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Docket: 2001-3891(IT)G |
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BETWEEN: |
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RONALD D. SANDNES, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on January 8, 2004, at Calgary, Alberta,
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By: The Honourable Justice Campbell J. Miller |
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Appearances: |
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Counsel for the Appellant: |
James W. Dunphy |
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Counsel for the Respondent: |
Margaret McCabe |
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JUDGMENT
The appeal from an assessment of tax made under the Income Tax Act for the 2001 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the disposition by Mr. Sandnes of the Canoro shares in 1997 was on capital account. Costs to the Appellant.
Signed at Ottawa, Canada, this 25th day of March, 2004.
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"Campbell J. Miller" |
Miller J.
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Citation: 2004TCC244 |
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Date: 20040325 |
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Docket: 2001-3891(IT)G |
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BETWEEN: |
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RONALD D. SANDNES, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Miller J.
[1] In 1997, Mr. Ronald Sandnes entered a number of transactions involving shares of Canoro Resources Ltd. (Canoro). The Respondent maintains that by virtue of his conduct and special knowledge of Canoro, Mr. Sandnes was a trader in securities and, therefore, not entitled to capital gains treatment nor to elect to have the Canoro securities deemed capital property in accordance with subsection 39(4) of the Income Tax Act (the Act). Mr. Sandnes' position is that the circumstances do not support a finding he was a trader, nor even that he was engaged in an adventure in the nature of trade, but that his investment in Canoro was just that, an investment on capital account. He filed his 1997 tax return on that basis. On the continuum from investor to trader, I find that Mr. Sandnes did not exhibit sufficient indices of carrying on a business to constitute a trader. The close call is between an investor or an adventurer and, on balance, by the manner in which he dealt with the Canoro shares I find he was simply an investor.
Facts
[2] Mr. Sandnes acquired a bowling centre in Trail, British Columbia, in 1974 and has since been operating that business. In the 1990s, Mr. Sandnes helped a friend in Alberta with the office administration of a mining company, referred to as Yellowjack. He also became involved with a company known as Golden Mammoth. These companies merged in 1996 to become Canoro. Mr. Sandnes became a director of Canoro and continued to assist on a part-time basis with office administration and shareholder relations. He commuted back and forth between British Columbia and Alberta, as he also continued to run his bowling centre.
[3] In the summer of 1996, Mr. Sandnes acquired approxiately 208,000 common shares of Canoro through a private placement. As part of that transaction he also received warrants to acquire additional common shares, exercisable on or before June 4, 1997. He stated that his motive at this time was to invest in the long term of a company he hoped would be successful in the oil and gas industry. In 1997, he exercised his rights under the warrants and acquired an additional 109,459 common shares at 0.37 ¢ a share. The shares were then trading at just over $1.00 a share. Mr. Sandnes sold some shares in Canoro to finance his exercise of the warrants. The only other purchase of Canoro shares of significance in 1997 was the exercise by Mr. Sandnes of an employee stock option to acquire 25,000 common shares in Canoro.
[4] Mr. Sandnes engaged in numerous sales of his Canoro shares in 1997. In the previous year, he had also shown a reliance on his Canoro shares as a means of meeting his financial requirements. In 1996, there were approximately 16 sales of Canoro shares and in 1997 approximately 23 sales of shares. The Respondent contended there was a greater number of actual dispositions, due to the thinly traded nature of the shares. So, for example, Mr. Sandnes, in May 1997, wished to sell 5,500 Canoro shares, but had to sell in three segments of 2,200, 3,000 and 300. I view this as one sale transaction by Mr. Sandnes.
[5] Of the 23 sale transactions in 1997, some were made to finance the exercise of the warrants, some were made to finance ongoing needs of the bowling centre, some were for personal needs and some were to pay debts owing to Canada Customs and Revenue Agency (CCRA). Mr. Sandnes indicated he would always advise the president of Canoro that he was selling his shares. Mr. Sandnes left Canoro in 2001 to work full-time in Trail, B.C. at the bowling centre. In 2002, Mr. Sandnes disposed of most of his Canoro shares.
