William Av. Siebens v. Minister of National Revenue, [1971] CTC 557, 71 DTC 5310

WALSH, J.:—This action came on for hearing before me in Calgary at the same time as the case of William J. McKinley v. M.N.R. (p. 574), and it was agreed by the parties that the evidence heard should apply to both cases since the facts are identical save for certain differences in the situation of the appellant McKinley which gave rise to an additional argument on his behalf as a result of which a separate judgment dealing with this separate argument will be rendered in his ease.

The notice of appeal sets out in both cases that Siebens Leaseholds Ltd. was incorporated on April 18, 1956 under the name of M. & S. Mining Company Limited and on August 23, 1957 its name was changed to Siebens Leaseholds Ltd. which, in 1958, commenced acquiring petroleum and natural gas leases and rights. On or about March 29, 1958 McKinley acquired 167 or one-sixth of the common shares of the company in the name of Tam Holdings Ltd., a company wholly owned by him, and became an officer of it, at which time the balance of the shares were held by Range Investments Limited, a non-resident-owned corporation. William Siebens, the appellant, came to Calgary in June 1959 following graduation from the University of Oklahoma in petroleum engineering, and advanced geological training and military service, and accepted employment with Siebens Leaseholds Ltd. on the basis that he would be given an opportunity to purchase shares of the company, and in August 1960 he purchased 167 common shares from Range Investments Limited, which company incidentally was controlled by his father, Harold Siebens, who had been active in the oil and petroleum industry in western Canada prior to his retirement when he took up residence in Nassau. Between 1960 and 1965, William Siebens and William McKinley operated Siebens Lease- holds Ltd. and bought and sold petroleum and natural gas leases and rights, carried out substantial exploration work and operated a map service. Their ultimate objective was allegedly to acquire and hold producing acreage which would enable the company to become a producer of petroeum products. On January 26, 1965 they each sold their one-sixth share interest and Range Investments sold its two-thirds interest in Siebens Leaseholds Ltd. to Canadian Export Gas and Oil Ltd. in an arm’s length transaction and respondent assessed Siebens and McKinley on the amount received as consideration for their shares without taking into account the underlying cost of the assets of Siebens Leaseholds Ltd. in computing their profit on this sale of shares.* [1] Appellants Siebens and McKinley say that the sale of their shares constituted the realization of a capital investment and that the amount received was not income, and in the alternative that respondent failed to compute accurately appellants’ profit which arose cn the sale of their shares for the reason that it failed to take into consideration the underlying cost of the assets of Siebens Leaseholds Ltd. represented by those shares.

In reply to the notice of appeal in each case respondent states that during the period from 1958 to 1965, Siebens Leaseholds Ltd. carried on the business of a lease trader and broker realizing thereby profits in excess of $1,100,000, and that it acquired and dealt with its inventory of petroleum and natural gas leases and rights in the course of its business as a trader with a view to trading therein or otherwise turning them to account in the most profitable manner open to it. Appellants were each assessed for one-sixth of the $1,100,000 for which the shares were sold or $183,700 less $167 being the cost of the shares at $1 each, and less one-sixth of $70,969.59 or $11,851.92 being their respective shares of expenses incurred on sale of the shares, leaving a net profit of $171,681.08.1 [2]

In making the assessments under appeal herein respondent acted upon the following assumptions :

(a) that William J. McKinley joined Siebens Leaseholds Ltd. in 1958 as a Director and its Chief Executive Officer;

(b) that Harold W. Siebens, who controlled Range Investments Limited, William J. McKinley and the Appellant were experienced and knowledgeable in the oil and gas business, having participated in various commercial ventures relating to oil and gas rights;

(c) that Siebens Leaseholds Ltd. was at all material times and throughout its existence a trader in oil and natural gas rights and leases;

(d) that all oil and gas rights and leases acquired by Siebens Leaseholds Ltd. were a part of its salable inventory and were acquired with a view to trading therein or otherwise turning them to account in the most profitable manner open to it;

(e) that early in the month of January of 1965 negotiations took place between officers of Canadian Export Gas & Oil Ltd. and Siebens Leaseholds Ltd. with respect to the sale by Siebens Leaseholds Ltd. of certain specific oil and gas leases in its inventory to Canadian Export Gas & Oil Ltd.;

(f) that Canadian Export Gas & Oil Ltd. entered into written agreements dated 26 January, 1965 and 16 March, 1965, with Range Investments Limited and the Appellant wherein, inter alia:

(1) Range Investments Limited and the Appellant agreed to sell all the shares of Siebens Leaseholds Ltd. to Canadian Export Gas & Oil Ltd. for $1,100,000.00.

