Dally (C.) v. M.N.R., [1991] 1 CTC 2556

Rip, T.C.J.:—The main issue in these appeals from assessments of income tax is whether 527208 Ontario Limited C Ontario") received money on the retirement of a debenture issued by Happy Valley Hotel Limited CH.V. Limited") on its own account or for the benefit of Walter E. Sandrin “ Walter") and Charles Dally (" Charles"). If Ontario received funds for the benefit of Walter and Charles, it is not liable for the tax assessed. If Ontario received the money for its own benefit, the respondent says the money was appropriated from Ontario by its shareholders, Walter and Charles, and they are liable to include the amounts in their incomes in accordance with subsection 15(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). [1] In either event the Court must determine whether the debenture was acquired by its owner as an investment or in an adventure in the nature of trade.

Ontario's appeal is with respect to the assessment for its 1986 fiscal year which terminated on October 31, 1986. The appeals of Walter and Charles are from assessments for 1985. All parties agreed to have the appeals heard on common evidence.

Facts

Although both Walter and Charles appeared as witnesses neither of them was fully knowledgeable concerning the events leading to the assessments. Walter stated that he was a shareholder of Ontario which acquired shares of H.V. Limited; the latter corporation carried on the business of an entertainment lounge and hotel under the firm name Happy Valley Hotel (" Happy Valley”). (The lounge was called "Scruples") Walter was not involved in either company's management; he relied on his lawyer and management for all decisions relating to the two companies. Neither he nor Charles could recall if either of them ever paid or subscribed for shares in Ontario. Charles said he “put up” $4,000 of his own money as the downpayment on the purchase of shares of H.V. Limited. He wrote a cheque to his father, a lawyer, "who looked after these things". He, like Walter, relied on his father as to the structure of the transaction. He knew nothing of any debenture issued by H.V. Limited. Charles was aware of the business being carried on at Happy Valley prior to acquisition since he was involved in a similar business carried on by a competitor, Campbell Street Station (Campbell"), which was located two blocks from Happy Valley.

Happy Valley, explained Charles, had a country and western format and was losing money. Charles described in general terms the business history of Happy Valley once it was acquired, but it was his father, Fred C. Dally, who had detailed knowledge of the events.

Fred C. Dally ("Dally") is a solicitor who has practiced in Sarnia, Ontario for the past 30 years. He described his practice as the largest commercial practice in Sarnia. Walter is the brother of Lucio Sandrin, a client of Dally. Dally described his relationship with Lucio Sandrin as "special and close”. According to Dally, the Sandrin family is very active financially in the Sarnia area and they and the Dally family are involved together in various investments.

Campbell opened in 1977 after Dally had been approached by Daniel Stonehouse, the owner of H.V. Limited, to build an entertainment lounge on Campbell Street in Sarnia. Dally and Lucio Sandrin agreed to join Stonehouse in the new venture. Stonehouse sold his shares in H.V. Limited and he, Walter and Dally’s daughter, Kate, became the original shareholders of Campbell Street Station Limited ( Limited"), the corporation which owned Campbell. When Stonehouse died in 1980, his interest passed to his children. Dally described Campbell as having "the cleanest record of any entertainment lounge in Ontario”.

or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(e) by the payment of a dividend or a stock dividend,

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof or

(g) by an action described in paragraph 84(1)(c.1) or (c.2),

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

When Campbell started carrying on business Stonehouse sold his shares of H.V. Limited to four people: Patrick Versage CVersage"), John Pasemko CPas- emko"), both hotel owners, Garry Marsh Ç Marsh"), a hotel owner and owner of a real estate firm which sold hotels and Cardy Investments Limited (Cardy Investments"), a corporation controlled by H. Gordon Cardy “Cardy"), president and chief operating officer of Canadian Pacific Hotels. At the time of the purchase one Timothy Fenton (” Fenton”) was hired as manager of Happy Valley and, said Dally, did a "very good job”.

