Date: 19990202
Docket: T-589-92
BETWEEN:
HER MAJESTY THE QUEEN
Plaintiff
- and -
CANADA TRUSTCO MORTGAGE COMPANY
Defendant
REASONS FOR JUDGMENT
MacKAY J.
[1] This is an appeal on behalf of Her Majesty the Queen from a judgment of the Tax Court of Canada1, rendered in 1991. By that decision Associate Chief Judge Christie allowed the defendant's appeal from reassessment of its liability for tax under the Income Tax Act (the "Act") in respect of 1984 and 1985 taxation years of a predecessor of the defendant corporation.
[2] When the appeal was heard there was no dispute between the parties about most of the basic facts or about the amounts at issue in the reassessments of the defendant's income for the years in question. Some matters that were at issue between the parties when the matter was before the Tax Court had been resolved, and the only issue outstanding when this action was heard is whether certain income of a controlled foreign affiliate of the defendant's predecessor in the years in question was income from an active business or whether it was foreign accrual property income ("FAPI") of the defendant's predecessor within s-s. 95(1)(b)of the Act as it applied in the years in question. If classed as the former, as it was by the Tax Court judgment, in the circumstances of the case it was not taxable as income of the defendant. If classed as FAPI, the amounts as agreed upon are income attributable to the defendant and assessable for tax in Canada pursuant to s-s. 91(1) of the Act.
[3] In my opinion, the learned Tax Court Judge was right in finding that the income of the foreign affiliate here in issue was not FAPI under the Act, and was not assessable as income of the defendant's predecessor. An order goes dismissing the plaintiff's action, and thus the appeal from the Tax Court decision, for the reasons that follow.
The background
[4] The defendant is a corporation formed by Letters Patent of Amalgamation effective December 31, 1985, pursuant to the Loan Companies Act of Canada, as it then applied2. Its predecessors were the former Canada Trustco Mortgage Company and the former Canada Permanent Mortgage Corporation ("Canada Permanent"), each of which former corporations had a long history in Canada. Upon its formation the defendant became liable for income tax indebtedness of its predecessors and thus of Canada Permanent for the years 1984 and 1985.
[5] The latter company, in December 1983, had provided for the incorporation of Canada Permanent Trust Company B.V. in, and under the laws of, the Netherlands. That corporation, which changed its name in October 1986, after the formation of the defendant, to Canada Trust Company B.V., is referred to hereafter simply as "B.V." At all times relevant in this action, within the meaning of paragraph 95(1)(a) of the Act, B.V. was a wholly-owned "controlled foreign affiliate" of Canada Permanent, and B.V.'s registered office was located in Amsterdam.
[6] Canada Permanent, until its amalgamation in 1985, was part of the Genstar group of companies. On December 14, 1983, Permanent Home Trade Plan Ltd., a wholly-owned Canadian subsidiary of Canada Permanent, issued additional shares to Canada Permanent for $46,335,000.00. The following day Permanent Home Trade Plan Ltd. purchased a US $55.5 million promissory note of Genstar Mortgage Corporation from Genstar Finance Netherlands B.V. (the "Genstar note"). The principal sum under the note was payable by US $4,250,000.00 per annum from January 31, 1985 to January 31, 1994 and thereafter by payment of $2.6 million on the same annual date until January 31, 1999, and interest was payable quarterly on the outstanding principal. On the same day as it purchased the Genstar note, December 15, 1983, Permanent Home Trade Plan Ltd. sold the promissory note to B.V. for the price it had paid, a discount price of US $43,343,750.00, the appraised value of the note at the time, which B.V. paid by cash in the amount of US $6,191,964.00 and, for the balance, by a non-interest bearing note for US $37,151,786.00.
[7] In the result B.V. earned interest on the Genstar note for the last 15 days of December 1983; for 1984 it received funds as the initial payment under the note as well as the quarterly interest payments under the note, and it earned bank interest on those funds received from the Genstar note that were subsequently deposited on short term with B.V.'s bank. In 1985, it received similar payment and income, and it also received income from interest paid on mortgages purchased that year from Canadian approved lenders under the National Housing Act (sometimes hereafter "N.H.A.").
