Citation: 2009 TCC 363
Date: 20090713
Dockets: 96-2936(IT)I, 2004-181(IT)I
2002‑2520(IT)I, 96-3516(IT)I
96-3127(IT)I, 96-3142(IT)I
96-3144(IT)I, 96-3489(IT)I
97-98(IT)I, 96-3056(IT)I
96-3289(IT)I, 96-3257(IT)I
BETWEEN:
CLAUDE MÉNARD, MARCEL BEAUREGARD,
JEAN-PIERRE GAMACHE, MANON CHARTRÉ,
SUCCESSION JEAN NADEAU, JEAN ST-PIERRE,
PAUL LAFONTAINE, SELIM TOUTOUNJI, MARION SAHAPOGLU‑FOREST
and GILLES BRASSARD,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
I. Introduction
[1]
These appeals pertain
to ten Appellants who invested in Société de recherches expérimentales en
télématique enr. ("SRET" or "Télématique") or in Société en
nom collectif R&D Mini-Robots enr. ("Mini-Robots"). Both partnerships were set up by a promoter
named N. Lassonde. The table in Appendix A of these Reasons for
Judgment sets out the amount that each Appellant invested and the year in which
the investment was made.
[2]
Although the Minister of
National Revenue ("the Minister") acknowledges that the partnerships carried
out research, to some extent, he nonetheless reassessed the Appellants and
disallowed the loss deductions and investment tax credits that they had claimed.
[3]
The Minister's position
is that
(a) the Appellants were
not members of genuine partnerships;
(b) in the alternative, the
partnerships did not carry on a business;
(c) in the further
alternative, the Appellants were "specified members" who were "limited partners";
(d) in the further
alternative, the Appellants were passive "specified members";
(e) in the further
alternative, the Appellants were not members of the partnerships in question at
the end of the fiscal year in issue; and
(f) the research expenditures
were greatly exaggerated, and the partnerships did not incur all the expenditures
claimed,
and accordingly, the Minister submits that the Appellants
were not entitled to deduct the business losses and investment tax credits
claimed.
[4]
Although several of the
Appellants' Notices of Appeal take the position that the loss deductions and
tax credits were justified in fact and in law, the arguments that the Appellants
raised at the hearing were mainly subsidiary: for example, the Appellants
submitted that they had a legitimate expectation that the deductions and
credits were valid since the partnerships had a proper tax shelter
identification number; that the deductions or credits were allowed in the
initial assessments; or that the Minister should have noticed that there were
problems earlier and should have disallowed the deductions in the initial
assessment.
[5]
While each Appellant's
case is somewhat different, the following example describes the structure of a
typical transaction proposed to the Appellants:
(a) The
potential investor is asked to invest roughly $10,000 in the fall.
(b) The investor is also
promised that X will provide financing for half that amount, i.e. $5,000 (but
sometimes for 100% of the investment).
(c) It is explained to the
investor that he or she will
(i) borrow $5,000 from
X,
(ii) purchase a $10,000 interest
in the partnership, and
(iii) grant a right of
first refusal to another third party, Y, entitling Y to purchase the investor's
partnership interest for 50% of the amount of his or her investment, that is to
say, $5,000. (Sometimes X and Y are the same partnership.)
d) It is also explained
to the investor that
(i) in a few weeks or
months, the investor will receive $5,000 from Y, who will purchase the investor's
partnership interest, thereby enabling the investor to repay the loan made by X
(or, if the investor borrowed 100% of the investment, half the loan amount),
and
(ii) the investor will get
a tax reduction of roughly $7,000, consisting of
- the deduction for his share
of the partnership loss, which is approximately $10,000 and will have the
effect of reducing his or her income tax by approximately $5,000, and
- a tax credit of approximately
$2,000,
and that, consequently, the investor will
make a profit of approximately $2,000.
[6]
For the following
reasons, the appeals will be dismissed.
II. The validity of the
reassessments
Facts
The Appellants' testimony
Testimony of Gilles Brassard
[7]
Mr. Brassard invested
in Mini-Robots in 1990, and again in 1991. He was an assistant business manager
at the Caisse populaire du Complexe Desjardins at the time.
[8]
Mr. Brassard said
that his aim was twofold: to benefit from a tax shelter, and to invest in
research and development (R&D). He believed that his investment in Mini‑Robots
was not speculative.
[9]
He also confirmed that
the following financial arrangement was proposed to him. He was to invest
$10,000, of which $5,000 would be borrowed from a financing source recommended
to him. Later, $5,000 would be returned to him, and this, combined with a tax
reduction worth $6,000 to $7,000, would result in a net profit of $1,000 to
$2,000. He does not recall who was supposed to return the $5,000 to him.
[10]
In 1989, he invested in
another project, ECT, and the financial aspect unfolded as I have just
described. As we shall see, the events unfolded somewhat differently with
Mini-Robots. The assessment of Mr. Brassard for 1989 is not before the
Court in this case.
[11]
When Mr. Brassard was
asked whether he recalled that the $5,000 that was to be returned to him was in
consideration of the purchase of his interest in Mini‑Robots from him, he
said that he did not. However, he did agree that once the amount related to his
1991 investment was returned to him, he no longer held an interest in Mini‑Robots.
