Atlas Industries Ltd. v. Minister of National Revenue, [1986] 2 CTC 2392, 86 DTC 1756

Christie, A.C.J.T.C.: The appellant appealed to this Court from reassessments by the respondent pertaining to its 1980, 1981 and 1982 taxation years. Counsel for the respondent informed the Court that he agreed that the appeal regarding the appellant’s 1980 taxation year should be allowed because of a difference in the relevant provisions of the Income Tax Act (“the Act”) in that year from what the Act prescribed in relation to the other two years. Accordingly these reasons are confined to the appellant's 1981 and 1982 taxation years.

The dispute is whether interest received by the appellant from the Bank of Nova Scotia in its 1981 and 1982 taxation years of $69,644 and $65,625 respectively is Canadian investment income. The appellant says it is. The respondent denies it.

One witness, Mr. Howard McKay, testified at the hearing. Recapitulated his evidence is that he is vice-president of the appellant, one of its directors and a 25 per cent shareholder. The remaining shares were divided among three others, each with 25 per cent. The appellant was incorporated on October 4, 1974, under the laws of Saskatchewan. Its head office is in Saskatoon. In the years under review it carried on business in an area within 100 miles of Saskatoon. Its business was the custom fabrication of sheet metal. It produced to order air-conditioning, ventilation and dust collection equipment. It was also engaged in the roofing business. In addition, a relatively small amount of finished products — in the order of $10,000 worth — was in inventory for sale. Contracts to sell equipment to order provided for payment upon completion of the work within 30 days of invoicing. The roofing business was conducted on the same basis.

The appellant’s fiscal year was July 1 to June 30. During the period July 1, 1979 to June 30, 1982, there would be about 25 employees (which included all four shareholders) in the metal shop. During that portion of the year climatically suitable for roofing, there would be an additional 30 employees. During the years just mentioned, investing company funds was dealt with by the witness, his father and Mr. Mel Peters, an officer of the company. Very little time, an estimated ten minutes a month, was spent on this. All investments were in term deposits with the Bank of Nova Scotia. The length of the terms was 30 or 32 days depending on whether the maturity date fell on a weekend. There may have been a few longer term investments, but 99 per cent were said to have been for 30 or 32 day periods. Investments were made on the basic premise that the appellant never required more than $100,000 on hand for operating purposes. No attempt was made to correlate maturity dates of the term deposits with receipt of non-interest income. Short-term deposits were chosen as the mode of investment because, at that time, interest rates in respect of them were as good or better than for long-term investments. Another reason given was: “We paid bonuses out to ourselves, the shareholders, and on the advice of our accountants, or when the need arose for any individual, we would withdraw money from that term deposit. When it was advantageous from a tax point of view, and on our accountant's recommendation, we would withdraw."

Financial statements prepared by a firm of chartered accountants and entered as an exhibit show short-term investments of the appellant as of June 30 in respect of the years 1978 to 1982 to be $150,000, $100,000, $450,000, $550,000 and $600,000. They also show that cash on hand and in the bank on each of these dates was $71,263, $20,078, $32,113, $66,753 and $23,956. The money in the bank was in a current account that did not pay interest. The financial statements show accounts receivable less allowance for doubtful accounts on the dates just referred to as $298,263; $415,059; $473,657; $366,086 and $198,831. Recourse to the term deposits to carry on the appellant's business was not anticipated. The business would not have been in jeopardy without the existence of the term deposits. It could be carried on without recourse to them. The money in the current account plus payments on receivables was regarded as sufficient to cover current expenses and, in fact, the term deposits were not resorted to by way of collateral on loans or otherwise for current requirements of the business nor were the funds involved needed to meet future capital requirements. It was said that if the need to resort to the term deposits had arisen the limit in this regard would never have exceeded $100,000. When funds used for term deposits were otherwise utilized, it was for the purpose of distributing benefits to the shareholders, primarily by way of bonuses. The shareholders were ultimately better off if the company rather than they invested in term deposits because the size of the deposits was greater thereby enhancing the rate of interest payable. In 1982 funds from term deposits were used in the redemption of shares. A document entered as an exhibit entitled “Compari- son of Interest Income to Operating Results'" prepared by the same chartered accountants shows interest as a percentage of gross revenue from 1975 to 1982 as — 0.8, 1.1, 0.3, 0.8, 2.9 and 2.6 respectively.

