REASONS
FOR JUDGMENT
Masse D.J.
Overview
[1]
The Appellant is appealing reassessments for the
2012 and 2013 taxation years. In the 2012 taxation year, the Appellant claimed
$44,959.18 as business losses carried forward from prior years. In the 2013
taxation year, the Appellant claimed $47,274.58 as non-capital losses of other
years carried forward. The Canada Revenue Agency (the “CRA”) disallowed these
claimed business losses carried forward from prior years on the grounds that
the Appellant was not operating a business and so he had no source of business
income from which to deduct business expenses and incur business losses
pursuant to sections 3 and 9 of the Income Tax Act, R.S.C., 1985, c. 1
(5th Supp.) (the “Act”). The CRA disallowed deductions for non-capital loses
carried forward from prior years on the grounds that the Appellant did not
incur non‑capital losses, as defined in subsection 111(8) of the Act in
any taxation year subsequent to 1991.
Factual Context
[2]
The Appellant is a professional electrical
engineer. He obtained his engineering degree at the University of New Brunswick
and he also obtained a master’s degree at Ohio State University. Prior to
becoming an engineer, he had a career in the military for 20 years having
attained the rank of major. He worked for Ontario Power Generation up to the
time of his retirement. After his retirement, he did some consulting work on a
self‑employed basis. He testified that he has been fully retired now for
about five years.
[3]
The Appellant began investing in securities
quite some time ago. Unfortunately, he is either a very bad or a very unlucky
investor and he has lost a great deal of money over the years. He says that
2012 and 2013 were the worst years of his life. He indicates that he did not do
any investing in those years and so he did not realize any capital gains for those
two years. It is also clear that he did not conduct any business activities during
those two years.
[4]
He testified that when he began to deal in
securities, he needed investment capital and so he borrowed from the banks at
the usual rates of interest. When his credit with the banks ran out, he began
to borrow heavily against his credit cards, which command very high interest
rates. He testified that he would get tips from different investment services
and he would act on these tips. These tips all dealt with high risk investments
and he lost money. Consequently, he decided to purchase long‑term
investments. In 1991, he began to invest heavily in a company called Central
Capital Corporation (“Central”). However, the share price of Central began to
nosedive. As the share price went down, he kept buying up more shares hoping
that the share price would turn around. However, the shares kept going down in
value and he lost more and more money. He testified that the share price of
Central dropped from $25 per share to around 5 cents a share. Central
eventually went bankrupt. As a result, the Appellant lost everything.
[5]
The Appellant states that he invested somewhere
in the neighbourhood of $260,000 in his ill‑fated investments. In the
meantime, the interest on the money he borrowed in order to invest kept
accumulating. He estimates his total losses amount to some $306,000. He
testified that he has not traded in any securities since 2005 and so he has not
incurred any capital losses or non-capital losses since 2005. He was just paying
interest on the money that he borrowed to invest.
[6]
When the Appellant filed his 2012 tax return
(Exhibit R-1), he claimed business losses of $44,959.18 (line 135). The
Appellant included in his return a financial statement. At the top of this financial
statement, the Appellant describes himself as a CRA recognized dealer in securities;
however, there is no evidence that the CRA recognized him as such. This financial
statement indicates that accrued interest characterized as “Accrued Annual Interest Carrying Charges (AAIC) on Debt
Service for Investment Loans negotiated and expressively utilized solely for
the ‘On Margin’ purchases of securities carried forward from previous trading
years” amounted to $42,716.57 and current interest amounted to $2,242.61.
The Appellant describes this total amount of $44,959.18 as “Retained Deficit Loss” as of December 31, 2012,
reported as net business losses at line 135 of his return. He testified that
these are business losses carried forward from prior years, specifically 2005.
When the Appellant filed his 2013 tax return (Exhibit R-2), he reported the sum
of $47,274.58 as non-capital losses of other years at line 252 of his return.
The Appellant essentially characterized the claimed 2012 and 2013 losses as
business losses incurred while operating the business of a dealer in
securities. He states that these business losses were incurred in 2005 and they
include carrying charges on borrowed money.
[7]
In 2005, he did not claim any gain or loss from
the disposition of securities. In 2005, he reported total income of $44,890.
