Garber v. The Queen

Garber v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2014-01-07
Neutral citation
2014 TCC 1
File numbers
2004-2787(IT)G, 91-1816(IT)G, 91-1946(IT)G, 91-509(IT)G
Judges and Taxing Officers
Eugene P. Rossiter
Subjects
Income Tax Act
Decision Content
Docket: 2004-2787(IT)G
BETWEEN:
ALLAN GARBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
____________________________________________________________________
Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013 and May 15, 2013, at Toronto, Ontario
By: Associate Chief Justice E.P. Rossiter
Appearances:
Counsel for the Appellants:
Howard Winkler
Counsel for the Respondent:
Gordon Bourgard, John Shipley and
Julian Malone
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1984, 1985, 1986 and 1987 taxation years are dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Ontario, this day of 7thrd day of January, 2014.
“E.P. Rossiter”
Rossiter A.C.J.
Docket: 91-1946(IT)G
BETWEEN:
GEOFFREY D. BELCHETZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
____________________________________________________________________
Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013 and May 15, 2013, at Toronto, Ontario
By: Associate Chief Justice E.P. Rossiter
Appearances:
Counsel for the Appellants:
Howard Winkler
Counsel for the Respondent:
Gordon Bourgard, John Shipley and
Julian Malone
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1986, 1987 and 1988 taxation years are dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Ontario, this 7th day of January, 2014.
“E.P. Rossiter”
Rossiter A.C.J.
Docket: 91-1816(IT)G
91-509(IT)G
AND BETWEEN:
LINDA LECKIE MOREL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013 and May 15, 2013, at Toronto, Ontario
By: Associate Chief Justice E.P. Rossiter
Appearances:
Counsel for the Appellants:
Howard Winkler
Counsel for the Respondent:
Gordon Bourgard, John Shipley and
Julian Malone
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1985, 1986, 1987 and 1988 taxation years are dismissed, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Ontario, this 7th day of January, 2014.
“E.P. Rossiter”
Rossiter A.C.J.
Citation: 2014TCC1
Date: 20140107
Docket: 2004-2787(IT)G
BETWEEN:
ALLAN GARBER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 91-1946(IT)G
AND BETWEEN:
GEOFFREY D. BELCHETZ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 91-1816(IT)G
91-509(IT)G
AND BETWEEN:
LINDA LECKIE MOREL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, A.C.J.
Index
A: Overview.. 4
B: The Appellants’ Claims. 8
1. Allan Garber, 2004-2787(IT)G: The S/Y Garbo LP (Type 1 Limited Partnership) 9
Expenses Claimed as of Final Submissions - Type 1 Partnership - The S/Y Garbo LP—Allan Garber 10
2. Linda Leckie Morel, 1991-1816(IT)G, 1991-509(IT)G: The S/Y Midnight Kiss LP (Type 2 Limited Partnership) 12
Expenses Claimed as of Final Submissions--Type 2 Partnership--S/Y Midnight Kiss LP--Linda Leckie-Morel 14
3. Geoffrey Belchetz, 1991-1946(IT)G: The S/Y Close Encounters LP (Type 3 Limited Partnership) 15
Expenses Claimed as of Final Submissions--S/Y Close Encounters LP--Geoffrey Belchetz. 16
C: The Respondent’s Grounds Relied on for Disallowance. 18
1. Sections 3 and 4 of the Income Tax Act 18
2. Sham.. 18
3. Expenses Not Incurred. 18
4. Timing of Expenses Deducted. 18
5. No Loans. 19
6. S/Y Garbo Capital Cost Allowance Restricted. 19
7. S/Y Garbo Interest Limitation. 19
8. S/Y Close Encounters LP - At-Risk Rules. 19
9. Section 245(1) 19
10. Section 67. 20
D: Issues. 20
E: Transactional Facts. 21
1. The Three Types of Limited Partnerships. 21
2. Investment in a Limited Partnership. 24
3. Charter Operations Agreements between the Limited Partnerships and OCGC.. 27
F: The Factual Summary. 28
1. Early Days. 28
2. Marketing and Sale of Limited Partnerships. 29
3. Development and Marketing of Yacht Chartering Business. 32
4. Planning, Design, Construction, or Acquisition of Yachts. 34
a) General 34
b) The Yachts. 34
c) The S/Y First Impressions. 34
d) The S/Y Garbo. 35
e) The Ondine (the S/Y Great Gatsby) 36
f) The Med 86. 36
g) The S/Y Gable. 36
h) Other contracts. 37
5. The CRA Audit and Investigation. 37
G: Misrepresentations: A Fraud from Beginning to End. 39
a) The Offering Memoranda. 42
b) Misrepresentations to Professionals. 54
c) Misrepresentations in OCGC Materials: The “Fleet of Yachts” and the “Gourmet Commissary” 59
d) Financial Statements for Limited Partnerships. 61
e) Misrepresentations regarding Foreign Entities. 70
f) More False or Backdated Documents. 72
g) Further Misrepresentations to Investors. 73
h) Building and Purchasing Yachts. 77
i) Starlight Charter 90
j) Other OCGC Businesses. 95
