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Citation: 2008TCC115
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Date: 20080221
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Dockets: 2006-2661(IT)G
2006-2663(IT)G
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BETWEEN:
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LEONARD JOEL POLLOCK,
BARBARA ANN MURRAY,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] These appeals were
heard together on common evidence and involve a husband and wife who jointly
sold shares in seven types of stock on three separate occasions in the 2003
taxation year. The Appellants reported their losses in respect to the
disposition of these shares as fully deductible business losses. Barbara Ann
Murray applied $48,311 of her portion of these losses as non-capital loss
carry-backs against her 2000, 2001 and 2002 taxable income. On Reassessment,
the losses for both Appellants were reclassified as capital losses. In
addition, the Minister of National Revenue (the “Minister”) reversed
Ms. Murray’s carry-back amounts.
[2] The issue is whether the
losses of $68,905 realized on the disposition of the shares was on account of
capital or on account of income.
[3] The Appellants take
the position that the transactions in 2003 were on account of income because
the stocks were acquired with the intention of reselling them at a profit,
making the stock sales an adventure in the nature of trade. Since a business,
in accordance with the definition contained in section 248 of the Income Tax
Act (the “Act”), includes an adventure in the nature of trade, then
the losses realized on the sale of these stocks were losses from a business.
Consequently, the Appellants argue that they should be entitled to fully deduct
the losses in computing their income in the 2003 taxation year.
[4] The Respondent’s position
is that the conduct of the Appellants is indicative of a share purchase for
investment objectives and not as a trader in stocks. This means the losses are on
account of capital.
[5] The parties filed the
following Agreed Statement of Facts, together with an attached schedule showing
the breakdown of shares sold in 2003:
2006-2661(IT)G
TAX COURT OF CANADA
BETWEEN:
LEONARD J. POLLOCK
Appellant
- and –
HER MAJESTY THE QUEEN
2006-2663(IT)G
TAX COURT OF CANADA
BETWEEN:
BARBARA ANN MURRAY
Appellant
- and –
HER MAJESTY THE QUEEN
Respondent
AGREED STATEMENT OF FACTS
The
parties accept as proven for the purposes of these Appeals the facts set out in
this Agreed Statement of Facts. No evidence inconsistent with this Agreed
Statement of Facts or any Schedules attached may be adduced at the hearing of
these Appeals. Additional evidence not inconsistent with this Agreed Statement
of Facts may be adduced by either party.
Unless otherwise specified, all facts relate to the 2003
taxation year.
The parties agree on the following facts:
The purchase and sale of the Shares
1.
Leonard
J. Pollock (“Pollock”) and Barbara Ann Murray (“Murray”) were each assessed capital
losses of $68,089 (the “Losses”) in the 2003 taxation year in respect of their
disposition of shares in various corporations (the “Shares”). The subject
matter of these appeals is whether the Losses were on account of capital or on
account of income;
2.
Pollock
and Murray (the “Appellants”) jointly purchased and sold the Shares, as set out
in Schedule A (attached);
3.
In
2003, the only shares the Appellants disposed of were the Shares;
4.
The
Appellants did not dispose of the shares at the first opportunity when the
selling price would have exceeded the purchase price;
5.
The
Global Thermoelectric shares, as set out in Schedule A, paid a single dividend
in 1999 of 0.000001 cents per share. The Adobe Systems shares, as set out in
Schedule A, paid quarterly dividends of 0.00625 cents per share. Dividends on
the Adobe shares occurred when Adobe merged with another corporation with which
the Appellant had purchased shares in. No other dividends were paid out to the
Appellants in respect of the Shares;
The Parties’ Income Tax treatment of the Shares
6.
Due
to an error in the Appellants’ 2003 Income Tax Returns, the Appellants each
reported their Losses as $65,315;
7.
The
Appellants reported their Losses as fully deductible business losses;
8.
In
her 2003 Income Tax Return, Murray applied $48,311 of her Losses as non-capital
loss carry-backs against her 2000, 2001 and 2002 taxable income (the
“Carry-backs”);
9.
