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Citation: 2004TCC244
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Date: 20040325
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Docket: 2001-3891(IT)G
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BETWEEN:
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RONALD D. SANDNES,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller J.
[1] In 1997, Mr. Ronald Sandnes
entered a number of transactions involving shares of Canoro
Resources Ltd. (Canoro). The Respondent maintains that by virtue
of his conduct and special knowledge of Canoro, Mr. Sandnes was a
trader in securities and, therefore, not entitled to capital
gains treatment nor to elect to have the Canoro securities deemed
capital property in accordance with subsection 39(4) of the
Income Tax Act (the Act). Mr. Sandnes'
position is that the circumstances do not support a finding he
was a trader, nor even that he was engaged in an adventure in the
nature of trade, but that his investment in Canoro was just that,
an investment on capital account. He filed his 1997 tax return on
that basis. On the continuum from investor to trader, I find that
Mr. Sandnes did not exhibit sufficient indices of carrying
on a business to constitute a trader. The close call is between
an investor or an adventurer and, on balance, by the manner in
which he dealt with the Canoro shares I find he was simply an
investor.
Facts
[2] Mr. Sandnes acquired a bowling
centre in Trail, British Columbia, in 1974 and has since been
operating that business. In the 1990s, Mr. Sandnes helped a
friend in Alberta with the office administration of a mining
company, referred to as Yellowjack. He also became involved with
a company known as Golden Mammoth. These companies merged in
1996 to become Canoro. Mr. Sandnes became a director of
Canoro and continued to assist on a part-time basis with office
administration and shareholder relations. He commuted back and
forth between British Columbia and Alberta, as he also continued
to run his bowling centre.
[3] In the summer of 1996, Mr. Sandnes
acquired approxiately 208,000 common shares of Canoro through a
private placement. As part of that transaction he also received
warrants to acquire additional common shares, exercisable on or
before June 4, 1997. He stated that his motive at this time was
to invest in the long term of a company he hoped would be
successful in the oil and gas industry. In 1997, he exercised his
rights under the warrants and acquired an additional 109,459
common shares at 0.37 ¢ a share. The shares were then trading
at just over $1.00 a share. Mr. Sandnes sold some shares in
Canoro to finance his exercise of the warrants. The only other
purchase of Canoro shares of significance in 1997 was the
exercise by Mr. Sandnes of an employee stock option to acquire
25,000 common shares in Canoro.
[4] Mr. Sandnes engaged in numerous
sales of his Canoro shares in 1997. In the previous year, he had
also shown a reliance on his Canoro shares as a means of meeting
his financial requirements. In 1996, there were approximately 16
sales of Canoro shares and in 1997 approximately 23 sales of
shares. The Respondent contended there was a greater number of
actual dispositions, due to the thinly traded nature of the
shares. So, for example, Mr. Sandnes, in May 1997, wished to sell
5,500 Canoro shares, but had to sell in three segments of 2,200,
3,000 and 300. I view this as one sale transaction by Mr.
Sandnes.
[5] Of the 23 sale transactions in
1997, some were made to finance the exercise of the warrants,
some were made to finance ongoing needs of the bowling centre,
some were for personal needs and some were to pay debts owing to
Canada Customs and Revenue Agency (CCRA). Mr. Sandnes indicated
he would always advise the president of Canoro that he was
selling his shares. Mr. Sandnes left Canoro in 2001 to work
full-time in Trail, B.C. at the bowling centre. In 2002, Mr.
Sandnes disposed of most of his Canoro shares.
Analysis
[6] The Respondent contends Mr.
Sandnes was a trader in Canoro securities. If he was a trader,
then he is precluded from electing to receive capital treatment
on disposition of the shares as provided by subsection 39(5) of
the Act which reads:
39(5) An election under subsection (4) does
not apply to a disposition of a Canadian security by a taxpayer
(other than a mutual fund corporation or a mutual fund trust) who
at the time of the disposition is
(a) a trader
or dealer in securities, ...
