Canadian Marconi Co. v. The Queen, 84 DTC 6267, [1984] CTC 319 (FCA), rev'd 86 DTC 6526, [1986] 2 CTC 465, [1986] 2 SCR 522

Ryan, J:—This is an appeal from a judgment of the Trial Division dismissing an appeal, brought by the appellant, Canadian Marconi Company, from income tax reassessments for its 1973, 1974, 1975 and 1976 taxation years.

During the taxation years in question a corporate taxpayer was entitled, by virtue of section 125.1 of the Income Tax Act, to make certain deductions from the tax otherwise payable by it. These deductions could be claimed in respect of “manufacturing and processing profits”.

Canadian Marconi Company is a manufacturer of electronic equipment. Before 1973, it also had a broadcasting division, which operated a radio station and a television station. Canadian Marconi was foreign controlled. Because of this, as a consequence of a change in government policy (and for other reasons), it was obliged to sell its broadcasting division in 1973. It received the purchase price in cash. The company sought to use these funds to acquire a business similar to its electronic equipment manufacturing business. In the meantime, it invested the proceeds of the sale in short-term interest bearing securities so as to be in a position to buy another business when an opportunity arose. During each of the taxation years in question, it sought to deduct from its tax an amount in respect of the interest it received on its short-term investments; it claimed that these deductions were permitted by section 125.1.

Its right to make the deductions depended, in part at least, on the interest received being income from “an active business”. The Minister, in his reassessments, took the position that the interest lacked this character; on behalf of the Crown, it was submitted both to the Trial Division and to us that the income was income from “property”, not income from a “business”. The Crown succeeded in the Trial Division. This appeal turns on that issue.

It is clear from subsection 125.1(1) that a corporate taxpayer may make a deduction in respect of its “Canadian manufacturing and processing profits for the year”. The wording of the subsection is complex, but nothing really turns on these complexities; I will therefore merely quote the subsection in a footnote.* [1]

The term “Canadian manufacturing and processing profits” is defined in paragraph 125. l(3)(a):

125.1 (3) Inthis section,

(a) “Canadian manufacturing and processing profits” of a corportion for a taxation year means 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 presribed for that purpose by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease;

In this appeal, the critical words are: “.. .income of the corporation for the year from an active business carried on in Canada. . .”.

Rules have been prescribed for the purposes of paragraph 125. l(3)(a). Regulation 5200, prescribed pursuant to the paragraph , reads:

5200. Subject to section 5201, for the purpose of paragraph 125. l(3)(a) of the Act, “Canadian manufacturing and processing profits” of a corporation for a taxation year are hereby prescribed to be that proportion of the corporation’s adjusted business income for the year that

(a) the aggregate of its cost of manufacturing and processing capital for the year and its cost of manufacturing and processing labour for the year

is of

(b) the aggregate of its cost of capital for the year and its cost of labour for the year.

The term “adjusted business income”, referred to in regulation 5200, is defined by regulation 5202:

5202. In this Part, except as otherwise provided in section 5203 or 5204,

“adjusted business income” of a corporation for a taxation year means the amounts, if any, by which

(a) 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

(b) the aggregate of all amounts each of which is the loss of the corporation for the year from an active business carried on in Canada;

It follows from these provisions that the interest which Canadian Marconi Company received from the short-term investments can enter into the computation of the company’s Canadian manufacturing and processing profits only if the interest is income from an active business.

It may be worth noting that, to enter into the computation, income need not itself be income from a manufacturing or processing source; it is enough that the income be from an active business. The amount of the deduction does, however, depend, to put it rather generally, on the proportion which manufacturing and processing capital and labour costs bear to total capital and labour costs.

I would note that counsel for the Crown conceded that, if in this case the income in question, the interest income, was from a business, the business was

(b) 5% of the lesser of

(i) the corporation’s Canadian manufacturing and processing profits for the year, and

(11) the least of the amounts determined under paragraphs 125(l)(a) to (d) in respect of the corporation for the year;

except that in applying this section for a taxation year after the 1973 taxation year, the reference in paragraph (a) to “9%” shall be read as a reference to “8%” for the 1974 taxation year, “7%” for the 1975 taxation year, and “6%” for the 1976 and subsequent taxation years.

an “active business”. This narrows the issue to the question whether the income had its source in “‘business”’ or in “property”.