[8] Those purchases were made, after exploring other opportunities for investing B.V.'s funds as they became available, when it was decided to invest in mortgages on real property located in Canada. Pursuant to written sales and administration agreements, Canada Permanent and its related corporation Canada Permanent Trust Company, transferred N.H.A. mortgages to B.V. for cash, in the following amounts:
January 24, 1985 - from Canada Permanent, $1,173,855.33
- from Canada Permanent Trust Company, $6,830,190.53
March 1, 1985 - from Canada Permanent, $583,541.33
- from Canada Permanent Trust Company, $2,971,186.59
May 1, 1985 - from Canada Permanent, $1,316,451.45
- from Canada Permanent Trust Company, $5,170,121.03
[9] Each of these purchases was of a block of mortgages and subject to a standard agreement which, inter alia, provided that the vendor company, for a fee, would continue to administer the mortgages concerned as trustee for B.V., the beneficiary, and that the administering trustee could elect to buy back the mortgages at any time in accord with a prescribed formula.
[10] The parties agree that the arrangements for concluding and administering the mortgages that were transferred to B.V., i.e. the screening of prospective borrowers for credit worthiness, ensuring that the mortgages were guaranteed under the National Housing Act, all administration of individual mortgages, and selection of mortgages included in the various block purchases, were completed by Canada Permanent or by Canada Permanent Trust Company. All mortgages purchased were secured approved loans. The transferor companies were approved lenders under the National Housing Act; B.V. was not, and the arrangement for continuing administration by approved lenders permitted maintenance of the insurance guarantee on the mortgages, in accord with that Act.
[11] The Minister of National Revenue reassessed the defendant for its 1984 taxation year on the basis that net income from bank interest earned by B.V. was FAPI, of a controlled foreign affiliate of a predecessor corporation, valued at $389,543.00. The assessment for the 1985 taxation year, concerned similar income from bank interest and also included the income earned by B.V. on mortgages held by it, income assessed at $1,802,263.00. The parties subsequently agreed on different amounts for the years in question, if the income in question is determined to be FAPI, which is the issue to be resolved by this appeal from the decision of the Tax Court.
[12] In the assessments for 1984 and 1985 the Minister of National Revenue relied upon a number of assumptions. There is no dispute about those except for the assumption that "B.V. did not carry on an active business". That assumption is not accepted by the decision of the Tax Court, from which this appeal on behalf of Her Majesty is raised. Christie A.C.J. T.C. found that B.V. did carry on an active business, and that its income here in question was from an active business and thus was not FAPI within s-s.95(1)(b) of the Act.
[13] In dealing with that issue the parties before me had different views about the application of the Act. Two issues were raised, neither of which appear to have been directly addressed in earlier argument before the Tax Court.
The issues
[14] For the plaintiff it is urged, first, that the income in question may be considered FAPI in light of its source and the manner in which it was earned even if other income of B.V., from other sources, is considered to be derived from an active business. For the defendant it is urged that it is the general nature of B.V.'s business that establishes an active business is carried on, and all income earned in that business is not FAPI of its Canadian parent corporation under s-s. 95(1)(b).
[15] The second issue raised in argument before me concerns the temporal application of the concept of active business. Thus, it was urged by counsel for Her Majesty that whatever the assessment of B.V.'s business in 1985, it could hardly be said that it carried on an "active business" in 1984.
[16] For the sake of clarity it may be useful to summarize the income of B.V. by source and its classification by the Minister's assessments. In the years in question B.V.'s income was derived from three different sources. In both years income was earned from the Genstar note, that is from the interest paid quarterly on the note, and some portion of the annual payment of principal, and the parties were agreed that this income was not FAPI. In both years B.V. also earned income from short term investments in bank deposits of the proceeds received as payments under the Genstar note, pending decisions on other forms of investment. That income in both years was classed by the Minister as FAPI. In 1985 interest earned on the investments made in that year in NHA mortgages was also classed as FAPI. A summary table of the income by source and as classed by the Minister is as follows:
Income source 1984 1985
earned earned Classed as
Income from payments received
in relation to Genstar note yes yes (not FAPI)
Income from bank deposits of income yes yes (FAPI)
received from Genstar note
Income from NHA mortgage
portfolio (none) yes (FAPI)
[17] When the matter was before the Tax Court it would appear that the possibility of classifying only a portion of B.V.'s income as FAPI was not addressed directly, even though the classification by the Minister was of some, but not all, income as FAPI, apparently by reference to the source of the income. Associate Chief Judge Christie, after finding that the business of B.V. was an active business, taking into account its various activities for the whole period, and with some reference to its subsequent evolution, found that all of the income in question was generated by an active business carried on by B.V. even though part of the income was the result of work done for it by independent contractors, i.e., the transferors of the mortgage portfolios. Thus, none of the income in question, regardless of its source, and regardless of the year in which it was earned, was considered FAPI under s-s. 95(1)(b) of the Act, since it was all income earned from an active business.
