Witkin v. R., 98 DTC 1933, [1998] 3 CTC 2869 (TCC)

Beaubier T. C.]. :

These appeals pursuant to the General Procedure were heard together on common evidence by consent of the parties at Toronto, Ontario from May 4 to May 6, inclusive and on May 8 and 11, 1998.

The Appellants have appealed the disallowance of business losses claimed by them for their 1988 to 1991 taxation years. Mr. Witkin has also appealed the disallowance of a carry back of his 1988 loss to 1987. The losses claimed and disallowed for each Appellant were as follows:

Mr. Nicholl claimed a loss carry-forward from 1988 to 1989 of $224,728 which was also disallowed.

The parties filed a “Statement of Agreed Facts (Partial)” which reads:

Statement of Agreed Facts (Partial)

For purposes of the hearing of these two appeals only, the Appellant and the Respondent agree to the following facts and that the documents identified as Exhibits may be admitted without formal proof thereof.

1. The Appellant is a resident of Canada.

2. Claridge Associates (“Claridge Associates”) was a general partnership formed on November 20, 1979 under the laws of the state of Texas. The original partners of Claridge Associates were Belcourt Construction Company Limited (“Belcourt”), a corporation incorporated under the laws of the Province of Quebec, as to 50% and Realty Properties Multi- Storey Inc. (“RPMSI”), a corporation incorporated under the laws of the State of Texas as to 50%. Subsequently, Soza Marine Services Limited (“Soza”), a corporation incorporated under the laws of the Province of Nova Scotia also acquired a partnership interest in Claridge Associates. A copy of the Limited Purpose Partnership Agreement of Claridge Associates dated November 20, 1979 is found at Tab 1 of the Appellants’ Book of Agreed Documents (the “Appellants’ Book of Documents”).

3. At the end of 1986, the partners of Claridge Associates were RPMSI as to 50% and Belcourt and Soza, collectively, as to 50%.

4. The fiscal year end of Claridge Associates was December 31 up to and including December 31, 1987.

5. Between July 1987 and October 1987, Belcourt and Soza ceased to have an interest in Claridge Associates. In a document entitled “Amendment to Limited Purpose Partnership Agreement of the Claridge Associates” stated to be executed on October 9, 1987, Multi-Storey Investments Inc. (“MSI”), a corporation incorporated under the laws of the State of Texas acquired an aggregate 50% interest in Claridge Associates. A copy of an amendment to Limited Purpose Partnership Agreement of Claridge Associates is found at Tab 4 of the Appellants’ Book of Documents.

6. Claridge Associates constructed a luxury residential condominium apartment complex situated in Dallas, Texas known as The Claridge and undertook the marketing of units thereof for sale.

7. By December 31, 1987, the outstanding indebtedness of Claridge Associates relating to the construction and completion of The Claridge was approximately US $82,500,000. Claridge Associates’ outstanding indebtedness was owed to Chase Manhattan Bank (National Association) (“Chase Manhattan”) and Morgan Guarantee Trust Company of New York (“Morgan Guaranty”). The outstanding indebtedness was guaranteed by Beneficial Corporation, a Delaware corporation and Wasco Properties, Inc. (“Wasco”), a Delaware corporation.

8. Pursuant to an Amended and Restated Purchase Commitment and Agreement dated as of October 15, 1985 (the “Commitment”), Wasco agreed to purchase from Claridge Associates and Claridge Associates agreed to sell to Wasco all condominium units in The Claridge that remained unsold to third parties on a date and time specified pursuant to the terms and conditions of the Commitment.

9. In addition, pursuant to the Commitment, Claridge Associates had the right to require Wasco to purchase the unsold units under certain terms and conditions. A copy of the Commitment is found at Tab 2 and amendments thereto are found at Tabs 3 and 5 of the Appellants’ Book of Documents.

10. Wasco and MSI entered into an agreement dated November 19, 1997 [sic]entitled “Agreement of Sale” (the “Wasco Sale Agreement”) pursuant to which Wasco agreed to sell and convey to MSI, subject to the terms and conditions of the Wasco Sale Agreement the unsold units in The Claridge, if Wasco acquired the units from Claridge Associates under the terms of the Commitment. A copy of the Wasco Sale Agreement is found at Tab 6 of the Appellants’ Book of Documents.

