Richard B. Stursberg, A.L. Peter Stursberg, Jessmar Investments Ltd., Richard K.G. Stursberg, W.B.G. Developments Ltd., Margaret L. Sheardown, Noran M. Sheardown and Frances E. Duncan v. Minister of National Revenue, [1990] 1 CTC 2335, 90 DTC 1159

Mogan, T.C.J.:—The appellant was a partner in a general partnership formed under the laws of British Columbia and under the firm name and style "Kanvan Group" (the "Partnership"). The purpose of the Partnership was to purchase certain land; to plan, develop and construct a multiple unit residential building (referred to in tax jargon as a “MURB”) on such land; and to earn rental income from such land and building. In 1981, the Partnership purchased a parcel of land in the City of Kanata, Ontario and paid to Kanata municipal levies in the aggregate amount of $214,848 in connection with the development of that land. The primary issue in this appeal is whether the amount of $214,848 may be deducted as an expense in computing the income of the Partnership under paragraph 18(1)(a) of the Income Tax Act or whether the amount of $214,848 is a non-deductible payment on account of capital under paragraph 18(1)(b) of the Act. A secondary issue affecting only the appellant and one other partner is whether there was in 1983 a disposition of a portion of his partnership interest with a resulting capital gain.

The Partnership was formed in the summer of 1981 and immediately acquired a parcel of land in the City of Kanata adjoining the City of Ottawa. The land was adequate in size for the rental project which the Partnership intended to construct but it had to be rezoned to permit construction. The Partnership was pursuing the rezoning in the fall of 1981 when the federal budget presented on November 12 stated that the special deductions for a proposed MURB would not be available in 1981 unless the installation of footings for the building was commenced before 1982. As a result of this new deadline imposed by the federal budget, it was necessary for the Partnership to change its plan and acquire a different parcel of land which was properly zoned so that the project could proceed with a realistic expectation that the installation of the footings would commence before January 1, 1982.

The Partnership through its agent/trustee, Treabbacom Properties Inc., entered into an agreement of purchase and sale with Costain Inc. ("Costain") dated December 4, 1981, pursuant to which it agreed to purchase on or about December 23, 1981 a parcel of land in Kanata comprising not less than five acres and zoned to permit the construction of four three-storey walk-up apartment buildings. It was the Costain land acquired on short notice which permitted the Partnership to meet the “footings deadline” of December 31 and proceed with the MURB project. In the purchase agreement with Costain, the Partnership acknowledged that it would be responsible for the special levies and fees due on application for a building permit and described in Schedule “J” of the Subdivision Agreement (dated March 30, 1977) between Costain and the Township of Goulbourn. [The Costain land was contained in the portion of the Township of Goulbourn which had become part of the City of Kanata when that City was formed at the end of 1978; and Kanata had assumed the municipal development agreements which were in place affecting lands of the predecessor Township which had become part of Kanata.] The Partnership also agreed to pay "the usual fees required" to obtain a building permit. The special levies and fees described in Schedule "J" of the Subdivision Agreement may be summarized as follows:

The first three items plus an engineering fee based on 125 per cent of the estimated cost of the building were due and payable on or before the issue of a building permit. For convenience, the above four items will be referred to herein as the “municipal levies".

Because of the need to commence the installation of the footings before the end of December 1981, the Partnership (through Treabbacom Properties Inc.) entered into a Pre-site Plan Agreement with Kanata and Costain which contained, inter alia, the following provisions:

(A) Kanata agreed to issue to the Partnership before December 9, 1981 a foundation permit for the four three-storey walk-up apartment buildings.

(B) The Partnership agreed (i) to construct the four buildings in the design already approved by Kanata; (ii) to restore the site to its original condition if the Partnership did not proceed with the development by December 31, 1981 and complete the buildings by December 31, 1982; (iii) to provide to Kanata a letter of credit for $12,000 to secure its obligation to restore the site; (iv) before the issuance of the foundation permit, to pay to Kanata a non-refundable amount of $10,000 and to provide to Kanata a letter of credit for $240,000 to secure payment of the municipal levies expected to be payable upon the issuance of a full building permit; and (v) to enter into a site plan agreement with Kanata prior to the issuance of a full building permit.

(C) The cash payment of $10,000 plus the letter of credit for $240,000 were to be applied against the municipal levies payable to Kanata on the date of issuance of the full building permit.