The statutory provisions in question
[18] Under the Act provision is made, in relation to the computation of income, in Division B, concerning Computation of Income, Subdivision i, concerning Shareholders of corporations not resident in Canada, for certain income to be included as income of a Canadian shareholder. Within that subdivision, ss. 90 and 91 provide that income of a Canadian taxpayer is to include certain amounts in respect of dividends received or other payments on behalf of shares held in a corporation not resident in Canada. Other sections deal with aspects of the earnings from foreign corporations, and s. 95 deals with "foreign accrual property income", here called "FAPI". The statutory provisions are complex, but it is agreed, and it is clear, that FAPI as provided for in that section, for the years in question, did not include income from an active business. At the times relevant for this matter, s. 95 included the following provisions, relevant in this matter:
| 95. (1) In this subdivision, |
| (a) "controlled foreign affiliate", at any time, of a taxpayer resident in Canada means a foreign affiliate of the taxpayer that was, at that time, controlled, directly or indirectly in any manner whatever, by |
| (i) the taxpayer, |
| ... |
| (a.1) "excluded property" of a foreign affiliate of a taxpayer means any property of the foreign affiliate that is |
| (i) used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business, other than... |
| ... |
| (b) "foreign accrual property income" of a foreign affiliate of a taxpayer, for any taxation year of the affiliate, means the amount, if any, by which the aggregate of |
| (i) the affiliate's incomes for the year from property and businesses other than active businesses, |
| ... |
| [A, B and C clauses set out exceptions, none of which are applicable in the case of B.V.'s income] |
| (2) For the purposes of this subdivision, |
| (a) in computing the income from an active business of a foreign affiliate of a taxpayer there shall be included |
| (i) any income from sources in a country other than Canada that would otherwise be income from property or a business other than an active business, to the extent that it pertains to or is incident to an active business carried on in a country other than Canada by the affiliate or any other non-resident corporation with which the taxpayer does not deal at arm's length, ... |
| ... |
The positions of the parties
[19] For the plaintiff it is urged that the Court should interpret subparagraph 95(1)(b) in light of a perceived purpose of legislation concerning FAPI, that is, to preclude deferral of income for tax purposes in circumstances where a corporation's controlled foreign affiliate has little or no tax applicable in the country in which it is situate, and thus income earned would otherwise be free of tax. Here, at the time in question, B.V. had little or no tax applicable to its income earned in the Netherlands in accord with a ruling of Netherlands tax authorities under the laws of that country, obtained shortly before B.V. was established. By 1987 those laws of the Netherlands were amended to eliminate the tax free status of income earned from mortgages held on real property abroad, in accord with changes negotiated in Canada-Netherlands tax treaty arrangements, and any mortgages held by B.V. at that time were sold back to the administrators under the agreements earlier concluded for B.V. to acquire the mortgages.
[20] In light of the general purpose of FAPI legislation, it is urged that the income of B.V. from interest on bank deposits in both 1984 and 1985, and in 1985 income from mortgages on properties situate in Canada and guaranteed under the N.H.A. program, was FAPI. In particular, for the plaintiff it was urged that the latter source of income, the returns on mortgages, was a result of a simple transfer of mortgage holdings of Canadian corporations, on real property in Canada, to a wholly owned foreign affiliate. It is urged that if, in the result, the income is not FAPI, the corporations have avoided tax in Canada and in the country of the foreign affiliate, and enjoy virtually tax free status for income earned from the mortgages transferred. I observe that it is not that outcome, but rather the provisions of the Income Tax Act which determine whether tax is payable on the income here in question.
