Mackay
J.:
This
is
an
appeal
on
behalf
of
Her
Majesty
the
Queen
from
a
judgment
of
the
Tax
Court
of
Canada
,
rendered
in
1991.
By
that
decision
Associate
Chief
Judge
Christie
allowed
the
defendant’s
appeal
from
reassessment
of
its
liability
for
tax
under
the
Income
Tax
Act
(the
“Act”)
in
respect
of
1984
and
1985
taxation
years
of
a
predecessor
of
the
defendant
corporation.
When
the
appeal
was
heard
there
was
no
dispute
between
the
parties
about
most
of
the
basic
facts
or
about
the
amounts
at
issue
in
the
reassessments
of
the
defendant’s
income
for
the
years
in
question.
Some
matters
that
were
at
issue
between
the
parties
when
the
matter
was
before
the
Tax
Court
had
been
resolved,
and
the
only
issue
outstanding
when
this
action
was
heard
is
whether
certain
income
of
a
controlled
foreign
affiliate
of
the
defendant’s
predecessor
in
the
years
in
question
was
income
from
an
active
business
or
whether
it
was
foreign
accrual
property
income
(“FAPI”)
of
the
defendant’s
predecessor
within
s-s.
95(
I)(b)of
the
Act
as
it
applied
in
the
years
in
question.
If
classed
as
the
former,
as
it
was
by
the
Tax
Court
judgment,
in
the
circumstances
of
the
case
it
was
not
taxable
as
income
of
the
defendant.
If
classed
as
FAPI,
the
amounts
as
agreed
upon
are
income
at-
tributable
to
the
defendant
and
assessable
for
tax
in
Canada
pursuant
to
s-s.
91(1)
of
the
Act.
In
my
opinion,
the
learned
Tax
Court
Judge
was
right
in
finding
that
the
income
of
the
foreign
affiliate
here
in
issue
was
not
FAPI
under
the
Act,
and
was
not
assessable
as
income
of
the
defendant’s
predecessor.
An
order
goes
dismissing
the
plaintiff’s
action,
and
thus
the
appeal
from
the
Tax
Court
decision,
for
the
reasons
that
follow.
The
background
The
defendant
is
a
corporation
formed
by
Letters
Patent
of
Amalgamation
effective
December
31,
1985,
pursuant
to
the
Loan
Companies
Act
of
Canada,
as
it
then
applied
.
Its
predecessors
were
the
former
Canada
Trustco
Mortgage
Company
and
the
former
Canada
Permanent
Mortgage
Corporation
(“Canada
Permanent”),
each
of
which
former
corporations
had
a
long
history
in
Canada.
Upon
its
formation
the
defendant
became
liable
for
income
tax
indebtedness
of
its
predecessors
and
thus
of
Canada
Permanent
for
the
years
1984
and
1985.
The
latter
company,
in
December
1983,
had
provided
for
the
incorporation
of
Canada
Permanent
Trust
Company
B.V.
in,
and
under
the
laws
of,
the
Netherlands.
That
corporation,
which
changed
its
name
in
October
1986,
after
the
formation
of
the
defendant,
to
Canada
Trust
Company
B.V.,
is
referred
to
hereafter
simply
as
“B.V.”
At
all
times
relevant
in
this
action,
within
the
meaning
of
paragraph
95(1
)(a)
of
the
Act,
B.V.
was
a
wholly-
owned
“controlled
foreign
affiliate”
of
Canada
Permanent,
and
B.V.’s
registered
office
was
located
in
Amsterdam.
Canada
Permanent,
until
its
amalgamation
in
1985,
was
part
of
the
Genstar
group
of
companies.
On
December
14,
1983,
Permanent
Home
Trade
Plan
Ltd.,
a
wholly-owned
Canadian
subsidiary
of
Canada
Permanent,
issued
additional
shares
to
Canada
Permanent
for
$46,335,000.00.
The
following
day
Permanent
Home
Trade
Plan
Ltd.
purchased
a
US
$55.5
million
promissory
note
of
Genstar
Mortgage
Corporation
from
Genstar
Finance
Netherlands
B.V.
(the
“Genstar
note”).
The
principal
sum
under
the
note
was
payable
by
US
$4,250,000.00
per
annum
from
January
31,
1985
to
January
31,
1994
and
thereafter
by
payment
of
$2.6
million
on
the
same
annual
date
until
January
31,
1999,
and
interest
was
payable
quarterly
on
the
out-
standing
principal.
On
the
same
day
as
it
purchased
the
Genstar
note,
December
15,
1983,
Permanent
Home
Trade
Plan
Ltd.
sold
the
promissory
note
to
B.V.
for
the
price
it
had
paid,
a
discount
price
of
US
$43,343,750.00,
the
appraised
value
of
the
note
at
the
time,
which
B.V.
paid
by
cash
in
the
amount
of
US
$6,191,964.00
and,
for
the
balance,
by
a
noninterest
bearing
note
for
US
$37,151,786.00.
In
the
result
B.V.
earned
interest
on
the
Genstar
note
for
the
last
15
days
of
December
1983;
for
1984
it
received
funds
as
the
initial
payment
under
the
note
as
well
as
the
quarterly
interest
payments
under
the
note,
and
it
earned
bank
interest
on
those
funds
received
from
the
Genstar
note
that
were
subsequently
deposited
on
short
term
with
B.V.’s
bank.
In
1985,
it
received
similar
payment
and
income,
and
it
also
received
income
from
interest
paid
on
mortgages
purchased
that
year
from
Canadian
approved
lenders
under
the
National
Housing
Act
(sometimes
hereafter
“N.H.A.”).
Those
purchases
were
made,
after
exploring
other
opportunities
for
investing
B.V.’s
funds
as
they
became
available,
when
it
was
decided
to
invest
in
mortgages
on
real
property
located
in
Canada.
