A-675-81
The Queen (Appellant)
v.
Marsh & McLennan, Limited (Respondent)
Court of Appeal, Thurlow C.J., Le Dain J. and
Clement D.J.—Toronto, January 18; Ottawa,
April 11, 1983.
Income tax — Income calculation — Dividend-tax refund
— Appeal by Crown from Trial Division's affirmation of
Board decision overturning assessment — Investments made
by respondent insurance broker with monies from premium
payments and elsewhere — Whether interest constituting
Canadian investment income as per s. 129(4) — Size and
duration of investments chosen to maintain high liquidity and
ensure adequate funds for obligations of brokerage business —
Majority (Thurlow C.J. dissenting) holding interest within s.
129(4)(a)(ii) exclusion since monies used or held in carrying on
brokerage business — Monies employed and risked in business
— Monies not held in trust for insurers — Respondent having
debtor-creditor relationship with insurers and clients —
Monies being property — Interest income from property —
Subparas. (ii) and (iii) overlapping since income from both
property and business where property used in trading activity
instead of mere investment — Exclusion definite on finding
(first) taxpayer carrying on business and (secondly) property
used or held in doing so — "Business" including "active
business" — Neither percentage of total income accounted for
by interest nor incorporated status of private company decisive
— Investment operation not inert — Interlacing of investments
and brokerage business within single entity — Appeal allowed
— Income Tax Act, S.C. 1970-71-72, c. 63, ss. 125, 129(4) (as
am. by S.C. 1974-75-76, c. 26, s. 86(2)), 248(1) — Income Tax
Act, R.S.C. 1952, c. 148, s. 21(4) — The Insurance Act, R.S.O.
1970, c. 224, ss. 347, 355.
The respondent taxpayer carried on business as an insurance
broker. On being notified that an insurer had agreed to cover a
risk for one of the respondent's clients, the respondent would
bill the client for the amount of the premium stipulated by the
insurer. This amount, minus an agreed commission, had to be
remitted to the insurer; however, according to its arrangements
with the several insurance companies, which followed the usual
practice in the insurance industry, the respondent did not have
to make the remittance for 60 days after the end of the month
in which the risk was accepted. The client paid the premium
some 30 days, on average, before the end of this 60-day period.
On receipt, the respondent would deposit the premium, together
with all other monies received by it, in a general, non-interest-
bearing bank account. This account was, in effect, a revolving
fund: the contents of it were used to pay the various obligations
of the respondent and to make investments, there being no
matching of specific receivables with specific payables.
The investments were made pursuant to an authorizing reso
lution of the respondent's board of directors, and took the form
of short-term bank certificates. When a given investment
matured, both the interest and the principal were deposited in
the general account. The amounts invested, and the periods for
which they were thus committed, were chosen so as to conform
to the respondent's policy of maintaining a high degree of
liquidity in its business operations, and with a view to ensuring
that the respondent would have sufficient funds available to
meet the financial obligations of the brokerage business, when
and as they arose. The particular officials responsible for
selecting and transacting the investments were required to
monitor—closely and on a continuing basis—the future cash
needs of the business; however, the making of the investments
occupied only a very small part of their work time.
The sum at issue in this case consisted of the interest earned
by the respondent on the foregoing investments. In the relevant
year, this interest constituted approximately 9% of the respond
ent's total before-tax income. Had the interest income not
existed, the respondent would still have made a comfortable
profit.
The question before the Court was whether the interest fell
within the definition of "Canadian investment income", set
forth in paragraph 129(4)(a), and could thus be included in
calculating the respondent's year-end refundable dividend tax
on hand. The Minister, in assessing, took the view that it could
not. The opposite conclusion of the Tax Appeal Board was
affirmed by the Associate Chief Justice, from whose decision
the Crown appealed.
Held (Thurlow C.J. dissenting), the appeal should be
allowed.
Per Le Damn J.: The notional fund consisting of the total of
unremitted premiums (minus commissions) at any time was
property used or held in the course of carrying on the business
of the respondent and, as such, was encompassed by the
exclusion in subparagraph 129(4)(a)(ii). To determine whether
this exclusion applies, the question one must ask is: Was the
fund employed and risked in the business? The answer on the
facts at bar is in the affirmative, since an amount equivalent to
the notional fund was committed to discharging the company's
obligations to the insurers, and thus was devoted to the carrying
on of the business.
Per Clement D.J.: The contents of the respondent's general
account were not impressed with any trust for the benefit of the
insurers, either by virtue of sections 347 and 355 of the Ontario
Insurance Act, or otherwise. The relationship between the
respondent and each of the insurers was instead one between
debtor and creditor, as was the relationship between the
respondent and each of its clients.
All of the money in the account was "property" of the
respondent, according to the definition in subsection 248(1),
and within the meaning of section 129. Hence, the interest
obtained by investing that money constituted income from
property. This finding, though, does not conclude the analysis
of the situation.
Subparagraph 129(4)(a)(ii) deals with income from prop
erty, while subparagraph (iii) is addressed to income from
business; but there is a degree of overlap between the two
provisions, because the two classes of income are not mutually
exclusive. As was indicated by the Exchequer Court in Wert-
man v. The Minister of National Revenue, there are situations
in which particular income may be regarded as deriving from
property and, at the same time, may also be regarded as
deriving from a business. Such a situation exists when the use
by which the property is caused to yield the income in question
is not mere investment in property, but rather is activity in the
nature of trade. In order to decide whether this is the case, and
whether the income is caught by the parenthetical exception in
subparagraph (ii), the Court must first determine whether the
taxpayer is carrying on a business. Once it is established that a
business does indeed exist, the only question remaining is
whether the property concerned is used or held in carrying it
on. If this second question also receives a positive answer, then
the property is the subject of trading activity and, by virtue of
the exceptiorT in subparagraph (ii), the resultant income is
excluded from Canadian investment income. There is no addi
tional inquiry which must precede the finding of exclusion. It
remains valid regardless of whether the business is an "active"
one (within the meaning of subparagraph (iii)), for the term
"business", used—as it is in subparagraph (ii)—without any
qualifier, comprehends an "active business". No basis exists for
inferring a parliamentary intention to limit the term's scope.
In ascertaining the status of the respondent's investment
income vis-a-vis paragraph 1 29(4)(a), one should not treat as
a decisive factor the (small) percentage of the business' total
income which is attributable to the interest. By the same token,
in the case of a private company the issue generally will not
turn upon the argument that, by virtue of the very fact of
incorporation, any profit-making activity of the company
amounts (at least prima facie) to the carrying on of a business.
Nevertheless, in the instant case, the respondent clearly was
carrying on a business. Furthermore, the investment transac
tions in question did not constitute a separate business, but
rather were incidental to the main—i.e., insurance-brokerage—
business. Indeed, the investments were used and held only for
purposes of that business, being timed so that the surplus
monies placed in them would be available when required for the
brokerage business. The investment operation possessed no
static or inert quality, such as would attach to an investment in
a long-term bond, made without regard to the use of the
principal in current, ongoing business. There was an interlacing
of the investments and the insurance-brokerage business, each
of them forming a part of a single entity.
It follows that the interest produced by the respondent's
investments is excluded from Canadian investment income, by
operation of the exception in subparagraph 129(4)(a)(ii). It
may also be noted, though, that the respondent's insurance-
brokerage business was an active business and, given the inter
lacing of that business and the investments, the interest would
also be excluded via subparagraph (iii).
Per Thurlow C.J. (dissenting): The interest on the invest
ments clearly was not income from an inactive business, as
contemplated by subparagraph 129(4)(a)(iii). If it was income
from a business at all, it must have been income from an active
business, and if it is to qualify as Canadian investment income,
it must do so by virtue of subparagraph (ii).
