Tax Court of Canada Judgments

Date: 20010312

Docket: 96-2732-IT-G,96-3496-IT-G

BETWEEN:

RICHARD McKEOWN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Garon, C.J.T.C.C.

[1]            These are appeals from reassessments of income tax for the 1991 and 1992 taxation years.

[2]            In his assessment for the 1991 taxation year, the Minister of National Revenue disallowed the deduction of all the appellant's share of the loss incurred by Commu-Sys Enr. for 1991 and also disallowed his share of the investment tax credit allegedly earned by that partnership for the 1991 taxation year.

[3]            In his assessment for the 1992 taxation year, the Minister of National Revenue disallowed the deduction of all the appellant's share of the loss incurred by Cablotel Enr. for 1992 and also disallowed his share of the investment tax credit allegedly earned by that partnership for the 1992 taxation year.

[4]            The losses incurred by the two above-mentioned partnerships, which amounted to a little more than $2,000,000 in each fiscal period, resulted from expenditures submitted to the Minister of National Revenue as scientific research and experimental development expenditures. The appellant's position is that those expenditures were deductible in computing each partnership's income under subsection 37(1) of the Income Tax Act.

[5]            The Court was told that just over 600 taxpayers were in a situation similar to the appellant's and were awaiting its decision in this case. The hearing of the two appeals lasted 33 days.

Facts

The appellant's testimony

[6]            The appellant is an instrument and control technician. He is responsible for electronics, pneumatics, hydraulics and electricity at Glassine Canada, a pulp and paper mill. During the years at issue, he had three children and his income was about $45,000, while his spouse's income was about $10,000. He prepared his own tax returns every year as well as those of his spouse and parents. He and his spouse owned a mortgaged family home and two cars financed by the bank. His spouse owned another property bequeathed to her by her mother, on which there was also a mortgage.

Commu-Sys Enr.

[7]            In October 1991, the appellant was informed of the existence of a partnership called Commu-Sys Enr. His co-workers spoke to him about a research project in which they had invested. It was actually one Roger Roy, the paper-maker, who mentioned it to him. The appellant made inquiries about the project and its tax benefits. He also attended an information session on the research project. Twenty or so potential investors went to the session, which had not been publicized. The appellant learned that the session was being held through his co-workers. The team in charge of presenting the project was made up of about eight people. They included representatives of the research company Omzar Technologies Inc. as well as a Jacques Caron, who owned the premises where the meeting was held.

[8]            According to the appellant, Commu-Sys Enr. was a group of individuals who pooled funds for the purpose of conducting research. He did not think that Commu-Sys Enr. would be doing the research itself. Technical information about the project was provided at the information session. The appellant testified that he had found the technical aspect very interesting because he was familiar with the subject since he had studied and was working in a technical field.

[9]            In his testimony, the appellant explained the research project that had been presented to him, as he understood it. He said that it was basically a cable project which would make it possible to provide remote detection of problems on networks. The purpose of the project was to develop a means for cable companies to improve equipment maintenance and resolve network problems more quickly. While cable maintenance is fairly easy in urban centres, the same is not true in remote areas. The appellant used the small town of Stoneham, where he lives, as an example. When there is a cable problem, he can certainly contact the cable company to let it know, but the company will not remedy the problem or go to the consumer's home as long as no other subscriber has contacted it about the same problem. The research project in which the partnerships that he joined were involved aimed at developing a system that would allow network problems to be pinpointed.

[10]          During the session, the taxpayers were given information explaining that the research project would be carried out by general partnerships. Investors would pool their funds and they would receive tax credits. The financing method was also explained to the investors. They had to pay half of their total investment. The appellant did not make a decision right away. He gathered information and thought about the project.

[11]          The appellant said that he was comfortable with the project. He had some knowledge of telematics. He was confident that the project could succeed and that a marketable product could be brought to completion if the research was properly structured. At the time the project was presented, some steps had already been planned. The documents given to the appellant set out the stages of the project's development.

[12]          Since the appellant was fascinated by the project's scientific and technical aspects, he spent some time looking at the résumés attached to the scientific opinion given to the investors at the information session. There were résumés for three people: Mr. Barski, Mr. Méthot and Mr. Marin. During the session, Mr. Barski had introduced the scientific staff and recited his own qualifications. On the basis of Mr. Barski's qualifications and physical appearance (he looked like a professor), the appellant had concluded that Omzar Technologies Inc.'s scientific team was competent. He did not ask himself whether each of Omzar Technologies Inc.'s employees was qualified. He saw Mr. Barski as being a very important member of that company's research team.

[13]          The appellant admitted that he knew nothing about the tax benefits. He obtained information by calling the Department of National Revenue, the Ministère du Revenu of Quebec and the Commission des valeurs mobilières (Securities Commission). He also checked whether the information provided by Commu-Sys Enr. was correct. He questioned officials from those three organizations without telling any of them the answers he obtained from the others. He asked them about the differences between a general partnership and a limited partnership. What he understood from these inquiries was that the expenditures made by a limited partnership are not deductible by its members, who are liable only to the extent of the amounts they have invested, whereas the members of a general partnership may deduct their share of the partnership's expenditures from their incomes but are also personally liable for all of the partnership's debts, even those exceeding the amounts they have invested. Moreover, the appellant did not make any connection between being a member of a general partnership and being an owner of a business. In his opinion, he was not carrying on a business, although he knew that he had to include his investments under "business income" on his tax return. The officials from the above-mentioned organizations even specified that the only eligibility criteria for the tax credit were that a genuine research project exist and that the members of the partnership be actively engaged in a general partnership.

[14]          Later, in 1993, when the appellant contacted the Department of National Revenue by telephone, its officials had been instructed to stop providing information. Moreover, the appellant testified that the Department's officials did not mention the concept of "specified member" to him. He also explained that, in his conversations with officials from the Securities Commission, they failed to tell him of the danger associated with such investments even though warnings had already been published in newspapers at that time.

[15]          The question of entitlement to tax credits was discussed during the information session. The team in charge of presenting the research project told the investors about the criteria to be met in order to have the status of active member. Investors had to participate actively and continuously. The team also told the potential investors that there would be information sessions, fascicles, reading material, questionnaires and laboratory visits.

[16]          The officials from the Department of National Revenue explained to the appellant that the government used to give grants to businesses that wanted to undertake research projects. The government subsequently changed its mind and decided to leave it up to businesses to find their own financing from potential investors and the government would then grant tax credits. The appellant also compared his investment with an RRSP set up by a taxpayer at a bank.

[17]          During the information session, the team in charge of presenting the project provided information about the nature of the partnership and on how the research project was to be carried out. The team gave the potential investors an explanation of the members' liability for the partnership's debts. During that session, Omzar Technologies Inc. was introduced to the investors as the entity that was to conduct the research. According to the information received by the appellant, Commu-Sys Enr. was proposing to its members that a $3,000,000 research contract be awarded to Omzar Technologies Inc., with the research work to be spread out over three years. The appellant did not know whether a service contract had already been signed by Commu-Sys Enr. and Omzar Technologies Inc. He believed that the general partnership, Commu-Sys Enr., held the rights to the research results.

[18]          After making inquiries of the various levels of government, and on the basis of the information he had obtained at the information session, the appellant decided to invest in Commu-Sys Enr. He testified that the research project presented to him was interesting. He definitely felt that the product of the research could be marketed. He also believed that the research project met the Department of National Revenue's stated eligibility criteria since it involved scientific uncertainties. However, he was aware of the risks associated with the project. The project had to meet the eligibility criteria set out in the Income Tax Act ("Act") and it had to be "genuine". Risk could therefore come from the scientific staff, from those responsible for the research and from the appellant himself. The appellant thought that the research and development credit could be denied him if the staff did not do the research as provided for in the Act or if he himself did not do his part in the participation program.

[19]          The appellant testified that he did not recall whether, at the time he invested in Commu-Sys Enr., a business plan had been prepared by that partnership's managers. However, he took it for granted that preliminary steps had been taken. He invested in Commu-Sys Enr. at the stage when the partnership wanted to bring together investors in order to undertake scientific research work. He said that he did not concern himself with the project's administrative aspect and, moreover, the reason he sought information from government was in order to determine whether the research project qualified for tax purposes. It was the project's scientific aspect rather than its administrative or financial side that attracted his attention. Furthermore, the appellant had no idea how Commu-Sys Enr. was going to market the research results. The marketing aspect had not been discussed at the information session or explained in the documents given to him. What interested him was the development of a product, since he saw that there was market potential.

[20]          When Commu-Sys Enr. was formed, the appellant did not know that the members of that partnership had to get together to make decisions collectively. Moreover, he had not met any of the members of the Commu-Sys Enr. partnership, aside from his co-workers at the mill. The members signed an agreement appointing Mr. Caron as manager of Commu-Sys Enr. The appellant therefore assumed that Mr. Caron would be making decisions in the members' interest. There were information sessions to which Mr. Caron invited the members and which most of them attended. The appellant was nevertheless aware that he was investing in a general partnership rather than a corporation. However, he did not know what differences there were between a listed corporation and a general partnership, apart from the tax benefits and the eligibility criteria. He had not asked the managers why they had chosen a general partnership structure rather than another type of structure for the purpose of undertaking the research. He wondered about that, which was why he obtained information from the Quebec Securities Commission.

[21]          The appellant decided to invest $25,000. That amount was determined using information provided by the brother-in-law of Roger Roy, the paper-maker. The brother-in-law had software that could record data on a taxpayer's income, his expenses and his taxes payable. Using that software and based on what he could afford, the appellant decided how much he would invest. The amount of the investment in Commu-Sys Enrwas not set by that partnership. Each investor could invest the amount he or she wished, provided that the investor paid at least half of the investment.

[22]          The appellant therefore borrowed $13,000 from a credit union, the Caisse populaire Desjardins in Stoneham, under a loan agreement dated December 31, 1991. He also took out a life insurance policy providing that the insurance company would repay the loan in the event of death or disability. He testified that he was in the habit of taking out insurance whenever he borrowed money. He had explained to the manager of the credit union that he needed $12,500 to invest in a research project and $500 for his own use. The interest rate was 12.856 percent, and the loan was repayable in one year. The appellant had told the credit union manager that the tax refund he was going to receive would be sufficient to repay the loan. The agreement between the appellant and the credit union provided that the appellant would pay the interest at the end of each month and that he would pay off his debt to the credit union as soon as he received his tax refund. The credit union deposited $12,500 in the appellant's account so that Commu-Sys Enr. could cash the cheque written out to it by him. On May 21, 1992, $8,598.30 was refunded by the federal government. On June 18, 1992, another $6,806.33 was paid by the Quebec government. An additional $2,754.93 was carried back to his 1988 taxation year.

[23]          On December 20, 1991, a loan was made to the appellant by Loron Inc. It was a personal loan with an interest rate of 10 percent. Despite that competitive rate of interest, the appellant did not ask Loron Inc. to finance his other loans. Under heading A of the agreement, it was stated that the appellant had to make two payments representing the first two months of interest. He testified that that loan was conditional on his obtaining a loan from a financial institution or on his simply paying 50 percent of his investment. No security was given to Loron Inc. One clause of the agreement provided that the appellant undertook to repay the loan from Loron Inc. in full if he transferred his shares to a third party. There was also a stipulation that his shares in Commu-Sys Enr. were to serve as collateral for the loan being granted. The appellant testified that he did not think about the term "collateral" used in the agreement. When he entered into the loan agreement, he did not understand the meaning of that term. When asked whether he knew that his debt would have been discharged if Loron Inc. had taken his shares, he testified that he really believed that the shares had value and hoped that they were going to increase in value. He would have sold his shares and found out from the partnership how to go about doing so. On cross-examination, the appellant admitted that his shares were a kind of security for the loan. If Loron Inc. had taken them, he would not have had to repay the loan. He said that the amount loaned to him by Loron Inc. was never in his possession, Loron Inc. having given that amount to Commu-Sys Enr. on his behalf.

[24]          The loan agreement was for a loan from Loron Inc. to the appellant equal to 50 percent of the appellant's investment in the project. After signing the agreement, the appellant gave Loron Inc. a cheque dated December 20, 1991, for $208.33, which represented the first two months of interest on the loan. The discrepancy between the date of the $12,500 loan by the credit union (December 31, 1991) and the date on which the appellant actually subscribed for shares in Commu-Sys Enr. (December 20, 1991) can be explained by the fact that the credit union had already indicated that it was prepared to grant him the loan in question. After signing the subscription form, he went back to the credit union to sign the loan agreement. He was thus able to draw a cheque for $12,500 on his account and, when it was cashed, the credit union would deposit the amount of the loan in the account. He made no payment to Loron Inc. other than the $208.33 for the first two months of interest. He testified that Loron Inc. did not ask him to make the other monthly payments provided for in the loan agreement.

[25]          A document entitled [TRANSLATION] "Commu-Sys: Account Analysis for the period of December 12-31, 1991" contains two entries in the appellant's name crediting $25,000 and attesting his investment. The document indicated that $2,288,020 was deposited in Commu-Sys Enr.'s account and that the same amount was given to Omzar Technologies Inc.

[26]          The documents recording the members' interests in Commu-Sys Enr. included a subscription form stating that the appellant had subscribed for 250 shares in the partnership. He filled out that form at the same time as he signed the loan agreement, namely on December 20, 1991. Jacques Caron's signature was affixed to the form. According to the appellant, the fact that Mr. Caron signed the form indicated that he was either the person in charge or the manager of Commu-Sys Enr. The document also meant that the appellant had become a member of the partnership by virtue of his investment.

[27]          Jacques Caron was the one who chose the finance company Loron Inc. At the time of the loan, the appellant did not know that Loron Inc. was run by Mr. Caron and Mr. Loranger. He had no knowledge of Loron Inc. at that time and did not try to obtain any information about it. Moreover, he admitted that he did not know who Loron Inc.'s shareholders were. The appellant did not sign any documents with Loron Inc. other than the loan agreement. He was not asked any questions beforehand by that company's representatives to check on his ability to repay or his credit. According to the appellant, the loan was automatic as soon as the first half of the investment was advanced by the investor. Moreover, in his view, the loan from Loron Inc. was to be repaid when the research project was completed, since his shares would then have had some value. The appellant testified that he understood from the documentation he received at the information session that the project was going to last three years. He said that he would not have invested if it had lasted longer, since that would have strained him financially. However, as long as the project was going forward and research was being done, he was convinced that his shares were going to be worth something.

[28]          The loan agreement between Loron Inc. and the appellant provided for 120 monthly payments of principal and interest. Only the interest had to be paid during the first year, however. The appellant was aware that this was an 11-year contract. That was a risk. He admitted that he had not negotiated the terms of the loan. According to him, since the product could be marketed, his shares would increase in value and he would have funds to repay the loan. However, if the project failed, he would have to repay a $12,500 debt.

[29]          Commu-Sys Enr.'s partnership agreement, which was registered on October 30, 1991, was filed at the hearing. According to the [TRANSLATION] "Auditors' Report to the Members of Commu-Sys Enr." included in Commu-Sys Enr.'s financial statements to December 31, 1991, the partnership had paid Omzar Technologies Inc. $2,340,500 to perform work under a research contract. Thus, 23,405 shares had been issued by Commu-Sys Enr. to its members at that time. According to the appellant, the $2,234,334 entered in the "Claim for Scientific Research and Experimental Development (SR & ED) Expenditures" represented expenditures made by Commu-Sys Enr. that qualified for research and development purposes. Of that amount, the appellant claimed $23,742 as his share, as a member of the partnership, of the research and development expenditures. An amount equal to 20 percent of the $23,742 deducted as research and development expenditures was claimed by the appellant as an investment tax credit. According to the information he had obtained—which was entered on Form T2038—that credit amount could be carried back to previous years or forward to subsequent years. The appellant claimed $1,993.07 of the credit in 1991 and carried the balance of $2,754.93 back to his 1988 taxation year.

[30]          On cross-examination, the appellant testified that he did not know that he would receive a tax refund of more than $18,000 in 1991. However, he knew that his net income would be reduced by investing, which would lower his tax rate. Indeed his $25,000 investment was wholly financed. When he purchased his shares in Commu-Sys Enr. on December 20, 1991, he was sure that he could obtain a personal loan from the credit union.

[31]          When the appellant received Commu-Sys Enr.'s partnership agreement, he did not seek professional advice. He had never signed such an agreement. According to the appellant, the agreement stated that the partnership's business involved raising funds in order to conduct research. There were two partners under the agreement, Mr. Caron and Mr. Lussier. However, there is some ambiguity, since article 3.0 of the agreement stated that: [TRANSLATION] "By signing this agreement, each member represents, warrants and agrees with each of the other members that the said member. . . ."

[32]          Although the appellant did not sign Commu-Sys Enr.'s partnership agreement, he was a member of the partnership. Article 3.6 of the agreement provided that the members had to be acquainted with research and development. The appellant said that that aspect was handled through the participation program. He said that Commu-Sys Enr.'s assets were made up of the funds collected for the purpose of carrying out the project in question. As to the advantages offered by that partnership, he explained that, in his view, they consisted not in profits but in the benefits associated with the partnership, such as the tax deductions that could be claimed.

[33]          In addition, article 9.1 of the partnership agreement provided that Mr. Caron was the secretary of Commu-Sys Enr. and that he had the authority to grant scientific research mandates. The appellant's interpretation of that provision is that Mr. Caron had full authority to award research contracts. The appellant said that the work involved in the various stages of the research project could perhaps be done by a number of subcontractors. However, since the full amount invested, namely $2,340,500, was transferred to Omzar Technologies Inc., he assumed that that company would be carrying out the entire research project. Moreover, the appellant stated that he trusted Mr. Caron. He thinks that Mr. Loranger was the one who chose Mr. Caron to be the partnership's secretary, since it was Mr. Loranger who had the idea of conducting research. Yet the partnership agreement stated that Mr. Caron and Mr. Lussier were the initial partners, with no reference to Mr. Loranger. The appellant explained that he had met Mr. Loranger during the examination for discovery of Mr. Jabbar, the president of Omzar Technologies Inc.

[34]          As well, article 9.2 of the partnership agreement provided that Commu-Sys Enr. also had to have liability insurance. In the appellant's opinion, insurance is crucial for any business, and he did not wonder why that clause was included in the partnership agreement.

[35]          Article 9.4 of the same agreement stated that the secretary, Mr. Caron, could enter into contracts with related persons. The appellant's interpretation of that clause is simply that Mr. Caron could enter into contracts with members of his family. It was also provided in clause 9.6 that the secretary could resign or be dismissed by the members at a special meeting. To the appellant's knowledge, there was no such meeting nor any resignation. The appellant saw Mr. Caron as the "manager" of Commu-Sys Enr. who was responsible for amassing the funds invested by the members and awarding the research contract to Omzar Technologies Inc.

[36]          Mr. Caron was appointed the manager of Commu-Sys Enr. by a resolution of its members dated December 20, 1991. Paragraph 3 of the resolution gave him a two-year term of office ending on December 31, 1993. The length of the term did not worry the appellant. Moreover, paragraph 4 of the resolution clearly provided that Mr. Caron could not get the members into debt or make them liable for an amount higher than that of the total investments, namely $2,340,500. Finally, paragraph 5 provided that Mr. Caron would report to the members at the end of his term. However, the appellant admitted that no report was given to him and that he did not ask Mr. Caron for one. He was not consulted about the decision to appoint Mr. Caron as manager. Rather, he said, it was the people who had organized the information session who chose Mr. Caron. The appellant trusted them, but he could not specify who appointed Mr. Caron.

[37]          After deciding to invest in Commu-Sys Enr., the appellant signed the share subscription form that had been handed to him by Roger Roy, the paper-maker, a few days prior to December 20, 1991. Mr. Roy then gave the signed form to the person in charge at Commu-Sys Enr. The form signed by the appellant referred to a partnership agreement dated February 20, 1991. The appellant did not inquire of those in charge at Commu-Sys Enr. as to when that partnership was actually created.

[38]          It was indicated at paragraph (f) of the form that the member of Commu-Sys Enr. had been told of the planned use of the investment results. The appellant testified that his understanding of that phrase was that "planned use" referred to the shortcoming that had been found in telematics systems in general and that the "investment results" would be the research and the funds invested to conduct it. Finally, paragraph (h) of the form provided that the member declared that he or she was satisfied with the partnership agreement attached to the form. The appellant said that he thought there was nothing in the form or the partnership agreement that would have aroused distrust or suspicion, as far as he could judge.

[39]          Aside from his co-workers, the appellant did not know anyone who had purchased shares in Commu-Sys Enr. He never received a list of the members of Commu-Sys Enr., even after his investment. The appellant added that he did not think it necessary to know all the members of the partnership. He said that decisions were made on an individual basis but that, taken all together, they formed a group decision.

[40]          The appellant never received a letter notifying him of Commu-Sys Enr.'s change of address from Boulevard Hamel in Québec to Boulevard Métropolitain in Montréal. Omzar Technologies Inc.'s laboratories were located at the same place as Commu-Sys Enr.'s new offices, on Boulevard Métropolitain in Montréal. The appellant realized this when looking at the letters he received from Commu-Sys Enr. and a letter from Omzar Technologies Inc. inviting him to visit the research laboratories.

[41]          The appellant said that fundraising was the first activity for members of Commu-Sys Enr. The members were thereafter given documentation to read. There were also questionnaires to fill out concerning the reading required of them. In March 1992, a members' meeting was held in Ste-Foy to provide information about the cable project. At the meeting, the members were provided with a computer and communications software. There was also a communiqué dated March 9, 1992, and signed by Pierre Black, who described himself as the scientific head, informing the members that the scientific board was about to complete the development of the participation program. The appellant had met Pierre Black at Commu-Sys Enr.'s meetings, but he does not know whether he worked for Commu-Sys Enr. Pierre Black was not a member of Commu-Sys Enr. If he was not a member of Commu-Sys Enr., then the appellant's conclusion is that he was probably an employee of Omzar Technologies Inc. The members who had been chosen to receive a computer had to pick it up at the offices on Boulevard Hamel in Québec. The appellant remembers seeing Pierre Black, Jacques Caron and two secretaries when he went there. The same communiqué of March 9, 1992, advised the members that the scientific board would give them details about the necessary participation activities. The appellant testified that only the broad lines of the participation activities were known in March 1992 and that details on the activities were not provided until the end of that month.

[42]          A letter dated March 12, 1992, was sent to the appellant by Pierre Black providing details about the participation program and referring to Groupe Omzar. The appellant admitted that he did not know of Groupe Omzar but said that he deduced that it was Omzar Technologies Inc.

[43]          On March 30, 1992, the appellant was sent another letter by Pierre Black. A few items were enclosed therewith, including a document on the design and development of a prototype telematics system. That document was part of the required reading. It was also in that letter that Commu-Sys Enr. notified the members that its offices were now on Boulevard Métropolitain in Montréal. The letter referred to the "company", but the appellant assumed that that meant Commu-Sys Enr.

[44]          By letter dated June 29, 1992, Pierre Black informed the members of Commu-Sys Enr. that Revenue Canada had conducted financial and scientific audits of the YY project carried out by Omzar Technologies Inc. for Dreyfus Bio-Systems Enr. and that the results were good. The appellant had heard of the YY project because some of his co-workers had invested in Dreyfus Bio-Systems Enr. Participation in that project had been proposed to him. The fact that there were researchers, such as Mr. Marin and Mr. Méthot, who worked on both that project and the cable project did not surprise him. The letter gave the names of the persons present during the audit. The appellant recalls Mr. Jabbar's name; he described Mr. Jabbar as being the executive head of Omzar Technologies Inc.

[45]          The YY project was referred to in another letter, dated September 23, 1992, written by Pierre Black as the head of the scientific department. Since that project had been audited by Revenue Canada, the appellant thought that it served to reassure the members as to the soundness of the project and of Omzar Technologies Inc.'s organizational structure. According to the appellant, the fact that Mr. Black referred to another project was not necessarily a breach of confidentiality, since he was a member of Commu-Sys Enr. In the appellant's view, the letter did not reveal any secrets regarding the YY project.

[46]          A certain Mohamed Abouelouafa, whose title was communications director, sent a letter to the members of Commu-Sys Enr. explaining how the work on the cable project was coming along. The appellant admitted that he did not know that person but assumed that he might be a relative of Mr. Jabbar's. He knew moreover that it was not Commu-Sys Enr. but rather Omzar Technologies Inc. that reported on the progress of the research.

[47]          During the months that followed, there were no activities other than reading the documents sent to the members. Finally, in the fall, a second members' meeting was held. Members of partnerships other than Commu-Sys Enr. may have been present at such meetings—members of VCA, for example—but the appellant was not aware of VCA's existence at the time. At the meetings, presentations were made by several people, but Mr. Barski was the person the appellant remembered the most. He explained that Mr. Barski's presentation was of greater interest to him because it dealt with the scientific aspect. The meetings were organized as part of the information component of the participation program.

[48]          As a member of Commu-Sys Enr., the appellant did not take part in decisions concerning the partnership's business. He did not make any effort to find out about the direction of the research. He said that he relied on the reports that were being sent to him. He did not check the quality of the research work. Moreover, apart from the participation aspect to which he referred, the appellant was not involved in any way in the management or in the ongoing activities of the partnership.

[49]          An undated document adopted by the scientific board and signed by Jacques Caron, the partnership's secretary, described the members' participation program. The program was approved by the scientific board made up of Mr. Marin, Mr. Barski and Mr. Rassi. According to the appellant, a participation program was developed to get the members involved in the research and to keep them informed about the various stages of the project. He also acknowledged that the participation program was important in meeting the eligibility criteria for the tax deductions, but the program was designed basically to keep the members informed about the project.

[50]          The members received a few documents to read and some questionnaires. For example, the appellant was sent a letter dated November 4, 1992, accompanied by a questionnaire. The letter referred to "essential" co-operation in terms of research and taxation. With regard to research, the appellant explained that co-operation was important in order for the scientific staff to have all possible data and knowledge. A similar letter was sent to the members on January 11, 1993. It was signed by Lise Bouffard on Mr. Loranger's behalf. The appellant said that Ms. Bouffard was the person he contacted whenever he had questions. As regards Mr. Loranger's position, the appellant did not know whether Mr. Loranger replaced Mr. Caron.

[51]          Starting in December 1992 or January 1993, the appellant stopped receiving reports on the progress of Commu-Sys Enr.'s research project. A report may have been sent to him toward the end of December 1992 on Commu-Sys Enr.'s behalf. Since the appellant had reinvested in Cablotel Enr., the partnership that continued Commu-Sys Enr.'s activities, he did not keep that documentation.

[52]          A letter dated January 20, 1995, from Mr. Caponi, a Revenue Canada auditor, to Commu-Sys Enr. stated that the research project complied with section 2900 of the Income Tax Regulations ("Regulations") only in part and that the members were not engaged in the activities of the partnership on a regular, continuous and substantial basis. The letter did not mention that the members were limited partners. The Department of National Revenue did not question the existence of Commu-Sys Enr. A second letter dated May 17, 1995, from Mr. Caponi to the appellant stated that, in support of the assessment, the Minister was relying on the appellant's status as a limited partner and specified member as grounds for disallowance. Commu-Sys Enr.'s existence was not questioned. After receiving that letter, the appellant called Mr. Caponi to talk about it. Not satisfied with the answer Mr. Caponi gave him, he also contacted Serge Huppé, a Revenue Canada appeals officer in Ottawa, who told him that ignorance of the law is not a valid defence.

[53]          A letter dated November 23, 1995, from the Minister to the appellant referred to a proposed settlement being offered to the appellant. A second letter dated July 26, 1996, reiterated the Minister's offer to settle. In that letter, the Minister stated that the appellant's tax liability was $36,338 but that it would be reduced to $19,366 if he accepted the settlement.

Cablotel Enr.

