Citation: 2007TCC650
Date: 20071023
Dockets: 2004-1450(IT)I
98-2962(IT)I
98-3234(IT)I
2002-1753(IT)I
BETWEEN:
MARJORIE LAUGER,
VAN CHUONG LUU,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Paris J.
[1] These appeals were
heard on common evidence. The Appellant Marjorie Lauger is appealing from
assessments made for the 1988, 1989, 1990 and 1991 taxation years by the
Minister of National Revenue ("the Minister").
The Appellant Van Chuong Luu is appealing from assessments made
by the Minister for the 1989 and 1990 taxation years.
[2] The Appellants
claimed business losses and investment tax credits in connection with their
investments in two partnerships: E.C.T. Systems ("ECT") and F.T.N.
Systems (" FTN"). ECT and FTN allegedly did scientific research and
experimental development work through subcontractors. ECT operated in 1989 and
1990, and FTN allegedly operated in
1990, 1991 and 1992.
[3] Ms. Lauger invested
in ECT in 1990 and invested in FTN in 1990 and 1991. Mr. Luu invested in
ECT in 1989.
[4] The amounts
invested and claimed in their income tax returns are as follows:
|
|
Marjorie Lauger
|
Van Chuong Luu
|
|
|
E.C.T.
Systems
|
F.T.N.
Systems
|
F.T.N.
Systems
|
E.C.T.
Systems
|
|
Taxation year
|
1990
|
1990
|
1991
|
1989
|
|
|
|
|
|
|
|
Amounts invested
|
$1,000
|
$10,000
|
$5,000
|
$10,000
|
|
|
|
|
|
|
|
Amounts claimed
|
|
|
|
|
|
Business loss
|
$962
|
$9,692
|
$3,904
|
$10,037
|
|
Investment tax credit
|
$194
|
$1,939
|
$966
|
$1,958
|
|
|
|
|
|
|
[5] In addition, Ms. Lauger
carried back part of her 1990 investment tax credit claim to 1988 and 1989. These
carry-backs amounted to $29 for 1988 and $2,024 for 1989. For the 1990 taxation
year, Mr. Luu reported a capital gain from the disposition of his shares
in ECT and claimed a capital gains deduction.
The basis of the
assessments
[6] For ECT, the Minister
allowed the business losses claimed in respect of Mr. Luu's 1989 taxation
year and Ms. Lauger's 1990 taxation year. However, he disallowed the
related investment tax credits in their entirety, on the basis that the
Appellants were passive specified members of the two partnerships within the
meaning of subsection 248(1) of the Income Tax Act
("the Act") since they were not actively engaged in ECT or FTN's activities on a
regular, continuous and substantial basis.
[7] For Mr. Luu's 1990 taxation
year, the Minister made certain adjustments to the capital gains from the sale
of his ECT shares.
[8] For Ms. Lauger's
1990 taxation year, the Minister allowed part of the business loss that she
claimed in respect of FTN, and disallowed the related investment tax credit in
its entirety, for the following reasons:
(i) A $1,722,000 expense claimed in calculating the
partnership's business loss was a fictitious expense that was not incurred by
the partnership for the purposes of scientific research and experimental
development or to derive income from a business or property, so this warranted
the disallowance of the portion of the business loss that stemmed from this
expense, and the disallowance of the related investment tax credit.
(ii) The
members of the partnership were passive specified members because they were not
actively engaged in FTN's
activities on a regular, continuous and substantial basis, so this warranted
the complete disallowance of the investment tax credit claimed by the members
of the partnership.
Consequently, the Minister
disallowed the carry-backs of Ms. Lauger's 1990 investment tax credits to the
1988 and 1989 taxation years.
[9] For
Ms. Lauger's 1991 taxation year, the Minister disallowed the entire
business loss that she claimed in respect of FTN, and the entire investment tax
credit related to that loss, for the following reasons:
(i) The
partnership did not carry on any business, so this warranted the complete
disallowance of the partnership's business loss and the related investment tax
credit.
(ii) The
partners were limited partners and specified members of the partnership, so
this warranted the complete disallowance of the partnership's business loss and
of the related investment tax credit.
(iii) The
partners were passive specified members of the partnership because they were
not actively engaged in FTN's activities on a regular, continuous and substantial
basis, so this warranted the complete disallowance of the investment tax credit
claimed by the members of the partnership.
(iv) The
partnership's scientific research and experimental development project was not
an eligible scientific research and experimental development project, so this
warranted the complete disallowance of the investment tax credit claimed by the
members of the partnership.
Additional arguments
[10] The Respondent in
the instant case is relying on certain additional arguments with regard to
Mr. Luu's 1989 taxation year and Ms. Lauger's 1990 and 1991 taxation
years. She submits that the Appellants were not members of a genuine
partnership in that they had no intention of forming a partnership contract, and
this, she submits, warrants the complete disallowance of the business loss that
they claimed with respect to the partnerships in issue, and the complete
disallowance of the related investment tax credit.
[11] With respect to Mr.
