Citation: 2014TCC1
Date: 20140107
Docket: 2004-2787(IT)G
BETWEEN:
ALLAN GARBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 91-1946(IT)G
AND BETWEEN:
GEOFFREY D. BELCHETZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 91-1816(IT)G
91-509(IT)G
AND BETWEEN:
LINDA LECKIE MOREL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, A.C.J.
Index
A: Overview.. 4
B: The Appellants’ Claims. 8
1. Allan Garber, 2004-2787(IT)G: The S/Y Garbo LP (Type 1 Limited
Partnership) 9
Expenses Claimed as of Final
Submissions - Type 1 Partnership - The S/Y Garbo LP—Allan Garber 10
2. Linda Leckie Morel, 1991-1816(IT)G, 1991-509(IT)G: The S/Y
Midnight Kiss LP (Type 2 Limited Partnership) 12
Expenses Claimed as of Final
Submissions--Type 2 Partnership--S/Y Midnight Kiss LP--Linda Leckie-Morel 14
3. Geoffrey Belchetz, 1991-1946(IT)G: The S/Y Close Encounters LP
(Type 3 Limited Partnership) 15
Expenses Claimed as of Final
Submissions--S/Y Close Encounters LP--Geoffrey Belchetz. 16
C: The Respondent’s Grounds Relied
on for Disallowance. 18
1. Sections 3 and 4 of the Income Tax Act 18
2. Sham.. 18
3. Expenses Not Incurred. 18
4. Timing of Expenses Deducted. 18
5. No Loans. 19
6. S/Y Garbo Capital Cost Allowance Restricted. 19
7. S/Y Garbo Interest Limitation. 19
8. S/Y Close Encounters LP - At-Risk Rules. 19
9. Section 245(1) 19
10. Section 67. 20
D: Issues. 20
E: Transactional Facts. 21
1. The Three Types of Limited Partnerships. 21
2. Investment in a Limited Partnership. 24
3. Charter Operations Agreements between the Limited Partnerships
and OCGC.. 27
F: The Factual Summary. 28
1. Early Days. 28
2. Marketing and Sale of Limited Partnerships. 29
3.
Development and Marketing of Yacht Chartering Business. 32
4. Planning, Design, Construction, or Acquisition of Yachts. 34
a) General 34
b) The Yachts. 34
c) The S/Y First Impressions. 34
d) The S/Y Garbo. 35
e) The Ondine (the S/Y Great Gatsby) 36
f) The Med 86. 36
g) The S/Y Gable. 36
h) Other contracts. 37
5. The CRA Audit and Investigation. 37
G: Misrepresentations: A Fraud from
Beginning to End. 39
a) The Offering Memoranda. 42
b) Misrepresentations to Professionals. 54
c) Misrepresentations in OCGC Materials: The “Fleet of Yachts” and
the “Gourmet Commissary” 59
d) Financial
Statements for Limited Partnerships. 61
e) Misrepresentations regarding Foreign Entities. 70
f) More False or Backdated Documents. 72
g) Further Misrepresentations to Investors. 73
h) Building and Purchasing Yachts. 77
i) Starlight Charter 90
j) Other OCGC Businesses. 95
H: Relevant Law and Analysis. 100
1. Did the three Limited Partnerships constitute a source of income
pursuant to sections 3 and 4 of the Income Tax Act and capable of suffering a
loss under sections 3, subsection 9(2), and section 96? 100
a) Is there a Source of Income for the Purposes of the Income Tax
Act?. 100
b) Were the Limited Partnerships Genuine Partnerships Carrying on a
Business in Common with a View to Profit?. 131
2. If the Limited Partnerships are determined to constitute an
income source, did they actually suffer the losses claimed by the Appellants?. 142
3. If the Limited Partnerships actually suffered the losses claimed,
did they properly compute the timing of partnership losses claimed for the
taxation years in question?. 145
a) The Law.. 145
b) Analysis. 146
4. If there was a source with genuine losses taken at the correct
times, what is the amount of capital cost allowance, if any, that the S/Y Garbo
Limited Partnership is entitled to take?. 146
a) The Law.. 146
b) Analysis. 147
5. Did each of the Appellants incur the interest expenses claimed
pursuant to paragraphs 18(1)(a) and 20(1)(c) of the Income Tax Act?. 147
a) The Law.. 147
b) Analysis. 150
6. Other Issues. 151
a) The At-Risk Rules and the S/Y Close Encounters Limited
Partnership. 151
b) Section 67. 153
I: Conclusion. 155
J: Costs. 155
[1]
The Appellants
subscribed through Overseas Credit and Guaranty Corporation (the “OCGC”) for one
of three types of Limited Partnerships. OCGC promoted and marketed the Limited
Partnerships as an opportunity to invest in a luxury yacht chartering business
structured to provide very attractive tax advantages to investors with limited
personal risk. OCGC acted as the general partner for each Limited Partnership. Einar
Bellfield incorporated OCGC in 1984 as its sole shareholder and was the
operating mind of the entity.
[2]
The investment involved
each Limited Partnership purchasing a luxury yacht from OCGC that was to be
delivered by a specified date. As the general partner, OCGC was committed to
building, marketing, and managing a luxury yacht chartering business known as
“Fantaseas” that would market and manage the yacht fleet of the Limited
Partnerships. OCGC contracted to provide each Limited Partnership with various
goods and services, in return for certain fees from the Limited Partnership. The
investment plan anticipated significant start-up costs, with profits projected
only in the long-term. However, as a Limited Partnership’s expenses exceeded
its revenue, the losses would flow down and be divided amongst the investors in
each Limited Partnership and deductible from their respective incomes.
[3]
The Fantaseas charters targeted
the high-end luxurious yacht chartering market. In this market at the time,
generally only an entire yacht could be chartered. Fantaseas aimed at an
unfilled market niche: the chartering of individual cabins in luxury yachts.
The Fantaseas concept was that each Limited Partnership yacht of a 60-foot
catamaran or an 80 feet plus monohull would have four equally sized staterooms
available individually for charter, along with crew quarters. Charter guests
would enjoy gourmet food, excellent full-staff service, and upscale accommodations.
Charters were to alternate between the Caribbean and the Mediterranean,
according to the season.
[4]
Starlight Canada Ltd.,
a company related to OCGC, was to coordinate the sale and marketing of the
yacht chartering business. An additional company related to OCGC, Fabu D’Or,
had the stated purpose of developing a commissary to prepare gourmet food
within the luxurious standards of the Fantaseas brand. OCGC had made
commitments to 36 Limited Partnerships to provide yachts of certain
specifications, but the how, where, and when the yachts would be built and
delivered changed several times. Depending on the timing, the yachts were
supposed to be built by companies in France (Dynamique, Chantier Yachting
France, or Maxi-Yachts), or at a site in Picton, Ontario. Various naval
architects and yacht builders participated at different points to design and
build the yachts promised by OCGC. As it turned out, only two yachts that met
the Fantaseas standards were ever purportedly built for the Canadian Limited
Partnerships.
[5]
The entire luxury yacht
chartering investment opportunity and the Fantaseas concept were the brainchild
of Einar Bellfield. The marketing and promotion of investment opportunities in
the luxury yacht Limited Partnerships was one of OCGC’s main investment
projects, although the corporation also developed and sold other investment
opportunities whose main premise appeared to have been that they were of a tax
advantageous nature.
[6]
The luxury yacht
Limited Partnerships were promoted by various accountants, lawyers, and others,
as tax shelters to their higher income-earning clients. The promoters received a
commission for each investor that subscribed. The promoters heavily emphasized
the tax advantages offered by the investment, which was the focus of much of
the promotional material provided to potential investors. The tax attractions
included the flow-through of losses from the substantial expenses incurred
during the start-up phase before any revenue was generated, as well as the
ability to claim depreciation on each yacht. For example, the Offering
Memorandum for the S/Y Garbo Limited Partnership provided an overview of the
tax advantageous nature of the investment opportunity as follows:
The OCG Corporation is dedicated
and organized to provide the taxpayer with attractive tax deals.
Tax investments differ from other
investments and they should be evaluated with certain objectives in mind. When
considering a regular investment, the basic concerns are risk versus return.
When evaluating tax investment,
your main concerns are maximum capital depreciation with a low or no-risk
exposure, and besides, there should be a good chance to obtain a reasonable
return on invested capital, plus a capital appreciation further down the line.
…
Due to this investment’s initial
high deductions and the declining capital cost allowance available to
purchasers of marine vessels, the calculation of owners [sic] net income may be
substantially influenced.
[7]
The structure of the
transaction was tax advantageous for the investor as explained by OCGC in the
Offering Memorandum for the S/Y Garbo Limited Partnership:
The Financing Program has been
tailored by OCG Corporation to maximize the available tax benefits for an
Investor and at the same time eliminate any cash outlay by the purchaser of a
Unit.
[8]
During the taxation
years in question, from 1984 until 1988, depending on the Limited Partnership
type, the investors claimed their share of their Limited Partnership’s losses
using the yearly loss schedules provided by OCGC. Investors also claimed their
interest payments on a promissory note, which was part of the consideration on
the purchase of a unit, as well as professional fees paid upon acquisition, in
the year of subscription.
[9]
In approximately April
1986, losses claimed by one Limited Partnership investor came to the attention
of the Canada Revenue Agency (the “CRA”). An
audit was commenced in October 1986. The CRA’s Tax Avoidance department became
involved and ultimately the CRA’s Special Investigations department ended up
conducting, in conjunction with the RCMP, search and seizures as well as
interviews of staffers and investors of OCGC. In the end, the CRA came to the
belief that OCGC was engaged in fraudulent activity in all the partnerships.
The Minister of National Revenue disallowed all losses, interest, and
professional fees claimed by the investors.
[10]
The CRA’s theory was
that fraud had occurred by or through OCGC. Criminal charges were prosecuted.
In 1994, Einar Bellfield was charged with two counts of fraud and two counts of
uttering false documents. Mr. Bellfield’s right hand man, Osvaldo Minchella,
was charged with the same counts several months later. A jury found both Mr.
Bellfield and Mr. Minchella guilty on all charges after a trial before the
Ontario Superior Court of Justice. These convictions were upheld on appeal and
leave to appeal to the Supreme Court of Canada was denied. Another player,
Pierre Rochat, was arrested in 1995. He pled guilty to uttering forged
documents in 1996, and was sentenced to six months in prison.
[11]
Of the over 600
investors that were reassessed, approximately 300 settled with the CRA. The
great majority of the investors however, proceeded with appeals before the Tax
Court of Canada. The Appellants before the Court are representative of those appeals
by other Appellants, save and except for a few that have decided not to be
bound by the result of these appeals.
[12]
The central issue is
whether each Limited Partnership constituted a genuine yacht charter business
between 1984 and 1988, the range of taxation years in which the Appellants
claimed Limited Partnership losses, interest, and professional fees relating to
their investment in a Limited Partnership unit. If the Limited Partnerships
were engaged in genuine businesses, then there was a source of income, and the
expenses claimed may be deductible depending on the resolution of other issues. If instead, I conclude that the
Appellants were defrauded from the very beginning of their investment, then the
Limited Partnership cannot constitute an income source for the Appellants and
no amounts claimed are deductible.
[13]
These appeals have a
lengthy procedural history. Notices of Assessment and/or Reassessment were
first issued in 1989 and/or 1990. Notices of Objection were filed in those same
years. The appeals were held in abeyance for many years pending negotiations
between the litigants and the final outcome of Mr. Bellfield and Mr.
Minchella’s trials and appeals in the criminal process. The criminal matters
ultimately came to a close in 2004. A number of Motions came before the Tax
Court of Canada regarding these appeals and caused further delays.
[14]
The taking of evidence
began on December 6, 2010 under the General Procedure Rule 119 over twenty
years after the first Notices of Assessment were issued. The trial proper began
on January 11, 2012, and in total, over 62 days of evidence was
given with some 34 witnesses plus some 23 Agreed Statements of Facts. The
hearing of the evidence occurred over an extended period to facilitate availability
of witnesses and to allow for a better organization and presentation of
evidence by both. As an aside, counsel for both parties worked together most
impressively and cooperatively in most instances to put evidence presented
before the Court that included tens of thousands of pages of multiple volumes
of exhibits that by my count has accumulated to the point of filling over 100
bankers boxes.
[15]
Four appeals were heard
on common evidence with each of the three Appellants having invested in one of
three Limited Partnership types. The 36 Limited Partnerships in which units
were sold were divided into three types according to whether they were marketed
and purchased in 1984, 1985, or 1986.
[16]
The Type 1 Limited
Partnerships were marketed and sold by OCGC in 1984. The 1984 Limited
Partnership before the Court is the "S/Y Garbo Limited Partnership" (the
“S/Y Garbo LP”). The Appellant Allan Garber purchased one of the 24 units in the
S/Y Garbo LP and held the unit in trust for himself, Stacy Mitchell and David
Sugarman.
[17]
The following year, in
1985, OCGC marketed and sold Type 2 Limited Partnerships. The 1985 Limited
Partnership before the Court is the "S/Y Midnight Kiss Limited
Partnership" (the “S/Y Midnight Kiss LP”). The appellant Dr. Linda
Leckie-Morel purchased one of the 24 units in the S/Y Midnight Kiss LP.
[18]
The Type 3 Limited
Partnerships were marketed and sold in 1986. This last type of Limited
Partnership before the Court bears some transactional difference due to the new
“at-risk rules” for Limited Partnerships introduced in the February 26, 1986 federal
budget. OCGC designed the transactional history of the 1986 Limited
Partnerships differently in an effort to grandfather them under the pre-1986 Income
Tax Act rules. The appellant Geoffrey Belchetz purchased one of the 25
units in the 1986 Limited Partnership before the Court, the “S/Y Close
Encounters Limited Partnership" (the “S/Y Close Encounters LP”).
[19]
The next three
subsections set out the claims and the procedural history associated with each
of the Appellants.
[20]
Allan Garber is a chartered
accountant and businessperson residing in Ontario. Mr. Garber’s appeal concerns
deductions from his income relating to his investment in the S/Y Garbo LP, a Type 1 Limited Partnership.
The deductions were claimed in the taxation years 1984, 1985, 1986, and 1987.
[21]
Mr. Garber learned
about the opportunity to invest in the Limited Partnership from a promoter, who
presented the Limited Partnerships as an investment in a capital asset, the
luxury yacht “the S/Y Garbo”, to be used in a yacht sailing chartering
business. The S/Y Garbo LP had 24 units available, with each full unit price
being $97,500. Mr. Garber purchased one-third of a unit for $32,500 in 1984.
[22]
Mr. Garber claimed a
share of the S/Y Garbo LP’s losses proportionate to his ownership of one-third of
a unit as business losses incurred as a result of making outlays and incurring
expenses for the purpose of gaining or producing business income, under section
3, subsection 9(2), and section 96 of the Income Tax Act (the “Act”),
as follows:
•
$15,058 out of
$1,084,064 total losses in the 1984 taxation year;
•
$5,381 out of $378,457
total losses in the 1985 taxation year;
•
$6,651 out of $478,902
total losses in the 1986 taxation year;
•
$6,552 out of $471,769
total losses in the 1987 taxation year.
[23]
Mr. Garber, per his
Fresh as Amended Notice of Appeal dated September 19, 2008, claimed the
interest he paid on one of two promissory notes used to purchase his one-third
of a unit in the S/Y Garbo LP and deducted from his income in each year that was
incurred, pursuant to paragraph 20(1)(c)(ii) of the Act, as
follows:
•
$635 in the 1984
taxation year;
•
$3,859 in the 1985
taxation year;
•
$2,512 in the 1986
taxation year;
•
$2,167 in the 1987
taxation year.
[24]
Finally, Mr. Garber
claimed $150 in professional fees he paid as part of his acquisition of
one-third of a unit, deducted in the year the expenses were incurred, pursuant
to paragraph 20(1)(e) of the Act.
[25]
The deductions for each
of the taxation years were disallowed by Notices of Assessment issued July 28,
1989. Mr. Garber filed Notices of Objection in October 1989, and appeals to the
Tax Court of Canada under paragraph 169(1)(b) of the Act.
[26]
Early in the trial, Mr.
Garber withdrew several of his claims. As of his Final Submissions, Mr. Garber
only pursues the expenses outlined in table below. The table is reproduced from
the Appellant’s Final Submissions:
Expenses Claimed as of Final
Submissions - Type 1 Partnership - The S/Y Garbo LP-Allan Garber (1/3 interest):
|
1984
|
|
|
|
Interest expense on Note #1
|
|
$2,166.00
|
|
Professional fees
|
|
$150.00
|
|
Feasibility study
|
$100,000
|
|
|
Production costs and professional fees
|
$120,000
|
|
|
Sales commissions and issue costs
|
$274,000
|
|
|
Linen, cutlery, china and utensils
|
$15,000
|
|
|
Marketing and advertising
|
$60,000
|
|
|
Subtotal:
|
$569,000
|
|
|
1/24 share x 1/3 of a unit
|
|
$7,902.78
|
|
Total:
|
|
$10,218.78
|
|
|
|
|
|
1985
|
|
|
|
Interest expense on Note #1
|
|
$2,166.00
|
|
Marketing and advertising
|
$60,000
|
|
|
Commissary Services
|
$90,700
|
|
|
Management Fees
|
$70,000
|
|
|
Subtotal:
|
$220,700
|
|
|
1/24 share x 1/3 of a unit
|
|
$3,065.28
|
|
Total:
|
|
$5,231.28
|
|
|
|
|
|
1986
|
|
|
|
Interest expense on Note #1
|
|
$2,166.00
|
|
Charter expenses
|
$12,663
|
|
|
Feasibility study update fee (50%)
|
$25,000
|
|
|
Management fee
|
$7,129
|
|
|
Marketing and advertising costs
|
$60,000
|
|
|
Moorage fees
|
$52,405
|
|
|
Depreciation
|
$139,696
|
|
|
Subtotal:
|
$296,893
|
|
|
1/24 share x 1/3 of a unit
|
|
$4,123.51
|
|
Total:
|
|
$6,289.51
|
|
|
|
|
|
1987
|
|
|
|
Interest expense on Note #1
|
|
$2,166.00
|
|
Charter expenses
|
$96,383
|
|
|
Feasibility study update fee (50%)
|
$25,000
|
|
|
Management fee
|
$100,000
|
|
|
Marketing and advertising
|
$60,000
|
|
|
Moorage fees
|
$55,139
|
|
|
Travel, consulting and general research
|
$35,000
|
|
|
Depreciation
|
$118,696
|
|
|
Subtotal:
|
$490,218
|
|
|
1/24 share x 1/3 of a unit
|
|
$6,808.58
|
|
Total:
|
|
$8,974.58
|
|
|
|
|
|
1988
|
|
|
|
Interest expense on Note #1
|
|
$2,166.00
|
|
Charter expenses
|
$123,788
|
|
|
Management fees
|
$100,000
|
|
|
Marketing and advertising
|
$64,200
|
|
|
Moorage fees
|
$58,424
|
|
|
Depreciation
|
$100,892
|
|
|
Subtotal:
|
$447,304
|
|
|
1/24 share x 1/3 of a unit
|
|
$6,212.55
|
|
Total:
|
|
$8,378.55
|
[27]
It should be noted that
the amount of the interest expenses claimed by Mr. Garber, in his Final
Submissions is not consistent with the expenses claimed in his Fresh as Amended
Notice of Appeal. In addition, as per the pleadings and notwithstanding a
schedule for expenses claimed as of March 26, 2012, which includes the taxation
year 1988, under this appeal Mr. Garber did not claim relief in the 1988
taxation year.
[28]
Dr. Linda Leckie Morel
is a medical doctor residing in Scarborough, Ontario. Dr. Leckie Morel’s
appeals concern deductions from her income in the taxation years 1985, 1987,
and 1988 in appeal number 1991-1816(IT)G, and the 1986 taxation year in appeal
number 1991-509(IT)G. Both appeals relate to her investment in the Limited
Partnership, S/Y Midnight Kiss LP”, a Type 2 Limited Partnership.
[29]
Dr. Leckie Morel was
presented with the opportunity to invest in the Limited Partnership by her
accountant. In 1985, she purchased one of 24 units in the S/Y Midnight Kiss LP
at a purchase price of $97,500. Her understanding was that the S/Y Midnight
Kiss LP was purchasing one yacht, the “S/Y Midnight Kiss”, to be used in a
luxury yacht chartering business.
[30]
Dr. Leckie Morel
deducted from her income the share of the S/Y Midnight Kiss LP’s losses
proportionate to her unit ownership as business losses incurred as a result of
making outlays and incurring expenses for the purpose of gaining or producing
business income, under section 3, subsection 9(2), and section 96 of the Act,
as follows:
•
$48,308 out of
$1,159,392 total losses in the 1985 taxation year;
•
$21,422 out of $514,120
total losses in the 1986 taxation year;
•
$15,565 out of $373,565
total losses in the 1987 taxation year;
•
$15,245 out of $365,878
total losses in the 1988 taxation year.
[31]
Dr. Leckie Morel also
deducted the interest paid on one of two promissory notes used to purchase her
unit of the S/Y Midnight Kiss LP, in each year that the interest was incurred,
pursuant to paragraph 20(1)(c)(ii) of the Act, as follows:
•
$11,757 in the 1985
taxation year;
•
$6,500 in the 1986
taxation year;
•
$6,500 in the 1987
taxation year;
•
$6,500 in the 1988
taxation year.
[32]
Finally, Dr. Leckie
Morel deducted $250 in professional fees paid in 1985, the taxation year the
expenses were incurred, relating to borrowing funds to purchase her unit in the
S/Y Midnight Kiss LP, pursuant to paragraph 20(1)(e) of the Act.
[33]
The deductions Dr.
Leckie Morel claimed for each of the taxation years were disallowed in Notices
of Assessment issued on September 7, 1989 for the 1985, 1986, and 1987 years; and
May 23, 1990 for the 1988 year. A Notice of Reassessment was issued on December
22, 1989 for the 1986 year. Dr. Leckie Morel filed Notice of Objections for
each taxation year.
[34]
On March 26, 2012, Dr.
Leckie Morel reduced the number of expenses she is claiming in these appeals.
The table below outlines the Appellant’s claims as of the Appellant’s Final
Submissions.
Expenses Claimed as of Final Submissions-Type
2 Partnership-S/Y Midnight Kiss LP-Linda Leckie-Morel:
|
1985
|
|
|
|
Interest expense on Note #1
|
|
$6,500.00
|
|
Professional fees
|
|
$250.00
|
|
Sales commissions and issue
costs
|
$274,000
|
|
|
Production costs and professional fees
|
$120,000
|
|
|
Feasibility study
|
$100,000
|
|
|
Marketing and advertising
|
$60,000
|
|
|
Commissary services
|
$90,700
|
|
|
Office expenses
|
$50,000
|
|
|
Subtotal:
|
$694,700
|
|
|
1/24 share
|
|
$28,945.83
|
|
Total:
|
|
$35,695.83
|
|
|
|
|
|
1986
|
|
|
|
Interest expense on Note #1
|
|
$6,500.00
|
|
Marketing and advertising
|
$60,000
|
|
|
International promotion
|
$35,000
|
|
|
Feasibility study update (50%)
|
$25,000
|
|
|
Management fee
|
$100,000
|
|
|
Subtotal:
|
$220,000
|
|
|
1/24 share
|
|
$9,166.67
|
|
Total:
|
|
$15,666.67
|
|
|
|
|
|
1987
|
|
|
|
Interest expense on Note #1
|
|
$6,500.00
|
|
Marketing and advertising
|
$60,000
|
|
|
International promotion
|
$40,000
|
|
|
Feasibility study update (50%)
|
$25,000
|
|
|
Management fee
|
$100,000
|
|
|
Consulting fees
|
$35,000
|
|
|
Subtotal:
|
$260,000
|
|
|
1/24 share
|
|
$10,833.33
|
|
Total:
|
|
$17,333.33
|
|
|
|
|
1988
|
|
|
|
Interest expense on Note #1
|
|
$6,500.00
|
|
Marketing and advertising
|
$64,200
|
|
|
International promotion
Management fee
|
$40,000
$100,000
|
|
|
Subtotal:
|
$204,200
|
|
|
1/24 share
|
|
$8,508.33
|
|
Total:
|
|
$15,008.33
|
|
|
|
|
[35]
Geoffrey Belchetz is a
businessperson residing in Toronto, Ontario. Mr. Belchetz appeals the
disallowance of deductions from his income relating to his investment in the
Limited Partnership, the “S/Y Close Encounters LP”, a Type 3 partnership, for
the taxation years 1986, 1987, and 1988.
[36]
A promoter of the
Limited Partnerships presented Mr. Belchetz with the opportunity to invest in a
Limited Partnership that would own a capital asset, the luxury yacht “S/Y Close
Encounters”, to be used in a yacht chartering business. In 1986, Mr. Belchetz
purchased one of the 25 units in the S/Y Close Encounters LP at a purchase
price of $116,000.
[37]
Mr. Belchetz deducted
his proportionate share of the S/Y Close Encounters LP’s losses as business
losses incurred as a result of making outlays and incurring expenses for the
purpose of gaining or producing business income, under section 3, subsection
9(2), and section 96 of the Act, as follows:
•
$35,900 out of $897,500
total losses for the 1986 taxation year;
•
$22,507 out of $562,675
total losses for the 1987 taxation year;
•
$26,932 out of $673,294
total losses for the 1988 taxation year.
[38]
Mr. Belchetz also
deducted the interest paid on one of two promissory notes used to purchase his
unit of the S/Y Close Encounter LP pursuant to paragraph 20(1)(c)(ii) of
the Act. The amounts in each year were:
•
$9,000 in the 1986
taxation year;
•
$9,445 in the 1987
taxation year;
•
$750 in the 1988
taxation year.
[39]
In addition, Mr.
Belchetz deducted $6,000 in professional fees paid to borrow funds to purchase
his partnership unit in 1986, the taxation year the expenses were incurred,
pursuant to paragraph 20(1)(e) of the Act.
[40]
Mr. Belchetz’s
deductions for each of the taxation years, 1986, 1987, and 1988, were
disallowed by Notices of Assessment issued on November 2, 1990. Mr. Belchetz
filed Notices of Objection for each taxation year on November 12, 1990. On June
14, 1991, the Minister of National Revenue confirmed the assessments by Notice
of Confirmation.
[41]
Just as the other two
Appellants did early in the trial, Mr. Belchetz reduced the expenses he is
claiming. Mr. Belchetz’s current claims as of Final Submissions are set out in
the table below:
Expenses Claimed as of Final Submissions-S/Y
Close Encounters LP-Geoffrey Belchetz:
|
1986
|
|
|
|
Interest expense on Note #1
|
|
$9,000.00
|
|
Professional fees
|
|
$6,000.00
|
|
Sales and marketing consulting fees and
other issue costs
|
$290,000
|
|
|
Feasibility study
|
$100,000
|
|
|
Production costs and professional fees
|
$90,000
|
|
|
Inspecting building of yacht
Travel and building consulting fee
|
$60,000
$35,000
|
|
|
Management fee
|
$30,000
|
|
|
Marketing and advertising
|
$25,000
|
|
|
Subtotal:
|
$630,000
|
|
|
1/25 share
|
|
$25,200.00
|
|
Total:
|
|
$40,200.00
|
|
|
|
|
|
1987
|
|
|
|
Interest expense on Note #1
|
|
$9,445.00
|
|
Feasibility study update (50%)
|
$25,000
|
|
|
Inspecting building of yacht
|
$60,000
|
|
|
Travel and building consultation fee
|
$35,000
|
|
|
Marketing and advertising
|
$30,000
|
|
|
Travel and promotion
|
$35,000
|
|
|
Management fee
|
$100,000
|
|
|
Subtotal:
|
$285,000
|
|
|
1/25 share
|
|
$11,400.00
|
|
Total:
|
|
$20,845.00
|
|
|
|
|
|
1988
|
|
|
|
Interest expense on Note #1
|
|
$750.00
|
|
Feasibility update fee (50%)
|
$25,000
|
|
|
Inspecting building of yacht
|
$60,000
|
|
|
Travel and building consultation fee
|
$35,000
|
|
|
Management fee
|
$100,000
|
|
|
Marketing and advertising
|
$140,000
|
|
|
Travel and promotion
|
$40,000
|
|
|
Subtotal:
|
$400,000
|
|
|
1/25 share
|
|
$16,000.00
|
|
Total:
|
|
$16,750.00
|
[42]
The Respondent submits
numerous grounds for the disallowance of the partnership losses, interest, and
professional fees claimed by the Appellants. Firstly, the Respondent argues
that the Limited Partnerships did not constitute an income source under
sections 3 and 4 of the Act because there was no genuine yacht charter
operation business; no yacht chartering business was ever carried on, and there
was no reasonable expectation of profit. The Respondent asserts that the
Limited Partnerships were not true partnerships in law because OCGC did not
carry on business in common with the investors in any of the 36 Limited
Partnerships in which units were sold.
[43]
The Respondent further
argues that the transactions were mere shams entered into with the Limited
Partnerships and that OCGC and Mr. Bellfield never had the intention to carry
on a business in common with the Limited Partnerships. The promissory notes were
presented as mere shams used by OCGC and Mr. Bellfield as part of his scheme to
defraud the Minister and the investors.
[44]
In the alternative, the
Respondent argues that the Limited Partnerships did not actually incur expenses
for the purpose of gaining or producing business or property income.
[45]
Again, in the
alternative, the Respondent asserts that under subsection 9(1) and 18(9),
certain expenses incurred are not deductible for timing reasons because no
deduction is available for outlays or expenses incurred in the taxation year
when the services are to be rendered after the end of that taxation year.
[46]
The Respondent also
submits that the promissory notes do not constitute actual loans. The
Respondent asserts that no money was lent or advanced to the investors and
therefore no interest can be deducted under subparagraphs 20(1)(c)(i) or
20(1)(c)(ii) of the Act or under the meaning of an outlay or
expense found in paragraph 18(1)(a).
[47]
Specifically regarding
the Type 1 Limited Partnership, the S/Y Garbo LP, the Respondent asserts that
any capital cost allowance deductions claimed pursuant to paragraph 20(1)(a)
in the taxation years of 1986, 1987, and 1988 are restricted by the leasing
property rules found in the Income Tax Regulations at subsections
1100(15), 1100(17), 1100(17.2), and 1100(17.3).
[48]
Alternately, the Respondent
submits that interest claimed under paragraph 20(1)(a) must be limited by
the half-year rule outlined in subsection 1100(2) of the Income Tax
Regulations because the S/Y Garbo yacht was not acquired in the years prior
to 1986.
[49]
Regarding the Type 3
Limited Partnership, the S/Y Close Encounters LP, the Respondent submits that
Mr. Belchetz’s partnership interest is not exempt from the at-risk rules
introduced on February 26, 1986 because it was not actively carrying on a
business on a regular and continuous basis before that date. The Respondent
further submits that as a non-exempt partnership unit, Mr. Belchetz’s claims
are limited to the amount he was at-risk for. Under the new rules introduced, his
claims are limited to a maximum of $6,000 in losses.
[50]
The Respondent further
claims that the deductions sought by the Appellants are barred by (former)
subsection 245(1) of the Act because to allow the expenses or
disbursements would unduly or artificially reduced the Appellants’ income.
[51]
Further, the Respondent
submits that even if the Limited Partnerships are determined to be a source of
income, the expenses claimed are barred from deductibility under section 67
because they were not reasonable and were not incurred to earn income.
[52]
The issues for the
Court to determine are as follows:
1.
Did each of the three
Limited Partnerships constitute a source of income pursuant to sections 3 and 4
of the Act and are capable of suffering a loss under sections 3, 96, and
subsection 9(2)?
2.
If the Limited Partnerships
are determined to constitute a source of income, did they actually suffer the
losses claimed by the Appellants?
3.
If the Limited
Partnerships actually suffered the losses claimed, did they properly compute
the timing of partnership losses claimed for the taxation years in question?
4.
If there was a source
with genuine losses taken at the correct times, what is the amount of capital cost
allowance, if any, that the S/Y Garbo LP is entitled to deduct?
5.
Did each of the
Appellants incur the interest expenses claimed pursuant to paragraphs 18(1)(a)
and 20(1)(c) of the Act?
6.
Did the Minister
properly disallow the partnership losses, interest, and professional fees?
[53]
The general structure
of each Limited Partnership type is set out below, followed by a description of
the subscription process for all investors and a detailed review of the
individual investor subscription process using one of the Limited Partnership
types as an example.
[54]
OCGC registered 79
Limited Partnerships, of three different types depending on the year
registered. Of the 79 Limited Partnerships, units were sold in 36 Limited
Partnerships. Einar Bellfield was the controlling mind of the general partner
and all original limited partners.
[55]
OCGC entered into
Limited Partnership Agreements with each Limited Partnership. The signatory was
the original limited partner, who was either Einar Bellfield (in trust), for
Type 1 and Type 2 Limited Partnerships, or OCGC Enterprises (in trust) for Type
3 Limited Partnerships.
a) Type 1 Limited
Partnerships – 1984 LPs
[56]
The original limited partner
of the Type 1 Limited Partnerships was Einar Bellfield, as bare trustee, and
the general partner was OCGC. There were 24 units per Type 1 Limited
Partnership. The price per unit in the Type 1 Limited Partnerships was $97,500.
If fully capitalized, each Type 1 Limited Partnerships would have born a total
capitalization of $2.34 million.
[57]
The two Type Limited
partnerships that the OCGC sold units in, both registered on November 28, 1984,
were:
1.
The S/Y
Garbo Limited Partnership
2.
The S/Y
Gable Limited Partnership
[58]
To provide a broad
overview of the subscription process, an investor subscribed to a Type 1
Limited Partnership by providing two Promissory Notes (“Promissory Note #1” and
“Promissory Note #2”) for a total amount of $97,500. In addition, a payment of
$450 in professional fees was made for the unit acquisition. The $6,500 in
interest for the 1984 year was also payable.
b) Type 2 Limited Partnerships
– 1985 LPs
[59]
The 1985 Limited
Partnerships’ original limited partner was Einar Bellfield, as bare trustee,
and their general partner was again OCGC. There were 24 units per Type 2
Limited Partnership and the price per unit was also $97,500. If fully
capitalized, there would be a total capitalization of $2.34 million.
[60]
Fourteen Type 2 Limited
Partnerships were registered on March 20, 1985, except for the S/Y Change of
Seasons Limited Partnership and the S/Y Main Event Limited Partnership. These
two partnerships were registered on November 8, 1985. The fourteen Type 2
Limited Partnerships were:
1.
Autumn
Sonata Limited Partnership
2.
S/Y
Bergman Limited Partnership
3.
S/Y
Bogart Limited Partnership
4.
S/Y
Casablanca Limited Partnership
5.
Queen
of Hearts Limited Partnership
6.
Ecstasy
Limited Partnership
7.
Going
My Way Limited Partnership
8.
S/Y Great
Gatsby Limited Partnership
9.
High
Sierra Limited Partnership
10.
Human
Desire Limited Partnership
11.
Serenade
Limited Partnership
12.
S/Y Midnight
Kiss Limited Partnership
13.
S/Y
Change of Seasons Limited Partnership
14.
S/Y
Main Event Limited Partnership
[61]
To subscribe to a 1985
Limited Partnership, the investor provided a down payment ranging from $4,000
to $6,000, as well as two Promissory Notes for the total amount of $93,500. An
additional varying amount was also paid in professional fees for the
acquisition of a unit. The interest owed for the 1985 subscription year, was
also payable.
c) Type 3 Limited
Partnerships – 1986 LPs
[62]
The 1986 Type 3 Limited
Partnerships had a different structure due to OCGC’s intentions to grandfather
the Limited Partnerships so that they would not fall under the new at-risk
rules introduced in the February 26, 1986 federal budget. This effort consisted
of OCGC Enterprises Inc. first acquiring all of the units of the Type 3 Limited
Partnerships before the February 26, 1986 deadline, and then reselling the
partnership units to the investors.
