O’Connor,
J.T.C.C.:—
This
appeal
was
heard
in
Toronto,
Ontario
on
February
7,
1994
pursuant
to
the
General
Procedure
of
this
Court.
The
appellant,
Peter
Mackintosh
appeals
from
the
assessment
of
the
Minister
of
National
Revenue
("Minister")
for
his
1987
taxation
year
whereby
the
Minister
denied
him
"rollover"
treatment
pursuant
to
subsection
73(5)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act"),
with
respect
to
the
sale
in
1987
of
certain
of
his
shares
of
Mackintosh
Flexo-Gravure
Limited
("Flexo")
to
his
two
daughters,
Mehgan
and
Heather,
on
the
basis
that
Flexo
did
not
satisfy
the
provisions
of
the
Act
in
order
to
qualify
as
a
small
business
corporation
within
the
meaning
of
subsection
248(1)
of
the
Act.
The
appellant
is
the
president
of
Flexo
and
presented
his
case
without
assistance
from
a
lawyer.
He
owned
65
per
cent
of
Flexo
and
his
wife
owned
35
per
cent.
The
issue
is
directly
related
to
and
depends
on
whether
the
income
earned
by
Flexo
in
1987
from
certain
term
deposits
was
active
business
income
of
Flexo
or
income
from
property.
At
the
end
of
the
1986
taxation
year,
the
balance
sheet
of
Flexo
shows
that
it
had
cash
on
hand
of
$739,351.
The
said
balance
sheet
also
shows
a
bonus
payable
of
$230,000
as
well
as
income
tax
payable
of
$182,476.
During
the
first
three
months
of
the
1987
calendar
year,
those
liabilities
were
paid.
Commencing
in
March
of
1987,
the
cash
on
hand
was
converted
initially
into
$400,000
of
term
deposits.
By
the
end
of
the
1987
taxation
year,
the
term
deposits
amounted
to
$550,000
and
the
interest
earned
thereon
by
the
appellant
was
$24,870.
The
1987
financial
statements
of
Flexo
show
that
there
were
accrued
bonuses
of
$421,523
and
dividends
paid
of
$222,923.
It
is
common
evidence
that
Flexo
operated
an
extremely
successful
and
profitable
business
in
inks,
particularly
water-based
ink.
According
to
the
notice
of
appeal,
Flexo
claimed
the
following
reserves:
first,
$75,000
to
cover
anticipated
claims
due
to
latent
defects
in
the
product;
second,
$75,000
to
cover
the
risk
of
environmental
damage;
third,
$75,000
for
potential
secondary
environmental
damage;
fourth,
$50,000
to
cover
an
anticipated
increased
tax
liability
for
the
1987
taxation
year;
fifth,
$75,000
to
cover
the
temporary
and
possibly
permanent
replacement
of
a
key
employee;
sixth
$50,000
to
self-
insure
employees’
medical
and
dental
coverage;
seventh,
$50,000
to
match
contributions
which
employees
might
make
to
their
own
RRSP
plans;
and
Flexo
allocated
a
portion
of
its
funds
to
meet
the
requirements
of
purchasing
its
rented
premises.
The
notice
of
appeal
also
states
that
the
appellant
supplied
products
on
a
trial
basis
sometimes
with
the
result
that
if
the
customer
was
not
satisfied
the
appellant
would
not
get
paid.
The
notice
of
appeal
also
alleges
that
the
appellant
had
to
pay
its
suppliers
promptly.
Thus
cash
was
required.
The
assumption
was
that
since
reserves
were
required
the
appellant
needed
the
moneys
for
business
purposes
and
consequently
the
interest
on
the
term
deposits
was
active
business
income
in
whole
or
in
part.
At
trial
the
appellant
did
not
argue
the
need
for
reserves
at
any
length
and
the
evidence
indicated
that
extremely
small
amounts
were
ever
required
to
meet
the
contingencies
mentioned
above.
The
appellant’s
position
at
trial
was
that
the
business
was
a
small
business
in
every
normal
sense
of
the
word
—
only
three
or
four
employees,
small
location,
etc.
The
appellant
on
the
asset
test
aspect
proposed
that
one
should,
in
a
case
like
this,
put
considerable
value
on
goodwill
and
know-how
and
not
simply
look
at
hard
assets.
He
gave
the
example
that
if
Flexo
was
generating
earnings
of
$800,000
one
should
value
the
company
on
an
eight
per
cent
multiplier
basis
and
find
that
the
true
value
was
8
x
$800,000.
