ALLAN GARBER, Appellant, v. HER MAJESTY THE QUEEN,, 2014 TCC 1

Docket: 2004-2787(IT)G BETWEEN: ALLAN GARBER, Appellant, and HER MAJESTY THE QUEEN, Respondent , ____________________________________________________________________ Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013 and May 15, 2013, at Toronto, Ontario By: Associate Chief Justice E.P.

Rossiter Appearances : Counsel for the Appellants: Howard Winkler Counsel for the Respondent: Gordon Bourgard, John Shipley and Julian Malone ____________________________________________________________________ JUDGMENT The appeals from the reassessments made under the Income Tax Act for the 1984, 1985, 1986 and 1987 taxation years are dismissed, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Ontario, this day of 7th rd day of January, 2014. “E.P. Rossiter” Rossiter A.C.J. Docket: 91-1946(IT)G BETWEEN: GEOFFREY D. BELCHETZ, Appellant, and

HER MAJESTY THE QUEEN, Respondent, ____________________________________________________________________ Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013 and May 15, 2013, at Toronto, Ontario By: Associate Chief Justice E.P.

Rossiter Appearances : Counsel for the Appellants: Howard Winkler Counsel for the Respondent: Gordon Bourgard, John Shipley and Julian Malone ____________________________________________________________________ JUDGMENT The appeals from the reassessments made under the Income Tax Act for the 1986, 1987 and 1988 taxation years are dismissed, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Ontario, this 7th day of January, 2014. “E.P. Rossiter” Rossiter A.C.J.

Docket: 91-1816(IT)G 91-509(IT)G AND BETWEEN: LINDA LECKIE MOREL, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard during the weeks of January 10, 2012; February 6, 2012; February 14, 2012; February 21, 2012; February 27, 2012; March 26, 2012; April 24, 2012; May 15, 2012; June 4, 2012; June 11, 2012; October 2, 2012; October 9, 2012; October 30, 2012, November 5, 2012; December 4, 2012; December 10, 2012; January 22, 2013; February 5, 2013; February 12, 2013; April 16, 2013; April 29, 2013

and May 15, 2013, at Toronto, Ontario By: Associate Chief Justice E.P. Rossiter Appearances : Counsel for the Appellants: Howard Winkler Counsel for the Respondent: Gordon Bourgard, John Shipley and Julian Malone ____________________________________________________________________ JUDGMENT The appeals from the reassessments made under the Income Tax Act for the 1985, 1986, 1987 and 1988 taxation years are dismissed, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Ontario, this 7th day of January, 2014. “E.P. Rossiter” Rossiter A.C.J.

Citation: 2014TCC1 Date: 20140107 Docket: 2004-2787(IT)G BETWEEN: ALLAN GARBER, Appellant, and HER MAJESTY THE QUEEN, Respondent, Docket: 91-1946(IT)G AND BETWEEN: GEOFFREY D. BELCHETZ, Appellant,

and HER MAJESTY THE QUEEN, Respondent, Docket: 91-1816(IT)G 91-509(IT)G AND BETWEEN: LINDA LECKIE MOREL, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Rossiter, A.C.J. Index A: Overview .. 4 B: The Appellants’ Claims . 8 1. Allan Garber, 2004-2787(IT)G: The S/Y Garbo LP (Type 1 Limited Partnership) 9 Expenses Claimed as of Final Submissions - Type 1 Partnership - The S/Y Garbo LP—Allan Garber 10 2.

Linda Leckie Morel, 1991-1816(IT)G, 1991-509(IT)G: The S/Y Midnight Kiss LP (Type 2 Limited Partnership) 12 Expenses Claimed as of Final Submissions--Type 2 Partnership--S/Y Midnight Kiss LP--Linda Leckie-Morel 14 3. Geoffrey Belchetz, 1991-1946(IT)G: The S/Y Close Encounters LP (Type 3 Limited Partnership) 15 Expenses Claimed as of Final Submissions--S/Y Close Encounters LP--Geoffrey Belchetz . 16 C: The Respondent’s Grounds Relied on for Disallowance . 18 1. Sections 3 and 4 of the Income Tax Act 18 2. Sham .. 18 3. Expenses Not Incurred . 18 4. Timing of Expenses Deducted . 18 5. No Loans . 19 6.

S/Y Garbo Capital Cost Allowance Restricted . 19 7. S/Y Garbo Interest Limitation . 19 8. S/Y Close Encounters LP - At-Risk Rules . 19 9. Section 245(1) 19

Section 67 . 20

D: Issues . 20 E: Transactional Facts . 21 1. The Three Types of Limited Partnerships . 21 2. Investment in a Limited Partnership . 24 3. Charter Operations Agreements between the Limited Partnerships and OCGC .. 27 F: The Factual

Summary . 28 1. Early Days . 28 2. Marketing and Sale of Limited Partnerships . 29 3. Development and Marketing of Yacht Chartering Business . 32 4. Planning, Design, Construction, or Acquisition of Yachts . 34

a) General 34

b) The Yachts . 34

c) The S/Y First Impressions . 34

d) The S/Y Garbo . 35

e) The Ondine (the S/Y Great Gatsby) 36

f) The Med 86 . 36

g) The S/Y Gable . 36

h) Other contracts . 37 5. The CRA Audit and Investigation . 37 G: Misrepresentations: A Fraud from Beginning to End . 39

a) The Offering Memoranda . 42

b) Misrepresentations to Professionals . 54

c) Misrepresentations in OCGC Materials: The “Fleet of Yachts” and the “Gourmet Commissary” 59

d) Financial Statements for Limited Partnerships . 61

e) Misrepresentations regarding Foreign Entities . 70

f) More False or Backdated Documents . 72

g) Further Misrepresentations to Investors . 73

h) Building and Purchasing Yachts . 77

i) Starlight Charter 90

j) Other OCGC Businesses . 95 H: Relevant Law and Analysis . 100 1. Did the three Limited Partnerships constitute a source of income pursuant to sections 3 and 4 of the Income Tax Act and capable of suffering a loss under sections 3, subsection 9(2), and

section 96? 100

a) Is there a Source of Income for the Purposes of the Income Tax Act? . 100

b) Were the Limited Partnerships Genuine Partnerships Carrying on a Business in Common with a View to Profit? . 131 2. If the Limited Partnerships are determined to constitute an income source, did they actually suffer the losses claimed by the Appellants? . 142 3. If the Limited Partnerships actually suffered the losses claimed, did they properly compute the timing of partnership losses claimed for the taxation years in question? . 145

a) The Law .. 145

b) Analysis . 146 4. If there was a source with genuine losses taken at the correct times, what is the amount of capital cost allowance, if any, that the S/Y Garbo Limited Partnership is entitled to take? . 146

a) The Law .. 146

b) Analysis . 147 5. Did each of the Appellants incur the interest expenses claimed pursuant to paragraphs 18(1)(

a) and 20(1)(

c) of the Income Tax Act? . 147

a) The Law .. 147

b) Analysis . 150 6. Other Issues . 151

a) The At-Risk Rules and the S/Y Close Encounters Limited Partnership . 151

b) Section 67 . 153 I: Conclusion . 155 J: Costs . 155 A: Overview [ 1 ] The Appellants subscribed through Overseas Credit and Guaranty Corporation (the “OCGC”) for one of three types of Limited Partnerships. OCGC promoted and marketed the Limited Partnerships as an opportunity to invest in a luxury yacht chartering business structured to provide very attractive tax advantages to investors with limited personal risk. OCGC acted as the general partner for each Limited Partnership.

Einar Bellfield incorporated OCGC in 1984 as its sole shareholder and was the operating mind of the entity. [ 2 ] The investment involved each Limited Partnership purchasing a luxury yacht from OCGC that was to be delivered by a specified date. As the general partner, OCGC was committed to building, marketing, and managing a luxury yacht chartering business known as “Fantaseas” that would market and manage the yacht fleet of the Limited Partnerships. OCGC contracted to provide each Limited Partnership with various goods and services, in return for certain fees from the Limited Partnership.

The investment plan anticipated significant start-up costs, with profits projected only in the long-term. However, as a Limited Partnership’s expenses exceeded its revenue, the losses would flow down and be divided amongst the investors in each Limited Partnership and deductible from their respective incomes. [ 3 ] The Fantaseas charters targeted the high-end luxurious yacht chartering market. In this market at the time, generally only an entire yacht could be chartered. Fantaseas aimed at an unfilled market niche: the chartering of individual cabins in luxury yachts.

The Fantaseas concept was that each Limited Partnership yacht of a 60-foot catamaran or an 80 feet plus monohull would have four equally sized staterooms available individually for charter, along with crew quarters. Charter guests would enjoy gourmet food, excellent full- staff service, and upscale accommodations. Charters were to alternate between the Caribbean and the Mediterranean, according to the season. [ 4 ] Starlight Canada Ltd., a company related to OCGC, was to coordinate the sale and marketing of the yacht chartering business.

