Howe v. The Queen

Howe v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2004-10-29
Neutral citation
2004 TCC 719
File numbers
2001-2716(IT)G
Judges and Taxing Officers
Ronald D. Bell
Subjects
Income Tax Act
Decision Content
Docket: 2001-2716(IT)G
BETWEEN:
DENIS HOWE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Timothy Gamble
(2001-3707(IT)G), Cameron W.D. White (2001-3715(IT)G),
Kenneth M. Hawley (2001-3712(IT)G) and Craig Lodge (2001-2718(IT)G) on March 29, 2004 and April 15, 2004 at Vancouver, British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
David R. Davies and Samantha Mason
Counsel for the Respondent:
Lynn M. Burch and Pam Meneguzzi
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1995 taxation year is allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada this 29th day of October, 2004.
"R.D. Bell"
Bell, J.
Docket: 2001-3707(IT)G
BETWEEN:
TIMOTHY GAMBLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Denis Howe
(2001-2716(IT)G), Cameron W.D. White (2001-3715(IT)G),
Kenneth M. Hawley (2001-3712(IT)G) and Craig Lodge (2001-2718(IT)G) on March 29, 2004 and April 15, 2004 at Vancouver, British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
David R. Davies and Samantha Mason
Counsel for the Respondent:
Lynn M. Burch and Pam Meneguzzi
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada this 29th day of October, 2004.
"R.D. Bell"
Bell, J.
Docket: 2001-3715(IT)G
BETWEEN:
CAMERON W.D. WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Timothy Gamble
(2001-3707(IT)G), Denis Howe (2001-2716(IT)G),
Kenneth M. Hawley (2001-3712(IT)G) and Craig Lodge (2001-2718(IT)G)
on March 29, 2004 and April 15, 2004 at Vancouver, British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
David R. Davies and Samantha Mason
Counsel for the Respondent:
Lynn M. Burch and Pam Meneguzzi
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 1995 and 1996 taxation years are allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada this 29th day of October, 2004.
"R.D. Bell"
Bell, J.
Docket: 2001-3712(IT)G
BETWEEN:
KENNETH M. HAWLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Timothy Gamble
(2001-3707(IT)G), Cameron W.D. White (2001-3715(IT)G),
Denis Howe (2001-2716(IT)G) and Craig Lodge (2001-2718(IT)G)
on March 29, 2004 and April 15, 2004 at Vancouver, British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
David R. Davies and Samantha Mason
Counsel for the Respondent:
Lynn M. Burch and Pam Meneguzzi
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1996 taxation year is allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada this 29th day of October, 2004.
"R.D. Bell"
Bell, J.
Docket: 2001-2718(IT)G
BETWEEN:
CRAIG LODGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Timothy Gamble
(2001-3707(IT)G), Cameron W.D. White (2001-3715(IT)G),
Kenneth M. Hawley (2001-3712(IT)G) and Denis Howe (2001-2716(IT)G)
on March 29, 2004 and April 15, 2004 at Vancouver, British Columbia
By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:
David R. Davies and Samantha Mason
Counsel for the Respondent:
Lynn M. Burch and Pam Meneguzzi
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1995 taxation year is allowed, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Costs are awarded to the Appellant.
Signed at Ottawa, Canada this 29th day of October, 2004.
"R.D. Bell"
Bell, J.
Citation: 2004TCC719
Date: 20041029
Docket: 2001-2716(IT)G
BETWEEN:
DENIS HOWE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
Docket: 2001-3707(IT)G
TIMOTHY GAMBLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
Docket: 2001-3715(IT)G
CAMERON W.D. WHITE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
Docket: 2001-3712(IT)G
KENNETH M. HAWLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
Docket: 2001-2718(IT)G
CRAIG LODGE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.
[1] The issues are defined by the parties as set forth in paragraphs 85 and 86 of the Partial Agreed Statement of Fact, but are restated here as:
1. Whether entitlement to the amount that the respective unitholders of two partnerships were to receive, pursuant to the offers that Vidatron was required to make to effect the exchange of its shares for units, being interests in those partnerships, was granted or to be granted for the purpose of reducing the impact "... of any loss that the unitholders may sustain" within the meaning of paragraph 96(2.2)(d), thereby reducing the "at-risk" amount and the consequent amount of partnership losses deductible by the partners.
