Roland
St-Onge:—The
appeals
of
Marsh
&
McLennan
Limited
and
Harry
Price
Hilborn
Insurance
Ltd
came
before
me
on
February
14,
1979,
at
the
City
of
Toronto,
Ontario
and
it
was
agreed
between
counsel
that
the
evidence
in
the
appeal
of
Marsh
&
McLennan
Limited
would
serve
for
the
appeal
of
Harry
Price
Hilborn
Insurance
Ltd
(78-876).
Marsh
&
McLennan
Limited
is
a
corporation
which
is
incorporated
under
the
laws
of
Canada,
having
its
head
office
at
7
King
Street
East,
Toronto,
Ontario.
Harry
Price
Hilborn
Insurance
Ltd
is
a
corporation
which
is
incorporated
under
the
laws
of
the
Province
of
Ontario,
having
its
head
office
at
7
King
Street
East,
Toronto,
Ontario.
During
the
1976
taxation
year,
both
companies
carried
on
the
business
of
an
insurance
broker.
The
issue
in
this
appeal
is
whether
some
amounts
of
interest
are
to
be
included
in
computing
the
“Canadian
Investment
Income”
of
the
appellant,
in
accordance
with
subsection
129(4)
of
the
Income
Tax
Act
SC
1970-71-72,
c
63,
as
amended.
At
the
end
of
the
hearing,
counsel
for
the
appellant
filed
with
the
Board
“Notes
of
Argument”
which
explain
the
problem
and
summarize
the
evidence
adduced
as
follows:
The
Issue
1.
This
appeal
originates
in
a
determination
of
the
refund
to
which
the
appellant
corporation
may
be
entitled
under
section
129
of
the
Income
Tax
Act
(“the
Act”)
for
its
1976
taxation
year,
ended
December
31.
That
determination
was
made
in
a
notice
of
assessment
dated
October
11,
1977.
By
virtue
of
subsections
152(1)
and
(1.2)
of
the
Act,
as
applicable
at
the
time
the
notice
of
assessment
was
made,
this
determination
is
regarded
procedurally
in
much
the
same
manner
as
an
assessment
of
ordinary
income
tax
payable
in
respect
of
a
taxation
year.
In
particular,
the
provisions
of
Divisions
I
and
J
relating
to
assessment
and
reassessment
are
applicable
to
such
a
determination.
The
appellant
therefore
filed
a
notice
of
objection
in
the
usual
form
to
which
the
respondent
replied
with
a
notification
of
confirmation,
and
an
appeal
was
lodged
with
this
Board
by
a
notice
of
appeal.
2.
Technically,
the
issue
on
appeal
is
whether
the
determination
by
the
respondent
of
‘‘the
amount
of
refund,
if
any,
to
which
the
taxpayer
may
be
entitled
by
virtue
of
section
129
is
correct.
More
narrowly
defined,
the
issue
is
whether
certain
interest
income
earned
by
the
appellant
forms
part
of
“Canadian
investment
income”
of
the
appellant
within
the
meaning
of
that
expression
as
defined
in
paragraph
129(4)(a).
This
is
the
issue
as
set
forth
in
the
pleadings.
3.
It
is
not
easy
to
state
in
words
what
portion
of
the
appellant’s
interest
income
is
in
dispute.
The
parties
are
in
agreement
that
the
appellant
earned
interest
income
in
1976
of
$2,071,547.
Income
Statement,
T-2
return
for
1976
Notice
of
Appeal,
paragraphs
3
and
4
Reply
to
Notice
of
Appeal,
paragraphs
1
and
3
The
position
taken
by
the
appellant
before
this
Board
is
that
the
entire
amount
of
$2,071,547
represents
“Canadian
investment
income”.
The
position
of
the
respondent
is
that
only
$725,915
of
this
total
amount
represents
“Canadian
investment
income”.
Notice
of
Appeal,
paragraphs
3,
4
and
6
Reply
to
Notice
of
Appeal,
paragraphs
1
and
3
In
order
to
appreciate
the
difference
between
these
two
positions,
it
is
necessary
to
review
the
facts.
The
Evidence
4.
The
appellant
corporation,
a
wholly-owned
subsidiary
of
a
US
company,
is
a
Canadian
private
corporation
which
carries
on
business
as
a
general
insurance
broker.
Its
income
consists
principally
of
commissions
receivable
from
insurance
companies
(or
other
sources
of
insurance
underwriting)
in
respect
of
policies
written
by
such
insurers
with
clients
introduced
by
the
appellant.
5.
In
the
insurance
industry,
it
is
the
practice
for
brokers
such
as
the
appellant
to
consult
with
potential
purchasers
of
insurance
regarding
their
insurance
needs.
The
broker
investigates
the
availability
of
insurance
to
meet
these
needs.
If
the
proposal
made
by
the
broker
is
accepted
by
the
customer
and
the
insurance
written,
a
commission
is
earned.
In
the
case
of
the
appellant,
most
of
the
contractual
arrangements
with
insurers
were
verbal.
One
example
of
a
written
contract
was
filed
and
the
testimony
indicates
that
this
document
is
reasonably
representative
of
the
other
written
and
unwritten
arrangements.
In
all
cases,
the
appellant
is
aware
of
the
commission
schedule
offered
by
the
insurer
(subject
to
further
negotiation
or
otherwise)
either
due
to
a
written
agreement,
to
public
dissemination
of
such
schedules
or
through
private
discussions.
6.
While
the
written
contract
makes
no
reference
to
collection
of
premiums,
the
appellant’s
witness
indicated
that
it
was
commonly
understood
in
the
industry
that
the
broker
undertakes
the
paperwork
of
invoicing
and
assumes
the
responsibility
of
collection.
This
represents
a
part
of
the
total
services
rendered
by
the
broker
to
earn
his
commission.
7.
Procedurally,
the
collection
and
remittance
function
generally
works
in
the
following
manner.
The
appellant
obtains
confirmation
from
the
insurer
that
insurance
is
available
in
accordance
with
the
terms
requested.
An
invoice
is
then
sent
by
the
appellant
to
the
customer
for
the
amount
of
the
premium.
Once
the
insurers
have
committed
themselves
to
underwrite
the
risk,
the
appellant
becomes
liable
to
them
for
the
amount
of
the
“net
premium”,
ie,
the
total
premium
less
the
agreed
upon
commission.
The
terms
of
payment
were
usually
60
days
after
the
end
of
the
month
in
which
the
invoice
was
sent.
The
broker’s
obligation
to
pay
the
net
premium
is
unrelated
to
the
actual
collection
of
amounts
invoiced.
The
appellant
must
pay
the
net
premium
in
any
event.
If
the
insured
does
not
pay
the
premium,
the
appellant
may
cause
the
insurance
to
be
cancelled,
but
remains
liable
to
the
insurer
for
the
portion
of
the
premium
which
relates
to
the
time
during
which
the
insurance
was
effective.
8.
In
cash
terms,
the
appellant
does
not
utilize
funds
collected
in
respect
of
a
particular
invoice
to
pay
the
net
premium
in
respect
of
that
policy.
All
amounts
received,
as
premiums
or
otherwise,
are
banked.
From
the
current
bank
accounts,
operating
expenses
are
defrayed
and
net
premiums
remitted
to
insurers.
From
time
to
time,
at
the
discretion
of
each
branch
accounting
manager,
withdrawals
are
made
from
these
accounts
if,
in
his
view,
the
amounts
held
are
in
excess
of
the
operating
needs
of
the
branch.
These
withdrawals
are
then
invested
in
interest-producing
assets.
During
the
period
of
1972
through
1976,
the
appellant
at
all
times
had
a
substantial
amount
of
investments.
Cash
on
hand
plus
investments,
referred
to
as
a
“float”,
varied
from
time
to
time
as
amounts
were
received
or
expended.
On
a
month-to-month
basis
in
1976,
this
float
ranged
between
$15
million
and
$22
million.
9.
Under
its
internal
investment
policy,
and
subject
to
restrictions
placed
upon
the
financial
officers
of
the
corporation
by
an
investment
resolution
which
was
introduced
in
evidence,
all
of
these
funds
were
held
in
current
bank
accounts,
bank
certificates
of
deposit
or
short-term
commercial
paper
issued
by
particularly
secure
borrowers.
No
interest
was
earned
on
the
bank
accounts
in
1976,
but
interest
was
earned
on
the
investments
in
the
amount
of
$2,071,547,
which
amount
the
appellant
claims
is
its
“Canadian
investment
income’’
for
that
year.
10.
The
cash
and
investment
summary
produced
by
the
appellant
is
a
particularly
useful
document
for
illustrating
the
issue
between
the
parties.
This
summary
shows,
on
a
monthly
basis,
the
actual
combined
cash
and
investment
balance
held
by
the
appellant
as
a
corporation,
as
well
as
the
location
and
control
of
this
cash
and
these
investments
as
between
head
office
on
the
one
hand
and
the
various
branches
on
the
other.
It
indicates
that,
at
each
month
end
in
1976,
the
branch
offices,
head
office
and
the
corporation
as
a
whole
held
positive
cash
and
investment
balances.
As
noted
above,
the
appellant’s
investment
income
is
earned
on
the
investment
portion
of
these
balances.
