Teelucksingh v. The Queen

Teelucksingh v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-01-13
Neutral citation
2011 TCC 22
File numbers
2005-1930(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Docket: 2005-1930(IT)G
BETWEEN:
LLOYD M. TEELUCKSINGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on November 8 to 10, November 12, November 15 to 19, and December 14 and 15, 2010, at Toronto, Ontario
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Christina A. Tari and Cindy Chiu
Counsel for the Respondent:
Roger Leclaire and George Boyd Aitken
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1993, 1994, 1995 and 1996 taxation years are allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:
a) the Appellant is entitled to restricted farm losses based on:
(i) the fair market value of the horses being $300,000 in the R Partnership and $350,000 in the XIII Partnership; and
(ii) expenses, including prepaid expenses, as filed by the Appellant; and
b) in computing the Appellant’s income arising from withdrawals from his RRSP the amount to be included in income shall be reduced from $27,237 to $13,810.
Costs to be determined on further representations.
Signed at Ottawa, Canada, this 13th day of January 2011.
"Campbell J. Miller"
C. Miller J.
Citation: 2011TCC22
Date: 20110113
Docket: 2005-1930(IT)G
BETWEEN:
LLOYD M. TEELUCKSINGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
C. Miller J.
Facts
[1] The very term "Arabian horses" takes me back to the early 1960s watching in awe as Lawrence gallantly galloped across the Arabian sands on a sinewy strong stallion. The power, the grace, the beauty – it was unforgettable. In the 1990s, Montebello Farms Inc. ("Montebello") was in the business of breeding these magnificent creatures. It required funds to attain a level of herd that would make such a venture viable. It devised a plan whereby it sought investors as limited partners in partnerships which acquired the Straight Egyptian Arabian horses and held them for a very brief period of time before transferring them into a company that would issue preferred shares in return. The limited partners, Mr. Teelucksingh being one of them, could then transfer such shares into their RRSP, using available RRSP funds. Based on the cost of the horses and prepaid expenses, the limited partners claimed restricted farm losses for the very brief first fiscal period of the partnership, which losses were then carried forward. The Respondent denied the losses on the basis that there was no partnership as there was no business nor an intention to make a profit, or if there was a partnership, on the basis that the expenses incurred to create the loss were not reasonable, primarily due to the horses being overvalued. The Respondent also has included in Mr. Teelucksingh’s income the amount he withdrew from his RRSP on the basis that the preferred shares were not qualified investments for RRSP purposes (a position withdrawn in argument) or that, in any event, they had no value.
[2] What is most interesting about this case is that, while the Respondent argues there may have been no partnership business as such, it is clear there was an underlying Straight Egyptian Arabian horse business founded in the operations of Montebello. The question is whether Montebello has created a legitimate financing arrangement that shifts the business into the many limited partnerships and companies, such businesses incurring fair market value costs and reasonable expenses in a manner that attracts the tax consequences sought by the Appellant. The Respondent suggests this is a scheme by unscrupulous businessmen to take advantage of investors by offering them tax benefits that do not properly flow from the arrangement.
Rulings
[3] Before turning to the facts, I wish to comment on some rulings I made during the trial and also on the general course of the trial. There were objections to the introduction of a number of documents on the basis that they could not be authenticated. Just by way of example, the Crown sought to introduce a letter signed by a non-party, a Mr. Little, addressed to another non-party, Mr. Schiebelhut. The Appellant had already entered as an exhibit a contract that had Mr. Schiebelhut’s signature on it. As this arose on the Friday, I asked the parties to provide very brief written submissions on admissibility of documentary evidence on Monday so I could make an appropriate ruling. The Appellant’s counsel did so: the Crown counsel did not.
[4] Relevance and authenticity are two different matters; simply because one document may appear to flow from another admissible document, and on its face appears relevant, it does not follow that it is admissible. Had the witness been familiar with Mr. Little’s signature, that may have been sufficient to authenticate the letter. I do not suggest the Court must always resort to a handwriting expert: some practical considerations must come into play. It is not enough, however, for a witness to see a signature for the first time in Court and compare it to the signature on the document to be introduced, offering the opinion that it looks the same. That, I suggest, would fall short of authenticating a document.