As required by that provision, the interest was income from
property. However, according to the Trial Judge, the interest
was not earned by the respondent through the carrying on of
any financial or investment business distinct from the respond
ent's insurance-brokerage business. This conclusion is support
ed by the evidence, including that dealing with the number of
transactions involved, the time devoted to them, and the limited
nature of the investments made. Consequently, in order for the
investment income to be caught by the exception in subpara-
graph (ii), it would have to have been "used or held ... in the
course of carrying on" the insurance-brokerage business itself.
The wording comprised by this exception is found in a
definition of "Canadian investment income" which includes
items of capital gain and items of income from an inactive
business. This context supports the view that it is only property
employed in the earning of the profits of the business which is
excluded from what is otherwise brought into Canadian invest
ment income by subparagraph (ii). Each of the verbs "held"
and "used" appears to gather into the exclusion much the same
kinds of things.
The property which generated the interest in this case did not
fall within the subparagraph (ii) exclusion. In the first place,
that property did not consist of the funds received by the
respondent from its customers in the course of its insurance-
brokerage business, for those funds were simply deposited in an
account from which no interest arose. The property that yielded
the interest was instead the investments—the certificates or
contracts—in which the funds were placed. Secondly, the
investing itself was an activity unrelated to the respondent's
brokerage business, its occurrence having no effect upon that
business. The investments were neither "used" nor "held" in
the course of carrying on the brokerage business, inasmuch as:
they were not made as part of the arranging of insurance
contracts, the collection of premiums, or the remittance of
premiums; they were not utilized to pay the business' obliga
tions; they did not constitute capital that was invested or at risk
in the business. Moreover, had any of the investments produced
a loss, that loss could not have been deducted, for tax purposes,
from the profits of the business. It is irrelevant that the
investments were timed to accord with the financial obligations
of the brokerage business.
CASES JUDICIALLY CONSIDERED
APPLIED:
Liverpool and London and Globe Insurance Company v.
Bennett, [1913] A.C. 610 (H.L.); Bank Line Ltd. v.
Commissioners of Inland Revenue (1974), 49 T.C. 307
(Eng. Ct. of Sess.—lst Div.); The Queen v. Rockmore
Investments Ltd., [1976] 2 F.C. 428 (C.A.); Wertman v.
The Minister of National Revenue, [1965] 1 Ex.C.R.
629; American Leaf Blending Co Sdn Bhd v Director-
General of Inland Revenue, [ 1978] 3 All ER 1185 (P.C.);
Scales (H.M. Inspector of Taxes) v. George Thompson &
Company, Limited (1927), 13 T.C. 83 (Eng. Q.B.).
OVERRULED:
March Shipping Limited v. Minister of National Reve
nue, [1977] CTC 2527 (T.R.B.).
CONSIDERED:
Anderson Logging Company v. The King (1924), 52
DTC 1209 (S.C.C.); Supreme Theatres Ltd. v. Her
Majesty The Queen (1981), 81 DTC 5136 (F.C.T.D.).
REFERRED TO:
Her Majesty The Queen v. Cadboro Bay Holdings Ltd.
(1977), 77 DTC 5115 (F.C.T.D.); Imperial Tobacco Co.
(of Great Britain and Ireland), Ltd. v. Kelly (H.M.
Inspector of Taxes) (1943), 25 T.C. 292 (Eng. C.A.);
Northend v White & Leonard and Corbin Greener (a
firm), et ai, [1975] 2 All ER 481 (Ch.D.).
COUNSEL:
J. S. Gill and S. Van Der Houf for appellant.
R. Couzin and R. K. Durand for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Stikeman, Elliott, Robarts & Bowman,
Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
THURLOW C.J. (dissenting): The issue in this
appeal is whether interest received by the respond
ent in its 1976 taxation year on investments of
surplus funds in its hands constituted "Canadian
investment income" within the meaning of para
graph 129(4)(a) of the Income Tax Act [R.S.C.
1952, c. 148 (as am. by S.C. 1970-71-72, c. 63, s.
1; and by S.C. 1974-75-76, c. 26, s. 86(2))]. The
facts are described in detail in the reasons for
judgment prepared by Mr. Justice Clement and
need not be repeated. A brief summary of what
appear to me to be the salient features will be
sufficient.
The respondent's business was that of an insur
ance broker. It consisted of placing insurance for
its customers with insurance companies prepared
to accept the risks, collecting the insurance premi
ums from the customers and paying their amounts,
less agreed commissions, to the insurers. In carry-
ing on this business, the respondent received pre
miums before it became necessary, under the
arrangements with the insurers, to pay the pro
ceeds to the insurers. The interval was, in general,
thirty to sixty days. When a sufficient amount had
accumulated in the respondent's hands, whether
representing commissions or premiums or interest
from previous investments, the respondent invested
it, in general, in deposit certificates or short-term
money market securities, the length of the term
being arranged or chosen so that, along with pre
miums expected to be received in the meantime,
the respondent would have money on hand to meet
its current expenses and pay insurers when the
obligations to pay them matured. It was from such
investments that the interest in question arose.
That this interest is income of the respondent
company and must be included in the computation
of its income for tax purposes is not in issue. What
is in issue is the right of the respondent to treat the
interest as Canadian investment income for the
purposes of calculating its refundable dividend tax
under section 129 of the Act. Subsection (4) of
that section provides:
129.(4)...
(a) "Canadian investment income" of a corporation for a
taxation year means the amount, if any, by which the
aggregate of
(i) the amount, if any, by which the aggregate of such of
the corporation's taxable capital gains for the year from
dispositions of property as may reasonably be considered
to be income from sources in Canada exceeds the aggre
gate of such of the corporation's allowable capital losses
for the year from dispositions of property as may reason
ably be considered to be losses from sources in Canada,
(ii) all amounts each of which is the corporation's income
for the year (other than exempt income or any dividend
the amount of which was deductible under section 112
from its income for the year) from a source in Canada that
is a property (other than a property used or held by the
corporation in the year in the course of carrying on a
business), determined, for greater certainty, after deduct
ing all outlays and expenses deductible in computing the
corporation's income for the year to the extent that they
may reasonably be regarded as having been made or
incurred for the purpose of earning the income from that
property,
(iii) all amounts each of which is the corporation's income
for the year (other than exempt income) from a source in
Canada that is a business other than an active business,
determined, for greater certainty, after deducting all out
lays and expenses deductible in computing the corpora
tion's income for the year to the extent that they may
reasonably be regarded as having been made or incurred
for the purpose of earning the income from that business,
exceeds the aggregate of amounts each of which is a loss of
the corporation for the year from a source in Canada that is
a property or business other than an active business; and
(b) "foreign investment income" of a corporation for a
taxation year means the amount, if any, by which
(i) the amount that would be determined under paragraph
(a) in respect of the corporation for the year if the
references in paragraph (a) to "in Canada" were read as
references to "outside Canada",
exceeds
(ii) the aggregate of all amounts deductible under section
113 from the corporation's income for the year.
It is not contended that the income in question
was "foreign investment income" or that it was a
capital gain within the meaning of subparagraph
129(4)(a)(i). That it was not income from an
inactive business within the meaning of subpara-
graph (iii) is also, in my view, clear. If it could be
regarded as income from a business at all the
business could not, as it seems to me, be regarded
as other than active. That leaves for consideration
subparagraph (ii) and in particular the wording:
... the corporation's income for the year ... from a source in
Canada that is a property (other than a property used or held
by the corporation in the year in the course of carrying on a
business) ....
