[OFFICIAL ENGLISH TRANSLATION]
Citation: 2003TCC502
Date: 20030716
Docket: 2000-963(IT)G
BETWEEN:
MAYA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Dussault, J.
[1] This case concerns appeals from assessments made under the Income Tax Act (the "Act") for the appellant's 1995, 1996 and 1997 taxation years.
[2] The respondent readily conceded that the assessment for the 1995 taxation year should be vacated.
[3] With reference to the assessments for the 1996 and 1997 taxation years, they were made under subsection 237.1(7.4) of the Act. The penalty assessed was calculated as being equal to 25% of the amount of the consideration received or receivable from a person for each of the taxation years in respect of the tax shelter before an identification number was issued for the tax shelter. For the purposes of the assessments, the consideration was calculated as being $549,500 and $771,000 respectively for each of the 1996 and 1997 taxation years.
[4] In making the assessments, the Minister of National Revenue (the "Minister") assumed the facts set out in subparagraphs (a) to (k) of paragraph 9 of the Reply to the Notice of Appeal. These subparagraphs read:
[TRANSLATION]
(a) The appellant is a Canadian-controlled private corporation;
(b) The appellant promotes an investment in a teakwood farm or plantation in Costa Rica as agent for Maya Forestales S.A., (hereinafter called "the Company");
(c) According to the statement or representation (hereinafter called "the Statement") made by the company, the investor acquires a lumber lot for reforestation in Costa Rica and planting rights on the lot for an amount of $100;
(d) According to the Statement, the investor gives the Company a mandate to develop the lot, apply weed killer and fertilizer, prepare the seedlings, plant them on the lot, and so forth, and pays the Company an amount of $9,900 for development expenses and fees;
(e) According to the Statement, the amount of $9,900 referred to in subparagraph (d) is deductible in the year in which the expenses referred to in subparagraph (d) are paid;
(f) According to the Statement, the company issues an offer to buy back no less than 70% of the value of the expenditure, which offer is accompanied by a bank letter of guarantee;
(g) The amount necessary to execute the guarantee is deposited in a trust account in the investor's name in a Canadian financial institution;
(h) According to the Statement, the acquisition of an interest in the teak plantation would give entitlement to a deduction in the first year of the acquisition equal to 99% of the cost of the interest in the teak plantation, which is more than the cost of the interest (100%) less the buyback offer of 70% for the interest and, consequently, an interest in the teak plantation is a tax shelter;
(i) No application to obtain an information number for the tax shelter as described in subparagraph (h) was filed with the Minister;
(j) The amounts of the consideration received or receivable from an investor in respect of the tax shelter described in subparagraph (h) are the following:
|
1996
|
$549,500
|
|
1997
|
$771,000
|
(k) According to the Statement, in the case of an investment of $10,000, the allowable deduction in the first four years would be $9,900, an amount that would be greater than the excess of the cost of $10,000 less the guarantee of $7,000.
$9,900 > $10,000 - (70% of $10,000) = $3,000
$9,900 > $3,000
[5] At the hearing, the parties agreed that the total consideration received or receivable was instead $566,000 for the taxation year ended on June 30, 1996, and $726,000 for the taxation year ended on June 30, 1997. For 1996, the assessment cannot be increased. For 1997, although the appellant did not succeed on the merits, the appeal should be allowed so that the penalty of 25 per cent be adjusted on the basis of $726,000 instead of $771,000.
[6] The relevant statutory and regulatory provisions are subsections 237.1(1), (4) and (7.4) of the Act and subsection 231(6) and paragraph 231(6)(c) of the Income Tax Regulations (the "Regulations").
· Subsections 237.1(1), (4) and (7.4) read:
237.1 (1) Definitions - In this section,
"person" includes a partnership;
"promoter" in respect of a tax shelter means a person who in the course of a business
(a) sells or issues, or promotes the sale, issuance or acquisition of, the tax shelter,
(b) acts as an agent or adviser in respect of the sale or issuance, or the promotion of the sale, issuance or acquisition, of the tax shelter, or
(c) accepts, whether as a principal or agent, consideration in respect of the tax shelter,
and more than one person may be a tax shelter promoter in respect of the same tax shelter;
"tax shelter" means any property (including, for greater certainty, any right to income) in respect of which it can reasonably be considered, having regard to statements or representations made or proposed to be made in connection with the property, that, if a person were to acquire an interest in the property, at the end of a particular taxation year that ends within 4 years after the day on which the interest is acquired,
(a) the total of all amounts each of which is
(i) an amount, or a loss in the case of a partnership interest, represented to be deductible in computing income in respect of the interest in the property (including, where the property is a right to income, an amount or loss in respect of that right that is represented to be deductible) and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
would equal or exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year, determined without reference to section 143.2,
would exceed
(ii) the total of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed, directly or indirectly, in respect of the interest in the property by the person or another person with whom the person does not deal at arm's length,
but does not include property that is a flow-through share or a prescribed property.
...
(4) Sales Prohibited - No person shall, whether as a principal or an agent, sell or issue, or accept consideration in respect of, a tax shelter before the Minister has issued an identification number for the tax shelter.