[54]          In the fall of 1992, during one of the many meetings at which the representatives and managers of the research project provided an overview of the progress of the work, Cablotel Enr. was introduced to potential investors and to the appellant as the partnership that was going to continue the research project begun by Commu-Sys Enr. The representatives of Cablotel Enr. told the investors of the opportunity of investing in the new partnership. No components of the project were identified to justify additional investment. The fact that VCA had existed before Commu-Sys Enr. and that Commu-Sys Enr. was a partnership that had continued the cable project was seen by the appellant as a precedent. Cablotel Enr.'s representatives told the investors that the research work would be done by the same subcontractor, Omzar Technologies Inc. The appellant knew that Mr. Barski was still on the research team.

[55]          A tax shelter number had been issued for Cablotel Enr.'s project. That fact gave the appellant a sense of security, since he believed that a preliminary check had been conducted, although he knew that the fact that a number had been obtained did not guarantee that the project was eligible. Cablotel Enr. introduced itself as a second partnership whose purpose was to accumulate the funds needed to continue the research project. The appellant said that he was not surprised that the project needed additional funds after less than a year. It was up to the research team to determine whether the initial amount was sufficient or whether more funds had to be obtained. The project heads asked the investors whether they were interested in investing in the project at $100 a share. They did not ask these investors to invest $2,000,000. The appellant never had any fear that those project heads would ask the investors to advance additional amounts. He does not know why Commu-Sys Enr. did not try to obtain those amounts itself. According to him, it was normal for a research project to face constraints and for additional funds to be needed to continue the project. Commu-Sys. Enr. had never suggested that additional investment would be needed to complete the project. The appellant explained that it was also easier for Omzar Technologies Inc. to obtain the necessary financing by spreading the fundraising over several years.

[56]          The appellant became a member of Cablotel Enr. on November 24, 1992. He thought that everything would proceed as it had with Commu-Sys Enr. The same research team that was already in place did the work involved in continuing the project. The appellant also admitted that he did not make inquiries the way he had with respect to Commu-Sys Enr. He had not yet had any problems with the Department of National Revenue. The Minister had accepted all his claims for tax credits for the research project. Since Cablotel Enr. was merely continuing Commu-Sys Enr.'s research project, the appellant felt comfortable with the technical, scientific and tax aspects of his investment in Cablotel Enr. He thought as well that the research would come to fruition. He stated that he was merely transferring his funds to Cablotel Enr. to ensure that the project continued.

[57]          The appellant therefore invested $26,000 in Cablotel Enr. He took basically the same steps to obtain the financing required for that partnership as he had for Commu-Sys Enr. Thus, he borrowed the first 50 percent of his total investment from the Caisse populaire Desjardins in Stoneham, that is, he obtained a personal loan of $13,000 from that credit union at an interest rate of 13.416 percent, including life insurance coverage. The appellant planned to pay back the loan using the tax refunds he was to receive. The first amount he received was $7,666.73 from the federal government for the 1992 taxation year. He was given another tax refund of $1,973.53 by the same government as a result of having carried back a portion of the investment tax credit to the 1989 taxation year. Finally, he received a tax refund of $8,632.38 from the Quebec government. The appellant therefore repaid his loan from the credit union in full using the tax refunds from the two governments.

[58]          The appellant explained that he did not declare his shares in Commu-Sys Enr. as an asset or his loan from Loron Inc. as a liability in the credit application he made to the credit union for his investment in Cablotel Enr. He simply explained that he did not consider it necessary to tell the credit union about those two items, just as he did not mention the second residence where his father-in-law lived. He said that many things were said orally and added that he had no control over what the credit union's representative wrote on the application. He testified that he told her that he had invested $25,000 in Commu-Sys Enr. and that that loan was for a tax shelter. As for the $13,000 loan for his investment in Cablotel Enr., the appellant provided the same kind of information that he had given to obtain funds to invest in Commu-Sys Enr.

[59]          The second half of the investment was financed by Noreco Inc., as can be seen from the personal loan agreement for $13,000 dated November 24, 1992. The appellant testified that he did not know of Noreco Inc. before he signed the loan agreement. The document had already been prepared by a manager in Montréal. The appellant himself wrote the date, the amount of the loan and his address on the loan agreement and signed the agreement. A representative of Noreco Inc. filled out the information on payment terms at paragraphs (a) to (c). Noreco Inc.'s address on the loan agreement was the same as that of Commu-Sys Enr. The appellant testified that that did not surprise him. The interest rate on the loan was 10 percent, the same as that on the loan from Loron Inc. Likewise, the appellant's shares in Cablotel Enr. were used as collateral for the loan granted. According to the appellant, his agreement with Noreco Inc. enabled him to acquire 260 shares in Cablotel Enr. at $100 each and at the same time represented a personal debt of $13,000. He therefore handed over a cheque for $13,000 made out to Noreco Inc. He admitted that he made a mistake, since the cheque should have been made out to Cablotel Enr. However, the cheque was never returned. He assumed that the $13,000 had been transferred to Cablotel Enr. by Noreco Inc. He never had possession of the $13,000 that Noreco Inc. loaned him. He did not meet with any representative of Noreco Inc.

[60]          The appellant acknowledged that he did not make any inquiries to determine how Noreco Inc. was structured or even try to find out who its officers and shareholders were. Noreco Inc. did not do a credit investigation on the appellant nor did it ask him any questions about his creditworthiness and solvency. There were no negotiations concerning the repayment terms for the loan made by Noreco Inc. The appellant made an initial payment of $216.67 for the first two months of interest.

[61]          At the time the loan was granted by Noreco Inc., the appellant still owed Loron Inc. the $12,500 it had loaned him. As a consequence, he would have to pay $273.53 a month on the two loans. On cross-examination, the appellant said that he had not considered whether he could afford to make that payment before he invested in Cablotel Enr. Nor had he considered the fact that he would have to repay the loan from Loron Inc. The appellant had understood that the value of the research work would enable him to repay the loans from Loron Inc. and Noreco Inc. The monthly payments that he had to make on those two loans were not a source of concern for him, since, in his view, the research being done constituted good consideration. Moreover, he was convinced that he would not have to pay back the loans over a 10-year period because the research was to be carried out over three years only. However, if the research had not led to the desired result, the principal on the two loans and the interest would have become payable immediately after the three-year period allotted to the research. At the time he invested in Cablotel Enr., the appellant already owed $1,040 in unpaid interest on Loron Inc.'s loan to him for his investment in Commu-Sys Enr.

[62]          To purchase his shares in Cablotel Enr., the appellant signed a subscription form and it was Mr. Loranger who signed that form for Cablotel Enr. He had been appointed as project manager by a resolution of Cablotel Enr. signed on November 24, 1992. However, between November 24 and December 31, 1992, the appellant was not notified of any meeting of the members of Cablotel Enr. nor was he informed that decisions had to be made regarding the partnership's activities. To his knowledge, Cablotel Enr. did not during that period take any particular actions, such as changing or drawing up a research protocol.

[63]          A letter dated July 15, 1993, that was sent to the appellant welcomed him to Cablotel Enr. and confirmed that the cheque made out to Noreco Inc. had been given to Cablotel Enr. The appellant had invested in November 1992, but he did not receive the letter confirming the loan until July 1993. That delay did not worry him, because in March 1993 he had received all the documents he needed for tax purposes from Cablotel Enr.

[64]          The appellant said that he was aware that there was a significant risk associated with Cablotel Enr.'s research project, since the project might well fail. If Cablotel Enr. had been unable to obtain additional funds to continue the project, the appellant would no longer have had any hope of the project being carried out. He had calculated the risk involved in Cablotel Enr.'s project. He explained that that was one of the reasons why he had not invested in Dreyfus Bio-Systems, that is, because he did not think that the product held any promise.

[65]          The appellant testified that he realized that, by investing in a general partnership like Cablotel Enr., he became liable for the debts incurred by the partnership. For the 1992 taxation year, Cablotel Enr. made $2,000,000 in qualified research and development expenditures.According to the appellant, Cablotel Enr. issued a total of 20,000 shares at $100 each. He purchased 260 of the 20,000 shares, which entitled him to claim $24,700 as his share, as a member, of the research and development expenditures. As an investment tax credit, he claimed 20 percent of the $24,700 deducted as a research and development expenditure.

[66]          According to a statement for an account at the Caisse populaire Duberger, the amounts deposited in Cablotel Enr.'s account came to $1,814,000 on November 30, 1992. Those amounts were paid out to Omzar Technologies Inc. A bank statement for Cablotel Enr.'s account at the Toronto-Dominion Bank shows that $227,000 had been deposited in the account and that the same amount was given to Omzar Technologies Inc. The cheques given to Omzar Technologies Inc. were all signed by Mr. Loranger.

[67]          The appellant stated that he did not attend the information sessions as he had done in the case of Commu-Sys Enr. He took it for granted that the project was identical and that the new partnership would proceed in the same way as Commu-sys Enr. He simply thought that Commu-Sys Enr.'s managers had found that extra funds were needed for the research work to progress and that they had therefore decided to issue more shares. However, there was no meeting of Commu-Sys Enr.'s members during which the need for additional funds was discussed.

[68]          Cablotel Enr.'s partnership agreement was almost identical to that of Commu-Sys Enr. The initial members of Cablotel Enr. were Michel Loranger and Manon Dubois. The appellant did not know Ms. Dubois but was aware that she was a member of Cablotel Enr. He did not know who worked for Cablotel Enr. According to the appellant, Mr. Loranger had no knowledge in the area of cable television. Mr. Loranger did not consult a scientific advisor to help him in his managerial duties. The appellant received no report from Mr. Loranger setting out the steps taken with third parties for the marketing of the results of the project. The appellant saw Mr. Black regularly at Cablotel Enr.'s meetings. However, it was difficult to say with certainty that Mr. Black was a representative of Cablotel Enr. or of Omzar Technologies Inc. The appellant later saw in the documents provided that Mr. Black was an employee of Omzar Technologies Inc.

[69]          The appellant was given documentation concerning his investment in Cablotel Enr. Most of the documents were the same as those he had received with respect to his investment in Commu-Sys Enr. The most important differences related to the project design document. Stages had been added by Cablotel Enr. The total cost of the project was also changed. Cablotel Enr. had $2,000,000 at its disposal, whereas Commu-Sys Enr. had had $3,000,000.

[70]          The document on prototype design for Cablotel Enr. sets out the same stages as those for Commu-Sys Enr.'s project. The stages indicated in the document do not represent the entire project, but since Cablotel was continuing the project, the stages completed by Omzar Technologies Inc. for Commu-Sys Enr. would not be redone. The stages listed in Commu-Sys Enr.'s design document were divided into two main stages in Cablotel Enr.'s design document. It would seem that Omzar Technologies Inc. had already completed the steps set out under Stage 1 in the design document. The appellant added that, since Omzar Technologies Inc. needed additional funds, Cablotel Enr. was created to meet that need. However, Commu-Sys Enr. did not cease to exist. Accordingly, rather than receiving several reports from the two partnerships, the members were given a single report on the cable project.

[71]          To the appellant's knowledge, no agreement was entered into by Commu-Sys Enr., Cablotel Enr. and VCA specifying how the rights to the research results would be divided up. As he understood it, the division of the profits and the rights to the research was to be determined on the basis of each partnership's percentage of investment in relation to the total investment amount. In this regard, since Commu-Sys Enr. had invested $2,340,500 while Cablotel Enr. had invested $2,000,000, the appellant saw his investment in the former as being more significant.

[72]          In a letter dated March 12, 1992, that he received from Cablotel Enr., the appellant was informed that a meeting would be held at the end of the month and that the members would each receive a computer. The members did not all receive a computer. Communications software was provided to the members by Omzar Technologies Inc. so that they could later communicate directly with its laboratory. However, the appellant said, the computer did not have a modem and that he did not buy one. The computer therefore did not work, and the appellant never communicated with Omzar Technologies Inc. The software that company provided was software that, once the work was completed, would allow the remote checking of network amplifiers. The appellant acknowledged that he never visited Omzar Technologies Inc.'s laboratories. Yet, his co-workers who invested in the same project had the opportunity to be taken on an organized tour of the laboratories.

[73]          The service contract between Cablotel Enr. and Omzar Technologies Inc. provided for an amount of $2,000,000 over a period of three years, starting in November 1992. The appellant thought that the cable project was not one that could easily be carried out within a short period of time. Having invested in Commu-Sys Enr. and Cablotel Enr., he even declared that he would have been prepared to invest again in another component, if necessary. He did not wonder what would happen if Omzar Technologies Inc. closed down. He was prepared to take the risk. As with the investment in Commu-Sys Enr., no market research surveys were done or potential clients approached. The objectives listed in the service contract were the same as those that applied to Commu-Sys Enr., including those with respect to the marketing aspect of the research results.

[74]          That service contract between Cablotel Enr. and Omzar Technologies Inc. was entered into on April 2, 1992, although investors like the appellant were not approached until the fall of 1992. The appellant said that the chronology of events did not surprise him. He explained moreover that the fact that the contract was entered into four months after he invested in Commu-Sys Enr. confirmed his view that it was easier for Omzar Technologies Inc. to obtaining financing of $2,000,000 three times rather than $6,000,000 once. At the time he invested in Commu-Sys Enr., the appellant did not know that the project would cost over $3,000,000.

[75]          The appellant understood that, given the uncertainties that existed, the $2,000,000 did not necessarily guarantee that the research results would be marketed. The ultimate goal was to market a product. The appellant testified that he believed that if marketing was not written into the service contract the members of the partnership would have to pay additional amounts to market the research results. He also said that he did not know the cost of obtaining a patent. He did not concern himself with the financial and administrative aspects of Cablotel Enr. He was interested only in the scientific aspect of the project, since he believed in the potential of the final product. He was confident that Cablotel Enr.'s managers would make the appropriate decisions. Yet he was not given any financial data or forecasts. In addition, no audit was done and Cablotel Enr.'s members had no figures available to them concerning the cost of the project for Omzar Technologies Inc. However, although the appellant knew nothing about Omzar Technologies Inc.'s financial health, the fact that Cablotel Enr. was prepared to transfer all the funds to it was an indication that it was in good financial health. In short, it was a matter of trust.

[76]          The appellant testified that he did not know the members of Cablotel Enr. with the exception of his co-workers who had already invested in Commu-Sys Enr. He added that he would certainly have made sure he knew them all if he had been aware that one of the eligibility criteria was that the members had to know one another. He also did not know how many members there were in the partnership and did not think that that information was important. What was important was obtaining funds. The government officials had not told him that he had to know the other partners. In actual fact, there were 83 members of Cablotel Enr. The appellant had assumed that Cablotel Enr.'s participation program was the same as that of Commu-Sys Enr.

[77]          When it came time for tax returns to be prepared, each member was provided with various documents so that he or she could claim the research and development expenditures. The appellant did not wonder about the significance of the data in the [TRANSLATION] "summary of SR & ED expenditures". No explanation was given to the members concerning those data.

Participation program for the members of Commu-Sys Enr. and Cablotel Enr.

[78]          A participation program was set up to meet the eligibility criteria. In the case of both investment partnerships, participation in the research project involved a reading component and an information component. The former component required the investors or members to read documents given to them by the partnership's representatives explaining the prototype telematics system. The documents explained the methods used for the research project. The information component provided the members with information about the development of the project. They then had to answer the questions asked. For example, the appellant was sent a letter with which was enclosed a questionnaire asking what constraints the telematics system might be subject to and what problems it might face when it was marketed. Finally, there was also a component involving a visit to the laboratories.

[79]          Commu-Sys Enr. also sent its members a report telling them what new developments had occurred and how the work on the research project was coming along. The appellant received a letter from Cablotel Enr. welcoming him in the partnership and informing him of the three aspects of participation, namely: the reading component, the participation proper and the requirements to be met under the Act. He was sent another report concerning the two investment partnerships on October 29, 1993. That report explained the nature of the research work, what had been accomplished and the timeline for each area of activity. The report also explained the experimental methodology and provided a detailed description of operations. It even referred to the uncertainties involved in the research.

[80]          The documents in the participation file of Mr. Crevier, a member of Commu-Sys Enr., were filed at the hearing because the appellant's file could not be found at Commu-Sys Enr. The first information session was informal, and attendance was not taken. The other meetings were more formal, and attendance was taken either by getting the members' signatures or simply by checking off the names of those who were there.

[81]          On cross-examination, the appellant admitted that he had no investment experience aside from the purchase of Canada Savings Bonds and investments made at a bank or credit union. He has never been a shareholder in a company. When he invested in Cablotel Enr. and Commu-Sys Enr., he had no other investments.

[82]          During the information session, the appellant also received many documents. He received similar documents when he invested in Cablotel Enr. in 1992 because that partnership was continuing Commu-Sys Enr.'s project. He did not keep those documents. There was no document explaining the financial aspect or the tax benefits resulting from the project. The appellant explained that the tax benefits consisted in a reduction in the taxpayer's net income, resulting in a tax refund as well as an investment tax credit equal to 20 percent of the total investment. The tax aspect was explained orally by Commu-Sys Enr.'s representatives at the information session.

[83]          The appellant said that the tax benefits were certainly attractive. He explained that they made the decision to invest a little easier and provided more of an incentive. He added that the investment partnerships would not have been created had it not been for the tax benefits. He did not say that he would not have invested had it not been for the tax benefits. He merely stated that they had a significant impact on his decision.

[84]          The appellant knew before he invested that legal advice had been obtained explaining the differences between a general partnership and a limited partnership. He is not sure whether the opinion he read was that dated March 16, 1992, prepared by lawyer André Corbeil for Cablotel Enr. That opinion looked at the differences between a general partnership and a limited partnership and dealt as well with the investment tax credit and the eligibility criteria for that credit. It is important to note that Mr. Corbeil concluded by advising the reader of the general anti-avoidance rule (section 245 of the Act).

[85]          The appellant does not recall whether the question of the product's profitability was discussed during the information sessions. Since the research contract awarded to Omzar Technologies Inc. was spread out over a period of three years, he thought that the project would not generate any income before the end of that period. The appellant maintained that he did not remember whether potential clients were mentioned during the information sessions. The cost of a similar product was not discussed during the sessions. The appellant was not particularly concerned about such matters. In his opinion, the project was viable, although he could not set an exact value on the final product. He did not evaluate the product's profit potential because he did not have the experience to do so. He believed that there was a risk, for example, if the research project did not result in a product. In the appellant's view, the research work that was done would perhaps have some value since it could benefit other research companies.

[86]          The question of selling shares was not explicitly addressed at the information session. The agreement provided that a member was to offer his or her shares to the other members first—to those working at the mill with the appellant, for example. The appellant did not ask himself whether he could sell his shares to a third party in the event that the other members were not interested in buying them.

[87]          The appellant also declared that he was not told of the preliminary steps taken by Commu-Sys Enr., such as market research surveys of licensees, discussions concerning the granting of possible licences and potential royalties for the sale of technology products, and studies on the setting up of facilities and on the project's feasibility. The appellant added that he knew nothing about obtaining a patent or the costs involved in doing so. As far as the costs were concerned, the appellant said that he would have been prepared to provide additional financing if Commu-Sys Enr. had needed it. In support of that statement, he pointed out that in 1992 he invested in Cablotel Enr., which was the continuation of Commu-Sys Enr., because he wanted the see the project move forward. On the other hand, the appellant gave as an example some of his co-workers who were not interested in investing further in Cablotel Enr. He said that the investment partnership was to hold the property rights in the final product of the research work.

[88]          The appellant admitted that he did not check Mr. Caron's level of competence. He did not know Omzar Technologies Inc., although he may have heard of it through his co-workers who had previously invested in similar research projects. He did not check up on Omzar Technologies Inc. He also had no idea how the amount claimed by Omzar Technologies Inc. for the research in the research contract had been established. He relied on Commu-Sys Enr.'s managers, sincerely believing that they had negotiated and taken all the appropriate steps. The appellant was not capable of judging whether the $2,340,500 awarded to Omzar Technologies Inc. by Commu-Sys Enr. was reasonable.

[89]          At the time he invested in Commu-Sys Enr., the appellant did not know whether Omzar Technologies Inc. had previously signed a similar research contract with VCA. He was told of VCA's existence by Roger Roy, the paper-maker, who assured him that the contract between VCA and Omzar Technologies Inc. contained a lower price for the research than that set in the contract between Commu-Sys Enr. and Omzar Technologies Inc. He testified that he was surprised that he had not been told there was another partnership but that it did not worry him because the investment was a continuation of the project. He also did not pay a great deal of attention to the patent questions that might be raised by VCA, since he understood that the same research work was being continued. VCA's investors had perhaps also invested in Commu-Sys Enr., which was continuing the project started by VCA. Moreover, in a letter dated August 5, 1992, Mohamed Abouelouafa, who described himself as the communications director, invited the members of Commu-Sys Enr. and VCA to meet the scientific staff working on those two partnerships' projects. The appellant confirmed that, although he did not know about VCA's project before investing in Commu-Sys Enr., he was told of its existence before he invested in Cablotel Enr. Following the above-mentioned meeting, the members had to fill out an attendance and evaluation form, which was important for the participation program.

[90]          The appellant said that, at the time of his initial investment, he did not know whether there were any ties between Commu-Sys Enr., Omzar Technologies Inc. and the finance companies. He was not aware that Commu-Sys Enr. paid all the funds it collected to Omzar Technologies Inc. He did not find this out until he prepared his tax return in 1991 after reviewing Commu-Sys Enr.'s financial statements as at December 31, 1991.

[91]          Those financial statements had been prepared by the chartered accounting firm of Grossman Kellerman Klein. Furthermore, the appellant did not know whether any tax consequences might result from the fact that all of the amounts were or were not paid to Omzar Technologies Inc. The financial statements indicated that Commu-Sys Enr. had no income for 1991. During his cross-examination, the appellant looked at Commu-Sys Enr.'s financial statements to December 31, 1991, and noted that it did not have any income. Since the funds collected and transferred to Omzar Technologies Inc. represented expenditures for Commu-Sys Enr., the result was a loss of $2,349,549. The appellant said that he was not surprised by that huge loss. He explained that he was seeing financial statements for the first time and so was not in a position to assess the information found in them. He added that, since the financial statements were prepared by a chartered accounting firm, they had to be accurate. The appellant did not receive other financial statements for the subsequent taxation years, namely 1992 and 1993.

Share transfers by the members of Commu-Sys Enr. and Cablotel Enr.

[92]          By letter dated December 29, 1992, Commu-Sys Enr. notified its members that they would be provided with information about the redemption of their shares. The appellant testified that he did not know in December 1992 that his shares were going to be redeemed. He said that he never received such a letter. The letter also stated that the members would be provided with tax slips for the interest paid to Loron Inc. The appellant admitted that he received such slips. He even had a letter from Loron Inc. certifying that it had received interest from him.

[93]          On December 20, 1993, an agreement to transfer shares in Commu-Sys Enr. was entered into by the appellant and Loron Inc. The appellant had signed the agreement before that date. He explained that Roger Roy, the paper-maker, had told him around July 1993 that Omzar Technologies Inc. was having some problems. He learned from Mr. Roy that there were conflicts of interest at Omzar Technologies Inc. and that Mr. Barski and Mr. Hallé were leaving that company. According to the appellant, since Mr. Barski was the head of the research team, his departure would cause delays in carrying out the research project. Aside from the discussions he had with Roger Roy and with his co-workers, there were no members' meetings concerning Omzar Technologies Inc.'s problems.

[94]          The amount owed by Loron Inc. for the share transfer was set off against the $12,500 owed by the appellant on the loan that Loron Inc. had made him when he purchased his shares in Commu-Sys Enr. on December 20, 1991. Loron Inc. did not require him to pay the interest he owed. The appellant had received the agreement around November 1993. He had read, signed and returned it without writing the date on it. It was indicated in the agreement that Mr. Jabbar was the president of Loron Inc. and that that company's chief place of business was at 6555 Boulevard Métropolitain in Montréal, in the same premises as the laboratories of Omzar Technologies Inc. As the appellant understood it, Omzar Technologies Inc. had waited until 75 percent of the members agreed to sell their shares before sending the signed agreement back to them. A letter dated December 22, 1993, accompanied the transfer agreement duly signed by Mr. Jabbar for Loron Inc. and Mr. Loranger for Commu-Sys Enr. The letter was signed by Lise Bouffard, who was acting on behalf of Commu-Sys Enr. The appellant does not know why Mr. Loranger rather than Mr. Caron signed the transfer agreement concerning Commu-Sys Enr.

[95]          The price was determined not by the appellant but by Omzar Technologies Inc. The appellant wondered whether the price was fair. He had been told that it represented the fair market value of the shares to the best of the parties' knowledge. When Roger Roy, the paper-maker, informed him of the conflicts at Omzar Technologies Inc., he did not tell him the amount offered for the redemption of the shares. The appellant therefore asked Mr. Roy whether there was any possibility of a higher price. Mr. Roy made inquiries and subsequently confirmed that it was the best offer. After he and Mr. Roy had discussed the matter, and given the uncertainties caused by the existence of conflicts within the Omzar Technologies Inc. team, they concluded that the price was reasonable.

[96]          There were no negotiations with Omzar Technologies Inc. concerning the redemption price. The appellant assumed that representatives of Commu-Sys Enr. and Omzar Technologies Inc. had negotiated the redemption price of the members' shares. However, he believed that that price represented the fair market value, since the project was to last three years and there was only a little more than a year to go.

[97]          Omzar Technologies Inc. later offered to redeem the members' shares, claiming that it wanted to retain control because there were disagreements within the group. Moreover, the appellant believes that the subscription contract provided that 75 percent of the members had to agree to sell their shares for Omzar Technologies Inc. to be able to regain control. A letter dated September 23, 1993, was therefore sent to the members asking them to read, sign and return the agreement for the transfer of their shares in Cablotel Enr. That letter was signed by Lise Bouffard for Mr. Loranger. According to Roger Roy, the paper-maker, the best option was to sell their shares, as he feared that the research project could fall through prematurely. The appellant therefore sold his shares in order to give control back to Omzar Technologies Inc. He believed that his decision would enable Omzar Technologies Inc. to move the project forward. He signed the transfer agreement and returned it to the offices of Omzar Technologies Inc. and Loron Inc. According to the appellant, he signed it around October but did not date it. He received the agreement countersigned by Mr. Loranger in the mail.

[98]          In Commu-Sys Enr.'s letter the amount indicated for the redemption of his shares was the same as the amount of Loron Inc.'s loan to him, namely $12,500. In August 1993, the appellant had received a report concerning the work on the cable project, but that report did not state what percentage of the work had been completed. The appellant noted from the report that the project was not without its achievements. Mr. Caron, as Commu-Sys Enr.'s manager and mandatary, did not provide the members with a report on the research work. He did not have the research results valued or assess the redemption offer made by Omzar Technologies Inc.

[99]          The appellant also said that, at the time of the transfer, he did not know the total amount of money that Omzar Technologies Inc. had spent on the work for the project as compared with the total invested by the members. However, he did assume that Omzar Technologies Inc. had used all the funds collected by Commu-Sys Enr., since the project was to be continued by Cablotel Enr., which had to obtain additional funds.

[100]        The appellant testified that the purpose of the set-off that took place in November 1993 of the sale price of his shares against the amount he owed on his loan from Loron Inc. was not to reduce or eliminate any loss that he could have sustained in Commu-Sys Enr. Furthermore, nothing in the agreement to transfer the shares to Loron Inc. suggested that his liability with respect to Commu-Sys Enr. would be reduced. The appellant also testified that he was not in any way forced to sell his shares. Finally, he said that, at the time he invested in Commu-Sys Enr., he did not know that his shares in that partnership were going to be redeemed.

