Jed Ladin v. Minister of National Revenue, [1977] CTC 2604, 78 DTC 1007

Delmer E Taylor:—This is an appeal against income tax assessments for the years 1972, 1973 and 1974 in which the Minister of National Revenue treated amounts of $61.027, ($28,898.17) and $19,074.28 respectively as profits (or losses) arising from business rather than from capital transactions. The appellant relied upon sections 4, 9 and 38 of the Income Tax Act, SC 1970-71-72, c 63 as amended, while the respondent relied, inter alia, upon sections 3, 9 and 248 of the said Act.

Facts

The appellant was, in the relevant years, a businessman in the City of Winnipeg, Manitoba, with some investment income. His main source of income, other than that in respect of the amounts in dispute in this appeal, was as an employee of two local firms, Custom Abattoir Ltd (hereinafter referred to as “Custom”) and Herb Best Beef Ltd (hereinafter referred to as “Herb”), in both of which either he or his immediate family held substantial interests. During the three years involved, the income in question arose from futures trading transactions on the Chicago Stock Exchange.

Contentions

The position set out in the notice of appeal was that the subject transactions were conducted as part of the Chicago commodity market, using the advice of a United States agent, but independent of and unrelated to the business activities of the appellant. Further, it was Stated that the results of these transactions were of a capital nature, not an income nature.

The respondent, in the reply to notice of appeal, contended that the transactions were connected with, interrelated with, and undertaken as a result of the type of work from which the appellant regularly earned his living.

Evidence

Mr Ladin stated for the Board that the corporation (Herb) bought beef cattle for slaughter at Custom. Custom also slaughtered for businesses other than Herb. He owned 37 /2% of Herb, a further 3772% was owned by Mr Herb Best. and the balance of 25% was owned by an investor, Mr Marshall Freed. A third company, Weiller and Williams, Ltd (hereinafter referred to as "WW”), owned equally by the appellant’s father and a Mr Max Freed, acted as a commission agent, buying and selling cattle. He himself had been engaged in the beef business since 1964 and his particular employment during the years in question was as a buyer, purchasing cattle (either for the account of Herb or Custom) from feed lots in either Canada or the United States, depending upon market conditions. and having them delivered for slaughter to Custom. The approximate capacity of Custom was 1,100 to 1,200 animals per week, and sometimes the entire requirement originated in the United States.

The grading system for beef cattle in Canada was considerably different than in the United States and was based largely upon the amount of fat in the animal—US customers preferring a higher fat content (more marbling), while the Canadian public bought more lean beef. The grading system in Canada went from Al. the choice lean beef, through A4, that which was considered too fat for good sales potential. There was a futures trading market in the United States for choice beef only. and little market for anything else. Except for a short time there was no futures trading market in Winnipeg for cattle. The appellant’s activity on the Chicago market had been mainly in beef, but he had also traded some corn and pork bellies. During these vears his agent in Chicago had been Weinberg Bros & Company (hereinafter referred to as "Weinberg”), and he had been active on the telephone each day from the time the market opened at 9 am until he had completed his trading for that day. Sometimes as many as ten telephone calls were required. but a good average was five per day. and he estimated the amount of his time spent on that activity to have been about 1 /2 hours per day.

A synoptic journal (Exhibit A-2) provided a record of the results of the transactions during these years in which he either received a cheque (or a credit to his account), or remitted funds to Weinberg, about once or twice each week. The transactions recorded, however, such as "Debit—Weinberg $1,920.00. Debit—Commission $320.00. Credit—Profit and Loss $2,240.00” (Jan 13, 1972) represented only the net financial result after several individual actions of buying or selling during a week or even during one day. The total picture was that of hundreds of loads of cattle bought and sold during a year on the futures market. all on "long” (expecting to sell later) or "short” (expecting to buy later) trading transactions, none of which provided ownership or proprietorship of the commodity to the appellant. The admitted purpose was only one—to sell at a profit—and although the account with Weinberg was not on a regular “margin” basis, a fee of $40 per load of cattle was charged. During the years involved this fee alone paid by the appellant totalled $19,135, $17,185 and $15,145. Although no precise figures could be provided by the appellant, it was Clear that the “purchases” and ‘‘sales’’, if they can be so termed, represented hundreds of thousands, perhaps millions, of dollars each year.