This is from various pensions such as Old Age Security, Canada Pension Plan and
other pension earnings. He reported negative business earnings of $30,545.73 in
2005. Together with his 2005 return, he filed a financial statement (Exhibit
R-3) claiming a loss of $28,816.73 described as “Accrued
Annual Interest Carrying Charges on Debt Service for Investment Loans
negotiated and utilized solely for the ‘On Margin’ purchases of Securities, in
particular 20,000 shares of Central Capital Class A, Dividend bearing,
retractable Shares at an original cost of $150,130 paid to TD Waterhouse”.
He also claimed interest of $1,729 resulting in a total aforementioned loss of
$30,545.73. This was used to offset other sources of income that he had
reported in 2005. He did not report any additional losses in 2005, and he did
not report any losses from the disposition of securities in 2005. The only
expenses reported were carrying charges that he wished to carry forward as business
losses.
[8]
Exhibit R-8 is an affidavit sworn by Paul
Culliton, a litigation officer in the Toronto Centre Tax Services Office of the
CRA. This affidavit was admitted into evidence pursuant to section 244 of the
Act. This affidavit indicates that in 2002 the Appellant reported net business
losses of $42,944, which were offset against pension, dividend and interest
income resulting in total income of $29,124. In 2003, the Appellant reported
net business losses of $45,186, which were offset against pension and interest
income resulting in total income of $26,694. In 2004, the Appellant reported
net business losses of $43,137, which were offset against pension earnings
resulting in total income of $30,621. In 2005, the Appellant reported net
business losses of $30,545, which were offset against pension income resulting
in total income of $44,890. In 2006, the Appellant reported net business losses
of $30,640, which were offset against pension earnings resulting in total
income of $46,735. In other words, from 2002 through to 2005, the Appellant
claimed net business losses totalling more than $192,000. Mr. Culliton
attests that he performed a search of the records of the CRA and he was unable
to find that the Appellant requested that the Minister of National Revenue (the
“Minister”) determine the amount of a loss in the 2002 through to 2006 taxation
years pursuant to subsection 152(1.1) of the Act.
[9]
The Appellant cannot tell us when Central went
bankrupt. He has no record of the date of bankruptcy other than to tell us it
was prior to 1995. He believes that YMG Capital bought out Central some time in
1993 through to 1995, but he cannot dispute the Crown’s suggestion that the
bankruptcy occurred in 1992. The Appellant has no proof of ownership of any
successor shares. He states that the shares of Central simply expired shortly
after the bankruptcy.
[10]
The Appellant is a poor record keeper. He does
have some documents relating to the acquisition of Central shares but they are
dated prior to 2000. He had no documentation indicating when there would have
been any disposition of any securities owned by him. There are no ledgers, bank
statements, trading vouchers or any documentation that one would expect a
commercial enterprise to maintain. He has identified credit card statements
(Exhibits R-4, R-5 and R-6) to show that he was heavily indebted to credit card
companies but these statements are dated December 2001, June 2003 and October
2003. These credit card statements also include expenditures that are of a
strictly personal nature, and one of them was in relation to his wife’s credit
card account. It is clear, therefore, that the Appellant did not segregate his
personal expenditures from his supposed business expenditures. None of these
statements itemize any security purchases.
[11]
In 2012 and 2013, the Appellant did not trade in
any securities at all and so he did not report any capital gains at all in
those two years.
Issues
[12]
It is the Appellant’s position that he was
operating a business in 2005 and prior years, that of a dealer in securities.
He incurred business losses and these business losses are available to be
carried forward and can be offset against his income in his 2012 and 2013
taxation years.
[13]
It is the Respondent’s position that the
Appellant was not operating a business as a dealer in securities and, therefore,
there were no business losses incurred which were available to be carried
forward and used to offset income in his 2012 and 2013 taxation years. It is
the Respondent’s position that any losses in the nature of carrying charges
incurred by the Appellant in 2005 were personal in nature and not business
losses. As such, the Minister properly disallowed the claimed losses.