That the interest in question was income from
property is in my opinion beyond serious dispute. I
regard as untenable the submissions to the con
trary put forward by counsel for the appellant. I
am also of the opinion that the interest was not
income earned in the carrying on by the respond
ent of a financial or investment business separate
from or in addition to the respondent's insurance-
brokerage business. The learned Trial Judge
[[1982] 2 F.C. 131] so found and in view of the
evidence on the point including that of the number
of investment transactions, the time spent on them
and the limited nature of the investments made, I
am of the opinion that his conclusion was justified
and should not be disturbed. That leaves the ques-
tion, which arises on the wording of the exception:
that is to say, whether the property from which the
interest was received was "property used or held
by the [respondent] corporation in the year in the
course of carrying on a business". This, as I see it,
is the issue on which the appeal turns.
The appellant's position was that the interest in
question was income or profit from the respond
ent's business since the funds invested to earn the
interest were surplus money generated by the busi
ness and since the terms for which the investments
were made were chosen so that the investments
would mature and the cash would be available at
times when it was expected to be needed in the
business. The investments were thus, in the appel
lant's submission, "property used or held by the
[respondent] corporation in the year in the course
of carrying on [its] business".
For this position the appellant relied principally
on the judgment of the House of Lords in Liver-
pool and London and Globe Insurance Company v.
Bennett' and that of the Court of Session in Bank
Line Ltd. v. Commissioners of Inland Revenue.'
In my opinion neither advances the appellant's
case.
In the Liverpool and London case the issue was
whether an insurance company was assessable on
income earned on investments of surplus funds and
funds required to be maintained by the laws of the
countries in which the business was carried on as
profits of its trade. The House of Lords held the
company to be liable on that basis. The ratio of
the decision as I read it appears from the following
passages from the speech of Lord Shaw of Dun-
fermline [at pages 616-617]:
It was argued, or it appeared to be argued, that this company
carried on separate businesses and that the matter of invest
ments of the company's funds was separate from its business of
fire and life insurance. My Lords, such companies in the
transactions for the year may make little profit, and sometimes
considerable loss, on one or other of their fire or life depart
ments; but nevertheless their stability may be maintained, and
often the regularity of their profit as a whole is continued, by
the fact that in the general balance of profits and gains there
falls on general accounting principles to be paid in as an item of
' [1913] A.C. 610 (H.L.).
z (1974), 49 T.C. 307 (Eng. Ct. of Sess.—lst Div.).
credit to revenue the interest upon invested funds. The same
kind of book-keeping occurs, and properly occurs, whether
these funds are invested at home or abroad. Neither in the one
case nor in the other are the funds kept, nor can they be kept on
sound book-keeping, out of the sum total of the profits or gains
of the concern.
and from the speech of Lord Mersey [at page
621]:
It is said that the dividends in question are derived from
investments made under this clause (18), and that such invest
ments form no part of the "business" of the company. In my
opinion there is no foundation either in fact or in law for this
contention. It is well known that in the course of carrying on an
insurance business large sums of money derived from premiums
collected and from other sources accumulate in the hands of the
insurers, and that one of the most important parts of the profits
of the business is derived from the temporary investment of
these moneys. These temporary investments are also required
for the formation of the reserve fund, a fund created to attract
customers and to serve as a stand-by in the event of sudden
claims being made upon the insurers in respect of losses. It is,
according to my view, impossible to say that such investments
do not form part of this company's insurance business, or that
the returns flowing from them do not form part of its profits. In
a commercial sense the directors of the company owe a duty to
their shareholders and to their customers to make such invest
ments, and to receive and distribute in the ordinary course of
business, whether in the form of dividends, or in payment of
losses, or in the formation of reserves, the moneys collected
from them. I make no distinction between the three classes of
investments (A, B, and C).
The case was distinguished in the Bank Line
case where what was under consideration was
income derived from the investment of funds
accumulated and held in reserve by the taxpayer
for the replacement of ships of its fleet. This time
the taxpayer was seeking to have the revenue
included in the profits from its trade.
The Lord President (Emslie), after reviewing
the Liverpool and London case, said [at page 322]:
In light of this somewhat lengthy review of the Liverpool and
London and Globe Insurance Co. case, which I have felt it
proper to embark upon in deference to the Appellants' argu
ment before us, I am in no doubt that the question to which all
the Judges directed their minds was whether the reserve funds
in question could be said to have been actively employed and
risked in the trade of fire insurance in the relevant years of
assessment, and that the decision turned upon the finding that
each and all of the funds was essential to the carrying on of
that trade in each of those years. In my opinion the confidence
placed by the Appellants in that case is ill-founded, and the
position of the Appellants' ship replacement reserve fund is
very different from that of any of the funds of Classes A, B and
C. In my opinion, further, if I am correct in holding that what
must be demonstrated by the Appellants here is the active
current employment and risking of the ship replacement fund in
their trade of owning and operating ships in each of the
relevant accounting periods, the Appellants have failed to do so.
This reserve fund was a fund laid aside to be employed and
risked in the future, and although the Appellants may be right
in saying that they had a present and continuing purpose in
maintaining this fund, I am quite unable to accept that they
accordingly "employed and risked" it in their business in the
relevant periods. The argument for the Appellants would have
been precisely the same if they had simply placed moneys
surplus to current needs in a strongbox for the same purposes.
Upon the findings in fact I am not persuaded that the existence
of such a reserve fund, whether invested or not, was in any real
sense essential to the carrying on of the Company's trade in any
of the periods in question. It need not have been maintained at
all so far as current trading was concerned, although one can
see that prudent shipowners might see advantages in pursuing a
policy of ship replacement out of self-generated funds rather
than out of borrowings. The true view of the facts is, in my
opinion, that the fund in question, unlike those of the insurance
companies and the securities deposited by the member of
Lloyd's in Owen v. Sassoon (1951) 32 T.C. 101, was estab
lished only with a view to being employed and risked in the
Appellants' business at some future date when capital assets
required to be replaced, and was not, within the meaning of the
test applied in the Liverpool and London and Globe Insurance
Co. case, "employed and risked" in the Appellants' business in
any of the three accounting periods with which the claim for
loss relief is concerned. [Emphasis added.] [Footnote omitted.]
Neither of these cases turned on wording such
as "held or used in the course of carrying on a
business", and while they throw some light on
what are, in particular situations, profits from a
trade, their chief resemblance to the present situa
tion lies in the fact that in both cases what was
under consideration was income derived by a com
pany from the investment of funds at its command.
A case which points up more clearly what I
think is meant by "held or used in the course of
carrying on 'a business" is Imperial Tobacco Co.
(of Great Britain and Ireland), Ltd. v. Kelly (H.M.
Inspector of Taxes), 3 where purchases of United
States dollars had been made in the course of and
for the purposes of the taxpayer's business in
buying tobacco leaf in the United States. In Sep-
3 (1943), 25 T.C. 292 (Eng. C.A.).
tember 1939 when war broke out the taxpayer had
a large balance of such dollars on hand which
shortly afterwards were requisitioned by the Brit-
ish government. In the meantime the British pound
had fallen in value and as a result the taxpayer
realized a substantial profit on its investment in
the United States dollars. This was held to be
profit from the taxpayer's trade. In such a situa
tion the taxpayer's property in the foreign
exchange while in its hands could probably be
characterized as property held in the course of
carrying on a business since it was property
acquired for use in the business, it was about to be
used in the business at the moment when it was
requisitioned by the British government and but
for that it would have been used in the carrying on
of the business just as the inventory of a business is
property held and used in the course of carrying on
the business. The investments made by the taxpay
er in the Liverpool and London case would also
fall within the meaning of "property used or held
in the course of carrying on a business" as so
interpreted. But those in the Bank Line case would
not.