[12]
Although Mr. Brassard
has only a limited recollection of what happened financially with his
investment in Mini-Robots, I find that, in 1990, instead of borrowing $5,000, he
borrowed $10,000 on his own and invested it in order to purchase an interest in
SRET. At the time that the $5,000 was to have been returned to him (for 1990)
he was told that, for certain reasons, this could not be done at the moment. It was
proposed that the $5,000 that he should have received be used to purchase a
$10,000 partnership interest in Mini-Robots in 1991. He agreed. In 1992, money
was returned to him. He invested a total of $20,000 for the two years, and
$10,000 was returned to him.
[13]
The 1990 investment was
made in December.
[14]
Mr. Brassard's
participation was very limited. He says that he attended two or three meetings
of Mini-Robots per year.
At those meetings, the partners saw the premises and equipment, but the
employees were not working at the time. The partners in attendance were
asked questions about the Mini‑Robot (an automatic vacuum cleaner) under development,
and Mr. Brassard recalls that some people made suggestions. Most of these
suggestions could have been solicited from any potential consumer.
[15]
Mr. Brassard took
no part in management decisions (regarding matters such as budgets, the
appointment of principals, research or the future of the business) and was not
consulted about such decisions.
[16]
He recalls that 50 or
100 partners attended the meetings. He knew only some of those people. Most people
who attended the meetings during the second year had not attended the meetings
in the first year.
[17]
Mr. Brassard's
participation was limited: he did what he was told, and nothing more.
[18]
His decision to invest
was individual, and was never made jointly with other partners. The only person
with whom he spoke about his investments was Mr. Sawodny, the person who
suggested the investment to him. Once he acquired an interest in Mini‑Robots,
if he had questions, he asked Mr. Sawodny and not the other Mini-Robots
partners.
Testimony of Richard Pagé
The Nadeau Succession
[19]
Mr. Pagé is not an
Appellant; he is the testamentary executor of Jean Nadeau.
[20]
He was familiar only
with certain facts about Mr. Nadeau. He prepared Mr. Nadeau's 1989
income tax return. He noticed that Mr. Nadeau had invested in SRET in
April 1989 and on November 19, 1989. Mr. Nadeau died the week after
November 19, and, as his executor, Mr. Pagé noticed that the 50% was
returned to Mr. Nadeau two or three weeks after the
November 19 investment.
[21]
Mr. Pagé was not
sure whether Mr. Nadeau had already sold his interest in SRET when the 50%
was returned to him.
[22]
Here are some of the
factual assumptions on which the Minister relied in reassessing the Nadeau
Succession:
- The members of the Partnership do not work actively
within the Partnership; they merely filled out questionnaires which had no
serious effect on the Partnership's research activities.
- The Appellant is a partner who, on a regular,
continuous and substantial basis throughout the year in issue during which the
Partnership usually carries on its business, is not actively engaged in the
activities of the Partnership business and does not carry on a business similar
to that carried on by the Partnership during that year.
- Before the end of 1989, Tecktel acquired the Appellant's
interest for an amount equal to 50% of his total investment in the Partnership.
- The Appellant was no longer a member of the Partnership
as at December 31, 1989.
[23]
I find that Mr. Nadeau
was not a member of SRET as at December 31, 1989.
Mr. Pagé's personal investment in Mini-Robots
[24]
Although he was not one
of the Appellants, Mr. Pagé invested $10,000 in Mini-Robots as well, in 1992.
He financed half that amount though a loan from a caisse populaire.
It was the advisor who proposed the investment in Mini-Robots who suggested he
take out a loan from the caisse populaire. Mr. Pagé subsequently received
the return of $5,000, in consideration of which he sold his interest in Mini‑Robots.
[25]
Mr. Pagé was then
expecting to realize a net profit of roughly $1,200 as a result of the
deductible loss and the tax credit. He expected nothing else from Mini‑Robots.
[26]
He did not carry on
business with others for the purpose of conducting scientific research. He was not
engaged in the business of Mini-Robots, and he attended no meetings.
[27]
After making his
investment, he discovered that he knew some of the other investors.
Testimony of Manon Chartré
[28]
Ms. Chartré invested
in Mini-Robots in December 1992 and claimed a loss deduction and tax credits
based on a $10,000 investment.
[29]
She recalls that she
was granted a loan for 50% of the investment amount. She also recalls that
the 50% was returned quickly to her, one or two months later. She had
been told that, by the end of 1992, everything would be finished, apart from
the profit that she would make through her income tax return.
[30]
Ms. Chartré's
involvement was limited to attending one meeting that lasted an hour and a half
to two hours. She was told that it was important to attend.
[31]
The first part of the
meeting was an information session in which some people showed the prototype
and discussed research. In the second part, participants exchanged comments about
the prototype.
[32]
Ms. Chartré knew a
few friends who had also invested in Mini-Robots that same year. She and
her friends did business with the same person, who advised them to make the
investment.
[33]
She had no intention of
doing business with others for the purpose of conducting scientific research. As
far as she was concerned, she was investing in a going concern managed by others
— specifically, the promoter and the
people around him. She attended the meeting as instructed. Soon afterwards,
her interest was bought back for $5,000 as planned and that was the end of
it.
