Citation: 2005TCC315
Date: 20051201
Docket: 2004-3217(IT)I
BETWEEN:
BRUNO LAPLANTE,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] The issue here is
relatively simple, namely whether the Appellant, in computing his income, could
deduct his losses from the disposition of publicly traded shares as business
losses. Were they business losses or capital losses?
[2] Under
subsection 9(3) of the Income Tax Act ("the Act"), the
Minister of National Revenue ("the Minister") denied the Appellant
the right to deduct $16,393, $24,703 and $2,435 as net businesses losses for
the 2000, 2001 and 2002 taxation years, respectively. For the same
taxation years, the Minister found that the Appellant was entitled to deduct
$5,117, $3,523 and $2,235, respectively, as net capital losses.
[3] The facts on which
the Respondent relied in making her decision are set out as follows in
paragraph 18 of the Reply to the Notice of Appeal:
[TRANSLATION]
Net business losses
disallowed
(a) During the taxation years in issue, the Appellant
had a full‑time job.
(b) During the taxation years in issue, the Appellant
reported the following net business losses:
|
Description
|
2000
|
2001
|
2002
|
|
|
|
|
|
|
Gross income
|
$144,558
|
$268,297
|
$7,495
|
|
|
|
|
|
|
(Expenses)
|
($160,951)
|
($293,000)
|
($9,930)
|
|
|
|
|
|
|
(NET
LOSSES)
|
($16,393)
|
($24,703)
|
($2,435)
|
(c) The amounts set out in the previous
subparagraph were claimed by the Appellant in connection with activities
involving the purchase and sale of shares on the stock market.
(d) During her audit, the Minister's auditor found
the following about the Appellant's activities:
(i) The transactions were not of the same
kind as those of a trader or dealer in securities;
(ii) The Appellant simply managed his personal
portfolio in a way that involved greater risk than would have existed with
mutual funds;
(iii) The Appellant's portfolio was small
(transactions worth $300 to $5,000);
(iv) There was no extensive buying and selling
of securities;
(v) Given the type of work the Appellant did
(selling sports equipment), he could not have been very knowledgeable about the
securities market;
(vi) He could not have had special knowledge
that he could use to realize quick gains on certain transactions;
(vii) Security transactions did not form a part
of the Appellant's ordinary business;
(viii) His security purchases were not financed
primarily on margin or by some other form of debt;
(ix) The Appellant was not licensed as a dealer
in securities and had not studied in that field;
(x) The Appellant had no clients and never
advertised in search of clients;
(xi) The shares purchased by the Appellant did
not involve any call options, so they were regular shares, not highly
speculative ones;
(xii) Since the portfolio was small
(transactions worth $300 to $5,000), the Appellant did not have to devote a lot
of time to these transactions.
(e) Moreover, the Appellant told the
Minister's auditor during their initial meeting that he purchased and sold
shares only in his personal capacity.
(f) Based on her analysis, the Minister's
auditor determined that the transactions for which the Appellant had claimed
net business losses were instead capital transactions.
(g) The Minister therefore disallowed the
$16,393, $24,703 and $2,435 claimed by the Appellant as net business losses for
the 2000, 2001 and 2002 taxation years, respectively.
Net capital losses
(h) The Minister allowed $5,117, $3,523 and
$2,235 as net capital losses for the 2000, 2001 and 2002 taxation years,
respectively.
[4] It should be noted
that the Appellant admitted all the facts set out in paragraph 18 of the
Reply to the Notice of Appeal with the exception of those set out in
subparagraphs (d)(i), (ii), (iv), (vii), (xi) and (xii).
Appellant's testimony
[5] The Appellant was a
mechanic during the period in issue. His academic training was limited to a
certificate in administrative technology. The Appellant testified that, in the
spring of 2000, he decided to redeem a mutual fund (worth about $38,000) whose
performance was sluggish and to take charge of his investments. In April 2001,
he transferred the proceeds of disposition of his investments ($38,000) and his
personal savings ($12,000) to a dealer at the CIBC. He stated that his
investment strategy was to purchase publicly traded shares that generally cost
less than $1.00. He explained that this type of investment was highly
speculative. He stressed that the turnover of his investments was very quick,
noting that he often sold shares the same day he bought them. To show that he
was very active in the stock market during the relevant period, the Appellant
testified that he carried out 170 transactions, 250 transactions and
14 transactions during the 2000, 2001 and 2002 taxation years,
respectively, and he filed Exhibit A‑3 in evidence to support his
testimony on this point.
