McNair,
J.:
—This
is
an
appeal
by
the
plaintiff
from
the
Minister
of
National
Revenue's
reassessments
of
tax
for
the
1979
and
1980
taxation
years
whereby
gains
realized
from
the
disposition
of
certain
employee
stock
options
and
other
shares
in
a
number
of
resource
companies
were
treated
as
income
from
an
adventure
or
concern
in
the
nature
of
trade.
A
statement
of
claim
and
a
statement
of
defence
were
filed
with
respect
to
the
1979
reassessment.
A
separate
statement
of
claim
and
corresponding
statement
of
defence
filed
with
respect
to
the
1980
reassessment
were
amended
as
a
consequence
of
a
second
reassessment
by
the
Minister
for
that
taxation
year
in
connection
with
items
not
in
issue
in
these
appeals.
Pursuant
to
agreement
of
counsel,
both
cases
were
tried
together
upon
common
evidence
and
were
the
subject
of
identical
argument.
The
Issue
The
sole
question
for
determination
is
whether
the
Minister
was
correct
in
treating
substantial
amounts
received
by
the
plaintiff
upon
the
disposition
of
shares
of
Warren
Explorations
Ltd.
(“Warren”),
Cane
Consolidated
Explorations
Ltd.
("Cane"),
Jorex
Ltd.
("Jorex")
and
Independence
Petroleums
Ltd.
("Independence")
as
business
income
within
the
meaning
of
subsection
9(1)
and
the
extended
definition
of
"business"
in
subsection
248(1)
of
the
Income
Tax
Act,
R.S.C.
1970-71-72,
c.
63,
as
amended,
rather
than
as
capital
gains,
as
the
plaintiff
contends
they
should
have
been.
Gains
realized
upon
the
sale
of
shares
of
a
fifth
company,
Jonpol
Explorations
Ltd.,
although
referred
to
in
the
pleadings,
are
not
at
issue
in
these
proceedings.
The
Facts
The
taxpayer,
John
Arthur
Pollock,
is
a
professional
mining
engineer
who
has
been
directly
involved
in
the
exploration
and
development
of
natural
resources
in
both
Canada
and
the
United
States
for
over
30
years.
In
1979
and
1980,
the
taxation
years
under
appeal,
the
plaintiff
disposed
of
shares
in
a
number
of
junior
resource
companies
for
which
he
was
then
working,
realizing
gains
in
the
amounts
of
$117,234.37
and
$560,738.33
respectively.
The
vast
majority
of
these
shares
had
been
acquired
through
the
exercise
of
employee
stock
options
granted
to
the
plaintiff
by
the
four
resource
companies
for
whom
he
was
working.
A
smaller
number
of
shares
were
acquired
when
the
plaintiff
exercised
a
number
of
promoter's
warrants
granted
to
him
by
Cane.
The
same
company
also
directly
issued
the
plaintiff
a
number
of
“bonus
shares"
for
services
rendered
in
assisting
with
financing.
In
addition,
the
plaintiff
received
some
125,000
so-called
"founder's
shares"
upon
formation
of
Independence,
approximately
5,000
to
6,000
of
which
were
committed
to
that
company's
“stabilization
fund”.
He
also
purchased
a
number
of
Independence
shares
from
a
third
party.
Finally,
the
plaintiff
admits
to
purchases
of
small
lots
of
Warren
and
Cane
shares
on
the
open
market,
although
the
exact
circumstances
surrounding
these
purchases
are
in
dispute.
It
will
be
useful
to
summarize
the
plaintiff's
share
transactions
in
each
of
the
four
companies.
A.
Warren
Explorations
Ltd.
The
plaintiff's
association
with
Warren
began
in
1973,
the
year
that
company
was
incorporated.
In
its
early
years,
Warren
was
primarily
a
mining
company.
Later,
the
company
became
involved
in
oil
and
gas
exploration
and
drilling
in
the
United
States.
The
plaintiff
served
as
director
and
officer
of
Warren
from
December
1973
until
June
1983.
For
most
of
this
period,
the
plaintiff
also
served
as
the
company's
president
and
general
manager.
On
July
1,
1979
a
formal
employment
contract
was
entered
into
between
Warren
and
the
plaintiff,
whereby
the
latter
agreed
to
serve
as
the
company's
president
and
general
manager
for
a
period
of
five
years
at
a
salary
of
$2,000
per
month.
As
a
further
inducement,
the
company
offered
the
plaintiff
a
stock
option
on
150,000
common
shares
at
a
price
of
$1
per
share.
Prior
to
the
employment
contract
of
July
1,
1979,
the
plaintiff
had
received
no
payment
for
his
services
apart
from
a
number
of
stock
options
granted
to
him
by
Warren.
By
agreement
dated
February
16,1977
he
was
given
an
option
on
200,000
common
shares
at
a
price
of
20¢
per
share.
The
plaintiff
partially
exercised
this
option,
thereby
acquiring
130,000
of
the
optioned
shares.
On
December
19,
1978
the
parties
entered
into
another
stock
option
agreement
under
which
the
plaintiff
became
entitled
to
acquire
160,000
common
shares
at
a
price
of
25¢
per
share.
This
option
was
completely
exercised,
in
six
different
stages,
between
April
4,
1979
and
September
17,
1979.
Further
incentive
options
were
granted
after
the
execution
of
the
employment
contract
of
July
1,
1979.
A
stock
option
agreement
dated
October
22,1979
enabled
the
plaintiff
to
purchase
80,000
common
shares
at
a
price
of
$1.80
per
share.
This
option
was
completely
exercised
in
four
different
stages
between
January
8,
1980
and
February
4,
1980.