Testimony of Claude Ménard
[34]
Mr. Ménard claimed
business losses and tax credits based on a $15,000 investment in SRET.
[35]
On November 6, 1989,
according to the documentation adduced in evidence, Mr. Ménard purchased a
"qualifying share" in SRET for $1.00. One the same date, he also signed
a document entitled [TRANSLATION] "Research Mandate" under which he purportedly
entrusted Geyser Informatique Inc. with [TRANSLATION] "the performance
of this computer research contract . . . upon payment of the amount of $15,000."
He also paid the $15,000 by cheque to Geyser on that date.
[36]
On that same November
6, Mr. Ménard gave Gestion Tecktel Inc. a right of first refusal in
respect of the [TRANSLATION] "property resulting from the research
contract." Fifteen days later, on November 21, 1989, Gestion Tecktel exercised
that right, and, by cheque dated November 21, 1989 and signed by the SRET promoter,
Gestion Tecktel paid $7,500, 50% of the research contract amount, to Mr. Ménard.
[37]
There is no way, based
on these documents, to determine how Mr. Ménard could have had more than a
$1 interest in SRET as at November 6 or December 31, 1989; consequently,
his share of any loss or credit would be $1 or less. However, I must take note
of the fact that the Minister assumed that the November 6 research mandate
did not reflect reality and that Mr. Ménard actually acquired a $15,000
interest in SRET.
[38]
Mr. Ménard concedes
that when the investment was proposed to him, he was explained that 50% of it
would be returned to him.
[39]
He was told that it was
very important to invest in SRET and that a terminal would be used.
[40]
Mr. Ménard's
participation was limited to a meeting at which a telecommunications terminal
was demonstrated and participants were offered the opportunity to use the
terminal. He filled out a questionnaire about the terminal's use. The questions
were of the kind that potential users could be asked.
[41]
He was not involved in
SRET in any other way, and he did not really know how SRET operated. He took no
part in management decisions.
[42]
Mr. Ménard knew
only one other SRET investor, and never met with other partners except during
the single meeting which he attended.
[43]
Other than the returned
money and the tax benefit, it was never suggested to Mr. Ménard that there
would be any profit from SRET. Mr. Ménard agreed that, without tax
advantages, he would never have invested in the SRET. He agreed that he had no
intention of carrying on a business in cooperation with the other SRET
partners.
[44]
Although Mr. Ménard asserted
that he continued to be an SRET member as at December 31, 1989, he
appears not to have concerned himself much with what was happening with SRET
after that date.
[45]
I find that Mr. Ménard
was no longer a member of SRET as at December 31, 1989.
Testimony of Jean St-Pierre
[46]
Mr. St-Pierre's
situation is as follows:
(a) On
December 12, 1989, he signed a document in which Infotique Tyra Inc. submitted
a bid to him for the supply of formatted laser discs. In the document, he
accepted the bid and purchased a formatted disk with a 125‑megabyte
capacity for $25,000.
(b) On the same day, he
signed a subscription contract under which he acquired a "qualifying share"
in SRET for $1.
(c) On December 15, 1989,
he wrote a $25,000 cheque payable to Infotique Tyra Inc.
(d) He signed a document
entitled [TRANSLATION] "Assignment", dated January 10, 1990, by
which, in his capacity as a partner in SRET and owner of a personal-library
laser disc prototype, he sold his entire interest in the laser disc prototype
to Infotique Tyra Inc. In his testimony, Mr. St‑Pierre expressed the
belief that he signed that document on December 12, 1989.
[47]
Mr. St-Pierre claimed
a loss deduction and an income tax credit based on having invested $25,000 in
SRET in December 1989.
[48]
He borrowed $25,000,
and was told that 50% of that would be returned to him. Under the initial
assessment, he had enough federal and Quebec tax advantages to come out $5,000
ahead.
[49]
In view of the
documents signed on December 12, I find that Mr. St‑Pierre cannot
have acquired more than a $1 share in SRET.
[50]
Mr. St-Pierre received
the 50% repayment on or about January 10, 1990.
[51]
Mr. St-Pierre did
not attend any meetings. His only involvement was this: the advisor who had
recommended that he make the investment read him questions from a questionnaire
and filled out the questionnaire for him. Mr. St‑Pierre testified
that he believed the questions were related to libraries.
[52]
He never intended to carry
on a business with the other partners.
Testimony of Paul Lafontaine
[53]
In his 1989 income tax
return, Mr. Lafontaine claimed the loss deduction and tax credits based on
a $10,000 investment in SRET.
[54]
However, his situation resembles
Mr. St-Pierre's. He testified that he purchased a laser disc from Infotique
Tyra Inc. for $10,000 and a $1 interest in SRET.
[55]
Consequently, I find
that Mr. Lafontaine, like Mr. St-Pierre, invested only $1 in SRET.
[56]
Mr. Lafontaine made
his investment on or about December 14, 1989. It was explained to him
that he would get 50% of his investment back in roughly one month, and that,
apart from that and the tax advantages, there would be no income from the investment.
The 50% was returned to him in February 1990.
[57]
Mr. Lafontaine attended
no meetings and filled out no questionnaires, though he did receive one.
[58]
He considered the
questionnaire nonsense.
[59]
He did not intend to carry
on a business with the other partners.