An additional company related to OCGC, Fabu D’Or, had the stated purpose of developing a commissary to prepare gourmet food within the luxurious standards of the Fantaseas brand. OCGC had made commitments to 36 Limited Partnerships to provide yachts of certain specifications, but the how, where, and when the yachts would be built and delivered changed several times. Depending on the timing, the yachts were supposed to be built by companies in France (Dynamique, Chantier Yachting France, or Maxi-Yachts), or at a site in Picton, Ontario.

Various naval architects and yacht builders participated at different points to design and build the yachts promised by OCGC. As it turned out, only two yachts that met the Fantaseas standards were ever purportedly built for the Canadian Limited Partnerships. [ 5 ] The entire luxury yacht chartering investment opportunity and the Fantaseas concept were the brainchild of Einar Bellfield.

The marketing and promotion of investment opportunities in the luxury yacht Limited Partnerships was one of OCGC’s main investment projects, although the corporation also developed and sold other investment opportunities whose main premise appeared to have been that they were of a tax advantageous nature.

[ 6 ] The luxury yacht Limited Partnerships were promoted by various accountants, lawyers, and others, as tax shelters to their higher income-earning clients. The promoters received a commission for each investor that subscribed. The promoters heavily emphasized the tax advantages offered by the investment, which was the focus of much of the promotional material provided to potential investors. The tax attractions included the flow-through of losses from the substantial expenses incurred during the start-up phase before any revenue was generated, as well as the ability to claim depreciation on each yacht.

For example, the Offering Memorandum for the S/Y Garbo Limited Partnership provided an overview of the tax advantageous nature of the investment opportunity as follows: The OCG Corporation is dedicated and organized to provide the taxpayer with attractive tax deals. Tax investments differ from other investments and they should be evaluated with certain objectives in mind. When considering a regular investment, the basic concerns are risk versus return.

When evaluating tax investment, your main concerns are maximum capital depreciation with a low or no-risk exposure, and besides, there should be a good chance to obtain a reasonable return on invested capital, plus a capital appreciation further down the line. [1] … Due to this investment’s initial high deductions and the declining capital cost allowance available to purchasers of marine vessels, the calculation of owners [sic] net income may be substantially influenced. [2] [ 7 ] The structure of the transaction was tax advantageous for the investor as explained by OCGC in the Offering Memorandum for the S/Y Garbo Limited Partnership: The Financing Program has been tailored by OCG Corporation to maximize the available tax benefits for an Investor and at the same time eliminate any cash outlay by the purchaser of a Unit. [3] [ 8 ] During the taxation years in question, from 1984 until 1988, depending on the Limited Partnership type, the investors claimed their share of their Limited Partnership’s losses using the yearly loss schedules provided by OCGC.

Investors also claimed their interest payments on a promissory note, which was part of the consideration on the purchase of a unit, as well as professional fees paid upon acquisition, in the year of subscription. [ 9 ] In approximately April 1986, losses claimed by one Limited Partnership investor came to the attention of the Canada Revenue Agency (the “CRA”). [4] An audit was commenced in October 1986.

The CRA’s Tax Avoidance department became involved and ultimately the CRA’s Special Investigations department ended up conducting, in conjunction with the RCMP, search and seizures as well as interviews of staffers and investors of OCGC. In the end, the CRA came to the belief that OCGC was engaged in fraudulent activity in all the partnerships. The Minister of National Revenue disallowed all losses, interest, and professional fees claimed by the investors. [ 10 ] The CRA’s theory was that fraud had occurred by or through OCGC. Criminal charges were prosecuted.

In 1994, Einar Bellfield was charged with two counts of fraud and two counts of uttering false documents. Mr. Bellfield’s right hand man, Osvaldo Minchella, was charged with the same counts several months later. A jury found both Mr. Bellfield and Mr. Minchella guilty on all charges after a trial before the Ontario Superior Court of Justice. These convictions were upheld on appeal and leave to appeal to the Supreme Court of Canada was denied. Another player, Pierre Rochat, was arrested in 1995.

He pled guilty to uttering forged documents in 1996, and was sentenced to six months in prison. [ 11 ] Of the over 600 investors that were reassessed, approximately 300 settled with the CRA. The great majority of the investors however, proceeded with appeals before the Tax Court of Canada.

The Appellants before the Court are representative of those appeals by other Appellants, save and except for a few that have decided not to be bound by the result of these appeals. [ 12 ] The central issue is whether each Limited Partnership constituted a genuine yacht charter business between 1984 and 1988, the range of taxation years in which the Appellants claimed Limited Partnership losses, interest, and professional fees relating to their investment in a Limited Partnership unit.

If the Limited Partnerships were engaged in genuine businesses, then there was a source of income, and the expenses claimed may be deductible depending on the resolution of other issues. [5] If instead, I conclude that the

Appellants were defrauded from the very beginning of their investment, then the Limited Partnership cannot constitute an income source for the Appellants and no amounts claimed are deductible. [ 13 ] These appeals have a lengthy procedural history. Notices of Assessment and/or Reassessment were first issued in 1989 and/or 1990. Notices of Objection were filed in those same years. The appeals were held in abeyance for many years pending negotiations between the litigants and the final outcome of Mr. Bellfield and Mr. Minchella’s trials and appeals in the criminal process.

The criminal matters ultimately came to a close in 2004. A number of Motions came before the Tax Court of Canada regarding these appeals and caused further delays. [ 14 ] The taking of evidence began on December 6, 2010 under the General Procedure Rule 119 over twenty years after the first Notices of Assessment were issued. The trial proper began on January 11, 2012, and in total, over 62 days of evidence was given with some 34 witnesses plus some 23 Agreed Statements of Facts.

The hearing of the evidence occurred over an extended period to facilitate availability of witnesses and to allow for a better organization and presentation of evidence by both. As an aside, counsel for both parties worked together most impressively and cooperatively in most instances to put evidence presented before the Court that included tens of thousands of pages of multiple volumes of exhibits that by my count has accumulated to the point of filling over 100 bankers boxes.

B: The Appellants’ Claims [ 15 ] Four appeals were heard on common evidence with each of the three Appellants having invested in one of three Limited Partnership types. The 36 Limited Partnerships in which units were sold were divided into three types according to whether they were marketed and purchased in 1984, 1985, or 1986. [ 16 ] The Type 1 Limited Partnerships were marketed and sold by OCGC in 1984. The 1984 Limited Partnership before the Court is the "S/Y Garbo Limited Partnership" (the “S/Y Garbo LP”).

The Appellant Allan Garber purchased one of the 24 units in the S/Y Garbo LP and held the unit in trust for himself, Stacy Mitchell and David Sugarman. [ 17 ] The following year, in 1985, OCGC marketed and sold Type 2 Limited Partnerships. The 1985 Limited Partnership before the Court is the "S/Y Midnight Kiss Limited Partnership" (the “S/Y Midnight Kiss LP”). The appellant Dr. Linda Leckie-Morel purchased one of the 24 units in the S/Y Midnight Kiss LP. [ 18 ] The Type 3 Limited Partnerships were marketed and sold in 1986.

This last type of Limited Partnership before the Court bears some transactional difference due to the new “at-risk rules” for Limited Partnerships introduced in the February 26, 1986 federal budget. OCGC designed the transactional history of the 1986 Limited Partnerships differently in an effort to grandfather them under the pre-1986 Income Tax Act rules.

The appellant Geoffrey Belchetz purchased one of the 25 units in the 1986 Limited Partnership before the Court, the “S/Y Close Encounters Limited Partnership" (the “S/Y Close Encounters LP”). [ 19 ] The next three subsections set out the claims and the procedural history associated with each of the Appellants. 1. Allan Garber, 2004-2787(IT)G: The S/Y Garbo LP (Type 1 Limited Partnership) [ 20 ] Allan Garber is a chartered accountant and businessperson residing in Ontario. Mr. Garber’s appeal concerns deductions from his income relating to his investment in the S / Y Garbo LP, a Type 1 Limited Partnership.

The deductions were claimed in the taxation years 1984, 1985, 1986, and 1987. [ 21 ] Mr. Garber learned about the opportunity to invest in the Limited Partnership from a promoter, who presented the Limited Partnerships as an investment in a capital asset, the luxury yacht “the S/Y Garbo”, to be used in a yacht sailing chartering business. The S/Y Garbo LP had 24 units available, with each full unit price being $97,500. Mr. Garber purchased one-third of a unit for $32,500 in 1984. [ 22 ] Mr. Garber claimed a share of the S/Y Garbo LP’s losses proportionate to his ownership of one-third of a unit as business

losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under

section 3, subsection 9(2), and

section 96 of the Income Tax Act (the “ Act ”), as follows: • $15,058 out of $1,084,064 total losses in the 1984 taxation year; • $5,381 out of $378,457 total losses in the 1985 taxation year; • $6,651 out of $478,902 total losses in the 1986 taxation year; • $6,552 out of $471,769 total losses in the 1987 taxation year. [ 23 ] Mr.