Analysis
[6] The Respondent contends Mr. Sandnes was a trader in Canoro securities. If he was a trader, then he is precluded from electing to receive capital treatment on disposition of the shares as provided by subsection 39(5) of the Act which reads:
39(5) An election under subsection (4) does not apply to a disposition of a Canadian security by a taxpayer (other than a mutual fund corporation or a mutual fund trust) who at the time of the disposition is
(a) a trader or dealer in securities, ...
[7] The Respondent acknowledges that if Mr. Sandnes was not a trader, but simply engaged in an adventure in the nature of trade, then the subsection 39(4) election would have been available to him, but that he is too late to avail himself of it. Subsection 39(4) reads as follows:
39(4) Except as provided in subsection (5), where a Canadian security has been disposed of by a taxpayer in a taxation year and the taxpayer so elects in prescribed form in the taxpayer's return of income under this Part for that year,
(a) every Canadian security owned by the taxpayer in that year or any subsequent taxation year shall be deemed to have been a capital property owned by the taxpayer in those years; and
(b) every disposition by the taxpayer of any such Canadian security shall be deemed to be a disposition by the taxpayer of a capital property.
[8] Mr. Sandnes suggests that subsection 39(4), and consequently subsection 39(5), do not even come into play, as the Canoro shares were an investment clearly on capital account.
[9] Was Mr. Sandnes a trader? The Federal Court of Appeal in The Queen v. Vancouver Art Metal Works Limited[1] confirmed that a trader or dealer applies to "persons who deal in merchandise who are engaged in buying and selling, or whose business is trade or commerce". The Court went on to state:[2]
I have no doubt that a taxpayer who makes it a profession or a business of buying and selling securities is a trader or a dealer in securities within the meaning of paragraph 39(5)(a) of the Act. As Cattanach, J. stated in Palmer v. R., "it is a badge of trade that a person who habitually does acts capable of producing profits is engaged in a trade or business". It is, however, a question of fact to determine whether one's activities amount to carrying on a trade or business. Each case will stand on its own set of facts. Obviously, factors such as the frequency of the transactions, the duration of the holdings (whether, for instance, it is for a quick profit or a long term investment), the intention to acquire for resale at a profit, the nature and quantity of the securities held or made the subject matter of the transaction, the time spent on the activity, are all relevant and helpful factors in determining whether one has embarked upon a trading or dealing business.
...
In conclusion, a taxpayer does not necessarily lose his election right under subsection 39(4) when he buys and sells securities for his own account. However, he loses such right to elect when he becomes a trader or a dealer, that is to say when he professionally engages in the business of dealing in securities or when his dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade.
[10] The Respondent also argues that Justice Noël in Kane v. The Queen[3] determined the factor that distinguishes a trader from an adventurer, where he stated:[4]
I believe that in determining the availability of the election to one who trades in securities without being licensed or registered, the focus should be the same, namely, does the author of the transactions in question possess a particular or special knowledge of the market in which he trades? To the extent that he does, he distinguishes himself from the common risk takers who "play the market" regularly or sporadically based on commonly available investment advice and information. That it seems is the guiding line which must delineate the scope of the election contemplated by section 39(4) of the Act and the limitation embodied in paragraph 39(5)(a).
In the case at hand, the Plaintiff had a special knowledge of the market in which Orell shares were traded. He was one of the directors of the corporation, its president, an insider by virtue of his holdings and a promoter as that term is defined in the B.C. Securities Act. But more importantly, he was directly involved in the mining ventures of Orell and in organizing its public financing offerings. As such he was in a position to anticipate market reaction to Orell's ongoing activities. That is the context in which the Plaintiff bought and sold Orell shares. His trading activities were not only stamped with the usual badges of trade which characterize the dealings of common risk takers, but they were conducted by reference to, and were driven by, the special knowledge which the Plaintiff had of the market in which the Orell shares were traded. Those in my view are the activities of a trader or dealer in securities as that term is used in subsection 39(5) of the Act.
