Date: 20030408
Docket: A-347-02
Citation: 2003 FCA 177
CORAM: DÉCARY J.A.
LINDEN J.A.
NOËL J.A.
BETWEEN:
DON DEPTUCK
Applicant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on March 27, 2003.
Judgment delivered at Winnipeg, Manitoba, on April 8, 2003.
REASONS FOR JUDGMENT BY: NOËL J.A.
CONCURRED IN BY: DÉCARY J.A.
LINDEN J.A.
Date: 20030408
Docket: A-347-02
Citation: 2003 FCA 177
CORAM: DÉCARY J.A.
LINDEN J.A.
NOËL J.A.
BETWEEN:
DON DEPTUCK
Applicant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an application for judicial review of a decision of Judge O'Connor of the Tax Court of Canada rendered pursuant to the informal procedure (Deptuck v. Canada [2002] D.T.C. 1835; [2002] 3 C.T.C. 2396) dismissing the applicant's appeal against a reassessment issued with respect to his 1983 taxation year, with costs in favour of the respondent.
Background
[2] At issue is whether the acquisition of specified assets by a partnership is subject to the arm's length rule set out in paragraph 69(1)(a) of the Income Tax Act (the Act), and if so whether the Tax Court Judge correctly held that the transaction in issue did not take place at arm's length.
[3] The Tax Court Judge held that the facts and issues in the appeal had been considered and conclusively disposed of in Madsen v. The Queen, 98 D.T.C. 1668, which decision was upheld on appeal in Chutka v. The Queen, 2001 D.T.C. 5093. He proceeded to dismiss the appeal on the basis that the aforementioned decision of the Federal Court of Appeal was dispositive of the matter before him.
[4] There is no need to restate the factual background which is set out in full in the decision under review. It suffices to say for present purposes that in Chutka, it was held that the transaction here in issue involving Inter-Teck Oil Limited partnership (ITOLP) and International Resource Recovery Inc. (IRRI) had not taken place at arm's length. This conclusion was arrived at on the basis that at the time of the transaction (November 10, 1982), the vendor, IRRI was controlled by Jagroop S. Gill who was also ITOLP's sole limited partner and who controlled its general partner, Inter-Teck Management Ltd. (ITML).
[5] Having so found, this Court in Chutka confirmed that paragraph 69(1)(a) had been properly invoked by the Minister to reduce the actual purchase price of the assets acquired by ITOLP ($6,850,000) to an amount equal to their fair market value ($442,000).
Relevant Statutory Provisions
[6]
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69(1) Except as expressly otherwise provided in this Act,
(a) where a taxpayer has acquired anything from a person with whom the taxpayer was not dealing at arm's length at an amount in excess of the fair market value thereof at the time the taxpayer so acquired it, the taxpayer shall be deemed to have acquired it at that fair market value;
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69(1) Sauf disposition contraire expresse de la présente loi:
(a) le contribuable qui a acquis un bien auprès d'une personne avec laquelle il avait un lien de dépendance pour une somme supérieure à la juste valeur marchande de ce bien au moment de son acquisition est réputé l'avoir acquis pour une somme égale à cette juste valeur marchande;
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96(1) Where a taxpayer is a member of a partnership, the taxpayer's income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, ..., shall be computed as if
(a) the partnership were a separate person resident in Canada;
(b) the taxation year of the partnership were its fiscal period;
(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of
(i) each taxable capital gain and allowable capital loss of the partnership from the disposition of property, and
(ii) each income and loss of the partnership from each other source or from sources in a particular place,
for each taxation year of the partnership;
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96(1) Lorsqu'un contribuable est un associé d'une société de personnes, son revenu, le montant de sa perte autre qu'une perte en capital, de sa perte en capital nette, de sa perte agricole restreinte et de sa perte agricole, pour une année d'imposition, [...], est calculé comme si:
(a) la société de personnes était une personne distincte résidant au Canada;
(b) l'année d'imposition de la société de personnes correspondait à son exercice;
(c) chaque activité de la société de personnes (y compris une activité relative à la propriété de biens) était exercée par celle-ci en tant que personne distincte, et comme si était établi le montant:
(i) de chaque gain en capital imposable et de chaque perte en capital déductible de la société de personnes, découlant de la disposition de biens,
(ii) de chaque revenu et perte de la société de personnes afférents à chacune des autres sources ou à des sources situées dans un endroit donné,
pour chaque année d'imposition de la société de personnes;
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248(1) In this Act,
"person", or any word or expression descriptive of a person, includes any corporation, and any entity exempt, because of subsection 149(1), from tax under Part I on all or part of the entity's taxable income and the heirs, executors, administrators or other legal representatives of such a person, according to the law of that part of Canada to which the context extends;
"taxpayer" includes any person whether or not liable to pay tax;
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248(1) Les définitions qui suivent s'appliquent à la présente loi.
