AMENDED
REASONS FOR JUDGMENT
Rip C.J.
[1]
568864 B.C. Ltd. ("568"), the
appellant, claims that in 2005 it acquired patents, a Class 14 asset, in a
bankruptcy proceeding for $3,500,000 and when it sold the patents in 2007, the
year in appeal, for $1.00, it incurred a terminal loss in accordance with
subsection 20(16) of the Income Tax Act ("Act"). The Crown disagrees. According
to the Crown the appellant did not acquire the patents in 2005 and if it did,
it did not acquire the patents for the purpose of earning income and therefore
the patents were not depreciable property [paragraph 1102(1)(c)
of the Income Tax Regulations ("Regulations")] and the
appellant is not entitled to a terminal loss. The respondent assessed the
appellant for 2007 on the basis the appellant disposed of a non‑depreciable
capital asset which gave rise to a capital loss. An Order of the Court dated,
May 16, 2014, permitted the respondent to file an Amended Amended Reply to
the Notice of Appeal — three weeks before trial — to withdraw the
Minister of National Revenue's assumption that the sale of the patents occurred
in 2007; the respondent's new position was that beneficial title and interest
in the patents were acquired by the appellant in 2010.
[2]
For a taxpayer to deduct an amount as a terminal
loss, the taxpayer must have incurred a capital cost in acquiring beneficial
ownership of depreciable property of a prescribed class. In the matter at bar
the appellant's position is that the patents originally were security for a
loan of $3,500,000 and on the loan becoming bad, it was assigned beneficial
ownership of the patents: subsections 79.1(2) and 79.1(6) of the Act.
[3]
There are two primary questions I have to answer
in this appeal:
1) Did the appellant acquire beneficial ownership of the patents before
September 2007, when it claims it sold the patents? If the answer is
"no", then the appeal must be dismissed;
2) If the answer to question 1 is "yes", then I must
decide if the appellant acquired the patents for the purpose of earning income
from a business or property.
[4]
To answer these questions, in particular
question 2, I believe, unfortunately, requires a rather lengthy review of
the facts surrounding the issues.
[5]
In assessing the appellant for 2007, the
Minister did not assume as a fact that the appellant acquired beneficial
ownership of the patents in 2010. The respondent, therefore, is obliged to
prove her allegation that the appellant acquired beneficial ownership of the
patents only in 2010.
Facts
[6]
The appellant is part of a group of corporations
known as, and referred to, the Woodtone Group or Woodtone that are controlled
by Mr. Jim Young and members of his family.
[7]
Mr. Young earned an M.B.A. from the University of Washington after receiving an undergraduate degree from Simon Fraser University. In 1977 he and a partner acquired a cedar shake and a shingle mill and
later, in 1989, he purchased Woodtone Industries Inc. in Abbotsford, B.C., a
company in the cedar remanufacturing business at the time. As the business
succeeded new companies as well as trusts were created in what became known as
the Woodtone Group of Companies.
[8]
The Woodtone Group's operating company is W.I.
Woodtone Industries Inc. ("W.I."). Mr. Young, however, explained
that he uses the term "Woodtone" in negotiations with the lumber
industry irrespective of the company involved rather than the name of a
specific corporation. Thus, although he may be wearing the hat of President of
the appellant, he will use "as common parlance" the term
"Woodtone".
[9]
W.I.'s main source of income since the 1990s is
from the manufacture of a line of exterior trim boards for new residential
construction, usually called fascia boards or gutter boards. The board behind a
metal gutter around a window or the outside corner of a residence is a gutter
board, Mr. Young explained. W.I., according to Mr. Young, is an
outside trim board company using real wood only. W.I. also manufactures related
products for windows, doors, corners of homes, that is, exterior trim boards
and siding products "all custom made, appearance graded, all custom primed
and coated ready for use on new construction North America wide."
[10]
The role of the appellant itself, according to
Mr. Young, includes the provision of management services for a fee to W.I.
and to hold assets "that we don't think are appropriate to be held in
[W.I.] although they are used by [W.I.] and we rent them [to W.I.] and charge a
fee for them".
[11]
The reason for separating the functions of the
appellant and W.I., explained Mr. Young, is that W.I. pays bonuses to its
employees based on the company's earnings that are based only on the profit and loss of the
operations of the business. "I don't want previous years' profits invested
in something … lost and then everybody has a loss for the year and nobody gets
a bonus … [because of] my strategic mistake as the manager." The
appellant's role "was to hold assets of value, and to make other
investments … on behalf of the Woodtone Group that may be successful, maybe
fail, but the operating company doesn't pay the price or take the benefit of
that decision."
[12]
Mr. Young also described the appellant as
"really the general manager" of W.I.
[13]
A Management Agreement between the two companies
is dated effective July 23, 1998. The second recital to the agreement
states that:
B. At Woodtone's request, 568864 B.C. Ltd. is to provide
operation management and financial services to Woodtone to ensure proper
management of the Plant, as set out on Schedule A;
…
SCHEDULE
"A"
SERVICES
TO BE PROVIDED
The services to be
performed by the Manager shall consist of those services reasonably required to
be performed by a manager of a facia siding manufacturing and wholesale
facility, consisting of general supervision of marketing, production and
personnel, and without limiting the generality of the foregoing, shall include:
1. Determining
sales, production, quality control and maintenance priorities;
2. Generally managing production;
3. Procuring and delivering products;
4. Managing customer relations;
5. Recruiting, supervising and managing
personnel;
6. Strategic planning and capital
budgeting;
7. Supervising
sales and marketing teams, maintaining key accounts, and participating in
weekly sales meetings;
8. Supervising and managing corporate
finances;
9. Determining and supervising sales
territories;
10. Overseeing major accounts;
11. Establishing quota and costing
formulas;
12. Reviewing completed jobs and analysis
of profitability;
13. Establishing sales budgets;
14. Developing
marketing strategies.
[14]
Mr. Young confirmed that the appellant has
been providing these services to W.I.
Products
[15]
The type of board that W.I. manufactures for
sale led to this appeal. W.I. wants to buy "pretty boards", as
Mr. Young described them. The framing lumber that W.I. normally purchases
from mills are 2 x 4s, 2 x 6s and 2 x 8s. W.I.
does not want holes or splits in the wood; it wants no appearance defects,
boards that are appearance graded, not structurally graded. Higher prices are
paid for boards of superior appearance.
[16]
Builders of homes want the "pretty boards"
but they also want long boards. As Mr. Young explained " … if they
have to run this fascia board for 30 feet, they have no interest in
putting up a 10 and butting it to another 10 and butting it to a third 10 …
[T]hey want as few joints as they can get". The less joints there are
reduces entry for moisture and mould growth.
[17]
Unfortunately, said Mr. Young, the mills do
not make long lengths only. They make all lengths. He explained that
"Lumber, 2x4 comes in what's commonly known as an 8 to 20 tally. So when you get the sawmill
production out, at the end of the day, they sawed 100 logs." There are
many 8s and 10s but less 14s, 16s, 18s and 20s. However, W.I.'s customers would
prefer 20s and the mills do not want to sell 20s exclusively, that is what Mr. Young
referred to as an 8 to 20 tally, wood having lengths from 8 feet to
20 feet. "You have to take a certain amount of shorts in order to get
longs. It is always a battle … [to] get as many longs as I can."