(ii) It was agreed that on the sale of the shares, Siebens Leaseholds Ltd. would own only certain specified leases, reservations, permits and royalty agreements set forth in Schedules A, B and C of the agreement dated 26 January, 1965.

(iii) Canadian Export Gas & Oil Ltd. agreed to change, within six months, the name of Siebens Leaseholds Ltd. so that it did not contain the word Siebens or any similar name.

(iv) Range Investments Limited and the Appellant agreed to sell to Canadian Export Gas & Oil Ltd. for the same price of $1,100,000 the leases, reservations and permits set forth in Schedules A, B and C of the agreement referred to in subparagraph (ii) above, in the event that they were unable to deliver the shares of Siebens Leaseholds Ltd.

(g) that the Appellant and Range Investments Limited were authorized by William J. McKinley to enter into the

appellants his portion of the aggregate of these taxes, $70,969.59 as a cost in determining his profit on the sale of his shares of Siebens Leaseholds Ltd

agreements referred to above dated January 26th and March 16th and to agree to sell his 167 shares of Siebens Leaseholds Ltd. (held in the name of Tam Holdings Limited, a company the shares of which were wholly owned by William J. McKinley) and by an agreement between these parties dated 16 February, 1965, Tam Holdings Limited agreed to deliver these 167 shares for sale to Canadian Export Gas & Oil Ltd. for one-sixth of the $1,100,000 sale price;

(h) that prior to the transfer of the shares of Siebens Leaseholds Ltd. to Canadian Export Gas & Oil Ltd., a new company known as Siebens Oil & Gas Ltd. was incorporated ;

(i) that Siebens Leaseholds Ltd. entered into an agreement with Siebens Oil & Gas Ltd. dated the 16th day of February, 1965, whereby Siebens Leaseholds Ltd. sold to Siebens Oil & Gas Ltd. a group of leases known as “Fargo override” thereby realizing a taxable profit;

(j) that all other assets and liabilities, and the business of Siebens Leaseholds Ltd., with the exception of the specific group of leases sought by Canadian Export Gas & Oil Ltd., were transferred to the newly incorporated company, Siebens Oil & Gas Ltd.;

(k) that Siebens Oil & Gas Ltd. continued to carry on the business previously carried on by Siebens Leaseholds Ltd. ;

(l) that the acquisition of 167 shares in Siebens Leaseholds Ltd., the acquisition of an inventory of petroleum and natural gas leases by Siebens Leaseholds Ltd. and the trading therein,, the negotiations with respect to certain of these leases owned by Siebens Leaseholds Ltd., the incorporation of Siebens Oil & Gas Ltd., with the transfer of all the assets and liabilities of Siebens Leaseholds Ltd. thereto, and the sale of the shares of Siebens Leaseholds Ltd. at a time when its assets included only specific leases sought by Canadian Export Gas and Oil Ltd., were part of a scheme for profit-making by the Appellant and the two other shareholders of Siebens Leaseholds Ltd.;

(m) that the sale of the shares of Siebens Leaseholds Ltd. constituted in essence the disposal of certain of the company’s trading inventory at a profit to the Appellant and resulted in the Appellant’s realizing a profit which was income from a business or adventure or concern in the nature of trade and is required to be included in computing the Appellant’s income for the 1965 taxation year.

