Tremblay,
T.C.J.
[Translation]:—This
appeal
was
heard
on
April
26,
1989
in
the
City
of
Montréal,
Québec
and
the
last
argument
was
received
on
September
5,
1989.
7.
Issue
It
must
be
determined
whether
the
appellant,
Société
d'Investissement
Desjardins
(“SID”)
correctly
deducted
a
sum
of
$250,000
received
as
a
dividend
from
Sico
Inc.
in
computing
its
taxable
income
for
the
1982
taxation
year.
According
to
the
appellant,
such
a
deduction
was
provided
for
in
paragraph
112(1)(a)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
when
the
dividend
came
from
a
Canadian
company.
The
respondent
refused
the
deduction
of
the
dividend,
alleging
that
the
appellant
was
a
specified
financial
institution
within
the
meaning
of
subsection
112(2.1)
of
the
Act
and
that
such
an
institution
was
not
authorized
to
make
the
dividend
deduction
provided
for
in
paragraph
112(1)(a)
of
the
Act
when
the
dividend
was
received
on
shares
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
appellant.
The
appellant
denied
that
the
shares
were
acquired
in
the
ordinary
course
of
its
business
and
this
was
accordingly
the
specific
issue.
2.
Burden
of
Proof
2.01
The
appellant
has
the
onus
of
showing
that
the
respondent's
assessments
are
incorrect.
This
burden
of
proof
is
based
on
several
judicial
decisions
including
a
judgment
of
the
Supreme
Court
of
Canada
in
Johnston
v.
M.N.R.,
[1948]
S.C.R.
486;
[1948]
C.T.C.
195;
3
D.T.C.
1182.
3.
Facts
A
large
number
of
the
facts
alleged
were
not
disputed.
3.01
SID
is
a
joint
stock
corporation
that
was
created
pursuant
to
the
Act
respecting
the
Fédération
des
caisses
populaires
et
d'économie
Desjardins
du
Québec,
S.Q.
1971,
c.
80,
as
amended).
Subject
to
the
provisions
of
this
Act,
SID
is
governed
by
the
provisions
of
Part
ll
or
the
Companies
Act.
SID
is
a
private
corporation
within
the
meaning
of
paragraph
89(1)(f)
of
the
Act
and
it
began
its
operations
in
1974.
3.0
2
According
to
its
enabling
legislation,
the
object
of
SID
is
to
encourage
the
development
of
industrial
and
commercial
businesses,
whether
or
not
they
are
co-operative
in
nature,
and
thus
to
promote
the
economic
development
of
Québec.
In
its
annual
report
SID
explains
that
its
mission
is
to
become
a
partner
in
dynamic
enterprises
with
expansion
projects
by
contributing
new
capital
likely
to
promote
these
projects.
The
appellant
states
its
mission
as
follows
in
the
annual
report:
.
.
..
Without
seeking
permanence
in
our
investments,
once
the
established
objectives
are
achieved
.
.
.
we
seek
partners
who
feel
that
a
corporation
such
as
ours
can
provide
them
with
valuable
support
in
planning
their
development,
both
strategically
and
financially
.
.
.
We
would
like
to
be
perceived
by
the
developing
business
as
the
most
useful
financial
partner
when
they
first
seek
outside
capital.
3.0
3
The
capital
stock
of
SID
consists
of
an
unlimited
number
of
ordinary
shares
with
no
par
value.
As
of
December
31,
1982
the
Fédérations
des
caisses
populaires
et
d'économie
Desjardins,
created
under
the
Savings
and
Credit
Unions
Act,
R.S.Q.,
c.
C-4,
held
approximately
79%
of
the
ordinary
shares
of
SID.
3.0
4
When
it
began
operations
in
1974,
SID's
business
consisted
in
lending
money
and
subscribing
for
shares
in
Québec
businesses.
Following
some
unfortunate
experiences,
primarily
that
in
which
it
made
loans
to
Core
Data
Products
Ltd.
while
taking
a
minority
share-holding,
it
was
decided
to
divide
SID's
operations
in
two.
From
late
1976
SID
concentrated
on
the
acquisition
of
minority
holdings
in
Québec
businesses
and
left
to
its
subsidiary,
Credit
industriel
Desjardins
Inc.
(CID)
the
task
of
operating
a
money-lending
business.
Thus,
in
late
1976
SID
passed
on
to
CID
its
mission
as
a
lender.
3.0
5
Among
SID's
principal
criteria
in
choosing
its
investments,
it
favours
contributions
of
capital
in
the
form
of
purchases
of
ordinary
shares
for
the
development
of
a
business.
Its
investments
amount
to
between
$1,000,000
and
$10,000,000,
and
for
each
investment
it
seeks
a
holding
of
between
20
per
cent
and
49
per
cent
of
the
business's
participating
and
voting
capital.
SID
is
essentially
a
venture
capital
corporation.
According
to
Mr.
Gagné's
testimony,
SID
held
investments
for
an
average
of
ten
years.
3.0
6
In
1982
SID
generated
income
primarily
from
dividends
(approximately
75
per
cent
of
its
profits)
received
from
corporations
in
which
it
had
invested
earlier.
The
remaining
25
per
cent
came
from
interest
on
these
investments
and
interest
earned
on
loans
made
between
1974
and
1976.
3.0
7
In
order
to
perform
its
role
as
an
active
partner,
SID
concentrated
its
resources
by
investing
in
a
limited
number
of
businesses.
As
indicated
in
its
annual
report,
filed
as
Exhibit
A-6,
SID
held
shares
as
of
December
31,
1982
in
Credit
industriel
Desjardins
Inc.,
Sico
Inc.,
Culinar,
Société
de
gestion
Sidly,
Canam-Manac,
Corporation
Provost
Ltée
and
its
subsidiaries,
and
in
Corporation
de
gestion
La
Vérendrye.
3.08
Sico
was
incorporated
under
Part
I
of
the
Québec
Companies
Act,
and
continued
under
Part
IA
of
this
Act
by
continuation
certificate
issued
on
December
16,
1982.
The
transactions
resulting
in
the
redemption
of
the
100,000
Class
A
shares
of
Sico
were
as
follows:
[not
reproduced]
3.0
9
In
1975,
when
it
still
had
a
lending
function,
SID
granted
a
loan
of
$2,000,000
to
Sico
and
obtained
from
the
principal
shareholders
of
the
latter
company
a
right
of
first
refusal
with
respect
to
shares
that
the
shareholder
might
have
wanted
to
assign
to
third
parties.
3.10
During
1977
the
Société
générale
de
financement
(SGF)
had
offered
to
purchase
from
Henri
Deslauriers
the
voting
and
participating
shares
he
held
in
Sico;
moreover,
SGF
agreed
to
lend
Sico
a
sum
of
$1,100,000
in
return
for
the
issuance
to
SGF
of
debentures
convertible
into
participating
shares.
3.11
In
March
1977,
under
its
right
of
first
refusal,
SID
purchased
499,000
Class
B
shares
of
Sico
stock
from
Henri
Deslauriers,
and
this
amounted
to
49.9
per
cent
of
the
participating
and
voting
shares
of
Sico
(that
is,
ordinary
shares
within
the
meaning
of
subsection
248(1)
of
the
Act).
3.12
On
June
29,
1978
under
a
trust
agreement
officially
dated
June
15,
1977,
Sico
Inc.
(Sico)
issued
to
SID,
also
under
a
right
of
first
refusal
previously
acquired
by
SID,
10
per
cent
convertible
debentures
for
a
total
of
$1,100,000.
These
debentures
were
convertible
into
200,000
Class
C
shares
of
Sico
in
the
twelve
months
preceding
their
due
date,
that
is,
between
June
29,
1984
and
June
29,
1985
(Exhibit
A-2);
the
Class
C
shares
of
Sico
were
participating
but
non-voting
shares
(Exhibit
A-1).
3.13
Between
1977
and
1982,
SID
acquired
other
Sico
shares
from
those
offered
by
the
other
Sico
shareholders.
In
fact,
in
December
1981,
SID
acquired
5,453
Class
B
shares
and
from
that
point
on
it
owned
50
per
cent
of
the
voting
shares
of
Sico
(Exhibit
A-7).
3.14
On
December
16
and
21,
1982
the
capital
stock
of
Sico
was
modified
(Exhibit
A-3).
The
corporation
was
also
continued
under
Part
IA
of
the
Companies
Act
(Exhibit
A-4).
The
authorized
capital
stock
of
Sico
was
now
made
up
as
follows:
(i)
100,000
non-voting,
non-participating
Class
A
shares
with
a
par
value
of
$5.50,
redeemable
as
of
December
31,
1982;
(ii)
1,000,000
Class
B
voting
participating
shares
(resulting
from
the
redesignation
of
the
899,992
Class
A
convertible
shares
and
100,008
Class
B
convertible
shares
of
Sico's
capital
issued
earlier;
(iii)
200,000
Class
C
shares
—
100,000
of
which
were
convertible
as
of
December
22,
1982
into
100,000
Class
A
shares;
—
100,000
of
which
were
convertible
into
Class
B
shares
as
Class
B
shares
were
issued
to
Sico
employees,
but
no
later
than
June
28,
1985.
3.15
On
December
22,
1982
the
terms
of
the
debentures
convertible
to
Class
C
shares
that
were
issued
in
June
1977
were
changed
to
provide
that
the
said
debentures
must
be
converted
before
December
31,
1982.
3.16
On
December
22,
1982
SID
converted
the
debentures
it
owned
into
200,000
Class
C
shares.
SID
later
converted
100,000
Class
C
shares
into
100,000
Class
A
shares.
3.17
On
December
31,
1982
Sico
redeemed
the
100,000
Class
A
shares
held
by
SID
for
$8
per
share,
and
this
generated
a
deemed
dividend
received
by
SID
totalling
$250,000.
3.18
During
1983,
in
order
to
maintain
its
control
of
Sico,
SID
converted
the
100,000
Class
C
shares
it
still
held
into
100,000
Class
B
shares
as
the
employees
of
Sico
subscribed
for
new
Class
B
treasury
shares
of
Sico.
3.19
Sico
is
a
company
that
has
always
considered
employee
participation
in
its
capital
to
be
very
important.
Since
1973
the
principal
managers
of
the
company
had
advocated
establishment
of
a
share
purchase
plan
for
employees.
After
SID
gained
control
of
Sico,
which
the
witness
Paul
Parent
described
as
"a
chance
mishap”,
the
employees
of
Sico
contacted
the
company's
management
to
propose
a
share
purchase
plan
for
employees
in
order
to
increase
their
interest
in
the
company
while
allowing
them
to
enjoy
tax
benefits
under
the
Québec
share
savings
plan.
The
directors
of
Sico
accordingly
contacted
SID
to
inform
it
of
the
employees’
request
and
to
negotiate
the
establishment
of
the
share
purchase
plan
(minutes
of
the
Sico
Board
of
Directors
filed
as
Exhibits
A-8
to
A-16).
An
ad
hoc
committee
was
then
set
up,
consisting
of
three
representatives
of
Sico
and
one
of
SID.
Both
the
principal
witnesses,
Messrs.
Paul
Parent
and
Raymond
Gagné,
were
members.
3.20
In
order
to
qualify
for
the
share
savings
scheme,
the
employees
had
to
subscribe
for
treasury
shares
of
the
company
of
which
they
were
the
first
purchasers.
Consequently,
the
subscription
by
the
employees
for
Sico
shares
might
have
had
the
effect
of
diluting
SID's
position.
SID
was
accordingly
concerned
to
encourage
the
application
of
this
plan
while
avoiding
any
dilution
in
its
holdings.
Moreover,
this
concern
was
expressed
in
the
letter
from
SID
to
Sico
dated
December
1,
1982
(Exhibit
A-16):
1.
Our
objective
remains
to
allow
the
employees
of
Sico
to
participate
in
greater
numbers
and
for
larger
amounts
in
the
ownership
of
the
business
since
we
believe
that
this
is
fundamentally
healthy
for
Sico.
2.
In
order
to
facilitate
the
application
of
this
plan,
without
changing
the
relative
position
of
the
shareholders,
we
shall
continue
to
promote
the
redemption
by
Sico
of
one-half
of
the
convertible
debentures
held
by
SID
and
to
ensure
that
all
these
debentures
become
convertible
into
voting
shares
rather
than
non-voting
shares.
3.21
Thus,
in
order
to
satisfy
the
request
by
Sico
employees
and
managers,
it
was
decided
to
advance
the
conversion
of
the
debentures
issued
in
1977
to
a
date
before
December
31,
1982.
These
debentures
were
converted
on
December
22,
1982
into
200,000
Class
C
shares,
100,000
of
which
were,
under
the
terms
of
the
shares,
convertible
into
Class
A
shares
redeemable
not
later
than
December
31,
1982.
The
100,000
Class
C
shares
that
remained
were
convertible
into
Class
B
shares
as
Class
B
shares
were
issued
to
the
employees
of
Sico,
but
not
later
than
June
28,
1985.
In
effect,
the
share
purchase
plan
for
the
employees
provided
for
an
issue
of
100,000
shares
for
employees.
As
the
employees
subscribed
for
100,000
Class
B
shares,
SID
was
able
to
purchase
the
same
number
of
Class
B
shares
and
thus
avoid
a
dilution
of
its
share
of
the
capital
stock.
This
accounts
for
the
conversion,
according
to
Exhibit
A-7,
of
49,962
Class
C
shares
in
December
1983,
50,038
Class
C
shares
in
July
1983
and
as
many
Class
B
shares.
3.22
In
December
1985,
SID
divested
itself
of
its
holding
in
Sico
when
that
company
launched
a
public
issue
by
means
of
a
prospectus.
4,
Act—Case
Law—Analysis
4.01
Act
4.01.1
The
provisions
of
the
Income
Tax
Act
involved
in
this
appeal
are
subsections
112(1)
and
112(2.1).
