Citation: 2009TCC397
Date: 20090810
Docket: 2006-2798(IT)G
BETWEEN:
JONES DEVELOPMENT CORPORTION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
This appeal was from
reassessments in respect of the Appellant’s 2001 and 2003 taxation years and a
Notice of Loss Determination issued in respect of the Appellant’s 2001 taxation
year. Prior to the hearing, the Appellant consented, on a without cost basis,
to the dismissal of its appeal for the 2001 taxation year. It agreed that the
Notice of Loss Determination issued in respect of its 2001 taxation year was
correct in reducing its non-capital loss to nil pursuant to subsection 80(12)
of the Income Tax Act (the “Act”).
[2]
The question that
remains in this appeal is whether the Minister of National Revenue (the “Minister”)
correctly calculated the adjusted cost base (the “ACB”) of the Appellant’s
interest in Harbourside Partnership (the “Partnership”) in 2003 when the
Partnership dissolved. If the Minister’s calculation is incorrect, then the
character of the parcels of land, at the time that they were transferred into
the Partnership, becomes a second question which must be determined.
[3]
The answer to the first
question depends on an interpretation of the Partnership Agreement that was
entered into by the Appellant, Pocket Bay Marina Ltd. (“Pocket Bay”), Maureen Franks (“Maureen”) and Stephen Franks
(“Stephen”).
Background
[4]
The parties submitted a
Partial Agreed Statement of Facts which is attached to these reasons as
Appendix A. The material facts are as follows.
[5]
Norman Jones, an
architect, is the president, sole shareholder and director of the Appellant.
The business of the Appellant is real estate development.
[6]
Mr. Jones described how
the Partnership was formed. He stated that Nova Pacific Developments Ltd. (“Nova
Pacific”), a corporation related to the Appellant, had purchased a parcel of
land contiguous to properties owned by Pocket
Bay, Maureen and Stephen. Pocket Bay was owned by Maureen and Stephen who were married to each other. In
the summer of 1993, Mr. Jones was introduced to the Franks by a real estate
agent who was a mutual acquaintance. The purpose of the introduction was to
ascertain if the Franks wanted to participate in developing their properties.
[7]
Mr. Jones stated that
he and the Franks met every few weeks in their garden, to have tea and discuss
the possibilities of a project. In early 1994, they discussed making a joint
approach to city council to have all of the parcels of land rezoned for a
multi-residential development (the “Development”). As a result of discussions
with the city officials, various sketches of the proposed Development were
produced. The final sketch was dated June 5, 1996.
[8]
The Appellant did all
of the work and paid all expenses with respect to the rezoning of the parcels
of land. Mr. Jones stated that he was acting on behalf of the Franks but that
they were waiting to see the form of development that would be approved before
they decided whether to sell their land or to partner with him in the
Development.
[9]
The parcels of land
were rezoned from single family residential lots to
W2-Marine-Commercial/Residential Retail and development permits authorizing the
Development were issued on September 3, 1996. It was Mr. Jones’ evidence that
the application for rezoning the properties would have been made in 1994 and
the rezoning would have been approved on September 3, 1996 when the development
permits were issued.
[10]
On November 1, 1996,
the Appellant, Pocket Bay, Maureen and
Stephen agreed in writing to form the Partnership. The Appellant dealt at arm’s
length with the other partners. Pocket
Bay, Maureen and Stephen each
transferred one parcel of land to the Partnership and the Appellant agreed to
cause Nova Pacific to transfer its parcel of land to the Partnership. The
business of the Partnership was limited to the acquisition, development,
construction, promotion and marketing of a condominium project on the
Development Property.
[11]
Pursuant to the
Partnership Agreement (the “Agreement”), the Appellant assigned to the
Partnership, all services which it had performed with respect to the
Development.
[12]
Pocket Bay, Maureen and Stephen originally purchased their
parcels of land for the purpose of earning income and historically held their
land as capital property.
[13]
On April 28, 1997, Pocket Bay and Stephen, jointly with the Partnership,
elected pursuant to subsection 97(2) of the Act to transfer their parcels of
land to the Partnership for proceeds of disposition equal to their ACB. Maureen
filed an amended subsection 97(2) election on May 29, 1998. They thus avoided
realizing total gains of $514,792 at the time of transfer.
