A-55-01
2002 FCA 291
Water's Edge Village Estates (Phase II) Ltd. (Appellant)
v.
Her Majesty the Queen (Respondent)
Indexed as: Water's Edge Village Estates (Phase II) Ltd. v. Canada (C.A.)
Court of Appeal, Desjardins, Linden and Noël JJ.A.-- Vancouver, May 27; Ottawa, July 9, 2002.
Income Tax -- Income Calculation -- Deductions -- Taxpayers purchasing 93.5% interest in U.S. partnership (Klink Development Company) in December 1991 for $320,000 -- Klink conveying computer purchased in 1982 for US$3.7 million but fair market value of which US$7000 in 1991, to B.C. limited partnership in which had 50% interest -- Klink recording net terminal loss under Income Tax Act, s. 20(16) -- Taxpayers claiming respective shares of loss in computation of income -- M.N.R. disallowing claim -- Tax Court Judge confirming reassessments on basis no viable partnership subsisted beyond December 1991 transactions, losses properly denied under general anti-avoidance rule in s. 245 -- (1) Partnership in existence at close of 1991 taxation year -- Taxpayers carried on business in common with view to profit while attempting to exploit computer in selected markets -- (2) Losses properly denied under s. 245 -- 1991 transactions providing taxpayers with substantial tax benefit -- Tax benefit only reason for transactions -- Taxpayers exploited obvious loophole in Act, used Act, ss. 13(21), 20(16) to obtain anomalous, unintended result -- S. 245 permitting Court to intervene as misused said provisions, abused capital cost allowance system.
Income Tax -- Partnerships -- Tax Court confirming reassessments disallowing claims for shares of partnership's terminal loss on basis no viable partnership -- Taxpayers' acquisition of interest in partnership, contribution of obsolete mainframe computer (asset giving rise to loss) to B.C. limited partnership primarily tax motivated -- Minister challenging continued existence of partnership as proposed use of computer not giving rise to reasonable expectation of profit -- Case law evolving since decision under appeal rendered -- Must determine whether lesser business intent existed despite predominant tax motivation -- Supreme Court of Canada holding reasonable expectation of profit test not relevant in determining existence of business where activity commercial-like -- In absence of personal element, activities directed towards generation of profit, and which bear badges of commerce, constituting business -- Taxpayers carried on business in common with view to profit while actively engaged in attempt to exploit computer in selected markets.
This was an appeal from a Tax Court of Canada decision concerning losses allegedly incurred by a partnership and of which the appellants (five other appeals were consolidated with this appeal) availed themselves in the computation of their respective income. On December 13, 1991, a British Columbia promoter and a company through which he conducted his activities purchased, on an interim basis, a 98% interest in a United States partnership, Klink Development Company, for $51,500. Shortly thereafter, on December 20, 1991, the appellants, along with three other individuals, paid $320,000 to acquire interests totalling more than 93.5% in Klink. On the same day, Klink acquired a 50% interest in a British Columbia limited partnership, called Interfin Leasing Partnership (ILP). Its contribution to that partnership consisted in the conveyance of an IBM mainframe computer which it had bought in 1982, for US$3.7 million but which had a market value of approximately US$7000 in 1991. The computer was obsolete in North America at that time. After the computer was conveyed by Klink to ILP, ongoing efforts were made to lease the computer in various Eastern European countries and Venezuela, none of which proved to be fruitful. In computing its income for its taxation year ending December 31, 1991, Klink recorded a net terminal loss in the amount of $4,441,390 pursuant to subsection 20(16) of the Income Tax Act. The appellants claimed their respective shares of this loss in the computation of their income for the relevant taxation years. The Minister of National Revenue reassessed the appellants and disallowed their respective share of the Klink loss. The Tax Court Judge confirmed the reassessments on the basis that no viable partnership subsisted beyond the December 1991 transactions and that, even if Klink did survive these transactions, the losses were properly denied by virtue of the general anti-avoidance rule (GAAR) in section 245 of the Act. The issues were: (1) whether appellants were members of a partnership at the time the losses were incurred; and (2) whether the losses were properly denied by section 245.
Held, the appeal should dismissed.
(1) The partnership remained in existence at the close of its 1991 taxation year based on cases decided since the decision under appeal. The acquisition by the appellants of their interest in Klink and the ensuing contribution of the computer to ILP were primarily tax motivated. But the question was whether the appellants as partners had the ancillary intention to profit from the continuing use of the computer, a question which the Tax Court did not address although it was incumbent upon it to have done so. The ongoing intention to exploit the computer with a view to profit was understood by the appellants to be an essential component of the tax plan which they had conceived and they acted in a manner which was consistent with that plan. In the absence of a personal element, activities directed towards the generation of profit and which bear the badges of commerce constitute a business. The appellants carried on business in common with a view to profit while they were attempting to exploit the computer in selected markets. That the U.S. partners agreed to remain in that capacity in order to insure the continued existence of the partnership is consistent with their continued intention to carry on business in common.
(2) The Minister took the position that the appellants had embarked on "avoidance transactions" the benefits of which were denied by the GAAR. He recognized that the terminal loss in the amount of $4,486,940 had been properly computed by Klink, subject to the application of section 245 which requires answers to three questions. The first question was whether the December 20, 1991 transactions resulted in a tax benefit to the appellants. The acquisition by the appellants of their respective interests in Klink on December 20, 1991 and the disposition, on the same day, of the computer to ILP, provided the appellants with a substantial tax benefit. Indeed, they gained access to a loss totalling $4,152,700 (93.5% of $4,441,390) at a cost of $320,000, or 13 cents to the dollar. The second question was whether the transactions could reasonably be considered to have been undertaken primarily for a purpose other than to obtain a tax benefit. The value of the tax loss in the hands of the appellants when contrasted with the income-earning prospects of the computer made the predominant purpose of the transactions plain and obvious. The difference between the amount paid by the appellants to acquire their partnership interest ($320,000) and the value of the computer at that time (US$7,000) was also indicative of the fact that first and foremost, the appellants paid to acquire a tax loss. There was no credible explanation for the manner in which the appellants proceeded to acquire their interest in the partnership and contribute the computer to another partnership prior to the close of its 1991 taxation year, other than the achievement of the tax benefit which they were seeking. The quest for the tax benefit was the only reason why the transactions unfolded as they did.
