Ross J. McGroarty v. Minister of National Revenue, [1989] 1 CTC 2280, 89 DTC 185

Garon, T.C.J.:—This is a case where the taxpayer is appealing from income tax assessments for the taxation years 1978, 1979, 1980, 1981 and 1982. These appeals were heard together.

At the trial, counsel for the appellant indicated that the issue relating to the treatment of a capital loss raised in the notice of appeal for the 1978 taxation year had been disposed of and nothing was required from the Court in this connection. There was also a second issue raised in the notice of appeal for the 1980 taxation year concerning the matter of an allowable business investment loss and it was agreed by counsel for both parties that in the result the reassessment of the Minister of National Revenue on this question is not to be varied.

There was therefore in these appeals a single issue in dispute. It is whether the gains made on the dispositions of shares in BX Development Limited (“BX”) in 1978, 1979, 1980 and part of 1981 and in Brent Petroleum Industries Ltd. ("Brent") in 1981 and 1982 gave rise to a capital gain or were income from a business.

The Facts

The appellant became a licensed stockbroker in early 1965 and was employed in such capacity with Gairdner & Company for about eight years. In 1972 he joined A. E. Osler & Company Limited, an investment dealer and worked with that firm as stockbroker and registered representative until 1976. During this period of employment with Osler, he was at some point a director of that company for about one year.

For some time he was the Chief Executive Officer and President of Century Energy Company, formerly known as Northville Exploration Inc. At the same time he also owned a substantial number of shares in that company. He was also a promoter for Securities Act purposes. He drew money from his margin account to make an investment in that company. In June 1981 appellant was instrumental in causing that Company to commit approximately $500,000 of its funds to three projects in which BX was engaged. Appellant explained in this way his activities with respect to Northville Exploration Inc. in answer to the following questions:

Q. Were you ever active in the underwriting of a private placement for either company?

A. Northville was an old mining company that had no money, no assets, and owed the bank $30,000.00. I took that shell company and used it as a vehicle, reorganized it, and put financing into it along with other board members and used that as a public vehicle to participate in the drilling of those lands in Louisiana which were operated by BX/Brent.

Q. When did this occur? When were you active in the financing?

A. If I recall correctly, financings for Century were all private, they were not public offerings. They were all private placements under the Securities Act of Ontario, namely 71 (1)(d) which is a lull period of 18 months, so exempt from prospectus. That would have taken place probably in 1981, as a guess.

Appellant received a commission in the amount of $10,000 in 1982 with respect to this private placement.

The appellant was a resident of Ontario at the relevant times. Around 1976, he began working as a public relations or communications officer for BX [1] until BX's amalgamation with “Brent” sometime in 1981 and continued in the same capacity for Brent. Brent was an oil and gas company. During the five years in issue the appellant was employed at BX’s and Brent's Toronto office. It is common ground that the appellant was never a director or corporate officer of BX or Brent or of any of their subsidiaries. Both companies were at the time public companies whose shares were listed and traded on the Vancouver Stock Exchange.

According to the appellant's testimony, BX head office was in Vancouver contrary to what is stated in the pleadings. That company also had an office in the State of Arizona where the limestone plant was located. Brent's head office was in Calgary, Alberta.

During those years, the appellant was the beneficial owner of publicly traded shares in various Canadian corporations, including BX and Brent.

Appellant began acquiring stock in BX in 1976 and at the beginning of 1978 he owned in the area of 40,000 to 45,000 shares in BX. The appellant's explanations as to why he acquired shares in BX read as follows:

BX Development was a small Vancouver based company with nominal interests in some mining properties in Canada, but relative to the number of shares issued enjoyed a substantial cash position. There were at that time about 1,600,000 shares issued and they were almost $1.00 a share in cash and the shares were trading at a discounted value relative to the market. The company had publicly announced that it was negotiating the acquisition or the tender of a lime operation in Arizona and I did some analysis, or investigation really, and discovered—the investigation was all in the filing statement of the Vancouver Stock Exchange—and discovered that the lime company that they were considering to acquire was established in 1917 and had been profitable since that time and for certain reasons it was available and BX Development was considering it. They were successful in acquiring the lime mine which supplied lime products to not only the copper industry but the coal industry and also especially in southwest of the United States it was very important as a purifier not only for air because of the EPA, but also water purification. So, it appeared to have certainly a very stable background with a very promising future.

It was part of appellant's duties to assist with shareholder communications by passing on news releases, press releases to the company's shareholders, the investment community and other interested persons. That information could include quarterly financial reports and annual reports and was received by appellant from the senior officials of BX or Brent. The same information would be passed on to regulatory bodies and to the press. The appellant described in this way his day-to-day work for that company:

A typical week, shareholder and investor relations, communications by phone and visitations in both Canada and the U.S.A. Visits included, shareholders, potential shareholders and investment community, i.e. analysts, brokers, investment bankers.

