Cross Country Industrial Development Corp v. Minister of National Revenue, [1981] CTC 2558

D E Taylor:—This is an appeal heard in the City of Montreal, Quebec, on June 2, 1981, against an income tax assessment for the year 1972 in which the Minister of National Revenue denied the small business deduction available under subsection 125(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The notice of appeal sets out the following:

— This company has always been active in trading in land as can be seen from 1965 and 1966, income tax returns where profits on sale of land were reported for $65,000 in 1965 and for $267,000 in 1966.

— In the past years the directors have been devoting their time with other corporations in the building of apartment houses and shopping centres and will resume the development of land in this company when they have completed their other projects.

— Though there were no major real estate transactions in 1972, it does not disqualify the corporation from conducting an active business since it has made constant efforts to produce business in 1972 and has made significant transactions in the past years.

— Bulletin No. IT-73R states “when short term investments acquired with surplus cash existing at a particular time and where such cash will be used in the active business later in the business cycle and where interest on accounts receivable, conditional sale contracts and mortgages where they arose through the corporation’s normal operations will be viewed as stemming from an active business”. This interpretation applies to the interest earned by our company.

— Moreover, our corporation maintains an office with a telephone listing and clerical staff is employed on a full time basis.

— Presently our company is erecting an industrial building where our own building staff is employed.

— Our company owns a large tract of land and ample current assets for development purposes.

— From the foregoing, it is considered that our corporation is engaged in an active business.

The Reply to Notice of Appeal sets out the contentions of the respondent:

— During the 1972 taxation year, the appellant earned gross rental income amounting to $24,106.70;

— The appellant did not provide its tenants with any special services;

— The appellant has invested idle funds in term deposit certificates since 1964 and has never used these funds in the course of any business;

— In the 1972 taxation year, the appellant earned interest income amounting to $29,874.48 from the investment of idle funds amounting to $335,000;

— The appellant was not engaged in any money lending business during the 1972 taxation year;

— The interest and the rental income earned by the appellant during the 1972 taxation year represented income from property;

— The interest and the rental income earned by the appellant during the 1972 taxation year did not result from the carrying on of an active business.

Evidence and testimony was submitted to the Board in support of the appellant’s contentions, but there was little difference of opinion between the parties as to the basic facts. The issue centred around the applicability of the relevant section of the Act to those facts. The letters patent dated September 19, 1957 showed as the objects of the company:

To administer, own, purchase, develop, lease take in exchange or otherwise acquire, immoveable property or interest therein, together with any buildings or structures that may be on the said immoveable properties or any of them and to sell, lease, or exchange or otherwise dispose of the whole or any portion of such immoveable property and all or any of the buildings or structures that are now or may be hereafter erected thereon, and to make such security therefore as may be deemed necessary;—

To erect and remodel buildings and deal in building materials, to improve, alter or manage the said immoveable properties, and buildings and to take or hold mortgages or hypothecs for any unpaid balance of the purchase price on any of the immoveable properties, buildings, or structures so sold and to sell or otherwise dispose of the said mortgages or hypothecs.

The rental in question was derived from a single “net-net” lease with Texaco Canada Ltd signed in 1968 for a building constructed by the appellant and continuously owned by it.

Some of the jurisprudence cited by counsel was:

For the appellant:

The Queen v Cadboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115;

MRT Investments Limited, ESG Holdings Ltd and Rockmore Investments Ltd v The Queen, [1975] CTC 354; 75 DTC 5224;

The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156;

The Queen v MRT Investments Limited, [1976] CTC 294; 76 DTC 6158;

ESG Holdings Ltd v The Queen, [1976] CTC 295; 76 DTC 6158;

Lois Hollinger v MNR, [1972] CTC 592; 73 DTC 5003;

Cosmopolitan Investments Co Ltd v MNR, [1974] CTC 2335; 74 DTC 1252;

The Queen v Dorchester Drummond Corporation Ltd, [1979] CTC 219; 79 DTC 5163;

Charwood Investments Ltd v MNR, [1978] CTC 2545; 78 DTC 1411;

King George Hotels Limited and Cavalier Enterprises Ltd v The Queen, [1981] CTC 78; 81 DTC 5082;

SB I Properties Limited v MNR, [1981] CTC 2288; 81 DTC 263.

For the respondent:

American Leaf Blending v Director-General, [1978] 3 All ER 1185;

King George Hotels Ltd v The Queen, [1981 CTC 87: 81 DTC 5082:

The Queen v Caboro Bay Holdings Ltd, [1977] CTC 186; 77 DTC 5115;

The Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156;

Lois Hollinger v MNR, [1972] CTC 592; 73 DTC 5003;

Trans regent Holdings Ltd v MNR, [1980] CTC 2221; 80 DTC 1212;

J A Leroux Inc v MNR, [1979] CTC 3051; 79 DTC 834;

Marsh & McLennan Limited v MNR, [1979] CTC 2388; 79 DTC 314;

Morbane Developments Ltd v MNR, [1979] CTC 2794; 79 DTC 674;

Gianita Holdings Limited v MNR, [1979] CTC 3043; 79 DTC 819;

Spence Building Limited v MNR, [1977] CTC 2104; 77 DTC 71;

March Shipping Limited v MNR, [1977] CTC 2527; 77 DTC 371;

Supreme Theatres Limited v The Queen, [1981] CTC 190; 81 DTC 5136.

The basic assumption of the Minister in assessing this taxpayer was that none of the income in question arose from the conduct of an active business. As an alternative, the Minister also stressed that the income from investments was from property and not even from business; while even if the income from rentals was determined to be from business, it was certainly not from an active business. In pointing up the nature of the income — rentals and interest — as opposed to the source of the funds, and the powers of the corporation, the respondent has highlighted the main difference between his views and those of the appellant.

Counsel for the appellant’s position is that the nature of the income in 1972 was quite irrelevant — Cross Country was engaged in an active business in the mid 1960’s and thereby produced the funds or the lease, now represented by investments in securities or real estate. According to counsel, the revenue therefrom should continue to be classified as from busi- 12% from 1973 to 1974. In 1975 and 1976, however, it is necessary to note a decrease. Although in 1975 the appellant’s relations with the Nordiques and the Caribous were at their closest, sales nonetheless decreased from 3,020 to 2,832. For part of 1976 the appellant was still an owner of the Nordiques, but sales fell to 2,495.

In 1977, 1978 and 1979, when the name of Roger Barre (or his companies) was not seen in the information media as a promoter of sports teams, sales recorded a comeback as compared with the 1976 figures.

According to Mr Barré, the car market may possibly swing by 10% from year to year (TS, p 75), but something other than normal publicity is required to explain an increase such as that from 1971 to 1975. Is the increase in new car sales during this period, from 1,329 to 1,828, namely, 500 in five years so much greater than 10% per year, even taking into account the peak in 1974?

Is not Mr Barré’s enthusiasm in his testimony but a reflection of his personality?

Would evidence (if this were possible) on overall car sales in metropolitan Quebec City as compared with his own sales have given greater force to his contention: The Board does not know.

The Board cannot see in the venture involving the Caribous the distinct benefit seen by the appellant for its subsidiary.

5.3.8 Although part of the appellant’s evidence supports its contention, the Board does not see in it the necessary preponderance to reverse the burden of proof on the appellant.

6. Conclusion

The appeal is dismissed in accordance with the above Reasons for Judgment.

Appeal dismissed.