Citation: 2012 TCC 75
Date: 20120307
Docket: 2011-377(IT)I
BETWEEN:
JEAN-GUY MALO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
I. Summary
of facts
[1]
This is an appeal from assessments made under the Income Tax
Act (the Act) for the 2006, 2007 and 2008 taxation years. In making the assessments, the Minister of National Revenue
(the Minister) relied on the facts set out in paragraphs (a) to (s) of the
Reply to the Notice of Appeal. The paragraphs read as follows:
[Translation]
(a) during the years in issue, the appellant’s income was
derived essentially from pensions and totalled $36,402 for 2006, $36,663 for
2007 and $36,944 for 2008;
(b) the appellant claims that he operated a precious trees
planting business in Costa Rica as “Malo Forestales;”
(c) the contract of mandate and services for the planting of
“precious crop” trees submitted by the appellant reveals the following information:
·
“Maya Trust” represents “Maya Forestales
S.A.” in Canada;
·
“Maya Trust S.A.” shall hold, on behalf of
producers, “crop tree” lots that will be designated by GPS at the time of
thinning;
·
the appellant claims to have become a lumber producer;
·
“Maya Forestales S.A.” shall provide the
following planting services: preparation of seedlings, soil, forest roads, transplanting
seedlings into pots and into the field, fertilization and herbicide
applications , where necessary, designation of lots by GPS, expertise and
administrative fees;
·
The appellant agrees to pay $100 per “precious
crop tree” to be planted;
·
“Maya Forestales S.A.” guarantees a 40% tax-free
rate of return per year, based on the growth of the trees only (except for the
planting year);
·
“Maya Trust S.A.” shall hold the titles and immovable
or movable rights on behalf of the appellant;
·
the appellant mandates “Maya Forestales S.A.” to
plant on its behalf;
·
the number of trees is 250 and the cost is $25,000.
(d) for each of the years in issue, the appellant reported no
income from the operation of said business but claimed business losses of $25,000
per year;
(e) an invoice totalling $25,000, identifying the services
described in subparagraph (c) was issued to the appellant by “Maya Trust S.A.;”
(f) the appellant claims to have paid $25,000 per year in
cash to purchase trees and for planting services. As for 2008, he claims to
have paid $20,000, and that the other $5,000 was paid to him for various services
rendered to his brother-in-law Michel Maheux, who represented “Maya Trust;”
(g) the appellant has not demonstrated that he paid the
amounts he claims having spent on the operation of his business;
(h) “Maya Trust” acted as agent
for Maya Forestales S.A and promoted, through Michel
Maheux, investments in the planting of precious trees in Costa Rica;
(i) the objective was to sell a timber harvesting business to
an investor, while promising him generous tax deductions;
(j) the appellant has never been to Costa Rica;
(k) he has no expertise in the forestry business;
(l) he devotes no time to his business;
(m) he states that the business will be profitable in about 10
years when the trees are mature;
(n) according to the appellant, it is Michel Maheux who is in
charge of selling the trees;
(o) he has no specific business plan and has been unable to
demonstrate that he made serious efforts to establish that the activity he
claims to have carried on was undertaken in a
sufficiently commercial manner;
(p) Michel Maheux is the subject of a number of judgments prohibiting
him from making investment contracts. In a judgment pronounced on June 17,
2005, the Court of Quebec corroborated the decision of October 15, 2003, rendered
by the Commission des Valeurs Mobilières du Québec (CVMQ), now the Autorité des
Marchés Financiers, prohibiting Québec Forestales and Michel Maheux from making
investment contracts. In that decision, the Court of Quebec mentioned that it
was demonstrated that Québec Forestales did not engage in any forestry activities
and did not provide its members with any goods or services;
(q) on October 11, 2005, a permanent injunction order was issued
by the Honourable Justice Jocelyn Verrier of the Superior Court of Quebec who ordered,
inter alia, the Coopérative de producteurs de bois précieux Québec
Forestales and Michel Maheux to cease and abstain from making any preferred
shares investments by the Coopérative de producteur de bois précieux Québec
Forestales, investment contracts or any other form of investment provided for
in section 1 of the Securities Act, by any means, including by letter
or via Internet site;
(r) the appellant acquired a tax shelter;
(s) the appellant did not submit the requisite identification
number to claim an amount in respect of a tax shelter;
[2]
The appellant called
his brother-in-law, Michel Maheux, as a witness. The following facts emerge
from his testimony and make it possible to better understand Mr. Maheux’s
and the appellant’s planting business:
[Translation]
(a) Mr. Maheux’s
family has been operating precious wood plantations since 1981.