It is in evidence that appellant's holding in that company never exceeded three per cent of its total capital stock. Appellant initially financed the purchase of stock in that Company that he first acquired in 1976 by a mortgage on his house. He testified that he did not have at the time any assets apart from this house. Subsequently more shares were acquired and financed by a second mortgage on this house. He also borrowed from the bank by giving the shares as security. Appellant further stated that throughout the appeal period, 1978 through 1982, he financed the acquisition of stock of BX and Brent through margin accounts in the brokerage community.

The appellant admitted that through the years 1978 to 1982 the volume of shares acquired and sold was substantial. In this connection, the assumptions made by the Minister in the reply to notice of appeal for each of the years in issue regarding the number of shares bought and sold by the appellant as well as the total proceeds and net gains from the sale of these shares, were not disputed. The chart below reproduces those data:

Appellant explained that during the initial part of the appeal period and for some time later he was forced to sell because of margin calls, certain family commitments relating to, inter alia, financial assistance given to a brother and the rise in interest rates. Appellant even mentioned one particular occasion where he “was sold out of over 30,000 shares" after advancing money to his brother as a result of the decline in the price of the stock and the credit requirements of the brokerage firm.

Although the appellant's volume of transactions in BX and Brent represented about 2 per cent of the total volume of transactions in those years in the stock of these two companies, for the appellant it constituted more than 90 per cent of his total holdings in his portfolio. Those shares in BX and Brent were always acquired through brokers in the open market. He had on occasions as many as 15 or 16 brokers during the appeal period. Although appellant's holding in BX and Brent was proportionately small, he was interested in the activities of that company to the point that he attempted to effect a change in its management with his background and contacts in the financial community.

Appellant admitted that his activities in dealing with the stock of BX and Brent were quite extensive. In this respect, the Minister’s assumptions in paragraph 4(f) of the reply to notice of appeal for each of the five years were not challenged. Paragraph 4(f) reads as follows:

4. In reassessing the appellant as hereinbefore admitted or pleaded, the respondent relied upon the following findings or assumptions of fact:

(f) the number of days during which the appellant carried out trades in BX/ Brent shares, and the number of such days expressed as a percentage of available trading days, in the 1978 to 1982 taxation years are as follows:

	No. of Days	No. of Available	Percentage of
Year	Traded	Trading Days	Available Trading Days
1978	119	251	47.41%
1979	88	251	35.06%
1980	80	251	31.87%
1981	37	251	14.74%
1982	52	251	20.72%

Appellant tracked the activities of the market every day and he was speaking on a regular basis to two brokers, possibly more than twice a week. He agreed that he spent a considerable amount of time on an ongoing basis reviewing information that he had before him, reading the newspapers, making decisions about buying and selling stock. The facts in this case are on many points similar to those considered by my brother St-Onge in the case of Dr. William Henry Patmore v. M.N.R., 65 D.T.C. 135 at page 138. The following passage of this judgment is of particular interest:

To sum up, this appellant acted as a stock-broker although unauthorized and unlicensed to do so. His course of conduct shows beyond reasonable doubt that he devoted as much of his time and activities, if not more, to the promotion of his share-selling scheme as he did to his regular occupation of geologist. Although he may not have had a regular stock-broker's office and did not use printed advertising and publicity to promote his sales it is self-evident that a substantial amount of word-of-mouth publicity was used by the appellant to promote his profit-making scheme, in view of the great number of transactions effected in so short a time in the shares of the particular company in which he had a personal interest.

The appellant received no dividend from any of the BX or Brent shares held by him in any of the 1978 to 1982 taxation years. It is also to be noted that the appellant agreed that throughout all the years he had a very quick turnover of shares.

Analysis

Counsel for the appellant put forward the general submission that the taxpayer's actions in purchasing and selling shares of the capital stock of BX and Brent during the five years in issue were not those of a trader. He went on to suggest that the appellant after losing his broker's position was employed by BX and Brent and on account of his belief in the potential for growth of the company, he "decided to invest heavily” in the stock of that company, to use appellant's own words. He also explained the appellant's frequency of transactions by his lack of liquidity during the relevant period. More specifically he stated that at various times during that five-year span margin calls due to the drop of stock prices and on account of the substantial rise in interest forced him to dispose of his stock from time to time.

