Jerome,
ACJ:—These
actions
are
brought,
in
accordance
with
the
Income
Tax
Act,
section
172,
as
appeals
from
the
determination
by
the
Minister
of
National
Revenue,
as
a
result
of
a
reassessment
that
during
the
plaintiff’s
1975
and
1976
taxation
years,
the
plaintiff
was
not
entitled
to
classify
as
investment
income
certain
sums
of
money
which
it
had
received
on
account
of
interest
from
sums
deposited
in
banks
in
the
Philippines.
I
heard
testimony
and
argument
at
Toronto
on
December
2,
1980,
and
held
the
matter
under
consideration
for
judgment.
One
of
the
cases
urged
in
argument
is
a
1979
decision
of
the
Tax
Review
Board,
Marsh
&
McLennan
Ltd
v
MNR
[1979]
CTC
2388;
79
DTC
314,
which
was
under
appeal
to
this
Court.
I
heard
testimony
in
that
matter
on
May
5,
1981,
and
set
it
over
for
argument
for
May
26,
1981,
and
indicated
to
counsel
at
that
time
that
I
would
hold
this
present
matter
under
consideration
pending
judgment
in
Marsh
&
McLennan,
which
I
rendered
on
October
6,
1981.
The
facts
here
are
by
no
means
simple,
but,
substantially,
not
in
dispute.
They
were
presented
through
the
testimony
of
one
witness,
Mr
Ben
H
Vanden
Belt,
who
for
ten
years
has
been
the
assistant
treasurer
of
the
Ford
Motor
Company,
of
which
the
plaintiff
Ensite
is
a
wholly
owned
subsidiary.
Through
this
testimony
and
the
book
of
documents
jointly
filed,
the
following
facts
were
established:
The
plaintiff
is
a
corporation
incorporated
under
the
laws
of
Canada
by
letters
patent
dated
the
14th
day
of
August,
1964,
and,
inter
alia,
carries
on
the
business
of
manufacturing
automobile
engines
at
the
City
of
Windsor,
in
the
Province
of
Ontario,
Canada.
For
some
time
prior
to
1973,
the
plaintiff
had
under
consideration
the
establishment
of
a
stamping
plant
in
the
Republic
of
the
Philippines,
an
operation
entirely
consistent
with
the
general
nature
of
its
business.
The
directors
authorized
a
direct
capital
investment
of
some
$5,000,000
and
authorized
the
borrowing
of
the
balance
up
to
a
total
of
$40,000,000
to
fund
the
operation
of
the
plant.
The
directors
also
authorized,
in
answer
to
the
Philippines
foreign
currency
exchange
requirements,
the
deposit
of
Ensite’s
cash
surplus
in
Philippines
banks,
but
did
so
through
a
rather
elaborate
swap
arrangement
which
was
undoubtedly
motivated
by
the
desire
to
insulate
itself
from
the
usual
risks
of
foreign
exchange
controls
or
devaluation.
Whatever
the
motivation,
the
plaintiff
financed
the
stamping
plant
by
means
of
foreign
currency
swap
arrangements
authorized
by
the
Central
Bank
of
the
Philippines.
Pursuant
to
these
arrangements,
the
plaintiff,
from
time
to
time,
deposited
United
States
dollars
with
the
Philippines
branches
of
three
commercial
Banks,
each
deposit
to
mature
in
six
annual
instalments
commencing
five
years
after
the
maturing
of
a
corresponding
Philippine
peso
loan,
and
bore
interest
payable
in
United
States
dollars
at
competitive
world
market
rates.
The
commercial
banks
loaned
Philippine
pesos
to
the
plaintiff
in
an
amount
equivalent
to
the
amount
of
such
United
States
dollar
deposits,
converted
at
the
then
current
rate
of
exchange.
Such
peso
loans
were
used
by
the
plaintiff
to
meet
the
capital
requirements
of
the
stamping
plant
operation.
The
peso
loans
earned
interest
payable
in
pesos
at
competitive
Philippine
rates,
and
the
term
of
each
peso
loan
parallelled
the
term
of
the
corresponding
United
States
dollar
deposit,
which
was
held
by
the
applicable
commercial
Bank
as
security
for
its
peso
loan.
