Canada Trustco Mortgage Co. v. MNR, 91 DTC 1312, [1991] 2 CTC 2728 (TCC)

Christie, A.CJ.T.C.:— This appeal relates to reassessments of the appellant's liability to tax under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") regarding its 1984 and 1985 taxation years. The appellant is the creation of one corporation by the amalgamation on December 31, 1985, of Canada Trustco Mortgage Company and Canada Permanent Mortgage Corp., the existence of both of which predated confederation in 1867. Upon the amalgamation the appellant became liable for the income indebtedness of Canada Permanent Mortgage Corp.

On December 14, 1983, Canada Permanent Trust Company B.V. was incorporated under the laws of the Kingdom of the Netherlands. On October 28, 1986, its name was changed to The Canada Trust Company B.V. and the corporation under either name is referred to in these reasons simply as B.V. Its fiscal year-end is December 24. At all homes relevant to this appeal B.V. was a wholly-owned subsidiary of Canada Permanent Mortgage Corp. which, as just mentioned, was one of the amalgamating corporations that became the appellant.

While at one time a number of matters were in dispute, there has been some resolution in this regard. What remains as the principal issue is this: Was interest income received by B.V. in its 1984 and 1985 taxation years arising out of bank deposits and payments made under mortgages held by it on properties in Canada income from an active business carried on by B.V.? If it was, the appeal must be allowed.

A secondary issue pertains to the correct method of calculating the appellant's tax liability in respect of the interest income in 1984 from the bank deposits, but this need not be resolved if the answer to the question asked in the immediately preceding paragraph is yes.

The main witness at trial was Mr. A.J. Unsworth. He is a Canadian citizen resident in Amsterdam who describes himself as a lawyer, business executive and professional director. He graduated from Dalhousie law school in 1958 and after private practice and employment with Maritime Telegraph and Telephone Company Ltd., he first became secretary and later general counsel for Genstar Corporation at Montreal. Late in 1979 he was posted to Holland by Genstar to do work in relation to its off-shore affiliates. At the time of the hearing he was one of three managing directors of B.V. The others were citizens of and resident in Holland and Barbados respectively. When B.V. was incorporated on December 14, 1983, with its registered office in Amsterdam, Unsworth was the sole managing director. He identified a copy of a deed of incorporation pertaining to B.V. that includes its articles of association. Among the objects stated in article 2, paragraph 1.a. is: “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;"

In the share register, Canada Permanent Mortgage Corporation is shown as the holder of all of the issued shares of B.V., being 10,000 common and 10,000 preferred shares, and it is noted therein that the shareholder's name was changed on December 31, 1985, to that of the appellant.

The first "General Meeting of the Shareholder" was held in Amsterdam on December 15, 1983. Unsworth, who had been appointed attorney and proxy of Canada Permanent Mortgage Corporation to attend all meetings of the shareholders of B.V., acted as chairman and a Mrs. P.A. Brindle was secretary. Among other things, the minutes record that:

Mr. Unsworth noted that on November 25th, 1983 the Shareholder, Canada Permanent Mortgage Corporation, had paid into an account established at Morgan Guaranty Trust Company of New York for the benefit of this company the sum of U.S. $7,000,000 in anticipation of payment of the full par value of 10,000 common shares "A" and 10,000 preferred shares "B" (both of the par value of Dfl. 1.000 each). He advised that the funds had been invested in U.S. dollar certificates of deposit maturing on December 15th, 1983 and that such funds, together with the interest thereon, were available to the Company from this date.

The issued share capital of the Company, consisting of Dfl. 20.000.000, was paid-up by appropriation of the full subscription price from the funds held to the Company's credit as mentioned in the preceding paragraph. The balance remaining after converting the dollars into guilders was directed to be allocated to the surplus account (share premium) of the Company.

Mr. C. de Bar of Brussels and Mr. A. Jiskoot of Baarn, the Netherlands, were appointed supervisory directors at a remuneration of 5,000 Dutch florins ("Dfl.") each per annum (about $3,500 Cdn. each) plus reasonable expenses. Coopers & Lybrand (Amsterdam) were appointed auditors. Unsworth explained that managing directors were analogous to officers of a Canadian corporation while supervisory directors were likened to the "Canadian-style director".

The meeting just referred to was followed on the same day by a "Combined Telephone Meeting” between Unsworth as managing director and De Bar as a supervisory director. The latter represented supervisory director Jiskoot by proxy. The minutes record a report having been made to the newly appointed supervisory directors on the formation of B.V. and this is followed by authorization that B.V. purchase from Permanent Home Trade Plan Ltd., which was also a subsidiary of Canada Permanent Mortgage Corporation, “a long-term note of Genstar Mortgage Corporation." [1] It had a face value of $55,500,000 U.S. An appraisal obtained by Unsworth set the market value of the security including accrued interest at $43,343,750 U.S., i.e., $55,500,000 minus a discount of $12,850,000 plus accrued interest of $693,750 equals $43,343,750. These particulars are listed in the minutes:

The average rate of return on this investment if held to maturity and treating the discount as it is recovered as income is 17.9 per cent.

The price paid for the note together with the accrued interest was $43,343,750 U.S.; of which $6,191,964 was payable forthwith in cash and a non- interest-bearing promissory demand note was issued for the balance of $37,151,786. All or part of the principal amount could be converted at the option of the holder into common shares of B.V. It was further resolved that B.V. would open the following accounts:

a) At the Morgan Guaranty Trust Company of New York, for the purpose of ratifying the account opened by the sole shareholder to receive the capital payment of U.S. $7,000,000, and

(b) At the Bank of America National Trust and Savings Association, Amsterdam, a U.S. dollar and guilder account. . .

