THorson, P.:—This is an appeal from the decision of the Income Tax Appeal Board, sub nom. No. 667 v. M.N.R., 23 Tax A.B.C. 213, dated December 8, 1959, so far as it dismissed the appellant’s appeals against his income tax assessments for 1950, 1951 and 1952 and a cross-appeal by the Minister from the said decision so far as it allowed the appellant’s appeals against his income tax assessments for 1953, 1954, and 1955.
The issue in the case is a familiar one. The appellant purchased agreements for the sale of land and lease option agreements at a discount and held them to maturity and the issue in the appeal and cross-appeal is whether the amounts of the discounts received by him as the agreements were paid were taxable income in his hands or accretions of his capital and, therefore, not taxable.
The amounts assessed against the appellant, in respect of which the appeal and cross-appeal arose, for the years in question were as follows, namely, $4,366.23 for 1950, $4,069.11 for 1951, $7,414.61 for 1952, $5,072.78 for 1953, $2,002.10 for 1954 and $3,637.52 for 1955. In each case the amount assessed represented the difference between the cost of the agreements to the appellant and the amounts received by him during the year when they were paid. In other words, the amount was the total of the discounts received by him for the year. When the Minister assessed the appellant for the years in question he added the amounts in question to the amounts of taxable income respectively reported by him on his income tax returns. The appellant objected to the assessments and on their confirmation by the Minister appealed to the Income Tax Appeal Board which disposed of his appeals as indicated.
There is no dispute about the accuracy of the figures. The issue is whether the amounts received by the appellant were taxable income to him as contended on behalf of the Minister or accretions to his capital as claimed by him.
I had occasion recently, in the case of M.N.R. v. Spencer, [1961] C.T.C. 109, to consider whether the profits realized by the respondent in that case from mortgages which he and his partner had purchased at a discount or acquired with a bonus were taxable income to him or not. In the course of my reasons for judgment I said, at page 125 :—
‘"Indeed, there is no rule of general application in cases of the kind referred to except that in every case the question whether the profits realized by a person who has purchased mortgages at a discount or acquired them with a bonus are enhancements of the value of investments or gains made ‘in an operation of business in a scheme of profit making’ or profits from an adventure or adventures in the nature of trade and, therefore, income within the meaning of Sections 3 and 4 of the Income Tax Act is a question of fact and its determination must depend on the facts and surrounding circumstances of the case and the true nature of the transactions from which the profits were realized.”
I said further, at the same page :
“The statement thus made is merely a particular application of the well established principle that, in determining whether the profits realized from particular transactions, or a single transaction, were capital accretions or profits from a business or an adventure in the nature of trade and, therefore, taxable income, ‘each case must be considered according to its facts’, as the Lord Justice Clerk said in the Californian Copper Syndicate case.”
The case referred to is the well-known case of Californian Copper Syndicate (Limited and Reduced) v. Harris (1904), 5 T.C. 159. There the distinction between profits that are subject to income tax and those that are not, together with the test to be applied in determining on which side of the dividing line they fall, was clearly stated. The decision, apart from its facts, is of great importance because of the objective test laid down by the Lord Justice Clerk (Macdonald) for determining whether the gain from a transaction was a capital one or income subject to tax. At page 165, he said:
“It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realization or conversion of securities may be so assessable, where what is done is not merely a realization or change of investment, but an act done in what is the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are famed for such a purpose, and in these cases it is not doubtful that, when they make a gain by a realization, the gain they make is liable to be assessed for Income Tax.”
And there follows, at page 166, the famous statement of the test to be applied:
“What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts ; the question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realizing a security, or is it a gain made in an operation of business in carrying out a scheme for profit making?” In the Spencer case (supra) I referred, at page 115, to many cases in which the test thus laid down has been approved, and, at page 125, I referred to numerous cases in which the principle that ‘‘each case must be considered according to its facts’’ has been stated by the Supreme Court of Canada.
It is essential, therefore, to ascertain the facts relating to the appellant’s transactions in agreements for sale and lease option agreements and the circumstances surrounding them in sufficient detail to enable the Court to ascertain their true nature and determine whether the profits arising from them were taxable income or not.