Luu's 1989 taxation year and Ms. Lauger's 1990 taxation year, the
Respondent further submits as follows:
- The
partnerships in issue did not carry on any business, so this warrants the
complete disallowance of the business loss claimed by the Appellants in respect
of the partnerships, and the complete disallowance of the related investment
tax credit.
- If
the Appellants were partners, they were specified limited partners of the
partnerships in issue, so this warrants the complete disallowance of the
business loss that they claimed in respect of these partnerships, and the
complete disallowance of the related investment tax credit.
Both arguments formed part
of the basis of Ms. Lauger's 1991 assessment.
[12] Counsel for the
Respondent acknowledges that the burden of proving the facts on which the additional
arguments are based is on the Respondent. The right to raise these new
arguments is set out in subsection 152(9) of the Act. Counsel for the
Respondent also acknowledges that even if the Court accepts these new
arguments, the amounts of the assessments cannot increase.
Facts
[13] ECT and FTN were
among 19 Zuniq Group partnerships that were used as scientific research and
experimental development tax shelters between 1986 and 1992. In
addition to these partnerships, Zuniq Group, a group of interrelated
corporations and partnerships headed by Hien Vohoang, encompassed various
associated corporations that supposedly performed research contracts
subcontracted out by the partnerships. Hien Vohoang managed Zuniq Group
with the help of some of his relatives. Mr. Vohoang died in 1993.
[14] From 1986 to 1992, Zuniq
Group created new partnerships each year to obtain funds to do computer science
research. In all, nearly 870 people invested in these partnerships. As I
stated, the entire execution of the research and development undertaken by
these partnerships was entrusted to subcontractors, all of which were Zuniq
Group corporations. The funds raised through the sale of the partnership shares
were transferred to the subcontractors in the same year that those shares were
sold. The following year, the partners' shares were bought back by a
corporation called Glenrock Investments Ltd. for 50% of their price.
[15] In certain cases, including
those of ECT and FTN, the
Zuniq Group partnerships operated for more than a year and undertook a
scientific research and experimental development program each year in relation
to the main project. In those cases, the partnership shares were sold
each year and were generally bought back the following year. At the end of that
period, the partnerships ceased operations.
[16] The ECT research
project was called "DAMDES" and involved the development of an expert
system for the diagnosis and maintenance of avionics systems. ECT had 216
partners in 1989, and, in 1990, 58 people purchased some of its shares.
[17] The FTN project was
called "MEDIA ENGINE" and included the development of a
programmable graphical interface system for medical applications. 146
people became partners of FTN in 1990. New shares were sold to 88 of those 146
partners in 1991, and to an unknown number of investors in 1992.
[18] For the 1989 and
1990 taxation years, the Minister determined that the DAMDES and MEDIA ENGINE
projects constituted eligible scientific research and experimental development
under section 2900 of the Income Tax Regulations ("the Regulations").
However, in 1991, the Canada Revenue Agency auditor was unable to obtain
documentation concerning the work done on the MEDIA ENGINE project, and
the work was determined to be ineligible for the purposes of section 2900.
The Appellants'
arguments
Mr. Luu
[19] Mr. Luu is not
disputing that he was a passive specified member of the ECT partnership, nor is
he disputing the merits of the assessment in issue. He feels that he is a
victim of a scam made possible by uncertainty in the application of the
provisions of the Act governing scientific research and experimental
development. He claims that he was in good faith, and asks the Court to take
account of this and render a "fair and equitable" decision in his
regard.
[20] Mr. Luu also asks
that the Court order the Respondent to permit him to become part of a settlement
offer that the Minister proposed to all those who invested in ECT and in the
other scientific research and experimental development partnerships that were affected
by the reassessments. The investors were given until February 1997 to accept
the settlement offer, but Mr. Luu did not do so.
Ms. Lauger
[21] Ms. Lauger submits that she was engaged in the activities of both the ECT and FTN
partnerships on an active, regular and continuous basis throughout the period in
which she was a member thereof. Consequently, she says that she was not a
passive specified member within the definition in subsection 248(1) of the
Act.
[22] Mr. Lauger
further submits that the Respondent has not proven that FTN did not incur all the
research and development expenses claimed in 1990. In her submission, FTN granted
research and development projects to subcontractors, and the work was actually
done by those subcontractors.
[23] She also says that
the documents that she adduced with respect to the MEDIA ENGINE project,
which was developed by FTN, show that the research done by FTN in 1991 was eligible
scientific research and experimental development under the Act.
[24] Ms. Lauger submits
that FTN was carrying on a
business to develop a graphics card, and that she was personally engaged in that
business. She also asserts that the Minister accepted the financial statements
of the ECT and FTN partnerships, and that, since the Minister did not go after the
partnerships, FTN was
carrying on a business that was a source of income under the Act.
[25] Lastly, Ms. Lauger
complains about the lengthy delays in the file, and the fact that she never had
the opportunity to meet the Minister's officers to explain her position.
Apparently, she did not have the opportunity to explain the circumstances of
her involvement in ECT and FTN to the objections officer at Revenue Canada because the letter
requesting that information was lost in the mail. She therefore asks that this
Court recommend that the Minister reduce the interest and penalties in relation
to the assessments.
