McCutcheon Farms Ltd. v. Minister of National Revenue, [1988] 1 CTC 2349, 88 DTC 1208

Sarchuk, T.C.J.: —McCutcheon Farms Ltd. appeals from reassessments of income tax for its 1981, 1982 and 1983 taxation years. In filing its income tax returns for those years the appellant reported interest income in the amounts of $43,863 (1981), $68,213 (1982) and $47,418 (1983). Concurrently the appellant claimed in respect of these amounts the small business deduction pursuant to the provisions of subsection 125(1) of the Income Tax Act.

The respondent reassessed to reduce the appellant’s active business income available for its small business deduction by removing its interest income earned from its other active business income.

The facts assumed by the respondent in so reassessing are as follows:

(a) that the interest income referred to in paragraph one of the Notice of Appeal were surplus funds invested in term deposits. These funds were generated by the appellant’s business activities;

(b) that the appellant had term deposits, interest income, other income and net income from 1977 to 1983 as follows:

	Term		Other	Net
Year	Deposits	Interest	Income	Income
1977	$ 70,000	$12,802	$103,128	($10,837)
1978	50,000	16,918	228,134	37,764
1979	50,000	19,780	226,007	33,992
1980	100,000	29,139	206,306	44,396
1981	100,000	43,803	231,627	62,641
1982	200,000	68,213	273,896	80,402
1983	200,000	42,111	188,497	53,237

(c) that the funds invested in the term deposits, as set out in paragraph (b) above were funds in excess of the appellant's day to day financial requirements; and

(d) that the interest income on the term deposits was income from a property and it was not incident to or pertaining to the active business carried on by the appellant.

In reaching this conclusion the respondent also relied upon the provisions of paragraphs 125(6)(e), 129(4.1)(b) and 129(4.1)(c) of the Income Tax Act.

The issue is whether the interest income in dispute is active business income as contended by the appellant or income from a source in Canada that is a property as referred to and defined in paragraph 125(6)(e) and subsection 129(4.1) of the Act (sometimes referred to as "Canadian investment income”).

The appellant, McCutcheon Farms Ltd., was incorporated in 1976 under the Business Corporations Act of Saskatchewan to conduct a farming operation and to process and sell seed and chemicals. At all relevant times Mr. Orville Allan McCutcheon was the president of the appellant and he, together with his wife, were the only shareholders and directors.

Mr. McCutcheon testified regarding the business activities of the appellant. Since its inception the company has rented 640 acres of land from Mr. McCutcheon and a further 960 acres from another company, all of which land it farms. During each taxation year the appellant also custom farmed up to an additional 400 acres of land. Its principal farming activity was the growing of commercial and pedigreed seed for sale to the seed trade. The appellant processed the commercial seed it produced and sold it either locally or to wholesalers such as Cargill, Taylor's Flour & Feed, or Pioneer Grain. In addition to growing seed McCutcheon Farms also purchased seed from other growers in the area, cleaned it and resold it to wholesale and retail customers. The appellant did not restrict its cleaning operation to its own product and provided custom cleaning for other farmers amounting to some 100,000 bushels a year. One other major facet of the appellant's business was the provision of a chemical and fertilizer service to local farmers. In a normal year it purchased from $80,000 to $125,000 worth of chemicals and fertilizer for resale.

The nature of the business carried on by the appellant in all relevant years was identical to that carried on by Mr. McCutcheon for many years prior to 1976. Upon incorporation all of Mr. McCutcheon's farm assets, excepting the land, were transferred to McCutcheon Farms Ltd., and for all practical purposes the operations were conducted as before.

In the years when Mr. McCutcheon personally carried on the farm operation all surplus earnings were held by him on deposit at Cargill and at the Canadian Imperial Bank of Commerce (CIBC). That practice was continued by the appellant. The funds at the CIBC were generally invested in 30 or 60 day term deposits. These term deposits amounted to $100,000 in 1981 and $200,000 in 1982 and 1983. With respect to the CIBC term deposits, the principal was never withdrawn or encroached upon and the interest earned was automatically credited to the appellant's current account as it became due. This, in Mr. McCutcheon's words "helped the current account along”.

