Sydney Bossin v. Her Majesty the Queen, [1976] CTC 358, 76 DTC 6196

Collier, J:—The plaintiff and three companions, in February 1969, purchased in the stock market some speculative shares. In February 1970 the shares were sold. The economic result of the whole diversion was the common one which usually befalls the great majority of ordinary citizens* [1] who attempt occasional forays into the perilous realms of the stock market. The plaintiff lost money, a $14,600 loss.

In the calculation of his taxable income for his 1970 taxation year, he deducted $14,600 from income. The Minister of National Revenue, in assessing, disallowed the amount. The Minister considered the loss

. was not a business loss sustained by the taxpayer but was a capital loss within the meaning of paragraph (b) of subsection (1) of section 12 . . .”.+ [2] The taxpayer disagreed. He contended the purchase and sale of the particular shares was “an adventure or concern in the nature of trade”. He appealed to the Tax Review Board. He lost. The present appeal followed.

As always in litigation, but especially in cases concerned with an adventure in the nature of trade, the facts are paramount.

These cases must all depend on their particular facts . . .I [3]

I therefore turn to the facts here. Essentially, they are not in dispute. ! am mindful, however, that they all emanate from the plaintiff and his witnesses.

The plaintiff is now 50 years old. He is married. In the relevant years he had three children all of whom were then attending university. He became a qualified chartered accountant in 1951. He has been an active partner in a large firm of chartered accountants from 1953 to the present. Since that year he has, in addition to his regular profession and occupation as an accountant, been engaged in various other business transactions, mostly in respect of land. Those dealings have been carried out on his own account, with others in partnership, with others in limited companies, and through his own limited company which he incorporated in 1963. He testified, and I accept his statement, he had always included in his calculations of income tax any gains from those transactions or ventures. He had, as well, claimed any losses as deductions from income.

He had rarely dabbled in the stock market. He had engaged, in the 1950’s and in the early 1960’s, in what he described as “minimal transactions”. Any gains which he may have made were not included as income in his income tax returns. Generally, he had steered clear of the hazards of the stock market.

The plaintiff had a good friend, Herbert R Binder, who was also his next-door neighbour. Binder was a pharmacist. The plaintiff’s accounting firm gave professional services to Binder’s pharmacy business. Prior to February 1969 Binder had purchased, in the stock market, shares of a company now known as United Bata Resources Ltd (Bata).* [4] There had been two purchases, to the extent of $5,000 to $10,000 each. The shares went up. He sold, realizing a profit. He did not, in any tax return, include the gains in his calculation of taxable income. He had been told by a chartered accountant adviser the gains should not be reported as income.

Even after selling his shares Binder maintained continuing interest in Bata. He, at no time, had any “inside information” on the companies’ prospects or their operations. He, the plaintiff, and other witnesses to whom I shall later refer, never studied or analyzed any financial statements or other business literature concerning Bata. Binder, in respect of Bata shares, was at all times interested only in making a quick profit. He never purchased them as an “investment” in the ordinary street sense of that word. He stated that the same intention prevailed when he, the plaintiff, and two others entered into the scheme I! shall presently recount. I accept Binder’s testimony. He impressed me as a candid, honest person. His evidence is consistent with the reasonable inferences and probabilities to be drawn from what other limited objective facts are here present.

In early 1969 he was at a social gathering of some kind. A gentleman named Philip Kosoy was there. He had known him for about 23 years. Kosoy, Binder and eight others held an interest in three buildings on Spadina Avenue in Toronto. Binder had a $5,000 interest in that particular matter. Kosoy was its leader. There was no written agreement among the ten. Binder described Kosoy’s occupation as a “speculator in just about anything to make money”. He agreed with the more delicate designation of “entrepreneur” .

At the social gathering Bata was discussed. Binder indicated that if he had the means he would like to get into the stock in a large way. Binder was very optimistic that the stock market price of the stock would increase rapidly and greatly. His friend Kosoy expressed interest. He offered a proposition to Binder. Kosoy would put up money for a period of one year. Binder could use it to buy Bata or whatever else he might wish. At the end of the year the money thus made available would have to be repaid to Kosoy, with interest. Kosoy was to get 50% of any profits which Binder made. Kosoy mentioned a figure of $50,000 although no maximum upper limit of funds was actually stipulated.

The next morning Binder consulted his friend and neighbour, the plaintiff, for advice.

I now turn, at this chronological point, to the plaintiff’s testimony. I accept his evidence. He impressed me in the same manner as did Binder.* [5] I find his testimony, as to his intention, and on other material issues, consistent with the probabilities surrounding the relevant currently existing conditions.! [6] Bossin had heard about the Bata stock. But he, like Binder, had never seen or considered any financial state- mente. One of his accounting firm partners had apparently made a large amount of money speculating in Bata shares. Bossin played golf occasionally with a Mr Murray Pessim, a promoter. Pessim had spoken glowingly of Bata’s prospects. As Bossin put it (I do not purport to quote verbatim): “Everybody in my firm, including the articled students, except me, was into Bata.” As I have earlier written, Bossin had never cared for flirtations in the stock market. He preferred real estate transactions. Nevertheless the proposition that. Kosoy had made to his neighbour, because of all he had heard about Bata, interested him. He volunteered to participate with Binder to the extent of one-half. Binder agreed. Bossin had never met Kosoy. He may have vaguely heard of him. Bossin did not at that time have enough free funds of his own to purchase Bata to any extent. He was therefore quite happy to use someone else’s money, on Kosoy’s terms, fully expecting to make a quick net profit.

On the same day, two of Binder’s close friends, David Pomotov and Irving Bloomberg, paid a visit. Pomotov was a fellow pharmacist. Bloomberg was in the wholesale toys business. Binder told them of the Kosoy proposition. They were both interested. An arrangement was made among the three to share Binder’s one-half interest equally. In other colloquial words, each took one-sixth of the action. Bossin knew of this agreement.

