T-2095-80
Gull Bay Development Corporation (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Ottawa, December 7
and 19, 1983.
Income tax — Exemptions — Appeal from assessment for
income tax in 1975 — Plaintiff incorporated to promote
economic and social welfare of reserve members and to provide
support for charitable organizations engaged in assisting eco
nomic and social development — Directors not paid nor
receiving profits — Plaintiff establishing commercial logging
operation to provide employment and training of Indians,
maintaining public buildings, funding educational activities —
S. 149(1)(l) of the Act exempting from tax associations organ
ized and operated exclusively for any purpose except profit —
Defendant contending plaintiff incorporated to carry on com
mercial activity — Plaintiff contending incorporation to deal
with social and welfare problems of reserve — Appeal allowed
— Issue turning on facts of each case — Letters patent not
mentioning logging operations — Plaintiff itself using logging
profits for social objectives — Corporate directors not benefit
ting personally — Corporation not set up to carry on commer
cial activity — Incorporation more efficient method of achiev
ing social objectives than Band Council — Social and welfare
activities real corporate objectives — Income Tax Act, S.C.
1970-71-72, c. 63, s. 149(1)(d)•(e),(f),(g),(l) (as am. by S.C.
1974-75-76, c. 26, s. 103(3)).
Indians — Income tax exemptions — Appeal from assess
ment — Plaintiff incorporated to promote economic and social
welfare of reserve — Commercial logging operation estab
lished providing employment, revenues for improving social
and economic situation — Whether plaintiff exempt under s.
149(1)(1) Income Tax Act as association organized and oper
ated exclusively for any other purpose except profit — Appeal
allowed — Facts of each case determining issue — Social and
welfare activities real objectives of corporation — Income Tax
Act, S.C. 1970-71-72, c. 63, s. 149(1)(1) (as am. by S.C.
1974-75-76, c. 26, s. 103(3)).
The plaintiff is appealing an assessment for income tax in
1975. The letters patent of the plaintiff corporation provide
that its objects include promoting the economic and social
welfare of members of the Gull Bay Indian Reserve and
providing support for charitable organizations engaged in
assisting their economic and social development. They further
provide that the corporation shall be carried on without purpose
of gain for members and that any profits will be used in
promoting its objects. The directors were not paid nor did they
receive any profit from their position. The plaintiff established
a commercial logging operation which provided employment,
trained Indian students, maintained public buildings, provided
funds to programmes established to give necessities to needy
reserve members, and provided funds for educational excur
sions and for other assistance activities. Paragraph 149(1)(l) of
the Income Tax Act provides that no tax is payable when a
person is "a club, society or association organized and operated
exclusively for social welfare, civic improvement, pleasure or
recreation or for any other purpose except profit". The plaintiff
contends that the primary motive for setting up the corporation
was to deal with problems on the reserve and to create fund-
raising activities for these purposes.
Held, the appeal should be allowed. To a considerable.extent,
the issue depends upon the facts of each case. The corporation
is operated "exclusively" for the purpose in paragraph
149(1)(l) pursuant to its charter, even though it may raise
funds for this purpose by its commercial lumbering enterprise.
The members (directors) did not personally benefit from the
corporation. In St. Catharines Flying Training School Limited
v. Minister of National Revenue it was held that "non-profit
able purposes" does not mean that no profits would ever result
from carrying out the purposes, but that the purposes are to be
carried out without the intention of making profits. It was also
held that the term "association" in its ordinary meaning is wide
enough to include an incorporated company. That interpreta
tion applies to the wording of paragraph 149(1)(1). The
Supreme Court of Canada recently held in Regional Assess
ment Commissioner et al. v. Caisse populaire de Hearst Ltée
that all relevant factors regarding an operation must be con
sidered and weighed to determine whether an activity has as its
preponderant purpose the making of a profit. In Minister of
National Revenue v. Bégin the respondent was tax exempt
because he had no claim to the profits of the partnership. The
defendant would distinguish this case since the present plaintiff
did actually receive the profits from the lumbering operations.
The plaintiff concedes that if a company makes profits from a
commercial operation, it cannot avoid taxation by turning them
all over to charity, but here the corporation was not merely
turning the profits over to someone else but was itself actively
engaged in social objectives for which it was formed. Paragraph
149(1)(g), dealing with "Non-profit corporation", does not
apply since it further requires that the corporation must not
carry on any business. The raising of money was not the basic
purpose of the corporation, and its charter makes no reference
to logging operations. Paragraph 149(1)(l) requires that the
association must be organized and operated exclusively for any
purpose except profit. According to British Launderers'
Research Association v. Central Middlesex Assessment Com
mittee and Hendon Rating Authority, "exclusively" must be
given its full effect. Although the logging operations of the
plaintiff were extensive and provided considerable revenue, the
letters patent make no reference to any business operations.