[63]
The 25 units per Type 3
Limited Partnership each had a unit price of $116,000. If fully capitalized,
each Limited Partnership’s total capital was $2,900,000. Units were sold in the
following twenty Type 3 Limited Partnerships, all registered on January 27,
1986:
1. Ambrosia Limited Partnership
2. Blue Gardenia Limited Partnership
3. Chasing Rainbows Limited Partnership
4. S/Y Close Encounters Limited
Partnership
5. Compassion Limited Partnership
6. Duet In the Sun Limited Partnership
7. Elegance Limited Partnership
8. Forbidden Fruit Limited Partnership
9. Holiday For Lovers Limited Partnership
10.
Midnight
Lace Limited Partnership
11.
Morning
Star Limited Partnership
12.
Operation
Moonlight Limited Partnership
13.
Pleasure
Seekers Limited Partnership
14.
Silvery
Moon Limited Partnership
15.
Sweet
Sensations Limited Partnership
16.
Winds
of Paradise Limited Partnership
17.
Wine
& Roses Limited Partnership
18.
Evening
Star Limited Partnership
19.
Opal
Mist Limited Partnership
20.
You
Only Live Once Limited Partnership
[64]
To purchase a Type 3
Limited Partnership from OCGC Enterprises Inc., an investor was required to
provide a $6,000 down payment, two Promissory Notes for the total amount of
$110,000, and varying amounts for professional fees ($9,000 for Mr. Belchetz)
related to the acquisition of a Limited Partnership unit. Payment was also
required for $9,000 in interest due in 1986, the year of subscription.
[65]
An investor in evaluating
the investment opportunity or subscribing to a Limited Partnership dealt with a
variety of documents.
[66]
First, investors were
provided with an Offering Memorandum that outlined the investment opportunity,
the charter market, financial projections, income tax considerations, the
management of the partnership, and other details. While there were some
differences between each year’s Offering Memoranda based on the distinctions
between the Limited Partnership types, the general terms of the investment were
quite similar.
[67]
Upon deciding to
invest, an interested party became a limited partner by signing a Subscription
Agreement and agreeing to be bound by a Limited Partnership Agreement that was
previously signed by the original limited partner. The original limited partner
was either Einar Bellfield (Type 1 and Type 2 Limited Partnerships) or OCG
Enterprises (Type 3 Limited Partnerships). Through the subscription agreement,
the investor also granted OCGC Power of Attorney and the right to act as an
agent for the Limited Partnership for purposes relating to the partnership.
[68]
An investor in a Type 1
and Type 2 Limited Partnerships then signed two promissory notes, promising to
pay the principal amounts and interest outlined in each note. The exact amounts
varied depending on the partnership type. For the Type 3 Limited Partnerships,
the financing portion differed in that investors signed an agreement to assume
the financing and related interest, charges, and expenses purportedly originally
arranged by OCGC for OCG Enterprises. This difference is again based on the
intention to grandfather the Type 3 Limited Partnerships by first selling the
partnership units to OCG Enterprises and claiming that they were actively
carrying on a business on a regular and continuous basis before the at-risk
rules came into effect.
[69]
A number of other key agreements
and documents were part of the investment process. Amongst others, there were:
1)
a loan agreement
between OCGC and the investor, with OCGC agreeing to loan the amount of the
subscription price outstanding after the down payment, if any, and with the
promissory notes provided by the investor securing the loan;
2)
an agreement that the
investor agree to guarantee and indemnify OCGC for his or her share of any
expenses incurred on behalf of the Limited Partnerships;
3)
a Buy-Back Agreement,
signed between OCGC and each investor, or assumed from OCG Enterprises, as was
the case for the Type 3 Limited Partnerships. As described in the S/Y Garbo LP,
this agreement granted the subscriber the right to force OCGC to buy the unit
back pursuant to the conditions set out:
The Partner has an
irrevocable right to sell the Units in the Partnership to OCG on the terms and
in accordance with the provisions contained herein and OCG must purchase such
unit in accordance with such provisions.
[70]
To provide a
summarizing illustration, the paragraph below outlines the key components of
the investment process. The S/Y Close Encounters LP is used as an example, with
some differences due to the intention to avoid the new at-risk rules. The S/Y Close
Encounters LP’s compliance with the at-risk rules is at issue in this case,
however, it is useful to employ it as a model.
[71]
An investor subscribed
to a unit of the S/Y Close Encounters LP by, inter alia:
1.
Signing a Subscription
Agreement and Power of Attorney Agreement with OCGC (acting on behalf of OCG
Enterprises), the owner of 100% of the S/Y Close Encounters LP units included
the investor’s agreement to the following:
a)
The agreement is bound
by the Limited Partnership Agreement, previously signed by the original limited
partner, OCG Enterprises, bare trustee.
b)
The investor’s
assumption of the financing that was originally arranged by OCGC for OCG
Enterprises and the assumption of all related obligations to pay interest,
charges, and expenses. The purported existing financing amounted to $110,000 of
the $116,000 unit price, and was secured by two promissory notes. The first
promissory note was in the principal amount of $75,000 and the second
promissory note was in the principal amount of $35,000.
c)
The assignment of a
Buy-Back Option from OCCG on behalf of OCG Enterprises, to the subscriber.
d)
The investor’s
agreement to grant OCGC Power of Attorney and to appoint OCGC as his agent and
true and lawful attorney for purposes in connection with the S/Y Close
Encounters LP.
e)
The investor’s
agreement to make the following current and future payments to OCGC:
•
$6,000 of the $116,000
total purchase price of the partnership unit to be paid immediately;
•
Payments for interest that
accrued on the first Promissory Note between January 1, 1986 and the closing
date of the unit purchase, with $750 due for each month; and
•
Interest payments of
$750 from January 31, 1987 to December 31, 1991.
2.
Signing a Guarantee or
Indemnity Agreement, whereby the investor agreed to indemnify OCGC for his
share of any payments made by OCGC on behalf of the S/Y Close Encounters LP in
carrying out its agreements with the Limited Partnership.
[72]
In its capacity as general
partner, OCGC entered into a number of agreements related to charter operations
with each Limited Partnership. The key agreements that OCGC entered into with
the Limited Partnerships included:
1)
A Limited Partnership
Agreement, setting out the general terms of the partnership and the
relationship and rights of the limited partner and the general partner;
2)
An Agreement of
Purchase and Sale between the Limited Partnership and OCGC, in which the
Limited Partnership agreed to buy a yacht from OCGC for a purchase price that
ranged from $2.34 million to $2.9 million, depending on the partnership year.
This was equivalent to the total investment in the Limited Partnership if the
limited partnership was fully capitalized;
3)
A Management Agreement
where OCGC contracted to manage the Limited Partnership’s yacht chartering
business;
4)
An Agreement for
Providing a Line of Credit, where OCGC contracted to arrange an operating line
of credit for the Limited Partnership to ensure adequate cash flow and cover
any deficits that may arise in the course of yacht charter operations.
[73]
OCGC was incorporated
in May 1984 by Einar Bellfield as the sole director and shareholder. The
Appellants describe this vision as follows:
Mr. Bellfield had a
vision (among other ideas) to purchase and/or to design and manufacture luxury
sailing yachts, and in addition, to provide management and financial assistance
within the yacht charter industry. In this regard, Mr. Bellfield can be
considered a pioneer.
According
to the testimony of certain individuals, some believed that Mr. Bellfield’s
luxury yacht charters concept was novel and had the potential to do well and
reach a new market.
[74]
Initially, from 1984 to
August 1985, the OCGC team consisted only of Mr. Bellfield and his wife Tina
working out of their condominium den and occasionally using office premises at
the TD Business Centre. In August 1985, Osvaldo Minchella joined the OCGC team
after meeting Mr. Bellfield at RadioShack. Mr. Minchella was working at
RadioShack at the time and sold Mr. Bellfield a computer. It was not until May
1986 that OCGC operations moved to its own office on Richmond Street in Toronto.
[75]
As noted, Mr. Bellfield
incorporated OCGC in May 1984 as the sole director and shareholder. On July 15,
1984, Einar Bellfield received a discharge as a bankrupt, after having filed
for bankruptcy on June 3, 1983. Several months after receiving the bankruptcy
discharge, Mr. Bellfield was arrested on October 2, 1984 on four fraud charges
related to another matter. The S/Y Garbo LP and S/Y Gable Limited Partnership’s
Offering Memoranda were distributed shortly thereafter in December 1984. After
a preliminary inquiry decision committing him to stand trial, Mr. Bellfield was
eventually acquitted on those other charges in 1987.
[76]
Before the
incorporation of OCGC in May of 1984, Mr. Bellfield began developing the
concept for the luxury yacht chartering Limited Partnerships. The Appellant Mr.
Garber first became aware of OCGC through a client. Mr. Bellfield had approached
that client with the opportunity to purchase units in the 1984 Limited
Partnerships. The client asked Mr. Garber to review the investment
documentation that Mr. Bellfield had presented.
[77]
Mr. Garber’s evaluation
of Mr. Bellfield’s initial attempt at structuring the Limited Partnerships was
that the financial projections were incomplete and the outline of the investment’s
business potential was brief. Mr. Garber was not prepared to touch the
investment at that particular point in time. In his view, there were problems
with the transaction’s structure and the level of information disclosed to
investors. Mr. Garber thought it was a very aggressive tax deal and at that
time he advised his clients not to make the investment.
[78]
Mr. Garber referred Mr.
Bellfield to his accounting partner Stacey Mitchell, a chartered accountant,
because the Limited Partnership offerings were more in line with Stacey
Mitchell’s area of professional focus on cash flow projections. Mr. Mitchell
refined the proposal, with the more rigorous product ultimately presented to
Mr. Garber. At that point, Mr. Garber decided that it was an interesting
opportunity for his partners and his clients. Mr. Garber and two of his accounting
firm partners, Mr. Mitchell and Mr. Sugarman, purchased a unit together. A number
of their clients also bought units.
[79]
The 1984 Limited
Partnership units in the S/Y Garbo LP and the S/Y Gable Limited Partnership
(the “S/Y Gable LP”) were sold by word of mouth, through the accounting firm
Moses, Sugarman & Company (i.e. Stacey Mitchell), by lawyers familiar with
OCGC, and by Mr. Bellfield himself. At this stage, there was no marketing strategy
for the Limited Partnerships. The development of the promotion of the Limited
Partnerships was still in the embryonic stage. Each potential investor was
provided a variety of documentation including the 1984 Offering Memorandum.
[80]
In 1984, only two Limited
Partnerships were registered and sold. The sales and promotion of the Limited
Partnership units significantly increased the following year however, and units
in 14 Limited Partnerships were sold. The 1985 Offering Memoranda were more
refined, although they remained substantially similar to the 1984 Offering
Memoranda. During this period, efforts to promote the investment opportunity
began to spread around a network of promoters and brokers.
[81]
The brokers and
promoters included lawyers and accountants who knew of Mr. Bellfield or OCGC
and were doing work of some kind for them. These lawyers and accountants began
to refer clients and received both professional fees from clients and
commissions from OCGC. They also purchased some of the units themselves. David
Franklin, a lawyer, was one of the key brokers who came on board to peddle the
Limited Partnerships after meeting with Mr. Bellfield in the summer of 1985. He
was involved in the marketing of the 1985 and 1986 transactions, but by 1987,
he was no longer involved.
[82]
Mr. Franklin became one
of the most significant promoters for OCGC. He prepared an investment proposal
that contained information based on the Offering Memoranda. He circulated this
investment proposal to prospective buyers, brokers, and promoters. He prepared
a template letter that he sent to his various sub-agents who were selling
units. The investment proposal solely emphasized the tax benefit as according
to him, he and the sub-agents were marketing a tax deal and not a business
investment opportunity.
[83]
Mr. Franklin testified
that although he was a lawyer himself, he relied upon the lawyers and
accountants’ opinions on the tax issues. As far as an investment from a
business point of view, Mr. Franklin thought it was a great business opportunity
because the investor would be making money from revenue generated from the
charter business of the yachts. In his opinion, the worst-case scenario was
that as long as the Limited Partnership was carrying on the business, the
investor could claim any losses. Although Mr. Franklin believed that Mr.
Bellfield was acquiring yachts, he believed that even if there was no revenue
you could still claim expenses and still benefit from the transaction on a cash
basis.
[84]
Upon beginning his
testimony, Mr. Franklin sought and was granted protection under section 5 of the Canada Evidence Act and
section 9 of the Ontario Evidence Act. His attendance was under subpoena
duces tecum. In terms of credibility, I note that Mr. Franklin was a
very fast talker. He had an explanation for everything and it was clear that he
had drunk Mr. Bellfield’s Kool-Aid. He did not want to answer the questions
presented and made attempts to give a side answer rather than answer a question
directly. On many occasions, he did not recall certain information despite his
central promotional role. Mr. Franklin blamed everyone else for being
responsible for misrepresentations, including the lawyers, accountants, and the
CRA. Nonetheless, I assessed that the evidence of Mr. Franklin, which I reference
here, is adequately credible to establish the nature of his promotional
efforts, the timeframe, and character of certain misrepresentations.
[85]
There were numerous
lawyers and accountants involved with, acting for, or in concert with Mr.
Bellfield, OCGC or the Limited Partnerships at various times. There were also
promoters, agents, and subagents, all peddling the units. Some of the lawyers
and accountants had multiple clients and professional relationships that would
obviously be in conflict. For example, they charged professional fees to
investors who were clients while receiving commissions on sales from OCGC. Also,
an accounting firm might prepare the financial statements for OCGC on a pro
forma basis for a Limited Partnership while at the same time, sell units in a
Limited Partnership to its own clients, purchase their own units, and even
provide tax opinions for the Offering Memoranda. The lawyers acted similarly,
to some extent. This did not occur in every case but there seemed to be an
attitude of “what’s wrong with that?” Maybe this was not a conflict or
something that would cause a professional to hesitate in 1984, but it would
certainly raise an eyebrow in the 21st century. Where did this all
leave the investor, whether it was in 1986, 2004, or 2013? In reviewing the
evidence, one is struck repeatedly by the questions: who was working for whom, and
in what capacity? What was the duty owed to whom, when, and what personal or
business interest did they have in the activity?
[86]
In the planning,
development and marketing of the luxury yacht chartering vision there were a
number of people who were responsible for or participated in the marketing,
sales, and operations of the Limited Partnership from June 1986 to 1990. Steven
Leibtag provided sales and marketing advice and was present from December 1985
through to late 1987. Rose Ashworth was present from September 1986 to June or
July 1989 as a sales representative for Fantaseas. David Martin was present
from March 1988 to 1989 conducting marketing and sales for Fantaseas. Bruce
Oekler was involved from December 1985 to December 1986 in developing a product
for travel agents in Florida. Helen Fullem was involved from December 1988 to
March 1989 in promoting Fantaseas overseas in Europe.
[87]
The Fantaseas concept
of elegant cruises on large luxury yachts with four separate cabins
accommodating upwards of eight people, targeted the high-end market. Starting
in late 1986, the development and marketing of the luxury yacht charter profile
of Fantaseas was mainly events or activities. Starlight representatives visited
travel agencies in Toronto, Ontario. They offered familiarization tours to
acquaint travel agents with the Fantaseas product. Starlight attempted to
develop a corporate incentive program. Trade shows were attended in New York and Chicago as well as two trade shows in Toronto to promote Fantaseas. An
audio-visual presentation was developed and used in office presentations in Toronto. Cold calls were made and brochures were developed and circulated. Itineraries were
developed for yacht charters in the Caribbean with particulars for restaurants,
departure sail times and dates, activity options, sources of food, etc. A
well-known chef named Jacques Pepin and his menus and food were used for
promotional purposes. There was also solicitation of market houses in Europe. There was an audio-visual presentation at the Casa Loma in Toronto as well as speakers,
which included Mr. Bellfield. This was basically a Q+A session for present
investors and to advance the sale of units in Limited Partnerships.
[88]
Attempts were made to
develop local government relations in St. Lucia and to establish a foothold
operational centre in the Rodney Bay Marina. Attempts were made to develop
appropriate crew training programs as well as plans for food and beverage
procurement and delivery. Attempts were undertaken to obtain media coverage
through an article entitled “Ultimate Charter” in May 1986, written by Bruce
Kemp, the author who also happened to conduct the feasibility study for OCGC
for the luxury yacht charter business proposed.
[89]
Professionals produced
a video shot in the Caribbean, and travel agents used certain shots from the
video. Advertisements were placed in Lifetime magazine and the Globe and Mail.
There was also a promotional kit developed for use by the travel agents but it
was in short supply and those who were trying to develop contact with the
travel agents industry could not obtain sufficient copies needed to market the
product.
[90]
The development,
marketing, and chartering of the Fantaseas concept was not without its problems.
None of the individuals retained had any experience in the development of a
start-up business of marketing yachts. They had no experience in the design or
construction of yachts, the marketing and sales of yachts, or marketing and
sales to the high-end niche market they were pursuing. A feasibility study of
some four volumes was completed in 1986 for OCGC, with an update completed some
two years later. Despite the existence of these studies, Ester Allan (now Ester
Palmer and referred to as such from herein), who was overall responsible for
the marketing, sale and operations of Starlight and the Fantaseas concept,
never read the feasibility studies. Her major sales representatives, Rose
Ashworth, David Martin, and Stephen Leibteg were not even aware of the studies.
[91]
At a certain point, the
marketing efforts were no longer productive because there was no product (i.e.
yachts) or an insufficient amount to bring the marketing of the luxury yacht
charters to fruition. Despite the 36 yachts promised to the Limited
Partnerships, OCGC only ever acquired. The S/Y Garbo was an 80-foot yacht, the
S/Y Gable was an 88-foot yacht, and the S/Y First Impressions was a 50-foot
yacht. The S/Y Garbo was not available for chartering until the spring of 1987
and the S/Y Gable was not launched until November 1988. The S/Y First
Impressions did not meet the Fantaseas concept and was looked upon as a
provisioning vessel. The following section provides an overview of the
planning, design, construction, and acquisition of yachts by OCGC.
[92]
The success of the 1984
Limited Partnerships and all successive Limited Partnerships sold was totally
dependent upon having a yacht for each Limited Partnership to participate in
the luxury yacht chartering business for the purpose of earning income. Each
yacht would be a part of the fleet of yachts used in the Fantaseas concept of
elegant cruises on luxury yachts sold on charter with four cabins per yacht.
[93]
As mentioned above, OCGC
committed to deliver 36 yachts. For the 1984 Limited Partnerships, the S/Y
Garbo and S/Y Gable were to be under construction in 1984 and delivered in 1985.
For the 1985 Limited Partnerships, 14 additional yachts were due by December
31, 1985, bringing the total number of luxury yachts to be completed by the end
of 1985 to 16 vessels. In 1986, OCGC committed to delivering an additional twenty
yachts by the final months of 1989 or early 1990.
[94]
As will be described
hereafter, there were really only three yachts ever owned or purportedly owned
by OCGC or held by OCGC: the S/Y First Impressions, the S/Y Garbo and the S/Y
Gable. Only one of the yachts was available in 1985; the S/Y First Impressions,
which was only 50 foot and not suitable for the Fantaseas concept. Neither the S/Y
Garbo nor the S/Y Gable were ever legally owned or registered in the names of
the Limited Partnerships, nor used to the benefit of the S/Y Gable or S/Y Garbo
Limited Partnerships.
[95]
The first yacht
acquired by OCGC was the S/Y First Impressions. Mr. Bellfield took possession
of the 50-foot yacht, to avoid losing OCGC’s deposit paid on the S/Y Garbo. On
November 27, 1985, title for the S/Y First Impressions was transferred to OCGC.
This yacht did not satisfy OCGC’s obligations to deliver large luxury yachts to
the Limited Partnerships.
[96]
The S/Y First
Impressions was purported to be a provisioning yacht for the luxury yacht
charters but in November 1985 but there were no yachts to provision. The First
Impressions arrived in St. Lucia in March 1986 where there was a dispute over
the lack of payment for the crew services rendered in the trans-Atlantic
crossing that resulted in the arrest of the S/Y First Impressions. Eventually
the ownership of the S/Y First Impressions was transferred to Tina Bellfield on
June 26, 1992, and the yacht was located in Toronto, Ontario.
[97]
The second yacht
acquired by OCGC was the S/Y Garbo, purportedly intended for the S/Y Garbo LP. In
February 1985, Mr. Bellfield met the owners of Dynamique Yachts in France and discussed with them the possibility of building luxury yachts. Dynamique was to
build the S/Y Garbo for OCGC. Over an extended period of time, Mr. Bellfield
failed to arrange financing for the S/Y Garbo, and to meet his financial
obligations to Dynamique. Various agreements and memorandums were drafted and
payments options rearranged. Repeatedly, Mr. Bellfield did not meet his full financial
obligations. A $50,000 deposit was paid, but further payments were not
forthcoming for a significant period of time. Mr. Bellfield faced the risk of
losing the deposit due to his inability to pay the balance owed on the S/Y
Garbo. Upon negotiation, the deposit was ultimately credited towards the
acquisition of a smaller yacht, the S/Y First Impressions.
[98]
OCGC eventually paid
the funds owed and acquired the S/Y Garbo. Dynamique sailed the yacht across
the Atlantic to St. Martin and OCGC took possession of the S/Y Garbo on April
4, 1986. As it turned out, the yacht was not up to the standard contemplated by
the Fantaseas concept and it suffered extensive structural damage in its maiden
voyage that required it go into a dry dock in Florida, U.S.A. for repairs. The S/Y Garbo was not available for charters until April 1987. Even then, there
were interior decoration problems, electrical issues, and general ongoing
repairs because of the yacht being in a southern climate. There were ongoing
requests for OCGC to pay its bills for repairs, etc., and funding was slow if
available at all. Title was never registered in the name of the S/Y
Garbo LP. Ultimately, in 1988 the S/Y Garbo was sold to Maxi-Yacht International
S.A.R.L. as part of financing for the French yacht building company.
[99]
OCGC negotiated the
purchase of a racing yacht known as the Ondine that was going to be called the
S/Y Great Gatsby. The racing yacht was an 80-foot aluminium yacht that was not
suitable for the Fantaseas concept. Notwithstanding the foregoing, OCGC entered
the contract to purchase the Ondine for $298,500 on December 24, 1985. Eventually,
Mr. Bellfield was once again behind on his payments and legal action was commenced
by the owner of the Ondine against OCGC for default of payments and for
stripping the yacht. The matter was settled in April 1988 and the possession of
the yacht was transferred back to the original owner.
[100]
A Med 86 was seen at a yacht
show in Miami and it was thought that it could be renovated to suit the
Fantaseas concept. An Agreement of Purchase and Sale was executed on January
30, 1987 but the sale did not close. The price of the yacht was $US 1,425,000
with a down payment of $350,000 paid in escrow with the balance payable on
closing set for April 1, 1987. The closing was delayed to May 1, 1987 with OCGC
agreeing to pay an additional $200,000 in escrow. In the end, the deal did not
close and OCGC was put in default. In arbitration with the owner, U.S. Yacht
was awarded damages of $367,167 plus accrued interest due to the failure to
close.
[101]
The third yacht
purportedly acquired by OCGC was the S/Y Gable. The S/Y Gable was designed by
Sparkman Stevens for the S/Y Gable Limited Partnership. It was to be
constructed by Michel Dufour, a well-known French builder. The plan was for Mr.
Dufour to carry out the construction of yachts and for Mr. Bellfield to provide
financing. Negotiations around the design continued from 1986 to 1987.
Maxi-Yacht International was created with Mr. Bellfield and Mr. Dufour as
shareholders. The Maxi-Yacht boat-building facility was constructed and
eventually had three yachts in various stages of construction. The first yacht
was the S/Y Gable with two other yachts in the process of construction, one
with a deck on, and one with the hull being made. The S/Y Gable was completed,
launched, and christened in November 1988 and was the first yacht that was
available to be delivered to a Limited Partnership that truly met the Fantaseas
concept. Even so, it was never transferred to the S/Y Gable LP or to any other
Limited Partnership, nor was it used to the benefit of any Canadian Limited
Partnership. Instead, it was sold to Starlight S.A.M., a French entity.
[102]
The other two yachts
constructed at the Maxi-Yacht facility were the Demoiselles des Rochfort and
the Rocco Jr. Both were sold to French Limited Partnerships.
[103]
In addition, two
purchase agreements were signed with Chantier Yachting France for two yachts in
March 1985; however, the company went into receivership in July 1985.
[104]
The CRA began to look
into the affairs of OCGC after an inquiry into a file of an OCGC investor named
Steven Mitchell on October 14, 1986. At that time, CRA auditor Karen McCordick was to review the validity of the S/Y Gable LP business losses claimed
by Mr. Mitchell. This was followed up with a request for the individual tax
returns of Mr. Mitchell and his wife for 1984 and 1985. It turned out that
Steven Mitchell was in fact the brother of Stacey Mitchell who had been heavily
involved in providing accounting services to OCGC for the Type 1 Limited
Partnerships as well as being a promoter and investor in some of the Limited
Partnerships.
[105]
The review by Ms. McCordick
into the business losses of Steven Mitchell led her to the S/Y Gable LP
Offering Memorandum and Mr. Bellfield, who was purported to be the keeper of
the records of OCGC and the corporate returns of OCGC for 1984 and 1985. Over
the next few months, Ms. McCordick pursued the S/Y Gable LP’s records and
documentation but was unsuccessful. In addition, it was noted that no corporate
income tax returns had been filed by OCGC at that time. The file was eventually
referred to the Tax Avoidance section and in the spring of 1986 was referred to
Special Investigations.
[106]
Over a period of many
months in 1987, there were numerous attempts by the CRA to have discussions
with OCGC and its representatives, in particular with Mr. Bellfield, to obtain
information with respect not just to Steven Mitchell’s returns but to the
overall operations of OCGC and its Limited Partnerships scheme. Some of the
information provided was forthcoming and other information was lacking. As it
turns out, much of the information requested was being manufactured as the
requests were being made.
[107]
Special Investigations
and Tax Avoidance continued their investigations and enquiries independent of
each other but Tax Avoidance took a backseat to Special Investigations. Tax
Avoidance apparently investigates the civil side of tax issues while Special
Investigations investigates and prepares tax issues for criminal prosecution. Tax
Avoidance formulated their position on OCGC and the Limited Partnership scheme
in 1988.
[108]
In June 1989, there
were search and seizures conducted at OCGC facilities and other locations, as
well as various interviews of individuals affiliated with OCGC and investors.
The CRA investigations, whether by Tax Avoidance or Special Investigations, were
extensive and exhaustive, but were not without problems given that Tax
Avoidance was one department of CRA and Special Investigations was another.
Furthermore, the RCMP became involved with respect to the investigation of possible
criminal activity.
[109]
The CRA Tax Avoidance came
to the belief that OCGC was engaged in fraudulent activity and was of the view
that
(a) There was a premature claim
for deductions i.e. capital cost allowance;
(b) OCGC was significantly
underfinanced and that there was no financing for yacht construction;
(c) There was no capital
contribution by the partners—simply a circulation of loans from OCGC to the
partners and back to OCGC. OCGC never had the money to make the loans in the
first place;
(d) There was a certain
amount of unreasonableness in the expenses and some amounts claimed for
expenses were excessive, i.e. the feasibility studies;
(e) Some expenses were
never incurred; and
(f) There were
significant problems in the actual manufacturing and delivering of the yachts
for the Limited Partnerships.
[110]
In the end, the
Minister disallowed all the losses, interest and professional fees claimed by
the investors. As described above, criminal charges were laid against Pierre
Rochat, Mr. Bellfield, and Mr. Bellfield’s right hand man, Mr. Minchella. Mr.
Rochat pled guilty to uttering forged documents. Mr. Bellfield and Mr.
Minchella were convicted of two counts of fraud and two counts of uttering forged
documents and their convictions were upheld on appeal.
[111]
The Appellants assert
that despite the evidence presented of a persistent pattern of OCGC and Mr.
Bellfield’s lies, there are sufficient indicators of a business because $13–14
million was spent on what the Appellants describe as efforts to establish a
yacht chartering business. In Appendix One of the Appellants’ Final
Submissions, they state:
3. Despite the fact that
the venture was ultimately unsuccessful, and notwithstanding the evidence of
lies and/or misrepresentations proffered by Mr. Bellfield, the fact is, that
OCGC created and established yacht chartering businesses that were both
visionary and worldwide in scope.
[Emphasis
in original]
[112]
This statement is accurate in part;
but should read, “OCGC created and established the illusion of a yacht
chartering business”. I find that the yacht chartering business was nothing more
than an illusion, a fraud from beginning to end. Most certainly there were
sufficient indicia present to lend an air of legitimacy. Most certainly there
was money spent for the purpose of developing these indicia, but for Mr.
Bellfield, they were all for the purpose of perpetuating the fraud on the
investors in the Limited Partnerships, the CRA, and many other parties that
came into contact with him in this venture.
[113]
The evidence shows that
the investors were induced with misrepresentations to invest not in genuine
Limited Partnerships, but rather in a Ponzi-like scheme orchestrated by Mr.
Bellfield. OCGC never had the capital necessary to implement the investment
plan, despite its many representations to the contrary. The only source of
funds OCGC had available was the investors’ interest payments and the small
deposits made by investors upon subscription in the Type 2 and Type 3 Limited
Partnerships. With a dire lack of capital, Mr. Bellfield had to continue to
sell units in Limited Partnerships so that he could keep funds coming in and he
could continue to perpetuate the fraud. To maintain the appearance that the
investment opportunity was real, Mr. Bellfield had to make an effort to build
or acquire yachts and provide indications that a charter business was being
developed. These efforts however, were always limited in scope and always
suffered from both a lack of yachts to implement any genuine chartering
business, and a severe lack of funds. Barely any results were produced when
compared to the enormity of the results represented to investors as not only
planned, but also to some extent, already achieved. Any yacht building and
charter development efforts by OCGC and its related companies were mere
window-dressing. Mr. Bellfield kept his scheme to himself and Mr. Minchella.
Investors, promoters, lawyers, accountants, and the staff of OCGC were all kept
in the dark.
[114]
The documentary
evidence shows that the starting point for the fraud began from the time that
the first Offering Memoranda were prepared in November 1984, if not earlier.
This was before any investors subscribed for any Limited Partnerships units.
The fraud continued without stop and grew in scope until the entire scheme
unravelled after the CRA and the RCMP began an extensive investigation, and the
investors ultimately ceased making their interest payments. The categories of
misrepresentations laid out in the section below show how the fraud progressed
chronologically and grew in scope and size, including:
1)
The fundamental
misrepresentations in the Offering Memoranda;
2)
The misrepresentations
to professionals at closing, including the false documents provided at closing
such as
a)
the false certificates,
b)
the false statements
regarding OCGC’s obligations,
c)
the false solemn
declarations,
d)
the false affidavits,
e)
the false hull
registration numbers;
3)
The misrepresentations
in OCGC’s materials and public relations campaigns regarding the “fleet of
yachts” and the “Gourmet Commissary”;
4)
Numerous false revenue
and expense items listed in the financial statements, with false expenses
growing annually;
5)
Misrepresentations
regarding the provision of financing and goods and services from the foreign
entities Starlight S.A. and Neptune Marine;
6)
Backdated and false
documents, including yacht delivery schedules and Management Agreements;
7)
Misrepresentations to
various yacht builders or sellers as to the availability of funds to build or
purchase yachts;
8)
Ongoing
misrepresentations to OCGC, Starlight employees and third parties as to the
state of charter operations and yacht construction;
9)
Ongoing false
statements to investors regarding the number of yachts built or under
construction, and expected delivery dates;
10)
Ongoing misrepresentations regarding the state of charter operations
and the number of charters booked; and
11)
False loss statements and other documents to defraud the CRA and
the investors.
[115]
The examples below
highlight the numerous instances of misrepresentation by OCGC, beginning with
the first misrepresentations that OCGC and Mr. Bellfield made to the 1984 investors
in the Offering Memoranda and continuing with the multitude of misrepresentations
OCGC continued to make throughout the taxation years in question. The
Respondent spent well over one hundred pages in his Final Submissions detailing
the extensive misrepresentations. Here, only key falsehoods are reviewed. There
are a sufficient number of examples provided to convey the intricate and
pervasive nature of the fraud. I have referred extensively to the Respondent’s
submission on the misrepresentation as I found the Respondent’s summary and
submission on this area excellent and succinct.
(i) The 1984 Offering
Memoranda: Misrepresentations of Material Facts
[116]
Both the 1984 Offering
Memorandum for the S/Y Garbo and the S/Y Gable are replete with material
misrepresentations. They demonstrate that from their very first contact with
this investment opportunity, the investors were fraudulently induced to invest.
Material misrepresentations were made to the investors, legal and accounting
professionals, those marketing and promoting the LPs and to the tax professionals
whose opinions were included in the Offering Memorandum.
[117]
Key misrepresentations
were made in both the 1984 Offering Memorandum for the S/Y Garbo LP and the
Offering Memorandum for the S/Y Gable LP. These documents are substantively the
same. The S/Y Garbo LP Offering Memorandum is referred to below by way of
example.
[118]
When considering the material misrepresentations below, it is
important to highlight that Mr. Bellfield certified on November 1, 1984, that
the contents of the S/Y Garbo LP Offering Memorandum were true and constituted
full disclosure of material facts relating to the investment opportunity, as
required by law. The certifying statement said as follows:
The foregoing constitutes full, true and plain
disclosure of all material facts relating to the securities offered by this
Offering Memorandum as required by Part XIV of the Securities Act (Ontario) and the regulations thereunder.
Financing and
Feasibility Study
[119]
The
Offering Memorandum states that business start-up costs of $953,200 will be
deductible in the first year of operation and that those costs consist mainly
of a feasibility study and the costs for arranging financing. The evidence
shows, however, that no financing was ever arranged. There was also no
feasibility study in the first year of operation. A feasibility study was not
commissioned until late 1985 and was only delivered by Bruce Kemp on January
28, 1986, at a cost of $4,000. Further, the evidence showed that Mr. Kemp had
no experience in the yacht charter business or in yachting at all—he was a
writer. The false assertion that the feasibility study was deductible in the
first year of operation is repeated elsewhere in the Offering Memorandum.
Brokers for
Management and Bookings
[120]
The first page of the
Offering Memorandum states: “OCG Corporation has made arrangements with major
brokers both for providing management and necessary bookings”, but there is no
evidence that such arrangements were made at the time that the Offering
Memorandum was distributed. In fact, Ester Palmer, Mr. Bellfield’s
sister-in-law, testified that she did not even begin working for Starlight
Charters until approximately January 1986 and only then were efforts made to
market the charters and build relationships with various travel agents. Ester
Palmer was the first employee of OCGC other than Tina Bellfield and Mr.
Minchella and was responsible for the development and marketing of the yacht
charter business. I found Ms. Palmer to be somewhat naïve, and a person who
took total direction from Mr. Bellfield. For example, no bills approved by Ms.
Palmer were paid without Mr. Bellfield’s specific authorization. She believed
everything he said, notwithstanding documentation that should have told her
otherwise. As a witness, she very frequently avoided answering questions by
saying “I do not know” or “I don’t recall”, citing these phrases dozens of
times during cross-examination, in fact over 100 times, even on matters that
should have been within her knowledge.
[121]
For example, in
referring to an OCGC brochure, Ester Palmer could not recall who edited the
brochure. She had no personal knowledge of who prepared the text, no knowledge
as to where some of the information in the brochure came from, she couldn’t
recall whether there was an international reservation system in place for the
yacht charters, she didn’t know who was responsible for paying Jacques Pepin,
she didn’t know if Fabu-D’Or was operating, and on and on. While the length of
time that has passed between the events she was testifying about and the trial might
explain this lack of memory in part, it does not sufficiently explain how she
would have no knowledge or understanding of certain affairs.
