THORSON, P.:—This is an appeal from the decision of the Income Tax Appeal Board ((1956), 15 Tax A.B.C. 200), dated May 28, 1956, dismissing the appellant’s appeal from his income tax assessment for 1947. The appeal was heard at Regina in Saskatchewan.
As shown by the notice of reassessment, dated December 3, 1954, the Minister in reassessing the appellant for 1947 added the sum of $5,043.75 to the amount of taxable income reported by him on the ground that the said sum was profit on the sale of assets to Moose Jaw Refineries Limited. The appellant objected to the assessment on February 2, 1955, and, without waiting for the Minister’s reply, appealed against it to the Income Tax Appeal Board which dismissed his appeal. It is from this decision that the appeal to this Court is brought.
Certain facts are not in dispute. They were clearly stated by the witnesses for the appellant, particularly by Mr. J. Gordon Ross of Moose Jaw in Saskatchewan, and I set them out as I find them to be. Sometime in September, 1947, Mr. Ross pur- chased some oil refinery equipment from Northern Petroleums Limited of Kamsack in Saskatchewan for $9,650 and paid for it with his own cheque. The equipment had been acquired by Northern Petroleums Limited from the liquidator of Great West Refineries Limited of Yorkton in Saskatchewan. The negotiations for the purchase of the equipment were conducted by Mr. Ross and Mr. H. F. Berry, then President of National Light & Power Company Limited of Moose Jaw, with Mr. J. Kalmacof, an officer of Northern Petroleums Limited. When Mr. Ross purchased the equipment he did so for a syndicate consisting of Mr. H. F. Berry, Mr. John Kalmacoff, Mr. C. M. Nixon, who held his interest in the syndicate for Mr. Ross, Mr. K. C. Graham and
C. K. Buchbach, the appellant in the present case. Mr. Berry, Mr. Kalmacoff and Mr. Nixon each had a one-quarter interest in the syndicate and Mr. Graham and the appellant each a oneeighth interest. Mr. Nixon held his interest for Mr. Ross who was the real owner of it. The purchase was made with the appellant’s knowledge.
After Mr. Ross had purchased the equipment for the syndicate, of which he was himself a member through Mr. Nixon, he sold it as it stood in position in Yorkton to Moose Jaw Refineries Limited for, as he put it, a price supposed to be $50,000. In making the sale he acted for the syndicate.
At the time of the purchase of the equipment Moose Jaw Refineries Limited had already been incorporated as a private company under the Companies Act of Saskatchewan, the certificate of incorporation being dated August 19, 1947, and, as appears from the minutes of a meeting of the subscribers of the memorandum of association held at Moose Jaw on August 20, 1947. Mr. K. C. Graham and the appellant, both of Moose Jaw, and Mr. J. Kalmacoff of Kamsack had become the first directors. Thus the directors of the Company were also members of the syndicate referred to:
The purchase of the equipment was approved by the shareholders of Moose Jaw Refineries Limited at a meeting held on December 1, 1947. Indeed, the resolution of approval was moved by the appellant as appears from the following minute :
"‘It was moved by C. K. Buchbach and seconded by J. Kal- macoff and unanimously carried:
" That the directors are authorized to negotiate the purchase from J. G. Ross at a price not in excess of $50,000 of the Refinery plant and equipment as is, where is and the directors are further authorized to execute any documents necessary to effect such purchase ; and the directors are authorized to make this purchase for cash only and are not authorized to deliver stock, debentures or any other obligations of the Company in connection with this purchase.’ ”
At the same meeting it was moved by C. K. Buchbach and seconded by J. Kalmacoff and unanimously carried :
"That the Directors be authorized to issue debentures in an amount not exceeding $100,000.00 to be sold as the Directors deem advisable ; the debentures to be sold at par and to bear interest at the rate of six per cent (6%) per annum payable semi-annually and to be transferable only on resolution approved by the Board of Directors, . . . .”