The Queen v Rockmore Investments Ltd ([1976] 2 FC 428; [1976] CTC 291; 76 DTC 6156) was a case having to do with the small business deduction provided by section 125 of the Income Tax Act. The case turned on whether certain income was income from an “active business carried on in Canada”. In his reasons for judgment, Chief Justice Jackett said at 430, 431 [293]:

In considering whether there is an “active business” for the purposes of Part I, the first step is to decide whether there is a “business” within the meaning of that word. Section 248 provides that that word, when used in the Income Tax Act, includes ‘‘a profession, calling, trade, manufacture or undertaking of any kind whatever” and includes “an adventure or concern in the nature of trade” but does not include “an office or employment”. Furthermore, the contrast in section 3(a) of the Act between “business” and “property” as sources of income makes it clear, I think, that a line must be drawn, for the purposes of the Act, between mere investment in property (including mortgages) for the acquisition of income from that property and an activity or activities that constitute ‘‘an adventure or concern in the nature of trade” or a “trade” in the sense of those expressions in section 248 (supra). Apart from these provisions, I know of no special considerations to be taken into account from a legal point of view in deciding whether an activity or situation constitutes the carrying on of a business for the purposes of Part I of the Income Tax Act. Subject thereto, as I understand it, each problem that arises as to whether a business is or was being carried on must be solved as a question of fact having regard to the circumstances of the particular case.

Before Canadian Marconi Company succeeded in selling its broadcasting division to the final purchaser, it had received a $4 million non-refundable deposit from another prospective purchaser. When that sale did not go through, the company retained the $4 million deposit. The purchase price of the division, received by the company during the 1973 taxation year, was approximately $18 million, paid in cash. The forfeiture of the deposit and the proceeds of the sale constituted a fund which made it possible for the company to invest substantial funds in short-term interest bearing securities while it was seeking to buy another business. The position taken by the Minister was that the securities which were purchased, to the extent of $20 million, were not used as part of Canadian Marconi’s working capital. It appears that the portion of the short-term securities in excess of $20 million was used as working capital. The Minister, in making his reassessments, assumed that the total of the short-term interest bearing securities that were not used as part of working capital never fell below $20 million. He assumed that the amount of the interest income arising from the securities not used as working capital was:

$ 723,000 in 1973,

$1,408,000 in 1974,

$1,776,000 in 1975, and

$1,608,000 in 1976.

The reassessments were made on the basis of these assumptions.

In support of his submission that the interest was income from a business, counsel relied in part on the number and on the value of transactions in shortterm securities during each of the four taxation years:

Counsel for the respondent observed with respect to these figures that the various transactions enumerated involved funds which, at least in some cases, were reinvested several times during a yearly period. Thus the amount of funds invested at any particular time would be substantially less than the total dollar value of the transactions which took place during the year.

Counsel for the appellant also relied on the proportion which the interest income from the short-term securities bore to the total income of the corpora- tion before taxes:

Counsel for the Crown noted, with respect to the “investment income” mentioned in the table, that the figures given are for the interest derived from all the short-term securities held and not just for the interest in issue in this appeal, the interest on securities up to a value of $20,000,000. Even allowing for this, however, the percentages were substantial.

Counsel for the company also submitted the following figures:

I would observe, once again, that the reassessments were based on an assumed investment of $20,000,000 in short-term funds. The figures for “funds invested” thus overstate the amount of the funds from which the interest in issue was derived. The “funds invested” nonetheless comprised a very significant part of the assets of the company.

In support of its submission that the income was derived from business, Canadian Marconi also relied on the time and effort expended by its employees on investing and re-investing the funds in short-term securities.

During most of the four-year period, Mr Philip Wheatley was in charge of the fund. At the time of giving evidence, he was senior vice-president and chief financial officer of Canadian Marconi. He has a degree in economics from the University of London and is a member of The Institute of Cost and Management Accounts of England. He joined the company in April 1973 as vice- president of finance and as treasurer. In May, 1974, his title was changed to senior vice-president and chief financial officer. He described himself as one of “the three members of the senior management of the company”.

Mr Wheatley had approximately 200 employees under his direction, 100 in the Treasurer’s Department and in the Comptroller’s Department, and 100 in the Computer Department. Mr Wheatley was responsible for the overall financial management of the company, including its capital resources.

Mr Wheatley said that the funds obtained from disposition of the radio and television department were invested in short-term investments: “. . . to preserve a degree of liquidity for the funds in case the opportunity arose to acquire another business, either through purchase of shares or assets”. He also said that he was seeking “. . . the maximum yield, consistent with safety”.