11.
The
month
of
January
was
chosen
as
an
example.
It
shows
a
cash
and
investment
balance
at
the
corporate
level
of
$17,603,000.
This
sum
is
made
up
of
cash
and
investment
balances
held
in
head
office
and
the
branch
offices.
In
each
case,
the
figure
shown
as
“total’’
in
column
3
represents
a
real
amount
of
cash,
bank
certificates
or
commercial
paper
held
and
controlled
by
the
head
office
or
the
branch
offices.
In
the
case
of
the
head
office
figure,
this
amount
represents
the
cumulative
effect
over
the
years
of
profit
drawings
from
the
branches,
plus
interest,
less
disbursements
on
account
of
acquisitions,
dividends,
etc.
In
the
branches,
it
represents
surplus
receipts
over
disbursements
and
transfers
to
head
office.
12.
Neither
of
columns
1
or
2
represent
a
segregated
fund,
nor
indeed
a
fund
at
all.
Both
are
arithmetic
calculations
which,
of
necessity,
add
to
yield
the
actual
cash
and
investments
on
hand
as
shown
in
column
3.
13.
Column
1
is
headed
“Unremitted
Premiums’’.
No
amount
is
shown
in
respect
of
head
office
as
it
sells
no
insurance.
For
each
branch
office,
the
amount
shown
is
a
calculated
approximation
of
the
portion
of
premiums
received
from
customers
which
will
ultimately
have
to
be
expended
as
a
remittance
of
net
premiums
to
insurance
companies.
To
arrive
at
this
figure,
the
appellant
applied
an
accounting
formula.
A
formula
is
required
because
there
is
no
feasible
manner
of
directly
determining
which
cash
receipts
reflect
premiums
received
on
policies
underwritten
by
insurance
companies.
The
formula
is
based
upon
the
unusual
relationship
between
the
premiums
receivable
and
the
net
premiums
payable.
The
difference
must
necessarily
equal
the
appellant’s
commissions.
Therefore,
to
determine
the
amounts
received
from
the
customers
which
will
have
to
be
remitted
to
insurance
companies,
the
appellant
added
the
net
premiums
paid
or
payable,
subtracted
amounts
receivable
(but
not
yet
received)
in
respect
of
invoices
sent,
and
then
subtracted
an
estimate
of
its
commissions.
This
estimate
was
based
upon
an
analysis
of
the
insurance
placed
by
each
branch
to
arrive
at
an
average
commission
rate.
The
purpose
of
computing
“unremitted
premiums’’
was
twofold:
to
comply
with
a
request
of
the
US
parent
and
to
provide
a
statistical
measure
of
how
successful
the
branches
were
in
collecting
outstanding
premiums.
14.
The
figures
in
column
1,
the
“unremitted
premiums”,
are
mere
calculations.
Whether
or
not
the
relevant
branch
actually
held
cash
and
investments
equal
to
this
amount
is
a
question
of
fact.
Indeed,
the
summary
shows
that
often
this
was
not
the
case.
In
the
month
of
January
1976,
for
example,
three
of
the
branches
had
an
actual
balance
of
cash
and
investments
which
was
less
than
the
calculated
amount
of
unremitted
premiums.
15.
The
figures
in
column
2,
the
“other”
cash,
are
determined
simply
by
subtracting
from
the
actual
cash
and
investments
held
as
shown
in
column
3,
the
unremitted
premiums
as
calculated
in
column
1.
If
the
latter
exceeds
the
former,
a
negative
amount
is
entered
in
column
2.
It
should
be
noted
that
in
the
balance
sheet
which
was
appended
to
the
1976
income
tax
return,
a
distinction
was
made
between
cash
and
“trust
funds”.
The
witness
explained
that
this
designation
is
based
upon
requirements
and
convenience
of
the
US
parent
company,
and
indeed
the
form
of
presentation
is
prescribed
by
the
parent.
In
fact,
the
amount
of
“cash”
corresponds
to
the
“other”
cash
shown
in
column
2
of
the
summary,
while
the
so-called
“trust
funds”
correspond
to
the
unremitted
premiums
shown
in
column
1.
16.
We
may
now
illustrate
the
appellant’s
position
in
this
appeal.
During
the
years
1972
through
1976,
interest
income
was
earned
on
the
“float”,
that
is,
on
the
investments
held
continuously,
in
variable
amounts,
from
month
to
month.
In
1976,
the
interest
income
was
$2,071,547.
It
represents
income
earned
by
investment
of
cash
which,
in
the
discretion
of
the
branch
accounting
manager
or
controller,
had
been
determined
to
be
surplus
to
the
immediate
needs
of
the
business.
Operating
expenses
were
paid
out
of
the
current
accounts.
These
produced
no
interest.
The
“float”
could
therefore
be
said
to
represent
an
amount
of
money
which
is
always
outstanding,
primarily
in
the
form
of
interest-bearing
investments.
The
submission
of
the
appellant
is
that
the
interest
on
this
float
is
“Canadian
investment
income”,
being
income
from
property
which
was
held
and
used
entirely
outside
the
course
of
the
appellant’s
business.
17.
The
summary
also
enables
us
to
perceive
in
a
graphic
manner
the
submission
of
the
respondent,
or
at
least
the
basis
of
the
determination
made
in
the
notice
of
assessment.
The
respondent
claims
that
$1,345,632
out
of
the
total
interest
income
earned
on
the
float
in
1976
did
not
constitute
“Canadian
investment
income”.
Reply
to
Notice
of
Appeal,
paragraphs
3,
4
and
5
This
amount
is
computed
by
subtracting
from
the
total
investment
income
as
shown
in
the
financial
statements,
a
portion
thereof.
The
portion,
which
both
sides
regard
as
“Canadian
investment
income”
is
computed
by
applying
a
complex
allocation
formula.
The
purpose
of
the
formula
is
to
arrive
at
a
figure
which
may
be
said
to
represent
the
proportion
of
total
investment
income
earned
in
the
year
which
is
attributable
to
the
amount
of
“other”
cash
as
calculated
in
column
2
of
the
summary.
That
is
to
say,
the
Respondent
requires
that
a
calculation
be
made
to
determine
the
amount
of
interest
which
the
appellant
might
have
earned
had
it
separately
invested
in
comparable
circumstances
an
amount
equal
to
the
portion
of
its
total
investments
shown
in
column
2.
18.
Mathematically,
the
computation
proceeded
in
this
way.
The
interest
income
earned
on
head
office
funds
was
firstly
determined.
A
notional
amount
of
interest
on
any
positive
“other”
cash
balances
of
the
branches,
as
computed
in
column
2,
was
added.
The
amount
added
was
calculated
by
averaging
the
column
2
amounts
separately
for
each
branch.
If
this
average
was
positive,
interest
at
9.5%
was
added.
The
figure
of
9.5%
represents
the
average
rate
of
return
on
investments
at
the
branch
level.
In
order
to
take
account
of
negative
balances
of
“other”
cash,
as
shown
in
column
2,
there
was
then
subtracted
from
the
total
the
amounts
of
such
negative
balances
multiplied
by
another
average
interest
rate,
in
this
case
9.87%.
This
figure
represents
the
average
rate
of
return
on
head
office
funds.
It
was
chosen
as
a
measure
of
the
negative
contribution
to
investment
income
in
respect
of
these
negative
balances,
apparently
on
the
theory
that
such
a
negative
balance
represents
a
notional
transfer
of
funds
from
head
office.
In
fact,
there
were
no
such
advances.
19.
The
respondent
appears
to
relate
this
complex
allocation
of
interest
income
to
a
simple
factual
distinction
between
which
funds
were
used
to
earn
what
income.
He
says
that
the
amount
of
$1,345,632
was
earned
directly
from
the
investment
of
moneys
collected
as
premiums
and
invested
pending
remittance
to
insurance
companies.
Reply
to
Notice
of
Appeal,
paragraph
4
and
5(e)
The
appellant
submits
that
this
is
inaccurate.
It
is
always
possible
to
divide
up
an
amount
of
income
into
two
parts.
However,
on
the
facts
of
this
case,
there
were
not
two
parts.
The
amount
which
the
respondent
describes
as
interest
income
on
unremitted
premiums
may
more
properly
be
said
to
be
the
portion
of
total
interest
income
which
would
have
been
earned
on
unremitted
premiums,
had
the
amount
calculated
to
be
the
“unremitted
premiums”
(column
1)
actually
been
set
aside
and
invested.
20.
The
evidence
indicates
that
the
interest
income
with
which
we
are
concerned
is
not
a
principal
component
of
the
appellant’s
revenue
or
pre-tax
income.
Total
interest
income
represents
about
9%
of
total
revenue,
or
2%
of
pre-tax
income,
while
the
disputed
amount
of
$1,345,000
represents
about
6%
of
total
revenue
and
18%
of
pre-tax
income.
In
the
absence
of
this
latter
amount
of
revenue,
the
appellant’s
return
would
be
some
28%
instead
of
33%,
still
a
healthy
economic
return.
21.
Testimony
was
also
received
in
order
to
explain
the
investment
activity
of
the
appellant.
Five
individuals
were
principally
involved.
Few
transactions
occurred
each
month
at
each
branch.
