Date: 19980326
Docket: A-243-96
CORAM: STRAYER J.A.
| DESJARDINS J.A. |
| ROBERTSON J.A. |
BETWEEN:
W. STRUAN ROBERTSON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Halifax, Nova Scotia, on Wednesday, February 11, 1998.
Judgment delivered at Ottawa, Ontario, on Thursday, March 26, 1998.
REASONS FOR JUDGMENT BY: DESJARDINS J.A.
CONCURRED IN BY: STRAYER J.A.
ROBERTSON J.A.
Date: 19980326
Docket: A-243-96
CORAM: STRAYER J.A.
| DESJARDINS J.A. |
| ROBERTSON J.A. |
In re the Income Tax Act
BETWEEN:
W. STRUAN ROBERTSON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
DESJARDINS J.A.
[1] In this appeal of a judgment of the Tax Court of Canada,1 the appellant claims the judge of that Court ignored relevant evidence regarding the circumstances surrounding the purchase of stock option shares from the treasury of a corporation in January 1990, and their sale in November 1990. The appellant questions only one of the issues analyzed by the Tax Court judge, namely whether the 1990 acquisition and disposition of the stock option shares constitute "an adventure in the nature of trade".2
[2] The respondent has taken advantage of this appeal to reargue an issue She was unsuccessful with in the Court below, namely whether an election made by the appellant in filing his 1984 personal income tax return under subsection 39(4) of the Income Tax Act (the Act) had been validly filed. Both parties made further submissions with regard to whether the appellant is a "trader or dealer" in securities within the meaning of subsection 39(5) of the Act; and whether the option shares sold by the appellant in 1990 constitute a "prescribed security" within the meaning of subsection 39(6) of the Act and subparagraph 6200(c)(iii) of the Income Tax Regulations.
[3] Since I come to the conclusion that it was open to the Tax Court judge to determine that the transaction of November 1990 was not an adventure in the nature of trade, I need not pronounce on the three other issues that were argued before us.
Facts
[4] The Tax Court judge stated at the beginning of his reasons for judgment that "most of the facts were not in dispute and these can be either found in the Notice of Appeal, the Reply, or in the evidence given at trial". The appellant, however, claims the first judge ignored relevant parts of the evidence. In view of this consideration, I shall attempt to summarize the facts bearing in mind the arguments raised by the appellant.
[5] The appellant was appointed Chairman of the Central Guarantee Trust Company ("C.G.T.") effective March 20, 1985. His employment agreement provided him with a substantial salary, pension and share option arrangements. The share option granted to him was a five-year option to purchase up to 250,000 common shares of C.G.T. at $11 per share expiring March 20, 1990. Guaranteed bank loans were provided by C.G.T. to enable employees to purchase shares of the corporation.
[6] In filing his personal 1984 income tax return, in early May 1985, the appellant enclosed an election form pursuant to subsection 39(4) of the Act. This provision allows a taxpayer to elect capital treatment for all dispositions of Canadian securities made by him in the taxation year or in any subsequent taxation year.3 The appellant signed and completed the form in all respects except for the field calling for the description of any Canadian security disposed of by the appellant in the relevant taxation year 1984. Revenue Canada returned the election form to the appellant with the request that he fill the remaining field and return the form to Revenue Canada. The appellant filled out the remaining field and returned the form, completed, as requested.
[7] In May 1986, Central Capital Corporation ("C.C.C." or the "Corporation") was incorporated and made the parent of a group of companies which included C.G.T. The Corporation was a public company. Both its common and class "A" shares were listed in the Toronto Stock Exchange. In May 1986, the appellant was appointed Chairman of the Board of Directors of C.C.C. In 1990, he became its Deputy Chairman. C.C.C.'s assets grew rapidly during the years preceding 1989, and it reported profits up to and including 1989.
[8] In May 1986, the appellant's earlier option was converted into an option to purchase up to 375,000 C.C.C. common shares at $7.33 a share by March 21, 1990. In April 1987, the option was further converted into an option to purchase up to 562,500 C.C.C. common shares at $4.89 per share on or before March 20, 1990. On October 28, 1987, the appellant exercised the option to purchase 300,000 C.C.C. common shares at $4.89 per share. By prior arrangement, he sold the purchased shares immediately to the two controlling shareholders of C.C.C., Messrs. Ruben Cohen and Leonard Ellen. The appellant reported the gain as being on capital account.
[9] As a result of having exercised other rights under C.C.C.'s stock-purchase plan, the appellant, at the end of 1989, held approximately 250,000 class "A" shares which were pledged to the Royal Bank of Canada and the National Bank of Canada as security for loans used to finance the acquisitions of these shares.
