Held: The appeal should be allowed.
In the case of a corporate taxpayer, case law has established a rebuttable presumption that income received from or generated by an activity done in pursuit of an object set out in the corporation's constating documents is income from a business. This presumption should apply because appellant had a specific "investment business" object. Indeed, even if that object were not expressed, a broader form of the presumption should apply. Appellant was incorporated to do business, and there was no reason why any income it earned should not be considered as prima facie income from a business.
The question whether appellant's income was from business or property is a matter of fact. In making this determination, the relevant inquiry is not into the taxpayer's business strategy but rather into whether the taxpayer was in fact in the investment business.
"Canadian manufacturing and processing profits", defined in s. 125.1, includes a portion of "all amounts, each of which is the income of the corporation ... from an active business ..." as determined by regulation. Section 5200 of the Regulations defines that portion as being a portion of the corporation's "adjusted business income", which is the amount by which income from an active business carried on in Canada exceeds the loss from an active business carried on in Canada. "Active business" is nowhere restricted to a manufacturing or processing business. If such restriction were intended, Parliament would have to express itself clearly to that effect.
Cases Cited
Considered: Smith v. Anderson (1880), 15 Ch. D. 247; Western Leaseholds Ltd. v. Minister of National Revenue, [1960] S.C.R. 10; M. R. T. Investments Ltd. v. The Queen, [1976] 1 F.C. 126, 75 D.T.C. 5224, aff'd 76 D.T.C. 6158; Gunnar Mining Ltd. v. Minister of National Revenue, [1968] S.C.R. 226; referred to: Wertman v. Minister of National Revenue, 64 D.T.C. 5158; Commissioners of Inland Revenue v. Korean Syndicate, Ltd. (1921), 12 T.C. 181; American Leaf Blending Co. v. Director‑General of Inland Revenue, [1979] A.C. 676; Anderson Logging Co. v. The King, [1925] S.C.R. 45; Queen & Metcalfe Carpark Ltd. v. Minister of National Revenue, [1973] C.T.C. 810, 74 D.T.C. 6007, aff'd [1976] C.T.C. xvi; Fontaine Watch Co. v. Minister of National Revenue, 60 D.T.C. 535; Supreme Theatres Ltd. v. The Queen, 81 D.T.C. 5136; Sutton Lumber and Trading Co. v. Minister of National Revenue, [1953] 2 S.C.R. 77; Burri v. The Queen, 85 D.T.C. 5287; Cragg v. Minister of National Revenue, [1952] Ex. C.R. 40; Minister of National Revenue v. Taylor, [1956‑60] Ex. C.R. 3; Morguard Properties Ltd. v. City of Winnipeg, [1983] 2 S.C.R. 493.
Statutes and Regulations Cited
Act respecting Canadian Marconi Company, S.C. 1935, c. 70, s. 3.
Act to incorporate the Marconi Wireless Telegraph Company of Canada, Limited, S.C. 1903, c. 149.
Business Corporations Act, 1982, S.O. 1982, c. 4, s. 15.
Canada Business Corporations Act, S.C. 1974‑75‑76, c. 33, s. 15.
Income Tax Act, S.C. 1970‑71‑72, c. 63, ss. 125.1, 248(1), as amended.
Income Tax Act, S.C. 1973‑74, c. 29, s. 1.
Income Tax Act, S.C. 1974‑75‑76, c. 26, s. 82.
Income Tax Act, S.C. 1976‑77, c. 4, s. 50.
Income Tax Regulations, SOR/73‑495, s. 5200.
Ontario Companies Act, R.S.O. 1897, c. 191.
Authors Cited
Canada. Minister of National Revenue. Interpretation Bulletin IT‑73R3, "Income from an Active Business", April 15, 1980.
APPEAL from a judgment of the Federal Court of Appeal, 84 D.T.C. 6267, [1984] C.T.C. 319, dismissing an appeal from a judgment of Décary J., 82 D.T.C. 6236, [1982] C.T.C. 277, dismissing an appeal from re‑assessment by the Minister of National Revenue under the Income Tax Act. Appeal allowed.
L. Yves Fortier, Q.C., and Jules Charette, for the appellant.
Ian MacGregor and Gaston Jorré, for the respondent.
