Canadian & Foreign Securities Co. Ltd.
(Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Collier J.—Toronto, May 1;
Ottawa, July 6, 1972.
Income tax—Investment company, qualifications of—
Whether promissory notes, "securities"—Income Tax Act,
section 69(2)(c).
Appellant company was assessed to income tax as an
ordinary corporation for 1965 instead of at the lower rate
applicable to investment companies, and appealed. During
that year it held for a time unsecured promissory notes of a
company of which it was also a shareholder. Section 69(2)
of the Income Tax Act provides that a company does not
meet the qualifications of an investment company unless
"at no time in the year did more than 10% of its property
consist of shares, bonds or securities of any one corporation
or debtor ...".
Held, affirming the assessment, unsecured promissory
notes are "securities" within the meaning of section
69(2)(c). The word "securities" therein must be construed
in a popular sense so as to include instruments for the
payment of money with or without some collateral obliga
tion and which are commonly dealt in for the purpose of
financing and investment..Re Waldstein 291 N.Y.S. 697,
applied. Promissory notes are popularly considered to be, in
the business sense, a form of investment. Singer v. Williams
[1921] 1 A.C. 41, distinguished.
INCOME tax appeal.
A. R. A. Scace for appellant.
W. J. A. Hobson for respondent.
COLLIER J.—This appeal, which was argued
on an agreed statement of facts, is from an
assessment by the respondent whereby the
appellant company's income tax for the year
1965 was increased by the sum of $60,125.99.
The question is whether the appellant for that
year was an investment company within the
meaning of section 69(2) of the Income Tax
Act, R.S.C. 1952, c. 148 as amended, and there
fore entitled to the rate of tax provided in
section 69(1) rather than the higher rate
imposed by section 39, if it were not an invest
ment company. The precise issue is whether
throughout the year 1965 the appellant com
plied with paragraph (c) of section 69(2).
For convenience, I set out the whole of sec
tion 69(2):
69. (2) In this Act, "an investment company" means a
corporation that, in respect of the taxation year in respect
of which the expression is being applied, complied with the
following conditions:
(a) at least 80% of its property was, throughout the year,
shares, bonds, marketable securities or cash,
(b) not less than 95% of its income for the year was
derived from investments mentioned in paragraph (a),
(ba) not less than 85% of its gross revenue for the year
was from sources in Canada,
(bb) not more than 25% of its gross revenue for the year
was from interest,
(c) at no time in the year did more than 10% of its
property consist of shares, bonds or securities of any one
corporation or debtor other than Her Majesty in right of
Canada or of a province or a Canadian municipality,
(d) at no time in the year was the number of shareholders
of the corporation less than 50, none of whom at any time
in the year held more than 25% of the shares of the
capital stock of the corporation, and
(e) an amount not less than 85% of its taxable income
plus exempt income for the year (other than dividends or
interest received in the form of shares, bonds or other
securities that have not been sold before the end of the
taxation year) minus
(i) 21% of its taxable income for the year, and
(ii) taxes paid in the year to other governments,
was distributed to the shareholders before the end of the
year.
The appellant in 1965 had complied with the
other six conditions set out in the subsection in
order to qualify as an investment company. (I
gather the appellant has operated as an invest
ment company for many years.) In May of 1965
it raised three million dollars by a public issue
of preferred shares. I quote from the statement
of facts: "The investment of this additional
capital extended over a period of several
months and during the interim, demand loans in
the amount of $1,200,000 were made to the
Empire Life Insurance Company. These loans
were evidenced by unsecured promissory notes
...." A copy of one such note for $500,000
(plus interest) was exhibited.
During 1965, the appellant held, as well,
shares of the Empire Life Insurance Company.
Using either cost or market values, and includ
ing the promissory notes in the calculations, it
was agreed that on June 30, 1965 more than
10% of the appellant's property consisted of
holdings (I use that word very loosely) in
Empire Life Insurance Company.' If the pro
missory notes are not included in the calcula
tions, but only the shares, then the appellant did
meet the requirements of paragraph (c).