The
total
time
spent
varied
from
one
half-day
per
month
at
small
branches
to
one
and
one-half
days
per
month
at
large
branches.
This
amount
of
time,
it
is
submitted,
is
minimal
in
the
context
of
an
organization
the
size
of
the
appellant
with
some
600
employees.
Furthermore,
the
individuals
involved
were
not
investment
counsellors
or
persons
with
a
particular
background
in
the
investment
business.
Their
principal
responsibilities
were
for
branch
or
head
office
accounting.
22.
The
investments
were
actually
made
through
the
facilities
principally
of
banks
and
sometimes
of
investment
dealers.
The
investment
activity
involved
generally
no
more
than
a
few
phone
calls
to
obtain
prevailing
rates
and
a
confirmation
that
funds
should
be
placed
at
those
rates.
The
term
of
the
investments
varied
considerably
but
most
of
the
funds
invested
were
placed
from
30
to
90
days.
23.
Finally,
the
appellant,
through
its
Treasurer
and
Controller,
testified
regarding
the
preparation
and
filing
of
its
income
tax
returns.
Having
been
uncertain
as
to
the
proper
method
of
determining
“Canadian
investment
income”,
the
appellant
attempted
an
allocation
of
its
interest
income
based
upon
its
understanding
of
the
law
and
Departmental
practice.
The
formula
used
in
preparing
the
return
for
1976,
which
was
discussed
above,
arose
out
of
specific
discussions
with
officials
of
the
Department
of
National
Revenue.
Consequently,
the
determination
of
“refundable
dividend
tax
on
hand’’
and
“dividend
refunds’’
in
the
1976
return
is
the
same
as
the
position
taken
by
the
respondent
in
this
appeal.
The
appellant’s
change
of
heart
which
led
to
the
filing
of
a
notice
of
objection
and
requests
for
refunds
in
respect
of
the
years
1973
through
1976,
followed
the
publication
of
the
decision
of
this
Board
in
March
Shipping
Limited
v
MNR,
[1977]
CTC
2527;
77
DTC
371
about
which
more
will
be
said
below.
On
the
basis
of
this
decision,
the
appellant
concluded
that
it
had
improperly
determined
its
“Canadian
investment
income”
for
1976
and
prior
years.”
In
his
argument,
counsel
for
the
appellant
referred
the
Board
to
MRT
Investments
Ltd
v
The
Queen,
[1975]
CTC
354;
75
DTC
5224.
The
issue
involved
three
corporations
whose
sole
activity
was
lending
money
on
the
security
of
mortgages.
He
held
that
1.
a
corporation
is
carrying
on
active
business
when
the
making
of
investment
is
the
very
purpose
for
which
it
has
been
incorporated
and
the
company
actively
pursues
this
objective;
2.
that
the
required
degree
of
activity
will
be
a
question
of
fact
in
each
case
having
regard
to
the
history
and
conduct
of
the
business;
3.
this
decision
was
upheld
in
the
court
of
appeal
except
in
ESG
Holdings
Ltd
v
The
Queen,
[1975]
CTC
354
(FC);
[1976]
CTC
295;
75
DTC
5224;
'76
DTC
6158.
(Taxpayer’s
appeal
allowed)
(FCA),
Mr
Justice
Walsh
had
held
that
the
taxpayer
was
not
carrying
on
an
active
business
since
it
had
retained
the
services
of
others
to
conduct
its
day-to-day
affairs.
The
Court
of
Appeal
decided
that
the
circumstances
did
not
differ
materially
from
those
in
Rockmore
Investments
Ltd
v
The
Queen,
[1975]
CTC
354.
In
his
notes
of
argument,
counsel
for
the
appellant
commented
on
the
relevant
jurisprudence,
the
1974
amendment
amending
the
definition
of
“Canadian
Investment
Income”
and
a
pending
Bill
as
follows:
25.
A
number
of
judicial
decisions
have
considered
these
sections.
Most
are
directed
towards
the
issue
of
whether
a
particular
corporation
derives
income
from
an
active
business
within
the
meaning
of
section
125.
26.
The
scheme
of
the
legislation
was
discussed
in
some
detail
in
argument
before
the
Federal
Court,
Trial
Division
in
the
case
of
MRT
Investments
Limited
et
al
v
The
Queen,
[1975]
CTC
354;
75
DTC
5224.
This
was
the
first
court
decision
involving
section
125.
The
issue
involved
three
corporations
whose
sole
activity
was
lending
money
on
the
security
of
mortgages.
The
issue
was
whether
the
income
derived
from
this
activity
constituted
income
from
an
active
business
within
the
meaning
of
section
125.
Counsel
for
the
Crown
pointed
out,
and
the
Court
accepted,
an
important
structural
distinction
between
the
system
of
taxation
established
by
sections
125
and
129
and
the
pre-1972
rules
regarding
personal
corporations.
In
the
latter
case,
what
had
to
be
determined
was
the
nature
of
the
corporation’s
business
and
whether
it
did
or
did
not
carry
on
an
“active
financial,
commercial
or
industrial
business”.
Under
the
present
scheme,
the
issue
is
not
the
nature
of
the
corporation’s
business,
but
rather
a
determination
of
sources
of
income.
Counsel
for
the
Crown
enumerated
these
as:
(i)
capital
gains
from
the
disposition
of
property;
(ii)
income
from
a
source
that
is
property;
(iii)
income
from
a
source
that
is
a
business
but
not
an
active
business;
or
(iv)
income
from
a
source
that
is
an
active
business
carried
on
in
Canada.
Commenting
upon
this
analysis,
Mr
Justice
Walsh
observed:
While
this
distinction
is
undoubtedly
true
it
does
not
settle
the
matter.
Certainly,
the
amount
to
which
the
25%
deduction
applies
by
virtue
of
subsection
125(1)
is
only
applicable
to
amounts
of
income
derived
from
the
“active
business”
of
the
corporation
carried
on
in
Canada
and
the
deduction
would
not
apply
therefore
under
this
section
to
the
investment
income
of
a
company,
the
active
part
of
whose
business
is
not
the
making
of
investments
for
a
profit.
The
distinction
isa
valid
one
for
a
corporation
which
has
income
from
different
sources,
part
being
from
its
active
business
operations
and
part
being
non-active
income.
27.
These
judgments
were
affirmed
on
appeal
([1976]
CTC
291,
294;
76
DTC
6156).
Commenting
upon
the
thrust
of
the
distinction
established
among
the
sources
of
income
by
sections
125
and
129,
the
Chief
Justice,
speaking
for
the
Court,
observed
at
p
293:
In
considering
whether
there
is
an
“active
business”
for
the
purposes
of
Part
I,
the
first
step
is
to
decide
whether
there
is
a
“business”
within
the
meaning
of
that
word.
Section
248
provides
that
that
word
when
used
in
the
Income
Tax
Act,
includes
‘‘a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatever”
and
includes
‘‘an
adventure
or
concern
in
the
nature
of
trade”
but
does
not
include
‘‘an
office
or
employment”.
Furthermore,
the
contrast
in
paragraph
3(a)
of
the
Act
between
“business”
and
“property”
as
sources
of
income
makes
it
clear,
I
think,
that
a
line
must
be
drawn,
for
the
purposes
of
the
Act,
between
mere
investment
in
property
(including
mortgages)
for
the
acquisition
of
income
from
that
property
and
an
activity
or
activities
that
constitute
“an
adventure
or
concern
in
the
nature
of
trade”
or
a
“trade”
in
the
sense
of
those
expressions
in
section
248
(supra).
28.
These
passages
suggest
that
the
scheme
of
taxation
under
sections
125
and
129
require
a
source-by-source
analysis
of
corporate
income.
On
the
one
hand,
there
may
be
income
from
an
active
business
carried
on
by
the
corporation.
On
the
other,
there
may
be
non-active
income,
income
from
investments
in
property
made
merely
for
the
acquisition
of
income
from
that
property.
This
type
of
analysis
is
greatly
expanded
in
The
Queen
v
Cadboro
Bay
Holdings
Ltd,
[1977]
CTC
186;
77
DTC
5115.
After
adopting
the
language
of
Mr
Justice
Walsh
cited
above,
Mr
Justice
Gibson
proceeds
to
analyse
in
some
detail
the
structure
and
import
of
the
system
established
by
these
sections,
expressly
going
beyond
the
narrow
issue
of
the
case
at
bar,
which
required
a
determination
of
whether
a
particular
company,
in
that
case
earning
rental
income
from
tenants
of
a
shopping
centre,
received
income
from
an
active
business
carried
on
by
it.
This
analysis,
commencing
at
pp
197,
5122,
is
worthy
of
reproduction
in
full
as
it
represents
what
is
surely
the
most
extensive
and
careful
judicial
examination
of
these
provisions
to
date.
Section
125
of
the
Act
refers
to
private
corporations
in
the
meaning
assigned
by
subsection
89(1)
of
the
Act.
Subsection
129(4)
of
the
Act
defines
“Canadian
investment
income”.
Subsection
129(1)
of
the
Act
enables
a
private
corporation
which
has
paid
income
tax
on
investment
income
(including
capital
gains)
to
recover
some
of
the
tax
paid
when
the
shareholders
of
that
company
are
paid
taxable
dividends.