Finally the minutes refer to an undertaking by B.V. signed by Unsworth and addressed to the Superintendent of Insurance at Ottawa. This was done at the request of B.V.'s parent which was a loan company subject to the application of the Loan Companies Act and regulations.

Canada Permanent Trust Company B.V. ("CanPerm B.V.") undertakes that while Canada Permanent Mortgage Corporation holds the fully paid shares of CanPerm B.V., it will:

(i) provide the Superintendent with copies of its financial statements and such other information concerning its financial condition and affairs as the Superintendent may from time to time request,

(ii) not carry on any business other than the business ordinarily carried on by a loan company,

(iii) not make any investment that a loan company is prohibited from making by section 60.3 of the Loan Companies Act (Canada),

(iv) not make or hold an investment in the shares of a loan company or of a corporation exercising powers substantially similar to the powers exercisable by a loan company, and

(v) not acquire or hold, except with the approval of the Superintendent, more than thirty per cent of the common shares of any corporation except a real estate corporation.

The formal agreement regarding the Genstar note [2] was entered into "as of December 15, 1983” between B.V. and The Permanent Home Trade Plan Ltd. [3]

Early in 1984 Mr. Filzwieser, an accountant employed within the Genstar group was transferred to Amsterdam to assist Unsworth. He was appointed a second managing director of B.V.

Prior to and after the incorporation of B.V., Unsworth engaged in exploring the possibility of B.V. engaging in commercial dealings with affiliates in the Genstar group. In 1982 there was an examination of the acquisition of Genstar Securities Corporation which owned Genstar Mortgage Corporation, a fairly significant mortgage broker. Another matter considered was financing second mortgages respecting residences built by a large construction company in Orange County, California, called Broadmore Homes. Neither of these was realized. Unsworth said that by the time B.V. was incorporated "the opportunities had disappeared, at least for Broadmore."

Early in 1984 the possibility of acquiring part of Canada Permanent U.K Ltd., a mortgage company in London, England, owned by Canada Permanent Mortgage Company, was considered. This company was running short of capital because of certain rules laid down by the Bank of England. This acquisition did not come to fruition nor did the possible acquisition of a company in the Genstar group called American Funding which carried on business in the United Kingdom. By mid-1984 the only investment made by B.V. was the Genstar note and, other good investment possibilities not having been found, its parent was considering terminating any expansion of its business and ordering it to declare dividends in its favour of the funds as they were received under the Genstar note. The thinking behind this was that the parent could put the funds to work more beneficially in Canada than B.V. was likely to accomplish. But in the end the dividends were not paid and the Genstar funds stayed with B.V.

When in 1984 Unsworth was faced with finding new business for B.V. or remitting its funds to its parent by way of dividends, he learned that there was quite active trading in Europe in Canadian and Australian government guaranteed securities. He focused on housing loans made by lenders approved by Canada Mortgage and Housing Corporation ("C.M.H.C.") for the purpose of making loans under the National Housing Act, R.S.C. 1985, c. N-11. There was no withholding tax in Canada on the interest from these loans that was remitted to Holland and, by reason of the Tax Convention then in existence between Canada and the Kingdom of the Netherlands, that income was not taxed in Holland. Further any dividends received by Canada Permanent Mortgage Corporation from its subsidiary B.V. would be exempt from Canadian corporate tax.

B.V.'s parent was a lender approved by C.M.H.C. for the purpose of making loans under the National Housing Act. C.M.H.C. may insure approved lenders against losses sustained as a result of default under loans held or administered by them. [4] An approved lender may sell loans together with the security taken in respect of them. It may also administer the insured loan for and on behalf of the holder thereof. An insurance policy issued under the National Housing Act in respect of a loan ceases to be in force if the loan is sold to a person other than an approved lender unless the loan continues to be administered by an approved lender in accordance with the regulations made under that Act. These statutory provisions were important in respect of six agreements entered into at the instigation of Unsworth. Two of them were made as of January 24, 1985, and as of March 1, 1985, between Canada Permanent Mortgage Corporation as “Administrator” and B.V. as "Purchaser". In addition two were made as of the same dates between Canada Permanent Trust Company (a wholly owned subsidiary of Canada Permanent Mortgage Corporation and also an approved lender) as "Administrator" and B.V. as "Purchaser". The final two were dated as of May 1, 1985. One was between Canada Permanent Mortgage Corporation as "Administrator" and B.V. as "Purchaser". The other was between Canada Permanent Trust Company as "Administrator" and B.V. as "Purchaser". Each agreement was for the sale of the administrator's right, title and interest, both legal and beneficial in mortgages on parcels of land in Canada. The sale price was $1,183,117; $583,541; $6,884,083; $2,971,187; $1,316,451; $5,170,121 respectively which was paid by B.V. to the administrators. The total number of mortgages bought was 326.

All six agreements are eight pages in length plus schedules which consist of particulars of the mortgages and sale price. Except for these particulars, the terms are the same. In the six agreements clauses 1 to 4, 6, 9, 10, 13 read:

1. The Administrator hereby sells, transfers and assigns unto the Purchaser, its successors and assigns, and the Purchaser hereby purchases from the Administra- tor, all the Administrator's right, title and interest, both legal and beneficial, in the Mortgages set out in Schedule “A” hereto at a purchase price for each Mortgage equal to the amount of principal outstanding thereon plus interest accrued thereon at the interest rate for the Mortgage to and including the date hereof.

