Farhills Farming Ltd. v. R., [1996] 1 CTC 2296, 96 DTC 1018 (Informal Procedure)

Christie A.C.J.T.C.:— These appeals are governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Act.

The years under review are 1988 and 1989. The issue regarding 1988 is whether interest income of the appellant in that year in the sum of $18,000 is active business income or Canadian investment income. The same question arises regarding the appellant’s 1989 taxation year. In that year the amount involved is $30,000. If these amounts are Canadian investment income the appellant is not entitled to claim them in computing the small business deduction under subsection 125(1)[1] of the Income Tax Act (“the Act’).

The notice of appeal reads:

(a) FARHILLS FARMING LTD. P.O. Box 29, Okotoks, Alberta, TOL OTO (b) The assessments under appeal are 1988 and 1989 pursuant to a reassessment dated March 25, 1992 as #3536494 for the 1988 taxation year and #3536495 for the 1989 taxation year. A letter advising of rejection of notice of objection by a Notice of Confirmation dated January 28, 1993.

(c) The Appellant maintained funds in investment accounts as a fund for the replacement of operating equipment and a prudent operating reserve.

(d) The issue is whether the interest earned by those accounts was “Canadian investment income” or “active business income”.

(e) The statutory position are Section 129(4) and Section 125(1) of the Income Tax Act.

(f) The Appellant states that the invested funds were an integral part of the business and that the said funds were in fact employed and at risk as a prudent reserve for operating costs and replacement of equipment.

(g) The Appellant requests a reassessment after a finding that the interest earned was from active business income and subject to the applicable rules.

Paragraphs 1 to 7 inclusive of the reply to the notice of appeal read:

1. He admits the facts alleged in paragraph (b) to the effect that the Appellant’s income was reassessed for the 1988 and 1989 taxation years, and that those reassessments were confirmed by the Respondent as stated in the Notice of Appeal.

2. He denies the facts alleged in paragraph (c) of the Notice of Appeal except to the extent that the Appellant maintained funds in investment accounts.

3. He further denies the facts alleged in paragraph (f) of the Notice of Appeal.

4. There are no other relevant facts contained in the Notice of Appeal.

5. In computing income for the 1988 and 1989 taxation years, the Appellant reported interest income in the amounts of $18,000 and $30,000, respectively, as active business income.

6. By Notices of Reassessment dated March 25, 1992, whichNotices were confirmed by Notice of Confirmation dated January 28, 1993, the Minister of National Revenue (the ‘Minister’) reassessed the Appellant’s income for the 1988 and 1989 taxation years by characterizing the reported interest income in the amounts of $18,000 and $30,000, respectively, as Canadian investment income.

7. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) The facts admitted above;

(b) During the years under appeal, the Appellant was a Canadian Controlled Private Corporation engaged in the active business of farming at Okotoks, Alberta;

(c) In its 1988 and 1989 taxation years, the Appellant had accumulated term deposits, Guaranteed Investment Certificates and Alberta Capital Bonds in the amount of $250,000 and $275,000 respectively (the “Investments”);

(d) Interest income earned on the Investments amounted to $18,000 in 1988 and $30,000 in 1989 (the “Interest-income”) which was not income pertaining to or incident to the Appellant’s active business of farming;

(e) The principal amount of, and the interest earned from, the Investments was reinvested in term deposits, Guaranteed Investment Certificates and Alberta Capital Bonds;

(f) At no time, up to or including the years under appeal, has any principal amount of the Investments been withdrawn by the Appellant for use in its business operations;

(g) The Appellant’s net income, excluding the Interest-income from the Investments, and before depreciation and taxes payable, was $24,943 in 1988 and $36,529 in 1989;

(h) During 1988 and 1989 the Appellant had no outstanding long term debt;

(i) No relationship existed between the principal sums in the Investments and any capital reserves that may have been needed by the Appellant;

(j) Meeting the financial needs of the Appellant’s daily business operations did not depend upon the existence of the Investments;

“Canadian investment income” is defined by paragraph 129(4)(a) of the Act. What is relevant in that paragraph for the purposes of this litigation are the words: “the corporation’s income for the year from a source in Canada that is a property”.

