Tax Court of Canada Judgments

Date: 19970320

Dockets: 94-2177-IT-G; 94-2178-IT-G; 94-2195-IT-G; 94-2196-IT-G; 94-2197-IT-G; 94-2199-IT-G; 94-2200-IT-G; 95-3868-IT-G

BETWEEN:

GUNNAR KJELSTRUP MADSEN, MARY ANN MADSEN, STEPHEN FUNK, LARRY J. LEE, KEN GRUNENBERG, ROSE HEINEKEY, BRUCE CHUTKA, WALLACE T. OPPAL,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Christie, A.C.J.T.C.

[1]These eight appeals were heard together. Each appellant seeks to deduct losses in computing his or her income. These losses pertain to the purchase of units of the capital in a partnership named Inter-Teck Oil Limited Partnership (“ITOLP”).

[2]ITOLP claimed the cost to it of certain equipment that it used in its business was $6.850M. It will be further described later. Capital cost allowance was claimed on the basis that the equipment was included in Class 29 of Schedule II of the Income Tax Regulations. The amounts claimed were: 1982 25% = $1,712,500.00; 1983 50% = $3,425,000.00; 1984 25% = $1,712,500.00. That resulted in these alleged losses per unit in ITOLP: 1982 - $6,402.39; 1983 - $6,358.54; 1984 - $6,275.12. In reassessing the Minister of National Revenue (“the Minister”) assumed that the fair market value of the equipment was $422,000.00 with the result that the losses per unit were reduced to: 1982 - $262.00; 1983 - $494.00; 1984 - $685.00. In summary the losses sought to be deducted by each appellant in computing his or her income and the resulting reduction on reassessments are as follows:

Appellant	Taxation Year	No. of Units	Losses Claimed	Losses Allowed	Reduction in Losses Claimed
Gunnar K. Madsen	1982 1983	25 20	$160,060 $127,171	$6,550 $9,880	$153,510 $117,291
Mary A. Madsen	1983	15	$95,378	$7,410	$87,968
Larry S. Lee	1982 1983	3 3	$19,207 $19,076	$ 786 $1,482	$18,421 $17,594
Ken Grunenberg	1982 1984	4 4	$25,610 $25,100	$1,048 $2,740	$24,562 $22,360
Rose Heinekey	1983	3	$19,076	$1,482	$17,594
Stephen Funk	1984	10	$62,751	$6,850	$55,901
Bruce Chutka Wallace T. Oppal	1983 1984 1983	10 10 5	$63,585 $62,751 $31,793	$4,940 $6,850 $2,470	$58,645 $55,901 $29,323

[3] On February 22, 1979 International Resource Recovery Inc. (“IRRI”) was incorporated under the laws of British Columbia. At all relevant times its sole shareholder and president was Jagroop S. Gill. It was involved in converting organic material variously referred to as sewage sludge, sewage waste, skimmings at sewage treatment plants managed by the Greater Vancouver Sewerage and Drainage District into marketable material. This business had been carried on by Mr. Gill in his personal capacity prior to the incorporation of IRRI.

[4] On April 1, 1982 IRRI entered into an agreement with the Greater Vancouver Sewerage and Drainage District to process “skimmings” from four of the latter’s sewage treatment plants. This agreement was to continue until October 1, 1982, subject to a right of termination by the district if, in its opinion, the operations of IRRI disrupted the operation of the plants or any of them of the District, or if IRRI “was in breach of any term, condition or agreement herein contained”.

[5]One of the assets of IRRI was the equipment employed to transform the sewage waste into marketable products (“the processing equipment”). That equipment was the creation of Mr. Gill.