[101]        The agreement to transfer shares in Cablotel Enr. was enclosed with a letter from Mr. Loranger to the appellant dated September 23, 1993. The members were asked to return the transfer agreement before October 8, 1993. From his discussions with Roger Roy, the paper-maker, in August and September 1993, the appellant had learned that there were problems at Omzar Technologies Inc. There were conflicts between the research team staff and the administrative personnel. The appellant transferred his shares to Noreco Inc., the company that had loaned him $13,000. He thought that, from an investment standpoint, it was preferable to do so in the circumstances. In his view, the execution of the project might well be prolonged. The agreement between the appellant and Noreco Inc. was for the transfer of 260 shares in Cablotel Enr. to Noreco Inc. as compensation for the debt resulting from the $13,000 loan. It was Mr. Loranger who signed the transfer agreement for Noreco Inc. as its president. The appellant said that he did not know Mr. Loranger was the president of Noreco Inc. before reading the transfer agreement.

[102]        The appellant testified that he sold his shares in Cablotel Enr. for the same reasons that he had sold his shares in Commu-Sys Enr. He wanted to give control back to Omzar Technologies Inc., and his intention was to have the research project make progress. He added that it did not seem worthwhile to him to keep his shares in Cablotel Enr. since he had already sold his shares in Commu-Sys Enr. The appellants' co-workers who had invested in the research project also sold their shares. He said that there was no verbal or written agreement between him and Noreco Inc. stating that his liability for the partnership's debts would become a limited liability once he sold his shares.

[103]        The amount offered to the appellant in return for the redemption of his shares was equal to 50 percent of his total investment in Cablotel Enr., which was in turn equal to the amount of the loan from Noreco Inc. This amount offered to the appellant was determined by the representatives of Omzar Technologies Inc. and Cablotel Enr. The appellant thought that the offer was reasonable given the work to be done. He felt that he was unable to check thoroughly into the reasonableness of the offer without assistance from an outside person. For him, it was also a matter of trusting the representatives of Omzar Technologies Inc.

[104]        The chartered accounting firm of Grossman Kellerman Klein sent an opinion dated September 24, 1993, that had been written for Noreco Inc. According to the appellant, that letter was sent to him to tell him that a capital gain is realized when shares in a general partnership are transferred. A $100,000 capital gains exemption was available at that time. However, there was no letter indicating the amount of the capital gain resulting from the transfer of the shares in Cablotel Enr.

[105]        The appellant was sent a letter from Noreco Inc. dated March 4, 1994, certifying that he had realized a capital gain of $12,500 during the 1993 taxation year. The fact that Noreco Inc. sent the letter did not make the appellant suspicious. An opinion on the disposition of shares in a general partnership had been prepared by Grossman Kellerman Klein. That opinion was dated January 25, 1993, and had been sent to Loron Inc.

[106]        The appellant testified that he did not transfer his shares in Commu-Sys Enr. and Cablotel Enr. at the same time. In fact, he had transferred his shares in the former sometime earlier. However, once he made the decision to sell his shares in Commu-Sys Enr., he no longer intended to keep his shares in Cablotel Enr. He transferred the latter shares around the end of 1993 or the beginning of 1994. He then reported a capital gain on that disposition in his tax return filed in 1994. During the same period, that is, in September 1993, the appellant had also received a participation program. However, he could not explain the connection between the two documents.

The appellant's investment in the SAET II partnership

[107]        After investing in Commu-Sys Enr. and Cablotel Enr., the appellant also got involved in another research project, namely that of SAET II, which involved a thermal energy storage system. He had heard about that project at a meeting concerning the cable project in the fall of 1993. Mr. Barski had presented the thermal energy accumulator project. A few of the appellant's co-workers had invested in SAET I in December 1992. Mr. Barski left Omzar Technologies Inc. while SAET II's project was in progress, and the appellant was informed that Alroma was taking charge of the project. He did not know whether it was Omzar Technologies Inc. or Alroma that had done the work on SAET I's project. Alroma was also a company that did scientific research. The SAET II partnership awarded the research contract to Alroma. SAET II was the continuation of the SAET I partnership. The appellant was aware of SAET I's project because he had obtained a leaflet from Pierre Marier, a co-worker, who had invested in SAET I. The appellant was much more interested in the cable project. However, when Mr. Marier talked to him about the project, he wanted to read the material concerning it.

[108]        The appellant decided in the fall of 1993 to invest in SAET II. According to the information provided, Mr. Barski was in charge of the project. In fact, one reason why the appellant transferred his shares in Commu-Sys Enr. and Cablotel Enr. was that SAET II was an interesting project that had been described to him by Pierre Marier and Roger Roy, the paper-maker. The project sought a means of optimizing solar energy and to create a kind of "heat pump" to store energy. At the time they made their investment, the thermal energy accumulator was shown to the investors. The appellant stated that he also had some knowledge in this field of research. He said that SAET II's project, like the cable project, involved some risks for him as an investor.

[109]        SAET II was a general partnership that was collecting the necessary funds to conduct research. The appellant could obtain the same benefits through the SAET II project that he had received from his investment in the projects of Commu-Sys Enr. and Cablotel Enr. He purchased his shares in November 1993. His investment was $25,000, or 250 shares at $100 each. This investment was financed in basically the same way as his investments in Cablotel Enr. and Commu-Sys Enr. He borrowed $12,500 from the credit union and paid back the loan using his federal and provincial tax refunds. The other $12,500 was provided by a finance company, 2961-5705 Québec Inc. The $12,500 cheque representing the funds borrowed from the credit union was made out by the appellant to 2961-5705 Québec Inc. He assumed that the money would be transferred to SAET II.

[110]        It can be seen from the credit application made to the credit union that the appellant did not declare the loans he had obtained from Loron Inc., Noreco Inc. and 2961-5705 Québec Inc. He explained that, at the time he invested in SAET II, he intended to transfer his shares in Commu-Sys Enr. and Cablotel Enr. Those transfers would thus have cancelled his debt resulting from the loans from the finance companies. In his credit application, the appellant did not declare the house owned by his spouse in which his father-in-law was living. He thought that the credit union knew about the loans he had taken out from the finance companies, so he did not mention them in his application.

[111]        In his tax return, the appellant claimed a tax refund of $7,568.56 from the federal government for the 1993 taxation year in connection with his investment in SAET II. He requested that the unused investment tax credit be carried back to the 1990 taxation year, which resulted in a refund of $1,904.38 from the federal government. He received a tax refund of $5,745.34 from the Quebec government.

[112]        The terms of repayment of the loan made by 2961-5705 Québec Inc. for the purpose of his investment in SAET II were almost identical to those for the loans from Noreco Inc. and Loron Inc. The appellant said that he never visited the offices of 2961-5705 Québec Inc. He did not complete parts A, B and C of the loan agreement. He did not fill out a credit application to obtain the loan from 2961-5705 Québec Inc.

[113]        The appellant asserted that he was not told about the activities that took place between the date of the SAET II partnership agreement, January 5, 1993, and the date of his investment, November 17, 1993. He admitted that he read the agreement before investing in the partnership. He did not obtain any professional advice. It can be seen from the agreement that the initial partners were Bruno Hallé and Marie-Josée Amyot.

[114]        After reading SAET II's partnership agreement, the appellant was convinced that SAET II was a partnership similar to Cablotel Enr. and Commu-Sys Enr. Mr. Hallé was SAET II's manager. According to a resolution signed by the members and dated November 17, 1993, Mr. Hallé was responsible for running the partnership and providing liaison between the members and the researchers. The appellant said that Mr. Hallé was introduced as the manager of Alroma at a meeting of the members of SAET II. That fact did not change the appellant's perception of things or give him more confidence with respect to his investment.

[115]        The appellant subscribed for shares in SAET II by filling out a subscription form on November 17, 1993. In that document, the appellant stated that he was acquainted with scientific research and development and that he had the financial experience to appraise his investment. In point of fact, the appellant was expecting a program similar to that of Cablotel Enr. and Commu-Sys Enr. He found that the amount of reading to be done was more extensive. The documents given to the members to read were very technical compared with those for the cable project. The appellant went to one or two members' meetings. He also read the documentation and filled out some questionnaires. The participation program was similar to those of Cablotel Enr. and Commu-Sys Enr.

[116]        As in the case of his investment in Cablotel Enr. and Commu-Sys Enr., the appellant did not know all the members. He knew those who worked with him for the same employer. He was not given a list of the members. He never made any decisions, as a member, concerning SAET II's business, nor did he write any reports on SAET II. He did not visit the project's laboratories. No project demonstration was given. The appellant did not take any steps to check up on the progress and quality of the project.

[117]        At the time he invested in SAET II, the appellant had taken out a total of $38,000 in loans from Loron Inc., Noreco Inc. and 2961-5705 Québec Inc. in addition to the $12,500 loan from the credit union. He knew that he would be able to pay back those debts because he was going to transfer his shares in Commu-Sys Enr. and Cablotel Enr. He added that, in the worst-case scenario, he would have mortgaged his home to repay the loans. Moreover, even if the share transfer had not been accepted, his shares would still have had a certain value. According to the appellant, there were some risks associated with SAET II's project. He said that the research project might have failed, lost value or not qualified for tax credits.

[118]        The appellant admitted that he had no guarantee that Mr. Barski would not leave SAET II or Alroma. He did not consider the possibility that SAET II's project might also fail as the cable project had, in other words, that his shares in SAET II might be redeemed for only 50 percent of his investment. With regard to Mr. Barski's competence, the appellant said that he had great confidence in Mr. Barski's abilities based on his presentation on the solar energy project. The appellant saw the thermal accumulator project as being an innovation by Mr. Barski, whereas the cable project, according to him, was Mr. Loranger's idea. Since Mr. Barski had conceived the thermal energy accumulator project, the appellant expected that he would be all the more dedicated to and intensely involved in it.

[119]        The appellant testified that he did not know whether the thermal accumulator project had been developed by other partnerships. No information was given to him about patents for the thermal energy accumulator invention. He did not learn until later that the Ersol and Solarix partnerships had also awarded research contracts to Omzar Technologies Inc. for solar energy research.

[120]        It can be seen from Ersol's partnership agreement that Mr. Barski and Roger Roy, the accountant, were the initial members of that partnership. They also had an interest in SAET I or SAET II, although it was not specified which. Ersol had given Omzar Technologies Inc. a mandate to develop a thermal energy accumulator. As the appellant explained, it was impossible for him to know that Omzar Technologies Inc. was also involved in a thermal energy accumulator project when he had invested only in the cable project.

[121]        During the first stage of the thermal energy accumulator project, work had been performed by SAET I. When he invested in SAET II, the appellant was not aware of the work done by SAET I. The project proposed by SAET II was to be of three years' duration. The informatics portion of the project had been developed by Ersol. The appellant did not know whether Mr. Barski was still a member of Ersol when SAET II was formed.

[122]        The appellant said that he was not aware that an article had appeared in La Presse on October 23, 1991, warning investors about promoters of research projects. Ersol was one of the partnerships named in the article. When the appellant contacted the Quebec Securities Commission, it did not draw his attention to promoters who were soliciting potential investors. Moreover, if he had been told that Ersol was [TRANSLATION] "dangerous" when he called the Commission, he would not have invested in SAET II nor indeed in Cablotel Enr. and Commu-Sys Enr.

[123]        The appellant's understanding was that the thermal energy accumulator project was Mr. Barski's. Mr. Barski therefore did not need to share the results with others. The appellant testified that there was never any mention made of an arrangement of any kind with SAET I. No presentation was ever made regarding the time needed to conduct all the research for the project or concerning the marketing of the product. Nor did the appellant wonder about the competence of Alroma's research team. He had understood that Mr. Barski had his own company, Boréal, that had rights to the accumulator. Boréal therefore joined forces with Alroma to develop the product. That was why the appellant did not think that Mr. Barski was an employee of Alroma. He did not know Alroma's scientific staff.

[124]        The appellant did not make any inquiries of Alroma to determine whether it had previously carried out research projects. He did not know the cost of the research project agreed on by Alroma and SAET II. He relied on the documents given to him by SAET II. The cost was determined by SAET II on the basis of the investments it was able to obtain. In addition, he did not ask himself whether there were sufficient funds to complete the project and why SAET had paid all the funds to Alroma. No analysis of the profit potential was made by either the appellant or SAET II. Moreover, according to the appellant, the product's profit potential depended on the need for the product.

Transfer of the appellant's shares in SAET II

[125]        A letter dated December 9, 1994, written by Roger Roy, the accountant, as the president of 2961-5705 Québec Inc. referred to the redemption of the appellant's shares in SAET II. The letter stated that the appellant had held his shares for more than 17 months. However, the appellant had in fact held them for only 12 months. The appellant said that he did not wonder about this. The letter stressed the importance of signing and returning the transfer agreement by December 28, 1994, because failure to return it within the agreed time would result in the loss of the capital gains exemption. The appellant therefore signed the agreement and returned it on December 21, 1994. He subsequently reported the capital gain when preparing his tax return. He also claimed a deduction for the interest he had paid to 2961-5705 Québec Inc. He did not pay that company any other amounts because it had not required him to do so. However, the capital gains deductions were disallowed.

[126]        At the time the appellant signed the transfer agreement, reassessments of tax had been made concerning his investments in Cablotel Enr. and Commu-Sys Enr. The members were informed that there was no longer an investment program. According to the appellant, this meant that the project would fail if Alroma could not complete it with the invested funds. He contacted Francine Dagenais of SAET II to check whether that information was correct. She held a position similar to that of Ms. Bouffard at Commu-Sys Enr. All of the members therefore decided to sell their shares.

[127]        Faced with the reassessments, the appellant contacted a number of people at the Department of National Revenue, including Mr. Caponi, Mr. Huppé and Mr. O'Grady. To justify the assessments, they referred to the concept of "specified member". They informed the appellant that the type of investment involved was no longer consistent with the Act and that no genuine research was being done. The Department's officials had never told the appellant of the "specified member" concept. The promoters of the research projects had not mentioned it either. Reliance had initially not been placed on that concept. The assessments and, for example, the letter of October 1, 1993, referred only to a lack of information on the salaries paid. The appellant received a letter from Doris Savard, a Quebec Department of Revenue lawyer, who explained the "specified member" concept to him following the notice of objection he had filed. The appellant's understanding is that a specified member is one who assumes only a limited risk.

[128]        The appellant admitted that the research project became less appealing once the government started denying the tax benefits associated with that type of investment. He said that it was not as worthwhile investing when the risk became greater. Following the government's denial of such benefits, the appellant did not check with Alroma on how the work was coming along or on how much it had spent. He did not want to jeopardize Alroma's offer to redeem his shares. Indeed, he did not hesitate to sell his shares in SAET II. Mr. Hallé did not give him a share valuation report. The appellant did not make any attempt to sell his shares. He considered himself lucky to have sold his interest for a price equal to 50 percent of his initial investment.

[129]        During his testimony, the appellant explained that he had contacted representatives of the various levels of government by telephone. In particular, he contacted the Quebec Securities Commission, told it the facts and described the research project in which he was going to invest. The Commission's official assured him that his investment complied with the Act and that no notice had been given to investors concerning the project. The appellant said that he saw a newspaper article warning readers about certain investments. He did not attach any importance to the article because it referred to outlandish research projects. He did not give the Commission or its official any documents on the research project. He did not know that official's name. He never asked her whether a prospectus had been authorized for Commu-Sys Enr. No steps were taken with respect to Cablotel Enr. and SAET II. The official's answer was that the project would be valid only if it was undertaken by a general partnership.

[130]        In this connection, a decision by the Securities Commission ordering VCA, Jacques Caron, Pierre Lussier and Loron Inc. and its officers, directors and employees to cease all investment activities was filed. The Commission did not tell the appellant about that ban. A similar ban was imposed on Bio-Systems II, Roger Roy, the accountant, and Esther Dreyfus. Moreover, articles appeared in a number of Quebec newspapers on November 19, 1991, notifying investors of [TRANSLATION] "questionable" partnerships. The appellant said that he would not have invested if he had known about those articles. Finally, the Commission also imposed a ban on Ersol, in September 1991.

[131]        The appellant had also contacted Revenue Canada by telephone for information on the eligibility criteria for tax credits. No documentation was sent to him. Revenu Québec, Revenue Canada, the Quebec Securities Commission and the promoters of the research projects told him nothing about the concept of "specified member".

Testimony of Serge Huppé and Gabriel Caponi

[132]        Two Revenue Canada employees, Mr. Huppé and Mr. Caponi, were called to give evidence concerning their perception of the facts of this case and the various stands taken by Revenue Canada that led to the assessments under appeal.

Serge Huppé's testimony

[133]        Mr. Huppé testified at the request of both the appellant and the respondent. He was employed as a Revenue Canada auditor during, inter alia, the years at issue and the following years. Starting in the fall of 1993, he handled the files of the general partnerships that had contracted with Omzar Technologies Inc. with respect to the research projects. He was assigned the research and development files after the Minister of National Revenue received a great deal of mail on the subject. In October 1994, Revenue Canada's head office decided to meet with a representative of the taxpayers' association. Work on those files at the Department's regional offices was therefore suspended.

[134]        After the meeting with the representative of the taxpayers' association, the Deputy Minister of National Revenue first set up a task force made up of seven Revenue Canada employees representing five sectors at that Department, as well as three scientists. He also created a working group composed of five assistant deputy ministers. The working group and the task force had the same mandate. The working group was to draw up a report for the Deputy Minister on the strengths and weaknesses of the files in question.

[135]        The task force considered the audit files of the investment partnerships concerned and not those of the investors. It was given access to the auditor's files for each partnership. By around March 1995, 139 partnerships had been audited and 37 others were awaiting auditing.

[136]        The auditor for each partnership had prepared a report containing the facts and evidence that had been obtained and explaining that auditor's position. The auditor had sent a proposed assessment to the members explaining the reasons for the possible assessment. The auditor in each file had previously questioned the person in charge of each partnership, who was generally the promoter. The promoter was asked about the investors' activities in the partnership.

[137]        After looking at 20 or so files, the task force prepared a report for the working group dated April 13, 1995. On April 18, 1995, the task force met with the working group to discuss the matter and the task force's report.

[138]        Mr. Huppé said that one of the task force's findings was that the members of the partnerships in question did not incur any risk with respect to their investments. Their shares were redeemed by the company that did the research work.

[139]        After the working group requested some clarifications, the task force wrote a second report dated April 21, 1995. Some additional information was provided by Mr. Huppé concerning the terms of the proposed settlement and the number of taxpayers to whom it was offered. Mr. Huppé said that the same settlement, except for the aspect involving the cancellation of interest, was offered to the partnership promoters who had also invested in the partnerships in question in these appeals. Revenue Canada refused to cancel the interest assessed against the promoters on the ground that they knew or ought to have known that the financial mechanism used by the partnerships could not entitle the investors to the tax deductions that had been dangled in front of them. Moreover, if the promoters had told Revenue Canada the facts, they could not have obtained a tax shelter number. The proposed settlement was sent to the taxpayers' association on June 20, 1995.

[140]        The task force then met with certain employees of the Department of Finance to discuss the possibility of a tax remission. The task force had concluded that such a remission was necessary in order to reach a settlement. Discussions were even held with the Quebec Department of Revenue to ensure that the settlement negotiations were conducted jointly by the two governments.

[141]        Processing of the objections to the assessments in question was still on hold when the audit work resumed around mid-April 1995.

[142]        For the 1991 taxation year, the auditors were instructed to issue assessments on the basis that the investors were limited partners, provided that there was evidence in the file to justify that position. It was necessary to act quickly, since the Minister's right to make assessments would soon be statute-barred. For the 1992 and 1993 taxation years, the auditors had to conduct an investigation and go to the investment partnerships' offices.

[143]        Mr. Huppé helped draft the proposed settlement. That proposed settlement was changed as a result of the extensive discussions between the Department of Finance and the Department of National Revenue.

[144]        Finally, Mr. Huppé said that, of the 7,288 taxpayers to whom the settlement was offered, 6,097 accepted it, 979 refused it and 212 never filed a notice of objection or responded to the settlement offer.

[145]        The proposed settlement referred to the principal group, which Mr. Huppé said was made up of 139 partnerships that were audited for the 1989-93 taxation years. There was a second group of investors who had invested in certain partnerships, the taxation years involved being 1992-94. Those partnerships had not applied for a tax shelter number, and the investors were not claiming an investment tax credit. The third group was made up of general partnerships that did not have a tax shelter number. The taxation years involved for those partnerships were 1986-88.

[146]        The proposed settlement offered by the Minister of National Revenue contained the following elements:

(a)            The investment tax credits were disallowed.

(b)            The deductions claimed by the investors for the business losses incurred by each partnership were disallowed.

(c)            A business loss was deductible, in the year the shares were redeemed, in respect of the disposition of those shares by each member.

(d)            The interest payable in respect of each assessment for each period ending on October 31, 1995, was cancelled. The justification for this was that the investors would not have objected to the assessment if they had known that they would be assessed as limited partners.

[147]        Mr. Huppé said that it should be noted that the proposed settlement applied only to investors who had invested in the partnerships in the principal group. If the investors accepted the settlement, they were to fill out a form that had been sent with it. The deadline for accepting the settlement was extended to December 29, 1995, or even later if there was a valid reason for the delay.

[148]        The auditors had also been instructed to determine the market value of the investors' shares in the partnerships. The suggested procedure was set out in a document entitled "Tax Operations Manual" ("TOM"), which was considered as a guide. For the 1989-93 taxation years, the auditors did not verify the fair market value of the investors' shares. Mr. Huppé also testified that the task force had not valued the shares in the partnerships because Revenue Canada was expecting most of the taxpayers to accept the settlement. Revenue Canada ultimately decided that the investors were limited partners on the basis of the findings in an investigation by the Quebec Securities Commission, which had questioned over 350 investors. During the investigation, those investors had all admitted that they knew their shares would be redeemed by the partnerships. According to Mr. Huppé, the evidence in the files clearly showed that funds had been set aside, for example in trusts administered by banks, for the redemption of the investors' shares.

[149]        Mr. Huppé said that all of the shares in VCA, Cablotel Enr. and Commu-Sys Enr. were redeemed. Those shares were redeemed regardless of whether or not any scientific research had been done. Mr. Huppé testified that, for the eligible research projects, the solutions proposed by the task force were more advantageous than the settlement offered by the Minister of National Revenue. On the other hand, for the projects that were not eligible, the solutions proposed by the task force were less advantageous than the settlement offered. Revenue Canada treated all the taxpayers the same way: all the credits and expenditures were disallowed regardless of whether or not scientific research work had been done. If the solution in the report of April 21, 1995, had been adopted for the projects that were not eligible, few taxpayers would have accepted the proposed settlement. Revenue Canada assumed that the investors were acting in good faith and did not know whether the research projects were eligible or not under the Income Tax Act. As regards the investors in the partnerships involved in eligible research projects, Revenue Canada could not ignore the fact that they were limited partners.

[150]        Following the report of April 21, 1995, and the discussions with the representatives of the Department of Finance, the working group considered the possibility of a tax remission. At the working group's request, the task force formulated 17 different solutions to resolve matters. One of these solutions was to treat all the taxpayers the same way, that is, to consider them all limited partners regardless of whether or not the research project was eligible. The task force proposed that the losses incurred by the investors in disposing of their shares in each partnership be considered business losses. Cancellation of the interest was proposed under the fairness provisions following a meeting between managers from Revenue Canada and Department of Finance managers.

[151]        The purpose of the proposed settlement was to allow the investors in certain partnerships a business loss equal to their initial investment even if no research had been done. The position taken by the Department of National Revenue was that a business actually existed and that the business losses should therefore be allowed. The Minister of National Revenue disallowed, however, all deductions for the investors in partnerships which had actually done research work. The reason the Minister agreed to offer that settlement was that the investors could not judge whether or not a given partnership was doing scientific research work. As well, the task force noted certain shortcomings in the Act and commented on them in its report of May 12, 1995.

[152]        At one point, Mr. Huppé summarized his testimony regarding the basis for the settlement offered to the taxpayers concerned by stating that those taxpayers were specified members, deemed limited partners and also silent partners. He added that the entire tax community had recommended to the taxpayers that they accept the proposed settlement.

Mr. Caponi's testimony

[153]        Mr. Caponi was an auditor in the research and development section at Revenue Canada from December 1993 to November 1995. At the time these appeals were heard, he was an auditor in the tax avoidance section of the Canada Customs and Revenue Agency.

[154]        In December 1993, Mr. Caponi received the first audit file concerning Omzar Technologies Inc. and the Ersol partnership for the 1991 taxation year. That file contained the partnership's tax shelter file, the form signed by the promoter to obtain a tax shelter number and other documents such as the project description, the partnership agreement, the participation mandates, the partnership's financial statements and information slips that had been given to the members for tax purposes. The financial statements had been prepared by the chartered accounting firm of Grossman Kellerman Klein. In that firm, Mr. Kellerman was the accountant responsible for the firm's client Omzar Technologies Inc. and for the investment partnerships.

[155]        Mr. Caponi told the Court that Revenue Canada found out that other investment partnerships were doing business with Omzar Technologies Inc. and that he was put in charge of all the relevant files. They included the files of Ersol, Commu-Sys Enr., VCA and Bio-Systems I for the fiscal period ending on December 31, 1991, and the files of Cablotel, Solarix, Communi-Cab and Bio-Systems II for the fiscal period ending on December 31, 1992.

[156]        Mr. Caponi testified that, on April 14, 1994, he and Mr. Carol Gagnon, the auditor responsible for Bio-Systems I's file, went to the offices of Omzar Technologies Inc. on Boulevard Métropolitain in Montréal where they met with Ms. Bouffard and Mr. Kellerman. No books or documents were available for the audit even though Mr. Caponi had sent beforehand a list of documents which was enclosed with a letter to Ms. Bouffard. Mr. Caponi, Mr. Gagnon and Mr. Kellerman had a general discussion about the investment partnerships' financial statements, which Mr. Caponi already had. Mr. Jabbar joined the group and told Mr. Caponi that Ms. Bouffard would be asked to give Mr. Caponi the information he needed. Since the documents were not available at that meeting, Mr. Caponi handed Ms. Bouffard the list of documents. Having read the investment partnerships' financial statements, and after his discussions with Mr. Kellerman, Mr. Caponi noted that the partnerships in question had no income but had only expenditures which were described as "research and development expenses". Those amounts were allocated to Omzar Technologies Inc.

[157]        After reviewing the financial statements of the investment partnerships and Omzar Technologies Inc. for the fiscal periods ending on December 31, 1991, and December 31, 1992, Mr. Caponi noted that Omzar Technologies Inc. had been incorporated in November 1990, at about the same time that the investment partnerships had been formed. He realized that the investment partnerships' expenditures were all allocated to Omzar Technologies Inc., which in turn reported them not as income but as amounts received in advance. Those amounts were entered under the item [TRANSLATION] "Research and development contract received in advance". In its assets, Omzar Technologies Inc. included an amount under [TRANSLATION] "Receivables" that was very close to the total of the prices of the contracts to be performed. When asked by Mr. Caponi how Omzar Technologies Inc. computed its income, Mr. Kellerman said that it used the completed contract method.

[158]        Mr. Caponi noted that the investment partnerships' financial statements did not include any expenditures for rent, insurance or accounting fees. Mr. Kellerman explained that it was impossible to divide up the expenditures among the investment partnerships. With regard to the way in which the members were given financing by the finance companies, Ms. Bouffard had told him that a loan representing 50 percent of each member's total investment was automatically granted to each member by a finance company.

[159]        Mr. Caponi observed that Loron Inc. financed the investors in VCA and Commu-Sys Enr. for 1991 while IPF Finance Inc. made loans to the investors in Bio-Systems I and Ersol. The investors in the four other partnerships—Cablotel Enr., Solarix, Communi-Cab and Bio-Systems II—obtained the capital they needed from Noreco Inc. Moreover, Ms. Bouffard confirmed to him that each member's entire interest in each investment partnership was in fact redeemed. Mr. Caponi noted that the three loan agreements for the three finance companies gave the same address for those companies, namely that of Omzar Technologies Inc. The three investment contracts indicated that the interest rate was 10 percent and that the loan was repayable in 120 monthly instalments, that is, over a period of 10 years. The first payment of principal was due one year after the investment. According to Mr. Caponi, the three loan agreements were identical. He was able to obtain two copies of loan agreements signed by investors in Commu-Sys Enr. There was no difference between the signed loan agreements and the blank ones given to him by Ms. Bouffard.

