Aquilini Estate v. The Queen

Aquilini Estate v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-06-12
Neutral citation
2019 TCC 132
File numbers
2015-129(IT)G
Judges and Taxing Officers
Frank J. Pizzitelli
Subjects
Income Tax Act
Decision Content
Docket: 2015-129(IT)G
BETWEEN:
ESTATE OF ELISA AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Francesco Aquilini (2015-131(IT)G), Paolo Aquilini (2015-132(IT)G), Roberto Aquilini (2015-133(IT)G) and Atrium Investment Trust (2015-134(IT)G) on December 3, 4, 5, 6, 7, 10 and 11, 2018 and May 6, 7 and 8, 2019 at Vancouver, British Columbia
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Thomas M. Boddez
Robert Carvalho Florence Sauve
Counsel for the Respondent:
Jasmine Sidhu
Perry Derksen Kiel Walker Peter Campbell
JUDGMENT
The appeal for the 2007 taxation year is dismissed. For the purpose of determining the Appellants’ losses from the AIGLP Partnership, the Minister is directed to allocate losses amongst the Appellants based on their initial capital contributions, but shall not disallow the portion of such losses utilized in 2003 since that year is not under appeal. To the extent any unused losses based on the aforesaid proper determination still then exist, the Appellants may apply their share as herein established to the 2007 year. Costs shall be awarded to the Respondent, provided that if any of the parties disagree with this cost award, they shall have 30 days from the date of this decision to submit their submissions on costs, failing which they shall be deemed to accept ordinary costs as the basis for the cost award.
Signed at Ottawa, Canada, this 12th day of June 2019.
“F.J. Pizzitelli”
Pizzitelli J.
Docket: 2015-131(IT)G
BETWEEN:
FRANCESCO AQUILINI
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Estate of Elisa Aquilini (2015-129(IT)G), Paolo Aquilini (2015‑132(IT)G), Roberto Aquilini (2015-133(IT)G) and Atrium Investment Trust (2015-134(IT)G) on December 3, 4, 5, 6, 7, 10 and 11, 2018 and May 6, 7 and 8, 2019 at Vancouver, British Columbia
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Thomas M. Boddez
Robert Carvalho Florence Sauve
Counsel for the Respondent:
Jasmine Sidhu
Perry Derksen Kiel Walker Peter Campbell
JUDGMENT
The appeal for the 2007 taxation year is dismissed. For the purpose of determining the Appellants’ losses from the AIGLP Partnership, the Minister is directed to allocate losses amongst the Appellants based on their initial capital contributions, but shall not disallow the portion of such losses utilized in 2003 since that year is not under appeal. To the extent any unused losses based on the aforesaid proper determination still then exist, the Appellants may apply their share as herein established to the 2007 year. Costs shall be awarded to the Respondent, provided that if any of the parties disagree with this cost award, they shall have 30 days from the date of this decision to submit their submissions on costs, failing which they shall be deemed to accept ordinary costs as the basis for the cost award.
Signed at Ottawa, Canada, this 12th day of June 2019.
“F.J. Pizzitelli”
Pizzitelli J.
Docket: 2015-132(IT)G
BETWEEN:
PAOLO AQUILINI
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Estate of Elisa Aquilini (2015-129(IT)G), Francesco Aquilini (2015‑131(IT)G), Roberto Aquilini (2015-133(IT)G) and Atrium Investment Trust (2015-134(IT)G) on December 3, 4, 5, 6, 7, 10 and 11, 2018 and May 6, 7 and 8, 2019 at Vancouver, British Columbia
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Thomas M. Boddez
Robert Carvalho Florence Sauve
Counsel for the Respondent:
Jasmine Sidhu
Perry Derksen Kiel Walker Peter Campbell
JUDGMENT
The appeal for the 2007 taxation year is dismissed. For the purpose of determining the Appellants’ losses from the AIGLP Partnership, the Minister is directed to allocate losses amongst the Appellants based on their initial capital contributions, but shall not disallow the portion of such losses utilized in 2003 since that year is not under appeal. To the extent any unused losses based on the aforesaid proper determination still then exist, the Appellants may apply their share as herein established to the 2007 year. Costs shall be awarded to the Respondent, provided that if any of the parties disagree with this cost award, they shall have 30 days from the date of this decision to submit their submissions on costs, failing which they shall be deemed to accept ordinary costs as the basis for the cost award.
