Bonner,T.C.J.:
—
The
appellant
appeals
from
assessments
of
income
tax
for
the
1983,
1984
and
1985
taxation
years.
It
contends
that
the
Minister
erred
in
the
calculation
of
the
small
business
deduction
to
which
it
is
entitled
by
virtue
of
section
125
of
the
Income
Tax
Act
("Act").
It
took
the
position
that
its
ll
.
.
income
for
the
year
from
an
active
business
carried
on
in
Canada
.
.
within
the
meaning
of
subparagraph
125(1)(a)(i)
of
the
Act,
includes
the
following
amounts
of
interest
income
from
term
deposits,
namely:
|
1983
|
$23,266
|
|
1984
|
$22,595
|
|
1985
|
$37,518
|
It
was
the
position
of
the
appellant
that
it
was
necessary
to
the
proper
conduct
of
its
business
to
maintain
a
level
of
working
capital
sufficient
(a)
to
withstand
the
effects
on
its
payables
and
receivables
of
economic
fluctuations
affecting
the
mining
industry
and
(b)
to
enable
it
to
purchase
mining
machinery
and
equipment
for
purposes
of
resale
in
the
course
of
its
business.
It
was
said
that
the
term
deposits
formed
part
of
the
necessary
working
capital
of
the
business
with
the
result
that
interest
income
generated
by
the
deposits
fell
within
the
statutory
language
previously
quoted.
The
relevant
statutory
provisions
are
as
follows:
(a)
For
all
the
taxation
years
in
issue:
Sec.
125.
(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
21%
of
the
least
of
(a)
the
amount,
if
any,
by
which
the
aggregate
of
(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.
.
.
.
(b)
For
the
1983
and
1984
taxation
years:
Sec.
125.
(6)
Definitions.
In
this
section
and
section
129
.
.
.
(d)
"active
business”
carried
on
by
a
corporation
in
a
taxation
year
means
the
business
of
manufacturing
or
processing
property
for
sale
or
lease,
mining,
operating
an
oil
or
gas
well,
prospecting,
exploring
or
drilling
for
natural
resources,
construction,
logging,
farming,
fishing,
selling
property
as
a
principal,
transportation
or
any
other
business
carried
on
by
the
corporation
other
than
a
specified
investment
business,
a
non-qualifying
business
or
a
personal
services
business;
(e)
"income
of
the
corporation
for
the
year
from
an
active
business"
means
the
income
of
the
corporation
from
an
active
business
carried
on
by
it,
including
any
income
pertaining
to
or
incident
to
that
business
and
amounts
deemed
by
subsection
129(6)
to
be
income
from
an
active
business,
but
does
not
include
income
for
the
year
from
a
source
in
Canada
that
is
a
property
(within
the
meaning
assigned
by
subsection
129(4.1)).
Sec.
129.
(4.1)
"Income"
or
"loss".
For
the
purposes
of
paragraph
(4)(a)
and
subsection
(6),
"income"
or
"loss"
of
a
corporation
for
a
year
from
a
source
in
Canada
that
is
a
property
includes
the
income
or
loss
from
a
specified
investment
business
carried
on
by
it
in
Canada
other
than
income
or
loss
from
a
source
outside
Canada
but
does
not
include
income
or
loss
(a)
from
any
other
business,
(b)
from
any
property
that
is
incident
to
or
pertains
to
an
active
business
or
a
non-qualifying
business
carried
on
by
it,
or
(c)
from
any
property
used
or
held
principally
for
the
purpose
of
gaining
or
producing
income
from
an
active
business
or
a
non-qualifying
business
carried
on
by
it.
(c)
For
the
1985
taxation
year:
Sec.
248.
(1)
In
this
Act,
"Active
business",
in
relation
to
any
business
carried
on
by
a
taxpayer
resident
in
Canada,
means
any
business
carried
on
by
the
taxpayer
other
than
a
specified
investment
business
or
a
personal
services
business.
.
.
.
Sec.
125(7)
Definitions.
In
this
section,
(a)
"active
business
carried
on
by
a
corporation”
means
any
business
carried
on
by
the
corporation
other
than
a
specified
investment
business
or
a
personal
‘services
business
and
includes
an
adventure
or
concern
in
the
nature
of
trade.
.
.
.
In
making
the
assessments
in
dispute,
the
respondent
relied
on
findings
or
assumptions
of
fact
which
included
the
following:
(c)
The
funds
invested
in
the
term
deposits
referred
to
in
paragraph
3
(b)
herein,
were
in
excess
of
the
amount
of
funds
required
to
carry
on
the
existing
or
planned
levels
of
business
activities
of
the
Appellant.
(d)
The
Appellant
had
no
plans
of
expanding
the
size
of
its
equipment
reconditioning
operation,
or
of
increasing
the
amount
of
the
inventory
which
it
had
normally
carried.
(e)
The
capital
for
the
term
deposits
referred
to
in
paragraph
3
(b)
herein,
was
at
no
time
withdrawn
by
the
Appellant
in
order
to
meet
any
working
capital
shortages.
