Joseph J. Huzan v. Minister of National Revenue, [1991] 2 CTC 2491, 91 DTC 1257

Kempo, T.CJ.:—These appeals involve the taxation years of 1984 and 1985 wherein the appellant disputed the respondent's reassessments involving the characterization of his dispositions of securities as being on income account. The appellant's pleaded position was that they were on capital account in that his sole objective at all material times was to build up an investment portfolio in well-managed Canadian public corporations.

During the 1982 to 1984 taxation years the appellant had owned and operated a small real estate company. On experiencing a downturn in the real estate industry, he began his own small oil company in 1983. The appellant said that, being self-employed without any pension fund, he desired to build up an investment portfolio as a small pension fund for himself for his later retirement years.

The appellant testified that in 1982, at the very outset, his direction had been steered by his broker to Poco Petroleum. It was represented to him as being the darling company of the industry. He confirmed this through his own reading of the local newspapers and the daily oil bulletins. He said that the diversification of his portfolio by transacting in the shares of other junior resource companies was also in accordance with his broker's advice.

An investment summary was prepared and entered as Exhibit A-7. It shows:

DETAILS OF SHARES HELD AT YEAR END

Shares Cost

December 31, 1982:

Merland Exploration	500	$ 3,276.25
Poco Petroleums Ltd.	60400	131,718.66
		$134,994.91
December 31, 1983:
Gordon Resource	1000	$	890.00
Omab Enterprises	1000		1,342.90
Tri-State Resources	2000		7,675.46
Pacific Western Airlines	200		2,310.50
Roxy Petroleums	2000		8,357.07
Poco Petroleums Ltd.	65700	161,304.29
		$181,881.22
December 31, 1984:
Gordon Resources	1000	$	890.00
Omab Enterprises	1000		1,342.90
Tri-State Resources	6100		18,010.47
Pacific Western Airlines	200		2,310.50
Roxy Petroleums	3000		11,352.77
Ice Station Resources	2000		2,633.82
Golden Sceptre	600		5,048.45
Gane Energy Corp	5000		2,066
Cimmarron Petroleum	4000		27,533.51
Altex Resources	9800		10,777.46
Poco Petroleums Ltd.	84900	261,165.64
		$349",315.44
December 31, 1985:
Gordon Resources	1000	$	890.00
Omab Enterprises			1,342.90
	1000
Tri-State Resources	6100		18,010.47
Carma Ltd.	15000		10,230
Pen West Petroleum	2000		3,249.27
New Scope Resources	3800		13,866
Golden Key Resources	5000		5,701.97
Canadian Roxy Petroleums	1000		11,352.77
Ice Station Resources	2000		2,623.82
Gane Energy Corporation	5000		2,066
Altex Energy Corporation	4800		5,277.46
Ontario & Quebec Railway	1		8,800
Cypress Drilling	2700		Nominal
Cimmarron Petroleum	2700		19,982.01
Poco Petroleums Ltd.	77023	350,747.72
		$454,140.39

INVESTMENT SUMMARY

	1983	1984	1985
Historical Cost of Capital Stock
Held
1. Beginning of Year	$134,995	$181,881	$349,315
2. End of Year	$181,881	$349,315	$454,140

The appellant financed this portfolio through a cash account and a margin account; the transaction summary, Exhibit A-5, indicated the bulk had occurred through the margin account:

TRANSACTION SUMMARY

				Number of Transactions
A.	Margin	Acquisitions		Dispositions
	Account
	1983	27	27	12
	1984		19	4
	1985		15	12
				Number of Transactions*
B.	Cash Account Acquisitions			Dispositions
	1983		3	1
	1984		1	Nil
	1985		2	3

♦The number of buy or sell orders that likely underlie the transactions listed in

Exhibit "A-4", under the heading “# of shares”. Cancellation or correction entries have not been included in the calculation.

Indeed a review of the transaction journal, Exhibit A-4, revealed that during the period September 1982 to June of 1983, the debit balance in the margin account remained under $100,000. Thereafter, and until June of 1984, it ran between $115,000 to $200,000. By March of 1985 it had risen to $248,000 and by the end of October of that year it exceeded $300,000. The share transaction activities recorded in the cash account were modest by comparison to that of the margin account. Poco Petroleum shares were transacted through both accounts.