Garber, per his Fresh as Amended Notice of Appeal dated September 19, 2008, claimed the interest he paid on one of two promissory notes used to purchase his one-third of a unit in the S/Y Garbo LP and deducted from his income in each year that was incurred, pursuant to paragraph 20(1)( c )(ii) of the Act , as follows: • $635 in the 1984 taxation year; • $3,859 in the 1985 taxation year; • $2,512 in the 1986 taxation year; • $2,167 in the 1987 taxation year. [ 24 ] Finally, Mr.

Garber claimed $150 in professional fees he paid as part of his acquisition of one-third of a unit, deducted in the year the expenses were incurred, pursuant to paragraph 20(1)(

e) of the Act . [ 25 ] The deductions for each of the taxation years were disallowed by Notices of Assessment issued July 28, 1989. Mr. Garber filed Notices of Objection in October 1989, and appeals to the Tax Court of Canada under paragraph 169(1)(

b) of the Act . [ 26 ] Early in the trial, Mr. Garber withdrew several of his claims. As of his Final Submissions, Mr. Garber only pursues the expenses outlined in table below.

The table is reproduced from the Appellant’s Final Submissions: Expenses Claimed as of Final Submissions - Type 1 Partnership - The S/Y Garbo LP-Allan Garber (1/3 interest): [6] 1984 Interest expense on Note #1 $2,166.00 Professional fees $150.00 Feasibility study $100,000 Production costs and professional fees $120,000 Sales commissions and issue costs $274,000 Linen, cutlery, china and utensils $15,000 Marketing and advertising $60,000 Subtotal: $569,000 1/24 share x 1/3 of a unit $7,902.78 Total: $10,218.78 1985 Interest expense on Note #1 $2,166.00 Marketing and advertising $60,000 Commissary Services $90,700 Management Fees $70,000 Subtotal: $220,700 1/24 share x 1/3 of a unit $3,065.28 Total: $5,231.28

1986 Interest expense on Note #1 $2,166.00 Charter expenses $12,663 Feasibility study update fee (50%) $25,000 Management fee $7,129 Marketing and advertising costs $60,000 Moorage fees $52,405 Depreciation $139,696 Subtotal: $296,893 1/24 share x 1/3 of a unit $4,123.51 Total: $6,289.51 1987 Interest expense on Note #1 $2,166.00 Charter expenses $96,383 Feasibility study update fee (50%) $25,000 Management fee $100,000 Marketing and advertising $60,000 Moorage fees $55,139 Travel, consulting and general research $35,000 Depreciation $118,696 Subtotal: $490,218 1/24 share x 1/3 of a unit $6,808.58 Total: $8,974.58 1988 Interest expense on Note #1 $2,166.00 Charter expenses $123,788 Management fees $100,000 Marketing and advertising $64,200 Moorage fees $58,424 Depreciation $100,892 Subtotal: $447,304 1/24 share x 1/3 of a unit $6,212.55 Total: $8,378.55 [ 27 ] It should be noted that the amount of the interest expenses claimed by Mr.

Garber, in his Final Submissions is not consistent with the expenses claimed in his Fresh as Amended Notice of Appeal. In addition, as per the pleadings and notwithstanding a

schedule for expenses claimed as of March 26, 2012, which includes the taxation year 1988, under this appeal Mr. Garber did not claim relief in the 1988 taxation year. 2. Linda Leckie Morel, 1991-1816(IT)G, 1991-509(IT)G: The S/Y Midnight Kiss LP (Type 2 Limited Partnership) [ 28 ] Dr. Linda Leckie Morel is a medical doctor residing in Scarborough, Ontario. Dr. Leckie Morel’s appeals concern deductions from her income in the taxation years 1985, 1987, and 1988 in appeal number 1991-1816(IT)G, and the 1986 taxation year in appeal number 1991-509(IT)G.

Both appeals relate to her investment in the Limited Partnership, S / Y Midnight Kiss LP”, a Type 2 Limited Partnership. [ 29 ] Dr. Leckie Morel was presented with the opportunity to invest in the Limited Partnership by her accountant. In 1985, she purchased one of 24 units in the S/Y Midnight Kiss LP at a purchase price of $97,500. Her understanding was that the S/Y Midnight Kiss LP was purchasing one yacht, the “S/Y Midnight Kiss”, to be used in a luxury yacht chartering business. [ 30 ] Dr.

Leckie Morel deducted from her income the share of the S/Y Midnight Kiss LP’s losses proportionate to her unit ownership as business losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under

section 3, subsection 9(2), and

section 96 of the Act , as follows:

• $48,308 out of $1,159,392 total losses in the 1985 taxation year; • $21,422 out of $514,120 total losses in the 1986 taxation year; • $15,565 out of $373,565 total losses in the 1987 taxation year; • $15,245 out of $365,878 total losses in the 1988 taxation year. [ 31 ] Dr.

Leckie Morel also deducted the interest paid on one of two promissory notes used to purchase her unit of the S/Y Midnight Kiss LP, in each year that the interest was incurred, pursuant to paragraph 20(1)( c )(ii) of the Act , as follows: • $11,757 in the 1985 taxation year; • $6,500 in the 1986 taxation year; • $6,500 in the 1987 taxation year; • $6,500 in the 1988 taxation year. [ 32 ] Finally, Dr. Leckie Morel deducted $250 in professional fees paid in 1985, the taxation year the expenses were incurred, relating to borrowing funds to purchase her unit in the S/Y Midnight Kiss LP, pursuant to paragraph 20(1)(

e) of the Act . [ 33 ] The deductions Dr. Leckie Morel claimed for each of the taxation years were disallowed in Notices of Assessment issued on September 7, 1989 for the 1985, 1986, and 1987 years; and May 23, 1990 for the 1988 year. A Notice of Reassessment was issued on December 22, 1989 for the 1986 year. Dr. Leckie Morel filed Notice of Objections for each taxation year. [ 34 ] On March 26, 2012, Dr. Leckie Morel reduced the number of expenses she is claiming in these appeals. The table below outlines the Appellant’s claims as of the Appellant’s Final Submissions.

Expenses Claimed as of Final Submissions-Type 2 Partnership-S/Y Midnight Kiss LP-Linda Leckie-Morel : [7] 1985 Interest expense on Note #1 $6,500.00 Professional fees $250.00 Sales commissions and issue costs $274,000 Production costs and professional fees $120,000 Feasibility study $100,000 Marketing and advertising $60,000 Commissary services $90,700 Office expenses $50,000 Subtotal: $694,700 1/24 share $28,945.83 Total: $35,695.83 1986 Interest expense on Note #1 $6,500.00 Marketing and advertising $60,000 International promotion $35,000 Feasibility study update (50%) $25,000 Management fee $100,000 Subtotal: $220,000 1/24 share $9,166.67 Total: $15,666.67

1987 Interest expense on Note #1 $6,500.00 Marketing and advertising $60,000 International promotion $40,000 Feasibility study update (50%) $25,000 Management fee $100,000 Consulting fees $35,000 Subtotal: $260,000 1/24 share $10,833.33 Total: $17,333.33 1988 Interest expense on Note #1 $6,500.00 Marketing and advertising $64,200 International promotion Management fee $40,000 $100,000 Subtotal: $204,200 1/24 share $8,508.33 Total: $15,008.33 3. Geoffrey Belchetz, 1991-1946(IT)G: The S/Y Close Encounters LP (Type 3 Limited Partnership) [ 35 ] Geoffrey Belchetz is a businessperson residing in Toronto, Ontario. Mr.

Belchetz appeals the disallowance of deductions from his income relating to his investment in the Limited Partnership, the “S/Y Close Encounters LP”, a Type 3 partnership, for the taxation years 1986, 1987, and 1988. [ 36 ] A promoter of the Limited Partnerships presented Mr. Belchetz with the opportunity to invest in a Limited Partnership that would own a capital asset, the luxury yacht “S/Y Close Encounters”, to be used in a yacht chartering business. In 1986, Mr. Belchetz purchased one of the 25 units in the S/Y Close Encounters LP at a purchase price of $116,000. [ 37 ] Mr.

Belchetz deducted his proportionate share of the S/Y Close Encounters LP’s losses as business losses incurred as a result of making outlays and incurring expenses for the purpose of gaining or producing business income, under

section 3, subsection 9(2), and

section 96 of the Act , as follows: • $35,900 out of $897,500 total losses for the 1986 taxation year; • $22,507 out of $562,675 total losses for the 1987 taxation year; • $26,932 out of $673,294 total losses for the 1988 taxation year. [ 38 ] Mr. Belchetz also deducted the interest paid on one of two promissory notes used to purchase his unit of the S/Y Close Encounter LP pursuant to paragraph 20(1)( c )(ii) of the Act . The amounts in each year were: • $9,000 in the 1986 taxation year; • $9,445 in the 1987 taxation year; • $750 in the 1988 taxation year.