When Fenton accepted the position at Happy Valley he was promised, according to Dally, he would be a shareholder of H.V. Limited but the promise was not honoured. Campbell soon hired him as its manager and subsequently Mrs. Fenton was allowed to acquire one-third of the issued shares of Limited from Stonehouse's children. “Campbell became very profitable,” said Dally, "and Happy Valley took a nosedive".

After Fenton left Happy Valley, H.V. Limited hired other managers but continued to lose money. It was soon $800,000 in debt and, during 1980 and 1981, the servicing of the debt was very high because of the high interest rates at the time. The purchasers, according to Dally, had paid a very high price for H.V. Limited and were now attempting to sell; their attempts were unsuccessful. Marsh, on behalf of the shareholders, finally offered to sell all the issued shares of H.V. Limited to Dally but the offer, initially, was turned down.

Marsh had known Fenton since they were children and he had faith in his management abilities. Marsh proposed in 1982 that Fenton be manager of both Campbell and Happy Valley and that Dally and his group take over H.V. Limited at nominal cost.

Marsh and Dally finally agreed on November 23, 1982 that the shareholders of H.V. Limited would sell their shares to Daily's clients for $12,000. Ontario was incorporated on November 3, 1982 to acquire the shares of H.V. Limited, Dally testified, in trust for the benefit of Charles, a person to be delegated by Sandrin, that is, Walter, and Fenton's wife, each as to one-third of the shares. Dally insisted the vendors knew who the beneficial purchasers were and that Ontario was designated to be the purchaser on their behalf as a matter of convenience and to try to isolate the individual appellants and Mrs. Fenton from the substantial investment risk of purchasing H.V. Limited at a time it was in serious financial difficulty. At the time of execution of the agreement H.V. Limited owed $334,000 to Versage, Cardy Investments, Marsh and John R. Marsh & Company Limited ('Marsh Limited"); $214,000 was already secured by debentures and the additional amount was required to be secured by debentures prior to closing. The debts were secured by numerous debentures. H.V. Limited also owed approximately $50,000 to its bank, which debt was secured by a second mortgage. (The first mortgage was in favour of Stonehouse to secure the purchase price of the shares on their acquisition by the vendors; the amount outstanding at the date of agreement was $191,335.) The purchaser agreed to guarantee payment of the first 12 months interest due on account of vendors' loans and advances to H.V. Limited including loans secured by debentures. The agreement provided that 50 per cent of the monthly profits of Happy Valley would go to Ontario and the other 50 per cent would be paid to the vendors towards reduction of their loans secured by the debenture. Campbell would manage Happy Valley without any fee. Dally stated the share of profits due to Ontario were for the benefit of the two individual appellants and Mrs. Fenton.

The agreement also provided for Ontario to use its best efforts to obtain the release of any personal guarantees of the vendors for liabilities of H.V. Limited and if releases were not obtained, the purchaser would attempt to refinance the loans. The releases were not obtained and the banks refused to refinance the loans. The debentures aggregating $334,000 were not subject to the transaction.

The transaction closed on March 18, 1983, after approval was received from the Liquor License Board of Ontario. On the same day each of Walter, Charles and Fenton advanced $4,000 to Dally for their respective shares of H.V. Limited. The money was placed in Daily's trust account and transferred out of the account the same day to pay the vendors for the shares. There was no book entry or any reference in writing that the $12,000 was a loan to Ontario.

When the agreement for the first transaction was executed on November 23, 1982, H.V. Limited was unable to pay its bills, Dally recalled; thereafter the situation continued to deteriorate, he added, notwithstanding additional money invested by the new owners in an attempt to "stem the losses". According to Dally, almost as soon as the agreement of purchase and sale was executed a second "deal" was proposed and before the second deal was done "we were in a third deal”. The transaction kept changing as the situation got worse, he said. Dally testified that Fenton should have done well as manager but he was "over-extended" managing both Campbell and Happy Valley.