[5] I also ruled against the Crown introducing what they claimed to be similar fact evidence in the cross-examination of Mr. Smith, who was on the stand for four days. Mr. Smith was an executive vice-president of Montebello, the moving force in the horse business giving rise to the investments in issue before me. The Crown intended to impeach his character by raising an Ontario Securities Commission ruling in 2007 concerning a 2003 – 2004 hedge fund investment in which Mr. Smith was involved. Mr. Smith has appealed that ruling. I did not allow the Crown to question Mr. Smith on this as I concluded the probative value did not outweigh the prejudicial effect. Indeed, I concluded there was little probative value to an assertion that, because 10 years after the investments in issue before me, Mr. Smith was involved in a totally different investment, which has run afoul of the Ontario Securities Commission, that he must have been unscrupulous in his earlier dealings. The facts were not similar enough, the timing was too distant and there could be some prejudice against the Appellant that would arise completely outside his control. On balance, I concluded this was not an appropriate line of questioning.
[6] The third ruling I wish to mention is allowing the Respondent to put certain Montebello customs documents to their Canada Revenue Agency (CRA) witness, Mr. Coehlo. The Respondent had presented these documents, prepared by Montebello for the shipping of horses between Canada and the United States, to Mr. Smith on cross-examination. Mr. Smith could not identify the documents so I marked them for identification, as Respondent’s counsel indicated they understood the author of the documents, another employee of Montebello, was going to be called by the Appellant. After Mr. Smith’s testimony, and after the expert’s testimony, the Appellant’s counsel advised that she had decided that it was no longer necessary to call this other employee. The Respondent’s counsel indicated they would attempt to get a hold of this potential witness and, if necessary, subpoena her. Before that occurred, the Respondent put its CRA witness on the stand, who testified that as Chief of Appeals in Kitchener, he had asked the appeal’s officer to obtain customs documents, if any, showing the movement of Montebello horses between the United States and Canada. It is those documents that were then presented to him. The Appellant’s counsel objected on the basis of the relevance and that such documents had not been provided prior to trial either on the Respondent’s list of documents or through any undertakings. The Respondent’s counsel argued he had hoped to impeach the credibility of the Appellant’s witness, as the customs documents showed much lower values for Montebello horses going from Canada to the United States and higher values on return. One of the horses in the Montebello Egyptian Bloodstock Investments R and Company, Limited Partnership was part of the list of horses in one of the bundles of the custom documents.
[7] I had heard enough evidence to satisfy me that the Montebello Egyptian Bloodstock Investments R and Company, Limited Partnership and Montebello Egyptian Bloodstock Investments XIII Limited Partnership investments were similar to many other such investments and that the shipment of horses between Canada and the United States was part of the modus operandi of Montebello. There could be any number of explanations why Montebello might show a much higher value of the horses on the customs forms on leaving the United States than was shown on entering the United States, but it struck me it was some evidence relevant to value, though by no means determinative. In having found relevance, and given the circumstances of how the documents came to Mr. Coehlo, and how the line up of Appellant’s witnesses was shifting, I exercised my discretion to admit the documents.
[8] The fourth ruling I wish to mention is in connection with a line of questioning Appellant’s counsel wished to ask Mr. Coehlo. Mr. Coehlo was the supervisor of the appeals officer, Mr. Kodrick. Mr. Kodrick was the appeals officer in the Kitchener office who testified in 2003 in the case of Balvinder Khaira v. Her Majesty the Queen,[1] a case also involving a similar Cabreah Limited Partnership investment, though not a Montebello one. Mr. Kodrick is no longer alive. Appellant’s counsel wished to read to Mr. Coehlo answers given by Mr. Kodrick at the 2003 trial as prior inconsistent statements to impeach Mr. Coehlo’s credibility. Counsel wished to do so on the basis Mr. Coehlo was only appearing before me to replace Mr. Kodrick who obviously could not appear. I agreed that was one of the reasons for hearing from Mr. Coelho, but it did not overcome the fact that the prior statement was not Mr. Coehlo’s statement – it was another person’s in another action. I found it would be improper to impeach Mr. Coehlo’s credibility on the back of someone else’s evidence given in a different case. I did not allow this line of questioning.
