Citation: 2008TCC268
Date: 20080502
Docket: 2004-1568(IT)G
BETWEEN:
JOHN STORWICK, SR.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1] The Appellant is an
individual who resides in the city of Calgary, Alberta.
[2] The Appellant’s
appeal and the appeals filed by Messrs. Madell, Falkenberg, and Caputo were
heard on common evidence.
[3] The four Appellants
were “test cases” for approximately 460 investors.
[4] The four Appellants were proceeding
as Representative Appeals on behalf of the other investors who have filed
Notices of Objection against the Reassessments issued by the Minister of
National Revenue (the “Minister”).
[5] In 1997 the
Appellant purchased 10 limited partnership units in Stellar Dynamic Limited
Partnership (the “Partnership”). The subscription price paid by the Appellant
was $10,850 per limited partnership unit.
[6] Manhattan Ventures
Ltd. (“Manhattan”), a corporation
resident in Canada, was the General Partner of the Partnership.
[7] The Revised Notice
of Appeal filed by the Appellant maintains that the business of the Partnership
was to purchase and actively promote the Quest Prestige Card in its acquired
territories and to purchase Class “A” common shares in Imaging Dynamic
Corporation (“IDC”), a corporation publicly traded on the Alberta Stock
Exchange.
[8] In 1997 Manhattan entered into a joint
venture agreement with IDC, the object of which was to develop the IDC Digital
Radiography System Engineering Prototype and share in gross revenues and
expenses. Manhattan contributed $320,000 to the joint venture entitling it to
3.2% of the future cashflow.
[9] In 1998 Manhattan terminated the joint
venture by exchanging its interest for 640,000 Class “A” shares of IDC. The
full $320,000 investment was expensed and Manhattan allocated the shares and the
resulting loss to the partners of the Partnership.
[10] The Quest Prestige Card was a
customer loyalty card that entitled the holder to discounts at hotels,
restaurants and other commercial establishments.
[11] Rockhaven International Inc. (“Rockhaven”) was a
company incorporated in the British Virgin Islands. Rockhaven owned the
copyright to the Quest Prestige Card.
[12] Stellar Financial Services Inc. (“Stellar”) was a
corporation resident in Canada.
[13] Stellar and Rockhaven entered into a Distribution
Agreement in 1996. Under the Distribution Agreement Stellar was required to
identify territories in Canada and the United States of America in which the Quest Prestige Cards
could be sold. Stellar was also to receive a commission of $1,750 for each
territory sold to investors, such as the Partnership.
[14] In 1997 and 1998 the
Partnership entered into 56 Licence Agreements with Rockhaven. Pursuant to
these agreements, Rockhaven granted the Partnership the exclusive right to
publish, reproduce, market and distribute the Quest Prestige Card within the
territories specified in the agreements.
[15] Pursuant to the Licence
Agreements, the Partnership agreed to pay a licence fee of $350 plus Advanced Royalties
of $20,000 for each territory.
[16] The Partnership also
agreed to pay a royalty amount of $5 for each Quest Prestige Card sold, distributed, marketed,
published or reproduced during the 20‑year term, after the sale of the
first 4,000 cards or the first year – whichever came first.
[17] The Partnership also
entered into separate Operating Agreements with Crusader Marketing Corporation Inc.
(“Crusader”). The agreements provided that Crusader was retained to market and
distribute the Quest Prestige Card in the territories acquired by the Partnership.
[18] Crusader agreed to provide the Partnership with
fifty-six cash performance bonds in the amount of $15,000 per territory. It was
specified that $3 would be released to Crusader upon the sale of a Quest
Prestige Card. At the expiration of the agreement the balance of the bond was
to be forfeited to the Partnership as damages for lack of performance.
[19] Based on the evidence presented at trial the Appellant
could not confirm whether the performance bonds were actually established.
