Richard D. Tafel v. Minister of National Revenue, [1987] 2 CTC 2019, 87 DTC 360

Rip, T.C.J.:—The appellant, Richard D. Tafel, appeals against income tax assessments for 1980 and 1984 in which the Minister of National Revenue, the respondent, reduced the amounts of the premiums paid to a registered retirement savings plan eligible for a deduction pursuant to subsection 146(5) of the Income Tax Act ("Act"). In each of 1980 and 1984, or within 60 days after the end of each year, Mr. Tafel paid $5,500 as a premium under a registered retirement savings plan of which he was an annuitant and deducted the full amounts of the premiums in computing his income for each year. The respondent reduced the amounts available as deductions in computing income to $1,871.60 and $4,057.19 in 1980 and 1984 respectively on the basis that $5,500 was greater than 20 per cent of the appellant's earned income for the respective taxation years.

Mr. Tafel carries on the practice of law. He incurred losses of $20,881 and $21,800 from transactions in commodity futures in 1980 and 1984 respectively. In accordance with the respondent's Interpretation Bulletin IT-346R, dated November 20, 1978, Mr. Tafel continued the practice he commenced in 1979 and in calculating his income for the particular year, deducted the full amount of losses.

The respondent is of the view that since Mr. Tafel deducted in full his commodity losses and reported any gains in full on the basis that such losses and gains were of an income nature, his activities in the commodity futures market constituted the carrying on of a business. In assessing the appellant, the Minister reduced his earned income from his law practice by the amount of his losses from transactions in commodity futures. As a result 20 per cent of the appellant's earned income in each year was less than $5,500.

Counsel for the respondent submitted during argument that if a taxpayer opts to use the income treatment of reporting gains and losses in commodity futures made available to him by the Interpretation Bulletin the transactions in commodity futures are a business and any losses are losses from a business* [1]

Subsection 146(5) authorizes a taxpayer in the same circumstances of the appellant who is an annuitant under a registered retirement savings plan to deduct in computing his income for the year, the aggregate of all amounts each of which is the amount of any premium paid by the taxpayer under the plan during the year or within 60 days after the end of the year not exceeding the lesser of $5,500 and 20 per cent of his earned income for that taxation year.

Paragraph 146(1)(c) defines "earned income" to mean the aggregate of:

(i) salary or wages, Superannuation or pension benefits, retiring allowances, death benefits, royalties in respect of a work or invention of which the taxpayer was the author or inventor, amounts included in computing the income of the taxpayer by virtue of paragraph 56(1)(b) of (c), amounts received by the taxpayer from a trustee under a supplementary unemployment benefit plan, amounts included in computing the income of the taxpayer by virtue of this section and amounts included in computing the income of the taxpayer by virtue of subsections 146.2(6) and 147(10) and (15),

(ii) income from the carrying on of a business either alone or as a partner actively engaged in the business,

(iii) rental income from real property, and

(iv) amounts deductible under paragraph 8(1)(l) or (m) in computing the income of the taxpayer,

minus

(v) losses from the carrying on of a business either alone or as a partner actively engaged in the business,

(vi) losses from the rental of real property, and

(vii) amounts deductible under paragraph 60(j), (j.1), (I) or (m) or under subsection (6) or (7) in computing the income of the taxpayer;

In argument the appellant took the view that since a transaction in commodity futures is not set out in the definition of "earned income" (paragraph 146(1)(c)) as is rental income, for example, any profit or loss from such transactions is not "earned income"; therefore the Minister ought not to have reduced his earned income.

Mr. Tafel started his transactions in commodity futures in 1978 or 1979 by investing several hundred dollars with his stockbroker. During the course of 1980 Mr. Tafel gave his stockbroker three cheques aggregating $20,000 and authorized the broker to buy and sell commodity futures at his discretion. In 1984 he gave his broker two cheques totalling $20,000 with the same instructions. In none of 1981, 1982 or 1983 did Mr. Tafel make any payments on account of acquiring commodity futures, although he incurred losses in those years.

