Jannock Ltd. v. The Queen, 96 DTC 1500, [1996] 3 CTC 2237 (TCC)

Beaubier J.T.C.C.: — These matters were heard together on common evidence at Toronto, Ontario, on May 6 - 10 and May 13 - 17, 1996 inclusive, pursuant to the General Procedure.

The Appellant (“Jannock”) called Robert Teskey, Q.C., Dennis P. Donovan, David Roberts, Frederick M. Partington, Edward C. Stewart, Stephen Akerfeldt, Peter Hayward, Graham Turner, Harold Weir and Robert Bruce. The Respondent called Raymond Strain, Lynn Inglis, Lawrence S. Rosen, F.C.A., who qualified as an expert, John Hagen, Derrick Fortune and Michael Edmonds. The Appellant called Patricia

L. O’Malley, F.C.A., who qualified as an expert, and John Tweddle to give rebuttal evidence.

The parties, by their solicitors, filed an agreement at the opening of the hearing that the part of the appeal for the Appellant’s taxation year ending December 31, 1986 relating to the skids issue in File 93-1491(IT)G is to be dismissed. Accordingly, it is ordered that that portion of the appeal for the year ending December 31, 1986 is dismissed.

Jannock has appealed assessments respecting its taxation years ending December 31, 1985 and 1986. The issues that remained to be determined at the hearing are whether Jannock purchased limited partnership units, was a member of a partnership, whether the partnership disposed of assets and realized a loss; whether that loss was allocable to Jannock to reduce its income; whether the transactions were complete and effective or they were artificial and a sham and whether the limited partners conferred a benefit on Jannock within subsection 245(2) of the Income Tax Act. Each set of issues arises as a result of Jannock’s purchase of limited partnership units in each year, those partnerships’ sales of assets in each year and the subsequent allocations of losses to Jannock. The assessments are that any or all of these things did not happen or were a sham or artificial.

Jannock is a public corporation which manufactures bricks, steel products and other products. Its head office is in Toronto, Ontario. On December 31, 1985 it purchased all 90 of the limited partnership units outstanding of Cancom Equity Fund Limited Partnership (“CEF”). CEF was formed in 1980 in Alberta to engage in speculative investments. This was done in concert with Canadian Commercial Bank of Edmonton, Alberta. The limited partners were pension funds excepting for Cancom Management Limited (“CML”) the general partner of CEF, which also owned six units. It is believed by Messrs. Teskey and Roberts that CML held these six units for Canadian Commercial Bank. CML was the only limited partner that was a taxable entity. The remaining limited partners -Abitibi Employees Retirement Income Plan Trust Fund, Air Canada Pension Trust Fund, Alberta Government Telephones Employees’ Pension & Death Benefit Fund, Board of Administrators Teacher’s Retirement Fund (Alberta), Canada Permanent Trust Company Account: 20-5202, Canada Permanent Trust Company Account: 261155-OO-TOR, City of Edmonton Pension Fund, City of Ottawa Superannuation Fund, Cooperative Life Insurance Company, Co-operative Life Insurance Company O.E. Account, Co-operators Insurance Association, Hospitals of Nova Scotia Pension Plan, R. Angus Alberta Limited Pension Fund, Retirement Plan of the Non-Bargaining Employees of the Price Company and Associated Companies, Sun Life Assurance Company of Canada, The Equitable Life Insurance Company of Canada, University of Calgary Pension Fund, University of Regina Pension Fund, and Via Rail Canada Inc. Pension Trust Fund - were pension funds. CEF anticipated gains of about 30 per cent per year on various trailer, oil and gas, mortgage brokerage and real estate investments, most of which were in Alberta. CEF made distributions in 1980 and 1981.

After the National Energy Policy was created CEF’s investments, in the words of one witness, “imploded”. Some went into bankruptcy without any warning. By 1982 most of its investments were “inverted”. In 1983 new management was hired which traded some of its bare land investments for suburban mall projects with mortgages and an income flow. Mr. Teskey was a director of CEF and a member of its executive committee throughout all of these events. He is and was a partner of Field and Field of Edmonton, Alberta. Field and Field acted as solicitors for the limited partners selling to Jannock throughout the transactions which are described. Fraser and Beatty, Toronto, acted for Jannock. Mr. Teskey testified that by mid-1985 CEF had $40,000,000 in asset value before write down and $16,000,000 in equity. The limited partners’ original investment in 1980 was $22,500,000, at $250,000 per unit.

