Table of Contents


Shares as investments

It has been suggested that shares are investments if the primary purpose of the investor in acquiring them was to generate dividend income - with share sales occurring in order to acquire alternate sources of dividend income (Gairdner Securities, see also Foreign Power). If this test were the touchstone for determining whether shares are capital property, most shares would be held on income account, as investors typically acquire shares with a view to capital appreciation, particularly in eras when dividend yields are low. However, in Irrigation Industries, the Supreme Court recognized that shares (in that case, shares of a junior mining company which did not yield dividends and which were held only for a period of weeks) "constitutes something the purchase of which is, in itself, an investment", and that the entering into of a transaction with the intention of disposing of shares at a profit as soon as there was a reasonable opportunity of doing so was not, by itself, sufficient to make that transaction an adventure in the nature of trade.

Accordingly, it would appear that something more is required in order for a purchase of shares to be on income account than a low or non-existent dividend yield (see Imperial Stables, Busby) and a relatively short holding period (Gold), although these factors, when combined with others, may assist in finding that the shares were acquired on income account. In other words, dispositions of shares are prima facie on capital account (Weldon, Atwater).

Trading volume/length of holding

Income account treatment may be accorded to the taxpayer where the taxpayer has many of the characteristics of a trader in securities. One of the indicia of trading in this sense includes engaging in a large volume of share transactions with relatively short holding periods (Karben Holding, Darke, McGroarty, Hawa). However, a relatively large volume of trading is not indicative of being a trader where it concerns one stock, and the taxpayer is repeatedly buying the stock in question until the taxpayer commences to repeatedly sells off its position in the stock, in contrast to the trading of a trader or dealer which "is characterized by buy/sell, buy/sell and not by buy/buy/buy" (Imperial Stables.) Furthermore, "the fact that a person buys and sells shares at a short interval is not, by itself, conclusive that the person is a trader or that the venture was in the nature of trade" (Leng).

In one case, gains or losses from the disposition of shares that had been held for less than approximately one week were directed to be assessed on income account (1338664). However, in another case, Rip J. found that the methodology of the Minister in treating shares held 365 days or fewer as on income account, and those held more than 365 days on capital account, " was arbitrary and without any reasonable basis", and allowed the taxpayer's appeal (Strassburger).

Business or background of taxpayer

Another indicator of a trader is that the taxpayer has specialized knowledge of the markets (see Forest Lane, Imperial Stables, McGroarty) or special knowledge of the companies in question or receives the shares as a de facto promoter or underwriter of the companies (Whittall, Pollock, Watts Estate, Osler Hammond cf. Grohne).

Similarly, shares or share options received as additional compensation for lending money to a high-risk borrower generally will be acquired on income account where the business of the taxpayer includes the making of such loans (Roynat).

A taxpayer, such as a bank, which normally holds most of its assets on income account, nonetheless typically will hold the shares of subsidiaries on capital account, and this can be the case even where the subsidiary was formed to avoid a loss on loans to one of the bank's customers (see Waylee).

S. 142.5(1) now deems most shares held by various financial institutions (defined in s. 142.21)) to be held on income account other than shares of subsidiaries or other "excluded property." Even before the enactment of s. 142.5(1), it was the view of CRA that such shares held by financial institutions such as banks and insurance companies generally were held on income account (13 June 1991 Memorandum; 18 March 1991 T.I.; 10 September 1990 T.I.).

Margin trading

The acquisition of shares on a highly leveraged basis, so that foreseeable fluctuations in their price could result in a requirement to sell them, e.g. as a result of a margin call, may also be indicative of a trader (Karben Holding, McGroarty, see also Tamas, Gold, Campbell).

Investment of time and skill

The application of a "business-like strategy" to the trading of stocks favours a finding that the trading is on income account (1338664). Similarly, the devotion of significant time to the taxpayer's stock-trading activities may suggest that they are on income account (McGroarty) and, conversely, not devoting significant time respecting when or how to trade shares is generally consistent with trading on capital account (Sandnes, Kriplani).

Speculative shares

Some decisions also have mentioned the nature of the shares acquired and sold as being speculative (rather than blue chip) and without a dividend yield as supporting a conclusion that they were acquired on income account (Placements Bouget, Wellington, McGroarty).

Relevant time of formation of intention

The relevant time for determining whether the taxpayer's intentions were such as to make a shareholding a trading asset or capital property may be the time at which the taxpayer entered into a binding contractual commitment to acquire the shares (Western Wholesale, Relevant time of intention.)

Indirect sales of real estate inventory or mining claims

Where a corporation holds a single real estate property (or land assembly) that is inventory and, in the circumstances of the case, a sale of the shares is merely an alternative method for realizing on the value of the real estate inventory, the sale of the shares likely will be on income account (Fraser, Mould, Cull, Burgess, see also Dumas).

Essentially the same principle applies where shares of exploration companies are sold as an alternative to the sale of mining claims (or oil and gas leases) that have been acquired by the companies in the course of a business of developing and disposing of them (McAdam, McKinley), or where the shares are received as consideration for the sale of mining claims that were acquired, or acquired and promoted, on income account, so that a sale of the shares is a means of realizing a profit from such activity (see Watts Estate).

This doctrine is unlikely to be applicable where the taxpayer only sells a portion of the taxpayer's shares of the company with a view to continuing to participate in the development of the company's business (Weldon, but cf. Watts Estate).

Maintenance of inventory status

Where a person such as an investment dealer acquires shares as part and parcel of its business activities so that the shares are inventory of its business, such shares likely will maintain their status of inventory rather than becoming capital property notwithstanding that they are held for a significant period of time (Osler Hammond, Gairdner Securities).

Gains on sales of shares of turnaround companies

As discussed above (Loan discounts on purchases of distressed debt), where an entrepreneur acquires the debt of a company in financial difficulty with a view to turning the company around, so that the debt (which was purchased at a substantial discount from the amount owing) may be repaid in his or her hands at a substantial gain, any such gain subsequently realized by him or her will be considered to have arisen from an adventure in the nature of trade, and will be taxable.

This is part and parcel of the broader principle that where a taxpayer makes a business of taking over old businesses, making over those businesses and then realizing a gain from the improvement in the business by selling shares or other securities of the company holding the transformed business, such gain is realized on income account (Atwater). Accordingly, it has been suggested that acquiring effective control of run-down companies with a view to turning them around and selling the shares at a gain should viewed as a business activity rather than as investing (Gairdner Securities); and it has been found that if a loss instead was realized on such a venture, it was on income account (Factory Carpet, Faucher). Similarly, where the taxpayer acquires shares of a loss company in order to transfer a profitable business to the company, with a view to realizing a gain on the shares when the (tax-sheltered) profits of the company are distributed as redemption or liquidation proceeds, such shares likely will be considered to have been acquired on income account (Malka, Evans, Bossy).

Presumption of consistency

In a close case, there is a presumption that where a taxpayer has reported gains in previous years on share sales as being on capital account, losses in the year under consideration also should be treated as having been realized on capital account (Kriplani, Rajchgot, see also Le Bel).