The appellant’s 1981 financial statement discloses a shareholders loan due to Mr. McCutcheon amounting to $225,322. This debt was incurred by the appellant shortly following incorporation and consists of the cost of acquiring machinery and a cash advance from Mr. McCutcheon. When the appellant commenced carrying on the farm operation McCutcheon transferred the sum of $117,000 in Cargill deposits to the appellant. These were demand deposits which could be withdrawn simply by giving Cargill notice. Although short-term, these deposits produced a very high rate of return. According to Mr. McCutcheon this practice afforded him, and at the relevant time, the appellant, a better credit rating with Cargill.

From September 30, 1976 when Mr. McCutcheon made the initial transfer of funds on deposit at Cargill to the appellant, all earned interest was automatically credited to that account. No withdrawals were made by the appellant until December 23, 1982. On that date Cargill required its clients to withdraw all deposits in excess of $100,000. The appellant withdrew the excess in the sum of $145,000, and immediately invested it in a similar demand deposit at the Saskatchewan Wheat Pool. It remained there undisturbed and earning interest throughout the remaining period of time in issue.

Mr. McCutcheon stated that although the appellant was required to and normally did pay its trade accounts within 30 days, its customers were somewhat less prompt. Of the 20 to 30 farmers who regularly purchased chemicals, fertilizer and seed from it, some paid upon delivery while others deferred payment for periods of up to six months or longer. Furthermore the nature of its business was such that it was necessary for the appellant to carry an inventory. To acquire inventory at the best price the appellant often purchased towards the end of the calendar year, a time at which its suppliers, notably Cargill, Cominco and Sherritt Gordon, would frequently offer special prices. Mr. McCutcheon alleged that these factors made it necessary for the appellant to maintain a substantial cash balance in its current account and to ensure that its other deposits were available on short notice.

Mr. McCutcheon testified that as a general rule the major suppliers required financial information from the appellant to enable them to set appropriate credit limits. Performance bonds were taken out by some suppliers with respect to the activities of distributors such as the appellant. To qualify the appellant was required to provide proof of financial stability. The large cash reserves on deposit at CIBC and Cargill were in part maintained for that reason.

The appellant's position is that during the relevant taxation years it carried on the active business of farming and that the interest income was its income from that active business in that it was income pertaining to or incident to that business. Counsel submitted that the Minister’s reassessment was wrong because subsection 129(4.1) of the Act specifically excludes income from any property that is incident to or pertains to an active business and income from any property used or held principally for the purpose of gaining or producing income from an active business carried on by it from consideration or inclusion as "Canadian investment income”. As a result the provisions of section 125 are applicable and permit the appellant to deduct from tax otherwise payable the small business deduction as set out in the provisions of section 125 of the Act.

The respondent's position is that the interest income in issue is Canadian investment income, and that while the appellant is not entitled to the small business deduction pursuant to section 125 of the Act, it is entitled to recover a portion of the tax paid pursuant to the various provisions of section 129 of the Act.

The primary thrust of the appellant's argument was that the interest income was income from property used or held principally for the purpose of gaining or producing income from the farm business. Counsel relied on The Queen v. Marsh and McLennan Limited, [1983] C.T.C. 231; 83 D.T.C. 5180 (F.C.A.), Brown Boveri Howden, Inc. v. The Queen, [1983] C.T.C. 301; 83 D.T.C. 5319 (F.C.A.), Canadian Marconi Company v. The Queen, [1986] 2 C.T.C. 465; 86 D.T.C. 6526 (S.C.C.), Supreme Theatres Limited v. The Queen, [1981] C.T.C. 190; 81 D.T.C. 5136 (F.C.T.D.), March Shipping Ltd. v. M.N.R., [1977] C.T.C. 2527; 77 D.T.C. 371, and Ensite Limited v. The Queen, [1986] 2 C.T.C. 459; 86 D.T.C. 6521 (S.C.C.).

In general terms the issue under consideration in these cases was whether particular income was income from property used principally for the purpose of producing income from the primary business. Counsel for the appellant contended that these decisions made it evident that the general test was whether the property, in this case the term deposits, was employed or risked in the taxpayer's farm business. He conceded that the risk had to be more than a remote risk and that a simple business purpose for the use of the property was not enough. The test was met if the appellant could establish that the withdrawal of the property would have a decidedly destabilizing effect on its farm operation. In this context the question was not whether the appellant was forced to use a pertinent property to do business, but whether the property was used to fill a requirement which had to be met in order to do business. Referring to the evidence adduced counsel made the following submissions in support of the appellant's position:

(a) The term deposits were used as part of the working capital.

