Citation: 2007TCC338
Date: 20070917
Docket: 96-4635(IT)I
BETWEEN:
CAMIL ROULEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] In 1992, Camil Rouleau and Richard McKeown were
among the 83 investors in Cablotel Enr. ("Cablotel"), a tax‑shelter
partnership created in order to finance a scientific research and experimental
development ("R&D") program. Like Mr. Rouleau, Mr. McKeown
filed an appeal before this Court. In both their cases, the Minister of
National Revenue ("the Minister") had disallowed the deduction
of a business loss consisting entirely of R&D expenses, and had disallowed the
investment tax credit ("ITC") attributable to those expenses, on the
basis that the Cablotel partners were limited partners for income tax purposes.
[2] Mr. McKeown's appeal
was filed under the general procedure and he was represented by counsel at the
hearing, which was held before the late Chief Judge Garon and spanned 33 days
in 1998 and 1999. On March 12, 2001, Chief Judge Garon dismissed Mr. McKeown's
appeal, both with respect to his investment in Commu‑Sys Enr. ("Commu‑Sys")
in 1991 and his investment in Cablotel in 1992. To summarize succinctly, the
Chief Judge held: (i) that those partnerships were not validly formed, notably
because the only objective pursued by the investors was to obtain tax
deductions, and not to carry on a business; (ii) that Mr. McKeown was a
specified member of a partnership and a limited partner, which meant that he
was not entitled to deduct the R&D tax losses or to the ITC; and (iii) that
he was a silent specified member of the partnership and was therefore not
entitled to the ITC.
[3] Surprisingly,
Mr. Rouleau's appeal, which was filed on December 12, 1996,
under the informal procedure, was heard more than ten years later, and six
years after the decision in McKeown v. The Queen. According to my
understanding, the appeals of five other Cablotel investors and two Commu-Sys investors
were to be heard at the same time as Mr. Rouleau's appeal, but all those other
investors dropped their appeals at the last minute. Thus, Mr. Rouleau was
the last Cablotel investor whose appeal was heard by this Court.
[4] In addition to a
disallowance of the tax deductions, the Minister seeks the penalty contemplated
in section 179.1 of the Income Tax Act, and costs for abuse of process.
No other penalty is in issue.
Facts
[5] The hearing of
Mr. Rouleau's appeal lasted
five days, and four witnesses were heard. In addition to testifying himself, Mr. Rouleau
adduced the testimony of Daniel Bédard, the advisor who suggested that he
invest in Cablotel, and Michel Cusson, a fellow investor who, unlike
Mr. Rouleau, accepted a 1995 settlement offer that the Minister made to
him as well as hundreds of other investors who had acquired the same kind of
tax shelter. As for the Respondent, she called Gabriel Caponi, the
Minister's auditor, as a witness.
[6] At paragraph 38 of the Reply to the
Notice of appeal, the Minister sets out the following factual assumptions
underpinning his assessment:
[TRANSLATION]
(a) The CABLOTEL
partnership ("the Partnership") was created on January 16, 1992. (admitted)
(b) Before the
Appellant joined the Partnership on November 11, 1992, the Partnership
and Omzar Technologies Inc. ("Omzar") signed a document entitled
[TRANSLATION] "Service Contract" stating that Omzar would perform work
described as scientific research and experimental development. (established)
(c) Omzar incorporated
on November 27, 1990, for the
purpose of doing work held out to be research and development; it was to carry
out a variety of work, and, to this end, nine partnerships ("the Partnerships")
were created.
|
1990
|
Dreyfus
Bio‑Systems
|
|
|
|
|
1991
|
Bio-Systems 1
|
Ersol
|
VCA
Commu-sys
|
|
|
1992
|
Bio-Systems
|
Solarix
|
Cablotel
|
Communicab
|
(admitted)
(d) The actual
proponent and organizer of the Partnerships was Omzar and its directing mind, Abdel
Jabbar Abouelouafa ("Jabbar"). (not contradicted, and considered established)
(e) For its fiscal
year ended December 31, 1992, the Partnership recorded a $2,000,108
loss, of which the amounts of $740,000 and $1,260,000 were, respectively, posted
as research expenses within the meaning of subparagraph 37(1)(a)(i) and
paragraph 37(1)(b) of the Income Tax Act. (established)
(f) Toward the
end of 1992, the Appellant gave the Partnership a sum of money representing 50%
of his total interest in the Partnership. (admitted)
(g) as for the
balance, the Appellant had no obligations to anyone (not established)
(h) Under the
purchase plan, every investor, without exception, was to have the benefit of
financing for 50% of his share. Thus, every member who invested money was
out-of-pocket for only 50% of the price of his partnership interest. (established)
(i) Noreco Inc. financed
each member of the Partnership without making any credit inquiries. (uncontradicted
and established)
(j) IPF Finance
Inc., Loron Inc., and Noreco Inc. ("the Financing Companies") were
not at arm's length from Omzar or Jabbar. (established)
(k) Based on the
documents submitted to the Minister of National Revenue, the loan, which
bore an interest rate of 10%, was repayable in 120 monthly instalments over a
period of 10 years, commencing one year after the date of the investment, that
is to say, in late 1993. (admitted)
(l) Based on
documents which were provided to the Minister of National Revenue, but which do
not reflect reality, the loans were repaid by means of the assignment of shares
in 1994. (admitted)
(m) The Appellant
knew, based on the presentation made at the solicitation, that his share
would be bought back in the short term for the amount presented as being
financed. (admitted)
(n) The Appellant
had a commitment from the proponents that his share would quickly be bought
back at a price determined in advance. (not established as written)
(o) All the
members of the Partnership assigned their shares to Noreco Inc. for an
amount equal to 50% of their shares (the "financed" amount). (not established
as written)
(p) The payment
was always made by setting off a debt equal to the "financed" amount granted
by the Financing Company. Based on the assignment agreement document, the
payments were to be made by "[TRANSLATION] "reduction, by way of compensation, of a
loan made" by the Financing Corporation: the amount to be paid exceeded
the fair market value of his share at the time of the disposition. (established)
(q) Since Noreco
Inc. gave all the members of the Partnership financing in an amount equal to
50% of their interest, Noreco Inc. had nothing to disburse. (established)
(r) Consequently,
Noreco Inc. acquired the shares for a total of $1,000,000 and cancelled the
$1,000,000 in loans repayable to it by the members. (established)
(s) As far as the
proponents and members of the Partnership were concerned, the use of the buyback/financing
scheme described above was an essential characteristic of the "tax
shelter" in respect of which they were reciprocally vendors and
purchasers. (admitted)
(t) The cash
amounts (50%) received from the members were deposited into the Partnership's
bank account, whereupon the Partnership immediately made a payment to Omzar. (established)
(u) Thus, in
reality, Omzar only had 50% of the funds available to perform the obligations
set out in the document entitled "Service Contract" (established)
(v) Starting in
November 1992, as soon as the funds were received from the Partnership, Omzar immediately
advanced them to one of the "Financing Companies", which re-used
the funds to "finance" other investors. (established)
(w) The Financing
Companies never repaid these advances to Omzar; rather, the advances were
annulled in a transaction between Omzar and the Financing Company
involved. (established)
(x) According to a
document dated February 15, 1994, between Omzar and Noreco Inc, Noreco Inc.
