Date: 20000118
Docket: A-359-98
CORAM: ROBERTSON, J.A.
ROTHSTEIN, J.A.
MCDONALD, J.A.
BETWEEN:
Appellant
Respondent
Heard at Edmonton, Alberta on Wednesday, December 1, 1999
Judgment delivered at Ottawa, Ontario, on Tuesday, January 18, 2000
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: McDONALD J.A.
DISSENTING REASONS FOR JUDGMENT BY: ROBERTSON J.A.
Date: 20000118
Docket: A-359-98
CORAM: ROBERTSON J.A.
ROTHSTEIN J.A.
McDONALD J.A.
BETWEEN:
BOW RIVER PIPELINES LTD.
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
DISSENTING REASONS FOR JUDGMENT
ROBERTSON J.A.
[1] With great respect, I cannot subscribe to the reasons offered by my colleague, Justice Rothstein. In my view, the appellant taxpayer is not entitled to add any amount to its cumulative Canadian Oil and Gas Property Expense ("COGPE") account in respect of Canadian resource properties it received on the termination of a limited partnership. Admittedly, the taxpayer acquired resource properties. What it failed to do was to incur an outlay or expense as contemplated by paragraphs 66.4(5)(a) and (b) of the Income Tax Act. At no time did the taxpayer give "valuable consideration" for the properties in question. The argument that it gave up its "assignee" interest in the limited partnership in return for its assets (the resource properties) is, in my respectful view, fundamentally flawed. The relevant facts are as follows.
[2] Both the taxpayer and Lone Rock Resources Ltd. ("Lone Rock") are Alberta corporations involved in oil and gas exploration. The former became interested in the Canadian resource properties held by the latter. Ultimately, they reached an agreement having due regard to various tax benefits to be derived from a carefully structured series of step transactions carried out over nine months.
[3] [Step 1] Lone Rock incorporates a numbered company and acquires all of its shares. [Step 2] In January 1986, the two corporations form a limited partnership. The numbered company is designated the general partner. Lone Rock is the limited partner. [Step 3] The numbered company contributes $1,200 in return for a .01% interest in the partnership. [Step 4] Lone Rock "rolls-over" its Canadian resource properties into the limited partnership in return for a 99.99% interest. The fair market value of those properties is $12.3 million. [Step 5] The taxpayer acquires all of the shares of Lone Rock. The purchase price is $6.3 million, plus $7 million which is used to retire the indebtedness of Lone Rock to the Bank of Montreal. [Step 6] On September 29, 1986, Lone Rock enters into a contract with the taxpayer whereby the former agrees to transfer all of its assets to the latter. The object is to substitute the taxpayer for Lone Rock as the limited partner. In return for Lone Rock giving up its 99.99% interest in the limited partnership, the taxpayer agrees to pay all of Lone Rock"s liabilities. [Step 7] On the same day, Lone Rock is dissolved under the Business Corporations Act of Alberta. [Step 8] The next day, September 30, 1986, the numbered company enters into a contract with the taxpayer whereby the former agrees to transfer all of its assets to the taxpayer (the only asset being its .01% interest in the partnership). In return the taxpayer agrees to pay all of the numbered company"s liabilities. [Step 9] The numbered company is dissolved under the Alberta Business Corporations Act. [Step 10] On the same day the limited partnership enters into a contract with the taxpayer whereby the former agrees to transfer to the latter all of its assets (the Canadian resource properties originally owned by Lone Rock). In return the taxpayer agrees to pay all of the liabilities of the limited partnership. [Step 11] The limited partnership is dissolved under the Partnership Act of Alberta.
[4] The taxpayer lost the first round of litigation with the Minister of National Revenue when this Court held that the taxpayer had failed to become a substituted limited partner because of non-compliance with Alberta"s Partnership Act [Step 6]. Under subsection 65(3) of that Act, the taxpayer achieved the status of an "assignee" who was entitled to receive only a "share of the profits" or "the return of its contribution to which the assignor would otherwise be entitled". Consequently, certain tax benefits could not accrue to the taxpayer under paragraph 98(5)(d) of the Income Tax Act . However, this Court remitted the issue presently under appeal to the Tax Court for consideration.