Interact technology and relationship with appellant
[18]
At the turn of the century Interact Wood
Products Ltd. ("Interact") had developed and patented a new
technology that would make wide and long boards of almost any length or width.
Interact's process enabled the boards to be finger jointed for length and edge
laminated for width. The patents and applications for patents were owned by
Interact's principal shareholder, Mr. Eric Cable. Mr. Young
explained what Interact did:
… They took some somewhat traditional technology, which is finger
jointing, taking little trim ends from the major mills as they trim to the
evens, 10 foot, 12 foot, 14 foot. There's these trim ends, which
are under 2 feet long, and finger joint them together to make a long one.
That's been done before, but what they added to it, there was a couple things,
but the simple thing they added to it was take that finger jointed long board
and put several of them side by side, gluing them together in a fancy way, so
that you could make this big panel of wood. So you'll have finger jointed
boards coming through from the finger joiner, short ends being finger jointed,
pressed into a long press and you made a 60 foot long board. Now, no
sawmill saws 60 foot.
So first off we've got length that's unavailable in solid wood. It's
now finger jointed to 60 feet long. You could take that finger jointed
piece, in and of itself, and just cut it to 20s, three 20s and you can do that
all day long and then you add 100 percent out turn of 20 foot lumber. Just
what my customers are asking for.
Second thing that they did was they took that 60 foot long
piece and they put another one beside it, another one and another one, another
one, and they made this great big wide panel, 20 feet that direction and
60 feet that direction. Then they had a method, I won't get into the
detail, they had a method of saws, they're called flying saws, of ripping out
of that any width you wanted. So now you could have 60 feet long and any
width you want.
[19]
The ability to acquire boards of any length and
width from Interact, declared Mr. Young, would allow W.I. to have a source
of lumber where it could secure all the length and width it wanted. It did not
have to acquire sizes it did not need or want. Mr. Young described the
process as "game changing".
[20]
W.I. had been purchasing lumber from Interact.
But, Mr. Young added, Interact was struggling and required financial
assistance. Mr. Young personally negotiated the purchase of the boards
from Interact on behalf of the appellant. Notwithstanding that the appellant
procured the boards, Interact sent the invoices to W.I. as purchaser. Copies of
three invoices from Interact to "Woodtone" in October and November
2004 describe the board lengths from 16 feet to 20 feet. There is no
evidence that the sales of boards to Interact's other customers were or were
not the same lengths or quality sold to Woodtone. Mr. Young said that
Woodtone was able to purchase "all the longs we wanted" from
Interact. He considered the ability to acquire these longer boards as a
competitive advantage notwithstanding that Interact had other customers as
well.
Appellant's loan to Interact
[21]
In the Fall of 2003, as Mr. Young recalled
that Interact "came with their tale of woe regarding money they needed to
grow their business, finish the technology, get into Family 2 and 3
(patents),
and build a bigger plant, produce more lumber …". Interact asked for
Woodtone's financial help and the appellant eventually advanced $3,500,000 to
Interact. Mr. Young recalled:
We had a look at what they were asking for, or what they thought was
required as far as financial help. We actually advanced them far more than
[what they wanted]. Because our analysis was that the lesser amount of money
was just a band‑aid, and that they needed quite a bit more money than
that. And since I was so interested in their technology, and so interested in
supplying this lumber to the Woodtone Group, and the advantage that it would
give to the Woodtone Group, 568 took the risk of investing that three and a
half million dollars in the Fall of '03.
[22]
Mr. Young explained that the appellant was
the appropriate corporation in the Woodtone Group to make the loan since he did
not want any operating company to have a "risky investment on its
books."
[23]
A "Term Sheet" dated October 17,
2003, was prepared by Interact for Mr. Young's review. Mr. Young said
this was not the first proposal and not the last but it was the first formal
proposal for the loan of $3,500,000.
[24]
As part of the loan, Woodtone Group would also
provide "general business advice" to Interact in consideration,
Mr. Young stated, of "3,500,000 options with an exercise price of
$1.00", assuming Interact "has 30,000,000 voting common shares
outstanding …". In the event Interact became a public offering corporation
at a valuation of less than $30,000,000 or, if Interact "is still private
after 3 years" and its value is less than $30,000,000, adjustments
would be made to the exercise price.
[25]
Mr. Young did not agree to the term in the
"Term Sheet" but negotiations continued with Interact who, according
to Mr. Young, continued to send him term sheets. He considered Interact's
activity to be "an iterative process … looking for more money."
However, he cannot recall whether he signed any term sheet, although he has
some unsigned copies in his possession.
[26]
In midst of negotiations, Mr. Cable and his
spouse, Mr. Young recalled, asked for short‑term help claiming
Interact was "broke". Because he was "very passionate about the
[Interact] technology and the potential of the benefit of the out‑turned
lumber from Interact that would really help the Woodtone Group", he caused
W.I. to loan Interact $500,000 on October 17, 2003 and $250,000 on
December 2, 2003, the $500,000 being advanced without security at the
time.
[27]
Mr. Young claimed the reason W.I., and not
the appellant, loaned the amounts of $500,000 and $250,000 was because it had
the money in its bank account at the time and the appellant did not. Book
entries adjusted the two loans from W.I. to the appellant so that the two loans
were recorded as loans from the appellant to Interact.
[28]
At the time Interact originally approached
Mr. Young for a loan it had already borrowed money from "some other
bridge financing people" at interest rates of "about 30 per
cent" and 51 per cent, according to Mr. Young.
[29]
On December 4, Interact executed a Security
Agreement in favour of W.I. for $750,000.
[30]
Also on December 4, Interact prepared and
executed an addendum to the Term Sheet of October 17 (indicating this was
the eleventh draft). The signing parties were Interact and the appellant.
[31]
On December 19, 2003 a loan agreement for
the $3,500,000 was finally executed. The interest rate was 18 per cent per
annum. Mr. Young wanted to make sure that Interact paid back the previous
bridge loans of 30 per cent and 51 per cent secured loans. He considered
the appellant's loan to Interact as "risky" so he required a
"first charge on everything". The balance of the loan "would be
for expanding the business, finishing the first plant, getting production up
and that's what 568 needs" a successful company to get lumber for the Woodtone
Group. In cross‑examination Mr. Young confirmed that
"roughly" $2,000,0000 would be applied to repay the bridge loans,
$500,000 to payables, working capital for Interact's plant in Golden, B.C.,
carrying costs in respect of its plant in Vavenby and the balance for
miscellaneous matters. The amount advanced by the appellant on December 19
was $2,700,000; there was a "holdback" with respect to interest on
the earlier loans by Woodtone.
