Date: 19991018
Docket: 98-147-IT-G
BETWEEN:
GREGORY K. STEELE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Teskey, J.T.C.C.
[1] The Appellant appeals his reassessment of income tax for the year 1988. This appeal arises from the Appellant's acquisition of 17 units of the limited partnership known as the B.V. Lake Mine Fund Limited Partnership ("B.V. Lake").
ISSUE
[2] The sole issue before me is whether B.V. Lake had a reasonable expectation of profit from any activity in 1988.
[3] The Appellant seeks from this Court the deduction from income of the actual amount he invested in 1988 of $15,300 or in the alternative, a capital loss of the same amount.
FACTS
[4] The parties hereto signed an Agreed Statement of Facts which was entered into the record as Exhibit A-2, together with a joint Book of Exhibits containing 17 different tabs, which was recorded as Exhibit A-1.
[5] The pertinent facts to this appeal that were agreed upon are as follow:
A. Auramet International Ltd. ("Auramet") developed, promoted and managed various limited partnerships in 1986, 1987, 1988 and 1989. A list of the 99 limited partnerships, including investor groups and mini-partnerships, is set forth as Schedule "A" attached hereto.
B. Auramet was incorporated in British Columbia in March 1984. It was extra-provincially registered in Alberta in December 1985 and in the Yukon in July 1986.
C. Auramet had its head office in Vancouver and an office in Calgary. Sales of limited partnership interests were conducted in both offices. It purported to manage mining operations on behalf of B.V. Lake.
D. 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 sometimes collectively referred to as the "Rogers Group". The directors and officers of the company were Messrs. Picken, Reimchen, W. Rogers and K. Rogers.
E. By written agreement stated to be effective February 24, 1987, B.V. Lake, 324872 B.C. Ltd., as the General partner of B.V. Lake, (the "General Partner") and Auramet entered into a management agreement whereby Auramet purported to assume all of the duties normally performed by the general partner. (Tab 10)
F. Management agreements on the same terms were executed by all of the limited partnerships promoted by Auramet.
G. The cost of a unit in B.V. Lake was $1,400. Typically a unit was paid for as follows:
$ 900 by cheques (with one or more post-dated cheques)
$ 500 (36%) note
$1,400
H. The records indicate that the Appellant subscribed for 17 units in B.V. Lake for a total subscription price of $23,800, which was to be paid by way of $15,300 provided by cash or cheque from the Appellant and $8,500 by way of alleged financing from Yorkdale Trust Co. N.V. ("Yorkdale").
I. Yorkdale provided similar financing for the limited partners in most of the limited partnerships promoted by Auramet.
J. A total of 14 taxpayers subscribed for 172.75 units of B.V. Lake for a total subscription price of $241,850. Of that, $120,150 was purportedly financed by Yorkdale.
K. The Offering Memorandum in respect of B.V. Lake indicated that investors would receive a tax deduction in the approximate amount of $1,788 per partnership unit. The Errata and Offering Memorandum are found at Tab 17.
L. Investors in the partnerships 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. The Appellant's Group Partnership was Jerwall Investors Limited Partnership.
M. The following documents would have been executed by a typical person purchasing units in B.V. Lake for the 1988 year:
a) Unit Subscription Agreement and Power of Attorney (Tab 11)
b) Assignment of Securities (Tab 12)
c) Promissory Note to Yorkdale (Tab 13)
d) Subscription Form for the Group or Mini Partnership.
N. In the case of the Appellant, similar documents were executed in the 1988 taxation year for B.V. Lake.
O. The Appellant's promissory note in favour of Yorkdale has not been paid by the Appellant, nor has any demand for payment ever been made. The Appellant's units in B.V. Lake were used as security for the promissory note.
P. None of the promissory notes executed in favour of Yorkdale in respect of the limited partnerships promoted by Auramet have ever been paid by those partners, nor has any demand for payment ever been made to any of the partners.
Q. The funds purportedly loaned to the limited partners by Yorkdale were never transferred from Yorkdale to B.V. Lake, Auramet, the General Partner or any other party.
R. Audited financial statements for B.V. Lake and the other partnerships were prepared by Heater & Company Chartered Accountants, of Calgary. Ken Jones, the Heater and Company auditor who prepared or was responsible for the preparation of these statements has, as a result of his actions with respect to these statements, had his registration cancelled by the Institute of Chartered Accountants of Alberta. A copy of the public notice respecting the cancellation of his registration appeared in the January 13, 1998 edition of the Calgary Herald.
S. The monies raised from the sale of limited partnership units and other monies collected by Auramet for use by B.V. Lake and the six other limited partnerships it promoted for 1988 were placed in and disbursed from a common pool. Purported expenses were also allocated from a common pool and invoiced by Auramet to the individual partnerships.