The corporation was not set up to carry on a commercial
activity, although the motive for forming the corporation was
probably to provide employment and training to otherwise
unemployed Indians by engaging in a commercial activity
which would both provide employment and raise funds to be
used for charitable activities. It was more efficient to carry on
this activity through a corporation than to have the Band
Council attempt to do it itself. If the lumbering operation had
been carried out by the Band Council, it is unlikely that any
attempt would have been made to tax the profits of the
enterprise. It is the policy of the Department of Indian Affairs
to encourage Indian bands to become self-reliant and to
improve living and social conditions on the reserves. The social
and welfare activities of the plaintiff are not a cloak to avoid
payment of taxation on a commercial enterprise, but are the
real objectives of the corporation.
CASES JUDICIALLY CONSIDERED
APPLIED:
St. Catharines Flying Training School Limited v. Minis
ter of National Revenue, [1955] S.C.R. 738; 55 DTC
1145; revg. (1953), 53 DTC 1232 (Ex. Ct.); Regional
Assessment Commissioner et al. v. Caisse populaire de
Hearst Ltée, [1983] 1 S.C.R. 57; British Launderers'
Research Association v. Central Middlesex Assessment
Committee and Hendon Rating Authority, [1949] 1 All
E.R. 21 (Eng. C.A.).
DISTINGUISHED:
Hutterian Brethren Church of Wilson v. The Queen,
[1980] 1 F.C. 757; (1979), 79 DTC 5474 (C.A.); Wood-
ward's Pension Society v. Minister of National Revenue
(1959), 59 DTC 1253 (Ex. Ct.).
CONSIDERED:
Minister of National Revenue v. Bégin, [1962] Ex.C.R.
159; 62 DTC 1099; Forest Lawn Cemetery Company v.
Minister of National Revenue (1952), 52 DTC 84
(Income Tax Appeal Board); Peter Birtwistle Trust v.
Minister of National Revenue (1938), 1 DTC 419 (Ex.
Ct.); The King v. The Assessors of the Town of Sunny
Brae, [1952] 2 S.C.R. 76.
REFERRED TO:
Lumbers v. The Minister of National Revenue, [1943]
Ex.C.R. 202.
COUNSEL:
Micha J. Menczer for plaintiff.
W. Lefebvre, Q.C. and B. Hobby for
defendant.
SOLICITORS:
Mattar, Menczer, Savage & Falsetto,
Ottawa, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: Plaintiff in these proceedings is a
corporation incorporated by Province of Ontario
letters patent on February 28, 1974, as a corpora
tion without share capital having its head office on
the Gull Bay Indian Reserve (No. 55), at Gull
Bay, Ontario, a reserve of some 16 square miles on
the west shore of Lake Nipigon some 120 miles
north of Thunder Bay. The letters patent of the
corporation provide that the objects of the corpo
ration include:
To promote the economic and social welfare of persons of
native origin who are members of the Gull Bay Indian Reserve
(No. 55) and to provide support for recognized benevolent and
charitable enterprises, federations, agencies and societies
engaged in assisting the development, both economic and social,
of native people who are members of the Gull Bay Indian
Reserve (No. 55).
They further provide that the corporation may hire
employees, maintain offices, and incur reasonable
expenses in connection with its objects, that the
corporation shall be carried on without purpose of
gain for members and that any profits or other
accretions to the corporation will be used in pro
moting its objects. It is further provided that the
directors shall serve without remuneration and no
director shall directly or indirectly receive any
profit from his position, provided only that he may
be paid reasonable expenses incurred by him in the
performance of his duties. In the event of dissolu
tion of the corporation all remaining property is to
be distributed or disposed of to incorporated native
peoples organizations in Ontario.
Plaintiff contends that it has from its inception
been involved in working for the social and eco
nomic development of the Gull Bay Indian
Reserve and its members and in the improvement
of the social and economic conditions of the mem
bers of the Band living there, which activities
include the establishment of a viable commercial
logging operation to provide employment for mem
bers of the reserve, the training of Indian students
from the reserve to work both as loggers and as
managers in the office facilities, the carrying out
of maintenance work on the recreational and
administrative buildings and facilities on the
reserve, providing funds to reserve programmes
established to give food, clothing and other neces
sities to needy members of the Gull Bay Indian
Reserve, providing of funds for travel expenses for
school-age children on the reserve to enable them
to take educational excursions that the school from
time to time determines to be beneficial, providing
of other assistance activities on the reserve deter
mined to be beneficial to social and economic
welfare of the members of the reserve, and that it
was therefore a non-profit organization within the
meaning of that term as defined in paragraph
149(1)(1) of the Income Tax Act [S.C. 1970-71-
72, c. 63 (as am. by S.C. 1974-75-76, c. 26, s.