Section
129
of
the
Act
in
effect
causes
a
private
corporation
which
earns
investment
income
to
prepay
income
tax
on
that
income.
There
is
a
refund
of
the
tax
only
to
the
extent
provided
by
section
129
of
the
Act
when
a
dividend
is
paid
to
shareholders
of
that
private
corporation.
In
considering
subsection
129(4)
of
the
Act
which
defines
“Canadian
investment
income”
it
would
appear
that
this
subsection
envisages
four
possible
sources
of
income
to
a
private
corporation,
namely:
(a)
income
from
capital
gains,
(b)
income
from
property,
(c)
income
from
a
business
other
than
an
active
business,
and
(d)
income
from
an
“active
business”.
(For
reasons
that
are
stated
later
in
this
judgment,
what
is
income
from
“a
business
other
than
an
active
business”
must
mean
income
from
a
business
that
is
in
an
“absolute
state
of
suspension”—see
quotation
from
The
Queen
v
Rockmore
Investments
Limited,
that
is,
devoid
of
any
quantum
of
business
activity,
but
which
has
some
asset
which
produces
income.)
Subsection
129(6)
of
the
Act
deems
an
amount
received
or
receivable
by
a
corporation
from
an
associated
corporation
to
be
income
from
an
active
business
to
the
extent
that
such
income
is
deducted
from
the
active
business
income
of
the
associated
corporation.
This
deeming
provision
prevents
any
amount
deducted
from
active
business
income
of
the
payor
becoming
investment
income
of
the
payee
associated
corporation
thus
preventing
the
result
that
would
flow
if
such
income
were
converted
into
investment
income
of
the
payee
associated
corporation
and
therefore
in
effect
eligible
for
a
dividend
refund
under
subsection
129(1)
of
the
Act.
Subsection
129(6)
applies
to
the
payee
or
recipient
corporation
only
in
taxation
years
of
the
recipient
commencing
after
1972.
In
addition
certain
other
conditions
must
obtain,
namely:
(1)
the
two
corporations
must
be
associated
at
any
time
in
the
relevant
taxation
year
of
the
payee
or
recipient;
(2)
the
sum
paid
must
be
deducted
or
be
qualified
as
deductible
in
computing
the
Canadian
active
business
income
of
the
associated
payor
corporation
in
any
taxation
year;
and
(3)
the
amount
must
be
otherwise
includable
in
income
from
property,
or
in
the
income
from
a
business
other
than
an
active
business
of
the
payee
or
recipient.
These
deeming
provisions
in
subsection
129(6)
only
apply
to
the
payee
or
recipient
associated
corporation.
The
necessity
to
have
such
deeming
provisions
in
such
a
case
indicates
that
the
normal
meaning
of
such
income
might
not
obtain
in
respect
to
a
payee
or
recipient
associated
corporation
in
these
circumstances.
As
stated,
the
source
of
the
income
of
the
defendant
private
corporation
is
from
rentals,
which
rentals
are
primarily
and
substantially
from
property
and
only
in
a
smaller
proportion
from
or
on
account
of
services
rendered
to
tenants
and
other
things
supplied
to
the
tenants.
The
fact
that
it
is
rental
income
is
not
significant.
The
type
of
income
could
have
been
interest,
royalties,
management
fees
or
one
of
the
many
other
types
of
incomes.
The
type
is
not
the
relevant
matter.
Instead
as
stated,
the
relevant
matter
is
whether
such
income
is
from
a
“business”
which
is
an
‘‘active
business”
within
the
meaning
or
section
125
or
whether
it
is
income
within
the
meaning
of
section
129.
Section
125
is
concerned
with
income
from
an
‘‘active
business
carried
on
in
Canada”.
“Business”
is
defined
in
subsection
248(1)
of
the
Act
as
including
‘‘a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatever
and
includes
an
adventure
or
concern
in
the
nature
of
trade
but
does
not
include
an
office
or
employment”.
Therefore
the
definition
of
business
in
section
125
of
the
Act
includes
those
meanings
in
subsection
248(1)
of
the
Act
and
also
includes
the
ordinary
dictionary
definition
of
business.
By
the
subsection
248(1)
definition
because
there
is
a
reference
to
“trade”
and
also
to
“an
adventure
or
concern
in
the
nature
of
trade”
all
such
activities
within
the
natural
meaning
of
those
words
and
as
also
judicially
defined
in
the
cases
are
included.
In
addition,
all
the
other
words
in
the
subsection
248(1)
definition
as
judicially
defined
are
included
in
the
meaning
of
“business”
plus
the
dictionary
definitions
of
these
words.
As
to
the
meaning
of
“active”
business
as
the
Court
of
Appeal
of
this
Court
said
in
The
Queen
v
Rockmore
Investments
Ltd
as
quoted
above,
when
Parliament
used
the
concept
“active”
business
in
subsection
125(1),
it
did
not
do
so
to
“exclude
a
business
that
is
in
an
absolute
state
of
suspension”
but
instead
must
have
intended
“to
exclude
some
business
having
sufficient
activity
in
the
year
to
give
rise
to
income”.
The
question
therefore,
in
attempting
to
ascertain
such
intention,
is
what
quantum
of
activity
must
there
be
in
a
taxation
year
that
gives
rise
to
income
that
should
be
categorized
as
income
from
an
“active
business”
within
the
meaning
of
section
125.
Nowhere
in
the
Income
Tax
Act
is
there
an
indicium
of
how
much
that
quantum
must
be.
In
the
absence
of
any
indicia,
and
in
order
that
there
may
be
certainty
and
no
confusion
on
this
point,
as
a
matter
of
construction
“if
the
words
used
are
ambiguous,
the
court
should
choose
an
interpretation
which
will
be
consistent
with
the
smooth
working
of
the
system
which
the
statute
purports
to
be
regulating;
and
that
alternative
is
to
be
rejected
which
will
introduce
uncertainty,
friction
or
confusion
into
the
working
of
the
system”.
(See
Trans-Canada
Investment
Corporation
Ltd
v
MNR,
[1953]
Ex
CR
292;
[1953]
CTC
353;
53
DTC
1227;
affirmed
[1956]
SCR
49;
[1955]
CTC
275;
55
DTC
1191,
adopting
language
in
the
Privy
Council
decision
on
an
appeal
from
the
Supreme
Court
of
Canada
in
Shannon
Realties
Ltd
v
Ville
de
St
Michel,
[1924]
AC
185
at
192.)
Such
an
interpretation
will
resolve
the
problem
of
this
not
clearly
defined
intention
of
Parliament,
and
will
permit
every
taxpayer
to
know
the
law
on
this
point.
Accordingly,
implementing
this
principle
it
must
be
assumed
judicially,
in
interpreting
the
meaning
of
section
125
and
its
relationship
with
section
129
and
with
the
whole
scheme
of
the
Income
Tax
Act,
that
any
quantum
of
business
activity
that
gives
rise
to
income
in
a
taxation
year
for
a
private
corporation
in
Canada
is
sufficient
to
make
mandatory
the
characterization
of
such
income
as
income
from
an
‘‘active
business
carried
on
in
Canada”.
Advertising
to
the
facts
of
this
case,
it
is
patent
that
what
the
defendant
taxpayer
private
corporation
did
during
its
1972
taxation
year
constituted
a
“business”
within
the
meaning
of
that
word
and
also
an
“active”
business
within
the
meaning
of
section
125
of
the
Act
and
consequently
its
rental
income
was
income
from
an
‘‘active
business”
in
Canada
within
the
meaning
of
section
125
of
the
Income
Tax
Act.
Such
are
the
findings
of
fact
in
this
case.
Further,
however,
although
not
necessary
for
the
decision
in
this
case,
the
following
propositions
appear
to
follow
in
the
application
for
tax
purposes
of
sections
125
and
129
of
the
Income
Tax
Act
and
their
relationship
to
the
scheme
of
the
Act,
namely:
1.
Any
business
within
the
meaning
of
subsection
248(1)
of
the
Income
Tax
Act
or
within
the
dictionary
definition
of
business
is
a
business.
2.
Any
business
activity
at
all,
of
a
private
corporation
in
Canada,
irrespective
of
the
quantum
of
it,
is
sufficient
to
make
mandatory
the
characterization
of
the
income
from
such
source
for
tax
purposes
as
income
from
an
“active
business”
within
the
meaning
of
section
125
of
the
Act.
3.
There
may
be
many
types
or
sources
of
income
from
an
active
business
within
the
meaning
of
section
125
of
the
Act.
Such
types
or
sources
of
income
may
be
or
from
rents,
interest,
royalties,
management
fees
and
so
forth.
The
relevant
matter
is
whether
from
the
particular
type
or
source
income
arose
which
should
be
categorized
as
income
from
an
“active
business
carried
on
in
Canada”
by
a
private
corporation
within
the
meaning
of
section
125
of
the
Act.
4.
Investment
income
of
a
private
corporation
is
certain
income
within
the
meaning
of
section
129
of
the
Act.
Such
investment
income
is
any
income
from
a
source
other
than
from
“an
active
business
carried
on
in
Canada”
within
the
meaning
of
section
125
of
the
Act,
or
from
an
“office”
or
“employment”
(see
subsections
3(1)
and
248(1)
of
the
Act),
and
includes
income
from
“property”.
