Wellington Hotel Holdings Limited (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Urie J.—London, June 28;
Ottawa, July 23, 1973 .
Income tax—Business income, computation—Losses on
securities sustained by hotel company—Whether deductible
as business losses.
Appellant company's principal business was the operation
of a hotel and restaurant. In 1969 it also engaged in the
purchase and sale of securities from which it sustained a
loss of over $20,000, which it sought to deduct from its
other income in computing its income tax for 1969.
Held, on the evidence appellant purchased the securities
not as investments but on speculation and the losses were
properly deductible as business losses.
Canada Permanent Mortgage Corp. v. M.N.R. 71 DTC
5409; Admiral Investments Ltd. v. M.N.R. 67 DTC
5114; Gairdner Securities Ltd. v. M.N.R. [1954] C.T.C.
24 followed. Irrigation Industries Ltd. v. M.N.R. [1962]
S.C.R. 346 distinguished.
APPEAL from Tax Review Board.
COUNSEL:
J. A. Giffen, Q.C., for appellant.
R. B. Thomas for respondent.
SOLICITORS:
Giffen and Pensa, London, for appellant.
Deputy Attorney General of Canada for
respondent.
URIE J.—This is an appeal from a decision of
the Tax Review Board dated the 30th day of
May, 1972 whereby an appeal by the appellant
from its re-assessment for the taxation year
1969 in which the respondent disallowed the
appellant's deduction for losses sustained by it
in the sale of marketable securities, was
dismissed.
The appellant was incorporated under the
laws of the Province of Ontario by Letters
Patent dated November 8, 1962 and since that
date its principal business was the operation of
an hotel and restaurant in the City of London,
the gross sales of which for the year ending
December 31, 1969, were as follows:
Friar's Cellar, food and beverages $407,892.00
Hotel, food and beverages 339,642.00
Catering 65,074.00
Rooms 352.00
Miscellaneous revenues 16,879.00
Total $829,839.00
The operating head of the company is Edward
J. Escaf who is a graduate in Commerce and
Business Administration from the University of
Western Ontario and he has been associated
with the appellant from its inception. Prior to
that he had also been in the family hotel busi
ness which I take it was the predecessor to the
present operation. The other officers of the
company are his brother, Fred Escaf, and his
sister Adeline who takes no active part in the
operations of the business. Fred Escaf is
primarily responsible for the catering division
and the general supervision of the operation,
reporting to Edward Escaf.
One of the objects of the company as set
forth in its Letters Patent reads as follows:
(a) To purchase or otherwise acquire and to hold, sell,
exchange or otherwise dispose of and deal in the property,
real or personal, rights and assets of and bonds, debentures,
debenture stock, shares of all classes and securities of any
form or type issued by any individual, corporation or com
pany, public or private, incorporated or unincorporated;
Edward Escaf testified that by reason of his
university training he had always been interest
ed in the stock market and had personally dab
bled in buying and selling securities in a small
way for a number of years. In 1967 the direc
tors of the appellant decided to cause the com
pany to engage in the business of buying and
selling securities pursuant to the powers given
to it as referred to above. In 1968 the appel
lant's operations in this regard resulted in a
small loss of $125 or $130 which was not
claimed as a trading loss in the operations of the
company. Mr. Escaf testified that he himself
was not a professional analyst but purchased
stock on the advice of persons who were con
nected with the companies in which he invested,
of relatives, of his solicitor and of brokers. Most
stocks were purchased on margin, most were
speculative and were purchased with a view to
capital appreciation and not for dividend earn
ings and all but one were listed on the Toronto
Stock Exchange. He stated that so far as he was
concerned the securities which he purchased on
behalf of the company were part of the compa-
ny's inventory for resale. Usually the sales were
made on the advice of brokers or because, in a
falling market, it was necessary to meet the
margin requirements of the particular brokerage
house with whom he had been dealing. The only
formal advice which he received with respect to
changes in the portfolio was from brokerage
houses.