2. The Administrator hereby represents and warrants as of the date hereof as follows:

(a) that the particulars set out in Schedule "A" with respect to each Mortgage are true;

(b) that each Mortgage is duly and validly registered in the proper land registry office and is a good and valid first mortgage against the property described therein, and enforceable in accordance with the tenor thereof;

(c) that each Mortgage is in good standing and not in default;

(d) that each Mortgage is fully insured under a mortgage loan insurance policy issued to the Administrator by Canada Mortgage and Housing Corporation ("C.M.H.C.") pursuant to the provisions of the Act and said regulations; and

(e) that each property securing a Mortgage is currently insured against damage by fire under an insurance policy in accordance with the Act and said regulation with loss, if any, payable to the Administrator as first mortgagee;

(f) that the Administrator is an Approved Lender under the Act.

3. Notwithstanding the said sale, transfer and assignment of the Mortgages, the Administrator as an Approved Lender will continue to administer and service the Mortgages for and on behalf of the Purchaser in accordance with the Act and said regulations and the terms of this Agreement. The Administrator agrees to give to the administration and service of each Mortgage the same standard of care as normally given to its own mortgage loans.

Without in any way limiting the generality of the foregoing, the Administrator agrees that such administration and service with respect to each Mortgage will include:

(a) keeping an account;

(b) collecting principal, interest and other moneys, (if any) to which the Purchaser is entitled together with realty taxes, if the Mortgage so provides, and if not, ascertaining whether the realty taxes levied on the property securing the Mortgage have been duly paid;

(c) remitting to the Purchaser promptly as received all payments on account of principal, interest and other moneys (if any) to which the Purchaser is entitled after making all deductions therefrom authorized pursuant to this Agreement;

(d) furnishing the Purchaser on or about the last day of each month with a statement of account showing receipts and disbursements and balance of the mortgage loan outstanding at the first day of such month;

(e) giving notices to the mortgagor under this (sic.) Mortgage regarding amounts overdue;

(f) maintaining fire and other insurance (where applicable) to protect the interest of the Purchaser in the property securing the Mortgage;

(g) providing any necessary services in connection with the settlement of loss in the event of age to or destruction of the property securing the Mortgage by fire or other insured hazards and in the disposition of insurance proceeds;

(h) taking of such steps as may be necessary for the exercise of any remedy available to the Purchaser in the event of default occurring under the Mortgage;

(i) maintaining in good standing the mortgage loan insurance policy with respect to the Mortgage;

(j) subject to the provisions of paragraph 5, providing any necessary services in connection with instituting and conducting a judicial sale or foreclosure action with respect to default and making claim for payment under the mortgage loan insurance policy on behalf of the Purchaser and payment of the proceeds of such policy to the Purchaser after making all deductions therefrom authorized pursuant to this Agreement.

4. Upon written request of the Purchaser, and at the expense of the Purchaser, the Administrator agrees to prepare, execute and deliver to the Purchaser good and proper assignments or transfers of any or all of the Mortgages in favour of the Purchaser or its nominee in form acceptable for registration in the proper land registry offices together with any other documentation relating to the Mortgages necessary to effect registration of the same. The Purchaser shall be entitled to register the assignments or transfers of the Mortgages at any time in the said registry offices, but in such event the Administrator shall continue to administer and service the Mortgages for and on behalf of the Purchaser in accordance with the Act and said regulations and the terms of the Agreement. If the Purchaser registers the said assignments or transfers in the said registry offices as aforesaid:

(a) the Purchaser shall forthwith notify the Administrator in writing of the same; and

(b) the Purchaser shall forthwith execute and deliver to the Administrator a good and proper direction addressed to each mortgagor to continue to make all payments under the Mortgage to the Administrator.

6. The Administrator shall have the option, exercisable upon 10 days notice, to purchase from the Purchaser any Mortgage on or before its maturity at a purchase price equal to the principal then outstanding on the Mortgage plus interest accrued at the rate stipulated in the Mortgage uP to the repurchase date together with payment of a fee equal to 1 per cent of the purchase price determined as aforementioned.

9. The Administrator shall not be required to advance funds for any purpose in connection with any of the Mortgages, and in particular shall not be required to pay premiums of insurance, taxes, charges for public utility services in arrears, fees payable to any Land Titles Office or Land Registry Office or costs of repairs or maintenance of the property securing a Mortgage, but shall be at liberty to do so if the Administrator deems it advisable, provided that the Administrator shall forthwith notify the Purchaser if funds are required in connection with the administration of, or the protection of the security when the Administrator chooses not to advance its own funds for such purposes. If the Administrator chooses to advance funds for such purposes, the Administrator shall be entitled to reimburse itself out of the Purchaser's account to the extent that funds are available therein. Upon receipt of a demand from the Administrator, the Purchaser shall forthwith reimburse the Administrator for any deficiency together with interest thereon at the mortgage interest rate until paid.

10. In consideration of the services rendered in administering and servicing the said mortgage loans as herein provided, the Purchaser shall pay to the Administrator a monthly remuneration calculated not in advance at the rate of one-half (‘/2) of one (1%) per cent per annum on the aggregate principal amount outstanding from time to time on the Mortgages at the beginning of each month or such other rate as may be mutually agreed upon from time to time. Such remuneration may be withheld from the amounts collected monthly prior to remittance by the Administrator to the Purchaser.

13. It is understood and agreed by the parties hereto that the relationship between them shall be that of trustee (the Administrator) and beneficiary (the Purchaser) with respect to all moneys collected by the Administrator on account of principal, interest or otherwise in respect to the Mortgages and such moneys shall be held in trust for the beneficial use of the Purchaser.

The mortgages remained registered in the names of the administrator throughout the life of the agreements.

By 1987 the Canada-Netherlands Tax Convention was amended with the effect of eliminating the exemption from taxation in the Netherlands of the interest received under the N.H. mortgage agreements. These agreements were then no longer financially attractive on an after-tax basis to B.V. and the administrators purchased back the remnants of the mortgages.

