Wilson,
J.:—The
issue
to
be
determined
in
this
appeal
is
whether
interest
earned
by
the
appellant,
Ensite
Limited
(“Ensite”),
from
United
States
dollar
deposits
in
the
Philippines
qualifies
as
“foreign
investment
income”
within
the
meaning
of
subsection
129(4)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148,
as
amended
by
S.C.
1970-71-72,
c.
63,
s.
1
and
S.C.
1974-75-76,
c.
26,
s.
86(2)
for
the
purposes
of
the
“dividend
refund”
under
subsection
129(1)
of
the
Act.
1.
The
Facts
Ensite,
which
carries
on
the
business
of
manufacturing
and
selling
automobile
engines,
is
a
private
corporation
within
the
meaning
of
subsection
89(1)
of
the
Income
Tax
Act.
In
1972
Ensite
decided
to
invest
in
a
stamping
plant
in
the
Philippines.
In
order
to
comply
with
Philippine
law
it
had
to
bring
foreign
currency
into
the
Philippines
to
finance
the
stamping
plant.
In
case
the
Philippine
peso
might
be
devalued
or
the
Philippine
government
might
prevent
Ensite
from
taking
foreign
funds
out
of
the
Philippines,
an
elaborate
arrangement
was
made
in
an
attempt
to
minimize
these
risks
while
at
the
same
time
satisfying
Philippine
law.
It
involved
the
investment
by
Ensite
of
up
to
$5
million
of
its
own
money
in
the
stamping
plant
and
the
obtaining
of
loans
to
provide
the
balance
of
the
capital
requirement
for
the
plant.
The
precise
details
of
the
arrangements
implemented
by
Ensite,
which
are
important
to
the
disposition
of
the
appeal,
are
set
out
in
the
reasons
for
judgment
of
Le
Dain,
J.
in
the
Federal
Court
of
Appeal,
[1983]
C.T.C.
296
at
298;
83
D.T.C.
5315
at
5317:
The
loans
were
made
available
through
“swap
arrangements’"
between
the
Central
Bank
of
the
Philippines
and
the
commercial
banks
which
made
the
loans
to
the
Philippine
branch
of
Ensite.
The
commercial
banks
obtained
Philippine
pesos
from
the
Central
Bank
at
the
prevailing
exchange
rate
upon
depositing
U.S.
dollars
with
the
Central
Bank
under
arrangements
that
ensured
that
the
pesos
could
be
reconverted
to
U.S.
dollars
in
the
future
at
an
agreed
exchange
rate,
thus
affording
protection
against
the
risk
of
devaluation.
Ensite
made
U.S.
dollar
deposits
with
the
commercial
banks,
which
then
made
the
peso
loans
in
an
equivalent
amount
to
the
Philippine
branch.
Ensite
received
certificates
of
deposit
for
the
U.S.
dollar
deposits
with
the
commercial
banks
which
it
turned
over
to
the
banks
as
security
for
repayment
of
the
peso
loans.
The
schedule
for
repayment
or
withdrawal
of
the
U.S.
dollar
deposits
corresponded
to
the
schedule
for
repayment
of
the
peso
loans,
which
was
to
begin
at
the
end
of
an
initial
period
of
five
years
and
continue
in
six
annual
instalments.
The
certificates
were
declared
to
be
“enforceable”
against
any
branch
of
the
commercial
banks
outside
of
the
United
States
thus
ensuring
against
the
risk
of
foreign
exchange
controls
that
would
prevent
U.S.
dollars
from
being
taken
out
of
the
Philippines.
It
was
not
essential
to
the
swap
arrangements
that
Ensite
make
the
U.S.
dollar
deposits
with
the
commercial
banks.
The
required
U.S.
dollars
could
have
been
made
available
by
the
commercial
banks
on
other
terms.
But
the
U.S.
dollar
deposits
permitted
Ensite
to
obtain
interest
rates
that
reduced
the
net
cost
of
the
borrowing.
In
its
return
for
the
1976
taxation
year
Ensite
claimed
a
“dividend
refund”
under
paragraph
129(1)(a)
of
the
Income
Tax
Act.
The
amount
of
the
refund
is,
according
to
the
section:
.
.
.
equal
to
the
lesser
of
(i)
/
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;
.
.
.
The
“refundable
dividend
tax
on
hand”
of
a
corporation
is
calculated
following
the
formula
set
out
in
subsection
129(3).
