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Citation: 2003TCC680
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Date: 20031114
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Docket: 2001-1420(IT)G
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BETWEEN:
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MICHAEL J. FOLEY,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
and
Docket 2001-1428(IT)G
MARK A. FOLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
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AMENDED REASONS FOR JUDGMENT
Beaubier, J.
[1] These appeals, pursuant to the
General Procedure, were heard together on common evidence at
Toronto, Ontario, on September 17 and 18, 2003. The Appellants
changed counsel in the week before the hearing and that was
permitted.
[2] The Appellants called Mark Foley
and their solicitor, James N. Aitchison. The Respondent called
the Appellant Michael J. Foley, and the auditor on these files,
Dennis A. Barboza, C.M.A.
[3] Statements of Agreed Facts were
filed respecting both Appellants. They read:
Mark A. Foley
"The parties hereto, by their respective solicitors,
admit the following facts:
1. Kingsberry
Properties ("Kingsberry") was a limited partnership,
formed under the Limited Partnerships Act, R.S.O. 1990, c.
L. 16 (the "LPA"), which was at all material times
engaged in the business of real estate development including land
acquisitions and sales, property development, construction,
leasing and management.
2. The fiscal
period of Kingsberry ended on December 31 in each year.
3. A
Partnership Agreement was executed on October 31, 1984 by John
Foley as the general partner, with Michael Foley and the
Appellant as the limited partners. An Amending Agreement was
signed on December 5, 1994.
4. John Foley
is the father of Michael Foley and the Appellant.
5. Lanmark
Management Limited ("Lanmark") was a corporation in the
business of providing property management services to a group of
related companies owned by the Appellant, his father, and his
brother (generally known as the Foley Group.)
6. The
Appellant was the sole shareholder, director and officer of
Lanmark.
7. At all
material times, Lanmark was engaged by Kingsberry to provide
property management services to Kingsberry, including
(a) managing its
general operations and administration;
(b) overseeing the
day-to-day office matters including administration of accounts
payable and receivable, certification of cheques and processing
of invoices;
(c) negotiating the
acquisition of properties;
(d) assisting John
in obtaining financing from Royal Bank;
(e) managing rental
properties, including leasing, banking and arranging for repairs
and serving of notices; and
(f) overseeing
and managing the development of properties, including
(i) dealing with
government authorities to obtain the necessary approvals for
services;
(ii) dealing with
surveyors;
(iii) dealing with
engineers;
(iv) obtaining all necessary
approvals for the registration of plans of subdivision including
making presentations at public hearings; and
(v) appearing before the
Ontario Municipal Board.
8. Lanmark
billed Kingsberry for the property management services
provided."
Michael J. Foley
"The parties hereto, by their solicitors, admit the
following facts:
1. Kingsberry
Properties ("Kingsberry") was a limited partnership,
formed under the Limited Partnerships Act, R.S.O. 1990, c.
L. 16 (the "LPS"), which was at all material times
engaged in the business of real estate development including land
acquisitions and sales, property development, construction,
leasing and management.
2. The fiscal
period of Kingsberry ended on December 31 in each year.
3. A
Partnership Agreement was executed on October 31, 1984 by John
Foley as the general partner, with Mark Foley and the Appellant
as the limited partners. An Amending Agreement was signed on
December 5, 1994.
4. John Foley
is the father of Mark Foley and the Appellant.
5. Fridel
Limited ("Fridel") was a corporation in the business of
building residential properties for a group of related companies
owned by the Appellant, his father, and his brother (generally
known as the Foley Group.)
6. The
Appellant was the sole shareholder, director and officer of
Fridel.
7. At all
material times, Fridel was engaged by Kingsberry to provide
services related to the construction of residential properties to
Kingsberry, including
(a) looking after human
resources, personnel;
(b) overseeing and
managing the construction of residential properties,
including
(i) drafting proposals
for new construction projects;
(ii) negotiating and signing
all quotes and contracts;
(iii) obtaining insurance coverage
for various projects;
(iv) meeting with architects and
engineers;
(v) meeting with the Ministry
of Housing; and
(vi) making
recommendations to John with respect to the sales of lots to
builders.
