Richer v. The Queen

Richer v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-08-06
Neutral citation
2009 TCC 394
File numbers
2005-4132(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2005-4132(IT)G
BETWEEN:
JACK RICHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on November 5, 6 and 7, 2007,
at Montréal, Québec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the Appellant:
Aaron Rodgers
Julie Gaudreault-Martel
Counsel for the Respondent:
Martin Gentile
____________________________________________________________________
JUDGMENT
The appeal from the reassessments made under the Income Tax Act for the 1993, 1995, 1996, 1997, 1998 and 1999 taxation years is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 6th day of August 2009.
"Gaston Jorré"
Jorré J.
Citation: 2009 TCC 394
Date: 20090806
Docket: 2005-4132(IT)G
BETWEEN:
JACK RICHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
I. Introduction
[1] This case involves the debt forgiveness provisions of the Income Tax Act (the “ITA”).[1]
[2] This case arises from the Appellant’s participation in four limited partnerships, litigation regarding the Appellant’s liability for capital contributions to those partnerships and the settlement of that litigation.
[3] The two principal issues that arise are: what was the amount of the Appellant’s debt, and when did the settlement occur?
[4] Under the terms of the settlement the Appellant paid US$1 million and gave up certain rights. The Appellant takes the position that the settlement entered into represented a determination of the amount of the debt and that in consequence no debt was forgiven. Alternatively, the Appellant takes the position that, if any amount was forgiven, it was much less than computed by the Minister.
[5] The Minister takes the position that at the time of the settlement the Appellant’s debt was just over US$2 million and that an amount of just over US$1 million was forgiven.
[6] Additional issues are whether the Appellant could deduct certain partnership losses in 1996 and whether the assessment of penalties was justified.
II. Facts
[7] The Appellant is a chartered accountant by training, although he has not been practising as such since 1986. Presently he is occupied as a businessman involved in various investments. His involvement in the limited partnerships central to this appeal arose from his relationship with the Bronfman family. The Appellant explained that he had participated in various investments with Charles Bronfman and other individuals since the mid-1970s. These investments took various forms including joint ventures, limited partnerships and corporations.
[8] The financial affairs of the Bronfman family were managed through Claridge Investments Ltd. (“Claridge”). In 1985, the Bronfman family changed the manner in which its real estate investment activities were conducted. A subsidiary of Claridge called Claridge Properties Inc. (“Claridge Properties”) was created. It was agreed that the Appellant would take part in future real estate investments through limited partnerships operated by Claridge Properties.
[9] In 1985 and 1986, the Appellant became a limited partner in four such partnerships: Livonia Associates and Company Ltd. (“Livonia”), Park Square Associates and Company Ltd. (“Park Square”), Hickory Associates and Company Ltd. (“Hickory”) and The Southland Building Partners and Company Ltd. (“Southland”). These limited partnerships were formed for the purpose of acquiring and operating specific real estate properties located in the United States.
[10] Whereas prior to that time when taking part in investments with Charles Bronfman he had invested his own funds directly or money would be jointly borrowed from a bank, it was agreed that the Appellant’s capital contribution to these four partnerships would be funded by Claridge Properties. Under this new arrangement, Claridge Properties provided capital to the limited partnerships in exchange for demand interest-bearing promissory notes from each limited partner, including the Appellant.
[11] From time to time the Appellant was asked to sign promissory notes in respect of amounts beyond those initially agreed to. The Appellant testified that every six months, Claridge Properties would issue a statement showing the amount of funds invested and request a note from each of the partners in respect of any additional funds contributed on their behalf.
[12] Mr. Andrew Parsons, a chartered accountant who was employed at Claridge up until 2004, testified for the Minister. During his 23-year relationship with Claridge, he occupied various positions including controller and senior vice‑president, finance, and chief financial officer. Mr. Parsons explained that at the end of each financial year, each partner would be asked to cover his proportionate share of any deficit in the partnership accounts.[2] The reason for this was that once a partnership had acquired real estate, any subsequent operating loss had to be funded in some way.[3] According to Mr. Parsons, this is how Claridge Properties ran all of its partnerships.
