Ted L. D’amico and James A. Ion v. Her Majesty the Queen, [1995] 2 CTC 2686

Beaubier J.T.C.C.:-These appeals were tried together on common evidence by consent of the parties at Calgary, Alberta from June 5 to June 7 inclusive, 1995.

The issues respecting both appeals are as follows:

1. Was the business loss claimed an amount arising out of reasonable outlays or expenses incurred by the partnership for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) and section 67 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act")?

2. Would the business loss claimed in connection with the partnership in 1986 unduly or artificially reduce the appellants’ incomes within subsection 245(1) of the Income Tax Act?

3. Did the Minister of National Revenue act with all due dispatch in examining the appellants’ 1986 income tax returns, and assessing, within the meaning of sections 152 and 165 of the Income Tax Act?

4. Are the notices of assessment invalid because the Minister of National Revenue failed to provide sufficient disclosure respecting the notices of assessment? (This claim to an issue was withdrawn by the appellants’ counsel after the close of evidence.)

An agreed statement of facts was filed by the parties which reads as follows:

It is agreed between the parties hereto, through their counsel, that for the purposes of these actions, and these actions only, the following facts should be admitted as evidence without any further or formal proof thereof. Nothing in this agreed statement of facts ("ASF") shall restrict the parties from producing evidence at trial to supplement or elaborate upon the facts set forth herein.

1. DOCUMENTS

1.1 This ASF should be read in conjunction with the joint Exhibits contained in the binder filed herewith. The joint Exhibits are identified by tab number. The parties agree to enter these documents as exhibits at trial. An index for the joint Exhibits is appended hereto, and inserted at the front of the Exhibit binder. The descriptions used herein for documents are for convenience only. The documents themselves should be referenced for their specific terms and import.

2. BACKGROUND

2.1 The appellant Dr. Ted L. D’Amico ("D’ Amico"), is a chiropractor, age 43. The appellant James A. Ion ("Ion”), is a professional engineer, age 57. Both reside in Calgary. Both are limited partners of CRL Management & Overhead Limited Partnership ("CRL”).

2.2 This litigation arises from a business loss claimed by the appellants in their 1986 income tax returns ("returns") relating to their acquisition of CRL limited partnership units as follows:

D’ Amico $84,000 loss

Ion $60,000 loss

2.3 D’Amico’s 1986 return is found under tab 1. Ion’s 1986 return is found under tab 9.

2.4 D’Amico received correspondence from Revenue dated July 22, 1987, advising that his return would be held in abeyance pending verification of the CRL loss, unless he wished to have his return processed without same (Tab 2). By correspondence dated August 11, 1989, D’Amico requested that his return be processed without the claimed business loss. [1]

2.5 By correspondence dated July 20, 1990, D’Amico was advised by Revenue of the reasons why they intended to disallow his CRL business loss write-off. [2] By correspondence dated September 18, 1990, Revenue advised D’Amico that they had made a final decision to disallow his CRL loss for the reasons outlined in their previous correspondence. [3] By a notice of reassessment dated November 22, 1990, D’Amico’s CRL loss of $84,000 was disallowed in full. [4] D’ Amico filed a notice of objection on December 11, 1990. [5] The Minister issued a notice of confirmation on June 24, 1992. [6]

2.6 Ion received correspondence from Revenue dated July 22, 1987, advising that his return would be held in abeyance pending verification of the CRL loss, unless he wished to have his return processed without same. [7] By correspondence dated April 28, 1989, Ion requested that his return be processed without the claimed business loss. [8]

2.7 By notice of assessment dated May 25, 1989, Ion’s CRL loss of $60,000 was denied in full. Ion filed a notice of objection on June 1, 1989. [10] By correspondence dated May 4, 1990 and June 11, 1990, [12] Revenue advised Ion of the reasons for their disallowance. The Minister issued a notice of confirmation on June 24, 1992. [13]

3. AURAMET INTERNATIONAL LTD.

3.1 Auramet International Ltd. ("Auramet") developed, promoted and managed 13 tax shelter limited partnerships in 1986 and 1987. A list of the 13 limited partnerships is set forth under Tab 17. [14]

3.2 Auramet was incorporated in British Columbia in March 1984. [15] It was extra-provincially registered in Alberta in December 1985 and in the Yukon in July 1986. [16]

3.3 Auramet had its head office in Vancouver and an office in Calgary. Sales of limited partnership interests were conducted in both offices. It managed mining operations on behalf of Canquest 86 Mine Fund Limited Partnership ("Canquest"), out of the Vancouver office.

3.4 The shareholders of Auramet, either directly or through holding companies, were A. Ron Davies, William J. Iwaschuk, William H. Rogers, John

H. Picken, and Ted H. F. Reimchen, all of Vancouver, and Kenneth D. Rogers of Calgary. All of these individuals worked for Auramet and are some times collectively referred to as the "Rogers Group". The directors and officers of the company were Messrs. Picken, Reimchen, W. Rogers and K. Rogers.

