Besse v. Minister of National Revenue, 99 DTC 5275, [1999] 3 CTC 52 (FCA)

Rothstein J.A.:

Issue

The issue in this appeal from the Federal Court Trial Division is whether certain “soft costs” in relation to an investment in a multiple unit residential building (“MURB”) acquired by a syndicate of which the appellant was a member, are deductible under paragraph 20(1)(e) of the Income Tax Act. The relevant year is 1979 and in that year paragraph 20(1 )(e) read:

20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (A), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto.

(e) an expense incurred in the year

(i) in the course of issuing or selling units of the taxpayer where the taxpayer is a unit trust, interests in a partnership or syndicate by the partnership or syndicate, as the case may be, or shares of the capital stock of the taxpayer, or

(ii) in the course of borrowing money used by the taxpayer for the purpose of earning income from a business or property (other than money used by the taxpayer for the purpose of acquiring property the income from which would be exempt),

including a commission, fee or other amount paid or payable for or on account of services rendered by a person as a salesman, agent or dealer in securities in the course of issuing or selling the units, interests or shares or borrowing the money, but not including any amount paid or payable as or on account of the principal amount of the indebtedness or as or on account of interest;

20. (1) Malgré les alinéas 18(1)a), b) et h), sont déductibles dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un bien pour une année d’imposition celles des sommes suivantes qui se rapportent entièrement à cette source de revenus ou la partie des sommes suivantes qu’il est raisonnable de considérer comme s’y rapportant:

(e) une dépense engagée dans l’année,

(i) à l’occasion de l’émission ou de la vente d’unités du contribuable lorsque le contribuable est une fiducie d’investissement à participation unitaire, de participation dans une société ou un syndicat par la société ou le syndicat, selon le cas, ou d’actions du capital- actions du contribuable, ou

(ii) à l’occasion d’un emprunt d’argent utilisé par le contribuable en vue de tirer un revenu d’une entreprise ou d’un bien (autre que l’argent utilisé par le contribuable pour acquérir un bien dont le revenu serait exonéré),

y compris une commission, des honoraires ou toute autre somme payés ou payables pour services rendus ou au titre de services rendus par une personne à titre de vendeur, d’agent ou de courtier en valeurs mobilières au cours de l’émission ou de la vente des unités, des participations ou des actions ou de l’emprunt de l’argent, mais à l’exclusion d’une somme payée ou payable à titre ou au titre du principal de la dette ou à titre ou au titre d’intérêts;

The expenses at issue consisted of:

The plaintiff’s share in the investment was .54% and his proportion of the expenses at issue was $3,296.46 in 1979. This deduction was claimed by the appellant but disallowed by the Minister. The disallowance was upheld in the Tax Court of Canada and by the learned Trial Judge.

According to the Investors’ Agreement, the syndicate was formed only if 100% of the units offered were subscribed. The closing date for the formation of the syndicate was 12:00 noon on December 18, 1979. On that date, 100% of the units offered had been subscribed for and the syndicate was formed. If the expenses at issue were incurred on or after December 18, 1979 and by the syndicate, they are deductible. If not, they are not deductible.

Decision of the Trial Judge

The learned Trial Judge found that a syndicate had been formed and that the appellant was a member of the syndicate. However, he found the expenses at issue were not incurred by the syndicate. Rather, he found they were paid by Grisé Management Co. Ltd., the manager of the MURB being acquired by the syndicate, and not by the syndicate itself. He also found that at the time the expenses were incurred by Grisé Management Co. Ltd. no syndicate had been formed. Further, he found no legal obligation on the part of the appellant to pay the expenses incurred. He concluded that the expenses were capital in nature and could not be deducted as expenses under paragraph 20(1)(e).

Position of the Parties

The appellant says a syndicate was formed, expenses were incurred by the syndicate and that such expenses were those contemplated by paragraph 20(1 )(e).

Before this Court, the Minister initially conceded that all the expenses in question were contemplated by paragraph 20(1 )(e). In the course of argument, however, counsel for the Minister suggested that the working capital commitment of $60,000 was not a paragraph 20(1 )(e) expense.

