Counsel for the Appellants:

David R. Davies

Florence Sauve

Shawn Tryon

Molly Martin

Counsel for the Respondent:

Michael Taylor

Matthew Turnell

Laura Zumpano

Meaghan Mahadeo

B. ISSUES TO BE DECIDED

15.

The preliminary issue to be decided is whether the determinations issued by the Minister for the Operating Partnership’s 2006, 2007 and 2008 fiscal periods are valid.

16.

The primary issue is whether the Operating Partnership was a valid partnership in law, such that its members may deduct their share of its net business losses in the 2006, 2007 and 2008 fiscal periods, or whether the Operating Partnership was invalid either because the partners were not carrying on business in common with a view to a profit or because the purported acquisition of Luxell’s business through the financing structure that consisted of the Operating Partnership agreement, Investor Partnership agreement, Investor Notes, Asset Purchase Agreement, Support Agreement, Call Option Agreement, and Service Notes was a sham.

17.

If the Operating Partnership was a valid partnership in law, then the issues to be decided are:

a)

whether each of the Operating Partnership, the Investor Partnership and Luxell dealt with the others at arm’s length at all times material to this appeal;

b)

whether the fair market value of the assets purportedly acquired from Luxell on August 30, 2005 exceeded the amount determined by the Minister, which was nil;

c)

whether, in computing net business income for the 2006, 2007 and 2008 fiscal periods, the Operating Partnership is entitled to deduct amounts (including CCA) identified by the Minister as non-deductible; and

d)

whether, in computing income for the 2008 fiscal period, the Operating Partnership is required to include the unpaid amount owing to Luxell as of December 31, 2007 in respect of the Service Note issued on December 31, 2005.

***

D. GROUNDS RELIED ON AND RELIEF SOUGHT

19.

He submits that the notices of determination issued by the Minister, determining the losses of the Operating Partnership in its 2006, 2007 and 2008 fiscal periods to be nil on the basis that the Operating Partnership was not a valid partnership in law, are valid. Subsection 152(1.4) of the Act permits the Minister to make that determination in respect of a partnership.

20.

He further submits that the Operating Partnership was not a valid partnership in law because its members did not carry on business in common with a view to profit. Instead, its members acquired units in order to access tax losses made available by Luxell in exchange for a capital infusion that was needed to keep Luxell’s business going. As there was no partnership, no amount may be allocated to the members of the Operating Partnership as partnership losses that may be deducted, pursuant to paragraph 12(1)(l) of the Act, in computing their income for the taxation years that include the Operating Partnership’s 2006, 2007 and 2008 fiscal periods.

20A.

In addition, no losses may be allocated to its members because the financing structure was a sham intended to convey the impression that the Operating Partnership had acquired ownership of Luxell’s assets in order to carry on a business for profit when in fact, the financing structure was intended only to give the Investors access to Luxell’s operating losses. In particular, it was always intended that Luxell would reacquire the assets and unwind the structure prior to the business becoming profitable or the Investor Notes and Service Notes becoming payable. Accordingly, the financing structure that consisted of the Operating Partnership agreement, Investor Partnership agreement, Investor Notes, Asset Purchase Agreement, Support Agreement, Call Option Agreement and Service Notes was a sham.

21.

If the Operating Partnership was a valid partnership, then he submits that:

a)

Each of the Operating Partnership, Luxell and the Investor Partnership did not deal with the others at arm’s length at all times material to this appeal within the meaning of section 251 of the Act.

b)

Under paragraph 69(1)(a) of the Act, the Operating Partnership is deemed to have acquired the assets of Luxell at their fair market value at the time of acquisition, which was not $29,000,000 but nil.

c)

In computing its business income for the 2006, 2007 and 2008 fiscal periods, the Operating Partnership is not entitled, pursuant to paragraph 20(1)(a) of the Act and Regulation 1100, to deduct any CCA in respect of the assets acquired from Luxell because their capital cost is nil.

d)

In computing its business income for the 2006, 2007 and 2008 fiscal periods, the Operating Partnership is not entitled, pursuant to paragraph 18(1)(a) of the Act, to deduct the expenses identified by the Minister as non-deductible in the attached Schedule “A”, as those expenses were either:

i)

not expenses of the Operating Partnership because they were the sole responsibility of Luxell under the Support Agreement;

ii)

double-claimed because the Operating Partnership deducted management fees paid to Luxell on the basis that Luxell was an independent contractor; or

iii)

not transferable to the Operating Partnership under the Support Agreement.

e)

In computing its income for the 2008 fiscal period, the Operating Partnership is required, pursuant to subsection 78(1) of the Act, to include the amount of the Service Note issued on December 31, 2005, because the Operating Partnership and Luxell were not dealing at arm’s length and the amount owing under that Service Note remained unpaid at the end of the second taxation year following the taxation year in which the Service Note was issued.

