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Citation: 2007TCC354
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Date: 20070803
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Dockets: 98-2857(IT)I
98-3366(IT)I
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2004-2436(IT)I
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BETWEEN:
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MOHAMED MOLEDINA,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowman,
C.J.
[1] These appeals were heard together. They are
from reassessments made under the Income Tax Act for the 1989, 1990,
1991, 1992 and 1993 taxation years. They involve the disallowance of losses
claimed by the appellant in respect of investments made by him in partnerships
purporting to carry on Scientific Research and Experimental Development (“SRED”).
Also, investment tax credits (“ITCs”) were claimed and disallowed. In some of
the years no investment was made but losses were carried forward or back from
other years.
[2] A number of reasons
might have been advanced for the disallowance, including the following:
(a) that there was
no partnership;
(b) that the
partnership was not carrying on business;
(c) that the
appellant was a limited partner; and
(d) that the
appellant was a “specified member”.
[3] I shall not dwell
on these and other arguments. The appellant is one of thousands of people, mainly
in Quebec, who invested in tax
shelters involving SRED. Approximately one thousand appeals were instituted in
this court. Some have been disposed of and many have been abandoned. In not one
of the appeals that have been heard has the taxpayer been successful. At
present about 160 appeals are left which we are endeavouring to move forward
with dispatch. In some cases groups of appeals have been held in abeyance
pending the disposition of a case Angell et al. v. M.N.R. et al., 2006
DTC 6582, which was heard by Justice Gauthier of the Federal Court. It was
an appeal from a decision of a prothonotary which had struck out an application
by Angell and a large group of taxpayers for judicial review in which
the taxpayers sought to have income tax assessments nullified because the
Minister of National Revenue had allegedly unduly delayed in dealing with their
notices of objection. Justice Gauthier dismissed the appeal and held that
the Tax Court of Canada had jurisdiction, not the Federal Court.
[4] The parties filed a
letter of agreement with the Court which reads as follows:
June
5, 2007
Raza Khimji
Raza Khimji &
Associates Inc.
204 – 9011 Leslie
Street
Richmond Hill, Ontario
L4B 3B6
Re: Mohamed
Moledina v. Her Majesty the Queen
T.C.C. No: 98-2857(IT)I,
98-3366(IT)I & 2004-2436(IT)I
Our files:
3-203714, 3-208810, 3-208944
Sir,
We are writing further
to our telephone conversation of today and in response to your letter which you
faxed to us on June 4, 2007. Please note that this letter rescinds and replaces
our earlier letter of today signed by Me Simon Petit. As discussed, both
parties agree to limit the issue to be raised before the Tax Court of Canada in
the above-mentioned appeals, in accordance with the following.
It is agreed that, with
respect to the above-mentioned appeals, the Appellant no longer disputes that
the assessments established for the 1989, 1990, 1991, 1992 and 1993 taxation
years were issued in accordance with the provisions of the Income Tax Act,
based on the relevant facts and the applicable legislation. The Appellant thus
accepts that the assessments are correct.
The parties therefore
agree that it is unnecessary to adduce any evidence relating to the amounts of
tax assessed or to the reasons for so assessing, or any arguments relating
thereto.
It is understood that at
the hearing, the only issue to be submitted to the Tax Court of Canada by the
Appellant will be whether the Court may grant relief from interest calculated
in accordance with the provisions of the Income Tax Act, because of
delays which the Appellant alleges are excessive and unacceptable.
The Appellant
acknowledges having been previously advised, most notably in a letter dated May
1, 2007, that the Respondent’s position in this last regard is that the Tax
Court of Canada’s jurisdiction prevents it from granting any relief from
interest and from allowing the appeals for the reason that the audit, objection
and/or appeal processes would have allegedly been too lengthy.
In support of its
position, the Respondent will, inter alia, rely on the Tax Court of
Canada decision in Raby v. Canada, 2006 TCC 406, which we have already
faxed to you. We refer you to paragraphs 50 and 51 of the reasons, which are
relevant to this issue:
[50] In closing, I
should point out that the Appellants criticized Revenue Canada’s treatment of their
file on several accounts and even with regard to the management of R & D
files in general. One of the most significant critiques pertained to delays,
which some of the Appellants considered excessive and unacceptable under the
circumstances. Thus, the Appellants request that this Court cancel the interest
in the event that their appeals are dismissed.
[51] As I stated at the
hearing, the cancellation of interest comes within the discretion granted to
the Minister under subsection 230(3.1) of the Act. The Tax Court of
Canada has no power in this regard because its jurisdiction is limited to
determining whether an assessment is well founded. If a taxpayer who has asked
the Minister to cancel his interest is dissatisfied with the Minister’s
decision, the taxpayer may file an application for judicial review in the
Federal Court.
However, as stated in our
letter of June 4, 2007, the Appellant still has an outstanding request for a
fairness review of his file pursuant to subsection 220(3.1) of the Income
Tax Act.
In consideration of the
Appellant’s concession that the assessments established for the 1989, 1990,
1991, 1992 and 1993 taxation are correct, the Respondent agrees not to request
costs or the application of the penalty pursuant to section 179.1 of the Income
Tax Act in relation to the conduct of the above-mentioned appeals.
In order to confirm with
the Court the extent of our agreement we ask that you sign this letter and
return a copy to us by fax as soon as possible. We shall then file a copy with
the Court.