Paragraphs 129(4.1)(b) and (c) provide:

129(4.1) For the purposes of paragraph (4)(a) and subsection (6),[2] “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

(b) from any property that is incident to or pertains to an active 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 carried on by it.

Paragraph 125(7)(c) of the Act provides:

125(7) In this section,

(c) “income of the corporation for the year from an active business” means the income of the corporation for the year from an active business carried on by it including any income for the year pertaining to or incident to that 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));

In Atlas Industries Ltd. v. Minister of National Revenue, [1986] 2 C. T.C. 2392, 86 D.T.C. 1756 (T.C.C.) this was said at pages 1764-65 with reference to paragraph 129(4.1 )(b):

Giving the words “incident to or pertains to an active business” their grammatical and ordinary sense, and bearing in mind their context, there must I think be a financial relationship of dependence of some substance between the property and the active business before the exclusion in paragraph 129(4.1)(b) comes into play. The operations of the business ought to have some reliance on the property in the sense that recourse is had to it regularly or from time to time or that it exists as a back-up asset to be called on in support of those operations when the need arises. This I regard to be the basic approach to paragraph 129(4.1)(b). Whether income-producing property has crossed the dividing line into the paragraph will depend on the facts of each case.

The foregoing was cited with approval by Sarchuk J.T.C.C. in McCutcheon Farms Ltd. v. Minister of National Revenue, [1988] 1 C.T.C. 2349, 88 D.T.C. 1208 (T.C.C.) and on appeal from that decision to the Federal Court-Trial Division by Mr. Justice Strayer: [1991] 1 C.T.C. 50, 91 D.T.C. 5047 at page 53 (D.T.C. 5049). With respect to paragraph 129(4.1)(c) Strayer J. applied this test: was the fund employed and risked in the appellant’s business? The Canadian source of this test are the reasons for judgment delivered by Le Dain J. in R. v. Marsh & McLennan Ltd. (sub nom. The Queen v. Marsh & McLennan Ltd.), [1983] C.T.C 231, 83 D.T.C. 5180 (F.C.A.), at page 243 (D.T.C. 5190).[3] It was approved in the reasons for judgment by Wilson J. in Ensite Ltd. v. R. (sub nom. Ensite Ltd. v. The Queen), [1986] 2 S.C.R. 509, [1986] 2 C.T.C. 459, 86 D.T.C. 6521 at page 516 (C.T.C. 462; D.T.C. 6524). This is said at page 520 (C.T.C. 464; D.T.C. 6525) of those reasons:

But “risked” means more than a remote risk. A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would “have a decidedly destabilizing effect on the corporate operations themselves”: March Shipping Ltd. v. Minister of National Revenue, 77 D.T.C. 371 (T.R.B.), at page 374.

In McCutcheon Farms Ltd., the appellant carried on the business of farming. It owned no land, but carried on that business on rented real estate. In addition to growing and selling grain the appellant produced and sold certified seed; did “custom” cleaning of seed for farmers; sold fertilizer and chemicals, most of these being supplied by Cargill Company and by Cominco. In its 1981, 1982, 1983 taxation years it included in its income tax returns certain interest income. In reassessing the Minister of National Revenue treated that interest income as Canadian investment income. Mr. Justice Strayer said this about the interest income at page 51 (D.T.C. 5048-49):

