Harvey Carson, Delon Christensen, William J. Foster, Joe Harrison, Leslie M. Hart, Jason Liou, Ann S. Mark, Max Meier, Lan Nohel, Magdaline Temmel, Walter Riva and Kenganey Investment Inc. v. Minister of National Revenue, [1988] 1 CTC 2382, 88 DTC 1249

St-Onge, T.C.J. [Orally]:—The appeals of Harvey Carson, Delon Christensen, William J. Foster, Joe Harrison, Leslie M. Hart, Jason Liou, Ann S. Mark, Max Meier, lan Nohel, Magdaline Temmel, Walter Riva and Kenganey Investment Inc., were heard on common evidence on the 5th, 6th and 7th day of October, 1987, at the City of Vancouver, British Columbia, and it has to do with losses by reason of their interest in Limited Partnerships in 1981, 1982 and 1983 taxation years.

The statement of facts in paragraph 21 of the notice of appeal in the case of Harvey Carson (85-1688(IT)) reads as follows:

21. The Appellant says that the Respondent has erred on the facts and in law in disallowing in the computation of his income for his 1981, 1982 and 1983 taxation years, his pro rata share of the aforementioned business losses which were duly allocated to him by reason of his partnership interests in the 1981 Limited Partnership, the 1982 Limited Partnership, and the 1983 Limited Partnership.

In the reply to the notice of appeal (Harvey Carson — 85-1688 (IT)), the respondent reassessed the appellants on the following grounds. Paragraphs 2 to 22 and paragraph 24 of the said Reply read as follows:

2. He admits the allegations contained in paragraph 1 of the Notice of Appeal and further adds that:

(a) the Appellant became a limited partner in the 1981 Limited Partnership by acquiring 7 units thereof, and

(i) paying cash in the amount of $4,900

(ii) giving a non-interest bearing promissory note in the amount of $20,825.

(b) the Appellant became a limited partner in the 1982 Limited Partnership by acquiring 25 units thereof, and

(i) giving a non-interest bearing promissory note of $52,500, and

(ii) paying $10,000 in cash to acquire 5,000 Class S Preferred shares in Aabco Oil & Gas Inc.

(c) the Appellant became a limited partner in the 1983 Limited Partnership by acquiring 20 units thereof, and

(i) giving a non-interest bearing promissory note of $44,400, and

(ii) paying a $9,600 in cash to acquire 4,800 Class T, Series A Preferred shares in Aabco Oil & Gas Inc.

It is the Respondent's position that the Appellant's involvement in the various Limited Partnerships was part of an overall tax scheme arrangement more fully described hereinafter.

3. He admits the allegations contained in paragraph 4 of the Notice of Appeal, and further adds that the general partner of the Limited Partnership was, at all relevant time, Savers Oil & Gas Inc., a company controlled by one Jeffrey Barnett, and that on and as of November 12,1981, the sole limited partner of the Limited Partnership was one Peter Barnett (Jeffrey Barnett’s brother) who, as contribution to the capital of the partnership had

(i) paid $3,675 in cash, and

(ii) given $22,050 in non-interest bearing promissory notes.

4. With further reference to the allegations contained in paragraph 4 of the Notice of Appeal, as of December 31, 1981, the limited partners in the 1981 Limited Partnership, and their respective contributions, were

Non-interest

bearing promissory

LIMITED PARTNER	Units Units Cash		notes notes
Members of the
public (including
Appellant)	1,149	$804,300	$ 3,418,275
Peter Barnett	7	3,675	22,050
Savers #1 Limited Partnership	1,000	1,000	3,674,000
Savers #2 Limited Partnership	2,844	284	10,451,416
Savers #3 Limited Partnership	7,000	700	25,724,300
TOTAL	12,000	$809,959	$43,290,041
		$44,100,000

5. He admits the allegations contained in paragraph 2 and further adds that the general partner of the Limited Partnership was, at all relevant time, Savers Oil & Gas Inc., and that as of December 30, 1982, the sole contributions made to the Limited Partnership were non-interest bearing promissory notes aggregating $3,852,400.

6. He admits the allegations contained in paragraph 3 and further adds that the general partner of the Limited Partnership was, at all relevant time, Savers Oil & Gas Inc., and that as of December 28, 1983, the sole contributions made to the Limited Partnership were non-interest bearing promissory notes aggregating $10,762,560.

7. With respect to the allegations contained in paragraph 5 of the Notice of Appeal, he admits that the Partnership Agreement states that the Purpose and Objects of the Partnership are:

"(a) The purpose of the Partnership shall be to invest in, buy, lease, hold, trade, and deal in or otherwise acquire and dispose of resource properties, hydrocarbons or minerals for profit. The object of the Program is to trade by investing funds in oil and natural gas and mineral properties, exploring and improving the properties as may be necessary, and selling the hydrocarbons, minerals or properties for profit.”