Mr Wheatley had authority to invest the funds within limits approved by the Board of Directors from time to time; he sought guidelines from the Board once or twice a year.

He testified that the time he expended in managing the funds varied from time to time; he estimated, however, that as much as twenty per cent of his time was occupied in this activity. He said that the work involved collecting material such as offers of securities made by companies; reviewing the financial condition of companies offering short-term paper; and reviewing legal opinions when included with offers. During certain periods, he would determine what investments were available on any given day and what investments should be made. He said that he developed strategy on “. . . whether we should go long or go short depending on our view of the trend of future interest rates”. He also supervised “. . . the actual processing of the paper work, issuing cheques, collection of the documentation, and so on”.

Mr Wheatley said that a listing of all the company’s short-term investments was prepared each Friday afternoon. This enabled him “‘. . . to review the transactions that had been carried out during the week, the balance of the investment portfolio, and to decide on strategy for the following week”.

Mr Wheatley testified that, during the relevant period, an assistant treasurer, Mr Smallwood, supervised the actual administration and record keeping of the transactions; the assistant treasurer “. . . carried out the day-to-day work”. About half the time of the assistant treasurer was devoted to this work. Mr Wheatley also said:

Under Smallwood, there was one (1) person who would be about full time involved in the investment portfolio management, and about half (2) the time of his secretary. In addition, there were various other people who would devote a small part of their time in the accounting department — people producing cheques and maintaining records of investments and so on.

He stated that about twelve of the 200 employees who were under his direction were involved from time to time with the short-term investments. From time to time, investment brokers assisted in making the investments.

There is no question that the investments from which the interest was earned were short-term interest bearing securities issued by financial institutions and large companies, and term deposits and deposit notes or certificates of chartered banks. According to Mr Wheatley, the investments were for terms ranging from one working day to one year; he said that “typically” there would be “. . . several transactions every week”. Generally speaking, the paper was held to maturity; ‘‘call privileges” were, however, exercised several times, “. . . but only with banks”.

Whether the interest earned by Canadian Marconi from its investments in short-term paper up to a value of $20 million was income from “property” or from “business” is a question of fact. The trial judge found that the interest in question was of ‘‘an investment income nature”. He said that he found the decisions of the Trial Division in The Queen v Marsh & McLennan, Ltd* [2] and Ensile Ltd v The Queen’X [3] useful in deciding this case. Both of these decisions have, however, since been reversed by this Court]:. [4] He also appears to have been of the view that the interest could not be included because it was not itself income from manufacturing or processing.

I turn to a consideration of the two cases in which the trial judge found the judgments of the Trial Division helpful.

The Queen v Marsh & McLennan, Ltd was a case which was concerned with the dividend refund available to private corporations under section 129 of the Income Tax Act. The issue involved interest earned by an insurance broker on short-term investments which were purchased with funds drawn from the broker’s non-interest bearing general bank account in which had been deposited premiums paid to the broker by customers on insurance policies placed by the broker with insurers. The broker was bound, under arrangements with the insurers, to pay to them premiums due on policies, placed by the broker, within specified periods. Customers often paid their premiums to the broker before the broker was liable to make payment to the insurers. The short-term securities from which the interest in question was received were paid for out of the bank account which included the premiums paid by the customers. The taxpayer, the broker, sought to bring this interest into the calculation of its refundable dividend tax on hand at the end of its taxation year. Whether it was entitled to do so depended on whether the interest was “Canadian investment income”, as defined in paragraph 129(4)(a) of the Income Tax Act, the relevant parts of which provide:

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

(i) . . .

(ii) all amounts each of which is the corporation’s 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) .. . .

(iii) all amounts each of which is the corporation’s income for the year . . . from

a source in Canada that is a business other than an active business . . .

exceeds the aggregate of amounts . . .

A critical question was, therefore, whether the income, received from the short-term paper, was income from “. . . a property other than a property used or held by the corporation in the year in the course of carrying on a business

The Trial Division held that the interest was income from a property which was not used or held by the corporation in the year in the course of carrying on a business. This decision was, however, reversed on appeal. Mr Justice Clement held that the fund from which the short-term securities were bought was property of the broker. Having so decided, he said, at 236-37 [5184-85], that:

. . . whether a property is or is not used or held by a corporation in the course of carrying on a business, or whether a business is or is not an active business, as referred to in ss (4)(a) is a question of fact to be found on a preponderance of evidence . . .