Another
option
agreement
dated
January
21,
1980
provided
for
100,000
common
shares
to
be
acquired
at
a
price
of
$2.50
per
share.
This
option
was
also
totally
exercised
by
the
plaintiff,
this
time
in
ten
different
stages
between
February
11,
1980
and
October
1,
1980.
Finally,
a
stock
option
agreement
dated
August
4,
1980
provided
for
50,000
common
shares
to
be
purchased
at
a
price
of
$3
per
share.
The
plaintiff
acquired
18,000
of
the
shares
on
October
22,
1980,
and
the
balance
on
November
5,
1980.
In
total,
670,000
shares
of
Warren
were
acquired
by
the
plaintiff
through
the
exercise
of
employee
stock
options.
Some
additional
shares
of
this
company
were
also
purchased
on
the
open
market.
Almost
all
of
the
shares
were
sold
by
the
plaintiff
in
the
relevant
taxation
years.
In
1979,
458,000
shares
were
disposed
of,
followed
by
198,500
shares
in
1980.
According
to
counsel
for
the
plaintiff,
the
issued
share
capital
of
Warren
at
the
relevant
time
was
approximately
6,000,000
shares.
The
plaintiff's
relationship
with
Warren
terminated
in
1983.
B.
Cane
Consolidated
Explorations
Ltd.
Cane
Consolidated
Explorations
Ltd.,
now
Cane
Corporation,
was
the
successor
to
Cane
Silver
Mines
Ltd.,
a
silver
company
originally
founded
in
1917.
In
the
early
1970s,
the
plaintiff
was
approached
by
the
company's
owner
with
a
proposal
to
reactivate
the
company
and
to
explore
some
properties
it
owned
in
Northern
Ontario.
A
prospectus
was
issued
on
November
6,1979
identifying
the
plaintiff,
who
was
president
of
the
company,
as
one
of
the
two
promoters
of
Cane.
As
reward
for
his
efforts
in
reorganizing
the
company,
an
agreement
was
made
on
September
4,1979
for
the
issuance
of
225,000
promoter's
warrants
entitling
the
plaintiff
to
acquire
that
number
of
common
shares
at
stipulated
prices.
By
agreement
dated
June
30,
1979,
Cane
granted
the
plaintiff
an
option
to
purchase
50,000
shares
at
a
price
of
20¢
per
share
in
lieu
of
remuneration.
As
further
inducement,
the
plaintiff
also
received
in
1979
a
bonus
of
105,000
shares,
free
of
charge,
as
compensation
for
his
services
to
the
company.
In
early
1980,
the
plaintiff
was
granted
various
incentive
options
as
a
means
of
interesting
Cane
in
developing
some
oil
and
gas
projects
in
the
United
States
in
conjunction
with
Warren.
By
agreement
dated
January
23,
1980,
he
received
an
option
for
50,000
shares
at
a
price
of
60¢
per
share.
An
option
for
75,000
shares
at
a
price
of
60¢
per
share
was
granted
to
him
on
September
2,
1980.
A
third
option
agreement
dated
October
18,
1980
provided
for
100,000
shares
to
be
acquired
at
a
price
of
80¢
per
share.
The
oil
and
gas
projects
proved
unsuccessful,
and
all
of
Cane's
U.S.
interests
were
ultimately
sold.
In
addition
to
the
105,000
bonus
shares
received
in
1979,
the
plaintiff
acquired
some
300,000
shares
of
Cane
in
1979
and
1980
through
the
exercise
of
his
employee
stock
options.
He
also
exercised
130,000
of
the
promoter's
warrants
in
1980.
The
total
numbers
of
Cane
shares
disposed
of
in
1979
and
1980
were
105,000
and
430,500
respectively.
According
to
plaintiff's
counsel,
the
issued
capital
of
Cane
at
that
time
was
approximately
2,000,000
shares.
The
plaintiff
still
remains
president
and
executive
officer
of
Cane,
and
today
holds
about
1,200,000
shares
representing
approximately
ten
per
cent
of
Cane's
total
stock.
C.
Jo
rex
Ltd.
The
plaintiff's
involvement
with
Jorex,
a
mining
exploration
company,
may
be
summarized
briefly.
The
plaintiff
never
became
a
director
and
officer
of
Jorex.
He
simply
worked
for
the
company
as
field
supervisor
in
charge
of
a
number
of
projects,
for
which
he
was
paid
a
retainer
of
$1,500
per
month.
All
of
the
Jorex
shares
sold
by
the
plaintiff
in
the
1979
and
1980
taxation
years
had
been
acquired
as
a
result
of
exercising
employee
stock
options.
The
first
of
these
options,
dated
December
5,
1977,
granted
an
option
to
purchase
25,000
Jorex
shares
at
a
price
of
35#
per
share,
of
which
15,000
shares
were
actually
purchased.
A
second
option
for
40,000
shares
at
a
price
of
40¢
per
share
was
granted
on
January
7,
1980.
This
was
fully
exercised
by
the
plaintiff
in
two
stages,
20,000
shares
being
acquired
in
March
and
June
of
1980.
It
appears
from
Revenue
Canada's
audit
that
an
additional
15,500
shares
were
acquired
by
the
plaintiff
between
June
and
August
of
1980.
The
plaintiff
disposed
of
a
total
of
5,000
Jorex
shares
in
1979
and
of
an
additional
55,500
shares
in
1980.
D.
Independence
Petroleums
Ltd.
Independence
was
incorporated
in
British
Columbia
on
April
30,
1979.
As
president,
director
and
one
of
three
promoters
of
the
company,
the
plaintiff
had
the
management
responsibility
of
bringing
the
company
into
partnership
with
Warren
in
an
oil
and
gas
exploration
venture
in
the
United
States.
