The Assistant Chairman:—On June 13, 1972 at Calgary, Alberta the appeal of Mr Paul A Ferner from a reassessment of the appellant’s income for the taxation year 1965 was heard by consent of the parties simultaneously with the appeal of Mr Cyril Joffe from a reassessment of his income for the taxation years 1965, 1966, 1967 and 1968. The evidence adduced at the hearing was, by agreement, to be applicable in both cases.
The facts are as follows:
1. In July 1961 the appellants and several other persons then known as the Kowall group, having purchased some land on 7th Avenue SW in Calgary, incorporated themselves into a company on October 10, 1971 under the name of Jemp Investments Ltd (to be referred to hereafter as “Jemp”) for the purpose of erecting an office building on the site which, it was hoped, would be leased by the Texaco Exploration Company which was known to be seeking to consolidate its several offices into one building in Calgary.
2. The shareholders in Jemp were:
| Morris Kowall | with 25% of the shares |
| Paul Ferner | with 25% of the shares |
Ed Sardachuck with 25% of the shares
| Cyril Joffe | with 12 /2% of the shares |
| Yale Joffe | with 12 /2% of the shares |
3. On October 20, 1961 Jemp received from Texaco Exploration Company a letter of intent whereby that company and Texaco Canada Limited (Texaco Exploration Company and Texaco Canada Limited to be hereafter collectively referred to as “Texaco”) would lease a major portion of a building providing that Jemp acquired a piece of land on the northwest corner of 6th Avenue and 5th Street SW in Calgary and constructed thereon a 10-storey building (Exhibit A-1).
4. From evidence adduced, the 7th Avenue property not being suitable for Texaco’s requirements, Jemp made arrangements to purchase the 6th Avenue and 5th Street property stipulated by Texaco in its letter of intent as well as additional contiguous land.
5. The initial payment for this land was made by Mr Sam Hashman who had attended a meeting between members of Jemp and Texaco’s representative and was aware of the proposed project. The balance of the price of the 6th Avenue and 5th Street SW property was guaranteed by Jemp, Mr Sam Hashman and Mr John O’Connor. The title of the 7th Avenue property held by Jemp was also pledged (Exhibits A-7 and A-8).
6. Texaco’s letter of intent was signed on the one part by Texaco and on the other by Mr Morris Kowall and Mr Yale Joffe on behalf of Jemp. A declaration of trust was drafted and signed on October 20, 1961 to the effect that any interest acquired under the agreement with Texaco was being held in trust for Mr Morris Kowall, Mr Paul Ferner, Mr Ed Sardachuck, Mr Cyril Joffe and Mr Yale Joffe (Exhibit A-2). Neither Mr Hashman nor Mr O’Connor were participants of Jemp.
7. Mr Sam Hashman offered to purchase from Jemp all their interest in the Texaco lease and office building project, which offer was refused. The following is an extract of the evidence given at the hearing:
Q. Actually you got the commitment from the Texaco companies, Exhibit A-1. Did you receive any offers from anyone to sell the commitments? A. Yes, we did.
Q. Would you describe that, sir? A. Of course, once we had Texaco — when I say “we” I mean Jemp Investments, had the Texaco thing wrapped up in the sense that we had a letter of commitment from them that was really the whole bundle of wax, so to speak, and we had an offer from Sam Hashman Management Limited, well, it came from Sam Hashman, to sell what we had assembled, that is, the Texaco commitment letter and the land, and everything else, for $100,000.00 cash, and without even making a counter-proposal we turned that down and decided to stay in and participate in the equity and in the development, which we did; and I am sure that if we had gone back and made a counter-proposal we should have got more money than that.
Q. You say you are sure that you could have? A. No doubt about it.
MR. PROCIUK (Member): Q. When you say “we”, you mean Jemp Investments Ltd.? A. Yes.
Q. And you received an offer and you would not sell out for $100,000.00 cash? A. For everything that we had done up to that date, and we would be out of the picture completely; and incidentally that offer had some bearing in ‘the determination of the equity arrangement in the new company.
8. On December 12, 1961 a company known as Petex Building Ltd (hereinafter referred to as “Petex”) was incorporated in order to finance and realize the Texaco office building project. Mr Hashman advanced as a shareholder’s loan $200,000 for 50% of the shares of Petex. Mr O’Connor advanced $100,000 as a shareholder’s loan for 25% of the shares of Petex, and a credit of $100,000 plus 25% of the shares of Petex were given to Jemp for the Texaco lease. The $100,000 referred to in the pertinent documents as a commission was to be paid out of the earnings of Petex. The share structure of Petex was therefore (Exhibit A-3):
| Issued Shareholder | ||
| Class A — voting, non-participating | 100 | Sam Hashman |
| Class B — voting, non-participating | 50 | Morris Kowall |
| Class B — voting, non-participating | 50 | JB O’Connor |
| Class C — non-voting, participating | 50 | Jemp Investments Ltd |
| Class C — non-voting, participating | 50 | Trust Corp of Bahamas Ltd |
| Class C — non-voting, participating | 100 | Sam Hashman Management Ltd |
9. On December 3, 1962 Mr Morris Kowall sold 96% of his shares in Petex — 64% to Mr Paul Ferner and 32% to Mr Ed Sardachuck. Mr Kowall also sold $24,000 of his credit of $25,000 of the unpaid commission on which Mr Kowall paid income tax.