With this in mind, Mr Justice Clement examined the evidence in the light of pertinent authority and concluded at 241-42 [5188-89]:

Having the foregoing considerations in mind, I return to the record. It is clear that the Broker was carrying on a business which was in fact the active business of the Broker. No matter that it was so, I am in full agreement with the learned Associate Chief Justice that it did not carry on an investment business in its own or separate right, and further that in his own words “the transactions in question here are incidental to the main business of the Defendant . . .”. Indeed, they were shown to be used and held for that purpose only. The investments were of temporarily surplus balances in short-term securities of which the principal and interest were returned to the Fund at a time, anywhere up to 90 days, when those surpluses would be required for the pur- poses of the Fund and the on-going insurance brokerage business of the Broker. There was nothing static or inert in the investment operation such as in an investment in a long-term bond with no need or plan for use of the principal in current and ongoing daily business. To use words employed by Rowlatt, J in Scales v George Thompson and Company Limited, [1927] 13 TC 83, on the facts of this case there was between the Broker’s business and the investments an inter-connection, an interlacing, an interdependence, a unity embracing the investments from the business. I conclude that the income from the investments is excluded as Canadian investment income under ss (4)(a)(ii). These facts would also, on authority I have cited, serve to exclude it under ss (4)(a)(iii).

Mr Justice Le Dain agreed that the fund in question was property used or held in the course of carrying on the business of the respondent within the meaning of the exclusion of subparagraph 129(4)(a)(ii) of the Income Tax Act. He said at 243 [5190]:

. . . I find the decisions in Liverpool and London and Globe Insurance Company v Bennett, [1913] AC 610, and Bank Line Ltd v Commissioners of Inland Revenue, 49 TC 307, suggestive as to the test to be applied: was the fund employed and risked in the business? In my opinion it was, because an amount equivalent to this notional fund was committed to the carrying on of the business in order to meet the company’s obligations to the insurers.

Mr Justice Le Dain did not refer to subparagraph 129(4)(a)(iii) of the Act; he did not, therefore, address in terms the question whether the income was from an active business.

The other case which the trial judge found to be helpful was the Ensite case. It, too, involved subsection 129(4) of the Income Tax Act and also turned on the words . other than a property used or held in the year in the course of carrying on a business”. Ensite Limited was incorporated in Canada, and was a private corporation as defined in subsection 89(1). It is a subsidiary of the Ford Motor Company of Dearborn, Michigan. It carried on business in Windsor, Ontario, manufacturing and selling automobile engines. Mr Justice Le Dain, who spoke for the Court, said at 298 [5317]:

. .. In 1972 its directors decided that because of its strong cash position it should finance the establishment of a stamping plant in the Philippines as part of the Ford participation in the “Progressive Car Manufacturing Program of the Philippines”, an objective of which was to increase Philippine exports. Philippine policy required that foreign exchange be brought into the country for such an investment. It was decided that Ensite would commit up to $5 million of its own money in direct, long-term investment in the stamping plant and provide the rest of the capital requirements, up to $40 million, by loans.

The loans were made available through “swap arrangements” between the Central Bank of the Philippines and the commercial banks which made the loans to the Philippine branch of Ensite. The commercial banks obtained Philippine pesos from the Central Bank at the prevailing exchange rate upon depositing US dollars with the Central Bank under arrangements that ensured that the pesos could be reconverted to US dollars in the future at an agreed exchange rate, thus affording protection against the risk of devaluation. Ensite made US dollar deposits with the commercial banks, which then made the peso loans in an equivalent amount to the Philippine branch. Ensite received certificates of deposit for the US dollar deposits with the commercial banks which it turned over to the banks as security for repayment of the peso loans. The schedule for repayment or withdrawal of the US dollar deposits corresponded to the schedule for repayment of the peso loans, which was to begin at the end of an initial period of five years and continue in six annual instalments. The certificates were declared to be “enforceable” against any branch of the commercial banks outside of the United States thus ensuring against the risk of foreign exchange controls that would prevent US dollars from being taken out of the Philippines. It was not essential to the swap arrangements that Ensite make the US dollar deposits with the commercial banks. The required US dollars could have been made available by the commercial banks on other terms. But the US dollar deposits permitted Ensite to obtain interest rates that reduced the net cost of the borrowing.

