Tax Court of Canada Judgments

Date: 20010108

Docket: 97-2936-IT-G; 97-2937-IT-G; 97-2938-IT-G; 97-2939-IT-G; 97-2940-IT-G; 97-2941-IT-G

BETWEEN:

JAMES S. DUNCAN, ANTHONY R. YOUNG, NORMAN EDEN, MARK LANGDON, TWIN OAKS VILLAGE ESTATES LTD., WATER'S EDGE VILLAGE ESTATES (PHASE II) LTD.,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowie J.

[1]            These are the Reasons for Judgment in the appeals of James S. Duncan, Anthony R. Young, Norman Eden, Mark Langdon, Twin Oaks Village Estates Ltd., and Water's Edge Village Estates (Phase II) Ltd. Their appeals under the Income Tax Act (the Act) were heard together on common evidence by agreement of the parties. The years under appeal are:

Water's Edge Village Estates (Phase II) Ltd.    1992

Twin Oaks Village Estates Ltd.           1990, 1991 and 1993

Anthony R. Young               1991 and 1992

James S. Duncan 1991, 1992 and 1993

Mark Langdon       1991 and 1992

Norman Eden         1991 and 1992

All the appeals concern losses said to have been incurred by a partnership and distributed to the Appellants under section 96 of the Act. The issues in each year for each Appellant are identical, except for some carry back or carry forward of the claimed losses in some cases.

[2]            In December 1991, each of these Appellants purportedly purchased an interest in a partnership by the name of Klink Development Company (Klink).[1] Klink was originally formed in the state of Ohio, USA, in 1979 under the laws of Ohio. Klink's original partners were five in number, and were resident in Ohio, Michigan and Texas. Klink purchased an IBM mainframe computer in 1982 for $3,700,000(US).[2] By 1991 Klink had fully depreciated the computer, both for accounting purposes and for the purposes of United States income tax laws. The total capital cost of the computer to Klink, undepreciated and converted to Canadian dollars, was $4,536,940. The Appellants, along with three other individuals, paid $320,000 to acquire interests totalling 93.57381% in Klink. On the same day, December 20, 1991, Klink became the only limited partner of a newly formed British Columbia limited partnership, Interfin Leasing Partnership (ILP). Klink's capital contribution to this partnership consisted of the conveyance by it of the computer, for which it received a credit to its capital account of $50,000. In computing its income under section 96 of the Act at its December 31, 1991 year end, Klink took a terminal loss on the computer of $4,486,940. From this, it deducted its income from operations of $45,550 to produce a net loss for income tax purposes of $4,441,390 to be allocated among the partners and claimed by them as non-capital losses, for the purpose of computing their incomes under section 3 of the Act. Klink also distributed a loss of $20,852 among its partners for 1992 as at December 31, 1992.

[3]            The Minister of National Revenue has reassessed each of the Appellants to disallow the deduction of their respective shares of the Klink losses for the 1991 and 1992 taxation years in the case of the individual Appellants, and for the 1992 and 1993 taxation years in the case of the corporate Appellants, both of which have a May 31 year end. There were also consequential reassessments to disallow losses carried forward or backward in the case of some of the Appellants. The reassessments are predicated upon the Minister's view that Klink was not a subsisting partnership after December 13, 1991, and alternatively, upon the application of the general anti-avoidance rule found in section 245 of the Act.

the participants

[4]            Anthony Young and James Duncan are businessmen who have had very successful careers in Victoria, British Columbia as developers of residential, commercial and recreational real estate. They have conducted their operation as equal partners for many years through Swift Sure Developments Ltd., of which they each owned 50% through their personal holding companies. Norman Eden is a Victoria businessman who has from time to time participated in projects with Mr. Young and Mr. Duncan. Twin Oaks Village Estates Ltd. (Twin Oaks) and Water's Edge Village Estates (Phase II) Ltd. (Water's Edge) are two of the operating companies of Mr. Young and Mr. Duncan which at the end of 1991, had recently completed development projects and, therefore, were in a liquid position.

[5]            Eng, Rozon & Floor (ERF) is a firm of chartered accountants in Victoria which has provided accounting services to Mr. Young and Mr. Duncan for some years. William S.F. Eng, Gordon Clarke and Lawrence Rozon (through a holding company) were among the group that purchased interests in the Klink partnership. Mark Langdon is a chartered accountant, and was in 1991 in the firm ERF, where he was the person principally responsible for the clients Duncan, Young and their various corporate vehicles.

[6]            James Hutton is a person engaged in the financial service industry. Nova Ban-Corp Financial Services Ltd. (Nova) is a corporation through which Mr. Hutton conducts some of his activities. The evidence was sparse, both as to Mr. Hutton's background, and as to the exact relationship between him and Nova. It would appear that Mr. Hutton, either personally or through some corporate agency, fits the definition of "promoter" of "tax shelters" as those expressions are defined for the purposes of section 237.1 of the Act.

[7]            Roger F. Belanger is an individual whose office is in Cincinnati, Ohio. The evidence did not reveal any significant details of Mr. Belanger's training or experience, but he purported to be in a position to assist the Appellants in finding a market for the services of a computer in Bulgaria, or perhaps some other Eastern European country. Interfin Incorporated (Interfin) is a Delaware corporation, and is apparently the corporate alter ego of Belanger.

[8]            Interfin Leasing Partnership (ILP) was initially formed under the name Moresby Enterprises Limited Partnership on November 1, 1991, under the Partnership Act of British Columbia. Its only general partner and its only limited partner were numbered companies. On December 20, 1991 the numbered companies ceased to be partners, the name was changed to Interfin Leasing Partnership, Interfin became the general partner, and Klink became the limited partner.

[9]            The IBM 3081-D16 mainframe computer, together with its peripheral equipment, was purchased by Klink in November 1982 for $3,700,000(US). It was leased to Federal Data Corporation, and subsequently subleased to Crawford Long Memorial Hospital in the United States. During the term of the sublease it was twice upgraded by the addition of components which were paid for by doctors at the hospital. By December 20, 1991, it had been fully depreciated by Klink, both for accounting purposes and pursuant to the income tax laws of the United States of America. It is not disputed that its historical cost to Klink, converted to Canadian dollars, was $4,536,940. I accept the evidence of Walter Seidel that by December 1991 this computer was obsolete and had a market value of about $7,000(US). To make it functional in Eastern Europe would have required not only considerable transportation expense, but also the cost of rewiring it to operate on 50-cycle electrical current.

the Appellants' acquisition of Klink

[10]          In July 1991, Mr. Hutton approached ERF with what Mr. Langdon described as an investment opportunity. A memorandum sent by Langdon and Eng to Young and Duncan on September 17, 1991 describes this investment opportunity. As it was the basis for much of what followed, it is worth reproducing here in full:

Jim Hutton, our mutual business acquaintance in Vancouver, has approached us with another investment opportunity which he thought you might be interested in. He feels that he could interest people in the local Vancouver area, however, given his past numerous business dealings with you, he asked us to present it to you first.