[6] On November 9, 1982 Inter-Teck Management Ltd. (“ITML”) was incorporated under the laws of British Columbia. Again its sole shareholder and director at all relevant times was Mr. Gill. In order to raise money these six events occurred on November 10, 1982 under the guidance of a lawyer retained by Mr. Gill:

(i) A limited partnership agreement was entered into between ITML as “the General Partner” and Mr. Gill as “the Founding Partner”. The agreement pertained to ITOLP. The purpose of ITOLP was “funding the purchase and operation of machinery to be used to process sewage waste into marketable end products including oil”. By definition: “‘Limited Partner’ means any person, firm or corporation who shall own a Unit representing a limited partnership interest in the Limited Partnership, and includes the Founding Partner and every person who has been admitted to the Limited Partnership as a limited partner”. Clause 5 provides:

“5.01 The Limited Partnership will come into existence upon the execution of this Agreement and the filing with the British Columbia Registrar of Companies (the ‘Registrar’) a certificate under the Act and shall continue for a period ending the earlier of:

[a] The first day of the 26th annual fiscal period of the Limited Partnership;

[b] The date on which the Limited Partnership is dissolved in accordance with the terms of this Agreement;

[c] The date on which the Limited Partnership is dissolved by operation of law or by judicial decree.”

Clause 7.01 provides in part:

“7.01 The capital of the Limited Partnership shall be divided into 274 Units which shall be issued as follows:

[a] One (1) Unit shall be issued to the Founding Partner in consideration of the Founding Partner making an original capital contribution of ONE DOLLAR [$1.00] and agreeing to make an additional capital contribution of TWENTY FOUR THOUSAND NINE HUNDRED and NINETY NINE DOLLARS [$24,999] as hereinafter provided; and

[b] Two Hundred and seventy-three [273] Units shall be issued pursuant to an Offering in consideration of each Limited Partner making a contribution of TWENTY-FIVE THOUSAND DOLLARS ($25,000) per Unit.”

Clause 14.01 provides:

“14.01 Net Revenue and net losses of the Limited Partnership for each fiscal year of the Limited Partnership shall be allocated to the Limited Partners pro rata to the number of Units held in the Partnership provided that after each Limited Partner has received his initial $25,000 investment the Net Revenue shall be distributed 60% to the Limited Partners and 40% to the General Partner.”

Clause 23.01 provides:

“23.01 Each Limited Partner and each person who is a transferee of a Unit and assignee of the interests, as Limited Partner, of the holder of such Unit, hereby irrevocably makes, nominates, constitutes and appoints the General Partner, and any new General Partner with full power of substitution, as its true and lawful attorney and agent, with full power and authority in its name, place and stead, to execute, swear to, acknowledge, deliver, file and record on his behalf in the appropriate public offices and publish all the following:

[a] This Agreement and counterparts thereof;

[b] Conditional Sales Agreement;

[c] The Management Agreement;

[d] The Sub Lease;

[e] The Maintenance and Technology Agreement;

[f] All instruments which the General Partner deems appropriate to reflect any amendment, change or modification to the Limited Partnership or to the Limited Partnership Agreement in accordance with the terms thereof;

[g] All certificates, registrations, amending registrations, dissolutions, or other instruments which the General Partner deems appropriate or necessary to qualify or to continue the qualification of the Limited Partnership as a limited partnership under the laws of the Province of British Columbia.”

The Partnership Agreement is signed by Mr. Gill on behalf of ITML as General Partner and by him on his own behalf as Founding Partner.

(ii) A certificate made under section 51 of the Partnership Act, R.S.B.C. 1979, c. 312[1] (“the Partnership Act”) was filed with the Registrar of Companies. It had been signed on November 9, 1982 by Mr. Gill on behalf of ITML as the General Partner and on his own behalf as the Limited Partner. It contained this statement:

“[c] The full names and addresses of the General and Limited Partners are:

[i] General Partner:

Inter-Teck Management Ltd.

1004 - 595 Howe Street

Vancouver, British Columbia

V6C 2T5

[ii] Limited Partner:

Jagroop S. Gill

8080 - 113B Street

Delta, British Columbia

V4C 5E8”

(iii) A sub-lease was entered into by IRRI and ITOLP. It pertained to property at the Iona Island Sewerage Treatment Plant at Richmond, British Columbia. The premises were to be used by ITOLP for the purpose of processing sewage waste. Mr. Gill signed on behalf of IRRI and on behalf of the General Partner ITML.

(iv) A conditional sales contract was entered into whereby IRRI sold the processing equipment to transform the sewage waste to ITOLP. The purchase price was 6.850M payable over a period from December 1, 1982 to November 30, 1992. Again Mr. Gill signed on behalf of IRRI and on behalf of the General Partner ITML.

