Citation: 2008 TCC 547
Date: 20081114
Docket: 2006-3332(IT)G
BETWEEN:
DOMINIQUE RICHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are appeals from
reassessments made by the Minister of National Revenue
("the Minister") on December 6, 2004, in which the
following business income amounts were added to the Appellant's income for the
2001, 2002 and 2003 taxation years:
(a) $27,779 for the 2001 taxation year;
(b) $10,130 for the 2002 taxation year; and
(c) $21,580 for the 2003 taxation year.
[2]
The business income
that was added to the Appellant's taxable income resulted from profits from flow-through
share transactions by the Appellant. The dispute is about the tax
treatment of profits made by an investment advisor on flow‑through share
transactions for himself.
[3]
The Respondent submits
that the profits from the flow-through share transactions constitute business
income in the Appellant's hands, just as profits or losses from transactions involving
securities other than flow-through shares would constitute business income or
losses for the Appellant.
[4]
The Minister made the
reassessments for the 2001, 2002 and 2003 taxation years on the basis of the
following facts set out in subparagraphs 15(a) through (q) of the Reply to
the Notice of Appeal:
[TRANSLATION]
(a) National Bank Financial Inc. (NBF) operates a
securities brokerage business.
(b) The Appellant is an investment advisor with NBF.
(c) NBF investment advisors are professionals whose
role is to assist NBF's clients with their investment decisions by offering
them informed advice based on objective, solidly documented research, with a
view to helping them make sound financial decisions.
(d) All or part of the remuneration that the
Appellant receives from NBF is in the form of commissions that are based on the
volume of investments made.
(e) The Appellant received the following employment
income amounts from NBF during the 2001, 2002 and 2003 taxation years:
|
|
2001
|
2002
|
2003
|
|
Employment income
|
$564,758
|
$633,358
|
$473,332
|
(f)
As a sideline to his activities as an NBF
investment advisor, the Appellant regularly trades in securities (flow-through
shares or other securities) on his own account.
(g)
The Appellant takes advantage of the knowledge
and experience relating to the securities (flow-through shares or other
securities) markets that he has acquired as an investment advisor.
(h)
The securities (flow-through shares or other
securities) transactions are part of the Appellant's ordinary business.
(i)
The Appellant has a history of intensive buying
and selling of securities (flow-through shares or other securities).
(j)
The securities (flow-through shares or other
securities) are usually held by the Appellant for short periods.
(k)
The securities (flow-through shares or other
securities) are mainly either purchased by the Appellant on margin or financed through
some other type of debt:
|
|
2001
|
2002
|
2003
|
|
Carrying charges and interest
|
$41,000
|
$16,553
|
$8,729
|
(l)
A profitable resale of the securities
(flow-through shares or other securities) is a deciding factor in the Appellant's
purchasing them.
(m) The Appellant's securities (flow-through shares or other securities)
transactions are speculative.
(n)
Indeed, for the 2001, 2002 and 2003 taxation
years, the Appellant reported business losses from transactions involving
securities other than flow-through shares:
|
|
2001
|
2002
|
2003
|
|
Business losses
|
($288,814)1
|
($34,746)1
|
($22,656)
|
________________________
1
Part of the business
losses for the 2001 and 2002 taxation years results, inter alia, from
the disposition of shares in Majescor Resources and/or Freewest Resources.
(o)
For the 2001, 2002 and 2003 taxation years, the
Appellant reported, however, capital gains from transactions involving
flow-through shares:
|
|
2001
|
2002
|
2003
|
|
Capital gain
|
$11,8631
|
$6,0812
|
$10,7903
|
____________________
1
From the disposition of
shares in Freewest Resources.
2
From the disposition of
shares in Majescor Resources.
3
From the disposition of
shares in National Bank, Majescor Resources and Freewest Resources.
(p)
For tax purposes, the Appellant had no reason to
treat his flow-through share transactions any differently from his transactions
in other securities.
(q)
This is especially true because some of those
transactions involved the same shares (i.e., shares in Freewest Resources and
Majescor Resources) and the Appellant treated them differently for tax purposes
depending on whether or not they qualified as flow-through shares.
