Robertson v. The Queen, 97 DTC 449, [1996] 2 CTC 2269 (TCC)

Brulé J.T.C.C.: — This appeal involves a reassessment of the Appellant’s 1990 taxation year. It is to be determined on the basis of whether or not the Appellant who disposed of certain shares in 1990 suffered an income loss rather than a capital loss.

Facts

Most of the facts were not in dispute and these can either be found in the Notice of Appeal, the Reply, or in the evidence given at trial. In brief, they are best presented as follows:

During the relevant period prior to 1990, the Appellant was the chairman and later the deputy chairman and a director of Central Capital Corporation (“CCC”), a public company with head office in Halifax, Nova Scotia, the common and class A shares of which were listed on the Toronto Stock Exchange.

Prior to 1990, and more specifically dealing with the Appellant’s 1984 Income Tax Return on May 3, 1985, the Appellant executed and subsequently filed a purported election pursuant to subsection 39(4) of the. Income Tax Act (“Act”).

The CCC was formed in 1986 as the parent company of the Central Capital Group, whose holdings included a controlling interest in Central Guaranty Trust Company, of which the Appellant was chairman, and several other corporations. CCC’s assets grew rapidly during the years preceding 1989, and it reported profits up to and including 1989.

CCC had established a stock-purchase plan for its executive employees, including the Appellant. Guaranteed bank loans were made to those employees to enable them to purchase shares of CCC. As a result of having exercised rights under this plan, the Appellant, at the end of 1989, held approximately 250,000 class A shares which were pledged to the Royal Bank of Canada and the National Bank of Canada as security for loans to the Appellant that he had applied to finance the acquisition of those shares.

During 1989 and until November 1990, CCC, through an “issuer bid” registered with the Toronto Stock Exchange, was purchasing certain of its outstanding shares on the market. These purchases, plus the purchases by corporations controlled by two major shareholders, and purchases by executive officers had the effect of maintaining the quoted prices of CCC’s shares in circumstances where otherwise those prices might have fallen. Apart from these trades, the market for CCC’s shares, particularly the common shares, was thin. Most of the “issuer bid” purchases, until March 1990, were of class A shares, but commencing at that time, CCC also made substantial purchases of common shares.

Under a 1986 agreement with CCC, the Appellant had an option to acquire 262,500 common shares from CCC’s treasury at a price of $4.89 per share, exercisable on or before March 20, 1990.

On January 4, 1990, the Appellant exercised his option referred to in the pleadings and acquired 262,500 common shares from CCC at a price of $4.89 per share. This purchase was fully financed by a loan to the Appellant from Lloyds Bank (which subsequently became Hongkong Bank of Canada). The quoted market price for CCC’s common shares on that day was $11.25 per share.

In February 1990, the Appellant transferred 9,450 of those common shares to his registered retirement savings plan. On November 28, 1990, in a private sale, the Appellant sold the remaining 253,050 common shares of CCC to a Mr. R.W. Moore for the then quoted market price of $6.75 per share. On December 31, 1990, the Appellant purchased the same number of common shares of CCC from Mr. Moore at their then quoted market price of $6.875 per share.

When filing his 1990 tax return, the Appellant took the position that the value of CCC’s common shares acquired by him on January 4, 1990, by exercising his stock option, for purposes of subsection 7(1) of the Income Tax Act was the exercise price of $4.89 per share and therefore that he had received no taxable benefit under that subsection. The Appellant reported a capital gain on the disposition of the common shares of CCC on November 28, 1990, based on the difference between the proceeds of disposition of $6.50 per share on November 28, 1990 and a cost of $4.89 per share.

At the time when he filed his 1990 tax return, the Appellant was not aware of the possibility of reporting his acquisition and subsequent disposition of common shares in 1990 as part of an “adventure in the nature of trade”.

Issues

The issues in this appeal were set out at different stages of the pleadings, the evidence, and argument but can be summarized as follows:

(a) does this Court have jurisdiction to consider whether the Appellant’s subsection 39(4) election was validly filed?

(b) was the Appellant a “trader or dealer” in securities within the meaning of subsection 39(5) of the Act?

(c) were the option shares sold by the Appellant in 1990 a “prescribed security” within the meaning of subsection 39(6) of the Act and subparagraph 6200(c)(iii) of the Income Tax Regulations?

(d) did the 1990 acquisition and disposition of the option shares constitute an adventure in the nature of trade?

