Church of Christ Development Company Limited v. Minister of National Revenue, [1982] CTC 2467, 82 DTC 1461

D E Taylor:—This is in connection with an appeal heard in Edmonton, Alberta on February 9, 1982 against income tax assessments for the years 1972 through 1976, in which the Minister of National Revenue assessed to tax certain amounts determined by the Minister to be income of the appellant. In so assessing, the respondent relied, inter alia, upon section 3, paragraphs 149(1 )(f), 149(1)(l) and subsection 152(7) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The Church of Christ Development Company Limited (the “Company”) was incorporated on September 9, 1957, pursuant to the laws of the Province of Alberta. The Memorandum of Association under “The Companies Act 1942” reads:

Memorandum of Association of the Church of Christ Development Company Ltd

1. The name of the Company is “Church of Christ Development Company Ltd”.

2. The registered office of the company will be situate in the city of Edmonton, in the Province of Alberta.

3. The objects for which the Company is established are:

(a) To conduct all busiess for the benefit and profit of the Churches of Christ in

Canada.

(b) To deal in shares, bonds, mortgages, real estate, agreements for sale, and other investments that the directors may seem (sic) advisable.

(c) To act or operate jointly with any other person, firm of corporation to carry out or perform any of the objects of the Company.

(d) To obtain by purchase, lease, exchange, hire, discovery, location or otherwise, mines, mineral claims, mineral leases, royalties, of every description, and to operate and turn the same to account, and to sell or otherwise dispose of the same or any of them or any interest therein.

(e) To invest and deal with moneys of the Company not immediately required in such manner as may from time to time be determined.

(f) To take security by way of mortgage, lien, encumbrance, pledge or otherwise upon any real state (sic) or personal property which the Company may think necessary or convenient for the purpose of its business.

(g) To make donations to such persons or Churches, in cash or other assets as the Company may think directly or indirectly conducive to any of its objects or otherwise expedient.

(h) To deal and trade in all kinds of natural products, goods, wares and merchandise, provisions and supplies in connection with the undertaking of the Company.

(i) To purchase, underwrite, subscribe for and otherwise acquire and hold and vote upon the shares, debentures, bonds of any corporation.

(j) To pay out of the funds of the Company all expenses incidental to its formation, incorporation, promotion or organization.

(k) To raise money through the sale of bonds, bank loans and private loans for the benefit of the Company.

(l) To act as agent for the purpose of issuing or countersigning certificates of stock, bonds or other obligations of any association or municipal or other corporation; to act as transfer agents and registrars in connection with said stock, bonds or other obligations, and to manage any sinking fund therefore on such terms as may be agreed upon.

(m) To investigate and report upon the Title to any movable or immovable property, lands, tenements and chattels real.

(n) To investigate, examine, audit and report on and guarantee the books, standing prospects, business affairs and conditions of any person, firm or corporation, and to examine on the legality of any title or the issue of the stock, bonds or debentures, and to guarantee any seal or signature or act of assignment, sale or transfer of any shares of stock or other property, real or personal, and to employ solicitors, accountants and experts for any of such purposes.

(o) To accept and fulfil as attorneys, agents, trustees or otherwise any trust for the transaction of business, the investment of funds, the collection of loans, rents, interest, dividends, and the issuing, making, handling and colection of debts, mortgages, debentures, bills, notes, coupons, and other securities for money.

(p) It is the intention of the company to apply the profits, if any, or any other income of the company promoting its objects and to prohibit the payment of any dividend to the members of the company.

4. Liability of the members is limited.

5. The authorized capital of the Company is (1,000) shares without nominal or par value.

6. The maximum price or consideration at or for which the shares without nominal or par value may be sold is one dollar ($1) per share.

7. This Company shall remain a private Company.

Among the activities of the appellant during the years now under review were — the acquisition and sale of real estate, the investment of funds in stocks and bonds, and the making of mortgage loans. An audit was performed on the appellant’s affairs for the 1972 through 1976 taxation years and the respondent determined that the appellant was not a registered Canadian Charitable Organization under paragraph 149(1 )(f) of the Income Tax Act and that it was not a Non-Profit Organization under paragraph 149(1 )(l) of the Income Tax Act. Finally, the appellant’s returns for the 1972 through 1976 taxation years were reassessed on a net worth basis from information and assistance provided by the appellant, including data from the following balance sheet:

