Bowman T.C.J.:
1 These appeals are from assessments for the taxation years 1987, 1988 and 1989 of the appellant. They involve the disallowance of losses claimed by him as a limited partner in the Tucson Health Care Limited Partnership (“THCLP”). He purchased three units for $75,000 U.S., or slightly over $100,000 Cdn. The central question is whether Dr. Goren's interest in the partnership was an“ exempt interest” within the meaning of subsection 96(2.5) of the Income Tax Act so as to entitle him to deduct his pro rata share of the partnership losses in excess of his “at-risk amount” as defined in subsection 96(2.2).
2 The “at-risk” rules were enacted in 1986 to prevent limited partners from deducting partnership losses in excess of what was, essentially, the capital that they had risked in the business. I need not set out the rules in detail. The issue here is not what they mean but whether they apply to Dr. Goren's partnership interest.
3 The at-risk rules introduced in the budget of February 1986 were not made retroactive and an exemption from their application was made in the case of partnership interests that were “exempt” within the meaning of subsection 96(2.5). That subsection reads:
For the purposes of subsection (2.4), an exempt interest in a partnership at any time means a prescribed partnership interest or an interest in a partnership that was actively carrying on business on a regular and a continuous basis immediately before February 26, 1986 and continuously thereafter until that time or that was earning income from the rental or leasing of property immediately before February 26, 1986 and continuously thereafter until that time, where there has not after February 25, 1986 and before that time been a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership and, for this purpose, an amount will not be considered to be substantial where(a) the amount was used by the partnership to make an expenditure required to be made pursuant to the terms of a written agreement entered into by it before February 26, 1986, or to repay a loan, debt or contribution of capital that had been received or incurred in respect of any such expenditure,
(b) the amount was raised pursuant to the terms of a prospectus, preliminary prospectus or registration statement filed before February 26, 1986 with a public authority in Canada pursuant to and in accordance with the securities legislation of Canada or of any province, and, where required by law, accepted for filing by that public authority, or
(c) the amount was used for the activity that was carried on by the partnership on February 25, 1986 but was not used for a significant expansion of the activity
(d) a partnership in respect of which paragraph (b) applies shall be considered to have been actively carrying on a business on a regular and a continuous basis immediately before February 26, 1986 and continuously thereafter until the earlier of the closing date, if any, stipulated in the document referred to in that paragraph and January 1, 1987, and
(e) an expenditure shall not be considered to have been required to be made pursuant to the terms of an agreement where the obligation to made the expenditure is conditional in any way on the consequences under this Act relating to the expenditure and the condition has not been satisfied or waived before June 12, 1986.
4 The questions boil down to the following:1) was THCLP “actively carrying on business on a regular and a continuous basis immediately before February 26, 1986 and continuously thereafter...”? and
2) was the contribution of capital to the partnership that was made “not substantial” for the purposes of subsection 96(2.5) because the amount of the contribution was used by the partnership to make an expenditure required to be made by it pursuant to a written agreement entered into by it before February 26, 1986?
5 The facts are a little complex, but for the purposes of this appeal they may be simplified. A limited partnership was registered in Ontario on May 17, 1985 as THCLP. The partners were Advocate Equities Inc., which was the promoter, and 624826 Ontario Limited, the general partner.
6 The initial offering memorandum of May 20, 1985 stated that the proposed business was the acquisition and operation of a 200 bed nursing home in Tucson, Arizona after it was completed. The facility was at that time under construction by Medi-Villas (Arizona) Inc., which owned another nursing home on the same site. Medi-Villas was owned by Donald DalBianco, a shareholder of 624826 Ontario Limited. Avila Lodges Inc. was owned by the same persons who owned 624826 Ontario Limited. It was to be the first purchaser of the nursing home and the intention was that it should then sell the nursing home, once completed, to THCLP.
7 The acquisition of the nursing home by THCLP was to be financed by the sale of 63 limited partnership units of $25,000 U.S. each for a total of $1,575,000 U.S. and a vendor take back mortgage of $6,350,000. The sale of the nursing home to THCLP was completed in November 1986. Prior to that date Medi-Villas was the owner.
8 Dr. Goren became aware of the investment possibility in THCLP from his accountant. He submitted subscription forms in May 1985 and January 1986 and ultimately put up the money in November 1986. Counsel for the respondent emphasized in evidence and argument that Dr. Goren's application to become a partner was not accepted by THCLP when he submitted the subscription form, that a second offering memorandum was issued for 66 units, that Dr. Goren had not read the offering memorandum and could not have understood it, and knew nothing about the proposed business operations. Moreover, counsel emphasized that there were delays in closing the transaction as the result of failure to obtain Housing and Urban Development (“HUD”) approval, that an escrow closing took place in January, but the failure to obtain HUD approval, as well as other litigation, delayed the closing until November 1986. It was also stressed that the partnership agreement was changed and the financing arrangements changed. All these, and many other details that were brought out in evidence, are of passing interest in demonstrating the difficulties that Canadians encounter in embarking on business ventures in the United States, but they are largely irrelevant to the question that is central to this appeal, which is, was THCLP actively carrying on business on a regular and a continuous basis immediately before February 26, 1986 and continuously thereafter.
9 I have great difficulty in seeing how THCLP can be said to have been regularly carrying on the business of operating a health care centre on February 26, 1986 when construction of the facility was not completed on that date and it was not the owner of it. THCLP had not received the money to acquire the home and in fact it was still owned by Medi-Villas. There of course have been cases such as Minister of National Revenue v. M.P. Drilling Ltd. (1976), 76 D.T.C. 6028 (Fed. C.A.)and Gartry v. R. (1994), 94 D.T.C. 1947 (T.C.C.)where it was held that a business had been commenced before the operation started to generate revenues, but in such cases the activities of the taxpayer including the expenditures of moneys, the acquisition of assets and the creation of a business structure had advanced to the point at which, as a matter of commercial reality, it could be said that it had commenced the process of operating a profit making entity.
10 None of these factors existed here on the relevant date of February 26, 1986. True, subscription forms had been received but the partnership was essentially only a shell with no capital but an anticipation that it would acquire a nursing home that it intended to operate. It is difficult to see how Parliament could have made its intention any clearer that for the members of a limited partnership to avoid the application of the at-risk rules the partnership had to be actively engaged in the business that was expected to generate the income. While cases such as MP Drilling and Gartry may hold that a business may commence at a date before the income producing activities start, the words “actively” and “on a regular and a continuous basis” connote (indeed, denote) a degree of commercial activity that it is impossible to find here.
11 In light of this conclusion it is unnecessary to deal with the second branch of the test in subsection 96(2.5) that there should not have been a “substantial contribution of capital” after February 25, 1986.
12 The appeals are therefore dismissed with costs.
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