T-1880-74
M.R.T. Investments Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, April 29 and
30; Ottawa, June 2, 1975.
Income tax—Small business deduction—Meaning of active
business income—Associated companies investing in mort-
gages—Whether "carrying on active business in Canada"—
Income Tax Act, S.C. 1970-71-72, v. 2, c. 63, ss. 125, 129,
189.
Plaintiff M.R.T. and two other companies, R and E.S.G.
were incorporated to invest in mortgages. Messrs. Godel and
Reinhart own M.R.T. and R, and manage all three. Most of the
loans made by the companies are through independent agents.
Defendant argues that, in 1972, the companies were not carry
ing on "active business" in the sense intended under section
125.
Held, the appeal by E.S.G. fails; the other two appeals
succeed. The words "active business income" are not ambig
uous, nor does the unrestricted interpretation sought by plain
tiffs result in internal disharmony in applying the Act if applied
to a company whose sole business is mortgage investment. The
fact that income, under section 125, must be separated into that
earned from active business and non-active (purely investment)
business, and that, for the latter, section 129 could perhaps be
used, does not preclude plaintiffs from using section 125 and
contending that their entire business is "active" and that the
entire "amount" of their income is from such source. Had
Parliament intended section 125 not to apply to such compa
nies, it could have defined "active business" or specifically
excluded companies whose only business is investment, or speci
fied a percentage of income that must be from non-investment
business activity. While there are certain helpful indicia, it
must, in each case, come down to a question of fact whether a
business is active. The activities must come entirely within
section 125, and the entire income be subject to the 25% credit,
or not at all, and section 129 would then be applied. There is a
distinction between business being carried on by a corporation
and by an individual. It has been established that if a corpora
tion carries on the business for which it was formed, there
arises a presumption that the profit from these activities is
profit derived from the business. Business is "something which
occupies time and attention and labour for profit"; money-lend
ing business means an enterprise with a degree of system and
continuity. The companies here were carrying on such a busi
ness. The fact that the companies paid no salaries, no office or
equipment rental, and had no full-time employees does not
necessarily imply a non-active business. The Act does not
specify the degree of activity that must be evident to qualify for
the small business deduction. However, when one party retains
the remunerated services of another in order to be totally
relieved from normal duties, the first party has relinquished its
activity. The activity of the three companies must be considered
over an extended period of time; they were administered by
specialists; each had its own loan policy, business forms etc.,
agents were retained, and there were a number of part-time
employees involved. There is little doubt that all three were
actively carrying, on business in 1972. However, E.S.G. had
merely been turned over to a management company with no
further intervention or supervision, and receipt of semi-annual
reports from the agent is not, in itself, active business activity.
Admiral Investments Limited v. M.N.R. [1967] 2 Ex.C.R.
308; Lumsden v. Inland Revenue Commissioners [1914]
A.C. 877; Anderson Logging Company v. The King [1925]
S.C.R. 45; Queen & Metcalfe Carpark v. M.N.R. [1973]
C.T.C. 810; Western Leaseholds Limited v. M.N.R. 59
DTC 1316; M.N.R. v. Kelvingrove Investments Limited
[1974] C.T.C. 450; Litchfield v. Dreyfus [1906] 1 K.B.
584; Hollinger v. M.N.R. 73 DTC 5003; M.N.R. v. Spenc-
er [1961] C.T.C. 109, applied. Heydon's case (1584) 3 Co.
Rep. 7a; Glen v. Schofield [1928] 2 D.L.R. 319; Wood v.
M.N.R. [1969] S.C.R. 330; Scott v. M.N.R. [1963]
S.C.R. 223; M.N.R. v. Maclnnes [1963] S.C.R. 299;
considered. Cosmopolitan Investments Co. Limited v.
M.N.R. 74 DTC 1252; Weintraub v. The Queen 75 DTC
5050; Aztec Forest Products Limited v. M.N.R. 74 DTC
1075; Lazare Investments Corp. v. M.N.R. 75 DTC 26;
Farlan Investments Ltd. v. M.N.R. 75 DTC 12; Centennial
Shopping Centre Ltd. v. M.N.R. 74 DTC 1190; Finning v.
M.N.R. [1961] C.T.C. 425, agreed with. Wertman v.
M.N.R. [1964] C.T.C. 252; Walsh v. M.N.R. [1965]
C.T.C. 478, distinguished. Commissioner of Inland Reve
nue v. The Korean Syndicate Ltd. 12 T.C. 181; Commis
sioner of Income Tax v. Hanover Agencies Ltd [1967] 1
' A.C. 681; Rideau Club v. Ottawa [1907] O.L.R. 118;
Newton v. Pyke (1908-09) 25 T.L.R. 127; Orban v.
M.N.R. 54 DTC 148; Graham v. M.N.R. 70 DTC 1747;
Noddy Subsidiary Rights Co. Ltd. v. Inland Revenue
Commissioners [1966] 3 All E.R. 459; M.N.R. v. Taylor
[1956-60] Ex.C.R. 3, discussed.
ACTION.
COUNSEL:
A. Gauthier and B. Verchère for plaintiff.
G. W. Ainslie, Q.C., and T. Ocrane for
defendant.
SOLICITORS:
Verchère, Primeau & Gauthier, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This action came on for trial at the
same time as actions bearing numbers T-1878-74,
E.S.G. Holdings Ltd. v. Her Majesty the Queen,
and T-1879-74, Rockmore Investments Ltd. v. Her
Majesty the Queen, and since the legal issue raised
and the facts bearing on its decision are nearly
identical in all three cases, save of course for
differences in the amount of taxation involved in
the assessment in each case, it was agreed that
they should be heard at the same time with all the
evidence adduced in connection with all three com
panies being heard in the present action being
made part of the record in the other two actions
and one set of reasons for judgment being appli
cable for all three cases.
The three companies in question all make
investments in mortgages as permitted by their
respective charters, and contend that they are
carrying on an "active business" in Canada within
the meaning of section 125 of the Income Tax
Act and hence are entitled to deduct from the tax
otherwise payable an amount equal to 25% of the
amount of their income from such. "active busi
ness". The Minister, on the other hand, contends
that no portion of the interest and other income
earned by the companies was income from an
"active business" so that they are not entitled to
any such deduction and they were assessed accord
ingly. These actions constitute appeals from these
assessments.
Two witnesses were called and separate books of
documents were filed in each case. The witnesses
were Mr. Elliot Godel, who is a shareholder, direc
tor and officer of both M.R.T. and Rockmore, and
manager of E.S.G., and Mr. George Reinhart who
is an officer of both M.R.T. and Rockmore and
works with Mr. Godel in the management of
E.S.G. It will be convenient to refer to the three
S.C. 1970-71-72, c. 63.
companies by using these abbreviated forms of
their names throughout these reasons. Mr. Godel
describes himself as an executive in the mortgage
and real estate fields and testified that he owns
100 common and 100 preferred shares of M.R.T.,
with Mr. Reinhart owning 99 common and 100
preferred and Mrs. Reinhart the other common
share. In Rockmore he owns 1 common share, a
company known as Monarch Management and
Investment Corporation, of which he is the princi
pal shareholder, owns 48 common shares and Mrs.