Pomotov had known Kosoy for many years. Pomotov, too, had a $5,000 interest in the same Spadina property earlier mentioned. Pomotov had also, before February 1969, traded on his own account in Bata. He had twice bought up to perhaps $7,000 and sold each time at a gain. On his accountant’s advice, he had not brought those profits into his calculation of taxable income.

At this particular time neither Binder nor Pomotov held any shares in Bata. The plaintiff, Binder and Pomotov all testified that they went into the Bata scheme with one purpose only: to make some quick money. They had no intention to hold the stock as an investment. I infer that Bloomberg’s intention and thinking was the same. They all knew that at the end of one year Kosoy had to be paid whatever funds he would loan or make available.

The next day (Monday, February 17, 1969) Binder telephoned Kosoy and instructed him to buy Bata shares up to $50,000. Kosoy knew, then or afterwards, that the other three had some arrangement with Binder. But he dealt only with Binder; he looked to him for the carrying out of the bargain; nothing, however, was put in writing between the two. Nor was anything at that time put in writing among the four members of the (for want of a better word) “syndicate” who were buying the stock.

On February 17, 1969 Kosoy bought in his own name 1,000 shares of Bata Resources Ltd and 2,500 shares of Stampede Oils Ltd. The shares were bought through Kosoy’s brokers on the market. They do not appear to have been original treasury shares, or from a particular underwriting. The probabilities are that Kosoy bought them on margin. They were always held in Kosoy’s name. There were no written formal or informal trust declarations, or other similar documents. The total purchase price was approximately $54,000.

The ensuing litany of melancholy facts has all too familiar a sound. In the first three months after purchase, the stocks went up about 20% in market price. At one stage Kosoy came to Binder and offered him a “deal”. The suggestion was that Binder should sell the Bata shares and put the profit into a land transaction in which Kosoy was interested. That was not done for two reasons. At the time the proposition was made not all four syndicate members were in the city. The others did not want to make decisions of that kind without everyone’s consent. The second reason was that all felt the Bata stock had considerable potential; that it would undoubtedly rise still further in price. As Bossin put it, “we were greedy”.* [7]

inevitably of course, the stock declined. The group were still optimistic. They did not sell. They remained convinced, although they had (in retrospect) no information, other than “street and cocktail party talk”, that the stock would recover, and that they would soon make money. The market price continued to go down. The foursome were well aware that February of 1970 was the end of the one-year arrangement with Kosoy. They knew he would have to be repaid. I think it fair to conclude they held on, hoping for even minor miracles, until the time of financial reckoning could no longer be postponed. Finally, Kosoy was instructed to sell the stock. That was done. Six thousand shares were sold in small blocks between February 5 and February 12, 1970.

The loss, including the interest on Kosoy’s money, was $34,700. It was apportioned among the foursome as follows:

Pomotov and Binder paid their share by handing over their $5,000 interests in the Spadina property, plus cheques for $1,700 each. Bossin went to his bank and borrowed $15,000. He paid Kosoy by cheque.

Very shortly before the Bata shares were sold, a document was signed by the foursome (Exhibit 3). It is as follows:

SHOPPERS DRUG MART

467 PARLIAMENT STREET - TORONTO 225 - 925-4121

AGREEMENT

Date Agreement Feb1, 1969 [sic]

Agreement undertaken between *(A) PK and *(B) [8] Group, whereby (A) agrees to buy and sell any stocks, bonds, real estate, or investment property agreed upon by (B).

(A) agrees to pay for and maintain all purchases as to contingent expenses such as brokerage, interest, etc, for a period of one year from the date of the first purchase.

At the end of the year (B) guarantees all net losses incurred by (A). Net losses shall be any brokerage charges, interest payments, or actual losses in differences between buy and sell prices.

(B) also guarantees to pay to (A) fifty percent of any net profits at the end of the year. Net profits shall be any profits left after all contingent expenses have been met. At the end of the year (B) shall also have option of settling any profit or loss with (A) and putting up the funds required to maintain any inventory currently being held by (A) for (B).

*(A) PK — Philip Kosoy

*(B) Group — Herbert Binder

Dave Pomotov

Irving Bloomberg — Syndicate Group —

Sid Bossin

The plaintiff suggested this document be drawn. It was actually done by Binder and Pomotov. Before signing, Bossin suggested the word “inventory” be used for the original word “investments”. The latter word had been the work of Binder and Pomotov. I am satisfied Binder and Pomotov had not used “investments” in the sense that it is used in the so-called trading cases. I think Bossin, as an accountant with experience in tax matters, knew the possible implications of the word “investments” and suggested the change. He quite frankly admitted he had, in respect of the loss, tax considerations in mind.

I now turn to counsel’s submissions. Counsel for the plaintiff contends the facts in evidence here strongly support the conclusion this loss arose from a business source;* that the plaintiff and his friends were not in the position of owners of an “ordinary” investment choos- ing to realize it;* [9] that this transaction or scheme was, even though an isolated one (in the sense of one purchase and sale of shares as compared to a repeated series) by individuals,! [10] nevertheless an adventure in the nature of trade. Counsel relies on the positive statements of pure speculative intention, rather than investment plans, avowed to by the plaintiff and the other two very interested witnesses. I have already indicated I accept the evidence of the plaintiff, Binder and Pomotov on this and other points. In coming to that finding of fact, I have kept in mind the remarks of Martland, J in the Irrigation Industries, [1962] SCR 346 at 350 and 351; [1962] CTC 215 at 219; 62 DTC 1131 at 1132, case that

. . . the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade [cannot] be determined solely upon [the] basis . . . [of] . . . seeking to ascertain the primary subjective intention of the purchaser at the time of purchase.

As Cartwright, J at pages 361-2, 230, pointed out in his dissenting reasons in the same case, it is strange that a tax result should depend on the intention with which a taxpayer entered into transactions of this kind,! [11] but nevertheless intention once ascertained is a fact that must be weighed.