1986 Interest expense on Note #1 $9,000.00 Professional fees $6,000.00 Sales and marketing consulting fees and other issue costs $290,000 Feasibility study $100,000 Production costs and professional fees $90,000 Inspecting building of yacht Travel and building consulting fee $60,000 $35,000 Management fee $30,000 Marketing and advertising $25,000 Subtotal: $630,000 1/25 share $25,200.00 Total: $40,200.00 1987 Interest expense on Note #1 $9,445.00 Feasibility study update (50%) $25,000 Inspecting building of yacht $60,000 Travel and building consultation fee $35,000 Marketing and advertising $30,000 Travel and promotion $35,000 Management fee $100,000 Subtotal: $285,000 1/25 share $11,400.00 Total: $20,845.00 1988 Interest expense on Note #1 $750.00 Feasibility update fee (50%) $25,000 Inspecting building of yacht $60,000 Travel and building consultation fee $35,000 Management fee $100,000 Marketing and advertising $140,000 Travel and promotion $40,000 Subtotal: $400,000 1/25 share $16,000.00 Total: $16,750.00 [ 39 ] In addition, Mr.

Belchetz deducted $6,000 in professional fees paid to borrow funds to purchase his partnership unit in 1986, the taxation year the expenses were incurred, pursuant to paragraph 20(1)(

e) of the Act . [ 40 ] Mr. Belchetz’s deductions for each of the taxation years, 1986, 1987, and 1988, were disallowed by Notices of Assessment issued on November 2, 1990. Mr. Belchetz filed Notices of Objection for each taxation year on November 12, 1990. On June 14, 1991, the Minister of National Revenue confirmed the assessments by Notice of Confirmation. [ 41 ] Just as the other two Appellants did early in the trial, Mr. Belchetz reduced the expenses he is claiming. Mr.

Belchetz’s current claims as of Final Submissions are set out in the table below: Expenses Claimed as of Final Submissions-S/Y Close Encounters LP-Geoffrey Belchetz : [8] C: The Respondent’s Grounds Relied on for Disallowance 1. Sections 3 and 4 of the Income Tax Act [ 42 ] The Respondent submits numerous grounds for the disallowance of the partnership losses, interest, and professional fees claimed by the Appellants.

Firstly, the Respondent argues that the Limited Partnerships did not constitute an income source under sections 3 and 4 of the Act because there was no genuine yacht charter operation business; no yacht chartering business was ever carried on, and there was no reasonable expectation of profit. The Respondent asserts that the Limited Partnerships were not true partnerships in law because OCGC did not carry on business in common with the investors in any of the 36 Limited Partnerships in which units were sold. 2.

Sham [ 43 ] The Respondent further argues that the transactions were mere shams entered into with the Limited Partnerships and that OCGC and Mr. Bellfield never had the intention to carry on a business in common with the Limited Partnerships. The promissory notes were presented as mere shams used by OCGC and Mr. Bellfield as part of his scheme to defraud the Minister and the investors. 3. Expenses Not Incurred

[ 44 ] In the alternative, the Respondent argues that the Limited Partnerships did not actually incur expenses for the purpose of gaining or producing business or property income. 4. Timing of Expenses Deducted [ 45 ] Again, in the alternative, the Respondent asserts that under subsection 9(1) and 18(9), certain expenses incurred are not deductible for timing reasons because no deduction is available for outlays or expenses incurred in the taxation year when the services are to be rendered after the end of that taxation year. 5.

No Loans [ 46 ] The Respondent also submits that the promissory notes do not constitute actual loans. The Respondent asserts that no money was lent or advanced to the investors and therefore no interest can be deducted under subparagraphs 20(1)( c )(

i) or 20(1)( c )(ii) of the Act or under the meaning of an outlay or expense found in paragraph 18(1)( a ). 6. S/Y Garbo Capital Cost Allowance Restricted [ 47 ] Specifically regarding the Type 1 Limited Partnership, the S/Y Garbo LP, the Respondent asserts that any capital cost allowance deductions claimed pursuant to paragraph 20(1)(

a) in the taxation years of 1986, 1987, and 1988 are restricted by the leasing property rules found in the Income Tax Regulations at subsections 1100(15), 1100(17), 1100(17.2), and 1100(17.3). 7. S/Y Garbo Interest Limitation [ 48 ] Alternately, the Respondent submits that interest claimed under paragraph 20(1)(

a) must be limited by the half-year rule outlined in subsection 1100(2) of the Income Tax Regulations because the S/Y Garbo yacht was not acquired in the years prior to 1986. 8. S/Y Close Encounters LP - At-Risk Rules [ 49 ] Regarding the Type 3 Limited Partnership, the S/Y Close Encounters LP, the Respondent submits that Mr. Belchetz’s partnership interest is not exempt from the at-risk rules introduced on February 26, 1986 because it was not actively carrying on a business on a regular and continuous basis before that date. The Respondent further submits that as a non-exempt partnership unit, Mr.

Belchetz’s claims are limited to the amount he was at-risk for. Under the new rules introduced, his claims are limited to a maximum of $6,000 in losses. 9. Section 245(1) [ 50 ] The Respondent further claims that the deductions sought by the Appellants are barred by (former) subsection 245(1) of the Act because to allow the expenses or disbursements would unduly or artificially reduced the Appellants’ income.

Section 67 [ 51 ] Further, the Respondent submits that even if the Limited Partnerships are determined to be a source of income, the expenses claimed are barred from deductibility under

section 67 because they were not reasonable and were not incurred to earn income. D: Issues [ 52 ] The issues for the Court to determine are as follows:

1. Did each of the three Limited Partnerships constitute a source of income pursuant to sections 3 and 4 of the Act and are capable of suffering a loss under sections 3, 96, and subsection 9(2)? 2. If the Limited Partnerships are determined to constitute a source of income, did they actually suffer the losses claimed by the Appellants? 3. If the Limited Partnerships actually suffered the losses claimed, did they properly compute the timing of partnership losses claimed for the taxation years in question? 4.

If there was a source with genuine losses taken at the correct times, what is the amount of capital cost allowance, if any, that the S/Y Garbo LP is entitled to deduct? 5. Did each of the Appellants incur the interest expenses claimed pursuant to paragraphs 18(1)(

a) and 20(1)(

c) of the Act ? 6. Did the Minister properly disallow the partnership losses, interest, and professional fees? E: Transactional Facts [ 53 ] The general structure of each Limited Partnership type is set out below, followed by a description of the subscription process for all investors and a detailed review of the individual investor subscription process using one of the Limited Partnership types as an example. 1. The Three Types of Limited Partnerships [ 54 ] OCGC registered 79 Limited Partnerships, of three different types depending on the year registered.

Of the 79 Limited Partnerships, units were sold in 36 Limited Partnerships. Einar Bellfield was the controlling mind of the general partner and all original limited partners. [ 55 ] OCGC entered into Limited Partnership Agreements with each Limited Partnership. The signatory was the original limited partner, who was either Einar Bellfield (in trust), for Type 1 and Type 2 Limited Partnerships, or OCGC Enterprises (in trust) for Type 3 Limited Partnerships.

a) Type 1 Limited Partnerships – 1984 LPs [ 56 ] The original limited partner of the Type 1 Limited Partnerships was Einar Bellfield, as bare trustee, and the general partner was OCGC. There were 24 units per Type 1 Limited Partnership. The price per unit in the Type 1 Limited Partnerships was $97,500. If fully capitalized, each Type 1 Limited Partnerships would have born a total capitalization of $2.34 million. [ 57 ] The two Type Limited partnerships that the OCGC sold units in, both registered on November 28, 1984, were: 1. The S/Y Garbo Limited Partnership 2.

The S/Y Gable Limited Partnership [ 58 ] To provide a broad overview of the subscription process, an investor subscribed to a Type 1 Limited Partnership by

providing two Promissory Notes (“Promissory Note #1” and “Promissory Note #2”) for a total amount of $97,500. In addition, a payment of $450 in professional fees was made for the unit acquisition. The $6,500 in interest for the 1984 year was also payable.

b) Type 2 Limited Partnerships – 1985 LPs [ 59 ] The 1985 Limited Partnerships’ original limited partner was Einar Bellfield, as bare trustee, and their general partner was again OCGC. There were 24 units per Type 2 Limited Partnership and the price per unit was also $97,500. If fully capitalized, there would be a total capitalization of $2.34 million. [ 60 ] Fourteen Type 2 Limited Partnerships were registered on March 20, 1985, except for the S/Y Change of Seasons Limited Partnership and the S/Y Main Event Limited Partnership. These two partnerships were registered on November 8, 1985.