[14]
Neither the Appellant
nor Nova Pacific made an election under subsection 97(2). The parcel of land
transferred into the Partnership by the Appellant was transferred at fair
market value in accordance with subsection 97(1) of the Act.
[15]
At the time of transfer
to the Partnership, the four parcels of land had the following attributes for
tax purposes:
|
Parcel #
|
FMV
|
ACB/Elected
Amount
|
Difference
|
|
1 (Appellant)
|
$200,000
|
$200,000
|
0
|
|
2 (Pocket Bay)
|
407,375
|
95,000
|
$312,375
|
|
3 (Maureen)
|
194,550
|
23,848
|
170,702
|
|
4 (Stephen)
|
158,075
|
126,360
|
31,715
|
|
Total
|
$960,000
|
$445,208
|
$514,792
|
[16]
The Partnership
constructed the condominiums and sold the developed properties from 1998 to
2003. The last condominiums were sold in 2003 and the Partnership was dissolved
in the same year. Upon dissolution, the Partnership reported that the Appellant
had a negative partnership equity balance of $210,674.
[17]
From 1998 to 2003, the
Partnership failed to account for the effect of the subsection 97(2) election
and it based its cost of goods sold on the FMV of the land transferred into it
by the partners. As a result, the Partnership overstated its cost of goods sold
by $514,792 (the “Partnership Error”).
[18]
This Partnership Error
caused the Partnership to report aggregate losses of $685,468 through 1998 to
2003. In accordance with paragraph 21 of the Agreement, the Appellant was
allocated 60%, or $410,694, of those losses.
[19]
Mr. Peter Clark, a
certified general accountant, testified on behalf of the Respondent. He stated
that he has been Maureen’s accountant since 1977. He was also the accountant
for Stephen and Pocket Bay until 1994 when Stephen decided to go to
another accounting firm. He again became the accountant for Stephen and Pocket Bay in 2001 when Stephen became ill and
Maureen brought all of the work back to him. Stephen died in 2005.
[20]
Mr. Clark described
Stephen and Maureen as intelligent, successful small business people.
[21]
It was Mr. Clark’s
evidence that he became aware of the Partnership Error in 1998. He read the
Agreement and it was his opinion that the gains were the responsibility of the
Franks and Pocket Bay. On his recommendation, Maureen reported
capital gains which totalled $170,653 in the 1997 to 2003 taxation years. When
he again became the accountant for Stephen and Pocket
Bay, Mr. Clark advised Maureen that the deferred gains
should be reported by them. He completed their tax returns so that Pocket Bay reported capital gains which totalled $291,447 and
Stephen reported capital gains which totalled $31,715. As a result, the total
capital gain reported was $493,815. He stated that the difference of $20,977
($514,792 - $493,815) was the result of a mistake that he made in Pocket Bay’s
tax return.
[22]
The Minister corrected
the Partnership Error by allocating $514,792 as capital gains to Maureen,
Stephen and Pocket Bay. This resulted in an increase to the adjusted
cost base (“ACB”) of their interest in the Partnership. The Minister did not
allocate any of the capital gains to the Appellant.
[23]
It is the Appellant’s
position that a portion of the gains should have been allocated to the
Appellant. This would result in an increase to the ACB of the Appellant’s
partnership interest on the deemed disposition in 2003. The ACB would not be
($210,674) as assumed by the Minister, but would be $97,614 which would give
rise to an allowable capital loss of $48,807.50.
Analysis
[24]
The general rule that
governs the transfer of property to partnerships is given in subsection 97(1)
of the Act. According to this subsection, a taxpayer who transfers property to
a partnership of which he is a partner is deemed to have disposed of the
property for its fair market value and the partnership is deemed to have
acquired it at the same amount.[1]
The result of the deemed disposition in subsection 97(1) is that any gain or
loss which has accrued on the property will be realized by the partner at the
time of transfer.
[25]
If certain conditions
are met, the partner who is transferring property to a partnership and the
partnership may elect, pursuant to subsection 97(2) of the Act, to defer
recognizing those gains or losses. The use of an election may mean that an
unrealized capital gain and the associated tax liability on this capital gain
are transferred to the partnership and the other partners unless the
partnership agreement indicates a contrary intention[2].
[26]
The question is whether
the Agreement allocates the deferred gains of $514,792 to Pocket Bay,
Maureen and Stephen as the partners who transferred the properties into the
Partnership; or, whether the Agreement permitted those partners to transfer
their gains and associated tax liabilities to the Appellant.