H: Relevant Law and Analysis. 100
1. Did the three Limited Partnerships constitute a source of income pursuant to sections 3 and 4 of the Income Tax Act and capable of suffering a loss under sections 3, subsection 9(2), and section 96? 100
a) Is there a Source of Income for the Purposes of the Income Tax Act?. 100
b) Were the Limited Partnerships Genuine Partnerships Carrying on a Business in Common with a View to Profit?. 131
2. If the Limited Partnerships are determined to constitute an income source, did they actually suffer the losses claimed by the Appellants?. 142
3. If the Limited Partnerships actually suffered the losses claimed, did they properly compute the timing of partnership losses claimed for the taxation years in question?. 145
a) The Law.. 145
b) Analysis. 146
4. If there was a source with genuine losses taken at the correct times, what is the amount of capital cost allowance, if any, that the S/Y Garbo Limited Partnership is entitled to take?. 146
a) The Law.. 146
b) Analysis. 147
5. Did each of the Appellants incur the interest expenses claimed pursuant to paragraphs 18(1)(a) and 20(1)(c) of the Income Tax Act?. 147
a) The Law.. 147
b) Analysis. 150
6. Other Issues. 151
a) The At-Risk Rules and the S/Y Close Encounters Limited Partnership. 151
b) Section 67. 153
I: Conclusion. 155
J: Costs. 155
A: Overview [1] The Appellants subscribed through Overseas Credit and Guaranty Corporation (the “OCGC”) for one of three types of Limited Partnerships. OCGC promoted and marketed the Limited Partnerships as an opportunity to invest in a luxury yacht chartering business structured to provide very attractive tax advantages to investors with limited personal risk. OCGC acted as the general partner for each Limited Partnership. Einar Bellfield incorporated OCGC in 1984 as its sole shareholder and was the operating mind of the entity.
[2] The investment involved each Limited Partnership purchasing a luxury yacht from OCGC that was to be delivered by a specified date. As the general partner, OCGC was committed to building, marketing, and managing a luxury yacht chartering business known as “Fantaseas” that would market and manage the yacht fleet of the Limited Partnerships. OCGC contracted to provide each Limited Partnership with various goods and services, in return for certain fees from the Limited Partnership. The investment plan anticipated significant start-up costs, with profits projected only in the long-term. However, as a Limited Partnership’s expenses exceeded its revenue, the losses would flow down and be divided amongst the investors in each Limited Partnership and deductible from their respective incomes.
[3] The Fantaseas charters targeted the high-end luxurious yacht chartering market. In this market at the time, generally only an entire yacht could be chartered. Fantaseas aimed at an unfilled market niche: the chartering of individual cabins in luxury yachts. The Fantaseas concept was that each Limited Partnership yacht of a 60-foot catamaran or an 80 feet plus monohull would have four equally sized staterooms available individually for charter, along with crew quarters. Charter guests would enjoy gourmet food, excellent full-staff service, and upscale accommodations. Charters were to alternate between the Caribbean and the Mediterranean, according to the season.
[4] Starlight Canada Ltd., a company related to OCGC, was to coordinate the sale and marketing of the yacht chartering business. An additional company related to OCGC, Fabu D’Or, had the stated purpose of developing a commissary to prepare gourmet food within the luxurious standards of the Fantaseas brand. OCGC had made commitments to 36 Limited Partnerships to provide yachts of certain specifications, but the how, where, and when the yachts would be built and delivered changed several times. Depending on the timing, the yachts were supposed to be built by companies in France (Dynamique, Chantier Yachting France, or Maxi-Yachts), or at a site in Picton, Ontario. Various naval architects and yacht builders participated at different points to design and build the yachts promised by OCGC. As it turned out, only two yachts that met the Fantaseas standards were ever purportedly built for the Canadian Limited Partnerships.
[5] The entire luxury yacht chartering investment opportunity and the Fantaseas concept were the brainchild of Einar Bellfield. The marketing and promotion of investment opportunities in the luxury yacht Limited Partnerships was one of OCGC’s main investment projects, although the corporation also developed and sold other investment opportunities whose main premise appeared to have been that they were of a tax advantageous nature.