owed Omzar $3,755,500. (established)
(y) This
amount consists of the following advances by Omzar to Noreco Inc.:
|
Solarix ($2,447,000
X 50%)
|
$1,223,500
|
|
|
|
|
Cablotel ($2,000,000
X 50%)
|
$1,000,000
|
|
|
|
|
Communicab ($2,017,000
X 50%)
|
$1,008,500
|
|
|
|
|
Bio-Systems II ($1,047,000
$ X 50%)
|
$523,500
|
|
|
|
|
Total advances:
|
$3,755,500
|
(established)
(z) The document
dated February 15, 1994 also
states that Noreco Inc. owns the shares of the Solarix, Cablotel,
Communicab and Bio‑Systems II Partnerships; those four
Partnerships assigned their rights (in the "research" results
and work) to Omzar, and, in consideration of this assignment, Omzar fully released
Noreco Inc. for the $3,755,500 in advances. Based on the documents submitted to
the Minister of National Revenue, the assignment of the Partnership's members'
shares is dated February 16, 1994 (established)
(aa) The Appellant
was entitled to receive an amount that was granted to it for the purpose of
reducing the impact, in whole or in part, of a loss sustained by reason of
being a member of the Partnership. (established)
(bb) The Appellant benefitted
from an arrangement for the disposition of his interest in the Partnership, and
one of the main purposes of this arrangement can reasonably be considered to be
to attempt to avoid the application of subsection 96(2.4) of the Income Tax
Act.
(cc) According to
Omzar's financial statements, most of its expenses consist of management
expenses and professional and legal fees: these expenses are not substantiated
by supporting documents, and many of them are accounted for by year-end entries
in respect of which Omzar's accountant remained very "evasive". (established)
(dd) Omzar's income
came solely from the aforementioned partnerships. (established)
(ee) All of Omzar's
so-called expenses are grouped together and there is no way to determine the specific
partnership for which they were incurred. (established)
(ff) Several of
the expenses that Omzar purportedly incurred were paid to corporations that
were not at arm's length from Omzar and Jabbar. (established)
(gg) A tiny portion
of Omzar's expenses went toward the performance of the service contracts with
the partnerships. (established)
(hh) The only reason
that the Appellant became a member of the Partnership was to reduce his tax
payable under the Income Tax Act. (established)
(ii) the members
of the Partnership do not know each other and do not work actively in the
Partnership. (established)
(jj) The
Partnership had no reason for existing other than to be a vehicle for tax
refunds and a financing tool for Omzar. (established)
(kk) The Appellant
was a member of a partnership other than a member who, on a regular, continuous
and substantial basis throughout the year during which the business of the
Partnership was ordinarily carried on, was actively engaged in the activities
of the Partnership or was carrying on a business similar to that carried on by
the Partnership. (established)
[7] In his testimony, Mr.
Rouleau disclosed that he held a Bachelor's degree in applied sciences, which
was awarded to him by Université Laval in 1984. His program was computer
engineering. On December 27, 1984, after a brief teaching stint at CEGEP
de Thetford Mines, Mr. Rouleau accepted a job as a computer engineer with UBM
2001 Inc. at a salary of $20,000 per annum, which was increased to $21,000 a
few months later. He left this job in 1985 because of his employer's uncertain
future and his low salary, and he began working for the Quebec public service,
initially as a casual employee and later as a permanent employee. He was
employed by several government departments, including the Ministère des
Finances, where he worked from 1992 to 1998.
[8] Mr. Rouleau declared
approximately $46,000 in income for the 1992 taxation year. His tax return stated
that his only other source of income was interest from Revenue Canada and Revenu Québec. On
cross-examination, he acknowledged that he did not invest any money in the
stock market. He did not have a secondary house or residence either. His car
was purchased with money from his mother. For the year 1993, his only sources
of income were employment (roughly $53,000), interest from Revenu Québec, and
a $57.63 retiring allowance.
[9] Mr. Rouleau found out
about the Omzar tax shelters when he learned that his father had invested in Commu‑Sys
in 1991. Mr. Bédard, a colleague of his father's, had proposed this investment
to Mr. Rouleau. The Cablotel tax shelter was the one that piqued Mr. Rouleau's
interest because of the area of research involved. The project was to
design and develop a prototype telematic system in order to optimize the
servicing of televisual information broadcasting networks in outlying areas. Mr. Rouleau
signed the Cablotel subscription form on November 10, 1992. (See Exhibit A‑3.)
[10] To finance the
$15,000 cost of acquiring his interest in Cablotel, Mr. Rouleau obtained a
$7,500 loan from the Caisse populaire des fonctionnaires du Québec [Quebec
public service credit union] on November 13, 1992. That loan financed his $7,500 outlay.
The other $7,500 was from a loan granted by Noreco. That loan was secured
by a pledge of Mr. Rouleau's Cablotel shares. (See Exhibit A‑2,
tab 7.) Mr. Rouleau repaid the credit‑union loan promptly.
