Paletta International – Federal Court of Appeal finds that there is no requirement for the Crown to explicitly plead “sham”

Hogan J had found that a tax shelter partnership, which had funded the prints and advertising expenses for films that it had purchased from Twentieth Century Fox, had not incurred such expenses for an income-producing purpose because there was no real prospect that Fox would not exercise its “options” to repurchase the films – and thus no real prospect that the films would generate revenue to the partnership. He stated that “the options were shams designed to mask the parties’ agreement that Fox would reacquire the films prior to their commercial release.”

In concluding that it was not procedurally unfair for Hogan J to make his quoted finding given that the Crown pleadings had “put the appellants on notice that the Minister took the view that it was a certainty that the partnerships would not have any income from the exploitation of the films,” Woods JA stated:

There was no reason for the assumptions to explicitly use the term “sham” or to explicitly state that there was deception. But it is obvious from the relevant assumptions that the Minister did assume that there was deception with respect to the options.

Neal Armstrong. Summaries of Paletta International Corporation v. Canada, 2021 FCA 182 under General Concepts – Sham and s. 9 – capital gain v. profit – real estate.