In 1976, Ensite included interest earned on its US dollar deposits in the Philippines in computing its foreign investment income and its refundable dividend tax on hand for purposes of section 129. It was entitled to do so if interest on the deposits were interest on property, but not if it were interest on “property used or held by the corporation in the year in the course of carrying on a business”. The Court, reversing the Trial Division, held, in the words of Mr Justice Le Dain, at 300 [5319]:

For the reasons which I briefly indicated in Marsh & McLennan I am of the opinion that the same view must be taken of the interest on the US dollar deposits in the present case. Whether or not it was essential to do so, the fund represented by the US dollar deposits was in fact committed to the carrying on of Ensite’s business in the Philippines. It was employed and risked in the business because it was an integral part of the arrangements by which the business was being financed. The US dollar deposits were the means by which the peso loans were obtained on the most favourable terms, including a reduced cost of borrowing, and they were security for the repayment of the loans. For these reasons they were in my opinion property used or held by Ensite in the carrying on of its business, and the interest earned on them was, therefore, not foreign investment income within the meaning of section 129.

In both Marsh & McLennan and Ensite*, [5] cases under section 129 of the Act, the critical issue was whether the income in question was income from . a property used or held by the corporation in the year in the course of carrying on a business . . .” rather than, as in the present case, whether the income was “. . . income of the corporation for the year from an active business . . .”.

I would observe that counsel for Canadian Marconi did not, if I understood his argument correctly, argue that the interest earned on the short-term investments was income from its manufacturing business either on the ground it was earned on property used in that business or otherwise. Even if it had been so argued, however, I am of the view that Marsh & McLennan and Ensite would be distinguishable.

In the present case, during the relevant taxation period, Canadian Marconi was, it is true, carrying on the business of manufacturing electronic equipment. The income from the short-term investments was, however, clearly not income from the manufacturing business in the ordinary sense of being income from selling or leasing manufactured products. Would it, however, be income from the manufacturing business as being income from property used in that business? I would note that, in Marsh & McLennan, Mr Justice Clement was of the view that the income in question was not only income from property used or held by the corporation in the course of carrying out its insurance business (and thus excluded from the benefits of section 129), but could also be classified as income from an “active business” under subparagraph 129(4)(a)(iii) (and thus excluded for that reason). Even, however, if I were to assume that the interest from the short-term investments in this case could, in appropriate circumstances, be income from the business if the investments were used in the electronic equipment business, I would nonetheless conclude (were it necessary to do so) that the interest in question was not, in the circumstances of this case, income from that business. The investments and the interest on them were being held by Canadian Marconi as a fund to purchase new capital assets (in the form of an ongoing business) for use in or in association with the manufacturing business). There was not, to use the words of Mr Justice Clement in Marsh & McLennan, between the investments and the manufacturing business, “. . . an interconnection, an interlacing, an interdependence, a unit embracing the investments and the business”. The short-term investments which were not being used as working capital were not, to quote Mr Justice Le Dain in Ensite, “employed and risked” in the manufacturing business which Canadian Marconi was carrying on. The investments were, I suppose, “at risk” in the general sense that all assets of the Company would ultimately be available to meet the claims of unsatisfied creditors. But, as the Lord President said in Bank Line Ltd v Commissoners of Inland Revenue 49 TC 307 (Ct of Sess), at 317 (a case which Mr Justice Le Dain found helpful in Marsh & McLennan): . . it does not assist the argument to know that all assets of a company are at risk in the sense that in the last resort they are available to its creditors”.

The appellant’s major submission in this appeal was, however, that, apart altogether from carrying on its manufacturing business, it also engaged, during the taxation years in question, in an investment business; its dealings in shortterm securities, it was said, constituted an active business carried on by it from which the interest income was earned.

Counsel submitted that, before Canadian Marconi sold its broadcasting business, it had carried on two distinct businesses, the manufacture and sale of electronic equipment on the one hand and broadcasting on the other. On the disposition of its broadcasting business, cash was substituted for its broadcasting assets. This cash was used to purchase short-term investments and to realize a profit from them: the company’s motive was the same as it had been when it operated the broadcasting business: to make a profit. But now the profit was to be made through the continuing investment in securities of the cash realized from the sale. Its activities in buying the short-term securities and in their management constituted the carrying on of a separate business, an investment business or a lending business. The interest it received was not, as the Crown argued, income from “property”, but income from “business”. The income was not, it was submitted, the sort of income envisaged in the passage from the reasons for judgment of Associated Chief Justice Noël in Hollinger v MNR, [1972] CTC 592; 73 DTC 5003, at 600 [5008-09], which reads:

. . . If income from property has any meaning at all, it can only mean the production of revenue from the use of such property which produces income without the active and extensive business-like intervention of its owner or someone on his behalf. I have in mind, for instance, property such as bonds or debentures or shares or real property which do not require the exertion of much activity or energy in order to produce the revenue . . .

