Date:
20130308
Docket:
A-89-12
Citation: 2013 FCA 74
CORAM: NOËL
J.A.
GAUTHIER
J.A.
TRUDEL
J.A.
BETWEEN:
RANDY
J. OLLENBERGER
Appellant
and
HER
MAJESTY THE QUEEN
Respondent
REASONS
FOR JUDGMENT
NOËL
J.A.
[1]
This
is an appeal from a decision of V.A. Miller J. of the Tax Court of Canada (the
Tax Court judge) confirming a reassessment issued by the Minister of National
Revenue (the Minister) denying the business investment loss (BIL) claimed by
Randy J. Ollenberger (the appellant) with respect to his 2007 taxation year.
The loss in question results from a loan in the amount of $613,772 advanced by
the appellant to AEF Corporation (AEF) which was never repaid. The Tax Court
judge confirmed the reassessment on the basis that AEF did not carry on an
“active business” and therefore was not a “small business corporation” at the
relevant time.
[2]
At
issue is whether the Tax Court judge applied the proper legal test in
confirming that the BIL had been properly denied, and whether the evidence
supports the conclusion reached by the Tax Court judge when the proper test is
applied.
[3]
The
provisions of the Income Tax Act, R.S.C. 1985, c. 1(5th
supp.) (the Act) which are relevant to the discussion which follows are
reproduced in the annex to this decision.
FACTUAL BACKGROUND
[4]
It
is sufficient for present purposes to set out a brief account of the
circumstances which led to the claimed loss based on the summary provided by
the Tax Court judge.
[5]
The
appellant leads BMO Capital Markets’ North America. In that capacity, he
manages a group of professionals who analyze oil and gas companies in Canada and the U.S. in order to identify investment opportunities for professional investors
(reasons, para. 4).
[6]
AEF
was incorporated in order to “acquire distressed, but producing oil and gas
properties and to operate these properties or to sell them, whichever was most
profitable” (reasons, para. 5).
[7]
According
to the appellant, Mr. Doug Djan, who testified on his behalf, contacted him on
September 28, 2008. He represented himself as the President of AEF and alerted
him to an investment opportunity in the context of an important acquisition of
oil and gas producing assets (oil & gas assets) (reasons, para. 7).
[8]
For
the purpose of making this acquisition, AEF entered into a purchase and sale
agreement which required a 10% deposit (ibidem). In order to find the
deposit, it obtained a loan of $600,000 from the appellant in exchange of a
commission of $100,000 (reasons, para. 10).
[9]
The
discovery of a defect in the title to the oil and gas assets in the days
following the advance of the loan, led to the termination of the purchase and
sale agreement and the forfeiture of the deposit on October 10, 2007 (reasons,
para. 9).
[10]
In
filing his tax return for his 2007 taxation year, the appellant claimed a BIL
equal to the amount loaned to AEF. The Minister initially took the position
that no loss had been incurred. However, following the discovery process, the
Minister acknowledged that a capital loss had been incurred, and the Reply to
the Notice of Appeal was amended accordingly.
DECISION OF THE TAX COURT JUDGE
[11]
As
a result of this concession, the only issue before the Tax Court judge was
whether AEF was a “small business corporation” as defined in subsection 248(1)
of the Act at the time when the loan was advanced. Looking at this definition
more closely, the Tax Court judge indicates at the beginning of her reasons
that this turns on whether AEF was an “active business” during the relevant
period (reasons, para. 2).
[12]
Addressing
the meaning to be given to these words she says (reasons, para. 17):
I disagree with the Appellant's position that the
definition of "active business" only means "business". The
word "active" is used in this provision as an adjective and by its
placement it is used to modify "business". Because it is meant to be
descriptive of the word "business", this word should not be
overlooked. See Pierre-André Côté, The Interpretation of
Legislation in Canada, 4th ed. (Scarborough: Canada, 2011) at p.295.