[20] When the Appellant
filed his income tax returns for the 1997 and 1998 taxation years he deducted
the following amounts:
|
|
|
1997
|
|
1998
|
|
Limited Partnership Losses
|
|
$80,750
|
|
$55,677
|
[21] By Notices of
Reassessment dated December 10, 2001, the amounts referred to in paragraph [20]
above were disallowed by the Minister.
[22] After the Notices of
Reassessment were confirmed by the Minister the Appellant filed Notices of
Appeal to the Tax Court of Canada.
B. Issues
[23] (a) Were the investments made
by the Partnership to become a Quest Prestige Card distributor, a source of
income for the purposes of section 9 of the Income Tax Act (the “Act”)?
If not, no expenses related to those investments are deductible.
(b) In the alternative, are the
Advance Royalties “tax shelter investments” as defined in section 143.2 of the Act?
If so, subsection 143.2(6) prohibits the deduction of the Advance Royalties in
the years under appeal.
(c) In the further alternative, can
any portion of the Partnership’s Advance Royalty expenses reasonably be
regarded as having been made or incurred in respect of a period after the end
of the years under appeal? If so, subsection 18(9) of the Act prohibits
the deduction of the Advance Royalties in the years under appeal.
(d) In the further alternative,
must the Advance Royalty expenses be matched to revenue from sales of Quest Prestige
Cards when determining profit under section 9 of the Act? If so, no
amounts in respect of the Advance Royalties are deductible by the Partnership
in the years under appeal.
(e) In the further alternative,
was any portion of the unpaid $15,000 balance of Advance Royalties, due under
each Licence Agreement, a contingent liability in the years under appeal? If
so, paragraph 18(1)(e) of the Act prohibits the deduction of the
contingent amounts.
(f) In the further alternative,
were the Licence Fees capital expenses? If so, paragraph 18(1)(b) prohibits
their deduction as a current expense.
(g) Was the Partnership, and in
return the Appellant, entitled to any deduction in respect of the IDC joint
venture in determining its section 96 partnership losses?
C. Analysis and Decision
[24] As noted above, the Partnership
agreed to pay Rockhaven $20,350 for each territory covered by the Licence
Agreement. This payment consisted of a $20,000 Advance Royalty payment and a
Licence Fee in the amount of $350.
[25] The evidence
presented to the Court indicated the following:
(A) The
Partnership claimed a deduction for the full amount of $20,350 per territory.
However, the Appellant admitted that the Partnership never paid nor was he ever
asked to pay the Advance Royalty of $15,000 per territory. In summary, the Partnership’s
total cash outlay, per territory, was limited to $5,350.
(B) The
Appellant admitted that at the time of the Partnership’s initial investment
there was no activity by Crusader to sell Quest Prestige Cards in the territories
acquired by the Partnership.
(C) Crusader
generated no revenue for the Partnership from the sale of the Quest Prestige Cards in 1997 and 1998.
(D) The
Appellant agreed that he did not conduct any investigation (either directly or
indirectly) concerning the various corporate entities behind the Quest Prestige
Card, before he made his investment.
(E) The
Appellant agreed that he did not monitor the marketing activities of Crusader.
(F) The
Appellant claimed Partnership losses on the basis that the Partnership was
engaged in a joint venture agreement with IDC.
[26] In summary, neither
the Appellant nor any of the other three Appellants could point to any personal
activity, on their part or the part of the Partnership, of marketing the Quest Prestige
Card.
[27] I will now deal with
the specific issues under appeal.
I. Source of
Income
[28] Counsel for the
Respondent maintained that neither the Partnership nor the Appellant was engaged
in a commercial activity when investments were made in the Quest Prestige Card
promotion. Counsel for the Respondent also maintained that the Partnership had no
source of business or property income from which to deduct the $20,000 Advance
Royalty and the $350 Licence Fee.
[29] Counsel for the Appellant and Counsel for the
Respondent each referred to the decision of the Supreme Court of Canada in Stewart
v. Canada, 2002 SCC 46 and Walls v. Canada, 2002 SCC 47.