11. The purchase price payable by MSI under the Wasco Sale Agreement for the unsold units was $23,000,000.

12. On December 30, 1987, Claridge Associates owned approximately 79 condominium units in The Claridge together with an undivided interest in its related common elements.

13. On December 31, 1987, the fair market value of the unsold condominium units in The Claridge was approximately $20,000,000.

14. Claridge Holdings No. 2 (“Claridge No. 2”) was a general partnership formed under the laws of the State of Texas. As at December 31, 1987, the partners of Claridge No. 2 were RPMSI, MSI and Strauss Investment Construction (“SICC”). SICC was a corporation incorporated under the laws of the State of Texas. A copy of the Claridge No. 2 Partnership Agreement is found at Tab 11 of the Appellants’ Book of Documents.

15. Strauss Investment Realty Corp. (“SIRC”) and Strauss Investment Management Company (“SIMC”) entered into an agreement stated to be made and entered into on December 31, 1987 entitled “Partnership Agreement of Claridge Holdings No. 1”. A copy of the said agreement is found at Tab 12 of the Appellants’ Book of Documents.

16. A document entitled “Assignment of Partnership Interest” and stated to be made and entered into on December 31, 1987 was entered into by, between and among MSI, RPMSI and Claridge Holdings No. 1. A copy of the said document is found at Tab 8 of the Appellants’ Book of Documents.

17. Pursuant to the said assignment agreement, Claridge No. 1 purported to acquire a 49.5% interest in Claridge Associates from each of MSI and RPMSI.

18. On December 31, 1987 Claridge Associates executed a document entitled “Conveyance Beneficial Ownership and Assumption” pursuant to which Claridge Associates transferred to Claridge No. 2 an undivided 85% beneficial ownership in the unsold units in the Claridge together with any improvements, fixtures and equipment located or constructed thereon. A copy of the document is found at Tab 9 of the Appellants’ Book of Documents.

19. As consideration for the assignment of the 85% beneficial interest, Claridge No. 2 agreed to assume and pay $23,000,000.00 of the principal indebtedness owed by Claridge Associates to Chase Manhattan and Morgan Guaranty and to assume an 85% share of all other indebtedness or obligations existing against the unsold units in The Claridge.

20. In a letter dated December 31, 1987, Claridge Associates agreed to provide to Claridge No. 2 a non-recourse guarantee of Claridge Associates, secured only by the partnership interest in Claridge Associates, to fund the amount by which $23,000,000 exceeds the sale price or disposition value of unsold units of The Claridge if such property was sold or otherwise disposed of voluntarily or involuntarily by Claridge Associates to a bona fide third party. A copy of the said undertaking is found at Tab 10 of the Appellants’ Book of Documents.

21. Financial statements of Claridge Associates for its fiscal year ending December 31, 1987 prepared by Lane Gorman Trubitt & Co., Certified Public Accountants, indicated a “net loss” of $34,341,022. The net loss was made up of an “operating loss” of $2,722,084, a “loss on sale of property” of $648,526, a “provision for loss on project costs” of $24,691,251, “interest expense” of $6,646,942 and miscellaneous income of $367,811. A copy of the said financial statements is found at Tab 13 of the Appellants’ Book of Documents.

22. Cooper, Millson & Foster, Chartered Accountants prepared financial statements of the Claridge Associates in Canadian dollars for the fiscal year ended December 31, 1987 which statement showed a loss of $45,330,148. A copy of the financial statements is found at Tab 14 of the Appellants’ Book of Documents.

23. On or about January 15, 1988, Wasco acquired the indebtedness of Claridge Associates owed to Chase Manhattan and Morgan Guaranty. A copy of a letter from Wasco to CMF Enterprises Limited dated March 30, 1988 is contained in the Closing Books that have been entered in evidence.

24. SIMC and SIRC executed a document dated March 28, 1988 and stated therein to reflect an agreement as of February 5, 1988 entitled “First Amendment to Partnership Agreement of Claridge Holdings No. 1”. A copy of this document is found at Tab 15 of the Appellants’ Book of Documents.