2. Whether, in the alternative, the transactions between each of the two partnerships, NM I and NM II and Vidatron were avoidance transactions which resulted directly or indirectly in tax benefits to the Appellants within the meaning of subsection 245(2) and paragraph 245(3)(b) of the Act.
[2] Although it is for the Court to determine, with respect to the first issue, the parties agreed that as stated in paragraph 87:
Except for the issue described above with respect to paragraph 96(2.2)(d) and the general anti-avoidance rule, the parties are agreed that the Appellants' would be entitled to deduct their share of the NM I and NM II business losses in accordance with the provisions of the Act.
[3] The parties filed a Partial Agreed Statement of Facts and Issues which reads as follows. This was supplemented by oral evidence and portions of examinations for discovery.
PARTIAL AGREED STATEMENT OF FACTS AND ISSUES
For the purposes of the proceedings in Timothy Gamble v. HMTQ TCC 2001-3707(IT)G, Cameron W.D. White v. HMTQ TCC 2001-3715(IT)G, Denis Howe v. HMTQ TCC 2001-2716(IT)G, Kenneth M. Hawley v. HMTQ TCC 2001-3712(IT)G, and Craig Lodge v. HMTQ TCC 2001-2718(IT)G and any appeal therefrom, the following facts are agreed to by the Appellants and the Respondent:
1. Vidatron Entertainment Group Inc. ("Vidatron") is a company incorporated under the laws of the Province of British Columbia. The common shares of Vidatron were at all material times publicly listed on the Vancouver Stock Exchange.
2. Vidatron's business at all material times included producing and distributing film, video and interactive programming for the corporate, education, and entertainment market sectors.
New Media Marketing Limited Partnership
3. The New Media Marketing Limited Partnership ("NM I") was established as a limited partnership under the laws of the Province of British Columbia on March 15, 1995.
4. The general partner of NM I was New Media Finance Ltd. (Vidatron Marketing Ltd. was the original general partner of NM I and was replaced by its successor in interest, New Media Finance Ltd.). Kathleen Martin and Shelley Kirk were the directors of the general partner. Kathleen Martin was the president and sole shareholder. Cameron White was the secretary.
5. NM I is one of a series of marketing limited partnerships in which Vidatron was involved: the others are Georgia Marketing Limited Partnership (1990), Georgia II Marketing Limited Partnership (1991), Vidatron Marketing (1993) Limited Partnership and New Media Marketing II Limited Partnership (1996).
6. On March 15, 1995 Vidatron and several related companies entered into a joint venture agreement (the "First JV Agreement") with NM I whereby NM I agreed to undertake an advertising and marketing program to promote Vidatron's products and services. The First JV Agreement was amended by an agreement dated October 15, 1995.
7. The management committee referenced in the First JV Agreement was comprised of Shelley Kirk, Kathleen Martin, Tim Gamble and Cameron White.
8. Under the terms of the First JV Agreement as amended, NM I was required to expend a minimum of $485,000 and a maximum of $1,275,000 during the period from March 15, 1995 to December 31, 1995. Vidatron agreed to match NM I's initial expenditures during the period from January 1, 1996 until the end of the term of the First JV Agreement on December 31, 2005.
9. In return for its initial expenditures under the First JV Agreement, and subject to further adjustments, Vidatron was required to pay NM I a share equal to 8% of "Net Revenues" as that term is defined in the First JV Agreement, commencing on January 1, 1996.
10. NM I's proportionate share of revenues was subject to a further annual adjustment based on the cumulative expenditures made by NM I and Vidatron in connection with the marketing program. The net revenues to be shared with the partnership are arrived at by first reducing the gross revenue by a base revenue adjustment of $7,000,000. The base revenue adjustment is an estimate of the revenue that would be achieved over the term of the marketing program in the absence of such program (both the initial phase and the remainder of the program).