On
incorporation,
the
plaintiff
subscribed
$21,000
as
seed
capital
and
received
125,000
treasury
shares.
Between
February
and
August
of
1980,
he
purchased
a
total
of
24,200
Independence
shares
from
a
third
party.
Finally,
the
plaintiff
exercised
an
employee
stock
option
on
June
2,
1980,
and
acquired
15,000
shares
of
Independence
at
a
price
of
$1.40
per
share.
On
December
15,
1980
the
plaintiff
resigned
as
president
and
director
of
Independence,
having
disposed
of
139,200
shares
representing
the
bulk
of
his
stock
holdings
in
that
company.
He
retained
only
25,000
shares
of
Independence,
which
were
eventually
rolled
into
his
investment
company,
Jonpol.
The
block
of
139,200
shares
includes
approximately
5,000
to
6,000
shares
which
the
plaintiff
had
contributed
to
the
Independence
"stabilization
fund"
upon
formation
of
the
company.
The
capitalization
of
Independence,
after
the
exercise
of
the
plaintiff's
options,
amounted
to
approximately
1,000,050
issued
shares.
As
the
foregoing
summary
indicates,
the
majority
of
the
shares
disposed
of
by
the
plaintiff,
with
the
exception
of
the
Independence
shares,
had
been
acquired
through
the
exercise
of
employee
stock
options.
It
seems
to
be
common
ground
that
these
options
had
been
granted
to
the
plaintiff
in
respect
of
his
employment
with
the
four
companies,
whereby
their
tax
treatment
would
be
governed
by
subsection
7(1)
of
the
Income
Tax
Act,
and
more
particularly
paragraph
(a)
thereof,
which
reads:
7.
(1)
Subject
to
subsection
(1.1),
where
a
corporation
has
agreed
to
sell
or
issue
shares
of
the
capital
stock
of
the
corporation
or
of
a
corporation
with
which
it
does
not
deal
at
arm's
length
to
an
employee
of
the
corporation
or
of
a
corporation
with
which
it
does
not
deal
at
arm's
length,
(a)
if
the
employee
has
acquired
shares
under
the
agreement,
a
benefit
equal
to
the
amount
by
which
the
value
of
the
shares
at
the
time
he
acquired
them
exceeds
the
amount
paid
or
to
be
paid
to
the
corporation
therefor
by
him
shall
be
deemed
to
have
been
received
by
the
employee
by
virtue
of
his
employment
in
the
taxation
year
in
which
he
acquired
the
shares.
The
plaintiff
reported
his
deemed
section
7
benefit
in
the
taxation
years
in
question,
by
including
in
computing
his
employment
income
the
difference
between
the
fair
market
value
of
the
shares
at
the
time
he
exercised
his
options
and
the
amount
paid
for
them.
It
might
be
noted
that
the
employee
stock
options
were
exercisable
at
prices
at
least
equal
to,
and
in
some
cases
slightly
greater
than,
the
trading
prices
of
the
shares
at
the
time
the
options
were
granted.
The
Minister
accepted
the
plaintiff's
reporting
method
under
section
7,
making
only
minor
adjustments
to
the
fair
market
values
of
some
of
the
shares
acquired
under
option
in
his
calculation
of
cost
amounts.
Actually,
there
is
no
dispute
regarding
the
amounts
included
in
employment
income
by
the
plaintiff.
On
the
advice
of
his
accountants,
the
plaintiff
treated
the
profits
realized
on
his
share
transactions
as
capital
gains
in
reporting
his
income
for
the
relevant
taxation
years,
thus
paying
tax
on
only
one
half
of
those
gains.
In
computing
his
capital
gain,
he
deducted
from
the
proceeds
of
disposition
of
the
shares
what
he
considered
to
be
the
adjusted
cost
base
to
him.
To
arrive
at
that
adjusted
cost
base,
he
added
to
the
cost
of
the
shares
the
benefit
deemed
to
have
been
received
by
him
under
section
7
in
respect
of
the
acquisition
of
the
shares,
purportedly
pursuant
to
paragraph
53(1)(j)
of
the
Income
Tax
Act.
The
Minister,
of
course,
disagreed
with
the
plaintiff's
characterization
of
his
gains
as
being
on
capital
account,
and
reassessed
on
the
basis
that
the
gains
realized
were
in
fact
income.
The
onus
of
proving
an
assessment
to
be
erroneous
in
fact
or
in
law
rests
on
the
taxpayer.
Hence,
it
becomes
necessary
to
examine
the
basis
of
reassessment.
The
assumptions
of
fact
relied
upon
by
the
Minister
in
reassessing
the
plaintiff
and
the
statutory
provisions
on
which
he
relies
are
set
out
in
paragraphs
8,
9
and
10
of
the
defence
to
the
amended
statement
of
claim
with
respect
to
the
reassessment
for
the
1980
taxation
year
as
follows:
8.
In
reassessing
the
plaintiff
on
the
basis
that
the
gain
on
the
sale
of
certain
shares
constituted
income
from
an
adventure
or
concern
in
the
nature
of
trade,
the
Minister
of
National
Revenue
relied
upon
the
following
findings
or
assumptions
of
fact:
(a)
the
facts
hereinbefore
admitted
or
pleaded;
(b)
during
1979
and
1980
the
appellant
bought
and
sold
shares
(the
"Shares")
at
a
profit
in
the
following
companies,
inter
alia:
Jorex
Limited
("Jorex")
Warren
Explorations
Limited
("Warren")
Cane
Consolidated
Explorations
Limited
("Cane")
Jonpol
Explorations
Limited
("Jonpol")
Independence
Petroleums
Limited
("Independence")
(c)
at
all
material
times,
the
plaintiff
was
a
field
supervisor
with
Jorex
and
was
the
president
of
Warren
Cane,
Jonpol
and
Independence.
