Western Wholesale Drug Ltd. v. The Queen, 77 DTC 5021, [1977] CTC 1 (FCTD)

Mahoney, J:—The issue is whether the plaintiff acquired 142,998 common shares of Stanley Drug Products Limited with the intention of disposing of them at a profit. It acquired them at a price of $1,121/2 each in a transaction that closed April 2, 1970. The plaintiff had acquired 34,286 common shares in 1963, the profit on the disposition of which is not in issue.

Stanley Drug Products Limited, hereinafter called “Stanley”, was a drug manufacturing company with its plant in Vancouver, BC. Prior to April 2, 1970 it was controlled, directly and indirectly, by an American drug manufacturer, Sperti Drug Corporation, hereinafter called “Sperti”. During the late 1960’s, ensuing upon the Report of the Royal Commission on Health Services in Canada, the Canadian pharmaceutical industry was considerably reshaped by federal and provincial action. Among other things, the federal government instituted the Pharmaceutical Industry Development Assistance (PIDA) program, which made capital funds available to Canadian drug manufacturers on very favourable terms.

The plaintiff is a drug wholesaler and wholly-owned subsidiary of Cunningham Drug Stores Limited, a substantial retail drug chain in Alberta and British Columbia. Stanley was the only drug manufacturer of any consequence in western Canada. Economies of scale and increasing demand, particularly stimulated by the liberalization of the laws relative to the substitution of generic drugs in prescriptions, made desirable the expansion of Stanley’s facilities, which were already producing at capacity. Sperti was unwilling or unable to provide its share of the funds necessary for expansion. Being foreign controlled, Stanley did not qualify under PIDA.

By a letter dated March 18, 1969 Leonard Weir, Stanley’s president, also a Canadian resident shareholder, presented Sperti with an ultimatum to either buy him out or sell at $1.25 per share. I accept, for this purpose, the evidence of Erling Bjarnason, then president of the plaintiff, that notwithstanding that the 16,000 shares offered were considerably fewer than the number then owned by the plaintiff, this approach was made with the plaintiff’s knowledge and with the intention that it would either entirely dispose of its interest or buy out Sperti. In the ensuing negotiations, the plaintiff was clearly a principal.

On April 8, 1969 Weir made a formal written offer to buy Sperti’s 142,998 shares at $1.25 each. The offer was open for acceptance to May 15, which was extended to May 30. The offer was, by consent, revoked on May 16 and replaced by one naming the plaintiff as the intended purchaser while reserving certain optional rights to Weir on the shares to be acquired. On May 29 the offer was accepted in principle and attorneys in Seattle, Washington, acting for Sperti, undertook the drafting of the formal agreement. On June 25, seizing upon what the attorneys characterized as ‘‘technical amendments” in the formal agreement submitted, Weir rescinded the offer on the basis that Sperti had not accepted it but rather had made a counter-offer. Bjarnason says that this was merely a tactic to speed up the completion of the deal which was, in the plaintiff’s view, dragging. He says that it was the plaintiff's hope and expectation that the sale would close. The delays actually encountered to not make the adoption of such a drastic tactic obviously desirable. There is no evidence that the parties behaved as though the rescision had been a ploy in the business process. A letter from Sperti to Weir, dated September 2, 1969 (Exhibit A-Tab 14) clearly indicates that, in Sperti’s view, at that date, the deal was off.

On August 7, 1969 Canadian Pharmacal Co Limited wrote Weir concerning “your offer of shares”. Between October 29, 1969 and January 6, 1970 active discussions regarding the possible acquisition of an interest in Stanley by Canadian Pharmacal involved the president of that company, Weir and Ralph Cunningham, president of Cunningham Drug Stores Limited. There were letters and there were meetings.

On October 16, 1969, in reply to a letter of October 7 which is not in evidence, Sperti confirmed an earlier telephone conversation with Weir in which it indicated that it “would accept an offer the same as that which was originally tendered by you on behalf of Mr Cunningham”. The plaintiff made an offer to buy at $1 per share, which it increased to $1.12 /2 on December 29. The transaction closed, at that price, on April 2, 1970.

It is unnecessary for me to review the evidence of the fruitless negotiations during 1970 involving the possible sale by the plaintiff of some or all of its Stanley shares. It is enough to find, as I do, that it was actively exploring the market for those shares between October 29, 1969 and January 6, 1970.

In September 1970 negotiations began with Mowatt & Moore Limited leading to the grant by the plaintiff of an option, for a consideration of $10,000, to sell 127,480 of its shares outright with a further option on the balance. When the option matured April 15, 1971, it was not exercised. The $10,000 has been assessed as income to the plaintiff for its 1971 taxation year. On August 16, 1971 the plaintiff sold all of its Stanley shares for $2.20 each resulting in a gain of $141,503.39 in its 1972 taxation year. The gain attributable to the 142,998 shares, in the amount of $134,646.19, was assessed as income. The plaintiff appeals against the assessments of $10,000 in 1971 and $134,646.19 in 1972.

The evidence establishes to my complete satisfaction that, while there were no doubt other valid business reasons for the plaintiff’s acquisition of the 142,998 shares, the possibility of their disposition at a profit was a motivating reason for the purchase. The evidence does not support the plaintiff’s contention that the agreement by which the shares were actually acquired was made early in 1969 and that what ensued between the so-called rescision of June 25, 1969 and the settlement of the essential terms upon which the purchase closed in April 1970, including the reduction of the purchase price, was normal business negotiation and mere tinkering with the details of an arrangement already made. There is nothing in the documentary evidence to corroborate that unlikely proposition; quite the contrary.

It is the intention of the purchaser of an asset when he acquires it that is crucial to the question whether that asset is an investment or stock-in-trade. The time of acquisition cannot antedate the moment that the purchaser becomes firmly committed to the essential terms of the purchase. The price to be paid is obviously an essential term of any agreement to purchase. The earliest possible date on which the plaintiff can be found to have established its commitment to the essential terms of the purchase is December 29, 1969, when it raised its offer to $1.121/2. By that date, the plaintiff was already actively exploring the possibility of resale and cannot deny that such possibility was in its mind.

The appeal is dismissed with costs.