McGroarty v. the Queen, 94 DTC 6276, [1994] 2 CTC 52 (FCTD)

Wetston J.:—This is an appeal in the form of an action pursuant to subsections 172(2) and 175(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act’’), brought by the taxpayer Ross J. McGroarty after being notified that the notices of reassessment by the Minister of National Revenue tor the taxation years 1978, 1979, 1980, 1981, 1982 had been confirmed by the Tax Court of Canada ([1989] 1 C.T.C. 2280, 89 D.T.C. 185).

Although the plaintiff’s notice of appeal referred to only the 1978 taxation year, it was agreed that the issues, apart from the dollar amount of the gains involved, were the same for each of the five taxation years. Consequently, these appeals were heard together as a joint application.

The issue in this case is whether the gains made on the dispositions of the shares in BX Development Limited ("BX") in 1978, 1979, 1980 and part of 1981 and in Brent Petroleum Industries Ltd. ("Brent") in 1981 and 1982 gave rise to capital gains or were income from business. For ease of reference, the shares will be described as BX/Brent.

The plaintiff treated gains from the disposition of shares in BX/Brent as capital gains. On the other hand, the Minister of National Revenue, by notice of reassessment classified the gains as income from business. The Minister’s position was upheld by the Tax Court of Canada.

The plaintiff became a licensed stockbroker in 1965. He subsequently worked as a stockbroker with Gardner and Company for about eight years. From 1972 to 1976, he was employed by the investment house of A.E. Osler and Co., where he worked as a stockbroker and registered representative. In 1978, the plaintiff left the stock brokerage industry.

In 1978, the plaintiff worked for Wall Street Financial Corp. The company provided financial public relations services to a number of companies including BX. His duties included the communication of BX corporate information to investors, shareholders, non-registered shareholders, and other potential investors.

The plaintiff was unemployed in 1979, having left Wall Street Financial Corp. He did not provide any services either directly or indirectly to BX as he disagreed with a decision of BX management to reject two takeover bids without providing shareholders the opportunity to vote.

Around 1980, he began working as a communications officer for BX. His duties were essentially the same as those performed for Wall Street Financial Corp. In 1981, BX amalgamated with Brent and the plaintiff continued in the same capacity for Brent.

Mr. McGroarty had also been the Chief Executive Officer and President of Century Energy Co. (formerly Northville Exploration Inc.) and a promoter as defined by the Securities Act. He owned a substantial number of shares in that company. In June 1981, Century Energy Co. committed approximately $500,000 to three projects in which BX was engaged. He received a commission of $10,000 in 1982 with respect to this private placement.

The parties agreed, that during the five years in question, the plaintiff was never a director or corporate officer of BX or Brent or any of their subsidiaries. The companies were public, involved in the resource industry, and traded on the Vancouver Stock Exchange. During those years, the plaintiff was the beneficial owner of publicly traded shares in various Canadian corporations including BX and Brent.

The plaintiff began acquiring stock in BX in 1975. His explanation as to why he acquired shares in BX is as follows (transcript, page 23):

I acquired shares in BX/Brent resulting from a public press release that was brought to my attention by a fellow stock broker and that press release indicated the company, the management of the company was in negotiation for a limestone plant in Douglas, Arizona which serviced and supplied limestone product to major mining companies in the southern parts of the United States. Major mining companies, most of which were listed on the New York board and the company product was used as a flux in the purification of copper and enjoyed a longstanding production record going back to some, I think it was 1917 or 1918 which was owned by a family. It was privately owned and it was indicated and subsequently proven that it had been profitable during all of those years. In addition to supplying the limestone product to the mining industry there were inroads being made in terms of water purification as far reaching as the State of California, keeping in mind that this location was in southern Arizona. So the growth potential appeared bright and history certainly was extremely stable. So based on the company's announcement that it was negotiating and researching the company and initially I researched it by requesting from the regulatory bodies; actually it was the Vancouver Stock Exchange, a filing statement. It was a filing statement of material facts and determined my initial investment in the company.

