Docket: 2021-370(IT)G

BETWEEN:

GORDON RAYMOND RUDOLPH,

Appellant,

and

HIS MAJESTY THE KING,

Respondent.

Appeal heard on May 28 to 30, 2024, at Quebec, Quebec; and

Written submissions filed by the parties on June 6 and 13, 2024

Before: The Honourable Justice Dominique Lafleur

Appearances:

Counsel for the Appellant:

Bobby Doyon

Counsel for the Respondent:

Julien Dubé-Sénécal

Noémie Vespignani

JUDGMENT

In accordance with the attached Reasons for Judgment, the appeals made under the Income Tax Act (the “Act”) for the 2007, 2008, 2009 and 2012 taxation years are allowed, with costs to the Appellant, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:

1. For the 2007 taxation year:

2. the Appellant did not dispose of any share in the capital of Keltic Petrochemicals Incorporated (“Keltic”), and hence, no amount shall be included in that respect in the calculation of his income under the Act; and

3. the Appellant is not entitled to any deduction for interest expenses under paragraph 20(1)(c) of the Act.

4. For the 2008 taxation year:

5. the Appellant did not realize any taxable capital gain from the disposition of 910,000 Class “A” common shares in the capital of Keltic;

6. in the calculation of the Appellant’s income under section 9 of the Act, the Appellant shall include an amount of $966,105.26 as profit resulting from the sale of 910,000 Class “A” common shares in the capital of Keltic to Mumsco Holdings Limited on March 4, 2008; and

7. the Appellant has realized a non-capital loss of $548,600, not a capital loss, resulting from the expiration of various options to buy shares in the capital of Keltic.

8. For the 2009 taxation year: the claim for non-capital losses carryforward from other years has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.

9. For the 2012 taxation year: the claim for non-capital losses carryforward has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.

The parties shall have 30 days from the date of this Judgment to agree on costs. If the parties do not come to an agreement on costs, they shall file written submissions, not exceeding 10 pages, on or before December 20, 2024. If the parties do not advise the Court that they have reached an agreement and no submissions are received by this date, then one set of costs shall be awarded to the Appellant in accordance with Tariff B.

Signed at Montreal, Quebec, this 25th day of November 2024.

“Dominique Lafleur”

Lafleur J.

Citation: 2024 TCC 148

Date: 20241125

Docket: 2021-370(IT)G

BETWEEN:

GORDON RAYMOND RUDOLPH,

Appellant,

and

HIS MAJESTY THE KING,

Respondent.

REASONS FOR JUDGMENT

Lafleur J.

I. OVERVIEW

1Gordon Raymond Rudolph (the “Appellant” or “Mr. Rudolph”) is appealing to this Court from reassessments made by the Minister of National Revenue (the “Minister”) under the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.), as amended) (the “Act”) for the 2007, 2008, 2009 and 2012 taxation years.

2According to the Minister, Mr. Rudolph’s profit from the sale of 910,000 Class “A” common shares (in these reasons, the Class “A” common shares are simply referred to as “shares”) in the capital of Keltic Petrochemicals Incorporated (“Keltic”) to Mumsco Holdings Limited (“Mumsco”) is in the nature of capital and not income. In that respect, the Minister is of the view that Mr. Rudolph sold 660,000 shares in the capital of Keltic to Mumsco on September 4, 2007 for $1,320,000, and 250,000 shares on March 3, 2008 for $500,000. Mr. Rudolph thus realized a capital gain of $990,000 in September 2007 and a capital gain of $253,975 in March 2008, the taxable portion of which must be included in the calculation of his income for the 2007 and 2008 taxation years respectively. At the hearing, the Respondent conceded that the capital gain resulting from the sale of shares on March 3, 2008 is $250,000, as the auditor from the Canada Revenue Agency (the “CRA”) did not take into account the appropriate average adjusted cost base of the shares in his calculations.

3Furthermore, according to the Minister, in 2008, Mr. Rudolph’s loss of $548,600 resulting from the expiration of options to buy shares in the capital of Keltic is also in the nature of capital.

4Finally, in 2007, the Minister disallowed a deduction of $70,549 claimed by Mr. Rudolph as interest expenses under paragraph 20(1)(c) of the Act, as the Minister is of the view that Mr. Rudolph did not pay interest totalling $70,549 on borrowed money used for the purpose of earning income from a business or property. At the hearing, the Respondent also objected to the Appellant’s testimony on the uses of money borrowed for purposes of interest deductibility in accordance with section 98 of the Tax Court of Canada Rules (General Procedure) (the “Rules”).

5According to the Appellant, the profit of $966,105.26 resulting from the sale of 910,000 shares in the capital of Keltic to Mumsco is in the nature of income and not capital. Further, because Mr. Rudolph disposed of 910,000 shares in the capital of Keltic to Mumsco on March 4, 2008 and had not sold any shares in the capital of Keltic to Mumsco at any time in 2007, the profit resulting from the sale should be recognized in the 2008 taxation year only and not partly in 2007 and partly in 2008 as determined by the Minister.

6Furthermore, for the 2008 taxation year, the Appellant is of the view that the loss of $548,600 resulting from the expiration of options to buy shares in the capital of Keltic is also of an income nature and not capital.

7Finally, at the hearing, Mr. Rudolph conceded that he had incurred interest expenses totalling $52,858.73 and not $70,549 as he claimed originally; hence, Mr. Rudolph is of the view that he is entitled to a deduction for interest expenses totalling $52,858.73 in the calculation of his income for the 2007 taxation year.

8For the 2009 and 2012 taxation years, the Minister disallowed the carryforward of non-capital losses from other years claimed by Mr. Rudolph as follows:

• (i)For the 2009 taxation year, the non-capital losses carryforward of $123,161 from 2007 was disallowed because, according to the Minister, the non-capital losses balance of other years was nil (Exhibit A‑1, Appellant’s Book of Documents, tab 1, notice of reassessment dated August 24, 2011); and
• (ii)For the 2012 taxation year, the non-capital losses carryforward of $40,000 was disallowed because, according to the Minister, the non-capital losses balance of other years was nil (Exhibit A‑3, notice of assessment dated August 6, 2013).

9At the hearing, Mr. Rudolph testified, as did David Hennigar and Brett Olsen. Nicole Meisner, the CRA’s appeal officer who reviewed the Appellant’s tax matters, testified for the Respondent.

10In these reasons, all references to statutory provisions are references to the Act, unless otherwise indicated.

II. ISSUES

11The parties acknowledge that this appeal raises the following issues for the 2007 and 2008 taxation years:

• (i)When did Mr. Rudolph dispose of 910,000 shares in the capital of Keltic to Mumsco, and what is the quantum and nature of the profit resulting from the sale of the shares?
• (ii)If Mr. Rudolph realized a capital gain on the sale to Mumsco of the shares in the capital of Keltic, is he entitled to the capital gain deduction under section 110.6 and to a deferral of part of the gain under section 44.1?
• (iii)Did Mr. Rudolph realize a loss on capital account or on income account totalling $548,600 on the expiration of his options to buy shares in the capital of Keltic in 2008?
• (iv)Is Mr. Rudolph entitled to a deduction in the calculation of his income in an amount of $52,858.73 under paragraph 20(1)(c) as interest paid or payable in 2007 on money borrowed for the purpose of earning income from a business or property, and should the Court admit Mr. Rudolph’s testimony in accordance with section 98 of the Rules?

12For the 2009 and 2012 taxation years, the issues are whether non-capital losses from other years could be carried forward to these years, which will depend on my findings on the nature of the losses resulting from the expiration of stock options (under issue (iii) above).

III. CONCLUSION

13In accordance with these reasons, the appeals for the 2007, 2008, 2009 and 2012 taxation years are allowed, with costs to the Appellant, and the reassessments are referred back to the Minister for reconsideration and reassessment on the following basis:

• (i)For the 2007 taxation year:

1. the Appellant did not dispose of any shares in the capital of Keltic, and hence, no amount shall be included in that respect in the calculation of his income under the Act; and
2. the Appellant is not entitled to any deduction for interest expenses under paragraph 20(1)(c).

• (ii)For the 2008 taxation year:

1. the Appellant did not realize any taxable capital gain from the disposition of 910,000 shares in the capital of Keltic;
2. in the calculation of the Appellant’s income under section 9, the Appellant shall include an amount of $966,105.26 as profit resulting from the sale of 910,000 shares in the capital of Keltic to Mumsco on March 4, 2008; and
3. the Appellant realized a non-capital loss of $548,600, not a capital loss, resulting from the expiration of various options to buy shares in the capital of Keltic.

• (iii)For the 2009 taxation year: the claim for the non-capital losses carryforward from 2007 has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.
• (iv)For the 2012 taxation year: the claim for the non-capital losses carryforward has to be redetermined on the basis of my findings that the losses resulting from the expiration of options to buy shares in the capital of Keltic are of an income nature to the Appellant and not on capital account.

14The parties shall have 30 days from the date of this Judgment to agree on costs. If the parties do not come to an agreement on costs, they shall file written submissions, not exceeding 10 pages, on or before December 20, 2024. If the parties do not advise the Court that they have reached an agreement and no submissions are received by this date, then one set of costs shall be awarded to the Appellant in accordance with Tariff B.

IV. CONTEXT

A. Origins of Keltic

15Keltic was a private company incorporated on March 20, 2000 under the laws of the province of Alberta by Brett E. Olsen, a corporate lawyer practising in Calgary. Back in 2000, Mr. Olsen was approached by W. Kevin Dunn, one of his clients, with the idea of developing a major world-class petrochemical plant in Goldboro, Nova Scotia. At that time, the proposed project was for a fully integrated petrochemical complex associated with a liquefied natural gas component and a cogeneration plant (the “Keltic Project”). It looked promising to Mr. Olsen. The project was designed to utilize the liquids from natural gas and process them to yield plastic (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 26–61).