[6] The Appellant
stated that he spent a substantial part of his time, about 20 hours a week
(evenings and weekends), studying the securities markets and investigating
potential purchases. He spent an hour a day taking part in specialized
discussion forums on the Internet. He also frequently consulted his father‑in‑law,
who was very active in the stock market, and occasionally consulted one of his
friends who was a dealer in securities at the time. He also read the financial
pages of local newspapers and the financial information provided by his dealer.
However, the Appellant admitted that he did not spend any time studying the
prospectuses or financial statements of the corporations whose shares he
planned to buy. The reasons behind his purchase of shares boiled down to the
following: he purchased a corporation's securities if the corporation announced
that it had obtained a major contract or if he thought the stock price was at
the beginning of an up cycle.
Analysis
[7] Generally speaking,
the result of a transaction is a capital gain (or loss) if the transaction is
consistent with the concept of investment, which involves the disposition of
property purchased with a view to financial return (that is, to earn income
from property or a business) or for personal purposes. On the other hand, the
result of a transaction is considered business income (or loss) where the
transaction fits within the concept of business, trade, speculation or a commercial
matter or project.
[8] Since there are no
definitions in the legislation, the courts have had to develop several criteria
in an effort to characterize a gain or loss resulting from specific work.
However, it must be recalled that no criterion taken in isolation is
necessarily sufficient or determinative and that all the circumstances in which
a transaction occurs must be examined in each case. The criteria or factors
most often used include the following:
(i) the taxpayer's true
intention as shown by the taxpayer's conduct and the circumstances in which the
transactions occurred;
(ii) the time between the
purchase and the sale;
(iii) the frequency of
transactions (history of extensive buying and selling of securities);
(iv) the nature of the
securities (whether are they speculative);
(v) whether the transactions
are of the same kind or carried out in the same way as those of a dealer in
securities. In this sense, does the taxpayer spend a substantial part of his or
her time studying the securities markets and investigating potential purchases?
Are security purchases financed primarily on margin or by some other form of
debt?
Appellant's intention
[9] What was the Appellant's
intention? In light of the Appellant's testimony, particularly concerning the
speculative nature of the securities he bought and sold, the number of
transactions carried out during the relevant period and the short time he owned
the securities, it is clear that the Appellant's only intention was to sell the
securities he had purchased as quickly as possible at a gain.
Nature of the securities
[10] Exhibit A‑3
shows that the Appellant purchased the vast majority of the shares for purely
speculative purposes. Many of the shares he purchased were from corporations
working in natural resources. Most of the purchased shares cost less than $1.00
(commonly referred to as "penny stocks"). It seems clear to me that
such shares are almost always of a non‑dividend type.
Time between purchase
and sale
[11] The evidence showed
that the Appellant generally owned the shares for a very short period of time.
In several cases, he sold shares the same day he bought them.
Transaction history
[12] It should be noted
that, although the Appellant's nest egg was small ($50,000), he carried out
170 transactions in 2000, 250 in 2001 and 140 in 2002 (the year he stopped
his investment activities).
Transactions of the same
kind as those of a trader in securities
[13] Counsel for the Respondent
argued that the Appellant's transactions were not of the same kind or carried out
in the same way as those of a trader or dealer in securities, for the following
reasons:
(i) the share purchases were
not financed on margin or by some other form of debt;
(ii) the Appellant had very
little knowledge of or experience in the securities field;
(iii) the Appellant did not
spend a substantial part of his time studying the securities markets and
investigating potential purchases;
(iv) his research tools
(financial pages in local newspapers, discussions with his father‑in‑law
and a dealer friend) were very rudimentary;
(v) his investment strategy was
simplistic.
[14] Although the Appellant
was not very experienced or sophisticated with regard to investing, the fact
remains that, in my opinion, he devoted a substantial part of his time to this
activity. I do not think that his lack of experience and sophistication are
reasons to deny him the right to deduct a business loss. His intention was
clearly to sell the securities he purchased as quickly as possible at a gain.
The speculative nature of the shares purchased, the number of transactions
carried out during the relevant period and the short period of time he owned
the securities are all indications of his true intention, on the basis of which
I find that he was entitled to deduct net business losses of $16,393, $24,703
and $2,435 in computing his income for the 2000, 2001 and 2002 taxation
years, respectively.
[15] For these reasons,
the appeals are allowed.
Signed at Ottawa, Canada, this
1st day of December 2005.
"Paul Bédard"
Translation
certified true
on this 30th day
of April 2008.
Brian McCordick,
Translator
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