[13] The effect of this arrangement was that the Appellant would recognize his increased indebtedness to Claridge Properties by signing promissory notes after the fact.
[14] The terms of the Appellant’s involvement in the four partnerships were not set down in formal written partnership agreements, but instead agreed to verbally and by handshake. The constitution of each limited partnership as well as the initial capital contribution of each partner is outlined in four separate declarations of limited partnership, however these documents do not reflect the arrangement regarding subsequent contributions described above.[4] The handshake agreements also appear to have included certain other arrangements between the parties.[5]
[15] The Appellant explained that according to the agreed-upon arrangement, every six months he received distributions of any income earned by the partnerships, along with statements in respect of interest owing on the invested funds and any requests as to further promissory notes. This continued until late 1989, by which time the Appellant had signed promissory notes in favour of Claridge Properties totalling US$1,209,266 as follows:
Limited partnership
Promissory notes
Southland
$194,500
Livonia
$273,000
Park Square
$213,188
Hickory
$528,578
Total of notes signed
US$1,209,266
[16] With the exception of Livonia, the partnerships lost money due to declining real estate values. Towards the end of 1989, an agreement was proposed that would allow the Appellant to withdraw from the partnerships. The Appellant testified that in early 1990, it had been verbally agreed that his liability to Claridge Properties in respect of the funds advanced on his behalf would be discharged in exchange for the transfer of his interest in the partnerships to Claridge Properties plus the payment by him to Claridge Properties of the sum of US$187,000.
[17] However, no final agreement was reached to resolve the Appellant’s involvement in the partnerships or his liability to Claridge Properties. No payment of US$187,000 was made by the Appellant, and negotiations regarding the details of his withdrawal continued through 1991; however, beginning in January 1990, the Appellant no longer received requests regarding the payment of interest or requests that he acknowledge further indebtedness in respect of subsequent contributions made by Claridge Properties.
[18] The matter remained unresolved, and ultimately Claridge Properties instituted proceedings in the Québec Superior Court against the Appellant in 1992.
[19] In those proceedings, Claridge Properties took the position that no agreement was ever reached with the Appellant regarding his withdrawal from the partnerships, and claimed in aggregate US$1,723,857.48. This figure represented what Claridge Properties had determined at that time to be the Appellant’s total indebtedness in respect of amounts advanced to fund his interest in the four partnerships. Claridge Properties’ claim included amounts allegedly advanced to the partnerships on the Appellant’s behalf, for which no promissory notes had been signed. These amounts were included based on the understanding Claridge Properties had of the verbal agreements described above regarding subsequent contributions of capital, as it was admitted that no written agreement existed in respect of them.
[20] The Appellant’s position in defence of these claims is set out in a pretrial brief filed in the Québec Superior Court in May 1996. His primary position was, as he testified in this Court, that an agreement had been made to settle his liability in respect of his involvement in the partnerships for the amount of US$187,000.
[21] The Appellant took a number of subsidiary positions as well. It is useful to reproduce the following paragraphs from his pretrial brief:
Defendant contends that his liability towards Plaintiff was settled and transacted and that in virtue of the agreement between the parties the only amount owed by Defendant, and the only amount that Plaintiff is entitled to claim from him, is the aforesaid sum of US $187,000.
Subsidiarily, it is Defendant’s position that he is not liable for the full amounts claimed by the Plaintiff in its actions. In this regard, Defendant states that his liability is limited either to the amounts set out in the promissory notes or the amounts set out in the confirmations of indebtedness produced by Plaintiff . . . .
If, however, it is determined that his liability was not extinguished or transacted as aforesaid, Defendant is entitled to offset from the total amount claimed by Plaintiff the value of his interest in the properties as established in the reconciliation . . ., namely US $1,258,000.
