O’Connor
J.T.C.C.:—This
appeal
was
heard
in
Vancouver,
British
Columbia
on
July
13
and
14,
1995
pursuant
to
the
General
Procedure
of
this
Court.
Issue
The
sole
issue
is
whether
the
Minister
of
National
Revenue
(“Minister”)
was
correct
in
including
in
the
appellant’s
income
for
its
1987
taxation
year
an
amount
of
$3,716,895
as
recapture
of
capital
allowance
and
an
amount
of
$977,435
as
an
increased
capital
gain.
This
issue
will
be
resolved
by
determining
whether
an
amount
of
$13,500,000,
representing
proceeds
of
two
loans,
more
fully
described
later,
which
was
applied
to
repay
indebtedness
of
the
appellant,
existing
prior
to
Appellant
entering
into
a
partnership,
represents
solely
consideration
for
a
capital
interest
of
the
appellant
in
the
partnership
or,
on
the
other
hand,
consideration
(other
than
an
interest
in
the
partnership)
received
as
proceeds
for
the
transfer
to
the
partnership
by
the
appellant
of
certain
assets.
Facts
The
relevant
facts
are
as
follows:
1.
The
appellant,
Pinot
Holdings
Ltd.,
formerly
Capozzi
Enterprises
Ltd.,
is
a
company
formed
under
the
laws
of
the
Province
of
British
Columbia.
2.
The
appellant
was
the
owner
of
certain
real
estate
assets
including
a
hotel
and
shopping
centre
and
other
real
estate,
all
in
Kelowna,
British
Columbia
(the
“Capri
assets”).
3.
The
appellant
was
indebted
to
the
Bank
of
Montreal
under
three
mortgages
on
the
Capri
assets
totalling
$13,500,000,
was
in
default
thereunder
and
desperately
needing
new
financing.
4.
On
November
8,
1986
the
appellant
and
Mannai
Investment
Corporation
Ltd.
signed
a
letter
of
intent
to
create
a
partnership
between
two
new
corporations
to
be
formed
by
them
and
to
have
the
appellant
transfer
the
Capri
assets
to
the
partnership
for
$13,500,000.
5.
The
letter
of
intent
also
set
out
that
the
new
corporation
formed
by
Mannai
Investment
Corporation
Ltd.
was
to
loan
the
partnership
$5,000,000
interest
free,
and
that
the
partnership
would
borrow
an
additional
$10,000,000
from
a
financial
institution,
such
$10,000,000
loan
to
be
secured
by
a
mortgage
on
the
Capri
assets.
The
letter
of
intent
provided
further
that
the
total
of
$15,000,000
would
be
applied
as
follows:
the
partnership
would
acquire
the
Capri
assets
from
the
appellant
for
$13,500,000
and
would
spend
the
remaining
$1,500,000
on
renovations
to
the
Capri
assets.
6.
Prior
to
January
30,
1987
a
company
known
as
312894
B.C.
Ltd.
(“312894”)
was
incorporated
and
acquired
all
the
shares
of
the
appellant;
and
Mannai
Investment
Corporation
Ltd.
incorporated
a
company
known
as
Mannai
Properties
Inc.
(“Mannai”).
7.
On
January
30,
1987
Mannai,
the
appellant
and
312894
entered
into
a
partnership
agreement
under
the
laws
of
British
Columbia
for
the
purposes
of
owning
and
operating
the
Capri
assets.
8.
On
January
30,
1987
the
partnership
entered
into
an
agreement
of
purchase
and
sale
to
purchase
the
Capri
assets
from
the
appellant
for
$13,500,000
with
a
closing
date
of
February
25,
1987.
9.
Under
this
agreement
of
purchase
and
sale
the
partnership
agreed
to
pay
the
purchase
price
of
$13,500,000
to
Salloum
Doak,
Barristers
&
Solicitors,
in
trust,
to
be
disbursed
to
the
Bank
of
Montreal,
the
appellant’s
creditor
prior
to
the
partnership,
when
clear
title
to
the
Capri
assets
was
registered
in
the
name
of
the
partnership.
10.