The judgment of the Court was delivered by
1. Wilson J.‑‑The issue in this appeal is whether or not the income earned by the appellant during the 1973 to 1976 taxation years from short‑term securities is "income of the corporation for the year from an active business" for the purpose of computing the appellant's "Canadian manufacturing and processing profits" under s. 125.1(1) of the Income Tax Act, R.S.C. 1952, c. 148 (as amended in the relevant years by s. 1 of S.C. 1970‑71‑72, c. 63, s. 1 of S.C. 1973‑74, c. 29, s. 82 of S.C. 1974‑75‑76, c. 26 and s. 50 of S.C. 1976‑77, c. 4). The Crown has conceded that if the income was from business, then it was income from an active business. The issue in this appeal therefore resolves itself into the question whether the income earned by the appellant is income from business or income from another source‑‑in this case, property.
1. The Facts
2. Prior to 1973, the appellant, Canadian Marconi Company ("CMC"), a manufacturer of electronic equipment, owned a broadcasting division. In September 1968, the Canadian Radio‑Television Commission was directed by the Governor General in Council not to grant renewal licences after a certain date to non‑Canadian citizens or ineligible Canadian corporations. This directive was implemented on January 12, 1971. As a result of this new policy, CMC, being foreign controlled, was denied a licence renewal for its broadcasting division by the CRTC and was compelled to sell it.
3. In July 1972, CMC sold its broadcasting division for $18 million in cash. CMC's plan was that the funds from the forced sale would be used to purchase a business similar to or complementary with its electronic equipment manufacturing business. Until it could find such a business to purchase it invested the funds in short‑term securities. These particular investments were chosen in order to earn interest income while maintaining a degree of liquidity in case the opportunity to buy a suitable business suddenly arose.
4. Throughout the 1973 to 1976 period, the funds remained invested in short‑term interest‑bearing securities but considerable energy and effort was expended by CMC in order to obtain a maximum return. About twenty per cent of the working hours of the senior company officer placed in charge of the investments was taken up in the day‑to‑day management of these investments. Every Friday, this officer carefully reviewed all transactions made during the week and decided on the investment strategy for the following week. At any one time there were as many as twelve employees involved in the management of the investments. The extent of the activity of this staff in managing the investments and their vigilance in earning a maximum return from the funds is evident from the numerous purchases completed each year (201 in 1973, 218 in 1974, 241 in 1975 and 381 in 1976), the variation in the lengths of terms of deposits made and securities purchased according to the trend of market interest rates and the fact that seldom would the staff reinvest the funds realized from a sale in the same instrument. Finally, the funds available for investment and actually invested represented roughly one‑half of CMC's total assets during the 1973 to 1976 period and the income earned from the investments constituted a significant percentage of the total income earned by CMC in each of the years in question‑‑21.4% in 1973, 52.7% in 1974, 35.4% in 1975 and 31.2% in 1976.
5. For each of the taxation years in issue CMC, relying on s. 125.1(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, claimed a tax credit in respect of a portion of the interest earned on its investments. It was of the view that this interest was part of its "Canadian manufacturing and processing profits", a portion of which is eligible for the deduction under that section. "Canadian manufacturing and processing profits" are defined in s. 125.1(3)(a) as such portion of the aggregate of "all amounts each of which is the income of the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose by regulation". CMC was of the view that the interest received from short‑term investments entered into the computation of its "manufacturing and processing profits" because the interest was income from an active business. The Minister, in his re‑assessments, was of the view that the interest income was income from property, not income from an active business.
2. The Courts Below
6. CMC appealed the Minister's re‑assessments to the Federal Court‑‑Trial Divison. Décary J. dismissed the appeal (82 D.T.C. 6236) and held that the income received by the plaintiff was income from property. Even if it were income from an active business he still would have dismissed CMC's appeal on the ground that in order to constitute "Canadian manufacturing and processing profits" under s. 125.1(3)(a) the business must be a manufacturing and processing business. CMC's further appeal to the Federal Court of Appeal (84 D.T.C. 6267) was also dismissed. Ryan J. for the Court held that the interest income could not be considered to be income from an investment business because of what, in his view, were "overriding considerations". I shall deal in detail with these considerations later in these reasons. Leave to appeal to this Court was granted on December 17, 1984.