[5]
Subparagraphs 15(a) through
(q) of the Reply to the Notice of Appeal correspond to paragraphs 9 to 23 of
the Respondent's Request to Admit of June 27, 2007. In his response
to the Request to Admit, the Appellant admitted the facts alleged in paragraphs
1 through 15 and paragraphs 19 through 23. The Appellant refused to
admit the fact alleged in paragraph 16 (subparagraph (h) of the Reply
to the Notice of Appeal) for the following reason: The transactions involving the
flow-through shares are not part of the Appellant's ordinary business because
he rarely (approximately one to four transactions per year) trades in
flow-through shares. The Appellant also refused to admit the fact alleged
in paragraph 17 (subparagraph (i) of the Reply to the Notice of Appeal)
for the following reason: Given the volume of his flow-through share transactions,
the Appellant does not have a history of intensive buying and selling of
flow-through shares. Lastly, the Appellant refused to admit the fact alleged in
paragraph 18 (subparagraph (j) of the Reply to the Notice of Appeal) for the
following reason: The flow-through shares which the Appellant traded were
held by him for at least one year during the period covered by the notices of
assessment in issue.
[6]
The income tax returns
filed by the Appellant for the taxation years in issue report the following
exploration and development expenses attributable to the flow‑through
shares:
|
|
2001
|
2002
|
2003
|
|
Exploration
and
|
|
|
|
|
development
expenses
|
$15,996
|
$24,000
|
$32,000
|
[7]
In his written answers
upon examination for discovery, the Appellant also confirmed the following
information:
(a)
His client base was
approximately 500 clients, made up essentially of individuals, as well as foundations,
trusts and businesses.
(b)
Roughly $500 million in
assets was under management, invested primarily in government bonds, corporate
bonds and debentures, Canadian and U.S. stocks, foreign stocks (Europe,
Asia and South America) and certain investment funds. Shares of companies operating
in the natural resource sector accounted for roughly 8% of the assets under
management.
(c)
The companies operating
in the natural resource sector whose shares (flow-through or otherwise) were
recommended to his clients were Alcan Inc., Inco Limited, Canadian Oil Sands
Trust, Canadian Natural Resources Limited, Talisman Energy Inc., Sherritt
International Corporation, Falconbridge Limited, Mines d'Or Virginia Inc.,
Majescor Resources Inc., Murgor Resources Inc., Freewest Resources Canada Inc.,
Calvaley Petroleum International Inc., Dia Bras Exploration Inc., Ashton Mining
Canada Inc., Metco Resources Inc. and Teck Cominco Limited.
(d)
During 2001, his
personal portfolio consisted primarily of U.S. technology stocks; natural resource
securities (flow-through shares or otherwise) likely accounted for 10-15% of
total portfolio value. In 2002 and 2003, natural resource securities probably
represented more than 50% of total portfolio value.
(e)
The transactions in his
personal portfolio that involved flow-through shares of companies operating in
the natural resource sector were as follows:
|
Date of
disposition
|
Number of shares
|
Name of corporation
|
|
Selling price
|
Date acquired1
|
Acquisition cost
|
Tax deduction
|
|
Acquisition cost –
tax deduction
|
|
Dec.21, 2001
|
30 000
|
Freewest Resources Canada
Inc. (80 000)
|
$8,350.00
|
Dec. 15, 2000
|
$20,000.00
|
$18,000.00
|
$2,000.00
|
|
Jan. 3, 2002
|
50 000
|
Freewest
Resources Canada Inc.
|
$13,992.21
|
|
|
|
|
|
|
|
|
|
July 12, 2002
|
8 500
|
Majescor Resources Canada Inc.