Analysis

While both counsel went into great detail to accent their position, I do not feel such is necessary. The Court intends to only put forward the meaningful arguments of each counsel as well as the opinion of the Court.

Issue (a)

The Court believes it has jurisdiction to determine whether or not the Appellant’s subsection 39(4) election was validly filed. Although the year involved was 1984, there is nothing in this appeal involving the assessment in that year. While no authorities were cited to the Court to deal with this jurisdictional question, the Court believes it has jurisdiction and such would come within the provisions of section 12 of the Tax Court of Canada Act.

The Appellant submitted that the election form signed by himself was invalid and of no effect because it was filed after April 30, 1985, the due date for the Appellant’s tax return, or because it was not complete when filed. When the completed version, subsequently submitted, was not “in the taxpayer’s return of income” as required by subsection 39(4) of the Act, the matter of its validity came into question.

That subsection of the Act reads as follows:

Except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year and the taxpayer so elects in prescribed form in the taxpayer’s return of income under this Part for that year,

(a) every Canadian security owned by the taxpayer in that year or any subsequent taxation year shall be deemed to have been a capital property owned by the taxpayer in those years; and

(b) every disposition by the taxpayer of any such Canadian security shall be

deemed to be a disposition by the taxpayer of a capital property.

[Emphasis mine.]

In light of the wording used in subsection 39(4), it appears that an election made under this subsection has an aspect of permanence, since it is effective with regard to every Canadian security owned by the taxpayer in any subsequent taxation year. Therefore, the validity of the election remains a prerequisite to the application of the presumption stated in subsection 39(4).

The Appellant said that the Respondent appears to be caught in a contradiction: unless a valid election was filed, subsection 39(4) can have no application to 1990; the fact that the 1984 tax return may not now be open for reassessment does not preclude the Court from determining whether a prerequisite to the application of subsection 39(4) to 1990 has or has not been fulfilled.

The case law is unanimous on the fact that in order for an election under subsection 39(4) to be valid, the taxpayer’s election form has to be filed “with” the return. This requirement has been clearly stated by Rip, J. in Financial Collection Agencies (Que.) Ltd. v. Minister of National Revenue (1989), [1990] 1 C.T.C. 2178, 90 D.T.C. 1040. Judge Rip said at page 2190 (D.T.C. 1049):

Just because it may be obvious from the return of income how a taxpayer wishes to report a particular transaction or item of income does not in itself free the taxpayer of the necessity of filing a form of election as required.

His interpretation was cited with approval in Loewen v. Minister of National Revenue, [1993] 1 C.T.C. 212 (sub nom. R. v. Loewen) 93 D.T.C. 5109 (F.C.T.D.) by Dubé J. who said at pages 220-21 (D.T.C. 5115):

Similarly, subsection 39(4) of the Act does not allow for late filing. It spells out very clearly that the taxpayer must elect in his return of income for that year, which in the case of individuals must be filed on or before April 30 of the following year under paragraph 150(1)(d) of the Act. There are several provisions in the Act that specifically allow the taxpayer to file late (see subsections 83(3), 85(7), 93(5) and 96(5) for such examples). However, the Act contains no provision specifically allowing a taxpayer to file late under subsection 39(4). Consequently, the taxpayer’s late election is not valid.

The present case differs slightly in that one field in the election form was left blank. This was corrected by Revenue Canada who then received a “completed” form. Such would not disturb the findings of Rip J. nor of Dubé J. (supra).

With regard to this issue, the Respondent relies on section 32 of the Interpretation Act in order to conclude that the validity of the election is not affected by the Appellant’s omission to fill out one field of the form. Section 32 reads as follows:

Where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form used.

In my opinion, this section is of no assistance with regard to the present case. Section 32 is concerned with variations in the form itself and not with its content. In other words, as long as the required information is provided, the fact that the form used differs from the one that is prescribed does not affect its validity. In the present case, the form used by the Appellant is the one prescribed, without any deviations. Section 32 does not apply in the present case.

In view of the above comments and the facts in this appeal, it is the Court’s opinion that the Appellant’s election was not validly filed and is based on the following findings:

- the election filed by the Appellant along with his tax return was incomplete and, therefore, not valid;

- when the completed election was filed, it did not meet subsection 39(4)’s requirement since it was not in the Appellant’s return of income; and

- complete or not, the election filed by the Appellant along with his tax return was filed late, which is not allowed under subsection 39(4) pursuant to Dubé J.’s decision in Loewen (supra).