(See
subsection
3(1)
of
the
Act.)
5.
Part
of
the
income
of
a
private
corporation
in
Canada
can
be
income
from
an
“active
business”
within
the
meaning
of
subsection
125(1)
of
the
Act,
and
another
part
of
its
income
can
be
income
within
the
meaning
of
section
129
of
the
Act.
6.
The
asset
which
produces
investment
income
within
the
meaning
of
section
129
of
the
Act,
on
its
sale
or
disposition
will
be
considered
for
tax
purposes
as
a
sale
or
disposition
of
a
capital
asset
and
not
of
an
inventory
asset.
7.
The
asset
(if
there
is
one)
from
or
on
account
of
which
income
arises
which
is
categorized
as
income
of
a
private
corporation
from
“an
active
business
in
Canada”
within
the
meaning
of
section
125
of
the
Act,
may
be
a
capital
asset
or
an
inventory
asset
within
the
meaning
of
the
Income
Tax
Act.
Which
it
is,
in
any
given
case,
is
a
question
of
fact.
29.
In
order
to
appreciate
the
distinction
which
must
be
made
in
the
present
case
between
sources
of
income,
the
appellant
submits
that
the
Board
must
consider
the
basic
policy
expressed
in
sections
125
and
129.
As
counsel
for
the
Crown
expressed
in
argument
before
the
Federal
Court,
Trial
Division
in
the
MRT
case
(at
pp
365-6),
the
system
is
designed
to
distinguish
between
the
income
of
a
private
corporation
from
an
active
business
carried
on
by
it
and
its
investment
income,
including
capital
gains.
The
taxation
of
investment
income
is
subject
to
the
rules
in
section
129.
The
company
initially
pays
the
full
corporate
rate
of
approximately
50%,
but
about
one-half
of
this
tax
is
refundable
upon
the
payment
of
taxable
dividends
to
shareholders.
In
the
case
of
Canadian-controlled
private
corporations,
income
from
an
active
business
is
taxed
at
a
special
low
rate
of
25%
subject
to
certain
annual
and
cumulative
limits.
Section
125
thereby
provides
an
incentive
to
small
businesses
which
are
Canadian
controlled
in
order
to
assist
them
in
capital
formation.
As
stated
towards
the
end
of
the
judgment
in
Cadboro
Bay
Holdings
Ltd
(supra),
the
income
of
a
private
corporation
may
derive
from
both
active
and
investment
sources.
In
this
case,
a
distinction
must
be
made
so
as
to
determine
which
part
of
its
income
may
potentially
benefit
of
the
small
business
deduction
under
section
125,
and
which
part
may
be
subject
to
the
refundable
tax
provisions
in
section
129.
30.
The
appellant
therefore
concludes
that
the
scheme
of
the
Act,
as
it
relates
to
this
appeal,
requires
a
distinction
be
drawn
between
active
business
income
and
investment
income,
and
that
the
fundamental
policy
behind
the
distinction
is
to
provide
a
mechanism
whereby
incentives
may
be
offered
in
respect
of
the
active
business
income
of
certain
private
corporations
while
denying
that
particular
incentive
to
the
passive
or
investment
income.
That
is
to
say,
the
distinction
between
these
sources
is
not
arbitrary
but
based
upon
a
readily
understandable
policy
of
assisting
small
Canadian-controlled
active
businesses
on
the
one
hand,
and
creating
a
refundable
tax
mechanism
to
promote
distributions
of
corporate
earnings
out
of
investment
income
on
the
other.
Appellant's
Submissions
31.
The
appellant
submits
that
the
disputed
portion
of
its
interest
income
does
not
constitute
income
from
an
active
business
but
rather
investment
income
which
falls
both
within
the
letter
and
the
spirit
of
section
129
of
the
Act.
In
particular,
the
appellant
submits
that:
(a)
its
investment
income,
including
the
disputed
portion
thereof,
does
not
constitute
income
from
a
separate
active
business
of
investing
carried
on
by
the
appellant;
(b)
this
income
is
not
essential
to
the
brokerage
business
carried
on
by
the
appellant
nor
is
the
earning
of
it
an
integral
part
of
that
business,
and
the
income
is
not
therefore
income
from
the
active
brokerage
business
by
virtue
of
some
force
of
attraction
doctrine;
and
(c)
the
interest
income,
including
the
disputed
portion
thereof,
is
income
from
property,
which
property
is
not
used
or
held
by
the
appellant
in
the
course
of
carrying
on
business.
32.
The
first
submission
is
that
the
disputed
interest
income
is
not
income
from
an
active
business
in
and
by
itself.
The
second
submission
is
that
the
income
is
not
income
from
the
active
brokerage
business,
and
responds
to
the
submission
of
the
respondent
in
paragraph
7(b)
of
the
reply
to
notice
of
appeal.
The
third
submission
is
positive,
and
brings
the
income
within
a
particular
category
of
“Canadian
investment
income”
as
defined
in
paragraph
129(4)(a),
and
responds
to
the
respondent’s
submission
in
paragraph
7(a)
of
the
reply
to
notice
of
appeal.
(A)
Active
Business
Income
33.
While
the
respondent
has
not
specifically
alleged
or
submitted
that
the
investment
or
surplus
funds
by
the
appellant
constitutes,
in
and
by
itself,
a
separate
active
business,
and
that
the
interest
income
in
dispute
is
income
from
such
an
active
investment
business,
it
nonetheless
seems
appropriate
to
consider
briefly
the
merit
of
such
an
assertion.
34.
None
of
the
decisions
reported
to
date
dealing
with
section
125
have
considered
whether
the
bare
investment
of
cash
in
bank
certificates
or
short-term
prime
commercial
paper
constitutes
an
active
business.
The
pronouncements
or
analyses
contained
in
the
cases
would
strongly
suggest
that
it
does
not.
Notwithstanding
the
breadth
which
tribunals
have
given
to
the
expression
‘‘active
business”,
there
would
appear
to
remain
limits.
For
example,
in
Smithers
Plaza
Ltd
v
MNR,
[1975]
CTC
2171;
75
DTC
137,
this
Board
declined
to
consider
income
derived
from
a
passive
real
estate
investment
as
income
from
an
active
business.
Mr
Cardin,
QC
suggested
that
the
difference
between
rentals
which
are
investment
income
and
rentals
which
are
active
business
income
depends
upon
“the
degree
of
managerial
involvement
and
operational
activity”
of
the
enterprise
(2173;
138).
35.
The
appellant
submits
that
the
passive
investment
in
bank
certificates
and
short-term
paper
would
fall
on
the
inactive
side
of
the
line
which,
according
to
the
Chief
Justice
in
the
passage
from
the
MAT
case
cited
above,
must
be
drawn
between
mere
investment
in
property
and
activities
that
constitute
a
business.
The
distinction
is
stated
in
analogous
terms
by
Noel,
ACJ
in
a
different
context
in
Hollinger
v
MNR,
[1972]
CTC
592
at
p
600;
73
DTC
5003
at
5008.
He
observes:
If
income
from
property
has
any
meaning
at
all,
it
can
only
mean
the
production
of
revenue
from
the
use
of
such
property
which
produces
income
without
the
active
and
extensive
business-like
intervention
of
its
owner
or
someone
on
his
behalf.
I
have
in
mind,
for
instance,
property
such
as
bonds
or
debentures
or
shares
or
real
property
which
do
not
require
the
exertion
of
much
activity
or
energy
in
order
to
produce
the
revenue.
This
passage
was
cited
by
Mr
Justice
Walsh
in
the
MAT
case
(supra,
p
372,
5237),
and
by
Mr
Justice
Gibson
in
Cadboro
Bay
Holdings
(supra).
In
the
latter
case,
it
was
observed
that
such
a
principle
is
not
of
assistance
in
interpreting
sections
125
and
129
as
such,
but
may
be
said
to
ennunciate
principles
of
interpretation
as
to
the
kind
of
activities
that
have
been
held
to
constitute
carrying
on
business
and
to
result
in
income
being
categorized
as
income
from
business
or
otherwise.
36.
Therefore,
even
if
the
interest
income
were
the
appellant’s
sole
source
of
revenue,
we
would
submit
that
it
is
not
income
from
an
active
business.
There
have
been
a
number
of
judicial
decisions
which
might
suggest
that
where
a
corporation
earns
income
by
carrying
out
its
objects,
such
income
is
almost
always
business
income.
However,
those
statements
invariably
arise
in
a
context
where
the
income
in
question
is
the
sole
source
of
corporate
revenue.
It
may
not
be
unreasonable
to
suggest
that
in
such
a
case
the
corporation
has
a
business.
In
the
case
at
bar,
the
appellant
undoubtedly
has
a
business,
but
it
is
not
the
investment
business.
As
observed
previously
in
discussing
the
scheme
of
the
legislation,
it
is
clear
that
a
corporation
may
have
income
from
an
active
business
as
well
as
inactive
or
property
income
falling
within
the
ambit
of
section
129.
In
one
case,
even
though
portfolio
investments
was
the
sole
activity
of
an
incorporated
company,
the
corporation
was
held
not
to
have
carried
on
an
active
financial,
commercial
or
industrial
business
within
the
meaning
of
the
old
personal
corporation
definition.