103(3))].
While a further argument was raised at trial
based on paragraph 149(1)(d) of the Income Tax
Act to the effect that the members and directors of
plaintiff are members of the Band Council which
controls plaintiff and that the Band Council car
ries out the functions of municipal government on
the reserve, so that plaintiff is a municipal corpo
ration, this was rejected by the Court at the trial.
During the course of the argument plaintiff also
invoked paragraph 149(1)(f) of the Act which
reads as follows:
149. (1) No tax is payable under this Part upon the taxable
income of a person for a period when that person was
(f) a charitable organization, whether or not incorporated, all
the resources of which were devoted to charitable activities
carried on by the organization itself and no part of the
income of which was payable to, or was otherwise available
for the personal benefit of, any proprietor, member or share
holder thereof;
Paragraph 149(1)(1) reads as follows:
149. (1) No tax is payable under this Part upon the taxable
income of a person for a period when that person was
(1) a club, society or association organized and operated
exclusively for social welfare, civic improvement, pleasure or
recreation or for any other purpose except profit, no part of
the income of which was payable to, or was otherwise
available for the personal benefit of, any proprietor, member
or shareholder thereof unless the proprietor, member or
shareholder was a club, society or association the primary
purpose and function of which was the promotion of amateur
athletics in Canada;
On June 14, 1977 plaintiff was assessed for
corporate income tax for the year 1975 in the
amount of $3,272.40. A notice of objection was
made but defendant sent notice of confirmation.
This action is an appeal from the assessment.
Defendant contends that in its 1975 taxation
year plaintiff carried out with a view to profit a
logging business from which it earned a profit of at
least $23,538, taking the position that plaintiff was
not exempt from tax as it was not a non-profit
organization within the meaning of paragraph
149(1)(1) of the Act nor a municipal corporation
within the meaning of paragraph 149(1)(d) of the
Act and that plaintiff is not an organization
described by subsection 149 (1) of the Act.
While the issue is a clearly defined one, the
extensive jurisprudence to which the Court was
referred by both parties indicates that it is very
controversial and to a considerable extent depends
on the facts of each case so that it was necessary to
introduce considerable factual evidence. At the
opening of the hearing plaintiffs counsel indicated
that arguments based on paragraph 149(1)(/) of
the Income Tax Act would be added, although it
was not specifically pleaded and defendant's coun
sel did not object to this.
Chief Tim Esquega testified that he has lived on
the reserve all his life and has seven children.
There are 323 people in all on the reserve. Since
1962 he has worked as a caretaker employed by
the Department of Indian Affairs and was elected
Chief of the Band from 1972 to 1978 and again
since 1980, as such being a member of the Band
Council which administers the funds provided by
the Department of Indian Affairs. The only work
which could be done on the reserve prior to the
formation of the Gull Bay Development Corpora
tion was some commercial fishing and trapping
which is very poor and some seasonal work in
fire-fighting. By 1972 membership on the reserve
was depleting and alcohol, vandalism and rape
were prevalent. The Hudson Bay store in the
community moved away as did the teachers. A few
members of the Band worked outside the commu
nity in logging operations. The community had
acquired a bad reputation so that the Government
was taking the core funding back and administer
ing it themselves. As Chief in 1972 he wanted to
create some work in the community. He had help-
ful advice from John Belair, a professor at Lake-
head University, who was working on a contract
basis with other bands giving them advice on
underbrushing and other forestry operations. The
corporation was formed as a vehicle to provide
employment.
When questioned by the Court as to why the
Band itself could not have carried on the lumber
ing operation he said that this would not be fea
sible because of the many social problems. The
Government money was slow to come in. The
by-laws of the corporation provided for nine direc
tors, of whom the Chief and all three councillors of
the Gull Bay Indian Reserve would hold office ex
officio.
Chief Esquega testified that the other directors
were selected from reputable members of the
Band. A lawyer from Thunder Bay was engaged to
assist them. The corporation had approximately 25
employees and initiated logging operations and
gave work of a social nature, cleaning up the
community, cutting wood for elderly residents,
moving unsightly abandoned cars, moving a gar
bage dump which was objectionable on windy
days, making hockey rinks, improving the fencing
around the cemetery, and painting old buildings.
