Taxpayer Not Entitled to Deduct Losses on Income Account

Procon Mining & Tunnelling Ltd.  v. HMQ 2022 TCC 71

Decision Here


This is a simple case of whether shares owned by a taxpayer were held on income or capital account.

Decision & Analysis

Procon Mining (“Appellant”), a mining contractor, purchased and held shares in a junior mining company in connection with its business. The founder and CEO testified that there was no intention to earn income on the shares and the Appellant did not acquire the shares intending to sell them.

The only issue the Court decided was whether the loss on the eventual sale of those shares was on income or capital account.

The Appellant deducted the loss on income account.  The Minister reassessed on the basis that the loss was on account of capital.

The Court found the following facts quite important: The Appellant did not receive any dividends on the shares; the Appellant reported the shares as long-term investments in its financials; and the Appellant had a history of reporting similar transactions on account of capital.

Furthermore, the Court was able to conclude that the shares were acquired by the Appellant in order to generate more revenue from its mining contract business, and although the shares were not acquired for trade or resale, the shares constituted an investment in the equity of the issuer. The Court found that the evidence overwhelmingly lead to the conclusion that the shares were purchased as an investment.


The Court iterates the principle that property owned or held in a business is one of two types of property. It is either inventory or it is capital property. The sale or disposition of property that is inventory gives rise to revenue included in income. The profit or loss on inventory dispositions are on income account. The sale or disposition of property that is not inventory gives rise to a capital gain or capital loss under the capital gain provisions of the Act.

The Act defines two types of property, one of which applies to each of these sources of revenue. Capital property (as defined in s. 54(b)) creates a capital gain or loss upon disposition. Inventory is property the cost or value of which is relevant to the computation of business income. The Act thus creates a simple system that recognizes only two broad categories of property.[1]

As the Court held in the Safeway decision, the test is whether the property is acquired with the intention of being held for the purpose of producing income (or being used in the production of income), in which case it is capital property. If it is acquired for the purpose of being turned over, it is inventory.[2]

Here, the Appellant argued that the purpose of owning the shares was to earn business income.  Since this was the Appellant’s intention, it follows that the loss should have been treated on income account.  The Court disagreed:

Businesses almost invariably hold significant amounts of capital property (think tree) to generate their business revenues (think fruit). It is almost antithetical to the correct distinction between the two types of property to say that the property acquired to be held and used to generate revenues from its business, which does not include trading in such property, is not capital property when sold (barring any change in use which is not before the Court in this case), generating a capital gain or capital loss, but is property of the business that when sold generates income or loss from the business in which it was held.[3]

The Court dismissed the Appellant’s appeal with costs to the respondent on the basis that the loss on the sale of shares was on income account.

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[1] Friesen v Canada 1995 SCC 103

[2] Canada Safeway Limited v Canada, 2008 FCA 24

[3] Procon Decision, paragraph 23.