Testimony of Marcel Beauregard
[60]
In his 1990 and 1991
income tax returns, Mr. Beauregard claimed the loss deduction as well as
tax credits based on a first investment of $10,000 in Mini‑Robots in 1990
and a second investment of $10,000 in 1991.
[61]
It was his financial
advisor who suggested these investments, and who obtained a $10,000 loan from Société
nationale de fiducie for him.
[62]
Mr. Beauregard's
case is somewhat similar to Mr. Brassard's. In 1990, Mr. Beauregard invested
$10,000 using the proceeds of a loan he obtained from Société nationale de
fiducie. On December 10, 1991, he borrowed $10,000 from Gestion N.L. Technik
Inc.
to make his 1991 investment. In November 1992, he transferred all his shares in
Mini-Robots to Gestion N.L. Technik, which, in consideration of the transfer,
cancelled the loan and the interest thereon.
[63]
Mr. Beauregard
only remembered certain things, and we do not know the details of what happened
during the two years in issue.
[64]
Since he testified that
he expected to make a profit thanks to the tax advantages, but those advantages
could not mathematically be greater than his investment; since he believed the
risk was minimal; and since there is no suggestion that he could expect other
income from Mini-Robots, I find that the return, by Gestion N.L. Technik,
of $10,000 to him (that is to say, 50% of his $20,000 investment) in
consideration of the purchase of his interest in the partnership, had been
planned from the start.
[65]
Mr. Beauregard may
have attended three meetings. He vaguely recalls a questionnaire, but does not think
that he filled one out. There was no other participation on his part. He was
not involved in the management of the business and he did not carry on a business
with the other members of the partnership.
Testimony of Jean-Pierre Gamache
[66]
In his 1989 income tax
return, Mr. Gamache claimed tax credits and the loss deduction based on a
$10,000 investment in SRET.
[67]
It was a broker who had
suggested the investment to him. The broker told him that it was a tax shelter
and that there was no risk because the government was involved.
[68]
Mr. Gamache recalls
few details of the transaction.
[69]
He knows that he
borrowed $10,000 to make the investment and that once everything was said and
done he made a net gain of $1,500 or $2,500.
[70]
On cross-examination,
he conceded that he must have had 50% returned to him. He believes that, prior
to investing, he received a document resembling the one which is discussed in
paragraph 12 of the Reply to the Notice of Appeal, and which provided the
example of a $10,000 investment.
[71]
One of the Minister's
assumptions of fact is that the Appellant was not a member of the partnership
as at December 31, 1989.
[72]
In his evidence, Mr. Gamache
did not show otherwise.
I find that he was not a member of SRET as at December 31, 1989.
[73]
Mr. Gamache agreed
that there was no risk.
[74]
He was not active
within SRET. He did not attend any meetings.
[75]
He agreed that he did
not carry on business with the other partners.
[76]
He considers himself a
victim in this story.
Testimony of Marion Sahapoglu-Forest
[77]
Ms. Sahapoglu-Forest invested
$10,000 in SRET in 1989, and $10,000 in Mini-Robots in 1992.
[78]
In both cases, from a
financial standpoint, she received 50% back in consideration of the purchase of
her partnership interest. With Mini‑Robots, she invested in November
1992, got the 50% back, and transferred her interest to Gestion N.L.
Technik in May 1993. That return of 50% of her investment cancelled the $5,000
loan (including interest) that Gestion N.L. Technik had made to Ms. Sahapoglu-Forest
to cover half her $5,000 investment in November 1992.
[79]
Although she does not
remember the dates, Ms. Sahapoglu-Forest concedes that the return from SRET
was received more quickly than the return from Mini‑Robots.
[80]
In both years, the return
of 50% was planned in advance and guaranteed her. Despite this guarantee, Ms. Sahapoglu-Forest
had some concerns.
[81]
For the SRET
investment, she borrowed the full $10,000 from Central Guaranty Trust Company. The
advisor who had suggested she invest in SRET is the same one who suggested she
take out a loan from Central Guaranty Trust.
[82]
Although the Minister
relied on the factual assumption that Ms. Sahapoglu‑Forest was no
longer a member of SRET as at December 31, 1989, she asserted that
she was still a member on that date.
[83]
Apart from the return
of 50% and the tax advantages, she did not expect any income from SRET or
Mini-Robots.
[84]
Ms. Sahapoglu-Forest had
been told that her involvement in the partnerships was necessary, and when a
representative of one of the partnerships would tell her to do something, she did
it. She contributed in the following way: she went to all meetings except one,
gave her opinion on various matters, filled out questionnaires, and tried out an
SRET terminal.
[85]
Although Ms. Sahapoglu-Forest
attended the meetings and although she voted (for example when those assembled
were asked to approve budgets) her participation was guided by what she was
told she had to do.
[86]
It is also clear that
she did not carry on business with the other partners. Rather, she made an
investment.
Testimony of Selim Toutounji
[87]
Mr. Toutounji invested
$10,000 in Mini-Robots in 1992 and claimed the loss deduction and tax credits accordingly.
[88]
Mr. Toutounji made
his investment in November 1992, probably on the evening of November 13. He
went with Ms. Sahapoglu-Forest that evening to meet the promoter, and
everything was done in less than 30 minutes. He signed a cheque for $5,000
and got $5,000 in financing, for a total investment of $10,000. He was told
that $5,000 would be returned to him.