The
plaintiff
was
also
a
promoter
of
shares
of
one
or
more
of
these
corporations;
(d)
in
the
1979
and
1980
taxation
years,
the
plaintiff
realized
gains
of
$117,234.37
and
$560,738.33
respectively
from
the
disposition
of
the
Shares;
(c)
the
possibility
of
reselling
the
Shares
at
a
profit
was
an
operating
motivation
for
the
acquisition
of
the
Shares.
B.
STATUTORY
PROVISIONS
UPON
WHICH
THE
DEPUTY
ATTORNEY
GENERAL
OF
CANADA
RELIES
AND
THE
REASONS
WHICH
HE
INTENDS
TO
SUBMIT:
9.
The
Deputy
Attorney
General
of
Canada
relies
upon
the
provisions
of
section
3,
and
subsections
9(1)
and
248(1)
of
the
Act.
10.
The
Deputy
Attorney
General
of
Canada
submits
that
the
plaintiff
had
in
his
mind
the
possibility
of
reselling
the
Shares
at
a
profit
as
an
operating
motivation
for
their
acquisition,
with
the
consequence
that
the
profit
realized
by
him
upon
the
disposition
of
the
Shares
was
income
from
an
adventure
or
concern
in
the
nature
of
trade,
and
was
therefore
properly
included
in
income
by
the
Minister
of
National
Revenue
in
the
plaintiff's
1980
taxation
year
pursuant
to
section
3,
and
subsections
9(1)
and
248(1
)
of
the
Act.
The
same
factual
assumptions
and
statutory
provisions
are
pleaded
in
paragraphs
5,
6
and
7
of
the
defence
pertaining
to
the
1979
taxation
year.
Shares
Acquired
Under
Employee
Stock
Options
The
first
matter
concerns
the
proposition
advanced
by
counsel
for
the
plaintiff
regarding
the
proper
tax
treatment
to
be
accorded
the
profits
realized
by
the
plaintiff
upon
the
disposition
of
the
shares
acquired
under
employee
stock
options.
He
referred
to
the
examination
for
discovery
of
one
of
the
tax
auditors,
during
which
counsel
for
the
Minister
stated
that
from
their
point
of
view
the
taxpayer
was
engaged
in
an
adventure
in
the
nature
of
trade
at
the
time
the
options
were
granted.
Plaintiff's
counsel
argued
that
this
statement
was
inconsistent
with
the
Minister’s
reassessments
of
income
for
both
taxation
years,
whereby
the
stock
options
were
deemed
to
have
been
received
by
virtue
of
the
plaintiff's
employment.
Plaintiff's
counsel
further
submitted
that
this
inconsistency
was
accentuated
by
the
extended
definition
of
"business"
contained
in
subsection
248(1)
of
the
Act,
which
specifically
excludes
“office
or
employment".
In
his
submission,
the
Minister's
assumption
that
the
plaintiff
was
engaged
in
an
adventure
in
the
nature
of
trade
when
he
received
the
options
under
review
simply
cannot
stand.
Plaintiff's
counsel
pressed
the
argument
that
even
if
the
plaintiffs
adventures
in
the
nature
of
trade
were
regarded
as
having
commenced
with
the
exercise
of
his
options,
the
Minister's
tax
treatment
of
the
proceeds
of
disposition
of
the
shares
acquired
thereunder
would
still
be
self-contradictory.
On
his
theory,
the
Minister
added
the
section
7
benefit
to
the
price
the
plaintiff
paid
for
his
shares
pursuant
to
paragraph
53(1)(j)
of
the
Income
Tax
Act
to
determine
the
adjusted
cost
base
of
the
shares
for
purposes
of
capital
gains
calculations.
According
to
him,
paragraph
53(1)(j)
is
the
only
provision
of
the
statute
allowing
for
such
a
computation,
and
the
Minister's
addition
of
the
section
7
benefit
in
calculating
the
adjusted
cost
base
of
the
shares
confirms
that
those
shares
ought
in
fact
to
receive
capital
gains
treatment.
In
my
opinion,
the
submissions
of
plaintiff's
counsel
on
this
point
are
entirely
lacking
in
merit.
Firstly,
I
would
observe
that
the
Minister,
who
had
admitted
initially
to
including
the
deemed
section
7
benefit
in
computing
the
adjusted
cost
base
to
the
plaintiff
of
his
stock
option
shares,
subsequently
withdrew
that
admission
and
pleaded
in
his
statement
of
defence
that:
.
.
.
the
Minister
of
National
Revenue
deducted
the
cost
of
the
shares,
and
not
the
adjusted
cost
base
of
the
shares,
in
computing
the
amount
of
the
gains
realized
by
the
Plaintiff
from
the
disposition
of
the
said
shares.
[Emphasis
added.]
Counsel
for
the
Minister
submitted
that
paragraph
53(1)(j)
is
certainly
not
the
only
statutory
provision
in
the
Income
Tax
Act
pursuant
to
which
the
section
7
benefit
may
be
added
in
computing
the
cost
of
the
shares,
pointing
out
that
in
the
case
at
bar
the
section
7
benefit
was
in
fact
included
in
computing
the
plaintiff's
cost
pursuant
to
section
9
of
the
Income
Tax
Act.
I
consider
that
it
was
both
fair
and
proper
for
the
Minister
to
thus
determine
the
plaintiff's
profits
from
his
business,
assuming
the
plaintiff
was
indeed
engaged
in
an
adventure
in
the
nature
of
trade.