In my view, the subjective statements of intention here are not without support from the other evidence. The funds were borrowed. That is not unusual. But here they were obtained in a most unusual way, on unusual and speculative terms, and with a firm deadline for ultimate settlement of accounts: pay Kosoy his money, interest, and 50% of the gains, if any. There is as well the evidence of the success of other speculators in this particular stock, and the street talk of its potential for a quick money turnover. Two of the participants had already been in that lucky class. There is no evidence before me that Bata shares had any intrinsic or real value (potential or otherwise) to attract the true investor. There was no separate bank account opened or kept by the four-man group. The shares were not in their four names or in the name of one of them as nominee. I can envisage some arrangements between four friends who decide to pool their resources to buy securities or stocks where separate bank accounts and brokerage accounts would likely be kept; where the plan would be to have a little variety (even at the outset) in a potential portfolio; where provision would be made for regular review; where some method would be agreed upon to allow a participant to withdraw. Arrangements of that kind may well smack more of investment with its tax treatment of gains and losses as on account of capital rather than on account of income.

Counsel for the defendant, in respect of the facts, urged that the holding of Bata for 12 months is more consistent with an investment motive than a speculative one. On the evidence here, I do not agree. The retention, rather than sale, after the initial upswing in market price was motivated by optimism that the stock would climb further, and by old-fashioned garden variety desire for a much larger profit. Some adventurers in the market, I suspect, are less timorous than others in holding on for more. Once the stock started its downturn, the decision to hang on, hoping for a reversal in trend, was to me a very logical and human one, and quite consistent with a pure speculative intent. It was the February 1970 deadline with Kosoy that ultimately dictated the time of the sale.

The defendant pointed as well to the initial use of the word “investments” in Exhibit 3. I have already commented on that document. I attach little significance either to that choice of word or to the change made. The defendant contended that there was evidence as to possible future dealings by the syndicate which militate against the testimony of a speculative plan only. It will be recalled that Kosoy, after the first upswing in price of Bata, proposed the group should take their then apparent profit and put it into a land transaction in which Kosoy had some interest. Bossin, in his testimony, agreed that it was possible, if Bata had reached the rosy price hoped for before the February deadline, the syndicate might not then have paid out Kosoy, but sold, and purchased other securities or stocks. The defendant urged the possibilities of turnover and accretions were always there; that this is more in accord with investment than adventure in the nature of trade. Unfortunately, neither the Court, nor the defendant, nor the plaintiff and his compatriots will ever know what would have been the ultimate course of conduct. Bata was unsuccessful. The earlier sale. of Bata (at a loss) and the purchase of other things more sound or profitable, was, I infer, not financially feasible.

Again, I can envisage a small group of individuals clubbing together, as I have earlier hypothesized, pooling funds (some of which might even be borrowed), buying specuiative shares as a group, turning them over when a profit opportunity arises, or selling to try and avoid or cut down a loss, endeavouring to add to and increase the group holdings, to provide “dividends” to the group members (to be pocketed or, by choice, put back into the group fund). It may well be the realization of those group assets, or realization from time to time of some of them, would attract tax treatment only on a capital basis. That is not the situation here. What the plaintiff and the other three might have done along the hypothetical lines outlined is as speculative as the Bata stock. I am convinced that this particular transaction was essentially a one-project scheme, with Bata as its commodity, and with no realistic thought of developing before. or after the February 1970 deadline an “investment portfolio”.

The issue then, in this appeal, is whether on the facts here the plaintiff was participating in an adventure in the nature of trade and entitled to claim his loss as a deduction against income. So far as 1 know, this is the first time this Court (or its predecessor) has been confronted with the problem of the tax treatment to be accorded to an islated transaction, by an individual, in the purchase and sale of shares.* [12] As might be expected, the Irrigation Industries case was relied on by the defendant, as almost conclusive against the plaintiff, the plaintiff, on the other hand, urged that decision was distinguishable, and that in any event the plaintiff’s actions here did not fall within the particular principles or tests, set out in the reasons of the majority, that had excluded tax liability in that case.

I think it necessary to refer to a number of other decisions as well (mostly of the Supreme Court of Canada).

In Minerals Ltd v MNR, [1958] SCR 491; [1958] CTC 236; 58 DTC 1154, a corporate taxpayer sold a number of petroleum and natural gas leases at a large profit. The Minister brought the profit into income. The taxpayer argued the profit was simply the realization of an investment and therefore a capital gain. It was held the profit had been made in the operation of the company’s business and was properly taxable. The points relevant to the case before me are: the Supreme Court approved the often-quoted extract from the Californian Copper Syndicate case [5 TC 159], and also affirmed the principle that even though a transaction is an isolated one it may nevertheless attract tax. Martland, J, delivering the judgment of the Court, said, in respect of the latter point (p 243 [1157-8]):

The fact that the leases were sold as a group rather than individually or in separate portions does not affect the result. The appellant contended that this was an isolated transaction, but that does not, in itself, prevent the profit from being taxable, as is pointed out in Edwards v Bairstow et al, [1956] AC 14, and in Mcintosh v MNR, [1958] SCR 119; [1958] CTC 18.

In my view, having acquired the leases as a part of its business, the appellant never intended to retain them, either for purposes of development or as an investment, but did intend to sell them if and when a suitable price could be obtained. Consequently the profit realized on their sale is not in the nature of a capital gain, but is a profit made in the operation of the appellant’s business.

In the previous year Chief Justice Kerwin, speaking for the Court, had made a somewhat similar statement where the taxpayer sought to be taxed was an individual. The taxpayer had entered into an arrangement to purchase some vacant land with the intention of subdividing and building houses on it. The arrangement was terminated. The taxpayer sold some of the vacant land at a profit. It was held the gain was taxable as income. I quote from Mcintosh v MNR, [1958] SCR 119 at 120-21; [1958] CTC 18 at 20:

It is quite true that an individual is in a position differing from that of a company and that, as stated by Jessel, MR in Smith v Anderson (1880), 16 Ch D 247 (approved by this Court in Argue v MNR, [1948] SCR 467 at 476; [1948] CTC 235),

“So in the ordinary case of investments, a man who has money to invest, invests his money and he may occasionally sell the investments and buy others, but he is not carrying on a business.”