[32]
The loan was secured, among other things, by a
guarantee of the principal amount and interest by Mr. Cable and Interact
Holdings, a corporation he controlled, as well, among other things, by an agreement
by Interact to mortgage and charge and grant in favour of 568 specific and
fixed security interest in all personal property, assets, rights and
undertakings, including accounts receivable, equipment and fixtures and other
assets. Mr. Cable would also offer the patents he owned personally as
security for the loan.
The Patents
[33]
That Mr. Cable owned the patents for the
intellectual property came to Mr. Young's knowledge shortly before
December 19. As a result it was necessary to obtain Mr. Cable's
personal guarantee from the loan including, in particular, security over the
patents, the "only valuable asset" according to Mr. Young. As he
explained it: "If there was going to be any trouble in this loan … at
minimum … we'd like our money back. But if we don't get it … we certainly want
to have the patents as security so we can use it to produce the lumber for the
Woodtone Group."
[34]
Mr. Cable executed an agreement, dated December 19,
2003, ("Security Agreement") securing the appellant's loan of
$3,500,000 to Interact and, among other things, charging and granting to the
appellant a security interest in the following intangibles described in
Schedule "A" of the Security Agreement:
Inventions or
improvements described and claimed in:
1. United
States Patent Application 09/892,142 filed June 26, 2001; and
2. Patent
Corporation Treaty (PCT) Application PCT/CA02/00981 filed June 26, 2002 designating
all member states of the Patent Cooperation Treaty, and any and all
applications constituting a national or regional phase entry of said PCT
Application.
and all right, title and interest in and to the said inventions or
improvements and said applications, and all continuations, divisions, renewals
of or substitutes for said applications, and in, to and under all Letters
Patent which may be granted on or as a result thereof, and any reissue or
reissues of said Letters Patent, in any and all countries.
[35]
The patent or patents ("Patent",
"Patents" or "intellectual property") described in
Schedule "A" to the Security Agreement were sometimes referred
to during the hearing of the appeal as "Family 1" Patents and Patent
applications and later were described as patents for a wood‑gluing and
clamping system. The U.S. patent was pending on December 19 and was for
the process Mr. Young described earlier in these reasons. Mr. Young
added these Patents, Family 1 Patents, had a secondary part, a layer
which, I understand, adds strength to the board. Over the years, until 2007,
once the appellant controlled Family 1, it applied for patents in other
jurisdiction including Canada, Russia, China, Japan, New Zealand, Mexico, Australia and Europe.
[36]
The Security Agreement was prepared by the
appellant's solicitors who referred it for review and comment to a patent
lawyer, Mr. Hilton Sue.
[37]
Mr. Sue confirmed that the U.S. Patent and
Investment Office assignment database records that Mr. Cable's security
agreement of December 19, 2003 had been recorded against all of
Mr. Cable's Patents and patent applications in favour of 568. These
include a description of the collateral, U.S. national entry of the PCT
application and the "divisional" of the application. Copies of the
pertinent patent assignment from the U.S. Patent and Trademark Office
confirming the appropriate registrations on January 14, 2004 were produced
by Mr. Young. The registered collateral U.S. patent application under the Personal
Property Security Act of British Columbia was registered on
December 24, 2003.
[38]
Also, by agreement dated December 19,
Interact granted to James Young (RMH) Trust the right to purchase
3,960,000 Class A voting shares for $1.00 per share contemplated earlier. The agreement is signed by
both Mr. Cable for Interact and Mr. Young as Trustee. The option was
put into trust "as part of strategic planning" according to
Mr. Young.
[39]
In Mr. Young's view the option to purchase
the shares was partly "for … making the loan" in addition to the
interest of 18 per cent on the loan. Mr. Young said he hoped to get
some benefit in the future if Interact became a publicly traded corporation but
he considered the option "not very important". I note that earlier he
had indicated the share options were consideration for Interact consulting with
the appellant.
[40]
In cross‑examination Mr. Young was
referred to a subsequent proposal dated January 10, 2005, made by Woodtone
concerning possible refinancing of Interact. Respondent's counsel addressed the
comments in the proposal that Woodtone expected the $3,500,000 to earn monthly
interest and have the principal repaid "and then watch and wait as the
warrants slowly became more and more valuable, until a liquidity event would
allow them to be exercised." Mr. Young declared the document was
written for Interact "to show them how far off the mark they were."
He had "seen too many of these small businesses … to believe that [i.e.
the warrants having significant value] would be the case." Mr. Young
insisted the warrants were offered to Woodtone as a bonus on the loan and was
not a critical consideration in making the loan. The main purpose of the loan
was for "Woodtone to acquire the wood and for the appellant to earn
management fees from Interact". He repeated that he wanted to make sure
Woodtone would get "the wides and longs" once Interact expanded its
production using the proceeds of the loan.
Interact's
financial problems
[41]
Interact did not pay interest on the loan as
required. A payment of interest on the $750,000 loan was due in
January 2004 and it was not made. Interest on the "main loan"
was due on January 31, 2004 but it was not made "so we learned very
quickly this Eric Cable … wasn't a man of his word at all. You can't
borrow three and a half‑million in December and not have $10,000 to make
an interest payment on that loan two weeks later … He had the money … he had no
intention of paying it."
[42]
Mr. Young stated that he kept demanding
payment of interest from Mr. Cable and his wife but mostly to no avail. He
watched what was happening at Interact's site and saw that the business was
expanding "from a capital point of view faster than [Mr. Cable]
generated any cash flow to fund it … he overspent dramatically on the capital
additions." Mr. Young acknowledged that he received a "little
bit of interest in February."
[43]
Interact's business was not doing well.
Mr. Young had his own ideas how Interact could succeed and was looking to
"resurrect" the business. By April 2004, he had discussions with
corporations who financed businesses with a view to developing a program that
could be "pitched to Interact".
[44]
Following a meeting with
Mr. Glen Johnson, a friend of Mr. Young and principal of Glace
Capital Corporation, Mr. Greg Vezina of Edgemark Capital Inc, who
represented Interact in earlier financings, Mr. Young and his son, Chris,
a proposal was prepared for discussion purposes. The proposal, a copy of which
was sent to Mr. Cable, contemplated restructuring part of the appellant's
loan to shares and reduction of the interest rate on the loan, additional
investment and a reduction of Mr. Cable's interest in Interact, among
other things. The proposal was rejected by Mr. Cable.
[45]
By June 2004, Interact was in default of its
obligations to 568. Interact required additional funds and negotiated a loan of
$800,000 from Nacan Products Ltd. ("Nacan"). Nacan supplied "the
polyurethane glues that are critical as part of the patented process to make
the finger‑jointed edge laminated and for especially structural
side" of the Patents, according to Mr. Young, and Nacan wanted to be
the exclusive supplier of the glues to Interact in return for the loan. A
condition of the loan was that 568 would subordinate certain of its
security — not the Patents — to Nacan and Mr. Young agreed to do
so since "it was critical for Interact to move forward" or face
"CCAA
tomorrow."