The respondent took the view the promissory
notes were "securities" within the meaning of
section 69(2)(c); thus the assessment increasing
the amount of tax payable.
For the appellant two arguments were sub
mitted on this appeal:
(a) Demand notes are not "securities" and therefore their
inclusion in the calculations earlier referred to is wrong.
(b) If the notes were securities within the meaning of
section 69(2)(c), then the appellant had substantially com
plied with the condition.
Dictionary definitions were referred to by
counsel for both parties, some of which indicate
that promissory notes could well fall within the
meaning of "securities", and others of which
would seem to exclude promissory notes. While
standard dictionary definitions can be of assist
ance, I agree with the comment in Craies on
Statute Law 6th ed. 1963 at p. 160: "Ordinary
dictionaries are somewhat delusive guides in the
construction of statutory terms." Counsel for
the appellant stated he was not relying too
strongly on dictionary definitions because of
the variation among them.
A number of cases were cited by counsel for
both parties in which the words "security" or
"securities" have been considered. Some of the
judgments were concerned with the use of the
word "securities" in a particular statute and
others when the word was used by a testator in
a particular will. Two decisions relied on by the
appellant illustrate these two lines of cases
(Singer v. Williams [1921] 1 A.C. 41; Re Ellis
Estate (1962) 37 W.W.R. 440). In the Singer
case the question was whether dividends
received by a shareholder of an American cor
poration were taxable under Case 4 or Case 5
of the Finance Act of 1914: were the shares
"foreign securities" or "foreign possessions".
The House of Lords held, in construing the
words of that particular statute that the shares
were not "securities". Viscount Cave said at p.
49:
My Lords, the normal meaning of the word "securities" is
not open to doubt. The word denotes a debt or claim the
payment of which is in some way secured. The security
would generally consist of a right to resort to some fund or
property for payment; but I am not prepared to say that
other forms of security (such as personal guarantee) are
excluded. In each case, however, where the word is used in
its normal sense, some form of secured liability is postulat
ed. No doubt the meaning of the word may be enlarged by
an interpretation clause contained in a statute, as by the
interpretation clauses in the Conveyancing and Law of
Property Act, 1881, the Settled Land Act, 1882, the Trustee
Act, 1893, and the Finance Act, 1916; or the context may
show, as in certain cases relating to the construction of wills
(In re Rayner [1904] 1 Ch. 176; In re Gent and Eason's
Contract [1905] 1 Ch. 386), that the word is used to denote,
in addition to securities in the ordinary sense, other invest
ments such as stocks or shares. But, in the absence of any
such aid to interpretation, I think it clear that the word
"securities" must be construed in the sense above defined,
and accordingly does not include shares or stock in a
company.
However, Lord Phillimore at p. 63 said this:
I have not been myself much impressed by the word
"securities." No doubt the proper meaning is that which has
just been given by my noble and learned friend Lord
Wrenbury. No doubt also the Court of Chancery has con
strued the word "securities" when it appears in an instru
ment creating a trust, as confined to securities in the strict
sense of the word, unless there should be other words in the
instrument showing that the creator of the trust has
attached to them a different meaning. But then it must be
remembered that the Court of Chancery started with the
view that there was only one investment open to trustees,
that is in Consolidated Bank Annuities, that even invest
ments in other Government stocks, such as Reduced 3 per
cents. or New 3 per cents., were only gradually and some
what grudgingly admitted, and that thenceforward, as from
time to time the area of trustees' investments has been
extended, either by the private instrument or by Act of
Parliament, the Court has always looked on each new
investment as having the duty of making good its title to
admission.
In a popular sense the word "securities" includes, I think,
nowadays the scrip of stocks and shares.
In my opinion, the Singer case is distinguish
able: the decision must be looked at in regard to
its particular facts and the particular statute
under consideration. Here in paragraphs (a), (b)
and (c) Parliament has drawn a distinction
between "shares", "bonds" and "securities", in
the sense that it did not intend "securities"
should necessarily include shares or bonds.
