[OFFICIAL ENGLISH TRANSLATION]
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Docket: 2003-3485(IT)I |
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BETWEEN: |
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LUC MASSÉ, |
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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 May 17, 2004, at Montréal, Quebec
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Before: The Honourable Judge Louise Lamarre Proulx |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Julie David |
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JUDGMENT
The appeal from the assessment 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, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 25th day of June, 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx J.
Certified true translation
Colette Dupuis-Beaulne
[OFFICIAL ENGLISH TRANSLATION]
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Reference: 2004TCC453 |
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Date: 20040625 |
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Docket: 2003-3485(IT)I |
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BETWEEN: |
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LUC MASSÉ, |
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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
Lamarre Proulx J.
[1] This is an appeal under the informal procedure relating to the assessment made by the Minister of National Revenue (the "Minister) for the 2001 taxation year.
[2] The issue at bar is whether losses totalling $45,356 resulting from securities transactions are a business loss or a capital loss.
[3] At the outset of the hearing, the Appellant informed the Court that he was familiar with the provisions of section 18.1 of the Tax Court of Canada Act and agreed with it. This section reads as follows:
18.1 Every judgment that allows an appeal referred to in subsection 18(1) shall be deemed to include a statement that the aggregate of all amounts in issue not be reduced by more than $12,000 or that the amount of the loss in issue not be increased by more than $24,000, as the case may be.
[4] The facts and the interpretation of the facts on which the Minister relied to make the assessment, and through which he disallowed the business loss, deeming it to be a capital loss that could potentially serve to reduce a capital gain, are described at paragraphs 13 and 14 of the Reply to the Notice of Appeal (the "Reply"), as follows:
[TRANSLATION]
a) the Appellant is a lawyer, born on July 21, 1958, and he is employed as the director of taxation services for Jacques Davis Lefaivre s.e.n.c., a firm of chartered accountants;
b) the Appellant has also carried on a designated professional business since at least 1987;
c) with respect to the year at issue specifically, the Appellant was employed by the Université de Montréal;
d) as of December 31, 2001, the Appellant's civil status was single;
e) with respect to the taxation year at issue, the Appellant reported the following figures:
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i) |
employment income |
$114,469 |
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ii) |
dividends |
$5,257 |
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iii) |
interest |
$4,828 |
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iv) |
professional income |
$3,000 |
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v) |
capital losses |
($7,267) |
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vi) |
business losses |
($45,356) |
f) since taxation year 1989, the Appellant has reported the following substantial employment income amounts:
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i) |
1989 - |
$67,308 |
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ii) |
1990 - |
$88,392 |
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iii) |
1991 - |
$89,739 |
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iv) |
1992 - |
$88,360 |
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v) |
1993 - |
$76,651 |
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vi) |
1994 - |
$79,404 |
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vii) |
1995 - |
$79,310 |
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viii) |
1996 - |
$85,197 |
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ix) |
1997 - |
$76,242 |
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x) |
1998 - |
$95,567 |
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xi) |
1999 - |
$155,317 |
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xii) |
2000 - |
$138,185 |
g) during the same period (1989 to 2000), the Appellant reported the following investment earnings:
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Dividends |
Interest |
Taxable Capital Gains |
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i) |
1989 - |
$10 |
$1,850 |
$79 |
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ii) |
1990 - |
$7 |
$1,582 |
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iii) |
1991 - |
$7 |
$2,259 |
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iv) |
1992 - |
$7 |
$6,929 |
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v) |
1993 - |
$8 |
$7,927 |
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vi) |
1994 - |
$9 |
$8,384 |
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vii) |
1995 - |
$9 |
$12,086 |
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viii) |
1996 - |
$11 |
$7,436 |
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ix) |
1997 - |
$15,443 |
$7,098 |
$242 |
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x) |
1998 - |
$23,876 |
$3,524 |
($1,908) |
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xi) |
1999 - |
$34,291 |
$4,392 |
($17,334) |
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xii) |
2000 - |
$33,384 |
$4,300 |
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h) of the taxable dividends reported by the Appellant, those from "Jacques Davis Lefaivre et Cie ltée" are the following:
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i) |
2001 - |
$3,568 |
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ii) |
2000 - |
$32,865 |
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iii) |
1999 - |
$34,277 |
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iv) |
1998 - |
$23,636 |
i) from 1989 to 2000, the Appellant contributed the following amounts to a registered retirement savings plan (RRSP):
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i) |
1989 - |
$7,500 |
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ii) |
1990 - |
$7,500 |
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iii) |
1991 - |
$11,500 |
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iv) |
1992 - |
$12,500 |
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v) |
1993 - |
$12,500 |
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vi) |
1994 - |
$13,500 |
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vii) |
1995 - |
$14,500 |
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viii) |
1996 - |
$13,500 |
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ix) |
1997 - |
$13,210 |
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x) |
1998 - |
$12,784 |
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xi) |
1999 - |
$12,786 |
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xii) |
2000 - |
$13,442 |
j) for the taxation year at issue, the losses incurred by the Appellant were reported as follows:
i) capital losses totalling $7,267 were claimed with respect to the sale of shares in "Bell Canada" and "Nortel";
ii) business losses totalling $45,356 were claimed with respect to the sale of shares in "Microcell Telecom Inc.," "Telesystem International Wireless Inc.," and "Memotec Communications Inc.";
k) the holding periods for the shares on which the business losses claimed are based are as follows:
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i)
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"Microcell Telecom Inc." |
June 18, 2001, to October 5, 2001 |
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ii) |
"Telesystem International Wireless Inc."
