Stringam Farms Limited v. Minister of National Revenue, [1977] CTC 2438, 77 DTC 317

The Chairman:—This is the appeal of Stringam Farms Limited from income tax assessments in respect of the taxation years 1970, 1971, 1972 and 1973. It should be noted that in 1971 the appellant had two fiscal periods, one ending July 31, 1971 and the other ending December 31, 1971. The appellant admits that there were nil assessments for the fiscal period ending December 31, 1971 and for the fiscal year 1972.

Nil Assessment Issue

As I understand it the only dispute in that respect is whether or not there can be an appeal from nil assessments. I propose to deal with that matter first.

Counsel for the appellant is contending that there can be appeals from nil assessments and cited the case of Ontario Culvert and Metal Products Limited v MNR, 38 Tax ABC 256; 65 DTC 379, a 1965 decision of the Tax Appeal Board which supported the view that a nil assessment could be appealed. As pointed out by counsel for the respondent, the Federal Court of Appeal in Her Majesty the Queen v Garry Bowl Limited, [1974] CTC 457; 74 DTC 6401, followed the decision of the Supreme Court of Canada in Okalta Oils Limited v MNR, [1955] SCR 824; [1955] CTC 271; 55 DTC 1176, concluding that there is no appeal from a nil assessment. Whether or not amendments to the Income Tax Act in this respect are being considered by the Legislator cannot be considered by the Board in rendering its decision in respect of a nil assessment in the appellant’s fiscal period from July 31 to December 31, 1971 and in respect of a nil assessment for the appellant’s 1972 taxation year. It is clear that the principle of stare decisis is applicable to the Tax Review Board when dealing with decisions of the Supreme or Federal Courts and the Board is bound to follow the findings of those courts in cases where the facts before it cannot be distinguished from those facts on which the Supreme and Federal Courts arrived at their decision.

I must therefore hold, on the basis of the Supreme and Federal Courts’ decisions in the Okalta Oils Limited and Garry Bowl cases that there is no appeal from a nil assessment and that the appeal in respect of the appellant’s fiscal period July 31, 1971 to December 31, 1971 and its appeal in respect of the 1972 taxation year must therefore be quashed.

Validity of Appellant’s Appeal for 1973

In his reply to notice of appeal, the respondent contended that the appellant’s appeal for the 1973 taxation year was invalid as it was an appeal from a notice of assessment dated April 1, 1975, which was subsequently replaced by a reassessment dated June 29, 1976. However, in argument counsel for the respondent admitted that in its notice of appeal the appellant had correctly stated the proper assessment and that that allegation in the Minister’s reply was to permit the appellant to amend its notice of appeal if it thought it necessary but that it was not the respondent’s intention to preclude the taxpayer from its right of appeal. In the circumstances, I assume that the point is no longer an issue.

Amendment to Reply to Notice of Appeal

In the statement of allegations of facts in the respondent’s reply to notice of appeal at paragraph 6(b) it is stated:

6. Upon re-assessment, the Respondent has:

(b) Treated the profits and losses it made in respect to the buying and selling of rapeseed and soybeans on the futures market as capital gains and capital losses.

Counsel for the respondent, in argument, stated, as suggested by counsel for the appellant, that the Minister had in fact treated all the profits and losses made by the appellant in the buying and selling of rapeseed and soybeans on the futures market as income and income losses, and not as capital gains and capital losses and that paragraph 6(b) of the respondent’s statement of allegations of fact should be amended accordingly.

The Issue

The principal issue in this appeal therefore is whether the profit realized and losses sustained by the appellant in the purchase and sales of commodity futures in the 1970 taxation year, the fiscal period beginning January 1, 1971 to July 31, 1971 and in the fiscal year 1973, were income or capital gains.

Résumé of Evidence Adduced

From the pleadings and the evidence adduced at the hearing, from the principal witness, Mr George Owen Stringam president of Stringam Farms Limited, it appears to be uncontested that the appellant company was incorporated in 1962 (Exhibit A-2), the shares of which were held by Mr Stringam, his sons, and other members of the family. At that time the appellant was engaged particularly in the raising of grain. Subsequently, Mr Stringam sold the farm to two of his sons and received grain as payment for the sale of the farm for some years. Not being able to sell the grain to the Wheat Board or on the market, it was used in feeding cattle. The first feed cattle was brought along in late 1968 and was placed in a custom-feed lot. The appellant delivered barley to the feed lot owners and received credit on the cost of feeding the cattle. When the cattle was finished, between 120 and 150 days later, it was sold to the highest bidder as fattened cattle. This was the type of operation carried out by the appellant in the taxation years pertinent to this appeal and involved between 500 and 1,200 head of cattle in the feed lots at all times.

During the same period, the appellant owned land on which it grazed cattle on a custom basis and sold a large quantity of fattened cattle in the pertinent taxation years as indicated in the appellant’s financial statements accompanying its tax returns.

In the three-year period from 1971 to 1973, the appellant also dealt in futures contracts in cattle, rapeseed, soybeans and barley but principally in cattle futures. The profit and loss statements of the appellant’s trading in commodity futures in the years pertinent to this appeal were filed as Exhibit A-1.

Mr Stringam stated in cross-examination that the financing of the purchases of the commodity futures was done by the appellant’s surplus account and that no borrowing was necessary to effect these transactions.

Contentions

Counsel for the respondent holds that the profit realized by the appellant in futures market transactions was income from a business within the meaning of sections 3, 4 and paragraph 139(1)(e) of the Income Tax Act.