« personne » Sont comprises parmi les personnes tant les sociétés que les entités exonérées de l'impôt prévu à la partie I sur tout ou partie de leur revenu imposable par l'effet du paragraphe 149(1), ainsi que les héritiers, exécuteurs testamentaires, administrateurs ou autres représentants légaux d'une personne, selon la loi de la partie du Canada visée par le contexte. La notion est visée dans des formulations générales, impersonnelles ou comportant des pronoms ou adjectifs indéfinis.
« contribuables » Sont comprises parmi les contribuables toutes les personnes, même si elles ne sont pas tenues de payer l'impôt.
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251(1) For the purposes of this Act,
(a) related persons shall be deemed not to deal with each other at arm's length;
(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.
(2) For the purpose of this Act, "related persons", or persons related to each other, are
(a) individuals connected by blood relationship, marriage or adoption;
(b) a corporation and
(i) a person who controls the corporation, if it is controlled by one person,
(ii) a person who is a member of a related group that controls the corporation, or
(iii) any person related to a person described in subparagraph (i) or (ii);
(c) any two corporations
(i) if they are controlled by the same person or group of persons,
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251(1) Aux fins de la présente loi,
(a) des personnes liées sont réputées avoir entre elles un lien de dépendance; et
(b) la question de savoir si des personnes non liées entre elles n'avaient aucun lien de dépendance à une date donnée est une question de fait.
(2) Aux fins de la présente loi, des « personnes liées » ou des personnes liées entre elles, sont
(a) des particuliers unis par les liens du sang, du mariage ou de l'adoption;
b) une corporation et
(i) une personne qui contrôle la corporation si cette dernière est contrôlée par une personne,
(ii) une personne qui est membre d'un groupe lié qui contrôle la corporation, ou
(iii) toute personne liée à une personne visée au sous-alinéa (i) ou (ii);
(c) deux corporations quelconques
(i) si elles sont contrôlées par la même personne ou le même groupe de personnes,
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Income Tax Regulations
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1102(1a) Where the taxpayer is a member of a partnership, the classes of property described in this Part and in Schedule II shall be deemed not to include any property that is an interest of the taxpayer in depreciable property that is partnership property of the partnership.
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1102(1a) Lorsqu'un contribuable est associé d'une société de personnes, les catégories de biens définies dans la présente partie et dans l'annexe II seront réputées ne comprendre aucun bien constituant une participation du contribuable dans un bien amortissable d'une société de personnes appartenant à la société de personnes.
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Arguments in Support of Application
[7] In support of his application for judicial review, the applicant alleges that the Tax Court Judge misconstrued the Chutka decision in holding that it was supportive of the reassessment in issue. According to the applicant, the strict application of the test laid down in Chutka has the opposite effect (Applicant's Memorandum, paragraph 6).
[8] Specifically, the applicant argues that if it is appropriate to look to the partners in applying paragraph 69(1)(a) as was held in Chutka, the transaction insofar as it involves him as a partner was at arm's length since he is unrelated to either Mr. Gill, IRRI or ITML (Memorandum of Fact and Law, paragraph 7). However, the applicant states that applying the arm's length test at the partner level is demonstrably unjustified as it would result in arm's length partners acquiring assets at the purchase price and non arm's length partners acquiring the same assets at fair market value, a result that was clearly not contemplated by Parliament. According to the applicant, the arm's length test, if it applies at all, must be applied at the partnership level (Applicant's Memorandum, paragraph 8).
[9] Having said this, the applicant maintains that the arm's length concept only applies as between persons (see subsection 251(1)) and, as a partnership is not "deemed" to be a person, this concept has no application with respect to partnerships (Applicant's Memorandum, paragraph 9).
