Georges Girard v. Minister of National Revenue, [1976] CTC 2159, [1976] DTC 1130

The Chairman:—The appeals of Georges Girard were heard at Montreal, Quebec on January 15, 1976, concurrently with that of Georges Girard Inc. In order to avoid any possible confusion, the decision and reasons for judgment in the appeal of Georges Girard Inc v MNR were given separately.

The Georges Girard case involves appeals from three tax assessments, the first of which is dated January 30, 1970 and concerns the 1962, 1963, 1964 and 1965 taxation years; the second assessment is dated August 31, 1970 and concerns the 1966, 1967, 1968 and 1969 taxation years. A third assessment, dated August 9, 1971, was also issued by the respondent for the 1970 taxation year. The taxpayer disputed this assessment and filed another Notice of Appeal dated June 22, 1972.

These appeals were heard concurrently, and the evidence adduced at the hearing, as well as the written pleadings of both parties, was taken into consideration in settling the issue for each of the taxation years involved.

The issue in each appeal and for each taxation year is the same, namely, whether the profits realized by the appellant from transactions involving securities from 1963 to 1970 inclusive are a capital return from an investment or income from trading in securities.

Since 1957 the appellant has been the president and majority shareholder of Georges Girard Inc, in addition to being employed as general manager by the corporation, which carried on an insurance brokerage business. In his testimony the appellant stated that he has always been employed by this corporation and has devoted all his time and efforts to building up its insurance business. He also stated that he invested in certain shares, on which he had made a profit. The appellant alleged that this profit was of a capital nature, since he was never authorized to act as a stockbroker, agent or dealer in securities, and that any profit realized could only come from his investments.

Respondent claimed that the appellant and Georges Girard Inc both dealt in securities, that their activity in the purchase and resale of short-term securities corresponded to the activities of a promoter or dealer in securities, and that the profit realized from these transactions was income from a business.

I should point out here that, in my view, not only brokerage houses, licensed stockbrokers, agents or sellers of securities or professional consultants in the field may carry on the business of trading in securities. The nature of the transactions, their frequency, volume and purpose are, in my opinion, valid criteria for distinguishing between investments per se and business transactions and, to my mind, can be applied to any taxpayer or transaction. I believe that, even though he may have neither a licence nor professional status in the field of securities, a taxpayer who, in the course of a single year, buys and resells a substantial volume of securities apparently for the purpose of realizing a profit from their short-term resale, is carrying on the business of trading in securities. However, if this same taxpayer not only buys securities but keeps them for several years, draws dividends from them, and has clearly purchased them in order to realize long- term profit, he has, in my view, made an investment. Even though this may be more difficult to prove, I do not believe one may automatically conclude that a dealer in securities can never make a long-term investment in certain company shares; and the reverse is also true. In short, these are the facts that determine the nature of such transactions.

In the case at bar, according to the financial statements, the appellant held shares in over one hundred corporations, with a total value of $1,180,370.87 as of December 31, 1969. From 1962 to 1969, by purchasing and reselling short-term shares, the appellant realized the following profits:

While the appellant’s transactions were with some one hundred corporations, those involving the shares of Northern Exploration Ltd, Kelly-Desmond Mining Corp and Gaspésie Mining Co Ltd proved to be the most profitable for the appellant (see Exhibit R-2).

In 1962 the appellant held shares in Northern Exploration Ltd valued at $10,000. In the ensuing years, the appellant was allegedly involved in marketing, promoting and issuing Northern Exploration shares. In recognition of his activities, he was allowed to purchase an appreciable block of that corporation’s shares at a price representing approximately one-half their value. The appellant subsequently resold these shares. Evidence showing that the appellant participated in a financial operation known as a “pool” by purchasing 150,000 shares of Northern Exploration has not been contradicted. The Securities Commission advised the appellant to take the necessary steps to create a market and keep it stable in transactions involving Northern Exploration shares. The evidence shows that a considerable number of shares was purchased and resold by the appellant that same day through some fifteen brokers. On various occasions, the appellant used the name of his wife, his secretary, Georges Girard Inc and others in order to carry out transactions that were in fact his own.

From these many transactions in Northern Exploration shares, the appellant allegedly made a profit of $245,715.22.

For the purposes of these appeals it is of little importance whether the appellant was engaging in washtrading, or whether it is legal to trade securities in someone else’s name. The only question before us is whether or not the appellant was carrying on the business of dealing in securities.

In my opinion, the facts show without a doubt that, although he was not licensed to do so, the appellant not only effectively acted as a dealer in securities, but also took on the role of stockbroker and promoter in many transactions, especially those involving Northern Exploration shares.

In addition, I have difficulty in believing that the appellant devoted all his time and effort to building up his insurance business, as he claims, when it was made clear during his testimony that he was not only highly competent and most knowledgeable in the securities area, but he also had, during the relevant years, devoted special attention to the purchase and resale of short-term stock, and had taken numerous significant steps to put the Northern Exploration shares on the market.

I think it should also be noted, in deciding the case at bar, that, according to the financial statements adduced by the appellant, his income from his insurance business was some $7,800 per annum, and the net profit of the insurance company during the years with which we are concerned averaged between $15,000 and $20,000 per annum— a tiny fraction of the appellant’s net income from his share transactions.

Hence, in my opinion, because of the nature of the transactions, their frequency and volume and the appellant’s purpose as well as his activities in numerous short-term stock transactions, the Board has no choice but to conclude that the appellant was carrying on a trade in securities during the years in question.

However, the evidence submitted by the appellant shows that in 1964 he sold some Regent Finance Corporation shares that he had held since 1953, and realized a gain of $39,021.02 on this transaction. In his testimony, the appellant stated that these shares had been reluctantly sold for reasons over which he had no control. in my view, though this capital gain may subsequently have been used in a stock-trading business carried on by the appellant, nevertheless, according to the appellant’s evidence, which was not contradicted by the respondent, the source of this amount was the sale of shares which had been held by the appellant for eleven years. I think it is clear that these shares were a long-term purchase, and one may reasonably conclude that the appellant truly meant to invest in Regent Finance Corporation. I must accordingly conclude that the sale of shares of Regent Finance Corporation that had been held for eleven years was for the appellant a liquidation of an investment, and the profit realized from this is consequently a capital gain.

For these reasons, the appeal is dismissed with respect to the 1962, 1963, 1965, 1966, 1967, 1968 and 1969 taxation years, and allowed in part for the 1964 taxation year, and the matter referred back to the respondent for reconsideration and reassessment in order to take into account that the $39,021.02 profit realized by the appellant in 1964 from the sale of Regent Finance Corporation shares was a non-taxable capital gain. In all other respects, the appeal in respect of the 1964 taxation year is dismissed.

Appeal allowed in part.