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Citation: 2004TCC548
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Date: August 11, 2004
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Docket: 2000-3420(IT)G
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BETWEEN:
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DAVID RAJCHGOT,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2000-3445(IT)G
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AND BETWEEN:
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JACQUELINE LACEY
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip J.
[1] The appellants, David Rajchgot and
Jacqueline Lacey, appeal income tax assessments in which the Minister of
National Revenue considered that they each incurred losses on account of
capital when they sold securities of Tee‑Comm Electronics Inc.
("Tee-Comm") The appellants, husband and wife, filed income tax
returns claiming the losses were non-capital losses. Mr. Rajchgot appeals an
assessment for 1997 and Ms. Lacey appeals from assessments for 1994 to
1997 inclusive.
[2] These appeals were heard together on common
evidence. Mr. Rajchgot testified on his and his wife's behalf. At the outset of
trial it was agreed that the control of the transactions and affairs of Ms.
Lacey during the relevant taxation years was in the hands of her husband and
the determination of whether the losses to the appellants were on capital or
income account would be influenced by Mr. Rajchgot's intention and
activities.
[3] Mr. Rajchgot graduated with great
distinction with a degree in finance from McGill
University. After receiving his Chartered Accountant designation in 1983 he
began work as a junior auditor with a predecessor of Ernst & Young.
[4] In 1985, Mr. Rajchgot was employed by a
junior department store as corporate controller. He quickly was promoted and
became vice‑president, finance and was appointed to the board of
directors as secretary and treasurer. His responsibilities included all
accounting matters and management of the security portfolio owned by his
employer.
[5] Mr. Rajchgot later joined a company called
Laura's Shoppe (P.V.) Inc. ("Laura's"). Laura's is a ladies retail
chain specializing in ladies wear and accessories. At Laura's Mr. Rajchgot was
a minority shareholder and Kalman Fisher, the president of Laura's, was
the majority shareholder. Mr. Rajchgot was responsible for all aspects of
the business except the actual purchasing of the goods. When he joined Laura's
it was on the brink of bankruptcy and owned six stores in Montreal. By 1998, the company was successful and operated
approximately 200 stores.
[6] In July of 1998, Mr. Rajchgot resigned from
Laura's to form his own consulting company, Bunra Investment Inc.
("Bunra"). Bunra offers retail consulting and technological solutions
to major corporations in Canada and the United States.
[7] From 1984 to 1993 Mr. Rajchgot was also a
part-time professor at the Graduate School of Business at McGill University. He taught courses to students in the
graduate accounting program, initially teaching case courses, and then teaching
courses on mergers and acquisitions, as well as financing.
[8] Mr. Rajchgot started investing in the late
1980's. He testified that he initially did not have a lot of money and bought
mostly "blue chip" shares in companies such as B.C.E. Enterprises
Inc. and Canadian chartered banks. He invested in a conservative manner. He
wanted to protect his capital. His original portfolio was neither large nor
leveraged, his focus was on secure dividend-paying companies or instruments
yielding guaranteed tax benefits.
[9] Over time, Mr. Rajchgot said, he started
investing in shares of a more speculative nature. He took a more risk-oriented
investment strategy. He purchased stocks relying on various forms of leverage,
often utilizing margin accounts with his broker. Mr. Rajchgot entered into
hedge and share option transaction, as well as pursuing investment strategies
involving both spreads and straddles. In order to assist his acquisitions Mr.
Rajchgot studied the markets, read a variety of books and research material,
such as trade magazines, and internet sites. Over the years Mr. Rajchgot reaped
profits from his investments. The profits were treated on account of capital.
However, in 1996 he incurred losses, which he declared as capital losses in his
tax return. In 1997 he and his wife incurred significant losses of $364,600 and
$441,091, respectively, and reported the losses on income account.
[10] The majority of the losses in 1996 and 1997
related to the dispositions of securities in Tee-Comm. Tee-Comm was a publicly
held company listed on the Toronto Stock Exchange. It manufactured and
distributed analogue home-satellite television systems. In 1995, Tee-Comm
changed its business strategy and entered the Direct-To Home ("DTH")
marketplace. Tee-Comm was developing both the hardware and software to support
a new DTH television satellite system. Mr. Rajchgot stated that Tee-Comm
hoped to be the first digitally transmitted television service provider in Canada. In February 1997 the Canadian Radio‑Television
and Telecommunications Commission approved an application by a subsidiary of
Tee-Comm to operate a Canadian DTH satellite distribution service. On February
28, 1997 Tee-Comm began to ship television boxes and satellite dishes
throughout Canada. However, in March of 1997 Tee-Comm
reported a significant loss and investors started to abandon the stock. In May
of the same year, the directors of Tee-Comm resigned and the Toronto Stock
Exchange halted trading in Tee-Comm stock. At that time the Bank of Montreal
demanded immediate payment of its loans from Tee-Comm and appointed an interim
receiver.