[9] Mr. Coehlo was not the CRA officer who was examined for discovery in the case before me. That was Mr. Tangredi from the Laval, Québec taxation office. Appellant’s counsel also wished to impeach Mr. Coehlo’s credibility by referring him to answers given by Mr. Tangredi on examination. While I permitted such questions to be put to Mr. Coehlo, I found it was not to impeach his credibility as such, but to simply demonstrate to the Court there were inconsistent views coming from the CRA. This I found was acceptable, as Mr. Tangredi’s evidence could be, and to some degree was, read in. If Mr. Coehlo provides a different answer it is for me to determine wherein lies the truth.
[10] Finally, with respect to the conduct of the trial generally, it was clear that counsel had a long and combative history in this litigation. Unfortunately, this would occasionally brew over into the courtroom. While the frustrations evident on both sides may be understandable and attributable to nothing more than human nature, I implored counsel to check such baggage at the door and conduct themselves as officers of the Court. Once the trial had started, the complaints, accusations and concerns that may have become the rule rather than the exception in the litigation process leading to trial, will not be tolerated at trial. The trial judge, and certainly this trial judge, is not interested in receiving a litany of such complaints and is only interested in a fair hearing where both sides can properly and effectively put their case before me so I hear all evidence and argument necessary to make a reasoned decision. While positions or objections can be made forcefully, they must at all times be presented courteously and respectfully. Enough said.
Facts
[11] Mr. Dale Smith, the former executive vice-president of Montebello gave a lengthy and detailed description of the business of Straight Egyptian Arabian horse farming and, specifically, the operation of Montebello. Indeed, I even saw a brief video of Montebello’s farming operations and was able to visually appreciate the splendour of the Straight Egyptian Arabian horse. I also saw photographs of the process by which semen is collected and heard details of the science of breeding certain bloodlines together. I could go on at some length describing an industry in which the Straight Egyptian Arabian horse represents just a small fraction of the general population of Arabian horses. I could likewise go on in greater detail of what appeared to be a modern, extensive horse operation carried on by Montebello in Québec and in Texas. It was fascinating evidence and provided some insight and background that set the stage to address the issues raised by the investing arrangement, but this case is about the tax consequences of the investing arrangement more than about the intricacies and complexities of the horse business. All to say, my description of facts related to the horse farming business will be a significantly abbreviated version of what I heard at trial. The emphasis will be on the investments.
[12] Montebello was in the Straight Egyptian Arabian horse farm business from the late 1980’s to 1997. The moving force behind Montebello was Mr. Paul Walker. Montebello obtained the nucleus of its horse inventory in an acquisition of a herd at auction from Stonebridge in October 1990. Mr. Walker was also involved with Stonebridge. It went out of business so there were deals to be had in buying their horse inventory. There was also a major acquisition of horses by Montebello in 1993 from Troy Associates Inc. of Luxemburg for $7,050,000. Interestingly, Mr. Walker also signed on behalf of Troy Associates. Mr. Smith recalled very few details of this major transaction.
[13] At its peak, Montebello had control of over 200 horses. It operated from a 350- to 400-acre farm near Montebello, Québec and also a training facility in Texas, with an administrative office in Pointe-Claire, Québec.
[14] Montebello started a Canadian Breeders of Straight Egyptian Arabian Horses Organization (CABREAH) with a view to further refine and improve the quality and reputation of Canadian bred Straight Egyptian Arabian horses. All mares bred by stallions owned by Montebello or any of the many other limited partnerships would be bred from CABREAH members’ stallions. Other CABREAH members were Edwards Arabian Farms, Heritage Arabian Farms, SEAH Farms and Shiloh Ranches.
[15] Revenue is earned in this business primarily in four ways:
a) The sale of horses from a successful breeding program.
The sales of horses would be by private treaty (i.e. private sales), through sales agents or, in certain circumstances, by auction.
b) Breeding services of a stallion.
It is important to note that, according to Mr. Smith, only one of 15 or 20 colts may become a productive stallion. The breeding was described as part art, part science. At Montebello, Mr. Walker and the breeding manager, Mr. Simon made the decisions to mix appropriate bloodlines.