[21] For the plaintiff it is also urged that in fact the defendant did not carry on an active business particularly in 1984, and its income from interest on bank deposits cannot properly be considered income from an active business. It is said that source of income, contrary to its description by Christie, A.C.J. T.C., cannot be interest earned on funds that were necessarily incidental to the active business of B.V.3 since it then had no active business. In my view, this argument does not deal with the basis on which Christie, A.C.J. T.C., classed the bank interest as income from an active business. The argument ignores his assessment of the activities of officers of B.V. in examining various proposals for expanding the role and lending activity of B.V., and it assesses the company's activity solely in relation to the source of the income earned from bank deposits, admittedly a restricted source. Moreover, it overlooks the plaintiff's own acceptance that B.V. did carry on an active business, an acceptance implicit from the Minister's acknowledgment that income from payments on the Genstar note was not FAPI. In addition to interest, some portion of the annual payments on the note must have been income in light of the discount price at which the note had been acquired.
[22] For the plaintiff it is also urged that the limited view of B.V.'s role held by its managing director at the time, the limited role it actually played in financial activities, the fact that B.V. had no employees of its own and did not itself perform any administrative functions in relation to the mortgages purchased, and that there was no significant risk to B.V.'s assets in the operation of its business, all point to the conclusion that it did not carry on an active business.
[23] The defendant argues that B.V., acting in accord with objectives set out in its articles of incorporation, is presumed to be carrying on a business, within the meaning of that term as used in the Act, and in the ordinary dictionary definition of the term. That business, in light of the activities carried on by the directors on behalf of B.V., it is urged, was an active business. It was no less an active business because various activities were considered but for a variety of reasons were not pursued, or because it had no employees of its own but relied upon services of staff of another company for B.V.'s purposes. It is urged for the defendant that its active business was carried on in 1984 and 1985, and all of the income derived from payments under the Genstar note, from bank interest earned on its short term bank deposits of revenues from the Genstar note, and from its investment in mortgages, was income from an active business, and thus was not FAPI within subparagraph 95(1)(b) of the Act.
Analysis
[24] Counsel for the parties essentially agree that in construing the Act, including paragraph 95(1)(b), one must consider the matter in light of the context of its purpose, as it may be derived from the words of the Act and as it may be evident from those words in the context of the Act as a whole.4
[25] At the relevant time there was no definition of "active business" as that term is used in paragraph 95(1)(b). It has since been defined for purposes of FAPI by amendment of the Act in 1995,5 following the decision of the Tax Court in this case. That amendment expressly excluded from "active business" of a controlled foreign affiliate an "investment business carried on by the affiliate...". Thus the amendment would appear to exclude the income in issue here from income gained from an active business. From the amendment it seems the income here in question would now be FAPI. That amendment has no application in this case.
[26] The term "business" is defined in s-s. 248(1) of the Act as including "a profession, calling, trade, manufacture of any kind whatever and, except for the purposes of [specified provisions not here relevant]...an adventure or concern in the nature of trade but does not include an office or employment". That definition is broad indeed, and in my opinion there is nothing in the context of paragraph 95(1)(b) as it applied in the years in question, that would lead one to consider that Parliament intended "business" in that paragraph to be construed other than broadly, in accord with s-s. 248(1).
[27] Here, the objects of B.V. as established by its articles of incorporation included the following:
| to participate in, finance and administer other corporations, companies and enterprises; to take up loans and to lend money and in general to enter into all forms of financial transactions;... |
It was urged for the plaintiff that this statement was mere "boiler plate" without any particular significance for B.V., but the evidence for the defendant is that the objects are standard provisions recognized for registration of a financial corporation in the Netherlands. Whether the objects of B.V. stated in its articles are standard or not, there is no doubt they do define the lawful activities of the company. In my opinion its activities from late 1983 through 1985 and later were within its objects, in particular within the scope of the terms "to take up loans and to lend money and in general to enter into all forms of financial transactions". These are clearly business objectives. Acting within its objectives, it was carrying on business6.
[28] Income derived from its activities within its objects is presumed to be income from a business.7 There is no basis in the facts of this case to conclude otherwise. I turn to the facts in this case after considering further the statutory provision and jurisprudence concerning the meaning of "active business" in other provisions of the Act.