[5] Associate Chief Judge Christie ruled against the taxpayer by holding that the latter was not entitled to add any amount to its COGPE account under paragraphs 66.4(5)(a) and (b) of the Act. Before Judge Christie, the taxpayer took the position that it had acquired resource properties from an arm"s length party, Lone Rock, for which it had paid $13.3 million and yet the taxpayer had received no "tax recognition for its expenditure". The $13.3 consisted of the $6.3 million paid to the shareholders of Lone Rock and the $7 million paid to retire Lone Rock"s indebtedness to the Bank of Montreal. By necessity, the taxpayer"s argument was doomed to failure because the $13.3 million had been expended to acquire the shares in Lone Rock, not the assets owned by it and which had already been transferred to the limited partnership. In order to rule in favour of the taxpayer, Judge Christie would have had to ignore the principle that a corporation is a distinct legal entity. [It was not until the hearing of this appeal that counsel for the taxpayer astutely abandoned this argument.]
[6] Judge Christie concluded that the contract between the taxpayer and the limited partnership in which the latter conveyed the Canadian resources properties to the former [Step 10] was ineffectual because the limited partnership had ceased to exist the day before the transfer occurred. In his opinion, the limited partnership ceased to exist because of the failure to substitute the taxpayer as the limited partner for Lone Rock. This meant that Lone Rock remained the limited partner but, as it was immediately dissolved under the Alberta Business Corporations Act, there could be no limited partnership without a limited partner. It follows that if no limited partnership existed there could be no contract between the taxpayer and a non-existent party [Step 10].
[7] The taxpayer"s other substantial argument was premised on the understanding that the limited partnership continued to exist for purposes of distributing partnership property pursuant to paragraph 98(1)(a) of the Income Tax Act. The taxpayer then argued that it acquired an interest in the limited partnership as "assignee" pursuant to subsection 65(3) of the Partnership Act and gave up its assignee right to receive a distribution of the assignor"s (Lone Rock) contribution to the limited partnership in return for all of the limited partnership"s assets. According to the taxpayer, its cost with respect to the acquisition of the resource property is equal to the fair market value of the assignee"s interest in the partnership - $12.3 million which represents the fair market value of the Canadian resource properties so acquired. It is this amount that the taxpayer said should have been added to its COGPE account. Judge Christie rejected this argument. First he held that paragraph 98(1)(a) of the Income Tax Act did not have the effect of permitting the partnership to continue for purposes of asset distribution. Second, and correlatively, he held that there was no one to whom the assignee right could be given up. Finally, Judge Christie held that once the limited partnership ceased to exist the resource properties devolved to the taxpayer as assignee of the limited partner. Therefore, there could be no giving up of a right by the taxpayer to another. Rather the resource properties were received by way of devolution as a result of the dissolution of the partnership. In Judge Christie"s opinion, the "assignee" right was extinguished and not given up. Within this framework, he ruled that the taxpayer had not incurred any outlay or expense in acquiring the resource properties in question as required under paragraphs 66.4(5)(a) and (b) of the Income Tax Act .
[8] My colleague, Justice Rothstein concludes, and in my respectful opinion rightly so, that the limited partnership did not cease to exist for purposes of distribution under paragraph 98(1)(a) of the Income Tax Act. It follows that Judge Christie erred in concluding that there was no one to whom the taxpayer could give up its assignee interest in the limited partnership. Justice Rothstein prefaces his analysis with the assumption that Judge Christie was correct in concluding that, under partnership law, the limited partnership ceased to exist once the limited partner, Lone Rock, was dissolved. For purposes of deciding this appeal, I am prepared to accept that the limited partnership continued to exist until formally dissolved under the Alberta Partnership Act [Step11]. This places the taxpayer"s case in the best light possible and yet it is my opinion that the taxpayer is not entitled to the tax benefit claimed. In the alternative, I will deal with the taxpayer"s "assignment" argument on the assumption that the limited partnership continued to exist for purposes of asset distribution because of paragraph 98(1)(a) of the Income Tax Act . Even with this concession, it is my opinion that the taxpayer cannot succeed. I hasten to point out that if the taxpayer cannot succeed in circumstances where it is assumed that all of the step transactions are valid, it should not be able to succeed where it is shown that at least one of those transactions was legally defective. My analysis begins with the isolation of certain key facts.
