Yong Tai Choi and Soon-Ok Choi v. Minister of National Revenue, [1991] 2 CTC 2315

Sobier, T.CJ.:—These appeals were heard on common evidence.

Counsel for the appellants and respondent produced and filed an agreed statement of facts.

The appellants appeal the reassessment by the respondent for their 1985, 1986 and 1987 taxation years whereby certain gains and losses claimed as gains and losses on account of income were treated as capital gains and capital losses.

The appellants are husband and wife who emigrated from Korea to Canada in 1970.

Through hard work and savings, by 1985, the appellants owned their own home, commenced and operated a computer software consulting business known as Your Chois Systems Inc. ("Your Chois") and had accumulated life savings of $80,000. These savings took the form of bank accounts, term deposits and Canada Savings bonds. They had also saved $20,000 for the education of their two daughters.

A neighbour, one Taylor, who was employed by a stock brokerage firm convinced Mr. Choi that he was losing ground on his savings through inflation and urged him to invest in the stock market. He stated that he could double the Chois' money in six years.

In January 1985, using the $80,000 savings, the $20,000 education fund, bank borrowings and moneys advanced by brokers on margin accounts, the Chois were prepared to enter the stock market. Initially, the investments were made in what is commonly known as “blue chip” stocks. They invested on a 50-50 basis.

In February of 1985, the blue chip securities were sold and the appellants began investing in speculative securities, including shares of mining and resource companies, a new computer technology company, and a courier company.

The Chois were introduced to one Daradich who was involved in promoting a company known as International Verifact Inc. ("International Verifact"). The Chois purchased 50,000 shares of International Verifact between February and May 1985 for over $200,000 partially on margin. The shares were disposed of between June and July 1985 for a loss of $7,135.79. During that time, they also purchased on margin for $188,229.14, 137,000 shares of Eden Roc Mineral Corp. ("Eden Roc"). Of the 137,000 shares of Eden Roc 71,000 shares were sold between July and November 1985 resulting in a gain of $41,071.

Between September and November 1985, they purchased 54,700 shares of Southwind Resources Explorations Ltd. ("Southwind") for $86,927.78, again partially on margin.

Between January and December 1986, the remaining shares of Eden Roc were sold at a loss of $14,147.55.

Between March and May 1986, partially on margin, the Chois purchased 80,000 shares of Happy Resources Ltd. ("Happy") a company listed on the Vancouver Stock Exchange at a cost of $250,250.27. The 80,000 shares of Happy were sold at various times between April and November 1986 with a resulting loss of $59,611.16.

In December 1985 and in January and March 1986, they purchased securities issued by Alert Couriers Ltd. ("Alert") which traded over the counter. These also were sold within a short period of time after purchase, also resulting in losses.

In February 1986, partially on margin, 5,000 shares of Tri-Coast Financial Corporation were purchased for $5,150 and sold in April 1986 for a loss of $1,225. In March 1986, 15,000 shares of Perrex Resources Inc. ("Perrex") were purchased on margin and sold in April 1986 for a loss of $1,405.

The Southwind shares purchased in late 1985 were sold in July andSeptem- ber 1986 for total losses of $7,979.79.

Similarly in February and March 1987, 40,000 shares of Microfuel System Inc. were purchased through the Vancouver Stock Exchange for $38,819.90 and sold between May and July for a loss of $822.30.

A small gain was made in connection with the 1987 purchase of shares of Terra Nova Energy Inc. ("Terra Nova") also listed on the Vancouver Stock Exchange. Between May and July 1987, the appellants purchased, partially on margin, an additional 43,300 shares of Southwind for $19,563.40. They sold 18,000 shares in September 1987 for a loss of $8,630.56. In October 1987, they purchased 8,000 more shares of Southwind. The Southwind shares ceased trading and the remaining 88,000 shares were sold for $400.

Finally, 5,000 shares of Andover Telecommunications Inc. ("Andover") were bought for $5,150 largely through a margin account in May 1987. These shares were sold in February 1988. It was not indicated whether there was a gain or a loss.

For their 1985 taxation year, the appellants reported the gains as capital gains. But in 1987, they requested that the trades made for 1985 and subsequent years be treated as income from a business.

Throughout most of this period, Mr. Choi was being advised by Mr. Du- radich and Mr. Schild who urged him to buy International Verifact, Eden Roc, Southwind and Alert. Other brokers advised on other purchases.

The foregoing is a brief outline of the purchases and sales of securities. However, the question remains whether or not they were for income or capital account. Put another way, did the profits and losses result from carrying on a business?

The definition of "business" set out in subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") states that business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade.

