http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/143508/index.do
Zhu v. Canada (April 14, 2016 – 2016 FCA 113, Dawson (author), Near, Boivin JJ. A.).
Précis: This is an appeal of a Tax Court decision blogged earlier on this site. Mr. Zhu argued unsuccessfully before the Tax Court that he should be entitled to deduct losses incurred by him on the disposition of shares at a time he was a non-resident of Canada. The Tax Court held that the losses were not incurred in the course of a business carried on in Canada under the common law test. The Federal Court of Appeal permitted him to raise a new argument on appeal, i.e., whether the losses were incurred in the course of a business carried on in Canada under the expanded test found in paragraph 253(b) of the Income Tax Act (the “ITA”). After consideration of the new argument the Court concluded that the losses were not incurred in Canada under the expanded test and dismissed the appeal with costs.
Decision: Mr. Zhu’s counsel advanced a very broad theory of the application of paragraph 253(b) of the ITA. It did not meet with success before the Court of Appeal:
[9] In order to consider the application of subsection 253(b) it is necessary to set out the relevant facts:
• The appellant was the Chief Financial Officer of Canadian Solar Inc. (CSI) from 2005 to June 6, 2008.
• During his employment with CSI, the appellant was granted the option to purchase 116,000 shares of CSI.
• In the 2008 taxation year, the shares of CSI were listed on the NASDAQ stock exchange, an American stock exchange.
• Upon the appellant’s resignation from CSI on June 6, 2008, the appellant ceased to be a resident of Canada for income tax purposes.
• On September 4, 2008, the appellant exercised his option to purchase 53,150 shares of CSI.
• On November 17, 2008, the appellant sold 25,000 shares at a price of $5.9065 (U.S.) per share.
• The next day, on November 18, 2008, the appellant sold the remaining 28,150 shares of CSI at a price of $5.3658 (U.S.) per share.
• As a result of the November 17 and 18, 2008, transactions, the appellant suffered a loss of $1,247,657.
• The appellant completed the November, 2008 trades through a stock broker based in the United States.
[10] The appellant submits that when an individual lists shares of a publicly listed corporation for sale on a particular stock exchange, the individual makes the share available to anyone who is willing to purchase the share, without any territorial restriction. It follows, the appellant submits, that the mere act of listing the sell order on a stock exchange in which a Canadian resident may purchase the shares is sufficient to meet the requirement that he solicited orders or offered the CSI shares for sale in Canada.
[11] I disagree.
[12] Assuming that listing publicly traded shares for sale on a stock exchange constitutes a solicitation or offer within the meaning of subsection 253(b), the solicitation or offer must take place in Canada. Offering shares listed on an American exchange through an American broker does not constitute the solicitation of orders or the offering of anything for sale in Canada by the offeror.
[13] The contrary conclusion would be inconsistent with the purpose of section 253, which has been held to be “to subject non-resident persons to Canadian tax provided they carry out a minimum amount of commercial activity within Canada’s borders” (Maya Forestales S.A. v. Canada, 2005 TCC 66, 2005 D.T.C. 514, at paragraph 34; aff’d 2006 FCA 35, 354 N.R. 272).
As a result the appeal was dismissed with costs.