(v) A maintenance and technology agreement was entered into between IRRI and ITOLP whereby the latter retained IRRI to maintain the processing equipment, provide technological advice regarding the equipment and to do research and development in respect of it. IRRI was to receive $200,000.00 for maintenance over the period January 1, 1983 to June 1, 1987. For the technological advice and research and development it was to receive $220,000.00 during the period January 1, 1983 to June 1, 1987. Mr. Gill signed on behalf of both parties.

(vi) A management agreement was entered into between ITML and ITOLP whereby ITML would manage the partnership’s project of converting sewage waste into marketable products. For this it was to be paid $2.135M over the period December 1, 1982 to December 1, 1987.

[7]The certificate made under section 51 of the Partnership Act filed with the Registrar on November 10, 1982 was amended on November 23, 1982 with reference to contribution of capital to the partnership. The amendment is signed in the same manner as the certificate of November 10, 1982. The amendment was filed and registered with the Registrar of Companies on November 30, 1982.[2]

[8] In my opinion the foregoing establishes that on November 10, 1982 ITOLP purchased the processing equipment from IRRI for $6.850M. At the time of the purchase ITOLP was composed of only two partners. ITML was the General Partner and all of its shares were owned by Mr. Gill and he was the sole director. Mr. Gill was the Limited Partner. Also at the time of the sale all of the shares of IRRI were owned by Mr. Gill and he was the sole director.

[9]None of the appellants testified at the hearing of these appeals. But each Notice of Appeal, except in the cases of the Madsens, alleges that during the taxation years in question the appellant held limited partnership units in the Inter-Teck Oil Limited Partnership and that ITOLP was formed on November 10, 1982 when it was registered with the Registrar of Companies. These allegations were admitted in the Replies to the Notices of Appeal.

[10]The Notices of Appeal in the cases of Gunnar Madsen and Mary Madsen do not at all comply with the requirements of paragraph 21(1)(a) of the Tax Court of Canada Rules (General Procedure). The taxation years under appeal regarding Gunnar Madsen are 1982 and 1983 and the taxation year under appeal regarding Mary Madsen is 1983. The Replies to those Notices of Appeal state, however, that the appellants had subscribed for limited partnership units of the Inter-Teck Limited Partnership for the fiscal periods ending 1982 and 1983. The Replies also state that on November 10, 1982 Inter-Teck Limited Partnership was registered with the B.C. Registrar of Companies.

[11]Paragraph 251(1)(a) and subparagraph 251(2)(c)(i) of the Income Tax Act (“the Act”) provide:

“251. (1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm’s length;

...

(2) For the purposes of this Act ‘related persons’, or persons related to each other, are

...

(c) any two corporations

(i) if they are controlled by the same person or group of persons.”

It is the position of the appellants that these paragraphs apply to persons, which includes a corporation. But it does not include a partnership which per se is not a legal entity. While I am prepared to accept that a partnership is not a legal entity it does not, in my view, follow that a contract entered into between a partnership as one party and a corporation or individual as the other party cannot be a non-arm’s length transaction as described in the statutory provisions just cited. The act of the General Partner ITML in signing the agreement to purchase the processing equipment for $6.850M bound itself contractually and it also obligated Mr. Gill, the Limited Partner. Together they constituted the partnership.

[12]In Sidhu v. M.N.R., [1995] T.C.J. No. 1354 the issue was whether the Minister erred in determining that the appellant was not employed in insurable employment. She is the mother-in-law of Malkutiar Singh Badesha, one of the persons carrying on the business of blueberry farming in partnership under the name Sagar Farms, the appellant’s employer (the payor). Singh Badesha had a 10% interest in the partnership.

[13]Subsection 2(1) of the Unemployment Insurance Act includes:

“‘insurable employment’ means employment specified in subsection 3(1).”

The opening words of subsection 3(1) and paragraph 3(2)(c) of that Act provide:

“3. (1) Insurable employment is employment that is not included in excepted employment and is

...

(2) Excepted employment is

...