Yours
truly
Philippe
Dupuis
Counsel
The Appellant agrees to
limit the issue
raised before the Tax
Court of Canada
regarding the
above-mentioned appeals,
in accordance with the
terms herein.
______________________________
Raza Khimji
Agent for the Appellant
[5] In light of this
agreement the merits of the appeals need not be considered. It is appropriate,
however, that at this point I deal briefly with the matter of this Court’s
jurisdiction in respect of interest. It is sometimes said, inaccurately in my
view, that we have no jurisdiction when a taxpayer objects to the imposition of
interest on income taxes. This statement is too broad. If the issue in an
appeal is whether the interest was properly calculated, or whether it was
imposed in accordance with the provisions of the Act, patently the Tax
Court has jurisdiction to hear such an appeal. Interest is a component of an
assessment and the Tax Court’s jurisdiction includes the power to hear and
determine appeals from assessments under the various statutes mentioned in
section 12 of the Tax Court of Canada Act. See Union Gas Limited v. The
Queen, 90 DTC 6659.
[6] I do not however believe
that the Tax Court of Canada has the power to review the exercise or
non-exercise of the Minister’s discretionary power to waive interest under
subsection 220(3.1) of the Act or, indeed, to exercise that power. Whether
that power of review belongs to the Federal Court is a matter best left to
determination on another occasion. In the recent decision of the Supreme Court
of Canada in Canada v. Addison & Leyen Ltd., [2007] S.C.J. No. 33
(QL), the following observation was made:
8 We
need not engage in a lengthy theoretical discussion on whether s. 18.5 can
be used to review the exercise of ministerial discretion. It is not disputed
that the Minister belongs to the class of persons and entities that fall within
the Federal Court's jurisdiction under s. 18.5. Judicial review is
available, provided the matter is not otherwise appealable. It is also
available to control abuses of power, including abusive delay. Fact‑specific
remedies may be crafted to address the wrongs or problems raised by a
particular case.
9 Nevertheless,
we find that judicial review was not available on the facts of this case. As
Rothstein J.A. pointed out, the interpretation of s. 160 by the
majority of the Federal Court of Appeal amounted to reading into that provision
a limitation period that was simply not there. The Minister can reassess a
taxpayer at any time. In the words of Rothstein J.A.:
While in the sense identified by the
majority, subsection 160(1) may be considered a harsh collection remedy,
it is also narrowly targeted. It only affects transfers of property to persons
in specified relationships or capacities and only when the transfer is for less
than fair market value. Having regard to the application of subsection 160(1)
in specific and limited circumstances, Parliament's intent is not obscure.
Parliament intended that the Minister be able to recover amounts transferred in
these limited circumstances for the purpose of satisfying the tax liability of
the primary taxpayer transferor. The circumstances of such transactions mak[e]
it clear that Parliament intended that there be no applicable limitation period
and no other condition on when the Minister might assess. [para. 92]
10 The
Minister is granted the discretion to reassess a taxpayer at any time. This
does not mean that the exercise of this discretion is never reviewable.
However, in light of the words "at any time" used by Parliament in
s. 160 ITA, the length of the delay before a decision on assessing a
taxpayer is made does not suffice as a ground for judicial review, except,
perhaps, inasmuch as it allows for a remedy like mandamus to prod the Minister
to act with due diligence once a notice of objection has been filed. Moreover,
in the case at bar, the allegations of fact in the statement of claim do not
disclose any reason why it would have been impossible to deal with the tax
liability issues relating to either the underlying tax assessment against York
or the assessments against the respondents through the regular appeal process.
11 Reviewing
courts should be very cautious in authorizing judicial review in such
circumstances. The integrity and efficacy of the system of tax assessments and
appeals should be preserved. Parliament has set up a complex structure to deal
with a multitude of tax-related claims and this structure relies on an
independent and specialized court, the Tax Court of Canada. Judicial review
should not be used to develop a new form of incidental litigation designed to
circumvent the system of tax appeals established by Parliament and the
jurisdiction of the Tax Court. Judicial review should remain a remedy of last
resort in this context.
[7] Generally speaking,
delay in processing a notice of objection is not a ground for vacating an
assessment or, a fortiori, for deleting interest. The reason for not
granting such relief is not because of a lack of jurisdiction in the Tax Court
of Canada —
if there is a legal basis for vacating an assessment it is within the Court’s
power to do so — but because delay is in most instances not a legal basis for
attacking an assessment because it lies within a taxpayer’s own power to bring
the delay to an end.
[9] In 1989 the
appellant, a nuclear engineer and obviously highly intelligent and well
educated, was induced to invest in a number of partnerships purporting to carry
on SRED. None of the partnerships in which the appellant invested in the years
1989 to 1992 were limited partnerships, although some of the arrangements
whereby the investors could resell their interest for 50% of the purchase price
a year later resulted, according to the Minister, in their becoming limited
partners within the meaning of subsection 96(2.4) of the Act and
therefore specified members as defined in section 248. In some cases where an
investor did not fall within the definition of limited partner they nonetheless
were alleged to be “specified members” because they were not actively involved
in the scientific research activities (referred to in some of the departmental
memoranda as “passive”). This resulted in a reduction or denial of losses
claimed and ITCs. I attach as Schedules A and B charts forming part of Exhibits
R‑5 and R‑6, which give some idea of the magnitude of the
operation. In all, upwards of 10,000 investors were involved, and losses of about
$263,000,000 were claimed for the taxation years 1986 to 1993. If, as the
charts in Schedules A and B indicate, Zuniq corporation was doing scientific
research on behalf of the multitude of partnerships, it would have required
vast facilities and a very large staff. I saw none of this but of course I am
not dealing with the merit of the appeals. It would not however surprise me if
the appellant felt that he had been sold a bill of goods and misled by
unscrupulous promoters into putting money into a tax avoidance scheme that was
less scientific research than smoke and mirrors. He stated that his
understanding was that if a partnership was given a tax shelter number (as they
all were) this amounted to an acceptance by the CRA of the legitimacy of the
investment and gave the investors the right to a deduction of losses claimed
and the ITCs associated with the investment. This of course is not so. A tax
shelter number is a requirement to deducting certain losses and expenses
associated with a tax shelter but it does not guarantee the tax consequences
promised by the promoter. It is a condition precedent, not a good housekeeping
seal of approval.
