Supreme Court of Canada
Irrigation Industries Ltd. v. The Minister of National Revenue, [1962] S.C.R. 346
Date: 1962-03-26
Irrigation Industries Limited Appellant;
and
The Minister of National Revenue Respondent.
1961: October 25; 1962: March 26.
Present: Taschereau, Locke, Cartwright, Martland and Judson JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA.
Taxation—Income tax—Capital gain or income—Mining shares purchased by company—Profit on resale—Whether transaction "an adventure or concern in the nature of trade"—Income Tax Act, R.S.C. 1952, c. 148 ss. 3, 4 and 139(1)(e).
The original purpose of the promoters of the appellant company, incorporated in 1947, was to erect a mill for the dehydration of alfalfa, but this object was abandoned by August 1948. The company remained inactive until 1952 when it acquired an office building. In the following year it purchased directly from a mining company 4,000 treasury shares of an initial issue by that company of 500,000 shares. The appellant resold the shares within a few months and thereby realized a total profit of $26,897.50. This profit was taxed by the Minister on a reassessment of the appellant for the taxation year 1953. The Minister's reassessment was upheld by the Tax Appeal Board and by the Exchequer Court, where it was held that the transaction in question was an adventure in the nature of trade and that the profit arising from it was taxable under the applicable sections of the Income Tax Act, R.S.G. 1952, c. 148. The appellant appealed to this Court.
Held (Cartwright and Judson JJ dissenting): The appeal should be allowed.
[Page 347]
Per Taschereau, Locke and Martland JJ.: The transaction in question did not fall within either of the positive tests which the authorities have suggested should be applied in determining whether or not a particular transaction does or does not constitute an adventure in the nature of trade, i.e., (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. Minister of National Revenue v. Taylor, [1956] C.T.C. 189; The Commissioners of Inland Revenue v. Livingston (1926), 11 Tax Cas. 538; Leeming v. Jones, [1930] 1 K.B. 279, referred to.
The appellant's operations in purchasing and selling the shares did not constitute the sort of trading which would be carried on ordinarily by those engaged in the business of trading in securities. What the appellant did was to acquire a capital interest in a new corporate business venture, in a manner which had the characteristics of the making of an investment, and subsequently to dispose, by sale, of that interest.
Although it might be contended that persons may make a business merely of the buying and selling of securities without being traders in securities in the ordinary sense, and that the transactions involved in that kind of business are similar, except in number, to that which occurred here, it had, however, been pointed out in Californian Copper Syndicate v. Harris (1904), 5 Tax Cas. 159, that, where the realization of securities is involved, the taxability of enhanced values depends on whether such realization was an act done in the carrying on of a business.
The nature and quantity of the property in question were not indicative of an adventure in the nature of trade. Commissioners of Inland Revenue v. Fraser (1942), 24 Tax Cas. 498; Edwards v. Bairstow, [1956] A.C. 14, referred to.
The test, applied by the trial judge, whether the appellant entered into the transaction with the intention of disposing of the shares at a profit so soon as there was a reasonable opportunity of so doing, standing alone, was not sufficient to determine whether or not the transaction constituted an adventure in the nature of trade. An accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income. Leeming v. Jones, [1930] 1 K.B. 279 and [1930] A.C. 415, referred to.
Per Cartwright and Judson JJ., dissenting: The finding of fact made by the trial judge that the purchase of the shares was not an investment, but a purely speculative purchase, and was entered into with the intention of disposing of the stock at a profit as soon as there was a reasonable opportunity of so doing was justified by the evidence and should be accepted.
While the guides formulated in Minister of National Revenue v. Taylor, supra, as to the meaning of the phrase "adventure or concern in the nature of trade" were helpful, it was there recognized "that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated." That the transaction in question here was an adventure did not admit of doubt. Equally, it was "in the nature of trade".
[Page 348]
The profit realized was not the enhancement in price of an ordinary investment but rather "a gain made in an operation of business in carrying out a scheme for profit making." Californian Copper Syndicate v. Harris, supra; Regal Heights Ltd. v. Minister of National Revenue, [1960] S.C.R. 902, referred to.