On
January
30,
1987
the
partnership
entered
into
a
loan
agreement
with
Mannai
to
borrow
$5,000,000
to
be
disbursed
to
the
partnership
on
a
date
to
be
mutually
agreed
upon
by
the
partnership
and
Mannai.
11.
On
February
10,
1987
the
partnership
entered
into
an
agreement
with
the
Hongkong
Bank
of
Canada
to
borrow
$10,000,000
secured
by,
inter
alia,
a
mortgage
against
the
Capri
assets.
12.
On
February
26,
1987
the
Hongkong
Bank
of
Canada
mortgage
was
registered
against
the
Capri
assets
and
the
proceeds
of
that
loan
plus
$3,500,000
of
the
Mannai
loan
for
a
total
of
$13,500,000
was
advanced
to
Salloum
Doak,
in
trust
in
accordance
with
the
agreement
of
purchase
and
sale.
13.
On
February
27,
1987
Salloum
Doak
disbursed
the
$13,500,000
to
the
Bank
of
Montreal
in
full
payment
of
the
mortgages
then
held
by
that
bank
on
the
Capri
assets.
14.
The
appellant
and
the
other
members
of
the
partnership
jointly
elected
on
Form
T-2059,
filed
pursuant
to
subsection
97(2)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63),
in
respect
of
the
transfer
of
the
Capri
assets
to
the
partnership.
The
amounts
elected
in
respect
of
each
depreciable
asset
was
equal
to
the
undepreciated
capital
cost
thereof
to
the
appellant
and
the
amount
elected
in
respect
of
each
non-depreciable
capital
property
was
equal
to
the
adjusted
cost
base
thereof
to
the
appellant.
Pursuant
to
the
loan
agreement
with
Mannai
(paragraph
10
above)
on
or
about
February
25,
1987,
Mannai
loaned
$5,000,000
to
the
partnership.
$3,500,000
of
this
loan
was
advanced
as
set
forth
above
in
paragraph
12.
15.
Pursuant
to
the
partnership
agreement
the
interests
of
the
partners
in
the
partnership
were
as
follows:
the
appellant,
five
per
cent;
appellant’s
parent,
312894,
45
per
cent;
and
Mannai,
50
per
cent.
16.
The
Minister
issued
a
notice
of
reassessment
dated
August
29,
1991
in
respect
of
the
appellant’s
taxation
year
ending
December
31,
1987
reassessing
the
appellant
for
federal
tax
of
$1,374,221.20,
a
late
filing
penalty
of
$329,428.11,
provincial
tax
and
penalty
of
$563,591.25,
and
arrears
interest
of
$1,271,315.73.
The
Minister
increased
the
appellant’s
income
for
1987
by
including
recapture
of
capital
cost
allowance
of
$3,716,895
and
by
increasing
the
appellant’s
taxable
capital
gain
by
$977,435,
both
in
respect
of
the
transfer
by
the
appellant
of
the
Capri
assets
to
the
partnership.
In
making
the
reassessment,
the
Minister
disregarded
the
elected
amounts
shown
on
Form
T-2059
filed
on
behalf
of
the
members
of
the
partnership
in
respect
of
the
transfer
of
the
Capri
assets
and
reassessed
the
appellant
on
the
basis
that
the
appellant
had
aggregate
proceeds
of
disposition
in
respect
of
the
Capri
assets
of
$13,500,000.
17.
The
appellant
objected
to
the
reassessment
by
filing
a
notice
of
objection
and
the
Minister
confirmed
the
reassessment
by
a
notice
of
confirmation
dated
May
20,
1993.
Before
the
hearing
on
the
merits,
the
appellant
presented
a
motion
seeking
to
shift
the
burden
of
proof.
The
grounds
for
the
motion
were
as
follows:
1.
In
the
reply
to
notice
of
appeal,
the
respondent
lacks
clarity
in
expounding
the
alleged
basis
upon
which
the
Minister
of
National
Revenue
(the
“Minister”)
wishes
to
rely
in
support
of
the
reassessment
made
by
the
Minister
and
the
applicant
was
not
clearly
advised
of
the
basis
upon
which
the
Minister
seeks
to
support
the
reassessment.