Younger women were engaged to help older ones
who could not do washing for themselves. Some
members were taken on tours of the logging opera
tion to show them how the work was done. A
generating system was built as there were frequent
power failures and fuel was sometimes bought for
persons on the reserve who could not afford it. An
alcoholic control programme was initiated and a
programme worker hired for this. The Government
money was always slow in coming in even after the
corporation was formed. The Government funds
were provided for the Band, but the corporation
was able to build up and improve the lifestyle of
the community with the corporation and the Band
Council working closely together. If the corpora
tion had to advance money to the Band Council for
necessary expenses for which Government funds
had not yet been received most of these advances
were paid back by the Band, and conversely if the
corporation received any advances from the Band
Council it would pay them back. Perhaps 15 mem
bers of the Band worked in the logging operation
while the others worked on the other social activi-
ties of the corporation. Unfortunately the initial
audited statements for 1975 did not clearly sepa
rate the logging operations from Band business. A
revised statement of March 31, 1976 restated the
1975 figures, and the Crown indicated it would
accept these figures as the basis for the assess
ment, but even this does not show the breakdown
although subsequent statements for the 1977 to
1981 years separate the figures of the logging
operations. In reply to a question from the Court
as to why the net income figures show a dramatic
drop from substantial profit in 1978 to an actual
loss in 1979 and 1981 and only a small net income
in 1980 the Chief explained that he had lost the
election in 1978 and not only he but all directors of
the corporation had been replaced. The resulting
operations of the corporation were very poor and
when he was re-elected the corporation owed some
$90,000 which has since been paid off. He testified
that little assistance was obtained from the
Department of Indian Affairs for most of the
social programmes carried on by the corporation.
In 1975 for instance a beach area was cleared on
the lake for swimming and picnic tables were put
in the park. No directors were ever paid anything
as such, but one who worked as a foreman in the
logging operation was paid for this and another
one was paid for looking after the office books.
There are now about 72 employees of the corpora
tion, some 49 engaged in logging and 22 others
engaged in other activities paid by the Band.
He testified that the head office of the corpora
tion is in a building owned by the Band and the
corporation pays for a share of the rent and heat
ing. The logging contract from Northern Wood
Preservers which was negotiated by Mr. Belair and
the Council is a standard contract given to all
logging operators.
John Belair, Professor of Forestry at Lakehead
University has had great experience in forest har
vesting, transportation and forest management
having worked for 24 years with Boise Cascade in
Kenora and Fort Frances. In 1972 the Department
of Indian Affairs asked him to assess the work
being done by the Band members on the reserve
some of whom are employed in thinning out the
woods. He discussed this with the then Chief and
met Esquega who told him that he would be
running as Chief. He suggested that by using
resources near the community the Band could
provide employment for its members. While on the
reserve he saw evidence of alcoholism, unsightly
junk, cars abandoned here and there, buildings in
disrepair, and the garbage disposal site which was
an eyesore with loose papers being thrown around
by the wind. While some baseball was being
played thëre was no formal diamond and no
recreational facilities that he could see. He subse
quently worked with Chief Esquega and the Coun
cil applying for the charter of the corporation
which was to be used as a key to bringing the
desired social improvements about. He estimates
that in 1975 there were about 12 to 15 employees
working directly in logging while the others were
doing work in the community. He went there from
the University every Thursday for over a year,
going through the bush with the logging crew who
were very inexperienced and needed training. He
brought along with him logging films as well as
travelogues, cartoons for the children and put on a
film show on Thursday evening. The only remu
neration he received from the corporation was for
his expenses. The Department of Indian Affairs
paid him for the feasibility studies which he was
doing.
To his personal knowledge some firewood was
cut for elderly residents, and work was done on the
houses and the schools. The old cars were removed
out of sight and a new garbage disposal site was
created. The office staff at the start consisted of
the Band administrator who was knowledgeable
and was assisted by a lady Band clerk.
Before setting up the corporation several com
munity meetings were held. While it was
enthusiastically received some concern was
expressed by the trappers and guides who worked
during the hunting and fishing season as to the
damage which would be caused to the environment
and wildlife by the logging operation. Moose hunt
ing supplied a major source of food for the Band.