APPEAL from a judgment of Cameron J. of the Exchequer Court of Canada, affirming a reassessment made by the Minister of National Revenue. Appeal allowed, Cartwright and Judson JJ. dissenting.
Donald McLaws, Q.C., for the appellant.
G. W. Ainslie and J. R. H. Tucker, for the respondent.
The judgment of Taschereau, Locke and Martland JJ. was delivered by
Martland J.:—This is an appeal from a judgment of Cameron J., who dismissed the appellant's appeal from a decision of the Tax Appeal Board, which had affirmed the reassessment of the appellant for the taxation year 1953.
The facts are outlined in the judgment of my brother Cartwright and I will not repeat them here in full. There are, however, two matters which should be mentioned. The first is that the shares of Brunswick Mining and Smelting Company Limited (hereinafter referred to as "Brunswick") were purchased by the appellant directly from Brunswick, being a part of an initial issue of shares by Brunswick to finance additional drilling and exploration work and for some underground development.
The nature of Brunswick's enterprise is described by Cameron J. as follows:
The Brunswick assets, according to the evidence, consisted of a number of mining claims in New Brunswick. The area had been previously explored and found to be unprofitable. But in 1952, when iron ore was scarce, geologists went into the area and found indications of certain minerals. Geophysical surveys followed and they indicated the possibility of very substantial deposits of lead, tin, sulphur and zinc. The company then decided to issue 500,000 shares of stock at $10 per share to raise funds for its exploitation, development, and the construction of a mill.
The other matter is that the purchase and sale of the Brunswick shares was not authorized by the Memorandum of Association of the appellant, or by the statutory powers conferred upon it by s. 19 of The Companies Act, R.S.A. 1955, c. 53. There can, therefore, be no suggestion that in
[Page 349]
purchasing and selling the shares in question the appellant was engaged in a business which it had been created to carry on. The purchase and sale of the shares was outside the scope of its business activities and consequently nothing can turn on the fact that the appellant is a limited company as contrasted with an individual.
The relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148, as amended, are the following:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.
* * *
139. (1) In this Act,
* * *
(e) "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment;
The issue in this appeal is as to whether an isolated purchase of shares from the treasury of a corporation and subsequent sale thereof at a profit, not being a part of the business carried on by the purchaser of the shares, or in any way related to it, constitutes an adventure in the nature of trade so as to render such profit liable to income tax.
The only evidence given in the Court below was that submitted by the appellant. There are no findings as to credibility. The decision is based upon that evidence and upon inferences drawn therefrom.
Cameron J. held that there was an adventure in the nature of trade and the basis of his decision is stated as follows:
On the facts in evidence and drawing what I consider to be the proper inferences therefrom, I have reached the conclusion that the purchase in question was not an investment, but a purely speculative purchase, and was entered into with the intention of disposing of the stock at a profit as soon as there was a reasonable opportunity of so doing. It was therefore an adventure or concern in the nature of trade.
[Page 350]
The reasons leading to his conclusion that the purchase was not an investment are:
1. The fact that the appellant borrowed the funds necessary to effect the purchase of the shares;
2. The inference that the nature of Brunswick indicated that its shares were speculative in value and that dividends could not be expected for some years.
With respect, I would not think that the question of whether securities are purchased with the purchaser's own funds, or with money borrowed by him, is a significant factor in determining whether their purchase and subsequent sale is or is not an investment.
Similarly, the fact that there was no immediate likelihood of dividends being paid on the shares should not have much significance, for there are many corporate ventures, financed by the sale of shares to the public, in which immediate payment of dividends may not be anticipated, and yet the purchase of the treasury shares of a company embarking on a new enterprise is a well-recognized method of making an investment.
However, assuming that the conclusion was correct that this purchase was speculative in that it was made, not with the intention of holding the securities indefinitely, with a view to dividends, but made with the intention of disposing of the shares at a profit as soon as reasonably possible, does this, in itself, lead to the conclusion that it was an adventure in the nature of trade?