However, it is also true, as well in the case of an individual as of a company, that the profits of an isolated venture may be taxed: Edwards v Bairstow, [1956] AC 14. It is impossible to lay down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour. As is: pointed out in Noak v MNR, [1953] 2 SCR 136; [1954] CTC 6, it is a question of fact in each case, referring to the Argue case and Campbell v MNR, [1953] 1 SCR 3; [1952] CTC 334, to which might be added the judgment of this Court in Kennedy v MNR, noted at p VIII of [1953] 2 SCR, which affirmed the decision of the Exchequer Court [1952] Ex CR 258; [1952] CTC 59.

In the present case I agree with Mr Justice Hyndman’s findings with reference to the appellant that:

“Having acquired the said property there was no intention in his mind to retain it as an investment, but to dispose of the lots, if and when suitable prices could be obtained.”

The implication I take from that passage is that the Chief Justice felt, even in the case of an individual selling, on an isolated occasion, some shares, there could (depending on the particular facts) be tax liability.

I come now to Irrigation Industries Ltd v MNR (supra). It is, I suggest, perhaps the classic case (albeit a most difficult one) in Canadian. income tax law on transactions which may or may not be adventures in the nature of trade. I agree with counsel for the plaintiff that it can be here distinguished on its facts. That does not mean, however, the principles and tests there set out can be disregarded. I find it necessary to refer at some length to the decision. The taxpayer company had been incorporated in 1947 to purchase some farm property and to conduct and operate an alfalfa mill at Brooks, Alberta. Those projects were never carried out. The company remained dormant for some years. It then purchased some property in Calgary. It financed with its bank some part at least of the purchase price. On February 6, 1953, the company directors received a favourable report on a mining company (Brunswick). Irrigation purchased 4,000 treasury shares directly from Brunswick (not on the market). The facts as found by the trial judge indicate the purchase was made on February 6, 1953. In order to buy, Irrigation had to make financial arrangements with its bank. It was allowed an overdraft. A cheque in payment of the stock ($40,000) was issued on February 23, 1953. Between March 10 and March 13 of the same year some of the Brunswick shares were sold at a profit, and the funds used to retire the overdraft. In June 1953 the remaining shares were sold. The moneys were credited to the bank loan in respect of the Calgary property. The Minister of National Revenue added to Irrigation’s income the profit made on the sale of the whole of the Brunswick shares. At the trial in the Exchequer Court the only witness who gave evidence on behalf of the taxpayer was its president. He had testified the intent of Irrigation was to hold the shares as an investment, but the company had been forced to sell because of pressure from its bank. The trial judge did not accept that explanation. He held that the company directors had always considered the shares to have a speculative value, that when they had gone up by 70% a sufficient amount were sold to pay the overdraft, that the remaining shares were later sold when the directors reached the conclusion the shares were overpriced and should be disposed of. The trial judge found the resulting profits to be taxable, that the purchase and sale was an adventure or concern in the nature of trade. The Supreme Court, in a split decision, held the gain to be the realization of an investment, and not taxable as income.

Martland, J, delivering the majority judgment, said at the outset (p 348 [216, 1131]):

The facts are outlined in the judgment of my brother Cartwright and I will not repeat them here in full.

He then, however, went on to point out specifically that the Brunswick shares had been purchased by Irrigation directly from Brunswick as part of an initial issue of treasury shares by Brunswick to finance some drilling and: exploration work of certain mining claims which, up until 1952, had been considered unprofitable. He also pointed out that the purchase and sale of the Brunswick shares was outside of the ordinary business of Irrigation. He stated the issue to be as follows

The issue in this appeal is as to whether an Isolated purchase of shares from the treasury of a corporation and subsequent sale thereof at a profit, not being a part of the business carried on by the purchaser of the shares, or in any way related to it, constitutes an adventure in the nature of trade so as to render such profit liable to income tax.

I note that Martland, J specifically referred once more to the particular shares that were bought—“treasury” shares. The plaintiff’s shares here were not “treasury” shares in that sense. Nor was the plaintiff here dealing directly with Bata. The distinction in facts is not conclusive in any way, but is, I think, one of many points to be kept in mind.

He commented on the reasons of the trial judge as follows (p 350 [218, 1132]):

The reasons leading to his conclusion that the purchase was not an investment are:

1. The fact that the appellant borrowed the funds necessary to effect the purchase of the shares;

2. The inference that the nature of Brunswick indicated that Its shares were speculative in value and that dividends could not be expected for some years.

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.

Similarly, the fact that there was no immediate likelihood of dividends being paid on the shares should not have much significance, for there are many corporate ventures, financed by the sale of shares to the public, in which immediate payment of dividends may not be anticipated, and yet the purchase of the treasury shares of a company embarking on a new enterprise is a well-recognized method of making an investment.

I make two comments in respect of the present case. The money used to buy Bata was borrowed money. It was, as I have earlier pointed out, borrowed in an unusual manner, and basically for this one particular stock purchase. More importantly it was subject to a repayment deadline, which had considerable influence on the purpose and actions of the plaintiff and his partners.

Martland, J continued (pp 350-51 [218-19, 1132-3]):

However, assuming that the conclusion was correct that this purchase was speculative in that it was made, not with the intention of holding the securities indefinitely, with a view to dividends, but made with the intention of disposing of the shares at a profit as soon as reasonably possible, does this, in itself, lead to the conclusion that it was an adventure in the nature of trade?

It is difficult to conceive of any case, in which securities are purchased, in which the purchaser does not have at least some intention of disposing of them if their value appreciates to the point where their sale appears to be financially desirable. If this is so, then any purchase and sale of securities must constitute an adventure in the nature of trade, unless it is attempted to ascertain whether the primary intention at the time of purchase is to retain the security or to sell it. This, however, leads to the difficulty mentioned by my brother Cartwright that the question of taxability is to be determined by seeking to ascertain the primary subjective intention of the purchaser at the time of purchase.

I cannot agree that the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade can be determined solely upon that basis. In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of “trade” than this before it can be said that there has been an adventure in the nature of trade.

