Brilund Mines Limited v. Minister of National Revenue, [1971] CTC 403, 71 DTC 5218

GIBSON, J.:—This is an appeal from re-assessments of the appellant’s income for the taxation year 1966 whereby the appel- lant’s income was increased by an amount of $531,706.28, being made up of what was alleged to be a gain of $451,706.23 realized on the sale of shares in Spooner Mines and Oils Limited and the sum of $80,000 purportedly representing ‘‘Income arising from settlement of claim against Mr. V. N. Harb ins on”.

In essence, the re-assessments constitute a claim for taxes in respect (1) of moneys received and gains realized by the appellant from shares of Spooner Oils Limited, and (2) other moneys received which the appellant obtained from the said Vincent Noble Harbinson, by way of settlement of two actions brought by the appellant in the Supreme Court of Ontario against Harbinson and others for the purpose of recovering assets of which the appellant allegedly had been deprived by the wrongdoings of Harbinson and other persons.

To understand what is at issue, certain background facts were given in evidence.

Some of these facts are also set out in the criminal cases of Regina v. Ben Smith, [1965] 4 C.C.C. 151; Regina v. Ben Smith and Harry Smith, [1963] 1 O.R. 249; and Regina v. Smith, Stuart, Schonbrun, Rauch and Rauch (1961), 131 C.C.C. 14; [1962] S.C.R. 215. These will be referred to later in these reasons.

In-brief, as at December 31, 1956 the appellant, according to its consolidated balance sheet, had assets of a value of $1,487,518.10 ; but during the year 1957 several persons fraudulently appropriated to themselves substantially all of these assets.

How this came about is now recited.

The situation was that in 1956 the appellant was effectively controlled and managed by one Ben Smith and one Harry Smith of Toronto. As at December 31, 1956, the consolidated balance sheet of the appellant listed assets totalling $1,487,518.10, consisting of current assets of $56,727.89, investments amounting to $914,945.09, fixed assets consisting of mining rights and claims and other physical equipment, exploration and other expenditures and so forth of $476,827.67, and other assets valued at $39,018.10.

The assets listed on the said balance sheet as investments were as follows:

Ben Smith and Harry Smith together with Harbinson and others in concert during the year 1957 appropriated to themselves substantially all the above-mentioned assets and also made certain gains or profits for themselves by dealing in said investments listed above and also by various ways using these investments for themselves personally, so that probably it can fairly be said that there was appropriated from the appellant $1,712,705.94 made up as follows :

As a result of these transactions, all of its cash and investments were appropriated by these several persons.

The several persons involved in: this fraudulent conspiracy which accomplished this result were the said Ben and Harry Smith and other members of the board of directors of the appellant with the complicity of the Canadian Imperial Bank of Commerce at Toronto, Ontario and the active co-operation of Harbinson, a Roy Hamilton Smith (no relation to Ben and Harry Smith), who had offices in the same building as Harbinson in Toronto who was a vice-president and director of New Chamber-, lain Petroleums Limited and Spooner Oils Limited and president and director of Hywood Scarcee Oils Limited, one Hyman Goldstein, a salesman employed by A. E. Osler & Company Limited and George Carnegie, a customers man employed by the stock borkerage firm of S. R. McKellar & Company; and also by the conspiracy of Ben and Harry Smith with four others. who purchased control of the appellant from Ben and Harry Smith in May 1957, namely, D. Charles Stuart of North Bay, who was the owner of 21 unpatented mining claims acquired by him in 1957 at a cost of $5,800 which were sold to the appellant for $960,000, and Stanley I. Schonbrun, Sol R. Rauch and Harold Rauch, all of New York.

Following the appropriation of all of the cash and investments of the appellant by various actions of the above-mentioned persons, certain criminal proceedings took place and also certain civil litigation was instigated.

The criminal proceedings were as follows :

Ben and Harry Smith were first charged with theft in 1958 of 65,920 shares of Spooner, the property of Perseverance, and the theft of $52,036, the property of Perseverance. The trial came on before Gale, J. (as he then was) and a jury on December 3, 1959. The jury found the accused not guilty. No appeal was taken by the Crown.

Ben Smith, D. Charles Stuart, Stanley I. Schonbrun, Sol R. Rauch and Harold K. Rauch were charged with stealing moneys and securities to the value of $960,000, the property of Brilund. The case came on for trial before Gale, J. (as he then was) with a jury at the assizes at the City of Toronto on September 19, 1960. None of the accused adduced any evidence in defence. Harold Rauch was found not guilty. Ben Smith, D. Charles Stuart, Stanley I. Schonbrun and Sol R. Rauch were found guilty and each of them was sentenced to a term of imprisonment of six years. They all appealed to the Court of Appeal and by judgment delivered June 20, 1961 the Court of Appeal dismissed the appeal ((1961), 131 C.C.C. 14). The accused then appealed to the Supreme Court of Canada. It was there held that as the cheque for $960,000 was a forgery (the signing officers never having been properly elected) the company did not have any ownership or special interest in the cheque and therefore it could not have been stolen. The appeals were therefore allowed ( [1962] S.C.R. 215).

Ben and Harry Smith were also charged with stealing 240,000 shares of New Chamberlain Petroleums Limited, the property of Brilund, by pledging the shares to the Canadian Imperial Bank of Commerce, King & York Streets Branch, to secure an overdraft of the joint account of the said Ben and Harry Smith at the said branch. Their trial came on before Gale, J. (as he then was) and a jury, commencing on April 12, 1960. They were convicted and sentenced to imprisonment for two years less a day. The appeal to the Court of Appeal for Ontario was dismissed ([1963] 1 O.R. 249). Leave to appeal to the Supreme Court of Canada was refused.