[46]
On June 7, 2004, the appellant, 568, wanted
Interact to find a "significant additional equity investor … in excess of
two million dollars" and in return 568 would subordinate its security to
the new loan and reduce interest on the loan to between 6 per cent and
9 per cent.
[47]
Nothing happened except, according to
Mr. Young, Interact was "trying to borrow from everywhere" and
did in fact again borrow from previous lenders at rates of 30 per cent but
568 did not subordinate any of its security for these loans. In the meantime,
Mr. Young believed, Interact continued to lose money.
[48]
By the beginning of 2005 Mr. Young realized
the appellant's investment in Interact was a "disaster". W.I. was not
getting the wood it wanted from Interact and the $3,500,000 loan was at risk.
Mr. Young recalled that he and his son spent weeks and weeks preparing a
business plan for Interact. The plan reviewed Interact's history, sales,
financings, income and recommended $3,000,000 new equity by 568, $1,000,000
payout to Mr. Cable, Mr. Cable transferring 70 per cent of his
common shares to 568, 568 reducing interest on its loan to 8 per cent, a
new sales manager, removal of a particular employee, etc. Mr. Young had no
faith in the management of Interact and believed that if present management
continued, 568 would have to demand payment of all debt owing to it even if it
meant bankruptcy of Interact.
[49]
Mr. Young "sat down" to discuss
the proposal with Mr. Cable and his wife and "entourage" but
Mr. Cable rejected the proposal. Mr. Cable, according to
Mr. Young, wanted to retain 100 per cent control. Mr. Young
denied Mr. Cable's charge that he wanted to take over the company. In
Mr. Young's view, he "wanted to buy a decent share position and use
that to change management … to add our talents to Cable and restructure this
business for the benefit of both …" Mr. Young "surmized"
that Interact was going into bankruptcy and he wanted to keep it alive and
"get lumber to Woodtone who needs it, wants it and can make a profit with
it [get] the management fees back."
Bankruptcy of Interact and Mr. Cable
[50]
In April 2005, Interact filed for creditor
protection under the CCAA followed by bankruptcy in July 2005.
Mr. Cable filed for bankruptcy in August 2005. Price Waterhouse Cooper
("PWC") was Trustee in both bankruptcies.
[51]
During this period Mr. Young was discussing
with people in the industry possible investment with Woodtone in Interact or,
after bankruptcy, to acquire all or some of its assets, in particular the
Patents. Mr. Ken McClelland, Vice‑president of Luxor Industrial
Corporation ("Luxor") an engineered wood producer company in Langley, B.C. at the time, accompanied Mr. Young to Interact's property in Vavenby,
B.C. to view the site Interact had purchased for a new plant. In an email of
August 2, 2005 to Mr. Young, Mr. McClelland stated he did not
see any future for any manufacturing of product at Vavenby. Among his
suggestions was for Interact to go into bankruptcy and then they might acquire
Interact's mill in Golden, B.C., and the Patent related assets. In effect,
Mr. Young stated, Mr. McClelland confirmed what he already thought. A
possible joint venture with Luxor after acquiring assets in a bankruptcy
auction was a possibility. Discussions and tours to Interact plants continued
into 2006. Mr. Young was also taking people from other companies to
Vavenby who also determined that "the Vavenby plant was never going to be
operational in an economic sense".
[52]
On September 9, 2005, Canadian Forest
Products Ltd. ("CanFor") wrote to PWC in Calgary, Trustee in
bankruptcy of Interact's estate, expressing interest in acquiring not only
Interact's property but also the intellectual property that "flows with
the assets in question". Mr. Young was an Inspector in
Mr. Cable's bankruptcy and was being kept abreast of Interact's
bankruptcy. Mr. Richard Pallen, a senior vice‑president of the
insolvency division of PWC and Trustee in bankruptcy, was in charge of
Mr. Cable's bankruptcy for PWC, represented PWC and chaired meetings of
Inspectors and executed documents for PWC as Trustee of the Estate of
Mr. Cable.
[53]
Once CanFor realized that the intellectual
property, the Patents, was owned by Mr. Cable and that the appellant had a
charge on the property, its interest in Interact ended, Mr. Pallen stated.
Their interest was also diminished due to Mr. Cable's common law spouse,
Patricia Melchior, taking legal action claiming Mr. Cable had no
rights to charge the intellectual property as security since there was a
resulting trust in her favour relating to the Patents and that Mr. Cable
had been unjustly enriched, that she had a constructive trust in the patent. At
the time Mr. Pallen considered Ms. Melchior's claim as
"dubious" It was only on January 29, 2007 that the British Columbia
Supreme Court, Masuhara J.
dismissed Ms. Melchior's actions and also limited the appellant's security
to a first charge on the Family 1 Patent and Patent applications.
[54]
Later, by agreement dated November 2, 2005,
PWC, in its capacity as Receiver of Interact's estate, sold to a numbered
British Columbia corporation ("BC Corp."), a subsidiary of Matco
Capital Ltd. ("Matco"), the debtor in‑possession lender to
Interact pursuant to the CCAA, Interact's assets, including
"intellectual property … owned by Interact (and expressly excluding
Eric Cable) … " The B.C. Superior Court approved the sale by Order
dated November 22, 2005 noting that to the extent the appellant or
Ms. Melchior has any interest in Mr. Cable's patent assets, the
security of the appellant or any trust interest of Ms. Melchior shall have
priority over the interest of the B.C. Corp. and certain other
corporations and that the appellant was given leave to enforce its security
against any interest Interact may have in the Patents.
[55]
On November 18, 2005 Mr. Young had
emailed a lawyer representing Matco concerning the acquisition by its
subsidiary and delays that might be forced by the Melchior litigation in
obtaining the rights to the Patents. He asked for support in obtaining the
Patents, offering to partner with Matco to sell "the entire package"
of Matco assets and "our IP" to CanFor "for a number we are
happy with" or to partner with Matco and "fire up the business".
Nothing came of this. Mr. Young repeated that there was "no
desire" to sell to CanFor.
Transfer of Patents to appellant
[56]
On November 23, 2005 the Inspectors in
Mr. Cable's bankrupcty resolved to and did release the intellectual
property, the Family 1 Patents, to the appellant (and CVM Holdings Ltd.)
"subject to ultimate accounting for the proceeds of disposition". The
Inspectors also discussed the Melchior appeal. Mr. Young testified that
the purpose of the meeting of Inspectors was to have the appellant "get a
hold of the IP, it was the rightful owner". It is on the release of the
Patents to the appellant that this appeal turns.