4. CRL LIMITED PARTNERSHIP

4.1 CRL was registered as a limited partnership under the Partnership Act of British Columbia on November 12, 1985. [17] Its registered office was #607, 750 West Pender St., Vancouver.

4.2 The Limited Partnership Agreement ("LPA") is found under Tab 21.

Hab 12.

4.3 The LPA lists on the title page, the changes of general partner. The directorship of the various general partners included members of the Rogers Group.

4.4 On July 15, 1986, the name of the partnership was changed to CRL.6 [18] Amended Certificates of Limited Partnership were registered on October 17, 1984 [19] and April 28, 1988. [20]

4.5 A total of 162 individuals purchased CRL units and claimed corresponding business losses in their 1986 Returns. A list of the CRL limited partners and the number of units they each purchased is found under tab 25.

The average purchase was 26.4 units. [21] One hundred and thirty (80 per cent) of the limited partners were from Alberta, 28 (17 per cent) from British Columbia and the balance from other provinces.

5. MANAGEMENT AGREEMENT

5.1 By resolution stated to be effective December 31, 1985, CRL undertook to retain Auramet to act as operator of the partnership business. [22] A similar resolution was passed stated to be effective December 31, 1986. [23]

5.2 By written agreement stated to be effective October 1, 1985, Auramet were engaged by CRL and the general partner to act as manager and operator. 24

5.3 Management agreements on the same terms were executed by all of the limited partnerships promoted by Auramet in 1986 and 1987.

6. JOINT VENTURE AGREEMENT

6.1 By agreement stated to be effective January 1, 1986, [25] CRL, Canquest, Morningland Ventures Ltd. ("MVL") and P’ship Groups Taxinvestor Management Ltd. entered into a Joint Venture Agreement.

7. PURCHASE OF CRL UNITS

7.1 The cost of a unit was $1,000. Typically, and in the case of the appellants herein, a unit was paid for as follows:

$430	(43%) cash
$570	(57%) note
$1000

7.2 D’Amico purchased 84 units in CRL and Ion purchased 60 units. The appellants paid for their units as follows:

	CASH	NOTE	TOTAL
	CASH
D’Amico, 84 units	$36,120	$48,880	$84,000
D’Amico, 84 units	$36,120
lon, 60 units	$25,800	$34,200	$60,000
Ion, 60 units	$25,800

7.3 Investors in the partnerships promoted by Auramet, including these in CRL, first joined the North West Investors Cooperative ("Coop"). The Coop was incorporated in British Columbia on September 30, 1983, under the Cooperative Associations Act. Its stated objects were:

To join taxpayers together on a cooperative basis to obtain for the members income tax planning and tax shelter investment information and purchase opportunities, on a quality basis that could not generally be afforded by individuals.

7.4 Ted Reimchen, a director and shareholder of Auramet, was one of the founding directors of the Coop. Both Reimchen and K. Rogers were directors of the Coop in 1986.

7.5 Investors in the partnership promoted by Auramet also joined what was known as a Group or Mini Partnership, which granted them warrants to participate in tax assisted investment offerings. There was no obligation to exercise the warrants. D’Amico’s Group Partnership was FT Donkelor & Associates Limited Partnership; Ion’s Group Partnership was Ronliv Taxinvestors Club Limited Partnership.

7.6 The following documents were executed in respect of Ion’s purchase of units in CRL for the 1986 year:

(a) Subscription Form executed on July 7, 1986 by Ion and his Group Partnership, RonLiv [sic] Taxinvestors Club, to purchase 120 "CC" Units, 60 units for 1986 and 60 units for 1987 (tab 30)

(b) Term Note dated July 7, 1986 to Yorkdale (tab 31)

(c) Letter agreement with Yorkdale dated September 30, 1986 (tab 32)

(d) Subscription Form by Ronliv Taxinvestors Club dated December 31, 1986 (tab 33)

7.8 The following documents were executed in respect of D’Amico’s purchase of units in CRL:

(a) Subscription Form executed on December 4, 1986 by D’Amico and his Group Partnership, FT Donkelor & Associates, to purchase 84 "CC" Units (tab 34)

(b) Loan Agreement and Assignment executed on December 4, 1986 with Yorkdale (tab 35)

(c) Promissory Note executed on December 4, 1986 to Yorkdale (tab 36)

(d) Subscription Form by FT Donkelor & Associates dated December 31, 1986 (tab 37)

7.9 The records of the Coop show a dividend on December 31, 1986. Ion’s dividend was $68.80, which was reported by him in his 1986 return. K. Rogers advises that the money was used to purchase shares of Barex Corporation NV ("Barex") [26] at a price of 1¢ per share. Ion was subsequently advised by Auramet that 1712 of his Barex shares were sold in 1986 for $17,120, and that he should report a capital gain of $17,000. Ion reported the gain in his 1986 Return; he also claimed a capital gains exemption in the same amount. Ion was advised by Auramet by letter dated January 9, 1987, that his remaining 5123 Barex shares had been sold for $51,230, and that he should report a capital gain of $51,000 for 1987. Ion reported the said gain on his 1987 return, and claimed a capital gains exemption in the same amount. Subsequently, Ion received his term note back stamped "cancelled".

