Her Majesty the Queen v. Cadboro Bay Holdings LTD, [1977] CTC 186, 77 DTC 5115

Gibson, J:—This is an appeal by the Deputy Attorney General of Canada on behalf of the plaintiff from the decision of the Tax Review Board dated July 11, 1974 which allowed the appeal of the defendant Cadboro Bay Holdings Ltd from a reassessment for income tax under Part I of the Income Tax Act for its 1972 taxation year.

The issue in this appeal is:

(1) whether the defendant’s income for that year was income “from an active business carried on in Canada” (sometimes colloquially referred to as income in respect to which the “small business deduction” applies) within the concept of those words in section 125 of the Act; or,

(2) whether such income was income (sometimes, in the context of business income, colloquially referred to as income from a “passive business”) within the concept of section 129 of the Act.

It was established in the proof that the defendant private corporation in its 1972 taxation year earned income. It was a landlord. It received rental income from its tenants. It operated a small shopping centre. There were seven separate tenants. Only one of them was what is sometimes referred to as a “Triple A” tenant, namely, a Canadian bank. The defendant corporation by its principal officer negotiated all the leases, took care of all the complaints from the tenants, arranged for the maintenance of the shopping centre and did all the things that were necessary to “run” the shopping centre. The evidence was that in this case it required some activity on the part of the defendant almost daily. On the facts the rental income of the defendant was in the main for use of the property, but also to a much lesser extent it was for services and other things supplied, such as heat, repairs, etc, by the defendant.

The point of disagreement between the parties in this case was whether or not the business activity of this defendant during its 1972 taxation year was of sufficient quantum so that the income which arose from such business activity should be categorized for taxation purposes as income from “an active business carried on in Canada” within the meaning of section 125 of the Act or whether such income should be categorized as income within the concept of section 129 of the Act.

As a consequence the determination of the issue on this appeal involves the determination of one and perhaps two (depending on the answer to the first) questions of fact, namely:

(1) did the defendant during its 1972 taxation year carry on a “business” within the meaning of that word in section 248 of the Act or within the dictionary meaning, and (if the answer to question (1) is “Yes”)

(2) was the business that was carried on by the defendant in that year an “active business” within the concept of section 125 of the Act?

A number of authorities were submitted by counsel. Most of the authorities relate to interpretations for tax purposes of statutory provisions, Canadian and of other jurisdictions, different from the wording and concepts of sections 125 and 129 of the Income Tax Act.

In so far as they may enunciate some principles of interpretation they may be of some assistance in this case. A number of them are now referred to and commented upon.

In Henry Wertman v MNR, [1964] CTC 252; 64 DTC 5158, the decision rested on the finding of facts that rentals from an apartment were received by the taxpayers as owners rather than as traders, and as a consequence the profits were not profits from a business and the operation of the property was not a business. In that case the Minister’s submission to support the assessment applying subsection 21(4) (of the Income Tax Act, RSC 1952) was “that the concepts of income from property and income from business are not mutually exclusive but blend completely and that while the rentals derived . . . can be regarded as income from property, they can and should also be regarded as income from the business of leasing apartments . . . which was a business in which the appellant and his wife were partners” [p 262 [5165]].

The Court in that case also registered this caveat (which is relevant in the subject case) (p 264 [5165]):

In Great Britain income from real property is computed for taxation purposes on a special basis prescribed under Schedule “A” and because of this, cases in which the revenue authorities have sought to bring rentals of real property into the computation of profits taxable under Schedule “D” as profits of a trade are not strictly parallel and thus not applicable in considering a case arising under the provisions of the Canadian statute. They do, however, offer some light on the subject of what is income from property as distinguished from income from trading and incidentally indicate that there is considerable diversity of opinion on the questions whether the letting of real property can be regarded as a trade.

In Harry Walsh et al v- MNR, [1965] CTC 478; 65 DTC 5293, the Court held that rentals from three apartment buildings were not income from a business but were income from property so as to entitle the taxpayers to capital cost allowance under subsection 1100(3) of the Income Tax Regulations (in 1960) for the 12 months of the taxation year and not just 61 days being the number of days in 1960 that these appellant taxpayers owned these three apartment buildings. The Court stated in that case (p 484 [5296]):

It is a question of fact at what point mere ownership of real property and the letting thereof has passed into commercial enterprise and administration.