In my opinion, the context in which the particu
lar wording of the exception is found—that is to
say, in a definition of investment income which
includes items of capital gain and items of income
from a business that is not active in the year—
lends support for the view that it is only property
that is in one way or another employed in the
carrying on of the business and thus in the earning
of the profits of that business that falls within the
exception. It seems to me that there is little differ
ence for this purpose between what is covered by
the word "held" and what is covered by the word
"used". In the context, "used" appears to me to
embrace almost all that "held" would cover,
though "held" could, I think, embrace such items
as an inventory of goods for sale or raw materials
on hand for use in the business though not yet used
in it.
In the present case the property from which the
interest arose was not, as it seems to me, the funds
received from the customers in the course of the
business. Such funds were simply deposited with
other monies in the respondent's bank accounts.
No interest arose from them. The interest arose
from the certificates or contracts in which the
funds were afterwards invested. 4 The investing was
not part of the arranging of insurance contracts or
the collection or remitting of premiums. It was, as
I view it, an unrelated activity that could happen
or not happen without affecting the respondent's
insurance-brokerage business in any way.
These investments were not used in the course of
carrying on that business. Not only were they not
made in the course of carrying on the business,
they were not used to pay its obligations. Nor were
they capital invested in or at risk in the business.
In fact they had no part to play in it or in the
course of carrying it on. Had any of them turned
sour and resulted in a loss it would scarcely be
arguable that the loss could be treated for tax
purposes as a deduction from profits of the broker
age business.
For the same reasons in my opinion they were
not "held in the course of carrying on the busi
ness". They were as I see it simply discrete invest
ments. The fact they were arranged so as to
mature when the proceeds would be needed to
discharge obligations of the business does not, in
my opinion, mean they were held in the course of
carrying on the business and is in my view irrele
vant. It indicates only that the investments were
made carefully and with regard to the anticipated
needs of the company for cash.
4 Compare Northend y White & Leonard and Corbin Greener
(a firm), et al., [1975] 2 All ER 481 (Ch.D.) per Templeman J.
at pages 488-489:
Of course, if the Solicitors Act 1965 had not been passed, or
if the firm had not carried on the exercise of the profession of
solicitors, there would have been no deposit account and no
interest. But it does not follow that the interest was 'immedi-
ately derived' from the carrying on of the profession. To
produce the interest there must be an intervening event
which could not be described as the carrying on of the
profession of a solicitor; namely, the loan of money by a
customer to a bank on terms that interest should be paid.
The fact that the money lent did not belong to the customer
did not prevent the interest deriving from the intervening
event; namely, the loan and the contract between the custom
er and the bank.
Accordingly in my opinion the interest in ques
tion was income from property within the meaning
of subparagraph 129(4)(a)(ii) and did not arise
from property falling within the exception to that
provision.
I would dismiss the appeal with costs.
* * *
The following are the reasons for judgment
rendered in English by
LE DAIN J.: I have had the advantage of read
ing the reasons for judgment of the Chief Justice
and Mr. Justice Clement which set out the facts,
the issues and the relevant authority. In my opin
ion the appeal should be allowed on the ground
that the notional fund or amount of money consist
ing of the total amount of unremitted premium
(after deduction of commission) at any time was
property used or held in the course of carrying on
the business of the respondent within the meaning
of the exclusion in subparagraph 129(4)(a)(ii) of
the Income Tax Act. I find the decisions in Liver-
pool and London and Globe Insurance Company v.
Bennett, [1913] A.C. 610 (H.L.) and Bank Line
Ltd. v. Commissioners of Inland Revenue (1974),
49 T.C. 307 (Eng. Ct. of Sess.—lst Div.), sugges
tive as to the test to be applied: Was the fund
employed and risked in the business? In my opin
ion it was, because an amount equivalent to this
notional fund was committed to the carrying on of
the business in order to meet the company's obli
gations to the insurers.
* * *
The following are the reasons for judgment
rendered in English by
CLEMENT D.J.: At issue in this appeal is wheth
er interest income received by Marsh & McLen-
nan, Limited ("the Broker") from short-term
investments in its 1976 taxation year was "Canadi-
an investment income" within the definitions of
paragraph 129(4)(a) of the Income Tax Act. The
amount of that income was $2,071,547, out of a
total income for the year in excess of $23,000,000.
It was from a source in Canada. The Minister had
accepted $725,915 as Canadian investment
income, but had treated the balance of $1,345,632
as not within the definitions. The basis on which
he made the apportionment is not in question:
effectively it is interest income of $1,345,632 that
rides on the issue.
The Tax Review Board [(1979), 79 DTC 314]
decided that this disputed amount was Canadian
investment income, and in this action the learned
Associate Chief Justice affirmed the decision. The
benefit to the Broker from these conclusions lies in
the operation of section 129 in bringing such
income into the calculation of refundable dividend
tax on hand at the end of the taxation year.
The relevant definitions in the subsection (omit-
ting phrases that are not pertinent) are these:
129. (4) ...
(a) "Canadian investment income" of a corporation for a
taxation year means the amount, if any, by which the
aggregate of
(ii) all amounts each of which is the corporation's
-income for the year ... from a source in Canada that is
a property (other than a property used or held by the
corporation in the year in the course of carrying on a
business) ...
(iii) all amounts each of which is the corporation's
income for the year ... from a source in Canada that is
a business other than an active business ...
exceeds the aggregate of amounts ....
The Broker is a Canadian corporation with head
office in Toronto. It carried (and continues to
carry) on the business of an insurance broker not
only in Toronto but in a number of branches
across Canada. Its clientele is for the most part
medium to large corporations. For these it provides
insurance consulting services, evaluation of insur
ance needs and recommendations in respect of
coverage and, when authorized by clients, nego
tiating and placing policies of insurance on their
behalf with insurers. It assists when necessary in
settlement of claims. Commissions allowed to the
Broker by the insurers on placement of policies are
a large part of the underlay of the issue.
Broadly speaking, upon notification of the
acceptance of a risk by an insurer the Broker billed
its client for the amount of the premium stipulated
by the insurer. Sixty days following the end of the
month in which the insurer accepted the risk and
the policy was placed (hereafter called "the 60-day
period"), the Broker became obligated to pay the
insurer the amount of the premium less an agreed
commission. Normally, the client would pay the
premium to the Broker some 30 days, on average,
in advance of the expiration of the 60-day period.
On receipt of the premium the Broker would
deposit it, as it did with all of its other receivables,
in a general non-interest-bearing bank chequing
account out of which it would pay its various
obligations and make the investments here in ques
tion. In actual operation, the flow of business of
the Broker by way of premiums received daily
from its clients, and other receivables, and pay
ment to various insurers on the expiration of the
many 60-day periods, as well as its operating
liabilities and all other obligations as they came
due, made of the general account what may be
called a revolving fund which I will herein call
"the Fund". In short, there was no connection
between any account receivable and any account
payable: in the business of the Broker they were
completely independent of each other. The invest
ments were made from time to time for such terms
and in such amounts as were deemed appropriate
in the circumstances of the day. It is the interest
received by the Broker on those investments that
must be categorized for the purposes of section
129. The position taken by the appellant is that:
(a) The income was not from a source that was property
within the intendment of s.s. (4)(a)(ii).
(b) In any event, the income was from property held by the
Broker in the course of carrying on its business of insurance
broker. or
(c) The income was from a source that was a normal and
integral part of its active business of an insurance broker.