[57]
The phrase "subject to an ultimate
accounting for the proceeds of disposition" was subject to heated
discussion between counsel, the respondent's counsel arguing that these words
nullified any claim by the appellant that it became beneficial owner of the
Patents on November 23. Mr. Pallen testified he incorporated the
phrase as part of the resolution because he was "trying to be pretty
conservative", that if Mr. Young could find "somebody in Dubai" willing to cover all Mr. Young's costs, interest "and amounts up the
road, I would like to get something to come back to the unsecured creditors"
but he doubted this would happen. He had concluded that the "solid wood
sector was in a long downturn, with very little capital investment going on in
any market", including Europe and Asia. Mr. Pallen explained that the
appellant was a secured creditor for $3,500,000. PWC "could not see a
situation developing where that [the] intellectual property could result in a
greater realization than … [$3,500,000] …". Mr. Pallen also believed
that "there was a big well to keep throwing money into on this". In
his view the "[Melchior] trial was out of control", taking
16 days. "Jobs [in the mills] were gone at that point." The appellant
had been funding the estate to deal with the Patents, he added. PWC (as Trustee)
no longer had an economic interest in the intellectual property and there was
no return to the unsecured creditors. The Trustee, he said, was devoting a lot
of time and expense.
[58]
Mr. Sue's understanding of the Minutes of
the Inspectors' meetings of November 23, and specifically the requirements
to account for any proceeds of disposition, "was that [568] would take
control and beneficial ownership of the IP at the time … "
[59]
Subsequently Mr. Pallen wrote to the
solicitor who was acting as patent agent for PWC informing him that the Patents
had been transferred to the appellant and for him to contact Mr. Young to
confirm any instructions. However, PWC was still legal owner of the Patents
since, as Trustee of Mr. Cable's estate, title to the Patents were vested
in the Trustee. However, once he believed the beneficial title to the Patents
was transferred to the appellant in 2005, Mr. Young's position was that
the appellant incurred all the risks and costs, including funding all the
protection efforts to maintain the rights to the Patents, including protecting
its rights in the Melchior litigation, which the appellant did.
[60]
This was confirmed by Mr. Sue who stated
that he understands that a registered title to the Patents does not change when
beneficial title to the Patents changed and that the beneficial interest owner
of the intellectual property would have the right to cause legal title to be
transferred at a time of its choosing. Also, once 568 became beneficial owner
of the Patents, it became responsible for funding future actions necessary to
preserve the intellectual property "and to make it progress". The
appellant became owner of the intellectual property and, as such, assumed the
right for the IP. This, of course, may very well be a legal opinion of
Mr. Sue to questions by appellant's counsel but his comments were not
subject to any objection by the respondent's counsel.
[61]
The Patents were still registered in
Mr. Cable's name at the end of 2005. The registered ownership of the
Patents had to be transferred in the U.S. Patent Office. Mr. Young
recalled that his solicitor, Mr. Dennis Fitzpatrick, obtained the
actual U.S. patent and on or about January 13, 2006 put it into his firm's
safety deposit box and remained in the safety deposit box to date of this
appeal. A copy of the Patent was provided to Mr. Young by his solicitor.
It was only in 2010, as described later in these reasons, that legal title was
transferred by PWC, as Trustee of Mr. Cable's estate, to the appellant.
The Crown says beneficial title also passed at this time.
Appellant's efforts with Patents
[62]
By November 2005 Mr. Young realized the
appellant lost $3,500,000, "a lot of money". The challenge at that
time, in Mr. Young's view, was to maintain control of the Patents and look
for a joint venture partner, regroup, produce the lumber for Woodtone and
permit the appellant to earn fees from the joint venture through royalties for
use of the Patents or, possibly, through management of the joint venture,
depending on the structure of the joint venture. But, to get the tools for the
operation of a joint venture and someone to join the joint venture,
Mr. Young insisted, required the Patents, which 568 obtained in 2005, the
equipment that was able to make use of the patent, which 568 purchased in 2006,
and defeat the claim of Ms. Melchior which was achieved in 2007.
[63]
In 2006, Mr. Young recalled, Woodtone was
discussing a joint venture with several companies, including Synergy Pacific
Engineered Timber Ltd. ("SP"), a company that fabricated porch posts
from lumber using a process not too different from W.I. in its manufacture of
lumber. SP appeared the more promising partner among the various companies
Mr. Young spoke to. Woodtone had business relations with SP as early as
2000 when SP started in business and which has continued to date of trial.
Woodtone is one of SP's key customers for structured wooden posts.
[64]
In June 2006, at a time principals of Woodtone
and SP were in serious negotiations, the appellant purchased for $165,000, at
auction, Interact's equipment required for the application of Family 1
Patents. In addition the appellant spent $48,000 dismantling the equipment and
moving it for safe keeping to SP's facility.
[65]
Mr. Young stated that
Mr. Morris Douglas, Chief Executive of SP, was "one of the few
in the industry that keeps a daily diary" and he asked Mr. Douglas in
2011 to write a description of the various meetings between principals of W.I.
and SP and their travels to Interact facilities, among other things. Excerpts
from Mr. Douglas' diary are attached to his letter of October 22,
2011 to Mr. Young. Mr. Douglas describes in point form meetings and
discussions between principals of Woodtone and SP starting on September 20,
2005 and ending on January 19, 2007. In his letter Mr. Douglas
describes SP's interest in Interact. Two former key employees of Interact, Adrian and Steven, working at SP had informed Mr. Douglas of Interact's Patents and Adrian was "pushing" him to have a look at the Interact process since it could
have potential for use in SP's operations. SP was not making any money at the
time and Mr. Douglas felt it needed a new product line. He "started
to explore the potential of the process" in SP's plant. From February 2006
to January 2007 "we were in constant dialogue with Woodtone's Jim and
Chris Young about some sort of joint venture", Mr. Douglas wrote
in his letter and repeated in Court.
[66]
The major shareholder of SP,
Mr. Michael Holzhey, met with Woodtone personnel on several occasions
in 2006 to explore the Interact process as it related to SP and Woodtone.
Mr. Douglas, indicated Mr. Holzhey, wanted to proceed. In preparation
for an August 9 meeting with Mr. Young, SP prepared a block plan
proposal for a joint venture that would require an estimated capital cost of
$1,500,000 which he was confident the appellant would advance. Meetings between
Woodtone and SP personnel continued throughout 2006.
[67]
Mr. Douglas noted in his 2011 letter that
"the lumber market had been deteriorating through 2006 and by the last
quarter, it became more evident that the timing was not right to proceed with
this investment … [and] agreed to wait until market conditions improved and we
would review the concept at that time." Mr. Douglas noted that as of October
2011 the market had not improved and concluded that "we have gone through
the longest lumber market downturn since the 1930's depression."
[68]
Mr. Young confirmed the deterioration of
the soft lumber market in North America. Business was "great" in 2005
and "okay" during the summer of 2006. It was at the end of 2006 and
2007 that the fall in business was real; it was, Mr. Young said, "the
beginning of the most precipitous fall in U.S. housing starts in the history of
the United States." About 50 per cent of Woodtone's business is to
the U.S. Mr. Young estimated that Woodtone's sales fell by 40 per
cent. He produced trade tables describing housing starts in the U.S. for the month of June
of the years 2005 to 2010. Below are the numbers for the month of June for each
year as well as the number of housing starts for each year:
|
|
JULY
|
ANNUAL
|
|
2005
|
187,600
|
2,068,100
|
|
2006
|
160,900
|
1,800,900
|
|
2007
|
127,900
|
1,355,100
|
|
2008
|
86,700
|
905,500
|
|
2009
|
56,800
|
553,900
|
|
2010
|
51,500
|
586,900
|
[69]
With these numbers of new homes being built it
would have been folly to build a new plant, Mr. Young stated. He believes
that the "ideal" number of new U.S. residential units for a year for
his business is 1,500,000.
[70]
Mr. Young stated that the drop in construction
of houses in the United States lead to a "dramatic" drop in the price
of lumber. Engineered wood, which is what Interact's Patents would produce, is
a competitor to solid wood and does not "have the luxury of being able to
fall [… since] … it did not have the same input costs". In other words, as
I understand it, the price of solid wood, natural wood, has the
"luxury", as Mr. Young put it, of being able to fall; engineered
wood would be out of sync in price in the market place and be very difficult to
sell. That is one reason any planned joint venture was not feasible by the end
of summer 2007.
[71]
In addition, Mr. Young explained, during a
housing start crisis, B.C. sawmills shut down due to lack of business and the
trim ends of wood that Woodtone relies on are not available.
[72]
From 2005 to 2007 the appellant applied for patents
of Family 1 in other jurisdiction including Canada, Russia, Japan, New Zealand, Mexico, Australia and in Europe.
[73]
Mr. Young's view was that, notwithstanding
the money 568 spent to obtain the Patents, purchase the Interact equipment and
defend its interests in the Patents against Ms. Melchior and the time and
sundry expenses Woodtone devoted to the project, conditions in 2007 did not
warrant further time or money in the project. It was apparent 568 could not
build a new plant itself or in a joint venture to manufacture engineered wood
applying the Patent acquired from Mr. Cable that would be profitable.
Things were not going to improve, Mr. Young concluded.
[74]
Therefore, by Agreement "made with effect
from September 30, 2007" the appellant 568 sold to Young Financial
Ltd., a corporation owned by Christopher Young, Mr. Young's son, the
beneficial interest in the intellectual property described in Schedule "A"
of the Security Agreement by Mr. Cable securing the appellant's loan to
Interact,
that is the Patents in Family 1, for one dollar, "the best estimate
of the market value of the Property presently available" according to the
Agreement. In filing its income tax return for 2007, 568 claimed a terminal
loss calculated as follows:
568 BC Ltd.
Patent – Capitalized cost continuity
schedule
|
|
Year end
|
|
Description
|
|
Amount
|
|
|
30-Sep-06
|
|
Defunct loan to Interact Wood Products
|
|
3,500,00.00
|
|
|
30-Sep-06
|
|
Legal costs to secure patent/intellectual property
|
|
300,596.92
|
|
|
|
|
Total capitalized cost at September 30, 2006
|
|
3,800,596.92
|
|
|
30-Sep-07
|
|
Legal costs to secure/defend patent
|
|
70,460.38
|
|
|
|
|
Subtotal
|
|
3,871,057.30
|
T2 sch 8 Class
14
|
|
30-Sep-07
|
|
Sold to Young Financial Ltd. for $1
|
|
|
Proceeds $1 and terminal loss
|
|
|
|
Total capitalized cost at September 30, 2007
|
|
(3,871,057.30)
|
|
|
30-Sep-08
|
|
additional costs paid to lawyer
|
|
24,159.00
(24,159.00)
|
T2 sch 9 Class 14 addition and terminal loss
|
[75]
Three years later, by agreement dated
August 24, 2010 ("Legal Transfer Agreement"), PWC, as Trustee of
the Estate of Mr. Cable, sold, assigned, and transferred to 568
Mr. Cable's entire "right and title to and the interest in" the
Family 1 Patents for a "wood‑gluing and clamping system"
and applications, the right to apply for patents on the invention in all
countries in the name of the assignee or its successors or assignees. The
appellant reduced its secured claim by $1,000,000 in consideration of the
assignment of legal title.
[76]
When PWC transferred legal title to the Patents
to 568 on August 24, Mr. Pallen was not aware that 568 had
transferred beneficial title to the Patents to Young Financial in 2007.
[77]
Mr. Sue drafted the Legal Transfer
Agreement. He described the phrase "entire right and title to and interest
in" as "a catch-all phrase to capture any interest Mr. Cable
would have at that time in respect of this intellectual property up to and
including legal title … to make sure nothing is remaining in Mr. Cable's
name". He believed that notwithstanding the transfer of the interest in
the Patents to the appellant in 2005, Mr. Cable still had legal title. At
the time he prepared the assignment of August 24, 2010, Mr. Sue also
was not aware that 568 had transferred beneficial interest in the intellectual
property to Young Financial Ltd. on September 30, 2007. He received the
letter of agreement between the appellant and Young Financial Ltd. a few days
before trial.
[78]
Mr. Sue registered legal title to the
Patents in the Canadian Patent Office in September 2010 and in the U.S. Patent
Office in August 2010 in the name of 568. He stated "in patent law
it's actually quite common for legal title and beneficial title to be in the
names of two separate entities". The fact that 568 had already transferred
beneficial title in 2007, he opined, did not affect its legality and "is
still effective in transferring legal title from Eric Cable to
[568]".
[79]
In her Amended Amended Reply the respondent
alleged that "even if the Patents met the definition of a depreciable
asset, it was not available for use by the appellant and, consequently, no
amount is includable with respect thereto in calculating the un-depreciated
capital cost of that class of depreciable property". I can only assume
that the respondent's conclusion that the Patents were not available for use by
the appellant was that the appellant did not have the equipment to apply the
Patent or, as suggested in the reasons of Masuhara J. in Mr. Cable's
application for an absolute discharge from Bankruptcy. At paragraph six of his
reasons, Masuhara J. wrote that the Trustee in bankruptcy "notes that
key computer controlled equipment was disabled through the erasure of computer
hard drives that rendered the [patent applications] equipment inoperable".
Later on, at paragraph 22, the judge stated that the key technical
information contained in the computer hard drive had disappeared and the Trustee
has not been able to locate it. Crown counsel therefore asked Mr. Young if
he was "aware whether or not the hard drive was disabled through the erasure?"
This too, among other allegations, was assumed by the respondent in assessing
but respondent's counsel read these portions of the reasons of Masuhara J.
in support of the respondent's allegation that without the information on the
hard drive, the appellant could not carry on business using the Patents.
[80]
Mr. Young declared that he and his
associates "did our homework" and the best person to have been asked
about any loss of key information in the computer hard drive was Mr. Douglas
who had testified the day earlier. As far as Mr. Young was concerned
"it was a complete rumor, inuendo by Mr. Cable." He recalled
that Adrian, one of the persons interested in the Patents and who had worked at
Interact, "informed [him] that no such thing had happened and was of no
concern. I [i.e. Adrian] programmed it by the way, not Eric Cable, and I
could re‑program it even if it did happen."
Analysis
[81]
If I find that the appellant was the beneficial
owner of the Family 1 Patents on September 30, 2007, when it sold the
Patents to Young Financial, I need not consider the respondent's argument that
beneficial ownership was transferred only in 2010.