25. In a letter agreement dated March 7, 1988, and accepted by SIMC and SIRC on March 24, 1988, SIMC and SIRC granted CMF Enterprises Limited (“CMF”), in consideration of the payment of $25 U.S. an option to purchase interests in Claridge No. 1 aggregating 99% exercisable on or before March 31, 1988. A copy of the said letter agreement is found at Tab 16 of the Appellants’ Book of Documents.

26. In agreements, each of which was dated March 28, 1988, CMF Enterprises assigned its option to each of the Canadian purchasers for the aggregate consideration of $1,800,000 Cdn. A copy of the said assignment of option in respect of each of the Appellant and CMF Investments (in which the Appellant, Nicholl, held a 19% interest) are found at Tabs 18 and 19, respectively, of the Appellants’ Book of Documents.

27. The Appellant Witkin paid CMF $82,302 in respect of assignment of the option and CMF Investments paid $109,739 in respect of the assignment of the option.

28. A “Purchase Agreement” dated March 28, 1988 was entered into among the Canadian purchasers, Richard C. Strauss, SIMC, SIRC, MSI and RPMSI, for the acquisition of interests by the Canadian purchasers totalling 99% in Claridge Holdings No. 1. The aggregate purchase price was $99.00 U.S. and the purchasers were required to make capital contributions to Claridge Holdings No. 1 in the aggregated amount of $1,342,000 U.S. on closing. A copy of the Purchase Agreement is found at Tab 21 of the Appellants’ Book of Documents.

29. Each of the purchasers signed a Notice of Exercise Option dated March 28, 1988. A copy of the Notice signed by Witkin and CMF Investments is found at Tabs 19 and 20 of the Appellants’ Book of Documents.

30. By a document entitled “Deed” signed March 31, 1988 but stated to be effective as of March 30, 1988, the Claridge Associates transferred the remaining 15% interest in the unsold units in the Claridge to Claridge Holdings No. 2. A copy of the document is found at Tab 23 of the Appellants’ Book of Documents.

31. The closing of the transactions between the Canadians and the Strauss group took place in Dallas, Texas on March 31, 1988. The three volume set of closing books containing the documents delivered and exchanged at closing will be entered into evidence.

32. On September 8, 1988, Claridge No. 2 transferred the unsold units in The Claridge to MSI. A copy of the Special Warranty Deed is found at Tab 34 of the Appellants’ Book of Documents.

33. On September 9, 1988, MSI transferred a 5.4% undivided beneficial interest in The Claridge to Claridge Associates. A copy of the “Conveyance of Beneficial Ownership” is found at Tab 35 of the Appellants’ Book of Documents.

34. On November 3, 1988, a document entitled “First Amendment to Conveyance of Beneficial Ownership” was executed by MSI. A copy of the document is found at Tab 36 of the Appellants’ Book of Documents.

35. A contract of sale was entered into by MSI and Winton Equities Inc. on February 2, 1990 for the sale of all of the units in the Claridge described in a schedule (that showed 65 units in total) together with materials and rights relating to the Claridge for a purchase price of $18,248,806.97 US. The sale was completed on March 22, 1990.

Both Appellants testified. Their counsel also called Anthony Young; John Campbell, a lawyer; and Thomas Weir, a Texas lawyer who qualified as an expert witness on partnership law in the State of Texas, U.S.A. The Respondent called Andrew McRoberts who qualified as an expert appraiser regarding Dallas real estate. The Appellants called Harry Hunsicker who qualified as an expert appraiser regarding Dallas real estate to give rebuttal evidence. Hereafter, the respective Claridge partnerships will be referred to as “Cl A”, “CI 1”, and Cl 2”.

Mr. Witkin purchased a 4.03% interest in Cl 1 from CMF for $82,302 by way of assignment of CMF’s option which he exercised by paying Cl 1 $5.00 plus a contribution to Cl 1 of $67,693 on March 28, 1988 (Exhibit A- 1, Tab 17).

Mr. Nicholl had a 19% interest in CMF Investments which paid CMF $109,739 for an assignment of the option for a 5.41 % interest in Cl 1. CMF Investments paid Cl 1 $7.00 plus a contribution of $90,254 on March 31, 1988. It was dated March 28, 1988. (Exhibit A-1, Tab 21).

