Wong v. R., [1996] 2 CTC 2435, 97 DTC 520

Bowman J.T.C.C.: — These appeals are from assessments for the appellant’s 1984, 1985, 1986 and 1987 taxation years. All issues for all four years are settled with the exception of a loss of $143,681.18 Cdn or $101,901.55 US claimed by the appellant for his 1986 taxation year.

The appellant alleges that he lost this amount in commodities trading on London commodities exchanges through a company in Geneva, Switzerland, Metcom Trading S.A. (“Metcom”).

The respondent contends that no trades took place and that the losses claimed are simply part of an elaborate scheme whereby money was sent to Switzerland purportedly to pay for the commodities purchases and that the same amounts, less an amount as a fee for accommodating the appellant, were sent to Hong Kong and ultimately found its way back to the appellant.

The appellant is an experienced trader in commodity futures. At present he works as vice-president and manager of a branch of Global Futures Inc. in Vancouver. From 1982 to 1986 he worked for International Futures Inc. in Vancouver. The business of both companies was commodity futures trading.

Typically, Global Futures Inc. would execute a trade on a recognized exchange on behalf of a client. Where the trade was on a “disclosed” basis, the client would be identified. If it was on an “omnibus” basis, the client’s name would not be disclosed.

In 1982 to 1988, the appellant engaged in two types of commodities trading — speculative and straddle. Speculative trading involves buying commodities for delivery at a future date and hoping that they would go up before delivery had to be taken. This type of trading is called uncovered or naked. It is a risky business. Straddles involve creating a loss in one year that is recouped in the next. Such manoeuvres are designed to shift income from one year to another. They appear to be substantially tax-driven with little risk of loss or prospect of gain. They appear to have been accepted in this case by the revenue authorities and I make no further comment on them beyond noting that Mr. Wong appears to have been able to carry them out with considerable skill.

The losses with which we are here concerned involve transactions with a Swiss-based organization, Metcom Trading S.A. Mr. Wong heard of Metcom by an advertisement that he received in the mail. He filled out the application and in due course received from Metcom a number of documents which he completed and sent back. He did not keep the original advertisement but he “had the impression” that Metcom was licensed to trade on the London Metal Exchange. The account which he opened was for $100,000 US, the amount that he said he was prepared to risk. He did not make any attempt to verify the reputation or standing of Metcom. The original application allegedly contained boxes to indicate the type of trading that he wanted done. He marked the “aggressive” box. On cross- examination he was unable to explain what his understanding was of “aggressive”. He did not seek to determine whether Metcom had a seat on any London exchange.

Among the documents were a brochure describing Metcom, which the appellant seemed to have skimmed but did not read in detail, a customer account agreement, a letter of trading authorization and an agreement for investment advisory services. In the application he stated that his net worth was $300,000 and that his average annual salary income was $100,000. His salary was in fact about one half that amount. The agreement provided that interest on debit balances in the account was no less than 2 per cent above LIBOR. This was never paid. The investment advisory services agreement showed Metcom as the “advisor”. It provided for a non-refundable fee for 1/2 per cent on the value of the assets in the account. This was never paid because according to Mr. Wong, his account was always in a debit position. He was supposed to deposit initially with Metcom $25,000 US. In fact only $20,000 US was deposited.

A number of documents were put in evidence which, on their face, indicate an extraordinarily high level of trading on the London Metal Exchange or the London Commodities Exchange. For example, the first purported purchase was of 40 lots of zinc on the London Metal Exchange. Each lot consisted of 25 tonnes, at $616 US per ton. This works out to $616,000 US. This amount was allegedly bought on October 17, 1986 and sold on October 29, 1986 at $597 US per tonne, giving rise to a loss of $19,000 US. Ten 25 tonne lots of aluminum were supposedly bought on October 29, 1986 at $817 US per tonne, a further 10 lots were bought on November 10, 1986 at $800 US per tonne and a further 10 lots on November 13, 1986 at $815 US per tonne, for a total cost of $608,000, for a loss of $16,250. Twenty more lots of aluminum were bought at $916 US per tonne and sold at $901.25 US for a loss of $7,375.

I shall not set out the other transactions, which involved copper and coffee. If one accepts the accuracy of the documents it would mean that an experienced trader in commodity futures, who has an annual income of $50,000, has entrusted to an unknown Swiss company absolute discretion to trade “aggressively” in metals or commodities on London exchanges without retaining control over the commodity, the nature or the amount of the contract. He purportedly authorized it to trade in futures contracts having a total value amounting to many multiples of his net worth, after putting up an initial deposit of $20,000 US. The trades are said to have taken place between October 17 and December 18, 1986 and invariably yielded a loss, for a total of $101,901.55 US.