In cross-examination it was established that the money invested in the term deposits was a combination of profits, bonuses which had been declared but retained and shareholder's loans.

At the outset counsel for the appellant said that the “total issue" in this appeal is related to the words “is incident to or pertains to an active business" in paragraph 129(4.1)(b) of the Act. Counsel for the respondent added:

I can advise the Court, the reason we are limiting ourselves up to that basis, is because that is the basis on which the Minister’s assessment proceeded. He proceeded on the basis of paragraph (b) in this case, and that is why it is being limited to that narrow question of what does “incident to”, or “pertaining to” mean in any circumstances of this case, and the facts that Your Honour is about to hear.

The respondent is entitled to so limit himself, even if this appeal might have been challenged on a broader basis: Stubart Investments Limited v. The Queen, [1984] C.T.C. 294 at 299; 84 D.T.C. 6305 at 6309. In making this observation I am not to be taken as stating that if this had been done the result that follows may have been different.

Paragraph 125(6)(d) was enacted by subsection 38(6) of Statutes of Canada 1979, c. 5, and was made applicable to taxation years commencing after 1979. It states:

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 or a non-qualifying business.* [1]

Subsection 129(1) provided:

129(1) Where a corporation was, at the end of any taxation year, a private corporation, if a return of its income for the year has been made within 4 years from the end of the year the Minister

(a) may, upon mailing the notice of assessment for the year, refund without application therefor an amount (in this Act referred to as its “dividend refund” for the year) equal to the lesser of

(i) %4 of all taxable dividends paid by it in the year on shares of its capital stock, and

(ii) its refundable dividend tax on hand at the end of the year; and

(b) shall make such a refund after mailing the notice of assessment if application therefor has been made in writing by the corporation within 4 years from the end of the year.

Under subsection 129(3) “refundable dividend tax on hand” of a private corporation at the end of any particular taxation year included an amount in respect of the tax payable by it in the year on its “Canadian investment income for the year". Paragraph 129(4)(a)t [2] defined “Canadian investment income". For present purposes it is sufficient to say that it means (subject to certain refinements which need not be considered) the amount, if any, of taxable capital gains minus allowable capital losses from sources in Canada plus “all amounts each of which is the corporation's income for the year from a source in Canada that is a property" net of all expenses. Paragraphs 129(4.1)(b) and (c)t [3] provide:

For the purposes of paragraph (4)(a) . . . “income” . . . of a corporation for a year from a source in Canada that is a property . . . does not include income . . .

(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 or a non-qualifying business carried on by it.

In my opinion in the context of this appeal the “property" referred to in paragraph 129(4.1)(b) was the debts owed to the appellant by the bank which were created in respect of the money deposited in term deposits from time to time. These debts generated the interest previously referred to. Each debt was a chose in action and rights of that kind are included in the broad definition of “property" in subsection 248(1).

During argument each of these authorities were cited by both counsel. In chronological order they are: M.N.R. v. Estate of Zachariah, [1970] C.T.C. 498; 70 D.T.C. 6326; Supreme Theatres Limited v. The Queen, [1981] C.T.C. 190; 81 D.T.C. 5136; The Queen v. Marsh & McLennan, Limited, [1983] C.T.C. 231; 83 D.T.C. 5180; The Queen v. Ensite Limited, [1983] C.T.C. 296; 83 D.T.C. 5315; The Queen v. Brown Boveri Howden Inc., [1983] C.T.C. 301; 83 D.T.C. 5319; Canadian Marconi Company v. The Queen, [1984] C.T.C. 319; 84 D.T.C. 6267.