[14]
In addition, if the Appellant borrowed money to
invest, then the carrying charges can only be characterized as forming part of
the adjusted cost base of the securities. If the securities were disposed of at
a loss, then the carrying charges are subsumed as part of the net capital
losses related to the disposition of the securities. The Respondent submits
that the Appellant did not incur any net capital losses that would still be
available to be carried forward and, even if he did, then such net capital
losses can only be carried forward and set off against capital gains. There
were no capital gains in 2012 and 2013 and therefore the Minister was justified
in disallowing the claimed losses in those taxation years.
Analysis
[15]
In determining the Appellant’s tax liability for
the 2012 and 2013 taxation years, the Minister assumed the following facts:
a) the Appellant
did not carry on a business in either the 2012 or 2013 taxation years;
b) the Appellant
did not incur a business loss in either the 2012 or 2013 taxation years;
c) the Appellant
last incurred a non-capital loss prior to March 23, 2004;
d) the Appellant
did not incur a non-capital loss in the 2004 or 2005 taxation year;
e) the Appellant
has no amount of unapplied non-capital losses available to carry forward to
either the 2012 or 2013 taxation years;
f) the Appellant
has no amount of unapplied capital losses available to carry forward to either
the 2012 or 2013 taxation years;
. . .
[16]
In Hickman Motors Ltd. v. Canada, [1997]
2 S.C.R. 336, the Supreme Court of Canada outlined the principles applicable
when a person challenges the assumptions made by the Respondent. Justice L’Heureux‑Dubé
said:
92 It is trite law that in taxation the
standard of proof is the civil balance of probabilities . . . and
that within balance of probabilities, there can be varying degrees of proof
required in order to discharge the onus, depending on the subject matter . . . .
The Minister, in making assessments, proceeds on assumptions . . .
and the initial onus is on the taxpayer to “demolish” the Minister’s
assumptions in the assessment . . . . The initial burden is only
to “demolish” the exact assumptions made by the Minister but no more . . . .
93 This initial onus of “demolishing” the
Minister’s exact assumptions is met where the appellant makes out at least a prima
facie case . . . . The law is settled that unchallenged
and uncontradicted evidence “demolishes” the Minister’s assumptions . . . .
94 Where the
Minister’s assumptions have been “demolished” by the appellant, “the onus . . .
shifts to the Minister to rebut the prima facie case” made out by the
appellant and to prove the assumptions . . . .
[17]
To satisfy the obligation of demolishing the
assumptions of the Respondent, the Appellant is required to call sufficient
evidence, by way of sworn testimony or documentation, to establish a prima
facie case. A prima facie case is one supported by evidence that
raises such a degree of probability in its favour that, if believed by the
Court, must be accepted.
[18]
Subsection 230(1) of the Act imposes on every
person carrying on a business the duty to keep records and books of account
containing such information as this will enable the taxes payable under the Act
to be determined. This positive duty on the taxpayer is essential if the self‑reporting
and self‑assessing aspects of the Canadian income tax system are to
function properly. This was made clear by Justice C. Miller of the Court in the
case of Quaidoo v. The Queen, 2003 TCC 677. In Quaidoo, as in the
case at bar, the Minister denied the taxpayer’s claim for business losses for
1999 on the basis that the taxpayer was not in business at the time of the
loss. The taxpayer had few records and only vague recollections of the goods
acquired and the manner of business. In dismissing the taxpayer’s appeal, Justice
C. Miller commented on the requirement set out in section 230 of the Act
requiring taxpayers to keep records:
18 Section 230
of the Act requires a taxpayer to keep books and records. How else in a
self-assessment system is the government to assess properly and not
arbitrarily? Mr. Quaidoo has the onus of proving the Minister’s
assumptions and consequently his assessment is wrong. He is the only one in a
position to do so. There may be exceptional situations where the only proof is
verbal and a highly credible taxpayer may satisfy Canada Customs and Revenue
Agency or this Court as to the proper expenditures. The Federal Court of Appeal
put it this way in Njenga at paragraphs 3 and 4:
The income tax system is based on
self‑monitoring. As a public policy matter the burden of proof of
deductions and claims properly rests with the taxpayer. The Tax Court Judge
held that persons such as the Appellant must maintain and have available
detailed information and documentation in support of the claims they make. We
agree with that finding. Ms. Njenga as the taxpayer is responsible for
documenting her own personal affairs in a reasonable manner. Self-written
receipts and assertion without proof are not sufficient.
