[OFFICIAL ENGLISH TRANSLATION]
Citation: 2003TCC505
Date: 20030716
Docket: 2000-382(IT)I
BETWEEN:
PIERRE BLIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2000-865(IT)I
BETWEEN:
JEAN-LUC BERNIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
LamarreProulx, J.
[1] These appeals were heard on common evidence. They concern the 1992 taxation year. The questions at issue are: (a) whether each appellant, as a principal or as an agent, sold, issued or accepted a contribution for the acquisition of an interest in a tax shelter before the Minister of National Revenue (the "Minister") had issued an identification number for the tax shelters; and (b) if so, whether the appellants exercised the due diligence that would allow them to avoid the imposition of the penalty under subsection 162(9) of the Income Tax Act (the "Act").
[2] The Minister answered the first question in the affirmative and the second question in the negative and imposed a penalty on each appellant under subsection 162(9) of the Act.
[3] Concerning the appeal of the appellant Blier, the facts taken into account by the Minister in making his assessment are described in paragraph 8 of the Reply to the Notice of Appeal as follows:
[TRANSLATION]
(a) in the 1992 taxation year, the appellant, as a principal or as an agent, sold, issued or accepted a contribution for the acquisition of an interest in a tax shelter, inter alia, in the following partnerships (hereinafter "the partnerships"):
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1.
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BARIENDO ENRG.
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2.
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BENDO V ENRG.
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3.
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DISPO MB ENRG.
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4.
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OSTÉTOX ENRG.
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5.
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PORCIRATE ENRG.
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6.
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SOMATOGRIS ENRG.
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(b) in connection with the acquisition of interests in these partnerships, a loss was represented to be deductible in computing income in respect of the interest and expected to be incurred by or allocated to the person for the particular year or for any preceding taxation year;
(c) the person who acquired an interest in the partnerships or a person with whom the person did not deal at arm's length, having regard to the statements or representations made in connection with the partnerships, could reasonably expect to receive or enjoy, directly or indirectly, or to have available an amount in respect of the interest;
(d) having regard to the statements or representations made or proposed to be made in connection with the partnerships it was reasonable to consider that, if a person were to acquire an interest in the partnerships, the amount reflecting the loss that was represented to be deductible would, at the end of a particular taxation year that ended within 4 years after the day on which the interest was acquired, equal or exceed the amount by which the cost to the person of the interest would exceed the amounts that he could reasonably expect to receive or enjoy, directly or indirectly, or to have available in respect of the interest;
(e) the partnerships were tax shelters under the Income Tax Act;
(f) the appellant, as a principal or as an agent, sold, issued or accepted a contribution for the acquisition of an interest in a tax shelter before the Minister of National Revenue had issued an identification number for the tax shelters;
(g) the total cost of the interests in the tax shelters for the persons who acquired them before the identification number for them was issued was as follows:
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TAX SHELTERS
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COST OF THE INTERESTS
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BARIENDO ENRG.
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$48,500
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BENDO V ENRG.
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$22,000
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DISPO MB ENRG.
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$58,000
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OSTÉTOX ENRG.
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$45,000
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PORCIRATE ENRG.
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$45,000
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SOMATOGRIS ENRG.
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$53,000
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(h) a penalty in the amount of $8,145 was imposed on the appellant for having, as a principal or as an agent, sold, issued or accepted a contribution for the acquisition of an interest in a tax shelter before the Minister had issued an identification number for the tax shelters;
(i) the penalty imposed on the appellant is equal to 3 per cent of the cost of the interests in the tax shelters referred to above in subparagraph (f);
[4] In the case of the appellant Bernier, the facts taken into account are described in paragraph 5 of the Reply. The partnerships referred to in subparagraph 5(a) areMB-BCP II Enrg and SPORTILIS Enrg.
[5] Subparagraphs5(g), 5(h) and 5(i) read as follows:
[TRANSLATION]
(g) the total cost of the interests in these tax shelters for the persons who acquired them before the identification number for them was issued was as follows:
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TAX SHELTERS
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COST OF THE INTEREST
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MB-BCP II ENRG.