A detailed examination and analysis of the opera
tion of the Fund particularly in relation to the
investments is necessary.
In 1976 the Broker dealt with upwards of 250
insurers, but the bulk of its business was transact
ed with some 30 to 35 major companies. There
were put in evidence written contracts between the
Broker and two insurers; and also seven letters
from insurers respecting the payment of commis
sions. As to all of the other insurers, with the
exception of The Canadian Indemnity Company,
most had verbal arrangements basically as
expressed in the written contract with The Conti
nental Insurance Company, and so with the terms
of any other written contracts; indeed, that con
tract appears to express the arrangements acted on
by all concerned in respect of billing and collection
of premiums and payments to insurers, constitut
ing the usual practice in the industry. The contract
with The Continental Insurance Company deals
only with commissions and compensation payable
by the insurer to the Broker and provides for
payment of "balance due" by the Broker to the
insurer "not later than 60 days after the end of the
month in which the business is processed". It is
clear by implication from these terms, and made
explicit by viva voce evidence, that the Broker, not
the client, was liable to the insurer for payment of
each premium, and it is apparent that the 60-day
period was in effect a credit term given by the
insurer and related to collection of premiums by
the Broker from its clients. It was so expressed in
one of the letters. It is equally clear from the
evidence that the insurers knew of the use made by
the Broker of premiums received from its clients
and deposited in the Fund.
These provisions were reflected in the method of
accounting provided by the Broker to all of the
insurers with whom it dealt: what is called the
"accounts current statement". It was rendered
monthly and was described in evidence as "a com
puterized report that lists the placings that the
insurance company made for us in this month, for
our clients, and it indicates ... the name of the
insured, the amount of the premium, the commis
sion percentage, a commission account and the net
of the premium account, and the effective dates
and the expiry date". The month referred to in
that evidence was May, and it was deposed that:
At the end of May we would produce a statement covering all
items billed in May, that statement would be sent immediately
to the insurance company who would expect to receive the net
premium total at the end of July.
This was the "balance due" referred to in the
contract. The seven letters went no further than to
stipulate that payments of account must be made
on the basis of the 60-day period.
The exception is the contract with The Canadi-
an Indemnity Company made in 1968. It bears the
title "Agency Contract". By it Marsh & McLen-
nan, Limited is employed by the insurer as an
agent of the company for the transaction of desig
nated classes of insurance, and the terms are
appropriate to such employment but not to the
relationship between a broker and an insurer. By
an "endorsement" of the same date, it was agreed
that Marsh & McLennan, Limited should be
called "Broker" instead of "Agent" in the con
tract. I find this contract to be anomalous. The
change in nomenclature did not change the several
obligations under the contract. Yet the evidence is
that the course of dealings between the parties
over the years was the same as between the Broker
and the other insurers with which it dealt, without
complaint or action by The Canadian Indemnity
Company up to the present. In these circumstances
I am of opinion that the bare terms of this contract
can provide no evidence or assistance relevant to
the issue and should not be taken into account for
that purpose.
In the result it is plain that the Fund is not
impressed with any trust for the benefit of the
insurers. The relationships are debtor and creditor,
both as between the Broker and its clients, and as
between it and the numerous insurers concerned.
The appellant urged that a trust in favour of the
insurers was nevertheless imposed on some part of
the Fund by virtue of sections 347 and 355 of The
Insurance Act of Ontario [R.S.O. 1970, c. 224]. I
reject this submission with all the unresolved com
plexities it entails. Section 347 affords protection
to an insured on payment of a premium to an
agent or broker, by deeming them to be the agent
of the insurer to receive the payment. Section 355
in my opinion has no application to the circum
stances of the present case: the client has effective
ly paid the Broker for the insurance and the claim
of the insurer lies only in debt against the Broker
on terms of credit without, as the evidence clearly
shows, any relationship to moneys received as
premiums.
I conclude that the whole Fund was "property"
of the Broker as the word is defined by subsection
248(1) of the Income Tax Act and used in section
129. The learned Associate Chief Justice in the
course of his reasons observed that the statutory
definition of "property" includes money, so that
income from invested money may be "income ...
from a source in Canada that is ... property". I
respectfully agree: the income from the invest
ments was from such a source.
I now move on to the internal dealings by the
Broker with the Fund. For the purposes of this
appeal it is to be taken that all of the revenues of
the Broker, whether from premium billings, fees,
interest, or otherwise, were deposited in the Fund
and the whole, whether in the head-office account
or those of the branches, is treated as consolidated.
From this the investments were made under the
authority of a resolution of some standing by the
board of directors:
RESOLVED that the Treasurer or Controller is authorized to
invest corporate cash in accordance with the following policy:
(B) Deposits and investments may be made in United States
and Canadian Bank Time Deposits and "primary" or
"secondary" Certificates of Deposit in the amount not to
exceed 10% of the capital, surplus and undivided profits
of any one bank. Maturities on Certificates of deposit
may not exceed 12 months.
As I have said, the Fund was also used in the
payment of all liabilities and obligations, current
and otherwise, incurred in the operation of the
brokerage business, including the payment to
insurers of "balance due" on due date and as well
dividends and other matters. It is to be noted that
upon maturity of an investment, both the principal
sum and the interest earned on it were paid into
the Fund. It is not disputed that in the insurance
industry such interest earnings were known and
accepted as an augmentation of the income of
brokers. The Fund was massive. Including invest
ments attributable to that source as it stood from
month to month in the accounting period of 1976,
it showed balances of cash and investment ranging
from a low of $15,000,000 to a high of near
$22,000,000. It was a policy of the Broker to
maintain a high degree of liquidity in its business
operations. The purpose of this was to maintain
general confidence in the company and to meet
large liabilities recurring regularly, such as pay
ments to insurers, payrolls, and so on. The short-
term investments served this purpose. In the words
of the Chief Financial Officer of the Broker:
We wish to have the funds available through our—while we
invest, we wish to have them available at the future point in
time when we recognize these liabilities are going to be
incurred.
We feel our image would be badly damaged if there was any
question that we were not able to make payment of our
liabilities at any point in time. That is one of the reasons for the
liquidity.
Several investment certificates were put in evi
dence: an example is one with Canadian Imperial
Bank of Commerce dated January 19, 1976, for
$500,000 for 14 days, maturing February 2, 1976,
with interest at 7 3 / 4 %, which on maturity was
credited to the Fund in the aggregate amount of
$501,486.30. Other certificates, of course, differed
in the term, amount of principal, and interest rate.
These investments were made by the Controller
in respect of Head Office General Account, and by
delegation to accounting managers at each of the
five principal branch offices of the Broker. The
Chief Financial Officer deposed that the function
of the accounting managers included "the mainte
nance of bank accounts, the orderly receipt and
disbursement of funds, keeping of the books of
account, preparation of statements, protection of
assets, preparation of financial and other state
ments, and other reports. A fairly normal account
ing operation." As to the investments themselves,
the manager was required on a continuing basis to
give close scrutiny to the cash needs of the business
for some period ahead, and determine the amount
of surplus in the Fund that could be reasonably
available for investment, and the length of time
after which the investment would mature and be
returned with interest to the Fund to be available
for payment of forward obligations. The practice
of the managers was to call the investment depart
ment of a bank and ask for interest-rate quotations
and come quickly to an understanding of the
investment opportunities available in certificates of
deposit. Thus, their responsibility in this area was
to determine as well as possible the amount of the
Fund available for investment and seek a reason
able rate of return "for the period that they would
have the funds available for". In the smaller
branches this task might average five to eight
investments a month, and in the larger branches
ten to fifteen. The amounts of such investments
would range from $50,000 to $100,000 in the
smaller branches, and in the larger in multiples of
$100,000 up to, say, $700,000. The terms ranged
from 1 day to 90 days. It was deposed that each of
such investments, when made, would take 15 to 20
minutes of the time of the manager—a very small
part of the time of his working month.
