Date: 20020612
Docket:
94-1787-IT-I
BETWEEN:
DON
DEPTUCK,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasons for
Judgment
O'Connor,
J.T.C.C.
[1]
This appeal was heard at Vancouver, British Columbia on
April 29, 2002. Numerous investors were affected by the
same set of facts and agreements. See for example the decision of
Christie, A.C.J. in Madsen et al. v. The Queen,
98 DTC 1668. That appeal affected eight such investors, two
of whom were Madsen and Chutka. Christie, A.C.J. dismissed the
appeals and his decision was upheld by the Federal Court of
Appeal reported as Chutka et al. v. The Queen,
2001 DTC 5093 ("Chutka").
FACTS
[2]
Subject to certain exceptions discussed later the facts and
issues in this appeal are essentially the same as those in
Chutka and are succinctly analysed in the decision of the
Federal Court of Appeal in that case. I quote certain extracts
from that decision:
[1]
These are appeals from a decision of the Tax Court of Canada
dated March 23, 1998 dismissing eight appeals from reassessments
under the Income Tax Act rejecting claims for deductions
of capital cost allowance in respect of the 1982, 1983 and 1984
taxation years. The appeals were consolidated as one proceeding
under Court file number A-267-98 by Order of Mr. Justice
Stone on May 11th, 1999. The appellants were at all relevant
times partners in a limited partnership named Inter-Teck Oil
Limited Partnership ("ITOLP"). They seek to deduct from
their income the losses pertaining to the purchase of units in
the capital of ITOLP.
Facts
[2]
ITOLP came into being as part of a larger scheme to fund the
purchase and operation of machinery used to process sewage waste
into marketable products, including oil. A brief description of
this scheme is useful for contextual purposes. On
February 22, 1979, International Resource Recovery Inc.
("IRRI") was incorporated under the laws of British
Columbia. At all relevant times its sole shareholder and
president was Jagroop S. Gill. IRRI was in the business
of converting organic material at sewage treatment plants managed
by the Greater Vancouver Sewerage and Drainage District into
marketable material. One of the assets of IRRI was equipment
designed and created by Mr. Gill to transform sewage waste into
marketable products.
[3]
On November 9, 1982, Inter-Teck Management Ltd.
("ITML") was incorporated under the laws of British
Columbia. Again, its sole shareholder and director was at all
relevant times Mr. Gill. On November 10, 1982, a certificate made
under section 51 of the B.C. Partnership Acts was
filed with the Registrar of Companies. The certificate evidenced
a limited partnership agreement that was entered into between
ITML as the "General Partner" and Mr. Gill as the
"Founding Partner", leading to the birth of ITOLP. The
purpose of ITOLP was to "fund [...] the purchase and
operation of machinery to be used to process sewage waste into
marketable end products including oil". The partnership
agreement was signed by Mr. Gill on behalf of ITML as general
partner and by him on his own behalf as founding
partner.
[4]
By a series of agreements entered into between IRRI and ITOLP --
also on November 10, 1982 -- it was arranged that the ITOLP would
carry out the processing of sewage on premises subleased to it by
IRRI and with processing equipment sold to it by IRRI. ITML
undertook to manage ITOLP's project of converting the sewage
waste into marketable products. IRRI was also contracted to
maintain and provide technological advice and research to ITOLP
in respect of the processing equipment.
[5]
Of interest in this appeal is the purchase and sale of the
processing equipment which took place at a stated price of
$6,850,000 payable over a period from December 1, 1982 to
November 30, 1992. The transaction was made by conditional sales
contract signed by Mr. Gill on behalf of the vendor IRRI and on
behalf of the purchaser and ITOLP's general partner, ITML.
Capital cost allowance was claimed on the basis that the
equipment was included in Class 29 of Schedule II of the Income
Tax Regulations. Accordingly, 25% of the equipment's capital
cost was claimed in 1982 ($1,712,500), 50% in 1983 ($3,425,000)
and 25% in 1984 ($1,712,500). These claims gave rise to alleged
losses per unit in ITOLP of $6,402.30 in 1982, $6,358.54 in 1983
and $6,275.12 in 1984.
