[1] William Docherty (Court File No. A-16-04) and Ronald Hakem (Court File No. A-17-04) have appealed from a decision of Miller J. of the Tax Court of Canada, dated December 16, 2003. The appeals were heard on a partial agreed statement of facts and common evidence. In a single set of reasons, the Judge dismissed their appeals from reassessments of income tax, for the year 1993 in the case of Mr. Docherty, and for the years 1990-1996 in the case of Mr. Hakem.

[2] The issue in both cases is whether, as partners in a partnership which carried on business as the Windsor Multi-Use Facility, the taxpayers were entitled to deduct from income their portions of the losses sustained by the partnership in the taxation years in question.

[3] The Judge held that they were deemed to be limited partners by virtue of paragraph 96(2.4)(b) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), since article 3.13 of the partnership agreement entitled them "either immediately or in the future and either absolutely or contingently, to receive an amount or to obtain a benefit ...".

[4] The benefits on which the Judge relied included provisions whereby partners were not obliged to pay the bills of R.C. Pruefer Co. Ltd., a company controlled by Mr. Docherty, until the partnership generated revenues, and an obligation on Pruefer to contribute the instalment payments owing by the partners for the balance of the subscription price, in the event that the revenues of the partnership were inadequate to cover the partners' obligations.

[5] As limited partners at some time in the relevant taxation years, the appellants were not entitled to deduct from their income an amount exceeding their "at-risk amount in respect of the partnership at the end of the fiscal period": subparagraph 96(2.1)(b)(i). The Court upheld the Minister's computations of the taxpayers' at-risk amounts, which counsel did not challenge on appeal, although he did point out that, in computing the amounts, the Judge deducted nothing for the benefit that he found that they had obtained under article 3.13.

[6] In the alternative, the Judge held that, if he was wrong on the first issue and the at-risk rules did not apply, the approximately $11 million of expenses incurred by the partnership, which constituted its loss, were not "reasonable in the circumstances" and, to that extent, were not deductible by virtue of section 67 of the Act. The expenses comprised fees paid to Pruefer, which was also a Windsor Multi-Use Facility partner, for professional services rendered by Mr. Docherty. Consequently, the taxpayers were limited to their at-risk amounts.

[7] The appellants advanced the following arguments in an attempt to show that the Judge erred in law in finding that the taxpayers were statutorily "deemed limited partners" and that article 3.13 of the partnership agreement triggered the "at-risk" rule.

[8] First, they say that the broad definition of "benefit" found in paragraph 96(2.4)(b), on which the Judge heavily relied, was enacted in 1998 by S.C. 1998, c. 19, section 123(5) and applied to fiscal years ending after November 1994. Accordingly, for the taxation years 1990-1993, the Judge erred in law in relying on the expanded, but inapplicable, definition of "benefit" contained in the 1998 version of paragraph (2.4)(b).

[9] Instead, counsel argued, the Judge should have relied on an earlier version of paragraph 96(2.4)(b) which referred only to an entitlement "to receive an amount or obtain a benefit." Counsel submitted that this provision must be interpreted more narrowly than paragraph (2.4)(d) which was enacted in 1998. In particular, effect should be given to the fact that the 1998 version included an entitlement to receive an amount or obtain a benefit "either immediately or in the future and either absolutely or contingently", words which did not appear in the applicable version of paragraph (2.4)(b). Since the benefit conferred on the partners by article 3.13 of the partnership agreement was, if applicable at all on the facts, both future and contingent, it was not captured as a "benefit" by the 1993 version of paragraph (2.4)(b).

[10] We do not agree. As counsel for the Crown pointed out in his memorandum of fact and law, the 1993 version of paragraph (2.4)(b) speaks of an entitlement to obtain "a benefit that would be described in paragraph (2.2)(d), where "benefit" is described in exactly the same terms as it is in the version of paragraph 96(2.4)(b) enacted in 1998. That is, it includes an entitlement to benefits, whether immediate or future, and absolute or contingent.

[11] In our view, the reference to paragraph (2.2)(d) in the 1993 version of paragraph (2.4)(b) incorporated into paragraph (2.4)(b) the more explicit definition of entitlement to benefit set out in paragraph (2.2)(b). The legislative change made in 1998 therefore seems more likely to have been intended to clarify and simplify the law, rather than to make a substantive change. Counsel was not able to direct us to jurisprudence on the pre-1998 law on what constituted an entitlement to receive a benefit that Parliament could be taken to have intended to reverse.