Godel owns 1. Mr. Reinhart owns 49 common
shares and Mrs. Reinhart 1, and the same four
parties are the officers of the company. Neither
Mr. Godel nor Mr. Reinhart are shareholders nor
officers of E.S.G., all the shares of which company
are held by five other persons or corporations, but
Mr. Godel manages it through his Monarch Man
agement and Investment Corporation. He had pre
viously managed a company doing similar business
known as Mohawk Investment Company for the
same group, this being a Quebec company, and
when they decided to enlarge into Ontario E.S.G.
was formed with the same shareholders to do
business there making loans on the security of
mortgages and his company was given the man
agement of it also.
M.R.T. was incorporated under The 'Corpora-
tions Act of Ontario on January 7, 1965 with wide
powers to carry on business as a financial agent, to
make loans on the security of mortgages or other
wise, and to purchase, lease and develop land with
the provision that it could not undertake any busi
ness within the meaning of The Loan and Trust
Corporations Act 2 . Rockmore was incorporated
under the provisions of the Quebec Companies Act
on January 5, 1965 to act as an investment com
pany and, inter alia, to deal in mortgages and real
estate. E.S.G. was incorporated in Ontario under
the provisions of The Business Corporations Act,
1970, on August 19, 1971, its principal objects
being given as "to lend and invest money on
mortgage of real estate or otherwise". It also was
subject to the provision that it could not lawfully
2 R.S.O. 1970, c. 254.
transact business within the meaning of The Loan
and Trust Corporations Act. None of them dealt
in what might be called conventional mortgages at
conventional rates of interest. As a matter of
policy E.S.G. only lent on the security of first
mortgages, charging an interest rate 2-3% above
the conventional rates. M.R.T. did not restrict
itself to first mortgages and in 1972 had loans
outstanding at interest rates varying from 7-16%.
The lower rates represent interest rates on mort
gages which it had bought from the original lend
ers at a discount so that the actual yield would be
substantially higher than this. Its normal rates are
2-5% higher than conventional rates. Rockmore
operates on the same basis but only in the Province
of Quebec.
All of the three companies operated on a com
paratively small scale. M.R.T., as of December 31,
1972, the taxation year in question, held 14 mort
gages, the total amount involved being $104,-
636.81. Its interest and other income earned for
that year totalled $12,471.47 and its net earnings
before taxes were $4,815.30. Rockmore, as of
December 31, 1972, held only 3 mortgages and a
small property of which the book cost was $2,465,
the total value of its mortgages and other receiv-
ables being $11,084.03. It had interest and other
income earned totalling $4,609.30 and it was
explained that $2,669 of this represented interest,
$350 represented rent on the small property which
had been bought in 1972 and was sold in 1973
after certain title difficulties had been overcome,
the balance being for fees earned as a result of
services rendered to two individuals for whom the
company had put through what the witness Godel
explained as "mortgage package". Net income
before taxes was shown as $3,479,.30. E.S.G. had
10 mortgages outstanding at the same date of a
total value of $106,577.98. Its interest earnings in
the year were $12,204.31 and earnings before
taxes $6,952.05. The mortgages outstanding and
net income of each company have continued to
increase since 1972, M.R.T. having 18 mortgages
in effect of a value of $121,384.37 yielding a net
income of $10,996.92 as of December 31, 1974,
Rockmore having 10 mortgages outstanding of a
total value of $44,799.84 yielding net income of
$13,985.57 as of the same date, and E.S.G. having
10 mortgages of a value of $142,540.45, and a net
income of $9,743.06 as of the same date. Rock-
more has increased its mortgages outstanding since
the end of 1974, the figure as of March 31, 1975
being $98,628.16 in addition to which it had com
mitments outstanding as of April 30, 1975 for
interim financing mortgages amounting to $162,-
450 to be disbursed in stages over the next few
months. All three companies have continually
increased the value of their, mortgages outstanding
and their gross incomes since the dates of their
respective incorporations although Rockmore's
gross income dropped somewhat in the years 1969
and 1970. While it is only the 1972 taxation year
of each company which is under consideration in
the present actions, the extent of their activity in
the preceding and subsequent years is relevant in
establishing a course of conduct which has some
bearing on their activities in 1972 and hence this
evidence was admitted.
The three companies were operated by Messrs.
Godel and Reinhart, assisted by members of their
office staff, together with a number of companies
owned or managed by them operating out of the
same office premises and using more or less the
same office staff and equipment. Neither Mr.
Godel nor Mr. Reinhart received any salaries from
these three companies nor were any charges made
to them for salaries of office staff or the use of
office stationery, telephones or equipment, with
the exception of E.S.G. which they merely
managed, charging it nominal sums for manage
ment in the amount of $300, rent and telephone in
the amount of $150 and bookkeeping in the
amount of $100 in 1972. These sums were paid to
Mr. Godel's company, Monarch Management and
Investment Corporation. The office staff employed
by the group consisted of a receptionist, an English
typist, a man who looks after the Ontario docu
mentation, a woman who looks after the insurance
and taxes, a man who looks after collections and
another who does inspections and appraisals and
follows up on delinquencies. Their salaries are paid
by three different companies, Elliot Realties,
which is owned by Mr. Reinhart as a registered
mortgage broker and does not make loans itself,
the Monarch Management and Investment Corpo
ration already referred to, and Charter Credit
Corporation which is a much larger company and
is itself controlled by the Hamilton Group with its
day-to-day operations being supervised by Mr.
Godel who is director and president of it. The
office of all these companies, consisting of about
4,000 square feet, is in Montreal although the
head office of M.R.T. is in Ottawa in the office of
its lawyer. Rockmore is listed in the Montreal
telephone directory but does no direct advertising.
Any advertising for prospective borrowers is done
by Elliot Realties. The companies' telephone ser
vice includes three WATTS lines, and Elliot Real-
ties subscribes to the Multiple Listing Service of
the Montreal Real Estate Board so they have the
benefit of this information to assist in appraisals of
real estate values in the Montreal area.
Most of the loans made by the three companies
concerned in the present proceedings , are made
through independent agents who, being aware that
these companies are prepared to make loans to
borrowers who might not be able to obtain them
through the normal commercial channels from
their banks or insurance or trust companies, refer
these potential borrowers to them. These agents
are independent and obtain their commissions
from the borrowers but the companies try to set up
exclusive agencies in certain areas. Thus M.R.T.
has an agent in Sudbury who also operates in
Sault St. Marie and Timmins and gives them first
refusal of loans he submits from these areas for
approval. M.R.T. also has an agent in Brockville
and several in Ottawa. Rockmore has an agent in
Quebec City, another in Sherbrooke, one in Hull
and many in Montreal, but most of its loans are
placed through Elliot Realties. Advertising done
by agents would not disclose the names of the
plaintiff companies to the public.
The witnesses testified that they are always
looking for new agents so as to increase their
lending business. The agents have a general idea of
the sort of loans which might be acceptable to
them but since these are relatively high risk loans
they have to examine them very carefully and they
probably only accept one in every two or three
submitted to them. Occasionally they have an
outside appraisal made but normally they visit the
property themselves and examine it. There is- often
considerable negotiation respecting the terms of
the mortgage, such as the amount of the loan, the
rate of interest, the duration of the loan and the
terms of repayment. They have their own forms
for loan applications although some of the agents
use theirs. Whenever possible they endeavour to
add one-twelfth of the estimated taxes to the
monthly payment and pay these taxes themselves.
Each company has a line of credit. M.R.T. had
$25,000 to $35,000 in 1972 and it is now $50,000.
