Hudon v. Canada, 2001 DTC 5630, 2001 FCA 320

Date: 20011029

Docket: A-744-99

Neutral citation: 2001 FCA 320

CORAM:        RICHARD C.J.

DESJARDINS J.A.

DÉCARY J.A.

                                                            IN RE the Income Tax Act

                                          R.S.C. 1985, c. 1 (5^th Supplement), as amended

BETWEEN:

                                                             JEAN-PIERRE HUDON

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-767-99

BETWEEN:

                                            JACQUES HAMEL, Liquidator of the Estate

                                                    of GEORGE SCANLAN, deceased

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-768-99

BETWEEN:

                                                            GÉRALD M. HARQUAIL

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-125-00

BETWEEN:

                                                                BERNARD GIRARD

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-126-00

BETWEEN:

                                                          DENYSE FRANK GIRARD

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                          Heard at Montréal, Québec, on Wednesday, October 10, 2001.

                     Judgment delivered at Ottawa, Ontario, on Monday, October 29, 2001.

REASONS FOR JUDGMENT BY:                                                                      DESJARDINS J.A.

CONCURRED IN BY:                                                                                                   RICHARD C.J.

                                                                                                                                              DÉCARY J.A.

Date: 20011029

Docket: A-744-99

Neutral citation: 2001 FCA 320

CORAM:        RICHARD C.J.

DESJARDINS J.A.

DÉCARY J.A.

                                                            IN RE the Income Tax Act

                                          R.S.C. 1985, c. 1 (5th Supplement), as amended

BETWEEN:

                                                             JEAN-PIERRE HUDON

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-767-99

BETWEEN:

                                            JACQUES HAMEL, Liquidator of the Estate

                                                    of GEORGE SCANLAN, deceased

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-768-99

BETWEEN:

                                                            GÉRALD M. HARQUAIL

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-125-00

BETWEEN:

                                                                BERNARD GIRARD

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                                                                                                        Docket: A-126-00

BETWEEN:

                                                          DENYSE FRANK GIRARD

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

DESJARDINS J.A.

[1]                 These are appeals of a judgment of the Tax Court of Canada (Harquail v. Canada, [1999] T.C.J. No. 715 (Q.L.)) which dismissed the appellants' appeals from assessments made with respect to the following taxation years: 1989, 1990 and 1991 for Messrs. Scanlan and Girard and for Mrs. Girard, 1989 and 1990 for Mr. Harquail, 1990 and 1991 for Mr. Hudon. For the purpose of this appeal, the assessments will simply be referred to as being for the years 1989, 1990 and 1991.

[2]                 By assessments for the 1989 taxation year, the Minister of National Revenue denied the appellants the capital gains deduction provided for by subsection 110.6 (2.1) of the Income Tax Act (the "Act") on the disposition of "qualified small business corporation share[s]" within the meaning of subsection 110.6(1) of the Act. The assessments for the 1990 and 1991 taxation years are only consequential to the 1989 assessments.

[3]                 Since the appeals were heard together, one set of reasons will be issued with copies of these reasons to be filed in each of the Court files.

The issue

[4]                 The only issue in these appeals is whether Arnaud Properties Limited ("Arnaud Properties") or Hall River Power Corporation ("Hall River") met the criteria of being an "active business" as that phrase is found in the definition of "qualified small business corporation share" in subsection 110.6(1) of the Act, throughout the twenty-four months immediately preceding the date on which the shares of the capital stock of Arnaud Properties were sold, namely February 24, 1989.

[5]                 "Active business" under subsection 248(1) means "any business carried on by the taxpayer other than a specified investment business or personal service business". The respondent conceded that neither Arnaud Properties nor Hall River carried on a specified investment business or a personal services business. The question, therefore, is whether Arnaud Properties or Hall River carried on business during the relevant time.

