BETWEEN:
and
____________________________________________________________________
Appeal heard on common evidence with the appeal of
Lazar Jevremovic (2002-2450(IT)G on December 1, 2005
at Montréal, Québec
Before: The Honourable Justice Gerald J. Rip
Appearances:
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____________________________________________________________________
AMENDED JUDGMENT
Whereas the Judgment and Reasons for Judgment at paragraphs [3] and [45] dated March 24, 2006 contained an error in that the amount allowed as capital gains deductions should have read $35,700;
The Reasons for Judgment are amended accordingly and the Judgment is amended as follows:
The appeals from the assessments made under the Income Tax Act for the 1990 and 1991 taxation years are dismissed.
The appeal from the assessment made under the Income Tax Act for the 1992 taxation year is allowed and the assessment is referred back to The Minister of National Revenue for reassessment and reconsideration on the basis that the appellant be allowed a capital gains deduction of $35,700.
The respondent is entitled to one set of costs together with the appeal of Lazar Jevremovic and Her Majesty the Queen (2002-2450(IT)G).
This Judgment is issued in substitution for the Judgment dated March 24, 2006.
The remaining provisions remain in force.
Signed at Ottawa, Canada, this 28th day of April, 2006.
Docket: 2002-2450(IT)G
BETWEEN:
LAZAR JEVREMOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Norma Maege (2002-2332(IT)G on December 1, 2005
at Montréal, Québec
Before: The Honourable Justice Gerald J. Rip
Appearances:
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Counsel for the Appellant: |
Serge Fournier |
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Counsel for the Respondent: |
Anne-Marie Boutin |
____________________________________________________________________
AMENDED JUDGMENT
Whereas the Reasons for Judgment at paragraphs [3] and [45] dated March 24, 2006 contained an error in that the amount allowed as capital gains deductions should have read $35,700;
The Reasons for Judgment are amended accordingly.
The appeal from the assessment made under the Income Tax Act for the 1990 taxation year is dismissed.
The respondent is entitled to one set of costs together with the appeals of Norma Maege and Her Majesty the Queen (2002-2332(IT)G).
This Judgment is issued in substitution for the Judgment dated March 24, 2006.
The remaining provisions remain in force.
Signed at Ottawa, Canada, this 28th day of April, 2006.
"Gerald J. Rip"
Rip J.
BETWEEN:
NORMA MAEGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
Docket: 2002-2450(IT)G
LAZAR JEVREMOVIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
[1] Norma Maege and Lazar Jevremovic appeal income tax assessments in which the Minister of Natural Revenue, in assessing, denied claims by the appellants for investment tax credits and business losses arising from their participation in a partnership under the firm name and style "la société de recherche technologique Botanical/Botanical Technologies Research and Development". However, at the objection stage the assessment was confirmed on the basis, among other reasons, that the partnership was a sham and the appellants had no right to any deduction claimed in respect to the partnership. Also, the property owned by the partnership was a tax shelter and no person filed with the Minister a prescribed form containing, among other things, the identification number for the tax shelter. Here, according to the respondent, pursuant to subsection 237.1(6) of the Income Tax Act no amount in respect of the partnership may be deducted or claimed by either appellant. The respondent had the onus of proving sham and that, the partnership was a tax shelter
[2] Ms. Maege's appeals are from assessments for 1990, 1991 and 1992. Mr. Jevremovic appeals from a 1990 assessment, although he invested in the partnership in 1991 and 1992 as well. The appeals were heard together on common evidence.
[3] At the beginning of the trial, respondent's counsel informed me that the respondent now agrees that Ms. Maege did incur a capital gains deduction of $35,700 in 1992, which was originally disallowed.
[4] Also, counsel had narrowed the issues to be tried to one issue: whether or not the partnership was a tax shelter. If I find that the partnership was a tax shelter, the appeals will fail and the appellants will abandon all other claims, except for Ms. Maege's claim for a capital gains deduction.
