Citation: 2012 TCC 417
Date: 20121128
Docket: 2011-1396(IT)G
BETWEEN:
OM
P. MITTAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
[1]
Mr. Mittal claims to be
a trader in securities and, as such, deducted business losses from that
activity of $35,226 in 2006 and $23,659 in 2007. The Minister of National Revenue
(the "Minister") denied those losses as business losses, assessing on
the basis that they were capital losses, as Mr. Mittal was neither a trader or
engaged in an adventure in the nature of trade.
Facts
[2]
Mr. Mittal’s losses
from 2004 and 2005 were assessed on capital account but Mr. Mittal and the
Respondent reached a settlement agreement in which the Respondent allowed Mr.
Mittal’s 2005 losses as business losses. Apart from indicating that he had
approximately 100 trades of 49,591 shares in 2005 representing a dollar amount
in purchases and sales of over $1,000,000, I heard no further evidence of the
circumstances involving Mr. Mittal’s 2005 trading activity.
[3]
Mr. Mittal is an
engineer by profession, having worked as such for Shaw Canada from 1998 to 2012. In 2006 and 2007 he averaged approximately 32 hours a week
working at Shaw.
[4]
Mr. Mittal indicated
that he had his own trading account as early as 2000, but maintained he
actually started trading in 2004. He provided a business plan prepared in 2005
which is worth reproducing:
Business
Plan – Security Trading
1. Personal
Growth
Maintain
a great positive attitude and decrease negative influences. Make an effort to
becoming deaf to negativity and choosing not to read or listen to negative
inputs, while also adding position input.
a.
I will read material on positive mental
attitudes
b.
Positive self talk
c.
I will exercise to stay healthy physically and
mentally
d.
I will practice YOGA for an average of 5 days a
week.
2.
Mission Statement
a.
I will invest my time into financial newspapers,
books and market research
b.
I will watch selective business programs on TV
such as BNN
c.
I will focus on the price action of the current
market conditions for trading.
d.
I will always expand my mind with new ideas.
e.
I am going to be trading "Online" on
TSE stick exchange.
f.
I shall not trade in futures, commodity and
currency.
g.
I will limit my risk.
3.
Goal Setting
a.
I will try to complete an average of 3 trades a
week.
b.
I will maintain a solid mental and emotional
state.
c.
I will I improve my knowledge and skills
4.
Financial Commitment
a.
I will fund my account out of my savings with a
minimum of $100,000.00.
b.
I will use margin as and when required for short
durations.
c.
I will borrow about $50,000.00 from Veenu Mittal
and Neil Mittal.
d.
I will use TD Canada Trust Line of Credit for
short durations.
5.
Time Commitment
a.
I will commit my time an average of 25 hours per
week.
b.
I will trade analysis on daily basis.
c.
I will do market analysis on daily basis.
d.
I will watch selective business programs on TV
as required.
e.
I will keep record of my account books weekly
basis.
f.
I will read financial newspaper and books.
6.
Record Keeping
a.
I will keep a record of all business
transactions.
b.
I will track profits and losses on monthly
basis.
7.
Trading Plan Methodologies
a.
Analyse recommendations and risk analysis from
financial institutions such as TD Waterhouse and BMO Investorline.
b.
Analyze recommendations of top picks from
business programs on TV such as BNN.
c.
Analyze recommendations of "Buy and
Sell" from financial newspapers.
d.
Analyze if certain stock is dropped or
appreciated considerably.
e.
Analyze if there is significant news about any
stock such as takeover etc.
f.
I will further review based on
·
Stock valuation – EPS, P/E, ROIC, P/S, Market
Cap, EBIDTA, BVPS etc.
·
Volatility
·
Yield, revenue stability, payout ratio, business
outlook, liquidity, interest rates scenario, debt ratio (D/E)
·
Growth history and Potential of earnings,
dividends and business
·
Geopolitical conditions
·
Cyclical stocks
·
Management issues, such as insider buying
g.
