Canada v. Irving Garber Sales Canada Ltd.
T-2315-87
Joyal J.
21/9/92
26 pp.
Appeal from Tax Court judgment vacating reassessments for 1978 to 1982 inclusive -- Taxpayer engaged in fur business -- Income derived from sales' commissions, sales of raw skins and of manufactured fur coats -- Under Income Tax Act, s. 125 business income enjoying preferred tax rate as against straight investment income -- Whether income earned by defendant from accumulation of certificates of deposit constituting business or investment income or income from property -- Crown submitting income earned on invested capital investment income based on assumptions no business purpose in holding investments; amounts of investments not substantially risked in defendant's business; income therefrom not related directly to defendant's income earned in carrying on active business; investment amounts vastly superior to needs of business -- Defendant justifying reserves as necessary to regain credibility in fur trading business after prior bankruptcy; as auction terms and conditions making "purchaser" responsible for payment, certificates of deposit necessary to participate in fur auctions and part of company's working capital -- Income from "active business" in s. 125 including "income pertaining to or incident to that business" -- Case law indicating question of fact, depending upon all surrounding circumstances, as to whether income derived from property or business -- In providing for preferential tax treatment for business income in s. 125, Parliament imposing more artificial distinction between kinds of income business may earn -- Appeal allowed in part -- Must determine whether income from, not by, business -- Although Hudson's Bay Company (fur vendor) looking to defendant for payment, defendant not losing possession or control of furs if customer defaulting -- Question why astute fur trader would risk $400,000 for three percent return -- As large and widely dispersed list of customers, inconceivable all would default in same year -- Given relatively low accounts receivable, high level of working capital not required for operations -- Good debt collection rate -- Reference to Ensite Ltd. v. R., [1986] 2 S.C.R. 509 -- Business purpose for use of property insufficient -- If not employed or risked in business, not property used or held in course of carrying on business -- Defendant's income-producing certificates which grew from $285,000 in 1978 to $623,000 in 1982 not necessary to defendant's operations, nor part of its working capital, nor incidental or pertaining to active business -- No correlation between total amount of purchase contracts executed over several auctions for account of several customers and total amount of reserves required to cover risk -- No evidence Hudsons Bay requiring audit of books for acceptance as purchaser -- Evidence as to significant exposure to risk either through auction purchases or other business activities relating to sales of fur garments not convincing -- On other hand, certificates of deposit only asset giving defendant continuity, stability and ability to meet shorter or longer term liabilities -- Defendant choosing not to operate through fat current bank account, preferring to keep low, fluctuating margin of credit balances, investing surplus into liquid short-term income-producing certificates -- Some funds must be available to meet unexpected downturns -- Although reserves claimed by defendant excessive, reasonable reserve necessary as operational requirement as defendant always open to some degree of contingent liability under terms of auction bids; prior bankruptcy required establishment and maintenance of financial stability; banking accommodation from time to time made available by reason of reserves; no tangible assets available to pledge as security for such accommodation; some individual purchases at auctions substantial; although risks in fur auctions not cumulative, evidence defendant having to extend some lines of credit to some customers with concomitant financial risk -- Sufficient oral and documentary evidence to fix reasonable amount for reserve at $200,000 -- Assessments varied to include in business income for each year income earned on $200,000 -- Balance of income earned from investments -- Income Tax Act, S.C. 1970-71-72, c. 63, s. 125(1)(a), (6) (as am. by S.C. 1979, c. 5, s. 38; 1980-81-82-83, c. 140, s. 86), 129(4) (as am. by S.C. 1974-75-76, c. 26, s. 86; 1979, c. 5, s. 41).