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June 28, 2000, to October 5, 2001 |
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iii) |
"Memotec Communications Inc." |
October 5, 2000, to October 25, 2001 |
l) for taxation year 2001, the following factors were used as the criteria for disallowing the business loss claimed:
i) your principal activity was not carrying on securities transactions;
ii) the Appellant cannot claim to devote a substantial part of his time to studying the securities market and researching potential purchases;
iii) for the year at issue, only 12 transactions gave rise to the claims for all the losses combined (capital losses and business losses).
14. In upholding the reassessment dated March 3, 2003, for the 2001 taxation year, the Minister relied particularly on the following presumptions of fact:
a) to determine whether the Appellant operated a business in the ordinary course of business, a number of factors need to be examined:
i) repetition of similar transactions
the Appellant made only 12 stock transactions in 2001; this does not represent a history of intensive purchases and sales;
ii) holding period
the holding period varies between four (4) and fifteen (15) months, which is a relatively long period for so-called "speculative" shares;
iii) knowledge of the securities market
the Appellant searches Internet sites, reads the financial news in newspapers, reviews various publications, and examines documentation sent to him by his broker; this does not make the Appellant a professional;
iv) securities transactions are a part of the Appellant's usual activities
the Appellant is the director of taxation services for a firm of chartered accountants; securities transactions are not a part of the usual activities relating to his work;
v) time spent
the Appellant stated that he spent approximately twenty minutes per day studying the securities market and researching potential purchases;
b) with respect to the Appellant's intent at the time he acquired the stock, anyone who buys and sells stock intends to make a profit, and the purchase of certain so-called speculative stock is not sufficient to claim that the Appellant was involved in a project involving a risk or an adventure in the nature of trade.
[5] The Notice of Appeal describes the factual circumstances regarding the transactions at issue as follows:
[Translation]
...
f) The corporations were recommended to me by my broker (and the analysts from his firm) solely because of their potential for substantial and rapid growth. No dividends were anticipated, because the cash assets from these corporations were to be used in their development. For example, TIW and Microcell are two corporations whose objective was to build a network to provide wireless telephone services. They were to compete with Bell Canada and other large corporations (national and international) in a rapidly expanding cellular telephone market.
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j) None of the three securities sold at a loss in 2001 had been purchased for the purpose of earning income during their holding period, and I have not, in fact, received any income from these securities. For the reasons set out in paragraph (f), the corporations at issue were unable to pay dividends, because they were at the development stage. This is why they presented a very high risk. TIW and Microcell experienced serious financial difficulties owing to the fact that they (and their financial advisors) had largely underestimated their network development expenses. The Memotec stock had been purchased by a German company.
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m) These three securities were held for a relatively short period: 15 months and 3 months for TIW, 12 months for Memotec (a number of which were held owing to the impossibility of buying or selling the shares), and 3 months for Microcell. In fact, the same can be said for most of the stock bought and sold in my non-RRSP account, because I held my securities for approximately 13 months only, on average (9.5 months excluding Sino-Forest, BCE Emergis, and BCE). For example, with Ciment St-Laurent and Cognicase, the holding period was 4 days and 113 days respectively. Some other securities were held a while longer, because it was not possible to sell them sooner (e.g., Teleglobe and Memotec), and because my broker advised me that the loss incurred shortly after acquisition was temporary and that they would gain in value "soon" (e.g., Bell Canada International, TIW, and Microcell).
n) The purchase of TIW shares ($27,151) and Memotec shares ($12,149) in 2000 was nearly entirely financed by the line of credit authorized by my brokerage firm in 1998. These amounts were high, particularly considering the net value of my portfolio.
[6] The Appellant testified. He explained that, with respect to the statement in paragraph 13(a) of the Reply, the accounting firm in which he practices his profession as director of taxation services includes 40 accountants.
