Capital Loss v. Loss

An individual, whose career had included senior positions at a stock brokerage, and who had a significant long-term holding in common shares of a public company (BNS), entered into a cash-settled forward which had the effect of establishing a short position against a portion of his BNS shareholding. However, the “storm clouds,” which he had correctly anticipated, blew away more quickly than feared and, approximately eight years later, he closed out the forward at a loss. Consistently with his intentions all along, he continued to hold his BNS stake thereafter.

This loss was fully deductible unless the forward was a hedge of a capital investment (his BNS shares). Lafleur J stated (at para. 86) that to be such a hedge, an instrument must be “directly linked (or symmetrical) to the underlying asset that is the subject of the hedge in terms of both quantum and timing.” She found that this test was not satisfied here given inter alia that “the settlements [under the forward] were not based on any anticipated sale of the BNS shares and the sale of BNS shares by Mr. MacDonald did not occur in close proximity to the settlements” (para. 107).

The taxpayer, who was a professional engineer, invested heavily in the shares of one public company (“Central”) (as a result of investing more and more as its share price went down), which became bankrupt in 1992. He initially borrowed from the banks to fund his investments until his credit with them ran out, after which he borrowed heavily on his credit cards. He had not traded in securities since then. In 2012 and 2013, the Appellant he deducted non-capital losses which he carried forward from the earlier years as well as continuing to deduct interest on his outstanding debt relating to the earlier investments.

Masse DJ concluded that the taxpayer’s claimed non-capital losses did not exist as he had not been carrying on a business: his trading had never shown a profit, he had no formal training in securities trading, he borrowed on credit cards at a 20% interest rate and dealt in only one security. Furthermore, his virtually complete failure to keep records meant that he was not in a position to demonstrate th existence of a business.

The taxpayer, whose business was the production and sale of manufactured homes, disposed of a number of assets to a related company, including shareholder loans to two partly-owned companies ("Valley" and "Lakeside"), which operated trailer parks. The companies would establish and sell lots and manufactured homes to occupy the lots. The taxpayer deducted non-capital losses on the disposition of the shareholder loans to a related company, which was prompted because a purchaser of the taxpayer's shares was not interested in these assets.

Graham J allowed the deductions. After affirming the taxpayer's position that the fair market value of the loans at the time of disposition was less than their book value, Graham J found that the losses were on income account, noting that this case was similar to Paco. The taxpayer was in the business of lending money (e.g. transactional or start-up financing for its dealers), but the shareholder loans were not part of this business, as the factors that characterized the taxpayer's usual loans (such as security) were not present.

However, Graham J also found that the money was lent for the purpose of earning income in the taxpayer's own business in selling manufactured homes given that Valley and Lakeside were an outlet for sales of its manufactured homes, so that on this ground the losses were deductible on income account.

The taxpayer, whose principal source of income was his RRSP, received distributions of $63,750 on an investment made outside his RRSP in a purported foreign currency trading fund promising a fixed yield of 17.5% p.a., before the fund's fraudulent nature was discovered. His $186,250 loss was not from an adventure in the nature of trade because the evidence was clear that the taxpayer approached the $250,000 investment as an investor and not a trader, including that the investment was held passively and was locked in for 28 months (para. 55). Respecting his active trading of investments held in his RRSP, "trades within an RRSP are not relevant in deciding whether an individual is in the business of trading" (para. 48).

C Miller J found that the taxpayer, an engineer by profession, was engaged in a business of stock trading and that his deduction of losses should be allowed. His time investment (25 hours per week) on investment reading and trading, and the nature of his trading activities, were consistent with an adventure in the nature of trade. The taxpayer engaged in 160 trades in a single year, representing a value of $3,237,279, which was approximately four times his total investment capital.

C Miller J stated (para 21) "I agree that there is no magic formula, no bright line test, that if you engage in say over 50 transactions it must be an adventure." He found that the evidence at hand tended to show a businesslike approach to the taxpayer's trading.

