Calvin Bullock LTD v. Minister of National Revenue, [1985] 1 CTC 2309, 85 DTC 287

St-Onge, TCJ [ORALLY]:—The appeal of the company Calvin Bullock Ltd was heard on July 13, 1984, in the City of Montréal, Province of Québec.

The issue is whether the appellant’s activity constitutes an active business income or an investment income in the appellant’s 1973 to 1976 taxation years inclusive.

With respect to the 1972 taxation year, the respondent contends that there is no appeal by virtue of section 129 of the Income Tax Act, SC 1970-71-72, c 63, as amended.

In the reply to the notice of appeal, the respondent admits the following:

1. the appellant was incorporated in 1932 and has carried on business in the field of mutual funds, and that its derived fees related to the CIF mutual funds.

2. that for many years, including the taxation years 1972 to 1976 inclusive, the appellant has purchased and sold Government bonds and treasury bills.

3. that during its 1976 taxation year the appellant:

(a) sold Canadian Government bonds;

(b) purchased a United States Treasury bill which it sold shortly thereafter, and realized a gain of $59,747.94.

In reassessing the appellant for the 1973 to 1976 taxation years, the respondent proceeded on the following assumptions of fact: subparagraphs 6(a) to (h) and paragraph 9 of the reply to the notice of appeal which read as follows:

6. In assessing the appellant for its 1973, 1974, 1975 and 1976 taxation years the Respondent proceeded, inter alia, on the following assumptions of fact:

(a) The Appellant is controlled by Calvin Bullock New York Ltd;

(b) Since 1933, the activities of the Appellant have been the following:

— Sale of shares, on an exclusive right basis, in two mutual funds corporations ie Canadian Investment Funds Ltd and Agro Fund Ltd; and

— in conjunction with Calvin Bullock New York Ltd it assists Canadian Investment Fund Ltd in the management of its funds;

(c) Since at least 1961, the Appellant uses its business profits to purchase Canadian Government Bonds and treasury bills which he [sic] then sells;

(d) These said bonds and bills are purchased at a discount generally one year before maturity and sold a few months before maturity as evidenced by the attached schedule to be taken as included herein;

(e) The profits realized on the sale of such bonds have always been considered income by the Appellant;

(f) In 1976, the Appellant purchased a US Treasury Bill bearing no interest and sold it eighteen (18) days later thereby realizing a profit of $2,732.00 and a further profit of $59,748.00 resulted from the increase in value of the US dollar in relation to the Canadian dollar during the period it held the bill;

(g) The detail of the income derived from Canadian bonds and treasury bills and treated as active business income by the assessments is as follows:

	1973 1974 1974 1975 1975 1976 1976
Interest on
bonds and bills	$48,086.00	$63,923.00	$60,998.00	$58,933.00
Interest on
cash deposit	5,773.00	193.00	1,445.00	795.00
Profit (loss)
on sale of bonds
and bills	(700.00)	20,450.00	8,500.00	18,700.00

(h) For the years mentioned the Appellant claimed the deduction of the following amounts as dividend refunds:

1972 — Nil (no dividends paid)

1973 —$11,667.00

1974 — $29,333.00

1975 — $22,893.09

1976 — $27,758.37

9. He submits that the profit of $59,747.94 on the sale of the US treasury bills in 1976 and the profit and interest income in the amount of $53,159.50 in 1973, $84,372.59 in 1974, $71,022.74 in 1975 and $81,159.50 in 1976 are part of the active business income of the Appellant and do not constitute investment income and hence the Appellant cannot claim a dividend refund under section 129 of the Act for the years 1973 to 1976 inclusive.

The evidence adduced reveals that the US company owns all the shares of the appellant company. The latter’s two main functions are, namely:

1. to be the principal distributor for the Canadian Investment Funds Ltd and Agro Fund Ltd; and

2. to assist Calvin Bullock New York Ltd.

Since 1932, the appellant company’s activity was to reach new investors in Canada for the mutual funds. It does not sell direct, nor does it deal in the stock market. It has no seat at the stock market. It pays fees to the US company but keeps a portion thereof. It does not have an operating line of credit with a bank, and the maximum amount kept therein is between $50,000 to $100,000 and maybe $150,000 for a few days. Three or four dividends were paid each decade, and the money earned was left in the Canadian company because the owner thereof did want to keep a good genuine Canadian company.