[11] The documentation concerning
the shelter emphasized the importance of investor participation, and
Mr. Rouleau expected to be able to participate. However, there was
practically no participation on his part. In December 1992, Mr. Rouleau
had received no news from Cablotel, so he contacted Mr. Bédard to find out
if the project had begun. Mr. Bédard told him that everything was proceeding
normally and that there was no need to worry. From January to
July 1993, Mr. Rouleau's involvement was limited to one or two telephone
calls per month. Mr. Rouleau said that he contacted Mr. Bédard to
avoid long‑distance charges, since he lived in Québec and Cablotel and Omzar's
offices were in Montréal. During one of these calls, Mr. Rouleau was told
that a progress report would be submitted to him. He only received that
report on October 20, 1993. (See Exhibit A‑2, tab 11.)
Naturally, Cablotel sent Mr. Rouleau the financial statements and
information slips necessary to fill out his 1992 income tax return.
[12] Mr. Rouleau confirmed
that he did not participate in any general meetings of the Cablotel partners,
and was not aware of whether there had been any such meetings. He also said
that he was not consulted about the decision to move Cablotel's establishment
from Hamel
Boulevard
in Québec to the Metropolitan Boulevard in Montréal on February 12, 1993. Mr. Rouleau also
acknowledged that he did not know the other Cablotel associates.
[13] Mr. Rouleau appears to have gone to the
Omzar laboratory in Montréal only once. This visit only took place on
February 28, 1994, after Noreco's acquisition, on February 16, 1994, of almost all the Cablotel shares. The visit
coincided with a skiing weekend that Mr. Rouleau spent at Mont‑Tremblant.
Mr. Rouleau discussed the Cablotel project for only one hour during the
visit. He was shown certain pieces of equipment, but a demonstration of the
results obtained from the R&D program was not possible, supposedly because
a computer was out of order. After his February 1994 visit,
Mr. Rouleau tried to contact Omzar again, but was unsuccessful because he
no longer had that company's telephone number.
[14] Mr. Rouleau produced
a printout, dated May 6, 2007, of a CIDREQ sole proprietorship data
record obtained from the Quebec registrar of businesses. The printout states that
Mr. Rouleau operated a computer services business. The business name
is given as Micro Arc-en-ciel, and the business is said to have begun on September 14, 1989, and to have ended on
December 31, 1989. The legal status information on the printout
states that Mr. Rouleau is no longer in business. The explanations
that Mr. Rouleau provided at the hearing do not establish that he was
operating a business in 1992. In fact, the only data pointing to the existence
of a business that can be found in his 1992 income tax return pertain solely to
Cablotel (Exhibit A‑5, at page 1 of the return, and the
attached T5013 slip).
Analysis
[15] First of all, a few
general comments should be made about the quality of the testimony of the
different witnesses, and
certain excerpts from this testimony should be pointed out.
[16] I find Mr. Caponi's testimony similar to the testimony
considered by the late Chief Judge Garon in McKeown. I was impressed by
the scope of Mr. Caponi's audit and his knowledge of the file. He analysed
Omzar's bank accounts and accounting records, and, based on the various funds
transfers that he was able to trace, he found that the money from the people
who invested in the nine Omzar tax shelters went through "financing
companies" that were tied to Omzar, and was used to finance half the cost
that the investors needed to pay to acquire an interest in those tax shelters. Actually, the
investors' money went into a tax shelter such as Cablotel, which then submitted
it to Omzar, which, in turn, advanced the vast majority of it to the financing
companies, notably Noreco. These financing companies lent the money to other
investors. The money obtained by one partnership in 1992 made it possible to
complete the financing of the R&D that another partnership had started in
1991. The principle at work was similar to a pyramid sales scheme: in
order to finish an R&D project, it was absolutely essential to continue
raising funds using other partnerships, or else there would not be enough cash
to finance the R&D project fully. In January 1993, when the tax
authorities discovered what had occurred, the entire scheme crumbled. It is not
surprising to learn that Omzar went bankrupt. (See the statement of
affairs of the bankrupt, which is dated July 6, 1995, and can be
found at tab 20 of Exhibit I‑1.)
[17] It should also be
mentioned that several hundred documents were tendered in evidence.
Mr. Caponi's audit revealed how little attention had been devoted to the
planning of these R&D programs and to the completion of the operations by
the proponent Omzar and by its salaried staff and some of the professionals
whose services had been retained. For example, some documents were signed by
people who apparently had no authority to do so. In addition, certain
transactions seem to have taken place before the prerequisites thereto. For example,
Noreco declared that it held
all the Cablotel shares, save one, on February 15, 1994, at the time
that Cablotel sold Omzar all of its rights to the results of the R&D work
done "from January 1993 to January 1996", but those
shares were only acquired the following day, that is to say, on February 16, 1994. To cite another
example, the subscription form signed by Mr. Rouleau on November 10, 1992 is attached to a copy of the partnership
agreement that bears the signature of the two initial partners and is dated
November 10, 1992, even though, in all likelihood, the agreement must
have been signed on January 16, 1992.
[18] Mr. Cusson, who testified at
Mr. Rouleau's request and was one of his fellow investors in Cablotel, straightforwardly
acknowledged that the only thing that interested him about Cablotel was getting
tax deductions, that he was not at all interested in R&D, and that he did
not expect to derive commercial benefits from this activity. His
investment, like that of Mr. Rouleau, was $15,000. He said that he would
not have tolerated that much exposure in such a risky business. He knew
that his interest would be bought back for $7,500 a few months later —naturally,
this was not a certainty, but it had happened to him before — and that this
would cancel his $7,500 loan from Noreco. He would then realize his profit by
obtaining a tax refund greater than his own net outlay.
[19] Mr. Cusson had
participated in such tax shelters from 1989 to 1993. He not only obtained his
tax refund, but also had his interest in the tax shelters bought back at a
price agreed upon in advance. It should be noted that in his first investment,
which dates back to 1989, Mr. Cusson laid out 100% of the cost of the
investment in December 1989, but then went to collect a cheque in
connection with a buyback for 50% of that cost a few weeks later in January
1990.
[20] Mr.
