Citation: 2009TCC24
Date: 20090202
Docket: 2006-2653(IT)G
BETWEEN:
IAN BAIRD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1]
These appeals are from
assessments of the Minister of National Revenue (the “Minister”) for the
Appellant’s 2001, 2002 and 2003 taxation years.
[2]
By those assessments
the Minister reassessed the Appellant’s tax liability by disallowing business
losses in the respective amounts of $539,419 and $559,338.
[3]
The Minister further
reassessed the Appellant’s tax liability for the 2003 taxation year by disallowing
$79,836 of non-capital losses carryforward from previous taxation years.
[4]
The parties agreed that
the only issue was whether the losses in the taxation years 2001 and 2002, as a
result of the disposition of the Appellant’s stock options in BCE Emergis
(“Emergis”), were on account of capital or income.
[5]
The Appellant claimed
these losses as non-capital losses from an alleged business of trading in
securities in the taxation years 2001 and 2002.
[6]
In computing income for
the 2003 taxation year, the Appellant claimed $79,836 as non-capital losses
allegedly available for carryforward from previous taxation years.
Evidence
[7]
Ian Munroe Baird
testified that in the year 2000 he was 38 years of age. He has a Bachelor of
Science in Biology and Business Administration from Memorial University in Newfoundland. He also studied at the University of Western Ontario in Investor Relations before the years in
issue here. He also took a course in Business Resource Management but could not
remember the date.
[8]
According to him, he
was interested and involved in business matters since he was in grade seven.
Later he took a job as executive director of the Y.M.C.A. at a business
development centre. The centre had a team of consultants and their purpose was
to give advice to student businesses.
[9]
They started a venture
capital fund for student loans from banks and the federal government. In nine
years they started 160 businesses.
[10]
After serving as
aide-de-camp to the Lieutenant-Governor of Newfoundland for five years, he took a position with Thompsom and Southam
newspapers. He was the publisher and general manager for a newspaper on the
west coast of Newfoundland with a staff of 400 people. He later
went to Ontario to run a technology business called Impact
Media. He was the vice-president for business development and then general
manager of another one of their businesses.
[11]
This work involved
receiving information from publicly traded companies and disseminating it to
the market. He was exposed to a great deal of information.
[12]
He became
vice-president and general manager of Emergis and later vice‑president
and general manager of Total Net which was on the leading edge of internet
service provision in Canada. While there he worked an inordinate
amount of time during the day, night and on weekends. By the time he left in
2000 Emergis had increased its staff from several hundred to several thousand.
[13]
He described his spouse
as a physiotherapist and a tri-athlete. She moved to France
and Australia to train for the 2000 Olympics.
[14]
When he left Emergis to
run a business of selling and trading stocks, he helped his wife in her
training and co-ordinated media exposure. He attended her races and “helped
her” but he said this did not impact his business. “I was free to stay in my
office and do market business.” Up to 1999 (when his options became available)
he had limited involvement in stocks. He had a few shares left to him by his
father and had purchased a few through brokerage houses. He read financial
sections of newspapers when he was growing up.
[15]
When he left Emergis he
became entitled to 62,000 options. He left because it was becoming very taxing
on him. Their stock was going up rapidly. He possessed a lot of wealth if he
used his options when they vested but he did not sell them. “I had a chance to
keep the paper, make a business and help my wife; to go into the market and
speculate where the shares were going; I could take my shares and go into the
market place and borrow money to pay for the shares and watch them grow to a
profit.” He was leveraged to the extent of $800,000 for the Emergis shares.
[16]
It was his position
that he intended to sell his shares at the first good opportunity.
[17]
The shares paid no
dividends. He was exposed to a lot of information in the ‘tech’ industry and he
believed that he could invest in the business, including Emergis outside of the
company. “I risked a whole lot of money to do so.”
[18]
In December 2000 he
took up the options and the debt. Up until that time he was being financed by
Emergis.
[19]
Between February 2000
and December 2000, 90 to 95% of his portfolio was in Emergis. He set up a
direct line to the market by obtaining a specialized trading account as
referred to in Exhibit R-1, Tabs 40 and 41. He had “multiple screens to
the market and multiple windows inside them”. He could keep an eye on the stock
and as to what it was doing.
[20]
He had an advanced view
of the bidding and asking prices. He subscribed to analysts’ reports and
information on futures. He looked for opportunities to make a move, mostly in the
North American markets.
[21]
In February 2000 there
was a “tech and com meltdown”. Tech stock like Emergis was dropping but the
company was still profitable. He believed that the stock would come back up. He
held on and waited for the time that it would come back up and that is when he
would make his move and make his profit.