Estate of Zachariah involved paragraph 35.(2)(b) of the Estate Tax Act, Statutes of Canada 1958, c. 29 as amended by section 5 of Statutes of Canada 1962-63, c. 5, which provides:

35.(2) Notwithstanding subsection (1), there may be deducted in computing the aggregate value of the property taxable on the death of any person

(b) the value of any property acquired by that person during his lifetime for or incident to residence in Canada as an officer or servant of an organization as defined for the purposes of section 3 of the Privileges and Immunities (United Nations) Act, whose duties required him to reside in Canada, if that person, at the time of his death, continued to be required by his duties as such officer or servant to reside in Canada.

The deceased died in the Town of Mount Royal, Quebec, on July 17, 1965. Prior to his death he had been employed as an auditor for 15 years for the International Civil Aviation Organization (ICAO) in Montreal, an organization of the kind described in paragraph 35.(2)(b). He was a citizen of and domiciled in India. Certain of the assets of the estate were taxed by the appellant. All of them, except for accrued interest, were acquired with funds accumulated from savings from the deceased's income earned as an employee of ICAO. The contention of the respondent that all property acquired by the investment of savings from income earned in Canada was exempt because such savings were “incident to residence in Canada” was rejected by Mr. Justice Walsh of the Federal Court—Trial Division. He said at 509 (D.T.C. 6332):

. . . it appears to me that the accumulation of savings and investments is a matter of individual choice and habits and not “incident to” residence in any particular place. To give a different interpretation to the exempting provision would be equivalent to exempting all property acquired from the saving and investment of income earned in Canada, in which event the only property not exempted would perhaps be inherited property or property owned by the diplomat prior to taking up residence in Canada and not brought into Canada in connection with such residence. This is not what the statute states and I do not believe it can be so interpreted.

Prior to the amendment made by Statutes of Canada 1962-63, c. 5, the phrase “incidental to residence in Canada" instead of “incident to residence in Canada" appeared in subsection 35(2) of the Estate Tax Act. This led His Lordship to embark on a consideration, which included reference to numerous dictionary definitions, of the distinction between “incident to" and “incidental to" and he concluded at 6331 that the former is a “more restrictive term" than the latter.

Supreme Theatres was concerned with the question whether these six items of income of the appellant were Canadian investment income.

(a) rent from the Amity Rehabilitation Association for the basement of the Century Theatre;

(b) rent from a used-car dealer for the vacant land unsuitable as a theatre parking lot;

(c) rent from the Scarborough Lions Club for the Birchcliff Theatre;

(d) rent from Banner Theatres Ltd. for the drive-in theatre in Orillia;

(e) rent from tenants of two apartments in the Cinema Theatre building;

(f) rent from a Christmas tree vendor for a portion of the Birchcliff Theatre parking lot.

The taxation years under review were 1972 and 1973. At that time Canadian investment income was defined under a differently worded paragraph 129(4)(a)*. [4] It bore no statutory relationship to the phrase "is incident to or pertains to”. These words, as has been seen, were introduced by the enactment of paragraph 129(4.1)(b) in 1979.

Of course none of the sources were capital gains and this eliminated consideration of subparagraph 129(4)(a)(i). Mr. Justice Gibson rejected the submission that the income in issue was "from a source in Canada that is a property” within the meaning of subparagraph 129(4)(a)(ii). In so doing he said at 193 (D.T.C. 5138) that "generally and normally a corporation cannot have income from property but only income from the business” and that there would have to be something "extraordinary or not normal” in order for a source of corporate income to be property. This disposed of subparagraph 129(4)(a)(ii) leaving for consideration subparagraph 129(4)(a)(iii) and in particular the words "from a source in Canada that is a business other than an active business” therein.