B. ISSUES TO BE DECIDED

16.

The preliminary issue to be decided is whether the determinations issued by the Minister for the Investor Partnership’s 2006, 2007 and 2008 fiscal periods are valid.

17.

The primary issue to be decided is whether the Investor Partnership was a valid partnership in law, such that its members may deduct their share of its net business losses in the 2006, 2007 and 2008 fiscal periods, or whether the Investor Partnership was invalid either because the partners were not carrying on business in common with a view to a profit or because the purported acquisition of Luxell’s business through the financing structure that consisted of the Operating Partnership agreement, Investor Partnership agreement, Investor Notes, Asset Purchase Agreement, Support Agreement, Call Option Agreement, and Service Notes was a sham.

18.

If the Investor Partnership was a valid partnership in law, the secondary issue to be decided is whether the Operating Partnership was a valid partnership in law, such that the Investor Partnership may be allocated its share of the Operating Partnership’s net business losses in the 2006, 2007 and 2008 fiscal periods.

19.

If the Investor Partnership and the Operating Partnership were both valid partnerships in law, then the issues to be decided are:

a)

whether each of the Investor Partnership, the Operating Partnership, and Luxell dealt with the others at arm’s length at all times material to this appeal;

b)

whether the Operating Partnership’s business losses for the 2006, 2007 and 2008 fiscal periods exceed the amounts determined by the Minister;

c)

whether the fair market value of the assets purportedly acquired from Luxell by the Operating Partnership on August 30, 2005 exceeded the amount determined by the Minister;

d)

whether the Operating Partnership and Investor Partnership are tax shelters or tax shelter investments within the meaning of sections 143.2 and 237.1 of the Act;

e)

whether the Operating Partnership’s business losses in the 2006, 2007 and 2008 fiscal years are subject to a reduction under subsection 143.2(6) of the Act;

f)

whether the Investor Partnership’s entitlement to deduct losses allocated by the Operating Partnership in the 2006, 2007 and 2008 fiscal years is subject to a reduction under subsections 96(2.1) and (2.2), and subsections 143.2(2), (6) and (7) of the Act; and

g)

whether the Investors’ entitlement to deduct losses allocated by the Investor Partnership in the 2006, 2007 and 2008 fiscal years is subject to a reduction under subsections 96(2.1) and (2.2), and subsections 143.2(2), (6) and (7) of the Act.

***

D. GROUNDS RELIED ON

21.

He submits that the notices of determination issued by the Minister, determining the losses of the Investor Partnership in its 2006, 2007 and 2008 fiscal periods to be nil on the basis that the Operating Partnership was not a valid partnership in law, are valid. Subsection 152(1.4) of the Act permits the Minister to make that determination in respect of a partnership.

22.

He further submits that the Investor Partnership was not a valid partnership in law because its members did not carry on business in common with a view to profit. Instead, its members acquired units in order to access tax losses made available by Luxell in exchange for a capital infusion that was needed to keep Luxell’s business going. As there was no partnership, no losses may be allocated to the Investors as partnership losses that may be deducted, pursuant to paragraph 12(1)(l) of the Act, in computing their income for the taxation years that include the Investor Partnership’s 2006, 2007 and 2008 fiscal periods.

23.

He submits that the Operating Partnership was not a valid partnership in law for the same reason: its members did not carry on business in common with a view to profit. Accordingly, even if the Investor Partnership was a valid partnership, no losses from the Operating Partnership may be allocated to the Investor Partnership as partnership losses that may be deducted, under paragraph 12(1)(l) of the Act, in computing the Investor Partnership’s income for the 2006, 2007 and 2008 fiscal periods.

23A.

In addition, no losses may be allocated to the Investors because the financing structure was a sham intended to convey the impression that the Operating Partnership had acquired ownership of Luxell’s assets in order to carry on a business for profit when in fact, the financing structure was intended only to give the Investors access to Luxell’s operating losses. In particular, it was always intended that Luxell would reacquire the assets and unwind the structure prior to the business becoming profitable or the Investor Notes and Service Notes becoming payable. Accordingly, the financing structure that consisted of the Operating Partnership agreement, Investor Partnership agreement, Investor Notes, Asset Purchase Agreement, Support Agreement, Call Option Agreement and Service Notes was a sham.

24.