11. Under the terms of the First JV Marketing Agreement, Vidatron agreed to make an offer to acquire the outstanding units of NM I after April 1, 1996 and before August 31, 1996. Vidatron agreed to make the offer at a price equal to the lesser of:
(a) $1,080 per unit; and
(b) the fair market value of the unit,
which was to be fully payable in common shares of Vidatron at their weighted average price for the 20 trading days preceding the fifth business day before the offer was made.
12. The First JV Agreement further provided that if 65% or more of the units issued, excluding any units owned by Vidatron, were tendered in acceptance of the exchange offer, the remaining limited partners were required to sell their units in NM I and the general partner was required to sell its interest to Vidatron in accordance with the terms in the First JV Agreement.
13. NM I offered its units for sale by way of offering memorandum dated October 15, 1995. NM I sold a total of 934 units at a price of $1,000 per unit for gross offering proceeds of $934,000.
14. NM I's 1995 fiscal period ended on December 31, 1995. For its 1995 fiscal period NM I had no revenues and expenses of $858,949 for an aggregate net business loss of $858,949.
15. The expenditures giving rise to NM I's net business loss were incurred mainly as follows: consulting fees paid to Vidatron management and officers, producing of demo and promotional videos, direct mail out of promotional material including brochures, pamphlets and proposals incorporating graphic design and printing, general promotion including trade shows, travel, clothing, meals, entertainment and advertising.
16. In accordance with the limited partnership agreement, $857,326 of the 1995 net loss for NM I was allocated to the limited partners. Each NM I limited partnership unit was allocated a loss of $917.90.
17. On July 31, 1996 Vidatron made an offer (the "NM I Offer" to acquire the limited partners' NM I units for $1,080 per unit (being the lesser of $1080 per unit and the fair market value of $1627 per unit) as required under the First JV Agreement. At that time unit holders were provided with the following documents: Offer to Purchase, Offering Circular, Valuation Report prepared by I.S. Grant & Associates dated June 7, 1996, Vidatron's financial statements for the nine months ended May 31, 1996, Director's Circular and a Letter of Acceptance and Transmittal. Subscribers had until August 23, 1996 to transmit their letters of acceptance to Vidatron.
18. The valuation required pursuant to section 2.16 of the First JV Agreement was prepared by I.S. Grant & Company for Vidatron.
19. Pursuant to the NM I Offer, more than 65% of all of the limited partnership units were tendered in acceptance of the exchange offer. Consequently, all of the NM I units were tendered to Vidatron, in exchange for an aggregate of 473,538 shares in Vidatron, at a deemed price of $2.13 a share (being the weighted average price for the shares as traded on the Vancouver Stock Exchange for the 20 trading days ending five days prior to the announcement of the NM I Offer).
20. The NM I Offers were accepted as described above and the interest of the general partner was sold to Vidatron before the base revenue of $7,000,000 was achieved.
21. NM I was dissolved once Vidatron acquired all the units of NM I.
New Media Marketing II Limited Partnership
22. The New Media Marketing II Limited Partnership ("NM II") was established as a limited partnership under the laws of the Province of British Columbia on March 6, 1996.
23. The general partner of NM II was New Media Finance II Ltd. Kathleen Martin and Shelley Kirk were the directors of the general partner. Kathleen Martin was the president, Shelley Kirk was the secretary and collectively they owned 100% of the shares of the general partner.
24. NM II is one of a series of marketing limited partnerships in which Vidatron was involved: the others are Georgia Marking Limited Partnership (1990), Georgia II Marketing Limited Partnership (1991), Vidatron Marketing (1993) Limited Partnership and New Media Marketing Limited Partnership (1995).
25. On March 6, 1996 Vidatron and several related companies entered into a joint venture agreement (the "Second JV Agreement") with NM II whereby NM II agreed to undertake an advertising and marketing program to promote Vidatron's products and services.
26. The management committee referenced in the Second JV Agreement was comprised of Shelley Kirk, Kathleen Martin, Tim Gamble and Cameron White.
27. Under the terms of the Second JV Agreement, NM II was required to expend a minimum of $835,000 and a maximum of $1,700,000 during the period from March 6, 1996 to December 31, 1996. Vidatron agreed to match NM II's initial expenditures during the period from January 1, 1997 until the end of the term of the Second JV Agreement on December 31, 2006.