Cusson did not know the other Cablotel partners, aside from a few colleagues
from his office who had also invested in the shelter. He was not involved in
any decision-making at Cablotel's partnership meetings. Mr. Loranger's
appointment as manager of Cablotel freed Mr. Cusson and the other partners
from managerial duties. Mr. Cusson acknowledged that he did not visit the
laboratory of Omzar, to which Cablotel had entrusted the $2 million that it obtained.
[21] Mr. Cusson said that he filled out a very
short questionnaire that the proponents had partners fill out in order to show
that they were engaged in the activities of the partnership on a continuous,
regular and substantial basis, but he was not certain whether he had received
the questionnaire after the contract of assignment for the buyback of his
shares in September 1993. He commented: [TRANSLATION] "Nothing about
that project surprises me anymore." It must be added that the welcoming
letter sent to the Cablotel partners was only sent out in July 1993, some
eight or nine months following the subscription.
[22] Mr. Cusson did not check how Cablotel or
Omzar spent the money, nor did he verify whether the buyback price, equal
to 50% of the subscription cost, represented the FMV of his interest in Cablotel.
However, he acknowledged that he never thought that the buyback price could be
worth more than the offered price, and did not negotiate it. Mr. Cusson accepted
the Minister's 1995 settlement offer, and he acknowledged that he was naive and
careless when he invested in Cablotel.
[23] Mr. Rouleau had the same information as Mr.
Cusson about the buyback of his shares. He produced, as Exhibit A‑2,
tab 5, the scenario that Mr. Bédard, his investment advisor, proposed
to him. Here is an excerpt from this scenario:
[TRANSLATION]
|
Assuming an investment of
|
$15,000
|
|
|
|
|
|
|
The following amount will be returned
as a right of first refusal
|
$ 7,500
|
|
|
|
|
|
|
If there is a loan, the interest cost
until May '93 will be
|
$ 313
|
|
|
|
|
|
|
Net cost, including borrowing cost:
|
$ 7,813
|
|
|
|
|
|
|
The tax savings will be:
|
$10,434
|
|
|
|
|
|
|
+ a federal tax credit of:
that can be carried back to previous years
|
$0
|
|
|
|
|
|
|
Tax refund
|
$10,434
|
|
|
|
|
|
|
Profit, with no loan
|
2,934
|
|
|
|
|
|
|
Profit, with loan
|
2,622
|
|
|
|
|
|
[24] Mr. Bédard himself had invested in one of
the Omzar tax shelters, namely Dreyfus Bio‑Systems, in 1990. His interest
in that partnership was bought back, as planned prior to his investment. He
said that he was only interested in the tax refund, not in the results of the
R&D. He could not have cared less about the commercial aspect. Mr. Bédard
received a 3% commission on the sale of Cablotel shares. He also confirmed that
Noreco granted loans to all the Cablotel investors. He says that no one
was denied a loan.
[25] In light of the
findings of fact set out above, I will adopt, in very large part, the approach
of the late Chief Judge Garon in McKeown. There,
the Chief Judge asked the following initial question: was Cablotel a
partnership? He answered this question in the negative, because "the investors
in question were merely seeking substantial tax benefits and never demonstrated
any intention of working together to undertake scientific research and
experimental development activities. In short, they had no intention of forming
a genuine partnership." (paragraph 393 of his reasons). In my
opinion, this question requires greater thought before I can decide it.
However, as Chief Judge Garon held at paragraphs 394 et seq., I
find that Cablotel did not carry on any business:
[394] In addition, no business was
carried on either by the appellant or by Commu‑Sys Enr. and Cablotel Enr.
in relation to the carrying out of the research work. This case is similar to Bendall
v. The Queen, supra, in which Judge Bonner stated the following:
The issue here is whether
the appellant carried on a "business" within the meaning of the Income
Tax Act ("Act"). That word is to be given its ordinary meaning and
that meaning does not include a tax avoidance scheme which is nothing more than
a pale imitation of a business. The appellant was not involved in a commercial
activity either directly or through Omni as his agent. The objective evidence
regarding the manner in which the scheme operated and the actions and inaction
of the parties point clearly to a conclusion that both the appellant and the
promoters of the scheme were indifferent to the marketing of the speed reading
course and to the earning of profits from that activity. There can be no doubt
that what was sought was a tax deduction which would result in a refund part of
which was to go to enrich the promoters of this scheme and the remainder of
which was to go to the appellant.
[Footnote omitted.]
[395] In the case at bar, no steps
or requests whatsoever were taken or made to ensure that the project would be
profitable. I cannot find anything suggesting that the groups in question could
have been profitable. No market research survey had been done. No marketing
plan had been developed. Moreover, the structure put in place was set up solely
for tax purposes, as shown by the "participation program" that was
established only to create the illusion that the government's criteria were
being met.
[26] I would also add
these comments, which I made in Waxman v. Canada, [1996]
T.C.J. No. 1689 (QL), [1997] 2 C.T.C. 2723, at paragraphs 47-50, and which
apply in a similar manner to the case at bar:
47 Ferme Rompré clearly had
an interest in obtaining the R&D findings in order to improve the
management of its own livestock. I have no doubt that the R&D program, if
conducted by Ferme Rompré, would have been oriented towards its business. It
seems to me that Agriboeuf's sole object was to carry out R&D projects and
to pass its costs on to the limited partners so that they could deduct them in
computing their incomes for tax purposes. The Act provides for R&D
incentives and it is possible for a limited partnership to incur R&D
expenditures for which deductions may be claimed by the limited partners.
However, and this is an important proviso, all the conditions of the Act must
be met and those who set up such financing arrangements must ensure that they
comply not only with the spirit but also the letter of the Act.
48 I do not believe that the
limited partners intended, through Agriboeuf, to operate a farming business or
to share in the proceeds of the sale of the R&D findings. In any case, it
is not certain that there was a market for the results of this kind of
research. The limited partners were not interested in anything other than the
deduction of the R&D expenditures for tax purposes and the $150-per-share
selling price of their interests.
