Date: 20010316
Docket: 2000-635-IT-I
BETWEEN:
GEOFFREY HEWETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1]
The issue was stated in the Reply to the Notice of Appeal to be
whether the Appellant is entitled to deduct his share of
partnership losses in the amount of $16,667 in his 1996 taxation
year. At the hearing, the Appellant, in response to the
Minister's assumptions of fact, said that he agreed with the
following assumption:
... the Appellant was one of the three partners in a limited
partnership known as Three Buoys Vacations BVI Limited
Partnership #4 (the "Partnership") which was involved
in operating houseboat rentals in the British Virgin Islands.
However, his Appellant's testimony at the hearing, on
cross-examination, was that there was no formal partnership under
law. He stated that "his accountants approved it".
[2]
In 1997 the Appellant went to a Three Buoys[1] presentation and was given a pro
forma. It showed that charters of a motor yacht at a British
Virgin Islands resort would, at 46 percent use, produce profit in
the sixth year with profit ascending in each of the nine
subsequent years.
[3]
The Appellant, in association with two other gentlemen, purchased
a boat for $199,500. This was effected by a down-payment of
$12,000, $4,000 each, and a loan from the Royal Bank of Canada
for $187,500. The Appellant gave evidence as to the Bank
completing a blank demand promissory note in the sum of $207,000
on January 27, 1988 and sending a letter to the three purchasers
describing the principal amount as $207,000. The group took
violent exception to this procedure. They received a letter from
the Bank dated February 12, 1988 stating:
Please be advised that we have received a cheque in the amount
of $19,500.00 from Three Buoys and have applied same to your
loan.
For your information, the particulars of same are as
follows:
Principal
Amount
$187,500.00
...
[4]
The Appellant's evidence was that the Bank had, in violation
of the arrangement, advanced money to Three Buoys, one of its
customers, before the boat was concluded. He alleged that the
Bank had failed to disclose problems with Three Buoys of which it
had knowledge including the fact that it had placed someone with
that company to oversee it. He testified that the Bank had put
Three Buoys in receivership after the investment commitment had
been made by the trio. He said also that they sued the Bank in
breach of fiduciary responsibility.
[5]
The Appellant testified that they had made interest payments of
$2,000 per month for 15 months. He also stated that the Bank, in
1989, seized and sold the boat for $115,000 and also that the
Bank was, in early 1989, putting Three Buoys in receivership. He
testified that lawyers and accountants, on behalf of the three
investors, had studied the pro forma and approved their
investment action.
[6]
The Appellant said that the Bank's claim against the trio for
$150,000 was settled, in 1996, for $50,000. The Appellant's
share of that sum paid to the Bank was $16,667. He stated that,
on the advice of their accountant, he claimed that sum as a
terminal loss in 1996. No submissions were made by him in that
regard.
[7]
Respondent's counsel submitted that the sum of $16,667 was a
partnership capital loss because the Appellant invested in the
partnership and when it ceased to exist the Appellant suffered
that loss. The alternate argument was that if the Court did not
conclude that there was a capital loss, there was, in any event,
no reasonable expectation of profit. She stated that the business
was never started, there was no profit, no revenue, the Appellant
relied on pro forma information, and referred to a number of
cases dealing with the concept of reasonable expectation of
profit.
ANALYSIS AND CONCLUSION:
[8]
There was no evidence that the Appellant's partnership, if
there was one, ceased to exist or when. Counsel did not deal with
the Appellant's evidence that there was no formal partnership
thus placing great doubt on whether he was a partner. It matters
not whether the loss in question arose as the Appellant's
share of a partnership loss or as on his account as an individual
participant in the activity.
[9] I
have no doubt about the Appellant having entered a business
venture. He was aware of the pro forma projections and made his
decision with approval of professionals, to proceed with that
undertaking. Therefore, the "reasonable expectation of
profit" has no application.
[10] The cost
of the boat, proceeds of disposition and financial results are as
follows:
Cost
$199,500
Sale
proceeds
$115,000
Balance
$ 84,500
[11] The
$50,000 paid by the trio relates only to retirement of the bank
loan and does not affect the above balance. Subsection 20(16) of
the Income Tax Act ("Act") provides that
where at the end of a taxation year a taxpayer has an
"undepreciated capital cost" of depreciable property of
a particular class and the taxpayer no longer owns any property
of that class:
... in computing the taxpayer's income for the year ...
there shall be deducted the ...
undepreciated capital cost. The boat was disposed of in 1989[2]
[12]
Subsection 20(16) requires that "there shall be deducted the
amount of the" undepreciated capital cost. Accordingly, a
terminal loss in respect of the boat arises in 1989 and not in
1996. If the terminal loss results in a non-capital loss for the
Appellant for 1989, it can be carried forward under section 111
to his 1996 taxation year. No evidence in that regard was
presented.
[13] The
appeal is allowed to provide a terminal loss of $28,166 (being
one-third of the sum of $84, 500) for the Appellant's 1989
taxation year. Although that year is not under appeal, that sum
may result in some amount being deductible in 1996, the year
under appeal.
Signed at Ottawa, Canada this 16th day of March,
2001.
"R.D. Bell"
J.T.C.C.
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