[160]        Mr. Caponi learned from Ms. Bouffard that Omzar Technologies Inc. kept the participation files of each member, which were prepared by two employees of Omzar Technologies Inc.

[161]        Mr. Caponi told the Court that Revenue Canada had retained Roger Goulet as a scientific advisor. Mr. Goulet was instructed in particular to audit the cable project involving VCA, Commu-Sys Enr. and Cablotel Enr. Scientific or technical audits of the projects of Bio-Systems, Ersol and Communi-Cab were also conducted for Revenue Canada.

[162]        Mr. Caponi testified that, after looking at Omzar Technologies Inc.'s ledger, he found it very difficult to understand the adjustments made to the expenditure account. He therefore went to Mr. Kellerman's office to check Omzar Technologies Inc.'s documentation, especially the worksheet and the year-end adjusting entries for the fiscal periods ending on December 31, 1992, and December 31, 1993. Mr. Kellerman did not provide any explanations concerning the entries or the ledger. Mr. Kellerman stated as well that he did not keep the finance companies' books. Mr. Caponi further noted that there was no invoicing and that, in particular, Omzar Technologies Inc. had not charged the GST or the QST on the service contracts. According to Mr. Kellerman, Omzar Technologies Inc. was tax-exempt. Mr. Caponi testified that he tried unsuccessfully to contact Mr. Loranger, who was the appropriate person as regards the finance companies.

[163]        Mr. Caponi said that Mr. Jabbar provided no explanation of the percentages assigned to each partnership with respect to the completion of the work. He also discovered that the finance companies never put out any annual reports or filed any tax returns and that Mr. Loranger was listed as a director of those companies. He found as well that a number of payments had been made by Omzar Technologies Inc. to Mr. Jabbar.

[164]        After visits were made to Omzar Technologies Inc. to determine the eligibility of the research projects, Mr. Caponi was informed that Communi-Cab's project was not eligible because the work being done was still at the preliminary stage. As for the research project of the Bio-Systems partnerships, the scientific opinion was that it was eligible in part. The solar energy project of Ersol and Solarix was not eligible. The cable project in which VCA, Commu-Sys Enr. and Cablotel Enr. had invested was eligible. The project of SAET (which had not had recourse to the services of Omzar Technologies Inc.) was found not to be eligible.

[165]        In January 1995, after receiving the scientific opinions, Mr. Caponi sent proposed assessments to the members of Ersol and Solarix, since the solar energy project had been found ineligible. No deduction of expenditures was allowed in those assessments. The members of VCA and Commu-Sys Enr. were also sent proposed assessments for the 1991 taxation year informing them that the research project was considered to be eligible. Those proposed assessments allowed the deduction of only 50 percent of the expenditures. The deduction for the other 50 percent was reversed because of the redemption of each member's interest in the partnerships in question. The investment tax credit was denied on the basis that the members were specified members. In March 1995, submissions were made to Revenue Canada on behalf of the four partnerships. No assessments were made at that time except against the members whose taxation year would soon be statute-barred.

[166]        Mr. Caponi clearly stated that no reference to the concept of "limited partner" was made in the proposed assessment of January 1995. That concept was mentioned for the first time in February 1995. An initial assessment was then sent to a taxpayer—a member of Commu-Sys Enr.—on the basis that he was a limited partner. Under an assessment made on that basis, the investment tax credit and the deduction of losses from the investment partnership were disallowed. According to Mr. Caponi, the members were treated as limited partners because of the investment partnerships' financing mechanism and the redemption of 50 percent of each member's interest.

[167]        Mr. Caponi also said that, in the case of the solar energy projects, that is, those of Solarix and Ersol, a letter was sent to the members of the investment partnerships on March 17, 1995, informing them that they were being denied the investment tax credit and the deduction of business losses. The business losses could not be deducted because the partnerships and their members had no expectation of profit.

[168]        On May 11, 1995, the auditors were all informed of a new Revenue Canada directive stating that all the members would be assessed for the 1991 taxation year on the basis that they were limited partners. Revenue Canada was taking into account the fact that the Minister of National Revenue's right to assess for 1991 would soon be statute-barred. In making those assessments, the Minister of National Revenue relied on the information that had been obtained regarding the financing and redemption of each member's interest. In May 1995, the members of Commu-Sys Enr. and VCA were indeed sent assessments for the 1991 taxation year, which assessments were premised on those members being limited partners. The same members were later assessed on the same basis for the 1992 taxation year. The only factual difference noted by Mr. Caponi between the two taxation years was that in 1991 the members wrote cheques to the investment partnership in question for 50 percent of their total investment while in 1992 they made their cheques out directly to the finance company.

[169]        The only documents that Mr. Caponi was able to obtain concerning the investment partnerships were bank documents, including bank statements, cheques and deposit slips. He said that all of those partnerships had the same address as Omzar Technologies Inc. The investment partnerships each produced just one financial statement for the 1991 taxation year in which no income was shown. The only expenditure was for research and development, as represented by a subcontract awarded to Omzar Technologies Inc. The partnerships did not produce any financial statements after that. According to Mr. Caponi, it was very difficult to determine the expenditures made by each partnership. He stated the following, inter alia:[1]

[TRANSLATION]

                Q.             And could you match up Omzar's expenditures with each partnership at that point?

A.             It was impossible for me to take an expenditure of Omzar's and say that it was expressly for a particular partnership, for the simple reason that, as Mr. Kellerman explained to me—and Lise Bouffard later told me the same thing—Omzar's expenditures were entered under one expenditure item and were not separated based on the project carried out and the partnership for which it was carried out.

[170]        Mr. Caponi also said that Omzar Technologies Inc.'s only income came from the subcontracts from eight or nine investment partnerships. He noted that its financial statements showed that the amounts it received during the year were not included in its income. Those amounts were recorded as advances in respect of uncompleted work. Substantial advances to unaffiliated companies were shown under Omzar Technologies Inc.'s liabilities.

[171]        Mr. Caponi noted that, at the time Omzar Technologies Inc. was incorporated, its had a capital stock of only $300. The investment partnerships had just one expenditure, which was allocated to Omzar Technologies Inc. Mr. Caponi thus concluded that Omzar Technologies Inc. and the investment partnerships were related. His audit focused generally on Omzar Technologies Inc.'s expenditures. He also noted that, as soon as funds flowed into an investment partnership, they were forwarded to Omzar Technologies Inc. by means of a cheque made out to it.

[172]        Mr. Caponi said that paragraph 5 of the partnership agreements of the investment partnerships provided that the partnerships' objective was to raise sufficient funds to perform research and development work. In the case of VCA's partnership agreement, Jacques Caron and Pierre Lussier signed as the initial partners. According to Mr. Caponi, however, those men were never members of that partnership.

[173]        Mr. Caponi stated that a decision by the Securities Commission on October 28, 1991, had prohibited VCA, Jacques Caron, Pierre Lussier and Loron Inc. from carrying out the distribution of shares as an investment. A similar decision was also made against Roger Roy, the accountant, Esther Dreyfus and Bio-Systems. The Commission imposed another ban on September 26, 1991, this time against Ersol for 1991. Moreover, according to Mr. Caponi, the partnership members had no power, nor did they have any role to play, in the investment partnership once they signed the subscription form. All decisions were entrusted to the manager of the partnership.

[174]        On the basis of the relevant documents, Mr. Caponi therefore concluded that the partnership agreements of the investment partnerships were almost identical and that, as far as the members' powers were concerned, the members merely invested funds in a partnership and gave all powers to the manager of the partnership. The research contracts were awarded to Omzar Technologies Inc. by the investment partnerships even before the members had invested in the partnerships. The service contracts that the various partnerships had with Omzar Technologies Inc. were virtually identical. The differences related to the amount awarded for the research and the description of the project.

[175]        Mr. Caponi noted that, in the financial statements of December 31, 1991, each of the investment partnerships had just one expenditure and no income. The same was true of the partnerships that had financial statements as at December 31, 1992. The expenditure was described as [TRANSLATION] "research and development expenses". The eight investment partnerships had identical financial statements aside from each partnership's name and the date on which it was formed. Those financial statements had all been prepared by Mr. Kellerman.

[176]        Mr. Caponi also found that there was an arrangement between each investment partnership and Omzar Technologies Inc. pursuant to which the partnership and Omzar Technologies Inc. had bank accounts at the same financial institution. Omzar Technologies Inc. deposited the cheque given to it by a given investment partnership under the research subcontract at the same institution as that where the partnership had its account. Generally speaking, the funds were deposited in Omzar Technologies Inc.'s account the same day that they were deposited in the investment partnership's account.

[177]        Mr. Caponi testified that he also realized from Omzar Technologies Inc.'s financial statements that that company advanced part of its funds to unaffiliated companies; indeed, there was an item in the statements called [TRANSLATION] "Advances to unaffiliated companies". Since Omzar Technologies Inc. had no income aside from the funds it received from the investment partnerships, it necessarily had to lend part of those same funds to unaffiliated companies.

[178]        Mr. Caponi also noted that all the members without exception received from the finance companies 50 percent financing of the total purchase price of their shares in an investment partnership. The members had to use their own funds for only 50 percent of their investment in the partnership. The partnership immediately wrote a cheque out to Omzar Technologies Inc. for the same amount. Omzar Technologies Inc. made advances to the finance companies in amounts equal to those it had been paid by the investment partnerships. The finance companies in turn advanced to the members 50 percent of their investment in the investment partnership. Based on his analysis of the ledger, Mr. Caponi thus concluded that the amounts had been received by Omzar Technologies Inc. According to a table he prepared, the same funds circulated among the partnerships, Omzar Technologies Inc. and the finance companies. Another table, based on the investment partnerships' accounts, showed that an equivalent amount was put in Omzar Technologies Inc.'s account.

[179]        Mr. Caponi said that, when Omzar Technologies Inc. repurchased the intellectual property rights from the finance companies, it had to be taxed on income of $6,400,000 since, according to him, it no longer had any obligation to perform work in the future and no reserve could therefore be deducted at the end of the year.

[180]        Mr. Caponi told the Court about a lengthy analysis of the expenditures made by Omzar Technologies Inc. Nearly 90 percent of the expenditures claimed by that company were for professional fees. Some payments were made to companies, including a company controlled by Mr. Barski and, in another instance, a numbered company controlled by Mr. Vachon. Another substantial part of the expenditures consisted of management fees and subcontracts. These expenditures totalled nearly $3,500,000 for a period of three years. For example, Gestion IPF Inc. received $112,510 in management fees and Groupe CJM received $107,200, from Omzar Technologies Inc. Those companies did not file any tax returns and did not have employer numbers. Omzar Technologies Inc. did not have an item for the interest income from the advances made to the finance companies.

[181]        Mr. Caponi also reviewed the worksheets of the accountant, Mr. Kellerman. He explained that Mr. Kellerman made a number of adjusting entries for the redemption of the shares of the investment partnerships' members at a price equal to 50 percent of the amounts they had invested. He noted from Omzar Technologies Inc.'s ledger that that company controlled all transactions relating to the advances to the finance companies and investment partnerships. According to Mr. Caponi, Mr. Kellerman gave him an overview of the financial arrangement. He noted that 10 percent of the members' investment was allocated to administrative expenses and that 40 percent was forwarded to Omzar Technologies Inc. He expressed the view that, if the finance companies had been independent, Mr. Kellerman would not have been supposed to know how those companies used the advances. When Mr. Kellerman did Omzar Technologies Inc.'s accounting, he not only recorded its advances to the finance companies but also allocated the advances made to each partnership, Bio-Systems, Communi-Cab, Cablotel Enr. and Solarix. In Mr. Caponi's view, that information did not belong to Omzar Technologies Inc.

[182]        During the audit of Omzar Technologies Inc., Mr. Caponi also noticed that most of the invoices had been produced using the same word processing software. It was standard invoicing, since only the company's name and the parties' names changed. A single invoicing system was used by the chartered accounting firm of Grossman Kellerman and Klein. The invoices did not include any tax calculation, were not signed and did not provide any description of services aside from the words [TRANSLATION] "management fees". Mr. Caponi said that he was not given any details about the management fees. He did not look at all of the invoicing at Omzar Technologies Inc. because a number of invoices were for small amounts only. In Mr. Caponi's view, the invoices were not for real services. The amounts on the invoices were put there merely to justify the amounts entered in the ledger. The year-end entries showed increases in the management fees. The amounts entered in Omzar Technologies Inc.'s ledger during a given year reduced the advances. Forty percent of Omzar Technologies Inc.'s funds related to expenditures made not for it but for the finance companies. Mr. Caponi said that a significant portion of the expenditures made by Omzar Technologies Inc. went to Mr. Jabbar's personal use. As an example, $275,000 was used to pay his Visa credit card account.

[183]        Mr. Caponi testified that about $650,000 was spent on the four research projects for nine investment partnerships. Those four projects were [TRANSLATION] "refinanced" by the nine investment partnerships over a period of three years.

[184]        According to Mr. Caponi's analysis, Omzar Technologies Inc. received only 50 percent of the funds invested. Of those funds, 10 percent remained in the finance companies' coffers as management fees. Some of the remaining 40 percent was paid to the subcontractors and employees as salaries, the amount involved being about $120,000, which represented no more than 20 percent of the total investment. Most of the rest was distributed among what Mr. Caponi called the [TRANSLATION] "companies in the group", namely Omzar Technologies Inc., the investment partnerships and the finance companies.

[185]        Mr. Caponi next commented on the main elements of the financial arrangement. He said that Omzar Technologies Inc. wanted to obtain a grant from the government by indirect means and that the investors profited from it. Omzar Technologies Inc. in turn ended up with the investors' initial investments, which enabled it to conduct research. For Omzar Technologies Inc., the purpose of the arrangement was to obtain a grant. The investors got tax deductions and a tax refund, and Omzar Technologies Inc. could continue operating. It could thus continue to exist as long as that scheme was used. The tax arrangement enabled it to be taxed on only part of the income from the investment partnerships. The following year, the new investment partnerships financed the previous year's expenditures. When the investors stopped financing Omzar Technologies Inc., it could no longer exist without finding another way of doing things. According to Mr. Caponi, Omzar Technologies Inc.'s bankruptcy was merely a logical consequence of the operations, since the investors had stopped investing. It had deferred income of 50 percent on which it had to pay taxes, but it no longer had the necessary funds because its seed capital was only $300.

[186]        Mr. Caponi inferred from what Ms. Bouffard told him that keeping a participation file for each investor was [TRANSLATION] "important from a tax point of view" for Omzar Technologies Inc. in order that each investor could receive an investment tax credit. To obtain that credit, it had to be shown that a given member was engaged in the activities of the investment partnership on a regular, continuous and substantial basis.

[187]        Mr. Caponi stated that the members' participation was limited to reading, a visit to the laboratories and a project demonstration. It was often an employee of Omzar Technologies Inc. who signed the correspondence for the investment partnership. According to Mr. Caponi, an overview of the investment partnerships' operations shows that the members did not participate in the general partnership in any way. In most cases, by the time an investor signed a subscription form, the subcontractor that was to perform the research work had already been chosen and the contract amount established. The investor did not make any decisions, since decision making was delegated to the manager of the investment partnership. The partnership's only activity was to award a subcontract to Omzar Technologies Inc. It engaged in no other activities.

[188]        Mr. Caponi stated that, in every case, the share transfer agreement between a member and the finance company concerned provided that the consideration for the transfer was the amount of the loan made by the company. He noted that all of those agreements show that—regardless of the year of the investment, the investors' failure to repay their loans, the degree to which the work on the project had been completed, and the project's eligibility—each member's shares were redeemed at a price representing 50 percent of his or her total investment through the cancellation of the loan made to the member. The duration of the project was of little importance. For example, Communi-Cab's project had existed for just one year and only 10 percent of the work had been performed.

[189]        Mr. Caponi testified that the fact that no principal was repaid and that each investor's shares were redeemed shows that there was no real loan. The investors never intended to repay the loans. The loan agreement was part of a scheme that enabled the investors to profit from their investments. It was a document that was necessary for tax purposes. Mr. Caponi also pointed out that the finance companies and Omzar Technologies Inc. did not file any tax returns referring to interest income. No payments of principal were made. No credit investigations were conducted concerning the investors. The financial statements of the investment partnerships and Omzar Technologies Inc. did not reflect the bank deposit figures. The bank accounts show that Omzar Technologies Inc. in particular received more funds than it declared in its financial statements.

[190]        The transfer agreements revealed discrepancies. Mr. Caponi declared that Mr. Jabbar's and the appellant's testimony and certain documents show that the finance company Loron Inc. financed the Commu-Sys Enr. research project. However, in a letter from Noreco Inc. to the appellant dated March 4, 1994, Noreco Inc. stated that the appellant had realized a capital gain of $12,500 in 1993. Mr. Caponi noted that it was Loron Inc. and not Noreco Inc. that had financed Commu-Sys Enr. Noreco Inc. was not supposed to have been aware of Commu-Sys Enr.'s activities. According to Mr. Caponi, those mistakes demonstrate a lack of attention and seriousness on the part of the parties concerned. For that reason, he gave little weight to those documents.

[191]        Mr. Caponi prepared an audit report for each of the eight investment partnerships and drew the following conclusions. The main basis adopted by the Minister of National Revenue for the assessments assumed that the members of the investment partnerships were limited partners within the meaning of subsection 96(2.4) of the Act. Should that first basis not be accepted, the second basis was that 50 percent of the claimed expenditures could not be deducted because the members actually paid only 50 percent of their total investments. The third basis for the assessments was that each member was a specified member within the meaning of the Act.

Abdel Jabbar Abouelouafa's testimony

[192]        The testimony of Abdel Jabbar Abouelouafa, hereinafter referred to as Mr. Jabbar, is especially important.

[193]        Mr. Jabbar has a bachelor's degree in human kinetics and an MBA. In 1990, 1991 and 1992, he was the director of Omzar Technologies Inc. He himself invested in the Dreyfus Bio-Systems, Ersol, Cablotel Enr. and SEPS partnerships. All the employees of Omzar Technologies Inc. invested in the last-named partnership, which was involved in the project in which Dreyfus Bio-Systems took part. Mr. Jabbar declared bankruptcy at some unspecified time.

[194]        He testified that Omzar Technologies Inc. was formed as a result of a $400,000 to $800,000 contract he had obtained from a certain firm to undertake the Bio-Systems project.

[195]        Mr. Jabbar described the events that led up to Omzar Technologies Inc.'s incorporation.

[196]        He had initially worked for Ironco Canada as a consultant. That company was involved in the paint industry but also had subsidiaries operating in the sports industry, manufacturing physical training machines. Ironco Canada had a small research laboratory. It was at that time that Daniel Dreyfus, the company's president, asked Mr. Jabbar to organize a research project. Mr. Jabbar therefore met with Roger Roy, Ironco Canada's accountant. Mr. Roy handled the investment aspect, while Mr. Jabbar was responsible for setting up the project. It was in connection with that project that he created Omzar Technologies Inc., to which Ironco Canada's research projects could be subcontracted.

[197]        The Dreyfus Bio-Systems research project already existed before Omzar Technologies Inc. was created. This was a project in the field of exertion physiology. Mr. Jabbar explained that it involved [TRANSLATION] "developing an expert system and a machine to effectively carry out high-performance evaluations". He said that the system was [TRANSLATION] "aimed at military training for planes and such—any training that requires a certain medical level at some point". Mr. Jabbar accepted the contract to develop the informatics component, while Ironco Canada kept the industrial component and the prototype manufacturing for itself. Mr. Dreyfus later became ill, and Mr. Jabbar took over the entire project. The project was a success, and Mr. Jabbar said that the system developed is the best in the world. Moreover, investors were found by Mr. Roy, the accountant, and Mr. Loranger, a shareholder in the finance companies, and Mr. Jabbar decided to maintain the structure of Omzar Technologies Inc. with a view to conducting research. Mr. Jabbar was the sole shareholder and director of Omzar Technologies Inc. There was also a board of directors, which Mr. Jabbar described as provisional and unofficial. It was made up of Mr. Rassi, a professor of finance at the Université du Québec à Montréal, and Mr. Méthot, a professor at the Université du Québec à Trois-Rivières and a specialist in exertion physiology. Those two men also invested in some investment partnerships.

[198]        Mr. Jabbar explained that the situation was very favourable when he created Omzar Technologies Inc. If the research project succeeded, Ironco Canada was going to market the results. According to Mr. Jabbar, the situation was very advantageous because the distribution network was already established.

[199]        The offices of the finance companies and the investment partnerships were those of Omzar Technologies Inc. They did not pay any rent to Omzar Technologies Inc., which paid all the expenses of the finance companies and the investment partnerships. Only Omzar Technologies Inc. had employees. However, there were persons in charge of the investment partnerships and finance companies who had been appointed by the members. Among these persons were Mr. Roy, the accountant, Mr. Loranger and Mr. Caron. Omzar Technologies Inc.'s equipment, including its computers, was used by the persons in charge of the investment partnerships and the finance companies. Omzar Technologies Inc. paid the legal fees and the fees charged by the chartered accounting firm of Grossman Kellerman Klein.

[200]        Omzar Technologies Inc.'s accounting was general accounting. The business's income came from the research contracts awarded by the investment partnerships. That was its only source of income. There was just one category of expenditures.

[201]        In his testimony, Mr. Jabbar next discussed the cable project of VCA, Commu-Sys Enr. and Cablotel Enr.

[202]        VCA was an investment partnership that brought together members who invested funds in research and development. Omzar Technologies Inc. conducted research pursuant to a mandate given to it by the members of the partnerships that invested in the project. Commu-Sys Enr. had the same ties to Omzar Technologies Inc. as VCA. Finally, Cablotel Enr. was like VCA and Commu-Sys Enr. in that its members invested in the same cable project.

[203]        Mr. Jabbar went on to say that the cable project was presented to Omzar Technologies Inc. by Mr. Loranger in early 1991. Mr. Loranger was the owner of [TRANSLATION] "head-ends", which are a type of system that receives signals by satellite or cable and then transmits them. Mr. Loranger also owned franchises that enabled him to distribute cable services in small towns and villages in the Québec area. He had detected a major problem with that type of cable distribution: when a system breakdown occurred, the difficulty was in pinpointing the source of the problem on the network. If the breakdown could be detected remotely, it would be much more economical for the cable service provider, since technicians would not have to go to each location to check things out. So Mr. Jabbar said that he had found the question interesting because the results of the research project could be marketed and testing would be very easy since Mr. Loranger already owned head-ends.

[204]        Taking Mr. Loranger's idea, Omzar Technologies Inc. then drew up a document setting out the project objectives, the problems involved, the scientific uncertainties and so on. Those persons, or the companies they designated, were paid by Omzar Technologies Inc. largely through fees. The document was submitted to Miguel Marin, the scientific advisor, and Mr. Barski, who had also written a scientific opinion. Technicians who had worked in the particular field in question were also consulted. Mr. Barski and Mr. Marin were consulted to ensure that the project met Revenue Canada's criteria.

[205]        For a while, Mr. Barski worked on the cable project full time for Omzar Technologies Inc. even though he was only an advisor. Mr. Marin, who was also an advisor and who had previously been a scientific advisor for Revenue Canada, did not work for Omzar Technologies Inc. on a full-time basis. The fact that Mr. Loranger retained the services of Mr. Barski and Mr. Marin was important because, according to Mr. Jabbar, it was essential that the research projects satisfy the criteria established by Revenue Canada.

[206]        The document in question was a general document that provided an overview of the cable project so that the research group could then develop "specifications" dealing with more specific matters and stating how the research would be conducted. Mr. Jabbar explained that the project had to be described in simple terms and that all the scientific jargon had to be put into non-technical language so that interested investors could understand the project. He said that the details of the research project were in the specifications.

[207]        Mr. Jabbar referred to a list of persons on Omzar Technologies Inc.'s cable project team. He explained that some employees worked directly on the cable project resolving [TRANSLATION] "problems arising out in the field", while other individuals advised Omzar Technologies Inc. on all of its projects. One person on the list was Mr. Méthot, who specialized in biomechanics and exertion physiology. He was an advisor who often came to Omzar Technologies Inc. to lend a hand and who took part in most of its research projects. There was also Mr. Rassi, who was both an investor in the investment partnerships and Omzar Technologies Inc.'s financial orientation advisor. Mr. Jabbar said that those people did not work directly on the cable project but made a contribution to all of Omzar Technologies Inc.'s projects. Mr. Black worked full time for Omzar Technologies Inc. as the information director for all the research projects. There was also Mr. Daumer, who participated in the work on the cable project on a full-time basis. Mr. Desrosiers worked full time for Omzar Technologies Inc. preparing the specifications for the cable project. Mr. Ouellet, Mr. Desjardins, Ms. Bordeleau, Mr. Nguyen and Mr. Hjiyej were also full-time employees of Omzar Technologies Inc. and were assigned to the cable project. Those employees made a technical contribution to that project.

[208]        VCA, Commu-Sys Enr. and Cablotel Enr. all invested in the cable project. The project design document was basically the same for the three partnerships. Most of the members who had invested in the project one year invested again the next year. They thus knew the research project well and could come on site to find out how it was progressing.

[209]        In the project design document, the cost of the research was estimated at $3,000,000 for VCA and Commu-Sys Enr. That estimate was made by Mr. Marin and Mr. Barski. At the time the project was designed, it was very difficult to prepare a precise budget. Mr. Marin and Mr. Barski had also estimated that three years would be needed for the research work on the cable project. The cost of the project was estimated at $2,000,000 in the case of Cablotel Enr.'s investment. Mr. Jabbar testified that the total cost of the research project through the investments of VCA, Cablotel Enr. and Commu-Sys Enr. could have been as high as $8,000,000 but Omzar Technologies Inc. was able to collect only $4,800,000 through the partnerships.

[210]        The service contracts between Omzar Technologies Inc. and the investment partnerships were nearly identical in terms of content, except, of course, for the partnership's name, the project, the amount involved and the amortization period. All the service contracts were accompanied by documents such as legal opinions on the tax aspects, scientific opinions, the project description and research reports. In the case of Commu-Sys Enr., the partnership's firm name declaration was also attached to the service contract. Mr. Jabbar testified that one reason why it was important that that document accompany the service contract was that it enabled Revenue Canada to verify the partnership's genuineness. In addition to those documents, the resolution authorizing Mr. Caron to act as the members' mandatary was appended to the service contract between Omzar Technologies Inc. and Commu-Sys Enr. Mr. Jabbar testified that the persons who signed on behalf of the investment partnerships were authorized to do so by resolutions found in the partnership agreements.

[211]        The tax law opinions had been provided by Mr. Corbeil, the lawyer for Omzar Technologies Inc. and the finance companies. Mr. Jabbar stressed the importance of those opinions for him and for the members of the investment partnerships. One had to be sure that the research project complied with the tax legislation. It was Omzar Technologies Inc. that paid Mr. Corbeil's fees.

[212]        When asked to explain why Commu-Sys Enr.'s service contract was dated August 30, 1991, while its firm name declaration, signed by Mr. Caron and Mr. Lussier as the initial members, was dated October 30, 1991, Mr. Jabbar declared that the difference could be explained by the fact that the partnership agreements had been lost and that he (Mr. Jabbar) had had to sign them again. He said that he signed them on August 30, 1991. However, it can be seen from the bank statement filed that the first time money was deposited in Commu-Sys Enr.'s account at the Caisse populaire Duberger was on December 2, 1991.

[213]        Paragraph 6 of the service contracts between Omzar Technologies Inc. and Commu-Sys Enr., between Omzar Technologies Inc. and VCA, and between Omzar Technologies Inc. and Cablotel Enr. stated that the partnerships (Commu-Sys Enr., VCA and Cablotel Enr.) were all owners of the work done as part of the research. Mr. Jabbar explained that each partnership's ownership of the research work was in proportion to its investment in the project.