7.10 Similar events transpired with respect to D’Amico, but for different amounts, and with the end result that his promissory note was returned stamped "cancelled".

8. PROJECT INTERCEPT

8.1 In 1985, Revenue implemented a program known as Project Intercept, the purpose of which was to identify on-line taxpayers who claimed significant losses from tax shelters, flow through shares, commodity straddles and other ventures. Project Intercept flagged returns where the taxpayer had at least $50,000 in positive income and $20,000 in business losses.

8.2 CRL and HS&M were identified for investigation by Project Intercept in May 1987. By correspondence dated May 21, 1987, Special Audit Division of Head Office ("HO") requested that the Vancouver District office ("DO") consider immediate audits of these two partnerships. The request was made of the Vancouver D.O., as the limited partnerships had their registered offices there. An investigation by the Vancouver D.O. soon indicated that the limited partnerships were operated out of Calgary, and that all the accounting records and the public auditors, Heater & Company, were there. By memorandum dated June 12, 1987, Vancouver recommended to HO that the matter be referred to the Calgary DO. By memorandum from HO dated June 17, 1987, Calgary DO was asked to consider immediate audits of HS&M and CRL.

9, REVENUE’S AUDIT

9.1 Stu Scott ("Scott"), head of Head of Tax Avoidance at Calgary DO, commenced a preliminary investigation of CRL on June 29, 1987. His first step was to interview Ken Jones of Heater & Company, the public auditors for CRL and the other partnerships. Scott reported to HO that an audit by the Calgary office could not get started until early August and that the issues would not likely be identified until mid-September.

9.2 By memorandum dated July 6, 1987, HO confirmed that the Calgary office would assign a business auditor to these two cases. On July 13, 1987, Scott advised K. Rogers that the CRL was being referred to Business Audit and that a review would commence in the next two or three weeks.

9.3 The auditor who was assigned to CRL was Daniel Bell, CA, Senior Business Auditor ("Bell"). Bell commenced his audit in mid-August 1987. He prepared a Tax Avoidance Referral for HO on CRL dated November 13, 1987 ("Bell Report"). Bell was transferred in October 1987. The file was assumed in late November 1987 by Robert Veltri, CM A and Senior Business Auditor ("Veltri"). Veltri prepared a report to HO dated February 4, 1988.

9.4 In April 1988, the business audit group of Calgary DO commenced an audit of the other 1986 limited partnerships, including Canquest, under the direction of Karen Smith, Senior Business Auditor Group Head.

9.5 Veltri was transferred in July 1988, and the CRL audit file was assigned to William B. Gatfield, CGA ("Gatfield").

9.6. In July 1988, Patricia Vercaigne of the business audit group of Calgary DO commenced a detailed audit of Auramet for the years 1986 and 1987.

9.7 Gatfield prepared a report on CRL to HO dated April 11, 1990.

10. ACCOUNTING

10.1 Audited financial statements for CRL were prepared by Heater & Company, Chartered Accountants, of Calgary. [27]

10.2 The moneys raised from the sale of limited partnership units and other monies collected by Auramet for use by the 1986 partnerships was placed in and disbursed from a common pool. Expenses were also allocated from a common pool and invoiced by Auramet to the individual partnership.

10.3 Auramet issued invoices to the five partnerships in 1986 for some $8 million. Of this, $2,105,250 was invoiced as CEE to Canquest. The balance of $5,900,511 was invoiced to the four G&A partnerships. Auramet invoiced CRL for $4,275,000, which was the loss claimed by CRL in its 1986 financial statements.

10.4 Auramet reported expenses on behalf of the partnerships from two sources-firstly, amounts incurred and disbursed in Canada and, secondly, amounts invoiced by Lynbrook Corporation NV ("Lynbrook") and recorded by Auramet as paid from the Yorkdale loan proceeds.

10.5 Lynbrook was incorporated on May 11, 1984 in Curacao, Netherlands Antilles. Its directors included Picken, W. Rogers and K. Rogers, who, along with the other members of the Rogers Group, owned 24 per cent of the shares.

10.6 Lynbrook issued two invoices to Auramet, one for $809,069, [28] which Auramet allocated to Canquest, and the other for $3,984,303, [29] , which Auramet allocated to the other four partnerships pro-rata.

10.7 Auramet recorded and allocated the 1986 partnership expenses as follows: all of the CEE expenses were allocated to Canquest and all of the G&A expenses were allocated to the other four partnerships on a pro-rata basis. The ratio of G&A expenses allocated to the CRL partnership was 72.15 per cent.