The relevant legislation

[6]                 Subsection 110.6(2.1) of the Act allows for a capital gain deduction in favour of an individual, resident in Canada, who disposed of a share of a corporation that was a "qualified small business corporation share". That phrase in turn is defined in subsection 110.6(1) of the Act in the following manner:

[7]                 The phrases "small business corporation", "active business" and "business", in turn, are thus defined in subsection 248(1) of the Act:

The facts

[8]                 In 1969, a corporation known as the Gulf Pulp and Paper Inc., which operated a pulp mill and owned forest concessions and rights to develop the hydroelectric potential of the Rivière Ste-Marguerite near Clarke City, Quebec, transferred those assets which consisted of land and buildings to Arnaud Properties. Its hydroelectric assets and hydroelectric development rights on the Rivière Ste-Marguerite were transferred, for legal reasons, to Hall River a wholly-owned subsidiary of Arnaud Properties. The parties admitted that the hydroelectric assets owned by Hall River represented during the period in issue 100% of that company's assets and 90% or more of the overall assets of Arnaud Properties.

[9]                 In 1973, the shareholders of Arnaud Properties developed a business plan for the company. At the outset, the plan involved the sale of lots, specifically building lots. Some forty lots were sold between 1973 and 1975. A few sales took place after that time.

[10]            Arnaud Properties did nothing but sell lots. It believed, however, that it could dispose of the lots more easily if electricity could be supplied to the residents at a lower cost. To do so, customers had to be found to make the development of First Falls on the River Ste-Marguerite profitable. One of the potential customers was Hydro-Québec. Hydro-Québec, however, had a policy of not purchasing electricity from independent producers. The other possible customer was Iron Ore.

[11]            Numerous efforts were made at the time and in subsequent years by both Arnaud Properties and Hall River to promote the development of the hydroelectric potential of the Rivière Ste-Marguerite.

[12]            In October 1978, Hall River commissioned a study to determine the feasibility of developing First Falls. The study, done by Montreal Engineering Company Limited at a cost of $10,000, concluded that developing First Falls was technically feasible, but that it would not be profitable to do so given the inefficiency of the existing generators. The cost of development was estimated at $7,000,000. Particular mention was made of three problems; the technology of certain facilities was obsolete; the falls produced an irregular current; and it was Hydro-Québec's policy that any electricity produced by an independent producer had to be used by the producer for its own purposes and could not be resold to third parties.

[13]            On November 10, 1979, Arnaud Properties instructed Mr. Harquail to examine three options:

(1)        the expropriation of the development site by Hydro-Québec;

(2)        the sale of rights and property connected with the hydroelectric project to Iron Ore; and

(3)        the operation as a joint venture with Iron Ore and Hydro-Québec.

[14]            Fifteen thousand dollars was made available to enable Mr. Harquail to carry out these instructions.

[15]            The third option would have enabled Arnaud Properties to circumvent Hydro-Québec's policy since Arnaud Properties could have resold, so to speak, the electricity to one of the proposed partners: Iron Ore and Hydro-Québec.

[16]            In April 1980, Mr. Harquail, in his capacity as agent of Arnaud Properties, took part in a meeting with representatives of Iron Ore and Hydro-Québec to discuss the work and costs associated with this hydroelectric project. Following another meeting held in June 1980, Hydro-Québec undertook a study relating to the temporary regulation of the Rivière Ste-Marguerite, in response to a request by Hall River and Gulf Power, a subsidiary of Iron Ore. The study recommended that Hydro-Québec undertake the project. Despite the study's conclusions, Hydro-Québec decided not to pursue the project, but instead, to develop the Grande-Baleine project.

[17]            Since a joint venture operation with Hydro-Québec was no longer possible, Arnaud Properties turned to Iron Ore which had just built a new plant in Sept-Iles. Representatives of Arnaud Properties and Hall River held discussions with representatives of Iron Ore in 1981 and 1982.

