King George Hotels Ltd. v. The Queen, 81 DTC 5082, [1981] CTC 87 (FCA)

Urie, J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s actions with respect to income tax reassessments made by the Minister of National Revenue in respect of the appellant’s 1973, 1974, 1975 and 1976 taxation years. The trial of the action was held at the same time and on the basis of common evidence as Cavalier Enterprises Ltd v Her Majesty the Queen. The appeal from the trial judgment in that case (Appeal Division #A-347-80) was argued together with this appeal.

Counsel for the appellant conceded at the outset, as I understood him, that the appellant carried on, inter alia, the business of property management and so decribed its business in its income tax returns. However, to the extent of its involvement in that aspect of its business, as distinct from its other activities, the business was not “an active business” in the taxation years at issue, within the meaning of that term as it is used in subsection 129(4) of the Income Tax Act. It was agreed by counsel that the sole issue in this appeal was whether or not the income derived from its property management was from an active business or from a business that was not an active business.

Section 129, generally speaking, pertains to the taxation of investment income earned by a private corporation, appellant’s counsel conceded that the appellant was, during the taxation years at issue, a Canadian controlled private corporation as defined by subsection 248(1). It was an “associated company” of Cavalier Enterprises Ltd within the meaning of that term in the Act. Subsection (3) of section 129 is designed to permit a private corporation which paid income tax on investment type income to recover a portion or all of that tax at such time as it pays taxable dividends to its shareholders. This is achieved by determining, pursuant to subsection (3), the corporation’s “refundable dividend tax on hand”. Subsection (4) defines, for the purpose of subsection (3), the corporation’s Canadian investment income. The relevant portion of subsection (4), for purposes of this appeal reads as follows:

(4) In subsection (3)

(a) “Canadian investment income” of a corporation for a taxation year means the amount, if any, by which the aggregate of . . .

(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 that 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.

It was appellant’s contention that the income which is the subject of the reassessments for the taxation years under review, was taxable under subparagraph 129(4)(a)(iii) since it was, in counsel’s view, income from “a busi- ness other than an active business”. This argument was advanced at trial and, after examining all of the relevant authorities, the learned trial judge concluded that whether the business from which the income in issue was derived was from an active or an inactive busienss was a question of fact in the determination of which regard must be had to all of the circumstances in each case. In reaching that conclusion, he relied on the judgment of this court in Her Majesty the Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DIC 6156. After carefully reviewing and analyzing all of the evidence he found that the income referred to in the reassessments was derived from an active rather than an inactive business, and it remained such when remitted to Cavalier by virtue of subsection 129(6) of the Act which reads as follows:

(6) Where any particular amount paid or payable to a corporation (in this subsection referred to as the “recipient corporation”) by another corporation (in this subsection referred to as the “associated corporation”) with which the recipient corporation was associated in any particular taxation year commencing after 1972, would otherwise be included in computing the income or loss, as the case may be, of the recipient corporation for the particular year from a source that is property or a business other than an active business, the following rules apply:

(a) for the purposes of subsection (4), in computing that income or loss, as the case may be,

(i) there shall not be included any portion (in this subsection referred to as the “deductible portion”) of the particular amount that was or may be deductible in computing the income or loss, as the case may be, of the associated corporation for any taxation year from an active business carried on by it in Canada, and

(ii) no deduction shall be made in respect of any outlay or expense, to the extent that that outlay or expense may reassonably be regarded as having been made or incurred by the recipient corporation for the purposes of gaining or producing the deductible portion; and

(b) for the purposes of this subsection and section 125,

(i) the deductible portion shall be deemed to be income of the recipient corporation for the particular year from carrying on an active business In Canada, and

(ii) any outlay or expense, to the extent described in subparagraph (a)(ii), shall be deemed to have been made or incurred by the recipient corporation for the purpose of gaining or producing that income.

