar which eventually became owner of the large area of some 1,500 acres, including the subject property sold to Home Smith, proceeded with the subsequent lavish golf course development in conjunction with the Royal Canadian Golf Association in order to impress the town authorities with a view to permitting the zoning of the other land for residential development.
As early as September 1966 Mr Bailey had through Haney Hunt and Bowden Limited, large realtors in Oakville, tried to sell the option lands of parcel 2, and parcel 3 (for which the option price had now been increased to $208,000 so that the total cost to take up the two options was now $340,000) but received no offer.
In the agreement of sale from Clearstream to Heinrich Ochs, the agent who was acting on behalf of the company to be formed (Ontra-Desar) it was provided that the purchaser would assume the first mortgage but that the sale was conditional on the assignment by the Jesuit Fathers to the purchaser of the option to purchase parcels 2 and 3 and on the vendor agreeing with Robertson Yates (as defendant was then called) for release and discharge at the time of closing, of any encumbrance, lien, claim or other interest which it might have on the three parcels. Mr Bailey insisted on this as the vendors were not to know that he or his company were in fact the purchasers so that the second mortgage would automatically be extinguished as a result of their purchase. It had to appear to the vendors that his claims under the second mortgage would be discharged in full and the security given therefor released to the purchasers. As soon as the purchase was completed his company was in a position to pay up any arrears due on the first mortgage and to take up the options on parcels 2 and 3. Subsequently defendant sold the land on parcel 2 in about 1973 but that is not the subject of the present assessments.
Thomas McWhirter, CA defendant’s auditor testified, corroborating Mr Bailey’s evidence as to the problems with the bonding companies as a result of the loss of liquidity due to not being able to obtain repayment of the second mortgage, the original loan of $350,000 having only been made for two years. To keep the option on parcels 2 and 3 in force payments of $7,000 had to be made to the Jesuit Fathers semi-annually and on several occasions defendant had to make the payments itself after waiting until five minutes before the deadline to see if Clearstream would be making them. He was aware that Clearstream group had been trying without success to sell the Glen Abbey property. He was greatly concerned with the delays in the action brought by defendant to foreclose the second mortgage, which was constantly being delayed by various procedures which were brought, he believes, to gain time for Clearstream. He shared Mr Bailey’s views that the investment was not fully protected by the value of parcel 1 and needed the added security of the options on parcels 2 and 3, and he was not aware at the time that Home Smith were buying property in the area. Robertson Yates (1966) Corporation was operated as one with Greenington Group, Robertson Yates carrying on the construction business and the Greenington Group after 1966 becoming involved mainly in sewer and water main construction plus investment in town houses. As a result there was a lack of liquidity which resulted in the sale of the town houses.
The statement of adjustments as of September 17, 1978, the date of the finalization of the purchase from Clearstream by Ontra-Desar is especially significant. It shows as a credit to the purchaser principal and interest due to Robertson Yates Corporation Limited (as defendant was then known) to be discharged by the purchaser as of August 15, 1968, in the amount of $651,907.44. Additional interest from August 6 to September 17 accrued in the amount of $5,879. The balance due on closing is shown as $483,464.60. Actually of course the purchaser never paid the amounts due to defendant since it itself was the purchaser, but on the other hand the balance due on the closing to the vendor Clearstream would have been increased by these amounts if they had not been shown as a liability to be discharged by the purchaser.
He testified that in July 1966 payments due by Clearstream to Robertson Yates fell into default just before the latter started foreclosure proceedings and that he therefore stopped recording interest as receivable in the books of the company, nor was any allowance set up for it as a bad debt following that date, as he considered there was no point in recording an item which there was little likelihood of collecting. It simply disappeared from the accounting records of defendant and was never written off. After the purchase by Ontra-Desar the transaction was not recorded on the basis of the statement of adjustments but on the basis of total cost, the principal of the mortgage amounting to $500,000 being transferred to the cost of the assets, and the balance of the purchase price not being recorded as such. No books were ever kept by Ontra-Desar, all its expenses being recorded only in Greenington’s books.