In Noddy Subsidiary Rights Co, Ltd v Inland Revenue Commissioners, [1966] 3 All ER 459, a case decided by the Chancery Division in England on appeal from a decision of the Special Commissioners, the facts were that the taxpayer company granted licences to manufacturers to exploit the fictitious character “Noddy” or ‘Little Noddy”, the literary and artistic copyright in which was owned by others, and the Court held that such taxpayer company was carrying on a trade and accordingly was not an investment company within section 257 of the Income Tax Act, 1952. At page 471 of the report the Court said:

If this case were to come before me as the first appellate tribunal, I should conclude without hesitation that the activities of the taxpayer company during the relevant years amounted to a trade. I have in mind in this connexion the terms of the company’s memorandum, the fact that Mr Broadribb spent half his working time managing the company’s affairs, the fact that he actively sought out customers, that he exercised when dealing with the licences when granted, skill and labour of a continuous and variegated kind. Those activities seem to me to contain all the elements of a trade, and once it is accepted, as it now must be, that Mr Broadribb was acting on behalf of the taxpayer company, it is, I think, irrelevant that he received his remuneration from some other source. The only respect in which it might be said that these activities do not contain the common elements of a trade is that the taxpayer company has no separable office or staff, but I do not think that that circumstance of itself is enough to prevent the activities from amounting to a trade. The activities admittedly go beyond investment in the ordinary sense, and it is plain that this company did not carry on the business of an investment company in the ordinary sense in contradistinction to the Statutory sense under the section I have read. I can myself see no reason for denying to its activities the title of a trade and placing them in the residuary category of Case VI of Sch D.

However, I am not making this decision afresh. My duty is to review the decision of the Special Commissioners. . . .

. . . I recognise that I must affirm their decision if I think it is a reasonable conclusion on the facts, even though I might myself have come to a different conclusion, but at the end of it it seems to me that the conclusion that this company did not carry on a trade is not a reasonable conclusion on the particular facts found by the commissioners. I think that the only reasonable conclusion from those facts is that this company did carry on a trade during the relevant years.

In Commissioner of Income Tax v Hanover Agencies Ltd, [1967] 1 AC 681, the House of Lords held that negotiating leases and collecting rent from tenants in commercial buildings in Jamaica was carrying on a business for purposes of categorizing the taxable income under the Income Tax Act of Jamaica, 1954. Section 5 of that Act, which defines chargeable incomes, describes the classes of income profits or gains as income profits or gains arising or accruing (a)(i) from any kind of property, (ii) from any trade, business, profession, employment or vocation, and (b)(ii) rents, royalties, premiums and any other profits arising from property.

By section 8:

For the purpose of ascertaining the chargeable income of any person, there shall be deducted all disbursements and expenses wholly and exclusively incurred by such person in acquiring the income . .. . and such disbursements and income include . . . (o) a reasonable amount for exhaustion, wear and tear of any building or structure used by the owner thereof for the purpose of acquiring the income from a trade business, profession or vocation carried on by him.

Lord Guest at page 687, after stating that respondents, after acquisition from a third party, continued to rent the premises and acquired six additional premises which they also rented out, said:

The question whether they were carrying on a business is primarily a question of fact. . . .

As the respondents’ claim depends on their satisfying the requirements of section 8(o), it may be convenient to consider this section first. In order to qualify for the deduction the building must be used for the purpose of acquiring income from a trade or business carried on by the respondents. The word “business” is of wide import and must be given its ordinary meaning unless the context otherwise requires. The respondents’ objects include, inter alia, acquiring of freehold property and the leasing of all or any of the company’s property. If a company’s objects are business objects and are in fact carried out, it carries on business. (Inland Revenue Commissioners v Westleigh Estate Co (1923), 12 TC 657 per Pollock, MR.) The respondents are engaged in negotiating leases and collecting rents from their properties. This would prima facie indicate that they were carrying on business so as to bring them within the terms of section 8(o).