Issue (b)

Notwithstanding the fact that the Court believes that the subsection 39(4) election form was not validly filed, the Court was requested that findings on issue (b) be made by this Court. Accordingly, such follows:

Was the Appellant a trader or dealer in securities? If so, then subsection 39(4) would have no application. Paragraph 39(5)(a) of the Act reads as follows:

An election under subsection (4) does not apply to a disposition of a Canadian security by a taxpayer who, at the time the security is disposed of, is

(a) a trader or dealer in securities.

The Respondent submitted that the Appellant was not a “trader or dealer in securities” within the meaning of subsection 39(5) of the Act. The share transactions of the Appellant did not involve anything more than participation in the executive share purchase plan of CCC. Such involvement was in no way like that of a trader or dealer either professionally or as a business. This is in contrast to the case of Kane v. R. (sub nom. Kane v. Canada), [1995] 1 C.T.C. 1, 94 D.T.C. 6671 (F.C.T.D.)where the taxpayer was not only a shareholder but president of a company, and also an insider and promoter. In support of his position, counsel for the Respondent referred to the case of Vancouver Art Metal Works Ltd. v. R. (sub nom. Vancouver Art Metal Works Ltd. v. Canada), [1993] 1 C.T.C. 346, 93 D.T.C. 5116 (F.C.A.)but the Court does not consider this case as being significant as it is predicated on there being a valid election under subsection 39(4) of the Act.

On the other hand, counsel for the Appellant told the Court that the Act does not define “trader”. Since, however, in the relevant passage in paragraph 39(5)(a) of the Act, the phrase “a trader or dealer in securities” is used, it must be concluded that a distinction between “trader” and “dealer” is intended, and this is supported to some extent in the case law. It appears that “dealer” refers primarily to a professional trader, such as a broker or other licensed dealer, and that “trader” can be something less, including a person who is not a broker or other licensed dealer but who carries on a business activity that amounts to something more than an adventure in the nature of trade.

While some cases were cited to the Court, none were completely identical to the present case. The Court prefers to accept the argument of the Respondent and the suggestion that the Appellant’s involvement was nothing more than participation in an executive share purchase plan. Certainly, there can be no suggestion that he was a dealer in securities. Accordingly, the Court holds that the Appellant was not a trader or dealer in securities within the meaning of subsection 39(5) of the Act.

Issue (c)

The question here is whether or not the option shares sold by the Appellant in 1990 are a “prescribed security” within the meaning of sub- section 39(6) of the Act and subparagraph 6200(c)(iii) of the Income Tax Regulations.

Subsection 39(6) of the Act reads as follows:

For the purpose of this section, “Canadian Security” means a security (other than a prescribed security) that is a share of the capital stock of a corporation resident in Canada, a unit of a mutual fund trust or a bond, debenture, bill, note, mortgage or similar obligation issued by a person resident in Canada.

Regulation 6200(c)(iii) of the Income Tax Regulations says:

For the purposes of subsection 39(6) of the Act, a prescribed security is, with respect to the taxpayer referred to in subsection 39(4) of the Act,

(c) a security that is

(iii) in which that taxpayer was not dealing at arm’s length ...

According to the Respondent, the Appellant did not acquire the optioned shares on January 4, 1990 in a transaction in which he was not dealing at arm’s length in accordance with the above definition. Rather, it was submitted that the Appellant acquired the shares from CCC on that date by way of an arm’s length transaction.

From the pleadings and evidence, it was obvious that the Appellant was not “related” to CCC within the meaning of section 251 of the Act.

The Appellant acquired the optioned shares on January 4, 1990 by way of exercise of his option rights as originally stipulated by written agreement on March 21, 1985 between himself and Central Trust Limited (CCC, a public corporation, had subsequently become a de facto successor in interest to the rights and obligations under this agreement of its subsidiary Central Trust, renamed Central Guaranty Trust Company). All that happened on January 4, 1990 was that the Appellant exercised his contracted share option rights. No dealing or negotiation as to price was involved, either in 1990 or in 1985. In 1985, the option price was simply pegged at the then open market price for common shares of Central Trust (subsequently exchanged for CCC shares pursuant to a general offering on a two for three basis). Similarly, the exercise price on January 4, 1990 was simply and straightforwardly the market price of that day, all as per the aforesaid agreement.

Counsel for the Appellant submitted to the Court an interesting article “Dealing at Arm’s Length: a Question of Fact” by Evelyn P. Moskowitz. While some interesting observations and comparisons are made the Court does not feel they apply to the present Appellant’s conduct.