28. In return for its initial expenditures under the Second JV Agreement, and subject to further adjustments, Vidatron was required to pay NM II a share equal to 8% of "Net Revenues" as that term is defined in the Second JV agreement, commencing on January 1, 1997.
29. NM II's proportionate share of revenues was subject to a further annual adjustment based on the cumulative expenditures made by NM II and Vidatron in connection with the marketing program. The net revenues to be shared with NM II are arrived at by first reducing the gross revenue by a base revenue adjustment of $11,000,000. The base revenue adjustment is an estimate of the revenue that would be achieved over the term of the marketing program in the absence of such program (both the initial phase and the remainder of the program).
30. Under the terms of the Second JV Agreement, Vidatron agreed to make an offer to acquire the outstanding units of NM II after April 1, 1997 and before August 31, 1997. Vidatron agreed to make the offer at a price equal to the lesser of:
(a) $1,080 per unit; and
(b) the fair market value of the unit,
which was to be fully payable in common shares of Vidatron at their weighted average price for the 20 trading days preceding the fifth business day before the offer was made.
31. The Second JV Agreement further provided that if 65% or more of the units issued, excluding any units owned by Vidatron, were tendered in acceptance of the exchange offer, the remaining limited partners were required to sell their units in NM II and the general partner was required to sell its interest to Vidatron in accordance with the terms in the Second JV Agreement.
32. NM II offered its units for sale by way of offering memorandum dated June 15, 1996. NM II sold a total of 1,999 units at a price of $950 per unit for gross offering proceeds of $1,899,050.
33. NM II's 1996 fiscal period ended on December 31, 1996. For its 1996 fiscal period NM II had gross revenues of $1,471 and an aggregate net business loss of $1,796,405. Each NM I limited partnership unit was allocated a loss of $894.32.
34. The expenditures giving rise to NM II's net business loss were incurred mainly as follows: consulting fees paid to Vidatron management and officers, production of demo and promotional videos, direct mail out of promotional material including brochures, pamphlets and proposals incorporating graphic design and printing, general promotion including trade shows, travel, clothing, meals, entertainment and advertising.
35. On or about June 11, 1997 Vidatron made an offer (the "NM II Offer") to acquire the limited partners' NM II units for $1,080 per unit (being the lesser of $1080 per unit and the fair market value of $1886 per unit) as required under the Second JV Agreement. At that time unit holders were provided with the following documents: Offer to Purchase, Offering Circular, Director's Circular, Valuation Report of I.S. Grant & Company Ltd. dated June 1, 1997, Vidatron's Financial Statements for the six months ended February 28, 1997 and Letter of Acceptance and Transmittal. Subscribers had until July 4, 1997 to transmit their letters of acceptance.
36. The valuation report required pursuant to section 2.16 of the Second JV Agreement was prepared by I.S. Grant & Company for Vidatron.
37. Pursuant to the NM II Offer, on July 4, 1997 a majority in excess of 65% of the limited partners tendered their acceptance of the exchange offer. Consequently, all of the limited partnership units were tendered in exchange for an aggregate of 423,042 shares in Vidatron, at a deemed price of $5.25 a share (being the weighted average price for the shares as traded on the Vancouver Stock Exchange for the 20 trading days ending five days prior to the announcement of the exchange offer).
38. The NM II Offers were accepted as described above and the interest of the general partner was sold to Vidatron.
39. NM II was dissolved once Vidatron acquired all the units of NM II.
Timothy Gamble ("Gamble")
40. At all material times Gamble was the president, and director or officer of Vidatron and a member of the management committee of the General partner.
41. Gamble acquired 25 units of NM I at $1,000 per unit for a total of $25,000. He subscribed for the NM I units on December 28, 1995 and paid for the units by cheque dated December 31, 1995. The general partner accepted his subscription on December 29, 1995.
42. Gamble's share of NM I's business loss for the 1995 taxation year was $917.90 per unit or $22,947.45 in total.
43. Gamble deducted his share of NM I's business loss in computing his income for the 1995 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
44. Further to Vidatron's offer under the First JV Agreement, Gamble sold his units of NM I to Vidatron in consideration for 12,676 common shares of Vidatron.
