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Citation: 2003TCC905
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Date: 20031204
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Docket: 2002-2205(IT)I
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BETWEEN:
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LOUIS LABELLE,
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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: 2002-2207(IT)I
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BETWEEN:
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JEAN-GUY THIVIERGE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Lamarre Proulx, J.
[1] These appeals were heard on common evidence. These are appeals under the informal procedure concerning the 1990, 1991 and 1993 taxation years for Appellant Labelle, and the 1993 taxation year for Appellant Thivierge.
[2] The first issue that may decide the outcome of these appeals is to determine if the partnership Logidirect Enr. (the "partnership"), in which the Appellants acquired interests in 1993, was a tax shelter within the meaning of the expression as set out in subsection 237.1(1) of the Income Tax Act (the "Act"). If applicable, the second issue is to determine if the Appellants filed with the Minister of National Revenue (the "Minister") a prescribed form containing prescribed information, including the identification number for the tax shelter in accordance with subsection 237.1(6) of the Act.
[3] Paragraph 6 of the Amended Reply to the Notice of Appeal (the "Reply") is identical for both Appellants. It reads as follows:
[translation]
a. The purported partnership Logidirect enrg. (hereinafter "the partnership") was created in 1993.
b. The partnership collected $200,000 from nine purported partners, including Raymond Cyr and Maurice Beauregard.
c. The partnership submits the financial statements containing the following information as of 31 December 1993:
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STATEMENTS OF INCOME
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Income
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0
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Other income
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1
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1
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Fee (subcontracting)
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200,000
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Interest and bank charges
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22
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200,022
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Net loss
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- 200,021
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BALANCE SHEET
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Cash
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14,267
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Taxes receivable
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13,302
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27,569
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Accounts payable
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27,560
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Advances
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30
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27,590
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Capital
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200,000
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Retained earnings
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- 200,021
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27,569
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d. The partnership claims to have formed a joint venture with 2955-9226 Québec inc. called the software research institute (hereinafter "the institute"), whose goal was to market a new software.
e. The firm 2955-9226 Québec inc. prepared income tax returns for the 1993 and 1994 taxation years and no other after that.
f. According to the information on its income tax returns, the shareholders were Maurice Beauregard (50%) and Louis Tanguay (50%). The company president was Raymond Cyr.
g. Among other things, the corporate agreement mentions the following elements:
- The partnership must provide a financial contribution of at least $200,000.
- The partnership and the institute agree to provide the computer company, Zéro Un inc., with the required research.
- Research shall be completed no later than 31 December 1993.
h. The institute's financial statements for the year ending 28 February 1994 reveal the following information:
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STATEMENTS OF INCOME
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Income
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200,000
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Professional fees
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5,950
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Subcontracting
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321,125
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Tax and licences
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222
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Interest and bank charges
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33
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R & D tax credit
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- 58,140
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Net loss
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- 69,190
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BALANCE SHEET
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Cash
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10,294
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Accounts receivable
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35,575
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Tax credit receivable
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137,445
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183,314
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Accounts payable
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156,469
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Income tax
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656
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Owing to shareholders
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78,305
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Capital
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62,000
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Retained earnings
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- 114,116
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183,314
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i. All income from the institute comes from Logidirect.
j. The $325,000 under the "subcontracting" item represents all of the expenses and this amount is paid in its entirety to the computer business, Zéro inc.
k. Shareholders of Zéro Un inc. are as follows:
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Raymond Cyr
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90%
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Louis Tanguay
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10%
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l. The research and development project as claimed by the partnership was assessed by a scientific advisor and deemed ineligible for the investment tax credit.
m. No application for a tax shelter number was filed with the Minister in respect of Logidirect.
n. The research activities as so deemed by the partnership did not, under the circumstances, involve any reasonable expectation of profit.
o. Furthermore, the circumstances under which the purported general partnership was formed was such that the members had no intention of acting as partners and their objective was not to operate a business venture.
p. The only reason that the Appellant became a partner was to pay less income tax under the Income Tax Act.
[4] Mr. Louis Labelle testified first. He admitted subparagraphs 6(a) to 6(k) and 6(m) of the Reply. The latter specified that no tax shelter number was filed with the Minister in respect of the partnership.
[5] During the cross-examination, the Appellant reported that it was the first time he made this kind of investment. He had heard about the Logidirect plan from Appellant Thivierge, who is his work colleague. The latter had spoken to him about it on several occasions. Mr. Stéphane Savard came to discuss it with him for a few hours. He explained that a partnership by the name of Logidirect would be formed, and that there would be nine partners. Those persons would purchase shares. The partnership would give a business a subcontract to perform research on software. By investing $25,000, he was told that he would be entitled to a $20,000 deduction and a tax credit of $5,000.
[6] A book of documents in respect of Appellant Labelle was filed as Exhibit I-1. Tab 8, dated 13 October 1993, indicates a loan in the amount of $25,000, at an interest rate of 9.5% and a scheduled loan repayment date of less than one year, that is, 28 September 1994. Mr. Savard had mentioned to him that with the money he would be receiving in his tax return (federal and provincial), he could repay the loan around that date.
[7] Mr. Labelle's income tax return for 1993 is in Tab 3 of Exhibit I-1. Mr. Savard prepared the return. On it there is a business loss deduction in the amount of $20,003 as well as an investment tax credit in the amount of $5,000.
[8] The statement of account for the loan is found at Tab 10 of Exhibit I-1. On 8 April 1994, there is a $7,500 deposit. The origin of this amount is explained vaguely. On 23 September 1994, there is indication of a payment in the amount of $11,965.54. According to the witness, this money is from federal and provincial tax refunds.
[9] The witness reports that the first partners' meetings took place when he took out his loan. It was at that time that he signed various documents regarding the partnership. However, at Tab 13 of Exhibit I-1, there is a partnership agreement concerning Logidirect Enr. The signature date is 1 March 1993. The witness says that he thought it was October 1993 that the initial meetings had taken place but he may have forgotten.
[10] The Respondent filed his book of documents regarding Logidirect as Exhibit I-2. According to those documents, Ms. Diane Blais was the partnership's manager. Appellant Labelle had not been party to that decision. It was also pre-established that Mr. Cyr would be the president. The latter had explained all of his expertise in software research in a table. The same answer applies with respect to the various other documents for the partnership, even those that the Appellant signed. He was not involved in any decision that concerned the partnership. He did not know the names of the other persons who had purchased shares in the partnership. He also had no knowledge of the partnership's banking activities.
[11] Appellant Thivierge testified. He explained that in 1993, in approximately late June, he came back from Somalia and wished to invest. He met Mr. Savard and decided to invest $10,000.
[12] Exhibit I-3 is the Respondent's book of documents regarding Appellant Thivierge. The cash loan contract is found at Tab 5, to which Exhibit I-4 must be added. The document was signed on 10 September 1993.
[13] The statement of account of the loan is found at Tab 7 of Exhibit I-3. On 8 April 1994, there was a $3,000 deposit: the exact same date as Mr. Labelle's deposit: [TRANSLATION] "$3,000 also represents 30% of your loan, and it was also 30% with Mr. Labelle." "Is it possible that someone else may have paid part of your loan?" "No, not at all, it is not possible." In fact, the various loan repayment dates are identical to those of Mr. Labelle, between 31 March 1994 and 8 November 1994. In Mr. Labelle's case, the last deposit was made on 12 December 1994.
[14] Appellant Thivierge's income tax return is found at Tab 3 of Exhibit I-3. He deducted $8,001 in business losses from his employment earnings. He claimed an investment tax credit of $2,000.