[29] The history of the use of the term "active business" in the Income Tax Act is traced in the decision of Christie, A.C.J. T.C.8 Other than that decision there is no jurisprudence that deals with that phrase as used in s-s. 95(1)(b), but in that decision the learned Associate Chief Judge, with whom I would agree, made reference to jurisprudence, dealing with those same words used in another section of the Act, in accord with established principle for interpretation of the same words used by Parliament in different provisions in the same statute.9
[30] The words were formerly used without any further definition in s-s. 125(1)(a), as it applied prior to 1979, in relation to taxation applicable to small businesses, or more specifically to Canadian controlled private corporations. That provision allowed a deduction in tax, otherwise payable by such a corporation, of an amount calculated in part by reference to income from a qualified "active business" carried on in Canada. I agree with Christie A.C.J. T.C.10 that certain cases dealing with the application of the former s-s. 125(1)(a), are useful in considering the term "active business" as it was applicable in s-s. 95(1)(b) in the case at bar. Those cases include M.R.T. Investments Ltd., E.S.G. Holdings Limited and Rockmore Investments Ltd. v. The Queen,11 on appeal cited separately as The Queen v. Rockmore Investments Ltd.12; The Queen v. M.R.T. Investments Ltd.13; E.S.G. Holdings Limited v. The Queen.14 In addition, Christie, A.C.J. T.C. also made reference to King George Hotels Limited v. The Queen.15
[31] From these cases it seems clear that there is no quantitative measure of activity that indicates an active business is carried on by a company engaged in financial activities within the scope of its objects. In the cases involving M.R.T., Rockmore and E.S.G., the incomes from all three companies were ultimately found to be from active businesses. All three operated out of the same premises and relied on the services of the same staff provided by a management company, and all three were engaged largely in the business of lending money under mortgages arranged, for the most part, through agents who were paid commissions by the borrowers. In the taxation year there in question, 1972, M.R.T. had income of approximately $12,500, largely interest from some 14 mortgages valued at some $104,000; Rockmore had income of about $4,600 from interest under three mortgages and modest return from a small property it held; and E.S.G. had interest income of some $12,000 from ten mortgages valued at some $106,000. In the case of M.R.T. and Rockmore, the trial judge found incomes to be from active businesses, but in the case of E.S.G., which operated exclusively by a management company, not by its own officers or staff, directors or shareholders, his lordship found its operations were not an active business. The Crown's appeals in M.R.T. and Rockmore were dismissed and the appeal of E.S.G. was allowed so that in the final result in all three cases the income in issue was found to be from active businesses.
[32] The cases are helpful further in that the trial judge's reference to the companies' activities prior and subsequent to the year in question, as relevant to the assessment of the nature of the business as active, was not undercut on appeal. In the Court of Appeal, Chief Justice Jackett commented that in considering whether there is an "active business" one must first determine whether there is a business within the definition in s-s. 248(1), and then one determines as a fact whether in the circumstances the business is an "active business" within the intent of the section in question, in those cases s. 125.
[33] In King George Hotels Limited v. The Queen16 Mr. Justice Urie, for the Court of Appeal, in disposing of an appeal concerning whether income derived from a property management business was income from "a business other than an active business" within s-s. 129(4)(a) of the Act, commented:
| ...it should be stressed that whether a business is an active or inactive one is, as earlier pointed out on the authority of the Rockmore_case..., one of fact dependant on the circumstances of each case. ... |
The taxpayer's appeal was dismissed, upholding the decision of the trial judge who had determined as a fact, after reviewing the evidence, that the business there in question was an active business.
[34] For the plaintiff it is urged that Ensite Limited v. The Queen17, sets a test, not here met by B.V., for establishing whether the income in question can be considered derived from an active business. That test is whether the property from which the income is derived was employed and risked in the business. Here it is urged the nature of the property, that is bank deposits and insured mortgages on real estate in Canada presented no real risk for B.V. I am not persuaded that the analogy drawn from the decision in Ensite is relevant. The test enunciated does not relate to assessing whether business is an active business but rather whether the income in issue there, interest earned on Philippine bank deposits, on the facts of that case, was "foreign investment income" qualifying within s-s. 129(4), in a claim for a dividend refund under s. 129(1)(a) of the Act. While s-s. 129(4) does define "foreign investment income" partly by reference to income from a source outside Canada that is a business other than an active business, the test set by the Supreme Court relates not to the nature of the business carried on abroad but to the classification of income from funds in a business other than an active business. Those funds were found by the Court of Appeal to have been used or held in the carrying on of the taxpayer's business, an active business, and thus the interest earned was not foreign investment income, a decision upheld by the Supreme Court.
