Gauvreau, Beaudry Limited v. Minister of National Revenue, [1981] CTC 2475, 81 DTC 392

Guy Tremblay [Translation]:—This case was heard at Quebec City, Quebec on February 20, 1980.

1. Point at Issue

It must be decided whether the profit of $29,500 made in 1974 by the appellant company on the purchase and sale of French francs is a capital gain or business income. The appellant’s line of business is the wholesaling of dry goods.

2. Burden of Proof

The appellant has the burden of showing that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act but from a number of judicial decisions, includ- ing the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts alleged by the respondent

(a) For several years, the appellant has specialized in the “wholesale” selling of products imported from France;

(b) Since at least on or about April 14, 1973 the appellant, as part of its import operations, has engaged in forward transactions involving the French franc;

(c) On May 3, 1974, as admitted by the appellant in paragraph 1 of Part A of its notice of appeal, the “Statement of Facts”, the appellant entered into futures transactions involving French francs by undertaking to purchase FF 500,000 on twleve occasions at the exchange rate of $0.1933, and by undertaking to sell them at market rates on future predetermined dates spread over the period beginning June 1, 1974 and ending May 1, 1975;

(d) During the taxation year ending November 30, 1974, the appellant realized as a result of this series of futures transactions in French francs a gain of $29,500.00, as admitted and detailed by the appellant in paragraph 2 of section A “Statement of Facts” of its notice of appeal;

(e) The aforesaid futures transactions in French currency and the purchases of French currency to pay the appellant’s French suppliers were both handled by the same banker;

(f) Futures transactions in French currency by the appellant from June 1974 to November 1974 correspond substantially with the appellant’s purchases in France for the same period;

(g) Futures transactions in French currency were for the appellant an integral part of the financing of its imports and of its business operations in general;

(h) The ‘technique’ used by the appellant to cope with fluctuations in French currency values constitutes a routine and daily practice of its business;

(i) The appellant has acquired an intimate knowledge of the fluctuations in French currency as a result of everyday business dealings with its French suppliers.

4. Facts

4.01 Since 1917, the main purpose of the appellant corporation has been wholesale dealing in dry goods.

4.02 The appellant’s fiscal year ends on November 30 of each year.

4.03 The appellant’s chief witness, Mr Gilles Bradette, CA, has been treasurer and comptroller of the company since 1973. After the president, he is the second in command. He personally handles the company’s finances and thus enjoys first-hand knowledge of the facts about which he testified.

Before he became comptroller of the appellant company, Mr Bradette was with the accounting firm of Peat, Marwick, Mitchell and Co of which the appellant was a client.

4.04 The facts admitted by the respondent and appearing in paragraphs 1.0 and 2.0 in Part A of the notice of appeal, entitled “Statement of Facts”, are as follows:

1.01 On May 3, 1974, the “appellant” entered into futures transactions in French francs, signing twelve contracts of purchase, each one for FF 500,000 at the rate of $0.1933, and undertaking to sell the said currency on future dates according to the due dates scheduled in advance, beginning on June 1, 1974 and ending on May 1, 1975.

2.0 In the course of the “appellant’s” fiscal year ending November 30, 1974, the contracts expired at this date yielded the following results:

	Selling		Purchase	Profit
Due date	price	price	price	(loss)
June 1, 1974	$ 97,500		$ 96,650	$	850
July 1, 1974	100,150		96,650	3,500
August 1, 1974	103,400		96,950	6,750
September 1, 1974	101,550		96,650	4,900
October 1, 1974	103,000		96,650	6,350
November 1, 1974	103,800		96,650	7,150
	$609,400		$579,900	$29,500

4.05 Before May 1974, which is to say during 1973, the appellant also had forward tansactions in French currency. Exhibit 1-1 contains the minutes of the meeting of the board of directors of the appellant on April 14, 1973. A decision was taken at that time to purchase bills of exchange aboard, a new policy in comparison with previous years. Phrased in very broad terms, the resolution reads as follows:

In view of the possible devaluation of the Canadian dollar, the board of directors has decided to adopta policy of futures buying, in order to settle our bills abroad.