It is difficult to conceive of any case, in which securities are purchased, in which the purchaser does not have at least some intention of disposing of them if their value appreciates to the point where their sale appears to be financially desirable. If this is so, then any purchase and sale of securities must constitute an adventure in the nature of trade, unless it is attempted to ascertain whether the primary intention at the time of purchase is to retain the security or to sell it. This, however, leads to the difficulty mentioned by my brother Cartwright that the question of taxability is to be determined by seeking to ascertain the primary subjective intention of the purchaser at the time of purchase.
[Page 351]
I cannot agree that the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade can be determined solely upon that basis. 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. As Scott L.J. said, when delivering the judgment of the Court of Appeal in Barry v. Cordy:
That a single transaction may fall within Case 1 is clear; but, to bring it within, the transaction must bear clear indicia of "trade"; e.g., Martin v. Lowry, (1925) 11 Tax Cas. 297—the single purchase of a vast quantity of linen for re-sale; or Rutledge v. Commissioners of Inland Revenue, (1929) 14 Tax Cas. 495, where there was a single purchase of paper. Unless ex facie the single transaction is obviously commercial, the profit from it is more likely to be an accretion of capital and not a yield of income.
The history of the phrase "adventure or concern in the nature of trade" was considered by the learned President of the Exchequer Court in Minister of National Revenue v. Taylor, where he said:
The expression "advanture or concern in the nature of trade" appeared for the first time in a Canadian income tax act in Section 127(1)(e) of the 1948 Act. It was, no doubt, taken from the Income Tax Act, 1918 of the United Kingdom. In that Act under Case I of Schedule D tax was chargeable in respect of any trade … and Section 237 defined trade as including "every trade, manufacture, adventure or concern in the nature of trade". Prior to its inclusion in the definition of trade by Section 237 of the Income Tax Act 1918, the expression appeared in the Income Tax Act of 1842. In that Act provision was made in the First Case under Schedule D for the charging of duties in respect of any "Trade, Manufacture, Adventure, or Concern in the nature of Trade,…." Indeed, the expression goes back to the Act of 1803.
In that case Thorson P. reviewed a number of the leading English and Scottish cases which had dealt with the meaning of the expression and, from those decisions, he formulated certain general propositions, some negative and some positive, applicable in determining whether or not a particular
[Page 352]
transaction did or did not constitute an adventure in the nature of trade. These are set out in the judgment of my brother Cartwright.
The positive tests to which he refers as being derived from the decided cases as indicative of an adventure in the nature of trade are: (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.
I will deal first with the second of these tests, which, if applied to the circumstances of the present case, would not, in my opinion, indicate that there had been an adventure in the nature of trade.
The nature of the property in question here is shares issued from the treasury of a corporation and we have not been referred to any reported case in which profit from one isolated purchase and sale of shares, by a person not engaged in the business of trading in securities, has been claimed to be taxable.
Cases in which the nature and quantity of the property purchased and sold have indicated an adventure in the nature of trade include The Commissioners of Inland Revenue v. Livingston (el cargo vessel); Rutledge v. The Commissioners of Inland Revenue, (a large quantity of toilet paper); Lindsay v. The Commissioners of Inland Revenue, and Commissioners of Inland Revenue v. Fraser, (a large quantity of whisky); Edwards v. Bairstow, (a complete spinning plant) and Regal Heights Ltd. v. Minister of National Revenue, (40 acres of vacant city land).
Corporate shares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well-recognized method of investing capital in a business enterprise.
[Page 353]
This point is made by Lord Normand in Commissioners of Inland Revenue v. Fraser, supra, at p. 502:
There was much discussion as to the criterion which the Court should apply. I doubt if it would be possible to formulate a single criterion. I said in a case which we decided only yesterday that one important factor may be the person who enters into the transaction … It is in general more easy to hold that a single transaction, entered into by an individual in the line of his own trade (although not part and parcel of his ordinary business) is an adventure in the nature of trade than to hold that a transaction entered into by an individual outside the line of his own trade or occupation is an adventure in the nature of trade. But what is a good deal more important is the nature of the transaction with reference to the commodity dealt in. The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity of sale does not occur. In some cases the purchase of a picture has been given as an illustration. An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognize at the time or afterwards that the possession of the picture will give him aesthetic enjoyment if he is unable ultimately, or at his chosen time, to realise it at a profit. A man may purchase stocks and shares with a view to selling them at an early date at a profit, but, if he does so, he is purchasing something which is itself an investment, a potential source of revenue to him while he holds it.
