The Assistant Chairman:
1 This appeal is from an income tax assessment in respect of the 1972 taxation year.
2 The notice of assessment from the Minister of National Revenue, dated December 13, 1972, had assessed the amount of tax for that year at $5,030.89, on the grounds that appellant had not derived this income from “an active business carried on in Canada”, and consequently had not observed the provisions of subparagraph 125(1)(a)(i) of the federal Income Tax Act (SC 1970–71–72, c 63) and could not receive the deduction that section allows to small businesses.
3 Appellant took the opposite position, challenged the rejection of its claim by serving a notice of objection on the Minister, who ratified the said assessment, and entered an appeal.
4 The point at issue is whether appellant is or is not an “active business” within the context of the Act. The facts alleged are as follows.
5 Parico Limitée was incorporated in 1962 and represented an investment of $8,000. In 1972 the shareholders included Mr René Massicotte, insurance broker; Mr I Tessier, pharmacist; and Mr Yvon Parent, pharmaceutical products dealer and the president of appellant, the business premises of which were located at 333 Dallaire Street in Rouyn (Exhibit A-2). The evidence proved that since 1970 appellant has duly provided the statements required of loan companies, and paid its taxes in accordance with the Quebec Department of Revenue's Corporation Tax Act, and the federal Income Tax Act (Exhibit A-3).
6 According to its counsel, appellant's business deals with loans on mortgages and on notes, and the loans are made for the most part to clients in Rouyn and Noranda. Applications for loans are submitted by notaries, insurance companies, real estate brokers and others in the area.
7 Although appellant is located in the same premises as Yvon Parent Ltée, at 333 Dallaire Street, and although there is nothing at this address to indicate appellant's existence, since the latter has neither separate stationery nor a telephone listing and does no advertising, none of this, according to Mr Parent, was necessary, since appellant is well known and its capacity for business can be easily measured by the number of loan applications it receives. Mr Parent stated that in 1962 the activities of Parico Limitée answered a real need in Rouyn and it was not until several years later, during which time appellant was the only lending company in the area, that a large-scale lending company became established in Rouyn and made substantial offers to purchase appellant's lending business.
8 Mr Parent gave an outline of the duties performed by appellant's three shareholders: namely, himself the president, who received customers, studied applications for loans and the guarantees offered; Mr Massicotte, the secretary, who, having taken courses in real estate assessment for this purpose, visited and assessed properties offered as security; and Mr Tessier, the treasurer, who investigated the prospective customer's financial situation and determined what company funds were available, after which a decision was made with respect to the loan requested. These three shareholders decided jointly, where necessary, to grant the loan; and if they so decided, the president concluded the transaction.
9 An average of one loan in five was granted, and they were repaid by means of a series of cheques issued in advance; the company's bookkeeping was done on a part-time basis and audited every month.
10 Appellant's counsel concludes that the company was an active business during 1972 in accordance with the terms of section 125 of the Act, and that it is entitled to receive the deduction provided therein.
11 Counsel for the respondent maintains that, in order to qualify for this deduction, appellant must prove:(a) that it is a private corporation within the meaning of paragraph 89(1)(f);
(b) that it is a Canadian-controlled private corporation within the meaning of paragraph 125(6)(a);
(c) that during the taxation year in question it derived income from carrying on a business;
(d) that the said income resulted from an active business.
12 In my opinion these two statutory expressions seem to have a great deal in common and overlap where it is a question of applying them to particular facts. Respondent argues that appellant was not a mortgage loan business under section 125, and consequently the income it received in 1972 derived from property.
13 It seems to me that the nature of a taxpayer's income, whether it derives from property or from a business, cannot by itself determine whether or not a business exists. Therefore, the mere fact that income derives from property does not warrant the assumption that no business exists. In my opinion, the existence or non-existence of a business is based on an entirely different criterion. It seems to me that this clarification is of major importance in view of the fact that subparagraph 125(1)(a)(i) of the Act, which refers to income derived from an active business, does not make any distinction between a business that derives income from property and a business that derives income from commercial transactions.
14 In the earlier decisions, determination of what constitutes a business seems to turn on the nature and degree of the taxpayer's business activities.