He further submits that, if the Investor and Operating Partnerships were both valid partnerships in law:

a)

Each of the Investor Partnership, the Operating Partnership and Luxell did not deal with the others at arm’s length at all times material to this appeal within the meaning of section 251 of the Act.

b)

Under paragraph 69(1)(a) of the Act, the Operating Partnership is deemed to have acquired the assets of Luxell at their fair market value at that time, which was not $29,000,000 but nil;

c)

In computing its business income for the 2006, 2007 and 2008 fiscal periods the Operating Partnership is not entitled, pursuant to paragraph 20(1)(a) of the Act and Regulation 1100, to deduct any CCA in respect of the assets acquired from Luxell because their capital cost is nil;

d)

In computing its business income for the 2006, 2007 and 2008 fiscal periods, the Operating Partnership is not entitled, pursuant to paragraph 18(1)(a) of the Act, to deduct the expenses identified by the Minister as non-deductible and detailed in the attached Schedule “A”, as those expenses were either:

i)

not expenses of the Operating Partnership because they were the sole responsibility of Luxell under the Support Agreement;

ii)

double-claimed because the Operating Partnership deducted management fees paid to Luxell on the basis that Luxell was an independent contractor; or

iii)

not transferable to the Operating Partnership under the Support Agreement.

e)

In computing its income for the 2008 fiscal period, the Operating Partnership is required, pursuant to subsection 78(1) of the Act, to include the outstanding amount of the Service Note issued on December 31, 2005, because the Operating Partnership and Luxell were not dealing at arm’s length and the amount owing under that note remained unpaid at the end of the second taxation year following the taxation year in which the Service Note was issued.

f)

The losses of the Operating Partnership that may be allocated to the Investor Partnership do not exceed the amounts determined by the Minister as detailed in the attached Schedule “B”.

g)

The Operating and Investor Partnerships are both “tax shelter investments” for purposes of section 143.2 of the Act because an interest in either partnership was a property that is a tax shelter for purposes of subsection 237.1(1) of the Act.

h)

The losses of the Operating Partnership in the 2006, 2007 and 2008 fiscal periods are reduced under subsection 143.2(6) of the Act by the value of the outstanding Service Notes, including accrued interest, because:

i)

the value of the outstanding Service Notes was an “at‐risk adjustment” of the Operating Partnership, within the meaning of subsection 143.2(2) of the Act, in respect of the expenditures represented by those notes; and

ii)

the value of the outstanding Service Notes was a “limited‐recourse amount” of the Operating Partnership, within the meaning of subsection 143.2(7) of the Act, that can reasonably be considered to relate to the expenditures represented by those notes.

i)

The losses of the Investor Partnership are subject to a reduction under subsection 143.2(6) of the Act by the value of the outstanding Investor Notes and by the value of the outstanding Service Notes, plus accrued interest, because:

i)

the value of the outstanding Investor Notes was a “limited-recourse amount” of the Investors, within the meaning of subsection 143.2(7) of the Act, that can reasonably be considered to relate to those losses; and

ii)

the value of the outstanding Service Notes was an “at-risk adjustment” of the Investor Partnership, within the meaning of subsection 143.2(2) of the Act, in respect of those losses.

Accordingly, the losses of the Investor Partnership in the 2006, 2007 and 2008 fiscal periods are reduced to $0.

j)

Under subsection 96(2.1) of the Act, the Investor Partnership is not entitled to deduct partnership losses allocated by the Operating Partnership that exceed its “at‐risk amount” in respect of the Operating Partnership. Under paragraphs 96(2.2)(c) and (d) of the Act, the Investor Partnership’s “at-risk amount” in respect of the Operating Partnership is reduced by the value of the outstanding Investor Notes and by the value of the outstanding Service Notes. In the 2006, 2007 and 2008 fiscal periods, the Investor Partnership’s “at-risk amount” in respect of the Operating Partnership is $0.

k)

Under subsection 96(2.1) of the Act, an Investor in the Investor Partnership is not entitled to deduct partnership losses allocated by the Investor Partnership that exceed the Investors’ “at-risk amount” in respect of the Investor Partnership. Under paragraphs 96(2.2)(c) and (d), and subsections 143.2(2) and (6) of the Act, the Investors’ “at‐risk amount” in respect of the Operating Partnership is reduced by the value of the outstanding Investor Notes and by the value of the outstanding Service Notes. In the 2006, 2007 and 2008 fiscal periods, the Investors’ “at-risk amount” in the Investor Partnership was $0.

Security for Costs

Where Available

160 Where it appears that the appellant is resident outside of Canada, the Court on application by the respondent may give such direction regarding security for costs as is just.

When to be Made

161 An application for security for costs may be made only after the respondent has delivered a reply to the notice of appeal.

Amount and Form of Security

162 The amount and form of security and the time for payment into Court or otherwise giving the required security shall be determined by the Court.

Effect of Direction

163 An appellant who has been directed to give security for costs may not, until the security has been given, take any step in the appeal unless the Court directs otherwise.