The Respondent further states that the Limited Partnership was created as part of a plan involving a series of transactions designed to:

(a) procure a substantial tax advantage to its subscribers, and

(b) bring financial rewards for the promoters, Messrs. Jeffrey Barnett and Gregory Anders.

8. Particulars of the plan were:

(a) A "tax loss" Limited Partnership would be formed and have as its general partner a company controlled by Jeffrey Barnett. Units of the partnership would be advertised and sold to members of the public who would be enticed to so acquire the units solely on the basis of the expected tax benefits that could be derived as a result of implementing the plan. 12,000 units at a "price" of $3,675 per unit (total issue: $44,100,000) would be advertised on the basis that an investor would have to acquire a minimum of 7 units, by paying cash in the amount of $700 per unit and signing promissory notes aggregating $2,975 per unit ($700 cash + $2,975 notes = $3,675).

(b) In addition, to ensure that all units would be sold and that the tax advantages anticipated could be had in the years 1982 and 1983 Limited Partnerships would, at the instigation of Jeffrey Barnett, be set up and would acquire units in the "tax loss" Limited Partnership by contributing very little cash (as low as 0.10¢ per unit) and issuing promissory notes to cover the “contribution price" of a unit.

(c) The "tax loss" Limited Partnership would enter into option agreements and a “Drilling Contract" with a corporation controlled by Gregory Anders. The “Drilling Contract" would purport to create an immediate liability for the "tax loss" Limited Partnership of $44,100,000 in respect of services which allegedly would be performed at same future date. The entire amount of $44,100,000 would be "funded" by the issuance of promissory notes of the “tax loss" Limited Partnership.

(d) The "tax loss" Limited Partnership would sell for $1.00 the option agreements and the “Drilling Contract" to a general partnership composed of the "tax loss" Limited Partnership and a corporation in which Jeffrey Barnett would have a direct or indirect substantial interest. The “tax loss" Limited Partnership would not however transfer its “liability” of $44,100,000 under the “Drilling Contract".

(e) The "tax loss" Limited Partnership would file an election under the provisions of subsection 97(2) of the Income Tax Act electing the transfer price of the “Drilling Contract", to be $1.00. As a result, and considering the “Drilling Contract” to have been part of its inventory on hand, the "tax loss” Limited Partnership, in computing its income, would claim to have suffered a loss of $44,100,000 (i.e. $1.00 elected amount minus the "cost" of the "inventory" of $44,100,000).

(f) This loss would then be allocated to the limited partners who would reduce their income from other sources by an equivalent amount (or carry backward or forward the said loss in those cases where no sufficient income had been earned in the year).

(g) With respect to the Limited Partnerships who had acquired units in the “tax loss" Limited Partnership, they would also allocate their "share" of the tax loss to their own limited partners (some of which were also Limited Partnerships created at the instigation of the promoters). As a result, a portion of the “tax loss" would be available through this mechanism for the years 1982 and subsequent.

9. He admits the allegations contained in paragraphs 6 and 7 and says that these steps were taken in furtherance of the plan described in paragraph 8 herein.

10. With respect to the allegations contained in paragraphs 8 and 9 of the Notice of Appeal, he admits that on November 12, 1981, the 1981 Limited Partnership, in furtherance of the plan described in paragraph 8 herein, entered into a “Drilling Contract”. He denies all further allegations contained in paragraphs 8 and 9 and more particularly denies that the sum of $44,100,000 represented an outlay or expense made by the 1981 Limited Partnership or revenues earned by Ganders.

11. With further reference to the allegations contained in paragraphs 8 and 9, the “Drilling Contract" was entered into,

(a) at a time when the 1981 Limited Partnership had, as capital available to it, only cash in the amount of $3,675 contributed by Peter Barnett,

(b) at a time when, under the 1981 Limited Partnership Agreement, neither the Appellant nor any other limited partner could be called upon to pay any amount with respect to the promissory notes given to the 1981 Limited Partnership,

(c) at a time when neither Ganders nor any agent or sub-contractor had

performed any service for or on behalf of the 1981 Limited Partnership.

12. With further reference to the allegations contained in paragraphs 8 and 9 of the Notice of Appeal,

(a) at no time until December 31, 1981 or at any time thereafter did the cash contributed to the 1981 Limited Partnership exceed $809,959,

(b) at no time until December 31, 1981, or at any time thereafter was the Appellant or any other limited partner called upon or be in a position to be called upon to pay the amounts of the promissory notes given to the 1981 Limited Partnership,

(c) at no time until December 31, 1981 or at any time thereafter, did Ganders perform any of the services called for under the “Drilling Contract" or be instructed to do so by the general partner of the 1981 Limited Partnership.