Analysis and Decision
[10] With respect to this last argument, paragraphs 96(1)(a) and (c) provide respectively that where a taxpayer is a member of a partnership the income therefrom shall be computed "as if the partnership were a separate person..." and "as if ... each partnership activity (including ownership of property) were carried on by the partnership as a separate person" (my emphasis). This has the same effect as a deeming provision for the limited purpose contemplated by section 96. It follows in my view that, absent indications to the contrary, a partnership must be regarded as a separate person for the purpose of computing income with the result that the rules prescribed in Division B (Computation of Income), including paragraph 69(1)(a), apply to a partnership as if it were a person.
[11] This Court in Chutka appeared to be concerned by the fact that paragraph 69(1)(a) applies to a "taxpayer" and that a partnership, while a person, is not a "taxpayer". However, this concern is alleviated altogether by the fact that subsection 248(1) defines a "taxpayer" as including "any person whether or not liable to tax". Similarly, the fact that a partnership does not figure amongst the persons who are deemed by paragraph 251(1)(a) not to deal at arm's length does not mean that a partnership is excluded from the arm's length rule when the facts required to give rise to its application are present. There is no obstacle to the application of paragraph 69(1)(a) to a partnership, and it is simply not conceivable that Parliament while treating a partnership as a person for the purposes of computing income would have disregarded the application of the arm's length principle, a rule that is fundamental to the computation of income.
[12] It is therefore apparent that this Court in Chutka correctly held that the arm's length rule set out in paragraph 69(1)(a) was applicable to the transaction in issue. As to the level at which this rule was to be applied, nothing turned on this in Chutka since the transaction was non-arm's length whether one was to look to the partners or to the partnership.
[13] However, it seems clear that when regard is had to subsection 96(1), the arm's length rule, which operates at the income computation stage, must be applied to the partnership rather than the partners. Subsection 96(1) envisages a single computation of income at the partnership level which requires in turn that partnership property be held at a uniform cost (Regulation 1102(1a) is evocative of this treatment with respect to depreciable property held by a partnership).
[14] The question to be answered when applying paragraph 69(1)(a) is whether a taxpayer - which as noted includes a person and hence a partnership for the purposes contemplated by section 96 - has acquired property from a person with whom the taxpayer was not dealing at arm's length at an amount in excess of the fair market value thereof at the time.
[15] In order to answer this question, one must identify the directing mind of the parties to the transaction and, if the directing mind of the disposing party is the same as the directing mind of the acquiring party, and the consideration paid is excessive, the provision applies.
[16] In this instance, there can be no doubt that the directing mind of IRRI and ITOLP was the same since Mr. Gill controlled both and indeed was the only person who participated in ITOLP's decision to acquire the assets at the stated price. The Tax Court Judge therefore came to the correct conclusion when he held, relying on Chutka, that the transaction was caught by paragraph 69(1)(a).
[17] The applicant argues in the alternative that the evidence before the Tax Court Judge in this case (in contrast with that in Chutka) shows that at the time of the acquisition, ITOLP had additional limited partners three of whom were not related to Mr. Gill and who held 9 of the 12 limited partnership units issued by ITOLP. According to the applicant, the Tax Court Judge erred by failing to recognize that ITOLP was under the de jure control of these individuals on the date of the transaction (Applicant's Memorandum, paragraph 10).
[18] The short answer to this argument is that there is no evidence that these additional partners had any say in the decision to acquire the assets at the stated price. In any event, the Tax Court Judge was entitled to hold that the applicant had failed to establish that these individuals were partners in ITLOP on November 10, 1982, the date on which the assets in issue were acquired (Reasons, paragraph 8).
[19] In coming to this conclusion, the Tax Court Judge quoted extensively from the submissions of counsel for the respondent (Reasons, paragraph 5) which revealed that although the individuals in question eventually became partners in ITLOP, they initially subscribed to an entity bearing a different name (i.e. Inter-Teck Oil Partnership rather than ITOLP). Counsel further submitted:
I would suggest it's reasonable to conclude that at some point these initial investors who signed on with Inter-Teck Oil Partnership, at some time they became participants in the limited partnership, Inter-Teck Oil Limited Partnership. What we don't know, what we have no evidence of is when that occurred. It must have occurred at some point in time, because the certificates say these people are at some point limited partners. It's at a point very much later in the proceedings, and I'll come to that when I look at the provisions of the Partnership Act. But they do at some point apparently become a part of the limited partnership.
