Date:20010117
Docket: A-589-95
CORAM: STONE J.A.
SHARLOW J.A.
MALONE J.A.
BETWEEN:
WILLIAM G. S. KING
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, Monday, January 15, 2001
and Tuesday, January 16, 2001
Judgment delivered at Toronto, Ontario,
on Wednesday, January 17, 2001
| REASONS FOR JUDGMENT BY: MALONE J.A. |
| IN AGREEMENT: SHARLOW J.A. |
Date: 20010117
Docket: A-589-95
BETWEEN:
WILLIAM G. S. KING
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
| _. This is an appeal from a decision by His Honour Judge D.E. Taylor, a Judge of the Tax Court of Canada, dated July 25, 1995. Judge Taylor dismissed the Appellant's appeal from a reassessment of the Appellant's income for the 1987 taxation year. The Minister of National Revenue (the "Minister") had increased the Appellant's income by disallowing the Appellant's pro-rata share of the business losses of two partnerships in which he claimed to be a partner. |
| _. It was claimed that each partnership had a loss in its 1987 fiscal year because of a fee of $1,027,055 alleged to be payable to a New York company called Esquire Records Inc. pursuant to a "Marketing, Production and Distribution Agreement" which was presented as the foundation of the business of the partnership. Under each agreement, $177,550 of the fee was due on April 30, 1988 and $850,000 was due on December 31, 1997. The latter obligation was evidenced by a promissory note bearing interest at 8.5%. |
| _. In return for that fee, Esquire was to provide certain services to the partnership, including the making, marketing, promotion and distribution of records, that would yield the partnership a royalty payable by Esquire. In each case, the fee was to be funded by partnership subscriptions for 40 units in the partnership. For each unit, a subscriber was to pay $5,150 on April 30, 1988 and assume 1/40 of the $850,000 obligation to Esquire that was due on December 31, 1997. In addition, the agreement provided that between 1988 and 1997, royalties earned by the partnership would be "reinvested" to provide further funding for Esquire's activities. |
| _. The learned Tax Court Judge found that the Appellant, an experienced business man, did not understand the transaction and paid no attention to the details when he signed the subscription agreement and other documents. He and many of the subscribers did not pay the cash portion of the subscription price when due. At some point the obligation for the cash portion was deferred in such a way as to make it contingent on receiving a tax refund. The cash payments finally made by the subscribers, as of the end of 1989, amounted to less than half what was needed to fund the work that Esquire was supposedly obliged to do under the Marketing, Production and Distribution Agreements. The evidence of one expert for the respondent, who assessed the partnerships on the basis of the Esquire agreements alone, concluded that they had no value to the partners once the tax reduction was disregarded. |
| _. The assumptions of fact made by the Minister, as stated in the pleadings, put in issue the question of whether or not the partnerships were carrying on a business in 1987. The appeal in the Tax Court could not succeed without rebutting those assumptions. This could be done only by establishing for each partnership that the agreement with Esquire was capable of being and was in fact the basis of a reasonable expectation of profit for the partnership: Moldowan v. The Queen (1977), 77 D.T.C. 5213 (S.C.C.), Tonn v. The Queen, 96 D.T.C. 6001 (F.C.A.), The Queen v. Mastri, 97 D.T.C. 5420 (F.C.A.). |
| _. The Tax Court Judge found that the Minister's assumptions had not been rebutted. His conclusion was based on findings of fact that in my view cannot be disturbed on the basis of palpable or overriding error. It has not been shown that his findings were made without proper regard to the evidence at trial. |
| _. An examination of the agreements discloses an arrangement that was commercially unrealistic. The Tax Court Judge obviously reached the same conclusion. In particular, the documents do not disclose whether Esquire was obliged to produce any particular record or match any particular artist to either partnership, or any one of a number of similar partnerships created in later years. Given those circumstances, if Esquire had produced a mega-hit, it is far from clear whether either partnership would be in a position to claim any benefit from it. Apart from that, the Tax Court Judge found that the Appellant and other subscribers had no intention of honouring the agreements they signed. There was evidence on which he could base that conclusion. |
| _. The Appellant argued that the Tax Court Judge fell into error by second-guessing the business decisions of the partnerships on the basis of hindsight, ignoring the potential for large profits if the activities of Esquire had resulted in a mega-hit, and relying too heavily on the small chance of that occurring and on his conclusion that the business was undercapitalized. The Tax Court Judge commented on those aspects, but only in the context of attempting to assess whether or not the agreements with Esquire could realistically be said to be the foundation of a business. I do not think he erred in that respect. |
| _. The Appellant challenged the Tax Court Judge's application of the "reasonable expectation of profit" test on the basis that the Appellant's personal motivation for acquiring unit interests in the partnerships was irrelevant in determining whether the partnerships themselves carried on a business. It would result in an error of law if the Tax Court Judge had concluded that there was no reasonable expectation of profit simply because the Appellant entered the partnerships solely for tax purposes. However, I do not read his reasons as depending on such a finding. |
| _. The Tax Court Judge noted that the purpose of the venture was one of the factors which should be considered in determining the overriding issue of reasonable expectation of profit. He concluded, because of the lack of commercial reality in the entire arrangement, that the motivation behind the partnerships was tax avoidance and not a legitimate pursuit of profit. I do not believe that any error was committed by considering the Appellant's motivation in that context. |
| _. Accordingly, I would dismiss the appeal with costs. |
"B. Malone"
J.A.
| "I agree" "Karen R. Sharlow" |
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
DOCKET: A-589-95
| STYLE OF CAUSE: WILLIAM G. S. KING |
Appellant
- and -
Respondent
DATES OF HEARING: MONDAY, JANUARY 15, 2001 and
| TUESDAY, JANUARY 16, 2001 |
PLACE OF HEARING: TORONTO, ONTARIO
| REASONS FOR JUDGMENT BY: MALONE J.A. |
| DATED: WEDNESDAY, JANUARY 17, 2001 |
| IN AGREEMENT: SHARLOW J.A. |
APPEARANCES BY: Mr. John W. Adams, Q.C. and
For the Appellant
Mr. Harry Erlichman and
For the Respondent
| SOLICITORS OF RECORD: FRASER MILNER |
1 First Canadian Place
M5X 1B2
Morris Rosenberg
| Deputy Attorney General of Canada |
For the Respondent
FEDERAL COURT OF APPEAL
Date: 20010117
Docket: A-589-95
BETWEEN:
Appellant
- and -
Respondent
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