By
way of Reassessment, the Minister of National Revenue reclassified the
Appellants’ Losses as capital losses. The Minister also reversed Murray’s Carry‑backs;
The Appellants’ previous income tax treatment of shares
10.
Prior
to 2003, the Appellants reported gains and losses resulting from the sale and
transfer of shares as capital gains and losses. They reported the gains and
losses as follows:
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Appellant
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Taxation Year/
Description of Shares
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Taxable Capital
Gains/Allowable
Capital Losses
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Pollock
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2000 (Hemosol, Canadian
National Railways and Global Thermoelectric Inc.)
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$11,793
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Pollock
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2002 (Goodyear Tire & Rubber and Marathon Foods Inc.)
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($439)
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Murray
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1994
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$2,464
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Murray
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1997 (Open Text security)
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$9,939
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Murray
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2000 (Hemosol, CNR and Global Thermoelectric shares)
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$11,793
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Murray
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2001 (Goodyear Tire & Rubber and Marathon Foods Inc.)
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($439)
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(the “Pre-2003 Shares”);
11.
Prior
to 2003, the Appellants did not report gains and losses resulting from the sale
and transfer of shares as gains and losses on account of income;
The Appellants’ Backgrounds
12.
At
all material times, Pollock reported income as a lawyer;
13.
Until
2002, Pollock also reported income as a Professor of Law at the University of Alberta, and began receiving
pension income from the University of Alberta in 2002;
14.
At
all material times, Pollock’s primary source of income was his income from the
practice of law, his salary from the University of Alberta and, when applicable, his pension;
15.
At
all material times, Murray reported income as an employee of Pollock’s practice;
16.
At
all material times, the Appellants’ ordinary business did not involve
purchasing and disposing of shares in corporations;
17.
At
all material times, the Appellants did not have any training or certification
in stock trading and had no special knowledge akin to that of a stock trader;
18.
The
Appellants used a stock broker (the “Broker”) to purchase and sell the Pre‑2003
Shares and the Shares;
19.
At
all material times, the Appellants infrequently purchased and sold stock and
had a minimal history of trading on the stock market;
20.
At
all material times, the Appellants did not spend any substantial amount of time
studying the stock market;
21.
The
Appellants did not investigate market conditions prior to the purchase and
disposition of the Pre-2003 Shares and the Shares;
22.
Pollock
did not investigate, monitor or research the Pre-2003 Shares and the Shares
prior to their purchase and disposition;
23.
Murray looked on the Internet
and had discussions with her brother and the Broker prior to the purchase and
disposition of the Pre-2003 Shares and the Shares; and
24.
The
Appellants relied on the advice and investigations of others with respect to
when to purchase and dispose of the Shares. Specifically:
a.
Pollock
relied on Murray; and
b.
Murray relied on the advice of
her brother, the Broker and to some extent her accountant.
DATED
at the City of Edmonton, in the Province of Alberta this 9th day of January, 2008.
Leonard
J. Pollock, Q.C.
Appellant
“Leonard J. Pollock”____
Leonard
J. Pollock, Q.C.
DATED
at the City of Edmonton, in the Province of Alberta this 9th day of January, 2008.
Barbara
Ann Murray
Appellant
“Barbara Ann Murray”___
Barbara
Ann Murray
DATED
at the City of Edmonton, in the Province of Alberta this 15th day of January, 2008.
John
H. Sims, Q.C.
Deputy
Attorney General of Canada
Solicitor
for the Respondent
Per:
__“Darcie Charlton”____
Darcie
Charlton
Counsel
for the Respondent
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SCHEDULE A
BREAKDOWN OF SHARES SOLD IN 2003
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Shares
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Date
Purchased
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Price of Purchase
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Date Sold
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Gain or (Loss)
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Pollock’s Portion
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Murray’s Portion
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1,000 Altarex
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Jan. 25, 2002
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$985.00
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Feb. 6, 2003
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($683.50)
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($341.75)
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(341.75)
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72 Adobe Systems Inc.