Pursuant
to
written
sales
and
administration
agreements,
Canada
Permanent
and
its
related
corporation
Canada
Permanent
Trust
Company,
transferred
N.H.A.
mortgages
to
B.V.
for
cash,
in
the
following
amounts:
January
24,
|
-
|
from
Canada
Permanent,
$1,173,855.33
|
1985
|
|
|
from
Canada
Permanent
Trust
Company,
|
|
$6,830,190.53
|
March
1,
1985
|
-
|
from
Canada
Permanent,
$583,541.33
|
|
from
Canada
Permanent
Trust
Company,
|
|
$2,971,186.59
|
May
1,
1985
|
-
|
from
Canada
Permanent,
$1,316,451.45
|
|
from
Canada
Permanent
Trust
Company,
|
|
$5,170,121.03
|
Each
of
these
purchases
was
of
a
block
of
mortgages
and
subject
to
a
standard
agreement
which,
inter
alia,
provided
that
the
vendor
company,
for
a
fee,
would
continue
to
administer
the
mortgages
concerned
as
trustee
for
B.V.,
the
beneficiary,
and
that
the
administering
trustee
could
elect
to
buy
back
the
mortgages
at
any
time
in
accord
with
a
prescribed
formula.
The
parties
agree
that
the
arrangements
for
concluding
and
administering
the
mortgages
that
were
transferred
to
B.V.,
i.e.
the
screening
of
pro-
spective
borrowers
for
credit
worthiness,
ensuring
that
the
mortgages
were
guaranteed
under
the
National
Housing
Act,
all
administration
of
individual
mortgages,
and
selection
of
mortgages
included
in
the
various
block
purchases,
were
completed
by
Canada
Permanent
or
by
Canada
Permanent
Trust
Company.
All
mortgages
purchased
were
secured
approved
loans.
The
transferor
companies
were
approved
lenders
under
the
National
Housing
Act;
B.V.
was
not,
and
the
arrangement
for
continuing
administration
by
approved
lenders
permitted
maintenance
of
the
insurance
guarantee
on
the
mortgages,
in
accord
with
that
Act.
The
Minister
of
National
Revenue
reassessed
the
defendant
for
its
1984
taxation
year
on
the
basis
that
net
income
from
bank
interest
earned
by
B.V.
was
FAPI,
of
a
controlled
foreign
affiliate
of
a
predecessor
corporation,
valued
at
$389,543.00.
The
assessment
for
the
1985
taxation
year,
concerned
similar
income
from
bank
interest
and
also
included
the
income
earned
by
B.V.
on
mortgages
held
by
it,
income
assessed
at
$1,802,263.00.
The
parties
subsequently
agreed
on
different
amounts
for
the
years
in
question,
if
the
income
in
question
is
determined
to
be
FAPI,
which
is
the
issue
to
be
resolved
by
this
appeal
from
the
decision
of
the
Tax
Court.
In
the
assessments
for
1984
and
1985
the
Minister
of
National
Revenue
relied
upon
a
number
of
assumptions.
There
is
no
dispute
about
those
except
for
the
assumption
that
“B.V.
did
not
carry
on
an
active
business”.
That
assumption
is
not
accepted
by
the
decision
of
the
Tax
Court,
from
which
this
appeal
on
behalf
of
Her
Majesty
is
raised.
Christie
A.C.J.
T.C.
found
that
B.V.
did
carry
on
an
active
business,
and
that
its
income
here
in
question
was
from
an
active
business
and
thus
was
not
FAPI
within
s-
s.95(
1
)(b)
of
the
Act.
In
dealing
with
that
issue
the
parties
before
me
had
different
views
about
the
application
of
the
Act.
Two
issues
were
raised,
neither
of
which
appear
to
have
been
directly
addressed
in
earlier
argument
before
the
Tax
Court.
The
issues
For
the
plaintiff
it
is
urged,
first,
that
the
income
in
question
may
be
considered
FAPI
in
light
of
its
source
and
the
manner
in
which
it
was
earned
even
if
other
income
of
B.V.,
from
other
sources,
is
considered
to
be
derived
from
an
active
business.
For
the
defendant
it
is
urged
that
it
is
the
general
nature
of
B.V.’s
business
that
establishes
an
active
business
is
carried
on,
and
all
income
earned
in
that
business
is
not
FAPI
of
its
Canadian
parent
corporation
under
s-s.
95(1)(b).
The
second
issue
raised
in
argument
before
me
concerns
the
temporal
application
of
the
concept
of
active
business.
Thus,
it
was
urged
by
counsel
for
Her
Majesty
that
whatever
the
assessment
of
B.V.’s
business
in
1985,
it
could
hardly
be
said
that
it
carried
on
an
“active
business”
in
1984.
For
the
sake
of
clarity
it
may
be
useful
to
summarize
the
income
of
B.V.
by
source
and
its
classification
by
the
Minister’s
assessments.
In
the
years
in
question
B.V.’s
income
was
derived
from
three
different
sources.
In
both
years
income
was
earned
from
the
Genstar
note,
that
is
from
the
interest
paid
quarterly
on
the
note,
and
some
portion
of
the
annual
payment
of
principal,
and
the
parties
were
agreed
that
this
income
was
not
FAPI.
In
both
years
B.V.
also
earned
income
from
short
term
investments
in
bank
deposits
of
the
proceeds
received
as
payments
under
the
Genstar
note,
pending
decisions
on
other
forms
of
investment.
That
income
in
both
years
was
classed
by
the
Minister
as
FAPI.
In
1985
interest
earned
on
the
investments
made
in
that
year
in
NHA
mortgages
was
also
classed
as
FAPI.
