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Citation: 2006TCC73
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Date: 20060228
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Docket: 98-3664(IT)I
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BETWEEN:
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MARIO BINETTE,
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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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AND
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Docket: 98-3617(IT)I
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DANIEL HARVEY,
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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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AND
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Docket: 98-3674(IT)I
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GILLES LORANGER,
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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 JUDGMENT
Bédard J.
[1] At the Appellants' request, these appeals were heard on common evidence. Pursuant to the informal procedure, the Appellants are appealing from assessments established against them for the 1987 taxation year by the Minister of National Revenue (the "Minister"). The Minister disallowed Gilles Loranger's investment tax credit of $2,600 for a $13,000 investment he made in 1987 in the general partnership Audio Digitale enr. (the "partnership"). The Minister also disallowed Daniel Harvey's investment tax credit of $2,800 for a $14,000 investment made in 1987 in the partnership. Lastly, he disallowed Mario Binette's investment tax credit of $1,200 for a $6,000 investment he made that same year in the partnership.
Issues
[2] The Appellants' investment tax credit was initially disallowed under section 27 of the Income Tax Act (the "Act") and section 2900 of the Income Tax Regulations (the "Regulations"). The Respondent is now relying on alternative arguments to disallow the credit.
[3] The Respondent claims these new arguments despite the fact that the Minister agreed to consider that the Appellant's partnership holdings led to a taxable capital gain, for which the Appellants requested the tax exemption under section 110.6 of the Act. By agreeing there was a capital gain resulting from the partnership holdings, the Minister initially recognized that a partnership genuinely existed. Moreover, the Minister also recognized a business loss for the total amount of the investment. By recognizing such a loss, the Minister admitted that a business existed. The Minister now states the opposite in support of his claim that the Appellants cannot actually benefit from the investment tax credit. Lastly, the Respondent relies on another alternative argument to disallow the investment tax credit. She claims that the Appellants are limited partners within the meaning of subsection 96(2.4) of the Act and as such, their share in the partnership's loss and tax credit was limited to their at-risk amount, in accordance with subsections 96(2.1), 96(2.2), 127(8.1), and paragraph 96(1)(g) of the Act.
Preliminary Statements
[4] Claude M. Papion testified as an expert witness in support of the Respondent's position. Sonia Borin also testified in support of the Respondent's position; she is a CCRA human resources advisor who acted as objections officer and who, from 1992 to 1995, coordinated all the notices of objection filed by the associates of nine partnerships in the Zuniq group. Lastly, Yves Renaud, chartered accountant, testified in support of the Respondent's position. Messrs. Binette and Loranger testified in support of their position. However, Mr. Harvey did not testify. It must be noted that the Appellants did not submit any documentary evidence in support of their position.
Testimony of Mr. Loranger
[5] Mr. Loranger invested $13,000 in the partnership following an information meeting organized by the promoters of the project that he attended with some 15 people he did not know. He did not think to ask for proof that the partnership existed, or for a list of the other members of the partnership. He had no idea how many associates purchased a share in the partnership. He did not know that the partnership had collected $750,000 and that it had given a research contract in this amount to the company Zuniq Corp. ("Zuniq"). He never participated in any associates meeting. He said that the partnership never provided any feasibility studies or marketing agreement.
[6] Moreover, he admits that when he invested, he already knew that his shares would be bought and he would recover half of his investment. He also stated that through tax benefits, he would recover not only the other half of his investment, but would also earn a return on his investment.
[7] He added that following his decision to invest in the partnership, the promoters of the project asked him to go to the offices of the Société d'entraide économique Métropolitaine de Montréal ("SEÉM"). He then signed many documents, the content of which he cannot recall. He does, however, recall that the SEÉM granted him a $13,000 loan, which was used for his investment in the partnership. He explained that the SEÉM received the proceeds of his partnership holdings directly ($6,500), and it used the proceeds to reimburse half of the loan it had granted. He added that he reimbursed the balance of the loan in June 1988 from the tax refund received for the 1987 taxation year, from the business loss of $10,400 and a $2,600 tax credit generated by his $13,000 investment in the partnership.
Testimony of Mr. Binette
[8] Mr. Binette's testimony was vague, unspecific, imprecise and sometimes unintelligible. Mr. Binette's lapses in memory left me mystified. At most, I learned the following from his testimony:
(i) He had invested $6,000 of his own funds following an information meeting organized by the promoters of a research project at which 20 other people were in attendance, none of whom he knew. The most he recalled was that the organizers of this information and promotion meeting spoke of tax credits and job creation, and distributed information documents, the content of which he no longer recalled.
(ii) He did not know the other associates of the partnership.
(iii) He did not participate in any associates meetings.
(iv) He was not aware of a marketing or feasibility plan for the projects allegedly promoted by the partnership.
(v) He did know the researchers assigned to the research, or the officers of the partnership, nor did he know the location of the head office of the partnership, or where the books and registries of the partnership were held. He did not even know that the partnership had granted a research contract to Zuniq.
(vi) He did not recall the events surrounding the sale of his share in the partnership. He did not even recall having received a $3,000 check linked to the sale of his share in the partnership.