In Stewart the Supreme Court stated the following:
50 It is clear that in order to apply s. 9, the
taxpayer must first determine whether he or she has a source of either business
or property income. As has been pointed out, a commercial activity which falls
short of being a business, may nevertheless be a source of property income. As
well, it is clear that some taxpayer endeavours are neither businesses, nor
sources of property income, but are mere personal activities. As such, the
following two-stage approach with respect to the source question can be
employed:
(i) Is the activity of the taxpayer undertaken in
pursuit of profit, or is it a personal endeavour?
(ii) If it is not a personal endeavour, is the
source of the income a business or property?
The first stage of the test assesses the general
question of whether or not a source of income exists; the second stage categorizes the source as either
business or property.
51 Equating “source of income” with an activity
undertaken “in pursuit of profit” accords with the traditional common law
definition of “business”, i.e., “anything which occupies the time and attention
and labour of a man for the purpose of profit”: Smith, supra, at
p. 258; Terminal Dock, supra. As well, business income
is generally distinguished from property income on the basis that a business
requires an additional level of taxpayer activity: see Krishna, supra,
at p. 240. As such, it is logical to conclude that an activity
undertaken in pursuit of profit, regardless of the level of taxpayer activity,
will be either a business or property source of income.
52 The purpose of this first stage of the test is
simply to distinguish between commercial and personal activities, and, as
discussed above, it has been pointed out that this may well have been the
original intention of Dickson J.'s reference to "reasonable expectation of
profit" in Moldowan. Viewed in this light, the criteria listed by
Dickson J. are an attempt to provide an objective list of factors for
determining whether the activity in question is of a commercial or personal
nature. These factors are what Bowman J.T.C.C. has referred to as
"indicia of commerciality" or "badges of trade": Nichol,
supra, at p. 1218. Thus, where the nature of a taxpayer's venture contains
elements which suggest that it could be considered a hobby or other personal
pursuit, but the venture is undertaken in a sufficiently commercial manner, the
venture will be considered a source of income for the purposes of the Act.
53 We emphasize that this "pursuit of
profit" source test will only require analysis in situations where there
is some personal or hobby element to the activity in question. With
respect, in our view, courts have erred in the past in applying the REOP test
to activities, such as law practices and restaurants, where there exists no
such personal element: see, for example, Landry, supra, Sirois, supra, Engler
v. R. (1994), 94 D.T.C. 6280 (Fed. T.D.). Where the nature of an activity
is clearly commercial, there is no need to analyze the taxpayer's business
decisions. Such endeavours necessarily involve the pursuit of profit. As such,
a source of income by definition exists, and there is no need to take the
inquiry any further.
(Emphasis
added)
54 It should also be
noted that the source of income assessment is not a purely subjective
inquiry. Although in order for an activity to be classified as commercial
in nature, the taxpayer must have the subjective intention to profit, in
addition, as stated in Moldowan, this determination should be made by
looking at a variety of objective factors. Thus, in expanded form, the
first stage of the above test can be restated as follows: “Does the taxpayer
intend to carry on an activity for profit and is there evidence to support that
intention?” This requires the taxpayer to establish that his or her
predominant intention is to make a profit from the activity and that the
activity has been carried out in accordance with objective standards of
businesslike behaviour.
55 The objective
factors listed by Dickson J. in Moldowan, at p. 486, were: (1) the
profit and loss experience in past years; (2) the taxpayer’s training; (3) the
taxpayer’s intended course of action; and (4) the capability of the venture to
show a profit. As we conclude below, it is not necessary for the purposes
of this appeal to expand on this list of factors. As such, we decline to
do so; however, we would reiterate Dickson J.’s caution that this list is not
intended to be exhaustive, and that the factors will differ with the nature and
extent of the undertaking. We would also emphasize that although the
reasonable expectation of profit is a factor to be considered at this stage, it
is not the only factor, nor is it conclusive. The overall assessment to
be made is whether or not the taxpayer is carrying on the activity in a
commercial manner. However, this assessment should not be used to
second-guess the business judgment of the taxpayer. It is the commercial
nature of the taxpayer’s activity which must be evaluated, not his or her
business acumen.