The fourteen Type 2 Limited Partnerships were: 1. Autumn Sonata Limited Partnership 2. S/Y Bergman Limited Partnership 3. S/Y Bogart Limited Partnership 4. S/Y Casablanca Limited Partnership 5. Queen of Hearts Limited Partnership 6. Ecstasy Limited Partnership 7. Going My Way Limited Partnership 8. S/Y Great Gatsby Limited Partnership 9. High Sierra Limited Partnership 10. Human Desire Limited Partnership 11. Serenade Limited Partnership 12. S/Y Midnight Kiss Limited Partnership 13. S/Y Change of Seasons Limited Partnership 14.

S/Y Main Event Limited Partnership [ 61 ] To subscribe to a 1985 Limited Partnership, the investor provided a down payment ranging from $4,000 to $6,000, as well as two Promissory Notes for the total amount of $93,500. An additional varying amount was also paid in professional fees for the acquisition of a unit. The interest owed for the 1985 subscription year, was also payable.

c) Type 3 Limited Partnerships – 1986 LPs [ 62 ] The 1986 Type 3 Limited Partnerships had a different structure due to OCGC’s intentions to grandfather the Limited Partnerships so that they would not fall under the new at-risk rules introduced in the February 26, 1986 federal budget. This effort consisted of OCGC Enterprises Inc. first acquiring all of the units of the Type 3 Limited Partnerships before the February 26, 1986 deadline, and then reselling the partnership units to the investors. [ 63 ] The 25 units per Type 3 Limited Partnership each had a unit price of $116,000.

If fully capitalized, each Limited Partnership’s total capital was $2,900,000. Units were sold in the following twenty Type 3 Limited Partnerships, all registered on January 27, 1986: 1. Ambrosia Limited Partnership 2. Blue Gardenia Limited Partnership 3. Chasing Rainbows Limited Partnership 4. S/Y Close Encounters Limited Partnership

5. Compassion Limited Partnership 6. Duet In the Sun Limited Partnership 7. Elegance Limited Partnership 8. Forbidden Fruit Limited Partnership 9. Holiday For Lovers Limited Partnership 10. Midnight Lace Limited Partnership 11. Morning Star Limited Partnership 12. Operation Moonlight Limited Partnership 13. Pleasure Seekers Limited Partnership 14. Silvery Moon Limited Partnership 15. Sweet Sensations Limited Partnership 16. Winds of Paradise Limited Partnership 17. Wine & Roses Limited Partnership 18. Evening Star Limited Partnership 19. Opal Mist Limited Partnership 20.

You Only Live Once Limited Partnership [ 64 ] To purchase a Type 3 Limited Partnership from OCGC Enterprises Inc., an investor was required to provide a $6,000 down payment, two Promissory Notes for the total amount of $110,000, and varying amounts for professional fees ($9,000 for Mr. Belchetz) related to the acquisition of a Limited Partnership unit. Payment was also required for $9,000 in interest due in 1986, the year of subscription. 2.

Investment in a Limited Partnership [ 65 ] An investor in evaluating the investment opportunity or subscribing to a Limited Partnership dealt with a variety of documents. [ 66 ] First, investors were provided with an Offering Memorandum that outlined the investment opportunity, the charter market, financial projections, income tax considerations, the management of the partnership, and other details.

While there were some differences between each year’s Offering Memoranda based on the distinctions between the Limited Partnership types, the general terms of the investment were quite similar. [ 67 ] Upon deciding to invest, an interested party became a limited partner by signing a Subscription Agreement and agreeing to be bound by a Limited Partnership Agreement that was previously signed by the original limited partner. The original limited partner was either Einar Bellfield (Type 1 and Type 2 Limited Partnerships) or OCG Enterprises (Type 3 Limited Partnerships).

Through the subscription agreement, the investor also granted OCGC Power of Attorney and the right to act as an agent for the Limited Partnership for purposes relating to the partnership. [ 68 ] An investor in a Type 1 and Type 2 Limited Partnerships then signed two promissory notes, promising to pay the principal amounts and interest outlined in each note. The exact amounts varied depending on the partnership type.

For the Type 3 Limited Partnerships, the financing portion differed in that investors signed an agreement to assume the financing and related interest, charges, and expenses purportedly originally arranged by OCGC for OCG Enterprises. This difference is again based on the intention to grandfather the Type 3 Limited Partnerships by first selling the partnership units to OCG Enterprises and claiming that they were actively carrying on a business on a regular and continuous basis before the at-risk rules came into effect. [ 69 ] A number of other key agreements and documents were part of the investment process.

Amongst others, there were:

1) a loan agreement between OCGC and the investor, with OCGC agreeing to loan the amount of the subscription price outstanding after the down payment, if any, and with the promissory notes provided by the investor securing the loan; 2) an agreement that the investor agree to guarantee and indemnify OCGC for his or her share of any expenses incurred on behalf of the Limited Partnerships; 3) a Buy-Back Agreement, signed between OCGC and each investor, or assumed from OCG Enterprises, as was the case for the Type 3 Limited Partnerships.

As described in the S/Y Garbo LP, this agreement granted the subscriber the right to force OCGC to buy the unit back pursuant to the conditions set out: The Partner has an irrevocable right to sell the Units in the Partnership to OCG on the terms and in accordance with the provisions contained herein and OCG must purchase such unit in accordance with such provisions. [9] [ 70 ] To provide a summarizing illustration, the paragraph below outlines the key components of the investment process. The S/Y Close Encounters LP is used as an example, with some differences due to the intention to avoid the new at-risk rules.

The S/Y Close Encounters LP’s compliance with the at-risk rules is at issue in this case, however, it is useful to employ it as a model. [ 71 ] An investor subscribed to a unit of the S/Y Close Encounters LP by, inter alia : 1. Signing a Subscription Agreement and Power of Attorney Agreement with OCGC (acting on behalf of OCG Enterprises), the owner of 100% of the S/Y Close Encounters LP units included the investor’s agreement to the following:

a) The agreement is bound by the Limited Partnership Agreement, previously signed by the original limited partner, OCG Enterprises, bare trustee.

b) The investor’s assumption of the financing that was originally arranged by OCGC for OCG Enterprises and the assumption of all related obligations to pay interest, charges, and expenses. The purported existing financing amounted to $110,000 of the $116,000 unit price, and was secured by two promissory notes. The first promissory note was in the principal amount of $75,000 and the second promissory note was in the principal amount of $35,000.

c) The assignment of a Buy-Back Option from OCCG on behalf of OCG Enterprises, to the subscriber.

d) The investor’s agreement to grant OCGC Power of Attorney and to appoint OCGC as his agent and true and lawful attorney for purposes in connection with the S/Y Close Encounters LP.

e) The investor’s agreement to make the following current and future payments to OCGC: • $6,000 of the $116,000 total purchase price of the partnership unit to be paid immediately; • Payments for interest that accrued on the first Promissory Note between January 1, 1986 and the closing date of the unit purchase, with $750 due for each month; and • Interest payments of $750 from January 31, 1987 to December 31, 1991.

2. Signing a Guarantee or Indemnity Agreement, whereby the investor agreed to indemnify OCGC for his share of any payments made by OCGC on behalf of the S/Y Close Encounters LP in carrying out its agreements with the Limited Partnership. 3. Charter Operations Agreements between the Limited Partnerships and OCGC [ 72 ] In its capacity as general partner, OCGC entered into a number of agreements related to charter operations with each Limited Partnership.

The key agreements that OCGC entered into with the Limited Partnerships included: 1) A Limited Partnership Agreement, setting out the general terms of the partnership and the relationship and rights of the limited partner and the general partner; 2) An Agreement of Purchase and Sale between the Limited Partnership and OCGC, in which the Limited Partnership agreed to buy a yacht from OCGC for a purchase price that ranged from $2.34 million to $2.9 million, depending on the partnership year.

This was equivalent to the total investment in the Limited Partnership if the limited partnership was fully capitalized; 3) A Management Agreement where OCGC contracted to manage the Limited Partnership’s yacht chartering business; 4) An Agreement for Providing a Line of Credit, where OCGC contracted to arrange an operating line of credit for the Limited Partnership to ensure adequate cash flow and cover any deficits that may arise in the course of yacht charter operations. F: The Factual

Summary 1. Early Days [ 73 ] OCGC was incorporated in May 1984 by Einar Bellfield as the sole director and shareholder. The Appellants describe this vision as follows: Mr. Bellfield had a vision (among other ideas) to purchase and/or to design and manufacture luxury sailing yachts, and in addition, to provide management and financial assistance within the yacht charter industry. In this regard, Mr. Bellfield can be considered a pioneer. [10] According to the testimony of certain individuals, some believed that Mr.