Counsel for the appellant contends that the appellant’s transactions in commodity futures were distinct and separate from and unrelated to its cattle feeding operations; that the appellant did not use the commodity futures market to hedge against fluctuation of price of finished cattle; that the appellant was not a trader in commodities; and he concludes that the profits realized and losses sustained from commodity futures are capital gains and losses.

In support of his contentions, counsel for the appellant cited certain paragraphs from Interpretation Bulletin [IT-346] dated September 13, 1976, dealing with the fiscal treatment that a taxpayer should give to profits and losses from trading in commodity futures. Counsel for the respondent also referred to the said Interpretation Bulletin and quoted part of a letter from the Minister of National Revenue dated June 21, 1977 to the president of the Winnipeg Stock Exchange. Although the information contained in the Minister’s letter and in the Interpretation Bulletin is interesting and informative, and because much emphasis was placed on the Bulletin, I think it is necessary to repeat here that neither the courts nor the Board are bound by such information because it merely sets out the position of the Department of National Revenue on a subject and is addressed particularly to the concerned members of the Department of National Revenue so that they may follow departmental directives and to practising tax lawyers so that they may know the Department’s attitude in a particular matter. The usefulness of such information to both the members of the Department and the practising lawyers is easily understood. However, it should be understood that the Tax Review Board must decide each case on the basis of the facts before it in the light of the pertinent sections of the Income Tax Act and in accord with applicable decisions of the higher courts and on no other basis.

In the instant appeal the basic question is whether the appellant’s transactions in commodity futures were part of its business, ventures in the nature of trade, or whether they were capital investments. Notwithstanding that we are here dealing in commodity futures, this IS, in my opinion, what is commonly referred to as a “trading case”, and in my opinion the well-established criteria for determining such cases are applicable.

Finding of Facts

I need not, I am sure, repeat that each case (particularly in trading cases) must be determined on all its facts. The pertinent facts in this appeal are:

1. The appellant is an incorporated company, the extensive objects of which are in the agricultural field. The objects of the company do not specify “trading in commodity futures’’. However, the courts have long established that it is the company’s activities and not the declared objects of the corporation that eventually determine the nature of the company’s transactions.

2. The appellant’s principal business is:

(a) the purchase, feeding of cattle on its own land and the sale of fattened beef;

(b) the purchase, the feeding of cattle in custom-feeding lots and the sale of finished cattle.

Basically the appellant’s principal business is trading in cattle.

3. The appellant’s transactions in commodity futures consisted in the purchase, feeding of cattle and sale of fattened cattle on the futures market. Whether or not the appellant used the commodity futures market for the purpose of hedging against price fluctuation of finished cattle, in my view, is immaterial. Basically the appellant’s transactions in cattle futures were trading in cattle and were not only related to but identical with the appellant’s principal business.

4. In the pertinent taxation years the'appellant also transacted on the futures market in rapeseed, soybeans and barley.

The courts and Board, in deciding trading cases, have always considered the taxpayer’s whole course of conduct. The evidence in this appeal indicates that the appellant, whether it was purchasing, feeding cattle on its own land and selling finished cattle, or whether it was doing the very same thing in custom-feed lots or by buying and selling cattle futures, its whole course of conduct was that of a trader in cattle, the purpose of which was to make a profit from the transactions.

Case Law

The leading case in this field of tax law, referred to by both counsel, is that of Atlantic Sugar Refineries Limited v MNR, [1949] CTC 196; 4 DTC 602, and, in my opinion, applicable a fortiori to the facts of the instant appeal. In the Atlantic Sugar Refineries Limited case the corporation’s principal business was the purchase of raw Sugar, refining it and selling refined sugar. Its transactions in the raw sugar futures market dealt only in raw sugar. In the instant appeal the relationship between the appellant’s principal business and its transactions in cattle futures was much stronger in that the principal business of the appellant was the purchase, feeding and selling of cattle and its transactions in cattle futures were exactly the same. The Atlantic Sugar Refineries’ dealings in the raw sugar futures market contended that it was an isolated transaction made necessary because of circumstances [s/c]. The appellant in the appeal presently before the Board admittedly engaged in many transactions in the commodity futures market in the pertinent taxation years (Exhibit A-1). The transactions in cattle futures were identical to those of the appellant’s principal business.

The taxpayer’s intention is a most important criterion in determining whether transactions are in the nature of an investment or whether they are part of a trade or business. In my opinion, an investment which could give rise to a capital gain would normally involve the acquisition and disposition of a long-term capital asset. In the purchase of commodity futures which are by nature short-termed and highly speculative, it is inconceivable that the appellant’s intention was to invest in long-term capital assets. The fact that the transactions were speculative is not sufficient ground to conclude that they were capital in nature. It seems to me quite clear that the appellant in the purchase of commodity futures in both cattle and grain was not making a long-term investment but was seeking to make a profit on a purchase and quick sale of the commodities. In my opinion, this fact alone could preclude the appellant’s transactions, in cattle and grain futures, from being considered as an investment which might give rise to eventual capital gains.

Decision

I conclude that the profits earned in the pertinent taxation years or losses suffered by the appellant in transactions in commodity futures in cattle were income derived from the appellant’s principal business of trading in cattle and taxable under sections 3 and 4 of the Income Tax Act. The appellant’s profits or losses from transactions in commodity futures in grain are income or losses from an adventure in the nature of trade within the meaning of section 139(1 )(e) of the said Act.

The appeal is therefore dismissed.

Appeal dismissed.