10.8 Cash of $2,926,894 was available and disbursed by Auramet in 1986. This is made up of $741,064 collected from the prior year limited partner receivable and $2,185,830 collected form the sale of 1986 limited partnership units, as follows:

CRL	$1,147,180 [30]	52.5%
Canquest	849,000 38.8%
HS&M	186,350	8.5%
Memcon	3,300	.2%
First Tax	nil	nil
Total	$2,185,830	100%

10.9 The following were claimed inter alia, as expenses by Auramet in Canada in respect of the 1986 partnerships:

Canquest, for direct mining

costs at Indian River, Yukon $l,022,000 [32]

Salaries and sales commissions $1,808,000

Overhead items of at least $132,461

10.10 The salaries and the overhead items were allocated by Auramet to CRL and the three other G&A partnerships.

10.11 Of the $2,105,250 claimed by Canquest as a loss in 1986, Revenue allowed $1,022,000 and disallowed the remainder. Appeals have been filed in respect of same.

10.12 The $1,808,000 in salaries and commissions is comprised of the

following:

Management salaries - Calgary	$173,200
Staff salaries - Calgary	$142,000
Commissions - Calgary	$479,127
Management salaries - Vancouver	$443,647
Staff salaries - Vancouver	$102,987
Commissions - Vancouver	$467,097
Total	$1,808,346

10.13 Auramet incurred overhead items in 1986 of $471,389, as follows:

Office Rent	$44,595
Office Equipment	$133,128
Telephone	$33,227
T ravel	$28,697
	$28,697
Professional Fees	$182,845
Interest	$48,897
Total	$471,389

10.14 In addition to the foregoing, over $100,000 was expended in 1986 on gold mining operations in Costa Rica.

11. COLDSPRING SHARES

11.1 In 1986, the assets of various 1985 and prior partnerships (sometimes known as the "Old Funds"), were exchanged for shares of MVL, a private company.

11.2 In early 1987, shares of MVL were issued to CRL and Canquest.

11.3 On June 9, 1987 the shares of MVL were exchanged for shares of Coldspring Resources Ltd. ("Coldspring"), a public company then listed on the VSE.

11.4 As a result of the Coldspring/MVL exchange, CRL received 844,000 Coldspring shares, less holdbacks. These shares were distributed pro rata to the CRL unit holders. Each CRL limited partner received 184.5 Coldspring shares per unit held.

11.5 The limited partners of Canquest, who paid $1,500 per unit, received 497.6 Coldspring shares per unit.

11.6 The shares of Coldspring commenced trading at 45¢ to 50¢. Thereafter, the stock declined. After two years, it was trading at 50, at which time it was consolidated 1:10 and the name changed to Isleshaven Capital Corp. After consolidation, the share price increased to 50¢, but declined thereafter. The stock is no longer listed.

11.7 K. Rogers, W. Rogers and Reimchen were, at the material time, directors of MVL and Coldspring.

11.8 This agreement may be signed in counterpart. A fax copy with counsel’s signature will be sufficient.

Dated at Calgary, Alberta,Dated at Edmonton, Alberta, this 5th day of June, 1995.

"K.E. Staroszik” "James N. Shaw" Kenneth E. StaroszikJames N. Shaw Counsel for appellantsCounsel for respondent

At the opening of the hearing the appellants conceded the 1986 assessments respecting the funds invested which were not at risk, namely, all except D’Amico’s cash paid of $36,120 and Ion’s letter of credit of $25,800.

Except in respect to subparagraph (d), respecting amounts allegedly purchased, the assumptions contained in the replies respecting each appellant are identical. The assumptions respecting James A. Ion read as follows:

11. In assessing the tax liability of the appellant for his 1986 taxation year as he did, the Minister relied, inter alia, upon the following assumptions of fact:

(a) The facts as admitted above.

(b) The partnership was one of a number of several limited partnerships which also included Memcon Group Services Limited Partnership, Canquest ’86 Mine Fund Limited Partnership, H.S.& M. Start Up and Overhead Limited Partnership and First Tax Investors Limited Partnership.

(c) The limited partnerships were promoted and controlled by A.R. Davies, W.H. Rogers, K.D. Rogers, T.H.F. Reimchen, J.H. Picken and W.J. Iwaschuk.

(d) The appellant allegedly purchased 60 units in the partnership at $1,000 per unit.

(e) These units were to be converted into shares in a public company purportedly giving a deductible business loss to the appellant for tax purposes.

(f) Under the scheme, the appellant was to finance his partnership unit in part from Yorkdale and was to collateralize the borrowed funds by the assignment of shares from Barex Corporation (hereinafter referred to as "Barex").

(g) No Barex shares were received by the appellant in order to pay off the alleged Yorkdale financing.

(h) The business losses claimed by the various limited partnerships are as set out in the attached Schedule I.