Church of Christ Development Co Ltd

Revised Balance Sheet as at December 31, 1976

Assets
Mortgages Receivable	$1,507,126.28
Less Reserve for doubtful accounts (1%)	15,071.26 $1,492,055.02
Special Loans
Receivable — (8%)	34,226.92
Stocks	337,316.80
Bonds	415,500.00
Land	50,431.11
Total Assets	$2,329,529.85
Liabilities
Bank overdraft	5,849.21
Bank Loans Payable —
Toronto Dominion Bank	75,624.40
Accounts Payable	239,619.95
Interest Payable	81,583.63
Trust Fund Certificates Payable	1,113,862.62
Total liabilities	1,516,539.81
Capital Account
Share Capital	6.00
Named Funds	78,199.98
Earned Surplus December 31, 1971	144,534.14
Apparent Profits (1972 - 1976)	590,249.92
Earned Surplus December 31, 1976	734,784.06
Total Liabilities and Capital	$2,329,529.85

The respondent determined that there had been total apparent profits of $590,249.92 for the taxation years under review and a reconciliation of income was prepared indicating an understatement of income which totalled $403,373.66. This was allocated in the following manner to the 1972 through 1976 taxation years:

Church of Christ Development Co Ltd

	Reconciliation of Income
1972	— Net Profits previously reported	$ 25,316.29
	— Additional Profits - per Revised
	Balance Sheet	92,733.70
	— Revised Taxable Income —
	(1/5 $590,249.92)	$118,049.99
	— Adjustments to Active Business Income	(118,049.99)
	— Adjstments to Canadian Investment Income	29,248.26
	— Taxable Dividends Deduction	(2,189.35)
	— Further Revised Taxable Income	27,058.91

1973	— Net Profits previously reported	37,886.16
	— Additional Profits - per Revised
	Balance Sheet	80,162.83
	— Revised Taxable Income —
	(1/5 x $590,249.92)	118,049.99
	— Adjustments to Active Business Income	(20,301.69)
	— Adjstments to Canadian Investment Income	47,985.34
	— Taxable Dividends Deduction	(6,198.77)
	— Further Revised Taxable Income	139,534.87
1974	— Net Profits previously reported	19,428.64
	— Additional Profits - per Revised
	Balance Sheet	98,621.34
	— Revised Taxable Income —
	(1/5 x $590,249.92)	118,049.99
	— Adjustments to Active Business Income	(37,536.16)
	— Adjstments to Canadian Investment Income	43,374.62
	— Taxable Dividends Deduction	(11,864.85)
	— Further Revised Taxable Income	167,827.09
1975	— Net Profits previously reported	26,085.04
	— Additional Profits - per Revised
	Balance Sheet	91,964.94
	— Revised Taxable Income —
	(1/5 x $590,249.92)	118,049.99
	— Adjustments to Active Business Income	(76,127.21)
	— Adjustments to Canadian Investment Income	96,645.09
	— Taxable Dividends Deduction	(21,613.11)
	— Further Revised Taxable Income	114,954.75
1976	— Net Profits previously reported	35,619.76
	— Additional Profits - per Revised
	Balance Sheet	82,430.22
	— Revised Taxable Income —
	(1/5 x $590,249.92)	118,049.99
	— Adjustments to Active Business Income	(135,714.53)
	— Adjustments to Canadian Investment Income	135,033.58
	— Taxable Dividends Deduction	(19,035.10)
	— Further Revised Taxable Income	98,333.93

Further, the respondent added a taxable capital gain of $47,313.35 to the appellant’s 1974 tax return.

Contentions

By the appellant:

— The Minister has assessed the Company in respect to both income and capital which have at all times been equitably owned by the Christian Church (Disciples), formerly called the Church of Christ, but if said income or capital are the property of the Company, then such income and capital gains were exempt from tax under the Income Tax Act.

— The Minister had disallowed items of both donations and expenses in respect to what the Minister has alleged to be income.

— If the company has income, which is not admitted but denied, the Minister has failed to allow any credit for a charitable donation although any such profits are the sole property of the Christian Church (Disciples).

By the respondent:

— The income of the appellant was not used to further the purported charitable purposes of the organization but rather for the benefit of the appellant;

— The appellant carried on activities and otherwise managed its property, both real and personal, for the purpose of making a profit therefrom;

— The appellant was not exempt from taxation on its income, in each of the years under review.

Evidence

The Church was a recognized and acknowledged charitable organization. (Where the term “Church” or “The Church” is used in this decision, it will refer to the religious organization formally called the Christian Church (Disciples) which, in earlier years, was called the “Church of Christ”.) For purposes of examining the issues brought out in this appeal, it must be clearly understood that the Church is not the appellant per se, but the Company is the appellant. While it is contended that the Company is an extension of the Church, there is no contention that the Church is an extension or division of the Company. Factual information, assertions or conclusions reached with regard to the Company may have no direct relevance to the Church as such.