(b) The
plantation in issue in the appeal is located in Las Delicias, Costa Rica. The
land was purchased in 1991 or 1992 with money from an investors’ group.
(c) The
business corporation (Corp.) Maya Forestales was incorporated in Costa
Rica.
(d) The
ownership of the land and trees planted on the land was divided. Maya
Forestales is the bare owner of the land and the trees planted on the land have
been designated as usufruct. Each investor, such as the appellant, owns a
certain number of designated trees.
(e) The
cost of the land is between $90,000 and $100,000. The tree planting is carried
out by a forestry engineer and the tree planting contracts provide for a number
of trees per hectare. A contract for 1,000 trees per hectare results in
approximately 800 trees per hectare. At the time, the cost of the trees was
about $10 per tree. According to Mr. Maheux, the tree’s value, 10 years
later, is $500 per tree.
(f) The
appellant invested $25,000 per year in the project for three years, 2006, 2007
and 2008, in exchange for which he obtained 750 of the plantation’s trees.
(g) The
plantations generate income through the sale of thinning logs that are transformed
into boards. However, the purpose of the plantation is not to engage in
short-term wood cutting operations. The expected profit must be derived from
the resale of standing timber considering the high demand for trees grown in ecological
plantations.
(h) Mr. Maheux
is also the President of Maya Trust S.A., which administers all of the investors’
titles in the precious wood in Costa Rica. Maya Trust S.A. only carries on
business as an agent. Indeed, the appellant may dispose of the trees or cut
them at will.
(i) In
light of the continual tree plantings in Costa Rica, Mr. Maheux can
scarcely say whether the trees the appellant acquired were planted before or
after the signing of the contract.
(j) The
appellant’s trees were designated following the signing of the contract.
II. Issue
[3]
The issue is whether or
not the losses the appellant claimed in 2006, 2007 and 2008 are deductable business
losses.
III. The
respondent’s position
[4]
The respondent submits
that the Minister properly disallowed the business loss of $25,000 that the appellant
claimed for each of the 2006, 2007 and 2008 taxation years. In support of his
argument, the respondent proposed the following four arguments:
(a) The
appellant did not actually incur the expenses claimed. I will not pursue this
first argument any further. In oral argument, counsel for the respondent recognized
that the appellant had been credible when he explained where the $75,000 he
invested in the tree planting came from.
(b) The
appellant made a tax shelter investment. In this case, the deductions cannot be
claimed, as no identification number was assigned to the tax shelter beforehand.
(c) The
tree planting activities do not constitute a business. For that reason, the
losses cannot be allowed as businesses losses.
(d) If
it were a business, the expense would not constitute a current expenditure, but
rather a capital expenditure.
IV. Analysis
Concept of tax shelter
[5]
The term “tax shelter” is
defined as follows in section 237.1 of the Act:
“tax shelter” means
(a)
a gifting arrangement described by paragraph (b) of the definition “gifting arrangement”;
and
(b)
a gifting arrangement described by paragraph (a) of the definition “gifting arrangement”,
or a property (including any right to income) other than a flow-through
share or a prescribed property, in respect of which it can reasonably be
considered, having regard to statements or representations made or proposed to
be made in connection with the gifting arrangement or the property, that, if a
person were to enter into the gifting arrangement or acquire an interest in the property, at
the end of a particular taxation year that ends within four years after the day
on which the gifting arrangement is entered into or the interest is acquired,
(i) the total of all amounts each of which is
(A) an amount, or a loss in the case of a partnership
interest, represented to be deductible in computing the person’s income for the
particular year or any preceding taxation year in respect of the gifting
arrangement or the interest in the property (including, if the property is a
right to income, an amount or loss in respect of that right that is stated or
represented to be so deductible), or
(B) any other amount stated or represented to be deemed
under this Act to be paid on account of the person’s tax payable, or to be
deductible in computing the person’s income, taxable income or tax payable
under this Act, for the particular year or any preceding taxation year in
respect of the gifting arrangement or the interest in the property, other than
an amount so stated or represented that is included in computing a loss
described in clause (A),
would equal or exceed
(ii) the amount, if any, by which
(A) the cost to the person of the property acquired
under the gifting arrangement, or of the interest in the property at the end of
the particular year, determined without reference to section 143.2,
would exceed
(B) the total of all amounts each of
which is the amount of any prescribed benefit that is expected to be received
or enjoyed, directly or indirectly, in respect of the property acquired under
the gifting arrangement, or of the interest in the property, by the person or
another person with whom the person does not deal at arm’s length.