[122]
Ms. Palmer became an
investor in the Forbidden Fruit Limited Partnership in 1986 and claimed losses
for a yacht that did not exist. Further, she never paid for the unit nor did
she pay any interest on the purchase of the unit. Notwithstanding that Ms.
Palmer was basically responsible for the marketing of the yacht chartering
business, and was an investor herself, she never read the feasibility studies
at any time, even though they were specifically referred to in the Offering
Memoranda of the Limited Partnerships. In fact, the feasibility study was never
the subject of any discussion during the operations. She appeared to be somewhat
truthful in the things she was aware of, but she seemed to be terribly naïve
and clearly believed Mr. Bellfield, her brother-in-law, on every aspect of the
operation, with significant personal reasons to continue to do so.
Brokerage
Fees, Construction Financing, and Acquisition Loans
[123]
The Offering Memorandum
shows $55,455 in brokerage fees, $1,109,000 in constructing financing, and $66,545 in
construction financing interest. There is no evidence, however, that the
brokerage fees were based in reality or that OCGC ever arranged construction
financing. In fact, all references to financing in the Offering Memorandum,
either for investors or for the project, are false. In the tax opinion included
in the Offering Memorandum from the law firm Leve & Zeller, a number of
assumptions were based on false representations by OCGC, including that loans
for $54,166 were available through a chartered bank to each limited partner for
their unit acquisition, and that the loan was secured by a letter of credit.
These representations were entirely false.
Cutlery, Linen, China, and Utensils
[124]
Cutlery, linen, china,
and utensils are listed as a deductible expense item for $15,000 when in fact
these items were not purchased until Ester Palmer began working with Starlight
Charters in 1986.
Marketing and
Advertising
[125]
The Limited Partnership
is described as having $60,000 in deductible expenses for marketing and
advertising. The evidence points to the main person working on marketing and
advertising of the charter was Ester Palmer, but she testified that she only
began at Starlight Charters in 1986. Again, it is not possible that $60,000 in
marketing and advertising expenses were deductible as described in the Offering
Memorandum as no such expenses could have been incurred until after Ms. Palmer
began working at Starlight Charters. The Respondent’s Final Submissions
accurately summarize why the representations regarding marketing and
advertising expenses are false:
Palmer was in charge of marketing, sales, and operations.
Her position was, she said, comparable to that of a general manager. Palmer did
not start her employment at Starlight until January 6, 1986. She said Starlight
was a start-up business and she was starting from scratch. Minchella confirms the evidence
of Palmer on this point. When Minchella joined OCGC in August 1985 the staff
consisted of Einar Bellfield, his fiancée, Tina Bellfield and himself. Tina
Bellfield was doing administrative work. That was the OCGC team up to December
31, 1985 except for professional advisers like Zeiler, Mitchell and David
Franklin’s assistant, Elizabeth Burrows, who was doing courier work. The
representation that the partnership had deductible expenses in the amount of
$60,000 for marketing and advertising was false.
[Footnotes removed]
Capital Cost Allowance
[126]
Repeatedly throughout
the Offering Memorandum, the S/Y Garbo yacht is described in the Offering
Memorandum as being acquired or under construction in 1984, with capital cost
allowance deductions beginning in that year. The testimony of Loic LeGlatin
demonstrates that it is impossible that the S/Y Garbo was acquired in 1984 or
that construction even began in 1984.
[127]
Mr. LeGlatin was hired
by Mr. Bellfield purportedly to find yachts suitable for the Limited Partnerships.
Mr. LeGlatin was definitely highly skilled to do this works as he had extensive
experience in the yachting field. His testimony showed him to be a credible
witness who had nothing to gain from misrepresenting his experience working for
OCGC. He was a straightforward, frank, and honest individual who answered
questions directly, with the information and knowledge that he had. Mr. LeGlatin
was not a person who was going to shade the truth in any way, but simply gave
evidence on matters that he had knowledge of, and certainly appeared to be
knowledgeable in the areas upon which he was examined and cross-examined. Mr. LeGlatin
testified that he personally arranged the order for what would be the S/Y Garbo,
with an agreement between OCGC and the yacht-builder Dynamique for one 80-foot yacht
signed on February 19, 1985.
[128]
Mr. LeGlatin also
testified that OCGC’s claim that the purchase agreement was executed following
a previous letter of intent purportedly signed in November 1984 was false and
in fact, impossible. In November 1984, OCGC was still working out of Mr.
Bellfield’s den in his condominium. Only Tina Bellfield worked for the company,
along with a clerical assistant/courier. OCGC’s other main persons of contact
were accountants and lawyers. It was Mr. LeGlatin who originally connected Mr.
Bellfield with the Dynamique yacht-building company and he did not even begin
working for OCGC until approximately January 1985. Furthermore, he did not meet
with Chantal Jeanneau of Dynamique until February 1985.
[129]
The S/Y Garbo was not
under construction in 1984 nor owned by OCGC. Possession of the S/Y Garbo by
OCGC did not actually pass until April 1986. Title to the S/Y Garbo never
passed to the S/Y Garbo LP. Mr. Garber, the 1984 investor in this case,
testified that his understanding was that a capital cost allowance was
deductible in 1984 because the S/Y Garbo was at the very least already under
construction. The representation in the Offering Memorandum that a capital cost
allowance was deductible in 1984 is false.
[130]
These are but some
examples of the numerous and significant misrepresentations in the Offering
Memoranda. The misrepresentations go to both the tax advantages of the
investment and the business venture, and show the ongoing and pervasive nature
of the fraud. The material facts that were falsely presented go to the core of
the securities being offered to investor and OCGC’s failure to ensure that they
were carried out as presented is a fundamental breach of its obligations.
[131]
Mr. Bellfield through
OCGC made these misrepresentations to ensure that a potential investor would
find the yacht charter investment attractive. The new 80-foot luxury yacht
under construction; the accoutrements necessary for luxury charters such as
cutlery, linen, and china being acquired; the appropriate marketing and
advertising undertaken; and the individuals retained to manage the business and
book the charters all supported by financing and a feasibility study as well as
deductibility of the capital cost allowance on the new 80-foot yacht. These
were all representations made to create the perception of a legitimate yacht
chartering business right from the beginning, and none of these representations
were true.
(ii) The 1985 Offering
Memoranda: Material Misrepresentations Continue
[132]
The substantial nature
of OCGC’s misrepresentations continued into the Offering Memoranda for the 1985
Type 2 Limited Partnerships, all of which are substantively the same as the
Type 1 Limited Partnerships. Mr. Bellfield again certified that these Offering
Memoranda represented full and true disclosure of material facts as required by
law. Key examples of these misrepresentations are set out in the paragraphs
below.
Brokers
[133]
On the
first page of the 1985 Offering Memoranda, OCGC claims that it has made
arrangements with major brokers. Again, this claim is not possible because
Ester Palmer did not begin her work at Starlight Charters until January 1986
and it was only at that point that she began to make arrangements with brokers.
Charter Bases
[134]
The first
page contains the assertion that charter bases were already established in Monaco and St. Lucia, by one Starlight Charters S.A. of Geneva. This assertion is impossible. The
evidence showed Starlight Charter S.A. to be nothing more than a shell company
that never provided any goods or services. The first page of the 1985 Offering
Memoranda states, with the above-mentioned false assertions underlined:
The OCG Corporation is an established company with assets
in the marine industry. In cooperation with Starlight Charters S. A. of Geneva, OCG has previously established charter bases in Monaco and St. Lucia.
Sail and motor yachts are becoming increasingly popular
both by the people who look at it for a vacation and for the people who are
only interested in it as a tax investment. Yachts offer generous depreciation
possibilities and also a possibility for good return on invested capital.
Although boats are allowed high capital depreciation, the
fact remains that they depreciate very little in value, and more than likely
will appreciate. The major areas for charter operations are in the Caribbean,
the Mediterranean and Tahiti in the Pacific. OCG Corporation has made
arrangements with major brokers both for providing management and necessary
bookings.
[Emphasis added]
Financing and
Feasibility Study
[135]
The false
representation that business start up costs totalling $953,200 was incurred and
deductible in the first year of operation is repeated in the 1985 Offering
Memoranda. These costs are again described as mostly relating to a feasibility
study and arrangements for financing however, the evidence shows that these
claims are false because there was no financing arranged or delivered, and no
feasibility study was commissioned until the end of 1985. In addition, the
feasibility study was delivered in 1986 and only at a cost of $4,000.
Construction
Financing, Construction Brokerage Fees, Investor Loans, Letter of Credit
[136]
All of the
representations about financing were false. There was no construction
financing, no construction brokerage fees, and therefore no construction
financing interest that could be owed. No loans were made to investors, and no
funds were advanced for the construction of the yacht. The amount of $212,200
listed in the Offering Memoranda as a deductible expense is for arranging a
letter of credit that did not exist. The only letter of credit was one that was
entirely fraudulent, purportedly arranged with Neptune Marine Resource S.A.,
a company set-up by Mr. Bellfield that was part of the elaborate fraud
perpetrated. The accounting firm Laventhol & Horwath based part of its tax
opinion on the false representations that there were loans available and that
OCGC had arranged for an operating line of credit to fund operations.
Cutlery, Linen, China, and Utensils
[137]
Both the
false representations that $15,000 in cutlery, linen, china, and utensils and
$60,000 in marketing and advertising expenses had been incurred are repeated in
the 1985 Offering Memoranda. The reasons supporting the conclusion that these
statements are false are explained in detail above, but to again summarize
briefly, Ester Palmer was involved in both the first purchases of cutlery etc.
and the first yacht charter marketing and advertising efforts, and she did not
begin working with Starlight Charters until January 1986.
Yacht
Acquisition
[138]
The 1985
Offering Memoranda also contains numerous representations that the 1985 Limited
Partnerships would acquire their yachts in 1985, when in fact, construction of
the yachts had not even begun and such an acquisition was impossible. This
material misrepresentation is highly significant as the acquisition of a yacht was
at the core of the securities described in the Offering Memoranda.
[139]
These
misrepresentations were there to induce investors to become part of a
fraudulent scheme in order to provide a continuous flow of funds to maintain
the illusion of a legitimate enterprise, all unbeknownst to the investors.
(iii) The 1986 Offering
Memoranda: Multiple False Representations, Again
[140]
The 1986 Offering
Memoranda continued the tradition with a parade of false representations. These
are summarized following, using the S/Y Close Encounters LP as an example.
These false representations demonstrate not only that OCGC perpetrated a fraud
against the 1986 investors from the beginning by inducing them to invest, but
also that the purported grandfathering of the 1986 Limited Partnerships using
the vehicle of OCG Enterprises was simply another false representation.
Financing
[141]
The S/Y Close
Encounters LP Offering Memorandum states that OCGC provided loans to OCG
Enterprises to fund the original purchase of all 25 units of the S/Y Close
Encounters LP on January 2, 1986, but there is no evidence that such loans were
actually provided. The Offering Memorandum also
states that OCG Enterprises contributed the original Limited Partnership
capital of $2.9 million to the S/Y Close Encounters LP, but there is no
evidence that these amounts were actually contributed by OCG Enterprises.
OCG
Enterprises’ Capital
[142]
The Offering Memorandum
represented that $1.45 million of the capital purportedly provided by OCG
Enterprises to capitalize the yacht “has been used by the Limited Partnership
to acquire the Yacht and related services”, when in reality the S/Y Close
Encounters LP’s yacht had not yet been purchased and was not in the process of
being built.
Line of
Credit
[143]
The Offering Memorandum
states that a line of credit was established and was available on an annual
basis until January 1, 1992, to make loans to the S/Y Close Encounters LP when
it faced cash flow deficiencies. It states that the S/Y Close Encounters LP
paid a one-time standby fee to OCGC for this arrangement, but in reality, there
is no evidence that a line of credit for those purposes was ever established or
that OCGC had the means to establish such a line of credit.
Gourmet
Dining and Services
[144]
The S/Y Close
Encounters LP’s Offering Memorandum claims that “gourmet dining and attentive
service are currently offered” as part of the yacht chartering business on a
“60-foot sailing catamaran or an 80-foot sailing monohull”, when in fact, actual
charters offered and yachts available were extremely limited in 1986, if
available at all. Further comments regarding the lack of yachts and the paucity
of actual charters are explored in the sections entitled “Building and
Purchasing of Boats” and “Starlight Charter”.
Feasibility
Study
[145]
The Offering Memorandum
claimed that OCGC “continuously updates and amends the feasibility study” when
there is no evidence that feasibility studies were “continuously” updated.
There were only two feasibility studies put into evidence, the first one in
1986, and an update provided in 1988.
Cutlery,
Linen, China and Utensils?
[146]
The Offering Memorandum
also contains the representation, again, that cutlery, linen, china, and
utensil expenses had been incurred, this time for the total amount of $65,000.
While Ester Palmer testified that she made the first purchase of such items in
1986, they did not go to the S/Y Close Encounters LP; it did not even have a yacht
yet and would have no use for such items at that time.
Bond
Guarantee
[147]
The assertion that OCGC
arranged for a completion guarantee for the S/Y Close Encounters LP, and paid
$29,000 for this bond guaranteeing that the yacht would be constructed at a
fixed price is also false. The statement in the Offering Memorandum that OCGC
incurred $72,500 in brokerage fee for construction financing arranged is false.
No construction financing was ever arranged, and there was no $150,000 in
deductible expenses for money advanced to OCGC for arranged financing for
purchasers of the secondary offering.
Inspection
and Monitoring Services; and Service, Decorating and Outfitting Equipment
[148]
The Offering Memorandum
represents that $60,000 was a deductible expense for inspecting the “Yacht
under construction” to ensure it was built to the required specifications. The
Offering Memorandum also asserts that the S/Y Close Encounters LP incurred
$69,000 in deductible expense for “service, decorating and outfitting equipment”.
No S/Y Close Encounters yacht was ever built and none was under construction at
that time, so both these representations are false.
Starlight
Charter S.A. and Neptune Marine
[149]
The 1986
Offering Memorandum also contains numerous references to Starlight Charters
S.A. (the “Starlight S.A.”) and Neptune
Marine Resource S.A. (the “Neptune”). While Starlight S.A. is mentioned in previous Offering Memoranda, the 1986 misrepresentations regarding Starlight S.A. and Neptune are numerous and substantial.
[150]
These two entities were established by Mr.
Bellfield in Switzerland, where corporate law at the time prevented the release
of the identities of the individuals behind corporate structures. Mr. Bellfield used these entities
to make numerous misrepresentations to the effect that financing was available
from Neptune and that Starlight S.A. contracted to provide yacht chartering
goods and services. One of the main reasons these entities were employed in the
scheme seems to have been as part of a late-game strategy to avoid an
originally unanticipated large corporate tax debt.
[151]
For the purpose of
brevity, an excerpt from the Respondent’s Final Submissions below summarizes
some of the most significant misrepresentations regarding Starlight S.A. and Neptune that are found in the S/Y Close Encounters LP Offering Memorandum:
112. The false
representations of fact in the S/Y Close Encounters Limited Partnership and
other 1986 limited partnerships included:
a. that certain of the management
services under the Management Agreement and the Acquisition Agreement had been
subcontracted by OCG Corporation to Starlight Charters S.A. (“Starlight”),
which will be responsible for performance thereof. The services were to include
but not be limited to construction consultation and inspection, arranging construction and operating financing, guaranteeing
completion of construction, provision of a feasibility study, provision of
staff, crew and supplies, arranging mooring facilities, maintenance of the
yacht, carrying out marketing programs and operating the yacht chartering
business (p.14)…
b. that most of the initial services had been
subcontracted to Starlight Charters S.A. which would be responsible for the
performance thereof (p.26).
c. that ongoing services had been subcontracted to
Starlight Charters S.A. which would be responsible for the performance thereof
with the right of OCGC to retain a 10% administration fee on all amounts
invoiced to the limited partnership (p.27).
d. that Starlight Charters S.A. had been engaged to
manage the business of the limited partnership by OCGC. (p.33)
e. that Neptune Marine Resource S.A. had provided
substantial financial assistance to OCGC in the purchase of the yacht and the
Initial Services (p. 33).
f. that a material contract relating to the yacht which
have been entered into and remain in full force and effect included a
management agreement between OCGC and Starlight Charters S.A. dated January 2,
1986 (p. 35).
…
…that the partnership had incurred
deductible expenses of $300,000 in respect to a letter of credit standby fee
(p. 25) OCGC never did obtain an operating line of credit. Minchella agreed
that the only letter of credit was the one with Neptune. The representation
that the partnership had incurred a deductible expense respecting a letter of
credit was false.
…
…that OCGC had arranged a completion
bond (p.26).
Minchella recalled that Forsey told Bellfield that if an agreement called for a
performance bond and one didn’t exist, that they should make one. The Neptune
Marine Resources S.A. Performance Bond was manufactured in a cut and paste
session in the offices of OCGC and printed in Toronto by Sibilia &
Associates. This representation was false.
…
… that OCGC had arranged a line of
credit on behalf of the Limited Partnership (p.27) OCGC never did obtain an operating line of
credit. Minchella
agreed that the only letter of credit was the Neptune Marine Resources S.A.
letter of credit printed by Sibilia and Associates in Toronto. This representation was
false.
…
that Starlight Charters S.A. would
arrange mooring spaces for the yacht in the Caribbean and Mediterranean,
international promotion and marketing and advertising, all for a fixed fee to
be paid by OCGC for which OCGC would be entitled to a 10% administration charge
(p. 28). Starlight
Charters S.A. provided no goods or services to any limited partnership. This representation was
false.
[Footnotes omitted]
[152]
Despite the numerous
material representations to the contrary in the 1986 Offering Memoranda, no
funds were actually available from Neptune, nor were any funds available to
Starlight S.A. Moreover, Starlight S.A. never actually provided any yacht
chartering goods and services. In fact, the evidence shows that many of the
services listed above were never provided at all to the Limited Partnerships,
by any party.
[153]
I again
emphasize that these misrepresentations induced investors to become part of the
fraudulent scheme that provided a source of cash for Mr. Bellfield. As time
progressed, the misrepresentations were repeated and expanded. It is evident
that it was necessary to make assertions that would make the fraudulent scheme
appear legitimate as the fraud continued to grow.
[154]
Much like most other
parties involved with Mr. Bellfield and OCGC, accounting and legal professionals
were repeatedly provided with false representations. They based their legal or
accounting opinions and/or promotional efforts on these false representations.
While some of these misrepresentations were addressed above in reference to the
tax opinions in the Offering Memoranda, further examples of misrepresentations
to professionals are following. Again, the representations were so plentiful
that those listed below are only key examples provided for illustrative
purposes.
(i) False Closing Documents
[155]
A number of false
documents and misrepresentations were made at closing to the legal
professionals representing investors. These professionals examined and relied
upon OCGC’s representations through certificates, signed obligations, solemn
declarations, and/or affidavits, to support the legitimacy of the investment
opportunity and, in representing their clients’ interests, to ascertain that the
yachts were indeed under construction and third party financing had been
obtained.
False
Certificates
[156]
The misrepresentations made
by Mr. Bellfield and OCGC in and around closing to the 1985 investors and the
professionals representing some of those investors were egregious, with
multiple false certificates signed and affidavits sworn.
[157]
Mr. Bellfield signed
certificates in the first weeks of December 1985 patently misrepresenting that
13 yachts were under construction and to be delivered by December 31, 1985. The
certificates asserted that five 80-foot yachts were under contract for purchase
from the yacht builder Dynamique and eight 60-foot catamarans were under
contract for purchase from Chantiers Yachting France, and that these yachts
were allocated to Limited Partnerships. In fact, none of the 13 yachts
were under construction at that time. The contracts to purchase yachts from the
yacht builders did not exist as described, and thus, it was impossible
for the yachts to have been delivered by December 31, 1985.
[158]
The evidence shows that
these false certificates and other misrepresentations made by OCGC were relied
upon by lawyers representing some of the investors and were considered key
documents to complete closing. This included the Appellant Dr. Leckie Morel’s
S/Y Midnight Kiss LP. As summarized in the Respondent’s Final Submissions:
142. …In the reporting letter, Kelsey,
Melnik & Hendler advised the subscribers that they had examined the
Offering Memorandum, Certificates of OCGC, and a contract and telexes between
OCGC and Dynamique Yachts providing for the purchase
by OCGC of an 80’ yacht from the company. The firm also advised that it had
relied on certain matters of fact, certificates of the general partner and the
opinion of the vendor’s solicitor, Leve & Zeiler. In the letter, the Kelsey
Melnik & Hendler further advised the subscribers that OCGC had entered into
an agreement for the purchase of a completed yacht prior to May 23, 1985 and
that one of the yachts ordered from Dynamique Yachts was for the partnership
and would be delivered prior to December 31, 1985.
…
150. In their reporting letters for the 1985 partnerships
including the Midnight Kiss, Kelsey, Melnik & Hendler reported that they
had, among other things, examined the Offering Memorandum, the Certificate of
OCG and a contract and telexes between OCG and Chantiers Yachting France
providing for the purchase by OCG of an 80-foot yacht from the company. They
also reported that OCG had entered into the agreement for the purchase of the
completed yacht and the acquisition of certain assets prior to May 23, 1985.
They reported that the yacht was presently under construction and would be
delivered prior to December 31, 1985.
[Footnote
omitted, emphasis added]
[159]
Mr. Minchella signed a
similar certificate for the Human Desire Limited Partnership on March 9, 1986,
falsely asserting that 13 yachts were under construction and one yacht would be
delivered (or, if the delivery dates were true facts, one yacht would already
have been delivered) to the Human Desire Limited Partnership by December 31,
1985.
Obligations
of OCGC
[160]
Both Mr. Bellfield and
Mr. Minchella signed on behalf of OCGC, a number of “Obligations of OCGC”. In
these documents, OCGC falsely represented that as consideration for the
investors’ subscription in the Limited Partnerships, OCGC had contracted for an
80-foot yacht to be built and delivered by December 31, 1985, that OCGC would
sell to the Limited Partnership as outlined in the Agreements of Purchase and Sale. The obligation that OCGC had obtained financing from a third party in order to cover
the cost of purchasing the yacht was also misrepresented.
[161]
David Franklin
testified that he relied on these obligations, and that these same false
representations were relied upon by others during closing, including the
Appellant Dr. Leckie Morel. Mr. Franklin’s evidence on this matter is
accurately summarized in the following excerpt from the Respondent’s Final
Submissions:
147. Franklin confirmed that the
Obligation of OCGC was given in consideration of the closing of the
transaction. He understood the other good and valuable consideration was the
giving of the promissory notes by the investors. He said he relied upon the
statements in closing and he believed them to be true. Respecting the
representation of third party financing in the Obligation of OCGC, Franklin said it was important since he did not want to be called upon to pay cash for the
purchase of the yacht. Franklin agreed that the Obligation was being
provided during the course of the closing, that it confirmed he was going to
get a yacht on a particular date, and that there was third party financing to
carry out the commitment. He agreed the same representations had been made to
Dr. Leckie, the appellant.
[Footnotes
omitted, emphasis added]
Solemn Declarations
[162]
David
Franklin, in his capacity as a lawyer, took solemn declarations from Mr.
Bellfield on December 16, 1985 that the above-described OCGC certificates were
true, and that contracts with Dynamique and Chantiers Yachts France existed and
would provide for a total of 13 yachts to be delivered on December 31, 1985.
Again, this assertion was impossible and the evidence shows that no such
contracts existed as described.
Affidavits
[163]
Mr.
Bellfield also swore affidavits in November 1985 that contained a number of
impossible and false statements, including the assertion that there were no
agents or sub-agents making commission on the sales of Limited Partnership
units. The evidence shows that these statements were manifestly untrue, with
Mr. Franklin already earning commissions and using sub-agents at the time the
affidavits were sworn. The affidavit also contained an incomprehensible
assertion regarding the source of the yacht for the S/Y Great Gatsby Limited
Partnership. As correctly summarized by the Respondent in his Final Submissions:
151. In an affidavit sworn in November of 1985, Bellfield represented that
OCGC had contracted to purchase yachts from Chantiers Yachting (France) prior
to May 21, 1985 and indicated 3 of the 4 yachts were for the Bergman, the
Midnight Kiss and the Great Gatsby partnerships. Franklin said he could not
explain how it was that Bellfield would be saying in November of 1985 that he
had purchased the Great Gatsby from Chantiers Yachting and yet by December 1985
was negotiating for the Great Gatsby as a refurbished yacht. In a further
November 1985 affidavits, Bellfield
allocated the yachts said to be the subject of contracts with Chantiers
Yachting (France) to entirely different partnerships. In fact, Chantiers
Yachting (France) had been in receivership since July of 1985. While Franklin could identify Bellfield’s signature on the affidavits, he could offer no
explanation for the inherently contradictory statements in the affidavits and
could not reconcile the statements in the three affidavits.
False Hull Registration
Numbers
[164]
In another egregious
example of his pattern of manufacturing false documents to sustain his
fraudulent scheme, Mr. Bellfield arranged to have false hull registration
numbers created when he was pressed to provide proof that yachts were indeed
under construction. Since hull
registration numbers are only available after about a third of the yacht
is built and a hull has been constructed, the provision of a hull registration
numbers also represents that construction had progressed sufficiently enough to
ensure that a yacht was deliverable by a specified date.
[165]
John Gartenburg appears
to have provided the impetus that led Mr. Bellfield to create false hull
registration numbers. Mr. Gartenburg is the lawyer who represented Donald
Ubell, a potential Limited Partnership investor in the S/Y Main Event Limited
Partnership. Mr. Gartenburg testified the he believed that his due diligence
responsibilities to his client required that he obtain the hull registration
number that the Agreements of Purchase and Sale between OCGC and the S/Y Main
Event Limited Partnership stated would be provided by December 31, 1985. This
was to ensure that the 60-foot catamaran promised to the S/Y Main Event was
actually being constructed as claimed. Mr. Gartenburg described this as
fundamental to the investment. It should be noted that in this regard, Mr.
Gartenburg appears to have been the legal professional who was most mindful of
his professional obligations in representing potential investors.
[166]
A number of witnesses
provided evidence in support of the conclusion that the hull registration
number provided to Mr. Gartenburg was false. An excerpt from the Respondent’s
Final Submissions correctly summarizes a portion of this evidence:
162. On or about April 30, 1986, Minchella wrote Gartenburg
a letter enclosing a copy of the hull registration numbers for Chantiers
Yachting France, with only the number for the S/Y Main Event revealed “for
[his] use only.” When
testifying, LeGlatin was shown Minchella’s letter to Gartenburg dated April 30,
1986 with an attached letter from Chantiers Yachting France dated April 24,
1985 providing a hull registration number for the Main Event 60’ catamaran.
LeGlatin testified that in April 1985 Chantiers Yachting France had not built a
60’ catamaran, had not laid the hull for one and did not have the mould for a
60’ catamaran.
163. Minchella testified in chief that Zeiler had asked him
to send a hull registration number for the Main Event to Gartenburg. Minchella
did so, by attaching the April 24, 1985 letter from Chantiers Yachting France
showing one hull number for the Main Event to his own letter to Gartenburg of
April 30, 1986.
164. Minchella testified in cross-examination that he now
knows that the hull registration number for the Main Event is a fabrication of
Einar Bellfield’s. Minchella
now knows that he sent Gartenburg a false and backdated document.
[167]
Ultimately, Mr.
Gartenburg advised his client to pull out of the transaction and demanded a
return of funds because he was not satisfied with the (false) hull registration
number provided after significant delays, and felt that the lack of such a
number vitiated the entire transaction. Mr. Ubell went on to pursue a return of
his funds by legal action.
[168]
As will be discussed
later regarding the Limited Partnerships’ financial statements, the fraudulent
representation of a false hull number to Mr. Gartenburg was not the only
occasion that false hull numbers were used to misrepresent to professionals
that yachts were under construction and sufficiently completed to be ready at
the date specified.
(i) Misrepresentations about
the “Fleet of Yachts” Available
[169]
OCGC’s publicity
materials also contained misrepresentations about the state of the yacht
chartering activities and the number of yachts that made up the Fantaseas
“fleet”. Below are a few representative examples.
[170]
Frequent
misrepresentations were made by OCGC and Mr. Bellfield about the number of yachts
that were available and performing charters. The Respondent provides a
selection of such representations that were made during 1986 and 1987,
excerpted in part below:
Throughout 1986 and 1987 OCGC’s
outward display was of a fleet of yachts:
a. Business Plan Presented to St. Lucia National
Development Corporation, August 1, 1986: “Starlight Charters Ltd. consists of
the most exclusive fleet of charter yachts in the world”.
…
d. Investor Newsletter, Dec. 5, 1986: “The fleet
is comprised of the largest and most supremely comfortable charter maxi yachts
in the world, unparalleled in design, comfort and luxury”.
[footnotes omitted]
[171]
Despite the
representations above, during the 1986 and 1987 years, there was no “fleet” of yachts
of eighty feet or more. At that time, there were only two boats. First, the
50-foot S/Y First Impressions that OCGC took title to in November 1985 and
arrived in St. Lucia in March 1986, but was not suitable to the Fantaseas
concept. Second, the 80-foot S/Y Garbo that also did not conform to the
Fantaseas brand, and was only briefly available for charters as of April 1987.
Further examples of the misrepresentation regarding chartering activities and
yachts available can be found in the section below detailing examples of the
misrepresentations regarding Starlight Charter’s activities.
(ii) Misrepresentations
about the Commissary
[172]
Fabu D’Or was a company
100% owned by Mr. Bellfield. It was supposed to be a commissary whose purported
purpose was to provide high quality food to Starlight cruises as well as to
other potential customers. One document describing Fabu D’Or stated: “Fabu D’Or
produces and retails food” and “every course is prepared here from start to
fabulous finish”. Despite these representations made in the present tense, Fabu
D’Or was not in fact producing and retailing food at the time. The marketing
plan for Fabu D’Or similarly contained misrepresentations, including that a
kitchen facility was complete and in use for testing food, despite it not in
fact being complete.
[173]
An OCGC brochure also
contained misrepresentations about Fabu D’Or, stating that the commissary’s
“sumptuous delicacies temp guests” and that “every morsel is prepared at the
Fabu D’Or commissary”. This was impossible because evidence showed that the commissary
facility was not operational at that time.
[174]
The financial
statements for Fabu D’Or ending October 31, 1987, help illustrate the level of
misrepresentation about Fabu D’Or, and Mr. Bellfield’s incessant pattern of
deceit. They state that there was $68,362 in equipment and $82,298 in leasehold
improvements, but a letter to investors claimed that there was $500,000 in
equipment. Evidence at the trial shows that up until October 1986 only $250 was
spent on actual food for the commissary. Mary Crocco testified to the effect
that this was a misrepresentation. Ms. Crocco was a sister-in-law to Mr.
Bellfield and believed everything that Mr. Bellfield said. In her testimony,
she gave the obvious answers to obvious questions, but she appeared confused
about several things and could not always recall or explain certain evidence.
[175]
It is also important to
note that Fabu D’Or was not held out as being created solely for the purposes
of providing commissary services to the yacht chartering Limited Partnerships. Its
vision was much wider in scope, according to its documents. As accurately
summarized by the Respondent in his Final Submissions at page 176:
548. The whole concept for Fabu D’Or was not only to
provide food for the cruises, but also to provide food to other charters, to
airlines and stores like Marks and Spencer and Loblaws. The concept also
included a bakery and a delicatessen restaurant that would also retail foods at
the same location. These concepts were discussed but never got running.
[176]
Many Fabu D’Or
“start-up” expenses are included in the list of expenses that the Appellants
claim make up the $13 to $14 million, despite the intention that Fabu D’Or
would have wider, non-yacht chartering purposes. The Respondent appropriately
summarized a portion of Mr. Minchella’s testimony on Fabu D’Or’s multiple
purposes at page 177 of his Final Submissions:
550. Minchella said the limited partners would only have
known as much about the Commissary as his 1987 document “The Charter Market and
Competition” told them. Minchella doesn’t know if the limited partners would
have understood that their money was going towards building a facility to be
owned by OCGC which was to include a restaurant and intended to supply baked
products to chain stores like Loblaws.
[177]
The yacht chartering limited
partnerships’ financial statements were filled with false information regarding
expenses incurred, revenues earned, and when or if the promised asset of a
yacht had been acquired. These financial statements were represented to the
investors as providing the true state of the finances of the Limited
Partnerships that they invested in. The investors, in turn, entirely relied on
the truthfulness of the financial statements as the basis for their losses
claimed in their yearly income tax returns when they were provided annually
with a Schedule of Losses per unit.
[178]
The sections following
describe examples of key misrepresentations in the financial statements of each
of the Limited Partnership types. Although the Appellants’ yacht chartering limited
partnerships are used as illustrative examples, the misrepresentations are
substantively the same across all the Limited Partnership financial statements
of the same type.
(i)Financial Statements for the Type 1
Limited Partnerships
[179]
The S/Y Garbo LP
financial statements for the years 1984 to 1989 inclusively were created by the
accounting firm Hattin, Moses, Sugarman & Company as part of a review
engagement. No audits were performed.
[180]
Hattin, Moses, Sugarman
& Company played several different roles with both the S/Y Garbo
LP and the S/Y Gable LP. The firm helped design the tax aspects of the
investment, marketed and sold the investment opportunity to some of its clients
and received commissions for doing so, and prepared the Limited Partnerships’
financial statements. Some members of the firm were also investors, with Mr.
Garber (the Appellant), who worked with the firm, co-owning the unit in the S/Y
Garbo LP with fellow firm members Mr. Mitchell, and Mr. Sugarman.
[181]
The evidence shows that
the S/Y Garbo LP financial statements and the S/Y Gable LP financial statements
were replete with false amounts for expenses and revenues that had no basis in
reality. Key examples of the false statements, found throughout the balance
sheets, income statements, and notes, are set out following.
[182]
There are numerous
false statements regarding the S/Y Garbo and the S/Y Gable including a yacht
and accessories valued at $1,095,236 listed
in the balance sheet ending December 31, 1984 for both Limited Partnerships.
Depreciation is taken against the assets on both balance sheets even though the
assets did not exist and were not under construction at that
time.
[183]
The 1985 to 1989 financial
statements also falsely list the S/Y Garbo LP and the S/Y Gable LP as having
yachts during those financial years and record depreciation being taken on the
asset.
[184]
The evidence shows that
possession of the S/Y Garbo was only acquired by OCGC in April 1986, before
being sold to finance Maxi-Yacht International S.A.R.L. in February 1988. There
is no evidence that the S/Y Garbo LP itself ever acquired title to the yacht.
While OCGC was entitled to acquire title on behalf of the partnership, such
acts had to be done for the benefit of the Limited Partnership. Sale of the yacht could only be done by special resolution of the Limited Partners, as
outlined in the Limited Partnership Agreement. There is no trace of a sale or
mortgage of the yacht on the financial statements of the S/Y Garbo LP. In an
example of the pervasive and material nature of the fraud perpetrated against
the investors, the S/Y Garbo is simply listed continuously as an asset through
to 1989 with depreciation taken.
[185]
The misrepresentations
regarding the S/Y Gable are similar. Despite being listed on the balance sheet
in the year ending December 31, 1984, and as an asset in the years from 1985 to
1989 inclusively, the S/Y Gable was still under construction in August 1988.
The yacht was only delivered to OCGC in October 1988 and christened in Monaco in November 1988. Shortly after its christening, the S/Y Gable yacht was sold to a
French entity, Starlight S.A.M. Just like the S/Y Garbo LP, the sale is not
reflected anywhere on the S/Y Gable LP financial statements, which highlights the
fraudulent misrepresentation that the yacht was owned by the S/Y Gable LP
beginning in 1984 through 1989.
[186]
Fictional charter
revenue amounts also appear on income statements for both the S/Y Garbo LP and
the S/Y Gable LP beginning in the 1986, 1987, and 1988 financial years. The
evidence shows that these amounts are not based in reality and appear to have
been made up.