On March 1,1983 Marsh Limited, Cardy Investments, Pasemko, Versage and March, Lucio Sandrin, Tim Fenton and Dally, Ontario and H.V. Limited and Cardy entered into an agreement amending to some extent the agreement of November 23, 1982. This amending agreement referred to eight debentures issued by H.V. Limited to the vendors and related corporations which advanced funds to H.V. Limited at various times. Not all the debentures were referred to in the earlier agreement. Also, each of Fenton, Lucio Sandrin and Dally agreed to guarantee the payments under the debentures in the event 50 per cent of the profits were not sufficient to cover the interest on the $334,000 for the first 12 months after closing.

A second agreement was executed on March 1, 1983; this agreement between Ontario and Limited, the owner of Campbell, was essentially an agreement not to compete. It provided for clientele to be apportioned between Campbell and Happy Valley and for payments to Happy Valley by Limited. Limited and H.V. Limited agreed Campbell would continue to cater to an under-25-years-of-age clientele and that Happy Valley would alter its operations so as to aim for a clientele over the age of 25 years. Happy Valley's entertainment policy was to be subject to Campbell's scrutiny and direction. Limited also agreed to pay the costs of bringing Happy Valley's premises to a state of repair and appearance that would be acceptable to the proposed new clientele. In addition Limited would contribute to Happy Valley’s operating expenses such amount as Limited in its discretion decided was necessary “to keep Happy Valley’s premises out of the hands of encumbrances and . . . not to attract (Campbell's) class of clientele". The payments were structured as fees paid by Limited to H.V. Limited. In effect, the profits of Campbell were being applied to the losses of Happy Valley.

Limited advanced $135,000 to H.V. Limited by way of fees but Happy Valley's business continued to deteriorate and the vendors became increasingly concerned about personal guarantees they had given on behalf of H.V. Limited to its bankers prior to the sale in 1982. Dally had informed Marsh "things were not working out” and that his clients wanted Marsh to take back the shares of H.V. Limited, as previously agreed. Dally said "we were ready to walk away with our losses". The losses included the $12,000 his clients invested to purchase the shares a year earlier and the additional $135,000 in advances (the fees). The vendors offered a“ "new deal”: they offered to incorporate a new corporation "Newco") which would purchase 50 per cent of the shares from the Dally- Sandrin group and agreed to personally guarantee with Daily's group H.V. Limited loans to the bank. In return Daily's group agreed to forgive the advances of $135,000 on the understanding the vendors, Cardy and Marsh Limited, would forgive the money owing to them by H.V. Limited including the loans secured by debentures. Dally was of the view that H.V. Limited could not pay both Marsh's group and the bank and survive. The parties also agreed to advance further money to H.V. Limited. This agreement was signed on December 21, 1983.

Dally described the situation three months later, in March 1984, as "even worse" than before. Marsh, Pasemko and Versage told Dally "we cannot afford it and we want out”. On March 2, 1984, an agreement was entered into between Ontario, Newco, Cardy and Cardy Investments, Pasemko, Marsh, Marsh Limited, Versage, Lucio Sandrin, Fenton, Dally and H.V. Limited. Pasemko, Marsh and Versage sold their interest in their shares and all amounts owed to them by H.V. Limited, including those secured by the debentures, which they had earlier agreed to forgive, to Ontario and Cardy Investments for the sum of one dollar as well as a release and indemnification from Ontario and Lucio Sandrin, Fenton, Dally, Newco, Cardy Investments and Cardy. Ontario was then the registered owner of 75 per cent of the issued shares of H.V. Limited and Cardy Investments the owner of 25 per cent of the shares. The agreement also provided that each of Ontario and Cardy Investments would name two directors to the board of H.V. Limited. Versage, Marsh and Marsh Limited and Pasemko also released H.V. Limited from all claims and forgave any and all moneys due to them from H.V. Limited. This included the unpaid interest on the $334,000. It was only in July 1985 that Dally “ got around” to preparing the releases to H.V. Limited.

The amounts owed by H.V. Limited to the vendors and related corporations had not been discharged notwithstanding the prior agreement since, according to Dally, Cardy was concerned with the adverse tax consequence of forgiving debt.

In the meantime Cardy Investments and corporations related to Dally and Lucio Sandrin had advanced additional funds to H.V. Limited.