The interest income was earned, it was submitted, by “. . . the exertion of much activity . . .”. Thus, it was not property income: it was business income.

In support of this submission, Canadian Marconi relied on the number and value of its transactions in short-term paper; on the proportion of its interest income to total income, and on the percentages of its funds invested in shortterm securities to the value of its total assets; and on the time and effort expended by its employees, and, particularly, on the time expended and skill exercised by Mr Wheatley, a senior executive. Reliance was also placed on the activity of the Board of Directors in prescribing investment limits.

Counsel submitted that the purpose of all of these activities during the taxation years in question was to make a profit. The activities were thus a “business”, and the income earned business income. Counsel relied, at least in part, on the decision of the Supreme Court of Canada in Regional Assessment Commissioner and The Municipal Clerk of the Corporation of the Town of Hearst v Caisse Populaire de Hearst Limitée (1983), 46 NR 285. In that case, an Ontario municipality had assessed a Caisse Populaire for business tax under a section of the Ontario Assessment Act, 1970. Paragraph 7(1 )(b) of the Act provides in part:

7. (1) Irrespective of any assessment of land under this Act, every person occupying or using land for the purpose of, or in connection with, any business mentioned or described in this sectin, shall be assessed for a sum to be called “business investment” to be computed by reference to the assessed value of the land so occupied or used by him as follows:

(a) . . .

(b) Every person carrying on the business of a . . . bank, banker or any other financial business for sum equal to 75 per cent of the assessed value.

The Caisse Populaire had been assessed as a bank. The assessment was confirmed by the assessment review court. The taxpayer then applied for a declaration that it was not liable to be assessed on the ground that it was not a business. The District Court found that the taxpayer was not a business. Appeals to the Divisional Court and to the Ontario Court of Appeal were dismissed. The case went to the Supreme Court of Canada by leave, and the appeal was dismissed.

I quote from Mr Justice McIntyre at 291-92:

Dupont, CCJ, in dealing with this matter at trial, found as a fact that the main, dominant or preponderant purpose of the respondent was to provide loans to its members for provident and productive purposes at low cost, and not to make a profit. I agree with the Divisional Court and the Court of Appeal that this finding, having been based on evidence, should not be disturbed in this court. Having made this finding of fact, Dupont, CCJ, decided as a result that the respondent was not carrying on a business. In so doing he was applying what I will refer to as the “preponderant purpose” test, and this course was approved in both appellate courts. If the preponderant purpose test is the correct one the appeal must fail. This is the position taken by the respondent. The appellant, however, contends that the test of preponderant purpose is not the correct test in law and, therefore, even in the face of findings of fact made at trial and supported in both appellate courts, the appeal must succeed.

The preponderant purpose test is based upon a determination of the purpose for which an activity is carried on. If the preponderant purpose is the making of a profit, then the activity may be classified as a business. However, if there is another preponderant purpose to which any profit earned is merely incidental, then it will not be classified as a business. This test seems to have its roots in the words of Jessel, MR, in Smith v Anderson (1880), 15 Ch, D 247. At p 258, in considering what meaning should be attributed to the word “business” and after discussing various dictionary definitions, he said:

Then taking the last edition of the Imperial Dictionary, which is a very good dictionary, we find it a little more definite, but with a remark which is worth reading: “Business, employment; that which occupies the time and attention and labour of men for the purpose of profit or improvement”. That is to say, anything which occupies the time and attention and labour of a man for the purpose of profit is business.

This test has been followed in Ontario and applied in cases where the incidence of assessment or taxation depended on the question of whether a certain activity was or was not a business . . .

Mr Justice McIntyre also said at 297:

. . . I agree that, in deciding whether or not any activity may be classed as a business under the provisions of s 7(l)(b) of the Assessment Act, all relevant factors regarding an operation must be considered and weighed in order to determine not whether in some general sense the operation is of a commercial nature or has certain commercial attributes, but whether it has as its preponderant purpose the making of a profit. If it has, it is a business; if it has not, it is not a business.

