Placements Bourget Inc. v. The Queen, 88 DTC 6274, [1988] 2 CTC 8, [1988] 1 CTC 35, [1987] DTC 5427 (FCTD)

Pinard, J. [Translation]:—This is an appeal in the form of an action pursuant to subsections 172(2) and 175(3) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended, brought by the taxpayer Placements Bourget Inc. after being notified that the notices of reassessment by the Minister of National Revenue for the taxation years 1978, 1979, 1980 and 1981 had been confirmed.

In its fiscal years ending on April 30, 1978 and October 31, 1979, 1980 and 1981, the plaintiff disposed of certain shares in its portfolio and made profits of $6,080.94, $426,351.98, $1,036,811.71 and $269,933 respectively. In its tax returns for the taxation years 1978 to 1981 inclusive, the plaintiff treated these profits as capital gains; it further claimed to be able to deduct the capital losses of $26,811.75 from the sale of bonds in 1980 and $12,500 from a loan made by it in 1980, together with a capital loss of $10,056 from the sale of bonds in 1981. The Minister of National Revenue, on the other hand, regarded the foregoing profit made by the plaintiff on the sale of its portfolio shares as business income and not a capital gain; the Minister also considered that the foregoing capital losses of the plaintiff could not be deducted from its income in view of paragraph 3(e) of the Income Tax Act.

Essentially, therefore, the Court must consider whether at the relevant time the plaintiff was a securities trader and/or whether the profit made by the plaintiff on the sale of its portfolio shares was a capital gain or business income in view of sections 3, 9, 39 and subsection 248(1) of the Act.

It is recognized that the question is one of fact; further, the plaintiff has the burden of showing that the Minister erred in confirming the notices of reassessment in question, in regarding it as a securities trader and in treating the profit made on the sale of its portfolio shares as business income.

At the hearing counsel for the parties admitted that the period from May 1 to October 31, 1978 was not in issue and they agreed to the filing by the plaintiff of accounting analysis tables for the profits on its sale of shares (P-1 to P-5 incl.). They further agreed to the joint filing of documents (D-1) by the defendant consisting of income tax returns, financial statements, notices of reassessment and a notification of confirmation of these notices by the Minister of National Revenue, all relating to the plaintiff. Finally, they agreed to the filing of a document by a Revenue Canada auditor analysing the plaintiff's securities transactions from May 1,1977 to October 31, 1981 (D-2), and to the filing by the defendant of a table showing the plaintiff's sources of financing (D-5).

By letters patent dated October 31, 1978 the Quebec Ministre des Consommateurs, coopératives et institutions financières confirmed the agreement merging into a single corporation known as Placements Bourget Inc. the companies Immeubles Bourget Inc. and Placements Bourget Inc. This merger took place shortly after Mr. Jean Langelier, the plaintiff's president and general manager, retired on April 10, 1977 at age 65. At the time in question and at the time of the hearing, Jean Langelier held a majority of the shares and absolute control of the plaintiff. During the taxation years at issue the other shareholders in the plaintiff were Mr. Langelier’s wife and two children.

In the 20 years before he retired, Jean Langelier was president and general manager of the Hôpital Bourget at Pointe-aux-Trembles, which he also owned through two separate corporations, one for the hospital operation and the other for the real estate. During this period Mr. Langelier worked at the hospital five to six days a week for ten to twelve hours a day. He fell ill when he reached age 63 and decided soon after to get rid of the hospital: when he retired in April 1977 he sold both the business and the real estate for $1.2 million, $500,000 of which was paid in cash. Until that time Mr. Langelier had only made occasional cash investments to earn interest and dividend income.

On Februrary 1, 1979 (a date admitted by the parties), Mr. Langelier transferred to the plaintiff some 120,000 shares which he held personally in four different companies, for a total price of $581,684.15. In consideration of this transfer he received 20 ordinary shares from the plaintiff worth $2,000 and became the latter’s creditor for the balance of $579,684.15. Mr. Langelier accordingly transferred the great majority of the shares he had held personally for some 15 years, retaining about 20-25 per cent so as to avoid selling at a loss.