Similarly, Viscount Simonds, in his judgment in Edwards v. Bairstow, when considering the suggested characteristics of an adventure in the nature of trade, said:
I find "activities which led to the maturing of the asset to be sold" and the search for opportunities for its sale, and, conspicuously, I find that the nature of the asset lent itself to commercial transactions. And by that I mean, what I think Rowlatt J. meant in Leeming v. Jones, [1930] 1 K.B. 279, that a complete spinning plant is an asset which, unlike stocks or shares, by itself produces no income and, unlike a picture, does not serve to adorn the drawing room of its owner. It is a commercial asset and nothing else.
Furthermore, the quantity of shares purchased by the appellant in the present case would not, in my opinion, be indicative of an adventure in the nature of trade, as it constituted only 4,000 out of a total issue of 500,000 shares.
The first of the two tests mentioned was stated by Lord Clyde in The Commissioners of Inland Revenue v. Livingston, supra, and is commented upon by Rowlatt J. in Leeming v. Jones:
I venture to refer, with respect, to what the Lord President, Lord Clyde, said in Inland Revenue Commissioners v. Livingston, 11 Tax Cas. 538 at 542. He is dealing with this very point, and he says: "I think the
[Page 354]
test, which must be used to determine whether a venture such as we are now considering is, or is not, 'in the nature of trade,' is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made." That covers all the cases. In the Cape Brandy Syndicate case, [1921] 2 K.B. 403, what the appellants had was in the ordinary line of business as brandy importers, and so on; what they had in Martin v. Lowry, [1927] A.C. 312, was what is done in the ordinary case of merchants buying a thing, advertising it and so on; and what was done in Livingston's case, 11 Tax Cas. 542, was in the ordinary course of the business of ship dealers and repairers, and so on.
Were the operations involved in the present case of the same kind and carried on in the same way as those which are characteristic of ordinary trading in the line of business in which the venture was made?
The only operations of the appellant in the present case were the purchase of 4,000 treasury shares directly from Brunswick and their subsequent sale, presumably through brokers. This is not the sort of trading which would be carried on ordinarily by those engaged in the business of trading in securities. The appellant's purchase was not an underwriting, nor was it a participation in an underwriting syndicate with respect to an issue of securities for the purpose of effecting their sale to the public, and did not have the characteristics of that kind of a venture. What the appellant did was to acquire a capital interest in a new corporate business venture, in a manner which has the characteristics of the making of an investment, and subsequently to dispose, by sale, of that interest.
But it may be contended that persons may make a business merely of the buying and selling of securities, without being traders in securities in the ordinary sense, and that the transactions involved in that kind of business are similar, except in number, to that which occurred here. It has, however, been pointed out in the well-known case of Californian Copper Syndicate v. Harris, that, where the realization of securities is involved, the taxability of enhanced values depends on whether such realization was an act done in the carrying on of a business. In that case the Commissioners had held that the transaction there in question was an adventure or concern in the nature of trade. The judgments on appeal make no reference to that point, but are based on the ground that the turning of the investment to account in
[Page 355]
that case was not merely incidental, but was the essential feature of the appellant's business. The passage in question reads as follows:
It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced value's obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for Income Tax.
In my opinion, the transaction in question here does not fall within either of the positive tests which the authorities have suggested should be applied.