Rockmore's line of credit in 1972 may have been
$7,500 to $15,000 but is now $25,000.'E.S.G. has
a combined line of credit with Mohawk Investment
Corporation which is between $100,000 and
$150,000.
When they accept a loan proposal they send a
cheque to a solicitor of their choice to release same
at the closing. They have had standard instructions
prepared for use by their Ontario solicitors and
similar instructions for use in Quebec by notaries
in connection with loans by Rockmore, giving
detailed information as to their requirements with
respect to title examination and the clauses and
conditions to be inserted in all their deeds of loan.
They try to get at least five years of post-dated
cheques which they then turn over to their bank as
collateral for their line of credit. When deciding
whether an Ontario loan should be placed with
M.R.T. or E.S.G. the witnesses admitted that
there is perhaps a possibility of some slight conflict
of interest, although if it is a second mortgage
E.S.G. would not take it in any event, its policy
being slightly more conservative. However, they
have had no complaints from the officers of E.S.G.
respecting their management of it or of Mohawk
Investments. Mr. Reinhart decides which company
would make the loan when it is decided to make
one after discussing this with Mr. Godel. The
decision would depend in part on availability of
funds. As far as the borrower or the agent is
concerned, it makes little difference which com-
pany does the lending. Similarly, while an agent
submitting a loan application might address his
letter to M.R.T. or E.S.G., this would make little
difference in deciding which company would pro
cess the application.
In testifying as to the sort of activity they have
to do in connection with loans, Mr. Reinhart used
a loan to one Diougardi as an example. The bor
rower wanted to borrow to make some renovations
to his property and after establishing his credit
they had a look at his plans and made the terms of
the loan coincide with his contract with his con
tractor so that advances would be made only as
required. They made several on-the-spot inspec
tions and obtained post-dated cheques to cover the
fire insurance. At one stage there was a misunder
standing between the contractor and the borrower
and they had some difficulties with the borrower's
lawyer with respect to their advances so they had
to have their own solicitor contact him. During the
course of the loan Mr. Diougardi died so they then
had to communicate with his wife to make neces
sary changes in their file. The witness conceded,
however, that this did not all take place in 1972.
One of the exhibits contains a remark by Mr.
Reinhart as a footnote to a letter written by him to
the company's solicitors in Hawkesbury in connec
tion with a loan to people by the name of Vil-
leneuve to the effect that "M.R.T. is not a 3-2
company and shouldn't perhaps make a direct
loan—if you agree have it bought by an individual
and transferred to M.R.T." It was explained that
this was a way of overcoming possible legal dif
ficulties resulting from the manner in which
M.R.T. was incorporated but that E.S.G. did not
have the same problem. In any event I do not find
that this has any bearing on the issue before the
Court. Mr. Reinhart testified also that frequently
the loans require re-financing for various reasons
which necessitates a further inspection of the prop
erty, the obtaining of a different series of post-dat
ed cheques as collateral as well as further corre
spondence and other documentation. A special
'form is set up for each loan, showing all relevant
details which are verified by an employee desig
nated for this purpose, and a tax ledger sheet is
maintained showing the tax status of each prop-
erty. Specimen sets of documents were produced
with respect to certain loans which indicate, as
might be expected, that there is a reasonable
amount of correspondence and documentation
involved before a mortgage loan is finally placed.
Unless there are complications, the witness
conceded that the collection of the payments only
involves routine work. While the witnesses were
vague on examination on discovery as to the time
they spent personally on the work of each of the
plaintiffs, Mr. Godel did state at trial that he
might spend 10 per cent of his time on the work of
M.R.T. and Rockmore combined and that Mr.
Reinhart was more involved than he on a day-to
day basis. He conceded however that this was only
an estimate. No attempt was made to keep track
of the amount of time spent by the office staff on
the work of each company and, as already indicat
ed, except for E.S.G., no specific charge was made
for office space, use of telephones and equipment
or staff.
The only other factual evidence adduced was to
the effect that the companies had each, in filing
their corporate tax returns prior to 1972, described
the nature of their business simply as "invest-
ments" whereas in 1972 they used the term "mort-
gages and real estate" in the case of Rockmore
and M.R.T. and simply "mortgages" in the case of
E.S.G. While the change may perhaps have been
induced by the provisions of the new Income Tax
Act, I do not attach much significance to this
difference. The nature of the companies' activities
had not changed and it is the real nature of the
activities which is the governing factor rather than
whatever designation the taxpayer chooses to give
to them in an abbreviated description of its activi
ties on a tax return.
It was also argued by plaintiffs that the assess
ments were made without any prior discussion or
warning and this despite the fact that prior to 1972
the issue had never been raised. The law had
changed for the 1972 taxation year, however, and
in any event there is no basis for this argument.
The Minister is not bound by the manner in which
an assessment has been made in preceding years,
nor is there any legal requirement to give a tax
payer notice or discuss his return before making an
assessment. As Cattanach J. stated in Admiral
Investments Limited v. M.N.R. 3 at page 317:
It is well settled that while a decision reached by the
Minister in one taxation year may be a cogent factor in the
determination of a similar point in a following year, the fact
that a concession may have been made to a taxpayer in one
year, does not, in the absence of any statutory provisions to the
contrary, preclude the Minister from taking a different view of
the facts in a later year when he has more complete data on the
subject matter. There is nothing inconsistent with the Minister
altering his decision according to the facts as he finds them
from time to time. An assessment is conclusive as between the
parties only in relation to the assessment for the year in which
it was made. (See M.N.R. v. British and American Motors
Toronto Limited, [1953] Ex.C.R. 153.)
The only significance that can be attached to the appellant
invariably declaring in its tax returns any gains or losses on its
purchase and sale of shares is that it is illustrative of its
consistent treatment of such gains or losses as gains or losses
from a business.
The relevant portion of section 125 of the Act on
which plaintiffs rely reads as follows:
125. (1) There may be deducted from the tax otherwise
payable under this Part for a taxation year by a corporation
that was, throughout the year, a Canadian-controlled private
corporation, an amount equal to 25% of the least of
(a) the amount, if any, by which
(i) the aggregate of all amounts each of which is the
income of the corporation for the year from an active
business carried on in Canada,
exceeds
(ii) the aggregate of all amounts each of which is a loss of
the corporation for the year from an active business car
ried on in Canada, [Italics mine.]
Since there were no losses, subparagraph (ii) is not
relevant in the present case nor are paragraphs (c)
and (d) of section 125(1) or section 125(2) dealing
with the business limit in a taxation year of
$50,000 and a total limit of $400,000. It is not
disputed that the three companies are Canadian-
controlled private corporations operating in
Canada. Defendant disputes however that they
were in 1972, or for that matter in prior or subse
quent years, carrying on "an active business" in
the sense intended to be given to those words in
section 125 of the Act. The Act itself makes no
attempt to define "an active business" so this is
left for the courts to decide in each case. While the
3 [1967] 2 Ex.C.R. 308.