[9] Lastly, I must point out that Mr. Binette's testimony did not help me understand the reason or reasons that led him to make such an investment.
Testimony of Ms. Borin
[10] In this case, Ms. Borin had noted that the partnership was incorporated according to Quebec's legislation on November 9, 1987, by André Gauthier and Ann Nguyen, Vo Hoang's wife (Exhibit 1-2, Tab 2). On November 9, 1987, the partnership granted Zuniq (of which Vo Hoang was chairperson and majority shareholder) a contract (Exhibit I-2, Tab 6) to carry out scientific research and experimental development of a prototype of a high-fidelity digital audio processing system to hold an audio signal on the magnetic discs of an IBM-PC personal computer (or compatible). According to the contract, all the development, construction and trial work was to be completed before December 31, 1987. On December 2 and 3, 1987, the partnership collected $750,000 from 48 associates (Exhibit I-2, Tab 3). On December 7, 1987, the partnership issued a $750,000 check payable to Zuniq (Exhibit I-2, Tab 5), although on December 31, 1987, Zuniq billed the partnership (Exhibit I-2, Tab 7) $750,000 for research work, which was the total amount collected from the 48 associates. On December 4, 1987, Zuniq signed sub-contracts for the research contract with three related companies, namely Zuniq Data Corp., Dias Informatique inc. and Data Age Corp. for $132,000, $376,000 and $65,000 respectively (Exhibit I-2, Tabs 8 and 9). On December 7, 1987, Zuniq issued a check jointly payable to Dias Informatique inc. and to SEÉM for $375,000 (Exhibit I-5). On January 15, 1988, Dias Informatique inc. gave SEÉM the order to pay $374,800 to UBC (Exhibit I-5). UBC bought back the associates' shares in January 1988 for an amount equal to 50% of their seed money (Exhibit I-2, Tab 11, and Exhibit I-5). To pay the buyback price of the associates' shares, UBC gave SEÉM the order to pay the associates. Ms. Borin said she could not find any information about UBC, except that its head office appeared to be in the state of Massachusetts. She did note that UBC had authorized Vo Hoang's wife to sign payment orders in its name. The partnership only had one fiscal year of 52 days. The end of the fiscal year (December 31, 1987) corresponded to the deadline Zuniq had and the deadline Zuniq had given its sub-contractors to complete the research work. The partnership claimed a loss that corresponded to the amount of the associates' contributions and the amount of the research contract granted to Zuniq. The people in charge of the research project were Le H. Huynh, Ph.D., project director, Alessandro Malutta, M.Sc. (INRS Telecom), and Huan Nguyen, B.Sc.A. (computer engineer). Further to the objection notices, in 1994 Ms. Borin hired Mr. White, an external scientific reviewer, to reassess the partnership's scientific research activities. During a conference call in which Messrs. White and Le Huynh also participated, Mr. Le Huynh confirmed that there was no documentation to support the scientific project other than what had already been provided to Georges E. Hudson, the external science auditor and author of the scientific research audit report dated December 26, 1989, that found that the project submitted by the partnership did not meet the essential criteria defined in the Information Circular 86-4R2, namely, the criterion of scientific uncertainties and that of technological advancement. Mr. White also found, in June 1984, that the project was not admissible (Exhibit I-2, Tab 21).
[11] Ms. Borin, we must remember, is the CCRA human resources advisor who acted as objections officer and who coordinated all the objection notices filed by the associates of the nine general partnerships. She realized the 12 partnerships of the Zuniq Group (Exhibit I-3) were managed by the same group of people, Mr. Vo Huang being the coordinator. For each partnership, there was only one fiscal year, the duration of which varied from a minimum of 52 days to a maximum of 11 months for the very short existence of these partnerships. In all cases, the end of the fiscal year corresponded to the deadline given to Zuniq or another partnership related to Zuniq to complete research work. In all cases, the investors contributed to the partnerships very shortly before the end of the fiscal year. Each investor's share was bought back by a partnership related to Zuniq for 50 to 60% of the initial funding. The period during which each investor held shares was very short, varying from a few weeks to three or four months. In all cases, each general partnership claimed a loss that corresponded to the total amount of the contribution and the research contract granted to Zuniq or a related partnership.
[12] Ms. Borin found that none of the Appellants intended to work together on a scientific research project and she therefore doubted the actual existence of these partnerships. She also found that the partnership did not actually operate a business and was actually created as a sham to allow Zuniq to acquire 50% of the seed money provided by the investors, while allowing them to lose nothing and even gain something through the tax benefits related to their investment. She therefore considered that the tax credit, which had already been disallowed because there was no admissible scientific research under the terms of section 2900 of the Regulations, should also be disallowed because the partnership had no legal existence and did not operate a business.