They
read
as
follows
in
1982:
112.
(1)
Where
a
corporation
in
a
taxation
year
has
received
a
taxable
dividend
from
(a)
a
taxable
Canadian
corporation,
or
(b)
a
corporation
resident
in
Canada
(other
than
a
non-resident-owned
investment
corporation)
or
a
corporation
exempt
from
tax
under
this
Part
and
controlled
by
it,
an
amount
equal
to
the
dividend
may
be
deducted
from
the
income
of
the
receiving
corporation
for
the
year
for
the
purpose
of
computing
its
taxable
income.
112.
(2.1)
No
deduction
may
be
made
under
subsection
(1)
or
(2)
in
computing
the
taxable
income
of
a
particular
corporation
(in
this
section
and
sections
248
and
258
referred
to
as
a
"
specified
financial
institution”)
that
is
(a)
a
corporation
described
in
any
of
paragraphs
39(5)(b)
to
(f)
or
an
insurance
corporation,
(b)
a
corporation
that
is
controlled
by
one
or
more
corporations
described
in
paragraph
(a),
or
(c)
a
corporation
associated
with
a
corporation
described
in
paragraph
(a)
or
(b),
in
respect
of
a
dividend
received
by
the
specified
financial
institution
on
a
share
that
was,
at
the
time
the
dividend
was
paid,
a
term
preferred
share,
other
than
a
dividend
paid
on
a
share
of
the
capital
stock
of
a
corporation
that
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
institution.
4.01.2
Historical
context
of
subsection
112(2.1)
and
term
preferred
shares
The
respondent
acknowledges
that
the
historical
context
described
by
the
appellant
at
pages
6,
7
and
8
of
its
submission
is
correct.
It
reads
as
follows:
According
to
the
general
rule
applying
to
corporations,
inter-company
dividends
are
not
subject
to
any
tax
because
the
beneficiary
must
include
the
amount
of
the
dividend
in
computing
its
income
for
the
year
(s.
12(1)(i))
but
they
may
be
deducted
under
subsection
112(1)
of
the
Act.
Subsection
112(2.1)
was
introduced
in
1979
(S.C.
1979,
c.
5,
s.
6)
to
prevent
a
deduction
in
the
computation
of
taxable
income
in
respect
of
dividends
received
by
specified
financial
institutions
(or
by
corporations
controlled
by
specified
financial
institutions),
the
principal
business
of
which
is
lending
money.
We
merely
have
to
read
paragraphs
39(5)(b)
to
(f)
to
determine
what
these
specified
financial
institutions
are:
banks,
trust
companies,
credit
unions,
insurance
corporations,
corporations
whose
principal
business
is
the
lending
of
money
or
the
purchasing
of
debt
obligations
or
a
combination
thereof.
Traditionally,
these
financial
institutions
granted
loans
to
their
customers.
The
interest
paid
on
these
loans
had
to
be
included
in
computing
the
income
of
the
financial
institutions
and
was
taxable
at
the
rate
applying
to
the
institution
in
question.
These
institutions
then
devised
a
tax-free
funding
formula.
Rather
than
making
loans,
they
subscribed
for
preferred
shares,
redeemable
at
their
option,
in
the
capital
stock
of
their
customers;
the
dividends
paid
on
these
shares
could
be
deducted
in
computing
the
income
of
the
said
financial
institutions.
Since
the
income
earned
from
these
shares
was
not
taxable,
the
performance
rate
of
the
dividends
on
these
shares
was
generally
lower
than
the
interest
rate
that
this
institution
would
ordinarily
have
charged
its
customer.
The
serious
loss
of
revenue
caused
by
this
tax-free
funding
mechanism
for
the
government
led
Parliament
to
introduce
the
concept
of
"term
preferred
shares",
dividends
on
which
were
no
longer
deductible
in
computing
the
recipient's
income.
Section
248
of
the
Act
gives
a
very
lengthy
and
extremely
technical
definition
of
term
preferred
share,
which
includes,
inter
alia,
a
share
that
the
issuing
corporation
is
required
to
redeem
or
which
the
holder
may
force
it
to
redeem.
In
other
words,
the
preferred
shares
for
which
the
financial
institutions
subscribed
were
more
in
the
nature
of
a
debt
than
equity
in
a
business.
Parliament
accordingly
introduced
section
112(2.1)
to
ensure
that
the
dividend
received
on
a
term
preferred
share
would
be
taxable
in
the
hands
of
the
recipient
in
the
same
way
as
interest.
To
ensure
that
financial
institutions
would
not
circumvent
the
legislation
and
subscribe
for
such
preferred
shares
through
a
subsidiary,
the
definition
of
specified
financial
institution
was
broadened
to
include
corporations
controlled
by
these
financial
institutions.
4.02
Case
law
The
following
cases
were
referred
to
by
the
parties:
1.
Kit-Win
Holdings
(1973)
Ltd.
v.
The
Queen,
[1981]
C.T.C.
43;
81
D.T.C.
5030
(F.C.T.D.);
2.
British
Columbia
Telephone
Co.
v.
M.N.R.,
[1986]
1
C.T.C.
2410;
86
D.T.C.
1286
(T.C.C.);
3.
Re
Pacific
Mobile
Corp.,
[1985]
C.B.C.
55,
page
32
(sub
nom.
American
Biltrite
(Canada)
Ltée
v.
Robitaille);
4,
The
Queen
v.
E.V.
Keith
Enterprises
Ltd.,
[1976]
C.T.C.
21;
76
D.T.C.
6018
(F.C.T.D.);
5.
Morguard
Properties
Ltd.
v.
City
of
Winnipeg,
[1983]
2
S.C.R.
493;
3
D.L.R.
(4th)
1;
6.
In
re
Amritsar,
Punjab
Co-operative
Bank
v.
Lahore
Income
Tax
Commissioner,
[1940]
A.C.
1055;
7.
General
Reinsurance
Company
Ltd.
v.
Tomlinson,
[1970]
2
All
E.R.
436;
8.
M.N.R.
v.
Independence
Founders
Ltd.,
[1953]
2
S.C.R.
390;
[1953]
C.T.C.
310;
53
D.T.C.
1170;
9.
Tip
Top
Tailors
Ltd.
v.
M.N.R.,
[1957]
S.C.R.
703;
[1957]
C.T.C.
309;
57
D.T.C.
1232;
10.
The
Queen
v.
RoyNat
Ltd.,
[1981]
C.T.C.
93;
81
D.T.C.
5072
(F.C.T.D.).
4.03
Analysis
4.03.1
Summary
of
parties'
arguments
According
to
the
respondent,
the
dividend
of
$250,000
in
question
was
received
on
shares
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
appellant.
According
to
the
appellant,
this
allegation
was
erroneous
in
fact
and
in
law
since:
(i)
the
class
A
shares
were
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
SID;
(ii)
moreover,
the
word
"institution"
used
at
the
end
of
subsection
112(2.1)
of
the
Act
does
not
specify
SID
but
rather
the
shareholders
who
control
SID,
in
this
case
the
Fédérations
des
caisses
populaires
et
d'économie
Desjardins
du
Québec;
these
class
A
shares
were
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
these
federations
and
the
respondent
did
not
adduce
any
evidence
to
the
contrary.
4
.03.2
Argument
concerning
the
meaning
of
"institution"
4.03.2(1)
The
appellant's
argument
reads
as
follows:
(a)
The
purpose
of
subsection
112(2.1),
as
we
have
established,
is
to
prevent
financial
institutions
(or
their
subsidiaries)
from
converting
into
dividends
what
would
otherwise
be
interest,
by
purchasing
term
preferred
shares
rather
than
granting
loans,
as
they
normally
do;
this
purpose
is
achieved
by
preventing
a
financial
institution
from
deducting
the
amount
of
the
dividend
received
on
such
shares
in
computing
its
income,
except
where
the
term
preferred
share
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
institution.
The
respondent
justified
his
assessment
by
claiming
that
the
Class
A
shares
in
Sico
were
acquired
by
SID
in
the
ordinary
course
of
the
business
it
carried
on;
according
to
the
Department,
the
word
"institution",
used
at
the
end
of
subsection
112(2.1),
must
be
interpreted
as
meaning
"the
specified
financial
institution”
that
received
the
dividend
rather
than
the
financial
institutions
that
controlled
SID,
but
the
appellant
challenges
this
assertion.
(b)
The
ban
on
deducting
dividends
received
on
term
preferred
shares
also
applies
to
the
subsidiaries
of
the
financial
institutions
and
associated
corporations
since
it
would
have
been
too
easy
for
financial
institutions
to
have
their
subsidiaries,
the
business
of
which
did
not
consist
of
lending
money,
acquire
such
shares
and
thus
circumvent
the
ban
in
subsection
112(2.1)
of
the
Act.
However,
in
order
to
interpret
the
exception
for
shares
that
were
not
purchased
in
the
ordinary
course
of
the
"institution's"
business,
we
submit
that
the
ordinary
course
of
the
financial
institution’s
business
must
be
considered
and
not
that
of
its
subsidiaries
or
associated
corporations.
We
submit
that
it
was
not
by
accident
that
Parliament
failed
to
repeat
the
expression
"specified
financial
institution”
at
the
end
of
subsection
112(2.1)
of
the
Act.
The
introductory
paragraph
of
112(2.1)
states
that
the
given
corporation,
that
is,
the
one
receiving
the
dividend,
is
called
a
“specified
financial
institution”
in
that
section.
Why
then
would
Parliament
have
used
only
the
word
"institution"
in
the
exception
for
this
purpose?
(c)
Moreover,
if
the
word
institution”
used
at
the
end
of
the
said
subsection
must
be
interpreted
to
mean
“specified
financial
institution",
it
would
be
easy
to
circumvent
this
provision.
A
bank
could
have
its
subsidiary,
the
principal
business
of
which
was
to
hold
title
to
various
properties
used
by
the
bank,
purchase
term
preferred
shares.
If
we
had
to
consider
the
“ordinary
course
of
the
business
carried
on
by
the
subsidiary”,
it
would
escape
the
prohibition
in
subsection
112(2.1)
of
the
Act
since
it
would
not
have
acquired
the
term
preferred
shares
in
the
ordinary
course
of
the
business
it
carried
on,
namely,
holding
property.
However,
if,
as
we
claim,
we
must
consider
the
ordinary
course
of
the
financial
institution’s
business
rather
than
that
of
the
subsidiary
to
determine
whether
the
exception
in
subsection
112(2.1)
of
the
Act
applies,
we
find,
given
our
example,
that
the
property-holding
subsidiary
could
not
deduct
the
dividends
received
on
the
term
preferred
shares
from
its
income
since
these
shares
would
have
been
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
bank
"the
institution”).
Thus,
the
bank
could
not
do
indirectly
what
it
could
not
do
directly.
(d)
Our
interpretation
is
also
supported
by
the
wording
of
paragraph
112(2.2)(f)
of
the
Act,
as
it
read
in
1982,
since
Parliament
here
speaks
expressly
of
a
share
owned
.
.
.
by
a
specified
financial
institution
that
acquired
the
share
in
the
ordinary
course
of
its
business.
Furthermore,
we
must
consider
that,
if
Parliament
had
wished
to
refer
to
the
business
of
the
specified
financial
institution
in
subsection
112(2.1)
of
the
Act,
it
would
have
done
so
as
explicitly
as
it
did
in
subsection
112(2.2)
The
provisions
in
subsections
258(1)
and
(3)
of
the
Act
are
examples
that
indicate
that,
when
Parliament
refers
to
the
shareholder
of
the
corporation
paying
the
dividend,
it
does
so
precisely:
Subsection
258(1):
For
the
purposes
of
this
Act,
where
at
any
time
after
November
16,
1978
the
paid-up
capital
of
a
term
preferred
share
owned
by
(a)
a
specified
financial
institution,
or.
.
.
was
reduced
otherwise
than
by
way
of
redemption,
acquisition
or
cancellation
of
the
share
or
of
a
transaction
described
in
subsections
84(2)
or
84(4.1),
a
dividend
shall
be
deemed
to
have
been
received
by
the
shareholder
at
that
time
equal
to
the
amount
received
by
him
on
the
reduction
of
the
paid-up
capital
of
the
share,
unless
the
share
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
shareholder.
Subsection
258(3):
For
the
purposes
of
paragraphs
12(1)(c)
and
(k)
and
sections
113
and
126
and
subject
to
subsection
(4),
each
amount
that
is
(a)
a
dividend
received
on
a
term
preferred
share
by
a
specified
financial
institution
from
a
corporation
not
resident
in
Canada,
or.
.
.
To
conclude,
in
order
for
subsection
112(2.1)
to
apply,
it
would
have
been
necessary
for
the
respondent
to
be
sure
that
the
class
A
shares
were
purchased
by
SID
in
the
ordinary
course
of
the
business
carried
on
by
the
group
of
financial
institutions
that
control
SID.
In
1982
up
to
80
per
cent
of
SID
was
controlled
by
a
group
of
persons
consisting
of
the
11
Fédérations
des
caisses
populaires
et
d'économie
Desjardins;
the
Caisse
de
dépôt
et
placement
du
Québec
held
approximately
20%
of
the
voting
shares
of
SID.
Needless
to
say,
the
shares
of
Sico
at
issue
here
were
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
said
federations
since
they
were
not
parties
to
the
transactions
that
occurred
in
December
1982.
SID
is
a
venture
capital
corporation
that
carries
on
its
own
business.
No
doubt,
the
various
Desjardins
federations
were
even
unaware
of
the
transactions
concluded
in
December
1982.
(e)
Moreover,
under
the
Savings
and
Credit
Unions
Act,
as
it
applied
in
1982
(R.S.Q.,
c.
