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Citation: 2005TCC766
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Date: 20051223
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Docket: 2002-2867(IT)G
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BETWEEN:
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STATUS-ONE INVESTMENTS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR ORDER
Rip J.
[1] The respondent has applied for leave of the
Court pursuant to section 54 of the Tax Court of Canada Rules (General
Procedure)(“Rules”) to further amend her amended reply to the Appellant’s
notice of appeal (“Second Amended Reply”). The application is the result of my
decision
striking out two paragraphs from the amended reply that referred to third
parties which decision was upheld by the Federal Court of Appeal. The disputed
paragraphs, statements 11(uu) and 11(ww), that I struck from the amended reply
were:
[translation]
(uu) From 1993 to 1998,
Equicap promoted and marketed
several limited partnership arrangements by means of offering memoranda;
(ww) The important aspects of these limited partnership
arrangements were identical to AFS No. 11, notably in terms of
structure, operating method, agreements signed, parties involved, actions
taken, objectives pursued and financial and tax results obtained;
[2] Noël, J.A, writing for the Federal Court of
Appeal in dismissing the respondent’s appeal, stated that:
[translation]
Insomuch as the Minister wishes to support
an assessment on the actions of a third party, he must then specify the link
between these actions and those of the taxpayer in question in order for the
taxpaer to know what must be shown.
[3] The disputed
provisions in the Second Amended Reply include the following portions of
paragraph 11 that contain facts the Minister assumed to be true in making the
reassessment for the Appellant’s 1996, 1998 and 1999 taxation years:
[translation]
(oo.1) the directing minds of Alliance No.11
and AFAS No. 11 were respectively Joseph Miller and Bernard Abrams
("Directing Minds");
(oo.2) Bernard Abrams was also the directing
mind of many other partnerships similar to AFS No. 11 namely, AFS Limited
Partnership No. 1, AFS Limited Partnership No. 2, AFS and Company Limited
Partnership No. 4, AFS and Company Limited Partnership No. 5, AFS Limited
Partnership No. 7, AFS Limited Partnership No. 8, AFS Limited Partnership No.
9, AFS Limited Partnership No. 12 and AFS Limited Partnership No. 14
(collectively called "Other AFS Partnerships");
(oo.3) Joseph Miller was also the directing
mind of many other partnerships similar to Alliance No. 11 namely, Alliance
Services (No. 1) Limited Partnership, Alliance Services (No. 2) Limited
Partnership, Alliance Services (No. 3) Limited Partnership, Alliance Services
(No. 4) Limited Partnership, Alliance Services (No. 5) Limited Partnership,
Alliance Services (No. 7) Limited Partnership, Alliance Services (No. 9)
Limited Partnership, Alliance Services (No. 10) Limited Partnership, Alliance
Services (No. 11) Limited Partnership (collectively called, "Other
Alliance Partnerships").
(oo.4) as with AFS No. 11, the units of the
Other AFS Partnerships were all subject to promotion and marketing by Equicap
through memoranda;
(oo.5) the promotion and marketing of these
units of the Other AFS Partnerships and the creation of the Other Alliance
Partnerships took place from 1993 to 1998;
(oo.6) as with AFS No. 11 and Alliance No. 11,
the purpose of the Other AFS Partnerships and Other Alliance Partnerships was
to participate in the commercial distribution of films for Warner Bros;
(oo.7) the financial and fiscal results of the
Other AFS Partnerships and the Other Alliance Partnerships were the same as
those of AFS No. 11 and Alliance No. 11, insomuch as:
(i)
they all suffered
losses that were ultimately allocated to the investors based on their
participation for tax deduction purposes;
(ii)
the maximum amount as Defined
Gross Payments was payable by Warner Bros. to Other Alliance Partnerships
under the Studio Theatrical Distribution Agreement;
(iii)
as with Alliance No.
11, the Other Alliance Partnerships were not able to fulfill their commitments
to Warner Bros. under the Studio Loan Agreement;
(oo.8) in November 1996, at the time the
Appellant subscribed its AFS No. 11 units, the Directing Minds were aware of
the losses incurred by the Other AFS Partnerships and the Other Alliance
Partnerships;
(oo.9) the Directing Minds did not intend to
carry on activities for profit;
(oo.10) in November 1996, at the conclusion of the
Studio Theatrical Distribution Agreement, the Studio Loan Agreement
and the Sub-Distribution Agreement, the Directing Minds and Warner Bros.
were aware of the financial results following similar agreements with the Other
Allaince Partnerships.