[9] Of the eleven step transactions outlined above, three are of critical significance. Each transaction involves a bilateral contract. The first contract involves the ineffectual attempt to sell Lone Rock"s 99.99% limited partnership interest to the taxpayer [Step 6]. Hindsight tells us that under Alberta partnership law the taxpayer became an assignee and not a substituted partner. The second contract involves the sale of the numbered company"s .01% interest, as general partner, to the taxpayer [Step 8]. The third and final contract involves the sale of the limited partnership"s assets (the Canadian resource properties) to the taxpayer [Step 10]. Against this background, there are three facts which are of critical significance to the disposition of this appeal.
[10] First, the only consideration provided by the taxpayer when acquiring its assignee interest in the limited partnership from Lone Rock was the promise to pay Lone Rock"s existing liabilities [Step 6]. The same promise was made to the numbered company when the taxpayer acquired that company"s interest in the limited partnership [Step 8]. Finally, the same promise was made to the limited partnership in return for its assets, namely the Canadian resource properties in question [Step 10]. In summary, the only consideration provided by the taxpayer under each contract was a promise to pay the existing liabilities of the other contracting party.
[11] Second, the three contracts in question are silent as to the amount of the indebtedness to be assumed by the taxpayer, thereby exposing it to unlimited liability, unless of course there were no existing liabilities. Counsel for the taxpayer conceded that Lone Rock had no "significant" liabilities at the time it purported to sell its limited partnership interest to the taxpayer (e.g. outstanding accounting bills). This concession blends with the understanding that the only indebtedness Lone Rock had was with the Bank of Montreal and that indebtedness had already been retired by the taxpayer pursuant to the terms of the share purchase agreement. As to the liabilities of the numbered company, we know that it had no assets other than a .01% interest in the limited partnership for which it paid $1,200 and so the prospect of this shell corporation having any significant liabilities is simply unrealistic. In my view, neither Lone Rock, nor the numbered, nor the limited partnership had any significant liabilities which could be assumed by the taxpayer. If the facts were otherwise, I am confident that the relevant evidence would have been produced at trial.
[12] Third, it is clear that the only money expended by the taxpayer under any contract was in respect of the purchase of the shares of Lone Rock. For obvious reasons, the share purchase contract could not result in the taxpayer acquiring any resource properties owned by Lone Rock.
[13] In summary, the taxpayer paid no money for its assignee interest in the limited partnership, the interest obtained from the general partner and, finally, in regard to the purchase of the limited partnership"s assets, namely the Canadian resource properties in question. Nor did the taxpayer provide other valuable consideration for what it purchased. All it gave was a promise to pay liabilities which the respective parties knew did not exist. The bottom line is that the taxpayer paid nothing and gave up nothing in return for what it received under all three contracts. Even if we could assume that there had been strict compliance with all of the provisions of the Alberta Partnership Act and that all of the transactions were therefore effective, the taxpayer is unable to show that it provided valuable consideration for what it received. From a legal perspective, the acquisitions could be looked upon as "gifts" which do not fall within the requirements set out in paragraph 66.4(5)(a) and subparagraph 66.4(5)(b)(i) of the Income Tax Act .
[14] Paragraph 66.4(5)(a) defines a taxpayer"s "Canadian oil and gas property expense " as ... "any outlay or expense made or incurred after December 11,1979 that is ...the cost to him of property described in subparagraph 66(15)(c)(i), (iii) or (iv) or a right to or interest in such property...". Paragraph 66.4(5)(b)(i) permits the taxpayer to add to his cumulative COGPE account "the aggregate of all Canadian oil and gas expenses made or incurred by him before ...". Can it be said that the taxpayer made an outlay or expense in acquiring the resource properties originally owned by Lone Rock? Not on the facts of this case. If any expense or cost was incurred by the taxpayer it stems from the acquisition of its assignee interest in the limited partnership. What did the taxpayer pay or promise to give in return for that interest? Nothing - it paid no money for the assignee interest, nor did it provide valuable consideration of any other kind . All that the taxpayer gave was a promise to pay debts which did not exist. It received something, but in return for nothing. It follows that the taxpayer cannot claim that it has incurred an expense or outlay within the meaning of paragraphs 66.4(5)(a) and (b) of the Act.
