Canadian Solifuels Inc. v. The Queen, docket 95-472-IT-G

Date: 19971211

Docket: 95-472-IT-G

BETWEEN:

CANADIAN SOLIFUELS INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

O'Connor, J.T.C.C.

[1] These appeals were heard at Toronto, Ontario on June 4, 1997. Subsequently, the hearing was re-opened and, on November 18, 1997, the Appellant introduced Exhibits A-8 to A-10, testimony was heard and further submissions were made. In issue are the Appellant's taxation years ending March 31, 1986 and March 31, 1988. The Statements of Agreed Facts for each year read as follows:

STATEMENT OF AGREED FACTS

1986 TAXATION YEAR

1. The Appellant is a Canadian-controlled private corporation.

2. At all material times, the business of the Appellant has included prosecuting scientific research and experimental development and at the material time over 90% of its revenue has been from the prosecution of scientific research and experimental development or the sale of rights in or arising out of scientific research and experimental development carried on by it.

3. The Appellant's taxable income for its taxation year ended March 31, 1985 together with the taxable incomes of all corporations with which it was associated in the 1986 taxation year for their taxation years ending in 1986 did not exceed the aggregate of the business limits of the Appellant and the associated corporations.

4. The Appellant was a "qualifying corporation" for its taxation year ended March 31, 1986 and was not an "excluded corporation".

5. The Appellant raised funds in its 1985 taxation year by means of a "quick flip" transaction in which "investors" advanced funds in exchange for scientific research tax credits plus a promissory note from the Appellant. Immediately after the exchange of those documents, each "investor" made a demand on the promissory note(s) and the Appellant repaid the amount of the note. The payments made by the Appellant discharging its obligations under these notes totalled $2,128,500.

6. On this financing, the Appellant raised a total of $2.2 million. The amount of $2,128,500, which included the amount of $893,500 was the total amount which the Appellant repaid to investors as part of these "quick flip" transactions.

7. At least part of the proceeds of this financing were used by the Appellant to carry on scientific research and experimental development during the 1986 taxation year.

8. The Appellant initially sought to treat this amount of "financing costs" totalling $893,500 as "qualified expenditures" in computing its Part VIII tax refund in order to discharge its liability for Part VIII tax for the 1985 taxation year arising out of the "quick flip". In addition, it deducted this amount of $893,500 in computing its income for purposes of Part I of the Income Tax Act creating a non-capital loss of $639,822 for the 1985 taxation year. The Appellant deducted a portion of this non-capital loss ($356,987) in computing its taxable income for the 1988 taxation year.

9. The Appellant's claim to treat the amount of $893,500 as expenditures on or in respect of scientific research and experimental development (SR & ED) was denied by Revenue Canada, which assessed the Appellant's Part VIII return on the basis that there was no SR & ED being carried on by the Appellant. The Appellant appealed this assessment to the Tax Court of Canada.

10. The appeal from the assessment of Part VIII tax for the 1985 taxation year was settled on the basis that the Appellant was allowed to include in its calculation of expenditures on or in respect of SR & ED and therefore, in its calculation of "qualified expenditures", a portion of these "financing costs" equal to $178,500. The Consent to Judgment executed by counsel for the Respondent and by Mr. Neil Harris of Goodman & Goodman, as it then was, counsel for the Appellant, is attached as Exhibit "A" to this Statement of Agreed Facts. Correspondence setting out the calculations in arriving at the amount to be agreed upon as "qualified expenditures" are attached as Exhibit "B".

DATED at the City of Toronto, Ontario, this "4th" day of June, 1997.

________________________

David W. Dolson

Counsel for the Appellant

DATED at the City of Toronto, Ontario, this "3rd" day of June, 1997.

George Thomson

Deputy Attorney General of Canada

Per:_____________________________

Alexandra K. Brown

Counsel for the Respondent

Department of Justice

...