8. Fridel
billed Kingsberry for the residential construction related
services provided."
[4] Paragraphs 7, 8, 11 and 17
were admitted in the Answers filed by the Appellants. The Replies
in each Appellant's Notice of Appeal are identical.
Paragraphs 5 to 20 of the Replies read:
5. This appeal
involves the question of the "at-risk rules" introduced
to the Income Tax Act and applicable after February 16,
1986. An interest in a partnership in existence on February 25,
1986 was grandfathered under subsection 96(2.5) as an
"exempt interest" provided that:
a) there has
been no substantial contribution of capital to the partnership
after February 25, 1986; and
b) there has
been no substantial increase in the indebtedness of the
partnership since that date;
6. In
assessing the Appellant as a Limited Partner of a partnership in
which he did not have an exempt interest under subsection
96(2.5), the Minister proceeded upon, inter alia, the
following facts:
a) At all
material times, Kingsberry Properties ("Kingsberry")
was a limited partnership of which the Appellant was a limited
partner;
b) Kingsberry
carried on business since October 1984;
c) the fiscal
year of Kingsberry was the calendar year.
d) From
December 31. 1986 to December 31, 1990, the following increases
occurred in the assets and liabilities of Kingsberry:
i) Total
assets increased by 182%
ii) Total
liabilities increased by 126%
iii)
Total rental properties/fixed assets increased by 537%
iv)
Total land held for redevelopment before the netting of
outstanding letters of credit increased by 345% (or 485% after
the netting of outstanding letters of credit); 83% of this
increase was as a result of new projects undertaken after
1986;
v) The number of
projects increased from 13 to 18;
e) There was a
substantial increase in both the capital and the indebtedness of
Kingsberry after February 25, 1986 which was not related to
commitments prior to February, 1986 and which constituted a
significant expansion of the activity of the partnership from
that date; and
f) The
Appellant's "at risk amount" was not, at any
material time, greater than nil.
Control of Kingsberry
7. An
agreement to form Kingsberry (the "Partnership
Agreement"). was executed on October 31, 1984 by John Foley
(the general partner), Mark Foley and Michael Foley (the limited
partners.) An Amending Agreement was signed on December 5,
1994.
8. John Foley
is the father of Mark and Michael Foley.
9. The
directors of Kingsberry were John Foley, Michael Foley,
Linda Hunter and Mary Jo Bathe - the two daughters of
John Foley.
10. At all material times,
the general partner, John Foley, had sole signing authority.
11. Subparagraph 6(a) of
the Partnership Agreement stipulated that the general partner
shall manage the business and affairs of the partnership and may
delegate to either of the limited partners the right to sign
cheques and other instruments subject to the general
partner's approval.
12. Subparagraph 6(e) of
the Partnership Agreement prohibits either limited partner from
taking any part in the management of the business or affairs of,
or transact any business for, Kingsberry and the limited partners
had no right to and could not sign for or bind the partnership in
any way.
13. It was specifically
and repeatedly confirmed in paragraph 6 of the Amending Agreement
that,
"In the event any provision of the Original Partnership
Agreement as amended by this Agreement should have the effect of
imposing upon any Limited partner any of the obligations of the
General Partner, such provision shall be of no force and effect
and shall not be considered a part of the Original partnership
Agreement as amended by this Agreement, by the remainder of the
Original Partnership Agreement as amended by this Agreement shall
continue in effect."
(Judge's note: the third last line above should
read "Agreement, but the remainder of the Original
...". See Exhibit A-3, Tab 164.)
14. The Appellant was not
directly involved with the administration, management and
operation nor did he take part in the control of the business of
Kingsberry in the relevant taxation years.
15. Any act by the
Appellant which may be referable to the administration,
management and operation of the business of Kingsberry was
performed by him only as an agent of John Foley, the general
partner. Otherwise, any such action was either performed by the
Appellant in his capacity as an officer or trustee of Lanmark
Management Limited or any one of Kingsberry's related
companies and trusts.
16. Kingsberry was
effectively bankrupt on December 31, 1993 and, in accordance with
subparagraph 8(a) of the Partnership Agreement, the limited
partnership was dissolved.