[187]
For the 1986 year, it
was impossible that there was any charter revenue earned by the S/Y Garbo LP. The
yacht was acquired in April 1986 and was not available for charter until April
1987 because it was undergoing intensive repairs in a dry-dock. For the 1987
year, the evidence shows that it was not possible for the S/Y Garbo LP to have
obtained charter revenues as high as the $123,000 listed, considering that the
S/Y Garbo was in a dry-dock until April 1987. Any actual charters conducted in
the remainder of the year earned minimal revenues. The charter revenues
recorded as earned by the Limited Partnership on the 1988 statement of income
are also false, as the S/Y Garbo was sold to finance Maxi-Yacht International
S.A.R.L. in February 1988.
[188]
Revenues listed as
earned from chartering the S/Y Gable in 1986, 1987, and 1988 years are
similarly unsubstantiated. The S/Y Gable was only finished and (very briefly)
acquired by OCGC in 1988 and was then almost immediately sold to the related
French entity.
[189]
The December 31, 1984
year-end Statement of Income for the S/Y Garbo LP is full of additional false
amounts, including expense amounts for a feasibility study, marketing and
advertising, and linen, cutlery, china, and utensils, none of which were
acquired or commissioned before 1986.
[190]
While the Appellant Mr.
Garber is still claiming the expenses listed in the previous paragraphs, at mid-trial
he dropped his claim for the following expenses that were listed on the 1984 Statement
of Income: construction financing brokerage fees, construction financing
interest, brokerage fees, letter of credit standby fees, and office expenses.
The evidence at trial, including Mr. Minchella’s testimony, shows that any reflections
of these amounts in the financial statements are fictitious. For example,
regarding the office expenses listed in the 1984 year, almost all OCGC work
occurred in Mr. Bellfield’s den, and no other space was used until December
1984. Rent, if any, was at such a small costs; rendering the amounts listed for
office expenses highly disproportionate. And in considering that the amount is
surrounded by other false amounts, it is highly unlikely to have a factual
basis.
[191]
The following comments
are not meant as a consideration of expenses that the Appellant no longer puts
before the Court; rather they are only considered as part of an effort to
evaluate the veracity of the financial statements as a document. The full
picture demonstrates the inherent dishonesty of the financial statements for
the Type 1 Limited Partnerships. Again, it was upon these financial statements
that the investors relied on in representing to the CRA that they were entitled
to claim losses.
[192]
The financial statements
from the Type 2 Limited Partnerships are similarly false. Here, the S/Y
Midnight Kiss LP is used as an example, but the misrepresentations are
substantively the same for all Type 2 Limited Partnerships.
[193]
Initially the financial
statements for several of the Type 2 Limited Partnerships were to be prepared
by the accounting firm Laventhol & Horwarth, but ultimately they were
prepared by Orenstein &
Partners. The mandate of both of these accounting firms was limited to
undertaking a review. No audit was conducted.
False Hull Registration Numbers Provided to Financial Statement Preparers
[194]
From January to April
1986, Harvey Taraday, a junior accountant at Laventhol & Horwarth was doing the field work in
preparing the financial statements. This witness appeared reliable, speaking
with respect to factual matters only, and his evidence was limited strictly to
the brief period of time in which he acted on the file. As part of the review
he was conducting, Mr. Taraday requested substantiation that the yachts were
under construction through the provision of hull registration numbers. He
understood that these numbers could only be obtained once the hull of a yacht was
built. Mr. Franklin confirmed in his testimony that he too was looking for hull
registration numbers in order to confirm whether capital cost allowance could
be claimed.
[195]
Mr. Taraday also
testified that OCGC asked Laventhol & Horwath to use the S/Y Garbo LP’s financial
statements as a model that, contained misrepresentation about the existence of
a yacht asset and depreciation claims.
[196]
Mr. Taraday testified
that Mr. Minchella provided a list of hull registration numbers for seven Type
2 Limited Partnerships: the S/Y
Main Event, the S/Y Bogart, the S/Y Bergman, the S/Y Change of Seasons, the S/Y
Casablanca, the S/Y Autumn Sonata, and the S/Y Midnight Kiss. These same hull registration numbers
appeared in the letter forwarded by Mr. Minchella to a partner at Laventhol
& Horwath. Mr. Minchella introduced the numbers as relating to yachts
“which were built”.
[197]
A letter was also sent
by Mr. Minchella to Mr. Franklin on April 7, 1986 that listed the hull
registration numbers of “yachts
which were built by Chantiers Yachting France” and “yachts which were built by
Dynamique”. This list contained 18 purported Hull Registration Numbers. Mr.
Minchella testified that he included three Limited Partnerships in that list
that were never actually subscribed to by any investors.
[198]
During his testimony,
Mr. Minchella conceded that he now knows the hull registration numbers were
false. The statements that any yachts were built by Chantier Yachting France
and Dynamique were not true, and the yachts listed as having hull registration
numbers in the letters to Laventhol & Horwath and to Mr. Franklin were in
fact never under construction. He claimed, however, that he was unaware at the
time that the numbers were false, and that while he put together the lists and
forwarded them as per Mr. Bellfield’s instructions, it must have been Mr.
Bellfield himself who provided the false numbers. Mr. Franklin also testified
that he later found out that the hull registration numbers provided were false.
[199]
The evidence indeed
shows that none of the yachts for which hull registration numbers were provided
were ever constructed. Chantiers Yachting France went into receivership in July
1985 and never built any yachts for OCGC. The statement in a letter to Mr.
Franklin on April 7, 1986 that Hull Registration Numbers existed for 13 yachts
“which were built by Chantier Yachting France” is therefore impossible and
entirely false. Dynamique only built two yachts that were ultimately acquired
by OCGC. No other 80-foot yachts were acquired by OCGC from Dynamique for the
Limited Partnerships. The statement in Mr. Minchella’s letter to Mr. Franklin
that the S/Y Gable, the S/Y Queen of Hearts, the S/Y High Sierra, and the S/Y
Change of Seasons were built by Dynamique is therefore also false. Part of the
evidence on this subject is accurately summarized by the Respondent at page 81
of their Final Submissions:
219. When LeGlatin first met with the Jeanneaus at
Dynamique in January 1985 they were finishing the mould for the construction of
the new 80’ boat. By July 1985 the hull would have been completed. Between
February 1985 and April 1986 LeGlatin made frequent trips to the Dynamique yard
in La Rochelle. He never saw more than one Dynamique 80. Naval architect, Michel
Joubert, the designer of the Dynamique 80 said that Dynamique had commenced
building the hull for the first Dynamique 80 by February 1985 and he was
advised in July 1986 that the first Dynamique 80 had been sold and that he was
to receive a royalty payment. Construction on a second Dynamique 80 commenced
sometime in 1986 and that boat was sold by December 1986. Joubert says that it
is impossible that five Dynamique 80’ boats could have been built by April
1986.
220. When LeGlatin and Bellfield visited Chantiers Yachting
France on February 20, 1985, before its bankruptcy, LeGlatin saw that all that
Chantiers Yachting France had in its yard were moulds for smaller boats and the
mould for the Lacoste 42. At that point Chantiers could only build one boat at
a time and had no experience in building larger boats.
[Footnotes omitted]
[200]
An expert opinion prepared
for the Respondent by Eric Ogden, a naval architect and yacht surveyor, further
substantiates the falseness of the hull registration numbers provided to
Laventhol & Horwarth in the course of their mandate to create financial statements
for the 1985 Limited Partnerships.
Mr. Ogden’s opinion also provides further evidence that the hull registration
number given to Mr. Gartenburg at closing in his capacity as a lawyer representing
Donald Ubell, and the hull registration numbers in the lengthy list provided to
Mr. Franklin were false. Mr. Ogden concluded that none of the hull registration
numbers conformed to the style used by either French yacht building company,
and more generally, was not consistent with the official format of French hull
registration numbers.
Misrepresentations
in the Financial Statements
[201]
After the mandate with
Laventhol & Horwath was terminated by OCGC, the accounting firm Orenstein
& Partners went on to do eight of the Financial Statements for the Type 2
Limited Partnerships. This was but one of many different capacities that Peter
Browning and his firm acted in for the Limited Partnerships and OCGC. Mr.
Browning’s accounting firm had initially provided
tax opinions on the reasonableness of the expenses to be claimed by the Limited
Partnerships as described in the Offering Memoranda. His firm then prepared
financial statements for some of the Limited Partnerships. The firm also became
a sales agent and active promoter for OCGC, as well an advocate on behalf of OCGC
and the Limited Partnership to the CRA. Lastly, the firm, at a later date,
conducted an audit of OCGC’s financing.
[202]
Mr. Browning is an avid sailor, a chartered
accountant by training, and most recently, an investment banker. In his
testimony, Mr. Browning was protective of the yacht chartering investment
scheme, which he described as a “tax gimmick”. He consistently chose his words
very carefully and had a tendency to only accept the obvious when it was presented
to him. He frequently put forth other explanations or alternative descriptions
in order to support his individual theory of the case.
[203]
Mr. Browning testified that in
preparing the financial statements for the eight Type 2 Limited Partnerships,
including the S/Y Midnight Kiss LP, only a review was conducted, with no
verification or substantiation of the existence of assets or the truthfulness
of claimed transactions. The firm fully relied on the management’s
representations.
[204]
Mr. Browning testified that he
prepared the financial statements for the 1985 taxation year with the
understanding that capital cost allowance was deductible because a yacht was
delivered to the Limited Partnerships by December 31, 1985. He came to this
understanding based on the provision by OCGC of its invoices for the yacht to
the Limited Partnerships and by the hull registration numbers
provided. None of the Type 2 Limited Partnerships that Mr. Browning prepared financial
statements for even had yachts under construction at that time, including the S/Y
Midnight Kiss. The capital cost allowance claims were false. In the S/Y Midnight
Kiss LP’s 1986 financial statements prepared by another member of Mr.
Browning’s firm, no capital cost allowance was claimed.
[205]
Mr. Browning also testified that
he prepared the financial statements for the 1985 taxation year in part by
relying on invoices provided by OCGC. Mr. Minchella testified that these
invoices were prepared for both the Type 1 and Type 2 Limited Partnerships in
March 1986, obviously in preparation for creating the financial Statements. Mr.
Minchella testified that he relied on the Offering Memoranda to source the
numbers listed in the invoices, and they were not in any way related to whether
the services or goods were actually provided by OCGC to the Limited
Partnerships.
[206]
Much like the financial statements
for the Type 1 Limited Partnerships, the S/Y Midnight Kiss and other Type 2
Limited Partnerships’ financial statements were filled with falsehoods. The
Respondent accurately summarized the broad nature of the misrepresentations in
his Final Submissions:
241. The balance sheet and related notes to the financial
statements of the Midnight Kiss for the year ended December 31, 1985 are false.
242. The balance sheet for the year ended December 31, 1985
for the S/Y Midnight Kiss Limited Partnership describes Fixed Assets totalling
$1,284,800. Notes 1 and 2 to the financial statement describe the depreciation
policy and the fact of depreciation being taken against the asset. The Fixed Assets
are described in Note 3 as a Yacht and cutlery, linen, china and utensils. Note
3 states that “No depreciation was claimed as the assets were not put into
operation during this period.”
243. There was no Midnight Kiss yacht in 1985 or ever. The
balance sheet of the Midnight Kiss for the year ended December 31, 1985 was
false.
244. The statement of income for the S/Y Midnight Kiss
Limited Partnership for year ended December 31, 1985 discloses expenses of a
$100,000 for a feasibility study, $60,000 for marketing and advertising costs,
$212,200 for a letter of credit standby fee, $66,545 for construction financing
interest, and $55,455 for construction financing brokerage fees. No feasibility study was
even commissioned until late 1985 or delivered until 1986, no marketing and
advertising was provided before 1986 and, no financing was ever provided to the Midnight
Kiss.
245. The statement of income for the S/Y Midnight Kiss
Limited Partnership for year ended December 31, 1985 is false.
246. The statements of income for the S/Y Midnight Kiss
Limited Partnership for years ended December 31, 1986, 1987, 1988 and 1989 are
also false. The income statements in these years variously make false claims
respecting moorage arranging fees, moorage fees, feasibility study fees,
interest on line of credit, letter of credit standby fees, construction
financing interest, and construction financing brokerage fees.
247. The statements of income for the S/Y Midnight Kiss
Limited Partnership for each of the years 1985, 1986, 1987, 1988, and 1989 are
false.
[207]
The Type 3 Limited Partnerships’ financial
statements similarly list fictitious expenses. In this section, the S/Y Close
Encounters LP’s financial statements are used as an example, but the
misrepresentations are substantively the same for the other Type 3 Limited
Partnerships.
[208]
Amounts of $116,000 appear in the
1986, 1987, and 1988 year statements that seem to correspond with the same
amount listed in the Offering Memorandum for a purported completion guarantee
fee. An additional $29,000 is listed in 1986 for arranging the completion
guarantee. The evidence shows that no such completion guarantee existed or was
arranged.
[209]
The Construction Financing Fee
listed in the 1986 Statement of Income and the amounts of $50,000 listed for a
letter of credit standby fee in the 1986, 1987, and 1988 financial years are
false. No such financing was ever obtained, despite the fact that evidence
highlighted how crucial this financing would have been to make OCGC’s
investment proposal feasible and attractive to investors. Nor was an operating
line of credit obtained for the Type 3 Limited Partnerships, despite the
$11,675 fee listed as an interest expense in the 1987 Statement of Income.
[210]
The $60,000 listed as an expense
for the inspection of the building of the yacht is not based in reality. There
was no yacht being built for the S/Y Close Encounters LP for 1986, 1987 and
1988. While the claim that the inspection of previous yachts might benefit
later Limited Partnerships might carry some weight in a different set of facts,
the prevalent nature of the fraud in this case makes this a weak argument in
supporting the veracity of this expense. Similarly, the 1987 expense for $100,000
and $59,000 in 1988 for moorage arranging fees is not based in reality. No
yacht was under construction and at the rate of construction of yachts
generally, it was not plausible that mooring needed to be arranged in advance.
The 1987 expense of $25,000 for the further feasibility study is also false, as
described above regarding expenses for feasibility studies by other Limited
Partnership types.
[211]
The Appellants argue
that much of the fraud perpetrated was related to Mr. Bellfield’s realization
that OCGC would have a considerable corporate tax liability. In response to
this, the Appellants claim that Mr. Bellfield, along with others, created a
trail of false documents to reduce the corporation’s taxable income. The
Appellants’ theory is summarized at page 26 of their Final Submissions,
stating:
OCGC as a supplier of goods and services
to Limited Partnerships had significant taxable income by virtue of the
invoices it delivered to the Limited Partnerships. In order to reduce its
taxable income, it created false relationships and documents, including the
creation of false transactions between itself and certain Swiss foreign
entities, Neptune Marine Resources Ltd. and Starlight SA.
[212]
The fraudulent misrepresentations
and false documents created to give the illusion of a relationship with the
foreign entities Neptune and Starlight S.A. are but one part of the grand fraud
perpetrated by Mr. Bellfield. They cannot be parceled out, as the Appellants
argue, to be treated as the separate relationship of OCGC and its tax affairs,
because, as I have repeated, there was never any business and the entire scheme
was a fraud from beginning to end. The fraudulent documents pertaining to Starlight
S.A. and Neptune help establish that OCGC never had any access to financing,
but constantly misrepresented that it did and that it was providing such
financing as part of its contractual obligations to the Limited Partnerships.
The false documents also help illustrate the massive scale of the fraud
perpetrated. Examples of these false documents are described in broad strokes following.
[213]
As discussed above, Mr.
Bellfield established two entities in Switzerland and fraudulently held these
entities out as offering financing and/or goods and services to OCGC and the
Limited Partnerships. In support of these fraudulent claims, Mr. Bellfield and
his co-conspirators Mr. Minchella and Mr. Pierre Rochat cooperated to create
false agreements, invoices, account statements and other documents, which were
given to the CRA by OCGC. This purportedly showed that Neptune made loans to
Starlight S.A. and OCGC. These documents included a Yacht Financing Agreement,
a Guarantee or Indemnity Agreement, an Agreement for providing Line of
Operating Credit, and invoices and account statements between S/Y Close
Encounter LP and Neptune from January 1, 1986 to January 31, 1987.
[214]
False invoices and
other documents were also created and presented to the CRA purportedly showing
that Starlight S.A. provided yacht chartering goods and services. This included
a Management Agreement between OCGC and Starlight Charters S.A., an invoice
from Starlight Charters S.A. to OCGC dated January 1, 1986 for consultation
fees, feasibility study, update study, et cetera, and so on. These are only a
few examples.
[215]
One of the most egregious
examples of misrepresenting the financing available from Neptune involved the
creation of false performance bonds. The Respondent accurately summarized the
evidence regarding these performance bonds at page 135 of his Final Submissions:
388. Exhibit R-77 is a binder of Performance Bonds.
a. Tab 1 is the Neptune Marine Resources S.A Performance
Bond for $1,450,000 with Neptune as the surety, Maxi Yacht as principal and
OCGC as obligee. The Bond is for the Gable and refers to a written contract
between Maxi Yacht and OCGC dated Nov. 1, 1984 for the building of one luxury
86 foot sail yacht of Sparkman and Stephens design. Minchella said there was no
such contract.
b. Tab 2 is the Neptune Marine Resources S.A Performance
Bond for $1,450,000 with Neptune as the surety, Maxi Yacht as principal and
OCGC as obligee. The Bond is for the Garbo and refers to a written contract
between Maxi Yacht and OCGC dated Nov. 1, 1984 for the building of one luxury 86
foot sail yacht of Sparkman and Stephens design. Minchella said there was no
such contract.
c. Minchella pointed out another flaw with the Garbo
Performance Bond which indicates it was signed January 2, 1986. He said that
could not have happened either. Minchella explained that it was Forsey who
noticed there weren’t Performance Bonds, although the documentation required
them and Forsey wasn’t at the company on January 2, 1986. Minchella thought the flawed
signature date was found on all the Performance Bonds.
d. Minchella found another reason to identify backdating in
the Performance Bonds. The Performance Bonds for the 1985 partnerships were all
for $1.45 million which value comes from the amending agreements which weren’t
signed until April 1987.
[Footnotes
omitted]
[216]
From the evidence, it appears that the fraudulent
performance bonds were created in a cut and paste effort by OCGC people and
were printed by Sibilia and Associates. OCGC was invoiced for these expenses
and for expenses relating to false documents regarding Starlight S.A. and Neptune. These expenses for documents perpetrating the fraud are included in the
Appellants’ summaries of funds that they claim were spent on the yacht
chartering business.
[217]
All of the Neptune and
Starlight S.A. documents were false. Neptune never provided any financing, and
Starlight S.A. never provided any goods and services.
(i) Yacht Delivery
Schedules
[218]
Multiple yacht delivery
schedules provided by OCGC and/or Mr. Bellfield were referred to and produced
as evidence throughout the trial. All of these contained misrepresentations of
when yachts would be delivered.
(ii) Management Agreements
[219]
Numerous false and
backdated management agreements were created by OCGC. Amongst these were
management agreements purportedly entered into with “Louic LeGlatin” in trust
for a corporation to be incorporated in the Channel Islands, or witnessed by an
individual by the same name. Mr. Loic LeGlatin testified that he did not
enter into these agreements nor did he recognize them, and that his name was
misspelt. He further testified to the impossibility of his entering into an
agreement in trust for the corporation listed in the agreement, and the
fact that the agreements were backdated to a date prior to his first encounter
with Mr. Bellfield. Mr. LeGlatin also explained that he only introduced Mr.
Bellfield to Pierre Rochat in February 1985, and as such, agreements
purportedly between Mr. Rochat and OCGC entered into in November 1984 and January
1985 were false.
[220]
As stated previously,
it is unnecessary to list all the false representations made by OCGC and Mr.
Bellfield. The effort here is to provide sufficient examples to illustrate the
pervasive and all-encompassing nature of the fraud. To that end, the excerpt
from the Respondent’s Final Submissions at page 119–124
serves to provide further examples of Mr. Bellfield and OCGC’s continuous
fundamental misrepresentations to investors. The first excerpt reads:
347. On June 24, 1985 Einar Bellfield sent a letter to
Larry Magelonsky [sic] announcing the completion and delivery of the
Garbo by the end of July 1985 and the completion of the Gable by the end of
1985 and the start of Gable charters in January 1986.
[Footnotes omitted]
[221]
This representation is
false, as described further in the next section regarding the building and
purchasing of yachts. OCGC only acquired possession of the S/Y Garbo in April
1986. The S/Y Gable was only launched in November 1988.
[222]
The second excerpt
reads:
349. The Stafford party charter took place on the leased Med. 86 between
Feb. 22, 1987 and March 1, 1987. The Staffords were limited partnership
investors. Dorothy Louie testified that Bellfield didn’t want the clients to
know that the leased Med 86 was not their yacht; Bellfield instructed them to
say that it was one of OCGC’s yachts. On page 4 (#0360000093) of her report she
wrote:
I can see that his concerns are valid, especially when we are
instructed to give the impressions that the Med 86 is our yacht and that we
have had charters all winter. In the course of conversation and sometimes
under questioning by the clients, the truth would slip out and can become a
source of embarrassment not only to the crew but to the Company as well.
350. Both the captain, Hugues Chiffoleau and Louie had received these
instructions from Einar Bellfield as to what they were to say to the clients.
They were instructed to give the impression that the Med 86 was their yacht,
which was not true. They were also instructed to say that they had had charters
all winter, even though she knew that this was only their second charter. They
were instructed to say things that were not true in order to give the clients a
false impression. From speaking with other crew on the boat the clients found
out that the boat was leased and this was only the second charter. The clients
questioned her; she had to do a cover-up which was very uncomfortable for her.
As in this case, Bill let the cat out of the bag by telling the clients
that the yacht did not belong to Starlight Charters and that we had in fact
charter the Med 86 from US Yachts. Also, that this has only been our second
charter. I was questioned on both issues, and covered up by saying that we
had in fact bought two Med 86 which was being refurbished in Florida, and being
behind schedule, could not make it to the Caribbean in time for their charter,
and the owner of US Yacht, feeling responsible, had loan us his personal yacht.
About the other charters, again because of the yachts being behind
schedule, we had to cancel most of our bookings but because we did not want
to spoil their planned vacation, had arranged to have this yacht at their
disposal. They accepted the explanations, but being investors, I can see where
they have grounds for being annoyed for not being told the truth. With the next
charter coming up in April and yachts not being available, it should be made
very clear what should be related to the clients so that we are not put in an awkward
position again. We cannot force the crew to lie so perhaps in the interest of
all concerned, it would be better to explain the situation to the clients prior
to the charter.
[Footnotes omitted, emphasis added]
[223]
As can be seen from the
post-charter report written by Ms. Dorothy Louie, OCGC employees were involved
in various ways in perpetrating the fraud. Some of them became concerned, but
most were not aware of the massive fraud in which they were involved. I found
Ms. Louie to be a fairly credible witness. She answered the questions presented
to her concisely and to the point. It was obvious she believed what she had
been told at the beginning, but as time progressed, she ran into relationship
issues and began to recognize Mr. Bellfield’s deceit. For example when they
were taking charters out on the Med 86, she had been given the impression that
the Med 86 was OCGC’s yacht. They were not told that the yacht was leased.
Einar Bellfield gave instructions to tell the guests that the yacht was owned
by OCGC. It slipped out that the yacht was not owned by OCGC, and this was only
on the second charter. Ms. Louie said she had to do her best to cover up the
untruths she was told.
[224]
As summarized
accurately by the Respondent, the misrepresentations to the investors continued
flagrantly, including:
351. At other times, investors were told:
a. March 10/11, 1987 letter: “The purpose of the meeting is to ratify
certain changes made by OCG in the design and construction of the Yacht and to
update some of the management and operating costs to reflect current
conditions”…“To ratify and confirm amendments made by the General Partner in
the various operating agreements with Overseas Credit and Guarantee Corporation
and Starlight Charters S.A. to reflect increased costs and enhanced
operations”.
b. Feb. 22, 1988 letter: “During the month of January OCGC has been
involved in lengthy meeting with Neptune Marine Resources in Geneva to obtain
the required documentation from Financial Institutions”
c. March 15, 1988 letter: “We would like to bring to your attention that
Overseas Credit and Guaranty Corporation is doing everything within its powers
to obtain the third party documents from Europe to satisfy Revenue Canada’s request”.
d. Sept. 7, 1988 letter: “At that meeting it was established that Revenue
Canada’s only serious problem lay in their understanding of the financing
mechanisms put in place by Overseas Credit and Guaranty Corporation”.
e. […]“It is
partially correct in that OCGC has used the $750 per month from investors to
build boats. However, most of these funds have been used to build tooling and
to get the production going to a point where construction financing can be
drawn on. At the same time construction financing has been arranged through
Neptune Marine Resources S.A. evidence of which is on hand at the OCGC office.
Further, Maxi Yacht (France) makes frequent draws on the construction financing
arranged by Neptune and will continue to do so in the future”. --- “OCGC can
not demonstrate that they have paid for these services [Starlight Charters
S.A.] because these services were paid for on OCGC’s behalf by Neptune Marine
Resources S.A. (OCGC thus owes Neptune for these
services). Bank confirmations of these payments have been presented to Revenue
Canada”.--- “OCGC has used the investors’ promissory notes to secure financing
to provide the variety of services”.--- “Starlight Charters S.A. is a Swiss
service company controlled by persons other than Mr. E. Bellfield…and has
provided Revenue Canada with a letter ..and a sworn affidavit from Mr. E.
Bellfield that he does not control Starlight”.---“Neptune Marine Resources
provide the construction financing for Maxi and has paid for the services
provided by Starlight to OCGC on behalf of the Limited Partnerships… Mr. E.
Bellfield does not control Neptune and is prepared to put witnesses on the
stand to testify to that effect”.
f. Dec. 6, 1988 Convention Centre minutes: “Blond with
glasses ---Where is the money that our notes secure?---Mr. Bellfield replied:
that is collateral security for funds raised in Europe”. ---“We have spent our
cash flow partially for the standby line of credit that we need”.---“One more
yacht will be completed within two or three months and from there on every two
months. In 1989 – one every month”.534
g. Feb. 3, 1989 letter: “…OCGC has prepared an information
package which addresses a number of questions raised by investors with respect
to their yacht investment. This package, which is enclosed contains…ii) Limited
Partnership Statement of Source and Application of Funds”.
h. August 30, 1989 Annual General Meeting Business Update:
“Improvements were made to the second and third boats…the fourth boat also
experienced similar delay problems…It is also interesting to realize that there
are currently two boats in the water that are active in chartering. However
Revenue Canada is still attacking these two Limited Partnerships on the same
basis. Our third boat was placed in the water, as of April 1989, the fourth
will be in at the beginning of August”.
i. Sept. 28, 1990 Browning letter to investors: “Our
engagement was to assist Mr. Scace to assess whether the financing transactions
with Neptune Marine Resources S.A. in connection with the manufacturing of
yachts and the provision of services relating to the yacht chartering/luxury
cruise business had, in fact, taken place. This financing structure had been
described by Mr. Bellfield and reflected in his hand-written schematic diagram
previously referred to”.
j. March
28, 1991 letter: “This is to formally notify you that Overseas Credit has
complied with the security agreement with Neptune Marine Resources S.A. and
accordingly has assigned your outstanding debt to 937325 Ontario Inc.”
[Footnotes omitted]
[225]
As discussed above, all
representations regarding Starlight Charters S.A. and Neptune were false. OCGC’s
representations quoted above regarding the number of yachts under construction,
available for charter, and to be acquired by Limited Partnerships were not a
true representation of the state of affairs, as will be illustrated in the
section that follows.
(i) Overview
[226]
Over the course of the
fraud masterminded by Mr. Bellfield, several different yacht building and
acquisition strategies were employed. As will be seen following, most
possibilities that Mr. Bellfield explored were short-lived, usually because
OCGC lacked the funds to carry out its contractual obligations.
[227]
As previously stated, OCGC
committed to delivering 36 yachts. For the 1984 Limited Partnerships, the S/Y Garbo
and the S/Y Gable were supposed to be under construction in 1984 and delivered
by the end of 1985. For the Type 2 Limited Partnerships, 14 additional yachts
were due by December 31, 1985, bringing the total number of luxury yachts that
should have been completed by the end of 1985 to 16 yachts. None were delivered
by that date. In 1986, OCGC committed to delivering an additional 20 yachts by
the final months of 1989 or early 1990.
[228]
The evidence at trial
demonstrated repeatedly that OCGC did not have the capital required to fund the
acquisition of the yachts. The Respondent noted that to meet its obligations to
acquire the 16 yachts due before December 31, 1985, OCGC would have needed at
least 16 million dollars. It would have needed an additional $20 million
minimum for the other 20 yachts promised to the remaining Limited Partnerships.
This amount does not even begin to account for any soft costs related to
acquiring the yacht assets or any of the extensive ongoing expenses
of setting up a luxury yacht chartering as OCGC was obligated to do as the general
partner under the terms of its Limited Partnership Agreements. With no source
of financing, OCGC relied entirely on investor deposits and interest payments.
As the Respondent noted, OCGC did not even receive 16 million dollars in total
from all investors by the end of 1988. The Respondent correctly summarized the
impossibility of OCGC delivering on its yacht delivery promises because of its
lack of funds:
The approximate cost of a Fantaseas yacht has been
described in the evidence. Robert Forsey, at Bellfield’s request, advised
Bellfield by letter dated August 28, 1986 that the cost of building such a
yacht would be in the range of $1,300,000 to $1,500,000. In OCGC’s October 31, 1985
financial statements, OCGC represents at Note 5 that the company had arranged
for financing the construction of the 16 charter vessels for $16,800,000 or
$1,050,000 on each charter vessel. On January 30, 1987, U.S. Yacht and OCGC entered
into a purchase and sale agreement for one Med 86 for US$1,425,000. In seeking bridge financing
for Picton from the CIBC, OCGC told Robert Callander that OCGC estimated the
cost for the construction of each yacht to be $1,450,000 (but were not seeking
financing from the CIBC).
OCGC therefore needed between $16,000,000 and $24,000,000
prior to December 31, 1985 just to pay for the costs of 16 yachts, with no
allowance for soft costs at all. OCGC did not even receive this amount from its
investors by the end of 1988 by which point it had promised to provide 36
yachts.
[Footnotes
omitted]
[229]
In total, OCGC only ever
took possession of three yachts despite promising 36 luxury yachts by 1990. The
particulars of the circumstances of the possession of these three yachts have
already been reviewed (see paragraphs [94] through [101]).
(ii) Dynamique: The S/Y
Garbo and the First Impressions
[230]
It was Loic LeGlatin,
hired by Mr. Bellfield to assist with yacht acquisition for OCGC based on his
extensive knowledge of the yachting world, who introduced Mr. Bellfield to
Chantal and Yann Jeanneau of Dynamique in February 1985 to discuss the
possibility of building of luxury yachts. Chantal Jeanneau was the main contact
person at Dynamique. Mr. LeGlatin coordinated negotiation of contract between
Mr. Bellfield and Dynamique, and acted as the technical advisor to Mr.
Bellfield. Dynamique was involved in the building of two yachts for OCGC, the
S/Y Garbo, and the S/Y First Impression.
The S/Y Garbo
[231]
The first contract for the
S/Y Garbo was signed between OCGC and Dynamique on February 19, 1985. As
discussed above, despite misrepresentations to the contrary, OCGC’s
representations that the S/Y Garbo or the S/Y Gable was under construction in
1984 were false since the first encounter with Dynamique only occurred in 1985.
[232]
By March 6, 1985,
Dynamique had become nervous because Mr. Bellfield had not arranged for a
letter of credit required for the down payment. Less than ten days later, Mr.
Bellfield ordered two more yachts from Dynamique despite having not yet come up
with a down payment for the first yacht. Mr. LeGlatin testified that this was a
trick in order to increase Dynamique’s patience.
[233]
Dynamique again
contacted Mr. Bellfield on April 17, 1985 regarding the down payment required
under the original contract for the S/Y Garbo. In May 1985, Dynamique contacted
Mr. LeGlatin to inform him that the down payment had still not been received
and they were attempting to ascertain whether the down payment would ever be
forthcoming or if the contract was annulled due to failure to meet this
condition. Mr. LeGlatin testified that he spent several months in France until July 1985, frequently calling and waiting to hear from Mr. Bellfield regarding
the down payment for Dynamique. Dynamique continued to construct the 80-foot
yacht but assumed that Mr. Bellfield was not able to purchase it. Dynamique
completed the hull in July 1985. Again, it should be noted that it is only
after hulls are completed that a hull registration number can be obtained on
application and assigned to a specific yacht.
[234]
The evidence shows that
another draft contract was proposed in September 1985. The contract required a
down payment and OCGC needed to pay the remaining balance by October 1985
before title would be transferred. Mr. LeGlatin testified that at the time, he
was no longer receiving funds for his own wages, and OCGC continued to fail to
pay any funds to Dynamique. His personal financial situation became so dire
that Mr. LeGlatin testified that he needed to borrow money from Chantal Jeanneau
to buy a plane ticket home.
[235]
Mr. LeGlatin, Ms.
Jeanneau, and Mr. Bellfield met together in October 1985 at the Annapolis Boat Show
in Annapolis, Maryland, where Mr. Bellfield was still pursuing the yacht under
construction despite not having paid any funds. Mr. Bellfield proposed that he
rent the yacht for a few months first before paying for it. A memo of agreement
was drafted with payment options, including an option that would require Mr.
Bellfield to follow a payment schedule. This schedule called for payment of
$100,000 by October 15, 1985, but once again, Mr. Bellfield did not meet this
obligation. He did eventually pay a down payment of $US 50,000 on November
1985.
The S/Y First
Impressions
[236]
Dynamique was done with
negotiating with Mr. Bellfield. The question then became whether Mr. Bellfield
would lose the $50,000 he had paid to Dynamique thus far. Mr. LeGlatin
testified that he suggested that Mr. Bellfield take a 50-foot yacht as an
alternative to losing the deposit. The $US 50,000 deposit for Dynamique was
used to purchase the 50-foot instead, with the bill of sale dated November 27,
1985. Title for the S/Y First Impressions, a yacht that would not satisfy
OCGC’s obligations to the Limited Partnerships, passed to OCGC some 8 months
after the initial contract for the S/Y Garbo. At this point, it was one month
before all 16 yachts promised to the Type 1 and Type 2 Limited Partnerships
were due for delivery. OCGC had only managed to pay $50,000 at that time and
clearly had difficulty even paying its employee, Mr. LeGlatin.
[237]
Ester Palmer testified
that the S/Y First Impression was supposed to be used as a provisioning boat
for the luxury yacht charters, but in November 1985, there were no yachts to
provision. The boat arrived in St. Lucia in March 1986. Mr. Steven Leibtag,
Operations Manager at Starlight Canada, testified that he visited the St. Lucia base of operation around that time. He testified that there was a significant
dispute with the S/Y First Impressions crew over a lack of payment for their
services rendered in the transatlantic crossing. Mr. Leibtab was an experienced
salesperson who appeared to answer accurately the questions directed to him. He
said that the reason he left OCGC was that they did not need his expertise since
they did not have any yachts. A similar frustration was expressed by others who
later left OCGC, such as Bruce Oekler.
[238]
Until March 1986, the S/Y
First Impression was the only boat available and even though it did not fit
within the Fantaseas brand, the boat was used to conduct limited charters in
the Caribbean. None of the charters benefited any of the Limited Partnerships. These
efforts were simply part of continued efforts at window-dressing and demonstrating
to investors that OCGC had yacht chartering capabilities. Eventually the
ownership of the S/Y First Impressions was transferred to Mr. Bellfield’s wife
on June 26, 1992, and located in Toronto, where Mr. Jack Moles later saw it. Mr.
