[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC453
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Date: 20040625
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Docket: 2003-3485(IT)I
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BETWEEN:
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LUC MASSÉ,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This is an appeal under the
informal procedure relating to the assessment made by the
Minister of National Revenue (the "Minister) for the 2001
taxation
year.
[2] The issue at bar is whether losses
totalling $45,356 resulting from securities transactions are a
business loss or a capital loss.
[3] At the outset of the hearing, the
Appellant informed the Court that he was familiar with the
provisions of section 18.1 of the Tax Court of Canada Act
and agreed with it. This section reads as follows:
18.1 Every judgment that allows
an appeal referred to in subsection 18(1) shall be deemed to
include a statement that the aggregate of all amounts in issue
not be reduced by more than $12,000 or that the amount of
the loss in issue not be increased by more than $24,000, as
the case may be.
[4] The facts and the interpretation
of the facts on which the Minister relied to make the assessment,
and through which he disallowed the business loss, deeming it to
be a capital loss that could potentially serve to reduce a
capital gain, are described at paragraphs 13 and 14 of the Reply
to the Notice of Appeal (the "Reply"), as follows:
[TRANSLATION]
a) the
Appellant is a lawyer, born on July 21, 1958, and he is employed
as the director of taxation services for Jacques Davis Lefaivre
s.e.n.c., a firm of chartered accountants;
b) the
Appellant has also carried on a designated professional business
since at least 1987;
c) with
respect to the year at issue specifically, the Appellant was
employed by the Université de Montréal;
d) as of
December 31, 2001, the Appellant's civil status was single;
e) with
respect to the taxation year at issue, the Appellant reported the
following figures:
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i)
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employment income
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$114,469
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ii)
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dividends
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$5,257
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iii)
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interest
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$4,828
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iv)
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professional income
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$3,000
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v)
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capital losses
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($7,267)
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vi)
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business losses
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($45,356)
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f) since
taxation year 1989, the Appellant has reported the following
substantial employment income amounts:
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i)
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1989 -
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$67,308
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ii)
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1990 -
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$88,392
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iii)
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1991 -
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$89,739
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iv)
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1992 -
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$88,360
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v)
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1993 -
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$76,651
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vi)
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1994 -
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$79,404
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vii)
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1995 -
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$79,310
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viii)
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1996 -
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$85,197
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ix)
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1997 -
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$76,242
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x)
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1998 -
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$95,567
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xi)
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1999 -
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$155,317
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xii)
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2000 -
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$138,185
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g) during the
same period (1989 to 2000), the Appellant reported the following
investment earnings:
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Dividends
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Interest
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Taxable Capital Gains
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i)
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1989 -
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$10
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$1,850
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$79
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ii)
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1990 -
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$7
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$1,582
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iii)
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1991 -
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$7
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$2,259
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iv)
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1992 -
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$7
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$6,929
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v)
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1993 -
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$8
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$7,927
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vi)
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1994 -
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$9
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$8,384
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vii)
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1995 -
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$9
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$12,086
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viii)
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1996 -
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$11
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$7,436
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ix)
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1997 -
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$15,443
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$7,098
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$242
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x)
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1998 -
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$23,876
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$3,524
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($1,908)
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xi)
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1999 -
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$34,291
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$4,392
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($17,334)
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xii)
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2000 -
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$33,384
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$4,300
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h) of the
taxable dividends reported by the Appellant, those from "Jacques
Davis Lefaivre et Cie ltée" are the following:
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i)
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2001 -
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$3,568
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ii)
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2000 -
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$32,865
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iii)
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1999 -
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$34,277
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iv)
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1998 -
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$23,636
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i) from
1989 to 2000, the Appellant contributed the following amounts to
a registered retirement savings plan (RRSP):
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i)
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1989 -
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$7,500
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ii)
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1990 -
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$7,500
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iii)
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1991 -
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$11,500
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iv)
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1992 -
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$12,500
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v)
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1993 -
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$12,500
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vi)
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1994 -
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$13,500
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vii)
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1995 -
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$14,500
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viii)
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1996 -
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$13,500
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ix)
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1997 -
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$13,210
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x)
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1998 -
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$12,784
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xi)
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1999 -
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$12,786
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xii)
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2000 -
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$13,442
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j) for
the taxation year at issue, the losses incurred by the Appellant
were reported as follows:
i)
capital losses totalling $7,267 were claimed with respect to the
sale of shares in "Bell Canada" and "Nortel";
ii) business
losses totalling $45,356 were claimed with respect to the sale of
shares in "Microcell Telecom Inc.," "Telesystem International
Wireless Inc.," and "Memotec Communications Inc.";
k) the holding
periods for the shares on which the business losses claimed are
based are as follows:
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i)
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"Microcell Telecom Inc."