Set out hereunder is a statement of the pur
chases and sales of securities made by the
appellant during the years 1968 and 1969 being
Exhibit A-3 in part:
WELLINGTON HOTEL HOLDINGS LIMITED
TRANSACTIONS IN MARKETABLE SECURITIES
TRANSACTIONS DE TITRES NÉGOCIABLES
1969 AND /ET 1968
Purchases—Achats Sales— Ventes
-- - — — Profit
# of # of or
shares shares (loss)
Date — Amount Date — Amount -
- # # — profit ou
Date d'actions Montant Date d'actions Montant (perte)
Numac Oil & Gas
Ltd Apr.—Avr. 23/69 300 $ 3,494.64 Sept.—Sept. 5/69 500 $ 4,159.50
Apr.—A vr. 29 /69 200 2,152.00
500 $ 5,646.64 500 $ 4,159.50 $(1,487.14)
I.T.L.Industries May—Mat 12/69 200 $ 4,418.76 Nov.—Nov. 12/69 500 $ 8,335.00
May—Mai 12/69 300 6,703.50 Aug.—Août 21/69 400 6,767.48
May—Mai 14/69 300 Aug.—Août 21 /69 400 6,767.48
May—Mai 14 /69 100 . 11, 059.46
May—Mai 14/69 100,
July—Juil. 24 /69 100 1,757.13
July—Juil. 24 /69 100 1,757.13
July—Juil. 28 /69 400 7,028.52
July—Juil. 28/69 400 7,028.52
2,000 $ 39,753.02 1,300 $ 21,869.96 (5,583.15)
Ontario Store
Fixtures Aug. -Août 19/69 500 $ 9,413.75 Aug. -Août 22/69 100 $ 1,766.50
Aug. -Août 25/69 500 9,916.25 Aug. -Août 2 2 / 6 9 300 5,038.32
Aug. -Août 22/69 100 1,741.62
Sept.-Sept. 10/69 100 1,381.37
Sept.-Sept. 10/69 100 1,455.62
Sept.-Sept. 10/69 100 1,418.50
Sept.-Sept. 12/69 200 2,713.24
Adj. /Aj. (1.40)
1,000 $ 19,330.00 1,000 $ 15,513.77 (3,816.23)
Brascan Limited Nov.-Nov. 14/69 3001 $ 8,057.02
2005
Nordic Explora
tions Ltd Mar.-Mar. 6/69 500 1,048.20 Sept.-Sept. 5/69 200 $ 371.04
Mar.-Mar. 6/69 500 1,048.20 Sept.-Sept. 8/69 250 439.49
Mar.-Mar. 6/69 1,000 2,147.80 Sept.-Sept. 9/69 200 371.04
Mar.-Mar. 6/69 1,000 2,147.80 Sept.-Sept. 9/69 1,016 1,884.88
May-Mai 6/69 500 1,125.25
May-Mai 6/69 500 1,125.25
May-Mai 6/69 500 1,125.25
May-Mai 6/69 500 1,125.25 Adj. /Aj. 60.00
5,000 $ 10,893.00
Consolidated 3 to 1
Consolidation 3 Ã 1 1,666 $ 10,893.00 1,666 $ 3,126.45 (7,766.55)
Bluewater Oil &
Gas Ltd Apr.-Avr. 11/69 5,000 $ 2,955.00
Capital Diversified
Industries Sept.-Sept. 15/69 100) Dec.-Déc. 23/69 300 $ 848.31 _ (444.88)
Sept.-Sept. 15/69 700 } $ 4,310.64
Sept.-Sept. 15/69 200J
1,000 $ 4,310.64 300 $ 848.31
Pinnacle
Petroleums Ltd Oct.-Oct. 1 7 / 6 8 1,000 $ 2,610.10 Apr.-A vr. 25 /69 2001 $ 3 ' 809.74
Oct.-Oct. 25/68 800 1, 759.28 Apr.-Avr. 25/69 1, 800J
Oct.-Oct. 29/68 200 440.26
2,000 $ 4,809.64 2.000 $ 3,809.74 (999.90)
Ulster Petroleum Dec.-Déc. 20/68 100 $ 225.00 /69 100 $ 550.00 325.00
Versatile Manu
facturing Limited /68 100 $ 1,366.88 May-Mai 5/69 100 $ 925.00 (441.88)
Loss on sale of marketable securities
Perte sur la vente de titres négociables $20,214.73
1969 -- _=
Numac Oil &
Gas Limited Aug. Août 8/68 300 $ 2,278.05 Dec.-Déc. 6/68 600 $ 4,317.90
Aug. -Août 2/68 700 5,279.47 Dec.-Dec. 6/68 200 1, 439.30
Dec.-Déc. 6/68 200 1,439.30
1,000 $ 7,557.52 1,000 7,196.50
500 rights—droits 106.75
500 rights—droits 116.75
$ 7,420.00 $ (137.52)
Dividends—Dividendes 12.00
1968:
Loss on sale of marketable securities
Perte sur la vente de titres négociables $ (125.52)
Mr. Escaf testified that he frequently pur
chased stock because of some knowledge of the
company in question. For example Capital
Diversified Industries is a company the head
office of which is in London, Ontario and the
president of which was known to Mr. Escaf. It
was the franchiser of the Red Barn chain of
restaurants and Mr. Escaf felt that it had a
reasonable future by reason of the nature of its
business, its management and its prospects.