Reverting to March 18, 1985, on that date there was a meeting at which supervisory directors De Bar and Jiskoot and managing directors Filzwieser and Unsworth were present. The minutes read in part:

At the present time, the Company's funds were fully invested and there was a programme for reinvestment of any interest income. It was reported that the sole shareholder was considering asking the Company (B.V.) to expand its operations by purchasing a subsidiary company in the U.S. and/or establishing a finance portfolio of investments to the U.S. These matters were still under discussion and the Managing Directors were instructed to pursue the matter with the sole shareholder and report back at the next combined meeting of the Supervisory and Managing Boards.

Unsworth said that at this time the matter of the funds of B.V. being sent to the parent was no longer a current issue. Because of activities in Canada involving members of the Genstar group in 1985 that culminated in the amalgamation on December 31 of that year of Canada Trustco Mortgage Company and Canada Permanent Mortgage Corporation, discussions with individuals in Canada about the future of B.V. came to a temporary halt. Minutes of meetings held on June 6, 1985, September 3, 1985, December 4, 1985, September 22, 1986 and December 1, 1986, at which the supervisory and managing directors of B.V. were present are also in evidence. In summary they show that the managers of B.V. were engaged in unsuccessful efforts to expand its business base. The underlying reasons for this appear to have been, first, a policy that essentially confined B.V. to making loans to subsidiaries in the Canada Permanent Mortgage Corporation group and, second, the desire that B.V. deal in U.S. dollars rather than European currencies. The attractiveness of the U.S. currency arose out of the volatility of European currencies. Unsworth added: "And the other reason is the investment in the U.S. was tax efficient, very, for us. There was no withholding tax on the interest being paid out of the U.S. and we could receive the funds and reinvest from Holland back into the U.S.” This was permitted by the Tax Convention between the United States and the Netherlands.

Eventually B.V. was authorized to seek mortgage investments outside the Genstar group. Commencing in 1987 funds were loaned to borrowers not within that group. They are referred to as "third-party borrowers". Assets in this regard are shown in a comparative B.V. balance sheet to be $41,089,576; $66,996,612; $60,182,367 in U.S. currency in 1987, 1988, 1989 respectively. There were seven different borrowers involved in respect of these loans. Initially they were administered in Amsterdam, but this was transferred to a branch of B.V. established in the Barbados. The reason for this transfer was not explained.

As for personnel involved with B.V. the evidence adduced comes to this. As mentioned at the outset, when B.V. was incorporated Unsworth was the sole managing director and the day after the incorporation of B.V. Mr. C. de Bar and Mr. A. Jiskoot were appointed supervisory directors. Early in 1984 Filzwieser was appointed a managing director and at the time of the hearing there were three managing directors, two in Holland and one in Barbados. At the date of the hearing there were three supervisory directors. All these directors had additional duties in relation to other corporations. Unsworth was paid b Genstar Holdings N.Y., a Dutch corporation, as were the employees on staff who were engaged in work for B.V. The lease of the premises that B.V. shared with other corporations in the Genstar group was in the name of Genstar Holdings. In 1985 Unsworth was a managing director for eight or ten corporations in the Genstar group. In addition he was managing director of three other companies and supervisory director of another company, all of which were Canadian owned. He estimated that during the years 1984 and 1985 he spent 10 per cent of his time working for B.V. In the overall he spent 80 per cent of his time working for other corporations in the Genstar group and 20 per cent was devoted to other interests that he had.

There was additional part-time staff involved with B.V. in Amsterdam, but the evidence is not at all exact in this regard. It can be inferred, however, that this involvement must have been minor because the sources of income of B.V. in 1984 and 1985 were the Genstar note, interest on bank deposits, and the N.H.A. mortgages. Commencing in 1987 there were loan transactions with seven third-party borrowers. Payments under the Genstar note were paid to Genstar's account at the First National Bank of Chicago in London, England, and the funds remained on deposit there until transferred in respect of investments such as the N.H.A. mortgages. The N.H.A. mortgages were administered in Canada under the terms of the purchase agreements pertaining thereto and, as already said, the administration of the loans to third-party borrowers was transferred to the Barbados. Commercial activity in Holland employing staff would have been primarily limited to the search for new commercial undertakings for B.V. There is no evidence of any attempt having been made to keep a record of the time dedicated by them to the business of B.V.

In this case we have B.V., a wholly-owned foreign subsidiary of Canada Permanent Mortgage Corporation, earning income in 1984 and 1985. Subsection 91(1) of the Act provides that in those circumstances in computing the income for a taxation year of a taxpayer resident in Canada there shall be included as income from its shares the foreign accrual property income ("FAPI") of the foreign affiliate for each taxation year of the affiliate ending in the taxation year of the taxpayer. Paragraph 95(1)(b) defines FAPI so that the income of a taxpayer's foreign affiliate from an active business is excluded therefrom. This requires deciding the vexed question of whether the interest income of B.V. in the years under review was income from an active business. This is a phrase of considerable imprecision that has been the subject of much litigation over the years, sometimes with confusing results.

The origin of the notion of active business in Canadian income tax legislation is the definition of "personal corporation” in paragraph 2(1)(i) of the Income War Tax Act, R.S.C. 1927, c. 97, as amended by Statutes of Canada 1940-41, 2nd session, c. 34, s. 6. The definition which is of some length includes this proviso at the end:

Provided that this paragraph shall not extend to a corporation or joint stock company which otherwise qualifies under this paragraph, but which in the opinion of the Minister carries on an active financial, commercial or industrial business, and the decision of the Minister on this question shall be final and conclusive.