[89]
In Mr. Toutounji's
case, this return was made on June 1, 1993, and was in consideration of the
transfer, by Mr. Toutounji, of his interest in Mini-Robots. It served
to cancel the loan that Mr. Toutounji had taken out on November 13.
[90]
Mr. Toutounji testified
as follows: [TRANSLATION] ". . . I took an active part in
the way I was asked to, at the meetings we were told to attend . . ." However, he was
disappointed because he was a scientist by training and was hoping to
contribute to developing the sensors necessary for the Mini‑Robot. He was
never able to make such a contribution at the meetings.
[91]
There was never any
question of Mr. Toutounji meeting with the other partners and making business
decisions.
[92]
Mr. Toutounji agrees
that if the project had succeeded, the promoter and others working with the
promoter would have made money, and he says that his role was to help out at
the beginning by investing money to enable someone else to operate a business.
Other testimony
Testimony of Simon Beauregard
[93]
Simon Beauregard, an
auditor at the Canada Revenue Agency (CRA), testified about the audit of SRET.
[94]
He discovered, among
other things, that SRET had no bank account or accounting books. All the
cheques from investors were deposited into the accounts of Geyser Informatics or
Infotique Tyra.
[95]
He made the following
discovery as well. SRET's promoter registered the entity's business name on
June 29, 1988.
In the registration declaration, the promoter said that he had no partners. On November 27, 1989,
the promoter filed a dissolution document, stating that he had ceased doing
business on November 27, 1989, and that he was the only person who
had been carrying on business.
On the same day, the promoter's brother-in-law registered a business name for
SRET and declared that he was the only person carrying on business.
[96]
He testified about the
work that he and others did, examining the numerous related partnerships, their
accounts, and the CRA's conclusion that more than half of SRET's expenditures
should be disallowed, including the expenditures claimed in relation to payments
made to CATK in Moscow and Challenge SA in France. He also testified about
the money (an amount equal to 50% of each investor's investment) used to buy
the investors' interests in SRET.
Testimony of Christian Dion
[97]
Christian Dion, a team
leader at the Canada Revenue Agency (CRA), testified about the audit of Mini-Robots.
He explained the work that was done in order to examine a large number of
related partnerships, their accounts, the expenditures claimed, and how the CRA
came to the conclusion that more than one-half of the expenditures claimed in
1990 and 1991 should be disallowed, including, among other things, expenditures
claimed for supplies by CATK in Moscow and Pacific Master Trading Ltd. in Asia.
There are certain other expenditures which the CERA concluded were not in the
nature of research expenditures.
Testimony of Jean St-Pierre (expert)
[98]
Jean St-Pierre is an
engineer with the CRA. He was qualified as an expert witness, and he testified
about his report on the research done by Mini‑Robots.
[99]
While he did find that
there was valid experimental development, he also found that the dollar amount
of the expenditures claimed was unrealistic.
[100]
He testified about the
CATK invoices and explained why he had doubts about the invoices, which seemed
completely unrealistic to him.
[101]
He also explained why
he doubted other research expenditures that were claimed.
[102]
His report was limited
to the years 1990 and 1991.
Testimony of Gabriel Caponi
[103]
Mr. Caponi is a
senior advisor with the office of the Deputy Commissioner for the CRA's Regional
Office. In 1993, he was assigned to the R&D sector of the CRA, and was part
of a team of auditors that examined the partnerships used as R&D tax
shelters.
[104]
He was assigned to the
Department of Justice Canada in 1995-1996 for roughly one year so that, among
other things, he could help examine the SRET and Mini-Robots files.
[105]
He examined those files
and prepared the diagrams at tab 104 of Exhibit I‑3 (SRET) and tab
304 of Exhibit I‑9 (Mini-Robots, 1990 and 1991). The diagrams summarize
the very complex movements of funds among several partnerships.
[106]
Mr. Caponi explained
how he prepared the two diagrams.
[107]
He also testified about
information obtained from the French tax authorities in September 1993 further
to a request under the tax agreement between Canada and France. The information
was related to the fact that Challenge SA had not supplied any software or
electronic equipment.
The last three witnesses
[108] The Respondent called three other witnesses,
whose testimony was primarily related to the ancillary arguments. The witnesses
were Jean‑Marc Boucher, the manager of the scientific research audit
section in Montréal; Normand Bergeron, a financial analyst who was an
investigator with the Commission des valeurs mobilières du Québec [Quebec
securities commission] from 1985 to 1995, and Serge Huppé, an appeals
officer who was at the CRA's Ottawa headquarters when he was involved with
these files.
Analysis
Were the Appellants specified members by virtue of
being limited partners?
[109]
Paragraph 96(1)(g)
of the Income Tax Act ("the ITA") provides:
96.(1) General rules. Where a taxpayer is a
member of a partnership, the taxpayer's income, non-capital loss,
net capital loss, restricted farm loss and farm loss, if any, for a taxation
year, or the taxpayer's taxable income earned in Canada for a taxation year, as
the case may be, shall be computed as if
. . .