[7] The Respondent acknowledges that
if Mr. Sandnes was not a trader, but simply engaged in an
adventure in the nature of trade, then the subsection 39(4)
election would have been available to him, but that he is too
late to avail himself of it. Subsection 39(4) reads as
follows:
39(4) 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 prescribed form in
the taxpayer's return of income under this Part for that
year,
(a) every
Canadian security owned by the taxpayer in that year or any
subsequent taxation year shall be deemed to have been a capital
property owned by the taxpayer in those years; and
(b) every
disposition by the taxpayer of any such Canadian security shall
be deemed to be a disposition by the taxpayer of a capital
property.
[8] Mr. Sandnes suggests that
subsection 39(4), and consequently subsection 39(5), do not
even come into play, as the Canoro shares were an investment
clearly on capital account.
[9] Was Mr. Sandnes a trader? The
Federal Court of Appeal in The Queen v. Vancouver Art Metal
Works Limited[1] confirmed that a trader or dealer applies
to "persons who deal in merchandise who are engaged in
buying and selling, or whose business is trade or commerce".
The Court went on to state:[2]
I have no doubt that a taxpayer who makes it a profession or a
business of buying and selling securities is a trader or a dealer
in securities within the meaning of paragraph 39(5)(a) of
the Act. As Cattanach, J. stated in Palmer v. R.,
"it is a badge of trade that a person who habitually does
acts capable of producing profits is engaged in a trade or
business". It is, however, a question of fact to determine
whether one's activities amount to carrying on a trade or
business. Each case will stand on its own set of facts.
Obviously, factors such as the frequency of the transactions, the
duration of the holdings (whether, for instance, it is for a
quick profit or a long term investment), the intention to acquire
for resale at a profit, the nature and quantity of the securities
held or made the subject matter of the transaction, the time
spent on the activity, are all relevant and helpful factors in
determining whether one has embarked upon a trading or dealing
business.
...
In conclusion, a taxpayer does not necessarily lose his
election right under subsection 39(4) when he buys and sells
securities for his own account. However, he loses such right to
elect when he becomes a trader or a dealer, that is to say when
he professionally engages in the business of dealing in
securities or when his dealings amount to carrying on a business
and can no longer be characterized as investor's transactions
or mere adventures or concerns in the nature of trade.
[10] The Respondent also argues that Justice
Noël in Kane v. The Queen[3] determined the factor that
distinguishes a trader from an adventurer, where he stated:[4]
I believe that in determining the availability of the election
to one who trades in securities without being licensed or
registered, the focus should be the same, namely, does the author
of the transactions in question possess a particular or special
knowledge of the market in which he trades? To the extent that he
does, he distinguishes himself from the common risk takers who
"play the market" regularly or sporadically based on
commonly available investment advice and information. That it
seems is the guiding line which must delineate the scope of the
election contemplated by section 39(4) of the Act and the
limitation embodied in paragraph 39(5)(a).
In the case at hand, the Plaintiff had a special knowledge of
the market in which Orell shares were traded. He was one of the
directors of the corporation, its president, an insider by virtue
of his holdings and a promoter as that term is defined in the
B.C. Securities Act. But more importantly, he was directly
involved in the mining ventures of Orell and in organizing its
public financing offerings. As such he was in a position to
anticipate market reaction to Orell's ongoing activities.
That is the context in which the Plaintiff bought and sold Orell
shares. His trading activities were not only stamped with the
usual badges of trade which characterize the dealings of common
risk takers, but they were conducted by reference to, and were
driven by, the special knowledge which the Plaintiff had of the
market in which the Orell shares were traded. Those in my view
are the activities of a trader or dealer in securities as that
term is used in subsection 39(5) of the Act.