A
summary
table
of
the
income
by
source
and
as
classed
by
the
Minister
is
as
follows:
Income
source
|
1984
|
1985
|
Classed
as
|
|
earned
|
earned
|
|
Income
from
payments
received
|
|
in
relation
to
Genstar
note
|
yes
|
yes
|
(not
FAPI)
|
Income
from
bank
deposits
of
in
|
yes
|
yes
|
(FAPI)
|
come
received
from
Genstar
note
|
|
Income
from
NHA
mortgage
|
|
portfolio
|
(none)
|
yes
|
(FAPI)
|
When
the
matter
was
before
the
Tax
Court
it
would
appear
that
the
possibility
of
classifying
only
a
portion
of
B.V.’s
income
as
FAPI
was
not
addressed
directly,
even
though
the
classification
by
the
Minister
was
of
some,
but
not
all,
income
as
FAPI,
apparently
by
reference
to
the
source
of
the
income.
Associate
Chief
Judge
Christie,
after
finding
that
the
business
of
B.V.
was
an
active
business,
taking
into
account
its
various
activities
for
the
whole
period,
and
with
some
reference
to
its
subsequent
evolution,
found
that
all
of
the
income
in
question
was
generated
by
an
active
business
carried
on
by
B.V.
even
though
part
of
the
income
was
the
result
of
work
done
for
it
by
independent
contractors,
1.e.,
the
transferors
of
the
mortgage
portfolios.
Thus,
none
of
the
income
in
question,
regardless
of
its
source,
and
regardless
of
the
year
in
which
it
was
earned,
was
considered
FAPI
under
s-s.
95(1
)(b)
of
the
Act,
since
it
was
all
income
earned
from
an
active
business.
The
statutory
provisions
in
question
Under
the
Act
provision
is
made,
in
relation
to
the
computation
of
income,
in
Division
B,
concerning
Computation
of
Income,
Subdivision
i,
concerning
Shareholders
of
corporations
not
resident
in
Canada,
for
certain
income
to
be
included
as
income
of
a
Canadian
shareholder.
Within
that
subdivision,
ss.
90
and
91
provide
that
income
of
a
Canadian
taxpayer
is
to
include
certain
amounts
in
respect
of
dividends
received
or
other
payments
on
behalf
of
shares
held
in
a
corporation
not
resident
in
Canada.
Other
sections
deal
with
aspects
of
the
earnings
from
foreign
corporations,
and
s.
95
deals
with
“foreign
accrual
property
income”,
here
called
“FAPI”.
The
statutory
provisions
are
complex,
but
it
is
agreed,
and
it
is
clear,
that
FAPI
as
provided
for
in
that
section,
for
the
years
in
question,
did
not
include
income
from
an
active
business.
At
the
times
relevant
for
this
matter,
s.
95
included
the
following
provisions,
relevant
in
this
matter:
95.(1)
In
this
subdivision,
(a)
“controlled
foreign
affiliate”,
at
any
time,
of
a
taxpayer
resident
in
Canada
means
a
foreign
affiliate
of
the
taxpayer
that
was,
at
that
time,
controlled,
directly
or
indirectly
in
any
manner
whatever,
by
(i)
the
taxpayer,
(a.l)
“excluded
property”
of
a
foreign
affiliate
of
a
taxpayer
means
any
property
of
the
foreign
affiliate
that
is
(i)
used
or
held
by
the
foreign
affiliate
principally
for
the
purpose
of
gaining
or
producing
income
from
an
active
business,
other
than...
(b)
“foreign
accrual
property
income”
of
a
foreign
affiliate
of
a
taxpayer,
for
any
taxation
year
of
the
affiliate,
means
the
amount,
if
any,
by
which
the
aggregate
of
(i)
the
affiliate’s
incomes
for
the
year
from
property
and
businesses
other
than
active
businesses,
[A,
B
and
C
clauses
set
out
exceptions,
none
of
which
are
applicable
in
the
case
of
B.V.’s
income]
(2)
For
the
purposes
of
this
subdivision,
(a)
in
computing
the
income
from
an
active
business
of
a
foreign
affiliate
of
a
taxpayer
there
shall
be
included
(i)
any
income
from
sources
in
a
country
other
than
Canada
that
would
otherwise
be
income
from
property
or
a
business
other
than
an
active
business,
to
the
extent
that
it
per-
tains
to
or
is
incident
to
an
active
business
carried
on
in
a
country
other
than
Canada
by
the
affiliate
or
any
other
nonresident
corporation
with
which
the
taxpayer
does
not
deal
at
arm’s
length,...
The
positions
of
the
parties
For
the
plaintiff
it
is
urged
that
the
Court
should
interpret
subparagraph
95(1
)(b)
in
light
of
a
perceived
purpose
of
legislation
concerning
FAPI,
that
is,
to
preclude
deferral
of
income
for
tax
purposes
in
circumstances
where
a
corporation’s
controlled
foreign
affiliate
has
little
or
no
tax
applicable
in
the
country
in
which
it
is
situate,
and
thus
income
earned
would
otherwise
be
free
of
tax.
Here,
at
the
time
in
question,
B.V.
had
little
or
no
tax
applicable
to
its
income
earned
in
the
Netherlands
in
accord
with
a
ruling
of
Netherlands
tax
authorities
under
the
laws
of
that
country,
obtained
shortly
before
B.V.
was
established.
By
1987
those
laws
of
the
Netherlands
were
amended
to
eliminate
the
tax
free
status
of
income
earned
from
mortgages
held
on
real
property
abroad,
in
accord
with
changes
negotiated
in
Canada-Netherlands
tax
treaty
arrangements,
and
any
mortgages
held
by
B.V.
at
that
time
were
sold
back
to
the
administrators
under
the
agreements
earlier
concluded
for
B.V.
to
acquire
the
mortgages.
In
light
of
the
general
purpose
of
FAPI
legislation,
it
is
urged
that
the
income
of
B.V.
from
interest
on
bank
deposits
in
both
1984
and
1985,
and
in
1985
income
from
mortgages
on
properties
situate
in
Canada
and
guaranteed
under
the
N.H.A.
program,
was
FAPI.
In
particular,
for
the
plaintiff
it
was
urged
that
the
latter
source
of
income,
the
returns
on
mortgages,
was
a
result
of
a
simple
transfer
of
mortgage
holdings
of
Canadian
corporations,
on
real
property
in
Canada,
to
a
wholly
owned
foreign
affiliate.
