Point Grey Golf & Country Club v. R., [1997] 1 CTC 2721, 97 DTC 854

Archambault J.T.C.C.: — These are appeals by Point Grey Golf & Country Club (“Point Grey”) from reassessments for income tax by the Minister of National Revenue (“Minister”) in respect of the 1989, 1990 and 1991 taxation years (“relevant taxation years”). The only issue raised by these appeals is whether interest income earned from investments made by Point Grey in the relevant taxation years constitutes “income from property” within the meaning of subparagraph 149(5)(a)(i) of the Income Tax Act (“Act”) and is accordingly taxable income for these years.

Facts

During the relevant taxation years, Point Grey operated a golf club and related recreational facilities on Marine Drive in Vancouver. It was incorporated in 1922 under the laws of British Columbia. Its by-laws provided that the objects of Point Grey was to conduct a golf and country club on the premises owned by Point Grey Golf & Country Club Limited. The latter rented its premises to Point Grey for an amount essentially equal to the amount of property taxes that it paid. Point Grey had a business license from the city of Vancouver and a liquor license from the provincial government. Mr. Richard Puder, who was on the Board of Directors in 1988 and 1989, confirmed that Point Grey operated its golf and recreational facilities only on a break-even basis. There was no intention to make a profit out of its operations. Point Grey qualified as a non-profit organization within the meaning of paragraph 149(1)(1) of the Act. The fiscal year-end of Point Grey is September 30. The amounts of net earnings and losses, before interest income, from 1988 to 1991, and the amounts of net earnings, from 1984 to 1991, were as follows:

In 1986, the Board of Directors decided that Point Grey needed a new clubhouse because the existing one was getting old and was too small for the needs of the members. The Directors were concerned that keeping the old clubhouse would not help attract new members required to maintain the healthy financial position of the club. A “Building Development Fund” was established for this purpose.

In October 1989, the members of Point Grey approved a project for the construction of a anew clubhouse. Its cost was to be financed with its funds in the Building Development Fund, its revenues from higher entrance fees paid by additional new members and from loans. By 1991, when the construction was completed, the total cost amounted to $4.8 million of which $600,000 was from borrowings.

Given a large inflow of money, Point Grey established on November 5, 1987, an Investment Committee comprised of three members of the club. Its first Chairperson was Mr. Fowlis, president and chief executive officer of a province-wide transport company. Mr. Fowlis had been involved in the management of short-term cash flow of that company. The other two members of the committee were Mr. Keast, a manager at the Toronto- Dominion Bank and Mr. Russell, a partner with the accounting firm Price Waterhouse. The members of this committee were replaced in 1990 by two other members of Point Grey, Mr. Griffith and Mr. Pegush and the general manager of the club, Mr. Kenneth J. Oleschuk.

Under the investment guidelines, the Investment Committee was to invest the funds earmarked for the construction in high quality money market securities. Capital had to be secured; no risk was to be taken. No money was in fact invested in bonds or shares. The Investment Committee invested only in treasury bills from provincial and federal governments, bankers’ acceptances and term deposits. Its aim was to achieve the highest yield possible. Such high yield required the investment of large sums: generally a minimum of $100,000.00. Until such amount was accumulated, funds were invested in overnight deposits. Usually this took about ten days.

When Point Grey had accumulated the required amount, the Investment Committee decided on the investment. At the beginning, the major concern was to choose a term which would take into account the expected fluctuations in the rate of interest. Towards the end, the major factor was the timing of the payments under the construction contract. The term varied from one to nine months. Bankers’ acceptances was a popular investment towards the end because it provided greater flexibility to the Investment Committee to meet its goal of having the funds available just in time for payments under the construction contract.

Most of the meetings of the Investment Committee took place by telephone. As a rule, the controller of Point Grey, Ms. Hu, obtained quotations for yield from four different sources. When Mr. Fowlis was the Chairperson for 1988 and 1989, he normally contacted Mr. Keast at the bank to see whether he could obtain a better rate than those obtained by Ms. Hu. Mr. Russell was usually consulted with respect to the term of the investment. Mr. Fowlis spent approximately two hours per month contacting Ms. Hu, Mr. Keast, and Mr. Russell. He could not evaluate how much time Ms. Hu spent to obtain the different quotations. He estimated that the other two members of his Investment Committee spent less time than him every month into this endeavor.