The answer to the second question being negative, the third question was whether the transactions resulted in a misuse or an abuse of the provisions of the Act, other than section 245, read as a whole. The capital cost allowance system is intended to recognize over time costs incurred to acquire capital assets actually used to earn income within the meaning of paragraphs 18(1)(a) and (b), and the "recapture" and "terminal loss" provisions are intended to adjust the aggregate deduction so recognized when subsequent events demonstrate that the asset has been over- or under-depreciated. In the present case, the decrease in value of the computer which underlies the terminal loss recorded by Klink was attributable to a period when the computer was not being used to earn income under the Act and hence was not "depreciable property". The general principle that limits the deduction of expenditures to those incurred for the purpose of gaining and producing "income" under the Act is set out in paragraph 18(1)(a). The recapture and terminal loss provisions (subsections 13(1) and 20(16) respectively) insure that in the end, it is the actual cost of a capital asset used to earn income under the Act that is deducted in conformity with the general limitation stated in paragraph 18(1)(a). The object and spirit of the relevant provisions is to provide for the recognition of money spent to acquire qualifying assets to the extent that they are consumed in the income-earning process under the Act. By acquiring their interests in Klink and insuring its continued operation, the appellants "imported", for Canadian income tax purposes, a capital cost equal to the computer's historical cost. They immediately took steps to profit from this cost by contributing the computer to ILP prior to the close of Klink's 1991 taxation year, thereby triggering a terminal loss pursuant to subsection 20(16). In doing so, they exploited an obvious loophole which allowed them to deduct a cost in excess of $4 million for a computer which had a value of US$7,000 when it first became depreciable property under the Act. The addition of subsection 96(8) (which applies after December 21, 1992) to the Act demonstrates that Parliament moved as quickly as it could to close the loophole exploited by the appellants precisely because the result achieved was anomalous having regard to the object and spirit of the relevant provisions of the Act which give rise to no ambiguity. Section 245 allows the Court to intervene when confronted with a misuse of the provisions of the Act. The appellants used paragraph 13(21)(f) and subsection 20(16) of the Act to obtain a result which was both anomalous and unintended when regard is had to their reason for being. They misused these provisions and abused the capital cost allowance system generally. The Tax Court Judge properly held that the losses claimed by the appellants were denied by section 245.
statutes and regulations judicially
considered
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 96(8) (as enacted by S.C. 1994, c. 21, s. 44).
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 9(1), 13(1) (as am. by S.C. 1988, c. 55, s. 6), (21)(b) (as am. by S.C. 1991, c. 49, s. 9), (f) (as am. by S.C. 1976-77, c. 4, s. 3; 1977-78, c. 1, s. 6), 18(1), 20(1), (16) (as enacted idem, s. 14; 1988, c. 55, s. 12), 96(1) (as am. by S.C. 1984, c. 1, s. 43; 1988, c. 55, s. 66), 111(1) (as am. by S.C. 1984, c. 1, s. 54), 245(1) "tax benefit" (as am. by S.C. 1988, c. 55, s. 185), "tax consequences" (as am. idem), "transaction" (as am. idem), (2) (as am. idem), (3) (as am. idem), (4) (as enacted idem), (5) (as enacted idem), (6) (as enacted idem), (7) (as enacted idem), (8) (as enacted idem).
| Income Tax Regulations, C.R.C., c. 945, s. 1100 (as am. by SOR/78-377, s. 3; 83-340, s. 1; 91-673, s. 1). |
| Partnership Act, R.S.B.C. 1996, c. 348, s. 4(c). |
cases judicially considered
applied:
Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391; [2001] 2 C.T.C. 40; Backman v. Canada, [2001] 1 S.C.R. 367; (2001), 196 D.L.R. (4th) 193; 11 B.L.R. (3d) 165; [2001] 2 C.T.C. 11; 2001 DTC 5149; 266 N.R. 246; Stewart v. Canada (2002), 212 D.L.R. (4th) 577; 288 N.R. 297 (S.C.C.); Walls v. Canada (2002), 212 D.L.R. (4th) 606 (S.C.C.); OSFC Holdings Ltd. v. Canada, [2002] 2 F.C. 288; (2001), 17 B.L.R. (3d) 212; 29 C.B.R. (4 th) 105; 2001 DTC 5471; 275 N.R. 238 (C.A.); leave to appeal to S.C.C. refused, [2001] S.C.C.A. No. 522.
distinguished:
Lea-Don Canada Limited v. Minister of National Revenue, [1971] S.C.R. 95; (1970), 13 D.L.R. (3d) 117; [1970] C.T.C. 346; 70 DTC 6271; Allied Farm Equipment Ltd. v. Minister of National Revenue, [1972] F.C. 263; [1972] C.T.C. 107; (1972), 72 DTC 6086 (T.D.); Oceanspan Carriers Ltd. v. Canada, [1987] 2 F.C. 171; [1987] 1 C.T.C. 210; (1987), 87 DTC 5102; 73 N.R. 91 (C.A.); Holiday Luggage Mfg. Co. v. Canada, [1987] 2 F.C. 249; [1987] 1 C.T.C. 23; (1986), 86 DTC 6601; 8 F.T.R. 94 (T.D.).
referred to:
Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298; (1998), 163 D.L.R. (4th) 385; 98 DTC 6505; 222 N.R. 58; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; (1999), 178 D.L.R. (4th) 26; [1999] 4 C.T.C. 313; 247 N.R. 19; 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804; (1999), 179 D.L.R. (4th) 577; [2000] 1 W.W.R. 195; 69 B.C.L.R. (3d) 201; 99 DTC 5799; 248 N.R. 216; Canada v. Antosko, [1994] 2 S.C.R. 312; [1994] 2 C.T.C. 25; (1994), 94 DTC 6314; 168 N.R. 16; Friesen v. Canada, [1995] 3 S.C.R. 103; (1995), 127 D.L.R. (4th) 193; [1995] 2 C.T.C. 369; 95 DTC 5551; 186 N.R. 243.