(c) subject to paragraph (d), employment where the employer and employee are not dealing with each other at arm’s length and, for the purposes of this paragraph

(i) the question of whether persons are not dealing with each other at arm’s length shall be determined in accordance with the provisions of the Income Tax Act, and

(ii) where the employer is, within the meaning of that Act, related to the employee, they shall be deemed to deal with each other at arm’s length if the Minister of National Revenue is satisfied that, having regard to all the circumstances of the employment, including the remuneration paid, the terms and conditions, the duration and the nature and importance of the work performed, it is reasonable to conclude that they would have entered into a substantially similar contract of employment if they had been dealing with each other at arm’s length.”

Paragraphs 251(2)(a) and 251(6)(b) of the Act provide:

“251.(2) For the purpose of this Act ‘related persons’, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption

...

(6) For the purposes of this Act,

...

(b) persons are connected by marriage if one is married to the other or to a person who is so connected by blood relationship to the other.”

Section 7 of the Partnership Act provides:

“7. Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership. The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.”

McArthur, T.C.J. said in paragraph 13:

“Dealing, at the outset, with subparagraphs 3(2)(c)(i) and (ii). The payor was a partnership in which the son-in-law of the Appellant was a 10% partner. Upon applying section 7 of the Partnership Act to the present fact situation together with subsection 251(2) and paragraph 251(6)(b) of the Income Tax Act, I find that the Appellant and the payor were not dealing with each other at arm’s length within the meaning of subparagraph 3(2)(c)(i) of the Act.”

This decision was reviewed under section 28 of the Federal Court Act by the Federal Court of Appeal: (1997) 208 N.R. 398. The judgment of the Court was delivered by Desjardins J.A. who said at page 399:

“[2] The sole issue raised by the applicant is whether the Tax Court judge erred in confirming the Minister’s determination that the applicant and the payor were not dealing at arm’s length during the relevant period.

[3] The payor is a partnership. The applicant is the mother-in-law of one of the partners. She was hired to work for the partnership, but by a partner who was not her son-in-law. The partnership is composed of four people who are brothers and sister.

[4] The applicant attacks the finding of the Tax Court judge who held that, by virtue of s. 7 of the Partnership Act of British Columbia, read in conjunction with ss. 251(2)(a) and 251(6)(b) of the Income Tax Act, the applicant and the partnership were not dealing with each other at arm’s length within the meaning of s. 3(2)(c)(i) of the Unemployment Insurance Act.

[5] Her counsel contends that, as a matter of law, there is no provision in the Income Tax Act which imputes the relatedness that exists between one partner and an outsider to any or all of the other partners of the partnership. The Income Tax Act, he says, deal with individuals, not with partnership. On the other hand, s. 7 of the Partnership Act, on which the Tax Court judge relied, deals with the concept of agency and not with that of relatedness. Therefore, relatedness between individuals established under the Income Tax Act, does not reach the partnership.

[6] We see no merit in the argument.

[7] Under the common law and the Partnership Act, a partnership does not constitute a legal entity. The act performed by one member in the course of business binds all partners who, together, make the partnership.

[8] If, as here, the applicant is hired by a partner who is not her son-in-law, her employment contract, nevertheless, binds all the members of the partnership. This includes her status with one of the partners which permeate the whole contract. As a result, the applicant was employed by her son-in-law and was indeed working for her son-in-law.

[9] It follows that the Tax Court judge was correct in concluding that the applicant’s employment was an excepted one under the Unemployment Insurance Act.”

I believe that Sidhu disposes of the argument about the inapplicability of the non-arm’s length provisions of the Act to the acquisition of the processing equipment.

[14]It is also said on behalf of the appellants that as ITOLP is a partnership it follows that paragraph 69(1)(a) of the Act can have no application to the contract of November 10, 1982 pertaining to the acquisition of the processing equipment. Paragraphs 69(1)(a) and 96(1)(a) of the Act read:

“69.(1) Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm’s length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value.

96.(1) Where a taxpayer is a member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(a) the partnership were a separate person resident in Canada.”