(g) the amount, if any, by which
(i) the loss of the partnership for a taxation year from any
source or sources in a particular place,
exceeds
(ii) in the case of a specified member (within the meaning of the
definition "specified member" in subsection 248(1) if that
definition were read without reference to paragraph (b) thereof) of the
partnership in the year, the amount, if any, deducted by the partnership
by virtue of section 37 in calculating its income for the taxation year
from that source or sources in the particular place, as the case may be . . .
. . .
were the loss of the taxpayer from that source or from
sources in that particular place, as the case may be, for the taxation year of
the taxpayer in which the partnership's taxation year ends, to the extent of
the taxpayer's share thereof.
[Emphasis added.]
[110] The definition of "specified member"
in subsection 248(1) of the ITA, read without reference to paragraph (b)
of that subsection, is as follows:
248. (1) In this Act,
"specified member" of a partnership in a
fiscal period or taxation year of the partnership, as the case may be, means
(a) any member of the partnership who is a
limited partner (within the meaning assigned by subsection 96(2.4)) of
the partnership at any time in the period or year . . .
[Emphasis added.]
[111] Subsection 96(2.4) of the ITA provides as
follows:
96(2.4) [Limited partners]. For the purposes
of this section and sections 111 and 127, a taxpayer who is a
member of a partnership at a particular time is a limited partner of
that partnership at that time if the taxpayer's partnership interest is not an
exempt interest at that time (within the meaning assigned by
subsection 2.5)) and if, at that time or within three years after that
time,
(a) by operation of any law which governs the partnership
arrangement, the liability of the taxpayer in the taxpayer's capacity as a
member of the partnership, is limited;
(b) the taxpayer or a person with whom the taxpayer
does not deal at arm's length is entitled to receive an amount or obtain a
benefit that would be described in paragraph (2.2)(d) if it were read
without reference to subparagraphs (2.2)(d)(ii) and (vi);
(c) one of the reasons for the existence of the taxpayer who
owns the interest
(i) may reasonably be considered to be to limit the liability of any
other person with respect to that interest, and
(ii) may not reasonably be considered to be to permit any person who
has an interest in the taxpayer to carry on that person's business (other than
an investment business) in the most effective manner; or
(d) there is an agreement or other arrangement for the
disposition of an interest in the partnership and one of the main reasons for
the agreement or arrangement may reasonably be considered to be to attempt to
avoid the application of this subsection to the taxpayer.
[Emphasis added.]
[112] Lastly, paragraph 96(2.2)(d), read
without reference to subparagraphs 96(2.2)(d)(ii) and (vi), states:
. . .
(d) where the taxpayer or a person with whom the
taxpayer does not deal at arm's length is entitled, either immediately or in
the future and either absolutely or contingently, to receive or obtain any amount
or benefit, whether by way of reimbursement, compensation, revenue guarantee or
proceeds of disposition 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 taxpayer may sustain by reason of being a member of the
partnership or by reason of holding or disposing of an interest in the
partnership, the amount or benefit, as the
case may be, that the taxpayer or the person is or will be so entitled to
receive or obtain, except to the extent that the amount or benefit is included
under subparagraph 66.1(6)(b)(ix), 66.2(5)(b)(xi) or 66.4(5)(b)(viii)
in respect of the taxpayer or the entitlement arises
(i) by virtue of a contract of insurance with an insurance corporation
dealing at arm's length with each member of the partnership under which the
taxpayer is insured against any claim arising as a result of a liability
incurred in the ordinary course of carrying on the partnership business,
. . .
(iii) as a consequence of the death of the taxpayer,
(iv) by virtue of an agreement under which the taxpayer may
dispose of the partnership interest for an amount not exceeding its fair market
value, determined without reference to the agreement, at the time of the disposition.
(v) by virtue of a revenue guarantee or other agreement in respect
of which gross revenue is earned by the partnership except to the extent that
the revenue guarantee or other agreement may reasonably be considered to ensure
that the taxpayer or person will receive a return of a portion of the taxpayer's
investment,
. . . or
(vii) because of an excluded obligation (as defined in subsection
6202.15(b) of the Income Tax Regulations) in relation to a share issued
to the partnership by a corporation,
. . .
[Emphasis added.]
[113]
The consequence of
these provisions is that if an Appellant is a specified member at any time in
the fiscal year in issue, that Appellant cannot deduct his or her share of the
losses of SRET or Mini-Robots.
[114]
He or she will, among
other things, be a specified member at a time of the year if, at that time or
within three years after that time, he or she is entitled to receive or obtain
any amount or benefit ". . . whether by way of
reimbursement, compensation, revenue guarantee or proceeds of disposition or in
any other form . . . granted . . . for the purpose of reducing the impact, in
whole or in part, of any loss that the taxpayer may sustain by reason of . . .
holding or disposing of an interest in the partnership, except to the extent
that the amount or benefit . . . arises by virtue of an agreement under which
the taxpayer may dispose of the partnership interest for an amount not
exceeding its fair market value, determined without reference to the agreement,
at the time of the disposition."
[115]
I have no doubt that,
in every case, except those of Mr. St‑Pierre and Mr. Lafontaine, there was, at
the very moment that the investment was made, an agreement under which each Appellant
would receive an amount equal to 50% of his or her investment, a few weeks or
months after the date of the investment,
in consideration of the transfer of the interest that they held in SRET or
Mini-Robots.