APPEAL from a Tax Court of Canada decision (Duncan v. Canada, [2001] 2 C.T.C. 2284; 2001 DTC 96) confirming the reassessments disallowing claimed shares of partnership losses of the Minister of National Revenue on the basis that no viable partnership subsisted beyond December 1991 and that the losses were properly denied by virtue of the general anti-avoidance rule in section 245 of the Income Tax Act. Appeal dismissed.
appearances:
George E. H. Cadman, Q.C. and Margaret Stanier for appellant.
Patricia A. Babcock for respondent.
solicitors of record:
Boughton Peterson Yang Anderson, Vancouver, for appellant.
Deputy Attorney General of Canada for respondent.
The following are the reasons for judgment rendered in English by
[1]Noël J.A.: This appeal is in respect of six appeals under the Income Tax Act [S.C. 1970-71-72, c. 63] (Act) which were heard together on common evidence by Judge Bowie of the Tax Court of Canada. By order of this Court, the six appeals were consolidated, the lead file being the appeal in the present matter. These reasons will therefore also be filed and stand as reasons for judgment in the five other appeals (namely, the appeals in files A-56-01, A-57-01, A-58-01, A-59-01 and A-60-01.)
[2]All the appeals concern losses said to have been incurred by a partnership and of which the appellants availed themselves in the computation of their respective income. While the appeals involve different taxation years ranging from 1990 to 1993, the issue in each year for each appellant is identical, except for the carry back or carry forward of the claimed losses in some cases.
The Transactions in Issue
[3]The facts are set out in detail in the decision of the Tax Court Judge (Duncan v. Canada, [2001] 2 C.T.C. 2284) and need not be repeated. It is sufficient for present purposes to briefly describe the transactions which gave rise to the claimed losses and their subsequent refusal by the Minister of National Revenue. The relevant statutory provisions are set out in Annex I to these reasons in the order in which they appear in the Act.
[4]In December 1991, each of the appellants purchased an interest in a United States partnership operating under the name Klink Development Company (Klink). Klink was originally formed in 1979 under the laws of the State of Ohio. Its original partners were all citizens and residents of the United States. In 1982, Klink purchased an IBM mainframe computer for US$3.7 million. The computer was rented out to a United Sates lessor under long term leases the last of which was to end December 31, 1991. By 1991, the computer had been fully depreciated both for accounting purposes and for purposes of United States income tax laws. It was considered to be obsolete in North America.
[5]On December 13, 1991, a British Columbia promoter by the name of Hutton and a company through which he conducted his activities purchased, on an interim basis, a 98% interest in Klink for $51,500. The remaining 2% interest was retained by the original U.S. partners.
[6]Seven days later, on December 20, 1991, the appellants, along with three other individuals, paid $320,000 to acquire interests totalling slightly more than 93.5% in Klink. Hutton and his company continued to hold the remaining portion of the interests which they had bought (approximately 4.5%). The Tax Court Judge found as a fact that the computer had a market value of approximately US$7,000 at that time.
[7]On the same day, Klink acquired a 50% interest in a recently formed British Columbia limited partnership, called Interfin Leasing Partnership (ILP). Klink's contribution to this partnership consisted in the conveyance of the computer for which it received a credit to its capital account of $50,000. At the same time, Klink assigned to ILP its rights under the outstanding lease of the computer, the term of which had been extended to March 31, 1992.
[8]The stated reason for the acquisition by the appellants of their interest in Klink and the contribution of the computer to ILP was to continue to derive income therefrom in selected markets where it still had income-earning potential. It was acknowledged that the computer was, at that time, obsolete in North America.
[9]It is apparent from the evidence that after the computer was conveyed by Klink to ILP, ongoing efforts were made to lease the computer in various Eastern European countries and later in Venezuela. A consultant was hired, markets were investigated, clients were approached, upgrades were purchased and trips were taken. According to the financial statements, approximately $20,000 was spent towards that end. However, none of these efforts had proven to be fruitful some two years thereafter.
[10]In computing its income under subsection 96(1) [as am. by S.C. 1984, c. 1, s. 43; 1988, c. 55, s. 66] of the Act for its taxation year ending December 31, 1991, Klink recorded a terminal loss in the amount of $4,486,940 pursuant to subsection 20(16) [as enacted by S.C. 1977-78, c. 1, s. 14; 1988, c. 55, s. 12]. This loss was reduced by income from operations of $45,550, to produce a net loss for income tax purposes of $4,441,390. The appellants claimed their respective shares of this loss in the computation of their income for the relevant taxation years, and in some cases the excess was carried back or forward as non-capital losses pursuant to paragraph 111(1)(a) [as am. by S.C. 1984, c. 1, s. 54].
[11]The Minister of National Revenue reassessed each of the appellants to disallow their respective shares of the Klink loss. The reassessments were predicated upon the view that Klink was no longer a subsisting partnership beyond the December 13 or 20, 1991 transaction, as the case may be. Alternatively, the Minister took the position that the appellants had embarked on "avoidance transactions" the benefits of which were denied by virtue of the general anti-avoidance rule (GAAR) set out in section 245 [as am. by S.C. 1988, c. 55, s. 185] of the Act.
The Decision of the Tax Court Judge
[12]The Tax Court Judge confirmed the reassessments on the basis that no viable partnership subsisted beyond either of the December 1991 transactions. He went on to determine that if Klink did survive these transactions, the losses were properly denied by virtue of section 245. This is the decision under appeal.
[13]The conclusion that the partnership was not in existence after the December transactions is based on the finding that the appellants did not intend to exploit the computer with a view to profit. This led to the Tax Court Judge to say that "[t]he meetings held and the memoranda generated" towards that end were "window-dressing" (reasons, paragraph 46). The Tax Court Judge made the earlier finding that the computer was used in the course of business during the short period ending to December 31, 1991. However, he held that this business was not carried on with a view to profit or in common with the U.S. partners (reasons, paragraphs 39, 40 and 41).
The Partnership Issue
[14]I am prepared to accept, for purposes of disposing of the appeal, that Klink subsisted as a valid partnership beyond the December transactions and remained in existence at the close of its 1991 taxation year. The case law surrounding this issue has evolved since the decision under appeal was rendered. At that time, the appeals to the Supreme Court in Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391 and Backman v. Canada, [2001] 1 S.C.R. 367 had been heard but judgment had yet to be delivered. The Supreme Court has since released two further decisions which also bear on the outcome of this appeal: Stewart v. Canada (2002), 212 D.L.R. (4th) 577; and Walls v. Canada (2002), 212 D.L.R. (4th ) 606.
[15]The first issue which the Tax Court Judge had to address is identical to the one identified by the Supreme Court in both Backman and Spire Freezers, i.e. were the appellants members of a partnership at the time the losses were incurred, the relevant time for our purposes being December 31, 1991. In those decisions, the Supreme Court emphasized what had been said in Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, namely that tax motivation will not derogate from the validity of a partnership where the three essential elements of a partnership are otherwise present.
[16]As will be seen, there can be no doubt in the present case that the acquisition by the appellants of their interest in Klink and the ensuing contribution of the computer to ILP, were primarily tax motivated. But the question remained as to whether the appellants as partners had the ancillary intention to profit from the continuing use of the computer. The Tax Court Judge in the course of his lengthy reasons did not discuss or allude to the possibility that the appellants could have had the secondary intention to exploit the computer with a view to profit.
[17]The Tax Court Judge had before him the decision of the Supreme Court in Continental Bank. One would have expected to find in his reasons the type of discussion which the Supreme Court engaged in Spire Freezers and Backman. As these decisions demonstrate, the issue which must be confronted in cases such as this is whether a lesser business intent can be said to exist despite a predominant tax motivation. An asserted business intent will be particularly difficult to exclude when it is consistent with the achievement of a predominant tax motivation and is supported by objective evidence. The Tax Court Judge does not appear to have considered this possibility.
[18]It seems clear that because section 245 is in play, the appellants directed their efforts at convincing the Tax Court Judge that they acquired their partnership interest predominantly or exclusively for a "bona fide" purpose (i.e. a purpose other than to obtain a tax benefit within the meaning of subsection 245(3) [as am. by S.C. 1988, c. 55, s. 185]). The Tax Court Judge categorically rejected this contention, properly so in my view. Nevertheless, in assessing the continued existence of the partnership, it was incumbent upon him to go beyond this question and determine whether the appellants had the ancillary intention to carry on business with a view to profit despite their tax motivation.
[19]Where a partnership is entered into for tax reasons, the approach which governs in ascertaining its continued existence is as follows (Backman, supra, at paragraphs 25-26):
As adopted in Continental Bank, supra, at para. 23, and stated in Lindley & Banks on Partnership, supra, at p. 73: "in determining the existence of a partnership . . . regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case". In other words, to ascertain the existence of a partnership the courts must inquire into whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to profit.
Courts must be pragmatic in their approach to the three essential ingredients of partnership. Whether a partnership has been established in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surrounding circumstances. That the alleged partnership must be considered in the totality of the circumstances prevents the mechanical application of a checklist or a test with more precisely defined parameters.
[20]Applying this approach in Backman, the Supreme Court came to the conclusion that the appellants had failed to establish an ancillary intention to carry on business with a view to profit. The key passage is reproduced below, at paragraph 29:
The appellant argues that he established an ancillary intention to carry on business with a view to profit by virtue of the purchase of a working interest in an oil and gas property. Here, again, the documentary evidence indicates an intention to form a partnership. Just prior to the transactions at issue in this appeal, the partnership agreement was amended to provide for investment in oil and gas as one of the purposes of the partnership. Shortly before the scheduled withdrawal of the American partners, the alleged partnership did purchase a one percent interest in an Alberta oil and gas property for $5,000. However, as discussed above, this evidence of intention must be weighed against other factors in the context of the surrounding circumstances relating to the oil and gas property. In considering those circumstances, we are not convinced that the putative partners had the necessary intention to carry on business in common with a view to profit. It is difficult to accept that there was in fact a business being carried on when none of the factors relevant to the existence of a business supports that contention. The putative partners did not hold themselves out to others as providers of goods or services derived from their interest in the oil and gas property. They had no management duties in respect of the property. There is no evidence that the alleged partnership or its agents expended anything other than nominal time, attention or labour on the project; nor did they incur any liabilities to other persons in respect of it.
[21]In contrast here, the putative partners did hold themselves out to others as providers of services derived from their interest in the computer; the partnership through its agents expended time, attention and labour on the project, and they incurred liabilities to other persons in respect of it. They also retained ownership of the asset which gave rise to the loss and continued to exploit it in the same business for a brief time, and thereafter in an attempt to exploit it in other markets (compare Spire Freezers, supra, paragraph 23). The ongoing intention to exploit the computer with a view to profit was understood by the appellants to be an essential component of the tax plan which they had conceived and they acted in a manner which was consistent with this plan (see the appellants' lawyer's reporting letter dated December 23, 1991, which emphasizes: "again that every effort must be made to market these products in Eastern Block countries", Appeal Book, volume III, page 416).