The interest income in question during the relevant taxation years arose out of three sources. The plaintiff kept on demand deposit with the Cargill Company substantial sums of money, starting with $117,000 provided by Mr. McCutcheon at the time of incorporation. By 1982 this had grown to some $245,000 and Cargill declined to keep such large sums. It paid to the plaintiff all amounts over $100,000 which the plaintiff then deposited with the Saskatchewan Wheat Pool in a similar demand deposit. The interest earned from each of these deposit accounts was automatically re-deposited with these respective companies and in turn earned more interest. The evidence is that neither of these accounts, nor the interest therefrom, have ever actually been drawn from for the farm or business operations. The other source of the contested interest income was, during the years in question, term deposits with the Canadian Imperial Bank of Commerce in Saskatoon. These have been generally short-term deposits, most of them for sixty days or less and only one for as long as one hundred and eighty days. The interest earned from these term deposits was paid into the plaintiff corporation’s current account at the bank from which operating expenses were paid. It is also true that certain amounts surplus to current needs have been drawn from the current account from time to time and put into further term deposits. On only one occasion has any principal amount been withdrawn from the term deposits to meet farming and business expenses and that was the sum of $20,000 drawn out in 1977 well before the taxation years in question. The evidence indicated that only $14,000 of this was spent on operating expenses. The general magnitude of these capital sums can be seen in the following table which also shows the interest income in each of the years in question as compared to the gross income from the farm and business and the relationship which the interest income bore to the gross income. As I understand it, the “Cash Holdings” item includes the amounts held in the demand deposits at Cargill and the Saskatchewan Wheat Pool, as well as the current operating account at the Canadian Imperial Bank of Commerce.

	1981	1982	1983
Income:
			$ 47,418.85
	$ 43,863.00	$ 68,213.00
Interest Income
		342,109.00	235,915.85
	275,490.00
Gross Income
Percentage of Interest
		19.94	20.10
	15.92
to Gross Income
		$233,239.00	$158,558.00
Total Expenses	$189,257.00
	86,233.00	108,870.00	77,357.85
Income Before Taxe
	62,641.00	80,402.00	57,217.89
Net Income
Cash Holdings	$262,113.00	$260,619.00	$309,152.00
Term Deposits	100,000.00	200,000.00	200,000.00

Mr. Justice Strayer went on at page 54 (D.T.C. 5050) et seq. to discuss the various submissions on behalf of the appellant in support of his claim that the interest income was income from an active business.

It was contended that these large capital sums are required by the plaintiff in case of emergencies or crop failures - failures which would not only drastically reduce or eliminate farm income but would badly affect sales of seed grain, fertilizer, and chemicals. But the evidence indicates that these capital sums were not drawn on for such purposes, not just in the years in question but never since the incorporation of the farm in 1976. While both the evidence and common knowledge indicate that there are many risks in farming, the risk that sums in the amount of the principal sums in question here would be required must, in the absence of more precise evidence, be regarded as “remote” and this, according to the Ensite decision, is not sufficient. One can readily understand, and admire, the position taken by Mr. McCutcheon, the President of the plaintiff company, that he would not want to farm without cash reserves, having seen many farm failures in the past by those who had inadequate reserves. But there is the basic problem in that the plaintiff has not shown clearly what would be a reasonable reserve nor does the evidence indicate any rational relationship between the principal sums accumulated and the reserves required. Mr. McCutcheon spoke of wanting the equivalent of two years expenses available in cash reserves. But the principal sums in question here have simply been allowed to grow by reinvestment of interest and by transfers from the current account without any indication of a rational plan or any evidence that such a plan was being followed. It was argued that the plaintiff carried no insurance of any kind during the years in question either on buildings, crops, or equipment and therefore required these large capital sums as a form of “self-insurance”. But the day-to-day operations of the business would not be dependent on the existence of such a fund nor, indeed, would the corporation necessarily draw on the fund in case of loss. There is no evidence, not only in respect of the three years in question, but over the whole period since the plaintiff was incorporated in 1976, that these principal amounts have ever been drawn on to pay for any loss by hail, or even theft, for example. The prospect of a wide-spread disaster to a value represented by these capital amounts again must be regarded as remote. The investment of surplus funds in these interest-bearing deposits is no different from any other investment the corporation might make in order to ensure that it was solvent enough, in the face of some disaster, to either resume this business or undertake some other business. It was suggested that such capital sums were required to establish a proper credit rating with Cargill and Cominco, wholesale suppliers of chemicals and fertilizers to the plaintiff. But there was little evidence to indicate what the credit requirements of these companies are and certainly nothing to suggest that they required liquidity in the order of several hundred thousand dollars. The evidence indicated that the plaintiffs credit limit with Cargill was $30,000, an amount which has obviously allowed the plaintiff to carry on its fertilizer and chemical business without difficulty. Assuming Cargill would want to be assured of liquid assets held by the plaintiff in this amount, this has no relationship to the principal sums actually held.