The plaintiff used his savings to purchase shares in BX. Subsequently, he financed the purchase of stock through a mortgage on his home. He later financed the acquisition of additional stock through a second mortgage on his home. He also borrowed money and used his shares as security. Finally, the plaintiff acquired stock through margin accounts in the brokerage industry.

During 1978 to 1982, the shares in BX and Brent comprised substantially all of the plaintiff's assets. He also had his home and notes relating to two loans. The loans were to Greg Graphics (a company owned by the plaintiff's brother) and Century Energy. The plaintiff borrowed money on his margin accounts in order to make these loans.

During the five years in issue, the plaintiff received no dividends from either the BX or Brent shares. Further, he admitted that the volume of shares acquired and sold was substantial and resulted in net gains. The chart below indicates the volume of shares purchased and sold:

The plaintiff asserted that during 1978-1982, he was forced to sell shares because of margin calls, financial assistance given to his brother and the rise in interest rates. The plaintiff also testified that more sales occurred for price consideration than because of margin calls.

The plaintiff testified further that his activities in dealing with the stock of BX and Brent were quite extensive and involved a quick share turnover. In this respect, the Minister’s finding in paragraph 4(f) of the reply to notice of appeal for each of the five years were un controverted. Paragraph 4(f) reads as follows:

4. In reassessing the appellant as hereinbefore admitted or pleaded, the respondent relied upon the following findings or assumptions of fact:

(f) the number of days during which the appellant carried out trades in BX/Brent shares, and the number of such days expressed as a percentage of available trading days, in the 1978 to 1982 taxation years are as follows:

		Table 2
Year	No. of Days	No. of Available	Percentage of Available
	Traded	Trading Days	Trading Days
1978	119	251	47.41%
1979	88	251	35.06%
1980	80	251	31.87%
1981	37	251	14.74%
1982	52	251	20.72%

Finally, the plaintiff agreed that he spent a considerable amount of time tracking market activities and making decisions about buying and selling the stock. He spoke on a regular basis with one principal broker and dealt with approximately 15 others.

The characterization of earnings as income or capital gains is a question of fact and must be assessed with regard to all the circumstances of the particular case: Mcintosh v. M.N.R., [1958] S.C.R. 119, [1958] C.T.C. 18, 58 D.T.C. 1021. In this regard, the statements of Urie, J. in Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473, 73 D.T.C. 5391 (F.C.T.D.), at pages 482-83 (D.T.C. 5398) are instructive:

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 Irrigation Industries v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, 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 for 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 Ltd. v. M.N.R. [1967] C.T.C. 165, 67 D.T.C. 5114, at page 175 (D.T.C. 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 C.I.R. v. Livingston, 11 T.C. 538, al page 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 that sense of that term that it was an underwriter and held a seat on a stock exchange, but rather made its purchases 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.

The plaintiff submits that his conduct with respect to the purchase and sale of the shares of BX/Brent was not that of a trader or speculator, nor were the dispositions of those shares an adventure in the nature of trade. He relied on the Supreme Court of Canada decision of Irrigation Industries Ltd. v. M.N.R., supra, in which it was held that a substantial profit made by the appellant on the sale of treasury shares, bought only a few months earlier from a mining corporation, was a Capital gain and not business income. It should be noted, however, that case involved an isolated transaction; as Martland, J. stated at page 349 (C.T.C. 217-18, D.T.C. 1132):

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 plaintiff testified that he accumulated a significant volume of shares in BX/ Brent. However, he asserts his actions were motivated by his assessment of the companies’ earnings and potential for growth. Further, he submits that although he frequently turned over the shares, his actions were as a result of his lack of liquidity: family commitments, loans and his tenuous margin position. The plaintiff asserts his intention was to maintain a position in the BX/Brent shares so as to take advantage of their growth potential. This Court, however, has held in a number of cases that the direct evidence of the taxpayer’s intention regarding the transaction or series of transactions is not determinative of the existence of that stated intention: Gairdner Securities Ltd. v. M.N.R., [1952] C.T.C. 371, 52 D.T.C. 1171 (Ex. Ct.) and Racine, Demers & Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.). Generally speaking, the person's intention is to be ascertained from his whole course of conduct.