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$56,000
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SPORTILIS ENRG.
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$101,000
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(h) a penalty in the amount of $4,710 was imposed on the appellant for having, as a principal or as an agent, sold, issued or accepted a contribution for the acquisition of an interest in a tax shelter before the Minister had issued an identification number for the tax shelters;
(i) the penalty imposed on the appellant is equal to 3 per cent of the cost of the interests in the tax shelters referred to above in subparagraph (g);
[6] The subparagraphs (g) of the Replies were admitted with the exception of the reference to "tax shelters".It was also admitted that no tax shelter number was issued in respect of any of the companies referred to in the Replies because, according to the appellants, it was not required.
[7] The first witness for the appellants was Gilles Thouin, a financial planner. He also acted as agent for the appellant Bernier. He explained how he became interested in research and development ("R & D") projects in 1981. He was in the field of education at the time. In 1984, he left teaching to start up the firm of Services informatiques Gilles Thouin Inc. ("SIGTI"). He wrote the various required examinations and worked for financial planning firms. In 1986, he opened an office in St-Jean with seven colleagues under the name of Sug-Gestion Inc. In 1989, Sug-Gestion joined with the Régal group. In April 1989, Mr. Thouin received a diploma as a certified financial planner from the Canadian Institute of Financial Planning. In March 1992, he received the title of financial planner from the IQPF.
[8] In April 1992, Camil Bureau and Sylvain Paré, whom Mr. Thouin had known since 1986, invited him to a meeting with Lucien Roy, a promoter, and Robert Roy, a researcher. The meeting took place in Ville Saint-Laurent where the research laboratories were located.
[9] Messrs. Bureau and Paré described the Colimax project to him. Mr. Thouin asserted that there was a tax opinion from a chartered accountants firm, Demers Beaulne & Associés, confirming that the project did not require a tax shelter number. On that point, he submitted a document dated March 12, 1992, as Exhibit A-1. The project analysis had been produced at the request of Messrs. Lucien and Robert Roy.
[10] On cross-examination, counsel for the respondent asked him whether the project that had been put forward was the same as the project analysed by the accountants. She referred to various project assumptions and, especially, to assumption 7 of the project, which reads as follows:
[TRANSLATION]
7. a member who participates in the project is not entitled to receive an amount in the form of refunds, compensation, revenue guarantees, proceeds of disposition, and so forth;
[11] The witness acknowledged that this was not the definitive project. However, he reiterated that, in the plan put forward, the tax credit was claimed by businesses engaged in research. If the tax credit had been claimed by the investors, he would have simply declined the offer to promote this product because, in the past, all the projects that had been similarly put together were reassessed by the tax authorities.
[12] The appellant Bernier testified. He is a financial planner or investment advisor. He has training in accounting. He has worked since 1985 in the sale of financial products such as insurance, investment funds, term deposits and salary insurance.
[13] During the period at issue, he worked with Mr. Thouin, director of the firm. He relied on Mr. Thouin who, in October 1992, had agreed that these products be offered to clients on the strength of the fact that the project was supported by the opinion of a tax professional.
[14] According to the witness, it wasSIGTI, a company that belonged solely to Mr. Thouin, that had entered into the agreement with the plan's promoters. As for him, he was working at Sug-Gestion, a multidisciplinary financial planning firm that provided financial consulting services. Mr. Thouin was the firm's director. According to the appellant, his role in distributing R & D projects was to solicit clients and make them a business proposal. He would give his documents to Sug-Gestion Inc.
[15] At Sug-Gestion, each person worked for himself, except that Mr. Thouin had authority over the products distributed. He had a veto right.
[16] He said that, according to Mr. Thouin, the project did not require either the approval of the Commission des valeurs mobilières du Québec(the "CVMQ") or a tax shelter number. There were no more than five people in each general partnership. The partnership claimed deductions for business losses and did not claim a tax credit. It was the research company that claimed the tax credit.
