October 07, 2011

Louise Darch and Gail Wright (Plaintiffs) v. Her Majesty the Queen (Defendant)

92 DTC 6366
Federal Court-Trial Division
May 21, 1992

(Court File Nos. T-3259-90 and T-3253-90.)
Income or capital gain — Substantial profits derived from acquisition and quick resale of speculative mining stock — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 9(1) and 39.

The taxpayers LD and GW and their husbands were the principal shareholders of W Ltd., a financial consulting firm. Through a complex series of agreements, the taxpayers personally acquired (during 1985 and 1986) a number of shares of CM Ltd., an inactive company which had become reactivated as a result of the transfer to it by an Australian corporation of certain U.S. gold properties. During 1985 and 1986, the taxpayers divested themselves of their shares of CM Ltd. at substantial profits. In reassessing the taxpayers in respect of their 1985 and 1986 taxation years, the Minister characterized these profits as income. The taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were dismissed. The knowledge and intentions of the taxpayers in this case must be considered to have been that of their husbands who were the principals of W Ltd. Indeed, LD’s husband, JD, was the directing mind behind the whole series of transactions involving the shares of CM Ltd., which would not have been possible without his contacts and special knowledge of CM Ltd.’s particular situation vis- -vis the Australian company. The scheme designed by JD, moreover, involved virtually no capital outlay on the part of the taxpayers (and of other clients of W Ltd.) and it was predicated on the purchase and early resale of CM Ltd.’s shares for a quick profit. There was, therefore, nothing to suggest that the taxpayers were remotely interested in CM Ltd. as an investment. Hence, the profits realized by them on their quick turnovers of its shares were income. The Minister’s reassessments were therefore affirmed.