Ménard v. The Queen

Ménard v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-07-13
Neutral citation
2009 TCC 363
File numbers
96-2936(IT)I
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 96-2936(IT)I
BETWEEN:
CLAUDE MÉNARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Marcel Beauregard (2004‑181(IT)I), Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I), Succession Jean Nadeau (96-3127(IT)I),
Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1989 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 2004-181(IT)I
BETWEEN:
MARCEL BEAUREGARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Jean-Pierre Gamache (2002‑2520(IT)I),
Manon Chartré (96‑3516(IT)I), Succession Jean Nadeau (96-3127(IT)I),
Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 1990 and 1991 taxation years is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 2002‑2520(IT)I
BETWEEN:
JEAN-PIERRE GAMACHE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Manon Chartré (96‑3516(IT)I), Succession Jean Nadeau (96-3127(IT)I),
Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 1989, 1990 and 1991 taxation years is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 96‑3516(IT)I
BETWEEN:
MANON CHARTRÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Succession Jean Nadeau (96-3127(IT)I), Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant herself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1992 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 96-3127(IT)I
BETWEEN:
SUCCESSION JEAN NADEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Agent for the Appellant:
Richard Pagé
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1989 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 96‑3142(IT)I
BETWEEN:
JEAN ST-PIERRE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Succession Jean Nadeau (96‑3127(IT)I), Paul Lafontaine (96-3144(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1989 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 96-3144(IT)I
BETWEEN:
PAUL LAFONTAINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Succession Jean Nadeau (96‑3127(IT)I), Jean St-Pierre (96‑3142(IT)I),
Selim Toutounji (96-3489(IT)I), Marion Sahapoglu-Forest (97-98(IT)I,
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1989 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Docket: 96-3489(IT)I
BETWEEN:
SELIM TOUTOUNJI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Succession Jean Nadeau (96‑3127(IT)I), Jean St-Pierre (96‑3142(IT)I),
Paul Lafontaine (96-3144(IT)I), Marion Sahapoglu-Forest (97-98(IT)I),
96-3056(IT)I) and Gilles Brassard (96-3289(IT)I, 96-3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1992 taxation year is dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Dockets: 97-98(IT)I
96-3056(IT)I
BETWEEN:
MARION SAHAPOGLU-FOREST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeals heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I),
Jean-Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Succession Jean Nadeau (96‑3127(IT)I), Jean St-Pierre (96‑3142(IT)I),
Paul Lafontaine (96-3144(IT)I), Selim Toutounji (96-3489(IT)I) and
Gilles Brassard (96-3289(IT)I, 96‑3257(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant herself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1989 and 1992 taxation years are dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Dockets: 96-3289(IT)I
96‑3257(IT)I
BETWEEN:
GILLES BRASSARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeals heard on common evidence with the appeals of
Claude Ménard (96‑2936(IT)I), Marcel Beauregard (2004-181(IT)I), Jean‑Pierre Gamache (2002‑2520(IT)I), Manon Chartré (96‑3516(IT)I),
Succession Jean Nadeau (96‑3127(IT)I), Jean St-Pierre (96‑3142(IT)I), Paul Lafontaine (96-3144(IT)I), Selim Toutounji (96-3489(IT)I) and
Marion Sahapoglu-Forest (97-98(IT)I, 96-3056(IT)I),
from September 4 to September 21, 2007, at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
For the Appellant:
The Appellant himself
Counsel for the Respondent:
Pierre Cossette
Philippe Dupuis
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1990 and 1991 taxation years are dismissed, without costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of July 2009.
"Gaston Jorré"
Jorré J.
Translation certified true
on this 8th day of October 2009.