In
Glaspie
v
MNR,
[1963]
33
Tax
ABC
274;
63
DTC
828,
the
corporation
invested
in
securities,
guaranteed
deposits,
mortgages
and
real
estate.
Notwithstanding
evidence
of
activity
involved
in
reorganizing
the
portfolio,
it
was
held
that
the
mere
exercise
of
good
management
in
the
operation
and
control
of
the
portfolio
did
not
constitute
the
carrying
on
of
an
active
business.
While
care
must
be
taken
in
applying
the
cases
under
the
former
provisions
to
sections
125
and
129,
the
appellant
nonetheless
submits
that,
a
fortiori,
its
investment
income
was
not
income
from
an
active
business.
(B)
Income
from
Brokerage
Business
37.
The
respondent
suggests
that
the
disputed
amount
was
“a
part
and
parcel
of
the
appellant’s
income
from
brokerage
business
and
was
thus
income
from
an
active
business”.
This
submission
brings
us
squarely
to
the
case
whose
publication
was
the
principal
reason
for
the
appellant’s
notice
of
objection,
March
Shipping
Limited
v
MNR,
[1977]
CTC
2527;
77
DTC
371.
The
appellant
submits
that
the
March
Shipping
case
is
squarely
on
point,
that
the
facts
differ
in
only
minor
respects
from
those
in
the
present
case
and
that
the
decision
applies.
Before
analysing
that
judgment,
two
points
should
be
noted.
Firstly,
the
decision
of
this
Board
was
appealed
by
the
Minister
of
National
Revenue,
but
the
appeal
was
never
heard
by
the
Federal
Court,
Trial
Division.
Rather,
the
taxpayer
consented
to
judgment
in
the
Federal
Court.
We
have
communicated
with
counsel
for
March
Shipping
Limited
and
were
told
that
the
reason
for
the
consent
was
related
simply
to
the
costs
of
further
litigation.
In
any
event,
no
higher
court
has
directed
its
mind
to
the
issues
raised
in
the
March
Shipping
case
and
we
therefore
submit
that
the
judgment
should
be
regarded
as
a
valid
precedent.
A
second
observation
is
that
the
provisions
of
paragraph
129(4)(a)
were
amended
in
1974.
The
law
as
applicable
to
the
1972
taxation
year,
the
year
in
issue
in
March
Shipping,
is
not
therefore
identical
to
the
law
applicable
to
the
1976
taxation
year,
in
issue
in
this
appeal.
In
our
third
and
final
submission
below,
we
shall
suggest
that
the
amendment
does
not
affect
the
result
of
this
case.
38.
March
Shipping
Limited
is
a
private
corporation
engaged
in
rendering
services
as
an
agent
to
shipping
companies.
In
1972
it
earned
interest
on
short
term
bank
deposits.
The
funds
placed
in
deposit
were
considered
surplus
to
the
daily
business
needs
of
the
company.
They
usually
originated
from
agreements
with
shipping
companies
to
provide
funds
to
March
in
advance
of
definite
requirements
for
the
payment
of
services
provided
by
it.
In
effect,
the
funds
were
held
by
March
and
invested
pending
disbursement
on
behalf
of
the
shipping
companies.
The
similarity
to
the
position
of
the
appellant
is
marked.
In
both
cases
money
was
received
and
to
the
extent
it
was
in
excess
of
current
operating
needs,
invested
in
shortterm
deposits
(or
in
the
case
of
the
appellant,
short-term
commercial
paper).
In
both
cases,
the
funds
received
were
to
be
remitted
to
or
disbursed
on
behalf
of
someone
else.
In
each
case
the
difference
between
the
amount
received
and
the
amount
to
be
remitted
or
disbursed
represented
the
profit
or
commission
of
the
taxpayer.
39.
Mr
Taylor
suggested
that
since
the
income
arose
upon
the
crediting
of
interest
by
a
bank
for
the
use
of
property,
there
was
a
prima
facie
case
for
considering
the
income
as
investment
income
rather
than
business
income.
The
Minister
argued
that
the
income
should
be
considered
income
from
an
active
business
because
the
funds
were
held
available
in
short-term
deposits
which
were
an
integral
part
of
the
appellant’s
operations.
At
p
2530,
[373]
counsel
for
the
Minister
is
quoted
as
having
stated:
Nous
soumettons
que
l’utilisation
répétée
des
excédents
de
caisse
temporaires
de
l’appelante,
en
vue
de
tirer
du
revenu
d’intérêts
de
certificats
de
dépôt
à
court
terme,
constituait
une
partie
intégrante
de
l’entreprise
active
de
l’appelante,
de
telle
sorte
que
les
intérêts
ainsi
gagnés
représentent
du
revenu
provenant
d’une
entreprise
active
et
non
du
revenu
tiré
d’un
bien.
This
assertion
is
almost
identical
with
the
submission
of
the
respondent
in
the
present
case.
It
was
rejected
in
March
Shipping.
At
p
2531
[374],
Mr
Taylor
observed
that
the
choice
of
short-term
rather
than
long-term
deposits
would
not
necessarily
characterize
the
interest
as
from
“business”
or
from
“property”.
In
order
that
the
interest
should
be
considered
as
having
been
derived
from
the
active
business,
“the
specific
function
under
review
should
form
a
necessary
part
of
the
whole
operation”.
To
be
viewed
as
necessary,
“it
should
be
evident
that
it
provides
a
significant
impact
on
the
total
revenue
produced
(and
probably
a
major
contribution
to
net
revenue);
and/or
that
its
elimination
would
have
a
decidedly
destabilizing
effect
on
the
corporate
operations
themselves”.
In
March
Shipping,
the
interest
income
represented
2.5%
of
revenue
and
10%
of
pre-tax
income.
In
the
present
case
the
equivalent
figures,
in
respect
of
the
disputed
portion
of
interest
income,
are
6%
and
18%.
However,
the
appellant
is
a
highly
profitable
corporation
and
the
evidence
demonstrates
that
removal
of
this
interest
income
would
in
no
way
have
a
“decidedly
destabilizing
effect
on
the
corporate
operations
themselves”.
Profitability
would
have
remained
at
28%.
The
test
as
stated
towards
the
bottom
of
p
2531
[374]
in
the
March
Shipping
case,
is
the
impact
on
the
company’s
purpose
and
objective,
in
that
case
providing
needed
services
to
shipping
companies,
in
the
present
case,
providing
general
insurance
brokerage
services.
40.
There
are
two
other
decisions
of
this
Board
which
deal
with
analogous
Situations.
Neither
is
nearly
so
close
to
the
present
facts
as
March
Shipping.
In
ACR
Corporate
Services
Ltd
v
MNR,
[1976]
CTC
2432;
76
DTC
1322,
the
taxpayer
corporation
carried
on
an
active
business
as
a
professional
secretary
for
incorporated
companies.
It
also
made
an
investment
in
shares.
These
were
sold
and
a
capital
gain
resulted.
The
funds
were
invested
in
credit
union
certificates
which
produced
interest.
One
of
the
issues
was
whether
the
interest
income
constituted
income
from
the
active
business
carried
on
by
the
taxpayer.
Mr
Dubrule
held
it
did
not.
The
investment
of
surplus
money
arising
from
the
sale
of
the
shares
was
not
regarded
as
a
part
of
the
active
business,
and
the
income
therefrom
was
held
to
be
investment
income.
41.
The
other
case
is
Baramy
Investments
Ltd
v
MNR,
[1977]
CTC
2558;
77
DTC
400,
also
a
decision
of
Mr
Dubrule.
The
taxpayer
corporation
was
a
private
corporation
controlled
by
US
residents.
It
held
investments
and
land
in
Canada.
In
particular,
the
taxpayer
purchased
land
for
the
purpose
of
building
commercial
or
industrial
complexes
for
rent.
It
also
traded
in
land.
In
the
years
1972
through
1975,
the
taxpayer
earned
income
from
rentals
and
land
trading
and
also
interest
income
on
agreements
of
sale
with
respect
to
land
and
on
bank
certificates.
The
Board
first
had
to
determine
whether
any
of
the
taxpayer’s
income
was
derived
from
an
active
business
carried
on
by
it.
After
examining
the
objects
of
the
corporation,
which
were
essentially
those
of
an
investment
and
landholding
company,
Mr
Debrule,
QC
concluded
that
it
did.
Since
the
sale
or
rental
of
land
were
the
two
main
sources
of
income,
and
were
derived
from
an
active
business,
interest
on
agreements
of
sale
was
held
also
to
be
income
from
the
active
business,
being
automatically
earned
when
land
was
sold
over
an
extended
period.
Interest
on
term
deposits
was
also
held
to
be
income
from
the
active
business
as
the
money
was
held
for
a
short
time
while
it
could
not
be
used
with
respect
to
the
acquisition
of
other
land
and
buildings.
42.
The
appellant
suggests
that
the
Baramy
Investments
case
is
easily
distinguishable
from
both
March
Shipping
and
the
present
appeal.
In
Baramy,
the
business
of
the
taxpayer
was
investing.
This
investing
was
primarily
in
real
estate.