[5] For the years in appeal a "tax shelter" was defined in subsection 237.1(1) of the Act as follows:
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"tax shelter" means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
(a) the aggregate of all amounts each of which is
(i) a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph (i),
would exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year,
would exceed
(ii) the aggregate of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed directly or indirectly in respect of the interest in the property, by the person or person with whom the person does not deal at arm's length
but does not include property that is a flow-through share or a prescribed property. |
Bien pour lequel il est raisonnable de considérer, à la lumière de déclarations ou annonces faites ou envisagées en rapport avec ce bien, que, si une personne acquérait une part dans ce bien, le montant visé à l'alinéa a) excéderait le montant visé à l'alinea b) à la fin d'une année d'imposition donnée se terminant dans les quatre ans après cette acquisition:
a) le total des montants dont chacun représenterait:
(i) une perte qui est annoncée comme étant déductible dans le calcul du revenu, au titre de cette part, et qui pourrait être subie par la personne ou attribuée à celle-ci pour l'année donnée ou pour une année d'imposition antérieure, ou
(ii) un montant qui est annoncé comme étant déductible dans le calcul du revenu ou du revenu imposable, au titre de cette part, et qui pourrait être engagé par la personne ou attribué celle-ci pour l'année donnée ou pur une année d'imposition antérieure, à l'exclusion d'un montant inclus dans le calcul d'une perte visée au sous-alinéa (i);
b) l'excédent éventuel du coût de cette part pour la personne à la fin de l'année donnée sur la valeur totale des avantages visés par règlement que la personne ou toute personne avec laquelle elle a un lien de dépendance pourrait recevoir, directement ou indirectement, au titre de cette part.
Les actions accréditives et les biens visées par règlement ne sont toutefois pas considérés comme des abris fiscaux.
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[6] A "prescribed benefit" is described in subsection 231(6) of the regulations to the Act. The portions of subsection 231(6) relevant to the appeal at bar are:
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(6) For the purposes of paragraph (b) of the definition "tax shelter" in subsection 237.1(1) of the Act, "prescribed benefit" in relation to a tax shelter means any amount that may reasonably be expected, having regard to statements or representations made in respect of the tax shelter, to be received by or made available to a person (in this subsection referred to as "the purchaser") who acquires an interest in the tax shelter, or a person with whom the purchaser does not deal at arm's length, which receipt or availability would have the effect of reducing the impact of any loss that the purchaser may sustain by virtue of acquiring, holding or disposing of the interest in the tax shelter, and includes such an amount.
(a)...
(b) that the purchaser or a person with whom the purchaser does not deal at arm's length is entitled at any time to receive, directly or indirectly, or to have available.
(i) as a form of assistance from a government, municipality or other public authority, whether as a grant, subsidy, forgiveable loan, deduction from tax or investment allowance, or as any other form of assistance, or... |
(6) Pour l'application de l'alinéa b) de la définition d' « abri fiscal » au paragraphe 237.1(1) de la Loi, l'avantage à recevoir au titre d'une part dans un abri fiscal est un montant que, compte tenu des déclarations ou annonces faites au sujet de cet abri fiscal, la personne qui acquiert cette part - appelée « l'acheteur » au présent paragraphe - ou une personne avec laquelle l'acheteur a un lien de dépendance peut raisonnablement s'attendre à recevoir ou à avoir à sa disposition, ce qui a pour conséquence de réduire l'effet d'une perte que l'acheteur pourrait subir en acquérant ou en détenant cette part ou encore en disposant. Sont notamment des avantages:
a)...
b) le montant que l'acheteur ou une personne avec laquelle il a un lien de dépendance a à un moment donné le droit de recevoir ou d'avoir à sa disposition, directement ou indirectement:
(i) soit à titre d'aide fournie par un gouvernement, une municipalité ou un autre organisme public, sous forme de prime, de subvention, de prêt à remboursement conditionnel, de déduction d'impôt ou d'allocation de placement ou sous toute autre forme... |
[7] Mr. Jevremovic is a chemical engineer with a particular expertise in water treatment and environmental engineering. Ms. Maege is a professional accountant with a CMA designation and a Master's degree in Business Administration. She began to invest in Botanical Technologies in 1989, and continued to do so through 1992.