The appellant, however, submitted that in order to ascertain whether the respondent was carrying on business the terms of section 5 of the Income Tax law must be looked at in order to see whether they were carrying on a business on the profits of which they were taxed. . . .

. . . It was submitted that the charge to income tax of the respondents was in respect of rent arising from the “Bank Building”. Thus, it was argued, they were not carrying on business on the profits of which they were taxed, but the profits on which they were taxed arose from the rent. . . .

Section 5 already referred to is an omnibus section which treats all profits and gains together whether arising from property or from employment or profession, or in respect to rent or emoluments, salaries or wages. These are all treated as profits or gains. . . . there is no provision for income tax in respect of the ownership of lands and hereditaments. It is only the rent of leased property which is charged . . .

The question, therefore, reverts to whether the respondents were carrying on a business. It was not seriously disputed by the appellant that they were. If so, then it appears to their Lordships indisputable that the profits on which they were assessed under Section 5(a)(ii) were the profits arising from that business.

In Joseph M Weintraub v Her Majesty the Queen, [1975] CTC 112; 75 DTC 5050, it was held that the company which owned two commercial holdings was not a personal corporation because its operations constituted an act of commercial business.

In Commissioners of Inland Revenue v Korean Syndicate, Ltd (1921), 12 TC 181, the facts were that during the material years the syndicate activities were confined to receiving bank interest and royalties, its only income, and to distributing the money among its shareholders and to paying premiums on a sinking fund policy. The Court per Lord Justice Atkin at page 205 said as follows:

Now I myself have no difficulty at all in coming to the conclusion that this Company is in fact carrying on a business, and it carried on a business of receiving the profits from the concession, in which it still retains an interest.. It is true that it may be called, if you please, a passive carrying on of business as opposed to an active carrying on of business, but I for my part think, with regard to the definition, I am not sure that it was really intended for a precise definition, but if it were so intended, I think the words would be too narrow that are used by Mr Justice Rowlatt in the case of The Commissioners of Inland Revenue v The Marine Steam Turbine Company, [1920] 1 KB 193. At page 203 he says “The word ‘business’, however, is also used in another and a very different sense, aS meaning an active occupation or profession continuously carried on, and it is in this sense that the word is used in the Act with which we are here concerned.” Personally, if any emphasis is attached to the word “active”, I think it would narrow the meaning of the word; for I see nothing to prevent a holding company, which is a very well known method of carrying on business in these days, from carrying on business. . . .

I think, therefore, that this Company are in fact carrying on a business and they are making profits out of the carrying on of a business, and therefore I think they were properly assessed.

In the case of Fry and Jones v Salisbury House Estate Ltd et al, [1930] AC 432, a company which owned a block of buildings leased commercial space to tenants and provided maintenance and other operational staff for the buildings. The Court (per Viscount Dunedin) stated as follows on page 439:

Now, the cardinal consideration in my judgment is that the income tax is only one tax, a tax on the income of the person whom it is sought to assess; and that the different Schedules are the modes in which the statute directs this to be levied. In other words, there are not five taxes which you might call income tax A, B, C, D and E, but only one tax. That tax is to be levied on the income of the individual whom it is proposed to assess, but then you have to consider the nature, the constituent parts, of his income to see which Schedule you are to apply. Now, if the income of the assessee consists in part of real property you are, under the statute, bound to apply Schedule A. Schedule A may, so to speak, get in touch with the assessee in different ways according to the condition of affairs.

