Acr Corporate Services LTD v. Minister of National Revenue, [1976] CTC 2432, 76 DTC 1322

The Assistant Chairman:—The above-mentioned corporation (hereinafter sometimes called the “appellant”) has appealed to the Tax Review Board from an assessment for tax for each of the 1973 and 1974 taxation years. The issue between the parties is, as I understand the matter: To what extent may the appellant claim that which is called a ‘Small business deduction,” Pursuant to the provisions of section 125 of the Income Tax Act as amended, in each of the years in question? The appellant contends it may claim such a deduction with respect to all its income in each of the years. The respondent contends that the appellant can only claim such deduction in so far as 1973 is concerned with respect to the income from its business and not with respect to the tax it pays as a result of a Capital gain which it had in its 1973 taxation year. As a result of the capital gain in the 1973 taxation year, the appellant had surplus funds on hand not needed for its business, and it invested those surplus funds in a certificate, i believe, of a credit union for one year. The funds were so invested that if the money were left with the credit union for a definite period (the year) a certain rate of interest would be received. However, should it be that the appellant wished to have the money at an earlier date, it could receive the full money invested but at a lesser rate of interest. The Crown took the position that, with respect to the interest earned from the investment of the surplus funds in a certificate, the appellant was not entitled to a small business deduction.

I do believe that there is really no substantial disagreement between the parties as to the facts in this case. The appellant is a corporation incorporated in 1966, pursuant to the laws of the Province of British Columbia, as a private company, and to date it has remained a private company, having three registered shareholders. According to Article 3 of its Memorandum of Association, among the objects for which the company was incorporated was “‘a) to establish and Carry on business aS professional secretary for incorporated companies”. According to Mr Michael Hretchka, a director of the appellant and the appellant’s representative at the hearing, from the date of incorporation until the present time the appellant has carried on, and is carrying on, its business as a professional secretary for incorporated companies. Its business has been carried on from various addresses in the City of Vancouver. The appellant contended, and it was not disputed by the respondent, that in all years from 1966 to 1974 inclusive the appellant only had a capital gain in the 1973 taxation year. In addition, the only year in which the appellant reported interest income as part of its income subject to tax, was the 1974 year. The evidence was that in the 1973 calendar year the appellant sold some shares and made a capital gain which it invested in certificates of a a credit union. As a a result of that investment, the appellant earned interest. Another matter which should be pointed out, and on which there is no dispute, is that from 1966 to date the appellant only had two clients for whom it acted as corporate secretary. In 1973 the gross revenue from that source was $600, and in 1974 the gross revenue from that source was $1,000. The Minister of National Revenue, the respondent, agrees that the net profit from this activity is income from an active business and consequently, with respect to these net amounts, the appellant is entitled to the small business deduction.

As mentioned, the issue is whether or not the taxable capital gain of $2,964.25 is to be considered as income for the purposes of the small business deduction. lt is to be noted, according to the appellant’s income tax return for the 1973 year, that after reporting ‘‘Net on income” of $407.10, the appellant reports a capital gain of $2,964.25 for a “TOTAL NET PROFIT” for the year of $3,371.35. In its surplus account the appellant adds an amount described as follows: ‘‘add non- taxable capital gain of $2,964.25”. In 1974 the appellant reports, in addition to its income from its corporate secretary services, interest earned of $702.63 and, as previously mentioned, contends that this is income from an active business and so is entitled to the small business deduction. The contention of the Crown is that, first of all, amounts subject to taxation under what are known as the “capital gains provisions” are under no circumstances to be entitled to the so-called “small business deduction”. The contention of counsel for the Crown is, as I understand her approach, that it is not all the income of a corporation which is entitled to the so-called “small business deduction,” but only that income which is income from an active business. The result is that the sources of income of a corporation must be looked at, and only those sources which produce “income from an active business” are to be considered with respect to the small business deduction.

The appellant, as mentioned, contends that the profit arising from the sale of shares in 1973 should be considered as part of the income of the appellant within the ambit of section 125 so that it be considered as income from an active business carried on by the appellant in Canada. I am of the view that this position can be readily rejected by reference to section 9 of the Income Tax Act. Subsection 9(1) states:

9. (1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

Subsection (3) of the same section reads as follows:

S. (3) In this Act, “income from a property” does not include any capital gain from the disposition of that property and “loss from a property” does not include any capital loss from the disposition of that property.

