Sobier,
T.C.C.J.
(orally):—
The
appellant
Mackintosh
Flexo-Gravure
Ltd.
(”
Flexo")
appeals
from
the
assessment
of
the
Minister
of
National
Revenue
(the
"Minister")
for
the
1987
taxation
year
whereby
the
Minister
disallowed
the
small
business
deduction
under
subsection
125(1)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the"Act")
and
the
manufacturing
and
processing
profits
deduction
under
subsection
125.1(1)
of
the
Act,
in
respect
of
interest
income
of
$24,870
earned
on
certain
term
deposits.
The
appellant
Jane
Mackintosh
("Jane
Mackintosh")
appeals
from
the
assessment
of
the
Minister
for
her
1987
taxation
year
whereby
the
Minister
denied
her
the
entitlement
to
a
rollover
pursuant
to
subsection
73(5)
of
the
Act
with
respect
to
the
sale
in
1987
of
certain
of
her
shares
of
Flexo
to
her
two
daughters,
on
the
basis
that
Flexo
did
not
satisfy
the
provisions
of
the
Act
in
order
to
qualify
as
a
small
business
corporation
within
the
meaning
of
subsection
248(1)
of
the
Act.
This
issue
is
also
directly
related
and
depends
on
whether
the
income
earned
by
Flexo
in
1987
from
the
term
deposits
was
active
business
income
of
Flexo
or
income
from
property.
At
the
end
of
the
1986
taxation
year,
Flexo
had
cash
on
hand
of
$739,351.
The
balance
sheet
of
Flexo
at
December
31,
1986
also
shows
a
bonus
payable
to
Mr.
and
Mrs.
Mackintosh,
as
well
as
some
minor
amount
to
employees,
of
$230,000
as
well
as
tax
payable
of
$199,869.
During
the
first
three
months
of
the
1987
calendar
year,
those
liabilities
were
paid.
Commencing
in
March
of
1987,
the
cash
on
hand
was
converted
initially
into
$400,000
of
term
deposits.
By
the
end
of
the
1987
taxation
year,
the
term
deposits
amounted
to
$550,000.
The
1987
financial
statements
of
Flexo
show
that
there
were
accrued
bonuses
of
$421,523
and
dividends
paid
of
$222,923.
It
is
not
denied,
but
freely
admitted,
that
Flexo
operated
an
extremely
successful
and
profitable
business
in
inks,
particularly
water-based
ink.
According
to
the
notice
of
appeal,
Flexo
claimed
the
following
reserves:
first,
$75,000
to
cover
anticipated
claims
due
to
latent
defects
in
the
product;
second,
$75,000
to
cover
the
risk
of
under-insured
environmental
damage
during
production;
third,
$75,000
for
potential
under-insured
secondary
environmental
damage;
fourth,
$50,000
to
cover
anticipated
increased
tax
liability
for
the
1987
taxation
year;
fifth,
$75,000
to
cover
the
temporary
and
possibly
permanent
replacement
of
a
key
employee;
sixth,
$50,000
to
institute
employees'
medical
and
dental
coverage;
seventh,
$50,000
to
institute
a
pension
plan
for
its
employees;
and
Flexo
allocated
a
portion
of
its
funds
to
meet
the
requirements
of
purchasing
its
rented
premises.
These
reserves
took
the
form
of
the
term
deposits.
It
is
the
interest
earned
on
these
term
deposits
which
is
in
issue.
The
appellants
argue
that
the
interest
was
income
of
the
corporation
from
active
business
and
is
eligible
for
the
small
business
deduction
and
the
manufacturing
and
processing
deduction.
In
the
alternative,
the
appellants
argue
that
a
part
of
the
interest
was
income
of
the
corporation
from
an
active
business
and
is
eligible
for
the
small
business
deduction
and
the
manufacturing
and
processing
deduction.
The
appellants
argue
that
the
interest
is
active
business
income
because
it
represents
income
pertaining
to
or
incident
to
business
in
accordance
with
paragraph
125(7)(c)
of
the
Act.
They
further
argue
that
it
satisfied
either
exception
(b)
or
(c)
of
subsection
129(4.1)
of
the
Act
as
a
consequence
of
the
extent
to
which
the
moneys
were
relied
on
by
the
business
operations
to
cover
any
of
the
anticipated
contingencies;
to
satisfy
cash
requirements
due
to
the
special
circumstances
in
the
year
and
to
support
the
plan
to
maintain
the
premises.
The
respondent
submits
that
the
interest
was
income
from
property
and,
therefore,
not
eligible
under
subsections
125(1)
and
125.1(1).
The
relevant
portions
of
the
Act
include
subsections
125(1)
(small
business
deduction);
125.1(1)
(manufacturing
and
processing
deduction);
129(4.1)
(income
or
loss
from
a
source
that
is
property);
248(1)
(active
business);
paragraphs
125(7)(a)
(active
business
carried
on
by
a
corporation);
and
125(7)(c)
(income
from
an
active
business).
I
need
not
spell
them
all
out
here
in
full.
The
question
is,
therefore,
was
the
$24,870
of
interest
income
active
business
income
or
income
from
property?
To
qualify
as
active
business
income,
it
must
be
income
from
an
active
business
carried
on
by
Flexo,
including
any
income
for
the
year
pertaining
to
or
incident
to
that
business,
but
does
not
include
income
for
the
year
from
a
source
in
Canada
that
is
property.
[See
paragraph
125(7)(c)
of
the
Act.]
In
the
case
at
bar,
there
is
no
doubt
that
Flexo
was
not
carrying
on
the
business
as
an
investment.