Department has issued certain guidelines they are
not binding on the Court. I understand that this is
the first time this issue has come before the Court
although there have been several cases in which
the Tax Review Board has been called upon to
interpret this section of the Act. There is therefore
some temptation to set down certain guidelines
which might be applied in future cases and be
helpful both to 'the taxpayers and the Minister,
such as former President Thorson did for trading
cases in M.N.R. v. Taylor 4 . One writer, Professor
Claude Boulanger, has already attempted to do
this in a recent article appearing in Revue Géné-
rale de Droit, Vol. 3, pages 7-56, entitled "La
notion d'exploitation active d'une entreprise de
l'alinéa 125(1)a) de la loi canadienne de l'impôt
sur le revenu", by analyzing decisions rendered in
connection with personal corporations interpreting
the words "active financial, commercial or indus
trial business" found in section 68 (1) of the former
Income Tax Act' as well as in certain trading and
similar cases. He suggests that the characteristics
that should be taken into consideration in deciding
whether a business enterprise is active or not
include the following:
1. The fact of its incorporation.
2. The objects declared in its letters patent.
3. The objects actually carried out by it.
4. The nature of its assets.
5. The activities of the company and its
administrators.
He breaks this latter down into subheadings as
follows:
(a) The corporation does nothing for all practi
cal purposes because persons not connected with
it assume all the work inherent in its activities;
4 [1956-60] Ex.C.R. 3.
5 R.S.C. 1952, c. 148.
(b) Carries on certain activity but this activity
is only of a routine nature;
(c) Its activity is very restricted whether as a
result of the small number of transactions, the
small amount involved, the small expenses, the
limited number of clients, the limited amount of
its services or the fact that there is not enough
work to keep personnel busy;
(d) The corporation does no commercial promo
tion, such as the absence of advertisements, no
telephone listing, no address known to the
public, no distinctive letter-head nor its name on
an office door;
(e) The corporation has no administrative or
physical organization such as an office or
employees, furniture, telephone, distinctive let-
ter-head or anything else which belongs to it;
(f) The corporation transacts principally with
the persons connected with it.
While all these criteria are undoubtedly useful
in reaching a decision in a given case, I believe
that it would not be desirable for the Court to lay
down a series of rules in an attempt to define what
constitutes "active business" within the meaning of
section 125 of the Act as each case must be
decided on its own facts, and the presence or
absence of one or more indicia of activity may be
of greater significance in one case than in another
depending on what other proof of activity is before
the Court. Therefore I am in accord with the
remarks of K.A. Flanigan, Q.C., Chairman of the
Tax Review Board, in the case of Cosmopolitan
Investments Co. Limited v. M.N.R. 6 in which he
states at page 1253:
Since the Legislature ... has obviously left the courts a great
deal of flexibility in interpreting the words "active business", it
seems to me that I should refrain from making more general
statements and that I should proceed from case to case and see
how this troublesome concept of "active business" will gradual
ly present itself to this Board.
6 74 DTC 1252.
In the same case, also at page 1253, the Chairman
refers to the existing jurisprudence based on sec
tion 68(1)(c) of the old Act:
One has also referred to the jurisprudence concerning S.
68(1)(c) of the old Act, dealing with personal corporations.
However, it is extremely doubtful whether decisions as to
whether or not a corporation "carried on an active financial
commercial or industrial business" could contribute anything to
the interpretation of S. 125(1) of the new Act. The purpose of
S. 67 of the old Act was to prevent the deferral of income tax
payable by a corporation which was in fact nothing but a
conduit pipe of income to its shareholder and which should
therefore be treated as such. Through the enactment of S.
125(1) of the new Act, the Legislature has intended to encour
age the deferral of tax in order to keep more money available
for future business operations than otherwise would have been
the case. The ultimate goals of the above provisions are there
fore completely different.
While the distinction is a valid one, I would not go
so far as to say that "it is extremely doubtful"
whether such decisions can contribute anything to
the interpretation of section 125(1).
Counsel for both parties in the present proceed
ings argued the matter both orally and with
lengthy written notes. Defendant's counsel stressed
the fact that, whereas under section 68 of the old
Act what had to be determined was the nature of
the corporation's business and whether it did or
did not carry on an "active financial, commercial
or industrial business", the emphasis in section 125
of the present Act is not on the nature of the
business but on the amounts earned from the
active business of the company in Canada as dis
tinct from its non-active business. He pointed out
that by virtue of sections 125 and 129 of the Act,
which latter section he invokes, the company can
have four distinct sources of income:
1. Capital gains from the disposition of
property;
2. From a source that is property;
3. From a source that is a business but not an
active business; or
4. From a source that is an active business
carried on in Canada.
While this distinction is undoubtedly true it does
not settle the matter. Certainly, the amount to
which the 25% deduction applies by virtue of
section 125 (1) is only applicable to amounts of
income derived from the "active business" of the
corporation carried on in Canada and the deduc-
tion would not apply therefore under this section to
the investment income of a company, the active
part of whose business is not the making of invest
ments for a profit. The distinction is a valid one for
a corporation which has income from different
sources, part being from its active business opera
tions and part being non-active income. I can find
nothing in section 125 itself, however, to justify a
conclusion that a corporation whose entire income
comes from investments cannot therefore be con
sidered as carrying on an "active business" when
the making of investments is the very purpose for
which it has been incorporated and constitutes the
business which it has been carrying on. Counsel for
defendant did not contend ,that no such company
can ever avail itself of the provisions of section 125
of the Act but this would appear to be the inevi
table conclusion of his argument if applied to
private companies whose sole "active business"
consists of dealing in investments.
In support of his argument that section 125 of
the Act should not be interpreted as if it stood
alone but that it should be read together with
sections 126 to 130 and, in particular, section 129,
in order to determine its true meaning, he relied on
the rule in Heydon's Case' to the effect that in
interpreting a. statute the mischief that Parliament
was concerned with prior to the-enactment and the
remedy provided therefor should be considered. He
referred to a modern restatement of the rule in the
Supreme Court of Canada in the case of Glen v.
Schofield' where Smith J. stated at page 320:
The real meaning to be attached to the words must be arrived
at by consideration of the mischief that the statute was intend
ed to remedy and the provisions of the statute as a whole, in
addition to the particular language of the section in question.
He stated that prior to the new Income Tax Act
there were two principal mischiefs, one being the
need for venture and circulating capital by small
enterprises who do not have access to well estab
lished capital markets and who are adversely
affected by the tax which has to be paid on their
income, and the other mischief being the utiliza-
7 (1584) 3 Co. Rep. 7a; 76 E.R. 637.
8 [1928] 2 D.L.R. 319.
tion of companies as a shield or veil between the
investor and his investment income, together with
the problem of locked in surplus assets held by
operating companies who could not distribute
them without severe tax consequences. The
reduced tax rate on the first $35,000 of company
income was introduced in 1949 to alleviate the
50% tax rate which was very severe for the small
businessman but this reduction applied to every
company no matter how prosperous and not only
to a young company just commencing its activities
with the necessity of building up its working capi
tal, although an old company was under no such
necessity. The problem of the use of companies as
a tax shelter for investment income was overcome
by the personal corporation sections 67 and 68 of
the former Act. The defect of this was that an
individual who carried on an active business
through a company could, instead of distributing
surplus funds by way of dividends, use them to
acquire investments in the name of the company
and the income therefrom would be included in the
company's income rather than the shareholder's,
except to the extent that it was passed on to him
by way of a dividend. Furthermore, double taxa
tion resulted to a certain extent since the company
would pay tax on its income and the shareholder
would pay a further tax on the distribution of same
by way of a dividend so that there was little
incentive to distribute surplus. This gave rise to the
dividend tax credit and to various dividend strip
ping schemes. He suggested that to overcome these
mischiefs the scheme of sections 125 and 129 of
the Act is to encourage active business by a grow
ing company by reducing the tax on the first
$50,000 per annum until the company has
accumulated surplus over a period of years to
$400,000, and moreover that a refund of tax is to
be given to a company when it distributes to its
shareholders a portion of the capital gains realized
by it, the income from its investments, and the
income from activities which constitute a business
other than an active business. He contends that the
general rule in interpreting a statute is that:
The relation of the various provisions of a statute to each other
is also relevant in determining meaning or scope. This factor is
called the "scheme" or "framework" of the Act, and a provi
sion should, if possible, be so construed as to fit into that
scheme or framework. (per Driedger, The Construction of
Statutes, page 17.)