[10] The following are
some of the relevant dates:
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Date of filing returns
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Date of reassessment
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1989 May 23, 1990
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March 16, 1994
(waiver)
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1990 June 6, 1991
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March 16, 1994
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1991 August 18, 1992
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March 15, 1996
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1992 July 16, 1993
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March 15, 1996
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1993 April 16, 1994
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Assessed as filed
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[11] The assessments for
the 1990, 1991 and 1992 taxation years were confirmed on March 3, 2004 and
the appellant personally filed appeals in this court by attaching to the notice
of appeal form a copy of the text of the notices of appeal for 1989 and 1992
filed by the firm Bonhomme, Castonguay & Associés on October 29, and
30, 1998. The notices of appeal for 1989 and 1992 were in French. The appellant
does not speak French.
[12] By March 1995
the Deputy Minister of National Revenue and other senior officials of the
Department of National Revenue realized that there was a serious problem with
respect to the SRED tax shelter partnerships. The Deputy Minister met on
March 15, 1995 with representatives of an association of taxpayers who had
invested in research and development projects. A summary of the meeting was put
in evidence, as follows:
MARCH 22, 1995
GENERAL PARTNERSHIPS IN
QUEBEC
SR & ED PARTNERSHIPS
MEETING WITH THE DM AND
THE INVESTORS ASSOCIATION
MARCH 15, 1995
SHORT MINUTES – MAIN
POINTS
1) Mr. Jules
Brossard advised that:
a) The
association represents some 800 investors and number is growing.
b) The
problem faced by the investors is not a legal one but a social one: bankruptcy,
marriage break-down etc. According to a survey they made, 50% of the investors
are facing bankruptcy while the other 50% may lose their house or RRSP.
c) The
investors were average employees and many have since lost their employment because
of the recession.
2)
gave his own situation: he owes $9,400 to both levels of Government for 1990 and
is expecting a tax bill of some $14,000. for 1991. He said he cannot meet a tax
debt of $25,000.
3) The
association raised the following points:
a) we
encouraged R&D
b) neither
Finance nor RC explained the requirements for “specified member”
c) refusal
to provide guidelines
d) providing
a tax shelter number
e) received
comfort from enquiries made to DO
f) RC
should have issued a Press Release
g) RC
accepted the claims for many years and only reacted in 1993
i) Investors
were in good faith
j) The
role of Government was to intervene earlier. The Government has not even yet
published the guidelines for the “passive” issue.
k) Certain
investors were not reassessed because it was statute-barred.
l) Investors
do not have the financial means to fight this in Court.
m) They
provided the example of which is now a viable corporation
employing 50 persons. They survived because of the R&D funds.
4) The
DM took strong exception to blaming RC. He mentioned that he will publicly
intervene, if needs be, to rectify the facts. He also mentioned the obligation
of tax specialists. He also added that the Department had no objection if
investors were to take action against the promoters and that we would certainly
do nothing to harm their case.
5) The
association met with Quebec DM and Mr. Brossard said that Quebec favors a settlement.
Mr. Brossard also mentioned prior settlements such as the CDA and the $200,000
transfer to the next generation for capital gain purposes.
6) The
association is looking for a global solution applicable to all investors,
whether or not R&D was done. Mr. Brossard conceded there was a problem if
no R&D was done. For such cases, he then mentioned we could look at
allowing a business loss, i.e., there was reasonable expectation of profit.
7) The
Association will hold a Press Conference soon to advertise a meeting with all
investors in Montreal on April 10, 1995. They will certainly not come down on RC but
rather explain the status of the case. Any RC employee is welcome to attend
“incognito”. They also mentioned Revenu Quebec has stopped all collections.
8) The
DM concluded the meeting as follows:
a) this
is only the start of the exchange of information.
b) RC
will complete its audits and reassessments to protect the Department’s
position.
c) Review
the various shelters and make necessary distinctions between cases depending if,
inter alia, R&D was done.
d) Liaise
with Revenu Quebec.
e) Consider
the Fairness Legislation.
f) Manage
the issue from HQ.
g) We
will then inform of our findings.
J.C. Boucher
[13] The government’s
response was fast, decisive and responsible. On the day of the meeting an
action plan was developed, as outlined in two memoranda, as follows:
MARCH 22, 1995
TASK FORCE
GENERAL PARTNERSHIPS IN
QUEBEC
SR & ED TAX SHELTERS
ACTION PLAN
1) Send
a FAX to remind the field offices to continue to keep all objections and
appeals in abeyance. (Done on March 16, 1995).
2) By
March 24, and in view of up-coming Press Conference by the Investors
Association, prepare Q&A – Media line – Issue Sheet.