[4] Appellant’s counsel
has consented to the inclusion of the following provision of paragraph 11 of
the Second Amended Reply, provided, however, the respondent provide more
precise details with respect to Mr. Takefman’s description as [translation] “the Appellant's Directing
Mind”:
11.4 Earl Takefman, who was the
Appellant's administrator and Directing Mind, personally subscribed to AFS and
Company Limited Partnership No. 4 units and knew its financial and
fiscal results at the Appellant's acquisition of AFS No. 11 units.
11.5 Earl Takefman did not intend to carry
on activities for profit.
[5] Respondent’s counsel
argues that based on the following facts alleged in the Amended Reply, the
allegations in dispute are relevant:
(i)
On
November 22, 1996, Status-One Investments Inc. and many other investors bought
units of a partnership, AFS No. 11 Limited Partnership (hereinafter "AFS
No. 11"), with amounts paid in cash and an amount borrowed from Berkshire
Financial Services No. 9 (hereinafter "Berkshire"). AFS No. 11's
general partner is Mediaventures No. 16 Inc.
(ii)
The
product of this subscription is used to create and buy units of a US
partnership, Alliances Services (No. 11) Limited Partnership (hereinafter
"Alliance No. 11"). The general partner is Alliance Distribution
Services No. 11 Inc. (hereinafter "Alliance Distribution"), a US
company whose president is Joseph Miller
(iii)
Alliance
No. 11 entered into a number of agreements with Warner Bros. and Riverside
Avenue Distributing Inc. (hereinafter "Riverside") targeting the
distribution of certain films in the US. Before these films even made it to the
theatres and only a few days after these partnerships were created and the
agreements signed, Alliance No. 11 claimed a net loss of $28,871,913, which is
attributed, in part, to AFS No. 11. This loss was, in turn, attributed to the
AFS No. 11 partnerships, including Status-One.
(iv)
The
losses claimed by Status-One were refused by the Minister of National Revenue,
in particular on the ground that neither AFS No. 11, or Alliance No. 11 were
genuine partnerships in the legal sense since they were not jointly operating a
company for the purpose of generating a profit. Moreover, in the Amended Reply,
the Respondent claimed that the agreements with Warner Bros. and Riverside were
a deception.
(v)
The
amount of all the promissory notes given by the investors were from ING Bank
N.V. (hereinafter "ING"), a Dutch bank. On November 22, 1996, the
amount was subject to a number of transfers, that followed a circular pattern.
The amount was loaned to Berkshire, which distributed the amount as a loan to
investors. The investors put this amount into AFS No. 11 by acquiring units. In
turn, AFS No. 11 invested the amount in Alliance No. 11. Finally, the same
amount is invested by Alliance No. 11 in a certificate of deposit with ING. All
these transfers were carried out using internal transfers between the accounts
the stakeholders held with ING. At all times, the amount was kept at ING to
ensure full recovery of the debt.
(vi)
A
series of transactions involving this credit facility was carried out between
December 3, 1996, and January 30, 1998, during which the certificate of
deposit with ING was temporarily held by Warner Bros. All these transactions
were predetermined and throughout the period in question, this amount was held
by ING as a guarantee against the debt. With these transactions were mechanisms
that ensured the distribution of income to the investors and allow them to pay
interest and reimburse the Berkshire loan at its term.
(vii)
In
its amended reply, the Respondent claimed that all the agreements related to
the use of the ING credit facility grant AFS No. 11 and the investors the right
to receive amounts allowing the investors to reimburse their Berkshire loan and
related interest. These benefits were granted in order to eliminate or reduce
the effect of the loss that the investors and AFS No. 11 could have incurred as
associates of their respective companies. Thus, the benefits should be reduced
from the calculation of the at-risk amount of AFS No. 11 and Status-One and
therefore reduce the amount of the loss that would be deductible.
(viii)
Over
1996 and 1997, Status-One and the other investors did not pay any interest to
Berkshire for their promissory note. Moreover, the Berkshire loans were debts
in regard to which remedies are limited, considering the agreements reached
between Alliance No. 11, Warner Bros., Berkshire, ING and Equicap. On this,
subsection 143.2(6) reduces the cost of Alliance No. 11 units held by AFS No.
11 insomuch as these units were a tax shelter investment.
(ix)
Moreover,
the investors involved in this strategy received an offering memorandum from
Alliance Equicap Inc. promoting an opportunity to participate in the
distribution of certain films with no provision for the income likely to result
from the distribution of these films. In addition, the offering memorandum
indentified an annual distribution of income to investors that would be
equivalent to the interest payable to Berkshire and a special distribution of
income to allow them to reimburse the capital on this loan.