[17] May 28,1996, is the date of the assessment. The notice of objection is dated June 28, 1996. The assessment was confirmed on October 18, 1999. Revenue Canada was waiting for Revenu Québec's position. At the provincial level, there had been out-of-court agreements.
[18] On cross examination, it was admitted that counsel for the appellants had asked the federal tax authorities to put the cases on hold pending the decision of Revenu Québec.
[19] In connection with his case withRevenu Québec, he pleaded guilty to a charge of filing a false return. But he did this in order to settle the matter. The settlement consisted of paying $100 per client, or, in his case, a total of $1,000.
[20] On cross-examination, the witness said that he had received a Bachelor of Accounting degree in 1985. Since 1986, he had registered with the CVMQ as a representative on a number of occasions (Exhibit I-15). To be registered as a representative with the CVMQ, an examination had to be written. There was a Commission manual.
[21] Counsel for the respondent showed him Exhibit A-1, which is the tax opinion based on a different plan from the one followed. The appellant Bernier answered that he could not say whether it was this document that he had seen or another. [TRANSLATION] "I saw some documents at the time and I had it confirmed to me that it was not a tax shelter."
[22] Counsel for the respondent filed, as Exhibit I-16, an information circular on "Tax shelter reporting." The circular is dated August 14, 1989.
[23] The appellants' next witness was Michel Dagenais, a business consultant. He also acted as agent for the appellant Blier. As Exhibit A-4, he submitted a judgment of the Superior Court of Quebec concerning a class action lawsuit by investors against the firms that had devised the investment plan and against the Attorney General of Canada and the Attorney General of Quebec. He drew the Court's attention to a passage from the judgment at page 16:
[TRANSLATION]
... In the case at bar, no registration number was required by either tax statute before investors could be solicited for this kind of research and development project.
[24] He thought that the matter was settled by this statement. He also said that he wondered why that statement had been included in the judgment. He asked for copies of the tape-recorded arguments. He said that representations had been made along these lines by lawyers for the Attorney General of Canada. As Exhibit A-5, he produced in evidence the portion of the transcript relating to those representations. It is not clear who typed the notes but, since both sides appear to have agreed that they reproduced what was said at that hearing, I shall quote an excerpt:
[TRANSLATION]
...
This being said, your Honour, I have told you that we were not familiar with what had happened prior to when they decided to claim a tax deduction. First, I find it hard to understand why their motion referred to tax shelters; that may be what was represented to the applicants but, in terms of taxation, that is not how the matter was presented. The concept of tax shelters is a concept that has been found in the Income Tax Act since 1988. The concept of partners, limited partnerships or specified members (of a partnership) is also found in the Income Tax Act. It is in section, as I remember, I think, it's 237, your Honour; it is also true that the Income Tax Act makes provision for issuing a number for those doing business in the area of research and development; it is even a duty under section 237, which is at page 202 854; you will see at subsection 237.1(2) it says that a promoter, in respect of a tax shelter, shall apply to the Minister in prescribed form together with prescribed information for an identification number for the tax shelter. In subsection 237.1(3), it states: Identification. On receipt of an application under subsection (2) for an identification number for a tax shelter, together with prescribed information and an undertaking satisfactory to the Minister that books and records in respect of the tax shelter will be kept and retained at a place in Canada that is satisfactory to the Minister, the Minister shall issue -- there is no discretion here, it says -- shall issue the documents to the one who represents them.
[25] Mr. Blier decided not to testify. His sole argument was that Revenue Canada should have followed the decision of Revenu Québec. Since counsel for the respondent had documents to be submitted that concerned him, he testified all the same at counsel for the respondent's request. He looked at Exhibit I-15, which refers to his own registrations as a representative, and admitted that he had in fact been registered with the CVMQ as a representative for certain companies since 1987.
[26] When he sold interests in a partnership, he knew that there was a tax opinion. He was not certain that he had read it.
[27] The next witness for the appellants was Benoît Poirier, a financial planner. Mr. Dagenais showed him a letter dated July 20, 1999, and addressed to the appellant Blier from Gilles Mercille, C.A., an appeals officer. The letter was filed in evidence as Exhibit A-8. The witness said that he had received a similar one. The letter stated:
[TRANSLATION]
...