(i) The business losses claimed by the appellant and the other investors in the limited partnerships listed in Schedule I equalled the alleged contributions either in cash or by purported financing to the limited partnerships.

(j) The business loss was promised to the appellant on the appellant’s agreeing to acquire the interest in the partnership.

(k) The expenses, and resulting losses, claimed as set out in Schedule I, were not made or incurred for the purpose of gaining or producing income from a business or property.

(l) The partnership did not incur losses in consequence of expenses made or incurred for the purpose of gaining or producing income from a business or property.

(m) To the extent that the partnership did incur losses in consequence of expenses made or incurred for the purpose of gaining or producing income from a business or property, all of which is not admitted but is denied, there was no reasonable expectation of profit in earning income from the said business or property.

(n) To the extent that the partnership did incur losses in consequence of expenses made or incurred for the purpose of gaining or producing income from a business or property, all of which is not admitted but is denied, such expenses were not reasonable under the circumstances.

(o) To the extent that the partnership did incur losses in consequence of expenses made or incurred for the purpose of gaining or producing income from a business or property, all of which is not admitted but is denied, a deduction in computing the income of the appellant made as a result of allowing the said losses would be in respect of expenses made or incurred in respect of a transaction or operation that would unduly or artificially reduce the appellant’s income.

Subparagraphs (b), (c), (d), (e), (f), (h), (i) and (j) were either not refuted or were confirmed by the evidence. The remaining subparagraphs, insofar as is necessary, will be dealt with in what follows.

Both of the appellants testified; their counsel also called Dominic Barbario, another investor, as a witness. The respondent’s counsel called Daniel Bell, Robert Veltri, William Gatfield, Kevin Gowland and Patricia Vercaigne as witnesses. All except Kevin Gowland are employees of Revenue Canada and participated in the audits in question. Kevin Gowland was employed as an accountant by Auramet.

The Court will deal with the appeal by referring to the issues.

Issue 3

Did the Minister of National Revenue act with all due dispatch in examining the appellants’ 1986 income tax returns, and assessing, within the meaning of sections 152 and 165 of the Income Tax Act?

The two appellants filed their 1986 income tax returns claiming the losses in question. Daniel Bell began an audit respecting the investors and signed a report on November 13, 1987. Many questions were unanswered or unsubstantiated as described in this report. Robert Veltri then began an in depth audit of the partnership and met with Ken Rogers. On February 4, 1988, his report, which expressed concerns, including numerical or financial discrepancies, was approved by the authorization of head office for a full scale audit. Mr. Veltri’s work on the file terminated in June 1988. Patricia Vercaigne did an in depth audit of Auramet and four or five other Revenue Canada employees did audits of the partnerships from August 1988 until April 1989. She met with Ken Rogers frequently and was in the offices of Auramet in Calgary three or four days each week. Her work concentrated on the 1987 year since Messrs. Bell and Veltri had essentially audited Auramet for 1986. William Gatfield dealt with CRL exclusively from the summer of 1988 until September 1990. Peter Hills joined him in August 1989. They and other officers of Revenue Canada dealt with the partnerships and every investor’s file and return until the assessments were completed. As an example CRL had 162 investors to be dealt with and contacted. There were 13 partnerships in total. Until the admission by the appellant at the opening of the hearing, the offshore matters had to be dealt with and established. The difficulties were described by Mr. Hills with the aid of Exhibit R-56. Exhibit R-56 and his testimony respecting it follow:

Q. The next heading is called the pool concept. We have heard evidence of a pool. And I understand that you have provided to us a schematic which engages the pool, and which may help explain some of the complications. I am just going to show you two of those, and ask you to identify that?

A. Yes, that’s a document that I prepared.

Q. And that is in respect of 1986, of course?

A. That’s correct.

Mr. Shaw: Your Honour, may that be the next exhibit, number R-56.

His Honour: That will be R-56.

Exhibit no. R-56:

Schematic of pool concept.

Q. Mr. Shaw: Perhaps it might [be] of assistance at this point if you could take us through the chart that you have drawn to highlight its meaning, and then we will discuss it within the context of the case.

A. In order to explain the pool, I would just like to backtrack for a moment and explain that the information contained in the pool is derived from essentially three sources; the 1986 audit and documentation I reviewed therein; the 1987 audit, which I did myself; and after being in Tax Avoidance I went to Special Investigations and participated in the seizure of the Auramet records and had the opportunity to review all of the Auramet records, many of which had not been provided to Revenue Canada.

So from that we were able to derive this schematic which shows the flow of the expenses claimed by the limited partners.

You wish me to explain from the beginning?

Q. Yes, why don’t we start at the top where we have James Ion, 1986 investor.

A. Using Mr. Ion as a typical 1986 investor, he signed a promissory note, number one, to one of the various Yorkdale companies.

Yorkdale purportedly provided funds, number two, to an Auramet bank account in Curacao, at Citco Corporation N.V.