[22]
When he exercised his
options n December 2000 he was of the belief that Emergis stock would rebound.
He did not want to give up.
[23]
He borrowed the money
to buy the stock and waited for the point when the price would rebound and he
could make money.
[24]
He made five to ten
trades in 2000. It was a very volatile market. He was referred to Exhibit R-1,
Tab 13 which was his 2000 income tax return and where he had claimed a taxable
capital gain of $39,173.28. He admitted that he had not reported any business
income or loss in that year.
[25]
He left it up to his
accountant. Then he said that he did not know whether he met his accountant or
not. He believed that he talked to his accountant about what his business was
doing.
[26]
In 2001 he sold his
first option shares. He was deeply in debt and he was forced to sell one-half
of his holdings in Emergis to pay down his debt. He was told by Price
Waterhouse that he was not diversified enough. He kept some of the shares
hoping that the price would come back up.
[27]
He bought shares in
Dell and Nortel and intended to benefit from the growth. Research in Motion was
a quick buy and sell. They went up a bit so he decided to sell. He was in debt
and highly leveraged. He agreed that he had only five to ten trades or less.
His plan was to trade as much or little on the market depending on his ability
to borrow
[28]
In 2001 after he got
the shares the market was bad and he got concerned as to how he could make a
living. He mentioned to other people that he might be looking for a job.
[29]
He was offered a job at
Platform. He was employed full-time there but checked his stock at night.
[30]
He was referred to
Exhibit R-1, Tab 46, which was his TD Waterhouse Investment Income Summary for
2001, and said that he sold some Emergis stock because he no longer felt that
it was a reasonable option to keep them. He could still make a profit at that
point.
[31]
In 2002 he sold the
rest of his shares in Emergis to pay off his debt.
[32]
In cross-examination he
said that during the period in issue he ran a consulting business but not
before 2001. From the moment he left Emergis in February 2000 up to April
2001, he was in the business as a trader in securities. He was not a trader in
securities prior to February 2000 and not in 2003.
[33]
Prior to 2002 the
Appellant said that he dabbled in the stock market through a broker. On July 1,
1999 he opened an account as a direct trader. He admitted that you could have
a direct trading account and not be in the business of trading. But when he
left Emergis he changed the status of his direct trading account to a “non
review and non intervention account” but he did not know when that was.
[34]
He could not explain
why there was no reference in his portfolio summary for the period May to
October 2000. He said that he never asked about that period.
[35]
He signed up for the
premium account but there was no written documentation about the direct access
account so it had to have been done by telephone.
[36]
He agreed that anyone
could access the internet and obtain the information set out in Exhibit R-1,
Tab 40 but he could not say whether that was the case for the charts set out in
Exhibit R-1, Tab 41. However, he had a president’s account and could access
information that was not available to others.
[37]
The fee for his
platform trading account was waived but he did not know when it was opened or
the criteria for it.
[38]
He did not have any
specific stock trading experience before 2001. He took a course in February
2001 with the Canadian Securities Institute and paid $415 for it. Anyone could
take it. It is for someone who wishes to be a licensed broker. He took it for
knowledge only and not because he wanted to be a broker. He took the course to
get the manuals and reading material. There were no classes. He read reports at
night after the market closed. He also read newspapers.
[39]
With respect to his
wife’s sports career, he was her assistant coach, media manager and discussed
her training program. He also organized interviews. He went to Australia around August 2000 in an effort to help her. He
believed that on paper he had enough money to do that.
[40]
When he left Emergis he
received a nine months salary of $112,500 and a car allowance of $800 per
month.
[41]
He was asked about an
interview he did with Radio Canada where he was quoted as saying that he left
his new job to be with his wife. He said that he was her assistant coach, her
“secret weapon” and her manager. She also had a team of coaches around her.
[42]
He discussed her
training schedule and talked about setting up interviews but that did not take
a lot of his time. He also assisted her financially. He could be looking at the
internet when he was away at events. He could check the stocks at internet
cafes.
[43]
He was in Sydney, Australia for one week; Hawaii for a weekend; at the Olympics
for four weeks and in Cancun, Mexico for five days.
[44]
He was referred to his
Curriculum Vitae in Exhibit R-1, Tab 20 where he said that he had resigned his
position at Emergis to become a trader. He said that this was an attempt to
explain why he was not working.
[45]
He identified his
Curriculum Vitae in Exhibit R-1, Tab 20, which he presented when he was
applying for a job at Platform but it did not indicate that he was a trader.