[10] During 1989 and until November 1990, through an "issuer bid" registered with the Toronto Stock Exchange, C.C.C. was purchasing certain of its outstanding shares on the market. These purchases, plus the purchases by corporations controlled by two major shareholders, and purchases by executive officers, had the effect of maintaining the quoted prices of C.C.C.'s shares in circumstances where otherwise those prices might have fallen. Apart from these trades, the market for C.C.C.'s shares, particularly the common shares, was thin. Most of the "issuer bid" purchases, until March 1990, were of class "A" shares, but commencing at that time, C.C.C. also made substantial purchases of common shares.
[11] On January 3, 1990, the appellant exercised his remaining option rights, purchasing 262,500 C.C.C. common shares at $4.89 per share. This purchase was fully financed by a loan of $l,283,625 from Lloyds Bank, which later became Hong Kong Bank of Canada. The appellant exercised his rights that date rather than waiting until closer to the March 21, 1990, option expiration date, in part, because of concern that something might happen that could prevent him, as an insider,4 from being able to exercise the option later. He had had, in this respect, conversations with Ms. Suzan MacLean, C.C.C.'s general counsel, in November and December 1989, regarding his responsibilities as an insider and the exercise of his options.
[12] The appellant testified that, as of 1989, the Corporation's long-term prospects appeared healthier than its 1990 and 199l short-term prospects. The Corporation's short-term prospects appeared to be "challenging and likely going to be somewhat negative".5 He exercised his remaining option rights on January 3, 1990, at least in part to ensure eligibility for the special dividend in C.C.C. common shares that, as a C.C.C. insider, he anticipated would be declared. At the time of exercise of the option, he expected that cash from the sale of C.C.C.'s interest in Inter-City Gas would be had any day and that a declaration of a special dividend would follow shortly. This was an enormously complex deal. There were other shareholders' interests and there were court orders and regulatory board orders required. This was going on endlessly.6 He was aware, as an insider, that he could not sell the shares until an announcement was made. He would then be free to proceed. He knew, however, he would not be eligible for increased dividends declared each quarter on the common shares. This increased dividend had been announced on November 23, 1989, and was made payable on January 1, 1990. By exercising his option on January 3, 1990, the appellant did not qualify to receive that dividend on the option shares.
[13] At the time he exercised his option rights, the appellant was preoccupied with a possible cash flow deficiency to service his debts on the loans he had contracted despite the fact that his annual income was over $100,000 of pension from Maritime Telephone and Telegraph (his prior employment), plus at least $250,000 salary from C.C.C. (converted to a pension in the latter part of that year) and a bonus of $50,000 from C.C.C. The appellant was concerned that the income derived from the dividends of his shares would not be sufficient to cover the charges he had to face. The bank loans fell due in the following sequence: $782,206 in November 1990, $924,000 in September 1991, and $927,752 in July 1992. He knew that he would have to deal with the bank indebtedness at some point in time.
[14] On February 28, 1990, the appellant transferred to his registered retirement savings plan ("R.R.S.P.") as many of these remaining option shares as he was permitted (9,540). The appellant explained that he had received pension income in 1989, which could be rolled over to a registered retirement savings plan not later than the end of February 1990, and deducted in computing his 1989 income for tax purposes. He had no cash with which to make such a payment, but he was eligible to make a contribution with the Corporation's shares, which he did.
[15] By late April 1990, adverse information became available to him, as an inside trader, that the Corporation's merchant-banking portfolio7 was seriously overvalued. Losses on this portfolio were made public commencing with the Corporation's first quarterly report for 1990, issued on May 17, 1990, but always after such information had come to the board. Other major writeoffs were made public, later on. The reported overall losses of the Corporation during this period caused the quoted market price of its shares to fall throughout 1990. In November 1990, the Corporation decided not to renew its "issuer bid".
[16] On November 28, 1990, the appellant sold his 253,050 option shares to Mr. R. Moore for the then quoted price of $6.75 per share, with the concurrent intent of buying them back shortly thereafter. His evidence was that, on advice from accountants, the shares were sold to crystallize a capital gain. He believed he would crystallize a capital loss. On December 31, 1990, he repurchased the said shares from Mr. Moore at their then quoted market price of $6.875. He sold these remaining option shares permanently in December 1991.