While the Appellant had a degree of friendship with the principal shareholders of CCC and received a generous allotment of option shares, such was not sufficient to say that the Appellant was not dealing at arm’s length in his transactions with CCC.

As a result of the above, it is concluded that the CCC shares in question were not “prescribed securities”.

Issue (d)

The principal question in this appeal, apart from the subsection 39(4) determination, is: Did the 1990 acquisition and disposition of the option shares constitute an adventure in the nature of trade?

There is a myriad number of cases dealing with the jurisprudence on the question of capital or income. These involve a wide variety of factual situations and assistance to this problem can often best be obtained where factual situations are similar to the present case, and where the courts have pronounced legal principles on the subject. Unfortunately, there is little agreement by the courts. Where one finds for capital, another will find for income in often quite similar situations.

Both counsel in this case argued their respective positions very well. The Appellant believed his dealings in the share options were properly reported on income account, while the Respondent took the opposite view.

The Appellant, in support of his position, referred to the case of Bossin v. R., [1976] C.T.C. 358, 76 D.T.C. 6196 (F.C.T.D.) wherein it was held that all factors had to be considered and the necessity of weighing each in relation to the others. The Appellant was assessed on the basis that a loss sustained was on capital account. The Court held in circumstances similar to the present case that there was an adventure in the nature of trade and therefore the loss was a deductible business loss.

Whether the Appellant conducted “an adventure in the nature of trade” or a “trade” was not significant. In either case any income or loss was from business with the same tax result.

While intention to resell at a profit is relevant, it is not controlling. The key question is whether the prospect of reselling at a profit was the motivating factor behind the acquisition (or a change in status) of the asset in question. This is true whether or not the asset is shares. The fact that shares have been purchased with borrowed money that likely can only be repaid by reselling the shares is a strong indication of a motivation to resell.

On the other hand referring to the case of Irrigation Industries Ltd. v. Minister of National Revenue, [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, the Respondent’s counsel pointed out that here the Supreme Court of Canada dealt with the matter and gave some guidance with respect to appropriate tax treatment of share transactions. Martland, J. for the three to two majority wrote that whether the relevant shares were purchased with borrowed money or not was not a significant factor in determining whether the purchase and resale of the shares was or was not an investment. Also, he wrote that whether an isolated transaction can be considered an adventure in the nature of trade cannot be determined solely upon the basis of intention at time of purchase. He further wrote for the majority at page 351 (C.T.C. 219; D.T.C. 1133):

In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of ‘trade’ than this before it can be said that there has been an adventure in the nature of trade.

Did the Appellant have the intention to resell the shares as soon as possible? Counsel for the Appellant suggested that his client was under pressure to acquire shares of his employer in the expectation of selling them at an early date at a profit. The case of R. v. Garneau, [1977] C.T.C. 288, 77 D.T.C. 5190 (F.C.T.D.) held that in such a situation the sale was on income account. Here at the time of purchase, there is no evidence that the Appellant wished to sell as soon as possible. His evidence was that on advice from accountants, shares were sold to crystallize a capital gain. The Appellant also believed when selling in November 1990, he was crystallizing a capital loss. Only later it would seem that the real benefit to the Appellant was to claim an adventure in the nature of trade and an income loss. Undoubtedly the Appellant was not too sophisticated in share options and sales resulting therefrom and he changed his mind from capital to income only at a later date. This was so despite his important corporate position.

The fact that a previous sale was reported on capital account does not set the rule for future sales. This prosposition was set out by Bell, J. in Friesen v. R. (sub nom. Friesen v. Canada), [1995] 1 C.T.C. 2560, 95 D.T.C. 492 (T.C.C.).

Conclusion

While there were many other cases referred to by both counsel, the Court believes that there was sufficient evidence that the Appellant was not dealing in an adventure in the nature of trade. The acquisition of the securities was not a part of a profit-making idea but rather was to take advantage of the generosity of the Appellant’s employers. The profit nature was not ignored but not paramount. The operation had not sufficient of the characteristics of an adventure in the nature of trade but rather was an investment which did not permit in law the Appellant to change his mind as time and conditions passed.

The answer to the issues are:

(a) this Court has jurisdiction to consider the validity of the subsection 39(4) election.

(b) the Appellant was not a “trader or dealer” in securities.

(c) the shares sold by the Appellant in 1990 were not “prescribed securities”.

(d) the 1990 acquisition and disposition did not constitute an adventure in the nature of trade.

The appeal is therefore dismissed with costs to the Respondent.

Appeal dismissed.