[15] Had the resource properties in question been conveyed directly to the taxpayer by Lone Rock as a gift, no one would question that the taxpayer would not be entitled to add the fair market value of those properties to its COGPE account. As a matter of statutory interpretation, the Act would not permit such. Moreover, a contrary interpretation would defeat the purpose of the provisions in issue. This is succinctly explained by counsel for the taxpayer in the following paragraphs extracted from their memorandum:
| Cost is a fundamental concept vital to determining tax liability. The most basic use of cost is to identify the amount for which a taxpayer can sell an asset without the proceeds being treated as taxable income. The cost of Canadian resource property is recognized by an addition to a taxpayer"s cumulative Canadian Oil and Gas Property Expense ("COGPE") account. When Canadian resource properties are disposed of, the proceeds are deducted from the account. If the taxpayer"s COGPE account reaches zero, proceeds of the sale of Canadian resource properties may then be treated as taxable income. [Footnote 1: Thus if a taxpayer pays $100 for an asset and therefore has a cost of $100, if the taxpayer sells that asset for $150 he does not pay tax on the whole $150, but only on the $50 profit.] |
[16] In my opinion, it makes no difference whether the taxpayer acquired the property indirectly, as opposed to directly, from Lone Rock. The fact remains that the taxpayer acquired property without incurring an enforceable legal obligation. Therefore, the fair market value of the property cannot be added to the taxpayer"s COGPE account.
[17] I pause here to point out that if one persists with the understanding that the limited partnership continued to exist until formally dissolved under the Partnership Act of Alberta [Step 11], there are two unexplained facets of the tax stratagem worth noting. Assuming that the taxpayer had become the substituted partner for Lone Rock, and not a mere assignee, it has never been explained how the limited partnership could continue to exist once the taxpayer purchased the general partner"s interest. In other words, if a taxpayer buys out the interests of the only two persons involved in a limited partnership (the general and limited partner) how can that partnership continue to exist? Under Alberta law, a partnership is defined as two persons carrying on business in common with a view to profit. Putting aside that legal issue, it has never been explained why the taxpayer would enter into a contract with the limited partnership to acquire Canadian resource properties at a time when the taxpayer held the interests of both the general and limited partners. In effect, the taxpayer would appear to be contracting with itself. The tax plan makes no sense unless the taxpayer"s advisors believed that the limited partnership could be treated as a separate or distinct legal entity and that the interests held by both the general and limited partners could be treated in the same way as shares in a corporation. But, as this belief is contrary to accepted principles of partnership law, the only plausible rationale is that the taxpayer was attempting to acquire indirectly from Lone Rock that which it did not want to acquire directly. Unfortunately, without giving valuable consideration, the taxpayer cannot lay claim to the right to add $12.3 million to its COGPE account.
[18] I turn now to the alternative scenario where it is assumed that the limited partnership continued to exist solely for the purpose of distributing its assets as contemplated by paragraph 98(1)(a) of the Income Tax Act. The taxpayer argues that it gave up an asset (its assignee interest in the partnership) in return for another asset of equal value, namely the resource properties. That right was given up to the limited partnership. The analogy was made of a person acquiring a painting by way of gift and then exchanging that painting for a Canadian resource property. In these circumstances the taxpayer submits that the person would be entitled to add the painting"s fair market value to its COGPE account. By analogy, the taxpayer argues that it acquired, not a painting, but an assignee interest in the partnership at no cost and that asset was exchanged for the Canadian resource properties. Hence, according to the taxpayer, it incurred a cost equal to their fair market value.
[19] I accept, for example, that if a person acquired a Picasso painting as a gift and exchanged it for a Canadian resource property, that person would be entitled to add the painting"s fair market value to his or her COGPE account, as being the cost of the resource property. Unfortunately, the analogy is inapplicable. In the present case, the facts do not show the contracting parties "bartering" or "exchanging" one distinct asset for another. That is to say there is no contract between the limited partnership and the taxpayer whereby the latter agrees to give up its rights as assignee of Lone Rock in return for the resource properties. Instead the resource properties devolved to the taxpayer as a result of its status as Lone Rock"s assignee.