One
of
the
amounts
included
in
this
complex
formula
is
a
corporation's
foreign
investment
income”,
defined
in
subsection
129(4)
as
follows:
(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
of
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
amounts
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.
As
can
be
seen
from
this
legislative
framework
an
addition
made
to
a
corporation’s
“foreign
investment
income”
may
well
increase
the
“refundable
dividend
tax
on
hand”
of
a
corporation
which
may
result
in
an
increase
in
the
size
of
the
“dividend
refund”
under
paragraph
129(1
)(a).
In
this
case
Ensite
included
interest
of
$2,323,140
from
its
U.S.
dollar
deposits
in
the
Philippines
in
its
calculation
of
“foreign
investment
income”
for
the
1976
taxation
year.
This
inclusion
made
the
amount
calculated
under
subparagraph
(i)
of
paragraph
129(1
)(a)
less
than
the
amount
under
subparagraph
(ii)
of
the
subsection
and
so
it
claimed
a
refund
of
$2,498,931.
The
Minister,
in
his
reassessment,
refused
to
recognize
the
interest
as
“foreign
investment
income”
as
defined
in
paragraph
129(4)(b)
because
it
was
income
from
an
active
business
or
was
“income
from
property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business”.
Ensite's
dividend
refund
was
therefore
reduced
by
$972,860.
Ensite
appealed
the
Minister’s
reassessment.
2.
The
Courts
Below
Jerome,
A.C.J.
([1981]
C.T.C.
445;
81
D.T.C.
5326)
allowed
the
taxpayer’s
appeal
to
the
Federal
Court
Trial
Division.
He
held
on
the
facts
(at
451;
5331)
that
"the
earning
of
the
[interest]
income
certainly
would
not
require
such
activity
on
the
part
of
the
plaintiff,
as
would
support,
.
.
.
the
concept
of
an
active
business”
and
so
the
interest
receipts
were
income
from
property.
He
also
held
that
that
property
was
not
“used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
business”.
For
this
conclusion
he
relied
primarily
on
the
reasoning
of
the
Tax
Review
Board
in
March
Shipping
Ltd.
v.
M.N.R.,
[1977]
C.T.C.
2527;
77
D.T.C.
371
(T.R.B.)
and
on
his
own
reasoning
in
The
Queen
v.
Marsh
&
McLennan,
Ltd.,
[1982]
2
F.C.
131;
[1981]
C.T.C.
410
(T.D.),
reversed
[1984]
1
F.C.
609
[1983]
C.T.C.
231
(C.A.).
In
holding
that
the
U.S.
dollar
deposits
were
not
property
used
or
held
by
the
corporation
in
the
course
of
carrying
on
its
business
he
stated
at
453
(D.T.C.
5332-33):
.
.
.
I
am
of
the
view
that
these
benefits
were
not
sufficient
to
integrate
the
transaction
with
the
taxpayer's
main
business,
or
to
use
the
language
of
the
statute,
to
warrant
a
finding
that
these
funds
were
“property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business".
It
is,
to
me,
extremely
significant
that
the
return
from
these
investments
would
carry
on
at
the
negotiated
rate,
independent
entirely
of
success
or
failure
of
the
plant
and
that
the
taxpayer
enjoyed
the
right
to
recall
the
invested
funds
at
any
time
and
to
do
so
in
American
currency
and
through
offshore
rather
than
Philippines
branches
of
the
banks
concerned.
These
were
prima
facie
investment
transactions.
As
a
result
of
these
precautions,
they
were
insulated
from
the
taxpayer's
main
business.
In
terms
of
the
attention
required
to
manage
them
or
their
effect
on
the
total
income,
they
remain
clearly
secondary
or
incidental
to
the
taxpayer's
main
business.
The
Federal
Court
of
Appeal
([1983]
C.T.C.
296;
83
D.T.C.
5315)
allowed
the
Crown's
appeal
on
the
issue
whether
the
dollar
deposits
were
property
used
or
held
by
the
corporation
in
the
course
of
carrying
on
its
business.
Le
Dain,
J.,
with
whom
Heald,
J.
and
Clement,
D.J.
agreed,
based
his
reasons
on
the
Federal
Court
of
Appeal's
decision
in
The
Queen
v.