Analysis
[26] The first issue that
I propose to address is whether the Appellants were "specified
members" of the partnerships in issue, under paragraph (b) of the
definition of that term in subsection 248(1) of the Act, which pertains to
what are known as "passive specified members". The definition reads,
in part, as follows:
"specified member" of a partnership in a fiscal period or taxation year of the
partnership, as the case may be, means
. . .
(b) any member of the partnership,
other than a member who is
(i) actively engaged in those activities of the partnership business
that are other than the financing of the partnership business, or
. . .
on a regular, continuous and
substantial basis throughout that part of the period or year during which the
business of the partnership is ordinarily carried on and during which the
member is a member of the partnership;
[27] Under subsections 127(8)
and (9) of the Act, if a member of the partnership is a specified member, that
member is not entitled to an investment tax credit in respect of the scientific
research and experimental development expenses.
Mr. Luu
[28] Mr. Luu does
not dispute that he is a passive specified member, and the evidence shows that
his involvement in the activities of the ECT partnership in 1989 was neither
active, nor regular, nor continuous, nor substantial.
[29] Like the other ECT
investors, Mr. Luu received certain diskettes from ECT about learning how to
use basic software like Excel and MS-DOS, and was asked to do certain exercises
on the diskettes and fill out a participation form in that regard. Mr. Luu
did not recall the exact nature of these activities, and said that he simply
did what he was asked to do.
[30] Claude Papion, the
scientific expert who testified for the Respondent and analyzed ECT and FTN's scientific research
and experimental development projects at the Minister's request, concluded that
the activities of ECT's partner participation program (and of FTN's, in fact)
were not even slightly relevant to the partnerships' research projects, and
contributed nothing to their advancement. In short, the participation
program merely served to create the illusion that ECT's partners were actively
engaged in its activities.
[31] The evidence shows
that Mr. Luu was not actively engaged in ECT's research project or in any
other activity of the partnership on a regular, continuous or substantial
basis.
[32] In light of my
conclusion, it is not necessary to consider the additional arguments raised by
the Respondent with respect to Mr. Luu's assessments.
[33] Lastly, the Court
does not have jurisdiction to order the Respondent to permit Mr. Luu to take
part in the settlement that the Minister offered the investors until 1997.
Counsel for the Respondent specified at the hearing that the Minister ceased to
offer the settlement proposal as of February 1997. I must decide whether the
assessments are well-founded or not, and the settlement offer is not one of the
elements that I must take into account in doing so.
Ms. Lauger
[34] My analysis of Ms.
Lauger's involvement in the activities of ECT and FTN must start with an examination of
the evidence regarding both partnerships' activities.
[35] As far as ECT is
concerned, that evidence shows that the partnership agreement was executed on
October 20, 1989, and that 3,474.9 shares were sold to 216
investors at a price of $1,000 per share, for a total contribution of $3,474,900.
On November 20, 1989, ECT entered into a contract with Dias Informatique Inc.,
a Zuniq Group corporation, under which Dias was to carry out scientific research
and experimental development work for ECT for $3,475,000. Dias, in turn,
entered into subcontracts with six other Zuniq Group corporations for this
research.
[36] In ECT's financial
statements for the period ended on December 31, 1989, there are only three
operating expenses:
|
Scientific research and
experimental development
expenses:
|
$3,477,606.00
|
|
Market research and study
|
$5,000.00
|
|
Bank charges
|
$63.00
|
[37] The research and
development expenses were paid to Dias in full in December 1989.
In January 1990, the investors received an offer from Glenrock Investments Ltd.
to purchase their shares for 50% of the amount originally paid.
[38] For 1990 in the case of ECT and 1990 and
1991 in the case of FTN, the evidence disclosed no continuous activity other
than the raising of funds from investors and the granting of research
contracts.
[39] In 1990, ECT raised $548,000 in
contributions from partners and entered into a $548,000 research contract with Dias
on November 16, 1990. The only other expenses listed on ECT's
financial statements for that year were $224 in bank charges and $2,112 for a
market study. Dias entered into research subcontracts with two other Zuniq
Group corporations.
[40] In 1990, FTN raised $3,040,000 in
contributions from partners, and paid $3,039,000 under a $6,000,000 research
contract with Zuniq Corp. (another Zuniq Group corporation). The
only other expense in FTN's financial statements for that year was
$52 in bank charges. Zuniq Corp. entrusted the research to five other Zuniq
Group corporations.
[41] In 1991, FTN raised $1,843,500 from its
partners and paid the same amount to Zuniq Corp. in respect of a research
contract. Once again, its only other expense in 1991 was $100 in bank charges.
[42] Ms. Lauger confirmed
that the FTN and ECT partnerships
were started up by Mr. Vohoang to obtain funds for scientific research and
experimental development. The plan was to entrust the research to
subcontractors.
[43] All of this leads me
to believe that, apart from raising funds from investors and granting research
subcontracts to Dias or Zuniq Corp., ECT and FTN had very few activities,
and that such activities as did exist were neither regular nor continuous.
