Graham Finlay Mudge v. Minister of National Revenue, [1974] CTC 2105

The Chairman (orally: December 4, 1973):— This is an appeal by Graham Finlay Mudge against the reassessment by the Minister of National Revenue for the 1971 taxation year. The question is whether or not the appellant was engaged in the business of trading in stock and thereby entitled to deduct his losses.

The situation is that, during 1971, up until September, the appellant was an employee of a chartered accountancy firm and in September he became a full-time student at the University of Western Ontario. In those two jobs, occupations, or whatever one might refer to the attendance at university as, he made the total sum of $8,033.33.

The evidence also indicates that, during that entire year, and as far back as August of 1970, he was engaged in buying and selling stocks listed on the New York and American Stock Exchanges. He bought and sold these shares—I am dealing now only with the year 1971—through a broker, a bank and a company in Toronto and, during most of the material time, the appellant was in London, Ontario. The facts further indicate that he had some 53 trades involving 43 purchases and totalling $340,000 in value in the taxation year 1971.

The only evidence called was that of the appellant himself, and the evidence given by him was that the shares were generally of a speculative nature, were all purchased on margin, and most of them were held for very short periods of time varying from a day or two to perhaps three weeks. He says that the intention was to buy and sell and make a profit. He said that, during the time he was living in London, he was in constant contact by telephone with his broker, almost on a daily basis, and perhaps, on occasions, more than once a day. He says that, in his original return he did not claim the losses that he sustained in 1971, which amounted to $11,000 in round figures, but in his return he did claim as an expense the interest paid on the margin purchases.

In a routine audit, the London office of the Taxation Division of the Department of National Revenue, through its Chief of Verification and Collections, wrote, as is seen by Exhibit A-1, asking for substantiation of the interest claimed. What the appellant did was send the stockbroker’s records, or copies of them, to the District Taxation Office, and the same official wrote back and said that, in the light of the number and type of transactions, the amounts should be included in income as either net profits or net losses. (It should be pointed out at this time that it was not then known to the taxation officials whether there was a profit or a loss.)

When the appellant reported the loss, as he had been requested to do, and it turned out to be a loss of $11,000, the Revenue Department, as he says, changed its attitude and (I paraphrase perhaps) said that this was not deductible.

I am well aware of the fact that the Minister of National Revenue is not bound by the two letters written by his employee or agent or servant that are included in Exhibit A-1, but this correspondence did result in the reassessment that brought the matter before me. It is therefore now for me to determine whether the appellant was engaged in the business of trading in stock in the year 1971.

The appellant cites on his own behalf the case of Wellington Hotel Holdings Limited v MNR, [1973] CTC 473 ; 73 DTC 5391, a decision of the Trial Division of the Federal Court of Canada allowing an appeal from this Board. In my view, the facts in that case are as close to being on all fours with the case before me as one could possibly expect in a factual situation. There is one major difference, and that is that Wellington Hotel Holdings Limited was, as the name would indicate, an incorporated company, and part of its objects included the right to purchase and otherwise acquire and sell shares, bonds or other investments, a fact which is shown and quoted on page 474 [5392] of that decision. However, that distinction is disposed of in the judgment of the learned trial judge at page 480 [5396], and I quote:

Does the fact that a company is empowered by its Letters Patent to buy and sell securities have any significance in the determination of which of the two classes of case the case at bar falls? In the Canada Permanent Mort- gages Corporation case (supra), Heald, J at pages 707-8 [5417] refers to the case of The Commissioners of Inland Revenue v The Scottish Automobile and General Insurance Company Limited, 16 TC 381, and in particular to the judgment of Lord President Clyde at pages 389-90.

He goes on to quote that judgment, which simply says, as has been said in so many cases, that it is not what the objects of a limited company say it can do but what the company actually does that counts. He goes on on page 480 [5396] to say:

On the basis, therefore, of the quoted passages I do not attach any particular significance to the fact that the Appellant was empowered by its Letters Patent to trade In securities. Rather, I think, that one must look at its whole course of conduct in respect of its share transactions to determine the true purposes for which the transactions were entered Into . . .

The further citation he then proceeds to make from the Canada Permanent decision indicates to me that he based his decision in the Wellington Hotel case on the evidence of the main witness, Mr Escaf, who stated, as indicated at page 474 [5392], (and I paraphrase) that, by reason of his university training, he had an interest in the stock exchange, had dabbled in the market in a small way, and that, in 1967, the directors of the company had decided to engage in the buying and selling of securities. Mr Escaf, who was obviously, as I think I can infer from the case, the predominant shareholder of that company, testified that he was not a professional analyst but had purchased stocks on the advice of people that he knew such as lawyers, relatives and stockbrokers, and that most of the stocks were purchased on margin with a view to capital appreciation, as most of them were speculative stocks. He also said that, so far as he was concerned, the securities that were purchased on behalf of the company were part of the company’s inventory for resale. He said that usually the resales took place on the advice of brokers and that the only official advice he received was from that source.

