Forest Lane Holdings Limited, Bonibo Holdings Limited v. Minister of National Revenue, [1987] 1 CTC 2051, 87 DTC 1

Christie, A.C.J.T.C.:—These appeals were heard together. By notice of appeal dated April 7, 1985, Forest Lane Holdings Limited ("Forest Lane") appealed to this Court regarding its 1980, 1981 and 1982 taxation years. By notice of appeal of the same date Bonibo Holdings Limited ("Bonibo") appealed regarding the same taxation years. Both are private companies. The issue in each appeal is the familiar one of whether in respect of their dealings in the acquisition and sale of corporate shares during the period relevant to these appeals the appellants’ conduct was that of traders or investors.

There was a nil assessment in respect of the 1982 taxation year of each appellant. The appeals in this regard must therefore be dismissed because an assessment of this kind is not an "assessment" within the meaning of section 169 of the Income Tax Act* [2] ("the Act’’): Okalta Oils Limited v. M.N.R., [1955] C.T.C. 271; 55 D.T.C. 1176 (S.C.C.); The Queen v. Garry Bowl Limited, [1974] C.T.C. 457; 74 D.T.C. 6401 (F.C.A.) and The Queen v. B. & J. Music Ltd., [1980] C.T.C. 287; 80 D.T.C. 6219 (F.C.T.D.). Nevertheless the issue previously stated must be determined in respect of that taxation year regarding both appellants because what they allege to be capital losses in 1982 were carried back to their 1981 taxation year. This is consistent with Day & Ross Limited v. The Queen, [1976] C.T.C. 707; 76 D.T.C. 6433 (F.C.T.D.).

Mr. David J. Hennigar is a shareholder, director and the active directing mind and will of the appellants. He is an entrepreneur with expert knowledge of dealing in securities. He has enjoyed significant success in his business activities. Inter alia, he is a director of ten public corporations, four subsidiaries of public corporations and 24 private corporations in addition to the appellants. He received the degree of Bachelor of Commerce from Mount Allison University in 1960 and the degree of Master of Business Administration from Queen's University in 1962. He joined Burns Fry Limited, a national investment dealer at its head office in Toronto on March 1, 1963, as a security analyst. This involved endeavouring to determine the merit of corporate shares as potential investments for clients. In June 1966 he and another employee were sent to Halifax to open a branch office. Hennigar was appointed associate manager and the following year he became manager of the branch. He was appointed a director of Burns Fry Limited in 1972. While manager he was engaged in selling stocks, but by reason of the pressure of other matters he gave up being a stockbroker in 1978 or 1979. He regards himself as being an investment dealer from that time on. He remained associated with Burns Fry Limited.

He said he is a “value oriented investor". He has never sold short or bought on margin. Nor has he ever written a naked call or put option or indulged in trading in commodities. He has written covered options, i.e., option contracts where he held the shares underlying the option. Naked options are generally recognized in the securities field as involving considerable risk. On the other hand, the witness said that “by and large, approximately 85 per cent of all options that are written against an underlying position tend to expire unexercised." Although he has, over the years, had recourse to bank loans Hennigar has been careful in this regard not to assume burdens of debt he cannot comfortably manage.

Forest Lane was incorporated in 1977 and Bonibo about a year later. Two reasons were given for this. First, to avoid the problems encountered by estates in transferring ownership of American securities previously owned by the deceased. By way of example it was said that if an estate includes stocks in American railway companies, a release must be secured from officials of every state in which the railway operates. Second, Hennigar desired to "build, hopefully, some equity for my wife and my two children". Mrs. Hennigar is a shareholder of both appellants and the Hennigar children are shareholders of Bonibo.

The witness testified that he is not a trader in securities nor are the appellants. He described the performance of the stock market during the time

(b) 90 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that he has vacated or confirmed the assessment or reassessed;

but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed.

relevant to these appeals as one of its “most unique periods”. This was precipitated by take-over activities which commenced about 1978 in the Canadian market. By 1980 “take-over fever” had set in. In support of this, evidence was adduced that traced rises and falls in the Toronto Stock Exchange index and volumes traded during the period 1971 to 1982. Also a comparison of annual volumes traded on that Exchange during the period 1971 to 1978 with volumes traded during the period 1979 to 1982 shows a very significant increase during the latter. The phrase “extraordinarily volatile” was employed by Hennigar to characterize the market. It was said that the appellants’ acquisition and sale of shares simply reflected that condition. He added: “If one were to look at the history of those companies (the appellants) subsequent to that period of time the ‘trading activity’, so-called has declined very remarkably, very substantially. It tends to follow the level of activity in the marketplace.”

A record prepared under the direction of Hennigar of the appellants’ dealing in securities during the period February 1, 1979, to January 31, 1982, is in evidence. It consists of several pages of detailed information, the reproduction of which in these reasons I do not regard as necessary. I shall indicate in abated form what is salient therein. This evidence divides the transactions into three components in respect of each appellant: (1) shares held under six months, (2) shares held from six months to one year and (3) shares held in excess of one year. In addition there is in evidence a statement showing the portfolio of each appellant as at January 31, 1982. All shares dealt with are shares of public corporations, many of which are prominent in the world of Canadian business.

With respect to Forest Lane the first category shows that 36,849 shares were sold. Shares of 27 corporations were involved. The total cost* [3] of the shares was $758,694.13. They were held for periods ranging from one day to five months and 27 days. On average the period of retention was one month and 23 days. There were 11,000 shares sold in the second category. Shares of ten corporations were involved. The total cost was $151,500.15. The shares were held for periods ranging from six months to eleven months and three days. On average the period of retention was eight months. There were 9,450 shares sold in the third category. Shares of twelve corporations were involved. The shares cost $112,138.21. They were held for periods ranging from one year to two years and nine months. On average the period of retention was one year and eight months.