William. Siebens testified that his father, Harold Siebens, who had incorporated Siebens Leaseholds with McKinley, wanted him to take over after he became inactive in 1958 after which time he had nothing to do with the decision-making although he continued to get the financial statements of the company through Range Investments. McKinley, who had been a lease broker before Joining the company, taught him a lot about the business which depends on rapid decision-making. He always hoped that the company would develop into a producing company but they had bad luck experiencing 68 dry holes. The government requires certain minimum payments to be made and exploration work to be done on lease and reservation acres and a bond has to be put up undertaking to do a certain amount of exploration work each year. By 1964 the company had become involved in very heavy obligations as a result of this, Range Investments having put up some $240,000 in bonds was unwilling to put up any more and the company was faced with the possibility of having to abandon some of its licences and acreage. Mr. Beck, president of Canadian Export Gas & Oil Ltd., had encountered his father casually at a cocktail party in November 1964 and had enquired if they had any acreage in northern Alberta which they would like to farm out. Mr. Beck expressed renewed interest in January 1965, asking them at that time if they would sell the company. The Canadian Export Gas & Oil Ltd.’s operations manager examined the very detailed maps which Siebens Leaseholds had of the oil lands in the western provinces and in due course made the offer of $1,100,000 for the shares of the company. Mr. McKinley had retired in December 1964 and was on a Caribbean trip and could not be located at the time, so while appellant was satisfied that he would be willing to join in with Range Investments and himself in the sale of all the shares of the company the purchasers insisted on a clause being put into the agreement to the effect that if all the shares could not be delivered then the assets of the company which they were acquiring would be sold in any event for the same price. He himself wished to continue in business so he formed the Siebens Oil and Gas Ltd. (in which McKinley had no interest) and some of the assets of Siebens Leaseholds, including its furniture, search records, maps and some royalties and other properties which they were holding in trust and could not sell, were withdrawn from Siebens Leaseholds and disposed of to the new Siebens Oil and Gas Ltd. by a separate agreement before the shares of Siebens Leaseholds were sold to Canadian Export. He also retained the staff who had worked for Siebens Leaseholds. The map board system was especially important to him as it was very detailed showing dry holes, pipe lines, freehold and Crown reservation acres and the owner of each quarter section of land, who was working there, and searches of open freehold land in the province, and they had files of every search in western Canada and at one time had written to most of the freehold leaseholders in Alberta. The company had also acted as agents for major companies and independents who did not wish to reveal their interests in certain areas, working on a commission basis. The company had lost money consistently, however, 1964 being the first year in which it showed a surplus. Its principal source of revenue, although a continually increasing one, was from the sale of oil leases and rights supplemented by leasing services and commissions and charges for the use of its map room. He denied that he had indicated to Mr. Beck a preference for selling shares of the company rather than physical assets. In the agreement for the sale of the shares, however, it was specified that the company would not at the time of closing have any outstanding. contracts of any nature except for the lease, reservation and the permit contracts or other agreements set forth in Schedule A, the royalty agreements annexed as Schedule B covering the leases set forth in Schedule A and granting a 3% overriding royalty, the royalty agreements annexed as Schedule C covering the reservations and Permit in Schedule A granting a 214% overriding royalty, and the contract giving rise to already existing overrides indicated in Schedule A. Mr. Beck subsequently testified that it was on the basis of the items listed in these schedules that the amount of his company’s offer for the shares of the company was calculated and that these were the only assets which they expected the company to have (other than certain cash items and bonds provided for in clauses 8, 9 and 10 of the rather elaborate agreement, the details of which do not concern us here).

On February 16, 1965, prior to the closing with Canadian Export Gas & Oil Ltd., Siebens Leaseholds Ltd. sold to Siebens Oil and Gas Ltd. certain leases and reservations, trust certificates, royalty agreements, mineral titles, office equipment and other assets listed in Schedules A to N of the agreement between them, including the 3% gross overriding royalty on certain leases and 214% gross overriding royalty on certain reservations and permit already referred to, which royalty agreements, reservations and permit formed part of the assets remaining in the company when the shares were acquired by Canadian Export Gas & Oil Ltd. By this agreement Siebens Leaseholds Ltd. had also sold to Siebens Oil and Gas Ltd. certain leases and royalty agreements held by it in trust; which, as Mr. Siebens indicated, could not be included in the sale to Canadian Export Gas & Oil Ltd. The aggregate sale price of all these assets was $479,559.53, so it was not an unsubstantial part of the company’s assets that was stripped off and sold to the new company before the sale of the shares of the company, which now held only the remaining assets, was made to Canadian Export Gas & Oil Ltd.