The sections of the Income Tax Act, Statutes of Canada, 1948, Chapter 52, later the Income Tax Act, R.S.C. 1952, Chapter 148, that fall to be considered are Sections 3 and 4 and Section 127(1) (e), later Section 139(1) (e). Sections 3 and 4 provide as follows:
“3. The income of a taxpayer for a taxation year for the purposes of this Part is his income from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year. ’
And Section 127(1) (e), later Section 139(1) (e), provides:
“139. (1) In this Act,
(e) ‘business’ includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment.”
There is no dispute about the facts. They were given in detail by the appellant himself and Mr. B. Robinson was called to give evidence of current rates of interest on mortgages. I shall summarize the appellant’s evidence but not necessarily in the order given by him.
The appellant is a barrister at law and solicitor anu head of the law firm of Scott, Gregg, Hopwood and Scott of Calgary. He is 69 years of age and has been practising his profession in the Calgary district for 47 years, except for the period of his military service in the Second World War.
The appellant has been engaged in several activities. He has carried on the practice of law from which his income has been approximately $12,000 per year. On his cross-examination he said that he had not specialized in real estate law, but admitted that before the Income Tax Appeal Board he had stated that he had specialized in real estate law, that he had been solicitor for the Calgary Real Estate Board and had lectured to students of the Board for many years on real estate law with particular reference to agreements, mortgages, and lease option agreements. He also admitted that his law firm acted for a couple of mortgage companies.
The appellant also operated a stock ranch near Calgary. He purchased the ranch in 1945 or 1946 and stocked it with pure bred Angus cattle, thoroughbred and Arabian horses, and pure bred swine and equipped it with a full line of machinery. He had up to $87,000 invested in it. He operated this ranch under the name Baha Tinda from 1946 to 1953 when he caused Baha Tinda Stock Farm Limited to be incorporated. He then transferred approximately 25 agreements that he had purchased to the corporation for which he took preferred shares in it for the total amount owing on the agreements, so that, as he put it, on his cross-examination, if the agreements went bad the stock went bad.
But the matters with which the Court is concerned in this case are the appellant’s purchases of agreements for the sale of land and lease option agreements at a discount and the nature of the profits realized by him from them for the years under review. The appellant began his purchases of these agreements in 1947 after he had returned from military service overseas and con. tinued to make them until 1955 when he discontinued this activity. The number of agreements purchased by him were as follows, namely, 28 in 1947, 17 in 1948, 20 in 1949, 28 in 1950, 20 in 1951, 20 in 1952, 15 in 1953, and 1 in 1954, a total of 149. Of the 84 agreements purchased in the period 1950-1954, there were 70 lease option agreements, 12 agreements for sale and 2 first mortgages. On his cross-examination he gave as the reason for ceasing the purchase of agreements the fact that he was getting older and that he felt that his estate must be clear of debts and have liquid assets to meet estate tax and succession duty liabilities.
I next set out the evidence relating to the nature of the agreements purchased by the appellant and the properties covered by them. Most of them covered properties in districts outlying Calgary particularly in small hamlets surrounding it, such as Bowness, Montgomery, Calwin and Forest Lawn. These localities were undeveloped with no water or sewer services and no facilities for protection against fire. They are places where the mortgage loan companies would not do business. The properties had small houses on them and had been sold to purchasers with small down payments averaging from 10 to 15 per cent with from 8 to 11 years in which to pay the balance. When the builders had sold the properties they could not realize their agreements at ordinary finance companies and could sell them only at a heavy discount. The discounts on the agreements purchased by the appellant were in the range of from 20 to 40% of the balance of the purchase price and he never purchased any agreements except at such discounts. The rate of discount referred to was the going rate for agreements of the kind in question. Most of the appellant’s agreements carried interest at the rate of 6 per cent on their unpaid balance, with a small number at 5 per cent and one or two at 7 per cent. While the appellant stated that the going rate of interest in the Calgary district was 6 per cent he corrected this statement later, and the evidence, as confirmed by Mr. Robinson, was that the going rate of interest was 414 and later 5 per cent on National Housing Act mortgages and © and later 514 per cent on other mortgages. But these rates were on loans of first class real properties on which the ordinary mortgage companies would not lend more than 50 or 60 per cent of their appraised values. The advances of such rates were without any discount. It was well known that the mortgage companies would not lend any money in the outlying districts and the financing of agreements of the kind purchased by the appellant was not possible at the current rates for mortgages. The discount at which such agreements had to be sold was essential to making their purchase attractive. This was because of type of the agreements.
