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Citation: 2005TCC292
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Date: 20050503
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Dockets: 2001-4542(IT)G
2001-4540(IT)G
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BETWEEN:
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WILLEM VANKERK,
ELSBETH VANKERK
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS:
[1] The parties filed a Statement of
Agreed Facts (Exhibit A-1).
[2] The Statement of Agreed Facts
reads, in part, as follows:
a) Commencing
in 1987, Mark Allan Eizenga and at a later date,
James Sylvester hatched a scheme to defraud investors and
the Government of Canada of millions of dollars.
b) The scheme
involved the creation of multiple putative
"partnerships". These "partnerships" were not
genuine partnerships because neither Eizenga nor Sylvester as the
principles of the managing general partner operating as Advanced
Business Opportunities ever had the intention to carry on
business in common with the investors. Rather, the intention of
Eizenga and Sylvester was to defraud the investors and the
Government of Canada of money.
c) Eizenga,
Sylvester and others represented to the investors that the
"partnerships" would carry on the business of producing
sound recordings, records and the like. This representation was
false and known by Eizenga and Sylvester to be false.
d) In fact,
the bulk of the monies collected as investments in the various
partnerships were simply re-routed into the pockets of Eizenga,
Sylvester, their companies and nominees. The small amount of
money which was not diverted to Eizenga, Sylvester and others was
spent on window-dressing to give the appearance of business
activities by the partnership when there, in fact, was none.
e) Eizenga and
Sylvester marketed the "partnerships" as vehicles,
which would produce substantial tax savings. Eizenga and
Sylvester also promoted the "partnerships" as high-risk
record production businesses.
f) Much
of the investment in the "partnerships" was done
through obligations to make cash payments and enter into
promissory notes, which obligations were either not honoured or
where (sic) only when tax refunds were generated.
g) The tax
refunds of the investors were generated by the fraudulent
statements generated by Eizenga, Sylvester and their nominees to
create an apparent entitlement to the deduction of losses and
accrued interest by the investors.
h) The refunds
thus generated were then re-circulated to Eizenga, Sylvester,
their companies and nominees or pocketed by the investors.
i) The
Minister later disallowed the various deductions claimed by the
investors on the basis that, inter alia, the amounts claimed had
not been incurred for the purpose of earning income from a
business or property.
Records International 88-6D (The First Partnership)
[3] On November 15, 1988,
762039 Ontario Limited operating as Advanced Business
Opportunities and George Eizenga (father of Mark Eizenga)
purported to form a general partnership known as Records
International 88-6D ("88-6D"). The Statement of Agreed
Facts states as follows:
k) in fact, 88-6D was no
more than part of an elaborate scheme by
Mark Allan Eizenga, James Sylvester and their
companies to defraud investors and the Government of Canada of
money.
[4] The Appellants each purchased
units in 88-6D as follows:
Number of
Purportedly
Cash
Units
Obliged to Pay
Paid
Willem Vankerk -
6
$127,500.00 $30,900.00 (Partly by way
of loan)
Elsbeth Vankerk -
6
$127,500.00 $30,900.00 (Partly by way
of loan)
[5] The Statement of Agreed Facts
contains the following comments:
s) the Managing
General Partner (762039 Ontario Limited) was the sole manager of
any alleged business of 88-6D.
t) Mark Allan
Eizenga was the promoter and Managing General Partner of many
other similar so-called Partnerships.
u) In fact, each of
the so-called partnerships were merely vehicles for Mark Allan
Eizenga, his associate James Sylvester and the corporations
they controlled to defraud the unit holders of the cash portion
of their investment.
v) None of the
so-called partnerships carried on their designated business and
none was capable of carrying on their designated business. To the
extent any activity was carried on by the so-called partnerships,
the activity or activities were designed as window-dressing to
disguise and conceal the sham activities and intentions of
Eizenga, Sylvester and their corporations. None of these
activities were for the benefit of the unit holders. Quite the
contrary, the activities were solely for the benefit of Eizenga,
Sylvester and their corporations.