Under
the
regulations
of
the
Central
Bank
of
the
Philippines
applicable
to
foreign
currency
deposits
and
as
a
result
of
the
swap
arrangements
with
the
commercial
banks,
the
plaintiff
obtained
protection
against
the
risk
of
the
devaluation
of
the
Philippines
peso
against
the
United
States
dollar
and,
in
addition,
a
guaranteed
right
of
withdrawal
from
the
Philippines
of
its
United
States
dollar
deposits.
At
December
31,
1975,
the
plaintiff
had
an
aggregate
of
$29,007,000
(US)
on
deposit
with
the
commercial
banks
pursuant
to
the
said
arrangements.
Substantially
all
of
these
deposits
were
long-term
deposits,
and
at
all
material
times,
substantially
all
of
these
deposits
consisted
of
funds
which
were
in
excess
of
the
working
capital
requirements
of
the
plaintiff.
During
its
1975
taxation
year,
the
plaintiff
earned
interest
on
such
United
States
dollar
deposits
in
the
amount
of
$2,041,545
(Canadian),
which
amount
the
plaintiff
included
in
computing
its
income
for
its
1975
taxation
year.
The
plaintiff
further
included
the
said
amount
of
$2,041,545
(Canadian)
in
computing
its
foreign
investment
income
within
the
meaning
of
paragraph
129(4)(b)
of
the
Act
for
the
purpose
of
computing
its
refundable
dividend
tax
on
hand
within
the
meaning
of
subsection
129(3)
of
the
Act
at
the
end
of
its
1975
taxation
year.
At
December
31,
1976,
the
plaintiff
had
an
aggregate
of
$30,147,000
(US)
on
deposit
with
the
commercial
Banks,
pursuant
to
the
said
arrangements,
and
again,
all
were
long-term
deposits
and
all
funds
were
in
excess
of
the
working
capital
requirements
of
the
plaintiff.
During
its
1976
taxation
year,
the
plaintiff
earned
interest
on
such
United
States
dollar
deposits
in
the
amount
of
$2,323,140
(Canadian),
which
amount
the
plaintiff
included
in
computing
its
income
for
its
1976
taxation
year.
The
plaintiff
further
included
the
said
amount
of
$2,323,140
(Canadian)
in
computing
its
foreign
investment
income
within
the
meaning
of
paragraph
129(4)(b)
of
the
Act
for
the
purpose
of
computing
its
refundable
dividend
tax
on
hand
within
the
meaning
of
subsection
129(3)
of
the
Act
at
the
end
of
its
1976
taxation
year.
During
its
1976
taxation
year,
the
plaintiff
declared
and
paid
a
taxable
dividend
in
the
amount
of
$7,496,794
and
in
its
federal
income
tax
return
for
its
1976
taxation
year
claimed
a
dividend
refund
pursuant
to
subsection
129(1)
of
the
Act,
in
the
amount
of
$2,498,931.
By
reassessment,
notice
of
which
was
posted
on
the
13th
day
of
July,
1978,
the
Minister
of
National
Revenue
determined,
inter
alia,
that
the
said
amount
of
interest
of
$2,323,140
(Canadian)
was
not
properly
includable
in
computing
the
foreign
investment
income
of
the
plaintiff
for
its
1976
taxation
year
on
the
basis
that
“interest
earned
on
term
bank
deposits
in
Philippine
banks
totalling
$2,323,140
is
considered
income
from
property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business
and
therefore,
not
investment
income
eligible
for
a
refund
of
Part
I
tax”.
In
the
said
reassessments
in
respect
of
the
1975
and
1976
taxation
years,
the
Minister
reduced
the
amount
of
the
refundable
dividend
tax
on
hand
of
the
plaintiff
as
computed
pursuant
to
subsection
129(3)
of
the
Act
as
at
the
end
of
the
1976
taxation
year
of
the
plaintiff
by,
inter
alia,
an
amount
equal
to
$1,066,963,
such
reduction
being
attributable
to
the
exclusion
by
the
Minister
of
the
said
amounts
of
interest
of
$1,944,710
(Canadian)
and
$2,323,140
(Canadian)
in
the
computation
of
the
plaintiff’s
foreign
investment
income
for
its
1975
and
1976
taxation
years,
respectively.