[20] Under paragraph 98(1)(a) of the Income Tax Act, a partnership is deemed not to have ceased to exist "until such time as the property ... has been distributed to the persons entitled by law to receive it." In the present case the taxpayer is entitled to receive the assets of the limited partnership as a matter of right, not contract, in its capacity as the assignee of the original limited partner, Lone Rock. Paragraph 98(1)(a) does not purport to create a contractual relationship between the partnership and a person who is entitled to its assets. The taxpayer did not have to provide valuable consideration to the limited partnership in return for the assets as it was entitled to them as a matter of legal right by virtue of its assignee interest. In these circumstances it is simply incorrect to speak of the taxpayer as providing valuable consideration for something to which it was already entitled as a matter of statutory law and not contract. The taxpayer"s right to receive a return of Lone Rock"s contribution to the limited partnership pursuant to subsection 65(3) of the Partnership Act was satisfied by the receipt of the resource properties by the taxpayer. That right was not given up but extinguished once the resource properties were received.
[21] I recognize that at first blush the painting analogy may be attractive, but one cannot lose sight of the facts of this case. The tax strategy involved the taxpayer acquiring Lone Rock"s 99.99% limited partnership interest which gave Lone Rock a right to 99.99% of the profits and, on dissolution of the partnership, 99.99% of the Canadian resource properties in question. Under the contract between Lone Rock and the taxpayer, the latter acquired only assignee rights. Nonetheless, one of those rights was the right to receive the contribution made by Lone Rock to the limited partnership. That right materialized on the dissolution of the limited partnership. At this stage, the taxpayer did not enter into another contract to acquire the resource properties for two reasons: (1) there was no need to enter into a contract as the taxpayer was entitled to receive legal title to those resource properties as a matter of law, that is, as assignee of Lone Rock"s limited partnership interest; and (2) there is no one to contract with. Both Lone Rock and the limited partnership ceased to exist and the numbered company had only a .01% interest for which it contributed $1,200 (an amount approximating .01% of the $12.3 million in resource properties). That is why paragraph 98(1)(a) of the Income Tax Act treats the partnership as continuing but only for purposes of distributing partnership property. Distribution is made according to the pre-existing rights of interested persons, not contract.
[22] The present case is distinguishable from the painting analogy. Here, there is only one exchange or contract. The painting analogy involves two discrete transactions. The first involves a gift. The second involves a contract in which a painting is exchanged for Canadian resource properties. The elements of "barter" and "exchange" that represent the distinguishing hallmarks of the second transaction in the painting analogy are absent from the case under appeal. In the present case, all that we have is a contract between Lone Rock and the taxpayer in which the latter acquires certain rights as assignee, rights which entitle the taxpayer to legal ownership of certain assets in which the assignor, Lone Rock, had an interest. According to the taxpayer"s argument, if a person gives up the right to an asset by acquiring legal title to it, that person is entitled to add the fair market value of the resource property to its COGPE account. This cannot be so.
[23] In the end, all that the taxpayer has done in this case is to acquire the Canadian resource properties, originally owned by Lone Rock, indirectly rather than directly and without incurring any legal obligation which can be regarded as an expense or outlay within the meaning of paragraphs 66.4(5)(a) and (b) of the Income Tax Act. In other words, the taxpayer has effectively acquired the right to legal title to the only asset held in the name of the partnership but without incurring any cost or enforceable legal obligation. The giving up of that right in return for the very property to which that right relates cannot be regarded as the giving up of an asset in exchange for another.
[24] I would dismiss the appeal with costs.
"J.T. Robertson"
J.A.
Date: 20000118
Docket: A-359-98
CORAM: ROBERTSON, J.A.
ROTHSTEIN, J.A.
MCDONALD, J.A.
BETWEEN:
Appellant
Respondent
REASONS FOR JUDGMENT
ROTHSTEIN, J.A.
ISSUE
[1] The issue in this appeal from the Tax Court of Canada is what cost, if any, the appellant is entitled to add to its cumulative Canadian oil and gas property expense (COGPE) account, pursuant to paragraphs 66.4(5)(a) and (b) of the Income Tax Act in respect of its acquisition of certain Canadian resource properties.
DECISION OF THE TAX COURT
[2] The learned Tax Court Judge held that the cost which the appellant was entitled to add to its COGPE account pursuant to paragraphs 66.4(5)(a) and (b) in this case was nil.
[3] The practical effect of this finding is to treat the property as if it had no cost, with the entire proceeds upon disposition of the property constituting taxable income.1
RELEVANT STATUTORY PROVISIONS
[4] Paragraph 66.4(5)(b)(i) permits the taxpayer to add to its cumulative COGPE account "the aggregate of all Canadian oil and gas property expenses made or incurred by him before that time". Paragraph 66.4(5)(a) defines a taxpayer's "Canadian oil and gas property expenses" as "...any outlay or expense made or incurred ... that is ... the cost to him of property described in subparagraph 66(15)(c)(i)(iii) or (iv) or a right to or interest in such property". The parties are agreed that the property in question is that described in subparagraph 66(15)(c)(i)(iii) or (iv). The question is what outlay or expense was made or incurred by the appellant, if any, to acquire the Canadian resource property.