56 In
addition to restricting the source test to activities which contain a personal
element, the activity which the taxpayer claims constitutes a source of income
must be distinguished from particular deductions that the taxpayer associates
with that source. An attempt by the taxpayer to deduct what is
essentially a personal expense does not influence the characterization of the
source to which that deduction relates. This analytical separation is
mandated by the structure of the Act. While, as discussed above, s. 9 is
the provision of the Act where the basic distinction is drawn between personal
and commercial activity, and then, within the commercial sphere, between
business and property sources, the characterization of deductions occurs
elsewhere. In particular, s. 18(1)(a) requires that deductions be
attributed to a particular business or property source, and s. 18(1)(h)
specifically disallows the deduction of personal or living expenses of the
taxpayer:
18. (1) In computing the income of a taxpayer from a
business or property no deduction shall be made in respect of
(a) an outlay or expense
except to the extent that it was made or incurred by the taxpayer for the
purpose of gaining or producing income from the business or property;
...
(h) personal or living
expenses of the taxpayer ....
57 It is clear from these provisions that the deductibility of
expenses presupposes the existence of a source of income, and thus should not
be confused with the preliminary source inquiry. If the deductibility of a
particular expense is in question, then it is not the existence of a source of
income which ought to be questioned, but the relationship between that expense
and the source to which it is purported to relate. The fact that an expense is
found to be a personal or living expense does not affect the characterization
of the source of income to which the taxpayer attempts to allocate the expense,
it simply means that the expense cannot be attributed to the source of income
in question. As well, if, in the circumstances, the expense is unreasonable in
relation to the source of income, then s. 67 of the Act provides a mechanism to
reduce or eliminate the amount of the expense. Again, however, excessive or
unreasonable expenses have no bearing on the characterization of a particular
activity as a source of income.
…
60 In summary, the issue of whether or not a taxpayer has a source of
income is to be determined by looking at the commerciality of the activity in
question. Where the activity contains no personal element and is clearly
commercial, no further inquiry is necessary. Where the activity could be
classified as a personal pursuit, then it must be determined whether or not the
activity is being carried on in a sufficiently commercial manner to constitute
a source of income. However, to deny the deduction of losses on the
simple ground that the losses signify that no business (or property) source
exists is contrary to the words and scheme of the Act. Whether or not a business
exists is a separate question from the deductibility of expenses.
As suggested by the appellant, to disallow deductions based on a reasonable
expectation of profit analysis would amount to a case law stop-loss rule which
would be contrary to established principles of interpretation, mentioned above,
which are applicable to the Act. As well, unlike many statutory stop-loss
rules, once deductions are disallowed under the REOP test, the taxpayer cannot
carry forward such losses to apply to future income in the event the activity
becomes profitable. As stated by Bowman J.T.C.C. in Bélec, supra,
at p. 123: “It would be ... unacceptable to permit the Minister [to
say] to the taxpayer ‘The fact that you lost money ... proves that you did not
have a reasonable expectation of profit, but as soon as you earn some money, it
proves that you now have such an expectation.’”
[30] I believe that the approach outlined by the Supreme
Court in Stewart may be summarized as follows:
(a)
Firstly, the
Court must determine if the taxpayer has a source of income from a business for
the purpose of section 9 of the Act. The ultimate objective of this part
of the test is to distinguish between commercial and personal activities
(paragraph 50), in accordance with the methodology prescribed by the Supreme
Court, especially at paragraphs 52-56, and 60.
(b)
Secondly,
having found a source of income, a Court must determine if the expenses claimed
by the taxpayer may be deducted pursuant to subsection 18(1) from the income
earned from the business. If they can, the expenses will be allowed, but only
to the extent that they are “reasonable” as required under section 67 (see paragraph
57 of Stewart). The Supreme Court emphasized (at paragraph 60):
Whether or not a business exists is a separate question
from the deductibility of expenses.