[Emphasis added.]
[6]
The purpose of section
237.1 of the Act is administrative. The provision is designed to ensure that a promoter
of investments in certain tax-advantaged property registers the property and
obtains a tax identification number before marketing it to potential investors.
Parliament thus facilitates the audit of such investment schemes under the definition
of the term “tax shelter;” the authorities make sure they can target all future
investors. In effect, when a taxpayer invests in a tax shelter, he or she must indicate
the identification number for the tax shelter in his or her income tax return
if he or she wishes to take advantage of the tax benefit announced.
[7]
Hence, section 237.1 of
the Act seeks to increase the effectiveness of tax authorities by allowing them
to better target files that require follow-up or more stringent audits. This
explains why the definition of a tax shelter was drafted in such a way as to
encompass all investment schemes or structures which meet the following two
main conditions:
(1) A promoter makes statements
or representations to an investor emphasizing the tax benefits of the investment
before the investor invests in the project;
(2) The subject matter of
the statements or representations is the emphasis on the fact that the investor
can deduct an amount equal to or in excess of the cost of his or her investment
within the four taxation years following his or her investment.
[8]
These two conditions summarize
the definition of the term “tax shelter” without going into all the subtleties on
which the application of the definition to specific facts might depend.
[9]
In Canada v. Baxter, the decision
of the Federal Court of Appeal touched on the concept of tax shelter. In that
decision, Ryer J.A. wrote that the property contemplated by the definition of tax shelter is each and
every property that is offered for sale to prospective purchasers.
The judge added that the definition
requires that to conclude a tax
shelter exists, statements or
representations must be made, at some time, in connection with the property
that is offered for sale. Statements must
have been made prior to any actual sale by the person who proposes to sell.
[10]
Also in Baxter,
Ryer J.A. added that the subject
matter of the statements or representations must have been a description of an
amount that the prospective purchaser would be able to deduct, in computing
income in respect of the property, as a consequence of an acquisition of the
property.
[11]
Moreover, the definition
does not specify either whether the statements or representations must take a particular
form or whether they must be made in any particular manner. It is
also generally accepted that any communication may be made in speech or writing.
[12]
In this appeal, as Mr. Maheux
explained during his testimony, there were no formal solicitations per se. In
effect, the discussions Mr. Maheux had with the appellant regarding the tree
planting project were rather personal and intimate when the appellant provided
a home for Mr. Maheux. The appellant, as well as his entire family, were
well aware of Mr. Maheux’s background.
[13]
The appellant therefore
knew of the tree planting project’s existence and that a number of persons had
already invested money into the project. Moreover, Mr. Maheux was in a
precarious financial situation, seeing as all his assets were seized, and was
in need of assistance.
[14]
It was in that context that
Mr. Maheux discussed the investment project with the appellant. According
to the appellant’s testimony, Mr. Maheux told him that the acquisition of
the trees on his plantation in Costa Rica would be a good investment for him. The
money invested would allow the appellant to acquire seedlings that he could cultivate
and then sell trees once they reached their optimum size. It was only through
the sale of the trees that the appellant intended to realize the expected
profits.
[15]
Mr. Maheux also
informed the appellant that he would be able to deduct the money invested, as
it constituted a current business expense. The information Mr. Maheux thus
shared with the appellant confirm the existence of a tax shelter in accordance
with the interpretation of the terms “statements” or “representations” used in
the definition of a tax shelter. Following the guidance of Baxter, it
suffices that Mr. Maheux discussed with the appellant the investment
opportunity and that he presented to the appellant the amount of possible deductions
for the definition of tax shelter to apply.
