Delmer
E
Taylor:—This
is
an
appeal
against
an
income
tax
reassessment
for
the
year
1972
in
which
the
Minister
of
National
Revenue
denied
to
the
appellant
a
claim
for
refundable
dividend
tax
in
the
amount
of
$13,246.
The
appellant
relied
upon
subsection
129(3),
subparagraph
129(4)(a)(ii)
and
subsection
248(1)
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63
as
amended.
The
respondent
relied,
inter
alia,
upon
subsections
129(1),
129(3)
and
129(4)
of
the
same
Act.
Facts
The
appellant
(hereinafter
referred
to
as
“March”
or
“the
company”)
is
a
private
corporation
under
the
laws
of
Canada
engaged
in
rendering
services
as
an
agent
to
shipping
companies.
The
appellant’s
income
for
the
year
1972
included
interest
in
the
amount
of
$56,972
realized
on
term
deposits
of
funds
available
to
it.
During
that
year,
the
company
paid
a
dividend
of
$62,500,
and
based
on
the
provisions
of
subsection
129(3),
calculated
and
claimed
the
said
refund
in
the
amount
of
$13,246.
Contentions
The
position
of
the
appellant
in
the
notice
of
appeal
was
that
the
interest
realized
($56,972)
constituted
investment
income.
The
respondent,
in
the
reply
to
notice
of
appeal,
contended
that
the
amount
did
not
represent
Canadian
investment
income
and
did
not
represent
income
from
property,
but
rather
income
from
an
active
business.
Evidence
Through
the
secretary-treasurer,
Mr
H
Collitz,
the
charter
of
the
company,
a
copy
of
an
agency
agreement,
and
a
statement
from
the
Bank
of
Montreal
detailing
the
short-term
deposit
activity
were
introduced.
The
deposit
and,
where
necessary,
retrieval
of
these
funds
in
short-term
investments
took
only
a
few
minutes
of
Mr
Collitz’s
time
each
day.
Essentially
the
evidence
of
Mr
Collitz
was
that
the
funds
placed
in
short-term
deposits
were
considered
surplus
to
the
daily
business
needs
of
the
company,
and
usually
originated
from
agreements
with
the
various
shipping
companies
(similar
to
the
one
introduced),
to
provide
funds
to
March
in
advance
of
definite
requirements
for
the
payment
of
the
services
provided,
which
included
the
outlay
of
funds
for
stevedores,
freight,
storage,
sub-agents,
etc.
In
simple
terms,
March
performed
for
the
shipping
companies
all
or
any
of
the
required
functions
expected
of
an
agent
in
the
handling
of
cargo
at
Canada’s
major
seaports.
It
was
kept
in
funds
by
the
shipping
companies
and
charged
its
own
fees
when
submitting
its
total
account.
The
procedure,
since
funds
were
usually
already
on
deposit,
was
for
March
to
in
effect
pay
its
own
accounts
subject
to
later
audit
or
confirmation
by
its
customers.
A
Mr
Humphrys,
chartered
accountant,
gave
some
information
regarding
the
terminology
used
in
describing
these
funds
on
the
financial
statements
of
March,
including
the
fact
that
certain
changes
and
modifications
had
taken
place
in
such
terminology
over
the
years.
He
did
not
regard
such
changes
as
a
significant
indication
of
the
real
nature
of
the
funds.
Argument
Counsel
submitted
written
argument,
and
the
two
positions
may
be
summarized
in
this
way:
For
the
appellant
that:
—the
funds
must
be
regarded
as
“property”,
as
defined
in
subsection
248(1)
of
the
Income
Tax
Act:
—the
income
is
“from
a
source
in
Canada”
as
required
in
subparagraph
129(4)(a)(ii)
of
the
said
Act;
—section
129
was
changed
effective
after
May
6,
1974
by
the
insertion
of
the
phrase
“other
than
a
property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”
and
the
requirement
for
this
change
should
be
interpreted
to
mean
that
no
such
exclusion
existed
before;
—the
funds
advanced
to
the
appellant
by
its
customers
were
in
effect
“loans
without
interest,
and
the
amounts
so
received
are
the
property
of
the
appellant
which
it
subsequently
invested”;
—if
the
income
is
not
from
investment,
then
it
would
still
qualify
under
subparagraph
129(4)(a)(iii)
as
income
other
than
active
business
income.
