Leonard Pipeline Contractors Ltd. v. Canada, docket T-2129-87

Date: 19980127

Docket: T-2129-87

     IN THE MATTER OF THE INCOME TAX ACT

BETWEEN:

LEONARD PIPELINE CONTRACTORS LTD.

     (the "Taxpayer")

Plaintiff

- and -

HER MAJESTY THE QUEEN

Defendant.

     REASONS FOR JUDGMENT

JEROME A.C.J.

[1]      This appeal of the Notice of Confirmation of Assessment of the plaintiff's income tax return for the 1982 taxation year mailed on August 28, 1987 came on for hearing before me at Toronto, Ontario, on November 4, 1997. At the close of oral argument, I took the matter under reserve.

[2]      The plaintiff filed the following Agreed Statement of Facts:

1.      The plaintiff is a company incorporated pursuant to the laws of Canada and formerly carried on business as a pipeline construction contractor. The plaintiff was formerly called 83913 Canada Limited. On April 18, 1985, the plaintiff was exported to the State of Wyoming.

2.      On or about October 1, 1977, the plaintiff, as 83913 Canada Limited, purchased the pipeline business of a company known as Leonard Pipeline Contractors Ltd. This company subsequently became Leonard-Baun Holdings Ltd. ("LBH Ltd.").

3.      The purchase agreement as amended provided that 83913 Canada Limited would purchase the following assets of Leonard Pipeline Contractors Ltd.:

(a)      all machinery and equipment;

(b)      all furniture, fixtures, tools, supplies and motor vehicles;

(c)      the benefit of all leases;

(d)      the benefit of all contracts and engagements both existing and presently being negotiated to which Leonard Pipeline Contractors Ltd. may be entitled including the benefits of the Pe Ben Joint Venture Agreement (Pe Ben Agreement), the OMECSA Agreement and the Al Qahtani-Shaw-Leonard Agreement (A-S-L Agreement);

(e)      the shares of Al Qahtani-Shaw-Leonard;

(f)      the goodwill including the right to use the name Leonard Pipeline Contractors;

(g)      all trademarks, trade or brand names, copyrights, trade designs, inventions, patents, licences and franchises; and

(h)      all real property located in the State of Minnesota.

4.      The purchase agreement as amended also provided that the purchase price for the assets, expressly excluding those assets set out in paragraphs 3(d) and 3(e) above, amounted to $6,700,000.00. $700,000.00 of this amount was allocated as goodwill and reported as such for income tax purposes by both the vendor and the purchaser. The purchase agreement as amended is silent with respect to the consideration to be given for those assets set out in paragraphs 3(d) and 3(e) above.

5.      In consideration of the sale of the benefit in the Pe Ben Agreement, the plaintiff entered into an agreement on January 1, 1978 (the Pe Ben Participation Agreement) with Leonard Pipeline Contractors Ltd. (now LBH Ltd.) whereby it was agreed that LBH Ltd. would share in the proceeds, as defined, of the Pe Ben Agreement up to $200,000.00 subject to a reduction as provided for in the said participation agreement.

6.      In consideration of the sale of the benefit in the A-S-L Agreement, the plaintiff entered into an agreement on January 1, 1978 (the A-S-L Participation Agreement) with Leonard Pipeline Contractors Ltd. (now LBH Ltd.) whereby it was agreed that LBH Ltd. would share in the proceeds, as defined, of the A-S-L Agreement up to $1,000,000.00 subject to a reduction as provided for in the said participation agreement.

7.      Both of the above-mentioned participation agreements were structured in the form of a joint venture agreement wherein LBH Ltd. had no further obligations and provided that the parties acknowledged that the amounts paid to LBH Ltd. would in no way be construed as accruing to the benefit of or on account for the plaintiff. The agreements provided that any losses would be the sole responsibility of the plaintiff.

8.      In its 1978 taxation year, the plaintiff caused to be paid to LBH Ltd. pursuant to the Pe Ben Participation Agreement $150,000.00.

9.      In its 1979 taxation year, the plaintiff caused to be paid to LBH Ltd. pursuant to the A-S-L Participation Agreement $566,727.00.

10.      In its 1980 taxation year, the plaintiff caused to be paid to LBH Ltd. pursuant to the A-S-L Participation Agreement $109,421.00.