(x)
Additionally,
Équicap distributed a financial analysis that based calculations of overall
investment performance on tax relief forecasts with no mention of potential
profit.
(xi)
In
its amended reply, the Respondent claimed that it is reasonable to consider
that if a person acquired a unit of Alliance No. 11 in 1996, the amount of the
losses that would likely be deductible would be equal to or greater than the
cost of acquiring the unit. In so doing, the units of Alliance No. 11 were a
tax shelter within the meaning of subsection 143.2(1)
[6] Appellant’s counsel
stated that the submissions by respondent’s counsel are a rehash of his
submissions to the Federal Court of Appeal and should not be accepted; the
allegations are not new, they are stated more precisely. The Crown is saying
the same things as before but in a more detailed way. In any event, Appellant’s
counsel submits, the Appellant’s intention when acquiring units in ASF No. 11
is the Appellant’s intention, not the intentions of the General Partner or
Directing Minds of the limited partnership. One must look to the Appellant, not
anyone else, to determine what the Appellant’s intention was at the time. To
refer to intentions of others, as is suggested in subparagraphs 11(oo.1) to
11(oo.10), is irrelevant, according to Appellant’s counsel.
[7] In my reasons for
judgment striking out subparagraphs 11(uu) and 11(ww) of the amended reply
I held that at that stage of the proceedings it appeared that these allegations
were not relevant in determining whether the taxpayer had the intention to make
a profit from the operation of AFS. No. 11. The inclusion of the allegations,
similar to those disputed allegations in the appeal of The Queen v. Global
Communications Ltd.,
would unduly prolong the discovery and the trial without any assurance that the
inquiry would deal with questions relevant to the assessments in issue.
[8] The allegations of
fact in subparagraphs 11(uu) and 11(ww) were facts purportedly assumed by the
Minister in assessing. They were rather general allegations without any
precision and related to nothing specific. Facts alleged as assumptions made by
the Minister on assessing are not ordinary allegations. In my original reasons
I referred to Rothstein, J.A. who explained that:
[translation]
The pleading of assumptions gives the Crown the
powerful tool of shifting the onus to the taxpayer to demolish the Minister's
assumptions. The facts pleaded as assumptions must be precise and
accurate so that the taxpayer knows exactly the case it has to meet.
[9] I concluded my
reasons as follows:
Subparagraphs 11(uu) and (ww) muddy
the appeal process. At this stage of the process, Equicap's actions appear to
have no direct bearing on the fundamental issues raised by the appeals.
Considerable caution should be exercised when third parties are involved. The
relevant actions are those of the Appellant, which has been assessed and is
entitled to know why. In some cases, it is quite possible that relationships or
ties between an Appellant and third parties will be relevant. Among other
things, I have in mind cases involving securities trading. However, I have
found nothing in the parties' pleadings to indicate that the facts alleged in
subparagraphs 11(uu) and (ww) are relevant. An Appellant must always make his
own case. The Minister must assess taxpayers based on what the taxpayers have
or have not done, and not, generally, on the conduct of a third party.
[10] The Federal Court of
Appeal held that the Crown did not demonstrate that the facts alleged in
subparagraphs 11(uu) and 11(ww), in particular the relationships between the
Appellant and third parties, were relevant to determine any intention. The
pleadings precisely show how these bonds or relationships between an appellant
and a third party can be useful in determining the taxes owing.
[11] Noël, J.A. cautioned
the Crown that it is not sufficient to allege that all circumstances are
relevant:
[translation]
It is not enough to claim, as the Crown
did, that all the circumstances are relevant. The fact that the person from
whom Status-One acquired its participation in the partnership carried out
similar activities with third parties in the past does not in itself prove the
intentions of Status-One at the time the agreements were signed.
[12] The question now
before me is whether, on the material before me, subparagraphs 11(oo.1) to
(oo.10), inclusive, of the Second Amended Reply do not muddy the appeal process
but clarify the bond or relationship, if any, between the Appellant and the
third parties to the extent that the relationships are relevant in determining
the intention of Status-One at the time it entered into transactions under
review.
[13] Section 54 of the Rules states that:
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A pleading may be amended my the party
filing it, at any time before the close of pleadings, and thereafter either
on filing the consent of all other parties, or with leave of the Court, and
the Court in granting leave may imposed such terms as are just.
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Une partie peut modifier son acte de
procédure, en tout temps avant la clôture des actes de procédure, et
subséquemment de touts les autres parties, ou avec l’autorisation peut
imposer les conditions qui lui paraissent appropriées.