Exhibit "A"

CONSENT TO JUDGMENT

The parties, by their solicitors, hereby consent to judgment, allowing the appeal for the Appellant's 1985 taxation year, without costs, and referring the matter back to the Minister of National Revenue for reconsideration and reassessment on the bases that:

(a) the Appellant was carrying on qualifying scientific research and experimental development during the 1985 taxation year; and

(b) the Appellant incurred a total of $1,187,023.00 in qualifying expenditures during the 1985 taxation year.

The Appellant is not entitled to any further relief.

...

Exhibit B

February 17, 1993

Messrs. Goodman & Goodman

Barristers and Solicitors

250 Yonge Street

Box 24, Suite 2400

Toronto, Ontario

M5R 2M6

Attention: Neil Harris, Esq.

Dear Mr. Harris:

Re: Canadian Solifuels Inc. v. M.N.R.

Court File No. 89-2095(IT) - Our File No. TO-173702

Canadian Solifuels Inc. v. H.M.Q.

Court File No. 91-1787(IT) - Our File No. TO-189405

Further to our telephone conversation in which I advised that you would be advised by Friday, February 15th of the results of the recent audit, I am pleased to set out the following.

The Department now accepts that all the expenses are allowable except the following:

1984

1. Consultation fee in the amount of $156,500 was paid on March 23, 1984 to a related company for services rendered by Dali Bar. It was found that the amount was incurred over three years, two of which were in respect of taxation years prior to April 19, l983. Furthermore, it appears that part of this payment was for the administration of the related company. An allocation is required for the purpose of clause 194(2)(a)(ii)(A).

2. $67,010 of the 1984 expenditures was made in the fiscal period ended March 31, 1983 and carried forward to the 1984 taxation year. This amount should not be included in the calculation of the Part VIII refund as defined in subsection 194(2).

1985

1. The 1985 opening balance of expenditures should also be adjusted as per item (2) above.

2. The broadcast automation system project in the amount of $1,300,000 was contracted out to a related company to do research on the project over three phases. The full amount was claimed in l985 before completion.

It was found that the first phase was completed in 1985 and the agreed amount of $404,000 was paid. The balance of $896,000 should be excluded in the calculation of Part VIII refund because of the limitation in subsection 18(9).

3. Financing costs of $893,500 incurred in 1985 should be excluded in the Part VIII refund calculation since it was a prescribed expenditure as defined in Reg. 2902(a)(i)(C).

4. The research and development work on the "micro processor control unit project" was contracted out to an unrelated company for $355,000. At the end of the 1985 fiscal period, only $50,000 was paid and the contract was terminated. The incomplete portion of $305,000 should be excluded in the calculation of Part VIII refund because of paragraph 18(1)(a).

Other than the items mentioned above, the auditor has accepted all the other expenses. I would be pleased to meet with you and Mr. Sherman next week if you think that would be helpful.

I look forward to hearing from you.

Yours very truly,

"signature"

Alexandra K Brown

Counsel, Tax Litigation

...

March 5, 1993

Messrs. Goodman & Goodman

Barristers and Solicitors

250 Yonge Street

Box 24, Suite 2400

Toronto, Ontario

M5R 2M6

Attention: Neil Harris, Esq.

Dear Sirs:

Re: Canadian Solifuels Inc. v. M.N.R.

Court File No. 89-2095(IT) - Our File No. TO-173702

Canadian Solifuels Inc. v. H.M.Q.

Court File No. 91-1787(IT) - Our File No. TO-189405

I have now received instructions from the Department of National Revenue and am authorized to make the following proposal:

1. The adjustments set out in my letter of February 15, 1993 [sic - should be February 17] are acceptable to both parties with the exceptions set out below.

2. Fifty percent of the claimed consulting fees of $156,000.00 are eligible while the other fifty percent are excluded.

3. Financing costs are not eligible as claimed. The Department proposes that for the 1985 taxation year, the amount of $178,500.00 be allowed comprised as follows:

7.5% x $2,200,000.00 - $165,000.00

7,500.00

6,000.00

$178,500.00

4. An additional $50,000 is eligible in the 1984 taxation year as financing costs actually incurred in that year as set out in your client's letter of January 25, 1993.