Further to the letter of Me Jules Brossard, dated October 21, 1996, and, at his request, we have postponed the analysis of your case pending a settlement with the ministère du Revenu du Québec.
Since the ministère du Revenu du Québec decided to assess a penalty against you pursuant to the provisions of section 1049.0.2 of the Taxation Act, we intend to abide by that decision unless you have other additional facts to submit to us within a period of 15 days from now.
...
[28] When he received his letter, the witness testified that he had telephoned Mr. Mercille to inform him that he had made an objection to Revenu Québec. Mr. Mercille apparently replied that, in the circumstances, he would await the decision of Revenu Québec. In Québec, the appeals of the dealers who were prosecuted were settled in 2001.
[29] Richard Cloutier, a financial adviser, testified, at the appellants' request. He expressed a point of view similar to that of the previous witness.
[30] Hélène Couture, a team leader in the tax fraud investigations directorate of Revenu Québec, testified at the request of the respondent. She began to work on the case in 1997. There had been an investigation in the case beginning in 1992. There was a series of searches in 1993 that focused primarily on project promoters, including the Roy group. She had to finalize the investigation in progress. She analysed the bank transactions and the documents that were seized and met with the people involved.
[31] She explained that a group of people had organized a financial package whereby taxpayers could claim unsubstantiated tax losses in connection with the Roy group's R & D projects.
[32] As Exhibit I-1, she submitted in evidence a table explaining how the package operated. There were 1,214 taxpayers who had invested in the projects. These individuals, a maximum of five per group, were divided into 265 different general partnerships. There were seven research management companies: RIO, RMB, LACTO, PBR, EDS, BOVI and U.P.M. There were five laboratory companies: Alphacell, KAMI MARK, BIO LEARNING, ILAC and DIATECH. Then, there were the five companies whose function it was to buy back the shares: MYRIADE, NATRAS, corporation 2961-7909, MIT MYRIADE and MAKOTO. The above were more involved in the investment. There were also others in the plan who had devised or sold the plan, that is, Placements Etteloc, corporation 2952-2166 Québec Inc. and the sellers.
[33] Placements Etteloc was a corporation directed by Messrs. Roy. The corporation 2952 was directed by Sylvain Paré and Camil Bureau. The laboratories were controlled byRobert or Lucien Roy, the promoters of the project.
[34] The second page of the table gives a description of the sellers' firms. The appellant Bernier is named in the SIGTI firm.
[35] Ms. Couture submitted in evidence as Exhibit I-4 a table entitled [TRANSLATION] "Participants' share by investment plan" [Quote-Part des impliqués par plan d'investissement]. The plan shows how the funds received from the investors were allocated. Thirty-two per cent was paid for the investment. Of this amount, 0.5 per cent was paid to the management companies, 7 per cent to the laboratories, 0.5 per cent to the share redemption companies, 15 per cent to the vendors, and 9 per cent to Etteloc and corporation 2952.
[36] She produced in evidence, as Exhibit I-2, the file for the partnership MB-BCP II Enrg., involving five members. The shares in this partnership had been sold by the appellant Bernier. One of the members was Annette Letendre who had signed her documents in November 1992. She purchased 10,000 shares in the partnership at a cost of $1 per share. The investment agreement that she entered into had a clause providing that [TRANSLATION] "The Partnership shall contract with one or more specialized firms able to carry out the project on its behalf as defined by the members as a whole." The amount of $10,000 is payable to the order of E.D.S. Détection Ltée, a representative of MB-BCP II Enrg.
[37] There is a contract between the MB-BCP II Enrg. Company and E.D.S. for a research contract on the subject described therein. The budget was $56,000. The term of the contract was from October 5, 1992, to December 31, 1992. Ms. Letendre signed the document on November 3, 1992.
[38] Also in Exhibit I-2, there is a partnership agreement between the various members. One may read, inter alia, after the description of the mode of operation of the partnership that [TRANSLATION] "for the year in progress, corporation Etteloc shall be mandated to manage the partnership."