[18]            In 1986, there was a change of provincial government. Hall River immediately approached the new government and exposed to it the possibilities and problems of the past regarding the development of First Falls. Mr. Harquail testified that they "received a very sympathetic hearing from the ministers of the Crown at that time". (Transcript, vol. 3, tab 55, at 615-16).

[19]            On February 18, 1987, Hydro-Québec adopted a new "politique d'achat" allowing the purchase of power from small producers in the province, subject to price negotiations. By then, the cost of the project to develop First Falls was estimated at $17,000,000 but, according to Mr. Harquail, he had foreseen no problems in obtaining the necessary financing.

[20]            A meeting of the directors of Hall River was held on July 2, 1987. It was decided that Messrs. Harquail and Girard would be representing Hall River in its negotiations with Hydro-Québec. Mr. Harquail explained that after July 1987 things were starting to move quite quickly. There was a lot of interest from possible participants both for construction and financing, and it was important that he and Mr. Girard be cloaked with sufficient authority to move ahead and meet these interested parties in an authoritative fashion. (Transcript, vol. 3, tab 55 at 620).

[21]            On July 7, 1987, Mr. Harquail, in his capacity as vice-president of Hall River, sent a letter to a vice-president of Hydro-Québec. The letter stated its interest to meet with representatives to discuss the procedures and requirements for a possible comprehensive agreement on the sale of electricity. This, it said, "would enable the Company to go forward [...] with the planning/development and construction" of First Falls. In turn, on August 20, 1987, Hydro-Québec sent to Mr. Harquail, in his capacity as vice-president of Hall River, a copy of its new policy for purchasing electricity produced by small power plants owned by third parties in Quebec, adopted on February 18, 1987, after the new provincial government came to power. Hydro-Québec was prepared to purchase electricity at 2.86 cents per kilowatt/hour, while Hall River wanted to sell electricity at 4.2 cents per kilowatt/hour.

[22]            On August 24, 1987, Mr. Harquail wrote to the Minister of Energy and Resources of Quebec informing him that Hall River was interested in developing a hydraulic site and was requesting the necessary permits to enter into an agreement with Hydro-Québec for the purchase of energy.

[23]            This letter was followed by another letter dated September 14, 1987, also to the Minister of Energy and Resources of Quebec from Mr. Harquail, suggesting that the production capacity of the hydroelectric resources be increased.

[24]            On November 13, 1987, the vice-president of SNC Hydro Inc. (now SNC Lavalin) contacted the industrial commissioner of the city of Sept-Iles and stated that in the event that negotiations with Hydro-Québec resulted in an acceptable rate for the sale of electricity, SNC would be in a position to provide financing, to construct and operate the project in conjunction with the Hall River Power Corporation.

[25]            However, the setting of the price for the sale of electricity remained difficult.

[26]            An "Avis de projet" form was sent to the Ministère de l'Environnement of Quebec on January 22, 1988, by Mr. Harquail on behalf of Hall River. That "Avis de projet" included an application for environmental permits.

[27]            In a letter to the Minister of Energy and Resources of Quebec dated January 29, 1988, Mr. Harquail, on behalf of Hall River, requested that three leases held by Gulf Power be cancelled, since Iron Ore, the owner of Gulf Power, had informed Hall River of its intention not to pursue the development of the hydroelectric potential of the First and Second Falls on the Rivière Ste-Marguerite. Hall River also asked that it be given leases by the Minister's department for eight lakes specified in the letter. Hall River wanted those leases so that it could regulate the flow of the watercourse while waiting for the Mile 56 project to be completed by Hydro-Québec.

[28]            On February 22, 1988, the director of environmental assessment of the Ministère de l'Environnement of Quebec replied to the "Avis de projet", stating that in the near future Hall River would receive the Minister's directive indicating the nature, scope and extent of the environmental impact assessment statement that Hall River would have to prepare.