Signed at Ottawa, Canada, this 12th day of June 2019.
“F.J. Pizzitelli”
Pizzitelli J.
Docket: 2015-133(IT)G
BETWEEN:
ROBERTO AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Estate of Elisa Aquilini (2015-129(IT)G), Francesco Aquilini (2015‑131(IT)G), Paolo Aquilini (2015-132(IT)G) and Atrium Investment Trust (2015-134(IT)G) on December 3, 4, 5, 6, 7, 10 and 11, 2018 and May 6, 7 and 8, 2019 at Vancouver, British Columbia
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Thomas M. Boddez
Robert Carvalho Florence Sauve
Counsel for the Respondent:
Jasmine Sidhu
Perry Derksen Kiel Walker Peter Campbell
JUDGMENT
The appeal for the 2007 taxation year is dismissed. For the purpose of determining the Appellants’ losses from the AIGLP Partnership, the Minister is directed to allocate losses amongst the Appellants based on their initial capital contributions, but shall not disallow the portion of such losses utilized in 2003 since that year is not under appeal. To the extent any unused losses based on the aforesaid proper determination still then exist, the Appellants may apply their share as herein established to the 2007 year. Costs shall be awarded to the Respondent, provided that if any of the parties disagree with this cost award, they shall have 30 days from the date of this decision to submit their submissions on costs, failing which they shall be deemed to accept ordinary costs as the basis for the cost award.
Signed at Ottawa, Canada, this 12th day of June 2019.
“F.J. Pizzitelli”
Pizzitelli J.
Docket: 2015-134(IT)G
BETWEEN:
ATRIUM INVESTMENT TRUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeals of
Estate of Elisa Aquilini (2015-129(IT)G), Francesco Aquilini (2015‑131(IT)G), Paolo Aquilini (2015-132(IT)G) and Roberto Aquilini (2015-133(IT)G) on December 3, 4, 5, 6, 7, 10 and 11, 2018 and May 6, 7 and 8, 2019 at Vancouver, British Columbia
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Thomas M. Boddez
Robert Carvalho Florence Sauve
Counsel for the Respondent:
Jasmine Sidhu
Perry Derksen Kiel Walker Peter Campbell
JUDGMENT
The appeal for the 2007 taxation year is dismissed. For the purpose of determining the Appellants’ losses from the AIGLP Partnership, the Minister is directed to allocate losses amongst the Appellants based on their initial capital contributions, but shall not disallow the portion of such losses utilized in 2003 since that year is not under appeal. To the extent any unused losses based on the aforesaid proper determination still then exist, the Appellants may apply their share as herein established to the 2007 year. Costs shall be awarded to the Respondent, provided that if any of the parties disagree with this cost award, they shall have 30 days from the date of this decision to submit their submissions on costs, failing which they shall be deemed to accept ordinary costs as the basis for the cost award.
Signed at Ottawa, Canada, this 12th day of June 2019.
“F.J. Pizzitelli”
Pizzitelli J.
Citation: 2019 TCC 132
Date: 20190612
Dockets: 2015-129(IT)G
BETWEEN:
ESTATE OF ELISA AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-131(IT)G
AND BETWEEN:
FRANCESCO AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-132(IT)G
AND BETWEEN:
PAOLO AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-133(IT)G
AND BETWEEN:
ROBERTO AQUILINI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2015-134(IT)G
AND BETWEEN:
ATRIUM INVESTMENT TRUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
1. These matters were heard at the same time and on common evidence.
2. The Appellants are appealing the reassessments by the Minister that increased their share of partnership income in 2007 from The Aquilini Investment Group Limited Partnership (“AIGLP”) and, in the case of the Appellants, Roberto Aquilini (“Roberto”), Francesco Aquilini (“Francesco”) and Paolo Aquilini (“Paolo”) decreased their share of partnership losses from The Geri Limited Partnership (“GERI”) pursuant to subsection 103(1.1) of the Income Tax Act or in the alternative pursuant to subsection 103(1) with respect to AIGLP Partnership income only, provisions that allow the Minister to reallocate partnership income or losses amongst related parties and non-related respectively, on a reasonable basis in accordance therewith. Essentially, the Minister took the position that the allocation of Net Income and Net Losses in both the AIGLP and GERI Partnerships was not reasonable in the circumstances and reassessed on the basis of allocating same based on the initial capital contributions of all the partners therein to the said partnerships; all of which will be discussed in more detail later.