C-4),
a
federation
is
an
organization
of
at
least
12
savings
and
credit
unions
(s.
123);
each
union
itself
is
formed
of
members
who
are
the
savers
(ss.
18
and
28);
the
object
of
a
federation
is
to
safeguard
the
similar
interests
of
its
members
and
for
such
purpose,
it
may
(a)
exercise
the
powers
of
a
union;
(b)
establish
educational,
publicity
and
technical
assistance
services;
(c)
make
agreements
with
an
affiliated
union
to
supervise
or
manage
its
affairs
for
a
fixed
period;
(d)
determine
the
amount
and
the
mode
of
payment
of
the
subscriptions
of
its
affiliated
unions;
(e)
supply
persons
interested
in
forming
a
union
with
the
necessary
information
to
ensure
its
efficacy
and
facilitate
its
formation;
(f)
assist
unions
affiliated
with
it
by
guaranteeing
the
carrying
out
of
their
commitments.
(section
129).
The
ordinary
course
of
a
federation’s
business
is
thus
to
look
after
the
interests
of
the
unions.
A
federation
also
has
the
power,
subject
to
specific
restrictions
(see
ss.
137,
139,
140,
141),
to
invest
in
company
shares,
but
this
is
not
the
ordinary
course
of
its
business.
The
premise
on
which
the
assessment
was
based
was
incorrect.
This
is
sufficient
reason
in
itself
to
set
it
aside
(Kit-Win
Holdings
(1973)
Ltd.
v.
The
Queen,
81
DTC
5030
[at
p.
5038):
This
opinion
[Johnston
v.
M.N.R.,
[1948]
CTC
195,
3
DTC
1182,
[1948]
SCR
486]
has
been
interpreted
and
relied
upon
as
authority
for
the
proposition
that
a
taxpayer
has
the
onus
of
proof
with
respect
only
to
the
findings
or
assumptions
made
by
the
Minister
or
his
assessors
on
his
behalf
at
the
time
that
the
assessment
was
made.
The
Minister’s
assessment
is
based
upon
the
assumptions
made
by
him
and
the
effective
manner
by
which
the
taxpayer
can
establish
error
in
the
assessment
made
upon
him
is
"to
demolish
the
basic
fact
upon
which”
the
assessment
was
made.
If
he
shows
that
the
facts
assessed
by
the
Minister
did
not
exist
and
even
if
they
did
exist
those
facts
do
not
bring
the
taxpayer
within
the
operation
of
the
taxing
provision
relied
upon
the
assessment
must
fail.
4.03.2(2)
Respondent's
reply
concerning
the
meaning
of
“institution”
The
respondent's
reply
reads
as
follows:
The
wording
of
subsection
112(2.1)
is
clear.
If
we
try
to
extract
the
various
components,
we
find,
inter
alia:
—
that
it
does
not
allow
a
particular
corporation,
called
a“
specified
financial
institution”,
to
make
the
deduction
in
subsections
112(1)
and
(2)
when
the
dividend
is
received
on
a
term
preferred
share;
—
that
a
"specified
financial
institution”
is
a
corporation
specified
in
paragraphs
39(5)(b)
to
(f)
of
the
Income
Tax
Act
and
also
a
corporation
controlled
by
one
or
more
corporations
referred
to
in
paragraphs
39(5)(b)
to
(f);
—
that
the
rule
governing
refusal
of
the
deduction
is
of
general
application,
the
only
exception
being
where
the
dividend
is
paid
on
a
share
that
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
institution.
The
word
“institution”
at
the
end
of
the
provision
can
refer
only
to
“specified
financial
institution”.
It
was
not
necessary
to
add
the
words
"specified
financial”
before
“institution”
because
it
is
clear
in
the
context
that
“institution”
can
refer
only
to
the
expression
"specified
financial
institution”,
which
Parliament
had
already
used
twice
in
the
same
sentence.
We
fail
to
see
any
ambiguity
in
the
meaning
of
"institution"
in
the
context
of
this
sentence.
Moreover,
how
could
there
be
ambiguity
when
the
word
“
institution”
is
not
used
at
all
in
the
other
provisions
creating
the
term
preferred
shares
scheme?
In
fact,
the
word
“institution”
is
not
used
in
paragraphs
39(5)(b)
to
(f)
of
the
Income
Tax
Act,
to
which
subsection
112(2.1)
specifically
refers,
and
in
the
other
provisions
to
which
counsel
for
the
appellant
referred
in
his
notes
(pp.
16
and
17),
Parliament
speaks
of
"specified
financial
institution.”
If
I
fully
understand
the
argument
of
counsel
for
the
appellant,
it
takes
him
outside
the
text.
He
does
not
give
the
word
the
meaning
it
has
in
the
context
of
the
sentence
but,
rather,
he
seems
to
affirm
that
if
Parliament
indeed
said
what
it
seems
to
have
wanted
to
say,
it
was
mistaken.
Parliament
erred
because
it
allowed
"specified
financial
institutions”
to
circumvent
the
provision
too
easily.
In
other
words,
counsel
tried
to
obfuscate
what
was
clear
and
then
attempted
to
clear
up
the
problem
by
way
of
an
example.
In
doing
so,
he
distorted
the
meaning
of
the
provision.
The
reason
why
Parliament
did
not
use
the
expression
specified
financial
institution"
a
third
time
at
the
end
of
subsection
112(2.1)
is
that
the
word”
institution”
was
sufficient
in
the
context
for
an
understanding
of
the
idea
conveyed.
While
paragraph
112(2.2)(f)
refers
to
the
"ordinary
course
of
its
business”,
this
part
of
the
sentence
takes
up
only
three
lines
and
there
is
no
ambiguity.
In
subsection
112(2.1)
the
sentence
takes
up
twelve
lines
and
it
was
more
necessary
to
use
the
wording
"the
ordinary
course
of
the
business
carried
on
by
the
institution”
rather
than
"the
ordinary
course
of
its
business”.
The
latter
formulation
could
have
caused
confusion.
To
summarize,
the
definite
article
"the"
placed
before
the
word
"institution"
is
used
as
a
demonstrative.
The
grammarian
Grévisse
has
stated:
The
definite
article
is
sometimes
used
as
a
demonstrative
before
nouns
designating
an
object
or
being
already
referred
to
.
.
."
(Le
bon
usage,
(1980)
TIth
edition,
p.
336,
No.
608).
In
the
sentence
with
which
we
are
dealing,
the
style
used
by
Parliament
would
have
been
much
more
cumbersome
if
it
had
said
"of
the
said
specified
financial
institution”
or
"of
this
specified
financial
institution”
when
"the
institution”
conveys
its
idea
very
well.
As
was
noted
bY
the
late
Mr.
Justice
L.-P.
Pigeon
in
the
courses
he
gave
to
the
legal
counsel
of
the
Québec
Government:
It
is
also
necessary
to
avoid
all
legal
jargon
that
is
not
indispensable.
As
far
as
possible,
legislation,
and
this
includes
regulations
and
contracts,
should
be
drafted
using
the
ordinary
words
of
everyday
vocabulary.
Learned
words
should
not
be
used
unless
they
are
absolutely
essential.
Moreover,
it
is
quite
pointless
to
include
expressions
that
do
not
add
to
the
meaning
and
that
make
a
sentence
more
cumbersome
when
their
only
purpose
is
to
give
the
text
a
legal
air;
examples
are
“the
said”,
“such”
etc.
These
words
are
sometimes
necessary
but
only
very
rarely.
If
they
are
not
indispensable,
they
should
be
avoided,
as
should
"aforesaid",
“
below-mentioned”,
“hereinafter”,
"hereinbefore"
etc.
These
are
all
expressions
that
are
not
used
in
everyday
language
and
are
not
generally
needed
in
legal
language.”
(Rédaction
et
interprétation
des
lois,
Québec:
Official
Publisher,
at
p.
37)
4.03.2(3)
Appellant's
reply
concerning
the
meaning
of
"institution"
This
part
of
the
appellant's
reply
reads
as
follows:
The
appellant
repeats
each
of
the
arguments
made
in
paragraph
5.1
of
its
notes
(pages
14
to
19)
and
maintains
that
the
word
“institution”,
used
at
the
end
of
subsection
112(2.1)
of
the
Act,
refers
to
the
financial
institution
of
the
Fédérations
des
caisses
populaires
Desjardins
du
Québec.
It
cannot
be
argued,
as
counsel
for
the
respondent
did,
that
the
style
would
have
been
much
more
cumbersome
if
Parliament
had
said
"of
the
said
specified
financial
institution”
or
"of
thisspecified
financial
institution”.
Parliament
did
not
have
to
use
the
demonstrative;
it
merely
had
to
add
the
words
emphasized
below
“in
the
ordinary
course
of
the
business
carried
on
bY
the
specified
financial
institution".
This
is
particularly
true
when
Parliament
took
the
trouble
in
the
introductory
paragraph
of
this
provision
to
indicate
that
the
particular
corporation,
that
is,
the
one
that
cannot
deduct
the
taxable
dividend,
is
called
a
“specified
financial
institution”
in
the
section
in
question
as
well
as
in
sections
248
and
258.
Given
the
way
in
which
Parliament
worded
the
provision,
how
can
it
be
argued
that,
by
using
the
word
"institution",
Parliament
wished
to
suggest
that
the
word
“institution”
meant”
specified
financial
institution”,
despite
the
introductory
paragraph?
In
this
sense,
the
quotation
from
Mr.
Justice
L.-P.
Pigeon
is
of
no
help
in
resolving
the
dispute.
Parliament
does
not
speak
in
vain.
In
the
work
quoted
by
my
friend
(Rédaction
et
interprétation
des
lois,
Québec:
Official
Publisher),
Pigeon
J.
states
the
following
at
p.
35:
There
is
a
strong
tendency
today
to
draft
contracts
or
undertakings
in
the
form
of
letters.
When
the
letter
is
a
contract,
the
rules
of
legislative
drafting
must
necessarily
be
applied,
but
in
the
case
of
genuine
letter
writing,
the
principles
of
literary
drafting
will
apply.
One
of
these
principles
is
that
excessive
repetition
of
the
same
word
should
be
avoided.
Consequently,
in
literary
writing
we
must
strive
to
vary
our
writing
[and]
we
must
strive
to
vary
our
expression.
This
is
what
should
never
be
done
in
legislative
drafting,
or
more
correctly
in
legal
drafting.ln
legal
drafting,
when
the
same
word
or
expression
is
not
used
identically,
the
courts
presume
not
that
the
author
wished
to
vary
his
expression
but
that
he
wished
to
make
a
distinction
or
to
change
the
meaning
.
.
.
While
it
is
legitimate
to
use
the
various
meanings
of
each
word,
it
is
necessary
to
avoid
doing
so
within
one
and
the
same
legal
document,
although
this
is
quite
permissible
in
literary
writing.
Consequently,
in
one
and
the
same
statute
or
document
you
should
never
use
the
same
expression
with
different
meanings.
Another
expression
or
another
word
must
be
used
to
say
something
different,
even
though
the
dictionary
might
justify
use
of
the
same
word.
There
are
accordingly
two
constraints
imposed
by
legislative
drafting:
never
use
the
same
word
with
two
different
meanings
and
never
use
two
different
words
to
express
the
same
idea.
To
conclude,
the
appellant
reiterates
that
not
only
was
the
premise
on
which
the
assessment
was
issued
incorrect
(see
Kit-Win
Holdings
(1973)
Ltd.,
mentioned
at
page
19
of
our
notes),
but
also
this
provision
cannot
be
interpreted
so
as
to
reduce
the
appellant's
rights
(that
is,
its
general
right
to
deduct
the
dividend
received)
in
the
absence
of
absolutely
clear
wording
(Morguard
Properties
Ltd.
et
al.,
quoted
at
page
25
of
the
appellant's
notes).
4.03.2(4)
Decision
concerning
the
meaning
of
“institution”
The
first
aspect
of
the
dispute
before
us
is
to
determine
the
correct
interpretation
of
"institution"
at
the
very
end
of
subsection
112(2.1).
First,
it
should
be
noted
that
the
Supreme
Court
of
Canada
recently
laid
down
the
rule
of
construction
to
be
used
in
tax
disputes
in
Stubart
Investments
Ltd.
v.
The
Queen,
[1984]
S.C.R.
578;
[1984]
C.T.C.
294;
84
D.T.C.
6305.
The
following
passage
very
clearly
states
the
principle
expressed
in
this
decision
(at
page
316
(D.T.C.
6323)):
Gradually,
the
role
of
the
tax
statute
in
the
community
changed,
as
we
have
seen,
and
the
application
of
strict
construction
to
it
receded.
Courts
today
apply
to
this
statute
the
plain
meaning
rule,
but
in
a
substantive
sense
so
that
if
a
taxpayer
is
within
the
spirit
of
the
charge,
he
may
be
held
liable.
See
Whiteman
and
Wheatcroft,
supra,
at
page
37.
While
not
directing
his
observations
exclusively
to
taxing
statutes,
the
learned
author
of
Construction
of
Statutes
(2nd
ed.
1983)
at
page
87,
E.A.
Driedger
put
the
modern
rule
succinctly:
Today
there
is
only
one
principle
or
approach,
namely,
the
words
of
an
Act
are
to
be
read
in
their
entire
context
and
in
their
grammatical
and
ordinary
sense
harmoniously
with
the
scheme
of
the
Act,
the
object
of
the
Act,
and
the
intention
of
Parliament.
Virtually
the
same
wording
was
used
in
Lor-Wes
Contracting
Ltd.
v.
The
Queen,
[1986]
1
F.C.
346;
[1985]
2
C.T.C.
79;
85
D.T.C.
5310,
at
83
(D.T.C.
5313;
F.C.