Brian McCordick, Translator
Citation: 2009 TCC 363
Date: 20090713
Dockets: 96-2936(IT)I, 2004-181(IT)I
2002‑2520(IT)I, 96-3516(IT)I
96-3127(IT)I, 96-3142(IT)I
96-3144(IT)I, 96-3489(IT)I
97-98(IT)I, 96-3056(IT)I
96-3289(IT)I, 96-3257(IT)I
BETWEEN:
CLAUDE MÉNARD, MARCEL BEAUREGARD,
JEAN-PIERRE GAMACHE, MANON CHARTRÉ,
SUCCESSION JEAN NADEAU, JEAN ST-PIERRE,
PAUL LAFONTAINE, SELIM TOUTOUNJI, MARION SAHAPOGLU‑FOREST
and GILLES BRASSARD,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
I. Introduction
[1] These appeals pertain to ten Appellants who invested in Société de recherches expérimentales en télématique enr. ("SRET" or "Télématique") or in Société en nom collectif R&D Mini-Robots enr. ("Mini-Robots"). Both partnerships were set up by a promoter named N. Lassonde. The table in Appendix A of these Reasons for Judgment sets out the amount that each Appellant invested and the year in which the investment was made.
[2] Although the Minister of National Revenue ("the Minister") acknowledges that the partnerships carried out research, to some extent, he nonetheless reassessed the Appellants and disallowed the loss deductions and investment tax credits that they had claimed.
[3] The Minister's position is that
(a) the Appellants were not members of genuine partnerships;
(b) in the alternative, the partnerships did not carry on a business;
(c) in the further alternative, the Appellants were "specified members" who were "limited partners";
(d) in the further alternative, the Appellants were passive "specified members";
(e) in the further alternative, the Appellants were not members of the partnerships in question at the end of the fiscal year in issue; and
(f) the research expenditures were greatly exaggerated, and the partnerships did not incur all the expenditures claimed,
and accordingly, the Minister submits that the Appellants were not entitled to deduct the business losses and investment tax credits claimed.[1]
[4] Although several of the Appellants' Notices of Appeal take the position that the loss deductions and tax credits were justified in fact and in law, the arguments that the Appellants raised at the hearing were mainly subsidiary: for example, the Appellants submitted that they had a legitimate expectation that the deductions and credits were valid since the partnerships had a proper tax shelter identification number; that the deductions or credits were allowed in the initial assessments; or that the Minister should have noticed that there were problems earlier and should have disallowed the deductions in the initial assessment.
[5] While each Appellant's case is somewhat different, the following example describes the structure of a typical transaction proposed to the Appellants:
(a) The potential investor is asked to invest roughly $10,000 in the fall.
(b) The investor is also promised that X will provide financing for half that amount, i.e. $5,000 (but sometimes for 100% of the investment).
(c) It is explained to the investor that he or she will
(i) borrow $5,000 from X,
(ii) purchase a $10,000 interest in the partnership, and
(iii) grant a right of first refusal to another third party, Y, entitling Y to purchase the investor's partnership interest for 50% of the amount of his or her investment, that is to say, $5,000. (Sometimes X and Y are the same partnership.)
d) It is also explained to the investor that
(i) in a few weeks or months, the investor will receive $5,000 from Y, who will purchase the investor's partnership interest, thereby enabling the investor to repay the loan made by X (or, if the investor borrowed 100% of the investment, half the loan amount), and
(ii) the investor will get a tax reduction of roughly $7,000, consisting of
- the deduction for his share of the partnership loss, which is approximately $10,000 and will have the effect of reducing his or her income tax by approximately $5,000, and
- a tax credit of approximately $2,000,[2]
and that, consequently, the investor will make a profit of approximately $2,000.
[6] For the following reasons, the appeals will be dismissed.[3]
II. The validity of the reassessments
Facts[4]
The Appellants' testimony
Testimony of Gilles Brassard
[7] Mr. Brassard invested in Mini-Robots in 1990, and again in 1991. He was an assistant business manager at the Caisse populaire du Complexe Desjardins at the time.
[8] Mr. Brassard said that his aim was twofold: to benefit from a tax shelter, and to invest in research and development (R&D). He believed that his investment in Mini‑Robots was not speculative.
[9] He also confirmed that the following financial arrangement was proposed to him. He was to invest $10,000, of which $5,000 would be borrowed from a financing source recommended to him. Later, $5,000 would be returned to him, and this, combined with a tax reduction worth $6,000 to $7,000, would result in a net profit of $1,000 to $2,000. He does not recall who was supposed to return the $5,000 to him.
