Baxter v. The Queen

Baxter v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2006-04-13
Neutral citation
2006 TCC 230
File numbers
2002-4035(IT)G
Judges and Taxing Officers
Ronald D. Bell
Subjects
Income Tax Act
Decision Content
Docket: 2002-4035(IT)G
BETWEEN:
R. DAREN BAXTER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on June 15, 2005, at Halifax, Nova Scotia
and
August 18 and August 19, 2005, at Toronto, Ontario
Before: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
Edwin C. Harris, Q.C.
Al Meghji
Ted Citrome
Counsel for the Respondent:
John W. Smithers
V. Lynn W. Gillis
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1998 and 1999 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment.
An award of costs is deferred as provided in the Reasons.
Signed at Ottawa, Canada, this 13th day of April, 2006.
"R.D. Bell"
Bell J.
Citation: 2006TCC230
Date: 20060413
Docket: 2002-4035(IT)G
BETWEEN:
R. DAREN BAXTER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.
ISSUES
[1] The issues are:
1. Whether the Appellant was, in the taxation years in question, carrying on the business of using the license acquired from TCL TRAFALGAR B.V. ("TCL") to trade futures contracts with TRAFALGAR TRADING LIMITED ("TT") and, alternatively, whether the Appellant acquired the license for the purpose of earning income from property.
2. Whether the Appellant, in acquiring that license, was dealing at arm's length with TCL.
3. Whether the Appellant acquired a "tax shelter" as defined in section 237.1 of the Income Tax Act ("Act").[1]
4. What was the fair market value of the license when acquired?
5. Whether the Appellant's entitlement to capital cost allowance is limited by the provisions of section 67 of the Act.
6. Whether the promissory note represented a contingent liability.
FACTS
[2] The Appellant testified that he was a lawyer practicing business and tax law and that, in April, 2004, he was appointed as Vice Chairman of the Nova Scotia Securities Commission. He also said that he was recently elected as a member of the Bar Council.
[3] He said that this case arose as a result of a capital cost allowance claim made by him in respect of the purchase of a license to use software.[2] He stated that it analyzes historical trends of trading and predicts future trends and issues orders for suggestions for purchase and sales. He testified that he purchased the ten year license from TCL for the sum of $50,000.[3] Subsequent evidence established that he made a down payment of $4,375 and provided three post-dated cheques for $4,375 each, such cheques being cashed over the following nine months. He then, on December 31, 1998 made and delivered to TCL a promissory note for $32,500 due on December 31, 2008, and bearing interest payable monthly, at the rate of 5 per cent per annum. The note is not subject to the terms of the Agency Agreement, and none of the terms of the note contemplate that a licensee would enter into an agency agreement. Further, section 11.4 of the License Agreement provides that it constitutes the entire agreement between the parties pertaining to the purchase and sale of a license.
[4] The Appellant said that he entered into an Agency Agreement with TT under which he provided the software, that the agent contributed $10,000 capital and that the agent was responsible to use the license to initiate trades. The Appellant, as a licensee under the License Agreement, had the option of entering into an agency agreement with TT. He understood that that was an option provided to licensees under a License Agreement and that the licensees were not under any obligation to enter into an Agency Agreement. No evidence was provided to support the position that licensees were under such an obligation. The Respondent's own witness, Allan Peters ("Peters")[4], stated that it was his understanding that licensees were not required to enter into an Agency Agreement.
