“The very term “Arabian horses” takes me back to the early 1960s watching in awe as Lawrence gallantly galloped across the Arabian sands on a sinewy strong stallion. The power, the grace, the beauty – it was unforgettable.”
So begins the judgment in the case of Teelucksingh and the Queen. It seems almost a shame to bring this eloquent prose back to the ground by bringing up taxes, but that is what it was all about after all.
It’s a horse race that has spanned 18 years since first assessment – and 11 days in court – and at the pole the taxpayer appears to have nosed out the Queen.
The plan is conceived
The genesis of the tax plan was the financing of a herd of Straight Egyptian Arabian horses. In order to build a sufficiently sized herd to be a viable business venture, Montebello Farms needed to gather cash. It struck upon the idea of pooling disparate investor funds through the use of a limited partnership structure.
Using example numbers detailed in the judgment, the key events in the arrangement were as follows:
- Under an Offering Memorandum, an investor borrowed $18,000 from Montebello, to acquire a limited partnership interest and common shares in a corporation
- At closing, current and prepaid expenses (including horse inventory) led to a farming loss distributed at $9,520 per unit, some useable that year and the rest carried forward
- Following closing, the partnership transferred the assets to the corporation in exchange for preferred shares, which shares were distributed to the limited partners about 45 days later upon planned dissolution of the partnership
- The preferred shares were structured to qualify for deposit to the investor’s RRSP, which at purported fair market value allowed for a swap-out of $18,236 in cash, the bulk of which was then used to retire the Montebello loan
- Dividend payments of $45,000 were made in each of the two following years, after which the corporation was dissolved
A bump in the road
Mr. Teelucksingh was one of hundreds of Montebello investors reassessed by Canada Revenue Agency (CRA). He participated in two Offerings, commencing in 1993 and 1995 respectively. In 2001, he was reassessed, with the restricted farm losses being denied and the RRSP transactions being treated as taxable withdrawals.
On appeal at the Tax Court of Canada, the judge summarizes the horse operations, but otherwise makes it clear that the case “is about the tax consequences of the investing arrangement more than about the intricacies and complexities of the horse business.”
The result would turn on the legitimacy of the partnerships, the valuation of the horses, and the reasonableness of two years’ prepayment of expenses.
Down to the wire
Interestingly, the judge did not find fault with the bona fides of the partnership nor with the complex series of transactions, expressing his only reservation to be “the inflated value of the horses.” Caught between optimistic and pessimistic expert testimony on either side of the dispute, the judge arrives at a compromise valuation for the horses at something less than half of the original values.
As to the prepayment, he stated, “While I have some concern as to the commercial reasonableness of such a prepayment provision, I have nothing concrete upon which to substitute my judgment for the partnerships’ judgment.”
Thus, almost two decades after supporting the herd, Mr. Teelucksingh will enjoy both the farming losses and RRSP gains, though not as lucratively as initially projected.