13. He admits that the 1981 Limited Partnership on November 12, 1981 assigned absolutely to the Aabco-Savers General Partnership all of its right, title and interest in and to the option agreement and the “Drilling Contract" for the price of $1.00 and that an election under the provisions of subsection 97(2) of the Income Tax Act ("the Act") was filed. The partners of the Aabco-Savers General Partnership were the 1981 Limited Partnership and Aabco Oil & Gas Inc., a corporation in which Jeffrey Barnett had, directly or indirectly, a substantial interest. He denies all further allegations contained in paragraphs 10 and 11 and more specifically denies that:

(a) the 1981 Limited Partnership had a liability in the amount of $44,100,000

(b) as a result of the election, under subsection 97(2) of the Act, a business loss of $44,100,000 had been suffered in the 1981 fiscal period, or in any other relevant period, of the 1981 Limited Partnership.

14. With respect to the allegations contained in paragraph 12 of the Notice of Appeal, he admits that the General Partner of the 1981 Limited Partnership allocated an amount of $44,100,000 to the limited partners thereof, but specifically denies that it was, factually or legally correct in so doing. He further admits that the Appellant, a limited partner, claimed as a loss a pro rata share of the said $44,100,000 in the computation of his 1981 income, but denies that he was correct in so doing.

15. With respect to the allegations contained in paragraph 13 of the Notice of Appeal, he admits that pursuant to the 1981 Partnership Agreement, the General Partner of the 1981 Limited Partnership allocated to the 1982 Limited Partnership, which had become a limited partner of the 1981 Limited Partnership, the amount of $3,675,000 as its pro rata share of the said $44,100,000, but specifically denies that it was factually or legally correct in so doing.

16. With respect to the allegations contained in paragraph 14 of the Notice of Appeal, he admits that pursuant to the 1982 Partnership Agreement, the general partner of the 1982 Limited Partnership allocated to the limited partners thereof the amount of $3,675,000, at the end of its 1982 fiscal year, and that the Appellant, a limited partner, claimed as a loss a pro rata share of the said $3,675,000 in the computation of his 1982 income, but specifically denies that he was correct in so doing.

17. With respect to the allegations contained in paragraphs 15 and 16 of the Notice of Appeal, he admits that pursuant to the 1981 Limited Partnership Agreement, the amount of $10,451,700 was allocated to Savers #2 Oil and Gas Program - 1981 Limited Partnership as its pro rata share of the $44,100,000 and that Savers #2 Oil and Gas Program - 1981 Limited Partnership had become a limited partner in the 1981 Limited Partnership on December 31, 1981 by acquiring 2,844 units thereof, but he specifically denies that it was factually or legally correct in so doing.

18. With respect to the allegations contained in paragraph 17 of the Notice of Appeal, he admits that Savers #2 Oil and Gas Program -1981 Limited Partnership then allocated the amount of $10,451,700 to its limited partners, which included the 1983 Limited Partnership, at the end of its 1982 fiscal year pursuant to its governing Partnership Agreement, and that the 1983 Limited Partnership was allocated the amount of $10,400,000, but specifically denies it was factually or legally correct in so doing.

19. With respect to the allegations contained in paragraph 18 of the Notice of Appeal, he admits that pursuant to the 1983 Partnership Agreement the General Partner of the 1983 Limited Partnership allocated to the limited partners the amount of $10,400,000 at the end of its 1983 fiscal year and that the Appellant, a limited partner, claimed as a loss a pro rata share of the said $10,400,000 in the computation of his 1983 income, but he specifically denies that the Appellant was correct in so doing.

20. He admits the allegations contained in paragraph 19 of the Notice of Appeal and says that in reassessing the Appellant with respect to his 1981, 1982 and 1983 taxation years, the Respondent assumed and proceeded on the basis that:

(a) the “Drilling Contract" was entered into in the circumstances as set forth in paragraph 11 herein;

(b) at no time was the cost of the 1981 Limited Partnership of the “Drilling Contract" in the amount of $44,100,000 or that the 1981 Limited Partnership had, as a result of the election under subsection 97(2) of the Act, suffered a business loss of $44,100,000;

(c) at no time were the promissory notes issued by the limited partners to the various Limited Partnerships, including the promissory notes issued by the Appellant to the 1981 Limited Partnership, genuine; neither was their eventual payment a virtual certainty in no way the subject of a contingency or the realization of the condition;

(d) at no time did the 1981 Limited Partnership incur an outlay or expense or become liable to pay an amount of $44,100,000 under the “Drilling Contract";

(e) at no time until December 31, 1981 or at any time thereafter, did Ganders perform any of the services called for under the “Drilling Contract" or be instructed to do so by the general partner of the 1981 Limited Partnership;

(f) at no time did the 1981 Limited Partnership suffer a business loss exceeding $187,110 or the Appellant become entitled to claim, as his share of the business losses suffered by the various Limited Partnerships in which he was a member, any amount exceeding those computed by the Respondent and shown as the Revised Allocation of partnership losses;

(g) the provisions of subsection 245(1) of the Act apply so as to prohibit, in the computation of the 1981 Limited Partnership's income any deduction in respect of the "cost" to it of the “Drilling Contract" since, if allowed, such a deduction would unduly or artificially reduce the 1981 Limited Partnership's income.