An executive officer of the Company, Mr Melvin Breckenridge, explained to the board the manner in which the Company came into being and functioned as the extension arm of the Church. The Company was the mechanism adopted in 1957 to promote the expansion and development work of the Church in a co-ordinated fashion, particularly the establishment of new churches, the improvement and enlargement of older churches and, in general, to foster and aid in the efforts of the various individual congregations. Mr Breckenridge noted that the Church did not have an organized hierarchy, representative of all the individual congregations as might be more common in other churches. For the Church, the Company served a function in Christian work similar to that which a “Synod”, a “Diocese”, a “Presbytery” or some other structure might serve in other religious groups.

A good deal of voluntary time and effort was provided both locally and nationally in the endeavours of the Company. Essentially, the funding came from investment certificates bearing interest at 5% which were funds loaned to the Company, usually by members of the various congregations. It had been the practice of the Company to invest these funds in regular stocks, bonds, etc, when surplus funds were available, and to loan them out to congregations or for church-related purposes, originally at a 6% annual rate of interest, but more recently at a higher rate. In addition to these investment certificates, funds also came by way of certain special “loan” funds and “named” (memorial) funds which were deposited with the Company for the Church extension work. Accountability of the Company to its members and donors was regular and openly conducted at the various conferences held by the congregations. Examples of contributions to Church summer camps and certain specific Church congregations were given by Mr Breckenridge.

Reverend John H Bergman, one of the founding members of the Company and now its President, filed with the Board a copy of an “Application for Approval for Charitable Organizations” dated April 18, 1958, which had been lodged with the Department of National Revenue in that year. The following reply dated June 5, 1958 had been received by the Company:

DEPARTMENT OF NATIONAL REVENUE — TAXATION DIVISION 444 Sussex Drive — Ottawa 2, Ont

5th June, 1958.

The Reverend J H Bergman,

253 Almon Street,

Halifax, NS

Reverend Sir:

Re: Church of Christ Development Company Ltd 242 Birks Building, Edmonton, Alberta

Receipt is hereby acknowledged of your Application of April 18th on behalf of the above named company to be recognized as a charitable organization within the meaning of the Income Tax Act.

Before proceeding with your Application we would be pleased if you would forward a copy of the constitution and by-laws of the company as requested on Form T511. This was apparently overlooked when you completed the form.

Yours very truly,

(Sgd) ??

Director, Legal Branch.

LVK/lr

It was the recollection of Rev Bergman that the requested information had been provided and that, in all of the years following incorporation up to the present time, proper corporation tax returns had been filed, showing annual financial information but based upon a “tax-exempt” status for the Company. Rev Bergman filed copies of the original Assessment Notices received from the Department of National Revenue indicating “Nil” assessments for the years under review in this appeal. The corporation tax returns for these years were also made available to the Board and each one did contain a set of financial statements — Operating Statement and Balance Sheet — but in the appropriate space provided, it was noted by the appellant that this was a “Non-Profit” corporation — and no tax was indicated as payable. According to Rev Bergman, in 1968 a review of the Company had been made by Revenue Canada, and, to his recollection, there had been no complaint, criticism or change. He had received no salary or stipend from the Company and the individual who looked after much of the detail operating work of the Company was his own secretary, whose salary he paid out of his own funds. Every effort was made to minimize cost and to maximize revenues. During a very lengthy period of several years in which serious discussions had been goind on with at least two other large church groups regarding possible closer collaboration or even union, a general moratorium had existed in all groups with regard to the establishment of new churches. That period had been spent in accumulating the funds which were now available in the Company and intended for future expansion. To a major degree it was these accumulated (as opposed to the contributed) funds which represented the basis of the matter at issue before the Board. It had been necessary, due to vastly increased building costs, to retain such funds until a build-up had occurred, sufficient to provide the needed capital for church buildings.

At the same time, it had been considered prudent for the Company to acquire and hold certain property sites for future churches in many parts of Canada. In some instances the land acquisition had been rather extensive and had resulted in sales of surplus land by the Company. Any profits which had been realized had been retained in the Company and again formed part of the sums in dispute. Since the Company wanted to remain stable and provide a solid base for the investment certificates held by the Church members, it had been its policy to invest in a variety of securities — real estate mortgages, bonds, and shares in publicly traded companies. Interest, dividends or net gains realized on any of these transactions were also maintained in the Company funds. The corporation now had six individual members or shareholders (including Rev Bergman) who comprised the Board of Directors, and one share was held in the name of the Church at large. No share certificates were produced and although Mr Bergman contended that in the final analysis (eg on winding up) all the Company assets would go to the Church, he was unable to provide any corporate or legislated support for such a view. It was his understanding, however, that this was Company policy and a generally held opinion, if not something jurisdic- tionally dictated.