3. Most of the facts are not in dispute between the parties and the parties filed a Partial Agreed Statement of Facts (“PASF”), a copy of which is attached as Schedule I hereto for ease of reference.
4. While the PASF sets out the context of this appeal in some detail, I will provide a brief summary of the underlying historical and factual context adduced from such agreed facts and the evidence from the trial that is necessary to understand the reassessments and issues raised thereunder.
5. Luigi Aquilini and his wife Elisa, who regrettably passed away in 2015, arrived in Canada during the mid-1950’s and founded what is no doubt now one of Canada’s most iconic business families having operations in Canada and internationally. Luigi’s business philosophy was to acquire undervalued real estate properties on a buy and hold basis, renovating or building on them and earning rental income or sales from development as well as farming; selling income earning properties only if such were a means to finance a better business opportunity.
6. Luigi and Elisa had three children, Francesco, Roberto and Paolo, all of whom were born in Canada and all of whom were deeply involved in the business from a young age, even working in the family business while attending university; such that Roberto took 6 years to complete a Bachelor of Commerce degree as a result of his large involvement in the family business. The evidence is that Francesco was involved in “hunting” or acquiring the investments and development of them to income earning status, Roberto was the office manager and financial administrator and Paolo was a designer and developer/builder; such that their skills and roles complemented each other for the benefit of the business while they all oversaw the management of the businesses following Luigi’s illness.
7. In 1989 Luigi was diagnosed with cancer with ongoing recurrences; leading to a multitude of medical procedures and treatments over the next several years and being told he would not live. His medical condition required the remaining family members to take a greater role in the business and the uncertainty of whether he would survive led to actions being taken to divest himself of his interests in the business in favour of his wife and children and to avoid taking on new interests, both to minimize taxes from deemed dispositions of his capital properties on death and to start planning for leaving a legacy for the benefit of his family and their descendants. It should be noted that Elisa and the three sons did indeed have some direct interests in the family business before Luigi became ill, owning shares in 1984 of Golden Eagle Ranch Inc., a corporation that owned farm lands and that amalgamated into Golden Coin Inc. The three sons also acquired their one third interest in the WEV Partnership around 1994, which owned the very substantial West Edmonton Village rental properties. By 2001 however, all the interests in the family business entities were owned, directly or indirectly, by Elisa and/or her three sons which I will sometimes refer to as the “brothers” herein.
8. After experiencing claims against the family business assets by an ex-spouse as a result of one of the son’s divorces in 1989, Luigi testified he became concerned with creditor proofing the family business assets from personal creditors, including ex-spouses, and settled 4 family trusts on May 1995, about 5 years later, described as EAFT, FAFT, RAFT and PAFT in the PASF, one for each of his wife and sons, under which the respective wife or son was the trustee and protector and under which they individually and their individual descendants were the beneficiaries. Spouses were not included as beneficiaries in the family trusts.
9. Although having only a partial elementary school education and not being able to read English, Luigi testified he understood that property held in the trusts was not the personal property of the sons and hence would be creditor proofed from the personal creditors of the sons, including their spouses. He testified that he left the structural decisions to his son, Roberto and advisors.
10. After the establishment of the family trusts, most but not all of the new acquisitions of property were made by partnerships in which the 4 family trusts had equal 25% interests; namely the H&A Partnership, the Atlantic Partnership and the Saint-Laurent Partnership. The St. Jacques Partnership was formed to acquire property in Montreal in 1999 but its partners were Francesco, Roberto and Paolo in equal shares. The only explanation given as to why this partnership was not owned by the family trusts having regard to the creditor proofing goals earlier enunciated was that there were other partners initially. There were also two other partnerships established before the trusts were settled, namely the WEV Partnership that owned the West Edmonton Village and the Garden Partnership, that too were owned by the sons in equal shares, as well as a trust known as the Atrium Investment Trust settled in 1994 (the “Old Atrium Investment Trust”) for the benefit of a corporation incorporated in Gibraltar that owned the original homes and business headquarters property of the family then used as rental properties.
