Section 4

In addition to being involved in construction (maintenance of roads, streets and bridges), the taxpayer owned several natural gravel quarries and sand pits and processed sand, river gravel, crushed stone and earth for sale to third parties and for use in its construction operations. It purchased three pieces of equipment for use exclusively for the handling of materials already gathered by a cable shovel in connection with the washing, sorting and crushing of the various products.

In order for the purchases to have generated an investment tax credit for Quebec purposes, they were required inter alia to qualify as Class 29 property, i.e., they were required to have been acquired for use primarily in the manufacturing or processing of goods for sale. Under the Quebec equivalent of Reg. 1104(9)(c), “manufacturing or processing” was deemed to exclude “construction."

In finding that this exclusion did not apply because the taxpayer’s construction and processing operations were distinct, Bourgeois JCQ noted that the operations’ respective customers differed, the processing occurred at sites distinct from the situs of the construction projects, only 27% of the processed product was used in the construction operation, the two operations could have been operated independently of each other, and there was separate accounting. The appeal was allowed.

The taxpayer operated a four-employee 1500-acre farm that produced potatoes, grains, market garden and dairy products, as well as a 10+-employee processing operation housed in four buildings on the farm, that purchased, sorted, washed and bagged potatoes before their sale. Whether various equipment purchased for use in the processing operation qualified for a tax credit for purchases of Class 29 property used in manufacturing or processing turned on whether an exclusion, from what otherwise would qualify as manufacturing or processing, for the carrying on of a farming or fishing business, applied.

Forlini JCQ confirmed the ARQ position that this exclusion applied given that this was a “vertically integrated” business in which the farming operation “sold” all of its potato production to the processing operation, carried on at the same location, and the processing operation acquired 90% of its purchases from the farming operation. The facts that there was separate accounting for the two divisions, and that each division had a substantial scale of operations, rather than being merely ancillary to the other, did not carry the day. Forlini JCQ concluded (at para. 85, TaxInterpretations translation) “that Lunick Farm carries on a single farming business.”

The taxpayer used approximately 20% of the area within greenhouses to grow cucumbers or other vegetables, or flowers, from seed for sale as grocery items or as little plants that could be transplanted. The taxpayer also annually produced about 85,000 floral arrangements in pots, which it sold to retailers such as Costco. To this end, it purchased already-grown flowers from other growers, and maintained them in its greenhouses pending its use of them for incorporation into the floral arrangements. Between 2012 and 2014, it constructed a biomass system for heating the greenhouses.

Gibbens JCQ found that this system qualified as a Class 29 property that entitled the taxpayer to investment tax credits, i.e., it was used primarily for the manufacturing or processing of goods for sale. After finding that the floral arranging activity was manufacturing or processing, she went on to find that the floral-arranging activity was a separate business rather than being part of the taxpayer’s (greenhouse) farming business, stating (at para. 68, TaxInterpretations translation):

Nothing otherwise suggests that the two activities were dependent one on the other. In particular, the floral arrangements were manufactured exclusively from already-grown plants that had been purchased by the Coop from third-party suppliers and not from flowers that the Coop had grown for sale as small plants to be transplanted.

The taxpayer, a paper products manufacturer, engaged in a hybrid transaction in which it sold some of the assets of its “Tissue Division” directly to a third-party purchaser (“Cascades”) and rolled the balance of them down to a Newco under s. 85(1) for Newco shares and sold the Newco shares to Cascades. CRA assessed on the basis that the sale of the Newco shares was on income account. The only issue before Graham J was whether s. 54.2 deemed the Newco shares to be capital property, which required that the drop-down transaction be considered to be the transfer of substantially all the assets of an active business.

Graham J found that "the test in section 54.2 is intended to be a somewhat flexible test but … there is no reason not to consider the fair market value of the assets when applying the test.” From the FMV perspective, the transferred assets represented about 68% of the assets of the Tissue Division – and perhaps significantly less, given that some of the Tissue Division assets had not been valued. He also was receptive to arguments that, given the flexibility of the test, he should also consider whether the dropped-down assets represented “the heart of the business of the Tissue Division,” but did not find any such indication on the evidence.