4.06 In paragraphs 1.0 and 2.0 of Part B entitled “Reasons for Appeal” of the notice of appeal, the appellant outlined the facts pertaining to these purchases in 1973:

1.0 In 1973, the “appellant” purchased goods from French suppliers, payable in instalments over ninety days. In order to protect itself against fluctuation in the French franc and the Canadian dollar during this period of time, the company then adopted the policy mentioned in the minutes of the special shareholders’ meeting calling for the payment of all its purchases made in France by forward transactions in French currency. Once a month, the company would send the bank handling the payment of its bills abroad a list of invoices bearing a due date of ninety days and request coverage for these specific on-the-spot purchases through forward transactions in French francs.

2.0 The “appellant” recognized that, for the period in question, these transactions represented part of its commercial operation; moreover, in compliance with Interpretation Bulletin IT-95, “Foreign Exchange Gains and Losses”, the tax treatment accorded these transactions was that of the “income treatment” (see IT-346, paragraph 13).

4.07 In April 1973, the terms of purchase in France were: 3% discount over 90 days; net amount over 180 days. There was at that time a fluctuation in the value of the franc in relation to the Candian dollar, as for example, 20¢ at purchase and 22¢ upon sale. The purchase of French francs on the date on which the goods were billed made it possible to pay the bills. This was a new experiment and a profitable one, according to the witness, if one analyses the transactions for 1973.

4.08 Beginning in the first months of 1974, however, the terms of purchase underwent a change. They became: 2% discount over 60 days; net amount over 90 days.

Since, according to the witness, the 60-day term is calculated from the date of billing, that is, from the date on which the goods left the factory, and since it takes 40 to 45 days to receive them, the terms of purchase from 1974 onwards, the witness stated, amounted all told to a 2% discount over 10 days and the net amount over 30 days.

Thus, according to Mr Bradette, the time elapsed was not long enough. There was no longer an interval requiring protection. It had become un- necessary to buy francs each time there was a purchase of goods and, as expressed in the grounds of appeal, the appellant maintained:

that, consequently, the company stopped paying its bills abroad through forward purchasing of French francs; in other words, it stopped taking forward positions in French francs in connection with its particular business operation, which involves selling draperies.

4.09 The company then decided, on the basis of a contract dated May 3, 1974, to undertake the purchase of 6 million French francs at the rate of FF 500,00 per month, at a cost of $0.1933 per franc, that is, at a monthly cost of $96,650 with the due date calculated from June 1, 1974. The selling price and the profits, totalling $29,500, are set out in detail in paragraph 4.04 above. Thus with this new method, according to Mr Bradette, the appellant did not take delivery of the French francs in order to settle its accounts, as It had done in 1973. It simply resold the francs on the due date, reckoning with the risks attendant upon fluctuations in the value of the franc or the Canadian dollar. The francs could just as easily have been resold at a loss as at a profit. This kind of transaction is known as futures buying and does not call for the outlay of funds except in the event of losses.

4.10 During fiscal year 1973 (December 1, 1972 to November 30, 1973), the appellant imported $1,326,235.03 worth of goods from France; goods imported in 1974 were valued at $1,272,503.70 and 1975 at $1,842,794.02, according to the entries in the appellant’s purchases ledger (Exhibit A-1). These figures are compiled under the heading “Department No 8”. From May to November 1974, imports amounted to $634,790; this is equal to the total as of November 30, 1974, $1,272,503, less the total as of April 30, 1974, $637,713.

4.11 Sales of French francs in 1975 were approximately what they were in 1974. Sales in the latter year totalled $609,400 (see para 4.04).

5. Act, case law and comments

5.1 Act

The sections of the new Income Tax Act that must be taken into consideration in the case at bar are subsections 9(1) and 39(1). Where necessary, they will be cited at length during the comments.