The Agency Agreement includes the following provisions:
(a) TT is the exclusive agent of the Appellant to engage in trading of S & P 500 Contracts using the license;
(b) the term of the Agency Agreement is ten years;
(c) the Appellant provides a copy of the Software to TT;
(d) TT provides $10,000 of initial trading capital;
(e) a trading report fee of US$0.50 is paid to the trading capital account for each trading report generated by the Software, up to a maximum of US$7,500 per year (the "Trading Report Fee");
(f) an agency fee of US$0.25 is paid to TT for each trading report generated by the Software, up to a maximum of US$3,750 per year (the "Agency Fee");
(g) Trading profits net of brokerage fees, Trading Report Fees, and Agency Fees (the "Net Trading Profits") are allocated on a monthly basis between the trading capital and TT on the following basis:
(i) until such time as the balance of the trading capital account is equal to the Principal Amount, 70% of the Net Trading Profits are contributed to the trading capital account, and 30% are paid to TT;
(ii) once the balance of the trading capital account is greater than the Principal Amount, 30% of the Net Trading Profits are contributed to the trading capital account, and 70% are paid to TT; and
(iii) notwithstanding (i) and (ii) above, to the extent that the balance of the trading capital account is less that the previous highest balance of such account at the end of a month, 100%of the Net Trading Profits are contributed to the trading capital account.
(h) TT agrees to pay to TCL from the trading capital account an amount equal to the accrued but unpaid interest on the Note on behalf of the Appellant;
(i) upon the expiration of the Agency Agreement, the trading capital will be allocated as follows:
(i) the $10,000 of initial trading capital is returned to TT; and
(ii) the balance is paid to the Licensee;
(j) TT covenants that the Average Annual Return (as defined in section 1.1 of the Agency Agreement to mean "the average of the annual Gross Trading profits achieved from the date of the execution of [the Agency Agreement] net of Brokerage Fees, expressed as a percentage of the License Fee") will be no less than eight per cent; and
(k) TCL agrees that the Principal Amount shall be reduced pro rata to the extent that TT breaches the covenant described above (the "Revenue Guarantee").
Accrued interest on the note has in fact been paid to TCL from the trading capital account on behalf of the Appellant.
[5] The Appellant said that he first heard about the software license potential from a client sometime in December, 1998. That client, Burton Langille ("Langille"), forwarded material to the Appellant after he had received a telephone call from the Appellant respecting same. The Appellant said that he had a long history of discussing business opportunities with Langille and that he had a lot of faith in him. He said he had received from Langille a summary of the performance of the license for a particular month.
A copy of that document, introduced in evidence contained the following description:
The following Table shows the day to day performance of a $10,000 License in Walk-Forward trading. "Walk-Forward trading" is the period from when simulation ended (May 1998) and real-time trading which will begin in November 1998. The daily returns of the S & P 500 and the TSE 300 have been included for comparison purposes. The Graph shows the cumulative return for the month.
The Appellant said:
I thought this was a rather interesting opportunity. ... I liked the concept that it would be - - this program removed ... human emotion and it was based upon statistical analysis. I also liked the concept that what the program did was it started the day in cash and it would work so that there were trades conducted throughout the day but at the end of the day, end in cash, so that was very interesting to me. And, of course, looking at the potential return looked very good, which is outlined under the heading "Potential Return" in the materials behind Tab 1.
He said that Langille had seen simulated trading results for about a year or so before actual performance and that he was very impressed with the consistency of returns. He also said that he relied upon Langille because he trusted him very much and that he, the Appellant, being a lawyer, did not know much about investing and found the demands of his law practice, serving his clients and maintaining and administering the office, quite demanding. He described Langille as "quite a capable individual" who spent a lot of time analyzing the market and trading.
[6] The Appellant stated that he had not seen the valuation of the software prepared by emc partners or the opinion of American Appraisal Canada, Inc. prior to purchasing the license. He said, however, that Langille had informed him that there were two appraisals that "more than supported the asking price of the software". He said that he had spoken to his business partner about this investment and had asked some colleagues "around town" whether they had known of the Trafalgar Group and whether it was a real company and whether it was reputable. He stated that that was confirmed to him by a number of those persons. He testified that he did not understand the workings of the software and that what he was interested in was the results and what the software could do, namely being able to predict market trends. He said that he knew he was buying software and that it was a Class 12 asset[5] and that he could claim capital cost allowance over a two year period. He also said that affected his decision.