On Labour Day weekend in 1985, Canadian Commercial Bank was placed in liquidation. CEF owed Canadian Commercial Bank approximately $2,800,000 which was unsecured. Mr. Strain, an employee of Canadian Commercial Bank at the time, stated that Canadian Commercial Bank created CML to provide the bank with off-balance sheet income. It owned 10 per cent of CML and provided CML with office space. CML’s initial officers were, in Mr. Strain’s words, “bank people”. A number of the pension fund investors in CEF were also shareholders in Canadian Commercial Bank. CEF’s directors ordered Coopers & Lybrand to do an audit of CEF as of August 31, 1985 and meetings of the investors in early October instructed Mr. Teskey to put together a proposal respecting CEF. In October, 1985, Mr. Teskey sent out an update (Exhibit AR-1, Vol. 2, Tab 23, page 2) which described the objectives reached at the meetings as follows:

Objectives:

We have characterized the objectives which must be achieved as follows:

1. A typical corporate structure which will permit the investors to have a direct hand in management through a Board of Directors.

2. A traditional corporate structure, understood by bankers, which will

permit a normal banking relationship to be established and maintained.

3. Limited liability for all investors.

In addition, we have characterized the following objectives as ones which would be desirable:

1. Maximum liquidity for units of ownership.

2. Right to proportionate representation of all investors on a Board of Directors.

3. Maximum preservation of unrealized tax losses in the Fund (being the difference between the tax cost of the Fund’s assets and their present fair market value).

4. Closing by the end of the Fund’s current financial year (December 31, 1985).

On December 5, 1985 each partner was sent a major memorandum accompanied by a summary of CEF’s assets, and a copy of the August 31, 1985 audit. For all of the limited partners to participate in any proposed act it was necessary that they all sign in street form and send in their limited partnership certificates and sign a letter of authorization for all future steps to be taken. Two alternatives were authorized, a new corporate structure in which the limited partners would become shareholders and in addition what did happen. All of the limited partners authorized both alternatives. As a result, the Jannock transaction proceeded in 1985.

Coopers & Lybrand were the auditors for CEF and Jannock. They introduced the parties to each other. In mid-December Mr. Teskey, as a director of CEF, met with Jannock’s Vice President, Finance, Dennis Donovan, in Toronto. Jannock offered to buy the limited partnership units for the fair market value of the underlying assets of the fund plus 7.5 for each dollar of non-capital loss that Jannock could use to reduce taxes otherwise payable. The fair market value would be returned to Jannock when CEF Limited Partnership No. 2 (“CEF2”), another corporation controlled by the limited partners, purchased the assets but the 7.5 would be held in escrow by Fraser & Beatty, Jannock’s Toronto solicitors, until the loss figure was finalized by assessment or this appeal. This offer was basically the proposal outlined by Mr. Teskey’s memorandum of December 5, 1985. It was in accordance with his advice to the untaxed pension funds that within their losses there was a tax loss which had no value to them but which had value to a taxable entity. It could be sold so as to yield something to the pension funds. It was agreed that income on the escrow money would be paid to the limited partners. Mr. Teskey had no other prospective purchaser. The offer was accepted.

Robert Teskey attended the closing on CEF’s behalf. Dennis Donovan executed the 1985 transactions on Jannock’s behalf. He was authorized to do this by a motion of Jannock’s board of directors on December 12, 1985 which stated:

It was resolved that the President and Vice-President Finance of the Corporation be and they are hereby authorized to enter into an agreement which they believe to be in the interests of the Corporation, for the purpose of reducing the taxes otherwise payable by the Corporation.

[Exhibit AR-1, Vol. 2, Tab 38.]

Mr. Teskey took some documents to Toronto on December 29, 1985. Others were couriered on December 30, 1985. All documents were signed and registered by December 31, 1985 in Edmonton and Toronto. The Memorandum of Agreement was signed then by Jannock and the general and limited partners (Exhibit AR-1, Vol. 4, Tab 59C). Clauses 2.01 to 2.04, 3.02(a) and (b) and 3.03(a) read:

2.01 Sale and Purchase of Units

The Vendors shall sell, assign, transfer and set over to the Purchaser, and the Purchaser shall purchase from the Vendors, the number of Units set opposite their respective names in Schedule A hereto, being a total of 90 Units, as of and from the Closing Date.

2.02 Purchase Price

The price payable for the Units hereby purchased and sold (the “Purchase Price”) shall be the aggregate of

(a) $8,547,386.00, being the limited partners’ net capital as shown in the interim audited financial statement of the Fund for the eight month period ended on August 31, 1985; and

(b) the amount which is 7.5 per cent of the non-capital losses of the Fund for the financial year of the Fund ending on December 31, 1985 allocated to the Purchaser pursuant to Section 96 of the Income Tax Act (Canada) as reported to the Vendors and the Purchaser not later than April 30, 1986 by Coopers & Lybrand, Chartered Accountants, the auditors of the Fund and of the Purchaser as at the date hereof.

