|
Citation: 2004TCC614
|
|
Date: 20040910
|
|
Docket: 1999-4087(IT)G
|
|
BETWEEN:
|
|
B. W. STRASSBURGER LIMITED,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Rip J.
[1] B. W. Strassburger Limited
("appellant") appealed an income tax assessment for the
1996 taxation year in which the Minister of National Revenue
("Minister") considered that certain securities of
publicly traded corporations were disposed of in the course of
the appellant's business. The Minister reassessed the
appellant for 1996 by treating the appellant's profits from
52 sales of securities in the year on account of income and
treating its gains from another 32 dispositions of
securities on account of capital. The difference in treatment is
that the Minister considered securities held less than a year as
trading assets and those held more than 365 days as capital
assets. The Minister also considered securities to be trading
assets if the appellant had originally purchased shares and held
them for more than a year but subsequently purchased additional
shares of the same corporation but held these latterly purchased
shares for less than 365 days[1].
[2] After argument by counsel, I
stated that the appeal would be allowed and that my reasons would
follow in due course.
[3] Mr. Jack Segal, a chartered
accountant, who was the appellant's auditor until 1996 but
who worked on the appellant's 1996 financial statements,
described the appellant's origins and the character and
intentions of its founder, Barney Strassburger, Senior
("Senior").
[4] Senior's is a rags to riches
success storey. At all times the appellant was owned and
controlled by members of the Strassburger family. Senior
purchased a Kentucky Fried Chicken ("KFC") franchise in
the 1950's and at the time of his death the appellant
operated 33 KFC and related franchises and a corporation,
Key Brand Foods Inc. ("Key Brand"), that prepared food
for distribution and sale to KFC franchises.
[5] Senior had four children. Only one
of his children, Barney Strassburger, Junior ("Junior")
was interested in the business. Junior was involved in the
business since he was 14 years of age, recalled Mr. Segal. While
one of Senior's daughters did work in the business for a
while, neither she nor her other two siblings were interested in
working. Senior wanted to protect the children not in the
business and at the same time ensure the survival of the
businesses.
[6] Before 1988 all the
Strassburger's family assets were owned by the appellant; the
appellant did not own shares in publicly traded corporations.
Among the assets owned by the appellant were
Twins Drive-In Limited ("Twins"), which
owned the KFC franchises, Key Brand and real estate.
[7] In 1988 Senior was still active in
the business, primarily with Key Brand, and Junior was
responsible for the KFC operations. Senior was also spending
about four months a year in Florida and Junior would replace him
at Key Brand during his absence. The Strassburgers would keep in
constant contact by telephone and fax while the elder
Strassburger was in Florida. Mr. Segal recalled that the
Strassburgers had a strong management team and had competent
employees.
[8] Senior wanted to protect his
non-working children and, at the same time, recognize
Junior's efforts and ability. As Mr. Segal put it, he wanted
to cement things in place so the children would be looked after
and let Junior expand and reap the rewards. Therefore in 1988 the
appellant and Twins, and some other "minor"
corporations proceeded to an (vertical) amalgamation. The
amalgamated company continued for a week so as to claim
depreciation for tax purposes. At the end of the week the
appellant sold its KFC stores, franchises and equipment to a new
corporation, Twin's Drive-In Inc. ("New
Twins"); the common shareholders in New Twins were Junior
and his sister June, each as to 50 per cent as well as
Senior who appears to have owned preferred shares. The sale price
was $9,500,000, the purported fair market value of the assets
being sold. The purchase price was secured by a note in this
amount payable over seven and a half years with interest at the
rate of nine per cent per annum.
[9] New Twins was very successful in
paying off its loan to the appellant. At the same time Key Brand
was extremely successful. Cash was flowing to the appellant.
Senior was concerned with what to do with the cash. In the
meantime the arrangement between Junior and his sister June was
not working out and in 1990 the father and son decided to
purchase June's shares in New Twins. New Twins and Key
Brand continued to thrive. Senior did not want to be in a
situation of "wealth creation", Mr. Segal stated,
and in 1992 he decided to freeze New Twins' shares. New Twins
was worth about $8,000,000 at the time. The freeze resulted in
the father and son each owning $4,000,000 in preferred shares and
Junior owning one common share in New Twins. Senior contemplated
that on his death Junior would purchase each siblings interest
for $1,000,000 or, since the preferred shares were retractable,
New Twins could purchase the preferred shares from the
children.
