The Queen v. CFTO TV Ltd., 82 DTC 6139, [1982] CTC 147 (FCTD)

Jerome, AC J:—This action is brought pursuant to the Income Tax Act section 172, by way of appeal from the decision of the Tax Review Board. At issue is the deduction made in each of the defendant’s taxation years 1971- 72 and 1973, of its share of operating losses as a partner in a Radio and Television Station in Windsor, Ontario. The issue in respect to the 1974 return is dependent upon the resolution of the other three years.

The defendant was originally incorporated as Baton Broadcasting Limited (hereafter “Baton”), but in 1971, changed to CFTO TV Limited (hereafter “CFTO”).

During the late 1960’s, it came to the attention of Mr. John Bassett, the President of the defendant company, that as a result of changes in Canadian regulations dealing with foreign ownership, the American owners of the Windsor Radio and Television Station CKLW TV (hereafter “CKLW”) wanted to sell. Baton, in association with MacLean-Hunter Limited (hereafter “MacLean-Hunter”) applied for the necessary approval of the Canadian Radio and Television Commission (hereafter “CRTC”) to purchase the Television Station, but was refused on the basis that the Commission wanted to assure some involvement, if not eventual full ownership, by the Canadian Broadcasting Corporation (hereafter “CBC”). This condition caused MacLean-Hunter to disassociate itself with the project and after some negotiations with the CBC, a joint application with the defendant was made in 1969. CRTC approval was granted for a partnership between the two, on the condition that the CBC be in a position to acquire full ownership at some time in the future. Accordingly, on May 29, 1970, Baton entered into an agreement with the CBC and with St Clair River Broadcasting Corporation (hereafter “St Clair’), a wholly-owned subsidiary of the CBC, to form a partnership for the purpose of proceeding with the purchase and operation of the CKLW Television Station. The clause in satisfaction of the condition imposed by the CRTC, paragraph 18, is as follows:

18. St Clair covenants and agrees that it will buy and Baton agrees that it will sell to St Clair, Baton’s partnership interest in CKLW-TV upon the following terns and conditions:

(a) St Clair may at any time and from time to time on giving thirty (30) days’ notice in writing to Baton and to the Vendors, purchase from Baton up to an additional twenty-four percentum (24%) interest in the partnership.

(b) St Clair shall on or before the 31st day of May, 1975, and may at any time prior to that date, purchase all of the remaining partnership interest of Baton. St Clair shall give ninety (90) days’ notice in writing to Baton and to the Vendors of its intention to exercise such rights.

(c) The purchase price for Baton’s interest in the partnership or part theeof shall be the aggregate of:

(i) A sum which shall bear the same proportion to Baton’s total capital advances to the partnership at the time of the purchase (including accrued interest thereon in accordance with the provisions of clause 7(b)) as the partnership interest being purchased bears to Baton’s total interest in the partnership at that time, and

(ii) Baton’s share of any accrued profits of the partnership attributable to the interest being purchased.

(d) St Clair covenants and agrees that upon purchasing either all or part of Baton’s interest in the partnership, it will deliver to Baton a written undertaking assuming in the case of a partial purchase the proportionate amount and in the case of a total purchase, all of the debts and liabilities of the partnership and covenant to protect, indemnify and save harmless Baton from any claim thereon.

(e) Baton covenants and agrees that at the time of the purchase of all or part of its partnership interest by St Clair that it shall execute such presents as are required to transfer the appropriate amount of capital from Baton’s account to that of St Clair.

(f) Baton covenants that it shall pay any sales tax that may become due as a

result of St Clair’s purchase of all or part of Baton’s partnership interest.

(g) Baton and St Clair agree that upon giving notice to Baton of its intention to purchase all of Baton’s interest in the partnership, St Clair shall designate what senior executive positions of the partnership they wish to have vacated and Baton covenants that it will together with St Clair cause the partnership to give such notices as are required to vacate these positions. No senior executive shall be employed on a basis that would entitle him to more than three months’ notice and an additional three months’ severance pay.

(h) The Parties agree to execute such further assurances as are necessary or desirable to give effect to the intent of this clause 18.

There is no dispute, and in any event there could be no other possible interpretation of the evidence that CKLW incurred operating losses in each of the years during the currency of this agreement and that the amount of the losses was accurately reported by the taxpayer in claiming them as a deduction in each of the years in question. In June, 1974, St Clair purchased all of the interest of the defendant and a partnership dissolution agreement was executed on June 27, 1974. The basis of the Minister’s rejection of the taxpayer’s assessments is that since the taxpayer was at all times indemnified against losses in this venture, the agreement was either not a partnership, or in the alternative, the taxpayer did not in fact incur real losses.