352),
as
is
shown
by
the
following
passage:
"The
only
principle
of
interpretation
now
recognized
is
a
words-in-total-context
approach
with
a
view
to
determining
the
object
and
spirit
of
the
taxing
provisions."
Therefore,
what
might
the
object
of
subsection
112(2.1)
of
the
Act
be?
This
provision
is
geared
primarily
to
preventing
a
corporation
called
a
"specified
financial
institution",
which
may
be
a
lending
institution
or
a
corporation
controlled
by
or
associated
therewith,
from
claiming
the
deduction
resulting
from
receipt
of
dividends
on
term
preferred
shares
(subsection
112(2)).
This
prohibition
applies
when
it
is
clear
that
the
said
shares
were
acquired
in
order
to
set
up
a
tax-exempt
administrative
mechanism
that
would
nevertheless
provide
them
with
a
return
that
is
at
least
as
advantageous
as
the
loans
usually
made
to
their
customers.
The
legislative
background
(paragraph
4.01.2)
of
subsection
112(2.1)
seems
to
show
that
the
abuse
of
such
a
mechanism,
which
causes
the
government
enormous
tax
losses,
is
the
situation
that
Parliament
wished
to
remedy.
However,
Parliament
admitted
one
exception.
If
this
lending
institution
or
a
subsidiary
thereof
receives
dividends
on
term
preferred
shares
for
some
exceptional
reason,
it
is
clear
that
this
would
not
fall
within
the
situation
that
Parliament
intended
to
remedy.
Although
such
an
interpretation
raises
possible
questions
concerning
the
frequency
with
which
dividends
must
be
received
in
order
to
bring
the
principle
in
subsection
112(2.1)
of
the
Act
into
play,
this
Court
is
of
the
opinion
that
Parliament
intended
to
give
the
courts
responsible
for
applying
this
provision
a
certain
amount
of
flexibility.
The
appellant
maintains
that
the
expression
"institution"
at
the
very
end
of
the
subsection
does
not
refer
to
the
corporation
affected
by
the
prohibition
on
deductions
for
dividends
received
but
rather
to
a
completely
different
thing,
in
this
case
an
organization
of
11
Fédérations
des
caisses
populaires
et
d'économie
Desjardins.
The
appellant
seemed
to
base
its
argument
on
a
method
of
interpretation
centred
exclusively
on
a
literal
and
grammatical
approach
to
the
wording
of
subsection
112(2.1),
the
result
of
which,
to
say
the
least,
involves
a
dubious
logic.
In
effect,
since
any
legislative
provision
that
contains
both
the
general
principle
and
the
exception
thereto
forms
a
consistent
and
logical
whole,
how
can
the
subject
referred
to
in
the
general
prohibition
and
the
subject
that
can
rely
on
the
exemption
from
this
principle
be
different
persons?
Such
an
approach
also
proves
to
be
contrary
to
the
method
of
interpreting
taxing
statutes
recognized
by
the
Supreme
Court
in
Stubart
Investments
Ltd.
This
Court
accordingly
feels
that
a
search
for
the
object
behind
subsection
112(2.1)
of
the
Act
rules
out
the
argument
based
on
the
fact
that
use
of
the
single
word
“institution”
on
two
occasions,
as
opposed
to
use
of
the
term
"specified
financial
institution”
in
the
same
section,
implies
that
a
different
meaning
must
be
given
to
the
two
expressions.
Although
it
is
a
factor
that
must
be
taken
into
consideration,
this
argument
is
not
sufficient
to
overturn
an
interpretation
based
on
a
search
for
the
object
consistent
with
the
terms
used
that
ensures
a
logical
and
coherent
application
of
the
provision
mentioned
above.
It
would
be
unfortunate
if
certain
deficiencies
in
legislative
drafting
made
it
possible
to
give
provisions
a
Clearly
illogical
scope
under
cover
of
a
method
of
interpretation
that
was
abusively
restrictive
and
literal.
Moreover,
it
is
surprising
to
find
that
the
former
wording
of
subsection
112(2.1),
the
amendments
to
which
in
1980-81
affected
only
the
list
of
the
corporations
subject
to
application
of
the
principle
contained
in
this
provision,
used
the
expression
"particular
corporation"
both
in
the
introductory
paragraph
and
at
the
very
end
of
the
provision:
112.
(2.1)
No
deduction
may
be
made
under
subsection
(1)
or
(2)
in
computing
the
taxable
income
of
a
particular
corporation
that
is
(a)
a
corporation
described
in
any
of
paragraphs
39(5)(b)
to
(f)
or
an
insurance
corporation,
(b)
a
corporation
in
which
a
corporation
described
in
paragraph
(a)
has
an
equity
percentage
(within
the
meaning
that
would
be
assigned
by
paragraph
95(4)(b)
if
(i)
the
rules
in
paragraph
94(1)(d)
were
applicable
to
all
trusts,
wherever
resident,
and
(ii)
the
references
in
subparagraph
95(4)(a)(i)
to
"
number
of
shares”
and
“number
of
issued
shares”
were
read
as
references
to
“number
of
issued
shares
other
than
shares
that
were
not
term
preferred
shares
on
November
17,
1978,
but
would
have
been
term
preferred
shares
on
that
day,
had
they
not
been
issued
before
that
day,
or
that
are
not
term
preferred
shares
by
reason
of
having
been
issued
pursuant
to
an
agreement
in
writing
made
before
November
17,
1978
and,
in
either
case,
that
were
issued
in
a
transaction
between
persons
dealing
at
arm's
length”
of
not
less
than
10%,
or
(c)
a
corporation
whose
principal
business
is
the
ownership
of
shares,
and
that
‘is
or
would
be,
if
all
corporations
described
in
paragraphs
(a)
and
(b)
were
members
of
a
related
group,
controlled
by
a
related
group
of
corporations
described
in
paragraph
(a)
or
(b),
in
respect
of
a
dividend
received
on
a
term
preferred
share
by
the
particular
corporation
other
than
a
dividend
paid
on
a
share
of
the
capital
stock
of
a
corporation
that
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
particular
corporation.
Thus,
since
the
sole
amendment
to
the
part
of
subsection
112(2.1)
of
the
Act
that
interests
us
was
the
insertion
of
the
expression
"specified
financial
institution"
to
replace
“
particular
corporation”,
this
Court
feels
that
Parliament
clearly
intended
the
term
“institution”
in
the
present
version
of
subsection
112(2.1)
to
refer
to
the
same
entity
as
the
expression
"specified
financial
institution"
previously
used
on
two
occasions
in
the
text
of
this
provision.
Finally,
the
authors
also
seem
to
be
unanimous
as
to
the
interpretation
to
be
given
to
subsection
112(2.1)
of
the
Act:
Subsection
112(2.1)
provides
that
subsections
112(1)
and
(2)
do
not
apply
to
permit
the
deduction
by
a
corporation
of
taxable
dividends
received
on
a
"term
peferred
share”
if
the
recipient
corporation
is
a“
specified
financial
institution”
as
defined.
The
disallowance
of
this
deduction
does
not
apply
if
the
share
on
which
the
dividend
was
paid
was
not
acquired
by
the
corporation
in
the
ordinary
course
of
the
business
carried
on
by
that
corporation.
The
term
"specified
financial
institution"
is
described
in
more
detail
in
the
commentary
at
#16,346
and
the
definition
of
a
"term
preferred
share”
is
described
in
more
detail
at
#16,348.
[CCH
Canadian
Tax
Reporter,
Vol.
3
page
15291
paragraph
16345]
It
is
clear
that
the
corporation
receiving
the
dividends,
the
"
recipient
corporation"
is
the
same
as
"that
corporation",
i.e.,
the
corporation
that
acquired
the
term
preferred
shares
on
which
the
dividends
were
paid.
A
similar
conclusion
may
be
drawn
from
the
comments
of
the
Canada
Tax
Service,
where
it
is
clear
that
the
terms
used
in
this
provision,
namely,
certain
described
corporations
in
respect
of
a
dividend
received
on
a
'term
preferred
share"'
and“
recipient
corporation"
refer
to
the
same
corporate
entity:
112.
(2.1)
By
virtue
of
subsection
112(2.1),
no
deduction
may
be
made
under
subsection
(1)
or
(2)
in
computing
the
taxable
income
of
certain
described
corporations
in
respect
of
a
dividend
received
on
a
"term
preferred
share",
which
expression
is
defined
in
subsection
248(1).
BY
way
of
exception,
such
a
dividend
is
deductible
if
paid
on
a
share
of
the
capital
stock
of
a
corporation
that
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
recipient
corporation.
[Richard
De
Boo
Canada
Tax
Service—Stikeman,
Vol.
6,
pages
112-114B]
In
conclusion,
this
Court
feels
that
the
term
“
institution”,
as
used
in
the
current
wording
of
subsection
112(2.1)
of
the
Act,
following
a
search
for
its
object,
must
in
all
logic
relate
to
the
notion
of
"specified
financial
institution”
as
defined
in
the
wording
of
this
provision.
Moreover,
since
this
was
the
intent
of
Parliament,
why
did
it
not
simply
use
the
expression
"specified
financial
institution”
rather
than
institution”
?
4.03.3
Argument
concerning
the
meaning
of
"ordinary
course
of
business^'
4.03.3(1)
Appellant's
argument
The
appellant's
argument
reads
as
follows:
SID
did^
not
acquire
the
class
A
shares
of
Sico
in
the^
ordinary
course
of
its
business
Should
the
Court
not
accept
our
interpretation
of
the
word"
institution”
in
subsection
112(2.1),
it
must
determine
whether
the
Sico
shares
were
acquired
in
the
ordinary
course
of
the
business
carried
on
by
SID.
We
respectfully
submit
that
the
evidence
adduced
at
the
hearing
showed
beyond
any
doubt
that
SID
did
not
acquire
the
class
A
shares
of
Sico
in
the
ordinary
course
of
its
business.
What
was
the
ordinary
course
of
the
business
carried
on
by
SID?
SID
is
a
venture
capital
corporation,
the
business
of
which
is
to
acquire
minority
holdings
of
voting
and
participating
shares
in
Quebec
businesses.
Thanks
to
the
management
and
financing
expertise
it
provides,
which
was
acknowledged
by
the
witness
Paul
Parent
of
Sico,
SID
acts
as
a
partner
in
a
business,
not
in
respect
of
the
management
and
everyday
operations
of
this
business
but
rather
in
respect
of
its
general
orientation.
It
is
allowed
to
do
this
by
the
positions
held
by
its
managers
in
the
business's
Board
of
Directors.
SID
invests
for
the
medium
and
long
term.
Since
1976
SID
had
carried
on
no
money-lending
business;
it
no
longer
carried
on
a
business
of
purchasing
and
selling
shares.
It
held
and
still
holds
investments
in
businesses.
On
this
last
point,
it
is
quite
revealing
to
find
that
Mr.
André
Michaud,
the
respondent's
auditor,
seems
to
have
felt
that
the
ordinary
course
of
SID's
business
was
to
purchase
and
sell
shares,
primarily
because
of
the
fact
that
in
1980
SID
had
purchased
282
ordinary
shares
of
a
company
called
Industeck
and
412
shares,
which
he
called
preferred
although
he
did
not
have
the
supporting
documents,
and
disposed
of
this
holding
218
days
later.
On
this
point
it
should
be
noted
that
Mr.
Raymond
Gagné
confirmed
that
SID
disposed
of
its
holding
in
this
company
because
of
the
company's
bankruptcy;
moreover,
Mr.
Gagné
denied
that
SID
held
preferred
shares
of
this
company.
He
indicated
that
SID
held
its
investments
for
an
average
of
10
years.
The
holdings
of
which
SID
disposed
resulted
in
most
cases
from
the
misfortunes
of
the
companies
in
which
it
had
invested
when
they
became
bankrupt
or
insolvent.
Mr.
Gagné
mentioned
the
names
of
Petro-Sun,
Industeck,
Core
Data,
Aquaparc,
Asbestonos,
Corporation
La
Vérendrye,
Sonex-
eau
and
Plastique
Macaple.
On
the
other
hand,
SID
disposed
of
its
holding
in
Québecair
and
Nordair
after
several
years
when
its
wish
to
merge
the
two
air
carriers
failed
to
gain
the
approval
of
both
levels
of
government.
It
also
disposed
of
its
holding
in
Sico
in
1985
when
the
latter
made
a
public
issue
and
listed
its
shares
on
the
stock
exchange;
it
had
been
a
shareholder
since
1977.
Exceptionally,
SID
held
preferred
shares
of
Canam-Manac.
This
exceptional
situation
was
explained
by
the
fact
that
SID
already
held
a
minority
share
in
this
company
and,
because
of
the
difficult
economic
situation
around
1981,
it
injected
new
capital
into
preferred
shares
so
as
not
to
take
control
of
this
company
to
the
detriment
of
the
majority
shareholders
at
that
time.
The
fact
remains,
however,
that
this
was
an
exceptional
situation
and
it
could
certainly
not
be
argued
that
the
acquisition
of
preferred
shares
(and
again
the
respondent
did
not
show
that
they
were
term
preferred
shares,
as
was
the
case
in
Sico)
formed
part
of
the
ordinary
course
of
the
business
it
carried
on.
The
debentures
initially
issued
in
1977
were
convertible
into
participating
nonvoting
shares.
The
1982
amendment
to
the
terms
of
these
debentures,
their
conversion
and
the
redemption
at
a
premium
of
the
class
A
shares
of
Sico
in
late
1982
were
carried
out
solely
to
comply
with
the
request
of
the
employees
of
Sico
to
increase
their
holdings
in
the
company's
capital
stock,
while
taking
advantage
of
the
provisions
of
the
Québec
share
savings
scheme.
To
attain
this
objective,
it
was
also
necessary
to
take
account
of
SID's
objectives,
that
is,
to
avoid
any
dilution
of
its
holdings
of
the
capital
stock
of
Sico.