The appellant said he had considered his personal knowledge of the stock market to be poor to fair, that he had advised his stockbroker as to his goals with respect to the purpose of the investment portfolio and that he had relied upon and followed his advice as to what should be done from time to time. He explained that his company Losanne Petroleums Ltd. (which also transacted in similar junior resource company shares) was itself not a junior oil company; its business involved participation in Alberta wells, and it had a small gas field and a couple of wells in Saskatchewan. It had asset values of around $1.5 million.

Losanne Petroleums Ltd. also transacted in Poco Petroleum shares. Ten thousand were purchased during 1984 and sold prior to its fiscal year ending 28 February 1985 at a $962.50 loss. During its 1986 taxation year itmade a $72,762 gain on the sale of 56,000 Poco Petroleum shares together with transacting in those shares similarly acquired and sold by the appellant on his personal account. For its 1987 year Losanne Petroleums Ltd. reported a $285,442 gain on 31,600 Poco shares. The other shares transacted by Losanne Petroleums Ltd. during the calendar years of 1985 and 1986 of which the appellant had also transacted on his personal account included Cimmarron Petroleum Ltd., and Golden Sceptre Resources Ltd. All of these, including Poco, were speculative junior resource oil companies with no reasonable expectation of dividend income to be gained therefrom.

The appellant denied that his involvement in the oil patch through his own businesses had given him any insights or leads as to how the oil industry itself had operated. He maintained that he had acted on advice initiated by his broker, Mr. Davidson, who was really the one responsible for building up his one-half million dollar personal stock portfolio within a four-year period of time. He acknowledged that he had control over five accounts which transacted in junior oil company shares. These five included his personal accounts (margin, cash and RRSP) and those of his own oil and gas companies.

The type of cash account maintained by the appellant with his broker enabled the buying of shares to have occurred without the necessity of the appellant paying for each purchase as it arose because the proceeds from a timely sale were expected to look after the liability arising from a purchase.

In direct examination the appellant testified that he had the financial capacity to meet any demand on his margin account if that need arose. This included rental properties, a clear title to his residence and the assets of Losanne Petroleums Ltd. which he controlled and which had over one-half a million dollars in term deposits and marketable securities on hand. However, in 1983, during the appellant's absence out of town, the broker had sold some shares of Poco Petroleum to bring down his margin account liability. While the appellant had originally testified in cross-examination that this was the only forced sale, he later recanted when shown a letter he had written to Revenue Canada in July of 1988 in which he had asserted that all of his Poco share sales from 1983 to 1986 were forced sales to cover his margin account balances at times when he was unable to increase his bank loans. Indeed, apparently 50,000 Poco shares were sold in March of 1985 for that reason, however by September of that year he had reacquired over 50,000. He reiterated the sale had happened on his broker's advice to bring down his margin account and that thereafter he was simply re-establishing his Poco position and diversifying in other companies.

With respect to the frequency of trading in Poco Petroleum shares during 1987, 50,000 were sold during March at a price range of 13.50 to 16.625 per share. During 1988, 4,000 were acquired in August at 10.125 per share, 30,000 were sold during October at 9.250 per share, 10,000 were bought in November at 7.876, and 18,323 were sold in December at 7.37 per share.

In any event the appellant conceded during cross-examination that Poco Petroleum shares had been bought and sold during 1983 and 1984, that Altex Resources shares were held for six and one-half months during 1984/85, PWA corporation shares were held for one year, Cimmarron Petroleum shares were held between one and two years, that Shovco Resources shares were held less than two months, that Renaissance Energy shares were held for six months, that Golden Sceptre Resources shares were held for less than one year, that Universal Explorations shares were held for less than six months, that Standard and Poors options were held for six days, that Merril options were held for less than 40 days, and that TransAlta warrants were held for less than three weeks.

The 1987 and 1988 years saw the appellant liquidating all of his stock. He agreed he enjoyed very little in the way of dividend income but that he had not been looking to receive any in any event. At this point it is apt to note that this testimony is at odds with his statement in the July 1988 letter to Revenue Canada wherein he had asserted that the Poco investment "was intended to be an income producing investment by way of dividends, growth value and participation in company management".

