T-3557-79
The Queen (Plaintiff)
v.
Marsh & McLennan, Limited (Defendant)
Trial Division, Jerome A.C.J.—Toronto, May 5
and 26; Ottawa, October 6, 1981.
Income tax — Income calculation — Appeal from Tax
Review Board's decision that the interest income earned by the
defendant as a result of the insurance premiums it invested in
short-term certificates was "Canadian investment income"
pursuant to s. 129(4) of the Income Tax Act — Whether the
defendant owned the funds which generated the interest income
— Whether the transactions are incidental to defendant's main
business or whether they constituted an active business in their
own right — Whether funds fall within the exception of s.
129(4)(a)(ii) in that they are "a property used or held by the
corporation in the year in the course of carrying on a business"
— Income Tax Act, R.S.C. 1952, c. 148, as amended by S.C.
1970-71-72, c. 63, ss. 129(1),(4)(a), 172.
The defendant, an insurance brokerage company, received
premiums from its insured clients and was required to remit
such premiums, less its commission, to its underwriters. The
latter usually required payment of the premiums 60 days after
the date on which the defendant received them. During that
interval, the defendant would invest the funds in short-term
certificates. In 1976, the defendant earned interest on those
transactions and contended before the Tax Review Board, that
the interest income was "Canadian investment income" pursu
ant to section 129(4) of the Income Tax Act and that it was
eligible for the dividend refund under section 129(1) of the Act.
The Tax Review Board allowed defendant's appeal. The issues
are whether the defendant owned the funds which generated
the interest income; whether the transactions are incidental to
defendant's main business or whether they constituted an active
business in their own right; and whether the funds fall within
the exception of section 129(4)(a)(ii), in that they are "a
property used or held by the corporation in the year in the
course of carrying on a business".
Held, the appeal is dismissed. The defendant is the owner of
the funds it receives in payment from its insured customers.
There is no evidence that any underwriter has ever attempted
to place the defendant under any restrictions in respect of these
moneys and all evidence points in the opposite direction, i.e.,
that the defendant has always enjoyed complete authority in
the management of these funds, free from even the slightest
suggestion of control by any of the underwriters with whom it
does business. The evidence falls far short of establishing
anything in the nature of a trust which would be sufficient to
dislodge the defendant's ownership of its gross revenues. The
evidence also confirms that the defendant's principal business is
that of an insurance agent and that the placing of these funds,
always in short-term certificates, and almost always with char
tered banks, is handled entirely by financial control officers in
each region who are required to devote no more than a few
minutes every day or every few days to this financial control
function. Thus, the transactions are incidental to the main
business of the defendant. To support a finding that the funds
are "a property used or held by the corporation in the year in
the course of carrying on a business", there must be something
more than a mere benefit to the corporation. There must be
some element which integrates the transactions with the tax
payer's main business; no such element exists in the present
case.
Vancouver Pile Driving & Contracting Co. Ltd. v. Minis
ter of National Revenue [1963] Ex.C.R. 162, referred to.
March Shipping Ltd. v. Minister of National Revenue 77
DTC 371, agreed with.
INCOME tax appeal.
COUNSEL:
J. S. Gill and S. Hershberg for plaintiff.
R. Couzin and R. Durand for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Stikeman, Elliott, Robarts & Bowman,
Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
JEROME A.C.J.: This action, although in the
form of a trial is, pursuant to the Income Tax
Act', section 172, an appeal from the decision of
the Tax Review Board 2 . The headnote at page 315
provides an accurate and concise summary of the
issues of fact and law and of the conclusions of the
Board, as follows:
The taxpayer insurance brokerage company received premi
ums from clients and was required to remit such premiums, less
its commission, to the appropriate insurance companies. The
vast majority of its income came from commissions. There was
often a delay of approximately two months between the date on
which the taxpayer received the premiums and the date on
which it paid them to the insurance companies. During this
period, the taxpayer would invest such "unremitted premiums"
in short-term obligations, and in 1976 received $1,345,632 in
interest on such investments. The taxpayer contended that this
' R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63.
2 Marsh & McLennan Ltd. v. M.N.R. 79 DTC 314.
sum was part of its "Canadian investment income" eligible for
the dividend refund under subsection 129(1) of the Income Tax
Act because: (1) it did not constitute income from a separate,
active business of investing (2) it was not essential to or an
integral part of the brokerage business so as to have become
income from that business, and (3) it was income from prop
erty, which property was not used or held in the course of
carrying on business. The Minister classified the interest on
unremitted premiums as income from the taxpayer's business.
