Collyer v. R., [1997] 3 C.T.C. 2446, 97 D.T.C. 1427

Mogan T.C.J.:

1 From 1984 to 1987, the Appellant together with other persons known to the Appellant participated in certain security transactions and loan guarantees involving Omnibus Computer Graphics Inc. (“Omnibus”) and 490089 Ontario Inc. (“0089”). Omnibus was a public company engaged in the computer graphics business and listed on the Toronto Stock Exchange (“TSE”) from January 11, 1984 until some time in 1988. 0089 was a holding company owning approximately 48% of the common shares of Omnibus Group Inc. (“Group”) which, at all relevant times, owned between 6% and 20% of the issued shares of Omnibus.

2 On May 11, 1987, the TSE suspended trading in Omnibus shares. On April 25, 1988, the Omnibus shares were delisted from the TSE. There was no trading in Omnibus shares on the TSE from May 11, 1987 to April 25, 1988. During 1987, the Appellant suffered losses because he owned directly or indirectly a significant number of shares of Omnibus, and he had guaranteed a bank loan in connection with the acquisition of Omnibus shares. When filing his 1987 income tax return, the Appellant claimed that such losses were “business losses” and applied them against other source income. In the reassessments under appeal, the Minister of National Revenue disallowed the losses as “business losses” and assumed that they were capital losses. The only issue for 1987 is whether the Appellant's losses were on income account or capital account. The other years under appeal are 1988, 1991 and 1992 but the issues in those years are a direct consequence of the only issue for 1987.

3 The Appellant is now (1996) retired but, from 1976 to 1988, he operated the only Canadian Tire store in Brandon, Manitoba. He had operated other Canadian Tire stores in other cities prior to 1976, and the first 10 years of his business life were in advertising. Omnibus was a new company in the early 1980s. It was regarded as a “high tech” company intended to produce computer graphics primarily for use in the entertainment field. It was a Canadian company with offices in Toronto and Hollywood. Because of the Appellant's background in advertising, he had confidence in the kind of creativity which he saw in Omnibus. When Omnibus became a public company listed on the TSE in 1984, the Appellant decided to become an Omnibus shareholder.

4 The Appellant's active participation as a shareholder in Omnibus covers a period of more than four years from September 1982 to February 1987. The different routes followed by the Appellant in his acquisition of Omnibus shares are described in Exhibits A-41 and A-42 and are summarized as follows:

Route A

499324 Ontario Limited (“324”) is a Collyer Family Company. In the period from September 1982 to January 1984, 324 borrowed $59,607 to purchase a 4.17% interest in 0089 which held a 48.7% interest in Group which held about 20% of the issued Omnibus shares. This indirect purchase of Omnibus shares through two holding companies proves the Appellant's early interest in Omnibus from September 1982 and throughout 1983. The amount of $59,607 is not in dispute in this appeal because it was an outlay by 324 and not by the Appellant.

Route B

0089 borrowed $550,000 on October 26, 1984 to provide funding to Omnibus. The Appellant paid $610 to 0089 and guaranteed the borrowing up to $10,687 in exchange for the right to subscribe for shares of 0089. The Appellant held a 4.4% position in 0089 at all relevant times and was required to pay $10,687 in 1987 with respect to his restricted guarantee.

The Appellant was one of about 30 individuals who were shareholders in 0089. Some of those 30 individuals were Canadian Tire dealers known to the Appellant.

Route C

In February 1985, 598606 Ontario Limited (“606”) was incorporated as a holding company for about 15 individuals including the Appellant who paid $25,000 to 606 for a 4.17% interest. In April 1985, 606 purchased approximately 670,000 shares from the treasury of Omnibus at a price of $1.35 per share. 606 then owned about 10% of the issued shares of Omnibus.

The Appellant was one of about 15 individuals who were shareholders in 606. More than one-half of the shareholders in 606 were also shareholders in 0089.

Route D

In January 1987, the Appellant purchased directly from the treasury of Omnibus 25,000 shares and 25,000 warrants ($4.00 for one share plus one warrant), paying an aggregate consideration of $100,000.

Route E

In January 1987, the Appellant purchased 3,333 Omnibus shares from 606 at a price of $4.50 per share for an aggregate consideration of $15,000.

Route F

In February 1987, upon the winding-up of 606, the Appellant received 24,870 Omnibus shares plus 9,259 warrants as a return of capital ($25,000) and winding-up dividend ($96,373).

Omnibus Shares and Warrants	Cost to Appellant
Route B	4.4% of 0089 which held 8.06% of the Omnibus shares on May 11, 1987	$ 610 10,687
Route C	4.17% of 606 which then held 10% of the Omnibus shares	25,000
Route D	25,000 Omnibus shares plus 25,000 Omnibus warrants	100,000
Route E	3,333 Omnibus shares	15,000
Route F	24,870 Omnibus shares plus 9,257 warrants upon winding-up of 606	(25,000) 96,373
Totals	53,203 Omnibus shares plus 34,527 Omnibus warrants plus 4.4% of 0089	$222,670

5 The main focus of the Appellant's business life at all relevant times was the operation of his Canadian Tire store at Brandon, Manitoba. There is no evidence that he was a dealer in securities in a general way or that he had significant transactions in the shares of any public company other than Omnibus. If he is to succeed in this appeal, he must do so on the basis that his transactions in the shares and warrants of Omnibus were adventures in the nature of trade. Having regard to all the circumstances, I have great difficulty seeing the Appellant's purchases of Omnibus shares and warrants as adventures in the nature of trade. They look more like investments to me.