45. Vidatron and Gamble filed a joint election under subsection 85(1) of the Income Tax Act (Canada)(the "Act") in respect of the transfer of Gamble's NM I units at an "agreed amount" of $82.102 per unit or $2,052.55 in aggregate.
46. By Notice of Reassessment dated April 15, 1999, the Minister of National Revenue (the "Minister") reassessed Gamble's 1995 taxation year to deny Gamble's share of NM I's business loss ("Gamble's 1995 Notice of Reassessment").
47. In confirming the reassessment of Gamble's 1995 taxation year the Minister relied on the GAAR as an alternate basis to disallow the deduction of Gamble's share of NM I's business loss for 1995.
48. Gamble acquired 25 units of NM II at $950 per unit for a total of $23,750. Gamble paid the full purchase price for his units by cheque on closing.
49. Gamble's share of NM II's business loss for the 1996 taxation year was $894.32 per unit of $22,358.02 in total.
50. Gamble deducted his share of NM II's business loss in computing his income for the 1996 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
51. Further to Vidatron's offer to acquire the Gamble's New Media II Partnership units under the Second JV Agreement, Gamble sold his units of NM II to Vidatron in consideration for 5,150 common shares of Vidatron.
52. Vidatron and Gamble filed a joint election under subsection 85(1) of the Act in respect of the transfer of Gamble's NM II units at an "agreed amount" of $55.67 per unit or $1,391.75 in aggregate.
Cameron White ("White")
53. In 1995 and 1996 White was the CEO and director of Vidatron. At all material times White was a member of the management committee of the general partners involved in NMI and NM II. In 1995 he was also secretary of the general partner.
54. White acquired 30 units of NM I at $1,000 per unit for a total of $30,000.
55. White's share of NM I's business loss for the 1995 taxation year was $917.90 per unit of $27,536.94 in total.
56. White deducted his share of NM I's business loss in computing his income for the 1995 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
57. Further to Vidatron's offer under the First JV Agreement, White sold his units of NM I to Vidatron in consideration for 15,210 common shares of Vidatron.
58. Vidatron and White filed a joint election under subsection 85(1) of the Act in respect of the transfer of White's NM I units at an "agreed amount" of $82.102 per unit or $2,463.26 in aggregate.
59. By Notice of Reassessment dated May 20, 1999, the Minister reassessed White's 1995 taxation year to deny White's share of NM I's business loss ("White's 1995 Notice of Reassessment").
60. In confirming the reassessment of White's 1995 taxation year the Minister relied on the GAAR as an alternate basis to disallow the deduction of White's share of NM I's business loss for 1995.
61. White acquired 27 units of NM II at $950 per unit for a total of $25,650. White paid the full purchase price for his units by cheque on closing. He subscribed for the NM II units on August 30, 1996 and the general partner accepted his subscription on that same date.
62. White's share of NM II's business loss for the 1996 taxation year was $894.32 per unit or $24,146.66 in total.
63. White deducted his share of NM II's business loss in computing his income for the 1996 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
64. Further to Vidatron's offer to acquire the White's NM II units under the Second JV Agreement, White sold his units of NM II to Vidatron in consideration for 5,562 common shares of Vidatron.
65. Vidatron and White filed a joint election under subsection 85(1) of the Act in respect of the transfer of White's NM II units at an agreed amount of $55.67 per unit or $1,503.34 in aggregate.
Denis Howe ("Howe")
66. Howe acquired 13 units of NM I at $1,000 per unit for a total of $13,000., He subscribed for the NM I units on December 19, 1995. The general partner accepted his subscription on December 20, 1995.
67. Howe's share of NM I's business loss for the 1995 taxation year was $917.898 per unit or $11,932.67 in total.
68. Howe deducted his share of NM I's business loss in computing his income for the 1995 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
69. Further to Vidatron's offer under the First JV Agreement, Howe sold his units of NM I to Vidatron in consideration for 6,591 common shares of Vidatron.
70. Vidatron and Howe filed a joint election under subsection 85(1) of the Act in respect of the transfer of Howe's NM I units at an "agreed amount" of $82.102 per unit or $1,067.33 in aggregate.
