Borstad Welding Supplies (1972) Limited v. The Queen, 94 DTC 6205, [1994] 1 CTC 395 (FCTD)

Reed, J.:—On September 9, 1993, reasons for judgment in this matter were issued (Borstad Welding Supplies (1972) Ltd. v. Canada, [1993] 2 C.T.C. 266, 93 D.T.C. 5457). As was noted on the last page of those reasons, I had been asked b counsel at the end of the trial to defer judgment if I should find for the plaintiff. That is, if I found, as I did, that the refillable gas cylinders were not all disposed of on June 1, 1985, I was asked to give counsel an opportunity to make written submissions to me on whether or not the rental income received from the cylinders, during the years subsequent to June 1985, was active business income or income from property. Until after the evidence has been heard at trial, the defendant's position accorded with the plaintiff's and it had been assumed that if the plaintiff was successful on the issue of disposition, the rental income would be characterized as active business income. Written submissions from both parties have now been received and further oral representations heard.

The defendant argues that the rental income was not active business income. The defendant argues that it is more properly characterized as income from property. If the income is active business income, the plaintiff can claim, with respect to that income, the small business deduction pursuant to subsection 125(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

Paragraph 125(7)(a) provides that, for the purposes of subsection 125(1):

“active business carried on by a corporation" means any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade;

Paragraph 125(7)(c) provides:

"income of the corporation for the year from an active business" means the income of the corporation for the year from an active business carried on by it including any income for the year pertaining to or incident to that business, but does not include income for the year from a source in Canada that is a property (within the meaning assigned by subsection 129(4.1));

[Emphasis added.]

Subsection 129(4.1) provides:

For the purposes of paragraph (4)(a) and subsection (6), "income" or "loss" of a corporation for a year from a source in Canada that is a property includes the income or loss from a specified investment business carried on by it in Canada other than income or loss from a source outside Canada but does not include income or loss

(a) from any other business,

(b) from any property that is incident to or pertains to an active business carried on by it, or

(c) from any property used or held principally for the purpose of gaining or producing income from an active business carried on by it.

[Emphasis added.]

Paragraph 125(7)(e) states:

“specified investment business” carried on by a corporation in a taxation year means a business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income from property (including interest, dividends, rents or royalties), unless

(i) the corporation employs in the business throughout the year more than five full- time employees, or

(ii) in the course of carrying on an active business, any other corporation associated with it provides managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than five full-time employees if those services had not been provided;

[Emphasis added.]

And subsection 129(4) states:

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

(A) the amount by which

(I) 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

(II) the aggregate of all amounts each of which is the portion of a taxable capital gain referred to in subclause (I) from the disposition by it of a property, other than a designated property, that may reasonably be regarded as having accrued while the property, or a property for which it was substituted, was property of a corporation other than a Canadian-

controlled private corporation, an investment corporation, a mortgage investment corporation or a mutual fund corporation

exceeds

(B) the amount by which

(I) 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,

exceeds

(Il) the aggregate of all amounts each of which is the portion of an allowable capital loss referred to in subclause (I) from the disposition by it of a property, other than a designated property, that may reasonably be regarded as having accrued while the property, or a property for which it was substituted was property of a corporation other than a Canadian-

controlled private corporation, an investment corporation, a mortgage investment corporation or a mutual fund corporation, and

(ii) all amounts of each of which is the corporation's income for the year from a source in Canada that is property (other than exempt income, any dividend the amount of which was deductible in computing its taxable income for the year or income that, but for paragraph 108(5)(a), would not be income from a property), determined 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 income from that property

exceeds

(iii) the aggregate of amounts each of which is the corporation's loss for the year from a source in Canada that is a property; and

(b) "foreign investment income” of a corporation for a taxation year means 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” and this Act were read without reference to subsection (4.1).

The defendant's position is that the rental income in question is income from property, not business income, and therefore pursuant to the above quoted provisions it is Canadian investment income. Reference was made to the definition of business set out in subsection 248(1) of the Act and to the jurisprudence in: DeVillard v. M.N.R., [1978] C.T.C. 2044, 78 D.T.C. 1047 (T.R.B.) at page 2049 (D.T.C. 1051); Wertman v. M.N.R., [1964] C.T.C. 252, 64 D.T.C. 5158 (Ex. Ct.) at page 266 (D.T.C. 5167); Hollinger v. M.N.R., [1972] C.T.C. 592, 73 D.T.C. 5003 (F.C.T.D.) at pages 599-600 (D.T.C. 5008-09); Buonincontri v. The Queen, [1985] 1 C.T.C. 370, 85 D.T.C. 5277 (F.C.T.D.) at page 372 (D.T.C. 5279); Burri v. The Queen, [1985] 2 C.T.C. 42, 85 D.T.C. 5287 (F.C.T.D.) at pages 46-47 (D.T.C. 5289). These cases establish criteria for distinguishing between business income and income from property. While they all deal with income earned in respect of real property counsel argues that the principles enunciated therein are equally applicable to income earned from the leasing of chattels.