[35] For the plaintiff it is also urged, on the authority of Ellaman Holdings Inc. v. The Minister of National Revenue18 that the Court should conclude that B.V. in this case was not engaged in the business of lending money. I do not find that decision relevant here. In that case Sarchuk T.C.J. found no evidence to support a claim that the taxpayer was in the business of lending money and thus no deduction was allowed for losses arising from defaults on mortgages held as an investment by the taxpayer which was otherwise engaged entirely in sale of stationary and supplies. In this case there is evidence of B.V.'s activities in lending money, of the importance of that activity within its wider object of acting as a financial corporation, and there is no question that it did so act. The only question here raised is whether its activities in the years in question demonstrate that it was engaged then in "active business".
[36] Determining that issue, within the context of s. 95(1)(b) is this Court's task. We have seen that provision defines FAPI, in part, as "the amount if any, by which the aggregate of (i) the affiliate's incomes for the year from property and businesses other than active businesses...". Those words in my opinion do not permit the separate treatment for tax purposes of portions of the total income of an affiliate engaged in active business, as though some portions from certain sources are not from an active business. The word "incomes" in my view relates to "property" and to "businesses other than active businesses"; it does not relate to streams of income classified by their source. If I am correct, the Minister's reassessments must relate to the whole of the income of B.V., not merely in 1984 and 1985 to income from bank deposits. Otherwise all such interest of foreign affiliates would be considered FAPI. Further, those reassessments could not relate to income earned on mortgages in 1985 simply because the properties secured were located in Canada. If the mortgages were held on properties elsewhere, e.g. in the U.K., the business of B.V. would have been no more or less "active", and the interest would not, in my opinion, be FAPI. The source of the stream of revenue flowing into B.V.'s total income is not the determining factor in assessing whether that income is FAPI under s. 95(1)(b). In my opinion, that assessment must relate to the totality of B.V.'s income in light of the evidence of the nature of its business as an entity, as an active business or otherwise.
[37] On the evidence adduced I am persuaded that in the years in question, 1984 and 1985, B.V. carried on an active business. That evidence is essentially the testimony, and documentary evidence in support of that, provided by Mr. A. J. Unsworth, the first managing director of B.V., whose evidence was uncontroverted. I note that no evidence was adduced on behalf of the plaintiff.
[38] The activities of Unsworth on behalf of B.V., undertaken with direction and approval of his superiors in the Genstar and later Canada Trustco operations, and of his supervisory directors within B.V., included the following.
[39] In 1983, before incorporation of B.V. but in anticipation of its creation, consideration was given to activities in which it might be engaged in financing activities and corporations within the Genstar group. Initial arrangements necessary for incorporation of the company were made, including banking arrangements in New York for receipt of funds from Canada Permanent as initial capitalization (some $ 7 million dollars), to be exchanged for shares to be issued by B.V. on its creation; banking services in Amsterdam; arrangements for a tax ruling from Dutch authorities and later, for purchase of the Genstar note, for incorporation of B.V. and for appointment of its initial supervising directors.
[40] On December 14, 1983, B.V. was incorporated and on the following day the first meeting was held of the shareholder, represented by proxy by the managing director, followed by a telephone conference meeting of the managing director and supervising directors. These meetings confirmed arrangements made by Unsworth on behalf of B.V. for banking and auditing arrangements, for issuing shares to B.V.'s parent, Canada Permanent, for the naming of supervisory directors, for arrangements for purchasing the Genstar note and for investment of income and assets in bank deposits for the short term. The second of the meetings approved an undertaking, on behalf of B.V., given by the managing director about its planned lending activities and its willingness to report to the superintendent of insurance in Canada, an undertaking perceived by B.V.'s parent to be important at the time. Some attention was paid at trial to this undertaking, as it was also to Unsworth's understanding of B.V.'s limited authority to lend moneys to third parties other than direct affiliates of the company, but neither of these, in my view, are significant in assessing whether the company was engaged in an active business.