21. In the alternative, the Deputy Attorney General of Canada submits that:

(a) the “Drilling Contract" and the promissory notes purportedly issued by the

1981 Limited Partnership in the amount of $44,100,000 were but shams, and

(b) the 1981 Limited Partnership was not the relation that subsists between persons carrying on business in common with a view to profit and was not in fact and law a partnership.

22. In the alternative, the Respondent submits that:

(a) the “Drilling Contract" did not constitute, in the 1981 Limited Partnership's hands, inventory with the consequence that any loss suffered as a result of the transfer of the “Drilling Contract" to Aabco-Savers General Partnership and the subsequent election under subsection 97(2) of the Act is on capital account,

and

(b) the 1981 Limited Partnership's business did not include trading or dealing in rights, licenses or privileges to explore for, drill for or take minerals, petroleum, natural gas or other related hydrocarbons. Hence, the provisions of sections 59, 64, 66, 66.1, 66.2 and 66.4 of the Act apply.

24. He respectfully submits that the Appellant, in respect of each of the years at issue, is not entitled to claim as his share of business losses suffered by the 1981 Limited Partnership, the 1982 Limited Partnership and the 1983 Limited Partnership any amount exceeding those allowed by the Minister of National Revenue by his reassessments.

At the hearing, counsel for the appellants admits subparagraphs 2(a), (b), (c), paragraphs 3, 4, 5, 6, subparagraphs 7(a), 11(a), (b), (c), and 12(a), (b) and

(c) of the reply to the notice of appeal.

As may be seen, the respondent in his reply admits paragraphs 12 to 19 of the notice of appeal, but denies that it was factually and legally correct in so doing.

Mr. Bruce Russell, an experienced lawyer in corporate and security laws, did incorporate Aabco Oil and Gas Inc. for the purpose of becoming a public company on the Vancouver Stock Exchange. In 1981, a prospectus of the said company was issued under and approved by the Superintendent of Brokers, and the shares of Aabco Oil and Gas Inc. did form part of the offering memorandum which was distributed to the public.

Mr. Jeffrey Barnett was the main participant. As already admitted the general partner of the Limited Partnership was at all times Savers Oil and Gas Inc., a company controlled by Jeffrey Barnett, and that on or about November 12, 1981, the sole limited partner of the Limited Partnership was Peter Barnett (Jeffrey Barnett's brother) who had contributed to the capital of the partnership $3,675 in cash and $22,050 in promissory notes.

Section 36 of the Securities Act requires the full disclosure to the Superintendent of Brokers of what is offered to the public before raising funds therefrom. This offering memorandum was amended twice to add additional partners and by November 12, 1981 they were considering acquiring a large number of oil and gas leases which was part of the option.

According to Mr. Russell, the offering memorandum was the vehicle used to sell the units and as far as he is concerned there was no misrepresentation. Exhibit A-10 is the approval by the Alberta Securities Commission to sell the units in that province. There is no partnership agreement except for Savers #4, and a subpoena was sent to the appellant by the respondent to get them. The leases for the first program were situated in the State of Missouri, U.S.A., whereas Savers #4 was to finance properties in Florida; namely, Paradise Resort and also to acquire interest in leases.

Upon cross-examination, Mr. Russell admits that he was not a tax expert and the opinion expressed in the documents were given by others. He was not acting on behalf of the 12 investors, but only for Mr. Jeffrey Barnett, his company and the Limited Partnership. He was not aware of the revenue of the various partnerships and knew nothing about the disposition of the money.

Mr. Russell did draft a partnership agreement which was filed as Exhibit A-2 and reads as follows at pages 355, 356, 368, 371:

2.5 Meetings

(a) The General Partner may secure the consent or agreement of any Limited Partner to any matter requiring such a consent or agreement in writing and such consents or agreements in writing may be used in conjunction with votes given at a meeting of Limited Partners or without a meeting of Limited Partners to secure the necessary consent or agreement hereunder.

(c) The General Partner will call a general meeting of the Limited Partners annually, as well as upon receipt of a written request from Limited Partners representing 10% of the outstanding Units. If the General Partner fails or neglects to call such a meeting within 15 days after receipt of the written request then any Limited Partners may call the meeting. Meetings are to be held at the principal place of business in British Columbia of the General Partner or such other place in Vancouver, British Columbia as the party calling the meeting may designate.

AMENDMENT

9.1 This Agreement may be amended in writing on the initiative of the General Partner with the Consent of 75% in Interest according to their participation Ratio of the Limited Partners provided that this Article may not be amended.

9.2 The General Partner may, without prior notice to or consent from any Limited Partner, amend any provision of the Agreement from time to time:

(a) for the purpose of adding to the Agreement any further covenants, restrictions, deletions or provisions which in the opinion of legal counsel to the program are for the protection of the Limited Partners; or

(b) to cure an ambiguity or to correct or supplement any provisions contained herein which in the opinion of counsel to the Program may be defective or inconsistent with any other provisions contained herein provided, in the opinion of such Counsel, the curing, correcting or supplemental provision does not and will not adversely affect the interests of the Limited Partners; or

(c) to make such other provisions in regard to matters or questions arising under the Agreement which in the opinion of counsel to the Program do not and will not adversely affect the interest of the Limited Partners.