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[14] Section 54 of the Rules
does not describe the conditions under which the Court may grant leave to amend
a pleading. Whether or not leave is granted is at the judge’s discretion. In
some instances the judge may wish to be guided by section 53 of the Rules
and consider whether the proposed amendment may prejudice or delay the fair
hearing of the action, or is scandalous, frivolous or vexatious, or is an abuse
of powers of the Court. In such circumstances no leave to amend would follow.
Similarly, the judge may also consider whether the proposed amendment discloses
reasonable grounds for the appeal or for opposing the appeal: s. 58 of the Rules.
The application at bar does not require the guidance of sections 53 and 58 of
the Rules.
[15] I am satisfied that at least to some extent
the amended allegations in subparagraphs 11(oo.1) to 11(oo.10) of the Second
Amended Reply are not new but describe in more detail what was alleged in
subparagraphs 11(uu) and 11(ww) of the amended reply. To this extent I agree
with Appellant’s counsel. For example, subparagraphs 11(oo.4) and 11(oo.5) of
the Second Amended Reply say much the same as subparagraph 11(uu) of the amended
reply. However, there are also sufficient details in subparagraphs 11(oo.1) to
11(oo.10) of the Second Amended Reply that permit to Appellants to understand
the dealings and possible relationships between the Appellant and the third
parties that were lacking in subparagraph 11(uu) and 11(ww) of the amended
reply.
[16] Subparagraphs
11(oo.1), (oo.2), (oo.3), (oo.6), (oo.7), (oo.8), (oo.9) and (oo.10) allege,
among other things, the names of the Directing Minds (âmes dirigeants) AFS No.
11 as well as other partnerships in which they were involved, the similarity of
objects of the partnerships, the financial and tax results of the other
partnerships in which the Directing Minds were the same as in AFS No. 11, that
the other partnerships incurred losses, that the other partnerships did not
respect the obligations under contracts they had with Warner Bros., that the
Directing Minds were aware of losses by the various partnerships at the time
the Appellant subscribed for units in AFS No. 11, that the Directing Minds had
no intention for AFS No. 11 to realize a profit.
[17] All of these
allegations, as well as those set out in subparagraphs 11(oo.4) and
(oo.5), may or may not be relevant in determining the Appellant’s intention
when it acquired units in AFS No. 11. Facts set out in paragraph 5 of these
reasons suggest that there may be a relationship between the Appellant and
third parties that influenced the Appellant’s decision to invest in AFS No. 11.
These allegations, so far, are merely allegations since the bulk of which were
assumed by the Minister in assessing and could be rebutted. Evidence that is
only available at trial may be necessary to determine the relevancy of disputed
allegations. Only the trial judge will be in a position to decide whether all,
some or none of the allegations in subparagraphs 11(oo.1) to 11(oo.10) are
relevant in considering the Appellant’s intention at the time it acquired units
in AFS No. 11. As I wrote in my earlier reasons, there may be appeals in which
the activities, past and present, of third parties may be relevant to the
actions of a taxpayer. One may be influenced by one’s future or current
associates. On the allegations that were before me on the motion to strike
subparagraphs 11(uu) and 11(ww), it was clear that nothing could be gleaned
from the impugned provisions and therefore they were struck. The provisions now
before me are detailed and may be of some import in considering the Appellant’s
intention. But again, this is for the trial judge to decide.
[18] With respect to
paragraphs 11.4 and 11.5, I do not see any need for the respondent at this time
to detail further Mr. Takefman’s description as a director and moving force of
the Appellant. Particulars may be obtained at discovery.
[19] The facts in this
application for leave to amend pleadings are not similar to several of the
cases referred to me by counsel: The Queen v. Canderel
Limitée
and Continental Bank Leasing Corp. v. R.
I have referred to the reasons of the Court of Appeal in Anchor Pointe Energy
Ltd. earlier in these
reasons.
[20] The respondent shall
have leave to file the pleadings referred to as Second Amended Reply. This, of
course, does not affect the Appellant’s right on discovery to question the
authorized representative of the respondent as to whether, when reassessing the
Appellant, the Minister assumed all or any of the facts alleged in paragraph 11
of the Second Amended Reply.
[21] The Appellant filed
its notice of appeal on July 22, 2002. The Court should not be a forum for
procedural wrongdoing.
It is time the parties got down to the merits of the appeal, exchange lists of
documents and proceed to discovery and trial.
Signed at Ottawa, Canada this 23rd day of December 2005.
Rip J.
on this 9th day of December 2005
Elizabeth Tan, Translator
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