[27]
The relevant paragraphs
of the Agreement are as follows:
TRANSFER OF INTERESTS TO PARTNERSHIP
11. The Partners agree to
transfer to the Partnership to following:
(a) Maureen shall
transfer Lot 1, Plan 10658, to the Partnership, free and clear of any financial
encumbrances;
(b) Stephen shall transfer
Lot 3, Plan 9678 to the Partnership, free and clear of any financial
encumbrances;
(c) Pocket Bay shall
transfer Lot 1, Plan 6394 to the Partnership, free and clear of any financial
encumbrances;
(d) Jones Development
shall cause Nova Pacific Business Park Ltd. to transfer Lot 2, Plan 10658 to
the Partnership, in consideration of the sum of $1.00, and the Partnership
shall assume all liability for the mortgages registered against the said lot in
favour of Scotia Mortgage Corporation and Lawrence Mayles, provided such
liability shall not exceed $289,000.00;
(e) Jones
Development shall assign to the Partnership all services performed by it to the
date hereof with respect to the Project, including the rezoning of the
Development Property.
The Partners shall not be
entitled to any consideration for the transfer of the aforedescribed lands and
services, save and except for the Contributory Interests, as hereinafter
defined.
All tax consequences of the
transfer of any asset to the Partnership by a Partner pursuant to this
paragraph 11 shall be the sole responsibility of the Partner transferring the
asset to the Partnership and shall not be a responsibility of the Partnership. It
is further agreed that the value at which the said assets are transferred to
the Partnership shall be as agreed between the Partners, or, failing agreement,
at the value specified by the Partner transferring such asset to the
Partnership. (emphasis added)
LIMITATION OF PARTNERSHIP
LIABILITY
12. It is the intention of
the Partners that the liability of the Stephen, Maureen and Pocket Bay shall be
limited to the extent of their respective Contributory Interests. It is
therefore hereby mutually agreed that, notwithstanding anything to the contrary
in this agreement herein contained:
(a) Neither Stephen,
Maureen or Pocket Bay shall be required to grant any guarantee or other
security to any party with respect to the business of the Partnership,
including, without limitation, guarantees to any institutional lender providing
construction financing;
(b) Neither Stephen,
Maureen or Pocket Bay shall be required to make any capital contribution or
loan to the partnership or to contribute to any losses incurred by Jones
Development or its principals as the result of the business of the Partnership;
(c) Jones
Development shall render and save harmless Stephen, Maureen and Pocket Bay from
any demand or claim arising against them as the result of the business of the
Partnership;
(d) Neither Stephen,
Maureen or Pocket Bay shall be required to compensate Jones Development for any
loss incurred by Jones Development as the result of the business of this
Partnership and no Party shall be required to contribute to or compensate any
of the other Party for the loss of the whole or portion of that Party’s
Contributory Interest, provided that Jones Development shall be responsible for
its Proportionate Share of any loss of any loan made to the Partnership made by
Stephen, Maureen or Pocket Bay.
…
PARTNERS CONTRIBUTORY INTERESTS
18. The Partners agree that
they shall have the following Contributory Interests in the Partnership (herein
called the “Contributory Interests”):
Jones Development $200,000.00
Maureen $194,550.00
Stephen $158,075.00
Pocket Bay $407,375.00
Interest shall accrue on the Contributory
Interests at the rate of five (5.0%) per annum, commencing and calculated
monthly from May 1, 1997. No Partner shall demand or be entitled to payment of
such Partner’s Contributory Interest except as provided in this agreement.
…
PARTNERS PROPORTIONATE INTERESTS
21. The Partners agree that
they shall have the following Proportionate Interests in the Partnership
(herein called the “Proportionate Interests”):
Jones Development sixty
(60.0%) per cent
Maureen ten
and two tenths (10.2%) per cent
Stephen eight
and three tenths (8.3%) per cent
Pocket Bay twenty
one and five tenths (21.5%) per cent
ACCOUNTING, CONTRIBUTIONS AND
DISTRIBUTIONS
22. The Partners agree that
profits and losses of the Partnership computed in accordance with generally
accepted accounting principles applied consistently from year to year shall be
shared between the Partners according to their Proportionate Interests.