Lynbrook, which is shown as number three, was sending invoices to Canada to Auramet, and the payments on those invoices were being made from the Auramet bank account either direct to Lynbrook or to one of three other Curacao corporations, that’s numbers five and six.

The off-shore invoices, number 832 and 833 that have been previously discussed, essentially fell into a pool of expenses, and there they were joined by the expenses coming through from Canada.

If we go back to Mr. Ion at the top and we follow the cash payment that he made, number seven, that was deposited to an Auramet bank account in Canada, they had numerous bank accounts, it went into one controlled by them. From those Auramet bank accounts, funds were disbursed in Canada for salaries, commissions, fees, office costs, and some Canadian exploration expenses. The amounts claimed as Canadian exploration expense, or CEE, were $1.296 million, mainly in the Indian River in the Yukon. $1.808 million was claimed as general and administrative, being the consulting and management fees we previously discussed, and the residual G & A amount, general and administrative of $132,462 was the residual office costs. That made up the total of $3.236 million.

If we take the funds flowing through from Canada and we join them together with the funds derived from off-shore, we now have a pool of expenses comprising of general and administrative of $5.925 million, that’s number 11, and a pool of CEE expenses comprising $2,105,000 at number 12.

The way in which Auramet operated then was that from the pool it drained the expenses down to the limited partnerships, the first one on the left-hand side being treated as Canadian exploration expenses. The complete fund or complete pool of Canadian exploration expenses was invoiced to Canquest. Canquest, in turn, told each of its limited partners the proportion of their loss, how much was allocated to them. The same thing was done for each of the 1986 limited partnerships, CRL received $4.275 million, and its investors received the same $4.275. And by the time we finish, the pool has been completely drained, and the investors have all received $1 of losses for each dollar that they originally subscribed for, which was what was promised to them on the subscription form.

Q. And that is in terms of the actual cash outlay, there was the further amount of the promissory note, I understand the ratio then would be 2.33 to 1?

A. 2.33 to 1, that is correct.

Q. So for every dollar of cash put up by an investor, they would receive $2.33 of tax write-offs?

A. That is correct.

Q. Assuming two things, that they had paid their cash?

A. Yes.

Q. Or that had not been forgiven in one manner or another; and, (b), that they had gotten full forgiveness of the promissory note?

A. That’s correct.

Q. So that is the pool, that is essentially how that would work so that a taxpayer would receive losses?

A. That was the system used in 1986, and the identical system was used in ’87.

Q. And Auramet drained out only G & A expenses to the five limited partnerships, and only Canadian exploration expenses to Canquest?

A. That’s correct.

Q. So there’s a very discrete division between the two?

A. That’s correct.

Q. There’s no leakage across?

A. No.

Q. And that was done by Auramet which was hired as the managing consultant and the manager of these various partnerships?

A. That is correct.

Q. Is there anything, then, in your report under the heading Pool Concept that arises that further explains what we see in the chart that gives some characterizations to what this lawsuit is about?

A. Would you repeat the question.

Q. Is there anything further in the Pool Concept in your report that embellishes or adds to the schematic that you have now presented?

A. Other than the fact that, as I said before, dollar for dollar, every investor got exactly the amount that he subscribed for, no.

Q. And the last paragraph of the first page you say the coincidence of the above has never been explained.

A. I am sorry.

Q. What is the coincidence that has never been explained, or how might it be explained?

A. If I can use a simile of two prototypical investors, one investor signs up on January 1, 1986, the other one signs up on December 31, 1986. With the way the scheme was worked, both investors would receive exactly the amount of losses that they had been promised. Now that’s quite possible for the investor on January 1 because they have the whole year to make the loss, but it is very unlikely that a person would join at five minutes to midnight on December 31, and that the company is able to make that loss within such a short time period to exactly equal the amount that he subscribed for.

The appellants complain about the length of time required for their reassessments. By entering into the contracts upon which they filed their claims for losses in 1986, they voluntarily entered into a partnership and a maze for which they must assume responsibility. The unequivocal and unrefuted evidence is that Ken Rogers stalled throughout the audits and failed to supply the documents and information requested. It is apparent that Revenue Canada had to employ tremendous effort to establish the proper foundation for its assumptions and to contact each investor and establish that the basis of the assumptions was consistent and valid. The appellants claim that CRL, over Ken Roger’s signature, asked for assessments, however they did not authorize CRL to do this. When the appellants finally asked for their assessments they got them in a timely fashion and in valid form.

For these reasons, the claims of the appellants described in issue 3 are dismissed.

Issue 1

Was the business loss claimed an amount arising out of reasonable outlays or expenses incurred by the partnership for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(l)(a)and section 67 of the Income Tax Act?

The appellants joined their partnerships as limited partners. Thus the source and character of the income or loss claimed retains its identity when it is allocated to the partner. The first page of each of their two page subscriptions are important respecting this. They are not completely identical and the filled in portions vary for each appellant.