Therefore,
we
must
determine
whether
or
not
the
interest
income
pertained
to
or
was
incident
to
its
ink
business.
Mr.
Mackintosh,
the
President
of
Flexo,
gave
evidence
that
the
moneys
invested
in
the
term
deposits
were
“surplus
or
excess
cash
flow”
derived
from
its
ink
business.
These
funds
were
not
needed
to
pay
expenses,
such
as
suppliers
and
wages.
The
moneys
necessary
for
those
purposes
were
paid
out
of
current
operations.
It
is
clear
that
while
Mr.
Mackintosh
is
an
able
businessman,
he
also
suffers
from
an
over-abundance
of
caution.
This
was
demonstrated
by
the
reserves
he
set
up.
His
evidence
did
not
disclose
any
pressing
need
for
setting
up
these
reserves
nor
Was
there
any
evidence
as
to
how
he
arrived
at
the
amounts
of
the
reserves.
Were
the
funds
needed
in
the
business?
The
answer
is
no.
In
1987,
bonuses
of
$343,000
were
accrued
and
paid
in
1987
and
1988;
as
well,
a
1987
dividend
of
$222,000
was
declared
and
even
then
the
amount
of
the
term
deposits
increased.
The
moneys
constituting
the
term
deposits
were
not
incidental
to
or
pertaining
to
the
business.
They
were
simply
not
required
in
the
business.
The
term
deposits
were
never
cashed
prior
to
maturity
in
order
to
pay
expenses
or
payables.
They
were
either
rolled
over
or
deposited
into
a
bank
account
and
reinvested
in
more
term
deposits
at
a
later
date.
The
authorities
were
well
canvassed:
McCutcheon
Farms
Ltd.
v.
The
Queen,
[1991]
1
C.T.C.
50,
91
D.T.C.
5047,
a
decision
of
the
Federal
Court-Trial
Division;
Muir
Cap
&
Regalia
Ltd.
v.
M.N.R.,
[1991]
1
C.T.C.
2342,
91
D.T.C.
533,
a
decision
of
the
Tax
Court
of
Canada;
and
San
Hit
Ltd.
v.
M.N.R.,
[1987]
2
C.T.C.
2078,
87
D.T.C.
450,
also
a
decision
of
the
Tax
Court
of
Canada.
Wilson,
J.
made
it
clear
in
Ensite
Ltd.
v.
The
Queen,
[1986]
2
S.C.R.
509,
[1986]
2
C.T.C.
459,
86
D.T.C.
6521,
a
decision
of
the
Supreme
Court
of
Canada,
that
to
qualify,
the
moneys
in
question
must
be
employed
or
risked
in
the
business.
At
page
520
(C.T.C.
464,
D.T.C.
6525),
she
said:
But”
risked"
means
more
than
a
remote
risk.
A
business
purpose
for
the
use
of
the
property
is
not
enough.
The
threshold
of
the
test
is
met
when
the
withdrawal
of
the
property
would
“have
a
decidedly
destabilizing
effect
on
the
corporate
operations
themselves":
March
Shipping
Ltd.
v.
M.N.R.,
[1977]
C.T.C.
2527,
77
D.T.C.
371
(T.R.B.),
at
page
2531
(D.T.C.
374).
Here,
the
moneys
were
in
fact
withdrawn
to
pay
bonuses
and
dividends
with
no
destabilizing
effect.
Flexo
continued
to
prosper.
The
business
did
not
rely
on
the
term
deposits
either
in
a
primary
fashion
or
as
a
back-up.
As
Associate
Chief
Judge
Christie
of
this
Court
said
in
Atlas
Industries
Ltd.
v.
M.N.R.,
[1986]
2
C.T.C.
2392,
86
D.T.C.
1756
(T.C.C.)
at
page
2404
(D.T.C.
1764):
Giving
the
words"
incident
to
or
pertains
to
an
active
business”
their
grammatical
and
ordinary
sense,
and
bearing
in
mind
their
context,
there
must
I
think
be
a
financial
relationship
of
dependence
of
some
substance
between
the
property
and
the
active
business
before
the
exclusion
in
paragraph
129(4.1)(b)
comes
into
play.
The
operations
of
the
business
ought
to
have
some
reliance
on
the
property
in
the
sense
that
recourse
is
had
to
it
regularly
or
from
time
to
time
or
that
it
exists
as
a
back-up
asset
to
be
called
on
in
support
of
those
operations
when
the
need
arises.
The
appellants
urged
the
Court
to
consider
that
part
of
the
moneys
were
used
or
needed
to
provide
active
business
income
but
gave
the
Court
no
evidence
as
to
what
that
portion
was.
The
Court
cannot,
without
some
evidence,
choose
a
figure
out
of
a
hat;
the
appellants
must
satisfy
me
as
to
what
portion
might
have
been
properly
applicable.
In
light
of
the
foregoing,
I
find
that
the
$24,870
of
interest
income
was
not
active
business
income
but
income
from
property.
Therefore,
the
assessment
with
respect
to
Flexo
is
confirmed
and
its
appeal
is
dismissed.
Having
determined
that
the
assets
in
question,
the
term
deposits
and
cash,
were
not
used
in
an
active
business,
it
follows
that
since
they
represented
over
50
per
cent
of
the
gross
assets
of
Flexo
in
1987,
not
all
or
substantially
all
of
the
assets
of
Flexo
were
used
principally
in
an
active
business
as
required
by
subsection
248(1)
of
the
Act
and,
therefore,
Flexo
was
not
a
small
business
corporation
as
required
by
subsection
73(5)
of
the
Act.
Therefore,
the
appeal
of
Jane
Mackintosh
is
also
dismissed.
Appeal
dismissed.
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