Preliminary details are as follows:

(1)            There is a general partnership in Ohio called the Klink partnership.

(2)            In November 1982, Klink partnership purchased an IBM 3081-D16 computer for $3.7 Million U.S. ($4,537,000 CDN).

(3)            At that time, it leased the computer to AT & T who in turn leased it to Crawford Long Hospital in Ohio.

(4)            This computer has had a long life, however, it is now obsolete in North America given changes in technology.

(5)            The opportunity is as follows:

                (a)            Jim Hutton wishes to enter into a minority position in the Klink partnership. Given the existing partners demands, Jim feels he can only afford about a 22% interest.

                (b)            He is offering you the remaining 78% for approximately $318,000.

                (c)            At this point in time you and Jim would be 100% owners in the Klink partnership.

                (d)            Unknown to the current partners in Klink, there is another firm (Interfin Lease of Cincinnati Ohio) who perceives a business opportunity for this computer.

                (e)            Interfin feels that while the technology maybe near obsolete in North America, it is likely state of the art in Eastern Europe. Interfin proposes that Klink will contribute the computer to a new partnership while they will contribute the brain power and expertise. This computer will then be leased to Eastern Europe with the idea of making substantial long term profits.

                (f)             It has been suggested that you purchase the existing partnership rather than simply buying the computer for several reasons:

                                (i)             There is an existing legal structure in place. By buying the existing partnership, it will save you the cost of having to "re-invent the wheel".

                                (ii)            Because the Klink partnership has been in existence since at least 1982, it has some degree of "presence" in Ohio. Interfin, who will be a key to making this deal work, is familiar with this name and maybe more comfortable dealing with Klink than dealing with a completely new entity.

(6)            Jim Hutton's lawyer is still ironing out some of the key details, however, it does appear to be an exciting opportunity to diversify in a burgeoning market using somebody else's brain power. There have been many articles recently projecting Eastern Europe as being an area that is prime for high growth. This may provide you with an opportunity to get in on the ground floor.

(7)            Once Jim's lawyer has done his due diligence, we will take a more detailed look at the business plan to see if the opportunity is all that it appears to be.

We will keep you informed as things progress.

[11]          At about the same time, Hutton provided Langdon with what he described as "an outline of the business plan to utilize such assets in Eastern Europe". This consisted of a one and one-half page letter from Belanger to Hutton which proposed that Interfin would form something called the USSR Trading Company to establish marketing relationships in the USSR, Bulgaria and other Eastern European countries. The object was to obtain a number of what he called third generation computers, to be leased to various companies in the Eastern European countries, with payment being made either by way of barter or trade credits. Two pages were attached, describing in general terms how barter finance and cash equivalent trade credits might work. These were not the outline of any sophisticated business plan, nor would anyone with a modicum of business experience be likely to draw the conclusion from them that Mr. Belanger had either special expertise or important business relationships that would facilitate trade with East bloc countries. A letter of September 19, 1991, from Belanger to Hutton said in part:

... At this time I'm in contact with a team of four men going to Bulgaria on a discovery trip. They have arranged meetings with political, educational, business and religious leaders. I would like to use this team in helping us develop contacts. ...

[12]          At about the middle of October 1991, Langdon went to Cincinnati to meet Mr. Belanger and, as he put it, to do due diligence with respect to him. His investigation of the bona fides of Mr. Belanger appears to have consisted of checking the telephone directory to ensure that the address listed there was the same address at which he met with him, going to his office and looking around to see that there were filing cabinets and other business equipment, and having a discussion with Mr. Belanger about the proposed deal. He said in his evidence that he had telephoned two of Mr. Belanger's references, but he had no real recollection about them or what they had to offer by way of information. He took no notes of what they said. He does not appear to have obtained a curriculum vitae of Mr. Belanger. He did not, apparently, make any effort to talk to anyone who had done business with Mr. Belanger, or otherwise inquire into his ability, his expertise, or his claim to have business connections in Eastern Europe. This is surprising, considering that he asserted during his evidence that it was Mr. Belanger's ability and his business connections that made the purchase of the Klink partnership interest worth $320,000, although he knew that the computer was Klink's only asset, and that it was obsolete. Indeed, the trial record is remarkably devoid of any evidence in relation to Mr. Belanger's education, experience, background or previous projects.

[13]          Mr. Langdon did, however, write to the other prospective investors on December 11, 1991, to inform them of what he had learned. The first half of this memorandum refers to difficulties in connection with moving Klink to British Columbia, and the need to have a 2% ownership interest remain with the partners in Ohio. It describes the current situation of the computer equipment, which was at that time under lease to Federal Data Corporation until March 31, 1992, with income of $14,133(US) to be generated to Klink under that lease for December 1991, and $100(US) for each of January, February and March, 1992. The rest of the memorandum is devoted to the proposed structuring of the arrangement with Belanger and the proposal for utilization of the computer in a data centre in Bulgaria. There is reference to an expectation of profits to Klink of $500,000(US) to $600,000(US). However, there is nothing that would substantiate this suggestion.

[14]          Oddly, Langdon and Eng sent to Young and Duncan on December 13, 1991 a replica of their earlier memorandum dated September 17, 1991, but with subparagraph 5(b) added as follows:

(b) Four other individuals, including myself, are interested in acquiring 6%.

Messrs. Langdon, Young and Duncan met on December 13, 1991. They decided at that meeting that they should enter into the transaction as it was eventually structured, with both Water's Edge and Twin Oaks acquiring substantial interests in Klink, along with Young and Duncan, and with lesser interests to be acquired by the members of ERF and Hutton.

[15]          In their evidence, both Mr. Langdon and Mr. Young took the position that it was the expertise and the connections of Mr. Belanger that made the Klink acquisition a viable business deal. It is surprising, therefore, that they were willing to proceed without a full business plan in hand. It was not until November 28, 1991, three weeks prior to closing the transaction, that Water's Edge entered into a "consulting agreement" with Interfin. Interfin was to be paid $3,000 down and $1,000 per week from December 9, plus expenses, to do market research and produce a business plan. The agreement is vague as to the work to be done, and specifies no date for delivery. Mr. Langdon sent the contract to Mr. Belanger on November 29 with a cheque for $3,000, and proposed that the balance would be paid in full on completion, rather than by instalments. He described the "tentative timetable" as being for a draft of the economic projections to be delivered by December 15, and "the entire package ... by December 31, 1991". A five-page document titled "Investment Summary" and a seven-page "Business Plan" were faxed by Mr. Belanger on December 16. They could fairly be described as puerile. To the extent that they project revenues and expenses, there is nothing to rationalize the estimates – they are simply numbers selected by Mr. Belanger without explanation.