...
(7.4) Penalty - Every person who files false or misleading information with the Minister in respect of an application under subsection (2) or, whether as a principal or as an agent, sells, issues or accepts consideration in respect of a tax shelter before the Minister has issued an identification number for the tax shelter is liable to a penalty equal to the greater of
(a) $500, and
(b) 25% of the total of all amounts each of which is the consideration received or receivable from a person in respect of the tax shelter before the correct information is filed with the Minister or the identification number is issued, as the case may be.
· Subsection 231(6) and paragraph 231(6)(c) of the Regulations read:
(6) For the purposes of paragraph (b) of the definition "tax shelter" in subsection 237.1(1) of the Act, "prescribed benefit" in respect of an interest in a property means any amount that may reasonably be expected, having regard to statements or representations made in respect of the interest, to be received or enjoyed by a person (in this subsection referred to as "the purchaser") who acquires the interest, or a person with whom the purchaser does not deal at arm's length, which receipt or enjoyment would have the effect of reducing the impact of any loss that the purchaser may sustain in respect of the interest, and includes such an amount
...
(c) that is the proceeds of disposition to which the purchaser may be entitled by way of an agreement or other arrangement under which the purchaser has a right, either absolutely or contingently, to dispose of the interest in the tax shelter (otherwise than as a consequence of the purchaser's death), including the fair market value of any property that the agreement or arrangement provides for the acquisition of in exchange for all or any part of the interest in the tax shelter, and
...
[7] Pierre Roberge, the president of the appellant, and Madeleine Lapointe and Daniel Beaudoin, both auditors with the Canada Customs and Revenue Agency, testified.
[8] During his testimony, Mr. Roberge submitted in evidence a number of the pre-printed contract forms used over the years by Maya Forestales S.A. ("Maya S.A."), represented by the appellant (initially designated as 2861-3883 Québec Inc.). The agreements, which were sometimes separate and sometimes grouped together as one document, deal with the mandate given by the investor to Maya S.A. for the purchase of the lot and the planting rights, the right given to plant trees and perform the other necessary work and the right to cut and market the timber (Exhibits A-2 to A-6).
[9] The contracts contain a clause whereby Maya S.A. undertakes to buy back from the investor, at the investor's option, the treed lot that it will have developed, between the eighth year from the date the trees are planted and 180 days thereafter, for an amount representing 70 per cent of the cost of the land and development expenses. They also provide for the deposit of an amount equal to that sum in a trust account in the investor's name to guarantee the buyback.
[10] According to Mr. Roberge, several investors, including himself, waived the buyback option and payment guarantee (see Exhibits A-6, A-11 and A-13).
[11] The disclosure documents used during the two years at issue (Exhibits A-7 and A-8) specify that 99 per cent of the business expenses are deductible and that Maya S. A. offers to buy back the lot acquired by the investor for an amount equal to no less than 70 per cent of the initial investment. It is provided that the buyback is guaranteed by the deposit of the necessary amounts in a special trust account (Exhibit A-7, page 9) or by a bank letter of guarantee or equivalent (Exhibit A-8, page 2).
[12] Counsel for the appellant submits that, where an investor has waived the buyback guarantee, it cannot be submitted therefore that he has been sold a tax shelter. According to him, the penalty imposed on the appellant would not be warranted in such circumstances.
[13] I am of the opinion that this argument is unfounded in view of the definition of "tax shelter" in subsection 237.1(1) of the Act. In the definition, the relationship established between the amount deductible within four years from the acquisition of an interest in a property and the cost of that interest reduced by the total value of the prescribed benefits is mainly based on the "statements or representations made or proposed to be made", that is, on the basis of what is proposed to the investor. Specifically, according to the actual wording of subparagraph 237.1(1)(a)(ii) in the
definition of "tax shelter", one must take into account an "... amount represented to be deductible in computing income or taxable income in respect of the interest ...." Moreover, based on subsection 231(6) of the Regulations, one must also take into account the amount that "may reasonably be expected, having regard to statements or representations made in respect of the interest, to be received or enjoyed by a person (in this subsection referred to as "the purchaser") ...which receipt or enjoyment would have the effect of reducing the impact of any loss that the purchaser may sustain in respect of the interest, ...." This last-mentioned amount is, in this case, the one represented as being the guaranteed buyback price should the investor exercise the buyback option referred to, that is, an amount of 70 per cent of the initial cost, or the cost of the lot and development expenses. Therefore, although the benefit is covered by the wording of subsection 231(6), in my opinion, it could also be concluded that it is more specifically referred to in paragraph 231(6)(c) of the Regulations. The fact that an investor or another person decides to waive the buyback guarantee is irrelevant
[14] In my opinion, given the statements and representations made in the documents submitted to the investors, that is, in both the disclosure documents and the proposed contracts, it is reasonable to consider that an investor could in fact deduct 99 per cent of his investment while 70 per cent of the investment is guaranteed, which meets the definition of a tax shelter as set out in subsection 237.1(1) of the Act, insofar as it is determined that the proposed investment in fact constitutes the acquisition of "an interest in a property". This point was contested by counsel for the appellant who claimed that the investors did not acquire "an interest in a property" but that they each acquired the whole of a property or a lot and the planting rights and not, as the respondent contends, a part or parcel of a property or plantation.
