Larry E. Woods v. Her Majesty the Queen, [1995] 2 CTC 2084, 96 DTC 1995

Rip J.T.C.C.:—Larry E. Woods, the appellant, has appealed income tax assessments for 1986 and 1987 on the basis that his profits from the disposition of securities were on capital account and not on account of income, as assessed by the Minister of National Revenue (’’Minister”). The respondent stated that in reassessing the appellant one of the assumptions of fact relied on by him was that the appellant was a trader in securities. Profit from dispositions of securities is income from a business: sections 3, 4, 9 and subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am.

5. C. 1970-71-72, c. 63) (the "Act"). Woods says he was not a trader in securities. In his view a trader in securities is one who sells securities upon realizing profits of "quarters" and "eighths". In other words, according to Woods, a trader in securities is one who "goes in and out of the market", who may purchase a security in the morning and sell that security in the afternoon once he or she has realized a gain or incurred a loss, no matter how small. Woods stated this is the description of a trader on Bay Street and insisted he was not such a trader. [1]

Woods has lived a very interesting and active life. He is a person who is always seeking a new challenge. Woods became a school teacher at age 19. He taught in an 11-room public school for one year and then spent another year at a teacher’s college. He continued teaching public school for four years while studying for a degree at McMaster University during evenings and summers. At age 26 he became a grade school principal and commenced studying toward a Master of Education degree at the University of Toronto. Upon graduating from the University of Toronto he started studying part- time for a Doctorate degree. The appellant also took a course towards becoming a school superintendent. He eventually taught at a teacher’s college in Hamilton, Ontario.

In the early 1970s he was injured and was unable to play hockey, which he had enjoyed. Unperturbed by this injury he took a new challenge and set his sights on representing Canada at the Olympics in sailing. Woods entered over 100 races a year training to reach this goal. He came second in the qualifying trials for the 1976 Olympics and qualified to represent Canada at the 1980 Olympics in Moscow, which were boycotted by Canada and other NATO countries. He continued his sailing efforts for the 1984 Olympics but came second in the trials.

In the meantime the Ontario Government closed the teacher’s college in Hamilton and eventually Woods accepted a job at the Ministry of Colleges and Universities in Toronto. I gather from the appellant that he was frustrated while working for the Ontario Government. He was having difficulty convincing his superiors that changes were needed in the training of Ontario youth. Woods was convinced that students be taught new technology rather than ’’past tense technologies”, which took the bulk of the Ministry’s budget at the time.

Woods sought assistance to advance his idea from businessmen and business analysts on Bay Street. He wanted to find out where the new technology companies were in Ontario. He obtained some money from his Ministry to start new courses in advanced computers and software.

Woods found Bay Street exciting. He met a stockbroker who wanted Woods to instruct him in sailing and flying in return for the stockbroker helping him in the stock market. One of the investments was profitable.

In 1984 Woods passed a securities course he studied by correspondence. He described the course as a "basic course taken by thousands of people”. He said he "busted his tail to learn as much as he could to help high tech companies" and I believe him. Woods impresses me as a motivated person and hard worker. He said he worked his way into the stock market. He testified he wanted to raise money for companies. The appellant’s goal was to help these companies and "also to make money". He said he discovered one "could make money by persuading people who did financing...[and]...you could earn a finder’s fee".

Woods described himself, when he first started out, as "naive". He knew he wanted to find good junior companies but admitted he "had no clue what was a good company". He also wanted a new career. The appellant fought to get through doors and finally was asked to write reports on companies. He said he read "lots and lots" to learn the business.

His stockbroker, Leon Kieselstein, confirmed Woods was interested in junior high technology stocks and he did not regard Woods to be a trader. Kieselstein stated Woods would buy stock if he liked the company and did not look at the company’s fundamentals such as earnings and management issues. At times Kieselstein thought Woods held on to stock rather than selling.