The appellant stated that there was a considerable element of risk in the agreements purchased by him. He lost $1,050.67 on. one of them in 1955 because the purchaser had abandoned his property and, indeed, up to 1955 he had 6 foreclosures, 4 abandonments of properties and 1 cancellation. He resold the properties that came back on his hands after spending money on them. The appellant explained that the risk involved in the agreements was largely due to the Judicature Act of Alberta under which there was no liability on personal covenant in an agreement for sale and that a condition in an agreement forbidding an assignment was negatived as void by the Land Titles Act with the result. that the purchaser of an agreement might find himself with an undesirable tenant against whom he had no recourse except to cancel his agreement and there was danger of a recession which would make the properties that were taken over unattractive to lessees if they could obtain other properties at a lower price. The appellant made it a rule when he purchased an agreement to eet an assignment of it from the vendor and also a transfer from him so that he became the registered owner of the property subject only to such caveat as the purchaser might have filed against it. This made the risk referred not unduly large. On his cross-examination the appellant admitted that the element of risk in the agreements were inherent in the law referred to and that he did not consider the risk of fire great because any loss by fire would be compensatible by insurance.
The appellant gave explicit evidence of the source of the funds that enabled him to purchase the agreements in question. When he went overseas in 1940 he owned 25 houses in Calgary or its vicinity. These were rented and he paid income tax on the rents received from them. The value of these houses was from $2,500 to $3,000 each. At the end of the war he had $54,000 in stocks and bonds. Within a year or so after the end of the war his houses were all sold after they had been prepared for sale by necessary renovations. He sold all his stocks and bonds. With the funds received from the sale of his houses and his stocks and bonds he purchased agreements for sale and lease option agreements of the kind described. The funds enabled him to buy 28 agreements in 1947, as already stated. As funds came in from the agreement he used them for further purchases. In 1946 he had a loan of $17,500 from the Bank. This was prior to the sale of his stocks and bonds which he put up by way of security. He obtained further loans from the Bank, his maximum liability to it being $100,000 which has all been paid off. He paid the Bank interest at the rate of 414 per cent. As moneys came in on the agreements he used them to purchase other agreements. For- example, in the years 1950, 1951, and 1952, the amounts that came in from agreements came to $173,009, inclusive of interest as well as principal payments, and in the same period he purchased 68 new agreements for a total of $169,000. It is manifest from the fact that he purchased 149 agreements in the period 1947-1954, which averaged close to 20 agreements per year, that his dealings in the agreements were substantial.
The appellant described in detail the circumstances under which he acquired the agreements. He purchased them by himself and never in association with anyone else. He did not set. up any organization for their acquisition, never employed anyone to purchase agreements for him, never advertised for them, and never offered to buy them. Nor did he bargain with vendors about the price he would pay. When he was asked by his counsel how he came to obtain the agreements he explained that people would know from those who were making payments on the houses that he had sold originally that he had money and would finance or deal with agreements, that he was approached by building contractors or real estate agents, that in each case they would state how much they wanted for the agreements that they had for sale and that he decided whether he would accept their offer or not. In some eases the building contractors or real estate agents were clients and in others lawyers in the outlying districts approached him. Some of the agreements that he purchased had been drawn by him or by a member of his firm and many were drawn by lawyers in places outside of Calgary. On his cross- examination he admitted that he had stated before the Income Tax Appeal Board that his office did real estate legal work for a considerable number of real estate firms, particularly at Bow- ness and Montgomery, that these dealt with individual building contractors who had small financial means, that when they had sold a house they had to realize cash on the agreement under which they had sold it in order to build another one, and consequently, offered their agreement for sale. It was known that the appellant was a potential purchaser of such agreements and they offered the agreement to him giving particulars of the price at which they would sell it. He either rejected the offer made to him or accepted it. Sometimes he purchased an agreement from a builder immediately after he had sold a house but he never dealt with him in advance of an actual sale by him. In some cases agreements were offered to him by other lawyers and sometimes they were brought to his attention by members of his firm. Since it was well known that he was buying agreements, it is clear that he had no need for any organization for their acquisition.