I have already, earlier in these reasons, commented to some extent on this question of “intention” or “primary intention” as it arises in this case. I shall not repeat myself. I have also earlier outlined other facts in evidence, and inferences from them, that in my view substantiate the ever-present intent of pure speculation on the part of the plaintiff. As I see it, those other facts and inferences are “clearer indications of ‘trade’ ”.

Once more there appears to have been emphasis in the Irrigation case that the taxpayer had put “money into a business enterprise . .” I conclude Martland, J was again referring to the direct purchase of treasury shares from Brunswick, and the intent to invest in and participate (even in a small way) in Brunswick’s new enterprise. That was not the situation with the plaintiff here. He and his three fellows were buying shares on the market, not dealing with Bata, not having really investigated its prospects. In Irrigation Industries some point was made of the differences between the method of investment by the Irrigation company, and the dealing in shares by traders. I quote (pp 354-5 [222-3, 1134-5]):

The only operations of the appellant in the present case were the purchase of 4,000 treasury shares directly from Brunswick and their subsequent sale, presumably through brokers. This is not the sort of trading which would be carried on ordinarily by those engaged in the business of trading in securities. The appellant’s purchase was not an underwriting, nor was it a participation in an underwriting syndicate with respect to an issue of securities for the purpose of effecting their sale to the public, and did not have the characteristics of that kind of a venture. What the appellant did was to acquire a capital interest in a new corporate business venture, in a manner which has the characteristics of the making of an investment, and subsequently to dispose, by sale, of that interest.

But it may be contended that persons may make a business merely of the buying and selling of securities, without being traders in securities in the ordinary sense, and that the transactions involved in that kind of business are similar, except in number, to that which occurred here. It has, however, been pointed out in the well-known case of Californian Copper Syndicate v Harris (1904), 5 TC 159 at 165, that, where the realization of securities is Involved, the taxability of enhanced values depends on whether such realization was an act done in the carrying on of a business. In that case the Commissioners had held that the transaction there in question was an adventure or concern in the nature of trade. The judgments on appeal make no reference to that point, but are based on the ground that the turning of the investment to account in that case was not merely incidental, but was the essential feature of tne appellant’s business. The passage in question reads as follows:

“It is quite a well settled principle in dealing with questions of assessment of income Tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to Income Tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business. The simplest case is that of a person or association of persons buying and selling lands or securities speculatively, in order to make gain, dealing in such investments as a business, and thereby seeking to make profits. There are many companies which in their very inception are formed for such a purpose, and in these cases it is not doubtful that, where they make a gain by a realization, the gain they make is liable to be assessed for Income Tax.”* [13]

I do not put undue weight on that point. It is, however, one of the many matters that must be considered in determining whether the plaintiff’s loss was or was not a Capital loss.

Martland, J referred, with apparent approval, to the general propositions formulated by Thorson, P in MNR v Taylor, [1956] CTC 189; 56 DTC 1125, for determining whether or not a particular transaction does or does not constitute an adventure in the nature of trade. Counsel for the defendant here relied greatly on the following excerpts from Martland, J’s reasons:* [14]

The positive tests to which he refers as being derived from the decided cases as indicative of an adventure in the nature of trade are: (1) Whether the person dealt with the property purchased by him in the same way as a dealer would ordinarily do and (2) whether the nature and quantity of the subject-matter of the transaction may exclude the possibility that its sale was the realization of an Investment, or otherwise of a capital nature, or that it could have been disposed of otherwise than as a trade transaction.

I will deal first with the second of these tests, which, if applied to the circumstances of the present case, would not, in my opinion, indicate that there had been an adventure in the nature of trade.

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 CIR v Livingston (1926), 11 TC 538 (a cargo vessel); Rutledge v CIR (1929), 14 TC 490 (a large quantity of toilet paper); Lindsey v CIR (1932), 18 TC 43, and CIR v Fraser (1942), 24 TC 498 (a large quantity of whisky); Edwards v Bairstow, [1956] AC 14 (a complete spinning plant) and Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 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.

Counsel cited the above extract for authority that shares cannot, except in the hands of a trader who makes his living by speculating in them, be a commodity or vehicle for an isolated adventure in the nature of trade; that shares can never be articles of commerce. I do not so interpret the words of Martland, J, bearing in mind the remarks (already quoted) of Kerwin, CJ in McIntosh v MNR, the learned judge’s reasons in the subsequent case of N R Whittall v MNR (supra), and some comments by Pigeon, J speaking for the Court in a still later case, MNR v Freud, [1969] SCR 75 at 80-81; [1968] CTC 438; 68 DTC 5279. In my view, the effect of all the cases and extracts referred to is that, in a particular set of circumstances, shares may in fact be a trading commodity (as opposed to investments) giving rise to taxability as income on the basis of an adventure in the nature of trade.

The next case of importance is MNR v Foreign Power Securities Corporation Ltd (supra). The taxpayer was an investment company. It sold, at a considerable profit, a number of shares from its portfolio. The Minister of National Revenue brought the gains into income.t [15] The Minister’s assessment was held to be wrong. Cartwright, J said, for the Court (p 297 [117, 5084]):

It is not questioned that the primary activities of the respondent are those of a bona fide investment company but counsel for the appellant argues that the particular transactions, out of which the profit sought to be taxed arose, were speculations constituting adventures in the nature of trade.

The question is essentially one of fact depending on the intention with which the respondent acquired the shares.

The learned trial judge has set out the relevant facts in detail and has made reference to several passages in the evidence. I do not find it necessary to repeat these. I am satisfied that the learned trial judge gave full consideration to all the circumstances relied upon by the appellant and having done so he reached the conclusion that the shares in question were acquired by the respondent as investments to be held as a source of income in the ordinary course of its business as an investment company and that the reason it decided to realize these investments after a comparatively short period of time was that, in the opinion of its responsible officers, the Shares had reached a price which was unrealistically high.

If this finding of fact is accepted, no question of law arises. A perusal of the record in the light of the full and able arguments addressed to us satisfies me that this finding was right.

