R St-Onge (orally: April 11, 1975):
1 This appeal is from a reassessment dated May 9, 1974 for the 1972 taxation year and it came before me on April 10, 1975 in the City of Winnipeg, Manitoba.
2 The appellant was incorporated on November 7, 1961 by 10 parties “to acquire by purchase, exchange or other lawful means, mortgages on real estate”, inter alia. Since that date the appellant has engaged in the business of a money-lender almost entirely on the security of highly speculative second mortgages.
3 The initial capital contributed by each of the 10 shareholders by way of purchase of shares of the appellant company or loans made to the company was $20,000 and the appellant arranged a revolving bank credit line of $20,000. In 1972 the appellant company had a credit line of $30,000.
4 Mr Zaslov, a lawyer and the beneficial owner of Mark Enterprises Ltd who controlled Marlee Investments Ltd, testified that from 1962 to 1967 the appellant company purchased second mortgages at discount but when the company became more solidified it lent money on 5-year mortgages with a clause of a payment of 3 to 6 months' interest in case of prepayment of the debt.
5 The appellant company acquired its loans from four sources: (1) Mr Zaslov's law office; (2) other lawyers; (3) real estate agents; (4) contractors and builders.
6 As may be seen, the nature of Mr Zaslov's profession led these people to his office and for this reason he did not need to advertise the company business. For the same reason the appellant company did not need an office, a separate telephone listing, stationery or a secretary.
7 Mr Zaslov was not paid a salary and he used his law firm secretary when necessary for the appellant company's business. From 1969 there was no committee to approve the loans and he alone made the inquiries and decided if a loan should be granted.
8 In the course of lending money some mortgaged houses became the property of the company but the latter was not in the business of owning real estate and the said houses were sold. One of these houses caused a great deal of difficulty to the company. First it took a certain time to become the owner, then fire partially destroyed it and there were long discussions with the insurance company to settle the damages.
9 In 1972 the appellant company made only one loan, held six mortgages and owned one property. Its mortgage receivables amounted to $14,350.23, its bank loan to $977.70 and its shareholders' advances to $5,361.10.
10 Mr Zaslov explained that the decrease in the appellant company's business was due to the uncertainty of the income tax law at that time and that the company was not registered under the Mortgage Brokers Act because it did not hold more than ten mortgages.
11 As may be seen, the appellant company had no letterhead, no business cards, no office furniture and equipment, did not advertise and did not pay any employees. The secretary was paid by the law firm and Mr Zaslov was paid for his professional services by the appellant company which in turn was deducting this amount from the mortgage loan. The payments on the mortgages were made by the deposit each month of postdated cheques.
12 Counsel for appellant argued that without the constant management of Mr Zaslov the appellant company could not operate; that the decline in business in 1972 did not prevent the appellant company from carrying on an active business in that year and that in the light of Cosmopolitan Investment Co Ltd v Minister of National Revenue, [1974] C.T.C. 2335, 74 D.T.C. 1252, the appeal should be allowed.
13 Counsel for respondent argued that “active business” should not be defined in a vacuum; that because there are three types of income, ie income from property, income from a business, and income from an “active business”, “active” should be construed to mean more than “an act or thing done in the performance of a function”.
14 In his opinion the words “active business” mean that a corporation needs to perform a certain degree of activity to fall under section 125 of the new Income Tax Act.
15 To prove the existence of three types of income, he referred the Board to section 129 which mentions income from “a business other than an active business”. Then he referred the Board to section 95 which deals with the type of corporation and multi-national company in which three types of losses are mentioned. Subparagraph 95(1)(b)(iii) reads:
(iii) the affiliate's losses for the year from property and businesses other than active businesses ...
16 As to the facts he stated that the appellant company was not very active in 1972 since it made only one mortgage loan and the other activity was the collection of mortgage payments in an amount of $17,000, which was effectuated by the deposit of postdated cheques.
17 I agree with counsel for the respondent that section 125 of the new Act cannot be read alone and sections 129 and 95 show that there are three types of income under the new Act. Also subsection 248(1) stipulates that property includes money.
18 Having made these distinctions, I have to consider whether the income in question was income from property, income from business, or income from an active business.
19 One must scrutinize the evidence adduced to discover which type of income the appellant company earned. The evidence has revealed that in 1972 the appellant company effectuated one mortgage only and that its main activity consisted in the collection of mortgage payments for a total amount of $17,000—the said payments being made by the deposit of postdated cheques at the bank. The appellant company did not have any organization of its own and the very few functions accomplished in the 1972 taxation year on behalf of the appellant company were executed through the facilities and services of Mr Zaslov's law firm by lending money and collecting interest.
20 Consequently the appellant's income was derived either from property or business, but certainly not from an active business.
21 According to my interpretation of section 125, one must look at the degree of activity in order to decide whether or not an appellant is carrying on an active business.
22 In my opinion the degree of activity of the appellant company in 1972 was not substantial enough to qualify it as carrying on an active business and consequently the appeal is dismissed.
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