[8] Mr. Jevremovic met Mr. Nelson, a businessman who was married to Ms. Maege, by happenstance, and they got to know each other well when Mr. Jevremovic rented office space in the same facility as Mr. Nelson's company "Thermactive". According to Ms. Maege, Mr. Jevremovic was subsequently engaged by Mr. Nelson to help with the engineering of solar energy and environmental conservation technology for greenhouse technologies being developed by Mr. Nelson's companies.
[9] In late 1990 Mr. Nelson approached Mr. Jevremovic about becoming a partner in Botanical Technologies. Botanical Technologies co-operated with a number of other agencies in the course of its research, including Agriculture Canada, and Ecole Polytechnique, and apparently some of the projects included biotechnology innovations that would work well with patented greenhouse technologies developed by Thermactive. (Mr. Nelson did not testify.) Funding for Botanical Technologies came from federal, provincial, and private sources.
[10] The first project that Botanical Technologies undertook was the development of something called "anthrocynanin", an organic coloring agent derived from plants, which could be used in both food coloring and cosmetics. Mr. Jevremovic testified that he believed there was a strong potential market for the products that Botanical Technologies would be developing, and therefore there was a good prognosis for profit in the medium to long term, echoing the estimates stated in the business plan. This view was supported somewhat by Ms. Maege's testimony that certain synthetic coloring agents had been banned by the government around the time that Botanical Technologies began developing anthrocynanin, indicating market potential for suitable replacement products. Mr. Jevremovic indicated that all the partners knew there were inherent risks in the investment, but they had confidence in the earning potential of the research over time. Additionally he indicated that he had a keen interest and expertise in the scientific research which also attracted him to the partnership, an interest echoed by Ms. Maege.
[11] Mr. Jevremovic testified that losses in the first two to three years of Botanical Technologies "anthrocynanin" project were understandable since this was a "research" phase and losses were normal within that timeframe. However, after two years of work the researchers could not overcome technical problems and as a result the partners delayed the solicitation of potential clients. The technical problems were eventually overcome, but funding to the project started to disappear by 1992, leading to its demise.
[12] On December 28th, 1990 Mr. Jevremovic invested $10,000 in Botanical Technologies, claiming a net business loss of $10,000, an investment tax credit of $1,480, and a Quebectax credit of $3,614. On December 31st, 1991 he invested $15,000, claimed a business loss for the year of $15,000, obtained an investment tax credit of $1,428, and a Quebec tax credit of $6,574. Ms. Maege first invested $20,000 on December 28th, 1989, $15,000 on December 28th, 1990, $22,500 on December 27th, 1991, and $13,235 on December 30th, 1992. She claimed losses in the amounts of the investments, and her corresponding share of the tax credits as well (the credits enjoyed appear to equal $3,170 and $4,149 for the 1989 tax year: $2,215 and $5,408 for the 1990 tax year: $2,142 and $9,861 for the 1991 tax year: and $1,860 and $4,832 for the 1992 tax year.)
[13] In terms of the timing of the investments Mr. Jevremovic stated that in 1990 he held back on investing until he received money from a severance package; in 1991 he held back until year end for cash flow purposes. When asked about their late-in-the-year contributions to the partnership Ms. Maege stated that this was standard in the partnership. Apparently the expenses incurred by Botanical Technologies, including salaries for researchers and technicians, would be paid by the "sister" company, Thermagro, during the year, then near year-end a "cash-call" would be made to get people to invest in Botanical Technologies to pay off those "debts". It appears that the parties purchased their interests in Botanical Technologies generally with payments of ten per cent in cash and the balance by promissory note, although Mr. Jevremovic believes he paid for his investment in full by cheque without a note.
[14] According to Ms. Maege, the division of the profits and losses of the partnership was done on a pro rata basis according to the partner's participation or contribution for the year. Partners who did not contribute any money in a particular year would not receive any tax benefit from the partnership for that year. Ms. Maege also echoed Mr. Jevremovic's testimony about the expectation of short-term losses and medium to long-term income.
[15] When asked about whether or not she made "statements or representations" about the losses and credits available to investors such as Mr. Jevremovic, Ms. Maege confirmed that she had done so; it was her responsibility to explain to partners how things would work financially, including the availability of scientific research and development credits. Documentary evidence, in the form of the Offering Memoranda for the relevant tax years, was introduced to confirm that investors were informed in writing about the possibility of enjoying deductible losses as well as tax credits through participation in the partnership.
[16] Ms. Maege was examined for discovery by counsel for the respondent. Counsel questioned Ms. Maege with respect to the Offering Memorandum:
Q. [30] At the last paragraph of the first page it's stated:
"That as an incidental consideration was the possibility to deduct the tax losses and the investment tax credit."
A. Yes.
Q. [31] That was known by the investor, was that known by the investors at the time they put money in it?
A. Yes, that was an opportunity for them to obtain a tax credit and a write-off as a, as an assistance to them in making their investments and covering their investment cost, ...
[17] At trial, Ms. Maege indicated that perhaps these answers were not quite correct, and that she could not say for sure what investors understood about losses and credits when they invested in the partnership.
[18] Later on, counsel questioned Ms. Maege on how the partners' contributions would be spent by the partnership:
Q. [194] Was that the plan from the beginning, that a hundred percent (100%) of the investments would be spent in each year?
A. Yes, that was the plan.
Q. [195] And, of course, that would create a business loss?
A. Yes.
Q. [196] Was that known at the beginning, that each partner would have a...
A. That was, that was anticipated, yes, it was anticipated as a, reconferred by the law as we understood it.
Q. [197] So they expect, they anticipated a hundred percent (100%) write-off of their investment in that year?
A. Yes, they did.
Q. [198] And they also expected the investment tax credit with regard to that; is that correct?
A. Yes.
[19] Ms. Yolaine Gendron, an auditor with the Canada Revenue Agency, who was in charge of the appellants' files at the Appeals level, testified that she concluded that the partnership was a tax shelter since the appellants anticipated from the outset they would receive tax credits and their annual investment costs would be written off each year. She was also influenced by the fact the investments were made near the end of each year, the losses claimed were equal to the amounts invested and the tax credits were allocated to partners in the proportion to the amount of capital a partner contributed.
[20] Ms. Gendron reviewed the documentation included in the appellants' tax returns, including reconciliations of each partner's capital account as well as partnership information returns for various years. In 1989 the total capital contributed, $100,000, representing subcontract costs, equaled the income loss of the partnership. In 1989 Ms. Maege had a 20 per cent interest in the partnership, having contributed $20,000.
[21] Ms. Maege was the contact person the CRA, or its predecessor, Revenue Canada, was to contact for partnership information.
[22] The partnership's claim for Scientific Research and Experimental Development Expenses ("SRED") for 1989 included a total of $100,000 of current and capital expenditures of which $79,254 were qualified for investment tax credit purposes and $20,746 were amounts of government and non-government assistance and contract payments in respect of research and development ("R & D") expenditures.
[23] As a result, in her 1989 federal Quebec tax returns Ms. Maege claimed a net loss from the partnership in accordance with section 37 of the Act in the amount of $20,000, a federal SRED investment tax credit of $3,170.16 and a Quebec wage tax credit of $4,149.20. Similar claims, based on their partnership interests were also made by the other partners. A form T5013, statement of partnership income, was accordingly issued to each partner.
[24] The fisc did not reassess Ms. Maege for 1989, said Ms. Gendron, because the year was statute barred. Ms. Gendron produced and reviewed similar documentation for 1990, 1991 and 1992. In 1990, the partnership had income of $7,020 which was distributed according to the partnership interest held by each partner in the partnership; however, the loss was allocated according to the proportional interest of each partner's capital contribution in 1990.
[25] For example, the partnership had gross income of $7,020 and a net loss of $70,000 in 1990. (Sub contract costs were $77,020.) The total capital contributed by all partners in 1990 was $70,000. Ms Maege contributed $15,000, or 21.4 per cent of the total, and Mr. Jevremovic invested $10,000, or 14.3 per cent of the total. Their allocation of the loss was 21.4 per cent and 14.3 per cent, respectively. The tax credits also allowed on the basis of capital contributed in the year. However, in allocating the income of $7,020, Ms. Maege was allocated $1,404 and Mr. Jevremovic was allocated $140.00, their respective percentage interest in the partnership. Ms. Maege had a 20 per cent interest in the partnership at the end of 1990. (She owned 23 units.) Mr. Jevremovic had a 2 per cent interest in the partnership at the end of 1990. (He owned 2 units.) The same principles of allocation of losses, tax credits and income were also applied in 1991 and 1992[1].