In
the
1976
reassessment,
the
Minister
determined
that
the
amount
of
the
dividend
refund
to
which
the
plaintiff
was
entitled
pursuant
to
subsection
129(1)
of
the
Act
in
respect
of
its
1976
taxation
year
was
$1,526,071
being
$972,860
less
than
the
amount
of
the
dividend
refund
claimed
by
the
plaintiff
in
respect
of
its
1976
taxation
year.
By
notices
of
objection,
the
plaintiff
objected
to
that
portion
of
the
Minister’s
reassessments
of
its
income
for
its
1975
and
1976
taxation
years
wherein
the
Minister
excluded
the
said
amounts
of
interest
of
$1,944,710
(Canadian)
and
$2,323,140
(Canadian)
in
computing
its
foreign
investment
income
within
the
meaning
of
paragraph
129(4)(b)
of
the
Act
for
its
1975
and
1976
taxation
years,
respectively,
and
accordingly
objected
to
the
Minister’s
determination
that
the
plaintiff
was
entitled
to
a
dividend
refund
of
$1,526,071
pursuant
to
subsection
129(1)
of
the
Act
for
its
1976
taxation
year.
By
notice
dated
the
12th
day
of
April,
1979,
the
Minister
confirmed
the
1976
reassessment
including
the
determination
of
the
dividend
refund
and
the
amount
of
the
refundable
tax
on
hand
of
the
plaintiff
for
the
1976
taxation
year
of
the
plaintiff.
It
is
from
these
reassessments
that
the
plaintiff
appeals
to
this
Court
and
argues,
of
course,
that
these
transactions
are
fundamentally
of
an
investment
nature
and
that
they
are
incidental
to
the
taxpayer’s
main
business.
The
defendant
argues
that
there
is
sufficient
integration
with
the
main
business
to
warrant
the
finding
that
the
funds
placed
on
deposit
in
the
Philippines
are
“property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”,
or,
in
the
alternative,
that
the
earning
from
these
deposits
is
income
from
an
active
business.
It
is
to
be
noted,
of
course,
that
by
virtue
of
paragraph
129(4)(b),
foreign
investment
income
is
determined
in
the
same
manner
as
Canadian
investment
income.
Section
129,
in
force
at
the
time,
is
as
follows:
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)
1/3
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.
(2)
Instead
of
making
a
refund
that
might
otherwise
be
made
under
subsection
(1),
the
Minister
may,
where
the
corporation
is
liable
or
about
to
become
liable
to
make
any
payment
under
this
Act,
apply
the
amount
that
would
otherwise
be
refundable
to
that
other
liability
and
notify
the
corporation
of
that
action.
(3)
In
this
section
“refundable
dividend
tax
on
hand”
of
a
private
corporation
at
the
end
of
any
particular
taxation
year
means
the
aggregate
of
amounts
each
of
which
is
an
amount
in
respect
of
any
taxation
year
commencing
after
it
last
became
a
private
corporation
and
ending
not
later
than
the
end
of
the
particular
taxation
year,
equal
to
the
least
of
(a)
25%
of
the
amount,
if
any,
by
which
the
aggregate
of
its
Canadian
investment
income
for
the
year
and
its
foreign
investment
income
for
the
year
exceeds
the
amount
deductible
under
paragraph
111(1)(b)
from
the
corporation’s
income
for
the
year,
(b)
the
amount,
if
any,
by
which
the
aggregate
of
(i)
25%
of
the
corporation’s
Canadian
investment
income
for
the
year,
and
(ii)
the
amount,
if
any,
by
which
40%
of
the
corporation’s
foreign
investment
income
for
the
year
exceeds
the
aggregate
of
amounts
deducted
under
subsection
126(1)
from
the
tax
for
the
year
otherwise
payable
by
it
under
this
Part,
exceeds
25%
of
the
amount
deductible
under
paragraph
111(1
)(b)
from
the
corporation’s
income
for
the
year,
(c)
25%
of
the
amount,
if
any,
by
which
the
corporation’s
taxable
income
for
the
year
exceeds
the
aggregate
of
(i)
4
times
the
amount,
if
any,
deductible
under
section
125,
(ii)
10/4
of
the
aggregate
of
amounts
deducted
under
subsection
126(1),
and
(iii)
2
times
the
aggregate
of
amounts
deducted
under
subsection
126(2)
from
the
tax
for
the
year
otherwise
payable
by
it
under
this
Part,
and
(d)
the
amount
of
the
tax
for
the
year
otherwise
payable
by
it
under
this
Part,
plus
the
aggregate
of
the
taxes
under
Part
IV
payable
by
the
corporation
for
the
particular
taxation
year
and
any
previous
taxation
years
ending
after
it
last
became
a
private
corporation,
and
minus
the
aggregate
of
the
corporation’s
dividend
refunds
for
taxation
years
ending
after
it
last
became
a
private
corporation
and
before
the
particular
taxation
year.