Exercise of options, and sale

In determining whether a gain from the disposition of shares or other property, which was acquired on the exercise of an option, was realized on capital or income account, it generally will be appropriate to have regard to the taxpayer's intention at the time at which the taxpayer acquired the option, rather than to have regard to the fact that at the time of exercise of the option, the taxpayer's intention was to immediately dispose of the shares at a gain over the exercise price (see Options).

Employees who exercise options pursuant to an employee stock option plan and then continue to hold the shares acquired by them on exercise for some time rather than immediately disposing of them generally will be unsuccessful in submissions that a loss realized on such disposition was on income account (Baird, Ellis), notwithstanding that they have special knowledge (or at least familiarity) respecting their company (see Sullivan, Corvalan, Robertson).

The acquisition of stock options, otherwise than under an employee stock option plan, as an "isolated" transaction, followed by their exercise and sale of the shares, very well may also be on capital account (Busby), even if the sale of the shares occurs over an extended period (Sandnes).

Rollover and other non-trading transactions

The acquisition of shares with a view to immediately selling them for their fair market value but realizing a loss thereon for tax purposes likely is not a trading transaction (Hollinger). This is consistent with the similar principle that if, as a commercial matter, the transaction in question is intended to produce a loss rather than a gain, it likely is not an adventure in the nature of trade even if the provisions of the Act deem there to have been a realization of gain ("Adventure" determined on commercial principles?; 20 March 2012 T.I. 2012-0438651E5).

CRA generally does not consider that non-depreciable property changes its character as such when it is transferred on a rollover basis to an affiliate (Income Tax Technical News, No. 7).

S. 54.2 deems shares issued to a taxpayer in consideration for the transfer of substantially all the assets of an active business to be capital property. Where shares have been issued by a corporation as consideration for real property transferred to it and s. 54.2 does not apply, CRA nonetheless generally will consider those shares to be capital property (25 October 1991 T.I.).

Shares acquired for resale so as to generate an artificial gain may be found to have been acquired on income account even though there is no commercial profit generated on the resale given that their character may be imbued with the intention of the principals to market and profit from their tax-savings scheme (see Faraggi).


Canada v. Lysanne Gendron, 2016 CAF 1

preordained resale of shares at no commercial profit was not an adventure

After a third party ("BW") had made an offer to purchase the shares of a Quebec manufacturing company ("Vulcain"), Mr. Gervais sold 1.04M Vulcain preferred shares (having a modest ACB) to his wife ("Mrs. Gendron") in consideration for a promissory note (payable in five annual instalments) and elected that s. 73 not apply to produce rollover treatment. Mr. Gervais then gifted a further 1.04M preferred shares to Mrs. Gendron on a rollover basis. Two weeks later and at the same time as the Vulcain common shares were sold by the other shareholders, Mrs. Gendron sold her 2.08M preferred shares to BW for $2.08M. She treated half of her $1M capital gain as being attributed to her husband (as that was the portion which she had acquired on a rollover basis), and treated the other half of the capital gain as being hers (for which she claimed the capital gains exemption).

In reversing the finding by Jorré J below that Mrs. Gendron's resale of the 1.04M preferred shares occurred on income account given that ”not only was there a rapid resale, but the resale… was programmed in advance,” Boivin J stated (at para. 32, TaxInterpretations translation):

The sale by Mrs Gendron of the shares purchased by her was predetermined and she sold at the same price as that at which she acquired them. Mr. Gervais did not realize any profit from the transaction. In these circumstances, even though the sale of the shares was “programmed in advance”…it appears to me to be at the very least incongruous to impute to Mrs. Gendron a reasonable expectation of profit and to categorize this transaction as an adventure or concern in the nature of trade.

Her sale of the gifted shares also occurred on capital account.

As Jorré J had not considered whether on the facts s. 245(2) applied (as contended by the Crown) to deny the recognition of capital gain by Mrs. Gendron so as to utilize the capital gains exemption, the matter was remitted to the Tax Court for review of this issue.

Baird v. Canada, 2010 DTC 5035 [at 6653], 2010 FCA 35

The taxpayer left the employment of his employer, a public corporation, in February 2000, exercised his employee stock options in December 2000, and sold those shares in March and April of 2001 and in March 2002 after they had declined in value. The Court of Appeal found no reason to interfere with the Tax Court's finding that the taxpayer (whose trading activities were limited) did not behave as a trader in relation to his shares. His losses were on capital account.

2529-1915 Québec Inc. v. Canada, 2009 DTC 5023 [at 5585], 2008 FCA 398

shares acquired for immediate resale as part of capital dividend account generation scheme were on income account

Overview of facts. The two individual taxpayers devised a scheme to: generate artificial capital gains of $110 million in some home-grown companies; pay the supposedly resulting capital dividend accounts (CDAs) of $55 million to another company (1915); generate artificial capital losses in the home-grown companies to offset their capital gains; effectively sell negotiated portions of the CDA to 3rd-party purchasers by having them subscribe for preferred shares at a 21% premium to their redemption amount with the shares' redemption amounts effectively being flowed out to the 3rd parties as purported capital dividends; and then pocketing such subscription "premiums" as capital dividends paid out to them. A more detailed summary of the facts is under s. 83(2).

Gains generated on income account. Noël JA found that the "gainmaking" shares which were acquired for the purpose of their immediate resale so as to give rise to such gains were acquired on income account, given that "property acquired for resale is held on account of revenue" (para. 73).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham capital dividend elections for distributions of what should have been known to be income-account gains were shams 266
Tax Topics - General Concepts - Tax Avoidance capital dividend elections for distributions of what should have been known to be income-account gains were shams 266
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business shares premiums received for marketing tax scheme were business income 213
Tax Topics - Income Tax Act - Section 83 - Subsection 83(2) capital dividend elections for distributions of what should have been known to be income-account gains were shams 718
Tax Topics - Income Tax Act - Section 9 - Exempt Receipts/Business shares premiums received for marketing tax scheme were business income 223

Ellis v. The Queen, 2007 DTC 996, 2007 TCC 289, aff'd 2008 DTC 6230, 2008 FCA 92

Shares which the taxpayer acquired mostly pursuant to an incentive stock option plan and which he did not sell on exercise given that, as CEO, he did not wish to create a negative market impression, but which he instead pursued monetizing pursuant to a forward exchange contract without ultimately proceeding with such an arrangement, gave rise to a capital loss when he ultimately disposed of them.

Evans v. Canada (Attorney General), 2003 DTC 5329, 2003 FCA 218, aff'g sub nom. Bossy v. The Queen, 2002 DTC 1763, Docket: 2000-1817-IT-G (TCC)

The taxpayers had transferred a profitable consulting business to an unprofitable management consulting firm ("TF&B) while at the same time being sold Class C shares of TF&B at a discounted price. The shares were redeemed 26 months later after the taxpayers had received dividends thereon.

In the Tax Court below, Beaubier TCJ had found that the gain on this share redemption was on income account given that the taxpayers acquired the shares with the "main purpose and intent of obtaining a profit from their redemption by means of the insertion of their consulting practice's income into TF&B" (para. 25), with such profits (which were many times their professional incomes) being the result of their efforts (para. 21). He had not made a pure error of law in so concluding.