No declaration of trust was ever prepared for execution by Ontario with respect to either the shares or the debentures, Dally affirmed, because "we kept drafting and changing agreements" as "deals" changed. "Things constantly changed," he said. Even before the first deal closed I knew we were in trouble and anticipated change." He stated neither a reporting letter nor a statement of account was issued by him with respect to this matter. Dally declared he had "never been caught up in a mess like this before in my life . . . and is not an example of the work I do". He repeated he "never saw things change so quickly”.

After the agreement of March 1984 there was no improvement in H.V. Limited's fortunes. Fenton was very upset because of this and subsequently he and his wife transferred their interests in H.V. Limited to the other shareholders, Walter, Charles and Cardy Investments, each of whom now owned one-third of the shares and debt of H.V. Limited.

Meantime, in the spring of 1984, Cardy, through his contacts in the hotel industry, according to Dally, secured the services of a new manager for Happy Valley. His name was Wayne Beattie.

Dally recalled that in spring 1984 there was a possibility that H.V. Limited would go bankrupt. Neither the Dallys nor the Sandrins had been involved in a bankrupt company and it was decided to avoid bankruptcy by making a proposal to creditors. Dally and Sandrin agreed to invest more money in H.V. Limited and in return the creditors would have the option of receiving 60 per cent of the amounts owed to them immediately or all of the amounts by way of post-dated cheques over a period of 24 months. All creditors chose the first option.

Beattie altered H.V. Limited's entertainment concept to that of a "stripper" operation, Dally testified. Dally said Beattie" ran the place wide open" and this resulted in a dramatic increase in sales and profit. "Beattie turned the business around.”

In January 1985 Cardy agreed to cause Newco, which he now controlled, to transfer its shares in H.V. Limited to Ontario in consideration of 25 shares of Ontario. Cardy also caused Cardy Investments to transfer debentures it held in H.V. Limited to Ontario. Dally said the purpose of the transfer was to permit Ontario to hold all the shares and debentures of H.V. Limited as trustee for the benefit of Walter, Charles and Cardy Investments, each as to a one-third interest.

By summer 1985 Dally was of the view the ownership of H.V. Limited had stabilized. The various ownership changes were not reflected in writing. Dally believed H.V. Limited had issued approximately 12 to 14 debentures to shareholders or persons related to shareholders, and assignments of each, as ownership interests changed. All outstanding debentures had been transferred to Ontario for nominal consideration of one dollar. The multitude of debentures was inconvenient. Dally testified it was therefore decided to consolidate the debentures into a single debenture in the amount of $354,000; this was done on July 3,1985. [2] Ontario, Dally stated, was to hold the debenture for the benefit of Walter, Charles and Cardy Investments each as to one-third interest.

While H.V. Limited's business became profitable Dally and Sandrin became dissatisfied with the operation at Happy Valley. Anyone who wished to enter the premises was admitted, whether they were of age or not. Fights took place. Senior Sarnia police officials met with Dally to advise him of what was transpiring and were curious to know the reason he was involved with Happy Valley. The police had never had any problems at Campbell, Dally emphasized on more than one occasion during his evidence. The police also informed Dally they suspected not all revenues were being accounted for by Happy Valley's employees. The liquor licence for Happy Valley was suspended for a time. Beattie was charged with assaulting a customer. Dally complained adverse newspaper publicity reflected on his and the Sandrin families. As a result, Dally said. Sandrin and I panicked and decided to get out”. He instructed Marsh to find a buyer for Happy Valley even though Cardy did not want to sell since he was far from the scene, in Toronto, and felt sheltered from the publicity. Dally accepted the first offer brought to him, in spite of Cardy’s objections.

Before the sale closed Dally invited officials of Revenue Canada to audit H.V. Limited. He explained the situation to them as described to him by the police. He testified he did not want his or Sandrin's reputation further tarnished in the event it became public knowledge H.V. Limited may have failed to report income and was charged with tax evasion. The respondent's officials were auditing H.V. Limited during the time the transaction closed. The assessments subject to these appeals resulted from this audit.