17. As a consequence of
Kingsberry's bankruptcy, John Foley, the general partner,
became liable to Kingsberry's creditors and became a
bankrupt.
18. At no time did the
Appellant or his brother, Michael Foley, come forward to
Kingsberry's Trustee in Bankruptcy to assert that they were
general partners of Kingsberry.
19. The Appellant was at
all material times a limited partner of Kingsberry.
20. Prior to the filing of
the Amended Notice of Appeal dated March 13, 2002, the
Appellant has never taken the position that he was a general
partner of Kingsberry. To the contrary, his position prior to
that date has consistently been that he was at all material times
a limited partner of Kingsberry.
[5] The appeals are brought in order
that the Appellants may claim partnership losses incurred by
Kingsberry Properties of $4,275,916 in 1993 and $4,726,003 in
1994. To do this the Appellants must establish that they were
general partners in Kingsberry Properties (and not limited
partners as the partnership agreement described them). The year
and portions of the losses claimed which are in dispute are:
Michael
Foley
Mark Foley
1991
$294,661
1996
$319,760
196,525
1997
85,514.93
185,625
1998
55,049.51
139,247
[6] The following assumptions in the
Replies were not refuted by the evidence:
b) Kingsberry
carried on business since October 1984;
c) the fiscal
year of Kingsberry was the calendar year;
The remainder are in dispute.
[7] The following paragraphs quoted
from the Replies in paragraph [5] hereof are correct: 10, 11, 12,
13, 16 (by virtue of a retroactive Court Order issued in December
1997 dating back to the beginning of the receivership) 17, 18 and
20.
[8] Each Appellant is claiming 45% of
Kingsberry Properties' losses in 1993 and 1994.
[9] There are two issues in dispute
between the parties:
1. Were the Appellants at risk and so not limited partners
within the meaning of subsections 96(2.1) and (2.4) of the
Income Tax Act?
2. If not, were the Appellants' interests in Kingsberry
exempt because, as the Respondent alleges, after February 25,
1986 there was a substantial increase in the indebtedness of
Kingsberry which was not used for a significant expansion of its
activity? (Subsection 96(2.5)).
Issue 1 will be dealt with first.
[10] Sections 12 and 13 of the Limited
Partnership Act R.S.O. 1990 Chap L. 16 read:
Business dealings by
limited partner with partnership - s.12(1)
12. (1) A limited partner may loan money to and transact other
business with the limited partnership and, unless the limited
partner is also a general partner, may receive on account of
resulting claims against the limited partnership with general
creditors a prorated share of the assets, but no limited partner
shall, in respect of any such claim,
(a) receive or hold as collateral security any of the limited
partnership property; or
(b) receive from a general partner or the limited partnership any
payment, conveyance or release from liability if at the time the
assets of the partnership are not sufficient to discharge
partnership liabilities to persons who are not general or limited
partners.
Rights of limited partner - s. 12(2)
(2) A limited partner may from time to time,
(a) examine into the state and progress of the limited
partnership business and may advise as to its management;
(b) act as a contractor for or an agent or employee of the
limited partnership or of a general partner; or
(c) act as a surety for the limited partnership.
R.S.O. 1980, c. 241, s. 11.
Limited partner in control of business - s. 13(1)
13.(1) A limited partner is not liable as a general partner
unless, in addition to exercising rights and powers as a limited
partner, the limited partner takes part in the control of the
business.
Additional rights and powers - s. 13(2)
(2) For the purposes of subsection (1), a limited partner
shall not be presumed to be taking part in the control of the
business by reason only that the limited partner exercises rights
and powers in addition to the rights and powers conferred upon
the limited partner by this Act.
R.S.O. 1980, c. 241, s. 12.
[11] It should be noted that Kingsberry was
an Ontario limited partnership in the business of property
development, construction and sales in Oshawa and Durham County,
Ontario. Respecting the quotation in paragraph [10]:
1. Subsection 12(1) allows a limited partner to transact
business "with" the limited partnership and not
"for" the limited partnership except as described in
subsection 12(2).
2. Subsection 13(1) exempts liability to a limited partner
unless the limited partner "takes part" in the control
of the business.