Without prejudice to the foregoing, in the Livonia action . . . Defendant claims compensation between any amount that he may be condemned to pay to Plaintiff and the value of his interest in the said property, US $729,000, and demands that Plaintiff be condemned to pay to him the sum of US $546,000.[6]
[22] Consistent with these subsidiary positions, the Appellant filed four countersuits against Claridge Properties, Charles Bronfman, Livonia, Hickory and other related parties. The documents relating to these lawsuits were not put before me. However, the Appellant testified that he sued for enforcement of the agreement to settle his liability for the amount of US$187,000; for the amount of US$456,000 he claimed he was owed on account of his involvement in Livonia and for the diminution in value of the properties suffered by him due to the actions of Claridge Properties.[7]
[23] On December 19, 1996, the Appellant and Claridge Properties entered into an agreement (the “Settlement Agreement”) to settle their respective claims. The following paragraphs of the Settlement Agreement are significant:[8]
WHEREAS Claridge and Richer are parties to the proceedings described on Schedule 2 to this Agreement and, contemporaneously with the execution of this Agreement, have agreed to settle their respective claims pursuant to such proceedings in consideration of the payment by Richer to Claridge of the sum of $1,000,000 in United States currency on the terms and conditions hereinafter set forth;
. . .
2. Claridge agrees that it shall cause Richer’s capital accounts in respect of the Partnerships to be netted to $0.00 in the case of each of the Partnerships. In consideration of such agreement, Richer agrees that he is not entitled to any positive balances which are now or at any time in the future may be in the capital accounts of any of the Partnerships, which may be applied by Claridge to the netting of accounts as aforesaid, and Richer transfers and assigns absolutely to Claridge all of his right and entitlement to any distributions of cash or other assets to which he is now or at any time in the future may be entitled as a partner of any of the Partnerships. . . . Claridge acknowledges that Richer is not liable for any deficiency in the capital accounts of any of the Partnerships.
. . .
4. Richer shall pay to Claridge, on or before January 8, 1997, the sum of $1,000,000 in United States currency, by certified cheque or bank draft. Richer acknowledges that he has signed a confession of judgment for such amount, and further acknowledges that should he fail to pay the amount of $1,000,000 in United States currency on or before January 8, 1997, Claridge may at any time thereafter obtain judgment upon such confession of judgment, time being of the essence. Claridge acknowledges that Richer’s payment pursuant to this paragraph is made without admission of liability with regard to any amounts claims [sic] in the proceedings described on Schedule 2.
. . .
6. Claridge and Richer acknowledge that they have signed a mutual release and discharge, a copy of which is annexed hereto as Schedule 3.
[Emphasis added.]
[24] I note that in addition to agreeing to the US$1 million payment, the Appellant gave up his interests in the partnership and his claims against Claridge and others.
[25] This Settlement Agreement was entered into contemporaneously with a Mutual Release and Discharge (“Release”) that was signed by all the parties on December 19, 1996 and provided, inter alia:
For good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, Richer, for himself, his heirs, predecessors, successors and assigns, hereby grants unto the Claridge Parties and each of them release and discharge from any and all claims, actions, causes of action, suits, debts, demands and damages whatsoever which Richer ever had, now has or which he or his heirs, predecessors, successors and assigns hereafter can, shall or may have against the Claridge Parties or any of them for or based upon or by reason of any fact, matter, transaction or thing alleged in the proceedings described in the Schedule attached hereto.
[Emphasis added.]
[26] Pursuant to the terms of the Settlement Agreement, the Appellant paid US$1 million to Claridge Properties by cheque dated January 6, 1997. The confession of judgment referred to was in consequence never registered.
[27] The Appellant’s and Claridge Properties’ legal representatives also executed a “Declaration of Settlement Out of Court”. This document was signed by the Appellant’s lawyer on December 20, 1996 and by Claridge Properties’ lawyer on January 7, 1997.
[28] In his 1996 tax return, the Appellant took the position that he was entitled to claim losses of C$215,740 in respect of his interests in Park Square and Southland. He explained that his position was based on his understanding that under the Settlement Agreement his at-risk amount in those partnerships had increased. Prior to 1996, the Appellant had not deducted these losses because his understanding was that his at-risk amount was nil for each of these two partnerships.
[29] By notices of reassessment issued on December 12, 2000, the Minister reassessed the Appellant for his 1993, 1995, 1996, 1997, 1998 and 1999 taxation years.