(48 265)
|
$5,700.00
|
July 30, 2001
|
$25,000.00
|
$15,995.60
|
$9,004.40
|
|
July 22, 2002
|
6 000
|
Majescor Resources Inc.
|
$3,580.00
|
|
|
|
|
|
|
|
|
|
July 26, 2002
|
10 000
|
Majescor Resources Inc.
|
$5,420.00
|
|
|
|
|
|
|
|
|
|
Jan. 30, 2003
|
10 000
|
Majescor Resources Inc.
|
$3,320.00
|
|
|
|
|
|
|
|
|
|
Jan. 31, 2003
|
13 765
|
Majescor Resources Inc.
|
$4,557.22
|
|
|
|
|
|
|
|
|
|
May 12, 2003
|
300 000
|
Metco Resources Inc.
|
$21,000.00
|
Dec. 31, 2002
|
$30,000.00
|
$24,000.00
|
$6,000.00
|
|
Jan. 6, 2004
|
133 325
|
Pershimco Resources
Inc.
|
$26,665.00
|
Dec. 15, 2003
|
$25,000.00
|
$20,000.00
|
$5,000.00
|
|
April 21, 2004
|
40 000
|
Metco Resources Inc. (190 590)
|
$6,320.00
|
Dec. 15, 2003
|
$30,000.00
|
$12,000.00
|
$18,000.00
|
|
April 22, 2004
|
60 000
|
Metco Resources Inc.
|
$8,970.00
|
|
|
|
|
|
|
|
|
|
May 20, 2004
|
90 590
|
Metco Resources Inc.
|
$9,964,90
|
|
|
|
|
|
|
|
|
1 Flow-through shares can be purchased only upon their
issuance by the company.
(f)
The transactions in his
personal portfolio that involved other kinds of securities of companies
operating in the natural resource sector were as follows:
|
Date of disposition
|
Number of shares
|
Name of corporation
|
Selling
price
|
Date acquired
|
Acquisition cost
|
|
Jan. 22, 2001
|
20 000
|
Freewest Resources
|
$5,119.50
|
July 21, 2000
|
$14,400.00
|
|
Feb. 1, 2002
|
10 000
|
Mines d'Or
Virginia
|
$7,000.00
|
Feb. 2, 2002
|
$8,083.66
|
|
Feb. 23, 2001
|
25 000
|
Freewest Resources
|
$7,179.00
|
Feb. 6, 2002
|
$7,580.50
|
|
Feb. 20, 2001
|
15 900
|
Majescor Resources
|
$5,317.50
|
Feb. 1, 2002
|
$7,950.00
|
|
April 29, 2002
|
18 500
|
Majescor Resources
|
$1,1825.55
|
June 27, 2001
|
$10,259.60
|
|
June 27, 2001
|
20 000
|
Freewest Resources
|
$7,718.28
|
July 21, 2000
|
$14,400.00
|
|
April 29, 2002
|
13 500
|
Majescor Resources (15 000)
|
$8,629.45
|
Sept. 4, 2001
|
$9,460.00
|
|
April 8, 2002
|
1 500
|
Majescor Resources
|
$1,855.98
|
Sept. 4, 2001
|
|
|
Sept. 4, 2001
|
30 000
|
Freewest Resources
|
$8,020.00
|
July 21, 2000
|
$21,600.00
|
|
Jan. 21, 2002
|
5 000
|
Ashton Mining Canada
|
$19,453.60
|
Nov. 6, 2001
|
$5,830.00
|
|
Jan. 24, 2002
|
5 000
|
Ashton Mining Canada
|
$19,800.20
|
Dec. 5, 2001
|
$8,335.59
|
|
Jan. 24, 2002
|
5 000
|
Ashton Mining Canada
|
$19,156.52
|
Dec. 24, 2001
|
$10,960.86
|
|
April 8, 2002
|
3 500
|
Majescor Resources (11 500)
|
$4,330.61
|
Dec. 27, 2001
|
$8,770.00
|
|
Jan. 28. 2002
|
15 000
|
Patrician Diamonds
|
$7,050.00
|
Jan. 23, 2002
|
$7,555.00
|
|
Date of
disposition
|
Number of shares
|
Name of corporation
|
Selling price
|
Acquisition date
|
Acquisition cost
|
|
April 26, 2002
|
5 000
|
Ashton Mining Canada
|
$13,115.81
|
Feb. 14, 2002
|
$14,555.46
|
|
June 14, 2002
|
3 000
|
Ashton Mining Canada
|
$6,354.90
|
Feb 14, 2002
|
$8,659.54
|
|
June 14, 2002
|
3 000
|
Ashton Mining Canada
|
$6,354.90
|
Feb. 15, 2002
|
$8,305.30
|
|
Feb. 14, 2002
|
10 000
|
Majescor Resources (15 000)
|
$13,660.16
|
Jan. 3, 2002
|
$15,898.39
|
|
April 8, 2002
|
5 000
|
Majescor Resources
|
$6,335.05
|
|
|
|
March 25, 2002
|
4 000
|
Teck
Cominco —
WTS May 25,
2004
|
$6,610.00
|