[10] New Twins was extremely successful
under Junior. It was repaying the note quicker than anticipated.
The appellant had cash and Senior continued to be concerned about
what to do with the money. He was not content with investing
funds in guaranteed investment certificates because he feared
inflation would cause an economic loss. He considered investing
in land and publicly traded companies and opted for the
latter.
[11] The appellant's first investment
was the purchase of $2,000,000 of shares in Pepsico in 1992.
Pepsico was the franchiser of KFC at the time and Senior felt
comfortable with this investment. As cash continued to be
accumulated in the appellant additional investments were made in
shares. On July 17, 1995 Senior suffered a stroke and ceased to
be active in Key Brand and the appellant.
[12] By April 28, 1996, the
1996 year-end of the appellant, the appellant's
marketable securities were worth $5,865,394. The appellant also
had mortgages and loans receivable (from arm's length and non
arm's length transactions) in the amount of $3,145,697, the
main loan receivable was from New Twins in the amount of
$2,530,107. Mr. Segal estimated the appellant's value at its
1996 year-end at approximately $34,000,000.
[13] Before his stroke Senior reviewed
possible investments and he decided what stocks the appellant
would purchase. He preferred companies whose businesses he knew
and understood. He purchased "quality" stock on the
Toronto and New York Stock Exchanges; he did not purchase junior
mining or oil companies, for example. The securities were
acquired through a stockbroker and by computer. From time to time
he would ask Mr. Segal for his views but Mr. Segal said he
did not follow the stock market. Mr. Segal insisted Senior wanted
to create a pool of funds for his other three children to live on
once he died. Senior died in 2002.
[14] Sometime before 1995 Senior subscribed
to a course on share trading. Mr. Segal believed the course
related to "calls and puts". Apparently Senior lost
interest in the course.
[15] Produced at trial by the appellant was
a summary of shares it sold during the period from May 1, 1995 to
April 28, 1996. The document is divided into four horizontal
sections, the first three sections describing shares sold in the
year which were held for less than ninety days, less than 180
days and less than 365 days respectively; the bottom portion
described shares sold that were held for more than a year.
Vertical sections of the document describe the name of the
investment, number of shares held at the beginning of the year,
dates the shares were purchased from May 2, 1995 to year end,
number of shares purchased, dates shares were sold during the
fiscal year and the number of shares sold on various dates,
number of days the sold shares were held, profit or loss from
each sale transaction and dividends received in the year from
each stock sold in the year.
[16] Mr. Segal reckoned that in the first
section, stocks held less than 90 days, only five of the
11 shares were dividend paying but were sold before any
dividends were paid; included among the shares held less than
90 days were seven "calls". The shares sold within
90 days included shares of Compaq, Bowater, Sun
Microsystems, Singer, Tembec, Lotus Development,
Bethlehem Steel and Advanced Gravis. The "calls"
included the Canadian dollar, Chemical Bank, Advanced
Microsystems and Silicon Graphics. The appellant's net gain
from shares held less than 90 days was $491,176.
[17] The shares held for less than
180 days included Walgreen, Cobra Golf, Sybase, Gentra,
Elpaso, Nova Scotia Power, Multi-Corp, Weldwood,
Enserve Corp, Advanced Microsystems, General Motors and
Dycom. The appellant's net gain from shares held between 90
and 179 days was $702,506.
[18] Shares sold between 180 and 365 days
included Maple Leaf Farms, Silicon Graphics, Mountain Province
Diamonds, Cott's Beverages, Calloway Golf, Onex, Wal Mart,
Boston Chicken, MHI Group, Nova Corp, Investor's Group and
Laidlaw. Five of the companies paid dividends to the appellant in
the year. The appellant's net gains from shares held more
than 180 days but less than 365 days were $969,773. The
appellant's net gain on shares held more than one year that
were sold in 1996 was $479,606.