It can probably be inferred that the draftsman, correctly as it turned out, anticipated considerable dispute about what would constitute carrying on an active financial, commercial or industrial business, so a summary disposition of the issue when it arose by the Minister of National Revenue was provided.

Subsection 21(1) of the Income War Tax Act, R.S.C. 1927, c. 97, as amended by Statutes of Canada 1932-33, c. 14, s. 3, provided:

21. (1) The income of a personal corporation, whether the same is actually distributed or not, shall be deemed to be distributed on the last day of each year as a dividend to the shareholders, and the said shareholders shall be taxable each year as if the same had been distributed in the proportions hereinafter mentioned.

Subsection 21(1) was replaced by subsection 61(8) of the Income Tax Act, Statutes of Canada 1948, c. 52. It read in part as follows:

61. (8) In this Act, a "personal corporation" means a corporation that, during the whole of the taxation year in respect of which the expression is being applied,

(c) did not carry on an active financial, commercial or industrial business.

Subsection 21(1) was replaced by subsection 61(1) of the 1948 statute. It reads:

61. (1) The income of a personal corporation whether actually distributed or not shall be deemed to have been distributed to, and received by, the shareholders as a dividend on the last day of each taxation year of the corporation.

They appear as subsections 68(1) and 67(1) of the Income Tax Act, R.S.C. 1952,

c. 148. They went by the board with the enactment of Statutes of Canada 1970-71-72, c. 63 which came into force on January 1,1972. [5] By the time the definition of personal corporation no longer featured in income tax legislation there existed a number of reported cases in which the words “active financial, commercial or industrial business" were considered.

The 1972 legislation did not, however, terminate the role and the significance of active business. The phrase appeared in a number of contexts in the 1972 legislation. I refer to these two instances, there being a number of reported cases regarding them.

Subsection 125(1) provided for a small business deduction in favour of a Canadian-controlled private corporation in respect of an active business carried on by it in Canada and subsection 129(1) provided for a dividend refund to a corporation, being the lesser of A of all taxable dividends paid by it in the year on shares of its capital stock and its “refundable dividend tax on hand" at the end of the year. In the definition of refundable dividend tax on hand what is described as "Canadian investment income” and "foreign investment income" are important components which are themselves defined. In those definitions "business other than an active business” featured.

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 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 19 years later in Rose v. M.N.R., [1971] C.T.C. 810; 71 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". [6] 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.).

Active business has been defined in the Act, but not in respect of FAPI. By subsection 38(6) of Statutes of Canada 1979, c. 5, paragraph 125(6)(d) was added. It read:

(d) "active business” carried on by a corporation in a taxation year means the business of manufacturing or processing property for sale or lease, mining, operating an oil or gas well, prospecting, exploring or drilling for natural resources, construction, logging, farming, fishing, selling property as a principal, transportation or any other business carried on by the corporation other than a specified investment business or a non-qualifying business;

Both specified investment business and non-qualifying business were also defined. This was applicable to taxation years commencing after 1979 in respect of corporations in existence on October 23, 1979, and taxation years commencing after October 23, 1979 in any other case. By subsection 66(1) of the same statute, this was added to subsection 248(1) of the Act applicable to taxation years commencing after 1978:

(a) “active business", in relation to any business carried on by a corporation resident in Canada, has the meaning assigned by paragraph 125(6)(d);

Paragraph 125(6)(d) was amended by Statutes of Canada 1980-81-82-83, c. 140, ss. 86(7) by adding "or a personal services business” at the end of the paragraph. Further amendments followed and currently paragraph 125(7)(a) provides:

125. (7) In this section,

(a) “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;

The definition in subsection 248(1) reads:

“active business”, in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business; [7]

I regard M.R.T. Investments Ltd., E.S.G. Holdings Ltd. and Rockmore Investments Ltd. v. The Queen, [1975] C.T.C. 354; 75 D.T.C. 5224 (F.C.T.D.); on appeal The Queen v. Rockmore Investments Ltd., [1976] C.T.C. 291; 76 D.T.C. 6156 (F.C.A); The Queen v. M.R.T. Investments Ltd., [1976] C.T.C. 254; 76 D.T.C. 6158 (F.C.A.); E.S.G. Holdings Ltd. v. The Queen, [1976] C.T.C. 295; 76 D.T.C. 6158 (F.C.A.) as the leading authorities regarding the concept of active business in relation to the appeal at hand. They did not involve a definition of active business which, as mentioned, obtains respecting FAPI.

The three actions were heard together in the Federal Court-Trial Division. While the issue was whether each corporation was carrying on an “active business" in Canada during their 1972 taxation year within the meaning of paragraph 125(1)(a) of the Act, the reasons for judgment are of precedential value in determining whether in the case at hand B.V. carried on an active business within the meaning of paragraph 95(1)(b) of the Act. [8] In Thomson v. M.N.R., [1946] C.T.C. 51; 2 D.T.C. 812 (S.C.C.) Mr. Justice Estey said at page 71 (D.T.C. 813): “Apart from a specific provision or necessary implication, it would be assumed that Parliament intended these terms to have the same meaning throughout these subsections, and indeed throughout the Act.”