[10] In 1989, he invested in another project, ECT, and the financial aspect unfolded as I have just described. As we shall see, the events unfolded somewhat differently with Mini-Robots. The assessment of Mr. Brassard for 1989 is not before the Court in this case.
[11] When Mr. Brassard was asked whether he recalled that the $5,000 that was to be returned to him was in consideration of the purchase of his interest in Mini‑Robots from him, he said that he did not. However, he did agree that once the amount related to his 1991 investment was returned to him, he no longer held an interest in Mini‑Robots.
[12] Although Mr. Brassard has only a limited recollection of what happened financially with his investment in Mini-Robots, I find that, in 1990, instead of borrowing $5,000, he borrowed $10,000 on his own and invested it in order to purchase an interest in SRET. At the time that the $5,000 was to have been returned to him (for 1990) he was told that, for certain reasons, this could not be done at the moment.[5] It was proposed that the $5,000 that he should have received be used to purchase a $10,000 partnership interest in Mini-Robots in 1991.[6] He agreed.[7] In 1992, money was returned to him. He invested a total of $20,000 for the two years, and $10,000 was returned to him.
[13] The 1990 investment was made in December.[8]
[14] Mr. Brassard's participation was very limited. He says that he attended two or three meetings of Mini-Robots per year.[9] At those meetings, the partners saw the premises and equipment, but the employees were not working at the time. The partners in attendance were asked questions about the Mini‑Robot (an automatic vacuum cleaner) under development, and Mr. Brassard recalls that some people made suggestions. Most of these suggestions could have been solicited from any potential consumer.
[15] Mr. Brassard took no part in management decisions (regarding matters such as budgets, the appointment of principals, research or the future of the business) and was not consulted about such decisions.
[16] He recalls that 50 or 100 partners attended the meetings. He knew only some of those people. Most people who attended the meetings during the second year had not attended the meetings in the first year.
[17] Mr. Brassard's participation was limited: he did what he was told, and nothing more.
[18] His decision to invest was individual, and was never made jointly with other partners. The only person with whom he spoke about his investments was Mr. Sawodny, the person who suggested the investment to him. Once he acquired an interest in Mini‑Robots, if he had questions, he asked Mr. Sawodny and not the other Mini-Robots partners.[10]
Testimony of Richard Pagé
The Nadeau Succession
[19] Mr. Pagé is not an Appellant; he is the testamentary executor of Jean Nadeau.
[20] He was familiar only with certain facts about Mr. Nadeau. He prepared Mr. Nadeau's 1989 income tax return. He noticed that Mr. Nadeau had invested in SRET in April 1989 and on November 19, 1989. Mr. Nadeau died the week after November 19, and, as his executor, Mr. Pagé noticed that the 50% was returned to Mr. Nadeau two or three weeks after the November 19 investment.
[21] Mr. Pagé was not sure whether Mr. Nadeau had already sold his interest in SRET when the 50% was returned to him.
[22] Here are some of the factual assumptions on which the Minister relied in reassessing the Nadeau Succession:
- The members of the Partnership do not work actively within the Partnership; they merely filled out questionnaires which had no serious effect on the Partnership's research activities.
- The Appellant is a partner who, on a regular, continuous and substantial basis throughout the year in issue during which the Partnership usually carries on its business, is not actively engaged in the activities of the Partnership business and does not carry on a business similar to that carried on by the Partnership during that year.
- Before the end of 1989, Tecktel acquired the Appellant's interest for an amount equal to 50% of his total investment in the Partnership.
- The Appellant was no longer a member of the Partnership as at December 31, 1989.
[23] I find that Mr. Nadeau was not a member of SRET as at December 31, 1989.
Mr. Pagé's personal investment in Mini-Robots
[24] Although he was not one of the Appellants, Mr. Pagé invested $10,000 in Mini-Robots as well, in 1992. He financed half that amount though a loan from a caisse populaire. It was the advisor who proposed the investment in Mini-Robots who suggested he take out a loan from the caisse populaire. Mr. Pagé subsequently received the return of $5,000, in consideration of which he sold his interest in Mini‑Robots.
[25] Mr. Pagé was then expecting to realize a net profit of roughly $1,200 as a result of the deductible loss and the tax credit. He expected nothing else from Mini‑Robots.
