Baillargeon v. MNR, 92 DTC 1212, [1991] 2 CTC 2525 (TCC)

Tremblay T.C J. [Translation] : —This appeal was heard on November 25, 1988 in Montreal, Quebec, and the matter was taken under advisement on August 22, 1989 following receipt of the final arguments by counsel.

1. Issue

It must be determined whether the appellant correctly computed his income for 1982 when he deducted a sum of $7,167 as a rental loss with respect to a multiple unit residential building (MURB) called “Chateau Lincoln". The appellant was one of a group of 144 investors who purchased the said building in 1982. The appellant had 25 out of 3,000 shares. The sum of $7,167 was the appellant's share of the portion of the $860,000 loss that was refused by the respondent.

The respondent refused the said loss, alleging, on the one hand, that a first part of the $7,167, namely, $3,834, related to negotiations for the purchase, flotation costs and sales commissions that the respondent felt were sums spent on capital expenditures within the meaning of paragraph 18(1)(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

On the other hand, the balance of $3,333 related to guarantees of liquidity, spent with respect to the period from January 1, 1983 to December 31, 1987. According to the respondent, therefore, it could not be deducted in computing income for 1982.

2.01 The appellant has the onus of showing that the respondent's assessment is incorrect. This onus arises from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In this judgment the Court held that the facts assumed by the respondent to support an assessment or reassessment were also presumed to be true until the contrary was proved. In the instant case the facts presumed by the respondent are described in paragraphs (a) to (j) of paragraph 5 of the respondent's reply to the notice of appeal. A number of these facts were admitted by the appellant and others were denied. This paragraph reads as follows:

5. In assessing the appellant for his 1982 taxation year, the Minister of National Revenue, the respondent, presumed the following facts, inter alia:

(a) In 1982 the appellant, who was one of a group of 144 investors, purchased [joint shares] in a multiple unit residential building known as Château Lincoln; [and shares in 118522 Canada Inc as the mandatary to hold the said building]; [admitted by the appellant with the addition of the underlined passages]

(b) In his tax return for the 1982 taxation year the appellant sought to deduct a sum of $9,738 as a rental loss with respect to the “Chateau Lincoln” multiple unit residential building; [admitted by the appellant]

(c) The respondent refused the deduction of a sum of $7,167 and allowed a sum

of $2,571 in respect of the said building: [admitted by the appellant]

(d) The appellant held 25 out of 3,000 shares in the said building; [admitted by the appellant]

(e) The sum of $7,167 claimed by the appellant and refused by the respondent represents the appellant’s share of a total of $860,000, which may be broken down as follows:

1. Liquidity guarantee refused	$400,000
2. Purchase negotiations
refused	$ 60,000
3. Flotation costs refused	$160,000
4. Commission on sale refused	$240,000
	$860,000
[admitted by appellant]

(f) The amounts relating to the costs of negotiating the purchase, the flotation costs and the sales commission, namely, $60,000, $160,000 and $240,000 respectively, are part of the capital cost of the building purchased by the appellant in 1982; consequently, the respondent added the sum of $460,000 to the capital cost of the building; [denied by the appellant]

(g) The sum of $400,000 in respect of the liquidity guarantee represents an expenditure relating to the period from January 1, 1983 to December 31, 1987; [denied by the appellant]

(h) The sum of $60,000 relating to the costs of negotiating the purchase are costs that had to be incurred for the appellant to become the owner of a share in “Chateau Lincoln”; [denied by the appellant]

(i) The sum of $160,000 relating to flotation costs represents the cost of the shares in the ownership of “Chateau Lincoln”: these were costs incurred by the developer of Chateau Lincoln that were subsequently passed on to the investors; [denied by the appellant]

(j) The sum of $240,000 represents the commission claimed by the developer, Les Investissements F.N.I. Inc, for the sale of 3,000 shares in "Château Lincoln” [the quantum of $240,000 is admitted, the rest is denied].

3. Facts

The facts proved are taken to a large extent from the appellant's statement of fact in his written submissions.

3.01 The appeal relates to the decision of the Minister of National Revenue to refuse the deduction of a sum of $7,167 claimed by the appellant in his 1982 taxation year as rental losses incurred on the purchase and operation of the multiple unit residential building known as "Château Lincoln" which the appellant held in undivided co-ownership with 143 other investors.

3.02 The sum of $7,167 represents the appellant's share of the sum of $860,000, which may be broken down as follows:

which costs and expenditures were paid from the proceeds of the individual subscription of each of the investors to shares in the co-ownership of the building in accordance with the provisions of a prospectus governing the public placement of these securities.

3.03 The appellant subscribed for 25 shares in the co-ownership and has 25 ordinary shares of the capital stock of 118522 Canada Inc. for an initial outlay of $25,000; he also assumed his share of the hypothec debts totalling $7,050,000; 143 investors did the same thing and, like him, subscribed for a greater or lesser number of shares, depending on their ability and needs.

3.04 The payment of $25,000 was made by the appellant on December 1, 1982 by means of two cheques drawn on the Caisse populaire de Saint-Louis-de- Gonzague de Beauharnois, although they were signed by Lucie Baillargeon, the appellant's wife (Exhibit A-2). The account, the folio number of which is 1867, is a joint account in the names of Paul and Lucie Baillargeon. The first cheque, bearing number 622, was for $2,500 and was payable to the order of Mr. Maurice Gagné "In Trust". The second cheque, numbered 623, was for $22,500 and was payable to the order of Les Investissements FNI Inc.

3.05 A share certificate numbered 003 (Exhibit A-1) for 25 shares is entitled "Château Lincoln". It was issued in the appellant's name, dated Verdun, December 31, 1982 and signed by Mr. Gilles Lefebvre, President.

It states that the said certificate and the 25 shares "are subject, as to their ownership and/or holding, sale, assignment and transfer to the subscription agreement and the management agreement provided for in the "Le Chateau Lincoln" prospectus dated the first day of December 1982”. Moreover, we also find a statement that "The shares in question entitle the holders thereof to subscribe and/or hold a number of ordinary shares of the capital stock of 118522 Canada Inc., The Registrar And Transfer Agent, equal to the number of shares held by them in "Le Chateau Lincoln".

3.06 The multiple unit residential building that was the subject of the offer was a twenty-storey residential complex, with a five-storey parking garage, containing 247 apartments and commercial space. Its municipal address was 1950 Lincoln Avenue in Montreal.

3.07 The cost to the investors of purchasing this building was $9,050,000.

3.08 It was the real estate syndicate promoters, Le Group Lefebvre SFI Inc. with the help of the securities dealers, Les Investissements FNI Inc, that organized, promoted and publicly distributed the distribution among investors.

3.09 The developers and brokers set uP 118522 Canada Inc. as a share company solely in the capacity of founders and this corporation made a conditional offer to purchase the building on November 10, 1982. According to the appellant, this offer was made by it as a mandatary of the investors.

3.10 The distribution was carried out by means of a prospectus, beginning with a shelf prospectus, the deposit and distribution of which were authorized by the Commission des valeurs mobilières du Quebec (CVMQ) on December 1, 1982, followed by a final prospectus, which received the Commission's stamp of approval on December 20, 1982.

3.11 An undated publicity brochure entitled Château Lincoln was filed as Exhibit A-3. At page 4 we find the following, after the total purchase costof $9,050,000 and the expenditure of $3,000,000:

Amounts deductible in 1982

Depreciation (2 1/2%)$	$ 268,000
Developer's fees	500,000
Flotation costs	160,000
Commission on sale	240,000
	$1,168,500

3.12 The 50-page shelf prospectus dated December 1, 1982 was filed as Exhibit A-4. We find the following, inter alia, at page 2:

At pages 2 and 3, inter alia, the definitions of the liquidity guarantee and the various agreements contained in the prospectus and the tax implications read as follows:

The investment agreement signed on December 31, 1982, consisting of 30 pages, was filed as Exhibit A-5.

The joint possession agreement signed on December 31, 1982, consisting of 27 pages, was filed as Exhibit A-6.

The management agreement dated December 31, 1982, consisting of 19 pages, was filed as Exhibit A-7.

Finally, the liquidity guarantee signed on January 17, 1983, consisting of 4 pages, was filed as Exhibit A-8. It is clear from this document that the money paid by Le Groupe to provide liquidity was to be repaid in accordance with fixed conditions but the said sums would not bear interest.

3.13 The offer invited investors to purchase a minimum of five shares of undivided co-ownership of the building from a total issue of 3,000 shares, the value on issue of each share being $1,000, and an equal number of shares in 118522 Canada Inc., which was set up for the purpose of holding title to the building, according to counsel for the appellant, as mandataryof the coowners.

3.14 The full amount of the investment was collected by the securities dealers, Les Investissements FNI Inc., between December 1, 1982 and the date of the Commission's approval, December 20, 1982, the moneys were placed in trust until the sale closed and all the documents and deeds required for the investment were completed.

3.15 The moneys generated by the offer, $3,000,000, were used to defray the following costs and expenditures:

the whole as set out in the shelf prospectus.

3.16 According to counsel for the appellant, all the flotation costs were contracted directly by 118522 Canada Inc. in its capacity as mandatary of the investors for them and on their behalf and only 118522 Canada Inc. and the investors were liable in law for payment of these debts.

3.17 The individual closing sessions with the investors (including the appellant) all took place between December 1, 1982 (the date on which the shelf prospectus was authorized) and December 20, 1092 (the date on which the Commission gave its approval).

3.18 During the individual closing sessions the investors signed and executed a subscription agreement, which was conditional upon the success of the offer, approval by the CVMQ and execution of the deed of sale for the building. Under this agreement they subscribed for co-ownership shares to be purchased in the building and shares in the capital stock of 118652 Canada Inc. Moreover, they gave a mandate to the brokers to sign for them and on their behalf a joint possession agreement, an investment agreement, a management agreement, a nypothecary act and the deed of purchase. Finally, they paid their individual subscriptions, the proceeds of which were to be held "in trust” by the brokers until all conditions of the offer had been met.

3.19 The main closing session took place on December 31, 1982, when the investors, represented for execution of the deeds first by 118522 Canada Inc. and later by Les Investissements FNI Inc. executed the following agreements:

(a) a agreement to purchase the building, including assumption of the hypothecary debt;

(b) a hypothecary act;

(c) a management agreement;

(d) a joint possession agreement;

(e) an investment agreement.

3.20 Since 1980 the CVMQ has required all real estate developers offering undivided co-ownership shares in multiple unit residential buildings to the public to observe the Securities Act and the developer accordingly had to distribute shares in the undivided co-ownership of the building by depositing and distributing a prospectus.

A letter dated June 5, 1986 issued by the CVMQ under Mr. Raymond Duhaime's signature confirmed that "the offer of shares in the 'Le Château Lincoln' real estate development in accordance with the prospectus dated December 1, 1982 was a transaction subject to the Securities Act” (Exhibit A-9). Also filed as part of Exhibit A-9 was decision No 220-I-82 dated December 1, 1982, issued by the CVMQ and granting a securities issuer registration (No 11076), permission to offer the securities mentioned in the prospectus dated December 1, 1982 and permission to distribute the said prospectus, valid until December 1, 1983.

3.21 According to Exhibit A-10, the financial statements for 1983, 1984, 1985 and 1986 showed the following results:

3.22 The statement of income for Château Lincoln for 1982 (Exhibit 1-1) showed no operating income but a so-called net rental loss of $9,738 ($7,500 in initial costs and $2,238 in depreciation).

3.23 As of December 31, 1982 Les Investissements FNI Inc. sent 118522 Canada Inc. and all the owners an account for the commission on the sale of 3,000 shares in the amount of $240 (Exhibit 1-2).

3.24 On December 31, 1982 Le Groupe Lefebvre SFI Inc., the project developer, also sent the numbered company and the owners a letter (Exhibit 1-3) claiming fees for professional services rendered and disbursements in the amount of $157,000 for preparing the prospectus and public issue of 3,000 shares.