Mr Vernon Radke, an officer with Revenue Canada, provided the Board with the background of the lengthy examination conducted into the affairs of the Company. The “net worth assessment” at issue was based to a large degree upon the revised set of financial statements and certain documents provided by the Company itself* [1] through an appointed outside auditor, Mr D K McElroy, B Com, CA. After Revenue Canada had expressed dissatisfaction to the Company regarding the original financial statements filed, Revenue Canada accepted these revised statements as supporting the “net worth”, but made three significant adjustments before reassessing. Mr McElroy reported the gains made by the Company on purchase and sale of shares, bonds and real estate as on “capital” account but the department regarded these gains as on “income” account; “management” salaries had been charged by Mr McElroy but since they were not paid during the various years under review, the amounts were substantially reduced by Revenue Canada (no explanation was provided by Mr Radke as to why any amount at all had been allowed as a deductible expense by Revenue Canada under the circumstances); and an amount of some $47,000 which the department calculated as a capital gain on sale of certain other real estate, based upon its V-Day valuation of the property was disputed by Mr McElroy and had not been taken into account by him.

A list of about one hundred real estate mortgages which were held by the Company as at December 31, 1976 was filed with the Board. Of these, only seven appeared to represent funds advanced to churches, the balance was to private individuals. Mr Radke had been unable to make any distinction between the mortgage loans made to the private individuals by this Company, and similar mortgages to be found in any regular portfolio of investments or between the so-called “church” mortgages and those to private individuals. Mr Radke also referred the Board to the schedules representing the “Disposition of Capital Property” (stocks, bonds, real estate, etc) which were included in each year’s financial statements by Mr McElroy, CA.

Church of Christ Development Co Ltd

	December 31, 1972
Disposition of Capital Property
Sale of 100 shares of Trans Canada Pipeline
Selling Price		5,275.00
Value December 31, 1971		5,000.00
Taxable Capital Gain			275.00
			137.50
	December 31, 1973
Disposition of Capital Property
Shares	Selling Price	Cost Cost	Gain (Loss)
400 Domtar	9,619.69	3,950.00	5,669.69
200 Price	3,472.81	1,179.62	2,293.19
200 Tungsten	585.50	1,171.00	(585.50)
unable to trace	5,144.20	4,782.26	361.94
50 Cominco	2,860.00	2,250.00	610.00
			8,349.32
Real Estate
Pleasantview	255,303.10	157,554.80	97,748.30
Total Capital Gain			106,097.62
Taxable Capital Gain			53,048.81

December 31, 1974
Disposition of Capital Property
Shares	Selling Price	Cost Cost	Gain (Loss)
200 Algoma Steel	4,893.46	4,067.81	825.65
6,000 Ehibex	17,727.07	15,000.00	2,727.07
100 Imperial	2,777.35	2,171.79	605.56
1,000 Brimco	8,683.50	5,630.00	3,053.50
Margin Account	1,179.41	5,800.00	(4,620.59)
300 PWA	3,912.19	1,047.48	2,864.71
Bonds
3,000 Labrador Acceptance	750.00	3,000.00	(2,250.00)
			3,205.90
Real Estate
Pleasantview	18,710.00	11,824.60	6,885.40
Bell Acres	155,635.30	82,006.88	73,628.42
Total Capital Gain			83,719.72
Taxable Capital Gain			41,859.86
December 31, 1975
Disposition of Capital Property
Shares	Selling Price	Cost Cost	Gain (Loss)
100 Versatile	1,023.75	667.94	355.81
300 Toronto Dominion	12,379.92	9,742.14	2,637.78
200 GMC	9,606.04	7,463.67	2,142.37
500 United Canco	716.41	3,403.45	(2,687.04)
Bonds
2,000 Great Plains	2,055.48	2,000.00	55.48
			2,904.40
Real Estate
Pleasantview	—	189.92	(189.92)
Bell	—	897.90	(897.90)
Mod West	109,400.00	81,026.19	28,373.81
Flickinger	35,000.00	20,363.22	14,636.78
Total Capital Gain			44,427.17
Taxable Capital Gain			22,213.58
	December 31, 1976
Disposition of Capital Property
Shares	Selling Price	Cost Cost	Gain (Loss)
100 Algoma Steel	2,752.57	2,354.45	398.12
200 Chrysler	3,225.56	4,562.06	(1,336.50)
200 Cominco	7,610.60	5,417.41	2,193.19
300 Dynasty	3,363.75	1,770.00	1,593.75
100 GMC	5,950.78	3,731.83	2,218.95
100 Inco	3,295.06	2,960.27	334.79
400 Massey	9,669.45	6,505.85	3,163.60
200 Sherritt Gordon	1,389.37	2,681.56	(1,292.19)
2,000 Steep Rock	6,000.00	2,813.41	3,186.59
100 Weldwood	1,194.37	954.67	239.70
450 Bell wts	1,774.50	—	1,774.50
200 City Savings	3,126.45	1,550.99	1,576.45
650 First City wts	3,564.85	—	3,564.85
Bonds
2,000 Husky	2,086.00	2,000.00	86.00
Canada Savings Bonds	6.85	—	6.85
			17,708.65

