Date:
20090609
Docket:
A-272-08
Citation:
2009 FCA 193
CORAM: SHARLOW
J.A.
RYER
J.A.
TRUDEL
J.A.
BETWEEN:
GARRET MADELL
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE
COURT
(Delivered
from the Bench at Edmonton, Alberta, on June 9, 2009)
RYER J.A.
[1]
This is an
appeal from a decision of Little J. of the Tax Court of Canada (2008 TCC 264)
dated May 2, 2008, dismissing the appeals of Mr. Garret Madell (the
“appellant”) from assessments of his 1997 and 1998 taxation years that were
made by the Minister of National Revenue (the “Minister”), pursuant to the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “ITA”). Unless
otherwise indicated, all statutory references in these reasons shall be to the
corresponding provisions of the ITA for the taxation years under consideration.
[2]
In the
taxation years under appeal, the appellant and Stellar Dynamic Limited
Partnership (the “Partnership”), in which the appellant was a limited partner, participated
in tax shelter arrangements promoted by Stellar Financial Services Inc. Under
these arrangements, they entered into licence agreements (the “Licence
Agreements”) with Rockhaven International Inc., a British Virgin Islands incorporated corporation.
Under those agreements, the appellant and the Partnership obtained licences
(“Licences”) to publish, reproduce, market and distribute, within specific
geographic areas, the Quest Prestige Card, a customer loyalty card entitling
its holder to discounts at hotels, restaurants and other commercial
establishments.
[3]
The
Licence Agreements required the appellant and the Partnership to pay $350 as a
licence fee and a royalty of $5.00 for each Quest Prestige Card that was sold
in the licensed territory. Licencees were required to pay an advance royalty
(the “Advance Royalty”) of $20,000 per Licence at the time of execution of the
Licence Agreements but in fact only $5,000 of that amount was paid by the
appellant and the Partnership when they executed their Licence Agreements.
[4]
As part of
the tax shelter arrangements, the appellant and the Partnership entered into
operating agreements (the “Operating Agreements”) with Crusader Marketing
Corporation Inc. (“Crusader”) at the same time they signed their Licence
Agreements. Under the Operating Agreements, Crusader agreed to market and
distribute the Quest Prestige Card in the territories that were specified in
their Licences.
[5]
Under
agreements (the “Performance Bond Conditions”) entered into at the same time as
the Operating Agreements, Crusader agreed to provide cash performance bonds
(“Performance Bonds”) of $15,000 per licensed territory to the appellant and
the Partnership, for the purpose of ensuring that it achieved minimum levels of
performance in respect of its marketing and distribution obligations under the
Operating Agreements. The Performance Bond Conditions provided that the fees
that Crusader was to receive for its marketing efforts under the Operating
Agreements would be offset against the amount of the Performance Bonds. If
those fees had not fully offset the amount of the Performance Bonds by the
expiration of the related Operating Agreements, the remaining amount of those
Performance Bonds were required to be paid to the appellant and the Partnership
as damages for the lack of performance by Crusader under the Operating
Agreements.
[6]
A tax
shelter identification number was obtained from the Canada Revenue Agency in
respect of the marketing of the Licences. Accordingly, the Licences that were
acquired by the appellant and the Partnership in 1997 and 1998 were tax shelter
investments, within the meaning of subsection 143.2(1).
[7]
In
computing his income for 1997 and 1998, the appellant deducted the full amount
of the Advance Royalties payable by him ($20,000 per Licence) under the Licence
Agreements he entered into in respect of those years. In addition, he deducted his
allocated share of the losses of the Partnership for those years that were
derived from similar deductions claimed by the Partnership in respect of
Advance Royalties payable by it under the Licence Agreements it entered into in
those years.
[8]
The Tax
Court Judge dismissed the appellant’s appeal for a number of reasons, namely,
a) that
the activities of the appellant and the Partnership in respect of the marketing
and distribution of the Quest Prestige Card did not constitute a source of
income for the purposes of section 9;
b) that
the expenditures of the appellant and the Partnership in respect of Advance Royalties
payable by them pursuant to their Licence Agreements were required to be
reduced to zero by virtue of the tax shelter investment rules in section 143.2,
and in particular subparagraphs 143.2(6)(b)(i) and (ii) thereof; and
c) that
the licence fees of $350 per Licence were capital expenditures, the deduction
of which was precluded by paragraph 18(1)(b).