[15] Mr. Mario Desmarais, an officer at the litigation office of Canada Customs and Revenue Agency ("CCRA"), testified on behalf of the Respondent. He filed, as Exhibit I-7, a book of documents regarding a history of bank transactions from December 1993 to December 1994, concerning the partners, the companies and the partnerships involved in this case. Based on these microfilmed documents, he prepared a table of banking activities for each partner in the partnership, as well as those of two companies involved in the loan set-up. This three-page table was filed as Exhibit I-8. The first page involves eight of the nine partners in the partnership. Negative amounts indicate loans and positive ones indicate cash inflows.
[16] According to the witness, a striking element in the table is that on the same day in April, there was a cash inflow that matched the 30% investment paid out by each of the partners.
[17] The witness confirmed that the partnership had not obtained a tax shelter identification number. He reported that two out of nine people filed an appeal. An offer to settle was proposed to the partners. This offer appears at Tab 12 of Exhibit I-2. The proposal was to grant as a business loss, at the time of its disposal, the participation amount that had not been repurchased and to cancel the interest up to 31 October 1995.
Arguments
[18] The Respondent's counsel refers to the definition of "tax shelter" in subsection 237.1(1) of the Act, which reads as follows:
"tax shelter" - 'tax shelter' means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
(a) the total of all amounts each of which is
(i) a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
would exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year,
would exceed
(ii) the total of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed directly or indirectly in respect of the interest in the property, by the person or another person with whom the person does not deal at arm's length
but does include property that is a flow-through share or a prescribed property.
[19] Counsel argued that in Appellant Labelle's case, the loss that was pronounced as deductible in computing the income was in the amount of $20,003, and in Appellant Thivierge's case, it was $8,001. Is the amount identified in (a) higher than that which will be identified in (b)? One must refer to the definition of what a prescribed benefit is under the Regulations in order to determine the total value of prescribed benefits.
[20] These prescribed benefits are described in subsection 231(6) of the Income Tax Regulations (the "Regulations"), which reads as follows:
231(6) For the purposes of paragraph (b) of the definition 'tax shelter' in subsection 237.1(1) of the Act, 'prescribed benefit' in relation to a tax shelter means any amount that may reasonably be expected, having regard to statements or representations made in respect of the tax shelter, to be received by or made available to a person (in this subsection referred to as 'the purchaser') who acquires an interest in the tax shelter, or a person with whom the purchaser does not deal at arm's length, which receipt or availability would have the effect of reducing the impact of any loss that the purchaser may sustain by virtue of acquiring, holding or disposing of the interest in the tax shelter, and includes such an amount
(a) that is, either immediately or in the future, owed to any other person by the purchaser or a person with whom the purchaser does not deal at arm's length, to the extent that
(i) liability to pay that amount is contingent,
(ii) payment of that amount is or will be guaranteed by, security is or will be provided by, or an agreement to indemnify the other person to whom the amount is owed is or will be entered into by
(A) a promoter in respect of the tax shelter,
(B) a person with whom the promoter does not deal at arm's length, or
(C) a person who is to receive a payment (other than a payment made by the purchaser) in respect of the guarantee, security or agreement to indemnify,
(iii) the rights of that other person against the purchaser, or against a person with whom the purchaser does not deal at arm's length, in respect of the collection of all or part of the purchase price are limited to a maximum amount, are enforceable only against certain property, or are otherwise limited by agreement, or
(iv) payment of that amount is to be made in a foreign currency or is to be determined by reference to its value in a foreign currency and it may reasonably be considered, having regard to the history of the exchange rate between the foreign currency and Canadian currency, that the aggregate of all such payments, when converted to Canadian currency at the exchange rate expected to prevail at the date on which each such payment would be required to be made, will be substantially less than that aggregate would be if each such payment was converted to Canadian currency at the time that each such payment became owing,
(b) that the purchaser or a person with whom the purchaser does not deal at arm's length is entitled at any time to receive, directly or indirectly, or to have available
(i) as a form of assistance from a government, municipality or other public authority, whether as a grant, subsidy, forgiveable loan, deduction from tax or investment allowance, or as any other form of assistance, or
(ii) by reason of a revenue guarantee or other agreement in respect of which revenue may be earned by the purchaser or a person with whom the purchaser does not deal at arm's length, to the extent that the revenue guarantee or other agreement may reasonably be considered to ensure that the purchaser or person will receive a return of all or a portion of the purchaser's outlays in respect of the tax shelter,
(c) that is the proceeds of disposition to which the purchaser may be entitled by way of an agreement or other arrangement under which the purchaser has a right, either absolutely or contingently, to dispose of the interest in the tax shelter (otherwise than as a consequence of the purchaser's death), including the fair market value of any property that the agreement or arrangement provides for the acquisition of in exchange for all or any part of the interest in the tax shelter, and
(d) that is owed to a promoter, or a person with whom the promoter does not deal at arm's length, by the purchaser or a person with whom the purchaser does not deal at arm's length in respect of the acquisition of an interest in the tax shelter
but, except as otherwise provided in subparagraph (b)(ii), does not include profits earned in respect of the tax shelter.
