Date: 20020617
Docket:
94-2099-IT-I
BETWEEN:
SARBAN
BAWA,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
O'Connor,
J.T.C.C.
FACTS
[1]
I find the relevant background facts to be as follows:
1.
The Appellant in filing his income tax return for 1982 deducted a
business loss of $12,804 in respect of two units which he
allegedly held in a partnership known as Inter-Teck Oil
Partnership.
2.
The Minister of National Revenue ("Minister"), by
Notice of Reassessment dated August 14, 1987 reassessed the
Appellant for the 1982 taxation year and in so doing reduced the
business loss to $262.10 per unit or $524.20 for two units. The
Notice of Reassessment indicates that the loss allowed is in
respect of a partnership known as Inter-Teck Oil Limited
Partnership ("ITOLP").
3.
By Notice of Objection dated October 7, 1987 the Appellant
objected to the said Reassessment for the 1982 year.
Consideration of this Notice of Objection was held in abeyance by
the Minister, after concurrence had been obtained from the
Appellant at that time, pending the outcome of certain other
appeals filed with the Federal Court of Canada by other
individuals involved in ITOLP.
4.
The appeals to the Federal Court referred to above were settled
in November, 1993 by Consent Judgment and as a result thereof the
rest of the limited partners, including the Appellant were
offered in January, 1994 the same terms of settlement as those
set out in that Consent to Judgment. The Appellant did not accept
the offer of settlement.
5.
The Minister by Notification of Confirmation dated May 27, 1994
confirmed the reassessment for the 1982 taxation year.
6.
The relevant substantive facts may be described as
follows:
(a)
International Resource Recovery Inc. ("IRRI") and
Inter-Teck Management Ltd. were incorporated under the
laws of British Columbia respectively on February 22, 1979
and November 9, 1982; at all material times Jagroop
Singh Gill ("Gill") was the sole shareholder and
director of IRRI and of Inter-Teck Management
Ltd.
(b)
ITOLP was registered with the Register of Companies of
British Columbia under the provisions of the Partnership
Act of that province on November 10, 1982; Inter-Teck
Management Ltd. and Gill were recorded under that registration
respectively as the general partner and "founding"
partner of ITOLP.
(c)
The initial fiscal period of ITOLP commenced on
November 10, 1982 and ended on December 31, 1982 for a
period of 52 days in 1982. The Appellant subscribed for two units
in an entity known as Inter-Teck Oil Partnership, the date
of the subscription being November 4, 1982 (see Tab 1, Exhibit
A-1). Certain other investors also subscribed for units in
Inter-Teck Oil Partnership, namely, Messrs. Ward,
Turner and Madsen (see Tabs 2, 3 and 4, Exhibit A-1). It should
be highlighted that this is the bone of contention between the
Appellant and the Minister. The Appellant maintains that he
became a general partner in the partnership named
Inter-Teck Oil Partnership and it was that entity which
acquired the equipment in question and as a partner he was
entitled to his share of the partnership loss and there was no
question of any arm's length problem. The Minister contends
that the entity which purchased the equipment from IRRI was ITOLP
and that the Appellant at a date later than November 10, 1982
became a limited partner in ITOLP. The Minister contends further
that the sale of the equipment was made by IRRI to ITOLP and that
there is no record and no evidence of any sale to
Inter-Teck Oil Partnership.
(d)
The Minister contends further that IRRI, Inter-Teck
Management Ltd., Gill and ITOLP did not deal with one another at
arm's length at any time, particularly on
November 10, 1982 when IRRI executed the conditional
sales contract selling the equipment to ITOLP.
(e)
The sale price in the said conditional sales contract was stated
to be $6,850,000 payable in instalments over 10 years. The
Minister contends that the equipment had a fair market value on
November 10, 1982 of no more than $422,000 and it is that value
that should be used because the sale was not at arm's length;
accordingly the equipment should have been included by the
partnership as a depreciable property under Class 29 in
Schedule II to the Income Tax Regulations
("Regulations") at a capital cost of no more
than $422,000. The following schedules indicate the losses as
reported by ITOLP and the losses as allowed.