3) Prepare
a reply to the Association for Mr. Gravelle’s signature and, once signed,
send an interim letter to the major firms representing taxpayers to advise them
of the status of this issue, i.e.:
a) that
the issue is under active consideration in HQ.
b) to
send any additional representations they may wish to make.
c) we
will get back to them before a final decision is made.
d) in
the meantime, all related objections will continue to be kept in abeyance.
e) the
audit process for the 1991 to 1993 taxation years will continue and, to protect
the Department’s position, reassessments will be issued where appropriate.
f) that
the issue has, and will continue to be, discussed with Revenu Quebec with a view to having
one common approach to the problems.
4) Contact
the affected DO Directors and, during the week of March 27, have a team
from Appeals (J.C. Boucher and S. Huppé), Legislation
(M. Lambert
and A. Marchand), Audit (C. Lamarche and M. Lefebvre) and two
science advisors perform additional work in Montreal in cooperation with the Audit
coordinator (see attached work plan).
5) By
March 31, communicate with the Quebec Security Commission, the Ontario
Security Commission and the Quebec Provincial Police as to any pertinent
information they may have on these tax shelters.
6) Send
an observer from the Montréal DO to the meeting scheduled by the Investors
Association for April 10.
7) By
April 13, submit to the TASK FORCE a position paper, covering, inter alia:
a) the
applicable law and the legislative history
b) on
each of the following components of the applicable law, the strengths and
weaknesses as applicable to these cases:
i) Projects
not eligible:
A) eligibility
v. non-eligibility
B) issue
of “reasonable expectation of profits”
C) quantum
of the loss
ii) Eligible
projects:
A) quantum
of the loss/research
B) at-risk
issue
C) passive
v. active
c) conclusions
8) The
Task Force will consider the next steps, including:
a) meeting
with Revenu Quebec.
b) meeting
with the major representatives.
9) Follow-up
with Finance on any legislative deficiency.
10) Develop
and distribute widely an article on Tax Shelters.
MARCH 22, 1995
Study on
General Partnerships in Québec
Used as SR & ED Tax Shelters
General Work Plan
Purpose: Assess
the evidence to determine the strengths and weaknesses of our position in the
cases of Québec-based General Partnerships used as SR & ED tax shelters
Team:
• To
be conducted jointly by Headquarters Appeals, Legislation, Specialized Audit
Programs and Tax Avoidance
• In
cooperation with the SR & ED Audit coordinator from Montréal Tax Services
Office
• Under
the direction of Appeals
Issues to
be Studied:
A. Eligibility
of Projects
I. Ineligible
SR & ED Projects
1. How
strong are we in our determination that the project is not eligible for
SR & ED purposes?
2. How
strong are we in our determination that there is no reasonable expectation of
profit?
II. Eligible
SR & ED Projects
1. Disallowed
Expenditures
a) Disallowed
Quantum
• nature
of disallowed expenses
• basis
of disallowance
• how
well documented
• problems
as third party is contracted to perform research
b) No
Expectation of Profit
• factors
considered for determination
2. Active
vs Passive Issue
• on
what basis determined
3. At-Risk
Issue
• any
indication by promoters that minimum risk involved
• any
reasonable assurance given to the investors
4. Buy-Back
• any
indication money set aside by the research corporation for that purpose
• repurchase
before the end of the year or the following year
5. Eligible
Salaries for Possible Québec Tax Credit
• revised
salaries that could be eligible for the Québec tax credit
B. Listing
of Taxpayers Involved
I. Ineligible
Projects
• taxation
years involved
• number
and name of partnerships
• number
of partners for each partnership
• amount
of losses claimed by each partnership
• where
reassessed, amount of losses allowed
• buy-back
and percentage for each partnership
II. Eligible
Projects
• taxation
years involved
• number
and name of partnerships
• number
of partners for each partnership
• amount
of losses claimed by each partnership
• for
those reassessed, amount of losses allowed
• buy-back
and percentage for each partnership
C. Analysis
1. From
the evidence gathered, determine if the findings generally apply to all
partnerships or whether major distinctions exist between, for example,
• the
various promoters
• the
various corporations
• the
partnerships
2. Prepare
“sample file” for each distinct situation, with all available evidence
[14] By April 3, 1995, a detailed
memorandum was prepared setting out the key points relating to the tax shelter.
I shall reproduce only the opening paragraphs:
APRIL 3, 1995
GENERAL PARTNERSHIPS IN QUEBEC
SR & ED TAX SHELTERS
BACKGROUND
• Approximately
10,000 investors in the Province
of Quebec purchased interests
in SR & ED general partnerships in 1989 to 1993 taxation years.
• To date, over
6,000 reassessments have been issued and an additional 9,000 may be issued as a
result of audits in progress.
• Eight taxpayers have filed appeals to the
Tax Court of Canada.
• Tax remissions
have been requested on behalf of the investors and two Applications for Class
Action have been filed mainly against the promoters, but also against the
Department.
KEY POINTS
• The Department
has identified certain areas of non‑compliance and, through thorough
audits, is taking the appropriate measures to deal with the situation.
• A member of such
a partnership is entitled to his/her share of the loss and the Investment Tax
Credit (ITC) on qualified expenditures provided he/she was actively engaged in
the activities of the business of the partnership and that the investment risk
was not limited. The investment risk may be limited, for example, by the fact
that an investor has obtained a guarantee that he or she will be able to sell
his or her partnership interest for an amount exceeding the Fair market Value.