FACTS
[5] As might be expected, a series of transactions, in part motivated by tax planning, preceded the acquisition of the Canadian resource property by the appellant. Some were the subject of prior litigation in the Tax Court and in this Court.2 However, for purposes of this appeal, it is not necessary to deal with these prior transactions or previous litigation, except in passing. The relevant transactions for the purposes of this appeal commenced on September 29, 1986.
[6] On September 29, 1986, Lone Rock Resources Ltd., a wholly owned subsidiary of the appellant, assigned to the appellant all its property, assets and business. The only asset of substance of Lone Rock was a 99.99% limited partnership interest in LRR Limited partnership. As assignee of Lone Rock's assets, the appellant thought it was becoming a "substitute limited partner" in LRR Limited partnership, but it was held previously by this Court that the appellant never became a partner, apparently because there was noncompliance with certain requirements of the Partnership Act of Alberta.3 As a result the appellant only had the status of an assignee of a limited partnership interest in the limited partnership in accordance with subsection 65(3) of the Partnership Act. Subsection 65(3) provides:
| An assignee who does not become a substitute limited partner has no right |
| (a) to require any information or account of the partnership transactions, or |
| (b) to inspect the partnership books, |
| but is entitled only to receive the share of the profits or other compensation by way of income, or the return of its contribution, to which his assignor would otherwise be entitled. |
[7] Subsequently on September 29, 1986, Lone Rock Resources Ltd. was dissolved.
[8] On September 30, 1986, the appellant entered into a distribution agreement with LRR Limited Partnership pursuant to which the limited partnership transferred all its assets to the appellant. These assets included Canadian resource property that had previously been contributed to the partnership by Lone Rock and which, on September 30, 1986, had an undisputed fair market value of $12,276,297.4
[9] The appellant submits that in order to acquire the Canadian resource property from the limited partnership, it gave up its interest as assignee of Lone Rock's limited partnership interest and that such interest had a value of $12,276,297. The appellant says that was the cost to it of acquiring the Canadian resource property.
REASONS OF THE TAX COURT JUDGE
[10] The learned Tax Court Judge rejected the appellant's argument. First he held that the limited partnership was dissolved on September 29, 1986 and not September 30, 1986:
| "The Registrar issues a certificate of dissolution regarding Lone Rock under the authority of the Business Corporations Act of Alberta. Subsection 203(6) of that Act provides: "The corporation ceases to exist on the date shown in the certificate of dissolution". The date shown on the certificate is September 29, 1986. In my opinion, the legal consequence is that the partnership was terminated on this date. |
[11] The Tax Court Judge's reasons for concluding that the limited partnership terminated on September 29, 1986 are somewhat cryptic. However, he may have believed that with the dissolution of Lone Rock, and given the fact that the appellant did not become a substitute limited partner, LRR Limited Partnership had no limited partner and as a result, without a limited partner, a limited partnership could not exist. Subsection 50(2) of the Partnership Act of Alberta provides:
| A limited partnership shall consist of |
| (a) one or more persons who are general partners, and |
| (b) one or more persons who are limited partners |
Whatever his reason, the Tax Court Judge concluded that the limited partnership was dissolved on September 29, 1986.
