Section 143.2

Promissory notes owing by the taxpayers, which were consideration for their acquisition of units of a limited partnership, provided that the interest thereon was to be paid by way of set-off against distributions otherwise payable by the partnership to the taxpayers. In fact, the partnership did not generate distributable cash and, particularly for the first taxation year in question, there was no evidence that interest was paid through the making of timely journal entries. Furthermore, in the case of short-term notes that were payable on demand, there was no evidence of arrangements for their repayment, nor had any copies of the notes been submitted into evidence (so that there was not evidence that the loan was in writing as required by s. 143.2(7)(a). Accordingly, the amounts represented by the notes were limited recourse amounts.

A partnership ("ICON") of which the taxpayer became a limited partner purchased software from a subsidiary ("Trafalgar Capital") of the developer of the software in consideration for cash (as to 30% of the purchase price) and a promissory note (for the balance), with the taxpayer then assuming a portion of the promissory note as part consideration for his units in ICON. ICON licensed the program to a Bermuda limited partnership ("ICAP") of which Trafalgar Capital was the general partner. An agreement between ICON and Trafalgar Capital guaranteed an average annual revenue of no less than 12% on leveraged trading funds used by ICAP over the ten-year term of the promissory note and provided that in the event the software did not generate this return, ICON could replace the board of directors of Trafalgar Capital. Campbell J. found that there were no bona fide arrangements for repayment of the promissory note given that (i) an acceleration clause under the promissory note likely would never be triggered because of the ability to ICON to replace the board of directors of Trafalgar Capital, (ii) limited partners who resided outside Canada were not required to provide any security or collateral, (iii) there was no genuine risk of loss because the limited partners as debtors under the promissory note had the benefit of the revenue guarantee of Trafalgar Capital which they could invoke in the event that they were called upon to pay the note, and (iv) the nature of the legal arrangements was quite unclear, whereas a bona fide "arrangement should readily be seen to be binding upon the parties; it should be prima facie obvious" (p. 254).

Furthermore, an alleged implicit set-off arrangement did not establish that interest was paid on the promissory notes within the 60-day period stipulated by subsection 143.2(7) given that Trafalgar Capital (in its own capacity rather than as general partner) did not owe money to either ICON or to each partner, and there was a failure to produce documentation as required under s. 143.2(13).

The taxpayer unsuccessfully submitted that it was not "necessary" for the Minister to have reassessed beyond the normal limitation period on the basis that the necessary facts underlying the assessment were known to the Minister prior to the expiration of the normal reassessment period. This submitted interpretation of "necessary" was not consistent with a unified textual, contextual and purposive interpretation.