[31] If we apply the test as outlined in Stewart to
the facts identified above, the following points should be recognized:
1.
The Reasonable
Expectation of Profit Test (“REOP”) has been rejected by the Supreme Court as a
test to determine whether a particular activity is a source of income.
2.
Lower Courts
are invited to employ the two-stage approach as outlined in paragraph 50 of Stewart.
In instances where the activities of the parties are not “clearly commercial”,
as stated in paragraph 53 of Stewart, lower Courts are required to
consider whether “the activity” has been carried out in accordance with objective
standards of business-like behaviour (see paragraph 54 of Stewart).
Lower Courts should decide whether “the taxpayer is carrying on the activity
in a commercial manner” (paragraph 55 of Stewart).
[32] Based on the statements made in
Stewart and the fact that the nature of the Appellant’s endeavours were
not “clearly commercial”, I must consider whether the “activity” under review
meets the tests as outlined above.
Objective standards of business-like behaviour:
I have carefully analyzed all of
the evidence and the following points should be noted:
(a)
None of the
four Appellants made any profit from the purchase of a licence to market the
Quest Prestige Cards in a specified territory or from the purchase of a share
in territories in Texas through Stellar Dynamic Limited Partnership. (Note: Only the Appellant
and Mr. Madell were involved in the Partnership.)
(b)
Furthermore, it
appears that there was no chance that any of the Appellants would ever realize
a profit from the sale of Quest Prestige Cards because they were each required
to provide Rockhaven with the entire $5 per card that was received from
Crusader, upon a sale.
(c)
None of the
Appellants provided any evidence of experience in marketing a product in a
definable territory.
(d)
None of the
Appellants gave evidence of any intended course of action to produce a profit
from selling Quest Prestige Cards in the specified territories.
(e)
Based on the
evidence provided, I have concluded that the sale of the Quest Prestige Card
was incapable of ever producing a profit because Crusader did not appear to
have a source of funding to carry on a sales campaign. Crusader also had no
confirmed source of compensation for their services and appeared to be
controlled by related persons.
(f)
In his
argument, Counsel for the Respondent said that the Quest Prestige Card
promotion was not a business opportunity offered to the Appellant, rather it
was a tax refund scam perpetrated on these individuals (underlining
added).
[33] Counsel for the Respondent said at page 28 of his
written submissions:
… This is not a case of a business that suffered
losses because it was ill conceived or poorly managed, and the tax authorities
are second guessing the business acumen of a taxpayer. This is a case where, in
fact, there was no business. There were no business expenses. There is no
factual foundation for any of the deductions claimed by the appellants …
Overview: It appears that the Appellants were duped into thinking that
Crusader would market the Quest Card for them. The Appellants’ belief that they
had invested in a business opportunity does not make the Quest Card promotion a
commercial activity. Through their evidence, and the absence of any evidence
from the promoters, it is apparent that the Appellants were victims of a scam.
Regardless, a deduction cannot be allowed to the Appellants in the absence of
the pursuit of profit in a legitimate business activity. “Put simply, other
Canadian taxpayers should not have to bear the financial burden which arises
from unfortunate circumstances”.
[34] In my opinion, the activity engaged in by the four
Appellants of selling the Quest Prestige Card and the activity of the
Partnership do not meet the test of objective standards of business-like
behaviour as referred to in Stewart for the reasons outlined above.
[35] In further support of his argument, Counsel for the
Respondent referred to various Court decisions which involved taxpayers who had
invested in numerous promotions made by Henry N. Thill.
[36] Counsel for the Respondent said that the structure used
by Mr. Allen and the other promoters of the Quest Prestige Card was virtually
identical to the structure that was used by Henry N. Thill in numerous
promotions.
[37] One of the main “Henry N. Thill” type cases cited by Counsel
for the Respondent was Maloney v. The Queen, 1989 CTC 213. In that case,
Mr. Justice Joyal of the Federal Court held that the true intent of
Mr. Maloney and the other Appellants was not to pursue a profitable business
opportunity, but rather to avail themselves of the attractive tax deduction the
scheme would provide to them.