In the instant case, the plaintiff engaged in a large number of transactions involving a rapid turnover of shares. As demonstrated by the Table 1, page 54, there were more than 300 different purchases of shares over this five-year period involving more than 300,000 shares. An even greater number of shares were sold during the same period. Further, the plaintiff testified that more sales occurred as a result of price considerations, than to meet margin calls. As Pinard, J. stated in Placements Bourget Inc. v. The Queen, [1988] 2 C.T.C. 8, 88 D.T.C. 6274 (F.C.T.D), at page 13 (D.T.C. 6278):

In the case at bar the plaintiff, as part of its principal activity, engaged in several hundred transactions to make a quick profit from the purchase and sale of shares. In the circumstances it does not matter that the plaintiff was not itself a trader in securities; it was still engaged in business of securities trading and the profit from the resulting dealings is truly business income.

While a person is not a trader merely because he or she does not intend to hold shares indefinitely (Irrigation Industries, supra, at page 350 (C.T.C. 218, D.T.C. 1133) the plaintiff's history of buying and selling a sizeable number of BX/Brent shares in order to make a profit points toward share trading.

In addition, the plaintiff’s background and experience were consistent with that of a trader in securities. He worked as a licensed stockbroker for approximately 13 years and gained considerable expertise in the securities market. Although he was not an insider for Securities Act purposes, his position as a communications officer provided him with considerable knowledge about the activities of BX and Brent.

His activities relating to the sale and purchase of the shares also indicate he was trading in the shares. His share purchases were highly leveraged. He financed his initial purchase of stock through his savings and a mortgage on his home. He later took out a second mortgage and relied heavily on margin financing in order to acquire additional stock. The extent of the plaintiff's borrowing and the methods of financing used were consistent with the activities of a trader in shares. The plaintiff's evidence also indicates he spent a considerable amount of time each week in activities relating to the purchase and sale of the shares.

Finally, the nature of the BX/Brent shares persuades me that the purchases were not for investment but for dealing in shares as a trader. The shares were resource company shares and did not provide dividends during the relevant period. It is clear that the numerous share purchases were not to earn income in the form of dividends, but to earn income by selling the shares. It was urged by the plaintiff that a trader would not deal in only one stock. On the other hand, the Court notes that an investor might diversify to diffuse risk. I suspect there is some merit to both of these arguments, but neither is determinative.

In conclusion, upon review of all the evidence and after considering the high volume of transactions, the relatively quick turnover of shares, the taxpayer's background and experience, the considerable amount of time spent buying and selling shares, and his heavily financed purchases of non-income producing shares, I find the ains realized on the disposition of the shares to be income from business. For all these reasons, the action is dismissed with costs.

Appeal dismissed.

Gary and Joan Montgomery v. Minister of National Revenue

[Indexed as: Montgomery (G.) v. Canada]

Federal Court—Trial Division (Pinard, J.), May 2, 1994 (Court File No. T-2818-93), on an application for judicial review of the denial by the Minister of National Revenue of the applicant's request for waiver of interest.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

The taxpayers applied to the Minister, on October 29, 1993 for a waiver of interest on the assessment of tax in respect of the 1984 taxation year pursuant to subsection 220(3.1). The Minister denied the request on the basis that it was beyond his power for assessments arising in respect of taxation years before 1985. The applicants sought a writ of certiorari to set aside the Minister’s denial and an order that the Minister’s power related to interest arising in 1985 and subsequent taxation years rather than just assessments for those years.

HELD:

A proper interpretation of the provision confined the Minister’s power to waive interest and penalties to assessments in respect of 1985 and subsequent years. Application dismissed.

Werner Heinrich for the applicants.

Ingeborg Lloyd for the respondent.

Cases referred to:

British Columbia Telephone Co. v. Canada, [1992] 1 C.T.C. 26, 92 D.T.C. 6129;

Johns-Manville Inc. v. Canada, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373.