In Hollinger v MNR, [1972] CTC 592; 73 DTC 5003, the taxpayer appellant was an inactive partner in a bottling company and she claimed a deduction in respect of the partnership income which the Minister disallowed on the premise that the income this taxpayer received from the partnership was through the carrying on of a business and not through the property, and as such it did not entitle the appellant to such deduction. The Court (per Noël, Associate Chief Justice, on page 600 [5008]) said:

I believe that most of those criteria are what may be termed subjective ones, ie, which deal or apply to the person receiving the income rather than to the objective question of the source of the income which, in my view, is always the overriding consideration which must determine the matter. The source here is clearly a business source. 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. There is no question that the appellant has entered into a partnership here with her mother and sister and this partnership is clearly operating a business from which she receives her share of the profits. A partnership, and this applies to the civil law as well as to the common law, is essentially a contractual relationship between two or more persons. The contract is usually in writing but need not be so. There must be a business carried on and, of course, this is what we have here. Each partner usually contributes either property, skill or labour but this is not essential and a partner may be a passive one who, such as here, merely supplies capital. There must be some arrangement for division of profits and usually an arrangement for the sharing of losses, although this also is not essential. The Partnership Act in the common law provinces defines partnership as “the relationship that subsists between persons carrying on business in common with a view to profit”. Article 1830 of the Quebec Civil Code says that:

“1830. It is essential to the contract of partnership that it should be for the common profit of the partners, each of whom must contribute to its property, credit, skill or industry.”

It is possible that, in some cases, the holding of property in joint tenancy, tenancy in common or other form of joint ownership, may not in itself create a partnership. However, when there is a clear business operation conducted and a receipt of a share of profits such as here, there can, in my view, be no question that the amounts received by the appellant are income from a business and not from property.

All these cases, above referred to, are in effect prologue, except in so far only as they enunciate some principles of interpretation, especially as to the kind of activities that have been held to constitute carrying on business and to result in being categorized as income from business and the kind that have not. But they are of no practical assistance in so far as they are founded on the interpretation of statutory provisions different from sections 125 and 129 of the Income Tax Act (1972).

What is of assistance and authority in the adjudication of this subject case is that in April 1976 the Court of Appeal of this Court decided three cases involving the interpretation of sections 125 and 129 of the Income Tax Act (1972). They were Her Majesty the Queen v Rockmore Investments Ltd, [1976] CTC 291; 76 DTC 6156; ESG Holdings Limited v Her Majesty the Queen, [1976] CTC 295; 76 DTC 6158; and Her Majesty the Queen v MRT Investments Limited, [1976] CTC 294; 76 DTC 6158.

Subsection 125(1) of the Income Tax Act reads as follows:

Small Business Deduction

125. (1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian-controlled private corporation, an amount equal to 25% of the least of

(a) the amount, if any, by which

(i) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada,

exceeds

(ii) the aggregate of all amounts each of which is a loss of the corporation

for the year from an active business carried on in Canada,

(b) the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregate of

(i) 10/4 of the aggregate of amounts deducted under subsection 126(1)

from the tax for the year otherwise payable by it under this Part, and

(ii) 2 times the aggregate of amounts deducted under subsection 126(2)

from the tax for the year otherwise payable by it under this Part,

(c) the corporation’s business limit for the year, and

(d) the amount, if any, by which the corporation’s total business limit for the year exceeds its cumulative deduction account at the end of the immediately preceding taxation year,

except that in applying this section for a taxation year after the 1972 taxation year, the reference in this subsection to “25%” shall be read as a reference to “24% for the 1973 taxation year, “23% for the 1974 taxation year, “22%’’ for the 1975 taxation year, and “21 %” for the 1976 and subsequent taxation years.

Section 129 of the Income Tax Act reads as follows:

Dividend Refund to Private Corporation

129. (1) Where a corporation was, at the end of any taxation year, a private corporation, if a return of its income for the year has been made within 4 years from the end of the year the Minister

(a) may, upon mailing the notice of assessment for the year, refund without application therefor an amount (in this Act referred to as its “dividend refund” for the year) equal to the lesser of

(i) /3 of all taxable dividends paid by it in the year on shares of its Capital stock, and

(ii) its refundable dividend tax on hand at the end of the year; and

(b) shall make such a refund after mailing the notice of assessment if application therefor has been made in writing by the corporation within 4 years from the end of the year.

(2) Instead of making a refund that might otherwise be made under subsection (1), the Minister may, where the corporation is liable or about to become liable to make any payment under this Act, apply the amount that would otherwise be refundable to that other liability and notify the corporation of that action.