49 If it had been established
that Agriboeuf did not operate a business, not only would the R&D
expenditures not have been qualified expenditures for the purposes of section
37 and thus for the purposes of the investment tax credit, but there would also
be the possibility that the limited partnership had not been validly
constituted. One of the conditions essential to the formation of a partnership
is that the partnership "should be for the common profit of the
partners" (art. 1830 Civil Code of Lower Canada). In this instance,
it may be questioned whether the partnership really intended to make a profit
for its partners. For an example relating to a limited partnership established
in a common law province, see the decision rendered by the Federal Court of
Appeal in Continental Bank Leasing Corporation and Continental Bank of Canada v. The Queen, 96 D.T.C. 6355.
50 In conclusion, it is
possible that Agriboeuf did not operate a farming business in 1987. However,
since the Minister admitted in his reply that Agriboeuf had operated a farming
business, the appellants did not have to adduce any evidence to convince me
that Agriboeuf did actually operate such a business. It is therefore not
appropriate in the circumstances to conclude that Agriboeuf did not operate a
farming business. The appellants have thus succeeded in discharging their onus
of establishing that the R&D expenditures that Agriboeuf incurred and that
the Minister disallowed were all or substantially all attributable to R&D.
[27] In order for a
taxpayer to be entitled to the R&D deductions under section 37 of the
Act, the taxpayer must be carrying on a
business, and the R&D expenses must be related to a business of the
taxpayer. But Cablotel was not carrying on any business because it was
created solely to transfer R&D tax deductions to investors, and had no
intention to carry on a business, whether by operating a cable system, reselling
its technology at a profit, or licencing others to use it in exchange for
royalties. And Mr. Rouleau did not personally carry on any business
either.
[28] Mr. Rouleau's submission that Cablotel operated
a business in 1992 is incorrect, because Omzar's conduct with respect to the
various tax shelters that it put in place year after year from 1990 to 1992 was
always the same. The investors' interests in the shelters were automatically bought
back, without regard to FMV, even before the R&D programs were finished. In
my opinion, the Omzar tax shelters, including Cablotel, never had any intention
to resell, in an ordinary business context, the rights that they might have
obtained as part of their R&D programs. This was simply a mechanism for
transferring tax deductions to the investors while leaving the R&D results
to the entity (perhaps Omzar) that might have a commercial interest in them. Consequently,
Cablotel has not met the conditions that must be met under section 37 of
the Act in order to be able to claim R&D expenses; its partners had no
right to deduct tax losses attributable to those expenses because of paragraph 96(1)(g)
of the Act;
and, as far as the ITCs are concerned, they were not entitled to them by reason
of subsection 127(8) of the Act,
which computes the ITC of a partner based on the "eligible expenses"
of the partnership, that is to say, the R&D expenses contemplated in
paragraph 37(1)(a) or subparagraph 37(1)(b)(i) of the Act.
[29] Even if I have erred
in law in finding Cablotel carried on no business, and even if one assumes that
Cablotel is a genuine
partnership, Mr. Rouleau's appeal still cannot succeed because he was a
limited partner within the meanings of subsections 96(2.2) and (2.4) of the Act. Once again, I adopt the
same analysis that Chief Judge Garon adopted in McKeown:
[403] Based on the parties' arguments and the evidence,
the appellant cannot be considered to have been a limited partner in the two
partnerships in question under the Income Tax Act unless subsection
96(2.4) of the Act is applicable to him. That subsection reads as
follows:
(2.4) For the purposes of this section and sections 111 and
127, a taxpayer who is a member of a partnership at a particular time is
a limited partner of that partnership at that time if his partnership
interest is not an exempt interest at that time (within the meaning assigned by
subsection (2.5)) and if, at that time or within three years after that time,
(a) by operation of any law which governs the
partnership arrangement, the liability of the taxpayer in his capacity as a
member of the partnership, is limited;
(b) the taxpayer or a person with whom the taxpayer
does not deal at arm's length is entitled to receive an amount or obtain a
benefit that would be described in paragraph (2.2)(d) if it were
read without reference to subparagraphs (ii) and (vi) thereof;
(c) one of the reasons for the existence of the
taxpayer who owns the interest
(i) may reasonably be considered to be to limit the
liability of any other person with respect to that interest, and
(ii) may not reasonably be considered to be to permit any
person who has an interest in the taxpayer to carry on his business (other than
an investment business) in the most effective manner; or
(d) there is an agreement or other arrangement for
the disposition of an interest in the partnership and one of the main reasons
for the agreement or arrangement may reasonably be considered to be to attempt
to avoid the application of this subsection to the taxpayer.
[404] First of all, a person who
has an exempt interest is not a limited partner. It was not argued that the
interest the appellant may have had in the partnerships was an exempt interest
within the meaning of subsection 96(2.5) of the Act. Paragraphs (a),
(b), (c) and (d) of subsection 96(2.4) of the Act
are the only provisions that may be applicable to the appellant.
[405] It follows that a member is
a limited partner at a particular time if one or more of the conditions set out
in paragraphs 96(2.4)(a), (b), (c) and (d) of the Act
are met at that time or within three years after that time.
[406] Here, in view of the facts
of this case, it seems to me that only the application of paragraph 96(2.4)(b)
need be considered. That paragraph refers to paragraph 96(2.2)(d) but
states that it must be read without reference to subparagraphs (ii) and (vi)
thereof.
[407] The relevant part of
paragraph 96(2.2)(d) of the Act reads as follows:
96(2.2) For the purposes of this section . . . the at-risk
amount of a taxpayer, in respect of a partnership of which he is a limited
partner, at any particular time is the amount, if any, by which the aggregate
of
. . .
exceeds the aggregate of
. . .
(d) where the taxpayer . . . is entitled, either
immediately or in the future and either absolutely or contingently, to receive
or obtain any amount or benefit, whether by way of reimbursement,
compensation, revenue guarantee or proceeds of disposition or in any other form
or manner whatever, granted or to be granted for the purpose of reducing the
impact, in whole or in part, of any loss that the taxpayer may sustain by
reason of being a member of the partnership or by reason of holding or
disposing of an interest in the partnership, the amount or benefit, as the
case may be, that the taxpayer . . . is or will be so entitled to receive or
obtain, except to the extent that . . . the entitlement arises
. . .