[20] Counsel also alluded to the evidence which showed that for some investors the initial subscription form to the Inter-Teck Oil Partnership was exchanged for a new form bearing the name of ITOLP. Counsel commented from this:
Now, unfortunately, we don't have the replacement forms with respect to Mr. Deptuck or with respect to Mrs. Ward or Mr. Turner [the additional arm's length partners], and the evidence appeared to be that basically these witnesses that came before the court had no documentation other than the documentation that has been provided by my learned friend to the court. We do, of course, as always in this type of case, ... , have difficulties created simply by the effluxion of time. But clearly to the organized legal mind, it makes sense that you would have some actual documentation that would convert the people who signed on with Inter-Teck Oil Partnership into members of the actual limited partnership.
It is noteworthy that Mr. Gill had indicated in the course of his testimony that revised forms had been issued to all the initial subscribers (Applicant's Application Record, page 391).
[21] Counsel also alluded to the partnership certificate filed with the Registrar of Companies on November 10, 1982 which shows Mr. Gill as the only limited partner before pointing to a further difficulty:
Now, we have some other problems here, ..., with the facts. We know that the limited partnership agreement talks about contributions of $25,000. And when we look at the Certificate of Limited Partnership that's the Appellant's Tab 2, that also talks about capital contributions of $25,000. Now, Mr. Gill told the court that -- well, he had concluded that it was impossible for any of the investors that he was looking to, to come up with $25,000, so he had changed the amount to $6,250. The subscription forms of the type that is Appellant's Exhibit 1 or the Respondent's number 2, provide for this lesser amount, $6,250. The documentation that was filed with the Registrar of Companies on the 10th of November 1982 still talks in terms of the $25,000. So on the one hand Mr. Gill is signing up investors for $6,250, and on the other hand, virtually simultaneously, under another entity's name, he's setting up the system to have investors for $25,000.
[22] Counsel finally submitted:
... This is the cloak in which the limited partnership was presented to the Registrar of Companies. These are the people who were the partners at that date. That's the date when the equipment is sold. And, yes, the Minister has assumed that at some later date these other individuals, like [Mrs. Ward] and Mr. Turner, became partners in the limited partnership, but there certainly is no evidence that they were partners in the Inter-Teck Oil Limited Partnership on November 10th, 1982.
[23] This is the background against which the Tax Court Judge refused to accept that the three individuals in question who eventually became limited partners in ITOLP had that status as of November 10, 1982 when the assets in issue were acquired.
[24] The applicant asks this Court to come to a different conclusion on this narrow point. Although it seems clear that the three individuals in question became partners of ITOLP sometime before the end of 1982 (since they shared in the partnership losses for that year), the question whether these individuals had become partners of ITOPL on November 10, 1982 is one of fact with respect to which this Court cannot intervene in the absence of a patent and overriding error. No such error has been identified. Having regard to the evidence, it was open to
the Tax Court Judge to hold that the applicant had failed to establish that the three individuals in question were partners on the transaction date.
[25] Finally, there is no merit to the applicant's argument that the subsequent purchase of units in ITOLP by the 154 subscribers who became partners establishes conclusively that the fair market value of the assets was equal to the transaction price. In this regard, it is sufficient to note that what is in issue here is the value of the assets purchased by ITOLP on November 10, 1982 and not the value of the units purchased by the investors at a subsequent date.
[26] The applicant raised as a further ground of judicial review the award of costs. As the appeal was heard pursuant to the informal procedure, the applicant submits that there was no authority for the Tax Court Judge to award costs in favour of the respondent. The respondent concedes that the order as to costs cannot stand. The order as to costs should therefore be set aside.
[27] Subject to this, I would dismiss the application for judicial review with costs.
"Marc Noël"
J.A.
"I agree"
"Robert Décary" J.A
"I agree"
"A.M. Linden" J.A.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-347-02
STYLE OF CAUSE: Don Deptuck v. Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: March 27, 2003
REASONS FOR JUDGMENT: Noël J.A.
CONCURRED IN BY: Décary J.A.
Linden J.A.
DATED: April 8, 2003
APPEARANCES:
Mr. Timothy W. Clarke FOR THE APPLICANT
Ms. Margaret E. T. Clare FOR THE RESPONDENT
Ms. Johanna Russell
SOLICITORS OF RECORD:
Bull Housser & Tupper FOR THE APPLICANT
Vancouver
Mr. Morris Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada
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