Schedule A
Inter-Teck Oil Limited
Partnership
Losses
as reported for the fiscal periods ended in 1982, 1983 and
1984
|
|
1982
|
1983
|
1984
|
|
Revenue
|
26,687.00
|
9,860.00
|
8,578.00
|
|
Less:
|
|
|
|
|
Capital
cost allowance
|
1,712,500.00
|
3,425,000.00
|
1,712,500.00
|
|
Other
expenses
|
68,442.00
|
69,341.00
|
15,461.00
|
|
|
|
|
|
|
Loss
for the year
|
1,754,255.00
|
3,484,481.00
|
1,719,383.00
|
|
Loss
per unit
|
6,402.39
|
6,358.54
|
6,275.12
|
Schedule B
Inter-Teck Oil Limited
Partnership
Losses
as allowed for the fiscal periods ended in 1982, 1983 and
1984
|
|
1982
|
1983
|
1984
|
|
Revenue
|
26,687.00
|
9,860.00
|
8,578.00
|
|
Less:
|
|
|
|
|
Capital
cost allowance
|
30,060.00
|
211,000.00
|
180,940.00
|
|
Other
expenses
|
68,442.00
|
69,341.00
|
15,461.00
|
|
|
|
|
|
|
Loss
for the year
|
71,815.00
|
270,481.00
|
187,823.00
|
|
Loss
per unit subscribed
|
262.10
|
493.58
|
685.49
|
[2]
The Appellant in
computing his income for 1982 sought to deduct a loss of $12,804
but the Minister contends because of the fair market value of
$422,000 that the proper amount of such loss so deductible in
1982 was only $524.20 for the Appellant's two
units.
SUBMISSIONS OF THE
APPELLANT
[3]
The Appellant's principal submissions are:
1.
That he subscribed to two units in Inter-Teck Oil
Partnership and not in ITOLP; that it was Inter-Teck Oil
Partnership which acquired the equipment at a price of $6,850,000
that the transaction between IRRI and
Inter-Teck Oil Partnership was arm's length
and that the said price fixed in the contract should be used to
determine capital cost allowance not fair market value. The
Appellant was unable to produce a sale or other conveyance by
IRRI to Inter-Teck Oil Partnership but he does refer to the
financial statements for Inter-Teck Oil Partnership for the
year ended December 31, 1982 prepared by Tierney and White
(Tab 6, Exhibit A-1). This statement which takes the form of a
notice to reader which cautions that no audit has been conducted
and the unlimited balance sheet accompanying the statements does
show the item "Machinery and Equipment" at
$6,850,000.
[4]
Further, the Appellant contends that the Minister was grossly
wrong in establishing the fair market value of the equipment at
no more than $422,000.
SUBMISSIONS OF COUNSEL FOR
THE RESPONDENT
[5]
I quote certain extracts from counsel's submissions at
page 3 et seq. of the Excerpt From
Proceedings:
MS. CLARE: Your Honour, Mr.
Bawa filed an income tax return for the year 1982 and he was --
and in that income tax return he sought to deduct a business loss
which he identifies as being from an entity known as the
Inter-Teck Oil Partnership. He was reassessed and a copy of that
reassessment has been filed as Respondent's Exhibit 1. In
that Notice of Reassessment, the Minister reassessed the
Appellant and disallowed ... part of the business loss that had
been claimed. That document, the Notice of Reassessment, clearly
refers to Inter-Teck Oil Limited Partnership.
... by virtue of a Notice of Objection, a copy of which has been
filed as Exhibit R-2 and identified by the Appellant as having
been signed by him on October the 7th, 1987, the Appellant
objected to the reassessment. ... What the Notice of Objection
says, in paragraph 1, is:
In 1982, I acquired two units of the Inter-Teck Oil Limited
Partnership (the partnership).
The Minister received this Notice of Objection and proceeded to
the stage of confirmation, and the Notice of Confirmation has
been filed as Exhibit R-3. The Minister indicated that he had
carefully considered the facts and reasons set forth in the
Notice of Objection and confirms the reassessment on the basis
that this equipment, which was acquired by Inter-Teck Oil
Limited Partnership, has been determined to be valued at
$422,000.
The Appellant was not satisfied and, as is his right, he filed an
appeal to this court. The document by which he filed his appeal
in the Informal Procedure does not at any point refer to either
the Inter-Teck Oil Partnership or to the Inter-Teck
Oil Limited Partnership. It just says:
I
wish to file an appeal of the notification of
confirmation.
The Minister then replied in great detail in the Reply to Notice
of Appeal herein, and dealt with the Appellant's case as
though it were an appeal with respect to the limited
partnership.
Now, we have heard Mr. Bawa's testimony that what he
purchased was units in a partnership. He provided a copy of a
subscription form showing that he subscribed and that the entity
described in the subscription form was Inter-Teck Oil
Partnership. Not a limited partnership, but Inter-Teck Oil
Partnership. I asked him whether he recalled signing a
replacement subscription form for the limited partnership. ... he
said he did not have a copy of the replacement form.
Mr. Bawa confirmed that he understood that he was to become a
limited partner; that that's clearly set out in the
subscription form, which was Tab 1 of Exhibit A-1. In
paragraph 3, it clearly indicated that he was to become a
limited partner, and that was his understanding. ...
Mr. Bawa also testified that, although the document refers to
becoming a limited partner in the first quarter of 1983, that
that process was, in fact, accelerated and that he would have
become a limited partner at an earlier date than that
indicated.
...