[16]          In the meantime, on December 13, Hutton and Nova had purchased a 98% interest in Klink. The other 2% remained with the U.S. partners.

[17]          On December 20, the Appellants, together with William Eng, Lawrence E. Rozon Inc. and Gordon Clarke (collectively "the Victoria group"), proceeded with the purchase from Hutton and Nova of interests in Klink totalling 93.57381%. Minutes thereafter, Klink conveyed the computer to ILP for an agreed price of $50,000 as its contribution to the capital of ILP, thereby giving rise to the planned terminal loss. The following series of transactions took place that afternoon.

[18]          1. The Victoria group purchased from Nova the following partnership interests in Klink:

                Purchaser                                                               Amount of Partnership Interest

                Eden                                                                                        8.91476%

                Young                                                                     8.91476%

                Duncan                                                                   8.91476%

                Twin                                                                                       24.51559%

                Waters                                                                    37.88773%

                Langdon                                                                                 1.10654%

                Eng                                                                                          1.85899%

                Rozon                                                                      1.10654%

                Clarke                                                                      0.34414%

                Clarke also purchased a 0.01% interest from Hutton. The purchasers also obtained the following convenant from Nova:

                3.3            Nova shall assist the Partnership from and after the Time of Closing until December 31, 1995 in the remarketing of the Partnership's computer assets in Eastern Europe by means of providing such services and office facilities as the Partnership may reasonably request from Nova's offices in Vancouver, France and Germany.

                For these interests the purchasers paid a total of $319,964.00 to Nova, and an additional $36.00 for the interest purchased by Clarke from Hutton.

                2.              The Klink Partnership Agreement was amended to admit the Victoria group as partners. The amended agreement provided in part.

The names of the Partners of the Partnership and their respective ownership percentage interests in the Partnership are as follows:

Norman Eden	8.91476%
Anthony R. Young	8.91476%
James S. Duncan	8.91476%
Twin Oaks Village Estates Ltd.	24.51559%
Waters Edge Village Estates (Phase II) Ltd.	37.88773%
H.K. Mark Langdon	1.10654%
William S.F. Eng	1.85899%
Lawrence E. Rozon Inc.	1.10654%
Nova Ban-Corp Financial Services Ltd.	0.01%
Gordon W. Clarke	.35414%
James A. Hutton	4.41619%
Nancy E. Klink	0.92%
Robert M. Klink	0.36%
Frank R. Leone	0.36%
Warren J. Rauhe	0.08%
Kay R. Rauhe	0.28%

                3.              Klink and Interfin became, respectively, the limited partner and the general partner of Moresby Enterprises Partnership in place of the numbered companies, and the name of that partnership was changed to Interfin Leasing Partnership. The business of Moresby is described in the original partnership agreement executed by the numbered companies as "The acquisition, maintenance and disposal of Property as the General Partner may from time to time determine." A certificate of limited partnership had been filed with the Registrar of Companies on December 4, 1991. The registered address of Moresby was 650 – 999 West Hastings Street, which was also the address of Nova, and of the numbered companies that were the original Moresby partners.

                4.              Klink and ILP entered into an agreement whereby Klink transferred title to the computer and all its peripheral equipment to ILP. Klink and ILP agreed therein that the fair market value of the computer equipment was $50,000, and the consideration received by Klink for this equipment was a credit to the capital account of Klink in ILP of $50,000. This was agreed to be in full satisfaction of Klink's obligation to make a contribution to the capital of ILP. Klink also assigned to ILP its rights as lessor of the computer equipment to Federal Data Corporation.

[19]          The closing of these transactions took place on Friday, December 20, 1991 by teleconference. Mr. Hutton and his lawyer, Mr. Campbell, were apparently in Mr. Campbell's office in Toronto. The Victoria group was represented by their lawyer, Mr. Jones, in Victoria. Mr. Jones reported to Mr. Young by a letter dated Monday, December 23, 1991, which reads as follows:

Dear Tony:

Re: Klink Development Company

As I reported to Mark Langdon, we finally concluded the above transaction in time late Friday afternoon.

Basically John Campbell reported that after he had perused the bill there was nothing in it to affect his opinion, and, accordingly, on receipt of your instructions I authorized him to proceed, which he did.

There may be a few minor matters to clear up such as a new limited partnership agreement and I emphasize again that every effort must be made to market these products in the Eastern Block countries.

Apart from that, I think that I should render my account before the year end which I trust the investors find to be satisfactory. I was pleased to be of service to you all.

[20]          Exhibit A-1, tab 49 is the minutes of a meeting held on December 20, 1991, immediately following the closing of the series of transactions. Attending the meeting were Messrs. Young, Duncan, Eden, Eng, Rozon, Clarke, Langdon and Jones in Victoria, and Messrs. Hutton and Campbell by telephone in Toronto. Mr. Langdon was appointed the managing partner of ILP, and there was some discussion about leasing the computer in Eastern Europe, and of a possibility of developing other business in Eastern Europe in such areas as construction management, software and accounting services. They scheduled a subsequent meeting, which Mr. Belanger would attend, to be held in Victoria on January 17, 1992.

[21]          The January 17 meeting was duly held, and it was attended by Messrs. Young, Eden, Rozon, Clarke, Langdon, Belanger and Tom Baldwin, an associate of Mr. Belanger's firm in Cincinnati. There was discussion about alternative uses for the computer. The options of selling it, re-leasing it in the North American market and donating it to a university were all considered and rejected. Mr. Belanger spoke of a meeting with a Mr. Nicolov, who he said was an engineer in Bulgaria with a connection to a petro-chemical firm called Neftochem.

[22]          Mr. Belanger wrote a one-page letter to Mr. Langdon on February 10, 1992, about discussions he had had concerning the potential use of the computer. On February 28, 1992, Mr. Langdon wrote to Mr. Belanger, indicating to him, among other things, "We are still reviewing our options as to your final two points; purchasing the upgrades for the computer and what to do with the equipment after March 31".[3]

[23]          Another meeting was held on March 5 and 6, 1992, involving Mr. Langdon, Mr. Rozon, Mr. Darc of Nova, Mr. Hutton and Mr. Belanger. At this meeting Mr. Belanger continued to indicate that there was a market in Bulgaria for leasing the computer through the creation of some sort of data processing centre. Like his business plan of December 16, 1991, Mr. Belanger's advice at this meeting is vague, and consists entirely of unsubstantiated hopes and opinions. Poland was also mentioned as a possible site for a data centre.

