The appellant (the “LP”) was a wholly-owned limited partnership of a REIT. The REIT and the LP entered into two successive written forms of agency agreements pursuant to which, in order to raise money for the LP’s real estate business, the REIT was authorized to raise money through REIT unit or debenture offerings and to incur the related costs as agent for the LP. Sommerfeldt J found that the offering expenses could not have been incurred by the REIT as agent for the LP, stating (at para. 137):
[T]he LP, being a partnership, did not have the legal capacity to issue units of a real estate investment trust (or of any trust, for that matter). Therefore, the LP did not have the capacity to authorize the REIT to undertake, as the LP’s agent, and on behalf of the LP, the Offerings of REIT Units, or, on the closing of those Offerings, to issue, as the agent, and on behalf, of the LP, the REIT Units to members of the public.
Furthermore, the REIT used the proceeds to subscribe for LP units rather than in the LP’s business. Accordingly, the LP was not entitled to ITCs for various expenses of the offerings, and other “public company” expenses such as of AIFs.
On the other hand, any expenses that related to the acquisition of the real estate properties of the LP or otherwise to those properties “were acquired by the LP for consumption or use in the course of the LP’s commercial activities” (para. 226) and, by virtue of s. 6 of the Partnerships Act (Ontario) (every partner is an agent of the partnership), those expenses were incurred by the REIT on behalf of the LP.
Furthermore, Sommerfeldt J found that the valid execution of one of the two agreements had not been established. In addition, the existence of an agency agreement had not otherwise been established for the period covered by that agreement or for the period predating both agreements. In particular, the evidence was consistent with the REIT having “raised money in its own capacity, and then used its money to invest in the LP” (para. 144) rather than having raised money on behalf of the LP (which the LP lacked the legal capacity to do), so that the evidence did not establish an implied agency; and there also was no evidence to suggest that an agency relationship arose for those periods by virtue of retroactive ratification by the LP as principal, given inter alia that at the time the alleged acts of agency were performed (in connection with the capital raises), the principal lacked the legal capacity to perform them and also lacked that capacity at any subsequent time of ratification.