Decision time – buying, selling, price target,
financing
h.
Exit – Sell the security, if the analysis
indicates to sell and cut further losses or take profit.
8.
Drawdown Rules
a.
Stop trading immediately if the account balance
exceeds a 50% drawdown of base capital and review what went wrong? For example:
·
Not executing trades when signals occur.
·
Executing trades when there is no entry signal.
·
Allowing losses to exceed predetermined amounts.
·
My contingency plan should any of those
possibilities occur is "Take one week off from the markets to reevaluate
my trading, current market conditions, my risk management and my mental and
emotional stability. If a vacation is necessary, take one."
9.
Compensation
a.
I will not draw any money from the business
until I decide to retire from my employment. I will use all proceeds to further
develop my business.
[5]
Mr. Mittal described
himself as something of a workaholic. He read extensively (he listed 16 finance
related books) and used various sources to obtain the financial knowledge he
deemed necessary to engage in his trading activity. He studied internet sites
such as TD Waterhouse and BMO InvestorLine, as well as watching financial and
business related television programs and attending numerous financial seminars.
He kept logs of his time devoted to his trading activities including this
research, as well as his actual trades, his recordkeeping, his banking and all
incidental related activity. His logs showed an average of 25 hours a week
devoted to this activity. He kept detailed records of all his trades.
[6]
Mr. Mittal took me
through his trades in 2006. There were several, Alcan, Bank of Montreal, Bank
of Nova Scotia, Canadian National Railway, Enervest, ING, Loblaws, ISHARE,
National Bank, Riocan, Royal Bank of Canada, Shoppers Drug Mart, Sun Life, TSX
Group X, Teranet, Toronto-Dominion Bank, Yellow Pages and Toronto-Dominion RR
Bonds, in which he acquired the shares in 2006 and sold either the same day,
within a few days or certainly before year-end: all short-term holdings. There
were seven sales in 2006 of shares (Advantex, Homeserve, Northgate Exploration,
TS Telecom, TD Monthly Inc., TAL China and AGF Aggregate growth) which had been
held since before 2005. In 2006, Mr. Mittal engaged in about 60 days of
actual trading representing 160 trades with a value of $3,237,279.
[7]
19 of the 27 stocks traded
in 2006 were non-dividend bearing. Many were blue chip: a couple Mr. Mittal
described as adventures, Northgate Exploration and TALVEST China Plus. The
stock portfolio consisted of 18 publicly traded shares, four mutual funds, four
income trusts and one bond.
[8]
Mr. Mittal financed
this activity from his own savings (approximately $100,000), non-interest
bearing demand loans from his two sons (one for $41,000 and one for $10,000 –
one son was paid back in 2008), a line of credit used occasionally in
short-term investments and a margin account rarely used.
[9]
Mr. Mittal also
invested for other family members including his wife, his sons and
daughter-in-law, totalling investments of over $700,000.
[10]
The volume of trades in
2007 was considerably less (29 trades over 10 days of active trading). Most of
these were sales with only a handful of purchases. Most activity was in the
first three months of the year.
[11]
Mr. Mittal explained
that his research suggested a real concern with the U.S. market and household
debt in 2007 and heading into 2008. He therefore significantly curtailed his
activity. He claims he was proven right by the events of 2008.
[12]
It was Mr. Mittal’s
intention that upon retirement he would rely on the trading activity as his
business.
Issue
[13]
Was Mr. Mittal in 2006
and 2007 a trader in securities or engaging in an adventure in the nature of
trade, which would entitle him to deduct business losses of $35,226 and $23,659
respectively?
Analysis
[14]
A non-capital or
business loss is the taxpayer’s loss from a business, business being defined in
section 248 of the Income Tax Act (the "Act") to
include a profession, calling, trade, manufacturing or undertaking of any kind
whatever…and an adventure or concern in the nature of trade.