His explanation was that he did not want to show that he was a failed trader, but
instead wanted to capitalize on the “Olympic theme”. Also, he did not think
that it was important to indicate that he was a trader in shares.
[46]
He did include business
income in his 1996 income tax return which was from Fridge Rentals. In 1998 he
included employment income from Emergis as well as in 1999. There was no
business income. The situation was the same in 2000. He also reported taxable
capital gains from the disposition of three different groups of shares.
[47]
He said, “I assume that
I gave my business information to my accountant. I discussed what I was doing
that year. I told him that I was in the business of trading shares. He made a mistake;
it should have been treated as income. We did not discuss the advantages or
disadvantages of reporting it as business income or capital gains or losses”.
[48]
In 2001 he went into
more detail with his accountant and he told him that they should treat him as a
trader in 2001.
[49]
On the day that he left
Emergis he could have sold his shares and made $7,000,000 to $10,000,000. In
December when he exercised his options the shares were trading at $42 per
share.
[50]
After looking at his
2001 income tax return found in Exhibit R-1, Tab 15, he agreed that Nortel
did pay dividends of $2,121.06 in 2001. He also reported business income from
his consultant business and more from sales, commissions or fees of $1,235,550
and showed a net loss of $586,889.95.
[51]
His accountant made the
so-called election as seen on pages 27 and 28 of his 2001 income tax return.
But it was not made based upon his losses. There was no discussion about filing
an amended return for the year 2000.
[52]
He did not claim any
expenses for the home for his business as a trader because he owned all of the
equipment. The Emergis shares he sold in the year 2000 were not part of the options
in question here.
[53]
He admitted that in the
year 2001 that he claimed no business expenses for the use of his home for his
trading business but did claim them for his consulting business. He left that
up to his accountant.
[54]
He did not report a
capital gain in 1999 because he must have broken even or lost.
[55]
He did not do much
actual trading but he was watching the market continually because the market
was so volatile and he was trying to pick the right time to sell. He was trying
to understand what was going on in the market.
[56]
He sold the first group
of the shares in question in 2001 because he was told to diversify or pay back
the loans. The lenders knew that tech stocks were not doing very well so they
changed the margins and said that if he did not sell then, they would.
[57]
In re-direct he said
that establishing the direct trading account was not a part of the steps he
took to become a trader.
[58]
Irving Gurau has been a
chartered accountant for 30 years. The Appellant was a client of his during the
years in question. Sometimes the Appellant brought documents to his office and
sometimes he sent them in. He referred to him as a ‘last minute person’ or a ‘once
a year client’.
[59]
He did not necessarily
meet with his client before the return was signed. His client was not a
sophisticated person. He left it up to his accountant to do as he felt proper.
[60]
He agreed that the 2000
return of the Appellant showed no business income and the proceeds of the share
dispositions were treated as a capital gain.
[61]
In the year 2000 the
Appellant would have talked to him about leaving Emergis but he could not
remember if they discussed his intentions. “Given the lateness of the date I
must just have taken the information and put it in as it was”.
[62]
However, in the year
2001 he met with the Appellant and discussed his actions during the year. He
told him that he was a trader and prepared his 2001 return as such.
[63]
He said, “in 2000 I
cannot imagine that I would have put my mind to this question. We did in 2001”.
[64]
His position was that
he had more time to think. He did not reflect back on the way the 2000 return
was filed. He should have reported it as income. He further said, “the
department did not seem too receptive to my filing an amended return for the
year 2000”.
[65]
He denied that in 2001
the return was filed as income as opposed to capital just because there was a
loss.
[66]
In 2001 the Appellant was
highly leveraged; he took courses; he had all the services and he had the time
to check the markets. It really seemed that he was in business.
[67]
In cross-examination he
said that the information he had evolved out of the discussions he had with the
Appellant. He did not say that he was having trouble with these losses but
afterwards it came up about what he was doing.
[68]
It was his suggestion
that the manner of reporting should be changed. It was his decision to describe
the Appellant as a trader.
Argument on Behalf of the Appellant
[69]
As indicated by counsel
for the Appellant in his opening statement, he argued that the issue before the
Court was whether or not the losses incurred in disposing of his shares (stock
option shares) in Emergis were income (non-capital losses) or capital losses.
[70]
In the present scenario
the Minister has deprived the taxpayer of the right to set off the losses as
against income while taxing the benefits as income.