McGroarty v. the Queen, 94 DTC 6276, [1994] 2 CTC 52 (FCTD)

Gains realized by the taxpayer from various sales of the shares of two Vancouver-listed stocks were on income account given his background and position (as a former licensed stockbroker who acted as communications officer for the companies), the frequency of transactions (300 different purchases of shares over a five-year period, and an even greater number of sales), the leveraged financing of his purchases, the nature of the companies (resource companies not paying dividends), and the considerable amount of time he spent tracking and trading the stocks.

Forest Lane Holdings Ltd. v. The Queen, 90 DTC 6495, [1990] 2 CTC 305 (FCTD)

It was found that two private companies, which were controlled by an individual who was a senior manager at a Canadian securities dealer, held the securities which it acquired "in the main for a short period of time and for the purpose of as quick a turnover as possible" (p. 6505). Many of the shares acquired were of resource companies which did not bear dividends, and the intention of the individual with respect to many of the transactions "was to profit from the rumour of takeover or from an actual takeover" (p. 6500). The extensive trading activities of the companies gave rise to gains on income account.

Sullivan Estate v. The Queen, 90 DTC 6191, [1990] 1 CTC 170 (FCTD)

An executive of a mining company ("Pacific Copper"), at a time that he anticipated that Pacific Copper would later dispose of its shares in an Australian subsidiary at a substantial gain, was granted employee stock options by Pacific Copper. Ten months later, when the market value of shares of Pacific Copper had climbed to reflect the sale, he exercised the options and realized employment income under section 7. A subsequent loss which he realized on the disposition of those shares approximately a year after the exercise date was realized by him on capital account.

Pollock v. The Queen, 90 DTC 6142, [1990] 1 CTC 196 (FCTD), aff'd 94 DTC 6050 (FCA)

The taxpayer, who was an experienced mining engineer, was held to have realized gains on income account from the disposition (generally a short time from their acquisition) of shares of mining companies of which he was a key employee. Although the majority of the shares had been acquired by him on the exercise of employee stock options, others had been acquired by him on the exercise of promoters' warrants, as bonus shares for his services, on the intial capitalization of the company, or on the open market. McNair J. distinguished Irrigation Industries on the basis of the multiplicity of the taxpayers' transactions involving the four companies and also noted that the taxpayer "was not a typical employee awarded an occasional stock option as an incentive or compensation for exceptional services rendered" (p. 6149) but instead was actively involved in the decision-making process leading to the granting of the options.

Imperial Stables (1981) Ltd. v. The Queen, 90 DTC 6135, [1990] 1 CTC 213 (FCTD), aff'd 92 DTC 6189 (FCA)

The taxpayer, which for convenience was referred to in the reasons for judgment by the name of its controlling individual shareholder ("Culley"), who had a history of making large stock market purchases of shares which were held for a very short period of time. The taxpayer purchased, primarily in the summer of 1981, over $1.2 million of Dome Petroleum shares, held those shares through a falling market and eventually liquidated its position commencing in June 1982 for a loss of over $900,000. Although Martin J. had no doubt (p. 6141) that "there was in Mr. Culley's mind at the time he acquired the Dome shares the possibility that he would sell them quickly if the price should rise to an acceptable level", Martin J. accepted the view of the Crown's expert witness that the Dome share transactions did not have the hallmarks of those of a trader or dealer in securities. "The trader or dealer is characterized by buy/sell, buy/sell and not by buy/buy/buy which is what Culley did" (p. 6140). When the market price of Dome shares declined, Culley averaged down rather than quickly cutting its losses. In addition, Culley had no specialized knowledge of the market, acquired the shares with its cash rather than borrowed funds, and made no special effort to study factors which would affect the price of the Dome shares. "The fact that there was no income from the shares by way of dividends is of no significance for no doubt Culley was expecting, when [it] eventuallly sold the shares, to sell them at a profit" (p. 6141). The loss sustained by Culley was a capital loss.

Karben Holding Ltd. v. The Queen, 89 DTC 5413, [1989] 2 CTC 145 (FCTD)

An estate incorporated the taxpayer and then transferred U.S. $1 million in assets to it. Under the direction of an investment manager the investment activities of the taxpayer "entailed the purchase generally on margin and the sale of shares and bonds within short periods of time", i.e., an average hold of about 3 months. Gains realized by the taxpayer were on income account.

Grohne v. The Queen, 89 DTC 5220, [1989] 1 CTC 434 (FCTD)

The taxpayer, who had not previously acted as a promoter, agreed along with four other promoters of a company, to purchase its shares at 25¢ per share to the extent that a rights offering was not fully subscribed for. Strayer J. was not convinced this was anything other than an isolated speculation, and held that any gains realized were of a capital nature.

Dumas v. MNR, 89 DTC 5004, [1989] 1 CTC 52 (FCA)

After the individual taxpayer had orally agreed to sell land, he was persuaded by his lawyer that it would be better for tax and other reasons to sell the shares of the company owning the land (after stripping out the other assets), rather than having the company sell the land. Pratte, J. held that in light of the fact that the land had been acquired by the company seven years after its incorporation by the taxpayer and his wife, the taxpayer had no intention of selling his shares in the company at the time he acquired them. The Fraser doctrine accordingly did not apply.

Placements Bourget Inc. v. The Queen, 88 DTC 6274, [1988] 2 CTC 8, [1988] 1 CTC 35 (FCTD)

The taxpayer was in a business of trading in securities in light of its objects, its almost daily trading of securities on margin, the speculative character of many of the shares (in mining and petroleum companies) and hold periods generally of under 12 months.

Cull v. The Queen, 87 DTC 5322, [1987] 2 CTC 63 (FCTD)

It was held that the partners in a law firm acquired the shares of a company engaged in the development as housing subdivisions of land held under option for the purpose of making a profit from that land, either through a direct sale or through a share sale. When the venture became worthless, the appellant taxpayer realized a loss on income account. "The provision by the partnership of advances to the company to keep the venture alive must be regarded as part and parcel of the venture", and the loss of those advances accordingly was also realized on income account.

Mould v. The Queen, 86 DTC 6087, [1986] 1 CTC 271 (FCTD)

The taxpayer acquired 12% of the shares of a company whose only asset was raw land which it intended to develop, subdivide, service, and then sell for building purposes. The sale of his shares 4 years later gave rise to a taxable profit since he regarded the company merely as a vehicle for achieving his end of dealing in land.