We find in Exhibit 1-3 details of the various accounts under the heading “Disbursements” totalling $148,970.22 reading as follows:

Disbursements

Advertising:	Air Canada	350.00
	"Les Affaires (79) Inc.” pub’n
	Les diplômés HEC	714.11
	l'ingénieur	225.00
	Finance	320.00
	The Gazette	483.00
	Le Devoir	2,396.63
	La Presse Ltée	3,039.35
		13,504.00
		21,032.09
Stationery:	Offset Ville-Marie	162.00
	Ind. Novation Inc.	548.01
	Groupe Data Inc.	2,038.30
	Paul A Joncas	1,998.91
	Graetz Inc.	356.43
		5,103.65
Printing of	Plow & Watters	13,493
Prospectus:
		13,493.00
Supplies:	W. D. Armstrong	20.10
		20.10
Entertainment	Auberge des Gouverneurs
Expenses:	Hôtel Plaza de la Chaudière	924.33
		144.05
		1,068.38
Insurance:	Ins. Tomonson, Saunders, Whitehead Ltée	1,000.00
		1,000.00
Legal costs:	Alarie, Gagné, Barristers	85,245.00
	Alarie, Gagné, Barristers	5,370.00
	Turgeon, Chalut, Notaries	15,000.00
		105,615.00

Advertising:	La Presse Limitée	1,638.00
		1,638.00
	Total	$148,970.22

Counsel for the respondent cross-examined the appellant as follows concerning these accounts:

Q. Now, I am going to ask you to go to the next page of that document. There is a list of disbursements totalling one hundred and forty-eight thousand nine hundred and seventy-eight dollars ($148,978). It includes advertising with Air Canada, Les Affaires Inc., diplômés HEC, a list. . . your stationery, we find printing of prospectus, supplies, entertainment expenses, insurance, legal costs, advertising. Were you aware, before you purchased, that these sums had been paid to Air Canada, Plow & Watters, Alarie & Gagné, Les Affaires, and so on?

A. I am aware of the advertising costs because I remember seeing in the Saturday newspaper a photo of that famous building.

Q. OK.

A. And the others, no, not really.

Q. And did you authorize those expenditures some way or other? Were you aware that they had been made before you became an investor? That is the question.

A. No, not really.

Q. You concluded that?

A. Yes. (Transcript, pp. 68 and 69)

3.25 The broker, Les Investissements FNI Inc., sent the same recipients a bill for $3,000 on December 31, 1982 for disbursements made in purchasing shares of 118522 Canada Inc (Exhibit I-4).

3.26 The developer, Le Groupe Lefebvre SFI Inc., claimed fees of $60,000 from the same persons, again on December 31, 1982, for meetings with representatives of the brokers, visits to various buildings for the purpose of finding a building that would be acceptable for purposes of a public offering and negotiations for the purchase of a building with the representative of Royal Trust (Exhibit 1-5).

Concerning this account counsel for the respondent examined the appellant as follows:

Q. So, the same question as before, for you, you did not consider that an amount to be paid, it was already included in your amount of one thousand ($1,000) or twenty-five thousand ($25,000)?

A. Yes.

BY THE COURT:

I think it is important to indicate that all those documents are all dated the thirty-first (31st) of December eighty-two ('82).

BY MR. DANIEL VERDON:

That is the date shown on them.

BY THE COURT:

That is so.

BY MR. DANIEL VERDON:

I do not know on what date it was done but that is the date shown on them.

Were you aware that there had been negotiations with a representative of Royal Trust for the purchase of the building before you saw that document?

A. Not really. (Transcript, pp. 73 and 74)

3.27 On January 20, 1983 the broker, Les Investiseements FNI Inc., sent each investor a letter wishing them a happy new year and, inter alia, information for tax purposes (Exhibit 1-6). This information reads as follows:

Le Château Lincoln

1950 Lincoln Avenue, Montréal

Information For Income Tax Purposes 1982

Share of MURB

Name of Company: 118522 Canada Inc.

(mandatary)

Address: 4, Place du Commerce, Suite 200,

Ile des Soeurs, Verdun, Qué. H3E 1J4

Company founder: Le Groupe Lefebvre SFI Inc.

Gilles Lefebvre, President

Selling agent: Les Investissements FNI Inc.

Gross income of business:		NIL
Business loss for 1982		Depreciation
(deductible)		allowed
— Building	7,100,000	2.5%	=	177,500
— Parking	900,000	4%		36,000
— Furniture	550,000	10%	=	55,000
— Land	500,000	0%		0
Total value:	$9,050,000			$268,500
Initial expenses (fees):
— liquidity guarantee		400,000
— purchase negotiations		60,000
— financing negotiations
		40,000
— flotation costs		160,000
— commission on sale		240,000
		$900,000
				900,000
Total Tax Loss:			$1,168,500
Number of units sold:		3,000
Tax loss per unit of $1,000 of				$389.50
capital subscribed:

Since the appellant had subscribed for 25 shares, his loss was $9,737.50 ($389.50 x 25).

3.28 In a notice of reassessment dated July 29, 1985 the Minister of National Revenue refused to allow the appellant to deduct the sum of $7,167, which was treated by the taxpayer as current expenditures generated in 1982.

It seems from the 17W-C form filed in court with the statement of income and the notice of reassessment that this sum was broken down as follows:

Moreover, the figure of $9,738 may be found in Exhibit 1-1 (3.22). It is the same, ive or take $.50, as Exhibit I-6 (3.27), since the loss calculated amounted to $9,737.50.

3.29 Concerning the mandates the developers were supposed to have received from the investors, Mr. Gilles Delisle, real estate developer, one of the key figures in the creation of the Château Lincoln syndicate, testified as follows:

So, before taking a financial risk that I shall explain to you in a few minutes, like that, the one we took at Chateau Lincoln, the first step was to bring together, in quotes, our partners, that is, the partners in the various other companies that were part of Le Groupe Lefebvre to see to what extent their clients or how many of their clients would be willing to invest in another project. Because that was always the starting point. If there had been no clients, there would necessarily have been no project.

And at that time, throughout the year then, because we are talking about December eighty-two ('82), when the preliminary was accepted and the final prospectus as well, so throughout the year, the various partners of Le Groupe Lefebvre, each time they met their clients, checked whether they had substantial taxable income still in the current year, and whether they were interested, if an offer was made concerning some real estate, in investing again that year for a second or third time or for a first time in a real estate project. And they gave them the major outlines: a concrete building etc., etc., the various considerations that were preliminary to any interest.

Then the client generally said: well yes, if it is an investment of this or that kind, well located and well built, etc., I would be interested in investing five thousand (5,000), ten thousand (10,000), twenty thousand (20,000), or whatever.

So that when we reached the month of. . . I don’t know, the date is not important, but September or October of the current year, each year, we held a meeting of the group's partners and finally we said: well, this year, if we had a real estate syndicate, how much interest do you have? In other words, what size building could we consider?

There, we had already listed a number of buildings that might be, on which we could make firm offers to purchase, and we gave them the details concerning a few projects, two (2) or three (3) usually, no more, and they were told : could we set up a syndicate of one million (1,000,000) or two million (2,000,000), three million (3,000,000), depending on the interest shown by the clients.

At the end of the meeting, well, then we reached agreement on size. Obviously, no concrete had been poured—if you will allow me—at that time but at least we knew that twenty-five (25), fifty (50), seventy-five (75) persons, more or less, right then, if we had a viable project, well located and well built, with the ratio of income to selling price, we could come up with goods of such and such a size. So

that in eighty-two ('82), for example, well, then we concluded that we could probably have our clients invest approximately three million dollars ($3,000,000). Between three and four million dollars ($3,000,000-$4,000,000).

Following that meeting, then, because there, what happened subsequently was that we took out a firm option on a building, in this case Chateau Lincoln, in that one we made it through a corporation that I think was called one one eight five two two (118522) Canada Inc.

So what we did was that this company, which became the mandatary, obviously through the money that was subscribed at first by Le Groupe Lefebvre in the sense that we had to invest the first money . . . because otherwise it was a chicken and egg situation, you must first have a project to put before the client and to have a project to do that, you must first pin it down as we did, with some kind of deposit.

In this one, as far as I can remember, it was a deposit of one hundred thousand dollars ($100,000) which was given to the owners of the building, which would in fact be forfeited, as we say in the business, and so, in other words, if we had not closed the deal, if we had not had enough clients, to buy the building because Le Groupe Lefebvre did not like that kind of money, well we would lose our deposit of one hundred thousand dollars ($100,000).

Hence the need with the partners, previously, because we were all together risking a hundred thousand dollars to see whether, together, we could raise a sum of three million (3,000,000).

Q. Is it correct to say that there was a nucleus of clients before you began making the investment?

A. Well, with figures like that, I can’t remember the exact amount, but there were certainly, out of one hundred and forty-four (144), the figure we ended with, between fifty (50) and seventy-five (75) clients who had specifically said: well, as far as I'm concerned, if you have a project of such and such a size, yes, I'd be interested in investing so much money.

Q. In the agreement in principle I understand that. . .

BY MR. DANIEL VERDON:

Your Honour, I should ask my friend to be less leading. This is his examination-in-chief.

BY MR. CLAUDE P. BUISSON:

Q. There was not an agreement of any kind, except one to be concluded, between the people before the investment was made?

A. Well, nothing had been signed, but the guy told us: /, if you have such and such a type of investment, I'll put in twenty thousand (20,000), I'll put in five thousand (5,000), I'll put in fifteen thousand (15,000). Nothing had been signed but in fact you went back to see the guy and he signed a document. So it was an agreement in principle. I don't know what you would call that.

BY THE COURT:

That's it. Le Groupe Lefebvre knew its clients.

BY THE WITNESS:

Well, yes, they were clients who were in various other management areas

BY THE COURT:

Yes.

BY THE WITNESS:

. . .boards of directors, financial planning and so on and the fact is . . . in fact, you will see, Your Honour, later, as a matter of fact, we had, if you examine the situation, a shelf prospectus on December 1, there was a final prospectus, if memory serves, on the twenty-first (21st) of December. Had it not been for that preparation and that oral commitment, it would have been physically impossible to raise three million (3,000,000) in a month. Even the big securities dealers don't raise that kind of money, even now, in real estate it's impossible. That takes three (3), four (4) or five (5) months and it is a long hard job.

So, in the final analysis, we did not have a signature at the time because, obviously, you cannot have someone sign what you do not know, but the client said: yes, I shall invest in a project of that size, that scope, located at that place, five thousand (5,000), ten thousand (10,000), twenty thousand (20,000), fifty thousand (50,000), depending on his needs from a tax point of view, and also his ability to invest five thousand (5,000), ten thousand (10,000, twenty thousand (20,000) or twenty-five thousand (25,000), as was the case for example, with Mr. Baillargeon, I think.

It is always the case when we have, well, this kind of oral commitment from fifty (50), sixty (60), seventy-five (75) clients, we said: well, if we have those today, let us look at the month of August, September or October, regardless, in the period when we had that discussion among the partners, if we already have fifty (50) to sixty (60) persons prepared to invest, for example. I don't know, one (1,000,00) or two million (2,000,00), well, we said, by the end of the year we should be looking good for at least another million (1,000,000) so a sum of three million (3,000,000), that should do it. Well, that’s how it came about. [Transcript, pp. 99-107]

3.30 Concerning the portion of the sum paid by the appellant that was to be used to pay disbursements, counsel for the appellant examined Mr. Deslisle as follows:

Q. . . .when the investor signed the subscription contract, he knew what would result from the issue. Of a sum of twenty-five thousand dollars ($25,000) did he know that a portion would be used to defray those sums (the disputed expenses)?

