Tamas v. The Queen, 81 DTC 5150, [1981] CTC 220 (FCTD)

Dubé, J:—The plaintiff is a radiologist operating a clinic at Montreal, PQ. During the period of 1967 to 1969 he acquired convertible debentures at a cost in excess of $560,000, the portfolio largely being made up of 4 /2% TWA Convertible Debentures, 6% Glen Alden and 5 /4% Leasco. In 1970 he sold the securities at a loss of $233,094.02.

He also purchased shares of Meisterbrau which he sold in June 1970 at a further loss of $9,803.65. From September to December of that same year, utilizing the proceeds of the sale of the debentures aforementioned, he purchased and sold on the silver and corn futures market incurring additional losses in the amount of $39,415.86.

The plaintiff claims that the foregoing activities were speculative in nature and constituted a “business” under paragraph 139(1 )(e) of the Income Tax Act. The paragraph reads:

(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 Minister assumed that the plaintiff was a full-time practising radiologist, did not carry on the business of trading in securities, did not consider himself a trader in securities in the years prior to his 1970 taxation year, relied on the advice of his stockbrokers, and held that the aforementioned debentures, acquired by the plaintiff, were not speculative in nature: therefore no deduction shall be made in respect of such losses, as provided under paragraph 12(1 )(b) of the Act.

12. (1) In computing income, no deduction shall be made in respect of

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as

expressly permitted by this Part

In his evidence the plaintiff explained that he started buying on the stock market in 1965 with occasional investments. He purchased between $25,000 and $35,000 Of his own money in “blue chip” stocks. Near the end of 1968 he changed from his conventional stock buying to a more perilous foray into the convertible debentures market. He borrowed from the bank and from his brokers up to $400,000. He became deeply interested in the study of stock market behaviour, spending some two to three hours a day at different brokerage houses collecting research material, and spending his evenings poring over brochures and other market publications. During office hours he spent much time on the phone with his brokers.

In the Spring of 1970 the brokers and the bank recalled their loans causing the plaintiff to liquidate his convertible debentures in a depressed market. The plaintiff attempted to recoup his losses by investing some of the amounts recovered into silver and corn futures. Unfortunately, the timing was wrong and he lost again. Properly chastened by the experience, he returned full-time to his practice of radiology. Coincidental with the advent of medicare, his medical revenues greatly increased in 1971.

In his income tax returns previous to 1970 the plaintiff had described his business or profession as “radiologist”, whereas for the year 1970 he described it as “radiology and trading”. Admittedly, the plaintiff is not a broker, holds no licence to sell stocks to others, did not attempt to trade with clients, and relied on his brokers to purchase and sell the securities.

Contrary to most taxpayers who dabble in the stock market — they usually claim their transactions to be capital in nature — the plaintiff argues that his was an adventure in the nature of trade. It is in his interest, of course, to show that in 1970 he was in “business” as a trader in securities so that his losses be fully deductible from income as expenses. Naturally, he has every right to endeavour to establish such a situation. The burden of proof, however, is upon him to show that the Minister was wrong in his assessment.

Undoubtedly, if all the plaintiff’s aforementioned transactions in debentures and futures had been transactions in real estate, the sheer volume of business could have been indicative of speculation on his part. Generally, however, purchasers of stocks are considered to be investors. The acquisition of corporate shares is a well-recognized method of investing capital in a business enterprise. Vide Martland, J in Irrigation Industries Ltd v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131.

At the outset, the plaintiff considered himself to be an investor when he limited his purchase to “blue chip” stocks. He claims that he became a speculator when he borrowed heavily and risked other people’s money, and his own, on the convertible debentures market. He points out that convertible debentures fluctuate in value and the holder has the right to convert them into a predetermined number of common shares. The interest on the plaintiff’s loans exceeded the return to him from the interest on the debentures. The latter were purchased in the hope and expectation that the value thereof would quickly appreciate, not for the purpose of accumulating interest therefrom. In order to achieve stronger leverage, the plaintiff selected debentures at depressed prices and bought on margin.

The TWA debentures were acquired at $51.25 per $100, Leasco at prices varying between $58 and $68 per $100 and Glen Alden bought at approximately $74 per $100. The plaintiff avers that when he purchased those convertible debentures his intention was clearly to convert and resell at a profit, not to hold as an investment.