Default of Appellant

164 Where the appellant defaults in giving the security required, the Court on application may dismiss the appeal.

Amount May be Varied

165 The amount of security may be increased or decreased at any time.

Notice of Compliance

166 On giving the security required, the appellant shall forthwith give notice of compliance to the respondent.

Payment Into and Out of Court

166.1(1) A person who pays money into Court shall do so by delivering to the Registry

(a) a bill of exchange drawn on a bank, trust company, credit union or caisse populaire, or such other bill of exchange as may be authorized by order of the Court, that is payable to the order of the Receiver General of Canada; and

(b) three copies of a tender of payment into Court. (Form 166.1)

(2) A payment into Court is effective on the day the bill of exchange is paid after presentation for payment.

(3) Where a payment is effective, the Registry shall return a copy of the tender of payment into Court to the person making the payment.

166.2(1) Where an order has been made by the Court for payment out of court of money that is in the Consolidated Revenue Fund, or for payment out of any such money, together with any interest that may have accumulated on it, a requisition shall be made by the Registry to the Receiver General for such payment.

(2) A requisition shall be for an instrument in the amount to be paid out and payable to the person to whom the money is to be paid pursuant to the order, to be sent to the Registry at Ottawa, or at such other place as may be specified, for delivery of the instrument to the payee’s counsel of record, if the payee has such a counsel, and otherwise for delivery to the payee.

Cautionnement pour dépens

Applicabilité

160 S’il semble que l’appelant réside à l’étranger, la Cour peut, à la demande de l’intimée, donner des directives appropriées portant sur le cautionnement pour dépens.

Délai

161 La demande visant à obtenir un cautionnement pour dépens ne peut être présentée qu’après que l’intimée a remis une réponse à l’avis d’appel.

Montant et forme du cautionnement

162 La Cour fixe le montant et la forme du cautionnement, ainsi que le délai imparti pour le consigner à la Cour ou le verser d’une autre façon.

Effet de la directive

163 Sauf directive contraire de la Cour, l’appelant qui a reçu la directive de consigner un cautionnement pour dépens ne peut prendre d’autres mesures dans l’appel tant que le cautionnement n’a pas été versé.

Inobservation par l’appelant

164 Si l’appelant ne verse pas le cautionnement imposé, la Cour peut, à la suite d’une demande, rejeter l’appel.

Variation du montant

165 Le montant du cautionnement pour dépens peut être augmenté ou diminué en tout temps.

Avis de versement

166 Après avoir versé le cautionnement imposé, l’appelant en avise immédiatement l’intimé.

Consignation et versement de sommes

166.1(1) La personne qui consigne une somme d’argent à la Cour remet au greffe :

a) une lettre de change tirée sur une banque, une société de fiducie, une caisse d’économie ou une caisse populaire, ou toute autre lettre de change pouvant être autorisée par ordonnance de la Cour, et qui est payable à l’ordre du receveur général du Canada;

b) trois exemplaires d’une offre de consignation à la Cour. (Formule 166.1)

(2) La consignation prend effet le jour où la lettre de change est payée, à la présentation pour paiement.

(3) Lorsque la consignation prend effet, le greffe remet à la personne ayant fait le paiement un exemplaire de l’offre de consignation à la Cour.

166.2(1) Lorsqu’une ordonnance a été rendue par la Cour pour le versement d’une somme consignée qui avait été versée au Trésor, ou pour le versement d’une partie d’une telle somme et, le cas échéant, des intérêts courus y afférents, le greffe doit demander au receveur général d’effectuer ce versement.

(2) Une demande de versement doit être une demande d’effet établi au montant à verser et payable à la personne à laquelle ce montant doit être versé conformément à l’ordonnance, lequel effet doit parvenir au greffe à Ottawa, ou à tel autre lieu qui peut être spécifié, pour qu’il soit remis à l’avocat inscrit au dossier du bénéficiaire ou, à défaut d’un tel avocat, pour qu’il soit remis au bénéficiaire lui-même.

CITATION:

2024 TCC 107

COURT FILE NO.:

2012-3093(IT)G

2012-3094(IT)G

STYLE OF CAUSE:

2078970 Ontario Inc. in its Capacity as Designated Partner of Lux Operating Limited Partnership and His Majesty The King

2078702 Ontario Inc. in its Capacity as Designated Partner of Lux Investor Limited Partnership and His Majesty The King

PLACE OF HEARING:

Ottawa, Canada (Virtual Hearing)

DATE OF HEARING:

July 31, 2024

AMENDED REASONS FOR ORDER BY:

The Honourable Justice David E. Spiro

DATE OF ORDER:

August 8, 2024

Counsel for the Appellants:

David R. Davies

Florence Sauve

Shawn Tryon

Molly Martin

Counsel for the Respondent:

Michael Taylor

Matthew Turnell

Laura Zumpano

Meaghan Mahadeo

Name:

David R. Davies

Florence Sauve

Shawn Tryon

Molly Martin

Firm:

Thorsteinssons LLP

Toronto, Ontario

For the Respondent:

Shalene Curtis-Micallef

Deputy Attorney General of Canada

Ottawa, Canada