And at the same meeting it was also resolved that the number of directors be fixed at three and that the appointment of the three directors, K. C. Graham, C. K. Buehbach and J. Kalmacoff as the directors of the Company be ratified and confirmed.
At the meeting of the directors immediately following this meeting of the shareholders it was moved by J. Kalmacoff, seconded by C. K. Buchbach and unanimously carried:
" That the number of shares set opposite the individual names be allotted to them as in the list below and that certificates therefor be issued on payment of the sums covered by the subscriptions :
K. C. Graham 2500 shares C. K. Buchbach 2500 J. Kalmacoff 5000 ( C. M. Nixon 5000 “ M. F. Harwood 4999 ( V. L. Smith 1
And the minutes also shows the following:
" "Whereas the following persons have subscribed for debentures in the amounts set forth opposite each name, be it resolved:
‘That the President and Secretary are hereby authorized to issue and deliver upon payment of the par value the following debentures in the amounts provided in this resolution:
K. C. Graham $4000.00 C. K. Buchbach 4000.00 J. Kalmacoff 8000.00 C. M. Nixon 8000.00 M. F. Harwood 8000.00 ‘ ‘‘
The authorized capital of Moose Jaw Refineries Limited was 20,000 shares of the par value of $1 each and it will be seen that it was all subscribed by members of the syndicate either in their own names or in that of their nominees so that the transaction for the sale of the equipment was between the members of the syndicate as vendors and the Company, all of whose shareholders were members of the syndicate, as purchaser.
The manner in which the sale of the equipment to Moose Jaw Refineries Limited was carried out and the members of the syndicate acquired 20,000 shares in it, being the whole of its authorized capital, and $32,000 of its debentures was graphically described by Mr. Ross and Mr. Kalmacoff. Everything happened on December 1,1947. All the members of the syndicate, including the appellant, were present. Moose Jaw Refineries Limited issued its cheque for $50,000 to J. Gordon Ross in payment for the equipment which Mr. Ross had sold to it, but at the time of issuing the cheque Moose Jaw Refineries Limited had no money. Mr. Ross issued cheques to the members of the syndicate for their shares of the difference between $50,000, the sale price of the equipment and $9,650, its purchase price, in proportion to their interest in the enterprise, namely, for $10,087.50 each to Mr. Berry and Mr. Kalmacoff and for $5,043.75 each to Mr. Graham and the appellant. When he was asked whether he had issued a cheque to Mr. Nixon he said that it was not likely that he had done so and he did not think that he had. There can, I think, be no doubt that he did not. It was part of the scheme that each of the recipients of the said cheques would supplement its amount and subscribe for sufficient shares and debentures of Moose Jaw Refineries Limited to enable it to meet the cheque for $50,000 which it had issued to Mr. Ross. The members of the syndicate then issued their cheques to Moose Jaw Refineries Limited in payment of the shares and debentures referred to for the following amounts, namely, Mr. Berry and Mr. Kalmacoff for $13,000 each, Mr. Graham and the appellant for $6,500 each. Mr. Ross, having turned over the equipment to the Company, issued his cheque to it for $2,912.50. The cheques were all dated December 1, 1947, and deposited the same day, the cheque for $50,000 issued to Moose Jaw Refineries Limited to Mr. Ross being deposited by him to the credit of his account, the cheques issued by him to the other members of the syndicate being deposited by them to the credit of their respective accounts and the cheques issued by them to Moose Jaw Refineries Limited being deposited by it to the credit of its account. All the members of the syndicate, including the appellant, sat around the table while this passing of cheques, referred to in the course of the hearing of the appeal as "‘kiting’’, occurred.
Shares and debentures were duly issued to the persons named in the minutes of the meeting of the directors as above set out but it was established that the shares issued to Mr. Nixon belonged to Mr. Ross and those issued to Miss Harwood and Miss Smith belonged to Mr. Berry, and also that the debentures issued to Mr. Nixon belonged to Mr. Ross and those issued to Miss Harwood to Mr. Berry.