Consequently
a
large
value
would
be
allocated
to
goodwill
and
know-how
and
the
company
would
meet
the
asset
test.
The
difficulty
here
is
that
the
financial
statements
do
not
treat
the
assets
in
this
way.
Moreover
no
evidence
was
submitted
in
support
of
this
hypothetical
approach
and
no
authority
sanctioning
same
was
mentioned.
The
Court
sympathizes
with
the
appellant's
position
that
he
is
in
effect
being
punished
by
the
tax
system
because
the
business
was
so
successful
in
generating
large
amounts
of
cash.
However
the
Court
must
apply
the
law
as
written
and
interpreted
by
the
decided
cases.
The
respondent
submits
that
the
interest
was
income
from
property
and,
therefore,
not
deductible
under
subsections
125(1)
and
125.1(1).
The
relevant
provisions
of
the
Act
include
subsections
248(1)
(definitions
of
small
business
corporation
and
active
business);
73(5)
("rollover");
125(1)
(small
business
deduction);
129(4.1)
(income
or
loss
from
a
source
that
is
property);
paragraphs
125(7)(a)
(active
business
carried
on
by
a
corporation)
and
125(7)(c)
(income
from
an
active
business)
which,
so
far
as
material,
reads
as
follows:
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;
“small
business
corporation”
at
any
particular
time
means
a
particular
corporation
that
is
a
Canadian-controlled
private
corporation
all
or
substantially
all
of
the
assets
of
which
were
at
that
time
(a)
used
in
an
active
business
carried
on
primarily
in
Canada
by
the
particular
corporation
or
by
a
corporation
related
to
it
73(5)
For
the
purposes
of
this
Part,
where
at
any
particular
time
a
taxpayer
has
transferred
property
to
his
child
who
was
resident
in
Canada
immediately
before
the
transfer
and
the
property
was,
immediately
before
the
transfer,
a
share
of
the
capital
stock
of
a
small
business
corporation,
except
where
the
rules
in
subsection
74(2)
require
any
taxable
capital
gain
from
the
disposition
by
the
taxpayer
of
that
property
to
be
included
in
the
income
of
a
person
other
than
the
taxpayer,
the
following
rules
apply:
(a)
the
taxpayer
shall
be
deemed
to
have
disposed
of
the
share
at
the
time
of
the
transfer
and
to
have
received
proceeds
of
disposition
therefor
equal
to
the
amount,
if
any,
by
which
(i)
the
fair
market
value
of
the
share
exceeds
the
lesser
of
(ii)
the
taxpayer's
capital
gain
otherwise
determined
from
the
disposition
of
the
share,
and
(iii)
the
amount
of
the
taxpayer’s
cumulative
small
business
gains
account
immediately
before
the
transfer
or
such
lesser
amount
as
the
taxpayer
specifies
in
respect
of
the
transfer
of
the
share;
(b)
the
child
shall
be
deemed
to
have
acquired
the
share
at
a
cost
equal
to
the
proceeds
of
disposition
deemed
to
have
been
received
by
the
taxpayer
under
paragraph
(a);
and
(c)
where
two
or
more
shares
have
been
disposed
of
at
the
same
time,
this
subsection
applies
as
if
each
share
had
been
separately
disposed
of
in
the
order
designated
by
the
taxpayer
or
if
the
taxpayer
does
not
so
designate,
in
the
order
designated
by
the
Minister.
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
20
per
cent
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
(other
than
the
income
of
the
corporation
for
the
year
from
a
business
carried
on
by
it
as
a
member
of
a
partnership),
and
(ii)
the
specified
partnership
income
of
the
corporation
for
the
year
exceeds
the
aggregate
of
(iii)
the
aggregate
of
all
amounts
each
of
which
is
a
loss
of
the
corporation
for
the
year
from
an
active
business
carried
on
in
Canada
(other
than
a
loss
of
the
corporation
for
the
year
from
a
business
carried
on
by
it
as
a
member
of
a
partnership),
and
(iv)
the
specified
partnership
loss
of
the
corporation
for
the
year,
(b)
the
amount,
if
any,
by
which
the
corporation's
taxable
income
for
the
year
exceeds
the
aggregate
of
(i)
10/4
of
the
aggregate
of
amounts
that
would
be
deductible
under
subsection
126(1)
from
the
tax
for
the
year
otherwise
payable
by
it
under
this
Part
if
the
amount
determined
under
subparagraph
126(7)(d)(i)
were
determined
without
reference
to
paragraph
123(1)(c),
an
(ii)
two
times
the
aggregate
of
amounts
deducted
under
subsection
126(2)
from
the
tax
for
the
year
otherwise
payable
by
it
under
this
Part,
and
(c)
the
corporation’s
business
limit
for
the
year.