[26] He did not carry on business with others for the purpose of conducting scientific research. He was not engaged in the business of Mini-Robots, and he attended no meetings.
[27] After making his investment, he discovered that he knew some of the other investors.
Testimony of Manon Chartré
[28] Ms. Chartré invested in Mini-Robots in December 1992 and claimed a loss deduction and tax credits based on a $10,000 investment.
[29] She recalls that she was granted a loan for 50% of the investment amount. She also recalls that the 50% was returned quickly to her, one or two months later. She had been told that, by the end of 1992, everything would be finished, apart from the profit that she would make through her income tax return.
[30] Ms. Chartré's involvement was limited to attending one meeting that lasted an hour and a half to two hours. She was told that it was important to attend.
[31] The first part of the meeting was an information session in which some people showed the prototype and discussed research. In the second part, participants exchanged comments about the prototype.
[32] Ms. Chartré knew a few friends who had also invested in Mini-Robots that same year. She and her friends did business with the same person, who advised them to make the investment.
[33] She had no intention of doing business with others for the purpose of conducting scientific research. As far as she was concerned, she was investing in a going concern managed by others — specifically, the promoter and the people around him. She attended the meeting as instructed. Soon afterwards, her interest was bought back for $5,000 as planned and that was the end of it.
Testimony of Claude Ménard
[34] Mr. Ménard claimed business losses and tax credits based on a $15,000 investment in SRET.
[35] On November 6, 1989, according to the documentation adduced in evidence, Mr. Ménard purchased a "qualifying share" in SRET for $1.00. One the same date, he also signed a document entitled [TRANSLATION] "Research Mandate" under which he purportedly entrusted Geyser Informatique Inc. with [TRANSLATION] "the performance of this computer research contract . . . upon payment of the amount of $15,000." He also paid the $15,000 by cheque to Geyser on that date.[11]
[36] On that same November 6, Mr. Ménard gave Gestion Tecktel Inc. a right of first refusal in respect of the [TRANSLATION] "property resulting from the research contract." Fifteen days later, on November 21, 1989, Gestion Tecktel exercised that right, and, by cheque dated November 21, 1989 and signed by the SRET promoter, Gestion Tecktel paid $7,500, 50% of the research contract amount, to Mr. Ménard.
[37] There is no way, based on these documents, to determine how Mr. Ménard could have had more than a $1 interest in SRET as at November 6 or December 31, 1989; [12] consequently, his share of any loss or credit would be $1 or less. However, I must take note of the fact that the Minister assumed that the November 6 research mandate did not reflect reality and that Mr. Ménard actually acquired a $15,000 interest in SRET.
[38] Mr. Ménard concedes that when the investment was proposed to him, he was explained that 50% of it would be returned to him.
[39] He was told that it was very important to invest in SRET and that a terminal would be used.
[40] Mr. Ménard's participation was limited to a meeting at which a telecommunications terminal was demonstrated and participants were offered the opportunity to use the terminal. He filled out a questionnaire about the terminal's use. The questions were of the kind that potential users could be asked.
[41] He was not involved in SRET in any other way, and he did not really know how SRET operated. He took no part in management decisions.
[42] Mr. Ménard knew only one other SRET investor, and never met with other partners except during the single meeting which he attended.
[43] Other than the returned money and the tax benefit, it was never suggested to Mr. Ménard that there would be any profit from SRET. Mr. Ménard agreed that, without tax advantages, he would never have invested in the SRET. He agreed that he had no intention of carrying on a business in cooperation with the other SRET partners.
[44] Although Mr. Ménard asserted that he continued to be an SRET member as at December 31, 1989, he appears not to have concerned himself much with what was happening with SRET after that date.
[45] I find that Mr. Ménard was no longer a member of SRET as at December 31, 1989.[13]
Testimony of Jean St-Pierre
[46] Mr. St-Pierre's situation is as follows:[14]
(a) On December 12, 1989, he signed a document in which Infotique Tyra Inc. submitted a bid to him for the supply of formatted laser discs. In the document, he accepted the bid and purchased a formatted disk with a 125‑megabyte capacity for $25,000.