(iv) by virtue of an agreement under which the taxpayer may
dispose of the partnership interest for an amount not exceeding its fair
market value, determined without reference to the agreement, at the time
of the disposition.
It follows from paragraphs 96(2.4)(b) and 96(2.2)(d)
(subject to the restriction I have just referred to in the case of the
latter) that a member is a limited partner where, at the time in question or
within three years after that time, the member is entitled to receive or
obtain, in any form or manner whatever, any amount or benefit referred to in
paragraph 96(2.2)(d) if that amount or benefit is granted or to be
granted "for the purpose of reducing the impact, in whole or in part, of
any loss that the taxpayer may sustain by reason of being a member of the
partnership or by reason of holding or disposing of an interest in the
partnership".
[408] According to the
respondent, the appellant had such an entitlement because it [TRANSLATION]
"was anticipated and planned, at least tacitly, that the investors would
dispose of their shares for a fixed amount exceeding their fair market value,
which amount was determined in advance without reference to the value at the
time of the disposition". However, the appellant asserted that no
representation was made to him—either before or at the time he purchased
his shares in Commu-Sys Enr. and Cablotel Enr.—that his shares would be
redeemed. He also testified that, at the end of the summer of 1993, he
received an offer from Loron Inc. to buy his shares in Commu-Sys Enr. and an
offer from Noreco Inc. to buy his shares in Cablotel Enr. The agreements by
which the appellant transferred the shares in question to Loron Inc. and Noreco
Inc. are dated December 20, 1993, and February 16, 1994, respectively. I
am reproducing below the main clauses of the transfer agreement between the
appellant and Loron Inc., the appellant's transfer agreement with Noreco Inc.
being for all practical purposes identical:
[TRANSLATION]
TRANSFER AGREEMENT
ENTERED INTO THIS 20TH DAY OF DECEMBER 1993
. . .
1.
I, the undersigned, a member of Commu-Sys
(hereinafter "the partnership"), hereby sell, assign and transfer to:
Loron Inc., 6555 Boulevard
Métropolitain est, Suite 502, St‑Léonard, Quebec H1P 3[sic] 3 (the
transferee), 250 shares in the partnership, representing all my rights and
interest as a member of the partnership, including but not limited to all
rights in the intellectual property arising out of the research and development
project carried out for the partnership and the right to exploit and market any
result of the project, and I agree and undertake to sign and give to the
transferee any document that is necessary or useful to effect a valid transfer
of the said shares and any rights associated therewith.
2. This
sale is being made in consideration of the sum of twelve thousand five hundred
dollars ($12,500.00), which represents, to the best of the parties'
knowledge, the fair market value of the shares sold, the said consideration
being payable as follows:
-
reduction, by way of compensation, of a loan made by
the transferee to the transferor, the said loan having been evidenced in
writing in a document dated December 20, 1991.
3.
Transferor's declaration and warranty
The transferor declares and warrants to the transferee that he is
the sole owner of the shares transferred hereunder and that he holds a clear
and absolute title to the shares by virtue of which title he is able to
transfer them to the transferee free and clear of any option, pledge or other
security whatsoever.
4. . .
.
5. . .
.
[409] Given the facts of this
case, I must determine whether, in the case of the redemption of the
appellant's shares in Commu-Sys Enr. and Cablotel Enr. by Loron Inc. and Noreco
Inc., the consideration for the share transfer—which consideration consisted in
the cancellation of the appellant's debts resulting from the loans made to him
by those two finance companies—could have been an amount or benefit for him
under paragraphs 96(2.4)(b) and 96(2.2)(d) of the Act. The
extinguishment of the appellant's debts to the two finance companies could have
constituted a benefit for him if it was possible that his shares in Commu‑Sys
Enr. and Cablotel Enr. were worth less than the debts in question.
[410] However, there are
exceptions to the rule set out in paragraph 96(2.2)(d) of the Act.
The Court's attention was drawn only to subparagraph (iv) of that paragraph,
which I cite here again for ease of analysis:
(iv) by virtue of an agreement under which the taxpayer may
dispose of the partnership interest for an amount not exceeding its fair market
value, determined without reference to the agreement, at the time of the
disposition
[411] It is therefore necessary
to determine whether the transfer agreement dated December 20, 1993, between
the appellant and Loron Inc. and the one dated February 16, 1994, between the
appellant and Noreco Inc. were agreements under which the appellant could
dispose of his shares in Commu-Sys Enr. and Cablotel Enr. for an amount that
could have exceeded their fair market value at the time of the disposition.
[412] The answer to this question
must be affirmative. Under the agreements, the appellant was able to dispose of
his shares in Commu-Sys Enr. and Cablotel Enr. for a consideration¾the word
"amount" used in subparagraph 96(2.2)(d)(iv) being very broad
in meaning given the definition in subsection 248(1) of the Act — that
could have exceeded their market value at the time of the disposition. As
consideration for the disposition of the appellant's shares, the agreements
provided for the extinguishment of the two debts (resulting from the loans made
by Loron Inc. and Noreco Inc.), the principal amount of which totalled $25,500.
The agreements did not provide for any method of valuing the appellant's
shares, nor did they establish a ceiling that could have been the fair market
value of the shares at the time of the disposition. The parties did not in
effect establish a ceiling based on the market value of the shares just by
stating in each agreement that the sale was being made for the amount
indicated, "which represent[ed], to the best of the parties'
knowledge, the fair market value of the shares sold". The agreements
did not provide that the appellant was required to repay any excess amount if
the appropriate authority determined in the final analysis that the amount set
out in either agreement exceeded the market value of the shares to which the
relevant agreement applied. It was therefore possible under the agreements for
the consideration received for the disposition of the appellant's shares to
exceed their market value at the time of the disposition.
[413] I do not think that I need
consider whether, in the present case, the consideration received by the appellant
on December 20, 1993, and February 16, 1994 — that is, the
extinguishment of his debts to Loron Inc. and Noreco Inc. — actually
exceeded the market value of the shares of which he disposed. I must be guided
solely by the wording of the agreements, which, in my opinion, did not preclude
the possibility of the consideration's exceeding the market value of the
appellant's shares at the time of the disposition.