[7] The Appellant testified that neither he nor anyone related to him had any relationship with TCL and that his purchase of the software license was "purely a commercial relationship". He said that at the time of purchase he did not know who Ed Furtak ("Furtak") was.[6] He said that he had never met Furtak until May 30[7] when he had lunch with him. He stated that he had never served Furtak in a professional capacity, that he had no friends or social acquaintances "at Trafalgar" and had never spoken to Wayne Gillis ("Gillis")[8] before making his investment and had never met or spoken to Allan Peters ("Peters").[9]
[8] The Appellant said that there were no negotiations respecting the purchase price of $50,000. He made the following statement:
The offer to acquire the license was presented to me at a fixed price. I suppose I had an option as to what - - how many licences I wanted to purchase but the price was fixed. It was a take-it-or-leave-it offer as I had understood it based upon the documentation.
[9] Respecting what happened after purchasing the license the Appellant said:
Under the arrangement with the contracts, once the contracts were accepted and I submitted - - you know, submitted the appropriate documentation and my cheques, trading would begin within about 30 days. This was in the arrangement with the Agency Agreement and the agent being Trafalgar Trading Limited, and Trafalgar Trading Limited then, I understand, had set up a bank account, contributed a total of ten thousand dollars into the bank account in accordance with the Agency Agreement and engaged a broker who is referenced in the Agency Agreement. And in addition to that, TCL Trafalgar B.V., the licensor of the software, in accordance with my instructions, forwarded the software directly to Trafalgar Trading. Trafalgar Trading then used that software to initiate the trades to - - to initiate trade instructions.
He then said that he understood that TT had received the software and began trading in "probably February of 1999". He said that he received a report, generally, on a monthly basis on the previous month's trading. He stated the minimum amount of license available to purchase was $50,000 and that is what he purchased. He then described the payment of brokerage fees and the net trading profit or loss and referred to the various formulas in the Agency Agreement. He said that the license was for a ten year period and that the agency arrangement was for a corresponding period. He stated that at the end of ten years the capital balance would be determined, the amount contributed by TT would be repaid and the balance would be his. He then read section 8.3 of the Agency Agreement. It stated:
Trafalgar Trading covenants that on expiration of the term of this agreement the average annual return generated by the Trafalgar Index Program with the trading capital shall be no less than eight per cent (8.0%).
He said he viewed the 8% of $50,000 as being guaranteed. He then read section 8.4 of the agreement as follows:
TCL Trafalgar hereby agrees that, notwithstanding the provisions of the License Agreement and the promissory note, the licensee's obligation to fulfil the terms of the promissory note and of section 3.1(e) of the License Agreement, it shall be limited, pro rata, to the extent that Trafalgar Trading fulfils the terms of Section 8.3 of this agreement.
The Appellant also said he understood that to mean that TT would generate the 8% profit and was so confident of that that, if it did not do so, the Appellant's obligation to fulfil the terms of the promissory note "would be alleviated pro rata" in accordance with what the performance might have been.
[10] On cross-examination, the Appellant said that he did not know whether Langille had had any experience in the trading of futures contracts on the Chicago Mercantile Exchange and that he had personally had no experience whatsoever with that, never having traded futures before.
He said, in response to a question, namely:
Do you know what a CTA is?
that he did not.
Respondent's counsel told him that CTA meant commodities trading advisor. The Appellant said that he did not "run" the proposal through a CTA. He stated that he deducted $2,500 in 1998 and the remainder of $47,500 in 1999. He said that he had not consulted with anyone knowledgeable in the futures industry about fees. He said that Langille had told him that:
the history of the simulated trading supported ... that the numbers were consistently phenomenal, to use his term.