Section 129 gives a private corporation a refund
able dividend tax amounting to 25% of its Canadi-
an and foreign investment income for the year,
Canadian investment being defined as income
"from a source in Canada that is a property", or
"a source in Canada that is a business other than
an active business". A distinction is now made
between the active business of a company and its
investment income including capital gains. The
company initially pays the corporation rate of 50%
on its investment income but one-half of this is
subsequently refunded to a private corporation
when this income is distributed as taxable divi
dends to the shareholders. These rules apply to all
private corporations. The Act distinguishes a par
ticular class of private corporation namely
"Canadian controlled private corporation" which
pays a lower rate of 25% on the first $50,000 of its
"active business" income in Canada until a fund is
accumulated of $400,000 of free tax active busi
ness income. A series of complex rules are
designed to allow Canadians to transfer their
investments to a private corporation and obtain the
same after-tax return 'on income realized through
the private corporation as if they had received the
income directly. Under this scheme section 125
confers an advantage on "Canadian owned private
corporations" carrying on an "active business" but
only until it has obtained an accumulated surplus
or reserve of $400,000, whereas section 129 of the
Act confers an advantage on all private companies,
without limit, with respect to all income earned by
them from sources other than the carrying on of an
active business. �.
Defendant's counsel argues that further support
for this interpretation of the scheme of the Act is
, to be found in the provisions of Part V of the Act
which was enacted at the same time as sections
125 and 129 but was subsequently repealed with
out ever having come into effect, but can neverthe
less be looked at in determining the interpretation
to be given to section 125 (see Craies on Statutes,
7th ed., page 414). These repealed sections pro
vided that a company which had used its income
and which had been taxed at the low rate to
purchase ineligible investments rather than to rein
vest the surplus in the augmentation of its working
capital or plant or machinery, or in distribution by
way of dividends to its shareholders, was required
to pay a special tax on the portion of the savings it
had realized through the payment of the low rate
under section 125 of the Act, which payment
would be refunded when the funds which had
originally been used for the ineligible investments
were reinvested in business assets or distributed by
way of a dividend. An ineligible investment was
defined in 189(4)(b) of Part V as a property that
was not acquired for the purpose of gaining or
producing income from an active business, with
certain exceptions which included mortgages, but
only those that matured within a year after the
date of their issue. He concludes from this that it
is clearly the scheme of the Act that income
derived from investment in mortgages such as
those held by the three companies in these cases
was not to be considered as income from an active
business.
There appears to be two fallacies in this reason
ing. In the first place, an ineligible investment by
definition was to be "a property that was not
acquired for the purpose of gaining or producing
income from an active business" and since the
investment in mortgages of these three companies
constituted their-whole business and is not merely
incidental to it, the interpretation sought by
defendant's counsel would again lead to the con
clusion that a corporation cannot be formed /with
the main purpose of having as its "active business"
investment in mortgages. In the present cases,
these mortgages were acquired for the purpose of
gaining or producing income from the companies'
active business. In the second place, if it can be
argued that the classification of mortgages of over
one year maturity as ineligible investments leads to
a conclusion that it was part of the scheme of the
Act that income from same could never be subject
to the 25% deduction under section 125 as a result
of these provisions of 189(4)(b) of the Act, then
surely the repeal of this Part, before it even took
effect, would lend itself to the converse argument
and it could be contended that it was later decided
that no such distinction should be made.
The conclusion of defendant's argument based
on the statutory scheme of the Act is that Parlia
ment intended to restrict "active business" to the
type of business activity which would require
plant, machinery, stock-in-trade and a consider
able amount of working or circulating capital
which would be tied up in the stock-in-trade and
the accounts receivable, whereas the income
derived primarily from the ownership of invest
ments or property, even if the owner of the invest
ment or property was required of necessity to
spend considerable time supervising his invest
ments, would pass through the company into the
hands of the owner at the reduced rate contem
plated by section 129 of the Act.
As previously stated, this lengthy explanation of
the alleged "scheme" of the new Act based on the
"mischief' it was intended to overcome, and the
resultant restricted interpretation which defendant
wishes to give to section 125 (1) rests on the
application of Heydon's rule to its interpretation.
However, I do not believe that Heydon's rule is
necessarily the correct rule to apply in the con
struction of section 125 in the present case. Elmer
A. Driedger's work The Construction of Statutes
has this to say at page 1:
The notion has long prevailed that three different rules or
approaches, may be employed in ascertaining the meaning of a
statute. First, there is said to be the "purpose" approach or
"mischief' rule, for which Heydon's Case ((1584) 3 Co. Rep.
7a, 76 E.R. 637) is cited as authority; a statute is to be so
construed as to suppress the mischief and advance the remedy,
thus giving the courts considerable latitude in achieving the
objective of the legislature despite any inadequacy in the
language employed by it. Then there is said to be the "literal'
approach or "plain meaning" rule as enunciated in the Sussex
Peerage Case ((1844) 11 Cl. & F. 85, 8 E.R. 1034); only the
words of the statute may be looked at and if they are clear by
themselves effect must be given to them whatever the conse
quences; the object of the statute may be considered only if
there is doubt. Finally there is what is called the "golden rule"
as propounded in Grey v. Pearson ((1857) 6 H.L.C. 61, 10 E.R.
1216), which it is thought permits a court to depart from the
literal meaning if that meaning leads to consequences it consid
ers to be absurd.
Concluding that these three approaches have by
more recent jurisprudence been fused into one and,
as a result, have undergone changes from their
original meaning, he states at page 2:
The object or purpose of a statute may be invoked, not to
change what was said by Parliament as was done at the time of
Heydon's Case, but to understand what was said. The object of
a statute and its factual setting are always relevant and not
merely in cases of doubt as at the time of Sussex Peerage. The
"rule" in Grey v. Pearson means only that the literal meaning
may be modified where that meaning results in some internal
disharmony, and not where it leads to consequences considered
to be absurd or unjust. The result then is that, whatever judicial
attitudes may have appeared in the past, today there is only one
method of construction and that is the literal one, but literal in
total context.
In pointing out that it often comes down to deter
mining whether the words in a statute should be
given a restricted or unrestricted meaning he states
at page 26:
The intention of Parliament must be gathered from the
words it has used to express that intention. Lord Haldane said
in Lumsden v. Inland Revenue Commissioners: ([1914] A.C.
877, at p. 892. Cited in Royal Bank of Canada v. Acadia
School Division, [1943] 1 W.W.R. 256; and see Leader v.
Duffey (1888), 13 A.C. 294 per Lord Halsbury, at p. 301.)
A mere conjecture that Parliament entertained a purpose
which, however natural, has not been embodied in the words
it has used if they be literally interpreted is not sufficient
reason for departing from the literal interpretation.