Cl 1 was a partnership of two corporations which was formed by a written agreement (Exhibit A-l, Tab 13) under Texas law on December 31, 1987 to have its first year end on March 31, 1988.

On December 31, 1987 Cl A realized losses in the luxury condominium project, The Claridge, in Dallas, Texas, in three ways:

1. It sold an 85% beneficial interest in the unsold condominiums to Cl 2 (Exhibit A-l, Tab 9) in return for Cl 2 assuming $23,000,000 US of indebtedness secured by the remaining condominiums as to approximately $20,000,000.

2. It made a provision for loss on the cost of The Claridge in its books.

3. It wrote down the remaining interest in its inventory in its books based upon “the deteriorated condition of the local and regional real estate market and the probability of continued depressed levels of activity and values”.

(Exhibit A-1, Tab 13)

As a result, the balance sheet of “The Claridge Associates” prepared in Canadian funds by the Toronto Chartered Accountants firm of Cooper, Mill- son and Foster, of which Mr. Nicholl was a partner, showed a provision for loss on project costs of $32,592,451. (Exhibit A-1, Tab 24). The total loss allocated to Cl 1 in that statement was $43,768,104.

In summary, the chronology of transactions 1s:

1. December 31, 1987, Cl 1 received 99% of Cl A from MSI and RPMSI.

2. December 31, 1987, Cl 2 received 85% of The Claridge from Cl A in consideration for

• assuming $23,000,000 U.S. of the principal indebtedness of Cl A

¢ assuming an 85% share of all other indebtedness against The Claridge units remaining.

3. January 15, 1988, Wasco acquired the $82,500,000 U.S. indebtedness against The Claridge which was secured by mortgage. On March 30, 1988 Wasco wrote to CMF and its assignees and stated that its sole recourse for this indebtedness was the mortgaged property. (Exhibit A-2, Vol. 2, Tab 13)

4. March 7, 1988, CMF acquired an option to acquire 99% of Cl 1. On March 28, 1988 this was assigned to 36 Canadian purchasers, including the Appellants.

5. March 31, 1988, Cl A transferred its remaining 15% of The Claridge to Cl 2 along with the Canadian purchasers contributions to CI 1 capital which totalled $1,342,000 U.S. Cl 2 also assumed the balance of the secured indebtedness on the condominium units.

6. March 31, 1988, Cl A signed with Cl 2, MSI and Richard Strauss (who was the effective owner or controller of all of the corporations involved in The Claridge), a “Carried Interest Agreement” (Exhibit A-2, Vol. 2, Tab 18). This agreement

(1) agreed that MSI shall transfer a 5.4% interest in the condominium units to Cl A, on the condition that MSI acquires them, subject to

(a) the $23,000,000 U.S. encumbrance;

(b) $3,000,000 U.S. “net profits” participation to which Wasco is entitled.

If MSI does not transfer the 5.4% it must pay Cl A $250,000 U.S. and Richard Strauss must assign his 50% interest in “Equitable Joint Venture” to Cl A (Paragraphs 4.2 to 4.5 and Schedule 7). The 5.4% was transferred to Cl A on September 9, 1988. One “Robert S. Strauss” was a partner in “Equitable Joint Venture” - see Exhibit A- 1, Vol. 2, Tab 22, page 3.

(2) MSI granted Cl A a two year option to purchase 94.6% (the balance after the 5.4%) of the unsold units remaining from time to time for $40,000,000 U.S., less 94.6% of the net proceeds and subject to the subparagraph 4.2(ii) indebtedness (Paragraph 5). Mr. Witkin testified that he had the means to exercise his share of the option price. He is believed. Mr. Young, and building construction corporations he managed and was associated with, purchased units in Cl 1 from CMF. He visited The Claridge in the option period in order to examine The Claridge and what he considered to be high sales and operating costs. Mr. Young felt that these costs were more than twice what they should be and his visit confirmed this. Mr. Witkin also felt that the operating costs of The Claridge were far too high. Both men felt this before they purchased their partnership interests.

(3) CI A irrevocably appointed MSI its power of attorney to manage and sell the condominium units (Paragraph 7). This gives MSI power to act “... in a manner consistent with the prudent ownership and sale of high-rise condominium units in Dallas, Texas”. This was confirmed by an amendment to Cl A’s partnership agreement on March 31, 1988 (Exhibit A-1, Vol. 2, Tab 25).