[6] The luxury yacht Limited Partnerships were promoted by various accountants, lawyers, and others, as tax shelters to their higher income-earning clients. The promoters received a commission for each investor that subscribed. The promoters heavily emphasized the tax advantages offered by the investment, which was the focus of much of the promotional material provided to potential investors. The tax attractions included the flow-through of losses from the substantial expenses incurred during the start-up phase before any revenue was generated, as well as the ability to claim depreciation on each yacht. For example, the Offering Memorandum for the S/Y Garbo Limited Partnership provided an overview of the tax advantageous nature of the investment opportunity as follows:
The OCG Corporation is dedicated and organized to provide the taxpayer with attractive tax deals.
Tax investments differ from other investments and they should be evaluated with certain objectives in mind. When considering a regular investment, the basic concerns are risk versus return.
When evaluating tax investment, your main concerns are maximum capital depreciation with a low or no-risk exposure, and besides, there should be a good chance to obtain a reasonable return on invested capital, plus a capital appreciation further down the line.[1]
…
Due to this investment’s initial high deductions and the declining capital cost allowance available to purchasers of marine vessels, the calculation of owners [sic] net income may be substantially influenced.[2]
[7] The structure of the transaction was tax advantageous for the investor as explained by OCGC in the Offering Memorandum for the S/Y Garbo Limited Partnership:
The Financing Program has been tailored by OCG Corporation to maximize the available tax benefits for an Investor and at the same time eliminate any cash outlay by the purchaser of a Unit.[3]
[8] During the taxation years in question, from 1984 until 1988, depending on the Limited Partnership type, the investors claimed their share of their Limited Partnership’s losses using the yearly loss schedules provided by OCGC. Investors also claimed their interest payments on a promissory note, which was part of the consideration on the purchase of a unit, as well as professional fees paid upon acquisition, in the year of subscription.
[9] In approximately April 1986, losses claimed by one Limited Partnership investor came to the attention of the Canada Revenue Agency (the “CRA”).[4] An audit was commenced in October 1986. The CRA’s Tax Avoidance department became involved and ultimately the CRA’s Special Investigations department ended up conducting, in conjunction with the RCMP, search and seizures as well as interviews of staffers and investors of OCGC. In the end, the CRA came to the belief that OCGC was engaged in fraudulent activity in all the partnerships. The Minister of National Revenue disallowed all losses, interest, and professional fees claimed by the investors.
[10] The CRA’s theory was that fraud had occurred by or through OCGC. Criminal charges were prosecuted. In 1994, Einar Bellfield was charged with two counts of fraud and two counts of uttering false documents. Mr. Bellfield’s right hand man, Osvaldo Minchella, was charged with the same counts several months later. A jury found both Mr. Bellfield and Mr. Minchella guilty on all charges after a trial before the Ontario Superior Court of Justice. These convictions were upheld on appeal and leave to appeal to the Supreme Court of Canada was denied. Another player, Pierre Rochat, was arrested in 1995. He pled guilty to uttering forged documents in 1996, and was sentenced to six months in prison.
[11] Of the over 600 investors that were reassessed, approximately 300 settled with the CRA. The great majority of the investors however, proceeded with appeals before the Tax Court of Canada. The Appellants before the Court are representative of those appeals by other Appellants, save and except for a few that have decided not to be bound by the result of these appeals.
[12] The central issue is whether each Limited Partnership constituted a genuine yacht charter business between 1984 and 1988, the range of taxation years in which the Appellants claimed Limited Partnership losses, interest, and professional fees relating to their investment in a Limited Partnership unit. If the Limited Partnerships were engaged in genuine businesses, then there was a source of income, and the expenses claimed may be deductible depending on the resolution of other issues.[5] If instead, I conclude that the Appellants were defrauded from the very beginning of their investment, then the Limited Partnership cannot constitute an income source for the Appellants and no amounts claimed are deductible.
[13] These appeals have a lengthy procedural history. Notices of Assessment and/or Reassessment were first issued in 1989 and/or 1990. Notices of Objection were filed in those same years. The appeals were held in abeyance for many years pending negotiations between the litigants and the final outcome of Mr. Bellfield and Mr. Minchella’s trials and appeals in the criminal process. The criminal matters ultimately came to a close in 2004. A number of Motions came before the Tax Court of Canada regarding these appeals and caused further delays.