The losses, according to the Appellant, are not the losses of the
limited partnership, they're the losses of this other entity,
the Inter-Teck Oil Partnership. The losses arise by virtue
of the claim for the capital-cost allowance with respect to this
device or equipment. In paragraph ... 8(g) of the Minister's
Reply, that equipment has attributed to it a fair market value of
no more than $422,000.
In my submission, there has been no evidence adduced by the
Appellant which would establish any value for that equipment
other than the value assumed by the Minister.
The Appellant says the equipment had a value of
$6.8 million, but no expert report was tendered or, indeed,
obtained by the Appellant or, it seems, any others of the persons
who invested in this partnership and in this equipment, which
would tend to establish a value of $6.8 million or any other
value. Even the document that was brought to the court this
afternoon, the -- attached to Exhibit A-2, a valuation report
which, first of all, I'd submit Your Honour can attribute no
weight to because we do not have the maker before us, but even
that accepts the value of $422,000 for the equipment and only
refers to a notional amount for the process in addition to that.
So I would submit, Your Honour, that there has been no evidence
adduced that would unseat this fair market value of the equipment
as being anything other than the $422,000.
Now, the only other question that arises in this appeal, I would
submit, Your Honour, is whether or not, because of the makeup of
the group, there is an issue as to arm's length or
non-arm's length. First of all, with respect to that,
Your Honour, we have Mr. Bawa commenting on the Minister's
assumptions with respect to the sale of the equipment to the
partnership in paragraph (f). Mr. Bawa took the position that the
conditional sale contract, dated November 10th, 1982, was not
executed. I produced a copy of the executed conditional sales
contract of that date and showed it to Mr. Bawa. Although he was
able to identify the signatures of his brother-in-law, Mr. Gill,
he still refused to accept that this conditional sales
contract(R-4) was executed.
...
MS. CLARE: So, Your Honour,
the Minister has assumed that on November 10th, 982, the
corporation sold the equipment to the limited
partnership.
Now, if the corporation sold the equipment to the limited
partnership, the only parties who can participate in claims for
capital-cost allowance with respect to that -- or with respect to
that equipment are the members of the limited partnership. In
order for Mr. Bawa to succeed in his claim with respect to the
amount that he sought to deduct in the 1982 taxation year,
it's the Minister's submission that he must be a member
of that limited partnership.
Now, this is an unusual situation where we have documentation
being drawn up and then replaced, perhaps because the maker had
no understanding of what partnerships are or what partnerships
do. Clearly, the Appellant's intention was to become a
limited partner. Clearly, there was a limited partnership
created. Clearly, this equipment belonged to the limited
partnership because it was sold to the limited partnership
November the 10th, 1982. The only way that Mr. Bawa can
participate in any of the losses with respect to the capital-cost
allowance on that -- on that partnership property is if he is
part of that limited partnership. So I find that when Mr. Bawa is
stating that he was not a member of the limited partnership, but
only of what seems to have been a predecessor entity called the
Inter-Teck Oil Partnership, that what he's really
saying is that he should not share in the loss, because the
Inter-Teck Oil Partnership, there's no evidence
that it owned anything. So if his position is that he should be
obtaining these losses as a shareholder in the Inter-Teck Oil
Partnership and it's by virtue of his situation with the
Inter-Teck Oil Partnership that he is -- that he has this
entitlement, then where is the proof that there's anything in
the Inter-Teck Oil Partnership that would give rise to any loss
that he could claim? There's nothing, Your Honour.
...
MS. CLARE: Yes, Your Honour. We do have filed a balance sheet
with respect to Inter-Teck Oil Partnership. Once again, we
haven't heard from the -- from the maker of that document, so
I suggest, Your Honour, you can attribute little or no weight to
that document. We don't know what instructions were provided
... Inter-Teck Oil Partnership or -- we don't know who
provided the instructions or what instructions were provided to
Tierney & White. They, on the second page, provide the usual
chartered accountant's notice to reader. You know, the usual
disclaimer: "We have not audited, reviewed, or otherwise
attempted to verify their accuracy or completeness." So we
don't know what was brought to Tierney & White. We have
no way of concluding that Tierney & White had a basis to come
to a conclusion that there were -- that these losses were losses
of this particular legal entity.
...
MS. CLARE: ... Now, at -- if we look at the Minister's Reply
to Notice of Appeal once again, we see that, in
paragraph 8(b) which was admitted by the Appellant, the
limited partnership was registered on November the 10th, 1982.
Until that occurred, Your Honour, there is no limited
partnership. because under section 51(1), the limited partnership
is formed when the signed certificate is filed with the
registrar. At that time - and we see this, once again, looking at
the -- at paragraph (b) of the Reply, which was admitted - the
company, which is Inter-Teck Management Ltd., and the
individual, and that individual is Jagroop Singh Gill, were
recorded under that registration respectively as the general
partner and a limited partner of the partnership.