The statement of defence alleged, inter alia, that the items of revenue in dispute were “‘incidental and ancillary to the plaintiff’s business activity, and as such is active business income”. This precipitated a consideration by His Lordship of the phrase “incident to” that appears in subparagraph 95(2)(a)(i)f [5] of the Act which relates to income from an active business of a foreign affiliate. After acknowledging at 193 (D.T.C. 5139) that the subparagraph “is unrelated to the issues or provisions of the Act respecting this case” he cited this passage from Jowitt’s Dictionary of English Law:

Thus, fealty was incident to every tenure, and could not be separated from it; so a rent may be incident to a reversion though it may be separated from it, that is, the one may be conveyed without the other. Hence incidents are divisible into separable and inseparable.

This statement follows: "The meaning and employment in the Income Tax Act of the word 'incident' probably is in its ‘separable sense'.” After some further analysis the conclusion is reached that the "meaning of 'incident' employed in that subsection (95(2)(a)(i) ) is in its separable sense.” The reasons then go on at 194-95 (D.T.C. 5139-40):

Employing this approach therefore, the question arises as to whether or not the Minister’s pleading in paragraph 6 is correct. And this question may be resolved as follows.

Are these six items or sources of income incidental to the main source of income from the plaintiff's business activity, that is, incidental in the sense that these sources or any of them are separable from the sources of income from its business activity if it has an active business?

What is the business activity of the plaintiff and does it earn active business income?

According to the documentary evidence such as the Letters Patent and certain of the contracts (see for example Exhibit 3), the business activity of Supreme Theatres Limited is and was at all material times, the business of operating motion picture theatres in Ontario, and income from such activity is and should be categorized as active business income.

Accordingly, the further question that must be asked is: Are all or any of these six items or sources of income part of the active business income of Supreme Theatres Limited or are they incidental or incident to such active business income?

From the evidence and after a careful consideration of the submissions of counsel, it would appear that items 3 and 4 above referred to, namely:

	1972	1973
3. Rent from the lease of Birchcliff Theatre to a
Lion’s Club	$2,875
4. Rent from the lease of land and drive-in
theatre facilities in Orillia	3,115	$4,200

are inseparable from the income and are part of the income from the normal business activity of Supreme Theatres Limited and therefore part of its active business income and that the other items are not; and accordingly, items 3 and 4 do not qualify as “Canadian investment income” while the other items do.

Therefore the Minister’s pleading in paragraph 6 of the statement of claim (sic) is not correct.

The appeal is therefore allowed in part with costs and the matter is referred back for reassessment not inconsistent with these reasons.

In Marsh & McLennan the issue was whether interest income received by the respondent in its 1976 taxation year was Canadian investment income

ness, to the extent that it pertains to or is incident to an active business carried on in a country other than Canada by the affiliate or any other non-resident corporation with which the taxpayer does not deal at arm’s length.

within the meaning of paragraph 129(4)(a)t. [6] The headnote describes the respondent's modus operandi as follows:

The taxpayer insurance broker received premiums from clients and was required to remit such premiums, less its commission, to the appropriate insurance companies. The vast majority of its income came from commissions. There was often a delay of approximately two months between the date on which the taxpayer received the premiums and the date on which it paid them to the insurance companies. During this period, the taxpayer would invest such “unremitted premiums” in short-term obligations. The taxpayer contended that the sum of $1,345,632 which it received as interest from Canadian sources was “Canadian investment income” and therefore eligible for the dividend refund.

I supplement this by making reference to what Clement, D.J. (with whom Le Dain, J. concurred in the result) said at (D.T.C. 5181-2):

Broadly speaking, upon notification of the acceptance of a risk by an insurer the Broker billed its client for the amount of the premium stipulated by the insurer. Sixty days following the end of the month in which the insurer accepted the risk and the policy was placed (hereafter called the 60-day period) the Broker became obligated to pay the insurer the amount of the premium less an agreed commission. Normally, the client would pay the premium to the Broker some 30 days on average in advance of the expiration of the 60-day period. On receipt of the premium the Broker would deposit it, as it did with all of its other receivables, in a general non-interest bearing bank chequing account out of which it would pay its various obligations and make the investments here in question. In actual operation, the flow of business of the Broker by way of premiums received daily from its clients, and other receivables, and payment to various insurers on the expiration of the many 60-day periods, as well as its operating liabilities and all other obligations as they came due, made of the general account what may be called a revolving fund which I will herein call the Fund. In short, there was no connection between any account receivable and any account payable: in the business of the Broker they were completely independent of each other. The investments were made from time to time for such terms and in such amounts as were deemed appropriate in the circumstances of the day. It is the interest received by the broker on those investments that must be categorized for the purposes of s. 129.