It appears to me that the words "active busi
ness" as used in section 125 are in no way ambig
uous or incapable of being given a literal interpre
tation based on the facts of any given case, nor
does the unrestricted interpretation of them sought
by plaintiffs result in internal disharmony in the
application of the statute if applied to a company
whose sole business consists in investing in mort
gages on and perhaps in dealing in real estate. The
fact that the amounts of the income of any corpo
ration under section 125 of the Act must be sepa
rated into that earned from its active business and
that earned from its non-active business, or purely
investment income and that for the latter type of
income section 129 could perhaps be used does not,
in my view, preclude the present corporations from
using section 125 and contending that their entire
business activities constitute an "active business"
and that the entire "amount" of their income
comes from such a source. Had Parliament intend
ed that section 125 should not be applied to com
panies such as the present corporations, it could
have said so by defining "active business" or by
specifically excluding companies such as the
present three whose entire active business consists
of investments from the operation of section 125,
or at the very least by specifying that a certain
proportion of the amount of a company's income
must come from active business operations of an
industrial or commercial nature other than mere
processing of investments. As was indicated in the
quotation from Lumsden v. Inland Revenue Com
missioners (supra) it would be futile to conjecture
what Parliament intended by section 125 by look
ing at other sections of the statute when the inter
pretation sought by defendant has not been
embodied in the words Parliament used in that
section if they are literally interpreted.
Moreover, I might add that even if we look at
what was the alleged purpose of the 25% tax
rebate for Canadian controlled private corpora
tions, as counsel suggests, there is nothing that
would appear to be contrary to public policy in
assisting corporations such as the present to build
up surplus funds for investment. The loans made
by these corporations serve a useful purpose for
the borrowers while, at the same time, yielding a
profit for the lending companies and the expansion
of sources from which borrowers can obtain
needed capital whether for residential housing con
struction or possibly for expansion of the borrow
ers' own industrial operations is something which
is to be encouraged and is not contrary to public
policy.
It comes down to a question of fact, therefore,
whether the business operations carried on by the
three companies in accordance with the provisions
of their respective charters were active business
operations or not. The fact that section 125, unlike
the personal corporation section 68 of the old Act,
foresees that a company can be an "active business
corporation" and still receive part of its income
from operations that do not constitute the carrying
on of an active business does not change the
situation in the present cases since all three com
panies' sole business operations consisted of lend
ing money by way of mortgages on real estate,
whether by original loans or buying existing mort
gages at a discount, together with one or two
isolated instances of purchasing and selling real
estate, which were strictly incidental to the main
business operations, and, in the case of Rockmore,
the making of some interim financing loans. Their
activities must therefore be found either to come
entirely within section 125 and their entire income
is then subject to the 25% tax credit, as plaintiffs
claim, or, alternatively, no part of their income can
be dealt with under this section and the entire
income of each company must be considered to
have been derived "from a source in Canada that
is a property", or "from a source in Canada whose
business is other than an active business", and
section 129 would then be applied to the entire
income, as defendant contends.
Defendant's counsel referred to the case of
Wood v. M.N.R. 9 in which Abbott J. stated at
page 334:
... this pattern of appellant's activities was consistent with the
making of personal investments out of his savings and not with
the carrying on of a business.
During the period from 1956 to 1963 the appellant
had acquired eight first mortgages' and five second
mortgages mostly at a discount or bonus which
averaged out to about 1' mortgages per year. It
must be pointed out, however, that in that case the
9 [1969] S.C.R. 330.
Court was dealing with an individual and not with
a corporation formed for this purpose, and further
more, as Abbott J. stated at page 333:
The appellant's investments, including investments in mort
gages, were made entirely from savings not from borrowings,
and his income from this source, including income from stocks
and bonds, was a relatively modest part of his gross income.
These are very important differences from the
present cases where the companies were incorpo
rated for this specific purpose, each had a line of
credit, the income receipts derived from the mort
gages being assigned to the bank as collateral for
the continued extension of this credit, and the
profit from these operations constituted the entire
income of the companies. In suggesting that the
test of the Wood case be applied, defendant's
counsel in his written argument states:
... all amounts so received will be on account of income from
property unless it can be said that the acquisition of the
mortgages was part and parcel of the carrying on of a business
or scheme for profit making.
It appears to me that in the present cases the
acquisition of these mortgages to obtain income
from interest and gain resulting from eventual
payment in full of those bought at a discount was
precisely "part and parcel of the carrying on of a
business or scheme for profit making".
An examination of the jurisprudence referred to
by both parties supports this conclusion. A series
of cases has established conclusively that there is a
distinction between business activities carried on
by an individual and a corporation formed for that
purpose, and that if a corporation carries on the
business for which it is formed it creates a pre
sumption that ,the profit from these activities is a
profit derived from the business. The leading case
is that of Anderson Logging Co. v. The King 10 in
which Duff J. stated at page 1214:
10 [1925] S.C.R. 45.
The sole raison d'être of a public company is to have a
business and to carry it on. If the transaction in question
belongs to a class of profit-making operations contemplated by
the memorandum of association, prima facie, at all events, the
profit derived from it is a profit derived from the business of
the company.
The fact that' the present companies are private
companies would not affect the validity of this
statement. See Queen & Metcalfe Carpark Lim
ited v. M.N.R." in which Sweet D.J. stated in
reference to the Anderson case at page 817:
Furthermore it would seem to me that the principle stated in
connection with a public company, would, so far as the issues in
this case are concerned, also be applicable to a private com
pany, as was the appellant.
The judgment refers only to the class of "profit
making operations contemplated by the memoran
dum of association" so would appear to be in
harmony with section 125 (1) of the new Act. See
also in this connection Western Leaseholds Lim
ited v. M.N.R. 12 , and M.N.R. v. Kelvingrove
Investments Limited 13 in which Cattanach J.
stated at page 453:
The respondent was incorporated for the purpose of acquir
ing and holding real and personal property for the purposes of
investment. In short it was authorized to conduct the business
of investing. That lacks the desirable degree of precision but in
common parlance it must mean that the respondent was in the
business of laying out its assets in property, without limitation
as to what kind of property, from which a return could be
expected.
The distinction between business being carried
on by a corporation and by an individual is also
clearly made by Sweet D.J. in Queen & Metcalfe
Carpark Limited v. M.N.R. (supra) in which he
distinguishes the cases of Wertman v. M.N.R."
and Walsh v. M.N.R. 15 , stating at page 817:
Both of those cases dealt with situations where the taxpayers
were individuals and not corporate entities. Accordingly they
differ from this case wherein the appellant is a corporation. In
my opinion they are, for that reason, distinguishable.
Similar principles have been applied by the Eng-
lish courts in cases such as The Commissioner of
11 [1973] C.T.C. 810.
12 59 DTC 1316.
13 [1974] C.T.C. 450.
14 [ 1964] C.T.C. 252.
' [1965] C.T.C. 478.
Inland Revenue v. The Korean Syndicate Ltd. 16
and Commissioner of Income Tax v. Hanover
Agencies Ltd." where it was stated at page 687:
If a company's objects are business objects and are in fact
carried out, it carries on business (Inland Revenue Comrs. v.
Westleigh Estate Co., ((1923) 12 T.C. 657, C.A.) per Pollock
M.R.). The respondents are engaged in negotiating leases and
collecting rents from their properties. This would prima facie
indicate that they were carrying on business so as to bring them
within the terms of section 8(o).