Again it was argued that this interest income was important to the overall profitability of the company. It will be noted in the table quoted above that interest income ranged from 15.92 per cent to 20.10 per cent of the gross income of the company and over 50 per cent of the net income before its taxes. But the more critical question is, was this income somehow necessary to the farming and agribusiness? It is clear that they would have been profitable without the income. It is also true that, with the exception of the interest income from term deposits which was paid into the company’s current account, the money was not employed in the business in any way. If the interest from the term deposits had simply been automatically accumulated in more term deposits the company could still have met its expenses and produced a profit. Further, there is evidence that from time to time surplus funds were drawn from the current account to augment the term deposits. As was pointed out in the case of Ben Barbary Co. v. Minister of National Revenue such income and the asset from which it is earned is no different from any other investment which the taxpayer might make even if it chose to use the income from such investment to help support its business. This does not make the capital asset “incident to or pertain to” the business. Nor in my view does it make it properly “used ... principally for the purpose of ... producing income from an active business”.

It was suggested that the capital sums might have to be used from time to time to pay expenses. As noted earlier, there is only one instance of this having happened, and that was in 1977 when $20,000 was withdrawn from term deposits of which $14,000 was actually used for expenses. In fact, the only formal arrangement with the Bank, in case of overdrafts on the current account from which operating expenses were paid, was that the Bank could automatically have recourse to Mr. McCutcheon’s personal account. There might well be some justification for having liquid assets such as a portion of the terms deposits available to cover short-term cash shortages. But it is difficult to see that in these particular facts there was a relationship of financial dependence on them “of some substance” as referred to in the Atlas Industries Ltd. case. As was said in that case, the relationship between the term deposits and the appellant’s businesses “was tangential at best”. Or in the language of Ensite, the risk of such sums being needed was “remote”. If some reasonable amount of reserves was in fact required, this amount was not demonstrated by the evidence. It was argued that such liquid sums were required to provide for replacement of what is undoubtedly very expensive farm machinery. Yet again there is no evidence that any of these capital sums were ever resorted to for such purpose. In the Ensite case Wilson J. said that a “business purpose for the use of property” is not enough and regarded profits held by a business

...in order to achieve some collateral purpose such as the replacement of a capital asset in the long term....

as not being “employed or risked in the business” and therefore not “properly used or held...in the course of carrying on a business”.

Finally, it was argued that these large capital sums were required in order for the plaintiff to be in a position to purchase land and pay all or substantial amounts of the purchase price in cash. First, it should be ob- served that since 1976 down to the present the corporation has never bought any additional land and although it has made a few offers none of these have been accepted. Secondly, I do not accept that money accumulated to expand a business, if that was really in contemplation here, creates any “financial relationship of dependence” between that sum and the existing business or that it involves money “employed” or “risked” in the existing business.