I think it important to note that the Court held the factual question (whether the transactions were speculations constituting adventures in the nature of trade) depended on the intention with which the shares were acquired. When I apply that test to the facts in this case, the answer has to be in favour of the plaintiff.

The facts in the N R Whittail v MNR case (supra) are admittedly considerably different from the facts in this case. The taxpayer there was an individual. He was a shareholder and director of an investment company and stock brokerage firm. He had been, on his own account, in a number of trading transactions in oil and gas rights and corporate shares. He contended the profits he made were the realization of investments and therefore capital gains. Martland, J said, after referring to an excerpt from the Californian Copper Syndicate case (p 432 [393, 5274]):

In respect of the transactions involved in this case, there was sufficient evidence on which the learned trial judge could properly find that the appellant was engaged in the business of buying and selling rights to land and securities, and that he was not in the position of an owner of an “ordinary” investment choosing to realize it.

Here, as I see it, the Bata shares owned by the plaintiff were never an “ordinary” investment. Nor was the plaintiff ever in the practical position of “choosing to realize” them.

I next refer to MNR v Freud (supra). The taxpayer was a lawyer who, with someone else, conceived the idea of designing a small personal sports car. The intention was, not to manufacture the car, but to interest a manufacturer to produce such a car. The taxpayer, with others, put up money to complete a prototype. The whole venture was unsuccessful. The plaintiff incurred a loss and sought to deduct it from income. The Minister disallowed the deduction. The taxpayer was ultimately successful. Pigeon, J said, in respect of isolated or single ventures (pp 79-80 [440-41, 5281]):* [16]

lt must also be noted that the Income Tax Act defines business so as to include “an adventure or concern in the nature of trade” (Section 139(1)(e)). By virtue of this definition, a single operation is to be considered as a business although it is an isolated venture entirely unconnected with the taxpayer’s profession or occupation. This consequence of the definition has been recognized and given effect to in many cases but I will refer only to one of them namely McIntosh v MNR, [1958] SCR 119; [1958] CTC 18, in which it was held that a single venture of speculation in land gave rise to taxable income when profit was obtained as a result of an acquisition made with a view to a profit on the resale. Kerwin, CJ said (at pp 120-121; p 20):

“It is quite true that an individual is in a position differing from that of a company and that, as stated by Jessel, MR in Smith v Anderson (approved by this Court in Argue v MNR),

‘So in the ordinary case of investments, a man who has money to invest, invests his money and he may occasionally sell the investments and buy others, but he is not carrying on a business.’

However, it is also true, as well in the case of an individual as of a company, that the profits of an isolated venture may be taxed: Edwards (Inspector of Taxes) v Bairstow et al. It is impossible to law down a test that will meet the multifarious circumstances that may arise in all fields of human endeavour. As is pointed out in Noak v MNR, it is a question of fact in each case, referring to the Argue case, supra, and Campbell v MNR, to which might be added the Jugment [sic] of this Court in Kennedy v MNR, which affirmed the decision of the Exchequer Court.

In the present case I agree with Mr Justice Hyndman’s findings with reference to the appellant that:

‘Having acquired the said property there was no intention in his mind to retain it as an investment, but to dispose of the lots, if and when suitable prices could be obtained.’

Such being the principles to be applied in cases when a profit is obtained, the same rules must be followed when a loss is suffered. Fairness to the taxpayers requires us to be very careful to avoid allowing profits to be taxed as income but losses treated as on account of capital and therefore not deductible from income when the situation is essentially the same.

In respect of the problem of acquisition of shares for investment or for trading, this was said (pp 80-81 [442, 5282]):

It is clear that while the acquisition of shares may be an investment (MNR v Foreign Power Securities Corp Ltd), it may also be a trading operation depending upon circumstances (Os/er Hammond and Nanton Ltd v MNR’ Hill-Clarke-Francis Ltd v MNR). Due to the definition of business as including an adventure In the nature of trade, it is unnecessary for an acquisition of shares to be a trading operation rather than an investment that there should be a pattern of regular trading operations. In the Fraser case, the basic operation was the acquisition of land with a view to a profit upon resale so that it became a trading asset.

I infer from those remarks that a share can be a commercial commodity, and not a mere article of investment.

He continued (pp 82 and 83-4 [443 and 444; 5282 and 5283]):

As previously pointed out, a single venture in the nature of trade is a business for the purposes of the Income Tax Act “as well in the case of an individual as of a company”.

. . . As we have seen while there is a presumption against an isolated operation having such a character in the hands of an individual, this presumption can be rebutted and it may be shown that even a single operation is in fact a venture in the nature of trade and therefore a “business” for income tax purposes.

In the present case as we have seen, the basic venture was not the development of a sports car with a view to the making of a profit by going into the business of selling cars but with a view to a profit on selling the prototype. Therefore, the venture, from its inception, was not for the purpose of deriving income from an investment but for the purpose of making a profit on the resale which is characteristic of a venture in the nature of trade. Nothing indicates that the character of the operation had changed when the outlays under consideration were made. On the contrary, the venture had become even more speculative, it was abundantly clear that respondent could have no hope of recovering anything unless a sale of the prototype could be accomplished. The outlays cannot be considered as a separate operation isolated from the initial venture, they have none of the characteristics of a regular loan.

In my view, the payments made by respondent could not properly be considered as an investment in the circumstances in which they were made. It was purely speculation. If a profit had been obtained it would have been taxable irrespective of the method adopted for realizing it. Such being the situation, these sums must be considered as outlays for gaining income from an adventure in the nature of trade, that is a business within the meaning of the Income Tax Act, and not as outlays or losses on account of capital.

The facts in the Freud case are, of course, quite dissimilar to the facts here. It was there conceded by the Minister of National Revenue that the taxpayer’s activity in respect of the prototype sports car was an adventure in the nature of trade. In some of the excerpts I have quoted, the Court was dealing with issues not raised in this case. But I am satisfied the remarks I have extracted are, in fact, pertinent to the issues in this appeal. The Freud decision reviews a number of the principles to be considered in the determination of what is or is not an adventure in the nature of trade. Additionally, it is, to my mind, a fairly recent affirmation by our highest court that the tax gatherer must recognize “adventures” which result in deductible deficits, and not just “adventures” which result in taxable profits.