(b) The appellant was self-insured. It did not carry insurance on its buildings, inventory or equipment, nor did it carry any form of liability or crop or hail insurance. Although conceding that it was unlikely that there would be a complete loss of income as a result of a complete crop failure, counsel argued that the risk of a crop failure or the alternative risk of a recession in the agricultural industry would be such that there would be no income. The need for substantial cash reserves as a back-up in such an eventuality was self-evident. The fact that they were never required during the years in issue was not relevant.

(c) The fact that these amounts were invested in short-term investments confirmed that the funds were held “for the purpose of being used as required in the farm business". Counsel argued: “if the appellant had intended that the funds be invested it would have invested them at a substantially greater rate of return by, for example, investing them in a five year term deposit".

(d) The term deposits were set aside to purchase new capital assets. The appellant's business strategy was to expand its farm operations. It had been actively seeking to purchase land and viewed the funds as having been set aside for the purposes of expansion of its business. Counsel submitted that this fact was corroborated by an offer to purchase of land made on October 30, 1981 (Exhibit A-9) and evidence of a further verbal offer for a substantial piece of property.

(e) The term deposits were an integral part of the business in that the interest income had a substantial impact on the total revenue; formed an integral part of the manner in which the farm business was financed and were necessary to the overall farm operation. In this latter context counsel argued that they could not be considered subsidiary or ancillary since they could not have been severed from the farm business without jeopardizing the business. The interest income was $43,863 in 1981, $68,213 in 1982 and $47,418 in 1983 and had a substantial impact on the total revenue and its elimination would have a destabilizing effect on the farm operations. These revenues were there regardless of economic conditions or farming conditions, and as such would have a significant effect on the farm operation even though the interest income formed only 15 or 16 percent of the gross income in those years.

(f) In order to carry on a farm service business in chemicals and fertilizer it was necessary to have an extremely sound financial structure, failing which the fertilizer and chemical suppliers would not have done business with the appellant. Counsel conceded that there was little evidence as to the level of financial stability demanded, but submitted that one could readily accept the fact that without such evidence, the suppliers would not have been anxious to have the appellant as their distributor.

This evidence, it was contended, established that the interest income was income from property used or held principally for the purpose of gaining or producing income from the farm business.

Sections 125 and 129 of the Income Tax Act require a distinction to be drawn between two sources of income — income from an active business and income from property. For the taxation years under appeal the issue relates to the interpretation of subparagraph 125(6)(e) and subsection 129(4.1). The relevant portions of these sections provide:

125(6)(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));

[Emphasis added.]

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.

[Emphasis added.]

The cases cited by both counsel on this issue dealt with the provisions of sections 125 and 129 of the Income Tax Act as they read prior to 1979. In that year a series of changes were introduced to sections 125 and 129 by S.C. 1979, c. 5. One such change was to drop the expression ”. . . other than a property used or held by the corporation in the year in the course of carrying on a business” from subparagraph 129(4)(a)(ii) of the Act. At the same time as the aforesaid expression was dropped from subparagraph 129(4)(a)(ii), subparagraph 129(4)(a)(iii) was withdrawn altogether and subsection 129(4.1) was added to the Act. This new provision replaced the aforesaid expression by a more detailed enumeration and introduced the notion of “specified investment business” which was defined in paragraph 125(6)(h) of the Act.

Following these amendments, several cases dealing with the pre-1979 Income Tax Act were decided, among them The Queen v. Marsh & McLennan Limited (supra) and Ensite Limited v. The Queen (supra). Although it was common ground that the decision of the Supreme Court of Canada in Ensite (supra) was applicable, both counsel implied that the Ensite test should now be applied in the context of the legislative changes. Counsel for the appellant argued that the words "pertaining to or incident to" used in subparagraph 129(4.1)(b) were designed to sweep property income such as that dealt with in Marsh & McLennan (supra) and in the case at bar into the ambit of active business income. Counsel for the respondent for her part argued that the new language used in subparagraph 129(4.1)(c) is broader than the former legislation and that the use of the qualifying adjective “principally” had the effect of expanding the meaning of property income. In view of these submissions it is appropriate to review both decisions.