[11] To find Mr. Sandnes a trader, therefore, requires a finding that his course of conduct in respect of the Canoro shares amounted to carrying on a business of buying and selling securities of which he had a particular or special knowledge. The course of conduct is to be viewed in light of his intention, frequency of transactions, duration of his holdings, nature and quantity of securities, time spent and the particular knowledge he possessed.
Intention
[12] Mr. Sandnes' stated intention was to hold the Canoro shares as a long-term investment. Indeed, of just over 300,000 Canoro shares held in 1997, he continued to hold 230,000 after 1997, and ultimately disposed of most of his shares in 2002. It was also clear, however, that in 1996 and 1997 he used his Canoro stock holdings as a bank account. When he needed money, for whatever reason, he turned to his Canoro shares. He engaged in this modus operandi soon after acquiring the bulk of the shares in 1996. His intent at this time, that is, upon the acquisition of the shares in 1996, was twofold: one, for long-term gain, and two, for a source of immediate and accessible funding (his "banking objective"). A trader has only one objective, to make profit from a scheme of trading. Even if I was to characterize Mr. Sandnes' banking objective as akin to a trader's objective of profiting on quick resales, the fact that Mr. Sandnes had an equal long-term investment objective, removes him in that respect from the category of a trader. It is difficult in Mr. Sandnes' case to conclude that one objective was predominant and somehow trumps the other. His behaviour supports a finding that the two objectives could be weighed equally. This is important, as I do not believe a trader can deny classification as such by relying on some remote, clearly subordinate intention of long-term investment. But that is not the case here. The existence of a "capital" intention, equal or greater than a profit-seeking intention, is sufficient to discriminate the investor or adventurer from the trader.
[13] This conclusion was premised on Mr. Sandnes' banking objective being the same as the profit-making intention. There is a difference, however, which further distinguishes Mr. Sandnes from the trader. The trader attempts to maximize profit at the earliest opportunity. Presumably, this would entail a close scrutiny of the market to ensure purchases and sales at optimal moments. There is no evidence that Mr. Sandnes paid any attention on a regular basis to how the Canoro stock was faring, prior to entering his many sales transactions. His sales were driven entirely by financial need. If his bowling centre needed a new vehicle, he looked to sell some stock; if CCRA required a payment, he looked to sell some stock; and if he needed cash to exercise warrants, he looked to sell some stock. This is not the picture of a trader motivated by profit, but of an individual motivated by need, cashing in on his investment.
[14] The Respondent relied upon the comments of Justice Lemieux in Arcorp Investments Ltd. v. The Queen[5] for support of the notion that a need for cash does not necessarily negate an intention of quick profits. Justice Lemieux indicated:[6]
[22] Mr. Hodgkinson's explanations do not satisfy me that the dominant purpose of the Arcorp transactions during 1984 and 1985 was not to earn profits from transacting in the securities themselves rather than looking to these securities as long-term investments from which interest and dividends would be forthcoming. Indeed, his desperate need for cash explains why Arcorp, of which he was the sole directing mind, would look to frequent buying and selling of securities for profit and therefore for income purposes. Moreover, Mr. Hodgkinson's testimony does not explain why, in those years, Arcorp was frequently purchasing and not only liquidating to meet the cash needs of its sole shareholder.
[15] Arcorp is however distinguishable. Arcorp was an investment management company - that was its very business. Its sole shareholder was a commission security salesman. The Court reviewed Arcorp's securities transactions to determine if they had the badges or characteristics of ordinary trading in securities. It found that in one year all of Arcorp's assets were in marketable securities. It bought and sold about 1.6 million shares in 32 resource companies and over 460 transactions. It held the securities briefly. Under those circumstances it is understandable that a plaintive cry that securities were sold to meet financial needs did not alter a clear trading intention to some different intention. In Mr. Sandnes' situation, there was no change in intention. He simply looked to cash in his investment in Canoro as needs demanded, hopeful that the bulk of shares would be held for the long term.