• During its
audits, the Department has determined that some projects were not eligible for
the tax incentives, which are designed to encourage R&D in Canada and benefit the Canadian economy, because no research
was conducted. In other cases, the partners were not active in the business or
the investment risk was limited.
• Strong
representations have been received from investors and their representatives.
• Revenue Canada is continuing to review the validity of the tax
shelters to ensure that its reassessments are correct under the law.
• The law must be
applied fairly and equally. If it is found that the provisions of the Income Tax
Act have been incorrectly applied in any case, the situation will be corrected.
Further the fairness provisions of the Income Tax Act which authorize the
Department to waive interest in certain circumstances will be applied where
appropriate.
[15] On April 5, 1995 a
memorandum was prepared for the Honourable David Anderson, Minister of
National Revenue. It read:
MEMORANDUM FOR THE HONOURABLE DAVID ANDERSON
SUBJECT: General
Partnerships in Québec
Used
as SR & ED Tax Shelters_
This is to inform you
of the status of the above cases involving investors in the Province of Québec.
BACKGROUND
• Approximately
10,000 investors in the Province of Québec purchased interests in SR & ED general
partnerships.
• To
date, over 6,000 reassessments have been issued disallowing the investment tax
credits and also disallowing or reducing the losses claimed. These
reassessments are under objection and an additional 9,000 reassessments may be
issued as a result of audits in progress. (Some investors have accepted
the reassessments)
• Eight
taxpayers have filed appeals to the Tax Court of Canada while tax remissions
have been requested on behalf of most of the investors. In addition, two
Applications for Class Action have been filed against the promoters. The
Department and Revenu Québec are also named as co‑defendants for part of
their claim.
• The
Québec Securities Commission has successfully prosecuted some promoters
STATUS
The investors
have formed an Association and I have met with members of the Association, including
their President and Vice-President, along with their representative, on
March 15, 1995. Mrs. Claudette Lévesque, Assistant to
Mr. Jean Pelletier, Chief of Staff of the Prime Minister, also
attended the meeting.
In view of
the number of taxpayers involved and the various representations received, I
have formed a special task force comprised of Assistant Deputy Ministers to
review the situation on a priority basis. In addition, we are working in close
cooperation with Revenu Québec.
I attach a
copy of the Media Line and Questions and Answers that have been prepared in
anticipation of any press coverage. I also attach a copy of a letter that will
be sent shortly to the President of the Association. The Association is
planning a meeting of their members on April 10, 1995 at which time the
letter may be made public.
I will keep
you aware of developments as they occur.
Pierre
Gravelle
[16] By April 13,
1995 the Study Group had prepared a detailed report. The executive summary
reads as follows:
THE REVIEW OF THE
GENERAL PARTNERSHIPS IN
QUEBEC
USED AS SR & ED TAX
SHELTERS
REPORT FROM THE STUDY
GROUP
EXECUTIVE SUMMARY
MANDATE
As a result of a
reassessing project involving some 10,000 taxpayers, the Deputy Minister formed
a Task Force of Assistant Deputy Ministers to review the whole situation. Our
mandate was to assess the strengths and weaknesses of the Department’s position
from a factual and legislative perspective and report accordingly to the Task
Force.
FINDINGS
The partnership’s interests
were all sold (buy-back agreement) within a few months of their purchases for
45% or 50% of the original investment.
No activity was carried
on by the partnerships after the buy-back.
The agreements between
the partnerships and the research corporations use the nomenclature of a
“mandate” and the partnerships claimed the itemized expenses allegedly spent on
their behalf by the research corporations. This led the Department to review,
for most eligible projects, the various expenses which were either allowed in
full or in part.
Most research agreements
are likely contracts for services.
For ineligible projects,
all expenses and related investment tax credits were disallowed.
For eligible projects,
all partners were considered passive members and were thus denied the
investment tax credit.
The at-risk rules were
not invoked.
CONCLUSIONS
1. INELIGIBLE
PROJECTS
The
Department is on good ground to maintain that those projects do not qualify as
SR & ED expenditures and that there was no business carried on by the
partnerships with a reasonable expectation of profit.
2. ELIGIBLE
PROJECTS
In
view of the buy-back, we are on very solid ground to take the position that any
SR & ED loss cannot exceed the “net” amount invested, i.e., the original
investment less the buy-back amount. In addition, any ITC would be only on the
net amount.
3. FAIRNESS
LEGISLATION
The
facts of the various cases come within the policy of the Department for the
cancellation/waiving of interest.
Jean-Charles
Boucher
Leader
of the Study Group
[17] The result of this
was that on May 12, 1995, Mr. R.M. Beith, Assistant Deputy Minister, Appeals
wrote a lengthy memorandum to the Deputy Minister,
Mr. Pierre Gravelle. He discussed all of the issues, including the
strengths and weaknesses of the Department’s position.
[18] On June 30,
1995 a settlement project was prepared and it reads as follows:
GENERAL PARTNERSHIPS IN
QUEBEC
USED AS SR & ED TAX
SHELTERS
SETTLEMENT PROJECT
• Revenue
Canada has now completed a
GENERAL REVIEW of these tax shelters and is proposing the following settlement
to the 6,300 taxpayers (MAIN GROUP) who invested during the 1989 to 1993
taxation years and claimed an investment tax credit (“ITC”), a partnership loss
and disposed of their partnership interest in the year following the year of
purchase.