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Jan. 27, 2000
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$9,954.67
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Feb. 11, 2003
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($7,187.62)
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($3,593.81)
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($3,593.81)
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1,000 Call-Loc. Inc.
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April 7, 2000
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$47,218.68
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Feb. 6, 2003
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($46,741.68)
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($23,370.84)
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($23,370.84)
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1,500 Global Thermoelectric
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August 26, 1999
Dec. 30, 1999
Jan. 27, 2000
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$27,600.96
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Feb. 11, 2003
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($8,108.65)
($16,217.31)
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($4,054.33)
($8,108.66)
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($4,054.33)
($8,108.66)
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429 Roxio
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Sept. 29, 1997
Sept. 30, 1997
Feb. 11, 1998
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$39,905.94
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Feb. 6, 2003
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($37,160.94)
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($18,580.47)
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($18,580.47)
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1,000 Vision Wall Inc.
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Jan. 25, 2000
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$1,185.00
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Feb. 6, 2003
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($942.00)
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($471.00)
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($471.00)
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1,907 Hemosol Inc.
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Jan. 12, 2000
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$20,048.29
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May 7, 2003
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($19,137.59)
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($9,568.80)
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($9,568.80)
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TOTAL for 2003:
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($136,179.29)
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($68,089.65)
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($68,089.65)
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[6] I have reproduced the
Agreed Statement of Facts, together with Schedule “A”, because it has a
direct bearing on my disposition of the issue in this appeal. It is essentially
a question of fact whether the Appellants were carrying on a business in stock
trading or whether their activities were for investment purposes only. It is
interesting to note that, in this type of appeal where the onus is upon the
Appellants to overcome the Assumptions of Fact relied upon by the Minister in
the amended Replies, the Appellants conceded all but one of those Assumptions
of Fact within the Agreed Statement of Facts. That one Assumption of Fact (11(i)
in the Amended, Amended Reply respecting Leonard Pollock’s appeal and 18(k) in
the Amended Reply respecting Barbara Ann Murray’s appeal) states:
…
the shares that were sold in 2003 were not highly leveraged as the Appellant
and her spouse have sufficient means to purchase those shares without
financing.
The
wording in assumption 11(i) to Mr. Pollock’s appeal added “and to hold them for
long term investment”. The concessions by the Appellants to all but one of the
Assumptions of Fact relied on by the Minister is crucial because it means the
Appellants essentially agreed with the Minister’s basis for the reassessments.
[7] I heard evidence from both
Appellants as well as Hugh Neilson, a chartered accountant, and Barry Gardiner,
an investment advisor. Mr. Pollock, was admitted to the bar in 1962 and, in
addition to practising law, taught several courses at the law school from 1972
to 2000. He testified that he had minimal experience in the stock market and
relied primarily on his wife to handle the stocks and keep him apprised of
choices made in this respect. His wife relied primarily on her brother for
advice. They established a line of credit of $100,000 to support their market
endeavours, which commenced in 1997. During this time his income varied from a
low of $64,960 in 2003 to a high of $478,635 in 2001 (Exhibit R‑2). On cross-examination,
Mr. Pollock confirmed that prior to 2003 the Appellants reported gains and
losses from the stock activities as capital gains and capital losses. His
explanation for the change in reporting status was that they followed the
advice of accountants in declaring and reporting sales. They followed Barry Gardiner’s
advice until he left the firm in 2000 at which time their file was handled by a
number of different individuals. It was Hugh Neilson that recommended that they
should change the way they were reporting these amounts. Mr. Pollock was unable
to give any explanation for his decision in late 1999 to retain stock in MGI
Software Corp. (later Roxio stock) and Global Thermoelectric when the market
value had changed so that substantial profits could have been realized. Instead
the stock was retained and between February 28, 2001 and January 31, 2003,
it steadily declined until the profit situation became a loss situation. Mr.
Pollock stated that they simply held onto it for too long a period and missed
“the window” of opportunity.
[8] Barbara Murray’s background
is in medical technology. After she entered the stock market in 1997 she
depended on her brother for advice. He was employed by MGI Software Corp. and
had knowledge of that company’s stock and the software product it sold. A large
portion of the stock which the Appellants purchased was in MGI Software Corp.
