Wellington Hotel Holdings Ltd. v. MNR, 73 DTC 5391, [1973] CTC 473 (FCTD)

Urie, J:—This is an appeal from a decision of the Tax Review Board dated May 30, 1972 whereby an appeal by the appellant from its reassessment for the taxation year 1969 in which the respondent disallowed the appellant’s deduction for losses sustained by it in the sale of marketable securities, was dismissed.

The appellant was incorporated under the laws of the Province of Ontario by letters patent dated January 26, 1972 [sic] and since that date its principal business was the operation of an hotel and restaurant in the City of London, the gross sales of which for the year ending December 31, 1969, were as follows:

The operating head of the company is Edward J Escaf who is a graduate in Commerce and Business Administration from the University of Western Ontario and he has been associated with the appellant from its inception. Prior to that he had also been in the family hotel business which I take it was the predecessor to the present operation. The other officers of the company are his brother, Fred Escaf, and his sister Adeline who takes no active part in the operations of the business. Fred Escaf is primarily responsible for the catering division and the general supervision of the operation, reporting to Edward Escaf.

One of the objects of the company as set forth in its letters patent reads as follows:

(a) To purchase or otherwise acquire and to hold, sell, exchange or otherwise dispose of and deal in the property, real or personal, rights and assets of and bonds, debentures, debenture stock, shares of all classes and securities of any form or type issued by any individual, corporation or company, public or private, incorporated or unincorporated;

Edward Escaf testified that by reason of his university training he had always been interested in the stock market and had personally dabbled in buying and selling securities in a small way for a number of years. In 1967 the directors of the appellant decided to cause the company to engage in the business of buying and selling securities pursuant to the powers given to it as referred to above. In 1968 the appellant’s operations in this regard resulted in a small loss of $125 or $130 which was not claimed as a trading loss in the operations of the company. Mr Escaf testified that he himself was not a professional analyst but purchased stock on the advice of persons who were connected with the companies in which he invested, of relatives, of his solicitor and of brokers. Most stocks were purchased on margin, most were speculative and were purchased with a view to capital appreciation and not for dividend earnings and all but one were listed on the Toronto Stock Exchange. He stated that so far as he was concerned the securities which he purchased on behalf of the company were part of the company’s inventory for resale. Usually the sales were made on the advice of brokers or because, in a falling market, it was necessary to meet the margin requirements of the particular brokerage house with whom he had been dealing. The only formal advice which he received with respect to changes in the portfolio was from brokerage houses.

Set out hereunder is a statement of the purchases and sales of securities made by the appellant during the years 1968 and 1969 being Exhibit A-3 in part:

Mr Escaf testified that he frequently purchased stock because of some knowledge of the company in question. For example Capital Diversified Industries is a company the head office of which is in London, Ontario and the president of which was known to Mr Escaf. It was the franchiser of the Red Barn chain of restaurants and Mr Escaf felt that it had a reasonable future by reason of the nature of its business, its management and its prospects.

Similarly, the president of Ontario Store Fixtures was known to Mr Escaf since he purchased the equipment for the appellant’s hotel and restaurant operations from that firm and he purchased the stock on the recommendation of the president.

ITL Industries had its office at the City of Windsor and through a relative there he learned that the company was to market a safety cap for medicine bottles which it appeared to him would give the company good prospects of financial success and he therefore purchased shares of that company from time to time as is shown on the schedule. He stated that he sold out when he learned that the company was unable to patent the safety cap and therefore the prospects for a successful future had dimmed considerably.

Nordic Explorations Limited, Ulster Petroleum, Versatile Manufacturing Limited and Pinnacle Petroleum were all purchased on the recommendation of brokers.

Numac Oil and Gas Limited was purchased because Mr Escaf knew that the Ivey family in London, which is well known in business circles, had a large interest in the company and that in his opinion, therefore, there would be good management with a good growth potential.

Bluewater Oil and Gas was purchased on the recommendation of his solicitor.