16Mr. Dunn and Mr. Olsen were the original shareholders of Keltic. Mr. Dunn was the president and Mr. Olsen the vice-president and corporate secretary. Mr. Dunn, who passed away in 2013, was the driving force behind Keltic, and his primary role was to raise capital to finance the Keltic Project.

17For about the first two years after Keltic’s incorporation, Mr. Dunn and Mr. Olsen evaluated the feasibility of the project. According to the results of a feasibility study, the feedstock to carry out the project was insufficient. Hence, Mr. Dunn and Mr. Olsen looked into the possibility of importing liquefied natural gas into Nova Scotia. As indicated by Mr. Olsen, since the project was not only a chemical processing facility but also a liquefied natural gas receiving terminal, they needed to integrate the liquefied natural gas receiving facility into the chemical processing plant. This resulted in the Keltic Project being much more expensive than originally anticipated. According to Mr. Olsen, the costs to implement the Keltic Project were evaluated in billions of dollars. Hence, in order to continue with the project, Mr. Dunn had to raise more funds. He was successful, but at that stage, no one knew whether the project would ultimately succeed.

B. Mr. Rudolph, his involvement with Keltic and the end of the Keltic Project

18During all the taxation years under review, Mr. Rudolph ran a successful practice as a full-time dentist under the name “Dr. Gordie Rudolph Dentistry”.

19In 1984, Mr. Rudolph graduated with a degree in technical engineering from the Technical University of Nova Scotia. Upon graduation, he secured employment with Michelin Tires (Canada) Ltd. in Bridgewater, Nova Scotia, and purchased a triplex. He occupied one unit with his wife and two daughters and rented out the other two units.

20In 1986, Mr. Rudolph enrolled in a Doctor of Dental Surgery program at Dalhousie University in Halifax. While in dental school, he started a taxi business to cover the costs of his studies and to support his family.

21In 1989, Mr. Rudolph purchased an established dental practice in Dartmouth, Nova Scotia. In 1991, he built the Sheet Harbour Professional Centre and established the Sheet Harbour Dental Centre, which serviced a rural community east of Halifax. Mr. Rudolph purchased several other properties throughout the 1990s in order to build a townhouse-style condominium development.

22In the early 2000s, Mr. Rudolph was the proponent for a 385-megawatt natural gas-fired power-generating facility in Bedford, Nova Scotia (the “Bedford Project”), which he registered for environmental assessment in 2003.

23In 2003, Mr. Rudolph started trading in currency futures. He was also a sponsor for a hotel development in downtown Halifax, called the “Downtown Hotel”.

24In the course of 2003, Mr. Dunn contacted Mr. Rudolph after seeing him in the media coverage of the Bedford Project. Their initial discussion centred on the potential relocation of the power-generating facility from Bedford to Goldboro, where the Keltic Project was to be located, in order to be part of the Keltic Project, and the possibility of Mr. Rudolph getting involved in the Keltic Project.

25In 2004, Mr. Dunn and Mr. Rudolph came to an agreement that led Mr. Rudolph to purchase the rights to obtain 75% equity interest in the cogeneration part of the integrated facility. From February 2004 to February 2005, in accordance with the agreement concluded with Mr. Dunn, Mr. Rudolph purchased 800,000 shares in the capital of Keltic for $400,000 (at a price of $0.50 per share). Mr. Rudolph purchased additional shares in the capital of Keltic over the following years, up to 2008.

26In 2004, Mr. Rudolph also became a director of Keltic. Mr. Rudolph was not an employee of Keltic, but in 2004, he received $20,000 for his consulting services in chemical engineering.

27In 2005, Mr. Rudolph began to purchase options to buy shares in the capital of Keltic.

28In December 2005, Keltic and Petroplus International B.V. (“Petroplus”) executed a Memorandum of Understanding to develop a plant with a liquefied natural gas regasification receiving terminal and storage facility. Upon signing the Memorandum of Understanding, Keltic received a payment of US$350,000. The negotiation continued into 2005 for the sale by Keltic of the liquefied natural gas component of the integrated project.

29On March 14, 2006, Keltic executed a Purchase and Sale Agreement with Maple LNG Ltd. (which was part of the Petroplus group of companies) and 4Gas B.V. for the sale of the liquefied natural gas component of the integrated project (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 86‑120). The purchase price (which included the amount of US$350,000 already paid by Petroplus) would be paid to Keltic as follows: (i) US$1.9M upon closing; (ii) US$2M, plus the amount payable to the municipality of the district of Guysborough, upon the transfer of the exclusive rights on the land situated in Goldboro; (iii) US$2M upon receiving the environmental approvals for the construction of the facility; (iv) US$10M upon the final investment decision; and (v) US$9.75M within 10 days of the arrival and unloading of the first commercial liquefied natural gas cargo.

30Around mid-2006, LyondellBasell Industries, a publicly traded company, expressed its interest in becoming Keltic’s strategic partner in its project (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 62). According to Mr. Rudolph, LyondellBasell Industries was the largest producer of polypropylene in the world and made annual sales of close to US$60M.

31In order to implement its project, Keltic still required significant capital. As circumstances began to align in a favourable manner, Mr. Rudolph initiated a significant investment in Keltic and started to buy shares and stock options in the capital of Keltic more aggressively.

32In July 2007, Keltic was just about to receive federal environmental approval and “things were looking very, very positive” according to Mr. Rudolph. However, around that same time, another director of Keltic, John Chisholm, informed Mr. Rudolph that the board of directors of Keltic would be taking a different direction with the Keltic Project. Specifically, the directors of Keltic were seeking to replace Mr. Rudolph as a director, along with two other directors, with businesspeople from Calgary at Keltic’s upcoming meeting to be held in September 2007.

33Mr. Rudolph, who wanted to continue with the Keltic Project, met with David Hennigar (a shareholder of Mumsco) on Labour Day weekend in 2007 and reached an agreement with him, which I will describe below. After that, Mr. Rudolph was successful in retaining his directorship in Keltic. He was also elected chair of the board. Various share transfers in the capital of Keltic and exercises of stock options in Keltic took place between September 2007 and March 2008.

34In 2008, Keltic formally announced its strategic partnership with LyondellBasell Industries (Exhibit A‑1, Appellant’s Book of Documents, tab 4, at 62), after having received the federal environmental permit in February 2008.

35In March 2008, the effects of the worldwide financial crisis were becoming evident for Keltic, as LyondellBasell Industries started to encounter difficulties in managing its debt. Further, the price of natural gas was falling. Mr. Rudolph stated that “things were getting a little shaky” and he was getting a “little concerned”. Nevertheless, he proceeded to make a few additional transactions in the capital of Keltic, which I will also address below.

36In January 2009, LyondellBasell Industries was placed under bankruptcy protection.

37Due to the worldwide financial crisis that started in 2007, Keltic received only US$1.9M upon closing and US$2M upon receiving the environmental approvals for the construction of the facility; Keltic was notified in 2010 that the purchasers, Maple LNG Ltd. and 4Gas B.V., were not going ahead with the purchase as planned, resulting in a significant financial loss for Keltic. Keltic, which required funds from these purchasers to maintain its operational viability, ceased operations, and the Keltic Project was abandoned. All employees were terminated, and Mr. Dunn’s salary was paid up to March 31, 2010. Minimal funds were left in Keltic to cover outstanding bills.

V. ANALYSIS

A. When did Mr. Rudolph dispose of 910,000 shares in the capital of Keltic to Mumsco, and what is the quantum and nature of the profit resulting from the sale of the shares?

(1) Conclusion

38For the following reasons, the Court finds that the disposition by Mr. Rudolph of 910,000 shares in the capital of Keltic to Mumsco took place on March 4, 2008, as indicated in Keltic’s corporate ledgers, and not partly in 2007 and partly in 2008 as determined by the Minister.

39Further, for the following reasons, the Court finds that Mr. Rudolph’s profit resulting from the sale of these shares to Mumsco is $966,105.26 and is on income account, since Mr. Rudolph was engaged in an adventure or concern in the nature of trade. Accordingly, an amount of $966,105.26 shall be included in the calculation of Mr. Rudolph’s income for the 2008 taxation year under section 9.

40Because of the Court’s findings on the nature of the profit realized by Mr. Rudolph upon the disposition of 910,000 shares in the capital of Keltic, Mr. Rudolph is not entitled to a capital gain deduction under section 110.6 or to a deferral of part of the gain under section 44.1.

(2) Evidence adduced at the hearing

41The Court must first determine the effective dates and review the various transactions entered into by Mr. Rudolph in respect of shares and stock options in the capital of Keltic.

42Without any credible and reliable evidence to the contrary adduced by the Respondent at the hearing, and for the following reasons, the Court finds that the transactions recorded in Keltic’s minute book, including the various dates entered in Keltic’s corporate ledgers, are an accurate reflection of the actual transactions and their effective dates.

43I find Mr. Olsen’s testimony reliable and credible. Mr. Olsen was in charge of the minute book: he was responsible for receiving subscription forms, issuing shares, updating corporate records and minute books, and completing and filing annual returns. All corporate records were kept at the address of Mr. Olsen’s law firm.

44Regarding Mr. Rudolph’s initial subscription to the capital of Keltic, Mr. Olsen said he would make the necessary entries in the corporate ledgers after receiving confirmation from Mr. Dunn or the office manager in Nova Scotia that Mr. Rudolph had made the required payments. There was no letter of subscription or other document, other than a two‑page document giving Mr. Rudolph an option to participate in the cogeneration facility. This document was not adduced in evidence.

45Furthermore, Mr. Olsen testified that he was not aware of any written documentation evidencing any investment made by the shareholders in the capital of Keltic, other than the relevant entries in the corporate ledgers and the share certificates issued to the respective shareholders.

46In addition to investing in shares in the capital of Keltic, Mr. Rudolph also subscribed to various options to buy shares in the capital of Keltic over the years.