[15]
There has been
considerable jurisprudence on what constitutes engaging in stock market
activity, entitling a taxpayer to deduct losses from that activity. The seminal
decision of Her Majesty the Queen v. Vancouver Art Metal Works Ltd. contains
the oft-listed factors necessary to weigh in addressing this issue:
a) Frequency of transactions.
b) Duration of holdings.
c) Intention to acquire for resale at
a profit.
d) Nature and quantity of securities.
e)
Time spent on activity.
[16]
In the recent Federal
Court of Appeal decision of Baird v. Canada, the
Court relied on the old Supreme Court of Canada case of Irrigation
Industries Ltd. v. Minister of National Revenue to
define an adventure in the nature of trade with both positive and negative
principles:
…
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.
21. Thorson
P., in Taylor, supra, also formulated a number of propositions
which he characterized as negative propositions. These propositions were set
out by Cartwright J. in his dissenting reasons in Irrigation Industries,
supra, at paragraph 49 of his Reasons:
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.
[17]
In the Tax Court of
Canada decision of Rajchgot v. Canada, Chief Justice Rip succinctly summarized
the task facing the judge in these cases as follows:
…
It is not the lack or presence of one or more factors that will determine
whether a transaction is on capital or income account; it is the combined force
of all of the factors that is important. There is no magic formula to determine
which factors are more or less important. Some factors complement each other.
Each case is different. A judge must balance all the factors.
…
[18]
Finally, there has been
a recent case, Zsebok v. Canada,
in which Justice Sheridan suggested that to be a trader the Appellant
"had to prove in addition to the above factors that he had a particular or
special knowledge of the market in which he trades". Justice Sheridan
was relying upon comments of Justice Noël in the decision of Kane v.
Canada.
In that decision, however, Justice Noël was dealing with whether the
taxpayer was caught by the exception in subsection 39(4) of the Act,
precluding traders from using the election. Justice Noël did however state
the following:
…
The factors highlighted by the Court of Appeal have traditionally been applied
indiscriminately to identify both persons who carry on a business in the true
sense, as well as persons who are in business by virtue of having engaged in an
adventure or adventures in the nature of a trade. Because they are badges or
indicia of trade, they must be found to exist to a degree or another under
either analysis before a conclusion as to the existence of a business for tax
purposes can be reached. Usually, the distinction matters little as the tax
treatment of profits or losses arising from a business is generally the same
whether a business is found to exist as such or whether its existence is
premised on the extended definition of the word "business". Hence,
the Courts have paid little or not attention to it. …
[19]
With these principles
in mind, was Mr. Mittal either a trader in securities, that is carrying on a
business, or engaged in an adventure in the nature of trade? Following Justice
Noël’s observation it is unnecessary, for purposes of determining whether Mr.
Mittal is eligible to claim business losses, to distinguish between the two. It
is enough if he meets the less onerous requirement of being engaged in an
adventure in the nature of trade. While I will go through the usual factors, it
is appropriate to step back and get an overall impression of what Mr. Mittal
was doing, his whole course of conduct as it were: the overall impression is of
an individual spending a great deal of time, energy and money in a very
organized and businesslike fashion in investing in the stock market, to the
extent that he intended this to be his retirement business. Unfortunately for
Mr. Mittal, it proved not to be as lucrative as he had hoped. Being
unsuccessful, however, does not make it any less an adventure.
[20]
I turn now to a review
of the factors to support the overall impression that leads me to conclude Mr.
Mittal was at the very least engaged in an adventure in the nature of trade.
a) Frequency of transactions
[21]
I agree that there is
no magic formula, no bright line test, that if you engage in say over 50
transactions it must be an adventure. At one end of the spectrum is the
purchase of one stock, held for some lengthy period of time: at the other end
of the spectrum is the purchase and sale of dozens of stock on a daily basis
throughout the year, with few if any held for any considerable period of time.