For 1990 and 1991, the Investment Committee basically followed the same guidelines for its investments. Mr. Oleschuk estimated that he spent roughly one day per month on the investment of the funds earmarked for the new clubhouse. He estimated Ms. Hu’s time to one day and a half. Mr. Oleschuk contacted both Mr. Griffith and Mr. Pegush with the quotations that he or Ms. Hu had obtained from the four regular sources. Mr. Oleschuk also indicated that some of his time was spent in insuring that the investment decisions made by the Investment Committee were properly reported to the Board of Directors.

Financial statements of Point Grey indicate that, at the end of its 1990 fiscal period, it had $1,295,092 in its Building Development Fund. Mr. Fowlis estimated that the highest amount of money invested at any given time prior to the commencement of the construction of the new clubhouse would have exceeded $3 million.

After the funds earmarked for the construction of the new clubhouse were expended, the Investment Committee was disbanded, as there was no further need for it. Point Grey did not accumulate any surplus after 1991, since it is still paying for the loan borrowed to finance the construction of the new clubhouse. Prior to 1987, entrance fees were used to finance the cost of capital expenditures. The same policy has been followed since 1991.

Pursuant to subsection 149(5) of the Act, the Minister treated Point Grey as a trust in relation to its interest income and, on a calendar basis, determined the amounts of interest income to be taxed. At first, it granted a deduction for a portion of the interest income considered to be part of the non-taxable operations of the Club in accordance with its past administrative policy. Subsequently, the Minister reversed these deductions for 1990 and 1991. The 1989 taxation year was statute barred. The amounts are as follows:

Position of the Appellant

Counsel for the Point Grey has raised two arguments. First, the investment of the funds earmarked for the construction of the clubhouse constituted a separate business because Point Grey acted in a business like manner in connection with these funds. It was attempting to achieve the highest possible return while at the same time not taking any risk on its capital. Point Grey had a substantial surplus of funds to invest and the Investment Committee and the controller acted like any money market traders. Alternatively, should I find that no separate business existed, counsel for Point Grey argued that the investment income should be considered as incidental to the club activities and not taxable as such.

Analysis

These appeals are raising exactly the same issue as the one that was raised in the decision of Elm Ridge Country Club Inc. v. Minister of National Revenue, [1995] 2 C.T.C. 2810, (sub nom. Elm Ridge Country Club Inc. v. R.) 95 D.T.C. 715 (T.C.C.), which I rendered on July 28, 1995. This issue is whether the interest earned by Point Grey during the relevant years constituted income from property or income from a business. In Elm Ridge, to determine which was the source of income, I adopted the two-step process described by V. Krishna, Characterisation of “Income from Business" and “Income from property", Canadian Current Tax (Butherworths) 1984, Vol. 1, No. 8, at p. C39, which I cited, at page 2828 (D.T.C. 724) of my reasons for judgment :

The characterisation of income from short-term investments involves a two-step process. The first step is to determine whether the taxpayer’s investments are an integral part of his other business activities: if they are, then the income from the investments is business income; if they are not, the second step is to determine whether the taxpayer’s investment activities constitute a separate business. If they do, the income from those activities is business income. If the investment activity does not constitute a separate business, the income from those activities is income from property.

[Emphasis added.]

In Elm Ridge, I decided that the interest income could not be considered as an integral part of Elm Ridge’s “other business activities” because Elm Ridge did not carry on any business. I gave these reasons, at pages 2932-33 (D.T.C. 726):

Here, the evidence has clearly established that Elm Ridge did not carry on its golf and other recreational activities for the purpose of making a profit. Its goal was only to recover from its members the cost of operating the club. Its annual budget was prepared with this objective in mind. The results from its financial statements from 1980 to 1988 show either a small excess of revenue over expenses or a shortfall of the same magnitude. For these nine fiscal periods, the statements show a cumulative loss of $954. These results are certainly consistent with the objective of Elm Ridge to only recoup its expenses. Not only was there no expectation of profit, but also none was made by Elm Ridge in the period from November 1979 to September 1988. Applying to the facts of this case the concept of income adopted by Dickson, J. in Moldowan, I must conclude that Elm Ridge* s golf operations did not constitute a business nor a source of income. Therefore, Elm Ridge’s investments could not have been an integral part of its business activities.