The word "business" was defined by Osler J.A. in
the case of Rideau Club v. City of Ottawa 18 where
he states at page 122:
"Business" is a word of large and indefinite import, but (as
used in the section) its evident and reasonable meaning is (to
adopt the language of the Master of the Rolls in Smith v.
Anderson, 15 Ch.D. 247, at p. 258) something which is fol
lowed and which occupies time and attention and labour for
profit.
In the British case of Litchfield v. Dreyfus 19
Farwell J. defines money-lending business at page
589:
Speaking generally, a man who carries on a money-lending
business is one who is ready and willing to lend to all and
sundry, provided that they are from his point of view eligible.
In the case of Newton v. Pyke 20 , referred to in
the Tax Appeal Board case of Orban v. M.N.R. 21 ,
Walton J., referring to the Litchfield v. Dreyfus
case (supra) stated:
It seems impossible to lay down any definition or description
which would be of much assistance, but I feel that it is not
enough merely to shew that a man has on several occasions lent
money at remunerative rates of interest; there must be a certain
degree of system and continuity about the transactions.
It clearly appears from the facts that the three
companies here were carrying on such a money-
lending business on a continuing basis.
To the same effect is the decision by Acting
Chairman R.S.W. Fordham, Q.C., of the Tax
16 12 T.C. 181.
" [1967] 1 A.C. 681.
18 (1908) 15 O.L.R. 118.
19 (1906) 1 K.B. 584.
20 (1908-09) 25 T.L.R. 127 at 128.
21 54 DTC 148 at 149.
Appeal Board in the case of Graham v. M.N.R. 22
where he states at page 1748:
A person who simply invests in mortgages can do so without
making a regular business of it but, here,.the appellant actually
decided whether or not the security offered was adequate and
otherwise satisfactory, had the necessary mortgage document
drawn, and thus carried out any mortgage transactions
arranged, from start to finish. I am satisfied that Bay Meadows
conducted an active business operation and that, in labelling it
as a personal corporation, the respondent was under a misap
prehension as to the facts. Theré is nothing passive about.Bay
Meadows.
The fact that the three companies were not
paying salaries, nor rental for the use of office
space or equipment nor did they have employees
working for them alone does not necessarily indi
cate that they were not carrying on an active
business. This question arose in an English case of
Noddy Subsidiary Rights Co. Ltd. v. Inland
Revenue Commissioners 23 . In this case a Mr.
Broadribb was the general manager of the taxpay
er company from its inception and later a director,
and had assisted in keeping accounts of certain
companies in the same group. Pennycuick J.,
deciding that the activities of the taxpayer
amounted to a trade, stated at page 471:
I have in mind in this connexion the terms of the company's
memorandum, the fact that Mr. Broadribb spent half his
working time managing the company's affairs, the fact that he
actively sought out customers, that he exercised when dealing
with the licences when granted, skill and labour of a continuous
and variegated kind. Those activities seem to me to contain all
the elements of a trade, and once it is accepted, as it now must
be, that Mr. Broadribb was acting on behalf of the taxpayer
company, it is, I think, irrelevant that he received his remuner
ation from some other source.
The income of the company in that case was from
royalties. The court found that it owned an item of
property and granted licences under it and that the
activities were, in the circumstances, the carrying
on of a trade.
In defining what constitutes an active business
22 70 DTC 1747.
23 [1966] 3 All E.R. (Ch.) 459.
guidance may also be found in the judgment of
Noël A.C.J. in the case of Hollinger v. M.N.R. 24
in which he stated at pages 5008-09:
If income from property has any meaning at all, it can only
mean the production of revenue from the use of such property
which produces income without the active and extensive busi-
ness-like intervention of its owner or someone on his behalf. I
have in mind, for instance, property such as bonds or deben
tures or shares or real property which do not require the
exertion of much activity or energy in order to produce the
revenue.
This judgment was referred to in the case of
Weintraub v. The Queen 25 at page 5055 where the
judgment states:
While the source of the income in the present case is
undoubtedly the property owned by Jodol, the property clearly
could not have produced the income without the active and
extensive work of plaintiff on behalf of the company.
That case dealt with sections 67 and 68 of the old
Act and found that although the person operating
and controlling Jodol Company was regularly
employed by another company during the years in
question, this did not alter the fact that he spent a
very substantial part of his time on behalf of the
company in operating its business of renting prop
erty owned by it so as to derive net income from
the same in accordance with the objects of the
company as set out in its letters patent. I adopt the
comments of Chairman K. A. Flanigan, Q.C., of
the Tax Review Board in the case of Aztec Forest
Products Limited v. M.N.R. 26 in which he stated
at pages 1076-77:
I have said many times in this type of case that I do not think
that it is necessary for a businessman to go to the expense of
acquiring separate premises, hiring unnecessary employees and
increasing his operating burden simply to create evidence that
might assist him in fending off a re-assessment that might
never take place. I think it would have been less than good
business practice to accomplish the desired result in any way
other than it was done by these two companies, at least in so far
as their bookkeeping and their day-to-day operations were
concerned.
In the case of Admiral Investments Limited v.
M.N.R. (supra) Cattanach J. said at page 5119:
It was common ground between the parties that the appellant's
income from its transactions in second mortgages was income
from a business and on the facts disclosed in evidence and on
24 73 DTC 5003.
25 75 DTC 5050 (now in appeal).
26 74 DTC 1075.
the basis of the authorities applicable to those facts, I have nc
doubt whatsoever that this is so.
He refers to the cases of M.N.R. v. Spencer [1961]
C.T.C. 109; Scott v. M.N.R. [1963] S.C.R. 223
and M.N.R. v. Maclnnes [1963] S.C.R. 299.
In the case of Spencer, which was a trading
case, it was held by Thorson P., inter alia, that the
fact that a person who had purchased mortgages
at a discount or had acquired them with a bonus
did not sell them but held them for maturity is not
necessarily an indication that he had purchased
them or acquired them as investments since the
sale of the mortgages prior to maturity is not an
essential condition to dealing in them, but holding
them to maturity might well be an important
feature of the operation of business in the scheme
of profit-making. He also held that the fact that a
person is a consistent purchaser or acquirer of
mortgages involving substantially greater risk is
more indicative of a speculative scheme for profits
than a policy of investment for the purpose of
securing a fair return on the money invested.
While each case to be decided under section 125
of the new Act must be dealt with according to its
own facts, I believe that some of the principles sel
out in the above jurisprudence, even though they
may have dealt with sections 67 and 68 of the old
Act, with trading cases, or with questions of capi
tal cost allowance, nevertheless are of considerable
help in determining the meaning of the words
"active business" section 125 of the new Act.
This section does not specify the degree of activity,
which must be left to the Court for determination.
The Tax Review Board has had occasion to deal
with the interpretation of section 125 in at least
four cases to which my attention was directed.
In Cosmopolitan Investments Co. Ltd. v.
M.N.R. (supra) the taxpayer company had com
menced business with about 50 businessmen
involved in lending money on mortgages, especially
when bonuses were available. After a passage of
time and some losses only four shareholders
remained, three of whom were members of a law
firm. The company had no private offices, or
separate telephone listing during the years in ques
tion. It only held four mortgages at the start of the
fiscal year 1972 and only two by the end of the
year. Nevertheless, it was held that it was carrying
on an active business and the small business
deduction was allowed on the basis that the Act
did not indicate the measure of activity the corpo
rate taxpayer must display in order to qualify for
the deduction. The business had started out by
being active and had receded into a state of non-
activity. At the conclusion of his decision, Mr.