Therefore,
the
onus
of
proving
the
reassessment
correct
should
lie
with
the
Minister.
2.
The
Minister
reassessed
the
applicant
relying
on
the
essential
assumption
that
the
applicant
received,
for
the
transfer
of
certain
assets
to
a
Canadian
partnership,
consideration
in
the
amount
of
$13,500,000
by
an
assumption
by
the
partnership
of
a
mortgage
which
the
applicant
was
liable
to
repay.
3.
The
Minister
abandoned
the
essential
assumption
upon
which
he
reassessed
the
applicant
and
confirmed
the
reassessment
on
a
fundamentally
different
premise.
On
confirming
the
reassessment,
the
Minister
made
the
essential
assumption
that
the
applicant
received
cash
in
the
amount
of
$13,500,000
as
consideration
for
the
transfer
of
certain
assets
to
a
Canadian
partnership
and
that
there
was
no
assumption
of
a
mortgage
by
the
partnership.
4.
In
the
reply
to
notice
of
appeal,
the
Minister
failed
to
disclose
the
original
essential
assumption
made
to
support
the
reassessment
which
is
inconsistent
with
the
new
basis
pleaded
in
the
reply
to
notice
of
appeal.
5.
The
respondent
has
pleaded,
at
paragraph
11
of
the
reply
to
notice
of
appeal,
facts
to
support
the
Minister’s
essential
assumption
and
all
the
facts
therein
pleaded
flow
from
the
same
basis
essential
assumption,
namely,
that
the
applicant
received
cash
consideration
in
the
amount
of
$13,500,000
for
the
transfer
of
the
assets
to
the
partnership.
6.
The
onus
is
on
the
Minister
to
prove
that
the
original
essential
assumption
set
out
in
paragraph
2
above
is
wrong
and
to
prove
all
elements
of
the
new
basis
for
the
assessment.
I
took
this
motion
under
reserve
and
after
reviewing
the
authorities
submitted
and
the
arguments
of
both
parties,
I
am
satisfied
that
the
motion
is
to
be
dismissed
principally
because
the
assumptions
of
the
Minister
were
essentially
conclusions
of
law
related
to
the
structure
of
the
transaction
rather
than
facts
requiring
proof.
Law
on
the
Merits
The
most
relevant
provisions
of
the
Income
Tax
Act
are
as
follows:
97(1)
Where
at
any
time
after
1971
a
partnership
has
acquired
property
from
a
taxpayer
who
was,
immediately
after
that
time,
a
member
of
the
partnership,
the
partnership
shall
be
deemed
to
have
acquired
the
property
at
an
amount
equal
to
its
fair
market
value
at
that
time
and
the
taxpayer
shall
be
deemed
to
have
disposed
of
the
property
for
proceeds
equal
to
that
fair
market
value.
(2)
Notwithstanding
any
other
provisions
of
this
Act...where
at
any
time
after
November
12,
1981
a
taxpayer
has
disposed
of
any
capital
property...to
a
partnership
that
immediately
after
that
time
was
a
Canadian
partnership
of
which
the
taxpayer
was
a
member,
if
the
taxpayer
and
all
the
other
members
of
the
partnership
have
jointly
so
elected
in
prescribed
form
and
within
the
time
referred
to
in
subsection
96(4),
the
following
rules
apply:
(a)
the
provisions
of
paragraphs
85(1
)(a)
to
(f)
apply
to
the
disposition
as
if
(i)
the
reference
therein
to
“corporation’s
cost”
were
read
as
a
reference
to
“partnership’s
cost”,
(ii)
the
references
therein
to
“other
than
any
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
receive
any
such
shares”
and
to
“other
than
shares
of
the
capital
stock
of
the
corporation
or
a
right
to
receive
any
such
shares”
were
read
as
references
to
“other
than
an
interest
in
the
partnership”,
(iii)
the
references
therein
to
“shareholder
of
the
corporation”
were
read
as
references
to
“member
of
the
partnership”,
(iv)
the
references
therein
to
“the
corporation”
were
read
as
references
to
“all
the
other
members
of
the
partnership”,
and
(v)
the
references
therein
to
“to
the
corporation”
were
read
as
references
“to
the
partnership”;
The
relevant
provisions
of
paragraphs
85(1
)(a)
to
(f),
if
they
were
read
as
directed
by
subsection
97(2),
would
read
as
follows:
(a)
the
amount
that
the
taxpayer
and
all
the
other
members
of
the
partnership
have
agreed
on
in
their
election
in
respect
of
the
property
shall
be
deemed
to
be
the
taxpayer’s
proceeds
of
disposition
of
the
property
and
the
partnership’s
cost
of
the
property;
(b)
subject
to
(c),
where
the
amount
that
the
taxpayer
and
the
other
members
of
the
partnership
have
agreed
on
in
their
election
in
respect
of
the
property
is
less
than
the
fair
market
value,
at
the
time
of
the
disposition,
of
the
consideration
therefor
(other
than
an
interest
in
the
partnership)
received
by
the
taxpayer,
the
amount
so
agreed
on
shall,
irrespective
of
the
amount
actually
so
agreed
on
by
them,
be
deemed
to
be
an
amount
equal
to
that
fair
market
value....