[116]
Since the Appellants
could not expect to receive any other amount from SRET or Mini-Robots, the only
conceivable purpose of returning the 50% was to reduce the impact, in whole or
in part, of the loss that they would necessarily sustain by investing in SRET or
Mini‑Robots (were that 50% not returned to them).
[117]
The amount equal to 50%
of the investment could not reflect the fair market value of the interest at
the time of its disposition because the 50% was fixed at the time the interest
was acquired. The success of a research project cannot be known in advance.
[118]
Consequently, the Appellants,
except Mr. St-Pierre and Mr. Lafontaine, were specified members who could
not deduct the losses.
[119]
A specified member
cannot claim his or her share of the investment tax credits related to the
scientific research and experimental development expenditures. This results
from paragraph 127(8)(a) and the definition of "investment tax
credit" in subsection127(9) of the ITA.
[120]
Consequently, the Appellants,
except Mr. St-Pierre and Mr. Lafontaine, cannot claim the investment
tax credits.
[121]
For somewhat different
reasons, the same result applies to Mr. St‑Pierre and Mr. Lafontaine;
they are not entitled to the losses and income tax credits claimed.
Were the Appellants passive specified
members?
[122] I have already established that the Appellants
come within paragraph (a) of the definition of "specified member"
in subsection 248(1) of the ITA. Do they also come within paragraph (b)
of that definition? Paragraph 248(1)(b) reads:
248(1) In this Act,
"specified member" of a partnership in a
fiscal period or taxation year of the partnership, as the case may be, means
. . .
(b) any member of the partnership, other than a member
who is
(i) actively engaged in those activities of the partnership business
that are other than the financing of the partnership business, or
(ii) carrying on a similar business as that carried on by the
partnership in its taxation year, otherwise than as a member of the
partnership,
on a regular, continuous and substantial basis throughout that part
of the period or year during which the business of the partnership is
ordinarily carried on and during which the member is a member of the
partnership;
[123]
Several Appellants were
not engaged at all. The most active ones attended a few meetings, but their involvement
was limited and was merely reactive to what they were asked to do.
[124]
This does not
constitute active engagement in one or more of the partnerships in question on
a regular, continuous and substantial basis.
[125]
Consequently, the Appellants
come within paragraph (b) of the definition of "specified member"
in subsection 248(1) of the Act. Thus, they cannot claim the investment
tax credits under paragraph 127(8)(a) and the definition of "investment
tax credit" in subsection 127(9).
Were the Appellants members of genuine partnerships?
[126]
In Backman v. Canada,
2001 SCC 10, [2001] 1 S.C.R. 367, the Supreme Court of Canada held as
follows:
17 The term "partnership" is not defined in the Act. .
. .We are of the view that, where a taxpayer seeks to deduct Canadian
partnership losses through s. 96 of the Act, the taxpayer must satisfy the
definition of partnership that exists under the relevant provincial or
territorial law. . . . It follows that even in respect of foreign partnerships,
for the purposes of s. 96 of the Act, the essential elements of a partnership
that exist under Canadian law must be present . . .
25 . . . In other words, to ascertain the existence of a
partnership the courts must inquire into whether the objective, documentary
evidence and the surrounding facts, including what the parties actually did,
are consistent with a subjective intention to carry on business in common with
a view to profit.
[127]
The law applicable to
partnerships is the law of the province in which the partnership was created. In
this case, that province is Quebec.
[128]
The law in force at the
time of the events in issue is set out in the Civil Code of Lower Canada,
specifically article 1830:
It is essential to the contract of partnership that it should be for
the common profit of the partners, each of whom must contribute to it property,
credit, skill, or industry.
[129]
A partnership can only
exist if three conditions are met:
(a) a spirit of
cooperation;
(b) the contribution, that
is to say, a combining of property, knowledge or activities; and
(c) a sharing of pecuniary
profits resulting from this combining.
[130] The Quebec Court of Appeal examined these
conditions in Cimon v. Arès, 2005 QCCA 9:
[TRANSLATION]
49 Article 2186 of the Civil Code of Québec
distinguishes between a contract of partnership and a contract of association:
A contract of partnership is a contract by which the parties, in
a spirit of cooperation, agree to carry on an activity, including the
operation of an enterprise, to contribute thereto by combining property,
knowledge or activities and to share any resulting pecuniary profits.
A contract of association is a contract by which the
parties agree to pursue a common goal other than the making of pecuniary
profits to be shared between the members of the association.
(Emphasis added.)
50 The first paragraph of that article essentially restates
the substance of article 1830 C.C.L.C. and specifies, like the prior cases
and scholarly writing, that the profits sought must be pecuniary. The following
essential conditions must be met in order for a partnership to be formed:
- a spirit of cooperation;
- the contribution, that is to say, a combining of
property, knowledge or activities; and
- a sharing of pecuniary profits resulting from this
combining.
SPIRIT OF COOPERATION
51 The parties must have a common intention to
form a partnership. The affectio societatis is often the criterion
that distinguishes the contract of partnership from other forms of association
that might at first appear similar. In the absence of a written contract,
courts had to glean this intent from what the parties actually did and from the
circumstances surrounding their professional relationships.