(4)
In
subsection
(3),
(a)
“Canadian
investment
income”
of
a
corporation
for
a
taxation
year
means
the
amount,
if
any,
by
which
the
aggregate
of
(i)
the
amount,
if
any,
by
which
the
aggregate
of
such
of
the
corporation’s
taxable
capital
gains
for
the
year
from
dispositions
of
property
as
may
reasonably
be
considered
to
be
income
from
sources
in
Canada
exceeds
the
aggregate
of
such
of
the
corporation’s
allowable
capital
losses
for
the
year
from
dispositions
of
property
as
may
reasonably
be
considered
to
be
losses
from
sources
in
Canada,
(ii)
all
amounts
each
of
which
is
the
corporations’
income
for
the
year
(other
than
exempt
income
or
any
dividend
the
amount
of
which
was
deductible
under
section
112
from
its
income
for
the
year)
from
a
source
in
Canada
that
is
a
property
(other
than
a
property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business),
determined,
for
greater
certainty,
after
deducting
all
outlays
and
expenses
deductible
in
computing
the
corporations’s
income
for
the
year
to
the
extent
that
they
may
reasonably
be
regarded
as
having
been
made
or
incurred
for
the
purpose
of
earning
the
income
from
that
property,
(iii)
all
amounts
each
of
which
is
the
corporation’s
income
for
the
year
(other
than
exempt
income)
from
a
source
in
Canada
that
is
a
business
other
than
an
active
business,
determined,
for
greater
certainty,
after
deducting
all
outlays
and
expenses
deductible
in
computing
the
corporation’s
income
for
the
year
to
the
extent
that
they
may
reasonably
be
regarded
as
having
been
made
or
incurred
for
the
purpose
of
earning
the
income
from
that
business,
exceeds
the
aggregate
of
amounts
each
of
which
is
a
loss
of
the
corporation
for
the
year
from
a
source
in
Canada
that
is
a
property
or
business
other
than
an
active
business;
and
(b)
“foreign
investment
income”
of
a
corporation
for
a
taxation
year
means
the
amount,
if
any,
by
which
(i)
the
amount
that
would
be
determined
under
paragraph
(a)
in
respect
of
the
corporation
for
the
year
if
the
references
in
paragraph
(a)
to
“in
Canada”
were
read
as
references
to
“outside
Canada”,
exceeds
(ii)
the
aggregate
of
all
amounts
deductible
under
section
113
from
the
corporation’s
income
for
the
year.
In
my
opinion,
the
earning
of
income
from
funds
placed
on
deposit
Is,
fundamentally,
an
investment
transaction,
and
since
this
taxpayer
is
in
the
business
of
making
financial
investments,
such
income
would
appear,
at
least
on
a
prima
facie
basis,
to
come
within
the
intent
of
section
129.
Any
doubt,
of
course,
must
be
resolved
in
reference
to
the
precise
language
of
the
statute,
and
in
this
respect,
a
number
of
decisions
prior
to
1974
have
established
that
in
the
terms
of
subparagraph
(ii),
“property”
includes
money,
so
that
income
from
invested
money
may
be
“income
from
a
source
in
Canada
that
is
a
property”.
The
1974
amendment
added
the
words
“other
than
a
property
used
or
held
by
the
corporation
in
the
year,
in
the
course
of
carrying
on
a
business”,
and
the
interpretation
of
this
latter
exception
was
a
central
issue
in
Marsh
&
McLennan
Ltd
v
MNR,
supra,
and
in
the
earlier
decision
of
March
Shipping
Ltd
v
MNR
[1977]
CTC
2527;
77
DTC
371.