Busby v. The Queen, 86 DTC 6018, [1986] 1 CTC 147 (FCTD)

There was found to be "no broad proposition of law that invests all stock option dealings with the character of speculative trading ventures". The taxpayer, who acquired stock options in two mining companies as a result of her close personal relationship with a businessman, exercised those options, and later sold some of the acquired shares at a substantial gain. "[T]hese relatively isolated stock option transactions were not part of a regular business pattern but rather were of an investment and capital nature, even though made with the hope and expectation of an ultimate realization of profit."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(5) 56

Watts Estate v. The Queen, 84 DTC 6564, [1984] CTC 653 (FCTD)

A mining engineer, a prospector and an investment dealer representative incorporated, and subscribed to the shares of a company in order to finance the acquisition and development of mining claims in the Coppermine River area in the Northwest Territories. Less than a year later, after the company had completed a public offering of treasury shares, the individuals accepted an offer from a contact of the investment dealer representative to purchase a portion of their shares. The three individuals were aware of the highly speculative nature of their venture, they had increased the value of the shares through their activities, and the offer for their shares (which had been included in a secondary offering) did not come as a surprise to them. Their gain was fully taxable.

The Queen v. Roynat Ltd., 81 DTC 5072, [1981] CTC 93 (FCTD)

Gains from the disposition of shares and share options were fully taxable, where those shares and options were acquired by the taxpayer, whose business was lending money, as a "bonus" which it demanded as extra compensation for lending to high-risk borrowers. "A bonus is always taxable when it is obtained as part and parcel of the operation of the taxpayer's regular business."

Weldon v. The Queen, 80 DTC 6224, [1980] CTC 301 (FCTD)

The taxpayers, who were real estate developers, formed a corporation to develop a real estate property. After encountering difficulties in the development process, they sold a 1/2 interest in the company, while retaining effective control and their plan to continue with development efforts. Jerome ACJ intimated that a direct sale of the parcel by the taxpayers would have been on income, noted (at p. 6226) that, however, the "acquisition and disposition of shares is prima facie a capital transaction," and went on to find (at pp. 6226-6227) that the Fraser doctrine did not apply to their sale of shares, so that they realized a capital gain:

[T]he partial sale of shares ... has generally been a circumstance which the Courts have accepted as an indication of a capital transaction especially where either or both vendor and purchaser continue active operations of the company. See...Blok-Anderson...72 DTC 6309

Malka v. The Queen, 78 DTC 6144, [1978] CTC 219 (FCTD)

The taxpayers (1) acquired the common shares of a company with accumulated losses of $325,000, (2) had a profitable shoe-making operation transferred to the company for a price equal to the operation's book value of $87,000, (3) generated profits in the company from the shoe business until the losses were fully utilized 18 months later, (4) had the shoe business transferred back out of the company for a price equal to its book value of $312,000 and (5) realized a gain when all the assets of the company were distributed to them as a liquidating distribution on their common shares. Since this course of events was anticipated at the time of acquisition of the shares, and accordingly "the purpose of the scheme was ... upon liquidation, to have the shareholders of the company make a profit from their shares many times their cost," (p. 6148) the gains were fully taxable.

McAdam v. The Queen, 78 DTC 6133, [1978] CTC 198 (FCA)

The taxpayer was found to be engaged in a "profit- making operation or business of finding mineral properties, developing them and turning them to advantage as circumstances might from time to time make it advisable" and "carrying out some or all of such activities through the use of corporations and reaping advantages by taking shares in such companies and selling such shares." A sale of a small portion of the shares held by the taxpayer in a mining- development company in order to raise money for personal reasons gave rise to a taxable profit.

Gold v. The Queen, 77 DTC 5430, [1977] CTC 616 (FCTD)

The purchase and sale of shares of a public company within the same month by a Revenue Canada employee gave rise to a capital loss. His investments in the stock market were relatively infrequent, he did not claim the loss as a trading loss in his return or before the Tax Review Board, and there was no evidence of any speculative borrowings.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 62 102

Western Wholesale Drug Ltd. v. The Queen, 77 DTC 5021, [1977] CTC 1 (FCTD)

resale possibility was being explored when purchaser committed to the essential purchase terms

After protracted negotiations the taxpayer, which was a drug wholesaler, agreed with the American majority shareholder ("Sperti") of a drug manufacturer ("Stanley") of which the taxpayer was a minority shareholder to purchase the shares of Stanley held by Sperti. The sale of the shares over a year later gave rise to a taxable profit. "It is the intention of the purchaser of an asset when he acquires it that is crucial to the question whether that asset is an investment or stock in trade", and at the time of acquisition, which Mahoney, J. stated "cannot antedate the moment that the purchaser becomes firmly committed to the essential terms of the purchase," the taxpayer "was already actively exploring the possibility of resale."

Darke v. MNR, 76 DTC 6468, [1976] CTC 734 (FCTD)

Shares in mining companies received by a partnership (which had been formed in order to stake claims) as partial consideration for the sale of mining properties of the partnership, were received in the course of the partnership's business. The shares, when distributed to a partner, accordingly were not capital properties to him.

The partner, who traded on his own account in the shares of 55 corporations in one year, was found to be a trader in shares. "The fact that a stock trader attempts selectivity in his trades, the fact that he selects shares of corporations which he hopes will yield good results, the fact that he discriminates in his deals in ways which he hopes will be to his advantage does not eliminate him from the category of trader."

McKinley v. MNR, 74 DTC 6138, [1974] CTC 170 (FCA)

The taxpayer and the other shareholder of a private oil and gas company ("Siebens"), which was engaged in the business of dealing in oil and gas leases, had Siebens transfer leases, which a purchaser was not interested in, to a newly-incorporated company that was owned by them, and then sold the shares of Siebens to the purchaser. The gain was taxable. The Minister's assumption was not negated that the taxpayer, when he previously had acquired his shares of Siebens "contemplated that the company, by its trading operation would, over a period of time, acquire a number of oil and gas leases which could later be disposed of at a profit either by the company selling its assets or by the shareholders selling their shares."

The quantum of the gain was computed with reference to the cost of the taxpayer's shares of Siebens, rather than with reference to the cost to Siebens of the leases which in effect had been sold to the purchaser.

Wellington Hotel Holdings Ltd. v. MNR, 73 DTC 5391 (FCTD)

The principal business of the taxpayer was to operate a hotel and restaurant. However, in 1967 it began to buy and sell securities on a small scale, and by the 1969 taxation year in issue, its sales of securities represented 16% of its gross sales. In finding that the taxpayer's securities losses for 1969 were realized on income account, Urie J stated (at p. 5398):

the securities bought and sold were speculative in nature, were non-income 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...of no particular significance.

Burgess v. MNR, 73 DTC 5040, [1973] CTC 58 (FCTD)

A house builder and two business associates contributed their interests in vacant land to a newly-incorporated company with a view to the company developing the land as a housing subdivision. After the relations between the builder and one of his associates became acrimonious and before the land had been developed all three agreed to sell their shares to a purchaser.

In light of the Fraser case and the character of the land as inventory, the gain was realized on income account.

Atwater Western Corp. v. MNR, 70 DTC 6312, [1970] CTC 472 (Ex Ct)

Two individuals with extensive experience in the purchase and sale of real estate incorporated the taxpayer to acquire a long-term lease of Montreal land with a view to constructing thereon a large multi-purpose building, and then had the taxpayer contribute the lease to a joint venture company ("West End"), with the taxpayer also subscribing for 200 of the 1,000 shares of West End at $1 per share. Four years later, the majority shareholder forced the taxpayer to sell its shares to such shareholder by threatening to abort the project if this were not done.