Testimony
was
given
for
the
appellant
by
Mr.
Thomas
R.
Capozzi,
the
representative
of
the
appellant
most
familiar
with
its
affairs
and
by
Mr.
Lawrence
Salloum,
solicitor
for
the
appellant.
Further,
the
examination
for
discovery
of
Ralph
Prietchuk,
an
appeals
officer
with
Revenue
Canada,
was
read
in
by
counsel
for
the
appellant.
Submissions
of
the
appellant
Counsel
submits
that
the
agreement
of
purchase
and
sale
does
not
itself
dispose
of
the
issue,
which
is
whether
consideration
other
than
a
partnership
interest
was
received
by
the
appellant
as
a
result
of
the
transfer
to
the
partnership
of
the
Capri
assets.
Counsel
submits
further
that
the
receipt
of
loan
proceeds
cannot
be
regarded
as
“consideration”
within
the
meaning
of
subsection
97(2).
She
also
argues
that
since
the
appellant
is
jointly
and
severally
liable
to
repay
both
the
$10,000,000
and
the
$5,000,000
loans
there
has
in
essence
been
a
simple
refinancing
to
the
extent
of
$13,500,000
of
the
amount
previously
owed
to
the
Bank
of
Montreal.
She
urges
me
to
ignore
the
agreement
of
purchase
and
sale,
stating
that
the
partnership
was
a
done
deal
on
January
30,
1987
and
that
the
agreement
of
purchase
and
sale
was
forced
upon
the
parties
by
the
Hongkong
Bank
of
Canada
because
it
wanted
a
paper
trail
for
the
Capri
assets.
With
respect
to
the
most
relevant
cases,
counsel’s
written
submissions
are:
A.
Haro
Pacific
and
Stursberg
It
is
instructive
to
contrast
the
facts
in
this
appeal
with
the
facts
in
both
Stursberg
RKG
v.
M.N.R.,
[1991]
2
C.T.C.
261,
91
D.T.C.
5607
(F.C.T.D.),
and
Haro
Pacific
Enterprises
Ltd.
v.
Canada,
[1990]
2
C.T.C.
493,
90
D.T.C.
6583
(F.C.T.D.).
In
both
Stursberg
and
Haro
Pacific
the
respective
taxpayers
received
cash
from
the
partnerships
of
which
they
were
members.
In
both
cases,
the
source
of
the
cash
was
capital
contributed
by
one
of
the
other
partners
to
the
partnership
with
the
intention
that
the
funds
be
paid
to
the
taxpayer.
The
recipient
partner
in
each
case
was
entitled
to
retain
those
funds
entirely
for
its
own
benefit,
without
any
obligation
to
repay
the
sums
to
the
partnership
or
to
a
creditor
of
the
partnership.
There
was
no
borrowing
involved
which
the
recipient
was
liable
to
repay.
In
Haro
Pacific,
the
Federal
Court-Trial
Division,
the
taxpayer
transferred
property
to
the
partnership
and
received
cash
which
had
been
contributed
as
equity
by
the
other
partner.
It
was
held
that
the
amount
so
received
was
“consideration”
for
the
purpose
of
subsection
97(2).