It
is
urged
that
if,
in
the
result,
the
income
is
not
FAPI,
the
corporations
have
avoided
tax
in
Canada
and
in
the
country
of
the
foreign
affiliate,
and
enjoy
virtually
tax
free
status
for
income
earned
from
the
mortgages
transferred.
I
observe
that
it
is
not
that
outcome,
but
rather
the
provisions
of
the
Income
Tax
Act
which
determine
whether
tax
is
payable
on
the
income
here
in
question.
For
the
plaintiff
it
is
also
urged
that
in
fact
the
defendant
did
not
carry
on
an
active
business
particularly
in
1984,
and
its
income
from
interest
on
bank
deposits
cannot
properly
be
considered
income
from
an
active
business.
It
is
said
that
source
of
income,
contrary
to
its
description
by
Christie,
A.C.J.
T.C.,
cannot
be
interest
earned
on
funds
that
were
necessarily
inci-
dental
to
the
active
business
of
B.V.
since
it
then
had
no
active
business.
In
my
view,
this
argument
does
not
deal
with
the
basis
on
which
Christie,
A.C.J.
T.C.,
classed
the
bank
interest
as
income
from
an
active
business.
The
argument
ignores
his
assessment
of
the
activities
of
officers
of
B.V.
in
examining
various
proposals
for
expanding
the
role
and
lending
activity
of
B.V.,
and
it
assesses
the
company’s
activity
solely
in
relation
to
the
source
of
the
income
earned
from
bank
deposits,
admittedly
a
restricted
source.
Moreover,
it
overlooks
the
plaintiff’s
own
acceptance
that
B.V.
did
carry
on
an
active
business,
an
acceptance
implicit
from
the
Minister’s
acknowledgment
that
income
from
payments
on
the
Genstar
note
was
not
FAPI.
In
addition
to
interest,
some
portion
of
the
annual
payments
on
the
note
must
have
been
income
in
light
of
the
discount
price
at
which
the
note
had
been
acquired.
For
the
plaintiff
it
is
also
urged
that
the
limited
view
of
B.V.’s
role
held
by
its
managing
director
at
the
time,
the
limited
role
it
actually
played
in
financial
activities,
the
fact
that
B.V.
had
no
employees
of
its
own
and
did
not
itself
perform
any
administrative
functions
in
relation
to
the
mortgages
purchased,
and
that
there
was
no
significant
risk
to
B.V.’s
assets
in
the
operation
of
its
business,
all
point
to
the
conclusion
that
it
did
not
carry
on
an
active
business.
The
defendant
argues
that
B.V.,
acting
in
accord
with
objectives
set
out
in
its
articles
of
incorporation,
is
presumed
to
be
carrying
on
a
business,
within
the
meaning
of
that
term
as
used
in
the
Act,
and
in
the
ordinary
dictionary
definition
of
the
term.
That
business,
in
light
of
the
activities
carried
on
by
the
directors
on
behalf
of
B.V.,
it
is
urged,
was
an
active
business.
It
was
no
less
an
active
business
because
various
activities
were
considered
but
for
a
variety
of
reasons
were
not
pursued,
or
because
it
had
no
employees
of
its
own
but
relied
upon
services
of
staff
of
another
company
for
B.V.’s
purposes.
It
is
urged
for
the
defendant
that
its
active
business
was
carried
on
in
1984
and
1985,
and
all
of
the
income
derived
from
payments
under
the
Genstar
note,
from
bank
interest
earned
on
its
short
term
bank
deposits
of
revenues
from
the
Genstar
note,
and
from
its
investment
in
mortgages,
was
income
from
an
active
business,
and
thus
was
not
FAPI
within
subparagraph
95(1
)(b)
of
the
Act.
Analysis
Counsel
for
the
parties
essentially
agree
that
in
construing
the
Act,
including
paragraph
95(1
)(b),
one
must
consider
the
matter
in
light
of
the
context
of
its
purpose,
as
it
may
be
derived
from
the
words
of
the
Act
and
as
it
may
be
evident
from
those
words
in
the
context
of
the
Act
as
a
whole.
At
the
relevant
time
there
was
no
definition
of
“active
business”
as
that
term
is
used
in
paragraph
95(1
)(b).
It
has
since
been
defined
for
purposes
of
FAPI
by
amendment
of
the
Act
in
1995,
following
the
decision
of
the
Tax
Court
in
this
case.
That
amendment
expressly
excluded
from
“active
business”
of
a
controlled
foreign
affiliate
an
“investment
business
carried
on
by
the
affiliate...”.
Thus
the
amendment
would
appear
to
exclude
the
income
in
issue
here
from
income
gained
from
an
active
business.
From
the
amendment
it
seems
the
income
here
in
question
would
now
be
FAPI.
That
amendment
has
no
application
in
this
case.
The
term
“business”
is
defined
in
s-s.
248(1)
of
the
Act
as
including
“a
profession,
calling,
trade,
manufacture
of
any
kind
whatever
and,
except
for
the
purposes
of
[specified
provisions
not
here
relevant],..an
adventure
or
concern
in
the
nature
of
trade
but
does
not
include
an
office
or
employment”.
That
definition
is
broad
indeed,
and
in
my
opinion
there
is
nothing
in
the
context
of
paragraph
95(1
)(b)
as
it
applied
in
the
years
in
question,
that
would
lead
one
to
consider
that
Parliament
intended
“business”
in
that
paragraph
to
be
construed
other
than
broadly,
in
accord
with
s-s.
248(1).
Here,
the
objects
of
B.V.
as
established
by
its
articles
of
incorporation
included
the
following:
to
participate
in,
finance
and
administer
other
corporations,
companies
and
enterprises;
to
take
up
loans
and
to
lend
money
and
in
general
to
enter
into
all
forms
of
financial
transactions;...
