Dividends that the taxpayer paid to a US shareholder (“Penn Central”) were, as an historical matter, in lieu of amounts that Penn Central otherwise might have derived from the leasing of a railway line used in its business. Ryan J found that the function of regulation 805(1) is to exempt from withholding tax amounts that are subject to taxation under Part I by virtue of falling within subparagraph 115(1)(a)(ii) (income from businesses carried on in Canada). Since dividends credited by the taxpayer to Penn Central were property income to Penn Central, and thus not subject to Part I tax, the exemption in Regulation 805(1) was not available, notwithstanding that the amount of dividends was periodically offset against rental payments which Penn Central owed to the taxpayer in respect of a railway business which Penn Central carried on in Canada.
Ryan J stated (at pp. 6104-6105):
Income which, at first sight, may appear to be income from property may, on closer analysis, turn out to be income from business. Rental income is an obvious example. Rents from property are generally considered to be income from property, but not if the owner so manages the renting as to make a business of it. … [S]ee Wertman … .
[I]t could not be seriously argued that Penn Central was in the business of dealing in stock, and no such submission was made. … There is [however] some authority for the proposition that income from property that is being used in a business may, in appropriate circumstances, be income from the business itself; an example might possibly be income in the form of interest from a bank account, the bank account being used in the day-to-day operation of the business.
…The question is … whether the [Canada Southern] shares themselves constituted a fund “employed and risked” in the business. I simply do not find it possible on the facts to hold that they were.