[6]
However, the Minister
of National Revenue did not share the appellants' opinion as
to the appropriate capital cost of the processing equipment. The
Minister found that the sale of the equipment was not made at
arm's length. Consequently, section 69(1)(a) of
the Act applied to deem ITOLP to have acquired the equipment at
its fair market value. On this approach, the Minister reassessed
the capital cost allowance deductions on the basis of the
equipment's fair market value which, in the Minister's
view, was $422,000. The losses per unit in ITOLP were therefore
reduced to $262 in 1982, $494 in 1983 and $685 in
1984.
The Tax Court
Decision
[7]
The appellants appealed the reassessments to the Tax Court, and
on March 20, 1998, those appeals were dismissed. The Tax Court
Judge was satisfied that this Court's decision in
Sidhu v. Canada (M.N.R.) disposed of the
appeals. In that decision, the Court upheld a decision of the Tax
Court that the non-arm's length provisions of the Act applied
to an employment relationship between a partnership and one of
its employees for the purposes of determining insurable
employment under the Unemployment Insurance Act. Even
though the employee was not related to the individual partner who
hired her, the contract of employment bound all of the partners
by virtue of section 7 of the B.C. Partnerships Act,
including the employee's son-in-law. Accordingly, the
contract was tainted by the familial relationship and could not
be taken as having been made at arm's length pursuant to
paragraph 251(2)(a) of the Act. Applying that decision to
the facts before him, the Tax Court Judge reasoned as
follows
While I am prepared
to accept that a partnership is not a legal entity it does not,
in my view, follow that a contract entered into between a
partnership as one party and a corporation or individual as the
other party cannot be a non-arm's length transaction as
described in [section 251 of the Act]. The act of the General
Partner ITML in signing the agreement to purchase the processing
equipment for $6.85M bound itself contractually and it also
obligated Mr. Gill, the Limited Partner. Together they
constituted the partnership.
[8]
The Tax Court Judge similarly rejected the appellants'
contention that, since the calculation of capital cost allowance
and tax in general are to be made at the partnership level as
though the partnership were "a separate person", then
the non-arm's length provisions of the Act cannot apply
because, on the one hand, paragraph 69(1)(a) only applies
to acquirers that are "taxpayers" and, on the other
hand, subsection 251(2)'s concept of "relatedness"
only applies to individuals and corporations. In rejecting this
argument, the Tax Court Judge, relying on ITOLP's membership
as reflected in the certificate filed with the Registrar of
Companies on November 10, 1982, concluded:
Paragraph
96(1)(a) is not a statutory declaration that for the
purposes of the Act a partnership is not a taxpayer...It deals
with "a taxpayer who is a member of a partnership".
That includes an individual or corporation. The income or loss of
taxpayer partners is to be computed at the partnership level as
if the partnership were a separate person. Income and losses are
then allocated to the partners. The basic approach to the proper
interpretation of paragraph 69(1)(a) in the context of
these appeals is the same as that just utilized in respect of the
arm's length provisions of the Act. Again when the sale and
purchase agreement was entered into on November 10, 1982 there
were only two partners in [the Partnership]. ITML was the General
Partner and Mr. Gill the Limited Partner. Together they
constituted the Limited Partnership. When ITML entered into the
agreement it not only bound itself contractually to IRRI, but it
also bound the Limited Partner, Mr. Gill, in the same way.
Both IRRI and Mr. Gill are persons and taxpayers.
[9]
Accordingly, the Tax
Court Judge decided that the non-arm's length
provisions properly applied to deem the purchase price of the
equipment to be its fair market value, namely $422,000. Since no
significant evidence was tendered before the Tax Court to rebut
the fair market value of the equipment as assessed by the
Minister, the reassessments were accepted and the appeals
dismissed.
...
The Parties'
Submissions
[10]
The appellants argue that ITOLP's status under the Act makes
it an ineligible target of paragraph 69(1)(a)'s fair
market value deeming provision. The appellants start from the
premise that paragraphs 96(1)(a) and (c) require
that a partnership be treated like a "separate person"
and that each "partnership activity (including the ownership
of property)" be considered as if it were "carried on
by the partnership as a separate person" for the purposes of
calculating income tax. Buttressing this special recognition of
the partnership as an entity separate from its members is
section 1102(1a) of the Income Tax Regulations which
requires that capital cost allowance be calculated as though
"partnership property" were acquired by the partnership
rather than the partners. Since the processing equipment was
purchased "on account" of ITOLP, it must be taken as
"partnership property" within the meaning of subsection
23(1) of the B.C. Partnership Act, and it must be treated
for income tax purposes as having been acquired by ITOLP as an
entity separate from the individual partners.
