The Queen v. Brown Boveri Howden Inc., 83 DTC 5319, [1983] CTC 301 (FCA)

Le Dain, J:—This is an appeal from a judgment of the Trial Division allowing an appeal from income tax reassessments in respect of the respondent’s 1975 and 1977 taxation years.

The issue is whether the interest earned on short term notes, in which the respondent invested the amount from time to time by which the progress payments received under manufacturing contracts exceeded current cash requirements, was Canadian investment income for purposes of dividend refund under section 129 of the Income Tax Act, RSC 1952, c 148, as amended by SC 1970-71-72, c 63, s 1, the relevant provisions of which are as follows:

129. (1) Where a corporation was, at the end of any taxation year, a private corporation, if a return of its income for the year has been made within 4 years from the end of the year the Minister

(a) may, upon mailing the notice of assessment for the year, refund without application therefore an amount (in this Act referred to as its “dividend refund” for the year) equal to the lesser of

(i) / of all taxable dividends paid by it in the year on shares of its capital stock, and

(ii) its refundable dividend tax on hand at the end of the year; and

(b) shall make such a refund after mailing the notice of assessment if application therefor has been made in writing by the corporation within 4 years from the end of the year.

(2) . ..

(3) In this section, “refundable dividend tax on hand” of a private corporation at the end of any particular taxation year means the aggregate of amounts each of which is an amount in respect of any taxation year commencing after it last became a private corporation and ending not later than the end of the particular taxation year, equal to the least of

(a) 25% of the amount, if any, by which the aggregate of its Canadian investment income for the year and its foreign investment income for the year exceeds the amount deductible under paragraph 111(1)(b) from the corporation’s income for the year,

(b) the amount, if any, by which the aggregate of

(i) 25% of the corportion’s Canadian investment income for the year, and

(ii) the amount, if any, by which 40% of the corporation’s foreign investment income for the year exceeds the aggregate of amounts deducted under subsection 126(1) from the tax for the year otherwise payable by it under this Part,

exceeds 25% of the amount deductible under paragraph 111 (1 )(b) from the corporation’s income for the year,

(c) 25% of the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregate of

(i) 4 times the amount, if any, deductible under section 125,

(ii) % of the aggregate of amounts deducted under subsection 126(1 ) and

(iii) 2 times the aggregate of amounts deducted under subsection 126(2)

from the tax for the year otherwise payable by it under this Part, and

(d) the amount of the tax for the year otherwise payable by it under this Part,

plus the aggregate of the taxes under Part IV payable by the corporation for the particular taxation year and any previous taxation years ending after it last became a private corporation, and minus the aggregate of the corporation’s dividend refunds for taxation years ending after it last became a private corporation and before the particular taxation year.

(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

(i) the amount, if any, by which the aggregate of such of the corporation’s taxable capital gains for the year from dispositions of property as may reasonably be considered to be income from sources in Canada exceeds the aggregate of such of the corporation’s allowable capital losses for the year from dispositions of property as may reasonably be considered to be losses from sources in Canada,

(ii) all amounts each of which is the corporation’s income for the year (other than exempt income or any dividend the amount of which was deductible under section 112 from its income for the year) from a source in Canada that is a property (other than a property used or held by the corporation in the year in the course of carrying on a business), determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that property,

(iii) all amounts each of which is the corporation’s income for the year (other than exempt income) from a source in Canada that is a business other than an active business, determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent 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; and

The respondent, Brown Boveri Howden Inc., was incorporated under the laws of Canada and is a private corporation within the meaning of subsection 89(1) of the Income Tax Act. It was incorporated as James Howden & Company (Canada) Limited, was named Howden Parsons Ltd. during the period that is relevant to the appeal, and was Howden Canada Limited when the action was instituted in the Trial Division. It is engaged in the manufacture and sale of turbo generating equipment, mechanical draft fans and other items of heavy equipment such as air preheaters, blowers, compres- sors, dust collectors, industrial fans, gas washing plant, heat exchangers and valves. Its business during the taxation years in question was described as the manufacture of air and gas handling equipment, the manufacture of steam turbines and the installation of turbine generators. The respondent has only a few contracts at any particular time but they are for large amounts in the multi-million dollar range and they involve relatively long production cycles, which, in the case of air and gas handling equipment run from four to six months, and in the case of turbine generators from four to five years. For this reason it is the normal practice in the respondent’s business to require progress payments, and virtually all of the respondent’s contracts provide for such payments.

During the period in question the respondent placed the total amount by which such progress payments exceeded its current cash requirements for operating costs, capital expenditures and dividends in short term notes, usually for 30 days and for all but a short time with the Royal Bank of Canada. At the end of each 30-day period it would determine how much, if any, of the total amount in such notes was required to meet the cash requirements for the next 30-day period and reinvest the surplus in new notes. In 1976 and 1977 the amount by which the progress payments exceeded current cash requirements was unusually large because in 1976 Ontario Hydro, on its contract with the respondent for the Pickering Power Station, delayed the commencement of manufacture for a period of some six to nine months but continued to make progress payments according to the original payment schedule.

The amounts of interest in issue in respect of the 1975 and 1977 taxation years are respectively $136,602 and $1,071,045. In its amended return for 1975 the respondent claimed refundable dividend tax on hand for purposes of section 129 in the amount of $60,796. In his reassessment in respect of the 1975 taxation year mailed on December 27, 1978 the Minister reduced the amount of refundable dividend tax on hand at the end of the year to $19,184.75, and denied any dividend refund in respect of the interest earned on the short term notes. In his reassessment in respect of the 1977 taxation year mailed on July 25, 1978 the Minister also denied any refundable dividend tax on hand and any dividend refund in respect of the interest on the short term notes.

The respondent’s appeal from these reassessments was allowed by the Trial Division on the ground that the case was indistinguishable from that of The Queen v Marsh <& McLennan, Limited, [1982] 2 FC 131; [1981] CTC 410; 81 DTC 5307, in which the Trial Division had held that the interest earned by an insurance broker on the short term deposit of unremitted premiums — that is, the total amount from time to time of premiums (after deduction of the broker’s commission) that had been collected from insured but had not yet been remitted to the insurers — was Canadian investment income within the meaning of section 129. The judgment of the Trial Division in Marsh & McLennan was reversed by a majority of this Court on April 11,1983 (Court File A-675-81). The common ground of tne majority judgment was that the interest was not Canadian investment income because it was from a source that was property used or held by the corporation in the carrying on of its business within the meaning of the exclusion in subparagraph (ii) of paragraph 129(4)(a) of the Act.

In my opinion the same conclusion must be reached with respect to the interest earned on the short term notes in the present case. The total amount from time to time of progress payments in excess of current cash requirements was property used or held by the respondent in the carrying on of its business. It was money that was committed to the carrying on of the business.

For these reasons I would allow the appeal, set aside the judgment of the Trial Division and restore the Minister’s reassessments, with costs in both the Appeal and Trial Divisions.