Harms v. MNR, 84 DTC 1666, [1984] CTC 2714 (TCC)

Rip, TCJ:—This is an appeal from an income tax assessment for 1980 wherein the respondent disallowed the appellant’s claim of a capital gain from profits gained on the disposition of certain gold coins and bars.

The appellant is a certified general accountant who since 1969 admittedly traded in gold, corn, wheat and cotton futures. He has also bought and sold shares of publicly traded companies.

In 1975 the appellant owned his accounting practice, a floor-covering and drapery shop and an office building, all in the city of Chilliwack, BC. In that year a successful client of the appellant — a person whose judgment the appellant respected — advised him he would do better by selling his building and investing elsewhere. The client gave the appellant some literature in economics to read. This literature could be described as ultra-conservative. The appellant then subscribed to reporting service called the International Harry Schultz Letter and in 1976, based on advice in this letter, the appellant sold his drapery and floor-covering business.

The appellant’s interest in this type of literature continued and in 1978 he read a book entitled “How You Can Profit From a Monetary Crisis” (“Crisis”) by one Harry Browne. According to the appellant this book, amongst others, questioned the holding of real estate as a good long-term investment. The appellant accepted the author’s advice and sold his office building in September, 1978.

The appellant testified he was greatly influenced by Browne’s descriptions of various inflationary and deflationary cycles in the United States as well as his reasons for the economic depression which started in 1929. The appellant stated that another book, entitled “Panics and Crashes”, written by one Harry Schultz, the author of the previously cited letter, confirmed Browne’s views and offered more examples of inflationary-deflationary cycles. The appellant testified he was fearful of hyper-inflation occurring in North America, not unlike that which transpired in Germany during the 1920s.

In his book Browne stresses, according to the appellant, that gold is the “best long-term store of value” and that currencies are only substitutes for gold. Browne, said the appellant, predicted an economic crash and that only gold would retain its purchasing power once the economy collapsed. The literature was highly critical of US monetary policy. The appellant testified he readily accepted Browne’s view of the economic situation and in 1978 was convinced that within six to eight years we would be living in a barter economy where gold would be the most valuable commodity. In the meantime the International Harry Schultz Letter was criticizing US monetary policy and the falling value of the US dollar and advised its clients to invest in gold. Other books the appellant read were offering similar advice.* [1] Consequently, out of the proceeds of sale of the office building, on October 4, 1978, the appellant purchased five twenty ounce gold bars for $26,654.55 and ten Kruggerands for $2,936.37.

In November 1979, the appellant began to subscribe to “The Dow Theory Letter” by one Richard Russell; the appellant described this letter as the “oldest investment advisory service in America”. In the June 18, 1980, edition of this letter the author ventured that gold would double its previous high of US $850 per ounce and, if so, “we will ultimately see a time when gold or real money will . . . suck everything into its vortex”. On July 4, 1980, the appellant purchased 100 Maple Leaf coins, being 100 ounces of gold, for $82,680.98.

In 1980 Paul A Volker was named chairman of the Federal Reserve Board and in November, President Jimmy Carter lost his bid for re-election as president of the United States to Ronald Reagan. To the appellant’s advisors a change in US monetary policy was imminent and therefore hyper-inflation might be avoided; in fact, according to the appellant, because of the high interest rates during December 1980, it was feared deflation would be taking over and that cash would be in short supply and thus the value of all assets, including gold, would fall; The Dow Theory Letter, on December 3, 1980, stated that a move by gold below US $582 was a signal for deflation in the economy and it would be time to sell. This confirmed the appellant’s appreciation of Browne’s scenario of the development of inflation over the length of its cycle, as stated on pages 66 to 70 of his “Crisis” book. The sixth step in the scenario was that if government “heeds” the warnings of the economy when inflation is noticeable on a monthly basis to arrest the inflation, a full-scale depression will be initiated. To the appellant it was clear the new US administration would “heed” the warning. The appellant relied on advice “that when the Federal Reserve in the United States stopped printing money it was obvious that we would have deflation and we would do better by placing money into treasury bills” rather than gold. Thus on December 19, 1980, the appellant sold his five twenty ounce gold bars and 100 Maple Leaf coins for $132,847.89. The Kruggerrands were not not sold. He reported the profit as a gain on account of capital.

