Shares

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.

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.

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 3^rd-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 3^rd 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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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."

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.

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."

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

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.

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.

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.

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."

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."

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.

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.

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.

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....

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.

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."

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".

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.

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."

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.

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.