The appellant’s memorandum of fact and law takes issue with
only the first two of the Tax Court Judge’s reasons for dismissing his appeal. In
our view, this appeal can be disposed of by reference to the tax shelter
investment provisions in section 143.2.
[9]
Applying
those provisions, the Tax Court Judge found that the $20,000 amount of the
Advance Royalty expenditure in respect of each of the Licences acquired by the
appellant and the Partnership was reduced to zero by virtue of two reductions
to that expenditure that are required by subsection 143.2(6). The relevant
portions of that provision read as follows:
|
143.2(6)
Notwithstanding any other provision of this Act, the amount of any
expenditure that is, or is the cost or capital cost of, a taxpayer’s tax
shelter investment, and the amount of any expenditure of a taxpayer an
interest in which is a tax shelter investment, shall be reduced to the
amount, if any, by which
(a)
the amount of the taxpayer’s expenditure otherwise determined
exceeds
(b)
the total of
(i) the limited-recourse
amounts of
(A) the taxpayer, and
(B) all other taxpayers not
dealing at arm’s length with the taxpayer
that can reasonably be
considered to relate to the expenditure,
(ii) the taxpayer’s
at-risk adjustment in respect of the expenditure, and
|
143.2 6) Malgré les autres dispositions de la
présente loi, le montant d’une dépense qui représente un abri fiscal
déterminé d’un contribuable, ou le coût ou le coût en capital d’un tel abri
fiscal, et le montant d’une dépense d’un contribuable dans lequel une
participation est un abri fiscal déterminé sont ramenés au montant égal à
l’excédent éventuel du montant visé à l’alinéa a)
sur le total visé à l’alinéa b):
a) le montant
de la dépense du contribuable, déterminé par ailleurs;
b) le total
des montants suivants :
(i) les
montants à recours limité du contribuable et des autres contribuables qui ont
un lien de dépendance avec lui, qu’il est raisonnable de considérer comme se
rapportant à la dépense,
(ii) le
montant de rajustement à risque du contribuable relatif à la dépense,
|
[10]
The first
reduction of the Advance Royalty expenditure in respect of each Licence was
determined by the Tax Court Judge to be $15,000 per Licence. He found that such
amount, which related to the unpaid balance of the Advance Royalty payable under
each Licence Agreement, was a limited recourse amount, within the meaning of
subparagraph 143.2(6)(b)(i).
[11]
The second
reduction of the Advance Royalty expenditure in respect of each Licence was
also determined by the Tax Court Judge to be $15,000. He found that such
amount, which related to the $15,000 Performance Bond that was required to be
provided under the Performance Bond Conditions applicable in respect of each
Licence, was an at-risk adjustment, within the meaning of subparagraph
143.2(6)(b)(ii).
[12]
The
appellant concedes that the Tax Court Judge was correct in finding that the
$15,000 unpaid balance of the Advance Royalty in respect of each Licence is a
limited recourse amount as contemplated by subparagraph 143.2(6)(b)(i).
However, the appellant argues that the Tax Court Judge erred by concluding that
the $15,000 Performance Bond amount in respect of each Licence is an at-risk
adjustment, as contemplated by subparagraph 143.2(6)(b)(ii). According
to the appellant, this finding was not open to the Tax Court Judge because he
made a factual finding that the evidence before him did not establish that the
Performance Bonds were actually provided by Crusader, even though the
Performance Bond Conditions obligated Crusader to provide them. Thus, the
appellant argues that if the Performance Bonds were not provided to the
appellant and the Partnership, there was no amount or benefit that could fall
within the definition of an at-risk adjustment in subsection 143.2(2). That
subsection reads as follows:
|
143.2(2)
For the purpose of this section, an at-risk adjustment in respect of an
expenditure of a particular taxpayer, other than the cost of a
partnership interest to which subsection 96(2.2) applies, means any amount
or benefit that the particular taxpayer, or another taxpayer not dealing
at arm’s length with the particular taxpayer, is entitled, either
immediately or in the future and either absolutely or contingently, to
receive or to obtain, whether by way of reimbursement, compensation,
revenue guarantee, proceeds of disposition, loan or any other form of
indebtedness, or in any other form or manner whatever, granted or to be
granted for the purpose of reducing the impact, in whole or in part, of any
loss that the particular taxpayer may sustain in respect of the expenditure
or, where the expenditure is the cost or capital cost of a property, any loss
from the holding or disposition of the property.