In Marsh & McLennan (supra) the issue was whether interest income derived by an insurance brokerage company from the temporary investment in short-term obligations of the "float" in respect of premiums received from clients for remittance (less commissions) to the appropriate insurance companies, should be characterized as Canadian investment income within the meaning of subparagraph 129(4)(a) of the Income Tax Act. Before the Tax Review Board in Marsh & McLennan Limited v. M.N.R., [1979] C.T.C. 2388; 79 D.T.C. 314 the taxpayer was successful as it was felt by Mr. St- Onge (as he then was) that "the main business [of the appellant company] was the selling of insurance policies and short-term loans was only a subsidiary or ancillary part of the company's operation". On appeal before the Federal Court, Trial Division in The Queen v. Marsh & McLennan Limited, [1981] C.T.C. 410; 81 D.T.C. 5307, Jerome, A.C.J. found that "the determination by the Board, both in respect to relevant facts and to applicable law, is fully in accord with my own". In the view of Jerome, A.C.J. the notion of “subsidiary or ancillary investment to the taxpayer's main business” (which concept originated from the case of March Shipping Ltd. v. M.N.R., [1977] C.T.C. 2527; 77 D.T.C. 371 (T.R.B.)) was applicable to the facts in Marsh & McLennan (supra).

In 1983, the Federal Court of Appeal reversed the decision of the Federal Court, Trial Division, in Marsh & McLennan (supra) i.e., the amount of unremitted premium invested was held to be property used or held by the corporation in the course of carrying on a business within the meaning of the exclusion of subparagraph 129(4)(a)(ii) of the Income Tax Act. Instead of relying on March Shipping (supra) and its notion of “subsidiary or ancillary investment to the taxpayer's main business", Clement, D.J. affirmed that the words "used or held” were broad enough to categorize the investment made by the corporation as producing business income. The test, he held, is not whether or not the investment was subsidiary or ancillary to the taxpayer's main business, it is whether the investment of funds for revenue has "some" connection with the taxpayer's business. At page 242 (D.T.C. 5189), Clement, D.J. wrote:

To use the words employed by Rowlatt, J. in Scales v. George Thompson and Company Limited, [1927] 13 T.C. 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 and the business.

[Emphasis added.]

At page 243 (D.T.C. 5190), LeDain, J. concurred with Clement, D.J. but proposed a test which has a more limited application:

. . . 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 insurers.

[Emphasis added.]

In Ensite Limited v. The Queen (supra) the issue arose as a result of the establishment by Ensite (a company manufacturing automotive engines), of a stamping plant in the Philippines. To satisfy the Philippines’ foreign exchange currency requirements and at the same time insulate itself from foreign exchange controls and devaluation of the Philippines peso, Ensite entered into elaborate swap arrangements. In essence, these arrangements involved borrowing Philippines pesos from commercial banks and using such pesos to fund the operation of the plant. At the time each such loan was made Ensite would deposit U.S. funds with the particular lending institution, in an amount equivalent to the peso loan then received. These deposits bore interest payable in U.S. dollars at competitive world market rates, and the question was whether such interest constituted “foreign investment income" for the purposes of paragraph 129(4)(b) as it read in respect of the 1975 and 1976 taxation years.

Before the Federal Court, Trial Division in Ensite Limited v. M.N.R., [1981] C.T.C. 445; 81 D.T.C. 5326 and the Federal Court of Appeal in The Queen v. Ensite Limited, [1983] C.T.C. 296; 83 D.T.C. 5315, this question was answered in the affirmative. In both cases the Court's reasoning was based on the Tax Review Board's decision in March Shipping Ltd. (supra) and the Federal Court, Trial Division's decision in Marsh & McLennan Limited (supra). Before the Supreme Court of Canada, it was held that the U.S. fund deposits were "property used or held by the corporation in the year in the course of carrying on a business” and that the interest earned thereon was therefore income”. Speaking for the Court, Wilson, J. reached that conclusion using the test formulated by LeDain, J. in the Marsh & McLennan case (supra). According to Wilson, J. (at page 463 (D.T.C. 6524)) LeDain, J.'s test was preferable to Clement, D.J.'s test "because it emphasizes that the holding or using of the property must be linked to some definite obligation or liability of the business". This corporate obligation, liability or “risk”, the Court added, "means more than a remote risk”. Referring to the statutory framework of the Income Tax Act prior to the amendments of 1979, Wilson, J. explains at pages 464-65 (D.T.C. 6525-26) where LeDain, J.'s test fits in:

. . . the legislative intention underlying [the legislative framework prior to the amendments of 1979] . . . was to catch income from property that is employed or risked in the taxpayer's business to such an extent that the income from it could be characterized as active business income. The use of words such as "employed" and “risked” appropriately implement Parliament's intention.