[14] The taking of evidence began on December 6, 2010 under the General Procedure Rule 119 over twenty years after the first Notices of Assessment were issued. The trial proper began on January 11, 2012, and in total, over 62 days of evidence was given with some 34 witnesses plus some 23 Agreed Statements of Facts. The hearing of the evidence occurred over an extended period to facilitate availability of witnesses and to allow for a better organization and presentation of evidence by both. As an aside, counsel for both parties worked together most impressively and cooperatively in most instances to put evidence presented before the Court that included tens of thousands of pages of multiple volumes of exhibits that by my count has accumulated to the point of filling over 100 bankers boxes.
B: The Appellants’ Claims
[15] Four appeals were heard on common evidence with each of the three Appellants having invested in one of three Limited Partnership types. The 36 Limited Partnerships in which units were sold were divided into three types according to whether they were marketed and purchased in 1984, 1985, or 1986.
[16] The Type 1 Limited Partnerships were marketed and sold by OCGC in 1984. The 1984 Limited Partnership before the Court is the "S/Y Garbo Limited Partnership" (the “S/Y Garbo LP”). The Appellant Allan Garber purchased one of the 24 units in the S/Y Garbo LP and held the unit in trust for himself, Stacy Mitchell and David Sugarman.
[17] The following year, in 1985, OCGC marketed and sold Type 2 Limited Partnerships. The 1985 Limited Partnership before the Court is the "S/Y Midnight Kiss Limited Partnership" (the “S/Y Midnight Kiss LP”). The appellant Dr. Linda Leckie-Morel purchased one of the 24 units in the S/Y Midnight Kiss LP.
[18] The Type 3 Limited Partnerships were marketed and sold in 1986. This last type of Limited Partnership before the Court bears some transactional difference due to the new “at-risk rules” for Limited Partnerships introduced in the February 26, 1986 federal budget. OCGC designed the transactional history of the 1986 Limited Partnerships differently in an effort to grandfather them under the pre-1986 Income Tax Act rules. The appellant Geoffrey Belchetz purchased one of the 25 units in the 1986 Limited Partnership before the Court, the “S/Y Close Encounters Limited Partnership" (the “S/Y Close Encounters LP”).
[19] The next three subsections set out the claims and the procedural history associated with each of the Appellants.
1. Allan Garber, 2004-2787(IT)G: The S/Y Garbo LP (Type 1 Limited Partnership)
[20] Allan Garber is a chartered accountant and businessperson residing in Ontario. Mr. Garber’s appeal concerns deductions from his income relating to his investment in the S/Y Garbo LP, a Type 1 Limited Partnership. The deductions were claimed in the taxation years 1984, 1985, 1986, and 1987.
[21] Mr. Garber learned about the opportunity to invest in the Limited Partnership from a promoter, who presented the Limited Partnerships as an investment in a capital asset, the luxury yacht “the S/Y Garbo”, to be used in a yacht sailing chartering business. The S/Y Garbo LP had 24 units available, with each full unit price being $97,500. Mr. Garber purchased one-third of a unit for $32,500 in 1984.
[22] Mr. Garber claimed a share of the S/Y Garbo LP’s losses proportionate to his ownership of one-third of a unit as business losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under section 3, subsection 9(2), and section 96 of the Income Tax Act (the “Act”), as follows:
• $15,058 out of $1,084,064 total losses in the 1984 taxation year;
• $5,381 out of $378,457 total losses in the 1985 taxation year;
• $6,651 out of $478,902 total losses in the 1986 taxation year;
• $6,552 out of $471,769 total losses in the 1987 taxation year.
[23] Mr. Garber, per his Fresh as Amended Notice of Appeal dated September 19, 2008, claimed the interest he paid on one of two promissory notes used to purchase his one-third of a unit in the S/Y Garbo LP and deducted from his income in each year that was incurred, pursuant to paragraph 20(1)(c)(ii) of the Act, as follows:
• $635 in the 1984 taxation year;
• $3,859 in the 1985 taxation year;
• $2,512 in the 1986 taxation year;
• $2,167 in the 1987 taxation year.
[24] Finally, Mr. Garber claimed $150 in professional fees he paid as part of his acquisition of one-third of a unit, deducted in the year the expenses were incurred, pursuant to paragraph 20(1)(e) of the Act.
[25] The deductions for each of the taxation years were disallowed by Notices of Assessment issued July 28, 1989. Mr. Garber filed Notices of Objection in October 1989, and appeals to the Tax Court of Canada under paragraph 169(1)(b) of the Act.
[26] Early in the trial, Mr. Garber withdrew several of his claims. As of his Final Submissions, Mr. Garber only pursues the expenses outlined in table below. The table is reproduced from the Appellant’s Final Submissions:
Expenses Claimed as of Final Submissions - Type 1 Partnership - The S/Y Garbo LP-Allan Garber (1/3 interest):[6]
1984
Interest expense on Note #1
$2,166.00
Professional fees
$150.00
Feasibility study
$100,000
Production costs and professional fees
$120,000
Sales commissions and issue costs
$274,000
Linen, cutlery, china and utensils
$15,000
Marketing and advertising
$60,000
Subtotal:
$569,000
1/24 share x 1/3 of a unit
$7,902.78
Total:
$10,218.78
1985
Interest expense on Note #1
$2,166.00
Marketing and advertising
$60,000
Commissary Services
$90,700
Management Fees
$70,000
Subtotal:
$220,700
1/24 share x 1/3 of a unit
$3,065.28
Total:
$5,231.28
1986
Interest expense on Note #1
$2,166.00
Charter expenses
$12,663
Feasibility study update fee (50%)
$25,000
Management fee
$7,129
Marketing and advertising costs
$60,000
Moorage fees
$52,405
Depreciation
$139,696
Subtotal:
$296,893
1/24 share x 1/3 of a unit
$4,123.51
Total:
$6,289.51
1987
Interest expense on Note #1
$2,166.00
Charter expenses
$96,383
Feasibility study update fee (50%)
$25,000
Management fee
$100,000
Marketing and advertising
$60,000
Moorage fees
$55,139
Travel, consulting and general research
$35,000
Depreciation
$118,696
Subtotal:
$490,218
1/24 share x 1/3 of a unit
$6,808.58
Total:
$8,974.58
1988
Interest expense on Note #1
$2,166.00
Charter expenses
$123,788
Management fees
$100,000
Marketing and advertising
$64,200
Moorage fees
$58,424
Depreciation
$100,892
Subtotal:
$447,304
1/24 share x 1/3 of a unit
$6,212.55
Total:
$8,378.55
[27] It should be noted that the amount of the interest expenses claimed by Mr. Garber, in his Final Submissions is not consistent with the expenses claimed in his Fresh as Amended Notice of Appeal. In addition, as per the pleadings and notwithstanding a schedule for expenses claimed as of March 26, 2012, which includes the taxation year 1988, under this appeal Mr. Garber did not claim relief in the 1988 taxation year.
2. Linda Leckie Morel, 1991-1816(IT)G, 1991-509(IT)G: The S/Y Midnight Kiss LP (Type 2 Limited Partnership)
[28] Dr. Linda Leckie Morel is a medical doctor residing in Scarborough, Ontario. Dr. Leckie Morel’s appeals concern deductions from her income in the taxation years 1985, 1987, and 1988 in appeal number 1991-1816(IT)G, and the 1986 taxation year in appeal number 1991-509(IT)G. Both appeals relate to her investment in the Limited Partnership, S/Y Midnight Kiss LP”, a Type 2 Limited Partnership.
[29] Dr. Leckie Morel was presented with the opportunity to invest in the Limited Partnership by her accountant. In 1985, she purchased one of 24 units in the S/Y Midnight Kiss LP at a purchase price of $97,500. Her understanding was that the S/Y Midnight Kiss LP was purchasing one yacht, the “S/Y Midnight Kiss”, to be used in a luxury yacht chartering business.
[30] Dr. Leckie Morel deducted from her income the share of the S/Y Midnight Kiss LP’s losses proportionate to her unit ownership as business losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under section 3, subsection 9(2), and section 96 of the Act, as follows:
• $48,308 out of $1,159,392 total losses in the 1985 taxation year;
• $21,422 out of $514,120 total losses in the 1986 taxation year;
• $15,565 out of $373,565 total losses in the 1987 taxation year;
• $15,245 out of $365,878 total losses in the 1988 taxation year.
[31] Dr. Leckie Morel also deducted the interest paid on one of two promissory notes used to purchase her unit of the S/Y Midnight Kiss LP, in each year that the interest was incurred, pursuant to paragraph 20(1)(c)(ii) of the Act, as follows:
• $11,757 in the 1985 taxation year;
• $6,500 in the 1986 taxation year;
• $6,500 in the 1987 taxation year;
• $6,500 in the 1988 taxation year.
[32] Finally, Dr. Leckie Morel deducted $250 in professional fees paid in 1985, the taxation year the expenses were incurred, relating to borrowing funds to purchase her unit in the S/Y Midnight Kiss LP, pursuant to paragraph 20(1)(e) of the Act.
[33] The deductions Dr. Leckie Morel claimed for each of the taxation years were disallowed in Notices of Assessment issued on September 7, 1989 for the 1985, 1986, and 1987 years; and May 23, 1990 for the 1988 year. A Notice of Reassessment was issued on December 22, 1989 for the 1986 year. Dr. Leckie Morel filed Notice of Objections for each taxation year.