The issues set out by the Respondent respecting each appeal are described in the following paragraphs which are taken from the Reply to Mr. Witkin’s Notice of Appeal:

27. He submits that the Appellant did not become a member of a partnership called Claridge No. 1 and therefore had no entitlement to deduct losses of Claridge Associates as reported by Claridge Associates in its fiscal year ended December 31, 1987.

28. He submits that as Claridge Associates was not a source of income thereafter, the Appellant had no losses therefrom nor from Claridge No. 1 under section 9 of the Act that were deductible in the taxation years in issue. He submits that as the Appellant had no losses under section 9 of the Act, he did not have a non-capital loss in his 1988 taxation year ...

29. He submits that there were no losses allocable to the Appellant from any writedown in value or transfer of units by Claridge Associates as all such losses were to be recognized by virtue of section 10 and Regulation 1801 prior to the Appellant acquiring any interest in Claridge Associates through Claridge No. 1.

30. He submits that any losses claimed by the Appellant were not deductible pursuant to subsection 245(1) of the Act as it read prior to September 13, 1988.

However the first issue which must be dealt with was stated succinctly in each Notice of Appeal to be whether the Appellants are entitled to deduct the amounts of losses claimed in each taxation year (paragraph 37, Mr. Witkin and paragraph 36, Mr. Nicholl). The Respondent’s assumptions in response to this are contained in assumptions (x) and (y), respectively. They are identical and read:

the Appellant did not make an investment in Claridge No. 1 for the purpose of carrying on business in common with a view to profit or with a reasonable expectation of profit;

The onus is on each Appellant to disprove this assumption.

On March 28, 1988 the Appellants and the other Canadian partners purchased a 99% interest in Cl 1 which in turn owned a 99% interest in Cl A. Thus the question is whether, when they purchased their interests in Cl 1, the Appellants had a reasonable expectation of profit from their investment in CI 1, the sole asset of which was 99% of CI A. On March 28, 1988 the Canadian partners expected that the agreements of March 30 and 31 would be executed and they were. Cl A retained 15% of The Claridge after December 31, 1987. It transferred that to Cl 2 on March 31, 1988 in return for its rights under the Carried Interest Agreement.

Whether the Appellants’ partnership interests were a source of income depends on whether it had a reasonable expectation of profit. Included in the criteria for this determination are the profit and loss experience, the training of the Appellants in the enterprise acquired, their proposed course of action and the capability of the enterprise to show a profit after capital cost allowance. (Moldowan v. R. (1977), 77 D.T.C. 5213 (S.C.C.), at 5215). Cl A’s situation from December 31, 1987 until March 31, 1988 is described in paragraphs 18 to 20 of the Statement of Agreed Facts (Partial). It had written its condominium units down dramatically. It was negotiating to transfer its remaining 15% interest in them. Its secured debt had been marketed to Wasco for $23,000,000 U.S. Mr. Weir’s testimony is to the effect that, because it had a business asset (the 15% in The Claridge) which could be the source of either business income or loss, it remained a partnership in Texas law. But, so far as is known, Cl A had lost over $59,000,000 U.S. in about four years. Its entire history was one of grievous losses. Later it was realized that early or mid-1988 was the bottom of the Dallas real estate market. But there is no evidence that the Appellants had the means of determining that when they purchased. They did think that the Dallas real estate market was at the bottom when they purchased. Unfortunately, it does not appear that it was the bottom of the market for The Claridge itself.

The Appellants became partners in Cl 1 on the exercise of their options on March 28, 1988 (Statement of Agreed Facts (Partial) paragraph 29). By March 31, 1988 Cl A had their contributions to Cl l’s capital which it paid to Cl 2 as part of the consideration transferred for what it was granted in the Carried Interest Agreement. When the Appellants became partners in Cl 1, Cl A had a reasonable expectation of completing the Carried Interest Agreement. It gave Cl A either the right to the 5.4% interest in The Claridge or $250,000 U.S. and 50% of the Equitable Joint Venture, which owned a 45,000 square foot Texas building partly occupied by a bank and which had a high vacancy rate. Cl A also obtained the $40,000,000 option.

