Foote v. R. - TCC: Professional investment advisor’s personal trades were on income account

Foote v. R. - TCC:  Professional investment advisor’s personal trades were on income account

Foote v. The Queen (April 21, 2017 – 2017 TCC 61, Boyle J.).

Précis:  Mr. Foote spend his entire career in the investment business rising to the co-head of institutional trading for a large Canadian full-service brokerage firm.  In 2009 he treated all of his personal trading (with the exception of short positions) as being on capital account (roughly a gain of $550,000).  CRA assessed him as a trader and he appealed to the Tax Court.  The evidence was simply overwhelming that Mr. Foote was a trader and not an investor.  His multiple transactions and short trading times essentially shone a neon light on his activities.  While his counsel obviously put up a very good fight, to an objective observer the result was inevitable.  The appeal was dismissed with costs.

Decision:  A very few paragraphs suffice to explain the result:

[9]             Mr. Foote has been in the investment industry for over 25 years. He has been investing personally throughout that period. He started with the predecessor of what is known now as RBC Dominion Securities. He remained at that brokerage firm for 15 years. I was not told what he did at RBC Dominion Securities; the Respondent’s assumption in the reply is that he was a “senior trader”. From there he went to CIBC World Markets in about 2005. He described that when he left CIBC World Markets in 2007, he was its Head of Institutional Trading. He joined RJL as its Co‑Head of Institutional Trading. He continues to hold that position.

[10]        As Co‑Head of Institutional Trading at RJL, Mr. Foote was not involved in the retail side of the business. The Research group at RJL is also separate from Institutional Trading. Institutional Trading does have full access to that group’s research.

[19]        Mr. Stiff [Mr. Foote’s investment advisor]and Mr. Foote spoke typically two or three times a week about buying and selling thoughts and opportunities as well as markets and investments generally. Mr. Foote initiated about 60% of these calls. All of Mr. Foote’s specific buying and selling instructions would have been relayed in such conversations. Specific buying and selling discussions were initiated by each of them about equally. Mr. Stiff would at least quickly review Mr. Foote’s holdings in each account for each conversation. He would normally provide Mr. Foote with his advice related to Mr. Foote’s planned purchases, sales and reinvestments. Mr. Stiff knew that Mr. Foote followed the markets beyond what he may have needed to as Co‑Head of Institutional Trading.

[20]        Mr. Foote acknowledged he gleaned information on the markets from his RJL work, even though he did not necessarily need to know it to do his job. In addition, he estimated he spent about 45 minutes daily reading and watching business and markets news. He also follows market analysts and research.

[24]        The 2009 monthly statements for the investment accounts are in evidence and are accepted by the Respondent and the Court as accurate. Read in conjunction with the other evidence, these show, among other things:

(a)     Mr. Foote finished liquidating his investments on Friday, February 27, 2009 and began reinvesting his cash on Monday, March 2, 2009; by the end of March he was 70% invested in securities and 30% in cash, in contrast to being only about 40% invested in securities at the end of 2008.

(b)     Mr. Foote invested in securities of 34 issuers. He only reinvested in two of the issuers whose securities he had liquidated in January and February.

(c)      The average hold period for the securities of any issuer was about 50 days. In five cases he sold within the first week of buying them. In 10 cases, sales began within 30 days of purchase; in 20 cases, within 60 days. In at least one case, Open Text, he continued buying an issuer’s securities after he started selling identical recently acquired shares. In at least one other, Addax Petroleum, he started selling the day after he bought, even before his purchase settled, and that, for a gain of less than 1%. The longest hold period was 274 days, less than nine months. The longest hold period in the U.S. account was less than 30 days.

(d)     Distributions or dividends of about $18,000 were received.

[Footnote omitted]

In the face of this evidence Justice Boyle had only one choice based on existing case law:

[50]        Having regard to the evidence relating to all of these considerations and my findings above, I conclude that Mr. Foote was trading in the securities as a business activity, or at least was buying and selling the securities as part of an adventure in the nature of trade. The key considerations in this case in arriving at that decision are:

1.       I have already found his primary intention when purchasing the securities to be to sell them at a profit as soon as a reasonable return in the then market circumstances could be realized. In so doing, I expressly did not accept his testimony about his intention.

2.       Mr. Foote spent considerable time each day monitoring markets beyond what he said was required for his employment. In addition, he gleaned relevant market information as part of his daily job as Head of Institutional Trading at a major investment dealer. This also gave him well beyond average access to market information that is public, and he availed himself of that access and information.

3.       The nature of the gains realized by Mr. Foote buying and selling securities in his investment accounts bears a close similarity to what he has been doing in his investment dealer positions for decades. He has developed considerable expertise and accumulated considerable knowledge at this.

4.       Mr. Foote was buying and selling regularly throughout the year.

5.       Mr. Foote’s holding periods were clearly short and often very, very short.

Accordingly the appeal was dismissed with costs.