Ollenberger v. The Queen: Federal Court of Appeal Affirms Wide Scope for the term “Active Business”

Bill Innes on Current Tax Cases

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On June 17, 2013 the Federal Court of Appeal[1] released a slightly modified version of its decision in Ollenberger v. The Queen which was originally released on March 8, 2013.  While the revisions are modest it allows an opportunity to review the important principle underlying this case.

The facts are quite simple.  Mr. Ollenberger loaned $600,000 to AEF Corporation (“AEF”).  The loan was not repaid when due and Mr. Ollenberger claimed a business investment loss of $613,772 in his 2007 taxation year.  The Minister denied the loss on the sole basis that AEF was not carrying on an active business as required by the business investment loss rules of the Income Tax Act[2].

The Tax Court dismissed Mr. Ollenberger’s appeal.[3]

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Mr. Ollenberger only called one witness, Doug Djan, the president of AEF.  From the onset it was clear that the trial judge was not impressed favourably by Mr. Djan:

[19]         The only evidence before me with respect to the business of AEF was the document entitled the Business Summary and the testimony of Mr. Djan. When I consider the totality of this evidence and the inconsistencies in Mr. Djan’s evidence and the inaccuracies in the Business Summary, I must conclude that the evidence as a whole is not credible.

[20]         These inconsistencies included the following.

[21]         The Business Summary listed Mr. Djan’s education as degrees in law, marketing and business from Pepperdine University and the University of Calgary. However, Mr. Djan testified that he had a political science degree from the University of Saskatchewan and a marketing degree from Pepperdine University. Although this inconsistency is innocuous, it is typical of the lack of veracity throughout most of his evidence.

[22]         Even the first line of the Business Summary was inaccurate.[4] It stated that AEF Corporation was formed in 2005; whereas, AEF was incorporated on April 27, 2006.

The trial judge concluded that the business of AEF was not “active” within the meaning of the Act:

[17]         I disagree with the Appellant’s position that the definition of “active business” only means “business”. The word “active” is used in this provision as an adjective and by its placement it is used to modify “business”. Because it is meant to be descriptive of the word “business”, this word should not be overlooked. See Pierre-André Côté, The Interpretation of Legislation in Canada, 4th ed. (Scarborough: Canada, 2011) at p.295.

[18]         Reading the definition as a whole, I conclude that an “active business” must be one which is “carried on”. The question therefore is whether there is sufficient evidence before me that would allow me to conclude that AEF carried on such a business.

[33]         Counsel for the Respondent aptly summarized Mr. Djan’s evidence as follows:

Mr. Djan seemed to imply that he had all of the — what does the term he used accoutrements of business and that he had to give potential investors something besides just air.  When the reality is, that’s what he gave them.  I can go tomorrow and create lovely, lovely business cards.  I can prepare a business summary.  I can do all of those things, that doesn’t make me a business, and that’s what we don’t see here.

[34]         The onus was on the Appellant to produce credible evidence to support his position that AEF was an active business and that he was entitled to a BIL. This he failed to do.

On appeal to the Federal Court of Appeal the court was less concerned with Mr. Djan’s veracity.  As to whether AEF carried on a business the court concluded:

[22]           I note at the onset that although the Tax Court judge states that she rejects the appellant’s evidence “as a whole”, neither party takes the position that this is what she effectively did. In particular, the respondent recognizes that the uncontested documentary evidence establishes that a business was in existence at the relevant time. Rather, the argument which she advances in support of the Tax Court judge’s decision is that AEF’s business was at a pre-inception state and the operations were not sufficiently advanced to support a finding that business was “carried on”. In making this submission, the respondent relies on the decisions of this Court in Harquail and Boulanger.

[23]           The difficulty with this submission is that the Tax Court judge did not adopt this view. Her reasons make no reference to either Harquail or Boulanger and do not address the question whether the operations of AEF were sufficiently advanced to allow for the conclusion that it was carrying on business. This is perhaps explained by the fact that the respondent admitted in her Amended Reply that:

AEF actively pursued ventures involving the acquisition of petroleum and natural gas assets in the Western Canadian Sedimentary Basin …

[24]           Given this admission, it is difficult to see how the Tax Court judge could have found that the business was at a pre-inception state even if she had wanted to, since the activity so described is at the core of AEF’s business. Rather, the Tax Court judge appears to have rendered her decision on the basis that the word “active” in the expression “active business” must mean something because it is meant to be descriptive of the word “business” (reasons, para. 17), and while AEF may have carried on business at the relevant time, it was not carrying on an “active business” (reasons, para. 18).

[Emphasis added]

The court then reviewed the legislative history of the term “active business” and concluded that the trial judge erred in attributing an importance to the use of the word “active” that could not be borne out by the legislative record:

[25]           In assessing the correctness of this approach, it is useful to consider the relevant definitions. The definition of “small business corporation” refers to “an active business carried on primarily in Canada”. The expression “active business” is defined in turn as “any business carried on by a taxpayer” other than specified exceptions which have no application in the present case.

[26]           It follows that when the two definitions are read together, the term “active business” means “any business carried on by the taxpayer”. Contrary to what the Tax Court judge suggests at paragraph 12 of her reasons, this reading does not overlook the word “active” in the expression “active business” but simply takes into account the defined meaning given to these words.

[27]           This reading is consistent with the legislative history surrounding the words “active business”. The notion was first introduced into the Act at the time of the 1972 reform. It was intended to distinguish corporations that generate income from business activity from those which generate so-called “passive” income. The purpose was to provide for the application of a more favorable tax rate on the former (see section 125, RSC 1952, c. 148, as amended by 1970-71-72, c. 63).

[28]           However, as Sharlow J.A. pointed out in Weaver v. Canada, 2008 FCA 238 at paragraphs 19 and 20, the experience was not successful. Indeed, the Courts focused on the fact that by definition, the carrying on of a business requires a minimum degree of activity with the result that most corporations, if not all, qualified.

[29]           This is what brought the legislator to change course in 1984. At that time the definition of “active business” was first introduced (1984, c. 45, ss. 92(1) and 40(1)), and has since remained unaltered. The definition effectively recognizes that any business being carried on is an active business, but rather carves out of this definition particular businesses such as those which derive their income from property and do so without the need to employ a certain number of employees (see the definition of “specified investment business” in subsection 125(7)).

In the end, the Crown was bound by the terms of its own admission:

[30]           The issue therefore is whether AEF was carrying on an “active business” as defined. When regard is had to this definition, AEF must be held to qualify if it was carrying on business at the relevant time. In this regard, the admission by the respondent that AEF was actively pursuing ventures involving the acquisition of oil and gas properties necessarily leads to the conclusion that this condition was met.

[31]           In my view, the Tax Court judge erred when she held that more was required in order to conclude that AEF was carrying on an “active business”. As otherwise it is conceded that AEF had assets and that these assets were used exclusively in that pursuit – no other use is suggested – it follows that AEF was a “small business corporation” at the relevant time.

[Emphasis added]

This decision is important because it confirms the long-held understanding in the tax and business communities that any degree of business activity will qualify as an “active business” with the sole exceptions of a “specified investment business” and a “personal services business”.

[1] 2013 FCA 74.

[2] R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”).

[3] 2012 TCC 30.

[4] On a lighter note one is reminded here of the famous quote of Mary McCarthy during the course of her notorious feud with Lillian Hellman:  “every word [Hellman] writes is a lie, including ‘and’ and ‘the’.”

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