Clement, D J:—At issue in this appeal is whether interest income received by Marsh & McLennan Ltd (the broker) from short-term investments in its 1976 taxation year was “Canadian 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 Appeal Board decided that this dispusted 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 (omitting phrases that are not pertinent) are these:
(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 active business . . . exceeds the aggregate 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 insurance needs and recommendations in respect of coverage and, when authorized by clients, negotiating and placing policies of insurance on their behalf with insurers. It assists when necessary in settlement of claims. Copmmissions 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 question. In actual operation, the flow of business of the broker by way of premiums received daily from its clients, and other receivables, and payment 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 paya-’ ble: in the business of the broker they were completely independent of each other. The investments 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 paragraph (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 operation 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 transacted with some 30 to 35 major companies. There was put in evidence written contracts between the broker and 2 insurers; and also 7 letters from insurers respecting the payment of commissions. 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 Continental Insurance Company, and so with the terms of the other written contracts: indeed, that contract appears to express the ar rangements acted on by all concerned in respect of billing and collection of premiums and payments to insurers, constituting 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 pro- cessed”. 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 computerized 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 commission 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 stateent 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 Canadian Indemnity Company made in 1968. It bears the title “Agency Contract”. By it Marsh & McLennan, Limited is employed by the insurer as an agent of the company for the transaction of designated 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 contract. 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. I reject this submission with all the unresolved complexities 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 circumstances of the present case: the client has effectively 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 investments 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 Investments 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 payments to insurers, payrolls, and so on. The short-term investments served this purpose. In the words of the chief financial advisor 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.
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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 evidence: 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%%, 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 maintenance 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 statements, and other reports. A fairly normal accounting 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 department 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 reasonable 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 determine 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 Appeal Board held that interest from the investments was only a subsidiary or ancillary part of the broker’s operation which did not constitute 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)(ii).
The motivation for this action by the broker lies in the decision of the Tax Appeal Board in March Shipping Limited v MNR, [1977] CTC 2327; 77 DTC 371. I will return to that decision later. Many authorities were cited in argument, 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 appreciably 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 application 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 in a preponderance of evidence. In my view the authority of The Queen v Rockmore Investments Ltd, [1976] 2 FC 428; [1976] CTC 291; 76 DTC 6156, in this Court extends so far. In determining a question of fact it is an inexorable rule that all of the relevant evidence and circumstances 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 meaning 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 determining the meaning and scope of the exclusions in particular circumstances, with consequential categorization of the income for the purposes of the section. The task extends to consideration of whether there is an interrelationship between the two paragraphs. The rationale of the judgment of the learned Associate Chief Justice on this point of the appeal is found in these paragraphs:
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 paragraphs are mutually exclusive. In my opinion the jurisprudence of the predecessor of this Court implicitly supports the opposite conclusion.
In Wertman v MNR, [1965] 1 Ex CR 629; [1964] CTC 252; 64 DTC 5158, one of the questions before the Exchequer Court of Canada was whether the income of a taxpayer was from property or from a business for the purposes of section 21 (now section 73) of the Income Tax Act. 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):
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 activities of the taxpayer in the operation of the apartment building and went on to say at 641-2:
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, 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, LJ, in Erichsen v Last, 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 appellant 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 TC 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 Act. ..’ ”
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 authorities and went on to say at 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 particular income may be accurately described as income from property and just as accurately regarded as income from a business.
He concluded at 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 v Director-General of Inland Revenue, [1978] 3 All ER 1185 at 1188. There, the taxpayer had constructed a factory and warehouse building for use in its tobacco business. The business eventually proved unprofitable and was discontinued. The taxpayer then rented the building 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 Revenue 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 asserted 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 relying 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 1188 Lord Diplock Said in part:
If the words in the various paragraphs of s 4 of the Malaysian 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.
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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 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 CUC) in Anderson Logging Co v The King, [1917-27] CTC 198; 52 DTC 1209:
The sole raison d’etre 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 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 FC 428; [1976] CTC 291; 76 DTC 6156, 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 circumstances 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 has then been canvassed: no further inquiry is prescribed. Prop- erty 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 business 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. “Business” 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 subparagraph (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 dividend 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 paragraphs.