47According to Mr. Olsen, there were three stock option plans in Keltic:

• (i)Stock Option Plan 1: available only to Mr. Dunn and himself;
• (ii)Stock Option Plan 2: available to officers, directors and suppliers to buy shares at $0.50 per share; and
• (iii)Stock Option Plan 3: available to two directors, namely Mr. Rudolph and Mr. Smith, to buy shares at $3 per share.

48The cost of each option was $0.10.

(a) Corporate ledgers

49From 2004 to 2008, the corporate ledgers indicate that Mr. Rudolph engaged in 34 transactions in respect of shares and options to acquire shares in the capital of Keltic. During that period, Mr. Rudolph bought 2,394,000 shares and sold 910,000 shares. In addition, Mr. Rudolph purchased 7,950,000 options: 7,716,000 options expired from 2007 to 2008, and he exercised 234,000 options (Exhibit R‑1, Respondent’s Book of Documents, tab 10, and Exhibit A‑1, Appellant’s Book of Documents, tab 7). These transactions are detailed below:

Date

Transaction

1

February 28, 2004

Purchase of 40,000 shares

2

March 30, 2004

Purchase of 40,000 shares

3

April 30, 2004

Purchase of 40,000 shares

4

May 31, 2004

Purchase of 40,000 shares

5

June 30, 2004

Purchase of 40,000 shares

6

July 31, 2004

Purchase of 40,000 shares

7

August 31, 2004

Purchase of 40,000 shares

8

September 30, 2004

Purchase of 60,000 shares

9

October 31, 2004

Purchase of 60,000 shares

10

November 30, 2004

Purchase of 40,000 shares

11

December 31, 2004

Purchase of 40,000 shares

12

February 28, 2005

Purchase of 320,000 shares

13

March 20, 2005

Purchase of 250,000 options

14

May 6, 2005

Purchase of 250,000 options

15

May 20, 2005

Purchase of 250,000 options

16

September 9, 2005

Purchase of 1,000,000 options

17

September 23, 2005

Purchase of 1,000,000 options

18

December 24, 2005

Purchase of 1,200,000 options

19

February 8, 2006

Purchase of 1,000,000 options

20

March 22, 2006

Purchase of 250,000 options

21

April 7, 2006

Purchase of 250,000 options

22

May 5, 2006

Purchase of 250,000 options

23

June 19, 2006

Purchase of 500,000 options

24

July 5, 2006

Purchase of 150,000 options

25

August 4, 2006

Purchase of 600,000 options

26

September 8, 2006

Purchase of 600,000 options

27

September 8, 2006

Purchase of 390,000 options

28

September 8, 2006

Purchase of 10,000 options

29

September 4, 2007

Purchase of 1,055,000 shares

30

September 7, 2007

Purchase of 220,000 shares (option exercised)

31

March 3, 2008

Purchase of 14,000 shares (option exercised)

32

March 4, 2008

Purchase of 290,000 shares

33

March 4, 2008

Purchase of 15,000 shares

34

March 4, 2008

Sale of 910,000 shares

(b) Labour Day weekend, 2007

50The Court accepts the version of events presented by Mr. Rudolph at the hearing in respect of his numerous meetings with Mr. Hennigar during the 2007 Labour Day weekend, and more particularly, in respect of the objectives sought by Mr. Rudolph, that is, to maintain his directorship and continue with the Keltic Project. Mr. Hennigar’s testimony confirmed Mr. Rudolph’s version of events. The Respondent has not adduced any evidence to the contrary.

51As mentioned above, in July 2007, Mr. Rudolph was advised that the board of directors of Keltic wanted to replace him as a director of the company. However, Mr. Rudolph did not want to be replaced as a director of Keltic and he wanted to continue with the Keltic Project, as planned.

52Mr. Rudolph testified that, in order to maintain his directorship, he needed to secure more funds to buy additional shares to vote in his favour at the upcoming annual meeting of Keltic’s shareholders. Therefore, with these objectives in mind, Mr. Rudolph contacted a very good friend of his, Mr. Hattie, CEO and President of Annapolis Group Inc. in Nova Scotia, who introduced him to Mr. Hennigar, a shareholder of Mumsco. Mr. Hennigar is a businessman from Nova Scotia with more than 60 years of experience in investment. During the 2007 Labour Day weekend, Mr. Rudolph met with Mr. Hennigar on several occasions.

53Mr. Hennigar, through Mumsco, agreed to loan him enough funds so Mr. Rudolph could exercise stock options to prevent the change of control of Keltic at the next annual upcoming meeting and be able to maintain his directorship. Mr. Hennigar testified that Mumsco advanced an amount of $1,320,000 to Mr. Rudolph in September 2007. Other sums were advanced in March 2008. Mr. Rudolph did not reimburse the sums that Mumsco advanced to him with actual cash but with the transfer to Mumsco of 910,000 shares in the capital of Keltic, at $2 per share, on March 4, 2008.

54According to the testimony of both Mr. Rudolph and Mr. Hennigar, the agreement they reached in September 2007 was that Mumsco would pay $2 per share, for a total of $1,820,000 for 910,000 shares in the capital of Keltic.

55Because Mr. Rudolph came highly recommended by Mr. Hattie to Mr. Hennigar, no written agreement was executed between them. Both Mr. Hennigar’s and Mr. Rudolph’s testimonies confirmed that there was no documentation evidencing their agreement.

56Mr. Hennigar, being one of five directors (and shareholders) of Mumsco, wrote a memorandum to his siblings (the other shareholders and directors) in September 2007, recommending the purchase of shares in the capital of Keltic. Mr. Hennigar testified that he was confident that an investment in Keltic would be a good investment, and if so, there would be a substantial return.

57In addition, Mr. Rudolph testified that he wanted Mr. Hennigar to become the chair of the board of directors of Keltic. However, Mr. Hennigar declined, but stated that he would support Mr. Rudolph as a chair of the board and would accept a directorship. Indeed, the evidence shows that, later in 2008, Mr. Hennigar became a director of Keltic.

58On September 4, 2007, Mumsco transferred $1,320,000 to Mr. Rudolph via wire transfer (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 231). Furthermore, on March 3, 2008, Mumsco transferred an additional amount of $500,000 to Mr. Rudolph (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 235). The total funds transferred by Mumsco to Mr. Rudolph in 2007 and 2008 amounted to $1,820,000. There is no dispute between the parties regarding the effective dates of these fund transfers.

(c) Transactions in the capital of Keltic following the meetings between Mr. Rudolph and Mr. Hennigar in September 2007

(i) Between Mr. Rudolph and Mr. Dunn on September 4, 2007

59On Labour Day Monday, 2007 (September 3, 2007), Mr. Rudolph met with Mr. Dunn in order to negotiate an agreement, as Mr. Rudolph knew that Mr. Dunn held some options to buy shares in Keltic (at $0.50 each) that were about to expire. Further, Keltic needed more capital to pursue its project.

60Mr. Dunn and Mr. Rudolph promptly entered into an agreement whereby Mr. Rudolph would provide between $1.5M and $2M to Keltic in exchange for shares in the capital of Keltic.

61Mr. Dunn and Mr. Rudolph agreed that Mr. Rudolph would receive newly issued shares in the capital of Keltic at a reduced price. They agreed that Mr. Dunn would exercise options to buy 1,105,000 shares, following which Mr. Dunn would transfer 1,055,000 shares to Mr. Rudolph; the total consideration to be paid by Mr. Rudolph amounted to $663,500, of which Mr. Dunn would receive $151,000 and Keltic would receive $512,500. Mr. Rudolph issued two cheques: one cheque payable to Mr. Dunn for $151,000 and one cheque payable to Keltic for $512,500.

62Keltic’s ledger (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 105) indicates that Mr. Dunn exercised his options on September 4, 2007 and received 1,105,000 shares in the capital of Keltic (400,000 shares at $0.40 each and 705,000 shares at $0.50 each) and on the same day, Mr. Dunn transferred 1,055,000 shares to Mr. Rudolph (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 108; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135).

63According to Mr. Olsen, that was a favourable arrangement for Mr. Rudolph, because otherwise he would have had to pay $3 per share in accordance with his stock options if he exercised them.

64Mr. Olsen testified that Mr. Dunn informed him of the arrangement whereby he would exercise his options but the payment would be made directly by Mr. Rudolph to Keltic. Further, as indicated by Mr. Olsen, the system he had put in place for Keltic prevented him from transferring stock options. For his convenience, he recorded the transactions as an exercise of options with the issuance of shares and a subsequent transfer of shares.

65Moreover, at that time, with Mr. Dunn’s approval, Mr. Rudolph became chair of the board of directors of Keltic.

(ii) Exercise of options by Mr. Rudolph on September 7, 2007

66On September 7, 2007, Mr. Rudolph exercised 220,000 options to buy 220,000 shares in the capital of Keltic for $660,000 (at a price of $3 per share) (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 105; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135).

(iii) Exercise of options by Mr. Rudolph on March 3, 2008

67On March 3, 2008, Mr. Rudolph exercised 14,000 options to purchase 14,000 additional shares in Keltic for $42,000 (at a price of $3 per share) (Exhibits A‑1, Appellant’s Book of Documents, tab 7, at 135 and R‑1, Respondent’s Book of Documents, tab 10, at 108).

(iv) Transactions between Mr. Rudolph and Mr. Olsen and between Mr. Rudolph and Mr. Dunn on March 4, 2008

68In February 2008, Mr. Rudolph contacted Mr. Olsen about his options, which were about to expire. They came to an agreement whereby Mr. Rudolph would provide $435,000 to Mr. Olsen to enable him to exercise options to buy 870,000 shares and, subsequently, Mr. Olsen would transfer 290,000 shares to Mr. Rudolph in repayment of that loan.