[22]The Tax Court Judge did question whether the partnership agreement contained the "type of provisions typically found in a partnership agreement" (reasons, paragraph 40). However, the formal validity of this agreement was not in issue in the appeal before him. The Minister admitted in the pleadings that Klink had been formed as a general partnership under the laws of the State of Ohio, and that the appellants purchased interests in that "partnership" (further amended reply, paragraph 1 which admits inter alia paragraphs 1 and 10 of the notice of appeal; see also the facts assumed by the Minister at paragraphs 11b) f), g) and k) of the further amended reply, Appeal Book, volume I, page 166).
[23]Furthermore, the documentary evidence reveals that the Minister's main reason for challenging the continued existence of the partnership was that the proposed use of the computer in selected markets did not give rise to a reasonable expectation of profit (Appeal Book, volume V, pages 824, 828, 832, 843, 904, 929). The Tax Court Judge agreed that the profit projections were not substantiated (reasons, paragraph 13). He also found that the partners, old or new, could not have expected profits for the short year ending December 31, 1991 (reasons, close of paragraphs 40 and 41). (In this connection, the Tax Court Judge appears to have overlooked that a profit would have resulted in the absence of the depreciation charge which was an optional deduction.)
[24]The Supreme Court has now held that the reasonable expectation of profit test is not a relevant consideration in determining the existence (or continued existence) of a business where the activity in question is commercial-like and cannot be viewed as a personal pursuit (Stewart, supra, at paragraph 47). In the companion case released on the same day (Walls, supra), this proposition was applied in the context of a partnership which had been entered into primarily for tax purposes. It is apparent from these two decisions that in the absence of a personal element, activities directed towards the generation of profit and which bear the badges of commerce, constitute a business.
[25]Keeping this in mind, and applying the approach developed by the Supreme Court in Spire Freezers and Backman, I am willing to accept that the appellants carried on business in common with a view to profit while they were actively engaged in their attempt to exploit the computer in selected markets. In so concluding, I stress that the Tax Court Judge was unable to hold that the concrete steps taken towards that end were a sham or that the computer was obsolete in the markets in which it was to be exploited.
[26]In any event, the computer was exploited with a view to profit until at least December 31, 1991, while lease payments continued to be received under the outstanding U.S. lease. As the Tax Court Judge noted at paragraph 39 of his reasons:
. . . it seems clear from the decision in Continental Bank Leasing that despite the short duration of potential income production remaining, the relatively small amount of income to be produced, and the completely passive nature of the earning process, a business existed until the end of the term of the lease.
[27]The subsequent finding that the U.S. partners did not intend to carry on business in common with the Canadian partners during this period is, in my respectful view, contrary to the evidence. That the U.S. partners agreed to remain in that capacity in order to insure the continued existence of the partnership (reasons, paragraph 41) is consistent (not inconsistent) with their continued intention to carry on business in common. Furthermore, Klink's financial statements for the period ending 31 December 1991 reveal that the U.S. partners actually shared in the financial results of the partnership for that period (Appeal Book, volume IV, page 641). According to subsection 4(c) of the British Columbia Partnership Act, R.S.B.C. 1996, c. 348, "the receipt by a person of the share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business". There was no evidence to the contrary.
The GAAR Issue
[28]The issue which the Tax Court Judge had to address was therefore whether the losses claimed by the appellants were properly denied by virtue of section 245. Before addressing this question, the Tax Court Judge had to be satisfied that the Act, when considered without regard to section 245, allowed Klink to record the terminal loss and the appellants to claim their respective share of the net loss resulting therefrom in the computation of their income.
[29]In this respect, the Tax Court Judge noted that the computer was the only depreciable property owned by Klink before the close of its 1991 taxation year. By virtue of paragraph 13(21)(f) [as am. by S.C. 1976-77, c. 4, s. 3; 1977-78, c. 1, s. 6] of the Act, the undepre-ciated capital cost of the computer to Klink was equal to its cost less the total depreciation previously allowed under the Act and the proceeds of disposition received by Klink from ILP. As the computer had never been used to earn income under the Act no depreciation had been claimed or allowed under the Act. Specifically, no amount had been deducted by Klink by reason of paragraph 20(1)(a).
[30]The Tax Court Judge after referring to the decision of the Supreme Court in Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622 (paragraph 40 of this decision seems particularly relevant), concluded that pursuant to paragraph 13(21)(f), the undepreciated capital cost of the computer in the hands of Klink stood at its full historical cost ($4,536,940) less the amount credited to the appellants in consideration for their contribution of the computer to ILP ($50,000). Applying the clear and unambiguous words of paragraph 13(21)(f) and subsection 20(16), he held that the terminal loss in the amount of $4,486,940 had been properly recorded by Klink (reasons, paragraphs 2 and 50 to 55).
[31]The Minister has not challenged this conclusion on appeal and thus recognizes that the terminal loss has been properly computed by Klink subject to the application of section 245, to which I now turn.
[32]The application of section 245 requires that an answer be given to each of the three following questions:
1. Did the December 20, 1991 transactions result in a tax benefit to the appellants?
2. If so, can the transactions reasonably be considered to have been undertaken primarily for a purpose other than to obtain a tax benefit?
3. If not, did the transactions result in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act, other than section 245, read as a whole?
[33]The transactions to be considered in the section 245 analysis are the acquisition by the appellants of their respective interests in Klink on December 20, 1991 (December 13, in the case of Hutton and his company) and the disposition, on the same day, of the computer to ILP. It is not disputed that these transactions provided the appellants with a substantial tax benefit. Indeed, they gained access to a loss totalling $4,152,700 (93.5% of $4,441,390) at a cost of $320,000, or 13 cents to the dollar (reasons, paragraph 57).
[34]With respect to the second question, only two of the six appellants gave evidence. One of them (Langdon) said that he was motivated "entirely" by the prospect of participating in the business of a data processing centre to be established in Eastern Europe. The other (Young) insisted that the "major motivation" was the opportunity to participate in the emerging Eastern European market. The Tax Court Judge found that these witnesses could not be believed "on this point" (reasons, paragraph 42). This finding, aside from being squarely within the privileged territory of the Tax Court Judge, is amply supported by the evidence.