Of note in this case is the fact that in filing his tax returns for the 1983 and 1984 taxation years the appellant had reported his share transactions as losses on account of income and not capital, the bulk of the net loss being made up of interest costs. He said that these filings were errors made by his accountants which passed unnoticed at those times. A copy of a ledger-type sheet of paper was produced (Exhibit A-6) which had been recently discovered amongst his accountants' working papers. This document, prepared in March of 1984, was in the appellant's handwriting. It was a record of his 1983 share transactions and on the bottom he had inscribed the words “capital gains or loss". The appellant testified his brother was an accountant and that through discussions with him in 1983 he was aware of the different tax treatment accorded to capital gains and to income gains. He said it was his intention that his 1983 net loss was to be treated on capital account.

One must observe that the 1983 and 1984 returns (Exhibits A-1 and A-2) were not at all complicated. The share loss taken on account of a business loss, with its large interest component, was not buried in a mass of complex schedules and attachments. Its description and amount stood out very clearly, not only on the front page of each return but especially so on the one-page stock transaction schedule. The appellant said he had merely glanced at each return, and that he had trusted his accountants to prepare them properly. The claimed “business loss” of $32,172 in 1983 arising out of the share transactions had obviously and clearly put his total income into a $13,373 negative position. For 1984, his $42,000 income was reduced to $20,662 by application of a $21,250 "business loss” arising out of the share transactions which was clearly reflected as such on both the front page and as scheduled. The 1985 return, again in an equally uncomplicated format, reported $102,500 in taxable capital gains (after taking an allowable $10,000 capital gains exemption) the effect of which increased his $19,700 other income to a total income of $128,862. During 1985 the appellant's gains on his share transacting amounted to $232,407.

On re-direct examination the appellant said that he had glanced at the front page of each his 1983, 1984 and 1985 tax returns, that he had simply looked at the numbers, and that “that was it".

The appellant's stockbroker Mr. James Davidson testified. He became licensed as such in 1981 and began with the appellant in the fall of 1982. The usual written application form which would have normally been taken setting out, inter alia, investment style and purpose, was no longer available to him for production. His testimony given in direct examination revealed:

Mr. Nixon:

Q. Your client, Mr. Huzan, would have given you instructions to transact his account. Can you tell us what those instructions might have been, ormore properly, can you tell us what those instructions were in 1983, in 1984, and in 1985?

A. We went and established a portfolio of, primarily, junior growth companies, specifically in the oil and gas area, which is the area that I know best and the area that I feel the most comfortable giving my clients the benefit of my knowledge. And specifically we stuck to a few positions and with the—I guess I’m convoluting a little bit the question, but with the hopes of turning a profit.

Q. And ultimately when you receive those instructions to do that, did you—let's assume—you make reference to turn a profit. What would you do in the bent that you had a share that had had some growth and you—would have advised Mr. Huzan as to when to sell that particular stock?

A. Definitely, definitely. And when to buy it for that matter too.

Q. And when to buy it. And when you advised him to sell a particular stock, what was the normal course after that transaction?

A. In the case of Joe's, it was usually taking the proceeds from the sale and paying down the debt against the account.

Q. And when you did that, did that give him more potential to—what did that allow him to do?

A. Well, it gave my head office more comfort, because at various points in time we had the account fully margined or fully collaterialized, paying down the debt by taking profits. It made my Toronto office feel more comfortable. That was a constant concern through the piece.

Mr. Davidson confirmed that it was not common practice for junior oil and gas companies to pay dividends and that the appellant had share transactions through three companies as well as on his own account. The kinds of investments selected were not income-earning types; rather the benefits would be realized on sale at a later point.

Contrary to the appellant's own assertion regarding his want of knowledge and abilities respecting the stock market and the oil industry which he had described as poor, Mr. Davidson's recall and opinion in this regard was that the appellant's skill and understanding in both areas was certainly not poor but rather it was good. It was also his view that any individual who did not have a very good understanding of the stock market would have been advised to stay away from a margin account, the reason being the leverage factor which entitled the brokerage firm to sell portfolio inventory if they were concerned about the collateral value of the stock portfolio. He said the decision to use a margin account would not be predicated on short-term versus long-term holdings. Mr. Davidson's view was that the margin account interest rates charged from time to time would likely be competitive with that of a lender's rate, and perhaps even more so in order to generate the business.