…
24. It is acknowledged and
agreed by the Partners that the proceeds from the disposition of the Project,
after payment of all costs related to the construction and development of the
project, shall be disbursed as follows:
(a) firstly, to the
payment of any expenses directly related to the sale of the Development
Property, including, without limitation, real estate commissions, adjustments,
and legal costs;
(b) secondly, in repayment
of the principal and accrued interest under any financing obtained to
facilitate the construction and development of the Project;
(c) thirdly, to pro
rata payment of any loan contributions (included interest accrued thereon) to
the Partnership made by the Partners; and
(d) fourthly, to pro rata
payment of the Contributory Interests, including interest thereon;
(e) finally, the
balance, if any, shall be distributed to the Partners in accordance with their
Proportionate Interest.
[28]
The principles that are
to be used in interpreting a contract were recently summarized by the Federal
Court of Appeal in General Motors of Canada Ltd. v. R.[3] as follows:
36 A
number of propositions emerge from the above authorities. First, failing a
finding of ambiguity in the document under consideration, it is not open to the
Court to consider extrinsic evidence. Second, where extrinsic evidence may be
considered, that evidence must pertain to the "surrounding circumstances
which were prevalent at the time". Third, even where there is ambiguity,
evidence only of a party's subjective intention is not admissible.
[29]
With these principles
in mind, I have not considered Mr. Jones’ testimony with respect to his
interpretation of various paragraphs of the Agreement. As well, I have not
considered any extrinsic evidence as it is my opinion that the Agreement is not
ambiguous.
[30]
Paragraph 11 of the
Agreement provides that the tax consequences of the transfer of any asset to
the Partnership by a partner pursuant to paragraph 11 shall be the sole
responsibility of the partner transferring the asset and shall not be a
responsibility of the Partnership. I note that the parcels of land transferred
by the partners are the major assets dealt with in paragraph 11 of the
Agreement.
[31]
This is a clear and
unambiguous intention of the partners not to permit the transfer of the deferred
gains and the associated tax liability to the Partnership.
[32]
Paragraph 18 of the
Agreement specifies that the partners’ contributory interest is the fair market
value of the property transferred into the Partnership and not the lower
elected amount. This, as well, reflects an intention of the partners to
allocate the deferred gains to Pocket Bay, Maureen and Stephen.
[33]
Finally, the Agreement
indicates that each partner is to receive the benefit of the gains that had
accrued on the parcel of land that it transferred into the Partnership.
Paragraph 24 specifies how the proceeds from the disposition of the Development
shall be disbursed. It entitles the partners to recover their contributory
interest, including interest thereon, in preference to receiving any proceeds
according to their proportionate interest.
[34]
Counsel for the Appellant
argued that paragraph 22 of the Agreement provided that the profits and losses
of the Partnership were to be shared between the Partners according to their
proportionate interests and this provision should govern to allocate 60% of any
correction for the Partnership Error to the Appellant.
[35]
The correction that the
Appellant refers to is the Partnership Error which is the deferred gains of $514,792.
[36]
The Appellant’s
argument begs the question. This argument implicitly assumes that the deferred
gains were transferred to the Partnership to be shared by the partners
according to their proportionate interests.
[37]
Counsel for the
Appellant also argued that the Appellant was granted a 60% proportionate
interest in the Partnership as compensation for the fact that it would bear a
portion of the tax burden from the deferred gains on the properties transferred
by Pocket Bay, Maureen and Stephen.
[38]
Neither the evidence
presented at the hearing nor the Agreement supports counsel’s submission. It
was Mr. Jones’ evidence that he received a 60% proportionate interest because
he assumed all of the liability for the Development. His evidence is supported
by paragraph 12 of the Agreement wherein the liability of Pocket Bay, Maureen and Stephen was limited to the extent of
their respective contributory interests.
[39]
In conclusion, the
Appellant has not shown that the Minister’s reassessment was in error.
[40]
The appeal is
dismissed. The Respondent is granted its costs with respect to the appeal of
the 2003 taxation year.
Signed at Halifax,
Nova Scotia, this 10th day of August 2009.
“V.A. Miller”
Appendix A
PARTIAL
AGREED STATEMENT OF FACTS AND ISSUES
AGREEMENT AS TO 2001 TAXATION
YEAR
1. The
Appellant agrees that the Notice of Loss Determination issued in respect of its
2001 taxation year does not understate the Appellant’s non-capital loss. The
Appellant consents to the dismissal of its appeal for the 2001 taxation year,
and the Respondent consents to that dismissal without costs.