Ms. Murray testified that they purchased the MGI shares so that when the proposed
technology products entered the market they could sell their shares and earn a
profit. She stated that, like MGI, the other stock purchases were also of a
speculative nature and were not purchased with a view to dividends.
[9] Barry Gardiner testified
that the Appellant, Barbara Murray, did not look to his firm for advice on
purchasing and selling stock, but instead she instructed him on what stock was to
be purchased or sold. He testified that the companies in which the Appellants
purchased these shares were all technology corporations whose shares would not
be purchased with an expectation of receiving dividends. Although I allowed Mr.
Gardiner to give his evidence as an expert witness, I am not giving any weight
to his evidence from the perspective of qualified expert opinion because he was
not qualified as an investment advisor until 2000, at which time he had left the
firm that was providing professional services to the Appellants, and, more
importantly, his areas of expertise listed in his curriculum vitae do not
include the area of the nature of stock purchasing.
[10] Hugh Neilson
testified that he was consulted by the Appellants on a sporadic basis after
Mr. Gardiner left the firm. In 2003 he had discussions with Barbara Murray
respecting a change in the reporting treatment of the losses from being on
capital account to income account.
Analysis
[11] The Appellants have
the onus of proving that their losses are properly characterized as arising
from an adventure in the nature of trade and not an investment. The decision in
M.N.R. v. Taylor, 56 DTC 1125, canvassed some general positive as
well as negative propositions for determining whether or not a transaction
constitutes an adventure in the nature of trade. The Supreme Court, in Irrigation
Industries Ltd. v. M.N.R., 62 DTC 1131 (S.C.C.), relying on the decision in
the Taylor case set out the
following positive tests:
(1)
Whether
the person dealt with the property purchased by him in the same way as a dealer
would ordinarily do; and
(2)
Whether
the nature and quantity of the subject matter of the transaction may exclude
the possibility that its sale was the realization of an investment or otherwise
of a capital nature, or that it could have been disposed of otherwise than as a
trade transaction.
And set out the
following negative tests:
(1)
The singleness
or isolation of a transaction cannot be a test of whether it was an adventure
in the nature of trade--it is the nature of the transaction, not its singleness
or isolation that is to be determined.
(2)
It is not
essential to a transaction being an adventure in the nature of trade that an
organization be set up to carry it into effect.
(3)
The fact that
a transaction is totally different in nature from any of the other activities
of the taxpayer and that he has never entered upon a transaction of that kind
before or since does not, of itself, take it out of the category of being an
adventure in the nature of trade.
(4)
The intention
to sell the purchased property at a profit is not of itself a test of whether
the profit is subject to tax for the intention to make a profit may be just as
much the purpose of an investment transaction as of a trading one. The
considerations prompting the transaction may be of such a business nature as to
invest it with the character of an adventure in the nature of trade even
without any intention of making a profit on the sale of the purchased commodity.
[12] The Federal Court of
Appeal in The Queen v. Vancouver Art Metal Works Limited, 93 DTC 5116,
at page 5119, sets out a number of factors to be used in the determination of
whether an individual is engaged in a trading business:
I have no
doubt that a taxpayer who makes it a profession or a business of buying and
selling securities is a trader or a dealer in securities within the meaning of
paragraph 39(5)(a) of the Act. As Cattanach, J. stated in Palmer v. R.,
"it is a badge of trade that a person who habitually does acts capable of
producing profits is engaged in a trade or business". It is, however, a
question of fact to determine whether one's activities amount to carrying on a
trade or business. Each case will stand on its own set of facts. Obviously,
factors such as the frequency of the transactions, the duration of the holdings
(whether, for instance, it is for a quick profit or a long term investment),
the intention to acquire for resale at a profit, the nature and quantity of the
securities held or made the subject matter of the transaction, the time spent
on the activity, are all relevant and helpful factors in determining whether
one has embarked upon a trading or dealing business.