52 The intention to form a partnership or the spirit of
cooperation is a subjective element, and Justice Lamer, in Beaudoin-Daigneault,
specified the analytical framework for assessing this crucial element:
[T]o determine whether there was an affectio societatis, [the Court must]
establish whether from the facts it could be said that there was [TRANSLATION] "a
collection of presumptions precluding any serious objection, even though each
one of them taken separately might give rise to some doubt."
. . .
SHARING OF PECUNIARY PROFITS RESULTING FROM THE COMBINING
65 Article 2186 C.C.Q. requires that the partners
share the pecuniary benefits resulting from the cooperative activity or
enterprise. It must be specified that mere savings do not constitute a profit;
a profit is [TRANSLATION] "a gain, of money or assets, which increases a
person's fortune."
[131]
Are the elements of a
true partnership present?
[132]
Whether it was SRET, or
Mini-Robots in 1990, 1991 or 1992, it is clear that the Appellants had no
cooperative intention to carry on an R&D business in common and share the
profits from that business.
[133]
Although some of the Appellants
might incidentally have wanted to help with research, all the Appellants made
their investments with a view to obtaining the tax advantages, which, combined
with a return of 50% of their investment to them, would yield them a profit. I am satisfied
that all the Appellants considered their investment quite safe, even though
some of them expressed some worry that the 50% might not be returned to them.
[134]
They did not expect
SRET or Mini-Robots to produce profits to which they would be entitled as
partners.
[135]
They expected to enter
and leave the partnership within a few weeks or months.
[136]
Apart from the investment
money, the Appellants provided little or no cooperation, since the individuals
who participated most in the partnerships merely attended a few meetings or did
what the organizers asked them to do. This is well reflected in the
testimony of Mr. Toutounji, who conceded that he offered start-up assistance
that enabled someone else to carry on a business.
[137]
These were not
contracts where the parties agreed, in a spirit of cooperation, to carry on an
activity together.
[138]
There was no true legal
partnership, and, consequently, the Minister properly disallowed the loss
deductions and investment tax credits.
Which R&D expenditures were truly
incurred?
[139] Given my findings regarding the other
arguments, it is unnecessary for me to determine the amount of R&D
expenditures actually incurred. However, given the Respondent's extensive
evidence on this point, I will summarize a few findings.
[140]
For the following
reasons, it is clear to me that much less than half the amounts claimed was
spent on R&D. First, to use the example from paragraph 5, the
evidence shows that, of the $10,000 received from an investor to fund $10,000
in research, the amount truly invested was not $10,000, since the money
returned to the investor came from the partnerships themselves. In reality, the
partnerships never really got more than $5,000 in available funds based on the
example. Thus, the partnerships had access to only 50% of the amounts invested.
[141]
In addition, a 10%
commission — $1,000 in the typical example — was generally paid to the sellers of the
partnership interests in question.
The amounts spent on this commission could not have been used for research.
[142]
Looking at the
situation from yet another angle, the Respondent submitted ample evidence
showing that some of the R&D expenditures were not actually incurred in
1989, 1990 or 1991. For example, I am satisfied that the following alleged expenditures
were never incurred:
(a) roughly $2,500,000
paid to Challenge SA in France in 1989;
(b) more than $1,500,000
paid to CATK in Russia in 1989;
(c) more than $700,000
paid by Mini-Robots to CATK in 1990; and
(d) more than $1,200,000 in
purchases made through Pacific Master in Asia in 1991.
[143]
In light of the
evidence, there is no doubt that other expenditures were not R&D
expenditures either.
[144]
The Minister's evidence
with respect to the R&D expenditures was not challenged.
[145]
It is unnecessary for
me to analyze the Respondent's other arguments.
III. The ancillary arguments
[146] A great deal of evidence was submitted
concerning the Minister's conduct and the parties' expectations. This Court's
jurisdiction in an appeal from an assessment is limited to the question: "Does
the assessment comply with the ITA?" It is therefore unnecessary for me to
examine this aspect of this case.
[147]
However, given all the
evidence submitted with regard to the Minister's conduct and the parties'
expectations, I will simply make the following comments.
[148]
Several of the Appellants
testified that they obtained information from the CRA or the Ministère du Revenu
du Québec in order to ensure that the investment was valid. However, their
statements on this subject were very general. Nothing in this aspect of the
evidence would lead me to conclude that the tax authorities assured the Appellants
that the specific projects in question in these appeals were valid. It is
possible, as one of the Appellants acknowledged, that someone told them very
generally that there could be R&D investment projects giving rise to
deductible losses and tax credits. This is very different from an assurance
regarding the specific investments.
[149]
Nothing in the evidence
has satisfied me that the ancillary arguments were justified in fact or in law. I would add
that the evidence shows that the Respondent made determined and reasonable efforts
to settle the disputes.
IV. Conclusion
[150]
I have a lot of
sympathy for the Appellants. I have no doubt that, at the time that they
invested, they believed these were valid tax shelters. Their situation is
regrettable, but the Minister is not the source of their problems.
[151]
For the above reasons,
the appeals will be dismissed, without costs.
Signed at Ottawa, Canada, this 13th day of
July 2009.
"Gaston Jorré"
Translation
certified true
on this 8th day of
October 2009.
Brian McCordick,
Translator
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