2.03 Payment of Purchase Price

The Purchaser shall pay and satisfy the Purchase Price as follows:

(a) as to an amount equal to $7,920,183.00, by delivery at the Time of Closing to the Vendors of 20 promissory notes of the Purchaser in the form annexed hereto as Schedule B in the aggregate sum of $7,920,183.00, each of such promissory notes to be payable to one of the Vendors and to be in an amount equal to the product of $88,002.03 multiplied by the number of Units set opposite such Vendor’s name in Schedule A hereto; and

(b) as to an amount equal to $627,203.00, by delivery at the Time of Closing to 338863 Alberta Ltd. on behalf of all of the Vendors of a promissory note of the Purchaser in the form annexed hereto as Schedule B in the sum of $627,203.00; and

(c) as to the balance of the Purchase Price, by delivery at the Time of Closing to the Escrow Agent of an amount of money equal to $500,000.00, being an estimate of the portion of the Purchase Price to be calculated in accordance with section 2.02(b) hereof, such amount to be adjusted by payment by the Purchaser to the Escrow Agent of any shortfall or repayment by the Escrow Agent to the Purchaser of any overpayment within 10 days after receipt by the Purchaser and the Vendors of the report of Coopers & Lybrand, Chartered Accountants, referred to in section 2.02(b) hereof.

2.04 Closing

The closing of the transaction contemplated herein shall take place at 12:00 o’clock noon (Toronto time) on the Closing Date at the offices of the Escrow Agent or at such other time and place as may be mutually agreed upon by the Vendors and the Purchaser.

3.02 Representations of the Vendors and Cancom

The Vendors and Cancom jointly and severally warrant and represent to the Purchaser that:

(a) the interim audited financial statement of the Fund for the eight month period ended on August 31, 1985, a copy of which is attached hereto as Schedule C, constitutes a true, accurate and complete statement of the affairs and financial position of the Fund as at that date and the results of its operations for the period then ended, and that there were no liabilities, contingent or otherwise, not reflected in the said statement at that date nor any provisions for estimated declines in the market values of revenueproducing properties or properties held for development or resale of the Fund or for uncollectible amounts with respect to agreements, debentures or mortgages receivable of the Fund not reflected in the said statement at that date;

(b) that the total net equity of the Limited Partners in the Fund will, on the Closing Date, be not less than the equity disclosed in the interim audited financial statement of the Fund for the eight month period ended August 31, 1985;

(c) that the Fund has not since August 31, 1985, made any distributions or appropriations of profits or capital to the Limited Partners;

(d) that no material adverse change has occurred in the financial position of the Fund since August 31, 1985;

3.03 Purchaser's Conditions

The Vendors represent, warrant and covenant with the Purchaser as follows, and the fulfilment of each of the following covenants is a condition precedent to the Vendors’ and the Purchaser’s obligations to complete the sale and purchase of the Units contemplated herein:

(a) at or before the Time of Closing, the Canadian Commercial Bank shall have released or shall have agreed to release the Fund from any and all liabilities and obligations of the Fund to it;

3.04 Survival of Warranties and Representations

The representations, warranties and covenants of the Vendors and Cancom in sections 3.01 and 3.02 shall survive the Closing Date, notwithstanding the closing of the transaction herein contemplated. Notwithstanding the closing of the transaction herein contemplated, the representations, warranties and covenants of the Vendors and Cancom in section 3.02 shall continue in full force and effect until the termination of the Escrow Agreement.

Closing date was defined as December 31, 1985. It was agreed that execution could be in counterpart.

The 1985 transactions are carefully and fully detailed in Field and Field’s reporting letter to the limited partners dated March 17, 1986 (Exhibit AR-1, Vol. 5, Tab 102). They transferred the limited partnership units to corporations which enabled the limited partners to have more control over the general partner. The corporations then transferred the limited partnership units to Jannock. After that, the limited partnership transferred all of its assets, but one, to a new limited partnership controlled by the pension funds. As a result:

1. The limited partners realized something from their investments.

2. Jannock acquired an operating Alberta limited partnership with a business history.

3. The partnership realized losses when it sold assets.

4. These losses were allocated to Jannock as the owner of the limited partnership units when the losses were realized by the sale of assets in 1985.