11. A snap shot of the entities that owned the family business prior to a 2001 reorganization - then consisting chiefly of rental income properties including hotels, development properties and farming and golf course properties and assets, would show that 5 corporations, 6 partnerships (above described) and a trust, the Old Atrium Investment Trust, owned these assets. There is no disagreement that the benefit of these entities at the time would legally flow to the respective shareholders, partners and beneficiaries thereof. It should be noted that the partnership agreements for each of the 6 partnerships above, owned in equal shares by either the 3 sons or the 4 family trusts, provided that residual net income and losses would be allocated in accordance with the said partnership interests; an allocation method not unlike that utilized by the Minister in these reassessments.
12. Each of Luigi and Roberto testified that the then structure was complex, confusing and inefficient, either making it difficult to obtain bank financing for the acquisition of properties due to the myriad of structures and financial statements or not maximizing the loans obtainable on property equity and was tax inefficient in that it locked losses into corporations that could not be used by other group entities. They also testified that some of the entities, such as the corporations and a few partnerships, were still owned by Elisa and/or the three sons rather than the family trusts and thus Luigi’s goals of creditor proofing their personal assets against personal creditors and ex-spouses and passing on growth to the trusts so as to build the legacy mentioned was still not reached in full. Roberto also testified that the existing structure, still effectively controlled by a father who had no legal interest but to whom the sons deferred, made it difficult to know what his ownership interest effectively was and so there was desire to consolidate their ownership share. Accordingly, the Appellants’ testimony is that in order to meet or better meet the aforesaid business, tax, creditor proofing and personal objectives, a major reorganization of the family business occurred in late December, 2001 and early January of 2002 the result of which was to bring the family business assets from the earlier mentioned entities under one umbrella known as AIGLP (earlier defined in the PASF). The Respondent disagrees that the goals of the reorganization were those stated by the Appellants and places the primary focus of the reorganization on tax purposes, to divert the future income and growth to the trusts and avoid taxes individually or due to the deemed disposition on death that would occur pursuant to subsection 70(5) of the Act.
13. AIGLP was established on December 27, 2001 by a Limited Partnership Agreement made between 638769 B.C. Ltd (“638769”) as the Initial General Partner and the 4 family trusts, EAFT, FAFT, RAFT and PAFT as Initial Limited Partners. The said partnership agreement initially provided for 5 classes of partnership units all of which had a subscription, redemption and retraction price of $10 per unit. Classes A, B, C & D were General Partnership Units while Class E was the only Limited Partnership class of units. The Class A units had voting rights attached to them of ten million votes per Class A unit, while all other Classes had one vote per unit. Accordingly, when 638769 subscribed for 10 Class A units on December 27, 2001 for a total of $100, it effectively gained unchallengeable control of the partnership where majority vote governed day to day operations. 638769 was owned by The Aquilini Family Trust, established around the same time, of which the 4 family trusts above mentioned were the beneficiaries and the directors were generally the family members.
14. The 4 family trusts each initially subscribed for 1 Class E unit on December 27, 2001 at $10 per unit for a total capital contribution of $40, although a few days later, on December 29, 2001 the Class E units held by EAFT, FAFT and PAFT were redeemed so that only RAFT remained a limited partner. The redemption was explained as a convenience move since Roberto, as trustee of RAFT, was a party always in the office and could more conveniently sign documents on behalf of the limited partnership. Roberto was also initially the only director of 638769 as well.
15. It should be noted that before being amended a few days later, the initial allocation mechanism for the allocation of Net Income and Net Loss, found in sections 11.01 and 11.02 respectively of the said Agreement, effectively provided that, after nominal allocation of one hundredth of one percent to a maximum of $100 of net income or loss to each of the Class A and Class E unit holders, pro rata, the residual net income would be allocated to the holders of the Class B, C and D unit holder pro rata, while the residual Net Losses would be allocated only to the Class C unit holders. Similarly, on any dissolution of the partnership, section 16.07 provides that after return of the nominal partnership capital of the Class A and Class E unit holders, the remaining assets would be distributed to the holders of the remaining Unit Classes, pro rata, based on the Capital Account balances of each of the Units.