[13] Rip
J. in Rajchgot v. The Queen, [2004] T.C.J. 403, affirmed by the Federal
Court of Appeal, [2005] F.C.J. 1514, also referenced these factors in
determining the taxpayer’s intention when the shares were acquired. At
paragraph [18] he stated:
… it
is not the lack or presence of
one or more factors that will determine whether a transaction is on capital or
income account; it is the combined force of all of the factors that is
important There is no magic formula to determine which factors are more or less
important. Some factors compliment each other. Each case is different. A judge
must balance all the factors. …
[14] The
intention of the Appellants at the time of the acquisition of the shares is to be
resolved within the framework of their entire course of conduct, having
reference to these various factors.
[15] Desjardins,
J. in the Federal Court of Appeal decision in Robertson v. Canada, [1998]
F.C.J. 401, at paragraphs 25 and 26, referred to “badges of trade” which could
assist in tracing the course of conduct of a taxpayer:
25 As noted by W.E.
Crawford and R.E. Beam, an "adventure", by the nature of that word,
is likely to be an isolated transaction. Many isolated transactions are not,
however, "in the nature of trade". There must be some activity, some
features of business in the transaction dealt with which makes it an adventure
in the nature of trade. What must be looked for is whether there are
"badges of trade" or behavioral factors which might assist in tracing
the course of conduct of the taxpayer. From these, inferences might be drawn as
to whether a taxpayer was engaged in an operation of trade or simply investing.
26 The decision of the Supreme
Court of Canada in Irrigation Industries Limited v. M.N.R. makes it clear that
the question of whether securities are purchased with the purchaser's own funds,
or with borrowed money, is not a significant factor in determining whether the
acquisition and subsequent sale is or is not an investment.
[16] Applying these principles to the facts in these appeals:
(a) Frequency
of the Transactions
Prior to
2003, when the Appellants first entered the stock market, they reported gains
and losses beginning in 1997 as capital gains and capital losses. Paragraph 10
of the Agreed Statement of Facts sets out the Appellants’ pre-2003 income tax
treatment of their share holdings. This reporting treatment changed in 2003
when they suffered substantial losses and reported them as business losses. This
occurred in the shares of both Global Thermoelectric Inc. and Hemosol where
gains in 2000 were reported as capital gains while in 2003 losses were incurred
and reported as business losses. The 2003 transactions were not distinguished
in any way from the previous transactions. When taxpayers suddenly switch their
reporting method from capital to income account as was done in these appeals,
there must be some solid evidence to support this change. I was not provided
any reasonable explanation except that there had been a change in accountants
within the same firm. The accountant’s evidence provided no basis that would
distinguish the 2003 transactions from the prior transactions. There were six
types of stock in which sales occurred on four different occasions between 1997
and 2002. According to Schedule “A” attached to the Agreed Statement of Facts,
in 2003 the Appellants sold seven types of stock on three separate occasions,
February 6, February 11 and May 7. I do not believe that the history of these
transactions in 2003 or in the years leading up to 2003 could be characterized
as frequent. Quite apart from my conclusion, the Appellants at paragraph 19 of
the Agreed Statement of Facts confirmed one of the basic Assumptions of Fact
upon which the Minister relied in reassessing, and, that is, they infrequently
purchased and sold stock.
(b) Duration
of Holdings/Intention to Acquire for Resale at a Profit (Motive)
All of the shares, which
were sold in 2003, except for Altarex, were held for periods of three to five
and one-half years. Even the Altarex shares were held for over a year. In 2000,
the Appellants transferred 93 of the Hemosol shares to an RRSP. The history of
the Roxio (previously MGI) shares disclosed that their market value rose
dramatically and remained at the higher values for over a year. The Appellants,
however, continued to retain these shares despite the lengthy window of
opportunity to “flip” the shares for substantial profits. The evidence showed
that eventually the value of these shares fell drastically. There is no doubt
that traders would have taken advantage of this opportunity to make a quick and
very large profit. Such actions do not support the Appellants’ stated intention
of being in the business of purchasing and selling shares to make a profit. It
is clear from the decision in Irrigation Industries that even if the
Appellants had the intention of disposing of the shares to make a profit at the
first opportunity, this fact, alone, will be insufficient to colour the stock
transactions as adventures in the nature of trade, without the presence of
“badges of trade” or indicia of business attaching to the Appellants’ stock
trading activities. The lengthy duration of the share holdings, the transfer of
some of the Hemosol shares to an RRSP and the continued holding of shares where
the value rose dramatically are clearly not the actions of a trader in the
business of buying and selling shares in the market to make a quick profit.