Woods continued to interview executives of small high tech companies and investment brokers to determine for purposes of his position at the Ministry as to what technology was on the market and which would require qualified employees. As a result of meeting with these various individuals Woods recognized a niche which was not being filled at the time. In his view Canadian investors are conservative. His niche was to find money for new corporations that had high technology expertise. Woods not only found money for these companies but also borrowed money to invest on his Own account. In many cases Woods prepared reports for such companies and rather than accepting a fee in money he accepted shares or options to purchase shares in these companies. With respect to several of the companies he was named a director.

Before the stock market fell in October 1987, there was euphoria amongst investors, Woods recalled: “You could underwrite anything”. After the fall, ’’the market in technology stocks was nil". Woods worked for the Ministry of Colleges and Universities until September 30, 1987. In September 1987, he formed a small venture fund, called Headstart Capital Corporation, and raised $1,000,000 which was invested in "some very good companies". Headstart was not successful due to stock market conditions.

The appellant divided the securities he purchased and sold into two types, one which he described as standard transactions and the other which he described as "seed/early stage" corporations. The standard transactions were securities he bought on the stock exchange. Woods sold shares in 20 companies in 1986, many of which were purchased in 1985 and 1986. His net loss on these transactions in 1986 was $5,865.

The "seed/early stage" securities were securities of junior technology companies he found money for or for which he had written reports. These securities were high risk and were usually purchased before the shares were traded on a stock exchange. He intended to sell the shares once they become eligible to be traded on the stock exchange. Woods sold seven of these securities in 1986. He had purchased stock of ISG securities in 1985 as well as escrow shares in 1986. He sold what he described as a small amount of shares in 1986 for a profit of $5,000. He bought stock in Tee- Comm Electronics Limited in 1985 at 38 cents per share and sold a portion of these shares in 1986 for a profit of $113,543. In 1985 he bought shares of Nelson Vending from the company and on the market. The appellant also bought additional shares of Nelson Vending in 1986 and then sold many of those shares in 1986 for a profit of $13,384. He purchased shares in Avcorp in 1985 for 50 cents a share and sold 1,500 shares in 1986 for a profit of $6,496. Woods "shorted" Avcorp stock in 1986. He purchased shares of Petco at 8 cents per share in 1985. Woods sold a small amount of the shares in 1986 for a profit of $32,382. He purchased shares in Consolidated Indescor when it was close to bankruptcy in late 1985 and purchased additional shares in 1986. The appellant’s profit on the sale of Consolidated Indescor shares in 1986 was $29,433. In 1985 he made several purchases of shares in a company called Futurtek. He acquired more shares of this company in 1986. He sold some of the shares in 1986 for a profit of $20,419.

In 1987 the appellant sold shares of 25 companies he purchased on the stock exchange. Most of these shares were purchased in 1986. His net loss on these shares was $18,096. He also sold shares in "seed/early stage" corporations. He sold shares of ISG in 1987 for a profit of $144,263. Woods testified that he bought shares of ISG and was also involved in a private placement of ISG shares for sophisticated investors. He said one was required to be a sophisticated investor to invest in ISG. He also sold shares in Tee-Comm Electronics Limited for a profit of $267,837, shares in Avcorp for a profit of $313,123, shares of Petco for a profit of $213,999, and shares of Foreign Capital for a profit of $19,108. Woods lost money on selling shares of Insured Dayco, a company which was close to bankruptcy in 1986 when he bought stock in 1986, and again in 1987. Some shares of Insured Dayco were sold in 1987 for a loss of $26,039. The appellant incurred a loss of $102,810 in 1987 on the disposition of shares in Nelson Vending as well as losses in a company called Life-Force International. He also incurred a loss of $67,749 on sale of shares of Life-Force International and a loss of $50,000 from a loan he made to a principal of that company.