The Pre-site Plan Agreement was dated December 8, 1981 and the cash payment of $10,000 plus the $240,000 letter of credit were delivered to the City of Kanata on December 9, 1981 when it issued a document entitled “Building Permit" which authorized only the installation of the footings to an estimated value of $100,000. Although the Pre-site Plan Agreement required delivery of a letter of credit for $240,000, the municipal levies payable under Schedule "J" of the Subdivision Agreement were only $214,848. The full building permit was not issued until after May 10, 1982 when the final Site Plan Agreement was signed by Treabbacom and the City of Kanata. By May 1982, the development levy had increased from $1,143 per residential unit to $1,260; and the engineering fee had increased to 2.5 per cent of the final contract amount for the work.

Mr. Roger Maus, a member of the Partnership who managed the Kanata project and testified in this appeal, thought that the municipal levies did not add any value to the project because there was nothing in the Subdivision or Site Plan Agreements which required Kanata to expend an amount equal to such levies on the Costain land or other land in the immediate vicinity. In his view, such levies were not authorized under a municipal by-law as a condition to obtaining a building permit but certain municipalities like Kanata were able to collect them by way of contract with respect to certain projects because the particular landowners were so anxious to proceed with construction. Apparently, if an owner was in a hurry to develop his land and could not afford a lengthy delay, the municipality was able to withhold its building permit like a hostage until the owner agreed to pay special levies and fees pursuant to a term in a Subdivision or Site Plan Agreement.

The Pre-site Plan Agreement dated December 8, 1981 provided in part as follows:

7. Prior to the issuance of a foundation permit by the City, the Owner agrees to pay to the City $10,000, which will be non-refundable, and shall post an irrevocable letter of credit for the balance of fees estimated to be required at the time that the building permit is issued. The amount of this letter of credit is to be $240,000 and shall expire March 31st, 1982. On the date of issuance of the Building Permit, the above letter of credit and $10,000 in cash shall be applied against the fees and charges determined by the Chief of Building Services . . .

Although the $ 10,000 cheque and the $240,000 letter of credit were delivered to Kanata on December 9, 1981, Mr. Maus explained that Kanata never drew funds against the letter of credit because it was an embarrassing process for the Partnership. Instead, the letter of credit was replaced by payments of cash which the Partnership made to Kanata in May 1982 when the Site Plan Agreement was signed. It appears that the letter of credit was posted only as security for the municipal levies. It is not clear, however, that the Partnership incurred the expense of $214,848 in its fiscal period ending December 31, 1981 because those municipal levies were not payable until Kanata issued the full building permit; and that permit could not be issued until after the Site Plan Agreement was negotiated and signed in the spring of 1982. If the Partnership project in Kanata had collapsed in February 1982 without proceeding beyond the "footings" stage, the letter of credit for $240,000 might have been returned to the Partnership because, although addressed by the Royal Bank of Canada to the City of Kanata, it contained the following clause:

Provided, however, that you are to deliver to The Royal Bank of Canada, Ontario— International Centre, Royal Bank Plaza, Toronto, Ontario M5J 2J5 at such time as a written demand for payment is made upon us, a copy of this letter countersigned by Mr. Roger Maus confirming that the building permits as set out above have been issued, and that the final site plan agreement has been executed by both parties.

Having raised the question as to whether the amount of $214,848 was an expense incurred in 1981, I must leave aside that question because it was not addressed by counsel in argument and the respondent admitted the appellant's allegation in paragraph 4 of his notice of appeal that “In 1981 the Partnership paid a municipal levy in the amount of $214,848.".

The appellant argues that the payment of $214,848 for the municipal levies did not create any enduring benefit to the Partnership; the payment was an obligation (not a benefit) which had to be discharged by [the] Partnership before it could construct the rental residential buildings which were incidental to its basic purpose; and payment of the municipal levies did not increase the value of the property as an asset that could be transferred to a subsequent purchaser. The respondent argues that the payment of $214,848 did produce an enduring benefit because the payment was a condition precedent to the construction of the rental buildings; the payment was a non-recurring cost and not a running day-to-day expense in a business; and the payment was as much a cost of the project as the survey, the building permit, architect's fees, and any other pre-construction cost required to be paid in order to complete the structure.

Counsel for the appellant relied on the decision of the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; [1985] 2 C.T.C. 111; 85 D.T.C. 5373 in which Estey J. delivered judgment for the Court and set out the following extracts from two earlier decisions. In M.N.R. v. Algoma Central Railway, [1968] S.C.R. 447; [1968] C.T.C. 161; 68 D.T.C. 5096, Fauteux J., as he then was, stated at page 162 (D.T.C.5097):

Parliament did not define the expressions “outlay . . . of capital” or "payment on account of capital”. There being no statutory criterion, the application or nonapplication of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination . . .

And in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia [1965] 3 All E.R. 209; [1966] A.C. 224, Lord Pearce stated at page 264:

The solution to the problem is not to be found by any rigid test or description. It

has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so Clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree. That answer:

depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process:

per Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946) 72 C.L.R. 634, 648.

[Emphasis added.]

These decisions from a high judicial level indicate the importance of the facts of a particular case including "the whole set of circumstances". Applying the words of Dixon, J. in Hallstroms, "from a practical and business point of view”, I conclude that the amount in issue ($214,848), if paid or incurred in 1981, was to obtain the foundation permit authorizing installation of the footings after December 9, 1981. For the reasons set out below, I conclude that the amount in issue was a capital outlay and not a deductible revenue expense.

On the facts, I do not regard this as the kind of “border line” case referred to by Lord Pearce in B.P. Australia. The Partnership was formed only in August 1981 and, during December 1981, it was striving to complete the purchase of the Costain land and to obtain the municipal authority required to dig a hole in the ground and install the footings which would qualify the proposed buildings as MURBs. The Partnership balance sheet at December 31, 1981 disclosed only two assets as follows:

Because of the balance sheet reference to "Note 2”, I shall set it out in its entirety:

2. Real Estate and Mortgage Payable

On December 23, 1981, the partnership, through Treabbacom Properties Inc., purchased a parcel of land of not less than five acres, described as “Block C, Plan M231, City of Kanata, Ontario” for $450,000 from Costain Ltd. The purchase was financed by down payments of $67,500 and a first mortgage secured on the property payable to Costain Ltd. of $382,500. The mortgage is for a term of one and one-half years with interest at the rate of 15%, interest only payable semi-annually, and principal repayments may be made without notice or penalty. Accrued mortgage interest of $1,258 is being reflected as part of the mortgage payable.

Land development and improvement expenses of $65,568 were included as part of the cost of real estate.

I assume that most of the $65,568 referred to in Note 2 was the cost of the footings installed before year end. On December 31, the proposed Partnership rental operation had not yet commenced. Indeed, there was barely a hole in the ground and less than $65,000 of footings installed. The statement of income for 1981 therefore shows no revenue whatsoever and seven expense items totalling $324,080 of which the largest amount by far was the municipal levies of $214,848. In these circumstances, I find it difficult to image [sic] how the substantial outlay of $214,848 can be regarded as an expense to be charged against the operation of a rental property which had not yet come into existence. In most of the cases cited by counsel for the appellant, there was a long-standing business operation against which a substantial outlay (possibly "capital" in character) could be charged if the Court were to find that such outlay was in fact a revenue expense: Johns-Manville Canada Inc. v. The Queen, supra; M.N.R. v. Algoma Central Railway, supra; Oxford Shopping Centres Ltd. v. The Queen, [1981] C.T.C. 128; 81 D.T.C. 5065; The Queen v. Metropolitan Properties Co. Limited, [1985] 1 C.T.C. 169; 85 D.T.C. 5128. In this appeal, the Partnership had no business or leasing operation at all in 1981; its property development was just getting under way at year end.

There was considerable evidence and argument as to whether payment of the municipal levies increased the value of the land as proof of an enduring benefit. It appears to me that payment of the municipal levies by itself did not increase the value of the land alone but a careful subsequent purchaser probably could, by contract, obtain the benefit of such payment if the land were to be sold in the brief period after such payment and prior to construction. A landowner, however, will not ordinarily incur the cost of an architect's fee and related development levies unless he has decided to construct the building which the architect will design and for which the levies will be paid. And when a landowner like the Partnership is determined to construct the specific building designed by the architect and identified in the building permit and Site Plan Agreement, any reasonable payment made by the owner as a necessary condition to have the building constructed results in an enduring benefit in the building itself.

In my view, it is not necessary to prove an identified element of increased value in the building resulting from each such payment in order to prove that each payment resulted in an enduring benefit. This would apply equally to the architect's fee, the cost of soil tests and excavation, the building permit fee and the municipal levies required under the Site Plan Agreement. All such amounts must be paid as necessary conditions to have the building constructed. In the absence of evidence that a particular landowner is making an imprudent or irrational payment, it should be assumed that any cost which he incurs in the development of commercial land will be part of his total investment on which he expects some level of reasonable economic return. In this appeal, there was no suggestion that payment of the municipal levies was an imprudent or unreasonable payment. Therefore, the amount of $214,848 satisfies the basic test for an outlay of capital as a substantial non-recurring payment which results in an enduring benefit.

As an expert witness, the appellant called Ronald Patrick Walsh, a well qualified chartered accountant whose expertise in accounting matters was not challenged by the respondent. Mr. Walsh expressed the opinion that the Partnership followed generally accepted accounting principles (referred to as "GAAP") when it recorded the municipal levies of $214,848 as an expense in its 1981 financial statements “as this was the accounting principle followed by a significant number of similar entities in Canada in 1981”. In his report, he stated that the real estate development industry may be subdivided into two groups:

— entities involved in an ongoing process of acquisition, development, rental, leasing or sale of real property ("ongoing entities”)

— entities created for a single real estate project ("single purpose entities").

Traditionally, ongoing entities are public or private corporations whereas single purpose entities may be joint ventures, limited or general partnerships, private corporations or proprietorships.

According to Mr. Walsh, ongoing entities require financial information for a number of purposes which include: preparing annual financial statements; filing tax returns; obtaining financing; soliciting investors; permitting a comparison of operating results with similar entities; and identifying ability to start new projects. By way of contrast, single purpose entities ordinarily require financial information only to prepare annual financial summaries for owners and to file tax returns. On page 3 of his report, Mr. Walsh makes the following statements:

Municinal levies under GAAP

Accounting procedures have evolved as follows:

1. The accounting treatment of municipal levies is not a matter covered by the recommendations in the CICA Handbook.

2. Ongoing entities normally include municipal levies as part of the cost of land and/or buildings.

3. Single purpose entities normally record municipal levies as an expense because such fees do not create any physical improvement to the land and are generally considered to be a cost of earning rental revenue. The nature of such levies is similar to property taxes which also do not create an improvement to land and are routinely expenses.

Both of the foregoing approaches can be considered to be Generally Accepted Accounting Principles.

Referring to the above passage from Mr. Walsh's report, there does not appear to be a universal accounting principle which applies to the primary issue in this appeal as, for example, the requirement to set up a "reserve" for certain contingent obligations. Indeed, it would appear from his report that GAAP can accommodate the business wishes of both groups of real estate developers because (i) ongoing entities which are finance oriented and must appeal to investors and lenders would want to enrich their balance sheet and profit position by capitalizing municipal levies; whereas (ii) single purpose entities which are tax oriented with few owners would want to defer tax by expensing municipal levies to reduce profit. If there is no universal accounting principle which applies to the payment of municipal levies, then I question whether expert evidence on GAAP can be of assistance in the appeal.

In cross-examination, counsel for the respondent produced a document (Exhibit R-4) entitled “Accounting for Real Estate Development Operators" which was a research study published by the Canadian Institute of Chartered Accountants ("CICA") in 1971. Mr. Walsh acknowledged that Exhibit R-4 would have been the only Canadian text dealing with real estate accounting in 1981. He also stated that when the CICA Handbook was silent on a particular subject, the accountant should go to other sources; and a CICA research study is a source which could provide guidance but would not be binding. Exhibit R-4 contains the following passage at pages 9 and 10:

The various sections of the study that follow are based on the premise that there is no validity in an argument that one set of accounting principles is appropriate for the small company whereas a different set is needed for the large companies; admittedly considerations of materiality may have some bearing. As a general rule, however, the principles on which the industry's accounting is based are not affected by the size of operations or by the nature of ownership. Similarly, this premise is largely true for the application of accounting principles, and as a result it is not considered necessary or appropriate in this study to differentiate between large and small or public and private companies in the industry.

The above passage from Exhibit R-4 puts a cloud over Mr. Walsh's distinction between ongoing entities and single purpose entities. Although Exhibit R-4 is only a non-binding research study of the CICA, it was first published in 1971; it had a fourth printing in 1977 indicating wide distribution in the accounting profession; and it was the only Canadian text on the subject in 1981. Also, at page 24 of Exhibit R-4 in a chapter entitled "Costs of Development II - Buildings" the following paragraph appears:

The two principal questions that arise in connection with construction costs concern the capitalization of expenses during the construction period and the definition of the construction period. Direct construction costs do not generally pose any accounting problems. These direct costs include materials, labour, and overhead when the development company carries out its own construction, or the construction costs of a contractor; they will also include, for example, the costs of feasibility studies and soil tests, and the fees of architects, consulting engineers, and lawyers. Landscaping costs are also integral to property development and should be capitalized, although it has been the practice of some development companies to expense them.

The municipal levies described in Schedule "J" to the Subdivision Agreement and repeated in Section "F" of the Site Plan Agreement relate only to the construction of the building and they are not land costs. Therefore, as preconstruction costs, they are like "the costs of feasibility studies and soil tests, and the fees of architects" all of which should be capitalized according to page 24 of Exhibit R-4.

Mr. Walsh stated that capitalizing the municipal levies of $214,848 would increase the basic land cost ($450,000) by more than 40 per cent as at December 31, 1981 when the land had probably not gone up in value as a result of paying such levies. That statement may be true if municipal levies are regarded as a cost of land but, in looking at land, I think he was focussing on the wrong asset. He should have been concerned as to how he could reflect the municipal levies as a pre-construction building cost with a note to the balance sheet or some more appropriate disclosure. Those levies were not related to acquiring and holding the land; they were payable only upon the issuing of a building permit. Although there were only footings at an approximate cost of $60,000 on December 31, 1981, the Partnership balance sheet at December 31, 1982 showed the buildings at $3,028,836. If the amount of $214,848 had been capitalized as a pre-construction building cost at December 31, 1981, that same amount would have been less than seven per cent of the revised building costsone year later at December 31, 1982.

In my view, the expert accounting evidence is not persuasive on the primary issue. Mr. Walsh's distinction between ongoing and single purpose entities indicated that municipal levies were not governed by a universal accounting principle; and Exhibit R-4 not only undermined that distinction but also stated that similar pre-construction costs should be capitalized. And finally, I think that an accounting expert should have at least considered the possibility of capitalizing the $214,848 as a pre-construction building cost but Mr. Walsh seems to have regarded the capitalization of that amount only as a possible distortion of the land cost. It was clear from the documents that the payment of $214,848 was not connected with owning the land but only with constructing the buildings.

In the 1981 assessment under appeal, the respondent capitalized the amount of $214,848 and apparently allocated that amount between land and buildings. I find that the amount of $214,848 was a payment on account of capital and that it should have been allocated 100 per cent to the cost of the buildings. The appeal on the primary issue is therefore allowed only for the purpose of allocating all of the $214,848 as a cost of buildings.

The secondary issue in this appeal concerns a 1983 transaction in which the appellant reduced his participating interest in the Partnership from 40 per cent to 15 per cent. Paragraph 28A of the Partnership Agreement permitted a partner to withdraw from the Partnership or reduce his Partnership interest if a third party was willing to become a member of the Partnerhip and to acquire the amount by which the withdrawing partner wished to reduce his interest. In accordance with paragraph 28A, if the third party signed the Partnership Agreement and paid a prescribed amount to the Partnership, the withdrawing partner was entitled to receive from the Partnership the aggregate of the following three amounts each of which would be proportionate to the reduction in his partnership interest: (a) his capital contribution; (b) his share of the profits or losses; and (c) his share of the value of the assets of the Partnership which apparently was taken to mean the amount by which the fair market value of the assets of the Partnership exceeded cost.

The Partnership fiscal period was the same as the calendar year. On December 31, 1982, there were 10 members of the Partnership including the appellant who held a 40 per cent interest and WBG Developments Ltd. ("WBG") which held a 10 per cent interest. On or about February 7, 1983, the participating interest of the appellant was reduced from 40 per cent to 15 per cent and the participating interest of WBG was increased from 10 per cent to 35 per cent when WBG paid $162,500 to the Partnership and the Partnership paid $162,500 to the appellant.

At the time of this transaction, the aggregate capital contributions of all partners was $400,000; the accumulated losses of the Partnership were $1,079,248; and the fair market value of the Partnership assets exceeded cost by $250,000. The amount of $162,500 represented 25 per cent of all capital contributions ($400,000) plus 25 per cent of the increase ($250,000) in fair market value of Partnership assets over cost. There were no profits of the Partnership to allocate or pay to the appellant on February 7, 1983 but he testified that the amount of $269,812 (representing 25 per cent of the accumulated losses of the Partnership) was transferred on the books of the Partnership from his account to the account of WBG.

With respect to the reduction of the appellant's Partnership interest from 40 per cent to 15 per cent, counsel argued that the appellant's only transaction was with the Partnership and is therefore governed by the specific provision of the Income Tax Act which apply to transactions between partners and their partnership. In such transactions, the Act regards a partnership as a separate entity and each transaction will normally result in an adjustment (either increase or decrease) to the adjusted cost base of a particular partner's interest in the partnership. The adjustments are identified in paragraphs 53(1)(e) and 53(2)(c) of the Act. Specifically, the appellant relies on subparagraphs 53(1)(e)(iv) and 53(2)(c)(v) and on subsection 40(3) of the Act which prevents the deductions in paragraph 53(2)(c) from causing a negative adjusted cost base and a resulting deemed capital gain. Counsel for the appellant referred to subsection 100(2) as the mechanism within the Act to recapture and tax any negative adjusted cost base when a person disposes of an interest in a partnership.

The appellant also relies on paragraph 3 of Interpretation Bulletin IT-338R dated May 28, 1979 and published by Revenue Canada, Taxation. The relevant parts of paragraph 3 are:

In circumstances where the applicable provincial law and the partnership agreement provide for a continuation of an existing partnership on the admission of a new partner, the effect on the existing partners' ACB will depend on whether the new partner made a direct contribution to the partnership or whether he purchased his partnership interest from one or more of the existing partners. Where the transaction is outside the partnership (the new partner buys his interest from one or more existing partners) it will result in a disposition or part disposition of one or more of the existing partners' partnership interests . . . If the incoming partner makes a contribution of capital to the partnership, there is no disposition of the existing partners' partnership interests nor is there any adjustment to the ACB of these interests. . . .

Applying the law concerning form and substance, I find that the appellant sold a 25 per cent interest in the Partnership to WBG on or about February 7, 1983. Although the form of the transaction was a surrender of a 25 per cent Partnership interest by the appellant to the Partnership and the acquisition of a 25 per cent Partnership interest by WBG from the Partnership, the substance of the transaction was a sale from the appellant to WBG outside the Partnership. I accept the argument of the respondent's counsel that the Partnership was used simply as a conduit in that transaction.

The appellant's argument concerning the scheme of the Act in subsections 97(1), 98(2), 40(3) and paragraphs 53(1)(e) and 53(2)(c) is no doubt valid and would apply to many circumstances in many partnerships. This scheme of the Act will ordinarily avoid the disposition of a partnership interest by any existing partner when one or more new members are admitted to an ongoing partnership or when the participating units of an ongoing partnership are redistributed among the existing partners. In such circumstances, some or all of the subsections and paragraphs in the Act listed immediately above would operate to change the adjusted cost base of the various partnership interests held by certain existing partners without causing any existing partner to dispose of capital property (i.e. a portion of his partnership interest) for income tax purposes.

The appellant's 1983 transaction was, however, quite different from the examples referred to in the preceding paragraph. Firstly, the appellant surrendered or transferred a substantial portion (25/40 or 5/8) of his partnership interest. Secondly, the 25 per cent Partnership interest was not allocated among existing partners or among some existing and some new partners. On the contrary, it was transferred wholly to an existing partner to increase the participating interest of WBG from 10 per cent to 35 per cent. Thirdly, the amount of $162,500 paid in to the Partnership by WBG was simultaneously paid out to the appellant. Fourthly, 25 per cent of the Partnership's accumulated losses was transferred on the books of the Partnership from the appellant to WBG.

And fifthly, WBG paid 25 per cent ($62,500) of the increase ($250,000) in the value of Partnership assets over cost in order to acquire an additional 25 per cent interest in the Partnership; and the appellant received (through the Partnership as a conduit) the $62,500 which WBG paid. There was no evidence that the Partnership, as a separate entity, or that any partners other than the appellant received a benefit with respect to WBG's payment of the $62,500. In other words, the estimated increase in value of $250,000 was used only for the purpose of determining a portion of what WBG should pay in February 1983 to increase its participation in the Partnership and a portion of what the appellant should receive for decreasing its participation in the Partnership.

In the 1983 assessment under appeal, the respondent determined that the appellant realized a capital gain upon the disposition of a 25 per cent interest in the Partnership; and the amount of the gain which was assessed for tax is not in dispute. I find that the appellant did dispose of a 25 per cent interest in the Partnership in 1983. The appeal on the secondary issue is therefore dismissed. There will be no costs awarded in this appeal because the appellant did not achieve any significant success.

Appeal allowed in part.