[16]
It is important to note
that the concept of tax shelter is so broad because the provision is primarily
intended to guarantee that the promoters obtain a tax identification number for their investment schemes before prospective
purchasers acquire the property presented.
[17]
Given that Mr. Maheux’s
project met the two main requirements of the definition of a tax shelter, namely,
(1) the existence of statements or representations, and (2) the
requirement for computing the two amounts, Mr. Maheux’s tree planting
project should have been registered as a tax shelter. In the absence
of a tax
identification number, the appellant
cannot benefit from the loss represented to be deductible, that
is, the business losses of $25,000 claimed for each of the taxation years in
issue, even though, at the end of the day, the losses were recognized as valid.
[18]
Seeing as that finding
is sufficient for me to dismiss the appellant’s appeal, I will simply make
summary observations on the other arguments put forward by the respondent.
[19]
According to the third argument
put forward by the respondent, the expenses claimed by the appellant are not deductible
as the trees were not purchased for the purposes of operating a business. The respondent
submits that the evidence shows that the appellant invested in the tree planting
project for personal reasons. According to the respondent, the appellant wanted
to help his brother-in-law, Mr. Maheux, obtain a tax benefit, or achieve
both goals. The expenses were not incurred for the purpose of operating a
business. Furthermore, according to the respondent, the expenditures incurred
by the appellant were capital in nature.
[20]
I disagree with the respondent
on that point. The evidence shows that the appellant did operate a business, or
at least, that the purchase of the trees constituted a business activity. The appellant’s
sole purpose, when he participated in Mr. Maheux’s project, was to resell
the 750 trees for a profit. That was the only way he could profit from his investment.
Accordingly, I conclude that the expenses were business expenses.
[21]
The appellant submits
that the $75,000 he spent were current expenses and are deductible as business
losses. According to the appellant, the invoices submitted to him by Mr. Maheux
are proof of the nature of said expenses.
[22]
I disagree with the appellant
on that point. Three identical invoices were filed in evidence. Each of them
break down the expenditures of $25,000 that were incurred as follows:
·
$2,500 for
the preparation of the seedlings;
·
$5,000 for
the preparation of the soil;
·
$2,500 for
the preparation of the forest roads and firewalls;
·
$5,000 for
the transplanting of seedlings into pots and into the field;
·
$5,000 for
herbicide and fertilizer;
·
$3,000 for
the GPS designation;
·
$2,000 for
expertise and administrative fees.
Despite the details of these invoices, no other
evidence was submitted to show that the appellant’s funds were actually used to
pay the expenses indicated. It is unlikely that each year the appellant incurred
expenses identical in amount and form. Furthermore, during his testimony, Mr. Maheux
even explained having used $26,000 of the money given to him by the appellant
to pay the arrears of farm monitoring costs. For that reason, the invoices do not make
it possible to find that the $75,000 was used to pay the expenditures indicated
on the invoices.
[23]
A review of the facts
adduced in evidence rather indicates that the $75,000 paid by the appellant allowed
him to purchase 750 trees that he intended to grow with a view to reselling
them in ten years or so.
[24]
There are no
definitions in the Act to distinguish between a current expenditure and a capital
expenditure. In the absence of specific legislative criteria, the issue must be
resolved by looking at the specific facts and circumstances of each case.
[25]
When viewed in this
way, the expenses are rather the cost of acquiring the inventory, namely, the
750 trees the appellant purchased in Costa Rica.
[26]
As inventory, the cost
of the trees could be allowed as a deduction by following a method different
from that applicable to current expenditures. I will not comment on how and
when to claim this expense because the sum of $25,000 claimed by the appellant
for each of the taxation years in issue is not deductible owing to the previous
finding.
[27]
For these reasons, the appeal
from the assessments made for the 2006, 2007 and 2008 taxation years
is dismissed.
Signed at Ottawa, Canada, this 7th day of
March 2012.
Robert J. Hogan
Translation certified true
on this 13th day of June 2012.
Daniela Possamai, Translator
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