Mr. Tafel transacted in gold futures. He says he was more active buying and selling shares on the stock market.

Interpretation Bulletin 346R provides for income treatment for tax purposes in cases where an individual taxpayer takes a futures position in commodities connected with his business or as part of his business operations or has inside information about a commodity which he uses for his benefit in one or more transactions. The bulletin refers to other individual taxpayers who take one or more future positions as "speculators". The bulletin states:

7. As a general rule, it is unacceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one-half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called “capital treatment") provided such reporting is followed consistently from year to year.

8. If a speculator prefers to use the income treatment in reporting gains and losses in commodity futures or commodities, it may be done provided this reporting practice is followed consistently from year to year. If income treatment has been used by a speculator in 1976 or a subsequent taxation year, the Department will not permit a change in the basis of reporting. Interpretation Bulletin CPP-3 discusses the effect of the income treatment and capital treatment on self-employed earnings for the purposes of the Canada Pension Plan.

I shall first deal with the appellant's argument in respect of the statutory definition of "earned income". The fact that there is no specific reference to transactions in commodity futures in paragraph 146(1)(c) does not detract from inclusion of profits or losses from such transactions in earned income if such transactions constitute a business (subparagraph 146(1)(c)(ii)). A “business”, for purposes of the Act, "includes a . . . trade . . . or undertaking of any kind whatever and . . . an adventure or concern in the nature of trade . . . ” (subsection 248(1)).

If the transactions by Mr. Tafel in commodity futures constituted a business, including an adventure or concern in the nature of trade, his earned income would be reduced to the extent of any loss from the carrying on of that business.

As I understand Mr. Tafel’s transactions in commodity futures, a person purchases a contract for the purchase of a commodity for future delivery at a certain date at a fixed price; if the price of the commodity on that date is less than the price fixed by the contract the contract is without value and the person incurs a loss equal to the amount of the purchase price of the contract; if on the date the price of the commodity is greater than the price fixed in the contract, the person will sell the contract at the higher price and make a profit.

Transactions in futures carried on by Mr. Tafel are not similar to the acquisition of the commodity itself, such as gold, for example, when the purpose is to hold the commodity indefinitely. (See Harms v. M.N.R., [1984] C.T.C. 2714; 84 D.T.C. 1666). When a person acquires or takes a futures position in a commodity he does not acquire the commodity; he acquires the futures position with the purpose of making a profit out of the purchase and sale of the contract. To my mind this is what constitutes a trade. (See Wisdom v. Chamberlain (H.M. Inspector of Taxes), 45 T.C. 92 at 106. The word "trade" is defined in The Shorter Oxford English Dictionary on Historical Principles, amongst other things, as:

. I. . Passage or resort for the purpose of commerce; hence, the buying and selling or exchange of commodities for profits; commerce, traffic, trading . . .

While Mr. Tafel's activities in commodities futures were infrequent and passive he acquired the contracts solely for the purpose of selling them at a profit. He put up the money but once he did so he relied on his broker to act as his agent and on his behalf in deciding when to purchase positions in futures and the amount to be invested. Mr. Tafel was dealing through his agent in a manner a trader in futures would deal. His method of transacting in futures was an adventure in the nature of trade, and thus a business.

Since I have found Mr. Tafel to have carried on a business, I need not concern myself with the question whether, if he was not carrying on business, the fact he reported all his gains and losses from transactions in commodity futures for tax purposes, as permitted by the Minister in Interpretation Bulletin 346R, alters that the transactions were capital in nature; that is, whether administrative tolerance which permits a taxpayer to report what are capital losses as income losses, alters a capital transaction to an income transaction for other purposes of the Act.

The losses incurred by Mr. Tafel in commodity futures reduce his "earned income" within the meaning of paragraph 146(1)(c) of the Act.

The appeal is dismissed.

Appeal dismissed.