• Based
on the results of the review, Revenue Canada has concluded that the investors are not entitled
to any ITC or partnership loss because their risk was limited. This position is
in agreement with the legislator’s intention when the concept of «specified
member» was introduced, e.g., to limit the use of partnerships as SR & ED
tax shelters.
• Revenue
Canada is prepared to allow, to the investors in the MAIN GROUP, an income loss
on the disposal of the partnership interest and, for an investor who was not a
promoter, to cancel the interest provided an investor agrees he/she is not
entitled to any ITC and partnership loss and waive his/her right of objection
and appeals in this respect. Attached is a copy of the settlement agreement.
• Any
investor in the MAIN GROUP who believes to be entitled to an ITC and
partnership loss on the grounds that his/her situation is substantially
different from the general findings of the review conducted by Revenue Canada
can have his/her case evaluated on its own merits. In such a situation, the
correctness of the reassessment and any cancellation of interest will be
governed by the particular facts of that case and the applicable law.
• The
second group (SECOND GROUP) involves 1,700 taxpayers who invested during the
1992 to 1994 taxation years, claimed a partnership loss but not an ITC and did
not dispose of their partnership interest in the year following the year of
purchase. Investors in this SECOND GROUP will have their federal reassessments
kept in abeyance pending the results of appeals filed with the Quebec Court
with respect to assessments issued by Revenu Québec.
• Revenu
Québec agrees in substance to the settlement project explained above.
Furthermore, upon receipt of copies of the federal assessments implementing the
settlement, Revenu Québec will offer to the particular taxpayers from the MAIN
GROUP the possibility to conclude a similar settlement.
• For
any request for information from Revenue Canada, please call directly or collect
to the Shawinigan-South Taxation Centre at 819‑536‑6489.
GENERAL PARTNERSHIPS IN QUEBEC
USED AS SR & ED TAX SHELTERS
DETAILS OF THE SETTLEMENT PROJECT
• All
investment tax credits are disallowed.
• All business
losses are disallowed.
• The
amount for the provincial scientific research tax credit previously included in
income is removed from income.
• The
capital gain or loss on disposal of the partnership interest is cancelled.
• A
business loss in the year of the buy-back, that is the year immediately
following the year of the investment, equal to the amount invested less the
buy-back is allowed.
• Thus,
the monetary loss for a $10,000 investment with a 50% buy‑back would be
$2,700:
Investment $10,000
Less:
Buy-back $5,000
Tax savings
(46% of
$5,000) 2,300 7,300
Monetary
loss $ 2,700
• The
net interest (the debit interest less the credit interest) from May 1st,
1990 to October 31, 1995 on the income tax payable resulting from the
adjustments mentioned above are cancelled.
• No
interest will be cancelled for the promoters who have invested in these tax
shelters.
• The
agreement letters should be returned to Revenue Canada no later than September 30,
1995.
[19] On July 5, 1995,
Mr. Jean-Charles Boucher wrote to Me Sylvain Castonguay,
the lawyer who was acting for the appellant and a large number of other persons
who invested in the SRED tax shelters and attached the Settlement Project in
French (Projet de règlement). A further letter was sent to Me Castonguay
on July 7, 1995. Those letters, without the attachments, were as follows:
Monsieur Sylvain
Castonguay
Procom Fiscalité Conseil
3030, boulevard Le Carrefour
Bureau 1101
Laval (Québec)
H7T 2P5
Le 5 juillet 1995
Monsieur,
Objet: Oppositions des contribuables
ayant investi dans
des sociétés
de recherche utilisées comme abris fiscaux
La présente fait suite
à notre lettre du 7 avril 1995 ayant trait aux avis d’opposition mentionnés en
rubrique.
Le Ministère a
maintenant terminé une étude générale de ces sociétés utilisées comme
abris fiscaux. Le résultat de cette étude et la position du Ministère sont
exposés au document ci-joint en date du 30 juin 1995.
Si vous désirez des
renseignements additionnels concernant la position générale du Ministère, vous
pouvez communiquer avec Jean‑Charles Boucher au (613) 957-2185
ou Serge Huppé au (613) 957-4077. Pour toute demande concernant un cas
spécifique, vous ou vos clients peuvent communiquer directement ou à frais
virés au Centre fiscal de Shawinigan-Sud au (819) 536‑6489.
Veuillez agréer,
Monsieur, l’expression de nos sentiments distingués.
Jean-Charles Boucher
Chef de section
Direction générale des appels
Administration centrale.
Monsieur Sylvain Castonguay
Procom Fiscalité Conseil
3030, boulevard Le Carrefour
Bureau 1101
Laval (Québec)
H7T 2P5
Le 7 juillet 1995
Monsieur,
Objet: Sociétés en nom
collectif au Québec
utilisées
comme abris fiscaux de RS & DE
La présente fait
suite à notre lettre du 5 juillet 1995 dans laquelle je vous exposais la
position du Ministère à l’égard des abris fiscaux mentionnés en titre.
Au nom du Ministère,
je désire confirmer que la solution proposée vaut pour tous les investisseurs
et tous les regroupements d’investisseurs. Également, et contrairement à ce qui
a pu être rapporté, il n’y a aucune négociation en cours avec quelque
représentant ou regroupement que ce soit et le Ministère n’entend pas entamer
de telles négociations. Toute rencontre qui peut avoir lieu a seulement pour
objet d’expliquer la position du Ministère dans ce dossier.
Je réitère donc que
la solution proposée vaut pour tous les investisseurs et qu’elle est juste et
équitable et conforme au droit applicable en la matière.