6 The Appellant's participation in 606 is interesting. See Route C above. According to the Appellant's evidence, 606 was allocated three seats on the board of directors of Omnibus. I assume this was because of the large block of Omnibus shares which 606 purchased in April 1985. He was asked by his colleagues in 606 to take one of those seats because of his background in advertising. Accordingly, the Appellant became a director of Omnibus in the spring of 1985. He remained a director until Omnibus went under in April/May 1987. He attended all board meetings and was asked to advise mainly on matters of personnel and management remuneration. He was impressed with what Omnibus had brought together in terms of “people talent”.

7 A director of a corporation listed on a stock exchange has a special responsibility with respect to the well-being of the corporation and the protection of the shareholders whom he represents. In particular, he may not use insider information for his own financial advantage. I do not go so far as to state that the director of a public listed corporation cannot be regarded as trading in the shares of the corporation but, when he only accumulates shares and never sells shares, it is difficult for me to view the shares he holds as anything but investments held on capital account. (I should add for the benefit of the Appellant that there was no evidence that he used any insider information for his own advantage.)

8 If one were to take a “shareholder snapshot” of the Appellant in mid-1985 or mid-1986, he did not own any Omnibus shares in his own name at those times. In July 1985 or in July 1986, he had invested $610 in 0089 and $25,000 in 606 and had guaranteed $10,687 of the borrowing by 0089, but he personally held no Omnibus shares. He would have needed the consent of the directors of 0089 or 606 if he had thought that it was prudent, shrewd or otherwise advantageous to sell Omnibus shares and recover his pro rata portion of any proceeds. A real speculator in the relatively volatile shares of a junior listed company would not have tied himself down to the whims of others if his sole purpose was to sell the shares for what he regarded as a good profit at the first opportunity.

9 The Appellant entered as Exhibit A-44 a chart showing the weekly prices of Omnibus shares on the TSE from January 1984 to April 1987. The chart speaks for itself but I would simply note that (i) in 1984, Omnibus shares traded in a range from $1.50 to $3.00; (ii) in 1986, they traded in a range from $2.50 to $7.60; and in the first four months of 1987, they moved from a high of $4.50 in January to a low of $2.10 when trading was suspended. The Appellant acknowledged in evidence that the price of Omnibus shares on the TSE had risen from 1984 to 1986 but he stated that he believed in the Company and expected the value of its shares to increase in the future. The Appellant and the two holding companies (0089 and 606) never bought Omnibus shares on the open market (i.e. from other vending shareholders). They bought only through private placements because the invested capital went directly into the treasury of Omnibus and they were able to buy a large number of shares at a better price. For example, see Route C above when 606 purchased 670,000 shares at $1.35 per share in April 1985 and compare that price with the TSE prices in April 1985 as shown on Exhibit A-44.

10 Similarly, compare Exhibit A-44 with Route D above when the Appellant personally bought 100,000 Omnibus shares from treasury just four months before trading was suspended. Shares purchased through a private placement cannot be sold for a period of twelve months. The shareholder is therefore locked in for a year and cannot sell no matter how high the market goes. This caution is explicitly stated on the second page of Exhibit A-43. In my view, shares bought through a private placement (like the shares bought by 0089 and 606 and the 100,000 shares bought by the Appellant in January 1987) will have a prima facie appearance of capital property unless (i) the buyer is a trader or dealer in securities; (ii) the buyer is actively trading in the shares of the subject company; or (iii) the shares are sold at the first profitable opportunity after their release from escrow. None of those conditions were satisfied with respect to the shares bought by 0089 or 606 or the Appellant personally.

11 Counsel for the Appellant referred to the following cases which were concerned with the sale of corporate shares or the loss of money loaned to a corporation: Irrigation Industries Ltd. v. Minister of National Revenue (1962), 62 D.T.C. 1131 (S.C.C.); Placements Bourg-Royal Inc. v. R. (1974), 74 D.T.C. 6269 (Fed. T.D.); Bossin v. R. (1976), 76 D.T.C. 6196 (Fed. T.D.); Becker v. R. (1983), 83 D.T.C. 5032 (Fed. C.A.); Cull v. Canada (1987), 87 D.T.C. 5322 (Fed. T.D.); and Angus v. R. (1996), 96 D.T.C. 1823 (T.C.C.). Each one of those cases stands on its own merits but, in my opinion, the most important consideration in this appeal by Mr. Collyer is an objective view of all circumstances surrounding his acquisition and holding (directly or indirectly through 0089 and 606) of Omnibus shares. An appeal of this kind is determined primarily on its facts. There is some evidence that 606 sold certain Omnibus shares in order to pay down its loan. Otherwise, there is no evidence that the Appellant or 0089 or 606 ever sold any Omnibus shares for profit. I conclude that the Appellant's acquisition of Omnibus shares either personally or through companies like 0089 and 606 was on capital account. I accept his own evidence that he really did have confidence in the future of Omnibus.

12 Considering that the Appellant prior to 1987 participated in the fortunes of Omnibus only through holding companies like 0089 and 606, that he became a director of Omnibus primarily to protect the financial interests of himself and his colleagues in 606, and that he never sold shares or warrants of Omnibus, I regard the Appellant as an investor (and not a trader) in the shares of Omnibus. The appeals are dismissed, with costs.