[39] There is an internal document from the financial planners firm for each investor. The one that relates to Ms. Letendre is dated November 5, 1992. It states that the amount of the deposit is $3,200 for an investment of $10,000 and that Ms. Letendre chose Plan 2. It also states that, of this amount of $3,200, $1,300, or 13 per cent, goes to SIGTI and 2 per cent goes to Consultations Invespro C.D. Inc.
[40] There is another agreement or an acknowledgment of receipt from E.D.S. Détection Ltée to the member Letendre. The clauses are as follows:
[TRANSLATION]
...
E.D.S. DÉTECTION LTÉE acknowledges receipt of a cheque in the amount of $ 3,200.00 and a payment guaranteed by the receivable issued by MYRIAD INTERNATIONAL TECHNOLOGY in the amount of $ 6,800.00 .
The total amount of the transaction and accepted by this acknowledgement is $ 10,000.00 .
The member ANNETTE LETENDRE acknowledges that he [sic] assigns all the rights and privileges on the account receivable of MYRIAD INTERNATIONAL TECHNOLOGY.
E.D.S. DÉTECTION LTÉE acknowledges that it accepts this receivable as payment for the research contract. E.D.S. DÉTECTION LTÉE acknowledges that it shall not exercise any other right or privilege, in relation to the member, on this portion of payment.
...
[41] There is a purchase requisition by Ms. Letendre for 10 shares of the partnership Envior, at a cost per unit of $4.68 for a total of $46.80. There is a purchase agreement for the shares by Myriad International Technology for a cost of $6,800.
[42] Ms. Couture produced in evidence the file of Normand Bourcier as Exhibit I-3. This investor had chosen Plan 1. His investment was in the amount of $14,000. The interest purchased was in the partnership Bendo V Enrg., the shares of which were sold by the appellant Blier. According to the internal document from the financial planner's firm, the amount that the vendor got back was 14 per cent, or $1,960, and 1 per cent went to Consultation Investpro C.D. Inc., or $140.
[43] The investor's cheque is in the amount of $14,000. The cheque is dated October 15, 1992, even though the internal document is dated November 3, 1992. He issued a cheque of $65.62 to the partnership Envior. The purchase agreement is in the amount of $9,520. On November 10, 1992, a certified cheque from M.I.T. Myriade was issued in the amount of $9,520 to Mr. Bourcier.
[44] Exhibit I-5 contains documents relating to Pierre-Yves Boucher. According to Plan 1, the investment of $5,000 was in the partnership of Somatogris Enrg. A cheque in the amount of $3,400 was given to him by the share redemption company Makoto Technologie.
[45] Exhibit I-6 contains the documents relating to Jean Pilon. The investment was $10,000 in accordance with Plan 1. He was given a cheque for $6,800 by the share redemption company Makoto Technologie.
[46] Exhibit I-7 contains documents relating to Guy Corriveau who made an investment under Plan 2. He issued a cheque for $7,040 for an investment of $22,000.
[47] Exhibit I-8 is the Table of tax losses. The table shows that each of the investors claimed a business loss on his income tax return equal to the amount of the investment and not the amount actually paid.
[48] Exhibits I-9 to I-11 consist of documents seized during the search at Etteloc in 1993. They describe the research projects, the operation of the partnerships and the financing plans.
[49] Exhibit I-10 consists of the plan referred to in paragraph 10 of these Reasons. Exhibit I-11 is the Colimax plan that was followed. A tax opinion is incorporated with it. Assumptions 7 and 8 read as follows:
[TRANSLATION]
7. the partners shall invest equal amounts in a taxable Canadian corporation (Company XYZ or the company) in the form of shares of the capital stock and shall automatically become shareholders in the company;
8. "A", "B", "C" are purchasing shares issued by Company XYZ held by the shareholders of Company XYZ and members of the partnership for an amount equal to 66% of the amount that they have received from Biosolémax inc. for the delivery of the R & D project;
[50] Since the tax opinion was frequently referred to as a defence, I am quoting the portion concerning the tax shelter number:
[TRANSLATION]
According to subsection 237.1(2) of the I.T.A. and paragraph 1079.2 of the Q.T.A., any promoter of a tax shelter must apply to the tax authorities for an identification number in respect of this tax shelter. No one may sell or issue an interest in a tax shelter before the tax authorities have issued an identification number for this tax shelter. The tax shelter number must be communicated to all persons who acquire an interest in the tax shelter. Without the indication of the tax shelter number, a taxpayer cannot claim or deduct an amount as an interest in a tax shelter.
