John
B
Goetz:—This
is
an
appeal
by
the
appellant
with
respect
to
his
taxation
years
1972,
1973,
1974,
1975
and
1976.
The
appellant
claims
he
should
have
been
allowed
capital
cost
allowance
commencing
in
his
1972
taxation
year
and
ending
in
his
1976
taxation
year
on
a
certain
movie
film
as
claimed
in
his
income
tax
returns
from
1972
to
1976.
He
bases
his
claim
on
paragraph
20(1)(a)
of
the
Income
Tax
Act
and
Class
18
Schedule
II
of
the
Income
Tax
Regulations.
In
assessing
the
appellant,
the
respondent
relied,
inter
alia,
on
sections
3,
9,
20
and
96
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended,
and
upon
Class
18
of
section
1100
of
the
Income
Tax
Regulations
and
section
3
of
The
Limited
Partnerships
Act,
RSO
1970,
c
247.
The
respondent
further
alleges
as
a
statement
of
fact
that
on
August
15,
1972,
the
appellant
and
Pentacle
VIII
Productions
Limited
(hereinafter
referred
to
as
“Pentacle”)
entered
into
a
partnership
agreement
to
produce
a
film
entitled
“Lies
My
Father
Told
Me”;
and
further
that
limited
partners
contributed
$371,500
to
the
capitalization
of
the
partnership
of
which
the
appellant
contributed
$50,000
for
a
13.4589%
interest
in
the
partnership.
The
respondent
further
alleges
that
depreciable
property,
if
acquired,
was
only
acquired
during
the
1974
taxation
year.
Consequently,
the
sums
of
$76,395
and
$41,701
were
properly
disallowed
in
the
1972
and
1973
taxation
years
pursuant
to
the
provisions
of
paragraph
20(1
)(a)
and
subsection
96(1)
of
the
Act.
The
respondent
further
alleges
that
if
the
total
capital
cost
of
the
film
to
the
limited
partnership
is
more
than
$371,500,
then
the
appellant’s
share
of
the
losses
of
the
partnership
should
not
exceed
his
capital
contribution
to
the
partnership
during
the
relevant
taxation
years.
Facts
The
appellant
filed
a
very
large
number
of
documents
composed
mainly
of
agreements
between
various
parties
as
well
as
financial
statements
of
two
different
corporations:
Pentacle
statements
from
December
31,
1972
to
1980;
and
Pentimento
Productions
Limited
(hereinafter
referred
to
as
“Penti-
mento”)
financial
statements
from
1974
to
1980
inclusive.
On
August
15,
1972,
a
limited
partnership
agreement
was
entered
into
between
Pentacle
(the
General
Partner)
and
each
person
in
Schedule
“A”
(the
limited
partners).
There
were
11
limited
partners,
one
of
whom
was
the
appellant.
Some
of
the
terms
of
the
agreement
were:
2.3
The
Limited
Partners
will
not
be
liable
for
the
debts
of
the
Partnership
beyond
the
amounts
they
contribute
to
the
capital
of
the
Partnership.
2.4
The
General
Partner
will
be
responsible
for
the
debts
of
the
partnership.
As
in
Schedule
A,
the
limited
partners
were
to
contribute
the
total
sum
of
$371,500,
of
which
the
appellant
contributed
$50,000.
Pentacle,
according
to
its
balance
sheet
as
of
December
31,
1972,
sets
out
as
a
fixed
cost
for
the
motion
picture
film
production
of
“Lies
My
Father
Told
Me”
the
sum
of
$946,027.34.
According
to
Pentacle’s
notes
to
financial
statements
for
December
31,
1973:
3.
The
partnership
signed
an
agreement
on
December
28,
1973
with
Durham
Productions
Inc,
in
which
Durham
Productions
Inc
will
loan
$350,000
to
the
partnership
to
complete
the
film.
(Italics
mine.)
In
the
notes
to
financial
statements
of
Pentacle
for
the
period
ending
December
31,
1974,
it
is
stated:
1.
Partnership
agreement
..
.
Losses
of
the
partnership
are
a
charge
against
the
partners
in
proportion
to
their
respective
capital
contributions
but
are
limited,
in
the
case
of
the
limited
partners,
to
their
respective
capital
contributions.
2.
Accounting
policy
and
presentation
No
revenues
have
been
earned
to
December
31,
1974
and
all
production
costs
incurred
to
this
date
have
been
capitalized.
The
cost
of
the
film
will
be
amortized
as
an
expense
in
amounts
equal
to
net
distribution
revenues
received.
.
.
.
3.
Completion
of
film
By
an
agreement
dated
June
21,
1974
the
partnership
agreeed
with
the
nominees
of
Pentimento
Productions
that
Pentimento
would
assume
responsibility
for
the
cost
of
completion
of
the
film
estimated
to
be
$350,000.
..
.
In
return
for
the
assumption
of
the
responsibility
for
the
costs
of
completing
the
film,
the
partnership
has
agreed
that
Pentimento
will
receive
the
first
$350,000
of
the
proceeds
from
any
use
of
the
film.
(Italics
mine.)
On
September
7,
1972
there
was
an
agreement
entered
into
between
Canadian
Film
Development
Corporation
and
Famous
Players
Limited
and
Pentacle
VIII
Productions
Limited,
Limited
Partnership,
to
produce
“Lies
My
Father
Told
Me”.
This
agreement
related
to
advances
to
Pentacle
for
the
production
of
the
film
“Lies
My
Father
Told
Me”
in
the
sum
of
$200,000
from
Canadian
Film
Development
Corporation
and
$25,000
from
Famous
Players.
Pentacle
(referred
to
as
the
“Producer”)
agreed
to
invest
$305,000
toward
the
production
of
the
film.
The
terms
of
this
agreement
required
that
all
moneys
earned
from
the
use
of
the
film
were
to
be
applied
in
the
following
manner
in
order
of
priority:
(1)
The
Canadian
Imperial
Bank
of
Commerce
up
to
the
maximum
of
$100,000;
(2)
The
Canadian
Development
Corporation,
Famous
Players,
the
Producer
and
the
completion
guarantor,
pro
rata
and
pari
passu,
until
all
their
advances
pursuant
to
this
agreement
have
been
fully
and
finally
reimbursed.
This
agreement
was
later
amended
in
April
1973
but
has
no
effect
on
the
basic
facts
involved.
On
September
7,
1972,
Pentacle
entered
into
an
agreement
with
Jan
Kadar
to
produce
the
film.
On
November
1,
1973,
Pentacle
entered
into
a
loan
agreement
with
the
Canadian
Imperial
Bank
of
Commerce
for
a
loan
in
the
aggregate
of
$200,000.
Part
of
the
terms
of
that
agreement
were
as
follows:
2.
The
Borrower
shall
use
the
proceeds
of
the
Loans
to
finance
the
production
of
a
film
based
on
a
screenplay
written
by
Ted
Allan
and
presently
entitled
“Lies
My
Father
Told
Me”.
3.
..
.
The
Borrower
(Pentacle)
hereby
covenants
and
agrees
that
all
monies
earned
from
the
use
of
the
Film
..
.
shall
be
applied
firstly
to
indebtedness
in
respect
of
such
advances
and
such
interest
thereon.
In
this
agreement
the
borrower
(Pentacle)
warranted
that
the
limited
partners
had
contributed
at
least
$371,500
(Canadian)
as
capital
and
that
Pentacle
had
received
$200,000
from
Canadian
Film
Development
Corporation
and
the
sum
of
$45,000
from
Famous
Players
Limited.
On
page
4
of
that
agreement,
it
was
further
warranted
that
“production
of
the
Film
is
now
in
progress’
and
that
it
would
be
successfully
completed
out
of
the
proceeds
of
the
loans
just
referred
to.
On
April
18,
1974,
an
agreement
was
entered
into
by
Arnold
Schniffer
and
Arnold
Issenman
(The
Nominees)
and
Pentacle
VIII
Productions
Limited,
among
other
things,
to
complete
the
film
for
distribution
and
release
(the
“work”).
The
Nominees
agreed
to
provide
an
amount
not
exceeding
$350,000
for
the
“work”
and
the
payables.
The
Pentacle
partnership
agreed
to
pay
into
the
Canadian
Imperial
Bank
of
Commerce
in
Toronto,
any
returns
from
the
use
of
the
film.
At
this
point
in
time
it
was
recognized
that
there
was
further
photography
and
“dubbing”
to
complete
the
production
and
post-production
expenses
totalling
at
least
$280,000.
Columbia
Picture
Industry
Inc,
on
March
25,
1975,
wrote
a
letter
which
is
in
the
form
of
a
very
long
agreement
addressed
to
Pentimento
and
to
Pentacle
wherein
it
is
stated
that
Pentimento
and
Pentacle
warranted
and
represented
that
they
had
substantially
completed
production
of
a
coloured
feature
motion
picture
entitled
“Lies
My
Father
Told
Me”.
This
document,
in
excess
of
30
pages,
gave
Columbia,
among
other
rights,
the
right
to
distribute,
cut
and
re-edit
the
film.
On
April
21,
1975,
Pentacle
wrote
the
limited
partners
advising
that
“the
film
is
now
being
cutand
should
be
in
answer
print
form
within
afewdays.”.
By
agreement
dated
April
13,
1973,
between
Canadian
Film
Development
Corporation,
Famous
Players
Limited
and
Pentacle
VIII
Productions
Limited,
Limited
Partnership,
to
produce
“Lies
My
Father
Told
Me”,
an
agreement
was
entered
into
whereby
it
was
acknowledged
that
further
advances
of
funds
were
required
if
the
film
was
to
be
completed
and,
as
a
result,
Famous
Players
advanced
further
sums
of
money
for
the
completion
of
the
film.
The
appellant
called
as
a
witness
one
Carl
Laywine
who
was
a
chartered
accountant
and
acted
for
Pentacle.
His
evidence
was
extremely
brief
and
he
reiterated
that
in
his
view
the
film
cost
$946,027.44
and
any
loans
were
payable
by
the
general
partner
(Pentacle).
He
stated
that
he
had
set
up
a
capital
cost
schedule
whereby
the
appellant
would
be
able
to
claim
a
60%
capital
cost
allowance
for
the
full
year
(1972)
and
forward.
He
mentioned
that
Columbia
Pictures,
in
March
1981,
remitted
the
sum
of
$419,000
in
Canadian
funds,
which
was
paid
to
the
Imperial
Bank
of
Commerce
and
to
other
creditors.
He
agreed
in
cross-examination
that
Pentacle
was
to
be
paid
in
order
to
cover
its
debts
from
the
proceeds
of
the
film.
He
agreed
that
at
the
end
of
1973
Pentacle
was
aware
that
they
did
not
have
sufficient
funds
to
complete
the
film
and
consequently
the
arrangement
with
Pentimento.
Harry
Gulkin,
who
was
the
film
producer,
stated
that
the
photography
was
completed
in
November
1972,
and
that
the
film
was
of
125
minutes’
duration.
Jan
Kadar,
who
was
a
director
of
a
very
high
calibre,
was
very
unhappy
with
this
rough
cut
and
would
not
allow
the
release
of
the
film.
Pentacle,
having
no
further
funds,
then
entered
into
the
agreement
with
Pentimento
referred
to
above.
As
at
December
31,
1972,
the
financial
statements
of
Pentacle
show
the
acquisition
costs
of
the
film
were
$946,027.34
and
he
set
this
figure
up
as
a
capital
cost
to
be
depreciated
under
Regulation
1100(1)
Class
18,
whereby
“Property
that
is
a
motion
picture
film
other
than
a
television
commercial
message”
can
be
appreciated
at
the
rate
of
60%.
The
accountant,
as
of
December
31,
1972,
set
up
a
depreciation
schedule
for
the
limited
partners
on
this
basis.
In
the
limited
partnership
agreement
it
was
clearly
stated
that
the
limited
partners’
liability
only
extended
to
the
amount
of
their
individual
capital
contributions.
Further,
section
3
of
chapter
237
of
The
Limited
Partnerships
Act
of
Ontario
provides
as
follows:
3.
General
partners
are
jointly
and
severally
responsible
as
general
partners
are
by
law,
but
limited
partners
are
not
liable
for
the
debts
of
the
partnership
beyond
the
amounts
by
them
contributed
to
the
capital.
(Italics
mine.)
As
stated
above,
paragraph
20(1
)(a)
of
the
Act
was
relied
upon
by
the
appellant
for
the
deduction
claimed
by
him
from
1972
to
1976
inclusive.
Paragraph
20(1
)(a)
reads
as
follows:
(1)
Notwithstanding
paragraphs
18(1)(a),
(b)
and
(h),
in
computing
a
taxpayer’s
income
for
a
taxation
year
from
a
business
or
property,
there
may
be
deducted
such
of
the
following
amounts
as
are
wholly
applicable
to
that
source
or
such
part
of
the
following
amounts
as
may
reasonably
be
regarded
as
applicable
thereto:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
The
appellant
stated
that
in
Montreal,
in
December
1972,
ten
people
viewed
the
film
without
sound,
stating
that
the
principal
photography
had
been
done
but
not
all
of
it.
He
says:
“It
was
not
shown
to
the
public,
but
there
was
a
film.”
If
the
appellant
is
to
have
the
benefit
of
Regulation
1100(1)
—
giving
him
a
60%
capital
cost
allowance
on
the
film
—
it
must
be
a
motion
picture
film
and
I
think
that
those
words
are
quite
clear
that
a
motion
picture
film
is
something
that
is
ready
to
be
shown
to
the
public.
As
of
December
31,
1972,
or
in
1973,
I
do
not
feel
that
the
appellant
owned
an
interest
in
a
motion
picture
film
that
could
be
termed
a
depreciable
asset.
Pentacle,
on
November
1,
1973,
obtained
a
loan
from
the
Canadian
Imperial
Bank
of
Commerce
for
the
sum
of
$200,000
on
the
basis
that
the
production
of
the
film
“is
now
in
progress”.
Further,
on
April
18,
1974,
Pentacle
entered
into
an
agreement
with
Schniffer
and
Issenman,
who
were
the
nominees
of
Pentimento,
for
the
purpose
of
doing
additional
work
to
complete
the
film.
Further
filming
was
required
and
the
dubbing
in
of
the
music
had
to
be
done.
The
film
was
finally
released
for
distribution
in
1975.
I
find
that
the
motion
picture
film
entitled
“Lies
My
Father
Told
Me”
was
not
completed
until
late
1974.
The
limited
partnership
was
established
to
complete
the
film
and
to
do
this
they
obtained,
from
Canadian
Film
Development
Corporation,
a
loan
in
the
sum
of
$200,000
and
$25,000
from
Famous
Players.
There
were
also
other
loans
of
$200,000
from
the
Imperial
Bank
of
Commerce
but
repayment
was
to
be
made
out
of
the
proceeds
of
the
film,
which
of
course
means
that
if
the
film
made
profits
then
the
above
amounts
would
be
repaid.
In
that
all
sums
of
loans
advanced
to
Pentacle
were
to
be
repaid
out
of
earnings,
the
capital
cost
as
set
out
in
the
financial
statements
of
Pentacle
has
to
be
tied
to
the
actual
capital
contributions
made
by
the
limited
partners
and
the
balance
of
the
loans
payable
was
a
liability
contingent
upon
the
film
in
fact
earning
profits.
The
obligations
were
then
contingent
upon
the
happening
of
an
uncertain
event
and,
if
no
profits
are
earned,
the
contingent
liability
does
not
become
payable
by
the
limited
partnership.
The
appellant’s
only
investment
in
the
limited
partnership
was
$50,000
and
therefore
his
gain
or
loss
is
directly
tied
to
that
contribution
as
a
capital
investment
in
the
limited
partnership.
Counsel
for
the
appellant
cited
the
following
cases:
Stef
any
k
Estate
v
MNR,
[1967]
Tax
ABC
834;
67
DTC
570;
MN
Fl
v
Wardean
Drilling
Limited,
[1969]
CTC
265;
69
DTC
5194;
Her
Majesty
The
Queen
v
Henuset
Bros
Ltd
(No
1
),
[1977]
CTC
227;
77
DTC
5169;
Gordon
McKee
v
Her
Majesty
The
Queen,
[1977]
CTC
491;
77
DTC
5345;
Lawrence
H
Mandel
v
Her
Majesty
The
Queen,
[1978]
CTC
780;
78
DTC
5246;
C
Ralph
Lipper
v
Her
Majesty
The
Queen,
[1979]
CTC
316;
79
DTC
5246;
Nahum
Gelber
v
Her
Majesty
The
Queen,
[1980]
CTC
505;
80
DTC
6359.
Counsel
for
the
respondent
cited
the
following
cases:
Lawrence
Mendel
v
Her
Majesty
The
Queen,
[1976]
CTC
545;
76
DTC
6316;
[1978]
CTC
780;
78
DTC
6518;
[1980]
CTC
130;
80
DTC
6148;
Gordon
McKee
v
Her
Majesty
The
Queen,
[1977]
CTC
491;
77
DTC
5345;
C
Ralph
Lipper
v
Her
Majesty
The
Queen,
[1979]
CTC
316;
79
DTC
5246;
Nahum
Gelber
v
Her
Majesty
The
Queen,
[1980]
CTC
505;
80
DTC
6369.
I
have
perused
the
above-mentioned
cases
and
I
have
reached
my
decision
on
the
basis
that
the
motion
picture
film
entitled
“Lies
My
Father
Told
Me”
was
not
completed
until
the
end
of
1974.
In
any
event,
the
appellant
is
entitled
to
claim
capital
cost
allowance
solely
on
the
basis
of
his
capital
contribution
to
the
limited
partnership
as
assessed
by
the
respondent.
For
the
above
reasons,
the
appeal
is
dismissed.
Appeal
dismissed.