3. The Issue
7. The distinction between income from a business and income from property is a difficult one to draw but it is one which the Act compels us to make. There are two reasons for the difficulty. First, the terms "business" and "property" are broadly and loosely defined in s. 248(1) of the Income Tax Act. As a consequence the definitions on a fair reading can be construed in such a way as to overlap. Second, persons or corporations generally engaged in trading‑type activity often use property as a means of earning income. On first reflection this sort of income could realistically be considered either business income or property income. The observation of Thurlow J. (as he then was) in Wertman v. Minister of National Revenue, 64 D.T.C. 5158 (Ex. Ct.), at p. 5167, that cases are "readily conceivable where particular income may be accurately described as income from property and just as accurately regarded as income from a business" is frequently apposite. The courts have handled the difficult task of deciding whether a particular receipt is business income or property income by applying certain set criteria or indicia of trading activity and, in the case of a corporate taxpayer, by applying a presumption in favour of the characterization of its income as income from a business. I shall examine these in reverse order.
8. It is frequently stated in both the English and Canadian case law that there is in the case of a corporate taxpayer a rebuttable presumption that income received from or generated by an activity done in pursuit of an object set out in the corporation's constating documents is income from a business. This presumption appears to have originated in a comment made by Jessel M.R. in Smith v. Anderson (1880), 15 Ch. D. 247. There, the Master of the Rolls said at pp. 260‑61:
You cannot acquire gain by means of a company except by carrying on some business or other, and I have no doubt if any one formed a company or association for the purpose of acquiring gain, he must form it for the purpose of carrying on a business by which gain is to be obtained.
...
When you come to an association or company formed for a purpose, you say at once that it is a business, because there you have that from which you would infer continuity; it is formed to do that and nothing else, and, therefore, at once you would say that the company carried on a business. So in the ordinary case of investments, a man who has money to invest, invests his money and he may occasionally sell the investments and buy others, but he is not carrying on a business. But when you have an association formed, or where an individual makes it his continuous occupation‑‑the business of his life to buy and sell securities‑‑he is called a stock‑jobber or share‑jobber, and nobody doubts for a moment that he is carrying on business. So, if a company is formed for doing the very same thing, that is for investing money belonging to persons in the purchase of stocks and shares, and changing them from time to time, either with limited or unlimited powers, I should say there can be no question that they are carrying on a business, whether you call it a business of investment or a business of dealing in securities, or, as in the case before me, both the business of investment and the business of dealing in securities.
The presumption was applied again for the purpose of distinguishing between business and other income in Commissioners of Inland Revenue v. Korean Syndicate, Ltd. (1921), 12 T.C. 181 (C.A.) The Court of Appeal considered that the fact that the taxpayer was a company in existence for some particular purpose "is a matter to be considered when you come to decide whether doing that is carrying on a business or not" (at p. 202). Most recently, in England, the presumption appears to have been extended to corporations with a profit‑making purpose and not just corporations whose precise objects are set out in their constating documents. In American Leaf Blending Co. v. Director‑General of Inland Revenue, [1979] A.C. 676 (P.C.), Lord Diplock stated that "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" (at p. 684).
9. In Canada, the presumption was employed by Duff J. (as he then was) in the case of Anderson Logging Co. v. The King, [1925] S.C.R. 45. Duff J., in a passage often cited by subsequent authority, said at p. 56:
The sole raison d'être of a public company is to have a business and to carry it on. If the transaction in question belongs to a class of profit making operations contemplated by the memorandum of association, prima facie, at all events, the profit derived from it is a profit derived from the business of the company.
The existence of the presumption was also noted by Locke J. in Western Leaseholds Ltd. v. Minister of National Revenue, [1960] S.C.R. 10 and it has been applied in many subsequent cases: see, for example, Queen & Metcalfe Carpark Ltd. v. Minister of National Revenue, [1973] C.T.C. 810, 74 D.T.C. 6007 (F.C.T.D.), aff'd [1976] C.T.C. xvi (F.C.A.); Fontaine Watch Co. v. Minister of National Revenue, 60 D.T.C. 535 (T.A.B.); M. R. T. Investments Ltd. v. The Queen, [1976] 1 F.C. 126, 75 D.T.C. 5224, aff'd 76 D.T.C. 6158 (F.C.A.) Indeed, although strictly speaking not relevant to the disposition of this appeal, it is interesting to note that Revenue Canada itself affirms the existence of the rebuttable presumption: see Interpretation Bulletin IT‑73R3, paragraph 2. The case law thus provides ample support for the existence of the presumption and, in my view, rightly so. An inference that income is from a business seems to be an eminently logical one to draw when a company derives income from a business activity in which it is expressly empowered to engage.