Thus, the ECT and FTN partners
could not possibly have been engaged in the business of the two partnerships on
an active, continuous and regular basis.
[44] This fact is
emphasized by the testimony that Ms. Lauger gave upon being cross‑examined
about FTN's activities.
[TRANSLATION]
Q. Okay. So in
1990, the FTN partnership, aside from raising money
and sending it to the subcontractors...
A. There was
research work.
Q. ...that's all
that went on?
A. With the FTN
partnership, there were research contracts, there was research being done.
Q. Apart from the
money that was transferred to the subcontractors...
A. Yes.
Q. ...there was
nothing done within the partnership?
A. There was
research work...
Q. By the
subcontractors?
A. ...the
subcontractors worked for FTN, the project manager looked after
organizing all of that, and gathering the information, precisely in order to
conclude the project, that it did not work.
Q. Was the project
manager Mr. Vohoang?
A. Yes.
(Transcript, June 29, 2006, at pages 33 and 34)
[45] Even if, contrary to
what I believe, one could consider that there was regular and continuous
activity in the ECT and FTN partnerships during the years in issue, the evidence does
not disclose active, regular and continuous engagement by Ms. Lauger in
the partnerships.
[46] Ms. Lauger testified that she worked
directly with Mr. Vohoang for Zuniq Group from April 1989 to November 1993. She
was Mr. Vohoang's executive secretary, and performed the following duties:
- performing day-to-day
administrative tasks to assist Mr. Vohoang
- coordinating the circulation
of information internally and with the research teams
- preparing and revising correspondence,
reports and minutes of the company's meetings
- doing research of
different kinds
- compiling data
- preparing documents on
computer science
- organizing Mr. Vohoang's
appointments and meetings
- following up on certain
files
- meeting with people or
groups on his behalf to discuss issues related to a variety of research work
-signing project-related
documents under a power of attorney
[47] After that, Ms. Lauger described her involvement
in the ECT and FTN partnerships. According to her testimony, she:
- verified scientific
reports concerning different projects in progress
- collected analytical data
from researchers
- was involved in progress
meetings
- managed the work
timetable
- analyzed the data
compiled by the researchers
- was involved in making
experimental prototypes and analyzing and testing them
- analyzed the costs
associated with project changes proposed by the researchers
- did computer-aided
modelling
- developed a conclusion
concerning the feasibility and technical success of the project
- compiled test results
- analyzed time sheets and
the log book
- analyzed the costs
associated with the changes proposed by the researchers in order to optimize
the outcome of the research
- made comments on the
graphical aspects
- followed up on the
progress and tested the functionalities
- met with the equipment
vendor representatives
- analyzed benchmarks in
order to confirm the technological advancement of the project
- tabulated the cost of equipment
and components necessary for the research work
- verified whether the
projects were on budget
- attended computer shows
[48] She said that she
always worked under the direction of Mr. Vohoang, who managed all projects
undertaken by Zuniq Group partnerships.
[49] In addition, it
appears that Ms. Lauger performed
work for ECT under the partner participation program that I described in
relation to Mr. Luu, and that she performed work for FTN under a virtually identical program. She tendered a
form that she filled out in 1991, setting out the details of her activities under
FTN's program for that year. Ms. Lauger spent a total of 35 hours and 15
minutes on these activities.
[50] As for the
documents tendered in evidence, Exhibit I‑4, tab 47
states that Ms. Lauger was appointed director of the ECT project at an
unknown date, but she admitted, on cross-examination, that she did not perform
the duties of this position, apart from signing certain documents as directed
by Mr. Vohoang and answering investors' calls. The fact that Ms. Lauger
did not act as a project director in 1990 (the year in issue for Ms. Lauger
in relation to ECT) is confirmed by two documents (Exhibit I‑9, tabs 4
and 38) signed by Mr. Vohoang in his capacity as ECT's [TRANSLATION]
"project director" in 1989 and 1990. It appears that Ms. Lauger
did not sign the contract between ECT and Dias and was not responsible for any
financial aspects of the partnership.
[51] The evidence
contains only one ECT document signed
by Ms. Lauger in 1990: a letter dated November 8 of that year, certifying
that an ECT partner named Daniel Pilon participated in the partnership in 1989.
[52] In order to create the FTN partnership, Ms. Lauger and two other individuals
signed a partnership agreement in late August 1990. The document was provided
to her by Mr. Vohoang, who designed the MEDIA ENGINE project. Ms. Lauger
says that she became a partner of FTN because the project interested her. She
was appointed secretary of FTN in the same agreement.
[53] On September 27, 1990, at Mr. Vohoang's
request, she signed, on behalf of FTN, a $6,000,000
scientific research contract between FTN and Zuniq Corp. She was not
involved in negotiating or drafting that contract.
[54] In addition, toward
the end of 1990, Ms. Lauger
participated in sessions held to explain the nature of FTN's
project to investors with a view to selling FTN shares to them. She accepted
enrolment forms filled out by investors in 1990, and did the same thing for
several other Zuniq Group partnerships. She also signed the letter accompanying
the binders sent to investors that contained the documentation about the
participation program. However, she neither drafted the letter nor
developed the participation program. Lastly, Ms. Lauger signed a letter
addressed to each investor on or about January 31, 1991, attesting to the amount invested by that
investor.