In cross-examination he refused to concede that there was any discrepancy in the books. He had recorded the acquisition at its actual cost. If interest had been received he would have recorded it in Greenington’s income statement. He admitted however that if it had been recorded as a receivable it would have been shown. Examined on his notes on defendant’s 1969 balance sheet he stated that the reference to Ture Anderson (Eastern) Limited is to a construction company acquired by defendant to do its water main contracts. Reference to the guarantee of bank advances to Mansion Estates Limited refers to an adventure of defendant in the development business, which was part of its liquidity problem. This latter company had subdivisions in Mississauga and Oakville including some land inventory in Mississauga held for future development. Another person was interested in it as well as Mr Bailey. It dealt in residential subdivisions around 1967, 1968 and 1969 but it was pretty well wound up by 1971. He stated that there was never any intention whatsoever to transfer any of the golf course properties to Mansion Estates. This was a different type of property altogether, being a short term development which could be completed right away.
Morton Greenglass, barrister who acted for Robertson Yates in the action against Clearstream to foreclose the mortgage as well as attempting to sell the property by virtue of the power of sale clause in the mortgage agreement stated that this latter was blocked by a judgment of the Ontario Supreme Court in an interlocutory injunction proceeding. He stated that a great number of defences had been raised in the foreclosure action, first that the original mortgage had never been beneficially released to Robertson Yates when an agreement was reach to add an additional $175,000 and a new document made to replace the first $350,000 mortgage and secure the entire amount. The second defence was that Robertson Yates which had a Canadian letters patent was prohibited by paragraph 14(k) of the Canada Corporations Act from lending to a company with which it had dealings or in which it owned shares. There was also a further contention that there were no specific powers in the company’s charter for lending money except for trade debts. It was also contended that the loan had been in con- travention of The Loan and Trust Corporation Act of Ontario. There was also the contention that Robertson Yates had verbally agreed with Clearstream that if it could not play up the mortgage when due the time for repayment would be extended by two months, so that the action brought was premature. It was further contended that Robertson Yates had never delivered to Clearstream a copy of the mortgage contrary to the terms of the mortgage and that contrary to The Mortmain Act it had an insufficient license to make a loan. Finally it was contended that by agreement between Clearstream and the Jesuit Fathers the two options had been assigned as collateral and that since any rights of foreclosure were subject to redemption the value of this security also had to be accounted for. A counterclaim was brought by Clearstream stating that Mr Bailey had undertaken to oversee the golf course construction but that negligence of supervision had delayed it. While he felt that most of the issues raised were frivolous the multiplicity of motions began to shake his confidence in succeeding in the proceedings. Moreover the ultra vires defence could easily have gone to the Court of Appeal and there might not have been a hearing before 1970 whereas the options were due to expire in August 1969. He felt that Clearstream would not have taken up the options for, if it had sufficient money for this it could have used it to relieve its default under the mortgage. There was a general hostile atmosphere and it was impossible to reach any agreement. He suggested arbitration out of court but this was never done. After issuing the writ he had suddenly realized that all defendant had to do was give a 45 day notice under a power of sale clause in the mortgage and sell the property. There were conflicting terms in the mortgage however and this procedure was restrained by an injunction brought by Clearstream. The day after the purchase was made by Ontra-Desar the actions were dismissed by agreement, with Robertson Yates paying the costs.