From
time
to
time,
inventories
of
real
estate
were
disposed
of
and,
as
is
natural
in
any
business,
funds
were
temporarily
held
pending
the
acquisition
of
further
inventory.
The
interest
on
these
funds
was
income
from
the
active
business
because
that
business
was
precisely
a
business
of
investing
and
because
the
funds
were
held
only
due
to
the
business
necessity
of
awaiting
the
availability
of
further
inventory.
Thus,
this
cash
was
surplus
not
to
the
needs
of
the
business
but
to
its
ability
to
expend
money.
The
money
was
held
in
the
course
of
carrying
on
the
business
pending
its
further
investment
in
additional
inventory.
In
the
March
Shipping
case,
and
in
this
appeal,
the
funds
which
were
invested
were
held
by
choice.
The
business
of
the
taxpayer
did
not
require
that
they
be
held.
They
were
truly
surplus
to
the
needs
of
the
business
and
the
interest
earned
on
them
was
investment
income.
(C)
The
1974
Amendment
43.
In
1974,
the
definition
of
“Canadian
investment
income”
was
amended.
The
amendment
affects
the
inclusion
of
income
from
property
in
subparagraph
(ii).
With
respect
to
taxation
years
ending
after
May
6,1974,
that
subparagraph
refers
to
income
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)”.
These
words
in
parentheses
were
added.
The
submission
of
the
appellant
is
that
the
additional
words
did
not
and
were
not
intended
to
enlarge
the
ambit
of
active
business
income
by
restricting
the
definition
of
property
income.
In
our
view,
the
purpose
of
the
amendment
was
to
provide,
perhaps
for
greater
certainty,
that
income
from
property
which
income
could
be
regarded
as
income
from
an
active
business
carried
on
by
a
taxpayer
would
fall
within
the
active
business
rules
of
section
125
and
not
the
investment
income
rules
of
section
129.
That
is
to
say
the
amendment
ensures
that
income
cannot
fall
into
both
categories.
It
does
not
shift
any
income
from
one
category
to
the
other.
This
is
the
interpretation
of
most
commentators.
44.
This
is
a
difficult
proposition
to
demonstrate.
One
interesting,
although
by
no
means
determining
fact,
is
that
in
several
cases
where
the
system
established
by
sections
125
and
129
is
investigated,
no
distinction
is
drawn
regarding
the
effect
of
this
amendment.
In
Baramy
Investments
Limited
(supra),
the
taxation
years
1972
through
1975
were
involved.
The
decision
was
made
without
regard
to
the
amendment
which
would
have
affected
at
least
one
of
these
years
and
not
others.
In
Cadboro
Bay
Holdings
(supra),
only
the
1972
taxation
year
was
involved.
However,
in
his
detailed
analysis
of
the
statute,
Mr
Justice
Gibson
cited
the
provisions
of
section
129
after
the
amendment.
He
did
not
find
it
necessary
to
deal
with
the
amendment
specifically
in
presenting
his
extensive
analysis
of
the
policy
and
workings
of
these
provisions.
In
March
Shipping,
the
amendment
was
mentioned
but
the
Board
did
not
find
it
relevant.
45.
It
is
also
relevant
to
look
at
applicable
provisions
of
the
Interpretation
Act,
RSC
1970,
c
I-23.
Subsection
37(2)
provides:
The
amendment
of
an
enactment
shall
not
be
deemed
to
be
or
to
involve
a
declaration
that
the
law
under
such
enactment
was
or
was
considered
by
Parliament
or
other
body
or
person
by
whom
the
enactment
was
enacted
to
have
been
different
from
the
law
as
it
is
under
the
enactment
as
amended.
46.
Another
source
of
direction
regarding
the
import
of
the
amendment
is
the
interpretation
given
by
the
Department
of
National
Revenue
to
these
provisions.
Interpretation
Bulletins
are
not
binding
authority,
and
indeed
the
appellant
would
certainly
not
accept
that
anything
said
in
a
Bulletin
emanating
from
the
respondent
should
be
allowed
to
prejudice
its
own
case
before
this
Board.
It
is,
however,
interesting
that
the
treatment
of
income
incidental
to
an
active
business
in
Interpretation
Bulletins
IT-73R
and
IT-73R2
is
identical.
The
earlier
Bulletin
is
dated
October
10,
1973,
before
the
amendment,
the
latter
is
dated
March
10,
1975,
after
the
amendment.
In
each
case,
it
is
stated:
The
Department
ordinarily
takes
the
view
that
the
income
from
an
active
business
is
not
limited
to
the
income
directly
attributable
to
the
active
business,
but
also
includes
ancillary
income
derived
from
assets
used
in
or
incidental
to
the
active
business.
Such
assets
are
those
which
were
acquired
for
purposes
of
earning
income
from
the
active
business
and
those
which
arose
out
of
the
conduct
of
the
active
business.
(Paragraph
3)
Each
Bulletin
then
proceeds
to
provide
examples
of
what
the
Department
regards
as
such
ancillary
income.
As
just
mentioned,
we
would
not
necessarily
agree
with
the
breadth
of
the
ancillary
income
concept
as
stated
in
these
Bulletins,
and
might
suggest
that
it
is
contrary
to
the
decision
in
March
Shipping
(supra)',
nonetheless,
we
find
it
significant
that
the
Department
of
National
Revenue
did
not
see
fit
to
specifically
refer
to
the
1974
amendment
in
this
regard.
It
would
appear
that
in
their
view
the
classes
of
income
from
property
which
should
be
regarded
as
incidental
to
an
active
business
and
therefore
as
being
income
from
the
active
business
did
not
change
with
the
amendment.
47.
In
the
March
Shipping
case
itself,
notwithstanding
that
the
Board
expressly
declined
to
consider
the
amendment,
there
are
comments
which
are
useful
in
this
context.
At
p
2529
[372],
Mr
Taylor
observes:
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.
He
then
concludes
that
the
interest
income
on
bank
deposits
is
prima
facie
income
from
property
and
is
not
attracted
to
the
active
business
on
the
facts
of
the
case.
The
appellant
submits
that
this
reasoning
is
as
true
before
as
after
the
amendment.
48.
If
it
is
incumbent
upon
the
appellant
to
provide
some
meaning
to
the
words
which
were
added
by
the
amendment,
we
would
submit
that
this
expression,
“property
used
or
held
in
the
course
of
carrying
on
a
business”,
provides
an
express
statutory
basis
for
excluding
from
investment
income
income
derived
from
property
where
the
corporation
uses
the
property
to
carry
on
an
active
business.
In
Cadboro
Bay
Holdings
(supra),
Mr
Justice
Gibson
seems
to
suggest
that
income
from
business
and
income
from
property
are
mutually
exclusive.
However,
in
Mr
Justice
Gibson’s
discussion
of
the
case
of
Wertman
v
MNR,
[1964]
CTC
252;
64
DTC
5158,
he
cites
a
passage
(at
p
188
of
his
judgment)
which
suggests
that,
in
that
case,
the
Crown
argued
that
“the
concepts
of
income
from
property
and
income
from
business
are
not
mutually
exclusive”.
This
could
represent
a
valid
reason
for
adding
these
words
in
1974.
49.
With
regard
to
the
word
“held”,
as
opposed
to
the
word
“used”,
we
would
suggest
that
examples
of
property
held
in
the
course
of
carrying
on
a
business
would
be
assets
such
as
reserves
of
insurance
companies
which,
while
not
expressly
used
in
the
insurance
business,
must
as
a
matter
of
law
or
business
necessity,
be
held.
Indeed,
it
is
of
some
interest
that
precisely
the
same
expression
occurs
in
subsection
138(9)
of
the
Act
dealing
with
insurance
company
reserves.
50.
Fundamentally,
the
appellant’s
submission
regarding
the
1974
amendment
is
one
of
policy.
The
amendment
underlines
the
basic
distinction
between
investment
income
and
active
business
income
which
is
at
the
heart
of
the
taxation
of
corporate
income
under
sections
125
and
129.
It
cannot
seriously
have
been
intended
by
Parliament
that
investment
income
earned
on
short-term
bank
deposits
of
surplus
funds
should
benefit
from
the
small
business
deduction.
This
is
not
the
type
of
income
the
accumulation
of
which
was
to
be
assisted.
In
a
business
sense,
the
disputed
income
is
investment
income.
In
one
English
case,
it
was
observed:
The
businessman
would
not
limit
income
from
investments
to
income
from
the
kinds
of
securities
which
are
quoted
on
the
stock
exchange
and
he
would,
I
think,
regard
his
income
from
investment
a
profitable
rent
from
the
sublease
of
office
premises
or
the
like
surplus
to
the
company’s
requirements
...
but
he
would
regard
income
from
an
asset
in
which
a
company
might
reasonably
have
invested
its
cash
reserves
in
order
to
have
them
ready
to
hand
if
it
needed
to
employ
them
in
its
business
as
the
typical
income
from
an
investment.
(Tootal
Broadhurst
Lee
Co
Ltd
v
IRC,
[1949]
1
All
ER
261
at
265-66
(HL)).
In
another
English
case,
interest
earned
by
solicitors
on
the
investment
of
clients’
funds
was
held
not
to
be
interest
from
money
held
in
the
course
of
carrying
on
the
profession.