He contended that the taxpayer did not own the unremitted
premiums which generated the interest income and that there
fore no dividend refund under subsection 129(1) was available
to the taxpayer. In the event that the unremitted premiums
were owned by the taxpayer, the Minister alleged that the
income therefrom was income from an active business. The
taxpayer rejected the Minister's analysis, and appealed to the
Tax Review Board.
Held: The taxpayer's appeal was allowed. Since the insur
ance companies could not demand the unremitted premiums
until the date they were due, the taxpayer, in the interim,
owned those funds and was free to invest them. Interest income
from short-term investments was only a subsidiary or ancillary
part of the taxpayer's operation, which part did not constitute
either an adventure in the nature of trade or an active business.
Such income fell within the definition of "Canadian investment
income", and the taxpayer's appeal was therefore allowed.
This matter came on for trial at Toronto on
May 5, 1981. There was no evidence for the
plaintiff and one witness for the defendant, John
Charles Meulier, Chief Financial Officer of the
defendant Marsh & McLennan, Limited. The
defendants Harry Price and Hillborn Insurance
Limited in related action number T-3556-79, are
wholly-owned subsidiaries of Marsh & McLennan,
Limited, so that evidence and argument and judg
ment in this matter apply equally to them. In
addition to the evidence of Mr. Meulier, some
twelve exhibits were filed for the defendant, and
upon completion of all evidence on that day, the
matter stood over to May 26, 1981, for argument.
After careful consideration of the evidence and
of the very able presentation by both counsel, and
after an examination of the relevant jurisprudence,
I find that the determination by the Board, both in
respect to relevant facts and to applicable law, is
fully in accord with my own.
The central question of fact relates to the own
ership of funds received by the defendant from its
insured clients. Obviously, these funds carry with
them the obligation upon the defendant to place
insurance on behalf of the customer and to pay for
it. On the other hand, all evidence indicates that
the general practice in the industry is for the
underwriter to place insurance, when requested by
an established agent, and to rely entirely upon the
good credit of such agent to make payment as and
when required by the underwriter. In fact, in
almost every case, it is only upon confirmation that
the underwriter has bound itself to the risk, that
the defendant renders an account to its customer,
so that the placing of insurance clearly precedes
the receipt of any funds by Marsh & McLennan,
Limited. Although the bulk of its business is with
thirty-five or forty major companies around the
world, the defendant does deal with over two
hundred underwriters, and there is great variation,
not only in the content, but in the form of agree
ment. In many cases, a substantial volume of
business has been done over many years under
nothing more than an oral understanding. It is true
that in the case of some underwriters, written
agreements exist which might be construed in such
a way as to place their agents in the position of a
trustee of unremitted premiums, but such formal
agreements are the exception rather than the rule.
In the small minority of cases where they do exist,
they are not honoured, and even in such situations,
there is no evidence whatsoever of any attempt to
identify what proportion of the defendant's general
receipts might be so classified. The time period
within which the underwriter demands payment
varies with each company but, routinely, runs to
sixty and, exceptionally, to ninety days. There is
no evidence that any underwriter has ever attempt
ed to place the defendant under any restrictions in
respect of these moneys and all evidence points in
the opposite direction, i.e., that the defendant has
always enjoyed complete authority in the manage
ment of these funds, free from even the slightest
suggestion of control by any of the underwriters
with whom it does business. In my opinion, the
defendant taxpayer is the owner of the funds it
receives in payment from its insured customers.
The evidence confirms the usual obligations of
agents in the general insurance business, both to
their insured and to their underwriters, but falls
far short of establishing anything in the nature of
a trust which would be sufficient to dislodge the
defendant's ownership of its gross revenues.
The evidence also confirms that the defendant's
principal business is that of an insurance agent and
that the placing of these funds, always in short-
term certificates, and almost always with char
tered banks, is handled entirely by financial con
trol officers in each region who, in addition to their
general managerial responsibilities, are required to
devote no more than a few minutes every day or
every few days to this financial control function. It
is clear, therefore, that whether it be in terms of
percentage of income, time and attention required
or the nature of the business involved, the trans
actions in question here are incidental to the main
business of the defendant and could not, in my
opinion, be construed as constituting, in any sense
of the word, an active business in their own right.
In my opinion, the earning of income from funds
placed on deposit in this way is fundamentally an
investment transaction and since this taxpayer is
not in the investment business, such income would
appear, on a prima facie basis, to come within the
intent of section 129(4)(a) which readsas follows:
129....