[11] To find Mr. Sandnes a trader,
therefore, requires a finding that his course of conduct in
respect of the Canoro shares amounted to carrying on a business
of buying and selling securities of which he had a particular or
special knowledge. The course of conduct is to be viewed in light
of his intention, frequency of transactions, duration of his
holdings, nature and quantity of securities, time spent and the
particular knowledge he possessed.
Intention
[12] Mr. Sandnes' stated intention was
to hold the Canoro shares as a long-term investment. Indeed, of
just over 300,000 Canoro shares held in 1997, he continued to
hold 230,000 after 1997, and ultimately disposed of most of his
shares in 2002. It was also clear, however, that in 1996 and 1997
he used his Canoro stock holdings as a bank account. When he
needed money, for whatever reason, he turned to his Canoro
shares. He engaged in this modus operandi soon after
acquiring the bulk of the shares in 1996. His intent at this
time, that is, upon the acquisition of the shares in 1996, was
twofold: one, for long-term gain, and two, for a source of
immediate and accessible funding (his "banking
objective"). A trader has only one objective, to make profit
from a scheme of trading. Even if I was to characterize Mr.
Sandnes' banking objective as akin to a trader's
objective of profiting on quick resales, the fact that Mr.
Sandnes had an equal long-term investment objective, removes him
in that respect from the category of a trader. It is difficult in
Mr. Sandnes' case to conclude that one objective was
predominant and somehow trumps the other. His behaviour supports
a finding that the two objectives could be weighed equally. This
is important, as I do not believe a trader can deny
classification as such by relying on some remote, clearly
subordinate intention of long-term investment. But that is not
the case here. The existence of a "capital" intention,
equal or greater than a profit-seeking intention, is sufficient
to discriminate the investor or adventurer from the trader.
[13] This conclusion was premised on Mr.
Sandnes' banking objective being the same as the
profit-making intention. There is a difference, however, which
further distinguishes Mr. Sandnes from the trader. The trader
attempts to maximize profit at the earliest opportunity.
Presumably, this would entail a close scrutiny of the market to
ensure purchases and sales at optimal moments. There is no
evidence that Mr. Sandnes paid any attention on a regular basis
to how the Canoro stock was faring, prior to entering his many
sales transactions. His sales were driven entirely by financial
need. If his bowling centre needed a new vehicle, he looked to
sell some stock; if CCRA required a payment, he looked to sell
some stock; and if he needed cash to exercise warrants, he looked
to sell some stock. This is not the picture of a trader motivated
by profit, but of an individual motivated by need, cashing in on
his investment.
[14] The Respondent relied upon the comments
of Justice Lemieux in Arcorp Investments Ltd. v. The Queen[5] for
support of the notion that a need for cash does not necessarily
negate an intention of quick profits. Justice Lemieux
indicated:[6]
[22] Mr. Hodgkinson's
explanations do not satisfy me that the dominant purpose of the
Arcorp transactions during 1984 and 1985 was not to earn profits
from transacting in the securities themselves rather than looking
to these securities as long-term investments from which interest
and dividends would be forthcoming. Indeed, his desperate need
for cash explains why Arcorp, of which he was the sole directing
mind, would look to frequent buying and selling of securities for
profit and therefore for income purposes. Moreover, Mr.
Hodgkinson's testimony does not explain why, in those years,
Arcorp was frequently purchasing and not only liquidating to meet
the cash needs of its sole shareholder.
[15] Arcorp is however
distinguishable. Arcorp was an investment management
company - that was its very business. Its sole shareholder was a
commission security salesman. The Court reviewed
Arcorp's securities transactions to determine if they
had the badges or characteristics of ordinary trading in
securities. It found that in one year all of Arcorp's
assets were in marketable securities. It bought and sold about
1.6 million shares in 32 resource companies and over 460
transactions. It held the securities briefly. Under those
circumstances it is understandable that a plaintive cry that
securities were sold to meet financial needs did not alter a
clear trading intention to some different intention. In Mr.
