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Sale of Shares Deemed Business Income

Subject: Capital vs. Income - Shares Number: 06-31 Date: 11/24/2006

Facts are key to determine tax treatment of share sales, not the classification on the tax return

In the recent case of Hawa (2006 TCC 612), the issue was whether the taxpayer had incurred a non-capital loss or a capital loss on the sale of shares in 2000 and 2001. In 2001, the taxpayer had 151 purchases and many sales of stock through two brokers. When the taxpayer filed his tax return, he mistakenly reflected capital losses instead of non-capital losses for the years 2000 and 2001.

The CRA’s main argument as to why the losses should be on account of capital and not on account of income was that the taxpayer had reflected the transactions as capital losses in his tax return. The judge quickly dismissed the classification on the tax return as irrelevant. Instead, he said that the facts of the case must be reviewed in order to determine whether the taxpayer was carrying on a business or not. The judge clearly stated that based on the “volume of trades, the rapidity of turnover and the appellant’s own testimony that he was buying and selling shares to realize a profit indicate that the concerted activity of the appellant was clearly the carrying on of a business.”

The judge also stated that the taxpayer was not carrying on an adventure in the nature of trade but was carrying on a business. He stated that the volume of transactions was not an adventure in the nature of trade but was a business.

This is a case that appears to be obvious, given the volume of transactions that occur. However, this is also a good indication of the importance of filing the tax return properly. If a taxpayer reports the wrong amounts or classifies the transactions improperly, and then tries to correct them, it is likely that the CRA will challenge the change even if it is correct.

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