[7] With respect to the statement made in paragraph 13(c) of the Reply, the Appellant is teaching a course on the principles of taxation at the Université de Montréal for one semester, specifically, three hours per week for thirteen weeks. An examination is administered at the end of the semester. One to two hours of preparation are needed for each class.
[8] With respect to the statement made at paragraph 13(e), the Appellant notes that the dividends are grossed-up to 125%, capital losses are reported at 100%, and interest results largely from the interest paid by the office on its capital outlay of $35,000. The same is true of the amounts set out in paragraphs 13(q) and 13(h).
[9] The Appellant stated that, in selecting his broker, he sought someone who pursued an entrepreneurial and aggressive investment policy, and who could advise him accordingly.
[10] With respect to the statements made in paragraphs 13(l)(iii) and 14(a)(i), he claimed that this number of transactions is not a determining factor. The transaction he conducted in his self-directed RRSP with Wood Gundy should also be taken into consideration. The Appellant filed a statement of transactions for this account as Exhibit A-1. Approximately 200 transactions were conducted from 1992, the year he opened this account, until 2001. In 2000, there were 44 transactions, and in 2001, there were 23. Exhibit A-1 had not been shown to the auditor.
[11] He filed as Exhibits A-4 and A-5 the broker's notes containing client information. The risk thresholds established for the self-directed RRSP were 25% high risk and 75% medium risk. For the non-RRSP account-the account in which the losses at issue were incurred-the risk factors were set at 35% high risk and 65% medium risk. With respect to the notes on the types of accounts, the funds for the RRSP account are provided in cash and by the RRSP itself, and the non-RRSP account is funded through a line of credit. The investment objective for the non-RRSP account was not to produce dividends, but to increase the value of the stock.
[12] With respect to the statement made in paragraph 14(a)(ii), the Appellant stated that, for some stock, there was no possibility of selling, because trading was halted, which explains the holding period of just over one year for this stock.
[13] He agreed with the statement made in paragraph 14(a)(iii), even though it was his opinion that it is not necessary to be a professional to make speculative investments. He relied on subsection 39(4) which provides for an election to have all securities transactions deemed to be capital property, and specifically excludes brokers from its application. It must be considered, therefore, that a transaction may be speculative in nature, even though the person is not a broker.
[14] With respect to the statement made in paragraph 14(a)(iv), the Appellant submits that, on the contrary, in a chartered accounting firm, relations with the financial world and business people are predominant. The time spent is longer than the amount of time indicated by the Minister in paragraph 14(a)(v), because he also tuned in to radio and television programs about the securities market and read articles about the stock exchange in the newspapers.
[15] The Appellant argued that it was necessary to establish the taxpayer's intention at the time of the purchase. He referred to Sydney Bossin v. The Queen, DTC 6196, a decision by Collier J. of the Federal Court Trial Division, who considered that an isolated securities transaction was an adventure in the nature of trade.
[16] The summary of this decision reads as follows:
The appellant taxpayer, in addition to his regular profession and occupation as an accountant, engaged in various business transactions, but mainly involving land. He rarely dabbled in the stock-market. However, in February, 1969, some of his companions and himself acquired some speculative shares, through an arrangement whereby the purchase money was loaned to them on the condition that it be repaid one year later with interest. The shares declined in value and faced with the obligation to repay the loan with interest at the end of the year, the taxpayer and his companions sold the shares in February, 1971 at a loss, the taxpayer's portion of which was $14,600 which he sought to deduct in computing his income. The Minister disallowed the deduction contending that the shares were acquired as an investment and, therefore, the loss sustained was on capital account. The taxpayer appealed contending that the transaction, though isolated, was an adventure in the nature of a trade and, therefore, the loss was a deductible business loss. In dismissing the appeal, the Board (74 DTC 1231) held that the transaction did not constitute a venture in the nature of a trade. The taxpayer appealed further.
Held: The appeal was allowed. In determining whether an isolated transaction was an adventure in the nature of a trade, all the factors must be considered and their probative values weighed against each other. This test must be applied regardless of the nature of the commodity in the transaction. Veritably, the taxpayer engaged in an isolated transaction and the evidence clearly established that it was an adventure in the nature of a trade. The loss was, therefore, deductible.
[17] The Appellant noted that this was an isolated transaction, as in Irrigation Industries, a case decided by the Supreme Court of Canada. In his case, there are a number of transactions.
[18] The Appellant also referred to the decision of Beaubier J. of this Court in Oakside Corporation Limited v. M.N.R. 91 DTC 328. He argued that similarly to the facts in that case, his intent was to acquire stock with a high potential for growth, yet entailing some risk. He was not seeking dividend income.
