David Dubrovsky v. Minister of National Revenue, [1988] 2 CTC 2347, 88 DTC 1712

St-Onge, T.C.J. [Orally]:—The appeals of Mr. David Dubrovsky were heard on April 26 and 27, 1988, at the City of Montreal, Quebec.

The issue in this matter is whether the appellant is allowed to deduct business losses in his 1981 and 1983 taxation years.

The contentions of the parties are as follows: (Paragraphs 1 to 14 of the notice of appeal)

1— THAT Appellant carried on high risk, speculative, business activities during the taxation years in question.

2— THAT such activities consisted of commodity trading and gambling junkets to Las Vegas and Atlantic City.

3— THAT the purchase and/or sale of commodities is a highly speculative activity and requires the daily, fulltime attention of a trader, during the period of time that the commodities futures market (in Chicago) is open for trading.

4— THAT trading in commodity futures, consists of the acquisition of a contract for delivery of a commodity, at a future time, and the profit or loss of the purchaser on a contract is dependent upon the fluctuation of the price of such commodity between the time of acquisition of the contract and the scheduled delivery date of such commodity.

5— THAT prices of commodities fluctuate and substantial sums of money can be made or lost in minutes, and any serious purchaser spends his full time and attention at a computer terminal watching market price fluctations.

6— THAT Appellant, during the period of time he was involved in commodities trading, spent his full business day at a computer terminal studying price patterns and reviewing records, reports and analysis.

7— THAT the Hollywood film "Trading Places”, while a caricature, is indicative of the type of activities and fluctuations that do take place in commodity trading.

8— THAT moreover, Appellant, on the odd occasions when he was not involved in the commodities market, partook in gambling junkets to Las Vegas and Atlantic City.

9— THAT Appellant spent significant time and energy in such gambling activities, which is an adjunct of, and related to, the gambles he makes daily in commodity trading.

10— THAT in the years in question, Appellant lost substantial amounts in his speculative activities, both in the commodities market, and on gambling junkets.

11— THAT indeed, in the 1981 year, a schedule to Appellant's tax return incorrectly reflected a profit of $15,648.75 from commodities trading, which was in error, such amount being the profit of Appellant for the period January through March 1981.

12— THAT in fact, Appellant, in the balance of the year 1981, lost $85,760, on account of his commodities trading, leaving a net loss in the amount of $70,111.25, in lieu of the profit of $15,648.75, as set forth in the schedule to Appellant's tax return.

13— THAT in addition to Appellant's losses on account of his commodities trading, lost an additional amount of $60,500 in 1981 with respect to his gambling junkets to Las Vegas and Atlantic City, and moreover, had comparable business losses in 1983 in the amount of $49,296.

14— THAT the activities of Appellant set forth herein, constitute a business, and Appellant is entitled to claim a tax deduction for the business loss suffered thereunder.

(Paragraphs 2, 3 and 4 of the reply to the notice of appeal):

2. With respect specifically to paragraphs 11 and 12 of the Notice of Appeal the Respondent, in addition to denying the facts alleged therein, says that the appellant has not shown that he sustained a loss of $85,760.00 from commodities trading in the taxation year 1981 instead of making a profit of $15,648.75 (U.S.) as stated in the schedule to his income tax return for the said taxation year;

3. By notices of reassessment dated November 22nd, 1985, the Respondent disallowed the Appellant gambling losses of $72,539.50 claimed by the appellant for the taxation year 1981 and of $49,296.00 claimed for the taxation year 1983;

4. In reassessing the appellant for the taxation years 1981 and 1983 the respondent relied, inter alia, on the following assumed facts:

a) According to documents submitted by him the appellant was present at gambling casinos in the United States a total of 21 days in 1981 and 11 days in 1983;

b) the appellant did not keep any books or records of his profits and/or losses from his gambling activities during the years 1981 and 1983;

c) the appellant's gambling activities were of an amateur and occasional nature and did not constitute a business.

At the hearing, counsel for the respondent agreed that the net loss, with respect to commodities trading being an amount of $63,858.00 in U.S. funds for the 1981 taxation year was not in dispute, whereas the gambling losses of $60,500 and $49,296 in 1981 and 1983 respectively are in dispute.

The appellant is an investor who made religious studies in Jerusalem from 1971 up to 1978. He was introduced in the stock market by a friend in Jerusalem and in 1979 he moved to Canada and became an associate with his three brothers in a family company. He became a licensed broker and acted for the said company. He rented premises close to the broker's office and was there every day, from ten in the morning up to four o'clock in the afternoon.

He stated that he wears two hats, one as an investor for the company and another as trader to obtain large profits in a short period of time. He started to trade in gold on a daily basis and then in various types of commodities. He did chart every single trade in a day in front of a computer to follow the curves. As to the gambling transactions, he was interested in travelling on- the-house by a lawyer friend. He lost money on his first three trips, $26,000 on his first trip, and so on, but he did not claim them because they were made for pleasure.

Then he met a professional gambler in Las Vegas and won $35,000. In 1981 he decided to play with him as one unit and as a business to earn substantial sums of money. He filed Exhibits A-3, A-4 and A-5 to prove the dates of the trips, the batch number, and payments by various cheques.

Upon cross-examination, he admitted gambling losses in the 1984, 1985 and 1986 taxation years, but apparently his hope was always to make a lot of money. He also admitted that he was in casinos 21 days in 1981 and 11 days in 1983, that there were no written records of his gains and losses for those years and the winnings were not reflected in the exhibits filed.

He read a lot of books on the theory of probability, and was convinced that he could win a lot of money from gambling in casinos, but he lost because of a miscalculation.

Counsel for the appellant argued that his client, in his business life, was engaged in different lines of activities, the nature of which was that of trading in high-risk activities such as the buying and selling of options and commodity futures.

The Minister has accepted, and correctly so, to deduct a commodity loss as being a business loss, and it shows that the appellant was engaged in high-risk activities as being in a business. Then, he referred the Court to a substantial jurisprudence to prove his point and to say that this type of case depends primarily on its own particular facts.

On the other hand, counsel for the respondent argued that the appellant's gambling activities were not a source of income since there was no reasonable expectation of profit, and it was just a question of luck. The appellant spent 21 days on one occasion and 11 days on a second trip, so it was not a continuous activity. He also insisted on the quantum of losses and from Exhibit A-4 to Exhibit A-6 inclusive, he could not find out the nature and the number of the appellant's losses, thereby concluding that he failed to prove his gambling losses.

The Court does not need to decide on the nature of the losses in dispute because the evidence to establish their existence does not satisfy the Court. As already mentioned, the appellant has admitted that there were no written records of his gains and losses and the winnings were not reflected in the exhibits filed.

Consequently, the appeal is allowed as to the losses of $63,858 in U.S. funds with respect to his commodity trading in 1981 and dismissed in all other respects.

Appeal allowed in part.