[29]            On February 29, 1988, at a meeting with Mr. Girard, the Associate Deputy Minister of Energy and Resources of Quebec explained that it was a very complicated process to change the price proposed by Hydro-Québec for supplying electricity.

[30]            On October 19, 1988, the Ministère de l'Environnement of Quebec provided Mr. Harquail with a revised version of the "draft directive" and invited Hall River's environmental consultant to submit comments to the appropriate branch of that Ministère. Mr. Harquail acknowledged that Hall River had not retained the services of an environmental consultant, but stressed that it was making representations to the cabinet (Government of Quebec) to seek an exemption from the requirement that it conduct an environmental impact assessment. He thought that this approach was worthwhile. Since the facilities were already in place, there would be no flooding and no people would be required to move.

[31]            During the fall of 1988, Mr. Girard was informed that Hydromega was interested in developing Hall River's hydroelectric assets. He met with representatives of Hydromega to discuss strategy and the possibility of developing the river's hydro-electric potential as a joint venture. In the course of that meeting, Hydromega's representatives indicated to Mr. Girard they wanted to buy Arnaud Properties.

[32]            An agreement in principle was entered into on October 23, 1988, between Hydromega and the shareholders of Arnaud Properties including all the appellants except Mr. Harquail. Hydromega agreed to acquire the shares, advances and rights of the shareholders of Arnaud Properties for $2,000,000.

[33]            On February 24, 1989, all the shareholders of Arnaud Properties sold their shares in the capital stock of that company to Hydromega for a price of $2,000,000.

[34]            Mr. Girard said that the project would have taken a lot of the shareholders' money. He estimated the amount would have been in the order of $5,000,000. He said that the project was not feasible considering the need to borrow money and the very low price offered by Hydro-Québec for the sale of electricity.

[35]            After the sale on February 24, 1989, Hydromega began the hydroelectric development that had been planned by Arnaud Properties and Hall River. Mr. Harquail testified that Hydromega was able to sell electricity at 4.5 cents per kilowatt/hour in 1990 or 1991.

The decision of the Tax Court judge

[36]            In the course of determining whether Arnaud Properties or Hall River had been in "active business" during the relevant period, or had carried on business during that period (see the definition of the phrase "active business" in subsection 248(1) of the Act), the Tax Court judge made the following comment at paragraphs 98 and 99 of his reasons:

[98]    What conclusion must be drawn from this examination of the principal activities and initiatives of the managers of Arnaud Properties and Hall River?

[99]    First, it seems clear from the case law that the fact that there was no income in a particular year or over a longer period is not a basis for concluding that a person or a corporation was not carrying on a business. Second, it is clear from the numerous efforts and initiatives undertaken by the managers of the two companies, in particular during 1987 and 1988, that the companies were not inactive during the 24 months in question and were not simply holding annual meetings and producing the reports needed to avoid dissolution.

He found, however, the decision of this Court in M.N.R. v. M.P. Drilling Ltd., (76 D.T.C. 6028) to be distinguishable. He quoted a passage from M.P. Drilling Ltd., to which I will refer later, and then said at paragraph 102 of his reasons:

[102]    The facts mentioned in the passage quoted above contrast with the facts in the instant case. Here, the managers of the two companies in question had not succeeded in making satisfactory arrangements with Hydro-Quebec in respect of the sale price of energy. In fact, Hydromega was unable to reach an agreement concerning the sale price of energy until a year or two later, after it had acquired the shares of Arnaud Properties. According to the evidence, the directors of Hall River considered the negotiation of an adequate price for the sale of energy to be a sine qua non if the project being planned by the manager of Arnaud Properties and Hall River in 1987 and 1988 were to be profitable. Without an agreement as to the sale price for energy, Hall River did not intend to proceed with the plan to develop the hydraulic resources it owned at First Falls or the Rivière Ste-Marguerite. That is why, despite the reservations expressed by the appellant Harquail, the managers of the two companies decided to sell all the shares they owned in the capital stock of Arnaud Properties.