Pinard, J.:—This is an application for judicial review of the decision of the Minister of National Revenue denying the applicants’ request pursuant to subsection 220(3.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, C. 63) (the "Act") for the waiver of interest. The applicants specifically request:

(a) a writ of certiorari, to quash and/or set aside the Minister’s decision: and

(b) an order that the Minister review the applicants’ request for a waiver of interest on the basis that subsection 220(3.1) of the Act is applicable in respect of interest accruing and payable in the 1985 and subsequent taxation years.

The facts are simple and are undisputed. By letter dated October 29, 1993, the applicants’ counsel applied on their behalf to the respondent pursuant to subsection 220(3.1) of the Act for the waiver of interest arising in respect of an assessment of tax issued in respect of their 1984 taxation year. By letter dated November 9, 1993, the respondent denied the applicants’ request on the ground that interest arising on a debt originating from an assessment with respect to the 1984 taxation year cannot be waived pursuant to subsection 220(3.1).

The issue to be decided in this application is whether the respondent correctly interpreted subsection 220(3.1) when he decided that it applied only to interest and penalties arising from assessments of tax for the 1985 and subsequent taxation years.

By virtue of subsections 161(1) and 248(11) of the Act, a taxpayer is liable to pay interest on amounts of unpaid taxes payable for a taxation year, such interests to be computed on the basis of the period during which such amounts are outstanding. The interest is to be compounded daily at the rate prescribed by the Act. Such liability for interest in respect of outstanding tax arrears accrues over time on a daily basis until either the total liability for tax and interest is extinguished by repayment of the debt or alternatively by way of waiver through the exercise of the Minister's discretion under subsection 220(3.1).

Prior to the introduction of subsection 220(3.1) into the Act, neither the Minister nor the courts had the authority to cancel or waive interest or penalties payable under the Act. The provision now reads as follows:

220(3.1) Waiver of penalty or interest. — The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by a taxpayer or partnership and, notwithstanding subsections 152(4) to (5), such assessment of the interest and penalties payable by the taxpayer or partnership shall be made as is necessary to take into account the cancellation of the penalty or interest.

The subsection contains no limitation as to over what period the discretion given to the Minister can be exercised. That restriction is now contained in subsection 127(5) of S.C. 1993, c. 24, An Act to Amend the Income Tax Act (the “Amending Act"). That subsection provides that subsection 127(2) (i.e., subsection 220(3.1) above) “applies to the 1985 and subsequent taxation years”. Subsection 127(5) reads:

127(5) Subsection (2) applies to the 1985 and subsequent taxation years.

The interpretation of a statute requires the consideration of four distinct elements, namely the words themselves, their immediate context, the purpose of the statute as manifested throughout the legislation, and extrinsic evidence of parliamentary intent to the extent admissible. Greater weight is to be given to clear words supported by their immediate context than to larger assertions of parliamentary intention (see British Columbia Telephone Co. v. Canada, [1992] 1 C.T.C. 26, 92 D.T.C. 6129 at page 31 (D.T.C. 6132) (F.C.A.); and E.A. Driedger, Construction of Statutes, 2d ed (Toronto: Butterworths, 1983) at page 87).

While the parties are in agreement with respect to these modern principles of statutory interpretation, they totally disagree on the effect of subsections 220(3.1) of the Act and 127(5) of the amending Act. On the one hand, the applicants submit that when read together and given their ordinary meaning, the effect of the subsections is that the Minister and taxpayers are entitled to rely on subsection 220(3.1) to cancel or waive any interest payable that arises in the 1985 and subsequent taxation years. On the other hand, the respondent contends that subsection 220(3.1) only applies to penalties and interest arising from assessments for the 1985 and subsequent taxation years.