71. By Notice of Reassessment dated March 11, the Minister reassessed Howe's 1995 taxation year to deny Howe's share of NM I's business loss ("Howe's 1995 Notice of Reassessment").
72. In confirming the reassessment of Howe's 1995 taxation year the Minister relied on the GAAR as an alternate basis to disallow the deduction of Howe's share of NM I's business loss for 1995.
Kenneth M. Hawley ("Hawley")
73. Hawley acquired 27 units of NM II at $950 per unit for a total of $25,650. He subscribed for the NM II units on August 30, 1996. The general partner accepted his subscription on September 6, 1996. Hawley paid the full purchase price for his units by cheque on closing.
74. Hawley's share of NM II's business loss for the 1996 taxation year was $894.32 per unit or $24,146.66 in total.
75. Hawley deducted $23,830 of his share of NM II's business loss in computing his income for the 1996 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
76. Further to Vidatron's offer to acquire the Hawley's NM II units under the Second JV Agreement, Hawley sold his units of NM II to Vidatron in consideration for 5,562 common shares of Vidatron.
77. Vidatron and Hawley filed a joint election under subsection 85(1) of the Act in respect of the transfer of Hawley's NM II units at an "agreed amount" of $55.67 per unit or $1,503.34 in aggregate.
Craig Lodge ("Lodge")
78. Lodge acquired 25 units of NM I at $1,000 per unit for a total of $25,000. He subscribed for the NM I units on December 29, 1995. The general partner accepted the subscription on December 29, 1995.
79. Lodge's share of NM I's business loss for the 1995 taxation year was $917.90 per unit or $22,947 in total.
80. Lodge deducted his share of NM I's business loss in computing his income for the 1995 taxation year on the basis that the loss was deductible pursuant to paragraph 96(1)(g) of the Act.
81. Further to Vidatron's offer under the First JV Agreement, Lodge sold his units of NM I to Vidatron in consideration for 12,676 common shares of Vidatron.
82. Vidatron and Lodge filed a joint election under subsection 85(1) of the Act in respect of the transfer of Lodge's NM I units at an "agreed amount" of $82.102 per unit or $2,052.55 in aggregate.
83. By Notice of Reassessment dated April 1, 1999, the Minister reassessed Lodge's 1995 taxation year to deny Lodge's share of NM I's business loss ("Lodge's 1995 Notice of Reassessment").
84. In confirming the reassessment of Lodge's 1995 taxation year the Minister relied on the GAAR as an alternate basis to disallow the deduction of Lodge's share of NM I's business loss for 1995.
Issues:
85. The first issue is whether the amount that the respective unitholders were contingently entitled to receive pursuant to the exchange offers that Vidatron was required to make was granted for a purpose outlined in paragraph 96(2.2)(d).
86. A further issue is whether, in the alternative:
(a) the transactions between NM I, NM II and Vidatron were avoidance transactions, which resulted directly or indirectly in tax benefits to the Appellants within the meaning of subsection 245(2) and paragraph 245(3)(b) of the Act; and
(b) whether subsection 245(2) of the Act does not apply because of subsection 245(4) of the Act.
87. Except for the issue described above with respect to paragraph 96(2.2)(d) and the general anti-avoidance rule, the parties are agreed that the Appellants would be entitled to deduct their share of the NM I and NM II business losses in accordance with the provisions of the Act.
The Parties agree that they shall be entitled to adduce other evidence (in addition to this Partial Agreed Statement of Facts or the Joint Book of Documents) or to ask the Tax Court of Canada to draw inferences from the evidence presented, provided that such additional evidence or inferences are not inconsistent with this Partial Agreed Statement of Facts.
The Appellants and Respondent agree to file copies of the following documents with the Court as exhibits for the purposes of this proceeding. The Parties agree that filing the following documents with the Court as exhibits pursuant to this agreement does not constitute compliance with Rule 145 of the Rules of General Procedure respecting expert witnesses.
A1. This Partial Agreed Statement of Facts
A2. Joint Book of Documents.