FACTS RELATING TO 2003
TAXATION YEAR
Formation of the
Harbourside Partnership
2. The
Appellant is a corporation incorporated under the laws of British Columbia.
3. The
Appellant’s business includes the provision of architectural services relating
to land development ventures.
4. On
November 1, 1996, the Appellant, another corporation known as Pocket Bay Marina
Ltd. (“Pocket Bay”), and two individuals known as Pansy Maureen Franks
(“Maureen”) and Stephen Oliver Franks (“Stephen”), agreed in writing to form a
partnership known as the Harbourside Partnership (the “Partnership”).
5. Pocket
Bay was owned by Maureen and Stephen.
6. The
Appellant dealt at arm’s length with the other partners.
7. A
copy of the written Partnership Agreement is attached at Tab B1.
8. The
purpose and business of the Partnership was to acquire, develop, construct,
promote and market a residential condominium project in the town of Sidney,
B.C.
9. The
land to be developed was originally in four contiguous parcels, one each owned
by Pocket Bay, Maureen and Stephen, and one owned by Nova Pacific Development
Ltd. (“Nova Pacific”), a corporation related to the Appellant.
10. In the Partnership
Agreement, Pocket Bay, Maureen and Stephen agreed to transfer their parcels to
the Partnership and the Appellant agreed to cause Nova Pacific to transfer its
parcel to the Partnership. The Appellant also agreed to assign to the
Partnership all services performed by it with respect to the development
project to the date of the Agreement.
11. The four parcels were
transferred to the Partnership in accordance with the Partnership Agreement on
November 1, 1996.
12. Pocket Bay, Maureen and
Stephen originally purchased their parcels for the purpose of earning income
and historically held the parcels as capital property. At the time of transfer
to the Partnership, the four parcels had the following tax attributes:
|
Parcel #
|
FMV
|
ACB/Elected Amount
|
Difference
|
|
1
|
$200,000
|
$200,000
|
$0
|
|
2
|
$407,375
|
$95,000
|
$312,375
|
|
3
|
$194,550
|
$23,848
|
$170,702
|
|
4
|
$158,075
|
$126,360
|
$31,715
|
|
TOTAL
|
$960,000
|
$445,208
|
$514,792
|
13. Pocket Bay, Maureen and
Stephen, jointly with the Partnership, elected under subsection 97(2) of the Income
Tax Act (the “Act”) to transfer their parcels to the Partnership for
proceeds of disposition equal to their adjusted cost bases in those parcels. By
doing so, Pocket Bay, Maureen and Stephen avoided realizing aggregate gains of
$514,792 on the disposition to the Partnership. Copies of the elections filed
by under subsection 97(2) by Pocket Bay, Maureen and Stephen are attached at
Tabs B2, B3 and B4, respectively.
14. Neither the Appellant nor
Nova Pacific made any election under subsection 97(2) of the Act in respect of
the transfer of Nova Pacific’s parcel to the Partnership and thus transferred
it at fair market value.
15. With respect to the transfer
of the parcels to the Partnership, the Partnership Agreement provided that:
All tax consequences of the
transfer of any asset to the Partnership by a Partner…shall be the sole
responsibility of the Partner transferring the asset to the Partnership and
shall not be a responsibility of the Partnership. It is further agreed that the
fair market value at which the said assets are transferred to the Partnership
shall be as agreed between the Partners, or failing agreement, at the value
specified by the Partner transferring such asset to the Partnership.
Creation of Partners’ Contributory and
Proportionate Interests
16. Under the Partnership
Agreement, the partners were credited with the following “Contributory
Interests” with a combined value of $960,000 upon transfer of the four parcels
to the Partnership:
|
Partner
|
|
Contributory Interest
|
|
Appellant
|
|
$200,000
|
|
Pocket Bay
|
|
$407,375
|
|
Maureen
|
|
$194,550
|
|
Stephen
|
|
$158,075
|
|
|
TOTAL
|
$960,000
|
17. The Partnership Agreement
provided that the partners were entitled to interest on their Contributory
Interests at the rate of 5% per year, calculated monthly commencing May 1,
1997.
