Jerome, A.C.J. [Orally]:—When I heard this argument this morning on this question of law, I indicated that I would return this afternoon at 3:30 to deliver judgment. I'm ready to do so.
This application is confined to a question of law, a preliminary question of law under Rule 474. Appropriately, the facts are not in dispute.
The plaintiff had carried on business in the Province of British Columbia for some time prior to 1976, when there was a change in the affairs of the company. Commencing in 1974, the plaintiff entered into agreements with Trend Management, whereby Trend agreed to manage securities that might be acquired from time to time on behalf of the plaintiff. Between 1975 and 1986, Trend purchased from time to time and made disposition from time to time of various Canadian securities for the account of the taxpayer.
In computing its income in the taxation years from 1975 to 1986, the plaintiff treated all of the transactions respecting securities in Canadian companies as capital gains and losses on the basis of the election under subsection 39(6) of the Act.
In respect of the 1983, 1984 and 1985 taxation years, the Minister reassessed and the present litigation ensued. The parties, in the course of the current appeal, have asked the Court to determine this question of law relative to the section 39 which sets up the election in these matters. Since subsection 39(4) allows a taxpayer in the position of this plaintiff to elect to treat on a lifetime basis these transactions as being capital in nature, but since subsection 39(5) confines that right, or that election to those who are not traders or dealers in securities.
Do the words a trader or dealer in securities in subsection 39(5) of the Act refer only to a person who is registered or licensed by a regulatory authority to buy and sell securities, or to a person who, in the ordinary course of business, buys and sells securities on behalf of other persons, or are the words broad enough to include anyone other than a person engaged in an adventure or concern in the nature of trade?
In the course of argument, a good deal of jurisprudence was put forward on both sides. The jurisprudence is not of much assistance for two reasons. First it is acknowledged by both counsel that this is the first time for the question in issue here. Second, most of the jurisprudence addresses itself to the question of whether the proceeds from a particular transaction with a particular taxpayer's factual circumstances should be construed as income or capital in nature. Since in none of those cases a section 39 election had taken place, the jurisprudence is really of limited assistance.
To answer the question then I have to go to the language of the statute itself, and I think it is appropriate in cases of this sort to look first at the purpose of the enactment.
It is, of course, improper to look at Parliamentary Debate for the purpose of statutory interpretation. If the proposer of legislation in the course of debate says that a given section has a given purpose or a given interpretation, that is only that speaker's opinion. The governing determination or factor will be the test of the language itself. If it doesn't say what the debater says it should, it is the text that governs.
Why then should we go to the Parliamentary Debates in this case? Only to set the context, to clarify the purpose of the enactment.
In that respect, the budget speech of the then Minister of Finance on March 31, 1977, the Honourable Donald S. MacDonald, made it clear that the purpose of this particular provision was in support of a program to encourage Canadian taxpayers to invest in Canadian companies, to purchase securities in assistance of Canadian enterprise.
That is the clear message from the budget documents and speeches that were filed as part of briefs on both sides in this case. In establishing the context of the section, I should refer to the Minister's statement about the purpose of the program.
That where a taxpayer elects in his return of income for his 1977 or any subsequent taxation year, all his gains and losses for the year and all subsequent years from the disposition of shares other than prescribed shares, bonds, debentures, notes, or similar obligations issued by a Canadian corporation, shall be deemed to be capital gains and capital losses of the taxpayer, except where the taxpayer is a dealer or a trader in securities, a bank, a trust company, credit union, life insurance corporation or similar institution.
I think the word institution is significant.
As I read the Budget Speech, the purpose of the program is to encourage the ordinary Canadian taxpayer to invest in Canadian enterprise.
The text is quite clear, and I turn to it now. I turn next to the text of subsection 39(4):
Election re: disposition of Canadian securities. Except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year, and the taxpayer so elects in his return of income for that year, every Canadian security owned by him in that year or any subsequent taxation year shall be deemed to have been a capital property owned by him in those years;
(b) every disposition by the taxpayer of any such Canadian security shall be deemed to be a disposition by him of a capital property.
An election under section 4 does not apply to a disposition of a Canadian security by a taxpayer who, at the time that the security is disposed of, is
(a) a trader or a dealer in securities . . .
And the rest of the list I think is consistent with the view that the exception or at least the election should be denied only to the institutional investor, a bank, a corporation basically—paragraph (b) is confined to banks, (c) is to trust companies, (d) is credit unions, (e) is life insurance corporations, (f) corporations whose principal business is either the lending of money or the purchasing of conditional sales contracts, finance companies, essentially. And the nonresident matter is not a factor in this case.
Accordingly, it seems entirely consistent to me to read trader or dealer in securities as being a part of that list.
I attach considerable significance to the fact that this election, once made, is binding on the taxpayer for a lifetime. And in that respect, I find interesting the observations filed on both sides by members of the tax accounting profession.
On behalf of the Minister, that’s at Tab 27 of the Minister's brief of documents, is a paper entitled “Some Issues Relating to the Taxation of Insider Trading Transactions. Comments on Interpretation Bulletin IT-479 by Crofton Unger."