The
mere
fact
that
paragraph
53(1)(j)
of
the
Act
provides
specifically
for
inclusion
of
the
section
7
benefit
in
computing
the
adjusted
cost
base
of
shares
acquired
pursuant
to
employee
stock
options
does
not
signify
that
the
disposition
of
such
shares
is
necessarily
on
capital
account,
nor
does
it
preclude
including
the
benefit
under
other
sections
of
the
Act.
As
Mahoney,
J.
remarked
in
Mansfield
v.
The
Queen,
[1983]
C.T.C.
97;
83
D.T.C.
5136
(F.C.T.D.),
at
page
99
(D.T.C.
5138):
Parliament,
in
enacting
paragraph
53(1)(j),
clearly
contemplated
that
a
transaction
might
lead
both
to
the
receipt
of
a
benefit
by
virtue
of
employment,
taxable
as
income
in
the
year
of
its
receipt,
and
to
the
acquisition
of
a
property,
the
gain
or
loss
on
disposition
whereof
would
be
taxable
or
allowable,
as
the
case
may
be,
in
the
year
of
its
disposition.
In
my
opinion,
it
is
entirely
conceivable
that
a
taxpayer
may
acquire
shares
under
employee
stock
options
and
at
the
same
time
become
engaged
in
an
adventure
in
the
nature
of
trade
with
respect
to
the
shares
so
acquired.
If
a
taxpayer
is
actively
trading
in
shares
acquired
under
employee
stock
options
then
it
may
become
increasingly
difficult
to
make
a
convincing
argument
that
the
proceeds
of
disposition
of
such
shares
constitute
capital
gain,
rather
than
income
from
a
trading
venture.
Moreover,
if
the
nature
and
quantity
of
the
shares
acquired
under
employee
stock
options
warrant
the
conclusion
the
taxpayer
was
trading
in
those
shares,
or
if
the
taxpayer
deals
with
the
shares
so
acquired
in
the
same
way
as
a
dealer
in
securities
ordinarily
would,
the
conclusion
becomes
almost
inescapable
that
any
gains
realized
on
the
disposition
of
the
shares
necessarily
must
be
income:
M.N.R.
v.
Taylor,
[1956]
C.T.C.
189;
56
D.T.C.
1125
(Ex.
Ct.).
The
fact
that
the
taxpayer
acquired
stock
option
shares
by
virtue
of
employment
is
irrelevant.
Rather,
it
is
the
manner
of
dealing
with
those
shares
which
becomes
determinative.
Assumptions
Made
by
the
Minister
in
Reassessing
In
the
course
of
his
argument,
plaintiff's
counsel
referred
to
a
number
of
erroneous
assumptions
alleged
to
have
been
made
by
the
Minister
in
reassessing
the
plaintiff
for
the
relevant
taxation
years.
The
first
of
these
relates
to
the
plaintiff's
alleged
use
of
knowledge
gained
by
virtue
of
his
position
in
the
various
companies
for
which
he
worked.
While
no
specific
allegation
of
use
of
insider
information
appears
in
the
pleadings,
the
following
statement
in
the
letter
from
the
Head
Office,
Specialized
Audit
Division,
to
the
Toronto
District
Office
indicates
that
an
assumption
of
such
use
was
indeed
one
of
the
bases
for
the
Minister’s
reassessments:
In
the
instant
case,
the
taxpayer
appears
to
be
a
"trader"
who
has
used
special
knowledge
of
at
least
two
corporations
to
realize
profitable
and
timely
short
sales.
[Emphasis
added.]
The
plaintiff
was
examined
on
this
and
emphatically
denied
using
information
to
which
he
was
privy
for
personal
gain.
While
it
is
obvious
that
the
plaintiff,
given
his
position
as
president,
director
or
promoter
of
most
of
the
companies
in
question,
would
be
intimately
acquainted
with
the
ongoing
activities
of
those
companies,
I
accept
his
evidence
that
he
did
not
use
any
insider
knowledge
to
further
his
own
interests.
In
this
respect,
I
also
note
the
following
excerpt
from
the
examination
for
discovery
of
one
of
the
defendant's
auditors,
which
was
read
at
trial
by
plaintiff's
counsel:
MR.
NATHANSON:
Okay.
But
as
far
as
you
are
aware
at
this
point,
the
Minister
does
not
assume,
has
not
found
any
specific
knowledge
or
information
upon
which
Mr.
Pollock
relied
in
dealing
in
securities?
THE
DEPONENT:
At
the
present
time,
there
is
nothing
that
comes
to
my
mind
to
state
that.
A
second
assumption
made
by
the
Minister
to
the
effect
that
the
plaintiff
was
engaging
in
short
sales
of
shares
was
likewise
challenged
by
counsel
for
the
plaintiff.
The
Minister's
assumption
in
this
regard
is
again
not
specifically
pleaded,
but
rather
emanates
from
correspondence
between
Head
Office
and
the
Toronto
District
Office.
The
Chief
of
the
Audit
Application
Section,
having
already
referred
to
the
plaintiff's
realization
of
"profitable
and
timely
short
sales",
continues
as
follows:
It
is
also
significant
that
he
sold
some
shares
short
and
in
1980
often
traded
short
on
shares
of
Warren
Explorations
Ltd.
Our
review
of
the
facts
indicated]
that
this
was
not
done
inadvertently
as
argued
by
the
taxpayer.
Indeed,
the
schedules
showing
the
plaintiff's
share
transactions
in
the
various
companies
contain
numerous
references
to
shares
bought
to
"cover
short".
On
cross-examination,
the
plaintiff
explained
that
the
term
"cover
short"
was
merely
an
accounting
term
and
that
while
his
brokers
occasionally
may
have
oversold
shares
in
his
accounts,
he
always
owned
sufficient
stock
to
cover
such
sales.