[19] Counsel for the Respondent referred to the decision of Campbell J. of this Court in Goorah v. Canada, [2001] T.C.J., No. 301 (Q.L.), who found that a stock transaction was capital in nature. Counsel cited paragraph 60 of this decision, in which the judge referred to the decision of the Supreme Court of Canada in Irrigation Industries Limited v. The Minister of National Revenue, [1962] S.C.R. 346:
60 In Irrigation Industries Ltd. v. M.N.R., Martland J. said:
It is difficult to conceive of any case, in which securities are purchased, in which the purchaser does not have at least some intention of disposing of them if their value appreciates to the point where their sale appears to be financially desirable. If this is so, then any purchase and sale of securities must constitute an adventure in the nature of trade, unless it is attempted to ascertain whether the primary intention at the time of purchase is to retain the security or to sell it. This, however, leads to the difficulty mentioned by my brother Cartwright that the question of taxability is to be determined by seeking to ascertain the primary subjective intention of the purchaser at the time of purchase.
I cannot agree that the question as to whether or not an isolated transaction in securities is to constitute an adventure in the nature of trade can be determined solely upon that basis. In my opinion, a person who puts money into a business enterprise by the purchase of the shares of a company on an isolated occasion, and not as a part of his regular business, cannot be said to have engaged in an adventure in the nature of trade merely because the purchase was speculative in that, at that time, he did not intend to hold the shares indefinitely, but intended, if possible, to sell them at a profit as soon as he reasonably could. I think that there must be clearer indications of "trade" than this before it can be said that there has been an adventure in the nature of trade. [...]
Conclusion
[20] I refer to the decision of the Federal Court of Appeal in Pollock v. Canada, [1993] F.C.J. No 1055 (Q.L.), confirming the Trial Division judge's decision in which he concluded that it was an adventure in the nature of trade, particularly because of the number of transactions. This Court, in paragraph 28 of the decision, concurred with the judge's statement regarding the decision of the Supreme Court of Canada in Irrigation Industries, supra:
In my opinion, the facts of the present case evince sufficient indications of trade to distinguish it from Irrigation Industries. The most salient disparity, of course, is the number of transactions engaged in by the plaintiff. In Irrigation Industries, the court had to consider an isolated purchase and subsequent sale of shares of one company. In the present case, I am confronted with numerous transactions involving the shares of four companies extending over a period of several years. I give some credence to the plaintiff's testimony that many of his options were exercised in stages to provide necessary financing for the corporations and his explanation for the frequency of dispositions, namely, that the state of the market at times made it impossible for his brokers to arrange for immediate sales of large blocks of shares. Nevertheless, the conclusion that the taxpayer engaged in a multiplicity of share transactions of a business nature is irrefutable.
[21] In Irrigation Industries, supra, the Supreme Court of Canada stated that a speculative intention alone was not sufficient to deem securities transactions to be of a business nature; other elements that are commercial in nature are necessary.
[22] It should be noted that in Irrigation Industries, only one transaction was at issue. In this case, the number of transactions is relatively high considering the Appellant's two accounts, which may constitute an indicator of the commercial nature of the activity. Other indicators for the account at issue include the fact that the Appellant was not seeking dividends, but growth in the value of the stock. The scope of investments comprised technology and computer companies. Because stock in this type of company had previously enjoyed explosive growth, the Appellant was seeking a repetition of that phenomenon. To do so, he risked making a loan on a line of credit. This constitutes risk in an investment situation.
[23] The Appellant's conduct also demonstrates the characteristics of a business person. He communicates constantly with his broker, a person he selected on the basis of that person's calculated risk purchasing methods. He monitors prices in the newspapers. He takes in all possible information about the securities industry. He reads commentators' articles in newspapers and specialized magazines, and he listens to their comments on the radio or on television.
[24] It is my opinion that, on the balance of probabilities, the Appellant acquired the stock at issue for business purposes, not for purposes that are capital in nature.
[25] Consequently, the appeal is allowed.
Signed at Ottawa, Canada, this 25th day of June, 2004.
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"Louise Lamarre Proulx" |
Lamarre Proulx J.
Certified true translation
Colette Dupuis-Beaulne
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REFERENCE: |
2004TCC453 |
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COURT FILE No.: |
2003-3485(IT)I |
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STYLE OF CAUSE: |
Luc Massé and Her Majesty the Queen |
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PLACE OF HEARING: |
Montréal, Quebec |
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DATE OF HEARING: |
May 17, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Louise Lamarre Proulx |
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DATE OF JUDGMENT: |
June 25, 2004 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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For the Respondent: |
Julie David |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |