Citation: 2006CCI420
Date: 20060721
Dockets: 1999-505(IT)I
2004-728(IT)I
BETWEEN:
BENOIT AMAR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif J.T.C.C.
[1] These are two
appeals relating to the 1988 and 1989 taxation years.
[2] The issue in docket
2004-728(IT)I is as follows:
·
Was
the Minister justified in refusing to allow the investment tax credit from 1988
to be carried over?
The issues in
docket 1999-505(IT)I are
as follows:
·
Was there a genuine
partnership, and if so, did it operate a business?
·
If so, was the
appellant a partner who was a limited partner in the alleged partnership,
within the meaning of subsection 96(2.4) of the Income Tax Act (the
“Act”), at a time during the year to which this appeal relates?
·
If so, was the
appellant a partner who was not regularly, continuously and substantially
actively engaged in the activities of the alleged partnership’s business during
the year in issue when the alleged partnership claims to have ordinarily
carried on its business, and who did not operate a business similar to the
business that the alleged partnership claims to have operated during the year
in issue?
·
Was the work presented
by the alleged partnership scientific research and experimental development?
·
Did the alleged
partnership have expenses in relation to scientific research and experimental
development during the taxation year in issue?
[3] In making and
justifying the assessments that have been appealed, the respondent assumed the
following facts:
Statement of facts, docket
2004-728(IT)I:
[TRANSLATION]
1. He denies all
of the allegations of fact and conclusions of law set out in the notice of
appeal that are not consistent with what follows.
2. During 1988,
the appellant invested in the alleged partnership, “Société d'informatique
A.H.D. enr.”
3. With respect to
the tax treatment claimed by the appellant for the year in issue, the Minister
denied the carry-over of the investment tax credit from 1988, in the amount of
$1,353.
4. The appellant
filed a notice of appeal in the Tax Court of Canada in relation to 1988, docket
number 99-505(IT)I.
5. In making and
upholding the reassessment for the taxation year in question, the Minister had
regard to, inter alia, the facts set out in the notice of appeal,
99-505(IT)I, a copy of which is attached hereto.
Statement of facts, docket
1999-505(IT)I:
1. The respondent
denies the facts alleged in paragraph 1 of the notice of appeal and adds that
there was no partnership during the period in issue.
2. He denies the
facts alleged in paragraph 2 of the notice of appeal.
3. He denies the
facts alleged in paragraph 3 of the notice of appeal and adds that the alleged
partnership did not carry on any genuine business.
4. He denies the
facts alleged in subsection 4 of the notice of appeal.
5. With respect to
paragraphs 5, 6 and 7 of the notice of appeal, he admits that in making the
initial assessment, the Minister of National Revenue allowed the deductions and
credits claimed and that a reassessment was made for the year in issue, but he
denies the rest as it is stated, the facts alleged therein.
6. He admits the
facts alleged in paragraphs 8, 9 and 10 of the notice of appeal, except for the
word [TRANSLATION] “Partnership”, which is denied.
7. He admits that
after an audit was done by Revenue Canada [TRANSLATION] “it was impossible to agree”, but he denies the
rest of paragraph 11 of the notice of appeal.
8. He admits
paragraph 12 of the notice of appeal.
9. He denies the
facts alleged in paragraph 13 of the notice of appeal and adds that the facts
alleged are not relevant to this appeal.
10. He takes notice
of the arguments made in paragraphs 14 and 15 of the notice of appeal.
11. He denies
paragraph 16 of the notice of appeal.
12. He denies
paragraph 17 of the notice of appeal as it is stated.
13. He denies
paragraph 18 of the notice of appeal.
14. With respect to
paragraph 19 of the notice of appeal, he takes notice of the argument made,
denies that it is correct and denies any facts that may be alleged therein.
15. With respect to
paragraph 20 of the notice of appeal, he admits that throughout the year the
corporation allegedly retained as a subcontractor was resident in Canada, but
he denies paragraph 20 of the notice of appeal.
16. With respect to
paragraphs 21, 22, 23 and 24 of the notice of appeal, he takes notice of the
arguments made, denies that they are correct and denies any facts that may be
alleged therein.
17. He denies
paragraphs 25 and 26 of the notice of appeal.
18. With respect to
paragraphs 27, 28, 29 and 30 of the notice of appeal, he admits that more than
90 days passed after the notice of objection was filed by the appellant, he
denies the other facts alleged therein as they are stated, and he adds that the
facts alleged are not relevant to this appeal.
19. In making the
reassessment in issue, the Minister of National Revenue assumed the following
facts, inter alia:
(a) LA SOCIÉTÉ
D'INFORMATIQUE A.H.D. ENR. (“the Partnership”) was created on February 2, 1988;
(b) in 1988, the
Partnership entered into an agreement with Zuniq Corp. (“Zuniq”) concerning the
performance of scientific research and experimental development work relating
to the “PERFIED” project;
(c) Zuniq
subsequently entered into an agreement with, inter alia,
Data Age Corp. and Dias Informatique (“the Zuniq group
corporations”). Those agreements related to the same project;
(d) Zuniq was
incorporated on March 25, 1985, with an object consisting of doing work
described as research and development. It was to perform various work, and for
that purpose various partnerships were created;
(e) the promoter
and organizer of the Partnership was Hien Vohoang (“Vohoang”), the prime mover
behind Zuniq;
(f) none of the
Zuniq group corporations deals at arm’s length with the others or with Zuniq
and Vohoang;
(g) the
work described by the Partnership (as scientific research and development
activity) is in no way scientific research and experimental development;
(h) the Partnership
had no expenses during the taxation year in issue relating to scientific
research and experimental development activities;
(i) for its fiscal
year ending on December 31, 1988, the Partnership claimed $1,493,044 which it
described as research expenditures under subparagraph 37(a)(i) of the Income
Tax Act;
(j) the $1,493,044
claimed was not an expenditure made by the Partnership on scientific research
and experimental development activities;
SUBJECT TO WHAT IS SUBMITTED ABOVE, THE
DEPUTY ATTORNEY GENERAL OF CANADA ADDS THE FOLLOWING:
20. The appellant
knew, at the time he acquired his share in the alleged Partnership, that he
would, within a short time, recover an amount equal to about 50 percent of his
share.
21. The appellant
had received a commitment from the promoters, the vendors, that he would,
within a short time, recover an amount equal to about 50 percent of his share.
22. All members of
the alleged Partnership received, within a short time after acquisition of
their shares, an amount equal to about 50 percent of their shares.
23. Zuniq, in
reality, had available to it only about 50 percent of the funds invested for
performing the obligations set out in the contract entered into with the
alleged Partnership.
24. The use of a
scheme to “buy back” the members’ shares for an amount equal to about 50
percent of their shares was, for the promoters and members of the alleged
Partnership, an essential characteristic of the “tax shelter” in which they
were the mutual vendors and purchasers.
25. The appellant was entitled to receive an
amount that he was given in order to eliminate or reduce the effect of a loss
arising from the fact that he had a share in the alleged Partnership.
26. The appellant benefited from a mechanism
providing for the disposition of his share in the alleged Partnership and of
which it is reasonable to think that one of the primary purposes was to try to
avoid the application of subsection 96(2.4) of the Income Tax Act.
27. Obtaining a reduction of his tax payable
under the Income Tax Act is the only reason why the appellant became a
member of the alleged Partnership.
28. The members of the alleged Partnership did
not know one another and did not actively work in the alleged Partnership.
29. The appellant is a partner who was not
regularly, continuously and substantially engaged in the activities of the
alleged Partnership’s business during the year in issue when the alleged
Partnership claims to have ordinarily carried on its business, and does not
operate a business similar to the business that the alleged Partnership claims
to have operated during that year.
30. The alleged Partnership had no reason for
its existence other than to provide a vehicle to generate income tax refunds
and an instrument for financing the corporations in the Zuniq group.
31. The appellant had no intention of entering
into a partnership contract; the appellant and the other contracting parties
did not intend to work together to generate profits for the alleged business.
32. In the circumstances, the activities that
the alleged Partnership considers to be research do not have any reasonable
expectation of profit, and so the alleged Partnership was not operating a
business in this respect.
1988
Taxation Year
[4] The Minister of
National Revenue (the “Minister”) refused to allow the appellant an investment
tax credit of $1,998.72 for an investment in the HAD partnership in 1988.
[5] The investment
tax credit was disallowed under section 37 of the Act and section 2900 of the Income
Tax Regulations (the “Regulations”).
[6] In his income tax
return, the appellant deducted only a portion of the investment tax credit,
amounting to $ 569.77.
[7] However, the
Minister allowed a deduction for all of the business loss claimed by the
appellant in relation to his investment in the partnership.
1989
Taxation Year
[8] The Minister disallowed the deduction of
$1,353.72, representing the portion of the investment tax credit that
was not used in 1988 and carried over to 1989 ($1,998.72 - $569.77).
[9] The appellant
represented himself at the hearing. Because he had the burden of proof, it
would have been usual for him to present his evidence first.
[10] To make his job
easier, and to ensure that he knew as accurately as possible why and how the
respondent had arrived at the assessments that he was challenging, it was
agreed that the respondent would present evidence first.
[11] The respondent gave
a very good summary of the evidence comprised of the testimony given
by Sonia Borin and the expert testimony given by Claude Papion.
The summary of that evidence, as prepared by counsel for the respondent, is
reproduced in the paragraphs that follow.
[12] Sonia Borin was the
objection officer and coordinator for all notices of objection filed by the
investors in 12 partnerships formed in the years 1986 to 1988 (“Zuniq group
partnerships”), including the computer partnership AHD Enr. (“the AHD
partnership”). She analyzed all of the information obtained by the Canada
Customs and Revenue Agency (“CCRA”) and her work was recorded in a report
entitled [TRANSLATION] “Objection Report”.
[13] The AHD partnership
is one of the 12 partnerships in the Zuniq group that was formed by
Hien Vohang and his group, which was composed primarily of close family
members and employees of Zuniq (“the Zuniq group”).
[14] The AHD partnership
was created on February 2, 1988. The founding members of the partnership were
Hien Vohoang and his wife, Anh Nguyen. Between May and September
1988, the AHD partnership collected $1,493,500 from 115 investors, including
the appellant.
[15] Hien Vohoang is
the sole shareholder, the president and the prime mover in
Zuniq Corporation Inc. (“Zuniq”). Zuniq claimed to be engaged in
various scientific research and experimental development work, and for that
purpose various partnerships were created in order to obtain financing.
[16] In 1988, the AHD
partnership entered into an agreement with Zuniq for the performance of
scientific research and experimental development work relating to a project
called “Perfied”. Zuniq allegedly entered into agreements relating to that
research project with Dias Informatique Inc., Data Age Corp. and Système Inar
(“Zuniq group corporations”). All of those corporations are related to Zuniq
or Hien Vohoang.
[17] In fact, Dias
Informatique Inc. uses the same address as Zuniq and the contact person for the
corporation is Lise Gauthier, a Zuniq employee. Data Age Corp. also
uses the same postal address as Zuniq and its sole shareholder is one of the
members of the Zuniq research team. As well, the director and sole shareholder
of Système Inar is Anh Nguyen, the wife of Hien Vohoang.
[18] According to the
invoices submitted by the AHD partnership, which contain no description of the
work done, the AHD partnership paid a total of $1,493,043 to Zuniq and the Zuniq
group corporations.
[19] The AHD partnership
submitted financial statements only for the 1988 taxation year, for a fiscal
year of 11 months ending on December 31, 1988. The partnership declared a net
loss of $1,492,544, including $1,472,393 as research and experimental
development expenditures. That loss corresponds, virtually entirely, to the
total contributions made by the investors.
Share Buy-back
[20] In January 1989, the
investors in the AHD partnership sold their shares for an amount equivalent to
50 percent of their initial investments.
[21] The assignment forms
show Dalat Investment Inc., another corporation in the Zuniq group, as the
purchaser of the investors’ shares. That corporation has filed no income tax
return with CCRA. Nonetheless, Anh Nguyen, the wife of Hien Vohoang,
signed assignment forms on behalf of that corporation in relation to another
partnership in the Zuniq group, the ALH partnership.
[22] Because of the
commitment he had received from the promoters, the vendors, the appellant knew,
at the time he acquired his share in the AHD partnership that he would, in a
short time, recover an amount equal to about 50 percent of his share.
[23] In fact, the return
on the appellant’s investment in the AHD partnership was derived from the tax
deductions and the short-term “buy-back” of his share for an amount equivalent
to 50 percent of his investment.
The Appellant’s Share
[24] At the hearing, the
appellant admitted that he had taken part in four or five meetings at the Zuniq
offices with Mr. Vohoang and a few scientists, at which the appellant made some
comments about the objectives of the research; however, he was not continuously
and regularly involved in decisions or in the operations of the partnership.
[25] In fact, the members
of the partnership, including the appellant, did not know one another and did
not actively work in the partnership.
Zuniq
Group Partnerships
[26] The documents
examined by Ms. Borin also led her to conclude that the 12 partnerships in the
Zuniq group were all managed by the Zuniq group and operated in the same way.
In fact, they used the same postal address as Zuniq.
[27] As with the AHD
partnership, before the end of the subscription period, the partnerships
entered into a research contract with Zuniq or a corporation in the Zuniq group
for an amount equivalent to the total subscriptions obtained. Subsequently,
often on the same day, Zuniq entered into subcontracts with other corporations
in the group.
[28] For each of the
partnerships, there was only one financial statement, for a fiscal year ranging
from 52 days to 11 months and ending on December 31. In all cases, the end of
the fiscal year corresponded to the time given to Zuniq and the other
corporations in the Zuniq group (subcontractors) to complete the research
work. The financial statements always showed a loss caused by research and
experimental development expenditures, the total of which was virtually
equivalent to the total invested by the investors and the amount shown in the
research contract that Zuniq or a corporation in the Zuniq group entered into.
[29] The investors
subscribed to the partnership shortly before the end of the only fiscal year.
At the beginning of the next year, each investor’s share was “bought back” by a
corporation in the Zuniq group for an amount ranging from 50 to 60 percent
of the initial investment.
[30] Consequently, the
period for which the investors’ shares were held ranged from a few weeks to a
few months (eight months at most). As well, no evaluation of the fair market
value of the shares of the 12 partnerships in the Zuniq group was submitted to
justify the “buy-back” price.
Testimony of Claude
Papion
[31] Claude Papion
testified as an expert witness, recognized by the Court.
[32] The AHD partnership
claimed that it had spent $1,493,044 on research and development activities in
1988.
[33] To determine whether
the activities of the AHD partnership was eligible under section 37 of the Act
and section 2900 of the Regulations, Mr. Papion used the three criteria set out
by the CCRA in Information Circular 86‑4R2: scientific or technological
advancement, uncertainty, and content.
[34] Examination of the
numerous documents provided to Mr. Papion by the representatives of the
partnership showed that no scientific or technical uncertainty had been
identified. Consequently, no work for the purpose of dispelling any scientific
or technological uncertainty could have been done, and obviously, no
technological or scientific advancement could have been demonstrated.
[35] In Mr. Papion’s
opinion, all of the documents provided showed only the intention to use
existing software, following a procedure for their application that was common
practice, without identifying the deficiencies.
[36] For the same
taxation year, two other partnerships in the Zuniq group, ALH Enr. and ALTA
Enr., claimed that they had spent $3,170,000 and $551,063, respectively, for
research and development activities in 1988.
[37] Those two
partnership’s project related to exactly the same subject as the AHD partnership’s
project. Overall, those three partnerships claimed about $5 million in
expenditures on scientific research and experimental development for the same
project. Despite that claim, Mr. Papion estimated the total contribution
of the research team to the project to have amounted to only 1.5 person-year.
As well, on February 7, 1990, according to the document entitled [TRANSLATION] “Balance Sheet” (tab 19,
page 96 of Exhibit I-3), 99.3 percent of the work had not yet
been completed.
[38] Mr. Papion’s final
point was that he concluded that the activities of the AHD partnership did
not satisfy the criteria in section 37 of the Act and section 2900 of the
Regulations. To support his conclusions, Mr. Papion used criteria
approved by the courts. On that point, see Northwest Hydraulic Consultants
Ltd. v. Canada, [2001] T.C.J. No. 340 (QL) and the decision of the Federal
Court of Appeal in C.W. Agencies Inc. v. Canada, [2001] F.C.J. No. 1886
(QL).
Analysis
[39] The respondent’s
evidence took a full day of hearings, during which the appellant was very
attentive but plainly very surprised, and astonished at the facts on which the
assessments that are the subject of these appeals that were laid out.
[40] The respondent’s
evidence unequivocally established the following facts:
·
The
AHD partnership’s project was not eligible, because it was not in any way a
scientific research project, since the project did not meet the minimum
characteristics to comprise a genuine research project.
·
The
appellant had not regularly, continuously and substantially played an active
role in the activities of the partnership, which made him a non-active partner.
·
At
the time the investment was made, it had been agreed that the appellant would
dispose of his shares at the beginning of 1989, in return for consideration
corresponding to 50 percent of his initial investment, making him a limited
partner within the meaning of subsections 96(2.2) and 96(2.4) of the Act.
·
(The
appellant formally admitted that he had been a non-active partner and admitted
the facts that made him a limited partner.)
[41] The appellant
clearly understood that the respondent had very convincingly demonstrated three
facts – that no genuine research was done, that he had been a non-active
partner and that his true status had been that of limited partner – and wisely
concluded that he was wasting his time by pursuing his objection; he then
consented to judgment. Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada, this 21st day of
July 2006.
“Alain Tardif”
on this 15th day
of 2006.
Julie Poirier , Translator
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