He
went
on
to
explain
that
the
dates
appearing
to
the
left
of
the
"Share
Bought/Sold”
column
in
the
schedules
to
the
audit
report
(Exhibit
1A)
summarizing
the
plaintiff's
share
transactions,
did
not
necessarily
correspond
to
the
date
of
the
exercise
of
option,
but
rather
appeared
to
represent
the
dates
when
stock
was
delivered
into
his
various
accounts.
The
following
excerpt
of
his
cross-examination
evidence
is
particularly
illuminative:
Q.
May
I
take
you
to
the
next
page,
page
200.
The
first
entry
would
show
that
you
were
all
sold,
your
broker
sold
the
stock
that
you
did
not
have.
A.
That
was
in
that
account.
He
oversold
875
shares
in
that
account
but
I
always
had
stock.
Q.
Where?
A.
I
would
either
have
it
in
my
office
or
in
another
account
or
anywhere.
It
says
here,
"Cover
short".
That's
an
accounting
term.
I
never
sold
a
stock
short
in
my
life.
Q.
That
refers
to
the
shortage
in
your
account
with
this
particular
broker?
A.
Yes.
I
accept
the
plaintiff's
testimony
on
this
point
and
find
that
he
never
at
any
time
sold
shares
he
did
not
actually
own.
The
third
assumption
made
by
the
Minister
and
disputed
by
counsel
for
the
plaintiff
is
contained
in
paragraph
6(c)
of
the
1979
defence
(corresponding
paragraph
8(c)
of
the
1980
defence)
and
reads
as
follows:
(c)
at
all
material
times
the
plaintiff
was
a
field
supervisor
with
Jorex
and
was
the
president
of
Warren,
Cane,
Jonpol
and
Independence.
The
plaintiff
was
also
a
promoter
of
shares
of
one
or
more
of
these
corporations.
[Emphasis
added.]
Plaintiff's
counsel,
while
not
denying
that
his
client
was
one
of
the
promoters
of
Cane
and
Independence,
argued
forcibly
that
the
plaintiff
was
essentially
a
promoter
of
the
two
companies
rather
than
the
promoter
of
their
stock.
I
accept
this
contention
and
find
that
the
plaintiff
was
not
what
is
commonly
referred
to
as
a
"stock
promoter",
but
simply
acted
as
the
promoter
of
Cane
and
Independence
in
the
sense
that
he
"[took]
the
initiative
in
founding,
organizing
or
substantially
reorganizing
the
business"
of
those
corporations
within
the
definition
of
provincial
securities
legislation.
I
also
find
that
the
plaintiff
was
a
promoter
of
Warren
in
the
same
sense.
The
prospectus
of
Cane
dated
May
29,
1981
lists
the
plaintiff
as
one
of
two
Cane
promoters
and
also
refers
to
him
as
a
promoter
of
Warren,
mentioning
that
in
this
latter
capacity
the
plaintiff
"was
responsible
for
raising
approximately
$12,000,000
for
Warren
over
the
past
six
(6)
years".
The
Law
and
its
Application
The
assumptions
made
by
the
Minister
regarding
the
plaintiff's
use
of
insider
information,
the
short
sales
of
shares,
and
his
position
as
stock
promoter
having
been
found
to
be
erroneous,
the
question
remains:
do
the
other
facts
of
the
case
support
the
conclusion
that
the
plaintiff
was
in
fact
engaged
in
an
adventure
in
the
nature
of
trade?
Counsel
for
the
plaintiff
submits
they
do
not,
relying
heavily
on
the
case
of
Irrigation
Industries
Ltd
v.
M.N.R.,
[1962]
S.C.R.
346;
[1962]
C.T.C.
215;
62
D.T.C.
1131
for
the
proposition
that
a
mere
intention
to
sell
securities
at
a
gain
is
not
sufficient
in
itself
to
establish
that
the
taxpayer
was
engaged
in
an
adventure
in
the
nature
of
trade.
He
argued
that
the
Minister's
assumption
that
the
possibility
of
reselling
the
shares
at
a
profit
was
an
operating
motivation
for
the
plaintiff's
acquisition
of
the
shares
is
therefore
irrelevant.
In
his
submission,
the
plaintiff's
entire
course
of
conduct
with
respect
to
the
shares
was
not
that
of
an
ordinary
trader
or
dealer
in
securities.
He
noted
that
the
plaintiff
never
denied
his
intention
to
dispose
of
the
shares
acquired
under
the
employee
stock
options
as
quickly
as
possible
and
at
a
price
that
was
not
less
than
the
trading
price
of
the
shares
at
the
time
the
option
was
exercised.
He
urged,
however,
that
the
plaintiff's
behaviour
with
respect
to
the
disposition
of
these
shares
was
no
different
from
that
of
any
employee
granted
a
stock
option.
The
only
logical
course
for
the
plaintiff
in
the
circumstances
was
to
dispose
of
the
shares
as
quickly
as
possible
under
opportune
market
conditions,
given
the
tax
treatment
of
the
employee
stock
options
under
section
7
of
the
Income
Tax
Act
and
the
concomitant
risk
of
the
shares
dropping
in
value
and
resulting
in
a
loss
to
him.
As
for
the
shares
not
acquired
through
the
exercise
of
employee
stock
options,
counsel
argued
that
the
plaintiff's
conduct
was
not
that
of
an
ordinary
trader
or
dealer
in
securities
and
that
the
plaintiff
was
not
a
promoter
of
shares
for
sale,
despite
some
speculative
activity
and
the
purchasing
of
shares
from
third
parties.