[12] With the dissolution of the limited partnership, the Tax Court Judge next concluded that the appellant had become the owner of the Canadian resource property owned by the limited partnership, not by reason of an expenditure or outlay of funds by the appellant, but simply by reason of the dissolution of the partnership:
| The appellant did become the owner of a Canadian resource property that was partnership property of a Limited Partnership. But this came about upon the dissolution of a Limited Partnership on September 29, 1986. At that moment the appellant held a 99.99% interest in the partnership and there is no suggestion or evidence that the partnership property represented by that interest could have devolved on any corporation or individual other than the appellant. The dissolution came about not by reason of an expenditure or outlay of funds by the appellant. It occurred by reason of a tax planning scheme designed to secure a tax-free roll-over under subsection 98(5) having gone off the rails because the appellant was not made a partner in the Limited Partnership. |
[13] Finally, the Tax Court Judge found that the appellant had not given up anything to receive the Canadian resource property:
| In fact, there was no giving up by the appellant to another involved. It received the resource properties upon the dissolution of the Limited Partnership. Any right which may have arisen by operation of subsection 65(3) of the Partnership Act would have been satisfied upon the appellant's receipt of the resource properties. Such a right would have been extinguished, not because it had been given up, but because the resource property having devolved upon the appellant, any such right ceased to exist. |
POSITION OF THE APPELLANT
[14] The appellant submits that for purposes of the Income Tax Act, the limited partnership did not cease to exist on September 29, 1986. Accordingly, as assignee of Lone Rock's assets on September 29, 1986, the appellant had acquired an assignee interest in the limited partnership on that date in accordance with subsection 65(3) of the Partnership Act, that the assignee interest was personal property by reason of subsection 54(2) of the Partnership Act, and that upon distribution of the Canadian resource property of the limited partnership to the appellant on September 30, 1986, the appellant gave up its personal property assignee interest for the Canadian resource property. It says the giving up of the personal property assignee interest in the limited partnership was an outlay made to receive the Canadian resource property.
POSITION OF THE RESPONDENT
[15] The respondent relies on the reasons of the Tax Court Judge and says that when the Canadian resource property devolved upon the appellant, its personal property right ceased to exist and was not given up and that no cost was incurred by the appellant to acquire the Canadian resource property.
ANALYSIS
[16] I agree with the appellant that the limited partnership did not, for purposes of the Income Tax Act, cease to exist on September 29, 1986. Paragraph 98(1)(a) of the Income Tax Act provides:
| (1) For the purposes of this Act, where, but for this subsection, at any time after 1971 a partnership would be regarded as having ceased to exist, the following rules apply: |
| (a) until such time as all of the partnership property and any property substituted therefore has been distributed to the persons entitled by law to receive it, the partnership shall be deemed not to have ceased to exist, and each person who was a partner shall be deemed not to have ceased to be a partner. |
[17] The learned Tax Court Judge did not think that paragraph 98(1)(a) applied in this case:
| In my opinion, this paragraph did not operate to extend the life of the Limited Partnership or the existence of the partners because there is no apparent purpose under the Act for such an extension. There is no evidence or suggestion that the existence of the partnership or that of the partners needed to be extended in order to determine partnership income or the liability to tax of the partners or the appellant in relation to that income or for any other relevant tax purpose affecting them or it. |
[18] With respect, the reasons given by the learned Tax Court Judge do not reflect the words of paragraph 98(1)(a). The provision simply says that the partnership is "deemed not to have ceased to exist", "until such time as all of the partnership property ... has been distributed to the persons entitled by law to receive it".
[19] It seems as if the Judge equated the appellant's entitlement under its assignee interest to receive 99.99% of the property of the limited partnership upon its dissolution with the distribution of that property to the appellant. If that were correct, paragraph 98(1)(a) would not apply to extend the existence of the limited partnership after September 29, 1986. However, the context of paragraph 98(1)(a) indicates that the entitlement to receive partnership property on dissolution and its distribution are not equivalent. In other words, entitlement implies an equitable right to the receipt of the property while distribution would indicate the transfer of legal title to the property. The provision recognizes that, for purposes of the Income Tax Act, an event giving rise to dissolution does not automatically result in the distribution of the partnership property to the partners. A transaction distributing the property is required. Appellant's counsel pointed out that the role of paragraph 98(1)(a) is to ensure that tax consequences do not depend on whether a partnership terminated under partnership law before its assets are distributed.
[20] In this case, the separate distribution transaction occurred on September 30, 1986. Accepting, without deciding, that the learned Tax Court Judge was correct that under partnership law the limited partnership was dissolved on September 29, 1986, it did not cease to exist for purposes of the Income Tax Act by reason of paragraph 98(1)(a) of the Income Tax Act until distribution of the Canadian resource property on September 30, 1986.
[21] Before the limited partnership ceased to exist, the appellant was the assignee of Lone Rock's partnership interest in the limited partnership, entitling it to Lone Rock's contribution to the limited partnership, pursuant to subsection 65(3) of the Partnership Act. Lone Rock's contribution was the Canadian resource property.