15 The word “business” generally calls to mind the idea of an organization which operates on a continuing basis and whose goal has been clearly defined by the people involved. The courts have never ventured to define what a business is or to determine what degree of activity must be reached in order to constitute a business. They have established certain criteria that can help to identify transactions of a commercial nature and transactions of a capital nature, but it is emphasized that these are only guidelines, and that whether or not a business exists essentially depends on the particular facts.
16 To my knowledge, the courts have never ruled on the existence or non- existence of a business solely on the basis of the purpose for which it was established. Sections 67 and 68 of the earlier Act provided that corporations carrying on an active financial, commercial or industrial business were not personal corporations, and in this regard many earlier decisions were cited, which in my opinion is very different from deciding what constitutes a business, or an active business, within the context of the new Act.
17 Since personal corporations no longer exist, court decisions that were relevant at the time are no longer necessarily relevant in determining what constitutes an active business under section 125 of the present Act. In my opinion, the problem must be considered from a completely different point of view and interpreted according to the meaning and intent of the legislator.
18 To support his argument that appellant was not a mortgage loan business, counsel for the respondent relied on the criteria upon which Mr R S W Fordham, QC, at that time a member of the former Tax Appeal Board, based his definition of what constituted a business, in George A Orban v. MNR, 10 Tax A.B.C. 179, 54 D.T.C. 148. The fact to be considered in this case was the ineligibility of losses incurred in two of the three loans granted in the course of a taxation year. Mr Fordham stated there that a business must have a certain degree of organization and continuity. Mr Orban, a resident of Montreal at the time, did not even consider himself to be a moneylender, although certain people knew that he had funds available. He did not advertise and his name did not appear on the list of moneylenders in Montreal. In the circumstances, Mr Fordham ruled that Orban was not operating a business, and that his losses were capital losses and therefore ineligible. Mr Fordham did not find that no business existed because the income derived from property. He stated that in order to determine whether a business was being operated one must necessarily have regard to the facts.
19 This case and others that were cited by counsel for the respondent related to losses resulting from loans, and the interpretation of the word “business” is generally much more restrictive than in section 4 of the earlier Act.
20 Since the case at bar is very different from Orban in that there is no reference whatsoever to losses of money incurred through loans, but only to the provisions of section 125 of the present Act, which allows a deduction to small businesses, the interpretation of the word “business” that is given in this Act and the one given in section 4 of the earlier Act should at least be compatible.
21 According to the evidence, appellant was incorporated on August 30, 1962, has been in operation since that time, transacts business, makes a profit, files income tax returns and pays taxes in accordance with the Corporation Tax Act of the Quebec Department of Revenue and the federal Income Tax Act. Exhibit A-1 reveals that on June 30, 1970 appellant was to receive the sum of $146,347.76 in mortgages and $13,240 in notes. The same document indicates that on June 30, 1971 appellant was to receive an amount of $307,434.94 in mortgages and $9,384.86 in notes; it was also to receive $364,110.49 in mortgages and $10,413.02 in notes on June 30, 1972 and on June 30, 1973, $390,140.17 in mortgages and $30,287.79 in notes.
22 Even though counsel for the respondent argued that appellant made only 9 loans in 1972, Mr Parent's explanation seems reasonable and plausible when he says that it increased its volume of business from $146,347.76 in 1970 to $307,434.94 in 1971; in 1972 appellant did not have sufficient liquid assets to make additional loans. It should also be noted that it was appellant's capital that was involved, not that of the shareholders personally. Nevertheless, the number of mortgage loans granted in 1972 is quite impressive, and I do not believe that the normal yearly fluctuation in the number of loans a business makes should place its status as a business in question. Counsel for respondent also maintains that appellant held promissory notes and notes on mortgages which constituted an investment that required very little time and effort and produced revenue of a capital nature.
23 In certain circumstances holding these notes might well be only an investment, but since appellant in this case in 1972 made mortgage loans in the amount of $364,110.49, and accepted promissory notes in the amount of $10,413.02, it is quite normal that these transactions would have been part of its total operations, which are specifically for the purpose of lending money, and in which the success of a transaction depends on the customer's solvency and his ability to repay his loan. This principle places appellant in an exposed position and requires him of necessity to make thorough investigations and keep a close watch on his customers.