[38] Mr. Maloney appealed the decision of the Federal Court
to the Federal Court of Appeal (see Maloney v. The Queen, 92 DTC 6570).
[39] In dismissing the appeal, Justice Hugessen said:
While it is trite law that a taxpayer may so arrange
his business as to attract the least possible tax (see Duke of Westminster’s
case, [1936] A.C. 1), it is equally clear in our view that the
reduction of his own tax cannot by itself be a taxpayer’s business for the
purpose of the Income Tax Act … To put the matter another way,
for an activity to qualify as a “business” the expenses of which are deductible
under paragraph 18(1)(a) it must not only be one engaged in by the taxpayer
with a reasonable expectation of profit, but that profit must be
anticipated to flow from the activity itself rather than exclusively from the
provisions of the taxing statute.
(Emphasis added)
[40] Various decisions of the Tax Court followed the
decision of Maloney. I refer to the following cases involving “Henry N.
Thill” promotions:
(a) Bendall v. The Queen, 96
DTC 1626;
(b) La Liberté v. The Queen,
96 DTC 1483;
(c) Schatroph v.
R., [1997] 3 C.T.C. 2148;
(d) Burton v. The Queen, 98 DTC 2064;
(e) Lorenz v. Canada, [1997] 1 C.T.C. 2484; and
(f) McPherson v. Canada, 2006 TCC 648.
[41] In Burton,
Justice Beaubier said that the operation was not organized to carry on business
for profit. Justice Beaubier said “it was a tax loss scheme, pure and simple”.
[42] I have reviewed all of the above Court decisions plus a
number of other decisions involving Henry N. Thill tax schemes. In my opinion
the decisions involving Mr. Thill remain “good law” in spite of the fact
that the Stewart decision has rejected the REOP test.
[43] In my opinion the activity of the Appellant to become a
Quest Prestige Card distributor, either personally or through the Partnership,
was not a source of income for the purpose of section 9 of the Act.
II. Tax Shelter Rules
[44] Section 143.2 of the Act provides
for an adjustment to the cost of expenditures relating to a tax shelter
investment.
[45] A “tax shelter investment” is defined in subsection 143.2(1)
of the Act. A “tax shelter investment,” means a property that is a tax
shelter for the purpose of subsection 237.1(1) of the Act, which
requires mandatory registration and reporting requirements for “tax shelters”.
[46] The Partnership filed and received a tax shelter
identification number as required under section 237.1 of the Act with
respect to the “research and development and customer loyalty card” [Exhibit 2,
Tab 2, Form T5001E]. It therefore follows that section 143.2 of the Act applies
in the present appeal.
[47] Notwithstanding
any other provision of the Act subsection 143.2(6) calculates the
expenditure amount in respect of a tax shelter investment, which is essentially
the amount of a taxpayer's expenditure before applying the rules, reduced by
deducting the total of:
(i) limited recourse amounts that can reasonably be
considered to be related to the expenditure;
(ii) at-risk adjustment in respect of the expenditure;
and
(iii) limited recourse amount and at-risk adjustment
of each taxpayer who deals at arm's length with the taxpayer and holds an
interest in the taxpayer, that can reasonably be considered related to the
expenditure.
[48] The Partnership’s
expenditure with respect to the tax shelter investment was the $20,000 royalty
amount, which was reported on the Summary Tax Shelter Information Form [Form
5003E].
[49] In the Tolhoek
v. Canada decision, 2006 TCC 681 confirmed (2008 FCA 128),
Madam Justice Campbell states that the unpaid principle of certain long term
debt will be deemed to be a limited-recourse amount unless all of the exceptions
in subsection 143.2(7) of the Act apply.
[50] The first five
exceptions to be met are found in paragraph 143.2(7)(a) of the Act, summarized
as follows:
1.
bona fide arrangements;
2.
evidenced in writing;
3.
made at the time the indebtedness arose;
4.
made for the purposes of repayment of debt and all interest; and
5. that the arrangements were made within a reasonable
period, no longer than 10 years.