18. The Partnership Agreement
also assigned each partner a “Proportionate Interest” as follows:
|
Partner
|
|
Proportionate Interest
|
|
Appellant
|
|
60.0%
|
|
Pocket Bay
|
|
21.5%
|
|
Maureen
|
|
10.2%
|
|
Stephen
|
|
8.3%
|
|
|
TOTAL
|
100%
|
19. The Partnership Agreement
provided that profits and losses of the Partnership, computed in accordance
with generally accepted accounting principles applied consistently from year to
year, would be shared between the Partners according to their Proportionate
Interests.
20. The Partnership Agreement
also provided that the proceeds from the disposition of the development
project, after payment of all costs related to the construction and development
of the project, would be disbursed as follows:
a. first,
to the payment of any expenses directly related to the sale of the property,
including, without limitation, real estate commissions, adjustments and legal
costs;
b. second,
in repayment of the principal and accrued interest under any financing obtained
to facilitate the construction and development of the project;
c. third,
to pro rata repayments of any loan contributions, including accrued interest
thereon, made by the partners to the Partnership;
d. fourth,
to pro rata repayment of the partners’ Contributory Interests, including
interest on those Interests; and
e. lastly,
the balance would be distributed to the partners in accordance with their
Proportionate Interests.
21. The Partnership constructed
the condominium development and sold the developed properties from 1998 to
2003. The last condominium was sold in 2003 and the Partnership dissolved.
Partnership Accounting and
ACB of the Appellant’s Partnership Interest
22. For its fiscal periods
ending from May 31, 1998 to May 31, 2003, the Partnership reported the
following partnership income and losses, of which it allocated 60% to the
Appellant in accordance with the Appellant’s Proportionate Interest:
|
Fiscal
Period End
|
Partnership
Income/Loss
|
60% Allocated
to the Appellant
|
|
May 31, 1998
|
($51,523.15)
|
($30,914.00)
|
|
May 31, 1999
|
($88,397.81)
|
($53,039.00)
|
|
May 31, 2000
|
($183,313.00)
|
($109,988.00)
|
|
May 31, 2001
|
($131,549.54)
|
($78,930.00)
|
|
May 31, 2002
|
($187,151.95)
|
($112,291.00)
|
|
May 31, 2003
|
($43,533.02)
|
($25,532.00)
|
|
TOTALS
|
($685,468.47)
|
($410,694.00)
|
23. Over the life of the
partnership, the Appellant contributed and withdrew the following amounts of
capital in addition to the parcel originally owned by Nova Pacific:
|
Fiscal Period End
|
Contribution/(Withdrawal)
|
|
May 31, 1997
|
$50,500
|
|
May 31, 1998
|
$16,356
|
|
May 31, 1999
|
($40,806)
|
|
May 31, 2000
|
($5,690)
|
|
May 31, 2001
|
($5,000)
|
|
May 31, 2002
|
($15,350)
|
|
May 31, 2003
|
$10
|
24. Upon the dissolution of the
Partnership, the Partnership reported that the Appellant’s partnership equity
was ($210,674), as follows:
|
Fiscal Period May 31, 1997
|
|
|
Opening contribution
|
$200,000
|
|
Additional contribution
|
$50,500
|
|
Ending balance
|
$250,500
|
|
|
|
|
Fiscal Period May 31, 1998
|
|
|
Opening balance
|
$250,500
|
|
Additional contributions
|
$16,356
|
|
Allocated losses
|
($30,914)
|
|
Ending balance
|
$235,942
|
|
|
|
|
Fiscal Period May 31, 1999
|
|
|
Opening balance
|
$235,942
|
|
Withdrawals
|
($40,806)
|
|
Allocated losses
|
($53,039)
|
|
Ending balance
|
$142,097
|
|
|
|
|
Fiscal Period May 31, 2000
|
|
|
Opening balance
|
$142,097
|
|
Withdrawals
|
($5,690)
|
|
Allocated losses
|
($109,988)
|
|
Ending balance
|
$26,419
|
|
|
|
|
Fiscal Period May 31, 2001
|
|
|
Opening balance
|
$26,419
|
|
Withdrawals
|
($5,000)
|
|
Allocated losses
|
($78,930)
|
|
Ending balance
|
($57,511)
|
|
|
|
|
Fiscal Period May 31, 2002
|
|
|
Opening balance
|
($57,511)
|
|
Withdrawals
|
($15,350)
|
|
Allocated losses
|
($112,291)
|
|
Ending balance
|
($185,152)
|
|
|
|
|
Fiscal Period May 31, 2003
|
|
|
Opening balance
|
($185,152)
|
|
Additional contributions
|
$10
|
|
Allocated losses
|
($25,532)
|
|
Ending balance
|
($210,674)
|
25. Copies of the Partnership’s
Balance Sheets and Income Statements for the fiscal periods ending May 31, 1997
to May 31, 2003 are attached at Tab B5.