According to subsection 237.1(1) I.T.A. and paragraph 1079.1 Q.T.A., a tax shelter is defined as any property of which it is expected, based on statements or representations made or proposed to be made in connection with the property, that the aggregate of the losses or other amounts, calculated in any of the relevant years, which a purchaser will be entitled to deduct in taxation years ending within four years of the date of acquisition of the property will exceed the cost of the interest in the property (less prescribed benefits) to the purchaser. Prescribed benefits (Regulation 231(6) I.T.A.) will include tax credits, revenue guarantees, contingent liabilities, limited recourse debt and rights of exchange or conversion.
According to paragraph 3 of Information Circular IC 89-4, dated August 14, 1989, the definition of a tax shelter depends entirely on the reasonable inferences to be drawn from representations made in connection with the property. Representations would include written representations such as those contained in sales brochures or advertisements and verbal representations such as those made in public or private information or sales meetings.
Thus, if the rules are applied to the Colimax project, if the cost of the interest in the company does not have to be reduced by a prescribed benefit, the tax loss resulting from the deduction of the research and development expenses in the company do not exceed the cost of the investment in the company. In this case, the Colimax project would not be a tax shelter and no application would have to be made to receive a tax shelter number. However, if the tax authorities consider that the purchase of the shares of company XYZ are a prescribed benefit reducing the cost of the investment and that at that point the proportion of the research and development expense in the company for a member is greater than the cost of the investment less the proceeds of disposition of the shares, the Colimax project will be considered a tax shelter and a tax shelter number must be obtained.
...
[51] Annette Letendre testified at the request of the respondent. She is a laboratory technician. She knows the appellant Bernier. He had previously advised her regarding an investment in connection with her son's education. Mr. Bernier called her to recommend another investment¾this one to save tax. She admitted that she had signed all of the documents in the file in Exhibit I-2. She thought she remembered that there were other people with her in the partnership. The appellant's tax return for the 1992 taxation year was filed as Exhibit I-12. There is a claim for a deduction as a business loss in the amount of $10,000 at line 135. The deduction was disallowed by the federal tax authorities.
[52] Normand Bourcier testified at the request of counsel for the respondent who showed him a statutory declaration, Exhibit I-13, signed on August 20, 1993. He stated in this declaration that he had met with the appellant Blier on two occasions regarding a R & D project where there was a possible tax shelter. He issued a cheque for $14,000. Mr. Blier had mentioned to him that he could count on a return of approximately $1,500, that is, with the tax deductions, he would get his money back plus make a profit of $1,500. He did not know the co-members. He said he was interested in R & D and in the tax savings.
[53] The next witness for the respondent was Guy Corriveau. The appellant Bernier had approached him with respect to acquiring an interest in a R & D company. He had made a similar investment back in 1990 and 1991. It was Mr. Bernier who had sold him the shares. What interested him was R & D and also the tax refund. On his income tax return for the 1992 taxation year, he claimed $22,000 as a business loss at line 135, while he had actually paid $7,040.
[54] The next witness for the respondent was Jean Pilon. He began making this kind of investment in 1989 through the appellant Blier. What interested him was the R & D and the tax savings. He acknowledged that he had paid only $3,200 and had claimed the amount of $10,000 as a business loss.