The plaintiff argues that the Act was amended to make it clear that specified investment income does not include business rental income from chattels. In addition, it is argued that there is a presumption that when a corporation which is incorporated for the purposes of conducting business earns income, that income is earned from the business. The decisions in Temax Investments Inc. v. M.N.R., [1991] 1 C.T.C. 2245, 91 D.T.C. 364 (T.C.C.) [sub nom. Mayon Investments Inc. v. M.N.R.], and Canada Trustco Mortgage Co. v. M.N.R., [1991] 2 C.T.C. 2728, 91

D. T.C. 1312 (T.C.C.), together with The Queen v. Rockmore Investments Ltd., [1976] C.T.C. 291, 76 D.T.C. 6156 (F.C.A.) were referred to for the interpretation of the small business deduction provisions.

The criteria for distinguishing between business income and income from property which have been developed in the real estate cases are: (1) the amount of time, attention and labour which the taxpayer spends on the enterprise; (2) whether relationships are created between the taxpayer and others (the public) such that the taxpayer incurs liabilities referrable to the enterprise; (3) the purpose of the enterprise and whether it is directed to the gaining of profit. In the DeVillard case, supra, at page 2051 (D.T.C. 1051) the difference between business income and income from property was said to be "determined by the nature and quantity of services provided to the tenants” of the real property in question. In the Burri Case, supra, at page 46 (D.T.C. 5289) Mr. Justice Strayer described the question to be asked as "did the income come to . . . [the taxpayers] essentially as owners of the property and not as operators of a business".

The defendant refers to the following aspects of the evidence as support for the contention that the income from the cylinders was income from property and not from a business: prior to June 1, 1985, the plaintiff owned and operated an industrial gas and welding products business; it employed approximately fifty persons and conducted its business at various locations in Alberta and British Columbia; the revenue expenses and assets of the company all declined sharply after June 1, 1985; only two employees (Elmer and Roy Borstad) continued to work for the company; most, if not all of the working assets of the company were sold to Union Carbide in May of 1985; the cylinders which were rented to Union Carbide were under its sole possession and control and the plaintiff provided no service with respect to them; the plaintiff had no intention of reentering the industrial gas and welding product business.

The defendant's argument, as I see it, is that after June 1, 1985, the nature of the plaintiff’s activities changed so radically that the plaintiff could no longer be described as conducting an active industrial gas and welding product business. While this may be true, I am not convinced that the income is properly characterized other than business income. The business engaged in after June 1, 1985 may have been different from what it had been before but I do not think it ceased to be a business. In my view, the income in question is properly characterized as income from the operation of a gas cylinder rental business and is business income.

As has been noted, there is a presumption that income earned by a company which has been incorporated for certain business purposes is business income: see Canadian Marconi Co. v. The Queen, [1986] 2 S.C.R. 522, [1986] 2 C.T.C. 465, 86 D.T.C. 6526, especially at page 531 (C.T.C. 470, D.T.C. 6529). This is reflected in paragraph 5 of Interpretation Bulletin IT-73R4:

Where a corporation was incorporated to earn income by doing business, there is a general presumption that profits arising from its activities are derived from a business (or from separate businesses as discussed in IT-206R). Thus, from the time that the activities contemplated commence (see IT-364) until they permanently cease, most corporations will be carrying on one or more businesses . . . .

In the Wertman decision, supra, Mr. Justice Thurlow, at page 266 (D.T.C. 5167), commented on the fact that in many cases income may be accurately described as income from property and just as accurately as income from a business. The two categories overlap. The definition now found in subsection 129(4.1), it seems to me, is in part designed to clarify that overlap by providing that income from property does not include income "from any property that is incident to or pertains to an active business" or "from any property used or held principally for the purpose of gaining or producing income from an active business” [emphasis added]. Thus in the overlap area, insofar as income from property might also pertain to an active business pursuant to subsection 129(4.1) it falls into the business income category and not that of income from property.

I have also considered whether, although the income in question is income from a business, the defendant can gain any support from the distinction between an active and an inactive business which the provisions of the Act seem to contemplate. In Rockmore, supra, Chief Justice Jackett said, at pages 293-94 (D.T.C. 6157):

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.

[Emphasis added.]