Tax Consequences of 88-6D
[6] As part of the
"window-dressing" referred to above, on
October 27, 1988 88-6D purported to issue a Marketing Note
to Esquire Canada in the amount of $1,020,000.00.
[7] 88-6D claimed that Esquire Canada
invoiced it in the amount of $1,219,400.00 for the period
December 15, 1988 to December 31, 1988. It should be noted
that this invoice was for a 15 day period.
[8] 88-6D reported a loss of
$1,286,004.00 for financial statement purposes for the fiscal
period December 15, 1988 to December 31, 1988.
Mainstream Productions 89-33 (The Second
Partnership)
[9] Eizenga, Sylvester and their
companies established a general partnership known as Mainstream
Productions - 89-33 ("89-33"). The scheme respecting
89-33 was identical in all relevant aspects to the 88-6D
scheme referred to above.
[10] The Appellants each purchased units in
89-33 on the following basis:
Number
of
Purportedly
Cash
Units
Obliged
to Pay
Paid
Willem
Vankerk -
18
$110,700.00 $20,800.00
Elsbeth
Vankerk -
12
$73,800.00 $13,800.00
Tax Consequences of 89-33
[11] 89-33 claimed that Esquire Canada
issued an invoice in the amount of $1,465,100.00 for the period
August 4, 1989 to December 31, 1989.
[12] 89-33 reported a loss of $1,478,713.00
for tax purposes for the fiscal period August 4, 1989 to December
31, 1989.
Mainstream Productions 90-50 (The Third
Partnership)
[13] 762039 Ontario Limited operating as
Advanced Business Opportunities ("ABO") purported to
form a general partnership known as 90-50
("90-50").
[14] The Appellants each purchased units in
90-50 on the following basis:
Number
of
Purportedly
Cash
Units
Obliged
to Pay
Paid
Willem
Vankerk -
12
$90,000.00
$40,575.00
Elsbeth
Vankerk -
12
$90,000.00
$64,950.00
Tax Consequences of 90-50
[15] 90-50 claimed that Esquire Canada
issued an invoice in the amount of $1,740,120.00 for the period
September 10, 1990 to December 31, 1990.
[16] 90-50 reported a loss of $1,760,353.00
for tax purposes for the fiscal period September 10, 1990 to
December 31, 1990.
[17] When the Appellants filed their income
tax returns for the taxation years indicated they deducted the
following amounts:
WILLEM VANKERK
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Loss Claimed
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Interest
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1988
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$153,756.00
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$10,838.00
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1989
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444,522.00
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60,598.00
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1990
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293,388.00
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91,422.00
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1991
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1,308.00
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54,660.00
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1992
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2,592.00
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40,995.00
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1993
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---
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44,495.00
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1994
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3,500.00
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40,995.00
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1995
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-----
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40,995.00
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$899,066.00
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$344,004.00
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ELSBETH VANKERK
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Loss Claimed
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Interest
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1988
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$153,756.00
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1989
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296,682.00
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$10,838.00
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1990
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295,722.00
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44,012.00
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1991
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1,308.00
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74,835.00
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1992
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2,592.00
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45,508.00
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1993
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34,132.00
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1994
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36,631.00
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1995
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34,131.00
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$750,060.00
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$280,087.00
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[18] The Minister of National Revenue (the
"Minister") reassessed the Appellants' taxation
years referred to above to deny all of the losses claimed by the
Appellants from the three Tax Shelters referred to above and to
deny all of the interest that had been claimed by the
Appellants.
B. ISSUES:
[19] The issues before the Court are
whether:
(1) Records International 88-6D,
Mainstream Productions 89-33 and Mainstream Productions 90-50
were partnerships carrying on business with a view to profit;
And
whether:
(2) The Appellants should be allowed
to deduct the losses and the interest that they claimed when they
filed their income tax returns for the indicated taxation
years.