James A. Ion’s first page reads:

SUBSCRIPTION FORM TO PURCHASE "CC" UNITS CRL O’RD FUND/Jel6 TO: "RonLiv Taxinvestors Club" Limited Partnership (the "Group Partnership") P’ship Groups Taxinvestor Management Ltd., as General Partner #303, 925-7th Avenue S.W., Calgary, Alberta T2P 1A5

The undersigned hereby exercises his "CC" Warrants previously purchased with his subscription to the Group Partnership and thereby subscribes for 120 Class "CC" Units in the capital of the Group Partnership (the "Unit(s)") at a price of $1,000 per Unit, for a total amount subscribed of $120,000 payable to the Group Partnership as follows:

$25,800 in cash "equivalent by way of a letter of credit" or cheque herewith: (payable to P’ship Groups Taxinvestor Management Ltd.) $25,800 in cash or by cheque on or before "July 31, 1987";

$34,200 by assignment of 1986 loan proceeds to the satisfaction of the General Partner;

$34,200 by assignment of 1987 loan proceeds to the satisfaction of the General Partner

The undersigned, as an individual, represents and warrants the following:

(1) Exemption from Securities Registration. The undersigned understands that he is purchasing securities pursuant to an exemption under all relevant securities legislation, and that such exemption will exempt the Group Partnership from registration notice, and certain other requirements of said legislation, and in respect to such legislation, or otherwise, the undersigned is a limited partner who previously purchased "CC" Warrants at the time he became a limited partner in the Group Partnership, and thereby now has a right to purchase "CC" units of the Group Partnership, and additionally he is a close business associate of the Group Partnership and is not the public relative to the Group Partnership or North West Taxinvestors Cooperative because, in addition to the aforesaid the undersigned is a close friend, relative, business associate, or employee of one of the promoters of the Group Partnership;

(2) Use of Proceeds and Adequate Information. The undersigned understands that with the proceeds from the sale of Class "CC" Units, the Group Partnership intends to purchase in Alberta for investment purposes, as principal, Units (the "Fund Units") in CRL Management and Overhead Limited Partnership ("the Fund") which, after all deductions have been claimed, may be exchanged for shares of Coldspring Resources Ltd. ("Coldspring") (the Units and Shares together being hereinafter referred to as the "Proposed Partnership Investments"); and additionally, the undersigned understands that the Group Partnership is a co-promoter of each of the entities comprising the "Proposed Partnership Investments" and as such has fully reviewed and understands all of the data and test results currently available in respect to these entities; and that undersigned has studied a copy of the summaries entitled "CRL Fund Summary" and "Britcol Resource Development Ltd-Information Circular-June 16, 1986" (collectively "The Information") and due to the foregoing and his relationship with the Group Partnership is of the opinion that he or she is able to, and any prudent investor with his or her net worth, business experience, and advisors would be able to evaluate both this investment and a direct or indirect investment in the Units and the Proposed Partnership Investments on the basis of The Information reviewed; and that the undersigned understands that:

(i) all and any costs or benefits which directly or indirectly relate to the said Fund are the responsibility of and for the benefit of the "CC" Unitholders of the Group Partnership; and

(ii) each Fund Unit is convertible into Shares of Coldspring on the basis of the then fair market value of the shares versus the then fair market value of the Units; which due to the same revenue base should remain constant at 250 Shares per Unit; and the subscriber hereby votes his "CC" Units in favour of 30,000 Shares of Coldspring, for exchange and delivery after all deductions have been claimed. The relevant Share(s) certificate registered in the name of the Group Partnership will, in due course, be provided to each "CC" Unitholder as collateral to protect his benefit entitlements, as aforesaid; and each "CC" Unitholder is hereby given a limited Power of Attorney to act for the Group Partnership in respect to causing or restricting any transfers of the aforesaid Share(s) certificate held or to be held by him. Upon completion of listing of shares of Coldspring if as and when same occurs and which is subject to approvals of VSE and authorities having jurisdiction, the Units will be exchanged for the Shares.

(3) Tax Deductions. The Fund shall allocate its business loss for income tax purposes (overhead) to each subscriber in the amount of $500 per Unit for 1986 and $500 per Unit for 1987. The total business loss to be allocated for 1986 is $60,000 (maximum of $1,000 per Unit) and for 1987 is $60,000.

Paragraph 3 of Ted L. D’Amico subscription form is different. It reads:

(3) Tax Deductions. The total business loss of $1,000 per Unit to be allocated to the subscriber for 1986 is $84,000 (maximum of $1,000 per Unit) and for 1987 is $.

There is no evidence that either appellant was a "close friend, relation, business associate or employee of one of the promoters". Nor was any evidence led that either could evaluate the investment or that either understood the alleged transaction. Each had some idea there was gold mining involved and each knew that he was getting a tax loss to claim which exceeded his cash or letter of credit.