[24]          In the meantime, the Klink partners decided to look into the possibility of leasing the computer in Venezuela rather than Eastern Europe. Mr. Duncan, Mr. Jones and Mr. Langdon travelled to Venezuela to investigate this. On April 24, 1992, Mr. Langdon wrote to Mr. Belanger, in preparation for this trip, to see whether Mr. Belanger could assist in obtaining a salesman's manual for the computer, maintenance records for it, and a synopsis of its history and capabilities.

[25]          At the end of April 1992, Mr. Belanger wrote to Mr. Langdon about a potential joint venture in Poland, to provide system integration services there, and in other Eastern European countries. In that memorandum he recommended that Klink should invest $350,000(US), together with a line of credit for an additional $150,000(US), and also contribute the computer. He concluded by offering to prepare a complete business plan for this project for $25,000(US). Under this proposal, another partnership called Newmark Leasing Partnership (Newmark), would have joined Klink, or ILP, in a joint venture. Paul Darc of Nova lent some encouragement to this proposal. A company called Consolidated Ventures International, Inc. of Ann Arbor, Michigan, was also a proposed participant in this joint venture. A number of proposals were advanced throughout the summer of 1992, and pro forma financial statements were circulated by Belanger. Two common elements of all Belanger's plans were that his company, Interfin, would receive significant compensation for its efforts, and that the Victoria group would make a substantial capital investment. The other common element was a lack of anything concrete to support Belanger's financial projections.

[26]          In November 1992, Klink and Newmark each agreed to invest up to $150,000(US) in a Polish data centre in Krakow, contingent upon the following:

a)              completion of a technical evaluation of how Newmark and Klink's mainframe computers will be relocated to Kracow, Poland and placed into use within the next six months, including cost estimates supported by firm quotations or proposals from suppliers of the services for transport, installation, set-up, acquisition of operating and application software, conversion of mainframe computers to Polish electrical standards and acquisition and installation of peripheral equipment.

                b)             receipt of a satisfactory revised business plan based upon available capital resources;

c)              completion of binding contracts between all Polish Data Centre joint venture partners satisfactory to Newmark and Klink including employment contracts, tax holiday agreement and data centre privatization agreement.

d)             finalization of arrangements for repatriation of capital satisfactory to 365648 B.C. Ltd. and Klink, and;

e)              completion of an "agenda" for the implementation of the Polish data centre with specific performance objectives identified and estimates of time requirements for each objective laid out, satisfactory to 365648 B.C. Ltd. and Klink

f)              Agreement from Bowen Enterprises Limited Partnership, Interfin Leasing Partnership and Federal Data Corporation regarding their contribution of 2 IBM mainframe computers.

[27]          On March 1, 1993, Belanger reported to Langdon that this proposal had not been accepted "... due to difficulties in securing Privatization papers from Poland's Ministry of Industry". In the same memorandum he reported on ten other proposals for ventures in Germany, Russia, Bulgaria and the Ukraine. There was no indication that any of these were likely to amount to anything, and in fact none of them ever did. Mr. Belanger concluded with a request to be paid $66,315(US) for fees and expenses.

[28]          In the meantime, Mr. Langdon, Mr. Duncan and Mr. Jones had travelled to Venezuela in mid-May 1992 to investigate what Mr. Langdon described as "... a great opportunity to carry out our original business plan in Venezuela rather than in Eastern Europe". Mr. Langdon made a cash call on the partners, other than the original United States partners, for $7,207 to cover costs of the trip. A facsimile message from Gustuva Cabrera Mata and Frank Hertel to Messrs. Duncan and Langdon on May 21, after their return from Venezuela, proposed two joint ventures between the Canadian and Venezuelan groups, one to develop building lots, and one to create a data centre in Caracas. Nothing came of this, however, and Mr. Langdon testified that by the middle of June any prospect of concluding a deal in Venezuela was remote, as the Venezuelans required too great an investment from Klink.

[29]          In April 1993, Mr. Belanger brought two associates, a Mr. Kordons and a Mr. Spink, to Victoria to meet with Messrs. Duncan, Eden and Langdon. Mr. Belanger and Mr. Spink had previously provided a so-called business plan of some six pages for a proposed investment bank venture to operate in Eastern Europe. This document is so vague and unsubstantiated as to be completely worthless as a business plan. I do not believe that Mr. Young or Mr. Langdon, or any of their associates, would have considered it to have any value at all. At the end of a meeting of about two hours, Mr. Langdon seems to have concluded that Mr. Belanger and his associates were in fact simply looking for investment money for other deals quite unrelated to the computer.

[30]          On May 27, 1993, Mr. Belanger wrote to Mr. Langdon and Mr. Darc. He made it clear that the plans for a data centre in Krakow, Poland, were not going to proceed. Now he proposed that each of Newmark and Klink invest $150,000(US) in something called the Interfin Emerging Markets Group. On June 18, Mr. Belanger sent a further three-page proposal to Mr. Langdon which would have required the Klink partners to invest a further $200,000(US), and which would have required them to deliver and install the computer in some undetermined Eastern European site. This proposal did not proceed either, and by the middle of 1993 matters were at a standstill, with Mr. Belanger wanting a further investment of capital by the Klink partners in the order of $200,000(US), together with the costs of transporting the computer to Europe, and additional fees and expenses of Interfin.

[31]          Some time between June and October 1993, Roger Belanger was operated on to remove a brain tumour. The operation was successful, but by the end of January 1994, his business had apparently been taken over by Mr. Kordons and Mr. Spink, and there was no longer any prospect that a deal might be put together, if indeed, there ever had been such a possibility.

the issues

[32]          This case raises the following three main issues:

                (i)             Did Klink continue to exist as a partnership after December 13, 1991, or alternatively, after December 20, 1991?

                (ii)            If Klink did continue to exist as a partnership, was it entitled to establish the undepreciated capital cost of its computer at the full historical cost, converted to Canadian dollars, of $4,536,940, and thereby claim a terminal loss of $4,486,940 in computing the income of the partnership for the 1991 taxation year under section 96 of the Act? and

                (iii)           If the Appellant is successful on the first two issues, then a third issue arises. Was the Minister justified in applying subsection 245(2) to deny the Appellants the tax benefit that otherwise would have resulted from the series of transactions that took place on December 20, 1991?