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., supra, at 2531 (D.T.C. 374). This would distinguish the investment of profits from trade in order to achieve some collateral purpose such as the replacement of a capital asset in the long term (see, for example, Bank Line Ltd. v. Commissioner of Inland Revenue (1974), 49 T.C. 307 (Scot. Ct. of Session)) from an investment made in order to fulfil a mandatory condition precedent to trade (see, for example, Liverpool and London and Globe Insurance Co. v. Bennett, [1913] A.C. 610 (H.L.) and Owen v. Sassoon (1951), 32 T.C. 101 (Eng. H.C.J.)). Only in the latter case would the withdrawal of the property from that use significantly affect the operation of the business. The same can be said for a condition that is not mandatory but is nevertheless vitally associated with that trade such as the need to meet certain recurring claims from that trade: see, for example, The Queen v. Marsh & McLennan, Ltd., supra and The Queen v. Brown Boveri Howden Inc., [1983] C.T.C. 301; 83 D.T.C. 5319 (F.C.A.).

It is true that in this case the taxpayer could have done business and fulfilled the Philippines requirement that foreign currency be brought into the country by a means not involving the use of property. It could have borrowed the U.S. currency abroad and brought it into the Philippines. But this consideration is irrelevant to our inquiry. The test is not whether the taxpayer was forced to use a particular property to do business; the test is whether the property was used to fulfil a requirement which had to be met in order to do business. Such property is then truly employed and risked in the business. Here the property was used to fulfil a mandatory condition precedent to trade; it is not collateral, but is employed and risked in the business of the taxpayer in the most intimate way. It is property used or held in the business.

The criteria established by Wilson, J. apply with equal force to the provisions of sections 125 and 129 as amended. In my view the legislative changes do not derogate from or alter the basic intention of Parliament to distinguish between active business income and income from property.

With these criteria in mind I turn to the facts before me. I have concluded that the appellant's appeal fails because the test set out in Ensite (supra) has not been met. On the evidence adduced, it cannot be said that the property in issue was employed or risked in the appellant's farm business. I do not accept counsel's submissions that the term deposits were an integral part of the financing of the appellant's farm business, nor were they necessary to the overall operation. In my view, at all times the term deposits were surplus and collateral to the active business. The funds were not used regularly in the course of the business, nor was there any realistic expectation that they would be used in the business. Although some of the interest from the term deposits held at the Canadian Imperial Bank of Commerce was credited to the appellant's current account, the evidence adduced did not satisfy me that this was necessary to fulfil a business requirement which had to be met in order to do business.

The Cargill term deposits (and later the deposits with the Saskatchewan Wheat Pool) were never used for any purpose associated with the active farm business. They were not used to cover operating expenses, nor were they required or used as collateral. Their existence may have helped to satisfy the suppliers of the financial stability of the appellant, but these funds were never committed or put at risk. There was no evidence that the holding or using of the Cargill deposits was linked to some definite obligation or liability of the business. Indeed, the evidence was that at a particular point of time Cargill refused to accept for deposit the amounts the appellant wished to invest.

Counsel contended that the term deposits could not have been severed from the active farm business without jeopardizing that business. There is little or no evidence to support that argument. It would be difficult on the facts of this case to find that the income generated by the term deposits had such an impact on total revenue that its removal would have “significantly affected” the current operations of the farm business. These were not investments made in order to fulfil a mandatory condition precedent to trade, nor were the investments made to comply with a condition vitally associated with its active business. There was no cogent evidence that the reserves were required to meet certain recurring claims arising in the course of its business as was the case in Marsh & McLennan (supra).