[4] SUMMARY OF BUSINESS LOSSES CLAIMED BY THE FIVE APPELLANTS:
Gamble
1995 $22,947.45
1996 $22,358.02
White
1995 $27,536.94
1996 $24,146.66
Howe
1995 $11,932.67
Hawley
1996 $24,146.66
Lodge
1995 $22,947.00
FACTS FROM EVIDENCE GIVEN AT HEARING:
[5] When White was asked, on cross-examination, whether there was an expectation on the part of the company that unitholders would exercise their rights to exchange units for shares when Vidatron made the offer, his response was:
Well, I don't know how to answer that. Was there an expectation? Yeah, there was -- there was a chance that it would happen, a good chance it would happen, but one never knows.
[6] The cross-examination continued as follows:
Q. Vidatron certainly wanted that to happen, is that not correct?
A. Well, I think I said yesterday I didn't -- I was somewhat indifferent once we had raised the money. That was the principal objective I had. And so -- and so as the company continued to grow it was good to have an opportunity to buy those revenue streams back but in 1994 and 1995 -- or 1995 and 1996 when we did these, the main objective was to attract investment capital.
Q. But it was good for Vidatron to get the units and exchange them for shares?
A. Well, I don't know. I don't know. You have to look in hindsight to see whether that was good or bad.
[7] Upon re-examination the following occurred:
Q. Did the company have the resources in the absence of these partnerships to go out and undertake these programs on its own?
A. Well, not -- you know, generally not really. I mean, there wasn't -- and in fact I don't think in earlier years there was a concerted program. It was just largely up to the managers of each division to try to do what they could within their resources to expand their business.
[8] With respect to Gamble's evidence, the following took place on direct examination:
Q. Did you ever finance Vidatron in other ways, say through shareholder loans?
A. Yes. You know, right from day one I took a second mortgage on my house to finance its -- you know, the beginning of the company. And then all along I participated in every financing the company did. I felt if it was good for investors it was good for me.
Q. Now I understand Vidatron participated in a number of other limited -- or marketing limited partnership arrangements in the early 1990s.
A. Yes.
Q. Why did it enter into these limited marketing partnership arrangements?
A. Well, first and foremost, the company was looking for marketing dollars to expand the market for its products and services and it was a way in which the company could attract investment dollars and marketing money and it was difficult to raise money on any other basis. It was a -- and so it seemed like it was a win-win for the investor. It was good for the customer and so it was a -- seemed like a good financial structure to raise new capital. ...
Q. Now in 1995 Vidatron entered into a joint venture agreement with the New Media Marketing Limited Partnership and what was -- from Vidatron's perspective, what was the reason for entering into that joint venture agreement with the New Media Marketing Limited Partnership?
A. Well, again it was a business relationship which would provide the company with marketing dollars. And so it was -- we felt it was an appropriate time for the company to be raising -- having access to money for the purpose of marketing its products and services.
Q. And why was it important to the company to raise marketing dollars?
A. Well, ultimately again, getting back to our original plan, we wanted to become less client focused, more product driven, and we needed to expand the markets for our products and so we needed to get exposure, we needed to have marketing for attending trade shows, for advertising, for doing direct mail so that we could really exploit, you know, the money that was invested in our product side of our business. So we then felt that it was extremely important to have marketing money.
Q. And was it your view that the joint venture agreement, the 1995 agreement between Vidatron and the New Media Marketing Limited Partnership, that that would be a good thing for the investors as well?
A. Yes, absolutely.
Q. And what in your view -- why in your view would it have been good for the investors?
A. Well, first of all because it was marketing money it allowed them to participate in the growth of the business and it was money that was going in as sort of last money in, but the investors were participating in the first dollars out from marketing. And so it wasn't R & D, it was marketing expenditures and then the investors got to participate in the success, if there was success, in the sales of the products and services. So we felt that it was a real win-win for both the investors and the company. ...
Q. Okay let's just speak about the potential to share in the revenue stream.
A. Yes.
Q. What was your understanding of how that worked?
A. Well, my understanding was, is that for incurring the -- for putting up the money to market its products and services the investors would have the right to earn a percentage of the company's gross revenue over a period of time.
Q. And you are aware there was an exchange feature in the joint venture --
A. Yes.
Q. -- agreements? And what was your understanding of that exchange feature and how it would work?
A. Well, my understanding was that the investors would have an option to either elect to convert to equity or to stay in and keep a royalty stream, keep a revenue stream.