Paragraph 3 promises the appellants a loss, not a profit. Paragraph 2 states that the Group Partnership "intends" to purchase Units in CRL which "may" be exchanged for Coldspring shares. The subscriptions were clearly stated to be exempt from securities regulations and the forms contain phrases couched for that purpose. Neither appellant complained about this.

Thus each appellant was told that his group partnership intends to purchase units in CRL and that a "tax deduction" is "to be allocated" or that CRL "shall allocate" to the subscriber an amount of "business loss" per unit. They contracted for an allocation of a "business loss" from the partnership.

To claim a business loss the partnership has to be in business. There was no profit. Therefore, to be in business, the partnership must have had a reasonable expectation of profit. The classic description of this is Dickson J.’s in Moldowan v. The Queen, [1948] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213 at 485 (C.T.C. 313-14, D.T.C. 5215) when he said:

Although originally disputed, it is now accepted that in order to have a "source of income" the taxpayer must have a profit or a reasonable expectation of profit. Source of income, thus, is an equivalent term to business: Dorfman v. M.N.R., [1972] C.T.C. 151, 72 D.T.C. 6131. See also paragraph 139(l)(ae) of the Income Tax Act which includes as "personal and living expenses" and therefore not deductible for tax purposes, the expenses of properties maintained by the taxpayer for his own use and benefit, and not maintained in connection with a business carried on for profit or with a reasonable expectation of profit. If the taxpayer in operating his farm is merely indulging in a hobby, with no reasonable expectation of profit, he is disentitled to claim any deduction at all in respect of expenses incurred.

There is a vast case literature on what reasonable expectation of profit means and it is by no means entirely consistent. In my view, whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance.

None of the officers of the partnership testified. Kevin Gowland, an accountant for Auramet, the manager and operator of CRL, who was first employed by Auramet in June 1987, said that basically Auramet’s operations were conducted to facilitate the sale of partnership units.

There is no evidence of any past profit or loss experience of CRL. There is no record of its training. Auramet (the contractual manager and operator of CRL’s alleged business) had two officers in Vancouver who had mining and geological experience. CRL had no capital cost allowance. William Gatfield testified that during his investigation between July 1988 and September of 1990 he discovered that neither Morningland Ventures Ltd. nor Coldspring Resources Ltd. had filed income tax returns, and that those returns had to be filed before he was able to complete his work. These two corporations were the source of any alleged mining business; their returns are not in evidence.

CRL’s intended course of action is only in evidence insofar as its purposes are in evidence and in the testimony of Mr. Gowland. The purpose of CRL in its Certificate of Limited Partnership filed November 12, 1985 (Exhibit AR-20) is to conduct exploration and development of mining properties. This was amended on October 17, 1986, before Ted D’Amico joined and before its fiscal year end of December 31, 1986 (Exhibit AR-23) to state that:

The general nature or character of the business to be carried on by the Limited Partnership is to earn a profit interest by incurring the overhead expenses necessary to enable the transition from various limited partnerships and other entities to Coldspring Resources Ltd.

[Emphasis added. I

These words are at once on purpose and obscure. CRL was to incur expenses. Presumably these were to enable the partnership interests to become share interests in Coldspring. The partnership interests of the appellants are capital. Thus Coldspring did not pursue a profit after October 17, 1986; rather it incurred expenses to cause a transition of a capital asset.

In fact, the appellants did receive Coldspring shares at no further cost in the manner described at the conclusion of the agreed statement of facts.

The appellants’ subscriptions were for allocated losses. Auramet, the manager and operator, provided no evidence of its 1986 activities as manager and operator. In 1987 it merely facilitated the sale of partnership units. No one testified on behalf of CRL as to CRL’s 1986 operations. It was stated in the subscriptions that each unit of CRL was to be convertible to shares in Coldspring. The October 17, 1986 amendment’s description of a "profit" was self-serving and false. The subscriptions promised losses. The elaborate cash and numerical flow created losses. The reference to "profit" was to satisfy the Partnership Act and the authorities. Auramet, its contracted manager, allocated to CRL "General and Administration Expenses" pursuant to CRL’s October 17, 1986 stated purpose and the subscribed intention of the appellants to obtain losses. These facts establish that there was to be no profit in CRL and none was intended.

There was no reasonable expectation of profit by CRL in 1986 and the source of its allocation in 1986 was losses, as was intended. Therefore the losses claimed did not arise out of outlays or expenses incurred by CRL for the purpose of gaining or producing income from a business or property. There were no business losses to claim for income tax purposes.

In view of the findings on issues 1 and 3, it is not necessary to deal with issue 2.

The appeals are dismissed.

A great deal of preparation by counsel was necessary on both sides. It is also obvious that most of the information and material that the appellants received respecting the operation and contained in the agreed statement of facts (which saved days of Court time) was due to the work of the respondent’s counsel and the audit of Revenue Canada. The respondent is awarded a full set of party-and-party costs respecting each appeal.

Appeals dismissed.