The fact that the term deposits at Cargill and at the CIBC could be described as short-term investments by itself does not support the appellant's position. Any argument that these funds had to be available at short notice is negated by the fact that throughout the taxation years in question, and indeed throughout the prior years when Mr. McCutcheon was operating the farm business, the deposits were never called upon to cover operating losses or to provide collateral in any business transaction. In addition there was no evidence of regular reliance by the appellant on these funds or of any real expectation of a risk requiring self insurance.

With respect to the argument that these funds were necessary for the purpose of future acquisition of capital assets, that argument as well can be disposed of by reference to the decision in Ensite (supra). In the course of her judgment Wilson, J., at page 464 (D.T.C. 6525), distinguished the investment of profits from trade in order to achieve some collateral purpose, such as the replacement of a capital asset in the long term from an investment made in order to fulfil a mandatory condition precedent to trade. Only in the latter case would the withdrawal of the property from that use significantly affect the operation of the business. It follows that even if the term deposit was held for the purpose of acquiring more farm land at some point in the future it would not be "property used or held principally for the purpose of producing income from an active business" within the meaning of paragraph 129(4.1)(c).

In the alternative counsel contends that even if the Court were to hold that the interest income is not excluded from the definition of “Canadian investment income" by virtue of the provisions of paragraph 129(4.1)(c), it was nonetheless open to the Court to characterize that income as active business income, if it was income incident to or pertaining to an active business within the meaning of paragraph 125(6)(e), or if it were income from a property incident or pertaining to an active business within the meaning of paragraph 129(4.1)(b). In this context counsel relied upon two decisions, Atlas Industries Ltd. v. M.N.R., [1986] 2 C.T.C. 2392; 86 D.T.C. 1756 and Aqua-Gem Investments Limited v. M.N.R., [1986] 1 C.T.C. 2528; 86 D.T.C. 1392 (under appeal to the Federal Court, Trial Division).

In Aqua-Gem Investments (supra) the taxpayer corporation was loaned large sums of money by its shareholders. The taxpayer invested these sums in short-term deposits and during the taxation years in issue acquired various businesses which were in financial difficulty as part of its long-term expansion plans. It was alleged by the taxpayer that it wanted to take advantage of the recession then prevailing in order to acquire other businesses and it therefore needed to have a surplus of money readily available in order to take advantage of opportunities as they arose. It was argued that in those circumstances the short-term investments were an integral part of its business and the interest earned thereon was active business income.

Counsel for the appellant specifically referred the Court to the following passage at page 2543 (D.T.C. 1403):

Because of the goals of the appellant during the economic depression, explained above for 1979 and 1980, the Court thinks it is also reasonable to conclude that the interest income for 1981 from short-term investments is income “incident to" the appellant's business.

On the basis of this comment, counsel submits that it is fair to accept the proposition that if interest derived from the deposits is viewed as being necessary to expand the business, or ultimately used to expand the business, such interest income is incident to an active business. With all due respect this reasoning is inconsistent with the judgment of Wilson, J. in Ensite (supra) and I am not prepared to follow it.

In Atlas Industries (supra) the Court discussed the meaning of the phrase “incident to or pertains to an active business" at page 2404 (D.T.C. 1764-65):

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).

Counsel argued that such a relationship of dependence existed in the case at bar. He again relied on the fact that the appellant was self-insured and that the funds and deposits were, at the very least, a back-up asset that could be called upon if needed to meet contingencies. He further argued that dependence could be established by virtue of the unchallenged fact that it was the business strategy of the appellant to expand the business. That constituted a relationship between the property and the business. The third relational aspect put forward by counsel was the fact that a considerable portion of the interest income was used for the current operating expenses of the appellant.

As I have already noted, I do not accept counsel's assessment of the evidence adduced. Furthermore, income from the investment of surplus funds, held for future business needs or future capital expansion does not pertain and is not incident to the business any more than it is income from the business. The concluding words of the judgment in Atlas Industries (supra) are applicable to the case at bar and I quote:

Whether income-producing property has crossed the dividing line into the paragraph will depend on the facts of each case. I am satisfied that the facts under consideration do not place the relevant property within it. The relationship between the debts created by the term deposits and the appellant's businesses was tangential at best. The debts were never resorted to in aid of the appellant's businesses nor was there any real expectation that they would be.

The appeals are dismissed.

Appeals dismissed.