Business

Before going on to find that the taxpayer’s activity of FX straddle trading, which had the appearance of commerciality but was not engaged in for profit, was not a business, and after noting (at para. 34) “the long accepted common law definition of business which simply requires that the activity be undertaken in the pursuit of profit,” Noël C.J. stated (at para. 38):

… Stewart… made it clear that the test being devised was consistent with the traditional common law definition of “business”. The word “business” is given an inclusive and expansive meaning under the Act (subsection 248(1)), but is left otherwise undefined. As in such circumstances, the private law -- the common law on the facts of Stewart -- fills the gap, the Supreme Court explained that the Stewart test gave effect to the common law definition of “business” (Stewart, para. 51) … .

In finding that the business of a Barbados subsidiary of the taxpayer was not a “business conducted principally with persons with whom [it did] not deal at arm’s length” notwithstanding that it raised its capital mostly from the taxpayer, Côté J. stated (at paras. 45-46):

I agree that the definition of “business” in s, 248(1) is broad and not restricted to income‑generating activities. However, we are not concerned with the word “business” alone. In my view, an ordinary and grammatical reading of the words “business conducted” conveys a different meaning than the word “business” alone. The addition of the verb “conducted” emphasizes Parliament’s intent to focus on the active carrying out of the business rather than on the establishment of prerequisite conditions that enable a foreign affiliate to conduct business.

Raising capital is a necessary part of any business, and capital enables business to be conducted. But one would not generally speak of capitalization itself as the conduct of the business. Our Court has repeatedly affirmed that there is a distinction between capitalization and the conduct of a business. As Justice Rand wrote, “[t]he capital machinery within and by means of which the business earning the income is carried on is distinct from that business itself” (Tip Top Tailors …).

At issue was whether a Barbados bank subsidiary (Glenhuron ) of the taxpayer, which used equity funds received from its Canadian parent to invest in short-term debt obligations, conducted its business principally with persons with whom it dealt at arm’s length, as required in s. 95(1) - investment business - (a). In finding that what the Crown argued to be the “receipt side” of Glenhuron’s business, i.e., “the capital investments by the Loblaw group [,] were not part of Glenhuron’s conduct of business” Woods JA stated (at paras. 82, 84-85):

For purposes of the ITA, the term “business” generally means “something occupying the time and attention and labour of a man for the purpose of profit” … .

Applying the meaning of “business,” there is no reason to conclude that the capital invested by the Loblaw group would have occupied the time and attention of Glenhuron in any meaningful way.

[T]his approach is consistent with long-standing jurisprudence which draws a distinction between “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income” … .

The filing position of the taxpayer (Wesbild), that it did not have a permanent establishment in B.C., was based on an application of the Marconi test of what was a business, so that under Reg. 400(2) it did not have a fixed place of “business” in B.C. CRA reassessed (but not until after the normal reassessment period) on the basis that, in the context of Reg. 400 et seq., “business” included having property or taxable capital gains as the only sources of income.

After finding that the filing position of Wesbild was reasonable and, therefore, not a “misrepresentation,” Fitzpatrick J stated (at para. 181):

Wesbild’s filing position conformed to the Marconi test… . There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.

The two individual taxpayers devised a scheme to: generate artificial capital gains of $110 million in some home-grown companies; pay the supposedly resulting capital dividend accounts (CDAs) of $55 million to another company (1915); generate artificial capital losses in the home-grown companies to offset their capital gains; effectively sell negotiated portions of the CDA to 3^rd-party purchasers by having them subscribe for preferred shares at a 21% premium to their redemption amount with the shares' redemption amounts effectively being flowed out to the 3^rd parties as purported capital dividends; and then pocketing such subscription "premiums" as capital dividends paid out to them. A more detailed summary of the facts is under s. 83(2).

In finding that the share premiums received by 1915 were business income to it, Noël JA found (at para. 64) that as the maximum value of the preferred shares was $1,000 "the premium was therefore paid for something other than the shares [and] this was obviously access to the CDAs," and stated (at para. 66):

[A]s additional amounts collected by the corporate appellants were generated in the course of successive operation the purpose of which was to produce surpluses, all the factors underlying the existence of a business are present."