A. Necessarily. Or he should have known it. [Transcript, p. 138]

3.31 On cross-examination Mr. Deslisle answered the questions of counsel for the respondent concerning the mandate to incur the initial costs as follows:

BY MR. DANIEL VERDON

Q. Earlier you explained that. . . you took out as a firm option, you said a non- refundable deposit.

A. Yes.

Q. One hundred thousand (100,000) for example, on Chateau Lincoln. Could it have been on the other?

A. Oh yes.

Q. You said . . . you also spoke about your financial risk, of Le Groupe Lefebvre, then the partners of that group. That financial risk, if I fully understand, it was of losing one hundred thousand bucks ($100,000) in deposit that you had paid on a building if you failed to make the offer, if you will. Is my understanding correct?

A. That was one of the risks.

Q. What were the others? Could you list them, if there were any?

A. Well, in fact, as soon as we made our decision, we had brochures printed. . .

Q. Hum, hum.

A. . . .on behalf of the company we advertised. In that case, it cost us almost twenty thousand dollars ($20,000), as far as I can remember, just in the newspapers.

Q. Hum, hum.

A. We had a pile of stuff printed from photographs. Just the photographs of the building . . . all the costs you can see there that were . . . Moreover, I think that in the record there is an invoice that is explicit, with all the costs with the invoices.

Q. One hundred and fifty some thousand bucks, something like that.

A. I don't remember that figure.

Q. Printer, Barrister, Notary, those things.

A. As far as I can remember, there were more than that but in fact the amount is not important. . .

Q. Yes. OK. It’s just to understand the principle.

A. I don't remember. . .

Q. No, no, it’s just to understand the principle.

A. . . . I can't go into details. But we had a financial risk in the case of the deposit. But if that was not done, it was, what is your question?

Q. Yes.

A. So, if it was not done, we also had the risk of having incurred all those expenditures for and on behalf of the company that were necessarily, if the investment did not work out, no one would have repaid us. So . . .

Q. It was you who had to live with that.

A. Indeed.

3.22 At pages 167 to 172 of the transcript the cross-examination of Mr. Delisle on the sum of $100,000 offered by Le Groupe Lefebvre and the other initial disbursements continues as follows:

Q. The offer to purchase that was made, you said one hundred thousand bucks ($100,000), it was Le Groupe Lefebvre that paid the hundred thousand (100,000) deposit?

A. No, It was one one eight five two two (118522) but. . .

Q. But who put up the money?

A. . . .which was loaned by Le Groupe Lefebvre.

Q. OK. . . . Did you contemplate the possibility at the time that the three thousand (3,000) shares, or, finally, that the three million (3,000,000) which comes to the same thing, would not be sold? Did it cross your mind when you put together that package?

A. It was always a risk that we were running, in fact.

Q. In that case, then, did you have a strategy, any plan to dispose of the building otherwise?

A. Well, it had already happened to us as a matter of fact. We had two possibilities at that time: either simply to give it back to the investors, to tell the trustee to give the money back to the investors . . .

Q. Hum, hum.

A. . . . or Le Groupe lefebvre could borrow the difference from some lender, subscribe the difference and resell the remainder through anoth- erprospectus in another year.

Q. The property as such, there was the possibility also that you wanted your hundred thousand bucks in it ($100,000).

A. Indeed, that's the first possibility. That's it . . .

Q. That is the first possibility.

A. . . if we did not think of the others. . .

Q. You give the money back to the investors.

A. And we lose our hundred thousand (100,000) . . .

Q. . . . plus all the other costs you had already incurred for it: broker, notary

A. Plus the potential profit and so on.

Q. Plus profit and commission.

A. And . . . and again what we did, in fact, as a matter of fact, in another later case, in a later year, was borrow the money, obviously with additional costs

Q. To attempt to get out of it.

A. . . . and carried the rest to resell it some time later.

Q. That, who assumed that burden . . .

A. Le Groupe Lefebvre.

Q. It was Le Groupe Lefebvre.

A. Necessarily. It was the one that was liable.

Q. It was stuck.

A. That's it.

Q. Sir. . .

A. With that residue.

Q. Yes, yes.

A. If there had been five (5%), ten (10%), fifteen (15%), twenty (20%) or thirty per cent (30%) there . . .

Q. Either you reimbursed the investors or you arranged to finish the project with other financing.

A. That's it.

Q. Did, . . . Clerk, would you mind giving me Exhibit 1-3. . .

BY THE COURT:

I was just about to ask him the question but if you ask him . . .

BY MR. DANIEL VERDON:

If you care to go to the second page, you have it, I think.

A. Disbursements, yes.

Q. Yes, disbursements. Is that what you were referring to earlier, expenses that

A. That's right.

Q. . . . meaning that you could lose, if it never worked out?

A. Exactly.

Q. If I understand, it was Le Groupe Lefebvre that contacted La Presse, Air Canada, Offset Ville-Marie, in any case all the people listed there . . . Plow & Watters, the printer. . .

A. In fact, on behalf of the corporation, always the hundred. . . I can no longer remember the company's name but. . . it was the company that incurred all these expenditures, but if there had been no investment, Le Groupe Lefebvre would have been forced to loan the money, to provide the money to the company to do it. But it was the company that contracted, that took all that action.

Q. It was Le Groupe Lefebvre that put the money in there . . .

A. That's right. Necessarily.

Q. ... to operate.

A. As long as we did not have the investors’ money, it was Le Groupe Lefebvre that was behind it.

Q. If the offer did not work out, well, at that time it was Le Groupe Lefebvre that would be liable for everything. That is, would pay for everything.

A. It was the company that would have paid but that would later have been defrayed by Le Groupe Lefebvre, which would have subsidized the company, necessarily but. . .

Q. In any case there was nothing in the company other than Le Groupe Lefebvre at that time.

A. Correct.

3.33 Concerning the surety for the obligation to give a liquidity guarantee, Mr. Deslisle testified as follows at page 185:

Q. . . . did Le Groupe Lefebvre guarantee the obligation of one one eight five two two to pay any expenses whatsoever?

A. Well. . .

Q. Were representations made to any of these suppliers that Le Groupe Lefebvre would pay?

A.	.	I. Nobody forced us to guarantee anything. But it went without saying that
	everybody realized that if things did not work out, they would be paid in any
	event. Technically, however, to answer your question, there was never a
	surety.
	. . . Well, no, that’s certain. But to answer your question from a technical
	point of view, there was no written endorsement but it went without saying
	that morally, they knew that they would not be left short. That's all.
Q.	A moral obligation to pay?
A.	Well, yes. That's certain.

3.34 Mr. Delisle testified that the developer was involved in more than 15 syndication projects for a total value of more than $125,000,000.

3.35 According to Mr. Delisle, it was absolutely essential to give possible investors a liquidity guarantee if they were to be interested in any project. Without this guarantee, no sale was possible. Moreover, the cost of this guarantee, namely, $400,000, was paid by the investors, each one realized that this was a cost covering a major risk. For the developer the liquidity guarantee was thus a normal part of a syndication contract.

The main provisions of the Income Tax Act involved in this case are sections 3 and 9, subsection 18(9) and paragraphs 18(1)(a), (1)(b) and 20(1)(e).

4.02 Case law and authors

The Court referred to the following cases and authors:

1. Charron v. M.N.R., [1987] 1 C.T.C. 2135; 87 D.T.C. 89 (T.C.C.);

Case Law Relied on by Appellant

A. Meaning of “in the course of"

2. M.N.R. v. Yonge-Eglinton Building Ltd., [1974] C.T.C. 209; 74 D.T.C. 6180 (F.C.A.);

3. Côté-Reco Inc. v. M.N.R., [1980] C.T.C. 2019; 80 D.T.C. 1012 (T.R.B.);

B. Nature of joint ventures

4. Walter H. E. Jaeger, Joint ventures; origin, nature and development, The American University Law Review, January 1960, Vol. 9, 1-23, p. 7;

5. Pierre A. Cossette, "Les groupements momentanés d"entreprises (joint ventures): nature juridique en droit civil et en common law" (1984), 44 Revue du barreau, No. 3, 463;

C. Judicial recognition of real estate syndicates

6. Consumers Cordage Company (Ltd.) v. Young (1898), 7 B.R. 67;

7. M.N.R. v. Kato, [1969] C.T.C. 492; 69 D.T.C. 5308 (Ex. Ct.);

8 . M.N.R. v. Lane, [1964] C.T.C. 81; 64 D.T.C. 5049 (Ex. Ct.);

9 . Lane v. M.N.R., [1977] C.T.C. 2264; 77 D.T.C. 188 (T.R.B.);

10. Lund v. M.N.R., [1972] C.T.C. 2202; 72 D.T.C. 1213 (T.R.B.);

11. Shainbaum v. M.N.R. (1963), 30 Tax A.B.C. 300; 63 D.T.C. 17 (T.A.B.);

12. Wise v. M.N.R. (1961), 26 Tax A.B.C. 6; 61 D.T.C. 70 (T.A.B.);

13. Walsh v. M.N.R. (1958), 20 Tax A.B.C. 94; 58 D.T.C. 522 (T.A.B.);

D. Guarantee similar to liquidity guarantee

14. Panda Realty Ltd. v. M.N.R., [1986] 1 C.T.C. 2417; 86 D.T.C. 1266 (T.C.C.);

15. The Queen v. Lavigueur, [1973] CTC 773; 73 D.T.C. 5538 (F.C.T.D.);

16. Brian J. Arnold, "Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes", Canadian Tax Paper No. 71, July 1983, pp. 87 et seq, pp. 216 et seq;

17. Henri, Léon and Jean Mazeaud, Leçons de Droit Civil, Volume 2, Paris: Edition Montchrestien, pp. 628 and 629, par. 691;

18. Jean-Louis Baudoin, Les obligations, Cowansville: Editions Yvon Blais, 1983, p. 294;

19. P.-B. Mignault, Q.C., Le Droit civil canadien, Librairie de droit et de jurisprudence, ed. C. Théoret, p. 309;

20. Alex Weill, Droit civil—Les Obligations, Précis Dalloz, 1971, p. 778;

21. D.W.M. Waters, Law of Trusts in Canada, 2nd edition, Toronto, The Carswell Company Ltd., 1984, p. 134;

22. Consolidated Textiles Ltd. v. M.N.R., [1947] C.T.C. 63; D.T.C. 958 (Ex. Ct.);

23. Timagami Financial Services Ltd. v. The Queen, [1981] C.T.C. 76; 81 D.T.C. 5064 (F.C.T.D.);

24. Ward's Tax Law and Planning, Volume 2, Toronto: The Carswell Company Ltd., 1983, pp. 4-143 to 4-155;

25. Morguard Properties Ltd. v. City of Winnipeg, [1983] 2 S.C.R. 493; 3 D.L.R. (4th) 1;

26. Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.);

27. Canadian Marconi Co. v. The Queen, [1986] 2 C.T.C. 465; 86 D.T.C. 6526 (S.C.C.);

Case Law Relied Upon By Respondent

28. Ryan v. M.N.R.,[1986] 1 C.T.C. 2142; 86 D.T.C. 1108 (T.C.C.);

29. Damico v. M.N.R., unreported T.C.C. decision, No 84-1560(IT), Judge Cardin, rendered June 23, 1986;

30. Tertulliani v. M.N.R., [1988] 2 C.T.C. 2068; 88 D.T.C. 1445 (T.C.C.);

31. Michel Laurence v. M.N.R., unreported T.C.C. decision No 85-1568(IT). Judge Lamarre-Proulx, rendered July 28, 1989; Submissions of Appellant

32. The Queen v. Phyllis Barbara Bronfman Trust, [1987] 1 C.T.C. 117; 87 D.T.C. 5059 (S.C.C.);

33. Vallambrosa Rubber Co. v. Farmer (Surveyor of Taxes) (1910), 5 T.C. 529, at 534;

34. Naval Colliery Company v. C.I.R. (1928), 12 T.C. 1017;

35. Oxford Shopping Centres Ltd v. The Queen, [1981] C.T.C. 128; 81 D.T.C. 5065 (F.C.A.); [1980] C.T.C. 7; 79 D.T.C. 5458 (F.C.T.D.);

36. Dictionnaire alphabétique et analogique de la Langue Française, Petit Robert, Société du Nouveau Littré;

37. The Shorter Oxford English Dictionary, Third Edition, Oxford, England: Clarendon Press;

38. Black's Law Dictionary, Fifth Edition, St Paul, Minnesota: West Publishing Co;

39. Revenue Canada Internal Memorandum, Corporate Rulings Multiple Unit Residential Buildings as Tax Shelters, dated September 22 and 24, 1979.