It was the Crown's position that the interest income was income from property used or held by the respondent in the course of carrying on business and that it was also income from an active business. Mr. Justice Clement had no difficulty in concluding, on the facts, that the interest income was income from an active business. He said at 241 (D.T.C. 5188): “It is clear that the Broker was carrying on a business which was in fact the active business of the Broker”. His Lordship went on to say that he was in full agreement with Associate Chief Justice Jerome who delivered judgment in the Court below that “the transactions in question here are incidental to the main business of the Defendant". His Lordship continued at 241 (D.T.C. 5188-9):

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 purposes 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 on-going daily business. To use 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. I conclude that the income from the investments is excluded as Canadian investment income under subparagraph (4)(a)(ii). These facts would also, on authority I have cited, serve to exclude it under subparagraph (4)(a)(iii).

Mr. Justice Le Dain said at 243 (D.T.C. 5190):

In my opinion the appeal should be allowed on the ground that the notional fund or amount of money consisting of the total amount of unremitted premium (after deduction of commission) at any time was property used or held in the course of carrying on the business of the respondent within the meaning of the exclusion in subparagraph 129(4)(a)(ii) of the Income Tax Act. I find the decisions in Liverpool and London and Globe Insurance Company v. Bennett, [1913] A.C. 610, and Bank Line Ltd. v. Commissioners of Inland Revenue, 49 T.C. 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.

In Ensite the question was whether interest earned on deposits in U.S. currency in banks in the Philippines was foreign investment income. As in Marsh & McLennan the taxation year under review was 1976. At that time "foreign investment income" was defined in paragraph 129(4)(b) of the Act and it was the same as the definition of Canadian investment income considered in Marsh & McLennan except that the phrase "outside Canada” was substituted for the words “in Canada”. The facts as set out in the headnote are:

The taxpayer corporation decided to finance the establishment of a manufacturing plant in the Philippines. The taxpayer decided that it would commit up to five million dollars of its own money in direct, long-term investment while the rest of the capital requirements, up to forty million dollars, would be provided 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 taxpayer’s Philippine branch. The commercial banks obtained Philippine pesos from the Central Bank upon depositing U.S. dollars with the Central Bank. The taxpayer made U.S. dollar deposits with the commercial banks, which then made the peso loans in an equivalent amount to the taxpayer's Philippine branch. The U.S. dollar deposits were made by the taxpayer out of surplus cash retained from its operations. The taxpayer took the position that the interest earned on the U.S. dollar deposits was foreign investment income.

The only issue which the Court of Appeal addressed was whether the income "was income from a source outside Canada that was property used or held by the respondent in the course of carrying on a business within the meaning of the exclusion in subparagraph (ii) of paragraph 129(4)(a)". The appeal was allowed. Mr. Justice Le Dain, in speaking for the Court, said at 300 (D.T.C. 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 U.S. dollar deposits in the present case. Whether or not it was essential to do so, the fund represented by the U.S. 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 U.S. 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.

Ensite was appealed to the Supreme Court of Canada. Argument was heard on May 21, 1986. Judgment was reserved and has not been delivered to date.

The facts in Brown Boveri Howden Inc. as set out in the headnote are:

The taxpayer corporation was engaged in a manufacturing business. It was the normal practice of the taxpayer’s business to require progress payments. The taxpayer placed the total amount by which such progress payments exceeded its current cash requirements in short term notes. The taxpayer took the position that the interest earned on the notes was Canadian investment income and the Federal Court—Trial Division (unreported) agreed.