[30] First, the Minister disallowed the partnership losses claimed by the Appellant in 1996, on the basis that no further capital contributions had been made by the Appellant or on his behalf.
[31] Second, the Minister determined that the Appellant incurred a gain (the forgiven amount) in 1997 of C$1,368,528 on the settlement of his debt to Claridge Properties. This figure was based on the following accounting prepared by Claridge Properties respecting the Appellant’s liability in U.S. dollars:[9]
Balance Owing
Oct. 31/96
Capital Contribution Dec. 96
Settlement Jan. 97
Receipt Distribution Dec. 96
Write-off
Balance Owing
Oct. 31/97
Southland
275,632
238,632
(514,264)
0
0
0
Livonia
273,000
0
(155,369)
(117,631)
0
0
Park Square
363,421
76,462
(330,366)
(109,517)
(1)
Hickory
609,216
88,725
(697,941)
0
Interest receivable
193,220
(193,220)
0
Subtotal US$
1,714,489
403,819
(1,000,000)
(117,631)
(1,000,679)
(1)
[32] This chart had been submitted to the Minister in the course of an audit it conducted of Claridge Properties.[10] To arrive at C$1,368,528, the Minister converted the US$1,000,679 write-off calculated by Claridge Properties into Canadian dollars at an exchange rate of approximately 1.37 (being the rate accepted by the Minister as applicable in January 1997).
[33] The Minister applied this gain first against the Appellant’s net capital losses carried forward and second, against the capital cost of his depreciable property as follows:[11]
Net capital losses
Amount
Reduction of net capital losses to be carried forward (from 1993-1995-1996)
C$89,469
Reduction of capital cost of the Appellant’s depreciable property as of December 31, 1996
C$1,279,061
Total
C$1,368,529
[34] The effect of these adjustments is reflected in the remaining reassessments. In 1997 and 1998, the Minister disallowed capital cost allowance deductions that had been claimed, and in 1999 the Minister refused to allow the carryforward of capital losses experienced prior to the settlement.
[35] In addition, the Minister also levied penalties pursuant to subsection 163(2) of the ITA on the additional taxable income resulting from the 1997, 1998 and 1999 reassessments.
[36] There will be reference to further facts in the analysis section below.
III. Issues
[37] The issues are:
(a) Whether the Minister correctly applied section 80, and more specifically:
(i) Timing — In what year does section 80 apply?
(ii) Was an amount forgiven? If an amount was forgiven, what was the amount? In turn, this raises the questions:
- What was the amount of the debt?
- Apart from the US$1 million payment, did the Appellant provide any other consideration as part of the settlement?
(b) Whether the Appellant is entitled to deduct losses of C$215,740 in respect of his interests in Park Square and Southland.
(c) Whether the Minister was justified in assessing penalties against the Appellant pursuant to subsection 163(2).
IV. Analysis[12]
SECTION 80
[38] Section 80 of the ITA contains rules that apply where commercial obligations are forgiven or reduced. The “forgiven amount” is applied to reduce the debtor’s losses carried forward from preceding taxation years and various other amounts as provided in subsections 80(3) to (12). If any portion of the forgiven amount remains unapplied, the debtor is subject to an income inclusion in accordance with subsection 80(13). As provided by paragraph 80(2)(c), the provisions in subsections 80(3) to (13) must be applied in numerical order.
[39] Subsection 80(3) concerns the reduction of non-capital losses, and provides in part as follows:
(3) Reductions of non-capital losses – Where a commercial obligation issued by a debtor is settled at any time, the forgiven amount at that time in respect of the obligation shall be applied to reduce at that time, in the following order,
(a) the debtor’s non-capital loss for each taxation year that ended before that time . . .
(b) the debtor’s farm loss for each taxation year that ended before that time . . .
(c) the debtor’s restricted farm loss for each taxation year that ended before that time . . .
[40] Similarly, subsection 80(4) provides in relevant part:
(4) Reductions of capital losses – Where a commercial obligation issued by a debtor is settled at any time, the applicable fraction of the remaining unapplied portion of a forgiven amount at that time in respect of the obligation shall be applied to reduce at that time, in the following order,
(a) the debtor’s non-capital loss for each taxation year that ended before that time . . .