At Montebello all mares were inseminated artificially.
c) Providing the board and care of horses.
d) Winning prizes from competitions.
In this regard, it should be noted there was an annual Egyptian competition put on by the Pyramid Society, as well as a CABREAH incentive program, the CABREAH Breeders Challenge, only open to CABREAH horses.
[16] Just to give an example of the financial side of the Montebello business, Montebello’s 1995 financial statements showed revenues from the sale of horses of approximately $16,000,000, revenues from breeding of approximately $900,000, and from board and care of approximately $1,873,000. As Mr. Smith pointed out, however, the revenue from the sale of horses did not necessarily equate to profits, as the $16,000,000 sales resulted in a $500,000 loss, while the board and care revenue resulted in approximately a $200,000 profit.
[17] As early as 1989, Montebello started to offer limited partnership investments to the public. According to Mr. Smith, it had insufficient capital for the large pool of mares it felt it needed to produce exceptional horses. Its strategy was to get investors, who wanted to be the industry, as limited partners, allowing Montebello to grow more rapidly. As he put it, this was to use the leverage of others’ capital. The two limited partnership arrangements before me are just two of many such investment arrangements put together by Montebello and other CABREAH members but are representative of these many other CABREAH limited partnership investments.
[18] I will refer to the Montebello Egyptian Bloodstock Investments R and Company, Limited Partnership as the "R Partnership" and Montebello Egyptian Bloodstocks Investments R Inc. as the "R Corporation" and the Montebello Egyptian Bloodstock Investments XIII Limited Partnership as the "XIII Partnership" and the Montebello Egyptian Bloodstock Investment XIII Inc. as the "XIII Corporation". Cumulatively, I will refer to the R Partnership and R Corporation as the "R Investment" and the XIII Partnership and the XIII Corporation as the "XIII Investment".
[19] Mr. Teelucksingh testified that he attended a presentation by a financial advisor on the Montebello horse farm operation and later received a copy of the Offering Memorandum, which I will soon describe, from the financial advisor. He confirmed that he decided to invest on the understanding that there would be profits coming out of these investments but also on the understanding that he would use money in his RRSP to make the investment. It was clear Mr. Teelucksingh was not intimately familiar with all the many details of the investment arrangement. He acknowledged signing all the documents necessary to make these investments
[20] It is useful to reproduce portions of the Offering Memorandum of the R Investment as Appendix A.
[21] The R Investment, as described in the Offering Memorandum of December 16, 1993 consisted of the following. The investor would acquire one unit in the R Partnership for $18,000 and 18 common shares in R Corporation for $18 (these shares could be put in the name of a co-investor, and in Mr. Teelucksingh’s case some common shares were put in his wife’s name). The maximum offering was $450,000. It was fully subscribed. The investor could borrow $18,000 from Montebello to make the investment. Mr. Teelucksingh did this. The loan had to be repaid within a relatively short period of time. Mr. Teelucksingh did repay the loan.
[22] The Offering Memorandum went on to describe that the $450,000 raised plus a loan of $120,000 from Montebello would be used to cover the following:
- the acquisition of 50% of a stallion, The Atticus and a colt, MB Sehnari for $400,000 from Montebello;
- working capital of $105,000;
- commission $45,000;
- expenses of issue $20,000.
[23] The business of the R Partnership and R Corporation was described in the Offering Memorandum as the business of acquiring, raising, showing and exhibiting Straight Egyptian Arabian stallions and selling their breeding services, all for the purpose of earning farming revenue. Indeed, the R. Partnership entered an agreement with Montebello, the Stallion Services Purchase Agreement, whereby Montebello agreed to buy, over a five year period, 13 breedings per year at $6,000 per breed for The Atticus and, starting in 1996, 11 breedings per year with MB Sehnari, totalling $78,000 per year in 1994 and 1995 and $144,000 per year in 1996, 1997 and 1998, for a total of $558,000 to be earned over five years. If the breeding was unsuccessful, Montebello would have to provide the services of a different stallion.
