Roland St-Onge:
1 This is an appeal from a reassessment dated June 26, 1973, wherein a tax was levied in respect of the 1972 taxation year.
2 On November 30, 1972, the appellant, a financial adviser and consultant living in Toronto, signed as purchaser a document with Seabourne Enterprises Limited, a company incorporated under the laws of England, in order to acquire one videotape recorded motion picture photoplay entitled “An Introduction to Dissection”, which videotape was one of a series of six videotape recorded motion picture photoplays entitled “Biology”, produced by Seabourne. The total purchase price was $10,000 but the appellant paid only $2,500 in 1972 and the balance was to be paid later.
3 This asset, being of Class 12, Schedule B, was depreciable at a rate of 100%. So, when the appellant prepared his income tax return for the 1972 taxation year, he claimed therein a deduction of $10,000.
4 The balance of the purchase price was to be paid as follows:the balance remaining of $7,500 of the purchase price by application thereto of one-half of the moneys which the appellant was entitled to receive on account of net revenues from the distribution of the videotape pursuant to a distribution agreement (described below) and by the payment in any event on November 30, 1979, of the portion, if any, of the purchase price then remaining unpaid.
5 By agreement made the same day between the same parties, the appellant as owner granted to Seabourne the exclusive right to distribute to exhibitors for exhibition throughout the world prints and all adaptations and derivations thereof of the videotape on, inter alia, the following terms:
6 (a) The term of the exclusive right to distribute the videotape to be fifteen (15) years from November 30, 1972, with an automatic renewal of the said term for a further period of 15 years in the absence of either party to the distribution agreement delivering notice to the other of its intention to terminate the arrangement.
7 (b) Seabourne as distributor to devote its best efforts to the proper marketing and distribution of the videotape so as to maximize gross returns.
8 (c) Seabourne as distributor to obtain a certificate or certificates of cultural or educational value from appropriate authorities in England regarding the videotape.
9 (d) Seabourne as distributor to insure the videotape adequately and to note the interest of the appellant on any insurance policy in that regard.
10 (e) Seabourne as distributor to be entitled to be reimbursed for distribution expenses incurred by it out of gross receipts derived from the distribution of the videotape.
11 (f) Until $10,000 has been paid to the appellant and Seabourne under the distribution agreement, the appellant to pay to Seabourne 10% of net revenues (gross receipts minus certain distribution costs) derived from distribution of the videotape.
12 (g) The appellant irrevocably directed Seabourne to pay on its behalf one-half of the moneys required to be paid to the appellant under the distribution agreement to Seabourne until the sum of $7,500 has been paid to Seabourne on account of the purchase price of the videotape.
13 (h) After $10,000 has been distributed to the appellant and Seabourne under the distribution agreement, the distribution fee payable to Seabourne to be 50% of the net revenues derived from distribution of the videotape.
14 The Minister disallowed the deduction on the basis that the videotape was not acquired as an investment for the purpose of gaining or producing income and that the transaction was a sham prohibited under section 245 of the Income Tax Act.
15 The appellant testified that before acquiring the videotape he had made some research on Seabourne Enterprises Limited to discover that Mr John Seabourne was an honest, reputable individual and that his company was in good financial standing. He also stated that he was not in the business of buying, selling or distributing videotapes or in any allied business; that he never entered into possession of the said videotape; that in buying the tape the income tax implication played a certain role and that his intention in buying the said tape was also to earn income therefrom. He filed a Promissory Note (Exhibit A-4) in the amount of $7,500 to show his commitment to pay the balance of the purchase price. This exhibit mentions no date but only the year 1979 for the payment of the said sum or such earlier date for the payment of two-thirds thereof to be paid to the purchaser pursuant to the agreement between the vendor and the purchaser dated November 30, 1972, already mentioned.
16 He also filed a document to show that he was the owner of the tape in 1972 and that the said tape was insured for a substantial sum of money.
17 Counsel for the appellant argued that the appellant's purpose in buying the tape was to earn income and that the said purchase was not a sham because the agreement is still in force; that there was no attempt whatsoever to disguise the nature of the contract or to deceive the Minister of National Revenue; that the appellant had executed a promissory note for the balance of the purchase price; that it was an arm's length transaction carried out in a business manner and that in 1972 the appellant was the owner of the tape notwithstanding the fact that he had left the possession of it to the seller. In short, he stated that the Board should look at the contract, the appellant's course of conduct and his intention.
18 Counsel for the respondent argued that the transaction under discussion was not a bona fide purchase and referred the Board among other cases to an American decision in Marvin M and Lorraine May v. Commissioner, TC Memo 1972-70 ... Dec 31, 309(M). In that case a taxpayer
entered into an arrangement in which he purported to purchase 13 television film episodes for an alleged price of $365,000. His out-of-pocket costs were $35,000 and it was never intended that he pay any more, notwithstanding that he was theoretically obligated to pay the entire purchase price. He attempted to take depreciation deductions aggregating $365,000 over a two-year period. Held, in the circumstances of this case, this was not a bona fide purchase, and taxpayer was not entitled to the claimed deductions.
19 In 1972 the appellant was not in possession of the videotape and was not in the business of buying, selling or distributing videotapes or in any business connected therewith. Moreover, the possibility of earning income out of this transaction was so remote that no serious businessman would have entered into such a transaction unless it was to use it as a tax shelter to unduly or artificially reduce his income.
20 A taxpayer is allowed to arrange his affairs to pay less taxes as long as it is legal and not too artificially done.
21 In the circumstances of this appeal the transaction under discussion is not a bona fide purchase for the purpose of claiming a deduction with respect to capital cost allowance.
22 Consequently the appeal is dismissed.
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