October 07, 2011

Her Majesty the Queen (Plaintiff) v. H. R. Loewen (Defendant)

93 DTC 5109
Federal Court-Trial Division
February 8, 1993

(Court File No. T-819-90.)

Income or capital gain — Gain on redemption of Scientific Research Tax Credit debenture — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 39(4), 127.3(6) and 194(4).

On July 16, 1984, the taxpayer purchased a Scientific Research Tax Credit (“SRTC”) debenture from D Inc. for $200,000. The redemption price of the debenture was $140,000 and the deemed cost was $100,000 under subsection 127.3(6) of the Act. At the taxpayer’s request, the debenture was redeemed by D Inc., on January 2, 1985, for $140,000. In assessing the taxpayer in respect of his 1985 taxation year, the Minister treated the resulting gain of $40,000 as business income from an adventure in the nature of trade. The taxpayer’s appeal to the Tax Court of Canada was allowed (90 DTC 1009) and the Minister appealed to the Federal Court-Trial Division.

Held: The Minister’s appeal was allowed. The taxpayer was seeking a tax shelter. He did not purchase the SRTC debenture in issue to earn interest income; he did not investigate D Inc.’s financial stability; he did not verify the existence of the assets charged by the debenture and he did not intend to lose control of the major portion of the purchase price thereof. His transaction, therefore, could not be characterized as an investment. It was clearly a legitimate profit-making scheme, i.e., an adventure in the nature of trade. Therefore, the gain derived therefrom was income. On an ancillary point, the taxpayer could not be heard to say that his SRTC debenture was to be treated as a capital property by virtue of an election under subsection 39(4) of the Act, which he had purported to make in 1988, inasmuch as subsection 39(4) does not contemplate late elections. The Minister’s assessment was affirmed accordingly.