The problem of insufficient
documentation is further compounded by the fact that the trial judge, who is
the assessor of credibility, found the applicant to be lacking in this regard.
19 While I
accept Mr. Quaidoo’s position that he entered upon a commercial venture, his
lack of record keeping, the oddity of invoices as receipts, his vagueness as to
exactly what goods were acquired and how, his vagueness as to the nature of the
business as a proprietorship or partnership, and if the latter with whom,
leaves me unable to rely solely on his oral testimony as to his expenditures.
If a taxpayer is going to incur significant expenses with a hope of earning a
profit, he must be diligent in accounting for those expenditures. He cannot
expect the government to guess. The system would fall apart.
Was the Appellant Carrying on a Business?
[19]
It is the Appellant’s contention that he was
carrying on the business of trading in securities and, therefore, any losses
which he incurred including carrying charges were business losses that would be
available to carry forward against future income.
[20]
What constitutes a business has been the subject
of determination by the Supreme Court of Canada in the matter of Stewart v.
Canada, 2002 SCC 46. Justices Iacobucci and Bastarache set out a two‑step
test for determining whether or not a taxpayer has a source of income from a
business or property. The Supreme Court stated:
50 It is clear
that in order to apply s. 9, the taxpayer must first determine whether he or
she has a source of either business or property income. As has been pointed
out, a commercial activity which falls short of being a business, may nevertheless
be a source of property income. As well, it is clear that some taxpayer
endeavours are neither businesses, nor sources of property income, but are mere
personal activities. As such, the following two-stage approach with respect to
the source question can be employed:
(i) Is the
activity of the taxpayer undertaken in pursuit of profit, or is it a personal
endeavour?
(ii) If it is not
a personal endeavour, is the source of the income a business or property?
The first stage
of the test assesses the general question of whether or not a source of income
exists; the second stage categorizes the source as either business or property.
[21]
The Supreme Court went on to note:
54 It should
also be noted that the source of income assessment is not a purely subjective
inquiry. Although in order for an activity to be classified as commercial in
nature, the taxpayer must have the subjective intention to profit, in addition,
as stated in Moldowan, this determination should be made by looking at a
variety of objective factors. Thus, in expanded form, the first stage of the
above test can be restated as follows: “Does the taxpayer intend to carry on an
activity for profit and is there evidence to support that intention?” This
requires the taxpayer to establish that his or her predominant intention is to
make a profit from the activity and that the activity has been carried out in
accordance with objective standards of businesslike behaviour.
55 The
objective factors listed by Dickson J. in Moldowan, at p. 486, were: (1)
the profit and loss experience in past years; (2) the taxpayer’s training; (3)
the taxpayer’s intended course of action; and (4) the capability of the venture
to show a profit. As we conclude below, it is not necessary for the purposes of
this appeal to expand on this list of factors. As such, we decline to do so;
however, we would reiterate Dickson J.’s caution that this list is not intended
to be exhaustive, and that the factors will differ with the nature and extent
of the undertaking. We would also emphasize that although the reasonable
expectation of profit is a factor to be considered at this stage, it is not the
only factor, nor is it conclusive. The overall assessment to be made is whether
or not the taxpayer is carrying on the activity in a commercial manner.
However, this assessment should not be used to second-guess the business
judgment of the taxpayer. It is the commercial nature of the taxpayer’s
activity which must be evaluated, not his or her business acumen.
[22]
In the case at bar, I have no doubt that the
Appellant subjectively intended to make a profit — no one would invest the kind
of money that the Appellant did with no intention of earning some return on
investment. However, I come to the conclusion that the Appellant was not
carrying on the business of a dealer in securities; I do so for the following
reasons:
(a) The
Appellant’s profit and loss experience from 2002 through to 2006 is abysmal. He
never showed a profit and he always experienced a loss. He himself stated that
he made no money and kept losing to the point where his strategy was to
continue buying more shares of Central even as the share prices were taking a
nosedive.
(b) The
Appellant admits that he had no formal training in securities trading. He had
no industry certifications and he has taken no business or financial planning
courses. It is difficult to resist the conclusion that he was dabbling in the
stock market as so many citizens do.