[11]
In the appellants' view, it follows from the foregoing that,
contrary to the approach adopted by the Tax Court Judge, the
non-arm's length provisions of the Act must as a matter
of income tax law be applied at the partnership level as if
ITOLP, not Mr. Gill or ITML, acquired the processing equipment.
As it happens, the relevant non-arm's length provisions of
the Act do not appear to contemplate partnerships. For example,
in the appellants' estimation ITOLP cannot be a "related
person" pursuant to section 251 because the term
"person" encompasses corporations but not partnerships.
Even though section 96 requires that ITOLP be considered as a
"separate person" for income tax purposes, this
concept of personhood is artificial and limited. A partnership
itself is not a person nor is it deemed to be a person. The
appellants note that where the legislator has specially deemed
partnerships to be persons in other provisions of the Act, no
similar deeming treatment applies with respect to the
non-arm's length provisions under review. Even if ITOLP were
to be considered a person, the appellants point out that
paragraph 69(1)(a) only applies to acquirers that are
"taxpayers". But, it is finally contended, ITOLP is not
a "taxpayer" within the meaning of the Act. Again,
partnerships have exceptionally been deemed to be taxpayers but
not in the instant case. Accordingly, the $6,850,000 purchase
price for the processing equipment must stand and be applied for
the purposes of calculating the capital cost allowance available
for each unit in the Partnership.
[12]
In the alternative, the appellants argue that the purchase and
sale of the processing equipment was conducted at arm's
length and the purchase price was fair....
[13]
The respondent's arguments, though less dramatic, are more
succinctly put. Crown Counsel characterizes the purchase and sale
of the processing equipment as having been made between IRRI (a
company solely owned by Mr. Gill) and two taxpayers,
namely ITML (the company Mr. Gill owned and the sole general
partner in ITOLP) and Mr. Gill (the sole limited partner in
ITOLP). Under long-established rules of partnership law, the
two taxpayers gained undivided ownership of the equipment
due to their status as partners. To say, as the appellants do,
that paragraph 69(1)(a) does not apply to Mr. Gill
and ITML because they did not acquire anything runs contrary to
these established partnership principles. Such principles have
been affirmed by this Court in Sidhu, supra, and
were properly applied by the Tax Court Judge in piercing the
"partnership veil" to examine the relationship between
IRRI, ITML and Mr. Gill. Doing so clearly reveals that the
parties to the purchase and sale were not dealing with each other
at am's [sic] length. Rather they were "related
persons" within meaning of subparagraphs 251(2)(b)(i)
and 251(2)(c)(i) of the Act.
[14]
The respondent further argues that the Court should not entertain
the appellant's submissions as to the equipment's fair
market value because the Minister's assumption as to the
equipment's true value was never disputed at trial.
Specifically, no expert testimony was brought to rebut the
Minister's assumption, and the Tax Court Judge accepted, as a
finding of fact, the fair market value assumed by the Minister.
This finding should not be disturbed as the Tax Court Judge was
entitled to make it.
Analysis
[15]
The central issue in these appeals is the extent to which
subsection 96(1) of the Act and subsection 1102(1a) of the
Income Tax Regulations affect, and indeed supercede, the
characterization of transactions involving partnerships at
private law. The appellants urge the Court to accept the position
that income tax law treats partnerships as limited purpose
"separate persons" in that they are persons for the
purposes of transacting separately from their members but not for
the purposes of attracting the non-arm's length transaction
rules of the Act. Despite the enthusiastic advocacy of
appellants' counsel, I am not persuaded that this view can
prevail.
[16]
A partnership's lack of separate legal personality is what
distinguishes it from an individual or corporation. The Act
maintains this lack of legal personality, and does not generally
treat partnerships as taxpayers. Instead, it is the individual
partners who pay tax on the basis of their particular share of
the income or losses of the partnership. In order for this
"flow through" of tax consequences to take place,
subsection 96(1) of the Act requires that the income or losses of
the partnership be computed as if the partnership were a
"separate person" and each "partnership activity
... were carried on by the partnership as a separate
person..." As a part of this conceptual separation,
expenditures to acquire depreciable property are capitalized at
the partnership level, and capital cost allowance is only
deductible at that stage. Section 1102(1a) protects
the integrity of calculating capital cost allowance at the
partnership level by ensuring that depreciable assets owned by a
partner in his or her personal capacity are not intermingled with
assets of the same class owned by the partnership. In my view,
the foregoing "regime" implies nothing more than a
notional construct for calculating a taxpayer's tax
liability. It is a purely administrative convenience necessary to
sustain the Act's view of the partnership as a conduit or
vehicle for taxpayers.