It was also explained that the appellant company was registered as a distributor with the Securities Commission because the funds had to be registered.

The appellant company has some 18 employees and it aids the US company by giving them advice with respect to the Canadian market.

As may be seen, the main activity of the appellant company is to invest and keep abreast the US company about the best investments in the Canadian market. In other words, it gives advice. Thus is a business in itself. Maybe the appellant company was tempted to use its own advice or expertise and knowledge to earn more income from its cash flow. The evidence adduced appears to be in that direction.

Counsel for the appellant argues that:

1. the appellant is dealing in short-term government securties as being a dealer;

2. since 1930, it has built up a respectable amount of retained earnings;

3. the appellant’s shareholders did not want to remove these funds from Canada;

4. the appellant’s shareholders wanted the safest securities, which were government guaranteed securities;

5. Mr Robert Bengough, the appellant company’s representative, spent only two to three hours a year to effectuate these investments.

According to him, the fact of getting a rate of interest for 30, 60 or 90 days by telephone did not constitute an active business.

Counsel for the appellant also argued that:

1. the appellant maintained its own funds passively in interest-bearing government securities;

2. that the appellant’s active business was the distribution of units or shares in various funds;

3. that the appellant was not a trader in securities;

4. that the appellant could not trade in securities because it would place it in conflict of interest;

5. the appellant was self-financing;

6. only a small portion of the retained capital was used in its operation;

7. a vast amount of revenue was from active business.

According to him, the fact that the appellant earned some $60,000 within 18 days was due to the Québec election in 1976.

Counsel for the respondent argued that there was no appeal with respect to the 1972 taxation year because of section 129 of the Income Tax Act. He also argued that:

1. the gain on the exchange of money constitutes income and not a capital gain;

2. that high risk is in the nature of a business;

3. this case is a question of fact;

4. that the money earned in Canada was the result of the same services rendered by the appellant company to the US company;

5. that there is no necessity to be a trader in shares and this would not prevent a taxpayer to make an adventure in the nature of trade;

6. that there was an intention of resale because the appellant purchased bonds and bills when they were close to maturity and sold them thereafter. This intention to sell has been present for the last 20 years;

7. there was always the secondary intention of reselling on a short-term period due to the possibility of the devaluation of the Canadian dollar;

8. the gain under review was easily half the income from the distribution of shares;

9. in the past the type of gain under review has been reported in the appellant’s income tax returns as being income from a business;

10. according to the Tip Top Tailors Limited v MNR, [1957] CTC 309; 57 DTC 1232, the appellant’s gain is considered to be from its normal course of conduct, consequently, it is business income;

11. in the case of MNR v Roy Louis W Spencer, [1961] CTC 109; 61 DTC 1079, the buying and selling of mortgages came to them by reason of their practice as solicitors.

There is a presumption juris tantum to the effect that a company is incorporated for the purpose of doing business. This Court believes that the evidence adduced does not refute this presumption. Far from it, it shows that the appellant’s activity with respect to the amounts under appeal is not so different from its normal day-to-day course of conduct.

The appellant’s expertise, and the knowledge of the market and of the situation in Québec were the guidelines to deal as it did. There is no doubt that there was an interconnection, an interlacing or an interdependence, to use the words in the case of The Queen v Marsh & McLennan, Limited, [1983] CTC 231; 83 DTC 5180, since the appellant’s gains came from the said expertise, knowledge and a well-organized system which provided advice and technical services for investment. This was the appellant’s main business; and its behaviour is not that of a dormant company but one of a company which is always on the spot to realize gain with its cash flow, whether the appellant buys interest-bearing papers to get the accumulated interest or tries to make a gain with the exchange of money. All this is so interlacing that it is within the appellant’s line of business.

The appellant company was using its own knowledge and organization for its own benefit.

According to the facts, the appellant company was active enough with respect to the transaction under review for this Court to decide that the appellant’s activity constitutes an active business income within the meaning of subparagraph 129(4)(a)(iii) of the Income Tax Act.

The appellant, who had the onus to refute the presumption juris tantum and to show that the respondent’s assessments were wrong, failed to do so.

For these reasons, the appeal is dismissed.

Appeal dismissed.