He pointed out that the appellant traded securities having an approximate value of $135,000 in 1969 which sum was approximately 16% of the gross sales of the company. Under cross-examination he stated that during the years 1968, 1969 and 1970 about 10% of his time was involved in the trading of securities and there were very few days that he was not in one or more brokerage offices and was in telephonic communication with brokers at least five or six times each day. He also admitted that he had a personal portfolio during that period of time but described it as small compared to that of the appellant. As can be seen from the statement and as Mr Escaf testified, the appellant was not involved as an underwriter or a promoter of any of the stocks in question, it had no control of any of the companies and it had no intention of maintaining a market in any of the shares. Moreover, the appellant did not do business with any of the companies on the list after it became a shareholder in those companies.

Ward. Fowler, a securities salesman with Nesbitt, Thompson Limited, testified that all of the transactions shown in the summary above were in marketable securities and described them as “trading type securities” for businessmen interested in investing risk capital. They were speculative in nature and were made with the hope of capital ap- preciation rather than dividend earnings. There was more risk than in investment grade securities, investment in which is primarily for modest profits and dividend income together with safety of capital. Of those stocks listed in Exhibit A-3 only Brascan Limited was a dividend paying stock.

The result of all the transactions referred to above resulted in a loss on the sale of securities in 1969 of $20,214.73 and this sum was claimed as a trading loss deductible from the appellant’s 1969 income for tax purposes. It is to be observed from Exhibit A-3 that during the fiscal year 1969 the appellant completed 26 purchases and 20 sales of securities. This amount of trading may be somewhat misleading because in a number of instances it may be that a single order was placed for shares of stock and the order was filled by a number of purchases. For example, on March 6, 1969, four purchases of Nordic Explorations Limited were made in two blocks of 500 shares each and in two blocks of 1,000 shares each. Mr Escaf was not able to recall whether he placed four separate orders on that day although he felt that probably individual orders were placed. There are other instances in the list, of course, where a similar situation prevails although the purchases of ITL Industries on May 14, 1969, of Brascan Limited on November 14, 1969 and of Capital Diversified Industries on September 15, 1969, have been combined in the schedule as one purchase. Presumably, therefore, it could be taken that the others which are not bracketed were individual orders although Mr Escaf was unable to so state.

The Minister disallowed the loss of $20,214.73 as a deduction from income for the appellant’s 1969 taxation year on the ground that the losses incurred by it were capital losses within the meaning of paragraph 12(1 )(b) of the Income Tax Act. The pertinent sections of the Act read as follows:

3. World income.—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. Income from business or property.—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;

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

(b) Capital outlay or loss.—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,

Counsel for the appellant argued that the losses were not capital losses within the meaning of paragraph 12(1)(b) since his client was in the business of trading in securities as well as in the hotel and restaurant business and the losses incurred in such trading were, therefore, deductible and in support of his submission argued:

(1) that the declared objects of the company included dealing in securities;

(2) that during the year 1969 the appellant had engaged in 26 purchases of blocks of securities and the sale of 20 blocks of securities;

(3) that the majority, if not all, of the securities bought and sold were speculative in nature and non-income-producing;

(4) that the securities were treated by the appellant as inventory to be bought and sold and that he envisaged selling the shares at a profit just as he would sell the inventories of food and beverages used in the hotel and restaurant business of the firm, at a profit;

(5) that the dollar value of the purchases and sales amounted to about 16% of the gross sales derived from the restaurant and hotel operations;

(6) that the elapsed time between the purchases and sales was relatively short;

(7) that the securities were usually purchased on margin as was evidenced by Exhibit A-4 and was in effect borrowed capital upon which interest was paid;

(8) that in making its investments the appellant did not engage the services of a separate investment counsel but acquired its investment information from various sources;

(9) that it was not surplus capital of the firm which was being used for purposes of investment and re-investment but it was what has been described as circulating or borrowed capital.

In support of his submissions appellant’s counsel relied basically on two cases, Canada Permanent Mortgage Corporation v MNR, [1971] CTC 694; 71 DTC 5409, and Admiral Investments Limited v MNR, [1967] 2 Ex CR 308; [1967] CTC 165; 67 DTC 5114.