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, CJ speaking for the Court first directed his attention to the scope of the word “business”. He said in part at 430:
In considering whether there is an “active business’’ for the purposes of Part 1, 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 undertaking 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 adventure 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 consideration 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 1 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 relevant and in essence accords with the passages I have above quoted. The line to be drawn is between 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, CJ said at 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 expressly 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 definition other than that provided by section 248 and the broad expression “carrying on”. Later he discussed 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 particular circumstances of a case call the operation under review an active business. This does not touch the point now under debate. He 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 operate. The real conduct of the affairs must be examined 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 investments 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 The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115, the issue was also whether the taxpayer was carrying 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 The Queen, [1981] CTC 190; 81 DTC 5136, where the issue arose under section 129. The business of the taxpayer was the operation 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 themselves, 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)(ii). 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 ‘the transactions 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 balances in short-term securities of which the principal and interest were returned to the Fund at a time, anywhere up to 90 days, when those surpluses would be required for the purposes of the Fund and the ongoing insurance brokerage business 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 on-going daily business. To use the words employed by Rowlatt, J in Scales v George Thompson and Company Limited, [1927] 13 TC 83, on the facts of this case there was between the broker’s business and the investments an inter-connection, an interlacing, an interdependence, 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 Ltd v MNR, [supra], which played an important part in the decision of the Tax Appeal 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 interest in the amount of $56,972 (ie 2 /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 investment 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 company, and that the amount of the investments was 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 2529-30:
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 appellant 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 business — 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 2531:
I am not aware of anything which would support the conclusion that an investment policy, calling for short-term rather than long-term deposits, would in itself necesarily 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 par: 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 necessarily 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 investment 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.
Le Dain, J:—I have had the advantage of reading 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 opinion the appeal should be allowed on the ground that the notional fund or amount of money consisting 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 Liverpool and London and Globe Insurance Company v Bennett, [1913] AC 610 and Bank Line Ltd v Commissioners of Inland Revenue, 49 TC 307 suggestive as to the test to be applied: was the fund employed and risked in the business? In my opinion 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 obligations to the insurers.
Thurlow, CJ:—The issue in this appeal is whether interest received by the respondent in its 1976 taxation year on investments of surplus funds in its hands constituted Canadian investment income within the meaning of paragraph 129(4)(a) of the Income Tax Act. 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 insurance broker. It consisted of placing insurance for its customers with insurance companies prepared to accept the risks, collecting the insurance premiums from the customers and paying their amounts, less agreed commissions, to the insurers. In carrying on this business, the respondent received premiums before it became necessary, under the arrangements with the insurers, to pay the proceeds to the insurers. The interval was, in general, 30 to 60 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 premiums 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 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 (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 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 tht 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 subparagraph (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 contrary 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 respondent of a financial or investment business separate from or in addition to the respondent’s insurance brokerage business. The learned trial judge 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 question, 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 respondent’s business since the funds invested to earn the interest were surplus money generated by the business 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 appellant’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 Liverpool and London and Globe Insurance Company v Bennett, [1913] AC 610, and that of the Court of Session in Bank Line Ltd v Commissioners of Inland Revenue, [1974] 49 TC 307. 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 Dunfermline:
It was argued, or it it appeared to be argued, that this company carried on separate businesses and that the matter of investments 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 departments; 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 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 bookkeeping, out of the sum total of the profits or gains of the concern.
and from the speech of Lord Mersey,
It is said that the dividends in question are derived from investments made under this clause (18), and that such investments 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 standby 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 investments, 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:
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’ argument 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 tht 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 TC 101, was established 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. (Italics added.)
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 situation lies in the fact that in both cases what was under consideration was income derived by a company 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 Company Limited v Kelly, 25 TC 1091, 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 September 1939 when war broke out the taxpayer had a large balance of such dollars on hand which shortly afterwards were requisitioned by the British 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 situation 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 taxpayer 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 particular 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 difference 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 moneys 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.* 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 brokerage business.
For the same reasons in my opinion they were not “held in the course of carrying on the business”. They were as I see it simply discrete investments. 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 irrelevant. It indicates only that the investments were made carefully and with regard to the anticipated needs of the company for cash.
Accordingly in my opinion the interest in question 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.
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