[35]The value of the tax loss in the hands of the appellants (all of whom were in a position to absorb it quickly) when contrasted with the income-earning prospects of the computer makes the predominant purpose of the transactions plain and obvious. Not only were the available markets for any ongoing exploitation of the computer limited, but the window of opportunity within those markets was bound to close rapidly. The difference between the amount paid by the appellants to acquire their partnership interest ($320,000) and the value of the computer at that time (US$7,000) is also indicative of the fact that first and foremost, the appellants paid to acquire a tax loss (reasons, paragraphs 43 and 44).
[36]Furthermore, as found by the Tax Court Judge (reasons, paragraph 44), there is no credible explanation for the manner in which the appellants proceeded to acquire their interest in the partnership and contribute the computer to another partnership prior to the close of its 1991 taxation year, other than the achievement of the tax benefit which they were seeking. These transactions represent one of a variety of ways (some much simpler) in which the appellants could have obtained ownership of the computer for the bona fide purpose which they assert. However, to trigger the terminal loss and make it available to the appellants, it was essential that the computer be acquired and disposed of in the manner chosen. The quest for the tax benefit is the only reason why the transactions unfolded as they did.
[37]Before addressing the third question, it is useful to briefly consider how the capital cost allowance system, which gave rise to the terminal loss recorded by Klink, operates. Paragraph 18(1)(a) (when read in the affirmative) sets out the basic rule that there may be deducted "In computing the income of a taxpayer from a business or property" expenses made or incurred "for the purpose of gaining or producing income from the business or property". Paragraph 18(1)(b) provides that "no deduction shall be made in respect of . . . a payment on account of capital or an allowance in respect of depreciation . . . except as expressly permitted by this Part".
[38]The term "depreciable property" is defined by paragraph 13(21)(b) [as am. by S.C. 1991, c. 49, s. 9] as property with respect to which a deduction may be claimed pursuant to paragraph 20(1)(a) which provides in turn that "there may be deducted . . . such part of the capital cost . . . or such amount in respect of the capital cost . . . of property . . . as is allowed by regulation". Section 1100 [of the Income Tax Regulations, C.R.C., c. 945 (as am. by SOR/78-377, s. 3; 83-340, s. 1; 91-673, s. 1)] prescribes the rates (percentages) which when applied to the undepreciated capital cost of property (using the diminishing-balance method), determine the amount which may be deducted annually.
[39]The workings of the capital cost allowance system became more complicated in 1976 when it was made to operate by reference to classes of property. But the system can best be understood when a single property is comprised within a given class such as was the case in respect of the computer held by Klink.
[40]The annual rate of depreciation prescribed by section 1100 is generally intended to track the decrease in value which a capital asset undergoes from year to year (I say "generally" because there are accelerated rates which are clearly intended as incentives). Where however, an arm's-length sale demonstrates that the asset has been over-depreciated (by virtue of being disposed of at a price which exceeds its undepreciated capital cost), or under-depreciated (by virtue of being disposed at a price below that amount), the Act provides for the "recapture" of the excessive depreciation by providing for its inclusion in income in the former case (subsection 13(1) [as am. by S.C. 1988, c. 55, s. 6]), and the deduction of the under-depreciated portion by requiring the deduction of what is commonly called a "terminal loss" equal to that amount in the latter case (subsection 20(16)).
[41]It is apparent from the foregoing that the capital cost allowance system is intended to recognize over time costs incurred to acquire capital assets actually used to earn income within the meaning of paragraphs 18(1)(a) and (b), and that the "recapture" and "terminal loss" provisions are intended to adjust the aggregate deduction so recognized when subsequent events demonstrate that the asset has been over-or under-depreciated. In mechanical terms, this adjustment occurs (in the case of a terminal loss) by virtue of the fact that paragraph 20(16)(a) requires that the undepreciated capital cost of property of a given class be deducted whenever a taxpayer no longer owns property of that class at the end of a given taxation year in which event the amount in question is "deemed" to have been deducted under paragraph 20(1)(a) in computing income for the year (paragraph 20(16)(d)).
[42]In the present case, it is common ground that the decrease in value of the computer which underlies the terminal loss recorded by Klink is attributable to a period when the computer was not being used to earn income under the Act and hence was not "depreciable property" (compare Lea-Don Canada Limited v. Minister of National Revenue, [1971] S.C.R. 95, at page 99 (per Hall J.)). The computer had a value of approximately US$7,000 when it began to be used to earn income under the Act. Yet, subsection 20(16) when read with paragraph 13(21)(f), requires that Klink deduct in the computation of its income for the 1991 taxation year the full cost of the computer (less the amount credited for its contribution to ILP) as though it had been used throughout since 1982 to earn income under the Act. This result, although it flows from the clear words of paragraph 13(21)(f) and subsection 20(16), is contrary to the scheme of the capital cost allowance provisions which limits the deduction of capital expenditures to those incurred for the purpose of earning income under the Act.
[43]The general principle that limits the deduction of expenditures to those incurred for the purpose of gaining and producing "income" under the Act is set out in paragraph 18(1)(a). The income in question is a "taxpayer's income for [the] . . . year" (sections 3 and 9). Paragraph 20(1)(a) provides for an exception to this limitation inasmuch as the deduction thereunder may, but need not be claimed in the year in which it becomes available. This is one of the reasons why paragraph 20(1)(a) is said to apply "Notwithstanding" paragraphs 18(1)(a) and (b).
[44]Nevertheless, the recapture and terminal loss provisions (subsections 13(1) and 20(16) respectively) insure that in the end (i.e. by the time a given class is emptied of property coming within it), it is the actual cost of a capital asset used to earn income under the Act that is deducted in conformity with the general limitation stated in paragraph 18(1)(a). There can be no doubt that the object and spirit of the relevant provisions is to provide for the recognition of money spent to acquire qualifying assets to the extent that they are consumed in the income-earning process under the Act.