At head office somewhat more time was spent,
because "there would be larger multiples available
for investment and the range of investments we
would use brokers as well as other banks to deter
mine competitive rates a little more aggressively
than the office manager would." In fact, some of
the investments were made through financial
houses such as Wood Gundy Limited.
In summary, the total income before tax of the
Broker for 1976 was in the order of $23,000,000.
Of this the investment income made up about 9%.
Had the Broker received none of the investment
income, it would have still had a comfortably
profitable operation. Evidence was given of the
internal accounting procedures of the Broker, and
the reasons for them, including the nomenclatures
used for the purposes of accounting to insurers and
others, but in the light of the foregoing it does not
appear to me that this aspect assists in determining
the issue and I will not describe them.
The Tax Review Board held that interest from
the investments was only a subsidiary or ancillary
part of the Broker's operation which did not con
stitute either an adventure in the nature of trade or
an active business, and so fell within the definition
of "Canadian investment income". I will come
later to the reasons of the learned Associate Chief
Justice for supporting this decision, which are
challenged by the appellant. Much argument was
had on whether the income was income from the
exclusions in the definition in subparagraph
(4)(a)(ii) of "property" "other than a property
used or held by the corporation in the year in the
course of carrying on a business", or whether it
was income "from a source in Canada that is a
business other than an active business" under
[subparagraph] (4)(a)(iii).
The motivation for this action by the Broker lies
in the decision of the Tax Review Board in March
Shipping Limited v. Minister of National Reve
nue, [1977] CTC 2527. I will return to that deci
sion later. Many authorities were cited in argu
ment, but I set aside those that turn on statutory
provisions not fairly comparable with section 129,
or in which the inquiry is directed to an appreci
ably different statutory purpose. Also I must of
necessity refrain from discussing cases in the Trial
Division which are presently in appeal to this
Court.
In approaching the interpretation and applica
tion of the definitions to the case at bar, I take it
to be clear that whether a property is or is not used
or held by a corporation in the course of carrying
on a business, or whether a business is or is not an
active business, as referred to in paragraph (4)(a),
is a question of fact to be found on a preponder
ance of evidence. In my view the authority of The
Queen v. Rockmore Investments Ltd., [1976] 2
F.C. 428 (C.A.) in this Court extends so far. In
determining a question of fact it is an inexorable
rule that all of the relevant evidence and circum
stances must be taken into account, weighed and
compared in coming to a finding. Further, I should
observe that those words and phrases, and as well
the comparable phrase used in section 125 and the
definition in section 248, should be given their
plain meaning as fairly understood in the normal
course of business, commerce, or industry since
there is no reason to impress any technical mean
ing on any of them.
Subparagraphs 129(4)(a)(ii) and (iii) are
directed to two sources of corporate income: from
property, and from business. It is the exclusions
from both that give rise to difficulties in determin
ing the meaning and scope of the exclusions in
particular circumstances, with consequential cate
gorization of the income for the purposes of the
section. The task extends to consideration of
whether there is an interrelationship between the
two subparagraphs. The rationale of the judgment
of the learned Associate Chief Justice on this point
of the appeal is found in these paragraphs [at page
1351:
The evidence also confirms that the defendant's principal
business is that of an insurance agent and that the placing of
these funds, always in short-term certificates, and almost
always with chartered banks, is handled entirely by financial
control officers in each region who, in addition to their general
managerial responsibilities, are required to devote no more than
a few minutes every day or every few days to this financial
control function. It is clear, therefore, that whether it be in
terms of percentage of income, time and attention required or
the nature of the business involved, the transactions in question
here are incidental to the main business of the defendant and
could not, in my opinion, be construed as constituting, in any
sense of the word, an active business in their own right.
In my opinion, the earning of income from funds placed on
deposit in this way is fundamentally an investment transaction
and since this taxpayer is not in the investment business, such
income would appear, on a prima facie basis, to come within
the intent of section 129(4)(a) ....
It seems to me that this passage is founded on a
concept that the two subparagraphs are mutually
exclusive. In my opinion the jurisprudence of the
predecessor of this Court implicitly supports the
opposite conclusion.
In Wertman v. The Minister of National Reve
nue, [1965] 1 Ex.C.R. 629, one of the questions
before the Exchequer Court of Canada was wheth
er the income of a taxpayer was from property or
from a business for the purposes of section 21 (now
section 74) of the Income Tax Act [R.S.C. 1952,
c. 148]. There is sufficient analogy with the point
at bar to make helpful the observations of Thurlow
J. (now Chief Justice of this Court). The taxpayer
owned a building of some 49 apartments from
which he collected rents, and the Minister asserted
that on the facts of the operation the rental income
fell within subsection 21(4):
21....
(4) Where a husband and wife were partners in a business,
the income of one spouse from the business for a taxation year
may, in the discretion of the Minister, be deemed to belong to
the other spouse.
Thurlow J. reviewed the several continuing activi
ties of the taxpayer in the operation of the apart
ment building and went on to say at pages
641-642:
The Minister's case for applying s. 21(4) is that the concepts
of income from property and income from business are not
mutually exclusive but blend completely and that while the
rentals derived from the Park Strand can be regarded as
income from property, they can and should also be regarded as
income from the business of leasing apartments in the Park
Strand which was a business in which the appellant and his
wife were partners. The appellant on the other hand submitted
that the appellant and his wife and son were simply co-owners
of property, that there was no business carried on in respect of
the rental of suites, that the three owners were not partners in
any such business and that in any case, the source of the
income was the property and not a business of letting suites.
The question of when receipts from the letting of real
property may be considered to be receipts from a business as
opposed to mere receipts from property has, so far as I am
aware, arisen in only two cases in this country. In the earlier of
these, Martin v. Minister of National Revenue ([1948] Ex.
C.R. 529), which arose under the Excess Profits Tax Act
O'Connor J., after citing passages from the judgments of the
Master of the Rolls, and of Brett L.J., in Erichsen v. Last
((1881) 4 T.C. 422), as to the meaning of trade said at p. 533:
A landowner in dealing with his own land and granting
leases thereof and so receiving rents and profits is not
carrying on business. But the question here is has the appel
lant reached the point where land ownership has passed into
commercial enterprise in land. In The Rosyth Building &
Estates Co., Ltd., v. P. Rogers (1918-24) 8 T.C. 11 at 17, the
Lord President said:
It may in the ordinary case be difficult to determine the
point at which mere ownership of heritage passes into the
commercial administration by an owning trader, but that
is a question of fact of a kind which is not infrequently met
with under the Income Tax Acts ...
On the facts before him, from which it appears that the
taxpayer in the case of at least some of her tenants provided
services, heat, electric stoves, furniture and linens, in addition
to the premises, O'Connor J., then held that the taxpayer was
engaged in a commercial enterprise.
His Lordship then reviewed a number of authori
ties and went on to say at pages 644-645:
Under the Canadian statute what is taxed as income from a
property or a business is the "profit therefrom" for a taxation
year, and this poses the question "what is the profit from the
property or business?" In the great majority of cases it is quite
immaterial whether the profit is regarded as arising from a
business or from property, but when the question does arise, it
is in my opinion simply one that must be resolved on the facts
of the particular case and I know of no single criterion on which
it may be determined. That the rentals are primarily or entirely
receipts from property may be a factor of great importance but
it is not necessarily conclusive for the question in a case such as
the present one is not so much what the income is derived from
but whether the income can be fairly described as income from
a business within the meaning of that term as used in the Act.