4.03 Analysis

4.03.1 Counsel filed particularly well-thought-out submissions that deserve to

be quoted. Because they extend to 60 pages, I shall limit myself to reproducing the essential elements thereof.

4.03.2 A. Summary of appellant's arguments

In order to understand the dispute as a whole, counsel first placed it in its context, as follows:

(a) the process of syndicating a major real estate project;

(b) the process of a public offer of savings to ensure partial funding.

He then explained that all the following situations in paragraph 20(1)(e) of the Income Tax Act (hereinafter called the Act) were satisfied:

(a) The expense must relate to an income source;

(b) The expense must be incurred in the taxation year in which the taxpayer seeks to deduct it;

(c) The expense must be incurred in the course of an issue or sale of ashare in a syndicate by a syndicate.

The second argument of counsel for the appellant was that the expenses incurred by the investors to obtain the liquidity guarantee were deductible as current expenditures that did not fall within paragraph 19(1)(b) of the Act but rather under paragraph 18(1)(a) of the Act.

4.03.3 B. Summary of respondent's arguments

The respondent divided his arguments into three points:

The respondent's first argument is that the expenses claimed by the appellant were not incurred by him during the 1982 taxation year and consequently he is not entitled to deduct the sums claimed. In other words, the respondent claims that the appellant had no legal obligation to pay the sums claimed under each of the items in dispute, but that he merely purchased an undivided share in real estate; the expenses included in the purchase price of the appellant's undivided share represent expenses that were incurred by third parties and that were not legally binding on the appellant in any way at the time they were incurred. The result is that the sums in question may be separated legally from the capital cost borne by the appellant to purchase his undivided share of Château Lincoln.

In the second part of our argument we shall maintain in the alternative that the arguments we raised in Charron v. M.N.R., supra, (on appeal to the Federal Court) apply here mutatis mutandis. However, given our main argument mentioned above, we do not believe that the Court will have to decide the question that was in dispute in Charron since the primary argument raised by us in this case was not before the Court in Charron.

Finally, in the third stage we shall argue more specifically on the question of the liquidity guarantee that the deduction claimed for a total of $400,000, concerning which the respondent argues that the said liquidity guarantee is an expense relating to the period from January 1, 1983 to December 31, 1987 and that consequently no amount may be deducted in this regard during the 1982 taxation year, especially since it was not incurred until 1983.

The respondent then relied on subsection 18(9).

4.03.4 C. Appellant's reply

In the more detailed arguments in his reply counsel for the appellant attempted to provide a better basis to refute the respondent's arguments.

First point: initial costs-mandate-syndicate.

Concerning the application of paragraph 20(1)(e), the appellant's argument showed that the disputed expenses totalling $7,167 were incurred in 1982 by the appellant as current expenditures. The respondent argued, on the other hand, that the sum of $3,834 relating to the initial expenses, that is the negotiation, acquisition, flotation costs and the sale commissions, were not incurred as current expenditures by the appellant but by the developer, the broker and the numbered company. According to the respondent, this was for the appellant a capital expenditure forming part of the purchase price deductible under paragraph 18(1)(b). The appellant replies that the broker, developer and numbered company acted as agents or mandataries of the investors.

4.04 The first issue is whether a mandate was given by the investors to the developer, broker and 118522 Canada Inc. to incur the necessary costs and expenses of setting up the syndicate on their behalf.

4.04.1 The respondent's position is clear. "When shares in real estate are offered for sale, the offer is not made by someone as an agent of the investor to whom the offer is made .. .” It cannot be claimed that someone is the "agent" of someone to whom advertising is directed to persuade him to purchase a property and who is not even known. If the investor has given no mandate to incur the so-called initial expenses, the result is that the investor cannot be held liable in law for payment as against third parties with whom the developer has contracted. The theory of the appellant's mandate was, according to the respondent, a mandate in which there was no mandate when the purported mandatary acted.

The respondent accordingly maintained that the expenses claimed by the appellant were incurred by the supposed agents and not by the appellant before he was the owner of an undivided share of Château Lincoln. In fact, according to counsel for the respondent, prior to December 31, 1982, the appellant had no legal obligation to pay the amounts claimed as deductions. Counsel referred to the testimony of the appellant (3.26) and Mr. Delisle (3.31). He concluded that the said sums formed part of the capital cost of the building purchased by the appellant and that they were accordingly deductible under paragraph 18(1)(b) but not under paragraph 18(1)(a).

4.04.2 Mr. Delisle’s testimony, which is quoted in paragraph 3.29, showed that it was in the early fall of 1982, following meetings over a period of several months, that a number of persons were already prepared to invest sums totalling about two million in a building that had a number of features meeting their requirements, needs and capacity. This building, the cost of which would be between 9 and 10 million, required an investment of about three million. It was after this oral consensus was reached that a search was begun for the appropriate building and Chateau Lincoln was finally chosen.

It seems clear to me that Le Groupe Lefebvre and the broker could not have engaged in such an enterprise without being certain beforehand, given their experience, that there was a reasonable chance of success. This reasonable chance was based specifically on the consent of a large group of investors on condition that the investment meet the conditions prescribed by them: it must be located in Montreal, built of concrete and so on. If we do not see in this preliminary oral agreement a clear mandate by agreement, was there not, when the investors in Château Lincoln subscribed, an express ratification of the acts done by the manager?

Was there not a quasi-contract of business management that obligated them and that was converted into an express mandate with retroactive effect?

In this regard I shall quote the appellant's reply almost in its entirety:

In the work by the Mazeaud brothers, Leçons de Droit Civil, we find:

691. Ratification of business management. The master may approve and ratify an act of management.

Roman jurists did not agree on the effects of ratification. Some felt that it converted management into a mandate.

In French law most authors admit that ratification retroactively converts business management into a mandate. This is also the solution provided by the modern codes. . . The result is that, as the mandator, the master who has ratified cannot rely on the argument that the acts performed did not achieve their purpose: he is bound by all the actions of the manager.

[Emphasis added.]

Counsel for the Minister of National Revenue attempted to rebut the argument concerning mandate by trying to establish on Mr. Baillargeon’s cross-examination that he knew nothing about these expenses, that he never authorized or personally approved them and that they were incurred before he became a co-owner. This argument will not stand, given the existence of a quasi-contract of business management.

It is clear that this witness was not a member of the original corps of investors who authorized the organization of the syndicate and mandated 118522 Canada Inc., the developer and broker, to incur the disputed expenses for them and on their behalf. Nevertheless, at the time when he signed the documents, he agreed to pay them from the proceeds of his investment.

If his testimony is understood correctly, Mr. Baillargeon does not deny knowing of the existence of his expenses and his obligation to pay; he merely denies having been required to pay them in addition to his investment.

We should also note that all the expenses claimed did not become due until December 31, 1982, after the property was purchased, the approval of the Commission des valeurs mobilières obtained and all the transactions referred to in the prospectus had closed. Thus thirty (30) days elapsed between his subscription and the payment of the disputed expenses.

(b) Business management

Counsel for the Minister of National Revenue argued that the principle of mandate could not be relied upon to justify the oblation to pay the debts incurred by 118522 Canada Inc., the developer or the broker, for those investors who subscribed only after the debts were incurred, since these persons could not have given the required consent for a mandate at the proper time.

This argument is rebutted simply by applying the rules of quasi-contract of business management to these investors.

In his book, Les Obligations, Professor Jean-Louis Baudoin defines the quasi- contract of business management as follows:

Business management is . . . the situation where a person (the manager) voluntarily looks after the affairs of another without the existence of a contract in this regard between them.

Judge Migneault has defined it as follows:

Business management exists where a person voluntarily acts, promises or contracts in the interest of a third party, without having received a mandate to this effect.

The Legislature deals with this subject in article 1043 et seq of the Civil Code of Lower Canada:

Art 1041. A person capable of contracting may, by his lawful and voluntary act, oblige himself toward another, and sometimes oblige another toward him, without the intervention of any contract between them.

Art 1042. A person incapable of contracting may, by the quasi-contract which results from the act of another, be obliged toward him.

SECTION I

OF THE QUASI-CONTRACT "NEGOTIORUM GESTIO”

Art 1043. He who of his own accord assumes the management of any business of another, without the knowledge of the latter, is obliged to continue the management which he has begun, until the business is completed or the person for whom he acts is in a condition to provide for it himself; he must also take charge of the accessories of such business.

He subjects himself to all the obligations which result from an express mandate.

Art 1044. He is obliged to continue his management although the person for whom he acts died before the business is terminated, until such time as the heir or other legal representative is in a condition to take the management of it.

Art 1045. He is bound to exercise in the management of the business all the care of a prudent administrator.

Nevertheless, the court may moderate the damages arising from his negligence or fault, according to the circumstances under which the management of the business has been assured.

Art 1046. He whose business has been well managed is bound to fulfill the obligations that the person acting for him has contracted in his name, to indemnify him for all the personal liabilities which he has assumed, and to reimburse him all necessary or useful expenses.

[Emphasis added.]

The authors suggest that there are three (3) preconditions for business management in this sense:

(1) a lack of representation by law, agreement or court order;

There is no business management if the parties have agreed that one should manage the business of the other. There will then be an express or tacit mandate, a business contract or a contract for service.

There will be no business management if someone is required by the law or by a judgment to deal with the business of another.

(2) an intention to manage the business of others;

The manager must intend to act for others and not on his own account and he must intend to be compensated.

Business management is closely related to the theory of representation.

(3) proper management;

The management must be proper for compensation to be enforceable.

In his Droit civil - Les Obligations, Weill mentions cases where business management was applied between co-owners and the promoters of a corporation:

business management is admitted between co-owners. . .; between usufructuaries and bare co-owners. .. between the founders and subscribers of a single corporation.

Under these rules it is not necessary for the person whose business is managed to know of the business management or for there to be consent (that would be express mandate), or for the person whose business is managed to be capable of contracting when the obligation is incurred on his behalf.

A quasi-contract of business management has the same legal effects as mandate; the person whose business is managed is personally liable for the debts and obligations incurred by the manager on his behalf.

We submit that all conditions for the creation of a quasi-contract of business management were satisfied in this case and that a relation between manager and him whose business is managed existed between the investors and 118522 Canada Inc., the developer and broker.

We should add that at no time did Le Groupe Lefebvre Inc. or Les Investissements FNI Inc. themselves pay these expenses from their own moneys but did so as representatives of the undivided co-owners following closure and the final prospectus from the proceeds of the investment.

4.04.3 I also adopt the appellant's opinion that the prospectus, an important evidentiary factor in this case, was equivalent in law to a contract between the parties. Section 217 of the Securities Act, which requires the filing of a prospectus for the information and protection of the public and which prescribes the terms and conditions therefor, refers as follows to situations in which the contract will be null and void or the price may be revised:

217.SA-[Rescission of contract] A person who has subscribed for or acquired securities in a distribution effected with a prospectus containing a misrepresentation may apply to have the contract rescinded and the price revised without prejudice to his claim for damages.

[Defence] The defendant may defeat the application only if it is proved that the plaintiff knew, at the time of the transaction, of the alleged misrepresentation.