[19] In the reply to the notice of appeal,
the respondent declared that in assessing the appellant, the
Minister assumed various facts, including the following:
15. ...
e) in late
1995, the Appellant hired Terry Rocke ("Rocke") as a
full-time advisor in security trading;
f)
Barney Strassburger Sr. and Barney Strassburger Jr. authorized
Rocke to purchase and sell securities based on his studies of the
stock markets and on his investigations into potential stock
acquisitions;
g) Barney
Strassburger Sr. and Barney Strassburger Jr. relied on
Rocke's experience and knowledge in the securities
market;
h) at all
material times, Rocke did not seek the long-term growth of
the securities acquired by the Appellant and his strategy was to
purchase securities and to sell such securities quickly;
[20] The testimony of Messrs. Segal, Rocke
and Junior are unanimous: Mr. Rocke ("Rocke")
never even approached the description of an advisor in security
trading. The Minister apparently assumed Rocke was an advisor as
a result of his officials meeting with him. Rocke testified that
his representations to the officials exaggerated his functions
and responsibilities with the appellant. No official from Canada
Customs and Revenue Agency ("CCRA") interviewed either
of the Strassburgers. Rocke stated he had filed income tax
returns reporting he carried on a business and feared tax
authorities would disallow the expenses he claimed he incurred in
the business. In order to convince the authorities that he
carried on a business, Rocke represented to the authorities that
the appellant, for example, bought, sold and held stocks
"based upon my feel of the market and the individual
stock". In other words, he represented himself to be a
"wheeler dealer". Nothing could be further from
the truth, as Rocke, himself, admitted. He said he lied to CCRA
officials. After observing Rocke, I have concluded that he was
not a person whose advice Senior would have acted on. The
Minister's assumptions regarding Rocke are wrong.
[21] Rocke met Junior socially in the early
1990's. Junior then hired him to do some market research on
traffic patterns and flows near drive-in restaurants to
help in determining where new KFC stores should be built. Before
this, Rocke had sundry jobs with various employers. In 1994
Junior asked Rocke to help his father put the appellant's
stock portfolio on computer. Junior was too busy working in the
restaurant business to help out. Senior apparently knew what a
computer could do. Rocke helped him purchase a computer, printer
and fax as well as software. Rocke said he also wrote some
programs on DOS for the appellant. The stock portfolio was
computerized between December 1994 and June 1995. Rocke was paid
$2,000 for his efforts. He was also allowed to use the
appellant's office while looking for a job during this
time.
[22] Upon Senior's return from Florida
in 1995, Rocke asked his help in acquiring a business. Instead,
Senior offered him a job working 20 hours per week.
Rocke's responsibility was to gather information requested by
Senior. Rocke could do what he wished for the balance of the
time. He also had use of an office telephone and fax machine
while he looked for a permanent position.
[23] Rocke simply supplied information that
Senior requested. Rocke had no investment experience. Except for
some Bell Canada shares his father purchased for him when he was
a youth, he owned no shares before 1994. Rocke did not devise any
financing strategies. He never took any courses on securities. He
never had authority from the Strassburgers, father or son, to
purchase or sell stock on his own. He acted on their
instructions. The appellant did not purchase and sell securities
based on Rocke's studies of the stock market and his
investigations into potential stock acquisitions. The
Strassburgers never relied on Rocke's experience and
knowledge in the securities market; his experience and knowledge
was zero.
[24] Rocke testified that his job was to
make sure Senior knew the value of the appellant's portfolio
"quickly". Senior, he recalled, was very "hands
on".
[25] At the appellant's offices Rocke
would watch financial programs on television with Senior. He also
read newspapers such as the Globe & Mail, Financial Post,
Investors News and the Kitchener-Waterloo Record; if he
thought some article may be interesting to Senior, Rocke would
show him the article. Rocke gathered information for Senior; he
did not carry on any research; nor was he qualified to do so.
[26] The appellant also subscribed to
"Money Line", a Reuter's service, and for $10
Senior would be able to order a report and receive it
on-line. Rocke would print the report and give it to
Senior. Rocke would also look at the report so that if Senior
wished to discuss it, he would be available as a sounding board.
Rocke recalled that "you would wait for [Senior] to say
something and you would react". Rocke did not volunteer
information to Senior. Senior may have asked Rocke if he knew
what a particular corporation did and Rocke would find out for
him.
[27] Rocke prepared daily and weekly
portfolio reports for Senior: the shares, their number, cost,
current value and number of shares traded during the period.
[28] The appellant purchased Tenneco and
Bowater, for example, on the recommendation of a broker, after
reviewing the history of the companies, the historic prices and
ratios, etc. When the broker's target price was reached
within weeks instead of a year, the stocks in Tenneco and Bowater
were sold, Rocke recalled. Rocke did not influence any purchases
or sales.
[29] After Senior's stroke in July 1995,
his son asked Rocke to continue working, but on a full-time
basis, doing the same type of work as he was doing for Senior.