In finding that the gain was on capital account, Jackett P stated (at p. 6314):

...there may be circumstances in which a subscription for shares in a new company, while prima facie a capital transaction, may be a mere step in the carrying on by the acquirer of a profit-making business or venture. If, for example, the acquirer made a business of taking over old businesses, giving them new images and corporate identities and then selling the shares in the new companies, a profit from the overall enterprise would be a profit from a business even though, looked at more narrowly, that profit were a profit from the sale of shares acquired by subscribing for the capital of a new company. However, I find no such enterprise here....

H.R. Whittall v. Minister of National Revenue, 67 DTC 5264, [1967] CTC 394, [1968] S.C.R. 432

The taxpayer, who was the president and majority shareholder of an investment dealer, realized substantial gains on income account from the disposition of shares of several companies of which he was a director and for which the investment dealer acted as underwriter, in addition to realizing a large gain on income account from the exchange of units in a gas syndicate for shares of the acquiring company. The taxpayer was found to have assisted materially in the marketing of the securities and, more generally, to be engaged in the business of buying and selling rights to land and securities, and therefore was not in a position of the owner of an "ordinary" investment choosing to realize it.

Minister of National Revenue v. Foreign Power Securities Corporation Ltd., 67 DTC 5084, [1967] CTC 116, [1967] S.C.R. 295

The taxpayer acquired shares of two utility companies from its parent at cost. The gains which it realized shortly thereafter were held to be realized on capital account based on a finding of the trial judge that:

"the shares in question were acquired by the respondent as investments to be held as a source of income in the ordinary course of its business as an investment company and that the reason it decided to realize these investments after a comparatively short period of time was that, in the opinion of its responsible officers, the shares had reached a price which was unrealistically high."

Fraser v. Minister of National Revenue, 64 DTC 5224, [1964] CTC 372, [1964] S.C.R. 657

sale of shares was alternate means to realize gain from real estate dealing

After being approached by Dominion Stores respecting the acquisition of a store the taxpayer, together with another individual who also was an experienced operator in the field of real estate, bought vacant land in 1952 with a view to building thereon a shopping centre (for Dominions) and an apartment building (which would provide customers for the store), incorporated two companies to hold the land in two parcels, and then sold the shares less than two years later. At the time of the sale of the shares of the shopping centre company to Dominions, the store was partially completed. The profit was made in the ordinary course of their business of real estate promotion. The sale of shares "was merely an alternative method that they chose to adopt in putting through their real estate transactions".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate sale of shares was alternative method of effecting secondary intention re land 153

Osler, Hammond & Nanton Limited v. Minister of National Revenue, 63 DTC 1119, [1963] CTC 164, [1963] S.C.R. 432

The taxpayer retained a portion of the common shares which were issued to it on an underwriting, and several years later sold a portion of such shares at a profit. Because the shares were received by the taxpayer as part of an underwriting transaction, the profits were taxable. The taxpayer also realized a taxable gain when rights which it received in connection with the same shares were exercised by it and the shares acquired in exercise immediately sold by it.

Hill-Clark-Francis Limited v. Minister of National Revenue, 63 DTC 1211, [1963] CTC 337, [1963] S.C.R. 452

The taxpayer, which in June 1952 obtained an option to acquire shares of a corporation with a view to ultimately exercising the option and making the corporation its subsidiary, in late August 1952 was approached by a potential purchaser of that corporation and in September 1952 entered into an agreement pursuant to which it exercised the option and immediately sold the exercised shares. The Court affirmed the finding of the trial judge that (p. 1212):

"... the appellant, having only an option on shares, did not carry out its plan to make Poitras a subsidiary. It exercised the option and sold the shares for cash and the other stated consideration, and this gave both the purchase and sale of the shares a trading character rather than acquisition and realization of a capital asset."

Irrigation Industries Ltd. v. The Minister of National Revenue, 62 DTC 1131, [1962] CTC 215, [1962] S.C.R. 346

shares generally an investment

The only dealing in shares by the taxpayer (whose objects did not include the purchase and sale of shares) was the purchase of 4,000 treasury shares of a junior mining company and the sale of those shares between three weeks and four months later at a gain. The trial judge, in finding that the gain was on income account, noted (in addition to the short holding period) that the purchase was made with borrowed funds, the shares were speculative and that dividends were not anticipated for some considerable time.

In finding that the gain was a capital gain, Martland J referred to cases finding that transactions in commodities or vacant land were adventures in the nature of trade, and then stated (at p. 352-3, SCR):

Corporate shares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well-recognized method of investing capital in a business enterprise.

This is not the sort of trading which would be carried on ordinarily by those engaged in the business of trading in securities. ... What the appellant did was to acquire a capital interest in a new corporate business venture, in a manner which has the characteristics of the making of an investment, and subsequently to dispose, by sale, of that interest.

Gardiner v. Minister of National Revenue, 54 DTC 1015, [1954] CTC 24, [1964] S.C.R. 66 (SCC)

trading down shareholdings held by former securities dealer

The taxpayer, which was a securites dealer, ceased in 1938 to comply with requirements of the investment dealers' association of which it was a member as a result of bank advances to it being too high relative to the value of securities held by it. It accordingly transferred its physical equipment, records and goodwill to a new company in consideration for shares, and itself ceased to be a member of the investment dealers' association, but retained the securities and the bank debts, and traded those securities and other securities between 1938 and the end of the Second World War, with 124 purchaes and 200 sales occuring. In finding that the taxpayer's gains were on income account, Rand J. stated (p. 1016):

[S]o far as the company's business included the disposal of securities held on April 30th, 1938, with resulting purchases, it was by way of completing the business admittedly carried on by the Comapnay as dealer before 1938... .

Investments, in the sense urged, look primarily to the maintenance of an annual return in dividends or interest. Substitutions in the securities take place, but they are designed to further that primary purpose and are subsidiary to it. On the facts before us, there cannot, in my opinion, be any real doubt that there was no such dominant purpose here.

Respecting a submission that a purchase of the shares of a particular corporation was effected in 1944 in order to obtain effective control of that corporation, thereby permitting the principal of the taxpayer to introduce his sons to industrial management, Rand J stated (p. 1016) that a business could include:

...a business of taking over, by means of stock control, run down industries, building them up, and disposing of them.

See Also

Procon Mining & Tunnelling Ltd. v. The Queen, 2022 TCC 71

shares which were acquired as part of a mining contract business were capital property

A mining contractor subscribed for shares of junior mining companies as an inducement to be awarded mine development work and as an investment. It argued that because it acquired the shares in order to generate business income, therefore, they were acquired on income account.

Boyle J thought this was almost backwards from the correct test, which he articulated as:

Inventory is a property acquired or produced for resale. All property held to produce income from the business other than inventory is capital property.