Moreover, cases are I think readily conceivable where particu
lar income may be accurately described as income from prop
erty and just as accurately regarded as income from a business.
He concluded at page 646:
On the whole there appears to me to be nothing in the situation
which affects the rentals with a trading character as distinct
from mere income receipts from property and I am accordingly
of the opinion that the profits from the Park Strand were not
profits from a business and that the operation of the Park
Strand was not a business in which the appellant and his wife
were partners. Section 21(4) therefore cannot be invoked to
support the assessment.
Such interrelationship, when it exists, is called
an "overlapping" in American Leaf Blending Co
Sdn Bhd v Director-General of Inland Revenue,
[1978] 3 All ER 1185 (P.C.), at page 1188. There,
the taxpayer had constructed a factory and ware
house building for use in its tobacco business. The
business eventually proved unprofitable and was
discontinued. The taxpayer then rented the build
ing to various companies to use and occupy it for
storage purposes at a monthly rent. The taxpayer
claimed to set off its earlier losses in its tobacco
business against its income from the rentals. The
essential point was whether the rental income was
from "a source consisting of a business" within
five separate classes of income specified by
section 4 of the taxing statute. The Inland Reve
nue asserted that those classes were mutually
exclusive, so that "rents" could not at the same
time be "gains or profits from a business" and so
be available for set-off under section 43, as assert
ed by the taxpayer. The Federal Court of
Malaysia upheld the claim of the Inland Revenue.
The Judicial Committee of the Privy Council
reversed that judgment.
I realize that caution must be exercised in rely
ing on judgments under one taxing statute to
support reasoning in coming to judgment on an
issue arising under a different taxing statute.
Nevertheless, there are passages in the judgment
of Lord Diplock that I think may fairly be taken
into account here as reflecting the approach taken
by Thurlow J., supra. At page 1188 Lord Diplock
said in part:
If the words in the various paragraphs of s 4 of the Malay-
sian Act are given their ordinary meaning, and their Lordships
see no reason why they should not be, there is plainly room for
overlapping between one paragraph and another. A company
may carry on business as an investment or holding company
deriving its gains or profits from dividends and interest from
the securities it owns. The gains or profit from the business of a
bank or moneylender are largely derived from interest received
on money lent. A property company or an individual may be
carrying on the business of letting premises for rents from
which the gains or profits of that business are derived.
So it is clear that `rents', despite the fact that they are
referred to in para (d) of s 4, may nevertheless constitute
income from a source consisting of a business if they are
receivable in the course of carrying on a business of putting the
taxpayer's property to profitable use by letting it out for rent.
And at page 1189:
The carrying on of `business', no doubt, usually calls for
some activity on the part of whoever carries it on, though,
depending on the nature of the business, the activity may be
intermittent with long intervals of quiescence in between.
I should observe that at the same page he said:
In the case of a private individual it may well be that the
mere receipt of rents from property that he owns raises no
presumption that he is carrying on a business. In contrast, in
their Lordships' view, in the case of a company incorporated for
the purpose of making profits for its shareholders any gainful
use to which it puts any of its assets prima facie amounts to the
carrying on of a business. Where the gainful use to which a
company's property is put is letting it out for rent, their
Lordships do not find it easy to envisage circumstances that are
likely to arise in practice which would displace the prima facie
inference that in doing so it was carrying on a business.
It is of more than passing interest that this
approach was also expounded by Duff J. (later
C.J.C.) in Anderson Logging Company v. The
King (1924), 52 DTC 1209 (S.C.C.), at page
1214:
The sole raison d'être of a public company is to have a
business and to carry it on. If the transaction in question
belongs to a class of profit-making operations contemplated by
the memorandum of association, prima facie, at all events, the
profit derived from it is a profit derived from the business of
the company.
While this factor is one to be taken into account in
a private company in a given case, it cannot of
itself be decisive except in the absence of other
relevant considerations.
In the result, I am of opinion that there is an
overlap between subparagraphs (4)(a)(ii) and
(4)(a)(iii) which supports a rational interpretation
of the subsection. Subparagraph (a) (ii) is directed
to income from property but excludes that of
which the source is used or held in carrying on a
business. These are broad terms. As pointed out in
The Queen v. Rockmore Investments Ltd., [1976]
2 F.C. 428 (C.A.), the first task is to determine
whether there is indeed a business being carried on
in which the property is used or for which it is
held. This is a matter of judgment in the circum
stances of a particular case, which may at times
present difficulties. Once it has been determined
that a business exists, it remains only to determine
whether the property is used or held in carrying it
on. The criteria for exclusion have then been can
vassed: no further inquiry is prescribed. Property
used or held in carrying on any business, so found,
is excluded as a source of eligible income. There is
no warrant, in my opinion, for saying that a busi
ness that is being carried on must as a necessity of
construction exclude an active business which must
also be carried on to merit the designation. To me,
such a view is grammatically indefensible. "Busi-
ness" standing alone does not exclude an "active
business": rather, it comprehends it. We come to
this: the operation of subparagraph (a)(ii) is not
by its language stopped dead in its tracks by the
reference in (a) (iii) to "a business other than an
active business". If the property is held or used in
carrying on an active business, it is equally used or
held in carrying on a business of the corporation.
It is the income from such a property that is
excluded from the calculation of refundable divi
dend tax. "Business" and "active business" are
not, in my opinion, used in an incompatible sense.
If the property yields income to a business, so
found, that income is to be excluded from the
calculation even if it is part of the income of an
active business. I think that this is the rationale
that must be given effect in interpreting the two
subparagraphs.
Other judgments of this Court must be noticed.
In The Queen v. Rockmore Investments Ltd.
(supra), the issue was whether the income of the
taxpayer was from an "active business" within the
intendment of section 125 of the Act. As I have
observed above, Jackett C.J. speaking for the
Court first directed his attention to the scope of
the word "business". He said in part at pages
430-431:
In considering whether there is an "active business" for the
purposes of Part I, the first step is to decide whether there is a
"business" within the meaning of that word. Section 248
provides that that word, when used in the Income Tax Act,
includes "a profession, calling, trade, manufacture or undertak
ing of any kind whatever" and includes "an adventure or
concern in the nature of trade" but does not include "an office
or employment". Furthermore, the contrast in section 3(a) of
the Act between "business" and "property" as sources of
income makes it clear, I think, that a line must be drawn, for
the purposes of the Act, between mere investment in property
(including mortgages) for the acquisition of income from that
property and an activity or activities that constitute "an adven
ture or concern in the nature of trade" or a "trade" in the sense
of those expressions in section 248 (supra). Apart from these
provisions, I know of no special considerations to be taken into
account from a legal point of view in deciding whether an
activity or situation constitutes the carrying on of a business for
the purposes of Part I of the Income Tax Act. Subject thereto,
as I understand it, each problem that arises as to whether a
business is or was being carried on must be solved as a question
of fact having regard to the circumstances of the particular
case.
The issue in the present case was not before the
Court, but the distinction drawn between income
from business and income from property is rele
vant and in essence accords with the passages I
have above quoted. The line to be drawn is be
tween the two sources of income: between mere
investment in property, and activity in the nature
of a trade. When the property is used or held in
the course of carrying on a business it is not
material whether the business is active or not.
Jackett C.J. said at page 430:
In spite of my best efforts to follow counsel in his attempt to
show that Parliament must have intended some limitation on
the scope of the words "active business" that it did not express
ly state, I have to confess my complete inability to detect any
such Parliamentary intent.