On September 26, 1975 Mr. Langelier, on behalf of Placements Bourget Inc., signed a margin agreement with the brokerage house of Lévesque Beaubien Inc. At the same time he signed a surety agreement undertaking to personally act as surety for Placements Bourget Inc. to the firm of Lévesque Beaubien Inc.

Jean Langelier explained that it was because of the inflation and the high interest rates in late 1978 and early 1979 that he decided to buy and sell shares on the stock market rather than to hold bonds. He hoped by this means both to ensure safety for his capital and to maximize returns. Accordingly, the plaintiff had at his disposal in the buying and selling of shares the liquid assets resulting from the sale of the Hôpital Bourget, the merger with Immeubles Bourget Inc., the turning over to it of Jean Langelier's personal shares and the gradual sale of his bonds. Mr. Langelier explained that he had only a general knowledge of securities, he was not a director of any companies other than the plaintiff, he was not in the habit of reading prospectuses or financial analyses and that aside from his own abilities, he relied heavily on his broker.

Mr. Charles Parent, a broker with Lévesque Beaubien Inc., confirmed that, because of the wave of inflation in late 1978, he had advised Jean Langelier to get out of bonds and to go into the stock market. He stated that the plaintiff's account was not discretionary and that he accordingly had to consult with Jean Langelier nearly every day, at 4:00 p.m. after the market had closed. He considered that Mr. Langelier had an average knowledge of the stock market.

Finally, Jean Langelier explained that the sale of the Hôpital Bourget in April 1977, the merger of his companies in 1978 and the transfer or turning over of his personal shares to the plaintiff on February 1,1979 was part of a strategy of asset concentration and estate planning.

Mr. Langelier referred to all this background in support of his contention that following his personal retirement on April 10, 1977 his company, the plaintiff, had no commercial activities, its principal activity being strictly the investment of his liquid assets in various securities in order to earn interest and dividend income.

However, the following facts duly established by the evidence tend to show instead that at the relevant time the plaintiff in fact acted as a securities trader and that the profit made on the sale of its portfolio shares constituted business income and not a capital gain.

It must first be emphasized that even the purposes of the plaintiff, as defined by the letters patent of October 31, 1978, consisted, inter alia, of ''carrying on the business of an investment company"; to this end, the letters patent stated the following:

(a) buy, receive, hold, own, sell, assign, transfer, pledge, give as security and otherwise acquire or dispose of mortgages, debentures, notes, shares and other securities, bonds, contracts and acknowledgments of indebtedness, owned by individuals, private or public companies, corporations or partnerships, states, governments, municipalities or bodies politic; collect, recover and dispose of interest, dividends and income from the foregoing property and exercise all rights, privileges and powers that such property may confer, including the voting rights associated therewith;

(b) direct, supervise and manage the affairs of companies or undertakings in which the company holds shares, bills, debentures or other securities or the property or rights of which it owns, and to this end hire and pay directors, accountants or other experts or representatives;

(c) act as agents and brokers for the investment, payment and transfer of money, for the purchase, sale, development or administration of all types of movable property, businesses and undertakings, for the administration, direction and organization of syndicates, associations, partnerships, companies or corporations; launch, manage or assist in the launching or administration of firms, companies or corporations;

(d) acquire by all means, administer and operate all types of businesses and undertakings, properties, privileges, contracts and rights which persons, films or corporations may enjoy, and which in the company's opinion may be beneficial for any considerations thought proper, and in particular for shares, bills, debentures or other securities of other companies; lease, sublease, sell or otherwise dispose of all or any part of the businesses, undertakings and property owned by the company;

(e) lend money on the security of real estate or buy or invest funds in mortgages, selling price balances or for payment of taxes with or without subrogation;

(f) employ experts to do research, make reviews and submit reports on the securities, financial situations, projects and affairs of any persons, firms or corporations, and to do research, make reviews and submit reports on the securities of all types of movable or immovable property, private or public; to do research and submit reports on the issuance of bills, debentures and other securities by persons, firms or corporations.

As we know, there is a presumption that a company’s income from activities authorized by the purposes described in its letters patent constitutes business income. In Canadian Marconi Company v. The Queen, [1986] 2 C.T.C. 465; 86 D.T.C. 6526, Wilson, J., for the Supreme Court of Canada, said at 469 (D.T.C. 6529):

The case law thus provides ample support for the existence of the presumption and, in my view, rightly so. An inference that income is from a business seems to be an eminently logical one to draw when a company derives income from a business activity in which it is expressly empowered to engage.