He stated again, in cross-examination, that in accordance with the Agency Agreement, TT contributed $10,000 to a trading account and that was the starting point of the amount that has been traded. In answer to Respondent's counsel's questions, he said he did not attempt to negotiate the due date, being December 31, 2008 and did not attempt to negotiate the principal sum of $32,500. The following exchange took place:
Q. So, you didn't attempt in any way to negotiate that?
A. No. I saw it as a take-it-or-leave-it arrangement.
Respondent's counsel followed this with questions as to whether the Appellant would negotiate the price of a car or a mortgage. Counsel continued that line of questioning by asking the Appellant whether he tried to negotiate the interest rate on the note, the answer being in the negative.
[11] The Appellant stated again that TT was his agent, engaging a broker to follow the instructions provided by the software. He also said that his agent set up an account for trading and further that he did not disclose his name to the Chicago Mercantile Exchange but did not know whether his agent had done so.
[12] When asked if he was operating a business the Appellant replied in the affirmative. The following took place:
Q. And what is the business? Could you describe it for me?
A. Well, the business really is set out in the Agency Agreement. I own this software license and I've contributed through my arrangement with the agent to trade at my behalf. The agent has contributed the capital, and so that capital is going to be - - my agent's capital is going to be traded over a 10 year period. At the end of the 10 years we'll determine how much profit was generated through the contribution of my agent's capital and my license and then we divide that profit accordingly. And usually the agent gets paid all along, but at the end of the 10 years that's when I determine what exactly my profit is.
Q. Okay. Are you saying that you're still in this business, then?
A. Yes, I am.
Q. Okay. And you'll agree with me as being on the Nova Scotia Securities Commission as part of your ongoing duty to disclose that you've described this business to the Nova Scotia Securities Commission as such?
A. I don't know if I described the business because I'm not initiating trades. The conflict of interest rules are based upon information that I may have or be perceived to have as a member of the Securities Commission. If I can use that to my personal advantage to, you know, initiate directly, you know, orders to buy and sell, that could present a perceived conflict of interest and that should be overseen. In this particular case I have no idea of the usual securities that are being purchased and sold. That's being done by a third party. ... I'm not initiating any trades so I'm not advising on or initiating and I have nothing to report.
[13] The Appellant then testified that he had inquired of Langille as to whether a tax shelter identification number had been obtained and was advised that it had not been so obtained. He said, in response to counsel's query, that he saw no tax shelter risk. He then testified that he had seen various legal opinions from the Fraser Milner law firm, having seen same in December 1988.
[14] A long series of questions by Respondent's counsel followed. They dealt with performance of the investment after the acquisition of the software license. The Appellant then clarified that he had paid $17,500 down for the license, partially in post-dated cheques which were cashed, the payment being to TCL and that TT put $10,000 dollars into the capital account that traded on his behalf.
[15] Appellant's counsel then entered as exhibits a number of "read-ins" from examination for discovery of the Respondent's nominee, Douglas Bruce ("Bruce").
He referred to the essential evidence including the admission by the auditor that in reassessing Baxter, the Canada Customs and Revenue Agency ("Revenue") did not assume that the Appellant had received any statements or representations and that he had no facts, information or knowledge to the effect that there were representations. Appellant's counsel advised the Court that the Attorney General, following that admission, amended the Reply to remove the allegation that there had been representations to the Appellant.
[16] Appellant's counsel then said:
They had that in their initial pleading and then they deleted it in their Amended Reply, and we are now, of course, agreed that there were no statements or representations made to Mr. Baxter, and that's the import of the tax shelter evidence.
[17] Appellant's counsel said that the Attorney General had alleged that the assessor had assumed there were no bona fide arrangements to repay the promissory note. When counsel suggested to the nominee that he did not really assume that, the nominee's response was:
I can't disagree with you.
Counsel then said that the result of this was the Attorney General amending his pleading to remove that allegation.
[18] Counsel asked Bruce at the examination for discovery:
Have you, in the course of preparing for this examination for discovery, found anything in the Reply that you take issue with in any way, that you think is inaccurate, incomplete?