He concluded at 297-98:

The preponderant purpose test has had wide — in fact almost complete — acceptance in Ontario and certain other provinces since the decision in The Rideau Club case. Essentially it has been based upon a consideration of whether the activity concerned is carried on for the purpose of earning a profit or for some other preponderant purpose. If the preponderant purpose was other than to make a profit, then even if there were other characteristics of the organization, including an intent in some cases to make a profit (see Maple Leaf case), it would not be classed as a business.

The Legislature must be presumed to have long been aware of the state of the law as declared in the line of authorities referred to above. As it has made no move to change it, I do not think the court should. I would accept and apply the preponderant purpose test. In view of the findings of fact in the case at bar earlier mentioned that the preponderant purpose of the respondent is not to make a profit, I would dismiss the appeal with costs.

I would note that, even for purposes of the provincial Assessment Act, the test of whether the taxpayer is in business is not merely whether profit is being sought, but whether that is the predominant purpose.

Counsel for the appellant recognized that the Supreme Court judgment deals with the term “business” in the Ontario Assessment Act, not in the Income Tax Act. His submission was, however, that “business” was not specially defined in the Ontario Act; “. . . the concept of ‘business’ is”, he said, “of universal application, and consequently this recent decision of the Supreme Court of Canada is relevant to the situation of the Appellant. There is no doubt, [he submitted] that the preponderant purpose of the Appellant in managing its funds during the taxing years under appeal was to make a profit”. He also submitted, properly, I think, that the definition of “business” in section 248 of the Income Tax Act is not, strictly speaking, a definition; the “definition” makes clear that certain things are to be included in the meaning of the term, and “office or employment” is not to be. It does not, however, purport to define “business”.

I am of the view, however, that, for purposes of the Income Tax Act, the fact that an activity is engaged in for the purpose of making a profit cannot be decisive of the question whether income from it has its source in “business” on the one hand, or in “property” on the other. Subsection 9(1) of the Income Tax Act reads:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

There can be no doubt that, in buying and holding, however briefly, the shortterm securities in question in this appeal, Canadian Marconi was seeking to make and was successful in making a profit. The question remains, however, whether the source of the profit was “business” or “property”.

Earlier in these reasons, I noted that the appellant had not argued that the interest on the short-term paper was income from its manufacturing business. I indicated, however, that, if such a submission had been made, I would have rejected it. What I said at that point has some relevance to the question whether the appellant’s profit from this interest was income from an investment business or from property in the form of investments. The activities of the company’s employees in buying short-term paper; the number and value of these transactions; the relationship between the interest earned and the total income of the company, and between the value of the investments and the value of the company’s total assets, all have relevance in answering this question. There are, however, certain overriding considerations: the funds used for investing in the shortterm papers were derived from the sale of the radio and television business; to the extent that they were not used as working capital, they were set aside for the purchase of new capital assets: to buy a new business related to the continuing manufacturing business. Considerable activity was, no doubt, involved in pur- chasing the commercial paper, but this activity was a necessary consequence of the need to hold investments in liquid form, in the form of paper that could be quickly converted into cash. The activity was activity designed to realize as much income as possible while at the same time maintaining safety. It was activity appropriate to an investor seeking, in Mr Wheatley’s words, “. . . the maximum yield consistent with safety”, and . . to preserve a degree of liquidity for the funds in case the opportunity arose to acquire another business . . .”. Although there was a good deal of buying, relatively few employees were involved, and, with the exception of the assistant treasurer, the secretary, and possibly one other, not a great deal of staff time was expended. It is true that Mr Wheatley, a skilled manager, played a significant role, but even he devoted only about twenty per cent of his time to the fund. I would characterize these activities as management of the company’s investments rather than as the carrying on of an investment business. The better view is that the source of the interest in question was “property”, not “business”, and I would so hold.

Counsel also submitted, in the alternative, that Canadian Marconi was in the business of lending money. I need only refer to what I have just said. Canadian Marconi, in buying short-term paper, was buying investments and holding them for the purpose of acquiring new capital assets. Every purchase of a certificate or bank deposit was, of course, in a sense a loan. But in no meaningful sense can it be said that the company was carrying on a lending business.

I thus agree with the trial judge’s finding that the interest in question was “investment income”, and as such was income from property and not from business. It is obvious, however, from what I have said, that I reach this conclusion for quite different reasons.

I would dismiss the appeal with costs.