March 06, 2012

Denis Howe, Timothy Gamble, Cameron W.D. White, Kenneth M. Hawley, and Craig Lodge (Appellants) v. Her Majesty the Queen (Respondent)

2004 DTC 3619
Neutral Citation: 2004 TCC 719
Tax Court of Canada
Date: October 29, 2004

Court File Nos. 2001-2716(IT)G, 2001-3707(IT)G, 2001-3715(IT)G, 2001-3712(IT)G, and 2001-2718(IT)G (General Procedure)

Deductions — Limited partnership losses — Whether Minister’s disallowance of limited partnership loss deductions by taxpayers was justified under “at-risk” rules, or under the General Anti-Avoidance Rule — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, ss. 53(2)(c)(i), 85(1), 96(1)(g), 96(2.1), 96(2.2)(d), 245(2), 245(3)(b), 245(5).

Facts: Vidatron was a public corporation involved in producing and distributing film, video, and interactive programming. NM I and NM II were limited partnerships, each of which entered into a joint venture agreement with Vidatron and others to promote Vidatron’s products. Under the terms of each of the joint venture agreements, Vidatron acquired all of the limited partners’ units of NM I and NM II in return for shares of Vidatron. NM I and NM II were then dissolved. Less than one and a half years elapsed between the time that each of NM I and NM II was established and the time at which Vidatron acquired all of the outstanding units from the limited partners (including the taxpayers). In reassessing each of the taxpayers for 1995 or 1996 or 1995 and 1996, the Minister denied them the deduction of their share of NM I’s and NM II’s losses that had been allocated to them by NM I for 1995 and by NM II for 1996. In support of these reassessments, the Minister relied on the partnership “at-risk” rules, and, in the alternative, on the General Anti-Avoidance Rule (“GAAR”). The taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were allowed. Under subsection 96(2.1) of the Act, limited partners can only deduct their proportionate share of business losses from a partnership up to their “at-risk amount”. This amount is, in essence, the limited partners’ partnership capital at risk. Under each of the joint venture agreements in this case, Vidatron was obligated to offer to acquire the partnership units at the lesser of their fair market value or $1,080 per unit. The evidence was that the fair market value of each unit would always exceed $1,080. Therefore, the offer price could not exceed the fair market value of the units. Hence, Vidatron did not “overpay” for the units. It was impossible for the taxpayers to obtain “any amount … for the purpose of reducing the impact … of any loss that they might sustain … upon the disposition of the units” within the meaning of subsection 96(2.1) of the Act. As a result, the “at-risk” rules were inapplicable. Nor were the transactions in this case “avoidance transactions” within the meaning of subsection 245(3) of the Act. They were undertaken primarily for genuine business purposes. In conclusion, neither the “at-risk” rules nor the GAAR justified the Minister’s disallowance of the partnership loss deductions claimed. The Minister was ordered to reassess accordingly.