5.2 Case law and other authorities

The case law and other authorities to which the parties have referred the Board are as follows:

1. Grant Geddes v MNR, [1976] CTC 2449; 76 DTC 1338;

2. T A Anderson v MNR, 40 Tax ABC 219; 66 DTC 167;

3. Aluminium Union Ltd v MNR, [1960] CTC 206; 60 DTC 1138;

4. Alumnium Union Ltd v MNR, 63 DTC 1254;

5. Atlantic Sugar Refineries Ltd v MNR [1949] CTC 196; 49 DTC 602;

6. Canadian Gypsum Co Ltd v MNR, 9 Tax ABC 319; 53 DTC 466;

7. Dominion Steel & Coal Corp Ltd v MNR, 16 Tax ABC 427; 57 DTC 147;

8. DWS Corporation v MNR, [1968] CTC 65; 68 DTC 5045;

9. Eli Lilly and Company (Canada) Ltd v MNR, [1955] CTC 198; 55 DTC 1139;

10. M Granatstein & Son Ltd v MN Ft, 13 Tax ABC 194; 55 DTC 396;

11. Imperial Tobacco Co (of Great Britain and Ireland), Ltd v Kelly and CIR, 25 TC 292;

12. Landes Brothers v Simpson, 19 TC 62;

13. Salada Foods Ltd v HMQ, [1974] CTC 201; 74 DTC 6171;

14. Salada Foods Ltd v HMQ, Federal Court of Appeal;

15. Southco Holdings & Management Ltd et al v MNR, [1975] CTC 2205; 75 DTC 162;

16. MNR v Louis W Spencer, [1961] CTC 109; 61 DTC 1079;

17. String am Farms Ltd v MNR, [1977] CTC 2438; 77 DTC 317;

18. CIR v George Thompson & Co. Ltd, 12 TC 1091;

19. Tip Top Tailors Ltd v MNR, [1957] CTC 309; 57 DTC 1232;

20. Wisdom v Chamberlain, 45 TC 92;

21. Cooper v Stubbs, [1925] 2 KB 753;

22. CIR v Reinhold, 34 TC 389;

23. A letter from the Minister of National Revenue dated July 28, 1975;

24. A letter from the Director of the Technical Interpretations Division of Revenue Canada dated September 23, 1975;

25. Interpretation Bulletin 346 dated September 13, 1976, entitled “Commodity Futures and Certain Commodities”.

5.3 Comments

A. Arguments submitted by the appellant

5.3.1 In its notice of appeal the appellant gave its arguments, in part:

4.0 The twelve contracts for forward purchases of FF 500,000 each, signed on May 3, 1974 by the “appellant”, constitute “additional purchases” of French currency which fall outside the range of activities considered normal in the drapery business, and these contracts were concluded by the appellant “as a speculation for its own account”.

5.0 The “appellant” stresses the fact that the foreign exchange contracts involving French currency and signed on May 3, 1974 represent transactions in commodity futures, which are carried on in connection with a host of different commodities such as cereals, metals (gold and silver) and, more especially, foreign currency. This fact was not disputed by personnel at the Appeals Division of the Quebec Office.

5.3.2 Departmental policy:

6.0 The “appellant” stresses the existence of a Department of National Revenue Policy made public in 1975 concerning taxation of transactions in commodity futures. Evidence of the existence of this policy is found in the following documents.

6.01 A letter from the Minister of National Revenue, the Honourable R Basford, dated July 28, 1975 and addressed to Mr R S Ennis. (This letter is summarized in Canadian Current Tax, Weekly Report and Commentary, Issue 36, No 118 and Issue 41, No 130, Butterworths.) The following is an excerpt from this publication:

“Non-business speculators in commodity futures will be entitled as a general rule to report all their gains and losses from transactions in commodity futures on a capital gain and loss basis provided such reporting is followed consistently from year to year."

6.0.2 A letter from the Technical Interpretations Division of the Department of National Revenue addressed to CCH Canadian Limited and dated September 23, 1975.

6.0.3 Interpretation Bulletin IT-346 from the Department of National Revenue, dated September 13, 1976 and entitled “Commodity Futures and Certain Commodities”.