In the same year, the Supreme Court of Canada decided MNR v Sissons, [1969] SCR 507; [1969] CTC 184; 69 DTC 5152. The taxpayer was an individual who had acquired debentures of two companies. By certain manipulations, one of the companies was able to redeem the debentures. The Minister brought the taxpayer’s net gain on that transaction into income. The Supreme Court of Canada upheld the Minister’s assessment. Pigeon, J, giving the judgment of the Court, referred to Irrigation Industries, but found the taxpayer had not, in order to assert capital gain, brought himself within the tests set out in that case. He said (pp 512-13 [187-8, 5154-5]):

For the respondent to escape taxation on his gain from the operation he has to show that it Is to be characterized as an investment. Otherwise, the conclusion is inescapable that it is an adventure in the nature of trade. In support of the judgment in the Court below, counsel for the respondent relied essentially on the decision of this Court in Irrigation Industries Ltd v MNR. In that case, an otherwise inactive company had purchased from a mining company 4,000 treasury shares of an initial issue of 500,000 shares. The majority held that this was an investment and that the gain obtained by selling the shares at a profit a few weeks later was not income. Martland, J said (at p 351):

“In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of ‘trade’ than this before it can be said that there has been an adventure in the nature of trade.”

Here the clear indication of “trade” is found in the fact that the acquisition of the securities was a part of a profit-making scheme. The purpose of the operation was not to earn income from the securities but to make a profit on prompt realization. The operation has therefore none of the essential characteristics of an investment, it is essentially a speculation.

In Irrigation Industries the tests that were applied to decide if the operation was an adventure in the nature of trade were (at p 352):

“(1) Whether the person dealt with the property purchased by him in the same way as a dealer would ordinarily do and (2) whether the nature and quantity of the subject-matter of the transaction may exclude the possibility that its sale was the realization of an investment, or otherwise of a capital nature, or that it could have been disposed of otherwise than as a trade transaction.”

The following was quoted from Viscount Simonds’ judgment in Edwards v Bairstow:

“I find ‘activities which led to the maturing of the asset to be sold’ and the search for opportunities for its sale, and, conspicuously, I find that the nature of the asset lent itself to commercial transactions. And by that I mean, what I think Rowlatt, J meant in Learning v Jones, [1930] 1 KB 279, that a complete spinning plant Is an asset which, unlike stocks or shares, by itself produces no income and, unlike a picture, does not serve to adorn the drawing room of its owner. It is a commercial asset and nothing else.”

Those observations apply with peculiar force in the instant case where the asset is a lot of debentures at or close to maturity. They could not be considered as acquired for income.

and (pp 514 [189, 5155]):

It is equally well established that even a single operation entered into for gain takes a business character when it cannot properly be considered as an investment but is to be characterized as a speculation. In such circumstances, it is an adventure in the nature of trade: Fraser v MNR, MNR v Freud.

I refer next to three decisions in this Court. The first is Admiral Investments Ltd v MNR, [1967] 2 Ex CR 308 at 313; [1967] CTC 165 at 175; 67 DTC 5114 at 5120. The taxpayer was an investment company. In 1963 the company made a small profit in some transactions in shares. In 1964 it incurred a substantial (on a comparative basis) loss. The Minister refused to include in income the 1963 profit or to allow the deduction from income of the 1964 loss. The taxpayer succeeded on appeal. I cite the case only for the proposition that shares may be a subject matter either of investment or of trade:

While shares may be the subject matter of investment, they are equally susceptible of being the subject matter of trade. Whether they fall into one category or the other, is dependent upon the particular facts of the case. The evidence above recited leads me to the conclusion that the purchase and sale of shares here involved was done in the course of business.

The next case is Wellington Hotel Holdings Ltd v MNR, [1973] FC 875 at 883; [1973] CTC 473 at 479; 73 DTC 5391 at 5395. The principal business of the taxpayer, a corporation, was the operation of a hotel and restaurant in London, Ontario. In 1967 it commenced buying and selling speculative securities. It suffered a small loss in 1968. In 1969 it engaged in 26 purchases and 20 sales of securities. A loss of approximately $20,000 was incurred. The company sought to deduct the loss from income. The Minister, predictably, refused to allow the deduction, contending the transactions were realization of investments, and the loss therefore fell on the capital side. The Minister, as to be expected, relied heavily on the Irrigation Industries case. Urie, J set out some of the contentions on behalf of the Minister [p 883]:

Counsel for the respondent, on the other hand, relied on Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, as holding that shares of stock of a company are different from other commodities or properties and even if purchased with the specific intention of making a profit, any profit or loss incurred In the sale thereof was for a capital gain or capital loss. He argued that until the Irrigation Industries decision (supra) in 1962 the Minister likely would have agreed that the losses were deductible but that case changed the law. As I understood his submissions, securities traded by persons or companies engaged only incidentally in that business are not taxable since securities represent an investment In a company which is itself created for the purpose of doing business, any expression of intention not to invest but to trade in securities by the appellant’s officers notwithstanding.

Somewhat similar submissions were advanced in this case. I cannot improve upon Urie, J’s disposition of them, nor his analysis of the Irrigation Industries case. I gratefully adopt what he said:* [17]

The respondent’s counsel, as above stated, referred to the following passage from the Irrigation Industries case (supra) at page 352:

“Corporate shares are in a different position zecause 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.”

To put the quoted passage in its proper context it is necessary, I think, to examine the issue in the case as defined by Martland, J. At page 349 [217-18, 1132] he states the issue:

“The issue in this appeal is as to whether an isolated purchase of shares from the treasury of a corporation and subsequent sale thereof at a profit, not being a part of the business carried on by the purchaser of the shares, or in any way related to it, constitutes an adventure in the nature of trade so as to render such profit liable to income tax.”’

. . . I do not understand Martiand, J to have rejected the possibility that a company can engage in the business of trading in securities notwithstanding that it is not its main business and it is not a securities broker in the accepted sense.