[34] On March 26, 2012, Dr. Leckie Morel reduced the number of expenses she is claiming in these appeals. The table below outlines the Appellant’s claims as of the Appellant’s Final Submissions.
Expenses Claimed as of Final Submissions-Type 2 Partnership-S/Y Midnight Kiss LP-Linda Leckie-Morel:[7]
1985
Interest expense on Note #1
$6,500.00
Professional fees
$250.00
Sales commissions and issue costs
$274,000
Production costs and professional fees
$120,000
Feasibility study
$100,000
Marketing and advertising
$60,000
Commissary services
$90,700
Office expenses
$50,000
Subtotal:
$694,700
1/24 share
$28,945.83
Total:
$35,695.83
1986
Interest expense on Note #1
$6,500.00
Marketing and advertising
$60,000
International promotion
$35,000
Feasibility study update (50%)
$25,000
Management fee
$100,000
Subtotal:
$220,000
1/24 share
$9,166.67
Total:
$15,666.67
1987
Interest expense on Note #1
$6,500.00
Marketing and advertising
$60,000
International promotion
$40,000
Feasibility study update (50%)
$25,000
Management fee
$100,000
Consulting fees
$35,000
Subtotal:
$260,000
1/24 share
$10,833.33
Total:
$17,333.33
1988
Interest expense on Note #1
$6,500.00
Marketing and advertising
$64,200
International promotion
Management fee
$40,000
$100,000
Subtotal:
$204,200
1/24 share
$8,508.33
Total:
$15,008.33
3. Geoffrey Belchetz, 1991-1946(IT)G: The S/Y Close Encounters LP (Type 3 Limited Partnership)
[35] Geoffrey Belchetz is a businessperson residing in Toronto, Ontario. Mr. Belchetz appeals the disallowance of deductions from his income relating to his investment in the Limited Partnership, the “S/Y Close Encounters LP”, a Type 3 partnership, for the taxation years 1986, 1987, and 1988.
[36] A promoter of the Limited Partnerships presented Mr. Belchetz with the opportunity to invest in a Limited Partnership that would own a capital asset, the luxury yacht “S/Y Close Encounters”, to be used in a yacht chartering business. In 1986, Mr. Belchetz purchased one of the 25 units in the S/Y Close Encounters LP at a purchase price of $116,000.
[37] Mr. Belchetz deducted his proportionate share of the S/Y Close Encounters LP’s losses as business losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under section 3, subsection 9(2), and section 96 of the Act, as follows:
• $35,900 out of $897,500 total losses for the 1986 taxation year;
• $22,507 out of $562,675 total losses for the 1987 taxation year;
• $26,932 out of $673,294 total losses for the 1988 taxation year.
[38] Mr. Belchetz also deducted the interest paid on one of two promissory notes used to purchase his unit of the S/Y Close Encounter LP pursuant to paragraph 20(1)(c)(ii) of the Act. The amounts in each year were:
• $9,000 in the 1986 taxation year;
• $9,445 in the 1987 taxation year;
• $750 in the 1988 taxation year.
[39] In addition, Mr. Belchetz deducted $6,000 in professional fees paid to borrow funds to purchase his partnership unit in 1986, the taxation year the expenses were incurred, pursuant to paragraph 20(1)(e) of the Act.
[40] Mr. Belchetz’s deductions for each of the taxation years, 1986, 1987, and 1988, were disallowed by Notices of Assessment issued on November 2, 1990. Mr. Belchetz filed Notices of Objection for each taxation year on November 12, 1990. On June 14, 1991, the Minister of National Revenue confirmed the assessments by Notice of Confirmation.