Ben Smith and D. Charles Stuart were charged with conspiring with Schonbrun and the two Rauch’s to defraud Brilund of $960,000. The citizens of the United States could not be extradited on a conspiracy charge and declined the invitation to attend voluntarily. Ben Smith and Stuart were tried separately. Stuart pleaded guilty in a trial before Ferguson, J. He then gave evidence at the, trial of Ben Smith before Donnelly, J. with a jury. Smith was convicted and sentenced to imprisonment for six years. His appeal to the Court of Appeal was dismissed [1965] 4 C.C.C. 151).

So much for the criminal proceedings.

The civil proceedings instigated and how they came about and were concluded are now recited.

In 1962 one Emanual Rosenblat, Manny Mazur and Paul Mazur of New York, obtained effective control and management of the appellant. It was not given in evidence precisely how many shares of the appellant they obtained, but in any event, it was sufficient for such purposes.

Rosenblat stated at this trial that he was a graduate of the Harvard Law School and had practised law in New York prior to Word War II, but that after the war he had gone into business and during all the material times he operated a chemical plant just outside New York City. He was the person who almost singlehandedly investigated what had been done in this appropriation of cash and investments of the appellant by the said several persons and who effectively caused the appellant to bring several civil legal proceedings against the wrongdoers for the return to the treasury of the appellant the said cash and investments.

After attempting unsuccessfully to have the company call a shareholders meeting on November 16, 1960, Rosenblat obtained an order of the Chief Justice of the High Court of the Supreme Court of Ontario ordering that a meeting of shareholders of Brilund be held under the direction of the Master on or before December 15, 1960. A meeting was held on December 14, 1960 with the Master as chairman. After a number of adjournments and applications to the Court, on March 22, 1961 Emanual Rosenblat, Dr. Henry Weiss, Moris Pakien, Carl Goldman and Wallace L. Minto were elected as directors.

Thereafter, the appellant commenced four actions in the Supreme Court of Ontario :

(Action No. 2989/61) On April 14, 1961, an action was commenced having the following style of cause :

BETWEEN :

BRILUND MINES LIMITED

Plaintiff

— and —

BEN SMITH, HARRY SMITH, D. CHARLES STUART, STANLEY I. SCHONBRUN, SOL R. RAUCH, and HAROLD D. RAUCH

Defendants.

The endorsement on the writ was as follows:

The Plaintiff’s claim is for damages in the amount of $960,000.00 with interest at 5% per annum from the 1st day of May, 1957, for loss sustained by the Plaintiff on or about the 1st day of May, 1957, by the theft or fraud or breach of fiduciary relationship of the Defendants in wrongfully paying out or causing to be paid out of the Plaintiff’s accounts with The Imperial Bank of Canada the sum of $960,000.00 to the Defendants for the use and benefit of .'■< the Defendants and wrongful receipt and detention of the said

$960,000.00 by the Defendants.

(Action No. 3091/61) On April 17, 1962, an action was commenced having the following style of cause:

BETWEEN:

BRILUND MINES LIMITED

Plaintiff

— and —

CANADIAN IMPERIAL BANK OF COMMERCE, FREDERICK FINDLAY, and FRANK UDELL

Defendants.

The plaintiff claimed :

(a) the sum of $1,010,000 or in the alternative the sum of $960,000 ;

(b) in the alternative, the sum of $357,864.27 being the amount by which the Canadian Imperial Bank of Commerce was enriched through the fraudulent transactions;

(c) the sum of $127,262;

(d) the sum of $75,000; and

(e) interest on all of the said sums from the dates the same were respectively debited from the account of the plaintiff until payment at the rate of 6% per annum.

(Action No. 5092/62) On June 28, 1962, an action was commenced having the following style of cause:

BETWEEN:

BRILUND MINES LIMITED

Plaintiff

— and —

VINCENT NOBLE HARBINSON, ROY HAMILTON SMITH, HYMAN GOLDSTEIN, GEORGE W. CARNEGIE, BEN SMITH, HARRY SMITH, G. MARSHALL FERGUSON, A. BERTRAM LOCKLEY, ROBERT AMELL, A. E. OSLER AND COMPANY, FREDERICK FINDLAY, CANADIAN IMPERIAL BANK OF COMMERCE, SPEX LIMITED and CHAPCOE INVESTMENTS CORPORATION LIMITED

Defendants.

The plaintiff claimed :

(a) a declaration that the options purportedly granted to Chapcoe Investments Corporation Limited and dated May 22, 1956, August 2, 1956 and April 5, 1957 are fraudulent and void and asks for a declaration accordingly ;

(b) against the defendants Vincent Noble Harbinson, Roy H. Smith, Hyman Goldstein, George W. Carnegie, Ben Smith,

G. Marshall Ferguson, Robert Amell, A. Bertram Lockley and Chapcoe Investments Corporation Limited :

(i) a declaration that the plaintiff is entitled to receive from them any and all shares of Chamberlain or Searcee Petroleums Limited owned by them or in their possession, power or control;

(ii) an injunction restraining them from selling, transferring, disposing of or otherwise dealing with any of the said shares of Chamberlain or Scarcee Petroleums Limited;

(iii) an interim injunction ;

(iv) an accounting for all profits made by them;

. (v) damages in the amount of $750,000 ;

(vi) judgment for the amount found due upon the taking of such accounts together with interest thereon at the rate of 5 % per annum;

(c) against the defendant A. E. Osler and Company, damages in the amount of $350,000; and

(d) against the defendants Canadian Imperial Bank of Commerce and Frederick Findlay, damages in the amount of $350,000.