He concluded in paragraph 103 that Arnaud Properties had not carried on business after 1975 since there had been no sale of lots after that date. With regard to Hall River, he stated again at paragraph 103:

[...] Nor was it established that Hall River had started to carry on a business consisting of the sale of electrical energy. Hall River had taken quite a number of steps preparatory to exploiting the river's hydro-electric potential at First Falls, but it had not actually started to carry on a business of that nature. As a matter of fact, it is clear from the evidence that the carrying on by Hall River of a business involving the sale of energy would never have commenced if no agreement could be reached with Hydro-Quebec on an acceptable price for the sale of energy.

It was his view that since Hall River had been incapable of concluding an agreement with Hydro-Québec, Hall River had never carried on business. He then dismissed the appellants' appeals from the Minister's assessments.

Submissions of the parties

[37]            The appellants essentially submit that the Tax Court judge erred in law in refusing to apply the principles enunciated in M.N.R. v. M.P. Drilling Ltd. to the facts of this case considering there are no material differences between the facts in both situations.

[38]            The respondent is of the view that the Tax Court judge correctly refused to apply the M.P. Drilling case considering his finding at paragraph 102 of his reasons that without an agreement as to the sale price for energy, there could be no hydroelectric development at First Falls on the Rivière Ste-Marguerite and, consequently, no carrying-on of a business by Hall River. In any case, says the respondent, Hall River had not been carrying on business throughout the twenty-four months preceding the sale of the shares. It was only roughly after July 7, 1987, that things started to move. The time period in question would only then have been about some nineteen months.

Analysis

[39]            A careful reading of the definition of the phrase "qualified small business corporation share" found in paragraph 110.6(1)(c) of the Act indicates that for a capital gain deduction to be claimed, the assets of a Canadian-controlled private corporation must be used in an "active business" being carried on "throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual ..." There is no dispute that the determination time is the date of the sale of the shares of Arnaud Properties on February 24, 1989.

[40]            The issue is therefore whether Arnaud Properties, the holding company, or Hall River, the wholly-owned subsidiary, was an "active business" throughout that twenty-four-month period preceding February 24, 1989. But since the electricity activities were only carried on by Hall River, the focus is on Hall River and whether it carried on business during that period.

[41]            Is this a question of fact or a question of law?

[42]            The respondent submits it is a question of fact and that the finding of the Tax Court judge should not be disturbed, absent a palpable and overriding error. She invokes in Her favour the decision of our Court in Her Majesty the Queen v. Rockmore Investments Ltd. (76 D.T.C. 6156 at 6157).

[43]            In Ludco Enterprises Ltd. v. Canada (2001 SCC 62">2001 SCC 62), however, the Supreme Court of Canada stated at paragraph 34 that the determination and application of the proper test under subparagraph 20.1(c)(i) of the Act, which was at issue in that case, was a question of law. The Supreme Court of Canada also stated that whether or not a taxpayer's purpose in making an investment falls within the ambit of subparagraph 20(1)(c)(i) of the Act is properly viewed as a question of mixed fact and law. This means, in the case at bar, that the determination and application of the proper test with regard to the phrase "active business" found in subsection 110.6(1) of the Act is a question of law. Whether Hall River was "active" in the sense of carrying on business is a mixed question of fact and law.

[44]            Ludco Enterprises Ltd. may, therefore, shed a new light on the reading of those cases where Rockmore Investments Ltd. was followed, for instance, in King George Hotel Limited v. The Queen (81 D.T.C. 5082 (F.C.A.)) where Urie J.A., for the Court, stressed at page 5084 that "whether a business is an active or an inactive one is [...] one of fact dependent on the circumstances of each case".