[41] Just as the other two Appellants did early in the trial, Mr. Belchetz reduced the expenses he is claiming. Mr. Belchetz’s current claims as of Final Submissions are set out in the table below:
Expenses Claimed as of Final Submissions-S/Y Close Encounters LP-Geoffrey Belchetz:[8]
1986
Interest expense on Note #1
$9,000.00
Professional fees
$6,000.00
Sales and marketing consulting fees and other issue costs
$290,000
Feasibility study
$100,000
Production costs and professional fees
$90,000
Inspecting building of yacht
Travel and building consulting fee
$60,000
$35,000
Management fee
$30,000
Marketing and advertising
$25,000
Subtotal:
$630,000
1/25 share
$25,200.00
Total:
$40,200.00
1987
Interest expense on Note #1
$9,445.00
Feasibility study update (50%)
$25,000
Inspecting building of yacht
$60,000
Travel and building consultation fee
$35,000
Marketing and advertising
$30,000
Travel and promotion
$35,000
Management fee
$100,000
Subtotal:
$285,000
1/25 share
$11,400.00
Total:
$20,845.00
1988
Interest expense on Note #1
$750.00
Feasibility update fee (50%)
$25,000
Inspecting building of yacht
$60,000
Travel and building consultation fee
$35,000
Management fee
$100,000
Marketing and advertising
$140,000
Travel and promotion
$40,000
Subtotal:
$400,000
1/25 share
$16,000.00
Total:
$16,750.00
C: The Respondent’s Grounds Relied on for Disallowance 1. Sections 3 and 4 of the Income Tax Act
[42] The Respondent submits numerous grounds for the disallowance of the partnership losses, interest, and professional fees claimed by the Appellants. Firstly, the Respondent argues that the Limited Partnerships did not constitute an income source under sections 3 and 4 of the Act because there was no genuine yacht charter operation business; no yacht chartering business was ever carried on, and there was no reasonable expectation of profit. The Respondent asserts that the Limited Partnerships were not true partnerships in law because OCGC did not carry on business in common with the investors in any of the 36 Limited Partnerships in which units were sold.
2. Sham
[43] The Respondent further argues that the transactions were mere shams entered into with the Limited Partnerships and that OCGC and Mr. Bellfield never had the intention to carry on a business in common with the Limited Partnerships. The promissory notes were presented as mere shams used by OCGC and Mr. Bellfield as part of his scheme to defraud the Minister and the investors.
3. Expenses Not Incurred
[44] In the alternative, the Respondent argues that the Limited Partnerships did not actually incur expenses for the purpose of gaining or producing business or property income.
4. Timing of Expenses Deducted
[45] Again, in the alternative, the Respondent asserts that under subsection 9(1) and 18(9), certain expenses incurred are not deductible for timing reasons because no deduction is available for outlays or expenses incurred in the taxation year when the services are to be rendered after the end of that taxation year.
5. No Loans
[46] The Respondent also submits that the promissory notes do not constitute actual loans. The Respondent asserts that no money was lent or advanced to the investors and therefore no interest can be deducted under subparagraphs 20(1)(c)(i) or 20(1)(c)(ii) of the Act or under the meaning of an outlay or expense found in paragraph 18(1)(a).
6. S/Y Garbo Capital Cost Allowance Restricted
[47] Specifically regarding the Type 1 Limited Partnership, the S/Y Garbo LP, the Respondent asserts that any capital cost allowance deductions claimed pursuant to paragraph 20(1)(a) in the taxation years of 1986, 1987, and 1988 are restricted by the leasing property rules found in the Income Tax Regulations at subsections 1100(15), 1100(17), 1100(17.2), and 1100(17.3).
7. S/Y Garbo Interest Limitation
[48] Alternately, the Respondent submits that interest claimed under paragraph 20(1)(a) must be limited by the half-year rule outlined in subsection 1100(2) of the Income Tax Regulations because the S/Y Garbo yacht was not acquired in the years prior to 1986.
8. S/Y Close Encounters LP - At-Risk Rules
[49] Regarding the Type 3 Limited Partnership, the S/Y Close Encounters LP, the Respondent submits that Mr. Belchetz’s partnership interest is not exempt from the at-risk rules introduced on February 26, 1986 because it was not actively carrying on a business on a regular and continuous basis before that date. The Respondent further submits that as a non-exempt partnership unit, Mr. Belchetz’s claims are limited to the amount he was at-risk for. Under the new rules introduced, his claims are limited to a maximum of $6,000 in losses.
9. Section 245(1)
[50] The Respondent further claims that the deductions sought by the Appellants are barred by (former) subsection 245(1) of the Act because to allow the expenses or disbursements would unduly or artificially reduced the Appellants’ income.
10. Section 67
[51] Further, the Respondent submits that even if the Limited Partnerships are determined to be a source of income, the expenses claimed are barred from deductibility under section 67 because they were not reasonable and were not incurred to earn income.
D: Issues
[52] The issues for the Court to determine are as follows:
1. Did each of the three Limited Partnerships constitute a source of income pursuant to sections 3 and 4 of the Act and are capable of suffering a loss under sections 3, 96, and subsection 9(2)?
2. If the Limited Partnerships are determined to constitute a source of income, did they actually suffer the losses claimed by the Appellants?
3. If the Limited Partnerships actually suffered the losses claimed, did they properly compute the timing of partnership losses claimed for the taxation years in question?
4. If there was a source with genuine losses taken at the correct times, what is the amount of capital cost allowance, if any, that the S/Y Garbo LP is entitled to deduct?
5. Did each of the Appellants incur the interest expenses claimed pursuant to paragraphs 18(1)(a) and 20(1)(c) of the Act?