For
the
respondent
the
position
was
that:
—the
charter
of
the
company
contains
the
following
clause
under
its
objects:
to
carry
on
the
business
of
a
holding
company
and
for
that
purpose
to
acquire,
hold,
deal
with
and
dispose
of
shares,
bonds,
notes
and
any
other
securities
whatsoever
—the
revenue
was
from
active
business
and
could
not
have
been
from
investment:
—the
amendment
to
the
Act
effective
after
May
6,
1974
to
which
the
appellant
has
attributed
certain
significance
should
not
be
interpreted
as
denying
a
benefit
to
the
taxpayer
thereafter,
which
benefit
had
in
fact
been
unquestionably
available
to
it
before
that
date.
Findings
The
Board
does
not
view
the
powers
granted
in
the
company
charter,
nor
the
noted
amendment
effective
May
6,
1974,
as
being
of
significant
benefit
to
the
argument
of
either
the
appellant
or
the
respondent.
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.
Counsel
for
the
appellant
seemed
to
urge
that
distinctions
be
made
between
income
from
“an
active
business”,
‘‘a
business
other
than
an
active
business”
and
“property”,
while
the
position
of
counsel
for
the
respondent
was
that
the
distinction
must
be
made
only
between
“an
active
business”
and
“property”.
I
am
unprepared
to
advance
an
opinion
on
what
could
be
described
as
“income
from
a
source
in
Canada
that
is
a
business
other
than
an
active
business”
(italics
mine),
in
addition
to
that
which
I
expressed
in
an
earlier
decision,
Spence
Building
Limited
v
MNR,
[1977]
CTC
2104
at
2111;
77
DTC
71
at
76:
According
to
the
judgments
in
the
cases
I
have
cited
in
this
decision,
it
is
an
examination
of
the
“activity”
or
“activities”
of
the
operation
in
question
which
forms
the
basis
for
determining
whether
the
income
of
a
corporation
should
be
identified
as
from
a
“business”
or
a
“property”.
The
review
in
this
case
of
the
various
possible
factors
and
characteristics
in
such
“activity”
or
“activities”
has
provided
little
enlightenment
on
how
any
“corporate
business
income”
(once
having
been
identified
as
such)
might
be
regarded
as
from
other
than
an
“active”
business.
The
Chief
Justice
in
the
judgment
in
the
Rockmore
Investments
Ltd
case
demurred
from
giving
any
general
conclusion
on
how
the
concept
of
“active”
business
is
to
be
applied.
The
Board’s
determination
that
the
income
in
question
in
this
appeal
is
from
“property”
and
not
from
“business”
leaves
it
unnecessary
to
pursue
the
matter
of
the
“active”
identification
any
further.
It
is
my
view
that
since
the
income
was
from
the
crediting
of
interest
by
the
Bank
of
Montreal
to
the
appellant
for
the
use
of
some
of
the
property
of
the
appellant,
there
is
a
prima
facie
case
for
considering
this
as
investment
income
rather
than
the
only
other
alternative
remaining
available
to
me—business
income.
It
might
well
be
suggested
that
it
could
be
investment
income
and
concurrently
business
income,
but
it
would
be
necessary,
in
my
view,
to
show
that
the
business
of
the
appellant
was
that
of
investment.
I
have
seen
little
evidence
to
support
such
an
assertion.
There
only
remains
to
examine
the
one
point
stressed
by
counsel
for
the
respondent
in
making
the
case
that
it
should
be
considered
income
from
an
active
business—that
the
treatment
of
the
funds
available
to
the
appellant
by
holding
them
in
short-term
deposits,
quickly
available,
was
an
integral
part
of
the
appellant’s
operations.
In
making
this
argument—that
this
interest
income
could
not
be
disassociated
from
the
total
active
business
of
the
corporation—counsel
stated
as
follows:
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.*
Counsel
also
relied
upon
the
reference
made
in
Associated
Investors
of
Canada
Limited
v
MN
Ft,
[1967]
CTC
138
at
144;
67
DTC
5096
at
5099:
A
profit
arising
from
an
operation
or
transaction
that
is
an
integral
part
of
the
current
profit-making
activities
must
be
included
in
the
profits
from
the
business.
See
MNR
v
Independence
Founders
Limited,
[1953]
SCR
389;
[1953]
CTC
310,
and
the
foreign
exchange
cases
such
as
Tip
Top
Tailors
Limited
v
MNR,
[1957]
SCR
703;
[1957]
CTC
309.
Counsel
for
the
appellant
in
commenting
that
the
facts
in
this
case
did
not
fit
such
criteria
brought
forward
his
opinion:
To
summarize,
the
first
conclusion
from
the
above
doctrine
and
jurisprudence
is
that
the
source
of
income
to
a
taxpayer
will
be
considered
as
business
only
if
that
source
is
essential
to
the
taxpayer’s
profit
making
activities.
