Judge
Flanigan
(orally:
October
29,
1974):—This
is
an
appeal
by
Cosmopolitan
Investments
Co
Ltd
against
a
reassessment
of
the
Minister
of
National
Revenue
for
the
1972
taxation
year.
This
is
one
of
the
first
times
that
an
appeal
has
come
before
the
Board
dealing
with
section
125
of
the
1972
legislation
and
this
case
resolves
itself
purely
into
a
determination
of
whether
or
not
the
appellant
was
Carrying
on
an
active
business.
It
is
agreed
by
all
parties
that
in
all
other
respects
the
appellant
satisfies
the
technical
requirements
of
section
125.
A
brief
history
of
the
company
is
that
in
accordance
with
the
provisions
of
Canadian
company
law
it
has
been
a
private
company
since
its
incorporation
in
1960.
It
was
made
up
of
as
many
as
40
to
50
local
businessmen
who
invested
in
the
company
which
in
turn
loaned
money
on
mortgages,
concentrating
particularly
on
taking
mortgages
where
bonuses
were
available.
This
went
on
until
about
the
mid-sixties,
when
one
particular
mortgage
turned
sour
and
the
company
lost
a
considerable
amount
of
money.
This
resulted
in
the
majority
of
the
shareholders
becoming
disenchanted.
Others
purchased
their
shares
and
it
eventually,
by
about
1968,
was
reduced
to
some
four
shareholders,
I
believe,
three
of
whom
were
members
of
the
law
firm
of
Mr
E
R
Wachowich,
QC,
including
Mr
Wachowich
himself
who
was,
as
he
said,
not
only
a
shareholder,
but
director,
president
and
manager
of
the
company.
The
company
had
no
private
offices
and
no
separate
telephone
listing
during
the
years
that
I
consider
material,
1970
to
1972.
I
would
expect
that
it
would
be
unnecessary,
when
one
looks
at
the
source
and
the
amount
of
income
that
the
company
declared
in
1972,
to
incur
these
additional
business
expenses.
What
the
company
did
was
lend
money
on
demand
notes,
and
it
had
an
interest
in
real
property,
its
avowed
intention
being
“to
make
income
out
of
this
property”.
Also,
at
the
start
of
the
1972
fiscal
year,
it
held
four
mortgages
(totalling,
I
think,
about
$9,500)
and
by
the
end
of
that
fiscal
year
the
number
was
reduced
to
two,
amounting
to
$9,497.
Section
125
of
the
new
tax
legislation
of
1972,
to
which
I
am
referring
in
this
appeal,
has
given
me
a
considerable
amount
of
difficulty.
It
seems
to
me
that
the
inclusion
of
the
word
“active”
in
the
section
really
has
done
nothing
but
create
a
problem.
One
might
say:
either
a
company
is
carrying
on
a
business,
or
it
is
not
and,
once
it
is
found
that
it
is,
this
implies
that
the
company
is
actively
engaged
in
doing
this.
Perhaps
one
should
replace
the
words
“carrying
on”
by
the
word
“has”
in
order
to
show
more
clearly
the
significance
of
the
qualification
“active”
as
the
opposite
of
“dormant”
or
even
“stationary”.
The
business
of
a
corporation,
without
any
further
adjective,
could
then
be
defined
as
a
more
or
less
permanent
organization
or
arrangement
of
production
factors
as
a
potential
source
of
income.
Such
an
organization
may
be
kept
alive
in
name
only,
awaiting
future
re-activation,
or
be
active.
In
introducing
the
small
business
deduction
as
an
incentive
to
do
business,
the
legislature
had,
in
my
opinion,
this
meaning
of
an
“active
business”
in
mind.
It
is
understandable
that
practitioners
are
looking
for
more
precise
guidelines
which
will
be
supported
by
the
courts.
One
has
considered
the
criteria
used
by
the
judiciary
for
deciding
whether
or
not
a
transaction
was
a
venture
in
the
nature
of
trade.