[13]
She
goes on to state (reasons, para. 18):
Reading the definition as a
whole, I conclude that an "active business" must be one which is
"carried on". The question therefore is whether there is sufficient
evidence before me that would allow me to conclude that AEF carried on such a
business.
[14]
The
Tax Court judge then proceeds with a review of the evidence, including the
extensive testimony of Mr. Djan, with respect to the “business of AEF”
(reasons, para. 19). She finds Mr. Djan and “the evidence as
a whole” not to be credible (ibidem), and concludes that the appellant
failed to produce “credible evidence to support his position that AEF was an
active business” (reasons, para. 34).
POSITION OF THE APPELLANT
[15]
The
appellant is of the view that correctness is the standard of review to be
applied to questions of law and that questions of mixed fact and law cannot be
reviewed in the absence of an overriding and palpable error in the absence of
an extricable question of law (appellant’s memorandum, para.72).
[16]
The
appellant takes issue with the Tax Court judge’s definition of “active
business”, which in his view imposes a test more onerous than that set out in
the Act (appellant’s memorandum, para. 85). Indeed, the definition of “active
business” is found at section 248 which states that an “active business means
any business carried on by the taxpayer other than a specified investment
business or a personal service business”. Thus, when determining whether AEF
was an “active business” the Tax Court judge was required to determine whether
AEF is a business other than a specified investment business or a personal
service business (appellant’s memorandum, para. 88). “[T]he Trial judge instead
considered whether the activity of AEF was a particular type of business”
(appellant’s memorandum, para. 86).
[17]
According
to the appellant, the evidence shows that the activity of AEF was “clearly” a
business (appellant’s memorandum, para. 14). The statement of the Tax Court
judge that “the only evidence before me with respect to the business of AEF was
the document entitled the Business Summary and the testimony of Mr. Djan”
(reasons, para. 19) constitutes a palpable and overriding error since there was
other evidence which supported the appellant’s position (appellant’s
memorandum, para. 91). Amongst other things, the Tax Court judge overlooked the
admission made by the respondent in the reply to the Notice of Appeal to the
effect that AEF actively pursued business ventures (appellant’s memorandum,
paras.6 and 90).
[18]
The
appellant also takes issue with the Tax Court judge’s finding that Mr. Djan was
not credible (appellant’s memorandum, paras. 92 to 94), but takes the position
that the record establishes that AEF was carrying on an active business
regardless of Mr. Djan’s evidence (appellant’s memorandum, para. 95).
POSITION OF THE RESPONDENT
[19]
The
respondent agrees with the appellant that the determination of the proper test
in the present case gives rise to a question of law reviewable on the standard
of correctness (respondent’s memorandum, para. 14).
[20]
The
respondent submits that the Tax Court judge properly held that AEF is not an
“active business”. In her view, the words “active business” must be interpreted
within the “more fulsome” definition of “small business corporation” found in
subsection 248(1) of the Act. According to the respondent the words “active
business” are to be given their grammatical and ordinary sense harmoniously
within the scheme of the Act (respondent’s memorandum, para. 19). This approach
coupled with the jurisprudence on point show that a “small business
corporation” pursuant to subsection 248(1) of the Act contemplates more than
“any business” (respondent’s memorandum, para. 33).
[21]
The
respondent relies on the decisions of this Court in Harquail v. Canada,
2001 FCA 320 (Harquail) and Boulanger v. Canada, 2003 FCA 332
(Boulanger) which establish parameters outside of which a business cannot be
said to be carried on either because the business has yet to begin operations
or is dormant (respondent’s memorandum, paras. 22 and 27). She argues that “active
business” within the meaning of the “small business corporation” definition
requires something more than preliminary steps (respondent’s memorandum, para.
24). An analysis of the evidence leads to the conclusion that AEF falls short
of that threshold (respondent’s memorandum paras. 24, 35, 49 and 53).