9.3 Limited Partners will be notified of full details of any amendment to this Agreement within 30 days of the effective date of the amendment.

10.1 Books and Records

The books and records of the Program shall be kept for income tax purposes and shall reflect all Program transactions and be appropriate and adequate for conducting the Program's business. Subject to Section 2.4(c) the books and records of the Program will be available for inspection by the Limited Partners at the head office of the General Partner during usual business hours.

10.2 Annual Statements and Other Reports

On or before 90 days into each fiscal year a report shall be transmitted to each Limited Partner containing an annual statement of receipts and expenditures of the Program, as certified by its auditors and a statement of each partner's share for income tax purposes of the Program's income.

10.3 The General Partner shall furnish each Limited Partner with interim activity reports at least once every six months giving details of the projects to which Net Proceeds to Program have been committed, and, in addition, shall furnish each Limited Partner with unaudited financial statements on a yearly basis.

11.1 Dissolution

The Program shall be dissolved upon the occurrence of any of the following:

(a) The decision of the General Partner when the business and affairs of the Program are completed and the assets distributed, subject to the consent of 75% in Interest of the Limited Partners as determined by their Participation Ratio;

(b) The bankruptcy, insolvency or dissolution (except dissolution as the consequence of merger, amalgamation, consolidation or other corporate reorganization) of the General Partner or the occurrence of any other event which would permit a trustee or receiver to acquire control of the General Partner's affairs;

(c) The agreement of all Partners;

(d) The expiration of the term provided in Section 1.4.

12.3 Miscellaneous

(d) This Agreement, and the application or interpretation thereof, shall be governed exclusively by its terms and by the laws of the Province of British Columbia.

(e) The rights and remedies provided by this Agreement are cumulative, and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the partners may have by law, statute, ordinance or otherwise.

(f) This Agreement may be executed in any number of counterparts with the same effect as if all the Partners all signed the same document. All counterparts shall be construed together and shall constitute one instrument.

(g) Each Partner irrevocably waives during the term of the Program any rights that he may have to maintain any action for partition with respect to leases held by the Program, or an interest therein, or other interest in real property, whether corporeal or incorporeal.

(h) Time is of the essence hereof.

(i) Each and all of the covenants, terms, provisions and agreements herein contained shall be binding upon and enure to the benefit of each Partner and, to the extent permitted by this Agreement, their respective heirs, administrators, executors, legal representatives, successors and assigns.

(j) In this Agreement where the case requires masculine pronouns it shall include feminine and neuter.

(k) No person, firm or corporation dealing with the Program shall be required to enquire into the authority of the General Partner to take any action or make any decision.

(I) Notwithstanding any other provision of this Agreement the Program shall not be dissolved by virtue of the death of any individual Limited Partner, the bankruptcy or winding up of any corporate Limited Partner, or the resignation of any Partner.

(m) If Revenue Canada, Taxation or any other competent taxing authority assesses or re-assesses any Limited Partner to any income tax, or proposes such an assessment or re-assessment, by disallowing any loss allocated to a Limited Partner by the partnership then, upon the General Partner receiving written notice of such assessment or re-assessment and at the written request of the Limited Partner, the General Partner will appoint counsel at the expense of the General Partner for the purpose of defending such assessment or re-assess- ment, provided however:

According to clause 2 "Term of Option” at page 382 of Exhibit A-2, the option was effective until December 22, 1981, but Mr. Russell was not in- structed to prepare any document for the exercise of such option, nor was he requested to do title researches with respect to clause 3. However, he was requested to prepare various documents for the 12th of November, 1981 because of the federal budget.

Mr. Russell also admitted that the agreements in the prospectus did not have the clause mentioned under the title "Price" at Tab 15, page 434 in Exhibit A-2. The first two pages of the Agreement between Ganders Petroleum Inc. and Savers Oil & Gas Program — 1981, Limited Partnership entered as Exhibit A-2 read as follows:

WHEREAS the said Owner is the owner of or holds options on the following oil and gas leases (hereinafter collectively called the 'Lands') situate in Vernon County, Missouri, U.S.A., McPherson County, Kansas, U.S.A. and Marion County, Kansas, U.S.A.:

(a) Vernon County, Missouri, U.S.A. leasehold interests of approximately 25,036 acres.

(b) McPherson County, Kansas, U.S.A. leasehold interests of approximately 10,460 acres.

(c) Marion County, Kansas, U.S.A. leasehold interests of approximately 1,000 acres.

(d) Vernon County, Missouri, U.S.A. leasehold interests of approximately 32,314 acres.

(e) Vernon County, Missouri, U.S.A. leaseholds interests of approximately 24,962 acres, subject to existing option and obligations (supra).