(4) In subsection (3),
(a) "Canadian investment income" of a corporation for a
taxation year means the amount, if any, by which the
aggregate of
(i) the amount, if any, by which the aggregate of such of
the corporation's taxable capital gains for the year from
dispositions of property as may reasonably be considered
to be income from sources in Canada exceeds the aggre
gate of such of the corporation's allowable capital losses
for the year from dispositions of property as may reason
ably be considered to be losses from sources in Canada,
(ii) all amounts each of which is the corporation's income
for the year (other than exempt income or any dividend
the amount of which was deductible under section 112
from its income for the year) from a source in Canada that
is a property (other than a property used or held by the
corporation in the year in the course of carrying on a
business), determined, for greater certainty, after deduct
ing all outlays and expenses deductible in computing the
corporation's income for the year to the extent that they
may reasonably be regarded as having been made or
incurred for the purpose of earning the income from that
property,
(iii) all amounts each of which is the corporation's income
for the year (other than exempt income) from a source in
Canada that is a business other than an active business,
determined, for greater certainty, after deducting all out
lays and expenses deductible in computing the corpora
tion's income for the year to the extent that they may
reasonably be regarded as having been made or incurred
for the purpose of earning the income from that business,
exceeds the aggregate of amounts each of which is a loss of
the corporation for the year from a source in Canada that is
a property or business other than an active business; and
Any doubt, of course, must be resolved in refer
ence to the precise language of the statute, and in
this respect, a number of decisions prior to 1974
have established that, in the terms of subpara-
graph (ii), "property" includes money, so that
income from invested money may be "income ...
from a source in Canada that is a property". The
1974 amendment added the words "other than a
property used or held by the corporation in the
year in the course of carrying on a business". In
the interpretation of this exception, some assist
ance can be derived from decisions which relate to
a different, but clearly analogous distinction, i.e.,
between income from assets or transactions of a
capital as opposed to a trading nature, e.g., in the
Canadian jurisprudence, Tip Top Tailors Limited
v. M.N.R. 3 , and in the British jurisprudence,
Davies v. Shell Company of China Ltd. 4 , and
Imperial Tobacco Co. (of Great Britain and Ire-
land), Ltd. v. Kelly (H.M. Inspector of Taxes) 5 . In
the Davies case, Shell Oil received deposits from
distributors in China as security for their perform
ance and the parent company converted the depos
its to sterling currency and, as a result, realized a
gain when called upon to refund the deposits in
due course. It is interesting to note that, notwith
standing the several aspects in which these moneys
were related to the operational side of the business,
the Court concluded that the gains were capital
rather than trading profits. In the Imperial
3 [1957] S.C.R. 703.
4 [1951] T.R. 121.
5 (1943) 25 T.C. 292.
Tobacco decision, the company made a similar
purchase of foreign currency, but since it was for
the purpose of ongoing purchases of tobacco,
which obviously was the taxpayer's stock-in-trade,
the Court reached the opposite conclusion. In the
Tip Top Tailors decision, the Court similarly con
cluded that the purchase of foreign currency for
the purpose of acquiring cloth, the taxpayer's
stock-in-trade, was a trading transaction. These
decisions were extensively reviewed in Vancouver
Pile Driving & Contracting Co. Ltd. v. M.N.R. 6 ,
where the taxpayer had posted a sum of money as
security for performance with a provincial author
ity and replaced the cash with a Dominion of
Canada bond purchased for the purpose. The issue
was whether a subsequent loss suffered on the sale
of the bond was a loss of capital or income. It is
significant that the decision of the Exchequer
Court confirmed the finding of a capital loss,
notwithstanding the fact that the asset had been
used to assist the operational side of the business.
The judgment of the Court was delivered by Thur-
low J., as he then was, who said, in part [at pages
165-167]:
In approaching the problem whether the loss in question was
a loss of capital within the meaning of s. 12(1)(6) it is I think
important to note that the appellant's business was that of
making and carrying out construction contracts and that it did
not include dealing in bonds. From this it appears to me to
follow, prima facie at least, that a gain or a loss through
appreciation or depreciation of bonds held by the appellant
would find no place in a computation of the profit from its
business but would simply be an item of capital. Moreover in
my opinion neither the fact that the purpose of the company
when purchasing the bonds was to hold them only for a short or
limited time nor the fact that the company had no idle funds
available for investment—other than a sum borrowed for the
purpose of making a security deposit—would serve to change
the prima facie nature of the purchase of such bonds from that
of a capital transaction into one on its trading or business
account or the gain or loss that might result from their subse
quent appreciation or depreciation into one of a trading as
opposed to one of a capital nature.
6 [1963] Ex.C.R. 162.