The upshot of the enterprise was that the members of the syndicate sold the oil refinery equipment, which they had purchased for $9,650, to Moose Jaw Refineries Limited, of which the members of the syndicate were the only shareholders, for $50,000 and with an additional outlay of $11,650 acquired 20,000 shares in the Company, being all its authorized capital, and $32,000 of debentures issued by it. The appellant’s oneeighth share of the difference between the purchase price and the sale price of the equipment came to the $5,043.75 which he received from Mr. Ross and deposited to the credit of his account.
Subsequently, the members of the syndicate, now all the shareholders of Moose Jaw Refineries Limited, subscribed for additional debentures to enable it to operate. The oil refinery equipment was moved from Yorkton to Moose Jaw during the winter of 1947-48 to a site which the Company had leased from National Light and Power Company Limited and the Company started production about the end of 1948 or the spring of 1949.
The members of the syndicate all held their shares intact until about 1952 when Transempire Oils Limited took over the Company by buying all the shares of its members at a substantial advance over the par value of $1 per share which they had paid for them. By that time the debentures had all been paid. The enterprise in which the members of the syndicate had embarked came thus to a successful and profitable conclusion.
Thus far I have set out the facts in respect of which there is no dispute, although it appears that up to the date of the hearing it had never been disclosed that when Mr. Ross purchased the oil refinery equipment and sold it to Moose Jaw Refineries Limited he was acting for a syndicate of which he was himself a member and that all the shareholders of the Company were members of the syndicate and in control of it. There are other facts in respect of which there is controversy. No credible reason was given why Mr. Ross carried his interest in the syndicate in the name of Mr. Nixon or why Mr. Berry hid behind Miss Harwood. Neither Mr. Ross nor Mr. Berry appeared as Shareholders of Moose Jay Refineries Limited although they were really such. It was suggested that the reason for their anonymity was for the purpose of enabling Moose Jaw Refineries Limited to claim depreciation or capital cost allowances on the basis of the cost of the equipment to them having been $50,000, which the Company in fact did claim but without success. It is obvious that if the facts which were disclosed at the hearing had been known earlier the Company would not have had the hardihood to make the claims for depreciation or capital cost allowances which it did. There is support for the suggestion in the statement of Mr. Ross that the purpose of the transaction was to put the equipment which he had sold at an increased valuation. He stated that the sum which he had paid for the equipment represented a fair price for it. In this opinion he was supported by Mr. Kalmacof who said that Northern Petroleums Limited had just purchased the equipment for $9,350 and its sale to Mr. Ross at $9,650 had gone through as a cost transaction. He knew that the cost of moving the equipment from Yorkton to Moose Jaw had been very high. But the fact is, as Mr. H. E. Hansen bluntly put it, that a good deal of the equipment had not much more than junk value, that it became necessary to replace the two fractionating towers, that the major part of the equipment was of questionable value and there was not enough of it, that it became necessary to add prehydrating and predesalting units. In fact, the attempt to operate the towers had cost the Company a good sales account. Mr. Kalmacoff also admitted that the equipment was a piece of junk.
It is plain that if Moose Jaw Refineries Limited had succeeded in its claim for depreciation or capital cost allowances on the basis of the oil refinery equipment having cost it $50,000 in a transaction that was at arm’s length, the allowances would have enured to the benefit of the members of the syndicate as being the shareholders of the Company. It may well be that the members of the syndicate had this possibility of benefit to them in mind when they embarked upon the enterprise the details of which were not disclosed until Mr. Ross freely stated them at the hearing before me, but I need not make any finding on this particular point.
The appellant stated that he was a mechanical engineer and plant superintendent of National Light and Power Company Limited and that prior to this case he had had no experience in purchasing or dealing in oil refinery equipment or dealing in shares. He further stated that he had no personal knowledge of the purchase of the oil refinery equipment and took no part in the negotiations for it. He left it to Mr. Ross to conduct the negotiations on his behalf as well as on that of the other members of the syndicate. He agreed that Mr. Ross had given a correct statement of what had happened. He admitted that he did have an interest in the transaction and knew that the cheque for $5,043.75 which he had received from Mr. Ross was his share of the profits from the enterprise. He had left it to Mr. Ross to work it out the best way he could.