[71]
In 2000 when the
Appellant left his active employment he embarked on a plan to deal in shares as
an adventure in the nature of trade. One test to be applied, were there indicia
of a trader in shares?
[72]
There is substantial
evidence of his intention to become a trader. He had a great deal of
entrepreneurial knowledge through his various jobs and his training which
culminated in his special knowledge which he acquired while working for
Emergis.
[73]
In 2000 when he left
Emergis he started a plan to trade his option shares. This plan was to sell the
shares at the best price when he exercised his options on December 2, 2000. The
purchase of the shares was fully financed and managed through a leveraged
account. He then embarked upon this trading business.
[74]
As a result of the ‘dot
com’ crash and the devaluation of the shares he was forced to sell and repay
the debt he had incurred in buying them.
[75]
The acquiring of the
Emergis shares was an adventure in the nature of trade. It is important as to
what the taxpayer’s intention was when he acquired the shares. Yet, in
cross-examination, not one question was asked about his intention.
[76]
We have the
uncontradicted evidence of the Appellant that his intention was to trade. Indicia
of trading are not a necessary finding to support this intention even though it
would support such a finding. In this case we have the intention as established
by the Appellant’s evidence together with indicia of trading.
[77]
The Appellant’s plan
was foiled by the market conditions. If the Appellant had profited from the
sale the Minister would have had an overwhelming case to include these profits
on account of income. We have Mr. Baird’s evidence of his intention to trade
but we also have evidence that he was involved in an
adventure in the nature of trade.
[78]
When the Appellant took
up his options he borrowed substantial funds to pay for the shares ($700,000
+). He was fully leveraged. He could have sold the shares at that time and made
millions and retired the debt. He did not.
[79]
He could have sold part
of the shares, paid off his debt and then kept the rest of the shares as an
investment (if his intention was to invest). He did not.
[80]
Based upon his special
knowledge of the markets and in particular, the tech industry and Emergis, he
risked it all. There could only be one reason why someone like him would do
that. He expected to make a bigger profit. He speculated that he would make
more. That is evidence of an adventure in the nature of trade. That is enough
to dispose of this case.
[81]
There was no evidence
of the possibility of dividends so as to find an investment intention. Now the
Minister seeks to add insult to injury.
[82]
He referred to Howard
v. R.
where Justice Sheridan decided a case in favour of the taxpayer which is on all
fours with the present case. There Justice Sheridan elevated the taxpayer to a
trader not just as one involved in an adventure in the nature of trade.
[83]
Counsel referred to the
case at bar as a factual case.
[84]
Just because you are
not selling does not mean that you are not involved in an adventure or concern
in the nature of trade if there is a reason for not selling. His failure to
sell was irrelevant. It was his intention and knowledge that that was
important. There is no presumption that the shares are being held as capital.
[85]
The proper test is
whether the taxpayer at the time of purchase, intended to resell the shares at
a profit as soon as possible.
Here as there, Mr. Baird had made a significant acquisition and was risking it
all.
[86]
It is not conclusive
that he did not sell at the first opportunity. As to the frequency of
transactions, one would be enough. It is irrelevant that he continued to hold
until he was forced to sell.
[87]
The best evidence of
his intention is the fact that he held on to them when he could have sold at a
profit.
[88]
The shares that were
sold in 2000 were not the options shares. This is not a case where he treated
them in one way in one year and then in a different way in another year.
[89]
This case is about the
treatment of his option shares. Mr. Baird and his accountant’s treatment of his
option shares were consistent. The 2000 year disposition of the shares is a
‘red herring’. The only evidence as to his intention when he acquired his
option shares was for a later profit. There were no dividends on the shares in
issue. This case is on all fours with the Howard, supra, case.
[90]
Apart from the
Appellant’s special knowledge of the markets and particularly of the shares in
issue, there are additional indicia of trade. He opened a direct trading
account; he watched it continuously; it was a non-review account and he had
access to information that only traders would have. It is irrelevant that
others could have the same access to information, because he testified that he
used that information.
[91]
It does not matter how
much time he spent on trading if it is an adventure in the nature of trade. He
left his job and he was not living with his wife. Even if he were employed full-time,
it still could have been an adventure in the nature of trade.
[92]
Just because he was
forced to sell some shares in 2001 and did not want to sell his Emergis shares
does not mean that he was not in business. The market was flat and he was
monitoring it. By the time of the second disposition in 2002 he had given up.
He had to sell to cover his debt. He never fulfilled his plan. His dispositions
were forced upon him by market conditions. This had none of the markings of an
investment. The very nature of the manner of acquiring the shares leads to only
one conclusion, that this was an adventure in the nature of trade.