Finally, I should draw to your attention the fact that the 1986 and 1987 taxation years are statue-barred. However, each was a nil assessment and the 1988 and 1989 taxation years are open and are currently being audited. Thus, your client is not denied any relief which may be available for subsequent years.

I will need to have your response to this proposal by Friday of this week in order that I am able to prepare for trial if necessary. I look forward to hearing from you.

Yours very truly,

"signature"

Alexandra K Brown

Counsel, Tax Litigation

...

March 9, 1993

Ms. Alexandra K. Brown

Counsel, Tax Litigation

Department of Justice

Exchange Tower

2 First Canadian Place

P.O. Box 36, Suite 3400

Toronto, Ontario

M5X 1K6

Dear Ms. Brown,

Re: CANADIAN SOLIFUELS INC.

COURT FILE NOS. 89-2096 (IT)

& 91-1787(IT)

As requested, I am enclosing herewith five copies of a Consent to Judgment in each of the above-noted matters and confirm that they will be filed with the Court on March 10, 1993.

Based upon these Consents to Judgment, we confirm that the Minister of National Revenue will issue reassessments on the basis that the Appellant incurred qualifying scientific research and experimental development expenses of $1,125,889 in its 1984 taxation year and $1,187,023 in its 1985 taxation year.

We also confirm that the Minister will readjust the amount of qualifying expenditures incurred by the Appellant in each of its 1986 and 1987 taxation years by:

a) adding the amount of $667,924 to the balance of its qualifying expenditures incurred in its l986 taxation year, and

b) adding the amounts of $228,076 and $305,000 to the balance of its qualifying expenditures in its 1987 taxation year.

We further confirm that because of the above-noted qualifying expenditures, the Appellant is entitled to receive a refund of Part I tax in respect of its 1988 taxation year in the amount of approximately $250,000 plus interest.

We would appreciate if this refund could be forwarded to the Appellant as soon as possible.

Yours very truly,

GOODMAN & GOODMAN

"signature"

Neil H. Harris

...

March 9, 1993

Messrs. Goodman & Goodman

Barristers and Solicitors

250 Yonge Street

Box 24, Suite 2400

Toronto, Ontario

M5B 2M6

Attention: Neil Harris, Esq.

Re: Canadian Solifuels Inc. v. M.N.R.

Court File No. 89-2095(IT) - Our File No. TO-173702

Canadian Solifuels Inc. v. H.M.Q.

Court File No. 91-1787(IT) - Our File No. TO-189405

This will confirm our understanding that the Department does not agree to make any specific adjustments to your client's accounts for the 1986 and 1987 taxation years. Any adjustments will have to await the completion of the audit of those years. The same is true for the 1988 taxation year.

It is on this basis that I will file the consents to judgment tomorrow with the Court.

Yours very truly,

Alexandra K. Brown

Counsel, Tax Litigation

...

STATEMENT OF AGREED FACTS

1988 TAXATION YEAR

1. The Appellant is a Canadian-controlled private corporation.

2. At all material times, the Appellant has carried on business prosecuting scientific research and experimental development and at the material time over 90% of its revenue has been from the prosecution of scientific research and experimental development or the sale of rights in or arising out of scientific research and experimental development carried on by it.

3. The Appellant's taxable income for its taxation year ended March 31, 1988 together with the taxable incomes of all corporations with which it was associated in the 1988 taxation year for their taxation years ending in 1987 did not exceed the aggregate of the business limits of the Appellant and the associated corporations.

4. The Appellant was a "qualifying corporation" for its taxation year ended March 31, 1988 and was not an "excluded corporation".

5. The Appellant was a member of a partnership, governed by the Limited Partnerships Act (Ontario), known as COGEN 2 Limited Partnership (the "Partnership") prior to and at December 31, 1987.