It
was
urged
for
the
plaintiff
that
this
statement
was
mere
“boiler
plate”
without
any
particular
significance
for
B.V.,
but
the
evidence
for
the
defendant
is
that
the
objects
are
standard
provisions
recognized
for
registration
of
a
financial
corporation
in
the
Netherlands.
Whether
the
objects
of
B.V.
stated
in
its
articles
are
standard
or
not,
there
is
no
doubt
they
do
define
the
lawful
activities
of
the
company.
In
my
opinion
its
activities
from
late
1983
through
1985
and
later
were
within
its
objects,
in
particular
within
the
scope
of
the
terms
“to
take
up
loans
and
to
lend
money
and
in
general
to
enter
into
all
forms
of
financial
transactions”.
These
are
clearly
business
objectives.
Acting
within
its
objectives,
it
was
carrying
on
business.
Income
derived
from
its
activities
within
its
objects
is
presumed
to
be
income
from
a
business.
There
is
no
basis
in
the
facts
of
this
case
to
conclude
otherwise.
I
turn
to
the
facts
in
this
case
after
considering
further
the
statutory
provision
and
jurisprudence
concerning
the
meaning
of
“active
business”
in
other
provisions
of
the
Act.
The
history
of
the
use
of
the
term
“active
business”
in
the
Income
Tax
Act
is
traced
in
the
decision
of
Christie,
A.C.J.
T.C.
Other
than
that
decision
there
is
no
jurisprudence
that
deals
with
that
phrase
as
used
in
s-s.
95(1)(b),
but
in
that
decision
the
learned
Associate
Chief
Judge,
with
whom
I
would
agree,
made
reference
to
jurisprudence,
dealing
with
those
same
words
used
in
another
section
of
the
Act,
in
accord
with
established
principle
for
interpretation
of
the
same
words
used
by
Parliament
in
different
provisions
in
the
same
statute.
The
words
were
formerly
used
without
any
further
definition
in
s-s.
125(
1
)(a),
as
it
applied
prior
to
1979,
in
relation
to
taxation
applicable
to
small
businesses,
or
more
specifically
to
Canadian
controlled
private
corporations.
That
provision
allowed
a
deduction
in
tax,
otherwise
payable
by
such
a
corporation,
of
an
amount
calculated
in
part
by
reference
to
income
from
a
qualified
“active
business”
carried
on
in
Canada.
I
agree
with
Christie
A.C.J.
T.C.
that
certain
cases
dealing
with
the
application
of
the
former
s-s.
125(1
)(a),
are
useful
in
considering
the
term
“active
business”
as
it
was
applicable
in
s-s.
95(1
)(b)
in
the
case
at
bar.
Those
cases
include
M.R.T.
Investments
Ltd.
v.
Z?.,
on
appeal
cited
separately
as
R.
v.
Rockmore
Investments
Ltd.
'2;
M.R.T.
Investments
Ltd.
v.
R.
;
ESG
Holdings
Ltd.
v.
R..
In
addition,
Christie,
A.C.J.
T.C.
also
made
reference
to
King
George
Hotels
Ltd.
v.
R..
From
these
cases
it
seems
clear
that
there
is
no
quantitative
measure
of
activity
that
indicates
an
active
business
is
carried
on
by
a
company
engaged
in
financial
activities
within
the
scope
of
its
objects.
In
the
cases
involving
M.R.T.,
Rockmore
and
ESG.,
the
incomes
from
all
three
companies
were
ultimately
found
to
be
from
active
businesses.
All
three
operated
out
of
the
same
premises
and
relied
on
the
services
of
the
same
staff
provided
by
a
management
company,
and
all
three
were
engaged
largely
in
the
business
of
lending
money
under
mortgages
arranged,
for
the
most
part,
through
agents
who
were
paid
commissions
by
the
borrowers.
In
the
taxation
year
there
in
question,
1972,
M.R.T.
had
income
of
approximately
$12,500,
largely
interest
from
some
14
mortgages
valued
at
some
$104,000;
Rockmore
had
income
of
about
$4,600
from
interest
under
three
mortgages
and
modest
return
from
a
small
property
it
held;
and
ESG
had
interest
income
of
some
$12,000
from
ten
mortgages
valued
at
some
$106,000.
In
the
case
of
M.R.T.
and
Rockmore,
the
trial
judge
found
incomes
to
be
from
active
businesses,
but
in
the
case
of
ESG,
which
operated
exclusively
by
a
management
company,
not
by
its
own
officers
or
staff,
directors
or
shareholders,
his
lordship
found
its
operations
were
not
an
active
business.
The
Crown’s
appeals
in
M.R.T.
and
Rockmore
were
dismissed
and
the
appeal
of
ESG
was
allowed
so
that
in
the
final
result
in
all
three
cases
the
income
in
issue
was
found
to
be
from
active
businesses.
The
cases
are
helpful
further
in
that
the
trial
judge’s
reference
to
the
companies’
activities
prior
and
subsequent
to
the
year
in
question,
as
relevant
to
the
assessment
of
the
nature
of
the
business
as
active,
was
not
undercut
on
appeal.
In
the
Court
of
Appeal,
Chief
Justice
Jackett
commented
that
in
considering
whether
there
is
an
“active
business”
one
must
first
determine
whether
there
is
a
business
within
the
definition
in
s-s.
248(1),
and
then
one
determines
as
a
fact
whether
in
the
circumstances
the
business
is
an
“active
business”
within
the
intent
of
the
section
in
question,
in
those
cases
s.
125.
In
King
George
Hotels
Ltd.
v.
/?.
Mr.
Justice
Urie,
for
the
Court
of
Appeal,
in
disposing
of
an
appeal
concerning
whether
income
derived
from
a
property
management
business
was
income
from
“a
business
other
than
an
active
business”
within
s-s.
129(4)(a)
of
the
Act,
commented:
it
Should
be
stressed
that
whether
a
business
is
an
active
or
inactive
one
is,
as
earlier
pointed
out
on
the
authority
of
the
Rockmore
case...,
one
of
fact
dependant
on
the
circumstances
of
each
case....