John Bright another barrister testified. He was one of the Clearstream group and has been secretary of it from the end of 1964 to the current time. He testified as to the various attempts made between 1964 and 1968 to raise additional funds as they were constantly short of cash. He agreed that from time to time Robertson Yates had to make some of the payments to keep the options in effect when Clearstream had insufficient funds. With respect to the settlement which had been negotiated with Mr Bailey he stated that it became abortive because there was no written agreement at the time and there was a later disagreement as to some of the details. He returned it to the shareholders and reported that what they had agreed to was not quite what Robertson Yates wanted so the settlement was never completed. He corroborated Mr Bailey’s evidence to the effect that the only intention of the Group had been to sell the golf club property to the Upper Canada Country Club at cost, but that this latter club was unable to develop its membership because of the delays in construction. Alternative purchasers were then sought and from March to July 1966 the sale was discussed with various parties but nothing developed. The foreclosure action in July of 1966 made it difficult to pursue the sale attempts and this accounted to some extent for the animosity between the other parties in Clearstream and Mr Bailey. From January 1967 to August 1968 however many purchasers were sought. Probably about 30 offers were received but none were accepted. The only unconditional offer was for parcel 2, and most of the offers attached a condition requiring rezoning or subdivision approval. Except for parcel 2 the other land appeared to be 10 or 15 years away from development. When Clearstream had bought the property they had felt that development could proceed but the subsequent master plan for the Town of Oakville changed this. The Ontra-Desar offer was perhaps $250,000 better than any that had been received up to that time and as a result of it the shareholders received a return of about 46¢ on each dollar they had invested. Aside from the mortgages there were some $250,000 of unsecured liabilities to be paid off. The legal view of Clearstream’s lawyer was that it could delay the foreclosure proceedings for at least 18 months and perhaps by four years if they were appealed. While Clearstream shareholders might between them have raised the sums required to take up the options if they had been sure of selling the properties soon after, they had been unable to get any serious offers, and none were willing to put up additional funds. He stated that there were probably 50 or more real estate agents making offers to Clearstream which was trying desperately to sell the property but none were serious. It was not until December 1966 that Mr Bailey succeeded in getting his resignation as a director accepted, so he would have had some awareness of some of these offers up to that time. A number of the prospective purchasers had gone to Robertson Yates trying to renegotiate its second mortgage position at a discount, but defendant had refused to do this.
With respect to the agreement by Ontra-Desar to discharge the Robertson Yates second mortgage which resulted in a reduction of the amount payable to Clearstream he stated that provided Clearstream obtained a clear release from any liability under the mortgage it was of no concern to Clearstream how Ontra-Desar paid Robertson Yates and whether in fact it did so.
On the basis of this evidence it is not difficult to conclude that the members of the Clearstream group when they acquired land from the Jesuit Fathers for the construction of the golf course, together with the surrounding land which they proposed to use for residential development, and the options on parcels 2 and 3, were embarking on an adventure in the nature of trade and that any profits derived therefrom would be taxable as income. Mr Bailey through his company Robertson Yates Limited (later Greenington Group Limited) became actively associated with a one eighth participation by virtue of the three shares he obtained when he caused his company to make the initial second mortgage loan of $350,000. He was also active throughout, serving on several committees of Clearstream and helping in the supervision of the building of the golf course and in connection with the later attempts to sell the property when the development plan became aborted as a result of the financial difficulties of the group and problems with the Town of Oakville in obtaining necessary zoning changes for development of the peripheral property. While he testified that he acquired the three shares as the result of merely adopting the same terms which Clearstream had offered to Interia Investment Management Limited when it was attempting to obtain the loan from that company, save that he was prepared to accept a lower rate of interest of 10%, I cannot conclude that he was entirely disinterested in the profit making potential of the proposed development. Although an engineer by profession and an experienced general contractor, whose companies had never been engaged in money lending business nor in residential development projects, he was certainly a sufficiently experienced and informed businessman to appreciate the profit potential of the proposed development. While his company had surplus funds available for investment at the time, and an interest rate of 10% in 1964 was probably substantially in excess of the yield being obtained from his companies’ other investments, I do not believe that the investment return from this loan on a second mortgage to be used for developing a golf course, which is always a project subject to some risk, would have been sufficient to have justified this investment if it had not been “sweetened” by his being given the three shares representing a one eighth interest.