Losses realized on the shares after the companies failed to proceed with the mines were capital losses - which were denied, because they were "superficial" (i.e., suspended) losses.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss shares that were acquired to generate business income rather than for resale were capital property 359

Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia), rev'd on various grounds [2019] FCAFC 51

private equity fund LP with 5-year holding objective realized share gain on income account

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of significant shareholdings in a TSX-listed Australian corporation which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. The significant gains realized by RCF IV and RCF V in disposing of these investments consistently with their modus operandi, which was (per the oral evidence) to “go in, make the investment, improve the performance of the company concerned and then seek to exit within three to six years after that time, having made a profit” (para. 32) were realized on income account. Pagone J stated (at para. 50):

[T]he receipt will bear the stamp of income where the taxpayer, as here, did have the purpose of making profit from the ultimate disposal of investments. … Profitable realisation of the investment by disposal was an objective of the investment by the RCF partnerships from the beginning.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) gains of a NR PE fund from disposals of Australian share investments that were managed in part in Australia were derived from Australia 427
Tax Topics - Treaties - Income Tax Conventions - Article 3 each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” 234
Tax Topics - Treaties - Income Tax Conventions - Article 13 exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild 420
Tax Topics - General Concepts - Stare Decisis lower court not bound by a point of law that was assumed rather than examined by a higher court 292
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 89
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 198
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property 514
Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment shares of Australian mining company were primarily attributable to the processing rather than mining operations 142
Tax Topics - General Concepts - Fair Market Value - Other processing assets of mining company were more valuable than its mining assets 238

Foote v. The Queen, 2017 TCC 61

senior stock broker realized gains on a small personal portfolio on income account

The taxpayer, who was the Co‑Head of Institutional Trading at a brokerage firm (Raymond James) liquidated the stock holdings in his personal account (with a value of about $650,000) in the first two months of 2009 and then, in early March 2009, started moving back into equities. In the remaining 10 months of 2009, he purchased and sold stocks of 34 issuers costing about $2,500,000, which involved 38 purchase transactions and 50 sale transactions, with an average hold period of about 50 days, and his total gain was about $550,000 (or an overall portfolio gain of 23%, as contrasted to gains over the same period in the major markets of 40%).

In finding that the taxpayer’s gains were realized on income account, Boyle J stated (at para 50):

I conclude that Mr. Foote was trading in the securities as a business activity, or at least was buying and selling the securities as part of an adventure in the nature of trade. The key considerations …are:

  1. …{H]is primary intention … to sell …at a profit as soon as a reasonable return …could be realized.
  2. Mr. Foote spent considerable time …monitoring markets beyond what … was required for his employment. … [H]e gleaned relevant market information as part of his daily job… . [which] gave him well beyond average access to market information that is public… .
  3. The nature of the gains … bears a close similarity to what he has been doing in his investment dealer positions for decades. …
  4. Mr. Foote was buying and selling regularly throughout the year.
  5. Mr. Foote’s holding periods were clearly short and often very, very short.

Gervais v. The Queen, 2015 DTC 1026 [at 105], 2014 TCC 119, rev'd supra 2016 CAF 1

rollover followed by immediate resale

After a third party ("BW") had made an offer to purchase the shares of a Quebec manufacturing company ("Vulcain"), Mr. Gervais sold 1.04M Vulcain preferred shares (having a modest ACB) to his wife ("Mrs. Gendron") in consideration for a promissory note (payable in five annual instalments) and elected that s. 73 not apply to produce rollover treatment. Mr. Gervais then gifted a further 1.04M preferred shares to Mrs. Gendron on a rollover basis. Two weeks later and at the same time as the Vulcain common shares were sold by the other shareholders, Mrs. Gendron sold her 2.08M preferred shares to BW for $2.08M. She treated half of her $1M capital gain as being attributed to her husband (as that was the portion which she had acquired on a rollover basis), and treated the other half of the capital gain as being hers (for which she claimed the capital gains exemption).

In finding (at para. 121) that there were "'very clear' indicia of an operation of a commercial character" in Mrs. Gendron's resale of the 1.04M preferred shares, so that the resale occurred on income account, Jorré J stated (TaxInterpretations translation):

Not only was there a rapid resale, but the resale… was programmed in advance.

Furthermore, if the principle in Irrigation Industries was that "an intention to rapidly resell a share was not a clear indication of a commercial transaction, the decision would be difficult to reconcile with previous and subsequent jurisprudence" (para. 113) - but, in any event, that decision was distinguishable as it involved treasury shares (para. 117).

However, the gifted shares were acquired by her on capital account as "the simple fact of wishing to realize the value of a gift by reselling the property even if rapidly…does not signify that the sale…is a commercial transaction" (para. 130).

As the purchased shares were acquired by her on income account, s. 47 did not apply so that her full $1M gain on resale was a capital gain on the gifted shares, and all of that capital gain was attributed to her husband.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) no averaging with identical share inventory 93

Prochuk v. The Queen, 2014 DTC 1050 [at 2917], 2014 TCC 17

trading RRSP funds does not make the annuitant a trader

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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss trading RRSP funds does not make the annuitant a trader 116
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business trading RRSP funds does not make the annuitant a trader 116

Wong v. The Queen, 2013 DTC 1114 [at 606], 2013 TCC 130 (Informal Procedure)

VA Miller J found that the sheer number of trades the taxpayer engaged in - exceeding 600 over a period of five years - supported a finding that he intended to acquire securities for resale at a profit (paras. 28-34). Therefore, the Minister was correct in finding that the taxpayer's gains from those activities were profit and his appeal was only allowed in order to correct some of the Minister's calculations.

Kriplani v. The Queen, 2012 DTC 1027 [at 2629], 2011 TCC 542 (Informal Procedure)

The taxpayer, who in 2005 was a training coordinator at IBM Canada, had filed her 1999 to 2004 returns on the basis that her share and option transactions were on capital account, and Jorré J found that her 2005 losses were also on capital account. In 2005 the taxpayer traded more frequently (19 sales) and held securities for shorter periods (at least 12 were held for periods ranging from a week to four months), and she used some leverage. On the other hand, her knowledge and time investment were not noticeably beyond that of other investors. On balance, the taxpayer did not displace the Rajchgot presumption that her 2005 sales should be treated the same (i.e., on capital account) as her 1999-2004 sales (para. 30).

Charbonneau Trust v. Quebec (Deputy Minister of Revenue), 2010 QCCA 400

resale of devise

On the death of Mr. Charbonneau, the trust received farm land which had ceased to be farmed by the time of his decease and which he had started to sell off in lots. As all that the trust did was to realize on the property received by it, its sale thereof gave rise to a capital gain.

1338664 Ontario Limited v. The Queen, 2008 DTC 4126, 2008 TCC 350

After noting that the question whether gains realized by the taxpayer (which was a family-owned corporation) on disposing of securities was on capital or income account depended on whether the gains resulted "from the application of a business-like strategy" (para. 25), Wood J. directed the Minister to reassess on the basis that half of the gains were realized on income account (which corresponded roughly to the number of disposed-of-securities that had been held for less that one week).