In the Ellis case a testator devised "all my
shares, stocks, bonds, and securities of every
kind . ..". The problem was whether a vendor's
interest in an agreement for sale of land could
be classed as a "security" within the meaning of
the words used by the testator and in the con
text of the particular will. Riley J. adopted the
restricted meaning of "securities" and held that
the agreement for sale fell within that meaning.
Other cases were cited where testators had
used the word "securities" and where a wider
meaning was given. 2 Again, I am unable to
obtain much assistance from these cases. The
solution to the question whether something was
or was not a "security" depended primarily on
the use of that word in a particular will.
Lord Shaw of Dunfermline aptly stated the
problem at p. 57 of the Singer case:
The word "securities" has no legal signification which
necessarily attaches to it on all occasions of the use of the
term. It is an ordinary English word used in a variety of
collocations; and it is to be interpreted without the embar
rassment of a legal definition and simply according to the
best conclusion one can make as to the real meanings of the
term as it is employed in, say, a testament, an agreement, or
a taxing or other statute as the case may be. The attempt to
transfer legal definitions derived from one collocation to
another leads to confusion and sometimes to a defeat of
true intention.
In my opinion, securities as used in section
69(2)(c) must be construed in a popular sense,
and not in the restricted manner found in the
older cases. I adopt the rule of construction
stated by Pollock B. in Grenfell v. C.LR. (1876)
1 Ex. Div. 242 at p. 248: "... the statute is not
to be construed according to the strict or techni
cal meaning of the language contained in it, but
. it is to be construed in its popular sense;
meaning, of course, by the words `popular
sense' that sense which people conversant with
the subject matter with which the statute is
dealing would attribute to it." I bear in mind
also that the predecessor of section 69(2) came
into the Income Tax Act in 1946, and therefore
the nineteenth century and early twentieth cen
tury cases cited must be looked at with caution.
I think it undesirable to attempt, in this judg
ment, any all-encompassing statement as to the
meaning of "securities" in this section of the
Income Tax Act. I am, however, satisfied that
Parliament used the word in a popular sense, so
as to include instruments for the payment of
money with or without some collateral obliga
tion and which are commonly dealt in for the
purpose of financing and investment'. A popu
lar expression comes to mind: to obtain a loan
on the security of a promissory note. In my
view, promissory notes are popularly consid
ered to be, in the business sense, a form of
investment. I note that paragraph (b) uses the
word "investments" to describe the words
"shares, bonds, marketable securities, or cash"
used in paragraph (a). It seems to me the facts
of this case support the view these call notes
are securities in the popular sense I have sug
gested. The appellant here while considering the
long range investment of the additional capital it
had raised into "shares", "bonds", "marketable
securities" or "cash" (investments) put the
money out into a short term security—call
notes.
I turn now to the second contention by the
appellant: that if these promissory notes were
securities, then there was substantial compli
ance with the paragraph. To give effect to this
argument, would, in my view, require reading
words into the paragraph. The opening words
are clear and explicit: "at no time in the year
did more than 10% of its property ..." I can
find no justification for adding words such as
"approximately" or "substantially" and indeed
I think it would be improper to do so.
Certain hypothetical situations were pro
pounded in argument, for example, when an
investment company at the close of business
one day held shares of a corporation amounting
to 8% of its property, and because of a spec
tacular rise in the market value early the next
day, the percentage interest had gone over 10%
before sufficient of the shares could be sold.
That hypothetical situation also raises the ques
tion of which of cost or market value is to be
used. Fortunately for me, those problems do
not arise here, and I do not speculate on the
answers.
For the reasons I have given the appeal is
dismissed with costs.
1 June 30, 1965 is the specific date set out in the state
ment of facts. I obtained the impression in argument that
probably the over 10% situation existed for a matter of a
few weeks, rather than one day.
2 For example, in Re Rayner [1904] 1 Ch. 176 where in
the particular will, the word "securities" was held to mean
"investments" and included stocks and shares.
3 I have taken those words from the judgment in Re
Waldstein 291 N.Y.S. 697 as setting out what I consider to
be included in the word "securities" in this section.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.