Supreme Theatres Ltd. v. The Queen, 81 DTC 5136, [1981] CTC 190 (FCTD)

Gibson, J:—This is an appeal of Supreme Theatres Limited from assessments of tax of its 1972 and 1973 taxation years, notices of which are dated February 9, 1978.

This appeal is premised on the factual basis set out in the pleadings among which is that Supreme Theatres Limited is a private corporation for the purpose of the Income Tax Act, in force in 1972 and 1973, so that the special provisions in section 129 of the Act in respect to what is or is not “Canadian investment income” are relevant.

The determination on this appeal is confined to the meaning and application in sections 125 and 129 of the Act of the words “active business income”, “income from a property” and “income from a source that is business other than an active business.”

Private corporations within the meaning of the Act are entitled to certain rate reductions through the mechanism of the small business deduction under section 125 of the Act and through the mechanism of “refundable dividend tax” under section 129 of the Act.

This appeal is not concerned with any rate reduction through the mechanism under section 125, although section 125 in respect to the meaning of the concept “active business income’’ is relevant. Instead this appeal is concerned solely with whether or not certain amounts of income from six sources constitute “Canadian investment income” within the meaning of paragraph 129(4)(a) of the Act.

The Income Tax Act in 1972 and 1973 contemplated that the sources of income of a private corporation could be of four types:

1. active business income.

2. income from a property.

3. income from a source that is business other than an active business.

4. capital gains.

The issue on this appeal is whether or not these certain amounts of income from six sources or any of them are (1) “income from a property” or “income from a source that is business other than an active business”, or (2) “active business income”. If they or any of them are active business income and not income from a property or income from a source that is business other than an active business, then the appeal pro tanto fails; and the converse applies. (None of the sources of income are from capital gains.)

Paragraph 129(4)(a) of the Income Tax Act at the relevant times read as follows:

(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 aggregate of such of the corporation’s allowable capital losses for the year from dispositions of property as may reasonably 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, determined, for greater certainty, after deducting 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 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 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

The six items or sources of income in issue here which Supreme Theatres Limited submit qualify as “Canadian investment income” within the meaning of paragraph 129(4)(a) of the Act are:

Whether or not these certain amounts of income from these six sources or from any of them are in any of the categories above referred to are now considered.

Are they or any of them income from a source that is a property?

There is a presumption that, since the purpose of a corporation is to make profits from carrying out its business objects, the income received by a corporation is business income.

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.” (Italics added)

per Duff, J in Anderson Logging Co v The King; [1917-27] CTC 198; 52 DTC 1209; see also Queen & Metcalfe Carpark Limited v MNR [1973] CTC 810; 74 DTC 6007.

The submission of Supreme Theatres Limited is that the transactions giving rise to the above amounts of income do not belong to a class of profitmaking operations contemplated by its memorandum of association, and that therefore there should be no such presumption in this case.

As to this, the submission is that none of the above amounts of income from these sources is in respect to objects or purposes contemplated by the letters patent of Supreme Theatres Limited and accordingly there should be no presumption that such income is business income, namely:

(a) rent from the Amity Rehabilitation Association for the basement of the Century Theatre (see amended statement of claim, paragraph 3);

(b) rent from a used-car dealer for the vacant land unsuitable as a theatre parking lot (see amended statement of claim, paragraph 4);

(c) rent from the Scarborough Lions Club for the Birchcliff Theatre (see amended statement of claim, paragraph 5);

(d) rent from Banner Theatres Ltd for the drive-in theatre in Orillia (see amended statement of claim, paragraph 6);

(e) rent from tenants of two apartments in the Cinema Theatre building (see amended statement of claim, paragraph 7); or

(f) rent from a Christmas tree vendor for a portion of the Birchcliff Theatre parking lot (see amended statement of claim, paragraph 9).

There is no definition of income from property in the Income Tax Act. Property per se is defined broadly in section 248 to mean:

property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action, and

(b) unless a contrary intention is evident, money;

In view of the jurisprudence that generally and normally a corporation cannot have income from property but only income from the business and because of the incidental and ancillary powers of corporations under the relevant Act of incorporation, and because in any event, according to the evidence there is nothing extraordinary or not normal about these particular sources of income of Supreme Theatres Limited, it is difficult to accept this Submission that any of the six items of income are income from a source that is property. Accordingly, this submission is not accepted.

Are they or any of them income from a source that is a business other than an active business?

The Act does not definte “income from . . . a business other than an active business” or “active business” income.