[93]
The appeals should be
allowed with costs.
Argument on Behalf of the Respondent
[94]
Counsel for the
Respondent referred to the case of Irrigation Industries Ltd v. Minister of
National Revenue
to review what he concluded were the general principles. The Court stated at
paragraph 13 that “It is difficult to conceive of any case, in which securities
are purchased, in which the purchaser does not have at least some intention of
disposing of them if their value appreciates to the point where their sale
appears to be financially desirable”.
[95]
It is not enough to
argue that since he intended to sell them at a profit that that is enough to
constitute an adventure in the nature of trade. At paragraph 14 the Court went
on to say, “ I think that there must be clearer indications of ‘trade’ than
this” (meaning the purchase on an isolated basis and not as a part of his
regular business) “before it can be said that there has been an adventure in
the nature of trade”
[96]
There must be a clearer
intention of trade. Intention to sell it at a profit is not enough.
[97]
In Rajchgot v. R.,
the Court stated at paragraph 17:
The critical factor in determining whether a taxpayer’s
acquisition of a property is for the purpose of investment or business is the
intention of the taxpayer at the time of the acquisition of the property.
Intention is to be ascertained from the appellant’s whole course of conduct.
Counsel opined that the exercise of an option is not
indicative of a trade.
[98]
With respect to
frequency of the trades, the Court in Sandnes v. R.
did not consider that 11 trades were sufficient to indicate a trader in
securities, neither did the Court consider that the likelihood of dividends was
a significant factor.
[99]
Counsel referred to Funk
v. Minister of National Revenue
at paragraph 20 which concluded that:
… It would seem to be now well settled that an accretion to capital
does not become income merely because the original capital was invested in the
hope and expectation that it would rise in value.
[100]
As set out in Sullivan
Estate v. R.
at paragraph 21 it was observed by the Federal Court:
I may, nevertheless, be permitted to repeat an observation I have
made in other cases dealing with a taxpayer’s intention, the favourable
determination of such intention being basic to the plaintiff’s case. Statements
or affirmations by a taxpayer of an intention is always evidence in the case.
The weight to be given to such assertions however will be in more or less
direct proportion to more objective evidence which is either more consistent
with the stated intention or more inconsistent with it. When taken together,
these two components, one way or the other, may together make for persuasive if
not always conclusive evidence.
[101]
Counsel opined that the
subjective evidence of Mr. Baird is not consistent with the objective evidence.
[102]
The Appellant stated in
his evidence that he was a trader from the time he quit his job in February
2000 until April 2001 when he took a job with Platform. A letter from his
accountant said that he spent an inordinate amount of time on this business and
yet his Curriculum Vitae given in response to an undertaking made no mention of
trading.
[103]
Further he did not
mention that he spent time training his wife when he created this Curriculum
Vitae. This would have taken away from the time he could have spent on any
trading business. The best objective evidence of his intention is the
Curriculum Vitae that he created for Platform. This was Exhibit R-2. It was
created to inform his prospective employers about his experience. He told them
that he resigned from his position at Emergis for the purpose of assisting in
the training and coaching of his wife in her quest to make the Canadian Olympic
team.
[104]
This Curriculum Vitae
was created after his alleged trading business would have ended. This was the
present evidence of his intention when he resigned. He did not take up the options
until December even though he resigned in February. He took up these options
only because they were about to expire. How could he say that he left to go
into business when he did not exercise these options until December 2000.
[105]
From the time he left
his job until he exercised his options he spent the time looking after his
wife’s athletic ambitions.
[106]
What risk was there
when he exercised these options? They were worth millions and he only borrowed
$700,000.
[107]
Counsel disagreed with
the Appellant’s argument that the case at bar was on all fours with Howard,
supra. The Howard case dealt with a taxpayer who was still employed in
the business of share acquisition while the Appellant here was receiving a
retirement package.
[108]
In Howard, supra,
the taxpayer did not sell even when the share price was increasing because he
did not want to sell his shares while he was actively promoting their
acquisition by would-be purchasers.
[109]
In the case at bar the
Appellant did not buy more shares and did not sell any. He was looking into one
particular share and had to be told to diversity.
[110]
If he was a trader, why
not sell them before they fell below the price at which he purchased them?
[111]
It may be that the
capital gain in 2000 is not the subject matter of the shares in this case but
his action in other years is material. When there was a loss he treated them as
income and when there was a gain he treated them as capital.