Did not all the investors recognize their status as mandators (or persons whose business was managed) by signing the subscription agreement required for the investment? Under the heading “ASSIGNMENT OF PROCEEDS OF ISSUE” in the prospectus, we find the following at page 11:

(ii) one hundred and fifty-seven thousand dollars ($157,000) will be used to defray all legal, accounting, advertising and printing cost incurred on behalf of the investors;

(iv) four hundred thousand dollars ($400,000) will be paid to Le Groupe Lefebvre SFI Inc. as fees for the liquidity guarantee;

(vi) forty thousand dollars ($40,000) will be paid to Le groupe Lefebvre SFI Inc as fees for arranging the financing for the deed to purchase the building.

The appellant's reply states the following:

We find in this passage an absolute declaration of the quality of the legal relationship between the parties, which was, moreover, recognized by all by reason of their subscription, i.e., the fact that it was stated that the expenses had been incurred on behalf of the investors establishes, without the shadow of a doubt, the intention of 118522 Canada Inc., the developer and broker, to make only the investors liable. The latter all clearly contracted for and on behalf of the investors and this representation gave rise to the debt for which the investors were liable.

We should also add that counsel for the Commission des valeurs mobilières, third parties with no interest in the dispute, checked this mandator-mandatary/ manager-person whose business is managed relationship with respect to liability for the debts and declared himself satisfied.

4.04.4 Counsel for the respondent referred to the following four cases to support his argument: Ryan 4.02(28), Damico 4.02(29), Tertulliani 4.02(30) and Laurence 4.02(31). All these cases seem to have a common thread, namely the fact that the initial costs were subscribed and paid by the developer.

4.04.4(1) Counsel for the appellant commented as follows on Ryan, Damico and Tertulliani:

Ryan, Allard [Damico] and Tertlliani

Counsel for the respondent asked the Court to consider Ryan and submitted it as a precedent in this case.

We submit that this decision went in favour of the Minister of National Revenue solely because of the facts, that it must be distinguished and that it does not apply to the instant case.

There are substantial differences between the facts in Ryan and those in the case before us.

The main reason for the Court seemed to be the fact that there was a flagrant contradiction in the taxpayer's argument; when he maintained there was a settlement of trust in favour of the investors, two (2) deeds of sale subsequent to the date of the alleged act of settlement, clearly established the developer's status as the owner.

It also appears that the initial costs were all subscribed and paid by the developer and this is fundamentally different from the facts in our case.

Moreover, the conditions for opening the settlement of trust do not seem to have been satisfied and the reasoning of Judge Brulé is open to serious challenge on at least two (2) important points.

First it does not seem correct to say that a settlement of trust must necessarily be in writing [4.02(21)] since a simple declaration of trust does not require any formalities and may be oral and be presumed from the intent of the settlor.

Second, it seems just as incorrect to say that the beneficiary must exist or be known for a trust to be created since it is sufficient for an apprehended beneficiary to exist or be capable of identification when the settlement takes effect.

The reasoning of Judge Brulé is especially weak when he rejects the arguments of the appellant that the payment had been made by Rockland Development Partnership for and on behalf of the eventual investors.

(It does not seem logical to say the costs were being incurred on behalf of the ultimate investors. These people were not known at the time many of the costs were ordered. One could ask: “What could have happened if it turned out no investors were found?” The Rockland Development Partnership would have to pay the cost.)

Such hypotheses are never allowed in strict law. Chief Justice Dickson of the Supreme Court, speaking for a unanimous Bench, recently reminded counsel in The Queen v. Bronfman Trust [4.02(32), at p. 5067];

(It was submitted and the Crown generously conceded that the Trust would have obtained an interest deduction if it had sold the assets to make the capital allocation and borrowed to replace them. . . It would be a sufficient answer to this submission to point to the principle that the court must deal with what the taxpayer actually did, and not with what he might have done.)

The first essential question that the Court should have asked is who had in fact incurred'the legal obligation to pay the suppliers, the investors or Rockland Development Partnership? If the response had been the latter, the Court should then determine whether Rockland acted on its own account or as an agent, mandatary or trustee etc. on behalf of others. Only the former finding would confirm its judgment.

It should be noted here that it was Rockland Development Partnership, which was a total stranger to the co-owners, that in fact incurred and spent the initial costs and was in fact subsequently reimbursed by the investors. That is fundamentally different from our case.

Counsel for the respondent also relied on Allard and Tertulliani; both these cases must also be distinguished for the simple reason that the initial costs had been paid by others before the taxpayers became the owners, and these facts are quite contrary to those in the instant case.

4.04.4(2) Concerning Laurence, which was filed with the Court in July 1989 by counsel for the respondent without comment, counsel for the appellant replied in late August as follows:

Laurence

Our friends relied on the decision of Judge Lamarre Proulx JTCC in Michel Laurence v Minister of National Revenue, which was issued recently by the Tax Court of Canada.

As in the other authorities relied upon by the other side, the facts in this case are totally different from those in the case before us and these differences all relate to essential legal facts that create totally different rights and obligations and we accordingly submit that this judgment cannot be raised against us either.

An examination of the facts in Laurence shows in effect that the expenses were incurred directly and paid by the builders and that only the builders were debtors.

In the reasons Judge Lamarre Proulx clearly interpreted the concept of expenses made or incurred by saying that it referred to the person who legally contracted the debt and who was in law the debtor.

Unlike what was done by the developers in the Chateau Lincoln syndicate, the builders in Laurence had never indicated to their contractors (Mr. Blouin and Mr. Déchénes) their capacity as representatives of the investors. They contracted the debts in their own names and on their own account with the ultimate aim of having the cost borne by the purchasers.

In our case the non-liability of the developer or the brokers for the debts and obligations contracted in establishing the syndicate (expenses amounting to $157,000) were clearly disclosed, in limini contractu, to each and every supplier. It was 118522 Canada Inc. and only it that incurred the debts as a mandatary or business manager of the investors. Of course, the developer had a moral obliga tion to pay them but was not legally the debtor. Had the situation not have turned out well, these suppliers would have had no legal remedy to force payment from the developer and would have been able to rely only on its good disposition and moral feelings to obtain payment. A trustee in bankruptcy acting on behalf of a developer that was insolvent would have had a statutory obligation to challenge any attempt to collect these debts from the developer's assets. Any legal creditor of the developer could have brought a paulian action to cancel payment of these debts by the developer. There are very major differences between a moral obligation (which does not give rise to rights) and an enforceable obligation; the law recognizes only the latter.

As regards all the other expenses involved in our dispute, the fact that the developer and broker represented the investors and that they were not liable as debtors was clearly and repeatedly disclosed to the investors, officials of the Commission des valeurs mobilières and the creditors of these debts, first when the debts were incurred through the intermediary of a corporation, and later, by the clear disclosure of the mandate in the prospectus and finally, tacitly, because of the conduct with respect to payment (e.g., no debt was paid in whole or in part from the developer's moneys).

For all these reasons the findings in Laurence cannot apply in the instant case.

4.04.5 In conclusion, I feel that this case is different from Ryan, Damico, Tertulliani and Laurence. In the instant appeal neither the developer nor the broker was a debtor. I agree with counsel for the appellant that the business management theory applies.

4.04.6 The second point relates to the liquidity guarantee for $400,000, the appellants share thereof being $3,333.

4.04.6(1) According to the respondent, because of the nature of this expense, which was to guarantee income of $250,000 to cover the eventual losses in each of the first five years, the said expense may apply only from January 1, 1983 to December 31, 1987. Moreover, the respondent continued that the liquidity guarantee contract (Exhibit A-8) between 118522 Canada Inc. and Le Groupe Lefebvre SFI Inc. was not signed until January 17, 1983. Article 2 of this contract provides that the sum of $400,000 was payable only within 15 days of the said contract, that is, by February 1, 1983, and that this sum was to guarantee that Le Groupe Lefebvre would meet any operating deficit of the property up to $250,000 in each of the years in the period from January 1, 1983 to December 31, 1987.

Moreover, the respondent contended that the income matching principle applied to ensure that the profit (or loss) in each of 1983, 1984, 1985,1986 and 1987 would not be distorted.

In Ryan Judge Brûlé confirmed this position of the Minister at page 2148 (D.T.C. 1112)

The principle of matching expenses with revenues has been dealt with by various authors and also by the courts. A review of this situation was provided by Thurlow, A.C.J. in the Federal Court case of Oxford Shopping Centres Ltd. v. The Queen, 79 D.T.C. 5458, [1980] 2 FC 87 (later upheld in the Federal Court of Appeal).

The learned judge, after reviewing earlier cases, said at 18;

I think it follows from this that for income tax purposes, while the “matching principle” will apply to expenses related to particular items of income, it does not apply to the running expenses of the business as a whole.

In the present case it is easily acceptable that the lease back insurance fee is related to the five-year period it covers, it is also noted that this is not the expense of a business in relation to its income but rather income from property. I believe that the Minister was correct in his treatment of this $160,000 amount.

Counsel for the respondent then made the following argument:

It will also be noted that, in any event, section 18(9) of the Income Tax Act applies to this situation. In Ryan Judge Brûlé said the following concerning a sum claimed as equivalent to a liquidity guarantee, that is, a lease back insurance fee of $160,000

It is interesting to know that after December 11, 1979, the date of this joint venture agreement, subsection 18(9) of the Income Tax Act was added to provide for a mandatory deferral in a situation such as this. (FJ. Ryan et al. v. M.N.R., [1986] 1 C.T.C. 2142 at 2148)

The evidence showed that essentially the liquidity guarantee was equivalent to a form of insurance for the investors.

On this point is will be noted that in a publicity document filed as Exhibit A-3 it is stated that "Le Groupe Lefebvre SFI guarantees up to a sum of $250,000 per year that the project will finance itself in 1983, 1984, 1985, 1986 and 1987. (At page 6 of Exhibit A-3, note 3 at the bottom of page 6.)

The testimony [of Mr. Delisle] should also be noted to the same effect:

A. Whereas with a liquidity guarantee, well, they said: at worst, it's true that I have spent so many dollars in my initial investment to pay for that insurance, if you like, it's a kind of insurance against a risk called deficits, it's true that this will cost me a few dollars but, on the other hand, I know where l"m going from now on, if the property makes a loss, I won"t have to spend any more.

(Transcript, p. 112)

BY THE WITNESS:

. . . That's to tell you that the four hundred thousand dollars ($400,000) insurance that they were charged at the beginning in that case, it reallywas not expensive.

(Transcript. p. 130)

A. That was our common practice. It was not the first one we had done. It was in light of the risks involved. And I’m trying to remember whether it was in that case or another, the CVMQ had disputed that amount and we had had an insurance company give their determination of the risk as if it had been theirs. One said that it would not take it but two (2) that below... approximately two (2) times the price that we would take it for, if they took it, it would perhaps be that amount.

So it was based on the size of the property, the extent or amount of the presumed deficit. Let us assume that they calculated in a twenty per cent (20%) vacancy rate for two (2) or three (3) years, how much that would be. And then they calculated the loss of interest involved and so on, I. . .

Q. If I fully understand, the agreement, a moment ago you said: in essence this was an interest-free loan, when all was said and done. Is that correct? Because I understand that you guaranteed liquidity up to two hundred and fifty (250) which you later increased but, in any event, that amount that you had to pay if there was a loss, would be reimbursed subsequently.

A. To the extent that there was net income, yes. A positive balance.

Q. Yes.

A. That's it.

Q. In other words, in principle, it was an interest-free loan that could be for a very long term.

A. Correct.

Q. Nobody knows and then it's a kind of insurance to get an interest-free loan.

A. Correct. An interest-free loan and the possibility, as I said earlier, the certainty that you will not have to reinject money.

Q. Not pay a single cent ($0.1) further.

A. That's mainly it.

Q. Good. But it was not insurance in the sense that if there had been a deficit, you would meet it and that would be the end of the matter. It was not insurance in the everyday sense, theft insurance, I pay five hundred bucks ($500) to insure my car against theft; if it is stolen I am paid the value of the car. But I no longer have to repay anything to the insurer. Now, in your case there was. . .

