Date: 20090123
Docket: A-480-07
Citation: 2009 FCA 19
CORAM: DÉCARY
J.A.
NOËL
J.A.
BLAIS J.A.
BETWEEN:
177795 CANADA INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an appeal from a decision by Justice Lucie Lamarre of the
Tax Court of Canada (the TCC judge), confirming the assessment of the Minister
of National Revenue (the Minister) pursuant to the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (the Act) for the appellant's 1992 taxation year.
[2]
The appellant is a corporation which, during
the 1992 taxation year, operated a company under the name of Sofati Ltée.
(Sofati). At issue is the appellant's right to
claim a loss of about US$16 000 000 incurred in 1988 and to deduct
the balance of it in computing its income for the 1992 taxation year. The loss in question was allegedly the result of the
operation of a business by a partnership of which the appellant had been a
member.
FACTS
[3]
The facts underlying the appeal were set out in a partial
agreement, which was reproduced by the TCC judge in her reasons. The TCC also heard the testimony of Michel Gaucher, the
appellant's president, and Nancy Orr, who was Sofati's vice-president at the
time and also in charge of its finances. Both
were involved in the negotiation of the transactions that allegedly made it
possible for the appellant to become a member of the partnership that generated
the loss.
[4]
The loss in question dates back to 1988 and
stems from Preston Parkway Joint Venture (PPJV), a partnership established
under the Partnership Act of the state of Texas, of which the appellant
became a member on December 1, 1987.
[5]
On November 30, 1987, PPJV's only asset and
only purpose was a rental property, Sherry Plaza, which had been built a number
of years earlier for the cost of US$32 000 000 and which, on November
30, 1988, had a market value of US$16 000 000.
[6]
Before December 1, 1987, the members of
PPJV were Louis G. Reese Inc. (Reese) and Preston Parkway Development Company
(PPDC), two American companies whose interests in the partnership were 99% and
1% respectively.
[7]
On December 1, 1987, the Bank of New York,
which held a mortgage on Sherry Plaza, bought Sherry Plaza at auction for
US$16 000 000. As
the building had been acquired by PPJV for US$32 000 000, the sale
resulted in a loss of US$16 000 000, which was recorded in PPJV's
financial statements for the fiscal year ending December 31, 1987.
[8]
PPJV was informed for the first time on October
12, 1987, that the real property would be seized and sold if it defaulted on
the mortgage payment. It
was also informed at least 21 days prior to the date of the seizure that the
property would be seized and sold.
[9]
On November 16, 1987, when the appellant agreed
to acquire Reese's and PPDC's interests in PPJV, it therefore knew that the
company's only asset would be seized and sold on December 1, 1987.
[10]
PPJV's constituting agreement provided that the
sole purpose of the partnership was to develop a real estate project that
eventually became Sherry Plaza. According
to the terms of an amendment that is undated but that became effective on
November 30, 1987, the original agreement was amended to allow for the
pursuit of other ventures.
[11]
On December 15, 1987, the agreement under
which Reese and PPDC transferred their interests to Sofati and its sister
company Westmount Park Towers Inc. (WPTI) was signed. Reese first assigned its 99% interest to the appellant and
WPTI in respective shares of 99% and 1%, and PPDC then transferred its 1%
interest to the appellant and WPTI in the same proportions, the whole
retroactive to December 1, 1987.
[12]
The only transaction made by PPJV under the
control of the Canadian partners occurred in September 1989, when PPJV acquired
a 1% interest in a project in Texas (the Highland Park Shopping Village) for
US$175 000.
[13]
In its return for the 1992 taxation year, the
appellant deducted its share of the US$16 000 000 loss resulting from
the sale of PPJV's real property in December 1987 in computing its income.
ASSESSMENT
[14]
The Minister refused to carry over the loss on
the ground that when the appellant purchased its share in PPJV, its intention
was not to carry on business with a view to profit from the activities of PPJV. The appellant therefore did not become a member
of that partnership within the meaning of the Act and therefore could not claim
entitlement to the loss incurred by PPJV under section 96 of the Act.
[15]
Alternatively, the Minister argued that, even
if PPJV was a partnership in which the appellant participated, no loss was
attributable to the appellant within the meaning of subsection 10(1) of
the Act and section 1801 of the Income Tax Regulations, C.R.C., c.
945. More specifically, subsection 10(1)
obliged PPJV to value Sherry Plaza according to its fair market value, namely
US$16 000 000, such that no loss was made in the year of disposition.
[16]
The Appellant objected to the assessment, which
was later confirmed by the Minister on May 4, 2004. Consequently, the appellant turned to the TCC.
TCC JUDGMENT
[17]
The TCC concluded that the American partners
and the Canadian buyers had no common intention to carry on business with a
view to profit. The essence of the TCC judge's
reasoning can be found at paragraph 36 of her reasons.
In my opinion, as in Backman [v. Canada, [2001] 1 S.C.R.
367, 2001 SCC 10], the Appellant did not prove that it agreed with the American
partners to carry on business in common with a view to profit from the
activities of PPJV. It is true that right before the repossession of the
property by [the Bank of New York], the partnership contract was amended to
provide for the possibility of investing in real property projects other than
the Sherry Plaza, and that indeed, two years later, PPJV finally invested
US$175,000 in a real property project it still has. However, considering the
circumstances surrounding the entire transaction, those facts alone do not
pursuade [sic] me that Louis G. Reese, PPDC and the Appellant had the intention
to carry on business in common with a view to profit. In my opinion, that was
the key element that had to be proven by the Appellant, which it failed to do.