[214]        The service contracts for the cable project also provided that Omzar Technologies Inc. could use the results of the research work in the projects of VCA, Commu-Sys Enr. and Cablotel Enr. to perform work in other research projects. Mr. Jabbar explained that that clause applied, inter alia, to the work and the work methods. For example, the routings developed in Dreyfus Bio-Systems' project were used in the cable project. That clause providing that the technology developed in one project could be used by Omzar Technologies Inc. for another project can also be found in all the service contracts between Omzar Technologies Inc. and the other partnerships, namely Bio-Systems I, Bio-Systems II, Ersol, Solarix and Communi-Cab. However, Omzar Technologies Inc. could not sell the results of the research work because it was not the owner thereof.

[215]        Cablotel Enr. did not have a business plan. The same was true of the other investment partnerships. In the case of Cablotel Enr., no market research survey, profitability study or test marketing had been done. Each partnership had initial members whom Mr. Jabbar knew. For Cablotel Enr., they were Mr. Loranger and Manon Dubois, an employee of Omzar Technologies Inc. As regards Bio-Systems, the initial members were Mr. Loranger and Carole Blanchard, who also worked for Omzar Technologies Inc. Ersol's initial members were Victor Barski, Mr. Jadwiga Josefowska and Roger Roy, the accountant. Mr. Roy and Ms. Blanchard were the initial members of Solarix, while Mr. Loranger and Ms. Dubois were the initial members of Communi-Cab.

[216]        Omzar Technologies Inc. also helped develop a participation program. Mr. Jabbar explained that the purpose of participation was to make the project comprehensible and explain its components to the members. It was therefore with that in mind that Omzar Technologies Inc. distributed computers to the members. Mr. Jabbar testified that, under the participation program, participation was achieved up to the level of the electronic bulletin board, which enabled the members to exchange information among themselves and with Omzar Technologies Inc. Although Omzar Technologies Inc. had some flexibility in performing the research work, those in charge of the investment partnerships could supervise the work to some extent because they were on site.

Gestion IPF Inc.

[217]        In Mr. Jabbar's testimony, reference was made to Gestion IPF Inc., a management company carrying on business in the marketing field. That company was formed in 1990 to do public relations work with respect to Omzar Technologies Inc.'s research projects. Gestion IPF Inc. had no employees, but it did have three shareholders: Mr. Jabbar, Roger Roy, the accountant, and Bruno Hallé. It ceased operating when the finance companies, such as IPF Finance Inc., Noreco Inc. and Loron Inc., were created.

The finance companies

[218]        The same individuals—Mr. Jabbar, Mr. Hallé and Mr. Roy—were also shareholders in IPF Finance Inc. Mr. Jabbar explained that at one point he was the only director of IPF Finance Inc. because he had purchased all of Mr. Roy's and Mr. Hallé's shares.

[219]        No consideration was paid to Mr. Roy and Mr. Hallé for the acquisition of their shares in IPF Finance Inc. Mr. Jabbar remained a shareholder in that company until February 1993. He then sold all the IPF Finance Inc. shares to Mr. Loranger. Mr. Jabbar explained that IPF Finance Inc. had no value since all it had was a debt resulting from a loan made by Omzar Technologies Inc. IPF Finance Inc. in turn made loans to the members of Dreyfus Bio-Systems for 1990 and the members of Bio-Systems I for 1991.

[220]        According to Mr. Jabbar, the reason Omzar Technologies Inc. loaned money to IPF Finance Inc. was that the interest rate on such advances (10 percent) was better than the interest paid by the banks. In addition, Mr. Jabbar said, there was a relationship of trust between the members of the investment partnership, the finance company concerned and Omzar Technologies Inc. On cross-examination, Mr. Jabbar admitted that the interest rate on the advances was only five percent. He testified that Omzar Technologies Inc. was able to make the advances to IPF Finance Inc. because it had funds in its account that it was not planning to use for research in the near future, since the research was carried out gradually. Those funds came from the investment partnerships.

[221]        Mr. Jabbar explained that the loans made to the members of the investment partnerships were interest-bearing loans. Omzar Technologies Inc. also received interest of five percent from IPF Finance Inc. It advanced amounts of $398,000 and $1,277,250 to IPF Finance Inc. Those advances represented about 50 percent of the total loans to the members. Mr. Jabbar stated that there were no documents showing the total advances made by Omzar Technologies Inc. to IPF Finance Inc. There was only an agreement in principle. He explained that the amounts were advanced not through a single payment but in small instalments. The advances were to be repaid over several years.

[222]        Mr. Jabbar declared that he did not think he was a shareholder of Loron Inc. but said that he did have shares in Noreco Inc. Those finance companies used the same offices as Omzar Technologies Inc. There was also another finance company, Groupe CJM, which was formed in 1992 and had offices in both Québec and Montréal. The shareholders, who each held a third of that company's shares, were Mr. Jabbar, Mr. Loranger and Mr. Caron. Groupe CJM's mission was to promote the cable project. It intended to purchase additional head-ends. When the cable project was completed, Groupe CJM planned to install [TRANSLATION] "the technology in the head-ends, do a field demonstration" and approach the major cable companies, such as Vidéotron and Rogers. Mr. Caron and Mr. Loranger owned four head-ends that could be used by Omzar Technologies Inc. [TRANSLATION] "for applications purposes". In 1991 and 1992, Omzar Technologies Inc. paid $169,730 in commission to Groupe CJM for management fees.

[223]        On February 23, 1993, a financing agreement was entered into by Loron Inc. and Omzar Technologies Inc. The same day, a resolution was passed by Omzar Technologies Inc.'s board of directors. Mr. Jabbar confirmed that it was Omzar Technologies Inc.'s practice to pass a resolution each time advances were made to a finance company. The resolution of February 23, 1993, thus confirmed all the advances from Omzar Technologies Inc. to Loron Inc. In the financing agreement, it was agreed that Omzar Technologies Inc. would lend Loron Inc. $2,359,050 at an interest rate of five percent. The terms for the repayment of the principal were also set out in the agreement, but they were vague: it was stated that the loan would be repaid in several instalments by December 31, 1996. Mr. Jabbar said that there was, of course, some degree of trust between Omzar Technologies Inc. and Loron Inc. Clause 6.01.02 of the financing agreement stated that Loron Inc. was to provide Omzar Technologies Inc. with consolidated financial statements at the end of its fiscal periods. Loron Inc. did in fact prepare financial statements as at September 30, 1992, and September 30, 1993. Mr. Jabbar said that he does not recall having seen those documents.

[224]        Mr. Jabbar testified that, besides the advances made by Omzar Technologies Inc. to IPF Finance Inc., Loron Inc. and Noreco Inc., the finance companies' other source of income was the interest that the members paid them on their loans. The finance companies did not file any tax returns or prepare any financial statements. All of the advances made to the finance companies were shown in Omzar Technologies Inc.'s financial statements for the years 1991 to 1993. Omzar Technologies Inc. also had financial statements for 1994 that were prepared in connection with its bankruptcy.

[225]        Mr. Jabbar further explained that Omzar Technologies Inc. did not receive interest from the finance companies. It received an amount on its advances. He said that Omzar Technologies Inc. [TRANSLATION] "never had time to reconcile the advances with the interest". He stated that it did in fact receive repayments of the advances but that it never did the accounting operations required to differentiate the interest from the repayments of principal.

[226]        Mr. Jabbar said that Loron Inc. was [TRANSLATION] "wholly owned" by Mr. Loranger. He declared that he was never a shareholder or director of Loron Inc. and that he was never its president. However, a transfer agreement between the appellant and Loron Inc. stated that Mr. Jabbar was the president of that company by virtue of a resolution of the company's board of directors dated December 8, 1992. Mr. Jabbar explained that Mr. Loranger was out of the country and that that he had served as president pursuant to a power of attorney signed by Mr. Loranger. Mr. Jabbar testified that he was never appointed president and that the above-mentioned reference in the agreement was a mistake. Mr. Loranger did, however, sign a transfer agreement with respect to Commu-Sys Enr.'s research project which was dated December 20, 1993. Mr. Loranger signed that agreement, but Mr. Jabbar could not explain why he did not sign for Loron Inc. the agreement concerning the Commu-Sys Enr. project. According to Mr. Jabbar, the secretary who prepared the document may have [TRANSLATION] "mixed up office of president and power of attorney".

[227]        Mr. Jabbar also signed another transfer agreement—between Loron Inc. and a Richard Brouillette—as the president of Loron Inc. pursuant to a resolution of the board of directors dated January 14, 1993. Mr. Jabbar said that there was a mistake in the document, and he gave the following explanation:[2]

[TRANSLATION]

                A.             . . . If the board of directors passed a resolution, it would have had to do so once for me to be president. It couldn't do that every time. And that's what strikes me as a little . . . I don't remember signing a resolution stating that I was Loron's president.

[228]        According to Mr. Jabbar, the same mistakes were repeated in the transfer agreements concerning Ersol that were signed on behalf of IPF Finance Inc. on December 20, 1993, since he was no longer the president of IPF Finance Inc. on that date. Mr. Loranger had become its president.

[229]        During his examination for discovery on August 11, 1997 (at page 46), Mr. Jabbar admitted that he was authorized to sign as the president of Loron Inc. On cross-examination, he explained that the resolution of December 8, 1992, referred to in the transfer agreement between Loron Inc. and the appellant authorized him to sign but not as president.

[230]        Mr. Jabbar stated that it had been shown on cross-examination, through the financing agreement between Omzar Technologies Inc. and Loron Inc., that Omzar Technologies Inc.'s advances to the finance companies were made at an interest rate of five percent. The loans by those finance companies to the members of the investment partnerships were made at an interest rate of 10 percent. A profit of five percent could therefore have been made by the finance companies. Mr. Jabbar admitted that, if things had gone as planned, there would have been [TRANSLATION] "a potential profit" for the finance companies. He added that this did not happen because, in 1993, following the assessments by Revenue Canada, the members of the investment partnerships were not interested in repaying the loans. Mr. Jabbar therefore decided to buy back the ownership rights in the technology.

[231]        Mr. Jabbar testified that Mr. Roy, the accountant, was Noreco Inc.'s sole shareholder on December 18, 1992. He admitted that he purchased Mr. Roy's shares later in December 1992 and became a shareholder. On February 23, 1993, Mr. Jabbar also transferred his shares in Noreco Inc. to Mr. Loranger. Mr. Loranger did not give anything in return for those shares. Mr. Jabbar explained that he wanted to merge IPF Finance Inc., Noreco Inc. and Loron Inc. to form a single company but that the merger never occurred.

[232]        The vast majority of the members of the various investment partnerships had 50 percent of their total investment financed by the finance companies. However, Mr. Jabbar indicated that some people, including those who ran the partnerships, received 100 percent financing of their investment in the investment partnerships. Omzar Technologies Inc. advanced to Noreco Inc. almost all of the amounts loaned by Noreco Inc. to the investors. The amounts so advanced came from the investments and repayments that Omzar Technologies Inc. was receiving on an ongoing basis. The amount loaned by Omzar Technologies Inc. to Noreco Inc. corresponded to the financing applications made to Noreco Inc. by the investors in the investment partnerships. Mr. Jabbar said that he could not explain why the vast majority of the loans were for 50 percent of the total amounts invested by the members. He declared that it was up to the members themselves to determine the amount of the loan they needed. Moreover, the finance companies and the investment partnerships had different objectives, which explains why the finance companies did not solicit the investors.

Omzar Technologies Inc.'s sources of financing

[233]        Over a period of about three and a half years, Omzar Technologies Inc. spent $3,735,320.59 to carry out the cable project. That amount came from three investment partnerships: VCA, Commu-Sys Enr. and Cablotel Enr. A table found in a document entitled [TRANSLATION] "Omzar Technologies Inc. - Cable Project: Amounts Spent" listed certain amounts as being "excluded". Mr. Jabbar explained that the table was prepared by the chartered accounting firm of Grossman Kellerman Klein and then sent to Ms. Racette, a valuator. Ms. Racette felt that the amounts referred to in the [TRANSLATION] "rent" and [TRANSLATION] "other expenditures" columns did not relate directly to the investment in the research and development work. Mr. Jabbar does not know who wrote the word "excluded".

[234]        Mr. Jabbar testified that the investment partnerships were Omzar Technologies Inc.'s only source of income at the time. He said that he stopped accepting investments from those partnerships when the government decided that no tax credits could be granted for such investments. He then considered other investment possibilities, such as a QBIC (Quebec business investment company; société de placements dans l'entreprise québécoise (SPEQ) in French). Another option could have been to convert Omzar Technologies Inc. into a public company. Omzar Technologies Inc. was given a $100,000 line of credit, later increased to $500,000, that was guaranteed by Mr. Jabbar personally. There were also sales of its equipment.

[235]        When Omzar Technologies Inc. wanted to obtain financing, it formed a corporation called SPEQ M.P.I. Inc. In its first distribution of securities to the public on November 9, 1993, SPEQ M.P.I. Inc. was described as being [TRANSLATION] "formed for the purpose of acquiring and holding, as the first purchaser and actual owner, common shares with full voting rights of a qualified corporation within the meaning of the Act respecting Québec business investment companies (Quebec)". The net proceeds of the shares issued by SPEQ M.P.I. Inc. were used to subscribe for class B shares in Omzar Technologies Inc. According to Mr. Jabbar, he owned 17,285 class B shares, which he sold for $10 each, or $1,728,500 in all. (Mr. Jabbar's testimony clearly contains an error here either as to the price per share or as to the total sale price.) Of that amount, $1,465,100 remained in trust with a lawyer from the firm of Barush Pollack as security for the loan made to Loron Inc. The balance of $263,400 was paid to Omzar Technologies Inc. to finance its research projects. On cross-examination, Mr. Jabbar said that the funds were used to finance the projects of Bio-Systems, Communi-Cab, Ersol and Solarix.

[236]        Loron Inc. made loans to those who invested in SPEQ M.P.I. Inc. To finance those investors, Loron Inc. had to borrow the money from Mirelis Properties, a company owned by Mr. Loranger. At the request of Mirelis Properties, Omzar Technologies Inc. stood surety for the loan. The reason it decided to do so was that Loron Inc. belonged to Mr. Loranger, who had made a huge contribution to Omzar Technologies Inc. Moreover, Omzar Technologies Inc. could not finance the investors directly because it had to be done by an unrelated, independent entity. That was a requirement of the Société de développement industriel du Québec (Quebec industrial development corporation) ("SDI").

[237]        Mr. Jabbar then formed another entity called Omzar Industriel, the directors of which were Mr. Méthot, Mr. Rassi and himself. It was to set up a manufacturing department and to obtain grants to create production lines. It was created because the bank no longer wanted to lend money to Omzar Technologies Inc. Omzar Industriel was to try to obtain a small business loan ("SBL"). Mr. Jabbar testified that he did not recall whether it was Omzar Industriel or Mr. Méthot's company that obtained the SBL. Mr. Méthot's company's name was Kinanthrométrique, and it received the professional fees that Omzar Technologies Inc. paid Mr. Méthot. It shared offices with Omzar Technologies Inc.

[238]        The Canadian government's decision regarding the investments by the members of the investment partnerships had a significant impact on Omzar Technologies Inc.'s financing. Mr. Jabbar thought that Omzar Technologies Inc. could come back on a stronger economic footing when the product was finished. That is not what happened. Omzar Technologies Inc. had loaned money to Loron Inc., Noreco Inc. and IPF Finance Inc., and those finance companies had then made loans to the investors. Omzar Technologies Inc., through Mr. Jabbar, wanted to recover the money loaned to the finance companies. Those companies were not able to repay their loans because the investors were no longer willing to pay. Mr. Jabbar therefore wanted to ensure that the amounts loaned to the finance companies came back to Omzar Technologies Inc.

The transfer agreements

[239]        Mr. Jabbar next gave his version of the events that led to the transfer agreements between the finance companies and the members of the investment partnerships.

[240]        According to Mr. Jabbar, Revenue Canada's assessments disallowing the research and development tax credits were what prompted the redemption of the investment partnerships' members' shares. The members began to worry and were no longer willing to repay their loans. Mr. Jabbar had asked Loron Inc. and the other finance companies to look into the possibilities of obtaining repayment of the members' loans. He testified that it was difficult to sue the members for the loans that the finance companies had made to them, which meant that the only other choice was to redeem their shares. On cross-examination, Mr. Jabbar was asked to explain how Omzar Technologies Inc. could have sued the members of the investment partnerships if there was no legal relationship between it and those members. He answered that Omzar Technologies Inc. did in fact have a relationship with the members of the investment partnerships because the finance companies [TRANSLATION] "were practically non-existent" since it was difficult to contact Mr. Roy, the accountant, and Mr. Loranger. Mr. Jabbar explained that Omzar Technologies Inc. would have had to redeem the finance companies' shares and then sue the members. He decided in a manner of speaking to go ahead and redeem the finance companies' shares.

[241]        The finance companies initially tried to recover the amounts loaned to the members of the investment partnerships by contacting them by telephone. Mr. Loranger also thought about turning to collection agencies. Mr. Jabbar testified that he did not agree with that approach. At the hearing, he said that Omzar Technologies Inc. did not resort to the services of collection agencies. He had stated, however, at his examination for discovery that it had indeed hired such agencies. He could not find the information on the collection agencies that the finance companies allegedly used. Mr. Jabbar, who himself invested funds in the investment partnerships and received loans equal to the full amount of his investment, never made any payment of either principal or interest.

[242]        On cross-examination, Mr. Jabbar specified that he was not the one who redeemed the shares of the members of the investment partnerships but stated that he did require the finance companies to do so. In fact, he said that he had asked Mr. Loranger to recover the amounts loaned, the other option being to acquire the members' rights in exchange for the amounts loaned.

[243]        The finance companies made a formal offer to the members to redeem their shares in the investment partnerships. The offer involved the redemption of each member's shares for an amount equal to the loan made to the member.

[244]        Mr. Jabbar also indicated that the market value of the redeemed shares was difficult to determine, which was why the price was set at the amount of the loan by the finance company to each member. Mr. Jabbar admitted that the market value of the shares was not determined in relation to the research expenditures that had been made. In his opinion, it was advantageous for Omzar Technologies Inc. to be able to get back the project "at half price". He explained that, in the area of research and development, there are a number of theories for determining the market value of research work. One of them is that [TRANSLATION] "one research dollar equals one dollar of value". Omzar Technologies Inc. did not adopt that theory, since there were no [TRANSLATION] "other indices" apart from [TRANSLATION] "the investment itself and the amount of the loan". Omzar Technologies Inc. therefore considered the amount of the loans that had been made to the members of the investment partnerships. Mr. Jabbar declared that he took a risk when the finance companies redeemed the members' shares, since the shares could well have been worth less than the amounts loaned.

[245]        Mr. Jabbar also commented on the transfer agreements entered into by the finance companies and Omzar Technologies Inc.

[246]        First of all, the transfer agreement entered into by Omzar Technologies Inc., the finance company IPF Finance Inc. and the investment partnership Dreyfus Bio-Systems on November 24, 1993, transferred Dreyfus Bio-Systems' intellectual property rights in the project to Omzar Technologies Inc. A similar agreement was entered into by Omzar Technologies Inc., IPF Finance Inc., Bio-Systems I and Ersol on December 6, 1993. A transfer agreement dated February 15, 1994, was also entered into by Omzar Technologies Inc., Loron Inc. and the VCA and Commu-Sys Enr. partnerships. Another agreement dated February 15, 1994, was signed by Omzar Technologies Inc., Noreco Inc., Bio-Systems II, Communi-Cab, Cablotel Enr. and Solarix. An agreement was also entered into on August 5, 1994, by Omzar Technologies Inc., Noreco Inc., Cablotel Enr. and Solarix.

[247]        Mr. Jabbar explained that, in his view, the transfer agreements, once signed, made Omzar Technologies Inc. the sole owner of the intellectual property rights in the various research projects. The preamble to the transfer agreements referred to the total advances that Omzar Technologies Inc. had made to the finance company —for example, in the case of the agreement between Omzar Technologies Inc., Loron Inc., VCA and Commu-Sys Enr. the amount so advanced to Loron Inc., namely $1,406,500, was mentioned. In article 3 of that particular agreement, Omzar Technologies Inc. discharged Loron Inc. in respect of the advances in question. The agreement transferred all the intellectual property rights of VCA and Commu-Sys Enr. in the cable project to Omzar Technologies Inc. The same approach was taken in the agreements between Omzar Technologies Inc. and the other partnerships.

[248]        With regard to the transfer agreement entered into on August 5, 1994, by Omzar Technologies Inc., Noreco Inc., Cablotel Enr. and Solarix, Mr. Jabbar was asked how Omzar Technologies Inc. could reacquire the same intellectual property rights it had acquired under the transfer agreement of February 15, 1994. He answered that the transfer occurred in two stages. The first stage, on February 15, 1994, was the transfer of some of the rights of VCA and Commu-Sys Enr. for $1,406,500, as can be seen from Exhibit I-2, Tab 95. The second stage, on August 5, 1994, involved the transfer of the rights held by Loron Inc. The rights were transferred according to the research projects. At the second stage, on August 5, 1994, Loron Inc.'s rights were transferred for $376,040 and Noreco Inc.'s for $966,060. The transfer agreement dated August 5, 1994, represented simply the second stage.

[249]        To pay the transfer price of $376,040, Mr. Jabbar asked the law firm of Barush Pollack to give that amount to Loron Inc. In return, Loron Inc. transferred its rights in Commu-Sys Enr. to Omzar Technologies Inc. In short, there were transfers in February 1994 and August 1994. In February 1994, Omzar Technologies Inc. obtained the rights in VCA and Commu-Sys Enr. from Loron Inc. for $1,406,500. In August 1994, it obtained the rights in VCA and Commu-Sys Enr. from Loron Inc. for $376,040. The price for those two transactions totalled $1,782,540. Omzar Technologies Inc. purchased the rights in Cablotel Enr. from Noreco Inc. for $1,253,400. Omzar Technologies Inc. thus acquired all the rights of the VCA, Cablotel Enr. and Commu-Sys Enr. partnerships with respect to the cable research project for a total of $3,035,940. Finally, Omzar Technologies Inc. obtained Commu-Sys Enr.'s rights for $1,492,510 and Cablotel Enr.'s rights for $1,275,094.

[250]        After all the shares of the members of the investment partnerships were transferred, Omzar Technologies Inc. and other companies decided to form a joint venture and to get listed on the Montréal Exchange. However, when Omzar Technologies Inc. and the three other companies filed the necessary document with the Montréal Exchange, the application was denied. In a second attempt, a "junior" listed company from Alberta suggested that Omzar Technologies Inc. join forces with it. That attempt was also unsuccessful.

[251]        Omzar Technologies Inc. went bankrupt. According to its balance sheet as at March 13, 1995, the value of its intellectual property rights was unknown. In actual fact, that intellectual property did not include the cable project. The licence was held by Omzar Technologies Inc. It was sold by the trustee on September 22, 1995, for $50,000 to Captech Communications Inc., the public company that held the right to market the cable project. The sale price for the licence was broken down as follows: $15,000 for the equipment and $35,000 for the technology rights. According to Mr. Jabbar, the trustee did not have the necessary skills to determine the value of the licence. Pierre Black was the inspector in Omzar Technologies Inc.'s bankruptcy.

[252]        Mr. Jabbar was himself a creditor in Omzar Technologies Inc.'s bankruptcy. He was owed $950,000. The trustee tried to sell the physical training machine project but did not find a buyer. Mr. Jabbar said that the trustee did not have the necessary knowledge to sell that type of technology. In fact, the trustee published a notice inviting bids on the four projects in question in August 1995.

[253]        Mr. Jabbar said that he was no longer a director or shareholder of Captech Communications Inc. at that time. He had sold his 6,000,000 shares for $610,000, which he had reinvested in Omzar Technologies Inc. before resigning.

Roger Goulet's testimony

[254]        Mr. Goulet testified as an expert. He is a telecommunications engineer. The field of telecommunications has to do with communications between human beings using electronic and optical signals. It includes cable television. Mr. Goulet is a professor at the Université de Sherbrooke and dean of the faculty of engineering at that institution.

[255]        Mr. Goulet was asked by Revenue Canada to determine whether the cable project actually involved scientific research or experimental development. With respect to Commu-Sys Enr.'s project, Mr. Goulet also had to give his opinion on whether the investors had been actively engaged in the research project. He familiarized himself with the cable project by reviewing the documentation given to him and by visiting Omzar Technologies Inc. During his visit, he examined the laboratory books and the technical documents that Revenue Canada had not had beforehand.

[256]        Mr. Goulet wrote a scientific assessment report for each partnership, namely Commu-Sys Enr., Cablotel Enr. and VCA. The three reports were nearly identical since they dealt with the same cable project. Mr. Goulet concluded that, for tax purposes, the cable project constituted a scientific research and experimental development project for the three partnerships. He testified that, from a scientific point of view, he was totally convinced that the project involved a kind of technological advancement despite the scientific uncertainties. He expressed some reservations regarding the technical content. In his view, the technical staff had [TRANSLATION] "the minimum qualifications needed and more or less adequate experience".

[257]        In his testimony, Mr. Goulet briefly described the cable project as a project whose purpose was to save maintenance costs for a cable television network. It involved a data transmission system that would make it possible to detect breakdowns along the network and then notify an operator about them. In short, Mr. Goulet testified that the idea was not new but that the project undertaken by Omzar Technologies Inc. was an ambitious one.

[258]        Mr. Goulet explained that, for any technical project, there must be technical follow-up, that is, everything must be documented. He said that Omzar Technologies Inc. gave him satisfactory documentation concerning the cable project. The interfaces (electronic circuits used for the project) were also well documented. Accordingly, based on the documentation provided to him by Omzar Technologies Inc., Mr. Goulet's opinion is that there was scientific research and experimental development.

[259]        During his visit, Mr. Goulet observed that Omzar Technologies Inc.'s laboratory was fairly well equipped. Omzar Technologies Inc. had told him that the work for Cablotel Enr. was 66 percent complete. The prototype that Omzar Technologies Inc. showed him was very interesting, but he believes that it fell far short of what, according to the project description, the project had set out to accomplish, that it was merely a demonstration unit. In Mr. Goulet's opinion, what he saw during his visit actually corresponded to about 40 percent of the objectives stated in the project description. It was a long way from being a device that could be marketed. Mr. Goulet explained that research should represent only 10 percent of a project's cost and that a large portion of the cost is invested in the engineering work required to make the prototype marketable. Thus, in his view, if the project had cost $4,000,000 at the time of his visit, that was a very high amount. His conclusion is that the research team did its best given its lack of experience. He also said that, considering the technical staff, he was surprised at the prototype that Omzar Technologies Inc. showed him.

[260]        During his visit to Omzar Technologies Inc., Mr. Goulet was given a presentation on the project by Mr. Black and a demonstration of the prototype. Mr. Goulet testified that he was surprised by the research team's lack of experience. He said that perhaps only two of the six people he met during the visit could be considered to have had technical training. The others did not play a very important scientific role in the cable project. According to Mr. Goulet, a specialized research project requires people with skills corresponding to the nature of the project. He testified that he wrote in his report that the staff was [TRANSLATION] "apparently competent" because he had met only a few people from the technical research team.

[261]        Mr. Goulet testified that $5,000,000 claimed as research expenditures for a three-year period is quite high for this type of project. He explained that such a project does not require much technical material or costly equipment. He added that salaries are generally the greatest expense in research projects. Based on what he was able to observe and on the résumés of the individuals concerned, Mr. Goulet's view is that it is difficult to justify the salaries paid by Omzar Technologies Inc. given the fact that the technical research team was made up of people with little technical experience in cable television. His conclusion is that, if Omzar Technologies Inc. used $5,000,000 for research, there must have been substantial management costs.