[24] Montebello also contracted to provide board and care for the two horses at Montebello Farms at $1,000 per month for the first three years and $1,250 per month for the following two years, payable in advance. Montebello further agreed, in a Horse Replacement Agreement, to replace any horse in respect of which there is a loss incurred. This was an additional cost to the R Investment of one percent of the agreed insured value. The R Investment was also charged the insurance cost of 1.34% of agreed insured value: such insurance was taken out by Montebello.
[25] Montebello also provided consulting and management expertise to the general partner, a wholly owned subsidiary of Montebello, for an annual fee of two percent of the purchase price of the horses, to be payable annually in advance. The general partner was to charge the R Investment this two percent fee. The Offering Memorandum also provided for a final closing on December 31, 1993 and that on January 15, 1994, the R Partnership would transfer the assets into the R Corporation for preferred shares. Within 45 days thereafter the partnership would be dissolved, distributing the preferred shares to the limited partners. The Offering Memorandum stated that the R Corporation would be dissolved on December 31, 1998. The Offering Memorandum went on to describe the conditions for the preferred shares to be considered a qualified investment for RRSP purposes.
[26] The Offering Memorandum indicated that, during the brief life of the R Partnership, any net income or loss would be determined in accordance with the cash method, anticipating losses available to the limited partners in 1993.
[27] I find the Offering Memorandum reflected closely what in fact occurred in this wholly subscribed offering. All the agreements were executed to put into place the investment just as set out in the Offering Memorandum.
[28] Mr. Smith outlined what happened. Montebello did lend money to the investors, who used it to buy the units and shares. Montebello did lend an additional $120,000 plus some additional monies for GST purposes. The R Partnership did use the funds to buy the two horses for $400,000 ($350,000 attributable to the half share in The Atticus and $50,000 for MB Sehnari), prepay expenses of $107,000, pay commissions and fees of the $45,000 and $20,000 respectively. This all took place immediately upon closing in 1993 effectively creating a loss in the period ended December 31, 1993 of $9,520 per partner, restricted to $6,010 in 1993, with $3,410 available for carry forward. The losses arose from the prepaid amounts and the treatment of the inventory cost of the horses, based on the $400,000 value attributed to them. See Appendix B for this calculation.
[29] Effective January 15, 1994, the partnership assets were rolled into the R Corporation (by virtue of a Transfer Agreement signed at closing and a meeting in January attended only by the general partner with proxies from investors): preferred shares were ultimately issued to Mr. Teelucksingh and his wife. At this time, the horses were valued by David Christie at $490,000. Mr. Teelucksingh transferred the preferred shares into his RRSP, using the RRSP funds to pay back the Montebello loan. The preferred shares were valued at $18,236. (see Appendix B for this determination)
[30] In May 1995, a $45,000 dividend was paid by the R Corporation to the preferred shareholders, which in Mr. Teelucksingh’s case, went into his RRSP accounts. A second dividend of a similar amount was paid in April 1996.
[31] The R Investment was referred to as a stallion deal, of which there were only a few. The vast majority of these types of investments were mare deals. The XIII Investment, which Mr. Teelucksingh also invested in, is an example of the mare deals. While the overall structure is similar, the proposed revenue streams differ in that revenue in the mare deals is generated from the sale of the mares’ foals, rather than breeding fees. Mr. Smith provided a chart demonstrating projected births and sales of the XIII Investment foals.