Similarly, the president of Ontario Store Fix
tures was known to Mr. Escaf since he pur
chased equipment for the appellant's hotel and
restaurant operations from that firm and he
purchased the stock on the recommendation of
the president.
ITL Industries had its office at the City of
Windsor and through a relative there he learned
that the company was to market a safety cap for
medicine bottles which it appeared to him would
give the company good prospects of financial
success and he therefore purchased shares of
that company from time to time as is shown on
the schedule. He stated that he sold out when he
learned that the company was unable to patent
the safety cap and therefore the prospects for a
successful future had dimmed considerably.
Nordic Explorations Limited, Ulster
Petroleum, Versatile Manufacturing Limited
and Pinnacle Petroleum were all purchased on
the recommendation of brokers.
Numac Oil and Gas Limited was purchased
because Mr. Escaf knew that the Ivey family in
London, which is well known in business cir
cles, had a large interest in the company and
that in his opinion, therefore, there would be
good management with a good growth potential.
Bluewater Oil and Gas was purchased on the
recommendation of his solicitor.
He pointed out that the appellant traded
securities having an approximate value of
$135,000 in 1969 which sum was approximately
16% of the gross sales of the company. Under
cross-examination he stated that during the
years 1968, 1969 and 1970 about 10% of his
time was involved in the trading of securities
and there were very few days that he was not in
one or more brokerage offices and was in tele
phonic communication with brokers at least five
or six times each day. He also admitted that he
had a personal portfolio during that period of
time but described it as small compared to that
of the appellant. As can be seen from the state
ment and as Mr. Escaf testified, the appellant
was not involved as an underwriter or a promot
er of any of the stocks in question, it had no
control of any of the companies and it had no
intention of maintaining a market in any of the
shares. Moreover, the appellant did not do busi
ness with any of the companies on the list after
it became a shareholder in those companies.
Ward Fowler, a securities salesman with Nes-
bitt, Thompson Limited, testified that all of the
transactions shown in the summary above were
in marketable securities and described them as
"trading type securities" for businessmen inter
ested in investing risk capital. They were
speculative in nature and were made with the
hope of capital appreciation rather than divi
dend earnings. There was more risk than in
investment grade securities, investment in
which is primarily for modest profits and divi
dend income together with safety of capital. Of
those stocks listed in Exhibit A-3 only Brascan
Limited was a dividend paying stock.
The result of all the transactions referred to
above resulted in a loss on the sale of securities
in 1969 of $20,214.73 and this sum was claimed
as a trading loss deductible from the appellant's
1969 income for tax purposes. It is to be
observed from Exhibit A-3 that during the fiscal
year 1969 the appellant completed 26 purchases
and 20 sales of securities. This amount of trad-
ing may be somewhat misleading because in a
number of instances it may be that a single
order was placed for shares of stock and the
order was filled by a number of purchases. For
example, on March 6, 1969, four purchases of
Nordic Explorations Limited were made in two
blocks of 500 shares each and in two blocks of
1000 shares each. Mr. Escaf was not able to
recall whether he placed four separate orders on
that day although he felt that probably individu
al orders were placed. There are other instances
in the list, of course, where a similar situation
prevails although the purchases of ITL Indus
tries on May 14, 1969, of Brascan Limited on
November 14, 1969 and of Capital Diversified
Industries on September 15, 1969, have been
combined in the schedule as one purchase. Pre
sumably, therefore, it could be taken that the
others which are not bracketed were individual
orders although Mr. Escaf was unable to so
state.