[17]
In this way, the fiction of a partnership as an entity separate
from the partners is temporary and does not extend to colour the
true legal nature of transactions at the time they are entered
into by a partnership. The characterization of legal
relationships is generally left to established principles of
partnership law. This approach was most recently affirmed by this
Court in Adams v. Canada (appeal by
Robinson) where Roberston, J.A. made the following
observations:
[11]
It is well accepted that at common law a partnership does not
constitute a distinct legal person such that it is separate from
its members. Indeed, it is the lack of a separate legal
personality and limited liability that distinguishes a
partnership from a corporation. In this regard, the Income Tax
Act recognizes the lack of legal personality of a partnership
by not treating "it" as a taxpayer. Admittedly, a
partnership must file an annual information return setting out
the income of the partnership, but it is the individual partners
who are liable to pay tax on the partnership's income. For
taxation purposes the partnership is treated as a "separate
person resident in Canada" solely for the purpose of
calculating income at the partnership level. In this way each
partner's share of the income may be allocated accordingly:
see paragraph 96(1)(a).
[12]
Accepting that a partnership does not constitute a distinct legal
entity, neither at common law nor for tax purposes, then in
strict legal theory the true tenants under a lease entered into
by a partnership are the individual partners existing as of the
date of the lease. Title to land, whether it be freehold or
leasehold, cannot vest in a non-entity such as a partnership: see
A.B. Oosterhoff, W.B. Rayner, Anger and Honsberger Law of
Real Property, vol. 2 (Toronto: Canada Law Book, 1985) at
1256. In the present case each of the eighteen doctors in
the Partnership must be deemed to have been a tenant under the
lease agreement of May 21, 1985.
Similarly, ownership
of the processing equipment could not, and did not, vest in
ITOLP. Rather, the acquisition of the processing equipment took
place between IRRI and ITML on behalf of ITOLP. Both IRRI and
ITML were "persons" and "taxpayers" within
the meaning of the Act and were controlled at all material times
by Mr. Gill who was also the limited partner in ITOLP at the time
of the transaction. This state of affairs is clear from the
certificate filed pursuant to section 51 of the Partnership
Act on November 10, 1982, upon which the Tax Court Judge was
entitled to rely in arriving at his decision. Whether or not
subsequent subscribers to ITOLP "ratified" the purchase
of the processing equipment does nothing to alter the proper
characterization of the transaction.
[18]
Accordingly, paragraph 69(1)(a) was properly invoked by
the Minister to deem the purchase price to be the fair market
value of the processing equipment by virtue of the parties being
"related persons" within the meaning of section 251. In
the absence of expert evidence to rebut the Minister's
assessment of the equipment's fair market value, the deemed
acquisition price of $422,000 must stand and the capital cost
allowance deducted accordingly.
...
SUBMISSIONS OF COUNSEL FOR
THE APPELLANT
[3]
Counsel for the Appellant puts forward a position which I am not
sure was advanced in Chutka. In any event, it is not
precisely discussed in Chutka. This position is that on
November 10, 1982, the date of the transfer of the asset, certain
other persons were limited partners in ITOPL with the result that
the sale of the equipment was arm's length. Counsel states
that Lois Ward and John Ward had two units each and Jim Turner
held five units for a total of nine units. Counsel goes on
further to say that the partnership agreement states that the
general partner is executing the conditional sales agreement as
agent for the limited partners. That means the contract is
between IRRI and the limited partners. As a matter of agency law,
the general partner acted as the agent. Counsel states further
that on November 10, 1982 Jim Turner, Lois Ward and
John Ward controlled the partnership and they all dealt at
arm's length with Mr. Gill and/or with IRRI.
[4]
Counsel went to great lengths to show that the persons mentioned
were limited partners at the time of the transfer of the
equipment with the result that it was an arm's length
transaction and that the price stipulated is the price that
should govern rather than the fair market value. In support of
this, counsel referred to the documentation including, in
particular, the memorandum of agreement, the subscriptions, the
specific provisions of the partnership agreement and several
other agreements and the Partnership Act of British
Columbia.