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June 18, 2001, to October 5, 2001
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ii)
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"Telesystem International Wireless Inc."
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June 28, 2000, to October 5, 2001
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iii)
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"Memotec Communications Inc."
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October 5, 2000, to October 25, 2001
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l) for
taxation year 2001, the following factors were used as the
criteria for disallowing the business loss claimed:
i) your
principal activity was not carrying on securities
transactions;
ii) the
Appellant cannot claim to devote a substantial part of his time
to studying the securities market and researching potential
purchases;
iii) for the
year at issue, only 12 transactions gave rise to the claims for
all the losses combined (capital losses and business losses).
14. In upholding the
reassessment dated March 3, 2003, for the 2001 taxation year, the
Minister relied particularly on the following presumptions of
fact:
a) to
determine whether the Appellant operated a business in the
ordinary course of business, a number of factors need to be
examined:
i)
repetition of similar transactions
the Appellant made only 12 stock transactions in 2001; this
does not represent a history of intensive purchases and
sales;
ii) holding
period
the holding period varies between four (4) and fifteen (15)
months, which is a relatively long period for so-called
"speculative" shares;
iii)
knowledge of the securities market
the Appellant searches Internet sites, reads the financial
news in newspapers, reviews various publications, and examines
documentation sent to him by his broker; this does not make the
Appellant a professional;
iv) securities
transactions are a part of the Appellant's usual
activities
the Appellant is the director of taxation services for a firm
of chartered accountants; securities transactions are not a part
of the usual activities relating to his work;
v) time
spent
the Appellant stated that he spent approximately twenty
minutes per day studying the securities market and researching
potential purchases;
b) with
respect to the Appellant's intent at the time he acquired the
stock, anyone who buys and sells stock intends to make a profit,
and the purchase of certain so-called speculative stock is not
sufficient to claim that the Appellant was involved in a project
involving a risk or an adventure in the nature of trade.
[5] The Notice of Appeal describes the
factual circumstances regarding the transactions at issue as
follows:
[Translation]
...
f) The
corporations were recommended to me by my broker (and the
analysts from his firm) solely because of their potential for
substantial and rapid growth. No dividends were
anticipated, because the cash assets from these corporations were
to be used in their development. For example, TIW and
Microcell are two corporations whose objective was to build a
network to provide wireless telephone services. They were
to compete with Bell Canada and other large corporations
(national and international) in a rapidly expanding cellular
telephone market.
...
j) None
of the three securities sold at a loss in 2001 had been purchased
for the purpose of earning income during their holding period,
and I have not, in fact, received any income from these
securities. For the reasons set out in paragraph (f), the
corporations at issue were unable to pay dividends, because they
were at the development stage. This is why they presented a
very high risk. TIW and Microcell experienced serious financial
difficulties owing to the fact that they (and their financial
advisors) had largely underestimated their network development
expenses. The Memotec stock had been purchased by a German
company.
...
m) These three
securities were held for a relatively short period: 15 months and
3 months for TIW, 12 months for Memotec (a number of which were
held owing to the impossibility of buying or selling the shares),
and 3 months for Microcell. In fact, the same can be said
for most of the stock bought and sold in my non-RRSP account,
because I held my securities for approximately 13 months only, on
average (9.5 months excluding Sino-Forest, BCE Emergis, and
BCE). For example, with Ciment St-Laurent and
Cognicase, the holding period was 4 days and 113 days
respectively. Some other securities were held a while
longer, because it was not possible to sell them sooner (e.g.,
Teleglobe and Memotec), and because my broker advised me that the
loss incurred shortly after acquisition was temporary and that
they would gain in value "soon" (e.g., Bell Canada International,
TIW, and Microcell).
n) The
purchase of TIW shares ($27,151) and Memotec shares ($12,149) in
2000 was nearly entirely financed by the line of credit
authorized by my brokerage firm in 1998. These amounts were
high, particularly considering the net value of my portfolio.