[262]        Mr. Goulet was also asked to assess whether the members of the partnerships concerned had been actively engaged in the research project. Based on the documents given to him by Revenue Canada, his view is that it was impossible for a member to participate in the research project or even contribute to its progress. He reached the conclusion that there was no participation by the members. Mr. Goulet had reviewed an investor's participation file and found the questionnaires filled out by the investors to be very general in nature. According to Mr. Goulet, a layperson cannot validly participate in a cable project like that of Omzar Technologies Inc. without having some skills and technical knowledge which would enable that person to make a contribution. In his view, attending meetings is not participation.

[263]        With regard to the possibility that the appellant participated in the cable project, Mr. Goulet testified that the appellant was capable of understanding the language and vocabulary of the project. However, he added that the appellant testified on irrelevant points because he did not take the time to understand the very nature of the project. For example, the appellant testified that the project sought to make cable distribution possible in remote areas when in reality it sought merely to facilitate the maintenance of cable television networks.

Jacques Lagassé's testimony

[264]        Mr. Lagassé testified as an expert. He is a lawyer, but no longer practises. He also has an MBA. He began his career at Gulf Canada and became the head of the legal department there. He specialized in intellectual property law. When he did work for concerns such as Gulf Chemicals and Shawinigan Chemicals, he was called upon to deal with various kinds of research contracts between them and subcontractors. He had to ensure, inter alia, that the research and development contracts were consistent with the requirements of intellectual property law.

[265]        Mr. Lagassé now works in his family business, Les Placements Essagal Inc. It is a venture capital corporation with assets of nearly $50,000,000. It invests in high technology and in research and development companies. Les Placements Essagal Inc. has know-how in research and development project evaluation. Each year, it considers a large number of projects that may range in value from $200,000 to $5,000,000. Mr. Lagassé is thus required to analyse those projects rigorously.

[266]        The respondent asked Mr. Lagassé to answer the following three questions:[3]

[TRANSLATION]

1. On their face, are the service contracts of Commu-Sys and Cablotel consistent with business and economic reality in the R & D field?

2. Assuming that the full amount of the service contracts was paid before the work began, is that consistent with business and economic reality?

3. Assuming that the appellant had the documents at Tabs 4-8 (documents A-8 to A-12 on his list of documents concerning Commu-Sys) when he invested in the Commu-Sys and Cablotel partnerships, are those documents sufficient to be able to make an informed business decision?

[267]        Counsel for the appellant expressed some reservations about the relevance of Mr. Lagassé's testimony.

[268]        Mr. Lagassé testified that, for any investment in research and development, the research contract is important because it establishes the intellectual property rights. He explained that a research contract must contain certain important elements, such as a description of the research work, the establishment of time constraints, the schedule of payments, requirements regarding research and development progress reports, specifics concerning intellectual property rights in the work, reasons for possible premature termination of the contract and the nature of the business relationship between the parties.

[269]        Mr. Lagassé said that, when he examined the service contracts between Omzar Technologies Inc., Commu-Sys Enr. and Cablotel Enr., he was surprised at how the matter of intellectual property had been dealt with. In addition, the description of the work and its various stages was very vague. A complete description is important for obtaining a patent. Payment of the agreed amount was also problematic, because the investment partnerships gave Omzar Technologies Inc. too much freedom. Business practice relating to the mode of payment for research work consists in paying a lump sum when the service contract is signed and paying the balance of the agreed price to the research company when the work is completed. This approach ensures that there is some control. That business practice allows for several possible types of payment. For example, the parties may provide that an amount representing the expenses already incurred by the research company to prepare the bid will be paid at the start of the project. Moreover, according to Mr. Lagassé, the fact that Omzar Technologies Inc. could use the research results was also rather disturbing, since it is important for a business to keep exclusive rights to such results. No deadlines were set out for completing each stage of the project. According to Mr. Lagassé, Omzar Technologies had carte blanche to carry out the research. This meant that the research company had complete control. The schedule for a research project is important because payment terms must be established and they are normally based on the completion of certain stages of the project. Commu-Sys Enr. and Cablotel Enr. should have required Omzar Technologies Inc. to give them progress reports on the project at very specific times. Mr. Lagassé noted that it is not standard practice to provide for a maximum investment amount in a service contract. The amounts raised by the partnerships were to serve two purposes: conducting the research and marketing the product. Thus, if all of those amounts were given to Omzar Technologies Inc., there would be no marketing of the product.

[270]        Mr. Lagassé said that a business plan should have been submitted to the appellant before he invested in the investment partnerships. The essential elements of a business plan relate to marketing, potential market shares, manufacturing, research and development and human resources. The business plan must explain to potential investors what the business is trying to achieve. In this case, Commu-Sys Enr. and Cablotel Enr. were created with two objectives in mind: to conduct research and to market a product. They thus necessarily had to have a business plan. There cannot just be basic research; the potential market must be discussed and quantified in the business plan.

[271]        Commu-Sys Enr. and Cablotel Enr. awarded the same research contract to Omzar Technologies Inc. However, Mr. Lagassé noted that there was no agreement concerning potential profit sharing. In his opinion, Commu-Sys Enr. and Cablotel Enr. should have entered into a confidential agreement to establish the economic value of the research that had already been done.

[272]        Mr. Lagassé answered the last question in his report by expressing the view that the appellant could not have made an informed business decision based on the documents given to him. Mr. Lagassé explained that there were no documents of a financial nature. In his opinion, it is necessary to provide documents explaining the research project, providing financial data on the project and indicating how the funds will be used. He said that the potential market targeted by the project must be quantified.

[273]        Moreover, the service contract in this case failed to specify the rate of return for the investor. Mr. Lagassé said that the return must not take the tax benefits into account, since they are merely a bonus granted by the government as an incentive to investment.

[274]        Mr. Lagassé also maintained that it is incorrect to say that one dollar invested equals one dollar of value. The value of research work is determined not on the basis of the amounts spent on research and development but rather on the basis of the economic potential of the result of the work.

Line Racette's testimony

[275]        Ms. Racette is a valuator with the chartered accounting firm of Richard Wise. She was qualified as an expert witness. Ms. Racette had prepared a report entitled "Valuation of Shares Omzar Télématique Inc." that was dated October 31, 1994. She noted that the date should actually be January 5, 1995. That valuation was prepared for Plannedco Inc. to enable it to purchase Omzar Télématique Inc. in accordance with the requirements of the Alberta Stock Exchange. As Ms. Racette understood it, Plannedco Inc. was merely a "shelf" company that was listed with the Alberta Stock Exchange and had no assets.

[276]        Ms. Racette established her valuation as at October 31, 1994. Omzar Télématique Inc.'s main asset was an exclusive worldwide licence to distribute and operate a system called Captech 2000. That licence had been granted by Omzar Technologies Inc. in August 1994 in return for a royalty of five percent on Omzar Télématique Inc.'s sales. A contract of sale was agreed on by Plannedco Inc., Mr. Jabbar and Omzar Télématique Inc. on October 13, 1994. It provided for the purchase of all of Mr. Jabbar's shares in Omzar Télématique Inc. In Ms. Racette's opinion, the mere fact that the same persons acted as both vendor and purchaser would not have affected the value of Omzar Télématique Inc.'s shares. She testified that, in the context of her valuation, she had to be sure that Omzar Télématique Inc. had the right to use the licence. Her check on October 31, 1994, indicated that the Captech 2000 system was complete and that six sales of the system had been made, including three on October 3, 1994, when it was demonstrated at the Cable Trade Show in Québec. Ms. Racette had also obtained a technical opinion from CIMA confirming that the Captech 2000 system was indeed ready to be marketed. She determined that the potential market for the cable technology was estimated at $206,000,000 for the following five years.

[277]        Ms. Racette testified that, as she understood it, the system included head-ends and amplifiers and that there were an average of 1,070 amplifiers per system. Captech 2000 was a system created for head-ends and amplifiers. Ms. Racette understood that the system could have a certain number of amplifiers attached to the head-ends. There was thus one price for the part of the system attached to the head-ends and a different price for the part attached to the amplifiers.

[278]        A number of accounting approaches can be used in valuing movable property. The one used to value the shares of Omzar Télématique Inc. was the discounted cash flow method, which is a profit-based approach.

[279]        Ms. Racette explained that she chose that approach because it was the most appropriate for a company like Omzar Télématique Inc. that was going to receive cash flow (or profits) in the future. Moreover, there were anticipated sales and market demand. The valuation was based on reasonable profit, income and cost projections corresponding to a market research survey and a research study. The approach in question requires the capitalization of a sustainable rate of return or profit level demanded by the purchaser of the business. It is an approach that takes account of the fact that sales are expected to increase from year to year. In her report, Ms. Racette concluded that the value of Omzar Télématique Inc.'s shares, including goodwill, was between $2,900,000 and $3,200,000.

[280]        Ms. Racette testified that, at the time of her report, the Captech 2000 system was ready to be marketed, that is, the system could be sold on October 31, 1994. There were "modules" that had not yet been completed but Ms. Racette went on the assumption that all aspects of the development would be completed. In her view, there were no insurmountable technological uncertainties at the time of the valuation. Thus, according to the research study done by CIMA, since the market was moving increasingly toward fibre optics, Omzar Télématique Inc. had to be able to make the cable system compatible with fibre optics to remain competitive. She also assumed that Omzar Technologies Inc. was going to provide considerable technical support. Ms. Racette's assumptions were based on the documents and information obtained from Omzar Télématique Inc.

[281]        The documents in question were provided by Mr. Jabbar and Mr. Daumer. A Mr. Tchamakian had helped Mr. Jabbar prepare the financial projections for Omzar Télématique Inc. He was an accountant. Ms. Racette testified that Omzar Télématique Inc.'s initial financial projections were unreasonable and were changed following discussions. That was why she had insisted that a market research survey be done to confirm the projections. That survey was done by Les conseillers ADEC Inc. ("ADEC"), which was hired by Omzar Télématique Inc. at Ms. Racette's suggestion. The survey constituted part of the valuation assumptions. ADEC's survey anticipated that, on average, clients would purchase a system with 350 amplifiers per head-end.

[282]        For each valuation, there must be an analysis of the industry in which the business operates in order to determine whether or not that industry is growing. Relying on actual facts and on an opinion taken from a report published by the Royal Bank, Ms. Racette noted that there was significant economic growth in the cable industry. The projections were made on the basis that Omzar Technologies Inc. would continue developing the technology and that interface modules were being developed at the time of the valuation.

[283]        One factor in the valuation was the sale of six head-ends to small operators in Québec. That factor was important to the valuation, since Omzar Télématique Inc. was just getting off the ground and the fact that sales had been made confirmed that there was demand. According to ADEC's market research survey, sales of cable systems could have reached $206,000,000 over the following five years. That conclusion was based on a "Total Market Forecast". This meant that, if 100 percent of all potential clients had purchased the Captech 2000 system, sales would have amounted to $533,000,000 in 1995. Ms. Racette said that, since it was impossible that 100 percent of potential clients would purchase the system, the actual market was only $37,000,000 in 1995. Omzar Télématique Inc. had made a projection of $60,000,000 for 1995-99, which projection represented about 29 percent of the potential market. The potential market did not depend on Omzar Télématique Inc.'s performance.

[284]        Having taken all those factors into account, Ms. Racette valued Omzar Télématique Inc.'s shares at $3,000,000 on October 31, 1994. In her view, if any of the report's assumptions was not borne out, that could possibly have an effect on the valuation, but there is no certainty that it would be a direct effect.

[285]        Ms. Racette testified that she was not aware that Omzar Technologies had other projects in the development stage. She expressed little concern about that situation. She testified that it was not important for her to know whether Omzar Technologies Inc. had actually developed technology through its employees or had subcontracted the required work. She did not examine Omzar Technologies Inc.'s ability to do the research. She had assumed that it would fulfil its obligations. Ms. Racette explained that, even if Omzar Technologies Inc. was a [TRANSLATION] "shell corporation", that would not have affected her valuation. According to the licence granted to Omzar Télématique Inc., Omzar Technologies Inc. was to provide technical support. If Omzar Technologies Inc. did not have the equipment to provide such support, it could have contracted with a third party to have what was necessary done, since it would have received royalties. Ms. Racette added that she would not have changed her valuation even if she had known that Omzar Technologies Inc. could not provide the necessary support or complete its projects. She wanted to be sure that Captech 2000 was a genuine product, and for that purpose, she hired competent individuals in order to obtain independent opinions. The important point in the valuation was the technology.

[286]        At the time of the valuation, Ms. Racette had not been informed that Omzar Technologies Inc. was on the verge of bankruptcy. She explained that what occurs after a valuation is not relevant in determining the fair market value of the product to be valued. Moreover, if she had known that Omzar Technologies Inc. was bankrupt, that would not necessarily have changed her conclusion.

[287]        Ms. Racette testified that she was not aware that the Captech 2000 system was the result of research by VCA, Commu-Sys Enr. and Cablotel Enr. In any event, that was not important for valuation purposes. In her valuation, the asset to be valued was the licence. In that regard, the fact that the product was marketable was very important. Ms. Racette also obtained an outside opinion confirming that the product was marketable.

[288]        Ms. Racette never received the information that was given to the members of the VCA, Commu-Sys Enr. and Cablotel Enr. partnerships. She understood that the technology had changed owners a few times prior to October 31, 1994. That was why she insisted on getting a legal opinion: to be sure that all the rights really belonged to Omzar Télématique Inc. She did not know that the members of the above-mentioned partnerships had been told by Omzar Technologies Inc. that no prototype would be made before 1995. Nevertheless, that fact is not decisive, since, at the time Omzar Télématique Inc. was valued, there had been a sale of the system and a demonstration had taken place at a show in Québec. Ms. Racette's assistant, Chantal Leblanc, actually went to that show and saw that the product existed. When asked whether she knew that only 10 percent of the work financed by Cablotel Enr. had been completed, Ms. Racette expressed the view that that was not important. In short, she declared that those allegations might or might not change the report's assumptions.

[289]        The sale of the Captech 2000 system was clearly noted on the invoice filed. The client was 9006-9394 Québec Inc., whose president was Mr. Méthot. Ms. Racette said that her assistant, Ms. Leblanc, had called the client to confirm that the sale had been made. Ms. Racette added that the fact that Mr. Méthot was a director and a friend of Mr. Jabbar's should not change her report. She said that Mr. Méthot could as a consequence have had better reasons for purchasing the system, since he would not have purchased it if it had not been suitable. What was important was that the technology existed.

[290]        9006-9394 Québec Inc. declared bankruptcy on June 5, 1995. The balance sheet showed that the company had no income. It purchased the systems, but it did not generate any income before going bankrupt. In Ms. Racette's view, what is important is that there was a sale, even if Mr. Méthot was involved in a tax shelter.

[291]        Ms. Racette did not verify whether Omzar Télématique Inc.'s projections were reasonable. She did not look at what happened after the valuation. With regard to the share transfer agreements between Omzar Technologies Inc. and the finance companies, Ms. Racette stated that she had never insisted that the February 1994 agreements be redone on August 5 and 12, 1994. She consulted an independent lawyer to make sure that Omzar Technologies Inc. owned 100 percent of the intellectual property rights.

[292]        Ms. Racette relied on Omzar Télématique Inc.'s financial statements as audited by the chartered accounting firm of Grossman Kellerman Klein. Ms. Racette explained that, all in all, there are no factors which, considered alone, would alter her opinion. In redirect examination, she explained that the cash flow method would produce the same or higher results if the business to be valued owned all the rights to the technology, aside from the licence. She further explained that, if all the rights had belonged to the same business, that is, if Omzar Télématique Inc. had not had to pay royalties to Omzar Technologies Inc., she would not have had to take that expense into account. The profits and cash flow would thus have been higher.

Marie-Claire Poupart's testimony

[293]        In her testimony, Ms. Poupart provided information on the Société de développement industriel ("SDI"), on the formation of a Quebec business investment company ("QBIC", or "SPEQ" in French) and on the handling of Omzar Technologies Inc.'s file in 1992 and 1993.

[294]        It should be noted that, by letter dated July 2, 1993, SDI confirmed that Omzar Technologies Inc.'s activities were eligible for SDI's purposes. According to Ms. Poupart, Omzar Technologies Inc. was required to have an applied research laboratory.

[295]        In the context of a public offering of shares, Omzar Technologies Inc. had to indicate in the prospectus how the funds would be used. It could not use the funds to pay its creditors or make loans. It could not use the funds obtained by SPEQ M.P.I. to guarantee a loan made to investors, nor could it allocate the funds it obtained to a single research project. Those are prohibited uses of funds under the QBIC legislation and regulations.

[296]        Before issuing slips for the tax shelter, SDI required confirmation that the funds had been invested in a QBIC and that the QBIC had made investments in a qualified business. Omzar Technologies Inc. provided those essential confirmations by filing letters from the chartered accounting firm of Grossman Kellerman Klein.

[297]        Ms. Poupart testified that she was not told about a letter sent by Omzar Technologies Inc. to Barush Pollack asking that law firm to transfer $1,938,000 from the QBIC to Mirelis. She said that she had contrary information in SDI's file. She confirmed that the transfer of funds to Mirelis was a prohibited purpose.

[298]        SPEQ M.P.I.'s registration was revoked because it and Omzar Technologies Inc. had failed to fulfil their obligations, namely filing financial statements with SDI for a five-year period following the date of an investment made by a QBIC in a business corporation.

Marie Cormier's testimony

[299]        Ms. Cormier also testified briefly.

[300]        Ms. Cormier is a lawyer with the secretariat of the Quebec Securities Commission. She was in charge of access to the documents held by the Commission, which is subject to the Act respecting access to documents held by public bodies and the protection of personal information.

[301]        A business or individual may obtain information from the Quebec Securities Commission if the information relates to prospectus filing and investments. Likewise, a legal entity or an individual may obtain the Commission's decisions prohibiting action. Ms. Cormier explained that the Commission did not provide information about tax benefits and advised those who contacted it in that regard to consult their lawyer.

[302]        The Quebec Securities Commission made a decision on September 26, 1991, prohibiting Ersol from soliciting investors to invest in partnership shares. The purpose of the decision was to protect investors, since that type of investment vehicle entails full liability for them and that represents a potential risk. The Court learned that the Commission had also issued a bulletin on May 24, 1991, referring to its decisions on the use of general partnerships as investment vehicles.

[303]        The Quebec Securities Commission also decided, through its legal services director, that VCA's managers had breached sections 148 and 149 of the Securities Act since VCA did not have a prospectus receipt or exemption. The decision, which prohibited any investment that was subject to the Securities Act, was published in the Commission's bulletin.

Linda St-Hilaire's testimony

[304]        Ms. St-Hilaire, a personal financial advisor at the Caisse populaire Desjardins in Stoneham, explained how that credit union dealt with credit applications in general and how it handled the appellant's file in particular.

[305]        In 1991, Ms. St-Hilaire worked at that credit union. Her job involved reviewing credit applications made by credit union members.

[306]        During the credit application process, all debts had to be reported, and Ms. St-Hilaire had no discretion to ignore certain debts. Checks were run to ensure that the person applying for credit had stated the truth.

[307]        Ms. St-Hilaire noted that the loan obtained by the appellant from Loron Inc. was not declared in his second credit application in November 1992. She said that the appellant also failed to declare the loan made to him by Noreco Inc. With regard to the latter loan, Ms. St-Hilaire testified that she never suggested to the appellant that he not declare it.

[308]        Ms. St-Hilaire stated that the credit union's decision on each of the loan applications might have been different if it had been told of the loans not declared by the appellant.

Luc Guillemette's testimony

[309]        Mr. Guillemette, a senior underwriter at the Laurentian General Insurance Company, gave testimony providing information concerning the insurance taken out by Omzar Technologies Inc. There is no need to go into any more detail about his testimony.

The appellant's arguments

[310]        For the appellant, it was stated first that Commu-Sys Enr. was, as shown by its partnership agreement, a general partnership whose purpose was [TRANSLATION] "to do business, including research and development work". Counsel for the appellant noted in particular that the partnership's fiscal period ended on December 31 of each year. He argued that, [TRANSLATION] "for the purposes of computing the appellant's taxable income and tax payable for 1991 in respect of his investment in Commu-Sys Enr., the fiscal period of Commu-Sys Enr. that must be considered is the one ending on December 31, 1991, in accordance with sections 96(1)(g) and 127(8) of the Act".

[311]        It was pointed out that the appellant had confirmed that, on December 31, 1991, he still owned the 250 shares in Commu-Sys Enr. that he had purchased for $25,000 on December 20, 1991; in this regard, it should be noted that Commu-Sys Enr. had issued 23,405 shares by December 31, 1991.

[312]        The appellant's $25,000 investment in Commu-Sys Enr. was financed through two separate transactions. First, he borrowed $12,500 from Loron Inc. on December 20, 1991, which was the day he signed the subscription form. Second, on December 31, 1991, he borrowed from the Caisse populaire Desjardins in Stoneham the sum of $13,000, $500 of which was used for other purposes. The $12,500 from the credit union's loan was added to the amount of the first loan from Loron Inc. The appellant paid the $12,500 to Commu-Sys Enr. on December 31, 1991. Counsel for the appellant argued that the appellant became a member of that partnership as of that date.

[313]        According to the appellant, the evidence also showed that Omzar Technologies Inc., a corporation resident in Canada, had an applied research laboratory that carried out a number of research contracts for various persons. Mr. Jabbar was Omzar Technologies Inc.'s only director.

[314]        A service contract was entered into by Omzar Technologies Inc. and Commu-Sys Enr. through which the former undertook to perform, for the latter's benefit, [TRANSLATION] ". . . scientific research and experimental development work with a view to creating a system for the design and development of a prototype telematics system for optimizing the maintenance of televised information transmission networks in remote areas". It was pointed out that, under the research contract, Commu-Sys Enr. owned the results of the research work done by Omzar Technologies Inc. Commu-Sys Enr. paid Omzar Technologies Inc. $2,340,500 in 1991. According to the appellant, the nature of Commu-Sys Enr.'s business [TRANSLATION] "was to collect funds which were to be paid to the subcontractor, Omzar, so that Omzar could conduct research for the cable research project. Subsequently, Commu-Sys should, in the normal course of things, have exploited the results of the research so as to make a profit from them or have disposed of them for payment in order to derive a monetary gain therefrom."

[315]        For the appellant, emphasis was placed on the fact that, in the Reply to the Notice of Appeal, the respondent had admitted that the cable research project could be characterized as scientific research and experimental development under section 2900 of the Income Tax Regulations.

[316]        In his tax return for the 1991 taxation year, the appellant claimed a deduction for scientific research and experimental development expenditures in connection with his interest in Commu-Sys Enr. The appellant argued that, in accordance with clause 37(1)(a)(ii)(D) of the Act, Commu-Sys Enr. made an expenditure of a current nature by a payment to Omzar Technologies Inc. to be used for scientific research and experimental development, specifically the cable research project. That project was directly related to the business of Commu-Sys Enr., which had the right to exploit the results of such scientific research and experimental development.

[317]        Thus, argued the appellant, on the basis of section 96 of the Act, he was fully justified in deducting from his 1991 taxable income his prorated share of the scientific research and experimental development expenditures made by Commu-Sys Enr. for its fiscal period ending on December 31, 1991.

[318]        The appellant also argued that, since the expenditure was a qualified expenditure under subsection 127(9) of the Act, Commu-Sys Enr. was entitled to an investment tax credit on its aggregate qualified expenditure for 1991 in accordance with paragraph (a) of the definition of "investment tax credit" in subsection 127(9) of the Act. It follows that, under subsection 127(8) of the Act, the appellant was entitled to his share of the investment tax credit established for Commu-Sys Enr.

[319]        After mentioning the various positions taken by Revenue Canada with respect to assessing him regarding his interest in Commu-Sys Enr., the appellant referred to the concept of "specified member" found in subsection 248(1) of the Act, and in particular to the English version of the definition and to Interpretation Bulletin IT-151R4, "Scientific Research and Experimental Development Expenditures".

[320]        Relying on paragraph 248(1)(b) of the Act, the appellant thus argued, paraphrasing the above-mentioned interpretation bulletin, that for a member of a general partnership not to be covered by the concept of "specified member", it is enough to show that he or she is ". . . a member who on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which he or she is a member of the partnership is: . . . (b) actively engaged in those activities of the partnership business other than its financing . . . ."

[321]        From the appellant's point of view, [TRANSLATION] "[t]he requirement that the taxpayer be a member of the partnership means that the test must be applied solely as of the date when the taxpayer became a member. This point is stressed in paragraph 74 of Interpretation Bulletin IT-151R4 through the following words: '. . . and during which he or she is a member of the partnership'."

[322]        The appellant added that the test in question must be applied to each member individually and must refer solely to the part of the partnership's fiscal period during which he or she is a member of the partnership. Counsel for the appellant continued as follows: [TRANSLATION] "the later it is in a partnership's fiscal period, the less exacting the participation test will be, since the activities of the partnership business prior to the date on which the taxpayer became a member of the partnership are not relevant".

[323]        After noting that the Act does not require a member to be engaged in a subcontractor's scientific research and experimental development activities, the appellant concluded that subsection 248(1) of the Act requires only that the member be engaged in the activities of the partnership business, with no reference to any additional obligation where the partnership awards a research subcontract to another legal entity. He also inferred that, in the case of his own participation in Commu-Sys Enr. for the 1991 taxation year, the relevant period for applying the "specified member" test is therefore the single day of December 31, 1991.

[324]        As regards the application of the test of participation in the activities of the partnership business, it was stated that the appellant [TRANSLATION] "was actively engaged in the activities of the partnership business on a regular, continuous and substantial basis throughout the relevant period". In support of that proposition, the appellant argued that, [TRANSLATION] "as soon as he was admitted as a member of the partnership, [the appellant] supported, with his entire patrimony, all the activities of Commu-Sys on a regular, continuous and substantial basis". He went even further, adding the following: [TRANSLATION] "Throughout the relevant period, the appellant was jointly and severally liable for all the actions and measures taken and commitments made by Commu-Sys, even commitments made by it before he became a member, and he was thus engaged in the activities of Commu-Sys on a regular, continuous and substantial basis. Even where a member was not involved in making some of the partnership's decisions because they were made before he or she became a member, the mere fact of becoming a member has a very important consequence, namely that from then on he or she is jointly and severally liable with the other members—to the extent of his or her entire personal patrimony—for all the partnership's decisions, even if they were made before the person became a member."

[325]        With regard to his participation, the appellant also referred to [TRANSLATION] "the opinion expressed by the Department of Revenue at question 20 of the federal table during the 1988 annual conference of the Association de planification fiscale et financière (APFF)":

[TRANSLATION]

The concept of being "actively engaged in the activities of the partnership business" is equivalent to the work that we are entitled to expect of a business owner in managing the affairs of his business, aside from everyday management, which the owner might entrust to a manager.

[326]        Finally, counsel for the appellant referred to the principles for interpreting tax legislation set out in certain Supreme Court of Canada decisions, particularly Johns-Manville Canada Inc. v. The Queen, 85 DTC 5373, and concluded that the concept of "specified member" represents an exceptional measure that must be interpreted in the manner that is most favourable to the taxpayer. The appellant thus argued that he cannot be considered a specified member of Commu-Sys Enr.

[327]        The appellant also submitted, as his main argument, that the sale of all of his shares in Commu-Sys Enr. to Loron Inc. for $12,500 on December 20, 1993, did not have the effect of making him a limited partner of Commu-Sys Enr. under subsection 96(2.4) of the Act. In support of that conclusion, the appellant stated the following:

[TRANSLATION]

125.          The member's full personal liability in respect of the operations of the Commu-Sys partnership was in no way limited, so that this sale did not in any way have the effect of making the appellant a limited partner of Commu-Sys under subsection 96(2.4) of the Act.

[328]        First of all, it was noted that the appellant had testified that, after considering the matter, he had decided to accept the offer to sell his shares in Commu-Sys Enr. to Loron Inc.