The evidence in support of the defendant’s contention that this business was operated as a partnership is overwhelming. In addition to the documents to which I have already referred, some ten others were filed as exhibits, including Minutes of the Board of Directors of Baton dated June 29, 1970, authorizing the company to acquire the assets in question “in partnership with St Clair River Broadcasting”, a Declaration of Partnership dated July 24, 1970, and registered in the County of Essex on July 30, 1970, a Bill of Sale for the Windsor station assets dated July 24, 1970, in which the purchaser is described as Baton Broadcasting Limited and St Clair River Broadcasting Limited, companies incorporated under the laws of the Province of Ontario, carrying on business in partnership under the firm name and style of CKLW-TV, and a Land Deed dated March 1, 1970, in which the description of the grantee is the same, as well as a number of assignments of contracts and a promissory note using the same description. Senior officers of both partners testified to the discussions which led up to the formation of the partnership, to the operational advantages that accrued from the creation of the partnership and to their understanding that they were engaged in a partnership operation at all times. Accounting experts, in testimony both on behalf of the plaintiff and the defendant, confirmed that all books of account were on a proper partnership basis and also that the partnership incurred the losses as and when identified by the taxpayer, although, as I understand it, it was the contention of the Crown’s expert accountant that it was in some way open to the taxpayer to reflect the indemnification obligation of St Clair in such a way as to offset the losses in each of the years in which they occurred.

I must therefore find that the business was a partnership at all times until dissolution in 1974, so that if the plaintiff is to succeed, it must be on the basis that the indemnification agreement transforms what appears to be a partnership into some other relationship or, in the alternative, eliminates the losses.

Counsel for the plaintiff developed a persuasive argument through an extensive review of text writing on partnership and jurisprudence in which partners, through internal arrangements, have limited the participation or liability of a partner to such an extent as to destroy the partnership, but the facts in this case, especially the language of the partnership agreement, lend no support whatever to such a finding here. The obligation of St Clair was to purchase the interest of the taxpayer in the fifth year of their agreement. As such, until the sale was actually consummated in 1974, and specifically during CFTO’s 1971-72 and 1973 taxation years, it remained a future and contingent event.

This broadcasting undertaking was placed on the market in the late 1960’s because of changes in CRTC regulations. Responding to community pressures, the CRTC insisted on a CBC presence when the station was purchased. The taxpayer’s initial application for approval to purchase this station was with a partner from the private sector and the ultimate agreement with the CBC was imposed upon the taxpayer by the CRTC. There could be no suggestion, therefore, that the taxpayer sought out the CBC or in any way depended upon association with the CBC, including indemnification, as a condition precedent to acquiring the station. Obviously, the defendant could not acquire ownership without CBC involvement but further advantage to the defendant in the agreement to sell after five years is considerably less obvious. The CBC, on the other hand, was quite pleased to enter into an agreement on the terms imposed by the CRTC in 1970 for several reasons. It guaranteed acquisition by the CBC in 1974 at 1970 prices with money that could be made available in 1974 but was not in the 1970 budget. It enabled the CBC to bear a minor share of operating costs at figures which were considerably lower than those of a wholly owned and operated CBC station. Finally, although this could not have been known at the time of acquisition of the station, under extremely skilful management, the station was brought from a position of enormous losses to the point, in 1974, where it appeared ready to begin turning a profit. Through this agreement, therefore, the CBC gained the additional advantage of purchasing a 1974 success for the price of a 1970 failure.

Counsel for the Crown argued strenuously that St Clair’s obligation fell upon the CBC and therefore really constituted a virtual Government guarantee to indemnify CFTO against any losses, but responsibility of the CBC or the Government cannot transform an obligation to purchase in 1974 into an obligation to indemnify or reimburse operational losses in each of the taxation years in which they occur. Furthermore, the background circumstances referred to above illustrate a number of factors which might have affected the position of the parties in respect to the agreement in 1974. Obviously, since the station was on the verge of success, CFTO would have been pleased to re-negotiate the agreement in such a way as to maintain the status quo or to acquire the whole of the interest of the CBC. Such action may or may not have met with CRTC approval, but perhaps an equal partnership for a further period of time may have been approved. A change of Government, a change of Parliamentary policy or even a budgetary freeze might have placed the CBC in a position of seeking CRTC approval to defer its obligation for a period of time. These possibilities are now of academic interest perhaps because, obviously, the CBC has, as required by the CRTC, acquired the whole of the station for a purchase price which reimbursed CFTO fully for its share of the cost and losses, together with the necessary interest, but they must be kept in mind in considering the position of the taxpayer in filing in 1971 his return for the 1970 taxation year. The books of account of CFTO accurately identified the losses in question and in every case, also contained notices presumably for the information of shareholders, outlining the obligation of the CBC under the agreement, but I fail entirely to see under what authority the taxpayer could have been permitted, much less obliged, to in some way attempt to withhold these operating losses and carry them forward to be reported and claimed only during the year in which the indemnifying purchase was actually consummated.

I find, on the evidence, that CFTO was involved as a partner in the ownership and operation of CKLW during the years in question and that the partnership sustained losses in the amounts and during the years as claimed in the CFTO returns, that until consummated in 1974, the agreement where- under St Clair agreed to purchase all of CFTO’s interests remained a future contingency which the taxpayer could not reflect in its returns for the 1971, 1972 and 1973 taxation years. The taxpayer was therefore entitled to deduct from CFTO income its share of the partnership losses in each of the years in question and, correspondingly entitled to treat, as it did, the recovery of its share of the 1974 losses as a capital gain.

This action is therefore dismissed with costs.