In Woods’ view these transactions were capital transactions which were encouraged by the Government of Canada. Woods argued that on May 23, 1985, the Government of Canada put forward incentive legislation providing every Canadian citizen with a $500,000 tax-free capital gain, based on the government’s recognition that an investment in Canadian companies was critical to the continued growth of the Canadian economy. Woods says that in fact the government at the time considered one of Canada’s most crucial needs to be the need for increased investment, particularly in early stage companies. He says few Canadian investors are prepared to assume the risk associated with early stage companies. The Government of Canada recognized this fact and acted upon it by creating the $500,000 capital gains allowance and enacting legislation in support of it as a means of encouraging Canadians to take more risks in investing in Canadian companies, especially early stage Canadian companies.

Woods was very critical of Revenue Canada Interpretation Bulletin IT-479, which he says was relied upon by Revenue Canada in assessing him. Woods states that this bulletin, as applied by Revenue Canada, penalizes those who carefully investigate before investing in early stage companies. He refers specifically to interpretation of early stage companies. Woods argued that the purpose of the tax-free capital gains in the amount of $500,000 was to encourage small companies and this is what he was doing: he was investing in small companies. Consequently, if he sold the securities at a profit such profit should be on account of capital. In Woods’ view, gains acquired through the sale of securities which had been purchased as "seed/stock" ought to be on account of capital. He states that "seed/stock investments" are typically acquired by investors who expect a long hold.

What constitutes a trade on Bay Street and what constitutes a trade for purposes of the Act are not the same. The tests for tax purposes include whether a property is being purchased to hold as an investment or whether the property is being purchased in the course of a trade. An important test is the intention of the taxpayer and his course of conduct in dealing with the property. The subject matter being acquired, the length of ownership, the frequency or the number of similar transactions and the circumstances leading to the disposition of the eventual disposition of the property are also important factors to consider. However, in facts similar to those at bar, a key factor is the question of motive, that is, why did the taxpayer acquire the property in the first place? Woods did not beat around the bush in testifying. He was most candid in stating that he purchased the securities for the purposes of making a profit from them. Woods also stated that he looked for securities that did not yield a dividend since in his view securities that yield dividends are not susceptible of substantial growth. It is clear therefore that I Ido not need to canvas the intention of Woods when he first acquired these securities: it was for the purpose of selling at the opportune time.

In Californian Copper Syndicate v. Harris (1904), 5 T.C. 159, Lord Justice Clerk stated the following at pages 165-66:

It is quite a well settled principle in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realisation, the gain they make is liable to be assessed for income tax.

What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being-Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making?

For the purposes of these appeals the test as to the subject matter being bought and sold is also relevant. When the asset does not produce income and the only manner in which a profit may be gained is by selling that asset there is an inference that such transactions is an adventure in the nature of trade. See Taylor v. M.N.R., [1956] C.T.C. 189, 56 D.T.C. 1125 (Ex. Ct.), and Rutledge v. C.I.R. (1929), 14 T.C. 490. In Taylor, supra, the taxpayer’s profit on the buying and selling of lead was taxable as income from a business. The evidence indicated that the taxpayer entered into the transaction for business reasons of a trading nature and not for investment purposes. Thorson P. found that the taxpayer dealt with the lead in exactly the same manner as any dealer of imported lead would have done. The nature and quantity of the commodity involvement transactions showed that the transactions was essentially a trading venture.

However, in Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, the Supreme Court of Canada found that a company had made a capital gain when it bought with borrowed money treasury shares of a highly speculative nature with little or no prospect of dividends and sold them within a few months. The asset of the company whose shares were purchased was an unproven mine. At C.T.C. page 223 (D.T.C. 1135) Martland J. said:

The only test which was applied in the present case was whether the appellant entered into the transaction with the intention of disposing of the shares at a profit so soon as there was a reasonable opportunity of so doing. Is that a sufficient test for determining whether or not this transaction constitutes an adventure in the nature of trade? I do not think that, standing alone, it is sufficient.

