INCOME TAX |
Income Calculation |
Capital Gains and Losses |
Hudon v. Canada
A-744-99
2001 FCA 320, Desjardins J.A.
29/10/01
25 pp.
Appeals from Tax Court's dismissal of appeals from assessments with respect to 1989, 1990, 1991 denying capital gains deduction provided for by Income Tax Act, s. 110.6(2.1) on disposition of "qualified small business corporation share[s]"--S. 110.6(2.1) permitting capital gain deduction in favour of individual, resident in Canada, who disposed of share of corporation that was "qualified small business corporation share"--"Qualified small business corporation share" defined as share of capital stock of corporation that, at determination time, is share of capital stock of small business corporation owned by individual and throughout that part of 24 months immediately preceding determination time while owned by individual was share, more that 50% of fair market value of assets of which attributable to active business--"Small business corporation" defined as Canadian-controlled private corporation, all or substantially all of fair market value of assets of which attributable to assets used in active business--"Active business" meaning any business carried on by taxpayer--"Business" including undertaking of any kind--Only issue whether Arnaud Properties Limited or Hall River Power Corporation "active business" as used in definition of "qualified small business corporation share" throughout 24 months immediately preceding date on which shares of capital stock of Arnaud Properties sold--In 1969 Gulf Pulp and Paper Inc. transferred assets consisting of land, buildings to Arnaud Properties--Hydroelectric assets, hydroelectric development rights on Rivière Ste-Marguerite transferred to Hall River, wholly-owned subsidiary of Arnaud Properties--Hydroelectric assets represented 100% of that company's assets and 90% or more of overall assets of Arnaud Properties--Arnaud Properties did nothing but sell lots between 1973 and 1975--Believed could sell lots more easily if electricity could be supplied to residents at lower cost--Numerous efforts made to promote development of hydroelectric potential--In 1978 Hall River commissioned study to determine feasibility of developing First Falls--Problems including Hydro-Québec's policy that any electricity produced by independent producer had to be used by producer for own purposes and could not be resold to third parties--In 1979 Arnaud Properties instructed Mr. Harquail to examine three options: expropriation, sale of rights and property connected with hydroelectric project to Iron Ore, operation as joint venture with Iron Ore, Hydro-Québec--Despite 1980 study recommending Hydro-Québec undertake project, Hydro-Québec deciding not to do so--In 1986 change of provincial government--In 1987 Hydro-Québec adopted new "politique d'achat" allowing purchase of power from small producers in province, subject to price negotiations--By then cost to develop project $17 million--In August Hydro-Québec indicating prepared to purchase electricity at 2.86 cents per kilowatt/hour while Hall River wanted to sell electricity at 4.2 cents per kilowatt/hour--Harquail requested necessary permits to enter into agreement with Hydro-Québec for purchase of energy--Financing arranged--Agreement in principle entered into in 1988 whereby Hydromega agreeing to acquire shares, advances, rights of shareholders of Arnaud Properties for $2 million--On February 24, 1989, shareholders of Arnaud Properties sold shares in capital stock of company to Hydromega for $2 million--Hydro-electric project not feasible considering need to borrow money, very low price offered by Hydro-Québec for sale of electricity--After sale, Hydromega began hydroelectric development and able to sell electricity for 4.5 cents per kilowatt/hour in 1990 or 1991--Appeals allowed--Determination, application of proper test with regard to phrase "active business" found in s. 110.6(1) question of law--Whether Hall River "active" in sense of carrying on business mixed question of fact, law--Tax Court concluded companies not inactive, yet since no agreement on sale price for energy reached, Hall River not carrying on business throughout relevant period--Approach to interpretation of law, appreciation of facts too restrictive--Two outside parameters where carrying on of business not occurring: on one hand, when company which has been incorporated, has not actually commenced operation and on other hand when company dormant and only holding annual meeting and filing returns so as to avoid forfeiture of charter--In between are some activities signifying company operating which should fall within spectrum of concept of carrying on business--Canada Starch Co. v. M.N.R., [1969] 1 Ex. C.R. 96 throwing some light on issue of carrying on business: expenses or other measures taken to introduce particular products to market, such as market surveys and industrial design studies, current expenses laid out while business operating--Bowater Power Co. v. Minister of National Revenue, [1971] 1 F.C. 421 (T.D.) holding whatever reasonable means taken to find out whether business should be created or not may still result from current operations of business as part of every day concern of officers in conducting operations of company in business-like way--Hall River carrying on business without interruption since 1978--Constantly on look-out for market to develop hydroelectric potential--Therefore meeting requirement of s. 110.6(1), both in terms of "active business" and relevant period--Requiring existence of agreement on sale of electricity before Hall River considered to be "carrying on business" adding element not found in legislation--Economic stimulus provides to equity participation in Canada and development of Canadian business enterprises rationale for tax exemption provided in s. 110.6(2.1)--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 110.6 "qualified small business corporation share", (2.1), 248 "active business", "business", "small business corporation".