(c) The
Appellant’s business plan was to act on tips and wait to see if the securities
he purchased went up. He finally settled on just one investment, Central. His
strategy regarding that investment was to throw good money after bad — his stop‑loss
strategy was to buy more shares as the price went down. This was a disastrous
business plan and not at all businesslike.
(d) The
capability of the venture to earn a profit was tenuous. The Appellant was
borrowing money on his credit cards in order to finance his investment. I can
take judicial notice of the fact that the rate of interest on credit card accounts
is very high — much higher than business loans negotiated with a bank. The
Appellant could not have reasonably expected his investments to have a return
on investment greater than the rate of interest he was paying on his credit
cards. He claimed expenses significantly higher than any profit and it must be
pointed out that his interest expenses alone were outrageous. Borrowing on
credit cards is not good business. He would have had to have about 20%
appreciation in value just to break even. He could not have had any reasonable
expectation of profit.
(e) The
Appellant did not keep detailed records and books of account. His record
keeping was essentially non‑existent. He did not segregate his business
records from his personal records. He did not maintain a separate bank account
for his so-called business. There is no evidence that he had any dedicated
space in his home to be used as a home office. There is no evidence of any
office expenses, trading software, market research, accounting software or business
ledgers. There is no evidence of any trading activities or receipts for his
expenses or business records. The only document he produced regarding business
activity in 2005 was his very brief and self‑serving financial statement
that is before the Court as Exhibit R‑3. There was virtually no
documentation which one would expect to see in a commercially active business.
This activity was not conducted in a businesslike or commercial manner.
(f) The
Appellant dealt only in one security, Central. If he were in the business of
trading in securities, one would expect a much more diversified portfolio. He
held on to the shares of Central when they were continually decreasing in
value. If he was a trader, he would have sold the shares and cut his losses so that
he could recoup whatever he could and invest in other securities. That is how a
trader makes money or minimizes his losses. He buys and sells. When a taxpayer
enters into an isolated transaction or only a few transactions, he is not a
trader.
(g) The
Appellant failed to show that he made any trade at all from 2002 and following
for profit or loss. He has not shown by any documentary evidence that there was
any disposition of the shares he owned in Central from 2002 and following.
There is an absence of evidence that Central declared or was forced into
bankruptcy from 2002 and following or that YMG Capital took over the shares or
the assets of Central at any time from 2002 and following.
[23]
The onus is on the Appellant to establish on the
balance of probabilities that he was in the business of trading in securities.
He has provided little to no evidence that he was conducting a business other
than his self‑serving testimony that he believed he was. He did not bring
any receipts, trading records, account records, ledgers, bank statements or any
third party records capable of establishing that his activity had the requisite
degree of commerciality. The Appellant failed to produce a single document to
show that he either acquired or disposed of shares during the period of 2002
and following. There is no evidence that he still owned any shares of Central
or that there was a disposition of those shares in that period by way of
bankruptcy or otherwise. I come to the conclusion that the Appellant was not
carrying on the business of a dealer in securities and therefore he had no
business losses that could be carried forward.
[24]
Even though I have concluded that the Appellant
was not carrying on a business, I have no difficulty in concluding that he
still suffered losses in the form of carrying charges on money borrowed to
purchase shares. These carrying charges can be considered as part of the cost
of acquiring and disposing of the shares. They form part of the adjusted cost
base of the shares and, if the shares are disposed of at a loss, then the
carrying charges form part of the capital loss on the disposition of the
shares. These capital losses are then available to be carried forward and used
to offset capital gains in future years. There is no evidence that the Appellant
incurred any net capital losses from 2002 and following and so he has no net
capital losses to carry forward. In any event, since the Appellant did not
realize any capital gains in 2012 and 2013, these carrying charges, which could
be considered to be part of net capital losses, could not be carried forward to
those years.
Conclusion
[25]
On considering all the above factors, I come to
the conclusion that the Appellant has failed to show that his activities in
relation to the trading in securities were conducted in a commercial manner. I
conclude that the Appellant has failed to establish that he was conducting a
business as a dealer in securities. In addition, the Appellant did not have any
net capital losses available to carry forward to 2012 and 2013.
[26]
For all the foregoing reasons, this appeal is
dismissed.
Signed at Toronto, Ontario, this 1st day of April 2016.
“Rommel G. Masse”
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