Accordingly, s. 54.2 did not apply, and it was unnecessary for him to go on to consider whether the Tissue Division was a separate business or merely a division of a larger business. However, Graham J stated (at para. 9):

[H]ad I had to decide this issue, the inconsistent filing positions taken by the Appellant would have hurt its case. The Appellant had a history of treating its operations as a single business when claiming capital cost allowance. The Appellant continued that single-business approach when determining the cost of the assets that were rolled into 722, yet treated the Tissue Division as a separate business when selling the common shares that the Appellant received from 722 on that rollover. I would have struggled with an outcome that gave the Appellant the benefit of single-business treatment for all of its prior tax years and for the first part of the sale transaction, yet gave it the benefit of separate-business treatment for the second half of that same transaction. Either the Tissue Division was a business or it was not. The Appellant should not have had it both ways.

A British taxpayer (Leekes) carrying on a retail trade through four stores acquired, for nominal consideration, all the shares of another company (Coles) carrying on a similar retail trade through three stores, and then effectively wound-up Coles so as to carry on the operations of the three former Coles’ stores directly. At issue was whether a provision which provided that Leekes (viewed as the successor to the Coles’ trade) could deduct any amount for which the predecessor (Coles) would have been entitled to relief if it had continued to carry on the trade, permitted Leekes to deduct its losses from continuing to carry on the three former Coles’ stores from its profits from operating its four “old” stores.

In finding that such relief was unavailable, Henderson LJ stated (at para. 27):

[T]he words "the trade" can only refer to the trade previously carried on by Coles. They cannot refer to the enlarged trade carried on by Leekes, because that trade had never been carried on by Coles, and Coles cannot therefore be deemed to have continued to carry it on. … [I]t is necessary to ascribe a deemed continuity to the former trade of Coles, although it now forms part of the merged business carried on by Leekes, and relief may only be obtained if and to the extent that Leekes then derives trading income from the former Coles trade.

The Crown brought a motion under Rule 58(1) for determination of questions of law respecting the application of Art. XXII(2) of the Canada-Brazil Treaty to the assumed situation of a Canadian resident taxpayer (who earns income from other sources that is taxable in Canada) earning bond interest arising in Brazil which is taxed in Brazil under Art. XI of the Treaty and with the taxpayer being deemed by Art. XXII(3) to have paid Brazilian tax equal to 20% of the gross bond interest arising in Brazil. The Crown position was that the maximum foreign tax credit available to the taxpayer under Art. XXII(2) was equal to the actual Canadian tax payable on the bond income arising in Brazil, which in its view must take into account applicable expenses incurred by the taxpayer to earn the income. The taxpayer’s position was that this credit instead equalled the Canadian tax rate multiplied by the gross amount of the interest. Art. XXII(2) provided:

The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.

In the course of accepting the Crown’s interpretation, Paris J stated (at para. 29):

IPL2 stands for the proposition that...gross income from a source in a particular location must be reduced by any deduction that may reasonably be regarded as applicable to that source. Tax is then computed on this net amount... . While the Treaty does not explicitly set out that Canadian tax be computed in this manner for the purposes of Article XXII(2), it is implicit in the phrase “income tax as computed before the deduction is given” which appears in Article XXII(2).

He went on to state (at para. 89):

Since the income derived from Brazil by the Canadian resident taxpayer in the hypothetical fact situation is from a source in a particular place, …the taxpayer would be required to compute income from that source as provided for in subsection 4(1)… first on the assumption that the taxpayer had no income or loss except from sources in Brazil, and second, that the taxpayer was allowed no deductions in computing income except those that may reasonably be regarded as wholly applicable to that source and except such part of any other deductions as may reasonably be regarded as applicable thereto.

The taxpayer ran, along with its subsidiaries, a lumber and paper goods business with annual sales of approximately $2.5 billion. In response to the group's accounts receivable being denominated in foreign currencies, the taxpayer began trading options. The trading quickly expanded, with one currency trader and three bond and security traders. The team's stated objective was to mirror, on a smaller scale, the "same sort of structure" as the trading flow of TD Bank.

In the course of finding that the taxpayer could treat its options as inventory (and hence claim losses in the year in question based on a decline in the value of its portfolio), Rip J found that the taxpayer's trading activities constituted a business. He noted, for example, the scale of operations (it was the third- or fourth-largest currency options trader in Quebec), and its conduct generally reflected a business enterprise entirely separate from its manufacturing business (para. 38).

See summary under s. 9 –timing.

The taxpayer, a lawyer, was bilked of $400,000 by scam artists, posing as clients, who induced him to incur "processing " fees in connection with the recovery of a supposed container in the Ivory Coast containing US$8.5 million of cash.