In
my
judgment
in
the
Marsh
&
McLennan
appeal,
I
approved
of
the
reasoning
of
the
Tax
Review
Board
in
both
cases.
In
March
Shipping
Ltd
v
MNR,
the
taxpayer
was
in
the
business
of
providing
services
to
shipping
companies
and
received
advance
payments,
somewhat
in
the
nature
of
retainers,
which
it
invested
in
short-term
deposits.
The
Board
made
the
following
findings:
that
these
were
fundamentally
investment
transactions;
that
since
the
taxpayer
was
not
in
the
investment
business,
these
transactions
could
only
be
considered
“integral”
if
the
specific
function
under
review
formed
a
necessary
part
of
the
whole
operation,
ie,
that
it
provided
a
significant
impact
on
the
total
revenue
produced,
which
it
did
not;
that
these
investments
were
subsidiary
or
ancillary
to
the
taxpayer’s
main
business
and
the
return
was
therefore
Canadian
investment
income
as
defined
by
subsection
129(4).
The
following
quotations
from
the
reasons
of
Delmer
E.
Taylor
are
of
interest:
at
2529
[372]:
There
is
no
question
in
my
mind
that
the
funds
can
be
regarded
as
property,
and
it
appears
to
me
irrelevant
to
the
issue
in
this
appeal
whether
or
not
such
property
was
part
of
the
proprietary
interest
of
the
Company,
or
represented
an
obligation
to
customers
—
the
funds
themselves
were
available
to
the
appellant
and
by
all
the
evidence,
completely
at
the
disposition
of
the
Company,
providing
the
terms
of
the
agency
agreements
were
fulfilled.
at
2529
[373]:
It
is
my
view
that
since
the
income
was
from
the
crediting
of
interest
by
the
Bank
of
Montreal
to
the
appellant
for
the
use
of
some
of
the
property
of
the
appellant,
there
is
a
prima
facie
case
for
considering
this
as
investment
income
rather
than
the
only
other
alternative
remaining
available
to
me
—
business
income.
It
might
well
be
suggested
that
it
could
be
investment
income
and
concurrently
business
income,
but
it
would
be
necessary,
in
my
view,
to
show
that
the
business
of
the
appellant
was
that
of
investment.
and
at
2531
[374]:
The
Company
could
have
refrained
from
investing
the
funds
(thereby
not
earning
the
interest);
or
used
its
own
or
borrowed
funds
rather
than
requiring
agency
deposits
(thereby
increasing
operating
expenses).
There
is
no
evidence
that
either
of
these
courses
of
action
would
have
affected
the
basic
operations
of
the
Company
in
any
way
except
by
less
revenue
or
greater
expense.
I
am
conscious
that
the
Company
likely
would
not
have
been
overjoyed
at
such
a
result,
and
obviously
chose
a
normal
course
—
to
obtain
maximum
revenue.
However,
it
is
not
my
conclusion
that
such
a
reduction
in
income
or
increase
in
operating
cost
of
$56,972,
when
viewed
against
the
background
of
the
total
operation,
can
be
described
as
having
a
significant
impact,
or
decidedly
destabilizing
effect
on
the
Company’s
purpose
and
objective
—
that
of
providing
needed
services
to
shipping
companies.
Rather
than
being
a
vital
or
even
component
part
of
the
total
operation,
the
investment
of
these
funds
could
more
properly
be
described
as
subsidiary
or
ancillary.
In
the
Marsh
&
McLennan
case,
the
taxpayer
was
an
insurance
agency
and
received
almost
all
of
its
income
as
a
result
of
billings
to
its
insured
customers.
The
evidence
disclosed
that
invoices
were
not
sent
to
customers
until
the
agent
had
received
a
commitment
from
the
underwriters
binding
the
risk
and
that
in
all
such
cases,
the
underwriters
relied
upon
the
good
credit
of
their
established
agent
in
making
payment
as
and
when
required
by
the
underwriter.
These
time
periods
varied
from
one
company
to
another,
but
routinely,
ran
to
60,
and
exceptionally,
to
90
days,
and
the
question
to
be
determined
was
the
nature
of
the
income
from
these
funds
which,
in
the
interim,
were
placed
by
the
agent
in
short-term
bank
deposits.