The
interest
was
described
rather
as
deriving
from
a
loan
or
investment
than
from
the
carrying
on
of
a
business.
The
intervening
event,
the
investment,
was
the
source
of
the
income.
(Northend
v
White
&
Leonard
and
Corbin
Greener,
[1975]
2
All
ER
481
at
488-89).
It
is
interesting
that
in
this
latter
case,
an
earlier
decision
was
distinguished
in
which
interest
on
securities
was
held
to
constitute
earned
income
rather
than
investment
income.
In
the
earlier
case,
the
taxpayer
was
a
firm
of
merchant
bankers.
This
is
precisely
the
type
of
situation
where
income
from
property
should
be
regarded
as
earned
income
or
income
from
an
active
business
since
such
a
taxpayer
necessarily
holds
property
in
the
course
of
carrying
on
the
business.
51.
A
subsequent
amendment
cannot
as
such
assist
in
interpreting
a
statute.
A
pending
bill
is
even
less
authoritative.
Nonetheless,
we
find
certain
provisions
of
a
government
bill
which
received
first
reading
in
the
House
of
Commons
on
January
29,1979
(Bill
C-37,
Fourth
Session,
Thirtieth
Parliament,
27
Eliz
II,
1978-1979)
to
be
of
interest
in
the
context
of
this
appeal.
Subparagraph
129(4)(a)(ii)
would
be
modified
by
a
new
subsection
129(4.1),
defining
income
from
property
so
as
to
expressly
exclude
income
from
any
property
“that
is
incident
to
or
pertains
to
an
active
business
carried
on
by
it”.
This
broader
language
might
expand
section
129
in
a
way
which
the
1974
amendment
did
not.”
On
the
other
hand,
counsel
for
the
respondent
stated
that
the
facts
in
the
case
at
bar
were
simple
and
not
disputed
and
explained
why
the
appellant’s
interest
on
short
term
loans
should
not
be
considered
as
Canadian
investment
income.
He
argued
that
although
the
premiums
were
received
by
the
appellant
and
deposited
in
current
accounts
in
the
various
branches,
the
company’s
books
showed
two
different
funds:
one
of
unremitted
premiums
(trust
funds),
the
other,
the
appellant’s
own
funds
(current
assets);
that
in
the
financial
statement
filed
with
the
1976
income
return
as
Exhibit
A-5,
an
amount
of
$725,915
figures
as
investment
income
whereas
another
amount
of
$2,071,547
is
active
investment
income;
that,
in
the
first
case,
the
investment
income
was
generated
from
the
appellant’s
own
fund
whereas,
in
the
second
case,
the
income
was
generated
from
funds
which
did
not
belong
to
the
appellant;
that
to
fall
under
section
129
and
to
generate
income
from
these
unremitted
premiums,
the
appellant
must
be
the
owner
of
these
funds;
that,
according
to
the
evidence
adduced,
the
appellant
was
not
the
owner
but
only
a
trustee
of
these
funds
and
that
to
be
branded
as
Canadian
investment
income,
the
said
income
must
come
from
a
source
that
Is
a
permanent
property.
In
his
opinion,
assuming
that
the
unremitted
premiums
were
the
appellant’s
property,
they
were
held
in
the
course
of
doing
an
active
business
and
that
no
emphasis
should
be
given
to
the
internal
treatment
of
the
said
funds
by
the
appellant
because
they
were
never
physically
segregated.
He
then
distinguished
the
March
Shipping
Limited
(supra)
case
by
saying
that
the
funds
were
advanced
to
and
were
to
remain
with
the
taxpayer
for
payment
of
certain
services
to
be
performed,
whereas
in
the
case
at
bar,
the
premiums
were
only
passing
through
the
appellant
company.
According
to
the
evidence
adduced,
the
appellant
company
is
an
intermediary
between
the
insurance
companies
and
clients
and
as
such,
it
received
a
fee
from
the
former.
The
appellant
company
sends
the
invoices
and
is
responsible
to
the
insurance
companies
for
the
accounts.
When
the
appellant
is
paid,
the
money
is
deposited
in
a
current
account
and
could
be
there
for
up
to
60
days.
At
a
certain
time,
the
appellant
company
prepared
a
written
statement
showing
and
remitting
the
premiums
received
less
the
commission
earned.
The
appellant
company’s
business
is
carried
on
in
the
main
cities
of
the
country
and
the
head
office
is
in
Montreal.
Its
main
source
of
income
is
the
commission
received
for
services
rendered
which
in
1976
could
have
gone
up
to
some
23
million
dollars.
In
addition,
the
appellant
company
has
another
source
of
income
that
comes
from
interest
on
short-term
loans.
Counsel
for
the
respondent
argued
that
the
appellant
company
was
not
the
owner
of
the
funds.
Money
is
only
a
means
to
acquire
goods
and
there
is
a
presumption
that
the
person
who
has
money
in
his
possession
is
the
owner
thereof.
Moreover,
with
respect
to
the
unremitted
premiums,
because
the
insurance
company
could
not
claim
the
amounts
before
maturity,
the
appellant
company
was
the
owner
of
this
money
for
30
to
60
days
and
was
free
to
invest
it
in
short-term
loans.
Counsel
for
the
respondent
stated
that
the
unremitted
premiums
were
held
in
the
course
of
doing
business.
Indeed
it
was
but
the
main
business
was
the
selling
of
insurance
policies
and
short-term
loans
was
only
a
subsidiary
or
ancillary
part
of
the
company’s
operation.
Counsel
for
the
respondent
also
argued
that
the
interest
income
came
from
an
active
business.
“Business”
as
defined
in
subsection
248(1)
of
the
Act
“includes
a
profession,
calling,
trade,
manufacture
or
undertaking
of
any
kind
whatever
and
includes
an
adventure
or
concern
in
the
nature
of
trade
but
does
not
include
an
office
or
employment”.
As
mentioned
by
Mr
Justice
Gibson
in
Cadboro
Bay
Holdings
Ltd
(supra),
part
of
the
income
of
a
private
corporation
in
Canada
can
be
income
from
an
“active
business”
within
the
meaning
of
subsection
125(1)
of
the
Act
and
another
part
of
its
income
can
be
income
within
the
meaning
of
section
129
of
the
Act.
If
so,
the
Board
believes
that,
in
the
case
at
bar,
the
appellant
company’s
income
from
its
short-term
loans
is
Canadian
investment
income
within
the
meaning
of
section
129
of
the
Act.
What
the
appellant
company
did
is
not
a
trade
or
an
adventure
in
the
nature
of
trade
because
there
is
no
trader
who
would
depend
solely
on
such
an
activity
and
would
set
up
this
kind
of
scheme
only
to
obtain
such
benefits.
As
a
matter
of
fact,
what
happened
was
accidental.
This
activity
of
the
appellant
company
is
a
windfall.
The
money
fell
in
the
current
account
and
produced
income
almost
by
itself,
without
any
noticeable
activity
by
the
appellant
company.
Therefore,
this
activity
does
not
constitute
an
active
business.
Furthermore
the
fact
that
the
respondent
has
already
accepted
some
$700,000
as
Canadian
investment
income
shows
that
the
appellant
can
have
Canadian
investment
income
if
it
proves
that
the
interest
in
dispute
came
from
funds
that
were
its
property
within
section
129.
As
to
the
way
the
appellant
company
deposited
the
premiums
in
a
current
account
and
kept
records,
the
rationale
of
this
system
was
explained
to
the
respondent
and,
in
that
respect,
the
Board
believes
that
the
Minister
should
not
tell
the
appellant
company
how
to
run
its
business.
The
fact
that
the
appellant
company
first
reported
its
interest
as
active
investment
income
was
explained
by
the
appellant
company
and
after
the
decision
in
March
Shipping
Ltd,
it
was
only
logical
for
the
appellant
company
(the
law
not
being
that
clear
in
this
matter)
to
adopt
the
same
practice.
As
to
the
issue
of
the
ownership
of
money
in
trust,
the
Board
must
give
the
following
explanation.
Unlike
lawyers
and
notaries,
there
was
no
obligation
in
law
for
the
appellant
company
to
hold
this
money
in
trust.
As
a
matter
of
fact,
the
evidence
shows
that
the
money
went
into
a
current
account
and
was
not
in
trust.
Also,
there
was
no
contract
between
the
appellant
and
the
insurance
companies
to
the
effect
that
this
money
should
be
in
trust.
Consequently
this
argument
of
trust
money
cannot
be
used
to
show
that
the
appellant
company
was
not
the
owner
of
these
funds.
It
is
only
after
the
income
was
earned
that
this
expression
was
used
on
prepared
forms
for
the
purpose
of
reporting
income.
This
should
in
no
way
prejudice
the
appellant
company.
For
these
reasons,
the
appeal
is
allowed
and
the
matter
referred
back
to
the
respondent
for
reconsideration
of
the
determination
of
the
refund
to
which
the
appellant
company
was
entitled
under
section
129
for
the
1976
taxation
year,
and
for
reassessment
on
the
basis
that
all
of
the
appellant
company’s
investment
income
in
1976
and
prior
years
constituted
“Canadian
Investment
Income”
within
the
meaning
of
that
expression,
as
defined
in
paragraph
129(4)a)
of
the
Act.
Appeal
allowed.
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