SUBMISSIONS
OF COUNSEL FOR THE RESPONDENT
[5]
I cite certain extracts from Counsel's
submissions:
Now, if we look at
the limited partnership agreement, the conditional sales
contract, and so on, all these documents are dated November the
10th, 1982. So what we have is apparently some individuals, who
either prior to or on the same date as this documentation was
entered into, have entered into a subscription of some sort with
an entity not even of the same name. This is Inter-Teck Oil
Partnership, and what we have is Inter-Teck Oil Limited
Partnership.
We have these individuals who agreed to participate in some
entity with a view to at some later date becoming limited
partners. And what the court is being asked to do is to make the
jump from these subscribers who signed on in November 1982, to
become part of something called Inter-Teck Oil Partnership. The
court is being asked to make the jump from there to them becoming
limited partners in the Inter-Teck Oil Limited Partnership, an
entity that was not even created until November 10th, 1982 and
which, by virtue of the terms of the Partnership Act Part
III, dealing with limited partners, could not, I would suggest,
be -- I will suggest be effective until a certificate was
obtained under the Partnership Act.
So, yes, we have these initial investors. And, yes, they agreed
in the forms that they signed that they would become limited
partners. Limited partners in what, we don't know.
The Minister has assumed that all the participants became
partners in the limited partnership and has sort of subsumed the
Lois Wards and James Turners of this world into the limited
partnership. And that's not an unreasonable thing for the
Minister to have done, because we do have the certificates that
were filed with the Ministry with respect to the limited
partnership that do contain the names of these individuals as
limited partners.
... I would suggest it's reasonable to conclude that at some
point these initial investors who signed on with Inter-Teck Oil
Partnership, at some time they became participants in the limited
partnership, Inter-Teck Oil Limited Partnership. What we
don't know, what we have no evidence of is when that
occurred. It must have occurred at some point in time, because
the certificates say these people are at some point limited
partners. It's at a point very much later in the proceedings,
and I'll come to that when I look at the provisions of the
Partnership Act. But they do at some point apparently
become a part of the limited partnership.
Now, this probably is no more than an example of the left hand
not knowing what the right hand was doing, because Mr. Gill has
instructed solicitors to proceed with creating a limited
partnership and so on, which they do, and at the same time he is,
you know, collecting subscribers and perhaps because he
doesn't want to lose them he has them signing up to some
form, which he himself has prepared. So you've got two things
happening. And what my learned friend would like you to do is to
say, okay, we will take the people who subscribed to this earlier
entity, Inter-Teck Oil Partnership, and we will just simply
on the very date at the very moment when the limited partnership
is created, we will just put them in and they magically become
limited partners on that date. And I would submit, ... , that
that simply is not the way things happen in the law.
There's a great deal that we don't know here. There are
some things that we do know.
We do know that where individuals subscribed to the
Inter-Teck Oil Partnership in forms like that signed by
Mrs. Ward, that's at Tab 1 in the Appellant's book, that
they later signed a substituted form.
We had Mr. Gill's evidence that with respect to
Melvyn Cross, one of the investors, that he signed a
subscription form in Inter-Teck Oil Partnership --
that's Exhibit R-2 -- and that he later signed a subscription
form, Exhibit R-3, in Inter-Teck Oil Limited Partnership. Now,
the subscription form R-3 is much more detailed than the one that
is R-2. It's also set up so that a witness signs it, a much
more formal document.
The -- with respect to Mr. Cross, the individual who subscribed
in R-2 on the 14th of December 1982, he signed the form that Mr.
Gill indicated was a replacement form on the 16th of March 1983.
Now, that would seem to be consistent with the suggestion in the
Inter-Teck Oil Partnership's Subscription Form itself, Tab 1
of Mrs. Ward's, or Exhibit R-2, that in the first quarter of
1983, the subscriber would convert to a limited
partnership.
Now, it occurs to me that what actually happened with Exhibits
R-2 and R-3 is that there was an actual substitution made. Yes,
you came on board under the original form, R-2, an investment in
Inter-Teck Oil Partnership, but you agreed in that that you would
later, and according to the form R-2, in the first quarter of
1983, you would convert to a limited partnership, and R-3 would
appear to be that conversion.