It was not his investment in Clearstream however which resulted in the eventual profit which the Minister now seeks to tax as income. He eventually gave up his three shares when the litigation between his company and Clearstream was settled after his purchase of the property and right to the options by Ontra-Desar, but even if he had not given up these shares he would not have made any profit as a result of his participation in the ill fated Clearstream development, since it is in evidence that the purchase price was only sufficient to return to the members of the group about 46¢ on each dollar of their investment. The members of the group therefore received not a profit but a loss on their investment. In fact from 1966 Clearstream was trying in every possible way to dispose of the property and option rights to any willing purchaser and had no reasonable anticipation whatsoever of selling at a profit, but was trying to get a price which would cut its losses and at least help the participants recover some part of their investment. Meanwhile they were by every legal means possible delaying the foreclosure of the mortgage by Mr Bailey’s company. His offer through Ontra-Desar was by far the best offer received and they were pleased to accept it, as had the foreclosure proceedings been successful, or the alternative proceeding to simply take over the property under the power of sale clause in the mortgage, they would most probably have had no return whatsoever on their investment.
What makes the present case unusual is that Mr Bailey and his company were involved in the project in two entirely separate and distinct capacities, first as a one eighth shareholder of Clearstream, and secondly simply as a mortgage lender. In the latter capacity Mr Bailey’s company could not have anticipated making any profit. A mortgage creditor merely received payment of the amount due under the mortgage, and lending money on a mortgage cannot normally be considered as an adventure in the nature of trade unless the lender is in this business, and even in this event its profits would be limited to the interest received together with any premiums for prepayment or other similar income. It would only be in very exceptional circumstances indeed that it could reasonably be concluded that a mortgage lender has made the loan in anticipation that there will be a default on it and that he will thereby obtain ownership of property worth considerably more than the loan and be able to dispose of same at a profit.
The evidence is quite clear that all that Mr Bailey was seeking to do after Clearstream’s default on the mortgage in 1966 was to recover the amount loaned and outstanding interest. There is no evidence whatsoever to cast any doubt on his testimony that if he had obtained possession of the property and rights in the options by the foreclosure procedures or by the takeover clause in the mortgage deed he would then have attempted to sell it for whatever he could get, hopefully sufficient to recover at least the major part of the sums due. His bonding company was pressing him because of his lack of liquidity and this would eventually if the situation were not remedied cause serious disruption of his construction business. He had no reason whatsoever to anticipate that after taking over the properties he would be able to sell them at a profit—in fact the unavailing efforts of the Clearstream group to do so, with which he was fully familiar gave no grounds for optimism in this connection. It is highly significant that he had even agreed to a settlement with Clearstream whereby he would take over the property and options and endeavour to sell it and if there were any profit this would go to Clearstream. The Clearstream directors, unwisely as subsequent events have proved, failed to implement this agreement. Finally as a last resort he bought the property from Clearstream through Ontra- Desar, keeping it a closely guarded secret that he would be the purchaser. His agent negotiated the best price possible.
Mr Bailey’s evidence is uncontradicted when he states that he did not know at the time of the purchase from Clearstream that Home Smith Realty Company was buying property in the area for a very large scale and apparently well financed development and had acquired some 1500 acres. Had this been known to any of the Clearstream group it is evident that they would have approached Home Smith before accepting the offer of Ontra- Desar. There is no justification for assuming that Mr Bailey possessed information which they did not. What is more probable is that in 1968 at the time Mr Bailey bought it through Ontra-Desar there was no market for the property but that in 1970 Home Smith, realizing that the golf course would suit its development plans very well was willing to pay Mr Bailey’s company a premium price for same. I therefore conclude that the profit resulting from this sale was an accidental profit resulting from the realization of an investment. In reaching this conclusion I conclude that it was not Mr Bailey’s intentions in 1964 when he joined the Clearstream group and had his company make the initial mortgage loan which is the pertinent time frame to which we must look, but rather his intentions in 1968 when he bought the property through Ontra-Desar. As I have stated previously, the original intention of making a profit with the other members of the Clearstream group by the acquisition and development of the subject property did not result in any profit but in a loss, so that it is Mr Bailey’s intention at the time he acquired ownership of the property through Ontra-Desar in 1968 which is the date which must be considered, since it is this acquisition of ownership and subsequent sale of profit which gave rise to the assessment. His intention in 1968 was not to make a profit by acquiring the property but rather to cut his losses and recover amounts due on the loan and interest if possible. This finding is in line with established jurisprudence in such cases as Irrigation Industries Limited v MNR, [1962] S.C.R. 346; [1962] CTC 215; 62 DTC 1131 in which Martland, J referred with approval to the decision of Lord Buckmaster in the British case of Leeming v Jones, [1930] AC 415. The fact that Mr Bailey had other companies in the period between 1967 and 1970 which dealt with residential subdivisions and which had purchased substantial numbers of town houses for rental income and subsequently sold same, the profits from which had been assessed as income does not affect this conclusion, as there is ample jurisprudence to the effect that even a trader is entitled to make a capital gain on an isolated transaction and that it is quite possible for him to have some profits properly taxable as arising from an investment in the nature of trade, and at the same time in an entirely separate project have a profit in the nature of capital gain, so that each separate project must be looked at by itself. Plaintiff’s action is therefore dismissed with costs and defendant’s 1970 income tax assessment is returned to the Minister for reassessment on the basis that the realized gain of $473,623.12 on parcels 1 and 3 was a gain on capital account.