Clearly since the taxpayer contends that the transaction which gave rise to the profit of $5,928.50 was not a business transaction then, as I see it, it is not income from a business within the meaning of section 9 nor is it income from property. If that amount cannot be income from a business, ! cannot see how it can be income from an active business as that expression is used in section 125. Accordingly, the appeal with respect to the 1973 taxation year is dismissed.

The remaining issue now relates to the 1974 taxation year. Accepting the proposition that a corporation may have a source of income which is considered to be such a source that it is an active business and so entitled to the small business deduction; may it have another source or sources of income which are such that they are not from an active business and so the total income of the corporation is not entitled to the so-called “small business deduction” but, rather, only the portion of its total business income which can be considered from an active business is entitled to the small business deduction? In making this submission, counsel for the respondent relied, in effect, on the case

of MRT Investments Limited, ESG Holdings Ltd and Rockmore Investments Ltd v Her Majesty the Queen. Counsel for the respondent referred to the decision of the Federal Court of Appeal with respect to those appeals which are reported at [1976] 2 FC 428; [1976] CTC 291 at 294 and 295; 76 DTC 6156 at 6158. On the issue of income from an active business, in substance the Federal Court of Appeal agreed, in So far as these appeals are concerned, with the decision of the trial judge. The reasons for judgment of the trial judge are reported at [1976] 1 FC 126; [1975] CTC 354: 75 DTC 5224.

In the cases above-cited, the companies were involved in the money- lending business on what one would call a comparatively small scale. The issue there was whether or not the income from that source earned by the companies was from an active business and so entitled to the deduction contemplated by section 125. Counsel for the Crown in those cases took the position which is reflected in the reports of the Federal Court trial judge at page 139 [364, 5231]. Counsel was pointing out contrasts between section 125 and section 129 of the Income Tax Act, and he contended that income, in so far as a company is concerned, can come from four distinct sources:

1. capital gains from the disposition of property;

2. from a source that is property;

3. from a source that is a business but not an active business; or

4. from a source that is an active business carried on in Canada.

The Court then stated, also at page 139 [364, 5231]:

While this distinction is undoubtedly true it does not settle the matter. Certainly, the amount to which the 25% deduction applies by virtue of section 125(1) is only applicable to amounts of income derived from the “active business” of the corporation carried on in Canada and the deduction would not apply therefore under this section to the investment income of a company, the active part of whose business is not the making of investments for a profit. The distinction is a valid one for a corporation which has income from different sources, part being from its active business operations and part being non-active income. I can find nothing in section 125 tself, however, to justify a conclusion that a corporation whose entire income comes from investments cannot therefore be considered as Carrying on an “active business” when the making of investments. is the very purpose for which it has been incorporated and constitutes the business which it has been carrying on. Counsel for defendant did not contend that no such company can ever avail itself of the provisions of section 125 of the Act but this would appear to be the inevitable conclusion of his argument it applied to private companies whose sole “active business” consists of dealing in investments.* [1]

Purely by way of observation with respect to the portion of the decision of Mr Justice Walsh above-quoted, could it not be that the investment by the appellant in the present case of its surplus money arising from the sale of certain shares is just incidental to its business of a corporate secretary? It must be noted that in the cases which were being decided by Mr Justice Walsh the corporations only had one business activity. He concluded, after considering the case law, that two of the appellants were carrying on an active business and were entitled to the small business deduction. He did not have a situation as is at hand in this particular case; namely, where a corporation is clearly, with respect to some of its income, carrying on an active business but it is disputed that the balance of its income is from an active business. However, the above-quoted paragraph does contain a statement which clearly applies to the situation in this appeal. The active business of the appellant is acting as a corporate secretary, and an active part of its business is not the making of one investment in 1973 and the receiving of one payment of interest in 1974. It would seem clear that “the deduction would not apply therefore under this section to the investment income of a company, the active part of whose business is not the making of investments for a profit”.

Consequently I am of the view that the appeal of the appellant with respect to its 1974 taxation year should be dismissed inasmuch as its only income from an active business was the amount determined by the respondent.

The appeal of the appellant for the 1973 and 1974 taxation years is dismissed.

Appeal dismissed.