In referring to the case before me, the situation to that point is almost identical. The shares were purchased on the advice of the broker. They were purchased on margin and they were speculative in nature. They were intended for resale and they were held for very short periods of time. In looking at the transactions in the Wellington Hotel case one sees that some of the stocks were held for months, whereas, in the case at bar, only days were involved in most of the transactions. I should say, however, that, in this case before me, the appellant did have about half a dozen stocks that he had inherited and that he included in the inventory in August of 1970 when he says he began trading. From then on he treated these as part and parcel of the business. In the Wellington Hotel case, the appellant traded securities having an approximate value of $135,000. In this case we have some 53 trades involving $340,000 worth of stocks.

It is interesting, and I just note in reviewing the Wellington Hotel case, that Escaf himself had a small portfolio which would almost correspond to the half dozen shares that this appellant brought into the trading share situation in August of 1970. As I have said, I am here dealing with the year 1971.

In Wellington Hotel Holdings Ltd v MNR (supra) the Minister relied to a great extent on Irrigation Industries Limited v MNR, [1962] SCR 346; [1962] CTC 215; 62 DTC 1131, as holding that shares of stock of a company are different than other commodities or properties and, even if purchased with the specific intention of making a profit, any profit or loss incurred in the sale thereof was a capital gain or a capital loss. Counsel for the Minister argued before Urie, J, and I am now reading from page 479 [5396] of the Wellington Hotel case, “that until the Irrigation Industries (supra) decision in 1962 the Minister likely would have agreed that the losses were deductible but that case changed the law”.

It is my understanding that the Irrigation Industries case became the accepted and understood state of the law in dealing with such transactions. The basis of it was, of course, that securities traded by persons or companies engaged only incidentally in that business are not taxable, since securities represent an investment in a company which is itself created for the purpose of doing business, “any expression of intention not to invest but to trade in securities by the appellant’s officers notwithstanding”. In other words, it seems to say that shares in a company are not commodities or properties in the usual sense because the shareholders do not have an actual hand in the operation of the business, which is operated by the directors. It is true that the Irrigation Industries case involved only one transaction, but it was the principle that was involved that was important, not the number or nature of the transactions.

From the second paragraph on page 482 [5397] it would appear that the trial judge in the Wellington Hotel case was able to distinguish the case before him from the Irrigation Industries case quite easily. In my view, if the Wellington Hotel Holdings Limited case is distinguishable, then certainly this case is just as easily distinguishable, because the facts, as I have said, are almost identical and the trading was far greater and far more in the nature of trading than was the case in Wellington Hotel Holdings Limited v MNR.

At page 482 [5398] the learned trial judge in the Wellington Hotel case further stated:

The additional facts in evidence upon which I rely to support my view are that the securities bought and sold were speculative in nature, were nonincome producing, were held for relatively short periods of time and formed a substantial portion of the total business of the Appellant. The fact that it was not part of the main business of the Appellant is, in my view as above stated, of no particular significance. The whole course of conduct of the Appellant leads inevitably to the conclusion that it Is buying and selling securities to make a profit.

Now to compare it with this case. Of the $340,000 involved in these transactions, only $129 of income revenue was received in the form of dividends. The shares were speculative and they were held for relatively short periods of time, and this activity formed a substantial, if not the only, business of the appellant in the year 1971.

Again, as the learned trial judge in the Wellington Hotel case found, I find as a fact in this case that the purchases were purely speculative and were entered into with the intention of disposing of the stock at a profit as soon as there was a reasonable opportunity of so doing. The fact that a loss resulted, just as the trial judge said in the Wellington Hotel case, is unfortunate, but nevertheless it was the intention to make a profit that would have been, in the eyes of the trial judge, taxable: therefore, conversely, the losses should be deductible.

As I have said, I based my decision in this case solely on the decision in the Wellington Hotel Holdings Limited case. The facts are so similar that I cannot see any distinction of material significance that would make this taxpayer fail by virtue of the Irrigation Industries case that did not exist in the Wellington Hotel case, and since the appellant in that case was successful, I therefore find, on the facts of this case, that the appeal should be allowed and the matter referred back to the Minister for reconsideration and reassessment accordingly.

In referring it back, I am not losing sight of Mr Borraccia’s reference to the fact that some investment stocks were bought in August of 1970, and I think, in referring it back in that manner, the whole matter will be reconsidered and reassessed accordingly.

Appeal allowed.