This
was
why
the
debentures
originally
issued
could
be
converted
into
voting
and
participating
shares
of
SID
as
the
employees
acquired
similar
shares.
By
acting
as
it
did,
SID
did
not
need
an
additional
investment
to
maintain
its
position.
Furthermore,
all
the
transactions
had
the
merit
of
not
changing
the
shareholders’
interests.
It
is
very
important
to
note
that
the
exception
in
subsection
112(2.1)
of
the
Act
refers
to
the
“
ordinar
course
of
the
business
carried
on"
and
not
"the
ordinary
course
of
business".
The
distinction
is
fundamental
since
SID's
decision
to
participate
in
the
reorganization
of
Sico's
capital
to
accelerate
the
conversion
of
the
debentures
that
it
held
may
have
been
made”
in
the
ordinary
course
of
business”
but
not
"in
the
ordinary
course
of
the
business
carried
on
by
SID”.
In
British
Columbia
Telephone
Company
v.
M.N.R.
(86
D.T.C.
1286),
the
appellant
carried
on
a
business
that
involved
selling
telephone
service
to
its
customers.
In
computing
its
income,
the
appellant
claimed
a
deduction
for
inventory
in
respect
of
certain
equipment,
namely,
goods
sold
to
other
telephone
companies
at
cost.
To
be
entitled
to
the
deduction,
the
taxpayer
had
to
show
whether
these
goods
were
held
by
it
for
sale
"in
the
ordinary
course
of
the
business
carried
on
by
the
company".
The
Court
recognized
the
distinction
between
the
ordinary
course
of
business
and
the
ordinary
course
of
the
business
carried
on
by
a
taxpayer
[p.
1290)]:
The
term
used
in
subsection
20(1)(gg)
is
not
"ordinary
course
of
business^',
but
"ordinary
course
of
the
business",
that
is,
the
ordinary
course
of
the
business
carried
on
by
the
taxpayer.
Thus,
I
must
consider
the
business
of
B.C.
Telephone
to
determine
whether
the
property
sold
by
it
to
Okanagan
Telephone
and
other
corporations
was
in
the
ordinary
course
of
its
business.
In
a
bankruptcy
matter
before
the
High
Court
of
Australia,
Rich,
J.
wrote
that
for
the
transactions
to
be
considered
in
the
ordinary
course
of
business
supposes
"that
according
to
the
ordinary
and
common
flow
of
transactions
in
affairs
of
business
there
is
a
course,
an
ordinary
course.
It
means
that
the
transaction
must
fall
into
place
as
part
of
the
undistinguished
common
flow
of
business
done,
that
it
should
form
part
of
the
ordinary
business
as
carried
on,
calling
for
no
remark
andarising
out
of
no
special
or
particular
situation":
Downs
Distributing
Co.
Pty.,
Ltd.
v.
Associated
Blue
Star
Stores
Pty.,
Ltd.
(In
Liquidation),
(1948),
76
C.L.R.
463,
at
page
477.
Street,
J.
of
the
Supreme
Court
of
New
South
Wales
stated
that
“
the
transaction
must
be
one
of
the
ordinary
day
to
day
business
activities,
having
no
unusual
or
special
features,
and
being
such
as
a
manager
of
a
business
might
reasonably
be
expected
to
be
permitted
to
carry
out
on
his
own
initiative
without
making
prior
reference
back
or
subsequent
report
to
his
superior
authorities,
such
as,
for
example,
to
his
board
of
directors.”:
Re
Bradford
Roofing
Industries
Pty.,
Ltd.
(1966),
84
W.N.
(Pt.
1)
(N.S.W.)
276
at
page
285;
Street,
J.
borrowed
with
minor
adaptations
the
words
of
Rich,
J.:
"the
requirement
is
that
the
transaction
must
fall
into
place
as
part
of
the
undistinguished
common
flow
of
the
company's
business,
that
it
should
form
part
of
the
ordinary
course
of
the
company's
business
as
carried
on,
calling
for
no
remark
and
arising
out
of
no
special
or
particular
situation”.
In
the
instant
case
the
reorganization
of
Sico's
capital
and
the
redemption
of
the
class
A
shares
held
by
SID
certainly
did
not
take
place
in
the
ordinary
course
of
SID's
business
('the
transaction
must
be
one
of
the
ordinary
day
to
day
business
activities,
having
no
unusual
or
special
features
.
.
.
the
requirement
is
that
the
transaction
must
fall
into
place
as
part
of
the
undistinguished
common
flow
of
the
company's
business.”)
Moreover,
if
matters
had
taken
their
normal
course,
SID
would
have
waited
until
the
debentures
fell
due
before
converting
them
into
participating
shares
in
Sico.
The
premature
conversion
and
the
redemption
of
part
of
the
shares
were
thus
unusual
occurrences
caused
by
the
desire
to
encourage
greater
participation
by
Sico
employees
in
their
company's
capital
stock.
How,
then,
can
the
Minister
of
Revenue
claim
that
these
unforeseen
and
unusual
events
occurred
in
the
ordinary
course
of
SID's
business?
There
is
no
judicial
decision
that
has
really
defined
the
meaning
of
the
ordinary
course
of
the
business
of
a
company.
Moreover,
as
was
stressed
by
the
Supreme
Court
of
Canada
in
Re
Pacific
Mobile
Corporation;
Robitaille
v.
American
Biltrite
(Canada)
Ltd.,
[1985]
CBC
55,
p.
32
(at
p.
33]:
It
is
not
wise
to
attempt
to
give
a
comprehensive
definition
of
the
term
"ordinary
course
of
business”
for
all
transactions.
Rather,
it
is
best
to
consider
the
circumstances
of
each
case
and
to
take
into
account
the
type
of
business
carried
on
between
the
debtor
and
creditor.
We
approve
of
the
following
passage
from
Monet
J.A.'s
reasons
discussing
the
phrase
"ordinary
course
of
business”
at
p.
205:
It
is
apparent
from
these
authorities,
it
seems
to
me,
that
the
concept
we
are
concerned
with
is
an
abstract
one
and
that
it
is
the
function
of
the
courts
to
consider
the
circumstances
of
each
case
in
order
to
determine
how
to
characterize
a
given
transaction.
This
in
effect
reflects
the
interplay
between
law
and
fact.
In
another
case,
The
Queen
v.
E.V.
Keith
Enterprises
Ltd.,
76
D.T.C.
6018,
the
taxpayer
was
a
management
company
that
had
invested
in
other
companies
involved
in
real
estate
development
and
in
construction;
moreover,
the
taxpayer
had
granted
loans
for
a
number
of
years
to
individuals
and
firms
with
which
it
did
business.
The
taxpayer
claimed
a
provision
for
bad
debts
in
respect
of
a
loan,
but
the
Department
refused
it.
The
Federal
Court
accordingly
had
to
decide
whether
the
loan
had
been
granted
in
the
ordinary
course
of
the
defendant's
business.
It
answered
in
the
affirmative
on
the
basis
of
the
repetition
of
similar
transactions
earlier
[at
p.
6020].
.
.
.
it
remains
that
the
loan
was
of
a
class
that
the
Defendant
had
the
power
to
make
and
had
established,
over
the
years,
a
pattern
of
making
in
the
ordinary
course
of
its
business,
and
that
Allyn
James,
notwithstanding
the
relationship,
was
within
the
class
of
persons
to
whom
such
financial
accommodation
had
been
regularly
extended.
Finally,
we
should
note
that
subsection
112(2.1)
is
an
exception
to
the
general
principle
stated
in
subsection
112(1)
concerning
the
deductibility
of
taxable
divi-
dends
received
by
a
taxable
Canadian
corporation.
As
was
noted
by
the
Supreme
Court
of
Canada
in
Morguard
Properties
Ltd.
et
al.
v.
City
of
Winnipeg,
[1983]
2
S.C.R.
493
[at
p.
5071:
For
centuries,
statutes
levying
taxes
and
like
imposts
on
the
citizen
have
been
read
strictly
in
the
sense
that
the
Legislature
must,
in
order
to
reduce
a
right
in
the
taxpayer,
say
so
in
unmistakably
clear
terms.
Conclusions
Whereas
the
word
"institution"
used
in
subsection
112(2.1)
of
the
Act
refers
to
the
shareholders
of
SID,
contrary
to
the
premise
on
which
the
respondent
relied
in
assessing
the
taxpayer;
Whereas
SID
is
a
venture
capital
business
that
makes
medium-
and
long-term
investments
in
participating
voting
shares
(ordinary
shares
within
the
meaning
of
the
Act)
in
Québec
companies;
Whereas
SID
does
not
carry
on
any
business
purchasing
and
selling
shares
but
acts
as
a
partner
providing
technical
support
for
Québec
businesses;
Whereas
it
is
not
part
of
SID's
mission
to
grant
loans
to
Québec
businesses,
either
in
cash
or
in
the
form
of
term
preferred
shares;
Whereas
the
sole
purpose
of
the
reorganization
in
1982
was
to
enable
employees
to
subscribe
for
the
share
capital
of
Sico
without
at
the
same
time
diluting
SID's
holding
in
the
company;
Whereas
the
transactions
concluded
in
December
1982
were
not
in
the
ordinary
course
of
the
business
carried
on
by
SID;
Therefore
To
Refer
the
assessment
back
to
the
Minister
of
Revenue
so
that
it
may
be
allowed
to
deduct
the
$250,000
claimed
with
respect
to
the
dividend
deemed
to
have
been
received
from
Sico
Inc.
in
computing
its
taxable
income.
1
4.03.3(2)
Respondent's
argument
concerning
the
meaning
of
"ordinary
course
of
business”
The
respondent's
argument
reads
as
follows:
Shares
Acquired
In
The
Ordinary
Course
Of
The
Business
Carried
On
By
Société
D'Investissement
Desjardins
Exhibit
1-2
entitled
"General
information
on
Société
d'Investissement
Desjardins
and
its
subsidiaries"
dated
January
25,
1978,
states
its
purposes
and
objects,
according
to
the
Act,
as
being:
Section
12:
The
purpose
of
the
Corporation
shall
be
to
create
and
administer
an
investment
fund
with
the
object
of
establishing
and
developing
industrial
and
commercial
undertakings,
of
a
cooperative
nature
or
not,
and
thus
promote
the
economic
progress
of
the
province
of
Québec.
Section
13:
The
Corporation
may
in
particular:
(a)
acquire
securities
and
any
evidences
of
indebtedness
and
title
of
participation;
(b)
establish,
provide
and
lease
and
hire
technical,
management
and
research
services
for
itself
or
for
others.
In
a
publicity
leaflet
(Exhibit
A-17)
Société
d’Investissement
Desjardins
explains
that
it
is
looking
for"
high
profitability
measured
by
increases
in
share
value
and
by
dividend
flow”.
The
financial
statements
and
the
statement
of
income
of
Société
d’Investissement
Desjardins
for
its
1982
taxation
year
(Exhibit
1-1)
disclose,
inter
alia:
1.
that
Société
d'Investissement
Desjardins
held
shares
in
10
corporations
[Form
125(9)];
2.
that
the
shares
held
included
non-voting
shares
of
4
corporations
[125(9)];
3.
that
its
gross
operating
income
included
dividends
totalling
$1,468,498
in
1982
and
$1,459,492
in
1981
(Unconsolidated
results);
4.
that
its
assets
included
obligations
(unconsolidated
balance
sheet)
totalling
$4,706,925
in
1981
and
$3,873,950
in
1981
(note
5
to
the
financial
statements);
5.
that
its
assets
also
included
notes
and
term
deposits
totalling
$6,931,000
in
1982
and
$9,466,000
in
1981
(Unconsolidated
balance);
6.
that
the
value
of
its
holdings
totalled
$54,360,101
in
1982
and
$48,742,842
in
1981
(note
6
to
the
financial
statements);
7.
that
at
page
1
of
its
statement
of
income
for
1982
Société
d'Investissement
Desjardins
described
itself
as
a"
holding
company”
and
stated
that
its
total
income
was
broken
down
as
follows
(which
contradicts
the
statement
on
page
9,
paragraph
(e)
of
the
notes
of
counsel
for
the
appellant):
|
—
interest
|
69.5%
|
|
—
dividends
|
37.9%
|
|
—
other
|
2.6%
|
|
The
evidence
also
showed:
|
|
—
that
Société
d'Investissement
Desjardins
held
preferred
shares
of
Indus-
teck;
—
that
the
debentures
for
$1,100,000
issued
to
Société
d'Investissement
Desjardins
by
Sico
on
June
29,
1978
were
convertible
into
participating
non-voting
class
C
shares
of
Sico;
—
that
despite
Mr.
Gagné's
statements
that
since
early
1977
Société
d'Investissement
Desjardins
was
restricted
to
acquiring
shares
and
left
the
business
of
lending
money
to
C.I.D.,
it
loaned
$1,100,000
guaranteed
by
debentures
to
Sico
in
June
1978
(Exhibit
A-2)
and,
according
to
what
can
be
noted
in
its
statement
of
income,
69.5%
of
its
income
consisted
of
interest;
furthermore,
the
document
entitled
"General
information
on
Société
d'Investissement
Desjardins"
(Exhibit
1-2)
contains
the
following
statements:
although
Société
d'Investissement
Desjardins
transferred
the
major
part
of
its
loan
portfolio,
it
did
not
intend
to
abandon
this
activity
(p.
4-1976)
and
it
must
be
remembered
that
Société
d'Investissement
Desjardins
also
works
in
the
loan
field.
(p.
5);;
—
that
despite
Mr.
Gagné's
statements
that
Société
d'Investissement
Desjardins
wished
to
hold
only
between
20%
and
49%
of
the
shares
of
the
corporations
in
which
it
invested,
it
actually
controlled
three
corporations
in
1982,
had
acquired
control
of
CORE
in
1976
(Exhibit
1-2,
p.