[16] The Respondent also raised McGroarty v. The Queen[7] in the same context. But again, that was a case of someone with a background consistent with that of a trader in securities, whose purchases were highly leveraged and whose transactions were substantial. Mr. Sandnes is simply not in the same category.
[17] I conclude that intention is not a factor that taints Mr. Sandnes as a trader.
Frequency of transactions
[18] In 1997, there were only two purchases of significance: one for approximately 109,000 Canoro shares on the exercise of warrants; the other the exercise of a 25,000 share-employee stock option. The Respondent alleges that this illustrates a level of "trading". I do not see it that way. The exercise of an employee stock option is in no way evidence of carrying on business as a trader, and is just not a factor in this determination. It arises solely in the context of an employee, not a trader.
[19] The exercise of warrants, at a time when the company's shares were trading at triple the warrant exercise price, was relied upon by the Respondent as evidence of Mr. Sandnes' intention to take advantage of the market as part of some profit-making scheme. This puts an emphasis on this transaction as some sort of stand-alone trade, which is not justified. The warrants were part of Mr. Sandnes' 1996 acquisition of shares through a private placement. It was not a separate acquisition as such. And, who would not exercise warrants under such circumstances. This was not a matter of special knowledge. The warrants had to be exercised by June 4, 1997, and Mr. Sandnes did so at the end of May 1997. He would have been extremely foolish not to have done so. So, in determining frequency of transactions, I discount reliance on these two purchases as proving any trading activity.
[20] What is left in 1997 is approximately 23 sales of Canoro stock. The trader, by definition, is one carrying on the business of buying and selling. In 1997 at least, Mr. Sandnes was effectively only engaged in selling. The buying, as indicated, relates primarily to the one major private placement acquisition in 1996. While the private placement was not an isolated transaction, it was the major acquisition of Canoro shares. There appear to have been some minor acquisitions in the predecessor corporations and two purchases in 1996 of approximately 30,000 shares each. With respect to the sales in 1997 of approximately 117,000 Canoro shares, approximately 60,000 shares were sold to provide Mr. Sandnes with sufficient funds to exercise his warrants and option to acquire 134,000 more shares, effectively cashing in some of his investment so he could carry on with that same investment. Mr. Sandnes increased his holdings in 1997 from approximately 220,000 shares to 232,000 shares.
[21] There remain a number of sales in 1997 to finance Mr. Sandnes' other requirements. The Respondent argues that these 20 or so remaining sales are of such frequency that indicate the business of trading. I disagree. Under the circumstances, that number of sales might support an adventure, something other than a long-term holding, but such frequency of sales in and of themselves, with no other badges of trade, are not determinative of trading.
Duration of holdings
[22] The majority of Mr. Sandnes' holding of Canoro shares was for a number of years, not months. From the time of his private placement acquisition in 1996, a significant number however were sold on an ongoing basis over the next couple of years. This short-term holding is, at first blush, indicative of trade, but more compatible, I would suggest, with either an adventure in the nature of trade or simply cashing in on one's investment.
Nature and Quantity of Securities
[23] The securities were all in Canoro, the company for whom Mr. Sandnes worked on a part-time basis. He held less than 5% of the issued stock of the company. Although there is no principle to suggest someone cannot be a trader in just one stock, it does stretch considerably the concept of "carrying on a business", if the one stock is only thinly traded. Again, this is more supportive of an adventure - something that looks like trade or simply an investment.
Time Spent
[24] Mr. Sandnes' time was spent on running a bowling centre in British Columbia, with only a couple of months off in the summer, and on helping out at Canoro in its office and with shareholder relations. There was little time spent on his share sales, apart from calls to his broker and advising the president of the company. Mr. Sandnes had no background or training in the financial markets, and it was evident that he spent no time studying the market to determine when to sell. The time spent does not support a finding of trader or even someone engaged in an adventure.