[414]
It is therefore my view that the exception set out in subparagraph 96(2.2)(d)(iv)
of the Act cannot be relied on by the appellant in this case.
. . .
[416] I therefore conclude that
the appellant must be considered a limited partner within the meaning of
paragraphs 96(2.4)(b) and 96(2.2)(d). As a consequence, I do not
have to look at the application of the other subparagraphs of subsection
96(2.4) of the Act.
[Emphasis added.]
[30] Since Mr. Rouleau claims that his situation was
different from Mr. McKeown's, I
must comment on his arguments. First of all, he submits that he never sold his
interest in Cablotel and that he does not come within the definition of "limited
partner" contemplated in subsection 96(2.4) of the Act.
[31] In my opinion, this argument is without merit for several reasons. First
of all, I think that it can be inferred from Mr. Rouleau's conduct, and
that of Noreco, that he tacitly accepted the sale of his interest in Cablotel
to Noreco,
even though he did not sign the contract of assignment. The facts on which I
make this finding are as follows. Mr. Rouleau never paid interest on the
loan that he obtained from Noreco, apart from the interest paid in advance upon
his subscription. He never repaid Noreco for the $7,500 loan, which was
supposed to have been repaid in full later in 2003, but he repaid the $7,500 loan
from the Caisse populaire. Noreco never claimed the interest for the period
subsequent to the first two months, nor did it demand the repayment of the
$7,500 loan itself. In its view, it acquired Mr. Rouleau's interest in
Cablotel, an interest which had, in fact, been pledged. (See note 17 above.)
Moreover, Mr. Rouleau undertook no serious efforts to claim his part of the
proceeds of the sale, to Omzar, of the rights to the results of the R&D
done by Cablotel. If he had done so, he would only have been entitled to an
amount equal to his loan, in which case compensation would have been effected.
[32] Even if I am erring
in fact and law in concluding that Mr. Rouleau tacitly accepted the sale
of his interest, I do not think that this alters the application of the
relevant provisions, namely subsections 96(2.4) and 96(2.2) of the Act, in any
way. The important thing to determine is whether Mr. Rouleau, in 1992 or
the three subsequent years, was entitled to receive a benefit within the
meaning of subsections 96(2.4)
and (2.2) of the Act. I will repeat the relevant portion of subsection 96(2.4):
"a taxpayer [Mr. Rouleau] who is a member of a partnership [Cablotel] at a
particular time is a limited partner . . . if, at that time
or within 3 years after that time, [the taxpayer] is entitled
. . . to receive an amount or to obtain a benefit that would
be described in paragraph 96(2.2)(d) [of the Act]. The benefit
contemplated by this paragraph is the "benefit that the taxpayer . . . is
entitled, either immediately or in the future and either absolutely or
contingently, to receive or to obtain, whether by way of reimbursement,
compensation, revenue guarantee, proceeds of disposition . . . or
in any other form or manner whatever, granted or to be granted for the purpose
of reducing the impact . . . of any loss that the
taxpayer may sustain because the taxpayer is a member of the partnership . . . .
[33] In my opinion, Mr. Rouleau was not only entitled to receive
such a benefit, but actually received one, thereby reducing the impact of the
loss that he sustained because of his membership of Cablotel. Given the
arrangement put in place, I have no doubt that Omzar and Noreco's intent was
that Mr. Rouleau would not have to repay the loan advanced by Noreco, a
corporation that was related to Omzar. The mechanism designed to achieve
this objective was to extinguish Mr. Rouleau's loan (and that of all other
investors) by repurchasing his interest at a price equal to the amount of that
loan. The only thing that he had to do was to sign the contract of assignment.
However, for personal reasons, Mr. Rouleau refused to sign it.
[34] In addition, the
benefit need not be in the form of "proceeds of disposition".
Paragraph 96(2.2)(d) of the Act specifies that the benefit can be in an
"other" form. Here, Mr. Rouleau got the same benefit as the
other Cablotel partners, who signed the assignment contract: a discharge from
the obligation to repay the loan, which discharge Noreco granted in order to
reduce the impact of the loss resulting from the acquisition of a partnership
interest in Cablotel. He was
never asked to repay the loan, and I am satisfied that he will never have to
repay it. That is the form of the benefit that Mr. Rouleau received. In the
spirit of the people who designed and promoted this tax‑related arrangement,
the lack of a signature on a contract was not going to cause anyone to lose the
benefit of discharge from the obligation to repay the loan, a benefit that they
offered all the investors. In actuality, Mr. Rouleau never had to finance more
than half his loss and that was the abuse that the provisions of
section 96 of the Act are designed to stop. It is my conclusion that all
the conditions precedent to a finding that Mr. Rouleau was a limited
partner of Cablotel for the purposes of the Act have been met.
[35] Since Mr. Rouleau is a limited partner of
Cablotel, he is not entitled to deduct his share of the R&D losses
sustained by that tax shelter. And since all the losses are R&D losses, he
is not entitled to deduct any loss amount. The ITCs must meet with the same
fate.
[36] There is an additional reason to conclude
that Mr. Rouleau is not entitled to deduct the ITCs. He was also a passive
specified member of Cablotel for the purposes of subsection 127(8) of the Act;
consequently, he cannot deduct his share of the ITC
amount that might have been determined in respect of that partnership. In order
not to be considered a passive specified member, Mr. Rouleau
would have had to prove, on a balance of probabilities, that he was engaged in
Cablotel's activities on a regular, continuous and substantial basis.
[37] As Chief Judge Garon held in McKeown,
the membership of the Cablotel partners was very symbolic at best, and it seems
clear to me that this conclusion also applies to Mr. Rouleau. Moreover, I
believe that the intent of Parliament in enacting the definition of
"limited partner" for the purposes of computing the ITC was to
prevent tax-shelter partnerships from benefiting from the ITC.
[38] In my view, it is completely
contrary to the intent of the Act to argue that one possible reason for
Mr. Rouleau's lack of activity is the fact that the Cablotel partnership
was engaged in only a small amount of activity. The reality is that in order to
be excluded from the concept of passive specified member, one must show that
one has been active, and, if there was no reason to be active, this would
constitute a circumstance intended to be caught by the provision. I have no doubt that Mr. Rouleau was a
passive specified member for the purposes of the ITC and I find
accordingly.