[82]
The significance of the transfer of beneficial
ownership to the appellant on the facts before me is found in
subsection 79.1(2) of the Act:
[83]
A creditor seizes a property where it acquires
the beneficial ownership of the property; that is, the beneficial ownership of
all of the property. Note that the phrase "beneficial ownership" in
English is "propriété effective" in French
and vice versa.
[84]
Did the appellant seize the Patents so as to
acquire beneficial ownership of the Patents in November 2005? What do the
courts and dictionaries consider to be the ordinary meaning of "beneficial
ownership"? I could find no definition of the term "beneficial
ownership", although the two words separately are defined.
[85]
The Shorter Oxford English Dictionary defines "owner" to include:
one who has the
rightful claim or title to a thing
[86]
The New Shorter Oxford Dictionary defines "beneficial" as:
of, pertaining to,
or having the use of benefit of property, etc.
[87]
Le Petit Robert I refers to "effectif, ive" as follows:
Concret,
positif, réel, tangible … réels (et non simplement
inscrits sur les rôles.)
[88]
Le Petit Robert I comments that the word "réel"
means real as opposed to imaginary, something that is certain or true.
[89]
In Jodrey Estate the
Supreme Court of Canada approved of the meaning given to the words
"beneficial owner" by Hart, J. in Mackeen v. Nova Scotia who
wrote:
It seems to me that the plain ordinary meaning of the expression
"beneficial owner" is the real or true owner of the property. The
property may be registered in another name or held in trust for the real owner,
but the "beneficial owner" is the one who can ultimately exercise the
rights of ownership in the property.
[90]
Earlier, in Wardean Drilling Ltd. v. M.N.R., Cattanach, J. opined
that for the purposes of undepreciated capital cost
… the proper test as to when property is acquired must relate to the
title to the property in question or to the normal incidents of title, either
actual or constructive, such as possession, use and risk.
…
As I have indicated above, it is my opinion that a purchaser has
acquired assets of a class in Schedule B when title has passed, assuming
that the assets exist at that time, or when the purchaser has all the incidents
of title, such as possession, use and risk, although legal title may remain in
the vendor as security for the purchase price as is the commercial practice
under conditional sales agreements. In my view the foregoing is the proper test
to determine the acquisition of property described in Schedule B to the Income
Tax Regulations.
[91]
The Federal Court of Appeal confirmed the
"incidents of title" test in Wardean Drilling Co. v. M.N.R., in Hewlett
Packard (Canada) Ltd. v. R.
and Morin v. R.
[92]
A beneficial owner of property therefore, is
someone who is the real owner of the property, a person who is in possession of
the property, a person who could derive income from the property or otherwise
use it and who is the person who suffers any loss if the property is damaged or
destroyed. The beneficial owner is the only person who can dispose of the
property in his or her sole discretion without interference.
[93]
The respondent submits that the appellant did
not obtain beneficial ownership of the Patents in 2005, that beneficial
ownership was assigned to the appellant when legal ownership was transferred to
it in 2010. The phrase "subject to an ultimate accounting for the proceeds
of disposition" in the resolution of Inspectors transferring the Patents
to the appellant restricted the appellant's right to real or beneficial
ownership of the Patents.
The appellant only obtained a security interest in the Patents in 2005. The
appellant had to account to the Trustee for any proceeds of sale in the Patents
in excess of $3,500,000. An equity of redemption, argued respondent's counsel, belonged to the Trustee
notwithstanding the purported release of the Patents to the appellant.
[94]
Respondent's counsel referred to the assignment
of legal title in the Patents to the appellant in 2010, that what was being
assigned was the "entire right and title to and interest in" the
Patents and that this included both legal and beneficial ownership.
[95]
Mr. Pallen, who testified as the Trustee in
Bankruptcy representative, said that in November 2005, PWC intended to transfer
beneficial title to the Patents to the appellant and the appellant intended to
acquire such title. This is absolutely clear from the evidence of Messrs. Pallen
and Young and was how they conducted themselves once PWC assigned the rights to
the Patents to the appellant. The appellant had absolute use enjoyment and
possession of the Patents. The appellant possessed physical patent documents
and it had the right to exploit the processes protected by the Patents.
Mr. Pallen confirmed to the patent agent that the appellant, through
Mr. Young, was the person who henceforth would be instructing him. The
appellant assumed all risk associated with the Patents. The appellant assumed
the owner's risk, for example, being the costs of ownership and was responsible
for defending its Patent ownership rights against the claims of Mr. Cable's
wife. The Trustee did not interfere with the appellant's use and enjoyment of
the Patents. In short, November 23, 2005 the appellant gained all the
incidents of beneficial title: possession, use and risk. It had the rightful
claim to the Patents and was the only person who could deal effectively with
the Patents as owner. By 2007 the appellant also had purchased the equipment capable
of utilizing the Patents and in 2007 had defeated Ms. Melchior's claim to
the Patents. The appellant was the beneficial owner of the Patents and, like
any other beneficial owner, had the right to sell the Patents to Young
Financial in 2007.
The Patents
[96]
The Patents were available for use by the
appellant on acquisition in 2005. What the appellant did subsequent to
acquisition was in the course of confirming and exercising its control and
ownership of the Patents.
[97]
In Gartry (W.C.) v. Canada, Bowman, J. (as he then
was) explained when a person becomes owner of depreciable property:
Where … a taxpayer … has exercised sufficient dominion over a
depreciable property that, having committed himself to purchase it, he orders
its modification for his specific purposes, and supervises and pays for those
modifications, even if passage of title is deferred until full payment … is
received, he has acquired a sufficient interest in the property and indicia of
title thereto that it becomes depreciable property in his hands …
[98]
The appellant exercised the attributes of a true
owner, acquired equipment to manufacture the wood using the Patents, moved the
equipment for safe keeping at its cost and, among other things, paid to protect
its ownership of the Patents. The appellant acquired sufficient interest in the
Patents and indicia of title, beneficial title thereto that it became
depreciable property in its hands. That it did not own the equipment to exploit
the Patents in 2005 is not significant, since the appellant could have licensed
the Patents to others who could have acquired the equipment. It, therefore, had
use of the Patents as early in 2005 in acquisition or as late as 2007 when it
had acquired the equipment and defeated Ms. Melchior's claims.
Acquired for purpose of earning income
[99]
Paragraph 1102(1)(c) of the Regulations
requires that for the Patents to be included as a Class 14 property, the
Patents be acquired by a taxpayer for the purpose of gaining or procuring
income. The respondent's main thrust with respect to paragraph 1102(1)(c)
is that the appellant did not acquire the Patents to earn income since no
business was being carried on or had commenced at the time the Patents were
acquired. In fact, W.I. was carrying on a business at the time, of which the
appellant was the manager. And it was for business reasons that the appellant
became involved in this imbroglio.