[45]            The Tax Court judge, in my view, took a very restrictive view of the phrase "active business" when he concluded at paragraphs 102 and 103 of his reasons that although there had been numerous efforts and initiatives undertaken by the managers of the two companies, in particular during 1987 and 1988, and that the companies were not inactive, yet, since no agreement on the sale price for energy had been made, Hall River had not been carrying on business throughout the relevant period.

[46]            I take, as a start for the interpretation of subsection 110.6(1) of the Act, the principles of statutory interpretation referred to by the Supreme Court of Canada in Ludco Enterprises Ltd. in paragraphs 36 to 40 of its reasons. Iacobucci J. for the Court reminds us of the modern rule of statutory interpretations put succinctly by E.A. Driedger in Construction of Statutes, 2nd ed. 1983 at p.87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament ...

[47]            The Supreme Court of Canada in Ludco Enterprises Ltd. states that "[i]n the absence of clear statutory language, judicial innovation is undesirable" (para. 38 of that decision) and that courts must therefore be cautious before finding within the clear provision of the Act an unexpressed legislative intention" (McLachlin J., now C.J., in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 at paragraph 43, cited in paragraph 38 of the reasons for judgment in Ludco Enterprises Ltd.).

[48]            "Active business" which is defined in paragraph 248(1) of the Act as meaning "any business carried on ..." is another undefined concept of the Act, such as the words "income" or "profit" noted by the Supreme Court of Canada in Ludco Enterprises Ltd., and is within the jurisdiction of courts to interpret.

[49]            I take it that the phrase "active business" is to be given its grammatical and ordinary sense harmoniously within the scheme of the Act, the object of the Act and the intention of Parliament.

[50]            The terms used by Parliament are indeed very undefined. The phrase "active business" means the carrying-on of a business. The word "business" in turn includes "an undertaking of any kind whatsoever".

[51]            The case of M.N.R. v. M.P. Drilling Ltd. (76 D.T.C. 6028), relied on by the appellant, is not a case directly in point as noted by the Tax Court judge since a different issue was at stake, namely whether certain expenses were capital expenditures and whether they were deductible even though they did not produce any income. In examining these questions, Urie J. A., for this Court, pronounced, however, an important obiter dictum on when a corporation begins to carry on business.

[52]            M.P. Drilling Ltd. had been incorporated on September 30, 1963, for the purpose of carrying on the business of marketing liquified petroleum gases in the Pacific Northwest and the Far East. It engaged in market negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and hired its first employees. It incurred, however, losses in 1964, 1965 and 1966. Finally, in 1966, it decided that the plan to market gas was not feasible and it commenced the operation of contract drilling which turned out to be very profitable. However, were the expenses which resulted in a loss deductible? Counsel for the Minister took the position that such expenditures were to ascertain the feasibility of going into the business of purchase and sale of liquified natural gas but were not made as part of the operation of the profit earning process of an existing business; they were made, he argued, as part of the formation of the structure necessary to engage in that process.

[53]            Urie J.A., for this Court, rejected these considerations. He made the following comment (at page 6030 of the reported decision) which the Tax Court judge reproduced at paragraph 101 of his reasons (96-4115(IT)G). Urie J.A. said:

In my view this argument does not withstand scrutiny in that it ignores the fact that the business structure per se came into existence in late September when the Respondent commenced its business operations by continuing the marketing negotiations, supply negotiations and technical studies through its consultants until June of 1964 when it opened its own office and engaged the services of its first employees, utilizing for such purposes funds advanced by its principal, Mr. Bawden, or other companies controlled by him.

[54]            Urie J.A. further said at p. 6031:

It also ignores the fact that in the early summer of 1964 Mr. Van Wielingen joined the Respondent as a ful time general manager and chief operational officer. His duties at that time were, according to his testimony, firstly, to develop a market for the product, secondly, to negotiate with actual and potential suppliers of liquid petroleum gases and, thirdly, to consider the technical aspects of production, storage, transportation and the like.