Finally,
he
submitted
that
the
plaintiff's
original
motivations
regarding
Independence
were
concerned
with
building
up
the
company
and
that
it
was
only
his
unanticipated
resignation
which
prompted
him
to
dispose
of
all
of
his
Independence
shares.
As
for
the
plaintiff's
involvement
with
the
Independence
stabilization
fund,
plaintiff's
counsel
argued
that
this
was
a
separate
transaction
in
which
both
the
extent
of
his
participation
and
any
gains
therefrom
were
minimal.
In
Irrigation
Industries,
supra,
the
Supreme
Court
of
Canada,
on
close
division,
held
that
the
substantial
profit
realized
by
the
appellant
on
the
sale
of
treasury
shares
purchased
from
a
mining
corporation
and
sold
within
a
few
months
thereafter
was
a
capital
gain
on
the
realization
of
an
investment
and
not
income
from
an
adventure
in
the
nature
of
trade.
Martland,
J.,
writing
for
the
majority,
posed
the
issue
thus
at
pages
217-218
(S.C.R.
349):
The
issue
in
this
appeal
is
as
to
whether
an
isolated
purchase
of
shares
from
the
treasury
of
a
corporation
and
subsequent
sale
thereof
at
a
profit,
not
being
a
part
of
the
business
carried
on
by
the
purchaser
of
the
shares,
or
in
any
way
related
to
it,
constitutes
an
adventure
in
the
nature
of
trade
so
as
to
render
such
profit
liable
to
income
tax.
The
learned
judge
resolved
it
thus,
at
page
219
(S.C.R.
351):
I
cannot
agree
that
the
question
as
to
whether
or
not
an
isolated
transaction
in
securities
is
to
constitute
an
adventure
in
the
nature
of
trade
can
be
determined
solely
upon
that
basis.
In
my
opinion,
a
person
who
puts
money
into
a
business
enterprise
by
the
purchase
of
the
shares
of
a
company
on
an
isolated
occasion,
and
not
as
a
part
of
his
regular
business,
cannot
be
said
to
have
engaged
in
an
adventure
in
the
nature
of
trade
merely
because
the
purchase
was
speculative
in
that,
at
that
time,
he
did
not
intend
to
hold
the
shares
indefinitely,
but
intended,
if
possible,
to
sell
them
at
a
profit
as
soon
as
he
reasonably
could.
I
think
that
there
must
be
clearer
indications
of
"trade"
than
this
before
it
can
be
said
that
there
has
been
an
adventure
in
the
nature
of
trade.
In
my
opinion,
the
facts
of
the
present
case
evince
sufficient
indications
of
trade
to
distinguish
it
from
Irrigation
Industries.
The
most
salient
disparity,
of
course,
is
the
number
of
transactions
engaged
in
by
the
plaintiff.
In
Irrigation
Industries,
the
Court
had
to
consider
an
isolated
purchase
and
subsequent
sale
of
shares
of
one
company.
In
the
present
case,
I
am
confronted
with
numerous
transactions
involving
the
shares
of
four
companies
extending
over
a
period
of
several
years.
I
give
some
credence
to
the
plaintiff's
testimony
that
many
of
his
options
were
exercised
in
stages
to
provide
necessary
financing
for
the
corporations
and
his
explanation
for
the
frequency
of
dispositions,
namely,
that
the
state
of
the
market
at
times
made
it
impossible
for
his
brokers
to
arrange
for
immediate
sales
of
large
blocks
of
shares.
Nevertheless,
the
con-
clusion
that
the
taxpayer
engaged
in
a
multiplicity
of
share
transactions
of
a
business
nature
is
irrefutable.
Counsel
for
the
plaintiff
cited
the
case
of
Busby
v.
The
Queen,
[1986]
1
C.T.C.
147;
86
D.T.C.
6018
(F.C.T.D.),
in
which
I
held
that
a
taxpayer's
profits
on
the
sale
of
shares
acquired
under
stock
options
granted
to
her
by
virtue
of
her
personal
relationship
with
one
of
the
principal
shareholders
of
the
two
resource
corporations
granting
such
options
were
capital
gains
and
not
income.
After
reviewing
the
facts
and
quoting
extensively
from
Irrigation
Industries,
supra,
I
drew
the
following
conclusions
at
page
155
(D.T.C.
6023):
In
my
view,
the
evidence
is
all
to
the
effect
that
these
relatively
isolated
stock
option
transactions
were
not
part
of
a
regular
business
pattern
but
rather
were
of
an
investment
and
capital
nature,
even
though
made
with
the
hope
and
expectation
of
an
ultimate
realization
of
profit.
The
inference
to
be
drawn
from
the
evidence
is
that
Rauball
was
the
"mastermind"
of
the
scheme.
His
purpose
vis-a-
vis
the
plaintiff
was
to
help
her
financially
because
of
their
special
relationship.
Neither
Rauball
nor
the
plaintiff
were
in
the
business
of
trading
in
securities.
The
plaintiff
still
holds
the
13,000
shares
of
T.R.V.
Minerals
that
she
acquired
under
option
and
paid
for
on
or
about
February
4,
1980.
The
only
other
shares
the
plaintiff
ever
held,
apart
from
the
optioned
shares,
were
those
of
Hasting's
Travel.
True,
in
the
present
case
the
taxpayer
still
holds
approximately
1,200,000
shares
of
Cane.
However,
the
fact
remains
that
the
substantial
number
of
his
stock
option
transactions
clearly
takes
them
far
beyond
the
category
of
being
isolated
transactions
that
were
not
part
of
a
regular
business
pattern
which,
in
my
view,
sufficiently
distinguishes
the
present
case
from
that
of
Busby.