The Minister’s position was that the expenses of $610,455 were incurred by Grisé Management Co. Ltd. and not by the syndicate and that they were incurred prior to the syndicate being formed and accordingly, members of the syndicate could not avail themselves of paragraph 20(1 )(e) for the purposes of deducting the expenses from their income. Although counsel for the Minister expressed some dissatisfaction with the finding of the learned Trial Judge that a syndicate was formed in this case, she did not challenge that finding.

Analysis

For purposes of this case, the key words in paragraph 20(1 )(e) are:

...an expense incurred in the year

(i) in the course of issuing or selling ... interests in a ... syndicate by the ... syndicate...

(ii) in the course of borrowing money used by the taxpayer for the purpose of earning income from a business or property...

including a commission, fee or other amount paid or payable for or on account of services rendered by a person as a salesman, agent or dealer in securities in the course of issuing or selling the units, interests or shares or borrowing the money...

Resolution of the issues in this case are dependent upon interpreting the relevant documents. While, having regard to the documentary evidence, we agree with the learned Trial Judge that a syndicate was formed, we respectfully disagree with his finding that the expenses incurred were not deductible by the appellant under paragraph 20(1)(e).

Syndicate

A syndicate is defined in the Shorter Oxford English Dictionary as, amongst other things, “a combination of persons formed for the promotion of an enterprise”. As found by Tax Appeal Board member Weldon in Ro- mano v. Minister of National Revenue (1966) 66 D.T.C. 490 at 500, a syndicate 1s:

Any group of persons who have agreed to pool their resources of money or of specific assets for some common purpose.

In this case, 2777 units at a price of $1,000 per unit were offered to investors. Investors were to become individual owners of the MURB and share in the assets, income and liabilities of the MURB. Accordingly, what was formed here was a syndicate for the purposes of paragraph 20(1)(e) of the Income Tax Act and expenses incurred in the course of issuing or selling interests in the syndicate by the syndicate including fees for the borrowing of money were deductible by members of the syndicate. As the syndicate is not a separate entity at law, any reference to an expense incurred by the syndicate means an expense payable by the members of this syndicate in accordance with their Investors’ Agreement. In this case, each investor was initially liable in proportion to his or her units held, although, except for the mortgage obligations which were proportionate to their interest, the investors could become jointly and severally liable for obligations of the MURB.

Sales Commissions

Sales commissions are clearly contemplated by the words of paragraph 20(1)(e). The front page of the prospectus issued with respect to this syndicate provides:

(2) the proceeds from subscription will be deposited with Grenier Ruel & Cie Inc. the sales agents, and held in trust till released in accordance with the terms of this prospectus.

The Plan of Distribution contained in the prospectus provides:

Plan of Distribution

2777 Units at the price of $1,000 per Unit, will be offered to the public in the Province of Quebec. Under an Agreement between Grisé Management Co. Ltd. and Grenier Ruel & Cie Inc. (the “Sales Agents”), the Sales Agents have agreed to use their best efforts to obtain subscriptions for the purchase of 2777 Units. Grisé Management shall pay a commission of $80 per Unit sold, to Grenier Ruel,

All monies received from subscription for Units offered hereby will be deposited and held by Grenier, Ruel & Cie Inc. as depository, to be disposed of in the following manner.

If subscriptions for a total of 2777 Units have not been received by December 18, 1979 (the “closing date”) all monies will then be returned to the subscribers without deduction of any kind and without interest.

If, on the contrary, all units have been subscribed for by December 1st, 1979I sic] Grenier Ruel & Cie Inc. will pay to G. Grisé Real Estate (the Agent) all the monies received from subscriptions for Units offered hereby after deduction of Grenier Ruel’s commission and organization fees payable to Grisé Management in the aggregate amount of $305,000 as defined in this Prospectus under the heading “Services provided by Grisé”.

The proceeds of subscription were to be paid to the sales agents and held in trust until released in accordance with the terms of the prospectus. Under the Plan of Distribution, sales commissions were payable at the rate of $80 per unit sold, but only if subscriptions for a total of 2777 units were received by December 18, 1979. If not, all monies were to be returned to the subscribers without deduction of any kind. If subscriptions for all units were received by December 18, 1979, the proceeds, net of amounts payable to Grenier Ruel & Cie Inc. for sales commissions and offering expenses and to Grisé Management Co. Ltd. as organizational fees were payable to Grisé Real Estate Co. Ltd. for purposes of acquisition of the MURB in which the syndicate members were investing. The necessary implication is that sales commissions of $222,160 were payable out of the proceeds of subscriptions by the syndicate members and only if the syndicate was formed. Accordingly, this expense could only have been incurred after the formation of the syndicate and was payable by the syndicate and therefore was deductible by the appellant under subparagraph 20(1 )(^)(i).