(b) the debtor’s net capital loss for each taxation year that ended before that time . . .
[41] After subsection 80(4) is applied, the taxpayer has the option of applying any remaining unapplied portion of the forgiven amount against certain balances, such as the undepreciated capital cost balances for depreciable property, in accordance with certain provisions of subsections 80(5) to (12). If there remains a portion of the forgiven amount unapplied and the taxpayer chooses not to make the designations required by those provisions, the taxpayer will be subject to an income inclusion in accordance with subsection 80(13).[13]
[42] The “forgiven amount” is defined in subsection 80(1), to the extent relevant to the present appeal, as follows:
“forgiven amount” at any time in respect of a commercial obligation issued by a debtor is the amount determined by the formula
A – B
where
A is the lesser of the amount for which the obligation was issued and the principal amount of the obligation, and
B is the total of
(a) the amount, if any, paid at that time in satisfaction of the principal amount of the obligation,
. . .[14]
[43] Counsel for the Appellant challenged the Minister’s application of section 80 on two grounds. First, he argued that no forgiven amount arose on the settlement of the Appellant’s debt to Claridge Properties or, alternatively, that the amount forgiven was significantly less than the C$1,368,529 assumed by the Minister.
[43]
[44] Secondly, he submitted that, even if it is determined that an amount was forgiven, that event occurred in December 1996 and not in January 1997 as assumed by the Minister. As a result, counsel took the position that the reassessments made by the Minister are incorrect and in contravention of the provisions of section 80. In oral argument, counsel framed this argument in terms of the Minister having assessed the wrong year.
Timing
[45] It is clear that in applying the debt forgiveness provisions in subsections 80(3) to (13), the forgiven amount must be determined at the time the obligation is settled.
[46] The Minister took the position that the Appellant’s debt to Claridge Properties was settled in 1997, focussing on the fact that it was not until January 1997 that the cheque for US$1 million, dated January 6, was processed. The theory proposed by the Minister was that there could not have been a reduction of the indebtedness of the Appellant in this case until that amount was paid by the cheque, and that only then was the debt settled for the purposes of section 80.
[47] The Minister argued, as I understand it, that the test was twofold.[15] First, the debt must be settled or extinguished.
[48] Secondly, because of the definition of “forgiven amount” in subsection 80(1) and, in particular, the reference in “B” of the definition to the “amount, if any, paid” there can be no forgiven amount until the amount is paid. The Minister argued:
. . . the forgiveness happens when the amount is paid. Because we know that when an amount is paid and it’s for the full indebtedness there is no forgiven amount obviously. There has to be a partial amount that is paid.
So in order for the Minister to set or to evaluate if there is a forgiven amount, the amount had to be paid because when we look at the definition of forgiven amount it says it’s A minus B, B being (a) the amount, if any, paid at that time in satisfaction of the principal amount of the obligation.
So if no amount is paid it can’t be taken into account in the evaluation of the forgiven amount. And it’s only at that time it can be realized or the Minister can realize if there is a forgiven amount or not.
. . . Our theory on this is . . . there could not have been a reduction of the indebtedness of Mr. Richer in this case until the amount was paid. And that’s when the debt is settled, pursuant to section 80 of the Act.[16]
[49] I do not agree.
[50] Paragraph 80(2)(a) provides that for the purposes of section 80:
an obligation issued by a debtor is settled at any time where the obligation is settled or extinguished at that time . . .
[51] In the context of section 80, the word “settle” connotes a final and legally binding resolution that terminates or reduces the debtor’s obligations: Carma Developers Ltd. v. The Queen, 96 DTC 1798 (TCC), per Bowman J. (as he then was) at paragraph 23, affirmed 96 DTC 6569 (FCA). Similarly, in Arcade Construction Ltd. v. M.N.R., 81 DTC 655 (TRB), M.J. Bonner (as he then was) held, at 656, that a debt or obligation was settled when the “. . . creditor and debtor deliberately agree to fix or vary their existing rights and obligations . . .”.