[32] The XIII Investment was for 25 combined interests of $20,000 for one limited partnership unit in the XIII Partnership and $40 for 40 common shares in the XIII Corporation for a maximum subscription of $501,000. The schedule of events listed in the Offering Memorandum is informative:
Schedule of Events
Event Date
Initial closing................................................................................ July 21, 1995
Fiscal year end of Limited Partnership(1)...................................... December 31, 1995
Limited Partners’ meeting............................................................. January 12, 1996
Asset transfer from Limited Partnership to Corporation (1)............ January 15, 1996
Dissolution of Limited Partnership................................................. February 15, 1996
Distribution of Preferred Shares.................................................... February 15, 1996
Commencement of cash distributions............................................ 1998
Final cash distribution................................................................... December 2001
Dissolution of Corporation............................................................ December 31, 2001
[33] Again this was fully subscribed. Mr. Teelucksingh went through the same routine by first borrowing from Montebello for the initial subscription, repaying the loan once the horses were flipped from the partnership into the corporation. The partnership paid $600,000 for seven mares. With the subscription funds plus a Montebello loan of $360,000 the XIII Partnership had, after commissions and fees, $190,000 for working capital, from which the partnership incurred prepaid expenses of $171,000, including board and care at $525.00 per month for the mares
[34] The XIII Partnership’s T5013 Schedule 1 form for the period ended August 15, 1995 showed a farming loss per unit of $15,000. The XIII Partnership’s T5013 Schedule 3 form showed $5,640 farming income per unit for 1996. Mr. Teelucksingh sought to deduct the maximum restricted farm loss of $8,750 in 1995 and carry forward the $6,250 loss available to offset 1996 income similar to the R Partnership. The losses were derived from the prepaid expenses and the amortization of the mares based on the value of $600,000 attributed to them. See Appendix C for this calculation.
[35] Similar to the R Partnership, the assets were transferred into the XIII Corporation. Mr. Teelucksingh and his wife used RRSP funds for the preferred shares valued at $20,001 (Mr. Teelucksingh received 9,001 preferred shares and Mrs. Teelucksingh received 11,000 preferred shares). For the calculation of the value of the preferred shares see Appendix C. Note the horses were valued at $695,000 for purposes of determining share value.
[36] Mr. Coehlo testified on behalf of the CRA. He was the Chief of Appeals in the Kitchener office of the CRA during the period the horse tax shelter partnerships were being reviewed by the CRA. The Kitchener office was chosen to manage this project. This involved reviewing the audit files, seeking further information and getting an independent appraiser, Ms. Henderson. Mr. Coehlo concluded that the value of the horses was overstated by 83% to 90%. The Kitchener office’s recommendation was to confirm the assessments based on:
a) evidence on the audit file;
b) no additional representations;
c) Ms. Henderson’s valuation and lack of confidence in Mr. Villasenor’s valuation, the valuation put forward by Montebello;
d) the Khaira case, a decision in an informal procedure case by Justice Mogan going against the taxpayer in a similar horse limited partnership investment.
[37] I turn now to the facts surrounding the value of the horses. I will review the reports from each sides’ expert as well as outlining what I consider to be other relevant facts that shed some light on value, such as insurance and the history of sales of certain of the horses. I will then address briefly any evidence regarding the value of board and care, which, as indicated, was prepaid.
[38] At the outset, I should say that I found both experts well qualified to opine on Straight Egyptian Arabian horses generally; Mr. Villasenor from an American large breeder perspective and Ms. Henderson from a Canadian small breeder perspective.
[39] Mr. Villasenor showed a good grasp of what Montebello was attempting to do in creating a nucleus of Straight Egyptian Arabian horses through a closed breeding program leading to a very special group of Arabian horses or even a signature horse. He testified that Montebello showed a lot of horses with success. With respect to the horses in issue before me, Mr. Villasenor saw all the horses at the relevant times in 1994 and 1995. I found the following excerpts from his report particularly helpful:
…
Based on my research and analysis, inspection of the specific horses, knowledge of the Arabian horse industry, and understanding of the Montebello/Cabreah breeding program and business plan, the estimated fair market value of the horses owned by the XIII LP was $685,000 CD at the valuation date (September 1, 1995), and the estimated fair market value of the horses owned by the R LP was $500,000 CD at the valuation date (January 15, 1994).
…
There are at least two major factors that drive the price for Straight Egyptian Arabian horses in the breeding context. The first is their rarity. Straight Egyptians account for only 1% of all Arabian horses. They are rare and therefore there is demand for them. The second is the purity of the horse’s bloodline and the desirability of the particular bloodline for a particular breeding operation.
…
What was unique to the Montebello/Cabreah breeding program was the size and quality of its horse population. No independent breeder would have been able to duplicate this breeding program. This program involved the world’s largest selection of Straight Egyptian Arabian bloodlines, and a wide palette of colours. Had the program operated for as long as it was planned, because of the international demand for exceptional Straight Egyptian Arabians, Montebello/Cabreah would readily have cornered the market for Straight Egyptian Arabians and controlled the price for these horses in the international market.
