Water's Edge Village Estates (Phase II) Ltd. v. Minister of National Revenue, 2002 FCA 291

• Judge: Desjardins, Linden and Noël, JJ.A.
• Court: Federal Court of Appeal (Canada)
• Case Date: July 09, 2002
• Jurisdiction: Canada (Federal)
• Citations: 2002 FCA 291;(2002), 292 N.R. 98 (FCA)

Water's Edge Village Estates v. MNR (2002), 292 N.R. 98 (FCA)

MLB headnote and full text

Temp. Cite: [2002] N.R. TBEd. JL.049

Water's Edge Village Estates (Phase II) Ltd. (appellant) v. Her Majesty The Queen (respondent)

(A-55-01; 2002 FCA 291)

Indexed As: Water's Edge Village Estates (Phase II) Ltd. v. Minister of National Revenue

Federal Court of Appeal

Desjardins, Linden and Noël, JJ.A.

July 9, 2002.

Summary:

Klink was a U.S. partnership that owned a 1982 IBM mainframe computer costing $3.7 Million U.S., but which by 1991 had been fully depreciated for accounting and tax purposes in the U.S. The computer was obsolete and now worth $7,000. In Decem­ber 1991, six Canadian taxpayers and others paid $320,000 to purchase a 93.5% interest in the partnership. Before the tax year ended on December 31, 1991, Klink acquired a 50% interest in another partnership in exchange for the computer. Because the computer had not been previously used to earn income, a loophole in the capital cost allowance provi­sions of the Income Tax Act entitled Klink to a terminal loss of $4,441,390. The taxpayers had in effect purchased a 93.5% share of a $4,441,390 unrealized capital loss for $320,000. The Minister disallowed the losses on the ground that by December 31, 1991, the partnership was no longer subsist­ing. Alternatively, the transactions consti­tuted a misuse of the Income Tax Act provi­sions and the deduc­tions were precluded by the general anti-avoidance rule (s. 245). The taxpayers appealed.

The Tax Court of Canada dismissed the appeal, confirming denial of the deductions on both grounds. The taxpayers appealed.

The Federal Court of Appeal dismissed the appeal. The court was willing to assume that the partnership remained subsisting after the date of the transactions giving rise to the tax losses. However, the general anti-avoidance rule in s. 245 applied to preclude the deduc­tions that were technically permitted under the Act but constituted a misuse of the Act. The predominant, if not sole, purpose of the transactions was to acquire a tax loss to set off against the taxpayers' other tax liabilities.

Income Tax - Topic 5061

Partnerships - Losses - General - [See Income Tax - Topic 9517 ].

Income Tax - Topic 9517

Tax evasion and tax avoidance - General principles - General anti-avoidance rule - Klink was a U.S. partnership that owned a 1982 IBM mainframe computer costing $3.7 Million U.S., but which by 1991 had been fully depreciated for accounting and tax purposes in the U.S., was obsolete and worth only $7,000 - In December 1991, Canadian taxpayers paid $320,000 to pur­chase a 93.5% interest in the partnership - Before the tax year ended on December 31, 1991, a disposition of the computer was arranged - Since the computer had not been previously used to earn income, a loophole in the capital cost allowance provisions of the Income Tax Act entitled Klink to a terminal loss of $4,441,390 based on the original cost of the computer - The taxpayers had in effect purchased 93.5% of a $4,441,390 unrealized capital loss for $320,000 - The Federal Court of Appeal affirmed that the general anti-avoidance rule in s. 245 applied to pre­clude the losses that were technically permitted under the Act - The predominant (if not sole) purpose of the transactions was to acquire a tax loss to set off against other tax liabilities (thereby avoiding tax otherwise payable) - The taxpayers mis­used the provisions of the Act to exploit an obvious loophole - See paragraphs 28 to 54.

Partnership - Topic 104

Tests of existence - General principles - Carrying on business with a view of profit - Klink was a U.S. partnership that owned a 1982 IBM mainframe computer costing $3.7 Million U.S., but which by 1991 had been fully depreciated for accounting and tax purposes in the U.S., was obsolete and worth only $7,000 - In December 1991, Canadian taxpayers paid $320,000 to pur­chase a 93.5% interest in the partnership - Before the tax year ended on December 31, 1991, a disposition of the computer was arranged - Since the computer had not been previously used to earn income, a loophole in the capital cost allowance provisions of the Income Tax Act entitled Klink to a terminal loss of $4,441,390 based on the original cost of the computer - The taxpayers had in effect purchased 93.5% of a $4,441,390 unrealized capital loss for $320,000 - The Minister disal­lowed the losses on the ground that by December 31, 1991, the partnership was no longer subsisting - The Federal Court of Appeal rejected this basis for disallowing the claimed losses - The court accepted that the taxpayers carried on business in common with a view to profit while they were actively engaged in efforts to market the computer in Europe - There was no evidence that those efforts were a sham or that the computer was obsolete in the European market - See paragraphs 14 to 27.

Cases Noticed:

Spire Freezers Ltd. v. Minister of National Revenue, [2001] 1 S.C.R. 391; 266 N.R. 305, refd to. [para. 14].

Backman v. Minister of National Revenue, [2001] 1 S.C.R. 367; 266 N.R. 246, refd to. [para. 14].

Stewart v. Minister of National Revenue (2002), 288 N.R. 297 (S.C.C.), refd to. [para. 14].

Walls and Buvyer v. Minister of National Revenue (2002), 289 N.R. 219 (S.C.C.), refd to. [para. 14].

Continental Bank Leasing Corp. v. Minis­ter of National Revenue, [1998] 2 S.C.R. 298; 229 N.R. 58, refd to. [para. 15].

Minister of National Revenue v. Shell Canada Ltd., [1999] 3 S.C.R. 622; 247 N.R. 19, refd to. [para. 30].

Lea-Don Canada Ltd. v. Minister of Na­tional Revenue, [1971] S.C.R. 95, refd to. [para. 42].

Allied Farm Equipment Ltd. v. Minister of National Revenue, [1972] F.C. 263, refd to. [para. 48]

Oceanspan Carriers Ltd. v. Minister of National Revenue, [1987] 2 F.C. 171; 73 N.R. 91 (C.A.), refd to. [para. 48]

Holiday Luggage Manufacturing Co. v. Minister of National Revenue, [1987] 2 F.C. 249; 8 F.T.R. 94 (T.D.), refd to. [para. 48].

65302 British Columbia Ltd. v. Minister of National Revenue, [1999] 3 S.C.R. 804; 248 N.R. 216, refd to. [para. 49].

Antosko v. Minister of National Revenue, [1994] 2 S.C.R. 312; 168 N.R. 16; [1994] 2 C.T.C. 25; 94 D.T.C. 6314, refd to. [para. 49].

Friesen v. Minister of National Revenue, [1995] 3 S.C.R. 103; 186 N.R. 243; 95 D.T.C. 5551, refd to. [para. 49].

OSFC Holdings Ltd. v. Minister of Nation­al Revenue (2001), 275 N.R. 238 (F.C.A.), refd to. [para. 52].

Counsel:

George Cadman and Margaret Stanier, for the appellant;

Patricia Babcock, for the respondent.

Solicitors of Record:

Boughton Peterson Yang Anderson, Vancouver, B.C., for the appellant;

Morris Rosenberg, Deputy Attorney Gen­eral of Canada, Ottawa, Ontario, for the respondent.

This appeal was heard on May 27, 2002, at Vancouver, B.C., before Desjardins, Linden and Noël, JJ.A., of the Federal Court of Appeal.

On July 9, 2002, Noël, J.A., delivered the following judgment for the Court of Appeal.