Q. And what was your understanding of the terms of the exchange offer?
A. Well, you know, I'm a little foggy on the actual mechanics of it but the exchange offer would be based on a number that was around 1,080 and it was the lesser of that number, and so it was a -- if the valuation was greater than that number it would -- the investors would receive $1,080, if it was less than that they would receive less than that.
...
Q. ... at that time what did you know about the method of valuation that would be used to determine the fair market value of the units for the purposes of the exchange offer?
A. I knew nothing about the method of evaluation. It was --
Q. And with respect to the 1996 joint venture agreement what did you know at the time of entering into that agreement? What -- the method of valuation that would be used?
A. I knew nothing about the method of valuation.
Q. Now based on your understanding of the joint venture agreements what then was the minimum return that an investor would guarantee to receive by virtue of subscribing for units in the New Media Marketing Limited Partnership?
A. I mean, I don't -- I mean, I don't think there was an amount that was guaranteed.
Q. Why do you say that?
A. Well, it's interesting. There were three features to the investment, as I see it. There was the write-offs, a potential revenue stream, and equity. And the only thing I thought for sure that was guaranteed was that they would get the write-off. Whether there was going to be a revenue stream that was going to make sense I don't know or whether there was going to be -- what the exchange offer was going to be I didn't -- nobody knew at the time. So I don't know what the guarantee would be.
Q. And what was your view of the riskiness, if you will, of a subscription in the partnership units in New Media I and New Media II?
A. Well again, I -- there was risk obviously associated with investing in this business. We did try to -- we did believe that we were building a successful business. We did believe that we were spending marketing money. We were going to spend it wisely and therefore we did think it would have a very positive effect on the business. But there was no way of knowing to what extent the marketing money was going to be effective or work. But we did manage it properly and we did enter into -- you know, used the money wisely and therefore we had good results with it. But at the point in time we had no way of knowing what the results would be. ....
Q. And how well did you know Mr. Grant prior to him preparing the valuations for the New Media Marketing I Limited Partnership?
A. I didn't know him at all really. As it turned out, we had people -- it turned out we knew we had -- we had people that we knew in common but that was about it.
Q. Do you know when Mr. Grant was actually hired to do the valuation for the New Media Marketing I Limited Partnership?
A. I don't know the specific date. ...
Q. What instructions did you provide to Mr. Grant when he was hired to do the valuation?
A. I didn't provide any -- no instructions. ...
Q. When did you first know what Mr. Grant's valuation would be in respect of the New Media Marketing I units?
A. I don't think I knew until he actually published something and wrote something. ...
Q. And what effect did the marketing expenditures that were made by the New Media I partnership and New Media II partnership, what effect did those marketing expenditures have on Vidatron?
A. Well, I think they -- they had a terrific impact on the growth of the company. Some of the businesses really prospered. Not all the expenditures paid off, there were certain things that didn't work as well as others. But overall, it was money that was very well spent and had a terrific impact on the growth of the business. ...
Q. And how did Vidatron grow or change between 1995 and 1996?
A. Well, you know, having access to marketing money definitely initiated growth in our sales and revenues and as a result of that we were able to also go into new areas. And so we expanded into the -- we had money to expand into the area of television and film and that area experienced terrific growth over the next few years and that was a result of having access to money to attend trade shows and to market these existing products and so on.
Q. And how did Vidatron grow or change from 1996 to 1997?
A. Well, again it was always becoming -- our revenue came from the product side of our business. So the service side of the business stayed pretty constant but we then were able -- we had more money to be developing and marketing products and that area was really the film and television area and so -- and that area experienced terrific growth.
...
Q. ... Could you please clarify how the revenue stream is related to the riskiness of a subscription in units?
A. Well, first of all, if the investor choose -- chose to keep his interest in the revenue stream, there was no guarantee on what the future revenues were going to be. As it turned out, because of a number of factors, the company experienced a terrific growth. It would have been a very good investment had the investors stayed in and -- and managed to earn the revenues they had coming to them but there was absolutely no way of knowing. One of the main reasons for the growth in th