[33]          The following are the essential parts of the sections of the Act that are relevant to these issues:

13(21)      In this section,

                ...

                (b)           "depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which he has been allowed, or, if he owned the property at the end of the year, would be entitled to, a deduction under regulations made under paragraph 20(1)(a) in computing income for that year or a previous taxation year;

                ...

                (e)            "total depreciation" allowed to a taxpayer before any time for property or a prescribed class means the aggregate of all amounts each of which is an amount deducted, or that but for section 67.3 would have been deducted, by the taxpayer by reason of paragraph 20(1)(a) in respect of property of that class or an amount deducted under subsection 20(16), or that would have been so deducted but for subsection 20(16.1), in computing his income for taxation years ending before that time;

                (f)             "undepreciated capital cost" to a taxpayer of depreciable property of a prescribed class as of any time means the amount by which the aggregate of

                (i)             the capital cost to the taxpayer of each depreciable property of that class acquired before that time,

                ...

                (iii)           the total depreciation allowed to the taxpayer for property of that class before that time,

                ...

20(1)        Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

                (a)           such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;

                ...

20(16)      Notwithstanding paragraphs 18(1)(a), (b) and (h), where at the end of a taxation year,

                (a)           the aggregate of all amounts determined under subparagraphs 13(21)(f)(i) to (ii.2) in respect of a taxpayer's depreciable property of a particular class exceeds the aggregate of all amounts determined under subparagraphs 13(21)(f)(iii) to (viii) in respect thereof, and

                (b)           the taxpayer no longer owns any property of that class,

                in computing the taxpayer's income for the year

                (c)            there shall be deducted the amount of the excess determined under paragraph (a), and

                (d)           no amount shall be deducted for the year under paragraph (1)(a) in respect of property of that class,

                and the amount of the excess determined under paragraph (a) shall be deemed to have been deducted under paragraph (1)(a) in computing the taxpayer's income for the year from a business or property.

245(1)      In this section and in subsection 152(1.11),

                “tax benefit” means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act;

                “tax consequences” to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount;

                “transaction” includes an arrangement or event.

245(2)      Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

245(3)      An avoidance transaction means any transaction

                (a)           that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

                (b)           that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

245(4)      For greater certainty, subsection (2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.

245(5)      Without restricting the generality of subsection (2),

                (a)           any deduction in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,

                (b)           any such deduction, any income, loss or other amount or part thereof may be allocated to any person,

                (c)            the nature of any payment or other amount may be recharacterized, and

                (d)           the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,

                in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance

245(6)      Where with respect to a transaction

                (a)           a notice of assessment, reassessment or additional assessment involving the application of subsection (2) with respect to the transaction has been sent to a person, or

                (b)           a notice of determination pursuant to subsection 152(1.11) has been sent to a person with respect to the transaction,

                any person (other than a person referred to in paragraph (a) or (b)) shall be entitled, within 180 days after the day of mailing of the notice, to request in writing that the Minister make an assessment, reassessment or additional assessment applying subsection (2) or make a determination applying subsection 152(1.11) with respect to that transaction.

245(7)      Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.

245(8)      On receipt of a request by a person under subsection (6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsection 152(4), assess, reassess or make an additional assessment or determination pursuant to subsection 152(1.11) with respect to that person, except that an assessment, reassessment, additional assessment or determination may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection (6).

the positions of the parties

[34]          The Appellants take the position that they purchased interests in a subsisting partnership, Klink, whose business was moved from Ohio to British Columbia, and which then became subject to Canadian tax laws, and that their primary reason for doing so was their desire to carry on a computer leasing business in common with a view to profit. They point to evidence of an existing computer leasing business being carried on by Klink since November 1982, and during December 1991 and January, February and March 1992. This, they say, satisfies the requirements of the first and third issues as I have outlined them above. The Appellants also take the position that even if the transactions were avoidance transactions, there was no misuse of a section of the Act, nor any abuse of the provisions of the Act read as a whole, because the terminal loss claimed by Klink is specifically provided for by sections 13 and 20 of the Act, together with Regulation 1100. For this reason, they argue, they succeed on the second issue; and for the same reason, even if the transactions were avoidance transactions, section 245 does not apply because of subsection (4).

[35]          The Respondent's position is that the Klink partnership ceased to be a partnership on December 13, 1991, when a 98% interest was acquired by Hutton and Nova, or alternatively, on December 20, 1991, when the Victoria group acquired their interests from Hutton and Nova. This position is predicated on a view of the evidence that none of Hutton, Nova or the members of the Victoria group had any intention of carrying on business in common with the others with a view to profit. What they purchased, it is said, was simply interests in common in the one partnership asset owned by Klink in December 1991, the computer. It had a value of $7,000(US), and it was under a lease which would produce $14,133(US) for the month of December and $100(US) for each of the ensuing three months. This, the Respondent says, is not a business.

[36]          The Respondent also argues, in the alternative, that if there was a subsisting partnership there is nevertheless no entitlement to claim capital cost allowance in respect of the computer, and so no entitlement to claim a terminal loss on the disposition of it. This argument is put on two bases. The first is that by December 1991 the computer had been fully depreciated pursuant to the tax laws of the United States. The second is that the computer was not acquired for the purpose of gaining or producing income.

[37]          Finally, the Respondent relies on section 245 of the Act, arguing that the Appellants' only purpose in acquiring the partnership interests in Klink was to obtain a tax benefit, and that for the Appellants to obtain that benefit would result in misuse of a provision of the Act, or in an abuse of the provisions of the Act read as a whole. Section 245 should, therefore, be applied to nullify the effect of the transactions and disallow the deduction by the Appellants of the terminal loss.

the partnership issue

[38]          The Appellants take the position that Klink survived the sale of a 98% interest to Hutton and Nova, and the subsequent resale of interests totalling almost 94% to the Victoria group. They rely on the Supreme Court's judgment in Continental Bank Leasing Corp. v. Canada.[4] There Bastarache J., whose reasons on this point were adopted by the majority of the Court, makes it clear that, sham aside, whether a partnership exists is a matter that must be determined by an examination of the facts and circumstances of each case to determine whether the essential ingredients of a partnership are to be found. Partnership is a relationship that subsists among persons carrying on a business in common with a view to profit. The essential ingredients, then, are "... (1) a business, (2) carried on in common, (3) with a view to profit".[5]

[39]          Counsel for the Respondent relied heavily on the fact that in December 1991 only a short period remained unexpired on the lease of the computer for the proposition that there was no business carried on by Klink after December 13, 1991. However, it seems clear from the decision in Continental Bank Leasing that despite the short duration of potential income production remaining, the relatively small amount of income to be produced, and the completely passive nature of the earning process, a business existed until the end of the term of the lease.