To fund these alleged losses he stated that he had to meet certain margin calls. He testified that he did not keep the demands for more payments but he did send off a series of payments for $20,000 US to Metcom. To fund these “margin calls” he says he borrowed from his father in Hong Kong, who sent him the money through an uncle in British Columbia. He would not send him the full $20,000 US, but rather sent him $18,800 US, said to be a lucky number. If the losses were real, Mr. Wong might do well to consider picking a different lucky number.

When the Department of National Revenue started questioning the authenticity of the trading through Metcom, the appellant communicated with Mr. John Bennett, the Metcom official with whom he dealt. Mr. Bennett was alternately uncooperative, coy or unresponsive, or else, donning a cloak of moral rectitude, he retreated behind the impenetrable armour of Swiss confidentiality. The fabled Swiss code of confidentiality, if I understand it correctly, involves the refusal of Swiss institutions such as banks to divulge details of their clients’ affairs to third parties, including the tax authorities of other countries. Here we have Metcom’s own client asking for details of his own transactions that Metcom purportedly carried out on his behalf, and running up against the same wall of silence. Something does not ring true.

Neither Mr. Bennett nor Mr. Wong’s father testified.

The improbability of Mr. Wong’s story is by itself sufficient for me to conclude that he had not succeeded in dislodging the assessment. My conclusion is further buttressed by the evidence of the Crown’s expert.

Mr. Michael Cameron was an expert of impressive qualifications and experience. He began working in commodities trading in London in 1966. He examined the documents provided by the appellant, including the four- teen Contract Confirmations, which purportedly detailed sixteen contracts in four commodities, zinc, aluminum, copper and coffee. He concluded that the transactions were “backdated shams”. I shall endeavour to summarize briefly his reasons, which are set out more fully in his report that was filed as evidence.

(a) Contract numbering:

The system of consecutive numbering used by Metcom used nine digit numbers, the first five digits gave the date and the last four the numbers of the transaction. In two of the transactions consecutive numbers are given to trades in different commodities. This is improbable because different commodities are traded at different times. Moreover the numbers and their sequence would indicate, implausibly, that Metcom was doing very little trading, if any, except for Mr. Wong’s trades.

(b) Names and places:

Metcom was not a name in the business, nor was Mr. Bennett. Mr. Cameron had never heard of them. An experienced trader such as Mr. Wong would have dealt with a reputable London house and not an unknown Swiss company, unless, of course, it was not intended that real trades take place.

(c) Margins and risk:

Even accepting Mr. Wong’s net worth to be $300,000 and his income to be $100,000 the magnitude of the trades, and the substantial exposure, would not be accepted by a reputable London house. No reputable house would accept business on this scale from someone with Mr. Wong’s means. Under this head Mr. Cameron observed:

Typical margin requirements would have been 10 per cent of contract value, payable in advance. These payments did not take place, and they would appear to have been beyond Mr. Wong’s means. Absence of such margins is an indication of lack of real risk, and therefore lack of real trading. Indeed, the five payments of $20,000 each do not look like margins at all, but appear to be payments of intended losses in advance.

Mr. Cameron made a number of other brief comments which I shall reproduce in full:

H. MIXING COMMODITIES

It is a very rare person indeed who speculates in a mix of commodities such as this one, especially with the addition of coffee to metals. Speculators normally specialise.

I. END-YEAR TRANSACTION

A person who only trades towards the end of a year is one who can be suspected of trading only for tax purposes. I have never come across such deals which were done for any other reason.

J. SETTLEMENTS

In a real brokerage house, the liquidating contract would automatically generate a settlement document. These settlements were generated much too late to look real.

K. REGULARITY OF LOSSES

It is clearly statistically possible for someone always to lose money every time he trades, but the chance is remote. The losses are so regular here that there is a presumption of tax-losses.

L. CONCLUSION.

For all the reasons stated in this report, especially the contract numbering and the contract values, I believe that these transactions were backdated shams, with losses arranged to conform almost precisely with prepayments. It is very difficult to cut real losses to conform precisely to prepayments. When it has happened it has only been by fortuitous accident, unpredictable in advance.

I accept Mr. Cameron’s evidence. I think that the transactions with Metcom were fictitious.

So far as the second branch of the Crown’s case is concerned, that most of the money went to Hong Kong and came back to Mr. Wong, there is no direct evidence to contradict Mr. Wong’s testimony that his father loaned him the money. My inability to accept that the trades purportedly carried out by Metcom on Mr. Wong’s behalf were genuine renders it equally impossible for me to accept that the moneys that came from his father were loans.

Counsel invited me to consider an alternative scenario, to the effect that even if Metcom trades were not real, and Metcom was fraudulently keeping the money and sending Mr. Wong bogus confirmations, if Mr. Wong honestly believed that the trades were taking place he should be able to deduct his losses. Mr. Wong is not that naive.

The appeals are allowed to the extent only to give effect to the settlement reached between the parties with respect to the other issues raised in the notice of appeal, as set out in the partial minutes of settlement. The respondent is entitled to her costs.

Appeals allowed in part.