Nor
am
I
convinced
that
the
taxpayer's
conduct
with
respect
to
the
granting
of
the
employee
stock
options,
at
least
those
of
Warren
and
Cane,
was
entirely
passive.
While
the
plaintiff
may
not
have
been
permitted
to
vote
on
the
resolutions
whereby
options
were
granted
to
him,
there
is
evidence
that
he
nevertheless
participated
in
the
discussions
leading
up
to
the
passing
of
those
resolutions.
The
following
excerpt
from
the
cross-examination
of
the
plaintiff
is
significant:
Q.
Did
anyone
voting
on
the
resolution
that
granted
you
options,
himself
grant
options
at
the
same
meeting
of,
by
resolution
immediately
before
or
immediately
after
the
resolution
giving
you
—
A.
Oh
yes,
there
would
be
resolutions
made
for
each
person
who
had
options.
Q.
So
that
if
you
and
three
other
directors
were
present,
was
it
normal
to
give
options
to
all
of
them?
A.
On
various
scales
of
responsibility
it
was.
Q.
So
that
you
would
abstain
from
voting
on
the
particular
resolution
that
concerned
you?
A.
Correct.
Q.
So
that
whoever
was
being
granted
that
option,
that
person
would
abstain?
A.
That's
correct.
Q.
But
would
be
present
at
that
discussion?
A.
That's
correct.
In
these
circumstances,
I
am
unable
to
accede
to
plaintiff's
counsel's
argument
that
the
taxpayer's
behaviour
with
respect
to
the
stock
options
was
typical
of
employees
receiving
such
options.
The
plaintiff
was
not
a
typical
employee
awarded
an
occasional
stock
option
as
incentive
or
compensation
for
exceptional
services
rendered.
He
was
the
president
of
three
of
the
four
companies
under
consideration,
and
in
his
capacity
as
officer
and
director
of
those
companies
was
actively
involved
in
the
decision-making
process
leading
to
the
adoption
of
the
resolutions
granting
him
his
various
options.
The
options
being
virtually
his
only
real
form
of
remuneration
from
these
companies
—
none
of
them
granting
dividends
during
the
years
in
question
—
an
increase
in
the
value
of
the
shares
acquired
under
option
surely
must
have
been
anticipated.
While
expressing
no
opinion
on
the
tax
treatment
to
be
accorded
to
gains
realized
upon
disposition
of
shares
acquired
through
the
exercise
of
employee
stock
options
generally,
I
consider
that
in
the
present
case
the
stock
option
shares
cannot
be
treated
differently
from
other
securities
purchased
at
various
times
and
in
large
quantities
by
a
taxpayer
and
disposed
of
within
a
short
period
of
time
in
pursuit
of
profit.
The
plaintiff's
argument
that
he
disposed
of
his
shares
as
soon
as
possible
merely
to
avoid
negative
tax
consequences
arising
from
the
operation
of
section
7
of
the
Act
cannot
avail
him
in
the
present
circumstances.
I
feel
supported
in
this
reasoning
by
the
decision
in
Mainwaring
v.
M.N.R.,
[1964]
C.T.C.
341;
64
D.T.C.
5214
(Ex.
Ct.).
In
that
case,
the
appellant
taxpayer
and
four
associates
incorporated
an
oil
and
gas
company
in
British
Columbia,
each
subscribing
for
a
large
number
of
shares
at
a
price
of
one-half
cent
per
share.
Dumoulin,
J.,
holding
that
the
profits
realized
on
the
sale
of
shares
were
assessable
as
income,
distinguished
the
case
before
him
from
Irrigation
Industries
as
follows
at
page
348
(D.T.C.
5217):
The
circumstances
and
incidents
here
seem
completely
different
from
those
obtaining
in
Irrigation
Industries.
The
latter
Company,
in
1953,
purchased
directly
from
a
mining
concern
4,000
treasury
shares
of
an
initial
issue
of
500,000.
Irrigation
Industries
Ltd.
resold
those
shares
within
a
few
months
at
a
profit
of
$26,897.50.
Manifestly,
the
aforementioned
deal
consisted
in
an
isolated
transaction
and
the
directors
of
Irrigation
Industries
took
no
participation
whatsoever
in
the
organization
of
the
mining
company
and
had
nothing
to
do
with
its
financing,
promotion
or
management.
Another
crucial
factor
is
the
plaintiff's
acquisition
of
shares
on
the
open
market
and
from
third
parties.
The
plaintiff
was
cross-examined
extensively
on
this
point
and,
although
unable
to
recall
specific
dates
and
numbers,
did
admit
to
several
purchases
on
the
open
market
or
from
friends.
While
those
may
have
been
somewhat
limited
in
number
and
quantity,
the
fact
that
he
made
such
purchases
is
inconsistent
with
his
testimony
that
his
main
focus
of
concern
was
the
disposition
of
shares
acquired
under
option
as
soon
as
possible
in
order
to
lock
in
his
section
7
benefit.
When
asked
in
reexamination
if
he
could
recall
what
impelled
him
to
buy
shares
from
time
to
time,
he
answered:
A.
Not
really.
Probably
to
make
money,
I
only
bought
several
on
four
or
five
occasions.
Based
on
the
evidence
in
its
entirety,
I
find
that
the
plaintiff’s
share
transactions
were
sufficiently
akin
to
those
of
an
ordinary
trader
in
securities
as
to
constitute
an
adventure
in
the
nature
of
trade
with
a
view
to
profit.
In
my
view,
the
plaintiff
has
failed
to
establish
on
balance
of
probability
that
the
Minister's
reassessments
were
incorrect.
In
the
result,
the
plaintiff's
appeals
are
dismissed
with
costs.
Appeals
dismissed.
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