[40]          Was that business carried on in common? And if so, was it with a view to profit? I am not able to examine the terms of the Partnership Agreement to see if it contains "the type of provisions typically found in a partnership agreement" to which Bastarache J. referred in Continental Bank Leasing[6] because it was not put into evidence. All that is in evidence is the amending agreement of December 20, 1991, which was executed in order to implement the transactions of that date and admit the Victoria group as partners. There is also evidence that the post-December 20, 1991 revenue to ILP from the lease of the computer was $16,194. Against this was charged depreciation of $15,000 (30% of $50,000) and professional fees of $14,458, producing a net loss of $13,264.

[41]          Mr. Langdon was made managing partner at a meeting held immediately after the closing took place.[7] The relationship (for partnership is not an entity but a relationship) between the United States partners who continued to hold a 2% interest among them, and the "new partners" who had bought 98% is unexplained. It is difficult to see how they can be said to be "carrying on business in common". None of the U.S. partners gave evidence. Nor was there any evidence as to the terms upon which they sold a 98% interest in Klink to Hutton and Nova. They were the owners of a computer which, but for the four remaining lease payments, had reached the end of its useful life. It was fully depreciated, and had a value of $7,000(US). There is evidence which satisfies me that they retained a 2% interest only because one of the lawyers involved in advising the Canadian purchasers expressed concern that unless some interest remained with the U.S. owners Klink might, as a matter of law, cease to exist. There is no evidence before me as to what advice, if any, was given to those U.S. partners. In these circumstances I am not prepared to infer that they had an intention to carry on business in common with Hutton, Nova, and the Victoria group, and in doing so to assume potential liability for any indebtedness which that group might incur. Nor could any of the partners, old or new, have expected profits. The operating loss for the period from December 20 to 31 was entirely predictable. It was also known that the computer was obsolete, and had no prospect of earning any revenue in North America after the expiry of the existing lease.

[42]          In addition to the six Appellants, Hutton, Nova, Eng, Rozon and Clarke, all acquired interests in Klink in December 1991. Only Mr. Langdon and Mr. Young gave evidence. Mr. Langdon said in his evidence that he was motivated to purchase his 1.10654% interest in Klink entirely by the prospect of participating in the business of a data processing centre to be established in Eastern Europe. He did agree, however, that he was aware of the potential tax advantage to be had from the claimed terminal loss arising on the disposition of the computer to ILP on the same day that he and the other members of the group purchased their interests. Mr. Young was somewhat more candid; he admitted that the tax loss to be generated in Klink was a motivating factor. He insisted, however, that the major motivation was the opportunity to participate in the then emerging Eastern European market by establishing a data centre there. For the reasons that follow, I do not believe their evidence on this point.

[43]          The fact that these nine taxpayers paid $320,000 for somewhat less than full ownership of a partnership whose only asset was a computer which had a value of $7,000(US) obviously calls for some explanation. The rationale offered by the two members of the group who testified was that they were not simply buying the computer, but they were buying access to Roger Belanger's expertise, and to his business connections, which would provide them with the opportunity to participate in the data processing business in Eastern Europe. They also said that they were paying for the covenant of Nova to assist in remarketing the computer. This explanation makes no sense. They made no investigation into the value of the computer before purchasing; they made virtually no investigation of the bona fides, the experience or the capabilities of Mr. Belanger. If they believed that Mr. Belanger had the business experience and acumen that he claimed, which I doubt they did, that belief must surely have been dispelled by the first business plan that he produced. These Appellants are not naive; I do not believe that any of them would have been taken in for even a short while by the kind of documents that Mr. Belanger was producing. Certainly the two who testified before me would have known better. Mr. Langdon was emphatic that, along with the computer, the group was paying for both the knowledge and experience of Mr. Belanger and his concept for a data centre in Eastern Europe, yet he, a chartered accountant, could not explain how the price of $320,000 had been arrived at, and his "due diligence" in respect of Mr. Belanger was, at best, cursory. Nothing in the evidence explains why anyone would pay even a nominal amount for Nova's covenant to assist.

[44]          Taxpayers are, of course, free to structure their affairs in whatever way they choose. The legal effect, however, is determined according to the facts. The transactions of December 13 and December 20, 1991, whereby the Victoria group acquired 93.5% of a partnership whose only asset was a nearly worthless computer with a large historical cost, and then caused that partnership to acquire a 50% interest in another partnership, and to convey the computer to that second partnership at a price having no basis in the evidence, also calls for some explanation. The explanation offered is that the Klink partnership had a "presence" in Ohio, and so Interfin would be more comfortable dealing with it than with strangers, and that the partnership provided the group with an existing legal structure. The ILP partnership, they said, provided incentive to Belanger to produce results for them. These explanations do not stand scrutiny. The purchasers certainly did not intend to carry on business in Ohio, or anywhere in the U.S. Mr. Belanger knew perfectly well throughout who the new owners were. Nothing in the evidence suggests that any of the U.S. partners would have any continuing interest, except nominally holding 2% to satisfy the lawyers' technical concerns about the law of partnership.

[45]          Equally troubling are the failure of the other members of the Victoria group to testify, and the failure of the Appellants to call Mr. Hutton, Mr. Belanger, or any of the several people who worked for them and had a part to play in this matter from time to time. No evidence was offered to suggest that any of them were unable to testify. There was some evidence that Mr. Belanger recovered successfully from his surgery; there was no evidence to explain his absence from the trial, nor was any application made to take his evidence by commission in the United States. Counsel for the Appellants sought to deal with these omissions by showing that the Revenue Canada assessor had not himself investigated either Mr. Belanger or the Eastern European market for data processing, and by arguing that he was under an onus to do so. Mr. Cadman relied upon the statement of Gonthier J., speaking for a unanimous Court, in Corporation Notre-Dame de Bon-Secours v. Communauté urbaine de Québec et al.,[8] where he said:

                It should at once be noted that there is a risk of confusion between the rule that a taxing provision is to be strictly construed and the burden of proof resting upon the parties in an action between the government and a taxpayer. According to the general rule which provides that the burden of proof lies with the plaintiff, in any proceeding it is for the party claiming the benefit of a legislative provision to show that he is entitled to rely on it. The burden of proof thus rests with the tax department in the case of a provision imposing a tax obligation and with the taxpayer in the case of a provision creating a tax exemption. It will be noted that the presumptions mentioned earlier tend in more or less the same direction. This explains why these concepts have been at times superimposed to the point of being confused with each other. With respect, they are nevertheless two very different concepts. In any event, the rule of strict construction relates only to the clarity of the wording of the tax legislation: regardless of who bears the burden of proof, that person will have to persuade the court that the taxpayer is clearly covered by the wording of the legislative provision which it is sought to apply.