Several criteria are available to assist in the determination as to whether transactions are in the nature of a speculation, or an investment. They are conveniently set out in the headnote of MNR v James A Taylor [1956] CTC 189; 56 DTC 1125, an Exchequer Court of Canada decision of 1956

(1) The terms “trade” and “adventure or concern in the nature of trade” are not synonymous expressions. A transaction which, by itself, does not constitute a trade may still be an adventure in the nature of trade. (2) 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. (3) If a person deals with the property purchased in the same way that a regular trader in property of the same kind would ordinarily do, such a dealing may fairly be called an adventure in the nature of trade. (4) The nature and quantity of the subject matter of the transaction may be such as to exclude the possibility that its sale was the realization of an investment or that it could have been disposed of otherwise than as a trade transaction. (5) If the element of speculation is present, the sale of a property that is productive of income and might be regarded as an investment, can be a trade in the property rather than the realization of an investment.

(6) The intention to resell at a profit may well be an important factor in determining that a transaction is an adventure in the nature of trade, but its presence is not an essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade. 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 if there is no intention of making a profit on the sale of the purchased commodity. (7) The fact that the 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. (8) 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 or that some operation be performed on the subject matter of the transaction to make it saleable.

Applying those criteria, first to the plaintiff’s transactions in silver, bearing in mind that silver brings no interest and no dividend, it becomes obvious that his governing motive was to speculate. An intention to resell at the earliest and most opportune time in a fluctuating market in order to recoup his heavy losses had to be the motivating factor behind the purchase.

As to the convertible bonds, the obvious intention of the taxpayer was not to hold the bonds and to collect the interest therefrom, but to realize promptly on an anticipated appreciation in value. The interest from the bonds would not cover the interest on the loans, not to mention the repayment of the borrowed capital. The doctor would not have borrowed so heavily and purchased on margin to assemble a safe long-term investment portfolio. He was doing well in his profession and would not be specially interested in courting such steep risks merely for picayune returns. He was going all out for substantial rewards. Clearly, his moves were not prudent and conservative, but aggressive and speculative. He dealt with his commodities in the same way that a regular trader in the property of the same kind would do, even if he had not set up the same organization to do it.

Not only commodity brokers or other professional agents in the securities business can be engaged in an adventure in the nature of trade while dealing in stocks and bonds. As Collier, J said in Sydney Bossin v The Queen [1976] CTC 358; 76 DTC 6196

Counsel cited the above extract for authority that shares cannot, except in the hands of a trader who makes his living by speculating in them, be a commodity or vehicle for an isolated adventure in the nature of trade; that shares can never be articles of commerce. I do not so interpret the words of Martland, J, bearing in mind the remarks (already quoted) of Kerwin, CJ in McIntosh v Minister of National Revenue, the learned judge’s reasons in the subsequent case of N R Whittai v Minister of National Revenue [ [1968] SCR 413], and some comments by Pigeon, J, speaking for the Court in a still later case, Minister of National Revenue v Freud [[1969] SCR 75 at pp 80-81]. In my view, the effect of all the cases and extracts referred to is that, in a particular set of circumstances, shares may in fact be a trading commodity (as opposed to investments) giving rise to taxability as income on the basis of an adventure in the nature of trade.

In Wellington Hotel Holdings Ltd v MNR [1973] CTC 473; 73 DTC 5391, Urie, J (then of the Trial Division of the Federal Court) held that the appellant’s conduct indicated that it was not looking for safe and enduring investments when it purchased securities, but rather that it wanted a quick return on the money put out. When instead it suffered losses these amounts were deductible. In his judgment the learned judge discussed the evidence of a Mr Escaf which he considered to be credible in view of the conduct of the appellant and the purchase and sale of securities which were obviously not of “investment grade” but of “speculative grade”. He said at 481 [5397]:

Mr Escaf was not looking for safe investments, he was looking for a greater return through appreciation in the value of his securities. Unfortunately, the appreciation did not take place and the appellant, therefore, suffered losses and in my opinion such losses are deductible from the appellant’s income for the purpose of determining its taxable income.

The position of the plaintiff in the instant case is much similar to that of Mr Escaf. Dr Tamas was not looking for safe investments, he was chancing on highly speculative leverage. The long odds did not pay off: he suffered heavy losses. By their very nature, as well as from the unfortunate results, it is obvious that the plaintiff’s transactions were not of “investment grade” but very much of “speculative grade”.

The taxpayer engaged in transactions which, in my view, formed an adventure in the nature of trade. His activities were speculative in nature and constituted a business under the Act. His losses are therefore deductible as claimed.

The plaintiff is entitled to his costs.