Now, unfortunately, we don't have the replacement forms with
respect to Mr. Deptuck or with respect to Mrs. Ward or
Mr. Turner, and the evidence appeared to be that basically
these witnesses that came before the court had no documentation
other than the documentation that has been provided by my learned
friend to the court. We do, of course, as always in this type of
case, ... , have difficulties created simply by the effluxion of
time. But clearly to the organized legal mind, it makes sense
that you would have some actual documentation that would convert
the people who signed on with Inter-Teck Oil Partnership into
members of the actual limited partnership.
...
What we do know is that there was a limited partnership created
here, and it is the limited partnership that has been allowed
losses by the Minister. We do know that that limited partnership
was created by a document dated November the 10th,
1982.
Now, if we look at the limited partnership agreement that's
at Tab 4, it's an agreement between Inter-Teck
Management Limited as the general partner and Mr. Gill as the
founding partner. And if we turn to page 2, we see at provision
1.01:
The General Partner
and the Founding Partner do ... agree to and do form a limited
partnership (the "Limited Partnership") pursuant
to the provisions of the Partnership Act of the Province of
British Columbia ... for the purpose of funding the purchase
and operation of machinery to be used to process sewage waste
into marketable end products including oil.
So it is by this
document, ... , that a limited partnership is formed, and this
document itself sets out that this limited partnership is being
formed pursuant to the provisions of the Partnership Act of
British Columbia.
Now, prior to this document being executed, there was no limited
partnership. Whatever it is that Mrs. Ward and Mr. Turner signed
up for, it was not the limited partnership, I would suggest,
created by this agreement of limited partnership.
...
If we look at Tab 2, the Certificate of Limited Partnership, also
dated November 10th, 1982, we have the signed document that
says:
We, the
undersigned...
The undersigned being
Inter-Teck Management Ltd. and Jagroop S. Gill, the
former as "General Partner", the second as
"Limited Partner". They signed on page 6. We have them
saying that they:
... having entered
into a Limited Partnership Agreement ... desire to form a Limited
Partnership ...
So we also have to distinguish, ..., between the limited
partnership agreement and the limited partnership. You can enter
into an agreement of limited partnership, but you don't have
an effective limited partnership in British Columbia until you
comply with the provisions of Part III of the Partnership
Act. So the only persons who subscribed to this certificate
that was filed on November the 10th are Inter-Teck Management
Ltd. as the general partner and Jagroop Gill as the limited
partner. And there's a provision right here to set out what
the full names and addresses of the general and limited partners
are.
If it were intended that there had been any partners other than
Inter-Teck Management Ltd. as general partner and
Jagroop Gill as limited partner on the 10th of November,
1982, it was certainly available to the -- to the persons putting
forward the Certificate of Limited Partnership to have added
other people into it. ...
Now, we have some other problems here, ..., with the facts. We
know that the limited partnership agreement talks about
contributions of $25,000. And when we look at the Certificate of
Limited Partnership that's the Appellant's Tab 2, that
also talks about capital contributions of $25,000. Now, Mr. Gill
told the court that -- well, he had concluded that it was
impossible for any of the investors that he was looking to, to
come up with $25,000, so he had changed the amount to $6,250. The
subscription forms of the type that is Appellant's
Exhibit 1 or the Respondent's number 2, provide for this
lesser amount, $6,250. The documentation that was filed with the
Registrar of Companies on the 10th of November 1982 still talks
in terms of the $25,000. So on the one hand Mr. Gill is
signing up investors for $6,250, and on the other hand, virtually
simultaneously, under another entity's name, he's setting
up the system to have investors for $25,000.
Your Honour inquired about the amendment of the limited
partnership agreement. And Mr. Clarke pointed you to the evidence
of Mr. Gill, which was that the limited partnership agreement had
been amended at some later date, but there's no evidence. Mr.
Gill didn't seem to know whether this was some sort of
omnibus amendment or what form the amendment took. But if we have
individuals who are subscribing to some sort of investment for
$6,250 in an entity called Inter-Teck Oil Partnership, and we
have a limited partnership being created on November 10th, 1982
that apparently is looking for investments of $25,000 in a new
entity called Inter-Teck Oil Limited Partnership, I don't
think the court can make the leap to say that as of the moment of
creation of this limited partnership, the individuals who signed
that subscription form for $6,250 with Inter-Teck Oil Partnership
magically become members of the limited partnership which, by its
very terms as filed with the Registrar of Companies, was a
different entity and one that required an investment of $25,000.