[21] Subparagraph 231(6)(b)(i) uses the terms "deduction from tax". This may include investment tax credits. The same subparagraph mentions "assistance from a government". Federal and provincial tax deductions may be taken into account. The Appellants can reasonably expect to receive an investment tax credit from the federal and provincial governments.
[22] In the case of Appellant Labelle, according to the definition of "tax shelter" in subsection 237.1(1), the computation in paragraph (b) is the cost of his share in the partnership, namely $25,000, minus the prescribed benefits under the Regulations: the federal and provincial investment tax credits, in the amount of $10,000, for a total of $15,000.
[23] Therefore, paragraph 237.1(1)(a) is $20,000 and paragraph 237.1(1)(b) is $15,000. Therefore, the amount under paragraph (a) exceeds the amount prescribed in paragraph (b). In addition, the amount in paragraph (b) should once again be less than $15,000. The table that was filed as Exhibit I-8 shows that all partners received a sum equalling 30% of their investment on 8 April 1994. The 30% buyback may constitute a prescribed benefit under paragraph 231(6)(c) of the Regulations because it is a mechanism whereby the person investing a sum will not have to pay the entire amount. Another troubling fact is that all loan agreements provide for repayment in less than one year, regardless of the amount borrowed.
[24] With regard to Appellant Thivierge, the figures differ but the legal result and analysis are the same.
[25] As set out in subsection 237.1(6) of the Act, a taxpayer cannot claim or deduct an amount in respect of a tax shelter in computing the amount of income or taxable income unless the taxpayer files a prescribed form containing prescribed information, including the identification number for the tax shelter.
[26] This subsection reads as follows:
237.1(6) Deduction disallowed - In computing the amount of income, taxable income or taxable income earned in Canada of, or tax or other amount payable by, or refundable to, a taxpayer under this Act for a taxation year, or any other amount that is relevant for the purposes of computing that amount, no amount may be deducted in respect of an interest in a tax shelter unless the taxpayer files with the Minister a prescribed form containing prescribed information, including the identification number for the shelter.
Conclusion
[27] I am of the opinion that the evidence clearly revealed that the investment plan in this case is a tax shelter. It is reasonable to consider that, in light of the announcements made or contemplated in relation to the Logidirect partnership, if a person bought shares in that partnership, the amount of losses would exceed the cost of that share minus the amount of investment tax credit from the federal and provincial governments. In addition, I must take into account the fact that all partners received a sum equal to 30% of their investment on 8 April 1994. The source of that sum was not explained. I can only conclude that it was a 30% buyback of the investment from each of the investors and that this buyback was pre-planned and was part of the investment conditions.
[28] Subsection 237.1(6) of the Act does not allow the deduction of business loss or an investment credit claim where a taxpayer does not submit a prescribed form containing the identification number for the tax shelter. There was no identification number for the tax shelter and there was no filing of a prescribed form.
[29] Consequently, the appeals are dismissed.
Signed at Ottawa, Canada, this 4th day of December 2003.
Lamarre Proulx, J.
Translation certified true
on this 9th day of February 2004.
Maria Fernandes, Translator
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