There the Supreme Court was considering an exempting provision of a provincial statute concerned with municipal taxes.[9] It was settled by the Supreme Court of Canada some 75 years ago that in appeals from assessments to income tax the onus of proof as to the inquiry into the facts of the case rests with the Appellant: Anderson Logging Co. v. The King.[10] This principle remains as valid today as it was then: Hickman Motors Ltd. v. Canada.[11]

[46]          I reject the proposition that the Minister's assessor must investigate at first hand every improbable explanation offered by taxpayers for transactions which, on their face, appear much more consistent with tax avoidance than with commercial enterprise, by travelling the globe to seek out witnesses who might shed light on the taxpayer's real intentions. That is the Appellants' burden, and no credible evidence was led before me to shift it to the Respondent. I infer from the absence of any evidence from either Hutton or Belanger that their evidence would not have been of any assistance to the Appellants. I draw the same inference with respect to the Appellants Duncan and Eden, and the other members of the Victoria group.[12] My conclusion on this point is that the Appellants did not intend to carry on any business involving the Klink computer. They simply intended to create a large tax loss for themselves at a relatively modest cost. The meetings held and the memoranda generated after December 20, 1991, and much of what was written before that date, were simply window-dressing designed to create the illusion of an intention to carry on a business in common, with a view to profit. The Appellants never had any such intention.

[47]          In my view, the Klink partnership came to an end on December 13, 1991 when a 98% interest passed to Hutton and Nova. If I am wrong in that, then it came to an end on December 20, 1991 when a 93.5% interest was assigned to the Victoria group.

[48]          In view of this conclusion it is not necessary to decide whether the business of Klink was moved from Ohio to British Columbia as the Appellants contended.

[49]          The conclusion that the Klink partnership did not survive the transactions which took place in December 1991 leads to the conclusion that it could not suffer the terminal loss that is claimed to be the result of the disposition of the computer. This in turn leads to the conclusion that the Minister's assessments are correct, and the appeals must be dismissed. However, in case a higher Court should disagree with my conclusion as to the termination of Klink as a partnership, I shall now consider the remaining issues. In doing so, I shall assume that the Klink partnership survived the transactions of December 1991.

the cca issue

[50]          If Klink was a valid subsisting partnership at the end of its fiscal period which coincided with the calendar year 1991, then subsection 96(1) of the Act required it to compute its income, or non-capital loss, for the year as if it were a separate person resident in Canada. The only depreciable property that it owned during 1991 was the computer. Its undepreciated capital cost is governed by paragraph 13(21)(f), which, so far as it is relevant here, provides that:

"undepreciated capital cost" ... means ... the amount by which the aggregate of the capital cost to the taxpayer of each depreciable property of that class acquired before that time ... exceeds ... the total depreciation allowed to the taxpayer for property of that class before that time ...

[51]          The capital cost to Klink, converted to Canadian currency, was its historical cost of $4,536,940. Counsel for the Respondent argued that the proper deduction from this for "... total depreciation allowed to the taxpayer ..." is the depreciation allowed pursuant to the United States tax laws. It is not disputed that the computer had been fully depreciated pursuant to those laws, as well as for accounting purposes. Moreover the evidence clearly shows that by December 1991 its market value was $7,000. The Respondent therefore takes the position that the undepreciated capital cost should be zero.

[52]          Counsel for the Appellants argued that this ignores the statutory definition of "total depreciation". Paragraph 13(21)(e), so far as it is relevant here, defines "total depreciation" allowed to a taxpayer to mean:

an amount deducted ... by the taxpayer by reason of paragraph 20(1)(a) in respect of property of that class or an amount deducted under subsection 20(16) ... in computing his income for taxation years ending before that time;

[53]          Klink has never computed income pursuant to the Canadian Act prior to 1991. It therefore has never deducted any amount by reason of paragraph 20(1)(a), or under subsection 20(16). The undepreciated capital cost of the computer in its hands, therefore, is the full historical cost, $4,536,940, with no deduction. There can be no doubt that this line of reasoning, while applying literally the plain words of the Act, leads to an anomalous result. Klink's entitlement to calculate a terminal loss on the basis of the total historical cost of the computer, after fully depreciating it both for accounting purposes and under the U.S. tax laws, is certainly inconsistent with the object and spirit of the provisions of the Act. As paragraph 20(1)(a) shows, the provisions dealing with capital cost allowance, including terminal losses, are intended to account for the consumption of capital in the income earning process. It was not Parliament's intention to provide the opportunity to permit the manufacture of non-capital losses by the acquisition of an interest in a foreign partnership having capital assets that have been fully depreciated.

[54]          Nevertheless, the words of paragraphs 20(1)(e) and (f) and subsection 20(16) are not ambiguous, and must be applied: Shell Canada Ltd. v. Canada.[13]

[55]          It follows that if Klink had continued to exist as a partnership then the Appellants would have been entitled to succeed on the second issue.

gaar

[56]          Again on the assumption that I am wrong in respect of the first issue, I turn to consider the application of section 245 of the Act. The following questions arise.

(i)             But for the application of section 245, would the December 20, 1991 transactions have resulted in a tax benefit to the Appellants?

(ii)            If the answer to the first question is yes, may the transactions reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit? and

(iii)           If the answer to question (i) is yes, and the answer to question (ii) is no, did the transactions, result directly or indirectly in a misuse of the provisions of the Act, or an abuse of the provisions of the Act as a whole?

[57]          It was not disputed by either of the Appellants who testified, or by their counsel in argument, that the December 20, 1991 transactions gave rise to a substantial tax benefit to them in the form of their share of the Klink loss, which was attributable almost entirely to the terminal loss claimed on the disposition of the computer. Without the acquisition from Hutton and Nova of the partnership interests in Klink, and without the disposition of the computer to ILP for $50,000 (an amount arrived at arbitrarily), there could have been no terminal loss to attribute under section 96 of the Act, and so no non-capital loss for the Appellants to include in the computation of their incomes under section 3 of the Act. In fact, the Victoria group among them secured non-capital losses totalling $4,152,700 (93.5% of $4,441,390) at a cost to them of $320,000, or 13 ¢ per dollar. Clearly the answer to question (i) is "yes".