[52] In my view, the combined effect of the Settlement Agreement and the Release, both signed on December 19, 1996 had the effect of terminating the Appellant’s liability under the promissory notes and all other amounts associated with his participation in the four partnerships. The following paragraphs from the Release illustrate this point:
For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Claridge Properties Ltd. [and other parties] (hereinafter the “CLARIDGE PARTIES”) hereby grant unto Jack Richer (“RICHER”), for themselves, their heirs, predecessors, successors and assigns, release and discharge from any and all claims, actions, causes of action, suits, debts, demands and damages whatsoever which the Claridge Parties or any of them ever had, now have or which any of them or their respective heirs, predecessors, successors and assigns hereafter can, shall or may have against Richer, for or based upon or by reason of any fact, matter, transaction or thing alleged in the proceedings described in the Schedule attached hereto.
For good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, Richer, for himself, his heirs, predecessors, successors and assigns, hereby grants unto the Claridge Parties and each of them release and discharge from any and all claims, actions, causes of action, suits, debts, demands and damages whatsoever which Richer ever had, now has or which he or his heirs, predecessors, successors and assigns hereafter can, shall or may have against the Claridge Parties or any of them for or based upon or by reason of any fact, matter, transaction or thing alleged in the proceedings described in the Schedule attached hereto.
Richer further acknowledges that the release and discharge herein granted in his favour shall not affect the right of Claridge Properties Ltd. to obtain judgment upon the confession of judgment bearing even date herewith executed by him in favour of Claridge Properties Ltd., in the event that Claridge Properties Ltd. is entitled to obtain judgment thereon under the terms and conditions of an agreement bearing even date herewith between Richer and the said Claridge Properties Ltd.
. . .
[53] Following the signing of the Settlement Agreement and the Release, Claridge Properties retained only the limited right to pursue the Appellant with regards to the US$1 million payment he had agreed to make, the original obligation having been extinguished. Therefore, the date of settlement for the purpose of applying the provisions of section 80 is December 19, 1996.
[54] Further, there can be no question that the agreement to pay the US$1 million on or before January 8, 1997 and to give up certain other rights constituted an amount paid on December 19, 1996 given that “amount” is defined in subsection 248(1) of the ITA as:
. . . money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing, except that, . . .
[The rest of the definition has no application.]
[55] Two further points warrant mention. First, the debt forgiveness scheme specifically contemplates in paragraph 80(2)(h) the possibility that in settling a debt, part of the consideration given by the debtor may consist of a new debt obligation:
(h) where any part of the consideration given by a debtor to another person for the settlement at any time of a particular commercial debt obligation issued by the debtor and payable to the other person consists of a new commercial debt obligation issued by the debtor to the other person
(i) an amount equal to the principal amount of the new obligation shall be deemed to be paid by the debtor at that time, because of the issue of the new obligation, in satisfaction of the principal amount of the particular obligation, . . .
[56] Secondly, under the Civil Code of Québec[17] whatever obligations existed between the Appellant and Claridge were extinguished by a mixture of compensation,[18] mutual release and novation[19] in the Settlement Agreement of December 19, 1996. Again, there can be no question that this results in an amount paid under the ITA.
[57] The Appellant argued that the Minister could not simply assess the settlement and debt forgiveness in any year and then make consequential assessments in other years.[20] I agree that the assessment must be based on the correct year of the settlement.
[58] However, insofar as the Appellant is arguing that the result of concluding that the settlement occurred in 1996 is that one should ignore any debt forgiveness entirely, I disagree.
[59] An assessment is usually of an amount of tax, interest and penalties and this is the case here. The underlying facts are simply the reasons leading up to the tax assessment.[21] Whether any amount was forgiven and when is part of the underlying facts. Here there is no question that the issue of debt forgiveness was part of the reasons for the assessment.[22] As a result any debt forgiveness remains relevant to the disposition of the appeal and will remain relevant to redetermining the Appellant’s liability.