6. The Partnership's business included the prosecution of scientific research and experimental development related to the scientific research and experimental development which constituted the business of the Appellant.

7. The Appellant took an active part in the management of the business of the Partnership and on behalf of the Partnership supervised and conducted the research of the Partnership.

8. The Appellant was not a "Limited Partner" as its liability was not limited ... by virtue of the provisions of the Limited Partnership Act (Ontario).

9. The Appellant, in its fiscal period ending December 31, 1987, incurred expenditures in Ontario that would be "qualified expenditures" if made by a "taxpayer" within the meaning of section 127(9) in the aggregate amount of $11,700,000.

10. The agreement governing the Partnership provided that the Appellant had an interest in the profits, losses, and expenditures of the Partnership of 15.23% and such allocation was reasonable in all the circumstances.

11. The Appellant's reasonable share of expenditures of the Partnership that would be "qualified expenditures" is $1,781,822.

12. The total of the expenditures described in paragraph 11 above, plus the Appellant's qualified expenditures which are not in dispute between the parties, did not exceed $2,000,000. No associated corporation had any qualified expenditures.

13. In the Appellant's income tax return for 1988, it claimed investment tax credits calculated at 35% on $1,781,822 of "qualified expenditures" incurred by the Partnership and a refund of 100% of such amount.

14. The Appellant filed form T2038 with his [sic] 1988 income tax return to claim the refund of such amount.

15. The Minister issued a Notice of Reassessment of December 8, 1993 thereby reassessing the Appellant's 1988 taxation year by applying a rate of 20% to the qualified expenditures incurred by the Partnership and applying a rate of refund of 40%. That is, the Minister assessed on the basis that the Appellant was not entitled to claim the enhanced investment tax credit available by virtue of paragraph (e) of the definition of investment tax credit in subsection 127(9) of the Income Tax Act.

16. The issue for decision by this Honourable Court is whether the Appellant is entitled to add an amount computed under paragraph (e) of the definition of investment tax credit in computing its investment tax credit arising from the activity of the Partnership.

DATED at the City of Toronto, Ontario, this "4th" June, 1997.

__________________________________

David W. Dolson

Counsel for the Appellant

DATED at the City of Toronto, Ontario, this "3rd" day of June, 1997.

George Thomson

Deputy Attorney General of Canada

Per:______________________________

Alexandra K. Brown

Counsel for the Respondent

Department of Justice

[2] In addition to the said Agreed Facts further factual testimony for the Appellant ("taxpayer") was given by Fredrick Donald Turack, a chartered accountant and by Dali Bar, president of the taxpayer. Counsel for the Respondent ("Minister") called Neil Howard Harris ("Harris") and Mitchell Jordan Sherman ("Sherman"), attorneys who had acted for the taxpayer in relation to earlier Tax Court proceedings resulting in the Consent to Judgment quoted above. The Minister also called Mr. Cheung, an appeals officer with Revenue Canada concerned with the matters in these appeals. All witnesses except Harris and Sherman were also heard at the November 18, 1997 re-opening of the original hearing.

[3] The issue in the appeal for the 1986 year is whether or not the $893,500 in question qualified as a research and development expense which therefore should have been included in the calculation of the taxpayer's investment tax credits. The issue in the appeal for the 1988 year is whether the taxpayer is entitled to claim the enhanced fully refundable investment tax credit at the rate of 35% or is it entitled only to an investment tax credit at the rate of 20%?

[4] A detailed summary of the legislative history related to SRTC financing and quick flips is set out in a decision of the Federal Court, Trial Division in Penner v. Her Majesty the Queen, 94 DTC 6567. A more succinct summary is set forth in an article of Geoffrey G. Briant appearing in 1985 Conference Report, page 589 and following. At page 597 to 599, the author states as follows:

SRTC Financings

Short term ("Quick Flip") SRTC Instruments

The April 19, 1983 amendments to the Act [SC 1983-84, c. 1] introduced a new financing mechanism for companies carrying on scientific research in Canada. As discussed above, this legislation made it possible for a taxable Canadian corporation to transfer the benefit of various tax incentives available to the company with respect to expenditures made for scientific research to a purchaser of shares, debt obligations, or royalty interests.