March 18, 2002
|
$6,400.00
|
|
May 27, 2002
|
25 000
|
Freewest Resources
|
$9,154.69
|
May 24, 2002
|
$8,750.00
|
|
May 28, 2002
|
1 500
|
Freewest Resources
|
$555.00
|
May 24, 2002
|
$375.00
|
|
Nov. 7, 2002
|
17 129
|
Majescor Resources (20 000)
|
$5,995.15
|
Nov. 6, 2002
|
$7,210.00
|
|
Nov. 20, 2002
|
2 400
|
Majescor Resources
|
$1,056.00
|
|
|
|
Sept. 3, 2003
|
471
|
Majescor Resources
|
$117.75
|
|
|
|
Feb. 14, 2003
|
3 113
|
PrimeWest
Energy
|
$79,727.31
|
Feb. 13, 2003
|
$80,159.75
|
|
Date of disposition
|
Number of shares
|
Name of corporation
|
Selling price
|
|
|
Acquisition date
|
Acquisition cost
|
|
Sept. 8, 2003
|
8 200
|
Ashton Mining Canada (10 000)
|
$12,056.00
|
July 3, 2003
|
$22,080.00
|
|
Sept. 9, 2003
|
1 800
|
Ashton Mining Canada
|
$2,566.58
|
|
|
|
Sept. 9, 2003
|
5 000
|
Ashton Mining Canada
|
$7,129.41
|
July 28, 2003
|
$8,530.00
|
|
Jan. 30, 2004
|
10 000
|
Tri Origin Resources
|
$2,700.00
|
Dec. 3, 2003
|
$3,080.00
|
(g)
With respect to the
flow-through shares, there was no research report or financial analysis
concerning the various exploration companies. The decisions to invest in
these companies were based on reading the prospectuses.
(h)
As for the shares other
than flow-through shares, the investment decisions were based, inter alia,
on financial analyses, offering memoranda, company histories or the various
press releases issued by the exploration companies.
(i)
The main motivation for
purchasing the flow-through shares of companies operating in the natural
resource sector was the tax deduction. The second motivation was the
opportunity to have a stake in a mineral discovery that could cause those
securities to increase in value.
(j)
The motivation for
purchasing the securities other than flow-through shares of companies operating
in the natural resource sector was capital appreciation based on stock market
speculation regarding "potential" mineral discoveries on their
properties.
[8]
The Appellant submits that
the assessments are wrong in fact and in law for the following reasons set out
in sub-subparagraphs 12(a)(i) through (ix) of the Notice of Appeal:
[TRANSLATION]
(i) The nature of a gain
or loss upon the disposition of a security is a question of fact.
(ii) The fact that the Appellant was a broker does
not mean that all his securities transactions give rise to business income or
losses.
(iii) The CRA was required to analyze the specific
facts related to the purchase and sale of flow-through shares before
determining whether they took place in the course of a business or were
transactions of a capital nature.
(iv) Indeed, whether the purchaser is a securities
broker or not, the main purpose of transactions involving flow-through shares
is usually not to sell the shares for a price higher than that paid for them.
(v) The Appellant's objective upon acquiring the
flow-through shares was, primarily, to take advantage of the tax benefit
available under the ITA, not to resell them at a profit.
(vi) Absent an intent to resell at a profit, the
property acquired will normally be held as a capital asset and its disposition
will be a transaction on capital account.