69On February 29, 2008, Mr. Olsen exercised his options to buy 15,000 shares in the capital of Keltic at $0.50 per share. On March 3, 2008, Mr. Olsen exercised his options to buy 855,000 shares in the capital of Keltic at $0.50 per share (Exhibit R‑1, Respondent’s Book of Documents, tab 10, at 108; Exhibit A‑1, Appellant’s Book of Documents, tab 7, at 135 and tab 15 at 237 and 239: a cheque by Mr. Rudolph for $7,500 issued to Keltic dated February 29, 2008 re: Brett Olsen loan/options; a cheque by Mr. Rudolph for $427,500 issued to Keltic dated February 29, 2008 re: Brett’s 855,000 shares at 0.50). Then, on March 4, 2008, Mr. Olsen transferred 290,000 shares to Mr. Rudolph.

70A similar arrangement was entered into with Mr. Dunn. On March 4, 2008, Mr. Dunn transferred 15,000 shares in the capital of Keltic to Mr. Rudolph, who paid $22,500 directly to Keltic in order for Mr. Dunn to exercise his options. Mr. Dunn exercised his options to acquire 45,000 shares in the capital of Keltic on February 29, 2008 at $0.50 per share (Exhibits R‑1, Respondent’s Book of Documents, tab 10, at 108 and A‑1, Appellant’s Book of Documents, tab 7, at 135).

71As indicated above, Mr. Olsen testified that no documentation between Mr. Rudolph and himself or between Mr. Rudolph and Mr. Dunn was prepared to give effect to these transactions. Mr. Olsen entered the transactions in the minute book of Keltic as exercises of options by Mr. Dunn and himself, with issuances of shares to both of them, followed by a transfer of shares to Mr. Rudolph.

(v) Transaction between Mr. Rudolph and Mumsco on March 4, 2008

72On March 4, 2008, Mr. Rudolph transferred 910,000 shares in the capital of Keltic to Mumsco.

(3) Timing of the sale by Mr. Rudolph to Mumsco of 910,000 shares in the capital of Keltic

(a) Parties’ positions

73According to the Respondent, the disposition of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco took place on the days Mr. Rudolph received funds from Mumsco: on September 4, 2007, Mr. Rudolph sold 660,000 shares because he received $1,320,000 from Mumsco, and on March 3, 2008, he sold 250,000 shares because he received $500,000 from Mumsco.

74Although Ms. Meisner reviewed the minute book showing that the transfer by Mr. Rudolph to Mumsco of 910,000 shares took place on March 4, 2008, she did not believe that Mr. Rudolph sold 910,000 shares on that date. According to the Respondent, dates and transactions indicated in the minute book are not an accurate reflection of the transactions that took place over the years in the capital of Keltic.

75Furthermore, the Respondent is of the view that Mr. Rudolph himself recognized that the sale of some shares in the capital of Keltic took place in 2007, as he filed a T1 Adjustment Request form with the CRA indicating a disposition of 800,000 shares in the capital of Keltic for $1,600,000 (Exhibit R‑1, Respondent’s Book of Documents, tab 8).

76However, the Appellant is of the view that the evidence shows that the disposition of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco took place on March 4, 2008. Further, the evidence shows that Mr. Rudolph’s accountant made a mistake and created confusion by filing the T1 Adjustment Request form without having in his possession the share certificate and the corporate ledgers of Keltic.

(b) Applicable principles

77In accordance with the Act, the income of a taxpayer for a taxation year includes the taxpayer’s income for the year from each business of the taxpayer (paragraph 3(a)). Subsection 9(1) provides that “... a taxpayer’s income for a taxation year from a business ... is the taxpayer’s profit from that business ... for the year”.

78However, the Act does not define “profit” and does not provide any specific rules for computing profit. The determination of profit is a question of law and must take into account any applicable provisions of the Act. When determining profit, a taxpayer must adopt a method of computation that is not inconsistent with the Act and established case law principles, that is consistent with well-accepted business principles, and that yields an accurate picture of the income for the year (Canderel Ltd. v. Canada, 1998 CanLII 846 (SCC), [1998] 1 S.C.R. 147 at paragraphs 29, 50 and 53).

79Further, in Ikea Ltd. v. Canada, 1998 CanLII 848 (SCC), [1998] 1 S.C.R. 196 at paragraph 37, the Supreme Court of Canada stated that amounts received or realized by a taxpayer, free of conditions or restrictions upon their use, are taxable in the year realized, subject to any contrary provisions of the Act or other rule of law.

80When examining that question, the Court should refer to the definition of the term “disposition” found in subsection 248(1), which reads as follows:

248(1) disposition of any property, except as expressly otherwise provided, includes

(a) any transaction or event entitling a taxpayer to proceeds of disposition of the property,

248(1) disposition Constitue notamment une disposition de bien, sauf indication contraire expresse :

a) toute opération ou tout événement donnant droit au contribuable au produit de disposition d’un bien;

81The disposition of property therefore includes a transaction or event that entitles a taxpayer to the proceeds of disposition of that property.

(c) Analysis

82As indicated in the previous section, there are no written agreements between Mr. Rudolph and Mr. Hennigar or Mumsco in respect of the sale of 910,000 shares in the capital of Keltic by Mr. Rudolph to Mumsco.

83At trial, the following documents were adduced in evidence to show that the transfer from Mr. Rudolph to Mumsco took place in March 2008, not in September 2007:

• (i)Keltic’s securities register–shareholder’s ledger indicating that Mumsco became a shareholder of Keltic on March 4, 2008 and received 910,000 Class “A” shares of Keltic upon the transfer from Mr. Rudolph (Exhibit A‑1, Appellant’s Book of Documents, tab 7);
• (ii)Share certificate No. 200 representing 910,000 Class “A” common shares in the capital of Keltic issued to Mumsco, dated March 4, 2008 (Exhibit A‑1, Appellant’s Book of Documents, tab 12);
• (iii)Email from Mr. Rudolph to Mr. Olsen dated March 3, 2008 requesting that a transfer of 910,000 shares in the capital of Keltic from him to Mumsco be reflected in the book and that a share certificate be issued to Mumsco reflecting its ownership (Exhibit A‑1, Appellant’s Book of Documents, tab 19).

84However, according to the Respondent, because Mr. Rudolph’s bank account statements (Exhibit A‑1, Appellant’s Book of Documents, tab 15, at 231 and 235) showed a deposit of $1,320,000 from Mumsco on September 4, 2007 and a deposit of $500,000 from Mumsco on March 3, 2008, Mr. Rudolph must have disposed of 660,000 shares in the capital of Mumsco on September 4, 2007 and 250,000 shares on March 3, 2008.

85Further, the Respondent wants the Court to consider the T1 Adjustment Request form filed with the CRA for the 2007 taxation year, which was never processed by the CRA and which indicates a sale of 800,000 shares in the capital of Keltic for $1,600,000, as evidence that Mr. Rudolph sold shares to Mumsco in September 2007.

86For the following reasons, I do not agree with the arguments raised by the Respondent.

87Firstly, Mr. Hennigar’s credible and disinterested testimony at the hearing was to the effect that Mumsco acquired 910,000 shares in the capital of Keltic on March 4, 2008.

88At the hearing, Mr. Hennigar testified that when he met Mr. Rudolph during the 2007 Labour Day weekend, Mr. Rudolph was concerned that he would not be able to keep his position as a director of Keltic, and he wanted to prevent a change of control of the company.

89Mr. Hennigar’s testimony aligns with Mr. Rudolph’s. The evidence is clear that Mr. Rudolph wanted to acquire more shares in the capital of Keltic to prevent such events from happening and did not want to sell shares at this point in time.

90Mr. Hennigar was very clear in his testimony that Mumsco never acquired shares in the capital of Keltic in September 2007, as the purpose of the agreement with Mr. Rudolph was to fund Mr. Rudolph’s acquisition of additional shares before Keltic’s annual meeting in order to prevent a change of control of the company. After the acquisition by Mumsco of 910,000 shares in the capital of Keltic, Mr. Hennigar became a director of Keltic sometime in 2008.

91Mr. Hennigar also testified that, following the various meetings he had with Mr. Rudolph in September 2007, he wrote a memorandum to his siblings (who are the other shareholders and directors of Mumsco) to recommend that Mumsco buy shares in the capital of Keltic. Mr. Hennigar then added in his testimony that it was at that time, in September 2007, that funds were advanced to Mr. Rudolph to enable him to buy additional shares or exercise sufficient stock options before the annual meeting, to prevent the change of control of Keltic. The agreement between Mr. Rudolph and Mr. Hennigar stipulated that Mumsco would receive shares in the capital of Keltic at $2 per share when all funds were advanced by Mumsco to Mr. Rudolph.

92In March 2008, all funds promised by Mumsco had been advanced, and then Mr. Rudolph transferred 910,000 shares in the capital of Keltic to Mumsco, for a consideration of $1,820,000. That amount was set off against prior advances by Mumsco to Mr. Rudolph.

93Further, Mr. Rudolph testified that his accountant, who is his brother, made a mistake by filing the T1 Adjustment Request form for 2007, and that he should not have filed that document. Mr. Rudolph sought to address that matter in the letter addressed to the CRA dated May 24, 2011, where he stated, “Although there was a share sale reported in 2007, the sale did not actually close until March 4, 2008. This is verified on the share register and can be addressed through an adjustment to the 2007 and 2008 returns” (Exhibit R‑1, Respondent’s Book of Documents, tab 4).

94At the hearing, the Respondent argued that I should not rely on Mr. Rudolph’s explanations because they were unclear and unreliable, and also because he never provided these explanations prior to the trial, despite having the opportunity to do so. However, the Respondent forgot Mr. Rudolph’s letter dated May 24, 2011 addressed to the CRA, referred to above, where Mr. Rudolph stated that the sale did not close until March 4, 2008.

