http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110968/index.do
Gleig v. The Queen (July 29, 2015 – 2015 TCC 191, Lyons J.).
Précis: Mr. Gleig and other appellants purchased interests in a mineral claim with a 25% up front payment. They claimed Canadian Resource Expenditures (“CRE”) on the full agreed price. CRA denied their claim on the basis that the program was an unregistered tax shelter or, in the alternative, a sham.
The Tax Court accepted CRA’s arguments that the program was an unregistered tax shelter and dismissed the appeals with one set of costs. As a consequence the Court did not deal with the sham argument.
Decision: The underlying transactions here were not complex:
[2] In 2002, Blue Hill and each of the appellants, plus other investors, entered into a separate Option Agreement and a separate Consulting Services Agreement (the “Agreements”). Under the Option Agreements, the appellants would each acquire a 0.2% interest in the Claims if they paid $2 upon signing the Agreements, undertook a work program (hiring Blue Hill on their behalf) to incur and pay CREs by certain dates payable by a Promissory Note (the “Note(s)”) in an agreed amount referenced in the Option Agreement. Although not referred to in the Agreements, each appellant paid an out-of-pocket payment equal to 25% of their respective agreed amount. In filing their respective 2002 income tax returns, each appellant claimed the entire agreed amount as CREs.
There were two questions before the Court:
[4] The issues are:
a) Whether the appellants acquired a “tax shelter” as defined in section 237.1 of the Income Tax Act (the “Act”).
b) Alternatively, whether the transactions between Blue Hill and the appellants were shams, and if so, whether the appellants made misrepresentations attributable to neglect, carelessness or wilful default in their 2002 income tax returns.
The promoter of the plan, Walter Barnscher, testified against the appellants:
[35] Walter Barnscher testified that he had stated to prospective investors that if they participated in the arrangement that their cost for tax purposes would be four times their out-of-pocket amount. He also informed prospective investors that they would be able to claim a $40,000 expense on their income tax return if they made an out-of-pocket payment of $10,000. That arrangement called for investors, including each appellant, to:
a) enter into the Agreements with Blue Hill;
b) pay $2 upon the execution of the Option Agreement, undertake a work program to incur qualifying CREs in the agreed amount on or before December 31, 2002, and pay the agreed amount, referenced in the Option Agreement, to Blue Hill on or before December 31, 2003;
c) sign a Note in the agreed amount payable to Blue Hill which investors were not required to pay;
d) pay an out-of-pocket payment equal to 25% of the agreed amount; and
e) deduct the agreed amount in their income tax returns.
[36] After meeting with the appellants, including other investors, Mr. Barnscher sent the Agreements (accompanied by a request that they sign and return these to Blue Hill) and the Notes, pre-dated with the effective date of January 1, 2002. He also sent an invoice dated December 31, 2002 for the agreed amount payable for work to be performed and a sample Statement of Business Activities form in one package with a Memo, tendered as Exhibit R-4, describing to the appellants how to expense the entire Amount on their income tax returns.
[37] Whilst the appellants testified that they received an invoice for the work program towards the end of 2002, this conflicts with Mr. Barnscher’s testimony that after he met with the appellants in late 2001 or early 2002 he sent the invoice as part of the package.
[38] Mr. Barnscher’s representation that an amount - four times of their out-of‑pocket payment - would be deductible for tax purposes in computing income, was made in the context of an assumed acquisition of the property to prospective investors in advance of the acquisition of, and connection with, the property. It also addresses the proposed income tax consequences that would arise on the assumed acquisition. Confirmation of this was provided in the package of documents sent after the meeting. I find that this fulfills the requirement of “represented to be deductible in computing income” under subparagraph 237.1(1) (a)(i) of the definition of a tax shelter.
[Footnote omitted]
Mr. Barnscher’s evidence was, in essence, fatal to the appellants’ case:
[46] In the circumstances, Blue Hill as a promoter, through Mr. Barnscher, marketed the sale of the Interests to investors. The income tax deduction expected to be available to purchasers of the Interests was a favourable marketing feature. The representation was made to prospective investors on behalf of Blue Hill, communicating or announcing to them that if they were to purchase an Interest, the acquisition cost of the Interest would be fully deductible in computing income notwithstanding that only 25% had been paid. The package of information was used in the sales campaign. In my opinion, the Interests marketed, including the Interests acquired by the appellants, meet the constituent elements of the definition to constitute tax shelters and a tax shelter identification number should have been obtained before any of the Interests were sold. Since it was unregistered and a penalty remains unpaid, the appellants are precluded from deducting any amount. Therefore, the Minister correctly disallowed the CREs in 2002 claimed by each appellant which resulted in a net business loss.
[47] The consequence of my finding that the Interests marketed were tax shelters is that, by virtue of subsection 237.1(6.1), the appellants are precluded from claiming any deduction in respect of the acquisition cost of their respective Interest acquired because no amount may be deducted by a person (the appellants) in respect of a tax shelter where any person (Blue Hill) is liable to such a penalty which remains unpaid.
[48] Notwithstanding the general time limitation periods in subsection 152(4) relating to assessments and reassessments, subsection 237.1(6.2) provides the Minister with the authority to reassess beyond those time limits to give effect to subsection 237.1(6.1).
[49] Since this suffices to dispose of the appeals, it is unnecessary to deal with the alternative issue and arguments.
As a result the appeals were dismissed with one set of costs.