Jacques Lafortune v. Minister of National Revenue, [1979] CTC 2087, 79 DTC 126

Guy Tremblay:—This case was heard at Ottawa, Ontario, on December 8, 1978.

1. Point at Issue

The point at issue is whether the appellant is correct in deducting an amount as non-capital loss for the 1973, 1974 and 1975 taxation years.

In 1969, the appellant had bought 4,000 shares (which were never issued) of a company which went bankrupt in April 1970 (the trustee was discharged in December 1971).

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 In 1969, the appellant was the production manager for Kent Reproductions Ltd, a subsidiary of Kentcom Holdings Ltd. The latter was also the parent company of a microfilm company.

3.02 In 1969, the appellant was offered an opportunity to become a part owner of Kentcom Holdings Ltd by purchasing 4,000 common shares of the company. The letter dated November 17, 1969 sent by Kentcom Holdings Ltd to the appellant was produced as exhibit A-2 with prospectus of the company dated April 17, 1970.

3.03 The 4,000 common shares were to be held in trust by the law firm of Low, Murchison, Burns and Thomas, Mr Thomas being the trustee. Considering that he worked for one subsidiary, that he trusted the company, and that the subsidiaries were in fairly sound financial position, the appellant decided to accept that offer. Its [sic] intention was not to sell the shares after a short time but to keep them.

3.04 In order to purchase the 4,000 common shares, the appellant obtained a $4,000 mortgage at an interest rate of 14%, payable in 50 equal monthly instalments of $61.17, the first payment on February 1, 1970, the final payment of $2,712.85 in December 1974.

3.05 In December 1969, the appellant transferred $4,000 by cheque to Mr Schmitz, President of Kentcom Holdings Ltd. This company, however, never issued the shares.

3.06 In April 1970, the said company went bankrupt and the trustee was discharged December 13, 1971.

3.07 The appellant did not receive any monies for his 4,000 common shares from the ensuing bankruptcy.

3.08 The appellant, for his 1973, 1974 and 1975 taxation years, deducted from his income the following amounts representing payments on the said mortgage:

3.09 For the year 1973, the amount of $1,466.30 comprised the payments made in 1972 and 1973, less $1.78 (24 x $61.17 $1,468.08 - $1,466.30).

3.10 For the year 1974, the amount of $3,515.49 was made up of 12 payments of $61.17 plus one of $2,781.45.

3.11 For the year 1975, the amount of $2,752 is an amount included in the one of $2,781.45 already paid in 1974. The evidence showed that the assessment concerning that year was well founded. Consequently, the appellant withdrew his appeal for the 1975 taxation year.

3.12 For the years involved, however, the respondent allowed the deduction for interest paid on the mortgage.

3.13 In his testimony, the appellant clearly affirmed that his intention was to keep the shares and not to sell them in a proximate [sic] delay.

4. Law—Jurisprudence—Comments

4.1 Law

The main sections of the new Act involved in the present case are 3, paragraphs 111(1)(a), 111(8)(b) and 20(1)(c).

4.2 Jurisprudence

The jurisprudence cited by the parties is:

1. Associated Investors of Canada Ltd v MNR, [1967] CTC 138; 67 DTC 5096;

2. Thomas J. Hopwood v MNR, [1969] Tax ABC 1010; 69 DTC 705.

4.3 Comments

4.3.1 Shares not issued

Does the fact that purchased shares were not issued change the nature of the problem?

The company had the legal authority to issue the 4,000 common shares. The fact that the company delayed in issuing them and that it went bankrupt within 5 months after the payment, cannot change the nature of the transaction: the appellant bought 4,000 common shares. If the transaction was not valid to purchase the shares, then it should be considered a loan to the company.

4.3.2 The purchase of shares: investment, not trade

From the evidence adduced, it is clear that the appellant is not in the business of buying and selling shares.

The evidence clearly shows this was the first time the appellant purchased shares. He intended to keep them for many years. It is clear that it was an investment for the appellant. Consequently, the loss must be considered as a capital one.

As stated in Thomas J Hopwood v MNR (cited above) at page 1016 1709]:

The purchase of shares in an existing company is a well-known form of investment, and profits or losses are capital gains or capital losses unless the individual is a trader in shares. It was clearly established that Mr Hopwood was not a trader in shares.

It is clear that the appellant was not a trader in shares. The capital loss occurred in 1971 before the enactment of the new Act.

If the money paid by the appellant is not considered as payment of shares but as a loan, then the loss would also be a capital one. Indeed, the appellant who had the burden of proof, did not give any evidence that he was in the business of lending money.

The Board confirms that the respondent was well founded in allowing the interest paid in the relevant years because of paragraph 20(1)(c) of the new Act, which provided the deduction of interest on loans made to buy property. Property also means “shares” (subsection 248(1) of the new Act).

5. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.