Bruce responded:
In terms of the Reply, the only thing I could suggest that I had some difficulty with or I have some difficulty with is the suggestion of non-arm's length.
When Bruce referred to the Reply stating that the parties involved in the investment were not dealing at arm's length, Appellant's counsel asked what his difficulty was with that and he responded:
I can't really say that I, at the time of assessment, that I was thinking in those terms.
When the question was put to Bruce on discovery:
So you're telling me that when the assessment was raised that the assumption was not, in fact, made.
the answer was:
Not - - no - - yes, I think I could - - that's what I'm saying, yes.
Appellant's counsel then said that the Attorney General deleted that allegation and pleaded it separately in the Amended Reply to the Notice of Appeal thereby assuming the onus of proof.
[19] With respect to whether the promissory note was a contingent liability, Appellant's counsel, still referring to the read-ins, said:
Basically he says - - basically what I was trying to say to him was:
What facts did you have to get to the conclusion that this was a contingent liability?
Appellant's counsel stated that his essential answer was:
All I did -- all it was was an exercise of interpreting the documents.
Counsel then said that the reason that he put that in is because if there was any suggestion by the Respondent that the facts support contingent liability he, Counsel, would ask what those facts were. He then said:
The auditor didn't find any facts, so the Attorney General will have to prove any facts that he considers necessary to that allegation, although, at the end of the day ... I don't think the Crown and I are going to have much of a dispute that really the contingent liability issue turns upon reading the contracts.
[20] Appellant's counsel then turned to the portion of the read-ins dealing with the argument of reasonableness. He said:
The import of the evidence ... is about what the - - this is another one of those allegations where the Attorney General asserted in the original Reply that when the Minister raised the assessment he concluded that the fair market value of the license was nominal. This evidence Mr. Bruce establishes that ain't so, and that is what led to the Attorney General again deleting that as an assumption, pleading it separately and saying "Okay, the auditor didn't assume that but we're alleging it and we are going to prove it." So this is another one of the assumptions that was deleted.
[21] With respect to another portion of the read-ins Appellant's counsel said:
The point I was making is that the Attorney General said that the auditor assumed that all of these transactions involved a down payment and a promissory note and the auditor admits in the following passages that that's not so, that he was aware that there were other transactions involving this license which were done fully with cash with no note. And so I said to him, "Why was the word 'apparently' used?" He said "I don't know". And then I said "And you're aware there were cash sales done without notes", and he said "Yes."
I then asked counsel whether that referred to sales to other persons and counsel replied in the affirmative.
[22] Respondent's first witness was Laurel Lee Uberoi. She was an auditor with the tax avoidance section of Revenue. Nothing in her evidence assists in the resolution of the matters herein.
[23] Respondent's counsel then produced Peters as a witness. He, an independent investment salesman, testified that he was a freelance independent salesman selling investments and that he had met Furtak and Gillis, being representatives of the Trafalgar Group. He said that upon the purchase of a license there was a requirement to enter into an agency agreement. He said that he had sold licenses to three individuals, being four sales of $50,000 each. He described what the license sought to achieve and said that he had explained the tax consequences that accompanied the purchase of a license and stated:
I explained that the entire investment of fifty thousand ($50,000.00) probably would qualify as a Class 12 asset, which meant that it was eligible for a 50% straight -- or 100% straight-line write off ... over a two year period of time.
Peters also said that the profits or losses would not be distributed until after the end of the ten year period, that interest on the note was to come out of trading profits, that an administration fee would come out of profits, that brokerage fees would come out of profits and that the $32,500 note was to be repaid out of profits. Peters also said that if the note was not paid off out of profits, the maker of the note would not have to write a cheque to make up the difference. He said that he "would have shown them" legal opinions obtained from Trafalgar. He said they were in depth analyses of the whole concept and whether or not it was a tax shelter, whether the whole investment qualified as a Class 12 asset and whether it was, therefore, eligible for the write off. He then said that the opinions were all to the effect that "yes, this was fine." The following exchange took place:
Q. Now, did you explain to your clients when you were selling them the Trafalgar Index Program Investment that they'd be running a business?