[55] Ms. Lauger says
that, in her capacity as secretary of FTN, she was responsible for sending the partners documents about
the day-to-day affairs of the partnership. To this end, she says that she
signed a May 1991 letter to the investors, asking them to approve a resolution
that would permit her to enter into a research contract between FTN and Uniware Inc. (a Zuniq Group corporation). That contract
was for the 1991 research project but was never signed. In October 1991,
Ms. Lauger signed two other letters to investors regarding the 1991
project; the letters contained the details of certain changes that FTN
wished to make to the MEDIA ENGINE project and its budget. Once again,
Ms. Lauger was not responsible for these changes and did not write the
letters, but simply signed them at Mr. Vohoang's request.
[56] In May 1992, which
is subsequent to the period in issue, Ms. Lauger allegedly signed another letter to the
investors, seeking their approval of the resolution concerning the buyback of
the investors' shares. She did not write the letter or draft the resolution.
[57] Ms. Lauger
signed some other documents that
referred to FTN, but was acting as a representative of
other entities when she did so. For example, a tax shelter number application
for FTN was made by Les Services Financiers Excelor Inc.
and signed by Ms. Lauger as director or representative of Excelor. The "transfer forms" by which the
investors sold their interests in FTN to Glenrock Investments Ltd.
("Glenrock") fall under the same category. Ms. Lauger signed
them for Glenrock under a power of attorney that she supposedly received from Dzung Tai Nguyen,
Mr. Vohoang's brother-in-law, on behalf of Glenrock.
[58] On
cross-examination, Ms. Lauger admitted that she was a full-time employee of Zuniq
Group from 1989 to 1993 and that her remuneration was $7,245.35 in 1989, $23,088
in 1990, $27,263 in 1991, $26,925 in 1992 and $29,831 in 1993. Her remuneration
was paid by some of the Zuniq Group corporations based on what she was doing
with the project, and she received remuneration from the corporation for which
she was doing work. As part of her work for Zuniq Group, she was allegedly an
authorized representative for several partnerships created by Mr. Vohoang,
with the exception of ECT and FTN. The nature of her responsibilities for
those other partnerships was similar to what she did for ECT and FTN, but she says that her
involvement in ECT and FTN was greater.
[59] Ms. Huyen‑Anh Nguyen, Mr Vohoang's
widow, testified for Ms. Lauger. She worked for Zuniq Group throughout
the period during which Ms. Lauger worked there, and recalls Ms. Lauger's
presence at the Zuniq Group office. However, she could not recall what
tasks Ms. Lauger carried out as a partner of ECT or FTN. She said:
[TRANSLATION]
A. How... in reality, Ms. Marjorie did
everything that my husband asked her to do, and at the same time, she also
helped him in the... a bit with the accounting, not with the administration
work with the researchers. She organized conferences and meetings, she
helped my husband enormously. Both of them sometimes worked until very late in
the evening, and occasionally even Saturdays.
Q. She did this as an employee of Mr. Vohoang's,
correct?
A. Assistant. Both as an employee and as an assistant.
(Transcript, June 29,
2006, at p. 208)
[60] It is clear that Ms. Lauger
participated in the Zuniq Group activities, but it is important, in analyzing
the evidence, to avoid confusing what Ms. Lauger may have done for Zuniq
Group, or any of its corporations or other partnerships, with what she did as a
partner of ECT and FTN.
[61] Based on the
evidence provided, it is impossible
to determine how much time Ms. Lauger may have devoted to ECT and FTN's business as a partner. She did not specify the
amount of time that these activities took, nor did she specify how frequently
she performed these tasks. Without such specifics, there is no way to tell
whether her engagement was regular and continuous. For the reasons just given, the
work on the investor participation programs is unrelated to the subject of the
DAMDES or MEDIA ENGINE projects, and should not be considered participation, by
Ms. Lauger, in ECT or FTN's activities.
[62] On the whole, Ms. Lauger's testimony about her activities
was rather general in nature. She often described her participation in most of
the partnerships created by Mr. Vohoang. In fact, in addition to ECT and FTN, Ms. Lauger was an authorized representative of
the following partnerships created by Mr. Vohoang: ARBUS‑486, CID,
CTN GET, RTS and TASS. This evidence does not lend
itself to the type of analysis that is needed in order to determine the nature
of her engagement in the ECT and FTN partnerships.
[63] In addition, it is
difficult to say which tasks and activities were tied to her status as a
partner, as opposed to her employment with Zuniq Group. The Respondent submits that since
Ms. Lauger
performed all her tasks for ECT and FTN on Mr. Vohoang's request, those tasks were part of
her employment as an assistant. Since Ms. Lauger was paid for this work, it
is submitted that the Court should not take it into account in deciding whether
she was actively engaged in ECT's and FTN's activities on a regular, continuous
and substantial basis.