[26] Appellants' counsel's primary submission was that the answer to the question of whether a tax shelter existed depends on the interpretation of opening lines of the definition of "tax shelter" in subsection 237.1(1):
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... property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property... |
Bien pour lequel il est raisonnable de considérer, à la lumière de déclarations ou annonces faites ou envisagées en rapport avec ce bien... |
[27] Counsel for the appellant observed that the definition of "tax shelter" uses the words "reasonably considered" and posited that it was not necessarily reasonable to expect that the partners would enjoy tax benefits in the nature of a tax shelter on the facts at bar. A reasonableness test, he suggested, would need to go into the extent of the representations: is it a representation to say that a partner would get a share of a loss and of credits, or does one have to go beyond that to inform a potential partner about potentially disproportionate benefits for a given level of investment? In the appellant's view, statements indicating that a partner in a venture would share in losses and credits would not qualify as a "statement or representation" for the purposes of subsection 237.1(1).
[28] Appellants' counsel stressed that when Ms. Maege bought into the partnership she knew the law as well as a tax lawyer would, and so no statement or representation was made to her or needed to be made to her so as to persuade her to make the investment. She might have made representations to others, but she was not advised by anyone as to the tax benefits of the investment opportunity. According to this line of reasoning, a sophisticated person versed in tax law and business would not be found to be participating in a tax shelter because he or she would not need to receive a detailed explanation of the scheme, while an unsophisticated person who requires a detailed explanation of the scheme would be found to be involved in a tax shelter. Counsel declared that I should look at the intent of the taxpayer: would the parties have invested if there were no tax benefit? In the case at bar the parties would have, in his view. Counsel suggested that this venture was quite unlike a situation in which passive investors blindly put money into an investment opportunity which they do not necessarily understand. Ms. Maege did not act on any person's representations or statements when she invested in the partnership. Mr. Jevremovic was motivated by his science background and hope of profit when he invested.
[29] In terms of Mr. Jevremovic's participation, his counsel stated that it was never explicitly stated to Mr. Jevremovic that he would enjoy tax benefits in the nature of a tax shelter arrangement. He got involved in the project because he liked the business - he was interested in the science aspect of the business - and because he thought there was income potential, not because of losses and credits. He did not see this as a tax shelter.
Analysis
[30] In terms of the financial aspects of an investment and whether or not it is a tax shelter, the provisions defining "tax shelter" can be reduced to a simple equation: there may be a tax shelter if A > (B - C) where A is the aggregate of deductions against income (including losses), B is the amount of the investment or cost, and C is the amount of prescribed benefits received (in this case, tax credits.) Applied to Mr. Jevremovic's 1990 tax year, for example, the calculation would be 10,000 > (10,000 - 5,094), militating towards a finding that the scheme is a tax shelter for the purposes of subsection 237.1.
[31] The emphasis by appellants' counsel on the importance of the phrase "statements or representations" in the definition of a tax shelter, and the corresponding conclusion that a sophisticated taxpayer would not be captured by the provision while an unsophisticated taxpayer would be captured is novel, but untenable. This argument gives insufficient weight to the words "having regard to" in English and "à la lumière" in French, which precede the words "statements or representations" and "déclarations ou annonces", respectively. Administrative policy at the time, outlined in Information Circular 89-4, was that
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[t]he definition of what constitutes a tax shelter depends entirely on the reasonable inferences to be drawn from representations made in connection with the property. Representations would include written representations such as those contained in sales brochures or advertisements and verbal representations such as those made in public or private information or sales meetings... |
[l]a définition d'un abri fiscal dépend entièrement des conclusion qu'on peut raisonnablement tirer des annonces faites à l'égard du bien. Il pourra s'agir d'annonces écrites, comme des brochures et des annonces publicitaires, ou d'annonces verbales comme des renseignements transmis en public ou en privé, ou au cours de réunions de promotion de vente... |
[32] According to the "Shorter Oxford English Dictionary"[2] the word "regard" means "to take notice of, bestow attention or notice upon; to give heed to; to look to, consider, [or] take into account."