(Action No. 8911/62) On December 10, 1962, an action was commenced having the following style of cause:

BETWEEN:

BRILUND MINES LIMITED

Plaintiff and —

VINCENT NOBLE HARBINSON, HARRY SMITH, BEN SMITH, G. MARSHALL FERGUSON, A. BERTRAM LOCKLEY, ROBERT AMELL, CANADIAN IMPERIAL BANK OF COMMERCE, and FREDERICK FINDLAY

Defendants.

The plaintiff claimed:

(a) a declaration that the defendant Harbinson holds all shares of Spooner acquired from the plaintiff under the agreement dated February 16, 1957 of which he is in possession or control in trust for the plaintiff ;

(b) for accounting of profits made by the defendant Harbinson in respect of any Spooner shares so acquired of which he has since disposed and judgment for the amount of such profits ;

(ec) an injunction restraining the defendant Harbinson from selling, transferring, disposing of, or otherwise dealing with any of the said shares of Spooner ;

(d) an interim injunction in the terms of paragraph (c) hereof ;

(e) in the alternative, for an accounting of the profits made by the defendants Ben and Harry Smith and Harbinson from the sale or other disposition of the Spooner shares so acquired from the plaintiff and judgment against the said defendants for the amount thereof together with interest at 5% per annum thereon;

(f) a declaration that the sum of $52,036.38 was money belonging to the plaintiff and that the defendant Bank holds the sum of $52,036.38 in trust for the plaintiff or in the alternative, damages against the defendant Bank and the defendant Findlay in the sum of $52,036.38 ; and

(g) damages against the defendants in the sum of $250,000.

Action No. 1 (the action between Brilund and Ben and Harry Smith, Stanley I. Schonbrun, Sol R. Rauch and Harold D. Rauch) was not proceeded with. Instead, the plaintiff decided to proceed against the Canadian Imperial Bank of Commerce. By judgment delivered September 11, 1964 the plaintiff recovered the sum of $1,313,442.62, being the sum of $960,000 with interest thereon from May 1, 1957 to the date of judgment. The Bank appealed to the Court of Appeal and the plaintiff cross-appealed. The action was finally settled for $750,000.

Rosenblat then entered into negotiations with the other wrongdoers to recoup for the plaintiff all the moneys of which it had been unjustly deprived. Rosenblat had available to him at that time the transcripts in the various trials as well as the findings of the various courts. This material provided the means for the pursuit of all those who had taken the cash and investments of the appellant in 1957.

Rosenblat in a letter to Mr. Paul Mazur, the secretary of Brilund, dated June 18, 1965, pointed out the appellant’s intention to recover the assets it had lost. This was repeated in several letters Rosenblat wrote to shareholders.

(See letter from Brilund to Paul Mazur, June 18, 1965— Book 14, page 220; letter from Brilund to Paul Mazur, December 23, 1966—Book 14, page 262 at page 267 ; and letters and. reports to shareholders from Rosenblat—Book 8, pages 49, 54, 55, 57 and 60.)

As a result of the efforts made, which were those mainly of Rosenblat, but with the advice and assistance of the two Mazurs,

the appellant recovered from various persons as follows:

From the Canadian Imperial Bank of Commerce

plus also what it received from Harbinson, which is in issue in this appeal.

What the appellant received from Harbinson, it recovered in the settlement of the action between it and Harbinson et al. (being Supreme Court of Ontario action No. 8911/62) ; and in the settlement of the action between it and Harbinson et al., including Chapcoe (being Supreme Court of Ontario action No. 5092/62).

The claim against Harbinson which was used as a proposed basis for this settlement, the appellant alleged, was formulated in the manner following (see Exhibit 14, page 178 being Rosenblat’s notes) :

Rosenblat sought to settle the two actions against Harbinson and the others from this sum rounded out to $257,000. He wrote Paul Mazur on June 18, 1965 (see Exhibit 14, page 220 at page 223) that he should try to negotiate a settlement with Harbinson by getting Harbinson to give the appellant 600,000 shares of Spooner Oils Limited plus $67,500. His precise words were:

. . . It is for this reason that Brilund will entertain a proposal which offers the shares of Spooner stock. This is something which Harbinson has and which he can part with. For this reason I thought that. 600,000 shares of Spooner with a market value of $150,000 plus $67,500 was such a “bargain”. The difference between the 538,500 shares and the 600,000 shares of Spooner provides the necessary cash to cover the $24,000 McKellar-Brilund check. This proposal waived all interest claims and the payment of attorney’s fees. The acceptance of stock in lieu of cash in a sharply declining market, at present market price, puts on Brilund Mines a very serious risk and hence a proposal of this kind should not be available more than 10 days.