The respondent assessed the appellant on the basis that the gain on the sale of the gold was a “profit from an adventure in the nature of trade and not a capital gain’’. Counsel for the respondent submitted in evidence a schedule of the appellant’s trading and future contracts for 1980, specifically showing trades in gold, corn, cotton and wheat. During the months of July and September in 1980, the appellant entered into 32 future contracts, 20 of which were for corn, five for wheat, six for gold and one for cotton. In cross-examination of the appellant, counsel for the respondent appeared to take the position that the acquisition of the gold bars in 1978 and the gold coins in 1980 were no different than the appellant’s activities in the commodity futures market and therefore ought to be taxed in the same way. The appellant replied that the acquisitions of the gold bars and coins were separate and apart from his trading in commodity futures; the latter, he said, is purely speculative and can be purchased on margin while in the former he “tied up $26,000 of investment capital” and rather than speculating was making an investment in gold to preserve his capital. The appellant also stated that he took actual delivery of the gold, but the commodity future contracts were held by his broker. In the appellant’s view “you buy gold on the assumption the economy is going to collapse and gold is your alternate source of value”. He stated his only gold purchases were in 1978 and 1980.

When questioned by counsel for the respondent why he did not put all of his money into gold the appellant replied that some stocks were paying 17 per cent dividends and paper money was still useful so long as the economy did not in fact collapse.

Notwithstanding cross-examination, the respondent’s submission in his reply to notice of appeal is that the sale of the gold was a profit from an adventure in the nature of trade; the respondent’s pleadings do not allege that the purchase and sale of the gold was part of the appellant’s commodity futures business.

The cases on what constitutes an adventure in the nature of trade are numerous. One of the leading Canadian cases is the Exchequer Court decision of MNR v Taylor, [1956] CTC 189; 56 DTC 1125. In that case Thorson, P set out criteria which are of assistance in identifying an adventure in the nature of trade. One is that the intention of the appellant at the time he made the acquisition of the asset, although not conclusive, is a most important factor in determining whether the gain from the disposition of the asset is on account of capital or income (vide also Jones v Leeming, [1930] AC 415, Warnford Court (Canada) Limited v MNR, [1964] CTC 175; 64 DTC 5103, Villeneuve v MNR, [1964] CTC 287; 64 DTC 5174 and MNR v N E Lawee, [1972] CTC 359; 72 DTC 6342).

The evidence of the appellant was that after reading a certain school of economic literature he was convinced that the economy was going to collapse and that he would have to purchase gold to preserve at least some of his capital. By preserving capital the appellant meant that the gold retains its purchasing power so that in the event of economic collapse the value of gold would be undiminished and would be the basis of barter; thus while cash falls in value and buys less, gold would purchase what it would have purchased when originally acquired. The appellant maintained this view throughout cross-examination; he stated that his total course of conduct was influenced by the advisory letters and books he read. Even after cross-examination his avowed statement of intention remained intact. The appellant was convinced a barter system was on its way to Canada and counsel for the respondent acknowledged the appellant was of this belief at the times of acquisitions of the gold.

The appellant did not deal in gold in the same way a regular trader in gold would ordinarily do. The appellant testified that he did not sell the gold when it reached its high of US $850 per ounce or even when the price of gold continued to drop; he sold the gold only when warned by advisers he respected of oncoming deflation and that he would be better to invest in treasury bills. He stated his acquisition of the gold had nothing to do with commodity futures; he treated each in a different way.

In Wisdom v Chamberlain (H M Inspector of Taxes), 45 TC 92 the Court of Appeal in England held that the gain on the sale of silver bullion was a profit from an adventure in the nature of trade. In that case an actor had assets worth £150,000 to £200,000 and an annual income of £40,000. His affairs were managed by a business manager. In the autumn of 1961 the business manager was worried that the pound might be devalued. After considering what was the best hedge, he decided to buy silver bullion, which was linked with the United States currency. He ascertained that the price had not varied by more than three per cent for the five years prior to the autumn of 1961 and there was no substantial likelihood of a sudden fall or rise. In November 1961 the business manager made an appointment some days in advance with a firm of bullion brokers with a view to buying £200,000 worth of silver on behalf of the appellant. On the day of the appointment the price rose suddenly, owing to action by the United States Treasury which the business manager had not foreseen. Consequently the brokers would only sell £100,000 worth. The business manager bought that amount on the terms that the brokers would lend the appellant £90,000 with interest at 3 per cent over bank rate and would repurchase at the same price at any time in the next six months. The business manager persevered in trying to buy a further £100,000, and in March 1962 the brokers agreed, if the old bargain was closed by repurchase. Accordingly on March 30, 1962, the first transaction was closed, at a loss of £3,000. On April 4, 1962, a new bargain was made for £200,000 of silver, the brokers undertaking to buy back for £210,000 anytime before October 12, 1962, provided that, if the price fell more than 4d. per ounce, they might require the appellant to elect between exercising his option and letting it lapse. The transaction was financed by loans of £160,000 from a bank and of £40,000 from the brokers, both at high rates of interest to be paid for one year in any event. In the autumn of 1962, the pound recovered and the price of silver jumped, and in October 1962 and in January 1963 the appellant sold his silver through the brokers at a clear profit of £48,000, disregarding the interest paid. If he had sold at the purchase price, he would have incurred a loss of £7,000 because of interest paid. On October 31, 1961, The Times newspaper had forecast a rise in silver prices following activities of the United States Treasury. On March 23, 1962, it wrote about a short-term improvement in the sterling crisis. On October 20, 1962, it announced a new all-time peak in silver prices. The business manager did not read any of these passages.