In short, the company was then in existence and was engaged in doing the normal things that any new business must do to bring its wares to the market place, hopefully with profitable results. As I see it, this business activity falls within paragraph (b) of Jackett, C.J.'s test in the Canada Starch case (supra). Not to characterize such activity under this head is to ignore the commercial reality of the situation, which was that the Respondent's efforts at all times were directed to bring products it expected (by negotiation) to be able to acquire, to users who, through the promotional efforts of the Respondent's officers, indicated that they would be interested in becoming purchasers thereof. Negotiations proceeded with some twelve suppliers and the same number of potential foreign customers culminating in expressions of intent from some of each. The permanent structure, the market and the products all existed and the efforts of the Respondent were directed to bringing them together with a resultant profit to it. The desire result was never accomplished and that part of the Respondent's business had to be abandoned although it continued in operation in the drilling business with profitable results. But the abandonment caused no transformation of the expenditures made in an effort to achieve profitability into expenditures capital in nature.

[55]            Urie J.A. noted that the negotiations undertaken had cumulated in some expressions of intent by potential customers to buy gas and by some producers to sell gas. He concluded that M.P. Drilling Ltd. had, in fact, been carrying on a business and not simply bringing the business into existence. He said, at pp. 6031-32:

Counsel took the position that, in substance, all of the expenditures were for a like purpose, i.e., to ascertain the feasibility of going into the business of purchase and sale of liquified natural gas to certain Pacific rim countries and this was so whether the work involved in such studies was carried out by the Respondent's own personnel or by outside consultants. He argued that none were made as part of the operation of the profit earning process of an existing business but were made as part of the formation of the structure necessary to engage in that process.

In my opinion, that argument is not supported by the evidence and, in fact, there is evidence which points in the opposite direction. Not the least important of that kind of evidence was the fact that negotiations undertaken by the Respondent's officers had culminated in some expressions of intent by potential customers to buy the gas and some by producers of the gas to sell it to the Respondent for the purpose of resale. Quite clearly then, the Respondent was in fact in business and was not simply bringing the business into existence. [...]

It was then argued that there must be revenue before any deduction can be made for expenses which might otherwise properly be deductible as made for the purpose of earning income. I cannot agree that because the Respondent had not generated any revenue, let alone profit, makes it any less "the process of operation of a profit making entity".

[56]            In M.P. Drilling Ltd., although the negotiations undertaken had culminated in some expression of intent by potential customers to buy gas and by some producers to sell gas to M.P.Drilling Ltd., no contract was ever signed during the relevant period. The Tax Court judge distinguished, however, the M.P. Drilling Ltd. case on the basis that, in the case at bar, there had been no agreement on the price for the sale of energy and that, without it, Hall River had no intention of proceeding with the development of the Falls River project and chose to sell their shares.

[57]            Was this distinction determinative of the issue? Does this mean that Hall River was never carrying on business?

[58]            The detailed history of the facts in this case indicates that Arnaud Properties, early in the process, came to the conclusion that the lots could sell more easily if electricity could be supplied to residents at a lower price. From 1978, when the commission of the first study to Montreal Engineering Company Limited was awarded until the sale of the shares of Arnaud Properties on February 24, 1989, Hall River never detracted from its objectives to develop First Falls. The key stumbling block was Hydro-Québec's policy of the time that any electricity produced by an independent producer had to be used by the producer for its own purposes and could not be resold to third parties.

[59]            Hall River tried, in 1979 and afterwards, to circumvent Hydro-Québec's policy by offering to operate a joint venture with Iron Ore and Hydro-Québec, but this project did not materialize. Hydro-Québec, in 1980, decided instead to develop the Grande Baleine project.

[60]            A change of government then occurred in 1986. Hall River was quick to react. It approached the government of Quebec and Hydro-Québec, and was given a copy of the new policy of Hydro-Québec.