At our last discussion at Harbinson’s office, where we talked over what might constitute a “real bargain”, Brilund indicated that it would consider, subject to the approval of the Board of Directors $67,500 plus 300,000 shares of Spooner stock. This $67,500 was a rough figure based upon 30,000 shares of Chamber- lain at $1.50 the $22,500 explained on page 2 paragraph 2. How- eevr, a proposal of this kind would require that Harbinson pay attorneys’ fees in an amount of $14,250 which is 10% of the total value of the settlement ($67,500 plus $75,000 — the $75,000 is 300,000 shares of Spooner at 25$ per share). This offer cannot be offered for more than 10 days for the reasons expressed above. I feel this a true bargain and I do not feel Brilund should accept less.

Apparently at this juncture Harbinson took the position that he was not interested in this proposal, saying that he was not personally involved in the fraud of Ben Smith and Harry Smith against the appellant.

Rosenblat was adamant. He then ordered a transcript of the evidence in the criminal case of Regina v. Ben and Harry Smith (supra) at which Harbinson had been a witness for the Crown. This was the case above referred to in which Ben and Harry Smith were charged with theft in 1958 of 65,920 shares of Spooner, the property of Perseverance, and theft of $52,036, the property of Perseverance, in which the jury found them not guilty. The transcript of the evidence disclosed what Harbinson said at this trial. This evidence of his involvement was entirely different from what he had heretofore told Rosenblat. Rosenblat also obtained two documents, Exhibit 14, page 182, being a cheque to Harbinson for $10,000 which Harbinson had not told Rosenblat about; and Exhibit 14, page 183, being minutes of a meeting of Perseverance Mining & Development Company. He obtained the latter from Mr. Ferguson, the lawyer in the said criminal case (referred to as ‘‘Smith’s man’’ by Gale, J. as he then was). Harbinson was recorded as being present at that meeting and being part of the transaction, which he had previously denied.

Rosenblat gave this transcript and copies of these documents to Harbinson and to Harbinson’s solicitors to prove to them the validity of the appellant’s civil lawsuits against Harbinson.

Following this, on September 2, 1965, Rosenblat again saw Harbinson and told him that the appellant would settle then for 600,000 shares of Spooner plus $97,000 plus $25,000 from Carnegie.

Then on September 24, 1965 Donald D. Carrick, solicitor for the appellant at the time, prepared the following memorandum addressed to T. P. O’Connor his partner, from an interview he had with Rosenblat and Mazur. This sets out the proposal for settlement.

Mr. Rosenblat and Mr. Mazur told me to-day about negotiations for a settlement of the action against Noble Harbinson. The action arises out of dealing in shares of Spooner owned by Brilund by Harbinson.

Our clients have got to the point where Mr. Harbinson has indicated desire to settle the action and he is furnishing them with information about the Spooner Company.

Mr. Rosenblat has in mind an Agreement under which Harbinson turns over to Brilund 600,000 shares of Spooner and pays a sum of money to Brilund, the exact amount of which is to be negotiated. The directors of Spooner will give an employment contract to Harbinson for a period of time at a salary to be negotiated.

Manny and Paul feel that this will return to Brilund the shares of Spooner they are entitled to receive plus a sum of money and Brilund will then acquire the services with his ingenuity of Harbinson working on behalf of Brilund and Spooner.

There is another consideration that enters into this. Harbinson represents to him that all he has is the shares of Spooner and to lose them would ruin him. This is an attempt to work out a compromise with Harbinson which will accomplish what I have mentioned above and it will also enable Brilund to settle the litiga- tion with Harbinson which, like all litigation, carries an element of uncertainty about the outcome. Harbinson has indicated that if he is obliged to give up the 600,000 shares of Spooner without anything more, he will fight the litigation to the end because it means his ruination.

Manny and Paul are going to get further information about the assets and liabilities of Spooner from Harbinson and if they are satisfied with the financial situation, they will try to negotiate a settlement along the lines mentioned with Harbinson.

The way the matter stands at the present time, is Harbinson is going to get the information for our clients and he is going to come up with some proposal which our clients will hear.

Manny used the word “merger” when he discussed this matter with Mr. Harbinson. I explained to Manny that a merger in our law would involve the union of Brilund and Spooner, either under the name of one of the companies, or under the name of a separate company and that is not what could be done at the present time. This may affect the proposal that Harbinson puts forward to him. Manny wants to leave the matter so that at a future date, depending upon the circumstances, a merger of Spooner and Brilund could be considered.

It may be necessary in negotiations to give Harbinson an option on a block of Brilund stock, but this is one of the matters that will have to be negotiated. Perhaps the option would be on Spooner stock.

There was a further meeting on November 11, 1965 of Rosen- blat with Harbinson and others. Then on November 12, 1965 there was a tentative agreement for settlement reached which was as follows: The appellant was to get 600,000 shares of Spooner; in addition, the appellant was to buy from Harbinson an additional 100,000 shares of Spooner, making a total of 700,000 shares; and the appellant was to pay Harbinson $140,000 for these additional 100,000 shares. Harbinson was also to pay back to the appellant $80,000 representing the settlement of the extra claim for cash heretofore proposed at $97,000.

Rosenblat said the reason he proposed that the appellant take the Spooner shares from Harbinson in partial settlement was because that was the only way the appellant could get paid, Harbinson not having sufficient money to pay the appellant’s claim; and that the reason that the appellant, as part of the settlement, proposed to buy an additional 100,000 shares from Harbinson of Spooner shares was so that the appellant would get effective control of Spooner and that in paying Harbinson $140,000 for those 100,000 shares, Harbinson would be in a position, out of it, to pay back to the appellant $80,000 representing, as stated, the cash amount of the proposed settlement.