95Also, the Court accepts the fact that Mr. Rudolph would not have sold shares in the capital of Keltic in September 2007, as he was looking for funds to buy additional shares in order to maintain his directorship in Keltic. Selling shares would only have reduced his chance of maintaining his directorship in Keltic.

96The Court accepts that Mumsco provided funds to Mr. Rudolph to enable him to buy additional shares in the capital of Keltic. The events that followed the meetings with Mr. Hennigar on Labour Day weekend in September 2007 show that Mr. Rudolph did indeed purchase additional shares and did not sell shares in the capital of Keltic.

97With the funds advanced by Mumsco, Mr. Rudolph purchased 1,055,000 additional shares in September 2007, in accordance with an agreement with Mr. Dunn, and exercised his own stock options to buy 220,000 shares. The total consideration paid by Mr. Rudolph for these transactions amounted to $1,323,500, as indicated above, which is approximately equal to the funds advanced by Mumsco in September 2007. This shows that Mr. Rudolph’s testimony is credible and should be accepted by the Court. This also is a corroboration of Mr. Hennigar’s testimony to the effect that the amount of $1,320,000 was an advance made by Mumsco to Mr. Rudolph to allow him to buy additional shares in the capital of Keltic.

98The following year, on March 3, 2008, Mr. Rudolph received an additional sum of $500,000 from Mumsco. On that day, he exercised his options to purchase 14,000 shares in the capital of Keltic for $42,000. The next day, he paid $7,500 for Mr. Olsen to exercise his stock options to acquire additional shares in Keltic, and an additional sum of $427,500 to Keltic to subsequently acquire 290,000 shares. He also purchased 15,000 shares in the capital of Keltic from Mr. Dunn for $22,500. The total consideration for these transactions amounted to $499,500, which was approximately equal to the amount advanced by Mumsco to Mr. Rudolph on March 3, 2008.

99In December 2007, there were 13,020,879 shares issued and outstanding in Keltic, and at that point, Mr. Rudolph held 2,075,000 shares, representing 16% of the shares. If Mr. Rudolph had not acquired additional shares in September 2007, he would have held only approximately 6.8% of the shares in the capital of Keltic.

100After transactions concluded at the beginning of 2008, Mr. Rudolph held 2,394,000 shares in the capital of Keltic, giving him approximately 17.2% of the shares (out of 13,949,879 shares).

101Finally, the Respondent argues that there is no evidence that the only sale of shares in the capital of Keltic actually occurred in 2008, as the dates in the corporate registry are not an accurate reflection of actual transaction dates.

102With respect to the veracity of corporate ledgers, the Respondent argues that evidence to contradict corporate ledgers is admissible. As the proceedings were taken in the province of Quebec, its laws of evidence apply and not the laws of Alberta (as per sections 2 and 40 of the Canada Evidence Act; see also Canada (National Revenue) v. Hardy, 2018 FCA 103 at paragraph 14).

103Further, the Respondent refers to subsections 30(1) and 30(6) of the Canada Evidence Act, which provide as follows:

Business records to be admitted in evidence

30(1) Where oral evidence in respect of a matter would be admissible in a legal proceeding, a record made in the usual and ordinary course of business that contains information in respect of that matter is admissible in evidence under this section in the legal proceeding on production of the record.

Court may examine record and hear evidence

(6) For the purpose of determining whether any provision of this section applies, or for the purpose of determining the probative value, if any, to be given to information contained in any record admitted in evidence under this section, the court may, on production of any record, examine the record, admit any evidence in respect thereof given orally or by affidavit including evidence as to the circumstances in which the information contained in the record was written, recorded, stored or reproduced, and draw any reasonable inference from the form or content of the record.

[Emphasis added.]

Les pièces commerciales peuvent être admises en preuve

30 (1) Lorsqu’une preuve orale concernant une chose serait admissible dans une procédure judiciaire, une pièce établie dans le cours ordinaire des affaires et qui contient des renseignements sur cette chose est, en vertu du présent article, admissible en preuve dans la procédure judiciaire sur production de la pièce.

Le tribunal peut examiner la pièce et entendre des témoins

(6) Aux fins de déterminer si l’une des dispositions du présent article s’applique, ou aux fins de déterminer la valeur probante, le cas échéant, qui doit être accordée aux renseignements contenus dans une pièce admise en preuve en vertu du présent article, le tribunal peut, sur production d’une pièce, examiner celle-ci, admettre toute preuve à son sujet fournie de vive voix ou par affidavit, y compris la preuve des circonstances dans lesquelles les renseignements contenus dans la pièce ont été écrits, consignés, conservés ou reproduits et tirer toute conclusion raisonnable de la forme ou du contenu de la pièce.

[Soulignements ajoutés.]

104Thus, in accordance with these provisions and as argued by the Respondent, the Court may draw any inference from the form or content of Keltic’s corporate ledgers and share certificates. Also, in accordance with the provisions of the Civil Code of Québec, corporate ledgers and share certificates may be contradicted by any means, and the probative value of any testimony is left to the appraisal of the Court (articles 2836 and 2845).

105The Respondent relies on the following discrepancies in Keltic’s corporate ledgers to support his position:

• -Mr. Rudolph requested that Mr. Olsen transfer 910,000 shares from him to Mumsco on March 3, 2008 at 2:28 p.m. (see Exhibit A‑1, Appellant’s Book of Documents, tab 19), but the transfer came into effect only on March 4, 2008.
• -Testimony of Mr. Olsen to the effect that he did not request written documentation before entering transactions of purchases, sales or transfers in the minute book of Keltic.

106I agree with the Respondent in respect of the application of the laws of evidence. However, after weighing all the evidence adduced at the hearing, I find that it shows that Mumsco did provide financing to Mr. Rudolph so he could acquire additional shares in the capital of Keltic to allow him to maintain his directorship at the annual meeting held later in September 2007. Mr. Rudolph was looking at increasing the number of shares he was holding in the capital of Keltic and was not looking at divesting himself of shares in September 2007, prior to the annual meeting of Keltic. It is clear that it cannot be found that, in September 2007, Mr. Rudolph disposed of any shares in the capital of Keltic and that he was entitled to any proceeds of the disposition of shares in the capital of Keltic.

107I also find that the evidence shows that Mumsco made an additional advance of $500,000 to Mr. Rudolph on March 3, 2008, allowing him to exercise more stock options, transfer additional funds to Keltic and pay Mr. Dunn and Mr. Olsen so they would exercise some stock options and subsequently transfer shares to him.

108Again, it cannot be found that, at this point on March 3, 2008, Mr. Rudolph had disposed of any shares in the capital of Keltic and that he was entitled to any proceeds from the disposition of shares in the capital of Keltic.

109Furthermore, the evidence shows that Mr. Dunn and Mr. Rudolph agreed in September 2007 that Mr. Rudolph would provide between $1.5M and $2M to Keltic in exchange for shares in the capital of Keltic. Indeed, between September 2007 and March 2008, Mr. Rudolph himself, either directly or through various transactions with Mr. Dunn and Mr. Olsen, invested approximately $1.7M in the capital of Keltic. Having met his obligations under the agreement with Mr. Dunn by providing additional capital to Keltic, Mr. Rudolph then instructed Mr. Olsen in March 2008 to proceed with the transfer of 910,000 shares in the capital of Keltic to Mumsco (see the email to Mr. Olsen dated March 3, 2008, Exhibit A‑1, Appellant’s Book of Documents, tab 19). I also find that this transfer took place after Mr. Rudolph acquired additional shares from Mr. Dunn and Mr. Olsen on March 4, 2008, considering his obligations to provide additional funding to Keltic.

110For all these reasons, the Court finds that Mr. Rudolph disposed of 910,000 shares in the capital of Keltic to Mumsco on March 4, 2008 because he was entitled on that date to the proceeds of disposition of the shares.

(4) Quantum and nature of the profit resulting from the sale by Mr. Rudolph to Mumsco of 910,000 shares in the capital of Keltic

(a) Parties’ positions

111According to the Appellant, Mr. Rudolph’s profit amounting to $966,105.26 from the sale of 910,000 shares in the capital of Keltic to Mumsco is on income account.

112Factors such as the speculative nature of the investment in Keltic, Mr. Rudolph’s initial intent to obtain a big return on his investment, the number of transactions in shares and options, the period of ownership, and the fact that Keltic was always in a deficit position and did not pay any dividends over the years are all indicative of transactions on income account.

113According to the Respondent, Mr. Rudolph’s profit resulting from the sale of 910,000 shares in the capital of Keltic is on capital account. Factors including the number of transactions, the period of ownership, the time spent on the activity and the financing of the activity are all indicative of capital transactions. According to Ms. Meisner, since Mr. Rudolph was a full-time dentist during the relevant taxation years, he had little time available for trading actively in shares or options. She was not provided with any evidence of the time Mr. Rudolph spent doing securities transactions, studying the market or looking for business deals. However, Ms. Meisner did not consider the nature of the shares, namely, that they were of a speculative nature, in concluding on the nature of the profit.

(b) Applicable principles

114The Act does not set out any criteria for distinguishing between capital gain and business income. Case law has established a framework for analyzing the nature of such revenue. Further, subsection 248(1) broadly defines a “business” as including “an adventure or concern in the nature of trade”.

115In M.N.R. v. Taylor,1956 CanLII 803 (CA EXC), [1960] Ex. C.R. 3 (Taylor), the Court sets out a number of criteria to apply in order to determine whether a transaction is “an adventure or concern in the nature of trade”, and these criteria were consistently used by the Court to make that determination.

116More particularly, in Happy Valley Farms Ltd. v. M.N.R.,1986 CanLII 7434 (FCTTD), [1986] 2 C.T.C. 259 at 263 (Happy Valley Farms), the Court reiterated these criteria and summarized them as follows:

1. The nature of the property sold. Although virtually any form of property may be acquired to be dealt in, those forms of property, such as manufactured articles, which are generally the subject of trading only are rarely the subject of investment. Property which does not yield to its owner an income or personal enjoyment simply by virtue of its ownership is more likely to have been acquired for the purpose of sale than property that does.