[64] Since Mr. Lauger was a full-time
employee of Zuniq Group during the years in issue, it is likely that a good
portion of the work that she attributes to ECT and FTN
was done in her capacity as an employee of Zuniq Group. This is particularly
true of the help that she provided to the scientists, and her research‑related
work on the DAMDES and MEDIA ENGINE projects.
[65] The Zuniq Group subcontractors were
responsible for doing all the research for ECT and FTN, and Ms. Lauger was paid
by some of those subcontractors. It is reasonable to conclude that the
following duties to which Ms. Lauger referred were part of the
subcontractors' responsibilities, and that the remuneration received by
Ms. Lauger from some of those subcontractors was for the performance of
those duties:
- managed the work
timetable
- analyzed the data compiled by the
researchers
- was involved in making experimental
prototypes and in analyzing and testing them
- analyzed the costs associated with
project changes proposed by the researchers
- did computer-aided modelling
- developed a conclusion concerning the
feasibility and technical success of the project
- compiled test results
- analyzed time sheets and the log book
- analyzed the costs associated with the
changes proposed by the researchers in order to optimize the outcome of the
research
- made comments on the
graphical aspects
- followed up on the progress
and tested the functionalities
- analyzed benchmarks in order
to confirm the technological advancement of the project
- tabulated the cost of equipment
and components necessary for the research work
- verified whether the
project was on budget
[66] Given her testimony as a whole, I also
doubt whether most of the duties listed above, and those set out in paragraph
48, were part of Ms. Lauger's responsibilities, not Mr. Vohoang's.
During her testimony about her role as a manager for ECT, Ms. Lauger made
the following clarifications.
[TRANSLATION]
Q. Ms. Lauger, you invested in the ECT
partnership.
A. As a partner.
Q. You were appointed a manager of the
partnership.
A. Yes.
Q. You must have been aware of what was going
on in that partnership, where the money went and why, what work was done for
the partnership, and how much it cost?
A. Here is a service contract that explains
the details of the amount.
Q. Yes.
A. I am not a scientist, so I cannot tell you
exactly what was done. As with all the partnerships that I explained to you, I
saw the contract. Hien Vohoang was in charge of that. He was the one who
did the big things in the partnerships. I was an employee. I explained that to
you. It was like that for all the partnerships. It was the same for this
partnership. Personally, I worked for... as I said, as far as the software, the
object oriented language, is concerned, I am not a specialist. I worked on the
user interface. The work that was done was verified by Hien Vohoang. He
is the one who approved that, because he was a scientist and I wasn't.
(Transcript, June 28, 2006, at pages 186-87)
[67] It would also appear
that Ms. Lauger was not in charge of the accounting work for the two
partnerships, and that the verification and tabulation that she was referring
to was done by other people.
[68] As for the meetings held to attract
investors, the work of that nature is related to the financing of the
partnerships. Thus, it is not taken into account for the purposes of paragraph
(b) of the definition of "specified member", which states:
"specified member" of a partnership in a fiscal period or taxation year of the
partnership, as the case may be, means
. . .
(b) any member of the
partnership, other than a member who is
(i) actively engaged in those activities of the
partnership business that are other than the financing of the partnership
business, or
(ii) carrying on a similar business as that carried on
by the partnership in its taxation year, otherwise than as a member of a
partnership,
on a regular, continuous and
substantial basis throughout that part of the period or year during which the
business of the partnership is ordinarily carried on and during which the
member is a member of the partnership;
[Emphasis added.]
[69] Lastly, the
relatively small number of documents adduced in evidence that were signed by
the Appellant on behalf of ECT
and FTN does not corroborate Ms. Lauger's testimony that her engagement in
the ECT and FTN partnerships in 1990 and 1991 was active,
continuous and substantial. In addition, given Ms. Lauger's admission that
she signed almost all these documents on Mr. Vohoang's request and was not
involved in the drafting or creation of any of these documents, I believe
that her role within the two partnerships was limited, and was always under the
control of Mr. Vohoang. He was the person who made the decisions in the
partnerships, and this was done without Ms. Lauger's participation.
Moreover, with respect to the vast majority of the tasks referred to in
paragraph 48, the little documentation before me contains no indication that
Ms. Lauger performed them.
[70] All in all, Ms.
Lauger has not succeeded in showing, on a balance of probabilities, that she was
engaged in the activities at ECT and FTN on a regular, continuous and
substantial basis during the periods in issue.
[71] Since I have found
that Ms. Lauger was a passive specified member, it is unnecessary for me to
analyze the Respondent's argument that Ms. Lauger was a specified member by
virtue of being a limited partner of ECT and FTN.
[72] The next issue is
whether the Minister correctly reduced the business loss claimed by Ms. Lauger
in 1990. It bears repeating that the Minister reduced FTN's business loss by
$1,722,000 and then proportionately reduced the business loss of each FTN partner accordingly.
[73] Based on the
evidence, the amount of $1,722,000 was paid by Zuniq Corp. to Glenrock Investments Ltd. Zuniq Corp.
was the company that received the research subcontract pertaining to MEDIA ENGINE.
Zuniq Corp, in turn, contracted out work on the MEDIA ENGINE project to Glenrock.