16. Roberto testified that the aforesaid initial provisions of the partnership agreement dealing with Allocation of Net Income and Losses and Distribution on Dissolution did not reflect the agreement of the family members and specifically did not comply with the goals, initially established by Luigi, to creditor proof and build a legacy for the benefit of the sons and their descendants, by passing growth to the 4 family trusts, and so they executed a first Amendment to the Agreement dated December 29, 2001 amending those sections to provide for new allocations that the Minister reassessed as unreasonable.
17. It is not clear to me from the evidence as to whether the family members had come to an agreement on the amendments stated to be “effective” as of December 29, 2001 by such date and the evidence is that the amendment was either signed on that date or afterwards, but there is no dispute between the parties that the amendments were agreed to and relied upon, so nothing herein turns on that issue.
18. It should also be noted, that the first amendment of December 29, 2001, while changing the Allocation of Net Income in section 11.01 substantially, did not effectively change the allocation of Net Losses since Net Losses would still be allocated to Class C unit holders. The only change was to add the words “or as otherwise determined by the partnership in writing” effectively giving the Appellants further flexibility in the allocation of losses. The explanation of the Appellants for the difference in treatment between Net Income and Net Losses was that it was Luigi’s wish that Elisa’s interest not be devalued; that she not take the risk of any losses which should be allocated only to the boys who, as the active members, managed the business, while she, due to her advanced age had limited her participation in the business to about half a day a week. It becomes clear then, that the difference in treatment because of such stated goals, was to be effected by the issuance of a different class of units to Elisa and the sons, which is in fact what occurred.
19. The first December 29, 2001 amendment also created 1 million Class F and 1 million Class G units for issuance at $10 per unit, consistent with the subscription for all other classes of units. In addition, pursuant to paragraph 3 of such Amending Agreement, section 11.01 Allocation of Net Income was replaced in its entirety with the following:
11.01 Allocation of Net Income. Net Income for any Fiscal Period will be allocated and credited among the Partners as at the end of the period as follows or as otherwise determined by the Partnership in writing:
(a) firstly, the greater of 0.01% of the Net Income and $100 shall be allocated and credited to the Holders of the Class A Units and Holders of the Class E units, pro rata based on the number of Class A Units and Class E Units held by them;
(b) secondly, 40% of the residual Net Income, to a maximum of $200,000 shall be allocated and credited to the Holders of Class B units pro rata based on the number of Class B Units held by them and 60% of the residual Net Income, to a maximum of $300,000 shall be allocated and credited to the Holders of the Class C Units, pro rata based on the number of Class C Units held by them;
(c) thirdly, 30% of residual Net Income, to a maximum of $150,000, shall be allocated and credited to Holders of Class B Units pro rata based on the number of Class B Units held by them and 70% of the residual Net Income, to a maximum of $350,000 shall be allocated and credited to the Holders of the Class D Units, pro rata based on the number of Class D Units held by them;
(d) fourthly, residual Net Income shall be allocated and credited to the Holders of the Class F Units pro rata based on the number of Class F Units held by them to a maximum of 7% of the aggregate balance in the Class F Units Capital Accounts;
(e) fifthly, residual Net Income shall be allocated and credited to the Holders of the Class G Units pro rata based on the number of Class G Units held by them; and
(f) sixthly, residual Net Income shall be allocated and credited to the Holders of Class A Units, pro rata based on the number of Class A Units held by them.
20. As can be seen from this Net Income allocation mechanism, having regard to paragraphs (b) and (c) above, the Class B unit holders would receive up to $350,000, the Class C unit holders up to $300,000 and the Class D unit holders up to $350,000 of the first $1,000,000 of Net Income with the Class G unit holders entitled to the rest, assuming no Class F units were issued under paragraph (e). The Class C unit holders would be allocated essentially all the Net Losses.
21. Section 16.07 dealing with distribution on dissolution of the partnership, mentioned above, was also amended to effectively provide that on dissolution, the Class B and C units would first be paid, followed in priority by the Class D units and then the Class F and G units, all pro rata per such class based on the balances in their respective Capital Accounts. The only difference from the old draft is that the new draft established an order of payout priority whereas the original draft lumped classes together.
22. It should be noted that there was a second amendment of December 29, 2001 that increased the number of Class B, C and D units to 10,000 each to facilitate the reorganization which otherwise has no further import in the resolution of this matter.