[41] In late 1983 and into 1984, Unsworth, in consultation with Genstar executives and reporting to his supervisory directors of B.V., investigated the following projects as possible investment opportunities for B.V.:
| i) the purchase of the Genstar note at an appraised price resulting in an average annual return of 17.9%, a transaction which when completed resulted in transfer of debt from Genstar operating companies to the Canada Permanent financial chain of companies, for cash; |
| ii) the acquisition by B.V. of another financial company, Genstar Securities Corporation, operating in the United States, an acquisition which by mid-1984 was no longer considered appropriate; |
| iii) the acquisition by B.V. of all or a portion of the Americal mortgage lending group of Genstar, which operated in the United States and in the United Kingdom; |
| iv) the acquisition by B.V. of mortgages held by Broadmore Homes, a corporation in Orange County, California, to assist in financing housing developments by purchasing packages of mortgages, a possibility not pursued after early 1984; |
| v) participation by B.V. in syndicated loans in the U.S. with other Canada Permanent subsidiaries; |
| vi) the acquisition by B.V. of Canada Permanent U.K., a small banking operation engaged principally in mortgage lending. |
The last of these possibilities took Unsworth to the United Kingdom on two or three occasions and brought representatives of the U.K. corporation to Amsterdam once, as the possible acquisition by B.V. was further explored, but ultimately no approval for this was forthcoming from B.V.'s parent and the banking operation in the U.K. was ultimately sold to a third party after Canada Trustco was created, i.e., in 1986. In exploring the other possible acquisitions and activities Unsworth travelled to both the United States and Canada, to consider these possibilities and to discuss them with officers at Canada Permanent.
[42] Supervisory and managing directors of B.V. appear to have met on a quarterly basis. Minutes of some of those meetings in the joint book of documents in these proceedings, which were referred to in testimony of Mr. Unsworth, include reports on various activities initially under consideration, and on the later investments in mortgages.
[43] By mid-1984 the various projects explored by Unsworth, except the possible acquisition of the banking operation in the U.K., were no longer considered appropriate. Officers of Canada Permanent then considered the possibility of arranging for payment from B.V. of special dividends from the proceeds of Genstar note, a step that would have precluded B.V.'s opportunities to develop as a financial corporation. That step was not pursued and by late 1984 Unsworth had learned of and was exploring the possibility of opportunities for investment by B.V. in mortgages on real properties in Canada. He learned of opportunities for this from others in the Netherlands who found these investments attractive under taxing arrangements applicable in Canada and under the tax treaty between Canada and the Netherlands. After discussions with Canada Permanent officers and approval of the supervising directors of B.V., arrangements were made for blocks of Canadian mortgages to be acquired, ultimately from the Canada Permanent corporations earlier indicated. As we have seen, these acquisitions were made early in 1985 on three separate occasions, with six block purchases, each under similar agreements. The total purchases in 1985 were some $18 million dollars of insured mortgages on real property in Canada. For the most part those mortgages were due for repayment by 1987, the anticipated date of renegotiation of the tax treaty between the Netherlands and Canada.
[44] Throughout 1984 and 1985, as in later years, B.V. received and accounted for payments made under the Genstar note, using staff resources provided by other Genstar companies in Amsterdam, on a part-time basis, including services of the managing director, Unsworth, and a second managing director who joined him in 1984. Short-term deposits of those receipts were made, mainly in B.V.'s bank in the U.K., NHA mortgages were purchased in 1985 and receipts from those, received and accounted for on a monthly basis after October in that year, were held for a time on short-term deposit. In late 1986, some months after Canada Trustco was created, some additional funding was provided to the operations of B.V. At the end of 1986 and in 1987 it began lending and financing arrangements with third parties, mainly mortgage funding, principally on properties located in the United States. By 1987 B.V. had established a branch in the Barbados from which of its operations in North America were directed and administered.
[45] B.V.'s activities after 1985 demonstrate continuing evolution as a financial corporation. Ultimately it became an established banking institution, albeit small in scale, and its operations, revenues and profits continued to grow. Its later activities were not significantly different from those originally contemplated and explored as possibilities in its early formative years.