Sheridan J. found that, on balance, the taxpayer's characterization of his share trading as an adventure in the nature of trade was correct and his losses were on income account. The frequency of trades suggested that the transactions were capital in nature - trades were done in only 5%-10% of the days in a given year, with shares held for an average of 60+ days. However, the taxpayer sometimes would hold shares for a matter of days or even hours, and he tended to trade mainly in three stocks. The taxpayer was also heavily over-leveraged. The taxpayer's full-time employment did not substantially interfere with his ability to devote his attention to managing his trades because his job entailed monitoring the markets with professional tools.

The taxpayers were unsuccessful in deducting as a loss the amount of a loan allegedly made by their law partnership to a corporation ("EM Diagnostics") to finance the research and patenting of new breast cancer screening techniques. In addition to doubting on the evidence that the partnership had made such a loan, Boyle J. noted that the loan had no apparent connection to the partnership's business.

Losses sustained by the taxpayer, when most of the property used by him in a business of selling pirated satellite television signals was seized by the RCMP, were fully deductible. Most of the property was inventory, and the balance of the property gave rise to a terminal loss.

The taxpayer sustained a total loss with respect to a joint venture to buy laptops and resell them at a gain, given that a purported vendor of the laptops was engaged in fraud. The taxpayer's loss was a fully deductible loss given that he and his co-venturer attended meetings with the seller's representatives and were not mere passive investors.

However, in another transaction with the same vendor, the loss was a capital loss and not a fully deductible loss given that the taxpayer played no active role and had no knowledge of the details of the transaction, which suggested that there were no indicia of a business.

The taxpayer disposed of a development property to a wholly-owned corporation on capital account rather than as inventory given that her practice had been to hold properties indefinitely as rental properties, and such transaction represented only a change in the form of her ownership of the property.

The taxpayer obtained a guarantee of the obligations of a US-resident sister corporation ("Fusion") to a US bank for the purpose for the purpose of capitalizing Fusion's operations. Accordingly, when it agreed to repay the loan to Fusion when Fusion became insolvent and the guarantee otherwise would have been called (which would have adversely affected the taxpayer's with the guarantor), the resulting loss to it was a capital loss. The principle (at para. 36) that "if payment under the guarantee is made for income-producing purposes related to the taxpayer's own business and not that of the corporation for which it repays the loan, then the expense may be treated as being on income account" did not apply.

Substantial advances which the taxpayer made to a U.K. subsidiary were made because the taxpayer's customer (Ford Motor Company) was requiring the taxpayer to operate on a global basis and the taxpayer feared that it would cease to be a major direct ("Tier 1") supplier to Ford if it did not maintain U.K. operations. As the advances were made in order to safeguard the taxpayer's stream of income from its Canadian business, the losses when sustained were currently deductible.

A corporation ("MAALSA") that was jointly funded by the taxpayer and two other provincial wheat pools transferred vacant land held by it to the taxpayer and the other wheat pools in satisfaction of debt that represented over 10 times the fair market value of the transferred property. Bowman, C.J. found that although the cost to the taxpayer of the land acquired by it was deemed by s. 79.1(6) to be equal to the amount that was owing to it, the land was acquired by the taxpayer on income account given that the Pools intended to sell the property as soon as possible after it was surrendered to them and that this transaction gave rise to an accounting profit. Furthermore, if attention were paid to the entire sequence of events, this did not help the taxpayer as the circumstances established MAALSA also held the land as inventory.

Losses which the taxpayer, who was the Vice-President (Finance) of a start-up company, realized on disposing of shares of that company, most of which he had acquired through the exercise of employee stock options, were found to have been realized on income account given his evidence that he was responsible for promoting the company's stock among investors and devoted virtually all his time to monitoring and assessing the performance of the shares, and that he intended to resell his shares for profit at the earliest best opportunity.

The taxpayers invested directly in the shares of a real estate development company that was developing a golf course (and of a related corporation that it was proposed would carry on operations of the golf course) but used a holding company to lend money on an interest-bearing basis to fund the project. Miller J. would have found that any loans made by them to the real estate development company would have been on income account given the speculative nature of the venture and their intention to have the golf course sold once it was operational. However, the loans advanced by them to the holding company were an investment so that the loss sustained by them on those loans was on capital account. Miller J. noted that if the project had been successful, the holding company would have received principal plus interest on its loans to the development company.