The learned Justice went on to dispose of the appeal in favour of the Crown. He said this at page 56 (D.T.C. 5052):

Looking at all of these putative purposes of the liquid capital sums involved, I cannot find a “financial relationship of dependence of some substance’’ between those sums and the ongoing existing business. The money was generated by the business but it was not, in the years in question, employed in the business except in a limited way through the use of term deposit earnings for current expenses. As noted, this was not a one-way street, as surplus funds from the current account were also used to purchase term deposits from time to time. The possibilities of these funds being drawn upon to sustain the business in any important way was remote and in fact did not happen during the years in question. I therefore do not think that these capital sums can be seen as ‘property that is incident to or pertains to an active business’ within the meaning of paragraph 129(4.1)(b). Using the tests employed respectively in analogous provisions under consideration in cases such as Ensite, I am unable to conclude that these sums amounted to “property used or held principally for the purpose of gaining or producing income” from the business, as referred to in paragraph 129(4. l)(c). These sums were not truly “employed and risked” in the business. One test referred to in the Ensite case was to consider whether the withdrawal of the property would have a “decidedly destabilizing effect” on the business. Looking at all the facts, I am unable to conclude that such withdrawal would have that effect.

I have dealt with the reasons for judgment delivered by Strayer J. at such length because the case at hand is to a considerable degree McCutcheon Farms revisited. The only witness at trial was Mr. Robert B. Cuthbertson. He is president and a director of the appellant. He is also its principal shareholder. In 1975 he graduated from the University of Alberta which conferred on him the degree of Bachelor of Science in Agriculture. After graduation he lectured at Lakeland College, a small agricultural college. The appellant was incorporated in 1981. At that time it had no land or livestock, only some farming equipment. That is basically the position today. Its farming operations were and are conducted on leased land. At present it has in the order of 4,000 acres under lease. Cuthbertson referred to the “cycle of grain” being 12 to 15 years. He explained that in this way: “Well the grain value seems to be cyclic in some nature. And it hits its highs and its lows. And those cycles seem to be between about a 12- to 15-year period, depending on various other factors: government is one; international governments is another; and what have you. But it’s a very long cycle for the grain industry, unfortunately. And we’re talking extreme variance in prices.” In the light of this the company set aside funds in anticipation of a slump in its farming business. Two other reasons for doing this was: first, technology in agriculture is expensive and changes quickly and it was desirable that the appellant be able to adapt to these changes; second, the appellant had to be in a position to pay cash for leases of land. Usually that cash 1s payable up front. In 1988 and 1989 about one-half of the land was leased on the basis that the landlord received a percentage of the gross profit from the harvest. The total amount of land under lease at that time was close to 3,000 acres.

A statement of income and retained earnings included in the appellant’s financial statements for the year ended July 31, 1988, shows rent paid in cash in 1987 was $22,195 and in 1988, $16,828. The witness then indicated that basically all grain, except canola, being sold overseas had to go through the Canadian Wheat Board system and that the lapse of time between seeding a crop and final payment is usually about 1 1/2 years. There may, however, be interim payments. The company was paid immediately for grain sold on the open market. In 1987 expenses before depreciation were $150,523. The same figure for 1988 is $139,117. The reason assigned for the difference is the use of less chemicals and fertilizer. The statement of income and retained earnings for the year ended July 31, 1989, shows expenses for 1989 of $231,271 before depreciation. This increase is related to great expenditures for fertilizer. Rent for 1989 was $27,543. The same statement for the year ended July 31, 1990, shows expenses before depreciation in 1990 were $226,078. This relatively small difference is attributed to less expense for salary, wages, spray and fertilizer. Counsel then referred to the statement of income and retained earnings for the year ended July 31, 1992. He said he did not have such a statement for the year ended July 31, 1991. The 1992 statement, however, includes references to both 1991 and 1992. Expenses before depreciation in 1991 were $205,103. The same figure for 1992 is $278,806. The witness said the increase from $205,103 to $278,806 was attributable to a great increase in the cost of fertilizer. He also mentioned repairs and maintenance. The statement shows that the increases in the expenditure for fertilizer from 1991 to 1992 was $19,723 to $46,505. The same increase for spray and rent was $6,626 to $11,400 and $15,221 to $44,373. The statements of income and retained earnings for the years ended July 31, 1993 and July 31, 1994 are also in evidence. They show expenses before depreciation in 1993 of $345,918 and in 1994 of $298,865. While not specifically referred to the statements show net income (loss) as follows: 1987 - $3,659; 1988 - $8,387; 1989 - $31,596; 1990 - $23,263; 1991 - $7,243; 1992 - $9,369; 1993 - $2,993; 1994 - ($78,923).