[17] The sale of the option rights on November 28, 1990, bought from the treasury on January 3, 1990, resulted in a taxable benefit to the appellant, under subsection 7(l) of the Act, which benefit was added to the adjusted cost base of his shares pursuant to paragraph 53(l)(j) of the Act. A loss resulted because the proceeds of disposition of the shares were less than his adjusted cost base as so determined. At the time he filed his 1990 tax return, the appellant reported this as a capital transaction as he was not aware of the possibility of reporting his acquisition and subsequent disposition of common shares in 1990 as part of an "adventure in the nature of trade". He later sought to deduct this loss as a loss from business, as part of an "adventure in the nature of trade". The respondent maintained that the loss was on account of capital.
The appellant's submission
[18] The appellant submits that the Tax Court judge failed to address the appellant's motivation in acquiring the shares in question. The evidence, he argues, was substantial that the appellant's primary objective in exercising his remaining stock-option rights in 1990 was to resell the shares as soon as he could, consistent with his insider-trading obligations, to discharge his indebtedness and put himself on his feet financially. The appellant had to resell relatively quickly because of the additional debt he incurred when he exercised his option rights. He realized that he was subject to insider restrictions with respect to the proposed declaration of a special dividend by C.C.C., but he expected this matter would be resolved quite soon. He was then confronted, in April 1990, with news of serious losses in C.C.C.'s merchant-banking portfolio which were found to have an adverse effect on the market price of its shares. Such information would only be made public gradually over the coming several months. If he had had any choice in the matter at this time, the appellant would clearly have been well advised to sell his shares at once. His not having done so, in these circumstances, he says, is not evidence of an investment intention but simply a consequence of his understanding of his insider-trading obligations. The appellant claims he finally sold as soon as he legally could. By concluding that "...there is no evidence that the appellant wished to sell as soon as possible...",8 the Tax Court judge disregarded relevant evidence and treated irrelevant evidence as relevant. In particular, he says, the Tax Court judge made no finding with regard to the appellant's indebtedness and to his insider trading obligations. The judge treated as highly relevant advice given to him by his accountants which, says the appellant, had no bearing on the issue as to whether a transaction is on account of capital or income.
Analysis
[19] There is no question that the Tax Court judge addressed the question as to whether resale for profit was the motivating factor in the appellant's purchase of the remaining option shares on January 3, 1990. The Tax Court judge stated early in his reasons for judgment that he would "only put forward the meaningful arguments of each counsel as well as the opinion of the Court."9 He summarized the appellant's argument and characterized the issue raised by him as being the key question to be considered.10 The appellant is therefore not justified in complaining that the Tax Court judge ignored the motivation behind his actions.
[20] The Tax Court judge applied the proper test, namely whether the appellant, at the time of purchase, intended to resell the shares as soon as possible for a profit.11 This amounts to asking whether early resale substantially motivated the appellant in purchasing the remaining option shares.
[21] The Tax Court judge was mindful of the difficulty of the task he was about to embark on. He said:
| There is a myriad number of cases dealing with the jurisprudence on the question of capital or income. These involve a wide variety of factual situations and assistance to this problem can often best be obtained where factual situations are similar to the present case, and where the Courts have pronounced legal principles on the subject. Unfortunately, there is little agreement by the Courts. Where one finds for capital, another will find for income in often quite similar situations. |
[22] Once he had summarized the contentions of the parties, the Tax Court judge stated:
| Did the Appellant have the intention to resell the shares as soon as possible? Counsel for the Appellant suggested that his client was under pressure to acquire shares of his employer in the expectation of selling them at an early date at a profit. The case of The Queen v. George H. Garneau, 77 D.T.C. 5190 held that in such a situation the sale was on income account. Here at the time of purchase, there is no evidence that the Appellant wished to sell as soon as possible. His evidence was that on advice from accountants, shares were sold to crystallize a capital gain. The Appellant also believed when selling in November 1990, he was crystallizing a capital loss. Only later it would seem that the real benefit to the Appellant was to claim an adventure in the nature of trade and an income loss. Undoubtedly the Appellant was not too sophisticated in share options and sales resulting therefrom and he changed his mind from capital to income only at a later date. This was so despite his important corporate position. |
| The fact that a previous sale was reported on capital account does not set the rule for future sales. This proposition was set out by Bell, J. in Harry A. Friesen v. The Queen, 95 D.T.C. 492. |
| ... |
| While there were many other cases referred to by both counsel, the Court believes that there was sufficient evidence that the Appellant was not dealing in an adventure in the nature of trade. The acquisition of the securities was not a part of a profit-making idea but rather was to take advantage of the generosity of the Appellant's employers. The profit nature was not ignored but not paramount. The operation had not sufficient of the characteristics of an adventure in the nature of trade but rather was an investment which did not permit in law the Appellant to change his mind as time and conditions passed. |