WHEREAS the said Lands are more particularly known and described in Schedules ‘A’, ‘B’, ‘C’, 'D' and 'E' annexed hereto.

WHEREAS the Contractor has expertise in drilling, exploration, site selection, trading, management and operation of oil and gas wells and resource, hydrocarbon and mineral management.

WHEREAS the Owner desires to employ and contract with the said Contractor to drill and complete an oil and/or gas well program on well sites on a fixed price basis hereinafter described, for the commodities and terms hereinafter set out to prove up and enhance the marketability of the "Lands" for resale and trade.

NOW WITNESSETH that in consideration of the sum of FORTY-FOUR MILLION ONE HUNDRED THOUSAND ($44,100,000.00) DOLLARS now paid by the Owner unto the Contractor, receipt of which is hereby acknowledged, the Contractor and the Owner hereby covenant, promise, agree and contract as follows:

DRILLING CONTRACT

The Contractor shall supply to the Owner all necessary and requisite management services, drilling services, operating services, exploration services, pumping and fracting services and steam services to enable the Owner to complete a drilling and exploration program (hereinafter known as "The Program") on the said lands.

PRICE

The total Contract Price is the sum of FORTY-FOUR MILLION ONE HUNDRED THOUSAND ($44,100,000.00) DOLLARS (CANADIAN), payable forthwith upon entering into this agreement. The Owner may provide the Contractor with one or more promissory notes payable on demand without interest as consideration for all or a portion of the Contract Price hereunder, PROVIDED HOWEVER, that the full Contract Price shall become due and payable and earned by the Contractor on the 12th day of November, 1981. The full Contract Price shall be credited to the Owners Joint Account as defined in the Model Form Operating Agreement annexed hereto as Exhibit "F". The full Contract Price shall be paid notwithstanding the Owner or its assigns fail to exercise options to purchase Oil and Gas Leases covering the lands set out in Schedules ‘A’, ‘B’, 'C', 'D', and 'E' hereto or substitutions therefor.

PROGRAM

The Program consists of drilling oil and gas wells on selected drilling sites on leased lands situate in Vernon County, Missouri, U.S.A. and McPherson and Marion Counties, Kansas, U.S.A. Depth, site selection and respective drilling costs of each well shall be fixed as hereinafter set forth. The intent of this agreement is to prove up and enhance marketability of the lands for the purpose of resale and specifically not for the purpose of exploration and continuing production.

TERM

The Program shall be completed by December 31, 1986, which shall also be deemed to be the expiry date of this agreement, PROVIDED HOWEVER, should any of the oil and gas leases hereunder continue in force in accordance with Article XIII of the Model Form Operating Agreement dated November 12, 1981 and annexed hereto, this agreement shall remain in full force and effect. Commencement, dates and scheduling of drilling shall be as directed from time to time by the Non-Operator upon recommendation of the Operator. Drilling shall commence within ninety (90) days of the receipt of necessary permit and title opinion documentation.

Mr. Russell did not know:

(1) Whether on November 12, 1981, there was any asset invested by Peter Barnett other than $3,675 in cash and $22,050 on promissory notes.

(2) Whether on the same date a substitution was made in accordance with fixed price turnkey drilling of Tab 15, page 438.

(3) Whether a valuation was obtained to establish the value of the drilling contract.

(4) How much was invested in company by number 4, 5, 6, 7 and 8 Limited Partnerships.

Mr. Russell terminated his testimony by saying that expertise was assets transferred to the general partnership in the sale agreement.

Mr. Henshaw, a chartered accountant, testified that he did not give any tax advice and his role was to do the accounting work. He did not express any clear opinion when he prepared the Savers Oil and Gas financial statement for 1981 because there was a problem of collectibility, and the notes for those who had subscribed in the program were recorded as receivable.

However, Mr. Henshaw's firm gave a clear opinion when the unaudited financial statements were prepared for Savers #1 and Savers #4. He filed as Exhibit A-18 a financial statement for Savers — 1981, Savers #2, #3 and #5, as well as for Aabco Oil and Gas Inc. which were yearly issued to the shareholders. Then he filed a list of disbursements under Exhibit A-19(a), (b), and (c). Exhibit A-19(a) was accepted by the respondent but (b) and (c) only for identification, because his contention was that these disbursements had nothing to do with the $44.1 million loss.

Upon cross-examination Mr. Henshaw explained that Mr. Jack Iles was a tax partner in his firm. A letter filed as Exhibit R-1 bore Mr. Henshaw's signature, but the said letter was prepared by Mr. Iles. They had numerous discussions with r. Jeffrey Barnett about the loss of $44.1 million and how it could be flowed through.

Then Mr. Henshaw being aware of all the documents, counsel for the respondent put the following question to him: Did you look at the document at Tab 15, page 434, under the title “Price”, and at Tab 18, page 487, a sale for $1? These documents should have a big impact on financial statements. How could you create a liability of $44.1 million when capitalization was not present? Mr. Henshaw admits that he recorded a loss of $44.1 million without seeking legal opinion.