Concomitantly, the business of brokerage firms is generated by active trading on the part of its clients. The appellant professed a poor understanding as to the whole matter of interest charges on his margin account, and had steadfastly maintained that in any event he had had sufficient assets to cover all his liabilities. Frankly, this does not jibe with the fact that the broker had exercised its leverage rights on the account from time to time, and the appellant had not committed these other resources to hold onto his stock portfolio then on hand.

Mr. David J. Grier, a public accountant, testified on behalf of the appellant. His firm of three to five employees had prepared the tax returns for the appellant for his 1983 to 1985 inclusive taxation years. Mr. Grier's testimony was of limited benefit as he had not personally prepared the 1983 or 1984 returns or their respective share transaction schedules. Rather, his activity was confined to checking the accuracy of the tax owing calculations. He had had no discussions with the appellant concerning the tax treatment of his 1983 and 1984 share transactions. He recalled the 1985 situation was discussed because it was such a large figure. The whole matter of the 1983 and 1984 manner of reporting arose during the spring of 1986 when the 1985 year was under examination. Mr. Grier had interceded thereafter on the appellant’s behalf with Revenue Canada but without success. Thus these appeals.

Analysis and Resolution

The resolution of the matter turns on its own facts. Christie, A.C.J. in Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054; 85 D.T.C. 419 (T.C.C.) at 2058 (D.T.C. 422) cautioned:

The direct evidence of a person who has an interest in the outcome of an appeal regarding the intention behind a transaction or series of transactions is not determinative of the existence of the stated intention. Generally speaking the intention is to be ascertained from the entire course of conduct and relevant circumstances and the inferences flowing therefrom: Gairdner Securities Ltd. v. M.N.R., [1952] C.T.C. 771; 52 D.T.C. 1171 per Cameron, J. at 38 (D.T.C. 1175) and Racine v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098 per Noël, J. at 159 (D.T.C. 5103).

I have significant reservations about the veracity of the appellant's testimony. Instances which arose during the hearing having an impact on his credibility include his untruthful representations to Revenue Canada (see Exhibit R-5, infra) that he was seeking dividend potential from his stock portfolio and that all of his Poco stock sales had been forced. The appellant attempted to distance himself from the letter during his testimony essentially by saying it encompassed someone else's words, and that he was without understanding of tax matters at the time. His protestations with respect to many aspects of the case were subjectively premised on his own ignorance and/or naivety; it was a common thread throughout the case. However it gained no support from Mr. Davidson's evidence if it is to be believed. The letter reads:

EXHIBIT R-5 Joseph J. Huzan 605, 550 - 6 Avenue S.W. Calgary, Alberta T2P 0S2 (403) 233-9119

July 29, 1988

Deputy Minister of National Revenue for Taxation

875 Heron Road

Ottawa, Ontario

K1A 0L8

Dear Sir:Ref: Notice of Objection to 1984 and 1985 reassessments

This letter is supplemental to the T400A's and the attachments thereto and is written to clarify my intent in the purchase of shares of Canadian corporations.

Beginning with my first purchase of Poco stock it was my primary intention to build a substantial equity position in this company for two equally important reasons.

1. To build an investment in a well managed Canadian public corporation whose shares had good dividend and growth potential, and

2. To build an equity position sufficient to enable me to actively participate in the management and growth of the company by obtaining a seat on the Board of Directors.

Other than a general knowledge of what I believed to be the outstanding qualities of the management I had no "inside" information and could not possibly have known that the stock would pay no dividends during the 5 years I held it, though my hope for growth in value was realized.

My hopes to build an equity position large enough to participate actively in the company were thwarted by the issuance of large amounts of treasury stock in 1985 and thereafter so that the possibility of building a strong voting position gradually diminished until I liquidated my holdings for reinvestment in a venture with more income and participation potential.

All sales of my Poco stock from 1983 to 1986 were "forced" sales inasmuch as they were made to cover balances owing in my margin account at times when I was unable to increase my bank loans due to other investment commitments. If you analyse the schedules showing the security transactions you will see that Poco shares were repurchased as quickly as possible afterwards.

