A J Frost:
1 I shall now give my decision in the above income tax appeal from an assessment pertaining to the 1971 taxation year, wherein the Minister of National Revenue assessed the appellant on his share of profits realized on the sale of an apartment building.
2 The appeals of Murray Armel, Joseph C Goldenberg and Gordon Atlin were heard, together with this appeal, on common evidence.
3 The appellant is a barrister and solicitor carrying on the practice of law as a partner in the law firm of Atlin, Goldenberg, Cohen, Gamble & Armel. In 1967, the appellant and his law partners, for an outlay of $6,333, acquired a one-third interest in St Clair & Warren Road Construction Company, a partnership engaged in the construction of an 80-suite apartment. The cost of the building was $1,164,864. In 1971, the said building was sold at a profit of $235,281 of which $7,842.71 was the personal share of the appellant.
4 The question at issue in this appeal is one of leverage: Did the highly leveraged position of the taxpayer affect the appellant's tax status under the appropriate provisions of the Income Tax Act?
5 A taxpayer may be classified as a trader, a speculator or an investor, depending on his moves and the nature of the market in which he operates. An investor normally invests his money for security and income and the prospect of income. He may switch his investments from time to time, having regard for market conditions and the inherent strength or weakness of his individual holdings. He invests to preserve the purchasing power of his dollars, which simply means that if he is prudent he aims to make capital gains. He wants his capital to generate more capital as well as income. These are the facts of life under today's changing economic conditions.
6 A trader usually engages in the sort of dealing which is normally carried on by those actively engaged in the particular market in which the taxpayer makes his moves. The case of Irrigation Industries Limited v Minister of National Revenue, [1962] S.C.R. 346, [1962] C.T.C. 215, 62 D.T.C. 1131, stands for the general proposition that the action must suit the market. In other words, the Board cannot properly categorize a taxpayer as a trader, investor or speculator without having regard for his activities and the criteria of the market place in which he places his bids.
7 The final category is that of the speculator. A speculator is an adventurer who often uses borrowed funds to achieve his purposes. Although the speculator may use his own funds entirely, leverage is not infrequently the hallmark of his activity or activities. Leverage exists when the profit to be realized on a large amount of money is controlled by a small deposit. Leverage is the power to push profits thereby enhancing potential gains. As in physics, the power of a lever depends on where the fulcrum is placed.
8 The appellant, a barrister who argued his own case, submitted that one of the basic principles behind the investment of funds was “to invest as little as possible to make as much as possible”. This, in my opinion, is bold business, and contrary to sound investment principles.
9 On the evidence adduced, I find that no aspect of this appeal is unfavourable to the appellant except the highly leveraged position of the partnership of over 50:1, which, in my view, characterizes the appellant's share of the profit realized from the sale of the Warren Road apartment building as a taxable gain under paragraph 139(1)(e) of the Income Tax Act.
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