The headnote in M.N.R. v. James A. Taylor, [1956] C.T.C. 189; 56 D.T.C. 1125 (Ex. Ct.) sets out succinctly the criteria in determining whether the transactions can be characterized as speculation or investment. The headnote reads in part as follows at page 1126:

(1) The terms "trade" and “adventure or concern in the nature of trade" are not synonymous expressions. A transaction which, by itself, does not constitute a trade may still be an adventure in the nature of trade. (2) The question whether a particular transaction is an adventure in the nature of trade depends on its character and surrounding circumstances and no single criterion can be formulated. (3) If a person deals with the property purchased in the same way that a regular trader in property of the same kind would ordinarily do, such a dealing may fairly be called an adventure in the nature of trade. (4) The nature and quantity of the subject matter of the transaction may be such as to exclude the possibility that its sale was the realization of an investment or that it could have been disposed of otherwise than as a trade transaction. (5) If the element of speculation is present, the sale of a property that is productive of income and might be regarded as an investment, can be a trade in the property rather than the realization of an investment. (6) The intention to resell at a profit may well be an important factor in determining that a transaction is an adventure in the nature of trade, but its presence is notan essential prerequisite to such a determination and its absence does not negative the idea of an adventure in the nature of trade. The considerations prompting the transaction may be of such a business nature as to invest it with the character of an adventure in the nature of trade even if there is no intention of making a profit on the sale of the purchased commodity. (7) The fact that the transaction is totally different in nature from any of the other activities of the taxpayer and that he has never entered upon a transaction of that kind before or since does not, of itself, take it out of the category of being an adventure in the nature of trade. (8) It is not essential to a transaction being an adventure in the nature of trade that an organization be set up to carry it into effect or that some operation be performed on the subject matter of the transaction to make it saleable.

The evidence of Mr. Choi is clear. He wished to accumulate a pool of capital quickly. He attempted to accomplish this by means of liquidating his savings and investing in the stock market. However, when the blue chip securities were sold and the program of purchasing highly speculative securities began, any thought of investment was replaced by a course of action and conduct, which were in the nature of pure speculation. The Chois embarked on a business of trading in securities.

Mr. Choi's evidence was that he wanted to get in and out quickly and take a profit. He also made it quite clear that he was motivated by greed. Mr. Choi relied on tips from promoters. He relied on brokers for advice. He watched the tape at his broker's office. He was in constant touch with his brokers. He spent a considerable number of hours researching and reading material on securities. The type of securities purchased were highly speculative and some were not listed on any recognized exchange. There were no prospects of any dividends on any of the shares which he purchased. Shares were held for short periods of time before they were sold. Most of the purchases were financed, at least partially, by loans or through purchases on margin.

That gains were previously reported as capital gains and later reclassified as income is no deterrent to claiming losses at later dates. See Harrison v. M.N.R., [1976] C.T.C. 2082; 76 D.T.C. 1078 (T.R.B.).

The Court was referred to and has considered many authorities cited by counsel for the appellant and the respondent. However, an examination of Tamas v. The Queen, [1981] C.T.C. 220; 81 D.T.C. 5150 (F.C.T.D.) is helpful in that the facts in Tamas were similar to those in this appeal. There, Dr. Tamas changed his purchasing habits from blue chips to "a more perilous foray into the convertible debenture market".

In Tamas, in dealing with this issue, Mr. Justice Dubé referred to Wellington Hotel Holdings Ltd. v. M.N.R., [1973] C.T.C. 473; 73 D.T.C. 5391, at page 223 (D.T.C. 5153) as follows:

In Wellington Hotel Holdings Ltd. v. Minister of National Revenue (73 D.T.C. 5291) Urie J. (then of the Trial Division of the Federal Court) held that the appellant's conduct indicated that it was not looking for safe and enduring investments when it purchased securities, but rather that it wanted a quick return on the money put out. When instead it suffered losses these amounts were deductible. In his judgment the learned judge discussed the evidence of a Mr. Escaf which he considered to be credible in view of the conduct of the appellant and the purchase and sale of securities which were obviously not of “investment grade" but of “speculative grade". He said at page 5397:

Mr. Escaf was not looking for safe investments, he was looking for a greater return through appreciation in the value of his securities. Unfortunately, the appreciation did not take place and the appellant, therefore, suffered losses and in my opinion such losses are deductible from the appellant's income for the purpose of determining its taxable income.

The position of the plaintiff in the instant case is much similar to that of Mr. Escaf. Dr. Tamas was not looking for safe investments, he was chancing on highly speculative leverage. The long odds did not pay off: he suffered heavy losses. By their very nature, as well as from the unfortunate results, it is obvious that the plaintiff's transactions were not of “investment grade" but very much of "speculative grade".

I adopt the reasons of Mr. Justice Urie in Wellington Hotel. They apply four square to these appeals. The purchases and sales cannot be said to have been realignments of their portfolio. They were speculative trades. Having regard to the foregoing, the Court must conclude that the appellants were involved in an adventure in the nature of trade and therefore their losses were business losses.

The appeals are allowed, with costs, and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the losses claimed by the appellants are deductible as claimed.

Appeals allowed.