Since the enactment of the amendments there has been a proliferation of research and development debentures and promissory notes offered for sale. Generally, the terms of these transactions provide that the company issues a debenture to the purchaser to secure a stated indebtedness (the "debenture amount") but the debenture is issued for a total consideration (the "consideration") which includes a premium over and above the debenture amount (the "premium"). For example, a debenture securing a debenture amount of $60 might be issued for the consideration of $100. The consideration thus consists of the $60 debenture amount plus a premium of $40. The terms of the debenture provide that the purchaser may demand repayment of the debenture amount at any time after issuance. The premium is retained by the issuing company for its own use and without any tax thereon.

The transfer of the tax incentives is accomplished by the issuing company designating, pursuant to subsection 194(4) of the Act, an amount not exceeding the consideration as the consideration received by the company for the issuance of the debenture. Pursuant to the provisions of the Act, the purchaser of the debenture is entitled to an SRTC, which is generally equal to 50 per cent of the amount designated by the company. The issuing company incurs a Part VIII tax liability equal to 50 per cent of the amount designated under subsection 194(4). The company may obtain a refund of its Part VIII tax to the extent of 50 per cent of the amount of expenditures made for scientific research that would qualify as a deduction pursuant to paragraphs 37(1)(a) or 37(1)(b) of the Act, other than expenditures prescribed for the purposes of paragraph 127(10.1)(c) of the Act. To the extent the expenditures are applied to reduce its Part VIII tax liability, the company must renounce its rights to claim the research expenditures as deductions under section 37 of the Act [Subsection 194(2)]. Any qualifying expenditures made during the year in which the debenture is issued may be used to reduce the company's Part VIII tax liability irrespective of whether the expenditures were incurred before or after the issuance of the debenture, provided such expenditures were incurred after April 19, 1983 [Ibid].

Many of the transactions involving research and development debentures have been in the form of a "daylight loan." At the closing of the transaction, the company issues the debenture and the investor pays the consideration. Shortly thereafter, usually on the same day, the purchaser delivers a demand for repayment of the debenture amount. The attraction of this type of tax shelter is that an investor is afforded the opportunity to eliminate tax payable and obtain a low risk return on his investment.

The result of the debenture issue is that the company is able to raise funds for a research project while transferring to the investor the benefit of tax credits flowing from the expenditures incurred in the project. Assuming that a debenture having a debenture amount of $60 is issued for a consideration of $100, the results of the transaction would be as follows:

For the Purchaser

Consideration paid $100

Debenture amount - returned on demand 60

Loss before tax credit (40)

Tax credit received by purchaser 50

Net gain to purchaser before tax $ 10

For the company

Amount received from investor $100

Amount repaid on demand 60

Amount retained by company $ 40

[5] With respect to the 1986 year, counsel for the Minister submits that the issue in that appeal related to the expenditure of $893,500 was resolved by the Consent to Judgment. Alternatively, counsel for the Minister submits that even if that is not so, the amount was in substance a repayment of a debt which is capital in nature and does not qualify as a research and development expenditure. With respect to the Consent to Judgment, the taxpayer's president, Mr. Bar submitted that he signed the same under duress and it was his view that the said Consent did not totally settle the issue concerning the $893,500. Mr. Bar claims he was not fully advised on the matter by Harris and Sherman. He thought it was a timing issue and that the portion of the $893,500 not allowed in 1985 could be used in subsequent years. Counsel for the taxpayer submits further that based on the evidence of Turack and Bar it was clear that the company wanted/needed as close as possible 100 ¢ on the dollar of the amounts put in by the investors, not merely 40% as shown in the example above. The taxpayer had no alternate source of funds and a plan was conceived whereby the investors acquired shares of a small business corporation which, in turn, acquired shares of the taxpayer, thus providing total funding to the taxpayer of close to 100 ¢ on the dollar which the taxpayer could use for research and development. It was submitted that since the funds were then all used for research and development the expenditure of $893,500 was part and parcel of the research and development operation and should be allowed as a financing cost.