In
the
Marsh
&
McLennan
matter,
the
Crown
contended
that
these
funds
were
never
owned
by
the
taxpayer,
which
is
not
in
issue
before
us.
Two
other
questions
remained,
the
first,
whether
these
investments
constituted
in
themselves
an
active
business,
and
the
second,
if
indeed
they
were
determined
to
be
income
from
property,
whether
the
property
was
“used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”.
I
dealt
with
these
latter
two
questions
in
the
following
language:
The
evidence
also
confirms
that
the
Defendant’s
principal
business
is
that
of
an
insurance
agent
and
that
the
placing
of
these
funds,
always
in
short-term
certificates,
and
almost
always
with
chartered
banks,
is
handled
entirely
by
financial
control
officers
in
each
region
who,
in
addition
to
their
general
managerial
responsibilities,
are
required
to
devote
no
more
than
a
few
minutes
every
day
or
every
few
days
to
this
financial
control
function.
It
is
clear,
therefore,
that
whether
it
be
in
terms
of
percentage
of
income,
time
and
attention
required
or
the
nature
of
the
business
involved,
the
transactions
in
question
here
are
incidental
to
the
main
business
of
the
Defendant
and
could
not,
in
my
opinion,
be
construed
as
constituting,
in
any
sense
of
the
word,
an
active
business
in
their
own
right.
Obviously,
a
benefit
to
the
taxpayer
in
the
form
of
earnings
from
these
transactions
is
a
common
factor
in
all
of
this
litigation,
otherwise
there
would
be
nothing
in
dispute,
but
in
my
opinion,
to
support
a
finding
that
these
funds
are
“a
property
used
or
held
by
the
corporation
in
the
year,
in
the
course
of
carrying
on
a
business”,
there
must
be
something
more
than
a
mere
benefit
to
the
corporation.
Surely,
there
must
be
some
element
which
integrates
the
transactions
with
the
taxpayer’s
main
business.
In
the
present
case,
these
funds
were
owned
by
the
plaintiff
and
were
surplus
to
its
ongoing
operational
needs.
The
placing
of
the
funds
in
the
Philippines
was
done
with
great
care
and
ingenuity,
which
befits
a
transaction
of
this
magnitude,
but
thereafter
the
earning
of
the
income
certainly
would
not
require
such
activity
on
the
part
of
the
plaintiff,
as
would
support,
in
any
sense
of
the
word,
the
concept
of
an
active
business.
If
these
transactions,
therefore,
are
to
fall
outside
the
provisions
of
section
129,
it
must
be
only
because
they
come
within
the
exception
in
subparagraph
129(4)(a)(ii)
as
income
from
“property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”.
In
addition
to
the
Marsh
&
McLennan
decision
which
is
directly
in
point,
assistance
in
the
interpretation
of
subparagraph
129(4)(a)(ii)
can
be
found
from
a
series
of
decisions
which
deal
with
different
but
analogous
problems,
ie,
the
distinction
between
income
from
assets
or
transactions
of
a
capital,
as
opposed
to
a
trading
nature,
eg,
in
the
Canadian
jurisprudence,
Tip
Top
Tailors
Limited
v
MNR,
[1957]
SCR
703;
[1957]
CTC
309;
57
DTC
1232,
and
in
the
British
jurisprudence,
Davies
(HM
Inspector
of
Taxes)
v
The
Shell
Company
of
China
Ltd,
[1951]
TR
121,
and
Imperial
Tobacco
Co
(of
Great
Britain
and
Ireland)
v
Kelly
(1943),
25
TC
292.
In
the
Davies
case,
Shell
Oil
received
deposits
from
distributors
in
China
as
security
for
their
performance
which
was,
of
course,
of
the
very
essence
of
the
taxpayer’s
main
business.
As
a
result
of
the
conversion
of
these
deposits
from
dollar
currency
to
sterling,
the
parent
company
realized
a
gain
when
called
upon
to
refund
the
deposits
in
due
course.