C. ANALYSIS:
1. Were the Partnerships referred
to as Records International 88-6D, Mainstream Productions 89-33
and Mainstream Productions 90-50 properly constituted
partnerships carrying on business with a view to profit?
[20] Section 2 of the Partnership Act of
Ontario defines a partnership as follows:
2. Partnership is the relation that subsists between persons
carrying on a business in common with a view to profit, but the
relation between the members of a company or association that is
incorporated by or under the authority of any special or general
Act in force in Ontario or elsewhere, or registered as a
corporation under any such Act, is not a partnership within the
meaning of this Act. R.S.O. 1980, c. 370, s. 2.
[21] The following facts were agreed in the
Statement of Agreed Facts:
1. The General
Partner, Advanced Business Opportunities never had the intention
to carry on business in common with the investors. (see
Background of Statement at paragraph "b")
2. The bulk of the
money collected from the investors in the various partnerships
were simply re-routed into the pockets of Eizenga and Sylvester
and the remainder of the funds was spent on "window
dressing" in an apparent attempt to indicate that a business
was being carried on. (see "Background" of Statement at
paragraph "c")
3. The majority of
the investment for each of the investor consisted of
"obligations" to enter into promissory notes and these
"obligations" were never honoured. (see
"Background" of Statement at
paragraph "e")
4. The partnerships
did not carry on their designated business. Furthermore the
partnerships were not capable of carrying on their designated
business.
AND
5. None of the
activities carried on by the partnerships was for the benefit of
the investors.
[22] In summary the partnerships did not
carry on any business activity. The sole and only activity was
the fraudulent activity perpetrated by Eizenga and Sylvester.
[23] I have concluded that the so-called
partnerships did not, at any time, engage in any business
activity. There was no profit-making intention. I quote from
paragraph d) of the Statement of Agreed Facts:
b) ...These
"partnerships" were not genuine partnerships because
neither Eizenga nor Sylvester as the principles of the managing
general partner operating as Advanced Business Opportunities ever
had the intention to carry on business in common with the
investors. Rather, the intention of Eizenga and Sylvester was to
defraud the investors and the Government of Canada of money.
2. Were the Appellants involved in
a business when they invested in the partnerships?
[24] Paragraph 18(1)(a) of the
Income Tax Act (the "Act") provides that
in order for a taxpayer to make a deduction from income, the
deduction must be shown to have been made or incurred for the
purpose of gaining or producing income from a business or
property.
[25] In determining whether the Appellants
could be considered to be carrying on a business the following
points should be noted:
- The so-called
"marketing expenses" were never paid and
"marketing" never took place.
- Partnerships were never
formed because neither Eizenga nor Sylvester (the principles of
ABO) had the intention to carry on business in common with the
investors.
- Eizenga and Sylvester
represented to the investors that the partnerships would carry on
the business of producing sound recordings, records and music and
these representations were false.
- Eizenga and Sylvester
marketed the partnerships as vehicles which would produce
substantial tax savings. Much of the investments in the so-called
partnerships were made through obligations to make cash payments.
These obligations were either not honoured or were only honoured
when tax refunds were generated.
- The tax refunds of the
investors were generated or created by the fraudulent statements
made by Eizenga and Sylvester to create an apparent entitlement
to the deduction of losses and earned interest by the
investors.
[26] On the facts contained in the Statement
of Agreed Facts and on the facts presented to the Court I have
concluded that the expenses that were claimed were not expenses
within the meaning of paragraph 18(1)(a) of the
Act because the so-called expenses were
"window dressing", "phony or
fictitious expenses".
[27] I have therefore concluded that on
these facts there was no business being carried on. This was
nothing more than a fraudulent scheme perpetrated by Eizenga and
Sylvester.
[28] In reaching this conclusion, I have
referred to the following Court decisions:
In Tonn et
al. v. R., 96 DTC 6001 the Federal Court said that there must
be a possibility of earning income or the expense is not
deductible.