Analysis

[6] In my opinion, with respect to the 1986 year, the Consent to Judgment settled the entire $893,500 issue. It is clear from the Agreed Facts and the exchange of correspondence attached thereto that the $893,500. was an issue, and as appears from Harris' and Cheung's testimony and the Agreed Facts, it had been resolved by the agreement of the Minister to pay a sum of $178,500. This represented 7.5% of the total funds raised of $2.2 million and the Minister considered that 7.5% was a reasonable financing cost. Further, the Consent states that the Appellant was entitled to no further relief. The following extracts from the correspondence establishes that the $893,500 was an issue:

Letter from the Minister to Harris dated February 17, 1993

3. Financing costs of $893,500 incurred in 1985 should be excluded in the Part VIII refund calculation since it was a prescribed expenditure as defined in Reg. 2902(a)(i)(C).

Letter from Justice to Harris dated March 5, 1993

3. "Financing costs" are not eligible as claimed. The Department proposes that for the 1985 taxation year, the amount of $178,500.00 be allowed comprised as follows:

7.5% x $2,200,000.00 = $165,000.00

7,500.00

6,000.00

$178,500.00

Letter from Harris to Justice dated March 9, 1993

As requested, I am enclosing herewith five copies of a Consent to Judgment in each of the above-noted matters and confirm that they will be filed with the Court on March 10, 1993.

Based upon these Consents to Judgment, we confirm that the Minister of National Revenue will issue reassessments on the basis that the Appellant incurred qualifying scientific research and experimental development expenses of $1,125,889 in its 1984 taxation year and $1,187,023 in its 1985 taxation year.

[7] Admittedly, the appeal which was ended by the Consent related initially to the Minister's position that the Appellant was not a research and development company but the evidence establishes that after the Minister agreed that that was not the case the issues boiled down to calculating the amounts to be allowed including the amount of $893,500, notwithstanding that the Consent does not specifically refer to that figure.

[8] Furthermore, even if counsel for the taxpayer had been successful in convincing me that the Consent did not resolve the issue, I am satisfied that the amount in question represented repayment of a debt, that it is capital in nature and is not a qualified expenditure. In this regard and in respect to the apparent incorrect reference to Regulation 2909(a)(i)(C) contained in Ms. Brown's letter of February 17, 1993, it is helpful to refer to Harris' testimony at the June 4, 1997 hearing. He stated:

Q. As part of the settlement discussions, or at any time, did you advise any representative of the government that $893,000 was, in fact, the repayment of the principal of the promissory notes?

A. No, neither was I asked.

Q. Am I correct that you didn't raise it because you understood that the government's position might well be different if it, in fact, was fully apprised of all the facts and that there wouldn't be an agreement to 178,000 plus the 50 in 1984?

A. Yes. Our view was that the 893, as the testimony you are hearing today, was simply a repayment of a promissory note. Somebody lent money to Canadian Solifuels, say, $100. This is the repayment, immediate repayment, instantaneous repayment on this amount of $893,000. It looked to us, at least, that an argument could be made that it was on capital account. It had nothing to do with financing. It was simply a repayment of capital. We were, therefore, concerned that if the matter did proceed to court, there could be a finding by the court that the entire thing was capital, was non-deductible and, therefore, Mr. Bar would not receive any reward for those monies.

...