The Minister disallowed the loss of
$20,214.73 as a deduction from income for the
appellant's 1969 taxation year on the ground
that the losses incurred by it were capital losses
within the meaning of section 12(1)(b) of the
Income Tax Act. The pertinent sections of the
Act read as follows:
3. The income of a taxpayer for a taxation year for the
purposes of this Part is his income for the year from all
sources inside or outside Canada and, without restricting the
generality of the foregoing, includes income for the year
from all
(a) businesses,
(b) property, and
(e) offices and employments.
4. Subject to the other provisions of this Part, income for
a taxation year from a business or property is the profit
therefrom for the year.
139. (1) In this Act,
(e) "business" includes a profession, calling, trade, manu
facture or undertaking of any kind whatsoever and
includes an adventure or concern in the nature of trade
but does not include an office or employment;
12. (1) In computing income, no deduction shall be made
in respect of
(b) an outlay, loss or replacement of capital, a payment
on account of capital or an allowance in respect of
depreciation, obsolescence or depletion except as express
ly permitted by this Part, ... .
Counsel for the appellant argued that the
losses were not capital losses within the mean
ing of section 12(1)(b) since his client was in the
business of trading in securities as well as in the
hotel and restaurant business and the losses
incurred in such trading were, therefore, deduct
ible and in support of his submission argued:
1. that the declared objects of the company
included dealing in securities;
2. that during the year 1969 the appellant had
engaged in 26 purchases of blocks of securities
and the sale of 20 blocks of securities;
3. that the majority, if not all, of the securities
bought and sold were speculative in nature and
non-income producing;
4. that the securities were treated by the appel
lant as inventory to be bought and sold and that
he envisaged selling the shares at a profit just as
he would sell the inventories of food and bever
ages used in the hotel and restaurant business of
the firm, at a profit;
5. that the dollar value of the purchases and
sales amounted to about 16% of the gross sales
derived from the restaurant and hotel
operations;
6. that the elapsed time between the purchases
and sales was relatively short;
7. that the securities were usually purchased on
margin as was evidenced by Exhibit A-4 and
was in effect borrowed capital upon which
interest was paid;
8. that in making its investments the appellant
did not engage the services of a separate invest
ment counsel but acquired its investment infor
mation from various sources;
9. that it was not surplus capital of the firm
which was being used for purposes of invest
ment and re-investment but it was what has
been described as circulating or borrowed
capital.
In support of his submissions appellant's
counsel relied basically on two cases, Canada
Permanent Mortgage Corporation v. M.N.R. 71
DTC 5409 and Admiral Investments Limited v.
M.N.R. 67 DTC 5114.
Counsel for the respondent, on the other
hand, relied on Irrigation Industries Limited v.
M.N.R. [1962] S.C.R. 346 as holding that shares
of stock of a company are different from other
commodities or properties and even if pur
chased with the specific intention of making a
profit, any profit or loss incurred in the sale
thereof was for a capital gain or capital loss. He
argued that until the Irrigation Industries deci
sion (supra) in 1962 the Minister likely would
have agreed that the losses were deductible but
that case changed the law. As I understood his
submissions, securities traded by persons or
companies engaged only incidentally in that
business are not taxable since securities repre
sent an investment in a company which is itself
created for the purpose of doing business, any
expression of intention not to invest but to trade
in securities by the appellant's officers
notwithstanding.
The Lord Justice Clerk in the leading author
ity cited in cases of this kind, namely Californi-
an Copper Syndicate v. Harris (1903-1911) 5
T.C. 159, at pages 165 and 166 sets forth clear
ly the two different business situations which
must be distinguished from the evidence in any
case:
It is quite a well settled principle in dealing with questions of
assessment of Income Tax, that where the owner of an
ordinary investment chooses to realise it, and obtains a
greater price for it than he originally acquired it at, the
enhanced price is not profit.... assessable to Income Tax.