Counsel for the respondent, on the other hand, relied on Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, as holding that shares of stock of a company are different than other commodities or properties and even if purchased with the specific intention of making a profit, any profit or loss incurred in the sale thereof was for a capital gain or capital loss. He argued that until the Irrigation Industries decision (supra) in 1962 the Minister likely would have agreed that the losses were deductible but that case changed the law. As I understood his submissions, securities traded by persons or companies engaged only incidentally in that business are not taxable since securities represent an investment in a company which is itself created for the purpose of doing business, any expression of intention not to invest but to trade in securities by the appellant’s officers notwithstanding.

The Lord Justice Clerk in the leading authority cited in cases of this kind, namely Californian Copper Syndicate v Harris (1904), 5 TC 159 at 165-6, sets forth clearly the two different business situations which must be distinguished from the evidence in any case:

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 . . . assessable to Income Tax. But it is equally well established that enhanced values 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; . . .

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the

question to be determined being—Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business ip carrying out a scheme for profit-making?

(Italics mine.) From this it would appear clear that whether a series of transactions results in a capital gain or loss or a trading profit or loss is a question of fact to be determined after considering all of the surrounding circumstances.

Does the fact that a company is empowered by its letters patent to buy and sell securities have any significance in the determination of which of the two classes of case the case at bar falls? In the Canada Permanent Mortgage Corporation case (supra) Heald, J at pages 707-8 [5418] refers to the case of The Commissioners of Inland Revenue v The Scottish Automobile and General Insurance Company Limited, 16

TC 381, and in particular to the judgment of Lord President Clyde at 389-90:

I think, however, it must be admitted that, within the limits of moneys not so immediately required, the terms of the memorandum and articles would not, as a matter of construction, exclude dealings similar in kind and object to those which are characteristic of the business carried on by an investment company. But this carries us hardly any distance at all, because the question is not whether the Company might possibly have traded as an investment company, but whether it was in fact trading as such, and whether this particular transaction was part of that trading.

(Italics mine.)

In Sutton Lumber and Trading Company Limited v MNR, [1953] 2 SCR 77; [1953] CTC 237 at 244; 53 DTC 1158 at 1161, Locke, J concisely stated the relevance of the company’s objects in determining questions of this kind as follows:

The question to be decided is not as to what business or trade the company might have carried on under its memorandum, but rather what was in truth the business it did engage in. To determine this, it is necessary to examine the facts with care.

On the basis, therefore, of the quoted passages I do not attach any particular significance to the fact that the appellant was empowered by its letters patent to trade in securities. Rather, ! think, that one must look at its whole course of conduct in respect of its share transactions to determine the true purposes for which the transactions were entered into and as Heald, J stated at page 709 [5418] of the Canada Permanent Mortgage Corporation decision (supra) “the course of conduct should be given precedence over the oral testimony of company officers as to the intent of the company where there is a conflict between the two”.

In Gairdner Securities Limited v MNR, [1954] CTC 24; 54 DTC 1015 Mr Justice Rand at pages 26-7 [1016] summarized the course of conduct in that case as follows:

. . . Between April 30, 1938 and December 31, 1946 roughly 124 purchases and 200 sales took place.

In these latter, of eight purchases amounting to 32,920 shares, 17,180 were resold on the same day, 2,475 within one month, 5,000 within two months, 5,000 within three months, 1,000 within four months and 2,265 within eighteen months. Of nine purchases made after 1946 amounting to 22,260 shares, 2,000 were resold on the same day, 1,000 in one month, 2,500 in two months, 3,500 in six months, 2,000 within one year, 9,260 within two years and 2,000 within three years.

These complementary transactions in buying and selling on their face bear the imprint of a course of action pursued with a view to making a profit through their ultimate result.. .

Investments, in the sense urged, looked primarily to the maintenance of an annual return in dividends or interest. Substitutions in the securities take place, but they are designed to further that primary purpose and are subsidiary to it. On the facts before us there cannot, in my opinion, be any real doubt that there was no such dominant purpose here.