So, at that point, Your Honour, we have, we know from paragraph
(a) which was admitted, 8(a), that Mr. Gill was the sole
shareholder and director of each of the corporation and the
company. We know that he signs as the limited partner. We know
that the general partner is the company. And at
November the 10th, 1982, there are no other partners of
any sort, whether limited partners or general partners, in the
limited partnership. By law, I would submit there cannot be any
others without amending the certificate.
Paragraph (f) of the Minister's Reply is the one, once again,
that deals with the purchase by conditional sales contract by the
limited partnership of the equipment. So the equipment is owned
by the limited partnership and at that point, at
November 10th, 1982, the only limited partner is Mr. Gill
and the only general partner is his company.
Now, with respect to the arguments about arm's length, if
there is any arm's length amongst any individuals who are
alleged to be partners in either the limited partnership or in
the -- what I like to think of as the predecessor partnership,
the only place that arm's length can exist is in -- at
November 10th, 1982 which was the date that the property is sold
to the limited partnership, the only arm's length exists in
or amongst these predecessor so-called partners. We really
don't have any evidence, other than the subscription to what
is entitled a partnership agreement, that Inter-Teck Oil
Partnership is, in fact, a partnership. We really don't have
any real evidence with respect to that. That's the
predecessor group. We don't really have any evidence on what,
if anything, that entity did, or what assets it had. We know it
didn't have the equipment, because the equipment was sold by
IRRI to the limited partnership on November 10th,
1982.
So we don't really know much about that, that entity, but it
has been in -- termed a partnership. And yes, there are people
who subscribed to that group, or joined in that group, whatever
it was, on November the 4th or November the 5th or
November the 9th, but they aren't part of the
limited partnership because -- at that point because there is no
limited partnership at that point. There's no limited
partnership until November the 10th, 1982, and they
come in the back door on an amendment to the certificate at a
later date and become limited partners. And that's the only
way that any of these Appellants from -- from the early days,
from the predecessor group, whatever it was, get to participate
in any loses of the limited partnership is if they were brought
into the limited partnership. And we accepted that they -- they
did come in and become part of the limited partnership, because
clearly, we allowed their losses, but not on the cost base that
they wanted which was 6.8 million.
...
ANALYSIS AND
DECISION
[6]
I accept the principal submissions of counsel for the Respondent.
There is no proof of the existence of Inter-Teck Oil
Partnership. All that we see are subscriptions for units in that
entity including a subscription by the Appellant and we see the
Notice to Reader statements indicating apparently that such an
entity exists and had acquired the equipment. That evidence, in
my opinion, is not sufficient to establish the existence of the
partnership nor its ownership of the equipment, especially
considering that no sale of the equipment to that entity was put
forward. What was submitted was an executed copy of the sale of
the equipment by IRRI to ITOLP and I have heard no satisfactory
evidence which would indicate that that conditional sales
agreement was not executed or was not valid. I am supported in
this by the fact that numerous investors in ITOLP declared losses
in respect of the equipment conveyed to ITOLP, losses related to
capital cost allowance in respect of that equipment. With respect
to the equipment's fair market value, a figure of $422,000
was accepted by the Federal Court of Appeal in Chutka et al.
v. The Queen, 2001 DTC 5093 and as no contradictory
evidence has been presented, I accept that figure. Consequently
the appeal is dismissed with costs.
[7]
The Appellants in the following appeals, namely
1.
Jagroop S. Gill, 94-2288(IT)I;
2.
Gurdarshan S. Gill, 94-2289(IT)I;
3.
Melvyn Cross, 94-2887(IT)I; and
4.
Margaret Cross, 94-2888(IT)I
agreed to be bound by the decision to
be rendered in this appeal. Consequently these Reasons for
Judgment shall constitute Reasons for Judgment in each of those
respective appeals. Consequently those appeals are likewise
dismissed and further there shall be only one set of costs in
respect of this appeal and the appeals mentioned
above.
Signed at Ottawa, Canada, this 17th day of June,
2002.
"T. O'Connor"
J.T.C.C.
COURT FILE
NO.:
94-2099(IT)I
STYLE OF
CAUSE:
Sarban Bawa v. Her Majesty the Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
April 29, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge T.
O'Connor
DATE OF
JUDGMENT:
June 17, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Margaret E. T. Clare
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
94-2099(IT)I
BETWEEN:
SARBAN BAWA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 29, 2002 at Vancouver,
British Columbia, by
the Honourable Judge Terrence
O'Connor
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Margaret E. T. Clare
JUDGMENT
The appeal from the reassessment made under the Income Tax
Act for the 1982 taxation year is dismissed in accordance
with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 17th day of June,
2002.
J.T.C.C.
Email this Content