Mr. Henshaw was not aware:

(1) On March 12, 1982, whether there was any income from the Program or from the “Drilling Contract".

(2) Whether the notes other than those given for Savers Oil and Gas Program were granted without interest.

(3) Whether the assets of Saver #8 investment was nominal.

(4) Whether any options were being exercised.

He also explained:

(1) That no asset was shown on the balance sheet of December 31,1981, for the drilling services contract, because at that time the contract was sold.

(2) That the note of Exhibit A-20 was written by the Audit Manager, a chartered accountant of his firm. This note reads as follows:

Note: — Inherent asset value of service contract difficult to establish. Deeming this contract at other than $1 and recording it as such would tend to overstate assets, and impair reasonability of F/S.

— Conservative approach was therefore taken and 100% of contract has been written down to a nominal value of $1.

— Coincidentally this approach supports the approach taken for tax purposes rendering the S. 97(2) transfer at $1.

— Also supports the absolute value of $1 placed by Savers Oil and Gas on disposal of service contract to Aabco Savers-partnership. Asset to be carried in Aabco-Savers also @ $1.

(3) That he cannot say whether the amount of $364,968 and and the two payments of $100,000 mentioned in Exhibit A-1, Tab IB, page 38, were paid for drilling services.

Mr. Henshaw admits that Aabco has committed to loan the net proceeds of Program to Savers, to a maximum of $700,000 to net an estimated $525,000 being net of issue expenses and selling commissions, but it was for three wells in Ohio Project as set out in Aabco prospectus of August 4, 1981, whereas the optional properties under appeal were situated in Missouri and Kansas, U.S.A. That the disbursement mentioned in Exhibit A-19(b) had nothing to do with Savers Oil and Gas Program — 1981 Limited Partnership, and he could not point out one item in the list of disbursements of Exhibit A-19(c) that was paid for the above program. The properties in Florida had nothing to do with the documents at Tabs 9 and 15 of Exhibit A-2. Finally, Mr. Henshaw admitted that he never saw any documents seeking for payments with respect to an account receivable of $44.1 million.

Mr. Jeffrey Barnett was in the restaurant business under the name of Pizza Patio throughout Canada, which business became a public company on the Vancouver Stock Exchange. Then he went into a joint venture with a Japanese group and sold it in 1977. He founded another restaurant business under the name of Elephant and Castle, which had 600 employees and sold for $23 million in 1983.

Mr. Barnett met with Mr. Rosenberg of Exxon Oil company in the U.S., by whom he was convinced to invest in junior oil and gas companies in United States. This is why Savers Program was performed in United States rather than in Canada.

Then Mr. Barnett corroborated the testimony of Messrs. Russell and Henshaw. He explained that Canada was creating incentives when price of oil was very low and there was great commercial opportunity when the price started to escalate, so he decided to invest in the United States where the market was greater.

Mr. Barnett explained that the underwriting of the Program was initiated by the Brokerage House and it was understood that $44.1 million would be raised in 1981 to enable Mr. Barnett to execute the Program. Then he filed some five letters to show his effort to realize his investment Program. When the Program in oil was seeking, he looked for two things: cash flow, and secure investment, and this is why he did invest in Real Estate in Florida. He testified that payments were made to exercise the option of Tab 28, page 573, Exhibit A-2.

Upon cross-examination, Mr. Barnett said that the Program was a commercial business transaction but he had to admit that, in December, the Program had a liability of $44.1 million when the investors were approached by people licensed to do so. Apparently, the investors were not provided with

— (1) projection of income and, (2) profit and loss statements in order to allow them to know how to recuperate $44.1 million. Mr. Barnett was the sole [person] responsible to decide not to call for payment of the notes with respect to*a liability of $44.1 million. Finally he had to admit that Ganders was not a big company and that he knew nothing about its assets and the number of its employees and its drilling equipment.

Mr. Iles, a chartered accountant, who did work with Revenue Canada for a period of ten years, has always been interested in tax work. He met Mr. Barnett when the latter wanted to go into the oil and gas business. A first Program called "Tasp" did not go through on October 13, 1981. He drafted a letter with respect to Savers Oil and Gas Limited Partnership, which was filed as Exhibit R-1, and on January 5, 1983, his firm sent a letter to Revenue Canada for the transfer of inventory by Savers Oil and Gas Program 1981, Limited Partnership, to Aabco-Savers General Partnership on November 12, 1981. The election form describes inventory as options, related drilling contracts for an agreed amount of $1.

Upon cross-examination, Mr. Iles explained that his role was just in tax matters and did not have anything to do with the conduct of the partnership. He admits that the net effect of the transaction of November 12, 1981 was a substantial loss and for an elected amount, one has to find the cost.