The only test which was applied in the present case was whether the appellant entered into the transaction with the intention of disposing of the shares at a profit so soon as there was a reasonable opportunity of so doing. Is that a sufficient test for determining whether or not this transaction constitutes an adventure in the nature of trade? I do not think that, standing alone, it is sufficient. I agree with the views expressed on this very point by Rowlatt J. in Leeming v. Jones, supra, at p. 284. That case involved the question of the taxability of profits derived from purchase and sale of two rubber estates in the Malay Peninsula. The Commissioners initially found that there was a concern in the nature of trade because the property in question was acquired with the sole object of disposing of it at a profit. Rowlatt J. sent the case back to the Commissioners and states his reasons as follows:
I think it is quite clear that what the Commissioners have to find is whether there is here a concern in the nature of trade. Now, what they have found they say in these words (I am reading it in short): That the property was acquired with the sole object of turning it over again at a profit, and without any intention of holding the property as an investment. That describes what a man does if he buys a picture that he sees going cheap at Christie's, because he knows that in a month he will sell it again at Christie's. That is not carrying on a trade. Those words will not do as a finding of carrying on a trade or anything else. What the Commissioners must do is to say, one way or the other, was this—I will not say carrying
[Page 356]
on a trade, but was it a speculation or a venture in the nature of trade? I do not indicate which way it ought to be, but I commend the Commissioners to consider what took place in the nature of organizing the speculation, maturing the property, and disposing of the property, and when they have considered all that, to say whether they think it was an adventure in the nature of trade or not.
The case was returned to the Commissioners, who then found as a fact that there had not been a concern in the nature of trade. Ultimately it reached the House of Lords, where the main issue was as to whether the profits were taxable under Case VI of Schedule D of the Income Tax Act, 1918. There is, however, a general statement of principle by Lord Buckmaster, at p. 420, which aptly applies to the present case, when he says:
an accretion to capital does not become income merely because the original capital was invested in the hope and expectation that it would rise in value; if it does so rise, its realization does not make it income.
In my opinion, therefore, the appeal should be allowed, with costs here and in the Court below, and the matter should be referred to the respondent with the direction that he deduct from the income of the appellant, for the taxation year 1953, the sum of $26,897.50.
The judgment of Cartwright and Judson JJ. was delivered by
Cartwright J. (dissenting):—This is an appeal from a judgment of Cameron J. dismissing an appeal from a decision of the Tax Appeal Board whereby the reassessment of the appellant for the taxation year ending December 31, 1953, was affirmed.
The relevant facts are fully set out in the reasons of Cameron J. and a brief summary will be sufficient to make plain the question which arises for decision.
The appellant was incorporated on October 25, 1947, under the Companies Act of the Province of Alberta as a limited company. The original purpose of its promoters was to erect a mill for the dehydration of alfalfa, but this was abandoned by August 1948. The appellant remained inactive until the autumn of 1952 when it purchased an office building in Calgary; it spent a substantial amount on alterations and, towards the end of 1955, sold the building for a sum equal to the total amount which it had spent on it.
[Page 357]
Early in 1953 the directors of the appellant received a favourable report on the shares of the Brunswick Mining and Smelting Corporation Limited, herinafter referred to as "Brunswick", and on or about February 23, 1953, the appellant purchased 4,000 treasury shares of that company at $10 per share, the total purchase price being $40,000. Between March 10 and March 13, 1953, the appellant sold 2,400 of these shares for a total of $38,513.50 and in June 1953, it sold the remaining 1,600 shares for a sum in excess of $28,000. It is common ground that the appellant realized a total profit of $26,897.50 from the purchase and sale of these 4,000 shares.
With the exception of certain debentures purchased in 1955 after the sale of the building referred to above the appellant had no dealings in securities other than the purchase and sale of the 4,000 shares of Brunswick.
There is no dispute as to any of the facts set out above.
At the trial before Cameron J. the only witness examined was Mr. Cheshire, the president of the appellant. The effect of his evidence was that the appellant purchased the Brunswick shares because it "felt that this was an excellent opportunity to invest money in a company which appeared to have an excellent chance for growth and development into a large mining operation", that the sales in March were prompted by the fact that the bank was pressing the appellant for repayment of a loan and those in June by the decision reached by the directors of the appellant at an informal meeting that the price of the shares had risen to such a point that, having regard to the aggregate value of Brunswick's known assets, it ceased to be in accordance with sound judgment to continue to hold them as an investment. There is, I think, an implication in the evidence of this witness that the shares were purchased as a long term investment rather than as a speculation looking to a quick turnover but there is no express statement to that effect.
