MDS Health Group Ltd. v. R., [1997] 1 CTC 111, 97 DTC 5009

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[1997] 1 CTC 111, 97 DTC 5009

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Stone J.A.: — This is an appeal from a judgment of the Tax Court of Canada of July 17, 1995 dismissing an appeal from a reassessment by the Minister of National Revenue in respect of the Appellant’s income for its 1986 taxation year.

The background of the dispute is outlined in the reasons for judgment of the learned Tax Court Judge. As those reasons are now fully reported in MDS Health Group Ltd. v. R., (sub nom. MDS Health Group Ltd. v. Canada) [1995] 2 C.T.C. 2526, 96 D.T.C. 1324, it is not necessary to restate the facts in detail here.

The central issue is whether an amount received by the Appellant in November 1986 from a partnership formed by the Appellant and its copartner in October 1986 was properly assessed by the Minister on the basis that it was consideration for transferring certain technology to the partnership in excess of the nominal amount elected by the parties pursuant to subsection 97(2) of the Income Tax Act R.S.C. 1952, c. 148, as amended [1] , and, accordingly, that one-half of the excess was required to be included in income as an eligible capital amount by virtue of paragraph 85(1 )(b) and subsection 14(1) of that statute. [2]

The fundamental position of the Appellant both here and below was that the amount received - $1,500,000 (U.S.) - cannot be viewed as consideration in excess of the amount elected as consideration for the technology transferred to the partnership. That argument was based on viva voce and other evidence of the arrangement contemplated by the parties to the partnership agreement and on various provisions of the agreement itself as showing that the Appellant had accepted to be bound by a legal obligation to recontribute the amount withdrawn. It was on this basis that the Appellant sought to distinguish the decision of Reed J. in Haro Pacific Enterprises Ltd. v. R., (sub nom. Haro Pacific Enterprises Ltd. v. Canada) [1990] 2 C.T.C. 493, 90 D.T.C. 6583 (F.C.T.D.).

The Appellant’s argument was rejected by the Tax Court Judge, who stated at pages 11-12 of this reasons:

Although the issues have been ably argued by both counsel for the Appellant, I have concluded that the submissions of the Respondent better reflect the true nature of the transaction. In the first place, there is no indication in the partnership agreement that the $1,500,000 (U.S.) withdrawn must be recontributed. Secondly, the continuing obligation to inject $1,500,000 (U.S.) by each partner over a period of three years, in my opinion, simply relates to the additional funding which each party was obliged to make to pay for the costs of research and development. Note that section 4.2 of the partnership agreement refers to “Initial Contributions” referring to $1,500,000 (U.S.) and the technology and section 4.5 refers to “Sustaining Contributions”. Nothing in the partnership agreement connects the $1,500,000 (U.S.) withdrawn by MDS to the “Sustaining Contributions”. Thirdly, there are no accounting records of any entity showing the liability or obligation of MDS to recontribute the $1,500,000 (U.S.). This amount may not have been material for MDS but it was so for the partnership. Fourthly, in fact the additional contributions made by each partner show no correlation to the $1,500,000 (U.S.) withdrawn. For example, the amounts contributed were not 3 x $500,000 (U.S.) for each partner but rather were instalments contributed from time to time in differing amounts, totalling more than $1,500,000 (U.S.) for each partner. Fifthly, although the lengthy testimony given by Wilfred G. Lewitt was credible, in the most important aspect of this case - 1.e., the alleged obligation to recontribute the $1,500,000 (U.S.) withdrawn, neither the terms of the partnership agreement nor the subsequent contributions in varying amounts, support his interpretation. The letter of July 11, 1986 to Canadian Patents & Development Limited is not persuasive and moreover is not reflected in the partnership agreement. Sixthly, the expert accounting evidence, if anything, indicates that in the year in question (1986) the most acceptable treatment of a transfer of technology to a partnership was a recognition of a gain by the transferring partner.

The Appellant contends that each of these findings and conclusions of the Tax Court Judge is erroneous. Counsel emphasized in particular that the Tax Court Judge ought to have had regard for the viva voce and other evidence which was lead by the Appellant as showing that from the outset it was contemplated that the Appellant as a partner would be entitled to do what it actually did, namely withdraw the amount in issue temporarily and recontribute it to the partnership during the first three fiscal years of the partnership in accordance with clause 4.5 of the partnership agreement. While it is plain that the Tax Court Judge did find the evidence of the principal witness “credible” to the extent indicated, he also found that “neither the terms of the agreement nor the subsequent contributions in varying amounts, support his interpretation”. It seems to us that the Tax Court Judge was there performing his normal function of assessing and weighing the evidence and that in the end he did not accept the evidence in question as reflecting the true nature of the transaction. As was pointed out by La Forest J. in Schwartz v. R., (sub nom. Schwartz v. Canada) [1996] 1 S.C.R. 254, [1996] 1 C.T.C. 303, 96 D.T.C. 6103, at page 278 (C.T.C. 319), “...appellate courts must treat a trial judge’s findings of fact with great deference” and, as appears in the passage recited at the same page from the judgement of Lord Shaw in Clarke v. Edinburgh and District Tramways Co., [1919] S.C. (H.L.) 35, 56 S.L.R. 303, at pages 36-37 and from the other authorities there cited by La Forest J., this deference extends to the weight given to the evidence by a trial judge. [3]

Nor are we persuaded that the Tax Court Judge misconstrued the relevant provisions of the partnership agreement by concluding that it contained “no indication...that the $1,500,000 (U.S.) withdrawn must be recontributed” and that there was no nexus between the obligation of the Appellant and its co-partner to make the above referred to capital contributions of $500,000 (U.S.) during each of the first three fiscal years pursuant to clause 4.5 and the withdrawal of the $1,500,000 (U.S.) amount as an “initial contribution by way of return of capital” pursuant to clause 11.2 of the partnership agreement. We respectfully agree with the Tax Court Judge that nothing in the language of clause 4.5 or in any other provision of the agreement imposed upon the Appellant an obligation to recontribute the withdrawn amount as such.

The appeal will be dismissed with costs.

Appeal dismissed.

Subsection 97(2) reads:

97(2) Notwithstanding any other provision of this Act, other than subsection 85(5.1), where at any time after November 12, 1981 a taxpayer has disposed of any capital property, a Canadian resource property, a foreign resource property, an eligible capital property or an inventory 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 “to the partnership”;

(b) in computing, at any time after the disposition, the adjusted cost base to the taxpayer of his interest in the partnership immediately after the disposition

(i) there shall be added the amount, if any, by which the taxpayer’s proceeds of disposition of the property exceed the fair market value, at the time of the disposition, of the consideration (other than an interest in the partnership) received by the taxpayer for the property, and

(ii) there shall be deducted the amount, if any, by which the fair market value, at the time of the disposition, of the consideration (other than an interest in the partnership) received by the taxpayer for the property so disposed of by him exceeds the fair market value of the property at the time of the disposition; and

(c) where the property so disposed of by the taxpayer to the partnership is taxable Canadian property of the taxpayer, the interest in the partnership received by him as consideration therefor shall be deemed to be taxable Canadian property of the taxpayer.

Paragraph 85(1 )(b) reads:

85(1) Where a taxpayer has after May 6, 1974 disposed of any of his property that was a capital property (other than real property, an interest therein or an option in respect thereof, owned by a non-resident person), a Canadian resource property, a foreign resource property, an eligible capital property or an inventory (other than real property) to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation, if the taxpayer and the corporation have jointly so elected in prescribed form and within the time referred to in subsection (6), the following rules apply:

(a) the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property shall be deemed to be the taxpayer’s proceeds of disposition of the property and the corporation’s cost of the property;

(b) subject to paragraph (c), where the amount that the taxpayer and the corporation have agreed upon in their election in respect of the property is less than the fair market value, at the time of the disposition, of the con sideration therefor (other than any shares of the capital stock of the corpora tion or a right to receive any such shares) received by the taxpayer, the amount so agreed upon shall, irrespective of the amount actually so agreed upon by them, be deemed to be an amount equal to that fair market value;

Subsection 14(1) reads:

14.(1) Where, at the end of a taxation year, the aggregate of all amounts each of which is an amount determined under subparagraph (5)(a)(iii) in respect of a business or an amount determined under subparagraph (5)(a)(iv) in respect of the business (the latter amount hereinafter referred to as an “eligible capital amount”) exceeds the aggregate of all amounts determined under subparagraphs (5)(a)(i) and (ii) in respect of the business of the taxpayer, the excess shall be included in computing the taxpayer’s income from that business for that taxation year.

If in doing so, a trial judge commits no palpable and overriding error which affected his assessment of the facts, an appellate court is not entitled to intervene: Stein v. “Kathy K” (The) (1975), [1976] 2 S.C.R. 802, 62 D.L.R. (3d) 1. This is not a case, as the Appellant contends that it is, where the Trial Judge drew the wrong inferences from the facts and where this Court is in as good a position as the Trial Judge to draw the proper inferences (see e.g. Union Marine & General Insurance Co. v. Bodnorchuk (1958), [1958] S.C.R. 399, 13 D.L.R. (2d) 609; Lessard v. Paquin (1974), [1975] 1 S.C.R. 665, 56 D.L.R. (3d) 726; Liverpool & London & Globe Insurance Co. v. Canadian General Electric Co., (sub nom. Can. Gen. Elec. Co. v. Liverpool & London & Globe Ins. Co.) (1981), [1981] 1 S.C.R. 600, 123 D.L.R. (3d) 513

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MDS Health Group Ltd. v. R., [1997] 1 CTC 111, 97 DTC 5009

Citations[1997] 1 CTC 111, 97 DTC 5009

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Citations
[1997] 1 CTC 111, 97 DTC 5009