Each of the Appellants and Mr. Young testified that they expected a profit from this. The Appellants expected a small profit. Mr. Young, an experienced developer, expected $1,500,000. All thought that the Dallas real estate market had bottomed out. All admitted that the income tax opportunities were a factor but stated that they were a secondary factor and not their primary intentions. They were all sophisticated investors and businessmen. Messrs. Witkin and Young were experts in real estate development with many years of successful experience in properties of the magnitude of The Claridge. Mr. Nicholl was a mature, experienced chartered accountant who marketed and brokered tax shelters, mergers and acquisitions, venture capital entities and did investment management for CMF, a firm owned by his chartered accounting partners.

Both Appellants appear to have had or been involved in many diverse business interests. Mr. Witkin, in particular, was a member of other real estate partnerships in Canada and the United States. He had been an employee and officer in major Canadian property development corporations, including Cadillac Fairview. Mr. Nicholl’s business was to look for ventures in Canada and in the United States. Mr. Nicholl now owns an interest in, and manages, a firm that sells and leases transport trailers. Both were and are very sophisticated businessmen.

The question remains whether, objectively, the Court can find that there is a reasonable expectation of profit from the purchase of the units by the Appellants. The tests are described in Tonn v. R. (1995), 96 D.T.C. 6001 (Fed. C.A.). This was a real estate venture which had no personal element of satisfaction for either Appellant. There is no evidence that either Appellant borrowed any money for the investment. They entered into very detailed, sophisticated agreements which were negotiated over a period of months by CMF’s Toronto and Dallas lawyers. The Appellants say that they expected a profit within about two years. Their plan can best be described as constituting the partnership agreements and the Carried Interest Agreement and the alternatives they gave Cl A and in turn the partners of Cl 1. Their position is that it is how they expected to earn income, but the Dallas real estate market did not turn up as soon as the Appellants expected and they did not profit.

The Appellants purchased into Cl 1 in which they did not have a majority for control purposes. The Canadian partners were subject to paragraph 3.1 of Cl l’s partnership agreement which reads:

3. Management

Similarly, Cl A’s partnership agreement defined “consent of the partners” to mean the unanimous consent of the partners (Exhibit A-1, Tab 1, subparagraph 1.1(e). Cl A only had a right to a 5.4% interest in The Claridge units on March 31, 1988. It had contracted to MSI (a Strauss corporation) an irrevocable right to manage The Claridge. That was also written into Cl A’s partnership agreement by the March 31, 1988 amendment (Exhibit A-l, Vol. 2, Tab 25), which could only be amended by unanimous agreement of the partners, two of which were SIMC and SIRC, Strauss corporations. Cl A also acquired the $40,000,000 two year option to purchase the units remaining from time to time. But for the Canadian partners to exercise the option both the Cl 1 partners and, in turn, the Cl A partners had to be unanimous. Strauss corporations had vetoes in each partnership. If a profit could be made on the option, they could prevent the Canadians from acquiring The Claridge and having the profit. The problems inherent in these restrictions were demonstrated when Mr. Hunsicker testified that the sales activity of The Claridge management was “stinking, lousy, bad” until May, 1990 when a new sales agent, Judy Pitman, was appointed. She sold The Claridge out in a short period. The $40,000,000 option expired March 31, 1990. Based upon both Appellants’ lack of any control over Cl 1 or Cl A or The Claridge, or its management or sales or the exercise of the option to purchase, or, for that matter, the acquisition by the Canadian partners of any proceeds, the evidence is that the Appellants’ plan was that the operation of The Claridge would be carried on by Strauss corporations in the same losing manner as it had before.

