Citation: 2008TCC264
Date: 20080502
Docket: 2004-1650(IT)G
BETWEEN:
GARRET MADELL,
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. Storwick, 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 Appellant
and the Partnership.
[14] In 1997 and 1998 the
Partnership entered into 56 Licence Agreements with Rockhaven. The Appellant
also entered into three Licence Agreements directly with Rockhaven. Pursuant to
these agreements, Rockhaven granted both the Appellant and 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 Appellant and the Partnership agreed to pay a licence fee of
$350 plus Advanced Royalties of $20,000 for each territory.
[16] Both 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 Appellant and the
Partnership 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.
[18] Crusader agreed to
provide 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 Appellant and the Partnership, respectively, 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
disallowed
|
|
$ 80,750
|
|
$ 55,677
|
|
Prepaid royalty expense
disallowed
|
|
$ 85,038
|
|
|
|
Licence expenses disallowed
|
|
$ 1,488
|
|
|
|
|
|
$167,276
|
|
$ 55,677
|
[21] By Notices of
Reassessment dated March 13, 2000 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 Appellant
and 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 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 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, both
the Appellant and 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) Both
the Appellant and the Partnership claimed a deduction for the full amount of
$20,350 per territory. However, both admitted that they never paid nor were they
ever asked to pay the Advance Royalty of $15,000 per territory. In summary, the
total cash outlay, per territory, was limited to $5,350.
(B) The
Appellant admitted that at the time of the initial investment there was no
activity by Crusader to sell Quest Prestige Cards in the territories acquired
by him or the Partnership.
(C) Crusader
generated no revenue from the sale of the Quest Prestige Cards in 1997. It was
admitted, however that Crusader did generate nominal revenue in 1998 and 1999.
(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 there
was 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. Storwick
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. Canada, [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 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 exception in subsection 143.2(7) of
the Act applies.
[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
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 this amount was contingently entitled to the Appellant and the
Partnership, 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 entered into with Rockhaven required the Appellant and 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
both the Appellant 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 neither the Appellant nor
the Partnership were 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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