Leng v. The Queen, 2007 DTC 370, 2007 TCC 59 (Informal Procedure)

The taxpayer, who was an assistant professor of pathology, engaged in approximately 17 transactions in shares of hi-tech companies in the three taxation years in question including four occasions where he bought and sold shares of a corporation within days. In finding that the taxpayer sustained losses on capital account, Rip A.C.J. stated (at 371) that "the fact that a person buys and sells shares at a short interval is not, by itself, conclusive that the person is a trader or that the venture was in the nature of trade".

B.W. Strassburger Limited v. The Queen, 2004 DTC 3255, 2004 TCC 614

The Minister reassessed the taxpayer for its 1996 year by treating its profits from 52 sales of securities in the year as being on income account and accepting that gains from another 32 dispositions of securities were on account of capital. Rip J. found that the methodology of the Minister in treating shares held 365 days or fewer as on income account, and those held more than 365 days on capital account, "was arbitrary and without any reasonable basis", and allowed the taxpayer's appeal.

Sandnes v. The Queen, 2004 DTC 2466, 2004 TCC 244

The taxpayer, who was employed part-time by a public resource company providing office administration and shareholder relations services, acquired shares on a private placement and on the subsequent exercise of warrants and employee stock options, and then sold his shares in numerous transactions over the following five years.

In finding that the taxpayer's transactions were on capital account rather than adventures in the nature of trade, Miller J. indicated that the taxpayer's activities were more those of an investor regularly cashing in an investment as a need for funding arose rather than an adventure in the nature of trade, and that there was no evidence that what little knowledge the taxpayer had about the business of the company in any way contributed to success in the financial markets or that the taxpayer spent any time studying the markets to determine when to sell.

Bossy v. The Queen, 2002 DTC 1763 (TCC)

An accounting firm of which the taxpayers were partners transferred its consulting business to a loss company controlled by one of the partners and took back non-voting preferred shares, with a view to those shares being redeemed when the loss company had realized sufficient revenues to pay off its debts and redeem the shares. The taxpayers realized a gain on income account when their shares were redeemed 26 months later given that the gain was attributable to the consulting work carried out by the taxpayers.

Hollinger Inc. v. The Queen, 98 DTC 1913 (TCC), aff'd 99 DTC 5500 (FCA)

In finding that shares with a high adjusted cost base but nominal fair market value that the taxpayer had acquired with a view to realizing the accrued capital loss were capital property to the taxpayer, Bowman TCJ. stated (at p. 1918):

"I do not regard a decision to sell an unproductive investment on terms that are as favourable as possible as a change of use, giving rise to deemed disposition and a conversion from capital to inventory."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit no converson to inventory when shares with accrued loss acquired with resale intention 82

Pitch v. MNR, 93 DTC 939, [1993] 2 CTC 2370 (TCC)

The taxpayer acquired convertible retractable preference shares with a view to redeeming them and realizing an SRTC credit. The redemption occurred approximately a year later. After considering evidence that purported to establish that the convertibility of the shares was the operating motivation in their acquisition, Christie A.C.J. found that the taxpayer's "operating intention from the beginning was to do precisely what was in fact done". Accordingly, his acquisition lacked the earmarks of an investment and the gain realized by him was on income account.

Waylee Investments Ltd. v. CIR, [1990] BTC 543 (PC)

After a customer ("HIL") of the Hong Kong and Shanghai Banking Corporation (the "Bank") began experiencing financial difficulty, the Bank, in light of the losses it would suffer if HIL were forced into liquidation, incorporated the taxpayer as a wholly-owned subsidiary, and had the taxpayer provide capital to HIL by way of share subscription. The Privy Council upheld the finding of the Board of Review that a gain which the taxpayer realized four years later from the sale of a portion of its shareholding was a capital gain. The bona fides of the Bank's declared policy of holding long-term investments through subsidiary companies had not been challenged. In addition, even if the HIL shares had been held directly by the Bank, they nonetheless would have been held as a long-term investment rather than being held as part of the Bank's circulating assets available to meet depositors' demands.

Administrative Policy

2017 Ruling 2017-0693751R3 - Transfer of Shares of a Foreign Affiliate

affiliated transfer of shares at gain equal to exempt surplus did not cause loss of capital property status
Quite similar transactions in the same corporate group were ruled upon in 2016-0630761R3.

A Canadian-resident corporation (ACo) transferred its FA1 shares on a s. 85.1(3) rollover basis to a newly-formed non-resident subsidiary (New FA), with New FA then transferring its FA1 shares to a Canadian subsidiary (BCo) of ACo for a note whose amount equaled the sum of the transferred shares relevant cost base and the net surplus (being exempt surplus) respecting FA1.

CRA ruled that the transfers of the FA1 shares would not by themselves cause such shares to cease to be capital property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 93 - Subsection 93(1.11) step-up in FA shares transferred into New FA and then sold for note to an affiliated Canco limited to sum of RCB and net surplus 248
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) - Paragraph 69(11)(b) s. 69(11)(b) inapplicable to transfer of FA to new FA who will use the excluded property exemption 324

2016 Ruling 2016-0648991R3 - Internal spinoff reorganization of XXXXXXXXXX

shares did not lose capital property character on internal spin-off transfer with a view to their further dorp-down

CRA provided s. 55(3)(a) rulings respecting a spin-off by one Canadian subsidiary (CanSub1) of a public company (ParentCo) of CanSub1’s foreign subsidiary (ForSub1) to another wholly-owned Canadian subsidiary (CanSub2) of ParentCo. It was proposed that the acquisition by CanSub2 of the ForSub1 shares be followed by their s. 85.1(3) drop-down to a foreign subsidiary of CanSub2 in consideration for common shares of equivalent value. CRA ruled that this double transfer of the ForSub1 shares would not result in those shares not qualifying as capital property.

The reorganization also included a similar double-transfer of shares of another subsidiary (ForSub3), and CRA provided a similar ruling.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) spin-off from one sub of public company to another with no streaming of cost base and cross redemption of preferred shares 519
Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(3) a double transfer of shares under s. 85(1) and 85.1(3) would not affect the shares’ capital property status 179

24 March 2015 External T.I. 2012-0470991E5 F - Mutual fund trust

capital v. income character determined at trust level

Before going on to discuss the effect of the s. 39(4) election, which likely applied even if a mutual fund trust was a "day trader" that used margin, CRA stated (TaxInterpretations translation):

[S]ubsection 104(2) deems a trust to be a taxpayer respecting property of the trust. … Consequently, the characterization of a gain or loss from the disposition of property of the trust must be made at the level of the trust. … [T]he criteria enunciated in… IT-479R, as well as those enunciated in the jurisprudence, must be considered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) flow-through to unitholder of capital gain designated by MFT 183
Tax Topics - Income Tax Act - Section 132 - Subsection 132(6) day trading included in investment undertaking 62
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose s. 39(4) presumption establishing expense non-deductibility 64
Tax Topics - Income Tax Act - Section 39 - Subsection 39(5) - Paragraph 39(5)(a) election can be made by leveraged day-trading MFT 183

20 March 2012 External T.I. 2012-0438651E5 - Capital vs Income

commercial loss/tax profit

General principles would be applied in determining whether flow-through shares were acquired on capital account. The fact that there was a tax benefit to be derived from their purchase would not itself result in their being acquired as an adventure in the nature of trade. CRA also stated:

...where a taxpayer is obligated to sell a particular property for a pre-determined sale price that is less than its original acquisition price such that it results in an "economic loss" (ignoring the value of any relevant tax attributes connected with the property) but results in a gain or profit for income tax purposes as a result of the operation of the rules in the Act, the courts have held that such gain or profit cannot, absent the presence of other factors, result in income earned from an adventure in the nature of trade.[1] [Footnote 1. See Loewen v. The Queen, 94 DTC 6255 (FCA); Moloney v. The Queen, 92 DTC 6570(FCA); Paquet v. The Queen, 95 DTC 868 (TCC); and Richer v. The Queen, 2009 DTC 1077 (TCC).]