Bellfield’s luxury yacht charters concept was novel and had the potential to do well and reach a new market. [ 74 ] Initially, from 1984 to August 1985, the OCGC team consisted only of Mr. Bellfield and his wife Tina working out of their condominium den and occasionally using office premises at the TD Business Centre. In August 1985, Osvaldo Minchella joined the OCGC team after meeting Mr. Bellfield at RadioShack. Mr. Minchella was working at RadioShack at the time and sold Mr. Bellfield a computer.

It was not until May 1986 that OCGC operations moved to its own office on Richmond Street in Toronto. [ 75 ] As noted, Mr. Bellfield incorporated OCGC in May 1984 as the sole director and shareholder. On July 15, 1984, Einar Bellfield received a discharge as a bankrupt, after having filed for bankruptcy on June 3, 1983. Several months after receiving the bankruptcy discharge, Mr. Bellfield was arrested on October 2, 1984 on four fraud charges related to another matter. The S/Y Garbo LP and S/Y Gable Limited Partnership’s Offering Memoranda were distributed shortly thereafter in December 1984.

After a preliminary inquiry decision committing him to stand trial, Mr. Bellfield was eventually acquitted on those other charges in 1987. 2. Marketing and Sale of Limited Partnerships

[ 76 ] Before the incorporation of OCGC in May of 1984, Mr. Bellfield began developing the concept for the luxury yacht chartering Limited Partnerships. The Appellant Mr. Garber first became aware of OCGC through a client. Mr. Bellfield had approached that client with the opportunity to purchase units in the 1984 Limited Partnerships. The client asked Mr. Garber to review the investment documentation that Mr. Bellfield had presented. [ 77 ] Mr. Garber’s evaluation of Mr.

Bellfield’s initial attempt at structuring the Limited Partnerships was that the financial projections were incomplete and the outline of the investment’s business potential was brief. Mr. Garber was not prepared to touch the investment at that particular point in time. In his view, there were problems with the transaction’s structure and the level of information disclosed to investors. Mr. Garber thought it was a very aggressive tax deal and at that time he advised his clients not to make the investment. [ 78 ] Mr. Garber referred Mr.

Bellfield to his accounting partner Stacey Mitchell, a chartered accountant, because the Limited Partnership offerings were more in line with Stacey Mitchell’s area of professional focus on cash flow projections. Mr. Mitchell refined the proposal, with the more rigorous product ultimately presented to Mr. Garber. At that point, Mr. Garber decided that it was an interesting opportunity for his partners and his clients. Mr. Garber and two of his accounting firm partners, Mr. Mitchell and Mr. Sugarman, purchased a unit together.

A number of their clients also bought units. [ 79 ] The 1984 Limited Partnership units in the S/Y Garbo LP and the S/Y Gable Limited Partnership (the “S/Y Gable LP”) were sold by word of mouth, through the accounting firm Moses, Sugarman & Company (i.e. Stacey Mitchell), by lawyers familiar with OCGC, and by Mr. Bellfield himself. At this stage, there was no marketing strategy for the Limited Partnerships. The development of the promotion of the Limited Partnerships was still in the embryonic stage.

Each potential investor was provided a variety of documentation including the 1984 Offering Memorandum. [ 80 ] In 1984, only two Limited Partnerships were registered and sold. The sales and promotion of the Limited Partnership units significantly increased the following year however, and units in 14 Limited Partnerships were sold. The 1985 Offering Memoranda were more refined, although they remained substantially similar to the 1984 Offering Memoranda.

During this period, efforts to promote the investment opportunity began to spread around a network of promoters and brokers. [ 81 ] The brokers and promoters included lawyers and accountants who knew of Mr. Bellfield or OCGC and were doing work of some kind for them. These lawyers and accountants began to refer clients and received both professional fees from clients and commissions from OCGC. They also purchased some of the units themselves. David Franklin, a lawyer, was one of the key brokers who came on board to peddle the Limited Partnerships after meeting with Mr. Bellfield in the summer of 1985.

He was involved in the marketing of the 1985 and 1986 transactions, but by 1987, he was no longer involved. [ 82 ] Mr. Franklin became one of the most significant promoters for OCGC. He prepared an investment proposal that contained information based on the Offering Memoranda. He circulated this investment proposal to prospective buyers, brokers, and promoters. He prepared a template letter that he sent to his various sub-agents who were selling units.

The investment proposal solely emphasized the tax benefit as according to him, he and the sub-agents were marketing a tax deal and not a business investment opportunity. [ 83 ] Mr. Franklin testified that although he was a lawyer himself, he relied upon the lawyers and accountants’ opinions on the tax issues. As far as an investment from a business point of view, Mr. Franklin thought it was a great business opportunity because the investor would be making money from revenue generated from the charter business of the yachts.

In his opinion, the worst-case scenario was that as long as the Limited Partnership was carrying on the business, the investor could claim any losses. Although Mr. Franklin believed that Mr. Bellfield was acquiring yachts, he believed that even if there was no revenue you could still claim expenses and still benefit from the transaction on a cash basis. [ 84 ] Upon beginning his testimony, Mr. Franklin sought and was granted protection under

section 5 of the Canada Evidence Act and

section 9 of the Ontario Evidence Act . His attendance was under subpoena duces tecum . In terms of credibility, I note that Mr. Franklin was a very fast talker. He had an explanation for everything and it was clear that he had drunk Mr. Bellfield’s Kool-Aid. He did not want to answer the questions presented and made attempts to give a side answer rather than answer a question directly. On many occasions, he did not recall certain information despite his central promotional role. Mr. Franklin blamed everyone else for being responsible for misrepresentations, including the lawyers, accountants, and the CRA.

Nonetheless, I assessed that the evidence of Mr. Franklin, which I reference here, is adequately credible to establish the nature of his promotional efforts, the timeframe, and character of certain misrepresentations.

[ 85 ] There were numerous lawyers and accountants involved with, acting for, or in concert with Mr. Bellfield, OCGC or the Limited Partnerships at various times. There were also promoters, agents, and subagents, all peddling the units. Some of the lawyers and accountants had multiple clients and professional relationships that would obviously be in conflict. For example, they charged professional fees to investors who were clients while receiving commissions on sales from OCGC.

Also, an accounting firm might prepare the financial statements for OCGC on a pro forma basis for a Limited Partnership while at the same time, sell units in a Limited Partnership to its own clients, purchase their own units, and even provide tax opinions for the Offering Memoranda. The lawyers acted similarly, to some extent. This did not occur in every case but there seemed to be an attitude of “what’s wrong with that?” Maybe this was not a conflict or something that would cause a professional to hesitate in 1984, but it would certainly raise an eyebrow in the 21 st century.

Where did this all leave the investor, whether it was in 1986, 2004, or 2013? In reviewing the evidence, one is struck repeatedly by the questions: who was working for whom, and in what capacity? What was the duty owed to whom, when, and what personal or business interest did they have in the activity? 3. Development and Marketing of Yacht Chartering Business [ 86 ] In the planning, development and marketing of the luxury yacht chartering vision there were a number of people who were responsible for or participated in the marketing, sales, and operations of the Limited Partnership from June 1986 to 1990.

Steven Leibtag provided sales and marketing advice and was present from December 1985 through to late 1987. Rose Ashworth was present from September 1986 to June or July 1989 as a sales representative for Fantaseas. David Martin was present from March 1988 to 1989 conducting marketing and sales for Fantaseas. Bruce Oekler was involved from December 1985 to December 1986 in developing a product for travel agents in Florida.

Helen Fullem was involved from December 1988 to March 1989 in promoting Fantaseas overseas in Europe. [ 87 ] The Fantaseas concept of elegant cruises on large luxury yachts with four separate cabins accommodating upwards of eight people, targeted the high-end market. Starting in late 1986, the development and marketing of the luxury yacht charter profile of Fantaseas was mainly events or activities. Starlight representatives visited travel agencies in Toronto, Ontario. They offered familiarization tours to acquaint travel agents with the Fantaseas product.

Starlight attempted to develop a corporate incentive program. Trade shows were attended in New York and Chicago as well as two trade shows in Toronto to promote Fantaseas. An audio-visual presentation was developed and used in office presentations in Toronto. Cold calls were made and brochures were developed and circulated. Itineraries were developed for yacht charters in the Caribbean with particulars for restaurants, departure sail times and dates, activity options, sources of food, etc. A well-known chef named Jacques Pepin and his menus and food were used for promotional purposes.

There was also solicitation of market houses in Europe. There was an audio-visual presentation at the Casa Loma in Toronto as well as speakers, which included Mr. Bellfield. This was basically a Q+A session for present investors and to advance the sale of units in Limited Partnerships. [ 88 ] Attempts were made to develop local government relations in St. Lucia and to establish a foothold operational centre in the Rodney Bay Marina. Attempts were made to develop appropriate crew training programs as well as plans for food and beverage procurement and delivery.