Counsel for the appellant then turned to a document entitled “FARHILLS FARMING LTD. Summary of Various Information on Financial Statements” that had been prepared by counsel for the respondent. The witness did not disagree with what is said in this document. The phrase “term deposit” included guaranteed investment certificates and Alberta bonds. The document reads:

- including interest income $148,466 $127,274 $96,801 $94,580 $92,483 $128,884

- excluding interest income$ 137,668 $109,196 $82,637 $76,402 $83,285 $86,791 Interest Income $10,798 $18,078 $14,164 $18,178 $9,198 $42,093

Increase (decrease) in Fixed Assets

- Gross $279,025 $35,141 $37,816 $156,351 $78,895 $163,144

- Net $260,188 $24,908 $35,732 $47,851 $54,195 $51,604

Cash flow $131,837* $115,456 $82,991 $87,240 $86,541 $122,950

Summary

‘Summary continued**

1987 1988 1989 1990 1991 1992

Term Deposits $237,000 $250,000 $275,000 $25,000 $25,000 $0

Liabilities (excluding

amounts due to the shareholders) $70,924° $42,189° $49,346° $20,398° $1,878 $2,371

Net Income before

depreciation & taxes
- including interest income $44,637	$43,217	$66,888	$54,883	$33,670	$38,393

- excluding interest income$25,439 $24,943 $36,529 $21,025 $17,751 $6,156

Interest Income	$19,198 $18,274 $30,359 $33,858 $15,919 $32,237
Increase (decrease) in
Fixed Assets
- Gross	$7,610 $24,300 $11,595 $22,904 $12,433 $47,300
- Net	$3,190 $24,300 $11,595 $22,904 $12,433 $47,300
Cash flow	$41,837 $6,864 $49,81 2 $30,288 ($1,787) ($9,520

A Estimate - Calculated by taking after tax net income and adding back in non-cash expenses (depreciation).

B Although term deposits decreased in 1983, there was mortgage receivable from shareholder of 100,000 in this year.

C Includes bank loan of 70,000 and management fee payable of 65,000.

D Includes management fee payable of $85,000 (1986), $70,000 (1987), $40,000 (1988), $42,500 (1989), $15,000 (1990).

E As per Statement of Change in Financial Position.

F In addition, the taxpayer had cash in bank of $305,460 (1990), $303,673 (1991), $319,153 (1992).

The balance sheet as at July 31, 1994, shows that in 1993 there was $35,626 cash in the bank plus $250,000 in term deposits for a total of $285,626. The same figures for 1994 are $8,044, $269,154, $277,198. In 1992 there was what the witness called “a wipe out” because of bad weather. This resulted in payment of government assistance of 264,117 in 1993. There was less severe but still damage from inclement weather in 1993. The government assistance with respect to that was 11,969. This was received by the appellant in 1994. The basis on which the 1994 payment was made was reduced from the 1993 basis. The government program known as GRIP (Guaranteed Revenue Income Program) was said to be now extinct. Cuthbertson later added that: “Other programs have come into place which are much better now.” In the ’80s there was in existence government sponsored crop insurance. The witness went on to describe the appellant’s equipment and the high cost of new equipment. With reference to the term deposit this exchange took place between the witness and his counsel:

Q. Now in the ’80s, from 1981 through to 1989, did you use those reserves in part to operate?

A. We didn’t use the cash out of the reserves. We used them to allow us to take risks. We submitted many bids. When you tender things, sometimes you get them, sometimes you don’t. And it turned out we didn’t get as many as we hoped for. One of the reasons is in a declining market, as the profit picture starts to shrink, it’s very difficult to tender something. We know that next year you’re going to get less, it’s very difficult to tender how much you’re going to pay for it.