But it is equally well established that enhanced values
obtained from realisation or conversion of securities may be
so assessable, where what is done is not merely a realisation
or change of investment but an act done in what is truly the
carrying on, or carrying out, of a business; ... .
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 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? (The emphasis is mine.)
From this it would appear clear that whether a
series of transactions results in a capital gain or
loss or a trading profit or loss is a question of
fact to be determined after considering all of the
surrounding circumstances.
Does the fact that a company is empowered
by its Letters Patent to buy and sell securities
have any significance in the determination of
which of the two classes of case the case at bar
falls? In the Canada Permanent Mortgage Cor
poration case (supra) Heald J. at page 5417
refers to the case of The Commissioners of
Inland Revenue v. The Scottish Automobile and
General Insurance Company Limited and in par
ticular to the judgment of Lord President Clyde
at pages 389 and 390:
I think, however, it must be admitted that, within the limits
of moneys not so immediately required, the terms of the
memorandum and articles would not, as a matter of con
struction, exclude dealings similar in kind and object to
those which are characteristic of the business carried on by
an investment company. But this carries us hardly any
distance at all, because the question is not whether the
Company might possibly have traded as an investment com
pany, but whether it was in fact trading as such, and
whether this particular transaction was part of that trading.
(The emphasis is mine.)
In Sutton Lumber and Trading Company
Limited v. M.N.R. [1953] 2 S.C.R. 77 at page
83, Locke J. concisely stated the relevance of
the company's objects in determining questions
of this kind as follows:
The question to be decided is not as to what business or
trade the company might have carried on under its memo
randum, but rather what was in truth the business it did
engage in. To determine this, it is necessary to examine the
facts with care.
On the basis, therefore, of the quoted pas
sages I do not attach any particular significance
to the fact that the appellant was empowered by
its Letters Patent to trade in securities. Rather, I
think, that one must look at its whole course of
conduct in respect of its share transactions to
determine the true purposes for which the trans-
actions were entered into and as Heald J. stated
at page 5418 of the Canada Permanent Mort
gage Corporation decision (supra) "the course
of conduct should be given precedence over the
oral testimony of company officers as to the
intent of the company where there is a conflict
between the two."
In Gairdner Securities Limited v. M.N.R.
[1954] C.T.C. 24 at page 26, Mr. Justice Rand
summarized the course of conduct in that case
as follows:
Between April 30, 1938 and December 31, 1946 roughly
124 purchases and 200 sales took place.
In these latter, of eight purchases amounting to 32,920
shares, 17,180 were resold on the same day, 2,475 within
one month, 5,000 within two months, 5,000 within three
months, 1,000 within four months and 2,265 within eighteen
months. Of nine purchases made after 1946 amounting to
22,260 shares, 2,000 were resold on the same day, 1,000 in
one month, 2,500 in two months, 3,500 in six months, 2,000
within one year, 9,260 within two years and 2,000 within
three years.
These complementary transactions in buying and selling
on their face bear the imprint of a course of action pursued
with a view to making a profit through their ultimate
result; ... .
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. (The emphasis again is mine.)
I think that the transactions undertaken by the
appellant as set forth in Exhibit A-3 "bear the
imprint of a course of action pursued with a
view to making a profit ...."
This view is, of course, reinforced by the
testimony of Mr. Escaf which, while relevant, is
not necessarily conclusive. I found Mr. Escaf's
testimony to be credible and I think that when it
is viewed with the conduct of the appellant in
the purchase and sale of securities which were
obviously not of "investment grade" but of
"speculative grade" it can be accepted, as I do
accept it, as corroborative of such course of
conduct.
Mr. Escaf was not looking for safe invest
ments, he was looking for a greater return
through appreciation in the value of his securi
ties. Unfortunately, the appreciation did not
take place and the appellant, therefore, suffered
losses and in my opinion such losses are deduct
ible from the appellant's income for the purpose
of determining its taxable income.
The respondent's counsel, as above stated,
referred to the following passage from the Irri
gation Industries case (supra) at page 352:
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 com
merce, but represent an interest in a corporation which is
itself created for the purpose of doing business. Their acqui
sition is a well-recognized method of investing capital in a
business enterprise.