[11] Mr. Rajchgot testified that he, and
presumably Ms. Lacey, and Mr. Fisher started investing in Tee-Comm shares in
late 1995.
[12] Mr. Rajchgot recalled that his initial
investments in Tee-Comm were "passive" investments. However, he
stated that during 1996 things became more hectic and he became more actively
involved. At that point his investment was highly leveraged and he was closely
watching every piece of information on Tee‑Comm. He also testified that
his position in Tee-Comm increased significantly in 1997 as he was engaging in
various transactions such as the acquisition of options in great numbers. The
following table describes the transactions made by the Mr. Rajchgot in
Tee-Comm shares during the period of 1995 to 1997:
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Settle Date
M/D/Y
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Purchases/Sales
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Description
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Price
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Amount
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11/03/1995
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2,000P
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Tee-Comm
Electronics Inc.
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12.750
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25,700.37
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11/07/1995
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1,000P
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Tee-Comm
Electronics Inc.
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13.375
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13,475.37
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04/26/1996
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3,000P
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Tee-Comm
Electronics Inc.
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11.500
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34,800.50
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05/01/1996
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10,000P
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Tee-Comm
Electronics Inc.
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11.950
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120,000.50
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07/04/1996
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3,000P
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Tee-Comm
Electronics Inc.
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13.500
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40,680.50
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07/10/1996
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1,100P
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WTS
Tee-Comm Electronics
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1.900
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2,165.50
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08/28/1996
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9,600P
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Tee-Comm
Electronics Inc.
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10.346
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99,906.74
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01/31/1997
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50P
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Call-100
Tee-Comm Expires February 22, 1997
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.900
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4,650.50
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01/31/1997
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35P
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Call-100
Tee-Comm Expires March 22, 1997
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1.300
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4,700.50
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02/21/1997
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1,500S
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Tee-Comm
Electronics Inc. Swap
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10,000.00
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02/25/1997
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50S
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Call-100
Tee-Comm Expired
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03/24/1997
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35S
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Call-100
Tee Comm Expired
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04/22/1997
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5,000S
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Tee-Comm
Electronics Inc.
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3.150
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15,499.50
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04/28/1997
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2,800P
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Tee-Comm
Electronics Inc. Swap
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4,760.00
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04/28/1997
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100S
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Tee-Comm Electronics Inc
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1.540
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04/28/1997
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7,500S
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Tee-Comm Electronics Inc
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1.550
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04/28/1997
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400S
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Tee-Comm
Electronics Inc
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1,600
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04/28/1997
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5,000S
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Tee-Comm
Electronics Inc.
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5,488.87
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05/14/1997
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7,100S
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Tee-Comm
Electronics Inc.
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.860
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6,005.50
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05/14/1997
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3,000S
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Tee-Comm
Electronics Inc.
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.860
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1,802.45
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[13] Mr. Rajchgot also testified that over the
years he regularly spoke to the president and other representatives of
Tee-Comm. He contacted officers of other companies involved with Tee-Comm in Canada and the United States. In
addition he and Mr. Fisher visited the Tee-Comm facility in Milton, Ontario, and were given a tour. During this time
Tee-Comm's president discussed the product and answered any questions. Mr.
Rajchgot and Mr. Fisher were also introduced to James Wilkinson, vice-president
of finance, who used to be vice-president of finance at Nortel during that
company's successful years, and according to Mr. Rajchgot he informed them
that commercial applicability of the product would take six months and if
Tee-Comm served only one-half of one per cent of the U.S. market, it would break
even. Mr. Rajchgot stated that after this meeting he and Mr. Fisher were
very impressed with the product and organization and bought more shares. Mr.
Rajchgot also testified that he had dinner with the president and
vice-president of finance of Tee-Comm in September of 1996.
[14] The question before me is
whether the appellants sustained losses from a “business”. A business includes
an adventure in the nature of trade: ss 248(1) of
the Income Tax Act.
[15] In Irrigation Industries Ltd. v. M.N.R.,
62 DTC 1131(S.C.C.), Justice Martland, speaking for the majority, set out the
"positive tests" originally considered by Thorson P. in Minister
of National Revenue v. Taylor, [1956] C.T.C. 189:
(1) Whether the person dealt with the
property purchased by him in the same way as a dealer would ordinarily do, and
(2) whether the nature and quantity of the subject-matter of the transaction
may exclude the possibility that its sale was the realization of an investment
or otherwise of a capital nature, or that it could have been disposed of
otherwise than as a trade transaction.
