Bowie T.C.J.:
1 These appeals are brought from assessments issued to the Appellant for the 1986 and 1988 taxation years. The appellant claimed a business loss of $116,200.00 against his income for the year 1988, arising out of advances he made to a firm of stockbrokers in the years 1984 and 1986, of which I will say more below. That deduction was disallowed by the Minister of National Revenue in assessing the Appellant. It was established at the trial that the Appellant did not file a Notice of Objection for the year 1986, and his appeal for that year therefore cannot succeed.
2 At all times material to these appeals the Appellant was employed as a stockbroker by the firm Dominion Securities. He was also a founding shareholder of two companies, Independence Petroleums Inc. (IP), and Pipestone Petroleums Ltd. (PP), both involved in petroleum exploration, whose shares traded on the Vancouver Stock Exchange. I will refer to the shares of these two companies collectively as “the shares”. Other shareholders included friends, family members and business associates of the Appellant. In his evidence Mr. Chan described himself as the de facto promoter of these companies, although another person was formally named as promoter in the companies' prospectuses. Apparently Mr. Chan did not consider it desirable to be named as the promoter while employed by Dominion Securities.
3 In the promotion of shares of this type it is convenient, or perhaps essential, that there be a trader who will stabilize the market by purchasing blocks of shares that are offered for sale, and by selling blocks of shares to those who wish to buy them. In the parlance of the trade this is known as making a market for the shares. Mr. Chan arranged with Mr. Nicholas Rowe of the firm Brink, Hudson and Lefever (BHL), members of the Vancouver Stock Exchange, that he would fill that role in connection with the shares. An inventory account was opened at BHL, with Mr. Lowe having the authority to carry out trades for that account. The account was operated using the funds of BHL, which was the owner of the inventory of shares in the account from time to time. The expectation of both BHL and Lowe was that the trading activity would give rise to profits in this account, and it was agreed between them that they would share these profits equally.
4 There was a good deal of evidence at the trial as to the nature of the Appellant's relationship with Mr. Lowe and with BHL. The day-to-day trading decisions were to be made by Mr. Lowe as the market maker; however, he testified that he would not make a major trade without consulting with the Appellant and getting his approval. The Appellant was not entitled to any share in the profits that were expected to be realized in the trading account. There was no explicit agreement between the Appellant and BHL, or between him and Lowe, as to the sharing of losses; however the Appellant's evidence, and that of Mr. Lowe and Mr. Groves, the president of BHL, as to the usages of the trade satisfies me that the Appellant was under an obligation to indemnify Mr. Lowe and BHL for any losses resulting from the operation of the account. Significant losses did in fact occur, and in 1984 they reached a level which caused Mr. Groves and Mr. Lowe great concern. They asked Mr. Chan to cover these losses, which he did by making a payment to BHL in the amount of $80,000.00. This was apparently sufficient to eradicate the losses that had accumulated in the inventory account, or, to put it another way, to bring the average cost per share in the account into line with the then current market price.
5 After having made this payment to BHL, the Appellant suggested to the other members of his group who were promoting the stocks that they should all contribute towards covering the losses; they, however, in his words, told him “to take a hike”, and he pressed the matter no further with them. What then was the nature of the $80,000.00 payment? Two things are clear. First, the Appellant did not acquire any interest in the shares comprising the inventory account; nor did he acquire a debt receivable from BHL. It was assumed by the Minister that this advance, and the second one which was made in 1986, were loans to Mr. Lowe. The evidence negates this assumption. I find that the first payment made by the Appellant to BHL was a payment made by him in the course of his business as a trader. It had two purposes. The first was to discharge his obligation, whether legal or moral or both, to indemnify BHL in respect of trading losses in the inventory account. The second was to maintain his reputation in the investment community.
6 Whether BHL would have had a cause of action against the Appellant for these losses is uncertain. What is certain, however, is that if he had not covered them with his own funds, BHL would have closed out the inventory account, the shares would have ceased to trade, and Mr. Chan's reputation in the Vancouver investment community would have suffered greatly as a result. The unfortunate result for the Appellant is that the payment of $80,000 is therefore a business expense, but one incurred, and therefore deductible, in 1984. He did not claim the deduction in that year, nor is it a year for which his assessment is under appeal.
7 Following receipt of the $80,000 payment, Mr. Rowe continued to trade in the shares through the medium of the inventory account. Regrettably, the fortunes of these shares did not improve, and a major loss was incurred in the account in 1986. Again the Appellant was called upon for a payment to cover these losses. This time he paid BHL $56,200.00, which was the total cost of the 200,000 shares remaining in the inventory account, and BHL conveyed all of those shares to him. Their market value at that time was negligible, and trading was, for all practical purposes, at an end.
8 I permitted the Appellant to reopen his case some months after the trial to introduce into evidence a photocopy of a page from the inventory position ledger of BHL which, he said, established his ownership interest in the shares. This document does confirm that the Appellant had made payments to BHL totaling $136,200 by September 23, 1986. However, it does not establish that the Appellant had acquired an ownership interest in the shares prior to the date on which he made the second payment to BHL, that is March 31, 1986.
9 At the trial the Appellant characterized his acquisition of these remaining shares from the inventory account as being a trading transaction carried out with a view to profit. The Appellant disposed of these shares in 1988 to his brother-in-law in exchange for certain consulting services which his brother-in-law had performed for him at that time, and which he valued at $20,000.00. The Respondent has pleaded that the Minister, in assessing the Appellant, assumed the fair market value of the shares at the time of this disposition to be $23,746.00, an assumption which was not challenged by the Appellant in his evidence.
10 The Appellant takes the position that this disposition of the shares gave rise to a non-capital loss in his 1988 taxation year. The shares were acquired, he says, with a view to their eventual resale at an enhanced price; as the promoter of the stock and a trader in the market he would have been required to take that profit into income. The Respondent's position is that by the time the Appellant made the second payment to BHL, and acquired ownership of the remaining shares, there was no market for them, and he had no reasonable expectation of profit. He was, it is argued, simply making the best of a bad situation. In my view, the Appellant dealt with the shares of IP as a trader. It is true that the market was close to non-existent when he acquired the block of 200,000 shares from the BHL inventory account. The price had dropped significantly, and Mr. Rowe was no longer making a market for them. Nevertheless, the Minister assumed, when assessing the Appellant, that the shares had a fair market value of $59,532 at that time, which seems to accord with the evidence of the Appellant.
11 In summary, I conclude that the first payment of $80,000.00 made by the Appellant to BHL, was a business expense in the taxation year 1984 when it was made, and the payment of $56,200 in 1986 represents the cost to him of the shares of IP which he acquired from BHL at that time and resold to his brother-in-law in December 1988 for proceeds which are deemed[FN1: <p><em>The Income Tax Act</em>, subsections 69(1) and 251(6)</p>] to be $23,746.00. There is no appeal before me for the 1984 taxation year. As I said at the outset, the appeal for the 1986 taxation year fails for lack of a Notice of Objection, which is a condition precedent to a valid appeal.
12 The appeal for the 1988 taxation year is allowed, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant incurred a non-capital loss in that year in the amount of $32,454.00. Success being substantially divided, the parties should each bear their own costs.
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