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.
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.
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
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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