A. Pardon me. Technically, if you do that, you will have increased premiums in the following years and you will have to pay for it eventually.

Q. Mr. Delisle, I am simply asking you to answer the question.

A. It’s exactly the same thing. I answered, I mean, it’s the same thing. You are right, yes or no. In other words, we were repaid but, in any event, when you pay for insurance, the same thing happens. If something is stolen from your car, if your car catches fire, you will have increased premiums later and inevitably you will repay it, just the same. It is simply to reduce the initial shock.

(Transcript, pp. 177-180)

Le petit Robert: Dictionnaire analogique de la langue française, 1977 edition, gives the following definition of insurance: “promise or guarantee that makes "something certain.” This dictionary goes on to say the following: "a contract by which an insurer guarantees the insured on payment of a premium or assessment the payment of an agreed sum if a specific risk occurs.” It is clear that in the instant case all the elements in the definition of insurance may be found in the so-called liquidity guarantee contract, which is, in essence, a promise that, should there be a lack of liquidity, Le Groupe Lefebvre SFI guaranteed to meet the loss for a period of five years and thus provided an interest-free line of credit during the period covered by the guarantee.

Our position in this case is in accordance with the position that has always been taken by the Minister of National Revenue in similar cases. On this point, we should refer to Interpretation Bulletin IT-417R, concerns sections 9 and 18(9) and in which paragraph 3 reads as follows:

To remove any uncertainty, subsection 18(9) of the Act was enacted into law on February 26, 1981, effective from December 11, 1979 and requires a taxpayer to match certain specified expenses to the taxation year to which they can reasonably be considered to relate. The department takes the view that subsection 18(9) was enacted for greater certainty and notwithstanding that it does not cover deferred charges or all types of expenses that can be prepaid, it is considered that the Income Tax Act (even as it read prior to the introduction of subsection 18(9)) always required and continues to require that all costs that could clearly be related to future periods be expensed in those periods, if they are important and if failure to defer the expense would distort the net profit not only of the year during which the expense was incurred but also of the subsequent year or years to which the benefit relates. . .

4.94.6(2) Counsel for the appellant commented as follows on the liquidity guarantee at pages 16 et seq. of his reply:

In their second main argument, our friends argued that the expenses for the liquidity guarantee should be staggered over five (5) years.

They contended that no profit was made by the Chateau Lincoln syndicate during the 1982 financial year and this led to the belief that it was necessary for a taxpayer to have income before he could claim a deduction.

This suggestion is quite erroneous in law and was rejected long ago in Vallambrosa Rubber Company Ltd. v. Farmer (Surveyor of Taxes) (1910), 5 T.C. 529, at 534:

The junior counsel for the Crown. . . wished your Lordships to accept this proposition, that nothing ever could be deducted as an expense unless that expense was purely and solely referable to a profit which was reaped within the year. I think that the proposition has only to be stated to be defeated by its own absurdity.

In their second argument counsel for the Minister of National Revenue raised the principle of matching income and expenditures as though it were universally accepted in Canadian tax law.

This is not the case. In fact, the courts have taken precisely the opposite position.

Given the decision in Naval Colliery Company Ltd. v. C.I.R., [4.02(34], Consolidated Textiles Ltd. v. M.N.R., [4.02(22)] and Oxford Shopping Centres Ltd. v. The Queen, [4.02(35)], a taxpayer is never forced to observe the matching principle and has an option of doing so or deducting all his expenses in the year in which they were incurred.

In his work Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes [4.06(16)], Professor Brian J. Arnold, after reviewing all the cases on the question of the matching of income and expenditures, concludes as follows:

The effect of these cases was to allow, but not to compel, a taxpayer to defer the deduction of costs incurred in a particular taxation year to a future year in computing income for tax purposes. Ordinarily, a taxpayer will prefer to deduct the costs as soon as possible in the year in which they are incurred; however, where the taxpayer cannot benefit from taking a deduction in the year in which the cost is incurred, the deduction can be deferred to a future taxation year or years if it can be justified on the basis of accounting principles as resulting in a more accurate matching of revenues and costs.

As might be expected, Revenue Canada has resisted the determination of the timing of deductions at the taxpayer's option in accordance with either the Consolidated Textiles rule or the matching principle . . .

Although the attempt to bring accounting practices and the tax practices closer together is commendable, it appears that Revenue Canada's new position is motivated by the desire to prevent taxpayers from having a choice as to the years in which amounts are deducted. Before the Associated Investors, Tower Investment, Canadian Glassine and Tobias cases, Revenue Canada made no attempt to bring the timing of deduction for income tax purposes into harmony with the treatment of expenses for accounting purposes. Rather, it consistently maintained the unreasonable position that amounts were deductible for income tax purposes only in the year they were incurred.

It is, however, questionable whether Canadian courts are prepared to accept Revenue Canada's position and require the timing of deductions for income tax purposes to follow accounting practices. . .

In Ward's Tax Law and Planning [4.02(24)] we find the same interpretation of the cases and the same statement of the rule:

It is submitted that the statement that section 18(9) was enacted for greater certainty, and that the act has always required and continues to require the amortization of prepaid expenses and deferred charges is clearly incorrect in view of the jurisprudence referred to above. Such jurisprudence has been specifically confirmed by the Federal Court of Appeal in Oxford Shopping Centres. . .

The respondents referred to F.J. Ryan [4.02(28)] in support of the matching principle. In his reasons Judge Brûlé completely misinterpreted the proposition in Oxford Shopping Centres [4.02(35)] and held that this decision introduced an obligation for the taxpayer to match his income with his expenditures; we, on the other hand, believe that on this point that case was wrongly decided. To our knowledge that is the only decision that has imposed the matching principle on the taxpayer.

We should note, finally, that the case law is a source of law and is binding on inferior courts. Interpretation Bulletin IT-417R merely reflects the position of Revenue Canada and does not have any authority in itself.

For the reasons given earlier, we believe that we have defeated the argument raised by the respondent involving matching.

Our friends argued naturally that section 18(9), ITA, applied and, in order to do so, they attempted to compare a “guarantee contract” to a contract of insurance.

Section 18(9), ITA, reads as follows:

18(9) Limitation respecting prepaid expenses

Notwithstanding any other provision of this Act,

(a) in computing a taxpayer's income for a taxation year from a business or property (other than income from a business computed in accordance with the method authorized by subsection 28(1)), no deduction shall be made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred;

(i) as consideration for services to be rendered after the end of the year,

(ii) as, on account or in lieu of, or in satisfaction of, interest, taxes (other than taxes imposed on insurance premiums), rent or royalty in respect of a period after the end of the year, or

(iii) as consideration for insurance in respect of a period after the end of the year (other than an amount paid in respect of reinsurance by an insurer).

There are only two (2) words and expressions in all those used by Parliament in this provision that are even remotely capable of referring to guarantee costs. The words “services” in subparagraph (i) and

“insurance” in subparagraph (iii)

In Dictionnaire alphabétique & analogique de la langue française [4.02(36)], "service" is defined as follows:

3. Particular work to be performed during one of these activities . . .

4. Obligation of a person whose trade is to serve a master; duty of a domestic servant (in: on, of service).

In The Shorter Oxford English Dictionary [4.02(37)] we find the following definition:

“11.1. Performance of duties of a servant; attendance of servants; work done in obedience to and for the benefit of a master. . .

IV.1. The action of serving, helping, or benefiting; conduct tending to the welfare or advantage of another. . . 4. Supply of the needs of. . ."

[Emphasis added.]

In Black's Law Dictionary [4.02(38)]:

Contract— Duty or Labour to be rendered by one person to the other, the former being bound to submit his will to the direction and control ofthe latter. The act of serving the labour performed and the duties required. Occupation, conditions, or status of a servant, etc Performance of labour for the benefit of another, or another's command;. . .[Emphasis added.]

These definitions evoke a notion of labour and work that is not sufficiently broad for the simple act of advancing money to execute a liquidity guarantee to be covered. The word “service” implies the doing of work that is too serious and predominant in the process of earning an income to allow the association desired by our friends. . . This distinction brings to mind that made between income from property and income from a business. So much so that the twinning of the intended meaning in the expressions "services" and "guarantees" seems absolutely impossible.

Can the liquidity guarantee be compared, then, to insurance?

Just as lamely:

in Dictionnaire alphabétique & analogique de la langue française [4.02(36)], "insurance" is defined as follows:

Contract by which an insurer guarantees the insured for a premium or assessment payment of an agreed sum if a determined risk occurs. Insurance contract, policy. Accident, fire, theft insurance. Life insurance, car insurance. Allrisk insurance, multi-risk insurance. Third-party insurance. Marine insurance.

In The Shorter Oxford English Dictionary [4.02(37)] we find the following definition:

4. Comm.—The act or system of insuring property, life, etc.; A contract the one party undertakes, in consideration of the payment (called a premium) to secure the other against pecuniary loss, by payment of a sum of money in the event of destruction of property (as by disaster at sea, fire etc.) or of the death or disablement of a person. . .

In Black's Law Dictionary [4.02(38)]:

A contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils. The party agreeing to make the compensation is usually called the ''insurer" or “underwriter”; the other the "insured" or "assured"; the agreed consideration, the “premium”; the events insured against, “risk” or "perils"; and the subject, right or interest to be protected, the “insurable interest”. A contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a unknown or contingent event and is applicable only to some contingency or act to occur in future. An agreement by which one party for a consideration promises to pay money or its equivalent or to do an act valuable to the other party upon destruction, loss, or injury of something in which the other party has an interest.

The ordinary meaning of insurance extends to life insurance, health insurance, damage insurance and liability insurance contracts but no further. The manufacturer giving a warranty is not an insurer and a company that gives extended warranties on cars is not subject to the Insurance Act, while the fact that a bank provides a letter of credit or rotating credit does not make it an insurer.

The insurance business is too strictly defined and regulated elsewhere than in the Income Tax Act for us to be able to give this expression a definition other than the traditional one.

Section 18(9), ITA, therefore fails to include guarantee costs. Certainly, the intent of Parliament to include them is uncertain and ambiguous.

Since this provision creates a restriction on a taxpayer's right to deduct an expense when it is incurred, section 18(9), ITA, is a prohibitive provision that must be strictly interpreted.

4.04 In fact, one of the most important canons of construction of a taxation statute states that uncertainty or ambiguity in a provision must be resolved in the taxpayer's favour.

In Morguard Properties Ltd. v. City of Winnipeg [4.02(25) at p. 509 (D.L.R. 13)] the Supreme Court of Canada clearly stated this canon of construction:

In more modern terminology the courts require that, in order to adversely affect a citizen's right, whether as a taxpayer or otherwise, the Legislature must do so expressly. Truncation of such right may be legislatively unintended or even accidental, but the courts must look for an express language in the statute before concluding that these rights have been reduced. This principle of construction becomes even more important and more generally operative in modern times because the Legislature is guided and assisted by a well-staffed and ordinarily very articulate Executive. The resources at hand in the preparation and enactment of legislation are such that a court must be slow to presume oversight or inarticulate intentions when the rights of the citizen are involved. The Legislature has complete control of the process of legislation, and when it has not for any reason clearly expressed itself, it has all the resources available to correct that inadequacy of expression. This is more true today than ever before in our history of parliamentary rule .. . .

[Emphasis added.]

In Johns-Manville Canada Inc. v. The Queen [4.02(26), at 126 (D.T.C. 5384] the Supreme Court stated that: "where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from the lack of explicitness in the statute should be resolved in favour of the taxpayer. . .

[Emphasis added.]

In another recent Supreme Court decision, Canadian Marconi Co. v. The Queen [4.02(27), at 472 (D.T.C. 6531)], Wilson J., writing for the Court, repeated the principle stated in Morguard Properties Ltd.: "the courts require that, in order to adversely affect a citizen's right, whether as a taxpayer or otherwise, the legislature must do so expressly."