[60] The fact that the settlement took place in 1996 will result in the appeal being allowed so that the assessments in issue are changed to take account of that. However, the effect of this change depends in part on the outcome of other issues. I shall return to the effect of this change later although I would note that, as a practical matter, given the way the debt forgiveness rules operate and given that a judgment of this Court cannot increase a tax assessment, this finding will, on its own, result in a very large reduction of the assessments.
Was an amount forgiven? If an amount was forgiven, what was the amount?
[61] In calculating the forgiven amount according to the definition in subsection 80(1), a necessary element of the formula is the principal amount of the obligation.
[62] Where the amount paid by the debtor is at least as great as the amount of the obligation, there can of course be no forgiven amount. Counsel for the Appellant first argued the Appellant’s liability towards Claridge Properties crystallized in 1990 at US$187,000.
[63] In light of all the evidence I am unable to conclude that the parties reached a binding agreement fixing the Appellant’s liabilities in 1990. Negotiations regarding the details of the Appellant’s withdrawal from the partnerships continued through 1991 without reaching a conclusion and no payment of US$187,000 was ever made by the Appellant.[23]
[64] The main argument pursued by counsel for the Appellant was that the US$1 million amount agreed to in the Settlement Agreement in fact represented the amount of the Appellant’s debt to Claridge Properties. In oral argument, however, counsel acknowledged that the amount of US$1 million was not the result of a careful calculation made by either the Appellant or Claridge Properties, that no one knew the exact amount of the debt and that “. . . the parties sawed it off at $1 million . . .” to avoid the risks and inconvenience of litigation.[24]
[65] In his oral testimony, Mr. Parsons confirmed the manner in which the amount of US$1 million was agreed to:
It was basically a sum that, you know, I would have discussed it with Mr. Ludwig. We would have agreed, because there was some... you know, a lot of back and forth between Mr. Richer's lawyers and mine. I recall my lawyer telling Mr. Richer's lawyer that any settlement had to have seven figures. . . . and this is the one that came and we accepted.[25]
[66] Under these circumstances, it cannot be concluded that the amount of US$1 million agreed to by the parties represented a determination of the Appellant’s debt to Claridge Properties. Moreover, there is nothing in either the Settlement Agreement or the Release that would indicate consensus between the parties regarding the amount of the Appellant’s debt. All the evidence indicates that the settlement represented a compromise between two disparate positions in order to avoid the expense and uncertainty involved in determining the lawsuits at trial.
[67] The Appellant raised a number of specific reasons why the Appellant’s debt was lower than assumed by the Minister; I shall return to those reasons. However, I would first note that while counsel for the Appellant presented a rough schedule computing the Appellant’s liability during oral argument,[26] no attempt was made to establish precisely the quantum of the Appellant’s debt. Counsel explained that exact calculations had not been attempted because of the difficulties of computation.[27]
[68] The difficulty of the computation notwithstanding, determining the amount of the Appellant’s debt must be undertaken to determine the consequences of section 80.
[69] A substantial amount of time at trial was devoted to challenging the Minister’s basis for concluding that the forgiven amount was C$1,368,528. As explained, the Minister arrived at this amount essentially by accepting as accurate the calculations performed by Claridge Properties as summarized in the chart in paragraph 31 above. According to this chart, the amount of the Appellant’s debt, which took into account US$117,631 owed to him in respect of his interest in Livonia, was US$2,000,679 before the US$1 million payment.
[70] The Appellant maintained that the figures in this chart overstated his liability for a number of reasons including the following:
(a) The balance owing October 31, 1996[28] includes amounts for which he did not sign promissory notes.
(b) The “capital contributions” stated as having been made in December 1996, totalling US$403,819, should not be included as part of his liability.
(c) Distributions made by Livonia totalling C$536,011 (US$155,809[29] in 1995 and US$236,631[30] in 1996) were not received by him nor applied against his debt to Claridge Properties.
(d) Management fees were wrongfully charged to Livonia, thereby decreasing his share in the proceeds from that partnership by US$137,097.
(e) Amounts were wrongfully transferred by Claridge Properties from Livonia to Hickory, thereby decreasing his share in the proceeds from Livonia by US$152,236.