[45]The appellants, by acquiring their interests in Klink and insuring its continued operation "imported" for Canadian income tax purposes, a capital cost equal to the computer's historical cost (through the combined operation of subsection 96(1) and paragraph 13(21)(f)). They immediately took steps to profit from this cost by contributing the computer to ILP prior to the close of Klink's 1991 taxation year thereby, in effect, triggering a terminal loss pursuant to subsection 20(16). In so doing, they exploited what can only be seen as an obvious loophole which allowed them to deduct a cost in excess of $4 million for a computer which had a value of some US $7,000 when it first became depreciable property under the Act.
[46]Counsel for the appellants relied on the subsequent addition of subsection 96(8) to the Act [Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1] to argue that the transactions in issue do not offend any unwritten rule or policy. Subsection 96(8) was added by S.C. 1994, c. 21 [s. 44], and made applicable after December 21, 1992. Paragraph 96(8)(a) is of direct relevance. It specifically counters the result achieved by the appellants in this case by deeming the cost of acquisition of depreciable assets held by a foreign partnership to an incoming Canadian partner to be the lesser of its fair market value or its capital cost determined according to the ordinary rules.
[47]Counsel argued that the prospective addition of subsection 96(8) demonstrates unequivocally that the transactions in issue did not offend the object and spirit of the Act at the time when they took place. I rather think that this amendment demonstrates that Parliament moved as quickly as it could to close the loophole exploited by the appellants precisely because the result achieved was anomalous having regard to the object and spirit of the relevant provisions of the Act.
[48]Indeed, the object and spirit of the relevant provisions is so clear that I questioned during the hearing whether the Tax Court Judge properly concluded, and the Minister properly conceded, that the Act when construed without regard to section 245, allowed Klink to deduct the terminal loss. There exists a number of cases where the words of the Act were given a distinct meaning derived from the object and spirit of the Act in a context that bears some resemblance to the present case (Lea-Don, supra; Allied Farm Equipment Ltd. v. Minister of National Revenue, [1972] F.C. 263 (T.D.); Oceanspan Carriers Ltd. v. Canada, [1987] 2 F.C. 171 (C.A.); Holiday Luggage Mfg. Co. v. Canada, [1987] 2 F.C. 249 (T.D.)). In all of these cases, the Court relying on the scheme of the Act or its object and spirit, refused to extend its application to persons not subject to tax thereunder.
[49]There is however one significant difference between these cases and the present one in that here, the relevant provisions give rise to no ambiguity. The undepreciated capital cost of the computer to Klink at the close of its 1991 taxation year was computed in strict conformity with paragraph 13(21)(f) and the terminal loss which it recorded is the inescapable result of the application of subsection 20(16). Faced with such clarity it would be inappropriate, for the reasons expressed by the Supreme Court in a number of recent decisions to attempt to modify the words of the relevant provisions to provide a result which conforms with their object and spirit (Walls, supra, paragraph 22; Stewart, supra, paragraph 65; Shell, supra, paragraph 40; 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at paragraph 51; Canada v. Antosko, [1994] 2 S.C.R. 312, at pages 326-327 and 330; Friesen v. Canada, [1995] 3 S.C.R. 103, at paragraph 11).
[50]More importantly perhaps, I would be unable to give those words a meaning that is suited to what I have identified as the object and spirit of the relevant provisions. Although for the reasons given, it is clear that these provisions are intended to apply to assets used to earn income under the Act and that it would be anomalous to allow a taxpayer to deduct the cost of an asset that was not so used, it remains that the asset here in question began to be used to earn income under the Act as of December 1991. At that time, the computer became "depreciable property" within both the letter and the spirit of the Act with the result that a cost must be attributed to it. The only cost which the Act provides for in the present fact situation is the original or full cost, and I do not believe that I could read into the Act the type of modification incorporated by the 1994 addition of subsection 96(8) to alter this result without infringing on the role of Parliament. In the end, I am satisfied that although the object and spirit of the relevant provisions is clearly discernible, I am unable to give effect to it under the normal rules.
[51]Section 245 does however allow the Court to intervene when confronted with a misuse of the provisions of the Act. For the reasons stated, I am of the view that the appellants used paragraph 13(21)(f) and subsection 20(16) of the Act to obtain a result which was both anomalous and unintended when regard is had to their reason for being. As such, the appellants misused these provisions and abused the capital cost allowance system generally.
[52]In so holding, I am giving section 245 a similar application to that given by this Court in OSFC Holdings Ltd. v. Canada, [2002] 2 F.C. 288; (leave to appeal denied, June 20, 2002, [2001] S.C.C.A. No. 522). But I wish to place particular emphasis on a key aspect of that decision (paragraph 69) where Rothstein J.A. states that:
. . . to deny a tax benefit where there has been strict compliance with the Act, on the grounds that the avoidance transaction constitutes a misuse or abuse, requires that the relevant policy be clear and unambiguous. The Court will proceed cautiously in carrying out the unusual duty imposed upon it under subsection 245(4). The Court must be confident that although the words used by Parliament allow the avoidance transaction, the policy of relevant provisions or the Act as a whole is sufficiently clear that the Court may safely conclude that the use made of the provision or provisions by the taxpayer constituted a misuse or abuse.
In my view, this very particular threshold has been met in this instance.
[53]Finally, no relief can be given to the appellants pursuant to subsections 245(2) and 245(5), by recognizing, as cost, the fair market value of the computer as of the time it became "depreciable property" under the Act having regard to the higher proceeds which they received for its contribution to ILP. If anything, recapture would be exigible.
[54]In conclusion, the Tax Court Judge properly held that the losses claimed by the appellants were denied by section 245.
[55]I would dismiss the appeal with one set of costs.
Desjardins J.A.: I concur.
Linden J.A.: I concur.