A. Yes. It was explained that it was a business but it was also explained that the business would be managed by Trafalgar.
Q. What did you explain to your clients on how to file their taxes?
A. They were told to file a separate schedule on their tax return to report this business and to claim the capital cost allowance.
Q. And you explained that to them?
A. Yes.
Peters said that he probably had provided copies of valuations on the value of the investment to investors. He said that they were not of much interest to the client because the main two focuses were the income tax savings and the potential for the investment to generate a lot of profit from "intra-day trading". When Peters was asked if he felt that there was any room for discussion of the terms in the agreements, he replied that there was no flexibility. He said:
It was presented as "This is the deal. Do you want it or do you not want it?"
He stated that the tax aspect of the investment was explained in a presentation to potential investors.
[24] On cross-examination Peters read a portion of a note that he had sent to many of his clients, namely:
The Belmont Financial Group Incorporated makes no statement or representation to you with respect to the income tax consequences of investing in the program.
He then said that he was not telling them what the tax consequences were and that they were always told to obtain their own tax opinions from their own tax advisors.
[25] Appellant's counsel presented a legal opinion from the law firm of Fraser Milner to Peters. That opinion stated:
None of the documents will contain any statement, representation or warranty concerning the tax consequences of the software for a taxpayer.
Peters said he didn't think the documents were given without any representation by Trafalgar as to the tax consequences.
This exchange followed:
Q. Well, perhaps you can explain to me why you would have thought that there were representations, although you told me you agreed with the opinions.
A. Well, I think representations were made in some of the documents, perhaps not this document.
Q. Which document were there representations in, Sir?
A. Oh, I don't remember now.
Q. You don't remember, okay. And then you see the next paragraph says:
"Each Purchaser will be given the option but not the obligation to enter into an Agency Trading Agreement."
Do you see that?
A. Um - hmm.
Q. So you understood from the ... opinions you had read, that the decision to enter into an agency was, in fact, a choice. Isn't that correct?
A. I guess it says that they were given the option, and then it goes on to say that it was - - "It is anticipated that all reasonable purchasers will exercise this option."
Q. Yes. And isn't that, in fact, how the transaction was structured with the clients, you were advising that they were given - - the option was given, but it was anticipated that they would enter, isn't that fair?
A. Perhaps it is. It's so long ago I don't remember, but I do remember that nobody wanted to exercise that option.
Q. Yeah, I think that's - - I understand what you're saying, you remember that nobody wanted to exercise the option but nobody was told that they absolutely had to sign the Agency Agreement, were they, Sir? You didn't tell them that, did you?
A. Probably not.
[26] After being presented with a number of slides upon which Peters confirmed the contents of sales promotional materials, Peters said that he relied on past performance as a basis to advise clients and that he had no reason to disbelieve any of the numbers in the promotional materials and that he thought that the investment by his clients would be a good investment. Peters agreed with Appellant's counsel's suggestion that the first step was that the licensee would acquire a license to the trading programs, that the second step would be that the licensee would appoint Trafalgar as agent to trade S & P 500 contracts using capital contributed by Trafalgar, and then that the profits derived from the trading would be divided between the licensee and Trafalgar.
[27] He testified that it was on the basis of that understanding that he had said earlier that there was a business but that it was being managed by Trafalgar. He then replied affirmatively to counsel's question to the effect that clients went into this investment knowing full well that there was potential for a huge upside but that there was also risk. He then replied affirmatively to the following question:
Q. Now, I am putting to you as my - - in concluding this part of the examination, that the essence of your advice to your clients based on all of this information was that this is a very good commercial investment with favourable tax consequences, isn't that a fair summary?