24 Appellant's incorporation in 1962 and its operation since, its purposes, and the continuity and nature of its arm's-length operations, prevent me from being of the same opinion as counsel for the respondent, who maintains that appellant was not operating a business. I conclude that appellant was carrying on a business or a moneylending operation during the 1972 taxation year, pursuant to paragraph 139(1)(e) of the earlier Act.
25 It is now a matter of determining whether, during the said year, this was an “active business” within the meaning of subparagraph 125(1)(a)(i) of the present Act, which does not define the meaning of these words and once again leaves the courts the difficult and important task of interpreting them. The task is a difficult one because the two words that form this expression cannot be interpreted as meaning the same as the words “did not carry on an active ... business” in subsection 68(1) of the earlier Act.
26 The interpretation to be placed on the expression “carry on an active business” under the present Act is important because when the legislators adopted this Act, they had the country's economy in mind, and granted tax relief to small businesses. Unlike the earlier Act, this Act now benefits many more such businesses. Within the context of the present Act, it would be neither wise nor advisable to limit the concept of an “active business” to an inflexible definition.
27 Under the present Act, therefore, I feel that the Board will have to take into account more than heretofore the very significant difference that exists between the ways in which a large and a small business are operated. It seems to me that small businesses should not be required to operate in the same way and carry on the same type of commercial activity as large businesses in order to be considered “active”. On the other hand, there should not be too broad an interpretation of section 125, so that persons making investments of a purely private nature profit from it.
28 Consequently, possible confusion and abuses in the application of the Act must be anticipated and prevented: the ambiguity of certain statutory expressions and criteria in the Act give rise to a considerable number of difficulties. Thus, the interpretation of the words “active business” and the word “business” should not vary appreciably from one section to another in the same Act.
29 To be more specific, let us consider the confusion and injustice that would result if, by using the restrictive interpretation of the word “business”, I came to the conclusion that appellant, on the basis of its activities, is not a business for the purposes of section 125 of the present Act, when for 10 years this same word was interpreted, in relation to appellant, in the context of section 4 of the earlier Act, in its broader sense, and resulted in taxes being levied on income derived from the very same activities.
30 It seems to me that a statutory expression to be used in levying taxes should be interpreted in exactly the same way as for tax relief or fiscal benefit. A contradictory interpretation would not only give rise to two different standards, but would jeopardize the beneficial impetus the legislators wished to give the country by granting special tax deductions to small businesses.
31 In his argument counsel for the respondent lists certain criteria relied on by the courts in interpreting paragraph (c) of subsection 68(1) of the earlier Act, which contains the following: “did not carry on an active financial, commercial or industrial business”.
32 The first criterion is: “The aims and objectives that were in truth pursued and achieved by the corporation”. Counsel cites Admiral Investments Limited v Minister of National Revenue, [1967] 2 Ex. C.R. 308, [1967] C.T.C. 165, 67 D.T.C. 5114, in which Cattanach, J adopts the opinion expressed by Locke, J in Sutton Lumber & Trading Company Limited v Minister of National Revenue, [1953] 2 Ex. C.R. 77, [1953] C.T.C. 237, 53 D.T.C. 1158, to the effect that it is not so much a matter of the business operations or activities that a company might have been able to carry on under its articles, but rather the kind of business in which it is actually engaged. He stated that in order to determine this, it is essential that there be a thorough examination of the facts.
33 Here the facts clearly establish that from 1962 onward appellant, whether or not it was acting in accordance with its articles, carried on a money-lending business which it has continued without interruption since that time; it is making a taxable income and has even turned down substantial offers of purchase.
34 The second criterion is: “Nature of the corporation's assets”. Counsel referred to Poppy Beale Glaspie v. MNR, 33 Tax A.B.C. 274, 63 D.T.C. 828, in which the Glaspie Lumber Company Limited was recognized as being an investment company. It was held that a simple substitution in its portfolio so as to include mortgage loans did not change the nature of the business, which was basically an investment business, and did not in any case make it an “active business” in the sense of the earlier Act.
35 This does not mean that a business of lending money on mortgages or other security cannot constitute an active business within the meaning of the present Act. The particular facts of a case will determine, firstly, whether there is a business, and secondly, whether its operations make it an active one or not.