11.      No part of the above amounts were included in the income of the plaintiff and all of the above amounts were reported by LBH Ltd., or one of its successor companies. LBH Ltd. (or one of its successor companies) reported the amounts for income tax purposes as proceeds of disposition of eligible capital property. The plaintiff specifically denies that the characterization of the receipt by LBH Ltd. as eligible capital property was correct in all the circumstances or in any event, has any relevance with respect to the plaintiff.

12.      The plaintiff, in its tax return for its 1982 taxation year, claimed non-capital losses from previous years in the amount of $6,181,614.00.

13.      On or about September 14, 1983, the plaintiff executed a waiver at the request of Revenue Canada, pursuant to s. 152(4) of the Act with respect to payments under the Pe Ben Participation Agreement in the amount of $150,000.00 for the 1978 taxation year.

14.      On or about June 28, 1984, the plaintiff executed a waiver at the request of Revenue Canada, pursuant to s. 152(4) of the Act with respect to payments under the A-S-L Participation Agreement in the amount of $337,277.00 for the 1979 taxation year. No waiver for the remainder of the 1979 payment nor any waiver for the 1980 payment was ever requested or executed.

15.      On or about September 22, 1985, Revenue Canada acknowledged in writing that the plaintiff's 1980 income tax return, including the payment of $109,421.00 would not be adjusted as it was statute-barred as of June 15, 1984.

16.      On or about May 12, 1986, Revenue Canada issued a Notice of Reassessment to the plaintiff for the plaintiff's 1982 taxation year and reduced the plaintiff's loss carry forward for 1982 by $826,148.00 by including in the plaintiff's 1978, 1979 and 1980 taxation years the respective payments to LBH Ltd. of $150,000.00, $566,727.00 and $109,421.00 as part of the plaintiff's income. Due to the Notice of Reassessment, Revenue Canada now claims that the plaintiff owes approximately $400,000.00 plus interest in additional federal income tax for the 1982 taxation year.

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[3]      Despite an able argument by counsel for the Minister, it would seem clear that the Minister is statute barred from reviewing the taxpayer's 1980 tax return. Indeed, the Minister clearly acknowledged the application of that provision on more than one occasion. I will therefore hold that firstly, the taxpayer's 1980 return is no longer subject to review by Revenue Canada.     

[4]      In case that finding is incorrect, it also seems abundantly clear to me the proceeds of the three years under review were not income in the hands of the plaintiff. On these facts, I find that the arguments advanced by counsel for the taxpayer in Wilson v. M.N.R. to be persuasive. I also find that to the extent the plaintiff controlled the funds in issue, he did so as trustee for LBH the vendor. It is my conclusion therefore, that at all material times this taxpayer treated the funds in dispute properly in its annual return.

[5]      The appeal is therefore allowed with costs, and the matter is returned to the Minister for re-assessment on the basis that the monies distributed to LBH Ltd. pursuant to the Pe Ben and A-S-L Participation Agreements should be designated as eligible capital expenditures.

                             "JAMES A. JEROME"

                                 A.C.J.

Toronto, Ontario

January 27, 1998

     FEDERAL COURT OF CANADA

     Names of Counsel and Solicitors of Record

DOCKET:                      T-2129-87

STYLE OF CAUSE:                  LEONARD PIPELINE CONTRACTORS LTD.

                         (the "Taxpayer")

                         - and -

                         HER MAJESTY THE QUEEN                         

DATE OF HEARING:              NOVEMBER 4, 1997

PLACE OF HEARING:              TORONTO, ONTARIO

REASONS FOR JUDGMENT BY:          JEROME, A.C.J.

DATED:                      JANUARY 27, 1998

APPEARANCES:                 

                         Mr. Richard D. Howell

                            

                             For the Plaintiff

                         Mr. Ernest M. Wheeler

                             For the Defendant

SOLICITORS OF RECORD:         

                         Aylesworth, Thompson, Phelan, O'Brien

                         P.O. Box 15, Suite 3000

                         Royal Bank Plaza, South Tower

                         Toronto, Ontario

                         M5J 2J1

                             For the Plaintiff

                         George Thomson

                         Deputy Attorney General

                         of Canada

                        

                             For the Defendant

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                          FEDERAL COURT OF CANADA

Date: 19980127

Docket: T-2129-87

                         BETWEEN:

                         LEONARD PIPELINE CONTRACTORS LTD.                         

                         (the "Taxpayer")

     Plaintiff

                         - and -

                         HER MAJESTY THE QUEEN

     Defendant

                        

            

                         REASONS FOR ORDER