2. The length of period of ownership. Generally, property meant to be dealt in is realized within a short time after acquisition. Nevertheless, there are many exceptions to this general rule.

3. The frequency or number of other similar transactions by the taxpayer. If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.

4. Work expended on or in connection with the property realized. If effort is put into bringing the property into a more marketable condition during the ownership of the taxpayer or if special efforts are made to find or attract purchasers (such as the opening of an office or advertising) there is some evidence of dealing in the property.

5. The circumstances that were responsible for the sale of the property. There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that will preclude a finding that the plan of dealing in the property was what caused the original purchase.

6. Motive. The motive of the taxpayer is never irrelevant in any of these cases. The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is one of the most important elements in determining whether a gain is of a capital or income nature.

117Further, in Vancouver Art Metal Works Ltd. v. Canada, (1993) 93 D.T.C. 5116 at 5119 (Vancouver Art Metal Works), the Federal Court of Appeal set out various criteria to determine whether a person was engaged in a trade or business:

It is, however, a question of fact to determine whether one's activities amount to carrying on a trade or business. Each case will stand on its own set of facts. Obviously, factors such as the frequency of the transactions, the duration of the holdings (whether, for instance, it is for a quick profit or a long term investment), the intention to acquire for resale at a profit, the nature and quantity of the securities held or made the subject-matter of the transaction, the time spent on the activity, are all relevant and helpful factors in determining whether one has embarked upon a trading or dealing business.

[Emphasis added.]

118Generally, the Court will consider the taxpayer’s motive (or intention), along with their overall conduct while in possession of the asset, to be the determining factor influencing their findings (Happy Valley Farmsat 263).

119In addition, in the specific context of share transactions, there is a strong presumption that profit from the sale of shares is on capital account, and not on income account (Irrigation Industries Ltd. v. M.N.R., 1962 CanLII 55 (SCC), [1962] S.C.R. 346 at 352). The rationale behind this presumption is that assets with income-producing potential are typically regarded as investments, and gains derived from the sale of such assets are generally considered to be capital gains. In that decision, the Supreme Court of Canada held that (at 352):

The nature of the property in question here is shares issued from the treasury of a corporation and we have not been referred to any reported case in which profit from one isolated purchase and sale of shares, by a person not engaged in the business of trading in securities, has been claimed to be taxable.

Corporate shares are in a different position because they constitute something the purchase of which is, in itself, an investment. They are not, in themselves, articles of commerce, but represent an interest in a corporation which is itself created for the purpose of doing business. Their acquisition is a well-recognized method of investing capital in a business enterprise.

120Nevertheless, it is a rebuttable presumption. In M.N.R. v. Freud, 1968 CanLII 50 (SCC), [1969] S.C.R. 75 at 80–81, the Supreme Court of Canada stated:

It is clear that while the acquisition of shares may be an investment …, it may also be a trading operation depending upon circumstances … Due to the definition of business as including an adventure in the nature of trade, it is unnecessary for an acquisition of shares to be a trading operation rather than an investment that there should be a pattern of regular trading operations.

[Emphasis added.]

(c) Analysis

121The Court must ascertain Mr. Rudolph’s intention when he acquired the shares in Keltic. Specifically, it must determine whether Mr. Rudolph was, in fact, engaged in the business of trading or dealing in securities in respect of the 910,000 shares in the capital of Keltic sold to Mumsco and thereby engaged in an adventure or concern in the nature of trade, or whether Mr. Rudolph held those shares as investments. In accordance with the applicable principles summarized above, the Court has to consider the following factors in order to do so:

• the frequency or number of similar transactions, and the length of period of ownership (quick profit or long-term investment);
• the nature and quantity of the securities held;
• the subject-matter of the transaction;
• the financing of the purchase of the securities;
• the time spent on the activity;
• the taxpayer’s motive; and
• the particular knowledge of Mr. Rudolph.

122For the following reasons, I find that Mr. Rudolph’s profit resulting from the sale of 910,000 shares in the capital of Keltic to Mumsco amounts to $966,105.26 and must be characterized as profit on income account, and not on capital account. I find that Mr. Rudolph was engaged in an adventure or concern in the nature of trade in respect of the shares in the capital of Keltic.

123The amount of $966,105.26 was calculated on the basis of the adjusted cost bases of the various shares and stock options exercised. These amounts were not in dispute between the parties.

124As indicated above, the evidence shows that Mr. Rudolph participated in approximately 34 transactions to purchase shares and 16 transactions to buy stock options in the capital of Keltic. From 2004 to 2008, he bought 2,394,000 shares and sold 910,000 shares to Mumsco, leaving him with a balance of 1,484,000 shares in 2008.

125I accept the fact that there was no market for the shares in the capital of Keltic; hence, the fact that Mr. Rudolph did not sell any shares in the capital of Keltic during the relevant period except for the 910,000 shares is not relevant.

126I have also considered the fact that 4Gas B.V. and Maple LNG Ltd. did not carry out the purchase of the liquefied natural gas component of the integrated project in accordance with the Purchase and Sale Agreement dated March 14, 2006, that LyondellBasell Industries was in bankruptcy proceedings and that, consequently, Mr. Rudolph was not in a position to sell any of the shares or stock options in the capital of Keltic.

127I do not find that the number of transactions is so large as to exclude the possibility that the sale of shares to Mumsco was a realization of an investment.

128However, other factors, described below, lead me to find that the profit from the sale of 910,000 shares in the share capital of Keltic to Mumsco was on income account, and that Mr. Rudolph was engaged in an adventure or concern in the nature of trade in respect of the shares in the capital of Keltic.

129Before his meeting with Mr. Hennigar in September 2007, Mr. Rudolph held 800,000 shares in the capital of Keltic. After reaching an agreement with Mr. Hennigar, Mr. Rudolph was able to obtain sufficient funds to acquire 1,594,000 additional shares in the capital of Keltic, through transactions with Mr. Dunn and Mr. Olsen and by exercising some of his own stock options, as described above.

130As indicated by Mr. Olsen, the agreements between Mr. Rudolph and Mr. Dunn and between Mr. Rudolph and himself were advantageous to Mr. Rudolph since Mr. Rudolph acquired additional shares in the capital of Keltic at a much lower price than $3 per share, which was the exercise price under his own stock options. I agree with Mr. Olsen.

131For example, the transaction of September 2007 with Mr. Dunn allowed Mr. Rudolph to acquire 1,055,000 shares for a total price $663,500, or $0.63 per share. Similarly, the transaction in March 2008 with Mr. Olsen allowed Mr. Rudolph to acquire 290,000 shares for a total price of $435,000, or $1.50 per share.

132Given the price paid by Mr. Rudolph to acquire additional shares from the two founders of Keltic, Mr. Dunn and Mr. Olsen, and the purchase price of the shares already agreed upon with Mr. Hennigar, Mr. Rudolph realized a quick profit on the sale of 910,000 shares in the capital of Keltic to Mumsco.

133In September 2007, Mr. Rudolph bought additional shares in the capital of Keltic with funds advanced by Mumsco in order to maintain his directorship in Keltic. Further, in March 2008, with additional funds advanced by Mumsco, Mr. Rudolph bought more shares in order to meet the promise made to Mr. Dunn to invest $1.5M to $2M in Keltic. Mr. Rudolph and Mr. Hennigar agreed that some time after Keltic’s annual meeting and after Mr. Rudolph invested additional funds in Keltic as agreed with Mr. Dunn, Mr. Rudolph would transfer 910,000 shares to Mumsco, at an agreed price of $2 per share. Mr. Rudolph did not intend to keep the additional shares for a long period, but wanted to divest himself of some shares quickly. In proceeding that way, he held additional shares for a short period.

134Furthermore, even if I were to consider the fact that Mr. Rudolph has held shares in the capital of Keltic since 2004, I would come to the same conclusion.

135The evidence shows that there was no market for the shares and that Keltic did not have the financial means to carry out its project. Keltic needed equity capital on a continuous basis. Mr. Rudolph stated that he would have disposed of his shares as soon as circumstances allowed him to do so. These facts show that Mr. Rudolph’s investment in Keltic was not a long-term investment; rather, he invested in Keltic to make a substantial return. I find that Mr. Rudolph’s intent was to invest in shares that had great growth potential but were a very risky investment.

136The evidence shows that an investment in Keltic’s share capital was clearly a speculative venture (Rouleau v. The Queen, 2008 TCC 244 at paragraphs 99–101). Mr. Rudolph testified that when he initially decided to invest in Keltic in 2004, he liked the concept and noted that the price of natural gas was relatively high at the time, which presented an attractive opportunity to bring liquefied natural gas to Nova Scotia. Although it was very speculative, Mr. Rudolph testified that he was optimistic about the potential for significant returns on his investment, particularly upon the involvement of 4Gas B.V. and Petroplus. Furthermore, Mr. Rudolph testified that the most likely outcome for Keltic would be to be taken over by another entity, like LyondellBasell Industries, and then he would be able to exchange his shares in the capital of Keltic for shares in a publicly traded corporation.

137Mr. Hennigar’s testimony also demonstrates the highly speculative nature of an investment in the capital of Keltic. However, because Keltic had a sound business plan, Mr. Hennigar concluded that investing in Keltic was a good opportunity for Mumsco.

138Further, according to Mr. Olsen, he realized over the years that the Keltic Project was too ambitious. The project required a significant investment of time and resources. Keltic never made any profit. According to the financial statements adduced in evidence, during all the years of Keltic’s operations, deficits were substantial, ranging from $8M to $10.9M (Exhibit A‑1, Appellant’s Book of Documents, tab 10).