36 Nothing in the evidence before us indicates that appellant was not carrying on a money-lending business and there is nothing that allows one to conclude that it was an investment company; even if its revenue derived from assets, it can, in my opinion, be called an “active business” within the meaning of section 125 of the present Act.
37 The third criterion is: “The activities of the corporation”. Here counsel for the respondent maintains that in order for a business to be operated actively, it must be supported by significant administrative organization, and he cites: Earl B Finning v Minister of National Revenue, [1961] Ex. C.R. 403, [1961] C.T.C. 425, 61 D.T.C. 1251; Percy N Smith v. MNR, 34 Tax A.B.C. 259, 64 D.T.C. 49; Larry Smith v Minister of National Revenue, [1970] C.T.C. 529, 70 D.T.C. 6344; and R v Joseph M Weintraub, [1972] F.C. 619, [1972] C.T.C. 331, 72 D.T.C. 6296, which deal with the absence of an organization, the volume of loans, the limited activity on the part of the administrators, and so forth. The decisions were rendered on the interpretation of the word “business” and on the interpretation of section 68 of the earlier Act, and they make no distinction between the operation of a large business and the active operation of a small business which relates particularly to section 125 of the present Act.
38 In basing his argument on these decisions, counsel for the respondent attached a great deal of importance to the fact that the total amount of mortgage loans that appellant received in 1972 was only $364,110.49; that it shared the premises of Yvon Parent Ltée; that it did not have a telephone listed under its own name; that it did not advertise in any way; and that there was nothing to indicate its presence at 333 Dallaire Street in Rouyn.
39 In my view, the amount of money involved in a business, the extent of its activities and its size depend solely on the circumstances under which it operates. It is unlikely that a trust company, bank or loan company of any size in a city such as Toronto or Montreal could be satisfied with business that only brought in $364,000 and operated as appellant does. Here, however, we are not concerned with a trust company, bank or large-scale loan company, or other company located in Montreal or Toronto, but rather with a small money-lending business established in Rouyn and responding adequately to local needs. It is possible that appellant company was well-known by banks, notaries, insurance and real estate companies in Rouyn as a money-lending business, and they referred more customers to the company than it could accommodate, so that it did not have to advertise or indicate its location by the use of signs. In these circumstances, were such advertisements and signs essential to make the company active? Appellant company receives its customers in shared accommodation. Given the fact that the company's volume of business over a period of 10 years has been adequate, can it be said that a separate and distinct office, a telephone listed under the company's name, or stationery bearing the company's letterhead, are essential to the active operation of this business? Does the absence of these details render the business less active? The division of work among the three shareholders and officers of the company to study applications for loans, check credit and grant loans is certainly not the administrative organization of banks or trust companies, but in the circumstances this organization, simple as it may seem, proved to be adequate and even efficient in so far as the needs of Parico Limitée were concerned. Does there have to be a much more sophisticated administrative organization in order for a small active business to be considered as such? Is the fact than an accountant is hired only on a part-time basis proof that the company is not active or would it not instead indicate that this is a small business in which the accounting does not require the services of a full-time accountant? In my opinion the organization and activities of a business must necessarily be judged in relation to the scale of its operations.
40 Counsel for the respondent, in maintaining that appellant company was not carrying on an active business, raised the point that appellant did not pay municipal taxes to carry on its business as laid down in the municipal by- law for the city of Rouyn (Exhibit R-1). By admitting in his testimony that he was not aware of this municipal tax, Mr Parent, president of appellant company, was perhaps guilty of infringing this by-law, for which moreover there is a penalty, but I do not believe that one can conclude from this fact that appellant company, for the purpose of taxation, does not carry on a business or an active business when it has paid taxes on its operations and when these taxes were fixed by the Minister of National Revenue.
41 In the light of the evidence given in this case, I conclude that in 1972 Parico Limitée was primarily a business, the activities of which consisted of mortgage loans and loans on notes; that this business was not passive or inactive, and that over a period of 10 years it has engaged in activity that is both reasonable and appropriate for a small business, in terms of the efforts of its officers as well as its annual volume of business, and I consider that Parico Limitée, for which the total volume of business is less than $400,000, is a private corporation actively operated in Canada; that it complies with the conditions and requirements of subparagraph 125(1)(a)(i) of the Act, and that it should be granted the deduction provided therein.
42 The appeal is therefore allowed.
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