[46] It was urged by counsel for the Crown that B.V.'s activities in 1984 and 1985 were essentially bookkeeping operations, without a staff of its own, with no premises of its own, no great volume of financing activities and limited outlook for investment opportunities on the part of its managing director. Its activities were not limited by law, however, other than by its articles of association. The limited resources available to it from the Genstar note in the early years might well have been added to, from borrowings or increased capitalization, if investment activities had been deemed appropriate for its expansion at that stage. One cannot ignore the activities undertaken by Unsworth and considered by the company's directors and its parent corporation in the early days as possible financing activities for B.V. In light of all of its activities, in my opinion, it is clear that B.V. was engaged in an active business in 1984 and 1985.
[47] Counsel for the Crown submitted that under the law of agency the vendors of the N.H.A. mortgage blocks to B.V. could not be agents for B.V. in administering the mortgages purchased, as I understand the argument, on the ground that B.V. could not itself administer the mortgages. With respect, I am not persuaded that the law of agency can be deemed to limit the authority that B.V. derived from its articles of association, or that it precluded B.V.'s purchase of the mortgages in question under agreements which, as I read them, dealt with the vendor/administrators, approved lenders under the N.H.A. program, as independent contractors, not as agents of B.V. The principles of the law of agency are not useful, in my opinion, in considering whether the mortgage arrangements should be considered outside the scope of B.V.'s activities to be assessed in considering the issues before me. Those arrangements were within the authority of B.V. under its articles. They cannot be ignored, on the basis of principles of the law of agency. They are a portion of the activities to be considered in assessing whether B.V. was engaged in active business, and whether, in 1985, its income derived from mortgage interest payments was income from an active business and thus was not FAPI.
Conclusion
[48] I find that in the years in issue B.V.'s activities were carried on within the objects of its articles of association and that these activities constituted an active business. Its income from this business, in 1984, from the first payment under the Genstar note and quarterly interest thereon and earned as income from bank deposits of the proceeds of the Genstar note, was income of the corporation from an active business. Further, in 1985 income from those same two sources and from interest earned, on mortgages purchased from and administered by approved lenders under the National Housing Act, on real property located in Canada, was also income from an active business. The income earned from bank deposits in both years and from returns on mortgages held in 1985 was income from an active business and did not constitute FAPI under s-s. 95(1)(a) as it then applied.
[49] For these reasons the appeal of Her Majesty from the decision of the Tax Court of Canada, brought by this action, is dismissed. An Order goes dismissing the action, in relation to both taxation years, 1984 and 1985, with costs to the defendant, and referring the matter of the defendant's taxable income for those years to the Minister of National Revenue for reassessment in accord with these Reasons.
Judge
OTTAWA, Ontario
February 2, 1999.
__________________1 Reported, Canada Trustco Mortgage Company v. The Minister of National Revenue, (1991), 91 D.T.C. 1312 (T.C.C.).
2 R.S.C. 1985, c. L-12, repealed by the Trust and Loan Companies Act , S.C. 1991, c. 45, s. 561.
3 Canada Trustco Mortgage Company v. M.N.R., supra, note 1 at p. 1325.
4 Stubart Investments Limited v. Her Majesty the Queen (1984), 84 D.T.C. 6305 (S.C.C.).
5 S.C. 1995, c. 21, s-s. 46(3).
6 Commissioner of Income Tax v. Hanover Agencies Limited, [1967] A.C. 681 at 687 (P.C.).
7 Canadian Marconi v. The Queen (1986), 86 D.T.C. 6526 at 6528 (S.C.C.).
8 Supra, note 1 at pp. 1319-1320.
9 See J. W. Estey J. in Thomson v. M.N.R. (1946), 2 D.T.C. 812 at 813 (S.C.C.).
11 (1975) 75 D.T.C. 5224 (F.C.T.D.).
12 (1976) 76 D.T.C. 6156 (F.C.A.).
13 (1976) 76 D.T.C. 6158 (F.C.A.).
14 (1976) 76 D.T.C. 6158 (F.C.A.).
15 (1981) 81 D.T.C. 5082 (F.C.A.).