[112]
Counsel referred to the
case of Lager v. The Queen
but said that case was different because it was not an option case and there
was a real chance of loss when the shares were purchased but that is not the
case here. There was no risk. All we have here is his own self-serving evidence
in his favour. Against him is the Curriculum Vitae that he filed and the Radio
Canada interview. This is clear, objective evidence of his intention to help
his wife pursue her Olympic dreams.
[113]
His explanation as to
why he did not include his trading business in his Curriculum Vitae presented
to Platform, that he was ashamed of his failure, does not ring true because the
Curriculum Vitae was created before he suffered his loss.
[114]
In 2000 he had very few
transactions, he exercised his options in December 2000 and he reported
his disposition as capital gains.
[115]
In 2001 he bought
Celestica shares, (after he was employed at Platform); Nortel (March 2001);
Research in Motion (March 2001); Dell Computer (2001) and sold the first of the
Emergis shares.
[116]
In 2002 the only
activity was in selling the rest of his Emergis stock. He purchased Vector
after he started with Platform.
[117]
He said that he spent
most of his time trading. Are these the actions of someone who said that he
quit his job with Emergis to help his wife as can be seen from the Curriculum
Vitae and the Radio Canada interview?
[118]
He did no research for
these shares. They were handed to him on a platter. What he might have done was
to keep his eye on them because he had a deadline to take up his options.
[119]
His 2000 return was
done in April 2001. He said that he discussed his business with his accountant
but his accountant said he did not remember any discussions about his business
for the 2000 taxation year.
[120]
For the 2001 taxation
year the Appellant’s accountant made the election based upon his taxable
position and how to treat it. Further, his accountant had another client whose
position sparked his recommendations for the Appellant. There was no need to
elect under the Income Tax Act. It was an act of desperation. Further he
did not file an amended return for the year 2000.
[121]
This was opportunistic
tax planning triggered by the losses in those years.
[122]
He did not claim any
expenses for an office in his home but he did for his consulting business.
[123]
Credibility is
fundamental here, the differences between the Curriculum Vitae and the context
speaks volumes here. There was no business.
[124]
The Appellant had a
selective memory. He went into great detail about his experience but when asked
about how much time he spent with his wife, he did not know. He could not
remember when he switched to his premium account.
[125]
An adverse inference
must be drawn because the wife did not testify. It could have substantiated his
evidence.
[126]
The appeals should be
dismissed, with costs.
Rebuttal
[127]
In rebuttal counsel for
the Appellant took issue with the way that counsel for the Respondent dealt
with the evidence of the accountant.
[128]
Further he suggested
that the Respondent was basing his whole case upon two things, the Radio Canada
interview and the two Curriculum Vitaes. This is not a question of credibility.
[129]
After the Appellant
exercised his options his actions are the most objective evidence of his
intention. This conduct showed that he was involved in an exercise in the
nature of trade. He was forced to exercise his options when he did and he
waited to sell because the right time to sell had not arrived.
[130]
Most of his time was
not spent with his wife. There was risk. He had shares worth $7,000,000 and
decided not to sell. That was a risk.
[131]
After he left Emergis
he still had more special knowledge than the ordinary trader. That does not
diminish the fact that he was involved in an activity or adventure in the
nature of trade.
[132]
Why did he not borrow
more? He could not. The 62,000 shares acquisition was an adventure in the
nature of trade. It is not conclusive that he did not make more trades. There
was no evidence of investment. Most of the Minister’s argument was based upon
his trading and not his intention.
Analysis and Decision
[133]
As counsel for the
parties argued, there are two issues in this case. The first issue is whether
the actions of the Appellant in selling his share of Emergis in the taxation
years 2001 and 2002 were “an adventure or concern in a nature of trade”. The
second issue is whether the Appellant, during the relevant period was carrying
on the business of stock trading (a trader).
[134]
If the Court should
find that the Appellant was carrying on an adventure or concern in the nature
of trade, it need not go further and the Appellant would be entitled to the
relief he seeks. However, the Appellant has argued that he was a “trader” in
shares and was therefore carrying on a “business” under the Act and was
therefore entitled to claim any losses from such activity as a non-capital
loss.
[135]
Counsel for the
Appellant argued most emphatically that the intention of the Appellant from the
outset was to hold the shares until he could sell them at a profit and this
finding alone would be sufficient to allow him to have the deductions that the
Minister has denied him.
[136]
However in Irrigation
Industries Ltd., supra, Justice Martland of the Supreme Court of Canada
concluded that the issue cannot be decided on that basis alone. He said, “I
think that there must be clearer indications of “trade” than this before it can
be said that there has been an adventure in the nature of trade”.