(3) In this section, “refundable dividend tax on hand” of a private corporation at the end of any particular taxation year means the aggregate of amounts each of which is an amount in respect of any taxation year com- mencing after it last became a private corporation and ending not later than the end of the particular taxation year, equal to the least of

(a) 25% of the amount, if any, by which the aggregate of its Canadian investment income for the year and its foreign investment income for the year exceeds the amount deductible under paragraph 111(1)(b) from the corporation’s income for the year,

(b) the amount, if any, by which the aggregate of

(i) 25% of the corporation’s Canadian investment income for the year,

and

(ii) the amount, if any, by which 40% of the corporation’s foreign investment income for the year exceeds the aggregate of amounts deducted under subsection 126(1) from the tax for the year otherwise payable by it under this Part,

exceeds 25% of the amount deductible under paragraph 111(1)(b) from the corporation’s income for the year,

(c) 25% of the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregate of

(i) 4 times the amount, if any, deductible under section 125,

(ii) 10/4 of the aggregate of amounts deducted under subsection 126(1),

and

(iii) 2 times the aggregate of amounts deducted under subsection 126(2)

from the tax for the year otherwise payable by it under this Part, and

(d) the amount of the tax for the year otherwise payable by it under this Part,

plus the aggregate of the taxes under Part IV payable by the corporation for the particular taxation year and any previous taxation years ending after it last became a private corporation, and minus the aggregate of the corporation’s dividend refunds for taxation years ending after it last became a private corporation and before the particular taxation year.

(4) In subsection (3),

(a) “Canadian investment income’’ of a corporation for a taxation year means the amount, if any, by which the aggregate of

(i) the amount, if any, by which the aggregate of such of the corporation’s taxable capital gains for the year from dispositions of property as may reasonably be considered to be income from sources in Canada exceeds the aggregate of such of the corporation’s allowable capital losses for the year from dispositions of property as may reasonably be considered to be losses from sources in Canada,

(ii) all amounts each of which is the corporation’s income for the year (other than exempt income or any dividend the amount of which was deductible under section 112 from its income for the year) from a source in Canada that is a property (other than a property used or held by the corporation in the year in the course of carrying on a business), determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that property,

(iii) all amounts each of which is the corporation’s income for the year (other than exempt income) from a source in Canada that is a business other than an active business, determined, for greater certainty, after deducting all outlays and expenses deductible in computing the corporation’s income for the year to the extent that they may reasonably be regarded as having been made or incurred for the purpose of earning the income from that business,

exceeds the aggregate of amounts each cf which is a loss of the corporation for the year from a source in Canada that is a property or business other than an active business; and

(b) “foreign investment income’’ of a corporation for a taxation year means the amount, if any, by which

(i) the amount that would be determined under paragraph (a) in respect of the corporation for the year if the references in paragraph (a) to “in Canada” were read as references to “outside Canada’’,

exceeds

(ii) the aggregate of all amounts deductible under section 113 from the corporation’s income for the year.

(5) Notwithstanding any other provision of this section, the least of the amounts determined under paragraphs (3)(a) to (d) in respect of the 1972 or 1973 taxation year of a corporation is,

(a) in respect of its 1972 taxation year, 93% of the least of the amounts so determined; and

(b) in respect of its 1973 taxation year, the aggregate of

(i) 93% of that proportion of the least of the amounts so determined that the number of days in that portion of the year that is before 1973 is of the number of days in the whole year, and

(ii) 100% of that proportion of the least of the amounts so determined that the number of days in that portion of the year that is after 1972 is of the number of days in the whole year.

