Le Bel v. The Queen, 87 DTC 5154, [1987] 1 CTC 259 (FCTD)

Collier, J.:—This is an appeal from the Tax Court of Canada. For practical purposes, it is a new trial.

For the period March 1, 1981 to February 28, 1982, the plaintiff incurred a loss of $78,286.47. The loss resulted from his personal trading in stocks and other types of securities. He designated the loss as a business loss. He sought to subtract it in calculating his 1982 total income. The Minister disallowed the amount as a business loss.

The plaintiff appealed to the Tax Court. His appeal was dismissed.

On my inquiry, counsel for the parties agree the evidence before me was substantially the same as that before the Tax Court. Perhaps, there was somewhat more detail in the hearing in this Court.

I am in agreement with the judge of the Tax Court, in dismissing the plaintiff's appeal against the Minister's assessment. I concur generally with the judge's findings and conclusions

I shall briefly set out my own reasons.

The plaintiff was born in 1945. He completed high school. He attended the University of Montreal from 1961 to 1963. From 1963 to 1969, he worked for five or six different companies, mostly as a purchasing agent. In 1969, he joined Superex Canada Ltd. as a purchasing agent. He did well. He eventually became vice-president and general manager of the company.

His gross income in 1974 was approximately $26,000. In 1979, it was approximately $145,000.

The plaintiff, for many years, engaged in personal transactions in the stock market. As with many Canadians, his purpose was, I suspect, twofold: to make money, and to create, as well, a portfolio of investments.

His first venture into the market was at age 15. He continued over the years. As his personal income and resources increased, the volume and dollar quantum of his transactions grew.

While with Superex, he spent as much time and energy as he could, while carrying out his duties and functions, in transactions in what I shall generally term “securities”: stocks, bonds, stock options, and the like.

Prior to 1981 he used four brokerage houses. He financed his transactions on margin, and where necessary, bank loans, plus, of course, his own resources. He subscribed to financial journals. He kept up to date on market and related matters.

In the early 1970s, he engaged in some stock option purchases and sales. In 1973, stock options became listed on the United States exchanges; in 1975 on the Canadian. He continued with those, and other, transactions. He described stock option ventures as always speculative, risky, although capable of producing quick, and sometimes high, returns.

The plaintiff had records available for his market dealings, and his gains and losses, going back to 1972. I shall refer later to those matters.

In 1980 he decided to leave Superex. He informed the company on September 2, 1980. His date of leaving was fixed, by him, as February 27, 1981.

His reasons for leaving Superex were not quite clear. He seemed to want a change, to spend more time at home, and to get away from the heavy schedule of travelling he was required to do.

He said he decided to get into the stock market on a full-time basis. He hoped to support himself and his family by the realization of profits. He was going to work out of his home.

During the last six months he was with Superex, he took a correspondence course in financial matters. He began subscribing to more financial journals than before.

On his severance from Superex, he received $110,000. The net, after withholding of tax, was $78,000. He received one payment in February 1981, the balance on June 16, 1981.

As of March 1, 1981, he had built an office in his home. He had a second telephone line installed in it.

The plaintiff testified he spent full time, five days a week, thereafter in stock market transactions. He increased the number of accounts he had with the brokerage houses. He dealt with perhaps two more individual brokers. He used the severance pay to help finance those dealings. He used margin and bank loans, as well, as he had done in the years before.

He said the number of his purchases and sales increased considerably in volume, particularly in the first six months from March 1, 1981. The dollar amount also increased considerably. He spent a good deal of time and money in stock options. The options he engaged in were more sophisticated than formerly.

Then disaster struck. The stock market, in 1981, took a severe downturn.

By September, or October 1981, the plaintiff realized the trouble he was in. He began looking for other employment. He liquidated his debts with the brokerage houses and the banks. He eventually was able to purchase, in March of 1982, a small company: Alpha Basic Corp., in Kitchener. He financed it by a mortgage on his house. The company first struggled, then succeeded. The plaintiff ultimately sold it at a profit.

The plaintiff's loss, from his market ventures, was the amount earlier set out: $78,286.47. Exhibit 13 shows this breakdown:

March 1, 1981 to December 31, 1981: $57,433.61

January 1, 1982 to February 28, 1982: $20,852,87.

I turn to the plaintiffs evidence as to market gains and losses over the years:

1972 — $3,586 (loss)

1973 — $5,216 (loss)

1974 — $4,594 (loss)

1975 — $7,575 (loss)

1976 — no information

1977 — $24,442 (loss)

1978 — $7,214 (gain)

1979 — $11,081 (gain)

1980 — $1,201 (loss)

In all those years, he treated the gains or losses as on the capital side. In his tax returns for 1978 to 1980, he designated the gains and losses as capital.

He felt that before March 1, 1981 his market activities were a "hobby". He adopted that expression when it was proffered to him by counsel for the defendant; that for the 12 months after March 1, 1981, it was his business.

The plaintiff filed a tax return for the calendar year 1981. He described himself as a vice-president. He did not show himself as in any other kind of employment, or capacity, in that year.

He reported dispositions of capital property in 1981. The amount he designated was $63,274.61. Included in that figure was the $57,433.61 loss, I have earlier referred to, shown on Exhibit 13. He claimed the permitted capital loss of $2,000 in calculating his income for that calendar year.

I turn now to 1983. His return for 1982 was dated April 29, 1983. He described his occupation in 1982 as “self-employed, then president". The latter position had reference to Alpha Basics Corporation.

In that return, he claimed the loss for the whole period March 1, 1981 to February 28, 1982. He attached two letters, both dated the same date of his return. In one, he purported to amend the 1981 tax return in respect of the summary of dispositions of capital property. In the other, he described his activities for a fiscal year, March 1, 1981 to February 28, 1982.

I asked the plaintiff a question as to how he would have treated the matter if he had made a substantial profit on the market ventures, rather than a loss. He candidly replied he probably would have designated it as a capital gain, and hoped he would not be reassessed.

I turn now to the submissions.

For the plaintiff it was contended, he was, for the period in question, regardless of past history and transactions, self-employed; the evidence, it was said, indicated a complete change of career or vocation; the market transactions were no longer a sideline; any losses or gains were on the business or income side.

I am unable to accept that contention.

The plaintiff for many years, for tax purposes, treated his stock market transactions as on the capital side. His return filed for 1981 took exactly the same approach, though the loss was large. He did not claim to be self- employed for the best part of that year.

His reasons as to why he filed the return in that way were not persuasive. I do not mean he lied, or toyed with the truth. His explanation was neither logical nor, from a practical or business point of view, understandable.

Much later, in April 1983, the plaintiff had second thoughts, or perhaps hindsight. He saw a possible way to salvage some part of his loss.

In my view, the plaintiff has failed to establish, on a balance of probabilities, his losses, in the period in issue, were not on the capital side.

A number of previous court decisions were cited, on behalf of both parties. I have not overlooked them. But all these cases, including this one, depend on their own particuar facts.

The action is dismissed, with costs.

Thank you, gentlemen, for your presentations and assistance.

Action dismissed.