The
taxpayer’s
appeal
was
dismissed,
upholding
the
decision
of
the
trial
judge
who
had
determined
as
a
fact,
after
reviewing
the
evidence,
that
the
business
there
in
question
was
an
active
business.
For
the
plaintiff
it
is
urged
that
R.
v.
Ensite
LtdV,
sets
a
test,
not
here
met
by
B.V.,
for
establishing
whether
the
income
in
question
can
be
considered
derived
from
an
active
business.
That
test
is
whether
the
property
from
which
the
income
is
derived
was
employed
and
risked
in
the
business.
Here
it
is
urged
the
nature
of
the
property,
that
is
bank
deposits
and
insured
mortgages
on
real
estate
in
Canada
presented
no
real
risk
for
B.V.
I
am
not
persuaded
that
the
analogy
drawn
from
the
decision
in
Ensite
is
relevant.
The
test
enunciated
does
not
relate
to
assessing
whether
business
is
an
active
business
but
rather
whether
the
income
in
issue
there,
interest
earned
on
Philippine
bank
deposits,
on
the
facts
of
that
case,
was
“foreign
investment
income”
qualifying
within
s-s.
129(4),
in
a
claim
for
a
dividend
refund
under
s.
129(
1
)(a)
of
the
Act.
While
s-s.
129(4)
does
define
“foreign
investment
income”
partly
by
reference
to
income
from
a
source
outside
Canada
that
is
a
business
other
than
an
active
business,
the
test
set
by
the
Supreme
Court
relates
not
to
the
nature
of
the
business
carried
on
abroad
but
to
the
classification
of
income
from
funds
in
a
business
other
than
an
active
business.
Those
funds
were
found
by
the
Court
of
Appeal
to
have
been
used
or
held
in
the
carrying
on
of
the
taxpayer’s
business,
an
active
business,
and
thus
the
interest
earned
was
not
foreign
investment
income,
a
decision
upheld
by
the
Supreme
Court.
For
the
plaintiff
it
is
also
urged,
on
the
authority
of
Ellanian
Holdings
Inc.
v.
Minister
of
National
Revenue™
that
the
Court
should
conclude
that
B.V.
in
this
case
was
not
engaged
in
the
business
of
lending
money.
I
do
not
find
that
decision
relevant
here.
In
that
case
Sarchuk
T.C.J.
found
no
evidence
to
support
a
claim
that
the
taxpayer
was
in
the
business
of
lending
money
and
thus
no
deduction
was
allowed
for
losses
arising
from
defaults
on
mortgages
held
as
an
investment
by
the
taxpayer
which
was
otherwise
engaged
entirely
in
sale
of
stationary
and
supplies.
In
this
case
there
is
evidence
of
B.V.’s
activities
in
lending
money,
of
the
importance
of
that
activity
within
its
wider
object
of
acting
as
a
financial
corporation,
and
there
is
no
question
that
it
did
so
act.
The
only
question
here
raised
is
whether
its
activities
in
the
years
in
question
demonstrate
that
it
was
engaged
then
in
“active
business”.
Determining
that
issue,
within
the
context
of
s.
95(1
)(b)
is
this
Court’s
task.
We
have
seen
that
provision
defines
FAPI,
in
part,
as
“the
amount
if
any,
by
which
the
aggregate
of
(i)
the
affiliate’s
incomes
for
the
year
from
property
and
businesses
other
than
active
businesses...”.
Those
words
in
my
opinion
do
not
permit
the
separate
treatment
for
tax
purposes
of
portions
of
the
total
income
of
an
affiliate
engaged
in
active
business,
as
though
some
portions
from
certain
sources
are
not
from
an
active
business.
The
word
“incomes”
in
my
view
relates
to
“property”
and
to
“businesses
other
than
active
businesses”;
it
does
not
relate
to
streams
of
income
classified
by
their
source.
If
I
am
correct,
the
Minister’s
reassessments
must
relate
to
the
whole
of
the
income
of
B.V.,
not
merely
in
1984
and
1985
to
income
from
bank
deposits.
Otherwise
all
such
interest
of
foreign
affiliates
would
be
considered
FAPI.
Further,
those
reassessments
could
not
relate
to
income
earned
on
mortgages
in
1985
simply
because
the
properties
secured
were
located
in
Canada.
If
the
mortgages
were
held
on
properties
elsewhere,
e.g.
in
the
U.K.,
the
business
of
B.V.
would
have
been
no
more
or
less
“active”,
and
the
interest
would
not,
in
my
opinion,
be
FAPI.
The
source
of
the
stream
of
revenue
flowing
into
B.V.’s
total
income
is
not
the
determining
factor
in
assessing
whether
that
income
is
FAPI
under
s.
95(1
)(b).
In
my
opinion,
that
assessment
must
relate
to
the
totality
of
B.V.’s
income
in
light
of
the
evidence
of
the
nature
of
its
business
as
an
entity,
as
an
active
business
or
otherwise.
On
the
evidence
adduced
I
am
persuaded
that
in
the
years
in
question,
1984
and
1985,
B.V.
carried
on
an
active
business.
That
evidence
is
essentially
the
testimony,
and
documentary
evidence
in
support
of
that,
provided
by
Mr.
A.J.
Unsworth,
the
first
managing
director
of
B.V.,
whose
evidence
was
uncontroverted.
I
note
that
no
evidence
was
adduced
on
behalf
of
the
plaintiff.
The
activities
of
Unsworth
on
behalf
of
B.V.,
undertaken
with
direction
and
approval
of
his
superiors
in
the
Genstar
and
later
Canada
Trustco
operations,
and
of
his
supervisory
directors
within
B.V.,
included
the
following.
In
1983,
before
incorporation
of
B.V.
but
in
anticipation
of
its
creation,
consideration
was
given
to
activities
in
which
it
might
be
engaged
in
financing
activities
and
corporations
within
the
Genstar
group.