6)
and,
according
to
Mr
Gagné's
statement,
wished
to
retain
control
of
Sico
although
it
encouraged
the
purchase
of
shares
by
Sico
employees.
All
in
all,
the
evidence
showed
that
Société
d'Investissement
Desjardins
wished
to
make
profits
by
investing
in
the
shares
of
corporations
but
was
eminently
flexible
in
its
approach.
It
chose
to
lend
money,
purchase
participating
and
voting
shares
or
to
invest
in
preferred
or
non-voting
shares,
depending
on
the
circumstances.
In
a
holding
company
of
this
kind
it
would
be
rather
surprising
if
the
situation
were
otherwise.
In
the
circumstances
it
is
clear
that
the
shares
acquired
in
December
1982
after
the
debentures
were
changed
and
converted
into
redeemable
shares
and
redeemed
cannot
be
taken
in
isolation.
These
shares
were
acquired
and
sold
in
a
search
for
"high
profitability
measured
by
increases
in
share
value
and
by
dividend
flow”,
which
is
the
objective
of
Société
d'Investissement
Desjardins,
according
to
its
information
leaflet
(Exhibit
A-17,
right-hand
column).
Concerning
the
meaning
of
the
expression
“
ordinary
course
of
the
business
carried
on”
by
the
specified
financial
institution,
Mr.
Geoffrey
S.R.
Dyer
states
‘the
following
at
page
25
of
an
article
published
in
“
Corporation
Tax
Conference—1986"
(Tab
B
below):
.
.
.
Obviously,
it
is
a
question
of
fact
whether
a
purchase
of
shares
by
a
specified
financial
institution
does
or
does
not
take
place
in
the
ordinary
course
of
the
institution’s
business.
Indeed,
in
the
nontax
area,
there
is
considerable
authority
for
the
proposition
that
these
words,
which
may
have
a
very
wide
meaning,
must
be
interpreted
within
the
context
in
which
they
are
used
(an
ordinary
principle
of
statutory
construction)
and
that
different
contexts
can
produce
dramatically
different
meanings.
In
the
case
of
a
purchase
of
term
preferred
shares
by
a
financial
institution,
some
assistance
may
be
found
in
those
tax
cases
that
consider
whether
particular
securities
transactions
carried
on
by
financial
institutions
are
on
account
of
capital
or
income.
The
very
nature
of
the
business
of
a
financial
institution
will
make
it
difficult
in
most
cases
to
contend
that
a
purchase
of
term
preferred
shares
was
beyond
the
ordinary
course
of
this
business.
In
the
case
of
a
specified
financial
institution
that
is
not
itself
engaged
in
the
financing
business
but
is
associated
with
a
financial
institution,
however,
there
could
be
considerably
more
scope
to
contend
that
its
term
preferred
share
investment
was
acquired
outside
the
normal
course
of
this
business.
In
the
September-October
1982
issue
of
Canadian
Tax
Journal
(Tab
C,
below),
Messrs.
Jack
Boultbee
and
Douglas
Ewens
state
at
page
749:
Unfortunately,
this
term
(ordinary
course
of
the
institution’s
business)
is
not
defined,
although
it
is
perhaps
sufficient
to
say
that
most
investments
made
by
such
institutions
are
made
in
the
ordinary
course
of
business.
To
my
knowledge,
there
is
no
judgment
dealing
directly
with
the
meaning
of
the
expression
found
in
subsection
112(2.1)
of
the
Act.
However,
there
are
decisions
where
judges
have
expressed
an
opinion
in
cases
where
they
had
to
determine
whether
certain
activities
of
businesses
involved
in
finance
were
carried
on
in
the
ordinary
course
of
business.
In
Punjab
Cooperation
[sic]
Bank
Limited
[sic],
Amritgar
[sic]
v
Commission
[sic]
of
Income
Tax,
[1940]
A.C.
1055
(Tab
D),
the
basic
tax
issue
was
whether
the
profits
made
by
a
bank
on
the
sale
of
securities
and
shares
were
taxable.
The
bank
argued
that
the
profits
made
were
not
taxable
because
they
had
not
been
generated
in
carrying
on
its
banking
business.
According
to
the
bank,
the
securities
and
shares
were
reserves
for
emergencies
and,
in
fact,
they
had
disposed
of
many
securities
because
several
depositors
had
withdrawn
their
holdings
and
the
bank
had
also
had
to
deposit
large
sums
of
money
with
the
Reserve
Bank
of
India.
The
bank
maintained
further
that
it
was
not
in
the
securities
business
and
the
profit
was
accordingly
not
taxable.
The
Privy
Council
upheld
the
decision
of
the
Tax
Commissioner
that
the
bank
had
been
involved
in
the
securities
and
shares
business
since
the
end
of
the
previous
year.
According
to
the
Privy
Council,
however,
it
was
not
necessary
to
find
that
the
bank
was
carrying
on
a
business
separate
from
its
usual
business
and
it
felt
rather
that
the
profits
generated
came
from
the
normal
activities
of
the
banking
business.
At
pages
1072
and
1073
the
Privy
Council
said:
If.
.
.
some
of
the
securities
of
the
bank
are
realized
in
order
to
meet
withdrawals
by
depositors,
its
seems
to
their
Lordships
to
be
quite
clear
that
this
is
a
normal
step
in
carrying
on
the
banking
business,
or,
in
other
words,
that
it
is
an
act
done
in
what
is
truly
the
carrying
on
of
the
banking
business.
.
.
It
accords
exactly
with
one
of
the
findings
in
the
statement
of
the
Commissioner
agreeing
with
the
views
both
of
the
Income-tax
officer
who
first
dealt
with
the
case
and
of
the
Assistant
Commissioner.
He
observed
“that
the
purchase
and
sale
of
shares
and
securities
are
so
much
linked
with
the
deposits
and
withdrawals
of
clients
that,
with
the
existing
Articles
of
Association,
the
purchase
and
sale
of
shares
and
securities
are
as
much
part
of
the
assessee's
business
as
receiving
deposits
from
clients
and
paying
them
off
are,
and
that,
therefore,
the
profits
which
arise
from
the
former
transactions
are
as
much
business
profits
as
the
profits
arising
from
the
latter
transactions
are.
The
parallel
that
can
be
drawn
between
this
judgment
of
the
Privy
Council
and
the
case
before
this
Court
will
be
immediately
obvious.
In
reality,
the
facts
in
the
Société
d'Investissement
Desjardins
case
are
even
stronger
because
in
the
case
of
a
bank
it
can
be
said
that
its
primary
task
is
to
receive
deposits
and
to
lend
money.
The
holding
of
securities
would
then
be
merely
collateral
to
its
primary
activities,
whereas
in
the
case
of
Société
d'Investissement
Desjardins
the
holding
of
bonds,
debentures,
shares
and
other
securities
of
the
same
kind
is
the
whole
business
activity
of
the
company.
We
should
also
refer
to
the
judgment
in
General
Reinsurance
Company
Ltd.
v.
Tomlinson,
[1970]
2
All
E.R.
436,
(Tab
E).
By
and
large,
this
case
involved
a
reinsurance
company
that
accumulated
funds
that
were
invested,
inter
alia,
in
a
portfolio
of
shares
and
other
securities.
The
dispute
concerned
the
question
as
to
whether
the
profits
made
on
the
sale
of
the
shares
and
securities
was
taxable.
After
reviewing
the
case
law,
including
Punjab,
Foster
J.
of
the
Chancery
Division
noted
at
page
446:
In
this
case
the
Commissioners
have
come
to
the
conclusion
that
realized
profits
and
the
dividends
and
interest
on
the
dollar
securities
have
been
obtained
in
the
carrying
on
of
the
business.
In
my
judgment,
the
Commissioners
were
fully
justified
in
coming
to
that
conclusion
on
the
facts
and
I
think
that
their
conclusion
was,
in
fact,
the
only
true
and
reasonable
conclusion.
We
should
also
draw
the
Court's
attention
to
two
judgments
of
the
Supreme
Court
of
Canada
showing
that
it
is
difficult
to
isolate
part
of
the
activities
of
a
corporation
from
the
ordinary
course
of
its
business.
These
are
M.N.R.
v.
Independence
Founders
Ltd.,
53
D.T.C.
1177,
and
Tip
Top
Tailors
Ltd.
v.
M.N.R.,
57
D.T.C.
1232.
First,
in
Independence
Founders
(Tab
F),
Kellock
J.
of
the
Supreme
Court
described
the
business
carried
on
by
Independence
Founders.
This
corporation
purchased
securities
that
it
gave
to
the
Royal
Trust
in
a
“unit”
and
in
return
received
Royal
Trust
shares”.
These
Royal
Trust
shares
were
deposited
with
Prudential
Trust
and
Independence
sold
its
customers
certificates
representing
ownership
rights
in
the
Royal
Trust
shares
as
an
investment.
The
customers
could
present
these
shares
to
Prudential
Trust
and
obtain
cash
or
other
Royal
Trust
shares.
During
the
years
in
dispute,
Independence
could
no
longer
acquire
the
necessary
securities
to
acquire
the
Royal
Trust
shares
and
it
accordingly
changed
its
method
of
operation
and
purchased
Royal
Trust
shares
issued
by
Prudential
Trust
and
sold
them
at
a
profit.
Was
the
profit
made
by
Independence
capital
in
nature
or
was
it
business
income?
The
Supreme
Court
held
that
it
was
business
income.
At
page
1180,
right-hand
column,
Kellock
J.
states
the
following:
The
principle
stated
by
Lord
Maugham
in
Punjab
Co-operative
Bank
v.
Income
Tax
Commissioner,
[1940]
A.C.
1055,
in
words
used
in
the
California
Copper
case
.
.
.
is
applicable,
namely,
enhanced
values
obtained
from
realization
or
conversion
of
securities
may
be
so
assessable,
where
what
is
done
is
not
merely
a
realization
or
change
of
investment,
but
an
act
done
in
what
is
truly
the
carrying
on,
or
carrying
out,
of
a
business.
In
Tip
Top
Tailors
Ltd.
(Tab
G)
the
company
was
in
the
business
of
buying
woollen
fabric
in
Great
Britain
and
it
purchased
pounds
sterling
to
pay
for
its
acquisitions.
In
late
1947,
since
it
felt
that
the
pound
sterling
was
going
to
decline
in
value,
it
purchased
a
larger
quantity
than
was
required
for
the
immediately
planned
purchase
of
fabric.
It
made
a
profit
of
$170,000
on
the
devaluation
of
the
pound.
It
was
necessary
to
determine
whether
the
profit
of
$170,000
made
on
the
devaluation
was
part
of
Tip
Top
Tailors’
income.
The
Supreme
Court
held
that
it
was
business
income.
At
page
1236,
last
complete
paragraph,
and
at
page
1237,
Locke
J.
stated
the
following:
I
agree
with
the
learned
trial
judge
that
it
was
a
scheme
for
profit-making
in
one
necessary
part
of
the
appellant's
trading
operations,
namely,
the
purchase
of
sterling
funds
and
part
of
an
integrated
commercial
operation
being
the
purchase
of
the
supplies
and
the
payment
for
them
in
that
currency.
It
was
apparently
treated
as
such
in
the
preparation
of
the
appellant's
accounts
for
the
years
in
question
since
if
it
was
simply
a
speculation
in
sterling
exchange
divorced
from
the
company's
trading
operations
the
interest
payable
on
the
bank
loan
would
not
have
been
deductible
as
an
operating
expense.
Finally,
we
should
note
the
judgment
of
Addy
J.
in
The
Queen
v.
RoyNat
Ltd.,
[1981]
C.T.C.
93
(Tab
H).
There
were
two
issues
in
this
case
but
only
the
second
is
of
interest
to
us.
In
the
headnote
to
the
case
we
see
that
RoyNat
carried
on
a
money
lending
business.
In
the
course
of
carrying
on
its
business
RoyNat
received
from
borrowers
securities,
shares
and
options
to
purchase
shares.
RoyNat
argued
that
the
profit
made
on
the
sale
of
the
shares
was
a
capital
gain,
while
the
Minister
contended
that
it
was
business
income.
At
page
104
Addy
J.
summarized
his
findings
of
fact
and
then
reviewed
the
Canadian
case
law.
At
page
107
he
states
that
the
profits
were
generated
from
transactions
or
operations
that
formed
an
integral
part
of
RoyNat's
activities.
That
case
was
very
similar
to
the
case
of
Société
d'Investissement
Desjardins.
The
difference
between
them
lies
essentially
in
the
fact
that
Société
d'Investissement
Desjardins
seems
to
have
been
more
active
than
RoyNat
in
the
field
of
acquiring
shares
as
a
form
of
investment.
However,
the
judgment
in
The
Queen
v.
E.V.
Keith
Enterprises
Ltd.,
to
which
counsel
for
Société
d'Investissement
Desjardins
refers
in
his
notes,
seems
to
us
to
provide
stronger
support
in
favour
of
the
assessment
than
the
argument
made
by
the
appellant.
In
fact,
in
this
case
the
judge
noted
that
money
lending
was
an
activity
that
the
corporation
could
carry
on
pursuant
to
the
documents
by
which
it
was
created
and,
moreover,
the
corporation
had
in
fact
been
involved
in
this
activity
for
a
number
of
years.
Société
d'Investissement
Desjardins
was
set
up,
inter
alia,
to
invest
in
securities
and
Mr.
Gagné
stressed
the
importance
of
this
aspect
of
the
appellant's
activities.
It
is
accordingly
unnecessary
to
consider
whether
the
acquisition
of
shares
was
a
normal
activity
of
Société
d’Investissement
Desjardins:
it
is
certain
that
this
was
the
case.