It should be noted that these are three decisions of the highest court in the land that are less than five (5) years old and that have laid down modern rules of interpretation to be applied to taxation statutes.

Furthermore, it can be seen that Parliament gave a specific list and for this reason the Expressio unius est exclusio alterius rule of interpretation applies here.

On December 11, 1979, the day on which the Ways and Means Motion was tabled under which s. 18(9), ITA, was enacted, officials of the Department of National Revenue and the Department of Finance were fully aware of the existence of these guarantee provisions in the real estate industry. They were the subject of two internal memoranda dated September 22 and 24, 1979 [4.02(39)]

The government accordingly had every possibility to include these guarantees in the list in section 18(9), ITA, if that had been its intention. The fact that it did not do so and that a doubt or ambiguity has resulted concerning the objects to which it was to refer, means that the government and the government alone should suffer the consequences. The taxpayer is entitled to a minimum degree of clarity in order to plan his affairs.

For all these reasons, s. 18(9), ITA, cannot apply here.

4.04.6(3) The appellant also maintained in paragraph 4.3 of his submissions that the investors' expense for the liquidity guarantee was deductible under paragraph 18(1)(a).

The appellant argued that the outlays and expenses made or incurred by the investors for the liquidity guarantee were deductible as current expenditures that did not fall under paragraph 18(1)(b) of the Act.

The evidence showed that the developer was actively involved in the syndication business with more than 15 projects on hand for a total value of more than $125,000,000 and that it was absolutely necessary for it to provide its investors with a liquidity guarantee if it wished to interest them. The liquidity guarantee formed part of its profit-making scheme because it had no option ut to provide it. Receipt of the proceeds of the liquidity guarantee was income for the developer.

From the investors’ point of view, the expense ensured that funds would be available and that there would be income of at least $250,000 per year for five years. Under the guarantee all the sums spent by the developer to provide the guarantee would ultimately be repaid by the co-owners but the sums advanced did not bear interest, another component of income. With the guarantee the co-owners did not acquire assets, benefits or advantages of a permanent nature because the application of the guarantee was contingent.

The guarantee in question was very similar to that given by the taxpayer in Panda Realty Ltd. [4.02(14)], which was found to be common because he had given it solely for the purpose of ensuring rental income.

In The Queen v. Lavigueur, 4.02(15), Walsh, J. held that the advances made by a landowner to his tenants in financial difficulty were current and deductible because they were made to protect and earn rental income.

We submit that the ratio decidendi in these two cases applies to the instant case; since the expenses incurred by the co-owners to obtain the liquidity guarantee were incurred to protect and ensure rental income flow, the expenditures should be held to be current.

4.04.7 The third point made by the respondent was a reference to his argument in Charron, (4.02(1)), which is on appeal to the Federal Court, and he maintained that it applied mutatis mutandis.

Counsel for the appellant also referred to the argument made by him in his initial submissions and on reply in the same case, Charron, adding that, since that time, the nine provinces that have enacted securities legislation have all subjected the distribution of undivided co-ownership shares to the application of those enactments.

Since I decided in the appellant's favour in Charron, I maintain my conclusions on these points.

4.04.8 Economic reasons for paragraph 20(1)(e)

4.04.8(1) The principles applied in a syndication are business principles that meet the needs of our modern times.

Not everyone is able to make the purchase of real estate worth $10,000,000. However, because of economies of scale, these major projects are very often much more profitable than more humble projects and are often better investments and, conversely, represent a small financial risk in case of failure; hence the necessity for the average investor to combine with others to bring together the necessary capital and expertise for the acquisition and to minimize his risks.

The success of a real estate syndicate also depends on capital, particular expertise in identifying assets with potential, establishing its real worth, its economic potential and market trends, appropriate means of funding, the legal means to be used and the legal traps to be avoided as well as resource persons who will be able to operate the project and so on. Few people can claim to have such skills.

Raising funds for a project of this kind and scope, that is, five, ten, fifteen or twenty million, requires a public distribution of securities subject to the provisions of the Securities Act. All public offerings must operate in accordance with this Act, under pain of severe penalties.

Generally, the public offering process takes several months and begins with an application for a preliminary notice of eligibility to the Commission des valeurs mobilières in the jurisdiction where it is intended to make the offering and to deposit certain fundamental documents, e.g., by-laws, resolutions, financial statements and statements of the nature and object of the contemplated offering; following the notice of eligibility, many meetings will be held with Commission analysts during which the eligibility of the issuer, the offering and its general outlines will be determined.

It must be understood that the Commission des valeurs mobilières has a role to defend the investing public and it will accordingly require the developer to provide a large amount of financial, economic, commercial and legal information, that it make representations and give guarantees with respect to tax shelter securities, e.g., flow-through shares, units in a MURB, shares eligible for the Quebec Share Savings Plan and so on, and the Commission may require a legal opinion as to the financial consequences of the investment, financial projections of liquidity and solvency, compliance by the issuer with certain financial ratios. Its analysts will study all the financial and legal aspects of the investment, e.g., project feasibility, the existence and validity of titles to assets, legal capacity of the issuer and its contractual undertakings and so on.

With the Commission des valeurs mobilières the investor has his lawyers, accountants, engineers and economists; moreover, the divergent interests of the broker mean that he finds another ally there.

It was with an understanding of the burden and complexity of this process of multilateral negotiations, but also of the high degree of protection offered to the investor that we can see why, because of the enormous costs involved for the issuer in a public offering, that Parliament wished to temper its rigour by the advantages offered in paragraph 20(1)(e) of the Act.

4.04.8(2) In paragraph 4.2 of his submissions counsel for the appellant gave an interpretation of paragraph 20(1)(e);

As it applied to the 1982 taxation year, section 20(1)(e) ITA, read as follows:

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), 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:

(a) . . .

(e) expenses of issuing or selling units, interests or shares or borrowing money. — 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) . . .

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.

Parliament accordingly laid down four (4) conditions for expenses and outlays made or incurred by a taxpayer when securities are issued to be deductible:

1. the expense must be applicable to a source of income from a business or property;

2. the expense must be incurred in the taxation year in which the taxpayer seeks to deduct it;

3. it must be incurred in the course of issuing or selling units in a syndicate by the syndicate;

4. the expense should not be paid or payable as or on account of the principal or interest,

and explained that the expenditures incurred by way of commission and fees or for services rendered by persons acting as vendors, agents or securities dealers during the issue or sale of shares (in a syndicate) were also deductible.

An examination of the facts relevant to the dispute and the expenses refused by the Minister as a deduction, in combination with the conditions imposed by Parliament in section 20(1)(e) confirms that each and every condition stated in this provision was satisfied and the Minister incorrectly refused the deduction claimed by the appellant.

(a) The expense must be applicable to a source of income

In this condition Parliament did not require the syndicate issuing securities already to have income from a business or property but merely to have a course from which income could be earned and that the expense be applicable to this source; we should add that it is sufficient for it to be a source of income and not a source of profit.

Under its mandate with 118522 Canada Inc., the syndicate held an option to purchase the property in question after November 10, 1982; the co-owners thus enjoyed an increase in value of the property between the date on which the offer to purchase was accepted and December 31, 1982, on which date the property was purchased; furthermore, since the purchase took place during the day of December 31, 1982, the source of income was created in the 1982 taxation year.

Moreover, it seems to us to be totally unquestionable that the direct and subsidiary expenditures for the issue incurred by the appellant related to the acquisition and operation of the property. The object of the offering was described in the prospectus and the investment was conditional on the purchase of the property by the syndicate before the end of the year, or the offer would otherwise be withdrawn.

These arguments rebut the argument attempted by the Minister that the investors did not earn income from the property in the 1982 taxation year. According to the relevant provision, it is not necessary for income to be earned from the property during the year in which the taxpayer claims the deduction but it is sufficient for the expense to be applicable to an income source.

If the Minister’s argument were accepted, we should have to view as not deductible all flotation costs incurred in Canada by companies to finance a take-over, purchase of assets or privatization, which are all transactions that Parliament specifically intended to encourage through section 20(1)(e), ITA.

Since there was a source of income and the disputed expenses and outlays related to that source, the first condition for the deduction under 20(1)(e) was satisfied.

(b) the expense must be incurred in the taxation year in which the taxpayer seeks to deduct it

At the hearing the appellant testified that he signed the subscription agreement on December 1, 1982. The legal effect of this contract was that, by subscribing, he undertook to defray his share of the expenses that the Minister refused to allow him to deduct; moreover, ton the same date the appellant gave two (2) cheques totalling twenty-five thousand dollars ($25,000) to cover his subscription; what is more, these cheques were dated December 1, 1982.

Counsel for the Minister argued that the expenses were not incurred by the investors but by the developer, the brokers or 118522 Canada Inc. There is no legal basis for this argument.

Neither the developer nor the dealers were liable in law for the payment of the brokerage costs or expenses; as Mr. Delisle testified at the hearing, the developer and the brokers, Les Investissements FNI Inc., never contracted these debts nor guaranteed them in any way whatsoever; to be sure, they had a moral obligation to pay them if the investment did notsucceed and it is probable that for the sake of credibility they would have made these payments all the same; in case of bankruptcy or refusal, however, the creditors had no remedy against them in law and it is only the enforceability of a debt that counts in law. The developer and the brokers had clearly disclosed to all the creditors that the contractual obligation to pay all these debts lay solely with the investors since all these obligations had been assumed by 118522 Canada Inc. in its capacity as a mandatary. In accepting this indication of payment from the developer, the creditors agreed to subject the enforceability of their debts to the success of the investment.

Moreover, it has long been established that an expense is incurred as soon as the taxpayer acquires a legal obligation to pay it. On December 1, 1982 the appellant had not only incurred the expense in the year in which he sought to deduct it but he had also paid it; this disposes of the second condition required to claim a deduction under 20(1)(e).

(c) the expense must be incurred in the course of issuing or selling units in a syndicate by the syndicate

“in the course of issuing units”

What the expression “in the course of” or in French "a l’occasion de" includes has been clearly established by the Federal Court of Appeal and the Tax Review Board in M.N.R. v. Yonge-Eglinton Building Ltd. [4.02(2)] and Côté-Reco Inc. v. M.N.R. [4.02(3)].

In the former case, in his analysis of this expression Thurlow, J. stated [see 4.02(2), at 214 (D.T.C. 6183]:

(It may not always be easy to decide whether an expense has so arisen but it seems to me that the words “in the course of" in paragraph 11(1)(cb) are not a reference to the time when the expenses are incurred but are used in the sense of “in connection with” or "incidental to" or “arising from" and refers to the process of carrying out or the things which must be undertaken to carry out the issuing or selling or borrowing for or in connection with which the expenses are incurred)

In Côte-Reco Inc. Tremblay J. commented as follows on the passage in Yonge- Eglinton Building Ltd [see 4.02(2)(at 2025(D.T.C. 1021)]

(Although the Court made this comment in a discussion of time, the broad meaning given to the phrase “in the course of" is still valid. When the appellant purchased its two insurance policies to guarantee the loan (a condition required by the lender), it did so “in the course of borrowing money". . .)

To satisfy the requirements of 20(1)(e), it is sufficient for the expense to be incurred in the course of an issue, to be incidental thereto or to be involved in the process of making this issue.

It is easier to understand why the Legislature used such a broad expression when we consider the process of a public offer because between the beginning and the end of the offer several months often elapse and a series of transactions are completed.

“issuing units in a syndicate"

What is a syndicate?

Like a joint venture, a syndicate is, above all, an association ex contractu, explicit or implied, between two or more persons for the pooling of financial and human resources to carry out a project or particular venture that generally involves a sharing of profits and losses among the co-contractors and a certain degree of control by each of them over the venture [4.02(4)].