The
partnership
agreement
in
Haro
Pacific
provided
that
the
partner
was
entitled
to
receive
the
cash
payment
“out
of
the
property”
of
the
partnership.
It
was
thus
clear
that
the
partners
intended
there
to
be
a
transfer
of
property
in
the
cash
from
the
partnership
to
the
partner.
As
such,
the
cash
payment
in
Haro
Pacific
could
clearly
be
treated
as
“consideration”
to
the
electing
partner.
Stursberg
similarly
treated
a
cash
withdrawal
by
a
partner
of
funds
contributed
by
another
partner
to
be
proceeds
of
disposition
of
his
partnership
interest
to
the
withdrawing
partner.
As
these
funds
were
injected
in
the
partnership
for
the
sole
purpose
of
being
transferred
to
the
other
partner
whose
interest
in
the
partnership
was
being
bought
out
with
the
funds
which
became
his
absolute
property,
the
cash
could
be
treated
as
proceeds
of
disposition.
The
facts
of
these
two
cases
are
different
in
very
important
ways
from
the
facts
of
this
appeal.
Neither
the
decision
in
Haro
Pacific
nor
in
Stursberg
is
authority
to
adjust
the
proceeds
of
disposition
to
the
appellant
pursuant
to
subsection
97(2)
of
the
Act.
B.
Otey
The
case
which
most
clearly
illustrates
the
principles
applicable
to
the
appellant’s
situation
is
an
American
case,
Otey
v.
Commissioner
of
Internal
Revenue
(1980),
634
F.
2d.
1046;
affg
(1978)
70
T.C.
312
(U.S.T.C.),
a
decision
of
the
United
States
Court
of
Appeal
(Sixth
Circuit)
affirming
the
United
States
Tax
Court.
This
case,
although
decided
for
purposes
of
U.S.
tax
laws,
addresses
the
same
question
as
is
raised
in
this
appeal.
In
the
Otey
case,
the
taxpayer
Otey
entered
into
a
partnership
with
Thurman
and
on
December
30,
1971
Otey
transferred
real
property
with
a
cost
basis
of
$18,500
(U.S.)
and
a
fair
market
value
of
$65,000
(U.S.)
to
the
partnership.
Otey
and
Thurman
each
received
a
50
per
cent
interest
in
the
partnership.
Thurman
contributed
no
capital
but
his
involvement
was
essential
to
obtain
a
loan
in
order
for
the
partnership
to
develop
the
property
contributed
by
Otey.
On
January
11,
1972
the
partnership
received
a
construction
loan
of
$870,300
(U.S.)
which
Otey
and
Thurman
were
jointly
and
severally
liable
to
repay.
The
partnership
advanced
$64,750
(U.S.)
from
the
loan
proceeds
to
Otey.
U.S.
tax
laws
permit
a
partner
to
contribute
property
to
a
partnership
and
take
back
a
partnership
interest
without
tax
consequences.
Further,
a
partner
may
receive
a
cash
distribution
from
the
partnership
without
a
resulting
taxable
gain
provided
such
distribution
does
not
exceed
the
partner’s
adjusted
cost
base
of
his
interest
in
the
partnership.
The
legislation
also
states
that
if
the
transfer
of
property
by
a
partner
to
a
partnership
results
in
the
receipt
by
the
partner
of
cash
or
consideration,
then
the
transaction
is
deemed
to
be
a
sale
rather
than
a
contribution
of
capital
to
a
partnership.
The
issue
addressed
by
the
Court
in
the
Otey
case
was
whether
the
transaction,
which
was
in
form
a
contribution
of
property
to
the
partnership
followed
by
a
distribution
of
loan
proceeds
to
Otey,
was
in
substance
a
sale
of
the
property
to
the
partnership
by
Otey
or
a
non-taxable
event.
The
Court
noted
that
a
taxpayer
ought
not
be
able
to
use
the
partnership
rollover
provisions
to
render
non-taxable
what
would
in
substance
have
been
a
taxable
exchange
if
the
transaction
had
not
been
run
through
a
partnership.