(b) On the same day, he signed a subscription contract under which he acquired a "qualifying share" in SRET for $1.[15]
(c) On December 15, 1989, he wrote a $25,000 cheque payable to Infotique Tyra Inc.
(d) He signed a document entitled [TRANSLATION] "Assignment", dated January 10, 1990, by which, in his capacity as a partner in SRET and owner of a personal-library laser disc prototype, he sold his entire interest in the laser disc prototype to Infotique Tyra Inc. In his testimony, Mr. St‑Pierre expressed the belief that he signed that document on December 12, 1989.[16]
[47] Mr. St-Pierre claimed a loss deduction and an income tax credit based on having invested $25,000 in SRET in December 1989.[17]
[48] He borrowed $25,000, and was told that 50% of that would be returned to him. Under the initial assessment, he had enough federal and Quebec tax advantages to come out $5,000 ahead.
[49] In view of the documents signed on December 12, I find that Mr. St‑Pierre cannot have acquired more than a $1 share in SRET.[18]
[50] Mr. St-Pierre received the 50% repayment on or about January 10, 1990.
[51] Mr. St-Pierre did not attend any meetings. His only involvement was this: the advisor who had recommended that he make the investment read him questions from a questionnaire and filled out the questionnaire for him. Mr. St‑Pierre testified that he believed the questions were related to libraries.
[52] He never intended to carry on a business with the other partners.
Testimony of Paul Lafontaine
[53] In his 1989 income tax return, Mr. Lafontaine claimed the loss deduction and tax credits based on a $10,000 investment in SRET.
[54] However, his situation resembles Mr. St-Pierre's. He testified that he purchased a laser disc from Infotique Tyra Inc. for $10,000 and a $1 interest in SRET.[19]
[55] Consequently, I find that Mr. Lafontaine, like Mr. St-Pierre, invested only $1 in SRET.
[56] Mr. Lafontaine made his investment on or about December 14, 1989. It was explained to him that he would get 50% of his investment back in roughly one month, and that, apart from that and the tax advantages, there would be no income from the investment. The 50% was returned to him in February 1990.
[57] Mr. Lafontaine attended no meetings and filled out no questionnaires, though he did receive one.
[58] He considered the questionnaire nonsense.[20]
[59] He did not intend to carry on a business with the other partners.
Testimony of Marcel Beauregard
[60] In his 1990 and 1991 income tax returns, Mr. Beauregard claimed the loss deduction as well as tax credits based on a first investment of $10,000 in Mini‑Robots in 1990 and a second investment of $10,000 in 1991.
[61] It was his financial advisor who suggested these investments, and who obtained a $10,000 loan from Société nationale de fiducie for him.
[62] Mr. Beauregard's case is somewhat similar to Mr. Brassard's. In 1990, Mr. Beauregard invested $10,000 using the proceeds of a loan he obtained from Société nationale de fiducie. On December 10, 1991, he borrowed $10,000 from Gestion N.L. Technik Inc.[21] to make his 1991 investment. In November 1992, he transferred all his shares in Mini-Robots to Gestion N.L. Technik, which, in consideration of the transfer, cancelled the loan and the interest thereon.
[63] Mr. Beauregard only remembered certain things, and we do not know the details of what happened during the two years in issue.
[64] Since he testified that he expected to make a profit thanks to the tax advantages, but those advantages could not mathematically be greater than his investment; since he believed the risk was minimal; and since there is no suggestion that he could expect other income from Mini-Robots, I find that the return, by Gestion N.L. Technik, of $10,000 to him (that is to say, 50% of his $20,000 investment) in consideration of the purchase of his interest in the partnership, had been planned from the start.[22]
[65] Mr. Beauregard may have attended three meetings. He vaguely recalls a questionnaire, but does not think that he filled one out. There was no other participation on his part. He was not involved in the management of the business and he did not carry on a business with the other members of the partnership.
Testimony of Jean-Pierre Gamache
[66] In his 1989 income tax return, Mr. Gamache claimed tax credits and the loss deduction based on a $10,000 investment in SRET.
[67] It was a broker who had suggested the investment to him. The broker told him that it was a tax shelter and that there was no risk because the government was involved.