The taxpayer, a lawyer, who followed a practice of lending to start-up private companies and receiving shares of the companies (generally a 50% bloc) for nominal consideration, with a view to realizing gain after the companies had raised further funds through private placements or by going public. A loss he sustained on such a loan was on income account.

The taxpayer, who in 2001 had made 151 purchases of stock in 16 companies, which were held for short periods of time, was found to be engaged in a business in the ordinary sense of the word with respect to his trading activities, with the results that the losses he sustained were on income account.

The taxpayer, who worked as a mining engineer for a junior exploration company, realized losses on capital account when he sold shares of his employer that he had acquired earlier in the year on the exercise of employee stock options given that his trading activities were limited to the sale of shares of his employer over several years, and he did not have any education, training or certification in stock trading and there were no other "badges of trade".

Sums which the taxpayer, a franchisor, advanced to another company ("991830") that was 2/3 owned by executives of the taxpayer and 1/3 owned by the individual operator of 991830 was found to give rise to a loss on income account when a 991830 terminated its operations, on the basis of a finding that the taxpayer made loans to various new franchisees in the ordinary course of its business activities in order to help the franchisees set up their businesses and thereby generate royalty income to the taxpayer.

Advances made by the taxpayer to its subsidiary to refinance receivables owing by the subsidiary to it were characterized as being made for the purpose of providing the subsidiary with working capital and as, therefore, being on capital account. The resulting loss is a capital loss rather than a fully deductible expense.

The taxpayer, who acquired shares of Tee-Com in 1995, 1996 and 1997 and disposed of the shares at a substantial loss in 1997, was found to have realized such losses on capital account. The frequency of his transactions was not high (approximately 11 purchases during the period), the length of his holdings did not show an intention for a "quick flip", he did not have any special connection with Tee-Com, and it was not unusual for an investor to spend significant time research and monitoring his investment. Furthermore, losses realized in 1995 and 1996 were reported on capital account, and there was no evidence to justify a change to income-account treatment in 1997.

Before going on to find that a loss realized by a stockbroker on the insolvency of a partnership carrying on a restaurant business in Greece was on capital account, Miller J. stated (at p. 2188) that "to overcome the normal status of a partnership unit as capital property is a more onerous task than doing likewise for shares, simply due to the nature of the structure", and noted that there was no evidence of conduct that was more consistent with the intention of the taxpayer being to enhance the value of the business with a view to resale at a profit, rather than carrying on the business with a view to profit.

The taxpayer, who was a stockbroker, capitalized a holding company with shares and debt in order for the holding company, through a subsidiary, to acquire a franchise. The loss sustained by him was on income account in light of his intent to make the franchise profitable and sell it for a quick profit, and in light of the short ownership of the franchise (less than two years) and bank financing of the franchise.

The promoters of limited partnerships were traders in real estate and sold properties to the partnerships with the intention that the partnerships would sell them at a profit as soon as possible. Accordingly, losses arising from write-downs of the properties that were allocated to the taxpayers were deductible by them.

Debts owing by an affiliated company to the taxpayer that arose from the payment by the taxpayer of third-party expenses of the affiliate were found to be deductible on income account on the basis of evidence that the controlling shareholder's purpose in creating the affiliate was to improve the profitability of the taxpayer both by providing an expanded market for its products and by reducing its overhead costs.

The Taxpayer's U.S. subsidiary developed over time a large balance owing to the taxpayer in respect of products and equipment sold by the taxpayer to the subsidiary for a profit and as a result of the taxpayer paying for various other expenses of the subsidiary. The Minister's disallowance of a deduction by the taxpayer of the amounts owing to it by the subsidiary was confirmed on the basis of a finding that Rip TCJ. that, by cancelling portions of the debt owing to the taxpayer, it contributed such portions to the subsidiary's capital and that such contribution represented a change of use of the money from a trade debt to capital.

The taxpayer paid licence fees owing by a corporation of which he was a shareholder on an understanding that the corporation would reimburse him through issuing flow-through shares to him. This undertaking was not fulfilled and McArthur TCJ. affirmed the reassessment of the Minister that the payment by the taxpayer was a capital loss.

A loss sustained by the taxpayer, the deputy chairman and the director of a public corporation, when he sold shares of the corporation approximately 11 months after acquiring them on exercise, was a capital loss.