5. Jannock used the non-capital losses allocated to it to reduce taxes otherwise payable.

Some problems arose in these complicated and voluminous proceedings with Jannock:

1. One property transferred was misdescribed. This was corrected. The correct property was always known and understood by the parties to be what was eventually and correctly transferred. That is not fatal.

2. The Gulf property, which was retained by CEF, took much longer to transfer than was originally expected. That did not affect any of the transactions.

3. Consents were not obtained from the mortgagees of the various real estate to the transfer of assets. However, this did not affect the validity of the Jannock deals.

4. Condition 3.03(a) was not met. By its actions on December 31, 1985, Jannock waived compliance with this at that date. Jannock gave several extensions orally. The Respondent made an issue of the problem of 3.03(a). Negotiations with the receiver of Canadian Commercial Bank were protracted. However, the receiver of Canadian Commercial Bank, which was owed $2,800,000 by CEF, never sued, nor did it even formally demand payment. Canadian Commercial Bank was the instigator of CEF. Mr. Teskey said he was negotiating to discount the $2,800,000 when dealing with the receivers. The partnership was a serious commercial loser which was managed by people put in their positions by Canadian Commercial Bank. It is obvious that CML was extremely close to Canadian Commercial Bank. The CEF units had been sold privately. The Court has no doubt that any law suit by the receiver of Canadian Commercial Bank would have been countered by very serious lawsuits against its receiver. Moreover the receiver would have understood this as a practical commercial fact. Mr. Teskey described the negotiations as a “dance” and they were. Had they not been, Canadian Commercial Bank would have sued or demanded, and it did not. All of this was foreseeable by all the parties on December 31, 1985. These negotiations were a problem for Jannock because it wanted to, and eventually did, replace CML with its own general partner. Once this was done Jannock planned to, and did, transfer its own property into CEF.

CML and its officers were also using the negotiations as a lever - they wanted releases from Canadian Commercial Bank’s receiver and CML’s officers would not sign transfers. They knew that Jannock did not plan to retain them as the manager of CEF. Nor were the pension funds satisfied with CML. The Canadian Commercial Bank release was finally received by CEF’s law firm on January 7, 1987. It could not be released to Jannock until March, 1987. The fact that this delay was not an obstacle to the deal which was adopted by the actions of the parties is confirmed by the fact that they entered into a second deal in December 1986.

5. As it turned out, the net equity of the limited partners in the Fund as disclosed in the December 31, 1985 audit was less than what was disclosed in the August 31, 1985 audit. (This indicates to the Court that the limited partners and Jannock honestly believed that the bottom of the market had been reached and the partnerships’ businesses had a profitable outlook — otherwise they would not have inserted clause 3.02(b) in that form.) Pursuant to the agreement adjustment clause, the 7.5 figure was adjusted by an amending agreement and a subsequent agreement to correct a mathematical error without any dispute to reflect the December 31, 1985 audited losses.

On December 31, 1985:

1. Jannock owned the CEF limited partnership units. CEF continued to operate in Alberta. (Mr. Donovan testified, and Exhibit AR-1, Vol. 5, Tab 101 confirmed, that Jannock amended its public liability insurance before the end of 1985 and covered CEF, and later CEFZ, in both 1986 and 1987).

2. CML, the general partner, continued to manage CEF.

3. A new operating limited partnership, CEF2, was owned by the corporations controlled by the former limited partners. It had purchased all of the partnership assets from CEF, except the Gulf property, for their fair market value. (There was an offer to purchase on the Gulf property by “Mogo” which was never carried out.)

4. Promissory notes from Jannock were, in essence, matched by notes which paid for the assets on December 31, 1985.

Contrary to the reasonable expectations of the parties, CEF2’s assets eroded badly in 1986, due to the continuing erosion of the economy.

In December 1986, CEF2 entered into an almost identical transaction with Jannock. It was simpler because the limited partnership units had been transferred to taxable Canadian corporations by the pension funds. There were competitors bidding for the continuing 1986 losses. As a result Jannock paid 13.5 for each dollar of non- capital losses that Jannock could use to reduce taxes otherwise payable. By the last day of 1986 this transaction was completed. The transaction proceeded as follows:

1. Jannock purchased the CEF2 limited partnership units on December 23, 1986 (Exhibit AR-1, Vol 10, Tab 238). CEF2 continued to operate in Alberta.