[16] The Federal Court of Appeal
in The Queen v. Vancouver Art Metal Works Limited,
set out helpful factors in determining whether a taxpayer has embarked upon a
trading or dealing business:
I
have no doubt that a taxpayer who makes it a profession or a business of buying
and selling securities is a trader or a dealer in securities within the meaning
of paragraph 39(5)(a) of the Act. As Cattanach, J. stated in
Palmer v. R., [1973] C.T.C. 323,"it is a badge of trade that a person who
habitually does acts capable of producing profits is engaged in a trade or
business. "It is, however, a question of fact to determine whether one's
activities amount to carrying on a trade or business. Each case will stand on
its own set of facts. Obviously, factors such as the frequency of the
transactions, the duration of the holdings (whether, for instance, it is for a
quick profit or a long term investment), the intention to acquire for resale at
a profit, the nature and quantity of the securities held or made the subject
matter of the transaction, the time spent on the activity, are all relevant and
helpful factors in determining whether one has embarked upon a trading or
dealing business.
[17] The critical factor in
determining whether a taxpayer's acquisition of a property is for the purpose
of investment or business is the intention of the taxpayer at the time of the
acquisition of the property. Intention is to be ascertained from the
appellant's whole course of conduct.
[18] To find that Mr. Rajchgot
(and his wife) were traders or the purchases and sales of the shares were
adventures in nature of trade I have to determine Mr. Rajchgot's intention
when he acquired the shares in light of his conduct. The parties agree that
Ms. Lacey's intention was that of her husband. In determining Mr.
Rajchgot's intention, factors such as the frequency of the transactions, the
duration of the holdings (whether, for instance, it is for a quick profit or a
long term investment), the nature and quantity of the securities held or made,
the subject matter of the transaction, whether the securities are heavily
financed, the time spent on the activity, motive and the particular knowledge
he possessed all have to be taken into consideration. It is not the lack or
presence of one or more factors that will determine whether a transaction is on
capital or income account; it is the combined force of all of the factors that
is important There is no magic formula to determine which factors are more or
less important. Some factors compliment each other. Each case is different. A
judge must balance all the factors. In the appeals at bar the following
factors, at least must be reviewed:
a) Frequency of The Transactions
[19] It was Mr. Rajchgot's evidence that he
participated in many transactions purchasing shares of Tee-Comm over the years.
Listening to his testimony during the trial I got the impression that the
appellant was almost constantly buying and selling Tee-Comm shares. However, according
to the exhibits produced, Mr. Rachgot engaged in approximately 11
purchases during the period 1995 to 1997. During the period under appeal he
acquired two blocks of warrants, one block consisting of 50 options and the
other block of 35 options. The first 50 warrants expired with no value on
February 22, 1997 and the second set expired without value on
March 22, 1997. Additionally the appellant engaged in a swap of 2,800
shares. Counsel for the appellants argues that the number of transactions is low
because Mr. Rachgot bought large blocks of shares and that the number of
transactions varies depending on whether one acquires one type of security or
many different securities. These transactions are not conducive of the
frequency which would indicate a trader in securities.
[20] Counsel for the appellants
referred to McGroarty v. Minister of National Revenue, [1994] 2 C.T.C.
52. In that case the Federal Court – Trial Division concluded that the taxpayer
was a trader. However, the Court stated at paragraph 21,
In
the instant case, the plaintiff, engaged in a large number of transactions
involving a rapid turnover of shares. As demonstrated by the Table 1, page 3,
there were more than 300 different purchases of shares over this five-year
period involving more than 300,000 shares. An even greater number of shares
were sold during the same period. Further, the Plaintiff testified that more
sales occurred as a result of price considerations, than to meet margin calls.
As Pinard J. stated in Placements Bourget Inc. v. The Queen, 88 D.T.C. 6274
(F.C.T.D), at page 13 6278):
In the case at bar the plaintiff, as part of its principal
activity, engaged in several hundred transactions to make a quick profit from
the purchase and sale of shares. In the circumstances it does not matter that
the plaintiff was not itself a trader in securities; it was still engaged in
business of securities trading and the profit from the resulting dealings is
truly business income.