(6) Where any particular amount paid or payable to a corporation (in this subsection referred to as the “recipient corporation”) by another corporation (in this subsection referred to as the ‘‘associated corporation”) with which the recipient corporation was associated in any particular taxation year commencing after 1972, would otherwise be included in computing the income or loss, as the case may be, of the recipient corporation for the particular year from a source that is property or a business other than an active business, the following rules apply:

(a) for the purposes of subsection (4), in computing that income or loss, as the case may be,

(i) there shall not be included any portion (in this subsection referred to as the “deductible portion”) of the particular amount that was or may be deductible in computing the income or loss, as the case may be, of the associated corporation for any taxation year from an active business carried on by it in Canada, and

(ii) no deduction shall be made in respect of any outlay or expense, to the extent that that outlay or expense may reasonably be regarded as having been made or incurred by the recipient corporation for the purpose of gaining or producing the deductible portion; and

(b) for the purposes of this subsection and section 125,

(i) the deductible portion shall be deemed to be income of the recipient corporation for the particular year from carrying on an active business in Canada, and

(ii) any outlay or expense, to the extent described in subparagraph (a)(ii), shall be deemed to have been made or incurred by the recipient corporation for the purpose of gaining or producing that income.

In The Queen v Rockmore Investments Ltd the Court had to consider the income for tax purposes from a moneylender operation carried on by a private corporation and found that its income for the relevant taxation year was income “from an active business carried on in Canada’’ within the meaning of those words as found in subsection 125(1) of the Act. The Court in that case said in reciting part of the argument of counsel for the Minister [p 292 [6156]]:

The main thrust of the very able argument of counsel for the appellant, as I understood it, was that

(a) alleviation of income tax of private corporations under Part I of the Income Tax Act is to be found, in so far as income from active businesses is concerned, in section 125, and. in so far as income from businesses other than active businesses is concerned, in section 129;

(b) a study of the schemes involved in section 125 and section 129 reveals a limitation that must be read into the phrase “active business’’ in order to implement the parliamentary intention; and

(c) such limitation either is, or includes (I am not sure which), an exclusion from the concept of active business of any business that consists of lending money on mortgages.

Counsel made it clear that the application of those two sections has given rise to much difficulty and that many matters are being held in abeyance in the hope that guidance may be obtained from the decision in this case.

The task of counsel was not easy because inter alia the provisions in question are not so framed as to make their raison d’être patent to the uninitiated. In spite of my best efforts to follow counsel in his attempt to show that Parliament must have intended some limitation on the scope of the words “active business” that it did not expressly state, I have to confess my complete inability to detect any such parliamentary intent.

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). Apart from these provisions, I know of no special considerations to be taken into account from a legal point of view in deciding whether an activity or situation constitutes the carrying on of a business for the purposes of Part I of the Income Tax Act. Subject thereto, as I understand it, each problem that arises as to whether a business is or was being carried on must be solved as a question of fact having regard to the circumstances of the particular case.

Having reached that conclusion, the second question to be answered is whether the business that was being carried on was an “active” business within the intent of section 125. Obviously, the concept of “active” business is not used to exclude a business that is in an absolute state of suspension because subparagraph 125(1)(a)(i) is dealing with “income . . . from an active business” and it must be assumed that the word “active” was used to exclude some businesses having sufficient activity in the year to give rise to income. More than that, as it seems to me, nothing can be said in a general way, at this stage, as to what is meant by the word “active” in subparagraph 125(1 )(a)(i). Each case must be dealt with by the fact finder according to the circumstances of the case. . . .

In so far as this case is concerned, I agree with the learned trial judge that the evidence shows that the respondent was “actively carrying on business in the year 1972” and, in the circumstances, in my view, its income for that year was therefore “income . . . from an active business”.

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 of 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 MNA [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”.

Adverting 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.

All these propositions follow because in the present Income Tax Act in Canada there are these specific sections 125 and 129. They deal specifically with kinds of income of private corporations. As stated, because of the enactment of section 125 and 129 in the Income Tax Act it is not helpful or relevant (except for the restricted purposes of some principles of interpretation) to consider jurisprudence which relates to the characterization for tax purposes of income founded on other statutor provisions either foreign or Canadian. For example. in some jurisdictions, there are specific taxing provisions regarding income from rentals of real property and there were also in the previous Canadian Income Tax Act before the 1972 amendments special provisions regarding the income of so-called personal corporations. These and other examples are for all practical purposes of no assistance in determining whether in any given case income of a private corporation in Canada is income from ‘‘an active business carried on in Canada” within the meaning of section 125 of the Act or whether it is income within the meaning of section 129 of the Act.

Accordingly, the appeal is dismissed with costs.