Paragraph 96(1)(a) is not a statutory declaration that for the purposes of the Act a partnership is not a taxpayer.[3] It deals with “a taxpayer who is a member of a partnership”. That includes an individual or corporation. The income or loss of taxpayer partners is to be computed at the partnership level as if the partnership were a separate person. Income and losses are then allocated to the partners. The basic approach to the proper interpretation of paragraph 69(1)(a) in the context of these appeals is the same as that just utilized in respect of the arm’s length provisions of the Act. Again when the sale and purchase agreement was entered into on November 10, 1982 there were only two partners in ITOLP. ITML was the General Partner and Mr. Gill the Limited Partner. Together they constituted the Limited Partnership. When ITML entered into the agreement it not only bound itself contractually to IRRI, but it also bound the Limited Partner, Mr. Gill, in the same way. Both IRRI and Mr. Gill are persons and taxpayers. Subsection 248(1) of the Income Tax Act includes:

“‘person’ or any word or expression descriptive of a person, includes any corporation, and any entity exempt from tax under Part I because of subsection 149(1), and the heirs, executors, administrators or other legal representatives of such person, according to the law of that part of Canada to which the context extends.

‘taxpayer’ includes any person whether or not liable to pay tax.”

[15]In my opinion the evidence proves that the transaction whereby ITOLP acquired the processing equipment was not at arm’s length. I add that no evidence was adduced on behalf of the appellants to rebut the assumption made by the Minister that the market value of the equipment was $422,000.00. In the course of his opening statement counsel for the appellants said:

“The machine that is central to this controversy was created — and I expect the evidence will demonstrate — was created between 1979 and 1981 or ‘82. It was dismantled in late 1985, and it is virtually — and it was a unique machine and it is at this point virtually impossible to have anyone value this machine. That is why it’s impossible for us to call expert evidence in that regard at this time.”

[16]While the foregoing is sufficient to dispose of these appeals in favour of the respondent I shall, in anticipation of the possibility of further appeals, deal with an additional and considerable body of evidence adduced at trial by counsel for the respondent. None of this was even alluded to in the pleadings. It is not easy to follow.

[17]The solicitor who advised regarding the legal documents already referred to in these reasons had received a determination under section 55[4] of the Securities Act of British Columbia which he passed on to his client. It reads:

“IN THE MATTER OF THE SECURITIES ACT

AND

IN THE MATTER OF INTER-TECK OIL LIMITED PARTNERSHIP

DETERMINATION UNDER SECTION 55

WHEREAS an application for a determination under Section 55 of the Securities Act has been received relating to a proposed distribution of Units (the Units) in INTER-TECK OIL LIMITED PARTNERSHIP for a total offering of $6,850,000, with a minimum investment per Unit of $25,000;

NOW THEREFORE the Superintendent of Brokers (Superintendent), being of the opinion that it would not be prejudicial to the public interest to do so, RULES, pursuant to Section 55 of the Securities Act that intended trades in the Units of INTER-TECK OIL LIMITED PARTNERSHIP shall be deemed not to be a distribution to the public and that registration is not required ON THE CONDITION THAT:

[a] Solicitations of prospective purchasers and sales of the Units in British Columbia shall be made only by Registered Securities Dealers; or JAGROOP S. GILL or JAGPAUL GILL.

[b] Sales are made to not more than 274 in British Columbia;

[c] Each purchaser purchases as principal, and that all of the purchases are completed within the period of six months of the first purchase, except that subsequent sales to the same purchasers may be carried out if made in compliance with written agreements entered into during that six month period;

[d] The Dealer or JAGROOP S. GILL or JAGPAUL GILL files an affidavit on completion of the purchases identifying the purchasers to whom he sold the Units and stating with respect to each purchaser that:

1. If an individual

[i] as of December 31, 1981 his net worth is at least $250,000 exclusive of home, car and furnishings; or

[ii] as of December 31, 1981, his net worth is at least $50,000 exclusive of home, car and furnishings and his taxable income for the 1981 taxation year, except for tax shelter investments, would have placed him in the 50% or higher tax bracket; and

[iii] by virtue of his investment experience; or

[iv] by virtue of his consultation with or advice from the dealer or JAGROOP S. GILL or JAGPAUL GILL;

he was in a position to evaluate the prospective investment on the basis of the Offering Memorandum and such other information that is presented to him;

2. If a corporation, is a corporation:

[i] whose officers and directors are in a position to evaluate the prospective investment on the basis of the Offering Memorandum and other information that has been presented to them:

[a] by virtue of their investment experience; or

[b] by virtue of their consultation with or advice from a dealer or JAGROOP S. GILL or JAGPAUL GILL with respect to the prospective investment; and

[ii] which has:

[a] had, for two consecutive years, pretax income in excess of $50,000; or

[b] shareholders’ equity (paid up capital plus retained earnings) in excess of $50,000;

[e] A copy of the Offering Memorandum as filed with the Superintendent shall be provided to each prospective purchaser and the face page must contain a warning to the effect that purchasers acquiring securities pursuant to this Memorandum will not have the benefit of a review of the material by the Superintendent of Brokers of British Columbia.