25 March 2010 External T.I. 2009-0308851E5 F - Transactions de valeurs mobilières

weighing of factors in IT-479R, para. 11 re the presence of a trading business

When asked, how are the factors in IT-479R, para. 11, interpreted, CRA responded:

As stated in ¶12 of the Bulletin, none of the factors stated in ¶11 may be sufficient, on their own, to determine whether a taxpayer's activities are those of a business, but a combination of those factors may be sufficient. The fact that a taxpayer generates a given number of transactions annually is not, in and of itself, a determining factor. Similarly, the fact that a taxpayer reports a large loss in the first year in which the election is made is also not a determinative factor. However, these factors could be indicators of the presence of any of the factors mentioned in ¶11. The presence of a combination of these factors may lead to the conclusion that the taxpayer's activities are those of a business.

Income Tax Technical News, No. 7, 21 February 1996 (cancelled)

retention of shares' capital property character on intercorporate rollover transactions

The questioner referred to the Revenue Canada position - that, in situations where a corporate taxpayer has acquired, on a section 85 "rollover," property that was non-depreciable capital property of a controlling shareholder or a "sister" corporation, it was ordinarily prepared to accept that the nature of the transferred property would not have changed solely because the taxpayer resold the property soon after the rollover – and asked whether this position was affected by the Mara Properties decision (95 D.T.C. 5168 [subsequently reversed at [1996] 2 S.C.R. 161]). Revenue Canada responded:

Revenue Canada does not consider the decision in Mara to have affected its position with respect to the nature of non-depreciable capital property following a rollover within a corporate group. Our position remains as stated at the 1983 and 1984 conferences [1983 CTF Roundtable, 1983 Conference Report, p. 785; and 1984 CTF Roundtable, Q. 49].

May 1995 Tax Executive Institute Round Table, Q. 19

A statement of powers in the incorporating documents for a corporation to make investments is not in itself determinative of whether investment transactions are on income or capital account.

15 September 1994 External T.I. 9418185 - TRADER OR DEALER - VENTURE CAPITAL CORPORATIONS

Venture capital corporations are not passive investors but rather are carrying on the business for which they were incorporated. Generally, they acquire shares either as part of their business or as an adventure in the nature of trade.

25 May 1994 External T.I. 9404215 - GAINS OR LOSSES ON FUTURES AND SHARES

Occasional investments in shares by a trader in commodity futures could result in gains or losses on account of capital rather than on account of income.

1 December 1992 T.I. (Tax Window, No. 27, p. 9, ¶2319)

Where one corporation within a corporate group transfers a capital property with an unrealized capital gain on a rollover basis to a second corporation within the group which, in turn, sells the property on a non-rollover basis to a third corporation, Revenue Canada's practice will be to accept the resulting gain as being a capital gain despite the short holding period irrespective whether the subsequent sale of the property was to a non-arm's length person or an arm's length person.

25 August 1992 T.I. (Tax Window, No. 23, p. 13, ¶2153)

Capital property received by a beneficiary of a trust will qualify as capital property when immediately thereafter transferred to a corporation under the s. 85(1) election.

25 October 1991 T.I. (Tax Window, No. 12, p. 10, ¶1554)

Where shares have been issued by a corporation as consideration for real property transferred to it and s. 54.2 does not apply, then if a sale of the capital property would have been on capital account, the sale of the shares generally will be on capital account.

13 June 1991 Memorandum (Tax Window, No. 4, p. 20, ¶1300)

With respect to a bank which had claimed the benefit of former s. 112(2.2)(f), Revenue Canada was of the view that a share that is acquired in the ordinary course of the business of a bank will give rise to profit or loss on income account on its disposition if the bank has continued to hold and use the shares within the ordinary course of its business until the time of disposition.

18 March 1991 T.I. (Tax Window, No. 1, p. 20, ¶1156)

Because securities transactions are an integral part of the business of an insurance corporation, it ordinarily realizes gains and losses on such transactions on income account.

10 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 18, ¶1012)

Where a financial institution takes possession of preferred shares on default and the shares are held for resale, those shares are held on inventory account.

30 March 1990 T.I.: 6 April 1990 Memorandum (September 1990 Access Letter, ¶1408)

Whether loan realization assets constitute inventory or other income assets of a bank is a question of fact which can only be determined upon a review of all the relevant facts.

20 July 1989 Memorandum (Dec. 89 Access Letter, ¶1068)

Although it is possible for a financial institution to realize capital gains on the sale of securities, the usual result would be that the gains will be treated as income because dealing in securities is part of the taxpayer's ordinary business.

86 C.R. - Q.16

Most profits attributable to venture capital corporations are on income account.

86 C.R. - Q.20

Where a s. 85(1) roll is followed by an immediate sale of the treasury shares, the sale of those shares generally will be on account of capital if the sale of the transferred property would have been on account of capital.

84 C.R. - Q.49

Where an individual transfers capital property to his corporation and the corporation disposes of that property a short time thereafter, RC is prepared to accept that the nature of the property did not change solely as a result of the transfer.

84 C.R. - Q.52

A short holding period for capital property bumped under s. 88(1)(d) will not preclude capital gains treatment to the parent.

81 C.R. - Q.6

Where the transfer of assets under section 85 followed by a sale of shares is simply an attempt to convert what would otherwise be an income gain to a capital gain, the profit on the sale of the shares will be considered to be "income."

80 C.R. - Q. 8

The fact that capital property has been transferred to a corporation pursuant to subsection 85(1) and the corporation immediately thereafter sells the property at a profit will not, by itself, preclude capital gains treatment on the sale.

IT-459 "Adventure or Concern in the Nature of Trade"

IT-479R "Transactions in Securities"

11. Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:

(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,

(b) period of ownership - securities are usually owned only for a short period of time,

(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,

(d) security transactions form a part of a taxpayer's ordinary business,

(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or by some other form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.


Sandler, "Character Roles: Property Transfers and Characterization Issues", 1996 Canadian Tax Journal, Vol. 44, No. 3, p. 605.

Adamson, "Portfolio Securities Transactions", 1992 Canadian Tax Journal, No. 3, p. 736.

Durnford, "Profits on the Sale of Shares: Capital Gains or Business Income? A Fresh Look at Irrigation Industries", Canadian Tax Journal, July/August 1987, p. 837.