2. The general partner of CEF2 continued to manage CEF2, all the units of which were owned by Jannock.

3. On December 30, 1986 a new operating Alberta limited partnership, CEF Limited Partnership No. 3 (“CEF3”), purchased all of the partnership assets, except the Abbeydale property, for their fair market value (Exhibit AR-1, Vol. 10, Tab 242). CEF3 was owned and controlled by corporations controlled by the former limited partners. Field and Field reported on the 1986 transactions to the board of directors for the pension funds by a letter dated December 30, 1986 (Exhibit AR-1, Vol. 10, Tab 251).

4. Promissory notes from Jannock were, in essence, matched by notes which paid for the assets in 1986.

Peter Hayward attended the closings for Jannock and David Roberts attended as solicitor for CEF2 in counterpart in Edmonton in 1986.

Peter Hayward, a former chartered accountant, who at times served as treasurer and as vice-president and treasurer of Jannock stated in respect to the purchases of partnerships in Alberta by Jannock in 1985 and 1986 that Jannock was acquiring “ongoing partnership units in ... an ... ongoing business venture” and that Jannock intended “to carry on an ongoing business related to real estate” in the partnerships purchased. He summarized each transaction as a purchase of partnership units and a sale of assets that resulted in tax losses that provided Jannock with an ongoing business venture. He also stated that Jannock intended to move its own properties into the partnerships. Mr. Hayward’s testimony is accepted by the Court.

The Court accepts Mr. Teskey’s evidence that at the end of 1985 the limited partners thought that the economy in Alberta had bottomed out and that business would improve for CEF2. It also accepts Mr. Donovan’s testimony that Jannock anticipated on December 31, 1985 that it would place its own general partner and its own property in CEF in 1986 and that CEF would carry on business. Both Jannock and CEF2 expected the Canadian Commercial Bank release constantly throughout 1986 and were caught in the Canadian Commercial Bank “dance”. Jannock proceeded with its plans for CEF and CEF2 as soon as it could.

Because Field and Field were dealing with a large number of untaxable pension funds many of which were unsophisticated, the documents on the vendors’ side of these transactions are voluminous. They are also very explicit as to the pension funds’ purposes and reasons because Mr. Teskey, Field and Field and the general partners under Field and Field’s supervision required, and were given, broad powers. As a result much of the documentation, evidence submitted and reasoning upon which the assessments are based are from the vendors’ points of view.

But it is the purchaser, Jannock, with which the Court is concerned. Jannock is the taxpayer which is assessed. Its purposes and intentions are what the Court must decide upon.

In both 1985 and 1986 Jannock received documents that were fully executed. Appropriate and proper searches done by Jannock’s solicitors before closing revealed no flaws in titles or registrations, or in the documents presented by the vendors except those already described and dealt with in this judgment. At closing all necessary registrations to complete the deals before the end of each year were done on or before December 31. Each of its acquired partnerships was an operating Alberta limited partnership carrying on business on that date.

The Court finds on the testimony of Mr. Donovan and Mr. Hayward that Jannock intended that those partnerships would continue to carry on business on December 31, 1985 and December 31, 1986. Given the price of acquisitions at fair market value, the parties had reasonable views in each year that the bottom of the economy had been reached. It was reasonable to expect that each partnership acquired by Jannock would be profitable in the future.

Mr. Hayward stated that Jannock wanted a full release of any obligation to Canadian Commercial Bank because Jannock wanted to move its own properties into the partnership. Jannock did transfer property into CEF2 in about March of 1987 after the Canadian Commercial Bank release was obtained (Exhibit AR-1, Vol. 11, Tab 287). CEF2 received income from property. CEF also received property and income from property after Jannock acquired that partnership. There is no evidence that either one of Jannock’s partnerships ever showed a net profit on rentals after Jannock acquired the limited partnership units. Any property either partnership acquired and sold when Jannock was a limited partner was sold at a loss. The Respondent did not assume or plead that the reassessments occurred because the partnerships did not continue to carry on business.

Mr. Weir, vice president and general counsel of Jannock testified that Jannock did not want to transfer property into CEF until CML resigned as its general partner. The pension funds had replaced CML’s management once and the evidence indicates that CML was an instrument of Canadian Commercial Bank. Therefore, this caution on Jannock’s part is understandable. CML would not resign until it obtained a release from Canadian Commercial Bank. CEF retained the Gulf property for 20 days after it was transferred to Jannock; its rent was offset by expenses. On June 23, 1987 CML was removed as CEF’s general partner and replaced by Jannock’s general partner 359856 Alberta Ltd. (Exhibit AR-1, Vol. 8, Tabs 187 and 191). In September Jannock transferred property in the Maritimes to CEF. It was never rented. It was 60 acres of bare land which CEF sold in 1990 at a reported loss. In August 1990 CEF acquired the Nisku property, a steel service centre building in Alberta. It is still being rented by CEF.