[51] The remaining two
exceptions can be found in paragraph 143.2(7)(b) of the Act, referred
to by Madam Justice Campbell at paragraph 41:
1. interest must be payable at least annually at the
prescribed rate; and
2. the interest must be paid no later than 60 days
after the end of each taxation year of the debtor that ends in the period.
[52] In the present appeal the $15,000 unpaid balance of the
Advanced Royalty due under each Licence Agreement was not made with bona
fide arrangements for repayment and no interest was levied on these
outstanding balances. As such the full $15,000 would be regarded as the
limited-recourse amount and deducted from the Partnership’s expenditure of $20,000.
[53] Subsection 143.2(2) of the Act sets out what is
meant by the term “at-risk adjustment,” the provision reads as follows:
(2) At-risk
adjustment -- For the purpose of this section, an at-risk adjustment in
respect of an expenditure of a particular taxpayer, other than the cost of a
partnership interest to which subsection 96(2.2) applies, means any
amount or benefit that the particular taxpayer, or another taxpayer not dealing
at arm's length with the particular taxpayer, is entitled, either immediately
or in the future and either absolutely or contingently, to receive or
to obtain, whether by way of reimbursement, compensation, revenue guarantee,
proceeds of disposition, loan or any other form of indebtedness, or in any
other form or manner whatever, granted or to be granted for the purpose
of reducing the impact, in whole or in part, of any loss that the particular
taxpayer may sustain in respect of the expenditure or, where the
expenditure is the cost or capital cost of a property, any loss from the
holding or disposition of the property.
(Emphasis
added)
[54] The at-risk adjustment would be the $15,000 performance
bond that Crusader had promised to establish since the Partnership was
contingently entitled to this amount for the purpose of reducing the impact, in
whole or in part, of any loss that may have been sustained in respect of the investment.
[55] Due to the application of the tax shelter rules, the
Advanced Royalties expense would be reduced to zero and as such no deduction
would be permitted.
[56] By virtue of the application of the tax shelter rules, there
is no longer an expense relating to the investment in the Quest Prestige Card,
the arguments and provisions outlined in subparagraphs 23(c), (d) and (e) above
would no longer apply.
III. Licence
Fee
When an expenditure
is made, not only once and for all, but with a view to bringing into existence
an asset or an advantage for the enduring benefit of a trade, I think that
there is very good reason (in the absence of special circumstances leading to
an opposite conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital [British Insulated & Helsby
Cables Ltd. v. Atherton, 10 T.C. 155, at 192].
[57] The Licence
Agreement between the Partnership and Rockhaven required the Partnership to pay
a $350 licence fee. Due to the enduring benefit that resulted from this one
time payment (i.e. a 20-year licence to sell the Quest Prestige Card in
assigned territories) the full $350 would be regarded as a capital outlay and
the Partnership would be precluded from a current deduction due to the
application of paragraph 18(1)(b) of the Act.
[58] Pursuant to Schedule
II of the Income Tax Regulations the licence acquired from Rockhaven
would fall in Class 14 for the purposes of the capital cost allowance rules,
such classification would result in the $350 payment being capitalized and
amortized over the life of the Licence Agreement (i.e. 20 years).
IV. Partnership Losses
[59] The evidence presented at trial
indicated that the Partnership was not a party to the joint venture. Not only
was the agreement between Manhattan and
IDC, but the initial investment amount of $320,000, which was subsequently
expensed resulting in the allocated losses, was paid by Manhattan. There were no written or oral
submissions presented by the Appellant to refute these facts.
[60] After analyzing the facts in the Appellant’s case, I
have concluded that the Appellant was not eligible to deduct the allocated Partnership
losses.
[61] Based upon the reasons outlined above, the appeals are dismissed,
with costs.
Signed at Toronto, Ontario, this 2nd day of May 2008.
“L.M. Little”
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