Moles was an employee of OCGC and supervised the repair work on the S/Y Garbo
in Florida. David Martin also testified that he knew that the yacht was in Ontario throughout his employment, but he considered the S/Y First Impressions to be
outside of the Fantaseas operations. David Martin had been an employee of Starlight
from Canada from March, 1988 to 1989 conducting marketing and sales for
Fantaseas. I found that Mr. Martin presented well as a witness, appeared to be
knowledgeable on the questions asked, and was direct, and honest.
The S/Y Garbo,
continued
[239]
On December 15, 1985,
yet another contract was created between Dynamique and OCGC; this time with
OCGC acting as the trustee for the S/Y Garbo. Mr. LeGlatin testified that once
again he was in France contacting Mr. Bellfield and OCGC frequently looking for
the funds to pay for the 80-foot yacht, and again they were not forthcoming.
Dynamique ultimately sailed the yacht across the Atlantic to St. Martin. The
documentary evidences shows an invoice and bill of sale from Dynamique to OCGC,
amongst other documents, with the S/Y Garbo finally sold to OCGC on April 4,
1986.
[240]
At that point, there
was one Limited Partnership yacht, with fifteen more yachts outstanding
and no funds or ability to build these other yachts. There were also two
problems with the one “Fantaseas” yacht that had finally come into OCGC’s
possession.
[241]
First, the S/Y Garbo
was not up to standards. Ester Palmer, Vice-President Operations of Starlight Canada, described the S/Y Garbo as a very sleek and beautiful yacht. She explained,
however, that the S/Y Garbo did not fit the Fantaseas concept because it did
not have the four equal cabins and therefore charters could not be sold on an
equal basis. David Martin, General Manager of Starlight Canada, also described the S/Y Garbo as not complying with the Fantaseas concept.
[242]
Second, the S/Y Garbo
suffered extensive structural damage on its maiden voyage, and had to be in a
shipyard in Florida to undergo significant repairs. This meant that there was
no 80-foot yacht available for charters. Again, the only yacht that could go on
charters until the S/Y Garbo left the dry dock in April 1987 was the S/Y First
Impressions, which was not a Limited Partnership yacht and smaller than
required for the Fantaseas concept. In fall 1986, Bruce Oekler, a travel consultant
in Miami who worked on marketing and sales for Starlight Canada, testified that he had to delay his marketing efforts because the S/Y Garbo was still not in
the water.
[243]
Jack Moles came on as
Project Supervisor in October 1986 to supervise the yacht repairs on the S/Y Garbo
in the Guy Couach Boatyard in Florida. He attempted to speed them up because
work was proceeding very slowly. Mr. Moles appeared very knowledgeable about
the areas upon which he testified. He was straightforward, professional, and he
answered questions fairly. Mr. Moles testified that there were serious
structural problems with the S/Y Garbo due to the yacht’s design. He also
testified that one of his priorities was to address late payments for repair
work that was slowing down the completion of work. He established a local bank
account as an effort to ensure work was paid for in a timely manner and to
ensure the yacht could leave the yard as soon as possible.
[244]
Mr. Moles testified
that there was some tension between him and OCGC from time to time because
there was difficulty in getting money from OCGC. He was trying to get the S/Y Garbo
out of the yard, and pay the interior decorator. The rules were that people had
to be paid before the yacht could leave the yard. At a time when OCGC was
already supposed to have delivered 16 yachts, OCGC was having trouble paying
for repairs on its very first Limited Partnership yacht. To emphasize, OCGC
could not afford repairs on one yacht when it had represented itself as having
at least 16 million dollars to acquire the yachts to be delivered by December
31, 1985.
[245]
The S/Y Garbo finally
left the yacht yard in Florida and went to St. Lucia to start chartering on
April 6, 1987. The first charter on the S/Y Garbo occurred in April 1987. After
that time, Mr. Moles heard regularly from Eraldo Marcolongo, Operations Manager
with Starlight Canada, who was based in St. Lucia. Mr. Marcolongo was often in
contact with Mr. Moles, looking for materials or parts for the S/Y Garbo. There
were interior decoration problems with the S/Y Garbo, electrical problems and
general ongoing repairs as a result of the yacht being in a southern climate.
In an ever-repeating pattern in the story of the OCGC fraud, Mr. Marcolongo had
to repeatedly request funds to pay the bills. He regularly complained about the
problem of getting regular funding on a timely basis, and he was looking for a
maintenance budget.
[246]
Despite the S/Y Garbo
not being available for charter until April 1987, the S/Y Garbo 1986 financial
statements list charter fees and false representations about the S/Y Garbo’s
availability for charter. The number of actual charters that the S/Y Garbo
undertook was limited, and many of the passengers who spent time aboard the S/Y
Garbo did so at reduced investor rates or were complimentary. This was in the
interest of Mr. Bellfield’s to keep up the smoke and mirrors of the luxury
yacht charter fraud. David Martin, General Manager of Starlight Canada, testified that the S/Y Garbo was out of service for the summer of 1988. The S/Y
Garbo ultimately went to St. Martin and then to boat shows to market the Fantaseas
concept. A sailing schedule in evidence shows the S/Y Garbo at charter shows in
the Virgin Islands, St Thomas, Antigua, and on one cruise in the fall of 1988.
[247]
In 1988, the S/Y Garbo
was sold to Maxi-Yacht International S.A.R.L. as part of the financing of that yacht-building
company. The sale of the S/Y Garbo asset to Maxi-Yacht does not appear in any
of the Limited Partnerships financial statements.
(iii) The S/Y Great Gatsby
[248]
The S/Y Great Gatsby
was one of several yachts that OCGC negotiated about potentially purchasing but
ultimately did not. Under its contracts with the S/Y Great Gatsby Limited
Partnership, a Type 2 Limited Partnership, OCGC was to deliver the S/Y Great
Gatsby yacht by December 31, 1985.
[249]
Originally
a racing yacht known as the “Ondine”, the S/Y Great Gatsby was an 80-foot
aluminium yacht described by several witnesses as
being in terrible condition. To bring it up to specifications for the Fantaseas
purpose would have been very difficult, if not impossible. Nonetheless, OCGC
had a contract to purchase the ex-race boat. Mr. Moles testified that the S/Y
Great Gatsby was quite unsuitable for the Fantaseas concept. It did not meet
the vision and standard. In terms of the issues with the yacht, Mr. Moles also
testified that the aluminium required a total rebuild and there was an
electrolysis issue. Jack Moles’ assessment, based on an auto-gauge inspection
to determine the thickness of the hull, was that the yacht would only be
satisfactory for a day-cruiser. Mr. LeGlatin also noted the yacht’s
deficiencies when he conducted a survey of the ex-racing yacht. The cost to
bring the S/Y Great Gatsby up to standard was not reasonable. Bruce Oekler
testified that he was aware of the Ondine (“the S/Y Great Gatsby”), but that he
understood it to be an incomplete shell with no rigging. Clearly, the S/Y Great
Gatsby could not meet the standards of a Fantaseas yacht.
[250]
Regardless of the clear
deficiencies of the ex-racer, OCGC contracted to purchase the Ondine on
December 24, 1985 for US $298,500, with an initial
payment followed by the balance monthly instalments for 24 months with
no guarantees whatsoever on the yacht’s condition.
It was to become the S/Y Great Gatsby Limited Partnership’s yacht. Various protracted negotiations followed, with assorted
legalities to determine. However, once again, OCGC (Mr. Bellfield) was behind on
payments. This led to the non-completion of the deal because US $12,652 was
still required for the closing to be completed. The owner of the Ondine
actually filed action against OCGC in September 1987 for default of payments
and for stripping the yacht. The matter was finally settled by Mr. Bellfield on
April 29, 1988, and possession of the yacht was transferred back to the owner.
[251]
Despite the fact the
yacht did not qualify, was ultimately never acquired, nor used for the
chartering, the S/Y Great Gatsby was listed as an asset on the S/Y Great Gatsby
Limited Partnership financial statements for the year ending on December 31,
1985.
(iv) The Med 86 (the First
Gable)
[252]
Two different yachts
had the potential of becoming the yacht for the S/Y Gable LP. The first one was
a “Med 86” to be purchased from U.S. Yacht. Again, this deal did not close due
to OCGC’s failure to pay the funds required to complete the purchase. The
second Gable was eventually acquired by OCGC, but OCGC’s title to the yacht was
only held briefly.
[253]
Mr. Moles saw the Med
86 Gable at a Miami boat show and arranged for a survey of the yacht to be
conducted. He believed that the Med 86 cabin could be renovated to create four
cabins adequate to suit the Fantaseas concept. In the end, despite the redesign
proposed by Mr. Moles, and an agreement of purchase and sale dated January 30, 1987,
the purchase did not close. The price for the yacht was US $1,425,000, with a
down payment of US $350,000 being required, paid in escrow before closing, and
balance paid on closing. The date for closing was set for April 1, 1987. A
further agreement was made delaying that closing date to May 15, 1987, with
OCGC agreeing to pay an additional US $200,000 in escrow. Despite this
arrangement, OCGC never did close the deal and was put in default.
[254]
OCGC demanded
arbitration with U.S. Yacht, with various complaints exchanged. The
arbitration’s findings, however, underlined the true nature of OCGC’s problems.
The problem was the same recurrent issue of a lack of capital. The arbitrator
found that OCGC suffered from a lack of sufficient cash flow to pay the amount
owed on May 15, 1987, and awarded U.S. Yacht a considerable amount of damages,
totalling more than $379,167. OCGC only received $162,298 in refund of the
amount paid into escrow.
(v) Chantier Yachting France
[255]
Purchase agreements
were signed with Chantier Yachting France for two yachts in March 1985,
however, the company informed OCGC that it had gone into receivership in July
1985. No yachts were actually built by Chantier Yachting France for OCGC. As
described above, subsequent to Chantier Yachting France entering into
receivership, OCGC made numerous fraudulent misrepresentations regarding
purportedly valid purchase agreements with the company, as well as hull
registration numbers for yachts built or under construction by Chantier
Yachting France despite the impossibility of these facts.
(vi) Maxi-Yacht
[256]
The second Gable was
built in France, based on a designed by Sparkman and Stevens, a highly
respected naval architect firm, and constructed by Michel Dufour, an acclaimed
French boat builder. The arrangement was actually for a number of yachts to be
built, with Mr. Bellfield providing the funds to finance the manufacturer in France while Mr. Dufour carried out the construction. Negotiations around the design
continued, running from as early as January 1, 1986 through September 30, 1987.
A number of other individuals were also involved in discussions concerning the yacht
design, with an Italian designer working on the interior, as well as consulting
with OCGC people such as Mary Crocco as to the appropriate kitchen appliances,
et cetera.
[257]
Mr. Moles traveled to France several times, acting as OCGC’s technical liaison. He saw the Maxi-Yacht facility’s
new building and described the facilities as having three yachts on the floor
at various stages of construction. The first yacht (the S/Y Gable) had a deck
on it. The second yacht had a completed interior with the deck ready to go on,
and the third yacht he described as being laminated in the mould.
[258]
Mr. Martin also visited
the Maxi-Yacht facility in France in August 1988. He met with Michel Dufour, the
Italian designers, and the house representatives in Europe. His impression of
the Maxi-Yacht facility was that it was a first class facility. Mr. Moles
testified that the Maxi-Yacht facility in France appeared to be purpose built,
the operations seemed to run smoothly and the plant was workable for the volume
of yachts planned. Photos were entered into evidence of the Maxi-Yacht facility
with yachts under construction.
[259]
There is no doubt based
on the evidence that the architect, builder, designer, and technical advisor
involved with the Maxi-Yacht had great expertise. The plant clearly created a
beautiful product. This does not change the fact though, that the product was
merely used in an attempt to perpetuate and continue the elaborate fraud. By
the time the S/Y Gable was completed and christened in 1988, this Limited
Partnership yacht was long overdue, as were many other yachts owed to the Limited
Partnerships. Worse, the S/Y Gable LP’s financial statements list the yacht as
a fully owned asset, when the actual Gable was only built, completed, and
delivered by Maxi-Yacht in October 1988.
[260]
The S/Y Gable is the
only yacht that was (briefly) delivered that can truly be described as meeting
the Fantaseas standards. Ms. Palmer was on the S/Y Gable to take photos for
marketing purposes, and as a guest to evaluate the guest experience. She
described the yacht as a beautiful yacht, with service and cuisine that was
consistent with the Fantaseas concept. Mr. Moles also saw the S/Y Gable under
construction in France at the Maxi-Yacht facility. In October 1988, he was in France for sea trials of the S/Y Gable. Mr. Moles described the S/Y Gable as a large,
sleek, racehorse type of yacht that met the Fantaseas concept, and gave a
generally good impression. Mr. Martin, General Manager of Starlight Canada from March 1988–1989, also described the S/Y Gable at the time as a
spectacular vessel.
[261]
OCGC took great pains
to make sure the christening of the S/Y Gable was a large attention-grabbing
event. This was particularly important to OCGC because at the time, an
extensive audit was underway by the CRA, and it wanted to emphasize strongly the
growing nature of its “successful” venture. The christening even included the
presence of Prince Albert of Monaco. It was, essentially, an elegant example of
the smoke and mirrors OCGC continuously employed to provide just enough
indications of a genuine business to attempt to keep suspicions that the entire
investment scheme was a fraud at bay.
[262]
Shortly after the
launch, the ownership of the S/Y Gable was transferred to Starlight S.A.M., a
related French entity.
[263]
The Maxi-Yacht plant
created two other yachts, the Demoiselles des
Rochefort and the Rocco Jr. These appear to have been the two yachts that Mr.
Moles saw on at the Maxi-Yacht plant. Both of these yachts were sold to French
partnerships in December 1988 and were not used to meet any of the contractual
obligations to the Canadian Limited Partnerships.
(viii) Picton
[264]
Picton was the site of
a warehouse that OCGC entered into a purchase and sales agreement for in August
1986, and where, despite numerous representations to the contrary, OCGC did
very little. For example, in one instance in the evidence (March 1987 “Overseas Credit and Guaranty
Corporation Proposal for Establishing Credit Arrangements”), Picton is falsely
described as follows:
The [Picton] plant is 25,000 square feet in size and moulds
have been developed for a 75’ catamaran, also designed for the ultimate cruise
experience. This plant in full operation is scheduled to produce 12 vessels per
year and production will commence in the spring of 1987.
[Footnotes removed]
[265]
The plant was not in
fact in operation, or anywhere near operational. Ross Price was hired as an
employee of OCGC to work at the Picton site, which was purchased by OCGC from
his family. Mr. Price was a witness who I found to be forthright and candid, and
he remembered the required details of his evidence quite clearly. I found him
to be quite credible.
[266]
Mr. Price was the
on-site manager of the Picton facility for about a year, from fall 1987 to
spring 1988. His responsibility was basically to be the site manager, to clean
the property up and to get it on the road to serving as a production facility.
The property was poorly lit and dirty, with minor electrical work done.
Second-hand catamaran moulds were put in the building and assembled, but
otherwise, nothing else was done. Mr. Price set-up some accounts with local
suppliers, but as time progressed, the suppliers never were paid. The Picton
facility was a warehouse only. It needed significant upgrades including
lighting, air systems, glass shop specialities, electrical supply, a compressor
system, wood shop, and a mechanical shop. In essence, the building was a shell
without the capacity for any production, and it remained that way. The building
was merely a warehouse with used moulds in it. These used moulds had spent a
significant time outdoors exposed to the weather and were in such a state of
disrepair that they could not be used. Between August 1986 when the property
was sold and spring 1988, only the second hand moulds were delivered. As
summarized by the Respondent regarding the mould in his Final Submissions:
490. Bellfield purchased a disassembled used travel lift
from the Prices in October 1986 for $38,000 to be assembled by Ross Price
inside the warehouse.
491. Bellfield purchased 60’ catamaran moulds
from Andrews Trucking for $40,000 and had them moved to Picton in January 1987.
492. Ross Price was hired by OCGC to
work in the Picton warehouse in the spring of 1988, did some clean up, pulled
the moulds in the yard into the warehouse and bolted them together and tried to
get a set of lines off the moulds because there were no drawings for them. Then Bellfield wanted to
sell the property so they moved the moulds and travel lift outside into a
field. Price stayed with OCGC through the winter of 1989 but by October 1989 he
was no longer an employee. The
Picton facility never produced any catamarans while Price was involved.
493. In October 1986 British
catamaran designer Derek Kelsall provided a preliminary design for a 75’
catamaran to OCGC for $3000. In March 1987 Kelsall visited Picton Ontario and examined the 63’ catamaran moulds which were sitting in the yard. He was not
impressed by them. Kelsall provided a written assessment of the moulds and the
possibility of incorporating them into a 75’ design and was paid $2000. He had
no further exchanges of correspondence with OCGC, the design work did not proceed
and Kelsall had no further involvement with OCGC or Maxi Yacht.
[267]
Mr. Price testified
that an investor, George Ward, showed up at the facility to see what was going
on. Mr. Ward thought something was wrong with the Limited Partnership
investment, and he went to the Securities Exchange Commission in Toronto with his concerns. Mr. Price also testified that he felt that some of the facts in
the OCGC brochure distributed were simply not correct.
[268]
Mr. Moles also
testified regarding his involvement with the Picton plant. Overall, his
impressions of the plant were poor and he felt that to make it operational it would
have required considerable expense and effort. Even if it was operational, only
one catamaran could have been built at the time given the limited space. In a
report he produced in July 1987, he predicted that the earliest the first
catamaran could be produced at the Picton facility, if his extensive
recommendations were implemented, would be in 1989. A 1988 business plan
described the facility as operational beginning in fall of 1988 and that Mr.
Moles was moving to the area to coordinate the operation’s start-up. Mr. Moles
testified that the business plan did not follow his recommendations, and that
he never intended to move to Picton.
[269]
Further misrepresentations
made by OCGC regarding the Picton facility are accurately summarized by the
Respondent in his Final Submissions at pages 160–162 as follows:
494. Contrary to the claim on page
10 of the OCGC corporate brochure, Kelsall was not the project leader in the
construction and design of OCGC’s maxi-catamarans. Kelsall was not aware of the
use of his picture and name in the brochure, and to his knowledge his
technology was not used in the claimed construction and design of OCGC’s
maxi-catamarans.
…
503. The forecast of boats on the
water by 1990 which was attached to Robert Forsey’s Feb. 24, 1987 memo to
Bellfield showed one 75’ catamaran, the Main Event, being completed in 1987,
four catamarans being produced in 1988 and more in 1989. To Mole’s knowledge no
such boats were ever produced.
504. Minchella received a copy of
Forsey’s “Delivery Schedule For Boats” memorandum to Bellfield of Feb. 24, 1987
with its attached “Forecast of Boats on Water by the Year 1990” (Exhibit
R14-Tab 173) which showed ten catamarans to be built by Maxi Yacht
International at its Picton plant. Minchella said he was not in charge of that
project so could not say where construction financing for the catamarans would
come from. However,
Minchella did know that at March 1987 OCGC did not have any bank or other
external financing available to it for the construction of the yachts besides
the investors’ interest payments and the investors’ notes.
505. Minchella was shown page 10 of
the OCGC brochure at Exhibit A22-Tab 5 which features a picture of Derek
Kelsall, describes him as project leader, and states that his technology is
being used in the construction and design of the OCGC catamarans. Minchella
said he was not involved in the production of the brochure but, having seen the
facts relating to Kelsall, that the brochure misstates both Kelsall’s position
and involvement and further misrepresents that there was manufacturing going on
at Picton, which never happened with anyone’s catamaran technology.
506. In 1989 Loïc LeGlatin, who by
then had his own business building catamarans, saw an ad in the paper about a
former boat building plant in Picton, Ontario so he drove there to take a look.
He met someone there who may have been the former owner and had the keys, so
could show him around. He saw a very old design catamaran mould sitting there
and it was damaged. He followed up and received a letter from Stephen Sobot of
OCGC dated December 21, 1989 which included a drawing of the catamaran which he
recognized as the Derek Kelsall design LeGlatin had showed Bellfield in 1985.
LeGlatin knew the drawing did not match the moulds that he had seen. Once he
realized that it was OCGC that he was dealing with he stopped all discussion.
[Footnotes removed]
(i) Starlight Canada
[270]
Starlight Canada was incorporated in 1986, and Ester Palmer came on board shortly thereafter. It was
only once she joined the organization that any marketing efforts occurred. Her
evidence shows that a significant portion of her work for Starlight Charters
consisted of marketing the luxury yacht chartering investment opportunity to
potential Limited Partnership investors. This was done either by selling the
concept through audio-visual presentations, or after they invested, arranging
for investors to enjoy yacht charters at reduced rates.
[271]
It was clear from Ms.
Palmer’s evidence that she was not aware of the enormity of the fraudulent
scheme she was involved in. She carried out some efforts that at first glance may
appear to be genuine expenses incurred to establish a yacht chartering
business. Ms. Palmer attempted to market the yacht charters to various travel
agents and to partake in promotional opportunities such as boat shows,
contests, and magazine articles. None of these efforts amounted to anywhere
near the scale that would have been required to create a genuine luxury yacht
chartering venture, and it seems Ms. Palmer lacked the experience to know the
extent to which she was being used by Mr. Bellfield to aid him in providing an
air of legitimacy to his fraudulent operations. For example, a Fantaseas
presentation video, an expense that was invoiced to Starlight Canada, was frequently used to market the yacht chartering Limited Partnership investment.
It was a key part of the presentation to seduce potential investors.
[272]
The evidence shows that
the operations of Starlight Canada, while unbeknownst to many of the
individuals involved, were undertaken primarily to market the sale of Limited
Partnership units, and to provide the illusion of legitimacy
to the fraud. This reality did become clear to certain individuals involved in
marketing efforts for Starlight Charters. For example, Bruce Oekler testified
that a lack of available yachts made it impossible for him to continue to
market the product. Bruce Oekler had contacted approximately 200 travel agents
about the Fantaseas concept; he testified that after he left Starlight Charters
in December 1986, none of these agents were contacted about the luxury yacht
charters.
[273]
All of Starlight
Charters’ marketing efforts required making fraudulent misrepresentations as to
the number of yachts it had available and the state of its operations. These were generally based on trusting Mr.
Bellfield’s representations. Several brief examples
are highlighted following, but only serve to represent a much wider body of
evidence.
[274]
In May
1986, Starlight Canada coordinated a promotional magazine article by a sailing
enthusiast who wrote enthusiastically about his stay on a yacht in April 1986,
and referred to the fact that ten yachts would be available. This fact was
obviously false and impossible given the state of yacht acquirement at the
time. The article only served to promote the venture and provide it with airs
of further legitimacy.
[275]
On a number
of occasions, Starlight Canada misrepresented itself as having a fleet of yachts
and a yacht chartering operation at the ready, including the following examples,
as summarized in the Respondent’s submissions at page 125:
Sept. 25, 1986 letter from Ashworth to Sears Travel: ‘The
Fantaseas fleet, operated by Starlight Charters Ltd., is comprised of the
largest and most supremely comfortable charter maxi yachts in the world”.
Oct. 14, 1986 letter from Ashworth to Tour Desk One Inc.:
“It’s the perfect way for your ‘hard to please clients’ to relax, close their
eyes and be pampered aboard the world’s most supremely luxurious fleet of
charter yachts”.
January 9, 1987 letter from Ashworth to Jack Haughton of
Osler, Wills & Bickle: “The Fantaseas fleet, operated by Starlight Charters
Ltd., is comprised of the largest and most supremely comfortable charter maxi
yachts in the world, all eighty feet or greater.”
February 20, 1987 letter to Don McLeod, Ashworth wrote:
“The Fantaseas fleet, operated by Starlight Charters Ltd., is comprised of the
largest and most supremely comfortable charter maxi yachts in the world, all
eighty feet or greater.”
May 22, 1987 letter to an incentive
house, Ashworth wrote: “The Fantaseas fleet, operated by Starlight Charters
Ltd., is comprised of the largest and most supremely comfortable charter maxi
yachts in the world, all eighty feet or greater. We take great pride in our
personalized service”
[276]
Starlight
Charters’ main purpose, was to market the fraudulent scheme to potential
Limited Partners and to maintain the illusion of the scheme’s legitimacy. The
expenses it incurred should be regarded as having been not for the Limited
Partnerships’ benefit, but for the purpose of carrying out and maintaining the
fraud.
(ii) Caribbean Operations
[277]
The evidence clearly
revealed that the entire OCGC operations and the Fantaseas concept was an
undercapitalized operation from the beginning. As indicated earlier, it is my
view that OCGC operations and the Fantaseas concept had all the hallmarks of a
Ponzi-like scheme. With no capital from the beginning, there was an inability
to fund the operations of the Caribbean base. This included the charter
operations, a cornerstone in its marketing efforts, and the location where the
product marketed was to be delivered (the high end cruises).
[278]
A successful long-term
business requires significant start-up costs. Here, there was a need for an
infrastructure for the Caribbean operations of the Starlight Charters concept,
as promised to the Limited Partnerships. This infrastructure would have included
the Caribbean base with an office, marina, vessels, trained crew, provisioning
and services, in order to meet the expected demand of the market in the
high-end yacht chartering service. Delivery of the service was a problem from
the beginning because of inadequate funding, i.e. no cash flow for even the
most basic parts of delivery for the promises advanced to Limited Partnerships.
As noted, there was some marketing carried out in order to develop interest in
the Starlight Charters high end yacht service, but it is my finding that this
marketing was not done for the benefit of the Limited Partnerships, but rather
to advance the Ponzi-like scheme. This was not a smash and grab robbery; this
was a long term fraud that was growing in size and scope over a long period of
time to the benefit of Mr. Bellfield, and to the long term disadvantage of the
Limited Partnership investors.
[279]
According to the
Caribbean Operations Manager, Mr. Marcolongo, very early on in the
establishment of operations there was not enough money for its operations, and on
some occasions there was no money at all. There are numerous examples of the
inadequate levels of funding. There was insufficient or no money for safety and
yacht repairs. There was an inability to meet rent obligations. There was not even
adequate money to provision charters that were going to be contras. There was an
inadequate amount of money to obtain and train a crew, pay marina fees, pay for
a telephone and telex, and according to Mr. Marcolongo, they could not even afford
to buy deck shoes. He even stole power from a local restaurant. Mr. Marcolongo made
inquiries to see if they could sell some of their equipment to pay for some of
their operations, but in the end, Mr. Marcolongo had to use his own money to
fund the operations.
[280]
This was the situation
that existed before the first yacht that came close to meeting the Fantaseas
concept was even acquired. This continued onward even after the S/Y Garbo was
acquired and made seaworthy. It is difficult to conclude otherwise than that
the operational aspects of Starlight Charters and the Fantaseas concept were anything
more than window-dressing, when the basic operational expenses of the Starlight
Charters Marina in the Caribbean for only one yacht that did not meet the
Fantaseas concept could not be met. The simple reason for the failure of the
success of the operations in the Caribbean was that there was no capital and no
financing; there was none of what was promised to the investors. All there was
were interest payments and small down payments on the sale of Limited
Partnerships unit, which were used by the OCGC head office to perpetuate the
fraud. This included acquiring a vessel or vessels that would meet the
Fantaseas concept and thereby allow for the sales of more partnerships, and in
turn, create a greater cash flow to meet the ongoing obligations of the entire
fraudulent scheme.
[281]
The argument of the
Appellants in part relies on expenses paid towards the provision and operation
of certain charters taken from 1986–1990 as indications that this had to be a
legitimate operation. The purported charters can be broken down into five
varieties. First, there appeared to be approximately 25 charters in total. Of
these 25, there were approximately five contras, which were charters offered in
lieu of payment of bills or expenses incurred by OCGC. There were eight
investor charters taken by investors in the Limited Partnerships at discounted
rates. There were four familiarization charters, for the purpose of promoting the
product. There were three charters that were terminated in whole or in part
because the customers were unhappy with the product. This left approximately
five charters that were actual paid charters over a period of five years.
[282]
Of those 25 charters,
it appears that approximately four were in the S/Y First Impressions,
two were in the Med 86, 15 were in the S/Y Garbo, four were in the S/Y
Gable, and one was in a French Limited Partnership yacht, the Demoiselle de
Rochefort. Of the S/Y Garbo cruises, there were four familiarization tours, two
contras, and four investor trips. Of the S/Y Gable there were approximately two
contras, and the two others were unhappy customers. Separate and apart from the
25 charters that reportedly took place, there were 14 others that were
reportedly cancelled. Ten were cancelled for technical reasons, crew problems,
or maintenance issues, and two were investor cancellations.
[283]
What is particularly
startling about the analysis of the purported charters and the cancellations
between 1986 and 1990 is that there was no real improvement over time in terms
of ability to deliver on the service marketed for the benefit of the Limited
Partnerships—if anything it simply got worse. To the point that in 1990, they
were in effect no charters and if there was a charter, it was conducted by a
non-Canadian Limited Partnership yacht.
[284]
A significant majority of
the charters were contras, investors, or familiarization tours. These were
conducted for the purpose of a) satisfying investors so as to develop more
investors, and b) to promote the product to writers or people providing
services to the company, again for the purpose of getting more investors that
would lead to getting more money that would lead to a greater fraud.
[285]
A fraud of this
proportion requires a significant amount of smoke and mirrors to keep the fraud
advancing forward. More Limited Partnerships had to be sold all the time in
order to perpetuate the fraud. In order to advance these sales, there had to be
promotion by word of mouth as well as more general legitimization through the
use of various parties including travel agents. The mere participation by a
number of legitimate members of the travel field does not a true business make;
Mr. Bellfield needed the operation to attain a level of presumed legitimacy. Just
like many other well-know Ponzi schemes, this involved the use of various
unsuspecting legitimate actors who, unbeknownst to them, aided in promoting the
fraud as if it were a genuine operation. The expenses of running the Caribbean operations, were expenses incurred to perpetuate the fraud. The expenses did not
constitute true business expenses that can flow through as eligible expenses
for the Limited Partnerships.
[286]
Once OCGC was incorporated
in May 1984, it was quickly followed by the incorporation and establishment of
a variety of other businesses. Some of these entities formed an integrated part
of OCGC, some were peripheral and some had nothing to do with integral OCGC
operations, but they were all entities where Einar Bellfield was the operating
mind. The OCGC related entities included the following:
1)
OCG Financial Holdings
Ltd.: a holding corporation;
2)
Overseas Credit and
Guaranty (Alberta) Corporation: formed to move capital assets of OCGC to Alberta to get a better tax advantage;
3)
OCGC Enterprises Inc.:
a company in which Mr. Minchella was the secretary and the treasurer and that
was the initial limited partner of all of the Type 3 Limited Partnerships;
4)
Overseas Mortgage Corporation;
5)
OCG Investments Alberta;
6)
The Baron Group;
a)
Baron Securities: an
entity that sold investments which were not the yacht chartering Limited
Partnerships, whose offices were at Yonge and Finch, not at the Richmond Street location of OCGC;
b)
Baron Insurance
Agencies Inc.;
c)
Baron Investment
Services Inc.;
d)
Baron National
Securities Inc.;
7) The American Diversified
Realty Group;
a)
American Diversified
Realty Fund: sold units in a realty fund in which Mr. Minchella and his wife
had signing authorities with Mr. Bellfield;
b)
American Diversified
Realty Inc.: Mr. Minchella was Vice-President. This was an operating company
for American Diversified Realty Fund;
c)
ADR Management and
Construction Inc.: a company that was to oversee construction of a new project;
8)
780807 Ontario Ltd.;
9)
750070 Ont. Ltd.;
10)
Starlight Group;
1)
Starlight Charters
Ltd.: based in Toronto and established to produce and market the Fantaseas
program for the OCGC Limited Partnerships;
2)
Starlight St. Martin S.A.R.L.;
11)
Brock Yacht Charter
Inc.: Jill Brock’s company, who was originally hired to do marketing and
consulting for Starlight Charters but in the end, sold the company;
12)
Maxi Yacht
International Ltd.: a company to acquire and build yachts in Ontario, in which
Mr. Minchella was the Secretary-Treasurer;
13)
Maxi Yacht
International Inc.: a Florida company to repair and service yachts that came
into operation such as the S/Y Garbo;
14)
Superior Group;
1)
Superior Salmon Farms
Limited: Einar Bellfield and his brother Jelleto opened a salmon farm in eastern
Canada, and purchased small salmon from the government to grow and then sell
for a profit. Lawyers who did work for this particular company then billed
OCGC;
2)
Superior Cumberland Bay
Limited: a subsidiary of Superior Salmon Farms;
15)
780315 Ontario Limited;
16)
Lauderdale Marina
(1988) Ltd.: a marina purchased in Orillia, Ontario in Mr. Minchella’s name in
trust in 1988. A houseboat was bought in 1984, was transferred to this company
and then rented at Lauderdale Marina;
17)
Coastal Cruisers Inc.: operated
a cruiser co-owned by Mr. Minchella and Mr. Bellfield at fifty percent each;
18)
Fabu D’Or Cuisine
Incorporated: a commissary that OCGC purportedly commenced that was to be used
for the purpose of production of food and meals for the Limited Partnership
charters and commercially;
19)
Lease Invest Ltd.: a
company to sell a financial product that involved investing in leases, for
example to lease equipment to Fabu D’Or, with Mr. Minchella as
Secretary-Treasurer; and
20)
Marine Indemnity Fund.
[287]
Of all of these
entities, only OCGC Enterprises Inc., Starlight Charters, Maxi-Yacht
International Limited, and Fabu D’Or Cuisine Inc. had anything to do with the
sale of yacht chartering Limited Partnerships, and establishing the Limited
Partnerships scheme. There was no evidence before the Court indicating that the
other entities were involved in the luxury yacht chartering scheme. The only
involvement the entitles had was that some of the money claimed by the
Appellants to have been spent by OCGC to acquire goods and services for the
Limited Partnerships, were in fact spent on acquiring goods and services for
those companies.
[288]
Three OCGC-related
ventures that were not within the domain of the luxury yacht chartering
business are highlighted following because their circumstances are particularly
insightful. The first, American Diversified, requires mention because of the
findings of an Ontario Securities Commission decision relating to its
activities. It also provides an illustrative example of how good and services
that the Appellants claim were acquired for the yacht chartering Limited
Partnerships were actually used for a variety of Mr. Bellfield’s other
ventures. The second and third examples, Lauderdale Marina and Coastal Cruises,
illustrate the same.
(i) American Diversified
[289]
The American
Diversified Realty Fund Limited Partnership was the subject of an investigation
and hearing by the Ontario Securities Commission. The Commission’s findings
that the American Diversified venture was a mere sham betray a similar pattern
to the findings regarding OCGC’s yacht chartering scheme made by this Court. As
correctly summarized by the Respondent at page 7 of his Final Submissions, the
Ontario Securities Commission concluded as follows:
5. On February 5, 1991 the Ontario Securities Commission
released its decision on a Securities Act investigation and hearing into
American Diversified Realty Fund Limited Partnership, American Diversified
Realty Inc., OCGC, OCGC Financial Holdings Ltd., OCGC (Alberta) Corporation,
Baron Securities Inc, Einar Bellfield and Paul Brooks, imposing trading bans on
all respondents.1
6. On February 11, 1991, the Globe and Mail reported on the
outcome of the Ontario Securities Commission investigation into American
Diversified Realty, a business Minchella had been very involved with. Minchella
believed that because some yacht limited partnership investors were also ADR
investors that they were aware of the investigation, the trading bans, and ADR
being shut down. The article was called “Real Estate Firm Shut Down for Sham
Financing Scheme” and after reporting on the 8 year trading ban imposed on the
scheme’s chief architect, Einar Bellfield, it summarized the Ontario Securities
Commissions findings regarding the sham financing scheme as follows:
a. The scheme had the money going around in a circle;
b. The company
that was supposed to make the real estate investments ended up holding notes
that were not backed by assets;
c. The company
that was supposed to make the real estate investments had no money to make the
investments;
d. The
investors ended up paying a half per cent interest on their own money.