Messrs. Witkin and Young testified that the costs of operation and sales at The Claridge were about double the norm. They say that when they purchased their interests in Cl 1 they planned to reduce them. But the Appellants had no right to reduce costs. That remained in the irrevocable control of the Strauss corporation managing The Claridge. Strauss corporations had already lost almost *4 of $82,500,000 in The Claridge, to the Appellants’ knowledge. Strauss corporations had been selling units in The Claridge for a number of years by March, 1988. The Appellants were entitled to only 99% of the 5.4% of any proceeds that might occur. The Appellants received Strauss corporations’ projections respecting The Claridge before they invested (Exhibit R-l, Tab 5). Mr. McRoberts demonstrated that these were optimistic in 1988 both as to square footage prices and as to the annual rates of increase. At an 18% increase in unit value each year he calculated a small return on the investments; at a 9% and a 4 /2% increase in unit value each year, the Appellants might receive a return of their investments. Mr. Hunsicker described the Canadian partners as “savvy” Canadians. Certainly the two Appellants were. They were quite capable of realizing that the projections were optimistic for the purposes of promotion and of doing the calculations that Mr. McRoberts did. Mr. Witkin also had his brother, a chartered accountant in a national firm, who introduced him to this investment, who could have done the calculations on the projections. Mr. Nicholl had partners who could have done the calculations. Both testified that they did not rely on the projections. But they possessed them and chose not to rely on them. In the Court’s view, it was not reasonable to fail to use them or to have one’s advisors review them if their purpose was to obtain a profit from The Claridge and, in turn, Cl A and Cl 1. This is particularly so when sophisticated, experienced, investors such as the Appellants are making purchases like the ones in issue. Mr. McRoberts’ calculations and his testimony and his amended report concerning the projections in Exhibit R-1, Tab 5 are accepted by the Court as the true picture of the projections contained in Exhibit R-1, Tab 5. On this basis, the Court finds that when the Appellants purchased their interests in Cl 1, its enterprise did not have any reasonable capability to show a profit.

If the Appellants’ intention was not to earn income it must be asked if their true intention was to gain a tax refund or loss (See Tonn, page 6011). The tax loss offered by CMF to the Appellants was far greater than any profit that could reasonably be envisioned in the projections or that the Appellants say they envisioned. The tax loss was immediate and very large whether it is considered by itself or in relation to the investment made by the Appellants. It could be calculated from the information supplied. In Mr. Witkin’s case the 1988 loss offered could be carried back against his very substantial 1987 income which he knew in March 1988. Mr. Nicholl was a chartered accountant engaged in the tax shelter field so that his understanding of his tax position at any time was sophisticated. The losses they claimed from the partnership in 1988 were substantial and in March, 1988 they, themselves, could each calculate them and could expect to use them in the way that they did. In Mr. Witkin’s case, the tax loss presented to him and his use of it to carry back to 1987 was a certainty.

In contrast, the Appellants’ had no reasonable expectation of a profit from their investments in Cl 1 in March, 1988. Under the contract with Cl A management of The Claridge remained with the Strauss corporations that had managed The Claridge into enormous losses for years. Only a unanimous agreement in both Cl 1 and Cl A could change the management and that would require the agreement of the Strauss corporations. A calculation of the return on Cl l’s 99% of the 5.4% interest in The Claridge based on the optimistic projections given to the Appellants and contained in Tab 5 indicated, for practical purposes, a mere possibility of a return of capital to the Appellants. By locking themselves into the old management, the Appel lants made that possibility very remote. The $250,000 U.S. and Equitable Joint Venture alternative were not calculated as to return in Court and there is no evidence that the Appellants had the information to make such a calculation in March 1988. Therefore, the Appellants did not have any means of determining a reasonable expectation from that alternative. Exercise of the $40,000,000 U.S. option required the unanimous agreement of both the Cl 1 and Cl A partners, each of which included Strauss corporations. Even in the remote possibility that it should have proved worth exercising, the Strauss corporations’ veto ensured that Strauss would reap the benefit. On the evidence, the Appellants bought tax losses and intended to do so.

The Court finds that the Appellants had no intention to profit or reasonable expectation of profit from their partnership interests in Cl 1 when they, and in Mr. Nicholl’s case CMF Investments, purchased them. They were not in business. Nor, under Canadian tax jurisprudence, was Cl 1 in business. On the total evidence, the Court finds that the Appellants’ intentions were to purchase and use tax losses and that is what they did. The Appellants are not entitled to deduct the amounts of losses claimed by them in each taxation year, and Mr. Witkin is not entitled to the carry back of loss in 1987.

The appeals are dismissed.

The Respondent is awarded its costs in respect to each appeal. But only one set of costs is awarded to the Respondent in respect to the hearing itself; it is to be divided equally between the Appellants.

Appeal dismissed.