Initial
arrangements
necessary
for
incorporation
of
the
company
were
made,
including
banking
arrangements
in
New
York
for
receipt
of
funds
from
Canada
Permanent
as
initial
capitalization
(some
$
7
million
dollars),
to
be
exchanged
for
shares
to
be
issued
by
B.V.
on
its
creation;
banking
services
in
Amsterdam;
arrangements
for
a
tax
ruling
from
Dutch
authorities
and
later,
for
purchase
of
the
Genstar
note,
for
incorporation
of
B.V.
and
for
appointment
of
its
initial
supervising
directors.
On
December
14,
1983,
B.V.
was
incorporated
and
on
the
following
day
the
first
meeting
was
held
of
the
shareholder,
represented
by
proxy
by
the
managing
director,
followed
by
a
telephone
conference
meeting
of
the
managing
director
and
supervising
directors.
These
meetings
confirmed
arrangements
made
by
Unsworth
on
behalf
of
B.V.
for
banking
and
auditing
arrangements,
for
issuing
shares
to
B.V.’s
parent,
Canada
Permanent,
for
the
naming
of
supervisory
directors,
for
arrangements
for
purchasing
the
Genstar
note
and
for
investment
of
income
and
assets
in
bank
deposits
for
the
short
term.
The
second
of
the
meetings
approved
an
undertaking,
on
behalf
of
B.V.,
given
by
the
managing
director
about
its
planned
lending
activities
and
its
willingness
to
report
to
the
superintendent
of
insurance
in
Canada,
an
undertaking
perceived
by
B.V.’s
parent
to
be
important
at
the
time.
Some
attention
was
paid
at
trial
to
this
undertaking,
as
it
was
also
to
Unsworth’s
understanding
of
B.V.’s
limited
authority
to
lend
moneys
to
third
parties
other
than
direct
affiliates
of
the
company,
but
neither
of
these,
in
my
view,
are
significant
in
assessing
whether
the
company
was
engaged
in
an
active
business.
In
late
1983
and
into
1984,
Unsworth,
in
consultation
with
Genstar
executives
and
reporting
to
his
supervisory
directors
of
B.V.,
investigated
the
following
projects
as
possible
investment
opportunities
for
B.V.:
i)
the
purchase
of
the
Genstar
note
at
an
appraised
price
resulting
in
an
average
annual
return
of
17.9%,
a
transaction
which
when
completed
resulted
in
transfer
of
debt
from
Genstar
operating
companies
to
the
Canada
Permanent
financial
chain
of
companies,
for
cash;
ii)
the
acquisition
by
B.V.
of
another
financial
company,
Genstar
Securities
Corporation,
operating
in
the
United
States,
an
acquisition
which
by
mid-1984
was
no
longer
considered
appropriate;
iii)
the
acquisition
by
B.V.
of
all
or
a
portion
of
the
Americal
mortgage
lending
group
of
Genstar,
which
operated
in
the
United
States
and
in
the
United
Kingdom;
iv)
the
acquisition
by
B.V.
of
mortgages
held
by
Broadmore
Homes,
a
corporation
in
Orange
County,
California,
to
assist
in
financing
housing
developments
by
purchasing
packages
of
mortgages,
a
possibility
not
pursued
after
early
1984;
v)
participation
by
B.V.
in
syndicated
loans
in
the
U.S.
with
other
Canada
Permanent
subsidiaries;
vi)
the
acquisition
by
B.V.
of
Canada
Permanent
U.K.,
a
small
banking
operation
engaged
principally
in
mortgage
lending.
The
last
of
these
possibilities
took
Unsworth
to
the
United
Kingdom
on
two
or
three
occasions
and
brought
representatives
of
the
U.K.
corporation
to
Amsterdam
once,
as
the
possible
acquisition
by
B.V.
was
further
explored,
but
ultimately
no
approval
for
this
was
forthcoming
from
B.V.’s
parent
and
the
banking
operation
in
the
U.K.
was
ultimately
sold
to
a
third
party
after
Canada
Trustco
was
created,
1.e.,
in
1986.
In
exploring
the
other
possible
acquisitions
and
activities
Unsworth
travelled
to
both
the
United
States
and
Canada,
to
consider
these
possibilities
and
to
discuss
them
with
officers
at
Canada
Permanent.
Supervisory
and
managing
directors
of
B.V.
appear
to
have
met
on
a
quarterly
basis.
Minutes
of
some
of
those
meetings
in
the
joint
book
of
documents
in
these
proceedings,
which
were
referred
to
in
testimony
of
Mr.
Unsworth,
include
reports
on
various
activities
initially
under
consideration,
and
on
the
later
investments
in
mortgages.
By
mid-1984
the
various
projects
explored
by
Unsworth,
except
the
possible
acquisition
of
the
banking
operation
in
the
U.K.,
were
no
longer
considered
appropriate.
Officers
of
Canada
Permanent
then
considered
the
possibility
of
arranging
for
payment
from
B.V.
of
special
dividends
from
the
proceeds
of
Genstar
note,
a
step
that
would
have
precluded
B.V.’s
opportunities
to
develop
as
a
financial
corporation.
That
step
was
not
pursued
and
by
late
1984
Unsworth
had
learned
of
and
was
exploring
the
possibility
of
opportunities
for
investment
by
B.V.
in
mortgages
on
real
properties
in
Canada.
He
learned
of
opportunities
for
this
from
others
in
the
Netherlands
who
found
these
investments
attractive
under
taxing
arrangements
applicable
in
Canada
and
under
the
tax
treaty
between
Canada
and
the
Netherlands.
After
discussions
with
Canada
Permanent
officers
and
approval
of
the
supervising
directors
of
B.V.,
arrangements
were
made
for
blocks
of
Canadian
mortgages
to
be
acquired,
ultimately
from
the
Canada
Permanent
corporations
earlier
indicated.
As
we
have
seen,
these
acquisitions
were
made
early
in
1985
on
three
separate
occasions,
with
six
block
purchases,
each
under
similar
agreements.