[137]
He also opined that “It
is difficult to conceive of any case, in which securities are purchased, in
which the purchaser does not have at least some intention of disposing of them
if their value appreciates to the point where their sale appears to be
financially desirable”.
[138]
Further, he did not
think that it was a significant factor whether the shares were purchased with
the taxpayer’s own money or with borrowed money.
[139]
Counsel for the
Appellant seemed to conclude that this was an important factor which would tend
to show that he was involved in an adventure in the nature of trade.
[140]
He also took exception
to what he considered to be a substantial failure on the part of counsel for
the Respondent in not asking any questions of the Appellant, when he testified,
as to his intentions.
[141]
The Court does not consider
this to be any weakness in the Respondent’s case. The Appellant’s evidence from
the beginning was that his intention was to hold the shares and sell them later
at a profit. It is extremely unlikely that he would have responded any
differently to any question abut his intention if so asked by counsel for the
Respondent.
[142]
Counsel for the
Appellant said that in this case we have “intention together with indicia of
trade”. However this Court is satisfied that the most substantial evidence
about the Appellant’s intention here was his declared intention, after the fact
and the number of trades that he did were not so substantial as to clearly
indicate that he was a “trader”.
[143]
His declared intention
must be corroborated by his whole course of conduct. In this case the Court is
satisfied that his course of conduct does not lead to the conclusion that he
was a trader.
[144]
The Court concludes
that the exercise of his options, in itself, is not indicative of a “trader”.
It is of significance that the options came about as a result of his employment
and not because of any actions of the Appellant in the market place.
[145]
The Appellant argued
that the evidence shows that he did not receive any dividends from the shares
in question and that that supports his stated contention that the acquisition
of the shares were not on account of capital.
[146]
However one could just
as easily hold non-dividend bearing shares for the purpose of investment if the
taxpayer believed that they would rise in value in the future.
[147]
Counsel for the
Appellant placed great reliance upon the case of Howard v. R.,
supra, and concluded that the case at bar is on all fours with the Howard
case. In that case, Justice Sheridan concluded that the taxpayer was elevated
to the position of a trader because of his special knowledge of the market.
[148]
This Court makes no
conclusion as to whether “special knowledge” of the market alone would be
sufficient to raise a taxpayer to the position of trader, but it would think
that this would only be one factor that would have to be taken into account in
considering the more important factor of the “Appellant’s whole course of
conduct” as referred to by Justice Rip, as he then was, in Rajchgot v. R.,
supra.
[149]
In Vancouver Art Metal Works Ltd. V. R., the Federal Court of Appeal indicated in
paragraph [13] that,
… 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.
[150]
There are similarities
between the case at bar and Howard, supra, but the cases are not on all
fours as was suggested. Significantly as pointed out by counsel for the
Respondent, that case dealt with someone who was still engaged in the business
and the learned trial judge concluded that he was in the dual role of a manager
and promoter. He was paying attention to the market to such an extent that he
characterized it by saying, “paying attention to the market was my daily living
and breathing focus.”
[151]
That cannot be said to
be the case at bar.
[152]
Further, as indicated,
the taxpayer in Howard was actively promoting the acquisition of the Company’s
shares to prospective investors.
[153]
The Court must have
been duly impressed by these actions of the taxpayer in making the finding that
it did in Howard, supra. The factual situation in the case at bar
is not similar to these facts.
[154]
In the present case the
Appellant was not buying more shares and he only sold his shares when he was
told to do so by Price Waterhouse to diversify his holdings. Surely this was
not the actions of a trader. He was basically locked into one category.
[155]
The Court is satisfied
that the Appellant was not acting like a “trader” when he held on to the shares
for such a long period of time even when they were continually decreasing in
value. Surely if he was a trader with knowledge of the market as he indicated,
he would have sold the shares before he was forced to do so. That is how a
“trader” makes money or eliminates or minimizes his losses. He buys and sells.
[156]
The Court agrees with
the submission of counsel for the Respondent that even though the treatment of
the portfolio as a capital gain in the year 2000 was not with reference to the
shares in issue in this case, his actions in previous years in treating some of
his portfolio as capital is certainly relevant.
[157]
Counsel for the
Respondent distinguishes Lager v. R., supra, on the basis that unlike
the shareholder in that case, the present Appellant had no risk because he
obtained the shares as a result of an option when the shares were worth much
more than he paid for them. That was true but he did have to borrow money to
purchase them and at one time he was forced to diversify his portfolio or pay
back the borrowed money. That was certainly a risk.