(vii) In addition, the profit from the disposition
of flow-through shares is a fictitious profit, because subsection 66.3(1) of
the ITA deems the Appellant to have acquired them at a cost of nil.
(viii) As Hugessen J.A. held in Loewen v. The
Queen, 94 DTC 6265 (F.C.A.), fictitious profit cannot be treated as
business income.
(ix) Moreover, in Petit v. The Queen, 2005
DTC 932 (T.C.C.), Lamarre J. held that if the motivation for an
investment is obtaining a tax benefit, not the possibility of reselling at a
profit, the investment is capital in nature and is not inventory.
Analysis
[9]
It may be helpful to point
out that the deemed cost of a flow-through share is nil by virtue of subsection
66.3(3) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1,
as amended ("the Act"), which reads as follows:
(3) Any flow-through share (within the meaning assigned by
subsection 66(15)) of a corporation acquired by a person who was a party to the
agreement pursuant to which it was issued shall be deemed to have been acquired
by the person at a cost to the person of nil.
[10]
The flow-through shares
acquired and/or disposed of by the Appellant in the 2001, 2002 and 2003 taxation
years are not subject to the election contemplated in subsection 39(4) of
the Act, by virtue of the application of the definition of the term
"Canadian security" in subsection 39(6) of the Act, which
excludes prescribed securities. Under Part LXII of the Income Tax
Regulations, which part is titled "Prescribed Securities, Shares and
Debt Obligations", flow‑through shares are prescribed securities.
[11]
Counsel for the
Respondent gleaned from the case law factors which are to be considered in
determining whether gains or losses are of an income or a capital nature. Those
factors, stated summarily, are as follows:
(a)
The question whether
gains or losses are of an income as opposed to a capital nature is one of fact,
and the taxpayer's whole course of conduct must be examined.
(b)
One of the most
important factors in categorizing property as a capital asset or as inventory
is the taxpayer's primary intention at the time that the property was acquired.
The taxpayer's secondary intention at that time is also important, and
objective evidence concerning the taxpayer's conduct must indicate that the prospect
of reselling the property was an "operating motivation" for its
purchase.
(c)
The primary or
secondary intention to resell the property at a profit is indicative of the
property having been acquired as inventory whose resale would result in
business income (or a business loss). The possibility of selling at a profit
must have been a motivation for purchasing the property. Such motivation is to
be inferred from the circumstances surrounding the transaction.
[12]
Counsel for the
Respondent also referred to Interpretation Bulletin IT-479R, pertaining to securities
transactions. It states that, in addition to the intention existing at the time
of purchase, other factors may be considered in order to determine whether a
loss or gain of principal from the disposition of a security is on income or
capital account. The factors that tend to show that the disposition of a
security resulted in a business profit (or loss) are the following:
(a)
the frequency of
[similar] transactions;
(b)
the period of ownership;
(c)
the taxpayer's knowledge
of securities markets;
(d)
the taxpayer's ordinary
business;
(e)
the time spent
studying the securities markets and investigating potential purchases;
(f)
financing (on margin
or some other form of debt);
(g)
advertising; and
(h)
in the case of shares, their
nature (speculative, non-dividend or dividend).
Application of the criteria to the facts of
this case
[13]
The Appellant is an
investment advisor who carried out a very large number of transactions on his
own account during the period in issue. In the course of the years 2002 and
2003, more than 50% of the Appellant's personal transactions involved
securities of companies operating in the natural resource sector. They involved
shares in mining companies that were listed on a prescribed stock exchange in
Canada. Thus, the investments were very risky and highly speculative. Earning dividends
was not one of the Appellant's objectives.
[14]
The flow-through shares
in which the Appellant invested were shares of Freewest Resources Canada
Inc., Majescor Resources Inc., Metco Resources Inc. and Pershimco Resources,
while the other securities in which he invested were shares of Freewest Resources,
Mines d'Or Virginia, Majescor Resources, Ashton Mining Canada,
Patrician Diamonds, Teck Cominco, PrimeWest Energy and Tri Origin Resources. Thus,
the Appellant purchased both flow-though and other shares of Freewest Resources
Canada Inc. and Majescor Resources Inc.