The appellant referred to two transactions he had carried out on the Canadian beef futures market, while it had operated, and indicated that these were considered a form of “hedging” (buying and immediately selling at a higher price for delivery at a later date), ownership actually passing to him, a situation somewhat different than the admitted speculative procedures on the Chicago market. In the appellant’s opinion, there was no relationship between futures trading in beef and corn, or in pork bellies and corn, although he accepted the fact that corn was a common feed in the United States and its effect on the availability of cattle could not be ignored completely. The approximate week’s slaughter in the United States was about 750,000 beef cattle and in Canada, about 70,000. Canada’s market, therefore, was inconsequential in the total, different grades of cattle were in demand, and the Canadian market was totally independent of the US market, unable to influence it in any way. The Canadian market followed by a week or so the US market. During the years in question he had borrowed several times from WW, at no interest, in connection with financing his futures trading transactions in Chicago.

Argument

Counsel for the appellant agreed that his client had been a speculator, but that the generally accepted definition for an investment “to produce revenue from the holding of it, not from the sale of it” could not be applied in futures commodity trading. Reference to several decisions, particularly that in Grant Geddes v MNR, [1976] CTC 2449; 76 DIC 1338, upheld the view that even if a taxpayer’s regular business was closely aligned with the commodity trading, the financial result of that commodity trading could be held to be of a capital nature. Counsel submitted that in the instant case, the appellant’s business activities in Winnipeg were unrelated to the speculative trading, and that no connection between the two had been shown. In support of the taxpayer’s position, counsel referred the Board to Revenue Canada, Taxation Bulletin IT-346 dealing with “Commodity Futures and Certain Commodities”. While recognizing that the bulletin could not be considered law, he stressed paragraph 9 from it:

9. As a general rule, a taxpayer who takes commodity futures positions in, or who has transactions in, a commodity connected with his business, is considered to be trading as part of his business operations and the com- ments in paragraph 3 above apply. However, there may also be some cases where a taxpayer who produces or uses a commodity in a particular business operation has transactions in that commodity or in futures of that commodity that are, in fact, not part of that particular operation. Whether or not a transaction would fall within this category depends on the facts in each case. As an example, a jeweller who buys 100 ounces of gold for his business (a normal amount for his business) and also makes additional purchases of 1600 ounces of gold, or of futures contracts representing 1600 ounces of gold, as a speculation for his own account, may be viewed as a speculator with respect to the additional purchases when all the facts of the situation are considered.

Counsel for the respondent argued that the evidence amply supported a view that the taxpayer’s commodity trading was tied in with his knowledge and experience in the beef cattle business and his direct employment during that period of time; that it was simply a second business requiring as it did daily, detailed attention, and the availability and utilization of very substantial sums of money. In counsel’s opinion that satisfied the specifics of the assessment and excluded the appellant from any relief which might appear to be available under Interpretation Bulletin IT-346. However, there could be no question that the series of transactions involved could be classified as a venture in the nature of trade—the single and admitted purpose was to buy and sell the commodity futures themselves, and out of this activity to make a profit. Several case references were provided by counsel, but major reliance was placed upon an August 15, 1977 decision by the Hon Lucien Cardin, PC, QC, Chairman of this Board, in which decision the Chairman dismissed the appeal of Stringam Farms Limited v MNR, [1977] CTC 2438; 77 DTC 317. Particular passages from that judgment were considered of special significance, at page 2441 [319]:

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.

At page 2443 [320] the Chairman states:

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.

It should be recorded that due to its recent date the above decision had not been available to counsel for the appellant before this hearing, and the Board commends counsel for the respondent for noting this fact and stating that time had not permitted him to provide his colleague with a copy in advance of the hearing date.

Counsel for the appellant also noted the difficulty which faces taxpayers if the various interpretation bulletins could not be relied upon, and distinguished the Stringam case (supra) from the instant appeal by noting a phrase in that judgment:

The transactions in cattle futures were identical to those of the appellant’s principal business.