In finding that the taxpayer realized a deductible loss on the sale by him of Saskatchewan Potash Corporation convertible bonds that the taxpayer had purchased 11 months previously, Teskey TCJ. stated (at p. 1225):

"A taxpayer who borrowed the total purchase price of the securities, for a fixed one-year term at an interest rate in excess by approximately 3% to 4% above the return the securities being purchased would produce, cannot be said to have made an investment in the circumstances herein, where the Appellant had no way of paying off the indebtedness incurred except by sale of the bonds."

A loss suffered by the taxpayer as a result of his guarantee of a bank loan made to a company in which he had a share investment, and related accounting fees, were non-deductible given that the evidence did not disclose that the taxpayer showed a clear intention that he was acting as a trader when he bought the shares or when he guaranteed the bank loan, or that he purchased the shares with the intention of transforming the company in order to turn it into a profitable enterprise and sell his shares. In addition, the loan was made for the purpose of providing working capital to the corporation.

Lamarre Proulx, TCJ. accepted the taxpayer's evidence that he and other investors, who had capitalized a numbered company in order to indirectly purchase a ceramic tile manufacturing plant that had just declared bankruptcy, had no intention to become tile manufacturers and had no knowledge of ceramic tile production but, rather, intended to resell their shares in relatively short order once the plant was in full operation. Accordingly, a loss on income account was realized when their investment became worthless.

Over a four-year period the taxpayer provided consulting services to a corporation partially-owned by it ("ADT") and included the fees in its income. These services represented approximately 1% of its total work. When it sold the fee receivables to the other shareholder for approximately 1/6 of their face amount, it was entitled to deduct the loss:

"The evidence establishes that the Appellant's trade account with ADT had not at any material time constituted a form of equity financing or investment in ADT, that its genesis was the Appellant's income earning operations, that it had not gained any separate characteristics by the passage of time or by the manner it was reflected in ADT's financial statements and that it remained a trade account until its disposition (p. 2025)."

The collapse of the taxpayer's currency trading and banking subsidiary would have effectively terminated the taxpayer's business (through a loss of creditor confidence). In order to prevent such a collapse, the taxpayer agreed that it would contribute £50 million to the subsidiary, sell the shares of the subsidiary to the Bank of England for £1 after which the Bank of England would provide the requisite financial support to the subsidiary. In finding that the £50 million payment of the taxpayer was deductible, Lord Keith stated (p. 326):

"A number of decided cases make it clear that a payment made to get rid of an obstacle to successful trading is a revenue and not a capital payment ... This must be no less true of a payment made to save the whole of an existing business from collapse."

The taxpayer entered into an agreement with the corporation owned by him and his wife to be paid fees in full consideration for providing guarantees of loans to be made to the corporation by The Royal Bank. However, in the absence of specific evidence that the fees actually paid by the corporation to the taxpayer were consideration for the provision of guarantees rather than for other services, Bonner J. found (at p. 1096) that the "guarantees were not shown to have been given in the course of a business or adventure in the nature of trade involving the provision of guarantees for reward". In addition, in the taxation year in question the taxpayer's quantum of liability under the guarantees was not fixed: negotiations with the bank in this regard were not concluded until four years later.

In finding that losses sustained on non-interest bearing advances made by the taxpayer to a real estate corporation of which the taxpayer was a shareholder and losses sustained pursuant to a guarantee were on capital account, Christie A.C.J. declined to follow the reasoning of Reed J. in the Cull decision.

A corporation whose business included the development and sale of real property and the sale of accounts receivable realized a deductible loss when it made a sale to its parent corporation of accounts receivable with a face amount of $300,000 for a sale price equal to their estimated fair market value of $239,730, with the sale price being satisfied by way of set-off against a dividend payable to the parent corporation.

An interest-free loan made by the taxpayer to an affiliated corporation that was in financial difficulty was found (without giving detailed reasons in support of this conclusion) to have been made as an adventure in the nature of trade, so that the resulting loss of the taxpayer was sustained on income account.

A loss which an air transport company sustained when a large stock of spare parts (much greater than the annual quantity required for the maintenance of its aircraft) was destroyed in the Second World War, was a capital loss.