In
Moloney, Young, Russell and Fullard v. The Queen, 89 DTC
5099 the Federal Court said that a scheme has no real business
purpose behind it if it consists of nothing more than the
circular movement of paper and return generated solely from
income tax deductions. (Note - This decision was affirmed by the
Federal Court of Appeal in Moloney v. The Queen, 92
DTC 6570.
In Stewart
v. Canada, [2002] 2 S.C.R. 645 the Supreme Court of Canada
said at page 679:
...whether or not a taxpayer has a source of income from a
particular activity is determined by considering whether the
taxpayer intends to carry on the activity for profit, and whether
there is evidence to support that intention.
[29] In this situation there was no business
activity carried on by any of the three Partnerships.
3. Are the interest
expenses deductible?
[30] I must next determine whether the
Appellants are allowed to deduct the interest expenses that were
claimed. The following deductions were claimed:
Willem Vankerk
1989
$10,838.00
1990
$60,598.00
1991
$91,422.00
1992
$54,660.00
1993
$40,995.00
1994
$44,495.00
1995
$40,995.00
$344,003.00
Elsbeth Vankerk
1989
$10,838.00
1990
$44,012.00
1991
$74,835.00
1992
$45,508.00
1993
$34,132.00
1994
$36,631.00
1995
$34,131.00
$280,087.00
[31] The interest referred to above was
calculated on the so-called promissory notes. However, the
interest was never paid by the Appellant on the promissory
notes.
[32] Paragraph 20(1)(c) of the
Act provides that interest expenses may be deducted from
income if the interest is paid pursuant to a legal obligation to
pay interest on money borrowed for the purpose of earning income
from a business or property.
[33] In this situation the Appellants have
not established that they paid any amount on account of interest
on the promissory notes. Furthermore, there was no business
associated with the amounts that the Appellants deducted as
interest.
4. Are the expenses that
were claimed reasonable in the circumstances?
[34] Section 67 of the Act provides
that no deduction shall be made in respect of an outlay or
expense except to the extent that it was reasonable in the
circumstance.
[35] In this situation Willem Vankerk paid
cash of $92,275.00 and claimed losses of $899,066.00 plus
interest of $344,004.00. Elsbeth Vankerk paid cash of $109,650.00
and claimed losses of $750,060.00 plus interest of $280,087.00.
The magnitude of the cash paid compared to the losses that were
claimed is not reasonable in the circumstances.
[36] Before concluding I wish to comment on
the interest that has been assessed by the Minister. From the
records that were filed with the Court I note that the 1987
taxation year of Willem Vankerk was reassessed on July 18, 1991
and the 1988 taxation year was reassessed on February 26,
1993. Elsbeth Vankerk's 1987 taxation year was reassessed on
July 18, 1991 and the 1988 taxation year was reassessed on
January 31, 1992. The 1989, 1990 and 1991 taxation years of
Willem Vankerk were reassessed on August 20, 1993. The 1989, 1990
and 1991 taxation years of Elsbeth Vankerk were reassessed on
August 30, 1993. In other words there has been an unusual delay
of 10 - 15 years between the date of the issue of the
Reassessments and the hearing of the appeals.
[37] I do not have the authority to waive
interest that has been assessed. However, under the Fairness
Legislation in the Act the Minister has the authority to
waive some of the interest if the delay in processing the appeals
was caused by the actions of officials of the Canada Revenue
Agency ("CRA"). (Note: I believe that the
policy of the CRA regarding the waiver of interest by the
Minister would also extend to delays caused by officials of the
Department of Justice.) The Minister may wish to review this
situation to determine if any portion of the interest that has
been assessed should be waived if the delay is caused by
officials of the CRA or lawyers with the Department of
Justice.
[38] For the reasons as outlined above, I
have concluded that the appeals should be dismissed with
costs.
Signed at Vancouver, British Columbia, this 3rd day of May
2005.
Little J.
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