Mr. William R. Hancock, now vice-president in charge of exploration of Canadian Export Gas & Oil Ltd., and Mr. August S. Beck, the president of that company, also testified corroborating Mr. Siebens’ evidence.

Mr. Hancock said that they were at first interested in certain leases and in finding out whether they were available to be farmed out or otherwise acquired but later became interested in acquiring the company itself as a means of acquiring the acreage they were interested in. Mr. McKinley played no part in the discussions and was not in Calgary at the time and, as far as he knows, Harold Siebens played no part in the discussions. Certain obligations of the company were not attractive to them and in setting the price for the shares they evaluated the acreage in which they were acquiring rights. As the deal developed they decided to acquire all the leases and reservations. They were particularly interested in certain leases and were less interested in the reservations as they would require certain expenditures, but eventually took them all through acquiring the shares in the company. He was in no way involved in the decision to buy the shares rather than physical assets, this being a matter which was up to Mr. Beck to decide.

Mr. Beck testified that his company was short on acreage and wanted to pick up some more. He knew both Harold Siebens and McKinley. He met Harold Siebens at a social occasion in the autumn who suggested that he see his son William and, as a result, they looked at what the company had by way of leases and reservations at its office and, in due course, made an offer to buy the shares of the company. They had a tax loss carry forward so it was desirable to make the offer for the shares. He does not recall ever having made an offer for the properties themselves and there was certainly no suggestion from Siebens that they would only sell shares and not the licences or reservations as such. Beck was aware, however, that an offer on this basis would probably be more attractive, although his company was really only interested in the leases. He was aware at the time that certain properties were still in process of negotiation and the price offered for the shares was based on the list given to him of the properties which would be included in the sale, and he was aware that other assets would be removed from the company first. There were no negotiations whatsoever with McKinley and the only reason for inserting the clause in the agreement providing for the sale of the assets in question in the event that all the shares could not be sold was that this was put in at the last minute on the advice of their counsel as McKinley could not be communicated with to agree to the sale of his shares and certain developments in drilling in the vicinity, if successful, might result in a rapid increase in value of the properties so. they did not wish to leave a loophole whereby McKinley could then refuse to sell his shares.

Mr. McKinley also testified and corroborated Siebens’ evidence. He-stated that he became active in the industry in 1950 as a field representative acquiring petroleum and natural gas. freehold rights and later became land manager for a company operated by Harold Siebens which Siebens sold in 1952. Until the autumn of 1955 he then worked with others but rejoined Siebens when he commenced operating in Canada again and in 1958 joined him in forming a new company, Siebens Leaseholds Ltd. which he helped to finance through his Tam Holdings Ltd. although the bulk of the financing was put up by Range Investments Ltd. At the time of the present sale the company was still trying to acquire petroleum and natural gas interests which might become productive. In December 1964, however, after a visit with Harold Siebens in the Bahamas he was asked to resign from the company which he did as of January 1, 1965 so he was no longer working for the company when the present sale was made although he still had his shares through Tam Holdings. He knew that William Siebens was concerned about the company’s heavy obligations and new capital which would be needed and that Range Investments would not put any more capital in. He himself w as somewhat less concerned, however, and was willing to carry on for another year. At the time he knew of no prospective sale and first heard of it on February 9, 1965 as a result of a telephone call he received on the Grand Cayman Islands as a result of which he then returned to Calgary and agreed to go along with the sale. He had been looking forward to retiring for about two years before that in any event. He admitted that he had been with a former company, Siebens Minerals Ltd., which carried on basically the same business as Siebens Leaseholds Ltd. and in which the shares were sold after some of its assets had been transferred to Siebens Leaseholds. He was merely an employee, however, and not a shareholder of that company. Before that he had worked as lease trader and broker for another company of Harold Siebens, Alberta Leaseholds Diversified, in which the shares had also been sold in 1952.