Errors in Partnership
Accounting and Financial Statements
26. In computing its income for
tax purposes between 1998 and 2003, the Partnership based its cost of goods
sold on the fair market value of the parcels transferred to it by the partners,
which was $960,000.
27. The Partnership erroneously
failed to account for the effect of the elections made by Pocket Bay, Maureen
and Stephen pursuant to subsection 97(2) of the Act, wherein the elected amount
was $514,792 less than the fair market value of those parcels (the “Partnership
Error”).
28. Maureen’s accountant, Peter
Clark, certified general accountant, became aware of the Partnership Error. On
his recommendation, Maureen reported capital gains totalling $170,653 in the
1997 through 2003 taxation years in an attempt to compensate for the
Partnership Error.
29. In 2001, Peter Clark became
the accountant for Pocket Bay. On his recommendation, Pocket Bay reported
capital gains totalling $291,447 in the 2001 and 2002 taxation years in an
attempt to compensate for the Partnership Error. Prior to Peter Clark becoming
its accountant, Pocket Bay had not reported any capital gains in respect of the
Partnership Error.
30. In 2002, Peter Clark became
the account for Stephen. On his recommendation, Stephen reported capital gains
totalling $31,715 in the 2003 taxation year in an attempt to compensate for the
Partnership Error. Prior to Peter Clark becoming his accountant, Stephen did
not report any capital gains in respect of the Partnership Error.
31. In total, Maureen, Pocket
Bay, and Stephen reported $493,815 of capital gains in respect of the
Partnership Error.
32. Peter Clark’s recommendation
to Maureen, Pocket Bay and Stephen to report the capital gains referred to in
paragraphs 27 through 30 above was based on his interpretation of the
Partnership Agreement. He did not base his recommendation based on any
agreement between the partners outside of the Partnership Agreement itself.
Reassessment by the Minister
33. In reassessing the
Appellant’s 2003 taxation year, the Minister concluded that the Appellant was
deemed to dispose of its interest in the Partnership when the Partnership
dissolved. The Minister concluded that the adjusted cost base of the Appellant’s
partnership interest was ($210,674), the amount of the Appellant’s partnership
equity as reported by the Partnership in its financial statements.
34. The Minister therefore
included a taxable capital gain of $105,337, being 50% of a deemed capital gain
of $210,674, resulting from the deemed disposition of the Appellant’s interest
in the Partnership when the Partnership dissolved.
35. The Minister corrected the
Partnership Error by allocating $514,792 as a capital gain to Maureen, Stephen
and Pocket Bay. The result was an increase to the ACB of those three partners’
interests in the Partnership. The Minister did not allocate any of the $514,792
to the Appellant, and therefore declined to increase the Appellant’s
Partnership equity and the ACB of the Appellant’s Partnership interest.
36. A copy of the auditor’s
working papers showing the Minister’s calculations is attached at Tab B6. A
copy of the auditor’s prior proposal letter, along with supporting working
papers, are attached at Tab B7.
ISSUES
37. The issue is whether the
Minister correctly computed the ACB of the Appellant’s interest in the
Partnership at the time the Partnership dissolved in 2003.
38. Specifically:
a. In
correcting the Partnership Error, did the Minister properly allocate $514,792
as a capital gain only to Maureen, Stephen and Pocket Bay, or should a portion
of that amount have been allocated to the Appellant by reducing the aggregate
Partnership business losses allocated to the Appellant in the Partnership’s
1997 through 2003 fiscal periods?
b. If
an amount in respect of the Partnership Error should be allocated to the
Appellant:
i.
What portion should have been allocated to the Appellant?
ii.
What was the adjusted cost base of the Appellant’s partnership interest
at the time the Partnership dissolved in 2003?
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