Bonner T.C.J.:
1 This is an appeal from an assessment of income tax for the 1990 taxation year. The issue is whether the Appellant suffered a non-capital loss of $65,895.00 in the year. The loss is said to have resulted from the write down to market value of the inventory of a business, that inventory consisting of 9,000 shares of Trilon Financial Corp.
2 The Appellant's position is summarized in the following passages from the Notice of Appeal:
3. In her previous taxation years, the Appellant engaged in securities transactions and reported same on account of income, which has not been disputed by Revenue Canada.
4. In her 1990 taxation year, the Appellant engaged in securities transactions (particulars of which are contained in Schedule “A” hereto), which resulted in a Subsection 10(1) of the I.T.A. inventory loss in the amount of $65,895.
Schedule “A” to Notice of Appeal reads:
3
The Appellant transacted in securities, namely Trilon Financial Corp. (TFC), as follows:
| Date | Transaction |
|---|
| Nov. 17, 1986 | applicant purchased 8,000 TFC warrants @ $14.75 per wrt = $118,080.00 (Note: each wrt on subscription bought 1.5 TGC common shares |
| Nov. 17, 1986 | the warrants were subscribed @ $19.33 per TFC share = $231,960.00 (12,000 shares) |
| Total ACB {1} of 12,000 shares: | $118,080.00 |
| +231.960.00 |
| $350,040.00 |
Notes:In May, 1987, TFC stock split from 12,000 to 18,000 shares. Therefore, ACB of 18,000 TFC shares = $350,040.00.On Dec 30, 1988, the applicant sold 9,000 TFC shares; Therefore, the ACB of the remaining 9,000 shares was $350,040.00 / 2 = $175,020.00.
On December 31, 1990, TFC traded at $12.25 per common share. Therefore the value of the TFC long position of 9,000 shares was $109,125.00.
The Subsection 10(1) inventory loss was therefore:
| $109,125.00 - value of position of Dec. 31, 1990 | | |
| -175,020.00 - ACB of remaining TFC shares | | |
| -$65,895.00 | | |
4 Paragraph 5 of the Notice of Appeal continues:
5. The Appellant reported such inventory loss in her T-1 return of income filed for such year, therein employing a lower cost or market method of accounting in respect to such inventory loss.
5 In making the assessment in issue the Minister of National Revenue (“Minister”) disallowed the deduction of the loss claimed by the Appellant. Essentially, his position was:
(a) the Appellant did not carry on a business of trading in shares;
(b) the shares held by the Appellant were not the inventory of a business;
(c) the Appellant did not dispose of the shares in the 1990 taxation year;
6 The Respondent defended the assessment on the basis just set out and, as well, argued that the issue was res judicata as a result of the decision of this Court in the Appellant's appeal from an assessment of tax for the 1989 taxation year.
7 In the 1989 appeal the issue was whether the Appellant was entitled to deduct $14,400.63 being a portion of the 1990 loss carried back to the earlier year. In that case the Respondent took the position that the shares of Trilon Financial Corporation were held in a stock brokerage account in the name of the Appellant for purposes of a “convertible hedge strategy” of the type dealt with in Schultz v. R. (1993), 93 D.T.C. 953 (T.C.C.). That strategy had been implemented in earlier years by the Appellant in conjunction with her former spouse, Dimitrius Lymberopoulos and her father, Vito Galati. The brokerage account in the Appellant's name was cross guaranteed with two other accounts with the same brokerage one such account being in the name of the Appellant's husband and the other in the name of her father. The liabilities of each of the three were guaranteed by the other two. The “convertible hedge strategy” required, for each transaction made by any one of the three, a precise offsetting transaction made by one of the other two with the consequence that each gain or loss of a member of the group was matched by a loss or gain of one of the others. Because all trading done in the three accounts was so hedged only minimal deposits were required by the broker. Purchases and sales of securities did not result in inflows or outflows of funds to or from any member of the group.
8 I have, for two reasons, set out in some detail the position taken by the Respondent in the Reply to the Notice of Appeal from the assessment for the Appellant's 1989 taxation year. Firstly that Reply contains a convenient and substantially accurate summary of the nature of the operation which the Appellant now asserts constituted the business or adventure in the nature of trade giving rise to the 1990 loss. Secondly the Respondent asserts that the Appellant is precluded by the doctrine of res judicata from relitigating the issue decided against her in her appeal from the 1989 assessment.
9 Subsection 18.16(1) of the Tax Court of Canada Act requires the Minister to file a Reply to the Notice of Appeal. Section 6 of the Tax Court of Canada Rules (Informal Procedure) governs the contents of the Reply. No attempt was made in the Reply filed in this case to plead facts which, if established, would support a defence of res judicata. The statement of issues to be decided does not refer to that defence. It is long settled law that that defence cannot be raised unless it is pleaded. Although evidence regarding the 1989 appeal was entered without objection from the agent for the Appellant I will not permit that evidence to be used as the foundation for a res judicata defence. To allow that would be to allow the Respondent to circumvent the Rules, and, in particular, paragraphs 6(1)(e) and (f), by simply ignoring them.
10 The assessment in issue was predicated on the assumption that the Appellant did not carry on a business of trading in shares. The onus was on the Appellant to establish that that such assumption was erroneous. The Appellant has failed to discharge it. The Appellant testified at the hearing of the appeal. At one time she worked for a firm of a tax consultants, J.K. Maguire and Associates, in a secretarial/clerical position. Her dealings in marketable securities appear to have been conducted under the guidance of the principal of that firm, J.K. Maguire. The Appellant professed to be unable to understand or recall many of the details of and circumstances surrounding the transactions carried out in her name. Her evidence fell far short of establishing that her dealings in securities, conducted as they were in conjunction with offsetting transactions carried out either by her father or her spouse, were undertaken in order to earn income. Mr. Maguire, who appears to have orchestrated the whole affair, did not testify. Nothing in the Appellant's activities resembles a “business” within the meaning of the Act. I recognize that that word is very broad in scope and that, by virtue of section 248 of the Act, it includes an adventure in the nature of trade. Nevertheless the essential ingredient of business which has not been shown to be present here is a commercial operation, a profit making purpose. In my opinion the activity relied on by the Appellant as business activity was nothing more than a mirage intended to distort the vision of the tax collector. There being no business section 10 of the Act cannot apply to give rise to the deduction sought by the Appellant.
11 For the foregoing reasons, the appeal will be dismissed.
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