Sandnes' situation, there was no change in intention. He
simply looked to cash in his investment in Canoro as needs
demanded, hopeful that the bulk of shares would be held for the
long term.
[16] The Respondent also raised McGroarty
v. The Queen[7] in the same context. But again, that was a
case of someone with a background consistent with that of a
trader in securities, whose purchases were highly leveraged and
whose transactions were substantial. Mr. Sandnes is simply not in
the same category.
[17] I conclude that intention is not a
factor that taints Mr. Sandnes as a trader.
Frequency of transactions
[18] In 1997, there were only two purchases
of significance: one for approximately 109,000 Canoro shares on
the exercise of warrants; the other the exercise of a 25,000
share-employee stock option. The Respondent alleges that this
illustrates a level of "trading". I do not see it that
way. The exercise of an employee stock option is in no way
evidence of carrying on business as a trader, and is just not a
factor in this determination. It arises solely in the context of
an employee, not a trader.
[19] The exercise of warrants, at a time
when the company's shares were trading at triple the warrant
exercise price, was relied upon by the Respondent as evidence of
Mr. Sandnes' intention to take advantage of the market as
part of some profit-making scheme. This puts an emphasis on this
transaction as some sort of stand-alone trade, which is not
justified. The warrants were part of Mr. Sandnes' 1996
acquisition of shares through a private placement. It was not a
separate acquisition as such. And, who would not exercise
warrants under such circumstances. This was not a matter of
special knowledge. The warrants had to be exercised by June 4,
1997, and Mr. Sandnes did so at the end of May 1997. He
would have been extremely foolish not to have done so. So, in
determining frequency of transactions, I discount reliance on
these two purchases as proving any trading activity.
[20] What is left in 1997 is approximately
23 sales of Canoro stock. The trader, by definition, is one
carrying on the business of buying and selling. In 1997 at
least, Mr. Sandnes was effectively only engaged in selling. The
buying, as indicated, relates primarily to the one major private
placement acquisition in 1996. While the private placement was
not an isolated transaction, it was the major acquisition of
Canoro shares. There appear to have been some minor acquisitions
in the predecessor corporations and two purchases in 1996 of
approximately 30,000 shares each. With respect to the sales in
1997 of approximately 117,000 Canoro shares, approximately 60,000
shares were sold to provide Mr. Sandnes with sufficient funds to
exercise his warrants and option to acquire 134,000 more shares,
effectively cashing in some of his investment so he could carry
on with that same investment. Mr. Sandnes increased his holdings
in 1997 from approximately 220,000 shares to 232,000 shares.
[21] There remain a number of sales in 1997
to finance Mr. Sandnes' other requirements. The Respondent
argues that these 20 or so remaining sales are of such frequency
that indicate the business of trading. I disagree. Under the
circumstances, that number of sales might support an adventure,
something other than a long-term holding, but such frequency of
sales in and of themselves, with no other badges of trade, are
not determinative of trading.
Duration of holdings
[22] The majority of Mr. Sandnes'
holding of Canoro shares was for a number of years, not months.
From the time of his private placement acquisition in 1996, a
significant number however were sold on an ongoing basis over the
next couple of years. This short-term holding is, at first blush,
indicative of trade, but more compatible, I would suggest, with
either an adventure in the nature of trade or simply cashing in
on one's investment.
Nature and Quantity of Securities
[23] The securities were all in Canoro, the
company for whom Mr. Sandnes worked on a part-time basis. He held
less than 5% of the issued stock of the company. Although there
is no principle to suggest someone cannot be a trader in just one
stock, it does stretch considerably the concept of "carrying
on a business", if the one stock is only thinly traded.
Again, this is more supportive of an adventure - something that
looks like trade or simply an investment.
Time Spent
[24] Mr. Sandnes' time was spent on
running a bowling centre in British Columbia, with only a couple
of months off in the summer, and on helping out at Canoro in its
office and with shareholder relations. There was little time
spent on his share sales, apart from calls to his broker and
advising the president of the company. Mr. Sandnes had no
background or training in the financial markets, and it was
evident that he spent no time studying the market to determine
when to sell. The time spent does not support a finding of trader
or even someone engaged in an adventure.
