Digests

Cardella v. Canada

A-213-99

2001 FCA 39, Stone J.A.

26/2/01

26 pp.

Appeal from Tax Court's judgment (99 D.T.C. 631) upholding Minister's denial of deductions for interest, other expenses--Appellant, physician, limited partner in Gerrard, owner of condominium project in Toronto, and in Collegeway, owner of condominium project in Mississauga --Before investing aware little likelihood of earning share of partnership income--Size of investment substantial over time, even though relatively small amount of cash paid initially--Capital contributions, financial payments funded by way of tax-sheltered cash flow, income savings--Appellant expected condominium properties would appreciate in value such that gain realized from sale at end of 10-year period would offset earlier losses--In 1988 appellant paying $1,920 towards $231,283 cost of one unit of partnership interest in Gerrard, and $10,925 towards $171,000 cost of one unit of partnership interest in Collegeway--Balance of purchase price paid by way of promissory notes--Appellant thereby assuming pro rata share of debt obligations of each partnership--Notes refinanced by means of interest bearing mortgages--Mortgage loan with respect to Collegeway amortized over 25 years--When appellant became partner, total debt related to acquisition of condominium property projected to increase--Each limited partner required to make monthly payments in respect of indebtedness limited to 42 or 43% of subscriber's losses for tax purposes--Subscriber's losses for tax purposes included carrying costs of promissory notes, "arranging fee", "guarantor fee"--In 1997 appellant's investment in Gerrard project terminated--Continued investment in Collegeway--In 1989, 1990, 1991, appellant sought to deduct from income interest with respect to both Collegeway, Gerrard, as well as arranging fee and guarantee fee with respect to Gerrard--Minister denied deductions on basis interest amounts not borrowed money used for purpose of gaining, producing income from business within Income Tax Act, s. 20(1)(c), arranging fee not deductible under s. 20(1)(e), guarantee fee not deductible under s. 20(1)(e.1)--In dismissing appeal, Tax Court rejecting appellant's contention investments in Gerrard, Collegeway amounting to adventure in nature of trade--Regarded appellant's intention at time of investing as of no relevance--Found direct evidence of intention in partnership agreements indicating properties to be held to derive rental income--Concluded when gains on resale excluded from consideration, two partnerships could not be regarded as sources of income--Appeal allowed in part; matter referred back to Minister for reassessment with respect to interest in Collegeway--(1) In determining whether transaction in real estate adventure in nature of trade, taxpayer's intention, feasibility thereof, factors to be considered: Friesen v. Canada, [1995] 3 S.C.R. 103--Facts found at trial not supporting feasibility of intention to profit on resale: appellant could only give effect to such intention within legal framework of limited partnership agreements, both of which significantly circumscribed ability of limited partner to bring about resale--In each case, passage of special resolution required--(2) Given respondent's pleaded assumption, appellant needed to show had source of income from either rental operations or from adventure in nature of trade--If succeeded in doing so by way of prima facie case, Minister's assumption demolished, onus of proof would then shift to Minister who would be obliged to establish correctness of assumption--(3) Moldowan v. The Queen, [1978] 1 S.C.R. 480 setting out test to determine whether appellant had reasonable expectation of profit--Rigour of test in cases involving no personal element somewhat tempered by Tonn v. Canada, [1996] 2 F.C. 73 (C.A.)--No "personal element" present herein: appellant made no use of any dwelling unit, purchased none of his own; participation limited to investments of limited partner--Appellant failing to demolish Minister's assumption Gerrard not having reasonable expectation of profit, therefore no business source of income--Partnership burdened by heavy debt load from beginning; load projected to remain undiminished throughout first 10 years of operations--No profit realized from Gerrard's inception until mortgage foreclosed in 1997--Interest, other expenses claimed in respect of Gerrard not deductible under s. 20(1)--Reasonable expectation of profit did exist in respect of Collegeway--Debt load amortized over 25 years; enjoyed profit in two of three years at issue herein--Collegeway intended to be long-term operation as indicated by partnership's constating document, fact mortgage loan amortized over 25 years--Appellant made out prima facie case of reasonable expectation of profit; Minister not establishing assumption to contrary correct--Interest expenses properly deductible under s. 20(1)(c)--Income Tax Act, S.C. 1970-71-72, c. 63, s. 20(1)(c) (as am. by S.C. 1980-81-82-83, c. 140, s. 12; 1990, c. 39, s. 9; 1991, c. 49, s. 15), (e) (as am. by S.C. 1979, c. 5, s. 7; 1988, c. 55, s. 12), (e.1) (as enacted by S.C. 1988, c. 55, s. 12).