Aside from my conclusions, the Appellants agreed in the Statement of Agreed
Facts at paragraph (4) that they did not dispose of shares at the first
reasonable opportunity when a substantial profit could have been realized.
(c) Nature
and Quantity of the Securities Held
Most of the shares
sold in 2003 were “high tech” stock. However, I do not believe this fact alone
eliminates them from the domain of the taxpayer who is looking to stock purchases
for investment. Taxpayers may hold these types of shares and yet they may not
necessarily be carrying on a business activity. The Appellants have agreed in
the Agreed Statement of Facts that they infrequently purchased and sold stock
and that they had a minimal history of trading on the stock market. As Rip J.
stated at paragraph [29] of Rajchgot:
…The evidence, however, does not
reflect active and hectic purchases and sales …
Those remarks apply
here. The nature and quantity of the shares (paragraphs 2, 3, 4, 5 and 10 of
the Agreed Statement of Facts) and the manner in which the Appellants dealt
with them are not indicative of an adventure in the nature of trade.
(d) The Time
Spent on the Activity and Particular Knowledge Possessed
Mr. Pollock had no
experience or training in the stock market. His focus was on teaching and
practising law. Other than setting up a line of credit to support the
activities, he relied on his wife and her brother for the decision making. His
wife kept him apprised by showing him the activities on a computer screen.
Barbara Murray had very little background or knowledge in securities
either. She relied on her brother for advice but the role he played and the
influence he had in her decisions were not fully canvassed in the evidence. She
instructed a stock broker to complete the purchases and sales. Ms. Murray’s
source of income was as an employee of her husband’s law practice. Her brother
was an employee of MGI but again it was unclear from the evidence if this
resulted in any advantage to the Appellants in the decision making. In summary,
the Appellants possessed no special knowledge, certifications or training in
the stock market, relying instead on Ms. Murray’s brother, the broker and their
accountant. Mr. Pollock spent no time or effort on researching or monitoring
the market activities and while his wife spent more time tracking or checking
on the internet, it was not nearly to the same degree that one would expect
from a trader. All these facts were agreed to at paragraphs 12 to 24 of the
Agreed Statement of Facts.
(e) Financing
The Appellants
established a line of credit to support their stock market activities. However
the evidence was that Mr. Pollock’s income from teaching law, his legal
practice and, when applicable his pension, ranged from a low of $69,000 to $478,635.
He also testified that he was able to pay off the line of credit at one point from
legal fees earned from a single legal case. The decision of the Supreme Court
in Irrigation Industries makes it clear that this factor of whether the
securities were purchased using the taxpayer’s own funds or borrowed money is
not a significant factor in determining if the activities are an adventure in
the nature of trade. Although there were borrowed funds here, the Appellants’
income appeared to be sufficient at times to pay off the line of credit.
Conclusion
[17] When I look at
the evidence respecting all of these factors in the context of the Appellants’
course of conduct surrounding the market activities, I can come to only one
conclusion: that the Appellants purchased the shares for investment purposes
and not as traders for quick profit. Although I accept that the Appellants’
stated intention was to sell these shares for profit, which can be true of most
business endeavours, their conduct does not support and in fact is contrary to
this stated intention. The Appellants in the Agreed Statement of Facts conceded
almost all of the Assumptions of Fact contained in the Reply. It is very
difficult for them to rely on their stated intention alone when the evidence
regarding their conduct in the stock market is indicative of investment
activities. When I couple this with their concessions in the Agreed Statement
of Facts, I have little choice but to dismiss their appeals with costs.
Signed at Ottawa, Canada, this 21st day of February 2008.
Campbell J.
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