Q. When you say “tender”, this is —

A. For land.

Q. - bidding on land rental land?

A. And machinery too as well through sales, through dealerships and stuff like that.

He added by way of a general statement that since 1989 the reserves were used directly in relation to the appellant’s business. This included 1995. At that time the appellant had an account with 23,000 in cash plus 277,000 in term deposits. The witness was asked, based on his experience and the evidence he had given to the Court, what he considered to be a required reserve for the operations of the appellant. He replied one year’s total expenses. The appellant’s farming expenses before depreciation for the period 1983 to 1986 were placed before the Court. They are: 1983 - 197,861; 1984 - 197,828; 1985 - 270,756; 1986 - 213,496. As already indicated those figures for the period 1987 to 1994 are: 1987 - 150,523; 1988 - 139,117; 1989 - 231,271; 1990 - 226,078; 1991 - 205,103; 1992 - 278,806; 1993 - 345,918; 1994 - 298,865. After this evidence was in Cuthbertson expressed the view that depreciation should also be considered. The figures for that are: 1983 - 57,504; 1984 - 57,958; 1985 - 55,182; 1986 - 52,013; 1987 - 40,054; 1988 - 32,641; 1989 - 28,446; 1990 - 26,222; 1991 - 24,549; 1992 - 26,653; 1993 - 32,257; 1994 - 29,894. He also emphasized that he regarded one year’s expenses as a minimum reserve. This to be done on a year-to-year basis and is inclusive of depreciation.

The foregoing 1s the substance of what was placed before this Court by the appellant and what is relied on by it to discharge the onus it has to establish on a balance of probability that the reassessments are in error.

In my opinion the appellant has not established that the 18,000 or 13,000 was income from property that was incident to or pertained to an active business carried on by it in 1988 and 1989 within the meaning of paragraph 129(4.1)(b) of the Act and in this regard I rely on what was said in Atlas and McCutcheon about this paragraph. It is also my opinion that the appellant has not established that the sums mentioned were income from property used by the appellant or held principally by it for the purpose of gaining or producing income from an active business carried on by it during the years just referred to within the meaning of paragraph 129(4. l)(c) of the Act. In this regard I make special reference to what was said by Strayer J. and Wilson J. in McCutcheon and Ensite regarding this test: was the fund employed and risked in the appellant’s business? The recourse made to the term deposits by the appellant does not bring it within either paragraph (b) or (c) of subsection 129(4.1). It will be seen from the document previously referred to entitled “Farhills Farming Limited Summary of Various Information on Financial Statements” that except for 1983 there was an increase in the term deposits over the previous year during the period 1981 to 1989. In 1983 there was a shareholder’s loan to Cuthbertson’s parents of 100,000. The evidence does not establish a rational relationship between these amounts and reasonably determined reserves. This passage from the reasons for judgment delivered by Mr. Justice Strayer has, in my view, particular application to the case at hand:

One can readily understand, and admire, the position taken by Mr. McCutcheon, the President of the plaintiff company, that he would not want to farm without cash reserves, having seen many farm failures in the past by those who had inadequate reserves. But there is the basic problem in that the plaintiff has not shown clearly what would be a reasonable reserve nor does the evidence indicate any rational relationship between the principal sums accumulated and the reserves required. Mr. McCutcheon spoke of wanting the equivalent of two years expenses available in cash reserves. But the principal sums in question here have simply been allowed to grow by reinvestment of interest and by transfers from the current account without any indication of a rational plan or any evidence that such a plan was being followed.

I emphasize the words “basic problem”.

Appeals dismissed.