The taxpayer purchased gems for an amount in excess of their worth, and then paid a total of $1,651,766 in charges purportedly made to secure a sale of the gems (which never occurred). This was a fraudulent scheme from the beginning to end and, accordingly, did not qualify as a business. Accordingly, the expenses so paid by the taxpayer were not deductible.

The Tax Court Judge did not commit a reviewable error when he found that the taxpayer's activities lacked commercial flavour and that the taxpayer was not engaged in farming activities to make a profit, but primarily to provide food for his table. As such, his activities did not amount to a business.

Before going on to find that rental condominium units of the taxpayer represented a source of income and that it was not necessary for the taxpayer to establish that he had a reasonable expectation of profit therefrom, Iacobucci and Bastarache JJ. stated (at para. 38) that:

"Equating the term 'business' with the phrase 'reasonable expectation of profit' does not accord with the traditional common law definition of business, which is that 'anything which occupies the time and attention and labour of a man for the purpose of profit is business'."

In the years in question a corporation which owned forest concessions and rights to develop the hydro electric potential of a river was engaged in negotiations with Hydro-Quebec and other activities with a view to developing that potential. Desjardin J.A., before going on to find that the taxpayer was engaged in a business, noted that the word business was defined to include an undertaking of any kind whatsoever and also noted that the determination of whether a taxpayer was engaged in an active business was a mixed question of fact and law.

The taxpayer was employed by the New Brunswick Department of Agriculture and Rural Development to assist in establishing and administering several dairy farms in Malawi, in consideration for which the Department received fees that were intended to cover its cost, cover overhead and make a small profit. In finding that the Department satisfied the requirement that it be carrying on a business, Noel J.A. stated (at para. 12) that in applying the definition of business in s. 248(1):

"It seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense, it was at least engaged in an 'undertaking of any kind whatever', namely the provision of services under a contract for a fee."

In any event, the Department was engaged in the business in the ordinary sense. Although the expected profits were small "a profit is a profit whether big or small and irrespective of one's motivation for generating it" (para. 21).

In its 1984 taxation year, a controlled foreign affiliate of the taxpayer ("B.V.") earned interest on a promissory note that B.V. had acquired from an affiliated Canadian corporation and reinvested that interest in bank deposits, and in 1985 B.V. earned income from interest paid on Canadian mortgages. The Minister conceded that the interest on the note was active business income rather than foreign accrual property income (FAPI), but assessed on the basis that the other interest income was fapi. In finding that B.V. was carrying on an active business, MacKay J. noted that the investing activities of B.V. were within the scope of the objectives set out in its articles of incorporation, supervising managing directors of B.V. met on a quarterly basis, B.V. through its supervisory director had investigated making other acquisitions in addition to those that it actually made, it used staff resources provided by affiliated companies in Amsterdam in connection with receiving and accounting for payments made on the note, and indicated that it was not appropriate for the Minister's reassessment not to relate to the whole of the income of B.V. so that the concession of the Minister that interest on the loan was from an active business assisted the taxpayer's position.

The taxpayer paid $200,000 for a debenture that was redeemable by both the company and him for $140,000, and realized a gain for tax purposes of $40,000 when the debenture was redeemed because a particular provision applicable to “SRTC debentures” (ITA s. 127.3(1)) had reduced the cost amount to him of the debenture to $100,000.

Hugessen J.A. noted (at p. 6268) that the taxpayer had been assessed, not on the basis that the profit he had realized for tax purposes was from a business in the general sense of the word but, rather, on the basis that it was from an adventure in the nature of trade, and that “the notion of an adventure in the nature of trade extends the reach of the charging sections to transactions which, although not carried out by a trader, are of the same kind as trading transactions.” He further noted (also at p. 6268) that “while a positive finding that a transaction was for speculation or for investment may be decisive as to whether it was or was not a trading transaction, an equivalent finding, i.e., that it was not one or the other of those things, cannot be” – as was the case here as the taxpayer’s debenture purchase had effectively been admitted not to be an investment.