Attempts were undertaken to obtain media coverage through an

article entitled “Ultimate Charter” in May 1986, written by Bruce Kemp, the author who also happened to conduct the feasibility study for OCGC for the luxury yacht charter business proposed. [ 89 ] Professionals produced a video shot in the Caribbean, and travel agents used certain shots from the video. Advertisements were placed in Lifetime magazine and the Globe and Mail.

There was also a promotional kit developed for use by the travel agents but it was in short supply and those who were trying to develop contact with the travel agents industry could not obtain sufficient copies needed to market the product. [ 90 ] The development, marketing, and chartering of the Fantaseas concept was not without its problems. None of the individuals retained had any experience in the development of a start-up business of marketing yachts.

They had no experience in the design or construction of yachts, the marketing and sales of yachts, or marketing and sales to the high-end niche market they were pursuing. A feasibility study of some four volumes was completed in 1986 for OCGC, with an update completed some two years later. Despite the existence of these studies, Ester Allan (now Ester Palmer and referred to as such from herein), who was overall responsible for the marketing, sale and operations of Starlight and the Fantaseas concept, never read the feasibility studies.

Her major sales representatives, Rose Ashworth, David Martin, and Stephen Leibteg were not even aware of the studies. [ 91 ] At a certain point, the marketing efforts were no longer productive because there was no product (i.e. yachts) or an insufficient amount to bring the marketing of the luxury yacht charters to fruition. Despite the 36 yachts promised to the Limited Partnerships, OCGC only ever acquired. The S/Y Garbo was an 80-foot yacht, the S/Y Gable was an 88-foot yacht, and the S/Y First Impressions was a 50-foot yacht.

The S/Y Garbo was not available for chartering until the spring of 1987 and the S/Y Gable was not launched until November 1988. The S/Y First Impressions did not meet the Fantaseas concept and was looked upon as a provisioning vessel. The following

section provides an overview of the planning, design, construction, and acquisition of yachts by OCGC.

4. Planning, Design, Construction, or Acquisition of Yachts

a) General [ 92 ] The success of the 1984 Limited Partnerships and all successive Limited Partnerships sold was totally dependent upon having a yacht for each Limited Partnership to participate in the luxury yacht chartering business for the purpose of earning income. Each yacht would be a part of the fleet of yachts used in the Fantaseas concept of elegant cruises on luxury yachts sold on charter with four cabins per yacht. [ 93 ] As mentioned above, OCGC committed to deliver 36 yachts. For the 1984 Limited Partnerships, the S/Y Garbo and S/Y Gable were to be under construction in 1984 and delivered in 1985.

For the 1985 Limited Partnerships, 14 additional yachts were due by December 31, 1985, bringing the total number of luxury yachts to be completed by the end of 1985 to 16 vessels. In 1986, OCGC committed to delivering an additional twenty yachts by the final months of 1989 or early 1990.

b) The Yachts [ 94 ] As will be described hereafter, there were really only three yachts ever owned or purportedly owned by OCGC or held by OCGC: the S/Y First Impressions, the S/Y Garbo and the S/Y Gable. Only one of the yachts was available in 1985; the S/Y First Impressions, which was only 50 foot and not suitable for the Fantaseas concept. Neither the S/Y Garbo nor the S/Y Gable were ever legally owned or registered in the names of the Limited Partnerships, nor used to the benefit of the S/Y Gable or S/Y Garbo Limited Partnerships.

c) The S/Y First Impressions [ 95 ] The first yacht acquired by OCGC was the S/Y First Impressions. Mr. Bellfield took possession of the 50-foot yacht, to avoid losing OCGC’s deposit paid on the S/Y Garbo. On November 27, 1985, title for the S/Y First Impressions was transferred to OCGC. This yacht did not satisfy OCGC’s obligations to deliver large luxury yachts to the Limited Partnerships. [ 96 ] The S/Y First Impressions was purported to be a provisioning yacht for the luxury yacht charters but in November 1985 but there were no yachts to provision. The First Impressions arrived in St.

Lucia in March 1986 where there was a dispute over the lack of payment for the crew services rendered in the trans-Atlantic crossing that resulted in the arrest of the S/Y First Impressions. Eventually the ownership of the S/Y First Impressions was transferred to Tina Bellfield on June 26, 1992, and the yacht was located in Toronto, Ontario.

d) The S/Y Garbo [ 97 ] The second yacht acquired by OCGC was the S/Y Garbo, purportedly intended for the S/Y Garbo LP. In February 1985, Mr. Bellfield met the owners of Dynamique Yachts in France and discussed with them the possibility of building luxury yachts. Dynamique was to build the S/Y Garbo for OCGC. Over an extended period of time, Mr. Bellfield failed to arrange financing for the S/Y Garbo, and to meet his financial obligations to Dynamique. Various agreements and memorandums were drafted and payments options rearranged. Repeatedly, Mr. Bellfield did not meet his full financial obligations.

A $50,000 deposit was paid, but further payments were not forthcoming for a significant period of time. Mr. Bellfield faced the risk of losing the deposit due to his inability to pay the balance owed on the S/Y Garbo. Upon negotiation, the deposit was ultimately credited towards the acquisition of a smaller yacht, the S/Y First Impressions. [ 98 ] OCGC eventually paid the funds owed and acquired the S/Y Garbo. Dynamique sailed the yacht across the Atlantic to St. Martin and OCGC took possession of the S/Y Garbo on April 4, 1986.

As it turned out, the yacht was not up to the standard contemplated by the Fantaseas concept and it suffered extensive structural damage in its maiden voyage that required it go into a dry dock in Florida, U.S.A. for repairs. The S/Y Garbo was not available for charters until April 1987. Even then, there were interior decoration problems, electrical issues, and general ongoing repairs because of the yacht being in a southern climate. There were ongoing requests for OCGC to pay its bills for repairs, etc., and funding was slow if available at all. Title was never registered in the name of the S/Y Garbo LP.

Ultimately, in 1988 the S/Y Garbo was sold to Maxi-Yacht International S.A.R.L. as part of financing for the French yacht building company.

e) The Ondine (the S/Y Great Gatsby)

[ 99 ] OCGC negotiated the purchase of a racing yacht known as the Ondine that was going to be called the S/Y Great Gatsby. The racing yacht was an 80-foot aluminium yacht that was not suitable for the Fantaseas concept. Notwithstanding the foregoing, OCGC entered the contract to purchase the Ondine for $298,500 on December 24, 1985. Eventually, Mr. Bellfield was once again behind on his payments and legal action was commenced by the owner of the Ondine against OCGC for default of payments and for stripping the yacht. The matter was settled in April 1988 and the possession of the yacht was transferred back to the original owner.

f) The Med 86 [ 100 ] A Med 86 was seen at a yacht show in Miami and it was thought that it could be renovated to suit the Fantaseas concept. An Agreement of Purchase and Sale was executed on January 30, 1987 but the sale did not close. The price of the yacht was $US 1,425,000 with a down payment of $350,000 paid in escrow with the balance payable on closing set for April 1, 1987. The closing was delayed to May 1, 1987 with OCGC agreeing to pay an additional $200,000 in escrow. In the end, the deal did not close and OCGC was put in default. In arbitration with the owner, U.S. Yacht was awarded damages of $367,167 plus accrued interest due to the failure to close.

g) The S/Y Gable [ 101 ] The third yacht purportedly acquired by OCGC was the S/Y Gable. The S/Y Gable was designed by Sparkman Stevens for the S/Y Gable Limited Partnership. It was to be constructed by Michel Dufour, a well-known French builder. The plan was for Mr. Dufour to carry out the construction of yachts and for Mr. Bellfield to provide financing. Negotiations around the design continued from 1986 to 1987. Maxi-Yacht International was created with Mr. Bellfield and Mr. Dufour as shareholders.

The Maxi-Yacht boat-building facility was constructed and eventually had three yachts in various stages of construction. The first yacht was the S/Y Gable with two other yachts in the process of construction, one with a deck on, and one with the hull being made. The S/Y Gable was completed, launched, and christened in November 1988 and was the first yacht that was available to be delivered to a Limited Partnership that truly met the Fantaseas concept. Even so, it was never transferred to the S/Y Gable LP or to any other Limited Partnership, nor was it used to the benefit of any Canadian Limited Partnership.

Instead, it was sold to Starlight S.A.M., a French entity.

h) Other contracts [ 102 ] The other two yachts constructed at the Maxi-Yacht facility were the Demoiselles des Rochfort and the Rocco Jr. Both were sold to French Limited Partnerships. [ 103 ] In addition, two purchase agreements were signed with Chantier Yachting France for two yachts in March 1985; however, the company went into receivership in July 1985. 5. The CRA Audit and Investigation [ 104 ] The CRA began to look into the affairs of OCGC after an inquiry into a file of an OCGC investor named Steven Mitchell on October 14, 1986.