In partial implementation of this transaction, the appellant gave Harbinson an unmarked cheque for $140,000 and Harbinson deposited 561,820 shares of Spooner Mines and Oils Limited in escrow with the appellant’s solicitors, Carrick, O’Connor and Coutts. The understanding was that a total of 700,000 shares would be deposited and until the complete settlement, the $140,000 cheque would not be cashed.

Instead, Harbinson had the $140,000 cheque certified.

Following this, there was a further meeting on November 18, 1965 and a more complete but still tentative settlement was reached. The $140,000 cheque was given back by Harbinson to the appellant. A so-called letter of intent dated November 18, 1965 was signed by both Harbinson and the appellant which was supposed to form the basis of the settlement. It read as follows:

LETTERS OF INTENT

VINCENT NOBLE HARBINSON (called “Harbinson”) and BRILUND MINES LIMITED (called “Brilund’’) do hereby signify their intent to enter into an agreement as follows:

1. Subject to acceptance of an Amending Filing Statement of SPOONER MINES AND OILS LIMITED (called “Spooner’’) by the Toronto Stock Exchange, reflecting the within transaction, Brilund will purchase from Harbinson 700,000 shares of Spooner at 20¢ per share for $140,000.00.

2. Chapcoe and/or Harbinson will pay Brilund $80,000.00 in full settlement of all Brilund’s claims against him arising out of the matters referred to in Supreme Court of Ontario Writs of Summons Nos. 5092/62 and 8911/62.

3. Harbinson will cause the resignations of two of the directors of Spooner and cause to be appointed two nominees of Brilund and also deliver resignations in blank (undated) of two additional directors of Spooner, including his own, to the said nominees of Brilund.

4. Harbinson will agree that so long as he is a director of Spooner he, and those other directors who are his nominees, will vote all shares of Spooner owned or controlled by them, including shares covered by proxies received or obtained by them, only as directed by Brilund.

5. Brilund will cause its nominees on the Board of Spoonér to vote in favour of the employment of Harbinson as the Chief Executive Officer of Spooner for a minimum 5-year term for an aggregate consideration of $75,000.00, which contract may be assigned to Harbinson’s personal. corporation, and which contract will be guaranteed by Brilund.

6. Brilund. will vote all its shares of Spooner during the employment of Harbinson as President and Chief Executive Officer to elect Harbinson as a director of Spooner.

7. Harbinson has delivered in escrow to Carrick, O’Connor & Coutts certificates covering shares of Spooner which, to- gether with certificates covering additional shares shall constitute the 700,000 shares to be purchased by Brilund.

This letter of intent is for the purpose of outlining of settling which must be approved by lawyers of both parties.

DATED at Toronto, Ontario, this 18th day of November, 1965.

(Signed) Vincent Noble Harbinson

BRILUND MINES LIMITED

(Signed) E. Rosenblat

President

(Signed) Paul A. Mazur

Secretary

The next meeting between Rosenblat and Harbinson was on January 5, 1966 at Harbinson’s house in Toronto.

Between November 18, 1965 and January 5, 1966 Rosenblat had been in Europe in connection with the operation of his regular business, a chemical plant in New York, and, in addition, on his return had been in New York and also in Toronto before January 5, 1966. On his visit to Toronto before January 5, 1966 he had been engaged in settling the action the appellant had against Ben and Harry Smith and others.

Then on January 5, 1966 Rosenblat saw Harbinson again when Harbinson indicated to him that he could not or would not carry out the proposed settlement pursuant to the so-called letter of intent. Among the things he could or would not do was to cause four of the seven directors of Spooner Oils Limited to be elected.

In addition, Rosenblat had found out that Spooner had divested itself of the Scarcee shares. The Scarcee Company apparently owned very valuable mineral rights and were vital in so far in Rosenblat’s view, and their absence made the Spooner shares much less valuable as an investment.

No further acts of implementation of the proposed settlement were accomplished until February 18, 1966, when Rosenblat caused the appellant to order that the shares held in escrow be sold. Harbinson did not agree that the apepllant had the right to order that these shares be sold, because according to the terms of the escrow, these shares were held pending directions from both parties by their solicitors. This dispute was not resolved, but the solicitors were given a direction signed by both Harbinson and Brilund Mines Limited (see Exhibit 14, page 191). It read as follows:

February 18, 1966 Mr. T. P. O’Connor,

Barrister & Solicitor,

320 Bay Street,

Toronto 1, Ontario.

Dear Sir:—

With reference to the 700,000 shares of Spooner Mines and Oils Limited which you are holding in voluntary escrow pending a determination and a settlement, you are hereby authorized to dispose of this stock at the following average prices:

100,000 shares at 70 Cents per share,

100,000 shares at 75 Cents per share,

100,000 shares at 80 Cents per share, and 400,000 shares at 85 Cents per share.

You are authorized to deliver this stock against payment and retain the proceeds pending instructions from Mr. E. Rosenblat and the writer. It is the intention that these shares will be distributed through G. W. Nicholson & Co. Ltd. and confirmations will be forwarded to you “In Trust”. You are also authorized to return the shares you are holding in excess of 700,000 to the writer.

Yours very truly,

(Signed) V. N. Harbinson

Agreed and Accepted:

BRILUND MINES LIMITED, by

(Signed) E. Rosenblat

President

(Signed) Paul A. Mazur

Secretary.