I just -- I cannot see, ..., how the court can reach that
conclusion.
...
... This is the cloak
in which the limited partnership was presented to the Registrar
of Companies. These are the people who were the partners at that
date. That's the date when the equipment is sold. And, yes,
the Minister has assumed that at some later date these other
individuals, like Mrs. Wilson and Mr. Turner, became partners in
the limited partnership, but there certainly is no evidence that
they were partners in the Inter-Teck Oil Limited Partnership on
November 10th, 1982. There is simply no evidence of that at all,
and it's requiring the court to make a completely unwarranted
leap of faith to conclude that in some way these individuals are
members of this limited partnership at that time.
...
... Section 65
provides that:
...Additional limited
partners may be admitted to the partnership by amendment of the
certificate in accordance with this part.
And we know that
section 70 provides in subsection (1) that:
A certificate shall
be amended when a person is added as a limited partner.
Similarly, the certificate shall be amended when a person is
added as a general partner.
So if it had been
sought at the outset to have these other individuals, Mrs. Ward,
Mr. Ward, Mr. Turner, Mr. Bawa, limited partners or general
partners right from the outset, then clearly their names should
have been in the certificate that was initially filed, which is
the document at Tab 2 of the Appellant's book of documents,
that we shouldn't have to be looking to the amended
certificate behind Tab 11 to find those persons who are put
forward as having become limited partners on the day the
partnership was formed.
...
[6]
Counsel for the Respondent adds that paragraph 9.02 of the
limited partnership agreement at page 11 states that:
Any person who shall
subscribe for and receive a Unit pursuant to the Offering or any
... shall be a Limited Partner.
She goes on to state
there does not appear to be any evidence that anyone received a
unit. She states that Mr. Gill's evidence was that there was
no one who received a certificate of anything.
[7]
The limited partnership agreement filed on November 10, 1982
indicates that the limited partnership intends to make an
offering of 273 units so we have got an intention to make an
offering of these units and of course, once again, counsel points
out that an intention to make an offering is inconsistent with
there already being people who are on-board as limited
partners of this partnership that had not yet come into
existence.
ANALYSIS
[8]
I find as a fact that the subscription forms signed by Lois Ward,
John Ward and James Turner were subscriptions with respect
to another entity than the limited partnership referred to as
ITOLP and they do not, in my opinion, notwithstanding references
to wishing to acquire the equipment agreeing to convert to
Limited Partnership and agreeing to certain documents including
the Conditional Sales Agreement, automatically makes those
persons limited partners of ITOLP as of
November 10, 1982. This is further evident from the
fact that some documents refer to a $25,000 figure and others to
a $6,250 figure. It follows, in my opinion, that the sale of the
equipment was, for the reasons analyzed in Chutka, not at
arm's length with the result that the sale is deemed to be
made at fair market value.
[9]
Moreover, as the Federal Court of Appeal has accepted that the
equipment's fair market value was $422,000 and as no
contradicting evidence was presented I accept that
figure.
[9]
Consequently, in my opinion, the decision of the Federal Court of
Appeal in Chutka et al stands and governs this appeal. The
result is that the appeal is dismissed with costs.
Signed at Ottawa,
Canada, this 12th day of June, 2002.
"T. O'Connor"
J.T.C.C.
COURT FILE
NO.:
94-1787(IT)I
STYLE OF
CAUSE:
Don Deptuck 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 12, 2002
APPEARANCES:
Counsel for the Appellant: Timothy W.
Clarke
Counsel for the
Respondent:
Margaret E. T. Clare
COUNSEL OF RECORD:
For the
Appellant:
Name:
Timothy W. Clarke
Firm:
Bull, Housser and Tupper
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
94-1787(IT)I
BETWEEN:
DON DEPTUCK,
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
Counsel for the
Appellant:
Timothy W. Clarke
Counsel for the
Respondent:
Margaret E. T. Clare
JUDGMENT
The appeal from the reassessment made under
the Income Tax Act for the 1983 taxation year is
dismissed, with costs, in accordance with the attached Reasons
for Judgment.
Signed at Ottawa, Canada, this 12th day of June, 2002.
J.T.C.C.
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