(footnotes removed)
[290]
The American
Diversified Realty Fund Limited Partnership provides another example of
expenses that are included in the Appellants’ claim that $13–14 million
was spent on yacht chartering activities. Payments to the individual acting as
the Chief Operating Officer of the American Diversified Realty Fund Limited
Partnership are included in the calculations leading to those total amounts. In
addition, based on the evidence, Mr. Minchella appears to have done
considerable work on American Diversified Realty Fund-related matters from 1985
through 1989, amongst his work on other non-yacht chartering Limited
Partnership matters. Payments to Mr. Minchella are also included in the $13–$14
million the Appellant claimed was spent on establishing a legitimate yacht
chartering business. Mr. Minchella, as can be seen from the list of ventures
above and in the example provided below, acted in numerous capacities in Mr. Bellfield’s
ventures unrelated to the yacht chartering Limited Partnerships.
(ii) Lauderdale Marina and
Coastal Cruisers
[291]
Lauderdale Marina was
another operation of OCGC that was unrelated to the luxury yacht chartering
activities. Also related to Lauderdale Marina was Coastal Cruises that OCGC
described as a houseboat rental operator. Mary Crocco’s ex-husband, Rick
Crocco, was Manager of Lauderdale Marina.
[292]
Ms. Crocco claimed to
have worked at the Lauderdale Marina for approximately three weeks but some of
the evidence contradicts this claim. There is evidence showing that she worked
to obtain insurance for Lauderdale Marina while at OCGC. There is also evidence
of her working on Lauderdale Marina’s kitchen while working at Fabu D’Or, and
evidence of her assisting with obtaining a roof contract for Lauderdale Marina.
There were also a number of instances where Ms. Crocco’s corporate credit card
was shown as being used for Lauderdale Marina, including an auto rental at Midland Ontario, dining in Gravenhurst, and petrol expenses. In addition, in a letter from
Mary Crocco to all OCGC staff, Ms. Crocco bore the title “General Manager,
Coastal Cruisers”, and advised staff to keep the Coastal Cruisers reservation
line free.
[293]
Ms. Crocco asserted in
her testimony that she spent 90% of her time working for OCGC on Fabu D’Or. It
is questionable if this is a fair representation of her time allocation. The
evidence shows that the percentage of time that her duties were spent on OCGC
activities unrelated to yacht chartering operations was likely higher. Indeed,
the evidence shows that Ms. Crocco was not unlike other OCGC employees whose
time was preoccupied with a variety of OCGC schemes and ventures, such as
marketing and promotion of the Limited Partnerships, and most significantly, the
development of the (illusion of) yacht chartering operations.
[294]
Regarding Coastal
Cruisers, this is another example of non-yacht chartering Limited
Partnership-related work that Mr. Minchella did, but was not excluded from the
Appellants’ calculations of the $13–$14 million that they claim was spent on
establishing a yacht chartering business. For example, Mr. Minchella spent some
of his work time acquiring a houseboat with Mr. Bellfield, that they both
co-owned and was used by Coastal Cruisers.
[295]
The Appellants claim
that their Limited Partnerships were engaged in business and constitute a
source of income for the purposes of the Act. They argue that separate
and apart from any fraudulent activities perpetrated by Mr. Bellfield et al. in
relation to OCGC, the yacht chartering business itself was not a fraud. The
Appellants contend that of approximately $15 million of funds that the
investors provided to OCGC, $13–14 million were spent on goods and services
for the purposes of creating a yacht chartering business. As stated by the
Appellants in their Final Submissions:
158. In the
present appeals, the rights of the Limited Partnerships with respect to OCGC
were, at least in part, respected. The Limited Partnerships entered into
agreements whereby they were entitled to various goods and services which were
to be provided by OCGC, and they received many of these services, including all
of the goods and services described in Appendix 1 hereto. The Appellants, in
other words, … received, at least in part, what they bargained for.
159. […] the
Appellants in the present Appeals were a part of a business that undertook
significant efforts in order to generate a profit. While no profit ever
materialized, the fact that the process was started is sufficient. In other
words, the fact that the majority of partnerships never received a boat is not
determinative of whether or not the losses were incurred while a business was
being carried on.
160. Significant
money was paid to arms-length third parties in order to begin establishing the
appropriate infrastructure required for the yacht chartering business.
…
162. Similarly,
significant money was also spent on the hiring and training of staff to operate
OCGC, the Starlight Charters office in Toronto, the bases in St. Lucia and Monte Carlo and the OCGC owned yacht manufacturing factory in Rochefort, France for the production of the yachts themselves. Fantaseas was marketed at tradeshows, in
magazines, in newspapers, and to individuals who visited Starlight Charters’ Toronto office.
163. As
explained above, there is no revenue benchmark that OCGC had to satisfy in
order for its business to be legally recognized. Further, that the company
failed to earn a profit is immaterial when determining whether the Limited
Partnerships were ever in business, or whether the business commenced despite
fraudulent conduct.
[296]
The Appellants also
assert that the Limited Partnerships should be evaluated on the basis that they
employed a franchise business model. OCGC’s activities and expertise developed
over the period of time in question, and the development of certain goods and
services accrued to the benefit of all the Limited Partnerships, who in essence
had bargained for the development of substantively the same yacht
chartering-related goods and services.
[297]
The Appellants further
argue that the Respondent has the onus to prove that the yacht chartering
business was a fraud from beginning to end because that assumption was not made
by the Minister during the assessment period. The Appellants’ position on this
matter is that the CRA simply concluded that because Mr. Bellfield committed a
fraud, it followed that the Limited Partnerships were a fraud. The Appellants
assert that the CRA never considered whether the Limited Partnerships
themselves operated a business, separate and apart from the fraud, or in
co-existence with the fraud. They claim that the CRA never evaluated the 13 to
14 million dollars spent on building a yacht chartering business, nor interviewed
third party suppliers and subcontractors because the tax authorities always
maintained the position that the Limited Partnerships were merely a fraud. This
was done in order to be consistent with the criminal charges pursued against
Mr. Bellfield et al. The Appellants emphasize that because the assumption was
not made on assessment, the Minister has the burden to prove that there was a
fraud from beginning to end, and has not done so.
[298]
The Respondent argues
that the Limited Partnerships were a fraud from beginning to end, and as such,
cannot constitute a business and thus, are not a source of income under the Act.
They assert that the evidence shows overwhelmingly that from day one, the
Appellants were fraudulently induced to invest in the Limited Partnerships
based on material misrepresentations, and the Limited Partnerships never
amounted to anything more than a fraud throughout their existence.
(i) The Law
The Source Doctrine
[299]
For the purposes of the
Act, in order for income to be taxable it must come from a source.
[300]
Section 9 of the Act
describes the computation rules to determine what constitutes a taxpayer’s
income or loss from a business or property, as follows:
9. (1) Subject to this Part, a taxpayer’s income for a
taxation year from a business or property is the taxpayer’s profit from that
business or property for the year.
(2) […] a
taxpayer’s loss for a taxation year from a business or property is the amount
of the taxpayer’s loss, if any, for the taxation year from that source computed
by applying the provisions of this Act respecting computation of income from
that source with such modifications as the circumstances require.
[301]
A business is defined
broadly under subsection 248(1) of the Act, which simply states that a
business includes “a profession, calling,
trade, manufacture or undertaking of any kind whatever and, […] an adventure or
concern in the nature of trade”
and excluded from that definition is income from an office or employment. This
definition is not exhaustive and it is therefore necessary to also refer to the
case law.
[302]
In Stewart, the
Supreme Court rejected the reasonable expectation of profit test and adopted a
common law definition of business. The Court explained the hallmark features needed
to identity a source of business income under the Act, as follows:
[50] It
is clear that in order to apply s. 9, the taxpayer must first determine whether
he or she has a source of either business or property income. As has been
pointed out, a commercial activity which falls short of being a business, may
nevertheless be a source of property income […]
[51] Equating “source of income” with an
activity undertaken “in pursuit of profit” accords with the traditional common
law definition of “business”, i.e., “anything which occupies the time and
attention and labour of a man for the purpose of profit”: Smith, supra,
at p. 258; Terminal
Dock, supra.
As well, business income is generally distinguished from property income on the
basis that a business requires an additional level of taxpayer activity:
see Krishna, supra, at p. 240. As such, it is
logical to conclude that an activity undertaken in pursuit of profit,
regardless of the level of taxpayer activity, will be either a business or
property source of income.
…
[303]
The question,
therefore, in analyzing whether a source of business income exists, is to
determine whether the activity is undertaken in pursuit of profit. If there is
a sufficient level of clearly commercial activity, it constitutes a source of business
income. If the level of activity is less than that associated with a business,
it may still qualify as a source of property income. The inquiry is best
summarized in the following excerpt from Stewart:
[61]
… whether or not a taxpayer has a
source of income from a particular activity is determined by considering
whether the taxpayer intends to carry on the activity for profit, and whether
there is evidence to support that intention. As well, where an activity
is clearly commercial and lacks any personal element, there is no need to
search further. Such activities are sources of income.
Can a Fraud Constitute a Source of Income/Business?
[304]
In Hammill v. Canada, the Federal Court of Appeal
considered the deductibility of expenses that the taxpayer paid to an agent in
efforts to sell certain precious gems. The Tax Court judge had concluded that
the expenses were not deductible under paragraph 18(1)(a) because the
taxpayer was “the victim of a fraud, from beginning to end”, and as such, the expenses could
not be found to relate to a business under the Act. The Tax Court also
went on to find that the expenses claimed were not reasonable in the
circumstances, within the meaning of section 67 of the Act.
[305]
In affirming the Tax
Court of Canada’s decision, the Federal Court of Appeal emphasized the trial
judge’s factual finding that the fraud began from the very inception of the
transactions in question. Justice Noël,
writing for himself, Justice Létourneau, and Justice Nadon, summarized the key factual findings at
trial, a portion of which is excerpted below:
[26] At
the very beginning of his analysis, the Tax Court Judge makes a finding of fact
which has gone largely uncontested and which, in my view, is fatal to the
appellant's case on the first issue. He said (paragraphs 114 and 115):
[114] As
far as the Court is concerned there is no question that the Appellant was the
victim of a substantial fraud from the beginning to the end. The Court is
satisfied that this fraud commenced when the Appellant was contacted about
profits to be made from buying and selling gems and this fraud continued with
the purported efforts of the perpetrators to sell the gems. …
…
The Tax Court
Judge later reiterated that "... the whole transaction was a fraud from
its inception" (paragraph 127).
[Emphasis in original]
[306]
The Federal Court of Appeal went
on to affirm that, so long as the evidence supported the conclusion that there
was a fraud from beginning to end, it is not possible for a business to exist,
and there is therefore no source from which expenses can be deducted for tax
purposes. The Court stated:
[27]
This
finding by the Tax Court Judge that the appellant was the victim of a fraud
from beginning to end, if supported by the evidence, is incompatible with the
existence of a business under the Act. This is not a case where the Court
must have regard to the taxpayer's state of mind, or the extent of a personal
element in order to determine whether a certain activity gives rise to a source
of income under the Act (Stewart, supra, Tonn v. The Queen, 96 DTC 6001 etc.).
Nor is this a defalcation case of the type described in Parkland
Operations, supra; Cassidy's Limited, supra; Agnew,
supra; and IT-185R, where a business is defrauded by an employee or a third
party, and the issue becomes whether the resulting loss is reasonably
incidental to the income-earning activities.
[28]
A
fraudulent scheme from beginning to end or a sting operation, if that be the
case, cannot give rise to a source of income from the victim's point of view
and hence cannot be considered as a business under any definition […]
[Emphasis added]
[307]
In the year following
the Hammill decision, the Federal Court of Appeal again had the
opportunity to consider the deductibility of certain expenses in the context of
fraudulent activity in Vankerk v. The Queen. In that case, the taxpayers
claimed deductions relating to their investments in partnerships whose business
would be the production of sound recordings.
[308]
Before the Tax Court of
Canada,
the parties filed a Statement of Agreed Facts that characterized the
partnerships as entirely fraudulent. Key agreed facts summarized by Justice
Little included:
[2] […]
a) Commencing in
1987, Mark Allan Eizenga and at a later date, James Sylvester hatched a scheme
to defraud investors and the Government of Canada of millions of dollars.
b) The scheme
involved the creation of multiple putative "partnerships". These
"partnerships" were not genuine partnerships because neither Eizenga
nor Sylvester as the principles of the managing general partner operating as
Advanced Business Opportunities ever had the intention to carry on business in
common with the investors. Rather, the intention of Eizenga and Sylvester was
to defraud the investors and the Government of Canada of money.
c) Eizenga,
Sylvester and others represented to the investors that the
"partnerships" would carry on the business of producing sound
recordings, records and the like. This representation was false and known by
Eizenga and Sylvester to be false.
d) In fact, the bulk
of the monies collected as investments in the various partnerships were simply
re-routed into the pockets of Eizenga, Sylvester, their companies and nominees.
The small amount of money which was not diverted to Eizenga, Sylvester and
others was spent on window-dressing to give the appearance of business
activities by the partnership when there, in fact, was none.
e) Eizenga and
Sylvester marketed the "partnerships" as vehicles, which would
produce substantial tax savings. Eizenga and Sylvester also promoted the
"partnerships" as high-risk record production businesses.
f) Much of the
investment in the "partnerships" was done through obligations to make
cash payments and enter into promissory notes, which obligations were either
not honoured or where (sic) only when tax refunds were generated.
g) The tax refunds
of the investors were generated by the fraudulent statements generated by
Eizenga, Sylvester and their nominees to create an apparent entitlement to the
deduction of losses and accrued interest by the investors.
h) The refunds thus
generated were then re-circulated to Eizenga, Sylvester, their companies and
nominees or pocketed by the investors.
i) The Minister
later disallowed the various deductions claimed by the investors on the basis
that, inter alia, the amounts claimed had not been incurred for the purpose of
earning income from a business or property.
…
v)
None of the so-called partnerships carried on their
designated business and none was capable of carrying on their designated
business. To the extent any activity was carried on by the so-called
partnerships, the activity or activities were designed as window-dressing to
disguise and conceal the sham activities and intentions of Eizenga, Sylvester
and their corporations. None of these activities were for the benefit of the
unit holders. Quite the contrary, the activities were solely for the benefit of
Eizenga, Sylvester and their corporations.
[309]
Justice Little went on to conclude
that the only activity associated with the “partnerships” was the fraudulent
activity carried out by the masterminds of the scheme. There was no business
carried out in common, no view to profit, and therefore no valid partnerships
as defined under section 2 of the Partnerships Act of Ontario.
Justice Little noted that the parties both conceded as much in the Statement of
Agreed Facts.
[310]
Justice Little
considered whether the Appellants were involved in a business within the
meaning of the Act that would give rise to the ability to deduct their
expenses pursuant to paragraph 18(1)(a). The Court noted, amongst other
pertinent facts, that the partnerships were never formed, and that the amounts
claimed, relied on fraudulent statements made by the perpetrators. In
concluding that no business existed but rather an entirely fraudulent scheme,
the Court stated, in part:
[26]
On the facts contained in the Statement of Agreed Facts and on the
facts presented to the Court I have concluded that the expenses that were
claimed were not expenses within the meaning of paragraph
18(1)(a) of the Act because
the so-called expenses were "window dressing", "phony or fictitious expenses".
[27]
I have therefore concluded that on these facts there was no
business being carried on. This was nothing more than a fraudulent scheme
perpetrated by Eizenga and Sylvester.
[28]
In reaching this conclusion, I have referred to the following
Court decisions:
In Tonn et al. v. R., 96 DTC 6001 the Federal Court said
that there must be a possibility of earning income or the expense is not
deductible.
In Moloney, Young, Russell and Fullard
v. The Queen, 89 DTC 5099 the Federal Court said that a scheme has no real
business purpose behind it if it consists of nothing more than the circular
movement of paper and return generated solely from income tax deductions. (Note
- This decision was affirmed by the Federal Court of Appeal in Moloney v. The Queen, 92 DTC 6570.
In Stewart v. Canada, 2002
SCC 46 (CanLII), [2002] 2 S.C.R. 645 the Supreme Court of Canada said at
page 679:
...whether or not a taxpayer has a source of income from a
particular activity is determined by considering whether the taxpayer intends
to carry on the activity for profit, and whether there is evidence to support
that intention.
[29]
In this situation there was no business activity carried on by any
of the three Partnerships.
[Emphasis
in original]
[311]
Finally, Justice Little went on to conclude that the $280,087 and $344,003 in interest expenses claimed by each of the
Appellants respectively were based on amounts paid for “so-called promissory
notes”.
The claims were not deductible under paragraph 20(1)(c) of the Act
because there was no evidence that the interest was actually paid, and there
was no business related to the interest expenses claimed as required under
paragraph 20(1)(c). Finally, Justice Little concluded that pursuant to
section 67 of the Act, the losses claimed were not reasonable in the
circumstances, stating:
[35]
In this situation Willem Vankerk paid cash of $92,275.00 and
claimed losses of $899,066.00 plus interest of $344,004.00. Elsbeth Vankerk
paid cash of $109,650.00 and claimed losses of $750,060.00 plus interest of
$280,087.00. The magnitude of the cash paid compared to the losses that were
claimed is not reasonable in the circumstances.
[312]
In upholding Justice Little’s
decision on appeal, the Federal Court of Appeal noted that all parties agreed
that the appellants were victims of a fraud. Justice Sharlow, writing for
herself, Justice Evans, and Justice Malone, went on to emphasize that the key
fact was that there was no business and where there is no business, there can
be no deductible business expenses. Justice Sharlow wrote, in part:
[2] It is common ground that the appellants
were defrauded, and that none of the putative partnerships carried on any
business. There are only trails of fictitious documents created by Mark Allan
Eizenga and James Sylvester to make it appear that the partnerships existed and
made business expenditures, when in fact they did not. It is argued for the
appellants that they honestly believed that they had invested in partnerships
that were carrying on business, that they were presented with business plans
that appeared to be reasonable, and that they relied reasonably on reputable
lawyers, accountants, investment advisers and bankers. It is also argued that
the appellants are innocent victims of a scheme that was intended to defraud
them as well as the Government of Canada, and that it is not fair that they
should bear all the loss.
[3] All of these arguments miss the point. This is not a
case in which the deductibility of a loss can be saved by evidence that the
appellants acted with due diligence. This is not a case of a business that
suffered losses because it was ill conceived or poorly managed, and the tax
authorities are second guessing the business acumen of a taxpayer. This is a
case where, in fact, there was no business. There were no business expenses.
There is no factual foundation for any of the deductions claimed by the
appellants. These appeals will be dismissed with costs.
[Emphasis
added]
[313]
A number of cases after
the Federal Court of Appeal’s decisions in Vankerk and Hammill
cited the legal principle that if taxpayers are the victim of a fraud from
beginning to end, their expense claims are barred from deductibility because
there is no source under the Act. For example, in Lefebvre v. The
Queen,
Justice Lamarre asserted that expenses used to finance a tax scheme are not
deductible under the Act. The Court determined, amongst other
conclusions, that the rental losses in question were not deductible because
they related to expenses that were never incurred to earn income, but rather to
finance the scheme. Justice Lamarre wrote:
[9] Moreover, the tax refund turned over to Mr. Avard
cannot be a deductible expense for the Appellants, as their agent is claiming. The
sum handed over by the Appellants to Mr. Avard was not used to earn
income from a property; it was used to finance the tax scheme
organized by Mr. Avard. Such an expense cannot be deductible, even if the
Appellants were victims of tax fraud (see Vankerk
v. The Queen, … 2006 FCA 96,
[2006] F.C.J. No. 371 (QL)).
[314]
By way of another
example, in Heppner v. The Queen,
Justice Woods identified the legal principle that losses are not deductible if
they were paid and lost in a fraudulent scheme. She stated:
[4] The
position of the Crown is that there is no source of income from which the
appellant can claim a deduction because the money was lost in a fraudulent
scheme.
[5] The
legal principle that the Crown relies on is not in dispute, and has been
articulated by the Federal Court of Appeal in several recent decisions: Hammill v. The Queen, 2005
D.T.C. 5397; Vankerk v. Canada, 2006 FCA 96… and The Queen v. Nunn, 2007 D.T.C.
5111.
Justice
Woods went on to conclude that the evidence pointed to the entire transactions
being a scam, and therefore, without a sufficient connection between a genuine
business and the losses claimed, the losses were barred from deductibility.
The
Co-Existence of a Fraud and a Business
[315]
The Appellants argue
that even if it is found that there was fraud, a fraud and a business can
co-exist and still constitute a source. Key examples of the case law that the
Appellant cites in support of this argument are examined below, with the
grounds upon which the Court came to its conclusion emphasized.
[316]
In Agnew v. The Queen, Justice O’Connor
heard appeals that were representative of approximately 138 appeals by
taxpayers whose investments provided virtually identical fact sets. The
promoter of the tax advantageous investments, as well as the service provider
in the investment opportunity misappropriated funds. Despite these misappropriations, Justice O’Connor
allowed the taxpayers’ appeals because there was evidence that sufficient
commercial activity was carried out. The Court summarized the main reasons for
allowing the appeals as follows:
[123] In my opinion the appeals are to be allowed
with costs for the following principal reasons:
(1) There was clearly a
commercial activity being carried on. Embryos were being bought, imported
and transferred into host cows with a view to producing calves having the same
meat quality as that of the donors of the embryos. Were it not for the
defalcations the bulk of the evidence is that the plan would have succeeded.
(2) There was an operating
farm where activities took place. The activities may not have been, on the
grand scale contemplated in the OM but there is no doubt the activities were
carried out.
(3) The investors relied on
the personalities involved namely, the lawyer Kennedy, who had a good
reputation, Ernst & Young, the Coles, the putting forth of the plan by
Costello, a well-known investment counsellor, the involvement of AIC. Although
the involvement of these various entities and persons may not have been as
extensive as it should have been it appears however that the investors were
impressed by the persons involved. It is also a fact that at least Watters
carried out extensive research on the concept and made inquiries of several
bodies which even Betteridge stated were the correct bodies to review. Watters
apparently decided that, at first, he did not like the investment but
consequently he changed his mind and went ahead with it.
(4) The Appellants paid for
their investment with their own monies. Even though the monies were borrowed
from National Trust Company they were borrowed on the security which the
Appellants placed on their homes or some other assets. Thus, effectively,
they were putting up their own assets/cash to make the investment.
(5) The operation was to be
carried out without any financing by the partnership or the corporations later
involved.
(6) The plan was carried out
over a long term, was extensive and thorough and included eight material
contracts. It attracted 135 investors. It was not "fly by night".
(7) It is well established
that a desire to obtain a tax advantage or loss does not automatically
stigmatize the investment and thus render it simply as a tax evasion scheme
even though a business is contemplated.
(8) Most importantly there was
no personal benefit or element involved in the investment. In Stewart v. Canada, [2002] S.C.J. No. 46, a decision of the
Supreme Court of Canada issued after the hearing of these appeals, a thorough
analysis is made of the concept of reasonable expectation of profit.
[Emphasis added]
[317]
As can be seen from the
excerpts above, considerable weight was placed by the trial judge on the
existence of commercial activity that would have led to a successful enterprise
but for the misappropriations of funds. In addition, the Tax Court of Canada
also emphasized, amongst other factors, the existence of an operational site
where the activities took place, the appellants’ provision of funds secured by
their own assets, and the fact that no financing was to be offered by the
partnership or corporations.
[318]
In Hayter v. Canada, the Appellant
invested in a plan involving the purchases of a large volume of laptops that
would then be resold. Ultimately the laptops were not delivered and the
taxpayer was a victim of fraud. The Tax Court of Canada rejected the Minister’s
argument that there was no business, with the Court emphasizing that although
the laptops were never delivered, they were purchased. Justice Pizzitelli distinguished the facts in Hayter
from those in the Vankerk as follows:
[27] The Respondent has taken the position that since
the transaction was never completed, i.e., the laptops were never delivered,
that same is evidence there was no business and relies on Vankerk v. Canada, 2006 FCA 96 […]
In that case, however, the investors purchased units in partnerships
that were found not to have carried on any business activity, with their
investments siphoned off by the two individuals who perpetrated a scheme to
defraud investors and Government by soliciting investments in fake partnerships.
In paragraph 3 of the appeal, Sharlow J.A. stated:
3 … This is a case
where, in fact, there was no business. There were no business expenses. There
is no factual foundation for any of the deductions claimed by the appellants. …
[28] In the case at hand, the funds were not being
used to invest in a purportedly existing partnership. There was no partnership
with SCQ or those behind it. The funds were advanced to a joint venture partner
who paid the funds for the acquisition of laptops and did not misappropriate
them.
[319]
Justice Pizzitelli went on to further distinguish the facts before
him from another case, Kleinfelder v. The
Minister of National Revenue. He emphasized that in the
laptop investment, unlike the investment scheme in Kleinfelder, the
funds were used to purchase the asset that was at the core of the investment
scheme, whereas in Kleinfelder, the automobiles were never purchased.
The Tax Court stated:
[29] The Respondent also relied on Kleinfelder v. The Minister of
National Revenue, 91 DTC 913, where the Appellant, who was in the business
of buying and selling real estate, agreed to participate in a joint venture
with a party and advanced funds to start a business of buying Mercedes
automobiles from estates and reselling them at a profit, to be split 50-50. In
paragraph 28 thereof, Hamlyn J. stated:
28 The transaction of
buying the automobiles never took place, marketing never took place and the
evidence about how the actual business was to be carried on was vague and
imprecise. The infusion of capital by the appellant was to start the business
but that business operation never started. The moneys were not expended by the
partnership for the purpose of gaining or producing income in that, the other
partner Mr. Gee misdirected the funds.
[30] This case is distinguishable
from the Kleinfelder case above in that the funds advanced
to the joint venture were in fact paid towards the purchase price of the laptop
computers and were not misdirected by Mr. Solleveld. The joint venture, in
fact, took all steps to meet its obligations to acquire the laptop computers
and the only misappropriation was by the Seller or its underlying principals.
There was also correspondence and agreements evidencing the terms of the
purchase, notwithstanding that they changed from time to time as part of the
Seller’s scheme to extract a higher and higher purchase price.
[Emphasis added]
[320]
In Johnston v. Canada, the taxpayer claimed losses amounting to
over $230,000 relating to his attempts to start yacht charter operation in the Virgin Islands. The Appellants emphasize that “the efforts undertaken by the
appellant in the Johnston case pale in comparison to the
activities undertaken by OCGC on behalf of the Limited Partnerships”.
In Johnston, however, the taxpayer was found to be a credible witness
who purchased a yacht and signed a charter management agreement with a Virgin Islands company, amongst other substantial efforts. Justice Bell rejected the
Minister’s arguments that the Appellant had no reasonable expectation of
profit, and determined that the taxpayer undertook extensive efforts and was a
victim of bad circumstances. In concluding that the losses were deductible,
the Court stated:
[26] The Appellant was a wholly
credible witness. I accept his evidence. He has been and is an
entrepreneur who believes in instituting business enterprises and pursuing
them or abandoning them in the absence of a conviction that they will succeed. The
evidence supports this entrepreneurial spirit and activity. It points
clearly to his success in establishing and continuing Custom.
[27] It
is hard to imagine that he could have done more to ensure not only a reasonable
but a thorough examination of the yacht business he was seeking to enter. The
evidence is clear that he consulted with experts with respect to the boat and
with respect to the type of operation and with respect to other matters where
he turned to experience for assistance. It does not militate against his
business acumen that he encountered difficulties in an environment where it
appears that not only were business ethics ignored but fraud was practiced. He
encountered problems both from man and from nature which could not be foreseen.
It might be said that he was extremely unfortunate with regard to a number of
the events described above. However, it is clear to me that this man set out in
the yacht charter business with the purpose of succeeding in turning it to
account in an economic way. The Reply to the Notice of Appeal stated that the
Appellant, before starting the "Activity ... prepared no business plan to
determine if it would be profitable." That is clearly incorrect as
palpably demonstrated by the Appellant's evidence and the admissions of the tax
department's auditor.
The Federal
Court of Appeal in Johnson
[321]
In Canada v. Johnson, the
Federal Court of Appeal recently had the opportunity to reconsider the appropriate tax treatment in the
context of a fraud. Ms. Johnson had invested in what turned out to be a Ponzi
scheme. Unlike many of the other investors however, she profited from her
investment without knowing that the proceeds she collected came from the funds
provided by the many other investors who ultimately lost their funds. The Tax
Court of Canada determined that the income was not taxable in her hands
because, based on Hammill, a fraudulent scheme cannot constitute a
source of income.
[322]
Justice Woods’ decision
was overturned on appeal. The Federal Court of Appeal held that because Ms.
Johnson’s contractual rights were respected, her income constituted a source,
regardless of whether the funds provided to her came from other investors, and
whether she was aware of the source of the funds or not. In concluding that Ms.
Johnson’s income was taxable, Justice Sharlow, writing for herself, Chief
Justice Blais, and Justice Trudel, reviewed Hammill and then detailed
when a Ponzi scheme may still give rise to an income source, stating in part:
[43] I do not quarrel with the
proposition that a Ponzi scheme involves the shuffling of money and that it
will collapse at some point. However, for income tax purposes, income is
calculated on an annual basis, not over the entire life of an enterprise. A
Ponzi scheme may well be a source of income for some participants during some
part of its existence. This case suggests how that could be so. Hypothetically,
if Ms. Johnson had made her payments to Mr. Lech knowing that he would use the
money to operate a Ponzi scheme, she would have profited exactly as she did in
the years in issue in this case, 2002 and 2003.
…
[46] There are two difficulties with
Ms. Johnson’s position. The first difficulty is that it is based on a
mischaracterization of the basis upon which Ms. Johnson is being taxed. She is
not being taxed because she profited innocently from a Ponzi scheme. She is
being taxed because she entered into a series of agreements with Mr. Lech to
receive a profit on her investments with him, and she received what she
bargained for. The fact that Mr. Lech funded her payments with the proceeds
of a Ponzi scheme is irrelevant.
[47] The second difficulty with Ms.
Johnson’s argument is that it is based on an incorrect understanding of the
statutory scheme for determining income for income tax purposes. The question
as to whether a Ponzi scheme is a source of income to a particular person,
whether innocent or not, is a question that must be answered on the basis of
the facts relating to that person. In principle, a person who participates in a
Ponzi scheme, either as the main operator or in association with others, may be
engaged in an undertaking that would be recognized for income tax purposes as a
business, even if the business is unlawful. Such a person is taxable on any
profits derived from the Ponzi scheme and, depending upon the specific
circumstances, may be permitted to deduct any related losses.
[48] It may well be that a victim of
a Ponzi scheme is unable to claim any tax relief for the resulting loss. That
would be the case if, for example, the circumstances are analogous to those in Hammill v. Canada, 2005
FCA 252 (CanLII), 2005 FCA 252. Mr. Hammill was induced to purchase gems
for eventual resale, and accumulated a significant inventory. When he decided
it was time to sell the gems, he paid a substantial sum of money to a person
who promised to facilitate the sale. The promises were never kept, and the gems
were stolen. Mr. Hammill claimed a deduction for the amounts paid to facilitate
the sale, on the basis that the purpose of the expenditures had been to sell
his gems at a profit. It was determined at trial, however, that Mr. Hammill was
the victim of a fraud that commenced when he was contacted about the profits to
be made from buying and selling gems, and continued with the purported efforts
of the perpetrators to sell the gems. This Court confirmed that his
expenditures were not deductible because they were not connected to any source
of income – or in other words, there was in fact no business even though Mr. Hammill
honestly believed that there was. Justice Noël, writing for the Court,
summarized this conclusion as follows at paragraph 28 of the reasons:
A fraudulent
scheme from beginning to end or a sting operation, if that be the case, cannot
give rise to a source of income from the victim’s point of view and hence
cannot be considered as a business under any definition
[49] However, the principle upon which Mr. Hammill
was precluded from claiming tax relief for his losses is not applicable to Ms.
Johnson. Their circumstances are entirely different, not because she profited
from her transactions with Mr. Lech, but because her contractual rights were
respected. As a matter of law, the fact that Mr. Lech used the proceeds of
his unlawful Ponzi scheme to fund the profits he was contractually obliged to
pay to Ms. Johnson is not relevant in determining the income tax consequences
to Ms. Johnson of her transactions with Mr. Lech.
[Emphasis added]
[323]
As set out in Johnson,
whether a Ponzi scheme gives rise to a source of income is a question
determined on its facts, for each taxation year in question. The mere fact that
income is earned from a Ponzi scheme, either knowingly or unknowingly, does not
preclude the existence of a source. Moreover, a taxpayer who operates a successful
Ponzi scheme is likely to earn income, albeit illegally, sourced from the
fraudulent activities he or she perpetuates. The key, according to the Federal
Court of Appeal, is to determine whether the taxpayer’s contractual rights were
respected, and whether the taxpayer got what they bargained for.
The
Definition of Fraud
[324]
For the purposes of those
reasons, it is helpful to refer to several definitions of fraud. According to Black’s
Law Dictionary, a fraud is:
1)
A knowing
misrepresentation of the truth or concealment of a material fact to induce
another to act to his or her detriment…
2)
A misrepresentation
made recklessly without belief in its truth to induce another person to act.
3)
A tort arising from a
knowing misrepresentation, concealment of material fact, or reckless
misrepresentation made to induce another to act to his or her detriment…
4)
Unconscionable dealing,
esp., in contract law…
[325]
The Dictionary of
Canadian Law defines a
fraud as: “[t]he essential elements of fraud are dishonesty, which can include
nondisclosure of important fact, and deprivation or risk of deprivation...”
[326]
Black’s Law
Dictionary describes a
fraudulent misrepresentation as:
A false statement
that is known to be false or is made recklessly – without knowing or caring whether
it is true or false- and that is intended to induce a party to detrimentally
rely on it. – Also termed fraudulent representation; deceit.
[327]
The Respondent also
sets out a number of authorities that provide a definition of a fraud in civil
matters. They are excerpted in part below:
599. The
constitutive elements of civil fraud were first laid out in Pasley v.
Freeman, incorporated
into Canadian law in 1909 by the Privy Council’s decision in United Shoe
Machinery, and succinctly summarized by the Alberta Court of Appeal in Kelemen
v. El-Homeira:
(1) there must be a false representation of fact;
(2) the representation must be made with knowledge of its
falsity;
(3) it must be made with the intention that it should be acted on by the
plaintiff ... in a manner which resulted in damage to him;
(4) it must be proved that the plaintiff has acted upon the false
statement, and has sustained damage by doing so.
600. The second
element’s source in English law is Derry v. Peek829, where negligent misrepresentation
(then not actionable) was distinguished from the higher threshold of fraudulent
misrepresentation, which constitutes the tort of deceit:
[…] fraud is proved
when it is shown that a false representation has been made (1) knowingly, or
(2) without belief in its truth, or (3) recklessly, careless whether it be true
or false.
601. Derry
v. Peek was followed and applied by Canadian case law, most recently by the
Supreme Court of Canada in BG Checo International Ltd.830 which also reiterated
that fraudulent misrepresentations could be simultaneously actionable in tort
and for breach of contract.
[328]
In Motkoski Holdings
Ltd. v. Yellowhead (County), the
Alberta Court of Appeal referred to some of the citations offered by the
Respondent in providing the following summary of the definition of fraud:
[57] The legal definition of fraud is well established: Derry v. Peek (1889), 14 A.C. 337; BG Checo International Ltd. v.
British Columbia Hydro and Power
Authority, 1993 CanLII 145 (SCC), [1993] 1 S.C.R. 12 at pp. 22, 54,
74-5; TWT Enterprises Ltd. v.
Westgreen Developments1992 ABCA 211
(CanLII), (1992), 3 Alta. L.R. (3d) 124, 127 A.R. 353 (C.A.). There are two
branches to it. Both branches are built on a finding that a false or inaccurate
statement was made. Under the first branch, fraud is established if the defendant “knew”
that the statement was false, and made it with the knowledge or
intention that the plaintiff would rely on it.