The
Court
stated
that
if
Otey
had
used
the
property
as
a
sole
proprietor
for
development,
was
able
to
obtain
borrowed
funds
and
used
the
loan
proceeds
for
his
personal
use,
no
gain
for
tax
purposes
would
have
been
realized.
The
Court
relied
on
the
fact
that
the
property
in
question
was
the
only
capital
contributed
to
the
partnership
and
without
this
property
the
partnership
would
have
had
no
assets
and
no
business.
Also,
the
property
had
to
be
in
the
partnership
to
make
the
borrowing
possible.
The
Court
emphasized
the
fact
that,
as
a
partner,
Otey
remained
personally
liable
for
the
entire
amount
borrowed
by
the
partnership.
Finally,
distributions
by
a
partnership
to
a
partner
out
of
borrowed
funds
to
restore
capital
accounts
to
equality
do
not
demonstrate
that
the
contributions
were
a
sale
to
a
partnership.
The
Court
distinguished
the
situation
where
a
partner
contributes
property,
the
partnership
borrows
money
and
distributes
the
borrowed
funds
to
the
partner
from
the
situation
where
the
distributed
funds
come
directly
from
the
other
partner
as
equity
and
are
withdrawn
by
the
partner
who
contributed
property
for
his
own
retention.
The
latter
fact
pattern
is
the
situation
found
in
Haro
Pacific
and
Stursberg.
At
page
321
of
the
trial
level
in
Otey,
the
U.S.
Tax
Court
stated:
Had
the
distributed
funds
come
directly
from
the
other
partner,
respondent’s
[IRS]
case
would
be
strong.
While
it
may
be
argued
that
the
funds
have
come
indirectly
from
Thurman
because
his
credit
facilitated
the
loan,
the
fact
is
that
the
loan
was
a
partnership
loan
on
which
the
partnership
was
primarily
liable,
and
both
partners
were
jointly
and
severally
liable
for
the
full
loan
if
the
partnership
defaulted.
We
do
not
view
the
factual
pattern
here
as
constituting
a
disguised
sale
of
the
land
to
Thurman
or
the
partnership.
For
all
the
above
reasons,
we
cannot
sustain
respondent
in
his
attempted
recharacterization
of
the
transfer
as
a
sale.
Also,
the
Court
stated
that
the
fact
that
the
documentation
indicated
the
transfer
to
be
a
“sale”
for
cash
was
not
particularly
significant
since
the
use
of
the
word
“sale”
is
not
determinative.
Rather,
it
was
the
true
intent
of
the
partners
which
indicated
whether
there
was
a
contribution
of
capital
to
the
partnership
or
a
sale
of
the
assets
to
the
partnership.
The
Tax
Court
concluded
that
the
receipt
by
Otey
of
loan
proceeds
from
the
partnership
which
Otey
was
personally
liable
to
repay
did
not
constitute
income
for
tax
purposes
to
Otey.
The
Court
of
Appeal
agreed
with
the
Tax
Court’s
analysis
and
conclusions.
It
is
submitted
that
the
analysis
in
Otey
should
apply
to
resolve
the
issue
in
the
present
appeal
in
favour
of
the
appellant.
Submissions
of
the
respondent
The
respondent’s
principal
submissions
are
that,
examining
the
transaction
as
a
whole,
there
was
not
a
refinancing,
but
rather
it
is
clear
that
the
partnership
purchased
the
assets
from
the
appellant
and
that
the
appellant
received,
in
addition
to
its
capital
interest
in
the
partnership,
an
amount
of
$13,500,000
because
that
amount
went
to
pay
the
appellant’s
pre-existing
indebtedness
to
the
Bank
of
Montreal.
He
points
to
authorities
that
form
does
matter
even
though
substance
must
also
be
examined.
Analysis
Although
I
agree
that
labelling
a
document
“Agreement
of
Purchase
and
Sale”
does
not
necessarily
make
it
so,
I
observe
that
another
document
entitled
“Fee
Agreement”
apparently
signed
January
30,
1987
and
only
by
the
partnership
and
Mannai
contains
a
“whereas”
which
reads
as
follows:
the
parties
hereto
entered
into
a
partnership
agreement
on
the
30th
day
of
January,
1987,
being
the
effective
date
of
the
partnership,
which
may
from
time
to
time
be
postponed
until
registration
of
the
purchase
of
the
partnership
assets.