[39] One can have doubts
about the nature of certain expenses incurred by Cablotel and about whether
they qualify under section 37 of the Act, but in view of the fact that
Mr. Rouleau was not entitled to deduct any of those expenses whether they
were incurred or not, I find that Mr. Rouleau's appeal must be dismissed.
The penalty in section 179.1 of the Act and
costs for abuse of process
[40] In the submission of
counsel for the Respondent, Mr. Rouleau knew that he had a significant tax
liability which remained unpaid. He also knew that collection measures were
being suspended for such time as the appeal was pending. He read only such portion of McKeown
as applied directly to his case. He acknowledges that he received the case
law that the Department of Justice lawyers sent him, including the decisions in
Brillon, 2006 TCC 76, 2006 DTC 2340 (Fr.)); Boudreault, 2005 TCC 660, 2005 DTC 1650 (Fr.); and Maslanka,
2004 TCC 158, 2004 DTC 2933, which he did
not read because they were unfavourable to him.
[41] Counsel for the
Respondent also contend that, one week before the hearing of his appeal,
Mr. Rouleau said that he had
facts to show regarding his degree of participation in Cablotel's activities. Some
members of the Cablotel partnership then testified in Court at his request. Counsel
for the Respondent submit that the testimony of those witnesses was prejudicial
to Mr. Rouleau.
Moreover, they assert that Mr. Cusson has acknowledged that he is now
aware of the subtleties of the Act, and has said that he had decided to settle
his file after consulting independent counsel. In their submission, this
constituted an objective assessment of his file. The lack of such an objective
assessment by Mr. Rouleau, and his conduct with respect to the payment of his
tax liability [TRANSLATION] "leaves no room for any further doubt
that he used this Court as a kind of parking space, that his appeal was pending
because of the suspension of collection measures, and that this suited him."
The lawyers add: [TRANSLATION] "[P]erhaps he said to himself: 'I
don't have much to lose by going to Court, so I will go.'" The
Respondent's counsel submit that there [TRANSLATION] "are still many matters
like Mr. Rouleau's before this Court, and we submit that the time has come
. . . to tell the appellants that if they do not adduce evidence — and this is
what we wrote to Mr. Rouleau — that [he would need to] adduce
evidence with respect to important aspects [but he nonetheless] has come before
this Court . . . without being aware of highly relevant case
law . . . and I think that he should be ordered
either to pay costs or [be subject to] section 179.1."
[42] Counsel for the
Respondent also cited Fournier, where
the Federal Court of Appeal acknowledged that this Court has the power to award
costs to the respondent where a taxpayer commits an abuse of process. Fournier
involved "excessive and abusive stubbornness." In the submission of
counsel for the Respondent, the abuse in the case at bar was that
Mr. Rouleau called witnesses whose testimony was unfavourable to his case.
There were also repeated last-minute requests to amend the Notice of
Appeal and to postpone the hearing in order to have more time to prepare.
[43] Mr. Rouleau would undoubtedly have been better
off accepting the settlement that the Minister offered him and all investors in
this type of R&D tax shelter on December 8, 1995 (Exhibit A‑6.). I have trouble
understanding why he did not do so. However, I do not believe that the penalty
contemplated in section 179.1, which states as follows, should be imposed
here:
179.1 No reasonable
grounds for appeal – Where the Tax Court of Canada disposes of an appeal by
a taxpayer in respect of an amount payable under this Part or where such an
appeal has been discontinued or dismissed without trial, the Court may,
on the application of the Minister and whether or not it awards costs, order
the taxpayer to pay to the Receiver General an amount not exceeding 10% of any
part of the amount that was in controversy in respect of which the Court
determines that there were no reasonable grounds for the appeal, if in the
opinion of the Court one of the main purposes for instituting or maintaining
any part of the appeal was to defer the payment of any amount payable under
this Part.
[Emphasis
added.]
[44] For a reason that I
cannot comprehend, Mr. Rouleau, like many taxpayers who invested in tax shelters like Cablotel, is unable to
accept that he was misled by proponents who were dishonest or incompetent, or
exercised poor judgment. These projects should never have been offered to
ordinary investors like him. The fact that the Commission des valeurs
mobilières du Québec [Quebec securities commission] did not approve the sale of
these shares to the public should have alerted the investors. Be that as it may,
Mr. Rouleau, blinded by his own conviction, continues to believe that he
is entitled to his tax deductions. Apparently, he even took roughly six weeks
of unpaid leave to prepare for the hearing of his appeal. Mr. Rouleau
represented himself, and the complexity of the relevant provisions of the Act
might have prevented him from correctly assessing the merits of his position. In
any event, I will give him the benefit of the doubt as to the reasons behind his
efforts. I am not satisfied that one of the primary reasons for his persistence
was to defer the payment of his taxes. As he pointed out, the interest
continues to accrue, and the longer the delay in repaying his tax liability,
the greater his tax burden gets. Consequently, I will not grant the
Respondent's request to have the penalty set out in section 179.1 of the
Act imposed.
[45] Moreover, since this
is an informal procedure appeal and there has been no patent abuse of process,
it is not appropriate to award costs to the Respondent either. This does not
mean that I do not believe that a form of abuse of the judicial system has
taken place here, because a similar appeal by Mr. McKeown was heard for 33
days, and the hearing of Mr. Rouleau's appeal required five days. In
neither instance did the appellants succeed. The two appeals should probably have been joined in
order to prevent the Minister from having to present lengthy and detailed proof
in support of his assessment twice. Other solutions could perhaps have attained
the objective of administering justice more effectively. However, it is my
opinion that, in the instant case, it is not appropriate to penalize
Mr. Rouleau by applying section 179.1 or by ordering him to pay costs.
[46] For all these reasons, Mr. Rouleau's appeal
is dismissed, without costs.
Signed at Georgeville, Québec, this 17th day of
September 2007.
"Pierre Archambault"
Translation
certified true
on this 12th day
of October 2007.
Brian McCordick,
Translator
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