As has been mentioned in a number of cases, it is necessary in cases of this nature to review the appellant's whole course of conduct in order to determine if the gains made by the appellant from the sale of shares in BX and Brent ought to be characterized as income from a business or whether they were capital gains. In this regard, it is apposite to consider the usual indicia applicable in trading cases.

First the appellant had been working as a licensed broker for approximately 13 years before he began acquiring BX’s stock. He was also a director of an investment firm by the name of Osler Company, an investment dealer. There is no question that when he started in 1978 acquiring and selling shares of the stock of BX and Brent he had considerable knowledge of the securities market. In addition, although he was not an insider for Securities Act purposes, he definitely was familiar with the activities of the company in whose stock he decided "to invest heavily” because of his duties as public relations officer or a corporate communications officer with BX and Brent during the years in issue.

Appellant's employment connections with BX and Brent and the nature of his duties with these companies had a bearing on his activities relative to the purchase and sale of BX and Brent shares. The type of background and experience the appellant had is often found in a trader in securities.

Appellant’s method of financing the acquisition of stock of BX and Brent should be looked into. Counsel for appellant laid much stress on a passage in the judgment of the Supreme Court of Canada in the case of Irrigation Industries Ltd. v. M.N.R., [1962] S.C.R. 346; [1962] C.T.C. 215; 62 D.T.C. 1131 at page 218 (D.T.C. 1132) where Mr. Justice Martland commented, on behalf of the majority of the Court, as follows:

With respect, I would not think that the question of whether securities are purchased with the purchaser's own funds, or with money borrowed by him, is a significant factor in determining whether their purchase and subsequent sale is or is not an investment.

These observations are to be viewed in the context of the particular facts of this case which had to do with the isolated purchase by a corporation of a block of treasury shares and their subsequent sale a few months later. Furthermore I do not read this passage as suggesting that the method of financing is a totally irrelevant consideration.

In the present case, I have already indicated that the appellant started off financing the acquisition of stock of BX and Brent through a first mortgage on his home. Later on, he agreed to having a second mortgage on same for the purpose of acquiring additional stock in the same company. During a substantial portion of the relevant period, appellant relied heavily on margin financing. A trader is more likely to embark on financing in this way than an investor. The extent of appellant's borrowing was considerable having regard to his limited financial resources and other financial commitments at the material times. That borrowing involved the financing of the acquisition of shares which may not have been highly speculative but definitely were not blue chips. The methods used by the appellant for financing the acquisitions of such shares are consistent with the activities of a trader.

There is also the point that the shares did not bear dividends during the period in issue. There is no question that, on the evidence, the purpose of the numerous purchases of shares was not the expectation of earning income in the form of dividends on this stock. The acquisition of such stock can only be explained by the appellant's desire to earn income by selling those shares.

Another matter of interest in the present case is the considerable volume of transactions in which the appellant engaged himself during the years under review. Looking at the chart reproduced earlier in these reasons there were more than 300 different purchases of shares over this five-year period involving more than 300,000 shares. An even greater number of shares were sold during the same period. These activities involving the purchase and selling of shares must be associated with the rapid turnover, by appellant's own admission, which these shares were subject to. This is apparent from the examination of the chart referred to earlier. As a matter of fact, the chart indicates that during four of the five years appellant disposed of a number of shares that was either nearly equal or greater than the number of shares he had acquired during the corresponding years. It is a history of buying and selling shares. This considerable number of purchases and sales clearly points in the direction that the taxpayer was trading in shares.

The time spent by the appellant in managing his portfolio was quite significant. The taxpayer's evidence is clear about this. Every week he was devoting a fair amount of time to activities relating to the purchase and sale of shares.

Counsel for the appellant pressed the point in support of the position that appellant was not a trader that a trader would not deal in one stock but in many stocks. While it may be so generally speaking it is not inconceivable that on occasions a trader in securities could concentrate mainly on one stock. On the other hand, it is more risky to deal only in one stock and an investor would normally be inclined to diversify. In any event, it would be highly artificial if a person could not be considered a trader because of this aspect of the matter if in all other respects he was. Even if this could be a factor pointing in the direction that appellant was an investor, the impact of all other indicia relative to appellant's experience and background, time spent on buying and selling shares, methods and extent of financing the acquisitions of such shares, volume of transactions, length of retention of these shares, leads me to conclude that the appellant embarked on the business of trading in securities. None of these factors are determinative but their cumulative effect is clear that the appellant was a trader in shares. Upon the whole of the evidence, I find that appellant's primary purpose for the acquisitions of these shares was to dispose of them quickly in order to make a profit therefrom.

Therefore I conclude that the profits made on the sale of the shares of the stock of BX and Brent during the years in issue were income from a business.

Accordingly, the appeals are dismissed.

Appeals dismissed.