The
case
of
B.C.
Telephone
v.
M.N.R.,
which
was
relied
upon
by
the
Counsel
for
the
appellant,
was
decided
in
a
very
different
context
from
the
instant
case.
The
distinction
made
by
Judge
Rip
of
this
Court
between
"the
ordinary
course
of
business”
and
the
"ordinary
course
of
business
carried
on
by
a
company”
does
not
give
us
a
better
understanding
of
the
expression
in
subsection
112(2.1)
of
the
Income
Tax
Act.
It
seems
to
us
that
the
judge
was
more
concerned
to
stress,
as
did
the
Supreme
Court
in
Re
Pacific
Mobile
Corporation
(also
referred
to
at
page
24
of
the
appellant's
notes)
that
“it
is
not
prudent
to
attempt
to
give
an
exhaustive
definition
of
the
expression
'in
the
ordinary
course
of
business'
that
would
apply
to
all
cases".
It
is
preferable
to
consider
the
circumstances
in
each
case
and
to
take
into
account
the
type
of
business
carried
on
by
the
debtor
and
creditor.
Judge
Rip’s
statements
in
B.C.
Telephone
relate
to
particular
circumstances
in
that
the
company
sold
equipment
at
cost
and
thus
did
not
make
a
profit.
However,
selling
equipment
without
making
a
profit
does
not
seem
to
be
an
activity
that
would
normally
fall
within
"the
ordinary
course
of
business”.
In
B.C.
Telephone,
however,
these
activities
were
integrated
into
the
business
carried
on
because
the
company
obtained
better
prices
by
purchasing
larger
quantities
than
it
required
and
selling
the
surplus
to
other
companies
providing
telephone
service.
In
the
instant
case,
the
"type
of
business”
carried
on
by
Société
d'Investissement
Desjardins
must
be
examined.
This
company
did
not
purchase
equipment
for
resale.
Société
d'Investissement
Desjardins
did
not
create
inventories
of
furniture
that
it
sold
in
the
market
place.
It
carried
on
a
business
that
to
a
large
extent
involved
investing
capital
in
corporations
in
the
form
of
shares.
This
was
an
integral
part
of
the
business
it
carried
on.
It
is
understood
that
it
is
not
possible
to
compare
what
Société
d'Investissement
Desjardins
does
with
what
B.C.
Telephone
does.
The
result
is
that
it
is
much
preferable
to
look
for
judicial
precedents
that
deal
with
businesses
similar
to
that
carried
on
by
Société
d’Investissement
Desjardins,
as
we
did
earlier,
rather
than
moving
away
from
it
with
judgments
such
as
that
in
B.C.
Telephone.
Conclusions
Société
d'Investissement
Desjardins
is
without
any
doubt
a
specified
financial
institution
referred
to
by
Parliament
in
subsection
112(2.1)
of
the
Income
Tax
Act.
It
is
clear
from
reading
the
provision
that
the
expression
"institution"
occurring
at
the
end
of
the
subsection
cannot
mean
anything
other
than
"specified
financial
institution”,
in
this
case
Société
d'Investissement
Desjardins.
Concerning
the
question
as
to
whether
the
Sico
shares
were
acquired
by
Société
d'Investissement
Desjardins
in
the
ordinary
course
of
carrying
on
its
business,
we
feel
that
we
have
shown
that
this
was
indeed
the
case.
The
cases
referred
to
support
as
Clearly
as
is
possible
the
position
taken
by
the
Department
of
Revenue.
If
we
adopt
the
interpretation
suggested
by
counsel
for
the
appellant,
we
reach
the,
to
say
the
least,
very
dubious
conclusion
that
a
"specified
financial
institution"
could
not
be
subject
to
subsection
112(2.1)
when
it
acquires
term
preferred
shares
for
the
first
time.
According
to
him,
this
is
a
transaction
that
would
have
to
be
ruled
out
of
the
ordinary
course
of
the
business
carried
on
by
the
specified
financial
institution.
In
other
words,
if
I
have
correctly
understood
his
argument,
subsection
112(2.1)
would
apply
only
to
the
specified
financial
institution
that
carried
on
a
business
based
on
the
acquisition
of
term
preferred
shares.
This
is
certainly
not
the
meaning
that
should
be
given
to
the
expression
"ordinary
course
of
the
business
carried
on
by
the
institution”
and
once
again
we
draw
the
attention
of
the
Court
to
the
text
of
Mr.
Dyer
(Supra,
at
p.
7),
who
wrote
that
in
practically
all
cases
a
specified
financial
institution
could
not
claim
that
the
acquisi-
tion
of
term
preferred
shares
did
not
form
part
of
the
ordinary
course
of
the
business
carried
on
because
of
the
very
nature
of
the
business
carried
on
by
these
institutions.
We
accordingly
request
that
the
appeal
be
dismissed.
,
4.03.3(3)
Appellant's
reply
concerning
the
meaning
of
"ordinary
course
of
business"
The
appellant's
reply
reads
as
follows:
Counsel
for
the
respondent
places
a
great
deal
of
emphasis
on
the
text
of
Mr.
Geoffrey
Dyer
published
in
Corporate
Tax
Conference”
in
1986.
According
to
him,
Mr.
Dyer
“wrote
that
in
practically
all
cases
a
specified
financial
institution
could
not
claim
that
the
acquisition
of
term
preferred
shares
did
not
form
part
of
the
ordinary
course
of
the
business
carried
on
.
.
.".
I
respectfully
submit
that
counsel
for
the
respondent
has
misread
Mr.
Dyer's
article.
This
passage
from
Mr.
Dyer's
text
concerns
a
financial
institution
(such
as
the
Fédérations
de
caisses
populaires
Desjardins)
and
not
specified
financial
institutions,
which,
according
to
Mr.
Dyer's
article,
can
show
much
more
easily
that
the
acquisition
of
shares
did
not
take
place
in
the
ordinary
course
of
the
business
carried
on
by
the
institution.
Let
us
look
again
at
the
passage
in
question
[at
p.
25]:
The
very
nature
of
the
business
of
a
financial
institution
(as
opposed
to
a
specified
financial
institution)
will
make
it
difficult
in
most
cases
to
contend
that
a
purchase
of
term
preferred
shares
was
beyond
the
ordinary
course
of
this
business.
In
the
case
of
a
specified
financial
institution
(which
is
what
the
appellant
is
since
it
is
controlled
by
financial
institutions)
that
is
not
itself
engaged
in
the
financing
business
but
is
associated
with
a
financial
institution,
however,
there
could
be
considerably
more
scope
to
contend
that
its
term
preferred
share
investment
was
acquired
outside
the
normal
course
of
this
business.
Counsel
for
the
respondent
stressed
the
first
sentence
in
the
above
text,
but
it
does
not
apply
to
the
appellant.
The
appellant's
case
is
really
covered
by
the
second
sentence
of
the
passage.
In
an
article
published
in
the
1983
issue
of
“Canadian
Tax
Journal”,
Mr.
Jack
Boultbee
commented
as
follows
on
the
expression
“
ordinary
course
of
the
business”
[at
p.
846]:
It
seems
that
for
something
to
be
in
the
ordinary
course
of
a
business,
it
must
be
a
business
that
is
carried
on
with
some
activity
and
continuity
(otherwise
it
would
not
have
a
"course"
of
business).
A
holding
company
that
merely
holds
shares
of
subsidiaries
(and
possibly
is
involved
in
the
management
of
those
subsidiaries)
usually
does
not
have
a
business
of
buying
shares
with
such
frequency
that
it
could
be
thought
to
acquire
the
shares
in
the
ordinary
course
of
that
business.
In
general,
Revenue
Canada
has
agreed
with
this
position
and
has
stated
that
it
will
not
ordinarily
apply
the
provisions
of
subsection
112(2.1)
to
shares
of
subsidiary
corporations
held
by
banks
or
other
specified
financial
institutions.
In
the
instant
case
the
appellant
reiterates
that
it
does
not
have
an
ordinary
course
of
business
consisting
of
purchases
and
sales
of
shares.
The
shares
it
holds
are
held
as
investments.
Furthermore,
it
is
very
hard
to
imagine
that
a
corporation
could
purchase
shares
of
its
subsidiary
(such
as
SID
shares
of
Sico)
and
claim
that
this
purchase
was
made
in
the
ordinary
course
of
its
business.
It
was,
moreover,
for
this
reason,
that
Mr.
Boultbee
mentioned
in
1983
that
dividends
paid
from
the
shares
of
a
subsidiary
of
a
bank
did
not
generally
give
rise
to
the
application
of
subsection
112(2.1)
of
the
Act.
For
this
reason,
inter
alia,
the
case
law
referred
to
by
the
respondent
is
not
relevant
in
this
case.
In
the
decisions
in
Punjab
Co-operation
Bank
Ltd.,
Amritgar
[sic].
General
Reinsurance
Company
Ltd.,
Independence
Founders
Limited
and
Tip
Top
Tailors
Ltd.
it
was
necessary
to
determine
whether
the
sales
of
securities
created
a
capital
gain
or
business
income.
This
distinction
does
not
exist
in
the
instant
case
since
SID
was
not
in
the
business
of
purchasing
and
selling
shares.
The
appellant
reiterates
that
the
tests
relied
on
by
the
Court
in
British
Columbia
Telephone
Company
(page
22
of
the
appellant's
notes)
are
relevant
since
the
Court
interpreted
the
expression
used
in
paragraph
20(1)(gg)
(ordinary
course
of
the
business”),
which
was
identical
to
that
in
subsection
112(2.1),
which
is
at
issue
before
this
Court.
For
these
reasons
the
appellant
maintains
the
conclusions
stated
at
page
26
of
its
notes
and
requests
the
Court
to
refer
the
assessment
back
to
the
Minister
of
Revenue
so
that
it
may
be
allowed
the
deduction
of
$250,000
claimed
in
respect
of
the
deemed
dividend
received
from
Sico
Inc.
in
computing
its
taxable
income.
4.03.3(4)
Decision
on
the
meaning
of
the
expression
“in
the
ordinary
course
of
the
business"
Concerning
the
second
aspect
of
the
dispute
before
us,
this
Court
feels
that
the
acquisition
of
the
term
preferred
shares
did
not
occur
in
the
ordinary
course
of
the
business
of
Société
d'Investissement
Desjardins.
4.03.3(4)(a)
First,
it
must
be
realized
that
it
is
the
acquisition
of
the
term
preferred
shares
that
is
the
subject
of
our
analysis.
A
hasty
glance
at
subsection
112(2.1)
of
the
Act
is
sufficient
to
persuade
us
of
the
truth
of
this
assertion.
(2.1)
No
deduction
may
be
made
under
subsection
(1)
or
(2)
in
computing
the
taxable
income
of
a
particular
corporation
(in
this
section
and
sections
248
and
258
referred
to
as
a
"specified
financial
institution")
that
is
(a)
a
corporation
described
in
any
of
paragraphs
39(5)(b)
to
(f)
or
an
insurance
corporation,
(b)
a
corporation
that
is
controlled
by
one
or
more
corporations
described
in
paragraph
(a),
or
(c)
a
corporation
associated
with
a
corporation
described
in
paragraph
(a)
or
(b),
in
respect
of
a
dividend
received
by
the
specified
financial
institution
on
a
share
that
was,
at
the
time
the
dividend
was
paid,
a
term
preferred
share,
other
than
a
dividend
paid
on
a
share
of
the
capital
stock
of
a
corporation
that
was
not
acquired
in
the
ordinary
course
of
the
business
carried
on
by
the
institution.
In
short,
what
were
the
circumstances
leading
to
the
acquisition
of
the
term
preferred
shares?
If
we
are
to
answer
this
question
adequately,
it
is
essential
that
we
take
into
account
the
importance
of
the
pressures
exerted
by
the
employees
of
Sico
on
the
terms
that
might
have
arisen
in
the
change
in
the
company's
capital
stock.
These
amendments
to
the
capital
stock
of
Sico
made
by
by-law
No.
42
(Exhibit
A-3),
which
were
directly
responsible
for
SID's
acquisition
of
the
term
preferred
shares
of
Sico,
provided,
inter
alia,
that
the
Class
C
shares
were
convertible
on
December
22,
1982
into
Class
A
shares
that
were
themselves
to
be
redeemed
by
Sico
on
December
31,
1982.
A
presentation
of
the
decisive
stages
preceding
the
allocation
of
the
deemed
dividend
of
$250,000
that
is
the
subject
of
this
dispute
will
enable
us
to
give
a
clearer
presentation
of
the
Court's
position.
In
1975
SID
was
granted
a
right
of
first
refusal
by
the
principal
shareholder
of
Sico
Inc.
(paragraph
3.09).
On
June
29,
1978,
under
its
right
of
first
refusal,
SID
became
the
holder
of
debentures
of
Sico
Inc.
amounting
to
$1,100,000.
The
issue
of
these
debentures
was
governed
by
a
trust
agreement
that
came
into
effect
retroactively
on
June
15,1977
(paragraph
3.12).
After
SID
acquired
control
of
Sico
(paragraph
3.13),
a
series
of
measures
was
contemplated
by
the
directors
of
Sico
Inc.
to
give
employees
a
much
greater
participation
in
the
business
(Exhibits
A-8
and
A-14).
The
date
of
conversion
of
the
debentures
issued
was
moved
up
at
the
request
of
the
employees
and
managers
of
Sico
Inc.
The
deadline
for
conversion
was
scheduled
for
December
31,
1982
(paragraph
3.15
and
3.21).
The
members
of
Sico
Inc.'s
Board
of
Directors
favoured
a
change
in
the
capital
stock,
the
conditions
of
which
were
laid
down
by
an
ad
hoc
committee.