129(4.1)
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
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.
125(7)
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:
(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));
The
question
is,
therefore,
was
the
$24,870
of
interest
income
active
business
income
or
income
from
property?
To
qualify
as
active
business
income,
it
must
be
income
from
an
active
business
carried
on
by
Flexo,
including
any
income
for
the
year
pertaining
to
or
incident
to
that
business,
but
excluding
income
for
the
year
from
a
source
in
Canada
that
is
property.
In
the
present
case
it
is
clear
that
Flexo
was
not
carrying
on
an
investment
business.
Therefore,
the
Court
must
determine
whether
or
not
the
interest
income
pertained
to
or
was
incident
to
its
ink
business.
It
is
clear
from
the
evidence
that
the
funds
represented
by
the
term
deposits
were
not
needed
to
pay
ongoing
expenses,
such
as
suppliers
and
wages.
The
moneys
necessary
for
those
purposes
were
paid
out
of
current
revenues.
The
evidence
did
not
disclose
any
pressing
need
for
setting
up
the
reserves
and
allocations
mentioned
in
the
notice
of
appeal
nor
was
there
any
evidence
as
to
how
the
appellant
arrived
at
the
amounts
of
the
reserves.
In
other
words
the
funds
were
not
needed
in
the
business.
The
moneys
constituting
the
term
deposits
were
not
incidental
to
or
pertaining
to
the
business
as
they
were
not
required
in
the
ongoing
operations
of
the
business
or
to
meet
the
reserves
and
allocations
alleged
in
the
notice
of
appeal.
The
term
deposits
were
never
cashed
prior
to
maturity
but
were
either
“rolled
over"
or
deposited
into
a
bank
account
and
reinvested
in
more
term
deposits
at
a
later
date.
At
trial,
counsel
for
the
respondent
referred
to
an
unreported
decision
of
this
Court
(Sobier,
J.)
dated
April
8,
1993
(now
reported
at
Mackintosh
Flexo-Gravure
Ltd.
v.
Canada,
[1993]
2
C.T.C.
3076),
a
decision
which
dealt
with
the
exact
issue
in
this
case
in
an
appeal
under
the
informal
procedure
by
Flexo
and
the
appellant's
wife.
As
in
the
present
case
the
question
was
whether
in
1987
Flexo
was
a
small
business
corporation.
That
case
stated
at
pages
3079-80:
Wilson,
J.
made
it
clear
in
Ensite
Ltd.
v.
The
Queen,
[1986]
2
S.C.R.
509,
[1986]
2
C.T.C.
459,
86
D.T.C.
6521,
a
decision
of
the
Supreme
Court
of
Canada,
that
to
qualify,
the
moneys
in
question
must
be
employed
or
risked
in
the
business.
At
page
520
(C.T.C.
464,
D.T.C.
6525),
she
said:
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.
M.N.R.,
[1977]
C.T.C.
2527,
77
D.T.C.
371
(T.R.B.)
at
page
2531
(D.T.C.
374).
Here,
the
moneys
were
in
fact
withdrawn
to
pay
bonuses
and
dividends
with
no
destabilizing
effect.
Flexo
continued
to
prosper.
The
business
did
not
rely
on
the
term
deposits
either
in
a
primary
fashion
or
as
a
back-up.
As
Associate
Chief
Judge
Christie
of
this
Court
said
in
Atlas
Industries
Ltd.
v.
M.N.R.,
[1986]
2
C.T.C.
2392,
86
D.T.C.
1756
(T.C.C.)
at
page
2404
(D.T.C.
1764):
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.
In
light
of
the
foregoing,
I
find
that
the
$24,870
of
interest
income
was
not
active
business
income
but
income
from
property.
Having
determined
that
the
assets
in
question,
the
term
deposits
and
cash,
were
not
used
in
an
active
business,
it
flows
that
since
they
represented
over
50
per
cent
of
the
gross
assets
of
Flexo
in
1987,
not
all
or
substantially
all
of
the
assets
of
Flexo
were
used
principally
in
an
active
business
as
required
by
subsection
248(1)
of
the
Act
and,
therefore,
Flexo
was
not
a
small
business
corporation
as
required
by
subsection
73(5)
of
the
Act.
I
have
found
no
reason
to
differ
from
the
decision
of
Sobier,
J.
and
consequently,
this
appeal
is
dismissed.
Appeal
dismissed.
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