5.3.3 The traditional tests:

7.0 Under the policy outlined above, the traditional tests used to make a distinction between a capital gain and business income must be set aside. According to these traditional tests, the mere presence at the time of the commodity purchase of an intention to resell at a profit (speculation) lends the transaction the aspect of an adventure in the nature of trade, and the gain realized from the sale is taxable as ordinary income. Similarly, if the purchase of the commodity does not constitute an investment designed to generate an annual income without any need to resell the commodity itself, the commodity must be classified as an inventory item rather than as a fixed asset, and the profit derived from its sale will be regarded as ordinary income.

5.3.4 The new criteria:

8.0 Under the new departmental policy as set forth in the documents cited in paragraphs 6.0.1, 6.0.2, and 6.0.3, these traditional tests have been replaced by more specific criteria which involve distinctions between three categories of taxpayers:

8.1 “Business speculators”

These are taxpayers who take commodity futures positions as an integral part of their business operations and who engage in transactions in commodities that are produced or grown, traded or connected with their business. For them, the gains and losses realized constitute ordinary income and losses.

8.2 "Insiders”

These are taxpayers who, by virtue of their status as employees or officers of a particular business, enjoy access to specific information concerning certain commodities, and who use this information to their own advantage by entering into futures transactions in such goods. For them as well, the gains and losses so realized represent ordinary income and losses.

8.3 “Non-business speculators”

This category includes all the other taxpayers who enter into commodity futures transactions for purely speculative purposes, that is, in the hope of making a profit. Under departmental policy, these individuals have the option of reporting gains and losses in commodity futures either as ordinary income and losses or as capital gains or losses, on condition that the method selected is followed consistently from year to year.

8.4 “The appellant” submits that it is not a "business speculator”'.

8.4.1 Its normal activities are those of a wholesale merchant in fabrics and draperies;

8.4.2 As it is not a “financial institution”, buying and selling foreign currency cannot constitute an integral part of its business operations;

8.4.3 Futures transactions in foreign currency are not connected with the drapery business in the same way that buying and selling cereals futures, for example, may be related to the business of producing, say, milled grains or other cereal-based foods.

8.5 The “appellant” submits that it cannot be considered an "insider”'.

8.5.1 Foreign currency exchange rates are quoted on a daily basis and disseminated by the financial media; they are accessible to the general public and the appellant does not, in this regard, enjoy access to any privileged or exclusive information that would not also be available to all taxpayers.

5.3.5 The case of Southco Holdings and Management Ltd et al v MNR, 75 DTC 162;

9.0 Personnel at the Appeals Division, Quebec District referred “the appellant’’ to Southco Holdings and Management Ltd et al v MNR, 75 DTC 162, concerning transactions in gold ingots. The “appellant” submits the following facts in relation to this case:

9.1 Firstly, this case was appealed by the taxpayer in question to the Federal Court of Appeal;

9.2 Secondly, the judgment in this case was delivered on the basis of the traditional tests used to distinguish between capital gains and business income and stressed in paragraph 7.0 above;

9.3 Thirdly, the Tax Review Board judgment (May 29, 1975) preceded the first of the two letters from the Minister of National Revenue dealing with transactions in commodity futures (July 28, 1975).

10.0 The “appellant” wishes to emphasize that the contracts of purchase signed on May 3, 1974 constituted firm commitments, and that it could not have terminated the said commitments without derogating from its obligations. In this connection, the taxpayer is prepared to obtain all necessary affidavits from BNP Canada Inc.

11.0 The “appellant’’ is of the opinion that paragraphs 9, 13 and 14 of Interpretation Bulletin IT-346 confirm the merit of its appeal to the Board. The “appellant” concluded the contract of May 3, 1974 as a ''non-business speculator" and not as a "business speculator*’.