The Crown also produced Jeffery Raymond Dahn ("Dahn") as a witness. He is a professor of physics at Dalhousie University. He had a financial advisor at the relevant time called Medric Cousineau ("Cousineau"). He testified that he bought a Trafalgar Index Program license from Cousineau for $17,500 cash and a promissory note. He understood the investment to be for a ten year period. After that period he said that any profits that accrued in the trading capital account would be used to pay off the promissory note and that the remainder would be transferred to him.
[28] After lengthy discussion about Appellant's counsel's objection to the question asked by Respondent's counsel, namely:
And what did he explain to you?
Appellant's counsel withdrew his objection. The objection, based upon the answer to that question being hearsay, was withdrawn after the Court's statement that it would need time to consider the law respecting the objection, Appellant's counsel having said that he did not want an adjournment for the ruling. He then said:
All I'm saying is that I don't want my withdrawal of the objection to be an admission that I consider this to be relevant.
Dahn said that he was advised by Cousineau that he would be buying a Class 12 asset and that the $50,000 could be deducted over two years.[10]
The trading was, to my understanding, being done by the people in Bermuda, the Trafalgar Group.
He also said that he had completed and signed a License Agreement such as that of the Appellant which was shown to him. He said that he had been subpoenaed to testify and that he had not filed a Notice of Objection respecting the reassessment disallowing his capital cost allowance claims.
[29] The Crown's next witness, David Frederick Prescott ("Prescott") is a Certified General Accountant. He testified that he was contacted by Cousineau, asking him to look at the Trafalgar investment for some of his clients. He then met with Gillis of the Trafalgar organization. Prescottalso stated that he was not prepared to prepare income tax returns for clients who purchased this investment.
[30] Another witness produced by the Respondent was Judy Elizabeth Harnett ("Harnett"). Harnett is an auditor with Revenue Canada, having been a tax avoidance auditor in the Tax Avoidance section for about seven years. She said that she had seen approximately 50 different taxpayers with an investment like that of the Appellant.
[31] The Respondent's final witness before the presentation of expert witnesses was Frederik H. Myatt ("Myatt") who appeared by videoconference. He stated that at a social occasion someone mentioned the Trafalgar Investment Program. He then telephoned Gillis and, ultimately, bought the program license. He identified the License Agreement he had signed. He said that he had made four payments of $4,375 each and gave a promissory note for $32,500 and that the investment was for a ten year period. He testified that he had not had any experience in the futures trading market. He said that he met Gillis and understood that he was the first Vice President of Trafalgar. Myatt said that he thought the income was guaranteed "at an 8 per cent earnings per year". He said that that would have paid the note off within the ten year term and that if:
the investment did not operate up to the 8 per cent, then the balance of the promissory note at the end of the ten year term would be written off.
He said he understood that he would not be held responsible for any of the promissory note over and above the original investment. He further said that he understood he could write the $50,000 off over a two year period.
ANALYSIS AND CONCLUSIONS
This portion of the Reasons includes more evidence, it being appropriate in the context of determining the issues, to set out pertinent facts relating to a given issue under the analysis of that issue.
First Issue
[32] The first issue is whether the Appellant was, in the taxation years in question, carrying on the business of using the license acquired from TCL to trade futures contracts with TT; alternatively, whether the Appellant acquired the license for the purpose of earning income from properties.
[33] The Amended Reply ("Reply") stated that the Respondent:
denies that an agency relationship was ever created between the Appellant and Trafalgar Trading Limited.
However, one of the assumptions of fact contained in that Reply, upon which "the Minister relied", reads as follows:
Trafalgar Trading was the exclusive agent of the licensee for the term of the agreement to engage in the trading of capital S & P 500 Contracts using the License & Software.
Respondent's counsel made no mention of this assumption in embarking upon his submission as to why no agency relationship existed.
Paragraph 2 of the Agency Agreement provides that:
The parties hereto agree that Trafalgar Trading shall be the exclusive agent of the licensee for the term of this agreement to engage in the trading of S & P 500 Contracts using the License.