Because each partnership was originally owned 84:6 by limited partners which were pension funds and were not taxable, each viewed all of its assets as inventory (See AR-1, Vol. 2, Tab 36, notes 1(d) and (e)). Michael Edmonds, C.A., a manager with Coopers & Lybrand in charge of the December 31, 1985 audit of CEF and the December 31, 1986 audit of CEF2 testified that, in the course of the 1986 audit, discussions occurred among the audit staff and with the audit partners, John Tweddle and Jim Stout in Edmonton. Mr. Tweddle explained these discussions fully and to the satisfaction of the Court when he gave evidence in rebuttal. He was an audit partner in charge of CEF2 and looked at its assets from CEF2’s point of view. CEF2 had treated its property two ways: income property had been depreciated, and property which did not receive income had been treated as inventory. At December 31, 1986, CEF2’s year end, it had only one property. The rest had been sold to CEF3. It was known that the one remaining property was going to be sold. Therefore Coopers & Lybrand and the general partner treated all of the property as inventory. Mr. Tweddle’s explanation and the treatments are both logical. They are accepted by the Court.

Mr. Weir participated in signing documents when Jannock acquired the limited partnership units of CEF2 on December 23, 1986. CEF2 retained the Abbeydale property. Its income was off-set by expenses. 359856 Alberta Ltd. was appointed as its general partner in June, 1987 (AR-1, Vol. 12, Tabs 303 and 304). In July 1987 Jannock transferred a metal fabricating plant it owned in Edmonton to CEF2. One month’s rent was received on this property. The property was sold by CEF2 in March 1990. CEF2 also owns a property in Mississauga, Ontario, which it rented for a few months and is now developing.

In both 1985 and 1986 Jannock purchased all of the limited partnership units of CEF and CEF2, respectively. All of the consideration, documentation, searches and registrations required to complete the purchase were paid and done before the end of each respective year. In each year the limited partnerships CEF and CEF2 sold assets of the partnerships to CEF2 and CEF3 respectively. All of the considerations, documentation and searches necessary to complete the sales were paid and done before the end of each respective year. In both transactions the parties were not related, and they were at arm’s length. The values agreed to were correct and the consideration was real and enforceable. The adjustment clause for the 7.5 and the 13.5 is an ordinary clause and the calculations to arrive at the final figure for the losses were done by an independent party pursuant to the clause. The amending agreements (and the mathematical amendment to the 1985 agreement) were in accordance with normal business practice in such transactions.

The transactions were complete and effective. Business entities and properties were transferred for consideration. The contracts bound the parties and they did not deceive anyone. The evidence of the transfers is plain for anyone to see. The contracts and indentures had serious and binding legal and financial consequences for all of the parties.

The pension funds which were the original limited partners were in control of CEF2 and CEF3 as planned. They used the income from the escrow funds to keep the properties that were not surrendered or quit claimed in the post-National Energy Policy Alberta economy operating in the expectation that things would turn around. The pension funds investments at the last calculation presented to the Court had values of less than 10 per dollar invested. One has now written its interest’s value down to $18. After 1981 no income on the partnership investments was paid to them. It was used to keep properties operating.

Jannock in turn received two Alberta operating partnerships, that is to say legal entities in business in the jurisdiction of Alberta with an operating history. Such legal entities can have a value and a purpose. These did to Jannock. The value was what Jannock paid above the value of the notes. The purpose was the use that Jannock put them to - to hold, rent and sell real property. It was the same purpose and use they had before and when Jannock bought the units in 1985 and 1986. These business entities and operations had no other purpose except to make a profit. At the time that Jannock acquired the limited partnership units, it was reasonable to expect that they would be profitable. Jannock transferred property to them from which it was reasonable to expect a profit on operations. However, just as the operations of the properties in CEF3 have not been profitable, there is no evidence that Jannock’s partnerships have had a profitable history.

On the evidence respecting each partnership the Court finds that at the time that Jannock acquired each partnership, each was in business and had a reasonable expectation of profit from operating property in Alberta. Mr. Teskey testified that at the time of each sale at the end of 1985 and at the end of 1986, he and the owners of the limited partnership units felt that the bottom had been reached and they expected an improvement in business and in property values. On the evidence of Mr. Donovan and Mr. Hayward, Jannock intended to sell the properties in the partnerships it acquired. Jannock intended to and in fact did put its own general partner and properties into these partnerships and intended the partnerships to be in the business of operating real property in Alberta partnerships. In the Court’s view, on the entire evidence, both the limited partnerships, after they were acquired by Jannock, had a reasonable expectation of profit and were in business.