[58]          I have already concluded at paragraphs 42 to 47 above that the Appellants had no intention of carrying on any business involving the use of the computer, but intended simply to derive a tax advantage through the artificial creation of a terminal loss on the disposition of it to ILP. Strayer J.A. said in The Queen v. Wu:[14]

                In this connection we refer to the decision of this Court in H.M. v. Placer Dome Inc., decided after the trial judgment in the present case. The provision in question in that case, subsection 55(2) of the Income Tax Act, required for its application that "one of the purposes" be to support a significant reduction in capital gain realized. It did not contain the words "may reasonably be considered that ... ". This Court, for purposes of decision, assumed, without finding, that the test was subjective. But it was held that in the face of the Minister's presumption that this was one of the purposes:

                                the taxpayer must offer an explanation which reveals the purposes underlying the transaction. That explanation must be neither improbable nor unreasonable ... the taxpayer must offer a persuasive explanation that establishes that none of the purposes was to effect a significant reduction in capital gain.

In our view, with the additional words in subsection 15(1.1) allowing for its application where "it may reasonably be considered" that one of the purposes of payment is alteration of the value of the interest of a shareholder, the onus is even greater on a taxpayer to produce some explanation which is objectively reasonable that none of the purposes was to alter the value of a shareholder's interest.

[59]          The Appellants were unable to give an explanation other than tax avoidance for these transactions which could meet the test of being "... neither improbable nor unreasonable ..."[15] when viewed subjectively. A fortiori they cannot do so when the test is the objective one imposed by the words "may reasonably be considered" that appear in paragraphs 245(3)(a) and (b). The second question must therefore be answered "no".

[60]          Subsection 245(4) saves transactions from the reach of subsection (2) if they do not result in "... a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act ... read as a whole". On this issue the Appellants rely on Husky Oil Limited v. The Queen.[16]In that case Beaubier J. found that the transactions in question were entered into for bona fide commercial reasons, and not to secure a tax benefit, and so it was not necessary for him to consider subsection 245(4). Nor does Jabs Construction Ltd. v. The Queen[17] assist the Appellants. In that case the taxpayer gifted certain properties which had appreciated in value to a charitable foundation to which it was related, designating the adjusted cost base to be the proceeds of disposition. The foundation then sold the properties at arm's length, realizing a substantial capital gain which was immune from taxation because of the foundation's charitable status. The foundation then loaned a portion of its proceeds of the sale to the taxpayer, which was able to deduct the interest paid on the loan in computing its income. Judge Bowman allowed the taxpayer's appeal from an assessment made under section 245, but he did so on the basis that the transactions in question were not avoidance transactions within subsection 245(3). Again, subsection (4) did not have to be considered.

[61]          In OSFC Holdings Ltd. v. The Queen,[18] I adopted the following passages from the judgments of Judge Bonner in McNichol et al. v. The Queen,[19] and of Judge Bowman in RMM Canadian Enterprises Inc. et al. v. The Queen:[20]

... The transaction in issue which was designed to effect, in everything but form, a distribution of Bec's surplus results in a misuse of sections 38 and 110.6 and an abuse of the provisions of the Act, read as a whole, which contemplate that distributions of corporate property to shareholders are to be treated as income in the hands of the shareholders. It is evident from section 245 as a whole and paragraph 245(5)(c) in particular that the section is intended inter alia to counteract transactions which do violence to the Act by taking advantage of a divergence between the effect of the transaction, viewed realistically, and what, having regard only to the legal form appears to be the effect. For purposes of section 245, the characterization of a transaction cannot be taken to rest on form alone. I must therefore conclude that section 245 of the Act applies to this transaction.

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                   To what Bonner J. has said I would add only this: the Income Tax Act, read as a whole, envisages that a distribution of corporate surplus to shareholders is to be taxed as a payment of dividends. A form of transaction that is otherwise devoid of any commercial objective, and that has as its real purpose the extraction of corporate surplus and the avoidance of the ordinary consequences of such a distribution, is an abuse of the Act as a whole.

These passages were also adopted by Tardif J. in Nadeau v. The Queen.[21]

[62]          Sections 13 and 20 of the Act, together with Regulation 1100, make provision whereby a taxpayer is allowed, when computing income from a business, to deduct an amount as capital cost allowance. The purpose of capital cost allowance is to reflect in the computation of profit the diminution in value from year to year of the capital assets used in the business. The rates of capital cost allowance which may be charged are fixed by Regulation, and they approximate the rates at which various capital assets are consumed.[22] The system whereby assets of the same class are pooled for purposes of capital cost allowance, the terminal loss provision in subsection 20(16), and the recapture provision in section 13, are all there to ensure that when an asset that has been used in the business is disposed of, an adjustment is made which will reflect any difference between the capital cost allowance claimed during the period that the asset was held and the actual extent to which its value has been consumed over that period. The obvious purpose is to ensure that in computing business income taxpayers may take into account the cost, but only the actual cost, of capital assets used up.

[63]          In the present case, the series of transactions which took place on December 20, 1991 was designed and carried out to put these provisions to a use that is totally inconsistent with their purpose, and with the overall scheme of the Act. The terminal loss claimed is quite unrelated to any decrease in value of the computer resulting from its use for the purpose of earning income. In fact the loss claimed is many times the value of the computer when the Victoria group first acquired their interests, and many times the price that they paid to acquire those interests. The argument that there was no misuse or abuse involved because the capital cost allowance claimed was specifically provided for in the Act has no merit. It is obvious that section 245 can never have any application if the saving provision of subsection (4) can be invoked on that basis. Every tax avoidance scheme depends on the application of some section of the Act to achieve its purpose. The clear intent of section 245 is to negative those tax avoidance transactions which, although technically within the Act’s provisions, are abusive in nature. The transactions in the cases at bar are in that category. The Minister was justified in applying section 245.

conclusion

[64]          To summarize the foregoing, the Klink partnership ceased to exist either on December 13, 1991 with the acquisition of a 98% interest by Hutton and Nova, or at the latest on December 20, 1991 with the acquisition from them by the Victoria group of interests totalling 93.57381%. In either event Klink did not, as a matter of law, exist at the time it purported to convey the computer to ILP, and it therefore could not take the terminal loss and distribute it under section 96 of the Act to the Appellants and others. The appeals fail on that basis. If I am wrong in that conclusion the appeals nevertheless must fail, because the Minister was justified in applying section 245 of the Act.

[65]          The appeals of each of the Appellants are dismissed. The Respondent is entitled to costs, but with one counsel fee only for each of senior and junior counsel. The Appellants will be jointly and severally liable for the costs.

Signed at Ottawa, Canada, this 8th day of January, 2001.

"E.A. Bowie"

J.T.C.C.

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