With respect to purchases of other shares, this was done on the advice of my broker who got nervous about the large investment in one share when I was using the margin account as a method of bridge financing. I did make numerous other investments; some for a very short time; some I still have, but this activity was secondary to my primary goal and any money made was re-invested in Poco.

I realize (now, although I didn't at the time) that my earlier returns were incorrectly filed and this has given rise to the problem I am having now. It is a poor excuse to say that I did not know enough tax law to realize that my previous accountant had made errors in the preparation of my return, but unfortunately it is the truth.

I point out again, that my investment in Poco was intended to be an income producing investment by way of dividends, growth value and participation in company management. The fact that I proved unrealistic in my expectations should not disprove my intent.

In any case, I will welcome the opportunity of a meeting for discussion, explanation, clarification or whatever is required to ensure that my reasons for making these investments is fully understood before a decision is made on my appeal.

Yours truly,

"J.J. Huzan"

Joseph J. Huzan

I do not accept the appellant’s assertion that his knowledge of the stock market and of the oil and gas resource industry was merely fair to poor. He and his companies transacted frequently in both; his companies were involved in oil and gas activities notwithstanding that they were not in the junior oil and gas resource class.

The explanation advanced by the appellant that he simply "looked" at the figures on the front page of his 1983 and 1984 returns is not an acceptable explanation. His brother had advised him of the capital versus income treatment of share transactions in 1983, so he had knowledge when he chose to simply "glance" at the numbers. Wilful indifference accorded by him toward his personal duty and legal obligation to fiscally report fully and accurately in my view diminishes his credibility. In my opinion there is a reasonable inference to be drawn that he was aware of the actual fiscal treatment of the share transactions for 1983 and 1984 and that it was of considerable advantage to him at the time, and that he simply chose to ignore it.

That all of the Poco Petroleum sales were forced was not true. Some were sold in 1983 by the broker to reestablish the margin account. Around 50,000 had been sold in 1985 allegedly for the same reason. Juxtaposed to this, one cannot help observing that while the appellant was steadfastly maintaining that his margin financing was always secure because of his other assets, the reality was that he had not used them to prevent this large transaction which had markedly depleted or diminished his alleged capital or investment-type portfolio.

Given my reservations about the appellant's testimony with respect to his intentions, and even if matters of its veracity were put aside, the objective evidence in this case points in many instances to the transactions being on account of a business or income activity. These include the frequency of the trading activity by the appellant and his companies in non-dividending, junior oil and gas resource companies (especially those of Poco Petroleum both during the 1983 to 1985 periods and thereafter), with a great majority of these activities being margined and thus subject to leverage at any time. Also, there was an absence of evidence in this case, which would have conferred some credence to the alleged intentions, that the bulk of the stock portfolio would have been held as an investment whether the price rose or fell.

I am unable to conclude that the frequent share transactions were intended to, and in fact represented, investment changes for the purpose of maintaining yield through diversification. The premise put forth by counsel was that the appellant was transacting in capital to gain a better capital, and that the principles in Irrigation Industries Ltd. v. M.N.R., [1962] C.T.C. 2151; 62 D.T.C. 1131 (S.C.C.), to the effect that stock market transactions do not normally give rise to trading income, would apply. In this vein the counsel advanced the following remarks of Martland, J. as impacting on the appellant's situation [at pages 219 and 221 (D.T.C. 1132-34)]:

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. . .

In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of is regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. 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.

Corporate shares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well recognized method of investing capital in a business enterprise.

In Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473; 73 D.T.C. 5391 (F.C.T.D.) Urie, J. considered and commented on the aforenoted reasons given in the Irrigation Industries case. I would reiterate and adopt his comments at page 482 (D.T.C. 5398) as applicable to the appellants situation:

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 fact that it was not part of the main business of the appellant is, in my view as above stated, of no particular significance. 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 50011 as there was reasonable opportunity of so doing.

The examination and analysis of the appellant's whole course of conduct leans heavily in favour of the finding that he was transacting in securities in the manner akin to that of an ordinary trader so as to constitute an adventure in the nature of trade with a view to profit, and that he has not shown error on the part of the respondent.

Accordingly, and for the reasons given, the appeal for each of the 1984 and 1985 taxation years is dismissed.

Appeal dismissed.