Marsh
&
McLennan,
Ltd.,
supra,
which
had
reversed
Jerome,
A.C.J.'s
decision
below.
Le
Dain,
J.
was
of
the
view
that
the
case
at
hand
was
analogous
to
that
case.
He
stated
at
300
(D.T.C.
5319):
For
the
reasons
which
I
briefly
indicated
in
Marsh
&
McLennan
I
am
of
the
opinion
that
the
same
view
must
be
taken
of
the
interest
on
the
U.S.
dollar
deposits
in
the
present
case.
Whether
or
not
it
was
essential
to
do
so,
the
fund
represented
by
the
U.S.
dollar
deposits
was
in
fact
committed
to
the
carrying
on
of
Ensite's
business
in
the
Philippines.
It
was
employed
and
risked
in
the
business
because
it
was
an
integral
part
of
the
arrangements
by
which
the
business
was
being
financed.
The
U.S.
dollar
deposits
were
the
means
by
which
the
peso
loans
were
obtained
on
the
most
favourable
terms,
including
a
reduced
cost
of
borrowing,
and
they
were
security
for
the
repayment
of
the
loans.
For
these
reasons
they
were
in
my
opinion
property
used
or
held
by
Ensite
in
the
carrying
on
of
its
business,
and
the
interest
earned
on
them
was,
therefore,
not
foreign
investment
income
within
the
meaning
of
section
129.
Leave
to
appeal
was
granted
by
the
Supreme
Court
of
Canada
on
December
15,
1983.
3.
The
Issue
As
is
apparent
from
the
above,
the
learned
judges
in
the
courts
below
placed
considerable
reliance
on
The
Queen
v.
Marsh
&
McLennan,
Ltd.,
[1982]
2
F.C.
131;
[1981]
C.T.C.
410
(T.D.),
reversed
[1984]
1
F.C.
609;
[1983]
C.T.C.
231
(C.A.).
In
that
case
the
taxpayer
was
in
business
as
an
insurance
broker.
When
the
taxpayer
was
told
by
an
insurer
that
it
was
prepared
to
accept
an
insured's
risk,
the
taxpayer
sent
a
bill
to
his
client,
the
insured.
Remittance
to
the
insurer
from
the
broker
did
not
have
to
be
made
until
60
days
after
the
end
of
the
month
in
which
the
risk
was
accepted.
There
was
often
a
period
of
time
between
payment
of
premiums
by
insured
persons
to
the
broker
and
remittances
by
the
broker
to
the
insurer,
during
which
time
the
broker
used
the
sums
to
invest
in
short-term
bank
certificates.
The
issue
was
whether
the
money
invested
was
“property
used
or
held
in
the
course
of
carrying
on
a
business”
within
the
meaning
of
the
exclusion
in
subparagraph
129(4)(a)(ii)
of
the
Income
Tax
Act.
A
majority
of
the
Court
held
that
the
exclusion
did
apply.
In
the
course
of
his
reasons
for
judgment
Clement
D.J.
stated
at
242
(D.T.C.
638):
To
use
words
employed
by
Rowlatt,
J.
in
Scales
(H.M.
Inspector
of
Taxes)
v.
George
Thompson
&
Company,
Limited
(1927),
13
T.C.
83
on
the
facts
of
this
case
there
was
between
the
Broker’s
business
and
the
investments
an
interconnection,
an
interlacing,
an
interdependence,
a
unity
embracing
the
investments
and
the
business.
Le
Dain,
J.
concurred
in
the
result
but
proposed
at
243
(D.T.C.
621)
a
differently
worded
test:
Was
the
fund
employed
and
risked
in
the
business?
In
my
opinion
it
was,
because
an
amount
equivalent
to
this
notional
fund
was
committed
to
the
carrying
on
of
the
business
in
order
to
meet
the
company’s
obligations
to
the
insurers.
Thurlow,
C.J.,
dissenting,
employed
a
test
which
on
its
face
appears
to
be
slightly
more
restrictive.
He
stated
at
247
(D.T.C.
619-20):
.
..
it
is
only
property
that
is
in
one
way
or
another
employed
in
the
carrying
on
of
the
business
and
thus
in
the
earning
of
the
profits
of
that
business
that
falls
within
the
exception
.
.
.
The
investing
was
not
part
of
the
arranging
of
insurance
contracts
or
the
collection
or
remitting
of
premiums.