10. The traditional expression of the presumption restricts its application to corporations whose corporate objects are expressly set out in their constating documents. Corporations formed under the Canada Business Corporations Act, S.C. 1974‑75‑76, c. 33, the Ontario Business Corporations Act, 1982, S.O. 1982, c. 4, and similar legislation do not need to list their corporate objects. These statutes have simply provided that corporations have the capacity and the rights, powers and privileges of a natural person (Canadian Act, s. 15; Ontario Act, s. 15). Accordingly, an issue may be raised some day as to whether the presumption applies to such corporations (or, more particularly, whether the scope of the presumption should be extended as Lord Diplock has done in the American Leaf Blending Co. case, supra) but this issue does not arise for consideration in this appeal since CMC, being incorporated in 1902 under The Ontario Companies Act, R.S.O. 1897, c. 191, and continued in 1903 under a special federal statute (An Act to incorporate the Marconi Wireless Telegraph Company of Canada, Limited, S.C. 1903, c. 149) was required to state its objects. Section 21 of this federal statute was amended (by An Act respecting Canadian Marconi Company, S.C. 1935, c. 70, s. 3), to provide that CMC:
... may take or otherwise acquire and hold shares, debentures or other securities of any other company having objects altogether or in part similar to those of the Company, or carrying on any business capable of being conducted so as, directly or indirectly, to benefit the Company, and to sell or otherwise deal with the same.
Thus, CMC had a specific "investment business" object and the traditional rebuttable presumption, in my view, applies in favour of its investment income's being characterized as income from a business. Indeed, even if CMC's investment objects were not expressed, I believe that a broader form of the presumption should apply. In a general sense CMC was incorporated to earn income by doing business. There is no reason why any income earned by it should not be considered as prima facie income from a business so long as it is recognized that the presumption is a rebuttable one. This approach has commended itself to courts even where no express object was contained in the constating documents: see, for example, Supreme Theatres Ltd. v. The Queen, 81 D.T.C. 5136 (F.C.T.D.), and Fontaine Watch Co. v. Minister of National Revenue, supra.
11. As I have indicated, the presumption that income earned by a corporate taxpayer in the exercise of its duly authorized objects is income from a business is rebuttable. For example, in Sutton Lumber and Trading Co. v. Minister of National Revenue, [1953] 2 S.C.R. 77, the appellant successfully rebutted the presumption and in Burri v. The Queen, 85 D.T.C. 5287 (F.C.T.D.), Strayer J., although questioning the existence of the presumption (pp. 5289‑90), held that if such existed it was rebutted on the facts before him. The question whether particular income is income from business or property remains a question of fact in every case. However, the fact that a particular taxpayer is a corporation is a very relevant matter to be considered because of the existence of the presumption and its implications in terms of the evidentiary burden resting on the appellant. The Federal Court of Appeal does not appear to me to have given adequate consideration to this aspect of the case, namely that CMC was a company with an investment object in its constating document.
12. The evidence at trial was far from offsetting the effect of the presumption; indeed, if anything, it tended to support it. It is trite law that the characterization of income as income from a business or income from property must be made from an examination of the taxpayer's whole course of conduct viewed in the light of surrounding circumstances: see Cragg v. Minister of National Revenue, [1952] Ex. C.R. 40, per Thorson P. at p. 46. In following this method courts have examined the number of transactions, their volume, their frequency, the turnover of the investments and the nature of the investments themselves. In this case the Federal Court of Appeal noted the extensive activities of CMC's employees in purchasing short‑term investments, the large number and high value of those transactions, the high proportion which the interest earned bore to the total income of the company and the high proportion which the total value of the investments bore to the total value of CMC's assets. But it perceived a number of considerations which it thought were "overriding", namely:
(1) the funds were derived from the sale of the broadcasting division and were set aside for the purchase of new capital assets;
(2) the considerable activity involved in purchasing the investments were "a necessary consequence of the need to hold investments in liquid form, in the form of paper that could be quickly converted into cash"; and
(3) few employees were involved and not a great deal of staff time was expended.
13. I shall deal with the first two together since they are both premised on the relevance of the taxpayer's business strategy. The assertion is, as I understand it, that the taxpayer's business strategy was to hold these funds as a temporary investment and that any investment activity was necessarily a result of that business strategy. But is the taxpayer's business strategy relevant to the issue before us? It seems to me that it is not.
14. The commercial reality in this case is that the taxpayer, perhaps unwillingly and contrary to its business strategy, has been compelled to enter the investment business rather than the electronic manufacturing or broadcasting business. The fact that the taxpayer might prefer or hope to be in the manufacturing business and not the investment business does not, however, appear to me to be relevant. The relevant inquiry is whether in fact he is in the investment business.