Real Estate

Bell		10,772.20	(10,772.20)
Flickinger	44,470.00	45,222.35 ( 752.35)
Mod West	157,560.00	163,700.00	( 6,140.00)
Total Capital Gain			44.10
Taxable Capital Gain			22.05

Furnished with an opportunity to do so, Rev Bergman presented a list of mortgages entitled “Church related” amounting to 29 (including the seven agreed to as “Church related” by the respondent) out of the list of 100. The other 22 mortgages he had so identified had a “church orientation” because they were members or adherents of the Church, or had qualified on compassionate or charitable grounds. In cross-examination, counsel for the respondent noted that even accepting Rev Bergman’s second list, his list still only accounted for approximately $180,000 out of the $1,300,000 of outstanding mortgages — the balance in counsel’s view were straight commercial mortgages.

At this junction of the hearing, counsel for the appellant reflected on the fact that there appeared to be two segments to this matter — the first, a determination by the Board whether the Company was entitled to the “nonprofit” status it claimed for tax purposes; and second, the determination of the specifics of certain financial matters (eg the capital gains) in the event that the Company did not so qualify. Obviously if the Board ruled that the Company did have “non-profit” reporting status, the matter was concluded and there would be no reason to consider the second issue. In order to expedite matters, counsel suggested that further “financial detail” be dispensed with, and he made a motion that the Board allow the appeal on the basis tht the Company had established its right to the “non-profit” status. Counsel for the respondent agreed to the Board hearing the motion and argument thereon, but pointed out that in the event the Board did not agree with the appellant and in fact denied the motion, an opportunity might be required for the appellant to present any further “financial detail” information if it wished to do so. the Board thereupon heard argument with regard to the basic question at issue — the taxable status of the Company.

Argument on the Motion

The position of counsel for the appellant was that the Board should accept the “charitable organization” designation of the Company based upon the application that had been made in 1958, the many years of proper filing of corporation tax returns and the nil assessments received throughout the years, up until this current Revenue Canada examination. The Company had indeed assisted in the establishment of some ten churches and two summer schools since incorporation, and was now in a position, both financially and in its relations with other major denominational churches to establish more congregations. The “real estate” activity had been explained by Mr Bergman as only “sale of surplus land”, and should be viewed as subsidiary only to the main intent of the Company in acquiring and retaining church building sites. Any “real estate” transactions which were not so covered had arisen as a result of special and unusual circumstances in which the Company became involved. The testimony of both Mr Breckenridge and Rev Bergman was that the members of the various church congregations regarded the Company as an extension of the Church; that other churches involved in similar extension activities regarded it as just that; and indeed the Church itself in a broad way treated the Company as just such an extension of its own activity and required regular accounting therefrom. Finally, at the very least, the Company was just a “trustee” incorporated to hold the expansion intended resources of the Church, on behalf of the Church, and should not be regarded as having any corporate taxable status in its own right.

Counsel for the respondent noted that while the appellant might argue that it had received “charitable organization” designation many years ago, or at least had been treated that way in original assessments by the department, that did not alter the fact that both the Minister and the Board must be convinced that the conduct of the corporation during the years under review warranted the continued use of such a “non-profit” designation. To retain such a designation for a particular year the corporation had to conduct itself within the framework of the legislative provisions affecting it. In order to tax the Company during any particular year, it was not incumbent upon the Minister to “de-register” it (even assuming it had ever been registered, a proposition that the Minister did not accept but expressly denied). The Minister alleged that the Company activities had put it outside the parameters for the continued income sheltering of such possible registration.