It
was,
as
I
view
it,
an
unrelated
activity
that
could
happen
or
not
happen
without
affecting
the
respondent's
insurance-brokerage
business
in
any
way
.
..
Not
only
were
they
not
made
in
the
course
of
carrying
on
the
business,
they
were
not
used
to
pay
its
obligations.
Nor
were
they
capital
invested
in
or
at
risk
in
the
business.
The
precise
difference
in
substance
between
the
test
employed
by
Le
Dain,
J.
and
that
of
Clement,
D.J.
is
not
easy
to
discern.
In
many
instances
property
which
is
“employed
or
risked"
in
the
business
will
be
“interconnected,
interlaced
and
interdependent"
with
the
business.
However,
the
wording
of
the
test
employed
by
Le
Dain,
J.
seems
more
specific
and
therefore
preferable
because
it
emphasizes
that
the
holding
or
using
of
the
property
must
be
linked
to
some
definite
obligation
or
liability
of
the
business.
The
test
applied
by
Clement,
D.J.,
on
the
other
hand,
is
worded
so
broadly
that
it
might
prevent
the
exception
from
applying
where
a
company
simply
failed
to
put
in
place
certain
organizational
and
accounting
mechanisms
in
order
to
create
the
formal
appearance
of
a
separate
and
distinct
concern.
The
substance
of
these
tests
seems
to
be
in
accordance
with
the
statutory
framework.
Section
125
allows
a
Canadian-controlled
private
corporation
with
income
from
an
active
business
to
obtain
a
deduction
from
the
tax
otherwise
payable
under
Part
I
of
the
Income
Tax
Act.
The
effect
is
to
tax
the
active
business
income
of
small
businesses
at
a
rate
lower
than
the
normal
corporate
rate.
Similarly,
section
125.1
provides
a
deduction
from
tax
payable
in
respect
of
a
company’s
Canadian
manufacturing
and
processing
profits
which
are
defined
in
subsection
125.1(3)
as
including
only
active
business
income.
On
the
other
hand,
subsection
129(1)
permits
a
corporation
to
receive
a
refund
of
tax
paid
on
“investment
income"
when
it
pays
dividends
in
order
to
achieve
a
partial
integration
of
personal
and
corporate
taxes
on
investment
income
received
by
a
taxpayer
from
a
corporation.
As
already
mentioned,
this
refund
is
equal
to
the
lesser
of
one-third
of
all
taxable
dividends
paid
during
the
year
and
the
“refundable
dividend
tax
on
hand",
defined
as
including
a
percentage
of
the
“Canadian
investment
income"
and
“foreign
investment
income"
of
the
corporation
for
the
year.
These
two
types
of
investment
income,
before
amendment
by
S.C.
1974-75-
76,
c.
26,
s.
86(2),
were
made
up
of
three
components:
net
taxable
gains,
income
from
property
and
income
from
a
business
other
than
an
active
business:
see
subsection
129(4)
of
the
Act.
The
legislative
scheme
was
thus
to
draw
a
distinction
between
active
business
income
which
would
fall
under
sections
125
and
125.1
and
other
sources
of
income
which
would
fall
under
section
129.
However,
it
was
clearly
arguable
that
income
from
property
which
was
immersed
in
the
trading
activity
of
the
corporation
could
qualify
as
active
business
income.
The
aforementioned
amendment
which
added
the
words
“other
than
a
property
used
or
held
by
the
corporation
in
the
year
in
the
course
of
carrying
on
a
business"
in
parentheses
after
the
words
“that
is
a
property"
removed
this
argument
and
preserved
the
distinction
between
active
business
income
and
other
sources
of
income:
see
Arthur
R.
A.
Scace,
The
Income
Tax
Law
of
Canada,
(3rd
ed.
1976)
at
page
257.
The
rebuttable
presumption
that
corporate
income
is
income
from
a
business
(see:
Canadian
Marconi
Co.
v.
The
Queen,
[1986]
2
C.T.C.
465,
released
concurrently
herewith)
is
of
no
application
here
as
it
would
tend
to
collapse
the
distinction
between
active
business
income
and
other
sources
of
income
which
Parliament
clearly
intended
to
preserve
in
its
amendment
of
subsection
129(4)
of
the
Act.
It
would
seem
to
follow
that
the
legislative
intention
underlying
the
amendment
was
to
catch
income
from
property
that
is
employed
or
risked
in
the
taxpayer's
business
to
such
an
extent
that
the
income
from
it
could
be
characterized
as
active
business
income.
