Harold Donald Smith v. Minister of National Revenue, [1973] CTC 714, 73 DTC 5526

Kerr, J:—This is an appeal from a judgment of the Income Tax Appeal Board which confirmed the assessment of the appellant’s income for 1969, whereby $9,380.39 claimed by the appellant as a trading loss deduction from income was disallowed on the ground that it was not a business loss but was a capital loss within the meaning of paragraph 12(1)(b) of the Income Tax Act. The loss resulted from the purchase and sale of securities in 1969.

In the years 1963 to 1972, inclusive, the appellant was in the employ of Richardson Securities of Canada, stockbrokers with seats on stock exchanges, as a full-time commissioned salesman of securities, or what is called in the trade a “customer’s man”. He transferred from that company’s Winnipeg office to its Calgary office in 1967, and the transactions in question took place in Calgary. Previously he had been a bank manager for some time. In the course of his duties with Richardson Securities he sought and advised customers in respect of buying and selling securities and sent their orders for purchase or sale to Richardson Securities’ order desk, whereupon that company would endeavour to accomplish the orders. The company charged a commission for its services as brokers. The appellant received as his remuneration from the company a percentage of the commissions charged by the company on the orders so placed by him.

In his notice of appeal the appellant stated, inter alia, that in 1969 he embarked on a program for profit through speculating on his own account in buying and selling various speculative type securities, that he thereby was engaged in a “business” as defined in paragraph 139(1)(e) of the Income Tax Act, having embarked upon an extensive and systematic program for profit as a trader in speculative shares, and that his losses in that year were in the nature of trade losses as defined in paragraph 139(1 )(x) of the Act, and that they are properly deductible in determining the profit from a business within the meaning of section 4 of the Act.

In his reply to the notice of appeal the respondent says that in assessing the appellant for 1969 he acted, inter alia, upon the following assumptions:

(a) the appellant was a commissioned salesman with Richardson Securities in Calgary at relevant times and from time to time purchased shares of various Companies upon his personal account;

(b) the appellant did not make a business of dealing in stocks upon his own account in 1969 so that any losses he may have incurred in that year were capital losses of a personal nature,

and the respondent says that the $9,380.39 claimed by the appellant as a deduction from income in 1969 was not a business loss but was a capital loss within the meaning of paragraph 12(1)(b) of the Act.

The appellant’s purchases and sales of securities on his own account in the years 1963-1970 are shown in Richardson Securities’ ledger cards (Exhibit A-1). The account was kept at first in the appellant’s name and later in his wife’s name until her death in November 1970.

In 1963 the appellant’s purchases were 500 shares of Shawinigan rights for $36.50, and several purchases of Canada Savings Bonds. In 1964 he purchased 100 shares of Sherritt Gordon for $415.50 which he sold soon afterwards, and he also had several small purchases and sales of other stocks. In 1965 he bought 100 shares of Steep Rock for $715.50, which he sold in 1966, and 1,000 shares of Obaska Lake for $165.50, which he sold in 1965. In 1966 he bought 1,000 shares of Peerless Canadian Exploration for $155.50, 500 of Western Warner Oils for $123 and 2,000 of Quinalta Petroleum for $635.50, all of which he sold in that year. In 1967 he bought 500 shares of Plains Petroleums for $180.50, another 1,000 of Plains Petroleums for $775.50, 500 of Negus Mines for $265.50, 500 of New Continental Oil for $225.50, 1,000 of Cantri Mines for $215.50, 500 of Cdn Nisto Mines for $315.50, and one share of Moore Corp for $35.50, for a total of $2,013.50, and he sold them in that year. In 1968 he bought 2,000 shares of Min-Ore Mines for $503.50, 1,500 of Plains Petroleums for $522.50, 2,000 of Murky Fault Metal Mines for $918.50, 2,000 of Trojan Consolidated for $717, 2,000 of Trojan Consolidated for $1,282.50, and 2,000 of Trojan Consolidated for $1,552.50, for a total of $5,496.50, and he sold them also in that year. He did not borrow money in those years to buy shares.

In 1969 the appellant made 18 purchases for a total of $33,340.93, the largest of which included 2,000 shares of Ulster Petroleums for $12,300, 1,000 of Permo Oil and Gas for $2,549, 2,000 of Permo Oil and Gas for $6,248, 2,000 of Trojan Consolidated for $2,934.55, 2,000 of Aberdeen Minerals for $1,328, 1,000 of Dynamic Petroleums for $2,712.90, and 500 of Dynamic Petroleums for $1,228. He made 14 sales in that year, all or practically all of his purchases.

In 1970 he made five purchases amounting to $2,086.40, and four sales.

In January 1969 the appellant obtained a loan of $6,000 from his brother-in-law, Dr M G Palmer, and gave his promissory note (Ex- hibit A-2) for that amount to Dr Palmer, payable on June 30, 1969; he also borrowed $3,300 from the Bank of Montreal; and with those sums and personal savings of his own he gave a cheque to Richardson Securities for $12,300 on February 5, 1969, which paid for the 2,000 shares of Ulster Petroleums, above mentioned, bought for a like amount on February 4. The appellant repaid the bank loan in 1969 and is paying interest on the Palmer loan. The year 1969 was the only year in which he borrowed money to buy stock. The shares were bought as bearer shares and were held as such by the appellant for various relatively short periods, sales dates being shown in Exhibit A-1. The major portion of the loss in 1969 was in the Ulster Petroleums transactions. Most of the shares were of young companies, non-dividend and speculative, and the shares bought in 1969 were of the same general kind as those bought in previous years, except perhaps for the Sherritt Gordon, Steep Rock and Shawinigan rights purchases, these last mentioned being older companies.