Special knowledge
[25] Mr. Sandnes did work part-time at
Canoro, but that is not tantamount to a special knowledge of the
company, such that he could anticipate market reaction. That was
a key element in Justice Noël's comments in Kane.
The Appellant in that case was not only directly involved as
president of the company's mining ventures, but also
organized its public financing offerings. There is no evidence
that what little knowledge Mr. Sandnes might have had about the
business in any way contributed to his success in the financial
market, let alone had any influence on that market. Mr. Sandnes
was an employee who obtained shares through stock options, and in
the first few months of the company's merged existence,
invested through a private placement. I fail to see any special
knowledge such that would move him into the trader category.
[26] It is important to step back from the
individual assessment of each of the above factors and view Mr.
Sandnes' conduct as a whole. His conduct was that of a
part-time employee acquiring shares in a new public company for
investment purposes and for a source of funding. The frequent
cashing in of part of his investment did not constitute carrying
on a business of buying and selling securities. It was his plan
from the outset to use some of his Canoro investment for funding
purposes. Though not trading as such, the many sales might look
like adventures, yet adventures in the nature of trade require a
greater degree of buying and selling than what I observe in this
case.
[27] The correct result in this case is that
Mr. Sandnes is not subjected to income treatment on the
disposition of his shares in 1997. My analysis tips the balance
between a finding of capital and a finding of adventure in the
nature of trade to a finding of capital. The overall impression
of Mr. Sandnes' activities is of an investor regularly
cashing in an investment rather than an adventurer in the nature
of trade.
[28] Finally, I wish to comment on
post-trial written submissions from the parties. Initially having
gone through the analysis, I found it was a close call, not
between a trader and an adventurer, for I am convinced Mr.
Sandnes was not a trader, but between income from an adventure in
the nature of trade and capital gain from the disposition of the
securities, a capital property. There was no doubt as to the
consequences if I found that the dispositions were on capital
account, but at trial the parties did not argue in depth the
consequences if I found an adventure in the nature of trade. I
did not want to resolve Mr. Sandnes' appeal without fully
appreciating and weighing the practical ramifications of the
adventure alternative. I therefore asked counsel to provide
written submissions as to the impact of a judgment finding Mr.
Sandnes was engaged in an adventure. Specifically, I needed the
parties to address the practical issue of whether
Mr. Sandnes could file an amended return containing the
appropriate election. This opened a hornet's nest of
conflicting views, not the least of which was the question of
whether there exists a concept of "honest mistake",
upon which Mr. Sandnes might rely to file a late election.
This concept was portrayed by Justice Robertson in Nassau
Walnut Investments Inc. v. R.,[8] as being in the womb
stage. Does this Court have jurisdiction to order the Respondent
to accept an amended return, not yet filed? Can this Court deem
there to have been an election, though not in a prescribed form?
Is there a right of a taxpayer to even file an amended return?
(In this respect see Justice Archambault's comments in
Lussier v. The Queen.)[9] The submissions of counsel made it
clear that a finding of an adventure in the nature of trade would
lead to no agreement as to the consequences which should flow
from such a determination, but only to uncertainty and a myriad
of complex issues of law, jurisdiction and fairness. Having
concluded that Mr. Sandnes' dispositions ought not to be
taxed as income, and that a finding of an adventure would create
some uncertainty in that regard, I resolved the balance is
rightfully tipped to a capital disposition.
[29] The appeal is allowed and the matter is
referred back to the Minister for reconsideration and
reassessment on the basis that the disposition by Mr. Sandnes of
the Canoro shares in 1997 was on capital account. Costs to the
Appellant.
Signed at Ottawa, Canada, this 25th day of March, 2004.
Miller J.
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