[68] Mr. Gamache recalls few details of the transaction.
[69] He knows that he borrowed $10,000 to make the investment and that once everything was said and done he made a net gain of $1,500 or $2,500.
[70] On cross-examination, he conceded that he must have had 50% returned to him. He believes that, prior to investing, he received a document resembling the one which is discussed in paragraph 12 of the Reply to the Notice of Appeal, and which provided the example of a $10,000 investment.[23]
[71] One of the Minister's assumptions of fact is that the Appellant was not a member of the partnership as at December 31, 1989.
[72] In his evidence, Mr. Gamache did not show otherwise.[24] I find that he was not a member of SRET as at December 31, 1989.
[73] Mr. Gamache agreed that there was no risk.
[74] He was not active within SRET. He did not attend any meetings.
[75] He agreed that he did not carry on business with the other partners.
[76] He considers himself a victim in this story.
Testimony of Marion Sahapoglu-Forest
[77] Ms. Sahapoglu-Forest invested $10,000 in SRET in 1989, and $10,000 in Mini-Robots in 1992.
[78] In both cases, from a financial standpoint, she received 50% back in consideration of the purchase of her partnership interest. With Mini‑Robots, she invested in November 1992, got the 50% back, and transferred her interest to Gestion N.L. Technik in May 1993. That return of 50% of her investment cancelled the $5,000 loan (including interest) that Gestion N.L. Technik had made to Ms. Sahapoglu-Forest to cover half her $5,000 investment in November 1992.
[79] Although she does not remember the dates, Ms. Sahapoglu-Forest concedes that the return from SRET was received more quickly than the return from Mini‑Robots.
[80] In both years, the return of 50% was planned in advance and guaranteed her. Despite this guarantee, Ms. Sahapoglu-Forest had some concerns.
[81] For the SRET investment, she borrowed the full $10,000 from Central Guaranty Trust Company. The advisor who had suggested she invest in SRET is the same one who suggested she take out a loan from Central Guaranty Trust.
[82] Although the Minister relied on the factual assumption that Ms. Sahapoglu‑Forest was no longer a member of SRET as at December 31, 1989, she asserted that she was still a member on that date.
[83] Apart from the return of 50% and the tax advantages, she did not expect any income from SRET or Mini-Robots.
[84] Ms. Sahapoglu-Forest had been told that her involvement in the partnerships was necessary, and when a representative of one of the partnerships would tell her to do something, she did it. She contributed in the following way: she went to all meetings except one, gave her opinion on various matters, filled out questionnaires, and tried out an SRET terminal.
[85] Although Ms. Sahapoglu-Forest attended the meetings and although she voted (for example when those assembled were asked to approve budgets) her participation was guided by what she was told she had to do.
[86] It is also clear that she did not carry on business with the other partners. Rather, she made an investment.
Testimony of Selim Toutounji
[87] Mr. Toutounji invested $10,000 in Mini-Robots in 1992 and claimed the loss deduction and tax credits accordingly.
[88] Mr. Toutounji made his investment in November 1992, probably on the evening of November 13. He went with Ms. Sahapoglu-Forest that evening to meet the promoter, and everything was done in less than 30 minutes. He signed a cheque for $5,000 and got $5,000 in financing, for a total investment of $10,000.[25] He was told that $5,000 would be returned to him.
[89] In Mr. Toutounji's case, this return was made on June 1, 1993, and was in consideration of the transfer, by Mr. Toutounji, of his interest in Mini-Robots. It served to cancel the loan that Mr. Toutounji had taken out on November 13.
[90] Mr. Toutounji testified as follows: [TRANSLATION] ". . . I took an active part in the way I was asked to, at the meetings we were told to attend . . ."[26] However, he was disappointed because he was a scientist by training and was hoping to contribute to developing the sensors necessary for the Mini‑Robot. He was never able to make such a contribution at the meetings.
[91] There was never any question of Mr. Toutounji meeting with the other partners and making business decisions.