The
second
conclusion
is
that
for
the
source
to
be
considered
as
an
active
business,
the
test
must
be
pushed
to
a
further
degree
in
that
the
circumstances
(activity,
labor
force,
capital
investment)
must
reveal
the
source
(in
the
words
of
Chief
Justice
Jackett
in
the
Rockmore
Investments
case)
to
be
“an
activity
or
activities
that
constitute
an
adventure
or
a
concern
in
the
volume
of
a
trade”
or
(in
the
words
of
Rowlatt)
be
“merged”
with
the
trade.
If
the
above
rules
are
applied
to
the
Appellant,
it
is
clear
that
the
interest
generated
on
its
term
deposits
does
not
even
satisfy
the
test
of
business
income,
let
alone
active
business
income.
The
evidence
clearly
indicates
that
shipping
is
the
one
and
only
business
of
the
Appellant
and
that
its
business
profits
are
derived
from
fees
and
commissions
received
from
its
customers
in
the
shipping
world.
It
is
not
in
the
business
of
investment,
insurance,
loans,
securities;
nor
can
it
be
in
any
way
considered
as
a
financial
institution.
The
fact
that
its
management
chose
to
invest
surplus
funds
from
time
to
time
in
term
deposits
does
not
make
it
a
financial
or
other
like
institution.
Indeed,
the
day-to-day
operations
of
the
Appellant
in
the
shipping
world
could
easily
continue
with
as
much
efficiency
were
such
term
deposits
not
made.
Furthermore,
Mr
Collitz’
evidence
clearly
indicates
that
the
investment
in
term
deposits
was
all
handled
by
one
person
(himself)
that
it
required
no
special
labor
or
other
force,
and
virtually
no
time
and
effort.
Once
the
investment
was
made,
nothing
further
was
required
to
generate
the
interest.
All
this
is
further
substantiated
by
the
Appellant’s
statement
of
earnings
for
1972
which
shows
gross
revenue
of
$2,153,943
consisting
of
$2,096,971
from
shipping
and
$56,972
of
investment
income—hardly
an
integral
part
of
the
business!
Accordingly,
the
foregoing
doctrine
and
jurisprudence
provide
more
than
enough
authority
for
the
proposition
that
the
interest
received
by
the
Appellant
on
its
term
deposits
do
not
constitute
business
income.
I
am
not
aware
of
anything
which
would
support
the
conclusion
that
an
investment
policy,
calling
for
short-term
rather
than
long-term
deposits,
would
in
itself
necessarily
characterize
the
interest
returns
as
specifically
from
“business”
or
from
“property”.
In
my
view,
while
the
term
“essential”
used
by
counsel
for
the
appellant
may
be
somewhat
extreme,
to
be
considered
“integral”
the
specific
function
under
review
should
form
a
necessary
part
of
the
whole
operation.
When
that
function
is
a
revenue-producing
one,
as
in
this
case,
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
the
instant
case
the
total
revenue
for
1972
was
$2,153,943,
of
which
amount
only
$56,972
(about
2.5%)
came
from
the
source
under
review.
The
net
revenue
before
income
taxes
was
$596,800,
and
even
if
one
proposed
that
the
total
of
$56,972
remained
undiminished
in
that
net
figure
(meaning
that
the
earning
of
the
interest
income
had
not
been
responsible
for
any
of
the
corporation’s
operating
expenses),
that
would
represent
less
than
10%
of
such
net
revenue.
The
company
could
have
refrained
from
investing
the
funds
(thereby
not
earning
the
interest);
or
used
its
own
or
borrowed
funds
rather
than
requiring
agency
deposits
(thereby
increasing
operating
expenses).
There
is
no
evidence
that
either
of
these
courses
of
action
would
have
affected
the
basic
operations
of
the
company
in
any
way
except
by
less
revenue
or
greater
expense.
I
am
conscious
that
the
company
likely
would
not
have
been
overjoyed
at
such
a
result,
and
obviously
chose
a
normal
course—to
obtain
maximum
revenue.
However,
it
is
not
my
conclusion
that
such
a
reduction
in
income
or
increase
in
operating
cost
of
$56,972,
when
viewed
against
the
background
of
the
total
operation,
can
be
described
as
having
a
Significant
impact,
or
decidedly
destabilizing
effect
on
the
company’s
purpose
and
objective—that
of
providing
needed
services
to
shipping
companies.
Rather
than
being
a
vital
or
even
component
part
of
the
total
operation,
the
investment
of
these
funds
could
more
properly
be
described
as
subsidiary
or
ancillary.
Decision
The
appeal
is
allowed
and
the
matter
referred
back
to
the
respondent
for
reassessment
accordingly.
Appeal
allowed.
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