As a consequence, it is necessary to employ some traditional and accepted methods to resolve the difficulties that arise in cases such as this, and to provide some certainty in the matter of assessment of income tax.

In the amended statement of defence, the Minister has taken the position that these items of revenue were “incidental and ancillary to the plaintiff’s business activity, and as such is active business income”. (See amended statement of defence, paragraph 6.)

section 125 of the Act does not define income from an active business to include income that is “incidental” or “ancillary” to a taxpayer’s principal business activity. And although income from certain sources has been described in other cases, speaking generally, as “subsidiary”, “ancillary”, “windfall”, “casual”, and “incidental” income, and by other words to the normal business of a particular taxpayer there is no reference in the Income Tax Act to the concept of “ancillary” income or to the concepts of any of the other words used except as to the concept of “incidental” income. And the only reference in the Act to “incidental” income is subparagraph 95(2)(a)(i), which provision is unrelated to the issues or provisions of the Act respecting this case. Section 95 deals with the active business income of a foreign affiliate:

(2) For the purposes of this subdivision,

(a) in computing the income from an active business of a foreign affiliate of a taxpayer there shall be included

(i) any income from sources in a country other than Canada that would otherwise be income from property or a business other than an active business, to the extent that it pertains to or is incident to an active business carried on in a country other than Canada by the affiliate or any other nonresident corporation with which the taxpayer does not deal at arm’s length . . . (Italics added)

(This provision was made “applicable to the 1972 and subsequent taxation years”.)

In dictionary definitions of “incident”, incidents are divided into separable and inseparable. Jowitt gives an example of one that is separable in his definition:

Thus, fealty was incident to every tenure, and could not be separated from it; so a rent may be incident to a reversion though it may be separated from it, that is, the one may be conveyed without the other. Hence incidents are divisible into separable inseparable.

The meaning and employment in the Income Tax Act of the word “incident” probably is in its “separable sense”. This seems to follow from two examples in the Act.

First, under section 125 of the Act, Parliament intended that a so-called small business may have income from an active business and income from a business other than its active business and so be subject to the two different rates of tax. (As to the approach generally in characterizing these two types of income in King George Hotels Limited v the Queen, [1981] CTC 87; 81 DTC 5082, the Court said, per Urie, J:

. . . It cannot be said, therefore, in my view, that income from “other than an active business” necessarily means that derived from a business that “is in an absolute state of suspension” or one “devoid of any quantum of business activity” as has been said in earlier decisions in the Trial Division. In any given case, the business may not be of that kind but whether or not it is, is not necessarily determinative of the issue, the resolution of which depends on the fact finder’s view of the true nature of the business based on the facts in the particular case. The quantum of activity may well vary from case to case but still it is necessary for the Court to weigh all of the evidence to characterize the quality of the particular business.)

Second, under subsection 95(2) above quoted, there is a specific statutory characterization of incident income and direction as to how “incident” income should be treated for tax purposes, that is incident income to the income of an active business; and the meaning of “incident” employed in that subsection is in its separable sense, because if “incident” had been used in its inseparable sense, such statutory characterization and direction would not have been necessary.

Employing this approach, therefore, the question arises as to whether or not the Minister’s pleading in paragraph 6 is correct. And this question may be resolved as follows:

Are these six items or sources of income incidental to the main source of income from the plaintiff’s business activity, that is, incidental in the sense that these sources or any of them are separable from the sources of income from its business activity if it has an active business?

What is the business activity of the plaintiff and does it earn active business income?

According to the documentary evidence such as the letters patent and certain of the contracts (see for example Exhibit 3), the business activity of Supreme Theatres Limited is and was at all material times, the business of operating motion picture theatres in Ontario, and income from such activity is and should be categorized as active business income.

Accordingly, the further question that must be asked is: Are all or any of these six items or sources of income part of the active business income of Supreme Theatres Limited or are they incidental or incident to such active business income?

From the evidence and after a careful consideration of the submissions of counsel, it would appear that items 3 and 4 above referred to, namely:

are inseparable from the income and are part of the income from the normal business activity of Supreme Theatres Limited and therefore part of its active business income and that the other items are not; and, accordingly, items 3 and 4 do not qualify as “Canadian investment income” while the other items do.

Therefore the Minister’s pleading in paragraph 6 of the statement of claim is not correct.

The appeal is therefore allowed in part with costs and the matter is referred back for reassessment not inconsistent with these reasons.

Appeal allowed in part.