First, counsel dealt with the “real estate” activity of the Company. It had been so extensive and consistent (including acquisition of acreage, subdivisions or semi-subdivision work, regular dealings with real estate agents, sales of lots, assistance in construction and financing, and finally the holding of the mortgages) that no distinction could be drawn by the Minister’s officials between that activity (holding of mortgages) of the appellant and any other regular real estate activity. The appellant had failed to provide evidence or support that any such distinction should be made or could be made. Counsel for the Minister recognized that certain isolated transactions or instances had been given some explanation at the hearing, but that did not change the firm basis for the real estate activity — it had proven lucrative and had been vigorously and competently pursued whenever the opportunity arose. Second, counsel also noted that the investment certificates, since they bore an interest rate of 5% and were allegedly for the purpose of re-loaning the funds at 6%, resulted in the financial base of the company reflecting straight commercial obligations to its depositors and contributors. Third, the Company invested in stocks and bonds not merely for interest or dividends, but traded in them as it was profitable or financially advisable to do so. It conducted that aspect of its affairs in a regular commercial way, just as would any other trader. Fourth, there was no evidence to support the contention that on “winding up”, the net assets belonged to the Church. While counsel did not doubt for a moment that this was the intention and perhaps the policy of the directors, nevertheless there was no such constraint evident in the material filed with the Board. Fifth, counsel noted that at least Rev Bergman (and possibly many others) as a shareholder and/or director was entitled to interest on the funds he had invested with the Company and had retained substantial family control over certain real property he had entrusted to the Company. Last, and most damaging of all in counsel’s view, was the fact that the activities of the Company were such that only a very limited part of the funds (primarily invested in either 7 or 29 mortgages) had gone to Church expansion or even to the much more broadly defined “church-related” activities. By far the bulk of the operations conducted had been totally unrelated to church or charitable activity at all. While undoubtedly that secondary commercial had been profitable and there was every indication that Rev Bergman and his fellow directors had carefully guarded, used and husbanded all available resources, the very activity itself in which it had engaged was not permitted to the corporation if it wished to retain any claim to “non-taxable” status. Counsel recognized that the Church was in itself a registered charitable organization, and the Minister had no question about that. The problem was that the Company did not form part and parcel of the Church, no matter how well intentioned its efforts; and its conduct, on its own merits, did not qualify it for tax exempt status. The essential thrusts of the argument of counsel for the respondent were — that the appellant had (and I quote once more from the Reply to Notice of Appeal) “carried on activities and otherwise managed its property, both real and personal, for the purpose of making a profit thereon”; — “that the income of the Company had not been devoted to charitable purposes”; and “that the interest rate of 5% payable on the investment certificates, when applicable to members of the Company, violated the provisions of the Income Tax Act”.

Counsel cited the case of Christian Homes for Children v MNR, 42 Tax ABC 248; 66 DTC 736; and The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156, as judicial support for the Minister’s position. From Christian Homes (supra), counsel quoted from 270 and 750 respectively:

Furthermore in Hobson v MNR, 21 Tax ABC 433; 59 DTC 211, a decision of the Board, it was said (at pp 213 and 436 respectively):

A charitable organization or institution is an organization created for the promotion of some public object of a charitable nature and functioning as such. A charitable institution is distinguishable from a charity or a charitable trust. Such was the ruling of Maclean, J, in Birtwhistle Trust v MNR, [1938-39] CTC 356 (1 DTC 419).

The important words to be noted here are the words “and functioning as such”.

A review and evaluation of the evidence herein in its entirety establishes that the appellant did not adhere to its corporate objects in the course of its operation, and that, while there may have been evidence of occasional acts of charity on its part, nevertheless, from a consideration of its whole course of conduct, it fell far short of its original charitable aims. The occasional instances of relief afforded to some neglected or needy child, or of even-less-frequent contributions made by it to certain other charitable or religious organizations to assist in their work, could not in themselves constitute the appellant institution a charitable organization in its own right. It is not a question of what activities the appellant corporation was permitted under the terms of its charter to carry on, but rather of what were in truth the activities in which it did engage. The evidence established that in substance the appellant had in fact carried on a commercial operation in the form of a summer camp and a home where children or expectant mothers might be boarded, and that this operation was carried on profitably. (See Sutton Lumber and Trading Co Ltd v MNR, [1953] 2 SCR 77 at p 93 [53 DTC 1158 at p 1166] ).

In the circumstances, the conclusion is inescapable that the appellant’s activities were not those of a charitable organization as contemplated by the relevant provisions of the various Income Tax Acts.

The evidence clearly established that the appellant did not devote all of its resources to charitable activities carried on by the organization itself as required by the income tax legislation in force for the years from 1950 on.

The appellant institution has fallen far short of meeting the onus resting upon it of establishing that every constituent element of section 62(1 )(e) of the Income Tax Act or of its precursor enactments has been complied with in order to qualify it for exemption from taxation under the said legislation.

It was noted that the legislation in effect under which the Christian Homes matter (supra) was reviewed was the Income War Tax Act and the old Income Tax Act, predecessors to the current Act under which this matter falls.

Findings

This is a sensitive and delicatte issue before the Board. There is no question that much time, effort and money have been dedicated to the work of the Company, and the devotion of the parties to the cause as they saw it cannot be doubted. Indeed, it must be applauded. Further, there was not the slightest indication of any activity by the Company which could in any way reflect adversely upon the Directors of the Company. In each of the years under review the Company reported to Revenue Canada on its assets and liabilities, together with a statement showing the net income for the year as it was calculated by the Company. In making reference to the supporting case law, counsel for the respondent made a specific point of noting that in Christian Homes (supra), there had been criticisms lodged regarding the conduct of that operation, the activity of its directors, the proper maintenance of the funds, etc — counsel noted there was no such criticism in this matter.