[f] Rescission rights to the same effect as Section 59, 60 and 61 of the Securities Act have been included in the contracts with the purchasers.

[g] No advertising with respect to the offer and sale of the securities will be allowed unless prior approval of the Superintendent of Brokers has been obtained.

[h] The Units shall not be sold, assigned, charged, fractionalized, mortgaged or in any way otherwise dealt with unless the whole of such Unit is so dealt with.”

[18]Mr. Gill decided that the individuals he had in mind as investors could not possibly meet the requirements of the determination by the Deputy Superintendent of Brokers and proceeded, without legal advice, to draw up what is called the “INTER-TECK OIL PARTNERSHIP SUBSCRIPTION FORM”.[5] It was intended to circumvent the section 55 determination. Ex. A-4 is dated December 30, 1982. It reads:

“INTER-TECK OIL PARTNERSHIP

SUBSCRIPTION FORM

Inter-Teck Oil Partnership

9577A-128 Street

Surrey, British Columbia

V3V 6J2

1. The undersigned hereby subscribes for 25 Units of Partnership Units.

2. The undersigned shall pay the sum of $6,250 per Unit to Inter-Teck Management Ltd. as follows:

(a) $1,500 in cash or cheque;

(b) $1,625 in cash or cheque by Jan. 1, 1987;

(c) $3,125 in cash or cheque by Jan. 1, 1992.

Inter-Teck Management Ltd. as agent for Inter-Teck Oil Partnership will be custodian of funds and will disperse the funds as required.

3. The undersigned hereby agrees to convert to Limited Partnership in the first quarter of 1983 and also agrees to retain Inter-Teck Management Ltd. as General Partner. The undersigned hereby agrees to the Conditional Sales Agreement, Sublease, Maintenance and Technology Agreement. New agreements will be drawn up in 1983 for Partnership conversion to Limited Partnership and a new Management Agreement.

4. The undersigned agrees to retain Inter-Teck Management Ltd. as Partnership manager. The undersigned also agrees to participate in the profit and loss of the Partnership and new Limited Partnership only in the year of purchase and recommencing in January 1, 1986.

5. The undersigned acknowledges that he is responsible for his own legal and tax advice.”

There are copies of seven other subscription forms - Ex. A-3 Tabs 2 and 11. Two are dated 9 and 10 November 1982. The remaining five are dated from November 14 to December 17, 1982. The number of units purchased vary. Ex. “A-4” is not signed by an appellant. Nor are any of these seven documents.

[19]In evidence as Ex. A-5 is a form dated February 14, 1983. It reads:

“INTER-TECK OIL LIMITED PARTNERSHIP

SUBSCRIPTION FORM AND POWER OF ATTORNEY

Inter-Teck Oil Limited Partnership

9577A - 128 Street

Surrey, British Columbia

V3V 6J2

1. The undersigned hereby subscribes for 25 Limited Partnership Unit(s) in the Limited Partnership.

2. The undersigned shall pay the sum of $6,250 per unit (the ‘Subscription Price’) to Inter-Teck Management Ltd., as follows:

(a) $1,500 in cash or cheque;

(b) $1,625 in cash or cheque by January 1, 1987;

(c) $3,125 in cash or cheque by January 1, 1992.

The General Partner, Inter-Teck Management Ltd. as custodian of all funds will hold those funds for disbursion as needed.

3. The undersigned hereby acknowledges the Conditional Sales Agreement, Sublease, Maintenance and Technology Agreement all dated November 10, 1982 and the Limited Partnership Agreement and Management Agreement dated January 10, 1983 and hereby specifically accepts and adopts each and every provision of the Limited Partnership Agreement, Management Agreement, Sublease, Maintenance and Technology Agreement and Conditional Sales Agreement as from time to time amended and in effect and agrees to be bound thereby. Undersigned also agrees to participate in the profit and loss of the Partnership only in year of purchase and thereafter from 1986 onwards.