10. On December 12, 1962 at a board of directors meeting of Petex the design, the supervision and the financing of the Texaco office building were approved. At the same meeting Mr Morris Kowall tendered his resignation as an officer of the company, which was accepted and Mr Paul Ferner was appointed secretary of the company (Exhibit A-10). As a result of the above transaction, the commissions that were then receivable were as follows:
| Morris Kowall | $ 1,000 |
| Ed Sardachuck | 33,000 |
| Paul Ferner | 41,000 |
| Cyril Joffe | 12,500 |
| Yale Joffe | 12,500 |
11. Petex commenced making payments on account of commission to Jemp from 1965 to 1969 at which time the $100,000 had been paid in full.
12. On April 15, 1965 a letter on which the signatures of Mr Paul Ferner and Mr Cyril Joffe appeared was addressed to the Department of National Revenue describing the business transactions relative to the $100,000 as a commission and claiming that the proceeds received for the business transactions were of a capital nature (Exhibit A-11).
13. In October 1966 the Hashman group sold their interest in Petex to Cummings Bros. At that time the appellants, Paul A Ferner and Cyril Joffe, received offers to sell their shares but refused. In 1968, from evidence adduced, Petex became a public company. Mr Sardachuck is claimed to have been forced by circumstances to sell his shares in 1968. Mr Kowall and Mr Sardachuck having withdrawn from Jemp and Mr Paul A Ferner not wishing to remain as part of a minority group sold his shares in 1969. Although Mr. Cyril Joffe is said to have, for the same reasons, sold his shares in Petex, it is not clear from the record when he did so.
14. From evidence Mr Kowall paid income tax on the payments relative to his share of the $100,000. When they sold their shares in Jemp in 1962, both Mr Ed Sardachuck and Mr Yale Joffe were also taxed on the receipt of payment in relation to their shares of the $100,000 paid by Petex.
15. Neither Mr Kowall, Mr Sardachuck nor Mr Yale Joffe appealed the assessment on payments received in relation to their shares of the $100,000 ‘‘so-called’’ commission paid to them by Petex.
The point to be determined here is whether the amounts reassessed representing the appellants’ shares of the $100,000 received for the transaction in their respective taxation years were receipts of income from a venture in the nature of trade within the meaning of sections 3 and 4 and paragraph 139(1 )(e) of the Income Tax Act or whether they constituted revenue of a capital nature resulting from an investment.
In the cases cited by counsel, although the learned judges have enunciated various criteria to be used as helpful guidelines in distinguishing the sometimes very subtle differences between income from a business or venture in the nature of trade and a capital gain, almost all of the learned judges have understandably stressed the necessity of considering all the circumstances pertinent to each case and the importance of getting to the fundamental nature of the transactions under review.
The Board is concerned here with the appeals of Mr Paul A Ferner and Mr Cyril Joffe and principally with the circumstances surrounding the receipt of their shares of the $100,000 “so-called” commission for negotiating the Texaco lease. The Board is not concerned with, nor should it be influenced by, whether or not the other members of Jemp paid or appealed their assessment with respect to the receipt of their shares of the $100,000. The Board must, however, attempt to determine the nature of the transactions and the circumstances under which the $100,000 became a receivable for Jemp generally and for the appellants in particular.
In analysing the evidence, it seems to me that there are two sets of circumstances to be considered. The first deals with what happened prior to the time Mr Hashman and Mr O’Connor became financially interested and involved in the Texaco building project and, secondly, the nature of the financial agreements between Jemp and the Hashman group.
There is no doubt that the Kowall group, later to be incorporated with Jemp, having heard that Texaco was seeking to centralize its several offices into one office building, did all it could to negotiate and acquire for itself this interesting lease.
Although Mr Kowall and Mr Sardachuck may at one time have been employees of Mr Hashman, there is no evidence that Mr Hashman masterminded the whole transaction from the beginning. On the contrary, there is evidence that Mr Hashman never was a participant in Jemp which effectively held the lease and which had bought land on 7th Avenue for the said Texaco project. Nor was there produced any evidence that might indicate that the persons composing Jemp negotiated the Texaco lease on behalf of or for Mr Hashman. Had that been the proven facts, then the receipt by Jemp of a commission of $100,000 for negotiating a lease for Mr Hashman would have been under entirely different circumstances than what the evidence in this case has shown and would no doubt give rise to a different conclusion.