This presumption has certainly not been rebutted if we consider the volume of the plaintiff's transactions, the period for which it held its shares, the nature of those shares and the financing and time spent on its actitivies.

During the years at issue the plaintiff engaged in some 484 transactions, including over a hundred annually in 1979, 1980 and 1981, taking as a single daily transaction shares of the same company that were sometimes sold or bought more than once a day. Additionally, the evidence disclosed repeated sale and purchase transactions in the same share in five separate cases.

On the period for which shares were held, the painstaking analysis by the witness Gilles Maillet, a Revenue Canada auditor, disclosed the following:

(a) in 1979 92 per cent of share sales were made less than 12 months after their purchase; 46 per cent of share sales were made less than six months after their purchase;

(b) in 1980 83 per cent of share sales were made less than 12 months after their purchase; 25 per cent of share sales were made less than six months after their purchase;

(c) in 1981 51 per cent of share sales were made less than 12 months after their purchase.

The same analysis disclosed that most of the shares held for more than 12 months were shares whose prices were falling.

As to the nature of the shares, some of these were speculative securities, especially in mining and petroleum. The plaintiff bought and resold both ordinary and preferred shares. Finally, the plaintiff bought its shares and resold them as soon as it made a profit, whether they were dividend-bearing securities or not.

The plaintiff financed most of its transactions through its broker and bank. In view of the margin agreement and surety agreement signed by its president, 50 per cent of many of the plaintiff's share purchases were financed by its broker, to whom it paid interest, in addition to commissions on both purchase and resale. In view of the value of its assets the plaintiff could also borrow from the bank and buy still more shares. Accordingly, in view of its debt to its president on which it paid no interest, the plaintiff could count on total financing for share purchases in excess of $3 million in each of the years 1979, 1980 and 1981. The evidence further disclosed that during this time the interest incurred to the broker and the bank exceeded the dividends received by the plaintiff.

So far as the time spent on these transactions is concerned, the plaintiff's four shareholders who received a salary all contributed, though its president Jean Langelier was by far the most active. While the other shareholders were primarily concerned with research and compiling data, in addition to being responsible for administration when Mr. Langelier was out of the country, the latter was otherwise in almost daily contact with his broker. In telephone conversations at about 4:00 p.m. after the stock exchange had closed, the broker made his suggestions and Jean Langelier gave him his instructions. It was established that he received detailed reports monthly from the brokers Lévesque Beaubien Inc. and from the plaintiff's accountants. These reports showed the plaintiff’s position in relation to its stock exchange dealings and thus served to inform Mr. Langelier, who also read the financial pages of the newspapers each day. Armed with this information and his personal abilities, he could thus assess the suggestions of his broker whom he in any case relied on and to whom he finally gave his instructions. Mr. Langelier even stated that he had been able to make his broker accept his personal strategy of buying shares on the downturn "at a base price of one-eighth falling” and of selling on the upturn "at a base price of one- eighth rising"; Mr. Langelier said that although at the beginning his broker was somewhat hesitant, he finally adopted this strategy to the benefit of other clients.

On all these points the following observations of Urie, J. of the Federal Court of Canada in Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473 at 482; 73 D.T.C. 5391 at 5398 seem to me to be highly relevant:

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 investments 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. M.N.R., supra, at page 319 [175, 5121] succintly 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 et al., 11 T.C. 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.

Here too the plaintiff attached great importance to the Supreme Court of Canada judgment in Irrigation Industries Limited v. M.N.R., [1962] C.T.C. 215; 62 D.T.C. 1131, in which it was held that the 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 borne in mind that this other case concerned an isolated transaction; Martland, J. said the following at 217 (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.

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 securities trader; it was still engaged in the business of securities trading and the profit from the result of its dealings is truly business income.

Accordingly, in view of all the facts and circumstances that arose and that have applied since the sale of the Hôpital Bourget and the personal retire- ment of Mr. Jean Langelier in spring 1977, I conclude that the plaintiff has not succeeded in establishing the validity of its action.

For all these reasons, I must dismiss the action with costs.

Action dismissed.