He concluded that the logging must not be done in
a conventional manner by large clear cuts but
rather it was done by what might be described as a
checker-board pattern, areas of about 6 acres
being cut with adjacent areas of similar size being
left untouched. Cutting rights for the area in
question belong to Northern Wood Preservers
(Saskatchewan) Limited and an agreement was
entered into with them to permit plaintiff to do the
logging and sell the wood to Northern Wood Pre
servers at a price fixed by the agreement. The area
in question consisted largely of stands of jack pine
and Northern Wood Preservers wanted it in tree
lengths to use as telephone poles. Great Lakes
Paper Company which had provided the corpora
tion with a licence had an excess inventory of jack
pine at the time and Domtar, the only other opera
tor in the area would accept wood but wanted it in
eight foot lengths and it was a long haul to their
mill. He testified that marking the blocks to be cut
is quite labour intensive, and also requires more
roads. In a fully commercial operation an entire
area would be cleared which would be more profit
able, but would destroy the wildlife. He eventually
increased the size of the areas marked to be cut
from 6-acre blocks to 10-acre blocks so the equip
ment could be moved more readily, but about 50%
of the total timber was left uncut as a browse for
the wildlife. Everybody including the timber licen
sees was happy with what they were doing. He
testified that he was successful in working out a
very favourable agreement with Northern Wood
Preservers (Saskatchewan) Limited due to his
friendship with a Mr. Headley, their Vice-Presi
dent. Initially the purchaser wanted wood deliv
ered to the mill, but he was able to persuade them
to build the roads as they had the equipment to do
so, deducting the cost of the roads from the initial
price. He was also able to arrange to have North
ern Wood Preservers do the hauling of the wood
themselves and they only charged a token amount
for this. He was also able to persuade them to
supply the necessary skidders and to assist in
training the operators in the care and operation of
these machines. Once a week a mobile repair truck
was sent to the site to perform maintenance train
ing for the loggers who were operating these
machines. He was also able to persuade Northern
Wood Preservers to do the scaling of the wood; if
they had not done so somebody else would have
had to be paid to do this work. Plaintiff therefore
contends that the agreement with Northern Wood
Preservers was almost of a quasi-charitable nature,
as it would not have been able to make nearly as
much profit, carrying on the operations as it did in
a manner to preserve the environment if Northern
Wood Preservers had not been sympathetic with
what they were doing for the community and given
them a very generous contract.
With respect to the argument based on para
graph 149(1)(1) of the Act plaintiff contends that
the primary motive for setting up the corporation
was to deal with problems on the reserve and to
create activity to raise funds to use for these
purposes. The members (i.e. directors) were not
themselves in a position to get any benefit from the
corporation. Reference was made to the case of St.
Catharines Flying Training School Limited v.
Minister of National Revenue' in which although
appellant was incorporated under Part I of The
Companies Act, 1934 of Canada [S.C. 1934, c. 33]
to give elementary flying training in conjunction
with the British Commonwealth Air Training Plan
there was a provision in the charter which prohib
ited the declaration of dividends. The company
actually made profits and the Minister contended
that as it was incorporated as a commercial com
pany and was not organized for non-profitable
purposes its profits were taxable. Thorson P. held
however that non-profitable purposes does not
mean that no profits would ever result from carry
ing the purposes out but simply that the purposes
are to be carried out without the intention of
making profits. Appellant could not keep or dis
tribute profits and it was not in the business of
conducting a school for profit even if it did make
profits. Dealing with the argument that paragraph
4(h) (which was the predecessor of paragraph
149(1)(1) although the wording is not identical)
Thorson P. stated at page 1235:
One of the contentions of counsel for the respondent was that
section 4(h) did not apply to the appellant at all, the submission
being that it was not a club or a society and that the term
association excluded a company incorporated, as the appellant
was, under Part I of The Companies Act, 1934. This submis-
' (1953), 53 DTC 1232 (Ex. Ct.).
sion cannot be accepted. The term "association" in its ordinary
meaning is wide enough to include an incorporated company.
While the section of the Act on which the learned
President was relying used the words "non-profit
able purposes" whereas the present paragraph
149(1) (1) uses the words "or for any other purpose
except profit" his comments at page 1236 might
be applicable. He states:
In my judgment, the purposes referred to must be purposes
that are carried out without the motive or intention of making a
profit, that is to say, purposes other than that of profit making.
That being the meaning of the term, I am satisfied that the
appellant was organized and operated solely for non-profitable
purposes. Its purpose was the conduct of a school for the
elementary flying training of prospective pilots under the Brit-
ish Commonwealth Air Training Plan. It was organized and
operated for that purpose and it had no other purpose. It was
not part of its purpose to make profits and it operated without
any profit making motive or intention. Mr. Seymour's evidence
to that effect was clear. Moreover, it is supported by the fact
that the appellant could never keep any of its profits or
distribute them to its stockholders or members. How could it
properly be said that it was in the business of conducting its
school for the purpose of making a profit when it was quite
impossible for it to keep or distribute any profit that might
come to it in the course of carrying out the purpose for which it
was organized and operated? The question answers itself.