When the closing documents for the sale of Happy Valley were being prepared by his law firm, an associate in his office, Mr. John Ruffi I li, inquired of Dally how the proceeds of sale were to be distributed. Dally testified he explained to his associate Ontario held the debenture and shares as trustee for the benefit of Charles, Walter and Cardy Investments, each as to a one-third interest. He also had Walter execute in his capacity as president of Ontario— although there is no evidence he was ever elected to this position by the first

and only directors of Ontario—an acknowledgement by Ontario: ”. . . that the entire debentures registered against the Happy Valley Hotel Limited are the property of the individual share holders [sic] and the balance of the closing funds should be paid accordingly".

Dally claims he is confident that Ontario was trustee. He insisted it was not his practice to prepare documents with retroactive dates; no declaration of trust was therefore prepared, He again repeated he was never previously involved in so frequent changes of ownership, police inquiries and such other disturbing matters in a single transaction. The preparation of declaration of trust by Ontario lost priority. He kept insisting he "never saw things change so quickly”.

In November 1985 the Happy Valley business assets were sold for $985,000 of which $572,040 was received on closing; the balance was a mortgage-back to the vendor. After paying amounts to H.V. Limited creditors, including Cardy Investments and persons related to shareholders for amounts advanced in excess of the amount secured by the debenture, commission and legal fees, the balance of $196,409. was paid on account of the $354,000 debenture to Charles, Walter and Cardy Investments, each receiving $65,470.

Dally testified Ontario never opened a bank account nor was an account opened for its benefit. There is no evidence that any of Walter, Charles and Mrs. Fenton had subscribed and paid for shares of Ontario; in fact, no shares of Ontario have ever been issued. [3] In fact, Dally insisted he never caused any corporate books, including a minute book and share transfer register, to be opened. No annual corporate returns were filed nor income tax returns prepared for Ontario, said Dally, until a demand was made by government authorities. The only tax return of Ontario filed with Revenue Canada, for its fiscal year ended October 31, 1983, states the corporation is “not active”, Dally testified that from the very outset it was intended that Ontario not carry on any business or own property on its own account; any property registered in its name was to be held as trustee for Walter, Charles and Mrs. Fenton. Dally insisted he always considered Ontario as a bare trustee.

As far as the second issue in the appeals are concerned, Daily's only evidence was that neither he nor Lucio Sandrin, nor either of the individual appellants, was a trader or speculator but had purchased property in the past for investment purposes only.

Basis of Assessments

Revenue Canada has assessed on the basis Ontario was the beneficial owner of the debenture in the amount of $354,000 and that Ontario has conferred a benefit on each of Charles and Walter. According to the respondent:

(a) the amount of $196,409 received by Ontario on the disposition of a debenture was income from a business within the meaning of subsection 248(1) and is to be included in its income pursuant to sections 3 and 4 of the Act; and

(b) an amount of $65,470 was appropriated by each of Charles and Walter from Ontario and such amount is to be included in their incomes, in accordance with subsection 15(1) of the Act.

First Issue

Dally appeared as a credible and forthright witness. His evidence in chief and in cross-examination was complimentary and consistent. His testimony was worthy of belief and ought to be accepted in its entirety. There was nothing in his cross-examination to suggest his evidence in chief was not truthful.

Notwithstanding the fact I accept Dally’s evidence as to intention it does not necessarily follow that the individual appellants each had a one-third beneficial interest in the debenture. A person may form the intention to follow a course to achieve a certain end but for one reason or another that end may not be achieved; intention by itself is not sufficient. A finding as to whether the beneficial interest in the debenture for $354,000 was that of Ontario or Walter and Charles depends on the balance of probabilities. To allow the appeals of Walter and Charles I must be reasonably satisfied that on the facts themselves Ontario did not have any beneficial interest in the debenture. [4]

During the time Happy Valley was carrying on business during the period Marsh 18, 1983 to the time Beattie was hired, H.V. Limited suffered losses and the losses were financed by Dally, Lucio Sandrin, Cardy Investments, Marsh, Pasemko, Versage, Cardy and Marsh Limited. Ontario advanced no money to H.V. Limited. No receipts or disbursements were ever entered in the books of Ontario—none existed—nor is there any evidence any member of the Dally or Sandrin families, including Charles and Walter, advanced money directly or indirectly, to or for the benefit of Ontario.