In summary, the Court finds that Jannock purchased the partnership units in 1985 and 1986. It was a member of those partnerships in 1985 and 1986. On the evidence, they were operated for the purpose of earning a profit. It was reasonable at all times to expect that the economy would turn around and that the properties owned by each Jannock owned partnership would be profitable. There is no evidence that they were profitable in those times, but it is general public knowledge that a great many firms operating real estate businesses much like the partnerships’ could not make a profit in those times either. On the evidence the losses of the partnerships were allocable to reduce Jannock’s income and they were allocated to Jannock. These allocations reduced Jannock’s income in 1985 and in 1986. The evidence of Patricia O’Malley, F.C.A., respecting Jannock’s reports of these matters is preferred. Her qualifications respecting securities matters are superior. Her opinion and her oral testimony in rebuttal to the Respondent’s expert witness about the methods of reporting adopted by Jannock were expressed more logically, especially with respect to the securities aspect, and with a foundation of reasoning which the Court accepts.

Jannock was legally able to use each dollar of non-capital loss to reduce taxes otherwise payable in 1985 and in 1986 as a result of the allocations, and it did. In the words of Mahoney J. of the Federal Court of Appeal in Irving Oil Ltd. v. R. (sub nom. Irving Oil Ltd. v. The Queen) (sub nom. Canada v. Irving Oil Ltd.), [1991] 1 C.T.C. 350 (sub nom KR. v. Irving Oil Ltd.) 91 D.T.C. 5106, at page 359 (D.T.C. 5113):

I would simply say that I fully agree with the learned trial judge that it was not a sham in the sense defined by Lord Diplock in Snook v. London & West Riding Investments, Ltd. As the trial judge found,

...the actions of the parties and the documents executed by them do not mask, but correspond with, the very legal rights and obligations upon which the parties embarked.

Judge Bell of this Court was more particular and used words that apply to the parties in this case in his judgment in Central Supply Co. (1972) Ltd. v. R. (sub nom. Central Supply Co. v. Canada), [1995] 2 C.T.C. 2320, 95 D.T.C. 434, at page 2348 (D.T.C. 449):

I have no difficulty in concluding that the actions taken by the Appellants were precisely those that were anticipated and that were reflected in the detailed documentation. The uncontroverted evidence made it clear that those documents created precisely the legal rights intended by the parties who executed same. Accordingly, no sham exists in the transactions entered into by the Appellants.

All of the transactions were complete and effective. They were not ar- tificial. Nor were they a sham.

The argument put forward by the Respondent respecting subsection 245(2) of the Income Tax Act was dealt with by the Federal Court of Appeal in Husky Oil Ltd. v. R. (sub nom. Husky Oil Ltd. v. Canada) (sub nom. Canada v. Husky Oil Ltd.), [1995] 1 C.T.C. 460 (sub nom. R. v. Husky Oil Ltd.), 95 D.T.C. 5244 at page 464 (D.T.C. 5246), when Pratte J. said for the Court:

The Tax Court allowed the respondent’s appeal on the ground that, as the respondent acquired the shares of Carma’s and Brinco’s subsidiaries for a price which had been determined in bona fide arm’s length negotiations and which, for all concerned, represented what was then thought to be the fair market value of those shares, it cannot be said that, as required by subsection 245(2), either Carma or Brinco conferred any benefit on the respondent.

The tax refund obtained by the Respondent was a benefit. No one denies that. But was that benefit conferred on the respondent by Brinco, Carma or another person? The respondent was either entitled or not to obtain the tax refund. If it was so entitled, that benefit was not conferred on the respondent by anyone but merely flowed from the provisions of the Income Tax Act that deemed the respondent to have suffered a capital loss in 1986 and authorized it to deduct part of that loss in the computation of its 1984 income; ...

Those words are applicable in the case before the Court.

Paragraphs 5 and 6 of Jannock’s Notice of Appeal (93-192(IT)G) for 1985 read:

5. On December 31, 1985 Jannock purchased all of the limited partnership units of Cancom and became its sole limited partner. Immediately thereafter, Cancom sold its real estate interests other than one parcel of land located in Alberta to a partnership named CEF Limited Partnership No. 2. These real estate interests were sold for their fair market value but at prices substantially below those for which they had been acquired by Cancom. As a result, Cancom realized capital and non- capital losses for income tax purposes in the amount of $9,009,396.00 for its fiscal period ending December 31, 1985 which, pursuant to the partnership agreement governing Cancom, were allocated to Jannock as the sole limited partner as at December 31, 1985.