4. By acceptance of this Subscription the Limited Partnership agrees to accept the monies and issue to the undersigned a receipt acknowledging acceptance. A Unit Certificate representing the Unit(s) subscribed for by the undersigned will be held in escrow by the General Partner upon payment in full.

5. In consideration of the General Partner accepting this subscription and conditional thereon:

(a) the undersigned agrees to be bound, as a party and as a Limited Partner in the Limited Partnership, by the terms of the Conditional Sales Agreement, and by the terms of the Limited Partnership Agreement, the Sublease, the Maintenance and Technology Agreement and the Management Agreement from time to time amended and in effect, and the undersigned expressly ratifies and confirms the Power of Attorney given the General Partner therein and

(b) the undersigned hereby irrevocably makes, constitutes and appoints the General Partner with full power of substitution, as his true and lawful attorney and agent, with full power and authority in his name, place and stead and for his use and benefit, to execute, swear to, acknowledge, deliver, file and record on his behalf in the appropriate public offices and publish all the following:

i. the Limited Partnership Agreement and counterparts thereof, the execution whereof by the General Partner being hereby ratified;

ii. the Conditional Sales Agreement and the Management Agreement the Sublease and the Maintenance and Technology Agreement and the execution whereof by the General Partner being hereby ratified;

iii. all instruments which the General Partner deems appropriate to reflect any amendment, change or modification to the Limited Partnership or to the Limited Partnership Agreement or to the Conditional Sales Agreement, the Sublease, or the Maintenance and Technology Agreement or the Management Agreement in accordance with the terms thereof;

iv. all certificate and instruments and amendments thereto which the General Partner deems appropriate or necessary to conform quality, or continue the qualification of the Limited Partnership in or otherwise comply with the laws of the Province of British Columbia;

v. all conveyances, agreements, and instruments which the General Partner deems appropriate or necessary to reflect the dissolution and termination of the Limited Partnership pursuant to the terms of the Limited Partnership Agreement to be entered into on behalf of each Limited Partner; and

vi. any and all other documents, certificates and instruments which may be required to be filled by the Limited Partnership under the laws of Canada or any Province or Territory thereof.

The Power of Attorney hereby granted shall be deemed to be irrevocable and coupled with an interest and will survive the disability, incapacity, insanity and insolvency of the undersigned and will extend to and be binding upon the heirs, executors, administrators, legal personal representatives, successors and assigns of the undersigned.

6. The undersigned hereby declares that the undersigned:

(a) is a resident of Canada within the meaning of the Income Tax Act of Canada;

(b) is not a non-eligible person within the meaning of the Foreign Investment Review Act (Canada);

(c) if an individual, has attained the age of majority;

(d) if a corporation, partnership, unincorporated association or other entity, is legally competent to execute this Subscription Form and Power of Attorney, to take all actions required pursuant hereto, and all necessary approvals of directors, shareholders, partners, members or otherwise have been given;

7. The undersigned acknowledges that he is responsible for his own legal and tax advice.”

[20]There is also in evidence three additional certificates filed under section 51 of the Partnership Act. Mr. Gill states he prepared them, again without legal advice. Each pertains to “INTER-TECK OIL LIMITED PARTNERSHIP”. The first is dated March 10, 1983 and is signed by Mr. Gill on behalf of the General Partner ITML and by him “on behalf of all the Limited Partners by power of attorney” (Ex. A-3 Tab 13). This is said across the top of the first page: “Amended certificate deleting original certificate dated November 10, 1982 and deleting amendment dated November 30, 1982. To be replaced by the following.” The certificate contains this statement:

“(c) The full names and addresses of the General Partner and Limited Partners are:

(i) General Partner

Inter-Teck Management Ltd. #256551

1004 - 595 Howe St.

Vancouver, British Columbia

V6C 2T5

(ii) Limited Partners

Schedule A”

Schedule “A” is not attached. Nevertheless it is clear there is only one general partner. The second, Ex. A-2 Tab 17, is simply a copy of Ex. A-3 Tab 13 except that it is stamped as being filed and registered with the Registrar of Companies on April 2, 1983. It has a Schedule “A” attached which is a list of the Limited Partners. There are some 60 names in Schedule “A”. Included are the names of three of the appellants, namely, Gunnar K. Madsen, Ken Grunenberg, Larry J. Lee.