Counsel for the appellants referred the Court to paragraph 20 of the respondent's reply to the notice of appeal to say that all the allegations were technically deficient and made a reproach to the Minister for not calling an expert witness. He said that the appellants' chartered accountant testified to the effect that the financial statements were prepared according to generally accepted accounting principles, and the assets had been treated correctly at a cost of $44.1 million; that there was no evidence to show that the election for the disposition of the said asset was not done properly.

Counsel for the appellants also argued that Mr. Russell was under a duty to disclose all the material facts to the superintendent, and the latter was satisfied that everything was complied with. Had the transaction not been genuine, he would have disclosed it. A promissory note is payable on demand and for this reason the liability was present.

Between 1981 and 1982 there was a great change in the price of oil and the offering memorandum went to sophisticated investors. It was very specula- tive. As to Mr. Jeffrey Barnett, the respondent did not prove his subparagraph 7(b) to the effect that the program did bring financial rewards for the promoters Jeffrey Barnett and Gregory Anders.

Mr. Barnett is a successful businessman who was new in the oil and gas business, and there is no evidence as to his intention.

Counsel for the respondent argued that there was no doubt about this case being a case of tax avoidance. The evidence of Messrs. Russell and Henshaw is sufficient to prove it. Then, she referred the Court to Amelia Rose v. M.N.R., [1973] C.T.C. 74 at 77; 73 D.T.C. 5083 at 5085, and I quote:

It does not seem to be in doubt that the reason for the scheme under which the corporations in question would be constituted a partnership to undertake management services for Central Park Estates Limited was to achieve tax advantages for the individuals owning the shares of some or all of those corporation. While this does not affect the result actually achieved by what was done, it does, in my view, warrant a very careful appraisal of the evidence when considering whether what was projected with that end in view was actually carried out.

Counsel for the respondent argued that the losses claimed in total are not deductible business losses because according to the evidence there was no reasonable expectation of profit in the carrying on of this program and the notes were not bona fide promissory notes because there was no cost to generate a loss.

None of the 12 appellants and no one from Ganders Oil and Petroleum have testified, whereas Messrs. Russell and Henshaw did testify as to the form of the transaction and knew nothing about the substance. The only one who knew about the substance was Mr. Barnett, and he was not of a great help. He did not provide the investors with a projection of the income or profit and loss statement, and in spite of a subpoena, there was a great lack of documents.

Then counsel for the respondent said that it did not make any sense to transfer an asset of $44.1 million for $1. No work was performed by Ganders, no calling of payments, so they were artificial transactions and the investor could not have a reasonable expectation of profit. She terminated her argument by saying that there was no necessity of having an expert witness after hearing Mr. Barnett.

The Court is more impressed by the evidence adduced by the respondent than that by the appellants. The appellants did not testify and the witnesses heard on their behalf were not able to show that this Savers Program was really created for a commercial purpose.

Upon cross-examination, the respondent was able to show that the appellants' witnesses knew very little about the transactions that were or were not carried out, and their roles were simply to draft documents on Mr. Barnett's instructions or to discuss the tax implications.

As to the substance, there is no evidence to prove:

(1) a liability of $44.1 million;

(2) the revenue of the various partnerships;

(3) the disposition of money;

(4) the exercise of option;

(5) the value of the “Drilling Contract";

(6) how much was invested in the company by partnership number 4,5, ) 5, 6, 7 and 8;

(7) request for payments of the account receivable of $44.1 million;

(8) that $364,968 and two payments of $100,000 of Tab 1(b), page 38 were paid for drilling services;

(9) that work was performed by Ganders Oil.

The evidence has also shown:

(1) that because of a problem of collectability the accountant was not able to give a clear opinion;

(2) that the accountant could not create a liability when there was no capitalization;

(3) that the loan of $700,000 from Aabco was for three wells in Ohio and not in Missouri or Kansas;

(4) that the documents filed demonstrate that it was absolutely impossible to earn a profit, but to incur substantial losses to be distributed to many sophisticated taxpayers.

The scheme did not have any commercial purpose and it is quite obvious that on November 12, 1981 everything was put into action to create a “tax loss” partnership for the sole purpose of obtaining a deductible loss. But above all, it is impossible to create a liability of $44.1 million when capitalization is nil and no income is coming in. Furthermore, how come Mr. Barnett, who had so much success with his investment and as a businessman, did not know about profit and loss statements and was unable to avoid creating a liability of $44.1 million. The only explanation is that on November 12, 1981, his intention was to create a "tax loss” Limited Partnership. The evidence is clear on the facts that as a businessman he did not carry out the business transaction as a businessman would do to realize a profit, and as a promoter, he did not act as such. The fact that the prospectus was approved by the Superintendent is not a guarantee that the whole program was on the level. As a matter of fact, the clause under "Price" in Tab 15, page 434, was not mentioned in the prospectus agreement. There is no doubt that the only reason for the scheme under which the various partnerships were constituted was to procure a substantial tax advantage to its subscribers.

The appellants had the onus to prove that the reassessments were wrong in fact and in law, and they failed to do so.

Consequently, the 12 appeals are dismissed.

Appeals dismissed.