The value of the contract was $1,722,000. The Minister assumed that Glenrock
did not exist and that this expense was fictitious. Nonetheless, the Minister
disallowed FTN the expense.
[74] The $1,722,000 expense was apparently made
by Zuniq Corp., not FTN, even though Zuniq incurred the expense in
performing the research contract that it got from FTN. FTN
did not claim this expense in computing its business loss for 1990. All the
research expenses that FTN entered in its financial statements for the fiscal
year ended December 31, 1990, were in relation to the amounts that Zuniq Corp.
was paid under the research contract entered into with Zuniq Corp. on
September 27, 1990. These expenses totalled $3,039,000, and the
Revenue Canada auditor who audited FTN's activities for
1990 found that FTN issued $3,039,000 in cheques to Zuniq Corp. during the
period.
[75] In light of this, I
do not see how the Minister could reduce FTN's operating expenses by an amount
which the partnership never claimed and which was claimed by another entity. In order to do so, one would have to lift
the corporate veil that separates Zuniq from FTN, but counsel for the
Respondent did not put forward any arguments in support of the idea that Zuniq's
separate legal existence should not be respected. In my opinion, this aspect of
the assessment is not well-founded.
[76] The next issue is
whether FTN was validly formed. The
Respondent asserts that FTN, like all Zuniq Group partnerships, was merely an
artificial financial construct, and that FTN had absolutely no intention to
carry on a business. She submits that FTN had no reason for being,
other than to serve as a vehicle to generate tax refunds and a financing tool
for the Zuniq Group corporations. Since it did not have the intention of
making a profit from the operation of a business, FTN did not, she submits, meet the
conditions of partnership formation.
[77] For the 1990
taxation year, the Minister recognized FTN's existence, and it is only when she
came before this Court that the Respondent raised the new argument that the
partnership did not exist. Consequently, the Minister has the burden of proof
with respect to this issue for the 1990 taxation year.
[78] In reassessing Ms.
Lauger for the 1991 taxation year, the Minister relied on the assumption that FTN had no reason for being,
other than to serve as a vehicle to generate tax refunds and a financing tool
for the Zuniq Group corporations. He submits
that the partners intended to invest an amount equal to 50% of the price
originally paid for the shares, obtain financing for the other 50%, get tax
deductions and investment tax credits, and, lastly, resell their shares as
quickly as possible for an amount equal to the financing obtained at the outset.
This ensured that the partners would make a profit from the investment, which
profit did not result from the operation of a business.
[79] It is therefore
incumbent on Ms. Lauger to prove, insofar as the 1991 taxation year is
concerned, that she intended to derive a profit from the operation of a
business in common with the other partners of FTN.
[80] In Backman v. The
Queen, [2001] 1 S.C.R. 367, at paragraph 25, the Supreme Court of
Canada held that
. . . 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.
Although the partnership agreement
in the case at bar states that the purpose of the FTN partnership is to engage in
commercial activity, this is not borne out by the circumstances surrounding the
creation and activities of the partnership. In my opinion, as the Respondent
submitted, FTN was indeed an artificial financial construct put in place by Mr.
Vohoang.
[81] It is not disputed that
Mr. Vohoang controlled FTN's creation and its activities. The partners relied on him
to develop and implement the MEDIA ENGINE research and development plan. It
is also undisputed that Mr. Vohoang managed the Zuniq Group corporations
and was responsible for granting research contracts to those corporations.
[82] In FTN's case, for the 1990 taxation year,
it appears that Mr. Vohoang planned the allocation of MEDIA ENGINE
research work among Zuniq Corp. and its subcontractors, namely Dias
Informatique Inc., Zuniq Data Corp., Glenrock Investments Ltd, Uniware
Inc., Sixgraph informatique Inc. and MicroGraphic Systems Inc.,
in accordance with the following diagram:
FTN SYSTEMS PARTNERSHIP
Zuniq Corp.
Glenrock Uniware
Inc.
Investment
Zuniq
Data Dias
Data Corp. Age Corp. Informatique
Inc.
Sixgraph
Micro
Informatique Inc. Graphic Systems
Zuniq
Corp.
[83] Michel Beaudry, the Revenue Canada
auditor, undertook an analysis of these contacts based on the documents
obtained from the Zuniq Group corporations. He tried to trace the amount
spent by FTN under the contracts granted to the corporations that were mandated
to carry out research. In the cases where he received the financial statements
of the subcontractor corporations, he noted that the expenses that could conceivably
have been related to research were significantly lower than the amounts stated
in the corporations' research contracts. For example, Zuniq Corp. apparently
received $3,039,000 from FTN and paid $2,345,000 under subcontracts to
the aforementioned corporations. Of the $694,000 that remained with Zuniq, it
appears that only $95,178 was spent on the salaries of the researchers who
worked for Zuniq, and only $17,303 was spent on research equipment purchases.
At the same time, Zuniq paid professional fees in the amounts of $102,148
and $61,391, which appear to include commission payments to tax planners for
the sale of FTN shares, and fees paid to Zuniq's lawyers and accountants.