Certain of the wording of this authorization is significant, namely, the words ‘‘pending a determination and a settlement, you are hereby authorized’’ etc.; and the words: “You are authorized . . . pending instructions from Mr. E. Rosenblat and the writer’’.

Apparently, and I accept the evidence to this effect, at this juncture, Harbinson unknown to Rosenblat was running a market in the shares of Spooner Mines and Oils Limited for the purpose of facilitating an underwriting and distribution of further shares of Spooner carried out by a company known as New Brunswick Uranium Metals & Mining Limited, which latter was also unknown before to Rosenblat.

By March 10, 1966, after certain of the shares had been sold, Rosenblat was insisting that all the Spooner shares in escrow be sold and apparently Harbinson did not wish any more of these shares sold because sales of these shares was spoiling the market he was running.

Finally, on April 7, 1966 the settlement which had been tentative up to that time was made between the appellant and Harbin- son. The settlement did not implement the terms spelled out in the so-called letter of intent in toto, but instead the terms were somewhat modified and changed in certain respects.

The settlement was accomplished in the following manner :

(1) the appellant gave a release to Harbinson for the sum of $5,000 (see Exhibit 14, page 213) ;

(2) the appellant gave a release to Chapcoe Investments Corporation Limited (the ‘‘alter ego’’ of Harbinson) for the sum of $75,000 ;

(3) the appellant gave Harbinson a cheque for $140,000; and

(4) (as of April 7, 1966, pursuant to the said direction of February 18, 1966, T. P. O’Connor had caused to be sold 322,000 shares of Spooner and had received for such $275,406.23, and there were still 378,000 shares of Spooner, out of the 700,000, in escrow. Harbinson agreed to give the appellant 85^ a share for these shares, the market was then about $1.40.) As a result, Harbinson gave to the appellant the sum of $321,300.

Following this, Harbinson directed the solicitor T. P. O’Connor to deliver the said moneys and the said 378,000 shares to the appellant so that this could be accomplished (see Exhibit 14, page 209) :

6th April, 1966. T. P. O’Connor, Esq., Q.C.,

Messrs. Carrick, O’Connor

Coutts & Crane,

Barristers, etc.,

320 Bay Street,

TORONTO

Dear Sir: Re : Spooner Mines and Oils Ltd.

With reference to my agreement with Brilund Mines Limited and my letter to you of 18th February, 1966, you are hereby authorized and directed to deliver forthwith to Brilund Mines Limited 378,000 shares of Spooner Mines and Oils Limited and the proceeds from the sale of the balance of the 700,000 shares which were held by you pursuant to the letter of 18th February.

You are now discharged from your duties as Trustee pursuant to the said letter insofar as I am concerned.

Yours very truly,

V. N. Harbinson.

In the result, therefore, the evidence was that in so far as the receipt of $451,706.23 is concerned, the settlement took the form of a purchase and sale, but it was not.. Harbinson did not wish evidence of his fraud recorded in the settlement documents and the appellant agreed to this.

The respondent pleads that the facts upon which the alleged profit of $451,706.23 should be included in computing the appellant’s income for 1966 were as follows:

(a) In late 1965 or early 1966 the Appellant purchased from one V. N. Harbinson 700,000 shares of Spooner Mines and Oils Limited (hereinafter referred to as “Spooner”) at 20¢ per share for the sum of $140,000.00;

(b) The said shares were purchased pursuant to a Letter of Intent between the Appellant and Harbinson dated November 18, 1965, which provided in part as follows:

“VINCENT NOBLE HARBINSON (called ‘Harbinson’) and BRILUND MINES LIMITED (called ‘Brilund’) do hereby signify their intent to enter into an agreement as follows:

1. Subject to acceptance of an Amending Filing Statement of SPOONER MINES AND OILS LIMITED (called ‘Spooner’) by the Toronto Stock Exchange, reflecting the within transaction, Brilund will purchase from Harbinson 700,000 shares of Spooner at 20$ per share for $140,000.00.”

(c) The 700,000 shares of Spooner were placed in an account at the brokerage house of G. W. Nicholson & Company Limited, under the name of “T. P. O’Connor in Trust” (1.e., in trust for the Appellant) ;

(d) By letter dated February 18, 1966, addressed to T. P. O’Connor, Harbinson instructed T. P. O’Connor to sell the 700,000 shares at prices ranging from 70$ per share to 85¢ per share. The shares were to be distributed through G. W. Nicholson & Company Limited. This letter was agreed to and accepted in writing by the Appellant, by its President and Secretary;

(e) Selling of the said Spooner shares on the open market commenced on March 2, 1966, and concluded on April 6, 1966. During this period 322,000 shares were sold;

(f) On April 7, 1966, the remaining 378,000 shares were sold to Harbinson at 85¢ per share;

(g) In the result a profit of $451,706.23 was realized by the Appellant, as follows:

Sales:	(through		account “T. P.
	O’Connor in Trust” at G.
	W. Nicholson & Co. Ltd.)
	March 2/66 to April 6/66
	322,000 shares					$275,406.23
	Sale	by	Appellant		to
	Harbinson
	April 7, 1966
	378,000 shares			@ 85¢		321,300.00
						596,706.23

Cost of Sales	$140,000.00
Legal Costs	5,000.00	145,000.00
Profit		$451,706.23

(h) Concurrently with the trading in the shares of Spooner referred to in paragraph (e) hereof an underwriting and distribution of the shares of Spooner was being carried out by a company known as New Brunswick Uranium Metals & Mining Limited;

(i) Harbinson was an officer of Spooner and New Brunswick Uranium Metals & Mining Limited;

(j) The said 700,000 shares of Spooner were trading assets of the Appellant, and not capital assets, and their acquisition and disposition was done in the course of the carrying out of a business or adventure or concern in the nature of trade;

(k) The profit of $451,706.23 realized by the Appellant on the purchase and resale of the Spooner shares was income of the Appellant from a busines within the meaning of sections 3, 4 and 139(1) (e) of the Income Tax Act.