The transactions were undertaken by Dally with the consent and knowledge of Walter and Charles. They had complete faith in him. His evidence was that he was acting for his son, Charles, and Walter. Dally governed the adventure, decided, together with Lucio Sandrin, what should be done and what capital should be invested in the venture. It was Daily's decision, concurred in by Lucio Sandrin, to sell. Dally was the head and brain for Charles and Walter.

There is no evidence that Ontario dealt with any lender to obtain loans on its own account. No money was held by Dally in his trust account for Ontario. The money advanced to Dally by Charles and Walter for the shares of H.V. Limited went directly from Daily's trust account to the vendors; there is no reference in Daily's ledger book of any money advanced by Charles and Walter was for the benefit of Ontario. Dally testified that although Ontario executed various agreements with the vendors Marsh, Versage and Pasemko, each of the vendors knew that Ontario was not the beneficial owner of the shares of H.V. Limited or the debentures issued by H.V. Limited. Again, there is no reason from what I heard at trial not to accept Daily's evidence.

The debenture was retired with the proceeds of sale; after providing for payment out of the proceeds to other creditors H.V. Limited paid $65,470. to each of Walter, Charles and Cardy Investments. Dally has testified Ontario held the shares and the interest in the debenture for the benefit of Cardy Investments as well as for Walter and Charles, although he was not certain whether Cardy Investments held its interest on its own account for Cardy personally. The respondent did not call any evidence to challenge Daily's testimony; it did not call Cardy, for example, to refute Daily's evidence that Ontario's interest in the debenture, to the extent of one-third, belonged to Cardy Investments. If that were not the case, Daily's evidence would be open to serious doubt. That Cardy Investments’ interest in the debenture was being held by Ontario is only more reason to accept Daily's evidence that Ontario was doing the same for Walter and Charles.

Ontario was not the beneficial owner of the shares of H.V. Limited and never acquired any debt of, nor did it advance funds to, H.V. Limited. The original debentures issued by H.V. Limited to Ontario were issued for the benefit of those persons who actually acquired the debt of, and advanced the moneys to, H.V. Limited, namely, Marsh, Marsh Limited, Cardy Investments, Versage and Pasemko.5 [5] While various written agreements refer to Ontario as the transferee of shares and debentures, it is clear from Daily's evidence Ontario was acting, if not as trustee, then as nominee initially for Charles, Walter and Mrs. Fenton and latterly for Charles, Walter and Cardy Investments. The eventual issuance of a single debenture to Ontario in the amount of $354,000 was to consolidate the numerous debentures previously issued into one debt instrument.

Dally may be wrong in law that Ontario held the shares and debentures as trustee originally for Walter, Charles and Mrs. Fenton and latterly for Walter, Charles and Cardy Investments. The creation of a trust requires a declaration by a trustee that he or she is acting as trustee with respect to a particularproperty for ascertainable beneficiaries for distribution at ascertainable times; the trustee must have knowledge he or she is a trustee. No such declaration, oral or written, is present in the case at bar; also, Ontario appears to have never been organized after it was incorporated. The evidence of Dally indicates clearly to me that Ontario never acted on its own account but was simply a nominee of the individual appellants (as well as Mrs. Fenton and, later, Cardy Investments) to hold the shares and debentures for their benefit. In all the transactions Dally, after consultation with Lucio Sandrin, was the person who decided what to do and when, and had complete discretion and authority to bind Walter and Charles. Ontario itself was simply the tool used by Dally.

The appeal by Ontario from the notice of assessment for its 1986 taxation year is allowed on the basis it was simply a nominee of its purported shareholders and had no income in the year. As far as the individual appellants are concerned, they did not appropriate any property from Ontario within the meaning of subsection 15(1) of the Act.

Second Issue

The second issue must now be dealt with. That is, did Charles and Walter acquire their interest in the original debentures as a capital or business asset? The debenture for $354,000 was a consolidation of the earlier debentures. The Act defines ''business" as follows:

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade but does not include an office or employment.