Mr. Kalmacof also admitted that he went into the transaction for profit. He thought the members of the syndicate could make money out of the transaction.
It was argued for the appellant that the sale of the oil refinery equipment was not a real transaction but merely a mark-up of valuation, whatever that may mean, that there was no real value in the shares or debentures which had been issued to the appellant and that when the appellant received the cheque for $5,048.75 from Mr. Ross he had not in fact received any profit. It was also urged that the transaction was an isolated one and that if the appellant had received any profit from it such profit was not taxable.
In my opinion, there is no substance in this submission. According to the resolution passed by the shareholders of Moose Jaw Refineries Limited the sale of the oil refinery equipment was to be for cash and the cheque for $5,043.75 which the appellant received from Mr. Ross was credited to his account. It was paid and its amount was received by him in 1947. The fact that he chose to use it together with money of his own to acquire shares and debentures of Moose Jaw Refineries Limited, whatever their value at the time of their acquisition might have been, has nothing to do with the matter. The appellant certainly thought that they were of value and they turned out to be such.
I find no difficulty in concluding that the sum of $5,043.75 was properly added to the amount of taxable income reported by the appellant on his return for 1947. In my opinion, it is clear that the appellant and the other members of the syndicate embarked upon and carried out a scheme for profit-making and that the profit made by each of them was a gain made in an operation of business in carrying out a scheme for profit-making, within the meaning of the test laid down by the Lord Justice Clerk (Mac- donald) in the famous case of Californian Copper Syndicate Limited v. Harris (1904), 5 T.C. 159 at 165. Moose Jaw Refineries Limited paid $50,000 to Mr. Ross, acting for the appellant and the other members of the syndicate as well as for himself as one of the members, for equipment that Mr. Ross had purchased for the syndicate for the purpose of selling it to the Company which had been formed by the syndicate and the appellant received $5,043.75 as his share of the profits of the said sale and the said amount was actually paid to him. Vide also Martin v. Lowery, [1927] A.C. 312; Honeyman v. M.N.R., [1955] Ex. C.R. 200; [1955] C.T.C. 151.
The isolation of the transaction does not absolve the appellant from liability : vide Atlantic Sugar Refineries Limited v. M.N.R., [1948] Ex. C.R. 622; [1948] C.T.C. 326, where I held that whether the gain or profit from a particular transaction is an item of taxable income cannot be determined solely by whether the transaction was an isolated one or not and that the character or nature of the transaction must be viewed in the light of the circumstances under which it was embarked upon and its surrounding facts. The mere fact that a transaction is an isolated one does not exclude it from the category of trading or business transactions of such a nature as to attract income tax to the profit therefrom. My decision in that case was affirmed by the Supreme Court of Canada, [1949] S.C.R. 706; [1949] C.T.C. 196: wide also the decision of Cameron, J., in McDonough v. M.N.R., [1949] Ex. C.R. 300; [1949] C.T.C. 213 and the decision of Fournier, J., in the Honey man case (supra) : vide also the decision in M.N.R. v. Taylor, [1956] C.T.C. 189, keeping in mind that in this decision I was considering whether the transaction there in question was ‘‘an adventure or concern in the nature of trade” within the meaning of Section 127(1) (e) of the Income Tax Act, Statutes of Canada 1948, c. 52.
In my judgment, the isolation of the transaction in the present case does not exclude it from the category of being an operation of business in carrying out a scheme of profit-making with the profit from it being subject to income tax.
For the reasons given, I am of the opinion that the sum of $5,043.75 received by the appellant in 1947 in the circumstances described was taxable income in his hands within the meaning of Section 3 of the Income War Tax Act, R.S.C. 1927, c. 97, and properly added to the amount reported by him on his return.
It follows that the appellant’s appeal herein must be dismissed with costs.
Judgment accordingly.