[33] Le Petit Robert[3]defines the word "lumière" as "[c]e qui rend claire, fournit une explication. V. clarté, éclaicissement... et [é]tat de ce qui est visible, évident pour tous. V. Évidence (Au grand jour...)"
[34] On their own, the words "regard" and "lumière" in the definition of "tax shelter" can hardly be construed as mandatory language.
[35] The Ontario Superior Court had occasion to consider the meaning of the phrase "have regard to" in Concerned Citizens of King v. King (Township)[4]:
To "have regard to" falls somewhere on the scale that stretches from "recite them then ignore them" to "adhere to them slavishly and rigidly".
[36] If Parliament had intended to make "statements or representations" the critical and definitive aspect of tax shelter schemes they would have not used as equivocal a phrase as "having regard to" or "à la lumière" as a modifier to "statements or representations" and "déclarations ou annonces". In Fédération des Caisses Populaires Desjardins de Montréal et de L'Ouest-du-Québec v. The Queen[5], Lamarre J. correctly summarized a fundamental principle of statutory interpretation that the legislature is presumed to say what it means and means what it says:
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In response to this first argument by the appellant, I will simply refer to the well-established rule of effectivity in statutory interpretation, which dictates that there be a reason for each word used in a statute. In The Interpretation of Legislation in Canada, 2nd ed., P.-A. Côté writes the following at page 232:
It must also be assumed that each term, each sentence and each paragraph have been deliberately drafted with a specific result in mind. Parliament chooses its words carefully: it does not speak gratuitously. |
En réponse à ce premier argument de l'appelante, je soulignerai simplement le principe bien établi de l'effet utile en matière d'interprétation des lois, voulant que chaque mot utilisé dans la législation ait sa raison d'être. P.-A. Côté, dans son recueil sur l'Interprétation des lois, 2e éd., écrit ceci à la page 259 :
En lisant un texte de loi, on doit en outre présumer que chaque terme, chaque phrase, chaque alinéa, chaque paragraphe ont été rédigés délibérément en vue de produire quelque effet. Le législateur est économe de ses paroles: il ne 'parle pas pour ne rien dire'. |
[37] With reference to tax shelters specifically, Dussault J. wrote in Maya Inc., v. the Queen, 2003 TCC 502, 2003 D.T.C. 947 at para. 13 that:
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[i]n the definition, the relationship established between the amount deductible within four years from the acquisition of an interest in a property and the cost of that interest reduced by the total value of the prescribed benefits is mainly based on the "statements or representations made or proposed to be made", that is, on the basis of what is proposed to the investor.
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...dans la définition, la relation établie entre le montant déductible dans les quatre ans de l'acquisition d'une part dans un bien et le coût de cette part diminué de la valeur totale des avantages visés par règlement est avant tout en fonction des 'déclarations ou d'annonces faites ou envisagées', c'est-à-dire en fonction de ce qui est proposé à l'investisseur.
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[38] Parliament modified the phrase "statements or representations" and "déclarations ou annonces" with the equivocal phrase "having regard to" and "à la lumière". We must presume that it did so for a reason. In the context of the foregoing the "statements or representations made or proposed to be made" and "déclarations ou annonces faites ou envisagées" are one possible indicator of whether a tax shelter arrangement exists, but the absence of explicit statements or representations about the investment opportunity is not determinative. Each case will be determined by its own particular facts.
[39] It also appears that in the context of the definition of "tax shelter" a "representation" need not be an explicit written or verbal assertion but can also include a mental or intellectual element, and appears to encompass representations to ones' self. The Shorter Oxford English Dictionary[6] defines the word "representation" as:
The action of placing a fact, etc., before another or others by means of discourse; a statement or account, esp. one intended to influence opinion or action; the action of presenting to the mind or imagination; an image thus presented; a clearly-conceived idea or concept.
[40] The role of the mental element in the determination of whether a taxpayer is involved in a tax shelter is further reinforced by the definitions of "propose" or "proposal", which seems to include ones own personal intentions. Again, according to the Shorter Oxford English Dictionary[7], the word can mean:
to put forward for consideration; to put before the mind; to state, propound; to set before one's mind as something to be expected; to put forward for acceptance; to put before one's own mind as something that one is going to do; to design, purpose, intend.