[158]
In that case however,
the Court was satisfied on the evidence that the Appellant did not act as an
investor. The evidence before this Court does not satisfy the Court that the
Appellant here, so acted.
[159]
In this case the Court
is satisfied that the Appellant spent a considerable amount of time in
managing, investing and being involved in his wife’s training. This was
consistent with his statement made to Petro Canada
that he was basically giving up his job with Emergis to help his wife achieve
her goals as an “Olympian”.
[160]
This was also
consistent with the information contained in his Curriculum Vitae that was prepared
for his interview with Platform where he did not make any reference to being a
trader in shares.
[161]
The Court is satisfied
on the evidence that following his departure from Emergis he spent the majority
of his time assisting in and following his wife’s career as an athlete. He
spent some of his time checking the stock market and to a certain extent buying
shares and even selling some of those shares. However his actions in buying and
selling these shares were not as a “trader”. His actions in checking the stock
market when he was on the road with his wife and in the evenings at home were
not the actions of a trader and do not bring the Appellant within the factual
situation as found by the Court in Howard, supra.
[162]
The Court was not
impressed by the evidence of the accountant. His evidence was to a certain
extent inconsistent with the evidence of the Appellant himself. The accountant
said that he had not necessarily met with his client before he signed the
income tax returns. He also said that he could not remember if the Appellant
discussed his intentions with him after he left Emergis but due to the lateness
of the date when the returns were completed he would have merely taken the
information he received and completed the returns.
[163]
The Appellant said that
he had discussed his business intentions with his accountant. This
inconsistency cannot be explained by the accountant’s statement that the
Appellant was not a sophisticated person with respect to taxation matters.
[164]
It is not reasonable to
conclude that the Appellant would have gone into a business of stock trading
without talking to his accountant about it and furthermore the Court is
satisfied that it would not be reasonable for the Appellant to have no
discussions about his actions during the year if he had truly started a
business of stock trading.
[165]
It is to be noted that
it was the accountant who took the action to describe the Appellant as a trader
in shares in 2001 and not the Appellant.
[166]
The Court further finds
the accountant’s explanation as to why he changed the designation in 2001 to
that of a trader not to be reasonable. He said that he could not imagine that
he would have put his mind to this question when preparing the return in 2000
but if we accept the evidence of the Appellant it is clear that they did talk
about it.
[167]
It is also clear that
the accountant did not file an amended return for the 2000 taxation year even
after he decided that the Appellant was a trader in 2001. His explanation that
Canada Revenue Agency did not seem amenable to this action is not a reasonable
explanation if he had properly concluded that he was a trader.
[168]
It would also appear
that this situation became apparent to him only because he had another client
who was a trader in similar circumstances and not because of anything that the
Appellant had told him.
[169]
The Appellant’s
explanation as to why he did not include his trading business in his Curriculum
Vitae for Platform was not reasonable.
[170]
The Court is satisfied
that the explanation suggested by counsel for the Respondent is more likely to
represent the true situation in light of all of the evidence given at trial. He
suggested that it was opportunistic tax planning triggered by the losses
incurred in those years.
[171]
It is also significant
that the Appellant did not report any office in the home expenses with respect
to his alleged trading business whereas he did claim such expenses with respect
to his consulting business.
[172]
The Court must also
draw a negative inference against the Appellant because his wife did not give
evidence. Certainly one could have expected her to have been able to give
relevant evidence with respect to the Appellant’s business and, in particular,
could have testified as to the amount of time that the Appellant spent during
the relevant years on her training and travelling with her to many places where
she took part in sports events.
[173]
On the basis of all of
the evidence and any reasonable conclusions that the Court is entitled to draw
from the evidence, the Court is satisfied that the Appellant has failed to
establish on a balance of probabilities that he was a trader or involved in an
adventure in the nature of trade, during the years in issue.
[174]
The Appellant’s
activity of buying and selling shares during the 2001 and 2002 taxation ears
does not constitute a business as defined in subsection 248(1) of the Act
and the losses incurred during those years resulting from the disposition of
his shares were not losses from a business under subsection 9(2) of the Act
but were capital losses pursuant to subsection 9(2) of the Act.
[175]
The Appellant is not
entitled to carry forward non-capital losses during the 2003 taxation year that
results from the disposition of shares in the 2001 and 2002 taxation
years.
[176]
The appeals are
dismissed with costs.
Signed at Ottawa, Ontario, this 2nd day of February 2009.
“T. E. Margeson”