In so concluding, he found that the circumstances were more nearly in line with those which prevailed in Her Majesty the Queen v Cadboro Bay Holdings, Ltd, [1977] CTC 186; 77 DTC 5115, than the case upon which appellant relied as being factually more akin to the case at bar, namely, Transregent Holdings Ltd v MNR, [1980] CTC 2221; 80 DTC 1212.

No useful purpose would be served by my reviewing the evidence. The trial judge did that, as I have already pointed out. Suffice it to say that I have not been persuaded that the learned trial judge erred in his appreciation of the facts and of the evidence in concluding that the activities of the appellant were sufficient to enable the income derived from those activities to be described as being income from an active business. There was certainly evidence upon which he could so conclude and this court would not be justified, therefore, in interfering with that finding.

I hold this opinion notwithstanding the argument vigorously advanced in this court, but not apparently in the Trial Division, that all of the earlier cases dealing with whether or not a business in an active or inactive one arose out of the application of section 125 of the Act, a section dealing with tax relief for small business corporations.

As does section 129, the section applies to Canadian controlled, private corporations. Paragraph 125(1 )(a) reads in part as follows:

1. There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount equal to 25% of the least of

(a) the amount, if any, by which

(i) 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, exceeds . . . (emphasis added)

Appellant’s counsel contrasted the use of the words “carried on” in this Subsection with the words “from a source, in Canada . . . ” used in subparagraph 129(4)(a)(iii). In counsel’s view by the words “carried on” it is implied that the taxpayer will actively conduct such business and will not do so through another corporation or person. On the other hand, it was said as a result of the use of the word “source” in the singular in subparagraph 129(4)(a)(iii) one is required to look at each source of income separately. Further, counsel said, the source must be from a property or business other than an active business. When income is derived from an active business it is derived from the “carrying on” of the business not the passive receipt of income the source of which is property or an inactive business. Thus, in his view, the role of the appellant herein in respect of property management, which largely consists of the receipt of rents from commercial leases, is essentially a passive role and thus the income derived from engaging in that role is from a source which is not an active business.

I cannot agree with those submissions. Section 125 is part of a scheme designed to assist small business corporations actively involved in operating businesses. Section 129 on the other hand is, as previously observed, designed to ensure that by the use of private Canadian-controlled corporations, taxpayers can obtain the same after-tax return on income distributed through such corporations as dividends as they would have if they had received the income from the investments directly. There are, thus, various sources of income for such corporations but income derived from an active business is excluded — a situation diametrically opposite to that encompassed by section 125. Therefore, in ascertaining the applicability of each section the same question must be asked viz. is the income under consideration derived from an active or inactive business? Nothing, in my view, turns on the use of the words “carried on” in section 125 or of the word “source” in section 129 in the determination of this issue and the finding of fact of the trial judge that appellant’s business is an active one is not affected by his failure to consider the difference in language between the two sections referred to by counsel.

Before disposing of the appeal I think that it should be stressed that whether a business is an active or inactive one is, as earlier pointed out on the authority of the Rockmore case, supra, one of fact dependent on the circumstances of each case. That being so, it is neither possible nor desirable to lay down any rule or principle applicable in every case. It cannot be said, therefore, in my view, that income from “other than an active business” necessarily means that derived from a business that “is in an absolute state of suspension” or one “devoid of any quantum of business activity” as has been said in earlier decisions in the Trial Division. In any given case, the business may be of that kind but whether or not it is, is not necessarily determinitive of the issue, the resolution of which depends on the fact finder’s view of the true nature of the business based on the facts in the particular case. The quantum of activity may well vary from case to case but still it is necessary for the court to weigh all of the evidence to characterize the quality of the particular business.

For all of the foregoing reasons, I would dismiss the appeal with costs. By reason of my proposed disposition of the appeal it is unnecessary to deal with the respondent’s argument as to the lack of jurisdiction of the court in respect of the appeal from the 1976 reassessment.