Before finding that deduction of the taxpayer's outlays was barred by s. 67, Webb J. found that the outlays arose out of activities (seeking to act as a trustee for supposed clients) that were undertaken as part of his law practice and, thus, related to a source of income (that business).

The taxpayer manufactured flight simulators which it used to provide flight training services directly or which were leased by it to airlines for their training purposes (coupled in many instances with a sale of the simulator to a third party). Jorré found (at para. 71) that the taxpayer's flight training and leasing/sale operations were part of a single civil aviation simulator business.

Before going on to find that legal fees incurred as a result of a cancellation by the taxpayer of an agreement to purchase a building were capital expenditures, Paris J. rejected a submission that they should not be considered to have been incurred in connection with a source of business. Although Paris J accepted the Crown's submission that the property, if acquired, would have represented a source of income that was separate from the two rental properties already held by the taxpayer, the property to be acquired already represented a source of income at the time the taxpayer agreed to purchase it. A business commenced where some significant activity was undertaken as "an essential preliminary to normal operations" (para. 14) and (at para. 16) "in the case at bar, the Appellant promised, in an enforceable contract, to purchase the building, and that is an essential preliminary to the operation of the property".

In finding that the taxpayer’s winemaking was linked to viticulture and was an integral part of its (estate winery) farming business, Campbell J stated (at paras. 25-26):

The winemaking is so directly tied to the activities in the vineyard that the Appellant cannot go to outside parties to purchase grapes because it produces "estate bottled wine". …

It is in the vineyard where most of the employees are hired, where most of the equipment is required and used, where the labour expenses are the highest, and where the majority of the acreage is used. …[T]he vineyard activities and operation are an integral part of the operation and the very foundation upon which the winery is able to produce and bottle its estate labelled wine.

The taxpayer had excess computer capacity that was needed to meet peak demands of its life insurance business but not otherwise, and which it provided for a fee to a wholly-owned subsidiary for sale by the subsidiary to the public. It was found that the taxpayer was engaged in a business separate from its life insurance business with respect to its dealings related to this excess computer capacity.

The businesses of subsidiaries acting as sales organizations for their parent, a distiller, were found to be an integral part of that distilling business.

Since there was some doubt as to whether or not a forestry operation and a tree plantation operation were separate businesses, it was not unreasonable of the special commissioners to conclude that the taxpayer carried on separate businesses.

The business of one company does not embrace the business of a second company if the second company is not the agent or puppet of the first and is not under the direct management and control of the first. The business of one subsidiary of Alcan International Ltd., which consisted of providing research and development services for a fee to affiliated companies, was distinct from the manufacturing business of another subsidiary of Alcan International Ltd. [C.R.: "Tax Avoidance"]

The taxpayer manufactured railway wagons, which it sold outright (outright or under hire purchase agreements) as well as letting out wagons on simple hire (i.e., no purchase options). After the First World War there was a great scarcity of wagons and the taxpayer decided to sell all the wagons which were being hired out. The Special Commissioners had stated that "we are unable to draw the very sharp line which we are asked to draw between wagons sold, wagons let on hire purchase and wagons let on simple hire...." Before concluding that the gain on this sale was a taxable profit, Lord Dunedin stated (at p. 474):

The hiring accounts were kept separate, but is was all one business.

The taxpayer, Mr. Nonis, who was a U.S. resident, had been employed as the general manager of the Toronto Maple Leafs pursuant to an employment contract entered into in 2013. For his 2013 and 2014 taxation years, Mr. Nonis included in his Canadian returns a pro-rated portion of his employment remuneration based on the number of days spent in Canada performing services to earn such income, and this was accepted by CRA. On April 12, 2015, his employer notified him that no further active services were required of him in order to fulfill his contract, and Mr. Nonis returned permanently to the U.S. However, under his contract, he continued to be entitled to remuneration for a number of years thereafter. In filing his returns for 2015 and 2016, Mr. Nonis used the same proration formula based on his days of service in Canada: 37 days for 2015; and zero days for 2016. The Minister reassessed Mr. Nonis on the basis of using the days of service that had been accepted for 2013 and 2014.

After finding that Mr. Nonis continued to be an employee after his “termination” (albeit, with virtually non-existent duties), Bocock applied the principle (at para. 59) that, under “paragraph 4(1)(b) of the Act, if a taxpayer works partly in Canada and partly in another country in the same taxation year, the taxpayer’s taxable Canadian income for the year is the amount earned while working physically in Canada” – so that Mr. Nonis’ reporting based on the 37 and 0 days of service in Canada was correct.