In finding that the taxpayer’s gain for purposes of the Act was a capital gain, Hugessen J.A. stated (p. 6269) that he did "not think it can properly be said that a transaction whose sole purpose is to reduce the tax otherwise payable by a taxpayer is, for that reason alone, an adventure in the nature of trade" and (p. 6270) that although "an intention to make a profit is not essential in order for a transaction to be characterized as an adventure in the nature of trade, such transaction must be one from which it is possible to derive a profit in a commercial sense".

In finding that a decline in the value of a property that was held as an adventure in the nature of trade and not as stock-in-trade of a real estate trading business qualified as inventory whose decline in value could be deducted in computing income under s. 10(1), Major J stated (at para. 55):

I do not accept the argument that s. 10(1) applies only to those who "carry on a business".

Before going on to find that the misappropriation by the accused of money received from Italian relatives did not give rise to income from an adventure in the nature of trade, Sheppard J. stated (p. 6427):

"'Adventure or concern' means the isolated nature of the transaction. 'In the nature of trade' means this person has conducted himself in the same manner as a person who would have who is in the business of trading in land."

In finding that the taxpayer did not acquire two real estate properties in connection with an adventure in the nature of trade, Cullen J. stated (p. 6635):

"An adventure in the nature of trade involves an isolated transaction only ... However, the isolated nature of the transaction by itself is not enough to conclude that it is an adventure in the nature of trade."

In rejecting a submission that the taxpayer's income from a horse racing syndicate was income from property rather than business income because the taxpayer's involvement in the syndicate was passive, Rouleau, J. stated:

"I am not satisfied that income from an investment in horses, even though care and maintenance was performed by someone other than the taxpayer, could constitute income from property. The active involvement of someone is required in order that the horses may generate revenues; they cannot do so by themselves."

Taxpayer's counsel unsuccessfully submitted that because the definition of "business" specifically excluded an office or employment, the Minister's assumption that the taxpayer had received employee stock options in connection with an adventure in the nature of trade could not stand. "[A"] taxpayer may acquire shares under employee stock options and at the same time become engaged in an adventure in the nature of trade with respect to the shares so acquired." (p. 6146)

"The term 'business' by definition includes an adventure in the nature of trade but it is not synonymous with carrying on a business. This latter concept requires more than the isolated type of transaction referred to as 'an adventure in the nature of trade'."

"I do not think that the association of a charitable organization with a commercial enterprise necessarily impresses that charitable organization with the characteristics of a 'business'".

In determining "when a transaction, which is not itself a trade or business, can be held to be 'an adventure or concern in the nature of trade' ... the question to be answered, ... was the asset acquired by the taxpayer as an investment or was it not."

The objects in the articles of incorporation of a company indicated that it was not in the business of lending money.

The taxpayer engaged in an adventure or concern in the nature of trade when he agreed with an individual ("Levy") to find a purchaser for the controlling shares owned by the Levy family in return for a 2% finder's fee, and then found such a purchaser. It was irrelevant that the taxpayer neither risked nor used money or property, and that he expended less effort than most finders would have done.

"[F]or purposes of the Income Tax Act, the fact that an activity is engaged in for the purpose of making a profit cannot be decisive of the question whether income from it has its source in 'business', on the one hand, or in 'property' on the other." The managing of an investment portfolio by a company primarily engaged in the business of manufacturing electronic equipment, was characterized as deriving income from property.

"[T]he restricted nature of the corporate powers of the taxpayer ... is a fact but it is not a critical one in determining liability for tax. The question to be decided is not as to what business the company might have carried on according to its charter, but rather what business it did carry on."

In order for an undertaking to be considered a "business" it must be carried on with a reasonable expectation of profit. Dubinsky, DJ stated (at p. 6110, DTC):

That [the taxpayer] made some isolated sales of potatoes and grain and some hay did not turn what I find as a fact to be a hobby undertaking into a business one.