[Footnotes omitted and Emphasis added.]

I believe that this conclusion applies equally to the facts of this case. Mr. Puder confirmed that Point Grey operated its club on a break-even basis. It did not carry on its activities for the purpose of making a profit. Its financial results support this fact.

The second step is to determine whether Point Grey’s investment activities constituted a separate business. The Act recognizes that property and business constitute two distinct sources of income. The tax treatment of these two sources of income is often the same, but not necessarily so, as this case illustrates. The Court must therefore differentiate them. On the definition of what constitute a business, the case of Smith v. Anderson (1880), 15 Ch.D 247, at page 258, is often cited. In this case, Jessel, M.R., used the following dictionary definition of “business”: “anything which occupies the time and attention and labour of a man for the purpose of profit is business”. With respect to the definition of “property”, I made the following observations in Elm Ridge, at pages 2825-26 (D.T.C. 723):

The term “property” is defined very broadly in subsection 248(1) but this definition is not very helpful in defining income from property. Since the Act does not define this expression, it must therefore be given its ordinary meaning. This expression is generally regarded as signifying the return on invested capital where little or no time, labour or attention is devoted to producing the return. No one would dispute that income from property would normally include dividends, interest, rents and royalties.

The key element that distinguishes property income from business income is the level of labour or activity that is required to generate the income. Property income is mainly the return on capital while business income is generally the return on labour, but more often on a combination of both labour and capital. Obviously, income from property cannot be generated without any human intervention. Someone must decide how to invest the capital and, thereafter, must collect the return derived therefrom. However, this human intervention plays a very small role in generating this income.

While interest income can constitute income from property, it may equally be earned from a business. In some instances, it is easy to establish that interest is earned from the latter source. For instance, banks, loan corporations and other financial institutions which derive their interest income by lending money to their clients earn income from a business source. To earn this income, the financial institutions must put in place an infrastructure which will deal with the different aspects of the lending business. This requires experienced personnel such as clerks to receive deposits from the customers, loans officers to meet potential borrowers, investigate the risk involved and negotiate the terms of the loans. It would equally involve collecting officers to ensure proper repayments of the loans. Such activities require critical labour input in addition to capital.

Similarly, no one would dispute that interest constitutes income from property when an individual invests most of his or her savings in Government Savings Bonds for long terms and, once this investment is made, collects the interest. It used to be that a particular investor would have to cut off the interest coupons, go to the bank and cash them. Nowadays, the Governments deposit the interest directly into one’s bank account. So hardly any labour is required.

Between these two extreme examples, you have the spectrum of investments which require more activities than those performed by this typical Government Savings Bonds holder and less than those required in the lending business.

I do not believe that the level of activity disclosed in these appeals is indicative of an investment business being carried on. I believe, on the contrary, that the Investment Committee acted like any other Canadian who wanted to obtain the highest return on his or her investments. The activities consisted only in canvassing four potential institutions and in making the best decision taking into account their experience and Point Grey’s goals. Those activities were similar to those described in the case of Sanilit Ltd. v. Minister of National Revenue, [1987] 2 C.T.C. 2078, 87 D.T.C. 450. My colleague judge Rip stated, at page 2088 (D.T.C. 457):

In my opinion, the fact that Mr. Sabourin spent one and one- half to two hours a month in making inquiries about the term investments does not amount to a business (see Burri v. R., 85 D.T.C. 5287 and March Shipping Ltd. v. Minister of National Revenue, 77 D.T.C. 371). Sanilit never held itself out to be an investment company; the money that it invested had no business nature.

See also Matlas S.A. c. R., (sub nom. Matias S.A. v. Canada) [1995] 1 C.T.C. 2047, (sub nom. Matias S.A. v. R.) 94 D.T.C. 1591 (T.C.C.).

I must add that we are not dealing here with an entity whose goal is to carry on an investment business. The main goal of Point Grey is to provide club facilities to its members on a break-even basis. The decision to build a new clubhouse required Point Grey to raise substantial sums of money in order to finance such construction and naturally, in the meantime, it invested its funds until required for the construction. The Investment Committee was disbanded once the construction had been completed.

Given that little labour or attention had to be devoted to produce the return, I conclude that the source of the interest income was property and not business.

For these reasons, the appeals are dismissed, with costs.

Appeal dismissed.