The taxation years under review were 1975 and 1977. Judgment in this case was delivered on July 8, 1983, which was two days after judgment was pronounced in Ensite. Heald and Urie, JJ. agreed with Mr. Justice Le Dain who said at 303 (D.T.C. 5321-2):

The respondent’s appeal from these reassessments was allowed by the Trial Division on the ground that the case was indistinguishable from that of The Queen v. Marsh & McLennan, Limited, [1982] 2 F.C. 131; [1981] C.T.C. 410; 81 D.T.C. 5307, in which the Trial Division had held that the interest earned by an insurance broker on the short term deposit of unremitted premiums — that is, the total amount from time to time of premiums (after deduction of the broker’s commission) that had been collected from insured but had not yet been remitted to the insurers — was Canadian investment income within the meaning of section 129. The judgment of the Trial Division in Marsh & McLennan was reversed by a majority of this Court on April 11, 1983 (Court File A-675-81). The common ground of the majority judgment was that the interest was not Canadian investment income because it was from a source that was property used or held by the corporation in the carrying on of its business within the meaning of the exclusion in subparagraph (ii) of paragraph 129(4)(a) of the Act.

In my opinion the same conclusion must be reached with respect to the interest earned on the short term notes in the present case. The total amount from time to time of progress payments in excess of current cash requirements was property used or held by the respondent in the carrying on of its business. It was money that was committed to the carrying on of the business.

In Marconi the taxation years in issue were 1973 to 1976 inclusive. The facts as set out in the headnote are:

The taxpayer was a manufacturer of electronic equipment during the taxation years in issue. Formerly, it also had a broadcasting division which operated a radio station and a television station but this division was sold in 1973. The taxpayer invested the sale proceeds in short-term interest bearing securities from 1973 to 1976 inclusive while looking for a business in which to invest the funds. The taxpayer took the position that the interest constituted “Canadian manufacturing and processing profits” and accordingly claimed a deduction with respect thereto. The Minister disallowed the deduction and the Federal Court — Trial Division (82 D.T.C. 6236) dismissed the taxpayer’s appeal from that assessment. The taxpayer further appealed to the Federal Court of Appeal.

The appellant was obliged to sell the radio and television stations because of government regulations regarding the ownership of businesses of that kind. The appellant was controlled by British interests. In addition to the proceeds of the sale the appellant had received and retained a $4 million non-refundable deposit from a prospective purchaser who failed to complete the contract. The fundamental point in issue was whether the interest income from investing the proceeds of the sale and aborted sale was income from business or income from property.

Under subsection 125.1(1) a corporate taxpayer is allowed to make specified deduction from tax otherwise payable in relation to its "Canadian manufacturing and processing profits". Paragraph 125.1 (3)(a) of the Act and what is relevant in sections 5200 and 5202 of the Regulations provide:

125.1(3) In this section,

(a) “Canadian manufacturing and processing profits’ of a corporation 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 prescribed 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 ease.

5200 . . . for the purpose of paragraph 125.1 (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.

5202 In this Part . . . “adjusted business income" of a corporation for a taxation year means the amount, 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.

Ryan, J. who delivered the reasons for judgment of the Federal Court of Appeal said at 321 (D.T.C. 6268-9):

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

After reviewing the facts pertaining to the manner in which the aforementioned funds were invested and reinvested from time to time and the time devoted by employees of the appellant in this regard, His Lordship concluded that the appeal should be dismissed. He said at 328 (D.T.C. 6273-4):

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. Commissioners of Inland Revenue, 49 T.C. 307 (a case which Mr. Justice Le Dain found helpful in Marsh & McLennan): “. . . it does not assist in 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.”

He added at (D.T.C. 6276): "The better view is that the source of the interest in question was "property", not ‘business’, and I would so hold.""