The corporation, whose sole activity was to acquire mortgages of sub-prime mortgagees, and which at the beginning of the taxation year in question held 14 mortgages totalling $104,637, was found to derive its net interest income as income from a business and from an active business. It, along with various other companies, was administered by specialists in the field of lending money on mortgages, the loans required careful investigation and negotiation of the terms, some refinancing activity occurred, the company operated with borrowed funds through a line of credit from a bank and the lending or purchasing of mortgages was the business for which it was formed.

The Court of Appeal, before going on to affirm the finding that the taxpayer's business was "active", stated (at p. 6157):

"The contrast in section 3(a) of the Act between 'business' and 'property' as sources of income makes it clear, I think, that a line must be drawn, for the purposes of the Act, between mere investment in property (including mortgages) for the acquisition of income from that property and an activity or activities that constitute "an adventure or concern in the nature of trade' or a 'trade' in the sense of those expressions in section 248."

The taxpayer acquired an apartment building in Vancouver (the “Park Strand”) in co-ownership with his wife. S. 21(4) of the pre-1972 Act gave the Minister the discretion to reallocate income of the taxpayer’s wife to him if the were “partners in a business.” In finding that the net rental income was income from property rather than from a business, so that s. 21(4) did not apply, Thurlow J stated (pp. 5165, 5167):

The evidence discloses that the Park Strand has 49 apartments and that the rentals for the year 1956 amounted to $55,716.50. The appellant devotes the whole of his working time to its affairs and he said that it keeps him busy from morning to night. …

[T]he sum received as rentals from the Park Strand should I think be regarded as having accrued to the appellant and his wife and son predominantly, if not entirely, in their capacity as owners of the property rather than as traders, and I also think that the rentals should be regarded as having accrued predominantly, if not entirely, from the use by tenants of the property in the sense that they represent payments for the tenants’ occupation thereof rather than payments arising from the process of letting apartments and providing certain limited services such as heat of which the tenants have the benefit. … There may well be cases wherein the extent of various services provided by the landlord under the terms of the leasing contract is such that the rental paid by the tenant can be regarded as in a substantial measure a payment for such services as well as for the use of the property and the interrelation of the use of the premises with the use of such services may be so extensive that the whole sum paid could readily be regarded not as mere rental of property but as true receipts of a business of providing apartments and services to tenants but I do not regard this as a case of that kind.

In finding that the purchase by individual shareholders of a company of mortgage receivables and conditional sales contracts owing to that company was an adventure in the nature of trade in addition to being a transaction in the course of their business of managing the company, Thorson P. stated (at p. 1098) that "if a person deals with the commodity purchased by him in the same way as a dealer in it would ordinarily do such a dealing is a trading adventure" and that "when the respondents purchased [the company's] mortgages and agreements their transaction was similar to the kind of transactions that dealers in mortgages and agreements engaged in".

The taxpayer, who orally agreed with his brother-in-law to jointly seek a franchise to supply a town with natural gas, received $10,000 in lieu of his rights in respect of the franchise which ultimately was obtained, having advised his brother-in-law that he would be required to devote most of his time to a well-servicing company, rather than to serving in a position with the gas company that was to supply the town under the franchise.

The project was "an undertaking of any kind" and the $10,000 receipt was income from a business, rather than a capital receipt. Thurlow J. stated (at p. 1180, DTC):

"the expression an undertaking of any kind appears to me to be wide enough by itself to embrace any undertaking of the kinds already mentioned in the definition; that is to say, trades, manufactures, professions, or callings, and any other conceivable kinds of enterprise as well."

A transaction whereby the taxpayer purchased lead and resold it to his employer at a gain was an adventure in the nature of trade - notwithstanding that he engaged in the transaction in order to assist the business of his employer (of which he is a general manager) rather than to make a profit, and notwithstanding that this was the only transaction of that type which he had engaged in personally - in light of the fact that "he dealt with the lead in exactly the same manner as any dealer in imported lead would have done" (p. 1139), in light of the speculative nature of the transaction, and in light of the fact that lead is a commodity rather than property of an investment nature.

"'Business' is a very wide word, and it is a wide elastic word in its extent, of course, but it has two distinct meanings. It may mean any particular matter or affair of serious importance ... [or] an active occupation or profession continuously carried on, and it is in this sense that the word is used in the Act with which we are here concerned."