[6] The Appellant testified. He
explained that, with respect to the statement in paragraph 13(a)
of the Reply, the accounting firm in which he practices his
profession as director of taxation services includes 40
accountants.
[7] With respect to the statement made
in paragraph 13(c) of the Reply, the Appellant is teaching a
course on the principles of taxation at the Université de
Montréal for one semester, specifically, three hours per
week for thirteen weeks. An examination is administered at
the end of the semester. One to two hours of preparation
are needed for each class.
[8] With respect to the statement made
at paragraph 13(e), the Appellant notes that the dividends are
grossed-up to 125%, capital losses are reported at 100%, and
interest results largely from the interest paid by the office on
its capital outlay of $35,000. The same is true of the
amounts set out in paragraphs 13(q) and 13(h).
[9] The Appellant stated that, in
selecting his broker, he sought someone who pursued an
entrepreneurial and aggressive investment policy, and who could
advise him accordingly.
[10] With respect to the statements made in
paragraphs 13(l)(iii) and 14(a)(i), he claimed that this number
of transactions is not a determining factor. The
transaction he conducted in his self-directed RRSP with Wood
Gundy should also be taken into consideration. The
Appellant filed a statement of transactions for this account as
Exhibit A-1. Approximately 200 transactions were conducted
from 1992, the year he opened this account, until 2001. In
2000, there were 44 transactions, and in 2001, there were
23. Exhibit A-1 had not been shown to the auditor.
[11] He filed as Exhibits A-4 and A-5 the
broker's notes containing client information. The risk
thresholds established for the self-directed RRSP were 25% high
risk and 75% medium risk. For the non-RRSP account-the
account in which the losses at issue were incurred-the risk
factors were set at 35% high risk and 65% medium risk. With
respect to the notes on the types of accounts, the funds for the
RRSP account are provided in cash and by the RRSP itself, and the
non-RRSP account is funded through a line of credit. The
investment objective for the non-RRSP account was not to produce
dividends, but to increase the value of the stock.
[12] With respect to the statement made in
paragraph 14(a)(ii), the Appellant stated that, for some stock,
there was no possibility of selling, because trading was halted,
which explains the holding period of just over one year for this
stock.
[13] He agreed with the statement made in
paragraph 14(a)(iii), even though it was his opinion that it is
not necessary to be a professional to make speculative
investments. He relied on subsection 39(4) which provides
for an election to have all securities transactions deemed to be
capital property, and specifically excludes brokers from its
application. It must be considered, therefore, that a
transaction may be speculative in nature, even though the person
is not a broker.
[14] With respect to the statement made in
paragraph 14(a)(iv), the Appellant submits that, on the contrary,
in a chartered accounting firm, relations with the financial
world and business people are predominant. The time spent
is longer than the amount of time indicated by the Minister in
paragraph 14(a)(v), because he also tuned in to radio and
television programs about the securities market and read articles
about the stock exchange in the newspapers.
[15] The Appellant argued that it was
necessary to establish the taxpayer's intention at the time of
the purchase. He referred to Sydney Bossin v. The
Queen, DTC 6196, a decision by Collier J. of the Federal
Court Trial Division, who considered that an isolated securities
transaction was an adventure in the nature of trade.
[16] The summary of this decision reads as
follows:
The appellant taxpayer, in addition to his regular profession
and occupation as an accountant, engaged in various business
transactions, but mainly involving land. He rarely dabbled in the
stock-market. However, in February, 1969, some of his companions
and himself acquired some speculative shares, through an
arrangement whereby the purchase money was loaned to them on the
condition that it be repaid one year later with interest. The
shares declined in value and faced with the obligation to repay
the loan with interest at the end of the year, the taxpayer and
his companions sold the shares in February, 1971 at a loss, the
taxpayer's portion of which was $14,600 which he sought to
deduct in computing his income. The Minister disallowed the
deduction contending that the shares were acquired as an
investment and, therefore, the loss sustained was on capital
account. The taxpayer appealed contending that the transaction,
though isolated, was an adventure in the nature of a trade and,
therefore, the loss was a deductible business loss. In dismissing
the appeal, the Board (74 DTC 1231) held that the transaction did
not constitute a venture in the nature of a trade. The taxpayer
appealed further.