[23] The general test to be followed, so as to distinguish between capital gain and business income from an adventure in the nature of trade, can be found in Californian Copper Syndicate (Limited and Reduced) v. Harris:12
| What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being " Is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? |
[24] The case at bar constitutes an isolated transaction. But as explained by Lord Radcliffe in Edwards v. Bairstow et al.:13
| [T]his was an isolated case. But, as we know, that circumstance does not prevent a transaction which bears the badges of trade from being in truth an adventure in the nature of trade. The true question in such cases is whether the operations constitute an adventure of that kind, not whether they by themselves or they in conjunction with other operations , constitute the operator as a person who carries on a trade. |
| (Emphasis added) |
[25] As noted by W.E. Crawford and R.E. Beam,14 an "adventure", by the nature of that word, is likely to be an isolated transaction. Many isolated transactions are not, however, "in the nature of trade". There must be some activity, some features of business in the transaction dealt with which makes it an adventure in the nature of trade.15 What must be looked for is whether there are "badges of trade" or behavioral factors which might assist in tracing the course of conduct of the taxpayer.16 From these, inferences might be drawn as to whether a taxpayer was engaged in an operation of trade or simply investing.
[26] The decision of the Supreme Court of Canada in Irrigation Industries Limited v. M.N.R.17 makes it clear that the question of whether securities are purchased with the purchaser's own funds, or with borrowed money, is not a significant factor in determining whether the acquisition and subsequent sale is or is not an investment.18
[27] The Tax Court judge rejected the appellant's proposition that he was under pressure to acquire shares of his employer and that he expected to sell them at an early date at a profit. He held that the acquisition of the securities was not a part of a profit-making idea but was rather to take advantage of the generosity of the appellant's employers. He distinguished the case at bar from The Queen v. Garneau.19 There, the taxpayer had no intention of putting any more money in an investment firm than what he had already disbursed. He had joined the firm on the understanding that the estate of the recently deceased partner would not be withdrawn. Later on, the estate withdrew a portion of the capital and required that the business be transferred to a new corporation where the individual participants were called upon to contribute the balance of the paid up capital. The taxpayer finally acquired shares in the new company which fared very well until a loss occurred. Marceau J. made a clear finding that, even when the company was still prospering, the taxpayer was already looking for a purchaser of his shares. Therefore, concluded Marceau J., "the possibility of reselling his shares at a profit in the near future was the main motivating reason why the taxpayer agreed to purchase them in the first place."20
[28] It is true that the Tax Court judge made no reference to the appellant's concerns about his cash flow. He also made no reference to the appellant's obligations as an inside trader being a factor preventing him from selling his option shares sooner than in November 1990. From the Tax Court judge's finding that there was "no evidence that the appellant wished to sell as soon as possible", one can infer that, although the appellant might not have been in a position to sell earlier, there was no clear indication, at the time of purchase, that selling as soon as possible was his primary goal. The appellant, on January 3, 1990, was interested in the prospect of a special dividend. The long-term prospects of the corporation appeared to him healthier than its 1990 and 1991 short-term prospects. It is only when things got sour that the appellant would clearly have been well advised to sell his shares at once.
[29] In concluding that the operation was on account of capital, the Tax Court judge could have been impressed by the fact that the appellant did not let his insider information stop him from acquiring the remaining option shares on January 3, 1990, although he knew, at the time of purchase, that he could not, because of those obligations, resell as soon as possible. Also, he might have considered the fact that the appellant re-purchased those shares on December 31, 1990, one month after the sale, and kept them until late 1991, before permanently disposing of them. Moreover, the Court noted that on February 28, 1990, the appellant transferred all the remaining option shares that he could into his R.R.S.P. The Court could infer, although it did not state so, that although the appellant might have been short of cash, he still valued his option shares enough to consider them as a long term investment.
[30] The Tax Court judge noted the appellant's evidence that the shares had been sold, on advice from his accountants, to crystallize a capital gain. The appellant claims the judge's reference to the accountants' statements was irrelevant. Perhaps it was. But on the other hand, it reflects the appreciation of those who were aware of the appellant's affairs. It was open to the Tax Court judge to infer, from the accountants' statements, that the share transactions were motivated by someone driven by a return on investment rather than by the quick silver of profit. The Court stated that "[T]he profit was not ignored but not paramount". The Court found the degree of motivation insufficient to characterize the 1990 transaction as being on account of income.