In the Canada Trustco case, supra, the following was said at pages 2738-39 (D.T.C. 1319-20):

Prima facie the words “active business" conjure up the notion of a business antonymous in nature to “inactive business", "inert business" or "passive business", and this is reflected in some of the decisions. In Manson v. M.N.R. (1952), 7 Tax A.B.C. 298, 52 D.T.C. 433 (T.A.B.) R.S.W. Fordham, Q.C. said at page 301 (D.T.C. 435): ”It may be a business, but if it is such, I can only regard it as a passive and not an active business”. And some nineteen years later in Rose v. M.N.R., [1971] C.T.C. 810, 68 D.T.C. 5481 (F.C.T.D.) Mr. Justice Collier spoke of a “small commercial business sufficient for it to be characterized as active rather than inactive or passive". In Portigal v. M.N.R., [1967] Tax A.B.C. 1117, 68 D.T.C. 47 (T.A.B.), J.O. Weldon, Q.C., advanced a more extreme view. He said at page 1120 (D.T.C. 50). "One of the main attributes of a personal corporation is that, in the taxation year being scrutinized, it did not carry on an active financial, commercial or industrial business, which simply means that, for all practical purposes, it did not carry on any business.” This approach was carried forward by Mr. Justice Gibson in The Queen v. Cadboro Bay Holdings Ltd., [1977] C.T.C. 186, 77 D.T.C. 5115 (F.C.T.D.).

He said at page 198 (D.T.C. 5122): “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'." And at page 199 (D.T.C. 5123): “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’.” But as will be seen further on in these reasons, this was rejected by Mr. Justice Urie in King George Hotels Ltd. v. The Queen, [1981] C.T.C. 87, 81 D.T.C. 5082 (F.C.A.).

[Emphasis added.]

In King George Hotels Ltd. v. The Queen, [1981] C.T.C. 87, 81 D.T.C. 5082 (F.C.A.), Mr. Justice Urie stated (C.T.C. 90-91, D.T.C. 5084):

Before disposing of the appeal I think that it should be stressed that whether a business is an active or inactive one is, as earlier pointed out in the authority of the Rockmore case, supra, one of fact dependent on the circumstances of each case. That being so, it is neither possible nor desirable to lay down any rule or principle applicable in every case. It cannot be said, therefore, in my view, that income from “other than an active business" necessarily means that derived from a business that “is in an absolute state of suspension” or one "devoid of any quantum of business activity” as has been said in earlier decisions in the Trial Division. In any given case, the business may be of that kind but whether or not it is, is not necessarily determinative of the issue, the resolution of which depends on the fact finder's view of the true nature of the business based on the facts in the particular case. The quantum of activity may well vary from case to case but still it is necessary for the Court to weigh all of the evidence to characterize the quality of the particular business.

[Emphasis added.]

Both counsel agree, however, that a distinction between an active and an inactive business is no longer a relevant one. It is agreed that the provisions of the Act, as presently worded, characterize any business carried on by a corporation as an active business unless it falls within the exceptions specified, that is, unless it is a personal services business or a specified investment business. The comments of Judge Brulé in Temax Investments, supra, at pages 2250-51 (D.T.C. 368) are cited:

The respondent's argument is centred around a complete departure from past jurisprudence. The new provision was enacted to disqualify from the small business deduction corporations which would otherwise qualify under the criteria of section 125. The principal purpose of the corporations at issue was to derive income from interest, meeting thereby the criteria set out in paragraph 125(6)(h). The respondent submits that the level of activity is irrelevant, what is important is the nature of the income. Since over 96 per cent of the income generated by the said corporations is interest income from mortgages, one must conclude that they are from a “specified investment business".

It would seem that the purpose of the amendment was to distinguish a "specified investment business" from any other business. Any other business would simply be labelled "active" and fall into the residual category in respect of which the lower rate of corporate tax is enjoyed.

[Emphasis added.]

There is no doubt the renting of chattels (the leasing of property other than real property) is expressly excluded by paragraph 125(7)(e) from the definition of a specified investment business. It therefore does not fall into the exceptions described in paragraph 125(7)(a). In addition, since income from a property source is defined by subsection 129(4.1) to include income from a specified investment business but to exclude income from any other business and since the leasing of chattels is expressly stated not to be a specified investment business both counsel agree that income from the business of leasing chattels is presumptively active business income.

I admit that I would not initially have read the amended provisions of the Act in this way. I was inclined to see the amendments, which created express exceptions to the category of an "active business”, as being addressed to the type of business activity rather than to the degree of activity or inactivity which was involved. It is clear that an "active business” is defined to include all types of business [1] except personal service businesses and some investment businesses. In any event, I have been persuaded by counsels’ explanation that the proper interpretation of paragraph 125(7)(a) is to read the reference to any business as presumptively including all business income (be it from an active or inactive business) as falling within the category of active business income unless the business falls within one of the exceptions, that is, unless it is a personal service business or a specified investment business. As indicated, I have already concluded that the income in question was business income. The plaintiff’s claim will therefore be allowed. The assessments in question will be referred back to the Minister for reassessment in accordance with these reasons. The plaintiff is entitled to its costs of the action. In his written submissions, counsel for the plaintiff made representations with respect to certain items of cost and the level thereof. I find those representations appropriate and costs will be awarded on that basis.

Claim allowed.