The appellant testified that in 1969 he thought that he had sufficient experience to go into the business of buying and selling shares for profit on his own account and that he borrowed money for the purpose and played the market for profit in such a business of his own in addition to his work as a commission salesman for Richardson Securities.

In 1963 the appellant had a small loss on his share transactions, which he did not claim as a deduction on his income tax return. In 1966 he had a loss of about $466, and did not claim it as a deduction. In 1965, 1967 and 1968 he had small gains, and did not report them as income. In those years he did not profess to be engaged in a business on his own account. He has continued to buy and sell stock. He was indefinite in his recollection as to what he reported for 1971 and 1972. The years after 1969 are not in issue in this appeal.

At all relevant times his office was in the premises of Richardson Securities, and that company paid the rent and the telephone charges. His purchases and sales of stock on his own account were made through Richardson Securities’ facilities, and he received a commission on them as on other customer’s purchases and sales orders obtained by him. He had no seat on any stock exchange. He had no business licence from Calgary and he paid no business tax to that city. He has never underwritten any shares, has never been a shareholder of an underwriting company or a company such as Richardson Securities, nor an officer of any such company, nor a promoter of same, nor an officer of any of the companies whose shares he bought or sold. He was not what is known in stock circles as an “insider”.

I accept as credible the appellant’s testimony that in 1969 he decided to engage in buying and selling speculative stocks as a trading venture for profit, and that he did not purchase the stocks to hold them as an investment or for dividends. He was doing well on his commission orders (earning some $42,363 in commissions from Richardson Securities in that year); he was familiar with the market by reason of his employment; and he had developed a confidence or expectation that he could trade profitably in stocks on his personal account, along with his work as a commissioned salesman with Richardson Securities. There are similarities between his stock transactions in 1969 and in the previous years, but I do not regard the fact that he was buying and selling stocks in the years prior to 1969, without professing to be in the business of trading in them on his personal account in those years, as inconsistent with or in contradiction of his becoming engaged in 1969 in the business of trading stocks on his own account. In those earlier years his personal stock transactions were relatively few, and small in amount, and he did not borrow money for them; whereas in 1969 he borrowed from his brother-in-law and from the bank, and his purchases and sales were much more extensive in number and volume than in the earlier years, and in his income tax return for 1969 he indicated a loss from business. The stocks were speculative and non-dividend, and he was selling them quickly, not holding them as investments or for dividend income. He was looking for quick profits. Although there was the same objective in each of the years to turn the stocks over at a profit, I think that the appellant’s personal stock transactions in 1969 amounted to the carrying on of a systematic and extensive scheme for profit-making purposes and that they had taken on the character of an adventure in trading and of a business. His employment with Richardson Securities did not in law or in fact preclude him from being engaged in buying and selling stocks on his personal account as a business in 1969. He could and did buy and sell aside from such employment. Neither do the facts that he was not an underwriter or promoter or an officer of a brokerage firm or of any company whose shares he was buying and selling, that he had no seat on a stock exchange and did not have a business licence from the City of Calgary, and that he used the facilities of Richardson Securities to effect his transactions, necessarily lead to a conclusion that he was not engaged in a business of trading in stocks on his own account in 1969. Those facts are relevant to be taken into consideration along with other factors, including the appellant’s intentions and course of conduct, but they are not conclusive in determining the issue whether the purchases and sales of shares by him in 1969 were made in a business of trading in shares carried on by him personally. I think that his course of conduct and the volume and nature of his stock transactions in that year support his expressed subjective intention of embarking upon a trading business in that respect in 1969. In my opinion, he is entitled to deduct from income the loss of $9,380.39 that he incurred as aforesaid in that year.

The appeal is therefore allowed, with costs, and the assessment will be referred back to the Minister of National Revenue for reassessment in accordance with these reasons.

The following cases are included in those cited by counsel: J A Taylor v MNR, [1956] CTC 189; 56 DTC 1125; Irrigation Industries Ltd v MNR, [1962] CTC 215; 62 DTC 1131; Me Laws v MNR, 37 Tax ABC 132; 65 DTC 1; J Funk v MNR, 37 Tax ABC 391; 65 DTC 139; Western Leaseholds Ltd v MNR, [1959] CTC 531; 59 DTC 1316; Os/er, Hammond & Nanton Ltd v MNR, [1963] CTC 164; 63 DTC 1119; N R Whittali v MNR, [1967] CTC 377; 67 DTC 5264; Admiral Investments Ltd v MNR, [1967] 2 Ex CR 308; [1967] CTC 165; 67 DTC 5114; Estate of Frederick J Thompson v MNR, [1970] Tax ABC 739; 70 DTC 1473; Swansburg v MNR, [1972] CTC 2125; 72 DTC 1096; Wellington Hotel Holdings Ltd v MNR, [1973] CTC 473; 73 DTC 5391.