By way of factual background to the M.R.T. Investments Ltd. litigation Mr. Justice Walsh said at page 357 (D.T.C. 5226-27):

M.R.T. was incorporated under The Corporations Act of Ontario on January 7, 1965 with wide powers to carry on business as a financial agent, to make loans on the security of mortgages or otherwise, and to purchase, lease and develop land with the provision that it could not undertake any business within the meaning of The Loan and Trust Corporations Act, R.S.O. 1970, c. 254. Rockmore was incorporated under the provisions of the Quebec Companies Act on January 5, 1965 to act as an investment company and, inter alia, to deal in mortgages and real estate. E.S.G. was incorporated in Ontario under the provisions of The Business Corporations Act, 1970, on August 19, 1971, its principal objects being given as “to lend and invest money on mortgage of real estate or otherwise”. It also was subject to the provision that it could not lawfully transact business within the meaning of The Loan and Trust Corporations Act. None of them dealt in what might be called conventional mortgages at conventional rates of interest. As a matter of policy E.S.G. only lent on the security of first mortgages, charging an interest rate 2-3 per cent above the conventional rates. M.R.T.did not restrict itself to first mortgages and in 1972 had loans outstanding at interest rates varying from 7-16 per cent. The lower rates represent interest rates on mortgages which it had bought from the original lenders at a discount so that the actual yield would be substantially higher than this. Its normal rates are 2-5 per cent higher than conventional rates. Rock- more operates on the same basis but only in the Province of Quebec.

All of the three companies operated on a comparatively small scale. M.R.T., as of December 31, 1972, the taxation year in question, held 14 mortgages, the total amount involved being $104,636.81. Its interest and other income earned for that year totalled $12,471.47 and its net earnings before taxes were $4,815.30. Rockmore, as of December 31, 1972, held only 3 mortgages and a small property of which the book cost was $2,465, the total value of its mortgages and other receivables being $11,084.03. It had interest and other income earned totalling $4,609.30 and it was explained that $2,669 of this represented interest, $350 represented rent on the small property which had been bought in 1972 and was sold in 1973 after certain title difficulties had been overcome, the balance being for fees earned as a result of services rendered to two individuals for whom the company had put through what the witness Godel explained as "mortgage package". Net income before taxes was shown as $3,479.30. E.S.G. had 10 mortgages outstanding at the same date of a total value of $106,577.98. Its interest earnings in the year were $12,204.31 and earnings before taxes $6,952.05. The mortgages outstanding and net income of each company have continued to increase since 1972, M.R.T. having 18 mortgages in effect of a value of $13,985.57 as of the same date, and E.S.G. having 10 mortgages outstanding of a value of $142,540.45, and a net income of $9,743.06 as of the same date. Rockmore has increased its mortgages outstanding since the end of 1974, the figure as of March 31, 1975 being $98,628.16 in addition to which it had commitments outstanding as of April 30, 1975 for interim financing mortgages amounting to $162,450 to be disbursed in stages over the next few months. All three companies have continually increased the value of their mortgages outstanding and their gross incomes since the dates of their respective incorporations although Rockmore's gross income dropped somewhat in the years 1969 and 1970. While it is only the 1972 taxation year of each company which is under consideration in the present actions, the extent of their activity in the preceding and subsequent years is relevant in establishing a course of conduct which has some bearing on their activities in 1972 and hence this evidence was admitted.

The witnesses at trial for the plaintiffs were Mr. Elliot Godel and Mr. George Reinhart. Both were shareholders and officers of M.R.T. and Rockmore. They were not shareholders, directors or officers of E.S.G., but it was managed by Monarch Management and Investment Corporation ("Monarch") the principal shareholder of which was Mr. Godel. Godel, Reinhart and Monarch managed M.R.T., Rockmore and E.S.G. plus a number of other companies. All were "operating out of the same office premises and using more or less the same office staff and equipment." The staff employed by the group consisted of about six individuals. Godel, Reinhart and the office staff were not paid by M.R.T., Rockmore or E.S.G. but by Monarch and two other corporations in the group. Godel might have spent 10 per cent of his time on the business of M.R.T. and Rockmore combined. Reinhart was more involved, but this was only an estimate by Godel and not reduced to anything specific. No record was kept about the time spent by the office staff on the work of each company. Unlike M.R.T. and Rockmore, E.S.G. was in 1972 charged management fees of $300, rent and telephone of $150 and bookkeeping of $100. These funds were paid to Monarch.

Most of the loans made by the three corporations were made through independent agents who obtained their commissions from the borrowers. Reinhart, after consulting Godel, would decide whether an Ontario loan should be placed with M.R.T. or E.S.G. It was admitted that this could give rise to a conflict of interest, but no complaints in this regard were received from M.R.T. The reasons for judgment then describe procedures in relation to making loans and in the absence of complications collection of payments on loans involved routine work.

Walsh, J. said at page 370 (D.T.C. 5235):

A series of cases has established conclusively that there is a distinction between business activities carried on by an individual and a corporation formed for that purpose, and that if a corporation carries on the business for which it is formed it creates a presumption that the profit from these activities is a profit derived from the business. [9]

His Lordship found that the businesses carried on by M.R.T. and Rockmore were active businesses. With respect to E.S.G. he said at page 376 (D.T.C. 5239):

I find that E.S.G. is in a different position from Rockmore and M.R.T. Its business activity was not carried on by its officers or directors or by any of its shareholders but was merely turned over to Mr. Godel’s Monarch Management Company, which operated it. No further intervention or supervision was done on its behalf nor were any directions given in connection with its day-to-day operations. The receipt of semi-annual reports from the agent is not in itself a business activity. I cannot, therefore, conclude that this manner of operation constitutes the carrying on of an “active business” by the company itself. Therefore, in the case of E.S.G., the appeal must fail. [10]

The Crown's appeal in The Queen v. Rockmore Investments Ltd. was dismissed. Chief Justice Jackett, speaking for the Court, said at page 293 (D.T.C. 6157):

In considering whether there is an “active business” for the purposes of Part I, the first step is to decide whether there is a “business” within the meaning of that word. Section 248 provides that that word, when used in the Income Tax Act, includes "a profession, calling, trade, manufacture or undertaking of any kind whatever" and includes “an adventure or concern in the nature of trade" but does not include “an office or employment". Furthermore, the contrast in paragraph 3(a) of the Act between "business" and "property" as sources of income makes it clear, I think, that a line must be drawn, for the purposes of the Act, between mere investment in property (including mortgages) for the acquisition of income from that property and an activity or activities that constitute “an adventure or concern in the nature of trade" or a "trade" in the sense of those expressions in section 248, supra. Apart from these provisions, I know of no special considerations to be taken into account from a legal point of view in deciding whether an activity or situation constitutes the carrying on of a business for the purposes of Part I of the Income Tax Act. Subject thereto, as I understand it, each problem that arises as to whether a business is or was being carried on must be solved as a question of fact having regard to the circumstances of the particular case.