In fact, Martland, J In writing the judgment for the Supreme Court of Canada in a later case, Whittail v MNR, [1967] CTC 377; 67 DTC 5264, concluded that the appellant in that case in the acquisition of the securities in question was endeavouring to make a profit from a trade or business, at all material times and, therefore, profits derived from sales were taxable. He found that the exchanges of securities were not a substitution of one form of investment for another. While he did not distinguish his judgment In the Irrigation Industries case (supra) he referred to it in the Whittail case (supra) and by implication I think it must be taken that he agrees that in a given set of circumstances persons or corporations not solely in the securities business who deal in corporate shares can be engaged in an

although I can fully appreciate the difficulties involved in such control, I cannot bring myself to believe that that is a valid criterion on which the Board should base its determination of whether the transactions in question In this appeal are in the nature of a business or on account of capital.

There is no doubt in my mind that underwriters, professional stock Promoters, and licensed brokers do trade In stocks; but, in my opinion, this does not mean that no one but a professional broker can trade in stocks.

It has been argued that stocks are not a trading commodity, and it is a fact that many people do invest in stocks, but it seems to me that the nature of the object itself cannot determine whether or not it is a trading commodity. Surely it is the use made of the object, and the purpose for which the object is acquired and disposed of, that must determine whether the taxpayer is using the commodity as an investment or for purposes of trade.

The criteria and the guidelines generally used in differentiating an investment from trade in my view should also apply to transactions involving stocks and securities.”

In that particular case the taxpayer, after selling shares in a family business for a large amount of cash, engaged in 1972 in a fair number of transactions involving the purchase and sale in the market, of securities and shares. In that respect, the facts are quite different to this case. The Chairman’s general comments are nevertheless, as I see it, apposite.

See also No 492 v MNR (1958), 18 Tax ABC 412; 12 DTC 124, and McConnell v MNR (1959), 23 Tax ABC 446 at 448: 14 DTC 173.

adventure in the nature of a trade within the meaning of section 139(1)(e) of the Income Tax Act. Such being the case, therefore, profits acquired from such trading would be taxable in the hands of the persons or corporations dealing in such shares and, of course, losses incurred would be deductible in computing their taxable income.

He concluded:

l cannot agree with submissions of counsel for the respondent in respect of his reliance on the Irrigation Industries case as supporting his proposition that the losses incurred were capital losses and I have reached the conclusion that the shares in question in this appeal were not investments in the sense referred to in the Irrigation Industries case nor were the changes made in the appellant’s portfolio merely changes of one form of investments to another. The purchases were purely speculative and were entered into with the intention of disposing of the stock at a profit as soon as there was reasonable opportunity of so doing.

The last case in this Court to which I shall refer is McDonald et al v The Queen, [1974] CTC 836; 74 DTC 6644. In 1964 five individuals and a company, as tenants in common, purchased 160 acres of land near Edmonton for $80,000. One of them, an appellant, was a practising lawyer. He and his three fellow appellants were not, in the usual sense, traders in land. The other two tenants in common probably were traders in land. The avowed intention (accepted by the Trial and Appeal Divisions) of the four appellants was to participate in the purchase of the land and “to realize an accretion to the purchase price by sale at a time when the increase in price obtainable made it expedient to sell”. The intention of all four was to retain their interest in the land for a minimum period of 10 years, perhaps continuing for 15 or 20. The land was sold in 1969 for $664,000. The appellants disputed liability for tax, contending the land purchase was an investment, and the gain on account of capital. The Appeal Division held:* [18]

. « « the contention of the appellant that his interest in the vacant land purchased was an investment and, being an isolated transaction outside the ordinary scope of his profession, the profit earned on its resale was not taxable, is in our view, untenable. Even if the fact is accepted that the sale was made due to a threat of expropriation, it was nonetheless a premature occurrence of the appellant’s ultimate intention, namely to sell his interest in the land at a profit. Although he was not dealing in what is normally considered to be a subject of commerce such as commodities, the transaction from Its very inception was purely speculative in character and was, in our opinion, as a matter of law, a venture in the nature of trade.

Moreover, we are of the further opinion that the character of the transaction and the taxability of the profit arising therefrom is in no way changed simply because the appellant’s intention was to retain his interest in the land for a substantially longer period of time than, in fact, he did. Since his intention from the beginning was to sell at a profit from then on its characterization as a venture remained and thus the validity of the taxation of his gain on the sale also remained.

The learned trial judge was correct, therefore, in his conclusion that the profit arising out of the transaction was taxable by virtue of sections 3 and 4 and paragraph 139(1)(e) of the Income Tax Act as those sections read In the taxation year under review. In so finding we rely on the principles enunciated in the following authorities: Californian Copper Syndicate v

Harris (1904), 5 TC 159; CIR v Livingston et al (1926), 11 TC 538: CIR v Fraser (1940-42), 24 TC 498, and Regal Heights Limited v MNR, [1960] SCR 902; [1960] CTC 384; 60 DTC 1270.

I note the commodity there was held for five years. That fact alone did not keep it in the category of a “capital investment”. In the case before me the Minister argued the holding of the Bata stock for one year pointed to investment, rather than adventure in the nature of trade. The McDonald case is, in my view, a good illustration of the general principle that, in order to solve the problem, all factors must be considered and balanced against each other. There, for example, (to point to a few factors) the motivating intention of the taxpayers appears to have outweighed the length of time the land was in fact held; the nature of the commodity dealt in was not, by itself, a conclusive test. In some circumstances the commodity (land, shares, or whatever) may be a subject matter of true investment, in others, a subject matter of speculative venture in trade.

After this far too lengthy review of the leading Canadian authorities, and after application of what I conceive to be the principles and tests set out in those decisions, I conclude that the transaction in which the plaintiff engaged was an adventure in the nature of trade.* [19] The loss he incurred is therefore deductible in the calculation of his income.

The plaintiff’s appeal is allowed. The Minister’s assessment for the 1970 taxation year is referred back, with a direction that the sum of $14,600 is properly deductible. The plaintiff is entitled to costs.