T. Auramet issued invoices to the 7 limited partnerships that it promoted in 1988, including B.V. Lake, for $4,568,911. Of this, $231,658 was invoiced as CEE and $10,192 was invoiced as general and administrative expenses to B.V. Lake. The balance was allocated to the other limited partnerships as general and administrative expenses.
U. Auramet reported expenses on behalf of the partnerships from two sources: firstly, amounts incurred and disbursed in Canada (salaries, commissions and office overhead of Auramet) and secondly, amounts invoiced by Lynbrook Corporation NV ("Lynbrook"). Lynbrook was purported to have provided services to Auramet offshore, but no services were ever provided by Lynbrook to Auramet, B.V. Lake, the General Partner or any of the other limited partnerships promoted by Auramet.
V. 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% of the shares.
W. Cash of $1,006,884 was collected by Auramet in 1988 from sale of 1988 limited partnership units as follows:
Limited Partnership Cash from partners
B.V. Lake $ 121,700
FOF Ventures 479,771
FOF Equity 194,420
OS Equity 95,145
Tico 3,600
Majotran 92,450
Isleshaven 19,800
TOTAL $ 1,006,884
X. The cash collected by Auramet from the limited partners was expended on salaries, commissions and other administrative expenses of Auramet relating to the sale of limited partnership units by Auramet. None of the cash collected was used by Auramet in the business of mining exploration or any other business carried on by B.V. Lake or other limited partnerships.
Y. The following were claimed inter alia, as expenses by Auramet in Canada in respect of the 1988 partnerships:
Limited Partnership Expenses Claimed
B.V. Lake $ 241,850
FOF Ventures 2,679,588
FOF Equity 1,128,741
OS Equity 231,428
Tico 128,000
Majotran 207,800
Isleshaven 44,000
TOTAL $ 4,641,407
Z. At no time did B.V. Lake carry on the business of mining or any other business, nor did it incur any expenses in the course of carrying on any business.
AA. K. Rogers, W. Rogers and Auramet plead guilty to 21 counts of evading or attempting to evade compliance with the Income Tax Act in respect of the limited partnerships they promoted in 1986 and 1987.
BB. K. Rogers, W. Rogers and Auramet used the same scheme with respect to B.V. lake as they did in the earlier partnerships promoted in 1986 and 1987 that led to their convictions.
CC. At the sentencing of K. Rogers and W. Rogers, a Statement of Facts was filed as an exhibit by Crown Counsel. K. Rogers and W. Rogers, through their counsel, took no issue with the Statement of Facts. The Statement of Facts is included at Tab 14. The transcript of proceedings is at Tab 15.
DD. At the sentencing of K. Rogers and W. Rogers, Sentencing Notes were read in by Crown Counsel. K. Rogers and W. Rogers, through their counsel, took no issue with the Sentencing Notes.
EE. K. Rogers and W. Rogers were each sentenced to two years less a day on each count to be served by electronic monitoring. Auramet was fined $9,239,895.04. The Reasons for Sentencing of the Honourable Judge Weitzel of the B.C. Provincial Court are found at Tab 16.
[6] The Appellant also gave oral testimony. He said in his examination-in-chief:
When I made the investment, I did so in the hope that I would make a profit and I did so in the hope that I would earn income from it.
One of the salient or important features to me was its tax treatment under the Income Tax Act. However, the principal purpose and my principal intent was to gain income from it as opposed to simply incurring a tax loss which I could write off against other income.
The write-off provisions of the investment were of interest to me because they protected my downside and by that I mean that if there was no profit in the venture or there was no income or gain earned, the after-tax cost of it would limit me. But the purpose of my investment was to, as I say, earn an income as opposed to simply incur a loss.
[7] He also stated that he made inquiries from Merv Lepper, who was a sales representative for Fraser Bow Securities Inc. ("Bow Securities"), the agent for the sale of the limited partnership interest in B.V. Lake, who also introduced him to one of the principals, namely W.J. Iwaschuk.
[8] As soon as the Appellant had given his evidence in chief and the cross-examination started, his memory failed him. He became evasive and many questions that should have been answered with a yes or no were hedged.
[9] Some examples of this are as follow: The Appellant was asked whether Bow Securities was the agent for B.V. Lake. His answer being "I don't know that". Yet, the offering memorandum clearly indicates this.
[10] When questioned on the various documentation that the Appellant must have had handed to him, his answers were again vague. "I may have". "I can't say one way or another".
[11] When asked if he had made any independent enquiries, his answer was: "No, I would think not".