It is now necessary to consider defendant’s counterclaim on the question of interest. It is defendant’s contention that since Ontra-Desar and defendant were in effect one and the same no capital or interest was paid by Ontra-Desar to defendant when the purchase was made from Clearstream in 1968 and that therefore the interest of $135,947.16 should not have been included to defendant’s income for its 1968 taxation year and that the loss carried forward of $11,001.38 for its 1969 taxation year should have been allowed. Paragraph 6(1)(b) of the Income Tax Act in effect at the time (RSC 1952, c 148) reads as follows:
6.(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year
(b) amounts received in the year or receivable in the year (depending upon the method regularly followed by the taxpayer in computing this profit) as interest or on account or in lieu of payment of, or in satisfaction of interest.
Amount is defined in paragraph 139(1)(a) of the Act as follows:
139.(1) In this Act,
(a) “amount” means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing.
Reading the two together it is evident that interest does not have to actually be paid in money. The amount was clearly receivable by defendant in 1968 as a mortgage creditor and in lieu of payment of or in satisfaction of it, its alter ego Ontra Desar paid an equivalent lesser sum in the cash adjustments from the sale than the amount which it would otherwise have had to pay to the vendor Clearstream. This is abundantly clear from the cash adjustments made at the time and based on figures worked out at a meeting prior to the completion of the sale between the Clearstream directors and Mr Bailey and his accountant Mr McWhirter. The fact that the vendors did not know when Mr Bailey insisted that the second mortgage be paid off in full including capital and interest by the purchaser that the purchaser was in fact another of Mr Bailey’s companies does not alter the situation, nor does the fact that the interest had not been recorded in the books of defendant as a receivable following the default on the mortgage. It is unnecessary here to go into the question as to whether the accounting procedure adopted was proper or not, but it can certainly be stated that a company cannot by the mere failure to record interest in its financial statements avoid taxation on its interest, even if this is done in good faith and with no intent to defraud. It is the real and actual situation which must be looked at and it is clear the defendant actually received the interest due to it on its loan as a result of paying less in cash to the vendor to the same extent when the purchase price was paid. The argument of defendant that the purchase price paid was more than the actual value of the property and options since purchaser knew it would not have to pay off the second mortgage and interest is of no relevance. It would only be of significance if the purchase price had been insufficient to pay off the entire first mortgage and outstanding interest plus the amount due on the second mortgage and outstanding interest on it, in which case it could properly be said that defendant had not recovered its entire investment, but even in this event, I am of the view that any amounts over and above what was required to pay off the first mortgage and accrued interest would in the first instance be at- tributed to the interest due on the second mortgage, with any remaining balance attributed to the capital, so that if there had been any loss to defendant as a result of a sale for such a price the loss would have been attributable to capital rather than to interest.
Defendant’s counterclaim fails therefore and is dismissed with costs. The decision of the Tax Review Board was correct on both issues.
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