It is well accepted that ‘‘the words themselves” should be given their ordinary meaning unless the context requires otherwise. [1] Here, subsection 127(5) of the amending Act refers to "taxation years". The words "taxation year" are defined in subsection 249(1) of the Act:

249(1) For the purpose of this Act, a “taxation year” is

(a) in the case of a corporation, a fiscal period, and

(b) in the case of an individual, a calendar year,

and when a taxation year is referred to by reference to a calendar year the reference is to the taxation year or years coinciding with, or ending in, that year.

Legal dictionaries provide the following definitions of “taxation year":

TAXATION YEAR. 1. The fiscal year in relation to which the amount of tax is being computed. 2. In the case of a corporation, a fiscal period and in the case of an individual, a calendar year.

The Dictionary of Canadian Law (Toronto: Carswell, 1991) at page 1063.

TAX YEAR. The period covered by a tax return. Individuals generally file on a calendar year while corporations, trusts, and other entities may file on a fiscal year.

Black’s Law Dictionary (St. Paul, Min.: West Publishing Co., 1990) at page 1463.

From the preceding definitions, a "taxation year” refers to a year, fiscal or calendar, for which tax is computed. Tax returns cover this period. In using the term “the 1985 and subsequent taxation years” and in French "années d'imposition 1985 et suivantes”, Parliament must be referring to periods of time for which tax returns are submitted.

I believe Parliament's intent, in subsection 127(5) of the amending Act, was to limit the Minister’s discretion to waive interest payable on those returns filed for the 1985 taxation year, and for subsequent taxation years.

Whereas tax returns are filed once a year, every year, interest, on the other hand, is compounded daily. There would have been no need to include "taxation year" or "subsequent taxation year”, if the cutoff point were to be determined by reference to the accruing of interest and not the year for which a return was filed. Instead, the legislature would have limited subsection (2) to "applies after January 1, 1985” or perhaps more specifically to “applies to interest accrued after January 1, 1985". Alternatively, if Parliament had intended to refer to interest payable in a specific period of time, namely a taxation year, it could have used, as it did in S.C. 1991, c. 49, the following wording:

180(2) Subsection (1) is applicable with respect to interest and penalties paid in the 1988 and subsequent taxation years.

[Emphasis added.]

While the provision could have been drafted more clearly, the language is not “ambiguous”. The conclusion that “the 1985 and subsequent taxation years" refers to years for which tax returns are filed is a reasonable one, given a plain language, dictionary definition of the term “taxation year”. For the above reasons, the same cannot be said for the applicants’ contention that “taxation year" refers to the time during which interest accumulates. Therefore, in the case at bar, there is not enough “reasonable uncertainty” or “factual ambiguity resulting from lack of explicitness" to decide in favour of the taxpayers (see Johns-Manville Inc. v. Canada, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85 D.T.C. 5373).

The legislative history of this provision is also instructive. In 1991, c. 49, in section 181(1) read:

220(3.1) The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by a taxpayer or a partnership.

Subsection 5 of section 181 read:

181(5) Subsection 220(3.1) of the said Act, as enacted by subsection (2), is applicable with respect to penalties and interest in respect of the 1985 and subsequent taxation years.

This was changed by section 127 of 1993, c. 24:

127(2) Subsection 220(3.1) of the said Act is repealed and the following substituted therefor:

220(3.1) The Minister may at any time waive or cancel all or any portion of any penalty or interest otherwise payable under this Act by a taxpayer or partnership and, notwithstanding subsections 152(4) to (5), such assessment of the interest and penalties payable by the taxpayer or partnership shall be made as is necessary to take into account the cancellation of the penalty or interest.

(5) Subsection (2) applies to the 1985 and subsequent taxation years.

The main changes that c. 24 seems to effect are to incorporate notwithstanding references to subsections 152(4) to 152(5). Subsection 127(5) simplifies the language in the original c. 49, at the expense of clarity. But there is no indication that Parliament’s intention has changed since the very clear wording in c. 49, which favours the Minister's position.

For all those reasons, I find that the respondent's interpretation of subsection 220(3.1) is correct in that this subsection only applies to penalties and interest arising from assessments for the 1985 and subsequent taxation years.

Consequently, the application will be dismissed.

Application dismissed.