[21] In the case at bar the quantity of the
transaction was not so large as to exclude the possibility that the sales of
the shares were realizations of an investment. The appellants were not engaged
in large and frequent transactions. Prior to 1997 the appellants reported their
dispositions of shares as capital transactions. Mr. Rajchgot signed his 1996
tax return on April 4, 1997. The 1996 tax return reports capital losses on
dispositions of Tee-Comm shares. On or about April 4, 1997 he was aware that
Tee-Comm was in a dire financial condition. In 1997 Mr. Rajchgot purchased
options, exercised two swaps, and commenced selling the Tee-Comm shares,
reporting the transactions on income account.
b) The Duration Of The Holdings
[22] The appellants' losses were incurred from
Tee-Comm securities purchased in 1995, 1996 and 1997. The 85 Tee-Comm options
purchased in 1997 were held between one to two months. Shares themselves were
held by Mr. Rajchgot between one and two years in most cases.
[23] This length of holding on to the shares
does not show the intention for a "quick flip" or quick profit. The
1997 options and shares were only held for a short period of time, until the
market crashed
[24] Mr. Rajchgot testified that at one point
Tee-Comm stocks rose to $16 and he could have realized a significant profit but
chose not to sell. This does not reflect the attitude of a trader wanting a
quick profit.
c) The Nature And Quantity Of The Securities Held
[25] The evidence was that Tee-Comm has never
paid dividends and was never in a position to pay dividends. The financial
position of Tee-Comm rendered it unable to pay dividends
[26] The appellants argued that their intention
was not to receive dividends but for a quick profit. The appellants were not
looking for a safe or enduring investment; their counsel argued that they
wanted to get in and out quickly while realizing a profit. The appellants
submitted that Tee-Comm stocks are not investment grade but speculative. The
appellants say that they were far into the realm of speculation. The appellants
were aware that Tee-Comm had no product, they were building the product, they
hoped that it would work, and it in fact did work some 10 years later.
[27] In determining
whether shares have been acquired for purposes of capital or on account of
income, the likelihood of the shares yielding a dividend is not that
significant. A person may purchase shares in the hope and expectation that they
will rise in value. As Lord Buckmaster stated, if the shares "[do] so
rise, [their] realization does not make it income". Many people invest in "start‑up"
corporations or corporations with promise; they are not necessarily looking for
dividends. These investors anticipate an increased value in the shares they
acquired and are often not carrying on a business activity.
[28] Counsel for the appellants also referred me
to the following excerpt from Woods v. Her Majesty the Queen, 96 DTC
1995, in which I stated at para 19:
For the purposes of these appeals the test
as to the subject matter being bought and sold is also relevant. When the asset
does not produce income and the only manner in which a profit may be gained is
by selling that asset there is an inference that such transactions is an
adventure in the nature of trade. See Taylor v. M.N.R.,
[1956] C.T.C. 189, 56 D.T.C 1125 (Ex Ct.), and Ruthridge
v, C.I.R (1929), 14 T.C. 490.
[29] Mr. Rajchgot declared that in 1995 Tee-Comm
was passive investment. He originally invested by acquiring a few thousand
shares. However, Mr. Rajchgot claims that toward 1997 the investment became
active and hectic. The evidence, however, does not reflect active and hectic
purchases and sales. I have no doubt Mr. Rajchgot was actively
investigating Tee Comm's activities and prospects but, in my view this is not
necessarily done solely by a trader; prudent investors may also actively
research an investment for purposes of purchasing or selling. There was no
adventure in the nature of trade.
d) The Time Spent On The Activity
[30] Mr. Rajchgot testified that he was deeply
involved in Tee-Comm and that he spent a significant amount on the buying and
selling of Tee-Comm shares. He was on the phone with his broker every day, he
checked the stock transactions minute by minute on the Internet, and read news
releases. He testified that he spoke with the President of Tee-Comm daily. Mr.
Rajchgot stated that in 1996 and 1997 he spent more time on Tee-Comm than he
did running Laura's, even though he was the vice-president and equity partner
of Laura's and they had in excess of 100 stores. He gave evidence that in
1997 he spent three to four hours a day on the Tee-Comm shares, trying to
discern information, speaking to individuals involved in Tee-Comm, and
gathering information that he required to justify the investment.
[31] I agree that Mr. Rajchgot is a highly
educated and knowledgeable individual. However, in this day and age it is not
unusual for an investor to spend a significant amount of time researching a
potential purchase on a computer or on the telephone with a broker. Mr.
Rajchgot's activities in 1997 were to save a losing investment or to reduce his
losses from the investment. When the initial purchases were made in 1995 and
1996 he was not spending three or four hours a day on Tee-Comm.
e) Financing
[32] The appellants leveraged their shares in
Tee-Comm through margin accounts. Mr. Rajchgot borrowed from his broker and
from Laura's. His tax return corroborates the fact that he was highly leveraged
and paying $14,000 of interest on his borrowings to finance the shares.
f) Particular Knowledge He Possessed
[33] Mr. Rachgot has testified that he was
extremely knowledgeable in stock trading, that his knowledge in stock trading
is equivalent to that of most brokers. He has the knowledge, the
qualifications, the experience to manage shares and securities in the same way
as a broker or trader.