[31] There is little doubt that the Tax Court's decision is succinct. Nevertheless, in view of the evidence, it was open to the Tax Court judge to find that "the operation had not sufficient of the characteristics of an adventure in the nature of trade but rather was an investment which did not permit in law the appellant to change his mind as time and conditions changed".
[32] For all of these reasons, I would dismiss this appeal with costs.
"Alice Desjardins"
J.A.
"I agree
| B.L. Strayer, J.A." |
"I agree
| J.T. Robertson, J.A." |
FEDERAL COURT OF APPEAL
Date: 19980326
Docket: A-243-96
BETWEEN:
W.S. STRUAN ROBERTSON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
__________________
1 [1996] T.C.J. No. 174, A.B. at 676.
2 The concept of "an adventure in the nature of trade" has been adopted by the courts in order to determine which purchase and sale transactions completed by a taxpayer are of a business nature and which are of a capital nature so as to establish the taxpayer's liability under the Income Tax Act. See Irrigation Industries Limited v. M.N.R., [1962] S.C.R. 346 at 351 and at 359; see also Friesen v. The Queen 95 D.T.C. 555l at 5554 (S.C.C.). See also the definition of the word "business" in subsection 248(l) of the Income Tax Act.
3 P.W. Hogg, J.F. Magee, "Principles of Canadian Income Tax Law", 2d ed. 1997, para. 16.13(h).
4 Pursuant to the Ontario Securities Act, which governed corporations, such as C.C.C., whose shares were listed on the Toronto Stock Exchange, the appellant was an "insider" of the Corporation and was required to report publicly all trades in the Corporation's shares. He was prohibited on pain of severe sanctions, from purchasing or selling securities of the Corporation at a time when he was privy to material "inside" information that was not publicly known. See A.B., vol. l, p.5 at par. 12 (notice of appeal).
5 See transcript of proceedings, 9 November 1995, pp. 187-90.
6 See transcript of proceedings, 9 November 1995, p. 24, lines 2-13.
7 The appellant described this operation as being "more aggressive lending to higher risk ventures" carried by Central Capital Management Inc., a corporation created by C.C.C. See transcript of proceedings, 8 November 1995, pp.19 and 28.
11 See P.W. Hogg, J.E. Magee, "Principles of Canadian Income Tax Law", 2d ed. 1997, para. 16.3(b).
12 (1904), 5 TC 159 at 166 (Scot. Ct. of Ex.), cited with approval in Minerals Ltd. v. M.N.R., [1958] S.C.R. 490 at 496, in Irrigation Industries Limited v. M.N.R., [1962] S.C.R. 346 at 354, and in Friesen v. The Queen 95 D.T.C. 5551 at 5554 and 5558 (S.C.C.); W. E. Crawford and R.E. Beam, "Adventure or Concern in the Nature of Trade"; "Badges of Trade as the Key Indicator of Taxpayer Intention" (1996) 44 Can. T.J. no. 3, 888 at 890.
13 [1955] 3 All E.R. 48, as quoted in M.N.R. v. McIntosh 56 D.T.C. 1004 at 1007 (Ex. Ct.). That decision was later confirmed by the Supreme Court of Canada in McIntosh v. M.N.R., [1958] S.C.R. 119.
15 See the case of No. 341 v. M.N.R. 56 D.T.C. 231 (T.A.B.), by Tax Appeal Board which quotes from the Indian case of Rajputana Textile (Agencies) Ltd. v. Commr. of Inc-Tax (1953), 24 ITR 46 at 56 (Bombay H.C.).
16 See J. W. Durnford, Profits on the Sale of Shares: Capital Gains or Business Income? A Fresh Look at Irrigation Industries (1991) No. 5, 35 Can. T.J. 837 at 887. See also Friesen v. The Queen 95 D.T.C. 5551 at 5568, Iacobucci J. dissenting, but with which the majority (at 5554) agreed on that point.
18 [1962] S.C.R. 346 at 350. There appears to be some doubts as to whether Irrigation Industries Limited has established a rebuttable presumption that the acquisition of corporate shares is on account of capital. See Her Majesty the Queen v. Mandryk (92 D.T.C. 6329 at 6334-35), and Pollock v. The Queen (D.T.C. 6050 at 6054-55 (F.C.A.)). Easton v. M.N.R., (A-196-92 (F.C.A.)), Freeman v. M.N.R. ((30 October 1997), (F.C.A.)); [1997] F.C.J. No. 1282, unedited, followed Mandryk.