To my mind the present case is distinguishable from the Tip
Top Tailors case and the Imperial Tobacco case in that while
the purchase of the bonds was made because they were needed
for the purposes of the security deposit under the contract and
were in fact used for that purpose they remained throughout
the property of the appellant and they were not used, as was the
sterling in the Tip Top Tailors case, nor were they purchased
to be used, as were the dollars in the Imperial Tobacco case, to
pay obligations incurred in the course of trading operations.
They might of course have been sold and the proceeds turned to
the payment of trading obligations and while they were deposit
ed as security they were undoubtedly subject to the right of the
Bridges Authority to sell them and to apply the proceeds in
discharge of the appellant's obligations under the contract, if
occasion therefor should arise, but that in my opinion is far
from indicating that the bonds were acquired or deposited to
pay trading obligations or, to put it another way, as a step
toward the discharge of such obligations.
Fortunately, none of these difficulties exists here.
Obviously, a benefit to the taxpayer in the form of
earnings from these transactions is a common
factor in all of this litigation, otherwise there
would be nothing in dispute, but in my opinion, to
support a finding that these funds are "a property
used or held by the corporation in the year in the
course of carrying on a business", there must be
something more than a mere benefit to the corpo
ration. Surely, there must be some element which
integrates the transactions with the taxpayer's
main business and no such element exists here.
The Board earlier considered a very similar
situation in March Shipping Ltd. v. M.N.R. 7 , in
which the taxpayer was in the business of provid
ing services to shipping companies and received
advance payments, somewhat in the nature of
retainers, which it invested in short-term deposits.
The Board made the following findings: that these
were fundamentally investment transactions; that
since the taxpayer was not in the investment busi
ness, these transactions could only be considered
"integral" if the specific function under review
formed a necessary part of the whole operation,
7 77 DTC 371.
i.e., that it provided a significant impact on the
total revenue produced, which it did not; that these
investments were subsidiary or ancillary to the
taxpayer's main business and the return was there
fore Canadian investment income as defined by
section 129(4). The following quotations from the
reasons of Delmer E. Taylor are of interest:
At page 372:
There is no question in my mind that the funds can be regarded
as property, and it appears to me irrelevant to the issue in this
appeal whether or not such property was part of the proprietary
interest of the Company, or represented an obligation to cus-
tomers—the funds themselves were available to the appellant
and by all the evidence, completely at the disposition of the
Company, providing the terms of the agency agreements were
fulfilled.
At page 373:
It is my view that since the income was from the crediting of
interest by the Bank of Montreal to the appellant for the use of
some of the property of the appellant, there is a prima facie
case for considering this as investment income rather than the
only other alternative remaining available to me—business
income. It might well be suggested that it could be investment
income and concurrently business income, but it would be
necessary, in my view, to show that the business of the appel
lant was that of investment.
And at page 374:
The Company could have refrained from investing the funds
(thereby not earning the interest); or used its own or borrowed
funds rather than requiring agency deposits (thereby increasing
operating expenses). There is no evidence that either of these
courses of action would have affected the basic operations of
the Company in any way except by less revenue or greater
expense. I am conscious that the Company likely would not
have been overjoyed at such a result, and obviously chose a
normal course—to obtain maximum revenue. However, it is not
my conclusion that such a reduction in income or increase in
operating cost of $56,972.00, when viewed against the back
ground of the total operation, can be described as having a
significant impact, or decidedly destabilizing effect on the
Company's purpose and objective—that of providing needed
services to shipping companies. Rather than being a vital or
even component part of the total operation, the investment of
these funds could more properly be described as subsidiary or
ancillary.
In my view, the conclusions of the Board in the
March Shipping matter were entirely valid and
were properly relied upon in deciding the Marsh &
McLennan matter as it did.
This action arises from a determination made by
the Minister of National Revenue of the refund to
which the defendant corporation was entitled
under section 129 of the Income Tax Act for its
1976 taxation year, which determination was made
in a notice of assessment dated October 11, 1977.
The determination was based on the taxpayer's
original 1976 return in which it reported income
from the transactions which are in issue here of
$2,071,547, but claimed only $725,915 as
"Canadian investment income" within the terms of
section 129. After filing the return, the taxpayer
apparently received advice that the entire sum
might come within the provisions of section 129
and therefore, upon receipt of the notice of assess
ment, the taxpayer filed a notice of objection in
the usual form, to which the Minister replied with
a notification of confirmation and an appeal was
launched to the Tax Review Board. It is from the
Board's determination that the whole amount of
$2,071,547 is "Canadian investment income" in
accordance with section 129(4) that this appeal
was taken, and for the reasons outlined, I am of
the opinion that the Board's conclusion was the
correct one and this appeal must therefore be
dismissed with costs, and the matter referred back
to the Minister for a reassessment of the refund to
which the defendant was entitled during its 1976
taxation year.
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