Taxpayers who were the innocent (albeit, perhaps aggressive) victims of a tax fraud, i.e., purported partnerships giving rise to large reported losses in the mid-1980s where, in fact, the partnerships were non-existent, ultimately had their Tax Court actions decided against them in 2014, and sought relief in 2014, or 10 years previously, for accrued interest. A large part of the delay (including CRA not assessing the taxpayers’ returns for quite some time) was attributable to CRA and Justice wanting to bring a criminal prosecution against the promoters before dealing with the taxpayers.

After three levels of review of the requested interest relief, CRA cancelled approximately 15 years and 63 months of accrued interest for the 2004 and 2014 applications, respectively. Boswell J found this decision to be reasonable. The lower relief for the 2014 application properly reflected the application to those applicants of the prohibition after a 2005 amendment to going back more than 10 years with interest relief; and the CRA delays were appropriately weighed against the fact that the applicants had had the ability to have their returns assessed so that they could pay the tax and cut off the interest.

Respecting the taxpayers’ comparison of themselves as the “innocent victims of fraud”, with the “KPMG Untouchables.” who “knowingly participated in a suspect offshore tax scheme,” and “the GLGI cases where taxpayers were granted full interest relief despite their culpability in participating in the tax schemes,” Boswell J stated (at para. 59):

…[C]omparisons to the KPMG Untouchables or the GLGI donors are neither factually relevant nor legally permissible. In Ludco … the Federal Court of Appeal held that evidence about other taxpayers who had benefited from an interest deduction for loans obtained in circumstances identical to those of the appellants was inadmissible… .

Neal Armstrong. Summary of Brandimarte v. Canada, 2019 FC 1034 under s. 220(3.1).

Dewar J reversed a finding of the Manitoba Tax Appeals Commission that a corporation (“533”) was subject to de facto control (as described in ITA s. 256(5.1)) by Mr. Carson rather than Mrs. Carson, Accordingly, 533 in fact was not associated within the meaning of ITA s. 256 with Mr. Carson’s companies and, thus, also, for Manitoba payroll tax purposes. This reversal was made on the basis that the TAC had misinterpreted the terms of a declaration of trust respecting 2/3 of the 533 shares held by one of Mr. Carson’s companies. With that reversal, there were no other significant findings that would support the TAC’s findings of association. In contrast to McGillivray, the evidence indicated that “she was making the material decisions in the operation of the restaurant” of 533, and there was no unwritten agreement that she would follow her husband’s direction.

Dewar J also commented obiter on the subsequent enactment of s. 256(5.11), stating:

I make no comment about whether that amendment if applicable in 2007 - 2011 would have changed the result which I have come to on this appeal, except to say that it would have merited further consideration. The amendment permits a court to conclude that a person without a legally enforceable right or ability to control or influence the election of directors has control of a company for the purpose of determining whether that company is associated with another.

I have italicized one word to highlight the lukewarm nature of this comment.

Neal Armstrong. Summary of North American et al. v. The Deputy Minister of Finance, 2019 MBQB 29 under s. 256(5.1).

The taxpayer and its parent (BWS) were guarantors of loans to an unrelated corporation (Vidabode) which had defaulted on loans from GE Capital.

Jorré DJ found that the taxpayer was entitled to deduct interest on a bank loan that it took out to on-lend on an interest-bearing basis to Vidabode in order for Vidabode to obtain GE Capital’s agreement to extend the period for remedying the default. He stated that at that point “the survival of Vidabode was still a possibility.” However, two months later, the taxpayer borrowed a larger sum in connection with subscribing for and acquiring common shares of Vidabode in order inter alia to fund the repayment by Vidabode of the GE Capital loans. The interest on this borrowing was non-deductible. Jorré DJ stated that at the time of this second borrowing:

the reasonable expectation … was that the company would quickly collapse. That is not consistent with a reasonable expectation of income.

A second issue was whether the taxpayer could claim an allowable business investment loss on its share investment in Vidabode. After that investment, each of it and BWS held about 40% of the Vidabode shares and BWS was party to a shareholders’ agreement with the second largest (34%) Vidabode shareholder providing that BWS would appoint two of the four directors and the chairman, who would have a casting vote. In finding that this meant that the taxpayer did not deal at arm’s length with Vidabode, so that no ABIL could be claimed, Jorré DJ stated:

The practical effect of the casting vote is the same as if BWS has the power to name three out of five directors.

… Silicon Graphics … is met. BWS had de facto control of Vidabode. It follows that BWS and Vidabode do not deal at arm’s length and, in turn, because BWS and the Appellant do not deal at arm’s length, the Appellant and Vidabode do not deal at arm’s length.

Neal Armstrong. Summaries of Keybrand Foods Inc. v. The Queen, 2019 TCC 161 under s. 20(1)(c)(i) and s. 251(1)(c).

S. 24 of the Limited Partnerships Act (Ontario) provides that “unless the partnership agreement or a subsequent agreement provides otherwise,” on a partnership dissolution the residual assets are to go to the general partner excepting for the payment to the limited partner of its contributions and unpaid profits distributions. Accordingly, Nordheimer JA found that, on a dissolution of a limited partnership that occurred as a result of the death of the limited partner (who had had a 50% profits participation), the estate of the limited partner was entitled to receive only a return of the relatively modest contributions of capital that the limited partner had made decades earlier, rather than 50% of the residual assets. The balance went to the general partner.

Nordheimer JA stated:

A limited partner enjoys protection from the liabilities of the limited partnership, unlike a partner in an ordinary partnership. In return for that protection, the limited partner is restricted to the receipt of two things under the LPA: one is their share of the profits and the other is the return of their contribution (see LPA, s. 11). A limited partner has no broader right to participate in the upside of the limited partnership, just as the limited partner has no broader obligation to suffer or contribute in the downside.

This is something to keep in mind in the relatively rare circumstance of a limited partnership agreement that does not override s. 24.

Neal Armstrong. Summary of Canadian Home Publishers Inc. v. Parker, 2019 ONCA 314 under s. 98(1)(b).