Robert Seaton, the former director of the Minerals Division of the Alberta Department of Mines and Minerals and since 1970. in private consulting practice, testified as an expert witness -to the effect that it was quite common for an oil company to enter into the business of becoming a producing oil and gas company by trading in exploratory reservations and leases, and that a number of the largest producing oil companies now in existence started out that way. By so doing the cost of exploration and the risks may be spread among as many people as possible. He concluded that Siebens Leaseholds Ltd.’s business could have led to its becoming an oil producing company.

On the second issue in these appeals of whether the cost of acquiring the inventory sold should be taken into account in the calculation of the profit made on the sale of the shares in the event that such sale is found to be taxable, James Gordon Hutchison, C.A. testified that he is familiar with the company’s financial statements and assessments, and that the cost of the sale of the shares should be taken as being the value of the ‘ Inventory of petroleum and natural gas leases and other rights at cost, (including first year rentals) ” which leases were valued at $135,901 and reservations at $33,264 for a total of $169,165 on the balance sheet as at January 31, 1965 of Siebens Leaseholds Ltd. (page 40 of Exhibit A-1, produced as part of Agreement as to documents). The sale agreement left the company with this together with sufficient cash to pay estimated income tax of $16,800 and provided that any undisclosed liabilities would be for the vendors’ account. As a result of this, additional tax in the amount of $70,969.59 which was assessed was paid over by the vendors and the Minister in his re-assessment allowed the pro rata proportion of this to appellant as part of the cost of the shares sold. It is his opinion that instead of allowing each of the appellants $12,018.92* [3] he should have allowed them one- sixth of $169,165 or $28,194, or an additional deduction of $16,176 in round figures for each appellant, as the cost of the shares against the sale price of same.

This case is difficult in that, while there is considerable jurisprudence touching on some of the points in issue, the facts of this case do not fit squarely within any of these decisions, most of which must therefore be distinguished. This is not a case where a company was incorporated with the intention of disposing of its assets by the sale of its shares at a profit. The shares were held for a relatively lengthy period of time (some 9 years) and the shareholders hoped that they would eventually locate oil or natural gas on some of their properties and become a producing company. To this extent it can be distinguished from such cases as Ronald K. Fraser v. M.N.R., [1964] C.T.C. 372; Nicholas DeToro v. M.N.R., [1965] C.T.C. 321 ; Ralph K. Farris v. M.N.R., [1970] C.T.C. 224 (now on appeal), and similar cases dealing with disposal of shares. In this respect it more closely resembles the cases of Paul Racine, Amédée Demers and François Nolin v. M.N.R., [1965] C.T.C. 150, and Gordon S. Shipp, Harold G. Shipp, Bessie L. Shipp and June C. Shipp v. M.N.R., [1967] C.T.C. 330.

Neither can I find that there was a secondary intention on the part of appellant at the time he acquired his shares to dispose of them or of most of the assets of the company at a profit rather than to participate in the operation of the company with a view to producing income from these operations so as to bring it within the findings of such cases as Hersch Fogel v. M.N.R., [1959] C.T.C. 227; Bayridge Estates Limited v. M.N.R., [1959] C.T.C. 158; Regal Heights Limited v. M.N.R., [1960] C.T.C. 384; G. W. Golden Construction Limited v. M.N.R., [1967] C.T.C. 111, which applied the case of Fraser v. M.N.R. (supra) ; M.N.R. v. Clifton H. Lane, [1964] C.T.C. 81, which relied on the Regal Heights case (supra) and Normac Investments Limited v. M.N.R., [1969] C.T.C. 468, which also referred to the Regal Heights case (supra), the case of M.N.R. v. James N. Sissons, [1969] C.T.C. 184, and the case of Western Leaseholds Limited v. M.N.R., [1959] C.T.C. 531. On the contrary, with respect to the absence of secondary intention it more closely resembles the cases of Racine, Demers et al. (supra), Hazeldean Farm Company Limited v. M.N.R., [1966] C.T.C. 607, and John S. Davidson v. M.N.R., [1968] C.T.C. 136, which latter case I distinguished in the case of Farris v. M.N.R., (supra).