[329]        The appellant also argued that [TRANSLATION] "[w]hether or not a person is a limited partner under the introductory portion of section 96(2.4) must be determined at a particular time, namely the date of the end of the partnership's fiscal period falling during the taxpayer's taxation year, in accordance with section 96(1)(g) of the Act".

[330]        The appellant argued that the taxation year in question is 1991. He added the following on this point: [TRANSLATION] "When reference is made in section 96(2.4)(b) to an amount the taxpayer is entitled to receive pursuant to section 96(2.2)(d) that is granted or to be granted for the purpose of reducing the impact, in whole or in part, of any loss, in this case it must be a loss sustained during the 1991 taxation year".

[331]        With regard to the statement in subsection 96(2.4) of the Act that the amount must be one the taxpayer is entitled to receive at the end of the partnership's fiscal period or within three years after that time, the appellant argued that, [TRANSLATION] "even where the entitlement to receive an amount does not arise until after the particular time, it must still be granted for the purpose of reducing the impact, in whole or in part, of any loss that the taxpayer may sustain at the particular time, that is, for our purposes, during the 1991 taxation year".

[332]        The appellant submitted that this interpretation of subsection 96(2.4) of the Act is consistent [TRANSLATION] "with Parliament's intent in enacting section 96(2.4), namely to prevent a taxpayer whose liability is indirectly limited from being able, for a particular taxation year, to claim credits and tax deductions in the same way as a member who is fully liable for the same taxation year" (para. 103).

[333]        It was argued vigorously for the appellant that [TRANSLATION] "in no way did Loron Inc.'s purchase of the appellant's shares in Commu-Sys have the effect of reducing at all his full liability—to the extent of all of his personal property—for any debt that Commu-Sys might have incurred during the period in which he was a member thereof". The appellant added that [TRANSLATION] "it is clear from sections 96(2.4) and 96(2.2)(d) that such an amount received by a taxpayer will have the effect of making the taxpayer a limited partner only if the amount was granted to the taxpayer to limit his or her liability arising out of his or her interest in the partnership for the taxation year in question, which is not the case here. For a member's entitlement to receive an amount to fit the description in section 96(2.2)(d) of the Act, that entitlement must have been granted to the member ". . . for the purpose of reducing the impact, in whole or in part, of any loss that the taxpayer may sustain by reason of being a member of the partnership or by reason of holding or disposing of an interest in the partnership . . . ."

[334]        The appellant stressed particularly that, [TRANSLATION] "[f]or an amount received to fall within the definition in section 96(2.2)(d) of the Act, it must have been granted to a member for the purpose of reducing, in whole or in part, his or her personal liability to a third party as a member of the partnership".

[335]        The purpose of Loron Inc.'s purchase of the appellant's shares [TRANSLATION] "was not to reduce the impact, in whole or in part, of any loss that the appellant may have sustained by reason of being a member of Commu-Sys or by reason of holding or disposing of an interest in that partnership, but rather to enable Omzar to recover the rights to the cable research project so that it could survive by trying to carry on with that project on its own behalf".

[336]        The appellant therefore concluded that the sale of his shares to Loron Inc. [TRANSLATION] "did not have the effect of making the appellant a limited partner of Commu-Sys." The appellant insisted that his liability was in no way limited as regards Commu-Sys Enr.'s operations.

[337]        The appellant argued that, should the Court find that the sale to Loron Inc. constituted an entitlement described in paragraph 96(2.2)(d) of the Act, he cannot be characterized as a limited partner and that he falls within the exemption set out in subparagraph 96(2.2)(d)(iv) of the Act.

[338]        On this point, the appellant noted that Revenue Canada had not assessed the market value of the shares of Commu-Sys Enr. at the time he disposed of them in December 1993.

[339]        The value of those shares was equal to the fair market value of the rights that Commu-Sys Enr. had to the results of the research being done on its behalf by Omzar Technologies Inc. Each share was equal to the market value of all the rights held by Commu-Sys Enr. divided by the number of shares in that partnership, that is, a total of 23,405 shares.

[340]        One of the methods suggested by the appellant for valuing the shares of Commu-Sys Enr. when its members disposed of them by transferring them to Loron Inc. was based on the valuation of Omzar Télématique Inc.'s shares. The appellant referred to a valuation by Line Racette, who at the time was in partnership with Richard Wise in the firm of Richard Wise & Partners. Ms. Racette used the discounted cash flow method, which she considered the most appropriate in the circumstances. Richard Wise & Partners valued Omzar Télématique Inc.'s shares at between $2,900,000 and $3,200,000 as at October 31, 1994. It was pointed out that Omzar Technologies Inc. was practically dormant in 1994.

[341]        Given the proportion of the cable project research results attributable to each of VCA, Commu-Sys Enr. and Cablotel Enr., the portion of the value attributable to Commu-Sys Enr. would be between $1,409,000 and $1,555,200. Since the appellant owned 250 shares out of a total of 23,405, the market value of his shares would be between $15,045 and $16,611. That market value is thus higher than the proceeds of disposition of $12,500 received by the appellant when he transferred his shares in Commu-Sys Enr. to Loron Inc.

[342]        The appellant also referred to another method of valuation, namely the cost method. Based on that approach, the market value of his shares would be $15,438 and thus also higher than the proceeds of disposition he received.

[343]        Finally, a third method was referred to by the appellant, namely valuation based on the sale of rights. He relied in this regard on the agreements that Omzar Technologies Inc. entered into with Loron Inc., VCA and Commu-Sys Enr., which show that [TRANSLATION] "Omzar paid $1,782,540 to acquire the portion of the rights that originally belonged to Recherche VCA and Commu-Sys". From that the appellant concluded as follows: [TRANSLATION] "Prorating based on how much each of those two partnerships paid Omzar ($473,000 in the case of Recherche VCA, or 17 percent, and $2,340,500 in the case of Commu-Sys, or 83 percent), the part of that amount attributable to the portion of the rights that originally belonged to Commu-Sys is $1,479,500 ($1,782,540 x 83%)". The value of the appellant's shares thus works out to $15,803.

[344]        With regard to his purchase of shares in Cablotel Enr., the appellant, in his written submissions, began by looking at the facts surrounding the formation of Cablotel Enr., the nature of its business, the number of members it had, the value of all of its shares and his own interest in that partnership. He then made the same arguments regarding his liability as a member of a general partnership and regarding the methods for valuing all of Cablotel Enr.'s shares and in particular his own shares in that partnership.

The respondent's arguments

[345]        In her written submissions, after first referring to the various steps involved in issuing the assessments against the investors, including the appellant, and to the audit conducted by Gabriel Caponi, a Revenue Canada official, and after then reviewing the evidence in detail, the respondent put forward five main propositions.

[346]        The first of them is that all the transactions set up by Omzar Technologies Inc., Mr. Jabbar, Mr. Roy (the accountant) and Mr. Loranger constitute a sham.

[347]        To prove the validity of that proposition, the respondent began by referring to certain general facts that raised some questions. The respondent stated the following in that regard:[4]

[TRANSLATION]

• with a capitalization of $300.00, Omzar ended up with contracts allegedly totalling $13 million in very little time;

• everything was organized by Omzar, including the formation of the partnership (with the involvement of an Omzar employee), the financing and the redemption, since, by Mr. McKeown's own admission, it was Omzar that redeemed the partnership shares, and the finance companies were therefore not involved in the redemption in any way;

• all the participants, without exception—that is, Omzar, the finance companies and the partnerships—were located in the same place, in Omzar's premises, and none of them except Omzar had any employees or made any specific expenditures, since Omzar defrayed all the expenses incurred by all the participants;

• Omzar had just one source of income, namely nine different alleged partnerships that were responsible for four projects and that had altogether nearly 600 investors; for every single one of those investors the following was true:

à automatic financing equal to at least 50 percent was granted with no credit investigation;

à there was no repayment of principal or payment of interest;

à all the investors failed to repay their loans;

à the shares of all the investors were redeemed in extinguishment of the loan that was still outstanding, which, for all the investors, equalled 50 percent of the amount they claim to have invested;

à in every case, the redemption extinguished only the loan even though all the investors owed unpaid, accrued interest;

à without exception all the investors financed by the same finance company—whether two, three or four different partnerships were involved—had their shares redeemed on the same date;

à all the investors, again without exception, transferred their shares in exchange for the cancellation of the 50 percent loan, regardless of the partnership involved and regardless of whether the work on the project seemingly "belonging" to the partnership was 100 percent complete, as in the case of Dreyfus, Bio-Systems I, Bio-Systems II, Ersol and VCA, 75 percent complete, as in the case of Commu-Sys, or 10 percent complete, as in the case of Cablotel, Solarix and Communi-cab;

• all the investors' shares were redeemed solely in extinguishment of their loans because, if the consideration had also included the cancellation of the accrued interest, the redemption price would have differed from one investor to the next since they did not invest on the same date and some of them would have received a higher amount than others, which would have destroyed the illusion they were trying to create;

• all the loan agreements, regardless of the finance company, were identical in that:

à all the finance companies were located at the same address as Omzar;

à the interest rate on all the loans was 10 percent, regardless of whether the loan was made in the summer of 1991 or in December 1993;

à all the loans were repayable in 120 monthly instalments;

à in every case, the first payment of principal did not have to be made until the following year.

[348]        Based on these facts, the respondent concluded as follows:[5]

[TRANSLATION]

                These few facts provide an overall picture of the structure set up by Omzar and of the "artificial" role played by the partnerships and thus by the alleged members thereof. In reality, the partnerships were created solely to serve as a "conduit" for Omzar in order to create the illusion that it was paying astronomical management fees to the finance companies, Jabbar and his "confederates" and to enable the investors to claim deductions equal to twice the amounts they invested. In our opinion, the transactions as a whole constitute a sham.

[349]        With respect to the sham theory, the respondent referred to the Supreme Court of Canada's decisions in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 56, and Continental Bank Leasing v. Canada, [1998] 2 S.C.R. 298, the Federal Court of Appeal's decision in Dundas v. The Queen, 95 DTC 5116, and, finally, this Court's decision in Robert Phénix v. The Queen, 98 DTC 1524.

[350]        In addition to the [TRANSLATION] "general facts", as she called them, the respondent referred to [TRANSLATION] "numerous factors that confirm the existence of a sham". They include the following:[6]

[TRANSLATION]

. . .

• document I-38[7] shows that, whatever the contracts entered into by Omzar and the partnerships, all the funds allegedly invested in the partnerships—but in an amount higher than that set out in the service contract—were immediately transferred to Omzar;

• the same document shows that, for $13 million in alleged investments, Omzar received less than $6.5 million in real money, which did not prevent it from advancing $11.1 million to the finance companies;

• although it advanced more than $11 million to Loron, Noreco and IPF Finance at an interest rate of five percent and they in turn loaned that money to the investors at an interest rate of 10 percent, Omzar did not request payment of the accrued interest, nor did the finance companies request such payment from the investors;

• documents I-13/986 and 987, namely Loron's financial statements dated September 30, 1992, and September 30, 1993, make no reference to the alleged loans and list no assets or liabilities demonstrating the existence of such loans;

• the financial statements as at September 30, 1993, indicate rather that Loron had a significant asset identified as "intellectual property rights" even though it is not supposed to have become the owner thereof until December 20, 1993, that is, nearly three months later;

. . .

• Omzar claims that it transferred more than $11 million to the finance companies pursuant to a mere agreement in principle, without any written contract aside from a contract entered into by it and Loron at a later date, February 23, 1993, which dealt with the December 1991 loans and stated that they had been made so that Loron could acquire the intellectual property rights, which rights Loron used as security for the loans in February 1993 even though, once again, it is not supposed to have acquired those rights until December 20, 1993;

• in computing its income, Omzar claimed an expense for "astronomical" management fees of several million dollars that it claims to have paid the finance companies even though no invoices were submitted by those companies, no real outlay of money was made, everything was transacted solely through accounting entries (in some cases "adjusting" entries), the companies did not report fee income, as shown by Loron's financial statements, and the companies were fairly inactive;

. . .

• documents I-15[8] and I-17,[9] which were also filed during Mr. Lassonde's cross-examination, provide information showing that the redemption at 50 percent was planned in advance. In the affidavit filed as Exhibit I-15, Mr. Lassonde stated in July 1989 that the anticipated value of the shares on December 31, 1989, would be 50 percent, while in the judgment filed as Exhibit I-17, Madam Justice Ginette Piché reproduced the testimony of some of the investors involved in the SRET venture and summed up one investor's testimony as follows:

. . . the result for me was a tax shelter. I invested $10,000, I was given back $5,000 two weeks later and I had attractive tax deductions.

[351]        On this point, the respondent concluded as follows:[10]

[TRANSLATION]

. . .

These facts as a whole lead inexorably to a single conclusion, namely that everything was planned in advance and that the investors knew full well that the loan was part of a financing scheme designed to provide them with significant tax deductions and that the "false" loan would in fact be cancelled through the transfer of their shares a few months later.

[352]        The respondent's second main proposition is that Commu-Sys Enr., Cablotel Enr. and SAET II did not exist.

[353]        As a starting point, the respondent stated that it was therefore necessary that the appellant be a member of a general partnership that was carrying on a business with a reasonable expectation of profit and that he not be considered a specified member.

[354]        In the context of that main proposition, the respondent argued that the appellant did not enter into a contract of partnership with a large number of investors since he and the other investors did not intend to join forces and pool their assets with a view to carrying on a business and sharing the profits among themselves. The respondent reviewed the appellant's testimony and the facts relating to Omzar Technologies Inc., Commu-Sys Enr. and Cablotel Enr. and pointed to the following factors in support of that conclusion:[11]

[TRANSLATION]

                We will not provide another exhaustive list of the facts looked at in the above-mentioned chapters. Nevertheless, we would like to say that the following few factors must be kept in mind:

• the alleged members did not know one another, as Mr. McKeown admitted, and merely followed Omzar's instructions;

• the partnership did not engage in any activities, however minimal, and its first fiscal period was also its last;

• the investors' conduct shows that they were merely following Omzar's instructions for tax reasons, that they showed no interest in the research or its results, that they did not care about the lack of results and that they showed no interest in controlling the progress of the work or in having control over the stages of the research, since, in any event, they did not take part in any meetings and were not involved in making any decisions;

• the resource persons identified to represent the partnerships were actually employees of Omzar, and Jacques Caron seems to have played only a minor part; ("replaced by 'Loranger'"—these words added by hand by the Chief Judge)

• Omzar appropriated the whole of the amounts invested in the partnerships, regardless of the amount set out in the contract awarded to it by each partnership, as shown by document I-38, and even appropriated the balances in the partnerships' bank accounts by arranging to have them closed;

• the investors did not even know that they were members of a partnership, since, at the time they claim to have disposed of their shares in the partnerships, they stated, as the appellant did, that they were disposing of securities identified as "Noreco" or "2961";

• the only plan shared by all of the investors was to obtain tax refunds, which is not considered a legitimate purpose.

[355]        Having referred to articles 2186, 2216 and 2224 of the Civil Code of Québec, the respondent concluded that the appellant and his alleged "unknown" partners never intended to join forces to carry on a business in common. Reference was again made to the Supreme Court of Canada's decision in Continental Bank Leasing v.Canada, supra, to show that [TRANSLATION] "the existence of a partnership is determined first and foremost by what the parties actually intended". Applying the principles stated in that Supreme Court of Canada decision, the respondent drew the following conclusion:[12]

[TRANSLATION]

. . .

                In our case, however, there was no business whatsoever, nothing being carried on in common—something that is moreover difficult when one does not know one's fellow members—and, above all, the investors were not seeking to carry on a business in common with a view to generating an operating profit, since all they wanted was to obtain tax benefits.

[356]        The respondent relied on the decision by Judge Archambault of this Court in Murray Waxman v.M.N.R., 97 DTC 705.

[357]        As her third main proposition, the respondent took the position that the evidence shows that no business was carried on by the investment partnerships or even by the appellant and the other members.

[358]        The respondent noted that, in the Supreme Court of Canada's decision in Continental Bank Leasing v. Canada, supra, Bastarache J. found that the concept of profit is an essential consideration that must be present before it can be claimed that a contract of partnership has been formed.

[359]        The respondent submitted that the evidence shows:[13]

[TRANSLATION]

. . . that the investors in question sought only to obtain substantial tax benefits and never demonstrated an intention to carry on any business. More specifically, in reviewing Mr. McKeown's testimony, we have brought out many facts showing the absence of information essential to the existence of a business. Those clear facts prove that there was no business whatsoever. Without going back over all those facts, and before looking at how the courts have defined "business", we would nevertheless like to stress the following few factors as examples demonstrative of the fact that no business was being carried on:

• no steps or requests whatsoever were taken or made to:

à ensure that the project would be profitable;

à obtain any indications whatsoever suggesting that it could be profitable;

à obtain a market research survey or even a marketing plan;

à prepare and obtain budget estimates or income forecasts;

à prepare and obtain a financial analysis or financial projections;

• the structure put in place was set up solely for tax purposes, as shown by the analysis of the "participation program", which was established solely to create the illusion that the government's criteria were being met;

• according to Mr. McKeown, the partnerships' objective was to bring together people to amass funds; raising money does not constitute carrying on a business any more than seeking tax benefits does;

• finally, in cross­-examining Mr. McKeown, we obtained a number of relevant statements or even admissions, including the following . . . .

[360]        The respondent also referred to the concept of business as discussed in the Supreme Court of Canada's well-known decision in Moldowan v. The Queen, [1978] 1 S.C.R. 480.

[361]        Relying on Maloney v. The Queen, 92 DTC 6570, the respondent noted that an objective expectation of profit refers to the profit flowing from the business's activities and not from the granting of tax benefits. According to the respondent, Bendall v.The Queen, 96 DTC 1626, is similar to the fact situation in the case at bar.

[362]        The respondent also put forward the proposition that, if the Court should find that the partnerships actually existed, then the appellant was a limited partner. The respondent referred first to the fact that the Income Tax Act provides for a number of tax benefits that are granted to taxpayers involved in scientific research and experimental development work unless the partnership members are considered to be specified members within the meaning of subsection 248(1) of the Act.

[363]        The respondent argued that the appellant was [TRANSLATION] "entitled to receive or obtain an amount or benefit, whether by way of reimbursement or proceeds of disposition or in any other form or manner whatever, granted or to be granted for the purpose of reducing the impact, in whole or in part, of any loss . . . ." According to the respondent, the appellant had such an entitlement [TRANSLATION] "because it was anticipated and planned, at least tacitly, that he would dispose of his shares for a fixed amount exceeding their fair market value, which amount was determined in advance without reference to the value at the time of the disposition".

[364]        The respondent added that the appellant [TRANSLATION] "can also be considered a limited partner because he had the benefit of an agreement or arrangement for the disposition of his shares and because one of the main reasons for the agreement or arrangement was precisely to avoid the application of the definition of 'limited partner' to him".

[365]        The respondent further argued that Parliament's intention in amending paragraph 37(1)(a) of the Act in 1988 was to ensure that a taxpayer who does research and development work for his or her business can deduct his or her expenditures only from the income of that business. Drawing a distinction between the scope of subparagraph 37(1)(a)(i) and that of subparagraph 37(1)(a)(ii), the respondent stated the following:[14]

[TRANSLATION]

. . .

The major distinction that emerges from a reading those two subparagraphs is merely a consequence of the contractual relationship between the payer and the person doing the research. Under subparagraph 37(1)(a)(i), it is not necessary to say anything about entitlement to exploit the results of the research, since the payer normally retains the intellectual property, whereas, under subparagraph 37(1)a)(ii), it is necessary to specify that the payer must be entitled to exploit the results of the R & D activities to be eligible for the deduction, since the corporation doing the R & D normally retains the rights, patents and publication right.

[366]        In answer to the appellant's argument that the Commu-Sys Enr. and Cablotel Enr. partnerships made [TRANSLATION] "a payment to be used for research and development", the respondent noted that one of the conditions set out in subparagraph 37(1)(a)(ii) of the Act was not met in paragraphs 6 and 10 of the service contracts between those partnerships and Omzar Technologies Inc. According to the respondent, since it was stated that the intellectual property belonged to the partnerships in question, Omzar Technologies Inc. retained the right to use the results of the work to perform other research work. The respondent submitted that, for the deduction under subparagraph 37(1)(a)(ii) of the Act to be available, it would at least have been necessary to provide for the reverse situation.

[367]        After tracing the history of the definition of "specified member" added in 1988, of the amendment made in 1994 and of the differences between the English and French versions, the respondent concluded that Parliament's intent was and has always been that the members be actively engaged "in [the] activities of the partnership business". According to the respondent, Parliament wanted to prevent [TRANSLATION] "promoters from attracting 'investors' solely on the basis of the tax benefit". The respondent added that what Parliament was seeking in creating the "specified member" concept [TRANSLATION] "was to make tax credits available to those directly involved in the R & D process".

[368]        With regard to that proposition, the respondent concluded that the evidence showed that the investors did what Omzar Technologies Inc. told them to do. Their interest in such symbolic participation was merely to comply with the eligibility criteria laid down by Revenue Canada for entitlement to the investment tax credit.

[369]        In answer to the appellant's argument that participation had to occur as of the date he invested in a partnership whose purpose was research and development, and given that the appellant made his investment at the end of the year, the respondent said that, if a partnership has chosen a structure that makes it impossible for a member to participate, that is a choice it makes and it must accept the consequences of its choice. The appellant could not become active in the partnership simply by virtue of being a member.

Analysis

[370]        Before dealing with the specific issues raised by these appeals from assessments by which the Minister of National Revenue disallowed, inter alia, the deduction of a loss resulting from scientific research and experimental development expenditures, I believe that it would be helpful to refer to the provisions of the Income Tax Act relating to that deduction at the relevant time.

[371]        Subsection 37(1) of the Act authorizes the deduction, in computing a taxpayer's income from a business, of expenditures of a current or capital nature made on scientific research and experimental development related to that business. Subsection 37(1) provides as follows:

(1) Where a taxpayer carried on a business in Canada in a taxation year and files with his return of income under this Part for the year a prescribed form containing prescribed information, there may be deducted in computing his income from the business for the year such amount as he may claim not exceeding the amount, if any, by which the aggregate of

(a) the aggregate of all amounts each of which is an expenditure of a current nature made by the taxpayer in the year or in a preceding taxation year ending after 1973

(i) on scientific research and experimental development carried on in Canada, directly undertaken by or on behalf of the taxpayer, and related to a business of the taxpayer,

(ii) by payments to

(A) an approved association that undertakes scientific research and experimental development,

(B) an approved university, college, research institute or other similar institution,

(C) a corporation resident in Canada and exempt from tax under paragraph 149(1)(j),

(D) a corporation resident in Canada, or

(E) an approved organization that makes payments to an association, institution or corporation described in any of clauses (A) to (C)

to be used for scientific research and experimental development carried on in Canada, related to a business of the taxpayer, and provided that the taxpayer is entitled to exploit the results of such scientific research and experimental development, or

. . .

(b) the lesser of

(i) the aggregate of all amounts each of which is an expenditure of a capital nature made by the taxpayer (in respect of property acquired that would be depreciable property of the taxpayer if this section were not applicable in respect of the property, other than land or a leasehold interest in land) in the year or in a preceding taxation year ending after 1958 on scientific research and experimental development carried on in Canada, directly undertaken by or on behalf of the taxpayer, and related to a business of the taxpayer . . . .

[372]        To define the expression "scientific research and experimental development", paragraph 37(7)(b) of the Act refers to the Income Tax Regulations ("Regulations"), as follows:

37(7) Definitions. In this section,

(a) . . .

(b) "scientific research and experimental development" has the meaning given to that expression by regulation.

[373]        It is section 2900 of the Regulations that specifies the meaning of "scientific research and experimental development". It reads in part as follows:

(1) For the purposes of this Part and paragraphs 37(7)(b) and 37.1(5)(e) of the Act, "scientific research and experimental development" means systematic investigation or search carried out in a field of science or technology by means of experiment or analysis, that is to say,

(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,

(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or

(c) development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing, materials, devices, products or processes.

[374]        Subsection 96(1) of the Act sets out the general rules for computing the income of a member of a partnership; it reads in part as follows:

(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;

(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of

(i) each taxable capital gain and allowable capital loss of the partnership from the disposition of property, and

(ii) each income and loss of the partnership from each other source or from sources in a particular place,

for each taxation year of the partnership;

. . .

(e.1) the amount, if any, by which

(i) the aggregate of all amounts determined under paragraphs 37(1)(a) to (c.1) in respect of the partnership at the end of the taxation year

exceeds

(ii) the aggregate of all amounts determined under paragraphs 37(1)(d) to (g) in respect of the partnership at the end of the year

were deducted under subsection 37(1) by the partnership in computing its income for the year;

(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's 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.

[375]        The above provisions of sections 37 and 96 of the Act show that a member is entitled, inter alia, to deduct his or her share of a loss incurred by a partnership that results from the deduction of expenditures of a current or capital nature made on scientific research and experimental development related to its business. Section 96 in particular can apply here, of course, only if the Commu-Sys Enr. and Cablotel Enr. groups were partnerships at the relevant time.

Were the Commu-Sys Enr. and Cablotel Enr. groups partnerships?

[376]        Given the facts of this case, it seems appropriate to me to begin by determining whether the Commu-Sys Enr. and Cablotel Enr. groups were genuine partnerships, the former in 1991 and the latter in 1992.

[377]        Since the term "partnership" is not defined in the Act, the provincial legal rules governing such groups must be applied to determine whether the groups in this case were indeed partnerships. It is unquestionably Quebec law that applies here.

[378]        The Civil Code of Lower Canada was applicable during the two years at issue pursuant to subsection 4(1) of the Act respecting the implementation of the reform of the Civil Code (1992, c. 57). Although the Civil Code of Québec received assent on December 18, 1991, it did not come into force—with the exception of two articles that are not relevant—until January 1, 1994, as a result of an order by the Quebec government dated May 19, 1993.

[379]        Articles 1830 and 1831 of the Civil Code of Lower Canada set out the essential conditions for a contract of partnership to exist. Those articles read as follows:

Art. 1830. It is essential to the contract of partnership that it should be for the common profit of the partners, each of whom must contribute to it property, credit, skill, or industry.

Art. 1831.Participation in the profits of a partnership carries with it an obligation to contribute to the losses.

Any agreement by which one of the partners is excluded from participation in the profits is null.

An agreement by which one partner is exempt from liability for the losses of the partnership is null only as to third persons.

If any one of these essential conditions is not met, there is no partnership.[15]

[380]        On the question of whether a partnership exists, I consider it helpful to bear in mind what the Supreme Court of Canada stated in Continental Bank Leasing v. Canada, supra. At the bottom of page 317, that Court noted that "[t]he existence of a partnership . . . is also determined by what the parties actually intended". This statement made by the Supreme Court of Canada in a case governed by the common law is, in substance, consistent with the civil law rule that a partnership cannot be presumed to exist if there was no intention to form one. In Reid v. McFarlane (1893), 2 B.R. 130, at pages 136-37, the Quebec Court of Appeal, taking the view that the conditions set out in articles 1830 and 1831 of the Civil Code of Lower Canada—namely a contribution by each partner for their common profit and participation in the profits—were not the only elements essential to the existence of a partnership, stated that, in civil law, a contract of partnership is subject to the essential conditions applicable to contracts generally, as set out in articles 984 et seq. of the Civil Code of Lower Canada:

[TRANSLATION]

Thus, consent is necessary to form a partnership and consent presupposes an intention to make such a contract. Before declaring that a partnership exists, the court must therefore conclude that the parties intended to form one. It is that intention that a court must look for.

[381]        In Le droit civil canadien,[16] at page 183, Pierre Basile Mignault stated the following concerning the essential elements of a partnership:

[TRANSLATION]

It is not enough for there to be reciprocal contributions or even profit sharing; there must also be an intention to enter into a partnership.