Professor
D
J
Sherbaniuk
has
pointed
out
in
a
paper
delivered
at
the
24th
Tax
Conference
of
the
Canadian
Tax
Foundation
in
Toronto
in
November
1972
that
even
an
isolated
transaction
may
constitute
an
adventure
in
the
nature
of
trade
and
that
the
profit
thereon
could
be
taxable
as
if
it
were
income
from
a
business.
Nevertheless,
one
or
more
of
such
transactions
would
not
necessarily
justify
the
assumption
of
a
“business”.
One
could
in
such
instances
even
speak
of
activities
without
the
existence
of
a
business.
One
has
also
referred
to
the
jurisprudence
concerning
paragraph
68(1)(c)
of
the
old
Act,
dealing
with
personal
corporations.
However,
it
is
extremely
doubtful
whether
decisions
as
to
whether
or
not
a
corporation
“carried
on
an
active
financial
commercial
or
industrial
business”
could
contribute
anything
to
the
interpretation
of
subsection
125(1)
of
the
new
Act.
The
purpose
of
section
67
of
the
old
Act
was
to
prevent
the
deferral
of
income
tax
payable
by
a
corporation
which
was
in
fact
nothing
but
a
conduit
pipe
of
income
to
its
shareholders
and
which
should
therefore
be
treated
as
such.
Through
the
enactment
of
subsection
125(1)
of
the
new
Act,
the
Legislature
has
intended
to
encourage
the
deferral
of
tax
in
order
to
keep
more
money
available
for
future
business
operations
than
otherwise
would
have
been
the
case.
The
ultimate
goals
of
the
above
provisions
are
therefore
completely
different.
If
one
goes
back
to
the
passing
of
the
1972
legislation,
one
recalls
that
there
was
a
great
hue
and
cry
in
the
country
that
this
Act
was
too
complicated
and
would
not
be
understood
by
the
everyday
man
on
the
street
who
had
to
file
an
income
tax
return
either
in
a
personal
Capacity
or
as
an
officer
of
a
company.
It
seems
to
me
that
I,
as
an
interpreter
only
and
not
as
a
legislator,
must
look
for
hidden
meanings
in
common
everyday
words.
I
think
if
one
takes
an
ordinary
definition
found
in
a
reputable
English
dictionary,
the
word
“active”
is
not
very
hard
to
understand.
lt
means
that
the
appellant
company
must
be
actively
engaged
in
making
use
of
what
I
have
called
its
“potential
source
of
income”.
It
would
be
unwise
at
this
stage
to
think
of
the
possible
activities
and
the
variety
of
businesses
one
may
encounter
in
applying
subsection
125(1)
of
the
Act.
Since
the
Legislature—and
I
refer
to
the
statement
of
the
Minister
of
Finance
as
quoted
by
Professor
Sherbaniuk
(p
96)—
has
obviously
left
the
courts
a
great
deal
of
flexibility
in
interpreting
the
words
“active
business”,
it
seems
to
me
that
I
should
refrain
from
making
more
general
statements
and
that
I
should
proceed
from
case
to
case
and
see
how
this
troublesome
concept
of
“active
business”
will
gradually
present
itself
to
this
Board.
In
the
present
case
it
appears
that
the
financial
statements
of
the
appellant
company
showed
a
certain
potential
for
comparatively
extensive
financial
operations,
although
the
activities
it
actually
performed
may
not
have
constituted
the
type
of
active
business
the
Legislature
had
in
mind.
However,
the
Act
does
not
indicate
the
measure
of
activity
the
corporate
taxpayer
must
display
in
order
to
qualify
for
the
incentive,
where,
for
example
in
this
case,
the
business
starts
out
being
active
and
then
recedes
to
a
state
of
nonactivity.
As
long
as
the
Act
is
not
more
specific
in
its
criteria,
it
may
be
very
difficult
indeed
to
enforce
these
provisions
in
such
a
way
as
truly
reflects
the
intentions
of
the
Legislature
when
it
enacted
them.
The
appeal
will
therefore
be
allowed.
Appeal
allowed.
Email this Content