(Italics again mine.) I think that the transactions undertaken by the appellant as set forth in Exhibit A-3 “bear the imprint of a course of action pursued with a view to making a profit..

This view is, of course, reinforced by the testimony of Mr Escaf which, while relevant, is not necessarily conclusive. I found Mr Escaf’s testimony to be credible and I think that when it is viewed with the conduct of the appellant in the purchase and sale of securities which were obviously not of “investment grade” but of “speculative grade” it can be accepted, as I do accept it, as corroborative of such course of conduct.

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 respondent’s counsel, as above stated, referred to the following passage from the Irrigation Industries case (supra) at page 352 [221, 1133-4]:

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.

To put the quoted passage in its proper context it is necessary, I think, to examine the issue in the case as defined by Martland, J. At page 349 [217-18, 1132] he states the issue:

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.

From the definition of the issue it is quite clear that the circumstances in that case differ substantially from those in the case at bar. This was not an isolated purchase of shares and subsequent sale. li was one of a substantial number of purchases and sales made in one taxation year as part of the business carried on by the purchaser ol the shares. In the Irrigation Industries case (supra) the appellant had been largely inactive whereas in this instance the appellant was actively engaged in the hotel and restaurant business and also in the purchase and sale of securities. While the two businesses are not related I do not think that that fact in itself precludes the possibility of the appellant engaging in a business other than its main business. On this basis, therefore, I do not understand Martland, J to have rejected the possibility that a company can engage in the business of trading in securities notwithstanding that it is not its main business and it is not a securities broker in the accepted sense.

In fact, Martland, J in writing the judgment for the Supreme Court of Canada in a later case, N R Whittai v MNR, [1967] CTC 377; 67 DTC 5264, concluded that the appellant in that case in the acquisition of the securities in question was endeavouring to make a profit from a trade or business, at all material times and, therefore, profits derived from sales were taxable. He found that the exchanges of securities were not ‘a substitution of one form of investment for another. While he did not distinguish his judgment in the Irrigation Industries case (Supra) he referred to it in the Whittai case (supra) and by implication I think it must be taken that he agrees that in a given set of circumstances persons or corporations not solely in the securities business who deal in corporate shares can be engaged in an adventure in the nature of a trade within the meaning of paragraph 139(1)(e) of the Income Tax Act. Such being the case, therefore, profits acquired from such trading would be taxable in the hands of the persons or corporations dealing in such shares and, of course, losses incurred would be deductible in computing their taxable income.

The additional facts in evidence upon which I rely to support my view are that the securities bought and sold were speculative. in nature, were non-income-producing, were held for relatively short periods of time and formed a substantial portion of the total business of the appellant. The fact that it was not part of the main business of the appellant is, in my view as above stated, of no particular significance. The whole course of conduct of the appellant leads inevitably to the conclusion that it is buying and selling securities to make a profit.

I cannot agree with submissions of counsel for the respondent in respect of his reliance on the Irrigation Industries case as supporting his proposition that the losses incurred were capital losses and I have reached the conclusion that the shares in question in this appeal were not investments in the sense referred to in the Irrigation Industries case nor were the changes made in the appellant’s portfolio merely changes of one form of investment to another. The purchases were purely speculative and were entered into with the intention of disposing of the stock at a profit as soon as there was reasonable opportunity of so doing.

The following excerpt from the judgment of Cattanach, J in Admiral Investments Limited v MNR (supra) at page 319 [175, 5121] succinctly states my views in the case at bar:

What must be looked at is what was done by the appellant with a view to asking the question in Lord President Clyde’s words in CIR v Livingston, 11 TC 538, at p 542:

“. . . whether the operations involved (in the transactions of the company) 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.”

While the appellant was not a trader in securities in the sense of that term that it was an underwriter and held a seat on a stock exchange, but rather made its purchases and sales through a stock exchange in the usual manner, nevertheless, the acts of the appellant were just the ordinary transactions of a person who deals in shares.

Therefore, in my opinion, the appellant is entitled to deduct the loss of $20,214.73 that it incurred in its 1969 taxation year.

The appeal is therefore allowed with costs.