Special knowledge
[25] Mr. Sandnes did work part-time at Canoro, but that is not tantamount to a special knowledge of the company, such that he could anticipate market reaction. That was a key element in Justice Noël's comments in Kane. The Appellant in that case was not only directly involved as president of the company's mining ventures, but also organized its public financing offerings. There is no evidence that what little knowledge Mr. Sandnes might have had about the business in any way contributed to his success in the financial market, let alone had any influence on that market. Mr. Sandnes was an employee who obtained shares through stock options, and in the first few months of the company's merged existence, invested through a private placement. I fail to see any special knowledge such that would move him into the trader category.
[26] It is important to step back from the individual assessment of each of the above factors and view Mr. Sandnes' conduct as a whole. His conduct was that of a part-time employee acquiring shares in a new public company for investment purposes and for a source of funding. The frequent cashing in of part of his investment did not constitute carrying on a business of buying and selling securities. It was his plan from the outset to use some of his Canoro investment for funding purposes. Though not trading as such, the many sales might look like adventures, yet adventures in the nature of trade require a greater degree of buying and selling than what I observe in this case.
[27] The correct result in this case is that Mr. Sandnes is not subjected to income treatment on the disposition of his shares in 1997. My analysis tips the balance between a finding of capital and a finding of adventure in the nature of trade to a finding of capital. The overall impression of Mr. Sandnes' activities is of an investor regularly cashing in an investment rather than an adventurer in the nature of trade.
[28] Finally, I wish to comment on post-trial written submissions from the parties. Initially having gone through the analysis, I found it was a close call, not between a trader and an adventurer, for I am convinced Mr. Sandnes was not a trader, but between income from an adventure in the nature of trade and capital gain from the disposition of the securities, a capital property. There was no doubt as to the consequences if I found that the dispositions were on capital account, but at trial the parties did not argue in depth the consequences if I found an adventure in the nature of trade. I did not want to resolve Mr. Sandnes' appeal without fully appreciating and weighing the practical ramifications of the adventure alternative. I therefore asked counsel to provide written submissions as to the impact of a judgment finding Mr. Sandnes was engaged in an adventure. Specifically, I needed the parties to address the practical issue of whether Mr. Sandnes could file an amended return containing the appropriate election. This opened a hornet's nest of conflicting views, not the least of which was the question of whether there exists a concept of "honest mistake", upon which Mr. Sandnes might rely to file a late election. This concept was portrayed by Justice Robertson in Nassau Walnut Investments Inc. v. R.,[8] as being in the womb stage. Does this Court have jurisdiction to order the Respondent to accept an amended return, not yet filed? Can this Court deem there to have been an election, though not in a prescribed form? Is there a right of a taxpayer to even file an amended return? (In this respect see Justice Archambault's comments in Lussier v. The Queen.)[9] The submissions of counsel made it clear that a finding of an adventure in the nature of trade would lead to no agreement as to the consequences which should flow from such a determination, but only to uncertainty and a myriad of complex issues of law, jurisdiction and fairness. Having concluded that Mr. Sandnes' dispositions ought not to be taxed as income, and that a finding of an adventure would create some uncertainty in that regard, I resolved the balance is rightfully tipped to a capital disposition.
[29] The appeal is allowed and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the disposition by Mr. Sandnes of the Canoro shares in 1997 was on capital account. Costs to the Appellant.
Signed at Ottawa, Canada, this 25th day of March, 2004.
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"Campbell J. Miller" |
Miller J.
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CITATION: |
2004TCC244 |
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COURT FILE NO.: |
2001-3891(IT)G |
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STYLE OF CAUSE: |
Ronald D. Sandnes and Her Majesty the Queen |
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PLACE OF HEARING: |
Calgary, Alberta |
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DATE OF HEARING: |
January 8, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Campbell J. Miller |
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DATE OF JUDGMENT: |
March 25, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
James W. Dunphy |
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Counsel for the Respondent: |
Margaret McCabe |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
James W. Dunphy |
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Firm: |
Warren Tettensor LLP |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |