Pinnacle International – Tax Court of Canada reallocates partnership profit under s. 103(1) based on relative contribution

The taxpayer and another wholly-owned subsidiary (“Taylor”) of the same corporation (“PIRG”) were the 5% and 95% partners, respectively, of a partnership, with an October 31 year end, which was engaged in developing a Vancouver condominium project. In October 2006, after virtually all of the profits from the development had been realized, PIRG transferred the shares of Taylor to a “Lossco” with which it dealt at arm’s length (“Meston”), with Taylor then being wound-up into Meston.

D’Arcy J noted that the taxpayer accepted that s. 103(1) applied because the allocation to Meston “was principally motivated by tax”. In applying s. 103(1) to confirm a CRA assessment which allocated 95% of the partnership profit for that year (minus the amount of a “deal fee” paid to Meston) to the taxpayer, D’Arcy J found:

• As Meston became a partner after over 99% of the partnership profits had been earned, so that it would be unreasonable to allocate 95% of those profits to Meston, the question then became as to how the 95% of the profits should be allocated as between Taylor and the taxpayer.
• Taylor was a “shell corporation” with “no physical assets, employees, or bank accounts” and which had not made “any significant financial contributions to the Partnership”.
• The taxpayer was “a corporation of substance” with employees who managed the development; and it also helped finance the development.
• Although the individual shareholder of PIRG testified that he provided his services on behalf of Taylor, he was paid millions in salary by the taxpayer, and nothing by Taylor.

Neal Armstrong. Summary of Pinnacle International Realty Group II Inc. v. The King, 2023 TCC 161 under s. 103(1).