It
is
interesting
to
note
that,
notwithstanding
the
several
aspects
in
which
these
moneys
were
related
to
the
taxpayer’s
main
business,
the
Taxation
Commissioner
concluded
that
the
gains
were
capital,
rather
than
trading
profits,
and
that
decision
was
affirmed
in
the
High
Court
of
Justice
and
in
the
Court
of
Appeal,
where
the
judgment
of
the
Court
was
delivered
by
Jenkins,
LJ,
who
said
at
page
157:
After
paying
the
best
attention
I
can
to
the
arguments
for
the
Crown
and
those
for
the
Respondent
Company,
I
find
nothing
in
the
facts
of
this
case
to
divest
those
deposits
of
the
character
which
it
seems
to
me
they
originally
bore,
that
is
to
say
the
character
of
loans
by
the
agent
to
the
Company,
given
no
doubt
to
provide
the
Company
with
a
security,
but
nevertheless
loans.
As
loans
it
seems
to
me
that
they
must
prima
facie
be
loans
on
capital
not
revenue
account;
which
perhaps
is
only
another
way
of
saying
that
they
must
prima
facie
be
considered
as
part
of
the
Company’s
fixed
and
not
its
circulating
capital.
As
appears
from
what
I
have
said
above,
the
evidence
does
not
show
that
there
was
anything
in
the
Company’s
mode
of
dealing
with
the
deposits
when
received
to
displace
this
prima
facie
conclusion.
In
my
view,
therefore,
the
conversion
of
the
Company’s
balances
of
Chinese
dollars
into
sterling
and
the
subsequent
re-purchase
of
Chinese
dollars
at
a
lower
rate,
which
enabled
the
Company
to
pay
off
its
agents’
deposits
at
a
smaller
cost
in
sterling
than
the
amount
it
had
realised
by
converting
the
deposits
into
sterling,
was
not
a
trading
profit,
but
it
was
simply
the
equivalent
of
an
appreciation
in
a
capital
asset
not
forming
part
of
the
assets
employed
as
circulating
capital
in
the
trade.
That
being
so
it
was
a
profit
of
the
nature
not
properly
taxable
under
Schedule
D,
and
the
Special
Commissioners
in
my
view
came
to
a
right
conclusion,
which
was
rightly
affirmed
by
the
learned
Judge,
and
I
would
therefore
dismiss
the
appeal.
In
the
Imperial
Tobacco
decision,
the
transaction
in
issue
was
similarly
the
purchase
of
foreign
currency,
but
since
it
was
for
the
purpose
of
ongoing
purchases
of
tobacco,
which
obviously
was
the
taxpayer’s
stock-in-
trade,
the
Court
reached
the
opposite
conclusion,
as
did
the
Canadian
courts
in
the
Tip
Top
Tailors
case,
where
the
taxpayer
had
purchased
foreign
currency
to
facilitate
the
purchases
of
cloth,
once
again
the
taxpayer’s
stock-in-trade.
These
decisions
were
extensively
reviewed
in
Vancouver
Pile
Driving
&
Contracting
Co
Ltd
v
MNP,
[1963]
CTC
10;
63
DTC
1007,
where
the
taxpayer
had
posted
a
sum
of
money
as
security
for
performance
with
a
provincial
authority
and
replaced
the
cash
with
a
Dominion
of
Canada
bond
purchased
for
the
purpose.
The
issue
was
whether
a
subsequent
loss
suffered
on
the
sale
of
the
bond
was
a
loss
of
capital
or
income.
It
is
significant
that
the
decision
of
the
Exchequer
Court
confirmed
the
finding
of
a
capital
loss,
notwithstanding
the
fact
that
the
asset
had
been
used
to
assist
the
operational
side
of
the
business.
The
judgment
of
the
Court
was
delivered
by
Thurlow,
J,
as
he
then
was,
who
said,
in
part:
In
approaching
the
problem
whether
the
loss
in
question
was
a
loss
of
capital
within
the
meaning
of
s
12(1
)(b)
it
is
I
think
important
to
note
that
the
appellant’s
business
was
that
of
making
and
carrying
out
construction
contracts
and
that
it
did
not
include
dealing
in
bonds.
From
this
it
appears
to
me
to
follow,
prima
facie
at
least,
that
a
gain
or
a
loss
through
appreciation
or
depreciation
of
bonds
held
by
the
appellant
would
find
no
place
in
a
computation
of
the
profit
from
its
business
but
would
simply
be
an
item
of
capital.