Cameron J. made the following finding of fact:
On the facts: in evidence and drawing what I consider to be the proper inferences therefrom, I have reached the conclusion that the purchase in question was not an investment, but a purely speculative purchase, and was entered into with the intention of disposing of the stock at a profit as soon as there was a reasonable opportunity of so doing.
[Page 358]
The considerations which brought Cameron J. to this conclusion were, (i) that the appellant at the time of purchasing the Brunswick shares had no funds of its own available for investment and used borrowed funds to pay for them, (ii) that the nature of the Brunswick undertaking was such that its shares were of speculative value, (iii) that even if Brunswick's operations proved successful its shares could not be expected to yield any dividends for a considerable time, and (iv) that the shares were held by the appellant only for the short time mentioned above.
After considering the whole record, in the light of the full and able argument of counsel, I find myself unable to say that the finding of fact made by Cameron J. was not justified by the evidence, and in my opinion it should not be disturbed.
There are difficulties in ascertaining the intention of a corporation in entering into a transaction. In Inland Revenue Commissioners v. Fisher's Executors, Lord Sumner said:
In any case desires and intentions are things of which a company is incapable. These are the mental operations of its shareholders and officers. The only intention that the company has is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a company's resolutions and instruments is their substance.
On the other hand in Regal Heights Ltd. v. Minister of National Revenue, Judson J., who gave the judgment of the majority of the Court held that the intentions of the appellant company were throughout its existence identical with those of its promoters who later became its directors.
In the case at bar there is no record of any resolution of the board of directors of the appellant or indeed of any formal proceeding to assist the Court in ascertaining its intention. The decisions in relation to the sale of the Brunswick shares appear to have been made at "informal meetings" of the directors. Mr. Cheshire's evidence regarding the appellant's intention was, as has been pointed out above, somewhat indefinite and it was proper for the learned trial judge to draw an inference as to what that intention was from the surrounding circumstances.
[Page 359]
Having concluded that we should accept the finding of fact made by Cameron J. and quoted above, the point which arises for decision may be briefly stated as follows. The appellant, which was not at any time engaged in the business of trading in securities, made an isolated speculative purchase of a block of shares, not with the intention of retaining them as an investment which would sooner or later yield an income by way of dividends but in the expectation and with the intention of disposing of the shares in the near future at an increased price; this expectation was realized as to part of the shares in less than a month and as to the balance within four months. The question is whether the resulting profit constitutes taxable income or a non-taxable capital gain.
The applicable sections of the Income Tax Act, R.S.C. 1952, c. 148, as amended, are sections 3, 4 and 139(1)(e) which read as follows:
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year from all sources inside or outside Canada and, without restricting the generality of the foregoing, includes income for the year from all
(a) businesses,
(b) property, and
(c) offices and employments.
4. Subject to the other provisions of this Part, income for a taxation year from a business or property is the profit therefrom for the year.
139(1) In this Act,
(e) "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatsoever and includes an adventure or concern in the nature of trade but does not include an office or employment.
Cameron J. was of opinion that the purchase and sale of the Brunswick shares was an adventure or concern in the nature of trade. The respondent supports this view while the appellant contends that, what occurred was simply the realization at an enhanced price of a capital asset or investment and did not constitute an adventure or concern in the nature of trade.
In Minister of National Revenue v. Taylor, the learned President of the Exchequer Court points out that while the phrase "adventure or concern in the nature of trade" first appeared in a Canadian Income Tax Act in s. 127(1)(e) of
[Page 360]
the 1948 Act it has been found in the Income Tax Acts of the United Kingdom since the Act of 1842 and indeed goes back to the Act of 1803. He then proceeds to a careful examination of the leading cases dealing with the meaning of the phrase decided up to the time of his decision and arrives inductively at certain general propositions to guide the Court in dealing wtih a particular case; these are accurately summarized in the head-note to the report as follows:
On the negative side:
(i) The singleness or isolation of a transaction cannot be a test of whether it was an adventure in the nature of trade—it is the nature of the transaction, not its singleness or isolation that is to be determined.