The record shows that it is only when the negotiations between Jemp and Texaco appeared to be imminent that Mr Hashman became sufficiently interested in the project and only then did he offer to buy the lease for $100,000 cash. At that moment, in my opinion, Jemp held a capital asset worth at least $100,000.
One of the submissions of counsel for the respondent was that the lease, without land and without a building, was worthless. One might well ask then why Mr Hashman was willing to offer Jemp $100,000 for the Texaco lease even before it was formally executed.
In the light of this offer which was refused by Jemp, one might also question the validity of another of counsel’s submissions to the effect that the $100,000 was a commission for services rendered to the Hashman group.
Neither of the appellants was in the business of acquiring and selling leases nor, in fact, were the other members of Jemp so engaged. Mr Paul Ferner, a practising lawyer, and Mr Cyril Joffe, a real estate and insurance broker, from evidence adduced had interests in other income-producing properties and it is entirely credible that their intention in acquiring the Texaco lease was to invest and to derive income from their investment in the Texaco office building project.
The financing of the Texaco project seems to have been beyond the capacity of Jemp alone and the negotiations with Mr Sam Hashman and Mr John O’Connor for the financing of the project began the second phase of the transactions. Mr Hashman paid for part of the land required by Texaco on 6th Avenue and 5th Street in Calgary, and the loan for the balance of the cost of this site was. guaranteed, among other things, by land previously acquired by Jemp on 7th Avenue for the Texaco project but which had proven to be inadequate for Texaco’s requirements.
lt was also agreed between Jemp and the Hashman group that a company known as Petex Building Ltd would be incorporated to finance and construct the Texaco office building. From uncontradicted evidence adduced it was Mr Sam Hashman, for reasons of his own, who insisted that the term “commission” be used in documents describing the transfer of the Texaco lease from Jemp to Petex (Exhibits A-9, R-1).
As indicated above, there is no evidence that justifies considering the $100,000 as a commission fee paid to Jemp for services rendered to the Hashman group. In my opinion, the Texaco lease was acquired and held by and for Jemp for the purpose of executing the Texaco office building project as planned by Jemp in July 1961. Whether the $100,000 is called a commission or something else, the agreement relating to the lease constitutes in fact a sale of Jemp’s capital assets, the price of which was to be paid over a period of years. This opinion is further supported by the contribution of both parties to the financial structure of Petex which was to realize the project and in which the Hashman group received 75% of the shares of Jemp for an advance of $300,000 as shareholders’ loans and Jemp received a credit of $100,000 to be paid out of earnings and 25% of the shares for transferring to Petex the Texaco lease which was essential for the realization of the project and which was, in fact, owned by Jemp. The contribution of each of the parties in Petex can, to my mind, be equated, and it is difficult to see how, in the circumstances, the $100,000 can be considered a commission fee for services rendered to Mr Hashman.
Counsel for the respondent makes much of the fact that Jemp held that lease 23 days and that its refusal to sell the lease at Mr Sam Hashman’s first offer was indicative that Jemp was merely holding out for more money. Even if this were true, it is immaterial to the point at issue. What to my mind is significant is that the appellants and the other members of Jemp in requiring 25% of the shares of Petex and in agreeing to wait some years before receiving their $100,000 which they could otherwise have obtained immediately, were serious in their declared intention of investing and participating in the operation of the Texaco office building as a revenue-producing enterprise.
The payment of the shares of the $100,000 to the shareholders of Jemp began in 1965 and the appellants held their shares of Petex until a majority decision of the board of directors of Petex agreed to sell their interest to a firm which transformed the company into a publicly owned enterprise. The decision to form a publicly owned company, which was beyond the power of Jemp to prevent, completely altered the circumstances and the conditions of its participation in the operation of the Texaco office building. The appellants’ subsequent sale of their shares in Petex cannot be considered as being indicative of speculation as part of a business or as a venture in the nature of trade dating back to 1961.
In résumé, the Texaco lease, the key to the Texaco office building project, was a Capital asset in the hands of Jemp which was sold to Petex for $100,000 plus 25% of the shares in Petex. Jemp’s contribution to the project was the immediate delivery of the Texaco lease to Petex while agreeing to take the risk of waiting some years before being paid the price of the lease out of the company’s earnings.
The transactions in which the appellants were involved are, to my mind, of a capital nature and the profit realized therefrom a capital accretion.
The appeal is therefore allowed.
Appeals allowed.