23. The Minister contends that in the circumstances the mechanism of allocation of profits and losses in amended Sections 11.01 and 11.02 are unreasonable and reassessed on the basis of allocating Net Income and Losses based on the partners’ initial capital contribution for their units following the reorganization in 2001. In order to understand the Minister’s position, we must now turn to the effects of the reorganization in order to see who acquired what partnership units in AIGLP. It should also be noted that the provisions of the GERI Limited Partnership are also relevant to the Minister’s reallocation which I will discuss after reviewing the effects of the reorganization.
24. As mentioned earlier, the effect of the 2001 reorganization was to bring all the family businesses under the umbrella of AIGLP and the steps that accomplished this are set out in paragraphs 37 to 40 of the PASF’s, details of which are found in Schedule B thereto.
25. As such details demonstrate, on December 29, 2001 each of the 4 family trusts subscribed for a total of 100 Class G units of AIGLP for a cash contribution of $1000. EAFT was issued 40 units and each of the sons’ trusts, FAFT, RAFT & PAFT were issued 20 units. Between December 31, 2001 and January 31, 2002, Elisa, Francesco, Roberto & Paolo transferred various shares they owned in the 5 aforementioned corporations; and the 6 partnerships and Old Atrium Trust transferred their various property holdings and assets - all to AIGLP, having a total net fair market value (net of assumed liabilities) of over $150.5 million in return for various classes of AIGLP Partnership units, each unit issued at $10.00 as per the AIGLP Partnership agreement above described. These were transfers on a rollover basis pursuant to subsection 97(2) of the Income Tax Act.
26. The following is a summary of the partnership units acquired, either through cash subscriptions or transfer of properties, their net value and the % of their net value rounded to the nearest tenth thousands (1/10000) of the said total of over $150.5 million contributed to AIGLP, which holdings continued to the 2007 year in issue:
Unit Holder
Class and Number of Partnership Units
Value of Contribution
% of Total Value
638769
10 Class A
$100
0.001
Elisa
1,331,026 Class B
$ 13,310,260
8.8406
Francesco
1,872,906 Class C
$ 18,729,060
12.4397
Roberto
1,872,906 Class C
$ 18,729,060
12.4397
Paolo
1,872,906 Class C
$ 18,729,060
12.4397
Garden Partnership
1 Class D
$ 10
0.0000
Wevco Partnership
3,669,181 Class D
$ 36,691,810
24.3704
St. Jacques Partnership
1,431,733 Class D
$ 14,317,330
9.5094
Atlantic Partnership
1,072,585 Class D
$ 10,725,850
7.1240
St Laurent Partnership
1 Class D
$ 10
0.0000
H&A Partnership
1,217,116 Class D
$ 12,171,440
8.0840
Old Atrium Trust
715,444 Class D
$ 12,171,440
4.7519%
EAFT
40 Class G
$ 400
0.0003
FAFT
20 Class G
$ 200
0.0001
RAFT
20 Class G
$ 200
0.0001
1 Class E
$ 10
0.0001
PAFT
20 Class G
$ 200
0.0001
Totals
15,055,916 Units
$150,559,160
100.0000
27. It is evident from analysing the above unit holdings and the Net Income and Net Loss allocation mechanisms earlier described that on the first $1,000,000 of income the Appellants would be entitled to the following distribution of income:
1. Elisa would be entitled to a maximum Net Income allocation of $350,000 for each fiscal year based on a contribution of $13,310,260.
2. Each of Francesco, Roberto and Paolo would be entitled to a maximum direct allocation on their Class C units of $100,000 [$300,000 X 1,872,906/5,618,718 per section 11.01(b)] plus a maximum indirect contribution on Class D units, from the flow through from their 1/3 ownership of the Garden, Wevco and St. Jacques Partnerships, of $73,415 [1/3 ($350,000 X 5,100,915 /8,106,061) per section 11.01(c)], for a total $173,415.
3. Each of the 4 family trusts would be entitled to a maximum indirect contribution on their Class D units, through the ownership of equal 25% interests in the Atlantic, St. Laurent and H&A Partnerships of $24,716 [¼ ($350,000 X 2,289,702/8,106,061 per section 11.01(c)]; and
4. Old Atrium Trust [whose Class D units were distributed to a new Atrium trust in 2004], would be entitled to a direct allocation on its Class D shares of $ 30,891 - ($350,000 X 715,444/8106,061 per section 11.01(c)].
