Décary J.A.:
The main issue in this appeal from a decision of the Tax Court of Canada is the appellant golf club’s tax exemption in respect of income from sources other than property under subparagraph 149(5)(^)(i) of the Income Tax Act, R.S.C. 1985 (5th Suppl.), c. 1, as amended (“the Act”), on the basis that it is a non-profit organization “the main purpose of which is to provide dining, recreational or sporting facilities for its members” (a “club”).
The facts are straightforward. The appellant is a private club. Its main activities consist of providing golf and related recreational facilities for its members. Swimming and tennis facilities are also available there. The club cannot seek to make a profit because it is, by nature, a non-profit organization within the meaning of paragraph 149(1)(/) of the Act. It establishes its budget at the beginning of the year with a view to being as close as possible to a balanced budget at year end. Its income is from dues paid by members at the beginning of each year, and from green fees, locker and cart rental charges, meals, drinks, and various other sources, including interest. It is this interest income that is in issue.
The interest income is produced as follows. To the extent that the revenues the club receives exceed operating expenses, especially if it is early in the year, they are invested, generally in short term deposits. The deposits produce interest, which is used, along with the surpluses that generate them, to pay the club’s operating expenses. It 1s not the club’s objective or practice to accumulate budget surpluses or invest its surpluses in such a manner as to maximize returns on its investments. The interest amounts for the taxation years in issue, i.e. 1986, 1987 and 1988, were $19,224.00, $11,528.00 and $22,604.00 respectively — relatively insignificant amounts when compared with the annual revenue of approximately $2 million. Depending on the year, the club operates at either a profit or a loss. As far as the years in question are concerned, there were losses of $2,991.00 in 1986 and $7,227.00 in 1988, and there was a profit of $925.00 in 1987.
Occasionally, when the club experiences a cash-flow problem, it borrows money so that it can continue to carry on its operations. It then claims a deduction for interest paid on the loans when it calculates its income.
The Minister of Revenue (“the Minister”) treated this interest income as income from property, taxable under subparagraph 149(5)(e)(1). The appellant filed an objection, claiming that in its opinion the income was not from property. The Minister also disallowed a deduction for interest paid on the loans, on the basis that they were not expenses related to a taxable source of income. The appellant appealed from this disallowance as well. In the Tax Court of Canada, Archambault T.C.C.J. dismissed the appellant’s appeals from the Minister’s assessments for the 1986, 1987 and 1988 taxation years.
The provision in issue is s. 149 of the Act, the relevant parts of which are reproduced below:
Income Tax Act (L504/R4038/T2/BT2) test_marked_paragraph_end (106) 0.851 0203_1601_1709
Division H Exemptions
Miscellaneous Exemptions
149. (1) No tax is payable under this Part on the taxable income of a person for a period when that person was
[...]
(/) a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was 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;
[...]
(5) Notwithstanding subsections (1) and (2), where a club, society or association was for any period, a club, society or association described in paragraph (!)(/) the main purpose of which was to provide dining, recreational or sporting facilities for its members (in this subsection referred to as the “club’’), an inter vivos trust shall be deemed to have been created of the later of the commencement of the period and the end of 1971 and to have continued in existence throughout the period, and, throughout that period, the following rules apply:
(a) the property of the club shall be deemed to be the property of the trust;
[...]
(d) tax under this Part is payable by the trust on its taxable income for each taxation year;
(e) the income and taxable income of the trust for each taxation year shall be computed on the assumption that it had no incomes or losses oilier than
(i) incomes and losses from property, and
[...]
Loi de l’impôt sur le revenu (L517/R3229/T2/BT2) test_linespace (236>217.60) 0.837 0204_1117_1255
Section H Exemptions
Exemptions diverses
149. (1) Aucun impôt n’est payable en vertu de la présente partie, sur le revenu imposable d’une personne, pour la période où cette personne était:
[...]