[Emphasis
added.]
Again,
in
my
view,
these
agreements,
by
themselves,
do
not
determine
the
issue
but
they
cannot
be
totally
ignored
in
attempting
to
ascertain
the
substance
of
the
transaction.
I
agree
that
the
decisions
in
Haro
and
Stursberg
can
be
distinguished
from
the
facts
in
this
appeal.
In
Otey
the
factual
situation
was
very
similar
but
not
identical
to
the
facts
here.
In
any
event,
although
the
analysis
in
Otey
is
helpful,
I
have
concluded
it
would
be
unwise
to
determine
this
appeal
solely
on
the
basis
of
a
U.S.
decision
based
on
an
interpretation
of
U.S.
law.
In
my
opinion
one
must
examine
the
entire
picture
before
and
after
the
entering
into
the
partnership
agreement
and
the
advancement
of
funds.
Before
the
partnership
agreement
and
the
new
loans
from
Mannai
and
the
Hongkong
Bank
of
Canada,
which
were
made
to
the
partnership,
the
appellant
was
the
sole
debtor
to
the
Bank
of
Montreal
in
an
amount
of
$13,500,000
and
the
sole
owner
of
the
Capri
assets.
After
the
partnership
agreement
and
the
new
loans
and
the
advance
of
funds
to
the
Bank
of
Montreal,
the
appellant
was
no
longer
indebted
to
the
Bank
of
Montreal
and
was
no
longer
the
sole
owner
of
the
Capri
assets,
but
through
the
partnership
the
appellant
and
its
parent
owned
together
50
per
cent
of
the
Capri
assets
and
Mannai
also
owned
50
per
cent.
This,
in
my
opinion,
is
substantially
different
from
a
refinancing
whereby
one
financial
institution
steps
into
the
place
of
another.
Admittedly
the
appellant
and
its
parent
became
liable
to
Mannai
and
the
Hongkong
Bank
of
Canada
on
the
new
loans
totalling
$15,000,000.
However,
although
this
liability
was
a
joint
and
several
one,
i.e.,
that
the
creditors
could
sue
the
appellant
and
its
parent
for
the
entire
amount,
these
debtors
would
have,
upon
paying
the
full
amounts
of
the
two
loans,
a
recourse
against
their
partner,
Mannai
for
50
per
cent
of
the
amounts
paid
to
the
creditors.
Because
of
the
foregoing,
I
have
concluded
that
for
its
transfer
of
the
Capri
assets
to
the
partnership
the
appellant
did
receive
something
in
addition
to
a
simple
interest
in
the
partnership.
The
partnership,
in
effect,
advanced
$13,500,000
to
the
appellant
which
the
appellant
used
to
pay
its
indebtedness
to
the
Bank
of
Montreal.
Consequently,
in
my
opinion,
subsection
97(1)
is
applicable
and
subsection
97(2)
is
not
applicable
because
the
appellant
received
more
than
an
interest
in
the
partnership
with
the
result
that
the
rollover
provisions
of
paragraphs
85(1
)(a)
to
(f)
are
not
available.
In
my
further
opinion,
however,
since
the
appellant
and
its
parent
were
liable
for
50
per
cent
of
the
new
loans
there
was
a
refinancing
to
that
extent.
Consequently,
what
the
appellant
received
as
consideration
for
the
transfer
of
the
Capri
assets
in
addition
to
an
interest
in
the
partnership
was
50
per
cent
of
$13,500,000,
i.e.,
$6,750,000
and
that
this
latter
figure,
rather
than
the
$13,500,000
used
by
the
Minister,
is
the
figure
which
represents
the
proceeds
of
disposition
of
the
Capri
assets.
Therefore,
for
all
of
the
above
reasons
the
appeal
is
allowed
to
the
foregoing
extent
and
the
matter
is
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
accordingly.
Since
the
appeal
is
allowed
only
to
the
extent
mentioned
above,
there
shall
be
no
costs.
Appeal
allowed
in
part.
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