In this case, I can see no ground for interfering with the finding of the Trial Division that the respondent's activities, which are carefully analyzed by the learned trial judge, constituted the carrying on of a money-lending business. Having reached that conclusion, the second question to be answered is whether the business that was being carried on was an "active" business within the intent of section 125. 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. It may be that experience in the application of the provision will make evident other conclusions of a general nature that can be deduced from the statute as to how the concept of "active" business is to be applied. I do not, myself, feel capable of deducing any such general conclusion at the present time.

The result was the same in the Crown's appeal in The Queen v. M.R.T Investments Ltd. Chief Justice Jackett said at page 295 (D.T.C. 6158): "There is no material difference between this appeal and the appeal heard simultaneously in The Queen v. Rockmore Investments Ltd.”

The appeal of E.S.G. Holdings Ltd. v. The Queen, supra, was allowed. The Chief Justice, again speaking for the Court, after quoting the last passage cited above from the reasons for judgment delivered by Walsh, J. said at page 296 (D.T.C. 6159):

With respect, I do not agree that there is any material difference in principle, in so far as the carrying on of an active business by a corporation is concerned, between carrying it on through the agency of officers or servants of the corporation and carrying it on through the agency of an independent contractor. The question is whether the taxpayer's “income” is "from an active business” and, in my view, the answer must be the same in both cases.

judgment in this regard.

In ruling that Finning Securities did not carry on an active financial business Mr. Justice Dumoulin said at page 428 (D.T.C. 1253): “Could one wish for a better description of ‘inactivity’? Whenever a person, or a body politic as in this instance, retains the remunerated services of someone else to be totally relieved from its normal duties or functions, surely, then, the former party relinquishes its ‘activity’ to the latter."

In King George Hotels Ltd. v. The Queen, [1981] C.T.C. 87; 81 D.T.C. 5082 (F.C.A.) the issue was whether, as contended by the appellant, the income derived by it from its property management business was income from "a business other than an active business” within the meaning of paragraph 129(4)(a) of the Act. The appeal was dismissed. Urie, J. speaking for the Court said at pages 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.

As indicated by Chief Justice Jackett in Rockmore Investments Ltd. the first step is to decide whether B.V. was engaged in a "business". I believe that B.V.'s commercial undertakings went beyond mere passive investment in property and that it was engaged in business within the meaning to be attributed to that word. [11] Much of what is said in the following passages regarding the issue of active business is relevant to the question of whether B.V. was engaged in business. [12]

I am also of the opinion that the business of B.V. was an active business. On this point I find no firm basis upon which it could be said that M.R.T. Investments Ltd. et al. is so distinguishable from the appeal at hand that justification exists for not coming to the same conclusion arrived at by the Federal Court of Appeal. There are some important and striking similarities between the facts pertaining to the three appellants in M.R. T. Investments Ltd. et al. and those relating to B.V. This is apparent from what has already been said in the reasons. By way of example, Unsworth and the other managing directors of B.V. were not paid by it nor were any of the staff engaged in matters concerning the business of B.V. They were all paid by another corporation in the Genstar group. Nor were Godel or Reinhart or the office staff paid by M.R.T., Rockmore or E.S.G.; they were paid by other corporations in the group with which Godel and Reinhart were involved. Unsworth did work for a number of companies in the Genstar group and he had other commitments as well. Also it can be inferred from the evidence that other managing directors were not at all exclusively with B.V. The same may be said of the office staff. Both Godel and Reinhart were concerned with businesses being conducted by a number of other companies as were the office staff under their control. B.V. had no office or staff of its own, but functioned from office space shared by others in the Genstar group. The same was true of M.R.T., Rockmore and E.S.G.

Apart perhaps from the search for new business opportunities, the work of B.V. was in no way complicated. Collecting payments on the mortgages held by M.R.T., Rockmore and E.S.G. was said by Mr. Justice Walsh to be "routine work". With reference to these searches for new commercial activity, I think they can weigh in favour of the existence of an active business even though they were unproductive. I see no reason why unsuccessful explorations of that kind should not be regarded as part and parcel of an active business. Further, and I regard this of special importance, what was said by Chief Justice Jackett in the E.S.G. Holdings Ltd. appeal leads to the conclusion that what was done in Canada by the administrators regarding the mortgages purchased by B.V. under the six contracts was, as far as the carrying on of an active business by B.V. is concerned, the carrying on of such a business by it through the instrumentality of independent contractors, namely, Canada Permanent Mortgage Corporation and Canada Permanent Trust Company.

The question raised by paragraph 95(1)(b) of the Act is whether B.V.'s interest income in 1984 and 1985 was from a business "other than an active business” or to put the question in a more straightforward way: Was that interest income generated by an active business carried on by B.V.? This must be answered affirmatively, and this is so even though part of the income was the result of work done for B.V. by the independent contractors and a paramount consideration of the contracts being entered into was that the administrators had the special attribute of being approved lenders.