ANALYSIS AND DECISION
[22]
I
note at the onset that although the Tax Court judge states that she rejects the
appellant’s evidence “as a whole”, neither party takes the position that this
is what she effectively did. In particular, the respondent recognizes that the uncontested
documentary evidence establishes that a business was in existence at the
relevant time. Rather, the argument which she advances in support of the Tax
Court judge’s decision is that AEF’s business was at a pre-inception state and
the operations were not sufficiently advanced to support a finding that
business was “carried on”. In making this submission, the respondent relies on
the decisions of this Court in Harquail and Boulanger.
[23]
The
difficulty with this submission is that the Tax Court judge did not adopt this
view. Her reasons make no reference to either Harquail or Boulanger
and do not address the question whether the operations of AEF were sufficiently
advanced to allow for the conclusion that it was carrying on business. This is
perhaps explained by the fact that the respondent admitted in her Amended Reply
that:
AEF actively pursued ventures
involving the acquisition of petroleum and natural gas assets in the Western Canadian Sedimentary Basin …
[24]
Given
this admission, it is difficult to see how the Tax Court judge could have found
that the business was at a pre-inception state even if she had wanted to, since
the activity so described is at the core of AEF’s business. Rather, the Tax
Court judge appears to have rendered her decision on the basis that the word
“active” in the expression “active business” must mean something because it is
meant to be descriptive of the word “business” (reasons, para. 17), and while
AEF may have carried on business at the relevant time, it was not carrying on
an “active business” (reasons, para. 18).
[25]
In
assessing the correctness of this approach, it is useful to consider the
relevant definitions. The definition of “small business corporation” refers to “an
active business carried on primarily in Canada”. The expression “active
business” is defined in turn as “any business carried on by a taxpayer” other
than specified exceptions which have no application in the present case.
[26]
It
follows that when the two definitions are read together, the term “active
business” means “any business carried on by the taxpayer”. Contrary to what the
Tax Court judge suggests at paragraph 12 of her reasons, this reading does not
overlook the word “active” in the expression “active business” but simply takes
into account the defined meaning given to these words.
[27]
This
reading is consistent with the legislative history surrounding the words
“active business”. The notion was first introduced into the Act at the time of
the 1972 reform. It was intended to distinguish corporations that generate
income from business activity from those which generate so-called “passive”
income. The purpose was to provide for the application of a more favorable tax
rate on the former (see section 125, RSC 1952, c. 148, as amended by
1970-71-72, c. 63).
[28]
However,
as Sharlow J.A. pointed out in Weaver v. Canada, 2008 FCA 238 at
paragraphs 19 and 20, the experience was not successful. Indeed, the Courts
focused on the fact that by definition, the carrying on of a business requires
a minimum degree of activity with the result that most corporations, if not
all, qualified.
[29]
This
is what brought the legislator to change course in 1984. At that time the
definition of “active business” was first introduced (1984, c. 45, ss. 92(1)
and 40(1)), and has since remained unaltered. The definition effectively
recognizes that any business being carried on is an active business, but rather
carves out of this definition particular businesses such as those which derive
their income from property and do so without the need to employ a certain
number of employees (see the definition of “specified investment business” in
subsection 125(7)).
[30]
The
issue therefore is whether AEF was carrying on an “active business” as defined.
When regard is had to this definition, AEF must be held to qualify if it was
carrying on business at the relevant time. In this regard, the admission by the
respondent that AEF was actively pursuing ventures involving the acquisition of
oil and gas properties necessarily leads to the conclusion that this condition
was met.
[31]
In
my view, the Tax Court judge erred when she held that more was required in
order to conclude that AEF was carrying on an “active business”. As otherwise
it is conceded that AEF had assets and that these assets were used exclusively
in that pursuit – no other use is suggested – it follows that AEF was a “small
business corporation” at the relevant time.
[32]
For
these reasons, I would allow the appeal with costs, set aside the decision of the
Tax Court judge and giving the judgment which she ought to have given, I would
refer the reassessment back to the Minister for reconsideration and
reassessment on the basis that AEF was a “small business corporation” at the
relevant time.
"Marc Noël"
“I
agree
Johanne
Gauthier J.A.”
“I
agree
Johanne Trudel J.A.”
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