Now, a good deal of the early part of it has to do with insider trading, which is not in issue here. But at page 768 under the heading "Dispositions by Persons Involved in Securities Industries", the bulletin says,
As an extension of the general principles enunciated earlier, and perhaps for greater certainty, paragraph 15 of the bulletin lists four situations in which persons will be considered to earn business income from securities transactions,
(1) the taxpayer participates in promotion or underwriting.
That's not here.
(2) the taxpayer is an officer of a firm or corporation that does promoting or underwriting.
That's not in play here.
(3) the taxpayer holds himself out to the public as a dealer.
That's not in play here.
(4) the taxpayer is a corporation whose prime activity is trading in securities, notwithstanding that the corporation does not hold itself out to the public as a trader or dealer in securities.
That provision might have application here. I don't know. That's what I’m asked to decide.
But I note that this treatment or this paper is dealing with this subject without any reference to the election in section 39. It is attempting, in other words, to decide whether a person would be considered to be in the business of trading in securities, so that the proceeds would be income.
Indeed in the following paragraph:
Nevertheless, paragraph 30 of the bulletin does not deny the above taxpayers the opportunity to recognize capital gains or capital losses in other securities transactions. Revenue Canada concedes that a taxpayer occasionally may acquire certain securities as an investment and may acquire other like securities or even different types of securities, the gains or losses from which should be treated as income. Consequently a taxpayer may in the same taxation year or different taxation years, properly resort to gains and losses, transactions, and at least report those as being on income account and report others as being on capital account.
Now, with that in mind I turn to page 772.
The bulletin should be revised to refer to persons whose primary business activity is buying and selling securities. The loose language now found in the bulletin might lead one to suspect that a family holding company organized for investment purposes may be trading on income account. It is our understanding that the ruling division is now of the opinion that there is no difference between the prime business activity of a corporation referred to in paragraph 5 of the bulletin and the prime activity of a corporation referred to in paragraph 15. Only companies whose prime activity is trading in securities and whose activities amount to a business activity, including an adventure or concern in the nature of trade, should be presumed to realize gains or losses on income account. The result would be both logical and consistent with case law.
And then to page 780, beginning in the middle of the page.
Any corporation whose prime business activity is trading in shares or debt obligations is also considered to be a trader or dealer in securities.
The above comment from the bulletin is too broad, because it may literally deny the subsection 39(4) election to a taxpayer's holding company that was buying and selling securities to earn investment income, but that might have displayed certain tendencies or sufficient sophistication to warrant the classification of certain gains as business income. As indicated, this treatment would apparently be contrary to the purpose for which the legislation was enacted. Officials of Revenue Canada are prepared to interpret the expression "a corporation whose prime business activity is trading in securities” in paragraph 15 of tne bulletin, to mean a corporation that is carrying on the business of trading or dealing in securities, and not a corporation whose activity constitutes an adventure or concern in the nature of trade.
Accordingly, a company incorporated to hold a portfolio of securities should not be treated as a trader or dealer in securities by reason of its corporate personality alone. This is consistent with our earlier contention that a taxpayer must be carrying on a business before he is precluded from having the rights to make a Section 39(4) election.
On the same subject, a paper by John Durnford, “Profits on the Sale of Shares: Capital Gains or Business Income? A Fresh Look at Irrigation Industries", Canada Tax Journal, July-August 1987, filed as part of the applicants argument here, has this language at page 839:
There is a question as to whether by using the expression a "trader or dealer in securities” in paragraph 39(5)(a), Parliament intended to exclude elections by ordinary persons who are active traders, but only on their own account. The author's view is that it was not the intention to deprive such taxpayers of the opportunity of electing.
In my opinion, the lifetime provision is a very significant aspect of this program. I find it consistent with a policy to encourage the ordinary taxpayer, whether corporate or individual, to invest in Canadian securities, and to accept a lifetime commitment to that position. In return the taxpayer is relieved of the uncertainty that occurs in the case of realty traders, to which I made some reference during the course of argument this morning.
This provision can only be directed to the non-institutional taxpayer. I see no purpose in endeavouring to encourage the kind of institutional investor in the same way. I attach great significance to the word lifetime, which is, as I've indicated, missing from those other portions of the statute which have given rise to so many disputes. I refer to the vexatious question about when the person passes the line of being a personal holder of real estate and gets into ventures in the nature of trade by realty transactions more frequent and more sizeable.
In this case, the investor, the taxpayer, corporate or personal, who takes the election under section 39, is by the use of that lifetime term relieved of that anxiety and I think that’s an important aspect of the program.
I find it, therefore, consistent with Parliament's announced policy to encourage investment in Canadian securities, to extend strictly to those taxpayers who do so, who purchase Canadian securities, shares in Canadian enterprises or corporations, a special treatment. That treatment is assured to them for a lifetime, that once they've elected to treat them as capital gains or losses that they can do so forever.
Accordingly, in my view, the text of the question put before me, to return to it:
Do the words a trader or dealer in securities in subsection 39(5) of the Income Tax Act refer only to a person who is registered or licensed by regulatory authority to buy and sell securities, or to a person who in the ordinary course of business buys and sells securities on behalf of other persons?
I would answer that question in the affirmative.