8. The basis upon which the Respondent included in the computation of the Appelant’s income the sum of $80,000.00 received from Harbinson or Chapcoe Investments Corporation Limited was as follows :

(a) In 1962 the Appellant commenced two actions against

V. N. Harbinson, and others. in the Supreme Court of Ontario;

(b) In the Statements of Claim filed in these actions the Appellant alleged, among other things, more particularly set out in the Statements of Claim

(i) that Harbinson, as well as Ray H. Smith, Ben and Harry Smith and others conspired to defraud the Appellant and to deprive it of profits,

(ii) that Harbinson, Chapcoe and others took a secret profit at the expense of the Appellant,

(iii) that as a result of certain acts of Harbinson and others the Appellant lost profits it ought to have made;

(c) In the Statement of Claim the Appellant claimed, inter alia,

(i) a declaration, as against Harbinson and other defendants, that it was entitled to receive from them any and all shares of New Chamberlain Petroleums Limited or Scarcee Petroleums Limited owned by them or in their posession, power or control,

(ii) a declaration that Harbinson held all shares of Spooner acquired from the Appellant under an Agreement dated February 16, 1957, of which he was in possession or control in trust for the Appellant,

(iii) an accounting of profits,

(iv) damages;

(d) Paragraph 2 of the Letter of Intent referred to in paragraph 7 hereof provided:

“2. CHAPCOE and/or HARBINSON will pay Brilund $80,000.00 in full settlement of all Brilund’s claims against him arising out of the matters referred to in Supreme Court of Ontario Writs of Summons Nos. 5092/62 and 8911/62.”

(e) Pursuant thereto the Appellant received from Harbinson or Chapcoe (a company owned and controlled by Harbinson) $80,000.00;

(f) The said sum represented payment to the Appellant of lost profits or property of an income nature and was not the payment of a capital amount;

(g) The said sum was income to the Appellant from a business.

9. The facts set out in paragraphs 7 and 8 hereof were before the officials of the Respondent on assessing and on confirming the assessment, were assumed to be true, and were taken into account by them in concluding that the sums of $451,706.23 and $80,000.00 should be included in computing the Appellant’s income for 1966.

As appears from the above summary of the facts, the appellant in this whole transaction, after the settlement of the two lawsuits, received receipts of $451,706.23 and $80,000.

These receipts were made up of (1) the value of the cash and the Spooner and Chamberlain shares appropriated by Harbinson,

(2) probably most of the gain or profit made by Harbinson in his dealings with these Spooner and Chamberlain shares of the appellant, and (3) the gain or profit made by the appellant when it sold the Spooner shares it obtained in the settlement by reason of the increase in their market value over and above their market value when the basis of settlement was proposed on November 18, 1965.

To be income within the meaning of the Income Tax Act, of course, the subject receipts must be traceable to an income source (1) within the provisions of the Income Tax Act, and

(2) that was pleaded.

The appellant submitted that the receipt of all these moneys and shares should be categorized in the broad way as a gross receipt in a settlement of a claim for damages in tort, which in substance implemented the prayer for relief in its statement of claim in the action between the appellant and Harbinson ef al. numbered 8911/62 at paragraph 22(g), viz.: “damages against the defendants in the sum of $250,000’’; that what really took place on April 7, 1966 was an abridged implementation of à tentative settlement made on November 18, 1965, namely, by way of the so-called letter of intent (see Exhibit 14, page 189) ; that the fact that the market price of the Spooner shares received in settlement went up was purely fortuitous; and that these shares were sold not because the appellant did not intend originally to hold these shares as an investment, but, on the contrary, because the circumstances had changed which made the holding of such shares inadvisable for the appellant; that these changed circumstances were that Harbinson could not deliver four of the seven directors of Spooner and that between November 18, 1965 and January 5, 1966 the appellant through Rosen- blat had found that Spooner had disposed of its shares in Scarcee which the appellant through Rosenblat considered one of the most valuable assets of Spooner and one which would have caused the appellant to hold the Spooner shares as an investment; and that because of the underwriting and further distribution of shares of Spooner by Harbinson through New Brunswick Uranium Metals & Mining Limited, all of which was unknown to the appellant through Rosenblat, that the appellant could not get effective control of Spooner.

The respondent, inter alia, submitted that the appellant in 1956 and 1957, when Ben and Harry Smith controlled it, held this portfolio of shares as inventory; and that from 1962 on and including the critical years 1965 and 1966, that the appellant continued to hold shares in other companies as inventory; and that, therefore, this whole transaction with Harbinson in the manner mentioned, by which the appellant received the said gain, was a trading transaction.

In my view, the evidence established the following :

A lump sum settlement was made by the appellant with Harbinson in respect to two lawsuits in the Supreme Court of Ontario which it had against Harbinson.