6. Did the Minister properly disallow the partnership losses, interest, and professional fees?
E: Transactional Facts
[53] The general structure of each Limited Partnership type is set out below, followed by a description of the subscription process for all investors and a detailed review of the individual investor subscription process using one of the Limited Partnership types as an example.
1. The Three Types of Limited Partnerships
[54] OCGC registered 79 Limited Partnerships, of three different types depending on the year registered. Of the 79 Limited Partnerships, units were sold in 36 Limited Partnerships. Einar Bellfield was the controlling mind of the general partner and all original limited partners.
[55] OCGC entered into Limited Partnership Agreements with each Limited Partnership. The signatory was the original limited partner, who was either Einar Bellfield (in trust), for Type 1 and Type 2 Limited Partnerships, or OCGC Enterprises (in trust) for Type 3 Limited Partnerships.
a) Type 1 Limited Partnerships – 1984 LPs
[56] The original limited partner of the Type 1 Limited Partnerships was Einar Bellfield, as bare trustee, and the general partner was OCGC. There were 24 units per Type 1 Limited Partnership. The price per unit in the Type 1 Limited Partnerships was $97,500. If fully capitalized, each Type 1 Limited Partnerships would have born a total capitalization of $2.34 million.
[57] The two Type Limited partnerships that the OCGC sold units in, both registered on November 28, 1984, were:
1. The S/Y Garbo Limited Partnership
2. The S/Y Gable Limited Partnership
[58] To provide a broad overview of the subscription process, an investor subscribed to a Type 1 Limited Partnership by providing two Promissory Notes (“Promissory Note #1” and “Promissory Note #2”) for a total amount of $97,500. In addition, a payment of $450 in professional fees was made for the unit acquisition. The $6,500 in interest for the 1984 year was also payable.
b) Type 2 Limited Partnerships – 1985 LPs
[59] The 1985 Limited Partnerships’ original limited partner was Einar Bellfield, as bare trustee, and their general partner was again OCGC. There were 24 units per Type 2 Limited Partnership and the price per unit was also $97,500. If fully capitalized, there would be a total capitalization of $2.34 million.
[60] Fourteen Type 2 Limited Partnerships were registered on March 20, 1985, except for the S/Y Change of Seasons Limited Partnership and the S/Y Main Event Limited Partnership. These two partnerships were registered on November 8, 1985. The fourteen Type 2 Limited Partnerships were:
1. Autumn Sonata Limited Partnership
2. S/Y Bergman Limited Partnership
3. S/Y Bogart Limited Partnership
4. S/Y Casablanca Limited Partnership
5. Queen of Hearts Limited Partnership
6. Ecstasy Limited Partnership
7. Going My Way Limited Partnership
8. S/Y Great Gatsby Limited Partnership
9. High Sierra Limited Partnership
10. Human Desire Limited Partnership
11. Serenade Limited Partnership
12. S/Y Midnight Kiss Limited Partnership
13. S/Y Change of Seasons Limited Partnership
14. S/Y Main Event Limited Partnership
[61] To subscribe to a 1985 Limited Partnership, the investor provided a down payment ranging from $4,000 to $6,000, as well as two Promissory Notes for the total amount of $93,500. An additional varying amount was also paid in professional fees for the acquisition of a unit. The interest owed for the 1985 subscription year, was also payable.
c) Type 3 Limited Partnerships – 1986 LPs
[62] The 1986 Type 3 Limited Partnerships had a different structure due to OCGC’s intentions to grandfather the Limited Partnerships so that they would not fall under the new at-risk rules introduced in the February 26, 1986 federal budget. This effort consisted of OCGC Enterprises Inc. first acquiring all of the units of the Type 3 Limited Partnerships before the February 26, 1986 deadline, and then reselling the partnership units to the investors.
[63] The 25 units per Type 3 Limited Partnership each had a unit price of $116,000. If fully capitalized, each Limited Partnership’s total capital was $2,900,000. Units were sold in the following twenty Type 3 Limited Partnerships, all registered on January 27, 1986:
1. Ambrosia Limited Partnership
2. Blue Gardenia Limited Partnership
3. Chasing Rainbows Limited Partnership
4. S/Y Close Encounters Limited Partnership
5. Compassion Limited Partnership
6. Duet In the Sun Limited Partnership
7. Elegance Limited Partnership
8. Forbidden Fruit Limited Partnership
9. Holiday For Lovers Limited Partnership
10. Midnight Lace Limited Partnership
11. Morning Star Limited Partnership
12. Operation Moonlight Limited Partnership
13. Pleasure Seekers Limited Partnership
14. Silvery