Arguments
[55] Mr. Thouin, who represented Mr. Bernier, referred to the Information Circular (Exhibit I-16). In the meaning of "promoter", the circular includes seller. According to Mr. Thouin, a promoter is the one who puts a financing package together; sellers take care of other things. He argued that Mr. Bernier relied on the tax professional who had told him that it was not a tax shelter and the opinion he had given himself as the firm's director. Mr. Bernier never thought that he was selling a tax shelter. He therefore exercised due diligence in the circumstances. Mr. Thouin also submitted that, throughout the objection process, Revenue Canada had indicated that it would follow Revenu Québec's approach, which had not assessed him a penalty.
[56] Mr. Bernier also spoke. He submitted that he had sincerely believed that, by settling matters at the provincial level, the federal prosecution would also be settled. That is what they had been led to believe. He also said that he had lived with this case for ten years. He had a brother-in-law who had invested in these projects. He would not have recommended this kind of investment to him had he known that it was a tax shelter. He did not know that the proposed plan required a tax shelter number. He relied on the tax opinion of people more knowledgeable in tax matters than he was and on the opinion of the director of his firm, Mr. Thouin. The appellant Bernier submitted that when he had made recommendations to his clients, he had made them in good faith with the information that he had at the time.
[57] Mr. Dagenais discussed the Superior Court judgment referred to in paragraphs 23 and 24 of these Reasons and submitted that the issue had been decided. The proposed plan did not require a tax shelter number.
[58] I will say right away that this argument does not hold. Two separate jurisdictions are involved. The judge in that case did not have the issue before us and could not make a determination on it. Moreover, it is a paragraph in a judgment and not the ratio of his decision.
[59] Counsel for the respondent contended that the appellants had admitted to selling interests in the partnerships described in the Replies. It was also acknowledged that no tax shelter number had been issued to the partnerships as a whole by the Minister. She referred to section 237.1(4) of the Act. That section provides that no person shall, whether as a principal or an agent, sell or issue, or accept consideration in respect of, a tax shelter before the Minister has issued an identification number for the tax shelter. She then referred to the definition of "tax shelter" in subsection 237.1(1) of the Act and submitted that the loss that was represented to be deductible in computing the income with respect to that interest and that could be incurred by or allocated to the person for the particular year or any preceding taxation year was greater than the actual cost of the investment.
[60] Concerning the penalty under subsection 162(9) of the Act, the issue is whether the appellants exercised due diligence. They are not ordinary taxpayers. The case does not involve investors; they are people who had an important responsibility to the public. The appellants were qualified people, people who had the necessary expertise. She referred to sections 204 and 205 of the Securities Regulation, which provides that an applicant who applies for registration as a representative of a dealer or an adviser must be at least 18 years old and must be resident in Québec. The applicant must have successfully completed the courses that would, in the opinion of the Commission, give the applicant an adequate professional training.
[61] The favourable tax opinion had been rendered in the document of March 12, 1992, which was filed as Exhibit I-10, and was specifically found at paragraph 7. Under that plan, a member who participates in the project is not entitled to receive an amount in the form of refunds, compensation, income guarantees, proceeds of disposition and so forth. Nowhere is it indicated that the acquirer of the shares was in fact going to pay a mere 32 per cent. However, with reference to the Colimax plan dated March 2, 1992, that was followed (Exhibit I-11), the attached tax opinion clearly states that this project would be considered a tax shelter and that a tax shelter number should be obtained.
[62] Where is this document that was not filed with the Court and which stated that the plan being promoted was not a tax shelter? Counsel for the respondent reminded the Court that neither appellant could say which document they had seen at the time.
[63] Counsel explained that Revenue Canada had put the cases on hold because counsel for the appellants had requested this and later the appellants themselves had made this request.
Conclusion
[64] Subsection 162(9) of the Act reads as follows:
162(9) Tax shelter identification number - Every person who
(a) files false or misleading information with the Minister in an application under subsection 237.1(2) for an identification number for a tax shelter, or
(b) whether as a principal or as an agent, sells, issues or accepts a contribution for the acquisition of an interest in a tax shelter before the Minister has issued an identification number therefor,
is liable to a penalty equal to the greater of
(c) $500, and
(d) 3% of the total of all amounts each of which is the cost to each person who acquired an interest in the tax shelter before the correct information is filed with the Minister or the identification number is issued, as the case may be.