Held: The appeal was allowed. In determining whether an
isolated transaction was an adventure in the nature of a trade,
all the factors must be considered and their probative values
weighed against each other. This test must be applied regardless
of the nature of the commodity in the transaction. Veritably, the
taxpayer engaged in an isolated transaction and the evidence
clearly established that it was an adventure in the nature of a
trade. The loss was, therefore, deductible.
[17] The Appellant noted that this was an
isolated transaction, as in Irrigation Industries, a case
decided by the Supreme Court of Canada. In his case, there
are a number of transactions.
[18] The Appellant also referred to the
decision of Beaubier J. of this Court in Oakside Corporation
Limited v. M.N.R. 91 DTC 328. He argued that
similarly to the facts in that case, his intent was to acquire
stock with a high potential for growth, yet entailing some
risk. He was not seeking dividend income.
[19] Counsel for the Respondent referred to
the decision of Campbell J. of this Court in Goorah v.
Canada, [2001] T.C.J., No. 301 (Q.L.), who found that
a stock transaction was capital in nature. Counsel cited
paragraph 60 of this decision, in which the judge referred to the
decision of the Supreme Court of Canada in Irrigation
Industries Limited v. The Minister of National
Revenue, [1962] S.C.R. 346:
60 In Irrigation
Industries Ltd. v. M.N.R., Martland J. said:
It is difficult to conceive of any case, in which securities
are purchased, in which the purchaser does not have at least some
intention of disposing of them if their value appreciates to the
point where their sale appears to be financially
desirable. If this is so, then any purchase and sale
of securities must constitute an adventure in the nature of
trade, unless it is attempted to ascertain whether the primary
intention at the time of purchase is to retain the security or to
sell it. This, however, leads to the difficulty
mentioned by my brother Cartwright that the question of
taxability is to be determined by seeking to ascertain the
primary subjective intention of the purchaser at the time of
purchase.
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.
[...]
Conclusion
[20] I refer to the decision of the Federal
Court of Appeal in Pollock v. Canada, [1993] F.C.J.
No 1055 (Q.L.), confirming the Trial Division judge's
decision in which he concluded that it was an adventure in the
nature of trade, particularly because of the number of
transactions. This Court, in paragraph 28 of the decision,
concurred with the judge's statement regarding the decision of
the Supreme Court of Canada in Irrigation Industries,
supra:
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 conclusion
that the taxpayer engaged in a multiplicity of share transactions
of a business nature is irrefutable.
[21] In Irrigation Industries, supra,
the Supreme Court of Canada stated that a speculative intention
alone was not sufficient to deem securities transactions to be of
a business nature; other elements that are commercial in nature
are necessary.
[22] It should be noted that in
Irrigation Industries, only one transaction was at
issue. In this case, the number of transactions is
relatively high considering the Appellant's two accounts, which
may constitute an indicator of the commercial nature of the
activity. Other indicators for the account at issue include
the fact that the Appellant was not seeking dividends, but growth
in the value of the stock. The scope of investments
comprised technology and computer companies. Because stock
in this type of company had previously enjoyed explosive growth,
the Appellant was seeking a repetition of that phenomenon.
To do so, he risked making a loan on a line of credit. This
constitutes risk in an investment situation.
[23] The Appellant's conduct also
demonstrates the characteristics of a business person. He
communicates constantly with his broker, a person he selected on
the basis of that person's calculated risk purchasing
methods. He monitors prices in the newspapers. He
takes in all possible information about the securities
industry. He reads commentators' articles in newspapers and
specialized magazines, and he listens to their comments on the
radio or on television.
[24] It is my opinion that, on the balance
of probabilities, the Appellant acquired the stock at issue for
business purposes, not for purposes that are capital in
nature.
[25] Consequently, the appeal is
allowed.
Signed at Ottawa, Canada, this 25th day of June,
2004.
Lamarre Proulx J.
Certified true translation
Colette Dupuis-Beaulne
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