Part of the difficulty in the present case arises from the fact that this company was not one formed for the purpose of acquiring and later developing and operating a specific asset such as a shopping centre, apartment building or a land development and then disposing of same by sale of shares of the company, but a substantial part of the company’s business consisted of the acquisition and sale of petroleum and natural gas leases and rights and it was only as a result of the revenue generated by these sales during the period between 1958 and 1965, together with such other revenue as it could get from the use of its map room or by acting as agents for other companies that it was able to continue in business, always with the hope of eventually acquiring rights in some oil or gas producing property. The very nature of its business required a constant turnover of these leases and permits in an attempt to upgrade the company’s inventory of them and eventually to obtain control of or rights in producing properties. The disposal of the leases, reservations and Permit to Canadian Export Gas & Oil Ltd. by the sale of the shares of appellant and his associates in Siebens Leaseholds Ltd. does not necessitate a finding of secondary in- tention on their part in order to make the profit on such sale taxable. It was at all times part of the regular business operation of the company to acquire and dispose of such leases, reservations and permits as profitably as possible and the mere fact that the sale in question involved not merely a few of them but constituted a disposal of the major portion of the company’s inventory of such assets does not, in my view, alter the situation, so that if the sale had been made by the company itself of the physical assets I would have no hesitation in finding that the profits on such sale were taxable as income of the company.

The fact that the ultimate intention was to make the company a producing company can largely be disregarded in considering whether this disposal of a substantial portion of its assets was a capital or income transaction. This is made clear in the case of Western Leaseholds Limited v. M.N.R. (supra), a case which resembles this one in that it dealt with natural gas and petroleum rights. It held, inter alia (see headnote, page 532) :

That the fact that the moneys realized from granting options and leases would be utilized to finance production of oil was irrelevant;

The very nature of the company and its operations was held to negate the claim of capital gains.

As Locke, J. stated at page 543 :

. . . to adequately explore [the lands] to determine whether it contained oil in paying quantities required an expenditure of moneys which was entirely beyond the financial capacity of the appellant.

This very closely resembles the present situation. In the well- known case of M.N.R. v. James A. Taylor, [1956] C.T.C. 189, the headnote setting out the criteria suggested by Thorson, P. to use in determining whether a transaction is ‘‘ an adventure or concern in the nature of trade’’ quotes as a negative criterion the following (page 190) :

The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even without any intention of making a profit on the sale of the purchased commodity.

If the company itself would have been taxable on the profits made from the sale of these assets, this brings us to the question of whether the shareholders would also be taxable when the same assets were sold by means of a sale of the shares of the company rather than physical sale of the assets themselves. In rendering judgment in the Ronald K. Fraser case (supra), Judson, J. stated at page 376:

Some point was made of the fact that the appellant did not in one case sell a store and in another case vacant land but shares in two companies. I agree with Cameron, J. that this was merely an alternative method that they chose to adopt in putting through their real estate transactions. The fact that they incorporated companies to hold the real estate makes no difference. Associated London Properties, Ltd. v. Henriksen (H.M. Inspector of Taxes) (1942-45), 26 T.C. 46.

A similar finding was made in the case of Nicholas DeToro v. M.N.R. (supra) which followed the Fraser case holding:

That the fact that the profit arose from the sale of shares rather than from the sale of real property was immaterial;

A contrary decision was reached, however, in the Shipp case (supra) by Gibson, J. in which the appellants had accepted an unsolicited offer for their shares in a shopping centre which they had operated profitably for four years. He held that the activities of the corporation were an exception to the usual activities of the appellants and the corporation was not formed as an alternative method of putting through a real estate transaction nor as a shield for the purpose of attempting to get a profit on capital account but that their shares were investments and their profit was derived from the realization thereof. He discussed the Fraser case (supra) distinguishing it and holding that the principles in it apply only (page 336) :

. . . when at the time of incorporation persons (1) have acquired real estate with the thought that it be sold as well as for income, and (2) have caused a company to be incorporated for the express purpose of attempting to get profit on capital account which otherwise would be income.