Moreover
in
my
opinion
neither
the
fact
that
the
purpose
of
the
company
when
purchasing
the
bonds
was
to
hold
them
only
for
a
short
or
limited
time
nor
the
fact
that
the
company
had
no
idle
funds
available
for
investment
—
other
than
a
sum
borrowed
for
the
purpose
of
making
a
security
deposit
—
would
serve
to
change
the
prima
facie
nature
of
the
purchase
of
such
bonds
from
that
of
a
capital
transaction
into
one
on
its
trading
or
business
account
or
the
gain
or
loss
that
might
result
from
their
subsequent
appreciation
or
depreciation
into
one
of
a
trading
as
opposed
to
one
of
a
capital
nature.
To
my
mind
the
present
case
is
distinguishable
from
the
Tip
Top
Tailors
case
and
the
Imperial
Tobacco
case
in
that
while
the
purchase
of
the
bonds
was
made
because
they
were
needed
for
the
purposes
of
the
security
deposit
under
the
contract
and
were
in
fact
used
for
that
purpose
they
remained
throughout
the
property
of
the
appellant
and
they
were
not
used,
as
was
the
sterling
in
the
Tip
Top
Tailors
case,
nor
were
they
purchased
to
be
used,
as
were
the
dollars
in
the
Imperial
Tobacco
case,
to
pay
obligations
incurred
in
the
course
of
trading
operations.
They
might
of
course
have
been
sold
and
the
proceeds
turned
to
the
payment
of
trading
obligations
and
while
they
were
deposited
as
security
they
were
undoubtedly
subject
to
the
right
of
the
Bridges
Authority
to
sell
them
and
to
apply
the
proceeds
in
discharge
of
the
appellant’s
obligations
under
the
contract,
if
occasion
therefor
should
arise,
but
that
in
my
opinion
is
far
from
indicating
that
the
bonds
were
acquired
or
deposited
to
pay
trading
obligations
or,
to
put
it
another
way,
as
a
step
toward
the
discharge
of
such
obligations.
The
stamping
plant
operation
in
the
Philippines
is
consistent
with
the
taxpayer’s
main
business.
In
committing
itself
to
this
project,
it
seems
to
me
that
the
taxpayer
made
two
financial
decisions:
the
first,
to
authorize
a
direct
capital
expenditure
of
$45,000,000,
$5,000,000
in
cash
and
up
to
a
further
$40,000,000
borrowed;
the
second,
and
in
my
opinion,
different
kind
of
decision
was
to
make
use
of
its
Canadian
cash
surplus
by
removing
it
from
investments
in
Canada
and
placing
it
in
investments
in
the
Philippines.
It
is
true
that
in
doing
so,
it
satisfied
a
condition
precedent
to
the
establishment
of
the
plant
and
facilitated
the
negotiation
of
credit,
but
in
the
light
of
the
several
other
aspects
in
which
the
transactions
were
kept
separate
and
distinct,
I
am
of
the
view
that
these
benefits
were
not
sufficient
to
integrate
the
transaction
with
the
taxpayer’s
main
business,
or
to
use
the
language
of
the
statute,
to
warrant
a
finding
that
these
funds
were
“property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”.
It
is,
to
me,
extremely
significant
that
the
return
from
these
investments
would
carry
on
at
the
negotiated
rate,
independent
entirely
of
success
or
failure
of
the
plant
and
that
the
taxpayer
enjoyed
the
right
to
recall
the
invested
funds
at
any
time
and
to
do
so
in
American
currency
and
through
offshore
rather
than
Philippines
branches
of
the
banks
concerned.
These
were
prima
facie
investment
transactions.
As
a
result
of
these
precautions,
they
were
insulated
from
the
taxpayer’s
main
business.
In
terms
of
the
attention
required
to
manage
them
or
their
effect
on
the
total
income,
they
remain
clearly
secondary
or
incidental
to
the
taxpayer’s
main
business.
I
therefore
would
allow
the
appeals,
with
costs,
and
return
the
matter
to
the
Minister
of
National
Revenue
for
the
reassessment
of
the
taxpayer’s
foreign
investment
income,
pursuant
to
section
129,
during
its
1975
and
1976
taxation
years.
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