[92] Mr. Toutounji agrees that if the project had succeeded, the promoter and others working with the promoter would have made money, and he says that his role was to help out at the beginning by investing money to enable someone else to operate a business.[27]
Other testimony
Testimony of Simon Beauregard
[93] Simon Beauregard, an auditor at the Canada Revenue Agency (CRA), testified about the audit of SRET.
[94] He discovered, among other things, that SRET had no bank account or accounting books. All the cheques from investors were deposited into the accounts of Geyser Informatics or Infotique Tyra.[28]
[95] He made the following discovery as well. SRET's promoter registered the entity's business name on June 29, 1988.[29] In the registration declaration, the promoter said that he had no partners. On November 27, 1989, the promoter filed a dissolution document, stating that he had ceased doing business on November 27, 1989, and that he was the only person who had been carrying on business.[30] On the same day, the promoter's brother-in-law registered a business name for SRET and declared that he was the only person carrying on business.[31]
[96] He testified about the work that he and others did, examining the numerous related partnerships, their accounts, and the CRA's conclusion that more than half of SRET's expenditures should be disallowed, including the expenditures claimed in relation to payments made to CATK in Moscow and Challenge SA in France. He also testified about the money (an amount equal to 50% of each investor's investment) used to buy the investors' interests in SRET.
Testimony of Christian Dion
[97] Christian Dion, a team leader at the Canada Revenue Agency (CRA), testified about the audit of Mini-Robots. He explained the work that was done in order to examine a large number of related partnerships, their accounts, the expenditures claimed, and how the CRA came to the conclusion that more than one-half of the expenditures claimed in 1990 and 1991 should be disallowed, including, among other things, expenditures claimed for supplies by CATK in Moscow and Pacific Master Trading Ltd. in Asia. There are certain other expenditures which the CERA concluded were not in the nature of research expenditures.
Testimony of Jean St-Pierre (expert)
[98] Jean St-Pierre is an engineer with the CRA. He was qualified as an expert witness, and he testified about his report on the research done by Mini‑Robots.
[99] While he did find that there was valid experimental development, he also found that the dollar amount of the expenditures claimed was unrealistic.
[100] He testified about the CATK invoices and explained why he had doubts about the invoices, which seemed completely unrealistic to him.[32]
[101] He also explained why he doubted other research expenditures that were claimed.
[102] His report was limited to the years 1990 and 1991.
Testimony of Gabriel Caponi
[103] Mr. Caponi is a senior advisor with the office of the Deputy Commissioner for the CRA's Regional Office. In 1993, he was assigned to the R&D sector of the CRA, and was part of a team of auditors that examined the partnerships used as R&D tax shelters.
[104] He was assigned to the Department of Justice Canada in 1995-1996 for roughly one year so that, among other things, he could help examine the SRET and Mini-Robots files.
[105] He examined those files and prepared the diagrams at tab 104 of Exhibit I‑3 (SRET) and tab 304 of Exhibit I‑9 (Mini-Robots, 1990 and 1991). The diagrams summarize the very complex movements of funds among several partnerships.
[106] Mr. Caponi explained how he prepared the two diagrams.
[107] He also testified about information obtained from the French tax authorities in September 1993 further to a request under the tax agreement between Canada and France. The information was related to the fact that Challenge SA had not supplied any software or electronic equipment.
The last three witnesses
[108] The Respondent called three other witnesses, whose testimony was primarily related to the ancillary arguments. The witnesses were Jean‑Marc Boucher, the manager of the scientific research audit section in Montréal; Normand Bergeron, a financial analyst who was an investigator with the Commission des valeurs mobilières du Québec [Quebec securities commission] from 1985 to 1995, and Serge Huppé, an appeals officer who was at the CRA's Ottawa headquarters when he was involved with these files.
Analysis
Were the Appellants specified members by virtue of being limited partners?[33]
[109] Paragraph 96(1)(g) of the Income Tax Act ("the ITA") provides:
96.(1) General rules. Where a taxpayer is a member of a partnership, the taxpayer's income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or the taxpayer's taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if
. . .
(g) the amount, if any, by which
(i) the loss of the partnership for a taxation year from any source or sources in a particular place,
exceeds
(ii) in the case of a specified member (within the meaning of the definition "specified member" in subsection 248(1) if that definition were read without reference to paragraph