To put the quoted passage in its proper con
text it is necessary, I think, to examine the issue
in the case as defined by Martland J. At page
349 he states the issue:
The issue in this appeal is as to whether an isolated purchase
of shares from the treasury of a corporation and subsequent
sale thereof at a profit, not being a part of the business
carried on by the purchaser of the shares, or in any way
related to it, constitutes an adventure in the nature of trade
so as to render such profit liable to income tax.
From the definition of the issue it is quite
clear that the circumstances in that case differ
substantially from those in the case at bar. This
was not an isolated purchase of shares and
subsequent sale. It was one of a substantial
number of purchases and sales made in one
taxation year as part of the business carried on
by the purchaser of the shares. In the Irrigation
Industries case (supra) the appellant had been
largely inactive whereas in this instance the
appellant was actively engaged in the hotel and
restaurant business and also in the purchase and
sale of securities. While the two businesses are
not related I do not think that that fact in itself
precludes the possibility of the appellant engag
ing in a business other than its main business.
On this basis, therefore, I do not understand
Martland J. to have rejected the possibility that
a company can engage in the business of trading
in securities notwithstanding that it is not its
main business and it is not a securities broker in
the accepted sense.
In fact, Martland J. in writing the judgment
for the Supreme Court of Canada in a later case,
Whittall v. M.N.R. [1967] C.T.C. 377 concluded
that the appellant in that case in the acquisition
of the securities in question was endeavouring
to make a profit from a trade or business, at all
material times and, therefore, profits derived
from sales were taxable. He found that the
exchanges of securities were not a substitution
of one form of investment for another. While he
did not distinguish his judgment in the Irrigation
Industries case (supra) he referred to it in the
Whittall case (supra) and by implication I think
it must be taken that he agrees that in a given
set of circumstances persons or corporations
not solely in the securities business who deal in
corporate shares can be engaged in an adven
ture in the nature of a trade within the meaning
of section 139(1)(e) of the Income Tax Act.
Such being the case, therefore, profits acquired
from such trading would be taxable in the hands
of the persons or corporations dealing in such
shares and, of course, losses incurred would be
deductible in computing their taxable income.
The additional facts in evidence upon which I
rely to support my view are that the securities
bought and sold were speculative in nature,
were non-income producing, were held for rela
tively short periods of time and formed a sub
stantial portion of the total business of the
appellant. The fact that it was not part of the
main business of the appellant is, in my view as
above stated, of no particular significance. The
whole course of conduct of the appellant leads
inevitably to the conclusion that it is buying and
selling securities to make a profit.
I cannot agree with submissions of counsel
for the respondent in respect of his reliance on
the Irrigation Industries case as supporting his
proposition that the losses incurred were capital
losses and I have reached the conclusion that
the shares in question in this appeal were not
investments in the sense referred to in the Irri
gation Industries case nor were the changes
made in the appellant's portfolio merely changes
of one form of investments to another. The
purchases were purely speculative and were
entered into with the intention of disposing of
the stock at a profit as soon as there was
reasonable opportunity of so doing.
The following excerpt from the judgment of
Cattanach J. in Admiral Investments Limited v.
M.N.R. [1967] 2 Ex.C.R. 308 at page 319 suc
cinctly states my views in the case at bar:
What must be looked at is what was done by the appellant
with a view to asking the question in Lord President Clyde's
words in C.I.R. v. Livingston et al (11 T.C. 538 at p. 542):
... whether the operations involved (in the transactions
of the company) are of the same kind, and carried on in
the same way, as those which are characteristic of ordi
nary trading in the line of business in which the venture
was made.
While the appellant was not a trader in securities in the
sense of that term that it was an underwriter and held a seat
on a stock exchange, but rather made its purchases and sales
through a stock exchange in the usual manner, nevertheless,
the acts of the appellant were just the ordinary transactions
of a person who deals in shares.
Therefore, in my opinion, the appellant is
entitled to deduct the loss of $20,214.73 that it
incurred in its 1969 taxation year.
The appeal is therefore allowed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.