[22] I agree with the appellant that its assignee interest in the limited partnership was personal property. Under subsection 54(2) of the Partnership Act, a limited partner's interest in a limited partnership is personal property. An assignment of that interest must also be personal property. The appellant's assignee interest, at the relevant time, had a value of $12,276,297. By reason of the distribution of the Canadian resource property of the limited partnership to the appellant, the appellant ceased to have an entitlement to property of the partnership as that entitlement was satisfied. It necessarily follows that the appellant gave up its personal property interest in the partnership in exchange for the Canadian resource property.
[23] An outlay or expense need not be made in cash. In this case the outlay was the giving up of the personal property assignee interest in the limited partnership for the assets of the limited partnership. The personal property assignee interest had a value of $12,276,297 and that was the cost to the appellant of the Canadian resource property.
[24] My colleague Justice Robertson concludes that Bow River did not incur any cost in order to acquire legal title to the Canadian resource property. As I understand his reasons, he is of the view that it is necessary to consider the transactions by which Bow River obtained its assignee interest in the limited partnership. Because he is of the opinion that Bow River paid nothing for its assignee interest and because it is the assignee interest that entitles Bow River, as of right, to obtain the Canadian resource property of the limited partnership upon its dissolution, he concludes that Bow River incurred no cost to obtain the Canadian resource property.
[25] I agree with Justice Robertson that Bow River is entitled, as of right, to obtain the Canadian resource property of the limited partnership upon its dissolution and that this right arises because Bow River has an assignee interest in the limited partnership. However, I respectfully do not agree that it is relevant to consider what Bow River paid for its assignee interest. In my opinion, what is relevant is the value and not the cost of the assignee interest to Bow River.
[26] The appellant submits and the respondent does not dispute that the fair market value of the assignee interest immediately prior to dissolution of the limited partnership was $12,276,297. The assignee interest is a personal property asset of Bow River. Prior to dissolution of the limited partnership, Bow River might have assigned that assignee interest to a third party in consideration for cash. The selling price of the assignee interest would not have been its cost to Bow River but its fair market value at the relevant time, i.e. $12,276,297. Had Bow River then purchased the Canadian resource property from the limited partnership for cash, it would have paid the limited partnership $12,276,297. It would be obvious that Bow River incurred a cost of $12,276,297 for the Canadian resource property.
[27] Instead of assigning the assignee interest to a third party and using the proceeds to purchase the Canadian resource property, the Canadian resource property devolved to Bow River by reason of its right under its assignee interest in the limited partnership to the assets of the limited partnership on its dissolution. The net effect, however, is the same. Bow River started with a personal property asset worth $12,276,297 and no real property and ended up with real property assets worth $12,276,297 and no personal property asset.
[28] To say that Bow River incurred no cost to obtain the Canadian resource property requires that one ascribe no value to the assignee interest. That would be contrary to the facts, which are that, at the relevant time, the assignee interest had a value of $12,276,297.
[29] For these reasons, I respectfully differ with my colleague Justice Robertson on the disposition of the appeal.
CONCLUSION
[30] I conclude that the cost which the appellant is entitled to add to its COGPE account, pursuant to paragraph 66.4(5)(a) and (b) of the Income Tax Act in respect of the Canadian resource property it received on the termination of the LRR Limited Partnership was $12,276,297.
[31] The appeal should be allowed with costs in this Court and in the Tax Court and the matter should be remitted to the Minister of National Revenue to reassess the appellant in accordance with these reasons.
"Marshall Rothstein"
J.A.
"I agree
F. Joseph McDonald"
__________________
1 Appellant's counsel told the Court that the cost of Canadian resource property is recognized by an addition to the taxpayer's cumulative COGPE account. When Canadian resource properties are disposed of, the proceeds are deducted from the account. If the taxpayer's account reaches zero, proceeds of the sale of Canadian resource properties may then be treated as taxable income.
2 Bow River Pipe Lines Ltd. v. Canada (17 April 1996), Court File No. 94-619(IT)G (T.C.C.), [1996] T.C.J. No. 364 (QL); Motion for reconsideration dismissed, 96 D.T.C. 1414; Appeal allowed in part, (1997), 216 N.R. 123 (F.C.A).
3 R.S.A. 1980, c. P-2.
4 The court was told that the limited partnership had no other significant assets other than the Canadian Resource property, and no significant liabilities.
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