At that time, CRA auditor Karen McCordick was to review the validity of the S/Y Gable LP business losses claimed by Mr. Mitchell. This was followed up with a request for the individual tax returns of Mr. Mitchell and his wife for 1984 and 1985. It turned out that Steven Mitchell was in fact the brother of Stacey Mitchell who had been heavily involved in providing accounting services to OCGC for the Type 1 Limited Partnerships as well as being a promoter and investor in some of the Limited Partnerships. [ 105 ] The review by Ms.

McCordick into the business losses of Steven Mitchell led her to the S/Y Gable LP Offering Memorandum and Mr. Bellfield, who was purported to be the keeper of the records of OCGC and the corporate returns of OCGC for 1984 and 1985. Over the next few months, Ms. McCordick pursued the S/Y Gable LP’s records and documentation but was unsuccessful. In addition, it was noted that no corporate income tax returns had been filed by OCGC at that time. The file was eventually referred to the Tax Avoidance

section and in the spring of 1986 was referred to Special Investigations. [ 106 ] Over a period of many months in 1987, there were numerous attempts by the CRA to have discussions with OCGC and its representatives, in particular with Mr. Bellfield, to obtain information with respect not just to Steven Mitchell’s returns but to the overall operations of OCGC and its Limited Partnerships scheme. Some of the information provided was forthcoming and other information was lacking.

As it turns out, much of the information requested was being manufactured as the requests were being made. [ 107 ] Special Investigations and Tax Avoidance continued their investigations and enquiries independent of each other but Tax Avoidance took a backseat to Special Investigations. Tax Avoidance apparently investigates the civil side of tax issues while Special Investigations investigates and prepares tax issues for criminal prosecution. Tax Avoidance formulated their position on OCGC and the

Limited Partnership scheme in 1988. [ 108 ] In June 1989, there were search and seizures conducted at OCGC facilities and other locations, as well as various interviews of individuals affiliated with OCGC and investors. The CRA investigations, whether by Tax Avoidance or Special Investigations, were extensive and exhaustive, but were not without problems given that Tax Avoidance was one department of CRA and Special Investigations was another. Furthermore, the RCMP became involved with respect to the investigation of possible criminal activity. [ 109 ] The CRA Tax Avoidance came to the belief that OCGC was engaged in fraudulent activity and was of the view that (

a) There was a premature claim for deductions i.e. capital cost allowance; (

b) OCGC was significantly underfinanced and that there was no financing for yacht construction; (

c) There was no capital contribution by the partners—simply a circulation of loans from OCGC to the partners and back to OCGC. OCGC never had the money to make the loans in the first place; (

d) There was a certain amount of unreasonableness in the expenses and some amounts claimed for expenses were excessive, i.e. the feasibility studies; (

e) Some expenses were never incurred; and (

f) There were significant problems in the actual manufacturing and delivering of the yachts for the Limited Partnerships. [ 110 ] In the end, the Minister disallowed all the losses, interest and professional fees claimed by the investors. As described above, criminal charges were laid against Pierre Rochat, Mr. Bellfield, and Mr. Bellfield’s right hand man, Mr. Minchella. Mr. Rochat pled guilty to uttering forged documents. Mr. Bellfield and Mr. Minchella were convicted of two counts of fraud and two counts of uttering forged documents and their convictions were upheld on appeal.

G: Misrepresentations: A Fraud from Beginning to End [ 111 ] The Appellants assert that despite the evidence presented of a persistent pattern of OCGC and Mr. Bellfield’s lies, there are sufficient indicators of a business because $13 – 14 million was spent on what the Appellants describe as efforts to establish a yacht chartering business. In Appendix One of the Appellants’ Final Submissions, they state: 3. Despite the fact that the venture was ultimately unsuccessful, and notwithstanding the evidence of lies and/or misrepresentations proffered by Mr.

Bellfield, the fact is, that OCGC created and established yacht chartering businesses that were both visionary and worldwide in scope . [Emphasis in original] [ 112 ] This statement is accurate in part; but should read, “OCGC created and established the illusion of a yacht chartering business”. I find that the yacht chartering business was nothing more than an illusion, a fraud from beginning to end. Most certainly there were sufficient indicia present to lend an air of legitimacy. Most certainly there was money spent for the purpose of developing these indicia, but for Mr.

Bellfield, they were all for the purpose of perpetuating the fraud on the investors in the Limited Partnerships, the CRA, and many other parties that came into contact with him in this venture.

[ 113 ] The evidence shows that the investors were induced with misrepresentations to invest not in genuine Limited Partnerships, but rather in a Ponzi-like scheme orchestrated by Mr. Bellfield. OCGC never had the capital necessary to implement the investment plan, despite its many representations to the contrary. The only source of funds OCGC had available was the investors’ interest payments and the small deposits made by investors upon subscription in the Type 2 and Type 3 Limited Partnerships. With a dire lack of capital, Mr.

Bellfield had to continue to sell units in Limited Partnerships so that he could keep funds coming in and he could continue to perpetuate the fraud. To maintain the appearance that the investment opportunity was real, Mr. Bellfield had to make an effort to build or acquire yachts and provide indications that a charter business was being developed. These efforts however, were always limited in scope and always suffered from both a lack of yachts to implement any genuine chartering business, and a severe lack of funds.

Barely any results were produced when compared to the enormity of the results represented to investors as not only planned, but also to some extent, already achieved. Any yacht building and charter development efforts by OCGC and its related companies were mere window-dressing. Mr. Bellfield kept his scheme to himself and Mr. Minchella. Investors, promoters, lawyers, accountants, and the staff of OCGC were all kept in the dark. [ 114 ] The documentary evidence shows that the starting point for the fraud began from the time that the first Offering Memoranda were prepared in November 1984, if not earlier.

This was before any investors subscribed for any Limited Partnerships units. The fraud continued without stop and grew in scope until the entire scheme unravelled after the CRA and the RCMP began an extensive investigation, and the investors ultimately ceased making their interest payments. The categories of misrepresentations laid out in the

section below show how the fraud progressed chronologically and grew in scope and size, including: 1) The fundamental misrepresentations in the Offering Memoranda; 2) The misrepresentations to professionals at closing, including the false documents provided at closing such as

a) the false certificates,

b) the false statements regarding OCGC’s obligations,

c) the false solemn declarations,

d) the false affidavits,

e) the false hull registration numbers; 3) The misrepresentations in OCGC’s materials and public relations campaigns regarding the “fleet of yachts” and the “Gourmet Commissary”; 4) Numerous false revenue and expense items listed in the financial statements, with false expenses growing annually; 5) Misrepresentations regarding the provision of financing and goods and services from the foreign entities Starlight S.A. and Neptune Marine; 6) Backdated and false documents, including yacht delivery schedules and Management Agreements; 7) Misrepresentations to various yacht builders or sellers as to the availability of funds to build or purchase yachts; 8) Ongoing misrepresentations to OCGC, Starlight employees and third parties as to the state of charter operations and yacht construction; 9) Ongoing false statements to investors regarding the number of yachts built or under construction, and expected delivery dates; 10) Ongoing misrepresentations regarding the state of charter operations and the number of charters booked; and

11) False loss statements and other documents to defraud the CRA and the investors. [ 115 ] The examples below highlight the numerous instances of misrepresentation by OCGC, beginning with the first misrepresentations that OCGC and Mr. Bellfield made to the 1984 investors in the Offering Memoranda and continuing with the multitude of misrepresentations OCGC continued to make throughout the taxation years in question. The Respondent spent well over one hundred pages in his Final Submissions detailing the extensive misrepresentations. Here, only key falsehoods are reviewed.

There are a sufficient number of examples provided to convey the intricate and pervasive nature of the fraud. I have referred extensively to the Respondent’s submission on the misrepresentation as I found the Respondent’s

summary and submission on this area excellent and succinct.

a) The Offering Memoranda (

i) The 1984 Offering Memoranda: Misrepresentations of Material Facts [ 116 ] Both the 1984 Offering Memorandum for the S/Y Garbo and the S/Y Gable are replete with material misrepresentations. They demonstrate that from their very first contact with this investment opportunity, the investors were fraudulently induced to invest.

Material misrepresentations were made to the investors, legal and accounting professionals, those marketing and promoting the LPs and to the tax professionals whose opinions were included in the Offering Memorandum. [ 117 ] Key misrepresentations were made in both the 1984 Offering Memorandum for the S/Y Garbo LP and the Offering Memorandum for the S/Y Gable LP. These documents are substantively the same. The S/Y Garbo LP Offering Memorandum is referred to below by way of example. [ 118 ] When considering the material misrepresentations below, it is important to highlight that Mr.

Bellfield certified on November 1, 1984, that the contents of the S/Y Garbo LP Offering Memorandum were true and constituted full disclosure of material facts relating to the investment opportunity, as required by law. The certifying statement said as follows: The fo

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