The main action numbered 8911/62 above referred to in the main related to dealings by Harbinson in Spooner shares of the appellant; and the appellant in it claimed damages of $250,000.

The other action numbered 5092/62 above referred to in the main related to dealings by Harbinson in the New Chamberlain shares of the appellant.

The manner in which this proposal of settlement was made by the appellant is set out in the private notes of Rosenblat (see Exhibit 14, page 178). In sum the proposal aimed at getting back for the appellant all the benefits Harbinson realized from his fraudulent dealings in the Spooner and Chamberlain shares of the appellant and the cash of the appellant he received.

This lamp sum settlement was made part in specie, namely, by way of shares in Spooner, and by a payment of $80,000 in cash. But as noted the settlement in specie involved also a purchase by the appellant for 100,000 shares of Spooner for $140,000.

This lump sum settlement, also in so far as the shares were concerned, had another complicating factor in that it took the form of a purchase and sale, but the evidence discloses, and I so find, that there was no purchase and sale. The transaction only took the form of a purchase and sale.

This lump sum settlement was made after considerable negotiations. Such negotiations were made at the same time as the negotiations for the settlement of the lawsuits involving Ben and Harry Smith, the bank and others. It was first of all put in tentative form by way of a so-called letter of intent dated November 18, 1965 above referred to. It is questionable whether, when he signed this so-called letter of intent, Harbinson ever intended to enter into a firm settlement at all. On the contrary, it may very well be that Harbinson was. persuaded to enter into this lump sum settlement that be made with the appellant because of the timing of Rosenblat’s activities in trying to settle with him in that as a result the latter experienced a disturbance by Rosenblat, of the market he, Harbinson, was running in Spooner shares in January and February 1966, and he wished to get Rosenblat and the appellant out of the picture so that he could make his own gain by his activities. In any event, as a consequence, the appellant in this lump sum settlement got more than it would have if the lump sum settlement had been made pursuant to the so-called letter of intent and. around the date November 19, 1965, or in any event before the time when Harbinson commenced to run a market in the Spooner shares.

On the evidence also, I am of the view that the appellant intended, prior to the final implementation of the settlement, to hold as an investment, the Spooner shares that it hoped to obtain in the settlement, but the appellant changed its mind when and because Harbinson could not cause the majority of directors of Spooner to be elected for the appellant, because the Scarcee shares had been sold from the Spooner portfolio, and also because the appellant found out that the option for further shares in Spooner had been given to a third party unknown to the appellant, which would have resulted in the appellant not having effective control of Spooner.

I am also of the view that the acts of the directors and officers of the appellant which made possible this fraudulent appropriation of the property of the appellant by Harbinson were ultra vires their powers. As a consequence, the intent therefore of these officers and directors at the various times as to whether the appellant intended to hold the Spooner and Chamberlain shares as investments or trading assets, was not the intent of the appellant which was the victim of such former intent.

Because the intention of the officers and directors in 1956 in acquiring the subject shares is not to be imputed to the appellant because of fraud, the intention for the purpose of the Income Tax Act of the company therefore in acquiring these shares is neutral. In other words, the appellant had neither the intention of acquiring or holding the Spooner and Chamberlain shares as trading assets nor as investments, at any time prior to November 18, 1965.

That date was the first time the company had an intention. On that date the appellant hoped to acquire the said Spooner shares in the setttlement of these two actions.

Rosenblat for the appellant negotiated the acquisition of these shares and intended the appellant to hold them as investments ; and he also caused the appellant to dispose of these shares at the time already stated, and for the reasons also already stated.

As to the gains or profits made by Harbinson in dealing with the Spooner and Chamberlain shares of the appellant that he fraudulently appropriated to himself, and which the appellant received in substantial measure in the settlement, I am of the view that different principles apply.

While Harbinson’s relationship with the appellant was not one of the classical fiduciary relationships, neverthelesss, because of the fraud he committed in appropriating to himself these shares (and cash) of the appellant (made possible by the acts of Ben Smith and Harry Smith and others as mentioned), the appellant was entitled to have restored to it the profits or gains that Harbinson made from dealing in these shares, and probably the Court, if the two actions had proceeded to judgment, would have imposed, in respect to such profits or gains, a constructive trust on Harbinson in like manner as a court would have if the relationship had been one of the classical fiduciary relationships. In other words, the appellant was entitled to such profits or gains.

On the settlement, the appellant probably received most of the gains or profits Harbinson made in connection with his dealings in these shares he appropriated from the appellant.

To the extent that the settlement included any such gains or profits made by Harbinson (and as to the quantum of these, I make no finding), in my view, such profits or gains are not receipts from a “business’’ within the extended meaning prescribed in Section 139(1)(e) of the Income Tax Act. This was a transaction of a different character entirely from the type of transaction envisaged in the judicial concept of ‘‘an adventure in the nature of trade’’. Such latter type of transaction was exhaustively examined in the case of M.N.R. v. James A. Taylor, [1956-60] Ex. C.R. 3; [1956] C.T.C. 189, by. Thorson, P., the former President of this Court. The subject profits or gains are probably in a similar category as secret profits recovered by a cestui que trust in a fiduciary relationship case, viz., not income from a source prescribed in the Income Tax Act.

In the result, the appeal is allowed with costs, and the reassessments are referred back for further re-assessment not inconsistent with these reasons.

Counsel for the appellant may prepare in both official languages an appropriate judgment to implement the foregoing conclusions and may move for judgment in accordance with Rule 172(1) (b).