[34] The Appellant caused the delivery to TT of the copy of the Trafalgar Index Program ("TIP"), the use of which had been granted by TCL to it. The Appellant's uncontroverted evidence described his understanding that TT had set up a bank account, contributed $10,000 into that account in accordance with the Agency Agreement, and engaged a broker. The Appellant also testified that he received a report, generally, on a monthly basis on the previous month's trading. He described the payment of brokerage fees and the net trading profit or loss and referred to the value formulas in the Agency Agreement. He was also clear in his evidence that at the end of the ten year agency period the capital balance would be determined, the amount contributed by TT repaid to it and that the balance would be his.
[35] The Appellant also covenanted with TT that it would not be held responsible for any claim resulting from realized losses or unrealized profits arising from the inability to execute trades in accordance with the Trading Reports.[11] Quite simply, the Appellant provided his license for use by TT on his behalf while TT provided $10,000 trading capital in the trading activity. It cannot be denied that the trading activities were conducted by TT. It cannot be denied that those trading activities constituted a business as defined in the Act.
The pertinent part of that reads:
Business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and ... an adventure or concern in the nature of trade ...
The law is clear that whenever an agent carries on business on behalf of a principal, the principal is deemed to be carrying on that business. It is beyond comprehension that a person would pay $50,000 for a license, enter into an express agency agreement with someone to exploit the use of that license, simply to have that agent carry on business on his own behalf, a premise advanced by the Minister for the Court's serious consideration. The Minister's written submission, in that regard, reads as follows:
It is submitted that Trafalgar was trading in their own name and assuming all risk with no recourse to the investor for any losses or liability. As such, the Respondent submits there is no real agency relationship between the Appellant and Trafalgar and the agreements entered into by the Appellant bear this out.
The Appellant's description of his motivation for entering into the license purchase arrangement clearly contemplated the use of the license for profit making for him.
[36] Respondent's counsel referred to Denison Mines Ltd. v. M.N.R.,[1971] F.C. 295 (F.C.T.D.), affirmed [1972] F.C. 1324 (F.C.A.). He described Justice Cattanach's reference to Smith, Stone and Knight, Ltd. v. Birmingham Corporation, [1939] 4 A11 E.R. 116 [K.B.D.] which posed six questions "as helpful indicia in determining who is really carrying on business". While those questions may have been useful in the fact situation in that case, they have no relevance here. The question in Denison was whether a subsidiary corporation formed by the Appellant was an agent carrying on business on behalf of the Appellant. The Court concluded that:
Here the very reason for the incorporation of CON-ELL was predicated on the legal advice that the appellant would be in breach of the condition of the trust deed if it conducted the housing operation on its own account. It is a principle of agency that a person cannot do by an agent what he cannot do himself. [12]
The Respondent also stated:
Simply put, there is no risk to the Appellant whatsoever.
It is patently clear that the Appellant risked losing his total investment.
[37] I have concluded, for the purposes of carrying on the business of using the license, that the Appellant had engaged in a legal relationship with TT constituting the creation of an agency whereby TT was his agent for the exploitation of the license acquired. If this was not a business, clearly the license is property, the purpose of acquiring same entitling him to a claim for capital cost allowance. Paragraph 20(1)(a) reads:
Notwithstanding paragraph 18(1)(a), (g) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation.
(emphasis added)
I am very surprised that this was an issue, the answer being so clear.
Second Issue
[38] The second issue is whether the Appellant, in acquiring that license, was dealing at arm's length with Trafalgar.
[39] The Respondent's Reply to the Notice of Appeal contained the following assumption of fact upon which "the Minister relied" namely:
The parties involved in the Investment were not dealing with each other at arm's length.
This assumption was deleted in the Amended Reply, one of the pleaded facts therein being:
The parties involved in the Investment were not dealing with each other at arm's length
Accordingly, the Respondent had th