Section 143.2

The ARQ did not lose heart with the victory by a representative investor in a tax shelter in Drouin (where CRA unsuccessfully argued that no business was carried on) and, for the same tax shelter and for the same year (as well as other years) was successful before the Court of Quebec in having most of the claimed deductions denied. For two of the years, there was a prescribed benefit in the form of limited recourse debt, which resulted in all the deductions being denied under the Quebec equivalent of ITA s. 231.7(6) as no tax shelter registration had been made. For two subsequent years, such registration had been made, but there nonetheless were tax shelter investments under Quebec equivalent of s. 143.2, so that the limited recourse nature of the debt again resulted in CCA denials under that provision and the equivalent of Reg. 1100(20.1).

Promissory notes owing by the taxpayers, which were consideration for their acquisition of units of a limited partnership, provided that the interest thereon was to be paid by way of set-off against distributions otherwise payable by the partnership to the taxpayers. In fact, the partnership did not generate distributable cash and, particularly for the first taxation year in question, there was no evidence that interest was paid through the making of timely journal entries. Furthermore, in the case of short-term notes that were payable on demand, there was no evidence of arrangements for their repayment, nor had any copies of the notes been submitted into evidence (so that there was not evidence that the loan was in writing as required by s. 143.2(7)(a). Accordingly, the amounts represented by the notes were limited recourse amounts.

A partnership ("ICON") of which the taxpayer became a limited partner purchased software from a subsidiary ("Trafalgar Capital") of the developer of the software in consideration for cash (as to 30% of the purchase price) and a promissory note (for the balance), with the taxpayer then assuming a portion of the promissory note as part consideration for his units in ICON. ICON licensed the program to a Bermuda limited partnership ("ICAP") of which Trafalgar Capital was the general partner. An agreement between ICON and Trafalgar Capital guaranteed an average annual revenue of no less than 12% on leveraged trading funds used by ICAP over the ten-year term of the promissory note and provided that in the event the software did not generate this return, ICON could replace the board of directors of Trafalgar Capital. Campbell J. found that there were no bona fide arrangements for repayment of the promissory note given that (i) an acceleration clause under the promissory note likely would never be triggered because of the ability to ICON to replace the board of directors of Trafalgar Capital, (ii) limited partners who resided outside Canada were not required to provide any security or collateral, (iii) there was no genuine risk of loss because the limited partners as debtors under the promissory note had the benefit of the revenue guarantee of Trafalgar Capital which they could invoke in the event that they were called upon to pay the note, and (iv) the nature of the legal arrangements was quite unclear, whereas a bona fide "arrangement should readily be seen to be binding upon the parties; it should be prima facie obvious" (p. 254).

Furthermore, an alleged implicit set-off arrangement did not establish that interest was paid on the promissory notes within the 60-day period stipulated by subsection 143.2(7) given that Trafalgar Capital (in its own capacity rather than as general partner) did not owe money to either ICON or to each partner, and there was a failure to produce documentation as required under s. 143.2(13).

In December 2009, individual taxpayers participated in a tax shelter that involved making both a leveraged investment and leveraged donation. In the investment component, they used money borrowed from a lender trust (FT) to purchase units in an Ontario LP, which used most of the proceeds to purchase notes of a BVI company (Leeward). The return on the notes was linked to whichever of a stock market index and a notional balanced portfolio performed the better, with Leeward then lending the funds back to FT via a second trust.

Respecting the leveraged donation, they borrowed money from FT at 7.85% p.a. – of which 3.75% of p.a. was required to be paid annually in cash (“cash-pay interest”) and with the balance was capitalized each year (“capitalized interest”). This borrowed cash was then contributed by them to a registered charity on condition that it invest most of such proceeds in a note of Leeward, that matured in 2028, and bore interest of 4.75%, of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing under the note to accrete by over 1/3 by 2028). These funds also were mostly circled back to FT. The ability of Leeward to be able to repay this note owing to the charity depended on the small portion of the funds received by it from the individuals (via the LP) under the investment component, that it invested in a fully-indexed note rather than on-lending back to FT via the second trust, appreciating at a rate of 10% p.a. over the close to 20 years until 2028.

After finding that their donation did not qualify as a “gift” under common law principles given that the interest rate of 7.85% that was charged to them by FT was less than a reasonable rate of interest, and that bona fide arrangements had not been made for repayment of the loan from FT (which had a term of 9.3 years) as required by ss. 248(32)(b) and 143.2(7)(a), Owen J went on to find that s. 143.2(12) resulted in the full amount of the loan from FT reducing the amount of their gift to nil under s. 248(32)(b) and s. 248(30)(a), stating (at para. 368):

[A] reasonable person would contemplate that when the Program Loans matured they would be replaced or refinanced with other similar loans and that EquiGenesis [the promoter] would take the lead in ensuring that this occurred. In fact, I cannot imagine an individual participating in the Program unless that individual fully expected the Program Loans to be replaced or refinanced in that manner. The refinancing of the loans associated with earlier similar programs offered by EquiGenesis certainly suggests that such an expectation would be reasonable and may even go so far as to suggest that this eventuality is “baked-in” to the fact that the Program has a 19-year term.

The taxpayer unsuccessfully submitted that it was not "necessary" for the Minister to have reassessed beyond the normal limitation period on the basis that the necessary facts underlying the assessment were known to the Minister prior to the expiration of the normal reassessment period. This submitted interpretation of "necessary" was not consistent with a unified textual, contextual and purposive interpretation.