Grant Geddes v. Minister of National Revenue, [1976] CTC 2449, 76 DTC 1338

A J Frost:—This is an appeal with respect to the appellant's 1972 taxation year.

The appellant owns and operates a small private grain elevator in southern Ontario. During the 1972 taxation year he took futures positions with respect to soybeans and corn. He made approximately twenty purchases and twenty sales in these commodities and realized a gain of $978.75.

The question at issue in this appeal is whether the appellant was in the business of trading in grain futures.

On the evidence, I find—

1. The appellant did not have access to any special or inside information which could give him any worthwhile clues as to the price trends of commodities traded over the Chicago Grain Exchange. In his business, he normally handled grain for farmers who brought the grain in for storage and he then turned the grain over as the farmers sold it. The nature of his business gave the appellant some information as to crops maturing in Southern Ontario but this information had no particular bearing on commodity futures listed on the Chicago market. However, being in the grain elevator business generated a real interest in US prices.

2. The appellant received regular market letters, giving fundamental interpretations based on supply-demand information, technical analysis of market action, economic value studies, long-term trading strategy, hedging suggestions and chart services. This information, however, was usually two or three days late in reaching the appellant.

3. The appellant dealt with Toronto brokers, but his orders were executed over the Chicago Grain Exchange.

4. The appellant did not do any charting on his own.

5. The appellant never took delivery under his contracts. He made a practice of selling the contracts at least ten days before they expired. He never wanted the beans.

6. No hedging operation was carried on. by the appellant.

7. Exhibit R-1 filed by the respondent indicates that during the sixmonth period from July to December 1972 soybeans and soybean meal moved up sharply and that this trend continued until mid-1973, with prices generally tripling during that period. Most of the appellant’s soybean transactions were with the market trend, not against it, and occurred for the most part in the last half of the year under appeal.

8. The appellant had no great technical understanding of market action, but he did try to zero in on short-term profits basing his transactions on how he felt about the market at the time. He found futures trading " a little exciting’ and he had a feeling for what was likely to happen. He also listened to what professional traders had to say about the market and phoned them on occasion. Charts had “little meaning for him except as a historical record of what had happened pricewise.

9. Any important knowledge the appellant had was of a fundamental nature.

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”.

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. At the time the appellant placed his orders, the commodity futures market was moving up strongly, and he had “sort of an educated hunch” that price trends were likely to continue. As already mentioned, his moves were generally with the market, and as a result he made a little bit of money on the side. He had the natural instincts of a trader and had some idea of what trading involved technically, but nonetheless the Board is satisfied that he was not a trader and would have had a difficult time had it not been for the prevailing bull market in futures with prices trending upwards. He didn’t have to fight the trend, as the odds were in his favour.

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.

Appeal allowed.