…
Just as Straight Egyptian Arabian horses are rare, there is not a large number of breeders of Straight Egyptian Arabian horses. Because this strain of Arabian horse is so rare, it is normally difficult to assemble a large herd of quality breeding stock. As with any other commodity, rareness and exclusivity drive the price upward in the market place. As noted, this challenge was overcome by the Montebello/Cabreah breeding program through its business plan. Limited partnerships were formed to provide the capital that allowed the assembly of an unparalleled collection of quality Straight Egyptian breeding stock. There are many strains and origins of Arabian horses and many breeding programs around the world. All Arabian horse breeding is not the same. The skillful mating of high quality Straight Egyptian Arabian horses is an art form. The Montebello/Cabreah farms had the facilities, the personnel and the bloodstock necessary to care for, Straight Egyptian horses of excellent quality, and to breed these horses to produce progeny of exceptional quality.
…
The estimates of value of the subject Straight Egyptian Arabian horses assessed for this report have been determined based on identification and qualitative assessment of their individual quality and pedigree analysis which can indicate future breeding success or failure. Of course, my estimates also had to consider proprietary programs such as the Cabreah Breeders Challenge Program. This program was open to an owner who had acquired a Straight Egyptian mare through the Montebello/Cabreah breeding program. Significant cash prizes were available to winning horses in a number of different competitions. The eligibility to compete in this program is a factor in the valuation of the XIII LP mares. In addition, in assessing the male horses acquired by the R LP, I took into account the existence of breeding guarantees over a five-year period. This guaranteed income stream from these horses has a direct impact on their value.
…
… In the case of the subject horses, clearly the intent of the business plan was to hold these animals as a breeding herd for a period of 5 to 7 years, and NOT to resell them to the open market in the near term. Hence, a significant factor in valuing the horses was their intended use, and the economic potential of that use.
[40] Mr. Villasenor also commented on Ms. Henderson’s report, suggesting that reliance on prices obtained at a particular auction, the Gleannloch auction, was not appropriate as he believed the cream of the crop in the Gleannloch herd had already been sold privately.
[41] Turning now to Ms. Henderson’s report, she acknowledged that she paid no attention to the impact of the business arrangements in valuing the horses. Indeed, she expressed suspicion of the guarantee of revenue provision as described in the Offering Memorandum. She also did not take into account access to the Cabreah breeders challenge. She referred to the future offspring of some of the horses, which obviously would not have been known as at the date of valuation. Finally, she believed public auctions were a dependable source of valuation information as opposed to private sales, where the price is often not known and parties would exaggerate what was paid. She described as "optimistic" prices for mares of $95,000, fillies of $55,000 and colts of $10,000, being the standard prices Mr. Smith testified were used in Cabreah transactions.
[42] Some excerpts from her report, I found of interest:
…
My opinion as to value was arrived at through examination and research of pedigrees and the condition of the marketplace at the time in question. I have seen all but three of the horses and have notations in this regard. I have assumed the three mares I have not seen to be average to above average in Arabian type and conformation.
…
In 1992, overall prices were buoyed by the Gleannloch Final Legacy Sale where the average price was $19,267.00 USD. Im 1994, prices for Egyptian Arabians averaged $6,191.00 USD. The First Annual Scottsdale Egyptian Sale averaged $6,843.00 USD for the same time period. The highest selling horse at this sale went for $19,000.00 USD. One mare and one stallion went for this price, while the balance of the mares were sold for an average of $5,770.00 USD. This information was taken from the Arabian Horse Digest International.
[43] Ms. Henderson’s report was not nearly as extensive or detailed as Mr. Villasenor’s.
[44] Each expert had something to say about each of the horses, but rather than going through all horses, I will simply compare their comments on two of the horses.
[45] With respect to The Atticus, after outlining the bloodline of the horse Ms. Henderson stated:
The Atticus was 3 years old at the time of valuation. There was one mare in foal to him at the time of valuation (which resulted in a chestnut filly). I viewed The Atticus in 1994 when he was shown at the Great Lakes Arabian horse show. I found him to be striking in appearance, with smooth body and good length of neck. He was a little long through the loin and the structure of his limbs has some faults.