Finally I regard the time factor between incorporation and the taxation period under review, 1984 and 1985, to be relevant. B.V. was incorporated on December 14, 1983, and the transaction with the Permanent Home Trust Plan Ltd. regarding the Genstar note was completed forthwith. Commencing January 24, 1985, the N.H.A mortgages were purchased under six contracts. These are all substantial transactions. Also in M.R.T. Investments Ltd. Mr. Justice Walsh held at page 358 (D.T.C. 5227) that corporate activity prior and subsequent to the period under review is relevant in establishing a course of action that has some bearing on that activity during that period. In this respect the loans to third-party borrowers is to be borne in mind.

In the case at hand much of the commercial activity involved interrelated corporations that were not dealing with each other at arm's length, but nothing was said about this that would lead to the conclusion that because of some special consideration those relationships have a bearing on whether B.V. was carrying on an active business. These well-settled basics prevail: a corporation is a legal entity quite distinct from its shareholders and a business carried on by it, with its attendant rights and liabilities, is that of a separate and independent legal person. [13]

Further I note that as recently as last February the Federal Court of Appeal in The Queen v. Irving Oil Ltd., [1991] 1 C.T.C. 350; 91 D.T.C. 5106; leave to appeal to the Supreme Court of Canada refused September 5, 1991, reasserted what has been observed on many occasions. Mr. Justice Mahoney, with whom the other members of the Court concurred, said at page 380 (D.T.C. 5114):

The Supreme Court of Canada’s decision in Stubart reaffirmed that it remains the law of Canada that:

Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of this ingenuity, he cannot be compelled to pay an increased tax: Inland Revenue Commissioners v. Duke of Westminster, [1936] 1 A.C. 1 at pp. 19-20.

With respect to the interest on the bank deposits I regard the funds that generated that interest to have been necessarily incidental to the active business of the appellant. These funds were committed to carrying on that business and this created interdependency between the two. It follows that this interest income was income from an active business.

At the commencement of these reasons I noted that there was a dispute about the correct method of calculating the appellant's tax liability, but that it need not be resolved if B.V.’s interest income in 1984 respecting bank deposits was income from an active business. I have found that this interest was income from an active business. Nevertheless considerable effort was expended on this aspect of the appeal and I shall make some observations about it even though they are by way of obiter dicta. The arguments and calculations go on for pages, but I shall endeavour to reduce the debate to its simplest comprehensible form.

If B.V.'s income by way of interest from bank deposits had been income from a business other than an active business, the combined effect of provisions in subsections 91(1) and (4) and paragraphs 95(1)(c) and (f) of the Act would be this. There shall be included as income of Canada Permanent Mortgage Company ("the parent") as income from its shares of B.V. the FAPI of the latter. There may be deducted in computing the parent's income an amount not exceeding the FAPI that is equal to the “foreign accrual tax" multiplied by the "relevant tax factor". The foreign accrual tax applicable to the amount of B.V.'s FAPI included in computing the parent's income is the portion of any income tax that was paid by B.V. to the Dutch government and that may reasonably be regarded as applicable to the amount of B.V.'s FAPI. The relevant tax factor is simply 1 divided by .46 or 2.1739.

The dispute is about the calculation of the amount of tax paid to the Dutch taxing authorities that may reasonably be regarded as applicable to B.V.’s FAPI. The FAPI referred to is the income received in 1984 by B.V. as interest on bank deposits. The appellant says that 24.19 per cent of the tax paid by B.V. may reasonably be regarded as applicable to B.V.'s FAPI. The respondent says 6.86 per cent.

The appellant contends that the percentage of foreign tax paid that is applicable to B.V.'s FAPI, and hence deductible in computing its parent's income, is the percentage that B.V.’s FAPI reduced by an agreed amount is of its gross income minus deductions under Dutch law of certain agreed expenses and also minus an amount that is referred to as "imputed interest". The

respondent's position is the same except that he would exclude the words "and also minus an amount that is referred to as imputed interest" which words embody the nub of the dispute. The imputed interest was a notional deduction under Dutch law pertaining to the Genstar note that was about three-quarters of B.V.'s gross income. In this regard one of the witnesses, by way of analogue to a notional deduction, referred to the deduction of an inventory allowance of three per cent once allowed under the Act. The respondent says that his method "reflects reality as opposed to the appellant's method." But he concedes that if the appellant is correct in its position about the imputed interest then its determination of the foreign accrual tax is accurate.

It strikes me that when an amount involving a percentage of foreign tax paid by a foreign corporation and the income of that corporation regarding that tax is relevant to determining the tax liability of its Canadian parent under the Act then, in the absence of some applicable provision under the Act or its regulations or some other compelling reason of which I find none in this case, the parent is entitled to rely on whatever deductions that enure to its benefit which are allowed under the foreign law in computing the foreign corporations income. The fact that in calculating the income of the foreign subsidiary that relates to the foreign tax paid a deduction is allowed that would not be allowed under the income tax law of Canada does not, as I see it, detract from what has just been said. If in any context under the Act Parliament wishes to avoid the impact of foreign law, it can do so.

I have not arrived at the conclusion about the percentage of foreign tax that is applicable to the FAPI of B.V. without uncertainty. But that is largely rooted in the imprecision of the provisions of the Act and in such case the benefit of the doubt is to e resolved in favour of the taxpayer. In Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.), Mr. Justice Estey, with whom the other judges concurred, said at page 126 (D.T.C. 5384):

Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer.

See also Fries v. Canada, [1990] 2 C.T.C. 439; 90 D.T.C. 6662 (S.C.C.).

The appeal is allowed.

Appeal allowed.