28. Based on the above allocation, Elisa who initially contributed 8.8406% of the partnerships’ capital would be entitled to 35% of the distributions up to $1,000,000 and each of Francesco, Roberto and Paolo who contributed, directly and indirectly, 23.7330% would be so entitled to 17.34% of distributions up to $1,000,000. Each of the trusts would be entitled to 2.4716% of the said distribution on contribution representing approximately 3.8% of the total capital contributions.
29. Any residue over $1 million however would be allocated to the Class G units pursuant to section 11.01(e), namely to the 4 family trusts; of which 40% thereof would go the EAFT and 20% to each of FAFT, RAFT and PAFT, notwithstanding negligible contribution to the total capital contribution of the AIGLP of 0.0003% and 0.0001% respectively.
30. Obviously there is no correlation between contributions to capital by the partners and entitlement to distribution of income.
31. As per section 11.02 of the partnership agreement however, any losses were allocated only to the three brothers as holders of the Class C units whose capital contribution was 12.4397% each or 37.3191% in total. Obviously no holders of other classes of partnership units share the risk of any loss.
32. It is also clear from the evidence, confirmed by Luigi and Roberto, that Elisa and the three brothers did not rely on any net income allocations for their living expenses but were able to each draw whatever amount they needed to live. This discretionary ability to take draws from AIGLP was consensual amongst all the family members and they understood that the taking of any such draws would reduce their partnership capital accounts without any immediate tax consequences. For the years 2002 to 2007, substantial draws were taken, not in equal amounts, by the three brothers in particular, sometimes in large amounts. For instance, Elisa took over $400,000 in total throughout those years, while Francesco, Roberto and Paolo took a total of $9.4 million in unequal amounts, all without any immediate tax consequences and with no obligation to pay interest to the AIGLP Partnership pursuant to its terms. Such draws grind the adjusted cost base of their respective partnership units and to the extent of negative adjusted cost base, which existed as a result of such draws, a capital gain would result on the ultimate disposition or deemed disposition on death of such units.
33. As a result of the allocation of Net Income and Net Losses pursuant to the agreement and the discretionary withdrawal of advances, the adjusted cost base of the partnership capital accounts of Elisa, and of the three brothers were by 2007 in deep negative territory.
34. The second part of the reorganization involved the transfer of properties from AIGLP, or corporations it owned as a result of the earlier part of the reorganization to second tier partnerships to segregate the different businesses of the group; namely the rental income properties, the development properties and the farming and golf properties into separate units, all held under the AIGLP umbrella.
35. In similar fashion to the creation of the AIGLP Partnership, three additional partnerships were set up under the umbrella organizations, all of which are described in paragraphs 47 to 70 of the PASF.
36. The Aquilini Group Developments Limited Partnership (“AGDLP”), later renamed the Aquilini Developments Limited Partnership (“ADLP”) was initially created on December 27, 2001 and pursuant to subsection 97(2) of the Act, AIGLP and the corporations owned by it transferred development properties to it in exchange for different classes of partnership units. Specifically, the different transferors were allocated different classes for tracking purposes which will be made clearer shortly.
37. Likewise, the Aquilini Group Properties Limited Partnership (AGPLP), later renamed Aquilini Properties Limited Partnership (APLP) was initially created on December 27, 2001 and AIGLP and two different corporations owned by AIGLP transferred various income properties to it in exchange for different classes of partnership units. The transfer by AIGLP included the West Edmonton Village property initially transferred to AIGLP from Wevco earlier mentioned and for which APLP issued Class C units.
38. Finally, the GERI Partnership was formed on December 30, 2001 to be the farming and golf course business of the group. On said date Elisa subscribed for 20 Class A units and each of the sons subscribed for 10 Class B units of GERI for $10 per unit. Thereafter, corporations owned by AIGLP or other corporations owned by the Aquilini family, predominantly Golden Eagle Ranch Inc., transferred farm properties and equipment to GERI pursuant to subsection 97(2) of the Act or made cash subscriptions in return for Class D partnership units, all as described in paragraphs 53 to 69 of the PASF and Schedule B thereof, page 4.