[18]
She added at paragraph 40:
In this case, the only asset of PPJV was seized immediately
after the retroactive withdrawal of the American partners. Even though the
purposes of the partnership were amended prior to their withdrawal, I am
satisfied that, in view of the evidence, neither Mr. Reese nor PPDC had an
intention to carry on business in common with a view to profit with the
Appellant and WPTI. Indeed, no investment was made with them after that. The
objectives sought by the Appellant after the withdrawal of Mr. Reese and PPDC,
and the time and money invested by the Appellant, were not to carry on the
business operated by PPJV while it was under American control. . . .
[19]
Having concluded that the appellant had not participated in the
pursuit of a common purpose with Reese and PPDC, the TCC judge did not discuss
the alternative argument raised by the Minister to justify the assessment.
ANALYSIS AND
DECISION
[20]
While recognizing that the TCC judge correctly identified the
constituent elements of a partnership, the appellant alleges that she
misapplied them (Appellant's Memorandum, paragraphs 29 to 67). The appellant also challenges a number of the conclusions
drawn by the TCC judge (paragraphs 68 to 76). The questions raised are either questions of fact or
questions of mixed fact and law. In either
case, this Court cannot interfere in the absence of a palpable and overriding
error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235). In my humble opinion, it has not been shown that the TCC
judge committed such an error.
[21]
Among the arguments raised by the appellant, the only one that
warrants closer examination is that the TCC judge should have determined
whether Reese's and PPDC's involvement was necessary to ensure PPJV's continued
existence (Appellant's Memorandum, paragraphs 33 and 54). The appellant argues that if the TCC judge had asked herself
that question, she would have necessarily concluded that PPJV continued to
exist with the appellant and WPTI as partners. According
to the appellant, Reese's and PPDC's participation was in no way necessary to
ensure PPJV’s long-term survival (Appellant's Memorandum, paragraph 55).
[22]
With respect, the TCC judge, after finding that the appellant had
never had the common intention of operating PPJV with the American partners,
did not have to take the analysis any further. In order to be entitled to the claimed loss, the appellant had to have
participated as a partner in the partnership that generated the losses. The TCC judge did not rule out the possibility that the
appellant could have created a new partnership with WPTI (Reasons,
paragraph 37), but she concluded unequivocally that the appellant had
never been part of the partnership that generated the losses.
[23]
The evidence supports that conclusion. According to the evidence, the only building that was the objective of
the business carried on by PPJV was sold on December 1, 1987. Only two
weeks later, the appellant was awarded its share in the partnership. In that respect, the appellant greatly insisted on the fact
that its admission into the partnership was retroactive to December 1
(Appellant's Memorandum, paragraphs 57 to 59). The appellant relies on the wording of the agreement, which
stipulated as follows in its opening paragraph (Appeal Book, Vol. I,
page 66):
This assignment
. . . is executed . . . on the fifteenth day of December,
1987, to be effective as of the first day of December, 1987 . . .
[24]
That being said, the parties to that agreement do not specify that
the contract reflects a verbal agreement entered into on an earlier date, as is
commonly done.
The parties simply agreed to make the agreement
retroactive to December 1, 1987. This is what
Ms. Orr's testimony reveals (Appeal Book, Vol. IV,
page 699, lines 3 to 8). For his part,
Mr. Gaucher stated that he did not know why the agreement was entered into
retroactively (Appeal Book, Vol. IV, page 667,
lines 6 to 10). Certainly, no one alleged that
the agreement signed on December 15, 1987, reflected a verbal agreement entered
into previously.
[25]
Whether the appellant intended to operate PPJV with the American
partners is a question of fact. The TCC judge found,
among other things, that PPJV had disposed of the revenue-producing building
when the appellant signed the December 15, 1987, agreement (Reasons,
paragraphs 16 and 25). As the development and operation of that building
was PPJV's only commercial activity, the TCC judge concluded that the appellant
could not have intended to carry on PPJV's business with the American partners.
The fact that the parties’ agreement was retroactive clearly cannot remedy this
defect.
[26]
The attempts to involve Reese in the subsequent operations that
the appellant was planning also failed to show that there was a common
intention to carry on business (Reasons, paragraphs 27 and 28). Ultimately, the TCC judge concluded that the appellant had
not succeeded in demonstrating that, at some point in time, it had had the
intention of carrying on business in common with the American partners.
The evidence supported this conclusion.
[27]
It is therefore not necessary to rule on the alternative argument
raised by the Minister to justify the assessment. I would say, however, that it is doubtful that subsection 10(1) can
apply notwithstanding subsection 10(2), as the Minister's counsel argues
(Respondent's Memorandum, paragraph 39). In
fact, subsection 10(1) sets out how inventory should be valued for the
purpose of computing income for a given taxation year, and, according to the
evidence, no inventory was owned by PPJV on December 31,
1987.
[28]
For
those reasons, I would dismiss this appeal
with costs.
“Marc
Noël”
“I agree.
Robert
Décary J.A.”
“I agree.
Pierre Blais J.A.”
Certified true translation
Johanna Kratz
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