The purchasers of the properties covered by the agreements made their payments of principal and interest to the appellant in various ways. In most cases they were deposited to his credit in a personal account that he kept with the Bank of Montreal. In some cases the money was deposited with the Guarantee Trust Company in his personal account with it and in other cases the payments were made to his law office particularly in cases where the purchasers had fallen into arrears and he w anted to keep a close check on them. The appellant kept the account for each agreement on the inside of the cover of the file in which he kept the documents. He did not employ anyone to do any bookkeeping for them. He did it himself.
The appellant did not sell any of the agreements purchased by him but kept them all to their maturity except in those cases where purchasers paid the balance owing under their agreements prior to their maturity.
When the appellant was asked by his counsel what his purpose was in buying the agreements in question he replied that his purpose was to create by investment a fund which would give him an income on his retirement which was overdue.
There is no doubt that the appellant considered that the prospects of making a profit from the discounts at w hich he purchased the agreements were very good and that he told friends that he considered them good investments. Indeed, he guaranteed some of them to friends for a year on the understanding that if they wished he would refund the money paid by them plus 5 per cent and take the agreement over. The discount in such cases might have been as high as 35 per cent but the person whom he guaranteed received only 25 per cent, the remaining 10 per cent being retained by him as what was called a “finder’s fee’’ which he declared as income. This was at the tail end of the period under discussion.
It is clear that the appellant was not a money lender in the ordinary sense of the term. He never advanced loans to builders or to others except to old friends.
I should add that there is no reason for drawing any distinction between the assessments for 1953, 1954 and 1955 and those for 1950, 1951, and 1952. If the latter are valid, so are the former. They all stand on the same footing.
On these facts I have no hesitation in finding that the profits realized by the appellant from the discounts at which he purchased the agreements in question were taxable income. Counsel for the appellant sought to distinguish the facts from those in the Spencer case (supra) to which I have referred but that is not the question for consideration. What must be determined is the true nature of the appellant’s transactions.
I do not see how anyone could reasonably conclude that the appellant’s purchases of agreements of the kind in question were investments. They were certainly not ordinary investments of the. kind referred to in the Californian Copper Syndicate case (supra). The agreements were not securities of the kind that a. prudent investor would consider. No loan company would look at them and they were of such a second class and speculative nature that only the high rate of discount at which they could be purchased and the good prospect of profit therefrom made them attractive to a purchaser.
In my opinion, it would be quite unrealistic to think of the profits as enhancements of the value of the investments. The purchases were plainly speculations for profit, not investments. I say this, notwithstanding the appellant’s statement of his intention and purpose in purchasing the agreements, and without doubt that his opinion that his profits were capital gains and free from income tax was honestly held, but I repeat here what I said in the Spencer case (supra), at page 132:
“It is well established that a taxpayer’s statement of what his intention was in entering upon a transaction, made subsequently to its date, should be carefully scrutinized. What his intention really was may be more nearly accurately deduced from his course of conduct and what he actually did than from his ex post facto declaration.’’
In my judgment, the facts establish that the appellant was in the business of purchasing agreements for sale and lease option agreements at a discount and holding them to maturity in order to realize the maximum amount of profit out of the discounts at which he had made his purchases. He had a special knowledge of the transactions into which he entered and the facilities that enabled him to acquire the agreements advantageously were available to him without any organization for the purpose on his part. His practice as a lawyer, with his special knowledge of real estate law, his connection with building contractors and real estate agents and his knowledge of the localities in which the properties covered by the agreements were located made for sound judgment on his part in carrying on his enterprise. Indeed, he had worked out a careful and effective profit-making scheme. Moreover, he had or borrowed the funds that enabled him to operate it on a substantial scale. I, therefore, conclude that the profits realized by him from the discounts at which he had purchased his agreements were plainly gains made by him ‘‘in an operation of business in a scheme of profit-making’’ within the meaning of the statement in the Californian Copper Syndicate ease (supra). The decision to be made is one of fact. I believe that if the facts of this case were placed before an ordinary reasonable man on the street and he were asked whether the appellant was engaged in a speculative scheme for profit making he would unhesitatingly answer in the affirmative. In my opinion, that conclusion is irresistible.
I find, therefore, that the profits realized by the appellant from the discounts at which he purchased the agreements in question were income from a business within the meaning of Sections 3 and 4 of the Act and taxable accordingly.
The Minister was, therefore, right in assessing the appellant in respect of such profits with the result that the appeal herein must be dismissed and the cross-appeal allowed with costs.
Judgment accordingly.