[12] When asked if he reviewed any financial statements of Remigior Corporation Limited ("Remigior") who was to enter into a joint venture with B.V. Lake, his answer was: "I may have, but I don't recall doing so".
[13] It also became quite apparent that he knew in 1988, when he invested his $15,300, the alleged tax consequences as set out in the next paragraphs.
[14] This is when the Canadian Exploration Expenses ("CEE") and the Mining Exploration Depletion Allowance ("MEDA") were taken into consideration, that his total expected tax deduction for his $15,300 investment was $30,906, and that his 1988 tax saving would be $19,329.
[15] As to enquiries made prior to the purchase of the 17 units of B.V. Lake, his answer again was: "So what enquiries I make, I can't remember".
[16] Also, when asked if he made subsequent investment in any of the other Rogers' partnerships, his answer again was: "I don't think I did, then maybe .... I don't think so".
[17] Against this, his 1991 T1 General tax return shows an investment in Chen-Nova Investment, limited partnership #18 on Schedule "A".
Appellant's Position
[18] The Appellant argues that at the time he purchased the 17 units of B.V. Lake, his intention was to make a legitimate business investment which he hoped to make a profit from, with the protection on the downside in the tax advantage of the purchase. Since the loss was the direct result of the fraud orchestrated by Rogers et al., based on the decisions of Cassidy's Limited v. M.N.R., [1990] 1 C.T.C. 2043 and Parkland Operations Limited v.The Queen, [1991] 1 C.T.C. 23, he is entitled to write-off against income the sum invested in 1988 or, in the alternative, to claim a capital loss in 1988.
Respondent's Position
[19] The Respondent submits that neither the Cassidy's or Parkland cases assist the Appellant herein, as in both these cases, the taxpayers were carrying on business and it was agreed herein that B.V. Lake did not carry on any business. Paragraph Z above reads :
At no time did B.V. Lake carry on the business of mining or any other business, nor did it incur any expenses in the course of carrying on any business.
[20] The Respondent notes that the Appellant, in his 1988 T1 tax return, claimed CEE of $22,799 and MEDA of $7,594 and did not claim a loss.
[21] The Respondent points out that the Financial Statement for the 1988 financial year of B.V. Lake, which is part of the Appellant's 1988 T1 tax return, shows Revenue at nil, expenses at nil and net loss for the year at nil.
[22] The Respondent argued that based on all the tabs in Exhibit A-1, that the conclusion should be reached that a purchaser of one of these limited partnerships units was attempting to purchase a tax write-off, and when the write-offs are finished, there is a possibility of rolling the partnership units into some shares, and that there just is no expectation of profit from purchasing a partnership unit.
[23] The Respondent argues that when the Appellant withdrew, at the opening of the trial, his claims for CEE and MEDA, that he claimed in his 1988 T1 tax return, there can be no loss allocated to the Appellant because there was no loss in the partnership.
[24] As to a capital loss, it cannot be claimed since there has been no disposition, but this would in any event require a finding by myself that the Appellant had a profit motive.
[25] In closing, the Respondent submitted that the reasonable inference from the evidence is that the Appellant simply attempted to purchase a tax write-off and the purchase was not for the purpose of earning income.
[26] I agree that the Respondent's arguments put forth are the ones that win the day. It is just not acceptable for a taxpayer to expect the Court to accept the simple statement "I expected to make a profit", and the fact that I was putting out $15,300 of my own money into the partnership and going to get an immediate income tax reduction of $19,329 in the first year, and further income tax deductions amounting to $11,577 over the next several years, was not the motivating factor in my decision to purchase the units.
[27] Based on all the evidence before me, I conclude that the driving motive of the Appellant was to gain the income tax write-offs.
[28] The Appellant has not satisfied me that he made the purchase with the reasonable expectation that the partnership units would produce a profit. He has not demonstrated he made any independent inquiries, and when asked about information obtained from Messrs. Lepper and Iwaschuk, his comment was: "You know, these guys were promoters. They took me in".
[29] I believe this summarizes the situation. The Appellant listened to the two promoters, saw the total tax write-offs of $30, 906 on an investment of $15,300, and jumped in. He gambled and he lost.
[30] The appeal is dismissed with costs.
Signed at Calgary, Alberta, this 18th day of October 1999.
"Gordon Teskey"
J.T.C.C.