[15] The argument of counsel for the appellant must be rejected. The Petit Robert, a French-language dictionary (the "Robert"), gives the French word "part" the primary meaning of [TRANSLATION] "what accrues to someone..., what a person owns or acquires in one's own right." It should also be noted that, in subsection 237.1(1) of the English version of the Act, the words used are "an interest in the property" as the equivalent of "unepart dans le bien". The acquisition of a right of ownership in a lot is most definitely covered by the English wording. Moreover, if one wanted to give the word "part"the meaning of [TRANSLATION] "part of a whole or a set", which the Robert gives as its second meaning, it cannot be concluded that a person who held 100 per cent or all of the shares ["parts"] in a property does not hold an interest ["part"] in the property.
[16] Finally, I shall conclude on this point by using the argument of counsel for the respondent who claimed that Maya S.A. and the appellant, its agent, sold an investor an interest in a plantation. In a copy of the irrevocable letter of guarantee given by Maya S.A. to an investor (Exhibit I-2), the following statement, inter alia, can be found:
[TRANSLATION]
...
· Statement of the originator: Maya Forestales S.A.
I, the undersigned, the originator, hereby state that I have acquired, on behalf of the recipient, under the terms of a CONTRACT OF AGENCY, signed on December 18, 1996, a lot and planting Rights from Maya Forestales S.A., designated as lots 71-45, part of farm #263233, situated at:
Las Delicias, District 3, San Juan de Mata, Canton 16, Turrubares, Province de San Jose, Costa Rica, REGISTRO NACIONAL CADASTRO NACIONAL, COSTA RICA.
TREES NO 050896 MICNOR 12136 to O50896 MICNOR 12235
(signature)
______________________
MAYA FORESTALES S.A. Witness (signature)
Date
...
[17] According to that statement, it appears that Maya S.A. was at the outset the owner of the lot that the investor had instructed it to purchase on his behalf and that this lot was in fact part of a farm or plantation, as counsel for the respondent claims. Furthermore, some documents establish that the registered owner of the plantation is still Maya S.A. and that an investor acquires an area of the plantation where a certain number of trees are planted that are identified and numbered according to the GPS (Global Positioning System), a position-fixing system by triangulation. The trees identified and numbered in this way are allocated to the investor-owner of the area or of that part of the plantation. (See the documents accompanying the contract of agency in Exhibit A-6.)
[18] In a letter that he sent to Ms. Lapointe dated May 15, 1998, Mr. Roberge confirmed that Maya S.A. [TRANSLATION] "is in fact the owner of the land" and that "with respect to the registration of the ownership of the Canadian investors' lots, the designation was made by GPS and registered under private seal with Ms. Loria". Ms. Loria is a notary and the director of Maya S.A. in Costa Rica.
[19] According to the documents submitted in evidence, there is no doubt that each lot constitutes an area or a part or an interest in the plantation of which Maya S.A. is the registered official owner.
[20] Thus, regardless of one's point of view and the meaning one gives to the word "interest" ["part"], I find that the investment proposed by Maya S.A. and the appellant during the years at issue consisted in the acquisition of an interest in a property.
[21] The last point raised concerns obtaining a tax shelter identification number. In their testimony, both Mr. Roberge for the appellant and Ms. Lapointe and Mr. Beaudoin for the respondent testified about the many steps taken and communications made in order to obtain a tax shelter identification number. A number of documents, including the correspondence exchanged, were also submitted in evidence. Two elements can be seen from the evidence presented. First, according to Mr. Roberge, the first application for a tax shelter identification number at the federal level was made only on June 26, 1998, (Exhibit A-18) or long after the end of the years at issue. I note only that such application had nevertheless been made to Revenu Québec on December 16, 1997, and that the appellant had received an identification number on January 20, 1998 (Exhibit A-16). Second, according to Mr. Beaudoin, the appellant never received a tax shelter identification number because its file was incomplete and, specifically, because the appellant was unable to sign an undertaking that Maya S.A.'s books and records, and not just the appellant's, would be kept and retained in Canada.
[22] Since the appellant, as the agent of Maya S.A., sold interests in a tax shelter during the years at issue without obtaining an identification number, it is accordingly liable to the penalty provided for in subsection 237.1(7.4) of the Act.
[23] As a result of the foregoing:
the appeal from the assessment made for the 1995 taxation year is allowed, and the assessment is vacated; the appeal from the assessment made for the 1996 taxation year is dismissed; and the appeal from the assessment made for the 1997 taxation year is allowed, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that, for the purposes of subsection 237.1(7.4) of the Act, the amount of the consideration received or receivable in the year is $726,000 instead of $771,000; the whole with costs to the respondent.
Signed at Ottawa, Canada, this 16th day of July 2003.
Judge Dussault
Translation certified true
on this 19th day of November 2003.
Sophie Debbané, Revisor
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