Findings

It is not my custom to attempt exact determination of meaning for interpretation bulletins, and I can add little to the comments given by the Chairman of this Board in Stringam, which comments have been quoted above. However, it is my view that whatever scant comfort might be read into Interpretation Bulletin IT-346 for the speculators in commodity futures, no relief could be accorded thereby to this appellant. The evidence is overwhelming, not only that he was knowledgeable, experienced and active in the beef cattle trade, purchasing in both Canada and the United States, but that he used these factors extensively and assiduously in the pursuit of gain on the Chicago market. For whatever reasons of personal choice or customer habit, the most sought-after beef in Canada was the least desired in the United States, and vice versa, and the appellant had travelled far and wide in both countries, keeping abreast of the available and prospective cattle feed lots. These facts had equipped him in a unique manner for his participation in the futures market in this commodity, but in the opinion of the Board, to some degree also in the markets for pork bellies and corn.

However, in my view, the most significant comment by the appellant was that Canada followed the US market for beef cattle, although lagging behind it for a period of time. He was obviously not only aware of this, but highly sensitive to it, in his activity as a buyer of cattle for Herb and Custom. I cannot equate this situation with the assertion by the appellant that the markets were disconnected or that experience in one would be of no value in the other.

Counsel for the appellant relied heavily upon the closing paragraphs in the Geddes decision (Supra), at page 2450 [1339]:

It seems clear from the evidence that the appellant did not have any specialized knowledge of trading principles, that is, a knowledge of the significance of trend lines, odd lots, volume, short interest ratios, breadth, Elliott theory, Dow theory, and all the other tools or approaches which professional people use to interpret market trends. . . .

Counsel for the respondent, in his argument, submitted that: “Surely you can trade in anything on the basis of technical knowledge, or on the basis of a fundamental knowledge?’’ While this premise may be true when applied to real estate trading cases, it has absolutely no validity with respect to trading over a stock or grain exchange. Stock prices and grain futures are determined by the action of the market, which is in the nature of an auction. Short-term movements of grain futures are only remotely related to economic fundamentals.

To say that a taxpayer can trade successfully on fundamentals is to deny the realities of trading and the principles which traders use. Thousands of traders operate in back rooms, trading over the New York and Toronto Exchanges. In the case at bar, nothing that the appellant did resembled a genuine trading operation. Such submissions as “scheme of profit-making’’ or “whole course of conduct’’ do not apply in any real sense to trading in futures on an organized exchange. I do not mean that a non-professional cannot trade. He certainly can, but he must trade in a technical sense, watch the market, cut his losses and not merely rely on a primary trend to bail him out. Our appellant is not a trader, and although he is far removed from being a mere dabbler, his gains are not profit from a business and therefore are not taxable in their entirety.

The appellant has already declared half of his net profit on these commodity transactions as a taxable capital gain and the appeal is therefore allowed.

To whatever degree the Presiding Member of the Tax Review Board was able to discern a distinction in the Geddes case between “technical knowledge’’ and “fundamental knowledge”, it was surely based to a substantial extent upon point no 10 in his earlier summation of the facts:

10. The appellant appreciated the fact that professional trading was more or less a full-time job and that a trader had to be ‘‘real close’’ to the market to “make money on the swings’’.

I have no difficulty in concluding that the appellant in the instant case was preoccupied in a major way with the Chicago commodity market during the relevant years; that he was as close as possible to all known and potential developments; and, more importantly, that he was required to make instantaneous decisions on a sustained daily, hourly or even by the minute basis, regarding the positions he wanted to take, hold or relinquish. The efforts of the appellant consisted of contracting to buy and/or sell for future deliveries, commodities with which he had an intimate working knowledge. These efforts took the form of a continuum, occupying him each business day, covering hundreds, probably thousands of individual transactions which required substantial financing and extended over three years. The purpose of all this speculation was hopefully to make a profit on each transaction but if not, at least on the totality of the separate transactions over an hour, a day, a week, a month, or even a year. I can think of nothing which would distinguish this set of circumstances from a business as determined for purposes of the Income Tax Act, and relied upon by the Minister of National Revenue in this appeal.

Decision

The appeal is dismissed.

Appeal dismissed.