SID
was
an
influential
member
of
this
study
group
as
appears
in
an
extract
from
the
minutes
of
a
meeting
of
the
Board
of
Directors
of
Sico
Inc.
held
on
April
21,
1982
(Exhibit
A-9):
Structure
of
capital
stock
At
the
request
of
the
President,
the
President
and
General
Manager
summarized
for
the
directors
the
action
taken
to
date
with
respect
to
the
project
to
restructure
the
company's
capital
stock
with
a
view,
inter
alia
to
increasing
employee
participation.
He
also
informed
them
of
the
Advisory
Committee's
recommendation
to
the
President
and
General
Manager
that
an
ad
hoc
committee
be
established,
made
up
of
representatives
of
the
main
groups
of
shareholders,
to
continue
with
the
study
of
various
aspects
of
this
question.
On
a
motion
duly
made
and
seconded,
it
was
unanimously
Resolved:
1.
to
authorize
the
establishment
of
an
ad
hoc
Committee
to
study
the
various
aspects
of
the
Board
of
Directors’
project
to
restructure
the
company’s
capital
stock
with
a
view,
inter
alia,
to
increasing
employee
participation
and
to
make
recommendations;
2.
that
the
said
Committee
should
consist
of
representatives
of
Société
d'Investissement
Desjardins,
Parisco
Inc
and
employees
of
the
company,
who
shall
agree
on
the
appropriate
terms
and
conditions
in
this
regard;
and
3.
that
the
said
Committee
decide
on
its
own
procedure
but
shall
not
be
considered
to
be
a
committee
of
the
Board
of
Directors.
A
by-law
concerning
the
modification
of
the
capital
stock
was
adopted
by
the
Board
of
Directors
on
December
15,
1982
(Exhibit
A-13).
The
decisive
aspects
of
Sico
Inc.'s
new
capital
stock
(Exhibit
A-3,
paragraph
3.14)
may
be
found
in
paragraph
3.5.1,
where
it
is
stated
that
Class
C
shares
should
be
converted
on
December
22,
1982.
Paragraph
3.2.1
states
that
the
Class
A
shares
(including
the
Class
C
shares
that
may
have
been
converted
earlier)
should
be
redeemed
by
Sico
Inc.
on
December
31,
1982.
This
Court
accordingly
feels
that
it
is
unthinkable
not
to
take
into
consideration
the
relationship
between
the
pressure
exerted
by
the
employees
of
Sico
Inc.
and
the
changes
made
in
this
company's
capital
stock
and
to
the
date
on
which
the
debentures
issued
were
converted.
—
Whereas
SID's
position
on
the
alternatives
designed
to
satisfy
the
staff
of
Sico
Inc.,
namely,
the
conversion
of
debentures
that
had
been
issued
to
it
into
Class
C
shares,
was
clearly
established
in
the
letter
sent
to
it
(Exhibit
A-16,
paragraph
3.20);
—
Whereas
the
number
of
Class
C
shares
convertible
into
Class
A
and
B
shares
was
200,000;
—
Whereas
the
number
of
convertible
voting
shares
(Class
B
shares)
was
100,000
and,
according
to
the
by-law
modifying
the
capital
stock
of
Sico
Inc.
(Exhibit
A-3),
the
conversion
would
be
carried
out
at
the
same
pace
as
voting
shares
would
be
issued
to
the
employees;
—
Whereas
the
maximum
number
of
voting
shares
intended
to
be
issued
to
Sico
Inc’s
employees
was
set
at
100,000;
—
Whereas,
finally,
following
the
modification
in
the
capital
stock
of
Sico
Inc.,
the
Class
A
shares
were
clearly
created
to
be
eliminated
from
the
paid-up
capital
of
Sico
Inc.,
this
Court
can
only
conclude
that
the
acquisition
of
the
term
preferred
shares
(Class
A
shares)
by
SID
was
merely
a
response
to
the
particular
situation
resulting
from
the
pressures
exerted
by
the
employees
of
Sico
Inc.
on
the
Board
of
Directors
of
that
company.
In
short,
there
was
nothing
to
support
the
assertion
that
the
acquisition
of
term
preferred
shares
in
this
case
might
have
been
made
in
the
ordinary
course
of
the
business
carried
on
by
SID.
4.03.3(4)(b)
Moreover,
if
we
assume
that
SID
is
to
a
large
extent
responsible
for
the
changes
made
in
the
capital
stock
of
Sico
Inc.,
that
SID
was
consequently
fully
aware
of
the
eventual
impact
of
these
changes
on
its
own
situation,
can
it
be
argued
that
the
acquisition
of
such
term
preferred
shares
was
a
logical
part
of
SID's
investment
philosophy?
This
Court
is
of
the
opinion
that
this
question
can
be
answered
only
in
the
negative.
In
effect,
Société
d'Investissement
Desjardins
defined
its
philosophy
(Exhibit
A-17)
as
follows:
—
SID
is
looking
for
high
profitability
measured
by
increases
in
share
value
and
by
dividend
flow.;
—
SID's
action
is
directed
toward
markets
that
offer
attractive
growth
potential
and
healthy
profits.
It
also
seems
to
be
admitted
that,
in
order
properly
to
perform
its
role
as
an
active
partner
in
the
management
of
a
limited
number
of
businesses,
SID
preferred
medium-
and
long-term
investments.
The
average
time
for
which
SID's
investments
were
held
was
ten
years.
How
can
it
be
argued
that
the
acquisition
of
term
preferred
shares,
which
occurred
in
this
case
on
December
22,
1982,
was
consistent
with
the
general
investment
philosophy
of
SID
when
the
same
shares
were
to
be
redeemed
by
Sico
Inc.
on
December
31,
1982?
The
acquisition
of
Class
A
shares
by
SID
must
be
viewed
as
an
isolated
transaction
that
cannot
in
any
way
be
considered
as
having
taken
place
in
the
ordinary
course
of
its
business.
This
Court
is
accordingly
of
the
opinion
that
the
circumstances
surrounding
this
case
and
the
particular
status
of
SID
make
it
possible
to
state
that
the
acquisition
of
the
term
preferred
shares
in
Sico
met
the
intention
behind
the
exception
in
subsection
112(2.21)
of
the
Act.
In
fact,
this
provision
was
clearly
enacted
to
avoid
the
improper
use
by
lending
institutions
of
shares
similar
to
loans
the
dividends
on
which
were
tax-freewhile
the
interest
on
the
sums
loaned
had
to
be
included
in
the
income
of
these
corporations.
The
malice
rule
that
emerges
from
this
provision
is
accordingly
the
abuse
of
this
tax-free
transaction.
However,
an
exceptional
situation
that
might
at
a
pinch
be
described
as
accidental
should
not
suffer
from
application
of
the
principle
in
subsection
112(2.1)
of
the
Act.
4.03.3(4)(c)
Relying
primarily
on
a
passage
in
an
article
by
Geoffrey
Dyer
and
on
a
number
of
decisions
of
the
Privy
Council
in
Britain
and
the
Supreme
Court
of
Canada,
counsel
for
the
respondent
argued
that
it
was
difficult
to
isolate
part
of
a
corporation's
activities
from
the
ordinary
course
of
its
business.
This
Court
feels,
however,
that
neither
of
the
authorities
on
which
the
argument
of
the
Minister
of
National
Revenue
was
based
applies
here.
In
effect,
the
attention
of
this
Court
was
drawn
to
another
passage
in
Geoffrey
Dyer's
article,
which
was
included
at
page
8
of
the
respondent's
arguments.
It
reads
as
follows:
In
the
case
of
a
purchase
of
term
preferred
shares
by
a
financial
institution,
some
assistance
may
be
found
in
those
tax
cases
that
consider
whether
particular
securities
transactions
carried
on
by
financial
institutions
are
on
account
of
capital
or
income.
The
very
nature
of
the
business
of
a
financial
institution
will
make
it
difficult
in
most
cases
to
contend
that
a
purchase
of
term
preferred
shares
was
beyond
the
ordinary
course
of
this
business.
In
the
case
of
a
specified
financial
institution
that
is
not
itself
engaged
in
the
financing
business
but
is
associated
with
a
financial
institution,
however,
there
could
be
considerably
more
scope
to
contend
that
its
term
preferred
share
investment
was
acquired
outside
the
normal
course
of
this
business.
[Emphasis
added.]
Although
SID
did
not
completely
stop
its
lending
activities,
it
is
clear
that
this
was
not
its
primary
function.
In
fact,
the
creation
of
Crédit
industriel
Desjardins
Inc.
in
1977
concentrated
the
lending
and
credit
activities
in
the
latter
institution.
SID's
primary
activity
was
to
invest
in
shares
of
a
limited
number
of
businesses
with
a
view
to
a
high
rate
of
return.
It
seems
therefore
that
the
description
in
Dyer's
article
of"
specified
financial
institution
that
is
not
engaged
in
the
financing
business
but
is
associated
with
a
financial
institution”
is
much
more
in
keeping
with
the
characteristics
of
SID.
The
presumption
that
the
acquisition
of
term
preferred
shares
was
made
in
the
ordinary
course
of
SID's
business
cannot
be
applied,
as
the
respondent
seemed
to
argue.
On
the
contrary,
it
is
quite
probable
that
such
an
acquisition
was
not
made
in
the
ordinary
course
of
its
business.
The
circumstances
surrounding
the
acquisition
of
the
term
preferred
shares
and
the
apparent
contradiction
between
SID's
investment
philosophy
and
the
characteristics
of
the
Class
A
shares
following
the
change
in
Sico's
capital
stock
are
both
factors
that
support
this
assertion.
4.03.3(4)(d)
Furthermore,
this
Court
is
also
of
the
opinion
that
the
case
law
relied
upon
by
the
respondent
(paragraph
4.02)
cannot
apply
in
this
case
to
determine
the
scope
of
the
expression
in
the
ordinary
course
of
the
business"
in
subsection
112(2.1)
of
the
Act.
In
the
decisions
in
Punjab,
supra,
and
General
Reinsurance
Company
Ltd.,
Supra,
which
required
the
classification
of
income
from
the
sale
of
certain
securities,
the
courts
felt
that
the
nature
of
banking
operations
and
the
insurance
business
required
a
certain
form
of
investment
by
them
in
portfolios
of
shares
or
foreign
currency.
In
short,
the
profits
obtained
by
realizing
the
securities
cannot
be
dissociated
from
the
type
of
business
that
requires
the
presence
of
these
investments.
The
following
passage
from
page
446
of
the
decision
in
General
Reinsurance
Company
Ltd.
clearly
illustrates
this
principle:
Such
an
acquisition
and
subsequent
realization
is
a
normal
step
in
carrying
on
the
insurance
business,
or
in
other
words
an
act
done
in
what
is
truly
the
carrying
on
of
the
business
of
the
society.
The
principle
stated
and
approved
by
the
court
in
the
Punjab
case
and
the
Californian
Copper
case
that
enhanced
values
obtained
from
realization
or
conversion
of
securities
may
be
assessable
where
what
is
done
is
not
merely
a
realization
or
change
of
investment
but
an
act
done
in
what
is
the
carrying
on
or
carrying
out
of
a
business,
is,
I
think,
the
true
principle
to
be
applied
in
this
case.
The
Tip
Top
Tailors
Ltd.
decision,
supra,
raised
a
rather
similar
principle.
In
fact,
it
was
held
that
the
acquisition
of
a
line
of
credit
in
foreign
currency
could
not
be
separated
from
the
textile-buying
transactions
that
were
the
business's
source
of
income.
The
following
passage
from
page
318
(D.T.C.
1236-37)
is
particularly
eloquent:
I
agree
with
the
learned
trial
judge
that
it
was
a
scheme
for
profit-making
in
one
necessary
part
of
the
appellant's
trading
operations,
namely,
the
purchase
of
sterling
funds
and
part
of
an
integrated
commercial
operation
being
the
purchase
of
the
supplies
and
the
payment
for
them
in
that
currency.
It
was
apparently
treated
as
such
in
the
preparation
of
the
appellant's
accounts
for
the
years
in
question
since
if
it
was
simply
a
speculation
in
sterling
exchange
divorced
from
the
company's
trading
operations
the
interest
payable
on
the
bank
loan
would
not
have
been
deductible
as
an
operating
expense.
This
case
law,
based
on
the
search
for
a
certain
connection
between
the
disputed
transaction
and
the
business's
current
activities,
is
quite
relevant
in
identifying
the
profits
made
by
the
business.
However,
can
it
be
concluded
on
the
basis
of
this
last
trend
in
the
case
law
that
the
term
preferred
shares
acquired
by
SID
cannot
be
isolated
from
all
the
investments
making
up
its
portfolio?
This
Court
feels
that
the
answer
to
this
question
may
be
found
in
the
wording
of
subsection
112(2.1)
of
the
Act.
In
effect,
Parliament
clearly
wanted
to
make
a
distinction
between
specified
financial
institutions
for
which
the
acquisition
of
term
preferred
shares
was
a
regular
operation
and
those
for
which
such
a
transaction
was
an
exception.
In
fact,
if
the
respondent's
argument
is
given
free
rein,
the
last
part
of
the
subsection
simply
has
no
force
or
effect
since
any
acquisition
of
term
preferred
shares
by
a
specified
financial
institution
should
be
subject
to
the
exemption
from
the
deduction
allowed
by
the
said
subsection.
In
other
words,
the
acquisition
of
term
preferred
shares
by
a
specified
financial
institution
primarily
involved
in
the
acquisition
of
shares
could
only
have
occurred
in
the
ordinary
course
of
business.
This
reasoning
can
only
lead
us
to
reject
the
cases
relied
upon,
which
cannot
be
applied
in
light
of
subsection
112(2.1)
of
the
Act.
5.
Conclusion
The
appeal
is
allowed
with
costs
and
the
whole
is
referred
back
to
the
respondent
for
reconsideration
and
reassessment.
Appeal
allowed.
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