It was recognized by both parties that there had been significant changes in the Income Tax Act with respect to registered charities effective in the 1977 taxation year but that the issue before the Board could only be determined with reference to the earlier provisions. Certain of the transitional provisions affecting registerd charities in the 1977 changes may be of value to this appellant in the event it is determined to have been qualified for such designation as at December 31, 1976. Other than that, both parties recognized that the jurisprudence which could aid the Board in examining many of the critical words and phrases in the Act was not very extensive or explicit.

Counsel for the appellant in his argument did not identify with precision any particular section of the Act within which he could qualify the appellant for such “non-taxable” status. The appellant’s major claim is that this route of incorporating a separate company for the purposes described was the only one available to provide a vehicle within which to perform the intended work. It is not necessary for the Board to decide whether this was the only vehicle but assuming that to be the case, the Church then had no less an obligation to monitor the operations of the Company, indeed it may have had more obligation in order that the Company retain the unusual claim to “non-taxable” status which it sought, and the Company should have been meticulous in adhering to the provisions of the Income Tax Act. While the Minister in his reply has relied upon paragraphs 149(1)(f) and 149(1)(l) of the Act, in fairness to the appellant, I have reviewed the four paragraphs of the Act which might provide potential for charitable exclusion in the years under review, at least to the degree I can interpret them:

149. (1) No tax is payable under this Part upon the taxable income of a person for a period when that person was

(f) Charitable organizations. — a charitable organization, whether or not incorporated, all the resources of which were devoted to charitable activities carried on by the organization itself and no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof;

(g) Non-profit corporation. — a corporation that was constituted exclusively for charitable purposes, no part of whose income was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof, that has not, since June 1, 1950, acquired control of any other corporation and that, during the period,

(i) did not carry on any business,

(ii) had no debts incurred since June 1, 1950, other than obligations arising

in respect of salaries, rents and other current operating expenses, and

(iii) except in the case of a corporation that was, before 1940, constituted exclusively for charitable purposes, expended amounts each of which is

(A) an expenditure in respect of charitable activities carried on by the corporation itself, or

(B) a gift to any donee described in paragraph 110(1)(a) or (b), and

the aggregate of which is not less than 90% of the corporation’s income for the period;

(h) Charitable trusts. — a trust all of the property of which is held absolutely in trust exclusively for charitable purposes, that has not, since June 1, 1950, acquired control of any corporation and that, during the period,

(i) did not carry on any business,

(ii) had no debts incurred since June 1, 1950, other than obligations arising

in respect of salaries, rents and other current operating expenses, and

(iii) expended amounts each of which is

(A) an expenditure in respect of charitable activities carried on by the trust itself, or

(B) a gift to any donee described in paragraph 110(1)(a) or (b), and

the aggregate of which is not less than 90% of the income of the trust for the period;

(I) Non-profit organizations. — a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada;

In general terms, an examination of the above paragraphs would lead me to believe that the simple acceptance by an organization of donations, bequests or funds from some of its supporters for deposit, and the investment by the organization of these moneys for the precise purpose of earning investment income thereon for the organization would not disqualify that organization from a “non-taxable status” to which it might otherwise be entitled. The word “income” appears in each of the above-noted paragraphs and any conclusion that a charitable organization must be passive, in fact dormant rather than active, in its efforts to improve financial resources, is not warranted, as I see it. The relevant Revenue Canada Interpretation Bulletin would indicate that “gifts” as well as “income . . . computed as though it were a taxable entity” would also form the revenue base of the organization, but that does not appear to me to be critical to a determination of this issue. The Minister in this matter did not appear to take serious issue with the direct “investment” activities of the appellant, although counsel did note that these activities exhibited virtually a “commercial” flavour.

Furthermore, the Minister did not rely upon the fact that there was no record of “registration” provided by the Company and, indeed, I do not think that fact alone would serve to exclude the appellant from the benefits of the “non-taxable status” sought. Proper application had been made in 1958; the testimony is that further information was supplied; and the continued filing of the corporation tax returns as a “non-profit” organization which resulted in consistent original “nil” assessments would weigh heavily in favour of the appellant if that were the only factor. Leaving that aside, therefore, it is simply a question of whether the appellant was entitled to the non-taxable status which it claimed in the years in question because it was “functioning as such" (see Christian Homes (supra) ).