[34] Mr. Rachgot also read trade magazines, such
as Audiophile and Tech Buff and noticed that digital was the next
wave, and he was involved with the people running the corporation. He met and
spoke to both the president and vice-president of finance of Tee-Comm. He also
communicated with potential business partners of Tee ‑Comm.
[35] In Kane v. The Queen, supra the
Court applied the factors set out in Vancouver Art Metal and determined
that the taxpayer's special knowledge was a determining factor:
In the case at hand, the Plaintiff had a
special knowledge of the market in which Orell shares were traded. He was one
of the directors of the corporation, its president, an insider by virtue of his
holdings and a promoter as that term is defined in the B.C. Securities
Act. But more importantly, he was directly involved in the mining ventures
of Orell and in organizing its public financing offerings. As such he was in a
position to anticipate market reaction to Orell's ongoing activities. That is
the context in which the Plaintiff bought and sold Orell shares. His trading
activities were not only stamped with the usual badges of trade which
characterize the dealings of common risk takers, but they were conducted by
reference to, and were driven by, the special knowledge which the Plaintiff had
of the market in which the Orell shares were traded. Those in my view are the
activities of a trader or dealer in securities as that term is used in
subsection 39(5) of the Act.
[36] Mr. Rajchgot's special
knowledge is not tantamount to such that he could anticipate market reaction.
There is no evidence that his knowledge contributed to his success in the
financial market or had any influence on the market. I fail to see any special
knowledge. He was not connected to Tee-Comm, he was not employed by Tee-Comm;
he simply purchased the company's shares after duly researching the stock. As
such, he did not have any special knowledge that anyone else could not have
acquired.
Conclusion
[37] Most of the Tee-Comm shares were purchased
by the appellants in 1995 and 1996. Any gains and losses on disposition of
shares in those years were claimed on account of capital. In 1997 the losses
were claimed as business losses. Appellants' counsel referred to Harrison v.
Minister of National Revenue
for the proposition that qualifying losses on account of capital or income when
filing an income tax return is not determinative of the status of the
transactions. The Harrison case can be distinguished. In Harrison the taxpayer filed his income tax return for the
period under appeal and claimed a capital loss. After changing accountants an
amended return was filed within which the taxpayer claimed he had sustained a
business loss. In the case at bar there is no question of reclassifying the
1995 and 1996 capital losses; we are considering the taxpayer's stated
intention at that period in time. While prior income tax filing may not be
determinative they can be indicative of a taxpayer's intention. There should be
some consistency in reporting share transactions. When a taxpayer all of a
sudden changes from reporting transactions from capital to income account or
from income to capital account there should be some evidence of the shares'
changes in status. In some circumstances it may help
if shares owned as capital and shares held on income
account were held in separate brokerage accounts. The taxpayer should be
prepared to show something that distinguishes his capital from income
transactions, that his transactions are not similar. This act should be done
when he first makes a transaction that is not consistent with previous
transactions. (There is evidence that Mr. Rajchgot did acquire 85 warrants in
1997 from a different broker.)
[38] There is no evidence before me that the
appellants, in acquiring the Tee-Comm shares, changed their original and
principal intention. Exhibit R-6, the opening and closing inventory in 1997 of
shares owned by Mr. Rajchgot, included shares in "Bell Canada", Bank
of Montreal and Royal Bank of Canada, among others, as well as Tee-Comm. These
bank shares, which he testified were acquired as capital assets and which
remained capital assets in Mr. Rajchgot's portfolio, are mixed with the shares
of Tee-Comm. All the shares are listed as "inventory". While I do not
put much weight on the description of the shares as inventory, a person with
Mr. Rajchgot's education and expertise ought to know that the word
"inventory" connotes a business asset. I doubt that Mr. Rajchgot meant
the shares of the Royal Bank and Bank of Montreal to be inventory. He testified
that only the Tee-Comm shares were trading assets, his other shares remained
capital assets. What happened in 1997 was that Tee-Comm shares started to fall
in value and Mr. Rajchgot, in February, when he realized the shares were
falling and would not return to their high values, started to sell the shares.
However, this did not alter his overall purpose in purchasing the shares as
capital assets.
[39] The appeals are dismissed with costs.
Signed at Ottawa, Canada this 11th day of August 2004.
Rip
J.
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