Junior wanted to maintain some continuity, Rocke recalled. Rocke
had no increased or additional responsibilities. He still could
not purchase or sell stock on his own.
[30] Rocke acknowledged that in 1996 the
appellant was more actively buying and selling stock.
[31] Before his father's stroke Junior
was aware of, but not interested, in the appellant's
investments. He was interested in the business only. After the
stroke he had to take care of the investments as well as Key
Brand. On the advice of a broker he caused the appellant to
purchase some "calls" in December 1995 and January
1996, but the appellant lost money on these "calls".
Junior did not cause the appellant to purchase "calls"
again.
[32] As a full-time employee with the
appellant after Senior's stroke, Rocke would inform Junior of
any significant change in value of any shares in the portfolio.
Junior's broker advised him to buy or sell. Rocke was the
liaison between the broker and Junior. Rocke would also telephone
the Toronto Dominion Bank Green Line and place orders for the
appellant on Junior's instructions. Before his stroke, Senior
would make the calls to Green Line himself.
[33] Senior, Rocke recalled, used to
complain that he could not get a straight answer out of Rocke.
Junior had the same complaint in his testimony. Junior testified
he is a "yes or no guy" and Rocke "can't say
yes or no". Rocke also frequently hesitated to give a
straight answer during his testimony.
[34] Junior corroborated much of Messrs
Segal's and Rocke's testimony. He is a successful
businessman who, after his father's death, became responsible
for all of the family's economic activities. He impressed me
as a hard-working businessman.
[35] Junior agreed that Rocke was hired by
his father to put the stock portfolio on computer. "It was
low on my priority list." Junior made no investment
decisions before his father's stroke. After his father's
stroke, Rocke continued to have no authority to buy or sell
shares.
[36] Junior described Rocke as a monitor and
coordinator for his father. He, himself, was afraid of the stock
portfolio. Junior was not sure how to run the stock portfolio. It
was "new to me". That was one of the reasons he asked
Rocke to stay on full-time. Junior asked his broker for
advice, to evaluate the stock market and recommend purchases and
sales. Rocke would be in touch with the brokers on Junior's
behalf. "Everything that happened after July 17" was
based on the broker's or Junior's advice.
[37] Junior did not look at Rocke's
daily reports on a daily basis. He was more concerned with
running the business. If something important was happening, Rocke
was expected to telephone him. Junior would regularly sit down
with Rocke to discuss the portfolio. He would ask Rocke to obtain
reports on a specific company or ask him if he read something
interesting. This would include articles related to the
appellant's restaurant business as well. As far as the
portfolio was concerned, Junior's preference was to liquidate
and eventually the family agreed to do so and receive regular
cash dividends from the appellant in lieu of the appellant making
investments. As at the date of trial, the appellant's
portfolio was reduced to shares in only one publicly traded
corporation.
[38] Junior agreed Rocke did not prepare any
strategies, he simply coordinated activity between him and the
broker. Rocke never gave an opinion, although he did attend
meetings with the broker and Junior.
[39] Junior discussed the appellant's
"exit strategy" with the broker soon after his
father's stroke. The appellant's share portfolio was not
doing well; the market in 1995 was poor; the appellant had
$690,000 in unrealised losses and a $1,000,000 loss the next
year. Junior decided to hold onto the portfolio hoping that the
market would improve. At the same time, the appellant purchased
shares so as to "average" down their costs and reduce
losses, Junior testified. At all times dispositions, whether they
resulted in gains or losses, were treated on capital account.
[40] The evidence of the appellant was
convincing: the appellant's activities on the purchase and
sale of shares were not that of a trader in securities, as
alleged by the Crown. I could find no fault in how the appellant
treated the dispositions of the shares; the appellant has been
consistent from day one: whether a loss or gain, dispositions
were treated on capital account and there was no evidence before
me that indicated that this treatment was wrong.
[41] I question how or why the tax authority
took the position they did. No doubt its officials relied on the
self serving exaggerated representations of Rocke and did not
have the courtesy of confirming his representations with a
representative of the appellant. Also the arbitrary decision that
shares held 365 days or less were held on revenue account
and those held more then 365 days were on capital account
was arbitrary and without any reasonable basis.
[42] For these reasons I allow the
appellant's appeal, with costs.
Signed at Ottawa, Canada, this 10th day of
September 2004.
Rip J.
Email this Content