[15]
The Appellant's
investments in shares other than flow-through shares were primarily motivated
by the possibility of making a significant profit upon resale in the event that
a new mineral deposit was discovered. With respect to the flow-through shares,
the Appellant's primary intention at the time of purchase was to take
advantage of the available tax benefit, and his secondary intention was to make
a profit upon resale in the event that a new mineral deposit was discovered
(see paragraph 7(i), supra).
[16]
The Appellant held
most of the flow-through shares for more than a year —which was longer, generally, than he held the non-flow-through
shares he acquired. The explanation for this is a statutory requirement that flow-through
shares acquired as a private investment be held for at least one year before
they can be resold in the market. This rule was in effect until
December 2002. As of January 2003, this mandatory holding period was
reduced to four months. The flow-through shares of Freewest Resources Canada Inc.
and Majescor Resources Inc. were acquired by the Appellant as private investments.
[17]
The securities
(flow-through shares and other shares) were financed mainly on margin or through
some other type of debt, as reflected in the carrying charges and interest
charges claimed by the Appellant for each of the years under appeal.
[18]
As stated in
subparagraph (n) in paragraph 4, supra, for each of taxation years
2001, 2002 and 2003, the Appellant reported significant business losses
resulting from transactions in securities other than flow-through shares, and some
of the losses claimed in 2001 and 2002 resulted from the disposition of shares
of Majescor Resources Inc. and/or Freewest Resources Canada Inc. During
the years in issue, the Appellant carried out five transactions involving flow-through
shares, two of which resulted in a commercial profit, that is, the proceeds of
disposition of the shares exceeded the initial acquisition cost. In most cases,
there was a fictitious profit, that is, the proceeds of disposition
exceeded the acquisition cost after the tax benefit was applied.
[19]
In view of the
circumstances set out above, it is clear that the primary motivation for the Appellant's
purchasing the flow-through shares was the tax deduction associated with the
ownership of such shares. However, as the Appellant himself admitted, there was
a second operating motivation in his purchase the flow‑through shares: the
opportunity to have a stake in a mineral discovery that could cause those
flow-through shares to increase in value.
[20]
In the case at bar,
contrary to the situation in Paquet v. The Queen, [1995] 2 C.T.C. 2941,
the resale at a profit of the flow-through shares and of the other shares issued
by the same corporations was an operating motivation in their purchase.
[21]
If the Appellant had
been interested in the flow-through shares only because of the tax deduction
entitlements that they conferred, he would never have acquired securities other
than flow-through shares of companies operating in the natural resource sector,
some of which issued flow-through shares that the Appellant acquired.
[22]
The decisions of the
Federal Court of Appeal in Loewen v. The Queen, [1994] 3 F.C. 83,
and Moloney v. The Queen, 92 DTC 6570, are not applicable to the
instant case, because here the Appellant's sole motivation was not just to
obtain a tax advantage, and because there was a real possibility here
of the Appellant's realizing a profit in a commercial sense, as opposed to a fictitious
profit equal to the tax benefit received. It might be useful to bear in mind
that the resale price of the flow-through shares was not predetermined, like
that of the debenture in Loewen, supra. In the instant case,
the decision to sell the flow-through shares was entirely the Appellant's, and
the selling price of those shares was necessarily the market value of the
issuing company's common shares and was therefore subject to market fluctuations
and changes in metal prices.
[23]
If Parliament had intended
that the tax benefit associated with flow‑through shares (the fictitious
profit) be subject solely to capital gains treatment, it would have included
a clear provision to that effect in the legislation. In this regard, it should
be pointed out that, until 1981, the tax benefit associated with flow-through
shares was treated as business income (see paragraph 66.3(1)(a) of
the Act).
[24]
For all these reasons,
the appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 14th day of November 2008.
"Réal Favreau"
Translation certified true
on this 29th day of January 2009.
Erich Klein, Revisor
Email this Content