[12] In any event, we are not persuaded that the partners' entitlement under article 3.13 of the partnership agreement would not be captured by the word "benefit" in paragraph (2.4)(b) standing alone, without reference to (2.2)(d).

[13] Second, the appellants submit that, properly construed, article 3.13 of the partnership agreement conferred no benefit on the taxpayers in any of the taxation years in question, because it only applied when the Windsor Multi-Use Facility was operating. In fact, in late 1992 it appeared very doubtful whether the facility would be built; in 1994, it became clear that it would not. The fees comprising the partnership loss were paid for services rendered in connection with steps taken merely to move the project forward, not with the operation of the facility.

[14] Counsel points out that article 3.13 deals with the obligations of partners to contribute "the cash required to finance the operation of the Windsor Multi-Use Facility to the extent that it is not available out of revenues ...". He says that the italicised words imply that the business is on-going, and not merely proposed, since only an operating business can have revenue.

[15] The Judge rejected this narrow interpretation of the article for three reasons. First, he interpreted it in light of the business of the partnership, which was defined in the limited partnership agreement of December 3, 1990, as the development and operation of the Windsor Multi-Use Facility.

[16] Second, he said that, since the partnership carried on business as the Windsor Multi-Use Facility, the reference in article 3.13 to "the operations of the Windsor Multi-Use Facility" should be taken to refer to the operations of the partnership, not the operation of the unbuilt development of the same name.

[17] Third, the conduct of the parties was consistent with the view that article 3.13 was already triggered, particularly the fact that Mr. Docherty took no steps to recover Pruefer's debt from the partners. It may also be significant in this regard that, for its taxation years 1992 and 1993, Pruefer wrote off part of its billings to the partnership as bad or doubtful debts, yet continued to bill for services rendered. The Judge did not find credible Mr. Docherty's explanation that he did not press the partners for payment because they did not have the money to pay.

[18] In concluding that article 3.13 was triggered, even though the facility was not built, the Judge, in our view, was correct. Accordingly, the at-risk rule applies; the taxpayers have not taken issue with the amounts found to be at risk (nil, in the case of Mr. Docherty).

[19] Despite the able submissions of counsel for the appellants, Mr. Barat, the appeals will be dismissed on the basis that the at-risk rules apply, with the result that it is not necessary to consider the Judge's alternative finding that the expenses claimed were unreasonable. Nonetheless, in our opinion, his conclusion cannot be said to be erroneous in law, or to be based on some palpable and overriding error.

[20] For these reasons, a copy of which will be entered in each Court File, the appeals will be dismissed, with one set of costs in the lead file, Court File No. A-16-04.

"John M. Evans"

J.A.

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKETS: A-16-04 & A-17-04

STYLE OF CAUSE: BETWEEN:

A-16-04

WILLIAM DOCHERTY

Appellant

and

HER MAJESTY THE QUEEN

Respondent

AND BETWEEN:

A-17-04

RONALD HAKEM

Appellant

and

HER MAJESTY THE QUEEN

Respondent

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: MARCH 9, 2005

REASONS FOR JUDGMENT

OF THE COURT BY: (NOËL J.A., SEXTON J.A., EVANS J.A.)

DELIVERED FROM THE BENCH BY: EVANS J.A.

APPEARANCES:

Mr. Arthur M. Barat, Q.C. FOR THE APPELLANT

Ronald Macphee FOR THE RESPONDENT

SOLICITORS OF RECORD:

BARAT FARLAM MILLSON

BARRISTERS & SOLICITORS

Windsor, Ontario FOR THE APPELLANT

JOHN H. SIMS, Q.C.

DEPUTY ATTORNEY GENERAL OF CANADA FOR THE RESPONDENT

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.4) - Paragraph 96(2.4)(b)

In finding that the taxpayers were limited partners by virtue of s. 96(2.4)(b), the Tax Court judge correctly relied on the existence of benefits...

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Docherty v. Canada, 2005 DTC 5199, 2005 FCA 93

Citations2005 DTC 5199, 2005 FCA 93

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Citations
2005 DTC 5199, 2005 FCA 93