The
first
witness
called
at
the
hearing
was
Daniel
D.
Hurley,
president
of
the
appellant.
He
testified
that
the
appellant
has
from
the
outset
in
1976
carried
on
the
business
of
selling
and
servicing
equipment
used
in
the
mining
industry.
Some
of
the
equipment
is
purchased
with
a
specific
or
prearranged
resale
in
view.
In
other
cases,
in
particular
those
involving
used
equipment,
the
purchases
are
more
speculative
in
nature
because
no
potential
buyer
has
been
identified
at
the
time
of
the
purchase
and
no
opportunity
exists
to
accurately
appraise
the
condition
of
the
equipment
prior
to
bidding
on
it.
Purchases
of
the
latter
type
were,
I
gather,
made
on
terms
requiring
early
or
immediate
payment
in
full
of
the
purchase
price.
Mr.
Hurley
stated
that
from
1984
onward,
the
appellant
had
an
operating
line
of
credit
at
its
bank
of
$150,000.
Further,
the
appellant's
bank
delivered
to
one
of
the
appellant's
suppliers
a
$175,000
guarantee
of
payment
in
respect
of
the
supply
to
the
appellant
of
inventory.
The
term
deposits
served
as
collateral
for
the
extensions
of
credit.
Mr.
Hurley
produced
a
copy
of
a
managerial
survey.
It
provided
him
with
details
on
a
month
by
month
basis
during
the
years
in
issue
of
the
appellant's
outstanding
payables,
its
payables
for
the
month,
the
purchases
paid
for
and
outstanding
accounts
receivable.
It
set
out
as
well
the
total
receivables
for
the
month,
total
deposits
for
the
month,
cheques
issued
during
the
month,
purchase
orders
paid
during
the
month
and
sales
for
the
month
for
which
invoices
had
been
issued.
It
is
clear
that
the
appellant's
accounts
receivable
and
accounts
payable
did
fluctuate
over
time.
The
term
deposits
which
generated
the
interest
in
question
were
retained
by
the
appellant
and
the
interest
was
reinvested.
At
no
time
was
it
necessary
to
cash
any
of
the
deposits.
The
appellant
utilized
its
overdraft
at
the
bank.
Mr.
Hurley
chose
not
to
cash
the
term
deposits
and
retire
the
overdrafts
in
order
to
prove
to
the
bank
that
the
appellant
was
credit
worthy.
Mr.
Hurley's
evidence
was
to
some
extent
at
least
supported
by
the
testimony
of
John
Robert
Ross,
a
chartered
accountant
who
has
been
the
advisor
to
Mr.
Hurley
and
the
appellant
since
1976.
Mr.
Ross
stated
that
the
appellant
was
a
growing
company,
that
it
needed
bank
support
and
that
it
was
necessary
that
it
establish
a
line
of
credit.
The
term
deposits
were,
Mr.
Ross
thought,
necessary
to
support
the
purchases
and
receivables
of
the
appellant.
Mr.
Ross
can
hardly
be
described
as
a
totally
objective
observer.
He
is
described
in
the
notice
of
appeal
as
the
appellant's
representative.
I
note
that
no
attempt
was
made
by
the
appellant
to
call
a
representative
of
its
bank
to
give
evidence
regarding
the
significance
or
otherwise
of
the
term
deposits
in
relation
to
the
bank's
various
decisions
to
extend
credit
to
the
appellant.
Without
doubt,
the
term
deposits
were
there
and
without
doubt,
they
were
pledged
to
the
bank.
What
remains
unclear,
however,
is
whether
the
deposits
played
a
significant
role
in
persuading
the
bank
to
extend
credit
to
the
appellant.
The
absence
of
independent
evidence
in
this
area
is,
in
my
view,
critical
in
light
of
the
objective
facts.
I
have
already
noted
that
the
appellant
at
no
time
found
it
necessary
to
have
recourse
to
the
term
deposits
in
order
to
meet
a
working
capital
shortage.
Also
significant
on
this
point
is
the
evidence
of
Denis
Vaillancourt,
a
Revenue
Canada
auditor
who
analyzed
the
appellant's
financial
position
and
in
particular,
the
ratio
of
current
assets
(exclusive
of
term
deposits)
to
current
liabilities.
During
the
years
in
question
the
ratio
was:
1983
6.36
to
1
1984
1.24
to
1
1985
4.5
to
1.
The
law
in
this
area
was
reviewed
and
summarized
in
the
decision
of
this
Court
in
Sanilit
Limited
v.
M.N.R.,
[1987]
2
C.T.C.
2078;
87
D.T.C.
450.
It
is
unnecessary
to
repeat
what
was
said
in
that
case.
The
evidence,
which
I
have
summarized,
does
not
establish
on
the
balance
of
probabilities
either
that
recourse
was
had
to
the
term
deposits
or
that
they
filled
any
genuine
need
for
a
back-up
asset
in
support
of
the
appellant's
business
operations.
The
appeals
will
therefore
be
dismissed.
Appeals
dismissed.
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