A syndicate and a joint venture are essentially the same except that the courts have traditionally reserved the name syndicate for specialized projects that are financial in nature, of which the property syndicate is an example.

In civil law a syndicate is an innominate contract [4.02(6)].

The existence of a syndicate in Canadian and Quebec law has been recognized since 1897, the year in which the Quebec Court of Queen’s Bench rendered its decision in Consumers Cordage Company (Ltd.) v. Young et al., [4.02(6)].

With respect to taxation the Exchequer Court of Canada and the Tax Review Board have recognized the existence of real estate syndicates on numerous occasions.

partnership and syndicate are related legal concepts although there are differences between them. A syndicate is similar to a partnership because both recognize that there is a prerequisite of a pool of common funds for their existence, e.g. the wish of the members or partners to join forces in the pursuit of a venture or joint enterprise, the need for contributions by members or partners either in terms of goods, in cash or services, and the presence of an expectation of profit and the need to share any profits. However, a syndicate differs from a partnership in the following ways:

(a) a member of a syndicate, in this capacity alone, does not have the power to bind other members, as the members of a partnership can;

(b) a syndicate does not, per se, have a separate legal personality from its members,whereas a commercial (or civil) partnership has one;

(c) each partner is a bona fide debtor of an obligation and must account for all profits he earns whereas this obligation is limited only to the single venture or business for which the syndicate is formed and the member remains completely independent as to any other business.

(d) a syndicate does not necessarily have a patrimony.

In light of the facts in this case, we must examine whether all the conditions for a syndicate to exist have been met.

"Need for a contribution to a joint venture”

To determine whether a syndicate exists it must be possible to show, as we have seen, a contribution by the members to a common purpose. This first condition was met by the investors in two (2) ways: first, by the monetary contribution they all made to the working capital of the business, that is, a sum of one hundred thousand dollars ($100,000) taken from the proceeds of the subscription of each member that was allocated to the working capital of that business [Exhibit A-4, at p 11], and second, by the assumption of the obligations contained in the various agreements that formed part of the investment, e.g., obligation to make additional contributions of required [Exhibit A-6, at p. 16], obligation to submit to the will of the majority at meetings, the joint and several assumption of debts incurred or to be incurred in the operation of the building, the assumption of the hypothecary debts, [Exhibit A-5, art. 31], and so on.]

It seems quite clear to us that the first condition was satisfied.

"Joint ownership of the business"

Compliance with the second condition can easily be established with the help of the evidence of dilution of shares in the co-ownership of the property and the shares of 118522 Canada Inc. adduced at the hearing. It was established that the investment involved one hundred and forty-four co-owners, including the appellant, who held shares in unequal proportions.

"Mutual control of the business”

Compliance with this condition can be established by examining the management rights vested in the co-owners. Under the provisions of the management and joint possession agreements, the co-owners, by a special resolution, could dismiss the manager, incur capital expenditures, require additional investment, dictate rental policies, dispose of the building, change its mission and so on. A finding that these rights exist is alone sufficient to affirm that this condition was met.

“Existence of a venture or business”

The evidence of the existence of the rental business was adduced at the hearing. The co-owners operated the building for more than six (6) years and this condition was accordingly also met.

“Right to share in the profits"

The right of the co-owners to share in the profits of the business was clearly established by article 30 of the investment agreement. Under this provision, each co-owner was entitled to receive his share of the profits made, prorated to the extent of his ownership.

Limitation to a single undertaking and exclusion of a partnership

Once again an examination of the provisions of the investment and joint possession agreements clearly shows that the parties excluded the existence of a partnership [Exhibit A-6, art. 7], that the partnership was limited to this venture, that a member did not have the power to bind the syndicate or the other members and any decision had to be taken jointly [arts. 11, 12 and 20 of Exhibit A-5].

Thus, all the conditions for a syndicate to exist were satisfied in turn.

An analysis of the legal nature of a syndicate also calls for comment because the Minister seems to want to raise the concept of co-ownership as a bar to the existence of a syndicate, and suggests that the existence of one necessarily excludes the other. This argument will not stand up to critical analysis.

For a syndicate to exist it is not necessary for it to have a patrimony:

(But this "community of interest" does not preclude one party to the venture from having title of the property involved, provided the other requisites are present. . .[sic]) [Yonge-Eglinton Building Ltd. [4.02(2)].

The fact that the property was held by co-owners rather than by the syndicate has no legal effect on the determination of the syndicate's existence; like any common law trust, the lack of a patrimony or of legal personality does not in any way affect the syndicate's existence; what is essential is a contractual undertaking to contribute to a joint venture.

The courts have on many occasions recognized the existence of a syndicate, even where all the assets used in the venture or business were held by others, e.g. in M.N.R. v. Joichi Kato et al. [4.02(7)], where the assets were held by a trust on behalf of the members, and in Lane v. M.N.R. [4.02(9)] and Wise v. M.N.R. [4.02(12)], where the assets were purchased, as in the instant case, in joint ownership directly by the members.

As far as we are concerned, these arguments dispose of the argument the Minister has attempted to make.

“By a syndicate”

The text-book argument will almost certainly be made that because the syndicate did not have legal personality, it could not issue shares.

We agree that the wording of the Act lacks rigour but following the letter of the law too strictly would clearly run counter to the intention of Parliament.

A syndicate is the co-owners as a whole, who are jointly and severally liable for the obligations resulting from the issue; if, for example, as a result of error or fraud, one of the co-owners lost his shares, he would have a joint and several remedy against the rest of the co-owners for compensation.

It should not come as a surprise that, as a result of this tax legislative drafting, the Income Tax Act contains no specific provision on the taxation of syndicates or businesses that are co-owned and the Minister imposes on them the taxation scheme that applies to wholly-owned businesses or partnerships.

Furthermore, it will be noted that neither a trust nor a civil partnership has a legal personality and such legal structures are nevertheless clearly covered by the provision.

In fact, the expression “issue by a syndicate” does not refer to any legal act that must necessarily be performed by a legal entity, but rather refers to the operations of delivering certificates to the beneficiary.

In Black's Law Dictionary, 5th ed., we find the following:

Issue: In financial parlance, the term issue seems to have two phases of meaning. . . When the securities are delivered to the purchaser, they will be issued to him, which is the other meaning of the term.

At the hearing the Minister seemed to wish to argue that there could not be an issue by the syndicate since this syndicate was not yet in existence. This argument is easily answered if we note that all the co-owners had conditionally subscribed to co-ownership shares before the date on which all the transactions closed, December 31, 1982. By this subscription each investor agreed to be a member of the syndicate, to be subject to all the obligations binding members among themselves and the members with third parties; when the shares were issued on December 31, 1982, the contractual relationship between all the members existed and was retroactive to the subscription date [art. 1085, C.C.].

These comments dispose of the final condition.

The appellant will thus have met all the conditions laid down by Parliament in section 20(1)(e), ITA and should accordingly be able to claim the deduction.

Scope of 20(1)(e), ITA

In order to conclude that the deduction should be allowed, we merely need now to examine the scope of 20(1)(e):

The main decision relating to this section was rendered by the Federal Court of Appeal in 1974, M.N.R. v. Yonge-Eglinton Building Ltd. [4.02(2)].

The Court should find that their payment made by the taxpayer, consideration of one per cent (1%) of his gross annual rental income to one of his creditors is deductible under 20(1)(e) in consideration who had provided him with credit for the construction of an office building. After finding that the expense was deductible, Thurlow J explained the scope of this provision.

(The general area of what is comprehended in subparagraphs (i) and (ii) of section 11(1)(cb) is I think indicated by the scope of what is expressly excluded by subparagraphs (iii) and (iv) [at that time these subparagraphs did not include commissions and bonuses paid to agents and brokers] for the fact that it was considered expedient to expressly exclude commissions and bonuses and payment as or on account of principal or interest, to my mind shows that what is referred to as "as expense incurred in the year" in the course of issuing or selling shares or borrowing money for the purpose referred to is capable of embracing a broad class of expenditures. . .)

and is authority for the acceptance of all expenses related to an issue or a loan. Thus the costs of guaranteed interest rates will be deductible, availability of funds, finder's fees in mortgage financing and so on.

In Interpretation Bulletin IT-341R the Minister accepted that the following expenses were deductible:

(1) expenses payable to a developer who guarantees repayment by the investor of a loan from a financial institution;

(2) a commitment fee;

(3) costs of applying for a hypothec, valuation costs and costs of hypothecary insurance;

(4) developer's costs relating to initial allowable costs under 20(2)(e), ITA.

The witness Delisle testified at the hearing that, in order to issue shares in a syndicate, the developer should necessarily confer a liquidity guarantee without which the issue would not sell. All real estate syndicates at that time provided such a guarantee and, given the competition, as a broker he had to require such a guarantee from the developer. The guarantee thus constituted an essential component of the issue.

However, the parallel between the liquidity guarantee provided by the developer and the commitment fee frequently required by institutional lenders is striking. Under the terms of a commitment fee, the lender undertakes in return for payment of a sum of money to lend the borrower up to a predetermined sum of money at a fixed rate of interest or one that will be fixed.

The liquidity guarantee that the developer provided for investors in the Chateau Lincoln project required him to meet any operating deficit caused by an excess of expenditures (excluding depreciation) over income from the property for five (5) years up to a maximum of two hundred and fifty thousand dollars ($250,000) per year. The sums thus advanced by the developer did not bear interest and did not become due from the investors until the time when the property generated positive cash flow.

In essence, by this guarantee the investors acquired a right to force the developer to finance the excess of expenditures over income from the property for five (5) years or, in other words, secured access to credit for a certain time, and this concept has legal effects that are quite identical to those of a commitment fee.

We submit that the expenses incurred by the investors to obtain a liquidity guarantee provided by the developer participated in the same way as a commitment fee, mortgage insurance or a guarantee against interest rate fluctuations on a foreign currency loan; they were geared to an on-going receipt of income and were not capital in nature.

The other items refused definitely fall under this section if it is found that the conditions for deductibility were satisfied.

We feel, in fact, that each and every condition of eligibility in section 20(1)(e), ITA, was met and that the Minister must accordingly be forced to allow the deduction of the disputed amounts.

4.04.8(3) It should be noted that the beginning of subsection 20(1) of the Act reads as follows:

Notwithstanding paragraphs 18(1)(a), (b) and (h). . .

The impact of this is that paragraph 20(1)(e) takes precedence over paragraphs 18(1)(a) and (b). These two provisions were at the heart of the dispute in Ryan [4.02(28)], Damico [4.02(20)], Tertulliani (4.02(30)) and Laurence (4.02(31)).

4.02.9 I share the appellant's opinion that:

the agreement existing between the appellant and the developer, the broker and 118522 Canada Inc. is at least a quasi-contract for business management (4.04.2);

the prospectus constitutes this agreement (4.04.4);

the decisions in Ryan (4.02(28)), Damico (4.02(29)), Tertulliani (4.02(30)) and Laurence (4.02(31)) are different from those in the instant case (4.04.5, 4.04.6);

the liquidity guarantee was not subject to the matching principle to subsection 18(9) of the Act (4.04.7, 4.04.7(2));

moreover, although the formula relating to the liquidity guarantee (Exhibit A-8) was signed on January 17, 1983 between 118522 Canada Inc. and Le Groupe Lefebvre SFI Inc., it nevertheless applied to 1982. The funding agreement was in fact signed on December 31, 1982 and payment was made by the investors between December 1, and December 20, 1982 (3.14) and the liquidity guarantee was provided for in the prospectus (3.12 and Exhibit A-4). This kind of contract signed prior to the principal contract, but of which it was in essence a part, is a common practice in the business world.

I maintain the ratio decidendi in Charron (4.04.7);

The evidence of the facts satisfied the intention and the wording of paragraph 20(1)(e) (4.04.8(2)).

Conclusion

The appeal is allowed with costs and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.