(ii) It is not essential to a transaction being an adventure in the nature of trade that an organization be set up to carry it into effect.
(iii) The fact that a transaction is totally different in nature from any of the other activities of the taxpayer and that he has never entered upon a transaction of that kind before or since does not, of itself, take it out of the category of being an adventure in the nature of trade.
(iv) The intention to sell the purchased property at a profit is not of itself a test of whether the profit is subject to tax for the intention to make a profit may be just as much the purpose of an investment transaction as of a trading one. The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even without any intention of making a profit on the sale of the purchased commodity.
On the positive side:
(i) If a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do such a dealing is a trading adventure.
(ii) 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.
The learned President while formulating these guides as helpful recognizes (vide p. 214 of the report) "that the question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated."
In McIntosh v. Minister of National Revenue, Kerwin C.J., delivering the judgment of the Court said at p. 121:
It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour it is a question of fact in each case.
[Page 361]
In the case at bar it appears to me that on the view which he took of the facts Cameron J. was right in holding that the transaction in question was an adventure in the nature of trade and that consequently the profit arising from it was taxable.
Among the meanings of the word "adventure" given in the Shorter Oxford Dictionary are "a pecuniary venture" and "a speculation"; "venture" in turn is given the meaning, "a commercial enterprize in which there is considerable risk of loss as well as chance of gain". That the transaction was an adventure does not seem to me to admit of doubt.
Equally, I think, it was "in the nature of trade". In Edwards v. Bairstow, Lord Radcliffe said at p. 38:
Dealing is, I think, essentially a trading adventure, and the respondents' operations were nothing but a deal or deals in plant and machinery.
In the case at bar the appellant's transaction was a deal in mining shares.
There is nothing in the reasons of Cameron J. or in what I have said above to throw the slightest doubt on the applicability to the Income Tax Act in this country of the principle stated by the Lord Justice Clerk, in Californian Copper Syndicate v. Harris:
It is quite a well settled principle in dealing with questions of assessment of Income Tax, that where the owner of an ordinary investment chooses to realize it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax.
On the facts as found by Cameron J. in the case at bar, the profit realized was not the enhancement in price of an ordinary investment but rather "a gain made in an operation of business in carrying out a scheme for profit-making". To hold otherwise would appear to me to be contrary to the reasoning of the majority in the Regal Heights case, supra.
I have arrived at this conclusion with some hesitation. It appears to me to involve the result that in cases of this nature the answer to the question whether a profit is or is not taxable depends on the purely subjective test as to the intention of the taxpayer when he acquired the shares which have subsequently been sold at a profit. If, for example, in the case at bar it had been found as a fact that the intention of the appellant when it acquired the shares was to hold
[Page 362]
them as an investment looking forward to the time when Brunswick would pay dividends the circumstance that a few weeks later it sold the shares at a profit would not have rendered that profit subject to tax. In Bawlf Grain Co. v. Ross, Duff J., as he then was, pointed out that the law does not as a rule "take note of subjective events in the stream of consciousness save in relation to or as manifested by some external word or deed." It seems strange that the question whether a certain profit is subject to tax should depend on the intention with which the taxpayer entered into the transaction from which it resulted, but the words of Bowen L.J. in Edgington v. Fitzmaurice, have often been quoted with approval:
… the state of a man's mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.
The other cause of my hesitation is that while the expression "adventure or concern in the nature of trade" has been in the acts in the United Kingdom for a century and a half and in the act in this country for thirteen years counsel have not referred to any reported case in which the profit arising from one isolated purchase and sale of shares by a taxpayer not engaged in the business of trading in securities has been claimed to be taxable. However this is perhaps not the type of problem in the solution of which the maxim omnis innovatio plus novitate perturbat quam utilitate prodest is of assistance.
I would dismiss the appeal with costs.
Appeal allowed with costs, Cartwright and Judson JJ. dissenting.
Solicitors for the appellant: McLaws, McLaws, Bancroft, Deyell & Floyd, Calgary.
Solicitors for the respondent: Department of National Revenue, Ottawa.
Email this Content