This judgment was partially reversed on appeal 2
in which it was held that, like other companies
incorporated under Part I of The Companies Act,
1934, the respondent had profit-making as one of
its objects and that the prohibition against declar
ing dividends was restricted to a certain period
after which time the profit could be ultimately
distributed. However, the profits earned in a
second agreement which provided that they should
not be distributed but held in a reserve account
until the termination of the contract after which
they would be paid to a flying club approved by
the Minister or revert to the Crown, were not
taxable. The present plaintiff is in a much stronger
position having been organized as a non-profit
organization.
Plaintiff also relies on the Tax Appeal Board
case of Forest Lawn Cemetery Company v. Minis
2 [1955] S.C.R. 738; 55 DTC 1145.
ter of National Revenue' in which appellant
showed a profit from the sale of plots although by
virtue of the provincial Act under which it was
incorporated this could not be distributed to share
holders. It was held that it was a non-profit organi
zation operating solely for civic improvement and
hence was tax exempt. Dividends had never been
declared and could not be declared by virtue of the
Cemetery Companies Act [R.S.B.C. 1924, c. 39].
In a recent Supreme Court case of Regional
Assessment Commissioner et al. v. Caisse popu-
laire de Hearst Ltée, a judgment pronounced on
February 8, 1983, now reported [1983] 1 S.C.R.
57, the issue was not income tax but the liability of
the respondent credit union for assessment under
The Assessment Act of Ontario [R.S.O. 1970, c.
32] for land it occupied and used in connection
with its operation. At page 9 of the typewritten
copy [page 64, Supreme Court Reports] of the
decision McIntyre J. states:
The preponderant purpose test is based upon a determination
of the purpose for which an activity is carried on. If the
preponderant purpose is the making of a profit, then the
activity may be classified as a business. However, if there is
another preponderant purpose to which any profit earned is
merely incidental, then it will not be classified as a business.
At page 18 [page 70, Supreme Court Reports] he
states:
Many community and charitable organizations, relying from
time to time on what would be termed commercial activity to
raise funds for the fulfilment of their objectives, could be
classed as businesses by such a test. To attach primary impor
tance to the commercial aspect of an operation in question will
offer, in my opinion, no sure or helpful guide. In my view, the
commercial activity test is too indefinite to allow consistent
application. I agree that, in deciding whether or not any
activity may be classed as a business under the provisions of s.
7(1)(b) of The Assessment Act, all relevant factors regarding
an operation must be considered and weighed. However, they
must be considered and weighed in order to determine not
whether in some general sense the operation is of a commercial
nature or has certain commercial attributes, but whether it has
as its preponderant purpose the making of a profit. If it has, it
is a business; if it has not, it is not a business.
3 (1952), 52 DTC 84 (Income Tax Appeal Board).
This viewpoint was carried very far by Dumoulin
J. in Minister of National Revenue v. Bégin 4 in
which leading citizens of a Quebec town organized
the formation of a partnership to sell beer in the
community with the purpose of distributing all
profits for purposes of social welfare, charity, edu
cation and civic improvement. The agreement
specified that the partners could not draw, retain
or appropriate any of the sums to be distributed
and that if the partnership were dissolved all assets
would be distributed for the same charitable pur
poses. It was held that it was tax exempt as neither
the respondent nor his partners ever received any
thing from the profits from the sale of beer; they
had no claim and no right to the profits of the
partnership.
Defendant would distinguish this case since
plaintiff in the present case did actually receive the
profits from the lumbering operations. Plaintiff
concedes that if a company makes profits from a
commercial operation it cannot avoid taxation on
them by turning them all over to charity. There
are limits to the charitable donations which a
commercial corporation can make. However in the
present case the corporation was not merely turn
ing the profits over to someone else but was itself
actively engaged in social objectives for which it
was formed. In fact perhaps more than 50% of the
time of its actual employees was spent on these
activities.