Annexe I
Schedule I--Relevant statutory revisions
3. The income of a taxpayer for a taxation year for the purposes of this Part is his income for the year determined by the following rules:
. . .
(d) determine the amount, if any, by which the remainder determined under paragraph (c) exceeds the aggregate of amounts each of which is his loss for the year from an office, employment, business or property; and
. . .
and the remainder, if any, obtained under paragraph (e) is the taxpayer's income for the year for the purposes of this Part.
. . .
9. (1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is his profit therefrom for the year.
. . .
13. . . .
(21) . . .
(b) "depreciable property" of a taxpayer as of any time in a taxation year means property acquired by the taxpayer in respect of which the taxpayer has been allowed, or would, if the taxpayer owned the property at the end of the year and this Act were read without reference to subsection (26), be entitled to, a deduction under regulations made under paragraph 20(1)(a) in computing income for that year or a previous taxation year;
. . .
(f) "undepreciated capital cost" to a taxpayer of depreciable property of a prescribed class as of any time means the amount by which the aggregate of
(i) the capital cost to the taxpayer of each depreciable property of that class acquired before that time, and
. . .
exceeds the aggregate of
(iii) the total depreciation allowed to the taxpayer for property of that class before that time,
(iv) for each disposition before that time of property (other than a timber resource property) of the taxpayer of that class, the lesser of
(A) the proceeds of disposition of the property minus any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, and
(B) the capital cost to him of the property,
. . .
18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
. . .
20. (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
. . .
(16) Notwithstanding paragraphs 18(1)(a), (b) and (h), where at the end of a taxation year,
(a) the aggregate of all amounts determined under subparagraphs 13(21)(f)(i) to (ii.2) in respect of a taxpayer's depreciable property of a particular class exceeds the aggregate of all amounts determined under subparagraphs 13(21)(f)(iii) to (viii) in respect thereof, and
(b) the taxpayer no longer owns any property of that class
in computing the taxpayer's income for the year
(c) there shall be deducted the amount of the excess determined under paragraph (a), and
(d) no amount shall be deducted for the year under paragraph (1)(a) in respect of property of that class,
and the amount of the excess determined under paragraph (a) shall be deemed to have been deducted under paragraph (1)(a) in computing the taxpayer's income for the year from a business or property.
. . .
96. (1) Where a taxpayer is a member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if
(a) the partnership were a separate person resident in Canada;
(b) the taxation year of the partnership were its fiscal period;
. . .
(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer' share thereof; and
(g) the amount, if any, by which
(i) the loss of the partnership for a taxation year from any source or sources in a particular place,
exceeds
(ii) in the case of a specified member (within the meaning of the definition "specified member" in subsection 248(1) if that definition were read without reference to paragraph (b) thereof) of the partnership in the year, the amount, if any, deducted by the partnership by virtue of section 37 in calculating its income for the taxation year from that source or sources in the particular place, as the case may be, and
(iii) in any other case, nil
were the loss of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership's taxation year ends, to the extent of the taxpayer's share thereof.
. . .
111. (1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as he may claim of
(a) his non-capital losses for the 7 taxation years immediately preceding and the 3 taxation years immediately following the year;
. . .
245. (1) In this section and in subsection 152(1.11),
"tax benefit" means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act;
"tax consequences" to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by, or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount;
"transaction" includes an arrangement or event.
(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
. . .
(4) For greater certainty, subsection (2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole.
(5) Without restricting the generality of subsection (2),
(a) any deduction in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, any income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any payment or other amount may be recharacterized, and
(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,
in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance
(6) Where with respect to a transaction
(a) a notice of assessment, reassessment or additional assessment involving the application of subsection (2) with respect to the transaction has been sent to a person, or
(b) a notice of determination pursuant to subsection 152(1.11) has been sent to a person with respect to the transaction
any person (other than a person referred to in paragraph (a) or (b)) shall be entitled, within 180 days after the day of mailing of the notice, to request in writing that the Minister make an assessment, reassessment or additional assessment applying subsection (2) or make a determination applying subsection 152(1.11) with respect to that transaction.
(7) Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.
(8) Upon receipt of a request by a person under subsection (6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsection 152(4), assess, reassess or make an additional assessment or determination pursuant to subsection 152(1.11) with respect to that person, except that an assessment, reassessment, additional assessment or determination may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection (6).
[Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1]
96. . . .
(8) For the purposes of this Act, where at a particular time a person resident in Canada becomes a member of a partnership, or a person who is a member of a partnership becomes resident in Canada, and immediately before the particular time no member of the partnership is resident in Canada, the following rules apply for the purpose of computing the partnership's income for fiscal periods ending after the particular time:
(a) where, at or before the particular time, the partnership held depreciable property of a prescribed class (other than taxable Canadian property),
(i) no amount shall be included in determining the amounts for any of A, C, D and F to I in the definition "undepreciated capital cost" in subsection 13(21) in respect of the acquisition or disposition before the particular time of the property, and
(ii) where the property is the partnership's property at the particular time, the property shall be deemed to have been acquired, immediately after the particular time, by the partnership at a capital cost equal to the lesser of its fair market value and its capital cost to the partnership otherwise determined;
(b) in the case of the partnership's property that is inventory (other than inventory of a business carried on in Canada) or non-depreciable capital property (other than taxable Canadian property) of the partnership at the particular time, its cost to the partnership shall be deemed to be, immediately after the particular time, equal to the lesser of its fair market value and its cost to the partnership otherwise determined;
(c) any loss in respect of the disposition of a property (other than inventory of a business carried on in Canada or taxable Canadian property) by the partnership before the particular time shall be deemed to be nil; and
(d) where 4/3 of the cumulative eligible capital in respect of a business carried on at the particular time outside Canada by the partnership exceeds the total of the fair market value of each eligible capital property in respect of the business at that time, the partnership shall be deemed to have, immediately after that time, disposed of an eligible capital property in respect of the business for proceeds equal to the excess and to have received those proceeds.