/) un cercle ou une association qui, de l’avis du ministre, n’était pas un organisme de bienfaisance au sens du paragraphe 149.1(1) et qui est constitué et administré uniquement pour s’assurer du bien-être social, des améliorations locales, s’occuper des loisirs ou fournir des divertissements, ou exercer toute autre activité non lucrative, et dont aucun revenu n’était payable à un propriétaire, un membre ou un actionnaire, Ou ne pouvait par ailleurs servir au profit personnel de ceux-ci, sauf si le propriétaire, le membre ou l’actionnaire était un cercle ou une association dont le but premier et la fonction étaient de promouvoir le sport amateur au Canada;
[...]
(5) Malgré les paragraphes (1) et (2), loisqu’un cercle ou une association était, pendant une période donnée, un cercle ou une association, visé à l’alinéa (1)/), dont l’objet principal consistait à fournir à ses membres des installations pour les loisirs, le sport ou les repas (appelé « club » au présent paragraphe), une fiducie non testamentaire est réputée avoir été créée à la fin de 1971 ou au début de la période, si ce début est postérieur à 1971, et avoir continué à existertout au long de la période et, tout au long de celle-ci, les règles suivantes s’appliquent:
a) la propriété du club est réputée être la propriété de la fiducie;
[...]
d) l’impôt prévu par la présente partie est payable par la fiducie sur son revenu imposable pour chaque année d’imposition:
e) le revenu et le revenu imposable de la fiducie pour chaque année d’imposition doivent être calculés à supposer qu’elle n’ait pas eu de revenus ni de pertes autres que:
(1) des revenus et des pertes provenant de biens,
[...]
Stated succinctly, the combined effect of paragraph I49( I )(/) and subparagraph 149(5)(e)(i) is as follows: a club such as the appellant that qualifies as a non-profit organization within the meaning of paragraph 149( 1 )(/) of the Act, and is therefore exempt under subsection 149(1) from paying tax on its income, immediately loses the benefit of this exemption in respect of such part of its income that is from property, if the main purpose of the club is to provide dining, recreational or sporting facilities for its members.
Therefore, to escape taxation on its interest income, the appellant must show that the income in question is not income from property.
The argument the appellant is essentially making in this regard is that the interest income is not income from property because the funds it invests, and the income generated by those investments, are subsequently employed and risked in the course of its activities. Accordingly, when a non-profit organization 1s involved, this interest income, which the case law considers business income when a profit-making entity is involved, is considered by analogy to be operating income.
To understand the appellant’s submissions, one must recall what is meant by “income from property.”
In L'impôt sur le revenu au Canada, Éléments fondamentaux, 2nd ed. (Sherbrooke: Les Éditions Revue de Droit de l’Université de Sherbrooke, 1997), P. Dussault and N. Ratti write at p. 6-1 that “income from property” means
[TRANSLATION] [...] the return on invested capital when neither the taxpayer entitled to it nor any of its agents has devoted much effort, time or attention to generating the income [...]
Thus, as a general rule, income from property includes but is not limited to interest.
There are two exceptions to this general rule in the context of businesses carried on for profit. Professor J. Dunford describes them as follows in “The Distinction Between Income from Business and Income from Property, and the Concept of Carrying On Business” (1991) 39 Canadian Tax Journal 1131 at 1166:
[...] There are two important exceptions to this principle [...] One arises where the securities held constitute an integral part of the taxpayer’s other business activities; the other, where the taxpayer’s investment activities are such that they amount in themselves to the conduct of a separate business [...]
The approach generally used to determine whether short-term interest income earned by a business comes within these exceptions in a given case is the one suggested by Professor V. Krishna in “Characterization of In- come from Business’ and ‘Income from Property’”, Canadian Current Tax (Toronto: Butterworths, 1984), Vol. 1, No. 8 at C-39:
The characterization 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.
To some extent, the appellant appears to be caught between a rock and a hard place. The interest income in issue 1s quintessential interest income because it is derived from investments that could hardly be more passive. Also, the appellant is not a profit-making entity; its investment activities can only be passive and incidental to its sporting and recreational activities, and profits can only be made incidentially since they cannot be the main objective of those activities. The appellant would be playing with fire if it tried to characterize its interest income as business income; such income would have to be incidental to activities primarily aimed at earning business income, which cannot be the case. This explains the unusual, hybrid proposition that when a club such as the appellant is involved, the interest resulting from the passive investment of an occasional budget surplus is neither income from property nor income from a business in application of the theory of incidental business income, but rather sui generis income from activities incidental to activities that can only generate profits incidentally.