The position of the individual appellants' counsel was that none of Charles, Walter, Dally and Lucio Sandrin was a trader or speculator. The appellants invested in H.V. Limited which carried on a business. They and Cardy Investments also acquired for one dollar debentures which, when consolidated, had a face value of $354,000. Counsel for the appellant submitted that the business assets of H.V. Limited were sold because Dally and Lucio Sandrin—and consequently Walter and Charles—wanted no part of Happy Valley after Beattie took over as manager and therefore any profits on the sale ought to be on account of capital. This may be so. However, the debentures were originally acquired by the individual appellants for one dollar when they were worthless. When Marsh, Marsh Limited, Pasemko and Versage transferred their interests in the debentures for one dollar H.V. Limited was in a very poor financial state; it owed considerable money and was unable to pay interest on its debt. The only way the individual appellants could realize on the debenture was to somehow cause H.V. Limited to have the ability to pay the debt. Walter and Charles were content to leave it to Dally to try to keep Happy Valley's business alive. Eventually his efforts were rewarded when Cardy was able to obtain Beattie's services.

Counsel for the appellants referred to several cases in support of his clients' position that they did not have any secondary of alternative intention on acquiring the debentures, to dispose of them at a profit: Regal Heights Ltd. v. M.N.R., [1960] C.T.C. 46; 60 D.T.C. 1270 (S.C.C.); Fraser, R.K. v. M.N.R., [1964] C.T.C. 372; 64 D.T.C. 5224 (S.C.C.); Racine v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098 (Ex. Ct.) per Noël, J. at 157 (D.T.C. 5103); Armstrong v. The Queen, [1985] 2 C.T.C. 179; 85 D.T.C. 5396 (F.C.T.D.) per Rouleau, J. at 183 (D.T.C. 5399); and Guy Dumas v. The Queen, [1989] 1 C.T.C. 52; 89 D.T.C. 5004 (F.C.A.).

In M.N.R. v. Sissons, [1969] C.T.C. 184; 69 D.T.C. 5152 (S.C.C.) at 187 (D.T.C. 5154) Pigeon, J. stated that "for the respondent to escape taxation on his gain from the operation he has to show that it is to be characterized as an investment. Otherwise, the conclusion is inescapable that it is an adventure in the nature of trade". In the case at bar, like in Sissons, the acquisition of the debenture, was in no way done as an investment is normally made. The debentures were acquired as part of a profit-making scheme, the purpose of which could not have been income from the debentures since H.V. Limited was insolvent, if not bankrupt, at the time the debentures were acquired. The purpose of acquiring the debentures was the hope that H.V. Limited would eventually pay the debenture holders. The cost of the debenture was one dollar. Walter and Charles had nothing to dose by acquiring the debentures and a whole lot to gain. The operation had none of the essential characteristics of an investment; it was essentially a speculation. See also Steeves, S.S. v. The Queen, [1977] C.T.C. 325; 77 D.T.C. 5230 (F.C.A.); The Queen v. Woods, [1977] C.T.C. 597; 77 D.T.C. 5411 (F.C.T.D.); Perkins v. The Queen, [1980] C.T.C. 199; 80 D.T.C. 6154 (F.C.A.); The Queen v. Meronek, [1982] C.T.C. 248; 82 D.T.C. 6187 (F.C.T.D.) and Spencer v. M.N.R., [1978] C.T.C. 2109; 78 D.T.C. 1129.

The individual taxpayers cannot succeed on the second issue.

judgment

The appeals of Charles Dally and Walter Sandrin are allowed and referred back to the respondent for reconsideration and reassessment on the basis each of them had a one-third beneficial interest in the debenture, and that the proceeds $65,470 received by each of them on the retirement of the debenture were income from a business within the meaning of section 248; accordingly they are to be included in the income of Walter and Charles for 1985 for the purposes of sections 3 and 4 of the Act. I have already stated the appeal of Ontario for its 1986 taxation year is allowed.

There shall be one set of costs awarded to the three appellants.

Appeals allowed in part.