[65] In subsection 237.1(1) of the Act, the words "tax shelter" and "promoter" are defined as follows:
"tax shelter" means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
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(a)
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the aggregate of all amounts each of which is
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(i)
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a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
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(ii)
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any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
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would exceed
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(b)
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the amount, if any, by which
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(i)
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the cost to the person of the interest in the property at the end of the particular year,
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would exceed
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(ii)
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the aggregate of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed directly or indirectly in respect of the interest in the property, by the person or a person with whom the person does not deal at arm's length
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but does not include property that is a flow-through share or a prescribed property.
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"promoter" in respect of a tax shelter means a person who in the course of a business
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(a)
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sells, issues, or promotes the sale, issuance or acquisition of an interest in the tax shelter, or
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(b)
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acts as an agent or adviser in respect of the sale or issuance, or the promotion of the sale, issuance or acquisition, of an interest in the tax shelter, and more than one person may be a tax shelter promoter in respect of the same tax shelter;
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[66] Subsection 237.1(4) reads:
237.1(4) Sales prohibited ¾No person shall, whether as a principal or an agent, sell, issue or accept a contribution towards the acquisition of, an interest in a tax shelter before the Minister has issued an identification number for the tax shelter.
[67] The argument that the proposed plan was not a tax shelter was not raised in evidence. It seems quite clear that, by paying only 32 per cent of the amount invested and by deducting, as a business loss, the full amount allegedly invested, the proposed plan is a tax shelter within the meaning of the definition of a tax shelter.
[68] The witnesses for the respondent who had participated in the plan proposed by the appellants all said that what had interested them in the investment was the tax savings, although they also said that they were not indifferent to the promotion of research and development.
[69] Did the appellants exercise the due diligence that would exonerate them from the application of the penalty provided for in subsection 162(9) of the Act?
[70] The Information Circular, dated August 14, 1989, is very clear. It explains what a promoter is, what a tax shelter is, what an application for a tax shelter identification number is and the penalties for any person who, as a principal or as an agent, sells or issues an interest in a tax shelter before the Minister has issued an identification number.
[71] The appellants referred to a tax opinion. They did not submit in evidence a tax opinion that clearly stated that the plan actually followed was not a tax shelter. In addition, the representatives' presentation itself to investors referred to the tax savings aspect. It was therefore negligent to promote this plan without first obtaining a tax shelter number.
[72] As counsel for the respondent submitted, the appellants were people who had qualified to be representatives of securities dealers. They had the requisite knowledge and held themselves out to be professionals in the field.
[73] Financial planners have an important role in economic life. They cannot hide behind the authorization given by the director of the firm. They must personally ensure that the investments they propose are legal and must exercise the required diligence with respect to the substantial investments that they propose to their clients.
[74] It is of interest to note that, beginning on December 2, 1994, subsection 162(9) of the Act was repealed and replaced by subsection 237.1(7.4) of the Act. The legislative provision is similar except that the penalty is increased from 3 per cent to 25 per cent.
[75] With respect to time limits, the appellants did not demonstrate a lack of diligence on the respondent's part in confirming the assessments or in reassessing the appellants. It was the appellants themselves who did not want the federal tax authorities to act before the Quebec authorities did. They would have preferred the decision at the federal level to be the same as the decision at the provincial level. This is understandable, but I have not seen or obtained any undertaking on the part of the federal tax authorities to follow the decisions of provincial tax authorities. It must also be remembered that, under paragraph 169(1)(b) of the Act, a taxpayer may appeal to this Court after 90 days have elapsed after service of the notice of objection if the Minister has not notified the taxpayer that the Minister has vacated or confirmed the assessment or reassessed. A taxpayer can also apply to this Court to set his appeal down for hearing once the Reply has been filed.
[76] In conclusion, the appellants did not demonstrate the degree of diligence required of them in the circumstances. Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada, this 16th day of July 2003.
Judge Lamarre Proulx
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