The
total
purchases
in
1985
were
some
$18
million
dollars
of
insured
mortgages
on
real
property
in
Canada.
For
the
most
part
those
mortgages
were
due
for
repayment
by
1987,
the
anticipated
date
of
renegotiation
of
the
tax
treaty
between
the
Netherlands
and
Canada.
Throughout
1984
and
1985,
as
in
later
years,
B.V.
received
and
accounted
for
payments
made
under
the
Genstar
note,
using
staff
resources
provided
by
other
Genstar
companies
in
Amsterdam,
on
a
part-time
basis,
including
services
of
the
managing
director,
Unsworth,
and
a
second
managing
director
who
joined
him
in
1984.
Short-term
deposits
of
those
receipts
were
made,
mainly
in
B.V.’s
bank
in
the
U.K.,
NHA
mortgages
were
purchased
in
1985
and
receipts
from
those,
received
and
accounted
for
on
a
monthly
basis
after
October
in
that
year,
were
held
for
a
time
on
short-term
deposit.
In
late
1986,
some
months
after
Canada
Trustco
was
created,
some
additional
funding
was
provided
to
the
operations
of
B.V.
At
the
end
of
1986
and
in
1987
it
began
lending
and
financing
arrangements
with
third
parties,
mainly
mortgage
funding,
principally
on
properties
located
in
the
United
States.
By
1987
B.V.
had
established
a
branch
in
the
Barbados
from
which
of
its
operations
in
North
America
were
directed
and
administered.
B.V.’s
activities
after
1985
demonstrate
continuing
evolution
as
a
financial
corporation.
Ultimately
it
became
an
established
banking
institution,
albeit
small
in
scale,
and
its
operations,
revenues
and
profits
continued
to
grow.
Its
later
activities
were
not
significantly
different
from
those
originally
contemplated
and
explored
as
possibilities
in
its
early
formative
years.
It
was
urged
by
counsel
for
the
Crown
that
B.V.’s
activities
in
1984
and
1985
were
essentially
bookkeeping
operations,
without
a
staff
of
its
own,
with
no
premises
of
its
own,
no
great
volume
of
financing
activities
and
limited
outlook
for
investment
opportunities
on
the
part
of
its
managing
director.
Its
activities
were
not
limited
by
law,
however,
other
than
by
its
articles
of
association.
The
limited
resources
available
to
it
from
the
Genstar
note
in
the
early
years
might
well
have
been
added
to,
from
borrowings
or
increased
capitalization,
if
investment
activities
had
been
deemed
appropriate
for
its
expansion
at
that
stage.
One
cannot
ignore
the
activities
undertaken
by
Unsworth
and
considered
by
the
company’s
directors
and
its
parent
corporation
in
the
early
days
as
possible
financing
activities
for
B.V.
In
light
of
all
of
its
activities,
in
my
opinion,
it
is
clear
that
B.V.
was
engaged
in
an
active
business
in
1984
and
1985.
Counsel
for
the
Crown
submitted
that
under
the
law
of
agency
the
vendors
of
the
N.H.A.
mortgage
blocks
to
B.V.
could
not
be
agents
for
B.V.
in
administering
the
mortgages
purchased,
as
I
understand
the
argument,
on
the
ground
that
B.V.
could
not
itself
administer
the
mortgages.
With
respect,
I
am
not
persuaded
that
the
law
of
agency
can
be
deemed
to
limit
the
authority
that
B.V.
derived
from
its
articles
of
association,
or
that
it
precluded
B.V.’s
purchase
of
the
mortgages
in
question
under
agreements
which,
as
I
read
them,
dealt
with
the
vendor/administrators,
approved
lenders
under
the
N.H.A.
program,
as
independent
contractors,
not
as
agents
of
B.V.
The
principles
of
the
law
of
agency
are
not
useful,
in
my
opinion,
in
considering
whether
the
mortgage
arrangements
should
be
considered
outside
the
scope
of
B.V.’s
activities
to
be
assessed
in
considering
the
issues
before
me.
Those
arrangements
were
within
the
authority
of
B.V.
under
its
articles.
They
cannot
be
ignored,
on
the
basis
of
principles
of
the
law
of
agency.
They
are
a
portion
of
the
activities
to
be
considered
in
assessing
whether
B.V.
was
engaged
in
active
business,
and
whether,
in
1985,
its
income
derived
from
mortgage
interest
payments
was
income
from
an
active
business
and
thus
was
not
FAPI.
Conclusion
I
find
that
in
the
years
in
issue
B.V.’s
activities
were
carried
on
within
the
objects
of
its
articles
of
association
and
that
these
activities
constituted
an
active
business.
Its
income
from
this
business,
in
1984,
from
the
first
payment
under
the
Genstar
note
and
quarterly
interest
thereon
and
earned
as
income
from
bank
deposits
of
the
proceeds
of
the
Genstar
note,
was
income
of
the
corporation
from
an
active
business.
Further,
in
1985
income
from
those
same
two
sources
and
from
interest
earned,
on
mortgages
purchased
from
and
administered
by
approved
lenders
under
the
National
Housing
Act,
on
real
property
located
in
Canada,
was
also
income
from
an
active
business.
The
income
earned
from
bank
deposits
in
both
years
and
from
returns
on
mortgages
held
in
1985
was
income
from
an
active
business
and
did
not
constitute
FAPI
under
s-s.
95(1
)(a)
as
it
then
applied.
For
these
reasons
the
appeal
of
Her
Majesty
from
the
decision
of
the
Tax
Court
of
Canada,
brought
by
this
action,
is
dismissed.
An
Order
goes
dismissing
the
action,
in
relation
to
both
taxation
years,
1984
and
1985,
with
costs
to
the
defendant,
and
referring
the
matter
of
the
defendant’s
taxable
income
for
those
years
to
the
Minister
of
National
Revenue
for
reassessment
in
accord
with
these
Reasons.
Appeal
dismissed.