With respect, I would not so limit the effect of the Fraser judgment. In the Fraser case Judson, J., referring to the judgment of Cameron, J. in the court below on the question of secondary intention of the appellants, states at page 375 :

In spite of the Judge’s emphasis on primary and secondary intention, when applied to the facts of this case it amounts to no more than this. He was saying that two active and skilled real estate promotors made a profit in the ordinary course of their . business, and this they obviously did. They were carrying on a business; they intended to make a profit, and if they could not make it one w ay, then they made it another way.

Also somewhat in favour of the appellant is the case of Elgin Cooper Realties- Ltd. v. M.N.R., [1969] C.T.C. 426, which held that although the appellant’s controlling shareholder had long been active in real estate, on the evidence the building in question had been intended as an investment and that intention was altered as a result of difficulties and faults encountered during construction so that the sale was not one made in the course of an adventure in the nature of trade.

The evidence disclosed clearly that William Siebens and William McKinley are both very knowledgeable people in the oil and gas business and in the acquisition and sale of petroleum and natural gas leases and permits as well as in exploration work. The present appellant, William Siebens, had not only been trained for it by his university education but was the protégé of his father, Harold Siebens, who had devoted most of his life to the business. Although Harold Siebens was no longer active at the time of this sale there is little doubt that through his holding in Range Investment Ltd. he was kept informed and was interested in what was going on. He had on at least two previous occasions been a shareholder of a company in the same business which was disposed of by the sale of its shares after transferring some of the company’s assets to another company which he incorporated. This was done, for example, in connection with the disposal of the shares of Siebens Minerals Ltd. before the present company, Siebens Leaseholds Ltd. was incorporated. In one of the preceding companies, the present appellant, William Siebens, also owned shares but his counsel argued that he was still at school at the time and that if he sold them it was because his father told him to and not as part of a pattern. In any event, all the parties concerned had wide business experience and the benefit of competent legal advice and I cannot conclude that they were not well aware of the distinction between the sale of physical assets of the company, the profits resulting from which would, in my view, clearly have been taxable, and the sale instead of all the shares of the stock of the company from which all but those physical assets had been previously removed, which would accomplish the same purpose and might not be taxable. Mr. Beck, the president of Canadian Export Gas & Oil Ltd., the purchaser, did not hesitate to admit that he was aware of the distinction and that he considered it more advantageous for his company to buy the shares, although if for some reason they could not get all of the shares should Mr. McKinley refuse to sell his, he was willing instead to buy from the company the assets in which he was interested for the same price, but this was only an alternative put in the agreement as a matter of caution. He suggested in his evidence that he was aware that an offer for the shares would be more interesting for the vendors, the implication being that from his point of view he could perhaps offer them a lower price by purchasing on this basis, although this was not specifically stated. There is nothing in the evidence to indicate that the vendors themselves insisted on the sale of the shares and would not have been willing to sell the assets as such however. They were in a position where if they did not sell them soon they might have to abandon some of them in any event as they did not have the funds available to meet the heavy commitments which would be involved in retaining them. What is clear is that appellant, William Siebens, wished to remain in the business and hence, as his father had done on previous occasions with other companies, he formed a new company and stripped the present company of assets which he wished to retain which produced revenue, such as overriding royalties, the maps and records and office furniture, as well as certain properties which were being held in trust and allegedly could not be sold. Although it was not provided for in the agreement he also retained the office staff and employees. Whether or not the purchaser was interested in these other assets it was given no opportunity to acquire them, its offer being based on the list given to it of the properties which Siebens Leaseholds Ltd. was prepared to sell.