[100] In Hickman Motors v. The Queen, McLachlin J. (as she
then was), described the purpose of paragraph 1102(1)(k) of the Regulations,
at p. 5364:
… The exclusion [in
paragraph 1102(1)(c)] is aimed at assuring that the asset for which
the deduction is claimed is an asset associated with income production as
distinguished from an asset acquired for non‑income producing purpose,
such as pleasure or personal needs.
[101] It is apparent to me that Mr. Young's, or rather the
appellant's, adventure in advancing the loan and subsequent default by Interact
weighed quite heavily against him. A period of ten years, from the time the
loan to Interact to the time of the hearing of this appeal, does not help one's
memory of events in the earlier years, and frequently, witness' testimony
includes evidence as to what he or she imagined or thought took place.
Nevertheless, while I concluded during trial that some of Mr. Young's
evidence may have suffered from hyperbolae and unintentionally favourable
recall of facts, I have found him to be a credible witness and a practical
businessman. For example, I believe he may have minimized what factor the share
warrants of Interact played as part of the loan to Interact. But the
appellant's prime motivating reason to lend $3,500,000 to Interact was to give
Interact the means to exploit the Patents in such a manner that the appellant
would get the wood sizes it wanted when it wanted and earn income as a result.
And when the appellant acquired the Patents in 2005, it did so in association
with income production in pursuit of and part of a profit making exercise to
exploit the Patents with another party in some joint venture or partnership where
a Woodtone company would be a participant and to which the appellant would
licence the Patents to derive income. The appellant acted in accordance with
reasonably acceptable principles of commerce and business practice.
[102] It was the appellant who advanced funds to Interact for the reasons
described by Mr. Young: for Woodtone to secure ideal sized wood and that
the appellant was its instrument to accomplish this. Mr. Young stated the
reasons for choosing the appellant was that it had a history of acquiring
property which it rented or leased for income to Woodtone for the latter's production
of product and this was no different. The loan to Interact was secured by the
very property that was the reason for the loan. There was no cross‑examination
proving otherwise.
[103] Once Interact and Mr. Cable became bankrupt the appellant's
goal had not changed: it still wanted to exploit the use of the Patents for
profit. The lengthy evidence describes efforts made by Mr. Young to try to
cause Interact to improve its business so that it could sell product to W.I.
When this failed and Interact became a bankrupt, his efforts − and
those of the appellant − were in trying to make use of the Patents
by the appellant or a Woodtone company through a joint venture or partnership
with others, charging a royalty for use of the Patents and a managerial fee to
manage the joint partnership. The appellant was searching to use the Patents
one way or another, originally on its own and later in a partnership or joint
venture, to give Woodtone access to the wood it wanted. The appellant was
treating the Patents no different than other property it had acquired and
leased or licensed to Woodtone in the past. Even before the appellant became
the beneficial owner of the Patents Mr. Young sought others in the
industry to join the appellant in exploiting the Patents for profit. That the
appellant was looking for potential joint ventures to join it in exploiting the
Patents as early as September 2005 was assumed by the Minister in assessing
and, for the period after acquiring the Patents in November 2005, corroborated
by Mr. Douglas. One way or the other, by licensing the Patents to W.I.
alone, in a partnership or joint venture, and, in addition earning management
fees, would the appellant gain income from the Patents.
Motions
[104] On May 6, 2014 by motion of the respondent, the Court granted an
Order to amend its Amended Reply to the Notice of Appeal to (a) correct the
assumption of the Minister (and thus deny) that the appellant sold the Patents
to Young Financial Ltd. on September 30, 2007; and (b) to allege that PWC,
as Trustee of Mr. Cable's estate, sold Mr. Cable's entire right, title
to and interest in the Patents to the appellant on April 24, 2010. The respondent
was also permitted to plead that due to the claim of prior secured creditors
the only property the appellant could seize in respect of the defaulted loans
were the Patents received under the security agreement with Mr. Cable;
that if the Patents were disposed of, the Patents were not depreciable
property; and if they were depreciable property, they were not available for
use by the appellant and therefore no amount is includable in calculating the
adjusted capital cost of a depreciable property.
[105] Subsequently, at the opening of trial the appellant applied for an
order that four documents ought not be admitted in evidence by the respondent
since the respondent did not include them in her List of Documents in
accordance with Rule 89 of the Tax Court of Canada Rules (General
Procedure) ("Rules"). The respondent wished to produce
these documents without including them on a required List of Documents as a
result of their production on a discovery of the appellant on September 5,
2013. There is no evidence as how the respondent obtained these documents
whether through the appellant's witness on discovery or otherwise. The
respondent argued that to disallow these documents would render null the Court
Order of May 6, 2014. I reserved my decision until after trial of the
appeal although the documents in question were submitted.
[106] Rule 89 of the Rules provides that:
|
(1) Unless the Court otherwise directs, except with
the consent in writing of the other party or where discovery of documents has
been waived by the other party, no document shall be used in evidence by a
party unless
|
(1) Sauf directive contraire de la Cour, ou sauf si
les autres parties ont renoncé au droit d’obtenir communication de documents
ou ont consenti par écrit à ce que des documents soient utilisés en preuve,
aucun document ne doit être utilisé en preuve par une partie à moins, selon
le cas :
|
|
(a) reference to it appears in the pleadings,
or in a list or an affidavit filed and served by a party to the proceeding,
|
a)
qu’il ne soit mentionné dans les actes de procédure, ou dans une liste ou une
déclaration sous serment déposée et signifiée par une partie à l’instance;
|
|
(b) it has been produced by one of the
parties, or some person being examined on behalf of one of the parties, at
the examination for discovery, or
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b)
qu’il n’ait été produit par l’une des parties, ou par quelques personnes
interrogées pour le compte de l’une des parties, au cours d’un interrogatoire
préalable;
|
|
(c) it has been produced by a witness who is
not, in the opinion of the Court, under the control of the party.
|
c)
qu’il n’ait été produit par un témoin qui n’est pas, de l’avis de la Cour,
sous le contrôle de la partie.
|
|
(2) Unless the Court otherwise directs, subsection
(1) does not apply to a document that is used solely as a foundation for or
as part of a question in cross-examination or re-examination.
|
(2) Sauf directive contraire de la Cour, le
paragraphe (1) ne s’applique pas au document utilisé uniquement comme
fondement ou comme partie d’une question dans un contre-interrogatoire ou en
réinterrogatoire.
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[107] There is no question that the respondent did not adhere to
Rule 89. An Order allowing a party to modify a pleading to allege new
facts and argument does not and cannot liberate that party from the
requirements of Rule 89. The appellant's application is therefore allowed.
The documents complained of are struck from the record.
Judgment
[108] The appeal is therefore allowed, with costs, and the assessment is
referred back to the Minister National Revenue for reconsideration and
reassessment on the basis that the appellant is entitled to a terminal loss of
$3,871,057 on the disposition of a Class 14 asset for the taxation year at
issue.
[109] These amended reasons for judgment are issued in substitution to the
reasons for judgement issued on December 29, 2014.
Signed at Ottawa, Canada, this 5th day of January 2015.
"Gerald
J. Rip"
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