As at January 31, 1982, Forest Lane’s portfolio consisted of a total of 17,414 shares of nine corporations that cost $52,731.59. The shares had been held for periods ranging from three months and nine days to 29 months and nine days. The average period of retention was one year and four months.

With respect to Bonibo, the first category shows that 18,065 shares were sold. Shares of 19 corporations were involved. The total cost of the shares was $460,460.15. They were held for periods ranging from one day to five months and six days. On average the period of retention was one month and 24 days. On average the period of retention was one month and 24 days. There were 6,650 shares sold in the second category. Shares of six corporations were involved. The total cost of the shares was $132,743.18. They were held for periods ranging from six months and 27 days to nine months. The average period of retention was seven months and 26 days. There were 12,800 shares sold in the third category. They related to two corporations. The shares cost $41,316.39. They were held for periods ranging from one year and one month to one year, four months and 24 days. The average period of retention was one year, two months and 27 days.

As at January 31, 1982, Bonibo’s portfolio consisted of a total of 18,260 shares of ten corporations that cost $66,093.58. The shares had been held for periods ranging from one month and 18 days to two years, nine months and 21 days. The average period of retention was 12 months and 29 days.

In the documents, reasons were given for each sale. Among the most common related to take-overs, a quick change in price and that potential was believed to have been reached.

Exhibits show this relationship respectively between dividend income of Forest Lane and gain (or loss) on dispositions of shares: 1979 — $394.50, $8,034.48; 1980 — $6,953.14, $40,978.40; 1981 — $4,732.89, $64,260.79 and 1982 — $2,780.43, ($29,823.21). The same numbers for Bonibo are: 1980 — $3,594.36, $9,598.89; 1981 — $3,321.71, $40,472.76 and 1982 — $3,836.85, ($17,551.75).

It has been said many times that the determination of whether a transaction or a number of transactions involves capital gain or loss versus business income or loss depends on the particular facts of each case. This passage from the reasons for judgment in Leonard Reeves Incorporated v. M.N.R., [1985] 2 C.T.C. 2054 at 2058; 85 D.T.C. 419 at 422 is apt regarding Hennigar's assertion that the appellants were not traders.

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 Limited v. M.N.R., [1952] C.T.C. 371; 52 D.T.C. 1171 per Cameron, J. at 381 (D.T.C. 1175) and Racine et al. v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098 per Noel, J. at 159 (D.T.C. 5103).

When the issue of capital gain or business income is involved in relation to the purchase and sale of corporate shares the decision of the Supreme Court of Canada in Irrigation Industries Limited v. M.N.R., [1962] C.T.C. 215; 62 D.T.C. 1131, is almost invariably referred to. It involved an isolated purchase and sale at a profit of shares of a mining corporation. It was held that on the facts the transaction was not an adventure in the nature of trade, consequently the profit was a capital gain. In speaking for the majority of the Court Mr. Justice Martland said at 220-21 (D.T.C. 1133-34):

The nature of the property in question here is shares issued from the treasury of a corporation and we have not been referred to any reported case in which profit from one isolated purchase and sale of shares, by a person not engaged in the business of trading in securities, has been claimed to be taxable.

Cases in which the nature and quantity of the property purchased and sold have indicated an adventure in the nature of trade include C./.R. v. Livingston (1926), 11 T.C. 538 (a cargo vessel); Rutledge v. C.I.R. (1929), 14 T.C. 490 (a large quantity of toilet paper); Lindsay v. C.I.R. (1932), 18 T.C. 43, and C.I.R. v. Fraser (1942), 24 T.C. 498 (a large quantity of whisky); Edwards v. Bairstow, [1956] A.C. 14 (a complete spinning plant) and Regal Heights Limited v. M.N.R., [1960] S.C.R. 902; [1960] C.T.C. 384 (40 acres of vacant city land).

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.

Bearing in mind that shares in a corporation are in a different position for present purposes from some other kinds of property, I am nevertheless, after having considered the various relevant indicia revealed by the whole of the evidence, left with the conviction that the appellants’ dealings in corporate shares constituted a business within the definition of that word in subsection 248(1) of the Act. It follows that the gains and losses therefrom were not capital gains and losses as advocated on behalf of the appellants.

The entire pattern of their conduct is consistent with trading as opposed to investment. I refer in particular to the time-frames between acquisition and sale; the volume of sales involved in relation to periods of retention, the reasons assigned for disposition and the comparison between reported dividend income and gains (losses) on the sale of shares. The acquisitions and sales of capital stock were not merely incidental to a primary investment purpose; they were an essential feature of the appellants’ businesses. I find nothing in the evidence regarding the conduct of the appellants that can be regarded as incompatible with what a knowledgeable, prudent stockbroker and admitted trader in corporate shares on his own account would have done.

As previously mentioned, Hennigar assigned two reasons for the incorporation of the appellants. The first pertaining to facilitating the transfer of American securities is, of course, irrelevant to what is in issue on these appeals. The second, being his desire to build some equity for his family, is not inconsistent with the appellants carrying on a business of trading in securities. While they are seeking to be treated as investors in relation to these appeals, their carrying on as traders could well result in the realization of what motivated their creation even though this may involve payment of more tax than otherwise might be the case.

In the light of the foregoing, these appeals cannot succeed and accordingly they are dismissed.

Appeals dismissed.