15. In Western Leaseholds Ltd. v. Minister of National Revenue, supra, the issue was whether the proceeds from sales of mineral rights by the taxpaying corporation were business income. The Crown argued that the proceeds were not business income and in support of its position cited the fact that the corporation intended at the outset that its main business should be in the production and sale of oil, not transactions in mineral rights. The plan was to use the proceeds of the transactions in mineral rights to finance the production of oil. Locke J. for the Court held that this intention was an "irrelevant circumstance in determining whether what was done was in truth the carrying on of a business for the purpose of making profit" (at p. 24). Similarly, the fact that the taxpayer here wanted his investments to be kept as liquid as possible so that, if the right opportunity arose, it could wind up its investment business and put its funds into that new business opportunity, does not alter the fact that the extent of the taxpayer's investment activity in the meantime was such as to constitute the earnings from it income from a business. In Gunnar Mining Ltd. v. Minister of National Revenue, [1968] S.C.R. 226, where the characterization of interest receipts from short‑term investments was in issue, Spence J. clearly thought that the taxpayer's objective of maintaining liquidity was irrelevant. At page 233 he stated:
... during the tax exempt period the appellant was operating two businesses‑‑firstly, a mining business, and secondly, an investment business, and the fact that its purpose in operating the second business was so that it might accumulate funds in a readily realizable form with which it could pay off the 5 per cent sinking fund debentures if they became due makes it nonetheless the operation of a second business.
I would respectfully adopt the reasoning of Locke J. and Spence J. in these two cases.
16. The Federal Court of Appeal was also influenced by its finding that few employees were involved in the company's investment activity and not a great deal of staff time was expended. While these are undoubtedly relevant considerations, it is important not to give them inordinate weight. In M. R. T. Investments Ltd. v. The Queen, supra, two of the three corporate taxpayers who were engaged in lending money by way of mortgages on real estate were held to be earning income from a business, despite the fact that the three companies were not paying salaries or rent for office space and despite the fact that they did not even have employees working for them. The presumption which I have discussed above and the day‑to‑day intervention of the officers and directors of the company in the company's business were enough to characterize the income as business income. It has also been repeatedly stressed that a large organization is not required for an "adventure or concern in the nature of trade": see, for example, Minister of National Revenue v. Taylor, [1956‑60] Ex. C.R. 3.
17. It seems to me, therefore, that two of the "overriding considerations" cited by the Court of Appeal are not relevant considerations in law. The third, while relevant, is not of sufficient weight to offset the effect of the presumption and the large scale investment activity of CMC during the years in question.
18. Counsel for the Crown submitted that the effect of allowing CMC's appeal would be that a tax credit intended to reduce the tax imposed on manufacturing and processing profits would be granted on income earned by means which in no way involved manufacturing or processing. But, as I read the Act, this is clearly permitted. Under s. 125.1(3) "Canadian manufacturing and processing profits" are defined as including a portion of "all amounts, each of which is the income of the corporation for the year from an active business ..." as is determined by rules prescribed by regulation. The regulation (s. 5200 of the Income Tax Regulations, SOR Cons. 1955, 1872, as amended by SOR/73‑495) defines that portion as being a portion of the corporation's "adjusted business income", defined in s. 5202 of the Regulations as the amount by which income from an active business carried on in Canada exceeds the loss from an active business carried on in Canada. "Active business" is nowhere restricted to a manufacturing or processing business. If Parliament intended such a restriction, it must express itself clearly to that effect. In Morguard Properties Ltd. v. City of Winnipeg, [1983] 2 S.C.R. 493, Estey J., for the Court, stated at p. 509:
... the courts require that, in order to adversely affect a citizen's right, whether as a taxpayer or otherwise, the Legislature must do so expressly. Truncation of such rights may be legislatively unintended or even accidental, but the courts must look for express language in the statute before concluding that these rights have been reduced.
I would adopt and apply this same principle of construction to this case.
4. Disposition
19. For these reasons I would allow the appeal and refer the matter back to the Minister of National Revenue for the appropriate re‑assessments for the 1973, 1974, 1975 and l976 taxation years. I would allow the appellant its costs throughout.
Appeal allowed with costs
Solicitors for the appellant: Ogilvy, Renault, Montréal.
Solicitor for the respondent: Frank Iacobucci, Ottawa.
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