6. In computing its income for the 1985 taxation year, Jannock deducted the capital and non-capital losses incurred by Cancom that were allocated to it pursuant to the partnership agreement governing the operation of Cancom.

Paragraph 5 of the Respondent’s Reply to this pleads:

5. In respect of the facts alleged in paragraph 6 of the Notice of Appeal, he admits that the Appellant deducted a capital loss of $260,242.00 and non-capital losses of $8,879,275.00 in computing its income for its taxation year ended December 31, 1985 but denies that the Appellant was entitled to do so.

Assumptions 7(h) and (i) of that Reply read:

7. In so reassessing the Appellant, the Minister made, inter alia, the following assumptions of fact:

(h) in its year ending December 31, 1985, the value of the property owned by CEF had declined resulting in an anticipated loss of $8,879,275.00 which amount included the decreased value of its real estate assets and an operating loss in its year ending December 31, 1985;

(i) CEF had also realized a capital loss of $260,242.00 resulting from the sale of securities;

Paragraphs 5 and 6 of Jannock’s Notice of Appeal (93-1491(IT)G) for 1986 read:

5. On December 23, 1986 Jannock purchased all of the limited partnership units of CEF No. 2 and became its sole limited partner. Immediately thereafter, CEF No. 2 sold its real estate interests other than one parcel of land located in Alberta to a partnership named CEF Limited Partnership No. 3. These real estate interests were sold for their fair market value but at prices substantially below those for which they had been acquired by CEF No. 2. As a result, CEF No. 2 realized capital and non- capital losses for income tax purposes for its fiscal period ending December 31, 1986 of which $6,813,662 was allocated to Jannock as the sole limited partner as at December 31, 1986, pursuant to the partnership agreement governing CEF No. 2.

6. In computing its income for the 1986 taxation year, Jannock deducted the capital and non-capital losses incurred by CEF No. 2 that were allocated to it pursuant to the partnership agreement governing the operation of CEF No. 2.

Paragraph 6 of the Respondent’s Reply to this pleads:

6. In respect of the facts alleged in paragraph 6 of the Notice of Appeal, he admits only that the Appellant sought to deduct non-capital losses of $6,799,462.00 and net capital losses of $14,200.00 in its taxation year ending December 31, 1986 and that the deduction of these amounts was denied by reassessment, notice of which was dated April 12, 1991.

Assumption 1 l(r) of that Reply reads:

11. In reassessing, the Minister made, inter alia, the following assumptions of fact:

(r) after completion of these transactions, the loss of CEF No. 2 for the 1986 taxation year was computed to be $6,806,268.00; as a result, the Appellant paid a further amount as a loss premium of $162,846.18 for a total loss premium paid of $918,846.18;

In its Notices of Appeal, the Appellant put the tax usage and the amounts of losses into contention. The Respondent acknowledged that in its Replies and specifically described the reductions claimed by the Appellant in the material quoted. In the course of argument, at the opening of Court on May 10, 1996, it was proposed by the Respondent’s counsel that the Court should not deal with the tax usage and tax amounts in these appeals. Rather, it was suggested that the Court should determine the other issues and that reassessments would follow. It was further proposed that if those reassessments are not appropriate, further appeals can be launched. The Appellant’s counsel opposed this. As stated then by the Court, these matters were placed in contention by the reassessments and the Notices of Appeal. In the instant cases, they are specifically referred to in the Replies and the assumptions. The Appellant’s witnesses testified as to the amounts of losses Jannock claimed. This hearing lasted ten full days during which a great deal of time was spent on the vendors’ side of the sales of the limited partnership units. It is the duty of the Court and the parties to avoid excesses in and excessive litigation. These matters are part of the assessments and appeals before the Court. Therefore the Court finds that:

(a) Jannock suffered a non-capital loss of $8,879,275.00 that it is entitled to use to reduce taxes otherwise payable in its taxation year ending December 31, 1985. Pursuant to the admission of Jannock’s counsel made in discussions respecting this matter on May 10, 1996, Jannock also suffered a capital loss of $260,242.00 in its taxation year ending December 31, 1985.

(b) Jannock suffered a non-capital loss of $6,799,462.00 that it is entitled to use to reduce taxes otherwise payable in its taxation year ending December 31, 1986. Jannock also suffered a capital loss of $14,200.00 in its taxation year ending December 31, 1986.

The parties left argument respecting costs until after judgment issued. The office of the Registrar will contact the parties within 14 days and fix a motion date to argue costs.

Appeal was allowed.