[382]        That intention to form a partnership cannot be presumed, and it implies that the parties intend to work together on an equal footing for the success of the common business.[17]

[383]        Commentators have recognized that, in Reid v. McFarlane, supra, the Quebec Court of Appeal conclusively laid down the judicial position on the element of intention.[18]

[384]        Having regard to the legal principles that have just been set out, it is necessary first to examine the terms of the contracts designated as "partnership agreements" that are relevant to this case.

[385]        On December 20, 1991, Jacques Caron and Pierre Lussier signed a "partnership agreement" for the purpose of establishing Commu-Sys Enr. The same two men were its initial members and Mr. Caron was its secretary. As regards Cablotel Enr., the agreement was entered into on May 24, 1992. The initial members were Michel Loranger and Manon Dubois. The agreement was identical to that of Commu-Sys Enr. except for the names of the initial members, the partnership's name, the partnership's secretary and the date of the agreement.

[386]        The first question is whether those two agreements constitute a contract of partnership. I shall refer for illustrative purposes to the agreement establishing Commu-Sys Enr. It is important to look first of all at the main clauses of that agreement:

[TRANSLATION]

Partnership agreement

Between Jacques Caron, Québec,

And                         Pierre Lussier, Québec,

And        Each person who becomes bound by this agreement from time to time following the secretary's acceptance of the subscription and power-of-attorney forms or the transfer forms validly signed and delivered.

In consideration of the reciprocal representations and undertakings set out in this agreement, the parties mutually agree as follows:

1.0            DEFINITIONS

                The following definitions apply to this agreement:

               

                "interest" refers to a member's undivided share in the partnership acquired for each $100 contribution;

"member" refers to any person who has an interest in the partnership in accordance herewith;

                "research and development project" means the scientific research and experimental development project whose purpose is to develop and design a prototype telematics system with a view to optimizing the maintenance of televised information transmission networks in remote areas;

. . .

2.0           FORMATION OF THE PARTNERSHIP

2.1            The parties and the persons who acquire an interest in the partnership agree to form a general commercial partnership, referred to herein as "the partnership".

3.0            STATUS OF MEMBERS

In signing this agreement, each member represents, warrants and agrees with each of the other members that the said member:

3.1            has the necessary capacity and competence to contract and to be bound by this agreement;

3.2            will provide, at the request of any member, proof of his or her status as required by this paragraph;

3.3            was a founder of the partnership along with the other signatories and has the knowledge required for the efficient carrying on of the partnership's business;

3.4            will not transfer or attempt to transfer interests to any other person who is unable to represent and warrant as stipulated in paragraph 3.1;

3.5            will immediately sign all certificates, declarations, instruments and documents required to comply with any statutes or regulations in any jurisdiction in Canada that concern the partnership's formation, continuation and operation;

3.6            is acquainted with research and development and wishes to be actively engaged, on a regular, continuous and substantial basis, in the development of a telematics system that goes beyond current standards for the transmission and management of textual, graphic and technical information (signals, etc.).

4.0            FIRM NAME

                The partnership's firm name is:

COMMU-SYS

                The partnership's address is:

               

                3405 Boulevard Hamel

                Suite 100, Québec, Quebec

                G1P 2J3

5.0            OBJECTIVES OF THE PARTNERSHIP

                The partnership would like to raise sufficient funds to allocate to the research and development project to be carried out by it.

6.0            INTERESTS AND FINANCIAL PROVISIONS

6.1            There is no limit on the number of interests in the partnership; however, the members may set any limit.

6.2            Each member shall pay the partnership $100. The subscription for each interest in the partnership must be accepted by the secretary and shall be payable in the manner indicated on the subscription form with power of attorney, an example of which can be found in Schedule A.

6.3            Each member shall participate, according to his or her share, in the partnership's assets and profits and shall contribute in the same way with respect to any debts and deficits it may incur. However, the loss for each fiscal period shall first be distributed as follows:

(a)            the amount paid by each member for the fiscal period shall be divided by the total amount paid by the members for the period and then multiplied by the total loss for the period, up to a maximum equal to the paid-up capital;

(b)            when the amount paid by the partners during a fiscal period becomes nil, the losses shall be distributed according to the members' shares.

6.4            All of the members shall be jointly and severally liable with respect to the obligations of the partnership.

. . .

7.0            FISCAL PERIOD, ACCOUNTING AND FINANCIAL STATEMENTS

7.1            The partnership's fiscal period shall end on December 31 of each year.

. . .

7.5            In computing its income or loss for any fiscal period for income tax purposes, the partnership undertakes to deduct the maximum amounts that it is able to deduct for that fiscal period.

. . .

8.0            DURATION OF THE PARTNERSHIP

8.1            The partnership shall end on May 31, 1999, unless it is terminated earlier in accordance with this agreement.

9.0            MANAGEMENT OF THE PARTNERSHIP

9.1            The members hereby appoint Jacques Caron as the partnership's secretary, and he hereby accepts that mandate. The secretary's role shall be to run the partnership on the members' behalf. Without limiting the generality of the foregoing, the secretary shall manage the partnership's activities and have authority to commit the sums allocated thereto, hire the necessary staff, sign contracts and instruments relating to those activities and grant scientific research mandates on the partnership's behalf.

9.2            Without limiting the generality of the mandate given under the preceding paragraph, the secretary may, on the partnership's behalf:

(a)            sign any mandate for the execution of research and development projects and represent the partnership in various respects pursuant to such mandate;

(b)            insofar as it is done as a protective measure for the partnership, sign and do anything necessary or useful to enable the research and development projects to be carried out and, where appropriate, to enable the partnership to hold a proprietary interest in the right to exploit and market the intellectual property in the results of the research projects;

. . .

(e)            look after the marketing of any intellectual property resulting from the research and development projects and negotiate agreements in that regard with third parties on the partnership's behalf;

(f)             accept subscriptions for interests in the partnership;

. . .

10.0          MEETINGS OF MEMBERS

10.1          The secretary may call a meeting of the members from time to time. He shall also call a meeting upon receipt of a written request from members holding at least 25 percent (in terms of value) of all the interests held. If the secretary fails or neglects to act on such a request by the members, any member may call the meeting in accordance with the terms hereof.

[387] Clause 6.2 of the agreement provides that each member shall make a contribution and clause 6.3 states that each member shall participate, "according to his or her share, in the partnership's assets and profits and shall contribute in the same way with respect to any debts and deficits it may incur". In clause 2.1 it is provided that the "parties and the persons who acquire an interest in the partnership agree to form a general commercial partnership".

[388]        Given the terms of the agreement, there is no question that it is a contract of partnership. Clause 6.2 requires the partners to make a contribution. Clause 6.3 expressly provides for participation in the profits. The same is true of losses, as clause 6.3 also states that each member "shall contribute . . . with respect to any . . . deficits". That part of clause 6.3 amounts, in substance, to sharing in losses, since deficits imply a situation in which expenditures exceed income. Clause 2.1 of the agreement contains an express provision concerning the parties' intention to form a general partnership.

[389]        It is not disputed that the way the parties themselves characterize an agreement is not decisive. What must be determined is whether the parties to the agreement in this case actually behaved as if a partnership existed.

[390]        The Court must therefore review the evidence to ascertain whether the parties really intended to form a partnership.

[391]        The appellant said that Commu-Sys Enr. was established to form [TRANSLATION] "a group of people to amass funds to have research done". He admitted that he did not know the other investors in the group, aside from his co-workers who were members. He expressly admitted that, if there had been no tax benefits, [TRANSLATION] "we would not have created the partnership to invest; the partnership would not have existed". He would not have invested if there had been no tax refund. The appellant did not participate in any decisions concerning the partnership's business.

[392]        Moreover, although they received millions of dollars from investors, the groups in question and their members, by and large, did not really care about the progress of the work or the results achieved. The members of the groups did not have any control, even in a general way, over the progress of the research work done by Omzar Technologies Inc. The members, including the appellant, did not participate in making any decisions relating to the groups' activities. They were not involved in the various stages of the research work. The investors merely followed Omzar Technologies Inc.'s instructions. The groups as such were totally inactive.

[393]        On the evidence, I conclude that the investors in question were merely seeking substantial tax benefits and never demonstrated any intention of working together to undertake scientific research and experimental development activities. In short, they had no intention of forming a genuine partnership.

[394]        In addition, no business was carried on either by the appellant or by Commu-Sys Enr. and Cablotel Enr. in relation to the carrying out of the research work. This case is similar to Bendall v. The Queen, supra, in which Judge Bonner stated the following:

                The issue here is whether the appellant carried on a "business" within the meaning of the Income Tax Act ("Act"). That word is to be given its ordinary meaning and that meaning does not include a tax avoidance scheme which is nothing more than a pale imitation of a business. The appellant was not involved in a commercial activity either directly or through Omni as his agent. The objective evidence regarding the manner in which the scheme operated and the actions and inaction of the parties point clearly to a conclusion that both the appellant and the promoters of the scheme were indifferent to the marketing of the speed reading course and to the earning of profits from that activity. There can be no doubt that what was sought was a tax deduction which would result in a refund part of which was to go to enrich the promoters of this scheme and the remainder of which was to go to the appellant.

                                                                                                                [Footnote omitted.]

[395]        In the case at bar, no steps or requests whatsoever were taken or made to ensure that the project would be profitable. I cannot find anything suggesting that the groups in question could have been profitable. No market research survey had been done. No marketing plan had been developed. Moreover, the structure put in place was set up solely for tax purposes, as shown by the "participation program" that was established only to create the illusion that the government's criteria were being met.

[396]        Nor was profit the groups' objective. Profit is an element essential to the existence of a partnership, as can be seen from article 1831 of the Civil Code of Lower Canada. This profit aspect was stressed in Ryan v. M.N.R., 92 DTC 2036. Albert Bohémier and Pierre-Paul Côté, among others, have recognized that a partnership can be formed only for the purpose of making a profit.[19] In making that assertion, those authors relied on Bourboin, supra, in which Rivard J.A. of the Quebec Court of Appeal noted that three elements are essential for a partnership to exist, one of which is the pursuit of the common goal of making a profit.

[397]        I therefore conclude that the groups in question were not partnerships for the purposes of the Civil Code of Lower Canada on the ground that the members did not intend to form a partnership and that the groups were moreover not formed with profit in mind.

Was the appellant a limited partner?

[398]        If, contrary to what I think, the groups in question were genuine partnerships, I must now consider the nature of those partnerships.

[399]        General partnerships are defined as follows in article 1865 of the Civil Code of Lower Canada:

General partnerships are those contracted for the purpose of carrying on business under a collective name or firm consisting ordinarily of the names of the partners, or of one or more of them, all of whom are jointly and severally liable for the obligations of the partnership.

[400]        If the two groups in question here were partnerships under the Civil Code of Lower Canada, there seems to me to be no doubt that they were general partnerships: the members' liability was unlimited, as can be seen from clause 6.4, quoted above, which I set out again here for convenience:

6.4            All of the members shall be jointly and severally liable with respect to the obligations of the partnership.

[401]        I must therefore consider whether a member of a general partnership under the Civil Code of Lower Canada can be a limited partner within the meaning of the Act.

[402]        Before looking at the technical rules for determining whether a member is a limited partner for the purposes of the Act, it is perhaps worth stating at the outset that, prior to the 1988 reform, limited partnerships were often used to finance scientific research and experimental development. Limited partners in such partnerships in many instances benefited, in relation to their scientific research and experimental development expenditures, from tax deductions that were greater than their contributions. However, those same partners were liable for the partnership's debts to third parties only to the extent of their contributions. With the 1988 reform, Parliament prohibited limited partners, through the combined effect of paragraph 96(1)(g) and subsection 96(2.4) of the Act, from deducting any loss sustained by a limited partnership as a result of scientific research and experimental development expenditures. This is why it is relevant to determine whether the appellant was a limited partner during the period at issue.

[403]        Based on the parties' arguments and the evidence, the appellant cannot be considered to have been a limited partner in the two partnerships in question under the Income Tax Act unless subsection 96(2.4) of the Act is applicable to him. That subsection reads as follows:

(2.4) For the purposes of this section and sections 111 and 127, a taxpayer who is a member of a partnership at a particular time is a limited partner of that partnership at that time if his partnership interest is not an exempt interest at that time (within the meaning assigned by subsection (2.5)) and if, at that time or within three years after that time,

(a) by operation of any law which governs the partnership arrangement, the liability of the taxpayer in his capacity as a member of the partnership, is limited;

(b) the taxpayer or a person with whom the taxpayer does not deal at arm's length is entitled to receive an amount or obtain a benefit that would be described in paragraph (2.2)(d) if it were read without reference to subparagraphs (ii) and (vi) thereof;

(c) one of the reasons for the existence of the taxpayer who owns the interest

(i) may reasonably be considered to be to limit the liability of any other person with respect to that interest, and

(ii) may not reasonably be considered to be to permit any person who has an interest in the taxpayer to carry on his business (other than an investment business) in the most effective manner; or

(d) there is an agreement or other arrangement for the disposition of an interest in the partnership and one of the main reasons for the agreement or arrangement may reasonably be considered to be to attempt to avoid the application of this subsection to the taxpayer.

[404]        First of all, a person who has an exempt interest is not a limited partner. It was not argued that the interest the appellant may have had in the partnerships was an exempt interest within the meaning of subsection 96(2.5) of the Act. Paragraphs (a), (b), (c) and (d) of subsection 96(2.4) of the Act are the only provisions that may be applicable to the appellant.

[405]        It follows that a member is a limited partner at a particular time if one or more of the conditions set out in paragraphs 96(2.4)(a), (b), (c) and (d) of the Act are met at that time or within three years after that time.

[406]        Here, in view of the facts of this case, it seems to me that only the application of paragraph 96(2.4)(b) need be considered. That paragraph refers to paragraph 96(2.2)(d) but states that it must be read without reference to subparagraphs (ii) and (vi) thereof.

[407]        The relevant part of paragraph 96(2.2)(d) of the Act reads as follows:

96(2.2) For the purposes of this section . . . the at-risk amount of a taxpayer, in respect of a partnership of which he is a limited partner, at any particular time is the amount, if any, by which the aggregate of

. . .

exceeds the aggregate of

. . .

(d) where the taxpayer . . . is entitled, either immediately or in the future and either absolutely or contingently, to receive or obtain any amount or benefit, whether by way of reimbursement, compensation, revenue guarantee or proceeds of disposition or in any other form or manner whatever, granted or to be granted for the purpose of reducing the impact, in whole or in part, of any loss that the taxpayer may sustain by reason of being a member of the partnership or by reason of holding or disposing of an interest in the partnership, the amount or benefit, as the case may be, that the taxpayer . . . is or will be so entitled to receive or obtain, except to the extent that . . . the entitlement arises

. . .

(iv) by virtue of an agreement under which the taxpayer may dispose of the partnership interest for an amount not exceeding its fair market value, determined without reference to the agreement, at the time of the disposition.

It follows from paragraphs 96(2.4)(b) and 96(2.2)(d) (subject to the restriction I have just referred to in the case of the latter) that a member is a limited partner where, at the time in question or within three years after that time, the member is entitled to receive or obtain, in any form or manner whatever, any amount or benefit referred to in paragraph 96(2.2)(d) if that amount or benefit is granted or to be granted "for the purpose of reducing the impact, in whole or in part, of any loss that the taxpayer may sustain by reason of being a member of the partnership or by reason of holding or disposing of an interest in the partnership".

[408]        According to the respondent, the appellant had such an entitlement because it [TRANSLATION] "was anticipated and planned, at least tacitly, that the investors would dispose of their shares for a fixed amount exceeding their fair market value, which amount was determined in advance without reference to the value at the time of the disposition". However, the appellant asserted that no representation was made to him—either before or at the time he purchased his shares in Commu-Sys Enr. and Cablotel Enr.—that his shares would be redeemed. He also testified that, at the end of the summer of 1993, he received an offer from Loron Inc. to buy his shares in Commu-Sys Enr. and an offer from Noreco Inc. to buy his shares in Cablotel Enr. The agreements by which the appellant transferred the shares in question to Loron Inc. and Noreco Inc. are dated December 20, 1993, and February 16, 1994, respectively. I am reproducing below the main clauses of the transfer agreement between the appellant and Loron Inc., the appellant's transfer agreement with Noreco Inc. being for all practical purposes identical:

[TRANSLATION]

TRANSFER AGREEMENT ENTERED INTO THIS 20TH DAY OF DECEMBER 1993

. . .

1.              I, the undersigned, a member of Commu-Sys (hereinafter "the partnership"), hereby sell, assign and transfer to:

Loron Inc., 6555 Boulevard Métropolitain est, Suite 502, St-Léonard, Quebec H1P 33

(the transferee), 250 shares in the partnership, representing all my rights and interest as a member of the partnership, including but not limited to all rights in the intellectual property arising out of the research and development project carried out for the partnership and the right to exploit and market any result of the project, and I agree and undertake to sign and give to the transferee any document that is necessary or useful to effect a valid transfer of the said shares and any rights associated therewith.

2.              This sale is being made in consideration of the sum of twelve thousand five hundred dollars ($12,500.00), which represents, to the best of the parties' knowledge, the fair market value of the shares sold, the said consideration being payable as follows:

-                reduction, by way of compensation, of a loan made by the transferee to the transferor, the said loan having been evidenced in writing in a document dated December 20, 1991.

3.              Transferor's declaration and warranty

                The transferor declares and warrants to the transferee that he is the sole owner of the shares transferred hereunder and that he holds a clear and absolute title to the shares by virtue of which title he is able to transfer them to the transferee free and clear of any option, pledge or other security whatsoever.

4.              . . .

5.              . . .

[409]        Given the facts of this case, I must determine whether, in the case of the redemption of the appellant's shares in Commu-Sys Enr. and Cablotel Enr. by Loron Inc. and Noreco Inc., the consideration for the share transfer—which consideration consisted in the cancellation of the appellant's debts resulting from the loans made to him by those two finance companies—could have been an amount or benefit for him under paragraphs 96(2.4)(b) and 96(2.2)(d) of the Act. The extinguishment of the appellant's debts to the two finance companies could have constituted a benefit for him if it was possible that his shares in Commu-Sys Enr. and Cablotel Enr. were worth less than the debts in question.

[410]        However, there are exceptions to the rule set out in paragraph 96(2.2)(d) of the Act. The Court's attention was drawn only to subparagraph (iv) of that paragraph, which I cite here again for ease of analysis:

(iv) by virtue of an agreement under which the taxpayer may dispose of the partnership interest for an amount not exceeding its fair market value, determined without reference to the agreement, at the time of the disposition

[411]        It is therefore necessary to determine whether the transfer agreement dated December 20, 1993, between the appellant and Loron Inc. and the one dated February 16, 1994, between the appellant and Noreco Inc. were agreements under which the appellant could dispose of his shares in Commu-Sys Enr. and Cablotel Enr. for an amount that could have exceeded their fair market value at the time of the disposition.

[412]        The answer to this question must be affirmative. Under the agreements, the appellant was able to dispose of his shares in Commu-Sys Enr. and Cablotel Enr. for a consideration¾the word "amount" used in subparagraph 96(2.2)(d)(iv) being very broad in meaning given the definition in subsection 248(1) of the Act¾that could have exceeded their market value at the time of the disposition. As consideration for the disposition of the appellant's shares, the agreements provided for the extinguishment of the two debts (resulting from the loans made by Loron Inc. and Noreco Inc.), the principal amount of which totalled $25,500. The agreements did not provide for any method of valuing the appellant's shares, nor did they establish a ceiling that could have been the fair market value of the shares at the time of the disposition. The parties did not in effect establish a ceiling based on the market value of the shares just by stating in each agreement that the sale was being made for the amount indicated, "which represent[ed], to the best of the parties' knowledge, the fair market value of the shares sold". The agreements did not provide that the appellant was required to repay any excess amount if the appropriate authority determined in the final analysis that the amount set out in either agreement exceeded the market value of the shares to which the relevant agreement applied. It was therefore possible under the agreements for the consideration received for the disposition of the appellant's shares to exceed their market value at the time of the disposition.

[413]        I do not think that I need consider whether, in the present case, the consideration received by the appellant on December 20, 1993, and February 16, 1994¾that is, the extinguishment of his debts to Loron Inc. and Noreco Inc.¾actually exceeded the market value of the shares of which he disposed. I must be guided solely by the wording of the agreements, which, in my opinion, did not preclude the possibility of the consideration's exceeding the market value of the appellant's shares at the time of the disposition.

[414]        It is therefore my view that the exception set out in subparagraph 96(2.2)(d)(iv) of the Act cannot be relied on by the appellant in this case.

[415]        Quite apart from the technical application of subsections 96(2.4) and (2.2) of the Act, it is clear from the evidence that the appellant behaved like a limited partner by not participating in decisions concerning the management of Commu-Sys Enr. and Cablotel Enr. Moreover, his liability was in fact limited to his contribution, that is, the contribution he actually made to the two partnerships in question. That contribution corresponded precisely to the money he borrowed from the credit union referred to above.

[416]        I therefore conclude that the appellant must be considered a limited partner within the meaning of paragraphs 96(2.4)(b) and 96(2.2)(d). As a consequence, I do not have to look at the application of the other subparagraphs of subsection 96(2.4) of the Act.

Entitlement to the investment tax credit

[417]        It remains to be determined whether the appellant is entitled to the investment tax credit for the scientific research and experimental development expenditures made by Commu-Sys Enr. and Cablotel Enr. during the years at issue, assuming that those groups were genuine partnerships. It was not argued that subsection 127(5) of the Act, which is a general provision concerning investment tax credits, could apply in this case.

[418]        Subsection 127(8) of the Act sets out details concerning the investment tax credit that apply generally to the members of a partnership.

[419]        That subsection provides that a member of a partnership may be allotted the appropriate share of a determined amount in respect of the investment tax credit to which a partnership could be entitled if it were a person and its fiscal period were its taxation year. The determined amount in question is established by referring to the definition of "investment tax credit" in subsection 127(9) of the Act. The applicable part of that definition is one of the following: paragraph (a), which must be read without reference to subparagraph (iii) thereof, paragraph (b) or, finally, paragraph (e.1), a portion of which is to be omitted. However, subsection 127(8) states that, in the case of a specified member, paragraph (a) of the definition of "investment tax credit" must also be read without reference to subparagraph (ii) thereof. Subparagraph (a)(ii) of the definition refers to "a qualified expenditure made by [a taxpayer] in the year". The term "qualified expenditure" is defined as follows in subsection 127(9) of the Act:

. . .

"qualified expenditure" means an expenditure in respect of scientific research and experimental development made by a taxpayer after March 31, 1977 that qualifies as an expenditure described in paragraph 37(1)(a) or subparagraph 37(1)(b)(i), but does not include

(a) a prescribed expenditure, nor

(b) in the case of a taxpayer that is a corporation, an expenditure specified by the taxpayer for the purposes of clause 194(2)(a)(ii)(A).

[420]        The concept of "prescribed expenditure" referred to in the definition of "qualified expenditure" is explained in section 2902 of the Regulations.

[421]        It follows from the foregoing that a specified member is not entitled to any investment tax credit for scientific research and experimental development expenditures.

[422]        It must therefore be determined whether, in this case, the appellant was a "specified member" within the meaning of subsection 248(1) of the Act. The definition of that term reads as follows:

"specified member" of a partnership in a fiscal period or taxation year of the partnership, as the case may be, means

(a) any member of the partnership who is a limited partner (within the meaning assigned by subsection 96(2.4)) of the partnership at any time in the period or year, and

(b) any member of the partnership, other than a member who is

(i) actively engaged in those activities of the partnership business which are other than the financing of the partnership business, or

(ii) carrying on a similar business as that carried on by the partnership in its taxation year, otherwise than as a member of the partnership,

on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which he is a member of the partnership.

[423]        The term "specified member" means either a limited partner within the meaning of subsection 96(2.4) of the Act or a member who is not actively engaged in the activities of the partnership business or who is not carrying on a business of the type contemplated by subparagraph (b)(ii) of the definition. Since I have concluded that the appellant was a limited partner within the meaning of subsection 96(2.4), it follows that he was a specified member under paragraph (a) of the definition of "specified member" in subsection 248(1) of the Act.

[424]        It is also my view that he was a specified member under paragraph (b) of the definition. It is true, as the appellant argued, that a member is not a specified member just because he or she is not personally engaged in scientific research and experimental development activities, especially where that work is entrusted to a subcontractor. Paragraph (b) of the definition of "specified member" expressly states that an individual is a specified member if he or she is not actively engaged in the activities of the partnership business. On the basis of subparagraph (b)(i) of that definition, it can be concluded that an individual is a specified member where he or she does not monitor the research work, inquire about the work's progress and advancement and any fairly important administrative problems that may arise in carrying out the research, or participate in any way in decisions concerning those matters. That is indeed the case of the appellant here. His participation in the activities of the two alleged partnerships was purely symbolic and artificial. Moreover, at the relevant time, he was not carrying on a business that satisfied the criterion set out in subparagraph (b)(ii) of the definition of "specified member".

[425]        With regard to the 1991 taxation year, it was also argued for the appellant that he cannot be blamed for not becoming a member of Commu-Sys Enr. until December 31, 1991. On this point, the onus was on the appellant to show that his participation differed from the type contemplated by the definition of "specified member". He cannot claim benefits under the Act in respect of a particular year if he has done nothing to be entitled to them.

[426]        I therefore conclude that the appellant was during the years at issue a specified member of Commu-Sys Enr. and Cablotel Enr. within the meaning of the Act under both paragraph (a) and paragraph (b) of the definition of "specified member", assuming, of course, that Commu-Sys Enr. and Cablotel Enr. were genuine partnerships. He is therefore not entitled to the investment tax credit provided for in subsection 127(8) of the Act.

Conclusions

[427]        Accordingly, I conclude as follows in these two appeals:

1.              The appellant is not entitled to deductions for the losses incurred by Commu-Sys Enr. and Cablotel Enr. during the 1991 and 1992 taxation years as a result of scientific research and experimental development expenditures on the ground that those groups were not genuine partnerships. Assuming that they were genuine partnerships, the appellant is not entitled to the deductions because he was a limited partner within the meaning of the Act.

2.              The appellant is not entitled to the investment tax credit for the scientific research and experimental development expenditures made by Commu-Sys Enr. and Cablotel Enr. during the 1991 and 1992 taxation years on the ground that those groups were not genuine partnerships. Assuming that they were genuine partnerships, he is not entitled to the credit because he was a specified member within the meaning of the Act.

[428]        The assessments made by the Minister of National Revenue against the appellant for the 1991 and 1992 taxation years as regards his interest in Commu-Sys Enr. and Cablotel Enr. are therefore correct.

[429]        During the hearing of these appeals, the parties informed the Court that they had come to an agreement under which each would pay their own costs.

[430]        The appeals from the assessments for the 1991 and 1992 taxation years are therefore dismissed without costs.

Signed at Ottawa, Canada, this 12th day of March 2001.

"Alban Garon"

C.J.T.C.C.

Translation certified true on this 31st day of July 2001.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

96-2732(IT)G

96-3493(IT)G

BETWEEN:

RICHARD McKEOWN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on common evidence on April 27, 28, 29 and 30 and May 1, 1998, May 11, 14 and 15, 1998, June 15, 17, 18 and 19, 1998, September 28, 29 and 30, 1998, November 2, 3, 4 and 5, 1998, December 1, 2, 3 and 4, 1998, February 3, 4 and 5, 1999, October 14 and 15, 1999, and October 18, 19, 20, 21 and 22, 1999, at Montréal, Quebec, by

the Honourable Alban Garon

Chief Judge

Appearances

Counsel for the Appellant:          Jean-Maurice Gagné

Counsel for the Respondent:      Pierre Cossette

                                                Christine Calvé

                                                Johanne Boudreau

JUDGMENT

          The appeals from the assessments made under the Income Tax Act for the 1991 and 1992 taxation years are dismissed without costs.

Signed at Ottawa, Canada, this 12th day of March 2001.

"Alban Garon"

C.J.T.C.C.

Translation certified true

on this 31st day of July 2001.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

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