Expenses of the Offering

While this expense is not described in detail in the material before us, the Minister does not argue that it is not an expense contemplated by paragraph 20(1)(e). The prospectus indicates that this fee is to be deducted from the gross proceeds of the sale of units in the syndicate by Grenier Ruel & Cie Inc. in the same manner as sales commissions. Accordingly, as in the case of sales commissions, it was payable only if the gross proceeds were realized, i.e. if the syndicate was formed and then only out of the gross proceeds of subscriptions. Accordingly, this expense was incurred after the formation of the syndicate and was payable by the syndicate and therefore is deductible by the appellant under subparagraph 20( 1 )(^)(i).

Mortgage Fees

According to the prospectus, mortgage fees “pertaining to the negotiation of the mortgages” necessary to finance the acquisition of the MURB were charged by Grisé Management Co. Ltd. to the syndicate members. Counsel for the Minister suggested that these were expenses incurred by Grisé Management Co. Ltd. but the documentary evidence indicates only that they were fees charged by Grisé to the syndicate for arranging the mortgages. They were paid by the syndicate members to Grisé Management Co. Ltd. after formation of the syndicate as fees for arranging the borrowing of money and are deductible by the appellant under subparagraph 20(1)(e)(11).

Working Capital Commitment

The prospectus indicates that Grisé Management Co. Ltd. was to provide working capital for the years 1980 and 1981 in the maximum amount of $200,000. The working capital commitment paid by the syndicate in 1979 of $60,000 may be an advance on account of anticipated working capital requirements in 1980 and 1981. If so, we have difficulty understanding how a working capital advance from investors comes within the scope of paragraph 20(1)(e) when, at the time of the advance, it was not known whether any contribution to working capital would actually be required. Perhaps the working capital commitment was a fee charged by Grisé Management Co. Ltd. for assuming the risk of having to provide working capital in 1980 and 1981, in which case the working capital commitment may fall under paragraph 20( I )(^). The Minister did not base his reassessment on the ineligibility of the working capital commitment under paragraph 20(1)(e) and, in the absence of this being an issue on which evidence could have been called in the Tax Court or in the Trial Division, we are not prepared, at this late stage, to question the eligibility of this expense. The expense was incurred by the syndicate after it was formed. For purposes of this case, the working capital commitment is deductible by the appellant under subparagraph 20(1)(e)(1).

Prospectus Preparation Fee

The prospectus preparation fee of $60,000 was charged by Grisé Management Co. Ltd. to the syndicate members and was represented as being included in “fees for the organization of the project”. It is not more precisely detailed but the Minister does not allege that it is not an expense contemplated by paragraph 20(1)(e). The fee was payable only if the syndicate was formed. It was paid to Grisé Management Co. Ltd. out of the proceeds of the subscription for units in the syndicate and was therefore an expense incurred by the syndicate after it was formed and is deductible by the appellant under subparagraph 20(1)(e)(1).

Conclusion

The Minister argues that the promoter, Grisé Management Co. Ltd. must have incurred liabilities to the sales agents and others involved in the preparation of the prospectus and the MURB and that some of these liabilities must have been incurred before the syndicate was formed. There is no evidence of such pre-syndicate liabilities by Grisé Management Co. Ltd. However, even if such liabilities were incurred by Grisé Management Co. Ltd. before the syndicate was formed, these liabilities are not in issue here. What is at issue is a deduction claim by a member of this syndicate of his pro rata share of expenses incurred by the syndicate in the course of issuing or selling interests in the syndicate and in the borrowing of money by the syndicate. On the basis of the documentary evidence, such expenses were incurred by the syndicate and are therefore deductible by the appellant under paragraph 20(1 )(e). Accordingly, we are of the view that the appeal should be allowed with costs in this Court, in the Trial Division and in the Tax Court of Canada. The matter will be remitted to the Minister for reassessment in accordance with these reasons.

Appeal allowed.