SCHEDULE A
LIMITED PARTNERSHIPS PROMOTED BY AURAMET
|
1. Atlas Shrugs Investors |
51. Low Fliers Limited Partnership |
|
2. Aurament Holdings No. 3 Limited Partnership |
52. LR Tax investors Club Partnership |
|
3. B Taxinvestors Group Limited Partnership |
53. Lynvan Investors Limited Partnership |
|
4. Blackshine Mine Fund Limited Partnership |
54. MHI Investment #1 Partnership |
|
5. Bhohar Investment Club |
55. Maco 2 Taxinvestment Club Partnership |
|
6. Boloro Taxinvestors Limited Partnership |
56. Maco Group Partnership |
|
7. Bradvan Investors Limited Partnership |
57. Maco X Group Partnership |
|
8. BV Lake Mind Fund Limited Partnership |
58. Mager Enterprises Limited Partnership |
|
9. Calpol Two Taxinvestors Partnership |
59. Mahoney Investment Club |
|
10. Camer Investors Limited Partnership |
60. Majotran Fund Limited Partnership |
|
11. Canquest 86 Mine Fund Limited Partnership |
61. Malee Group Partnership |
|
12. Can II Shelter Group Limited Partnership |
62. Maliv Group Limited Partnership |
|
13. Chen-Nova Invetment Club Partnership |
63. Memcon Group Services Limited Partnership |
|
14. Chirobrad Investors Limited Partnership |
64. Mergl Taxinvestors Club Partnership |
|
15. Churvan Investors Limited Partnership |
65. Mervan Investors Limited Partnership |
|
16. Comac Investors Limited Partnership |
66. Montymer Taxinvestors Partnership |
|
17. CRL Management & Overhead Limited Partnership |
67. Norwels Investors Partnership |
|
18. Curtvan Investors Limited Partnership |
68. Odem & Associates Group Limited Partnership |
|
19. Danvan Investors Limited Partnership |
69. Odem 2 Investment Club Partnership |
|
20. Davies Ventures Fund Limited Partnership |
70. Oilscan Investors Partneship |
|
21. Decantri Investors Limited |
71. Okavan Investors Limited Partnership |
|
22. Delvalle Investors Limited Partnership |
72. OS Equity Limited Partnership |
|
23. Dervan Investors Limited Partnership |
73. Ottwo Investment Club Limited Partnership |
|
24. Earwill Shelters Limited Partnership |
74. P'Can Shelter Investments Limited Partnership |
|
25. Elstaffo Investment Limited Partnership |
75. Patvan Investors Limited Partnership |
|
26. Family Taxinvestors Club Limited |
76. Pep Taxinvestors Club Partnership |
|
27. Fire & Ice Investors Partnership |
77. Pep Two Taxinvestors Club Partnership |
|
28. First Taxinvestors Club Limited |
78. Powderstick Investment Club |
|
29. FOF Equity Limited Partnership |
79. Rachar Investment Club Limited Partnership |
|
30. FOF Ventures Limited Partnership |
80. Reimholt Investors Limited Partnership |
|
31. Fourth Taxinvestors Group |
81. Ricgail Investment Club |
|
32. Freehold Investors Partnership |
82. Rivan Enterprises Limited Partnership |
|
33. FT Donkeolor & Associates |
83. Ronliv Taxinvestors Club Limited |
|
34. Glojon 2 Investment Club |
84. Ronstaber Taxinvestors Limited Partnership |
|
35. Glojon 3 Investment Club |
85. Ronvan Investors Limited Partnership |
|
36. Glojon Investment Club Limited Partnership |
86. Rozthorpe Investors Limited Partnership |
|
37. High Flyers Taxinvestors Partnership |
87. SP 1 Taxinvestors Club Partnership |
|
38. Hovdent Investors Limited Partnership |
88. Stinger One Taxinvestors Limited Partnership |
|
39. Hubhub Investors Limited Partnership |
89. Tax Shelter Creation Fund |
|
40. IR Gold Fund Limited Partnership |
90. Tico Ventures Limited Partnership |
|
41. Jaydiem Investors Partnership |
91. Travphone II International Partnership |
|
42. JCP Start-up & Overhead Limited Partnership |
92. Travphone International Partnership |
|
43. Jerwall Investors Limited Partnership |
93. Truvan Investors Limited Partnership |
|
44. Jestdent Investors Limited Partnership |
94. Twasvan Investors Limited Partnership |
|
45. Kenpay Taxinvestors Club Limited |
95. Vending Systems Partners Partnership |
|
46. Kenro Shelter Group Limited Partnership |
96. Vicben Investors Limited Partnership |
|
47. Kolvik Investors Partnership |
97. Voicecom Sales Partnership |
|
48. Kushes Taxinvestors Partnership |
98. Wilvan Investors Limited Partnership |
|
49. LDM Investment Club Partnership |
99. ZZ Holdings No. 9 Limited Partnership |
|
50. Louvan Investors Limited Partnership |