[Emphasis added]
|
143.2(2) Pour l’application du présent article, le
montant ou l’avantage qu’un contribuable, ou un autre contribuable avec
qui il a un lien de dépendance, a le droit, immédiat ou futur et absolu ou
conditionnel, de recevoir — sous forme de remboursement, de compensation,
de garantie de recettes, de produit de disposition, de prêt ou d’autre forme
de dette ou sous toute autre forme — et qui est accordé en vue de
supprimer ou de réduire l’effet d’une perte que le contribuable peut subir
relativement à la dépense ou, dans le cas où la dépense représente le
coût ou le coût en capital d’un bien, d’une perte résultant du fait que le
bien est détenu ou fait l’objet d’une disposition constitue un montant de
rajustement à risque relatif à une dépense du contribuable. Le présent
paragraphe ne s’applique pas au coût d’une participation dans une société de
personnes à laquelle s’applique le paragraphe 96(2.2).
[Je souligne]
|
[13]
We are of
the view that the appellant’s argument cannot be accepted. It is clear that the
Operating Agreements required Crusader to perform marketing functions on behalf
of the appellant and the Partnership in the territories covered by their
Licences. It is equally clear that the Performance Bond Conditions obligated
Crusader to post (i.e. deliver) a $15,000 Performance Bond in respect of each
licensed territory for the purpose of ensuring that Crusader achieved a minimum
level of marketing and distribution performance under the Operating Agreement in
respect of that territory.
[14]
In our
view, the provisions of the Performance Bond Conditions contain revenue
guarantees that constitute amounts or benefits to which the appellant and the
Partnership were entitled, within the meaning of subsection 143.2(2). To fall
within that provision, a particular amount or benefit need not be received:
entitlement thereto is sufficient. These revenue guarantees were, in the
entirety of the tax shelter arrangements in which the appellant and the
Partnership acquired Licences, granted or agreed to be granted for the purpose
of reducing the loss that the appellant and the Partnership might sustain as a
consequence of having acquired their Licences and having agreed to incur
Advance Royalty expenditures in respect of those Licences.
[15]
Our
conclusion on this issue springs from our interpretations of the Performance
Bond Conditions and the provisions of subsection 143.2(2), which are matters of
legal interpretation. While the Tax Court Judge made a factual finding that the
Performance Bonds contemplated by the Performance Bond Conditions applicable in
respect of each of the Licences acquired by the appellant and the Partnership
may not have been physically delivered to them, this finding is irrelevant to
our conclusion. The appellant and the Partnership became entitled to receive
the Performance Bonds at the time of execution of the Performance Bond
Conditions and the at-risk adjustment, within the meaning of subsection
143.2(2), arose at that time. A subsequent failure of Crusader to physically
deliver the Performance Bonds, if indeed such a failure did occur, does not
negate the entitlement of the appellant and the Partnership to receive them
that arose upon the execution of the Performance Bond Conditions.
[16]
Accordingly, we are of the
view that the Tax Court Judge was correct in finding that the revenue guaranty
provisions of the Performance Bond Conditions in respect of each Licence
acquired by the appellant and the Partnership in 1997 and 1998 constituted an
at-risk adjustment, within the meaning of subsection 143.2(2), in respect of
the Advance Royalty expenditure applicable to each of those Licences, in the
amount of $15,000 per Licence, and that each such Advance Royalty expenditure
was required, pursuant to subparagraph 143.2(6)(b)(ii), to be reduced by that
amount.
[17]
This
reduction, along with the $15,000 reduction that has been conceded by the
appellant, is sufficient to reduce to zero the Advance Royalty expenditure in
respect of each Licence acquired by the appellant and the Partnership in the
taxation years under consideration in this appeal.
[18]
Having
reached this conclusion, we find it unnecessary to consider any of the
additional arguments raised by the appellant. As well, we express no opinion on
any of the other bases for decision of the Tax Court Judge. However, we note
that one aspect of the issue raised by the appellant with respect to the
interpretation of Stewart v. R., [2002] 2 S.C.R. 645 was addressed by
this Court in Massé v. Minister of National Revenue, 2003 FCA 351.
[19]
For the
foregoing reasons, the appeal will be dismissed with costs.
“C. Michael Ryer”
J.A.
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