[41] The words "déclarations" and "annonces" appear to indicate a communication to the public. Le Petit Robert refers to an "action d'annoncer, de faire savoir quelque chose au public, verbalement ou par écrit " in the definition of "annonce". Similarly, in defining the word " déclarations ", Le Petit Robert refers to "action de déclarer; discours ou écrit par lequel on déclare". The word " déclarer " is defined as " faire connaître... d'une façon expresse, manifeste ". However, the word " envisager " is defined, in part, by Le Petit Robert as:
...Examiner par la pensée, considérer... Prendre en consideration, avoir en vue... Penser (à). Prévoir, imaginer comme possible. Envisager toutes les éventualities...
In the French language as well as the English language of this provision, " déclarations " and " annonces " may be contemplated or considered, even if not made.
[42] The determination of whether a tax shelter arrangement exists for the purpose of subsection 237.1(1) is ultimately made on a reasonable basis. As Bowman T.C.J. (as he then was) stated in Tsiantoulas v. Canada, [1994] T.C.J. No. 984:
Reasonableness is a question of fact and requires the application of a measure of judgment and common sense.
[43] In this case Ms. Maege is obviously a sophisticated individual with professional credentials. She structured the partnership, and informed the investors about the opportunities for profit, and the financial ramifications of losses, including income deductions and tax credits. Mr. Jevremovic is also a highly educated person with business experience.
[44] The appellants knew that other investments would be fully written-off each year. As to whether they understood the losses, deductions, and credits that would be the result of their investments, Ms. Maege's evidence is dubious, since at trial she contradicted statements she made in her examination for discovery. However, based on the evidence of Ms. Maege and Mr. Jevremovic and their high degree of sophistication it is reasonable to conclude that they knew the extent of the tax benefit that they would enjoy for the years that the partnership was in operation. They knew that their investments would be written-off as to 100 per cent for the tax years in question and they knew the extent of the available credits. There were representations made and proposed to be made in connection with the partnership property that if the appellants acquired interests in the partnership at the end of any particular taxation year ending within four years after the day they acquired the interests they would incur losses and other deductions from income or taxable income and obtain tax credits in excess of their investments. The fact that Ms. Maege did not make statements to herself with respect to the Botanical Technologies is irrelevant. She expected beneficial tax consequences to arise as a result of her investments in the partnership. Mr. Jevremovic was also aware that the investment was a tax shelter.
[45] The appeals of Ms. Maege for 1990 and 1991 and the appeal of Mr. Jevremovic for 1990 are dismissed. Ms. Maege's appeal for 1992 is allowed and referred back to the Minister only to allow her a capital gains deduction of $35,700. All with costs to the respondent.
Signed at Ottawa, Canada, this 28th day of April, 2006.
"Gerald J. Rip"
Rip J.
COURT FILE NOS.: 2002-2332(IT)G and 2002-2450(IT)G
STYLE OF CAUSE: Norma Maege and Her Majesty the Queen
and Lazar Jevremovic and Her Majesty the Queen
PLACE OF HEARING: Montréal, Québec
DATE OF HEARING: December 1, 2005
AMENDED REASONS FOR
JUDGMENT BY: The Honourable Justice Gerald J. Rip
DATE OF AMENDED
APPEARANCES:
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Counsel for the Appellants: |
Serge Fournier |
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Counsel for the Respondent: |
Anne-Marie Boutin |
COUNSEL OF RECORD:
Firm: Brouillette Charpentier Fortin
Montréal, Québec
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] Ms. Gendron prepared for trial schedules for years 1989 to 1992, inclusive, showing the amounts contributed, income, R & D expenses, losses claimed for Quebec tax credits and federal tax credits claimed for the partnership as a whole and for each partner. These schedules were supported by Exhibits produced at trial.
[2] 3rd ed. Vol. II, Clarendon Press: Oxford.
[3] Le Petit Robert : Dictionnaire alphabétique et analogique de la langue française, DICTOBERT Inc., Montréal, Quebec, 1993
[4] [2000] O.J. No. 3517.
[5] 2000 DTC 1585. (translation)
[6] Supra note 2.
[7] Supra note 2.