139Note 1 on the financial statements of Keltic for the taxation year ending December 31, 2007 stated that:

… The Company is involved in the development of a petrochemical and other related products facility in the province of Nova Scotia. Since commencing this project the Company has been successful in raising equity capital to allow it to discharge its liabilities in the normal course of operations.

During this phase of its development project the Company has not generated any revenue and has experienced losses in each year of operations since incorporation. The Company’s ability to continue to develop this project will be dependent upon obtaining adequate financing….

140As both Mr. Rudolph and Mr. Olsen have stated, and as confirmed by the information found in the financial statements, Keltic consistently required additional capital to carry on its activities.

141I note that the fact that Keltic never paid dividends and was not in a position to pay dividends does not carry that much weight in this analysis (Rajchgot v. The Queen, 2004 TCC 548 at paragraph 27). However, as indicated in Woods v. The Queen, (1995) 1995 CanLII 18902 (TCC), 50 D.T.C. 1995 at paragraph 19, “when the asset does not produce income and the only manner in which a profit may be gained is by selling that asset there is an inference that such transactions is an adventure in the nature of trade”.

142I find that in the case at bar such an inference must be made, given all the facts described above, including an absence of market for the shares in the capital of Keltic and Mr. Rudolph’s intent to sell the shares as soon as he could.

143Further, as the evidence shows, Mr. Rudolph used the funds advanced by Mumsco to acquire additional shares in the capital of Keltic, and he did not use his own funds. I find that this is also a factor showing that the sale by Mr. Rudolph of 910,000 shares in the capital of Keltic is an adventure or concern in the nature of trade.

144Mr. Rudolph’s particular knowledge also shows that he was involved in an adventure or concern in the nature of trade in respect of his dealings with Keltic’s shares and options (Kane v. The Queen, (1994) 1994 CanLII 19382 (FCTTD), 48 D.T.C. 6671 (F.C.T.D.)).

145It is clear that Mr. Rudolph, in his capacity as a director and subsequently the chair of the board, was sufficiently involved in Keltic’s operations to be aware of its business development. During his testimony, he provided a comprehensive overview of the agreements between Keltic and other key players in the industry. As the chair of the board, he was responsible for coordinating the activities of the board, presiding over its meetings, and providing guidance and leadership to the management team. This was his method of assisting Keltic in its growth and the creation of value for its shareholders.

146In that respect, the Respondent argues that because Mr. Rudolph’s intent was to create value for Keltic’s shareholders, it was clear that the profit realized by Mr. Rudolph on the sale of 910,000 shares in the capital of Keltic to Mumsco was on capital account. However, I cannot agree with the Respondent, as many other factors indicate that Mr. Rudolph was engaged in an adventure or concern in the nature of trade. Mr. Rudolph was not a passive investor, as the evidence clearly demonstrates his involvement in the Keltic Project. Mr. Rudolph had a strong knowledge of the chemical field, having studied in technical engineering.

147Despite his main occupation as a dentist, Mr. Rudolph testified that he acquired a wealth of knowledge on the financial world from programs broadcast on a financial news channel. Also, the evidence shows that Mr. Rudolph would spend on average 20 to 25 hours a week on businesses other than his dental practice. Indeed, during the taxation years under review, Mr. Rudolph would work 70 to 80 hours a week.

B. Did Mr. Rudolph realize a loss on capital account or income account totalling $548,600 on the expiration of his options to buy shares in the capital of Keltic in 2008?

148The amount of the loss is not in dispute. The loss amounted to $548,600 and represents the total cost of all stock options held by Mr. Rudolph in Keltic that expired during the 2008 taxation year.

(1) Parties’ positions

149According to the Respondent, as mentioned in the previous section of these reasons, all transactions done by Mr. Rudolph in the capital of Keltic, including all his dealings with stock options, were transactions on capital account and not on income account. Particularly with respect to options, Mr. Rudolph did not trade his stock options purchased between 2004 and 2007, but exercised only 234,000 out of his 7,950,000 stock options, which shows that these operations were on capital account.

150In her analysis with respect to the nature of the loss on the expiration of stock options, Ms. Meisner took into account the same factors as she did in her analysis of the nature of the profit resulting from the sale of 910,000 shares to Mumsco, namely the frequency of the transactions, the period of ownership, the time spent and the financing of the activity. Further, according to Ms. Meisner, Mr. Rudolph, being a very successful full-time dentist, would have had little time to actively trade in stock options.

151According to the Appellant, the speculative nature of holding stock options in Keltic should have been taken into account by the Minister in her analysis of the nature of the income from stock options dispositions, but it was not. Further, the fact that Keltic was always in a deficit position shows the risks taken by Mr. Rudolph, as confirmed by the testimonies of both Mr. Olsen and Mr. Hennigar. Mr. Rudolph’s knowledge of the financial market and the time he spent studying the market are also strong indicators that the losses are on income account, and not on capital account.

(2) Analysis and conclusion

152For the same reasons detailed in the previous section on the nature of the profit resulting from the sale by Mr. Rudolph to Mumsco of 910,000 shares in the capital of Keltic, the Court finds that the losses in the amount of $548,600 resulting from the expiration of Mr. Rudolph’s stock options in Keltic are on income account, and not on capital account. The various factors examined in the previous section also apply to this issue. The Court finds that Mr. Rudolph was engaged in an adventure or concern in the nature of trade with respect to his stock options ownership in Keltic.

153In 2004, when Mr. Rudolph was first involved in Keltic, he negotiated an arrangement with Mr. Dunn to obtain a 75% equity interest in the cogeneration part of the integrated facility, and in order to do so, he subscribed to 800,000 shares in the capital of Keltic at $0.50 per share over a one-year period from February 2004 to February 2005. He testified that, as things were starting to align in a favourable manner for Keltic, he began to purchase stock options in Keltic that gave him the right to purchase shares in the capital of Keltic at $3 per share.

154From March 20, 2005 to September 8, 2006, on 16 different occasions, Mr. Rudolph paid a total of $795,000 to acquire 7,950,000 stock options, each option expiring 2 years after its issuance.

155In December 2007, the board of directors agreed to extend the expiry dates of the remaining stock options held by Mr. Rudolph. Later on, Mr. Rudolph paid an additional $30,000 to extend some stock options. Consequently, the total cost of all his stock options was $825,000 (Exhibit R‑1, Respondent’s Book of Documents, tab 4, at 67–68).

156Mr. Rudolph testified that, in addition to his shares ownership, the stock options held in Keltic were also important to him because of Keltic’s agreements with companies, such as 4Gas B.V. and LyondellBasell Industries. Indeed, as indicated above, his ultimate objective was to have Keltic merge with LyondellBasell Industries or another publicly traded company, to exchange his shares for publicly traded shares.

157More particularly, I find that the speculative nature of the stock options carries even more weight in the characterization of the losses resulting from the expiration of the stock options as being on income account than in the characterization of the profit from shares disposition.

158The Court also took into account the fact that Mr. Rudolph started trading in the mid-2000s, and he is still a very active trader. In 2007, he established trading accounts for options with RBC Direct Investing (Exhibit R‑1, Respondent’s Book of Documents, tab 33). The evidence also shows that Mr. Rudolph had considerable knowledge of the securities market, spending a lot of time studying the market and making a lot of investments in stock options over the years.

C. Is Mr. Rudolph entitled to a deduction of an amount of $52,858.73 under paragraph 20(1)(c) as interest paid or payable in 2007, and should the Court admit Mr. Rudolph’s testimony under section 98 of the Rules?

(1) Parties’ positions

159According to the Respondent, the deduction of $70,549 claimed by Mr. Rudolph for the 2007 taxation year as interest paid or payable on money borrowed for the purpose of earning income from a business or property was disallowed as no supporting documentation was provided to the CRA.

160Further, according to the Respondent, the Court should not admit Mr. Rudolph’s testimony on the uses of money borrowed, as he did not provide a complete answer to an undertaking given during his examination for discovery, and did not forthwith provide complete information to the Respondent upon discovering his answers were incomplete, as prescribed by section 98 of the Rules.

161At the hearing, the Appellant conceded that he was not seeking to deduct an amount of $70,549 under paragraph 20(1)(c) as originally claimed, but an amount of $52,858.73, because Mr. Rudolph did not remember specific uses of the totality of the borrowed funds. According to the Appellant, the amount of $52,858.73 represents interest paid on funds borrowed for the purpose of earning income from a business or property, as he argues the funds borrowed were used either to buy shares in corporations or to invest in various business ventures he was involved in during those years.

(2) Conclusion

162For the following reasons, the Respondent’s objection is sustained: Mr. Rudolph’s testimony on the use of the funds borrowed is not admitted and shall not be part of the Court’s record, in accordance with section 98 of the Rules.

163Further, even if Mr. Rudolph’s testimony had been allowed by the Court, his testimony in respect of the uses of the funds borrowed was extremely vague, and hence, the Court is not convinced, on a balance of probabilities, that the funds were borrowed for the purpose of earning income from a business or property.

164Accordingly, no deduction is allowed in computing Mr. Rudolph’s income under paragraph 20(1)(c) for the 2007 taxation year.

(3) Analysis

(a) Section 98 of the Rules: Respondent’s objection

165The Respondent raised an objection on the admissibility of Mr. Rudolph’s testimony regarding the uses of the funds borrowed. At the hearing, the Court took the objection under reserve. For the following reasons, the Respondent’s objection is sustained and Mr. Rudolph’s testimony on the use of the funds borrowed is not admitted and shall not be part of the record.

166Section 98 of the Rules provides the following:

98 (1) Where a party has been examined for discovery or a person has been examined for discovery on behalf or in place of, or in addition to the party, and the party subsequently discovers that the answer to a question on the examination,

(a) was incorrect or incomplete when made, or

(b) is no longer correct and complete,

the party shall forthwith provide the information in writing to every other party.