The
use
of
words
such
as
“employed"
and
“risked”
appropriately
implement
Parliament's
intention.
Counsel
for
the
appellant
argued
that
in
this
case
the
dollar
deposits
could
be
said
to
be
“risked"
in
the
sense
that
if
the
business
failed
they
could
be
seized.
He
submitted
that
this
demonstrated
that
the
test
is
too
wide.
If
“risked"
was
the
right
test,
then
all
property
would
meet
the
test
since
ultimately
all
property
is
available
to
the
creditors
of
a
corporation.
But
“risked"
means
more
than
a
remote
risk.
A
business
purpose
for
the
use
of
the
property
is
not
enough.
The
threshold
of
the
test
is
met
when
the
withdrawal
of
the
property
would
“have
a
decidedly
destabilizing
effect
on
the
corporate
operations
themselves":
March
Shipping
Ltd.
v.
M.N.R.,
supra,
at
2531
(D.T.C.
374).
This
would
distinguish
the
investment
of
profits
from
trade
in
order
to
achieve
some
collateral
purpose
such
as
the
replacement
of
a
capital
asset
in
the
long
term
(see,
for
example,
Bank
Line
Ltd.
v.
Commissioner
of
Inland
Revenue
(1974),
49
T.C.
307
(Scot.
Ct.
of
Session))
from
an
investment
made
in
order
to
fulfill
a
mandatory
condition
precedent
to
trade
(see,
for
example,
Liverpool
and
London
and
Globe
Insurance
Co.
v.
Bennett,
[1913]
A.C.
610
(H.L.)
and
Owen
v.
Sassoon
(1951),
32
T.C.
101
(Eng.
H.C.J.).
Only
in
the
latter
case
would
the
withdrawal
of
the
property
from
that
use
significantly
affect
the
operation
of
the
business.
The
same
can
be
said
for
a
condition
that
is
not
mandatory
but
is
nevertheless
vitally
associated
with
that
trade
such
as
the
need
to
meet
certain
recurring
claims
from
that
trade:
see,
for
example,
The
Queen
v.
Marsh
&
McLennan,
Ltd.,
supra,
and
The
Queen
v.
Brown
Boveri
Howden
Inc.,
[1983]
C.T.C.
301;
83
D.T.C.
5319
(F.C.A.).
It
is
true
that
in
this
case
the
taxpayer
could
have
done
business
and
fulfilled
the
Philippine
requirement
that
foreign
currency
be
brought
into
the
country
by
a
means
not
involving
the
use
of
property.
It
could
have
borrowed
the
U.S.
currency
abroad
and
brought
it
into
the
Philippines.
But
this
consideration
is
irrelevant
to
our
inquiry.
The
test
is
not
whether
the
taxpayer
was
forced
to
use
a
particular
property
to
do
business;
the
test
is
whether
the
property
was
used
to
fulfill
a
requirement
which
had
to
be
met
in
order
to
do
business.
Such
property
is
then
truly
employed
and
risked
in
the
business.
Here
the
property
was
used
to
fulfill
a
mandatory
condition
precedent
to
trade;
it
is
not
collateral,
but
is
employed
and
risked
in
the
business
of
the
taxpayer
in
the
most
intimate
way.
It
is
property
used
or
held
in
the
business.
Counsel
for
the
appellant
also
referred
us
to
Vancouver
Pile
Driving
&
Contracting
Co.
v.
M.N.R.,
[1963]
C.T.C.
10;
63
D.T.C.
1007
(Ex.
Ct.)
which
suggests
that
bonds
put
up
as
security
are
not
trading
income.
There
the
security
was
required
by
the
government
if
the
taxpayer
was
to
be
allowed
to
do
construction
work.
But
the
issue
in
that
case
was
simply
whether
the
proceeds
from
the
sale
of
the
bonds
were
capital
or
income.
It
was
correctly
held
that
they
constituted
capital.
The
issue
whether
these
bonds
were
used
or
held
in
the
taxpayer's
business
was
not
in
issue.
I
do
not
see
therefore
how
the
appellant
draws
any
comfort
from
that
decision.
4.
Disposition
For
the
reasons
given
I
would
dismiss
the
appeal
with
costs.
Appeal
dismissed.