In Irrigation Industries Ltd. the taxpayer made only purchases of shares of a single corporation and did not have a history of buying and selling shares. Woods purchased treasury shares in many companies and traded on those shares. In Gairdner Securities Ltd. v. M.N.R., [1954] C.T.C. 24, 54 D.T.C. 1015 (S.C.C.), at page 27 (D.T.C. 1016), Rand J. stated:

Ordinarily, a business is a scheme involving a series of transactions of one or more modes of dealings, more or less repetitive, for making a profit from the total activities.

In Dobbs Estate v. M.N.R., [1967] Tax A.B.C. 137, 67 D.T.C. 135, the Tax Appeal Board held that the taxpayer, a retired RCMP officer, did not acquire shares of corporations in the ordinary way, but by exercising options that had been made available to him. Accordingly he did not buy the shares as an investment since he lost no time turning over at a profit at frequent intervals during the year with no thought of retention. Consequently, the board held that Mr. Dobbs had been trading in the shares.

The appellant relied on the Tax Revenue Board decision of Bossin v. M.N.R., [1974] C.T.C. 2311, 74 D.T.C. 1231, in which A.J. Frost Esq. held that the criteria used in determining the nature of a share transaction are different from those applicable to transactions involving other commodities. Mr. Frost’s conclusion is contrary to reported cases on this subject matter.

In Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473, 73 D.T.C. 5391 (F.C.T.D.), at pages 482-83 (D.T.C. 5398), Urie J. stated that:

The additional facts in evidence upon which I rely to support my view are that the securities bought and sold were speculative in nature, were non-income producing, were held for relatively short periods of time and formed a substantial portion of the total business of the appellant.... The whole course of conduct of the appellant leads inevitably to the conclusion that it is buying and selling securities to make a profit.

I cannot agree with submissions of counsel for the respondent in respect of his reliance on the Irrigation Industries case as supporting his proposition that the losses incurred were capital losses and I have reached the conclusion that the shares in question in this appeal were not investments in the sense referred to in the Irrigation Industries case nor were the changes made in the appellant’s

portfolio merely changes of one form of investments to another. The purchases were purely speculative and were entered into with the intention of disposing of the stock at a profit as soon as there was reasonable opportunity of so doing.

The following excerpt from the judgment of Cattanach J. in Admiral Investments Ltd. v. M.N.R., [1967] C.T.C. 165, 67 D.T.C. 5114 (Ex. Ct.), at page 175 (D.T.C. 5121) succinctly states my views in the case at bar:

What must be looked at is what was done by the appellant with a view to asking the question in Lord President Clyde’s words in C.ZR. v. Livingston et al. (1926), 11 T.C. 538 at page 542):

...whether the operations involved (in the transactions of the company) are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.

While the appellant was not a trader in securities in the sense of that term that it was an underwriter and held a seat on a stock exchange, but rather made its purchases and sales through a stock exchange in the usual manner, nevertheless, the acts of the appellant were just the ordinary transactions of a person who deals in shares.

Woods participated in over 100 transactions in 1986 and 1987. The shares he acquired admittedly were not those which would yield dividends during his term of ownership. Woods did not even consider acquiring shares which would yield dividends. Woods stated that he acquired the shares for the purpose of selling them once it was profitable to do so. The time frame within which he held his shares was usually less than a year. Woods used borrowed funds to acquire the shares. Woods was an insider, he was director of several companies whose share he bought and sold. Notwithstanding Woods’ unquestioned sincerity in investing in these companies in order to provide them with funds, he also wanted to sell the shares of these companies for a profit; this was his motive in the first place. He was trading in the securities of these corporations and that the assessments issued to him in 1986 and 1987 were correct.

During the course of the trial there was evidence to the effect that Woods may not have applied the aggregate amount of losses incurred in subsequent years to gains in earlier years, including 1986 and 1987. (See paragraph 111(1)(b) of the Act.) With the cooperation of counsel for the respondent Woods made a formal request to the Minister that his losses from subsequent years be applied, to the fullest extent possible, to the taxation years in appeal.

The appeals shall be dismissed with costs. However, reassessments are to be issued to carryback losses of subsequent years.

Appeals dismissed.