David Laurie Diller v. Minister of National Revenue, [1980] CTC 2532, 80 DTC 1444

M J Bonner:—The appellant appeals from assessments of income tax for the 1972 to 1975 taxation years. His position is that the Minister improperly disallowed the carry forward of non-capital losses incurred in 1971. The non-capital losses were said to have been incurred in 1971 as a result of trading operations in foreign exchange. They were not reported in the appellant’s income tax return for 1971. At the time the return was filed (and for a number of years thereafter) the appellant took the position that his gains and losses in foreign exchange trading were on capital account.

There were five issues:

A. Did the appellant incur a non-capital loss at all?

B. If so, was it incurred in 1971?

C. If so, what was the quantum?

D. What amount is available as a deduction in the computation of taxable income for 1972 and later years?

E. Is the appellant entitled to carry forward the loss (or a part thereof) or is he disentitled because of the fact that the 1971 year was said to be “statute barred”?

Evidence was given at the hearing of the appeals by the appellant and by Donald F King. That evidence established that at some time in 1970 the appellant and Mr King joined together to trade in foreign exchange. They did so following formation of an agreement to share equally the profits and losses from such trading. The agreement was verbal. The appellant’s role was to do the buying and selling; that is to say, he placed the orders. Mr King described his role as the “backer”. It is plain that the two were partners, although the word was never mentioned.

The trading involved a number of transactions which were entered into in 1970 and 1971. Very early in 1971 it came to an end. The exact date on which trading ceased was not given in evidence. It ceased when Mr King was obliged to pay his bank, which had financed the trading operations, approximately $290,000.* [1] That was, Mr King said, the amount advanced by the bank to cover the obligations of the partnership on a contract on which it lost money.

Mr King called upon the appellant for payment of his one-half share. The appellant was short of money. Mr King testified that “the ground rules changed when Mr Diller did not pay”. He expressed the view that if he had to pay the bank, then the loss which the two had incurred in foreign exchange trading was his loss. He therefore claimed to deduct the entire amount for tax purposes. Although Mr King thought that the loss was $345,000 he stated that he and some of the respondent’s officials agreed that it was $315,400. The appellant does not appear to have been a party to any such agreement.

The appellant’s share of the money required to pay the bank was advanced by Mr King’s wife, Stephanie. On April 1, 1971, the appellant executed and delivered a promissory note to Mrs King in the amount of $170,250. The execution and delivery of the note was no sham operation. The appellant has, since April of 1971, paid instalments on the note at a rate apparently satisfactory to Mrs King.

Although not clearly defined by the pleadings, it became apparent at trial that the first issue turns on the question whether losses on foreign exchange trading was incurred by Mr King or by him and the appellant. On the evidence it is quite clear that one-half of a loss on the foreign exchange trading operations was, in fact, incurred by the appellant. Mr King’s rationalization as to a change in the ground rules is without foundation. I know of no basis (and none was advanced in argument) on which it could be suggested that the appellant’s inability to pay, or pay promptly, made him any the less one of two persons who sustained a loss.

I turn next to two related questions, quantum and timing. Here, complete confusion reigns. The trading operations took place during a period falling in part in 1970 and in part in 1971. They consisted of entry into a substantial number of individual contracts for the purchase or sale of foreign exchange. Mr Diller could not say how many “trades” were made in 1970, but he guessed at figures between 20 and 50. A profit of approximately $30,800 was said to have been earned in 1970, but no detail as to the method of calculation was given.

Mr Diller stated that his 1971 loss from trading operations was $170,250. The figure which he used was the amount of the promissory note delivered to Mrs King. No written records of the foreign exchange trading transactions were produced at the hearing of the appeals. At one time Mr King had some records or vouchers, but they were lost or destroyed when he moved to new offices. The appellant said that he had jotted down gains and losses on a piece of paper, but that he was not sure whether he still had the paper at the time of the hearing.

If the partnership had a fiscal period other than the calendar year no mention of that fact was made in evidence.

The loss, said to have been incurred in 1971, arose from a contract made in 1970 and extended as to maturity date sometime later in that year. That contract was the only one outstanding at the end of 1970. When it matured early in 1971 the trading ceased.

Despite the imprecision in the evidence as to the volume of the trading operations undertaken by the appellant and Mr King, it appears to have been sufficiently large and continuous in nature to be an “ordinary trading business’’ and thus to require a valuation of the inventory of contracts on hand at the end of each fiscal period in order to accurately ascertain profit or loss from the business for the period. There was no evidence as to the quantum of the unrealized profit or loss on the last contract outstanding at the end of 1970. Without such evidence it is, I think, impossible to determine the amount of profit or loss for either 1970 or 1971. The position is set forth in the reasons for judgment of Jackett, CJ, in Oryx Realty Corporation v MNR, [1974] CTC 430; 74 DTC 6352:

Gross trading profit for a taxation year may be obtained by adding together the profits of the various transactions completed in the year or by adding together the prices at which sales were effected in the year and deducting the aggregate of the costs of the various things sold. Either of such methods would be suitable for a business consisting of relatively few transactions. In the ordinary trading business, however, the practice, which has hardened into a rule of law, is that profit for a year must be computed by deducting from the aggregate “proceeds” of all sales the “cost of sales” computed by adding a value placed on inventory at the beginning of the year to the cost of acquisitions in the year and deducting a value placed on inventory at the end of the year.

The appellant said that in the contract giving rise to the loss his position was “short Canadian dollars, long US dollars’’. He also said that when the contract originally became due and was extended there was a loss on it. Mr King explained the Canadian dollar was rising against the US dollar. It seems quite clear that a part of the loss which the appellant identifies as a 1971 loss was, in fact, incurred in 1970. In the result the appellant has failed to establish what part of the loss was incurred in 1971 and what part was incurred in 1970. There was no attempt made to establish any right to carry forward a 1970 loss.

Even though I have no doubt that there was an overall loss from the foreign exchange trading carried on by the partnership, I cannot say how much, if any, was available for application in the computation of taxable income for the years now under appeal.

The appeals must therefore be dismissed. Thus, it is not necessary to deal with the fourth and fifth issues, although I will observe in relation to the fifth issue that I very much doubt that the fact that the period mentioned in subparagraph 152(4)(a)(ii) of the Income Tax Act has passed for a particular year precludes recomputation of the quantum of a loss for that year when such recomputation is relevant to the determination of liability for tax in another year. I am inclined to think that nothing in the words of subsection 152(4) requires the Minister, when assessing tax for a year, to adhere rigidly to some position of finding which has been shown to be erroneous Simply because he has taken that same position or made that finding in assessing for some other year in respect of which he is not at liberty to reassess because of the passage of the four year period. In the absence of a clear statutory direction I have great difficulty in accepting an argument, the implication of which is that the subsection requires demonstrable error to be perpetuated.

Appeal dismissed.