Veuillez agréer,
Monsieur, l’expression de nos sentiments les meilleurs.
Jean-Charles Boucher
Chef de section
Direction générale des appels
Administration centrale.
[20] The appellant
testified that he (and, presumably, the other investors for whom Me Castonguay
acted) was advised by Me Castonguay to reject the Department’s
offer of settlement. He also testified that he was told that the investors
could do better in the Federal Court. The advice was wrong on all counts. On
November 23, 1995, letters were sent to all investors who had put money
into the SRED projects, whether they had objected or not and whether they were
represented. The letter read as follows:
November 23, 1995
Subject: Investment
in Partnerships Used As
Scientific
Research Tax Shelters____
Dear Sir or Madam,
We are
writing to you as an investor in a partnership used as scientific research tax
shelter.
Following a
joint review, Revenue Canada and Revenue Quebec announced their positions on June 30, 1995 when they
presented a settlement proposal. Attached are the documents relating to this
settlement offer entitled “Settlement Project” and “Details of the Settlement
Project”.
Revenue Canada undertook to be the
first to communicate the settlement to all investors who were not represented
and to the investors who were represented, allowing them until
September 30, 1995 to return the letter of agreement. This was done with
respect to all investors who had filed a Notice of Objection. We are proposing
the same settlement to those investors who did not file an objection to the
reassessment and to investors who have not yet been reassessed for the years
1992 and 1993.
The vast
majority of investors accepted the settlement based on the virtual 100%
recommendation of it by the tax community. Out of a concern for fairness and to
ensure that all investors have had an opportunity to consider this settlement,
we have agreed to write to all investors who have not sent in their letter of
agreement.
Our records
indicate that you invested in at least one partnership to which the settlement
applies. The enclosed documents include two different letters of agreement.
Letter A is intended for investors who were not promoters of these tax
shelters, and Letter B is intended for promoters who invested in these tax
shelters. If you wish to take advantage of this settlement, please send the
appropriate letter of agreement to the Chief of Appeals of the Shawinigan‑Sud
Tax Centre before December 30, 1995.
To enable
you to make an informed decision, we are attaching a series of questions and
answers. You will also find enclosed a table showing examples of the tax
consequences, including interest, for the 1989 through 1993 taxation years
covering situations in which the investment tax credits and partnership losses
were disallowed in their entirety, and a table for taxation years 1989 and 1990
covering situations where the investment tax credits were disallowed but the
partnership losses were fully allowed. As you will see, the settlement offer
reduces your tax liability by 21% to 63%, depending on the taxation year and
your particular circumstances.
This
settlement is a global solution, and it must refer to all partnerships used as
tax shelters in which you invested. The only exception involves partnerships
for which the investment tax credits and partnership losses were never adjusted
and the taxation year is statute-barred.
The
settlement is the best possible, given the circumstances. It is fair and
equitable and it represents the most favourable interpretation possible of the
applicable legislation. It includes the most generous interest relief possible
under the circumstances. In effect, the Department cancels the interest, not
only up to October 31, 1995, as provided in the settlement, but up to the date
reassessments will be issued to give effect to the settlement, provided you are
not a promoter. Furthermore, we will agree to a reasonable payment arrangement
to pay the tax liability, including waiving of future interest if your
financial situation warrants it.
If you do
not return your letter of agreement before December 30, 1995, we will
assume that you have refused the settlement. The Department will then proceed
with a review of your file, which will be processed based on the applicable
legislation.
If you
require additional information, please do not hesitate to contact the
Shawinigan-Sud Tax Centre directly at (819) 536-6489 (collect calls accepted).
You may wish, where applicable, to consult your financial consultant or tax
specialist.
Yours truly,
Jean-Charles Boucher
Appeals Branch
Headquarters
[21] Although the
documents quoted above are lengthy, I have reproduced them to demonstrate the
thoroughness, speed and fairness with which Revenue Canada responded to the
problem. There was attached the “Settlement Project” which is set out above as
well as a “Fact Sheet” and other detailed information. The offer was obviously
not accepted by the appellant and his lawyers made no attempt to bring the
matter to a hearing in Court, apparently because they were waiting for other
cases to be heard.
[22] On July 26, 1996,
Revenue Canada again wrote to the
appellant by registered mail offering to perform an in‑depth review of
his particular situation. Whether with the advice of his lawyer, or without it,
Mr. Moledina did not take advantage of this offer. Indeed, he appears not
to have picked up some of his registered mail. The letter read as follows:
Subject: Investments
in Partnerships Used as
Scientific
Research Tax Shelters
Dear Sir:
This
is further to our letter dated November 23, 1995.
We
were then advising you of a settlement offer by virtue of which your tax
liability as of June 28, 1996, which amounted to $ 12 912.12
with respect to the partnerships subject to the settlement, would have been
reduced to $ 6 151.97, a reduction of $ 6 760.15.
You
will recall that the Department had concluded, after a general review, that the
investors were not entitled to either an investment tax credit or partnership
losses. However, and in order to allow them to conclude this matter, Revenu Canada offered the global
settlement, including the cancellation of interest. This measure conditional on
the acceptance of the settlement offer. In effect, based on the facts revealed
by the general review, and outside of the acceptance of the settlement, the
interest will not be cancelled.