[84] The analysis of the
contracts granted by Zuniq in association with the MEDIA ENGINE project revealed similar arrangements.
Data Age, which received $178,800 from Zuniq for a MEDIA ENGINE
research contract, apparently spent $80,497 on researchers' salaries, nothing
on research equipment, but $56,910 on professional fees. These amounts were
supposed to include expenses incurred for research work that Data Age was
to do on ARBUS‑486, CTN Systems and GET Systems
research projects in 1990.
[85] Strangely, Data Age also appears to have granted
a $349,600 subcontract to SixGraph Informatique for work on the
MEDIA ENGINE project, even though Data Age received only $178,800 from
Zuniq. Even more strangely, the contract between Zuniq and Data Age is
dated November 20, 1990, whereas the contract between Data Age and
SixGraph is dated September 30, 1990. In other words, Data Age subcontracted
MEDIA ENGINE work to SixGraph almost two months before getting the
contract from Zuniq.
[86] The biggest
subcontract granted by Zuniq as part of the MEDIA ENGINE project was $1,722,000 to Glenrock Investments Ltd.
for [TRANSLATION] "the creation of an internal technical library service
specializing in the electronics and computing fields." The reason why an
internal library service of this type would be necessary in the context of the
MEDIA ENGINE project is unclear.
[87] When Mr. Beaudry
tried to obtain information about Glenrock, Mr. Vohoang said that he could
not provide any, because he had no interest in that corporation. Mr. Vohoang
said that it was an American corporation, and provided a California address. Enquiries
addressed to authorities in the United States disclosed that Glenrock had no existence there.
[88] However, the
evidence shows that Mr. Vohoang opened a bank account under the name Glenrock Investments Ltd.
with National Trust using a Calgary corporate address. The signing officers for this account
were Mr. Vohoang and Ms. Lauger.
[89] In addition, it can
be seen that Glenrock was incorporated in Dublin, Ireland, in 1988 (Exhibit
I-42, tab 40) and that, in 1990, in her capacity as director, Huyen‑Ahn Nguyen,
Mr. Vohoang's wife, signed a change of head-office address, though the new
address was still in Dublin.
[90] Lastly, the contract
between Zuniq Corp. and Glenrock was signed by Dzung T. Nguyen, Mr.
Vohoang's brother-in-law, in his capacity as a representative of Glenrock.
[91] In my opinion, this
shows that Mr. Vohoang did not want to let Mr. Beaudry have access to Glenrock's
records to determine what the funds transferred from Zuniq Corp. to
Glenrock were used for. It should be recalled that Glenrock was the same company
that purchased the shares of the ECT and FTN partners for 50% of the original
price. Based on the evidence, I infer that Glenrock was part of the financial scheme
put in place by Mr. Vohoang, and that the funds transfers to Glenrock were for
purposes other than research, or obtaining library services.
[92] In sum, it appears
that very little of the money raised by FTN in 1990 was used for research and
development purposes. I am convinced that Mr. Vohoang established this
partnership to obtain financing for the Zuniq Group corporations, not to carry
on a business in common with a view to a profit.
[93] Another
consideration that leads me to believe that FTN was not carrying on a business
is that FTN does not appear to have
kept the benefits stemming from the research work. Based on
representations that Sixgraph Informatique made to Revenue Canada in January 1993
(Exhibit I-4, tab 32, at page 8), it appears that the
MEDIA ENGINE project was transferred to Sixgraph in
1992. Sixgraph proceeded to market a graphics card called Wizard 924,
which is described in the advertising material adduced by Ms. Lauger (Exhibit A-2).
Based on the corporate information obtained by Mr. Beaudry, Mr. Vohoang and a
corporation that he controlled were the only shareholders of Sixgraph.
[94] Although FTN spent
$4,882,500 on the project in 1990 and 1991, it did not receive any payments
from Sixgraph for the use of the research that it carried out. Ms. Lauger
confirmed that FTN
never earned any income. This is obviously not an indicator that FTN was
carrying on a commercial enterprise, and it shows that Mr. Vohoang
manipulated FTN
for the benefit of his own corporation, namely Sixgraph.
[95] Ms. Lauger testified
that she believed that FTN might eventually make a profit, but she did not say
what she did to ensure that a profit would be possible. It appears that
she simply took Mr. Vohoang's representations at face value. Based on the
evidence before me, those representations were patently false. FTN's activities were
not intended to make a profit, and FTN cannot be considered to have been carrying
on a business. Given the circumstances, FTN was not a genuine partnership, and
its activities were not a source of income within the meaning of the Act.
[96] Accordingly, I find
that Ms. Lauger's assessments for the 1990 and 1991 taxation years are
well-founded.
[97] Lastly, the Court
does not have jurisdiction to grant Mr. Luu's and Ms. Lauger's request to reduce the
interest that has accrued on the assessments.
[98] For all these
reasons, Mr. Luu's and Ms. Lauger's appeals are dismissed.
Signed at Ottawa, Canada, this
23rd day of October 2007.
" B. Paris"
Translation certified true
on this 22nd day of January 2008.
Brian McCordick, Translator
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