[12] Subparagraphs 6(a), (c) and (e) of the
Limited Partnership Agreement between John, Mark and Michael
Foley dated 31 October, 1984 read:
Management
6.(a) The business and affairs of the
partnership shall be managed by the general partner who shall
have all necessary powers to carry on the partnership business
and may sign documents and contracts in the name of the business
or in such other name as may from time to time be agreed upon by
the partners and may sign, endorse and accept in the name of the
business all bills, notes, cheques, drafts or other instruments
for the purpose of the business. The general partner may delegate
to either of the limited partners the right to sign such cheques
and other instruments subject to his approval. Notwithstanding
the foregoing, the general partner shall have no authority (i) to
sell, exchange, pledge, mortgage or otherwise encumber or dispose
of all or a substantial part of the assets of the partnership
without the prior written consent of the limited partners; or
(ii) to borrow money on behalf of the partnership, other than for
the purpose of discharging obligations of the partnership not
voluntarily incurred by the general partner, without the prior
written consent of the limited partners.
(c) The general
partner may, in his discretion, employ other persons interested
in or companies owned by, associated with or affiliated with the
general partner to render, on behalf of the partnership, part or
all of such specialized and general administrative services as
are reasonably required to accomplish the purposes of the
partnership.
(e) No limited
partner, as such, shall take any part in the management of the
business or affairs of or transact any business for the
partnership and shall have no right to and shall not sign for or
bind the partnership in any way.
[13] Kingsberry broke its operations down
into three divisions:
1. John Foley, a former plumbing and heating contractor
with a high school education, located and purchased property and
arranged financing.
2. Mark Foley, who has a university degree in environmental
studies, did everything relating to subdivision of the property
into lots, assisted John, and did rental property management of
any residences (from 10 - 22, and once up to 85 or 90).
3. Michael Foley, who has a B.Comm., attended to the
construction of underground services, to residential construction
projects, and to sales.
[14] Both Mark and Michael signed cheques
and did various office administration jobs. They also instructed
lawyers respecting litigation in their fields, signed cheques for
Kingsberry and dealt with the bank. John signed at the bank as a
general partner. Mark, born January 18, 1955 and Michael, born
December 4, 1957, both signed guarantees for Kingsberry at the
bank which had expired when Kingsberry was put into
receivership.
[15] Mr. Aitchison testified that he did
litigation work for Kingsberry and the Appellants. In the course
of the receivership the Royal Bank and its Toronto solicitors
proposed to sue the Appellants on the basis that their activities
for Kingsberry had taken them outside of the limited partnership
status. Mr. Aitchison advised them that he thought that the
Royal Bank's position was valid. On that basis the Appellants
paid large sums to settle the bank's claim without it
proceeding to litigation. A second claim was also settled on the
same basis.
[16] The question is whether Mark and
Michael took part in the control of the business of Kingsberry.
Its business was the purchase, development, construction and sale
of property.
[17] Kingsberry's business was divided
into three portions. All of the evidence is that each was
controlled and operated by a different Foley: John - purchases;
Mark - subdivision and rentals; Michael - construction. Michael
and John shared sales. While the number of projects was in the
teens, the number of lots each year was in the hundreds. It is
clear that both the size of Kingsberry's business and the
division of labour meant that each Foley was in control of his
part of Kingsberry's business. It also results in the fact
that the three shared control of the whole business and the
responsibility for its success or failure. Mark and Michael each
took part in the control of Kingberry's business. Thus they
were each at risk and were not limited partners within the
meaning of subsections 96(2.1) and (2.4) of the Income Tax
Act - issue one in paragraphs [9] hereof.
[18] For these reasons it is not necessary
to deal with the second issue.
[19] The appeals are allowed and the
assessments are referred back to the Minister for reconsideration
and reassessment in accordance with these reasons. The Appellants
are awarded party and party costs throughout, but only one set of
costs is awarded respecting the hearing itself. However, both
parties had two counsel in attendance at the hearing and
therefore the Appellants are awarded costs for a second counsel
respecting the hearing.
These Reasons for Judgment are issued in
substitution for the Reasons for Judgment dated October 15,
2003.
Signed at Ottawa, Ontario, this 14th day
of November 2003.
Beaubier, J.
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