[58] Under the second branch, it is sufficient if the
defendant did not actually know the statement was false, so long as the
statement was made recklessly. “Recklessly” in this context means that the
statement was made “without caring whether it was true or false”. “Recklessly”
does not just mean the statement was made with “very great negligence”, nor
that it was made in a highly risky context, such that the probability of
someone relying on the statement to their detriment was enhanced. As Lord
Herschell said in Derry v.
Peek at p. 375, “making a
false statement through want of care falls far short of, and is
a very different thing from, fraud, and the
same may be said of a false representation honestly believed though on
insufficient grounds”. Under neither branch of the test is it sufficient that
the defendant “should have known” the truth, or should have been more careful and made
further inquiries; actual knowledge or actual indifference to the truth is
required.
(ii) Analysis
A Fraud from Beginning to End
[329]
I conclude that the OCGC
yacht chartering business was a fraudulent scheme from beginning to end
throughout which the investors’ contractual rights were not respected. As such,
per the Federal Court of Appeal in Johnson and Hammill, it cannot
give rise to a source of income from the Appellant’s point of view and cannot
be considered a business under any definition. The Appellants argue that the
burden regarding certain assumptions is on the Respondent. It is not necessary,
however, for this Court to enter into an intricate analysis of whom the burden
falls upon to prove or destroy any assumptions that the Limited Partnerships
were a fraud from beginning to end. If the onus was upon the Appellants, they
have failed to meet it, and if the burden was indeed the Respondent’s, she has
proven on a balance of probabilities that the contractual rights of the
investors were not respected and the Limited Partnerships were a fraud through
and through.
[330]
The evidence has shown
that, within the meaning of the definitions of fraud set out above, the OCGC
yacht chartering business was a fraudulent scheme. From the start, Mr.
Bellfield and OCGC induced investors to subscribe in the Limited Partnerships
by knowingly misrepresenting multiple material facts. Throughout the taxation
years in question, Mr. Bellfield and OCGC fraudulently misrepresented the state
of the yacht chartering business, the availability of capital and access to
financing, the number of yachts under construction, and yacht delivery dates.
Dishonesty infiltrated all levels of OCGC’s interactions, from its relationship
with the investors to its relationships with professionals as well as third
parties. These misrepresentations are found in a wide span of OCGC activities
and materials, including the yacht chartering promotion material, certificates
and representations made to investors, accounting and legal professionals,
information provided to banks, newsletters distributed to investors, financial
statements upon which the investors relied to claim their losses, the
information provided to the CRA, and most importantly, from the beginning, the
Offering Memoranda. It is not a situation where a venture morphed into a fraud
over time—the fraud was present when the Offering Memoranda was conceived.
[331]
OCGC, as the vendor of
the Limited Partnership units and as the general partner of each of the 36
Limited Partnerships, and Mr. Bellfield as the sole shareholder, director, and
president of OCGC, had complete control of all aspects of the scheme and persistently
and repeatedly made material misrepresentations. These falsehoods were of such
significance that they go to the very core of OCGC’s contractual obligations to
the parties involved with the corporation, including obligations undertaken
towards investors and yacht builders, as well as assertions made to legal and
accounting professionals.
The Amount
of Funds Spent
[332]
The mere fact that a
significant amount of money was spent is not surprising given the enormous
scope of the scheme, which originally brought in over 600 investors. A
considerable amount of smoke and mirrors are necessary to continue a fraud of
such a large scale, aimed at high net worth individuals, and purported to be
creating a luxury yacht chartering business at the highest end of a not yet
accessed charter market. In fact, spending much of the investor money coming in
to perpetrate the illusion of a successful business is the hallmark of a Ponzi
scheme.
[333]
Further, the evidence
does not show that the cited $13–14 million was in fact spent on activities
relating specifically to a yacht chartering business. Some of those funds were
spent on OCGC activities that were not related to the Limited Partnerships,
such as payments to employees who also worked on other OCGC endeavours. Most of
those funds were spent by OCGC on marketing and promoting the Limited
Partnerships as tax shelter investment opportunities and creating the smoke and
mirrors necessary to do so. Such expenses were not incurred for the purpose of
building a yacht chartering business but rather in this case were the costs of
perpetuating the fraud. Other portions of the funds were used by Mr. Bellfield
for his personal benefit, including the eventual transfer of the title for the S/Y
First Impressions from OCGC to Tina Bellfield.
[334]
Having professionally appointed
offices and premises to impress investors or to utilize the same presentations
to investors are all part of the back-drop and scenery to perpetuate a Ponzi-like
scheme. The entire Fantaseas concept was all part and parcel of the
ever-growing factual background necessary to attract and convince investors to
buy into the tax gimmick presented and sold by Mr. Bellfield. This included the
establishment and operations in the Caribbean, the development and
establishment of manufacturing facilities, including prototypes, the
establishment of the commissary concept and the promotional activities.
Furthermore, the attempts to utilize prominent individuals for promotional
activities were carried out for the purpose of maintaining the illusion of
legitimacy. Examples include: a) Sparkman & Stephens for yacht design; b)
yacht manufacturers such as Mr. Dufour at Maxi-Yacht, Chantier Yacht France and
Dynamique; c) Jacques Pepin as the designer and developer of menus (at a
certain point, against his will); and d) having the S/Y Gable christened by
Prince Albert of Monaco. Mr. Bellfield used professionals to develop fraudulent
financial statements and prospectuses, all for the purpose of gaining the air
of legitimacy. Most professionals were caught up in the whole concept because
they were making professional fees and commissions on sale of units in the
Limited Partnerships.
[335]
As was explained above
in identifying OCGC’s many misrepresentations, at least $16 million would have
been required merely to buy the yachts promised to the 16 Limited Partnership
by the end of 1985. An additional minimum of $20 million would have been needed
for the yachts owed to the remaining Limited Partnerships in which units were
purchased, making a total of $36 million required merely for the acquisition of
yachts. This figure does not include any soft costs related to yacht
acquisition. More significantly, this $36 million estimate does not include the
millions of dollars that would have been required to set up, market, and manage
the genuine yacht chartering business promised by OCGC. The scope of the fraud
perpetuated here was so extensive that the number of yachts actually delivered
and charters actually undertaken are strikingly trivial in their proportional
insignificance. Based on the evidence before the Court, it is indisputable that
the portion of the $13–14 million actually spent on Limited
Partnership related activities was anything more than money spent on elaborate
window-dressing to perpetuate the fraud.
[336]
The Appellants state that the
sheer magnitude of the expenses can only signify that the Limited Partnerships
reached the state of being in business. I regret to have to repeat myself, but
this was not a smash and grab robbery; this was a sophisticated, planned, and
well-orchestrated Ponzi-like scheme which grew in size and scope as more people
were duped by the illusion of the legitimacy of OCGC’s operations. No doubt
there would have come a point in time that the Ponzi-like scheme would have
collapsed, but the money spent was necessary for Mr. Bellfield to maintain the
illusion of legitimacy. Without spending this money, the illusion of legitimacy
would have disappeared rapidly and the Ponzi-like scheme would have collapsed.
Mr.
Bellfield Benefited from Fraud
[337]
Certain funds cannot be
traced but it appears reasonable to conclude from the evidence that Mr.
Bellfield appropriated some funds for his own benefit. For example, The S/Y
Garbo was sold as part of financing Maxi-Yacht International, which constructed
three yachts for OCGC: the S/Y Gable, the Demoiselle, and Rocco Jr. None of
these three yachts were ever acquired by a Canadian Limited Partnership. Michel
Dufour’s affidavit evidence states that two of the yachts, the Demoiselle and Rocco Jr, were sold to French Limited
Partnerships. As a result of the sale, OCGC France received commissions of approximately 10,000,000 FF. He further states that Mr. Bellfield as
the majority shareholder controlled OCGC France directly or indirectly, and
that most of the funds used to build the Demoiselle and Rocco Jr. yachts came
from OCGC in Toronto. While Mr. Dufour was never cross-examined on this
evidence because he is deceased, I found his evidence to be sufficiently
reliable and necessary for admission at trial in affidavit form, under the
principled exception to hearsay. With regards to Mr. Dufour’s evidence, I
believe it to be reliable and have probative value. First, the evidence was
given by videotape, second, it was under affirmation, and third, there was no
apparent reason or motive for Mr. Dufour to give evidence of anything that was
less than truthful. In addition, Mr. Dufour was an integral part of the
purported construction of the Fantaseas concept yachts, and was certainly in a
position to speak to the issues at which his evidence was directed. His
evidence appears to be corroborated to some extent by the evidence that is
before the Court, albeit on a collateral or indirect basis. Having said the
foregoing, I accept Mr. Dufour’s evidence on his interactions with Mr.
Bellfield and OCGC, as well as the operations of Maxi-Yacht. There was no
counter-evidence provided as to any points of his evidence that may have been
questioned by the Appellants, in particular where the funds of those were
directed.
[338]
The Appellants argue that Mr. Bellfield
must have had the intention for at least a portion of the business to be
genuine, because he spent almost all of the investor money coming in, and much
of it on Limited Partnership related activities. Repeated and persistent
material misrepresentations and the failure to meet contractual obligations do
not cease to be categorized as fraud merely because the scheme may not have
left the fraud artist(s) with a lot of cash in pocket after paying all the expenses
to maintain the fraud. It is also clear from the evidence that various
contractual obligations undertaken with third parties in furthering the
illusion of a yacht chartering business were undertaken without regard to cost
nor long-term ability to pay. It is apparent that in this case, Mr. Bellfield
likely hoped to keep the scheme going for significantly longer than it did.
[339]
This is most
definitely not a story of a businessperson with a great vision whose failings
led him to perpetuate some fraudulent acts while still attempting to build a
genuine business. The misrepresentations are too significant early on; the
falsehoods too constant and prevalent. Mr. Bellfield was a fraud artist from
the start.
Mr.
Bellfield was a mastermind
[340]
Mr. Bellfield used his
personality, communication skills, and ability to convince others. He traded
favours with lawyers, accountants, promoters, and prominent persons to create
this illusion. Once he created the foundation for the establishment of the
Limited Partnerships and the incentive for persons who would have the
wherewithal to bring on investors, i.e. accountants, lawyers, and individuals
such as Mr. Franklin, the scheme took on a life of its own because of the
attractive nature of the investment as a tax gimmick.
[341]
According to the Appellants, from
1984 to 1991, Mr. Bellfield employed at least 68 individuals excluding independent
contractors and outside individuals at a cost of $1.6 million. It was
acknowledged that some were working on other OCGC interests, but the Appellants
assert that the majority were working on creating the luxury yacht chartering
business. I have found that the modus operandi of Mr. Bellfield was to commit a
fraud from beginning to end. This fraud began with only two people—Mr. Bellfield,
and his wife Tina. Later, it included Mr. Minchella and Mr. Bellfield’s
sister-in-law, Ester Palmer. As time went on, more Limited Partnerships were
marketed, more Limited Partnership were developed, more investors subscribed,
more promises and commitments were made and larger operations were necessary. All
of this led to more personnel being required. Some of the personnel recognized
the fraudulent nature of the activities and no longer wanted to be involved,
i.e. Mr. LeGlatin and Mr. Garthson. Others did not have the capacity to
recognize the fraud either because of their lack of work experience and/or
their close relationship to Mr. Bellfield. There is no doubt that the witnesses
who felt that the endeavour was a genuine business were clear as to what they
believed, but unfortunately, they were duped into participating in an illusion
created by Mr. Bellfield. The entire enterprise was a fraud ab initio.
[342]
Einar
Bellfield was a master of deceit and manipulation. The evidence clearly shows
that no one other than himself and eventually Mr. Minchella, were fully aware
of the scope and magnitude of the Ponzi-like scheme perpetuated. Mr. Bellfield
was extremely careful about having employees and associates of OCGC operate in
silos, and conducted its affairs on a need-to-know basis. Almost all of the
employees operated in their own sphere of work endeavours without knowledge of the
endeavours of others. For example, Ester Palmer was primarily focused on
marketing and promotion. Mr. Dufour was focused on the development and
manufacturer of the yachts. Mr. Marcolongo was focused on Caribbean operations.
Jack Moles was focused on acquiring and adapting yachts to the Fantaseas
concept. Mr. LeGlatin was much the same as Mr. Moles but in the European
context. The only ones really working together were some of the marketing
people—Ester Palmer, Stephen Leibtag, David Martin, and Rose Ashworth and they
did not even all work together at the same time. On the commissary side, there
was Dorothy Louis and Mary Crocco. On the side selling Limited Partnership units,
there was David Franklin and Peter Browning, amongst others. None of these
individuals had much knowledge of the activities of the other. Only Mr.
Bellfield knew how the puzzle fit together, and he ensured that the containment
continued until the very end. Even with regard to his own right hand man Mr.
Minchella, he kept him in the dark with lies and deceit.
Claims
regarding the CRA’s Behaviour
[343]
The Appellants throughout the
trial made numerous suggestions or innuendos about a variety of aggressive or
inappropriate behaviour by members of the CRA. My task is not to assess the
conduct of the CRA, but rather to determine whether or not the expenses claimed
in these appeals are legitimate. This is not a criminal prosecution. As stated
in Ereiser v. Canada:
[31] […] the role of the Tax Court of Canada in an appeal of an
income tax assessment is to determine the validity and correctness of the
assessment based on the relevant provisions of the Income Tax Act and the facts giving rise to the
taxpayer’s statutory liability. Logically, the conduct of a tax official who
authorizes an assessment is not relevant to the determination of that statutory
liability. It is axiomatic that the wrongful conduct by an income tax official
is not relevant to the determination of the validity or correctness of an
assessment.
[344]
As I stated, the entire Ponzi-like
scheme was set to collapse eventually. The conduct or intervention of the CRA
did not turn this Ponzi-like scheme, a fraud from beginning to end, into a
genuine business. All the intervention did was instigate the lifting of the
veil to reveal the prevalent nature of the fraud.
Lack of Capital and
Access to Capital
[345]
The Appellants
attempted to address the lack of capital or access to capital by arguing that
OCGC could have mortgaged the yachts to obtain additional financing. Several
witnesses also testified to this effect. While this right might have been
available to OCGC, it was seriously limited. The mere existence of a right to
mortgage the yachts as the general partner does not vitiate the many
misrepresentations that OCGC made to multiple parties that it had capital and
access to capital. In addition, any mortgaging of a Limited Partnership yacht
could only take place if it was in the best interest of the Limited Partnership.
The partners could not sell a yacht without a special resolution. The evidence
did not demonstrate that the Limited Partnerships had any interest in having
their yachts mortgaged. Their interest was in having the yacht asset delivered
and operational with a yacht chartering business established so that it could
offer charters. The investors’ tax interests were also in having the yacht
delivered so that they could begin claiming capital cost allowance, and in
having the expenses charged to the Limited Partnerships, so the tax benefits
could flow down to them.
[346]
No evidence was
provided of yachts being mortgaged or sold in order to access capital in a way
that benefited the Limited Partnerships. For example, when the S/Y Garbo was
sold to finance a French yacht builder, no information was presented to the S/Y
Garbo Limited Partnership about the sale and the proceeds of the sale were not
put towards the benefit of the partnership. The Limited Partnership did not
allow the sale or disposition of all or substantially all of the Limited
Partnerships assets, i.e. yacht, by a special resolution by the Limited
Partnership, as required in the Limited Partnership Agreement. The S/Y Garbo
was sold because—as was the perpetual pattern of OCGC—capital was needed to
meet OCGC’s obligations to deliver yachts to Limited Partnerships, and the
corporation did not have enough money. The corporation’s source for funds was
limited to incoming interest payments and small deposits of investors. OCGC
sold the S/Y Garbo to a French yacht builder in a scramble to finance an effort
to keep the scheme going. Further, there were only three yachts actually built,
of which at least one was not suitable for chartering purposes. Mortgaging the
few yachts that did exist would have done little to address OCGC’s fundamental
lack of capital.
Analyzing the Purported
“Business Indicia”
[347]
The Appellants focused their
case on the business indicia, and argued strongly that the presence of business
indicia which grew over time showed that they were “in business and continued in business throughout the
years under appeal”. In a vacuum, the argument is very strong. However, it does
not stand to scrutiny.
[348]
In order to perpetuate this
long-term fraudulent scheme, business indicia had to be developed, presented,
and maintained to give the perception of legitimacy. The perception of
legitimacy and tax attractiveness appealed to innocent investors and led to upwards
of approximately $460,000 per month in cash flow to Mr. Bellfield. Of the
business indicia, much of the indicia were short term. For example, besides Mr.
Minchella and family members, all employees of OCGC involved were short term
employees most of whom were with OCGC for six months to a year. The retaining
of professionals was a similar story, switching accounting and law firms, or
using one firm for one transaction and another for a different transaction, so
that nobody would really know what was going on. Virtually all contracts for
the acquisition or construction of yachts were disasters, except the S/Y Gable,
with none of them resulting in title to any yacht passing to any of the 36
Limited Partnerships.
[349]
Legitimacy required a
corporation in the front end: OCGC. It required an Offering Memorandum, but one
without fraudulent material misrepresentations. There was no feasibility study
in the front end, no market assessment, no professional workup of an Offering
Memorandum, and no capitalization. These are all things that OCGC represented
that it had done when contracting with investors. All efforts at building a
yacht chartering business could only go so far without a product.
[350]
The $13 to 14 million
sounds significant and it is significant, however it is not so significant when
it is considered in the context of the scale of this fraud. There were 36
Limited Partnerships subscribed, capitalized at approximately $2.5 million each,
for a total capitalization of $90 million. By December 31, 1985, commitments
had been made to deliver 16 yachts at a minimum cost of a million dollars each.
By that date, none had been built and it was not until over a year and a half
later that a single yacht was even available for chartering. In order to keep
the fraud going, to keep investors coming, and maintain the cash flow, which at
one time or another was $460,000 per month plus, money had to be spent on the
illusion of a legitimate business.
[351]
As time went on, it
would take more money to continue the illusion, but the money was not there in
the amounts necessary to hold up the fraud. Again, OCGC needed at least $16
million just to build the 16 yachts owed to the first 16 Limited Partnerships by
December 31, 1985—this is without consideration of the millions of dollars it
would have taken to actually establish, develop, and maintain a head office for
a genuine yacht chartering business, develop and promote marketing and
advertising to sell the product, keep accounting and legal requirements up to
speed, pay commissions, train a full staff for the alleged fleet of 36 yachts,
build a genuine functioning commissary, and so on. The monohulls were going to
be built in France and the catamarans were going to be built in Picton. All of
this was to be done without one nickel of capitalization on the front end, and
without any capitalization or funding at any point in time except for the cash
deposits by the investors and their monthly interest payments.
[352]
The business indicia
that the Appellants refer to are simply the window-dressing necessary to
perpetuate the fraud from beginning to end on everyone that Mr. Bellfield came
into contact with. There is no evidence that supports the intention to carry on
any activity for profit as required by the Supreme Court of Canada decision in Stewart.
This is not a case similar to the Tax Court decisions referred to previously in
Johnston v. Canada, and Agnew
v. The Queen,
in which sufficient genuine business activities were undertaken. This is a case more akin to Vankeerk.
In Vankeerk, a Statement of Agreed Facts established the fraudulent
nature of the scheme and the fact that the Limited Partnerships were not
genuine. In this case, the fraudulent nature of the entire scheme is
established by the facts set out in the many examples of misrepresentations above.
OCGC bore the Hallmarks of a Ponzi-like Scheme
[353]
Separate and apart from
being a fraud from beginning to end, the evidence reveals that OCGC’s yacht
chartering investment was effectively a Ponzi-like scheme with the essential
and hallmark characteristics of a Ponzi-like scheme.
[354]
The planning and
development of the yacht chartering business—whether it was a novel or
entrepreneurial or business-like idea or investment—was undercapitalized and
underfinanced from the incorporation of OCGC in May 1984. In fact, I would go
so far as to say it was never financed and it was never capitalized.
[355]
Black’s Law
Dictionary defines a Ponzi
scheme as follows:
A fraudulent investment
scheme in which money contributed by later investors generates artificially
high dividends or returns for the original investors, whose example attracts
even larger investments. · Money from the new investors is used directly to
repay or pay interest to earlier investors, usually without any operation or
revenue-producing activity other than the continual raising of new funds. The
scheme takes its name from Charles Ponzi, who in the late 1920s was convicted
for fraudulent schemes he conducted in Boston.
[356]
While the yacht
chartering business was a modified Ponzi scheme in the sense that it was a
Ponzi-like scheme oriented towards creating the illusion of substantial tax
losses instead of high returns, it was still a Ponzi-like scheme. The investors’
funds were the only source of funds, and they were not used to pay returns or
repay early investors, but rather, to maintain the illusion of a business so
that investors would continue to subscribe, attracted by the opportunity to
claim significant losses for tax purposes without investing substantial funds.
Just like most Ponzi schemes, the yacht chartering business never had any
access to capital, nor consisted of any true operations or revenue-producing
activity beyond those required for window-dressing to maintain an appearance of
legitimacy.
[357]
I make reference to the
Respondent’s Memorandum of Fact and Law, paragraphs 82–92,
which substantiate with the references therein, the fact that the only source
of revenue for the yacht chartering businesses were the investors’ monthly
interest payments and small down payments from some of the investors:
82. Minchella claimed that
building the boats with investors’ interest payments had been the deal right
from the beginning.9
83. Bellfield was able to pay Dynamique
for the 1984 partnership yacht Garbo on April 4, 1986 because he had the cash
inflow from the 1985 investors who were sending in their money at the end of
December 1985 and the first few months of this purchase and any additional
purchases were predicated on the success of our marketing and sales efforts.”
90. Minchella said another
source of funds for Maxi Yachts construction of the Gable was a mortgage put on
the Garbo after OCGC sold the Garbo to Maxi Yacht. He agreed that money from
one partnership had to be used to meet promises to another partnership but
Minchella claimed that OCGC had the right to mortgage the boats.
91. Minchella claimed that it
was the defaults in payments in the 1986 limited partnerships which represented
approximately 70% of all of the receivables of OCGC’s that kept the 1985
partnerships from getting their yachts.
92. In fact, investor defaults
in later years had nothing to do with OCGC’s failure to honour its commitment
to even one 1985 limited partnership. OCGC committed in the Offering Memoranda
to the construction and delivery in 1985 to the 1985 partnership yachts.
Bellfield’s Ponzi scheme and his absence of capital from the outset explain
OCGC’s failure to meet its 1985 commitments, not events occurring after the
fact.
[358]
In the course of
evidence in the trial, during the cross-examination of John Garthson, there was
a review of the financing options available to OCGC. They included:
1)
Vendor-take back
financing;
2)
A lending institution
advancing money to the investors who would then use the money to buy the units;
3)
Pledging of investors’
promissory notes to a financial institution;
4)
Obtaining third party
financing of delivery of goods and services;
5)
Manufacturer take on
the obligation to fund the construction pending the yacht sales;
6)
A combination of
options 1 to 5; and
7)
OCGC self-finance the yacht
development based on interest payments received from the investors, and the
mortgage the yachts.
[359]
There could be no
vendor-take back financing because the vendor was OCGC and the evidence shows
that they never had any access to financing nor could they have reasonably
expected to have such access. OCGC did not have the credit-worthiness for:
a)
Vendor take back financing; and
b)
Third party financing.
Manufacturers
could not take on the obligation of financing construction because OCGC never
met their financial obligations to the manufacturers, or manufacturers went
into receivership. The manufacturers in the end were substantially owned, in
whole or in part by Mr. Bellfield. Lending institutions could advance money to
the lenders to buy the units, but that was an individual investor-by-investor
process. The banks would not provide OCGC with financing. The banks instead invited
OCGC to refer investors to them for this purpose. In addition, there was no
evidence of pledging promissory notes to financial institutions, but there was
evidence of attempts to obtain financing from financial institutions, which was
largely unsuccessful.
[360]
The evidence discloses
that none of the foregoing actions took place, save and except for a) the
monthly interest payments by the investors and b) sale of the S/Y Garbo that
was only used for the limited purpose of financing Maxi-Yacht International.
The bottom line is that there was no financing. Any attempt to obtain financing
through bona fide financial institutions was a failure at best and the
other alleged financing were simply on paper, from companies that Mr. Bellfield
controlled.
[361]
It is my view that from
the beginning, the entire scheme was a fraud upon the Appellants and other
investors and as it turned out, a fraud on the CRA. Crucial to perpetrating the
fraud in the magnitude carried out by Mr. Bellfield and others in concert with
him was having innocent investors on his side. How did Mr. Bellfield achieve
getting investors on side? He did so by taking three classic actions in a fraud
of this nature:
1)
The development of a product that was attractive to a target market;
2)
By making representations and commitments to investors in the target market to gain
their confidence and investment; and
3)
By concluding contractual relationships with investors to ensure a continuous
flow of funds.
He
then repeated the foregoing over and over again to new and innocent, hopeful
investors.
[362]
A review of the
evidence clearly shows all of the foregoing:
1) Evidence of the nature of a product and its
attractiveness to gullible, hopeful, and innocent investors who might even be
considered greedy, i.e. Offering Memoranda;
2) Evidence of representations and commitments to
gullible, hopeful, and innocent potential investors. Representations and
commitments are fundamental enticements to the development of a contractual
relationship with the investors, i.e. false documents provided prior to and at
closing;
3) Evidence of a contractual relationship created
with each individual investor with all the appropriate documentation to
establish what at first glance would appear to be a solid contractual
relationship but in essence is smoke and mirrors for a game of masquerade with
the investors and to all who might enquire or look into the bona fides of the
scheme, i.e. all the subscription-related documents;
4) Evidence of the financial aspects of each Limited
Partnership, namely the losses of each individual partnership and how those
losses were shown in the Limited Partnerships. The loss statements were then used
to claim losses, as in the financial statements and related documents;
5) Information flow to investors and the public and
the creation of indicia of a legitimate of a business operation of each Limited
Partnership i.e. the window dressing of Starlight Charters and the Commissary;
6) The development and distribution of information on
the exclusivity and opportunity the product presents to the target market. This
included information to capture the imagination of innocent investors such as
the luxurious nature of the cruises in sunny climates with sumptuous meals and
state of the art accommodations all without financial risk to the investor and attractive
cash returns through a tax gimmick.
[363]
The evidence of
misrepresentations presented at trial was enough to convince me of all of the
foregoing. In fact, the volume of evidence is so overwhelming, voluminous, and
uncontradicted, that when one looks at the evidence in its totality, one cannot
come to any other conclusion other than that this was a fraud from beginning to
end perpetrated by the mastermind Mr. Bellfield. He showed no mercy in terms of
duping the public, the investors, the CRA, his own staff, and others, in his
attempts to further his own personal interests and those of his family members.
There was no genuine business carried on and I therefore conclude that the
Appellants did not have a source of income from which they could deduct
expenses or losses.
[364]
The Respondent argues
that the Limited Partnerships do not constitute genuine partnerships because
they were merely part of a fraud perpetuated upon the investors. He asserts
that there was no common purpose of carrying on a business with the investors,
stating at page 218 of his Final Submissions:
695. … the evidence does not
establish that the S/Y Garbo, Midnight Kiss or Close Encounters were genuine
“partnerships.” OCGC, while carrying on a fraud business at the expense of the
investors, was not carrying on business in common with the investors.
[Emphasis in original]
[365]
The Appellants assert
that the Limited Partnerships were in fact carrying on a yacht chartering
business, in which substantial start-up costs were anticipated. The Appellants
emphasize that even where a yacht was not ultimately delivered, and the
business was unsuccessful, other goods and services that were acquired as part
of the $13 to 14 million spent were related to the yacht chartering business.
They assert that it is not the place of the Minister or the Court to
second-guess the business acumen of taxpayers; but rather simply to evaluate if
sufficient indicators of commerciality are present.
[366]
In evaluating whether
the Limited Partnerships were engaged in a business, the Appellants argue that
the focus of the inquiry should be on the Limited Partnerships themselves,
rather than on other relationships where fraud or misrepresentations were
present. They assert that the focus of the inquiry should not be on the
relationship between OCGC and the CRA regarding OCGC’s corporate taxes, in
which OCGC perpetuated a fraud to evade a significant corporate tax liability.
The Appellants further assert that the inquiry should also not focus on the
relationship between OCGC as a vendor and the investors as purchasers of units
in the Limited Partnerships in which various misrepresentations were present in
the sale transactions. Instead, the Appellants argue, the only relevant
determination is whether the Limited Partnerships had sufficient business
indicia to demonstrate that they were a genuine business. The Appellants state
at page 30 of their Final Submissions that the focus of the Court should be as
follows:
74. In order to
determine whether the Limited Partnerships were in business, one must look at
what the Limited Partnerships paid for and what they received in exchange for
those payments by way of goods and services as part of the start-up of their
respective businesses.
(i) The Law
The Taxation of Partnerships
[367]
While a partnership is
not considered a taxpayer under the Act, subsection 96(1) instructs that
partnership income or losses should be calculated at the partnership level as
if the partnership was a separate entity, and then allocated proportionately amongst
the individual partners in accordance with their partnership share. The
relevant portions of the provision read:
96. (1) Where a
taxpayer is a member of a partnership, the taxpayer’s income, non-capital loss,
net capital loss, restricted farm loss and farm loss, if any, for a taxation
year, or the taxpayer’s taxable income earned in Canada for a taxation year, as
the case may be, shall be computed as if
(a) the partnership were a separate person
resident in Canada;
(b) the taxation year of the partnership were
its fiscal period;
(c) each
partnership activity (including the ownership of property) were carried on by
the partnership as a separate person, and a computation were made of the amount
of
(i) each
taxable capital gain and allowable capital loss of the partnership from the
disposition of property, and
(ii) each
income and loss of the partnership from each other source or from sources in a particular
place, for each taxation year of the partnership[…]
…
(f) the amount
of the income of the partnership for a taxation year from any source or from
sources in a particular place were the income of the taxpayer from that source
or from sources in that particular place, as the case may be, for the taxation
year of the taxpayer in which the partnership’s taxation year ends, to the
extent of the taxpayer’s share thereof; and
(g) the
amount of the loss of the partnership for a taxation year from any source or
from sources in a particular place were the loss of the taxpayer from that
source or from sources in that particular place, as the case may be, for the
taxation year of the taxpayer in which the partnership’s taxation year ends, to
the extent of the taxpayer’s share thereof.
The Essential Ingredients of a Valid Partnership
[368]
Partnership losses are
only deductible under the Act if it is established that a valid
partnership existed. Ontario’s Partnerships Act defines a partnership as
follows:
2. Partnership
is the relation that subsists between persons carrying on a business in common
with a view to profit […]
[369]
The essential
ingredients required for a genuine partnership were outlined by Justice
Bastarache, writing in dissent in Continental
Bank Leasing Corp. v. Canada.
In essence, a genuine partnership will be found where the parties were:
1)
carrying on a business;
2) in
common; and
3) with
a view to profit.
[370]
Justice Bastarache’s three
essential ingredients for a partnership were adopted by the Supreme Court of
Canada in two subsequent cases, Backman v. Canada, and Spire Freezers Ltd. v. Canada. Both cases apply the legislative
definition found in Ontario’s Partnerships Act and most common law
partnership statutes.
[371]
In undertaking a factual inquiry
required to assess whether a partnership existed, the parties’ intentions will
be considered, as will various other indicia such as, the parties’
contributions to the effort, the existence of a joint interest in property,
whether income or losses are shared, whether there was shared management and
control, and if the parties shared a bank account. Justice Bastarache described
the factual inquiry required to evaluate if a partnership existed as follows:
[23] The existence of a partnership
is dependent on the facts and circumstances of each particular case. It
is also determined by what the parties actually intended. As stated in Lindley
& Banks on Partnership (17th ed. 1995), at p. 73: “in
determining the existence of a partnership . . . regard
must be paid to the true contract and intention of the parties as appearing
from the whole facts of the case”.
[24] The
Partnerships Act does not set out the criteria for determining when a
partnership exists. But since most of the case law dealing with partnerships
results from disputes where one of the parties claims that a partnership does
not exist, a number of criteria that indicate the existence of a partnership
have been judicially recognized. The indicia of a partnership include the
contribution by the parties of money, property, effort, knowledge, skill or
other assets to a common undertaking, a joint property interest in the
subject-matter of the adventure, the sharing of profits and losses, a mutual
right of control or management of the enterprise, the filing of income tax
returns as a partnership and joint bank accounts.
Ingredient One: Carrying on
a Business
[372]
In considering how to
analyze the first ingredient, “carrying on a business”, the Supreme Court of
Canada in Backman clarified that in the context of the
partnership test, a business does not necessarily need to be new, nor does the
business need to be carried on for a significant amount of time. In fact, one
transaction may be sufficient to ground a finding that the parties were carrying
on a business, so long as the purported partnership does not amount to an
“empty shell”. As stated by the Supreme Court of Canada:
19 In law, the meaning of
"carrying on a business" may differ depending on the context in which
it is used. Provincial partnership acts typically define "business"
as including "every trade, occupation and profession". The kinds of
factors that may be relevant to determining whether there is a business are
contained in the existing legal definitions. One simple definition of
"carrying on trade or business" is given in Black's Law Dictionary
(6th ed. 1990), at p. 214: "To hold one's self out to others as engaged in
the selling of goods or services." Another definition requires at least
three elements to be present: (1) the occupation of time, attention and labour;
(2) the incurring of liabilities to other persons; and (3) the purpose of a
livelihood or profit: see Gordon v. The Queen, [1961] S.C.R. 592, per
Cartwright J., dissenting but not on this point, at p. 603.
20 The
existence of a valid partnership does not depend on the creation of a new
business because it is sufficient that an existing business was continued.
Partnerships may be formed where two parties agree to carry on the existing
business of one of them. It is not necessary to show that the partners carried
on a business for a long period of time. A partnership may be formed for a
single transaction. As was noted by this Court in Continental Bank,
supra, at para. 48, "[a]s long as the parties do not create what amounts
to an empty shell that does not in fact carry on business, the fact that the
partnership was created for a single transaction is of no consequence."
Furthermore, to establish the carrying on of a business, it is not necessary to
show that the parties held meetings, entered into new transactions, or made
decisions: Continental Bank, supra, at paras. 31-33. A business may be
established even in circumstances where the sole business activity is the
passive receipt of rent, as was noted by L'Heureux-Dubé J. in Hickman Motors
Ltd. v. Canada, [1997] 2 S.C.R. 336, at para. 46 […]
Ingredient Two: “In Common”
[373]
In Backman, the Supreme Court of Canada went on to analyze the meaning of
carrying the business out “in common”. The Court reiterated that the fact that
only one partner carries out the management and control of the partnership does
not preclude a finding that the business is carried out in common. The Court
also noted that the finding that a partnership existed might be based in part
on a valid contractual agreement between partners, but the existence of a
contractual agreement is not sufficient to decide the issue. All three criteria
for a valid partnership must be met. The Court went on to summarize other
factors that may be relevant in considering whether the parties had the
intention to carry on a business “in common”, stating:
21 In
determining whether a business is carried on "in common", it should
be kept in mind that partnerships arise out of contract. The common purpose
required for establishing a partnership will usually exist where the parties
entered into a valid partnership agreement setting out their respective rights
and obligations as partners. As was noted in Continental Bank, supra, at
paras. 34-35, a recognition of the authority of any partner to bind the
partnership is relevant, but the fact that the management of a partnership
rests with a single partner does not mandate the conclusion that the business
was not carried on in common. […] It may be relevant if the parties held themselves
out to third parties as partners, but it is also relevant if the parties did
not hold themselves out to third parties as being partners. Other evidence
consistent with an intention to carry on business in common includes: the
contribution of skill, knowledge or assets to a common undertaking, a joint
property interest in the subject-matter of the adventure, the sharing of
profits and losses, the filing of income tax returns as a partnership,
financial statements and joint bank accounts, as well as correspondence with
third parties: see Continental Bank, supra, at paras. 24 and 36.