39. The group structure following the reorganization steps above can be seen in the diagram attached as Schedule A to the PASF, ignoring the Vancouver Canucks business division which was not yet in existence.
40. Each of the lower tier partnership agreements contained an allocation mechanism that attributed any gains from the disposition of a property to the initial transferor of that property to the lower tier partner. Accordingly, when the West Edmonton Village property was sold in 2007, the capital gains resulting from such sale were attributed to AIGLP which had initially transferred the property to AGLP in return for Class C units.
41. The definition of “Attributable Gains” found in section 1.01 of each of the APLP, ADLP and GERI Partnership agreements reads as follows:
Attributable Gains of a Class of Units for a Fiscal Period means all gains realized by the Partnership in that Fiscal Period on the disposition of property acquired on the issuance of Units of that Class.
42. Each of the three lower tier partnership agreements includes a section 11.01 that distributes Attributable Gains to the Class of unit holders who transferred such property as mentioned, before distributing residual gains to the holders of essentially all the issued classes, other than the nominal initial general partner and limited partner units.
43. Each of the said three partnership agreements includes a section 11.02 dealing with the Allocation of Net Losses. In the ADLP and APLP agreements, Net Losses are essentially only allocated to Units owned by AIGLP, which of course would be thrown into the mix of Net Income and Net Losses of AIGLP and allocated in accordance with the AIGLP mechanism earlier described.
44. With respect to the GERI Partnership, a total of $23,223,360 was received by it as a net contribution resulting from the transfer of properties by 4 corporations initially, that later reorganized into Global and CPI, and the cash contributions of Elisa and the three brothers. Global and CPI (including through their predecessors), contributed properties having a net value of $19,117,090 and $4,105,770 respectively, for a total of $23,222,860, amounting to 99.99785% of the total contribution in return for Class D units; while Elisa, through her subscription for 20 Class A units at $10 per unit contributed cash of $200, amounting to 0.00086% of the total contribution and each of Francesco, Roberto and Paolo, through their individual subscription for 10 Class B units at $10 per unit contributed cash of $100 each, amounting to 0.00043% of the total contribution. Notwithstanding the minimal contribution by Francesco, Roberto and Paolo, the Class B units issued to them would entitle them to claim all the Net Losses of GERI for each fiscal year.
Subsequent events
45. Following the 2001 reorganization and prior to 2007 the following relevant events occurred:
1. Net Income and Net Losses were distributed in accordance with the AIGLP and GERI Partnership agreements, although AIGLP never had net income above the $1 million threshold for preferred allocations described in sections 11:01 (b) and (c) above until 2007.
2. A new trust, The Atrium Investment Trust (“Atrium”) was settled on January 1, 2004 with 638769 as trustee and the four family trusts as beneficiaries. Atrium was made a beneficiary of Old Atrium, earlier discussed, and Old Atrium made a capital distribution of its 715,444 Class D units in AIGLP to Atrium, such that the new Atrium stepped into the shoes of Old Atrium and thus took the benefit of the 4.7519% initial contribution made to AIGLP by Old Atrium.
3. In May of 2004, each of the partnership agreements of AIGLP and GERI were amended to provide in section 5.04 thereof that no partnership unit thereof could be redeemed or retracted without the unanimous consent of Luigi, Elisa, Francesco, Roberto and Paolo. There was no change to the retraction or redemption value of $10 per unit of all classes.
4. In 2005, AIGLP purchased a 50% interest in the Vancouver Canucks business comprised of the hockey team and the arena, each of which were held in new lower tier limited partnerships owned by AIGLP. The evidence is that such interest was acquired by use of existing equity and third party financing, including a vendor take back loan secured, at least in part, by the West Edmonton Village property as well as personal guarantees of Francesco. Roberto testified that there was agreement amongst the brothers that they would indemnify each other with respect to any such guarantees.
5. In 2006 Francesco started negotiations for the purchase of the remaining 50% interest in the Vancouver Canucks business.
2007 Events
46. AIGLP agreed to acquire the remaining 50% interest in the Vancouver Canucks which required it to raise a substantial amount of capital, obtained in part from the sale of other capital assets, including the West Edmonton Village property then owned by AGLP, a bottom tier partnership earlier described. The West Edmonton Village property was sold to an arm’s length purchaser on March 20,