5.3.6 Paragraphs 9, 13 and 14 of IT-346, entitled “Commodity Futures and Certain Commodities”, read as follows:

9. As a general rule, a taxpayer who takes commodity futures positions in, or who has transactions in, a commodity connected with his business, is considered to be trading as part of his business operations and the comments in paragraph 3 above apply. However, there may also be some cases where a taxpayer who produces or uses a commodity in a particular business operation has transactions in that commodity or in futures of that commodity that are, in fact, not part of that particular operation. Whether or not a transaction would fall within this category depends on the facts in each case. As an example, a jeweller who buys 100 ounces of gold for his business (a normal amount for his business) and also makes additional purchases of 1600 ounces of gold, or of futures contracts representing 1600 ounces of gold, as a speculation for his own account, may be viewed as a speculator with respect to the additional purchases when all the facts of the situation are considered.

Foreign Exchange

13. The general principles relating to the determination of whether a foreign exchange gain or loss is on account of income or capital, as outlined in Interpretation Bulletin IT-95, “Foreign Exchange Gains and Losses”, also apply to gains or losses resulting from futures transactions in foreign currency where such transactions are part of a taxpayer’s business operations.

14. A taxpayer who has transactions in foreign currency futures, or in foreign currency, that do not form part of a business operation will be treated in the same way as a speculator, as outlined in paragraphs 6 and 7 above, with respect to such transactions.

5.3.7 Counsel for the appellant cited the case of Grant Geddes v MNR (No 1 on the list), in which Mr Geddes had made profits in 1972 as a result of several transactions in grain futures. Profits that were viewed as business income by the Department of National Revenue were regarded as capital gains by Mr Frost of the Tax Appeal Board, notwithstanding that the appel- lant was engaged in the grain elevator business. In allowing the appeal, Mr Frost based his ruling on the fact that the appellant did not have any particular knowledge of the methods and principles utilized by professionals in this line of business to interpret the market.

5.3.8 In the case at bar, according to learned counsel, the appellant established a new policy in 1974, a policy of investment as opposed to that of the previous year, 1973.

B. Arguments submitted by the respondent

5.3.9. According to learned counsel for the respondent, neither the statement issued by the Minister of National Revenue in July 1975 nor Interpretation Bulletin 346 of September 13, 1976 are binding in law. Only the Act and test established by precedent in respect of a company may be used by a tribunal to decide this case.

C. Analysis

5.4 The Board clearly cannot base itself on either the interpretation bulletin or the letter from the Minister of National Revenue, because they conflict with the ordinary principles established by precedent, and consequently, with the underlying principles of the Income Tax Act.

In J Camille Hare/ v DMR of the Province of Québec, 77 DTC 5438, the Supreme Court sanctioned the application of an administrative policy, but as the Court emphasized, the case was one where the said administrative policy did not conflict with the Act and where the Act itself is ambiguous.

5.5 In applying the usual principles, the Board concluded that the profit in question resulted from “an adventure or concern in the nature of trade” and was therefore to be considered a business-related profit.

Indeed, the object of the transaction — French currency — is by its very nature a commercial object.

Moreover, when they are the subject of futures trading, French francs are already sold at the time of their purchases; only the due date is different, it occurs once a month. Thus the existence of an intent to profit over the short term can no longer be doubted.

The appellant, for its part, buys and sells dry goods and is not a financial institution — and buying and selling foreign currency cannot constitute an integral part of its ordinary business operations.

However, within the meaning of the Income Tax Act, the operative concept is that of “an adventure or concern in the nature of trade”, consistent with the definition of the word “business” in section 248. That definition is as follows:

“Business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and includes an adventure or concern in the nature of trade but does not include an office or employment:

The greater part of the precedents cited earlier is consistent with this ruling.

5.6 If the administrative policy issued by the former Minister of National Revenue and set out in detail in Interpretation Bulletin 346 is a policy de- signed to meet a financial and economic need, it is the view of the Board that such a policy should be incorporated in the legislation.

If it is not, it would seem that the policy in question could lead to discrimination if it is not applied uniformly to all those who may be covered by it. In fact, taxpayers who do not receive consistent treatment from the respondent have no other recourse but to lodge an appeal to the court. The latter, however, has no choice but to apply the Act as the usual principles of statute law as in the instant case, and uphold the assessment.

6. Conclusion

The appeal is dismissed in accordance with the above-mentioned reasons for judgment.

Appeal dismissed.