Charles S Underhill v. Minister of National Revenue, [1973] CTC 2183

The Chairman (orally):—This is an appeal by Charles S Underhill against a reassessment of the Minister of National Revenue for the taxation year 1966. The appeal arises out of the disallowance as a deduction of an expense claimed by the taxpayer in respect of a substantial sum of money that he was forced to pay by virtue of his terms of employment as a salesman with Midland-Osler Securities Limited, one of the larger security brokerage houses in the country.

May I say at the outset that I am indebted to counsel for both parties for the efforts they have made in bringing the facts before me, as I think that the facts are most important in these cases.

As an expression of personal opinion, I think the law is most unsettled in this particular field, and perhaps I may have had some hand in making it that way; but it is clearly, I think, a peculiar type of operation that does depend on the factual situation and, in a great many cases, works an undue hardship on the individual concerned by virtue of his employment.

There is no question whatsoever but that the appellant was an employee of Midland-Osler Securities Limited at its Vancouver office; that he was the holder of a salesman’s licence under the BC laws governing securities; that he was authorized to trade on the Vancouver Stock Exchange by virtue of his employment with Midland-Osler; and that he would not have been permitted to exercise the business activities that he did unless he had been employed by them or by some similarly licensed firm.

What occurred was that, after a series of rather successful years, both for himself and for his employer, he became involved, in or about the year 1966, with some of his clients in the purchase of shares in a company that was known as Cascade Molybdenum Mines Ltd which, during the progress of this hearing, has been referred to as “Cascade Molly”. As l understand it, he received certain information on a Friday afternoon from a person in a position of authority with the Vancouver Stock Exchange, that Cascade Molly’s directors had been given an ultimatum to make available certain information to the public or there would be a suspension of trading in that stock. Faced with that ultimatum, they immediately released some news that they were going to take over an old-established iron works firm in British Columbia.

The appellant, in his evidence, indicates that there were some very large investors, well-known names, involved in the transaction, and he was confident from his experience that the stock would rise on the opening of the Exchange on Monday once the news was generally known. He contacted five or six of the heavier investors, passed the information to them, and received orders to purchase approximately 60,000 shares. He also purchased, on his own personal trading account, some 10,000 shares, but his own trading account does not enter into this transaction, in my opinion, in any way. As he had anticipated, the stock did open on Monday at a slightly higher range. It had been a stock that was trading at around a dollar and had gone up into the four to five dollar range. It hit a peak somewhere over five dollars, as I recall, and then dropped back to about $4.75.

The investors with whom he was dealing apparently felt that the stock had topped off, and instructed him to sell their shares. He would have been in the position of dumping approximately 35,000 shares on to the market at that time, and I think even a layman can take judicial notice of the fact that this would have had a very adverse effect on the market and on that particular stock, and that in that event it might well have seemed possible that his clients would have suffered a greater loss than they eventually did.

He was bound by the rules and regulations of the Vancouver Stock Exchange and also, I assume, of the Superintendent of Brokers under the BC Securities Act, to carry out his clients’ instructions. However, he did not do so. He entered into discretionary trading, which is a prohibited manner of carrying on business for a licensed salesman. He let the stock out as he saw fit, hoping to reduce the losses of his clients, and unfortunately the stock went lower and the loss was eventually greater than his clients anticipated it would have been had he followed their instructions.

It is clear from the evidence, and uncontradicted, that a clear term of his employment was his responsibility to make up losses suffered by virtue of non-payment by his clients. I can say that it is an almost universal term of employment for salesmen with such companies that. they enter into an indemnification agreement whereby it is specified that they must make up out of their earnings—and, if not, out of their own pockets—any loss sustained by the employer (in this case, Midland-Osler) by virtue of the non-payment of accounts by clients of the individual salesmen. This appellant did enter into such a written contract after 1959 when he became a licensed salesman, and it is as a result of entering into that agreement that he was forced eventually to make up the losses that his clients of Cascade Molly suffered.

It is also clear from the evidence of Mr Patterson, who at the present time is the assistant branch manager of Midland-Osler in this area, that even had the appellant carried out the instructions and sold out the shares and a similar loss had ensued, if the clients had then been forced by legal action on behalf of Midland-Osler to pay for their shares, the appellant would still have had to make up any deficiency that still existed.

In this case and at this point I find it incumbent on me to say, by what will be obiter dicta, only, in this case, that at that stage it seems to me that such a loss should clearly be a deductible expense under paragraph 11(6)(c) of the Income Tax Act as it then was, whereby a commission salesman, even though he is an employee, should be allowed to deduct such losses up to the extent of his commissions.

However, unfortunately for the appellant in this case, on his own evidence, and on the clear facts before me, he chose not to follow that. course of action and did his best to minimize the losses of his clients in an effort to retain them as potential sources of income for himself and for the company. In my mind, this clearly took him out of the exemptions permitted to commission salesmen who are employees and placed him in the position of protecting a capital asset, and therefore the outlays. made by him in the circumstances of this particular case were outlays on capital account and therefore. not deductible as is contended by the appellant.

Therefore, on all the evidence and on the material filed, I find that the appellant has not succeeded in discharging the onus of explanation cast upon him, and the appeal must be dismissed.

Appeal dismissed.