So much the more when the objective is to put an
unexpressed limitation on the scope and operation
of the words "a business" standing without defini
tion other than that provided by section 248 and
the broad expression "carrying on". Later he dis
cussed the meaning to be attributed to the phrase
"an active business" used in subsection 125(1), the
same phrase as is used in subparagraph
129(4)(a)(iii) but for the purpose of designating
the source of income that a small business is
entitled to deduct from its tax in a taxation year,
not, as in the latter, for the purpose of excluding it
as a source of income to be taken into account in
calculating the amount of refundable dividend tax.
I do not suggest that the variance of purpose
makes any difference in the determination either
way. In each case it is a matter of judgment,
however difficult at times, as to whether or not a
reasonably-minded businessman would, in the par
ticular circumstances of a case, call the operation
under review an active business. This does not
touch the point now under debate. He [Jackett
C.J., at page 431] said that "it must be assumed
that the word `active' was used to exclude some
businesses having sufficient activity in the year to
give rise to income." This observation should not
be isolated from its context. A quiescent company
may have taxable income from any source such as
investments in property. Taxable income is the
basis on which taxation relief commences to oper
ate. The real conduct of the affairs must be exam
ined in detail to determine whether or not it
discloses the criteria for relief. On the facts of the
case, Rockmore Investments Ltd. was found to be
carrying on active business in mortgage invest
ments within the meaning of subsection 125(1). I
take this to affirm the view expressed by Lord
Diplock that gain from an investment may overlap
the conduct of an active business.
In Her Majesty The Queen v. Cadboro Bay
Holdings Ltd. (1977), 77 DTC 5115 (F.C.T.D.),
the issue was also whether the taxpayer was carry
ing on an active business attracting the operation
of subsection 125(1). It was a landlord whose
taxable income was derived from rentals. Gibson J.
reviewed a number of authorities and affirmed the
decision that the taxpayer was carrying on an
active business. Valuable as the judgment is on
other points, I get no help from it for the present
discussion. Closer to the point is the judgment of
Gibson J. in Supreme Theatres Ltd. v. Her
Majesty The Queen (1981), 81 DTC 5136
(F.C.T.D.), where the issue arose under section
129. The business of the taxpayer was the opera
tion of motion-picture theatres. Included in its
taxable income were rentals from the leasing of
the basement of one of its theatres, vacant land
adjacent to a theatre, from renting theatres them
selves, apartments located in one of the theatres,
and part of a theatre parking lot for a short period.
The taxpayer claimed all this to be Canadian
investment income. Gibson J. found that it was
income from property, as it undoubtedly was. He
then discussed the attributes of an active business
for the purpose of determining whether that
income was from a business other than an active
business for the purposes of subparagraph
(4)(a)(iii). He pointed out that, under its letters
patent and on the evidence, the taxpayer's business
was the operation of motion-picture theatres, and
held that the leasing activities were not separable
from its active business. The taxpayer's claim
failed. The judgment impliedly recognizes that
there may be an overlap between income from
property and income from an active business for
the purposes of paragraph (4)(a).
Having the foregoing considerations in mind, I
return to the record. It is clear that the Broker was
carrying on a business which was in fact the active
business of the Broker. No matter that it was so. I
am in full agreement with the learned Associate
Chief Justice that it did not carry on an investment
business in its own or separate right, and further
that in his own words [at page 135] "the transac
tions in question here are incidental to the main
business of the defendant". Indeed, they were
shown to be used and held for that purpose only.
The investments were of temporarily surplus bal
ances in short-term securities of which the princi
pal and interest were returned to the Fund at a
time, anywhere up to 90 days, when those sur
pluses would be required for the purposes of the
Fund and the ongoing insurance-brokerage busi
ness of the Broker. There was nothing static or
inert in the investment operation such as in an
investment in a long-term bond with no need or
plan for use of the principal in current and ongoing
daily business. To use words employed by Rowlatt
J. in Scales (H.M. Inspector of Taxes) v. George
Thompson & Company, Limited (1927), 13 T.C.
83 (Eng. Q.B.), on the facts of this case there was
between the Broker's business and the investments
an interconnection, an interlacing, an interdepend
ence, a unity embracing the investments and the
business. I conclude that the income from the
investments is excluded as Canadian investment
income under subparagraph (4)(a)(ii). These facts
would also, on authority I have cited, serve to
exclude it under subparagraph (4)(a)(iii).
I now come to March Shipping Limited v. Min
ister of National Revenue, which played an impor
tant part in the decision of the Tax Review Board,
in the judgment of the learned Associate Chief
Justice, and in argument on behalf of the Broker.
The facts in it have some analogy to those at bar.
The income of the company for its 1972 taxation
year amounted in all to $2,153,943 including inter
est in the amount of $56,972 (i.e. 2 1 / 2 %) from
short-term deposits of funds received by it from
shipping companies in prepayment of services it
had contracted to perform. The categorization of
that interest was in issue for the purposes of
section 129. It was said in evidence that the invest-
ment of those funds and their retrieval to the fund
when necessary, took only a few minutes of the
daily time of the secretary-treasurer of the com
pany, and that the amounts of the investments
were considered surplus to its daily business needs.
The operating effect of this arrangement was that
the company paid its own accounts against its
customers out of the amounts they had prepaid,
subject to later audit or confirmation.
In the ratio of his decision bearing on the matter
now under consideration, Mr. Taylor said at pages
2529-2530:
It is my view that since the income was from the crediting of
interest by the Bank of Montreal to the appellant for the use of
some of the property of the appellant, there is a prima facie
case for considering this as investment income rather than the
only other alternative remaining available to me—business
income. It might well be suggested that it could be investment
income and concurrently business income, but it would be
necessary, in my view, to show that the business of the appel
lant was that of investment. I have seen little evidence to
support such an assertion. There only remains to examine the
one point stressed by counsel for the respondent in making the
case that it should be considered income from an active busi-
ness—that the treatment of the funds available to the appellant
by holding them in short-term deposits, quickly available, was
an integral part of the appellant's operations.
He then reviewed the argument of counsel and
several authorities and came to this conclusion at
page 2531:
I am not aware of anything which would support the conclu
sion that an investment policy, calling for short-term rather
than long-term deposits, would in itself necessarily characterize
the interest returns as specifically from `business' or from
`property'. In my view, while the term `essential' used by
counsel for the appellant may be somewhat extreme, to be
considered `integral' the specific function under review should
form a necessary part of the whole operation. When that
function is a revenue-producing one, as in this case, to be
viewed as necessary it should be evident that it provides a
significant impact on the total revenue produced (and probably
a major contribution to net revenue); and/or that its elimination
would have a decidedly destabilizing effect on the corporate
operations themselves. In the instant case the total revenue for
1972 was $2,153,943, of which amount only $56,972 (about
2.5%) came from the source under review.
On this I can only say, with respect to those who
hold different opinions, that Mr. Taylor took a
view of the evidence before him that is not neces
sarily applicable to this case. He did not examine
the scope of the exclusion in subparagraph
(4)(a)(ii), nor the possibility of overlap between it
and subparagraph (4)(a)(iii): points on which I
have sufficiently expressed my opinion.
Nor do I think that the percentage the invest
ment income bears to the total income should be a
decisive factor in coming to a conclusion. Such
income is put forward as Canadian investment
income because appreciable financial advantage
would accrue therefrom to the company if it were.
This should be recognized, and the appellant
should be entitled to have the issue resolved upon
all relevant factors that the record yields. This is
the course I have endeavoured to follow.
In the result I would allow the appeal with costs
throughout, and affirm the assessment made by
the Minister.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.