If the company had simply been sold as a going concern by the disposal of all of its shares without first stripping off any of its assets I might have been prepared to find that the profit on the sale of the shares represented a capital gain, since Siebens Leaseholds Ltd. was not formed with a view to acquiring a certain asset or assets in order to subsequently dispose of them at a profit through the sale of its shares. In view of the stripping off of assets to the extent of $479,559.53 by transferring them to a new company before the sale of the shares of the old company, Siebens Leaseholds Ltd., however, I have reached the conclusion that what was really involved was the sale of the assets of Siebens Leaseholds Ltd. which remained in the company at the time of the sale of the shares to Canadian Export Gas & Oil Ltd. and that in line with the Fraser and DeToro judgments (supra) the sale of the shares was merely an alternative method of putting through the real estate transaction. Appellant’s appeal must therefore fail on this ground.

This brings us to the alternative argument that if appellant is to be taxed on his portion of the profits made from the sale of his shares on the basis that what was really sold by him was his portion of the physical assets of the company being acquired by the purchasers as a result of this purchase, then his share of the book value of these assets of the company should be deducted from the sale price of these shares in order to determine the profit realized by him on the sale of them. The Minister has allowed him only the par value of $1 a share at which he acquired the 167 shares and his portion of the taxes subsequently assessed against the company which, by virtue of the sale agreement, the vendors had to pay.

While there is some force in respondent’s argument that it is not the Company w hich is being taxed here on its profit on the sale of the physical assets but merely the shareholders on their profit on the sale of the shares and that it is therefore only the cost of these shares to them which should be taken into consideration as a deduction, and wrong to take into consideration the financial statements of the company and to look behind the sale of the shares to calculate the profit on the sale of the properties, it is precisely because I have found that the sale of the shares was merely an alternative method of selling the properties that I have reached the conclusion that these profits are taxable. This conclusion was not based on the fact that appellant and his associates were traders in shares who have realized a profit consisting of the difference between the purchase and sale price of such shares. It seems only reasonable then to conclude, as Mr. Hutchison did in his evidence, that the amounts shown in the balance sheet of the company as of January 31, 1965 which represented the financial position of the company as of the date of the sale to Canadian Export Gas & Oil Ltd. as the value of the inventory of petroleum and natural gas leases and other rights at cost (including first year rentals) in the amount of $169,165 should be credited against the purchase price as the cost of these shares and that appellant should receive a credit of one-sixth of this after deducting the credits he has already been allowed.* [4] While the Fraser case (supra) does not actually spell out how the calculation of a profit on the sale of shares was made it would appear to have been made on this basis. It was also what was done in the DeToro case (supra).

Further authority for going behind the corporate entity to reach a realistic conclusion as to actual expenses incurred can perhaps be found in the Supreme Court judgment of M.N.R. v. Henry J. Freud, [1968] C.T.C. 438, in which a lawyer joined with an associate and formed a corporation to develop a proto- type of a sports car hoping eventually to sell their idea embodied in the prototype at a profit to someone who would be interested in putting it into production. Eventually all the other participants withdrew save for the taxpayer who put in a further $13,840 to try to bring the project to a conclusion, partly in the form of advances and partly by direct payments by him for labour and materials. He deducted this from other income for the year. The Minister claimed this was a capital outlay and, moreover, that the activity was that of the corporation and not of the taxpayer, and that the loss was the corporation’s. The Court, in finding unanimously for the taxpayer, held inter alia (see headnote) : _ f

(2) The fact that a corporate entity was interposed to carry out the venture did not in the present circumstances affect the matter; the taxpayer’s shares did not represent an “investment” and if the project had been successful there could be no doubt but that a profit realized from their sale would have been taxable.

(3) For the same reason, the taxpayer’s advances to the corporation were not in the nature of an “investment” and they had none of the characteristics of a regular loan. They represented outlays made in the hope of making a profit on the whole transaction and were made for the purpose of deriving income from an adventure in the nature of trade.

Although dismissing the appeal on the main issue, therefore, I would maintain appellant’s appeal in part, on this alternative issue and refer the re-assessment back to the Minister for further re-assessment not inconsistent with the terms of this Judgment. Appellant having been partially successful in his appeal shall have one-third of his. costs in same.