Certainly plaintiff although incorporated for
charitable purposes with a provision that none of
its income was payable for the personal benefit of
any member could nevertheless not claim exemp
tion under paragraph 149(1)(g) since that para
graph has a further requirement that the corpora
tion must not carry on any business. For this
reason plaintiff does not invoke paragraph
149(1)(g), but rather paragraph 149(1)(f) which
deals with "Charitable organizations" rather than
"Non-profit corporation" under paragraph
149(1)(g). In the St. Catharines Flying Training
School case (supra) Thorson P. had held that the
word "association" is broad enough to include an
incorporated company. Paragraph 149(1)(1) under
the heading "Non-profit organizations" includes
an "association" operated exclusively for social
4 [1962] Ex.C.R. 159; 62 DTC 1099.
welfare, civic improvement, pleasure or recreation
or for any other purpose except profit.
In the case of Peter Birtwistle Trust v. Minister
of National Revenue' it was held that a charitable
institution is an organization created for the pro
motion of some public object of a charitable nature
and functioning as such; that a charitable institu
tion was clearly distinguishable from a charity, or
a charitable trust.
In the case of The King v. The Assessors of the
Town of Sunny Brae 6 the profits of a laundry
operated by a religious society devoted to the
education of wayward girls and orphans were held
to be taxable although there were three dissenting
decisions. The remarks of Cartwright J. [as he
then was] in his dissent however at page 85 would
appear to be particularly apt in the present case.
He states:
In the contemplation of the legislature as expressed in the
Statute and in fact as shewn by the material filed, the operation
of the laundry business, large though it be, is merely incidental
to the charitable purposes of the appellant and for the mainte
nance thereof. This is not the case of an institution carrying on
a commercial business and incidentally performing sundry
charitable works or paying over its profits to be used by others
for charitable purposes but rather that of a society or institu
tion of which all the primary purposes are purely charitable
which is actively engaged in carrying on charitable works and
which as an incidental means of providing some of the money
which is required for the prosecution of such charitable works
carries on a business under statutory powers.
That case dealt with municipal rates rather than
income tax.
Defendant also refers to considerable jurispru
dence. The case of Hutterian Brethren Church of
Wilson v. The Queen' dealt with profits from a
farming operation conducted by the taxpayer. It
was held that the taxpayer was engaged in the
business of farming for a profit, an activity which
itself is neither religious nor charitable in nature.
In rendering the judgment of the Court of Appeal
Pratte J. stated at page 5475 [page 759, Federal
Court Reports]:
5 (1938), 1 DTC 419 (Ex. Ct.).
6 [1952] 2 S.C.R. 76.
7 [1980] 1 F.C. 757; (1979), 79 DTC 5474 (C.A.).
The evidence also shows that the business of farming for a
profit actually was, during the years here in question, the
appellant's main activity and that most of its assets were used
to buy farm land and agricultural equipment. In those circum
stances, it is clear, in my view, that the appellant could not
benefit from section 149(1)(J) because it did not devote all its
resources to charitable activities carried on by itself. The
business of farming is neither a religious nor a charitable
activity; it is a commercial activity.
and again:
Moreover, a commercial activity like farming for a profit does
not become a charitable activity within the meaning of section
149 for the sole reason that it is carried on by a charitable
person with the intention of using the income derived from that
business for charitable purposes.
That case can perhaps be distinguished however
since it was pointed out [at page 759] that one of
the main objects for which appellant was estab
lished was, according to its memorandum of asso
ciation "to engage in and carry on farming,
agriculture, stock-raising, milling and all branches
of these industries" and it was found that this was
its main activity.
The same comment also applies in the case of
Woodward's Pension Society v. Minister of Na
tional Revenues in' which the sole business of
appellant, a non-profit organization was to acquire
shares of the operating companies of Woodward's
and sell them to employees, surplus funds going
from time to time to appointed pension trustees to
provide funds for payment of pensions. Thorson P.
accepted the argument that exempting provisions
of the taxing statute must be applied strictly refer
ring to the case of Lumbers v. The Minister of
National Revenue. 9 At page 1260 he states:
The section presupposes that if a club, society or association
is to be exempt from tax under it it should be organized and
operated exclusively for a purpose "except profit", that is to
say, for a purpose other than a profit one. That necessary
condition does not exist in the present case.
and again on the same page:
The raising of money was its basic purpose and for that
purpose, namely, the raising of money, it was directed to deal in
shares of the various Woodward companies by acquiring and
selling them and it was intended that its dealings should result
in the raising of money so that it could provide the necessary
monetary assistance to the appellant's actual organization was
8 (1959), 59 DTC 1253 (Ex. Ct.).
9 [1943] Ex.C.R. 202.
a profit one. It was certainly not organized for a purpose
"except profit" within the meaning of the term "any other
purpose except profit."