Flanigan, Chairman of the Board, said at page
1254:
In the present case it appears thât the financial statements of
the appellant company showed a certain potential for compara
tively extensive financial operations, although the aétivities it
actually performed may not have constituted the type of active
business the Legislature had in mind. However, the Act does
not indicate the measure of activity the corporate taxpayer
must display in order to qualify for the incentive, where, for
example in this case, the business starts out being active and
then recedes to a state of non-activity. As long as the Act is not
more specific in its criteria, it may be very difficult indeed to
enforce these provisions in such a way as truly reflects the
intentions of the Legislature when it enacted them.
In the second case, that of Lazare Investments
Corp. v. M.N.R. 27 , the taxpayer company was
engaged in the business of discounting balance of
sale documents, interim financing and lending
money on second mortgages. It never advertised
but it was well known among notaries and small
builders. It was operated by a person who was
mainly engaged in a clothing business although it
had two telephone numbers and a letter-head. It
succeeded in accumulating a surplus of $164,000.
Applying section 125, it was found that the com
pany was entitled to the small business deduction
since, in order to have the degree of success which
the company had enjoyed, there had to have been
some very active work carried on by its president
which would therefore satisfy the onus of proving
that it was engaged in an active business. In
rendering his decision, Mr. Flanigan stated at
pages 27-28:
As I have said in other cases, and particularly in Cosmopolitan
Investments Co. Ltd. v. M.N.R., 74 DTC 1252, it was my
express feeling that that was not the type of company that
Section 125 was meant to benefit, but, in my respectful view,
Parliament has not succeeded in precluding this type of opera
27 75 DTC 26.
tion from taking advantage of the section. I think there is a vast
difference between the type of business where there is merely a
sitting back and clipping of coupons and the type of operation
that this appellant was engà ged in. In order to have the degree
of success that it has experienced over the years, there had to
be some very active work carried on by the president, Mr. Jack
Lazare. My feeling is / that Section 125 was primarily intended
to stimulate employment by the granting of opportunities for
smaller businesses to increase their working capital but, in
commenting on this section when increasing the limits, the
Honourable Minister of Finance stated, "... this provides up to
$11,500 in additional cash flow to every eligible small business
man in the country. For example, he could use it to expand his
business, finance inventory, meet his bank charges or to build
up his working capital. Under current circumstances, I have no
doubt that he will be able to make good use of this money". It
seems clear then, to me at least, that in the eyes of the Minister
the businessmen entitled to such benefits included people in a
business such as this appellant has been engaged in.
A similar finding was made in the case of
Farlan Investments Ltd. v. M.N.R. 28 , which dealt
with the operation of apartment buildings. The
small business deduction under section 125 was
allowed. The headnote in part reads:
The section was not really intended to benefit this type of
business, but rather to assist small businesses to build up
capital reserves, to increase productivity and thereby increase
employment. However, the wording of the section had failed to
exclude a company such as the taxpayer company, which
undoubtedly qualified under the ordinary dictionary definition
of the word "active".
The fourth case, Centennial Shopping Centre
Ltd. v. M.N.R. 29 refused to allow the deduction to
the appellant which owned and operated a small
shopping centre, an active business, but did not
maintain any office or any clerical or managerial
staff on a full-time basis, but instead entered into
an agreement with another company to manage
and operate it for a fee. This firm was not subject
to appellant's directions from day to day, therefore
it was held that appellant was not engaged in an
active business. Similar reasoning is found in the
Weintraub case (supra) at page 5055 where it is
stated:
28 75 DTC 12.
29 74 DTC 1190.
The situation is quite different from the Finning and Larry
Smith cases (supra) where there was very little activity on the
part of the company as such as distinguishable from the activity
of the appellant personally. The situation might be quite differ
ent in the present case had the plaintiff, after acquiring the
properties in question through the company incorporated by
him, merely rented them to a single tenant or turned them over
to a trust company or agent to administer, merely collecting a
percentage of the rentals as income for the company. In such
circumstances it might well be held that the company was not
engaged in an "active" commercial business.
A similar statement is found in the case of
Finning v. M.N.R. 30 which dealt with section 68 of
the former Act in which Dumoulin J. stated at
page 428:
Whenever a person, or a body politic as in this instance, retains
the remunerated services of someone else to be totally relieved
from its normal duties or functions, surely, then, the former
party relinquishes its "activity" to the latter.
The facts in the present case indicate that the
companies were administered by specialists in the
field of lending money on mortgages, each having
its own policy with respect to the type of loan it
made, its rates and region. The loans were some
what risky in nature involving careful investigation
and negotiation of the terms. The companies
sought and retained agents to submit loan applica
tions and had regular dealings with them and with
solicitors. The companies had their own forms for
loan applications and the subsequent processing
and following up on same, as well as standard type
of instructions for their solicitors or notaries. In
most cases they collected monthly payments to
cover taxes from the borrower and looked after the
payment of these taxes themselves. They did some
re-financing and in some cases purchased mort
gages at a discount, and they operated with bor
rowed funds consisting of their lines of credit from
the bank. While none of them had full-time
employees working for them there were a number
of persons who worked in connection with the
business of each from time to time, and at the
same time did similar work for other companies
with whom they shared the office space and other
facilities.
3° [1961] C.T.C. 425.
A consideration of the course of conduct over an
extended period of time is relevant in determining
the extent of the activity of a company's business.
Certainly, a company could be incorporated but
not actually commence operation on any extensive
scale until some years thereafter: Similarly, a com
pany that has been active could become dormant
or nearly so, merely holding annual meetings and
filing its returns in order to avoid the forfeiture of
its charter. In neither event could it be considered
as carrying on an "active business". Except for
such extreme situations however I do not believe
that the question of whether a company is carrying
on an active business or not in any given year
should be determined by looking at its activity in
that year alone, or that mortgage lending compa
nies, such as the present companies, should be
considered as being inactive in any given year
merely because they have made relatively few new
loans in that year, although they have made a
substantive number in the immediately preceding
or succeeding years. In any event in the present
case there is little doubt that these companies were
all actively carrying on business in the year 1972.
However, although counsel appeared to agree
that all three companies were in the same position
with respect to the applicability of section 125 to
the amounts of income earned by them, I do not
find this to be the case. In accordance with the
findings in the Cosmopolitan Investments Co. and
the Finning cases, and the statement in the Wein-
traub case (supra), I find that E.S.G. is in a
different position from Rockmore and M.R.T. Its
business activity was not carried on by its officers
or directors or by any of its shareholders but was
merely turned over to Mr. Godel's Monarch Man
agement Company, which operated it. No further
intervention or supervision was done on its behalf
nor were any directions given in connection with
its day-to-day operations. The receipt of semi
annual reports from the agent is not in itself a
business activity. I cannot, therefore, conclude that
this manner of operation constitutes the carrying
on of an "active business" by the company itself.
Therefore, in the case of E.S.G., the appeal must
fail. In the cases of Rockmore and M.R.T. they
will be maintained. Since all three cases were
argued together only one set of counsel fees will be
allowed. Plaintiffs are entitled to their costs and
one-third of their counsel fees in each of the
M.R.T. and Rockmore cases, and defendant to her
costs and one-third of counsel fees in the E.S.G.
case.
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.