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Citation: 2003TCC389
Date: 20030604
Docket: 2000-3716(IT)G
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BETWEEN:
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DAVID MORLEY,
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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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____________________________________________________________________
Motion heard by telephone conference call on June 3,
2003
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Before: The
Honourable Judge D. W. Beaubier
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Appearances:
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Counsel for the
Appellant:
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Sheldon Silver,
Q.C.
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Counsel for the
Respondent:
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Harry Erlichman
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____________________________________________________________________
ORDER AND REASONS FOR ORDER
Beaubier,
J.T.C.C.
[1] This
motion by the Respondent was heard by telephone conference call on June 3,
2003.
[2] It
is for the following relief:
(1) an Order pursuant
to subsection 110(c) of the Tax Court of Canada
Rules, General Procedure, dismissing
the appeal with respect to the issue
of the fair market value
of the computer software acquired;
and for
alternative forms of relief.
[3] The
grounds for the relief described are summarized as follows in the Notice of
Motion:
1. The Appellant states in
his Amended Notice of Appeal that Agensys (Canada) Limited Partnership
(formerly the Continental Limited Partnership) acquired computer software
pursuant to an agreement dated December 20, 1992, as amended and restated on
June 30, 1993. The Appellant further states in his Amended Notice of Appeal
that he was a partner of Agensys (Canada) Limited Partnership.
2. The stated purchase
price for the software was $12,150,000 plus 10% of the Partnership's annual
gross sales of products derived from the software after the Partnership had
generated cumulative sales from programs derived from the software in excess of
$12,000,000. The Appellant states in his Amended Notice of Appeal that the
software was valued at $14,875,000 as at April 1993.
3. The Minister of National
Revenue assumed in assessing that the software had no value. The Appellant
challenges this assumption as to the value of the software.
4. During the examination
for discovery of the Appellant which was held on September 11 – 12, 2002,
counsel for the Respondent requested production of the object code, source code
and related user documentation which was the subject the December 20, 1992
agreement as amended and restated on June 30, 1993.
5. In response to this
request, the Appellant advised that the source code was held in escrow in the
Turks & Caicos. Counsel for the Appellant undertook to make inquiries as to
the availability of the source code and the object code and to advise under
what conditions they would be available to the Respondent.
6. To date, the Appellant
has produced two versions of source code neither of which could be the source
code that was the subject of the December 20, 1992 transaction.
[4] The
evidence contained in the extensive affidavit of Elizabeth Chasson, one of the
Respondent's counsel in this matter, supports these grounds in detail and is
not refuted. The Appellant has delivered two purported "originals" on
copies of the software which is the subject of the fair market value question
of the computer software acquired and the Respondent's experts have proven that
these two are dated after December 20, 1992.
[5] The
Appellant's partnership's escrow agreement with the
Trustee (Exhibit to the Affidavit of David R. Poore) dated May 23,
2003) specifies that:
1. Subsequent updates shall be delivered to the Trustee.
2. Release of the "Source Code" is restricted.
As a result, the material the Respondent has received may be updates.
[6] But
according to the Amended Notice of Appeal:
1. The
"Acquisition Note" on which the value turns is capitalized in the
face amount of $12,150,000 until December 31, 2002. So the value must have been
determined by December 20, 1992.
2. The value of
$12,150,000 was for the software which allegedly existed on December 20, 1992.
3. The Appellant
subscribed for his five partnership units on October 19, 1993 for a price
of $232,500 – cash, $35,025 and a "Subscription Note" in the general
terms of the Acquisition Note.
4. In his
Subscription, the Appellant became a member of the Agensys (Canada) Limited
Partnership (formerly The Continental Limited Partnership) which is the
Partnership which entered into the Escrow Agreement with Temple Trust Company
Limited, a licensed trust company under the laws of the Turks and Caicos Islands,
the escrow agent (the "Trust Company").
[7] The
Trust Company is in another jurisdiction. It is not a party to this action.
Therefore what it has or has not got is not within the power of this Court.
That is a chance that the Appellant took when he entered the partnership
without taking sufficient safeguards.
[8] The
result is that, at present:
1. There is no
evidence that the software, which is the source of value on
December 20, 1992 exists, or that it existed on
December 20, 1992.
2. Any question as
to its existence now or in December, 1992 has not been answered by the
Appellant, and apparently he cannot answer it.
3. The date for
complying with undertakings has expired.
[9] However,
the affidavit of Ian R. Assing filed by the Appellant describes a 1993 software
which is alleged to be a later version of the December 20, 1992 software.
Moreover, the December 20, 1992 Software Acquisition Agreement (Exhibit C to
the affidavit of Elizabeth Chasson) contains paragraph 3.1 which sells the software
to the Partnership into which the Appellant purchased on October 19, 1993.
Finally, the Appellant's Amended Notice of Appeal describes a 1996 lawsuit by
the Partnership against the vendor of the software which was settled by, in
part, a transfer of the world-wide rights to the software to the Partnership
(Paragraphs 18 and 19). In particular, the agreement of December 20, 1992
was not repudiated. Rather, it was enforced.
[10] In these circumstances, on the material before the Court at present,
Canadian rights to the software that the December 20, 1992 agreement appears to
describe, were produced and transferred to the Partnership for an apparent form
of value.
[11] This motion is to dismiss the appeal respecting the fair market value
of the software. But there is no evidence that the software had no value. In
these circumstances, the question as to what its value is, or the value of the
$12,150,000 note and the remaining consideration by the Partnership (see
Article 5 of the Agreement) or, possibly, their value on October 19, 1993, are
ones for a Hearing Judge.
[12] Paragraphs 3 and 4 of the Notice of Motion request:
3. an Order requiring the
Appellant to answer all outstanding questions and produce the requested
documentation arising from the examination for discovery;
4. an Order abridging the
time for the filing and service of the Respondent's expert report;
[13] Respecting paragraph 3 of the Notice of Motion, the Appellant did file
further material respecting the undertakings on May 23 and on May 30, 2003 and
leave is granted to allow such material into the Record. However, it is ordered
that the Appellant is not entitled to lead any evidence at the Hearing
respecting any matters which are presently outstanding.
[14] In view of the foregoing, the Order requested in paragraph 4 of the
Notice of Motion is granted respecting both parties' expert reports which have
been served and filed to and including this date.
[15] In summary, it is Ordered:
1. Paragraph 1 of the Notice of
Motion is denied;
2. Paragraph 2 of the Notice of
Motion is denied with the proviso that at this date, the software presented is
apparently dated November 1993. Therefore at the Hearing, (1) the providence of
that software is in question and (2) the value respecting which both parties
are to present evidence is that of the November 1993 software and not that of
any other software or version of software.
3. Paragraph [13] hereof is
repeated. However, it is this Court's opinion that the Respondent's motion was
the reason that the responses of May 23 and May 30, 2003 occurred.
4. Paragraph [14] hereof is
repeated.
[16] Particularly in view of the Court's findings and orders described in
subparagraphs [15] 3 and 4 hereof, the Respondent is awarded the costs of this
motion on a party and party basis in any event of the cause of this action.
Signed at
Saskatoon, Saskatchewan, this 4th day of June 2003.
J.T.C.C.
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