... we believed that this was a good settlement in that we believed that if we had gone to court, there was certainly a possibility that they could be found to be capital and not income. We referred to the regulations of the Act and if we look at the regulations, we were talking about the deduction, Regulation 29.02. It is quite right that if somebody is in carrying on fully R & D activities, then that allows them to deduct certain amounts, but even if they are fully carrying on R & D activities, the only financing cost that they were allowed under the Act were amounts set out in s. 21(c) to s. 21(i). They include interest, compound interest, brokerage fees, share transfer fees, all of the normal interest-type expenses.

When we approached Mr. Bar to ask him what it was, his testimony today was the same as his testimony was three years ago. They are not interest. They are not brokerage fees. They are not compound interest. They are simply a repayment of monies that Canadian Solifuels borrowed and an instantaneous repayment. So, in our views, at least in our views, that they were not on income account and, therefore, they would not be deductible and when the facts came out in a courtroom, it would be clear that they are non -- could be clear that they are non-deductible.

THE COURT: Mr. Harris, one question. In reference to capitalizing that amount and spreading it over five years, was that part of any of the negotiations?

THE WITNESS: No, Your Honour. From an accounting point of view, Mr. Turack had certain gap requirements, that he had to present them on an accounting statement basically over a number of years, but this was -- this 893, at least as we understood it, was an amount paid in October of 1984 and simply, as Mr. Bar has testified, Canadian Solifuels received $2.2 million and they immediately repaid $2.1 million. A part of the 2.1 is this 893. It was an instantaneous repayment. So, it was clearly an amount, at least repaid to the investors, in the 1985 year.

So, whether there was some accounting practice that required the amounts to be spread over a number of fiscal years, it was clear, to me at least, from an income tax point of view that the amount was expended in 1985 and, therefore, the question arises in respect of the '85 taxation year of Canadian Solifuels.

THE COURT: Therefore, you were quite happy to accept 7.15 percent.

THE WITNESS: Absolutely, Your Honour.

THE COURT: Of 2.2 absolutely, plus the 50,000.

THE WITNESS: Right. I think we advised Mr. Bar of two things. We advised him that if he did go to court, there would be at least a question raised by the government that these are on capital account and regardless of Regulation 29.00, 29.01 or 29.02 and regardless of the activities that Mr. Bar carried on which the government clearly had agreed by that time were all R & D activities, that was not the issue. The issue was simply whether or not these amounts were amounts within 21(c), (d), (e), (f), (g), (h), or (i) of the Income Tax Act. We could not tell Mr. Bar that we had a very strong case on this issue. So, we said, this may be an opportunity.

[9] With respect to the 1988 year, counsel for both the taxpayer and the Minister were well aware of the decision of the Federal Court of Appeal in Allcolour Chemicals Limited et al. v. The Queen, 93 DTC 1194. However, counsel for the taxpayer submitted that since the taxpayer itself incurred all of the expenditures and only got reimbursed by submitting receipts to a law firm holding the partners' monies in trust, one should essentially ignore the partnership structure. Counsel pointed out that the testimony confirmed that the partnership had no bank account and that all payments to the taxpayer were made out of the said trust monies.

[10] In my opinion it is clear from the Notice of Appeal, the Reply and the Statement of Agreed Facts for 1988 that the expenditures were definitely made on behalf of the partnership. Neither the fact that the taxpayer carried out the works under the contract dated February 23, 1986 between the taxpayer and the limited partners nor the method by which the taxpayer was reimbursed for expenditures changes this position. The expenditures were those of the partnership and the decision in Allcolour applies with the result that the taxpayer is only entitled to the investment tax credit at the rate of 20%.

[11] For the above reasons, the appeals are dismissed with costs.

[12] Admittedly, the reference in the February 17, 1993 letter to Regulation 2902 is inaccurate. This however cannot estop the Minister from disallowing an expenditure because it does not fall within the expenditures permitted by paragraphs 20(c) to (i) of the Income Tax Act.

Signed at Ottawa, Canada, this 11th day of December, 1997.

"T.P. O'Connor"

J.T.C.C.