Pitch v. MNR, 93 DTC 939, [1993] 2 CTC 2370 (TCC)

Christie, A.C.T.C.C.J.:— The year under review is 1984. The issue is whether the profit realized by the appellant on the disposition of shares of General American Technologies Inc. is business income or a capital gain. In response to an offering memorandum dated November 30, 1983, issued by Connor, Clark & Company Ltd. of Toronto, the appellant shortly thereafter purchased 66,000 shares for $1.50 each or a total of $99,000. The memorandum states:

NEW ISSUE

GENERAL AMERICAN PROPERTIES INC. [1] $9,900,000

Retractable, Convertible, Participating, Non-Voting First Special Shares, Series I (the"Series I Shares”)

PRICE: $99,000 per Minimum Subscription (66,000 Series I Shares)

			Net Proceeds
	Price to		of the Sale to
	Public	Agents Fee	the Corporation
Per Series I Share	$1.50	$0.12	$1.38
Per minimum subscription
(66,000 series I shares)	$99,000	$7,920	$91,080

Included in what follows are these statements:

There is currently and will be no market for these securities. Accordingly, the price for this offering has been determined by negotiation between the corporation and Connor, Clark & Co. the “ managing agent").

Subject to the limitations set forth under the heading "Canadian Income Tax Consequences", in the opinion of the counsel and the auditors for the corporation and the counsel for the managing agent, if the proposed legislation [2] , which is contained in a notice of a ways and means motion to amend the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") becomes law in substantially the same form as the aforesaid proposed legislation, persons who subscribe for series I shares shall be able to deduct a scientific research tax credit equal to approximately one-half of the amount of their subscriptions.

The series I shares, at the option of the holder, in the period from October 18, 1984, to November 17, 1984, are:

(a) retractable at a retraction price of $0.90 per series I shares, if the proposed legislation, which is contained in a notice of ways and means motion to amend the Act tabled November 25, 1983, in the House of Commons (the"amending legislation”), becomes law on or before October 17, 1984, in substantially the same form as the amending legislation; or

(b) exchangeable for $0.90 and one-half a non-voting class A special share (a “class A share") per series I share, if the amending legislation has not become law by October 17, 1984, in substantially the same form as the amending legislation.

An irrevocable standby letter of credit has been arranged with a Canadian chartered bank to support the cash payments included in the above retraction privilege and exchange privilege. Payment of the retraction price or payment of the cash portion of the exchange proceeds and the issue of class A shares will be made on December 17, 1984.

The series I shares, at the option of the holder, from October 18, 1984, are convertible into class A shares:

(a) on the basis of one class A share for each series I share if the proposed legislation becomes law on or before October 17, 1984, in substantially the same form as the amending legislation; or

(b) on the basis of one and one-half class A shares for each series I share, if the proposed legislation has not become law by October 17, 1984, in substantially the same form as the amending legislation.

The foregoing is followed by 34 pages that review what is being offered with considerable particularity under headings such as "Canadian Income Tax Consequences", "Risk Factors", Legal Opinions” and "Tax Calculations". Some of what has already been said in these reasons is repeated in the 34 pages. The document entitled "Tax Calculations” reads:

1. The Income Tax Act (Canada) is amended to conform with the amending legislation.

2. A subscriber will retract on December 17, 1984.

3. A subscriber is an individual.

In the period October 18, 1984 to November 17, 1984, the appellant exercised his right to have the 66,000 shares redeemed at the redemption price of 90¢ per share. He was paid accordingly.

Evidence was led with a view to establishing that the convertibility of the series I shares into class A shares was the operating motivation in the acquisition of the shares. This offered potential for long term investment. Mr. Herbert

G. Lebane, C.A., financial adviser to the appellant was asked whether, in the absence of convertibility, he would have advised the appellant to acquire the shares. He replied: “Absolutely not.” The evidence of the appellant was to the same effect. Nevertheless I am not convinced about this.

To my mind the operating intention from the beginning was to do precisely what was in fact done. The appellant would invest $99,000 in series I shares. These would be redeemed during the specified redemption period at 90¢ per share and the appellant would be satisfied with the economic benefit in excess of $99,000 accruing to him from the redemption price taken in combination with the resulting scientific research tax credit. This lacks the earmarks of an investment. Rather it embodies the attributes of an adventure in the nature of trade which is included in the definition of business in subsection 248(1) of the Act.

In M.N.R. v. Sissons, [1969] S.C.R. 507, [1969] C.T.C. 184, 69 D.T.C. 5152, the respondent acquired debentures from two related companies on the verge of bankruptcy for a small fraction of their face value. Some of the debentures were redeemed and the respondent realized a profit of $87,000. It was held on appeal to the Supreme Court of Canada that the profit was realized in an adventure in the nature of trade and was therefore taxable as income from a business. Pigeon, J., who delivered the judgment of the Court, said at page 512 (C.T.C. 188, D.T.C. 5154):

Here the clear indication of "trade" is found in the fact that the acquisition of the securities was a part of a profit-making scheme. The purpose of the operation was not to earn income from the securities but to make a profit on prompt realization. The operation has therefore none of the essential characteristics of an investment, it is essentially a speculation. [3]

In the course of argument on January 14, 1993, counsel for the appellant cited Loewen v. M.N.R., [1990] 1 C.T.C. 2133, 90 D.T.C. 1009 (T.C.C.). This decision was reversed three weeks later by the Federal Court-Trial Division: The Queen v. Loewen, [1993] 1 C.T.C. 212, 93 D.T.C. 5109.

The appeal is dismissed.

Appeal dismissed.