The "black" gene in Arabian horses is rare and is quite appealing to many people. The dam of The Atticus was black. The value of his pedigree plus the black gene would be considered worth pursuing as a young stallion.
…
BASED ON MY RESEARCH AND THE ABOVE INFORMATION, I VALUE THE ATTICUS AT $75,000.00USD.
[46] Mr. Villasenor after outlining the bloodline of The Atticus stated:
…
The Atticus would have to be considered one of the heirs apparent to the breeding legacy of the Minstril. The Atticus has a tremendous sire line, which would indicate a high level success as a breeding sire. Under the stewardship of a qualified and ongoing Straight Egyptian breeding and marketing program such as Cabreah, I believe he will be a top breeding stallion. …
… Given the value of the breeding revenues over the first five years as well as the intrinsic value of The Atticus, under those circumstances, his fair market value would be approximately $850,000, so that his 50% interest would be a fair market value of approximately $425,000CD.
[47] I note that Montebello acquired The Atticus in an arms length deal in 1992 for approximately $105,000 Cdn when The Atticus was only a year old.
[48] With respect to the mare, Ansata Zaahira, after identifying the progeny and bloodlines Ms. Henderson stated:
…
Ansata Zaahira was 9 years old at the valuation date of January 16, 1996. She had a proven record as a broodmare. I have not personally seen this mare, but I do have a photograph of her 1996 filly, which gives me a good idea of the quality.
BASED ON MY RESEARCH AND THE ABOVE INFORMATION, I VALUE ANSATA ZAQAHIRA AT $20,000.00USD.
[49] Mr. Villasenor goes into greater detail as to the bloodlines of Ansata Zaahira concluding:
…
… Mares of this breeding are highly sought by Straight Egyptian breeders around the world. Many of this mare’s relatives have been exported to the Middle East and are now owned by Kings and Princes.
Under the stewardship of a well-managed, high quality ongoing Straight Egyptian breeding program and business plan like that of Montebello/Cabreah, I believe she would have been a top producing breeding mare. Under these circumstances, I estimate her fair market value as $110,000 CD.
[50] Attached as Appendix D is a comparative chart of the experts’ values.
[51] Apart from the experts’ reports, the following evidence addressed the issue of value. First, though not with respect to the horses at issue before me, I received copies of two bills of sale, both in 1995. The first, dated July 17, 1995 was for the sale of nine horses from Arabco North Inc. to Heritage Arabian Farms Ltd. (a Cabreah member) for $63,000 US. Four days later on July 21, 1995 Heritage Arabian Farms sold the nine horses to Montebello for $857,500 Cdn. Mr. Villasenor, when asked about this discrepancy in price, had no answer.
[52] Second, Mr. Smith testified that there were general prices for horses sold to the limited partners:
$95,000 for a mare;
$70,000 for a two-year old mare
$55,000 for a one-year old mare
$10,000 for a colt
$50,000 for a colt with breeding potential
[53] Third, according to Mr. Smith, Montebello would insure mares at $60,000 to $70,000 in the mid-1990’s, but also provided mare replacement guarantees to the partners. In 1989, Lloyd’s Livestock policy was produced indicating amounts insured ranging from $100,000 to $200,000 per horse. By 1992, Montebello was co-insuring their horses. A Montebello Equine Mortality Insurance Claims Report showed insured values and claim payments for the period 1992 to July 1997. Due to the co-insurance, all payments were 50% of the insured value which ranged from $15,000 to $97,000, with an average of approximately $25,000 for fillys and $40,000 for mares. This is remarkably close to a price paid by Montebello ($31,200 CD) for a bay mare, Bint Foula, in an acquisition from Gleannloch Farms in 1992, which Montebello sold shortly thereafter to another Cabreah member for $50,000 US. A year and half later, Montebello reacquired Bint Foula for $95,000.
[54] Fourth, the Appellant also produced letters of support dated July 1997 from Chapel Farms in Georgia and Misheks Arabian Farms in Minnesota, letters that had been reviewed and authenticated by Mr. Villasenor. Chapel Farms indicated it routinely sold its fi