[71] In the first two arguments, counsel disputes the amount the Appellant had agreed to be liable for. The remaining arguments relate to the various claims made by the Appellant that would have offset part of his liability.
Balance owing October 31, 1996
[72] I will first consider the argument that the Appellant is not liable for principal amounts in respect of which he did not sign promissory notes.
[73] The Appellant signed promissory notes totalling US$1,209,266. The signed notes are a clear acknowledgment of liability. The chart prepared by Claridge Properties lists the Appellant’s total balance owing as of October 31, 1996, including interest receivable of US$193,220, as US$1,714,489. This total balance includes US$316,003 which is not evidenced by signed promissory notes.
[74] Despite considerable testimony on the matter, the specific details of the arrangement made between the Appellant and Claridge Properties regarding subsequent recognition of indebtedness remain unclear. The Appellant acknowledged that the arrangement involved signing promissory notes after the fact of a capital contribution made on his behalf by Claridge Properties,[31] but appears to suggest that he could only be held liable for subsequent contributions if he agreed to them by signing the promissory notes.[32]
[75] He also testified to breaches of the understandings in the handshake agreements. These breaches will be discussed later.
[76] He also explained that he could not have been subject to a cash call given that he was a limited partner in the ventures and could therefore only be held liable for contributions that had been agreed upon.[33] Given that the handshake agreements are separate legal arrangements from the limited partnerships, the fact that the Appellant, in his capacity as a limited partner, is not liable for further contributions to the limited partnerships does not resolve the question.
[77] The Appellant’s evidence is not entirely consistent with that of Mr. Parsons, who explained that it was the usual practice in all Claridge partnerships to require the partners to contribute additional amounts in the event of a deficit. However, Mr. Parsons also testified that he was not involved in the formation of the partnerships,[34] and that he had virtually no role respecting the loans to the partners beyond arranging for money to be transferred from Claridge in accordance with instructions he received from Claridge Properties.[35] For these reasons, I do not ascribe much weight to his evidence as it pertains to the terms of the Appellant’s involvement in the partnerships.
[78] It is clear that there was some kind of obligation on partners to fund any cash needs of the partnership; indeed, the course of conduct up to the point when the Appellant stopped signing promissory notes is consistent with this. It is clear that there were other obligations; on the evidence before me, Claridge breached at least one of those obligations (see paragraphs 91 to 93). Finally, it is clear that after January 1, 1990[36] even Claridge implicitly recognized that whatever funding obligation there had been had ended (see paragraph 83 below).[37] The question then becomes whether the funding obligation had ceased with respect to the debts claimed by Claridge in the period beginning when the Appellant stopped signing promissory notes and ending on January 1, 1990 (the 1989 period). The amount related to this period is the US$316,003 already referred to.
[79] Given that Mr. Parsons, the only witness from Claridge, was not present when the handshake agreements were made, that, based on the evidence before me, Claridge was breaching its obligations in 1989 by charging management fees[38] (see below), that the only witness to testify who actually participated in making the agreements was the Appellant and that I accept the Appellant’s evidence on this, I conclude, in spite of the uncertainty of the terms of the handshake agreements, that the Appellant was not liable for the amounts in respect of which he did not sign promissory notes. For these reasons, the amount of US$316,003 did not form part of the Appellant’s debt.[39]
Capital contributions in December 1996
[80] I now turn to the argument concerning the capital contributions, totalling US$403,819, stated as having been made in December 1996.
[81] Mr. Parsons explained that the amounts in this column represented the amount Claridge Properties had to contribute to the partnerships to net the Appellant’s accounts to zero in accordance with the Settlement Agreement.[40] The contributions were necessary because Claridge Properties had calculated there to be deficiencies in his accounts due to unfunded liabilities that had accrued in the partnerships. Mr. Parsons further explained that these deficiencies were treated by Claridge Properties as loans to the Appellant.[41]
[82] I have already concluded there was no agreement that the Appellant would be liable for amounts in respect of which he did not sign a promissory note. For the same reasons as those outlined above, I find that the amounts totalling US$403,819 included in the chart prepared by Claridge Properties did not