In my opinion, it is sufficiently clear from the wording of the Act and the legislative intent it expresses that the appellant is introducing a distinction where Parliament has not seen fit to draw one.
Parliament has taken care to ensure that clubs such as the appellant, unlike other nonprofit organizations, are taxed on all their income from property and therefore, it is plain, on all their interest income. When urged to specify what the words “income from property” in subparagraph 149(5)(e)(I) would mean if his submissions were accepted, the only kind of example that counsel for the appellant could provide was interest from exceptional activities such as raising funds to build a new clubhouse.
In my opinion, such a restrictive construction of the subparagraph is entirely unjustified, and would, for all practical purposes, empty it of all meaning. There is no reason to believe that Parliament used the words “income from property” in any non-traditional sense. Nor 1s there any reason to believe that Parliament, in enacting legislation of such general scope with regard to clubs which it knows cannot carry on activities primarily aimed at making a profit, was concerned with the manner in which the income would be produced. Interest income is taxable regardless of the activities of the clubs that give rise to its production. As a result, the appellant’s attempts to associate them with one activity rather than another lead nowhere.
To accept the interpretation proposed by the appellant would be tantamount to holding that although Parliament used terms of the most general kind — terms which are normally understood to include passive investment income like the income in issue — it intended not to include all interest income such clubs might earn through proper management in the course of their operations, but only such interest income as the clubs might earn from extraordinary activities.
Under the rules of interpretation, as R. Sullivan notes in Driedger on the Construction of Statutes, 3rd ed. (Toronto: Butterworths, 1994) at 156-57:
The legislature is presumed to know all that is necessary to produce rational and effective legislation. This presumption is very far-reaching [...] The legislature is presumed to have a mastery of existing law, both common law and statute law. as well as the case law interpreting statutes. It is also presumed to have knowledge of practical affairs [...]
Parliament must have known that clubs like the appellant would have occasional budget surpluses in the normal course of their activities arid would invest such surpluses until they were needed, as any good manager would do. Especially in view of the very general wording Parliament employed, it simply could not have intended to disregard the normal course of activities and only address activities carried on outside that normal course.
In my opinion, therefore, the very words used in subparagraph 149(5)(e)(I), and the legislative intent they express, do not point in the direction in which counsel for the appellant would lead us. The interest income in the case at bar is undoubtedly income from property within the meaning of subparagraph 149(5)(e)(I).
Having so concluded, 1 am of the opinion that it is not necessary to follow the approach suggested by Krishna (supra, para. 12) and adopted by the Tax Court of Canada in this case, to determine whether the income was from business or from property. In any event, that approach was designed for profit-making organizations and in my view it is unsuited to non-profit organizations. I should note incidentally that the cases the appellant particularly emphasizes (R. v. Ensite Ltd., [1986] 2 S.C.R. 509 (S.C.C.) and R. v. Marsh & McLennan Ltd. (1983), [1984] 1 F.C. 609 (Fed. C.A.)) were de- cided in a specific statutory context which involved the interpretation of the expression “income from a property used or held by the corporation in the year in the course of carrying on a business” found in paragraph 129(4)(b) of the Act. In addition, the issue in Canadian Marconi Co. v. R., [1986] 2 S.C.R. 522 (S.C.C.) was the interpretation of the expression “income of the corporation for the year from an active business” for the purpose of calculating “Canadian manufacturing and processing profits” under subsection 125.1(1) of the Act. Those are not the expressions before us, and I believe it would be imprudent to depart from the particular statutory context of the case at bar.
In addition, I agree with the finding of Archambault T.C.C.J. that the loan interest costs incurred by the appellant as a result of cash-flow problems are not deductible because they are not related to an income-producing or taxable investment.
I would dismiss the appeal with costs.
Appeal dismissed.
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