Marconi was also appealed to the Supreme Court of Canada. It was argued immediately after Ensite. Judgment was reserved and has not been pronounced to date.* [7]

I do not garner much assistance from these cases for these reasons. None bear on the meaning of the words ""pertains to an active business"". Also the fact that in Estate of Zachariah Mr. Justice Walsh declared that ""incident to"" is a more ""restrictive term"" than “incidental to"" does not of itself really contribute notably to solving what course of conduct falls within or without the words ""incident to an active business"". Furthermore those considerations which may be relevant to determining what is ""incident to residence in Canada"" are, for the most part, likely to be far removed from what is pertinent to determining what constitutes ""incident to an active business"".

I confess that I may not fully appreciate the precise import of the reasons for judgment in Supreme Theatres. It strikes me, however, that the conclusions therein are really founded on a distinction between ""active"" and ""non-active"" corporate income that related to quantum of corporate activity which existed at the time relevant to that case, but which no longer obtained after enactment in 1979 of paragraph 125(6)(d) (supra) applicable to taxation years thereafter.

Marsh & McLennan, Ensite and Brown Boveri Howden, Inc. all turn on a consideration of the words ""property used or held by the corporation in the year in the course of carrying on a business"". As has been shown, these words are now embodied in paragraph 129(4.1 )(c). I am not concerned with this paragraph. What is germane are the words ""incident to or pertains to"" in paragraph 129(4.1)(b). There is a presumption that when Parliament enacts two paragraphs in a section they are not intended to mean the same thing. In Hill v. William Hill (Park Lane) LD., [1949] A.C. 530, Viscount Simon said at pages 546-7:

It is to be observed that though a Parliamentary enactment (like parliamentary eloquence) is capable of saying the same thing twice over without adding anything to what has already been said once, this repetition in the case of an Act of Parliament is not to be assumed. When the legislature enacts a particular phrase in a statute the presumption is that it is saying something which has not been said immediately before.

In Marconi which related to pre-1979 taxation years the issue was not, as it is in the instant case, whether the investments which produced the interest income were ""any property that is incident to or pertains to an active business"", but whether the activities of the corporation through its employees in relation to making and managing the investments which produced the interest income were part and parcel of the appellant’s overall business or alternatively whether they constituted a separate business thereby establishing that interest income as business income and not, as alleged by the respondent, income from a property source.

There is nothing before me that suggests that the income from the shortterm deposits with the Bank of Nova Scotia was not income from a property source. As I understand the legislation relevant to this appeal, in order for the interest income involved in this appeal to be Canadian investment income it must be shown: first, that it was from a source in Canada that is property and, second, that the property is not incident to nor does it pertain to the active businesses of the appellant. The first must be taken as conceded by the respondent. It would be a contradiction in terms for him to take the position, as he has done, that the only issue in the appeal is whether the interest income is income from any property that is incident to or pertains to the active businesses of the appellant and also allege that the income was not from a source that is property. A consideration of the applicability of paragraph 129(4.1 )(b) to a set of facts presupposes that the income in issue is from a property as opposed to a business source.

The key question to be addressed is this: were the debts pertaining to the short-term deposits incident to or did they pertain to the appellant’s businesses of fabricating sheet metal and roofing? If the answer is yes the appeal fails. If the converse is correct it succeeds.

I am informed that there are no decided cases regarding paragraph 129(4.1)(b) and I have found none. Nor am I aware of judicial authority that is analogically helpful.

The starting point I think must be that where a corporation is carrying on an active business and it has income from a source in Canada that is a property, that property is not necessarily to be regarded as being incident to or pertaining to the business. If that was intended, presumably Parliament would have said so.

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. 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 fundamental purpose of these term deposits was unrelated to sustaining the appellant’s businesses, but it was to direct the profits therefrom into the hands of the shareholders, primarily by way of bonuses.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment on the basis that the interest income received by the appellant from term deposits with the Bank of Nova Scotia in its 1980, 1981 and 1982 taxation years was Canadian investment income as defined under paragraph 129(4)(a) of the Act. The appellant is entitled to party and party costs.

Appeal allowed.