On April 21, 2017, the Tax Court of Canada rendered its judgment in Foote v. The Queen, 2017 TCC 61. As Blue J Tax correctly predicted with 95%+ confidence, the Court held that the taxpayer’s gains from trading in securities should be characterized as business income.
How consistent was this decision with prior decisions? Our Blue J Tax analysis of the case follows.
In Foote, the taxpayer was the Co-Head of Institutional Trading at a full-service investment firm, with extensive expertise and experience in the investment industry. In 2009, the taxpayer personally purchased and sold stocks costing $2.5 million, resulting in a total gain of $550,000. The taxpayer reported this gain as a capital gain in his 2009 income tax return, and the CRA reassessed to include the full amount of the reported capital gain as business income. The taxpayer appealed to the Tax Court of Canada.
At the Tax Court, the taxpayer argued that his expertise and experience in the investment industry did not extend to what he regarded as actual trading activities, and thus was not relevant to the analysis of whether his securities trading was part of an adventure in the nature of trade. The court rejected this argument. The evidence showed that the taxpayer had been in the investment industry for over 25 years, occupying highly senior positions that gave him above average access to market information, which he used to make his trading decisions.
The taxpayer also argued that his investment strategy had remained unchanged from previous years: his strategy had always been to invest in diversified securities that have a potential for 30% returns within a reasonable time period (e.g., 2.5 years).
The court also rejected this argument. There was no evidence to corroborate this investment strategy: there was no written record of this objective, and there was no detailed evidence about the taxpayer’s trading activities from prior years. This led the court to consider only the actual activity in the taxpayer’s accounts in 2009, from which the court concluded that the taxpayer intended to sell the 2009 securities purchases as soon as he could realize a reasonable gain, and that he expected that to be a very short time frame in the circumstances.
In dismissing the appeal and finding that the taxpayer was indeed trading in the securities as a business activity, the court considered the following key factors: 1) the taxpayer’s primary intention when purchasing the securities was to sell them at a profit as soon as a reasonable return could be realized; 2) the taxpayer spent considerable time each day monitoring the markets, and he had access to market information that was well beyond average, which he used to make his trading decisions; 3) the taxpayer had substantial expertise and knowledge in buying and selling securities; 4) the taxpayer was buying and selling securities regularly throughout the year; 5) the taxpayer’s holding periods were clearly short, with the average hold period being 50 days.
Blue J Tax Case Analysis
- Blue J Tax correctly predicted the outcome of the Foote case with 95%+ confidence.
- Even if the Court had accepted Mr. Foote’s testimony that he intended to hold the securities for a longer time frame (one year or more), this would not have changed Blue J Tax’s prediction or confidence level.
- If Mr. Foote’s occupation did not involve dealing in securities and he was not knowledgeable about the securities market, Blue J Tax predicts that the gains from securities trading would have been on account of capital with 93% confidence.
Securities Trading Insights
- 61% of cases on the issue of securities trading have resulted in a finding that the gains or losses should be characterized as income.
- Where the taxpayer intended to hold the securities for less than one year, the court holds that the gains or losses should be characterized as income 60% of the time.
- Where the taxpayer’s ordinary occupation or business involves trading or dealing in securities, the court holds that the gains or losses should be characterized as income 81% of the time.
- Each time you run our Securities Trading Classifier, you apply the entire body of case law to your client’s situation.
- Want to make sure you are considering all the new securities trading cases when you give your advice? Blue J Tax reflects the newest case law and takes every case into account when providing its prediction.