With
respect to investors who believe that their situation is substantially
different from the results of the general review, the Department has offered
them, instead of accepting the settlement proposal, to perform an in‑depth
review and to process their file in accordance with the particular facts of
their case. If you wish that such a specific review be done, we would ask you
first to complete the attached questionnaire for each partnership for which you
have filed objections and to return same to the following address, using the
enclosed pre-addressed envelope, if you so desire.
Chief
of Appeals
Revenue
Canada
Tax
Centre
Shawinigan‑Sud
G9N
7S6
The
information requested deals with your participation in the activities of the
business of the partnership and the question of whether or not your investment
risk was limited. This information will permit us to appreciate, if that is the
case, the distinction between the particular facts of your case and those
revealed by the general review. We will then contact you or, if that is the
case, your representative, with respect to the results of this specific review
and the further process of your file.
In
order to start the review as soon as possible, we ask that you return the duly
completed questionnaires by September 6, 1996, at the latest. If the
questionnaires are not returned by that date, and unless you have in the
meantime accepted the settlement offer cancelling interest up to
December 29, 1995 by sending your agreement letter to the above mentioned
address, we will conclude that you do not wish to submit the requested
information. If such is the case, the Department will dispose of your notices
of objection on the basis that your situation is not different from the facts
revealed by the general review with the results that you are not entitled to
either the investment tax credit or the partnership losses.
If you
require additional information about the Department’s position, please do not
hesitate to contact the Shawinigan-Sud Tax Centre at 536‑0693, Extension
6572. For long distance calls, please dial 1‑800‑511‑3774,
Extension 6572.
Yours
sincerely,
Jean‑Charles
Boucher
Appeals
Branch
Headquarters
[23] On October 24, 2002,
Me Bonhomme, who appears to have been associated at some
point with Me Castonguay in the firm Bonhomme, Castonguay &
Associés ceased to act for the appellant in respect of the appeals for 1989 and
1992.
[24] The matter
languished. On March 3, 2004, the Canada Customs and Revenue Agency
(“CCRA”) confirmed the assessments for the taxation years 1990, 1991 and 1993.
On May 21, 2004, the appellant filed notices of appeal to this court
by attaching parts of the notices of appeal in French for 1989 and 1992 that
had previously been filed by his lawyer.
[25] On January 23, 2004
the Registry of this Court wrote to the appellant setting a status hearing for
the appeal for 1989 for March 4, 2004 and on April 22, 2004 a status
hearing for the appeal for 1992 was set for June 2, 2004. In one case the
appellant did not appear, having failed to pick up his mail. Judgment was
rendered against him and then on application was set aside.
[26] In June of 2004 the
appellant retained a lawyer, Mr. Khalil and a status hearing was heard by
conference call and the Honourable Alban Garon, C.J. granted
Mr. Khalil’s request to hold the appellant’s appeal along with a large
number of the SR&D files in abeyance pending the disposition of some other
cases in the Tax Court.
[27] On
June 8, 2005, the Registry of the Court wrote to Mr. Khalil with
respect to his request to adjourn Mr. Moledina’s cases to permit him to
consider Chief Justice Garon’s decision in McKeown v. The Queen, 2001
DTC 511, which had been rendered in March 2001. He was directed to
advise the Court by July 15, 2005 whether he wished to proceed with those
appeals.
[28] On June 28,
2005, the CCRA wrote to Mr. Moledina stating that it could not process his
request under the Fairness Provisions since his case was still before the Tax
Court of Canada. I presume that with this judgment this obstacle will be
removed.
[29] On July 13,
2005, Mr. Khalil wrote to the Court asking that the appeals of his clients
(which would include Mr. Moledina’s appeals) be held in abeyance pending
the disposition in the Federal Court in file no. T-2096-04 (the Angell case).
On August 11, 2005, the Registry of the Court replied to Mr. Khalil
denying his request. The decision of Gauthier J. of the Federal Court in Angell,
supra, was rendered on September 14, 2006.
[30] On January 18, 2007,
Mr. Gonthier of Mr. Khalil’s firm Marchand Melançon Forget LLP, stated
that “the undersigned counsel” ceased to act for the appellant. The cases were
set down for hearing on June 11, 2007 in Toronto, roughly 14 years after the
notices of objection were filed. They were heard by me.
[31] This delay is
unacceptable. Nonetheless, I do not think I can grant the appellant the relief
he seeks. Quite apart from the question of jurisdiction, I have to ask who is
responsible for the delay. Certainly no fault can be attributed to the
Department of National Revenue. Its response to the problem was swift, decisive
and responsible. It made a fair and generous offer to settle and even extended the
time for acceptance. I can find no basis for criticizing the government’s
behaviour and even if delay were a legal basis for granting the relief sought
by the appellant, I can see no grounds for laying that delay at the feet of the
government. The Minister delayed confirmation of the assessments in an attempt
to resolve the thousands of objections filed in connection with the SRED tax
shelters. It was open to any taxpayer to institute an appeal in this court
90 days after filing a notice of objection. Once a case is in this court
the practice of the Registry is to accommodate any appellant who wishes to move
a case at flank speed. If the parties want a trial date they can have one
within a month. I feel considerable sympathy for the appellant. He acted in
good faith and relied upon the advice of his lawyers. His trust was misplaced.
[32] The appeals are
dismissed. There will be no order for costs.
[33] The issuance of the
judgment in this case was delayed because under the Official Languages Act
if any portion of the proceedings in a case is in both official languages, the
reasons and judgment must be issued simultaneously in both languages.
Signed at Ottawa,
Canada, this 3rd
of August 2007.
Bowman, C.J.
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