Testimony of Mr. Papion
[13] In December 2005, Claude Papion, a computer expert, was mandated by the Respondent to carry out an assessment of the requests regarding the partnership's scientific research activities using the documentation submitted by the partnership and the documentation related to the assessment of admissibility of the partnership's prior research work, carried out by Georges Husson, external scientific reviser who had done work for Revenue Canada. Under his mandate, Mr. Papion was to report to the Respondent as an expert on the admissibility of the work accomplished by the partnership in accordance with subsection 2900(1) of the Regulations. This report dated January 17, 2005, was submitted as evidence by the Respondent (Exhibit I-1). Mr. Papion therefore testified as an expert in support of the Respondent's position.
[14] To determine the admissibility of the work accomplished by the partnership, Mr. Papion considered three criteria used by Revenue Canada and described in the Information Circular 86-4R2, namely:
- scientific or technological advancement;
- scientific uncertainty;
- scientific or technical content; this criterion consists of first determining what resources were used and whether they were reasonable and second, whether the resources were used to carry out scientific or technical research.
[15] Mr. Papion stated that, among others, he had examined the following:
(i) the 661 form (Exhibit I-2, Tab 16). During the 1987 fiscal year, the partnership submitted a claim form for scientific research and experimental development expenses, along with a description of the project and the resumé of the scientists allegedly granted the project;
(ii) an 80-page document dated September 1989, "Anti-Aliasing Filter, by Le H. Huynh, P.h.D." (Exhibit I-2, Tab 20);
(iii) the June 7, 1991, letter, "Réponse au rapport de vérification de recherches scientifiques relativement au projet du contribuable Société de Recherche Audio-Digitale enr." [Reply to Audit of Scientific Research Regarding the Project of Taxpayer Société de Recherche Audio-Digitale enr.] signed by Hien Vohoang (Exhibit I-2, Tab 18);
(iv) the 4-page report of the audit of scientific research produced by Mr. Husson dated December 26, 1989 (Exhibit I-2, Tab 19) and his addendum to this report dated June 21, 1991 (Exhibit I-2, Tab 17) in response to the June 7, 1991, reply mentioned above.
[16] Mr. Papion noted the following concerning the documentation submitted:
(i) The purpose of the project submitted by the partnership was to develop a prototype of a digital processing system for a high-fidelity audio signal and to create an anti-aliasing filter with variable cut-off frequency and digital control. He noted that the project, as clearly indicated by the partnership, did not result in anything concrete in terms of new or improved products; in other words, he noted from the documentation submitted that no prototype was constructed and the project did not progress any further than the model and simulation steps.
(ii) There was no fundamental technological uncertainty for the prototype the partnership had planned. In fact, he noted that in 1986-1987 not only was it possible to create the anti-aliasing filter the partnership wanted to create but it had actually been done previously with a 16-bit processor. The processor made the project possible with only simple standard programming. The partnership had only to follow the processor's technical characteristics, which indicated the steps to follow.
(iii) The 80-page document dated September 1989 (Exhibit I-2, Tab 20) submitted by Le H. Huynh plainly described the main elements of texts published and recommended by universities in the field of systems science.
(iv) There were no hypotheses to be tested (meaning problems to solve) and no summary of hypotheses tested or results obtained as the work progressed. There was no documentation to show the role of each of the researchers in completing the project. In other words, from the documents examined, he could not find any element whatsoever that would lead him to confirm that admissible work actually took place.
(v) The scientists who were granted the project were very qualified.
(vi) The $750,000 expenses submitted in support of the scientific research and experimental development seemed unlikely to him, considering the employees assigned to the project and the short period of time (52 days) these employees had to complete the project.
Analysis
[17] The Appellants did not convince me that the Minister erred in finding the partnership's research project inadmissible, in this case, by using the approach presented in Information Circular 86-4R2 to establish the criteria to be reviewed in order to determine whether a project is admissible. It seems to me that the courts have accepted this approach.[1] I also agree with counsel for the Respondent that the Appellants were not able to present concrete evidence that identified the uncertainties or the progress of the projects. In fact, the Appellants did not submit any evidence on this subject. They simply criticized Mr. Papion for having made a finding on the admissibility of the project without previously having consulted the scientists involved in the project and without having tried to obtain the summaries of the hypotheses tested and the results obtained as the work progressed. I would like to remind the Appellants that Mr. Papion did not review these summaries because they were not part of the documentation submitted to him by the Respondent, since the Respondent had not been able to obtain them from the partnership or Zuniq despite many attempts. Could this be because the summaries simply did not exist? I would remind them that the burden of providing evidence to this effect was theirs. Their criticism of the Respondent and of Mr. Papion are unjustified and unwarranted in this case. I understand the Appellants' frustration to a certain point. They have only to address the actual people responsible for this mess, for which they are partially responsible through their negligence, recklessness and their naïveté.
[18] In my opinion, the Appellants did not show there was genuine scientific research and experimental development in the project in which they had invested. This being an essential condition to qualifying for an investment tax credit, the Appellants are therefore disallowed.
[19] This finding alone is sufficient to dismiss the appeals. The finding releases me from having to analyse the Respondent's alternative arguments.
[20] For all the above reasons, the appeals are dismissed.
Signed at Ottawa, Canada, this 28th day of February 2006.
Bédard J.
Translation certified true
on this 5th day of May 2006
Elizabeth Tan, Translator
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