(2) Where a party provides information in writing under subsection (1),

(a) the adverse party may require that the information be verified by affidavit of the party or be the subject of further examination for discovery, and

(b) the writing may be treated at a hearing as if it formed part of the original examination of the person examined.

(3) Where a party has failed to comply with subsection (1) or a requirement under paragraph (2)(a), and the information subsequently discovered is,

(a) favourable to that party’s case, the party may not introduce the information at the hearing, except with leave of the judge, or

(b) not favourable to that party’s case, the Court may give such direction as is just.

98 (1) La partie interrogée au préalable, ou la personne qui l’est au nom, à la place ou en plus de cette partie, qui découvre ultérieurement qu’une réponse à une question de l’interrogatoire :

a) était inexacte ou incomplète;

b) n’est plus exacte et complète,

doit fournir immédiatement ce renseignement par écrit à toutes les autres parties.

(2) Si une partie fournit un renseignement par écrit en application du paragraphe (1) :

a) une partie opposée peut exiger qu’il soit appuyé d’une déclaration sous serment ou qu’il fasse l’objet d’un nouvel interrogatoire préalable;

b) ce renseignement peut être traité lors d’une audience comme s’il faisait partie de l’interrogatoire initial de la personne interrogée.

(3) Si une partie ne se conforme pas au paragraphe (1) ou à l’alinéa (2)a) et que le renseignement obtenu ultérieurement est :

a) favorable à sa cause, elle ne peut le présenter en preuve à l’instance qu’avec l’autorisation du juge;

b) défavorable à sa cause, la Cour peut rendre des directives appropriées.

167The purpose of examination for discovery is to render the trial process more fair and more efficient by allowing each party to fully know before trial the positions of each party so as to define the issues between them (Canada v. Lehigh Cement Limited, 2011 FCA 120 at paragraph 30, citing Montana Band v. Canada (T.D.), 1999 CanLII 9366 (FCTTD), [2000] 1 F.C. 267). Trial by ambush is no longer allowed in Canada.

168Section 98 of the Rules was enacted to codify these obligations and specifically provides that these are continuous disclosure obligations. Upon becoming aware that an answer was incomplete, a party has an obligation to provide the information forthwith to every other party. As provided in paragraph 98(3)(a) of the Rules, where a party fails to follow the Rules, that party may not introduce the favourable information at the hearing, except with leave of the Court.

169In the case at bar, counsel for the Appellant advised the Court that on the eve of the trial, when preparing Mr. Rudolph for his testimony, he realized that the undertaking provided by Mr. Rudolph to the Respondent in 2023 was incomplete, as various bank statements were missing. Counsel for the Appellant proceeded to inform the Respondent immediately and provided copies of the missing bank statements on the first day of trial.

170I find that the question put to Mr. Rudolph during examination for discovery was clear: “…why was this interest allegedly paid…?” Mr. Rudolph answered that it may not be limited to his investment in Keltic but could have been for some other businesses as well (Exhibit R‑2, Pre-Trial Examination of Mr. Rudolph on February 1, 2023, at 48–49). Mr. Rudolph undertook to provide more information regarding the context of the claim and, if possible, any supporting documents.

171Mr. Rudolph provided his answer to the undertaking and sent the Respondent copies of a chart showing interest payments allegedly made from January to December 2007 under six facilities of credit, together with a page taken from a tax return, 15 monthly statements in respect of only two lines of credit, and a mostly illegible handwritten document (1 page) containing some explanations. At the hearing, the Appellant adduced in evidence additional statements in respect of two other lines of credit, and conceded that interest paid on two other lines of credit cannot be substantiated. However, Mr. Rudolph never gave answers to the Respondent in respect of the uses of the funds borrowed under the various facilities of credit, but only provided incomplete documentation as described above.

172In light of the above circumstances, the Court finds that Mr. Rudolph’s testimony regarding the uses of the borrowed funds cannot be admitted. Mr. Rudolph should have either taken the corrective measures required by subsection 98(1) of the Rules or requested more time to provide his answers. A party is obliged by subsection 98(1) to provide updated information and complete information in writing forthwith (see Kallis v. The Queen, 2021 TCC 58 (Kallis) at paragraph 9).

173In the case at bar, and similar to the case in Kallis, it seems it is not a situation where the information came to light late in the game, but rather, that the search effort was not made until the eve of the trial. If the Court were to admit Mr. Rudolph’s testimony on the uses of the borrowed funds without the Respondent having had a chance to ask discovery questions on the issue, it would be unfair to the Respondent and go against the interests of justice.

174Because Mr. Rudolph’s testimony is not admissible, and he had the onus to show that the money borrowed was used for the purpose of earning income from a business or property, no deduction can be allowed under paragraph 20(1)(c) for the 2007 taxation year.

(b) Interest deductibility: paragraph 20(1)(c)

175The Court could also have concluded that Mr. Rudolph was not entitled to any deduction for interest under paragraph 20(1)(c) on different grounds.

176Because Mr. Rudolph’s testimony was extremely vague and unclear as to the uses to which he put the funds borrowed, the Court was not convinced, on a balance of probabilities, that the money borrowed was used for the purpose of earning income from a business or property in accordance with the requirements of paragraph 20(1)(c).

177The relevant part of paragraph 20(1)(c) reads as follows:

20 (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

Interest

(c) an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer’s income), pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy),

(ii) an amount payable for property acquired for the purpose of gaining or producing income from the property or for the purpose of gaining or producing income from a business (other than property the income from which would be exempt or property that is an interest in a life insurance policy),

or a reasonable amount in respect thereof, whichever is the lesser;

[Emphasis added.]

20 (1) Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien pour une année d’imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu’il est raisonnable de considérer comme s’y rapportant :

Intérêts

c) la moins élevée d’une somme payée au cours de l’année ou payable pour l’année (suivant la méthode habituellement utilisée par le contribuable dans le calcul de son revenu) et d’une somme raisonnable à cet égard, en exécution d’une obligation légale de verser des intérêts sur :

(i) de l’argent emprunté et utilisé en vue de tirer un revenu d’une entreprise ou d’un bien (autre que l’argent emprunté et utilisé pour acquérir un bien dont le revenu serait exonéré ou pour contracter une police d’assurance-vie),

(ii) une somme payable pour un bien acquis en vue d’en tirer un revenu ou de tirer un revenu d’une entreprise (à l’exception d’un bien dont le revenu serait exonéré ou à l’exception d’un bien représentant un intérêt dans une police d’assurance-vie),

[Soulignement ajouté.]

178Paragraph 20(1)(c) allows the deduction of interest paid on borrowed money that is used for the purpose of earning income from a business or property. As set out by the Supreme Court of Canada in Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC), [1999] 3 S.C.R. 622, there are four requirements that must be met for a deduction under paragraph 20(1)(c):

(i) the amount must be paid in the year or payable in the year in which it is sought to be deducted;

(ii) the amount must be paid pursuant to a legal obligation to pay interest on borrowed money;

(iii) the borrowed money must be used for the purpose of earning non-exempt income from a business or property; and

(iv) the amount must be reasonable, as assessed by reference to the first three requirements.

179Mr. Rudolph had the onus to trace the borrowed funds to an identifiable use triggering the deduction. In other words, the link had to be established by Mr. Rudolph between the funds borrowed and the income-earning process.

180The Court finds that Mr. Rudolph’s testimony was vague and not convincing.

181With respect to interest of $398.70 paid under a TD line of credit (No. 0857) of $25,000, Mr. Rudolph testified that it coincided with the purchase of a 40-acre lot in Bedford (“Bedford Lands”), which was the last industrial land in Halifax. According to Mr. Rudolph, the land was transferred to a corporation and subsequently sold around 2018 or 2019.

182Mr. Rudolph added that the interest of $6,549.61 paid under an RBC line of credit (No. 2001) of $570,400 also coincided with the purchase of the Bedford Lands.

183With respect to the interest of $46,246.49 paid under an RBC loan (No. 8002) in the amount of $1,370,000, Mr. Rudolph testified that it must have been borrowed for several projects, including the purchase of the Bedford Lands, the acquisition of various shares and options, a project for the development of a hotel in downtown Halifax (which was not approved) and the Bedford Project.

184Finally, with respect to interest of $11,247.62 paid under an RBC loan (No. 8001) in the amount of $185,000, Mr. Rudolph did not remember why he had borrowed these funds but argues that, as the deduction for interest paid on that loan was allowed by the CRA in previous years, a deduction should also be allowed for 2007.

185As indicated above, Mr. Rudolph had the onus to show that the money borrowed was used for the purpose of earning income from a business or property. His testimony was far from convincing: either he did not remember why he had borrowed money, or he testified that it must have been for a certain project, without indicating which project in particular or giving any more details regarding the project.

186The evidence adduced at the hearing by Mr. Rudolph is not sufficient and did not convince the Court, on a balance of probabilities, that the money borrowed was used for the purpose of earning income from a business or property. Accordingly, one of the requirements of paragraph 20(1)(c) was not met. Therefore, Mr. Rudolph cannot deduct any amount under paragraph 20(1)(c) for the 2007 taxation year.

Signed at Montreal, Quebec, this 25th day of November 2024.

“Dominique Lafleur”

Lafleur J.

2024 TCC 148

COURT FILE NO.:

2021-370(IT)G

STYLE OF CAUSE:

GORDON RAYMOND RUDOLPH v. HIS MAJESTY THE KING

PLACE OF HEARING:

Quebec, Quebec

DATES OF HEARING AND WRITTEN SUBMISSIONS:

May 28 to 30, 2024 June 6 and 13, 2024

REASONS FOR JUDGMENT BY:

The Honourable Justice Dominique Lafleur

DATE OF JUDGMENT:

November 25, 2024

APPEARANCES:

Counsel for the Appellant:

Bobby Doyon

Counsel for the Respondent:

Julien Dubé-Sénécal

Noémie Vespignani