Mr Wisdom claimed the transactions were on account of capital. The taxing authorities assessed on the footing that the transactions were an adventure in the nature of trade. The appellant contended that silver was not a commodity which he would have bought if he had intended to make a quick profit, and the object of the transactions, which were really one transaction, was to minimize possible loss through devaluation. The Crown contended that the silver was purchased for the intention of reselling at a profit, that owing to interest charges it could not have been held for a long period and that articles in The Times showed that at the end of October 1961, a rise in the silver was expected and that at the beginning of 1962 the fear of devaluation had passed.

This case went to the Court of Appeal and Harman, LJ held that even if the acquisition of the silver was as a hedge against devaluation:

. . . it was nevertheless a transaction entered into on a short-term basis for the purpose of making a profit out of the purchase and sale of a commodity, and if that is not an adventure in the nature of trade I do not really know what is. The whole object of transaction was to make a profit. It was expected that there would be devaluation, and the reason for wanting to make a profit was that there would be a loss on devaluation; but that does not make any difference, it seems to me, to the fact that the motive and object of the whole transaction was to buy on a short-term basis a commodity with a view to its resale at a profit. That, as it seems to me, is an adventure in the nature of trade . . . (page 106) (Emphasis added)

In the case at bar the appellant used his own money, being the proceeds of the sale of an office building, to purchase the gold. Although the sale of the gold was only six months after the second purchase of gold, that is of 100 Maple Leaf coins, there is no evidence, nor may one infer, that the intent of the appellant was to sell the gold at the time of either acquisition; the second acquisition took place, according to the appellant, because in July 1980 the economy still looked as if it were heading for collapse.

In Southco Holdings and Management Ltd et al v MNR, [1975] CTC 2205; 75 DTC 162, a decision of the Tax Review Board, Mr St-Onge, as he then was, found that gold was purchased with the intention of “reselling it at the best opportunity”. In 1968, Southco Holdings and Management Ltd purchased 8,400 ounces of gold which it sold in 1969 at a profit of $51,870. In subsequent transactions the corporation and its principal shareholder also bought and sold gold at a profit. The gold was allegedly purchased as a hedge against inflation and it was admitted that mere ownership per se was of no benefit unless a subsequent sale took place. On two occasions gold was sold to meet pressing business demands. In the appeal at bar there was no evidence the appellant participated in other gold coin or bullion transactions. In fact, the appellant testified that the only time he purchased gold was in 1978 and 1980. Mr Harms testified that he did not sell the gold at his best opportunity; he stated he could have sold the gold at a much higher price had this been his intention. He fully expected he would require the gold for barter.

I have difficulty in finding that these transactions were entered into on a short-term basis or that the appellant intended to sell the gold at his best opportunity.

Troubled economic times are frequently ripe for various people of various views to form and write various economic treatises and expound various solutions to a multitude of people. Some may be “pie in the sky” solutions and others may some day lead to a Nobel prize. In this appeal the Court must determine if the taxpayer was motivated solely by what he read and believed in arriving at a decision to purchase the gold and that the potential resale of gold was not a factor in arriving at the decision; if that is the case any profits on the sale of the gold are on capital account. Cross-examination did not reveal any fact on which one could even infer that the appellant purchased the gold for resale; the appellant was convinced the economy was going to collapse and that gold would serve as the basis of any barter system that would evolve.

As in the appeals of Lawee and Montford Lakes Estates Inc v The Queen, [1980] CTC 27; 79 DTC 5467, the appellant acquired property, in this case gold, as a source of security. By holding the gold Mr Harms had some security and peace of mind in the event the future should unfold as he expected.

Accordingly, the appeal is allowed and referred back to the respondent for reconsideration and reassessment.

Appeal allowed.