…
27 In the case at bar, taken by themselves, the
partnership agreement and other documentation indicate an intention to form a
partnership. But that is not sufficient because the fundamental criteria
of a valid partnership must still be met.
[374]
In Teelucksingh v. Canada, the Tax Court of
Canada noted that the approach to the partnership test differs in the context
of Limited Partnerships, which by their very nature require that management and
control only be exercised by the general partner. Justice Miller stated:
[68] […]Obviously,
with respect to a limited partnership, the question of control and management
is somewhat different and it is only the general partner who would exercise
such control and management.
Ingredient Three: A View to
Profit
[375]
Regarding the third ingredient, “a
view to profit”, the Supreme Court of Canada in Backman emphasized that
the intentions of the parties will be the key consideration. Tax motivations
for participating in the partnership will not affect the validity of a
partnership, so long as an ancillary intention to make a profit also exists. As
stated by the Supreme Court:
22 A determination of whether
there exists a “view to profit” requires an inquiry into the intentions of the
parties entering into an alleged partnership. At the outset, it is
important to distinguish between motivation and intention. Motivation is
that which stimulates a person to act, while intention is a person’s objective
or purpose in acting. This Court has repeatedly held that a tax
motivation does not derogate from the validity of transactions for tax
purposes: Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Canada
v. Antosko, [1994] 2 S.C.R. 312; Stubart Investments Ltd. v. The
Queen, [1984] 1 S.C.R. 536, at p. 540. Similarly, a tax
motivation will not derogate from the validity of a partnership where the
essential ingredients of a partnership are otherwise present: Continental
Bank, supra,
at paras. 50-52. The question at this stage is whether the
taxpayer can establish an intention to make a profit, whether or not he was
motivated by tax considerations. For further discussion, see D.
Nathanson, “Tax Motive Kills Partnership: Spire Freezers (cf.
Continental Bank)” (1999), 7 Tax Litigation 458.
23 Moreover,
in Continental
Bank, supra,
this Court held that a taxpayer’s overriding intention is not determinative of
whether the essential ingredient of “view to profit” is present. It will
be sufficient for a taxpayer to show that there was an ancillary profit-making
purpose. This flows from the following observation made in Lindley
& Banks on Partnership, supra, at pp. 10‑11, and
adopted in Continental
Bank, supra,
at para. 43:
. . . if a partnership is formed with some other
predominant motive [other than the acquisition of profit],e.g., tax
avoidance, but there is also a real, albeit ancillary, profit element, it may
be permissible to infer that the business is being carried on "with a view
of profit." If, however, it could be shown that the sole reason for
the creation of a partnership was to give a particular partner the
"benefit" of, say, a tax loss, when there was no contemplation in the
parties' minds that a profit . . . would be derived from carrying on the
relevant business, the partnership could not in any real sense be said to have
been formed "with a view of profit".
24 An ancillary purpose is by
definition a lesser or subordinate purpose. In determining whether there is a
view to profit courts should not adopt or employ a purely quantitative
analysis. The amount of the expected profit is only one of several
factors to consider. The law of partnership does not require a net gain
over a determined period in order to establish that an activity is with a view
to profit. For example, a partnership may incur initial losses
during the start up phase of its enterprise. That does not mean that the
relationship is not one of partnership, so long as the enterprise is carried on
with a view to profit in the future. Therefore, where a partnership is
formed with the predominant motive of acquiring a tax loss, it is not necessary
to show an intention to profit by the amount necessary to recoup the acquired
losses or produce a net gain.
[376]
Spire Freezers Ltd. also emphasized that a tax motivation, or the fact
that a business would incur significant losses initially, was not sufficient to
find that there was no view to profit so long as an ancillary profit making
intention existed. The Court stated:
25 […] the fact that the appellants admitted that they
principally entered into the transactions to reduce their Canadian income tax
liability by gaining access to the losses does not prevent a finding of
partnership.
26 The majority of the Court of
Appeal also rejected the notion that there was a view to profit because the
parties did not contemplate recouping the initial loss. However, the
determination of the existence of a view to profit is not a matter of strictly
quantitative analysis. The quantum of the initial loss compared to the
anticipated profit does not negate the holding of partnership in this case. The
law of partnership does not require a net gain over a determined period in
order to establish that an activity is with a view to profit. For example, a
partnership may incur initial losses during the start-up phase of its
enterprise. That does not mean that the relationship is not one of partnership,
so long as the enterprise
is carried on with a view to profit in the future. […]
[377]
It is not sufficient, however, to
ground a finding that there was “a view to profit” if the parties’ singular
intention was to access significant tax benefits, without any actual business
being carried out in common with a view to profit. Such was the determination
in Rouleau v. The Queen, and McKeown v. The Queen. As
stated by Justice Archambault in Rouleau:
[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.
[378]
As stated in Teelucksingh,
the view to profit is not necessarily limited to when the business is in
partnership form:
74 […]
a view to profit is a view to profit from the business or enterprise, not
strictly from the particular form of legal entity.
75 […]
The fact that no profit was made while in the partnership form is not
sufficient to deny this form of arrangement its legitimacy. This was a cleverly
crafted investment vehicle, premised on the existence of a real business.
The Proper Approach to the Partnership Inquiry
[379]
The Supreme Court of Canada in Backman
provided guidance as to how the partnership inquiry should be conducted,
emphasizing the need to identify the true contract between the parties and
their intentions within the factual context of each case. The Court stated:
25 As
adopted in Continental Bank, supra,
at para. 23, and stated in Lindley & Banks
on Partnership, supra, at p. 73: “in determining
the existence of a partnership . . . regard must be paid to the true contract
and intention of the parties as appearing from the whole facts of the
case”. In other words, to ascertain the existence of a partnership the
courts must inquire into whether the objective, documentary evidence and the
surrounding facts, including what the parties actually did, are consistent with
a subjective intention to carry on business in common with a view to
profit.
26 Courts
must be pragmatic in their approach to the three essential ingredients of
partnership. Whether a partnership has been established in a particular
case will depend on an analysis and weighing of the relevant factors in the
context of all the surrounding circumstances. That the alleged
partnership must be considered in the totality of the circumstances prevents
the mechanical application of a checklist or a test with more precisely defined
parameters.
[380]
In Rezek v. Canada, the
Federal Court of Appeal also discussed the role of intention and documentation
in the partnership inquiry and emphasized that regardless of whether an
agreement exists, the focus will always be on whether the facts at hand show
that the three essential elements for a partnership are met:
[80] A declared intention of the parties
that there is no partnership relationship will carry little or no weight. Lindley & Banks at paragraph 5-05 quote Cozens-Hardy
M.R.'s more forceful statement in Weiner
v. Harris, [1910] 1 K.B. 285:
Two parties enter into a
transaction and say "It is hereby declared there is no partnership between
us." The Court pays no regard to that. The Court looks at the transaction
and says, "Is this, in point of law, really a partnership?". It is
not in the least conclusive that the parties have used a term or language
intended to indicate that the transaction is not that which in law it is.
[81] Nor
will the existence or non-existence of a partnership agreement be sufficient to
decide the issue. In Backman
v. The Queen, 2001 SCC 10 (CanLII), [2001] 1 S.C.R. 367 at
paragraph 27, Iacobucci and Bastarache JJ. determined that, even in the face of
a partnership agreement and other formal documentation, there was no
partnership because the fundamental criteria for a valid partnership were not
met.
[82] Sophisticated
parties may have elaborate documentation. Unsophisticated parties may not and
may also not be aware of the law of partnership. The question is always whether
there is a business carried on in common with a view to profit. If there is, a
partnership subsists at law, irrespective of the parties' stated intention, the
existence or non-existence of a partnership agreement or the parties'
understanding of the law.
(ii) Analysis
[381]
The appropriate
question then, in applying the partnerships test to the extensive evidence
presented in this case, is whether the yacht chartering Limited Partnerships were
carrying on a business in common with a view to profit. With the numerous
misrepresentations made by Mr. Bellfield et al, did the parties have a shared
intention to carry out the Limited Partnership’s business in common with a view
to profit such that the Limited Partnerships constitute valid partnerships?
Focusing on the evidence regarding the intention of the parties, with OCGC as
the general partner, and the investors as the limited partners, and on the
fundamental contractual nature of a partnership, was there a meeting of the
minds between the parties?
[382]
In addition to my
conclusion that the yacht chartering business was a fraud from beginning to end
and bore all the hallmarks of a Ponzi scheme, I also conclude that the Limited
Partnerships were not genuine partnerships in law. The three elements required
to meet the partnership test are not met. The numerous misrepresentations
provided by way of examples in the factual summary above demonstrate the
all-encompassing nature of OCGC and Mr. Bellfield’s misrepresentations, and how
they were vitiated any shared intention to enter into and carry on a
partnership relationship. I apply the three partnership factors below.
[383]
There was no “business carried on”.
There was merely a fraud perpetuated by Mr. Bellfield. This was a fraud from
beginning to end, regardless of whether some of the investors still believe
that there was a genuine yacht chartering business. The only business that
existed was the business of the fraud perpetuated by Mr. Bellfield and his
vehicle for the fraud, OCGC. The purpose of the business was to defraud the
investors and the CRA. The evidence discloses that fundamental
misrepresentations were made to investors right from the beginning in the
founding documents of each Limited Partnership. The misrepresentations were so
significant that the Offering Memoranda was fundamentally misleading so as to
render it impossible for the investors to have a meeting of the minds with the
perpetrator of the fraud. Briefly, one need only refer to the evidence of Mr.
Belchetz, who admitted that had he known that the things purportedly done in
the Offering Memorandum had not been done, he probably would not have made the
investment.
[384]
There was no business “in common”,
despite the existence of partnership contracts. These documents, and all the
documents relating to the Limited Partnerships, were riddled with fraudulent
misrepresentations. They were part of the window dressing—part of the fiction.
I query how there could be a meeting of the minds when the two parties had
different motives—Mr. Bellfield to perpetrate a fraud, and the investors to get
the benefits of a tax gimmick with a longer term ancillary view to invest in a
yacht chartering venture. How could there be a meeting of the minds when the
foundation of the scheme is fraudulent yet the investors are not aware of or are
ignorant of the fraud perpetrated on them. There can be no intention of
carrying on a business “in common” on the facts of this case.
[385]
As for the “view to profit”, there
was no view to profit for the Limited Partnerships. As stated by the
Respondent, the evidence establishes that Mr. Bellfield had the intention to
profit at the expense of the Limited Partnerships. Mr. Bellfield
never had the intention to actually pursue a venture in common with the
investors that would result in the Limited Partnerships themselves or the
investors making a profit. The number of misrepresentations he made are too
prevalent and the level of fraud too pervasive to determine otherwise. The
yacht chartering activities were so drastically under-funded, the activities so
limited and unsuccessful, the yachts so delayed and limited compared to the number
contracted for, the extensive luxury yacht chartering business promised so
large and the activities actually carried out so skeleton thin, that I can only
conclude that the sole activities pursued by OCGC were merely attempts to
create the illusion of an operating business.
(i) The Law
The Test under Subsection 18(1)
[386]
Subsection 18(1) of the
Act sets out the requirement that for expenses to be deductible, they
must have been incurred by the taxpayer for the purpose of gaining or producing
business or property income. The provision states:
18. (1) In
computing the income of a taxpayer from a business or property no deduction
shall be made in respect of
(a) an outlay
or expense except to the extent that it was made or incurred by the taxpayer
for the purpose of gaining or producing income from the business or property
[387]
Justice Iacobucci,
writing for the majority in Symes v. Canada after canvassing the relevant
jurisprudence, concluded that a purpose test, based on the language of
paragraph 18(1)(a), was the most appropriate test to apply when
evaluating whether an expense is deductible under subsection 18(1). The Court
stated:
Upon reflection, therefore, no test has been
proposed which improves upon or which substantially modifies a test derived
directly from the language of s. 18(1) (a). The analytical
trail leads back to its source, and I simply ask the following: did the
appellant incur child care expenses for the purpose of gaining or producing
income from a business?
[388]
The applicable test therefore,
is the following: were the expenses incurred for the purpose of gaining or
producing income for the Limited Partnerships.
(ii) Analysis
[389]
If I erred in
determining that the Limited Partnerships did not carry on a genuine business
which constituted a source, I conclude in the alternative that the expenses
claimed were not incurred for the purpose of operating the Limited
Partnerships’ yacht chartering business and therefore are not deductible
pursuant to subsection 18(1). Fundamental to Mr. Bellfield’s fraudulent scheme
was the creation of a documentary trail to attempt to legitimize an otherwise
illegitimate, illegal, and fraudulent presentation of expenses, and losses, all
for the purpose of advancing on the fraud to allow himself and others to sell
the Limited Partnership units.
[390]
Mr. Bellfield had to
create losses in order to perpetuate the sale of Limited Partnerships as tax
advantageous. Given that he was not actually incurring the expenses necessary
to legitimize these losses, he had to create expenses that were never incurred
in the year in which they were represented to have incurred. Or if they were
incurred, they were incurred for the mere purpose of maintaining the illusion
of a genuine business capable of delivering 36 yachts and operating a luxury chartering
business for that fleet of yachts. The expenses were a fiction!
[391]
As part of the evidence
with respect to the misinformation and the misrepresentations circulated by Mr.
Bellfield and others, a reference will be made to the financial statements
developed and massaged by Mr. Bellfield for the individual partnerships and
used by the investors as the cornerstone for their losses. Buttressed by
undisputed facts as to: a) the existence of yachts for each individual Limited
Partnership; b) the availability of yachts for use by individual Limited
Partnerships’ in the charter business; and c) the expenses allegedly incurred
and invoiced yet never actually paid for or incurred show that most expenses
were not incurred or if they were incurred, were never actually paid for
because OCGC lacked the resources to pay for these expenses.
[392]
Certainly, there were
some expenses incurred and some expenses paid for, but similar to Vankerk,
expenses that were not fictitious or phony were incurred as window dressing for
the purpose of perpetuating a fraudulent scheme. The purpose of those expenses
was to continue Mr. Bellfield’s fraudulent scheme and not to earn or produce
income. The expenses were paid for with the interest payments of the investors or
were never paid for.
[393]
Although not the
mastermind behind this massive fraud, but someone who played a key role in
maintaining and expanding it, Mr. Minchella was of the view that as long as you
had a paper trail to show that the expense was incurred or paid, that was all
that was required to justify and support the financial statements and losses
claimed. This he learned at the knee of the mastermind, Mr. Bellfield. In
preparing financial statements for the Limited Partnerships, Mr. Minchella
would go to respective Limited Partnerships’ Offering Memoranda, copy down the
expenses shown on the pro-forma statements, and insert the expenses in the
draft financial statements. The fact that these expenses were never incurred,
was not a requirement as far as Mr. Minchella was concerned, in order to be
listed in the financial statements.
[394]
The conclusions above
are more than sufficient to dispense with these appeals. I ground my finding first
in the fundamental determination that the Limited Partnerships constituted a
fraud from beginning to end and that the fraud bore the hallmarks of a Ponzi
scheme; second that Limited Partnerships were not genuine partnerships in law; and
finally, the alternative conclusion that the purpose of those expenses—if incurred—was
not to earn or produce income but rather to provide window-dressing to the
fraud.
[395]
Given the lengthy
nature of this trial, the number of parties affected by this decision, and the
efforts put in by counsel, several of the Respondent’s other alternative
arguments are also briefly canvassed below.
(i) The Test under 18(9)
[396]
Subsection 18(9) of the
Act requires that a taxpayer match in a reasonable manner any prepaid
expenses for services, interest, taxes, rent, royalty, or insurance to the year
in which those expenses relate. The provision states in part:
18. (9) Notwithstanding any other provision of
this Act,
(a) in
computing a taxpayer’s income for a taxation year from a business or property
[…], no deduction shall be made in respect of an outlay or expense to the
extent that it can reasonably be regarded as having been made or incurred
(i)
as consideration for services to be rendered after the end of the year
(ii) as, on account of, in lieu of payment of or in
satisfaction of, interest, taxes (other than taxes imposed on insurance
premiums), rent or royalties in respect of a period that is after the end of
the year, or
(iii) as consideration for insurance in respect of a period
after the end of the year[…]
(b) such portion of each outlay or
expense (other than an outlay or expense of a corporation, partnership or trust
as, on account of, in lieu of payment of or in satisfaction of, interest) made
or incurred as would, but for paragraph 18(9)(a), be deductible in
computing a taxpayer’s income for a taxation year shall be deductible in
computing the taxpayer’s income for the subsequent year to which it can
reasonably be considered to relate.
[397]
As previously
described, the documentary trail created by Mr. Bellfield to justify the tax
losses claimed had little relation to actual expenses incurred, nor to the
timing of the expenses incurred purportedly for yacht chartering purposes, and
are therefore, also precluded from deductibility pursuant to subsection 18(9).
[398]
The Respondent argues
that even if the Limited Partnerships were found to constitute sources of
income that incurred genuine losses taken at the correct time, capital cost
allowance would not be available in respect of the S/Y Garbo because the S/Y
Garbo LP never acquired the yacht.
[399]
In Hewlett Packard (Canada) Ltd. v. R., the
Federal Court of Appeal affirmed that the “classic test of acquisition” is the
one articulated by Justice Cattanach in Minister
of National Revenue v. Wardean Drilling Ltd.:
... it is my opinion
that a purchaser has acquired assets of a class in Schedule B when title has
passed, assuming that the assets exist at that time, or when the purchaser has
all the incidents of title, such as possession, use and risk, although legal
title may remain in the vendor as security for the purchase price as is the
commercial practice under conditional sales agreements. In my view the foregoing
is the proper test to determine the acquisition of property described in
Schedule B to the Income Tax Regulations.
[400]
Capital cost allowance
may be deducted pursuant to paragraph 20(1)(a) of the Act, with
the portion of the capital cost deductible prescribed by the Income Tax
Regulations. Regulation 1102(1) excludes from deductibility property that
was not acquired for an income gaining or producing purpose.
[401]
The evidence discloses that
as a key part of marketing the Limited Partnerships, capital cost allowance was
held out to be deductible right from the beginning. Albeit, when Mr. Bellfield
was caught in this misrepresentation, he had to retract but then created other
deductions to allow the losses to be substantiated.
[402]
Specifically relating
to the capital cost allowance claimed for the S/Y Garbo, the yacht was
purportedly delivered in the spring of 1986 but had to go to a dry dock for a
full year. The S/Y Garbo was not available for charters until the spring of
1987, at which point its primary charter function was to impress investors and
others. No evidence was presented that title to the S/Y Garbo was ever
acquired by the S/Y Garbo LP. While OCGC was allowed to hold title to the S/Y
Garbo, this had to be done in the interest of the S/Y Garbo LP. It was not. I
conclude that even if I erred in determining that there was no source, the
capital cost allowance claimed by the Appellant for the S/Y Garbo is not
deductible pursuant to Regulation 1102(1)(c). The yacht was only used by
OCGC as window-dressing to perpetuate the fraud and was never acquired by the
S/Y Garbo LP for income gaining or earning purposes.
[403]
A taxpayer can deduct
certain interest expenses from their income on an accrual basis under
paragraphs 18(1)(a) and 20(1)(c) of the Act. Under
subparagraph 20(1)(c)(i), the amount must be for interest paid or
payable for borrowed money used to earn business or property income.
Subparagraph 20(1)(c)(ii) allows a deduction for interest payable for
property acquired for the purpose of gaining or producing business or property
income. For amounts to qualify under both subparagraphs, the interest amounts
must be reasonable and paid or payable that year in fulfilment of a legal
obligation to pay the interest. The provision states in part:
20. (1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and
18(1)(h), in computing a taxpayer’s income for a taxation year from a business
or property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may
reasonably be regarded as applicable thereto […]
(c) an amount paid in the year or payable in respect of the
year (depending on the method regularly followed by the taxpayer in computing
the taxpayer’s income), pursuant to a legal obligation to pay interest on
(i) borrowed money used for the purpose of earning income
from a business or property (other than borrowed money used to acquire property
the income from which would be exempt or to acquire a life insurance policy),
(ii) an amount payable for property acquired for the
purpose of gaining or producing income from the property or for the purpose of
gaining or producing income from a business (other than property the income
from which would be exempt or property that is an interest in a life insurance
policy), […]
or a
reasonable amount in respect thereof, whichever is the lesser;
[404]
The Supreme Court of
Canada considered the deductibility of interest under subparagraph 20(1)(c)(i) in Shell
Canada Ltd. v. Canada,
and summarized the qualification requirements as follows:
[28] Section 20(1)(c)(i) allows taxpayers to deduct
from their income interest payments on borrowed money that is used for the
purpose of earning income from a business or property. It is an exception to s.
9 and s. 18(1)(b), which would otherwise prohibit the deduction of amounts
expended on account of capital, i.e., interest on borrowed funds used to
produce income. […] The provision has four elements: (1) the amount must be
paid in the year or be payable in the year in which it is sought to be
deducted; (2) the amount must be paid pursuant to a legal obligation to pay
interest on borrowed money; (3) the borrowed money must be used for the purpose
of earning non-exempt income from a business or property; and (4) the amount
must be reasonable, as assessed by reference to the first three requirements.
[405]
In Ludco Enterprises Ltd. v. Canada, the Supreme Court
of Canada considered the proper inquiry for the income-earning purpose test
under subparagraph 20(1)(c)(i). After canvassing a number of approaches,
the Court concluded that the question to pose was whether the taxpayer had a
reasonable expectation of income in making the investment for which the money
was borrowed. The Court stated:
[50] With respect to the plain
meaning of s. 20(1)(c)(i), the only express requirement related to
“purpose” is that borrowed money must have been “used for the purpose of
earning income”. Apart from the use of the definite article “the”, which
on closer analysis is hardly conclusive of the issue before us, nothing in the
text of the provision indicates that the requisite purpose must be the
exclusive, primary or dominant purpose, or that multiple purposes are to be
somehow ranked in importance in order to determine the taxpayer’s “real”
purpose. Therefore, it is perfectly consistent with the language of s.
20(1)(c)(i) that a taxpayer who uses borrowed money to make an
investment for more than one purpose may be entitled to deduct interest charges
provided that one of those purposes is to earn income.
…
[54] Having determined that an
ancillary purpose to earn income can provide the requisite purpose for interest
deductibility, the question still remains as to how courts should go about
identifying whether the requisite purpose of earning income is present.
What standard should be applied? In the interpretation of the Act, as in
other areas of law, where purpose or intention behind actions is to be
ascertained, courts should objectively determine the nature of the purpose,
guided by both subjective and objective manifestations of purpose: see Symes,
supra, at p. 736; Continental Bank, supra, at para. 45; Backman,
supra, at para. 25; Spire Freezers, supra, at para. 27.
In the result, the requisite test to determine the purpose for
interest deductibility under s. 20(1)(c)(i) is whether, considering all
the circumstances, the taxpayer had a reasonable expectation of income at the
time the investment was made.
[Emphasis
added]
[406]
The distinction
between subparagraph 20(1)(c)(i) and subparagraph 20(1)(c)(ii) is explained in the Tax Court of Canada decision, Penn Ventilator Canada Ltd. v. The Queen. Justice Lamarre Proulx concluding
that based on the Supreme Court of Canada determination in Minister of National Revenue v. TE McCool Ltd., that a promissory note does not constitute borrowed
money, subparagraph 20(1)(c)(i) could not apply to interest paid on a
promissory note. Justice Lamarre Proulx then went on to hold that subparagraph
20(1)(c)(ii) applied in that case so as to make the interest on the promissory
note deductible.
[407]
Shell is also frequently cited to express the
principle that a taxpayer’s legal relationship must be respected except
where otherwise required by a provision of the Act or where the legal
relationships are a sham. As stated by the Supreme Court of Canada:
[39] This
Court has repeatedly held that courts must be sensitive to the economic
realities of a particular transaction, rather than being bound to what first
appears to be its legal form: Bronfman Trust, supra, at pp. 52-53, per Dickson C.J.;Tennant, supra, at para. 26, per Iacobucci J. But there are at
least two caveats to this rule. First, this Court
has never held that the economic realities of a situation can be used to
recharacterize a taxpayer’s bona
fide legal
relationships. To the contrary, we have held that, absent a specific
provision of the Act to the contrary or a finding that they are a sham, the
taxpayer’s legal relationships must be respected in tax cases.
Recharacterization is only permissible if the label attached by the taxpayer to
the particular transaction does not properly reflect its actual legal effect: Continental Bank Leasing Corp. v.
Canada, [1998] 2 S.C.R. 298, at para. 21, per Bastarache J.
[408]
I next consider the
Respondent’s alternative argument regarding the deductibility of the Appellants’
claimed interest expenses under subparagraph 20(1)(c)(ii). To qualify under subparagraph 20(1)(c)(ii), the interest must meet the same four
elements cited above from Shell: 1) the amount must paid or payable in
the year the deduction is sought; 2) there must be a legal obligation to pay
interest on the amount paid or payable; 3) the amount must be incurred for a
non-exempt income earning purpose; and 4) the amount must be reasonable. There
is a slight modification required to the purpose test for the interest amount
to qualify under subparagraph 20(1)(c)(ii). The question to be asked is:
was there a reasonable expectation of income at the time the property
was acquired for business or property (non-exempt) income-earning purposes? As
explained in Ludco, income-earning does not need to be the primary or
dominant purpose of the investment.
[409]
I determine that only three out of
four parts of the test are met. First, the amounts claimed as interest relate
to the year in which the deductions are sought. Second, as asserted above, I
conclude that there was no source of business income because the investors were
defrauded from beginning to end. The Supreme Court of Canada in Ludco directs
my inquiry to the objective and subjective manifestations of the taxpayers’
intentions at the time the investment was made. I determine that despite
the fact that the Appellants’ were defrauded of their interest payments, they
had a reasonable expectation of income at the time of their investment
as required under subparagraph 20(1)(c)(ii) and outlined in Ludco.
The Appellants’ expectation of income was only in the long-term and was an
ancillary purpose of an otherwise tax-motivated investment, but it nonetheless
qualifies under the statute. Third, I conclude that the interest amounts were
reasonable.
[410]
Ultimately, however, I
conclude that the fourth requirement is not met. The interest expenses are not
deductible under subparagraph 20(1)(c)(ii) because there was no legal
obligation to pay interest. The promissory notes are based on the fundamental
misrepresentation that they were to act as security for loans purportedly
arranged by OCGC. OCGC claimed that these purported loans were to finance the
purchase price of a Limited Partnership unit, which in turn would be used by
OCGC to capitalize each Limited Partnership and finance its operations. No such
loans existed, and the Limited Partnerships were never capitalized. The
Appellants entered into the promissory notes based on fraudulent
misrepresentations, and any contractual obligation to pay interest amounts is
vitiated by fraud.
(i) The Law
[411]
The S/Y Close
Encounters LP, along with the other partnerships of the same type, attempted to
circumvent the at-risk rules introduced as of February 25, 1986. Subsection
96(2.1) limited the deductibility of a partner’s losses to the amount of
capital that partner invested, subject to certain adjustments. The provision
states in part:
96.(2.1) Notwithstanding subsection (1), where a taxpayer
is, at any time in a taxation year, a limited partner of a partnership, the
amount, if any, by which
(a) the total of all amounts each of which is the
taxpayer’s share of the amount of any loss of the partnership, determined in
accordance with subsection 96(1), for a fiscal period of the partnership ending
in the taxation year from a business (other than a farming business) or from
property
exceeds
(b) the amount, if any, by which
(i) the taxpayer’s at-risk amount in respect of the
partnership at the end of the fiscal period […]
shall
(c) not be deducted in computing the taxpayer’s
income for the year,
(d) not be included in computing the taxpayer’s non-capital
loss for the year, and
(e) be deemed
to be the taxpayer’s limited partnership loss in respect of the partnership for
the year.
[412]
The grandfathering
provisions that the S/Y Close Encounters LP and other Type 3 Limited
Partnerships rely on are found in subsection 96(2.5). The requirement that must
be met to avoid the at-risk rules is that the partnership needs to have been “actively carrying on business on a regular and
continuous basis immediately before February 25, 1986 and continuously
thereafter”.
[413]
In Goren v. R., Justice Bowman (as he then was)
determined that a Limited Partnership was not exempt from the at-risk rule
because it did not meet the grandfathering requirement. The Court stated:
9 I
have great difficulty in seeing how THCLP can be said to have been regularly
carrying on the business of operating a health care centre on February 26, 1986
when construction of the facility was not completed on that date and it was not
the owner of it. THCLP had not received the money to acquire the home and in
fact it was still owned by Medi-Villas. There of course have been cases such as
Minister of National Revenue v. M.P. Drilling Ltd. (1976), 76 D.T.C.
6028 (Fed. C.A.) and Gartry v. R. (1994), 94 D.T.C. 1947 (T.C.C.) where
it was held that a business had been commenced before the operation started to
generate revenues, but in such cases the activities of the taxpayer including
the expenditures of moneys, the acquisition of assets and the creation of a
business structure had advanced to the point at which, as a matter of
commercial reality, it could be said that it had commenced the process of
operating a profit making entity.
10 None
of these factors existed here on the relevant date of February 26, 1986. True,
subscription forms had been received but the partnership was essentially only a
shell with no capital but anticipation that it would acquire a nursing home
that it intended to operate. It is difficult to see how Parliament
could have made its intention any clearer that for the members of a limited
partnership to avoid the application of the at-risk rules the partnership had
to be actively engaged in the business that was expected to generate the
income. While cases such as MP Drilling and Gartry may hold
that a business may commence at a date before the income producing activities
start, the words “actively” and “on a regular and a continuous basis” connote
(indeed, denote) a degree of commercial activity that it is impossible to find
here.
[Emphasis
added]
(ii) Analysis
[414]
The evidence
demonstrates that regardless of all other conclusions, the Type 3 Limited
Partnerships were not carrying on a business on a regular and continuous basis
before the at-risk rules were introduced on February 26, 1986. As described in Goren,
it takes more than simply the subscription of units in a Limited Partnership to
carry on a business on a regular and continuous basis. All that occurred before
February 1986 with respect to the Type 3 Limited Partnerships, was the
subscription of units by an entity operating and controlled by Mr. Bellfield. None
of the expenses incurred prior to the grandfathering date were incurred for the
purpose of the Type 3 Limited Partnerships earning or gaining income. This is
simply another example of papering the file in an attempt to legitimize the
fraudulent scheme and allow Mr. Bellfield another year of selling Limited
Partnerships to continue the Ponzi scheme despite the introduction of new tax
rules.
(i) The Law
[415]
Section 67 of the Act
provides a general limitation on the deductibility of expenses or outlays
that are otherwise deductible under the Act, requiring that the expenses
be reasonable in circumstances. The provision states:
67. In computing income, no deduction shall be
made in respect of an outlay or expense in respect of which any amount is
otherwise deductible under this Act, except to the extent that the outlay or
expense was reasonable in the circumstances.
[416]
The Appellants
accurately summarized the law on this issue at page 35–36
of their Final Submissions:
In a leading
case on the section, the Court in Gabco Limited v. Canada (Minister of National Revenue - M.N.R.) concluded:
It is not a
question of the Minister or this Court substituting its judgment for what is a
reasonable amount to pay, but rather a case of the Minister or the Court coming
to the conclusion that no reasonable business man would have contracted to pay
such an amount having only the business consideration of the appellant in mind.
Reasonableness
measures the expense in terms of its magnitude or quantum. While there may be
a subjective element on the part of the trier of fact, there should be a search
for the objective component.
Mohammad v. Canada, [1997] F.C.J. No.
1020 (F.C.A.)at para. 28, […]
The
determination of whether an expense is “reasonable” should be made as of the
time the expenditure was made and not with the benefit of hindsight. Further,
reasonableness is an open-ended concept that requires the judgment and common
sense of an objective and knowledgeable observer with reference to the open marketplace.
Williams v.
Canada, 2009 TCC 93 at para. 16, [Williams] […]
Safety Boss
Ltd. v. Canada, [2000] T.C.J. No. 18 (T.C.C.) at para. 27 […]
Simply paying more than fair market
value for a product is not necessarily unreasonable. On this point, the
Federal Court of Appeal has concluded:
While it may be
true, as suggested in Mohammad, that paying fair market value for
something is prima facie reasonable, I am unable to agree with the Crown that
it necessarily follows that paying more than fair market value for something is
unreasonable. There may be circumstances in which a decision to pay more than
fair market value for something is a reasonable decision. [emphasis
added]
Petro-Canada v. Canada, 2004 FCA 158 at
para. 64, [Petro] […]
…
It is trite law
that it is not the court’s position to second guess the business judgment of
taxpayers. Often dubbed the Business Judgment Rule, errors in business
judgment, unless the Act stipulates otherwise, do not prohibit one from
claiming deductions for losses arising from those errors.
Tonn v. Canada, [1995] F.C.J. No. 1635
(C.A.) at para. 39 […]
Similarly,
section 67 is not a mechanism to reduce expenses based on poor business
judgement. Accordingly, expenses will not be denied simply because a person,
with the benefit of hindsight, made a poor business decision.
Hammill v.
Canada, [2005] F.C.J. No. 1197 (F.C.A.) at paras. 52-53,
[Hammill], […] Williams, supra at para. 16 […]
[417]
The Respondent in turn,
amongst other arguments, referred to the oft-cited quote by the Federal Court
of Appeal in Hammill regarding the application of section 67:
53. The choice of words (reduce or eliminate)
is not accidental. The Supreme Court was setting-up section 67 as the proper
means of testing the reasonableness of an expense once a business has been
found to exist. It was doing so after having explained that at the first level
of inquiry (i.e. the existence of a source of income and the relationship
between an expense and that source) courts ought not to second guess the
business judgment of the taxpayer (Stewart, supra, paragraphs 55, 56 and 57).
Section 67 was identified as the statutory authority pursuant to which an
inquiry could be made as to the reasonableness of an expense. In my view, the
Supreme Court in Stewart acknowledged that there is no inherent limit to the
application of section 67, and that in the appropriate circumstances, it can be
used to deny the whole of an expense, if it is shown to be unreasonable.
(ii) Analysis
[418]
By any measure of
common sensibility, the expenses allegedly incurred were not reasonable in the
circumstances and are barred from deductibility under section 67 because many
of them were not incurred in whole or in part, or if they were incurred, were
not incurred for a profit motive other than for a profit to Mr. Bellfield. All
in all, the expenses were not reasonable in the circumstances in consideration of
the entire scheme. In terms of the expenses themselves, recorded on the financial
statements and relied upon by the investors in claiming their losses, there was
no regard on Mr. Bellfield or OCGC’s part as to a) whether they were legitimate
or b) if they were reasonable in quantum for services rendered, if they were
rendered at all. Many of the amounts claimed appeared to be entirely
manufactured and had no basis in reality.
[419]
I decline to address
every alternative argument raised by the Respondent. My canvassing of the legal
issues herein and my resulting conclusions, namely the lack of a source of
income, the non-existence of genuine Limited Partnerships, the further
determination that the expenses, when incurred, were not incurred for business
purposes, as well as the alternative arguments I addressed briefly, are more
than sufficient to dispose of this appeal. For the reasons outlined, the four
appeals are dismissed.
[420]
The Court will receive
submissions on costs in writing within 45 days of the date of this decision
with written submissions limited to fifteen pages of text. Costs submissions
should address the following issues: a) should either party be entitled to
costs; b) if the answer to the first question is in the affirmative, what type
of costs? That is, costs based on the Tariff, or some costs award other than
the Tariff based on Rule 147 including consideration of settlement offers, if
any. Any evidence on the issue of costs should be by way of affidavit with each
party entitled to put in a response affidavit within 15 days of receiving the
other party’s cost submissions. If the parties want to be heard orally on the
issue of costs, please advise the Court in writing, in addition to written
submissions, at the time of filing the written submissions and the Court will
advise if it will entertain oral submissions.
Signed at Ottawa, Ontario, this 7th day
of January, 2014.
“E.P. Rossiter”
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