Where does Mr. Mittal fit along that spectrum vis-à-vis the frequency of
transactions? I conclude that he resembles far more the day-trader with his
160 trades scattered throughout the year, than someone simply making the
occasional isolated transaction. The Respondent argues that only 60 days of
actual trading, with an average of only approximately three trades a week is
not enough to justify the "adventure" status. So , is 100 days of
trading with an average of five trades a week enough? As already indicated, the
test cannot be reduced to such a mathematical formula. I find Mr. Mittal’s
number of trades and number of days trading is evidence of someone engaged in
an adventure. This factor alone however is not determinative.
b) and c) Duration of holdings and
intention to acquire for a profit
[22]
From a review of Mr.
Mittal’s trades, it is clear the vast majority were short‑term holds.
Yes, there were some stocks sold in 2006 or 2007, acquired in 2005 or earlier,
but not many (approximately 7) compared to the overall number of trades. This
reflects an intention on Mr. Mittal’s part to earn a profit on resale.
Regrettably for Mr. Mittal, he does not appear to have played the market as
effectively as he would have liked, but I have no doubt that is what he was
doing - playing the market.
[23]
Mr. Mittal’s intention
in this regard was confirmed by his evidence that upon retirement, trading
would be his only business. The Respondent interpreted this evidence as
suggesting the market was Mr. Mittal’s retirement fund, that is, invest now to
yield gains in retirement. That is not how I interpreted Mr. Mittal’s evidence.
It was not his intention to invest now to reap gains in retirement. It was his
intention to be a good enough trader to earn ongoing profits from trading
activity, something that in retirement he could devote all, not just part, of
his time towards.
[24]
I find this factor
points decisively to someone engaged in an adventure, if not indeed to an
actual trader.
d) Nature and quantity of
securities
[25]
Certainly there were
some blue chip stocks acquired by Mr. Mittal, but this fact is overshadowed by
the quick sale of most of these stocks. They do not appear to have been
acquired for the long-term. I find that Mr. Mittal had a rather diversified
portfolio. He did not limit himself to simply a handful of bank stocks for
example. He only had the one bond and four mutual funds, somewhat safer bets,
investing the greatest amounts in publicly traded shares. The Respondent argues
that Mr. Mittal was not venturing in high risk stock. I agree the majority,
though not all, of his stock investments were blue chip, but I do not find this
factor alone is a clear indication that Mr. Mittal was not engaged in an
adventure. I view this factor as neutral.
[26]
With respect to risk,
the Respondent argued that Mr. Mittal was not highly leveraged, relying
primarily on his own funds. Yes, however, he did borrow from his family and did
use a line of credit and margin account, though sparingly. I see this financing
arrangement as a neutral factor.
e) Time spent on activity
[27]
Mr. Mittal’s
uncontradicted evidence was that he put in approximately 25 hours per week
on his trading activity, if all his research and study time was included. Mr.
Mittal clearly attempted to become as steeped in the market as time permitted,
not only on his own behalf but also for members of his family. This was not the
occasional call or check the newspaper’s listings, this was a daily devotion to
following the market, studying the market and, as I have already characterized
it, playing the market. It is a classic example of an adventure in the nature
of trade.
[28]
While I have referred
primarily to 2006, my view is the same for 2007. Yes, there were less trades,
less activity, but most of that activity was in the first few months of the
year. I accept Mr. Mittal’s testimony that his research led him to proceed with
caution in the latter half of 2007. It would make little sense to view his
activity in 2007 to be any less of an adventure than it was in 2006.
[29]
The Appeals for 2006
and 2007 are allowed and referred back to the Minister for reconsideration and
reassessment on the basis that the losses incurred by Mr. Mittal in 2006 and
2007 are business losses. Costs to the Appellant.
Signed at Ottawa, Canada, this 28th day of November 2012.
"Campbell J. Miller"
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