Stephen Harrison v. Minister of National Revenue, [1976] CTC 2082, 76 DTC 1078

The Chairman:—This is the appeal of Stephen Harrison from an income tax assessment in respect of the 1972 taxation year. By a second notice of reassessment dated July 11, 1975 the respondent disallowed a business loss of $25,180.11 which the appellant sought to carry back from its 1973 taxation year, and it is in respect of this assessment that the appellant objects.

The issue in this appeal is whether the loss claimed by the appellant was incurred in the business of trading in stocks or whether it was a capital loss arising from investments bought and disposed of. It was agreed by the parties concerned that the details of each and every transaction need not be filed, as they were summarized in the list filed as Exhibit A-1. This list bears the following heading: “Stephen Harrison Schedule of Stock Market Trading for the Year ended January 3, 1974" but, as all the transactions listed took place in 1972, it was admitted that the date of the year end should read “January 3, 1973”. How and why the appellant’s fiscal period was deemed to have ended on January 3 was neither discussed nor explained at the hearing. However, it is clear that the transactions appearing in the said Exhibit A-1 were those that gave rise to the business loss claimed in the appellant’s 1973 amended return, as the fiscal period covered allegedly ended in the 1973 taxation year..

For a number of years the appellant had been employed by Harrison Fabrics, an enterprise owned by his father. In 1962 the appellant’s father died leaving the appellant half the shares of Harrison Fabrics. In 1969 the company was sold and the appellant received in excess of $200,000 in cash for his shares.

In the years 1968 and 1969, the appellant was engaged in buying stocks on margin. However, after receiving the $200,000 in cash for the sale of Harrison Fabrics in 1969, the appellant engaged much more heavily in the purchase and sale of stocks in 1970 and 1971, but did not deduct any of the losses incurred when filing his income tax returns for the years from 1969 to 1971, inclusive.

In 1970, Rober Lew Corp Ltd was incorporated, of which the appellant was the beneficial owner and which was incorporated to serve as an estate planning vehicle for the Harrison family.

In 1972, the appellant purchased shares both personally and through Rober Lew Corp Ltd to such an extent that it is alleged that the appellant had engaged in about 125 separate transactions in the purchase and sale of shares and securities in the period from January 3, 1972 to January 3, 1973. (In the appellant’s notice of appeal another figure is given as the number of transactions engaged in, and therefore the exact number of transactions made in the calendar year 1972 was not clearly established.

In his 1972 income tax return dated April 28, 1973, the appellant claimed to have suffered a capital loss in respect of which he deducted the maximum allowance of $1,000 permissible under the provisions of the Act, but in his original assessment the Minister disallowed the deduction claimed.

In the meantime, the appellant changed his accountant, and his brother-in-law, Henry Zimmer, who is a chartered accountant, acted for the appellant as of February 1974. In his testimony, Mr Zimmer stated that he was astonished to see the mass of stock transaction slips in the appellant’s possession, and said that it took him two weeks to make a history of the appellant’s transactions and to establish his losses. (See Exhibit A-1.) Mr Zimmer said he then filed an amended return for the appellant’s 1973 taxation year, claiming a business loss for that year. Mr Zimmer also filed a Notice of Objection to the Minister’s assessment of March 18, 1974, in which the $1,000 deduction in respect of a capital loss had been disallowed. In the notice of objection, he claimed that the appellant had sustained a business loss in 1973 and that any excess of the loss not applied to the 1973 fiscal year should be carried back to 1972 pursuant to paragraph 111(1)(a) of the Income Tax Act, SC 1970-71-72, c 63 and amendments thereto. The exact portion of the alleged business loss applicable to the 1972 taxation year was not clearly established.

Noiwithstanding the confusion created in the appellant’s 1972 return and the respondent’s Reply to the Notice of Appeal, it would appear that Counsel for the respondent does not now dispute the fact that the appeilant did incur a capital loss as a result of his buying and selling stocks in the calendar year 1972, but denies that these activities constituted a “business”. The question to be determined, therefore, is whether or not the appellant was carrying on a business — and, indeed, whether what is commonly known as “playing the stock market” can be considered to be a business within the meaning of the definition contained in subsection 248(1) of the Income Tax Act.

Counsel for the appellant alleges that the appellant followed the stock market very closely, that he spoke to his brokers three or four times a day; that he spent three or four afternoons a week at brokerage houses; that he subscribed to stock market reports and publications; that he renewed his portfolio daily, selling his stocks as the price went up; that he often purchased stocks on margin; that he dealt with several brokers at a time; that he did not examine the balance sheets of the companies whose stocks he bought; that he never received any dividends; that he did not purchase blue chip stocks; and that he made a succession of quick trades, holding stocks for only a day or two in order to make small profits more often. These facts were not contradicted.

Counsel for the respondent, on the other hand, contends that there is no indication that the appellant was carrying on a business, and suggests that what he was doing was renewing his capital investments and updating his portfolio. Counsel also claimed that the appellant did not underwrite any stocks; that he could not sustain any stocks on the market; that he did not promote stocks as would a broker; and that he was not a professional in the field of trading in securities. Counsel concludes therefore that the appellant was not in the business of trading in stocks and his losses for 1972 were not business losses. Counsel for the respondent also suggested that the Minister was rather lenient in his treatment of the profits derived from the purchase and sale of stocks when administering the old Income Tax Act and considered such transactions as a form of investment rather than as the actual business of trading in stocks, because full disclosure of the profits realized by the countless Canadians who play the stock market to a considerable extent would be well-nigh impossible for the Department of National Revenue to control effectively.

This reasoning, of course, would be equally true of, and applicable to, capital gains from the same source made after 1972, but, in any event, 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 this instance, how can so many transactions in the buying and selling of stocks on short term, and involving a total of some $340,000, possibly fall within the accepted criteria of what is generally understood as investment where there is no intention whatever of earning dividends and where the purpose of the continuous acquisition and sale of stock is to realize a series of small but frequent profits?

On the other hand, the continuous acquisition of new stocks and their quick sale in numerous transactions for a series of small profits is, in my view, in itself almost a definition of the act of trading.

I conclude therefore that the appellant was not an investor in stocks but was engaged in a business or venture in the nature of trade within the meaning of the definition in subsection 248(1) of the Income Tax Act. Just as the profits derived from such a venture would, in my opinion, be fully taxable in the hands of the trader, so are the losses incurred fully deductible business losses.

Since, as I have said, it was not made clear in the assessments or in the pleadings (nor, I might add, in the evidence adduced at the hearing), what is the exact amount of loss that is in issue or that is to be carried back to the 1972 taxation year, and since there appears to be some unexplained overlapping between the 1972 and 1973 fiscal years, and the 1972 and 1973 calendar years, the Board hereby allows the appeal in part, and refers the matter back ‘to the Minister for reconsideration and reassessment on the basis that the appellant was in the business of trading on the stock market and that therefore, when the true amount of the said business loss has been ascertained, it will be deductible in its entirety in the relevant taxation year. It therefore follows that, if the loss is determined to have been incurred in the 1973 fiscal year, a substantial portion of it will be available to be carried back to the 1972 taxation year.

Appeal allowed in part.