Date: 20010316
Docket: 2000-635-IT-I
BETWEEN:
GEOFFREY HEWETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue was stated in the Reply to the Notice of Appeal to be whether the Appellant is entitled to deduct his share of partnership losses in the amount of $16,667 in his 1996 taxation year. At the hearing, the Appellant, in response to the Minister's assumptions of fact, said that he agreed with the following assumption:
... the Appellant was one of the three partners in a limited partnership known as Three Buoys Vacations BVI Limited Partnership #4 (the "Partnership") which was involved in operating houseboat rentals in the British Virgin Islands.
However, his Appellant's testimony at the hearing, on cross-examination, was that there was no formal partnership under law. He stated that "his accountants approved it".
[2] In 1997 the Appellant went to a Three Buoys[1] presentation and was given a pro forma. It showed that charters of a motor yacht at a British Virgin Islands resort would, at 46 percent use, produce profit in the sixth year with profit ascending in each of the nine subsequent years.
[3] The Appellant, in association with two other gentlemen, purchased a boat for $199,500. This was effected by a down-payment of $12,000, $4,000 each, and a loan from the Royal Bank of Canada for $187,500. The Appellant gave evidence as to the Bank completing a blank demand promissory note in the sum of $207,000 on January 27, 1988 and sending a letter to the three purchasers describing the principal amount as $207,000. The group took violent exception to this procedure. They received a letter from the Bank dated February 12, 1988 stating:
Please be advised that we have received a cheque in the amount of $19,500.00 from Three Buoys and have applied same to your loan.
For your information, the particulars of same are as follows:
Principal Amount $187,500.00
...
[4] The Appellant's evidence was that the Bank had, in violation of the arrangement, advanced money to Three Buoys, one of its customers, before the boat was concluded. He alleged that the Bank had failed to disclose problems with Three Buoys of which it had knowledge including the fact that it had placed someone with that company to oversee it. He testified that the Bank had put Three Buoys in receivership after the investment commitment had been made by the trio. He said also that they sued the Bank in breach of fiduciary responsibility.
[5] The Appellant testified that they had made interest payments of $2,000 per month for 15 months. He also stated that the Bank, in 1989, seized and sold the boat for $115,000 and also that the Bank was, in early 1989, putting Three Buoys in receivership. He testified that lawyers and accountants, on behalf of the three investors, had studied the pro forma and approved their investment action.
[6] The Appellant said that the Bank's claim against the trio for $150,000 was settled, in 1996, for $50,000. The Appellant's share of that sum paid to the Bank was $16,667. He stated that, on the advice of their accountant, he claimed that sum as a terminal loss in 1996. No submissions were made by him in that regard.
[7] Respondent's counsel submitted that the sum of $16,667 was a partnership capital loss because the Appellant invested in the partnership and when it ceased to exist the Appellant suffered that loss. The alternate argument was that if the Court did not conclude that there was a capital loss, there was, in any event, no reasonable expectation of profit. She stated that the business was never started, there was no profit, no revenue, the Appellant relied on pro forma information, and referred to a number of cases dealing with the concept of reasonable expectation of profit.
ANALYSIS AND CONCLUSION:
[8] There was no evidence that the Appellant's partnership, if there was one, ceased to exist or when. Counsel did not deal with the Appellant's evidence that there was no formal partnership thus placing great doubt on whether he was a partner. It matters not whether the loss in question arose as the Appellant's share of a partnership loss or as on his account as an individual participant in the activity.
[9] I have no doubt about the Appellant having entered a business venture. He was aware of the pro forma projections and made his decision with approval of professionals, to proceed with that undertaking. Therefore, the "reasonable expectation of profit" has no application.
[10] The cost of the boat, proceeds of disposition and financial results are as follows:
Cost $199,500
Sale proceeds $115,000
Balance $ 84,500
[11] The $50,000 paid by the trio relates only to retirement of the bank loan and does not affect the above balance. Subsection 20(16) of the Income Tax Act ("Act") provides that where at the end of a taxation year a taxpayer has an "undepreciated capital cost" of depreciable property of a particular class and the taxpayer no longer owns any property of that class:
... in computing the taxpayer's income for the year ... there shall be deducted the ...
undepreciated capital cost. The boat was disposed of in 1989[2]
[12] Subsection 20(16) requires that "there shall be deducted the amount of the" undepreciated capital cost. Accordingly, a terminal loss in respect of the boat arises in 1989 and not in 1996. If the terminal loss results in a non-capital loss for the Appellant for 1989, it can be carried forward under section 111 to his 1996 taxation year. No evidence in that regard was presented.
[13] The appeal is allowed to provide a terminal loss of $28,166 (being one-third of the sum of $84, 500) for the Appellant's 1989 taxation year. Although that year is not under appeal, that sum may result in some amount being deductible in 1996, the year under appeal.
Signed at Ottawa, Canada this 16th day of March, 2001.
"R.D. Bell"
J.T.C.C.
[1] Three Buoys Houseboat Charters Ltd. whose business, through it and a related company or companies was to build and charter houseboats.
[2] There was no evidence that the Appellant had any other property in that class. One would suspect that if such evidence existed the Respondent would have adduced it.