[21]The third is dated December 30, 1983 and is also signed by Mr. Gill on behalf of the General Partner ITML and by him “on behalf of all the Limited Partners by power of attorney” (Ex. A-3 Tab 20). This is said across the top of the first page: “Amended certificate deleting original certificate dated November 10, 1982 and deleting amendment dated November 30, 1982. To be replaced by the following.” It contains this statement:

“(c) The full names and addresses of the General Partner and Limited Partners are:

(i) General Partner

Inter-Teck Management Ltd. #256551

P.O. box 10147

1245 - 700 W. Georgia St.

Vancouver, B.C. V7X 1C6

(ii) Limited Partners

Schedule A - Amendments to partnership holdings

(1982)

(iii) Limited Partners - 1983

Schedule B”

The only other thing the certificate deals with is the contribution of capital to the partnership. Schedules “A” and “B” are not attached to the exhibit. There is, however, additional material included in Ex. A-3 Tab 21. It consists of two lists of names. The first list consists of 40 names and is Schedule “A” referred to in the certificate dated December 30, 1983. The second list has 93 names and is Schedule “B” referred to in that certificate. Both lists are stamped as having been filed and registered with the Registrar of Companies on December 30, 1983. The only appellants included in Schedule “A” are Larry J. Lee and Gunnar K. Madsen. Schedule “B” only includes the names of the appellants Bruce Chutka, Rose Heinekey, Mary Madsen and Wallace Oppal.

[22] I find the evidence of Mr. Gill to be obscure and at times self-contradictory. It is not persuasive. As I understand it, it is alleged that whoever signed a subscription form as depicted in Ex. A-4 thereupon became a “general partner”. I think this means a general partner in an ordinary partnership of the kind envisaged in Part I of the Partnership Act of British Columbia as opposed to a limited partnership.

[23]The majority of these general partners being unrelated to Mr. Gill, it is contended that it follows that it cannot be said that the parties involved in the sale and purchase of the processing equipment for $6.850M were not dealing at arm’s length. This notwithstanding that of the seven Ex. A-3 type of subscription forms placed in evidence by the appellants, five are dated after November 10, 1982 and not on the same date. Further, as previously noted in paragraph 18, none of these forms placed in evidence by counsel for the appellants was signed by an appellant and, I repeat, no appellant was called upon to testify at trial.

[24]Lois J. Wilson (formerly Ward) testified that she signed a subscription form on November 9, 1982. It is one of the seven forms previously referred to. She subscribed for two units at $6,250.00 each. In cross-examination she admitted she had nothing to do with management of a business partnership. She also acknowledged that on February 22, 1983 she signed an Ex. A-5 type of subscription form.

[25]It was also said on behalf of the appellants that all who signed an Ex. A-5 type of form commencing in 1983 thereupon became a general partner in a limited partnership. Again it is not clear whether this was ITOLP that came into existence on November 10, 1982 or the partnership described in the “amended” certificates referred to in Ex. A-3 Tab 13, Ex. A-2 Tab 17 and Ex. A-3 Tab 20.

[26]In any event, with respect, I cannot consider this evidence to have any relevance to the basic issue before this court on these appeals. That is whether the Minister erred in reassessing to reduce the $6.850M to $422,000.00, the latter being the fair market value.

[27]Notwithstanding the evidence about partners in a general partnership in 1982 and their conversion into limited partners in 1983 I am of the opinion that this is a straightforward case where on November 10, 1982 IRRI sold the processing equipment to ITOLP for $6.850M under circumstances whereby the parties to that agreement were not dealing at arm’s length. On November 10, 1982 the processing equipment became the partnership property of ITOLP and it has not been established that that condition ceased to exist at any time relevant to these appeals.[6] There is no evidence that the certificate filed under section 51 forming ITOLP was cancelled in accordance with section 69 of the Partnership Act.

[28]The appeals are dismissed.

Signed at Ottawa, Canada, this 20th day of March, 1998.

"D.H. Christie"

A.C.J.T.C.C.

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