The facts are clearly different in the present case,
for the raising of money was not the basic purpose
of the corporation, and its charter makes no refer
ence to logging operations.
Defendant points out that paragraph 149(1)(1)
requires that the club, society, or association must
be organized and operated exclusively for social
welfare civic improvement, pleasure or recreation
or for any other purpose except profit. He refers to
the case of British Launderers' Research Associa
tion v. Central Middlesex Assessment Committee
and Hendon Rating Authority 10 in which Lord
Denning stated at page 23:
There is one thing which is clear both on the wording of the
statute and on the cases. The word "exclusively" must be given
its full effect. It is not sufficient that the society should be
instituted "mainly" or "primarily" or "chiefly" for the purposes
of science, literature, or the fine arts. It must be instituted
"exclusively" for those purposes.
In the Hutterian Brethren Church case -(supra)
Ryan J. stated at page 5478 [page 766, Federal
Court Reports]:
I "am satisfied, however, that the correct analysis of the
evidence in this case is that the business purpose of the Corpo
ration was not merely an aspect of a single overriding religious
purpose. The Corporation had a business as well as a religious
object—farming on a commercial basis—an activity which was
pursued on a large scale and pursued profitably. The motiva
tion of the individuals who farmed may well have been reli
gious. But the farming itself was conducted by the Corporation
as a business. The business profits were not, of course, available
as such to the members of the Corporation. They were, how
ever, available for the future use of the Corporation in the
pursuit of its objectives, religious and commercial. In these
circumstances, it can hardly be said that all of the resources of
the Corporation were devoted to charitable activities carried on
by it, even assuming that its religious objects were for legal
purposes charitable.
There is no doubt that in the present case the
logging operations of plaintiff were extensive and
provided considerable revenue much of which is
still held in surplus, so these remarks may well be
apt, but, as has been pointed out previously the
farming operation was part of the objects set out in
the memorandum of association of the church,
while in the present case the letters patent makes
10 [1949] 1 All E.R. 21 (Eng. C.A.).
no reference to any business operations whatso
ever. I believe that this is a substantial distinction.
During the course of argument there was a
generalized discussion as to the manner in which
the Department deals with activities such as the
sale of Christmas greeting cards and calendars by
UNICEF or apples, candy bars, Christmas cakes
and Christmas trees by organizations such as
Rotary and Kiwanis clubs to raise funds for their
welfare activities, and it was generally conceded
that it is unlikely that tax would be claimed on the
profits derived therefrom, although such opera
tions are frequently quite substantial in nature and
frequently competitive with businesses carrying on
the same commercial activity.
The real issue in the present case appears to be
that the corporation was not set up, as its letters
patent indicate, to carry on a commercial activity
although it is no doubt true that the motive for
forming the corporation may have been that it was
desirable to provide employment and training to
otherwise unemployed Indians on the reserve by
engaging in a commercial activity which would not
only provide such employment but raise funds to
be used for the very worthy social and charitable
activities required on the reserve. However, it was
more efficient to carry on this activity through a
corporation than to have the Band Council
attempt to do it itself. Elections from time to time
change the membership of the Band Council and
different factions in the Band have different objec
tives, and while even the corporation was not
immune from this, as appears from what happened
during the brief period when Chief Esquega was
replaced by another chief and his associates, it was
nevertheless more practical to operate as a corpo
ration and negotiate as such with the company for
whom the lumber was being cut. If this lumbering
operation had been carried out by the Band Coun
cil itself it is unlikely that any attempt would have
been made to tax the profits of the enterprise. It is
certainly the policy of the Department of Indian
Affairs to encourage Indian bands to become self-
reliant and to improve living and social conditions
on the reserves, and there is no doubt from the
evidence in this case that a great deal has been
accomplished in improving living conditions on the
reserve by the work done by employees of the
corporation with funds derived from the lumbering
operations, and in providing gainful employment
for members of the Band who would otherwise be
on welfare.
I do not believe that because a corporation was
formed for these purposes this should alter the
liability for income tax.
The social and welfare activities of plaintiff are
not a cloak to avoid payment of taxation on a
commercial enterprise but are the real objectives
of the corporation.
While the jurisprudence in this difficult area has
led to varying results, depending on the facts
applicable in each case, I have concluded that in
the present case, whether by the application of
paragraph 149(1)(f) or of paragraph 149(1)(1)
plaintiff s appeal should be maintained. The corpo
ration is operated "exclusively" for the purpose set
out in paragraph 149(1)(1) pursuant to its charter,
even though it may raise funds for this purpose by
its commercial lumbering enterprise.
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.