There is very little guidance available to the Board on the subject of “non- taxable organizations” and indeed there has been very little “hard evidence” presented by the appellant. Nevertheless, I am prepared to accept the argument of counsel for the respondent that the activity of the appellant in buying and selling stocks and bonds and in buying, subdividing, servicing and selling land, was conducting a business in such a way that this activity can readily be distinguished from the simple investment of Company funds for purposes of earning income therefrom. Few details were provided to the Board by the appellant regarding the magnitude of this part of the operation (stocks, bonds and real estate) but some perception can be gained from the financial information filed, which information was quoted earlier in this decision. In this “business” activity, the Company risked the very assets themselves with which it was entrusted — the funds on deposit with it in “investment certificates”. The fact that the Company was successful and made a profit is irrelevant — the activity was a venture in the nature of trade — the stocks, bonds and real estate took on the characteristics of inventory rather than investment. To whatever degree that places the cause of the appellant in jeopardy is then only a question of whether that activity is permitted under the relevant provisions of the Act. It might be comforting to the Minister to assert that such “business” activity is excluded under paragraph 149(1 )(f), but it is not certain in my mind that support can be seen in that section for such exclusion. There is no obvious reason to delineate the term “income” so that it could be only investment income. Clearly, the provisions in paragraphs 149(1 )(g) and (h) “did not carry on any business” exclude the appellant from protection therein. But in any analysis, the Minister is still left in support of the major point of his argument with paragraph 149(1)(l) — “for any other purpose except profit” (italics mine).

As I have indicated, it would be extremely difficult for the appellant to sustain a position that the gains enjoyed almost consistently over a period of some 5 years from buying and selling stocks and bonds, had been a fortuitous but ancillary result of its efforts to invest for the purpose of earning interest or dividends. However, no such posture is at all supportable with regard to the gains on the real estate activities as I see them. At the present time, there is little if any residual real estate in the Company name that is dedicated to the alleged eventual purpose of church building; the extent and expertise in dealing with real estate matters is evident throughout the period under review; and the investment (in recent years at respectable interest rates) in the mortgages resulting from lot sales and house construction are factors which lead me to a conclusion that this real estate activity was vital and central, not just of a subsidiary or tangential nature in the conduct of the Company’s affairs. The corporation had been operated for the specific purpose of making a profit from a business, not merely for earning income on investments and, in so doing, it divested itself of the major protecting cloak which could differentiate it from normal commercial activity and put at risk its identification as a “charitable organization”. Whatever its activities in earlier years, the metamorphosis must be considered complete for the years under review and the Company joined the business world for purposes of the Income Tax Act. That the profit so earned may eventually find its way into charitable purposes while laudable, is not a redeeming feature — it will be only the net profit after the impact of income taxes that will be so available.

Since the above comments effectively dispose of the main question put to the Board, and decide that the appellant does not qualify during the years under appeal for “non-taxable” status, it is not necessary for the Board to examine in detail all the alternate arguments put forward by the respondent. However, it can be noted that it would be very difficult for the appellant to prove that the income (including profit realized on its business activities) was all “devoted to charitable activities”. Reverend Bergman (and perhaps others) was a “proprietor, member or shareholder thereof”, and interest on his own investment certificates was payable to him in certain circumstances, even though perhaps not paid. This is not meant as criticism but merely to state facts, either one of which, by itself, could place the non-taxable status of the company in jeopardy. (See portions of the Income Tax Act quoted earlier.) That last assertion might also apply in light of the contention of the appellant that in the final analysis (eg winding up), the net assets would be payable to the Church, since it is also alleged by the appellant that the Church is a shareholder.

In summary, it would appear to me that on each of the points raised by counsel for the respondent, the Minister might well be on solid ground — but it is clearly supported by the “profit” provisions of paragraph 149(1 )(l). As opposed to that, no substantive argument has been raised by the corporation which would serve to designate its activities as coming under the very rigid provisions of any section of the Act permitting the sheltering of charitable income from tax. The appellant has not established its claim to “non- taxable status” and the motion with respect to that main issue has failed.

On the subsidiary issue of the “quantum” involved, it should be noted that considerable information was provided at the hearing which had relevance to the specific amounts involved. It was my impression that counsel for the appellant was very much enlightened during the conduct of the hearing about the numbers and mathematics used by the Minister in the assessments, and that he had accepted the validity of much that had been pointed out by counsel for the respondent. This was particularly true of one item of profit on the sale of certain real estate in which counsel for the appellant Originally believed there was a dispute regarding V-Day valuations. As I recall the discussion, his concern was assuaged. Further, any concession which could be made toward the “management salary” charge to Rev Bergman or his staff alleged by the corporation, might only further aggravate the difficulty experienced by the corporation in staying within the rules noted above that “none of the income should be available to the shareholder”. Finally, whatever issue there might have been with regard to the “capital” or “income” question has been resolved in this decision — the amounts at issue on the evidence to date are on income account. Nevertheless, in accordance with the agreement reached between counsel, there may be a matter of quantum of income which deserves review, and the Board will contact counsel for the appellant to determine if a re-scheduling of the appeal is required or if the matter should be disposed of and a decision on the merits and quantum of the appeal itself rendered on the basis of the reasons given above. At this point in time it may appear to the parties that there is no further value in a re-scheduling hearing.

The motion made by counsel for the appellant is hereby denied.

Appeal dismissed.