[61]            There was never an agreement on price to make the project profitable in the eyes of Hall River. The shareholders finally sold their shares in Arnaud Properties on February 28, 1989. To say, however, that Hall River never carried on business during all the time it spent money and energy to make real the objects of its incorporation which are found in its letters patent of July 1969, and which were "to produce, generate, manufacture by any means and to supply, sell and dispose of electricity ..." would be too restrictive an approach to both the interpretation of the law and the appreciation of the facts.

[62]            It is not easy to delimit the content of the concept of carrying on business. One can see two outside parameters where the carrying on of business does not occur: on the one hand, when a company, which has been incorporated, has not actually commenced operation and, on the other hand, when a company has become dormant and is only holding annual meetings and filing its returns so as to avoid the forfeiture of its charter. There are, in between, some activities, however, which are signs that a company is operating and which should fall within the spectrum of the concept of carrying on business, even though, for example, the activities are carried on for the purpose of reaching an agreement which eventually is not reached or even though they do not result in the earning of income.

[63]            In this line of reasoning, I find helpful the comments made by Jackett J. in Canada Starch Company Limited v. Minister of National Revenue (68 D.T.C. 5320 at 5324-25). While this case turns on the notion of deductible business expenses or capital outlay, the following, which throws some light on the issue of carrying on business, was said:

[...] Similarly, in my view, expenses of other measures taken by a businessman with a view to introducing particular products to the market-such as market surveys and industrial design studies-are also current expenses. They also are expenses laid out while the business is operating as part of the process of inducing the buying public to buy the goods being sold.                                                 [My emphasis]

[64]            Again, in Bowater Power Company Limited v. Minister of National Revenue (71 D.T.C. 5469 at 5481), a case dealing also with deductible business expenses and capital outlay, Noël, A.C.J. stated:

[...] While the hydroelectric development, once it becomes a business or commercial realty is a capital asset of the business giving rise to it, whatever reasonable means were taken to find out whether it should be created or not may still result from the current operations of the business as part of the every day concern of its officers in conducting the operations of the company in a business-like way. I can, indeed, see no difference in principle between all of these cases. [My emphasis]

[65]            In my view, Hall River was carrying on business without interruption since 1978. It was constantly on the look-out for a market to develop its hydroelectric potential. Hall River, therefore, meets the requirement of subsection 110.6(1) of the Act, both in terms of "active business" and in terms of the relevant period, namely "throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual".

[66]            To require the existence of an agreement on the sale of electricity before Hall River may be considered to be "carrying on business" is to add an element not found in the legislation. The rationale for the tax exemption provided in subsection 110.6(2.1) of the Act is the economic stimulus it provides to equity participation in Canada and the development of Canadian business enterprises (V. Krishna, Income Tax Law, (Concord: Irwin Law, 1997) at 190). The Honourable Michael Wilson said the following when the measure was introduced in the House of Commons (see House of Commons Debates, May 23, 1985 at 5014 ):

This measure will encourage more Canadians to invest in small and large businesses. It will help Canadian companies to accelerate their return to a healthy financial position by attracting new equity investment. It will assist smaller businesses in raising capital to pursue new ideas and new directions. It will help raise capital for research and development.

Most important, this is a broadly-based incentive that allows individual Canadians to decide where to put their money and how to create wealth, economic activity and jobs. This is central to our philosophy. The decisions should and will be made by individuals across Canada, not by politicians or public servants here in Ottawa. This is a measure designed to unleash [the] full entrepreneurial dynamism of individual Canadians.            [My emphasis]

Conclusion

[67]            I would allow these appeals with costs in this Court and before the Tax Court of Canada, I would set aside the decision of the Tax Court judge and I would refer the assessments back to the Minister for reconsideration and reassessment on the basis that the appellants are entitled to the capital gain deduction provided for by subsection 110.6(2.1) of the Act.

"Alice Desjardins"

                                                                                                              J.A.

"I agree

J. Richard C.J."

"I agree

Robert Décary J.A."